COMMUNITY BANK SHARES Annual Report 2012

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exceptional service

lasting relationships

local decisions

In 2012, net income available to shareholders rose to $6.9 million and $2.06 per diluted common share, which was a 15.08% increase over the prior year. For the full-year, the Company’s return on assets and equity were 0.95% and 9.13% respectively. We continue to measure our performance within a peer group of 58 public bank holding companies between $500 million and $1 billion in assets, and we can report that our annualized return on assets performance ranked in the top quartile of the peer group for the 2nd consecutive year. While pleased with this performance, we are not satisfied with just the top quartile and will strive to improve upon that ranking . In the paragraphs that follow, we’ll focus on what led to our improved operating performance in 2012 and also address our top strategic initiatives for the coming year.

Our board and management teams focus intently on net interest margin as we recognize that this metric directly correlates with the earnings potential of our franchise. Net interest margin on a fully taxable equivalent basis remained steady at 4.07%. The primary differentiator in this metric has been the Company’s overall cost of funds, which was 0.70% at year-end 2012, a 31 basis point reduction from the prior year. As 2013 gets underway, we realize that margins will be under pressure in the coming quarters and possibly longer. Interest rates on deposit accounts simply cannot be reduced much lower than present. Cash inflows from investment securities and loans are re-pricing at lower rates, which naturally puts pressure on our margin. In addition, there is significant competition among healthy banks to put profitable loans on the balance sheet. We have increased our sales staff and improved our internal approval process with the goal being to attract new loan prospects in 2013. We are not forecasting significant balance sheet growth in the coming year but would like to put cash flows from our investment portfolio into new loans to help provide margin support in a challenging low interest rate environment.

In addition to loan growth, we have focused on continuing the credit quality improvement we have experienced the last few years. Non-performing assets to total assets improved measurably to 1.84% at the conclusion of 2012. This metric ended the year below 2% for the first time since 2007. In dollar terms, non-performing assets were $15.1 million at year-end, a $5.8 million reduction over the course of the year. We want to continue to drive the decline in non-performing assets and believe we will by focusing on the orderly resolution of problem credit situations. Another reason that non-performing assets have declined is the continued slowdown of credits moving from performing to non-performing status. We have substantially improved our underwriting process in the last five years. Reducing non-performing assets continues to be a top strategic initiative in 2013.

Non-interest expenses increased 3.87% over 2012 as we continue to manage costs effectively. In addition to salary and wage increases, other factors contributing to the increase were a continued rise in health insurance costs, ongoing legal expenses tied to non-performing assets, and increased costs associated with managing and administering foreclosed assets. The optimistic and realistic view of the current credit trends is that costs associated with the management and resolution of NPAs will decline as ratios improve. That realization would help lighten the expense burden of the Company as those costs continued to run above historical norms this past year.

In summary, we believe the Company is positioned very well from a strategic perspective. Our Tier 1 capital grew to $98.8 million at year-end and both subsidiary banks continue to operate in the highest regulatory classification of “well-capitalized”. In addition to our strong capital position, earnings per share increased by 15.08% over the prior year period. Our team strives to deliver outstanding service at every customer touch-point. This type of service delivery and our relationship approach to banking is our differentiator in the marketplace. The coming year will prove to have its challenges, including but not limited to the ones highlighted in this letter. If the economy continues to improve and our team delivers on its key strategic objectives, we believe we can and will continue to create value for shareholders that have entrusted us with their investment. Thank you for your continued support and confidence.

Sincerely,

CBIN ANNUAL REPORT 2012 | LETTER TO SHAREHOLDERS

Gary L. Libs James D. RickardChairman President & CEO

ASSETS

Cash and Due from Financial Institutions $19,039

Interest Bearing Deposits in Other FI’s 32,305

Securities Available for Sale 251,205

Loans, Held for Sale 1,225

Loans, Net of Allowance for Loan Losses of $8,762 456,827

Federal Home Loan Bank and Federal Reserve Stock 5,998

Accrued Interest Receivable 3,014

Premises and Equipment, Net 14,094

Cash Surrender Value of Life Insurance 20,709

Other Intangible Assets 638

Foreclosed and Repossessed Assets 6,345

Other Assets 8,101

TOTAL ASSETS $819,500

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits

Non-Interest Bearing $169,411

Interest-Bearing 455,256

Total Deposits 624,667

Other Borrow 45,500

Federal Home Loan Bank Advances 40,000

Subordinated Debentures 17,000

Accrued Interest Payable 177

Other Liability 5,714

TOTAL LIABILITIES 733,058

SHAREHOLDERS’ EQUITY

Total Shareholders’ Equity 86,442

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $819,500

2012 FINANCIAL STATEMENTS

Interest Income $32,826Interest Expense 4,030 Net Interest Income 28,796 Provision for Loan Losses 4,101 Non-Interest Income 8,423 Non-Interest Expense 23,748 Income Before Taxes 9,370 Income Tax Expense 1,685 Net Income 7,685 Preferred Stock Dividends 764 Net Income Available to Common Shareholders 6,921 Basic Earnings Per Common Share 2.06 Diluted Earnings Per Common Share 2.06

(In thousands)DECEMBER 31, 2012 BALANCE SHEET

(In thousands, except per share amount)INCOME STATEMENT

!"#$%"&As of December 31, 2012, the Company had $98.8 million in tier 1 capital, which was

a $6.4 million increase from December 31, 2011. This increase was generated from

$5.6 million in earnings retained throughout 2012. The increase in retained earnings

contributed to the Company’s expanding tangible common equity ratio, which ended

the year at 7.05%, a 70 basis points increase over the course of the year. Both of the

Company’s subsidiary banks continue to operate in the highest regulatory classification of

“well-capitalized”. A strong capital base continues to be a key strategic priority.

'()*$)+,%-,./0$)(00(0The Company provided $283 million in financing to businesses in the local markets we

serve. Of that total, $116 million was attributable to new requests for financing, and $167

million represented renewals of existing credit facilities. In 2012, we strategically expanded

our business services team to position our sales force toward additional opportunities for

profitable loan growth within the communities we serve. Our approach continues to be

relationship-oriented, which is deeply rooted in our culture to provide truly exceptional

service. We believe this differs greatly from the one-size fits all approach to banking and

the results will indicate clear differentiation in the markets we serve.

'()*$)+,%-,1-2(-3)(40Our private bankers provided $26.7 million loans to homeowners in our local communities

in 2012. Most of these loans are sold on the secondary market in order to protect our

shareholders from risk associated with interest rate fluctuations over the life of the loan.

Secondary market sales contributed $421,000 in non-interest income during 2012, a

$151,000 increase over the prior year. In addition, the Company closed $7.5 million in

new home equity loans in 2012. The housing market showed signs of healing in 2012.

Our private bankers took more home purchase applications than in recent years and the

new construction outlook seems promising for the overall direction of the residential

housing market.

Pat Hagan & Lamont Hagan | OwnersBluegrass Brewing Company

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?(#-0$%,@4-3%ANon-interest deposits grew $41.5 million, or 32.48%, in 2012. The Company ended the year with $169.4 million in non-interest

deposits. This low-cost funding source now accounts for 27.12% of total deposits, a significant increase from five and ten years ago

and truly a fundamental shift in the funding side of the Company’s balance sheet over that longer-term time horizon. The strategic

emphasis to build low-cost deposits through our relationship banking model is the single largest contributor to this trend in core

deposit growth. It is also no secret that businesses and consumers are keeping higher average balances because of the uncertainties

that exist in the economy at-large, which is also a contributing growth factor in today’s environment.

Total deposits grew to $624.7 million at year-end, primarily the result of the growth that occurred in the non-interest transaction

account category. Core deposits help to strengthen a bank balance sheet because they help stabilize net interest margin and

most typically act as an expander of margin in normal interest rate environments. All said, core deposit growth will continue to be

important to the balance sheet mix because of its implication on the bank’s earning engine – net interest margin.

!4(*$%,B/"&$%COne of the highlights in 2012, was the reduction of the Company’s non-performing assets and overall

improvement of credit quality metrics. This was and will continue to be a strategic priority for the

Company. Non-accrual loans and foreclosed assets decreased from $20.8 million at year-end 2011

to $15.1 million at year-end 2012. On a percentage basis, non-performing assets to total assets

decreased from 2.61% to 1.84%. This marks the first time the Company has moved below the 2%

non-performing asset figure since 2007. Both subsidiary banks continue to reserve for probable

incurred losses and provided $4.1 million into the allowance for loan losses throughout the year, a

decrease of $289,000 when compared to 2011. The Company is focused on resolving credit issues

promptly and has devoted additional resources to promote improvement in this area.

D(7A)-&-+COur Company realizes that strong community banks need to be both high-tech and high-touch. In

early 2012, we released our Android mobile application to compliment the same application that our

iPhone users enjoyed. Our mobile banking enrollment nearly doubled in 2012 to over 3,500

users. Checking balances, paying bills, and transferring money have been the norms

thus far in the mobile banking space but we believe this is only the beginning. And, we

intend to invest the time, resources, and capital to stay ahead of the curve and ultimately

improve the banking experience of our customers. We are excited about the future

opportunities and have several projects in development to do just that. Currently, we are

revamping our bank websites, exploring an application that allows online account opening,

as well as other enhancements to online and mobile banking. The technological curve of banking

continues to evolve and we want to be a community bank that leads in this important area.

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,!-22/)$%C,G);-&;(2()%Bank officers and associates continue to be active and engaged in their support of various

local non-profit organizations, charities, associations, and clubs. In 2012, our foundation and

subsidiary banks awarded $190,599 to support local programs and non-profit organizations.

In addition, employees contributed over 4,300 hours of volunteerism to support various local

endeavors. Our Company had representation on over 50 local non-profit boards. We pride

ourselves in helping others and do our part to make the communities we serve a better place

today, tomorrow, and for those yet to come.

NET INTEREST MARGIN *Publicly Traded Bank Holding Co’s - $500 Million to $1 Billion

2008 2009 2010 2011 2012

4.20%

4.00%

3.80%

3.60%

3.40%

3.20%

3.00%

3.09%

3.19%

3.90%

4.07%

3.57%

3.75%3.71%

3.60%

PeerGroup Median

4.07%

3.67%

RETURN ON ASSETS

1.00

.90

.80

.70

.60

.40

.20

0.90% 0.95% 0.96%0.96%

2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4

0.96% 0.96%0.94%

0.93%

0.57%

0.62%

0.70%

0.64%

0.72%0.77%

0.79% 0.81%

*Publicly Traded Bank Holding Co’s - $500 Million to $1 Billion

PeerGroup

Median

* The term well-capitalized is used to define the capital position of banks not consolidated holding

companies. Well-capitalized minimum calculation is based upon the Company’s risk-weighted assets

as of the dates presented.

NON-INTEREST DEPOSITS / TOTAL DEPOSITS

CBIN CONSOLIDATED | total regulatory capital

*Publicly Traded Bank Holding Co’s - $500 Million to $1 Billion

2008 2009 2010 2011 2012

30%

26%

22%

18%

14%

10%

6%

0%

15.33%

14.04%

18.61%

13.06%

18.59%

13.32%

22.00%

15.68%

2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4

$110,000,000

$100,000,000

$90,000,000

$80,000,000

$70,000,000

$60,000,000

$50,000,000

$86,649,000

$98,663,000 $99,553,000

$56,409,000

$55,919,000

$56,220,000

$56,735,000

$100,989,000

$104,010,000

$102,614,000$105,724,000

$88,625,000

$56,610,000

$57,393,000

$55,241,000

PeerGroup Median

27.12%

18.23%

$56,055,000

COMMUNITY BANK SHARES OF INDIANA, INC. OFFICERS

James Rickard President & CEO Paul Chrisco EVP, Chief Financial Officer Kevin Cecil EVP Bill Wright EVP, Treasurer, & Director of Planning Michael Bauer EVP, Chief Credit Officer M. Diane Murphy SVP,Community Relations Officer J. Robert McIlvoy SVP, Retail Banking Carl Page SVP, Human Resources Director, Asst. Corporate Secretary Scott Carr SVP, Audit & Risk Management, Chief Compliance Officer Syd Whitlock SVP

COMMUNITY BANK SHARES DIRECTORS

Gary Libs Chairman of the Board Steven Stemler Vice Chairman of the Board R. Wayne Estopinal Director George Ballard Director

Todd Frossard SVP Maury Young VP, Controller Doug Blank VP, Credit Administration Manager Timothy Rigrish VP, Security Officer, Information Security Officer Rose Torres VP, Senior Internal Auditor Lisa Morley VP, Human Resources Bill Keeney VP, Commerical Loan Workout & Recovery Specialist Anthony Miles AVP, IT Manager Pam Kirby AVP Pamela P. Echols Corporate Secretary Stephanie Book Marketing Officer

Gerald Koetter Director James Rickard Director Norman (Ned) Pfau, Jr. Director Kerry Stemler Director

THE SCOTT COUNTY STATE BANK BOARD

Eric Graham Chairman of the Board Terry Goodin Director Terry Lowry Director Steve Hauer Director

Paula Murray DirectorJames Rickard DirectorTodd Stewart DirectorSydney Whitlock Director

THE SCOTT COUNTY STATE BANK OFFICERS

Sydney Whitlock President & CEO Kathleen Julian EVP, Corporate Secretary Russell Comer SVP, Senior Lending Officer Paul Chrisco Chief Financial Officer Scott Carr SVP, Audit & Risk Management, Chief Compliance Officer James Moon VP Michael Bauer VP, Chief Credit Officer Michelle Lakins VP, Retail Sales & Support Manager Julie Bruce AVP, Main Office Manager

Dawn Roll AVP Andrew McGarvey AVP, Regulatory Compliance Officer, BSA Officer, CRS OfficerTimothy Rigrish VP, Security Officer, Information Security OfficerTami Nance AVP, Customer Relationship SpecialistJonathan Cooper AVP, Customer Relationship OfficerPaula Everhart Banking Officer, Westview ManagerSarah Bautista Banking Officer, Austin ManagerJoyce Hoard Banking OfficerBonnie Walton Banking OfficerLola Elaine Seaver Banking Officer

NELSON COUNTY BUSINESS DEVELOPMENT BOARD

Guthrie Wilson, III Chairman Richard Heaton Director George Ballard Director Kevin Cecil Director

Ken Rapier, Jr. Director James Rickard Director Francis Smith, II Director

YOUR COMMUNITY BANK BOARD OF DIRECTORS

Kerry Stemler Chairman of the Board R. Wayne Estopinal Vice Chairman of the Board Steven Stemler Director Gerald Koetter Director James Rickard Director Kevin Cecil Director

W. James Lintner, Jr. Director Gary Libs Director Gregory Huber Director Robert Pullen Director Robert Campbell, Jr. Director James Geisler Director

YOUR COMMUNITY BANK OFFICER LISTING

Kevin Cecil President & CEOJames Rickard President & CEO of Community Bank SharesPaul Chrisco EVPBill Wright EVP, CFO, Director of PlanningMichael Bauer EVP, Chief Credit OfficerTodd Frossard EVP. Business ServicesM. Diane Murphy SVP, Community Relations OfficerJ. Robert McIlvoy SVP, Retail BankingBrian Brinkworth SVP, Manager, Business ServicesJoseph Bauer SVP, Business ServicesPhilip Ryan SVP, Manager, Kentucky Business ServicesRobert Sullivan SVP, Business ServicesLe Anne Scott SVP, Manager, Business Services Edward (Andy) Mayer, Jr. SVP, Business Services, Manager Private Banking Carl Page SVP, Human Resources Director, Assistant Corporate Secretary Vicki Rough SVP, Private BankingScott Carr SVP, Audit & Risk Management, Chief Compliance OfficerLisa Lutgring VP, Manager, Treasury Management & Deposit Account SupportMarjorie Knoop VP, Manager, IT Applications SupportHoward Keene VP, Market Manager, Nelson CountyTimothy Rigrish VP, Security Officer, Information Security OfficerGlenn Roney VP, Retail Small Business DevelopmentJonathan Cherry VP, Business ServicesAaron McKinney VP, Business ServicesJim McMahel VP, CollectionsJenna Hagedorn VP, Loan Operations ManagerDoug Blank VP, Credit Admin. ManagerLisa Morley VP, Human ResourcesVanessa Goldberg VP, Treasury Management Sales Nick Phelps VP, Business Services Dev. Officer Rose Torres VP, Senior Internal Auditor Amanda Matheny VP, Private BankingMaury Young VP, ControllerBill Keeney VP, Commerical Loan Workout & Recovery SpecialistAdam Naville VP, Business ServicesNicki Harbaugh VP, Retail BankingPamela Echols Corporate SecretaryMary Beth Gulick AVP, Sr. Credit Analyst

Angela Ripperdan AVP, Sr. Credit AnalystRay Hart AVP, Sr. Credit AnalystStacy Graf AVP, Treasury Management SalesAlicia Shelman AVP, Treasury Mgmt. Sales, Virtual Banking DirectorBrenda Bowling AVP, Retail BankingKyra McCormick AVP, Retail BankingM. D. Smith AVP, Retail BankingLinda Rudloff AVP, Retail BankingKaren Crecelius AVP, Retail BankingSusan Metka AVP, Retail BankingCrystal Byrd AVP, Retail BankingLea Ann Lumpkins AVP, Retail BankingDavid Dunn AVP, Retail BankingRay Lucas AVP, Retail BankingTony Bennett AVP, Retail Banking Kathy Barnes AVP, Deposit OperationsMargaret Richards AVP, Manager, Document Scanning CenterAnthony Miles AVP, IT ManagerAndrew McGarvey AVP, Compliance Officer, BSA Officer, CRA OfficerJennifer Gilland Banking OfficerDawn Riddle Banking OfficerPolly Hall Banking OfficerNic Genakos Banking OfficerDavid Smith Banking OfficerDebbie Frederick Reconciliation OfficerJenny Hoffman Operations OfficerMelissa Hassan Reconciliation OfficerJennifer DuBois Operations OfficerAnnette Brown IT OfficerMatt Muller Asst. Treasurer

simply serving

!"#$%&"'($106 A W. John Rowan Blvd. (40004)502.348.9278)*+,#+$%-".*+/

119 E. Stephen Foster Ave. (40004)502.348.7150

BARDSTOWN, KY

)*0%1(**#+'.4510 Shelbyville Road (40207)

502.895.1713

2(.*,"3$*13205 Magisterial Dr. (40223)502.489.3600

&34+/5/"$*%67(8(471 West Main Street (40402)

502.569.4266

9/34+:;#/<401 E. Spring St. (47150)812.981.7303

101 W. Spring St. (47150)812.981.7345

)*(*+%)*/++*480 New Albany Plaza (47150)812.949.6852

=/($*73$+%>?(7:1(/*@2910 Grantline Rd. (47150)

812.948.8945

A3B#7($C+/%6"3$*701 Highlander Point Dr. (47119)

812.923.7901

FLOYDS KNOBS, IN

LOUISVILLE, KY

2626 Charlestown Rd. (47150)812.949.6850

4328 Charlestown Rd. (47150)812.949.6800

102 Heritage Square (47172)812.246.8321

2917 E. Tenth St. (47130)812.258.2060

5112 Highway 62 (47130)812.285.4050

201 West Court Ave. (47130)812.285.1111

901 E. Lewis & Clark Pkwy. (47129)812.280.9607

CLARKSVILLE, IN

JEFFERSONVILLE, IN

SELLERSBURG, IN

307 W. Main Street (47102)812.794.0000

?+.*43+'57 N. Michael Dr. (47170)

812.752.9656

125 W. McClain Ave. (47170)812.752.4501

9/34+:;#/<155 W. Wardell (47170)812.752.4501

SCOTTSBURG, IN

812.752.4501

812.752.0004

812.752.4501

scottcountystatebank.com

812.981.7750 (Local)866.944.2004 (Toll-Free)

812.981.7357 (Local)888.291.9415 (Toll-Free)

Clark County 812.981.7705Floyd County 812.981.7300Louisville 502.569.4285Bardstown 502.348.1975

yourcommunitybank.com

SHARES

D$4+.*"/%&+7(*3"$.812.981.7373