UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended December 31, 2002
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 $0.10 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 and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the asked price of
$15.21 per share of such stock as of March 20, 2003, was $36,078,804. (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 20, 2003, there were issued and outstanding 2,372,045 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of Form 10-K - Proxy Statement for the 2003 Annual Meeting of
Stockholders.
Form 10-K
Index
Page
----
Part I:
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II:
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 19
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 51
Part III:
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 52
Item 13. Certain Relationships and Related Transactions 52
Item 14. Controls and Procedures 52
Item 15. Principal Accountant Fees and Services 52
Part IV:
Item 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 53
Signatures 54
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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 ("CBSI") and
Community Bank of Kentucky ("CBKY"). Until March 1, 2002, the Company also
operated two bank branches in Clark County, Indiana under the name Heritage
Bank of Southern Indiana ("HBSI"). On March 1, 2002, HBSI was merged with and
into CBSI. CBSI and CBKY are state-chartered stock commercial banks
headquartered in New Albany, Indiana and Bardstown, Kentucky, respectively,
and at times are referred to herein collectively as the "Banks". CBSI is
regulated by the Indiana Department of Financial Institutions and the Federal
Deposit Insurance Corporation. CBKY is regulated by the Kentucky Department
of Financial Institutions and the Federal Deposit Insurance Corporation.
During 2002, the Company established three new wholly-owned subsidiaries
of CBSI to manage its investment portfolio. CBSI Holdings, Inc. and CBSI
Investments, Inc. are Nevada corporations which jointly own CBSI Investment
Portfolio Management, LLC, a Nevada limited liability corporation which holds
and manages investment securities previously owned by the Bank. A total of
$88.7 million in investment securities were initially transferred from the
Bank to CBSI Investment Portfolio Management, LLC.
The Company had total assets of $465.5 million, total deposits of $289.8
million, and stockholders' equity of $43.3 million as of December 31, 2002.
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.
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 subsidiaries are engaged primarily in the
business of attracting deposits from the general public and using such funds
to originate 1) secured and unsecured business loans of various terms to
local businesses and professional organizations, 2) consumer loans
including home equity lines of credit, automobile and recreational
vehicle, construction loans, and loans secured by deposit accounts, and
3) residential real estate loans. In addition, the Company also offers
non-deposit investment products such as stocks, bonds, mutual funds,
and annuities to customers within its banking market areas through Heritage
Financial Services, a division of CBSI.
Lending Activities
Commercial Business Loans. The Company also originates non-real estate related
business loans to local small businesses and professional organizations. This
type of commercial loan has been offered at both variable rates and fixed rates
with balloon payments required at maturity and can be unsecured or secured by
general business assets such as equipment, accounts receivable or inventory. 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 commercial real estate loans. However, commercial business loans also
involve a higher level of credit risk because of the type and nature of the
collateral.
Commercial Real Estate Loans. The Company's 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 attempts to protect itself against the increased credit risk
associated with these loans through its underwriting standards and ongoing
monitoring processes.
Residential Real Estate Loans. The Company originates one-to-four family,
owner-occupied, residential mortgage loans secured by property located in the
Company's market area. The majority of the Company's residential mortgage loans
consist of loans secured by owner-occupied, single 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. ARM loans, however, can carry increased
credit risk because during a period of rising interest rates the risk of default
on ARM loans may increase due to increases in borrowers' monthly payments.
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The Company's 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.
After the initial fixed rate period, the Company's ARM loans generally 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, after the initial fixed rate period the interest
rate on ARM loans adjusts to the one-, three- or five-year U.S. Treasury
Constant Maturity Index plus a spread. The Company's policy is to qualify
borrowers for one-year ARM loans based on the initial interest rate plus the
maximum annual rate increase.
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.
Regulations limit the amount that a bank may lend based on the appraised value
of real estate securing loans that qualify for sale into the secondary market.
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. 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.
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. 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.
The underwriting standards employed by the Company for consumer loans include a
determination of the applicant's credit history and an assessment of the
prospective borrower's 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 from any
verifiable secondary income. The underwriting process also includes a comparison
of the value of the collateral in relation to the proposed loan amount.
Loan Solicitation and Processing. Loans are originated through a number of
sources including 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. The Company's responsibility on these loans is the
fulfillment of the loan purchaser's requirements. These loans often have reduced
underwriting features and may be made without an appraisal or credit report at
the option of the purchaser. 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. Private mortgage insurance is generally required on 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 is reviewed after the fact for compliance with the Company's general
underwriting standards. A loan exceeding the authority of the underwriting loan
officer requires the approval of a loan committee or the Board of Directors of
the subject subsidiary bank, depending on the loan amount.
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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 30 days for commercial real estate loans and
60 days for residential real estate loans.
Employees
As of December 31, 2002, the Company had 156 employees, 134 full-time and 22
part-time. CBSI employed 64 full-time and 14 part-time employees and CBKY
employed 17 full-time and 4 part-time employees as of December 31, 2002. The
remaining employees were employed by the Company. None of these entity's
employees are represented by a collective bargaining group. Neither the Company
nor any subsidiary has ever experienced a work stoppage.
Competition
The banking business is highly competitive, and as such the Banks compete not
only with other commercial banks, but also with savings and loan associations,
trust companies and credit unions for deposits and loans, as well as stock
brokerage firms, insurance companies, and other entities providing one or more
of the services and products offered by the Banks. In addition to competition,
the Company's business and operating results are affected by the general
economic conditions prevalent in its market area.
The Banks' primary market areas consist of the counties of Floyd, Clark and
Harrison, which are located in Southern Indiana along the Ohio River, and
Jefferson and Nelson Counties in Kentucky. Jefferson, Clark, Floyd, and Harrison
counties are four of the seven counties comprising the Louisville, Kentucky
Standard Metropolitan Statistical Area, which has a population in excess of one
million. Nelson County is located approximately 40 miles southeast of
Louisville. The aggregate population of Floyd, Clark and Harrison counties is
approximately 204,000. The population of Jefferson and Nelson Counties are
approximately 693,000 and 39,000, respectively. Counties surrounding Nelson
County include: Spencer, Anderson, Hardin, Washington, Marion, Larue, and
Bullitt Counties, which together have a population in excess of 234,000. The
Company's headquarters are in New Albany, Indiana, a city of 38,000 located
approximately three miles from the center of Louisville.
Regulation and Supervision
As a bank holding company, the Company is regulated under the Bank Holding
Company Act of 1956, as amended (the "Act"). The Act limits the business of bank
holding companies to banking, managing or controlling banks and other
subsidiaries authorized under the Act, performing certain servicing activities
for subsidiaries and engaging in such other activities as the Board of Governors
of the Federal Reserve System ("Federal Reserve Board") may determine to be
closely related to banking. The Company is registered with and is subject to
regulation by the Federal Reserve Board. Among other things, applicable statutes
and regulations require the Company to file an annual report and such additional
information as the Federal Reserve Board may require pursuant to the Act and the
regulations which implement the Act. The Federal Reserve Board also conducts
examinations of the Company.
The Act provides that a bank holding company must obtain the prior approval of
the Federal Reserve Board to acquire more than 5 percent of the voting stock or
substantially all the assets of any bank or bank holding company. The 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. A bank holding company is permitted,
however, to acquire shares of any company, the activities of which the Federal
Reserve Board has determined to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. 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, the Federal Reserve
Act restricts the Banks' extension of credit to the Company.
On November 12, 1999, Congress enacted the Gramm-Leach-Bliley Act. The
Gramm-Leach-Bliley Act permits bank holding companies to qualify as "financial
holding companies" that may engage in a broad range of financial activities,
including underwriting, dealing in and making a market in securities; insurance
underwriting and agency activities; and merchant banking. The Federal Reserve
Board is authorized to expand the list of permissible financial activities. The
Gramm-Leach-Bliley Act also authorizes banks to engage through financial
subsidiaries in nearly all of the activities permitted for financial holding
companies. The Company has not elected the status of financial holding company
and at this time has no plans for these investments or broader financial
activities.
As state chartered commercial banks, CBSI and CBKY are subject to examination,
supervision and extensive regulation by the FDIC and their respective
Departments of Financial Institutions (the "DFIs"). CBSI is a member of and owns
stock in the FHLB of Indianapolis, while CBKY 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 FHLB system. CBSI
and CBKY are also subject to regulation by 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 is intended primarily for the protection of their customers and
depositors, and not Company shareholders.
The FDIC and the DFIs regularly examine the Banks and prepare a report for the
consideration of each Bank's Board of Directors on any deficiencies that it may
5
find in each Bank's operations. The relationships of each of the Banks with its
depositors and borrowers also is regulated to a great extent by both federal and
state laws, especially in such matters as the form and content of the Banks'
mortgage documents and communication of loan and deposit rates to both existing
and prospective customers. 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
state and 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.
CBSI 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. CBKY is subject to legal lending limits
of 20 percent of unimpaired capital and surplus for unsecured loans and 30
percent of unimpaired capital and surplus for secured loans.
Federal Regulations
Sections 22(h) and (g) of the Federal Reserve Act place 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 (15% of CBSI's, or 20% of CBKY'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 of directors 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, 2002
the Banks were in compliance with the above restrictions.
Safety and Soundness. The Federal Deposit Insurance Act ("FDIA"), as amended by
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("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 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
FDICIA, 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% or a Tier II average 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, 2002, the Company and each of the
Banks was deemed well-capitalized for purposes of the above regulations.
Federal Home Loan Bank System. CBSI is a member of the FHLB of Indianapolis, and
CBKY 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 Federal Home Loan Bank Board (FHLBB).
FIRREA separated the home financing credit function of the FHLB's from the
regulatory functions of the FHLB's regarding savings institutions and their
insured deposits by transferring oversight over the FHLB's from the FHLBB to a
new federal agency, the Federal Home Financing Board ("FHFB").
As members of the FHLB system, each of CBSI and CBKY is required to purchase and
maintain stock in the FHLB 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, 2002, $6.8 million and $930,000 of FHLB stock were outstanding for CBSI and
6
CBKY, respectively, each of which was in compliance with this requirement. In
past years, CBSI and CBKY have received dividends on their FHLB stock.
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 generally accepted accounting principles. 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 Banks are
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 CBSI and CBKY are
insured by the SAIF, while the HBSI deposits assumed by CBSI upon the merger of
HBSI into CBSI 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 undercapitalized. 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
undercapitalized subgroup "C" category are assessed the highest insurance rate.
As of December 31, 2002 CBSI was assigned to the well-capitalized, subgroup "A"
category and paid an annual insurance rate of 1.7 cents per $100 of deposits. As
of December 31, 2002 CBKY was assigned to the well-capitalized, subgroup "B"
category and paid an annual insurance rate of 2.5 cents per $100 of deposits.
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 Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Cash on hand or on deposit with the Federal
Reserve Bank of $2.1 million and $1.2 million was required to meet regulatory
reserve and clearing requirements at year-end 2002 and 2001. These balances do
not earn interest.
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.
The Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Cash on hand or on deposit with the Federal
Reserve Bank of $2.1 million and $1.2 million was required to meet regulatory
reserve and clearing requirements at year-end 2002 and 2001. These balances
do not earn interest.
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 has not been audited by the Internal Revenue Service for the past
ten years.
Indiana Taxation. The Company is subject to a franchise tax imposed by the
State of Indiana. The 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. In 2000, the Indiana financial institution tax
law was amended to treat resident financial institutions the same as
nonresident financial institutions by providing for apportionment of Indiana
income based on receipts in Indiana. This revision allowed for the exclusion
of receipts from out of state sources and federal government and agency
obligations.
Currently, income from the CBSI's subsidiaries CBSI Holdings, Inc.,
CBSI Investments, Inc. and CBSI Investment Portfolio Management, LLC is not
subject to the Indiana franchise tax.
The Company's state franchise tax returns have been audited through the tax year
ended December 31, 1997.
Kentucky Taxation. The Company is subject to a franchise tax imposed by the
State of Kentucky. The tax is imposed at a rate of 1.1% on taxable net capital,
which equals capital stock paid in, surplus, undivided profits and capital
reserves, net unrealized holding gains or losses on available for sale
securities, and cumulative foreign currency translation adjustments less an
amount equal to the same percentage of the total as the book value of United
States obligations and Kentucky obligations bears to the book value of the
total assets of the financial institution. A financial institution whose
business activity is taxable within and without Kentucky must apportion its
net capital based on the three factor apportionment formula of receipts,
property taxes and payroll taxes unless the Kentucky Revenue Cabinet has granted
written permission to use another method.
7
ITEM 2. PROPERTIES
The Company conducts its business through its corporate headquarters located in
New Albany, Indiana. CBSI operates a main office and nine branch offices in
Clark and Floyd Counties, Indiana, and a loan production office in Jefferson
County, Kentucky, while CBKY operates a main office and one branch in Nelson
County, Kentucky, and one branch in Jefferson County, Kentucky. The following
table sets forth certain information concerning the main offices and each branch
office at December 31, 2002. The aggregate net book value of premises and
equipment was $11.3 million at December 31, 2002.
Owned or
Location Year Opened Leased
- -------- ----------- ------
Community Bank of Southern Indiana:
101 West Spring St. - Main Office 1937 Owned
New Albany, IN 47150
401 East Spring St. - Drive Thru for Main Office 2001 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
201 W. Court Ave. 1996 Owned
Jeffersonville, IN 4710
5112 Highway 62 1997 Owned
Jeffersonville, IN 47130
2910 Grantline Rd. 2002 Leased
New Albany, IN 47150
400 Blankenbaker Parkway, Suite 100 2002 Leased
Louisville, KY 40243
Community Bank of Kentucky:
106A West John Rowan Blvd. - Main Office 1997 Leased
Bardstown, KY 40004
119 East Stephen Foster Ave. 1972 Owned
Bardstown, KY 40004
7101 Cedar Springs 2002 Leased
Louisville, KY 40291
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, 2002.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq Small Cap market under the
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.
2002
- -----------------------------------------------
QUARTER ENDED HIGH LOW DIVIDEND
- ------------- ---- --- --------
March 31 ....... $17.00 $15.60 $ 0.145
June 30 ........ 18.75 16.90 0.145
September 30 ... 17.75 15.55 0.145
December 31 .... 16.56 14.50 0.145
2001
- -----------------------------------------------
QUARTER ENDED HIGH LOW DIVIDEND
- ------------- ---- --- --------
March 31 ....... $13.63 $12.38 $ 0.145
June 30 ........ 14.75 13.05 0.145
September 30 ... 16.40 14.35 0.145
December 31 .... 16.00 14.55 0.145
The Company intends to continue its historical practice of paying quarterly cash
dividends although there is no assurance by the Board of Directors that such
dividends will continue to be paid in the future. The payment of dividends in
the future is dependent on future income, financial position, capital
requirements, the discretion and judgment of the Board of Directors, and other
considerations. In addition, the payment of dividends is subject to the
regulatory restrictions described in Note 11 to the Company's consolidated
financial statements.
As of March 1, 2003, there were 801 holders of the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected historical consolidated
financial information from 1998 through 2002. This information should be read in
conjunction with the Consolidated Financial Statements and the related Notes.
Factors affecting the comparability of certain indicated periods are discussed
in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Years Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share data) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Income Statement Data:
Interest income ............................ $ 25,052 $ 29,295 $ 30,488 $ 26,139 $ 22,357
Interest expense ........................... 13,354 17,045 18,314 14,004 12,208
Net interest income ........................ 11,698 12,250 12,174 12,135 10,149
Provision for loan losses .................. 1,144 520 1,197 654 354
Noninterest income ......................... 3,160 2,186 1,974 1,483 1,417
Noninterest expense ........................ 10,938 9,379 8,833 7,483 7,290
Income before taxes ........................ 2,776 4,537 4,118 5,481 3,922
Cumulative effect of
change in accounting principle .......... -- -- (172) -- --
Net income ................................. 2,126 2,955 2,679 3,352 2,398
- -----------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Total assets ............................... $ 465,549 $ 429,616 $ 416,221 $ 384,443 $ 331,945
Total securities ........................... 92,374 99,101 86,436 104,337 92,698
Total loans, net ........................... 321,634 294,030 287,254 246,018 199,575
Allowance for loan losses .................. 3,814 3,030 2,869 1,741 1,276
Total deposits ............................. 289,830 255,892 258,222 226,473 212,867
Federal funds purchased and
repurchase agreements ................... 36,393 39,075 22,547 28,182 19,499
FHLB advances .............................. 92,700 89,000 91,800 86,250 56,000
Total shareholders' equity ................. 43,297 42,365 40,888 41,630 41,386
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Data:
Basic earnings per share ................... $ 0.87 $ 1.18 $ 1.05 $ 1.26 $ 0.89
Diluted earnings per share ................. 0.87 1.18 1.05 1.26 0.88
Book value (1) ............................. 17.53 17.22 16.59 16.00 15.34
Cash dividends per share ................... 0.58 0.58 0.54 0.54 0.48
- -----------------------------------------------------------------------------------------------------------------------------------
Performance Ratios:
Return on average assets ................... 0.47% 0.71% 0.67% 0.94% 0.79%
Return on average equity ................... 4.91 6.90 6.43 7.98 5.87
Net interest margin ........................ 2.78 3.07 3.17 3.58 3.38
Efficiency ratio ........................... 74 65 62 55 63
- -----------------------------------------------------------------------------------------------------------------------------------
Asset quality ratios:
Non-performing assets to total loans ....... 1.17% 0.74% 0.39% 0.13% 0.47%
Net loan charge-offs to average loans ...... 0.12 0.13 0.03 0.08 0.05
Allowance for loan losses to total loans ... 1.17 1.02 0.99 0.70 0.64
Allowance for loan losses to
non-performing loans .................... 120 186 252 549 172
- -----------------------------------------------------------------------------------------------------------------------------------
Capital ratios:
Leverage ratio ............................. 9.0% 10.0% 9.9% 10.7% 12.7%
Average stockholders' equity to
average total assets .................... 9.6 10.2 10.4 11.8 13.5
Tier 1 risk-based capital ratio ............ 12.4 14.8 14.5 16.4 19.8
Total risk-based capital ratio ............. 13.6 15.9 15.5 17.1 20.4
Dividend payout ratio ...................... 66.1 49.6 51.3 43.0 52.6
- -----------------------------------------------------------------------------------------------------------------------------------
Other key data:
End-of-period full-time equivalent
employees ............................... 145 131 114 124 108
Number of bank offices ..................... 14 11 10 10 8
(1) Exclusive of accumulated other comprehensive income.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This section presents an analysis of the consolidated financial condition of the
Company and its wholly-owned subsidiaries, the Banks, at December 31, 2002
and 2001, and the consolidated results of operations for each of the years in
the three year period ended December 31, 2002. The information contained in this
section 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 on Form 10-K.
The Company conducts its primary business through its two Bank subsidiaries,
which are community-oriented financial institutions offering a variety of
financial services to their local communities. The Banks are engaged primarily
in the business of attracting deposits from the general public and using such
funds for the origination of: 1) commercial business and real estate loans and
2) secured consumer loans such as home equity lines of credit, automobile loans,
and recreational vehicle loans. Additionally, the Banks originate and sell into
the secondary market mortgage loans for the purchase of single-family homes in
Floyd, Clark, and Harrison Counties, Indiana, and Nelson County, Kentucky,
including surrounding communities. The Banks invest excess liquidity balances in
mortgage-backed, U.S. agency, state and municipal, and corporate securities.
The operating results of the Company depend primarily upon the Banks' net
interest income, which is the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities.
Interest-earning assets principally consist of loans, taxable and tax-exempt
securities, and FHLB stock. Interest-bearing liabilities principally include
deposits, retail repurchase agreements, federal funds purchased, and advances
from the FHLB Indianapolis and FHLB Cincinnati. The net incomes of the Banks are
also affected by 1) provision for loan losses, 2) noninterest income (including
gains on sales of loans and securities, deposit account service charges and
commission-based income on non-deposit investment products), 3) noninterest
expenses (including compensation and benefits, occupancy, equipment, and data
processing expenses, and other expenses, such as audit, advertising, postage,
printing, and telephone expenses), and 4) income tax expense.
This discussion includes various forward-looking statements with respect to
credit quality (including delinquency trends and the allowance for loan losses),
corporate objectives and other financial and business matters. When used in this
discussion the words "anticipate," "project," "expect," "believe," and similar
expressions are intended to identify forward-looking statements. The Company
cautions that these forward-looking statements are subject to numerous
assumptions, risks and uncertainties, all of which may change over time. Actual
results could differ materially from forward-looking statements.
In addition to factors disclosed by the Company elsewhere in this annual report
on Form 10-K, the following factors, among others, could cause actual results to
differ materially from such forward-looking statements: 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
the Banks do not assume an obligation to update or revise any forward-looking
statements subsequent to the date on which they are made.
Highlights
The Company reported net income of $2,126,000 during 2002 compared with
$2,955,000 for 2001, a decrease of 28.1%. The Company's performance in 2002 was
adversely impacted by increases in non-interest expense and provision for loan
losses and a decline in its net interest income. Non-interest expense increased
as a result of incremental expenses related to the opening of two new branches
during the year. The provision for loan losses increased because of increases in
non-performing loans and average impaired loans. The Company's book value per
common share, exclusive of accumulated other comprehensive income, increased
from $17.22 at December 31, 2001 to $17.53 per share at December 31, 2002.
The following table summarizes selected financial information regarding the
Company's financial performance:
Table 1 - Summary
(Dollars in thousands, For the Years Ended December 31,
except per share amounts) 2002 2001 2000
- --------------------------------------------------------------------------------
Net income ........................ $ 2,126 $ 2,955 $ 2,679
Basic earnings per share .......... 0.87 1.18 1.05
Diluted earnings per share ........ 0.87 1.18 1.05
Return on average assets .......... 0.47% 0.71% 0.67%
Return on average equity .......... 4.91 6.90 6.43
The Company experienced solid balance sheet growth as total assets grew 8.4%
during 2002 to $465.5 million from $429.6 million at December 31, 2001. The
Company generated loan growth of 9.4% during 2002 to $321.6 million, which was
primarily attributable to growth in commercial business, real estate
construction, and home equity loans. Deposits increased 13.3% during 2002 to
$289.8 million, fueled mostly by growth in money market accounts and
non-interest checking accounts. The Company will continue to seek loans and
deposits by developing relationships with commercial and retail customers within
its market areas.
10
During 2002, the Company expanded its banking offices by moving into newly
completed Wal-Mart Supercenters in New Albany, Indiana and Louisville, Kentucky.
The Company also established a loan production office on Blankenbaker Parkway in
Louisville, Kentucky. The Company expects that the Wal-Mart branch in New Albany
will enhance its ability to increase deposit market share within Floyd County,
Indiana. The new offices in Louisville, Kentucky are a part of the Company's
ongoing plan to expand into the Jefferson County, Kentucky market.
Results of Operations
Net Interest Income
The Company's principal revenue source is net interest income. Net interest
income is the difference between interest income on interest-earning assets,
such as loans and securities, and the interest expense on the liabilities used
to fund those assets, such as interest-bearing deposits and borrowings. Net
interest income is impacted by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities as well as changes in
market interest rates.
Net interest income decreased $552,000 or 4.5% to $11.7 million for 2002
compared to $12.3 million in 2001. The Company's net interest rate spread
declined slightly to 2.46% for 2002 from 2.53% in 2001, and its net interest
margin decreased from 3.07% in 2001 to 2.78% for 2002. The reduction in the
Company's net interest margin was caused by the yield on interest-earning assets
declining faster than the cost of interest-bearing liabilities due to market
interest rates that declined from early 2001 through the end of 2002 (the prime
rate fell by 5.25% over this period). Although the net interest margin for 2002
declined from the prior year, the Company experienced a 7.4% increase in net
interest income from the third quarter of 2002 to the fourth quarter of the same
year due to various balance sheet management strategies implemented during 2002.
The Company reinvested proceeds from the sales and maturities of securities into
loans with generally higher yields than the securities they replaced. Further,
the Company entered into an interest rate swap in August 2002 to convert a
portion of its floating rate commercial loans to higher-yielding fixed rate
loans (See Note 12 to the Consolidated Financial Statements).
Average interest-earning assets increased 5.4% during 2002 to $420.2 million,
compared to a 3.9% increase during 2001. The growth in each of these periods
primarily resulted from an increase in average loans funded by increases in
deposits and short-term borrowings. The increase in loans is attributable to the
Company's continued focus on commercial business, commercial real estate, and
home equity lending. Average loans grew $24.7 million or 8.6% to $310.0 million
in 2002, as the loan yield declined to 6.54% for 2002. The Company attributes
the growth in commercial loans to its local presence in the markets it serves
and its ability to meet the needs of its commercial customers through local
decision making and rapid responses to customer inquiries. Additionally, the
Company expanded its commercial loan originating abilities through additional
commercial lending representatives. Consumer loans increased because of the high
demand for home equity lines of credit as market interest rates were generally
lower in 2002 than historical norms. The current interest rate environment
should also result in continued strong loan demand, but should result in a
reduced loan yield during 2003. The yield on interest-earning assets declined to
5.96% during 2002 from 7.35% the prior year due to generally declining interest
rates over the last two years.
During 2002, average interest-bearing liabilities grew $28.2 million to $381.5
million, an increase of 8.0% over 2001, while the costs of interest-bearing
liabilities declined to 3.50% for 2002 from 4.82% in 2001. The increase in
average interest-bearing liabilities was primarily attributable to growth in
interest-bearing deposits, which are comprised of money market deposit, savings,
and NOW accounts. The Company attributes growth in the average balance of
deposits to its increased focus on its retail delivery systems, including
initiatives such as a streamlined checking account product line, expanded
customer hours at most of its banking centers, and the installation of a check
imaging system during 2001.
While there can be no assurance as to the tangible long-term impact that the
generally lower interest rates will have on the Company's future levels of net
interest income and net interest margin, it is presently anticipated, given the
pricing sensitivity and asset/liability mix of the Company's balance sheet and
current interest rates, that the Company's net interest margin should improve
modestly in 2003 from 2002.
For 2001, net interest income was $12.3 million, up $76,000 from 2000. The
Company's net interest rate spread increased from 2.52% during 2000 to 2.53% in
2001, while net interest margin declined to 3.07% in 2001 from 3.17% in 2000.
Net interest income for 2001 increased from 2000 due primarily to an increase in
average-interest earning assets and a shift in average earning assets from
securities to loans with a higher rate of return.
Market interest rates declined from early 2001 through December 31, 2002. At
December 31, 2000, the Company owned approximately $53.6 million in callable
agency securities, which is a type of security that can be called by the issuer
as of a specific date when it is in the issuer's interest to do so. Generally,
issuers of these securities will exercise the call option as market interest
rates for securities with similar characteristics fall below the coupon on a
given issue. Consequently, most of the callable agency securities owned by the
Company as of December 31, 2000 were called during 2001 as market interest rates
declined. This provided the Company with an excess of cash and interest-bearing
deposits that had to be reinvested at substantially lower interest rates,
resulting in a decline in the Company's net interest margin. The Company
principally reinvested these funds in mortgage-backed securities and loans.
To compound the decline in the yield on interest-earning assets caused by the
reinvestment of proceeds of called agency securities, the Company had
outstanding $86.0 million in fixed rate FHLB advances with a weighted average
rate of 5.87% as of December 31, 2000, most of which were "putable" or
"convertible". Putable advances give the FHLB the right to require the Company
to choose either conversion of the fixed rate to variable rate tied to the three
month LIBOR index or prepayment of the advance without a penalty. There is a
substantial penalty if the Company prepays the advances before the FHLB
exercises its right. The FHLB will
11
generally only exercise its right in a period of rising interest rates.
Consequently, as rates fell during 2001 it became less likely that the FHLB
would exercise its right, resulting in only a slight reduction in the cost of
fixed rate FHLB advance during 2001. Fixed rate advances were $88.0 million and
$86.0 million with weighted average rates of 5.81% and 5.87% as of December 31,
2002 and 2001, respectively.
Table 2 provides detailed information as to average balances, interest
income/expense, and rates by major balance sheet category for 2000 through 2002.
Table 3 provides an analysis of the changes in net interest income attributable
to changes in rates and changes in volume of interest-earning assets and
interest-bearing liabilities. Yields on tax-exempt securities have not been
presented on a tax equivalent basis.
Table 2 - Average Balance Sheets and Rates for December 31, 2002, 2001 and 2000
2002 2001 2000
--------------------------- ---------------------------- ----------------------------
Average Average Average Average Average Average
(Dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------------------------- ---------------------------- ----------------------------
ASSETS
Earning assets:
Interest-bearing deposits with banks ... $ 5,821 $ 124 2.13% $ 12,390 $ 473 3.82% $ 4,320 $ 314 7.27%
Taxable securities ..................... 85,868 3,698 4.31 84,694 4,974 5.87 94,147 6,111 6.49
Tax-exempt securities .................. 10,804 500 4.63 8,603 431 5.01 6,868 365 5.31
Total loans and fees(1)(2) ............. 310,004 20,278 6.54 285,351 22,856 8.01 270,930 23,086 8.52
FHLB stock ............................. 7,674 452 5.89 7,601 561 7.38 7,502 612 8.16
--------- ------- --------- ------- --------- -------
Total earning assets ...................... 420,171 25,052 5.96 398,639 29,295 7.35 383,767 30,488 7.94
Non-interest earning assets:
Less: Allowance for loan losses ........ (3,325) (2,912) (2,130)
Non-earning assets:
Cash and due from banks ................ 8,635 7,329 7,974
Bank premises and equipment, net ....... 11,371 10,794 9,912
Other assets ........................... 12,547 4,474 1,399
--------- --------- ---------
Total assets .............................. $ 449,399 $ 418,324 $ 400,922
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits ............................... $ 257,491 $ 7,539 2.93% $ 236,279 $10,981 4.65% $ 222,136 $11,454 5.16%
Federal funds purchased and
repurchase agreements ............... 31,319 354 1.13 27,779 739 2.66 21,688 1,209 5.57
FHLB advances .......................... 92,709 5,461 5.89 89,253 5,325 5.97 94,220 5,651 6.00
--------- ------- --------- ------- --------- -------
Total interest bearing liabilities ........ 381,519 13,354 3.50 353,311 17,045 4.82 338,044 18,314 5.42
Non-interest bearing liabilities:
Non-interest bearing deposits .......... 23,089 19,285 20,036
Other liabilities ...................... 1,502 2,887 1,182
Stockholders' equity ................... 43,289 42,841 41,660
--------- --------- ---------
Total liabilities and shareholders' equity $ 449,399 $ 418,324 $ 400,922
========= ========= =========
Net interest income ....................... $11,698 $12,250 $12,174
======= ======= =======
Net interest spread ....................... 2.46% 2.53% 2.52%
Net interest margin ....................... 2.78% 3.07% 3.17%
(1) The amount of fee income included in interest on loans was $187, $312, and
$243 for the years ended December 31, 2002, 2001, and 2000, respectively.
(2) Calculations include non-accruing loans in the average loan amounts
outstanding.
Table 3 illustrates the extent to which changes in interest rates and changes in
the volume of interest-earning assets and interest-bearing liabilities affected
the Company's interest income and interest expense during the periods indicated.
Information is provided in each category with respect to (i) changes
attributable to changes in volume (changes in volume multiplied by prior rate),
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume), and (iii) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
Table 3 - Volume/Rate Variance Analysis
Year Ended December 31, 2002 Year Ended December 31, 2001
compared to compared to
Year Ended December 31, 2001 Year Ended December 31, 2000
------------------------------- -------------------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
Due to Due to
------------------------------- -------------------------------
Total Net Total Net
Change Volume Rate Change Volume Rate
-------- ------- ------- -------- ------- -------
(Dollars in thousands)
Interest income:
Interest-bearing deposits with banks ....................... $ (349) $ (190) $ (159) $ 159 $ 365 $ (206)
Taxable securities ......................................... (1,276) 68 (1,344) (1,137) (584) (553)
Tax-exempt securities ...................................... 69 104 (35) 66 88 (22)
Total loans and fees ....................................... (2,578) 1,859 (4,437) (230) 1,194 (1,424)
FHLB stock ................................................. (109) 5 (114) (51) 8 (59)
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest income ............... (4,243) 1,846 (6,089) (1,193) 1,071 (2,264)
Interest expense:
Deposits ................................................... (3,442) 915 (4,357) (473) 701 (1,174)
Federal funds purchased and
repurchase agreements ................................... (385) 84 (469) (470) 278 (748)
FHLB advances .............................................. 136 204 (68) (326) (296) (30)
------- ------- ------- ------- ------- -------
Total increase (decrease) in interest expense .............. (3,691) 1,203 (4,894) (1,269) 683 (1,952)
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income ................. $ (552) $ 643 $(1,195) $ 76 $ 388 $ (312)
======= ======= ======= ======= ======= =======
12
Non-interest Income
Non-interest income was $3.2 million during 2002, $2.2 million during 2001, and
$2.0 million during 2000. The substantial increase in non-interest income for
2002 was due to the increase in cash surrender value of life insurance and
increases in gain on the sale of available for sale securities, service charges
on deposit accounts, and gain on the sale of mortgage loans. The increase from
2000 to 2001 was primarily due to the same factors resulting in the 2002
increase, excluding the increase in cash surrender value of life insurance.
Table 4 provides a breakdown of the Company's non-interest income during the
past three years.
Table 4 - Analysis of Non-interest Income
Percent
Year Ended December 31, Increase/(Decrease)
-------------------------------- ------------------------
(Dollars in thousands) 2002 2001 2000 2002/2001 2001/2000
------ ------ ------ --------- ---------
Service charges on deposit accounts ........................... $1,100 $ 920 $ 667 20% 38%
Commission income ............................................. 330 599 657 (45) (9)
Gain on sale of mortgage loans ................................ 457 359 172 27 109
Loan servicing income, net of amortization .................... 96 101 121 (5) (17)
Increase in cash surrender value of life insurance ............ 514 -- -- * *
Other ......................................................... 152 176 100 (14) 76
------ ------ ------
Subtotal ................................................... 2,649 2,155 1,717 23 26
Gain on sale of available for sale securities ................. 511 31 -- * *
Gain on sale of trading securities ............................ -- -- 171 * *
Gain on sale of premises and equipment ........................ -- -- 86 * *
------ ------ ------
Total ...................................................... $3,160 $2,186 $1,974 45% 11%
====== ====== ======
* Less than 1% or not meaningful.
The increase in cash surrender value of life insurance was $514,000 for 2002.
The Banks invested $10.0 million in life insurance on key employees to offset
existing employee benefits expenses and because the tax-equivalent yields were
better than alternative investments. The tax-equivalent yield on the life
insurance investments was approximately 8.6% for 2002. The Company reduced its
risk in relation to the life insurance purchase by spreading the total
investment among three life insurance carriers rated AA or better by Standard &
Poor's.
Gain on sale of available for sale securities increased $480,000 for 2001 to
$511,000 for 2002. The Company sold securities during the year in response to
specific cash needs as identified through its liquidity management process. The
Company purchased securities during the year at times when cash on hand exceeded
expected uses over a relatively short time horizon (30-90 days).
Service charges on deposit accounts increased 20% in 2002 to $1.1 million. The
Company attributes the increase to the continued growth in core deposits and a
new overdraft policy that was implemented in mid-2002. The increase in 2001 was
primarily attributable to an increase in checking and savings accounts and a
deposit fee schedule that was revised in mid-2000.
The market interest rate environment heavily influences revenue from mortgage
banking activities. The increase in gain on sale of mortgage loans from 2001 to
2002 was due to the transfer from loans to loans held for sale and subsequent
sale of $16.0 million of residential mortgage loans at the end of the second
quarter of 2002. The generally lower interest rates of 2002 continued to spur
refinancing activity as gains on the sale of mortgage loans continued to rise in
2002 compared with 2001. The increase in net gain on sale of mortgage loans from
2000 to 2001 reflected increased refinancing activity as mortgage interest rates
fell over the period beginning in mid-2000. During 2002, the Company sold $35
million in residential mortgage loans into the secondary market as compared to
$30 million in 2001.
Commission income declined from $599,000 in 2001 to $330,000 in 2002, a decrease
of 45%. The Company attributes the decrease in commission income to reduced
consumer confidence levels in relation to the volatile U.S. stock market that
reduced the volume of transactions at Heritage Financial Services, a division of
CBSI that sells non-bank investment products.
Non-interest Expense
Total non-interest expense increased by 17% to $10.9 million in 2002 compared to
$9.4 million in 2001 as a result of increases in salaries and employee benefits,
equipment, data processing, and other expenses. Non-interest expense increased
from $8.8 million in 2000 to $9.4 million in 2001. The Company expects that
non-interest expense will continue to increase through 2004 as it expands into
the Louisville, Kentucky market through two or three additional banking offices.
Table 5 provides a breakdown of the Company's non-interest expense for the past
three years.
Table 5 - Analysis of Non-interest Expense
Percent
Year Ended December 31, Increase/(Decrease)
-------------------------------- ------------------------
(Dollars in thousands) 2002 2001 2000 2002/2001 2001/2000
------ ------ ------ --------- ---------
Salaries and employee benefits ................................ $ 5,967 $ 5,207 $ 4,993 15% 4%
Occupancy ..................................................... 823 844 741 (2) 14
Equipment ..................................................... 871 602 472 45 28
Data processing ............................................... 1,106 916 988 21 (7)
Marketing and advertising ..................................... 373 310 176 20 76
Other ......................................................... 1,798 1,500 1,463 20 3
------- ------- -------
Total ......................................................... $10,938 $ 9,379 $ 8,833 17% 6%
======= ======= =======
13
Salaries and benefits, the largest component of non-interest expenses, rose by
$760,000 to $6.0 million for 2002 as a result of additional employees to staff
the Company's new banking offices. The Company attributes the increase from 2000
to 2001 to its initiatives to improve customer service as a new customer call
center was established to field telephone inquiries from customers.
Additionally, the Company experienced the full year impact of the 2000 increase
in staffing levels in its operations areas which were increased to improve
turnaround time on loans and increase the general level of customer service.
Occupancy expense decreased in 2002 from 2001 due to a banking center
rehabilitation program initiated and completed during 2001. This program
included repairs and maintenance and exterior improvements at most of the
Company's banking centers. Banking center improvements were limited in 2002 as
management sought to control non-interest expenses in response to a falling net
interest margin.
Equipment expense increased during 2002 due to the Company's expansion of its
banking offices with the opening of the two Wal-Mart branches and the Louisville
loan production office. Equipment expense increased during 2001 as a result of
the purchase of new check processing equipment, which provides the Company with
the capacity to increase its total check processing volume without substantially
increasing its labor costs. The equipment also allows the Company to return
check images to its customers rather than the original checks.
Data processing expense increased during 2002 as the Company began offering
Internet banking to its customers in the third quarter of 2001 and experienced
the full-year impact of initiatives undertaken in 2001. Data processing expense
declined during 2001 because of a charge of $180,000 in 2000 related to the
conversion of CBKY to the same core data processor that CBSI utilizes. Excluding
this charge, data processing expense increased by $108,000 during 2001 because
of expenses related to interfacing new check processing equipment with the
Company's core data processing systems and the implementation of a "data
warehousing" computer software system (this system facilitates loan and deposit
data analysis).
Marketing and advertising expense increased during 2002 and 2001 due to the
additional expenses incurred as the Company promoted brand awareness and its
retail banking activities.
Other non-interest expense increased during 2002 as a result of increased
professional and legal fees due to various initiatives the Company has already
implemented or will initiate in 2003, and increased miscellaneous expenses
related to the opening of three new offices.
Financial Condition
Loan Portfolio
The Company experienced loan growth of 9.6% during 2002 as total loans increased
$28.4 million to $325.4 million at December 31, 2002. Loan growth was
particularly strong in the commercial business, real estate construction, and
home equity portfolios as sustained lower interest rates in 2002 continued to
have an impact on loan demand. Commercial mortgage loans decreased $9.0 million
during 2002 to $67.8 million as principal payments on these loans exceeded
demand for new loans of this type. The Company currently retains 10 and 15 year
mortgage loans that it originates and sells substantially all 30 year conforming
mortgage loans into the secondary market to reduce the interest rate risk of
holding such assets should interest rates rise. At the end of 2002, the Company
was servicing $30 million in mortgage loans for other investors compared to $31
million in 2001 and $41 million in 2000. The decline in the mortgage banking
servicing portfolio from 2000 to 2002 resulted from management's decision to
sell a majority of its loans on a servicing released basis, combined with loan
principal repayments on loans held in the servicing portfolio.
The Company's lending activities remain primarily concentrated within its
existing markets, and are principally comprised of loans secured by
single-family residential housing developments, owner occupied manufacturing and
retail facilities, general business assets, and single-family residential real
estate. The Company emphasizes the acquisition of deposit relationships from new
and existing commercial business and real estate loan clients.
Table 6 provides a breakdown of the Company's loans by category during the past
five years.
Table 6 - Loans by Type
As of December 31,
(Dollars in thousands) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Real estate:
Residential .......................... $ 81,618 $ 81,249 $ 91,310 $ 93,632 $ 99,026
Commercial ........................... 67,745 76,754 76,185 52,499 35,424
Construction ......................... 29,081 14,506 6,928 5,342 4,379
Commercial ............................. 106,576 94,159 89,054 78,973 48,057
Home Equity ............................ 29,595 19,818 14,017 7,344 6,760
Consumer ............................... 10,488 10,011 11,630 8,676 5,154
Loans secured by deposit accounts ...... 345 563 999 1,275 2,048
-------- -------- -------- -------- --------
Total loans ............................ $325,448 $297,060 $290,123 $247,741 $200,848
======== ======== ======== ======== ========
14
Table 7 illustrates the Company's fixed rate maturities and repricing frequency
for the loan portfolio:
Table 7 - Selected Loan Distribution
One Over One Over
As of December 31, 2002 Year Through Five Five
(Dollars in thousands) Total Or Less Years Years
-------- -------- -------- --------
Fixed rate maturities ............................ $ 71,591 $ 9,125 $ 17,884 $ 44,582
Variable rate repricing frequency ................ 253,857 151,950 97,873 4,034
-------- -------- -------- --------
Total ............................................ $325,448 $161,075 $115,757 $ 48,616
======== ======== ======== ========
Allowance and Provision for Loan Losses
Provisions for loan losses are charged against earnings to bring the total
allowance for loan losses to a level considered adequate by management based on
historical experience, the volume and type of lending conducted by the Banks,
the status of past due principal and interest payments, general economic
conditions, and inherent credit risk related to the collectibility of each
Bank's loan portfolio. The provision for loan losses was $1,144,000 for the year
ended December 31, 2002 as compared to $520,000 for 2001 and $1,197,000 for
2000. Net charge-offs were $360,000 during 2002 as compared to $359,000 and
$69,000 for 2001 and 2000, respectively. Net charge-offs for 2002 were virtually
unchanged from 2001 even though the Company experienced substantial loan growth
and the general economic climate was unfavorable. Charge-offs for real estate
loans increased significantly during 2002 but were substantially offset by a
sizeable recovery on a loan previously charged off during 2002. There are some
specific borrower situations, as evidenced by the increase in non-performing
assets discussed later in this report, which may lead to future charge-offs.
The Company maintains the allowance for loan losses at a level that is
sufficient to absorb credit losses inherent in its loan portfolio. Management
determines the level of the allowance for loan losses based 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 future cash flows.
The allowance for loan losses is increased by a provision for loan losses, which
is charged to expense, and reduced by charge-offs of specific loans, net of
recoveries. Changes in the allowance relating to impaired loans are charged or
credited directly to the provision for loan losses. At December 31, 2002, the
Company's allowance for loan losses totaled $3,814,000 as compared to $3,030,000
and $2,869,000 at December 31, 2001 and 2000, respectively.
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.
Table 8 provides the Company's loans charge-off and recovery activity during the
past five years.
Table 8 - Summary of Loan Loss Experience
Year Ended in December 31,
---------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
------- ------- ------- ------- -------
Allowance for loan losses at beginning of year ............... $ 3,030 $ 2,869 $ 1,741 $ 1,276 $ 1,014
Adjustment to conform pooled subsidiary's fiscal year end .... -- -- -- -- 8
Charge-offs:
Residential real estate ................................... (24) (10) -- (24) (31)
Commercial real estate .................................... (297) (254) -- (3) --
Construction .............................................. -- -- -- -- --
Commercial business ....................................... (189) (45) (52) (136) (52)
Home equity ............................................... -- (15) -- -- --
Consumer .................................................. (48) (48) (17) (28) (21)
------- ------- ------- ------- -------
Total ................................................... (558) (372) (69) (191) (104)
------- ------- ------- ------- -------
Recoveries:
Residential real estate ................................... -- 2 -- -- --
Commercial real estate .................................... 192 3 -- -- --
Construction .............................................. -- -- -- -- --
Commercial business ....................................... -- -- -- -- 3
Home equity ............................................... -- -- -- -- 1
Consumer .................................................. 6 8 -- 2 --
------- ------- ------- ------- -------
Total ................................................... 198 13 -- 2 4
------- ------- ------- ------- -------
Net loan charge-offs ......................................... (360) (359) (69) (189) (100)
Provision for loan losses .................................... 1,144 520 1,197 654 354
------- ------- ------- ------- -------
Allowance for loan losses at end of year ..................... $ 3,814 $ 3,030 $ 2,869 $ 1,741 $ 1,276
======= ======= ======= ======= =======
Ratios:
Allowance for loan losses to total loans .................. 1.17% 1.02% 0.99% 0.70% 0.64%
Net loan charge-offs to average loans ..................... 0.12 0.13 0.03 0.08 0.05
Allowance for loan losses to non-performing loans ......... 120 186 252 549 172
The following table depicts management's allocation of the allowance for loan
losses by loan type during the last three years. Allowance funding and
allocation is based on management's assessment of economic conditions, past loss
experience, loan volume, past-due history and other factors. Since these factors
and management's assumptions are subject to change, the allocation is not
necessarily indicative of future loan portfolio performance. Allocations of the
allowance may be made for specific loans or loan categories, but the entire
allowance is available for any loan that may be charged off. Loan losses are
charged against the allowance when management deems a loan uncollectible.
15
Table 9 - Management's Allocation of the Allowance for Loan Losses
As of December 31,
------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- ----------------------------
Percent of Loans Percent of Loans Percent of Loans
(Dollars in thousands) Allowance to Total Loans Allowance to Total Loans Allowance to Total Loans
--------- -------------- --------- -------------- --------- --------------
Residential real estate ...... $ 319 25.1% $ 260 27.3% $ 217 31.5%
Commercial real estate ....... 1,321 20.9 1,138 25.8 933 26.3
Construction ................. 80 8.9 55 4.9 -- 2.4
Commercial business .......... 1,764 32.7 1,301 31.7 1,472 30.7
Home equity .................. 224 9.1 150 6.7 122 4.8
Consumer ..................... 106 3.3 126 3.6 125 4.3
------ ----- ------ ----- ------ -----
Total ........................ $3,814 100.0% $3,030 100.0% $2,869 100.0%
====== ===== ====== ===== ====== =====
Asset Quality
Loans (including impaired loans under Statement of Financial Accounting
Standards 114 and 118) are placed on non-accrual status when they become past
due 90 days or more as to principal or interest (180 days for residential real
estate). When loans are placed on non-accrual status, all unpaid accrued
interest is reversed. These loans remain on non-accrual status until the loan
becomes current or the loan is deemed uncollectible and is charged off. The
Company defines impaired loans to be those commercial loans that management has
classified as doubtful (collection of total amount due is highly questionable or
improbable) or loss (all or a portion of the loan has been written off or a
specific allowance for loss has been provided). Loans individually classified as
impaired decreased from $1.9 million at December 31, 2001 to $1.7 million at
December 31, 2002. Non-performing assets also include foreclosed real estate
that has been acquired through foreclosure or acceptance of a deed in lieu of
foreclosure. Foreclosed real estate is carried at the lower of cost or fair
value less estimated selling costs, and is actively marketed for sale.
Total non-performing loans increased from $1.6 million at December 31, 2001 to
$3.2 million at December 31, 2002. These non-performing loans are primarily
secured by real estate and, historically, the Company's interest in the real
estate securing these loans has generally been adequate to limit the Company's
exposure to significant loss. While management does not believe that the
increase in non-performing assets indicates a significant decline in general
asset quality, management's estimate of future credit losses (as evidenced by
the current level of the Company's allowance for loan losses) is inherently
uncertain and may differ from actual results.
Table 10 provides the Company's non-performing loan experience during the past
five years.
Table 10 - Non-Performing Assets
As of December 31,
------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Loans on non-accrual status (1) ............................ $3,171 $1,588 $1,052 $ 145 $ 470
Loans past due 90 days or more and still accruing .......... -- 39 86 172 267
------ ------ ------ ------ ------
Total non-performing loans ................................. 3,171 1,627 1,138 317 737
Other real estate owned .................................... 630 560 -- 13 200
------ ------ ------ ------ ------
Total non-performing assets ................................ $3,801 $2,187 $1,138 $ 330 $ 937
====== ====== ====== ====== ======
Percentage of non-performing loans to total loans .......... 0.97% 0.55% 0.39% 0.13% 0.37%
Percentage of non-performing assets to total loans ......... 1.17 0.74 0.39 0.13 0.47
- --------------------
(1) Impaired loans on non-accrual status are included in loans. See Note 3 to
the consolidated financial statements for additional discussion on
impaired loans.
Investment Securities
Table 11 sets forth the breakdown of the Company's securities portfolio for the
past five years.
Table 11 - Securities Portfolio
December 31,
------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Securities Available for Sale:
U.S. Government and federal agency ................ $ 8,756 $ 27,089 $ 54,572 $ -- $ --
Mortgage-backed ................................... 61,295 54,354 23,651 4,057 666
State and municipal ............................... 13,040 10,707 7,219 2,371 --
Corporate bonds ................................... 9,283 6,951 994 -- --
Common stock ...................................... -- -- -- -- 250
-------- -------- -------- -------- --------
Total securities available for sale ......... 92,374 99,101 86,436 6,428 916
Securities Held to Maturity:
U.S. Government and federal agency ................ -- -- -- 66,255 59,259
Mortgage-backed ................................... -- -- -- 26,388 29,194
State and municipal ............................... -- -- -- 4,256 3,329
Corporate bonds ................................... -- -- -- 1,010 --
-------- -------- -------- -------- --------
Total securities held to maturity ........... -- -- -- 97,909 91,782
-------- -------- -------- -------- --------
Total .................................... $ 92,374 $ 99,101 $ 86,436 $104,337 $ 92,698
======== ======== ======== ======== ========
16
Table 12 sets forth the breakdown of the Company's investment securities
available for sale by type and maturity as of December 31, 2002.
Table 12 - Investment Securities Available for Sale
As of December 31, 2002
----------------------------------
Weighted
Amortized Average
(Dollars in thousands) Cost Fair Value Yield (1)
------- ---------- ---------
U.S. Government and federal agency:
Within one year ..................... $ 2,005 $ 2,034 4.02%
Over one through five years ......... 6,547 6,722 3.71
------- -------
Total U.S. Government and agency ....... 8,552 8,756 3.78
State and municipal
Over one through five years ......... 105 109 5.05
Over five through ten years ......... 3,312 3,501 4.51
Over ten years ...................... 9,270 9,430 4.73
------- -------
Total state and municipal .............. 12,687 13,040 4.67
Corporate Bonds
Within one year ..................... 1,015 1,019 3.66
Over one through five years ......... 850 857 4.89
Over ten years ...................... 7,384 7,407 3.88
------- -------
Total corporate bonds .................. 9,249 9,283 3.93
Total mortgage-backed securities ....... 60,209 61,295 4.21
------- -------
Total available for sale securities .... $90,697 $92,374 4.21%
======= =======
(1) Not tax equivalent basis for tax-exempt securities.
The investment portfolio primarily consists of U.S. Government and federal
agency obligations, mortgage-backed securities, securities issued by states and
municipalities, and corporate bonds. Mortgage-backed securities consist
primarily of obligations insured or guaranteed by Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, or Government National
Mortgage Association.
Securities available for sale decreased from $99.1 million at December 31, 2001
to $92.4 million at December 31, 2002 as the Company sold securities to fund
loan growth. The Company has reallocated proceeds from the sales, maturities,
and calls of U.S. Government and federal agency securities over the last two
years into mortgage-backed, state and municipal, and corporate securities.
Management reinvested the proceeds from the U.S. Government and federal agency
securities in mortgage-backed securities to develop a cash flow stream that is
better adapted to the Company's interest rate sensitivity profile.
Mortgage-backed securities provide periodic cash flows and are subject to
accelerated prepayments in times of declining interest rates. Securities
available for sale have a weighted average life of 4.9 years.
Deposits
Total deposits were $289.8 million at December 31, 2002 compared to $255.9
million at December 31, 2001, an increase of 13.3%. Deposit growth was primarily
due to the introduction of a money market account during 2001, which was priced
competitively within its market areas. The Company reduced its money market rate
at the end of the third quarter of 2002 in an effort to increase its net
interest margin, consequently slowing the rate of growth in these accounts over
the last quarter of 2002. The Company expects that it will again experience
strong growth in money market deposits during 2003 as the Company expands its
money market product line in early 2003. Total certificates of deposit declined
12.2% over the course of 2002 as management sought to reduce the reliance on
higher-cost CD's by focusing on the opening of lower-cost transaction accounts.
The Company is opening non-interest deposit accounts at a faster rate than in
past years, but these accounts generally have low average balances and a large
number of such accounts are required to substantially affect the total
outstanding balance of such accounts
The Company anticipates that, based upon changes it made to its retail
operations during late 2002, it will be able to attract a substantial amount of
new non-interest bearing deposit accounts, which will have a positive affect on
the Company's net interest margin. Some of the retail changes made in 2002
include a new retail incentive compensation plan, two new branches in Wal-Mart
Supercenters, a free business checking account and increased marketing efforts
promoting lower-cost transaction accounts.
17
Table 13 provides a profile of the Company's deposits during the past five
years.
Table 13 - Deposits
December 31,
------------------------------------------------------------
(Dollars in thousands) 2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Demand (NOW) ...................................................... $ 38,008 $ 43,378 $ 46,945 $ 41,523 $ 31,908
Money market accounts ............................................. 74,448 10,782 -- -- --
Savings ........................................................... 30,656 45,897 41,853 41,552 36,066
Individual retirement accounts-savings ............................ 338 377 379 442 549
Individual retirement accounts-certificates of deposit ............ 16,173 15,035 13,636 13,014 14,709
Certificates of deposit, $100,000 and over ........................ 28,048 39,030 45,870 27,249 21,426
Other certificates of deposit ..................................... 76,369 81,277 86,236 85,725 89,394
-------- -------- -------- -------- --------
Total interest bearing deposits ................................... 264,040 235,776 234,919 209,505 194,052
Total non-interest bearing deposits ............................... 25,790 20,116 23,303 16,968 18,815
-------- -------- -------- -------- --------
Total ............................................................. $289,830 $255,892 $258,222 $226,473 $212,867
======== ======== ======== ======== ========
Federal Funds Purchased and Repurchase Agreements
The Company's short-term borrowings consist of repurchase agreements and federal
funds purchased, which represent overnight liabilities to non-affiliated
financial institutions. While repurchase agreements are effectively deposit
equivalents, these arrangements consist of securities that are sold to
commercial customers under agreements to repurchase. Short-term borrowings
decreased $2.7 million from $39.1 December 31, 2001 to $36.4 million at December
31, 2002.
Federal Home Loan Bank Advances
FHLB advances increased from $89.0 million at December 31, 2001 to $92.7 million
at December 31, 2002. These advances principally consist of putable (or
convertible) instruments that give the FHLB the option quarterly to put the
advance back to the Banks, at which time the Banks can prepay the advance
without penalty or can allow the advance to adjust to three-month Libor (London
Interbank Offer Rate). In calculations provided by the FHLB to the Company,
three month Libor would have to rise by more than 300 basis points from December
31, 2002 levels before the FHLB would exercise its put option. These advances
have various maturities through 2010. See Note 7 to the consolidated financial
statements for additional information. The Company does not anticipate that it
will enter into putable advances for the foreseeable future, but instead may use
fixed rate advances to fund balance sheet growth as needed.
Liquidity
Liquidity levels are adjusted in order to meet funding needs for deposit
outflows, repayment of borrowings, and loan commitments and to meet
asset/liability objectives. The Banks' primary sources of funds are deposits;
repayment of loans and mortgage-backed securities; Federal Home Loan Bank
advances; maturities of investment securities and other short-term investments;
and income from operations. While scheduled loan and mortgage-backed security
repayments are a relatively predictable source of funds, deposit flows and loan
and mortgage-backed security prepayments are greatly influenced by general
interest rates, economic conditions and competition.
Liquidity management is both a daily and long term function of business
management. If the Banks require funds beyond those generated internally, as of
December 31, 2002 the Banks have $14 million in additional capacity under their
borrowing agreements with the FHLB and approximately $13 million from other
correspondent financial institutions that provide additional sources of funds.
The Company anticipates it will have sufficient funds available to meet current
loan commitments and other credit commitments.
Capital
Total Company capital increased $932,000 during 2002 to $43.3 million, primarily
due to net income earned and other comprehensive income related to the increase
in value of available for sale securities and the interest rate swap into which
the Company entered in August 2002. Offsetting these increases to capital were
dividends per share of $0.58 and an increase in treasury stock of $1.5 million
during 2002 as the Company continued to actively repurchase shares of its common
stock in the open market.
The Company has actively been repurchasing shares of its common stock since May
21, 1999. A net total of 326,096 shares at cost of $5.1 million have been
repurchased since that time under both the current and prior repurchase plans,
with 96,007 shares at a cost of $1,596,000 purchased in 2002. The Company's
Board of Directors authorized another share repurchase plan in May 2001 under
which a maximum of $3.0 million of the Company's common stock may be purchased.
Through December 31, 2002, a total of $2.2 million had been expended to purchase
133,507 shares under the current repurchase plan.
Regulatory agencies measure capital adequacy within a framework that makes
capital requirements, in part, dependent on the risk inherent in the balance
sheets of individual financial institutions. The Company and its subsidiary
Banks continue to exceed the regulatory requirements for Tier I, Tier I leverage
and Total risk-based capital ratios. See Note 11 to the Consolidated Financial
Statements.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/liability management is the process of balance sheet control designed to
ensure safety and soundness and to maintain liquidity and regulatory capital
standards while maintaining acceptable net interest income. Interest rate risk
is the exposure to adverse changes in net interest income as a result of market
fluctuations in interest rates. Management continually monitors interest rate
and liquidity risk so that it can implement appropriate funding, investment, and
other balance sheet strategies. Management considers market interest rate risk
to be the Company's most significant ongoing business risk consideration.
The Company currently contracts with an independent third party consulting firm
to measure its interest rate risk position. The consulting firm utilizes an
earnings simulation model to analyze net interest income sensitivity. Current
balance sheet amounts, current yields and costs, corresponding maturity and
repricing amounts and rates, other relevant information, and certain assumptions
made by management are combined with gradual movements in interest rates of 200
basis points up and 100 basis points down within the model to estimate their
combined effects on net interest income over a one-year horizon. Interest rate
movements are spread equally over the forecast period of one year. Previously,
the Company applied instantaneous interest rate movements within its internal
model. The Company feels that using gradual interest rate movements within the
model is more representative of future rate changes than instantaneous interest
rate shocks. The Company does not project growth in amounts for any balance
sheet category when constructing the model because of the belief that projected
growth can mask current interest rate risk imbalances over the projected
horizon. The Company believes that the changes made to its interest rate risk
measurement process have improved the accuracy of results of the process.
Consequently, the Company believes that it has better information on which to
base asset and liability allocation decisions going forward.
Assumptions based on the historical behavior of the Company's deposit rates and
balances in relation to changes in interest rates are incorporated into the
model. These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure future net interest income or precisely predict the
impact of fluctuations in market interest rates on net interest income. The
Company continually monitors and updates the assumptions as new information
becomes available. Actual results will differ from the model's simulated results
due to timing, magnitude and frequency of interest rate changes, and actual
variations from the managerial assumptions utilized under the model, as well as
changes in market conditions and the application and timing of various
management strategies.
Given a gradual 200 basis point increase in the projected yield curve used in
the simulation model, it is estimated that as of December 31, 2002 the Company's
net interest income would decrease by an estimated 3.0% over the one year
forecast horizon. The forecast results are heavily dependent on the assumptions
regarding changes in deposit rates; the Company can minimize the reduction in
net interest income in a period of rising interest rates to the extent that it
can resist raising deposit rates during this period. Given a gradual 100 basis
point decrease in the projected yield curve used in the simulation model, it is
estimated that as of December 31, 2002 the Company's net interest income would
decrease by an estimated 1.1% over the one year forecast horizon. In a falling
interest rate environment, the Company's assets would continue to reprice
downward while much of its liabilities have effectively reached their interest
rate floors. The Company continues to explore transactions and strategies to
both increase its net interest income and minimize its interest rate risk.
The interest sensitivity profile of the Company at any point in time will be
affected by a number of factors. These factors include the mix of interest
sensitive assets and liabilities as well as their relative repricing schedules.
It is also influenced by market interest rates, deposit growth, loan growth, and
other factors. The tables below are representative only and are not precise
measurements of the effect of changing interest rates on the Company's net
interest income in the future.
19
Table 14 illustrates the Company's estimated annualized earnings sensitivity
profile based on the asset/liability model as of year-end 2002:
Table 14 - Interest Rate Sensitivity For 2002
Gradual Gradual
Decrease Increase
In Interest In Interest
Rates of 100 Rates of 200
(Dollars in thousands) Basis Points BASE Basis Points
------------ ---- ------------
Projected interest income:
Loans..................................$ 21,357 $ 21,744 $ 22,508
Investments............................ 3,203 3,340 3,608
Short-term investments................. 431 442 466
----------- ----------- -----------
Total interest income..................... 24,991 25,526 26,582
Projected interest expense:
Deposits............................... 5,640 5,814 6,826
Other borrowings....................... 5,332 5,533 6,004
----------- ----------- -----------
Total interest expense.................... 10,972 11,347 12,830
----------- ----------- -----------
Net interest income.......................$ 14,019 $ 14,179 $ 13,752
=========== =========== ===========
Change from base..........................$ (160) $ (427)
% Change from base........................ (1.1)% (3.0)%
Table 15 illustrates the Company's estimated annualized earnings sensitivity
profile based on the asset/liability model as of year-end 2001:
Table 15 - Interest Rate Sensitivity For 2001
Decrease in Rates Increase in Rates
----------------- -----------------
200 100 100 200
(Dollars in thousands) Basis Points Basis Points BASE Basis Points Basis Points
------------ ------------ ---- ------------ ------------
Projected interest income:
Loans...................................$ 18,438 $ 19,736 $ 20,951 $ 22,071 $ 23,164
Investments............................. 4,673 5,052 5,368 5,612 5,824
Short-term investments.................. 4 14 24 43 61
---------- -------- --------- --------- ---------
Total interest income...................... 23,115 24,802 26,343 27,726 29,049
Projected interest expense::
Deposits................................ 4,762 5,373 6,559 8,060 9,406
Other borrowings........................ 5,487 5,635 5,783 6,107 6,488
---------- -------- --------- --------- ---------
Total interest expense..................... 10,249 11,008 12,342 14,167 15,894
---------- -------- --------- --------- ---------
Net interest income........................$ 12,866 $ 13,794 $ 14,001 $ 13,559 $ 13,155
========== ======== ========= ========= =========
Change from base...........................$ (1,135) $ (207) $ (442) $ (846)
% Change from base......................... (8.1)% (1.5)% (3.2)% (6.0)%
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMMUNITY BANK SHARES OF INDIANA, INC.
New Albany, Indiana
FINANCIAL STATEMENTS
December 31, 2002, 2001, and 2000
CONTENTS
REPORT OF INDEPENDENT AUDITORS........................................................................... 22
REPORT OF INDEPENDENT AUDITORS........................................................................... 23
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS......................................................................... 24
CONSOLIDATED STATEMENTS OF INCOME................................................................... 25
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY.............................................................................. 26
CONSOLIDATED STATEMENTS OF CASH FLOWS............................................................... 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................................................... 30
21
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
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, 2002 and 2001, and
the related consolidated statements of income, changes in shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company'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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the 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, 2002 and 2001, and
the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
Crowe, Chizek and Company LLP
Louisville, Kentucky
January 31, 2003
22
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Community Bank Shares of Indiana, Inc.
New Albany, Indiana
We have audited the accompanying consolidated statements of income,
stockholders' equity, and cash flows of Community Bank Shares of Indiana, Inc.
and Subsidiaries for the year ended December 31, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Community Bank Shares of Indiana, Inc. and Subsidiaries for the year ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for debt securities in 2000 in accordance with
the provisions of Statement of Financial Accounting Standards No. 133.
Monroe Shine
New Albany, Indiana
January 27, 2001
23
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED BALANCE SHEETS
December 31
(In thousands, except share amounts)
- ----------------------------------------------------------------------------------
2002 2001
---- ----
ASSETS
Cash and due from banks $ 6,631 $ 8,442
Interest-bearing deposits in other financial institutions 950 2,657
Securities available for sale, at fair value 92,374 99,101
Loans held for sale 9,230 1,401
Loans, net 321,634 294,030
Federal Home Loan Bank stock, at cost 7,700 7,658
Accrued interest receivable 1,967 2,375
Premises and equipment, net 11,324 11,216
Cash surrender value life insurance 10,514 --
Other assets 3,225 2,736
--------- ---------
$ 465,549 $ 429,616
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 25,790 $ 20,116
Interest bearing 264,040 235,776
--------- ---------
Total deposits 289,830 255,892
Short-term borrowings 36,393 39,075
Federal Home Loan Bank advances 92,700 89,000
Accrued interest payable 337 338
Other liabilities 2,992 2,946
--------- ---------
Total liabilities 422,252 387,251
Shareholders' equity
Preferred stock, without par value;
5,000,000 shares authorized; none issued -- --
Common stock, $.10 par value per share
10,000,000 shares authorized;
2,728,298 shares issued; 2,394,545 and
2,475,894 shares outstanding 273 273
Additional paid-in capital 19,533 19,513
Retained earnings 27,373 26,653
Accumulated other comprehensive income (loss) 1,332 (259)
Unearned ESOP and performance share awards
(2002 - 7,657, 2001 - 13,713) (80) (143)
Treasury stock, at cost (2002 - 326,096 shares,
2001 - 238,691 shares) (5,134) (3,672)
--------- ---------
Total shareholders' equity 43,297 42,365
--------- ---------
$ 465,549 $ 429,616
========= =========
24
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
(In thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Interest and dividend income
Loans, including fees $20,278 $22,856 $ 23,086
Securities: taxable 3,698 4,974 5,970
tax exempt 500 431 365
Federal Home Loan Bank dividends 452 561 612
Interest-bearing deposits in other financial institutions 124 473 314
Trading account securities -- -- 141
------- ------- --------
25,052 29,295 30,488
Interest expense
Deposits 7,539 10,981 11,454
Federal Home Loan Bank advances 5,461 5,325 5,651
Short-term borrowings 354 739 1,209
------- ------- --------
13,354 17,045 18,314
------- ------- --------
Net interest income 11,698 12,250 12,174
Provision for loan losses 1,144 520 1,197
------- ------- --------
Net interest income after provision for loan losses 10,554 11,730 10,977
Noninterest income
Service charges on deposit accounts 1,100 920 667
Commission income 330 599 657
Gain on sale of available for sale securities 511 31 --
Gain on trading securities -- -- 171
Gain on sale of mortgage loans 457 359 172
Gain on sale of premises and equipment -- -- 86
Loan servicing income, net of amortization 96 101 121
Increase in cash surrender value of life insurance 514 -- --
Other 152 176 100
------- ------- --------
3,160 2,186 1,974
Noninterest expense
Salaries and employee benefits 5,967 5,207 4,993
Occupancy 823 844 741
Equipment 871 602 472
Data processing 1,106 916 988
Marketing and advertising 373 310 176
Other 1,798 1,500 1,463
------- ------- --------
10,938 9,379 8,833
------- ------- --------
Income before income taxes and cumulative
effect of change in accounting principle 2,776 4,537 4,118
Income tax expense 650 1,582 1,267
------- ------- --------
Income before cumulative effect of
change in accounting principle 2,126 2,955 2,851
Cumulative effect of change in accounting
principle, net of income tax -- -- (172)
------- ------- --------
Net income $ 2,126 $ 2,955 $ 2,679
======= ======= ========
Earnings per share:
Basic $ 0.87 $ 1.18 $ 1.05
Diluted $ 0.87 $ 1.18 $ 1.05
See accompanying notes.
25
COMMUNITY BANK SHARES OF INDIANA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31
- --------------------------------------------------------------------------------------------------------------
Common Stock Additional
Shares Paid-In Retained
Outstanding Amount Capital Earnings
----------- ------ ------- --------
(In thousands)
Balance at January 1, 2000 2,617 $273 $19,472 $ 23,859
Comprehensive income:
Net income -- -- -- 2,679
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- -- --
Cumulative effect of change in
accounting principle, net of tax -- -- -- --
Total comprehensive income
Cash dividends declared ($.54 per share) -- -- -- (1,374)
Purchase of 108,600 shares treasury stock (109) -- -- --
Forfeiture of 1,200 performance share awards -- -- -- --
Vesting of 2,900 performance share awards 3 -- -- --
Commitment of 5,756 shares to be released
under ESOP 6 -- 19 --
------ ---- ------- --------
Balance at December 31, 2000 2,517 $273 $19,491 $ 25,164
Comprehensive income:
Net income -- -- -- 2,955
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- -- --
Change in minimum pension liability,
net of tax effects -- -- -- --
Total comprehensive income
Accumulated
Other Unearned
Comprehensive ESOP and Total
Income Performance Treasury Shareholders'
(Loss) Share Awards Stock Equity
------ ------------ ----- ------
(In thousands)
Balance at January 1, 2000 $ (232) $(339) $(1,403) $ 41,630
Comprehensive income:
Net income -- -- -- 2,679
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 2,039 -- -- 2,039
Cumulative effect of change in
accounting principle, net of tax (2,661) -- -- (2,661)
--------
Total comprehensive income 2,057
--------
Cash dividends declared ($.54 per share) -- -- -- (1,374)
Purchase of 108,600 shares treasury stock -- -- (1,550) (1,550)
Forfeiture of 1,200 performance share awards -- 13 (13) --
Vesting of 2,900 performance share awards -- 46 -- 46
Commitment of 5,756 shares to be released
under ESOP -- 60 -- 79
------- ----- ------- --------
Balance at December 31, 2000 $ (854) $(220) $(2,966) $ 40,888
Comprehensive income:
Net income -- -- -- 2,955
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 747 -- -- 747
Change in minimum pension liability,
net of tax effects (152) -- -- (152)
--------
Total comprehensive income 3,550
(Continued)
26
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31
- ---------------------------------------------------------------------------------------------------------------------
Common Stock Additional
Shares Paid-In Retained
Outstanding Amount Capital Earnings
----------- ------ ------- --------
(In thousands)
Cash dividends declared ($.58 per share) -- -- -- (1,466)
Purchase of 48,500 shares treasury stock (49) -- -- --
Vesting of 2,300 performance share awards 2 -- -- --
Commitment of 5,531 shares to be released
under ESOP 6 -- 22 --
----- ---- -------- --------
Balance at December 31, 2001 2,476 273 19,513 26,653
Comprehensive income:
Net income -- -- -- 2,126
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects -- -- -- --
Change in unrealized gains (losses),
interest rate swap net of reclassification
and tax effects -- -- -- --
Change in minimum pension liability,
net of tax effects -- -- -- --
Total comprehensive income
Cash dividends declared ($.58 per share) -- -- -- (1,406)
Purchase of 96,007 shares treasury stock (96) -- -- --
Vesting of 300 performance share awards -- -- -- --
Stock options exercised 8,602 shares 9 -- (14) --
Commitment of 5,756 shares to be released
under ESOP 5 -- 34 --
----- ---- -------- --------
Balance at December 31, 2002 2,394 $273 $ 19,533 $ 27,373
===== ==== ======== ========
Accumulated
Other Unearned
Comprehensive ESOP and Total
Income Performance Treasury Shareholders'
(Loss) Share Awards Stock Equity
------ ------------ ----- ------
(In thousands)
Cash dividends declared ($.58 per share) -- -- -- (1,466)
Purchase of 48,500 shares treasury stock -- -- (706) (706)
Vesting of 2,300 performance share awards -- 15 -- 15
Commitment of 5,531 shares to be released
under ESOP -- 62 -- 84
------- ----- ------- --------
Balance at December 31, 2001 (259) (143) (3,672) 42,365
Comprehensive income:
Net income -- -- -- 2,126
Change in net unrealized gain (loss) on
securities available for sale, net of
reclassification and tax effects 1,213 -- -- 1,213
Change in unrealized gains (losses),
interest rate swap net of reclassification
and tax effects 455 -- -- 455
Change in minimum pension liability,
net of tax effects (77) -- -- (77)
--------
Total comprehensive income 3,717
Cash dividends declared ($.58 per share) -- -- -- (1,406)
Purchase of 96,007 shares treasury stock -- -- (1,596) (1,596)
Vesting of 300 performance share awards -- 2 -- 2
Stock options exercised 8,602 shares -- -- 134 120
Commitment of 5,756 shares to be released
under ESOP -- 61 -- 95
------- ----- ------- --------
Balance at December 31, 2002 $ 1,332 $ (80) $(5,134) $ 43,297
======= ===== ======= ========
See accompanying notes.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $ 2,126 $ 2,955 $ 2,679
Adjustments to reconcile net income to
net cash from operating activities
Proceeds from sale of trading securities -- -- 10,084
Provision for loan losses 1,144 520 1,197
Depreciation 1,008 780 644
Net amortization (accretion) of securities 825 289 (10)
Gain on sale of available for sale securities (511) (31) --
Mortgage loans originated for sale (26,512) (29,780) (15,931)
Proceeds from mortgage loan sales 35,174 29,343 16,103
Gain on sales of mortgage loans (457) (359) (172)
Increase in cash surrender value of life insurance (514) -- --
Federal Home Loan Bank stock dividends (42) (57) (56)
Gain on sale of premises and equipment -- -- (86)
ESOP and performance share award expense 95 99 125
Net change in
Accrued interest receivable 408 765 (344)
Accrued interest payable (1) (106) 61
Other assets 864 (205) (792)
Other liabilities (943) 491 831
-------- -------- --------
Net cash from operating activities 12,664 4,704 14,333
Cash flows from investing activities
Net decrease in interest-bearing deposits 1,707 2,973 137
Activity in available for sale securities
Sales 33,994 7,762 --
Purchases (52,066) (81,144) (275)
Maturities, prepayments and calls 26,339 61,694 1,555
Activity in held to maturity securities
Maturities, prepayments and calls -- -- 5,421
Loan originations and payments, net (45,047) (7,856) (42,738)
Purchase of Federal Home Loan Bank stock -- -- (183)
Purchase of premises and equipment, net (1,116) (1,705) (1,396)
Investment in cash surrender value of life insurance (10,000) -- --
-------- -------- --------
Net cash from investing activities (46,189) (18,276) (37,479)
(Continued)
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
---- ---- ----
Cash flows from financing activities
Net change in deposits $ 33,938 $ (2,330) $ 31,749
Net change in short-term borrowings (2,682) 16,528 (5,635)
Proceeds from Federal Home Loan Bank advances 15,700 7,000 81,200
Repayment of advances from Federal
Home Loan Bank (12,000) (9,800) (75,650)
Exercise of stock options 120 -- --
Purchase of treasury stock (1,596) (706) (1,550)
Cash dividends paid (1,766) (1,483) (1,411)
-------- -------- --------
Net cash from financing activities 31,714 9,209 28,703
-------- -------- --------
Net change in cash and due from banks (1,811) (4,363) 5,557
Cash and due from banks at beginning
of year 8,442 12,805 7,248
-------- -------- --------
Cash and due from banks at end of year $ 6,631 $ 8,442 $ 12,805
======== ======== ========
Supplemental cash flow information:
Interest paid $ 13,355 $ 17,151 $ 18,175
Income taxes paid 354 1,800 2,011
Supplemental noncash disclosures:
Transfers from loans to loans held for sale 16,034 -- --
Transfers from loans to foreclosed real estate 215 560 --
Transfers from loans to repossessed assets 50 -- --
Transfers of securities from held to
maturity to trading account -- -- 10,311
Transfers of securities from held to
maturity to available for sale -- -- 81,911
Loan originated to facilitate the
sale of premises and equipment -- -- 300
See accompanying notes.
29
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations: The consolidated financial
statements include Community Bank Shares of Indiana, Inc. and its wholly owned
subsidiaries, Community Bank of Southern Indiana (Community Bank), Heritage Bank
of Southern Indiana (Heritage Bank), and Community Bank of Kentucky (CB
Kentucky), collectively referred to as "the Company". Effective March 1, 2002,
Heritage Bank of Southern Indiana dissolved their charter and all accounts were
combined with Community Bank of Southern Indiana, having no affect on the
consolidated entity. Intercompany balances and transactions are eliminated in
consolidation.
The Banks provide financial services through their ten offices in Southern
Indiana and four in Kentucky. The Banks' primary deposit products are checking,
savings, and term certificate accounts, and their primary lending products are
residential mortgage, commercial, and installment loans. Substantially all loans
are secured by specific items of collateral including business assets, consumer
assets and commercial and residential real estate. Commercial loans are expected
to be repaid from cash flow from operations of businesses. Other financial
instruments, which potentially represent concentrations of credit risk, include
deposit accounts in other financial institutions and federal funds sold.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ. The allowance for loan
losses and fair values of financial instruments are particularly subject to
change.
Cash Flows: Cash and cash equivalents include cash, deposits with other
financial institutions with maturities less than 90 days, and federal funds
sold. Net cash flows are reported for interest-bearing deposits in other
financial institutions, loans, deposits, and short-term borrowings.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Trading securities are carried at fair value, with changes in unrealized holding
gains and losses included in income. Other securities, such as Federal Home Loan
Bank stock, are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Mortgage Banking Activities: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of aggregate cost or market value.
To deliver closed loans to the secondary market and to control its interest rate
risk prior to sale, the Company enters "best efforts" agreements to sell loans.
The aggregate market value of mortgage loans held for sale considers the price
of the sales contracts.
On July 1, 2002, the Company became subject to new accounting guidance for
certain commitments to originate loans. The new guidance requires loan
commitments related to the origination of mortgage loans held for sale to be
accounted for as derivative instruments. The Company's commitments are for fixed
rate mortgage loans, generally lasting 60 days and are at market rates when
initiated. Considered derivatives, the Company had commitments to originate $2.3
million in loans at December 31, 2002 which it intends to sell after the loans
are closed. The impact of adopting this guidance was not material and
substantially all of the gain on sale generated from mortgage banking activities
continues to be recorded when closed loans are delivered into the sales
contracts.
30
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of deferred loan fees and costs and an allowance for
loan losses.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income on mortgage
and commercial loans is discontinued at the time the loan is 90 days delinquent.
Consumer loans are typically charged-off no later than 120 days past due. In all
cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful. All interest accrued
but not received for loans placed on nonaccrual is reversed against interest
income. Interest received on such loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogenous loans, such as consumer and residential real estate, are
collectively evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosure.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line method with useful lives ranging from 7
to 40 years. Furniture, fixtures, and equipment are depreciated using the
straight-line method with useful lives ranging from 2 to 10 years.
Servicing Assets: Servicing assets represent the allocated value of retained
servicing rights on loans sold. Servicing assets are capitalized in other assets
and expensed into other income against service fee income in proportion to, and
over the period of, estimated net servicing revenues. Impairment is evaluated
based on the fair value of the assets, using groupings of the underlying loans
as to interest rates and then, secondarily, as to geographic and prepayment
characteristics. Fair value is determined using prices for similar assets with
similar characteristics, when available, or based upon discounted cash flows
using market-based assumptions. Any impairment of a grouping is reported as a
valuation allowance.
Company Owned Life Insurance: The Company has purchased life insurance policies
on certain key executives. Company owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
discounted amounts.
31
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed. Foreclosed assets amounted to $630,000 and
$560,000 at year-end 2002 and 2001 and are included in other assets in the
consolidated balance sheets.
Repurchase Agreements: Repurchase agreement liabilities, included in short-term
borrowings, represent amounts advanced by various customers. Securities are
pledged to cover these liabilities, which are not covered by federal deposit
insurance.
Benefit Plans: Pension expense is the net of service and interest cost, return
on plan assets, and amortization of gains and losses not immediately recognized.
A minimum pension liability is separately recorded with an offset to other
comprehensive income to the extent the plan's current liability, if in excess of
the plan's assets, is not otherwise recorded. Profit sharing and 401k plan
expense is the amount contributed determined by formula.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2002 2001 2000
---- ---- ----
(In thousands,
except per share amounts)
Net income as reported $ 2,126 $ 2,955 $ 2,679
Less: Stock-based compensation expense
determined under fair value based method 79 87 136
--------- --------- ---------
Pro forma net income $ 2,047 $ 2,868 $ 2,543
========= ========= =========
Basic earnings per share as reported $ 0.87 $ 1.18 $ 1.05
Pro forma basic earnings per share 0.84 1.15 1.00
Diluted earnings per share as reported 0.87 1.18 1.05
Pro forma diluted earnings per share 0.84 1.15 1.00
The weighted-average assumptions for options granted during the year and the
resulting estimated weighted average fair values per share used in computing pro
forma disclosures are as follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Risk-free interest rate 4.21% 4.85% 6.60%
Expected option life 10 years 10 years 10 years
Expected stock price volatility 24.67% 26.70% 10.62%
Expected dividend yield 3.60% 3.74% 3.90%
Estimated fair value per share $ 3.65 $ 3.89 $ 2.50
32
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet committed to be released or allocated to participants, is shown as a
reduction of shareholders' equity. Compensation expense is based on the market
price of shares as they are committed to be released to participant accounts.
Dividends on allocated ESOP shares reduce retained earnings; dividends on
unearned ESOP shares reduce debt and accrued interest.
Off Balance Sheet Financial Instruments: Financial instruments include
off-balance sheet credit instruments, such as commitments to make loans and
standby letters of credit, issued to meet customer-financing needs. The face
amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Derivatives: All derivative instruments are recorded at their fair values. If
derivative instruments are designated as hedges of fair values, both the change
in the fair value of the hedge and the hedged item are included in current
earnings. Fair value adjustments related to cash flow hedges are recorded in
other comprehensive income and reclassified to earnings when the hedged
transaction is reflected in earnings. Ineffective portions of hedges are
reflected in earnings as they occur.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unallocated.
Diluted earnings per common share include the dilutive effect of additional
potential common shares issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income, recognized as separate
components of equity, includes changes in the following items: unrealized gains
and losses on securities available for sale, unrealized gains and losses on
interest rate swaps, and a minimum pension liability.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there are currently such matters that
will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $2.1 million and $1.2 million was required to meet regulatory reserve and
clearing requirements at year-end 2002 and 2001. These balances do not earn
interest.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders, as more fully described in a separate note.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
33
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Operating Segments: While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not material
and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by management to be aggregated in one reportable operating segment.
Cumulative Effect of Change in Accounting Principle: On October 1, 2000, the
Company adopted SFAS No. 133 and, as permitted by the standard, transferred
securities with an amortized cost of $10.3 million from held to maturity into
trading. The cumulative effect of change net of tax was to decrease net income
for 2000 by $172,000 ($.07 per share, basic; $.06 per share, diluted). The
Company also transferred the remaining held to maturity portfolio with an
amortized cost of $81.9 million to the available for sale category. The
cumulative effect of this change, net of tax, was to decrease accumulated other
comprehensive income by $2.7 million.
New Accounting Pronouncements: On July 1, 2002, the Company became subject to
new accounting guidance for certain commitments to originate loans as described
in "Mortgage Banking Activities."
Effective in 2002, a new accounting standard relating to changes in accounting
for business combinations and intangible assets resulted in no effect to the
Company since there are no intangible assets included on the balance sheet nor
any recent acquisitions by the Company.
New accounting standards on asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishment of debt
were issued in 2002. Management determined that when the new accounting
standards are adopted in 2003 they will not have a material impact on the
Company's financial condition or results of operations.
Reclassifications: Some items in the prior years' financial statements were
reclassified to conform to the current presentation.
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
2002
U. S. Government and federal agency $ 8,552 $ 204 $ -- $ 8,756
State and municipal 12,687 391 (38) 13,040
Mortgaged-backed 60,209 1,109 (23) 61,295
Corporate bonds 9,249 34 -- 9,283
------- ------ ----- -------
Total $90,697 $1,738 $ (61) $92,374
======= ====== ===== =======
2001
U. S. Government and federal agency $27,023 $ 232 $(166) $27,089
State and municipal 10,838 94 (225) 10,707
Mortgaged-backed 54,467 327 (440) 54,354
Corporate bonds 6,950 32 (31) 6,951
------- ------ ----- -------
Total $99,278 $ 685 $(862) $99,101
======= ====== ===== =======
34
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES (Continued)
Sales of available for sale securities were as follows.
2002 2001 2000
---- ---- ----
(In thousands)
Proceeds $ 33,994 $ 7,762 $ --
Gross gains 540 50 --
Gross losses (29) (19) --
Contractual maturities of available for sale securities at year-end 2002 were as
follows. Mortgage-backed securities which do not have a single maturity date are
shown separately.
Amortized Fair
Cost Value
---- -----
(In thousands)
Due in one year or less $ 3,020 $ 3,053
Due from one to five years 7,502 7,688
Due from five to ten years 3,312 3,501
Due after ten years 16,654 16,837
Mortgage-backed 60,209 61,295
------- -------
Total $90,697 $92,374
======= =======
Securities pledged at year-end 2002 and 2001 had a carrying amount of $70.5
million and $75.5 million to secure public deposits, repurchase agreements and
Federal Home Loan Bank advances.
NOTE 3 - LOANS
Loans at year-end were as follows.
2002 2001
---- ----
(In thousands)
Commercial $ 106,576 $ 94,159
Mortgage loans on real estate
Residential 81,618 81,249
Commercial 67,745 76,754
Construction 29,081 14,506
Home equity 29,595 19,818
Loans secured by deposit accounts 345 563
Consumer 10,488 10,011
--------- ---------
Subtotal 325,448 297,060
Less: Allowance for loan losses (3,814) (3,030)
--------- ---------
Loans, net $ 321,634 $ 294,030
========= =========
35
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
During 2002 and 2001, substantially all of the Company's residential and
commercial real estate loans were pledged as collateral to the Federal Home Loan
Bank to secure advances.
Activity in the allowance for loan losses was as follows.
2002 2001 2000
---- ---- ----
(In thousands)
Beginning balance $ 3,030 $ 2,869 $ 1,741
Provision for loan losses 1,144 520 1,197
Loans charged-off (558) (372) (69)
Recoveries 198 13 --
------- ------- -------
Ending balance $ 3,814 $ 3,030 $ 2,869
======= ======= =======
Information about impaired loans is presented below. There were no impaired
loans for the periods presented without an allowance allocation.
2002 2001 2000
---- ---- ----
(In thousands)
Impaired loans at year-end $1,682 $1,854 $ 985
Amount of the allowance for loan losses allocated 527 369 189
Average of impaired loans during the year 2,227 1,315 418
Interest income recognized during impairment 26 184 17
Nonperforming loans at year-end were as follows
Loans past due over 90 days still on accrual $ -- $ 39 $ 86
Nonaccrual loans 3,171 1,588 1,052
Nonperforming loans includes both smaller balance homogenous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
36
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - LOANS (Continued)
Loans and off-balance-sheet commitments (including commitments to make loans,
unused lines of credit, and letters of credit) to principal officers, directors,
and their affiliates were as follows.
2002
(In thousands)
Beginning loans $ 26,977
New loans 41,682
Effect of changes in related parties (6,199)
Repayments (32,899)
--------
Ending loans $ 29,561
========
2002 2001
---- ----
(In thousands)
Off-balance-sheet commitments $10,363 $9,841
Mortgage loans serviced for others are not included in the balance sheets. The
unpaid principal balances of mortgage loans serviced for others were
approximately $30.0 million and $31.0 million at year-end 2002 and 2001.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in non-interest bearing deposits, were approximately
$299,000 and $388,000 at year-end 2002 and 2001. Servicing assets related to
these loans, included in other assets, were $207,000 and $109,000 at year-end
2002 and 2001.
NOTE 4 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows.
2002 2001
---- ----
(In thousands)
Land and land improvements $ 1,263 $ 1,272
Buildings 9,623 9,384
Furniture, fixtures and equipment 4,710 4,040
-------- --------
15,596 14,696
Less: Accumulated depreciation (4,272) (3,480)
-------- --------
$ 11,324 $ 11,216
======== ========
Rent expense was $83,000, $38,000, and $30,000 for 2002, 2001, and 2000,
respectively. Rent commitments under noncancelable operating leases (in
thousands) were as follows, before considering renewal options that generally
are present.
2003 $ 154
2004 147
2005 147
2006 147
2007 158
Thereafter 1,084
37
NOTE 5 - DEPOSITS
Time deposits of $100,000 or more were $28.0 million and $39.0 million at
year-end 2002 and 2001.
Scheduled maturities of time deposits for the next five years (in thousands)
were as follows.
2003 $60,112
2004 31,305
2005 12,439
2006 4,144
Thereafter 12,588
Deposits from principal officers, directors and their affiliates at year-end
2002 and 2001 were approximately $7.5 million and $6.9 million.
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings consist of retail repurchase agreements representing
overnight borrowings from deposit customers, effectively deposit equivalents,
and federal funds purchased representing overnight borrowings from other
financial institutions. The debt securities sold under the repurchase agreements
were under the control of the subsidiary banks during 2002 and 2001.
Information concerning 2002 and 2001 repurchase agreements is summarized as
follows.
2002 2001
---- ----
(Dollars in thousands)
Repurchase agreements at year-end
Balance $26,393 $23,475
Weighted average interest rate 0.59% 1.35%
Repurchase agreements during the year
Average daily balance $27,966 $27,397
Maximum month-end balance 37,561 35,721
Weighted average interest rate 1.04% 3.45%
Federal funds purchased were $10.0 million and $15.6 million at December 31,
2002 and December 31, 2001, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank (FHLB) were as follows.
2002 2001
-------------------------- ---------------------------
Weighted Weighted
Average Average
Rate Amount Rate Amount
---- ------ ---- ------
(Dollars in thousands)
Fixed rate 5.87% $88,000 5.81% $86,000
Variable rate 1.33 4,700 1.88 3,000
------- -------
$92,700 $89,000
======= =======
The advances were collateralized by first mortgage loans and commercial loans
under a blanket lien arrangement and available for sale securities which were
pledged as security under the agreement.
38
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES (Continued)
The contractual maturities of advances outstanding as of December 31, 2002 are
as follows.
Fixed Variable
----- --------
(In thousands)
2003 $ 5,000 $4,700
2004 13,000 --
2008 2,000 --
2009 21,000 --
2010 47,000 --
The fixed rate advances consisted of $84.0 million in convertible advances. The
FHLB has the quarterly right to require the Company to choose either conversion
of the fixed rate to a variable rate tied to the three month LIBOR index or
prepayment of the advance without penalty. There is a substantial penalty if the
Company prepays the advances before FHLB exercises its right.
NOTE 8 - 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. In 1997, the plan
was amended such that there can be no new participants or increases in benefits
to the participants.
A reconciliation of the projected benefit obligation and the value of plan
assets follow.
2002 2001
---- ----
(In thousands)
Change in projected benefit obligation
Balance, beginning of year $ 680 $ 637
Interest cost 47 44
Actuarial (gain) loss 47 36
Benefits paid to participants (27) (37)
----- -----
Ending benefit obligation 747 680
Change in plan assets
Fair value, beginning of year 494 587
Actual return on plan assets (61) (56)
Benefits paid to participants (27) (37)
----- -----
Ending plan assets 406 494
----- -----
Funded status (341) (186)
Unrecognized net actuarial loss 376 249
----- -----
Prepaid benefit cost $ 35 $ 63
===== =====
39
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - BENEFIT PLANS (Continued)
The components of pension expense and related actuarial assumptions were as
follows.
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Interest cost $ 47 $ 44 $ 42
Expected return on plan assets (44) (52) (56)
Amortization of unrecognized loss 25 7 --
---- ---- ----
Pension expense (income) $ 28 $ (1) $(14)
==== ==== ====
Discount rate on benefit obligation 6.75% 7.00% 7.00%
Rate of expected return on plan assets 9.00% 9.00% 9.00%
A minimum pension liability is separately recorded with an offset to other
comprehensive income to the extent the plan's current liability, if in excess of
the plan's assets, is not otherwise recorded. As a result of the 1997 amendment
discussed previously, the plan's projected benefit obligation also represents
its current liability. At year-end 2002 and 2001, the plan's current liability
exceeded the assets by $341,000 and $186,000. Accordingly, the Company's 2002
and 2001 balance sheets include a minimum pension liability of $376,000 and
$249,000 which is in addition to the prepaid benefit cost otherwise recorded.
Among other events, the amount carried in accumulated other comprehensive income
will be reclassified to earnings should management elect to terminate the plan.
CB Kentucky is a participant in the Financial Institutions Retirement Fund, a
multi-employer defined benefit pension plan covering two of 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, 2002. There have been no new enrollments since 1998.
Employee Stock Ownership Plan: Employees participate in an Employee Stock Option
Plan (ESOP). The ESOP borrowed from the Company to purchase 56,690 shares of
Company stock at $10.08 per share. The Company makes discretionary contributions
to the ESOP, as well as paying dividends on unallocated shares to the ESOP, and
the ESOP uses funds it receives to repay the loan. When loan payments are made,
ESOP shares are allocated to participants based on relative compensation and
expense is recorded. Dividends on allocated shares increase participant
accounts. Participants receive the shares at the end of employment.
Contributions to the ESOP during 2002, 2001 and 2000 were $61,000, $62,000 and
$60,000. Expense for 2002, 2001 and 2000 was $95,000, $84,000 and $79,000.
Shares held by the ESOP trust were as follows.
2002 2001
---- ----
(In thousands)
Allocated to participants 37 33
Unearned 8 13
---- ----
Total ESOP shares 45 46
==== ====
Fair value of unearned shares $124 $203
==== ====
40
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - STOCK-BASED COMPENSATION PLANS
Defined Contribution Plans: A 401(k) benefit plan allows employee contributions
up to 15% of their compensation, which are matched equal to 100% of the first 3%
of the compensation contributed. Expense for 2002, 2001 and 2000 was $86,000,
$89,000 and $80,000.
Stock Options: The Company's stock option 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 and expiration dates
of up to ten years. Terms of the options are determined by the Board of
Directors at the date of grant and generally vest over periods of three to four
years. 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. As of December 31, 2002, the plan
allows for additional option grants of up to 35,472 shares.
A summary of the activity in the plan follows.
2002 2001 2000
----------------- ------------------ -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
(In thousands, except per share amounts)
Outstanding at beginning
of year 184 $16.87 185 $17.55 162 $19.20
Granted 4 16.10 19 15.50 51 13.58
Exercised (9) (14.08) -- -- -- --
Forfeited (11) (19.44) (20) (20.87) (28) (19.88)
--- --- ---
Outstanding at end of year 168 $17.01 184 $16.87 185 $17.55
=== === ===
Options exercisable at year-end 154 $17.12 106 $18.39 99 $17.59
For options outstanding at December 31, 2002, the option price per share ranged
from $13.50 to $21.00 and the weighted average remaining contractual life on the
options was 6.3 years.
Performance Share Awards: 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
$2,000, $15,000 and $46,000 was recognized for the years ended December 31,
2002, 2001 and 2000, respectively. All compensation expense has been recognized
for the shares granted in 1999.
41
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES
Income tax expense (benefit) was as follows.
2002 2001 2000
---- ---- ----
(In thousands)
Current $ 632 $1,577 $ 1,573
Deferred (41) 5 (403)
Valuation allowance 59 -- --
Cumulative effect of change in
accounting principle -- -- 97
----- ------ -------
Total $ 650 $1,582 $ 1,267
===== ====== =======
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following.
2002 2001 2000
---- ---- ----
(Dollars In thousands)
Federal statutory rate times
financial statement income $ 944 34.0% $ 1,542 34.0% $ 1,400 34.0%
Effect of:
Tax-exempt income (190) (6.8) (127) (2.8) (105) (2.5)
State taxes, net of federal
benefit (59) (2.1) 135 3.0 46 1.1
Change in
valuation allowance 59 2.1 -- -- -- --
Change in
cash surrender value
of life insurance policies (175) (6.3) -- -- -- --
Other, net 71 2.5 32 0.7 (74) (1.8)
----- ---- ------- ---- ------- ----
Total $ 650 23.4% $ 1,582 34.9% $ 1,267 30.8%
===== ==== ======= ==== ======= ====
Year-end deferred tax assets and liabilities were due to the following.
2002 2001
---- ----
(In thousands)
Deferred tax assets
Allowance for loan losses $1,455 $1,085
Net unrealized depreciation on
securities available for sale -- 71
Employee benefit plans 218 239
Minimum pension liability 147 97
Net operating loss carryforward 59 --
Other 22 76
------ ------
Total 1,901 1,568
42
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (Continued)
2002 2001
---- ----
(In thousands)
Deferred tax liabilities
Premises and equipment (310) (212)
FHLB stock (181) (163)
Deferred loan fees and costs (152) (82)
Mortgage Servicing Rights (79) (41)
Net unrealized appreciation on securities
available for sale (570) --
Net unrealized appreciation on interest
rate swap (291) --
Other (97) (8)
------- -------
Total (1,680) (506)
Valuation allowance on deferred tax assets (59) --
------- -------
Net deferred tax asset $ 162 $ 1,062
======= =======
In 2000, the Indiana financial institution tax law was amended to treat resident
financial institutions the same as nonresident financial institutions by
providing for apportionment of Indiana income based on receipts in Indiana.
Receipts for Indiana were defined to exclude receipts from out of state sources
and federal government and agency obligations. This change was effective
retroactively to January 1, 1999. The provision for income taxes for 2000
includes a credit of $89,000 in recognition of this change.
Community Bank and CB Kentucky qualified under provisions of the Internal
Revenue Code which through 1987 permitted them to deduct from taxable income a
provision for bad debts that exceeded the provision for loan losses charged to
income on the financial statements. Retained earnings at December 31, 2002 and
2001 includes this benefit of approximately $3.7 million for which accounting
standards do not require a deferred federal income tax liability to be recorded.
If the banks were liquidated or otherwise ceased to be banks or if tax laws were
to change, this liability would be recorded with an offset to income tax
expense.
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and,
additionally for banks, prompt corrective action regulations involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure
to meet capital requirements can initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. As of December 31, 2002
and 2001, the most recent regulatory notifications categorized the Company and
Banks as well capitalized under the regulatory framework for prompt corrective
action.
43
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
Actual and required capital amounts and ratios are presented below at year-end.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in millions)
2002
Total Capital (to Risk Weighted Assets):
Consolidated $ 45.5 13.6% $ 26.9 8% $ 33.6 10%
Community Bank 37.6 12.7 23.6 8 29.6 10
CB Kentucky 7.3 18.7 3.1 8 3.9 10
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 41.7 12.4% $ 13.4 4% $ 20.1 6%
Community Bank 34.2 11.6 11.8 4 17.7 6
CB Kentucky 6.9 17.7 1.6 4 2.3 6
Tier I Capital (to Average Assets):
Consolidated $ 41.7 9.0% $ 18.5 4% $ 23.1 5%
Community Bank 34.2 8.4 16.3 4 20.4 5
CB Kentucky 6.9 12.5 2.2 4 2.8 5
2001
Total Capital (to Risk Weighted Assets):
Consolidated $ 45.7 15.9% $ 23.0 8% $ 28.8 10%
Community Bank 28.6 14.8 15.4 8 19.3 10
Heritage Bank 8.8 13.6 5.2 8 6.5 10
CB Kentucky 7.3 22.3 2.6 8 3.3 10
Tier I Capital (to Risk Weighted Assets):
Consolidated $ 42.6 14.8% $ 11.5 4% $ 17.3 6%
Community Bank 26.8 13.9 7.7 4 11.6 6
Heritage Bank 8.0 12.3 2.6 4 3.9 6
CB Kentucky 6.9 21.2 1.3 4 2.0 6
Tier I Capital (to Average Assets):
Consolidated $ 42.6 10.0% $ 17.1 4% $ 21.4 5%
Community Bank 26.8 9.2 11.6 4 14.5 5
Heritage Bank 8.0 9.2 3.5 4 4.3 5
CB Kentucky 6.9 13.2 2.1 4 2.6 5
Regulations limit capital distributions by banks. Generally, capital
distributions are limited to undistributed net income for the current and prior
two years. During 2003, the banks could, without prior approval, declare
dividends of approximately $200,000 plus any 2003 net income retained to the
date of dividend declaration.
44
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - INTEREST RATE SWAP
On August 30, 2002, the Company entered into a $25,000,000 interest rate swap
arrangement to exchange variable payments of interest tied to Prime for receipt
of fixed rate payments of 6.51%. The variable rate of the swap resets daily,
with net interest being settled monthly. The notional amount of the swap does
not represent amounts exchanged by the parties. The amount exchanged is
determined by reference to the notional amount and other terms of the swap. The
swap has been designated by management as a cash flow hedge of its Prime-based
commercial loans to in effect convert the loans from variable interest to a
weighted average fixed interest rate of 6.76% until the swap's maturity on
August 30, 2007.
The hedge relationship was determined to be highly effective during 2002. The
value of the swap at inception was zero, but increased to $915,000 during 2002
of which $169,000 was reclassified to interest income as a yield adjustment to
the hedged loans. The remaining amount of $746,000 is reported in other assets
and as accumulated other comprehensive income. During 2003 based on current
rates, approximately $565,000 of gain related to the swap will be reclassified
out of other comprehensive income into interest income.
NOTE 13 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as commitments to make loans for the Company's
portfolio, credit lines and letters of credit, are issued to meet
customer-financing needs. These are agreements to provide credit or to support
the credit of others, as long as conditions established in the contract are met,
and usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year-end.
2002 2001
---- ----
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
(In thousands)
Commitments to make loans $1,869 $14,987 $246 $ 1,968
Unused lines of credit -- 79,189 -- 72,265
Letters of credit -- 3,784 -- 2,601
Commitments to make loans are generally made for periods of 60 days or less and
are at market rates. The fixed rate loan commitments have interest rates ranging
from approximately 4.25% to 7.5% and maturities ranging from 30 days to 30
years.
See Note 1 for further discussion on mortgage-banking activities.
45
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end.
2002 2001
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In thousands)
Financial assets
Cash and due from banks $ 6,631 6,631 $ 8,442 $ 8,442
Interest-bearing deposits
with banks 950 950 2,657 2,657
Securities available for sale 92,374 92,374 99,101 99,101
Loan held for sale 9,230 9,393 1,401 1,415
Loans, net 321,634 327,719 294,030 301,756
Federal Home Loan Bank stock 7,700 7,700 7,658 7,658
Accrued interest receivable 1,967 1,967 2,375 2,375
Interest rate swap 746 746 -- --
Financial liabilities
Deposits 289,830 292,344 255,892 259,084
Short-term borrowings 36,393 36,393 39,075 39,075
Advances from Federal Home
Loan Bank 92,700 107,810 89,000 96,226
Accrued interest payable 337 337 338 338
The methods and assumptions used to estimate fair value are described as
follows.
The estimated fair value equals the carrying amount for cash and due from banks,
interest-bearing deposits in other financial institutions, Federal Home Loan
Bank stock, accrued interest receivable and payable, demand deposits, short-term
borrowings, and variable rate loans or deposits that reprice frequently and
fully. Security and interest rate swap fair values are based on market prices or
dealer quotes, and if no such information is available, on the rate and term of
the instrument and information about the issuer. For fixed rate loans or
deposits and for variable rate loans or deposits with infrequent repricing or
repricing limits, fair value is based on discounted cash flows using current
market rates applied to the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying
collateral values. Fair value of loans held for sale is based on market quotes.
Fair value of debt is based on current rates for similar financing. The fair
value of off-balance-sheet items is based on current fees or costs that would be
charged to enter into or terminate such arrangements and is not material.
46
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information for Community Bank Shares of Indiana, Inc.
follows:
CONDENSED BALANCE SHEETS
December 31
2002 2001
---- ----
(In thousands)
ASSETS
Interest-bearing deposit in other financial institutions $ 1 $ 86
Premises and equipment 938 907
Receivables from subsidiaries 28 33
Investment in subsidiaries 42,653 41,593
Other assets 1,391 654
------- -------
Total assets $45,011 $43,273
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Dividends payable $ -- $ 360
Short-term borrowings 930 --
Accrued expenses and other liabilities 784 548
------- -------
Total liabilities 1,714 908
Total shareholders' equity 43,297 42,365
------- -------
Total liabilities and shareholders' equity $45,011 $43,273
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31
2002 2001 2000
---- ---- ----
(In thousands)
Income
Dividends from subsidiaries $ 4,300 $3,100 $1,800
Management and other fees from subsidiaries 2,269 2,906 1,878
Interest and dividend income 41 88 48
------- ------ ------
Total income 6,610 6,094 3,726
Expense
Operating expenses 4,697 3,934 3,525
------- ------ ------
Income before income taxes and equity
in undistributed net income of subsidiaries 1,913 2,160 201
Income tax benefit 814 343 563
------- ------ ------
Income before equity in undistributed net
income of subsidiaries 2,727 2,503 764
Equity in undistributed (distributions in excess)
of net income of subsidiaries (601) 452 1,915
------- ------ ------
Net income $ 2,126 $2,955 $2,679
======= ====== ======
47
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
2002 2001 2000
---- ---- ----
(In thousands)
Cash flows from operating activities
Net income $ 2,126 $ 2,955 $ 2,679
Adjustments
Equity in undistributed net income of subsidiaries 601 (452) (1,915)
Depreciation 418 252 185
(Increase) decrease in other assets
and liabilities, net (469) 275 (1,026)
------- ------- -------
Net cash from operating activities 2,676 3,030 (77)
Cash flows from investing activities
Change in interest-bearing deposits in other
financial institutions 85 (64) 640
Purchase of premises and equipment, net (449) (777) (170)
Securities transferred to affiliate -- -- 2,000
Premises and equipment transferred to affiliate -- -- 568
------- ------- -------
Net cash from investing activities (364) (841) 3,038
Cash flows from financing activities
Net change in short-term borrowings 930 -- --
Purchase of treasury stock (1,596) (706) (1,550)
Exercise of stock options 120 -- --
Dividends paid (1,766) (1,483) (1,411)
------- ------- -------
Net cash from financing activities (2,312) (2,189) (2,961)
------- ------- -------
Net change in cash -- -- --
Cash at beginning of year -- -- --
------- ------- -------
Cash at end of year $ -- $ -- $ --
======= ======= =======
48
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
2002 2001 2000
---- ---- ----
(In thousands, except per share amounts)
Basic
Net income $ 2,126 $ 2,955 $ 2,679
======= ======= =======
Average shares:
Common shares issued 2,728 2,728 2,728
Less: Unallocated ESOP shares (8) (16) (24)
Treasury stock (284) (212) (147)
Performance share awards -- (1) (4)
------- ------- -------
Average shares outstanding 2,436 2,499 2,553
======= ======= =======
Net income per common share, basic $ 0.87 $ 1.18 $ 1.05
======= ======= =======
Diluted
Net income $ 2,126 $ 2,955 $ 2,679
======= ======= =======
Average shares:
Common shares outstanding for basic 2,436 2,499 2,553
Add: Dilutive effects of outstanding
options 16 4 1
------- ------- -------
Average shares and dilutive
potential common shares $ 2,452 $ 2,503 $ 2,554
======= ======= =======
Net income per common share, diluted $ 0.87 $ 1.18 $ 1.05
======= ======= =======
Stock options for 69,700, 134,817 and 120,408 common shares were excluded from
2002, 2001 and 2000 diluted earnings per share because they were antidilutive.
49
COMMUNITY BANK SHARES OF INDIANA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income components and related taxes were as follows.
2002 2001 2000
---- ---- ----
(In thousands)
Unrealized holding gains on
available for sale securities $2,365 $1,266 $3,375
Less reclassification adjustments for gains
later recognized in income (511) (31) --
------ ------ ------
Net unrealized gain 1,854 1,235 3,375
Unrealized holding gain on interest
rate swap 915 -- --
Amounts reclassified to interest income (169) -- --
------ ------ ------
Net unrealized gain 746 -- --
Change in minimum pension liability (127) (249) --
------ ------ ------
Other comprehensive income (loss)
before tax effects and cumulative
effect of change in accounting principle 2,473 986 3,375
Tax effect (882) (391) (1,336)
Cumulative effect of change in
accounting principle, net of tax -- -- (2,661)
------ ------ ------
Other comprehensive income (loss) $1,591 $595 $(622)
====== ====== ======
NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings Per Share
Interest Net Interest Net ------------------
Income Income Income Basic Diluted
------ ------ ------ ----- -------
(In thousands, except per share amounts)
First quarter $6,319 $2,946 $718 $0.29 $0.29
Second quarter 6,337 2,837 256 0.10 0.10
Third quarter 6,239 2,852 502 0.21 0.21
Fourth quarter 6,157 3,063 650 0.27 0.27
2001
First quarter $7,756 $3,096 $834 $ .33 $ .33
Second quarter 7,513 3,091 849 .34 .34
Third quarter 7,332 3,118 705 .28 .28
Fourth quarter 6,745 2,996 567 .23 .23
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 1, 2001, the board of directors of the Company determined to engage
Crowe, Chizek and Company LLP as its independent auditors for the fiscal year
ended December 31, 2001. On March 1, 2001, the registrant orally notified Monroe
Shine & Co., Inc. ("Monroe Shine"), its independent auditors at that time, of
this determination and that Monroe Shine would not be engaged for the fiscal
year ending December 31, 2001. The determination to replace Monroe Shine was
recommended by the audit committee and approved by the full board of directors
of the Company.
The report of Monroe Shine on the consolidated financial statements of the
Company for the year ended December 31, 2000 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles. During the year ended December 31, 2000
and during the period from December 31, 2000 to March 1, 2001, there were
no disagreements between the registrant and Monroe Shine concerning accounting
principles or practices, financial statement disclosures, or auditing scope or
procedure.
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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 20, 2003.
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 Plan", "Employment and
Retirement Agreements", 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 20, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain owners and management is
incorporated herein by reference to the information under the heading "Stock
Ownership by Directors and Executive Officers" and "Information About Our Other
Stock Compensation Plans" in the Company's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on May 20, 2003.
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", "Indebtedness of Management", and "Other
Transactions with Management and Related Parties" in the Company's definitive
Proxy Statement for the Annual Meeting of Stockholders to be held on May 20,
2003.
ITEM 14. CONTROLS AND PROCEDURES
Company management, including the Chief Executive Officer (serving as the
principal executive officer) and Chief Financial Officer (serving as the
principal financial officer), have conducted an evaluation of the effectiveness
of disclosure controls and procedures pursuant to Securities Exchange Act of
1934 Rule 13a-14. Based on that evaluation, the Chief Executive Officer and the
Chief Financial Officer concluded that the disclosure controls and procedures
are effective in ensuring that all material information required to be filed in
this annual report has been made known to them in a timely fashion. There
have been no significant changes in internal controls, or in other factors that
could significantly affect internal controls, subsequent to the date the Chief
Executive Officer and the Chief Financial Officer completed their evaluation.
ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is incorporated
herein by reference to the information under the headings "Audit Fees",
"Financial Information Systems Design and Implementation Fees", and "All Other
Fees" in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 20, 2003.
52
PART IV
ITEM 16. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are included in Item 8 of this Form 10-K:
Independent Auditors' Reports
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(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
The following exhibits are filed herein:
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 * (2)
10.2 Retirement Agreement with Robert E. Yates * (2)
10.3 Employment Agreement with James D. Rickard * (3)
10.4 Community Bank Shares of Indiana, Inc. 1997 Stock Incentive Plan * (4)
10.5 Community Bank Shares of Indiana, Inc. Dividend Reinvestment Plan * (5)
10.6 Employment Agreement with Patrick J. Daily *
10.7 Employment Agreement with Christopher L. Bottorff *
10.8 Data Processing Services Agreement with Jack Henry and Associates, Inc.
10.9 Electronic Funds Transfer Agreement with Jack Henry and Associates, Inc.
11.1 Computation of Earnings Per Share
21.0 Subsidiaries of Registrant
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Monroe Shine & Co., Inc.
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* 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 on Form 10-K filed April 2,
2001.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q filed
November 14, 2000.
(4) Incorporated by reference from the exhibits filed with the Registration
Statement on Form S-8, filed July 29, 1998, and any amendments thereto,
Registration statement No. 333- 60089.
(5) Incorporated by reference from the exhibits filed with the Registration
Statement on Form S-3, filed November 14, 1997, and any amendments thereto,
Registration Statement No. 333-40211.
(b) Reports on Form 8-K:
The Registrant filed a report on Form 8-K on October 25, 2002 reporting its
announcement on such date of its financial results for the third quarter of
2002.
(c) Exhibits
See response to Item 16(c)(3).
53
SIGNATURES
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.
March 31, 2003 By: /s/ James D. Rickard
----------------------------
James D. Rickard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ James D. Rickard President, Chief Executive Officer, and Director March 31, 2003
-------------------- (Principal Executive Officer)
James D. Rickard
/s/ Paul A. Chrisco Senior Vice President and Chief Financial Officer) March 31, 2003
------------------- (Principal Financial and Accounting Officer)
Paul A. Chrisco
/s/ Timothy T. Shea Chairman of the Board of Directors and Director March 31, 2003
-------------------
Timothy T. Shea
/s/ Robert J. Koetter, Sr. Director March 31, 2003
--------------------------
Robert J. Koetter, Sr.
/s/ Gary L. Libs Director March 31, 2003
----------------
Gary L. Libs
/s/ James W. Robinson Director March 31, 2003
---------------------
James W. Robinson
/s/ George M. Ballard Director March 31, 2003
---------------------
George M. Ballard
/s/ Gordon L. Huncilman Director March 31, 2003
-----------------------
Gordon L. Huncilman
/s/ Kerry M. Stemler Director March 31, 2003
--------------------
Kerry M. Stemler
/s/ Steven R. Stemler Director March 31, 2003
---------------------
Steven R. Stemler
/s/ Dale L. Orem Director March 31, 2003
----------------
Dale L. Orem
54
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, James D. Rickard, certify that:
1. I have reviewed this annual report on Form 10-K of Community Bank Shares of
Indiana, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 30, 2003
/s/ James D. Rickard
- -------------------------------------
James D. Rickard
President and Chief Executive Officer
55
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Paul A. Chrisco, certify that:
1. I have reviewed this annual report on Form 10-K of Community Bank Shares of
Indiana, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 30, 2003
/s/ Paul A. Chrisco
- -------------------------
Paul A. Chrisco
Senior Vice President and
Chief Financial Officer
56
Exhibit Index
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 * (2)
10.2 Retirement Agreement with Robert E. Yates * (2)
10.3 Employment Agreement with James D. Rickard * (3)
10.4 Community Bank Shares of Indiana, Inc. 1997 Stock Incentive Plan * (4)
10.5 Community Bank Shares of Indiana, Inc. Dividend Reinvestment Plan * (5)
10.6 Employment Agreement with Patrick J. Daily *
10.7 Employment Agreement with Christopher L. Bottorff *
10.8 Data Processing Services Agreement with Jack Henry and Associates, Inc.
10.9 Electronic Funds Transfer Agreement with Jack Henry and Associates, Inc.
11.1 Computation of Earnings Per Share
21.0 Subsidiaries of Registrant
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Monroe Shine & Co., Inc.
99.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* 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 on Form 10-K filed April 2,
2001.
(3) Incorporated by reference to the Quarterly Report on Form 10-Q filed
November 14, 2000.
(4) Incorporated by reference from the exhibits filed with the Registration
Statement on Form S-8, filed July 29, 1998, and any amendments thereto,
Registration statement No. 333- 60089.
(5) Incorporated by reference from the exhibits filed with the Registration
statement on Form S-3, filed November 14, 1997, and any amendments thereto,
Registration Statement No. 333-40211.
57
Exhibit 10.6 - Employment Agreement with Patrick J. Daily
AGREEMENT
AGREEMENT, effective as of March 24 , 2000, Community Bank Shares of
Indiana, Inc., an Indiana Corporation (the "Corporation" or the "Employer"), and
Patrick J. Daily (the "Executive)".
WITNESSETH
WHEREAS, in order to induce the Executive to continue to serve as the
President of Heritage Bank of Southern Indiana and Senior Vice President of the
Corporation, the Employer and the Executive desire to enter into this Agreement
to specify the terms of the Executive's employment;
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. Definitions. The following words and terms shall have the meanings set
forth below for the purpose of this Agreement:
(a) Base Salary. "Base Salary" shall have the meaning set forth in Section
3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause" shall
mean termination because of personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
(c) Change in Control of the Corporation. (A) "Change in Control of the
Corporation" shall be deemed to have occurred if (i) any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934
("Exchange Act") is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; and (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Corporation cease for any reason to constitute at
least a majority thereof unless the election, or the nomination for election by
stockholders, of each new director was approved by a vote of at least two-thirds
of the directors then still in office who were directors at the beginning of the
period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) Disability. Termination by the Employer of the Executive's employment
based on "Disability" shall mean termination because of any physical or mental
impairment which qualifies the Executive for disability benefits under the
applicable long-term disability plan maintained by the Employer or any
subsidiary or, if no such plan applies, which would qualify the Executive for
disability benefits under the Federal Social Security System.
(g) IRS. IRS shall mean the Internal Revenue Service.
(h) Notice of Termination. Any purported termination of the Executive's
employment by the Employer for any reason, including without limitation for
Cause, Disability or Retirement, or by the Executive for any reason, shall be
communicated by written "Notice of Termination" to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a dated notice
which (i) indicates the specific termination provision in this Agreement relied
upon, (ii) sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Executive's employment under the provision
so indicated, (iii) specifies a Date of Termination, which shall be not less
than thirty (30) nor more than ninety (90) days after such Notice of Termination
is given, except in the case of the Employer's termination of Executive's
employment for Cause, which shall be effective immediately; and (iv) is given in
the manner specified in Section 11 hereof.
(i) Retirement. Termination by the Employer of the Executive's employment
based on "Retirement" shall mean voluntary termination by the Executive in
accordance with the Employer's retirement policies, including early retirement,
generally applicable to their salaried employees.
2. Term of Employment.
(a) The Employer hereby employs the Executive as President of Heritage
Bank of Southern Indiana and Senior Vice President of Community Bank Shares and
Executive hereby accepts said employment and agrees to render such services to
the Employer on the terms and conditions set forth in this Agreement. The
initial term of employment under this Agreement shall be for one year,
commencing on the date of this Agreement and shall extend each year for an
additional year on the date that is sixty days prior to the expiration date for
the remaining term of this Agreement unless either party shall notify the other
of its intention to stop such extensions. If the Board of Directors or the
Executive elects not to extend the term, it shall give written notice of such
decision to the other party not less than thirty (30) days prior to any such
annual extension date. If any party gives timely notice that the term will not
be extended as of any annual extension date, then this Agreement shall,
terminate at the conclusions of its remaining term. References herein to the
term of this Agreement shall refer both to the initial term and successive
terms.
58
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employer as may be consistent with his titles and
from time to time assigned to him by the Employer's Board of Directors.
3. Compensation and Benefits.
(a) The Employer shall compensate and pay Executive for his services
during the term of this Agreement a base salary, which may be increased from
time to time in such amounts as may be determined by the Board of Directors of
the Employer. In addition to his Base Salary, the Executive shall be entitled to
receive during the term of this Agreement such bonus payments as may be
determined by the Board of Directors of the Employer.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employer, to the extent commensurate with his then duties and responsibilities,
as fixed by the Board of Directors of the Employer. The Employer shall not make
any changes in such plans, benefits or privileges which would adversely affect
Executive's rights or benefits thereunder, unless such change occurs pursuant to
a program applicable to all executive officers of the Employer. Nothing paid to
Executive under any plan or arrangement presently in effect or made available in
the future shall be deemed to be in lieu of the salary payable to Executive
pursuant to Section 3(a) hereof. Notwithstanding the foregoing, nothing
contained in this Agreement shall require the Executive to participate in any
tax qualified or non-qualified benefit plan of the Employer.
(c) During the term of this Agreement, Executive shall be entitled to paid
annual vacation in accordance with the policies as established from time to time
by the Board of Directors of the Employer.
4. Expenses. The Employer shall reimburse Executive or otherwise provide
for or pay for all reasonable expenses incurred by Executive in furtherance of,
or in connection with the business of the Employer, including, but not by way of
limitation, and traveling expenses, and all reasonable entertainment expenses
(whether incurred at the Executive's residence, while traveling or otherwise),
subject to such reasonable documentation and other limitations as may be
established by the Board of Directors of the Employer. If such expenses are paid
in the first instance by Executive, the Employer shall reimburse the Executive
therefor.
5. Termination.
(a) The Employer shall have the right, at any time upon prior Notice of
Termination, to terminate the Executive's employment hereunder for any reason,
including without limitation termination for Cause, Disability or Retirement,
and Executive shall have the right, upon prior Notice of Termination, to
terminate his employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by the
Employer for Cause, Disability or Retirement or in the event of the Executive's
death, or (ii) Executive terminates his employment hereunder other than
following a Change in Control of the Corporation or a material breach of this
Agreement by the Employer which has not been cured in accordance with the terms
of this Agreement, Executive shall have no right pursuant to this Agreement to
compensation or other benefits for any period after the applicable Date of
Termination.
6. Change in Control of the Corporation. In the event of a Change in
Control of the Corporation, then the Employer shall:
(A) pay to the Executive, in twelve (12) equal monthly installments, a
cash amount equal to the Executive's annual base salary as of the date of
the Change in Control of the Corporation, and
7. Mitigation; Covenant Not To Compete; Exclusivity of Benefits.
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise, nor shall the
amount of any such benefits be reduced by any compensation earned by the
Executive as a result of employment by another employer after the Date of
Termination or otherwise.
(b) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise.
8. Withholding. All payments required to be made by the Employer hereunder
to the Executive shall be subject to the withholding of such amounts, if any
relating to tax and other payroll deductions as the Employer may reasonably
determine should be withheld pursuant to any applicable law or regulation.
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 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
59
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employer: C. Thomas Young
Chairman of the Board of Directors
Community Bank Shares of Indiana,
Inc. 202 East Spring Street
New Albany, Indiana 47150
To the Executive: Patrick J. Daily
3303 Twelve Oaks Court Sellersburg, IN 47172
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 Employer to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
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 by the substantive laws of the State of Indiana.
13. Nature of Obligations. Nothing contained herein shall create or
require the Employer to create a trust of any kind to fund any benefits which
may be payable hereunder, and to the extent that the Executive acquires a right
to receive benefits from the Employer hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Employer.
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.
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 Prohibition. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C.ss.1828(k))
and any regulations promulgated thereunder.
IN WITNESS WHEREOF, this Agreement has been executed on March 24, 2000 and
is effective as of March 24, 2000.
COMMUNITY BANK SHARES
Attest: OF INDIANA, INC.
/s/ M. Diane Murphy By: /s/ Michael L. Douglas
- ------------------- -----------------------------------------
M. Diane Murphy, Secretary Michael L. Douglas
/s/ Patrick J. Daily
-----------------------------------------
Patrick J. Daily
CTY/bh YOUNG6 A:DAILY..AG
60
Exhibit 10.7 - Employment Agreement with Christopher L. Bottorff
AGREEMENT
THIS AGREEMENT is made by and between Community Bank Shares of Indiana,
Inc. an Indiana corporation, and Community Bank of Kentucky, Inc., a Kentucky
corporation (each a "Corporation", and collectively the "Employer"), and
Christopher L. Bottorff (the "Executive").
WITNESSETH:
WHEREAS, in order to induce the Executive to serve as (i) President -
Louisville Market of Community Bank of Kentucky, Inc., and (ii) Senior Vice
President of Community Bank Shares of Indiana, Inc., the holding company of
Community Bank of Kentucky, Inc., the Employer and the Executive desire to enter
into this Agreement to specify the terms of the Executive's employment.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereby agree as follows:
1. DEFINITIONS. The following words and terms shall have the meanings set
forth below for the purpose of this Agreement.
(a) Base Salary. "Base Salary" shall have the meaning set forth in
Section 3(a) hereof.
(b) Cause. Termination of the Executive's employment for "Cause"
shall mean termination because of personal dishonesty, incompetence (as defined
hereinbelow), willful misconduct, breach of fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule or regulation (other than traffic violations or similar offenses) or
final cease-and-desist order, or a material breach of any provision of this
Agreement by the Executive. For purposes of this subsection (1)(b), the term
"incompetence" shall be defined as neglect of duties, lack of effort, or
substandard performance arising from the Executive's level of commitment, and
not solely from a general worsening of the economy.
(c) Change in Control of the Corporation. (A) "Change in Control of
the Corporation" shall be deemed to have occurred if (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934
("Exchange Act") is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Corporation representing 25% or more of the combined voting power of the
Corporation's then outstanding securities; and (ii) during any period of two (2)
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Corporation cease for any reason to constitute at
least a majority thereof, unless the election, or the nomination for election,
by stockholders of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
(d) Code. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(e) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated for Cause or for Disability, the date
specified in the Notice of Termination, and (ii) if the Executive's employment
is terminated for any other reason, the date on which a Notice of Termination is
given or as specified in such Notice.
(f) Disability. Termination by the Employer of the Executive's
employment based on "Disability" shall mean termination at any time after the
date of hire because of any physical or mental impairment which qualifies the
Executive for disability benefits under the applicable long-term disability plan
maintained by the Employer or any subsidiary or, if no such plan applies, which
would qualify the Executive for disability benefits under the Federal Social
Security System.
(g) IRS. IRS shall mean the Internal Revenue Service.
(h) Notice of Termination. Any purported termination of the
Executive's employment by the Employer for any reason, including without
limitation for Cause, Disability or Retirement, or by the Executive for any
reason, shall be communicated by written "Notice of Termination" to the other
party hereto. For purposes of this Agreement, a "Notice of Termination" shall
mean a dated notice which (i) indicates the specific termination provision in
this Agreement relied upon, (ii) sets forth in reasonable detail the facts and
circumstances claimed to provide a basis
for termination of Executive's employment under the provision so indicated,
(iii) specifies a Date of Termination, which shall be not less than thirty (30)
nor more than ninety (90) days after such Notice of Termination is given, except
in the case of the Employer's termination of Executive's employment for Cause,
which shall be effective immediately; and (iv) is given in the manner specified
in Section 11 hereof.
(i) Retirement. Termination by the Employer of the Executive's
employment based on "Retirement" shall mean voluntary termination by the
Executive in accordance with the Employer's retirement policies, including early
retirement, generally applicable to their salaried employees.
2. TERM OF EMPLOYMENT.
(a) The Employer hereby employs the Executive as (i) President -
Louisville Market of Community Bank of Kentucky, Inc., and (ii) Senior Vice
President of Community Bank Shares of Indiana, Inc., and Executive hereby
61
accepts said employment to commence no later than September 9, 2002, and agrees
to render such services to the Employer on the terms and conditions set forth in
this Agreement. The initial term of employment under this Agreement shall be for
two (2) years, commencing on the date of this Agreement and shall extend each
year for an additional year on each annual anniversary of the date of this
Agreement such that at any time the remaining term of this Agreement shall be
from one to two years, unless either party shall notify the other of its
intention to stop such extensions. If the Board of Directors or the Executive
elects not to extend the term, it shall give written notice of such decision to
the other party not less than thirty (30) days prior to any such annual
extension date. If any party gives timely notice that the term will not be
extended as of any annual extension date, then this Agreement shall terminate at
the conclusion of its remaining term. References herein to the term of this
Agreement shall refer both to the initial term and successive terms.
(b) During the term of this Agreement, the Executive shall perform such
executive services for the Employer as may be consistent with his titles and
from time to time assigned to him by the Chief Executive Officer of Community
Bank Shares of Indiana, Inc.; provided, however, such executive services shall
not be materially changed from the Executive's present duties as President -
Louisville Market of Community Bank of Kentucky, Inc., and Senior Vice President
of Community Bank Shares of Indiana, Inc., without the Executive's express
written consent, which consent may be withheld in the sole discretion of the
Executive. Executive shall not be required to report to any supervisor other
than the Chief Executive Officer of Community Bank Shares of Indiana, Inc.,
without his express written consent, which consent may be withheld in the sole
discretion of the Executive. Notwithstanding the above, Executive's duties shall
include, but not be limited to, development of the commercial lending portfolio,
private banking portfolio, and general business development to enhance
Employer's profitability in the Jefferson County, Kentucky, market, in addition
to such other duties as the Chief Executive Officer of Community Bank Shares of
Indiana, Inc., may in his discretion assign from time to time.
3. COMPENSATION AND BENEFITS.
(a) The Employer shall compensate and pay Executive for his services
during the term of this Agreement at a minimum base salary of $100,000.00 (One
Hundred Thousand Dollars) per year ("Base Salary"), which may be increased from
time to time in such amounts as may be determined by the Board of Directors of
the Employer. In addition to his Base Salary, the Executive shall receive an
additional cash bonus of at least $10,000.00 (Ten Thousand Dollars) payable in
January 2003, subject to the Executive remaining in the employment at such time.
(b) During the term of the Agreement, Executive shall be entitled to
participate in and receive the benefits of any pension or other retirement
benefit plan, profit sharing, stock option, employee stock ownership, or other
plans, benefits and privileges given to employees and executives of the
Employer, including life, medical, dental and disability insurance coverage, to
the extent commensurate with his then duties and responsibilities, and in the
same manner and scope as such benefits are provided to other officers of the
Employer with similar responsibilities and results obtained, as fixed from
time-to-time by the Board of Directors of the Employer; provided, however, the
Employer shall provide health insurance for the benefit of the Executive
commencing upon the date of thisAgreement in the same scope and extent that
Employer presently provides health insurance benefits to other similarly
situated executives. The Employer shall not make any changes in such plans,
benefits or privileges which would adversely affect Executive's rights or
benefits thereunder, unless such change occurs pursuant to a program applicable
to all executive officers of the Employer. Nothing paid to Executive under any
plan or arrangement presently in effect or made available in the future shall be
deemed to be in lieu of the salary payable to Executive pursuant to Section 3(a)
hereof. Notwithstanding the foregoing, nothing contained in this Agreement shall
require the Executive to participate in any tax qualified or non-qualified
benefit plan of the Employer.
(c) During the term of this Agreement, the Employer shall provide the
Executive with coverage for supplemental long-term disability insurance to the
extent that such coverage is then provided as a benefit to other employees.
(d) During the term of this Agreement, the Executive shall be entitled to
four (4) weeks of paid annual vacation. The Executive shall not be entitled to
receive any additional compensation from the Employer for failure to take a
vacation, nor shall the Executive be able to accumulate unused vacation from one
year to the next, except to the extent authorized in writing by the Board of
Directors of the Employer.
(e) During the term of this Agreement, the Employer shall provide
Executive with a cash allowance of at least $600.00 per month for an automobile.
(f) Upon commencement of employment by the Executive, the Employer agrees
to grant the Executive stock options to purchase 4,000 shares of common stock of
the Community Bank Shares of Indiana, Inc. ("Common Stock"), pursuant to the
Employer's stock option plan. Such options shall have an exercise price equal to
the fair market value of a share of Common Stock on the date of grant, shall be
incentive stock options under Section 422 of the Code and shall vest and become
exercisable as follows: (i) thirty-three and one-third percent (33 1/3%), or
options to purchase 1,333 shares of Common Stock, shall vest immediately on the
date of grant, (ii) thirty-three and one-third percent (33 1/3%), or options to
purchase 1,333 shares of Common Stock shall vest on the first anniversary date
of this Agreement, and (iii) thirty-three and one-third percent (33 1/3%), or
options to purchase 1,334 shares of Common Stock shall vest on the second
anniversary date of this Agreement.
(g) In the event that Employer subsequently adopts a stock grant program,
Executive shall be entitled to participate in such program in the manner and
extent subsequently determined by the Board of Directors, without diminution of
Executive's rights under Section 3(f) above.
4. EXPENSES. The Employer shall reimburse Executive or otherwise provide
for or pay for all reasonable expenses incurred by Executive in furtherance of,
or in connection with the business of the Employer, including, but not by way of
limitation, traveling expenses and all reasonable entertainment expenses
62
(whether incurred at the Executive's residence, while traveling, or otherwise),
subject to such reasonable documentation and other limitations as may be
established by the Board of Directors of the Employer for all similarly situated
executives employed by Employer. If such expenses are paid in the first instance
by Executive, the Employer shall reimburse the Executive therefor.
5. TERMINATION.
(a) The Employer shall have the right, at any time upon prior Notice
of Termination, to terminate the Executive's employment hereunder for any
reason, including termination for Cause, Disability or Retirement, and Executive
shall have the right, upon prior Notice of Termination, to terminate his
employment hereunder for any reason.
(b) In the event that (i) Executive's employment is terminated by
the Employer for Cause, Disability or Retirement or in the event of the
Executive's death, or (ii) Executive terminates his employment hereunder other
than following a Change in Control of the Corporation or a material breach of
this Agreement by the Employer which has not been cured in accordance with the
terms of this Agreement, Executive shall have no right pursuant to this
Agreement to compensation or to any non-vested stock options granted to the
Executive, which shall be governed by the terms of the option grant and the
Employer's stock option plan that such options were granted under.
(c) In the event that Executive's employment is terminated by the
Employer for other than Cause, Disability, Retirement or the Executive's death,
or such employment is terminated by the Executive due to a material breach of
this Agreement by the Employer which has not been cured within fifteen (15) days
after a written notice of non-compliance has been given by the Executive to the
Employer, and as of Executive's date of Termination no Change in Control of the
Corporation has occurred, no written agreement which contemplates a Change in
Control of the Corporation and which still is in effect has been entered into by
the Employer and no discussions and/or negotiations are being conducted which
relate to the same, then the Employer shall, subject to the provisions of
Section 6 hereof, if applicable:
(1) pay to the Executive, in equal monthly installments,
beginning with the first business day of the month following the Date of
Termination, a cash severance amount equal to the Base Salary which the
Executive would have earned over the remaining term of this Agreement as of his
Date of Termination; and,
(2) maintain and provide for a period ending at the earlier of
(i) the expiration of the remaining term of the Executive's employment which
remained immediately prior to the Executive's Date of Termination, or (ii) the
date of the Executive's full-time employment by another employer (provided that
the Executive is entitled under the terms of such employment to benefits
substantially similar to those described in this subparagraph (2), at no cost to
the Executive, the Executive's continued participation in all group insurance,
life insurance, health and accident and disability plans in which the Executive
was entitled to participate immediately prior to the Date of Termination,
provided that in the event that the Executive's participation in any plan,
program or arrangement as provided in this subparagraph (2) is prohibited by the
terms of the plan or by the Employer for legal or other bona fide reasons, or
during such period any such plan, program or arrangement is discontinued or the
benefits thereunder are materially reduced for all employees, the Employer shall
arrange to provide the Executive with benefits substantially similar to those
which the Executive would have received had his employment continued throughout
such period to the extent such benefits can be provided at a commercially
reasonable cost. In the event such benefits cannot be provided at a commercially
reasonable cost, the Employer shall pay the Executive that portion of the
premiums or other costs of such plans allocable to the Executive in that year
prior to the Date of Termination for the period set forth in this
subparagraph (2). Nothing provided for in this subparagraph (2) shall be
construed as to provide for continued participation by the Executive in any
stock option or restricted stock plan or any cash incentive or bonus plan of the
Employer or adversely effect any rights the Executive has with regard to any
vested stock options granted to the Executive, which shall be governed by the
terms of the option grant and the Employer's stock option plan that such options
were granted under.
6. CHANGE IN CONTROL OF THE CORPORATION. In the event of a Change in
Control of the Corporation, then the Employer shall, subject to the provisions
of Section 7 hereof, if applicable:
(a) immediately pay to the Executive, in a single lump sum payment,
a cash amount equal to two (2) times each of (i) the Executive's Base Salary,
(ii) the Executive's average yearly automobile allowance paid during the prior
two (2) years, and (iii) the Executive's average yearly bonus compensation paid
during the prior two (2) years, which amount shall be calculated as of the date
of the Change in Control of the Corporation; and,
(b) maintain and provide for a period ending at the earlier of (i)
the expiration of twenty-four (24) months from the date a Change in Control of
the Corporation has occurred or (ii) the date of the Executive's full-time
employment by another employer (provided that the Executive is entitled under
the terms of such employment to benefits substantially similar to those
described in this subparagraph (b), at no cost to the Executive, the Executive's
continued participation in all group insurance, life insurance, health and
accident, and disability plans in which the Executive was entitled to
participate immediately prior to the date of the occurrence of the Change in
Control of the Corporation, provided that in the event that the Executive's
participation in any plan, program or arrangement as provided in this
subparagraph (b) is prohibited by the terms of the plan or by the Employer for
legal or other bona fide reasons, or during such period any such plan, program
or arrangement is discontinued or the benefits thereunder are materially reduced
for all employees, the Employer shall arrange to provide the Executive with
benefits substantially similar to those which the Executive would have received
had his employment continued throughout such period to the extent such benefits
can be provided at a commercially reasonable cost. In the event such benefits
cannot be provided at a commercially reasonable cost, the Employer shall pay the
Executive that portion of the premiums or other costs of such plans allocable to
the Executive in the year prior to the Date of Termination for the period set
forth in this subparagraph (b). Nothing provided for in this subparagraph (b)
63
shall be construed as to provide for continued participation by the Executive in
any stock option or restricted stock plan or any cash incentive or bonus plan of
the Employer.
7. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and
benefits pursuant to Section 6 hereof, either alone or together with other
payments and benefits which Executive has the right to receive from the
Employer, would constitute a "parachute payment" under Section 280G of the Code,
the payments and benefits pursuant to section 6 hereof shall be reduced, in the
manner determined by the Executive, by the amount, if any, which is the minimum
necessary to result in no portion of the payments and benefits under Section 6
being non-deductible to the Employer pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The
determination of any reduction in the payments and benefits to be made pursuant
to Section 6 shall be based upon the opinion of independent tax counsel selected
by the Employers' independent public accountants and paid by the Employer. Such
counsel shall be reasonably acceptable to the Employer and the Executive; shall
promptly prepare the foregoing opinion, but in no event later than thirty (30)
days from the Date of Termination; and may use such actuaries as such counsel
deems necessary or advisable for the purpose. In the event that the Employer
and/or the Executive do not agree with the opinion of such counsel, (i) the
Employer shall pay to the Executive the maximum amount of payments and benefits
pursuant to Section 5, as selected by the Executive, which such opinion
indicates that there is a high probability do not result in any of such payments
and benefits being non-deductible to the Employer and subject to the imposition
of the excise tax imposed under Section 4999 of the Code and (ii) the Employer
may request, and Executive shall have the right to demand that the Employer
request, a ruling from the IRS as to whether the disputed payments and benefits
pursuant to section 6 hereof have such consequences. Any such request for a
ruling from the IRS shall be promptly prepared and filed by the Employer, but in
no event later than thirty (30) days from the date of the opinion of counsel
referred to above, and shall be subject to Executive's approval prior to filing,
which shall not be unreasonably withheld. The Employer and Executive agree to be
bound by any ruling received from the IRS and to make appropriate payments to
each other to reflect any such rulings, together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained
herein shall result in a reduction of any payments or benefits to which the
Executive may be entitled upon termination of employment under any circumstances
other than as specified in this Section 7, or a reduction in the payments and
benefits specified in Section 6 below zero.
8. MITIGATION; COVENANT NOT TO COMPETE, EXCLUSIVELY OF BENEFITS
(a) The Executive shall not be required to mitigate the amount of any
benefits hereunder by seeking other employment or otherwise nor, except as
otherwise provided elsewhere in this Agreement, 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 following a Change in
Control of the Corporation, he will not, for a period of time equal to what
would have been the then remaining term of this Agreement absent his termination
of employment, directly or indirectly and in any way, whether as principal or as
director, officer, employee, consultant, agent, partner or stockholder to
another entity (other than by the ownership of a passive investment interest of
not more than five percent (5.00 %) in a company with publicly traded equity
securities), (i) own, manage, operate, control, be employed by, participate in,
or be connected in any manner with the ownership, management, operation or
control of any business located within 75 miles of the Corporation's main office
and prior to a Change in Control of the Corporation that competes with any
business of the Employer; (ii) interfere with, solicit on behalf of another or
attempt to entice away from the Employer any project, loan, arrangement,
agreement, financing or customer of the Employer or any contract, agreement or
arrangement that the Employer is actively negotiating with any other party, or
any prospective business opportunity that the Employer has identified; or, (iii)
for himself or another, hire, attempt to hire, or assist in or facilitate in any
way the hiring of any employee of the Employer.
(c) The specific arrangements referred to herein are not intended to
exclude any other benefits which may be available to the Executive upon a
termination of employment with the Employer pursuant to employee benefit plans
of the Employer or otherwise.
9. WITHHOLDING. All payments required to be made by the Employer hereunder
to the Executive shall be subject to the withholding of such amounts, if any,
relating to tax and other payroll deductions as the Employer may reasonably
determine should be withheld pursuant to any applicable law or regulation.
10. ASSIGNABILITY. Subject to the provisions of Section 6 above, the
Employer may assign this Agreement and their rights and obligations hereunder in
whole, but not in part, to any corporation, bank or other entity with or into
which the Employer may hereafter merge or consolidate or to which the Employer
may transfer all or substantially all of their assets, if in any such case said
Corporation, bank or other entity shall by operation of law or expressly in
writing assume all obligations of the Employer hereunder as fully as if it had
been originally made a party hereto, but may not otherwise assign this Agreement
or their rights and obligations hereunder. The Executive may not assign or
transfer this Agreement or any rights or obligations hereunder.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth below:
To the Employer: James D. Rickard
President & CEO
Community Bank Shares of Indiana, Inc.
101 West Spring Street
New Albany, Indiana 47150
64
To the Executive: Christopher L. Bottorff
3406 Tootenhill
Jeffersonville, PT 47130
12. AMENDMENT; WAIVER. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Employer to sign on
their behalf. No waiver by any party hereto at any time of any breach by any
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the State of Indiana.
14. NATURE OF OBLIGATIONS. Nothing contained herein shall create or
require the Employer to create a
trust of any kind to fund any benefits which may be payable hereunder, and to
the extent that the Executive acquires a right to receive benefits from the
Employer hereunder, such right shall be no greater than the right of any
unsecured general creditor of the Employer.
15. HEADING. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. VALIDITY. The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
17. COUNTEPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
18. REGULATORY PROHIBITION. Notwithstanding any other provision of this
Agreement to the contrary, any payments made to the Executive pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with Section 18(k) of the Federal Deposit Insurance Act (12 U.S.C. ss.1828(k))
and any regulations promulgated thereunder.
19. EMPLOYER'S REPRESENTATION REGARDING REGULATORY MATTERS. Employer
represents, and Executive acknowledges, that Community Bank of Kentucky, Inc.,
presently operates under a resolution of its Board of Directors by which it
reports certain matters on a quarterly basis to the Department of Financial
Institutions of the Commonwealth of Kentucky. Employer further represents that
to the best of its knowledge and belief Community Bank Shares of Indiana, Inc.,
is presently in conformance with all applicable laws, rules, and regulations,
and that no pending or threatened enforcement actions regarding any purported
regulatory violations exist.
[Signature Page Follows]
IN WITNESS WHEREOF this Agreement has been executed and is made effective
as of this 28th day of August, 2002.
For "EMPLOYER"
COMMUNITY BANK SHARES OF INDIANA, INC.
By: /s/ James D. Rickard Attest: /s/ Pamela P. Echols
-------------------- --------------------
James D. Rickard, President Secretary
COMMUNITY BANK OF KENTUCKY, INC.
By: /s/ James D. Rickard Attest: /s/ Pamela P. Echols
-------------------- --------------------
Printed: James D. Rickard Secretary
Title: President & CEO, Community Bank Shares
For "EXECUTIVE"
Christopher L. Bottorff
- ------------------------------
CHRISTOPHER L. BOTTORFF
CGF7/cbsLagr
65
Exhibit 10.8 - Data Processing Services Agreement with Jack Henry and
Associates, Inc.
JACK HENRY AND ASSOCIATES, INC.
DATA PROCESSING SERVICES AGREEMENT
This Agreement, entered into this 10thh day of December, 2002, between:
COMMUNITY BANK OF SOUTHERN INDIANA
101 West Spring Street
New Albany, IN 47150
hereafter called "Client" and
Jack Henry and Associates, Inc.
663 Highway 60
Monett, MO 65708
hereafter called "MA".
JHA is in the business of providing data processing services throughout
its trade area and Client is desirous of securing such services from JHA.
Therefore, on the date first noted above, the parties do hereby agree as
follows:
1. Description of Services
Client hereby contracts for and JHA hereby agrees to furnish, on the terms
and conditions hereinafter set forth, the data processing services ("SERVICES")
which are enumerated on Exhibit "A" attached to and a part of this Agreement.
Upon the completed execution of this Agreement Client and JHA shall
mutually proceed in good faith i) to promptly develop a detailed plan for the
conversion of Client to the Services ii) to define a mutually acceptable
schedule for the training of Client's personnel with respect to the conversion
to and the implementation of the Services.
2. Term of Agreement
The original term of this agreement shall be for five (5) years with a
commencement date of either the day of conversion to the new JHA system, or 240
days after the date of this Agreement, which ever occurs first. This Agreement
shall be automatically extended for successive terms of one year from the
expiration date of the original term. Either party may terminate the Agreement
at the end of any contract term provided that written notice to this effect is
given to the other party not less than 90 days prior to the end of any contract
term. It being understood that if proper notification is not given, the term
will automatically be renewed for one year
In the event that the Client provides timely notice to JHA as aforesaid of
its intention to terminate this Agreement, this Agreement shall terminate as
provided herein. In the event of such termination, the Client shall pay JHA all
direct expenses incurred by JHA in turning over to the Client all information
maintained by JHA and relating to data processing Services performed by JHA for
the Client. These expenses shall include, but shall not be limited to, charges
for computer run time and programming requirements in accordance with JHA
published rate schedules in effect at that time.
In the event that the Client discontinues using JHA for processing prior
to the end of any contract term, the Client will be liable to JHA for a lump sum
early termination fee to be calculated as the average monthly billing exclusive
of pass through cost including, but not limited to, data lines, postage, Federal
Reserve charges, etc., for the past twelve months multiplied by the number of
months and any portion of a month remaining in the contract term. In the event
that any entity assumes the deposit liabilities of Client, such entity will
automatically assume the obligations and liabilities of Client hereunder for the
remaining contract term.
Upon receipt of notice of Client's intention to deconvert from JHA's
service bureau the agreement termination and deconversion fees listed
above shall become immediately due and payable. Under no circumstances
shall Client render payment of these fees later than thirty days after JHA
has billed Client for them. JHA reserves the right to cease providing ALL
Services to Client if any amount due to JHA under this Agreement or any
other amount due JHA is not paid in a timely fashion.
Subject to revisions as provided for hereafter, the Schedule of Service
Fees will remain in effect for the term of the Agreement. At the end of
each twelve (12) month period during the term, JHA may increase the
Schedule of Service Fees then in effect by such an amount as JHA
determines to be appropriate; provided, however, that JHA may not at that
time increase the service fees in effect by a percentage greater than the
percentage increase during the preceding twelve (12) month period in the
"Consumer Price Index - Seasonally Adjusted US City Average for All Items
for all Urban Consumers (1982-84 = 100)" published monthly in the "Monthly
Labor Review" of the Bureau of Labor Statistics of the United States
Department of Labor or, should that index cease to be published, the most
comparable index published on a regular basis by the US Government. JHA
will provide a ninety (90) day advance written notice to
Client before such changed fees go into effect.
During the term of this Agreement, Client shall not engage any third party
processor other than JHA to provide the Services and shall not perform the
Services itself provided that JHA agrees to provide Services for the
geographic area and volume sizes that Client requires.
66
3. Ownership and Confidential Nature of Computer Software and Material
During the term of this Agreement, JHA covenants to furnish and maintain,
on its premises and at its cost, all of the equipment which it deems
necessary to perform the Data Processing Services. JHA retains the right
to move the equipment to any other location provided that such change will
not materially alter the Services JHA provides to Client as specified in
this Agreement. During the term of this Agreement, Client covenants to
furnish and maintain, on its premises and at its cost, all of the
equipment and materials specified by JHA as being necessary for Client to
receive, transmit and otherwise utilize the data processing Services
specified in Exhibit "A". The Client shall also notify JHA of the
anticipated commencement of on-line Services through new or additional
terminals or the opening of new branches at least thirty (30) days in
advance of the commencement of such Services so as to enable JHA to
arrange for necessary communication lines and with the understanding that
the scheduled implementation date of such new on-line support may be
dependent on the delivery schedules of third party vendors. The Client
agrees to reimburse JHA when billed for charges, or the Client's portion
of charges pro-rated among those Clients served, for communication lines
or devices or installation of communication lines or devices arranged and
paid for by JHA on behalf of the Client. Any equipment leased by JHA to
Client shall be maintained in accordance with the provisions of a separate
lease agreement.
All data processing Software, specifications, documentation (including
manuals, routines, sub-routines, or techniques, herein collectively called
"Software") and original ideas or formulae relating to data processing or
other handling or treatment of data (herein collectively called "Ideas"),
are and shall remain the sole, confidential, trade secret property of JHA.
It is agreed that the Client will not copy related materials or divulge
the contents of said Software and Ideas to any third party without
permission for such disclosure or use being granted in writing by JHA.
The Client shall reimburse JHA for any prior agreed upon costs incurred by
JHA in developing customized Software or modifications to Software to
satisfy the requirements of the Client or the Client's independent
auditors, including the cost of the computer time to run said Software.
During the term of this Agreement JHA shall as necessary install the then
most current copy of the Software and any program temporary fixes "PTFs".
The installation of these Software and PTFs is necessary to enable JHA to
continue processing Client's data in an accurate and timely fashion. As a
result of these Software updates and PTFs it may be necessary for JHA to
retrofit Client's customized code, if any, in order to guarantee its
compatibility with the then current version of the Software. Client shall
reimburse JHA for such retrofitting of Client's customized code at JHA's
then current rates for such Services. It is further agreed that such
customized Software or modifications will remain the property of JHA and,
assuch, JHA has the right to use said Software or modifications in
providing Services to other financial institutions.
4. Transportation of Data
In the event that Client desires that JHA provide Proof of Deposit
Services, Image Capture Services or MICR recognition Services the
following section shall apply regarding the transportation of the items to
be so serviced.
The parties acknowledge that reliable transportation of Client's input
data and its processed work is necessary for JHA to perform in accordance
with the Agreement. Accordingly, Client may either provide its own
transportation of both the input data and processed work or it may elect
to authorize JHA to contract for an authorized carrier to provide the
transportation services and/or utilize JHA's own or its agent's vehicles
to transport Client's input data and processed work for a fee as shown in
Exhibit "A".
In the event Client elects to authorize JHA to provide the transportation
services and JHA elects to contract for a carrier to provide the necessary
transportation services, such services will be rendered under the terms
and conditions of a contract between JHA and said carrier or courier which
such contract shall be made a part hereof by reference. JHA reserves the
right to change carrier or couriers from time to time during the term of
this Agreement. Client has the right to obtain from JHA a copy of the
contract which is in effect upon written request to JHA. Client agrees
that it is a third party beneficiary of said contract and any other which
JHA may elect to become a party to during the term of this Agreement. As
such, it agrees to be bound by and subject to all terms and conditions of
these courier contracts, which shall be standard courier contracts,
including, but not by way of limitation, any limitation of liability
provisions. It is the intent of the parties that JHA's liability to Client
or third parties for losses in transit, if any, shall be the same as the
liability of the carrier to JHA under its Agreement. In the event JHA
elects to utilize its own or its agent's vehicles to render the
transportation services necessary for the performance of this Agreement,
then the parties agree to be bound by a Compensation Schedule for such
services, which shall be mutually agreed upon. Accordingly the same
limitation of liability provisions as provided in standard courier
contracts or such additional agreements as may be required by JHA to
perform such courier services shall apply whether any claim is by JHA
and/or Client against the authorized carrier or Client against JHA
utilizing its own or its agent's vehicles.
5. Examination
The records maintained by JHA for the Client shall be subject to
examination by those Federal or State agencies having jurisdiction over
the Client to the same extent that such records would be subject to
examination were they maintained and produced by the Client on its own
premises, and JHA is authorized to provide the representatives of such
agencies access to such records. Reasonable expenses incurred by JHA on
the Client's behalf during the course of such examination may, at JHA's
sole discretion, be charged to the Client by JHA with itemized accounting
of such expenses.
6. Responsibility for Data
All records transmitted to JHA by Client shall remain the property of the
Client. In order to meet the requirements of the Gramm-Leach-Bliley
Financial Modernization Act, JHA and Client each agree that all
information communicated to it by the other, including the terms and
conditions of this Agreement, whether before the effective date or during
the term of this Agreement, shall be received in strict confidence, shall
be used only for the purposes of this Agreement, and that no such
information shall be disclosed by the recipient party, its agents or
employees without prior written consent of the other party, unless such
information is publicly available from other than a breach of this
provision. Each party agrees to take all reasonable precautions to prevent
the disclosure to outside parties of such information, including without
limitation, the terms of this Agreement except as may be necessary by
reason of legal, accounting or regulatory requirements beyond the
reasonable control of JHA or Client, as the case may be.
67
JHA will use reasonable care in the processing of the accounts for the
Client and reports to the Client. The Client agrees to promptly check and
verify all of the reports received from JHA to ascertain that all data has
been processed and reported correctly, and to report any discrepancies to
JHA not later than three (3) business days following receipt of such
reports. Business days will be defined to be Monday through Friday, from
8:00 A.M. to 5:00 P.M. EST. Failure to report any discrepancies within the
time prescribed in the previous sentences shall constitute a conclusive
presumption that such reports are correct and accurate.
JHA will provide safeguards determined at its discretion to ensure
protection against destruction of records and Software by fire or other
disasters, loss of data in transit or machine or human error, or
unauthorized manipulation of data or reports insofar as can reasonably be
expected using then current techniques and/or then current accepted
business practices for storage and transfer of magnetic media.
JHA maintains a disaster recovery plan with off site data files and
communications facilities for the reestablishment of Services in the event
of a disaster at JHA and agrees to make such backup processing capability
available to the Client in the event of a major disaster at JHA.
7. Warranties, Exclusive Remedies and Limitation of Liability
JHA shall have no duties or responsibilities except those expressly set
forth in this Agreement. The liability of JHA for any and all damages and
actual loss caused by JHA under this Agreement shall not exceed an
aggregate total greater than the fees paid to JHA during the previous
twelve months of this Agreement less the various expenses and pass through
costs defined on Exhibit A. Client shall provide JHA with all
documentation necessary to demonstrate any claimed loss by Client. JHA
shall not be liable for any loss which is settled or compromised by Client
without prior written consent of JHA. At the request of JHA, Client shall
transfer and assign to JHA all rights and remedies of Client with respect
to any claim which is ultimately paid by JHA.
The warranties contained herein shall be divided into the following
categories:
Equipment:
JHA shall use its own Software and current equipment such as is
indicated by JHA's specific needs and Industry standards. All
equipment shall be maintained in a reasonable fashion which shall be
compliant with industry standards. JHA shall not be liable to Client
or to any third party, including, but not limited to, customers of
Client, for errors resulting from defects or malfunctions of the
mechanical or electronic equipment used in performing its Services
hereunder.
Processing:
JHA warrants to provide the Services under this Agreement in a
competent manner consistent with industry standards. In the event
that the Services provided by JHA shall fail to meet the foregoing
standard JHA shall diligently and in good faith attempt to correct
the Services without additional cost to Client. During the period
that JHA is so correcting its Services, Client shall not expect JHA
to provide any Services without compensation. If within a reasonable
time JHA is unable to correct the Services, Client shall be entitled
to an equitable reduction in fees paid to JHA for the defective
Services. The remedies herein contained are exclusive.
ATM Services:
JHA shall not be liable to Client or to any third party, including,
but not limited to, customers of Client, for any loss, damage, cost
or expense arising from the use of any lost or stolen ATM cards;
failure or delay in making a requested transfer; erroneous
transfers; liability by reason of insufficiency of funds in any
account; unauthorized transfers; and failure to comply with state or
federal laws, rules or regulations.
JHA shall not be liable for delays or failures in the performance or completion
of any of its obligations under or with respect to this Agreement beyond its
reasonable control including, but not limited to, delays caused in whole or in
part by acts of civil or military authority, riots, epidemics, war, governmental
regulations, strikes, lockouts, labor difficulties, fire, hurricanes, flood,
insurrection, catastrophes, failures of transportation, communications or power
supply, unavoidable mechanical difficulty with its computer equipment, acts of
God, or other causes beyond its control or due to third parties.
JHA shall not be liable or responsible to Client or to any third party,
including, but not limited to, customers of Client, for any consequential,
special, indirect, or incidental damages, even if JHA has been advised of the
possibility of such damages, except to the extent such damages result solely
from the willful misconduct or gross negligence of JHA. Any liability of JHA to
Client resulting from failure to comply with the terms of this Agreement wherein
JHA shall become legally obligated to pay for damages resulting from any claim
arising from this Agreement shall be limited to the actual damages suffered by
Client and under no circumstances shall the total aggregate liability of JHA
under this Agreement exceed the fees paid by Client to JHA during the previous
twelve months of this Agreement less the various expenses and pass through costs
defined on Exhibit A. The forgoing warranties set forth in this Agreement are in
lieu of all other warranties, express or implied, whether of merchantability,
fitness or otherwise.
8. Billing and Payment for Services
The Client agrees to accept the Services and equipment described in this
Agreement and in the attached Exhibit "A" and Exhibit "B"(If applicable)
and to pay JHA all amounts due hereunder in accordance with such Exhibits.
Following the end of each billing period, JHA shall bill the Client for
all amounts due JHA hereunder for such billing period (including, but not
limited to, all standard repetitive charges, all charges for additional
requested Services, and other charges incurred by the Client whether
contemplated by this Agreement or agreed to by independent written
contract or verbal contract or otherwise requested). Payment shall be made
by the Client when invoice is rendered. Payment of all invoice amounts not
received by JHA within 30 days of invoice date shall bear interest at the
rate of 1.5% per month (18% per year) until paid.
68
9. Magnetic Ink Character Recognition
JHA requires that the magnetic ink character recognition (MICR) line
printed on certain Client input documents conform to standards acceptable
to JHA. JHA shall not be liable for failure of its equipment to read the
Client's input documents, nor for any subsequent errors in transmission of
data or printed listing if the MICR specifications are not adhered to.
Items returned in error or processed in error due to the inability of JHA
equipment to read unacceptable MICR of any of the Client's input documents
shall be the sole liability of the Client. Upon request, JHA will furnish
the Client with detailed specifications for acceptable MICR standards.
10. Severability
If any provision of this Agreement or the application of any provision to
either party or third person should be held invalid by a court of law, the
remainder of this Agreement or the application of such provision to the
parties or third parties other than those to which it is held invalid,
shall not be affected thereby and shall remain in full force and effect.
11. Entire Agreement
This Agreement including Exhibit A attached and Exhibit B (Exhibit B is
attached in the sole instance that Client will receive Item Processing
Services from JHA) constitutes the sole and entire Agreement between JHA
and the Client pertaining to the provision of subject Data Processing
Services and supersedes all prior agreements and understandings of the
parties in connection therewith.
JHA makes no representations or warranties, expressed or implied, by
operation of law or otherwise, except those expressly stated herein. This
Agreement shall not be modified, amended, rescinded or waived in whole or
in part except by a duly executed written document signed by the parties.
This Agreement and the exhibits and schedules attached hereto shall be
governed by the laws of the State of Missouri, and the rules and
regulations of the appropriate financial institution regulatory agencies.
The parties hereto bind themselves and their successors and assigns to the
faithfulobservance and performance of this Agreement and the terms and
conditions hereof; provided that the Client shall not assign its rights
hereunder without the prior written consent of JHA.
All notices required by this Agreement shall be sent via certified or
registered mail, return receipt requested, postage prepaid, addressed to
JHA at:
Jack Henry and Associates, Inc.
663 Highway 60
Monett, MO 65708
Attention: President
and to the Client at:
COMMUNITY BANK OF SOUTHERN INDIANA
101 West Spring Street
New Albany, IN 47150
Attention: President
The notice shall be deemed delivered on the earlier of the actual date of
delivery or four days after mailing.
12. Audit Responsibility
JHA shall cause to be performed, on an annual basis, a third party
operational review of its data processing centers. A copy of the most
recently completed audit for Client's servicing center will be made
available upon written request to the manager of the center. JHA shall,
upon request, schedule a mutually convenient time whereby Client audit
representatives may visit the processing center for further audit needs.
Client should review on a daily basis any audit, maintenance and exception
reports available from JHA.
13. Time frames for Receipt and Delivery of Work
JHA shall make available the following:
o Access to on-line files between 7:00 A.M. and 7:00 P.M. daily.
o Access to print spool files for initiating of report printing
at Client location between 6:00 A.M. and 7:00 P.M. daily.
Additional access to on-line and print files may be made available upon
request by Client.
Client shall make data available to JHA for daily processing as follows:
o Maintenance transactions for new and existing Client customers
by 7:00 P.M.
o MICR data file transmissions for items processed and captured
by Client or a third party processor by 7:00 P.M. Later
availability times may be made available on written request by
Client for exception conditions. Late delivery of these items
will result in the assessment of additional fees by JHA.
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JHA recognizes that availability of certain data required for
processing of Client's work (such as ATM and ACH transactions)
may not be under Client's direct control. JHA will make
reasonable efforts to accommodate the processing time frames
of these other providers.
For Clients utilizing backroom check processing services of
JHA, a courier pickup and delivery schedule will be developed
prior to implementation to allow for adequate check clearing
time frames.
If the installation requires JHA to have access to another
vendors Software being used by Client, Client will obtain any
required permission for JHA's access; and Client will pay any
charges or fees made by said vendor. In this connection JHA
will agree to treat said vendor's software as confidential and
proprietary to said vendor.
14. Notification of Changes
JHA shall notify Client in advance of any changes that would affect Client
procedures, system access or functionality, reports, processing time
frames or related areas.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate as of
the date first written above.
JHA: CLIENT:
JACK HENRY & ASSOCIATES, INC. COMMUNITY BANK OF
SOUTHERN INDIANA
By: /s/ Jack Prim By: /s/ James D. Rickard
------------------- --------------------------
Jack Prim James D. Rickard
Chief Operating Officer President and
Chief Executive Officer
Date: December 20, 2002 Date: December 19, 2002
EXHIBIT "A"
ADDENDUM TO DATA PROCESSING AGREEMENT
Monthly Processing Costs will be as follows:
Base Processing Fee includes the following applications:
o Customer Information File o Account Analysis
o Demand Deposit Accounting o Customer Profitability
o Savings & Club Accounting o Accounts Payable
o Loans (All types) o Overdraft Protection
o Time Deposit Accounting o Home Equity Loans
o Repurchase Agreements o Loan pricing
o Individual Retirement Accounting o Cash Sweep
o General Ledger o ACH Origination
o Safe Deposit Box Accounting o Executive Reminder System
o Stockholder Accounting o Account Reconciliation
o Automatic Funds Transfer System o Audit Confirmations
o Loan Collections
Base Processing Fee will remain fixed for the term of the Agreement for up
to a total of 31,551 Deposit and Loan accounts (regardless of account
status or activity). This pricing does not include a Holding Company
General Ledger. Currently, an Additional General Ledger is $350 a month
and $3,500 one-time.
STANDARD MONTHLY COSTS:
Base Processing Fee $13,252 (Includes up to 10 devices)
Additional 169 Devices $5,070
Telephone Line Charges (Estimated) $1,100
Additional Monthly Fees:
ACH Fed-Line Interface $150
Inclearing via Fed N/C
Call Reporter Interface N/C
Enhanced Statements $100
70
DSI Image Interface $825
StreamLine Platform Automation (Deposits & Loans) $1,550 (Please refer to
attached Exhibit BSI Forms)
JHA Teller-Host Based Teller Automation System (43 Workstations) $1,075
SIGMASTER $430
CTR MASTER $430
BONDMASTER $430
CHECKMASTER $430
ISOSCELES $430
On-Line JHA Integration $100 (Additional
workstations may be added at a cost of
$75 per workstation per month)
InTouch Voice Response $1,600 (Includes up to
7,5000 transactions; transactions above 7,500 @ $.06 each)
PinPoint Report Retrieval $700
Silhouette Document Imaging $1,500
JHA Demand Account Reclassification $500
Collateral Tracking $145
Enhanced Loan Servicing $415
FinSer Interest Rate Risk Module $300
Mutual Fund Sweep $145
Batch Interface to Other Home Banking System $450
On-Line ATM Transaction authorization - PassPort $300 (Includes up to 7,000
transactions; $.05 each additional
transaction)
Card Base Fee (@ $.10 per card/per month) Cost
On-Line Debit Transaction authorization - PassPort $105 (Includes up to 2,500
transactions; $.05 each additional
transaction)
ATM Driver Fee (7 ATMs) $1,200 (First ATM@ $300; each
additional @ $150)
Communication Cost - JHA to PassPort $150
SUBTOTAL STANDARD MONTHLY COSTS: $32,882 LESS JHA 5-YEAR
ALLOWANCE: ($1,325)
TOTAL MONTHLY COSTS:
Months 1-3 $1,250*
During the first 3 months of Services under this Agreement Client shall pay when billed all pass though charges. As
indicated by the $1,250.00 fee shown above. Actual processing fees for these months will be deferred until Months 4-60,
when client shall pay JHA an additional $1,595.00 per month to compensate for these deferred charges.
Months 4-60 $33,152** **Calculated as shown below
Months 4-60 Standard Processing Fees $31,557
Prorated repayment amount for Months 1-3 +$1,595
$33,152 total monthly fee
ONE TIME COSTS
CIF 20/20 Conversion-Installation $45,000
Education
- Parameter Training $ 1,200 4.5 days in Charlotte, N.C. for up
to 3 people. Parameter and product plan training to facilitate conversion planning activities. Each additional person
$500.
- On-Site Training $3,700 3.5 days training at financial
institution location. Training financial institution staff on daily functions. (Financial institution
provides training room and equipment) Each additional day $1,200.
Network Connectivity Training $2,800 Includes 2-days on-site to train
financial institution staff or network vendor on JHA connectivity standards, device naming conventions, IP
addressing, terminal emulation and GUI configuration, printer setup and other information as needed.
Additional installation assistance available for $175.00 per hour.
Phone Line Installation (Estimated) $ 850
ACH Fed-Line Interface $ -0-
Inclearing via Fed $ -0-
Call Reporter Interface $ -0-
Enhanced Statements $ -0-
DSI Image Interface $ 9,500 Pricing represents standard
interface implementation and support fes for the
Doc 24 Statement Format. Any non-standard customization will be billed at a
of $150 per person per hour for initial implementation and annual release.
StreamLine Platform Automation (Deposits & Loans) $14,000 (Includes Bankers Systems Forms
Module for the State of 1N)
JHA Teller-Host Based Teller Automation System $10,500 (Includes only modules listed in
monthly cost section)
STORE/FORWARD (20 @ $250 per workstation) $ 5,000
InTouch Voice Response $ 5,000
PinPoint Report Retrieval $ 2,000
Silhouette Document Imaging $ 9,000
JHA Demand Account Reclassification $ 1,000
Collateral Tracking $ 500
Enhanced Loan Servicing $ 6,000
FinSer Interest Rate Risk Module $ 1,350
Mutual Fund Sweep $ 1,000
Batch Interface to Other Home Banking System $ 1,500
On-Line ATM Transaction authorization - PassPort $ 3,000
On-Line Debit Transaction authorization - PassPort $ 2,500
ATM Driver Fee (7 ATMs) $ 3,000
TOTAL INSTALLATION/TRAINING CHARGES: $128,400
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Client will pay additional costs beyond monthly processing charges as follows:
o All telecommunication line costs, charges, expenses and installation
fees at actual cost (if different from those indicated).
o All costs, expenses and charges attributable to i) the sorting,
mailing and/or transmission of reports or other output to Client or
its designees, and ii) the transportation, transmission or delivery
of such reports and other materials between the facilities of JHA at
which the Services are provided and the delivery points of Client
(other than routine courier services to the extent that they may be
covered in Section "4. Transportation of Data".
o All costs, expenses and charges incurred by JHA at Client's request
including costs, expenses and charges attributable to travel,
photocopy and data and record storage and retrieval, to the extent
that such charges and expenses are billed by JHA.
o All costs expenses and charges attributable to the supplies and
postage used, purchased or incurred in the preparation and mailing
of periodic statements to customers of Client, including paper
stock, envelopes, and other related charges which are billed by JHA.
o All Federal Reserve Bank, clearing house, regulatory agency and
other third party clearing charges and all costs expenses and
charges attributable to such charges.
o Hardware maintenance charges onsite at Client's location equipment.
o Any forms and supplies related to Client's printing requirements.
o All charges associated with the costs, charges and expenses for
software licensing and customization, hardware and other equipment.
o A monthly minimum fee equal to 70% of the monthly fees shown on
Exhibit "A" and Exhibit "B" (if applicable). This minimum fee shall
be subject to offset to the extent that Client's actual processing
fees exceed it and shall begin as of the earlier of the date the
Client begins using JHA Services under this Agreement or 240 days
from the date of this Agreement.
o Costs associated with external reporting via magnetic media, such as
Credit Bureau Reporting, including a cost of $75.00 per tape
generated.
o Travel and out of pocket expenses of conversion/education personnel
traveling to Client location.
o The fees shown above are for the processing of one institution on
one data library. If Client adds additional institutions (other than
the Community Bank of Kentucky, Bardstown, KY. which must be merged
into Client prior to the commencement of Services) or additional
data libraries then Client will be responsible for additional
processing fees
SCHEDULE OF SERVICE FEES
# OF ACCOUNTS PRICE PER ACCOUNT
- ------------- -----------------
4000 $ 1
5000 0.8500
6000 0.7500
7000 0.6786
8000 0.6250
9000 0.6050
10000 0.6000
11000 0.5950
12000 0.5900
13000 0.5850
14000 0.5800
15000 0.5750
16000 0.5700
17000 0.5650
18000 0.5600
19000 0.5550
20000 0.5500
21000 0.5450
22000 0.5400
23000 0.5350
24000 0.5300
25000 0.5250
26000 0.5200
27000 0.5150
28000 0.5100
29000 0.5050
30000 0.5000
31000 0.4990
32000 0.4980
33000 0.4970
34000 0.4960
35000 0.4950
36000 0.4940
37000 0.4930
38000 0.4920
39000 0.4910
40000 0.4900
41000 0.4890
42000 0.4880
43000 0.4870
44000 0.4860
45000 0.4850
46000 0.4840
47000 0.4830
48000 0.4820
49000 0.4810
50000 0.4800
51000 0.4790
52000 0.4780
53000 0.4770
54000 0.4760
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BSI FORMS
(a) Client will sign a separate LICENSE/SUPPORT-LINE AGREEMENT (LSLA)
directly with Bankers Systems, Inc (BSI) which will permit Client to
acquire and use the proprietary Laser Forms of BSI on the JHA
Platform System(TM).
(b) Client will pay JHA in advance the annual current usage fee of BSI
Laser Forms from July 1 to July 1. The initial fee will be prorated
from 30 days after JHA completes the installation to next July 1.
This Agreement is for the use of BSI Laser Forms only for the
states(s) specified above. Additional fees will be required if other
states are added hereafter.
(c) Client will receive support for use of BSI's Laser Forms directly
from BSI and not from JHA. The Warranty on said Laser Forms is
granted to Client by BSI in said LSLA. Client understands and agrees
that JHA makes no warranty or guaranty of said Laser Forms, and has
no liability or responsibility to Client or any other entity for
said Laser Forms, or the use thereof.
(d) The following forms will NOT be supplied by nor supported by BSI:
RE Appraisal form #A00067
Sales Agreement #F01073
Postponement & Modification Agreement #F46146
General Agreement #F46148
Attorney's Final Certificate of Title #F76032
Insurance Certificate #F76046
Attorney's First Certificate of Title #F76048
Recorder's Receipt for Mortgage #F76052
Owner's Affidavit #F76073
Materialmens's Affidavit & Release #F76093
Construction Acknowledgment #F76094
Closing Instructions - JR Lien #F76123
Construction Loan Agreement #76147
Inspection Report #F76158
Personal Statement #F76203
Residential Appraisal Review Form #F76278
Recert. Of Value #F76313
Drawal Request #F76324
Property Inspection Information #F76337
Termite Letter #F76454
RE Appraisal Request Form PPB05
Hypothecation Agreement #U76026
ECOA
Federal Reserve Form G-3
PB Loan Agreement
Request For Certification (TransAmerica)
Statement of Legal Services
Stock Assignment Separate from Certificate
Revolving Credit Mortgage #F75232
Seller Escrow Authorization #F76286
Description of Perpetual Line (CL) #F76337
Description of Perpetual Line (1) #F76377
Description of Perpetual Line (2) #F76376
Tax Advice Waiver #F76378
Termite Letter #F76454
Second Home Rider - Form 389
REFI Acknowledgment Z0007
Agreement & Disclosure - Checkline Z0014
Borrower's Cert. - HELOC
Credit Line Insurance
ECOA
Foundation Notice
Gift Letter
Disclosure & Disclaimer For Construction Loans #A00069
Home Equity Line of Credit Agreement Form
Overdraft Protection Form
81
CONTRACT MODIFICATION
WHEREAS, JACK HENRY & ASSOCIATES, INC., 663 West Highway 60, Monett, MO 65708
(JHA) entered into a Data Processing Services Agreement (Agreement) dated
December 10, 2002, with COMMUNITY BANK OF SOUTHERN INDIANA, 101 West Spring
Street, New Albany, IN 47150 (Client).
NOW THEREFORE, JHA and Client mutually contract and agree that said Agreement is
modified as follows:
1. The "DATA PROCESSING SERVICES AGREEMENT" is changed and modified as follows:
A. In Section "2. Term of Agreement":
1. Following the fourth subparagraph insert the following:
73
"Upon the completion of thirty six months of processing under
this Agreement JHA will permit Client to give JHA 12 months
written notice of its intent to terminate this agreement in
order to move to in-house processing using either the JHA
Silverlake System(R) or JHA CIF 20/20(TM) software. In order
to avail itself of this option Client will need to license the
software from JHA, pay all installation fees associated with
such installation of the software and purchase all required
hardware from JHA."
2. Add a new subparagraph as follows:
"In the event that upon proper and timely notice Client
deconverts from the Services or if JHA ceases to do business
for any reason then JHA will within thirty (30) days of JHA's
receipt of said notice provide Client with one set of test
tapes with appropriate file layouts, and one set of final
deconversion tapes. Each set will consist of up to 5 tapes at
no cost with an additional cost of $75.00 per tape for each
additional tape. All tapes will be provided in standard
format. In no event shall the charges for the preceding
services exceed an amount of $7,500.00 for these deconversion
services. All other services and/or programming will be
performed and billed at JHA's then current standard rate."
B. In Section "3. Ownership and Confidential Nature of Computer
Software and Material" immediately following the first sentence in
the first subparagraph insert the following:
"JHA shall keep the software used to provide the Services current
with commercially reasonable standards for the banking industry in
general. Additionally, JHA shall maintain the software used to
provide the services in compliance with the appropriate federal and
state banking laws. Client shall provide JHA notice of any changes
to or interpretations of federal and state banking laws which Client
believes have a direct impact on JHA's compliance with said laws in
regard to Client."
C. In Section "6. Responsibility for Data":
Revise the second sentence of the second subparagraph to read as
follows:
"The Client agrees to promptly check and verify all of the reports
received from JHA to ascertain that all data has been processed and
reported correctly, and to report any discrepancies to JHA not later
than five (5) business days following receipt of such reports."
D. In Section "13. Time frames for Receipt and Delivery of Work":
Strike:
"MICR data file transmissions for items processed and captured by
Client or a third party processor by 7:00 PM. Later availability
times may be made available on written request by Client for
exception conditions. Late delivery of these items will result in
the assessment of additional fees by JHA."
And replace it with:
"MICR data file transmissions for items processed and captured by
Client or a third party processor by 9:00 P.M. Central Time. Later
availability times may be made available on written request by
Client for exception conditions. Late delivery of these items will
result in the assessment of additional fees by JHA."
In witness whereof, the parties have caused this CONTRACT MODIFICATION to be
executed by their duly authorized representatives.
JHA: CLIENT:
JACK HENRY & ASSOCIATES, INC. COMMUNITY BANK OF SOUTHERN INDIANA
By: /s/ Jack Prim By: /s/ James D. Rickard
----------------------- ------------------------------
Jack Prim James D. Rickard
- ------------------------------------ ------------------------------
Type/Print Name Type/Print Name
Title: COO Title: President & CEO,
---------------------------- ----------------------------
Community Bank Shares
Date: December 30, 2002 Date: 12-19-02
-------------------- ----------------------------
74
Exhibit 10.9 - Electronic Funds Transfer Agreement with Jack Henry and
Associates, Inc.
JACK HENRY AND ASSOCIATES, INC.
ELECTRONIC FUNDS TRANSFER PROCESSING SERVICES AGREEMENT
This Agreement, entered into this 10th day of December, 2002 between:
COMMUNITY BANK OF SOUTHERN INDIANA
101 West Spring Street
New Albany, IN 47150
hereafter called "Client" and
Jack Henry and Associates, Inc.
633 Highway 60
Monett, MO 65708
hereafter called "JHA".
JHA is in the business of providing electronic switch processing services
throughout its trade area and Client is desirous of securing such services from
JHA.
Therefore, on the date first noted above, the parties do hereby agree as
follows:
1. Definitions.
In addition to other terms defined elsewhere in this Agreement, the
following terms shall have the following meanings when used in this
Agreement, unless the context clearly requires otherwise:
a) "Products" mean the Processing Services, computer software programs,
Documentation, JHA-supported files and databases utilized by JHA,
Additional Products (as defined below), and any modifications,
revisions, enhancements, or updates to any of the foregoing.
b) "Documentation" means the documentation for JHA Processing Services
provided to Client, as amended from time-to-time.
c) "Live Transaction" means a collection of related electronic messages
designed to complete a Transaction, for other than test or
certification purposes, at an automated teller machine ("ATM"),
point of sale ("POS") device or other device which accepts debit
and/or credit cards for payment or other funds transfer purposes,
and which Transaction is concluded by a credit or a debit to a
cardholder's account.
d) "Network" means an electronic funds transfer network supported by
JHA.
e) "Transaction" means an authorization request, inquiry transaction,
cash withdrawal, payment transaction, refund or reversal initiated
by a cardholder at an automated teller machine ("ATM"), point of
sale ("POS") device or other device which accepts debit and/or
credit cards for payment purposes and which is transmitted to JHA
for processing hereunder.
f) "Processing Services" means the computer data processing services
provided by JHA to Client in accordance with this Agreement and may
include terminal driving, electronic authorization, links to
Networks, transaction switching, and other support services
described in Exhibit A attached hereto.
2. Description of Processing Services.
Client hereby contracts for and JHA hereby agrees to furnish, on the
terms and conditions set forth herein, the Processing Services which are
enumerated on Exhibit A attached to and a part of this Agreement. Upon the
completed execution of this Agreement Client and JHA shall mutually proceed in
good faith to promptly develop a detailed plan for the conversion of Client to
the Processing Services
3. Term of Agreement.
This Agreement shall have a term of five (5) years with a
commencement date of either the day PROCESSING SERVICES are first provided by
JHA to Client, or 240 days after the date of this Agreement, which ever occurs
first. Thereafter this Agreement shall automatically renew for successive five
(5) year terms unless terminated by either party by written notice no less than
one hundred eighty (180) days prior to the expiration of the then current five
(5) year term of this Agreement. In addition, either party may terminate this
Agreement by written notice to the other party should a determination be made by
any judicial or administrative authority that the Processing Services provided
pursuant to this Agreement are illegal.
In the event that the Client provides timely notice to JHA as
aforesaid of its intention to terminate this Agreement, this Agreement shall
terminate as provided herein. In the event of such termination, the Client shall
pay JHA all direct expenses incurred by JHA in turning over to the Client all
information maintained by JHA and relating to Processing Services performed
by JHA for the Client. These expenses shall include, but shall not be limited
to, charges for computer run time and programming requirements in accordance
with JHA published rate schedules in effect at that time. In the event that the
Client discontinues using JHA Processing Services prior to the end of any
contract term, the Client will pay to JHA via ACH payment a lump sum early
termination fee to be calculated as the average monthly billing exclusive of
pass through cost including, but not limited to, data lines, postage, Federal
Reserve charges, etc., for the past twelve months multiplied by the number of
months and any portion of a month remaining in the contract term. In the event
that any entity assumes the deposit liabilities of Client, such entity will
automatically assume the obligations and liabilities of Client hereunder for the
remaining contract term.
Upon receipt of notice of Client's intention to deconvert from JHA's
75
Processing Services the early termination and expenses listed above shall become
immediately due and payable. Under no circumstances shall Client render payment
of these fees later than thirty days after JHA has billed Client for them. JHA
reserves the right to cease providing ALL Processing Services to Client if any
amount due from Client to JHA under this Agreement or any other amount due from
Client to JHA is not paid in a timely fashion. JHA shall have the right to
terminate this Agreement should Client fail to pay any amounts due to JHA
hereunder and fail to cure that default within seven (7) days after written
notice. In that event JHA shall treat said nonpayment as an anticipatory breach
and shall be entitled to proceed as though Client had given JHA proper notice of
its intention to discontinue Processing Services as provided for above. Either
party may terminate this Agreement should the other party materially breach any
other obligation under this Agreement and fail to cure that breach within thirty
(30) days after written notice.
4. File Ownership and Security.
a) File Security. JHA acknowledges that all data files provided by
Client are the property of Client and that JHA's use thereof or
access thereto does not create in JHA any right, title or interest
therein, except as provided for hereunder. JHA will implement
reasonable security precautions and take appropriate actions with
respect to the Client data files so as to enable JHA to satisfy its
obligations under this Agreement and to prevent the loss, alteration
or unauthorized access of Client data files.
b) Security and Protection of Products. Client acknowledges that the
Products and Processing Services are the property of JHA and that
Client's use thereof does not create in Client any right, title, or
interest therein, except as provided for hereunder. Client will
implement reasonable security precautions and take appropriate
action so as to enable Client to satisfy its obligations under this
Agreement and to prevent the loss, alteration or unauthorized access
of Products or Processing Services.
5. Examination.
The records maintained by JHA for the Client shall be subject to
examination by those Federal or State agencies having jurisdiction over the
Client to the same extent that such records would be subject to examination were
they maintained and produced by the Client on its own premises, and JHA is
authorized to provide the representatives of such agencies access to such
records. Reasonable expenses incurred by JHA on the Client's behalf during the
course of such examination may, at JHA's sole discretion, be charged to the
Client by JHA with itemized accounting of such expenses.
6. Exclusivity.
Once Client has ordered a specific Processing Service from JHA and
has transferred such Processing Services to JHA from its current provider of
such Processing Services, Client agrees to obtain that Processing Service
exclusively from JHA through the term of the Agreement; except that, if Client
has given written notice of its intent not to renew this Agreement at the end of
the term, Client may, during the final ninety (90) days of this Agreement,
transfer such portion of its Processing Services as Client may deem necessary to
assure continued service at the end of this Agreement. Client shall nevertheless
remain responsible for all required payments, including but not limited to any
applicable minimum payments, network fees and phone line disconnections fees
throughout the entire term of this Agreement.
7. JHA 's Reliance on Client's Instructions..
In general, JHA will expect to receive any necessary instructions,
information or data from Client. However, it is contemplated that data,
information or certain instructions from time to time may be transmitted
directly to JHA by third parties on behalf of Client. JHA agrees to respond to
such data, information and instructions from third parties when it is customary
for such to be provided in that manner. JHA shall be entitled to reasonably rely
upon any data, information or instructions provided hereunder.
8. Client Duties and Responsibilities.
a) Responsibility for Client Instructions/Information. Client assumes
responsibility for the consequence of any instructions or other
information given to its customers by Client. Client shall also be
responsible for instructions provided to or by certain third party
vendors as described in Section 7 above.
b) Notice of Discrepancies. Client shall be responsible for auditing
and balancing the data contained in any reports, and for reconciling
any out-of-balance condition. Client will notify JHA of any
out-of-balance condition which Client believes or reasonably should
have believed to be caused by a failure of the Processing Services
by midnight of the tenth (10th) working day immediately following
the day of receipt by Client. Failure of Client to notify JHA of any
out-of-balance condition within such time period waives Client's
right to an adjustment. In the event that Client fails to notify JHA
within 10 days of any out of balance condition and Client desires
JHA assist Client in correcting said out of balance
condition then JHA shall at its sole discretion provide such
assistance at its then current fee for such services. In the event
of the foregoing JHA shall not assume any liability for any
attempted correction.
c) Third Party Products and Processing Services.
(i) Network Access. If as a part of the Processing Services,
Client requests access to Networks or other third party
service providers, Client agrees to enter into the appropriate
agreements with such Networks and/or third party service
providers, including but not limited to sponsoring financial
institutions. Client agrees to comply with the terms of any
such Network and/or third party service provider agreement,
all applicable Network operating rules and regulations, and to
pay any fees imposed by Network(s) and/or third party service
providers with respect to Client. JHA shall sign a "processor"
or other agreement if required by the Network or third party
service provider in order to provide Processing Services to
Client under this Agreement. Client shall indemnify, defend
and hold JHA harmless from any fees, costs, liability or
obligation to the Network or third party service provider
arising out of any such agreement or otherwise, unless JHA has
specifically assumed such fees, costs, liabilities or
obligations hereunder, and notwithstanding any provision of
any such "processor" or other agreement signed by JHA. It is
understood and agreed that any Network sponsorship for Client
under this Agreement shall be coterminous with this Agreement;
provided, however, that both parties shall comply with any
applicable Network operating rules and regulations and all
applicable laws after any termination of any sponsorship
provided for pursuant to this Agreement.
(ii) Changes to the Processing Services. If any Network or third
party service provider mandates changes to the Processing
Services, or changes are required to or because of the
terminals used for the Processing Services, Client shall be
responsible for paying for such changes on a time and
materials basis, provided however that JHA will use reasonable
efforts to prorate such charges among its customers using the
affected Network, service provider or terminal.
76
(iii) Reporting Responsibility. Client shall be responsible for any
Client specified reporting that is mandated by a Network
and/or third party service provider. Any fees assessed with
respect to such reporting shall be the responsibility of the
Client.
d) Cooperation. The obligations of JHA under this Agreement are subject
to and conditioned upon the cooperation and timely performance by
Client of its obligations, including but not limited to compliance
by Client with any requirements contained in the Documentation.
e) Financial Obligations. Client will maintain account(s) within their
own institution or with such financial institutions as may be
required for Network sponsorship and to maintain such balances as
may be required for settlement of transaction activity, authorized
adjustments or any other financial obligations arising under the
Processing Services.
f) Client is responsible for reviewing its monthly billing for Services
provided by JHA. In the event that Client does not report any
discrepancy with said billing or challenge any charges in writing on
any bill within ninety days of the bills presentation to Client then
Client shall be deemed to have waived any correction of such non
reported and/or non challenged errors and JHA shall have no further
obligations relating to said billing.
9. Payment.
Client agrees to pay upon presentation by JHA of an electronic funds
transfer debit for such amount, the then applicable charges for the Products
covered thereby. Unless specified otherwise, all amounts are due when the
Processing Services have been completed or other Products provided. JHA shall
provide an invoice to the Client for review prior to initiation of the
electronic funds transfer debit. Set-up fees and annual fees will be invoiced
and are payable in advance. Amounts outstanding after the due date are subject
to an interest charge to date of payment of the lesser of 18% per annum or the
highest legally allowable rate. JHA may adjust its fees annually, upon at least
sixty (60) days written notice; provided no such increase, except with respect
to rates for professional services, shall exceed 10%. Notwithstanding the
foregoing, unless otherwise specified in Exhibit A, JHA reserves the
unrestricted right to charge Client the amount of any increases in third party
telecommunications charges (plus any JHA's service charge), Network pass-through
fees or other such expenses incurred on behalf of Client by JHA. Additionally
JHA reserves the right to immediately terminate Processing Services under this
Agreement and to terminate this Agreement if any amount due hereunder shall not
be paid via ACH within (5) five days of its original ACH transfer attempt or if
any ACH payment due under this Agreement is reversed without written notice to
JHA of said reversal and JHA's written acceptance of said reversal.
10. Changes to Processing Services.
JHA reserves the right to modify the Processing Services provided
during the term of this Agreement. In the event of a modification that
materially degrades the quality or performance of the Processing Services to
Client, and said degradation has not been corrected by JHA within ninety (90)
days of written notice to JHA of said degradation, Client
may cancel the Agreement within thirty (30) days of the receipt of updated
Documentation describing the modification, without penalty, effective sixty (60)
days after receipt by JHA of written notice of termination from Client.
11. Disaster Recovery.
Upon request, JHA will provide Client access, at JHA, to the
non-confidential portions of JHA's disaster recovery plan, or will provide a
copy thereof at its then current charges. JHA agrees to release such information
(under appropriate confidentiality agreement) as may be reasonably necessary to
allow Client to develop its own disaster recovery plan to work in concert with
the JHA plan.
12. Insurance.
JHA will maintain a Fidelity Bond covering loss of money, securities
or other property resulting from one or more fraudulent or dishonest
acts for which JHA is legally liable.
13. Warranties.
Client's Remedies and Limitation of Liability. JHA and Client
acknowledge that circumstances could arise entitling Client to damages or
rescission arising from performance by JHA of its obligations hereunder or a
failure by JHA to perform its obligations and have agreed in all such
circumstances that Client's remedies and JHA's liabilities will be limited to
those set forth in this Agreement. For material breach or default of this
Agreement, JHA's sole obligation shall be to remedy the breach.
JHA shall have no duties, liabilities, or responsibilities except
those expressly set forth in this Agreement.
Client shall provide JHA with all documentation necessary to prove
any claimed loss by Client. JHA shall not be liable for any loss which is
settled or compromised by Client without prior written consent of JHA. At the
request of JHA, Client shall transfer and assign to JHA all rights and remedies
of Client with respect to any claim which is ultimately paid by JHA.
The warranties contained herein shall be divided into the following
categories:
Equipment:
JHA shall use software and current equipment such as is
indicated by JHA's specific needs and Industry standards. All equipment
shall be maintained in a reasonable fashion which shall be compliant with
industry standards. JHA shall not be liable to Client or to any third
party, including, but not limited to, customers of Client, for errors
resulting from defects or malfunctions of the mechanical or electronic
equipment used in performing its Processing Services hereunder.
Processing:
JHA warrants to provide the Processing Services under this
Agreement in a competent manner consistent with industry standards. In the
event that the Processing Services provided by JHA shall fail to meet the
foregoing standard JHA shall diligently and in good faith attempt to
correct the Processing Services without additional cost to Client. During
the period that JHA is so correcting its Processing Services, Client shall
not expect JHA to provide any Processing Services without compensation. If
within a reasonable time JHA is unable to correct the Processing Services,
Client shall be entitled to an equitable reduction in fees paid to JHA for
77
the defective Processing Services. The remedies herein contained are
exclusive.
ATM/Debit Card Services:
JHA shall not be liable to Client or to any third party,
including, but not limited to, customers of Client, for any loss, damage,
cost or expense arising from the use of any lost or stolen ATM and/or
debit cards; failure or delay in making a requested transfer; erroneous
transfers; liability by reason of insufficiency of funds in any account;
unauthorized transfers; and failure to comply with state or federal laws,
rules or regulations.
JHA shall not be liable for delays or failures in the
performance or completion of any of its obligations under or with respect
to this Agreement beyond its reasonable control including, but not limited
to, delays caused in whole or in part by acts of civil or military
authority, riots, epidemics, war, governmental regulations, strikes,
lockouts, labor difficulties, fire, hurricanes, flood, insurrection,
catastrophes, failures of transportation, communications or power supply,
unavoidable mechanical difficulty with its computer equipment, acts of
God, or other causes beyond its control or due to third parties.
JHA shall not be liable or responsible to Client or to any
third party, including, but not limited to, customers of Client, for any
consequential, special, punitive, indirect, or incidental damages, even if
JHA has been advised of the possibility of such damages. THE FOREGOING
WARRANTIES SET FORTH IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER
WARRANTIES, EXPRESS OR IMPLIED, WHETHER OF MERCHANTABILITY, FITNESS OR
OTHERWISE. IN ANY ACTION BY CLIENT AGAINST JHA ARISING FROM THE
PERFORMANCE, OR FAILURE OF PERFORMANCE OF JHA's OBLIGATIONS UNDER THIS
AGREEMENT, DAMAGES SHALL BE
LIMITED SOLELY TO DIRECT MONEY DAMAGES ACTUALLY INCURRED BY CLIENT AND
DIRECTLY ATTRIBUTABLE TO JHA's PERFORMANCE OR FAILURE TO PERFORM,
REGARDLESS OF THE FORM OF ACTION AND WHETHER IN CONTRACT, TORT, STRICT
LIABILITY, OR OTHERWISE; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL SUCH
DAMAGES OR ANY RIGHT OF RECOVERY BY CLIENT EXCEED THE TOTAL CHARGES PAID
BY CLIENT TO JHA UNDER THIS AGREEMENT FOR THE THREE (3) MONTHS IMMEDIATELY
PRECEDING THE DATE ON WHICH CLIENT'S CLAIM AROSE, LESS THE VARIOUS
EXPENSES AND PASS THROUGH COSTS DEFINED ON EXHIBIT A. IN NO EVENT SHALL
JHA BE RESPONSIBLE OR LIABLE FOR ANY LOSS OF PROFITS, INCIDENTAL,
CONSEQUENTIAL, SPECIAL, PUNITIVE, OR INDIRECT DAMAGES OF ANY KIND OR
NATURE.
Client agrees that JHA shall have no duty of indemnity or
contribution for a third party claim arising from the use of the Products
or JHA's performance or non-performance of any Processing Services
hereunder.
Client acknowledges and agrees that the damage and liability
limitations set forth in this Section 13 are reasonable in light of all
present and reasonably foreseeable events and the possible amount of
actual damages to Client. The limitations set forth in this Section 13
will survive termination of this Agreement notwithstanding Client election
to rescind or otherwise be discharged from this Agreement.
14. Client's Liability for Third Party Claims.
Client agrees to defend, indemnify and hold JHA harmless from any
claim by a third party for any damages, including lost profits, direct,
incidental, consequential, special, indirect or punitive damages arising out of
or relating to Client's use of the Products and Processing Services; provided
JHA promptly notifies Client of any such claims and Client is provided an
opportunity to fully participate in the defense or settlement of any such
claims.
15. Network Mandated Changes to the Processing Services.
If any Network or third party service provider mandates changes to
the Processing Services, or changes are required to or because of the terminals
used for the Processing Services, or as a result of changes in applicable law
and/or regulation, Client shall be responsible for paying for such changes on a
time and materials basis, provided however that JHA will use its best effort to
prorate such charges among its customers using the affected Network, service
provider or terminal.
16. Local Lines.
Client shall have sole and exclusive responsibility for provision
and maintenance (including all local, state and federal taxes if any) of local
dial-up lines used by Client's ATMs at which transactions processed by JHA
hereunder originate. Client shall provide telecommunication line access for each
such ATM at Client's expense.
17. Merchant Interaction.
Client shall have sole and exclusive responsibility for sales and
marketing services to merchants including but not limited to arranging for
hardware shipment, delivery, installation, proposing rollout schedules to JHA
for JHA's approval, ensuring compliance by merchants with Network rules and
regulations, ensuring compliance by Client and merchants with all applicable
federal and state regulations, handling of all adjustments and chargebacks,
providing on-going monitoring and service of all ATMs, and for providing
settlement reporting to all merchants behind the Client. JHA does not as a
result of this Agreement agree to undertake any direct relationship or privity
with any merchant behind Client. In the event that Client requests that JHA
interact directly with any such merchant behind Client to an extent beyond JHA's
provision of the Processing Services hereunder, Client shall compensate JHA for
such interaction on a time and materials basis.
18. ATM and Telecommunications.
Client agrees to maintain its ATM configuration and its
telecommunications network standards in accordance with the standards set forth
in the Documentation. In the event Client does not maintain such standards, JHA
reserves the right to pass through any and all additional related charges to
Client that JHA incurs due to Client's non-conformance to the JHA standards in
regard to ATM configuration and telecommunications network. These charges
(including local, state, and federal taxes if any) will be listed on the monthly
Client invoice and shall be due and payable upon billing.
19. Taxes.
Any taxes based upon this Agreement, the Processing Services or
Products provided, including but not limited to sales, use and personal property
78
taxes, shall be paid by Client. Notwithstanding the foregoing, Client shall not
be responsible for any taxes based upon the income of JHA.
20. Confidentiality.
JHA and Client each agree that all information communicated to it by
the other, including the terms and conditions of this Agreement, whether before
the effective date or during the term of this Agreement, shall be received in
strict confidence, shall be used only for the purposes of this Agreement, and
that no such information shall be disclosed by the recipient party, its agents
or employees without prior written consent of the other party, unless such
information is publicly available from other than a breach of this provision.
Each party agrees to take all reasonable precautions to prevent the disclosure
to outside parties of such information, including without limitation, the terms
of this Agreement except as may be necessary by reason of legal, accounting or
regulatory requirements beyond the reasonable control of JHA or Client, as the
case maybe.
21. Equipment Return.
Any equipment provided by JHA and placed at the Client's site during
the term of this Agreement must be returned at termination of this Agreement at
the expense of Client. Client will pay to JHA an amount equal to the fair market
value of any equipment not returned to JHA within thirty (30) days after
termination. Equipment may include, but is not limited to: ATM modems, JHA's
workstations and other telecommunications equipment. If Client changes the
Processing Services provided to Client under this Agreement and said change
results in Equipment, communications systems and lines which will no longer be
needed, the Client shall bear all fees associated with said items including but
not limited to buyouts of the contracts and leases and termination fees
associated therewith as applicable.
22. Expiration of Offer.
This offer for Products in this Agreement will expire if not
executed by the Client and returned to JHA within sixty (60) days from the date
first listed above.
23. Audit Responsibility.
JHA shall cause to be performed, on an annual basis, a third party
operational review of its processing centers. A copy of the most recently
completed audit for Client's servicing center will be made available upon
written request to the manager of the center. JHA shall, upon request, schedule
a mutually convenient time whereby Client audit representatives may visit the
processing center for further audit needs. Client should review on a daily basis
any audit, maintenance and exception reports available from JHA.
24. Assignability.
This Agreement shall not be transferable or assignable by Client
without prior written consent by JHA. However, Client may assign its rights and
obligations under this Agreement by written document, to which JHA is a signing
party, to any holding company which becomes a majority stockholder or parent
company of Client by voluntary action and with the written approval of Client
and its stockholders. In this event, both Client and the assignee shall be
responsible and liable to JHA for the performance of the obligations and duties
of Client pursuant to this Agreement.
25. Entire Agreement.
This Agreement including Exhibit A attached and incorporated herein
constitutes the sole and entire Agreement between JHA and the Client pertaining
to the provision of subject Processing Services and supersedes all prior
agreements and understandings of the parties in connection therewith. JHA makes
no representations or warranties, express or implied, by operation of law or
otherwise, except those expressly stated herein. This Agreement shall not be
modified, amended, rescinded or waived in whole or in part except by a duly
executed written document signed by the parties. This Agreement and the exhibits
and schedules attached hereto shall be governed by the laws of the State of
Missouri, and the rules and regulations of the appropriate banking regulatory
agencies. The parties hereto bind themselves and their successors and assigns to
the faithful observance and performance of this Agreement and the terms and
conditions hereof ; provided that the Client shall not assign its rights
hereunder without the prior written consent of JHA.
All notices required by this Agreement shall be sent via certified
or registered mail, return receipt requested, postage prepaid, addressed to JHA
at:
Jack Henry and Associates, Inc.
663 Highway 60
Monett, MO 65708
Attention: Terry Thompson
and to the Client at:
COMMUNITY BANK OF SOUTHERN INDIANA
101 West Spring Street
New Albany, IN 47150
Attention: President
The notice shall be deemed delivered on the earlier of the actual date of
delivery or four days after mailing. IN WITNESS WHEREOF, the parties have
executed this Agreement in duplicate as of the date first written above.
JHA: CLIENT:
JACK HENRY & ASSOCIATES, INC. COMMUNITY BANK OF SOUTHERN INDIANA
By: /s/ Terry W. Thompson By: /s/ James D. Rickard
---------------------- ----------------------------
Terry W. Thompson James D. Rickard
- --------------------------- -------------------------------
Print/Type Name Print/Type Name
Title: President Title: President
------------------- ----------------------------
Date: December 23,2002 Date: 12-19-02
-------------------- ---------------------------
79
EXHIBIT "A"
Processing (Monthly Fees)
Transaction Fee............................................. $.10/trans, with $500 min.
Connect Fee, monthly........................................ ..... $400.00
Endpoint/ACH charge, monthly................................ ..... $29.00
Adjustments, via FAX........................................ $15.00 each
Monthly Network Connect Charge
Cirrus .................................................. $50.00
Plus ................................................... $50.00
Visa Check (Monthly Fees)
Transaction Fee (Authorization).......................... $.15 each, with $500 min.
Transaction Fee (Settlement)............................. $.04 each
Connect Fee, monthly..................................... $250.00
Sponsorship Fee, monthly................................. $150.00
Visa Pass Through ....................................... Billed at cost
Hot carding fee (manual)................................. $10.00/card
PassPort Auto Hot Card................................... $.04
Exceptions Management Back Office (per attached Exceptions Management Back Office Client Agreement)
One Time Fees
ATM Card Installation Fee................................ $1,000.00
Debit Card Installation Fee.............................. $2,500.00
Cirrus................................................... $300.00
Plus..................................................... $300.00
Regional Network Set-Up Fee.............................. pass thru
VISA CRIS (Fees only apply if services are used.)
Pass Through Fees
One Time Set Up ........................................ $500.00/FI
Monthly Support Fee .................................... $150.00/Fl
Scored Transaction...................................... $.0025/Transaction
Report Re-transmission.................................. $50.00/Request
PassPort Fees
One Time Set Up.......................................... $250.00
Monthly Support Fee...................................... $50.00
Miscellaneous Fees (Fees only apply if services are used.)
Adding a new BIN..................................................... $500.00 (One time)
Adding a new ATM..................................................... $150.00 (Monthly)
Add ATM Expedite Fee................................................. $150.00 (One time)
Change debit card Network............................................ $1,000.00 (One time)
Change in ATM network membership...................................... $1,000.00 (One time)
Change regional networks. ie. Pulse to Star.
Change in authorization type.......................................... 1,000.00 (One time)
Change or upgrade from strip file auth to PassPort.
Database Maintenance.................................................. $25.00 each
Pager group, welcome screen, surcharge screen, marketing messages, receipt
print, etc.
"Friendly Surcharge Network" ......................................... $500.00 setup
................................................................... $50.00 /month
Card Order Files to Card Vendor ...................................... $250.00 setup
................................................................... $10.00/ transmission
Procedural Manuals................................................... $30.00 Plus Shipping
2 manuals are issued at installation time at no charge. Additional manuals
would be furnished at an additional charge per manual.
Special Gen Requests.................................................. $500.00 (One time)
80
Balancing Assistance ................................................. no charge
Telephone assistance above and beyond.
Report Re-spool....................................................... $25.00 (Past 60 Days)
Training, Remedial.................................................... $1000.00 per day plus travel expenses
Training, Phone....................................................... no charge
Programming ......................................................... $150.00/hr
Research Fee ........................................................ $75.00/hr
Client will pay additional costs beyond monthly processing charges as follows:
o Miscellaneous MasterCard and Visa fees as billed.
o All telecommunication line costs, charges, expenses and installation fees
at actual cost (if greater than those indicated).
o Billing for phone services shall begin at date of actual installation of
said services.
o In the event of the cancellation of phone services for any reason Client
shall bear all costs associated with said cancellation.
o All costs, expenses and charges incurred by JHA at Client's request
including costs, expenses and charges attributable to travel, photocopy
and data and record storage and retrieval, to the extent that such charges
and expenses are billed by JHA.
o All costs expenses and charges attributable to the supplies and postage
used, purchased or incurred in the preparation and mailing of periodic
statements to customers of Client, including paper stock, envelopes, and
other related charges which are billed by JHA.
o All Federal Reserve Bank, clearing house, regulatory agency and other
third party clearing charges and all costs expenses and charges
attributable to such charges.
o Hardware maintenance charges on equipment maintained at Client's site.
o Any forms and supplies related to Client's printing requirements.
o All charges associated with the costs, charges and expenses for software
licensing and customization,
hardware and other equipment.
o A monthly minimum fee equal to 70% of the monthly fees shown on Exhibit
"A" . This minimum fee shall be subject to offset to the extent that
Client's actual processing fees exceed it and shall begin as of the
earlier of the date the Client begins using JHA Processing Services under
this Agreement or 240 days from the date of this Agreement.
o Travel and out of pocket expenses of conversion/education personnel
traveling to Client location.
CONTRACT MODIFICATION
This Contract Modification is entered into on December 10, 2002, by and between
COMMUNITY BANK OF SOUTHERN INDIANA, 101 West Spring Street, New Albany, IN 47150
(Client) and JACK HENRY & ASSOCIATES, INC., 663 West Highway 60, Monett, MO
65708 (JHA) who mutually contract and agree as follows:
Client and JHA are signing and entering into multiple other written contracts
and agreements dated December 10, 2002. Certain of those contracts and
agreements are changed and modified as follows:
1. The "ELECTRONIC FUNDS TRANSFER PROCESSING SERVICES AGREEMENT" is changed
and modified as follows:
A. In Section "3. Term of Agreement.":
a. Revise the second sentence of the first subparagraph to read
as follows:
"Thereafter this Agreement shall automatically renew for successive one
(1) year terms unless terminated by either party by written notice no less than
ninety (90) days prior to the expiration of the then current five (5) year term
of this Agreement."
b. Revise the second subparagraph to read as follows:
"In the event that the Client provides timely notice to JHA as aforesaid
of its intention to terminate this Agreement, this Agreement shall terminate as
provided herein. In the event of such termination, the Client shall pay JHA all
direct expenses incurred by JHA in turning over to the Client all information
maintained by JHA and relating to Processing Services performed by JHA for the
Client. These expenses shall include, but shall not be limited to, charges for
computer run time and programming requirements in accordance with JHA published
rate schedules in effect at that time. JHA shall cap its expenses for such
deconversion at $2,500.00. This fee shall include one set of test tapes with
file layouts and one set of final deconversion tapes containing Client
cardholder information. Additional support services and tape request will be
available at the rate of $150.00/hour.
In the event that the Client discontinues using JHA Processing Services
prior to the end of any contract term, the Client will pay to JHA via ACH
payment a lump sum early termination fee to be calculated as the average monthly
billing exclusive of pass through cost including, but not limited to, data
lines, postage, Federal Reserve charges, etc., for the past twelve months
multiplied by the number of months and any portion of a month remaining in the
contract term. In the event that any entity assumes the deposit liabilities of
Client, such entity will automatically assume the obligations and liabilities of
Client hereunder for the remaining contract term."
B. In Section "13. Warranties.":
Strike:
81
"JHA shall not be liable or responsible to Client or to any third
party, including, but not limited to, customers of Client, for any
consequential, special, punitive, indirect, or incidental damages, even if JHA
has been advised of the possibility of such damages. THE FOREGOING WARRANTIES
SET FORTH IN THIS AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, WHETHER OF MERCHANTABILITY, FITNESS OR OTHERWISE. IN ANY ACTION BY
CLIENT AGAINST JHA ARISING FROM THE PERFORMANCE, OR FAILURE OF PERFORMANCE OF
JHA's OBLIGATIONS UNDER THIS AGREEMENT, DAMAGES SHALL BE LIMITED SOLELY TO
DIRECT MONEY DAMAGES ACTUALLY INCURRED BY CLIENT AND DIRECTLY ATTRIBUTABLE TO
JHA's PERFORMANCE OR FAILURE TO PERFORM, REGARDLESS OF THE FORM OF ACTION AND
WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE; PROVIDED,
HOWEVER, THAT IN NO EVENT SHALL SUCH DAMAGES OR ANY RIGHT OF RECOVERY BY CLIENT
EXCEED THE TOTAL CHARGES PAID BY CLIENT TO JHA UNDER THIS AGREEMENT FOR THE
THREE (3) MONTHS IMMEDIATELY PRECEDING THE DATE ON WHICH CLIENT'S CLAIM AROSE,
LESS THE VARIOUS EXPENSES AND PASS THROUGH COSTS DEFINED ON EXHIBIT A. IN NO
EVENT SHALL JHA BE RESPONSIBLE OR LIABLE FOR ANY LOSS OF PROFITS, INCIDENTAL,
CONSEQUENTIAL, SPECIAL, PUNITIVE, OR INDIRECT DAMAGES OF ANY KIND OR NATURE. "
And replace it with the following:
"JHA shall not be liable or responsible to Client or to any third party,
including, but not limited to, customers of Client, for any consequential,
special, punitive, indirect, or incidental damages, even if JHA has been advised
of the possibility of such damages. THE FOREGOING WARRANTIES SET FORTH IN THIS
AGREEMENT ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHETHER OF
MERCHANTABILITY, FITNESS OR OTHERWISE. IN ANY ACTION BY CLIENT AGAINST JHA
ARISING FROM THE PERFORMANCE, OR FAILURE OF PERFORMANCE OF JHA's OBLIGATIONS
UNDER THIS AGREEMENT, DAMAGES SHALL BE LIMITED SOLELY TO DIRECT MONEY DAMAGES
ACTUALLY INCURRED BY CLIENT AND DIRECTLY ATTRIBUTABLE TO JHA's PERFORMANCE OR
FAILURE TO PERFORM, REGARDLESS OF THE FORM OF ACTION AND WHETHER IN CONTRACT,
TORT, STRICT LIABILITY, OR OTHERWISE; PROVIDED, HOWEVER, THAT IN NO EVENT SHALL
SUCH DAMAGES OR ANY RIGHT OF RECOVERY BY CLIENT EXCEED THE TOTAL CHARGES PAID BY
CLIENT TO JHA UNDER THIS AGREEMENT FOR THE TWELVE
(12) MONTHS IMMEDIATELY PRECEDING THE DATE ON WHICH CLIENT'S CLAIM AROSE,
LESS THE VARIOUS EXPENSES AND PASS THROUGH COSTS DEFINED ON EXHIBIT A. IN
NO EVENT SHALL JHA BE RESPONSIBLE OR LIABLE FOR ANY LOSS OF PROFITS,
INCIDENTAL, CONSEQUENTIAL, SPECIAL, PUNITIVE, OR INDIRECT DAMAGES OF ANY
KIND OR NATURE."
In witness whereof, the parties have caused this CONTRACT MODIFICATION to be
executed by their duly authorized representatives.
JHA: CLIENT:
JACK HENRY & ASSOCIATES, INC. COMMUNITY BANK OF SOUTHERN INDIANA
By: /s/ Terry W. Thompson By: /s/ James D. Rickard
--------------------- -------------------------------
Terry W. Thompson James D. Rickard
- ----------------- ----------------------------------
Print/Type Name Print/Type Name
Title: President Title: President
---------------------------
Date: December 23,2002 Date: 12-19-02
---------------------------
82
EXCEPTIONS MANAGEMENT BACK OFFICE
CLIENT AGREEMENT
WHEREAS, JACK HENRY & ASSOCIATES, INC., 663 West Highway 60, Monett, MO
65708 ("JHA") and COMMUNITY BANK OF SOUTHERN INDIANA, 101 West Spring Street,
New Albany, IN 47150 ("Client") entered into an Electronic Funds Transfer
Processing Services Agreement dated December 10, 2002 ("Agreement");
NOW, THEREFORE it is mutually agreed as follows:
By signing this Exceptions Management Back Office Addendum ("Client Agreement"),
JHA agrees to provide, and Client agrees to receive, the services described in
this Client Agreement, subject to all of the terms and conditions set forth
below.
I. General Description of Services
The Exception Management Back Office service (the "Service") enables
Client to refer Client's VisaCheck(R) and/or MasterMoney(R) cardholders
(each, a "Cardholder") to a chargeback specialist for handling of
Cardholder charge disputes ("Chargebacks"). The chargeback specialists
will act on the Client's behalf to analyze Cardholder dispute(s), obtain
necessary Chargeback-related documentation, and manage the Chargeback
process from the initial retrieval process through any optional
arbitration and compliance proceedings.
II. JHA Responsibilities
JHA will provide the following to Client:
1. Coordination of the exception management back office
implementation process
2. Access to chargeback specialists
o via telephone, FAX, e-mail, or USPS first class mail
o Monday through Friday, normal business hours for areas
served, excluding normal bank holidays ("Normal Business
Hours")
3. Exceptions case management
o coordination of Chargeback case throughout
Chargeback cycle
o documentation
o retrieval request
o Chargeback
o representments
o second Chargeback
o optional arbitration and compliance proceedings
o communication
o with Cardholder
o with Visa and MasterCard
o with Client
o consulting
o with Cardholder on rights and documentation
o with Client on next steps
4. Reporting
o actions taken on behalf of Client
o monthly summary reporting
5. Standard Service Levels
o take appropriate action within three (3) business
days of receipt of required documentation;
provided, however, Client understands and agrees
that Client must promptly provide required
documentation sufficiently in advance of network
deadlines in order to allow JHA, acting reasonably
under the circumstances, to take appropriate
action in advance of such network deadlines. These
requirements are explained in more detail in the
Documentation.
III. Client Responsibilities
In order to utilize the Service, Client understands and agrees that
it must:
1. Assign appropriate resources to work with the implementation
team and chargeback specialists
2. Provide all required data, including e-mail address, at time
of setup
3. Provide instructions to its Cardholders and Client personnel
about calling
4. Authorize JHA to access and use historical transaction data
83
5. Assist with obtaining necessary documentation when requested
6. Initiate appropriate entries to Cardholder accounts or
Client's internal accounts or both based upon reports
generated by JHA
IV. Documentation
Upon the execution of this Client Agreement, JHA will provide to Client
one (1) copy of its standard user documentation ("Documentation") for the
Service. JHA may update the Documentation from time-to-time upon written
notice to Client. Such Documentation is and remains confidential and
proprietary information for all purposes of the Agreement. The
Documentation explains the Service in more detail and further specifies
the responsibilities of JHA and Client regarding the Service. JHA and
Client will comply with the requirements of the Documentation. JHA
reserves the right to charge for additional copies of documentation.
V. Pricing Pricing for the Service is as follows:
One-time Implementation Fee $250.00 Monthly Client
Fee $ 80.00 Standard Case
Management Fee (per case opened) $ 15.00 Enhanced Case
Management Fee $ 100.00
The Implementation Fee covers the expense to add Client's program and
associated data, to the exceptions management systems. For this fee, JHA will
manage all steps required to implement successfully the Client's program,
including database changes and required testing. It also covers the cost of
initial Client Documentation. The fee is applied to each Client BIN set up and
is due upon execution of this Client Agreement.
The Monthly Client Fee is applied to each issuer and can cover multiple
BINS. The fee covers the cost to maintain Client on file and to communicate with
Cardholders, Client, Visa and MasterCard.
The Standard Case Management Fee is imposed on each case opened.
Generally, a case is opened when a Cardholder of Client questions the validity
of a transaction, requiring a chargeback specialist to begin the case management
process. A standard case may consist of a retrieval request, Chargeback,
re-presentment or second (arbitration) Chargeback or some combination of them.
Case management fees are accumulated throughout each month and are charged on
Client's monthly invoice.
The Enhanced Case Management Fee is imposed when arbitration, compliance
or good faith collections efforts documentation is received by JHA.
Note: Fees separately imposed by MasterCard and Visa for exception
processing are the responsibility of Client.
JHA reserves the right to increase prices by giving the Client at least
ninety (90) days advance written notice of the proposed price increase.
VI. Additional Terms and Conditions
A. JHA and Client represent and warrant that the individuals signing
this Client Agreement below on their respective company's behalf are
duly authorized to bind their respective companies to the terms and
conditions of this Client Agreement.
B. Client agrees that JHA will invoice Client, and Client shall pay to
JHA, the fees set forth in this Client Agreement within 30 days of
issuance of the invoice.
C. Client recognizes that in the provision of Services under this
Client Agreement, JHA will have access to and will use account,
transaction, and other information that may be considered
confidential information. Notwithstanding any other provision of
this Client Agreement, Client hereby consents to JHA, the affiliates
of JHA, and their respective independent contractors under
appropriate confidentiality agreements, storing, disclosing and
using such information in order to manage and to reduce payment and
fraud risks and to manage and recover losses suffered by financial
institutions and others; and to the extent and only in a manner that
such storage, disclosure, and use may be permitted under federal,
state, or local statutes, regulations, and requirements applicable
to eFunds or to JHA, including but not limited to the Fair Credit
Reporting Act and the Fair Debt Collection Practices Act. eFunds
shall assist JHA in complying with any reporting or disclosure
requirements applicable to JHA under any federal, state or local
statutes, regulations, or requirements.
D. Client understands that JHA may provide some or all of the Services
directly or through an independent contractor. JHA shall ensure that
it has an appropriate written agreement with any such independent
contractor to comply with JHA's obligations under this Client
Agreement.
E. Client acknowledges and agrees that, although the Service is
designed to provide Client the means to meet
84
Visa and MasterCard Chargeback and Cardholder dispute resolution
requirements, JHA makes no representations, warranties or guarantees
that any or all Cardholder disputes will be resolved to the
satisfaction of the parties through the Services provided herein.
Neither JHA nor its service providers shall be responsible for any
losses, damages, or liabilities, whether in contract, tort
(including negligence), strict liability or under any other theory,
incurred by Client or its representatives or agents, or any
cardholders, caused by inaccuracies or errors in the Service, or
otherwise associated with the Service. In no event shall JHA nor its
independent contractors be liable for indirect, special, incidental,
or consequential damages including, but not limited to, lost profits
incurred by Client or its representatives or agents, or any
cardholders in connection with the Service or services provided
under this Client Agreement. EXCEPT AS EXPRESSLY SET FORTH HEREIN,
JHA AND ITS INDEPENDENT CONTRACTORS DISCLAIM ALL WARRANTIES WITH
RESPECT TO THE SERVICE PROVIDED UNDER THIS CUSTOMER AGREEMENT, BOTH
EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO ANY IMPLIED
WARRANTY OF MERCHANTABILITY AND WARRANTY OF FITNESS FOR A PARTICULAR
PURPOSE.
F. Client shall indemnify, defend and hold JHA, its independent
contractors, and their officers, agents and employees, harmless from
and against any and all losses, claims, demands, actions, causes of
action, suits, costs, attorney's fees, damages, expenses,
compensation, penalties, liabilities and obligations of any kind
asserted by a third party resulting from, arising out of, or
incurred in connection with any Client (i) use of the Service and
any information obtained thereform; (ii) failure to comply with Visa
or MasterCard operating rules or regulations, or applicable law; or
(iii) failure to comply with the terms of this Client Agreement.
G. Notwithstanding the preceding subsections E and F, the Client shall
receive a credit to the Client's settlement account in the actual
amount of any Chargeback for which Chargeback rights have been lost,
where such loss was caused by the negligence of JHA or its
independent contractors or the failure of JHA or its independent
contractors to perform their responsibilities under section II of
this Agreement; provided, that with respect to the item for which
Chargeback rights have been lost, the Client has fully complied with
the Client's responsibilities under section III of this Agreement.
In no event shall such obligation under this Agreement to make
payments to the Client under this subsection G exceed Twenty-Five
Thousand Dollars ($25,000) or the total amount paid by the Client
under the Client Agreement, whichever amount is higher.
H. Said Agreement is adopted, ratified and incorporated herein by
reference, and shall also govern this Client Agreement and in the
event of any conflict between the Agreement and the terms of Client
Agreement the terms of the Client Agreement shall control.
IN WITNESS WHEREOF, the parties thereto cause this Client Agreement to be duly
executed on this 10th day of December, 2002.
JHA: CLIENT:
JACK HENRY & ASSOCIATES, INC. COMMUNITY BANK OF SOUTHERN INDIANA
By: /s/ Terry W. Thompson By: /s/ James D. Rickard
-------------------------- -------------------------------
Terry W. Thompson James D. Rickard
- ------------------------------- ----------------------------------
Print/Type Name Print/Type Name
Title: President Title: President & CEO,
Community Bank Shares
Date: December 23,2002 Date: 12-19-02
ABA# _______________
85
Exhibit 11.1 - Computation of Earnings Per Share
2002 2001 2000
---- ---- ----
(In thousands, except per share amounts)
Basic
Net income $ 2,126 $ 2,955 $ 2,679
======= ======= =======
Average shares:
Common shares issued 2,728 2,728 2,728
Less: Unallocated ESOP shares (8) (16) (24)
Treasury stock (284) (212) (147)
Performance share awards -- (1) (4)
------- ------- -------
Average shares outstanding 2,436 2,499 2,553
======= ======= =======
Net income per common share, basic $ 0.87 $ 1.18 $ 1.05
======= ======= =======
Diluted
Net income $ 2,126 $ 2,955 $ 2,679
======= ======= =======
Average shares:
Common shares outstanding for basic 2,436 2,499 2,553
Add: Dilutive effects of outstanding
options 16 4 1
------- ------- -------
Average shares and dilutive
potential common shares $ 2,452 $ 2,503 $ 2,554
======= ======= =======
Net income per common share, diluted $ 0.87 $ 1.18 $ 1.05
======= ======= =======
Stock options for 69,700, 134,817 and 120,408 common shares were excluded from
2002, 2001 and 2000 diluted earnings per share because they were antidilutive.
Exhibit 21 -- Subsidiaries of Registrant
State of Incorporation
Name of Subsidiary or Organization
- ------------------ ---------------
Community Bank of Southern Indiana Indiana
CBSI Holdings, Inc. Nevada
CBSI Investments, Inc. Nevada
CBSI Investment Portfolio Management, LLC Nevada
First Community Service Corporation Indiana
Community Bank of Kentucky Kentucky
Nelson Service Corporation Kentucky
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Form S-8 Registration
Statement No. 333-60089 and Form S-3 Registration Statement No. 333-40211 of
Community Bank Shares of Indiana, Inc., of our report dated January 31, 2003 on
the consolidated financial statements of Community Bank Shares of Indiana, Inc.
as of December 31, 2002 and 2001 and for the years then ended as included in
the registrant's annual report on Form 10-K.
Crowe, Chizek and Company LLP
Louisville, Kentucky
March 28, 2003
86
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Form S-8 Registration
Statement No. 333-60089 and the Form S-3 Registration Statement No.
333-40211 of Community Bank Shares of Indiana, Inc. of our report dated
January 27, 2001 on the consolidated financial statements for the year ended
December 31, 2000 appearing in the annual report on Form 10-K for the year
ended December 31, 2002.
MONROE SHINE & CO., INC.
New Albany, Indiana
March 28, 2003
Exhibit 99.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Form 10-K of Community Bank Shares of
Indiana, Inc. for the year ended December 31, 2002, I, James D. Rickard, Chief
Executive Officer of Community Bank Shares of Indiana, Inc., hereby certify
pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley
Act of 2002, that:
(1) Such Form 10-K for the year ended December 31, 2002 fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in such Form 10-K for the year ended December 31,
2002 fairly presents, in all material respects, the financial condition and
results of operation of Community Bank Shares of Indiana, Inc.
By: /s/ James D. Rickard
--------------------------------------------------
James D. Rickard
President and
Chief Executive Officer
Date: March 31, 2003
Exhibit 99.2
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Form 10-K of Community Bank Shares of
Indiana, Inc. for the year ended December 31, 2002, I, Paul A. Chrisco, Chief
Financial Officer of Community Bank Shares of Indiana, Inc., hereby certify
pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) Such Form 10-K for the year ended December 31, 2002 fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in such Form 10-K for the year ended December 31,
2002 fairly presents, in all material respects, the financial condition and
results of operation of Community Bank Shares of Indiana, Inc.
By: /s/ Paul A. Chrisco
-------------------------------
Paul A. Chrisco
Senior Vice President,
Chief Financial Officer
Date: March 31, 2003
87