-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ONzr34ICqa8L4EHZ8QPO4vH/GaesaT2aGwHOEH2To3EdJnWiY+y2TRp/7mqe38lV h2zbFSDFpGvUDnj37wTF2g== 0000927946-00-000034.txt : 20000411 0000927946-00-000034.hdr.sgml : 20000411 ACCESSION NUMBER: 0000927946-00-000034 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GERMAN AMERICAN BANCORP CENTRAL INDEX KEY: 0000714395 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351547518 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11244 FILM NUMBER: 582965 BUSINESS ADDRESS: STREET 1: 711 MAIN ST STREET 2: P O BOX 810 CITY: JASPER STATE: IN ZIP: 47546 BUSINESS PHONE: 8124821314 MAIL ADDRESS: STREET 1: 711 MAIN STREET CITY: JASPER STATE: IN ZIP: 47546 FORMER COMPANY: FORMER CONFORMED NAME: GAB BANCORP DATE OF NAME CHANGE: 19950510 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended: December 31, 1999 OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____________to_____________ Commission File Number 0-11244 GERMAN AMERICAN BANCORP ----------------------- (Exact name of registrant as specified in its charter) INDIANA 35-1547518 - ------------------------------------ ------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 711 Main Street, Box 810, Jasper, Indiana 47546 - ----------------------------------------- -------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (812) 482-1314 Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered NONE Not Applicable - --------------------- ------------------------------------ Securities registered pursuant to Section 12 (g) of the Act: Common Shares, No Par Value - --------------------------- (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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ The aggregate market value of the voting stock held by nonaffiliates of the Registrant (assuming solely for purposes of this calculation that all directors and executive officers of the Registrant are affiliates) valued at the last trade price reported by NASDAQ as of March 10, 2000 was approximately $146,723,000. As of March 10, 2000, there were outstanding 9,029,109 common shares, no par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Shareholders of German American Bancorp for 1999, to the extent stated herein, are incorporated by reference into Parts I and II. (2) Portions of the Proxy Statement of German American Bancorp for the Annual Meeting of its Shareholders to be held April 27, 2000, to the extent stated herein, are incorporated by reference into Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) 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. | | PART I Item 1. Business. General German American Bancorp (referred to herein as the "Company", the "Corporation", or the "Registrant") is a multi-bank holding company organized in Indiana in 1982. The Company operates five affiliate community banks with 25 banking offices and two insurance subsidiaries with 5 insurance offices in the eight contiguous Southwestern Indiana counties of Daviess, Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The banks' wide range of personal and corporate financial services include making commercial and consumer loans; marketing, originating, and servicing mortgage loans; providing trust, investment advisory and brokerage services; accepting deposits and providing safe deposit facilities. The Company's insurance activities include offering a full range of title, property, casualty, life and credit insurance products. The Company's subsidiaries are described in the following table:
Names of Principal Subsidiaries Type of Business Location Parent Company - ------------------------------------------------- ---------------------------- ------------------- --------------------------------- German American Bank Commercial Bank Jasper, IN German American Bancorp First American Bank Savings Bank Vincennes, IN German American Bancorp First State Bank, Southwest Indiana Commercial Bank Tell City, IN German American Bancorp German American Holdings Corporation 2nd Tier Holding Company Jasper, IN German American Bancorp GAB Mortgage Corp. Inactive Jasper, IN German American Bancorp German American Reinsurance Co., Ltd. Credit Life Insurance Jasper, IN German American Bancorp Peoples National Bank Commercial Bank Washington, IN German American Holdings Corp. Citizens State Bank Commercial Bank Petersburg, IN German American Holdings Corp. The Doty Agency, Inc. Insurance Agency Petersburg, IN Citizens State Bank First Title Insurance Company Title Insurance Agency Vincennes, IN Citizens State Bank - ------------------------------------------------------------------------------------------------------------------------------------
The Company over the five-year period ended December 31, 1999 has experienced both internal growth and growth by acquiring other banks, thrifts and insurance agencies. For a description of acquisitions see note 18 to the Company's consolidated financial statements included in the Company's annual report to shareholders for 1999 and filed as Exhibit 13.4 to this report. Most of these acquisitions have been accounted for under the pooling-of-interests method of accounting, with the result that the financial statements for all periods prior to such acquisitions were retroactively restated. In January 1999, the Company completed a merger with 1ST BANCORP of Vincennes, Indiana. 1ST BANCORP's subsidiaries included First American Bank (formerly known as First Federal Bank); First Financial Insurance Agency, Inc.; and First Title Insurance Company. 1ST BANCORP's thrift operations through First American Bank included mortgage banking activities. First Financial Insurance Agency, Inc. operated an office in Gibson County, Indiana, which now operates as a part of The Doty Agency. Also in January 1999, the Company completed a merger with The Doty Agency, Inc. of Petersburg, Indiana. Doty is a general multi-line, full-service insurance agency and that now has offices in Gibson, Knox, Pike and Dubois counties in Indiana. In May 1999, the Company acquired Smith and Bell, a general multi-line, full-service insurance agency in Vincennes, Indiana. Smith and Bell now operates offices in Knox County, Indiana as part of The Doty Agency. Additional information regarding the Company and its subsidiaries is included in the Company's Annual Report to Shareholders for 1999, selected portions of which are filed as Exhibit 13 to this Annual Report on Form 10-K (the "Shareholders' Report") and are incorporated herein by reference. Recent Development - Holland Bancorp Merger On March 24, 2000 the Company announced that it had agreed in principle to acquire Holland Bancorp, Inc. ("Holland"), through the merger of Holland with and into the Company, and the simultaneous merger of Holland's sole bank subsidiary, The Holland National Bank, into the Company's subsidiary, The German American Bank. The Holland National Bank operates four banking offices in Dubois County, Indiana. Under the terms of the proposed merger, the shareholders of Holland would receive 3.5 shares of common stock of the Company for each of their Holland shares, or an aggregate of approximately 947,777 shares of common stock of the Company. At December 31, 1999, Holland had total assets of and total shareholders' equity of $64 million and $6 million, respectively. Holland reported net income of $532 thousand for the year ended December 31, 1999. The proposed merger is subject to the completion of due diligence and execution of a definitive agreement, approval by shareholders of Holland, Holland's receipt of a fairness opinion, approval of the appropriate bank regulatory agencies and other conditions. It is contemplated that the mergers will be consummated during the third quarter of 2000, and that they will be accounted for under the pooling of interests method of accounting. Competition The banking business is highly competitive. The Company's subsidiary banks compete not only with financial institutions that have offices in the same counties but also compete for deposits, loans and many other types of financial services products with financial institutions that are located throughout Southwest Indiana and adjoining areas. In addition to other commercial banks, the Company's subsidiary banks compete with savings and loan associations, savings banks, credit unions, production credit associations, federal land banks, finance companies, credit card companies, personal loan companies, brokerage firms, insurance companies, lease finance companies, money market funds, mortgage companies and other non-depository financial intermediaries. Many of these banks and other organizations have substantially greater resources than the Corporation. Recent changes in federal and state law have resulted in and are expected to continue to result in increased competition. The reductions in legal barriers to the acquisition of banks by securities firms, insurance companies and other financial service companies resulting from implementation of the Gramm-Leach-Bliley Act of 1999 and other recent and proposed changes are expected to continue to further stimulate competition in the markets in which the Banks operate, although it is not possible to predict the extent or timing of such increased competition. Employees At February 29, 2000 the Company and its subsidiaries employed approximately 385 full-time equivalent employees. There are no collective bargaining agreements, and employee relations are considered to be good. Regulation and Supervision The Company is subject to the Bank Holding Company Act of 1956, as amended ("BHC Act"), and is required to file with the Board of Governors of the Federal Reserve System ("FRB") annual reports and such additional information as the FRB may require. The FRB may also make examinations or inspections of the Company. Under FRB policy, the Company is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support them even in circumstances where the Company might not do so absent such an FRB policy. The Company's subsidiary banks are under the supervision of and subject to examination by one or more of the Indiana Department of Financial Institutions ("DFI"), the Office of Comptroller of Currency ("OCC"), the Federal Deposit Insurance Corporation ("FDIC") and the Office of Thrift Supervision ("OTS"). Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors rather than shareholders. With certain exceptions, the BHC Act prohibits a bank holding company from engaging in, or acquiring direct or indirect control of more than 5 percent of the voting shares of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be "closely related to banking." Under current regulations, bank holding companies and their subsidiaries are permitted to engage in such banking-related business ventures as sales and consumer finance; equipment leasing; credit life insurance; computer service bureau and software operations; mortgage banking; and securities brokerage. As a result of recent amendments to the BHC Act, many of these acquisitions may be effected by bank holding companies that satisfy certain statutory criteria concerning management, capitalization, and regulatory compliance if written notice is given to the FRB within 10 business days after the transaction. In other cases, prior written notice to the FRB will be required. In evaluating a written notice of such an acquisition, the FRB will consider various factors, including among others the financial and managerial resources of the notifying bank holding company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The FRB may apply different standards to activities proposed to be commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. Effective March 11, 2000 the Gramm-Leach-Bliley Act of 1999, which was signed into law on November 12, 1999, permits a bank holding company to qualify as a "financial holding company" and, as a result, be permitted to engage in a broader range of activities that are "financial in nature" and in activities that are determined to be incidental or complementary to activities that are financial in nature. The Gramm-Leach-Bliley Act amends the BHC Act to include a list of activities that are financial in nature, and the list includes activities such as underwriting, dealing in and making a market in securities; insurance underwriting and agency activities; and merchant banking. The Federal Reserve Board is authorized to determine other activities that are financial in nature or incidental or complementary to such activities. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in certain of the activities permitted for financial holding companies. Indiana law, the National Bank Act, the Home Owners Loan Act, and the BHC Act restrict certain types of expansion by the Company and its bank subsidiaries. Under the Home Owners Loan Act, First American Bank may branch, subject to certain conditions, anywhere within the United States. Under the BHC Act, the Company may establish non-banking offices without geographical limitation. Under the BHC Act, the Company must receive the prior written approval of the FRB or its delegate before it may acquire ownership or control of more than 5 percent of the voting shares of another bank, and under Indiana law it may not acquire 25 percent or more of the voting shares of another bank without the prior approval of the Indiana Department of Financial Institutions ("DFI"). In 1994, the Congress enacted the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), which substantially changed the geographic constraints applicable to the banking industry. Effective September 29, 1995, the Riegle-Neal Act allowed bank holding companies to acquire banks located in any state in the United States without regard to geographic restrictions or reciprocity requirements imposed by state law. Effective June 1, 1997 (or earlier if expressly authorized by applicable state law), the Riegle-Neal Act allowed banks to establish interstate branch networks through acquisitions of other banks, subject to certain conditions.. The establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. In 1996, Indiana authorized out-of-state banks to establish branch offices in Indiana. The Indiana Financial Institutions Act now permits, in appropriate circumstances, (A) with the approval of the DFI: o the acquisition of all or substantially all of the assets of an Indiana-chartered bank by an FDIC-insured bank, savings bank or savings association located in another state, o the acquisition by an Indiana-chartered bank of all or substantially all of the assets of an FDIC-insured bank, savings bank or savings association located in another state, o the consolidation of one or more Indiana-chartered banks and FDIC-insured banks, savings banks or savings associations located in other states having laws permitting such consolidation, with the resulting organization chartered by Indiana, and o the organization of a branch in Indiana by FDIC-insured banks located in other states, the District of Columbia or U.S. territories or protectorates having laws permitting an Indiana-chartered bank to establish a branch in such jurisdiction, and (B) upon written notice to the DFI: o the acquisition by an Indiana-chartered bank of one or more branches (not comprising all or substantially all of the assets) of an FDIC-insured bank, savings bank or savings association located in another state, the District of Columbia, or a U.S. territory or protectorate, o the establishment by Indiana-chartered banks of branches located in other states, the District of Columbia, or U.S. territories or protectorates, and o the consolidation of one or more Indiana-chartered banks and FDIC-insured banks, savings banks or savings associations located in other states, with the resulting organization chartered by one of such other states, and (C) the sale by an Indiana-chartered bank of one or more of its branches (not comprising all or substantially all of its assets) to an FDIC-insured bank, savings bank or savings association located in a state in which an Indiana-chartered bank could purchase one or more branches of the purchasing entity. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act. Among other things, the Gramm-Leach-Bliley Act repealed the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act. This act also created a new "financial holding company" under the BHC Act, which will permit holding companies to engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking, and insurance company portfolio investment activities, and authorizes such other financial activities as may be determined by rule or order of the FRB. In addition, the Gramm-Leach-Bliley Act imposes significant new financial privacy obligations and reporting requirements on all financial institutions, including banks. Among other things, it will require financial institutions (a) to establish privacy policies and disclose them to customers both at the commencement of a customer relationship and on an annual basis and (b) to permit customers to opt out of a financial institution's disclosure of financial information to nonaffiliated third parties. The Gramm-Leach-Bliley Act requires the federal financial regulators to promulgate regulations implementing these provisions within six months of enactment, and the statute's privacy requirements will take effect one year after enactment. The earnings of commercial banks and their holding companies are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, varying the discount rate on bank borrowings, and setting reserve requirements against bank deposits. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans and earned on investments or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks in the past and this is expected to continue in the future. The general effect, if any, of such policies upon the future business and earnings of the Company cannot accurately be predicted. The Company and its bank subsidiaries are required by law to maintain minimum levels of capital. These required capital levels are expressed in terms of capital ratios, known as the leverage ratio and the capital to risk-based assets ratios. The Company significantly exceeds the minimum required capital levels for each measure of capital adequacy. See "Management's Discussion and Analysis -- Capital Resources," included in the Shareholders' Report. Also, federal regulations define five categories of financial institutions for purposes of implementing prompt corrective action and supervisory enforcement requirements of the Federal Deposit Insurance Corporation Improvements Act of 1991. The category to which the most highly capitalized institutions are assigned is termed "Well-Capitalized." Institutions falling into this category must have a total risk-based capital ratio (the ratio of total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the ratio of Tier 1, or "core", capital to risk-weighted assets) of at least 6%, a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and must not be subject to any written agreement, order or directive from its regulator relative to meeting and maintaining a specific capital level. On December 31, 1999, the Company had a total risk-based capital ratio of 14.78%, a Tier 1 risk-based capital ratio of 13.53% (based on Tier 1 capital of $89,272,000 and total risk-weighted assets of $659,631,000), and a leverage ratio of 9.07%. The Company meets all of the requirements of the "Well Capitalized" category and, accordingly, the Company does not expect these regulations to significantly impact operations. The Company is a corporation separate and distinct from its bank and other subsidiaries. Most of the Company' revenues will be received by it in the form of dividends or interest paid by its bank subsidiaries. These subsidiaries are subject to statutory restrictions on its ability to pay dividends. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies to the effect that a bank holding company should not pay cash dividends exceeding its net income or which could only be funded in ways that would weaken the bank holding company's financial health, such as by borrowing. Additionally, the FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability in appropriate cases to proscribe the payment of dividends by banks and bank holding companies. The FDIC, OCC, OTS and DFI possess similar enforcement powers over the respective bank subsidiaries of the Company for which they have supervision. The "prompt corrective action" provisions of federal banking law impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies. Statistical Disclosures The following statistical data should be read in conjunction with Management's Discussion and Analysis (Item 7), Selected Financial Data (Item 6), and the Financial Statements and Supplementary Data (Item 8) included elsewhere herein through incorporation by reference to the indicated pages of the Shareholders' Report.
Securities (dollars in thousands) The following tables set forth the carrying amount of Securities at the dates indicated: December 31, 1999 1998 1997 ---- ---- ---- Securities Held-to-Maturity: U.S. Treasury and other U.S. Government Agencies and Corporations................................. $ --- $ 19,258 $ 49,345 State and Political Subdivisions...................... 29,288 27,591 24,983 Asset- / Mortgage-backed Securities................... 903 1,497 2,998 ----------- ----------- ---------- Subtotal of SecuritiesHeld-to-Maturity........... 30,191 48,346 77,326 ----------- ----------- ---------- Securities Available-for-Sale: U.S. Treasury and other U.S. Government Agencies and Corporations............. $ 92,326 $ 68,386 $ 67,990 State and Political Subdivisions...................... 26,487 30,455 21,670 Asset- / Mortgage-backed Securities................... 58,967 52,686 22,377 Equity Securities.................................... 10,368 --- --- ----------- ----------- ---------- Subtotal of Securities Available-for-Sale........ 188,148 151,527 112,037 ----------- ----------- ---------- Total Securities............................. $ 218,339 $ 199,873 $189,363 =========== =========== ========
Statistical Disclosures (continued)
The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates (dollars in thousands): ......... ......... 1999 compared to 1998 1998 compared to 1997 --------------------- --------------------- Increase / (Decrease) Due to (1) Increase / (Decrease) Due to (1) ---------------------------------------------------------------------------- Volume Rate Net Volume Rate Net --------------------------------------------------------------------------- Interest Income: Federal Funds Sold and................. Other Short-term Investments....... $(691) $(185) $(876) $(103) $36 $ (67) Taxable Securities..................... 1,115 198 1,313 (915) (115) (1,030) Nontaxable Securities (2).............. 504 (149) 355 625 (2) 623 Loans and Leases (3)................... 4,708 (2,891) 1,817 3,817 (784) 3,033 ------------------------------------------------------------------------------ Total Interest Income..................... 5,636 (3,027) 2,609 3,424 (865) 2,559 ---------------------------------------------------------------------------- Interest Expense: Savings and Interest-bearing Demand.... 385 (232) 153 282 (161) 121 Time Deposits.......................... 571 (1,314) (743) 584 (59) 525 FHLB Advances and Other Borrowings..... 1,781 (37) 1,744 218 7 225 ------------------------------------------------------------------------------ Total Interest Expense.................... 2,737 (1,583) 1,154 1,084 (213) 871 ------------------------------------------------------------------------------ Net Interest Income....................... $2,899 $(1,444) $1,455 $2,340 $(652) $1,688 ============================================================================== (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Change in interest income include the effect of tax equivalent adjustments using a tax rate of 34 percent for all years presented. (3) Interest income on loans includes loan fees of $877, $1,230, and $1,029 for 1999, 1998, and 1997, respectively.
The following is a schedule of loans by major category for each reported period (dollars in thousands): December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Real Estate Loans Secured by 1-4 Family Residential Properties............. $356,001 $295,788 $252,828 $244,414 $278,931 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers........ 64,054 62,736 60,421 64,415 69,000 Commercial and Industrial Loans.............. 161,711 136,249 121,444 123,101 113,215 Loans to Individuals for Household, Family and Other Personal Expenditures........... 112,870 104,024 92,126 77,990 76,675 ------- ------- ------ ------ ------ Total Loans............................... $694,636 $598,797 $526,819 $509,920 $537,821 ======== ======== ======== ======== ========
Statistical Disclosures (continued) The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences and consumer loans) outstanding as of December 31, 1999 which, based on remaining scheduled repayments of principal, are due in the periods indicated (dollars in thousands).
Maturing --------------------------------------------------------- Within After One After One But Within Five Year Five Years Years Total ---- ---------- ----- ----- Commercial, Agricultural and Poultry............. $64,023 $49,824 $111,918 $225,765
Interest Sensitivity Fixed Variable Rate Rate Loans maturing after one year.... $100,956 $60,786 The Provision for Loan Losses provides a reserve (the Allowance for Loan Losses) to which loan losses are charged as those losses become identifiable. Management determines the appropriate level of the Allowance for Loan Losses on a quarterly basis through an independent review by the Bank's credit review section done by employees who have no direct lending responsibilities. Through this review, all commercial loans with outstanding balances in excess of $25,000 are analyzed with particular attention paid to those loans which are considered by management to have an above-average level of risk. This analysis is evaluated by Senior Management and serves as the basis for determining the adequacy of the Allowance for Loan Losses. Through this review process a specific portion of the reserve is allocated to impaired loans and to those loans which are considered to represent significant exposure to risk, and estimated potential losses are provided based on historic loan loss experience for consumer loans, residential mortgage loans, and commercial loans not specifically reviewed. In addition, a balance of the reserve is unallocated to provide an allowance for risk, such as concentrations of credit to specific industry groups, which are difficult to quantify in an absolute dollar amount. Nonperforming loans comprise: (a) loans accounted for on a nonaccrual basis ("nonaccrual loans"); (b) loans contractually past due 90 days or more as to interest or principal payments (but not included in the loans in (a) above) ("past due loans"); and (c) loans not included above which are "troubled debt restructuring" as defined in Statement of Financial Standards No. 15 "FASB 15", "Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("restructured loans"). The following table presents information concerning the aggregate amount of nonperforming assets (dollars in thousands):
December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Nonaccrual Loans................................. $7,237 $5,411 $3,568 $3,065 $2,478 Past Due Loans................................... 1,564 1,522 3,358 1,622 3,282 Restructured Loans............................... --- --- --- --- 122 --- --- --- --- --- Total Nonperforming Loans.................... 8,801 6,933 6,926 4,687 5,882 Other Real Estate................................ 2,434 1,156 785 706 968 ----- ----- --- --- --- Total Nonperforming Assets................... $11,235 $8,089 $7,711 $5,393 $6,850 ======= ====== ====== ====== ======
Interest income recognized on nonperforming loans for 1999 was $428,000. The gross interest income that would have been recognized in 1999 on nonperforming loans if the loans had been current in accordance with their original terms is $815,000. Loans are placed on nonaccrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection. Accounting standards require recognition of loan impairment if a loan's full principal or interest payments are not expected to be received. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. The total dollar amount of impaired loans at December 31, 1999 was $2,230,000 and are included in the table above. For additional detail on impaired loans, see Note 3 of the consolidated financial statements included in the Shareholders' Report (Exhibit 13.4). Statistical Disclosures (continued) At December 31, 1999, in addition to nonperforming and impaired loans above, the Company had a total of $6,021,000 of loans on its commercial loan watch list. Loans may be placed on the watch list as a result of delinquent status, concern about the borrower's financial condition or the value of the collateral securing the loan, substandard classification during regulatory examinations or simply as a result of management's desire to monitor more closely a borrower's financial condition and performance. It is management's belief that loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that are not included in the table and discussion above, do not represent or result from trends or uncertainties which will have a material impact on future operating results, liquidity or capital resources. At December 31, 1999 there were no material credits not already disclosed as nonperforming, impaired or as watch list about which management is aware of possible credit problems of borrowers which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. This paragraph includes forward-looking statements that are based on management's assumptions concerning future economic and business conditions as they affect the local economy in general and the Company's borrowers in particular, which economic and business assumptions are inherently uncertain and subject to risk and may prove to be invalid. Readers are also cautioned that management relies upon the truthfulness of statements made by the borrowers, and that misrepresentation by borrowers is an inherent risk of the activity of lending money that could cause these forward-looking statements to be inaccurate. Actual results may differ materially from those expressed or implied by the foregoing forward-looking statements due to the above risks and other factors. Summary of Loan Loss Experience The following table summarizes changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category, and additions to the allowance which have been charged to expense (dollars in thousands).
Year Ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Balance of allowance for possible losses at beginning of period...................... $8,323 $8,574 $8,040 $8,430 $8,142 Addition of Affiliate Banks........................... 356 80 --- --- --- Loans charged-off: Real Estate Loans Secured by 1-4 Family Residential Properties......................... 815 627 122 67 236 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers......................... 222 --- --- 286 --- Commercial and Industrial Loans....................... 184 342 401 481 107 Loans to Individuals for Household, Family and Other Personal Expenditures.................... 784 1,075 543 321 281 --- ----- --- --- --- Total Loans charged-off............................ 2,005 2,044 1,066 1,155 624 ----- ----- ----- ----- --- Recoveries of previously charged-off Loans: Real Estate Loans Secured by 1-4 Family Residential Properties......................... 100 76 1 27 6 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers......................... 135 19 66 125 560 Commercial and Industrial Loans....................... 37 73 665 126 66 Loans to Individuals for Household, Family and Other Personal Expenditures.................... 204 207 95 59 83 --- --- -- -- -- Total Recoveries................................... 476 375 827 337 715 --- --- --- --- --- Net Loans recovered / (charged-off).................. (1,529) (1,669) (239) (818) 91 ------ ------ ---- ---- -- Additions to allowance charged to expense............. 1,718 1,338 773 428 197 ----- ----- --- --- --- Balance at end of period.............................. $8,868 $8,323 $8,574 $8,040 $8,430 ====== ====== ====== ====== ====== Ratio of net recoveries / (charge-offs) during the period to average loans outstanding.......... (0.24)% (0.28)% (0.04)% (0.15)% 0.02% ===== ===== ===== ==== ====
Statistical Disclosures (continued)
The following table indicates the breakdown of the allowance for loan losses for the periods indicated (dollars in thousands): December 31, December 31, December 31, 1999 1998 1997 ---- ---- ---- Ratio of Ratio of Ratio of Loans to Loans to Loans to Total Total Total Allowance Loans Allowance Loans Allowance Loans --------- ----- --------- ----- --------- ----- Residential Real Estate.............. $1,888 51.25% $1,161 49.40% $893 47.99% Agricultural Loans................... 615 9.22% 902 10.48% 1,001 11.47% Commercial and Industrial Loans.................. 3,963 23.28% 2,878 22.75% 3,084 23.05% Loans to Individuals................. 871 16.25% 1,000 17.37% 1,039 17.49% Unallocated.......................... 1,531 N/A 2,382 N/A 2,557 N/A ----- ----- ----- Totals............................... $8,868 100.00% $8,323 100.00% $8,574 100.00% ====== ====== ======
December 31, December 31, 1996 1995 ---- ---- Ratio of Ratio of Loans to Loans to Total Total Allowance Loans Allowance Loans --------- ----- --------- ----- Residential Real Estate.............. $631 47.94% $482 51.86% Agricultural Loans................... 1,322 12.63% 2,693 12.83% Commercial and Industrial Loans................. 2,997 24.14% 2,722 21.05% Loans to Individuals................. 795 15.29% 788 14.26% Unallocated.......................... 2,295 N/A 1,745 N/A ----- ----- Totals ............................. $8,040 100.00% $8,430 100.00% ====== ======
Return on Equity and Assets
The ratio of net income to average shareholders' equity and to average total assets, and certain other ratios, are as follows: Year Ended December 31, 1999 1998 1997 ---- ---- ---- Percentage of Net Income to: Average Shareholders' Equity..................... 9.61% 9.67% 8.93% Average Total Assets............................. .94% .99% .88% Percentage of Dividends Declared per Common Share to Net Income per Common Share (1)............... 51.04% 46.24% 44.30% Percentage of Average Shareholders' Equity to Average Total Assets............................. 9.77% 10.21% 9.83% (1) Based on historical dividends declared by German American Bancorp without restatement for pooling.
Statistical Disclosures (continued)
The average amount of deposits is summarized for the periods indicated in the following table (dollars in thousands): December 31, 1999 1998 1997 ---- ---- ---- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Demand Deposits Non-interest Bearing............... $70,665 --- $58,267 --- $55,483 --- Interest Bearing................... 80,822 1.90% 69,492 1.84% 69,491 2.23% Savings Deposits....................... 104,303 3.13% 101,025 3.33% 90,792 3.27% Time Deposits.......................... 435,922 5.29% 425,534 5.59% 415,093 5.61% ------- ------- ------- Totals............................. $691,712 4.03% $654,318 4.35% $630,859 4.41% ======== ======== ========
Maturities of time certificates of deposit of $100,000 or more are summarized as follows: December 31, 1999 3 months or less............................... $53,410 Over 3 through 6 months........................ 12,419 Over 6 through 12 months....................... 11,453 Over 12 months................................. 26,390 ------ Total....................................... $103,672 ======== Forward-Looking Statements This Report contains statements relating to future results of the Company that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, adequacy of allowance for loan losses; simulations of changes in interest rates; litigation results; and dividend policy. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in economic conditions; interest rate fluctuations; competitive product and pricing pressures within the Company's markets; equity and fixed income market fluctuations; and personal and corporate customers' bankruptcies. Results may also differ materially due to inflation; acquisitions and integrations of acquired businesses; technological change; changes in law; changes in fiscal, monetary, regulatory and tax policies; success in gaining regulatory approvals when required; the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends; as well as other risks and uncertainties detailed elsewhere in this Annual Report and from time to time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. Item 2. Properties. - ------------------ The Company conducts its operations from the main office building of German American Bank at 711 Main Street, in Jasper, Indiana. The main office building contains approximately 23,600 square feet of office space. The Banks and other subsidiaries conduct their operations from 29 other locations in Southwest Indiana. Item 3. Legal Proceedings. - ------------------------- There are no material pending legal proceedings, other than routine litigation incidental to the business of the Company's subsidiary banks, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------ There were no matters submitted during the fourth quarter of 1999 to a vote of security holders, by solicitation of proxies or otherwise.
Special Item. Executive Officers of the Registrant. - ------------- ------------------------------------- NAME AGE TITLE AND FIVE YEAR HISTORY George W. Astrike (64) Chairman of the Board for the Company since January 1, 1999; Chairman and Chief Executive Officer of the Company from 1995 through 1998; Chairman of German American Bank since 1995; Chairman and President of German American Bank prior thereto. Director of Citizens State Bank and First American Bank from date of Acquisition through April 1999. Director of all other subsidiaries since acquisition by the Company. Mark A. Schroeder (46) President and Chief Executive Officer since January 1, 1999; President and Chief Operating Officer of the Company from 1995 through 1998; Vice President / Chief Operating Officer prior thereto. Director of each of the other subsidiaries since acquisition by the Company. Clay W. Ewing (44) Executive Vice President - Retail Banking of German American Bancorp since May, 1999; Director of First American Bank since May, 1999; President and Chief Executive Officer of First State Bank since 1995. Director of First State Bank since 1994. Stan J. Ruhe (48) Executive Vice President - Credit Administration of the Company since 1995; Director of Citizens State Bank since May, 1999; Executive Vice President of German American Bank since 1995; Senior Vice President - Credit Administration prior thereto. Richard E. Trent (41) Senior Vice President and Chief Financial Officer since April 1999; Vice President and Chief Financial Officer of the Company since December, 1997; Vice President, Budgets & Financial Analysis of CNB Bancshares from January, 1997; Manager of Finance and Planning, Wells Fargo Bank from August, 1996; Various financial officer capacities within American General Finance, Inc. and subsidiaries prior thereto. Messrs. Schroeder, Ruhe and Astrike have been associated with the Company in various capacities since 1972, 1982, and 1983, respectively. There are no family relationships between any of the officers of the Corporation. All officers are elected for a term of one year.
PART II The information in Part II of this report is incorporated by reference to the indicated sections of the Registrant's annual report to shareholders for the fiscal year ended December 31, 1999 ("Shareholders' Report"). Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------------------------------------------------------------------------------ See "Market and Dividend Information" on page 37 of the Shareholders' Report which is filed as Exhibit 13.1 to this report and is incorporated herein by reference. "Market and Dividend Information" that is incorporated by reference herein contains statements relating to future results of the Company that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including dividend policy. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed in "Market and Dividend Information," and those risks and uncertainties that are described in Item 1 of this report, "Business," under the caption "Forward-Looking Statements," which description is incorporated herein by reference. Item 6. Selected Financial Data. - --------------------------------- See "Five Year Summary of Consolidated Financial Statements and Related Statistics" on page 1 of the Shareholders' Report which is filed as Exhibit 13.2 to this report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. - -------------------------------------------------------------------------------- See "Management's Discussion and Analysis" on pages 2 through 13 of the Shareholders' Report which is filed as Exhibit 13.3 to this report and is incorporated herein by reference. "Management's Discusision and Analysis" that is incorporated by reference herein contains statements relating to future results of the Company that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, adequacy of allowance of loan losses; simulation of changes in interest rates; litigation results; and dividend policy. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed in "Management's Discussion and Analysis," and those risks and uncertainties that are described in Item 1 of this report, "Business," under the caption "Forward-Looking Statements," which description is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - --------------------------------------------------------------------- The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committees and Boards of Directors of the holding company and its affiliate banks. Primary market risks which impact the Company's operations are liquidity risk and interest rate risk. The liquidity of the parent company is dependent upon the receipt of dividends from its bank subsidiaries, which are subject to certain regulatory limitations explained in Note 9 to the consolidated financial statements in the Company's Shareholders' Report. The affiliate banks' source of funding is predominately core deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and long-term borrowings from the Federal Home Loan Bank. Further detail is provided in the sections entitled SOURCES OF FUNDS and USES OF FUNDS contained in Management's Discussion and Analysis in the Company's Shareholders' Report, which is filed as Exhibit 13.3 to this report and is incorporated by reference herein. The Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios, and by estimating its static interest rate sensitivity position. Management's approach to monitoring and mitigating these risks is explained in the LIQUIDITY AND INTEREST RATE RISK MANAGEMENT section of Management's Discussion and Analysis in the Company's Shareholders' Report. Another method by which the Company's interest rate risk position can be estimated is by computing estimated changes in its net portfolio value ("NPV"). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities. NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities. Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment. The table below provides an assessment of the risk to NPV in the event of sudden and sustained 1% and 2% increases and decreases in prevailing interest rates. The table indicates that as of December 31, 1999 the Company's estimated NPV might be expected to decrease in the event of an increase in prevailing interest rates, and might be expected to increase in the event of a decrease in prevailing interest rates (dollars in thousands). Interest Rate Sensitivity as of December 31, 1999 Net Portfolio Value Net Portfolio as a % of Present Value Value of Assets ----- --------- Changes In rates $ Amount $ Change NPV Ratio Change -------- -------- -------- --------- ------ +2% $62,795 (23.0)% 6.66% 161 b.p. +1% 73,014 (10.5) 7.57 70 b.p. Base 81,584 --- 8.27 --- -1% 90,506 10.9 8.95 68 b.p. -2% 87,989 7.9 8.65 38 b.p. The above discussion, and the portions of "Management's Discusision and Analysis" that are incorporated by reference into the above discussion, contains statements relating to future results of the Company that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, simulation of changes in interest rates. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed above, those that are described in "Management's Discussion and Analysis," and those that are described in Item 1 of this report, "Business," under the caption "Forward-Looking Statements," which description is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. - ----------------------------------------------------- The financial statements of the Company and related notes on pages 14 through 35 of the Shareholders' Report and the Independent Auditors' Report thereon on page 36 of the Shareholders' Report which are filed as Exhibit 13.4 to this report, are incorporated herein by reference. The financial statements of the Company and related notes that are incorporated by reference herein may contain statements relating to future results of the Company that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, adequacy of allowance of loan losses; simulation of changes in interest rates; litigation results; and dividend policy. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed in such financial statements and those risks and uncertainties that are described in Item 1 of this report, "Business," under the caption "Forward-Looking Statements," which description is incorporated herein by reference. The Interim Financial Data on page 6 of the Shareholders' Report, which is included in the "Management's Discussion and Analysis" filed as Exhibit 13.3 to this report, is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. - -------------------------------------------------------------------------------- Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant. - ------------------------------------------------------------- Information relating to Directors of the Corporation will be included under the caption "Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 27, 2000 which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Report (the "2000 Proxy Statement"), which section is incorporated herein by reference in partial answer to this Item. Information relating to Executive Officers of the Corporation is included under the caption "Executive Officers of the Registrant" under Part I of this Report on Form 10-K, and is incorporated herein by reference. Item 11. Executive Compensation. - --------------------------------- Information relating to compensation of the Corporation's Executive Officers and Directors will be included under the captions "Executive Compensation" and "Election of Directors -- Compensation of Directors" in the 2000 Proxy Statement of the Corporation, which sections are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------------------------------------------------------------------------- Information relating to security ownership of certain beneficial owners and management of the Corporation will be included under the captions "Election of Directors" and "Principal Owners of Common Shares" of the 2000 Proxy Statement of the Corporation, which sections are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - --------------------------------------------------------- Information responsive to this Item 13 will be included under the captions "Executive Compensation - Certain Business Relationships and Transactions" and "Executive Compensation - Compensation Committee Interlocks and Insider Participation" of the 2000 Proxy Statement of the Corporation, which sections are incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - --------------------------------------------------------------------------- a) The following Consolidated Financial Statements of the Corporation, and the Auditors' Report therein, included on pages 14 through 36 of the Shareholders' Report, are incorporated into Item 8 of this report by reference. Location in Shareholders' Report -------------------- 1. Financial Statements German American Bancorp and Subsidiaries Consolidated Balance Sheets at December 31, 1999 and December 31, 1998 Page 14 Consolidated Statements of Income, years ended December 31, 1999, 1998, and 1997 Page 15 Consolidated Statements of Cash Flows, years ended December 31, 1999, 1998, and 1997 Page 16 Consolidated Statements of Changes in Shareholders' Equity, years ended December 31, 1999, 1998, and 1997 Page 17 Notes to the Consolidated Financial Statements Pages 18 - 35 Independent Auditors' Report Page 36 2. Other financial statements and schedules are omitted because they are not required or because the required information is included in the consolidated financial statements or related notes. b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended December 31, 1999. c) Exhibits: The Exhibits described in the Exhibit List immediately following the "Signatures" pages of this report (which are incorporated herein by reference) are hereby filed as part of this report. Pursuant to the requirements of Section 13 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. GERMAN AMERICAN BANCORP (Registrant) Date: March 28 , 2000 By/s/Mark A. Schroeder ---------------- ---------------------- Mark A. Schroeder, President and Director Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act 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. Date: March 28 , 2000 By/s/Mark A. Schroeder ---------------- ---------------------- Mark A. Schroeder, President and Director (Chief Executive Officer) Date: March 28 , 2000 By/s/George W. Astrike ---------------- ---------------------- George W. Astrike, Director Date: March 28 , 2000 By/s/David G. Buehler ---------------- --------------------- David G. Buehler, Director Date: ---------------- -------------------- David B. Graham, Director Date: ---------------- ----------------------- William R. Hoffman, Director Date: ---------------- -------------------- Michael B. Lett, Director Date: ---------------- ----------------------- C. James McCormick, Director Date: March 28 , 2000 By/s/Gene C. Mehne ---------------- ------------------ Gene C. Mehne, Director Date: March 28 , 2000 By/s/Robert L. Ruckriegel ---------------- ------------------------- Robert L. Ruckriegel, Director Date: March 28 , 2000 By/s/Larry J. Seger ---------------- ------------------- Larry J. Seger, Director Date: March 28 , 2000 By/s/Joseph F. Steurer ---------------- ---------------------- Joseph F. Steurer, Director Date: ---------------- ------------------ C.L. Thompson, Director Date: ---------------- ---------------------- Michael J. Voyles, Director Date: March 28 , 2000 By/s/Richard E. Trent ---------------- --------------------- Richard E. Trent, Senior Vice President (Chief Financial Officer and Principal Accounting Officer)
Executive Compensation Plans and Exhibit Arrangements* Number Exhibit List - ------------- ------ ------------ 2.1 Agreement of Merger dated December 8, 1997, among the Registrant, CSB Bancorp and the Citizens State Bank of Petersburg, as amended, is incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 filed February 26, 1998. 2.2 Agreement of Merger dated January 30, 1998, among the Registrant, FSB Corporation and the FSB Bank of Francisco, as amended, is incorporated by reference from Exhibit 2.2 to the Registrant's Registration Statement on Form S-4 filed February 26, 1998. 2.3 Agreement and Plan of Reorganization between the Registrant and 1ST BANCORP dated August 6, 1998, is incorporated by reference from Exhibit 2 to the Registrant's Registration Statement on Form S-4 filed October 14, 1998. 3.1 Restated Articles of Incorporation of the Registrant as amended April 23, 1998 are Incorporated by reference to Exhibit 3 to Registrant''s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. 3.2 Restated Bylaws of the Registrant as amended August 14, 1990, are incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 1995. 4 No long-term debt instrument issued by the Registrant exceeds 10% of consolidated total assets. In accordance with paragraph 4 (iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission upon request copes of long-term debt instruments and related agreements. X 10.1 The Registrant's 1992 Stock Option Plan, as ammended, is incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-4 filed October 14, 1998. X 10.2 Schedule identifying material terms of Incentive Stock Options (including replacement options) granted to the Registrant's executive officers under the Registrant's 1992 Stock Option Plan. X 10.3 Executive Deferred Compensation Agreement dated December 1, 1992, between The German American Bank and George W. Astrike, is incorporated herein by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993. X 10.4 Director Deferred Compensation Agreement between The German American Bank and certain of its Directors, is incorporated herein by reference from Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993 (The Agreement entered into by George W. Astrike, a copy of which was filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993, is substantially identical to the Agreements entered into by the other Directors.) The schedule following Exhibit 10.4 lists the Agreements with the other Directors and sets forth the material detail in which such Agreements differ from the Agreement filed as Exhibit 10.4. Executive Compensation Plans and Exhibit Arrangements* Number Exhibit List - ------------- ------ ------------ X 10.5 Stock Option Agreement between the Registrant and George W. Astrike dated September 2, 1998 is incorporated by reference or from Exhibit 10.9 to the Registrant's Registration Statement on Form S-4 filed October 14, 1998. X 10.6 Non-Qualified Index Executive Supplemental Agreement dated September 1, 1998 between the Registant and George W. Astrike is incorporated by reference from Exhibit 10.10 to the Registrant's 1998 form 10-K filed March 26, 1999. X 10.7 Split Dollar Life Insurance Plan Agreement dated November 5, 1998 between the Registrant and George W. Astrike is incorporated by reference from Exhibit 10.11 to the Registrant's 1998 form 10-K filed March 26, 1999. X 10.8 Consulting Agreement dated August 21, 1998 between the Registrant and George W. Astrike. 13.1 Market and Dividend Information (page 37) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999. 13.2 Five Year Summary of Consolidated Financial Statements and Related Statistics (page 1) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999. 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 2 through 13) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999. 13.4 Consolidated financial statements and related notes (pages 14 through 35), Auditor's Report (page 36) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1999. 21 Subsidiaries of the Registrant. 23.1 Consent of Crowe, Chizek and Company LLP 23.2 Consent of Gaither, Rutherford & Co., LLP 23.3 Consent of KPMG LLP 27 Financial Data Schedule. 99.1 Opinion of Gaither, Rutherford & Co., LLP 99.2 Opinion of KPMG LLP
EX-10.2 2 EXHIBIT 10.2
Schedule Identifying Material Terms of Options Granted To German American Bancorp Executive Officers Option Type of George Mark Stan Urban James Price Option Date Astrike Schroeder Ruhe Giesler Essany per Share - ------ ---- ------- --------- ---- ------- ------ --------- Original Grant (2) 4/20/93 22,973.07 19,144.22 11,486.53 5,743.27 5,743.27 $8.49 Replacement (3) 12/30/94 2,761.87 2,552.56 ------- ------- ------- 12.68 Replacement (3) 7/10/95 4,816.69 2,552.56 ------- 765.77 367.57 12.22 Replacement (3) 1/9/96 7,147.18 ------- 1,767.35 756.04 765.77 12.85 Replacement (3) 7/15/96 ------- 2,187.91 1,373.52 685.55 875.16 14.19 Replacement (3) 1/16/97 6,197.92 3,864.15 2,613.92 1,782.74 1,655.40 16.13 Replacement (3) 1/28/97 5,288.03 ------- ------- ------- ------- 16.09 Replacement (3) 8/1/97 ------- 2,634.75 1,106.69 553.34 553.34 17.60 Replacement (3) 5/1/98 ------- ------- ------- ------- 1,273.39 28.62 Replacement (3) 8/3/98 ------- ------- 337.37 367.13 ------- 26.55 Additional Grant (4) 9/2/98 63,945.00 ------- ------- ------- ------- 22.22 Replacement (3) 5/4/99 ------- 1,869.00 603.75 ------- ------- 17.38 (1) Number of options and per share exercise price have been retroactively adjusted for subsequent stock splits and dividends. (2) These options under the German American Bancorp 1992 Stock Option Plan (the "Plan") were made on April 20, 1993. These options expire ten years after the grant date. The options granted to Mr. Astrike became exercisable with respect to one-half of the shares immediately upon grant and with respect to the other one-half of the shares on the first anniversary of the grant date. The options granted to the other executive officers became exercisable with respect to twenty percent of the shares on each of the anniversary dates beginning on the first anniversary of the date of grant. (3) The Stock Option Plan provides that if the optionee tenders Common Shares of the Corporation already owned by the optionee as payment, in whole or part, of the exercise price for the shares the optionee has elected to purchase under the option, then the Corporation is obligated to use its best efforts to issue a replacement option of the same type (incentive or non-qualified option). With the same expiration date as the option that was exercised, and covering a number of Common Shares equal to the number of Common Shares tendered. Replacement options may not be exercised until one year after the date of grant. (4) These options were granted to Mr. Astrike on September 2, 1998. These non-qualified options expire in twenty years and are immediately exercisable.
EX-10.8 3 AGREEMENT FOR CONSULTING SERVICES Exhibit 10.8 AGREEMENT FOR CONSULTING SERVICES THIS AGREEMENT, made and entered into this 21st day of August, 1998, by and between German American Bancorp, a bank holding company incorporated pursuant to the laws of the State of Indiana, (hereinafter "German American") and George W. Astrike (hereafter "Astrike"). WITNESSETH: WHEREAS, it is the consensus of the Board of Directors of German American that Astrike's services in the past have been of exceptional merit and have constituted an invaluable contribution to the growth and profitability of German American, and have brought it to its present status of operating efficiency and its present position of exceptional stature in the community; and, WHEREAS, the experience of Astrike, his knowledge of the affairs of German American, and his reputation and contacts in the industry are so valuable that assurance of his continued services is essential for German American's future growth and profitability, and it is in the best interest of German American to arrange terms of continued service for Astrike so as to reasonably assure his remaining availability to German American as Chairman of the Board of Directors and as a Consultant; and, WHEREAS, Astrike is willing to continue to provide services to German American in accordance with the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of services performed in the past and to be performed in the future as well as of the mutual promises and covenants herein contained, it is agreed as follows: I. For the period commencing with the date hereof and ending on December 31, 1998, Astrike shall be, and remain, Chairman of the Board and Chief Executive Officer of German American. Astrike shall be compensated for the services during the period described in Paragraph I hereinabove in an amount not less than, and in the same manner as he is being compensated on the date hereof, including all existing fringe benefits offered by German American and all fringe benefits offered by German American through December 31, 1998 to the executive officers of German American. II. For the period commencing on January 1, 1999 and ending on the last day of the month in which the 1999 Annual Meeting of German American is held, Astrike shall be and remain as the Chairman of the Board and a full-time employee of German American concentrating on bank acquisitions, real estate development and the transition of the new Chief Executive Officer. Astrike shall be compensated for the services during the period described in Paragraph II hereinabove in an amount not less than, and in the same manner as he is being compensated on the date hereof, including all existing fringe benefits offered by German American and all fringe benefits offered by German American through the date of the 1999 Annual Meeting to the executive officers of German American. 1 III. For the period commencing on the 1st of the month immediately following the 1999 Annual Meeting of German American and ending September 1, 2003 (Consulting Period), Astrike shall be a Consultant to German American. A. From the beginning of the Consulting Period until the Annual Meeting in 2001, Astrike agrees to act as Chairman of the Board of German American. B. During that portion of the Consulting Period ending September 1, 2000, (the "Prime Period") Astrike shall provide services during a maximum of ten (10) days per month to German American. For the remainder of the Consulting Period, Astrike will provide services during a maximum of three (3) days per month. During these days of service, he will be available at reasonable times and places as may be mutually agreed upon to provide services to the Senior Management and Board of Directors of German American. C. During the Prime Period of the Consulting Period, German American shall pay Astrike Twenty Thousand Two Hundred Fifty Dollars ($20,250.00) per month. Following the Prime Period and for the remainder of the Consulting Period, German American will pay Astrike One Thousand Two Hundred and Fifty Dollars ($1,250.00) per month. Payments made to Astrike under the Consulting Agreement will be subject to withholding for applicable Federal, State and Local income taxes and will be reportable on form W2. D. Astrike will keep himself informed concerning the affairs of German American by reference to reports, which German American will supply, and such other means as may be agreed upon. Astrike shall not be required to travel from whatever place he may then be living or staying for the purposes of such consultation unless all expenses incurred by him shall be paid by German American. E. During the Consulting Period, Astrike shall not become the owner of, nor engage, directly or indirectly, in any business which is substantially similar to the business of German American either as a partner, greater than a 5% stockholder, officer, director, employee or otherwise, within an area of one hundred (100) miles from German American's principal location, unless German American has first consented, in writing, thereto. F. German American shall not merge or consolidate into or with another corporation, or reorganize, or sell substantially all of its assets to another corporation, firm, or person unless it agrees to assume and discharge the obligations of German American under this Agreement. 2 IV. Within thirty (30) days of the date hereof, German American shall implement the following programs by written agreement for the benefit of Astrike, which shall be in addition to any existing retirement plan that Astrike is participating in : A. Non-Statutory (Non-Qualified) Stock Option Plan that grants Astrike the right to purchase no fewer than 58,000 shares of German American for a price equal to the current fair market value as of the date of grant. B. BENMARK Non-Qualified Deferred Contribution Index Executive Supplemental Retirement Plan with a single premium of no less that $1,305,000 providing for lifetime annual supplemental benefit payments commencing September 1, 2003 in substantially the form and substance as illustrated on the attached indicative Participant Plan Summary. Said benefit payments shall be based upon an accumulated cash surrender value equal to the single premium amount plus accumulated premium earnings which shall be calculated annually utilizing the weighted average portfolio yield on all company owned life insurance policies in effect for the full calendar year. The amount of the lifetime annual supplemental benefit payments shall be computed by multiplying the accumulated cash surrender value by a benefit crediting rate equal to the weighted average portfolio yield on all company owned life insurance policies in effect for the full calendar year less an after-tax opportunity rate based upon a rate of interest equal to the average annual two-year treasury instrument plus 37.5 basis points. C. BENMARK Endorsement Split Dollar Life Insurance Plan that will provide Astrike with a life insurance benefit of at least $1 million on his death; payable to Astrike's designated beneficiary(ies). V. This Agreement shall be binding upon and inure to the benefit of Astrike and German American and any successor organization which shall succeed to substantially all of its assets and business. During the lifetime of Astrike, this Agreement may be amended or revoked at any time, in whole or in part, by mutual written agreement of the parties. VI. Any notice, consent or demand required or permitted to be given under the provisions of this Agreement shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent or demand is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party's last known address as shown on the records of German American. The date of such mailing shall be deemed the date of notice, consent or demand. 3 VII. This Agreement shall be governed by the laws of the State of Indiana. This Agreement is solely between German American and Astrike and shall not be assignable by either, but shall be binding upon the designated recipients, beneficiaries, heirs, executors and administrators of the Consultant and upon the successors of German American. GERMAN AMERICAN BANCORP ATTEST __________________________ BY THE HUMAN RESOURCE COMMITTEE Mark A. Schroeder, President OF THE BOARD OF DIRECTORS _________________________Chairman -------------------------- -------------------------- -------------------------- -------------------------- WITNESS - -------------------------- ------------------------------ George W. Astrike
Participant Plan Summary German American Bancorp Plan begins in September George W. Astrike Premium: $ 1,305,000 Single Premium October 20, 1999 Current Age: 63 Retirement Age: 68 Age at Death: 85 5.88% Bank's After-Tax Benefit Split FICA and Policy Portion of Annual Annual Index Annual From Index Total Dollar Tax On Surrender Death Policy Opportunity Liability Index Pre-Retire Post-Retire Annual Death Economic Value Benefit Income Cost Balance Expense Index Accrual Benefit Benefit Benefit Value ----- ------- ------ ---- ------- ------- ------------- ------- ------- --------- -------- 1998 1 63 1,317,716 2,781,743 12,716 (15,447) 1,000,000 924 1999 2 64 1,375,968 2,812,944 58,252 (46,888) 14,063 14,063 1,000,000 1,257 2000 3 65 1,437,761 2,625,441 61,794 (48,553) 35,630 21,568 1,000,000 1,394 2001 4 66 1,507,216 1,995,785 69,454 (50,277) 66,868 31,238 1,000,000 1,825 2002 5 67 1,580,213 2,080,078 72,998 (52,063) 100,970 34,102 1,000,000 2,136 2003 6 68 1,655,824 2,167,211 75,611 (53,911) 80,776 35,347 20,194 35,347 55,541 1,000,000 1,887 2004 7 69 1,733,200 2,257,209 77,377 (57,017) 60,582 33,165 20,194 33,165 53,359 1,000,000 2,104 2005 8 70 1,813,786 2,350,031 80,585 (60,185) 40,388 33,230 20,194 33,230 53,424 1,000,000 2,296 2006 9 71 1,898,153 2,445,626 84,367 (63,468) 20,194 34,043 20,194 34,043 54,237 1,000,000 2,580 2007 10 72 1,985,560 2,543,878 87,407 (66,885) 33,429 20,194 33,429 53,623 1,000,000 2,846 2008 11 73 2,078,651 2,646,438 93,091 (70,410) 36,946 36,946 36,946 1,000,000 3,122 2009 12 74 2,184,569 2,759,012 105,918 (73,702) 52,477 52,477 52,477 1,000,000 3,497 2010 13 75 2,295,851 2,879,529 111,282 (77,445) 55,118 55,118 55,118 1,000,000 3,917 2011 14 76 2,411,604 3,003,892 115,753 (81,377) 55,997 55,997 55,997 1,000,000 4,386 2012 15 77 2,532,265 3,131,976 120,661 (85,467) 57,328 57,328 57,328 1,000,000 4,911 2013 16 78 2,656,418 3,263,636 124,153 (89,732) 56,070 56,070 56,070 1,000,000 5,499 2014 17 79 2,785,916 3,398,895 129,498 (94,120) 57,628 57,628 57,628 1,000,000 6,160 2015 18 80 2,919,803 3,537,640 133,887 (98,698) 57,321 57,321 57,321 1,000,000 7,462 2016 19 81 3,058,133 3,679,975 138,330 (103,432) 56,846 56,846 56,846 1,000,000 12,107 2017 20 82 3,200,941 3,825,927 142,808 (108,324) 56,172 56,172 56,172 1,000,000 14,308 2018 21 83 3,350,315 3,977,896 149,375 (113,375) 58,641 58,641 58,641 1,000,000 16,776 2019 22 84 3,512,127 4,142,351 161,811 (118,658) 70,293 70,293 70,293 1,000,000 19,614 Benmark Projected values are based primarily on current non-guaranteed elements and assumptions. (See Introduction Section for more details)
EX-13.1 4 MARKET AND DIVIDEND INFORMATION - ------------------------------------------------------------------------------- Market and Dividend Information for 37 German American Bancorp Common Stock - ------------------------------------------------------------------------------- MARKET AND DIVIDEND INFORMATION German American Bancorp's stock is traded on NASDAQ's National Market System under the symbol GABC. The quarterly high and low closing prices for the Company's common stock as reported by NASDAQ and quarterly cash dividends declared and paid are set forth in the table below. Per share closing prices are retroactively restated for all stock dividends. Per share cash dividends declared and paid on the Company's common stock have not been restated for mergers accounted for as poolings of interests. 1999 1998 ---- ---- Cash Cash High Low Dividend High Low Dividend ---- --- -------- ---- --- -------- Fourth Quarter $22.38 $17.25 $0.125 $24.94 $21.32 $0.110 Third Quarter $22.38 $16.31 $0.125 $27.44 $21.32 $0.110 Second Quarter $18.33 $16.31 $0.125 $29.02 $26.98 $0.110 First Quarter $21.67 $17.62 $0.110 $29.25 $26.30 $0.100 ------ ------ $0.485 $0.430 ====== ======
The Common Stock was held of record by approximately 2,920 shareholders at March 1, 2000. Cash dividends paid to the Company's shareholders are primarily funded from dividends received by the Company from its subsidiaries. The Company presently intends to follow its historical policy as to the amount, timing and frequency of the payment of cash and stock dividends. The declaration and payment of future dividends, however, will depend upon the earnings and financial condition of the Company and its subsidiaries, general economic conditions, compliance with regulatory requirements, and other factors. Transfer Agent: UMB Bank, N.A. Regional J.J.B. Hilliard, W.L. Lyons, Inc. Securities Transfer Division Market Makers: Louisville, Kentucky P.O. Box 410064 Contact: George Morrin Kansas City, MO 64141-0064 (800) 444-1854 Contact: Shareholder Relations (800) 884-4225 NatCity Investments, Inc Indianapolis, Indiana Contact: Eric Wheeler Shareholder (800) 321-7442 Information and Terri A. Eckerle Corporate Office: German American Bancorp McDonald Investments, Inc. P. O. Box 810 Evansville, Indiana Jasper, Indiana 47547-0810 Contact: Kent Gourley (812) 482-1314 800) 513-0844
EX-13.2 5 SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- Five Year Summary of Consolidated Financial Statements and Related 1 Statistics Dollars in thousands, except per share data - ------------------------------------------------------------------------------- The following selected data has been taken from the Company's consolidated financial statements. It should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Summary of Operations: Interest and Fees on Loans............. $53,868 $51,980 $49,160 $48,316 $45,493 Interest on Investments................ 14,061 13,380 14,065 13,572 13,448 ------ ------ ------ ------ ------ Total Interest Income.............. 67,929 65,360 63,225 61,888 58,941 ------ ------ ------ ------ ------ Interest on Deposits................... 27,860 28,450 27,804 28,037 26,626 Interest on Borrowings................. 7,899 6,155 5,930 5,965 5,240 ----- ----- ----- ----- ----- Total Interest Expense............. 35,759 34,605 33,734 34,002 31,866 ------ ------ ------ ------ ------ Net Interest Income.................... 32,170 30,755 29,491 27,886 27,075 Provision for Loan Losses.............. 1,718 1,338 773 428 197 ----- ----- --- --- --- Net Interest Income after Provision for Loan Losses............ 30,452 29,417 28,718 27,458 26,878 Noninterest Income..................... 6,251 4,996 5,698 12,869 (1) 7,418 Noninterest Expenses................... 24,832 22,318 24,278 (1) 22,714 22,205 ------ ------ ------ ------ ------ Income Before Income Taxes............. 11,871 12,095 10,138 17,613 12,091 Income Tax Expense..................... 3,049 3,525 2,868 6,230 4,101 ----- ----- ----- ----- ----- Net Income............................. $8,822 $8,570 $7,270 $11,383 $7,990 =================================================================================================================================== =================================================================================================================================== Year-end Balances: Total Assets........................... $992,635 $896,925 $846,332 $795,555 $839,237 Total Loans, Net....................... 685,424 589,765 516,747 500,132 527,431 Total Deposits......................... 698,261 665,113 645,349 624,401 664,134 Total Long-term Debt................... 122,902 124,381 100,296 101,885 80,387 Total Shareholders' Equity............. 87,487 91,276 84,412 79,389 70,717 =================================================================================================================================== =================================================================================================================================== Per Share Data (2): Net Income............................. $0.96 $0.93 $0.79 $1.24 $0.87 Net Income - as adjusted (3) .......... 0.96 0.93 0.88 0.76 0.87 Cash Dividends (4)..................... 0.49 0.43 0.35 0.28 0.25 =================================================================================================================================== =================================================================================================================================== Other Data at Year-end: Number of Shareholders................. 2,918 2,920 2,709 2,622 2,564 Number of Employees.................... 392 364 327 394 384 Weighted Average Number of Shares (2).. 9,186,474 9,197,274 9,189,349 9,180,938 9,177,367 (1) In 1997, 1ST BANCORP incurred a $1.3 million one-time special SAIF assessment. In 1996, 1ST BANCORP realized a gain of $7.3 million on the sale of branch offices. (2) Share and Per share data has been retroactively adjusted to give effect for stock dividends and splits, and excludes the dilutive effect of stock options. (3) Excludes $1.3 million SAIF assessment in 1997 and $7.3 million gain on sale in 1996. See Management's Discussion and Analysis for further information. (4) Cash dividends represent historical dividends declared per share without retroactive restatement for poolings.
EX-13.3 6 MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- 2 Management's Discussion and Analysis - ------------------------------------------------------------------------------- INTRODUCTION AND OVERVIEW German American Bancorp ("the Company") is a multi-bank holding company based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National Market System under the symbol GABC. The Company operates five affiliate community banks with 25 banking offices and 5 full-service insurance offices in the eight contiguous Southwestern Indiana counties of Daviess, Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The banks' wide range of personal and corporate financial services include making commercial and consumer loans; marketing, originating, and servicing mortgage loans; providing trust, investment advisory and brokerage services; accepting deposits and providing safe deposit facilities. The Company's insurance activities include offering a full range of title, property, casualty, life and credit insurance products. Prior to the acquisition activity in January 1999, the Company operated primarily in the banking industry. The information in this Management's Discussion and Analysis is presented as an analysis of the major components of the Company's operations for the years 1997 through 1999 and its financial condition as of December 31, 1999 and 1998. This information should be read in conjunction with the accompanying consolidated financial statements and footnotes contained elsewhere in this report. Results have been retroactively adjusted for the effect of all stock dividends and splits. MERGERS AND ACQUISITIONS In January 1999, the Company completed a merger with 1ST BANCORP of Vincennes, Indiana. 1ST BANCORP's subsidiaries included First American Bank (formerly known as First Federal Bank); First Financial Insurance Agency, Inc.; and First Title Insurance Company. 1ST BANCORP's thrift operations through First American Bank included mortgage banking activities, a heavy concentration of residential real estate mortgages in their loan portfolio, and a heavy concentration of borrowings as a long-term funding source. As such, the composition of 1ST BANCORP's loan portfolio, funding sources, allowance for loan losses, and operating results differed significantly from that of the Company in periods prior to the merger. This merger was accounted for as a pooling of interests and prior to 1999, 1ST BANCORP's financial statements were prepared on a June 30 fiscal year-end. Accordingly, the Company's calendar period financial statements for periods prior to 1999 have been restated to include 1ST BANCORP fiscal period financial results. Also in January 1999, the Company completed a merger with The Doty Agency, Inc. of Petersburg, Indiana. Doty is a general multi-line, full-service insurance agency and has offices in Gibson, Knox and Pike counties in Indiana. This merger was accounted for as a pooling of interests. Prior years' results exclude the effect of the merger, as restatement would not have had a material impact on overall financial results. In May 1999, the Company acquired Smith and Bell of Vincennes, Indiana. Smith and Bell is a general multi-line, full-service insurance agency with offices in Knox County, Indiana. This merger was accounted for as a purchase. Accordingly, operating results of Smith and Bell are included only after the date of merger. Management anticipates that additional mergers and acquisitions with like-minded institutions may occur in future years. The Company's approach offers these institutions the advantage of competitive operational efficiencies gained by spreading fixed operating costs over a larger asset base, without the loss of flexibility and independence associated with acquisition by large regional multi-bank holding companies. Through affiliation with the Company, ownership is predominantly held within a group of shareholders who reside in the banks' general market areas and who support the banks' commitment to their local communities. - ------------------------------------------------------------------------------- Management's Discussion and Analysis 3 (continued) - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS - ------------------------------------------------------------------------------- NET INCOME Net income of $8,822,000 or $0.96 per share for the year ended December 31, 1999 compared favorably to net income of $8,570,000 or $0.93 per share for the prior year. 1998 net income of $8,570,000 or $0.93 per share represented an 18% increase over 1997 earnings of $7,270,000 or $0.79 per share. Continued growth in earnings has been facilitated by steady growth in loans and net interest income. In 1999 and 1998, loan growth along with declining credit quality in specific segments of the portfolio has required the Company to increase its provision for loan losses over prior years. 1997 results included a one-time Savings Association Insurance Fund ("SAIF") industry-wide assessment by the FDIC. NET INTEREST INCOME Net interest income is the Company's single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. Net interest margin is this difference expressed on a tax-equivalent basis as a percentage of average earning assets. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit demand, Federal Reserve Board monetary policy, and changes in tax laws. Net interest income in 1999 increased $1,415,000 or 4.6% over 1998 results while 1998 increased $1,264,000 or 4.3% over 1997. A significant portion of the increase in both years resulted from loan growth. Net interest margin for 1999, 1998 and 1997 was 3.94%, 3.99% and 3.95%, respectively, excluding the impact of asset growth strategies employed in late 1998 and throughout 1999. Yields on earning assets and rates on interest-bearing liabilities declined in 1999 compared to the prior year. The decline in net interest margin is attributable to a more competitive pricing environment for loans and deposits. The Company employed various asset growth strategies in late 1998 and throughout 1999, whereby affiliate banks invested proceeds from FHLB borrowings in agency, municipal, mortgage-backed and equity securities in order to more effectively utilize capital in excess of requirements. These asset growth strategies have net interest margins ranging from 1.00% to 1.50%, which reduced overall net interest margin by 7 basis points in 1999 and improved net interest income by $235,000. See the Company's Average Balance Sheet and the discussion headed LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for further information on the Company's net interest income, net interest margin, and interest rate sensitivity position. PROVISION FOR LOAN LOSSES The Company provides for loan losses through regular provisions to the allowance for loan losses, which totaled $1,718,000, $1,338,000 and $773,000 in 1999, 1998 and 1997, respectively. These provisions were made at a level deemed necessary by management to absorb estimated losses in the loan portfolio. The increase in provision in 1999 and 1998 was due to growth in residential real estate mortgage loans, an increase in charge-off experience in consumer loans at one affiliate, and an increase in allowance for substandard loans in the sub-prime, out-of-market residential mortgage loan portfolio of another affiliate. The Company discontinued new sub-prime, out-of-market residential real estate lending in 1999. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which will be used to determine future provisions for loan losses. Refer also to the section entitled LENDING AND LOAN ADMINISTRATION for further discussion of the provision and allowance for loan losses. NONINTEREST INCOME Noninterest income of $6,251,000 for 1999 represents an increase of 25.1% over the 1998 results of $4,996,000. This followed a decline of 12.3% in 1998 from the $5,698,000 reported in 1997. Increases in insurance commissions and service charges on deposit accounts, tempered by a decline in the gains on sales of mortgage loans, resulted in the overall increase in noninterest income in 1999. The 1998 decline in noninterest income was attributable to a lower gain on sale of mortgage loans. Excluding net gains on the sales of loans, other real estate and securities, noninterest income increased by 43.4% and 14.9% in 1999 and 1998, respectively. - ------------------------------------------------------------------------------- 4 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------
Noninterest Income % Change From dollars in thousands Prior Year 1999 1998 1997 1999 1998 ---- ---- ---- ---- ---- Trust and Investment Product Fees....................... $835 $833 $794 0.2% 4.9% Service Charges on Deposit Accounts..................... 1,757 1,599 1,429 9.9 11.9 Insurance Commissions & Fees (1)........................ 2,239 685 479 226.9 43.0 Other Income............................................ 1,013 958 845 5.7 13.4 ----- --- --- Subtotal ........................................... 5,844 4,075 3,547 43.4 14.9 Gains on Sales of Loans and Other Real Estate........... 413 883 2,180 (53.2) (59.5) Securities Gains, net................................... (6) 38 (29) (115.8) 231.0 - -- -- TOTAL NONINTEREST INCOME............................ $6,251 $4,996 $5,698 25.1 (12.3) ====== ====== ====== (1) Prior year results exclude the impact of 1999 insurance acquisitions. See Note 18 to the Consolidated Financial Statements.
In an effort to provide customers an opportunity to fulfill all their financial needs through the Company's affiliate banks and associated financial services companies, the Company completed strategic insurance acquisitions in 1999. As a result, the Company's insurance commission income has grown significantly. Insurance commissions increased to $2,239,000 and $685,000 in 1999 and 1998, respectively. Gains on sales of loans and other real estate are derived predominantly from the Company's mortgage banking division. These gains declined by $470,000 or 53.2% in 1999 compared with 1998. This followed a decrease of $1,297,000 or 59.5% in 1998 over 1997 reported results. During 1999, lower volumes in residential real estate loan production and correspondingly lower levels of loan sales caused by a rising market interest rate environment resulted in the decreased gain on sale of loans. The decrease in 1998 was primarily caused by First Federal Bank's decision to portfolio current loan production to generate additional net interest income rather than sell loans to the secondary market. NONINTEREST EXPENSE Noninterest expense of $24,832,000 for 1999 represents an 11.3% increase over the 1998 results of $22,318,000. This followed a decline of 8.1% from the $24,278,000 reported in 1997. The increase in 1999 resulted from insurance acquisitions, establishment of the corporate identity program at First American Bank, implementing wide-area network technology, and Year 2000 preparation. The decline in 1998 resulted largely from First Federal Bank's decision to close outlying mortgage loan production offices near the end of 1997. These closures resulted in declines in personnel, occupancy, and other expenses. In addition, 1997 noninterest operating expenses included a one-time special FDIC assessment of $1.3 million at First Federal Bank.
Noninterest Expense % Change From dollars in thousands Prior Year 1999 1998 1997 1999 1998 ---- ---- ---- ---- ---- Salaries and Employee Benefits.......................... $13,433 $12,132 $12,520 10.7% (3.1)% Occupancy, Furniture and Equipment Expense.............. 3,401 3,069 3,019 10.8 1.7 FDIC Premiums........................................... 160 170 1,593 (5.9) (89.3) Data Processing Fees.................................... 990 988 855 0.2 15.6 Professional Fees ...................................... 871 1,029 1,292 (15.4) (20.4) Advertising and Promotion............................... 888 684 652 29.8 4.9 Supplies................................................ 807 680 674 18.7 .9 Other Operating Expenses................................ 4,282 3,566 3,673 20.1 (2.9) ----- ----- ----- TOTAL NONINTEREST EXPENSE........................... $24,832 $22,318 $24,278 11.3 (8.1) ======= ======= =======
Salaries and Employee Benefits comprised approximately 54% of total noninterest expense in 1999 and 1998 and 52% in 1997. Salaries and Employee Benefits increased $1,301,000 or 10.7% during 1999. Excluding the Company's insurance operations acquired in 1999, these expenses increased $537,000 or 4.4%. Personnel costs declined $388,000 or 3.1% in 1998. This decline was due to the closure of loan production offices at First Federal Bank, offset by merger and acquisition related expenses, an increase in base compensation at other affiliates and costs associated with the Company's employee computer purchase program, which was implemented in late 1997. - ------------------------------------------------------------------------------- Management's Discussion and Analysis 5 (continued) - ------------------------------------------------------------------------------- Occupancy, furniture and equipment expenses increased by $332,000 or 10.8% in 1999, after a modest increase of $50,000 or 1.7% in 1998. The 1999 increase includes depreciation on Citizen State Bank's new main office in Petersburg, Indiana and for the new Cherry Tree branch for Peoples National Bank in Washington, Indiana. Also contributing to the 1999 increase was the implementation of a state-of-the-art wide-area network and associated operating and application systems at the retail banking affiliates. These systems are expected to provide long-term benefits with regard to improved quality of customer service and control of personnel expenses, and in some cases were in preparation for the Year 2000. FDIC premiums totaled $160,000 in 1999, $170,000 in 1998 and $1,593,000 in 1997. 1997 premiums included a $1,330,000 one-time SAIF industry-wide assessment by the FDIC, which was applied to all of the deposits of First Federal Bank. Data processing fees remained stable in 1999 after an increase of $133,000 in 1998. The 1998 increase reflected an increase in the number of accounts processed and conversion expenses at the Company's newly acquired affiliates in 1998. Professional fees totaled $871,000 in 1999, $1,029,000 in 1998 and $1,292,000 in 1997. Expenses incurred by the holding company for merger and acquisition and other professional fees totaled $530,000 in 1999, $723,000 in 1998 and $342,000 in 1997. A significant portion of the costs associated with acquisitions completed in early 1999 was expensed during 1998, resulting in the lower level of professional fees. While it is not possible to predict the level of future acquisition activity and the resulting level of associated costs, management intends to continue to pursue acquisition opportunities, and therefore, continued costs will be likely in future years. 1997 also included a $200,000 reserve for legal fees made in connection with an unasserted potential claim at one of the affiliate banks. After payment of certain expenses associated with this unasserted claim, the remainder of this accrual was reversed in late 1998. Advertising and promotion expenses totaled $888,000 in 1999, $684,000 in 1998 and $652,000 in 1997, representing approximately 0.1% of average total assets in each year. Increases in 1999 were attributable to the introduction of the corporate identity program at new affiliates and to the implementation of a customer information system for all banking affiliates. The customer information system is being used to improve customer service, analyze customer profitability and identify cross-selling opportunities. Supplies and other operating expenses increased $843,000 in 1999 after a decrease of $101,000 in 1998. Excluding the Company's insurance acquisitions in 1999, these expenses increased $636,000 or 15.0%. The increase was attributable to telecommunication charges, collection costs associated with sub-prime residential mortgage loans, and costs related to the survivor benefits associated with the existing directors' deferred compensation plan. Telecommunication charges increased $179,000 and are primarily attributable to network charges to support the Company's new technology platforms and operating systems. Collection costs increased $197,000 primarily at one affiliate bank, as efforts continue to collect on delinquent sub-prime out-of-market residential real estate loans and to liquidate other real estate owned. The Company discontinued this type of lending during 1999. Director compensation increased due to recording the survivors benefit obligation related to the death of a director in 1999. Increases also occurred in volume related expenses such as postage and other services. Other operating expenses include the amortization of goodwill and core deposit intangibles, totaling $301,000, $294,000 and $280,000 in 1999, 1998 and 1997, respectively. PROVISION FOR INCOME TAXES The Company records a provision for current income taxes payable, along with a provision for deferred taxes payable in the future. Deferred taxes arise from temporary differences, which are items recorded for financial statement purposes in a different period than for income tax returns. The major item affecting the difference between the Company's effective tax rate recorded on its financial statements and the federal statutory rate of 34% is interest on tax-exempt investments and loans. Other components affecting the Company's effective tax rate include affordable housing tax credit investments, state income taxes and non-deductible merger costs. Note 11 to the consolidated financial statements provides additional details relative to the Company's income tax provision. The Company's effective tax rate was 25.7%, 29.1% and 28.3%, respectively, in 1999, 1998, and 1997. - ------------------------------------------------------------------------------- 6 Management's Discussion and Analysis (continued) - -------------------------------------------------------------------------------
INTERIM FINANCIAL DATA Unaudited - dollars in thousands except per share data For the three months ended December September June March -------- --------- ---- ----- 31 30 30 31 1999: Interest Income....................................... $17,870 $17,140 $16,577 $16,342 Interest Expense...................................... 9,681 9,020 8,591 8,467 ----- ----- ----- ----- Net Interest Income................................ 8,189 8,120 7,986 7,875 Provision for Loan Losses............................. 779 298 272 369 Noninterest Income.................................... 1,707 1,464 1,575 1,505 Noninterest Expense................................... 6,779 6,098 6,060 5,895 ----- ----- ----- ----- Income before Income Taxes......................... 2,338 3,188 3,229 3,116 Income Tax Expense................................. 336 874 946 893 --- --- --- --- Net Income....................................... $2,002 $2,314 $2,283 $2,223 ====== ====== ====== ====== Earnings per Share and Diluted Earnings per Share (1). $0.22 $0.25 $0.25 $0.24 ===== ===== ===== ===== Weighted Average Shares (1)........................... 9,125,004 9,217,241 9,214,764 9,203,098 ========= ========= ========= ========= 1998: Interest Income $16,708 $16,277 $16,151 $16,224 Interest Expense...................................... 8,809 8,637 8,553 8,606 ----- ----- ----- ----- Net Interest Income................................ 7,899 7,640 7,598 7,618 Provision for Loan Losses............................. 862 177 145 154 Noninterest Income.................................... 1,311 1,363 1,227 1,095 Noninterest Expense................................... 5,678 5,829 5,481 5,330 ----- ----- ----- ----- Income before Income Taxes......................... 2,670 2,997 3,199 3,229 Income Tax Expense................................. 683 850 967 1,025 --- --- --- ----- Net Income....................................... $1,987 $2,147 $2,232 $2,204 ====== ====== ====== ====== Earnings per Share and Diluted Earnings per Share (1). $0.22 $0.23 $0.24 $0.24 ===== ===== ===== ===== Weighted Average Shares (1)........................... 9,198,534 9,198,045 9,196,698 9,195,783 ========= ========= ========= ========= (1) Share and Per share data has been retroactively adjusted to give effect for stock dividends.
Provision for loan losses increased in the fourth quarter of 1999 primarily due to an increase in non-performing assets during the period. Provision for loan losses increased in the fourth quarter of 1998 due to implementation of more conservative collection practices at a new affiliate, which led to an increase in charge-offs during the period. See LENDING AND LOAN ADMINISTRATION in the section entitled RISK MANAGEMENT for more information. CAPITAL RESOURCES - ------------------------------------------------------------------------------- The Company and affiliate Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well-capitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. The Company and all affiliate Banks at year-end 1999 were categorized as well capitalized. See Note 9 to the consolidated financial statements for actual and required capital ratios. - ------------------------------------------------------------------------------- Management's Discussion and Analysis 7 (continued) - ------------------------------------------------------------------------------- The Company continues to maintain a strong capital position. Shareholders' equity totaled $87.5 million and $91.3 million at December 31, 1999 and 1998, respectively. Total equity represented 8.81% and 10.18%, respectively, of year-end total assets. The $3.8 million decline in shareholder's equity is attributable to an increased level of cash dividends paid, implementation of a stock repurchase plan, and a decline in market value of the Company's available-for-sale investment portfolio. In addition, the capital to asset ratio was reduced by asset growth strategies in the investment portfolio, which were implemented in late 1998 and throughout 1999 to more effectively utilize excess capital. The Company paid cash dividends of $4.5 million in 1999 and $3.1 million in 1998. The increase in 1999 dividends paid includes an increase in dividends per share and the issuance of shares in connection with merger and acquisition activities, the 5% stock dividend paid in late 1998, and the Company's Dividend Reinvestment Plan. The Company implemented a stock repurchase plan during 1999, pursuant to which it repurchased 206,558 shares of stock (as restated for subsequent 5% stock dividend) for an aggregate of $4.3 million. At December 31, 1999 the market value of the available-for-sale investment portfolio had declined 4.2% or $4.8 million, net of tax, from year-end 1998. This decline in market value is recorded as a reduction of shareholders' equity, and was due to a rise in interest rates during 1999. This decline compared favorably to the 8.3% decline in similar maturity U.S. Treasury bonds during the same period. SOURCES OF FUNDS - ------------------------------------------------------------------------------- The Company's primary source of funding is its base of core customer deposits. Core deposits consist of demand deposits, savings, interest-bearing checking, money market accounts, and certificates of deposit of less than $100,000. Other sources of funds are certificates of deposit of $100,000 or more, brokered deposits, overnight borrowings from other financial institutions and securities sold under agreement to repurchase. The membership of the Company's affiliate banks in the Federal Home Loan Bank System (FHLB) provides a significant additional source for both long and short-term collateralized borrowings. The following pages contain a discussion of changes in these areas. The table below illustrates changes between years in the average balances of all funding sources:
Funding Sources - Average Balances % Change From dollars in thousands Prior Year 1999 1998 1997 1999 1998 ---- ---- ---- ---- ---- Demand........................................... $70,665 $58,267 $55,483 21.3% 5.0% Savings and Interest-bearing Checking............ 125,972 122,174 117,514 3.1 4.0 Money Market Accounts............................ 59,153 48,343 42,769 22.4 13.0 Other Time Deposits.............................. 353,938 353,313 318,113 0.2 11.1 ------- ------- ------- Total Core Deposits........................... 609,728 582,097 533,879 4.7 9.0 Certificates of Deposits of $100,000 or more and Brokered Deposits......................... 81,984 72,221 96,980 13.5 (25.5) FHLB Advances and Other Borrowings............... 145,595 110,942 107,217 31.2 3.5 ------- ------- ------- Total Funding Sources......................... $837,307 $765,260 $738,076 9.4 3.7 ======== ======== ========
CORE DEPOSITS The Company achieved 4.7% core deposit growth in 1999 and 9.0% in 1998 over prior year average balances. Deposit growth will continue to be influenced by competition and the interest rate environment, as well as the increased availability of alternative investment products, seasonal and other non-economic factors. Average non-interest bearing demand deposits increased by $12.4 million or 21% in 1999 after a 5% increase in 1998. Double-digit growth was also obtained in money market accounts in 1999 and 1998, primarily because this demand product provides a higher interest rate than interest-bearing checking products. Demand, savings and money market deposits represent a stable source of funding for the company, totaling approximately 42% of core deposits in 1999, 39% in 1998 and 40% in 1997. - ------------------------------------------------------------------------------- 8 Management's Discussion and Analysis (continued) - ------------------------------------------------------------------------------- Other time deposits consist of certificates of deposits in denominations of less than $100,000. These deposits remained stable in 1999 versus 1998 and comprised 58% of average core deposits. Other time deposits increased 11.1% in 1998 and comprised approximately 61% of average core deposits. OTHER FUNDING SOURCES Federal Home Loan Bank advances and other borrowings represent the Company's most significant source of other funding. Borrowed funds totaled $145.6 million, $110.9 million, and $107.2 million in 1999, 1998, and 1997 respectively. In 1999, $20 million of the increase in borrowed funds was used in match-funded asset growth strategies in the investment portfolio. The additional reliance on borrowed funds in 1999 was to supplement core deposits from the Company's primary market areas. Certificates of deposits in denominations of $100,000 or more and brokered deposits are an additional source of other funding. Large denomination certificates and brokered deposits increased 13.5% in 1999 after a 25.5% decline in 1998. These certificates remained stable as a component of total funding sources at 9.8% in 1999 and 9.4% in 1998. The Company also utilizes short-term funding sources from time to time. These sources consist of overnight federal funds purchased from other financial institutions, secured repurchase agreements which generally mature within 30 days, and overnight discount notes secured from the FHLB. These borrowings represent an important source of short-term liquidity for the Company. Short-term funding sources, large denomination certificates, and brokered funds are considered to be more subject to periodic withdrawals than are core deposits, and therefore, are generally not used as a permanent funding source for loans. Long-term debt is in the form of FHLB advances, which are secured by the pledge of certain investment securities and residential mortgage loans. In 1999, long-term FHLB advances were used primarily to fund the residential real estate portfolio in the Company's mortgage banking segment and to fund asset growth strategies in the investment portfolio. See Note 8 to the Consolidated Financial Statements for further information. USES OF FUNDS - ------------------------------------------------------------------------------- LOANS Total loans grew $95.8 million or 16.0% in 1999 and $72.0 million or 13.7% in 1998. The Company's loan portfolio is diversified, with the heaviest concentration in residential real estate loans. Commercial and industrial loans represent 24% of the loan portfolio while residential real estate loans represent 51%, consumer loans 16%, and agriculture and poultry loans 9%. In 1999 and 1998 the Company achieved growth across all segments of the portfolio. In 1999, commercial and industrial loans grew 19%, residential real estate loans grew 20% and consumer loans grew 9%. The Company's commercial lending is extended to various industries, including hotel, agribusiness and manufacturing, as well as health care, wholesale, and retail services. The table below presents year-end balances of the loan portfolio:
Loan Portfolio dollars in thousands December 31, 1999 1998 1997 ---- ---- ---- Commercial and Industrial....................................... $161,711 $136,249 $121,444 Residential Mortgage Loans...................................... 356,001 295,788 252,828 Consumer Loans.................................................. 112,870 104,024 92,126 Agricultural and Poultry........................................ 64,054 62,736 60,421 ------ ------ ------ Total Loans................................................. 694,636 598,797 526,819 Less: Unearned Income...................................... (344) (709) (1,498) Allowance for Loan Losses............................ (8,868) (8,323) (8,574) ----- ----- ----- Loans, net.................................................. $685,424 $589,765 $516,747 ======== ======== ========
- ------------------------------------------------------------------------------- Management's Discussion and Analysis 9 (continued) - ------------------------------------------------------------------------------- The Company's policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southwestern Indiana. Commercial extensions of credit outside this market area are generally concentrated in real estate loans within a 120 mile radius of the Company's primary market, and are granted on a selective basis. Commercial loans outside this radius are generally further limited to loans guaranteed by either the Small Business Administration (SBA) or the Farm Service Agency (FSA). With the acquisition of 1ST BANCORP, and its thrift subsidiary First Federal Bank in January 1999, the Company acquired a mortgage banking operation and a loan portfolio heavily concentrated in residential real estate loans. First Federal concentrated primarily on residential real estate lending, but at the same time offered consumer and commercial loans in its local market. Residential real estate loans were originated by its retail office in its primary market areas as well as in areas outside its designated lending areas through loan production offices and a network of correspondent lenders. The Company discontinued new sub-prime, out-of-market residential real estate lending in 1999. The overall loan portfolio is diversified among a variety of borrowers; however, a significant portion of borrowers are dependent upon the agricultural, poultry and wood furniture manufacturing industries. Although wood furniture manufacturers employ a significant number of people in the market area, there is no concentration of credit to companies engaged in that industry. No concentration of credit in excess of 10% of total assets exists within any single industry group. INVESTMENTS The investment portfolio is a principal source for funding the Company's loan growth and other liquidity needs. The Company's securities portfolio consists of money market securities, uncollateralized U.S. Treasury and federal agency securities, municipal obligations of state and political subdivisions, asset-/mortgage-backed securities issued by U.S. government agencies and other intermediaries, and corporate investments. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The composition of the year-end balances in the investment portfolio is presented in Note 2 to the Consolidated Financial Statements and in the table below:
Investment Portfolio, at Amortized Cost dollars in thousands December 31, 1999 % 1998 % 1997 % ---- - ---- - ---- - Federal Funds Sold and Short-term Investments.... $1,688 0.7% $32,790 13.7% $43,107 18.1% U.S. Treasury and Agency Securities.............. 96,205 40.7 87,459 36.6 117,452 49.2 Obligations of State and Political Subdivisions.. 55,885 23.7 56,694 23.7 45,431 19.1 Asset- and Mortgage-backed Securities............ 62,418 26.4 54,378 22.7 20,561 8.6 Corporate Securities............................. --- --- --- --- 4,839 2.0 Other Securities................................. 20,027 8.5 7,853 3.3 7,063 3.0 ------ --- ----- --- ----- --- Total Securities Portfolio................... $236,223 100.0% $239,174 100.0% $238,453 100.0% ======== ===== ======== ===== ======== =====
In 1999 and 1998 the investment portfolio mix was relatively balanced. In 1999, the decrease in federal funds sold and short-term investments was used to fund loan growth. The increase in agencies, mortgage-backed and other securities were the result of match-funded asset growth strategies funded by FHLB advances. The $188 million available-for-sale portion of the investment portfolio provides an additional funding source for the Company's liquidity needs and for asset/liability management requirements. Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not be interpreted as an indication that management anticipates such sales. RISK MANAGEMENT - ------------------------------------------------------------------------------- The Company is exposed to various types of business risk on an on-going basis. These risks include credit risk, liquidity risk and interest rate risk. Various procedures are employed at the Company's affiliate banks to monitor and mitigate risk in their loan and investment portfolios, as well as risks associated with changes in interest rates. Following is a discussion of the Company's philosophies and procedures to address these risks. - ------------------------------------------------------------------------------- 10 Management's Discussion and Analysis (continued) - ------------------------------------------------------------------------------- LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with the Company's affiliate banks. Loan personnel at each bank have the authority to extend credit under guidelines approved by the bank's board of directors. Executive and board loan committees active at each bank serve as vehicles for communication and for the pooling of knowledge, judgment and experience of its members. These committees provide valuable input to lending personnel, act as an approval body, and monitor the overall quality of the banks' loan portfolios. The Corporate Loan Committee, comprised of members of the Company's executive officers and board of directors, strive to ensure a consistent application of the Company's lending policies. The Company also maintains a comprehensive risk-weighting and loan review program for its affiliate banks, which includes quarterly reviews of problem loan reports, delinquencies and charge-offs. The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses. The Company maintains an allowance for loan losses to cover potential losses identified during its loan review process. The allowance for loan losses is comprised of: (a) specific reserves on individual credits; (b) allocated reserves for certain loan categories and industries, large and out-of-market loans, and overall historical loss experience; and (c) unallocated reserves based on trends in the type and volume of the loan portfolios, current and anticipated economic conditions, and other factors. Specific reserves are provided for credits when: (a) the customer's cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring. The table below provides a comparative analysis of activity in the allowance for loan losses:
Allowance for Loan Losses dollars in thousands December 31, 1999 1998 1997 ---- ---- ---- Balance as of January 1.......................................... $8,323 $8,574 $8,040 Allowance of Acquired Subsidiary................................. --- 80 --- Adjustment to Conform Fiscal Years............................... 356 --- --- Provision for Loan Losses........................................ 1,718 1,338 773 Recoveries of Prior Loan Losses.................................. 476 375 827 Loan Losses Charged to the Allowance............................. (2,005) (2,044) (1,066) ----- ----- ----- Balance as of December 31........................................ $8,868 $8,323 $8,574 ====== ====== ====== Net Charge-offs to Average Loans Outstanding..................... 0.24% 0.28% 0.04% Provision for Loan Losses to Average Loans Outstanding........... 0.27% 0.23% 0.14% Allowance for Loan Losses to Total Loans at Year-End............. 1.28% 1.39% 1.63% Net charge-offs increased significantly in 1999 and 1998 from 1997. Approximately $1.3 million of the net charge-offs in both years related to installment loan losses at one affiliate and losses on sub-prime residential real estate loans at another affiliate. The increased charge-off experience in 1999 and 1998 resulted in higher provisions for loan losses. The Company discontinued new sub-prime out-of-market residential real estate lending during 1999. Refer also to the section entitled PROVISION FOR LOAN LOSSES in the discussion regarding the RESULTS OF OPERATIONS.
NONPERFORMING ASSETS Non-performing assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due ninety (90) days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower's ability to repay becomes doubtful. Uncollected interest accrued in the current year is reversed against income at the time a loan is placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. - ------------------------------------------------------------------------------- Management's Discussion and Analysis 11 (continued) - ------------------------------------------------------------------------------- The table below presents an analysis of the Company's non-performing assets. The unfavorable trend in nonaccrual loans is primarily attributable to sub-prime out-of-market residential real estate loans. Approximately $900,000 of the increased other real estate owned is related to one loan.
Non-performing Assets dollars in thousands December 31, 1999 1998 1997 ---- ---- ---- Non-accrual Loans................................................ $7,237 $5,411 $3,568 Past Due Loans (90 days or more)................................. 1,564 1,522 3,358 Restructured Notes............................................... --- --- --- --- --- --- Total Non-performing Loans................................... 8,801 6,933 6,926 Other Real Estate Owned.......................................... 2,434 1,156 785 ----- ----- --- Total Non-performing Assets.................................. $11,235 $8,089 $7,711 ======= ====== ====== Non-performing Loans to Total Loans.............................. 1.27% 1.16% 1.31%
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT Liquidity is a measure of the Company's ability to fund new loan demand, existing loan commitments and deposit withdrawals. The purpose of liquidity management is to match sources of funds with anticipated customer borrowings and withdrawals and other obligations to ensure a dependable funding base, without unduly penalizing earnings. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. The Company provides for its liquidity needs by maintaining money market assets, managing cash flows from its investment portfolio, through growth in core deposits, and by maintaining various short- and long-term borrowing sources. Interest rate risk is the exposure of the Company's financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company's earnings, the Company monitors interest rate risk through computer-assisted simulation modeling of its net interest income. The Company's simulation modeling monitors the potential impact to net interest income under four interest rate scenarios -- flat, rising, declining and most likely. The Company's objective is to actively manage its asset/liability position within a one-year interval and to limit the risk in any of the four interest rate scenarios to a reasonable level of tax-equivalent net interest income within that interval. Funds Management Committees at the holding company and each affiliate bank monitor compliance within established guidelines of the Funds Management Policy. The Company also monitors interest rate risk by estimating its static interest rate sensitivity position. Static interest rate sensitivity is an analysis of the relationship between rate sensitive assets and rate sensitive liabilities at a point in time, and quantifies interest rate risk as the difference, or "gap", between assets and liabilities expected to mature or reprice in given time intervals. Static interest rate sensitivity is also expressed as a ratio of rate sensitive assets to rate sensitive liabilities. A ratio of 100% suggests a balanced position between rate sensitive assets and liabilities within a given repricing period. The table on the following page reflects the Company's static interest rate sensitivity position as of December 31, 1999 over various time intervals and based on current interest rates. Interest earning assets and interest bearing liabilities have been distributed based on their actual or expected repricing dates. - ------------------------------------------------------------------------------- 12 Management's Discussion and Analysis (continued) - ------------------------------------------------------------------------------- Although rate sensitivity gaps constantly change as funds are acquired and invested, a significant portion of the Company's assets and liabilities reprice within 1 year and are closely matched at 89%. At financial institutions with negative gaps, net interest income tends to increase in declining interest rate environments, and decrease in rising interest rate environments. As of December 31, 1999 the Company had no derivatives, trading portfolio or unusual financial instruments which expose the Company to undue interest rate risk.
STATIC INTEREST RATE SENSITIVITY at December 31, 1999 dollars in thousands Maturing or Repricing ----------------------------------------------------------- 1 Year Over 1 Year Over or Less to 5 Years 5 Years Total ----------------------------------------------------------- RATE SENSITIVE ASSETS Money Market and Investment Securities, at amortized cost $ 21,430 $ 88,979 $ 125,814 $ 236,223 Loans and Loans Held for Sale, net of unearned income 369,525 244,640 82,972 697,137 ------------ ------------- ----------- ----------- Total Rate Sensitive Assets $ 390,955 $ 333,619 $ 208,786 $ 933,360 =========== =========== =========== =========== RATE SENSITIVE LIABILITIES Interest Bearing Deposits (1) $ 349,997 $ 162,175 $ 114,418 $ 626,590 Borrowings (2) 90,263 71,538 34,216 196,017 ----------- ----------- ----------- ----------- Total Rate Sensitive Liabilities $ 440,260 $ 233,713 $ 148,634 $ 822,607 =========== =========== =========== =========== Cumulative Rate Sensitivity Gap $ (49,305) $ 50,601 $ 110,753 =========== ========== =========== Cumulative Ratio (3) 89% 108% 114% (1) Although interest-bearing checking and savings deposits are subject to immediate withdrawal and repricing, a portion of these balances has been included in the Over 5 Years category to reflect management's assumption that these accounts are not rate sensitive. (2) Rate sensitivity of borrowings includes effect of refinancing $40 million of overnight funds at December 31, 1999 into long- term borrowings in January 2000. See Note 8 to the Consolidated Financial Statements. (3) Rate Sensitive Assets/Rate Sensitive Liabilities
YEAR 2000 - ------------------------------------------------------------------------------- The Company expended approximately $500,000 on Year 2000 related items, including approximately $200,000 in cash outlays in 1999. These outlays exclude the cost of implementing the Company's state-of-the art platform and computer systems upgrade, but include the Company's share of third party systems costs and other costs to prepare for the Year 2000. The Company updated all contingency plans on an on-going basis and performed tests of those plans in the third and fourth quarters of 1999 to ensure all departments were equipped in the event implementation was necessary. The Company increased its cash position in the fourth quarter of 1999 in the event that customers desired to withdraw large amounts of cash from their accounts. The Company did not experience unusual cash requests from customers, either from the time leading up to the year-end or in the period following year-end. Management was on-site to monitor the date rollover at year-end 1999. No problems were encountered with any of the Company's systems. While all of the effects, as they relate to the Company's customers, may not be fully known until a future date, management is not aware of customers who have encountered significant problems relating to the Year 2000. Management is not aware of any remaining uncertainties or contingencies with respect to the Year 2000. - ------------------------------------------------------------------------------- Management's Discussion and Analysis 13 (continued) - ------------------------------------------------------------------------------- The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years. For tax-equivalent adjustments, an effective tax rate of 34% was used for all years presented (1).
Average Balance Sheet (Tax-equivalent basis / dollars in thousands) Twelve Months Ended Twelve Months Ended Twelve Months Ended December 31, 1999 December 31, 1998 December 31, 1997 ----------------- ----------------- ----------------- Principal Income/ Yield/ Principal Income/ Yield/ Principal Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS Federal Funds Sold and Other Short-term Investments..... $19,413 $951 4.90% $32,282 $1,827 5.66% $34,118 $1,894 5.55% Securities: Taxable.................... 156,996 10,065 6.41% 139,541 8,752 6.27% 154,113 9,782 6.35% Non-taxable................ 56,346 4,599 8.16% 50,218 4,244 8.45% 42,821 3,621 8.46% Total Loans and Leases (2).... 646,439 54,077 8.37% 591,291 52,260 8.84% 548,218 49,227 8.98% ------- ------ ------- ------ ------- ------ TOTAL INTEREST EARNING ASSETS............. 879,194 69,692 7.93% 813,332 67,083 8.25% 779,270 64,524 8.28% ------- ------ ------- ------ ------- ------ Other Assets.................. 68,822 62,524 57,125 Less: Allowance for Loan Losses (8,554) (8,326) (7,974) ----- ----- ----- TOTAL ASSETS.................. $939,462 $867,530 $828,421 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Savings and Interest-bearing Demand Deposits............ $185,125 4,797 2.59% $170,517 4,644 2.72% $160,283 4,523 2.82% Time Deposits................. 435,922 23,063 5.29% 425,534 23,806 5.59% 415,093 23,281 5.61% FHLB Advances and Other Borrowings........... 145,595 7,899 5.43% 110,942 6,155 5.55% 107,217 5,930 5.53% ------- ----- ------- ----- ------- ----- TOTAL INTEREST-BEARING LIABILITIES................ 766,642 35,759 4.66% 706,993 34,605 4.89% 682,593 33,734 4.94% ------- ------ ------- ------ ------- ------ Demand Deposit Accounts....... 70,665 58,267 55,483 Other Liabilities............. 10,376 13,675 8,922 ------ ------ ----- TOTAL LIABILITIES............. 847,683 778,935 746,998 ------- ------- ------- Shareholders' Equity.......... 91,779 88,595 81,423 ------ ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $939,462 $867,530 $828,421 ======== ======== ======== NET INTEREST INCOME........... $33,933 $32,478 $30,790 ======= ======= ======= NET INTEREST MARGIN........... 3.87%(3) 3.99% 3.95% (1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. (2) Non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $877, $1,230, and $1,029 for 1999, 1998, and 1997, respectively. (3) Net interest margin in 1999 was 3.94% excluding asset growth strategies that averaged $25 million, which were funded by FHLB borrowings and were employed during the year at tax-equivalent net interest margins ranging from 1.00% to 1.50%. These growth strategies were employed in order to more effectively utilize equity capital in excess of requirements. See the discussion regarding NET INTEREST INCOME in the section entitled RESULTS OF OPERATIONS for further information.
EX-13.4 7 CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 14 Consolidated Balance Sheets Dollars in thousands - -------------------------------------------------------------------------------
December 31, 1999 1998 ---- ---- ASSETS Cash and Due from Banks........................................................ $ 23,707 $ 18,097 Federal Funds Sold and Other Short-term Investments............................ 1,189 31,491 ----------- ----------- Cash and Cash Equivalents.................................................. 24,896 49,588 Interest-bearing Time Deposits with Banks...................................... 499 1,299 Securities Available-for-Sale, at Market....................................... 188,148 151,527 Securities Held-to-Maturity, at Cost........................................... 30,191 48,346 Loans Held for Sale............................................................ 2,845 2,449 Loans ........................................................................ 694,636 598,797 Less: Unearned Income........................................................ (344) (709) Allowance for Loan Losses.............................................. (8,868) (8,323) ----------- ----------- Loans, Net..................................................................... 685,424 589,765 Stock in FHLB of Indianapolis and Other Restricted Stock, at cost.............. 9,660 7,853 Premises, Furniture and Equipment, Net......................................... 19,782 17,796 Other Real Estate.............................................................. 2,434 1,156 Intangible Assets.............................................................. 2,161 1,841 Accrued Interest Receivable and Other Assets................................... 26,595 25,305 ----------- ----------- TOTAL ASSETS........................................................... $ 992,635 $ 896,925 =========== =========== LIABILITIES Noninterest-bearing Deposits................................................... $ 71,671 $ 67,218 Interest-bearing Deposits...................................................... 626,590 597,895 ----------- ----------- Total Deposits............................................................. 698,261 665,113 FHLB Advances and Other Borrowings............................................. 196,017 131,409 Accrued Interest Payable and Other Liabilities................................. 10,870 9,127 ----------- ----------- TOTAL LIABILITIES..................................................... 905,148 805,649 SHAREHOLDERS' EQUITY Common Stock, no par value, $1 stated value; 20,000,000 shares authorized...... 9,029 8,705 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.... --- --- Additional Paid-in Capital..................................................... 53,846 48,190 Retained Earnings.............................................................. 28,559 33,570 Accumulated Other Comprehensive Income (Loss).................................. (3,947) 811 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY............................................. 87,487 91,276 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 992,635 $ 896,925 =========== =========== End of period shares issued and outstanding.................................... 9,029,109 8,704,592 =========== =========== See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------- Consolidated Statements of Income 15 Dollars in thousands, except per share data - -------------------------------------------------------------------------------
Years ended December 31, 1999 1998 1997 ---- ---- ---- INTEREST INCOME Interest and Fees on Loans.................................................. $53,868 $51,980 $49,160 Interest on Federal Funds Sold and other Short-term Investments............. 951 1,827 1,894 Interest and Dividends on Securities: Taxable................................................................. 10,065 8,752 9,782 Non-taxable............................................................. 3,045 2,801 2,389 -------- -------- ------ TOTAL INTEREST INCOME................................................ 67,929 65,360 63,225 INTEREST EXPENSE Interest on Deposits........................................................ 27,860 28,450 27,804 Interest on FHLB Advances and Other Borrowings.............................. 7,899 6,155 5,930 ----- ----- ----- TOTAL INTEREST EXPENSE............................................... 35,759 34,605 33,734 -------- ------- -------- NET INTEREST INCOME......................................................... 32,170 30,755 29,491 Provision for Loan Losses................................................... 1,718 1,338 773 -------- -------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......................... 30,452 29,417 28,718 NONINTEREST INCOME Trust and Investment Product Fees........................................... 835 833 794 Service Charges on Deposit Accounts......................................... 1,757 1,599 1,429 Insurance Commissions & Fees................................................ 2,239 685 479 Other Operating Income...................................................... 1,013 958 845 Gains on Sales of Loans and Other Real Estate............................... 413 883 2,180 Net Gain/(Loss) on Sales of Securities...................................... (6) 38 (29) -------- -------- ------- TOTAL NONINTEREST INCOME................................................ 6,251 4,996 5,698 -------- -------- ------- NONINTEREST EXPENSE Salaries and Employee Benefits.............................................. 13,433 12,132 12,520 Occupancy Expense........................................................... 1,718 1,676 1,663 Furniture and Equipment Expense............................................. 1,683 1,393 1,356 FDIC Premiums............................................................... 160 170 1,593 Data Processing Fees........................................................ 990 988 855 Professional Fees........................................................... 871 1,029 1,292 Advertising and Promotion................................................... 888 684 652 Supplies.................................................................... 807 680 674 Other Operating Expenses.................................................... 4,282 3,566 3,673 -------- -------- ------- TOTAL NONINTEREST EXPENSE............................................... 24,832 22,318 24,278 -------- -------- ------- Income before Income Taxes.................................................. 11,871 12,095 10,138 Income Tax Expense.......................................................... 3,049 3,525 2,868 -------- -------- ------- NET INCOME.................................................................. $ 8,822 $ 8,570 $ 7,270 ======= ======= ======= Earnings per Share and Diluted Earnings per Share........................... $ 0.96 $ 0.93 $ 0.79 See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------- 16 Consolidated Statements of Cash Flows Dollars in thousands - -------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................... $ 8,822 $ 8,570 $ 7,270 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Accretion/(Amortization) on Investments........................ 318 18 24 Depreciation and Amortization........................................ 2,028 1,814 1,621 Amortization of Mortgage Servicing Rights ........................... 241 242 153 Net Change in Loans Held for Sale.................................... 6,843 25,320 (9,179) Loss in Investment in Limited Partnership............................ 108 113 122 Provision for Loan Losses............................................ 1,718 1,338 773 Loss (Gain) on Sale of Securities, net............................... 6 (38) 29 Gain on Sales of Loans and Other Real Estate......................... (413) (883) (2,180) Change in Assets and Liabilities: Deferred Loan Fees................................................ (381) (13) (48) Interest Receivable and Other Assets.............................. (5,970) (2,519) (2,879) Interest Payable and Other Liabilities................................... 923 (1,751) 2,091 Unearned Income................................................... (365) (356) (205) --- --- --- Total Adjustments.............................................. 5,056 23,285 (9,678) ----- ------ ------------- Net Cash from Operating Activities....................................... 13,878 31,855 (2,408) ------ ------ ----- CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks....................... 823 1,547 (1,002) Proceeds from Maturities of Other Short-term Investments............. --- --- 996 Proceeds from Maturities of Securities Available-for-Sale............ 35,779 110,959 58,833 Proceeds from Sales of Securities Available-for-Sale 953 50,390 29,826 Purchase of Securities Available-for-Sale............................ (83,512) (178,739) (90,514) Proceeds from Maturities of Securities Held-to-Maturity.............. 5,544 16,532 6,195 Proceeds from Sales of Securities Held-to-Maturity................... --- 362 --- Purchase of Securities Held-to-Maturity.............................. (4,982) (8,503) (7,730) Purchase of Loans.................................................... (9,884) (5,998) (1,152) Proceeds from Sales of Loans......................................... 5,875 463 1,926 Loans Made to Customers, net of Payments Received.................... (85,925) (58,530) (20,273) Proceeds from Sales of Fixed Assets.................................. --- --- 41 Proceeds from Sales of Other Real Estate............................. 1,604 310 88 Property and Equipment Expenditures.................................. (3,616) (2,481) (2,557) Acquire Affiliates and Adjust to Conform Fiscal Years................ (22) 2,934 --- -- ----- --- Net Cash from Investing Activities............................. (137,363) (70,754) (25,323) ------- ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits................................................... 26,014 5,567 20,947 Net Change in Short-term Borrowings.................................. 66,087 1,480 (7,540) Purchase / Retire Common Stock....................................... (4,320) (360) (637) Advances in Long-term Debt........................................... 95,000 90,996 83,769 Repayments of Long-term Debt......................................... (79,834) (66,911) (85,357) Issuance of Common Stock............................................. 348 196 817 Dividends Paid....................................................... (4,467) (3,122) (2,797) Purchase of Interests in Fractional Shares........................... (35) (43) (38) -- -- -- Net Cash from Financing Activities............................. 98,793 27,803 9,164 ------ ------ ----- Net Change in Cash and Cash Equivalents.................................. (24,692) (11,096) (18,567) Cash and Cash Equivalents at Beginning of Year....................... 49,588 60,684 79,251 ------ ------ ------ Cash and Cash Equivalents at End of Year............................. $ 24,896 $ 49,588 $ 60,684 ====== ======== ======== Cash Paid During the Year for: Interest.............................................................. $ 38,774 $ 34,391 $ 33,257 Income Taxes.......................................................... 3,695 3,834 3,298 See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity 17 Dollars in thousands, except per share data - -------------------------------------------------------------------------------
Common Stock/ Accumulated Additional Other Total Paid-in Retained Comprehensive Shareholders' Capital Earnings Income Equity Balances, January 1, 1997 (as previously reported for German American Bancorp)... $33,040 $24,125 $ 495 $ 57,660 Retroactive Restatement for Pooling of Interests (2,039,665 shares in 1999)....... 3,414 18,560 (245) 21,729 ------------------------------------------------------ Balances, January 1, 1997 as restated..................... 36,454 42,685 250 79,389 Comprehensive Income: Net Income............................................. 7,270 7,270 Change in Unrealized Gain / (Loss) on Securities Available-for-Sale..................... 408 408 ------------------------------------------------------ Total Comprehensive Income......................... 7,678 Cash Dividends ($.32 per Share, as restated for pooling of interests).................. (2,797) (2,797) Issuance of Common Stock for: Dividend Reinvestment Plan (9,873 shares).............. 306 306 Exercise of Stock Options (15,818 shares).............. 432 432 Employee Stock Purchase Plan (6,492 shares)............ 79 79 5% Stock Dividend (313,986 shares)..................... 8,253 (8,253) - Two for One Stock Split (2,546,041 shares)............. 2,546 (2,546) - Purchase and Retirement of Common Stock (24,124 shares)... (363) (274) (637) Purchase of Interest in Fractional Shares................. (38) (38) ------------------------------------------------------- Balances, December 31, 1997 as restated................... 47,707 36,047 658 84,412 Comprehensive Income: Net Income............................................. 8,570 8,570 Change in Unrealized Gain / (Loss) on Securities Available-for-Sale..................... 153 153 ------------------------------------------------------ Total Comprehensive Income......................... 8,723 Cash Dividends ($.36 per Common Share, as restated for pooling of interests).................. (3,122) (3,122) Issuance of Common Stock for: Dividend Reinvestment Plan (2,233 shares).............. 36 36 Exercise of Stock Options (7,459 shares)............... 85 85 Employee Stock Purchase Plan (6,481 shares)............ 75 75 5% Stock Dividend (410,363 shares)..................... 8,146 (8,146) - Three for Two Stock Split (628,730 shares)............. 346 (346) - Acquisitions (67,203 shares)........................... 818 652 1,470 Purchase and Retirement of Common Stock (19,979 shares)... (318) (42) (360) Purchase of Interest in Fractional Shares................. (43) (43) ------------------------------------------------------- Balances, December 31, 1998 as restated................... 56,895 33,570 811 91,276 Comprehensive Income: Net Income............................................. 8,822 8,822 Change in Unrealized Gain / (Loss) on Securities Available-for-Sale..................... (4,785) (4,785) ------------------------------------------------------- Total Comprehensive Income......................... 4,037 Cash Dividends ($.485 per Common Share,................... as restated for pooling of interests).................. (4,467) (4,467) Issuance of Common Stock for:............................. Exercise of Stock Options (4,825 shares).................. 43 43 Director Stock Awards (6,481 shares)................... 305 305 5% Stock Dividend (431,942 shares)..................... 9,179 (9,179) - Acquisitions (70,000 shares)........................... 173 96 269 Purchase and Retirement of Common Stock (199,077 shares).. (4,292) (28) (4,320) Purchase of Interest in Fractional Shares................. (35) (35) Adjustment to Conform Year-ends........................... 572 (220) 27 379 ------------------------------------------------------ Balances, December 31, 1999............................... $ 62,875 $ 28,559 $ (3,947) $ 87,487 ====================================================== See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------- 18 Notes to the Consolidated Financial Statements Dollars in thousands - ------------------------------------------------------------------------------- NOTE 1 - Summary of Significant Accounting Policies Description of Business and Basis of Presentation German American Bancorp operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp and its subsidiaries conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant policies are described below. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. Certain prior year amounts have been reclassified to conform with current classifications. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Estimates susceptible to change in the near term include the allowance for loan losses, impaired loans, and the fair value of financial instruments. The Company acquired 1ST BANCORP in 1999 in a pooling of interests (see Note 18). Prior to 1999, 1ST BANCORP's financial statements were prepared on a June 30 fiscal year-end. The Company's calendar period financial statements for periods prior to 1999 have been restated to include 1ST BANCORP fiscal period financial statements (i.e. the Company's previously reported December 31, 1998 balances were combined with 1ST BANCORP June 30, 1998 balances). 1ST BANCORP is combined with the Company on a calendar basis for all 1999 periods. As a result of 1ST BANCORP's prior fiscal reporting, the 1999 statement of cash flows, statement of changes in shareholder's equity, and certain notes include an "adjustment to conform fiscal years" to adjust from fiscal to calendar period reporting. Securities Securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity. These include securities that management may use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar reasons. Securities held as available-for-sale are reported at market value with unrealized gains or losses included as a separate component of equity, net of tax. Securities classified as held-to-maturity are securities that the Company has both the ability and positive intent to hold to maturity. Securities held-to-maturity are carried at amortized cost. Premium amortization is deducted from, and discount accretion is added to, interest income using the level yield method. The cost of securities sold is computed on the identified securities method. Restricted stock, such as stock in the Federal Home Loan Bank (FHLB), is carried at cost. Loans Interest is accrued over the term of the loans based on the principal balance outstanding. Loans are placed on nonaccrual status when scheduled principal or interest payments are past due 90 days or more, unless the loan is well secured and in the process of collection. The Company defers loan fees and certain direct loan origination costs. Deferred amounts are reported in the balance sheet as part of loans and are recognized into interest income over the term of the loan based on the level yield method. The carrying values of impaired loans (as explained below in "Allowance for Loan Losses") are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as increases or decreases to bad debt expense. Loans held for sale are carried at the lower of cost or fair value, in aggregate. Allowance for Loan Losses The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance for loan losses required based on past loan loss experience, known and inherent risks in 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. - ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 19 Dollars in thousands - ------------------------------------------------------------------------------- NOTE 1 - Summary of Significant Accounting Policies (continued) Loan impairment is reported when full repayment under the terms of the loan is not expected. 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. Commercial, agricultural and poultry loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on nonaccrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Premises, Furniture, and Equipment Premises, Furniture and Equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated on the straight-line method with useful lives ranging from 10 to 40 years. Furniture and equipment are primarily depreciated using straight-line methods with useful lives ranging from 3 to 12 years. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Other Real Estate Other Real Estate is carried at the lower of cost or fair value, less estimated selling costs. Expenses incurred in carrying Other Real Estate are charged to operations as incurred. Intangible Assets Intangible Assets are comprised of core deposit intangibles ($113 and $173 at December 31, 1999 and 1998, respectively) and goodwill ($2,048 and $1,668 at December 31, 1999 and 1998, respectively). Core deposit intangibles are amortized on an accelerated method over ten years and goodwill is amortized on a straight-line basis over twelve to fifteen years. Core Deposit Intangibles and Goodwill are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. Servicing Rights Servicing rights are recognized and included with other assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to type, interest rates and age. Fair value is determined based upon discontinued cash flows using market based assumptions. Stock Compensation Expense for employee compensation under stock option plans is reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Financial Accounting Standard No. 123 was used for stock-based compensation. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity. Income Taxes Deferred tax liabilities and assets are determined at each balance sheet date and are the result of differences in the financial statement and tax bases of assets and liabilities. Income tax expense is the amount due on the current year tax returns plus or minus the change in deferred taxes. Earnings Per Share Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the potential dilutive effect of additional common shares issuable under stock options. - ------------------------------------------------------------------------------- 20 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - ------------------------------------------------------------------------------- NOTE 1 - Summary of Significant Accounting Policies (continued) Cash Flow Reporting The Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial institutions. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold. Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. 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. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business, or the values of assets and liabilities not considered financial instruments. New Accounting Pronouncements Beginning January 1, 2001 a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this pronouncement is not expected to have a material effect on the Company's financial results, but the effect will depend on derivative holdings when this standard is adopted. NOTE 2 - Securities The amortized cost and estimated market values of Securities as of December 31, 1999 are as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- Securities Available-for-Sale: U.S. Treasury Securities, and Obligations of U.S. Government Corporations and Agencies............... $96,205 $ --- $(3,879) $92,326 Obligations of State and Political Subdivisions............. 26,597 462 (572) 26,487 Asset-/Mortgage-backed Securities........................... 61,514 6 (2,553) 58,967 Equity Securities........................................... 10,368 --- --- 10,368 ------ --- --- ------ Total................................................... $194,684 $468 $(7,004) $188,148 ======== ==== ======= ======== Securities Held-to-Maturity: Obligations of State and Political Subdivisions............. $29,288 $289 $(643) $28,934 Asset-/Mortgage-backed Securities........................... 903 6 (5) 904 --- - - --- Total................................................... $30,191 $295 $(648) $29,838 ======= ==== ===== =======
The amortized cost and estimated market values of Securities as of December 31, 1998 are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- Securities Available-for-Sale: U.S. Treasury Securities, and Obligations of U.S. Government Corporations and Agencies............... $68,201 $219 $(34) $68,386 Obligations of State and Political Subdivisions............. 29,103 1,443 (91) 30,455 Asset-/Mortgage-backed Securities........................... 52,881 50 (245) 52,686 ------ -- --- ------ Total................................................... $150,185 $1,712 $(370) $151,527 ======== ====== ===== ======== Securities Held-to-Maturity: U.S. Treasury Securities, and Obligations of U.S. Government Corporations and Agencies............... $19,258 $ 2 $(46) $19,214 Obligations of State and Political Subdivisions............. 27,591 1,159 (13) 28,737 Asset-/Mortgage-backed Securities........................... 1,497 14 --- 1,511 ----- -- --- ----- Total................................................... $48,346 $1,175 $(59) $49,462 ======= ====== ===== =======
- ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 21 Dollars in thousands - ------------------------------------------------------------------------------- NOTE 2 - Securities (continued) The amortized cost and estimated market values of Securities at December 31, 1999 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Asset-backed, Mortgage-backed and certain Other Securities are not due at a single maturity date and are shown separately.
Estimated Amortized Market Cost Value ---- ----- Securities Available-for-Sale: Due in one year or less..................................... $2,681 $2,699 Due after one year through five years....................... 23,108 22,701 Due after five years through ten years...................... 76,551 73,992 Due after ten years......................................... 20,462 19,421 Asset-/Mortgage-backed Securities........................... 61,514 58,967 Equity Securities........................................... 10,368 10,368 ------ ------ Totals.................................................. $194,684 $188,148 ======== ======== Securities Held-to-Maturity: Due in one year or less..................................... $1,236 $1,240 Due after one year through five years....................... 7,539 7,473 Due after five years through ten years...................... 9,960 9,923 Due after ten years......................................... 10,553 10,298 Asset-/Mortgage-backed Securities........................... 903 904 --- --- Totals.................................................. $30,191 $29,838 ======= =======
The amortized cost of securities at December 31, 1999 are shown in the following table by contractual maturity, except for asset/mortgage-backed securities, which are based on estimated average lives. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities totaling $10,368 do not have contractual maturities, and are excluded from the table below.
Maturities and Average Yields of Securities at December 31, 1999: Within After One But After Five But After Ten One Year Within Five Years Within Ten Years Years ---------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield ---------------------------------------------------------------------------------------------- U.S. Treasuries and Agencies.............. $ --- --- $17,100 6.13% $71,122 6.60% $7,983 6.28% State and Political Subdivisions.......... 3,917 8.22% 13,547 7.88% 15,389 8.22% 23,032 8.56% Asset- / Mortgage-backed Securities............ 4,813 6.14% 37,163 6.43% 20,188 6.40% 253 6.58% ----- ------ ------ --- Totals............. $8,730 7.07% $67,810 6.64% $106,699 6.80% $31,268 7.96% ====== ======= ======== ======= A tax-equivalent adjustment using a tax rate of 34 percent was used in the above table.
At December 31, 1999 and 1998, U.S. Government Agency structured notes, consisting primarily of step-up and single-index bonds, with respective amortized costs of $7,983 and $9,985 and fair values of $7,150 and $9,984 were included in securities available-for-sale. - ------------------------------------------------------------------------------- 22 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - ------------------------------------------------------------------------------- NOTE 2 - Securities (continued) Proceeds from the Sales of Securities are summarized below:
1999 1998 1997 ---- ---- ---- Available- Held-to- Available- Held-to- Available- Held-to- Trading for-Sale Maturity Trading for-Sale Maturity Trading for-Sale Maturity ------- --------- -------- ------- --------- -------- ------- -------- -------- Proceeds from Sales..... $--- $ 953 $--- $14,046 $50,390 $ 362 $9,984 $29,826 $ --- Gross Gains on Sales.... --- 6 --- 18 119 10 13 --- --- Gross Losses on Sales... --- (12) --- (11) (92) (6) (23) (19) --- Income Taxes on Gross Gains........ --- 2 --- 7 48 4 5 --- --- Income Taxes On Gross Losses....... --- (5) --- (4) (37) (2) (9) (8) --- Sales of securities held-to-maturity in 1998 consisted of mortgage-backed securities for which payment of more than 85% of principal had occurred.
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $33,740 and $50,079 as of December 31, 1999 and 1998, respectively. NOTE 3 - Loans
Loans, as presented on the balance sheet, are comprised of the following classifications at December 31, 1999 1998 Real Estate Loans Secured by 1- 4 Family Residential Properties......................... $356,001 $295,788 Commercial and Industrial Loans......................................................... 161,711 136,249 Loans to Individuals for Household, Family and Other Personal Expenditures.............. 112,870 104,024 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers............ 64,054 62,736 ------ ------ Totals.............................................................................. $694,636 $598,797 ======== ======== Nonperforming loans were as follows at December 31: Loans past due over 90 days and accruing................................................ $1,564 $1,522 Non-accrual loans....................................................................... 7,237 5,411 ----- ----- Totals.............................................................................. $8,801 $6,933 ====== ====== Information regarding impaired loans: 1999 1998 ---- ---- Year-end impaired loans with no allowance for loan losses allocated..................... $1,784 $ 613 Year-end impaired loans with allowance for loan losses allocated........................ 446 543 Amount of allowance allocated to impaired loans......................................... 224 151 Average balance of impaired loans during the year....................................... 2,337 2,297 Interest income recognized during impairment............................................ 169 212 Interest income recognized on cash basis................................................ 120 117
Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 1999. A summary of the activity of these loans follows: Balance Changes Deductions Balance January 1, in Persons December 31, 1999 Additions Included Collected Charged-off 1999 - ----------------------------------------------------------------------------------------------------------------------------------- $ 19,155 $ 12,363 $ (1,385) $ (9,180) $ --- $ 20,953
- ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 23 Dollars in thousands - ------------------------------------------------------------------------------- NOTE 4 - Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses follows: 1999 1998 1997 ---- ---- ---- Balance as of January 1................................ $8,323 $8,574 $8,040 Allowance of Acquired Subsidiary....................... --- 80 --- Adjustment to Conform Fiscal Years..................... 356 --- --- Provision for Loan Losses.............................. 1,718 1,338 773 Recoveries of Prior Loan Losses........................ 476 375 827 Loan Losses Charged to the Allowance................... (2,005) (2,044) (1,066) ----- ----- ----- Balance as of December 31.............................. $8,868 $8,323 $8,574 ====== ====== ======
NOTE 5 - Mortgage Banking The amount of loans serviced by the Company for the benefit of others was $154,407 at December 31, 1999 and $123,356 at December 31, 1998. At December 31, 1999 and 1998, unamortized loan servicing rights totaled $1,171 and $1,012 respectively, and are included in Accrued Interest Receivable and Other Assets in the Consolidated Balance Sheet. For the years ended December 31, 1999, 1998, and 1997, the Company capitalized $473, $426, and $366, respectively, of servicing rights that were originated through its loan origination network and retail banking offices. Capitalized amounts and amortization reported in the statement of cash flows for 1999 exclude adjustments to conform fiscal years, which amounted to a net reduction of servicing rights of $74. There were no valuation allowances at December 31, 1999 or 1998. NOTE 6 - Premises, Furniture, and Equipment
Premises, furniture, and equipment as presented on the balance sheet is comprised of the following classifications at December 31, 1999 1998 ---- ---- Land............................................................................... $3,072 $3,008 Buildings and Improvements......................................................... 19,758 17,281 Furniture and Equipment............................................................ 12,978 11,820 ------ ------ Total Premises, Furniture and Equipment........................................ 35,808 32,109 Less: Accumulated Depreciation................................................ (16,026) (14,313) ------ ------ Total....................................................................... $19,782 $17,796 ======= =======
Depreciation expense was $1,667, $1,453 and $1,437 for 1999, 1998 and 1997, respectively. NOTE 7 - Deposits At year-end 1999, interest-bearing deposits include $186,427 of demand and savings deposits and $440,163 of time deposits. Stated maturities of time deposits were as follows: 2000.................................. $269,692 2001.................................. 110,534 2002.................................. 34,493 2003.................................. 13,323 2004.................................. 10,697 Thereafter........................... 1,424 ------ Total.............................. $440,163 ======== - ------------------------------------------------------------------------------- 24 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - ------------------------------------------------------------------------------- NOTE 8 - FHLB Advances and Other Borrowed Money
The Company's funding sources include Federal Home Loan Bank advances, repurchase agreements, and federal funds purchased. Information regarding each of these types of borrowings is as follows: December 31, 1999 1998 ---- ---- Long-term advances from the Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities...... $122,815 $124,381 Promissory notes payable at a weighted average interest rate of 8.8%................. 87 --- -- --- Long-term borrowings............................................................. 122,902 124,381 ------- ------- Overnight discount note advances from the Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities... 40,000 --- Repurchase agreements................................................................ 24,015 6,903 Federal funds purchased.............................................................. 9,100 125 ----- --- Short-term borrowings............................................................ 73,115 7,028 ------ ----- Total borrowings.............................................................. $196,017 $131,409 ======== ========
At December 31, 1999 interest rates on the fixed rate long-term FHLB advances ranged from 5.0% to 6.7% with a weighted average rate of 5.8%. Of the $122.8 million, $84.0 million or 68% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. At December 31, 1998 interest rates on the fixed rate long-term FHLB advances ranged from 4.9% to 6.0% with a weighted average rate of 5.4%. Of the $124.4 million, $87.0 million or 70% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. The interest rate for the overnight discount note advances from the FHLB at December 31, 1999 was 4.1%. There were no overnight discount notes outstanding on December 31, 1998. All of the overnight discount notes were refinanced into long-term advances during January 2000 at rates ranging from 6.1% to 6.4% with a weighted average remaining maturity of 48 months. Scheduled principal payments on long-term borrowings at December 31, 1999 are as follows: 2000........................................................ $13,135 2001........................................................ 18,225 2002........................................................ 25,636 2003........................................................ 12,249 2004........................................................ 30,441 Thereafter................................................ 23,216 ------ Total.................................................. $122,902 ======== NOTE 9 - Stockholders' Equity The Company and affiliate Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and 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 about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. - ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 25 Dollars in thousands - ------------------------------------------------------------------------------- NOTE 9 - Stockholders' Equity (continued) The prompt corrective action regulations provide five classifications, including 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 plans for capital restoration are required.
At year-end 1999, consolidated and selected affiliate bank actual capital levels and minimum required levels are presented below: Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Regulations: ------ ------------------ ------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- Total Capital (to Risk Weighted Assets) Consolidated....................... $97,525 14.78% $52,770 8.00% $65,963 10.00% German American Bank............... $26,974 12.49% $17,280 8.00% $21,600 10.00% First American Bank................ $24,526 13.64% $14,382 8.00% $17,977 10.00% Peoples National Bank.............. $15,547 13.28% $9,367 8.00% $11,709 10.00% Citizens State Bank................ $12,399 12.76% $7,775 8.00% $9,718 10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated....................... $89,272 13.53% $26,385 4.00% $39,578 6.00% German American Bank............... $24,266 11.23% $8,640 4.00% $12,960 6.00% First American Bank................ $22,567 12.55% $7,191 4.00% $10,786 6.00% Peoples National Bank.............. $14,079 12.02% $4,684 4.00% $7,025 6.00% Citizens State Bank................ $11,372 11.70% $3,887 4.00% $5,831 6.00% Tier 1 Capital (to Average Assets) Consolidated....................... $89,272 9.07% $39,367 4.00% $49,208 5.00% German American Bank............... $24,266 7.42% $13,076 4.00% $16,345 5.00% First American Bank................ $22,567 7.92% $11,402 4.00% $14,252 5.00% Peoples National Bank.............. $14,079 7.88% $7,144 4.00% $8,930 5.00% Citizens State Bank................ $11,372 7.28% $6,250 4.00% $7,813 5.00%
Capital ratios for First State Bank are materially consistent with consolidated capital ratios. The Company and all affiliate Banks at year-end 1999 and 1998 were categorized as well capitalized. Regulations require the maintenance of certain capital levels at each affiliate bank, and may limit the dividends payable by the affiliates to the holding company, or by the holding company to its shareholders. At December 31, 1999 the affiliates had $3.5 million in retained earnings available for dividends to the parent company without prior regulatory approval. Stock Options The Company maintains a Stock Option Plan and has reserved 185,456 shares of Common Stock (as adjusted for subsequent stock splits and dividends and subject to further customary anti-dilution adjustments) for the purpose of grants of options to officers and other employees of the Company. Options may be designated as "incentive stock options" under the Internal Revenue Code of 1986, or as nonqualified options. While the date after which options are first exercisable is determined by the Stock Option Committee of the Company, no stock option may be exercised after ten years from the date of grant (twenty years in the case of nonqualified stock options). The exercise price of stock options granted pursuant to the Plan must be no less than the fair market value of the Common Stock on the date of the grant. The Plan authorizes an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. An optionee may tender already-owned common shares to the Company in exercise of an option. In this instance, the Company is obligated to use its best efforts to issue to such optionee a replacement option for the number of shares tendered, as follows: (a) of the same type as the option exercised (either an incentive stock option or a non-qualified option); (b) with the same expiration date; and, (c) priced at the fair market value of the stock on that date. Replacement options may not be exercised until one year from the date of grant. - ------------------------------------------------------------------------------- 26 Notes to the Consolidated Financial Statements (continued) Dollars in thousands, except per share data - ------------------------------------------------------------------------------- NOTE 9 - Stockholders' Equity (continued)
Changes in options outstanding were as follows, as adjusted to reflect stock dividends and splits: Number Weighted-average of Options Exercise Price ---------- -------------- Outstanding, beginning of 1997..................................... 46,224 $11.28 Granted............................................................ 74,949 12.57 Exercised.......................................................... (36,623) 11.83 ------ Outstanding, end of 1997........................................... 84,550 14.47 Granted............................................................ 65,923 22.39 Exercised.......................................................... (53,708) 10.53 ------- Outstanding, end of 1998........................................... 96,765 20.05 Granted............................................................ 2,472 17.38 Exercised.......................................................... (5,066) 8.49 ----- Outstanding, end of 1999........................................... 94,171 20.59 ====== Options exercisable at year-end are as follows: 1999............................................................... 91,698 $20.68
Financial Accounting Standard No. 123 requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock option plans. No compensation cost was recognized for stock options in any of the years presented. In future years, the pro forma effect of not applying this standard may increase as additional options are granted. At year-end 1999, options outstanding have a weighted average remaining life of 13.72 years, with exercise prices ranging from $8.49 to $28.62.
1999 1998 1997 ---- ---- ---- Pro forma Net Income............................................... $8,818 $7,987 $7,132 Pro forma Earnings Per Share and Diluted Earnings per Share........ $0.96 $0.87 $0.78
For options granted during 1999, 1998 and 1997, the weighted-average fair values at grant date are $1.74, $9.29 and $7.36, respectively. The fair value of options granted during 1999, 1998 and 1997 was estimated using the following weighted-average information: risk-free interest rate of 4.75%, 5.11% and 5.58%, expected life of 1.0, 9.7, and 3.6 years, expected volatility of stock price of .22, .32 and .18, and expected dividends of 2.52%, 1.64% and 2.06% per year. Stock Repurchase Plan On July 29, 1999 German American Bancorp announced that its Board of Directors approved a stock repurchase program for up to 446,250 of the outstanding Common Shares of the Company, representing nearly five percent of then outstanding shares. Shares were purchased from time to time in the open market and in large block privately negotiated transactions. The Company commenced bidding for shares on August 3, 1999 and concluded bids and purchases (even though not all shares authorized under the program had been repurchased) on December 14, 1999. The Company repurchased 206,558 shares of common stock during 1999 in conjunction with the Plan at prices ranging from $17.02 to $22.02 per share. Shares have been adjusted for the December 1999 stock dividend. Stock Purchase Plan The Company maintains an Employee Stock Purchase Plan whereby full-time employees can purchase the Company's common stock at a discount. The purchase price of the shares under this plan is 85% of the fair market value of such stock at the beginning or end of the offering period, whichever is less. No shares have been issued under this plan to date. - ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 27 Dollars in thousands - ------------------------------------------------------------------------------- NOTE 10 - Employee Benefit Plans The Company and all its banking affiliates provide a contributory trusteed 401(k) deferred compensation and profit sharing plan, which covers substantially all full-time employees. The companies agree to match certain employee contributions under the 401(k) portion of the plan, while profit sharing contributions are discretionary and are subject to determination by the Board of Directors. The Doty Insurance Agency, Inc. provides a similar 401(k) deferred compensation plan which covers full-time employees, except there is no profit sharing component in the Doty plan. Employees of 1ST BANCORP joined the banking affiliate plan in January 1999, employees of Citizens State and FSB Corporation in June 1998, and employees of Peoples in April 1997. Contributions to these plans were $779, 609, and $549 for 1999, 1998, and 1997, respectively. Prior to their merger with the Company, Peoples had a non-contributory defined benefit pension plan. The Projected Benefit Obligation under this plan was suspended at April 30, 1997. The plan was terminated in 1998 resulting in an $83 settlement gain, net of excise tax. 1ST BANCORP and Citizens State Bank had non-contributory defined benefit pension plans with benefits based on years of service and compensation prior to retirement. The benefits under the Citizens State Bank plan were suspended at August 1, 1998. The benefits under the 1ST BANCORP plan were suspended at December 31, 1998. During 1999, a loss of $147 was recorded on a partial settlement of the 1ST BANCORP plan. As of December 31, 1999, the Citizens State Bank plan was merged into the 1ST BANCORP plan. Accumulated plan benefit information for the Company's plan as of December 31, 1999 and 1998 is as follows:
1999 1998 ---- ---- Changes in Benefit Obligation: Obligation at beginning of year............................................ $ 1,392 $ 1,636 Service cost............................................................... --- 62 Interest cost.............................................................. 104 79 Benefits paid.............................................................. (725) (54) Actuarial (gain) loss...................................................... 118 (7) Adjustment in cost of settlement........................................... 191 --- Effect of curtailment...................................................... --- (324) --- --- Obligation at end of year.................................................. 1,080 1,392 ----- ----- Changes in Plan Assets: Fair Value at beginning of year............................................ 2,125 2,086 Actual return on plan assets............................................... (11) 58 Employer contributions..................................................... --- 35 Benefits paid.............................................................. (725) (54) ---- -- Fair value at end of year.................................................. 1,389 2,125 ----- ----- Funded Status: Funded status at end of year............................................... (309) (733) Unrecognized prior service cost............................................ 20 24 Unrecognized net (gain) or loss............................................ (75) 255 Unrecognized transition asset.............................................. 22 24 -- -- Prepaid benefit cost....................................................... $ (342) $ (430) === ===
- ------------------------------------------------------------------------------- 28 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - -------------------------------------------------------------------------------
Net periodic pension expense (benefit) for the years ended December 31, 1999, 1998 and 1997 is as follows: 1999 1998 1997 ---- ---- ---- Service cost................................................... $ --- $ 62 $ 126 Interest cost.................................................. 104 79 119 Expected return on assets...................................... (160) (105) (135) Amortization of transition amount.............................. (2) (2) (2) Amortization of prior service cost............................. (3) (1) (3) Recognition of net (gain) or loss.............................. 3 (14) --- - -- --- Net periodic pension expense (benefit)......................... $ (58) $ 19 $ 105 == == ===
The weighted-average assumed rate of return used in determining the net periodic pension cost for 1999, 1998 and 1997 was 8.0%. The weighted-average assumed discount rate used in determining the actuarial present value of accumulated benefit obligations at December 31, 1999, 1998 and 1997 was 7.5%. The weighted-average rate of increase in future compensation levels was not applicable for 1999 and was 5.0% for 1998 and 1997. NOTE 11 - Income Taxes
The provision for income taxes consists of the following: 1999 1998 1997 ---- ---- ---- Currently Payable............................................. $3,536 $3,722 $3,218 Deferred...................................................... (440) (150) (303) Net Operating Loss Carryforward............................... (47) (47) (47) -- --- --- Total..................................................... $3,049 $3,525 $2,868 ====== ====== ======
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows: 1999 1998 1997 ---- ---- ---- Statutory Rate Times Pre-tax Income........................... $4,036 $4,112 $3,446 Add/(Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments.............. (987) (965) (785) Non-deductible Merger Costs............................... 14 119 73 State Income Tax, Net of Federal Tax Effect............... 581 725 629 Low Income Housing Credit................................. (407) (343) (343) Other Differences ........................................ (188) (123) (152) --- --- --- Total Income Taxes...................................... $3,049 $3,525 $2,868 ====== ====== ======
The net deferred tax asset at December 31 consists of the following: 1999 1998 ---- ---- Deferred Tax Assets: Allowance for Loan Losses................................. $2,359 $2,103 Net Operating Loss Carryforwards.......................... 93 140 Deferred Compensation and Employee Benefits............... 1,392 674 Unrealized Depreciation on Securities..................... 2,589 --- Other..................................................... 158 310 --- --- Total Deferred Tax Assets............................... 6,591 3,227 Deferred Tax Liabilities: Depreciation.............................................. (490) (458) Leasing Activities, Net................................... (18) (153) Purchase Accounting Adjustments........................... (7) (17) Unrealized Appreciation on Securities..................... --- (532) Mortgage Servicing Rights................................. (464) (405) Other..................................................... (251) (372) --- --- Total Deferred Tax Liabilities.......................... (1,230) (1,937) Valuation Allowance........................................... (48) (48) -- -- Net Deferred Tax Asset.................................. $5,313 $1,242 ====== ======
- ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 29 Dollars in thousands, except per share data - ------------------------------------------------------------------------------- The Company has $274 of federal tax net operating loss carryforwards expiring in the following amounts: Year Amount Year Amount --------------------------------------------------------------- 2002 107 2008 62 2003 105 Under the Internal Revenue Code, through 1996 First Federal Bank was allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. Subject to certain limitations, First Federal Bank was permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. First Federal Bank generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, First Federal Bank was only allowed a deduction based on actual loss experience. Under legislation enacted in 1996, beginning in fiscal 1997, First Federal Bank was no longer allowed a special bad debt deduction using a percentage of taxable income method. Also, beginning in 1997, First Federal Bank was required to recapture its excess bad debt reserve over its 1987 base year reserve over a six-year period. The amount has been provided in First American Bank's deferred tax liability. Retained earnings at December 31, 1999, includes approximately $2,300 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 1999 was approximately $782. NOTE 12 - Per Share Data Earnings and dividend per share amounts have been retroactively computed as though shares issued for stock dividends and splits had been outstanding for all periods presented. The computation of Earnings per Share and Diluted Earnings per Share are provided below:
1999 1998 1997 ---- ---- ---- Earnings per Share: Net Income.................................................... $8,822 $8,570 $7,270 Weighted Average Shares Outstanding........................... 9,186,474 9,197,274 9,189,349 Earnings per Share........................................ $0.96 $0.93 $0.79 Diluted Earnings per Share: Net Income.................................................... $8,822 $8,570 $7,270 Weighted Average Shares Outstanding........................... 9,186,474 9,197,274 9,189,349 Stock Options, Net............................................ 3,788 21,696 9,416 ----- ------ ----- Diluted Weighted Average Shares Outstanding............... 9,190,262 9,218,970 9,198,765 Diluted Earnings per Share................................ $0.96 $0.93 $0.79
NOTE 13 - Lease Commitments The total rental expense for all leases for the years ended December 31, 1999, 1998, and 1997 was $175, $151, and $312, respectively, including amounts paid under short-term cancelable leases. At December 31, 1999, the German American Bank and First State Bank subleased space for three branch-banking facilities from a company controlled by a director and principal shareholder of the Company. The subleases expire in 2000, 2001 and 2008 with various renewal options provided. Aggregate annual rental payments to this Director's company totaled $58 for 1999. Exercise of the Bank's sublease renewal options is contingent upon the Director's company renewing its primary leases. - ------------------------------------------------------------------------------- 30 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - ------------------------------------------------------------------------------- NOTE 13 - Lease Commitments (continued) The following is a schedule of future minimum lease payments: Years Ending December 31: Premises Equipment Total -------- --------- ----- 2000........................... $86 $16 $102 2001........................... 59 8 67 2002........................... 56 1 57 2003........................... 50 --- 50 2004........................... 50 --- 50 Thereafter..................... 205 --- 205 --- --- --- Total........................ $506 $25 $531 ==== === ==== NOTE 14 - Commitments and Off-balance Sheet Items In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and commitments to sell loans, which are not reflected in the accompanying consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make commitments as it uses for on-balance sheet items. The Company's exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of government sponsored entity counterparts. These commitments are subject to market risk resulting from fluctuations in interest rates. Commitments and contingent liabilities are summarized as follows, at December 31, 1999 1998 ---- ---- Commitments to Fund Loans: Home Equity.......................... $12,262 $15,782 Credit Card Lines.................... 8,813 6,030 Commercial Operating Lines........... 47,761 29,554 Residential Mortgages................ 8,357 18,143 ----- ------ Total Commitments to Fund Loans.. $77,193 $69,509 ======= ======= Commitments to Sell Loans............... $3,304 $5,255 Standby Letters of Credit............... $1,928 $1,690 Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less. The Company self-insures employee health benefits for the majority of its affiliate banks. Stop loss insurance covers annual losses exceeding $70 per covered individual and approximately $615 in the aggregate. Management's policy is to establish a reserve for claims not submitted by a charge to earnings based on prior experience. Charges to earnings were $604, $526 and $517 for 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, respectively, the affiliate banks were required to have $4,755 and $3,341 on deposit with the Federal Reserve, or as cash on hand. These reserves do not earn interest. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 31 Dollars in thousands - -------------------------------------------------------------------------------- NOTE 15 - Non-cash Investing Activities 1999 1998 1997 ---- ---- ---- Loans Transferred to Other Real Estate........ $2,923 $3,958 $4,153 Securities Transferred to Available-for-Sale.. --- 8,034 --- The above data should be read in conjunction with the Consolidated Statements of Cash Flows. On the date of merger with Citizens State, investment securities with an amortized cost of $8.0 million and estimated market value of $8.1 million were reclassified from Held-to-Maturity to Available-for-Sale. This action was taken as a result of the business combination and in order to conform Citizens State's investment portfolio to the Company's liquidity and interest rate risk policies. See also Note 18 regarding a purchase acquisition in 1999. NOTE 16 - Segment Information The Company's operations include two primary segments: retail banking and mortgage banking. The retail banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and single-family residential mortgage loans, primarily in the affiliate bank's local markets. The mortgage banking segment involves the origination and purchase of single-family residential mortgage loans; the sale of such loans in the secondary market; and the servicing of mortgage loans for investors. The retail segment is comprised of community banks with 25 banking offices in Southwestern Indiana. Net interest income from loans and investments funded by deposits and borrowings are the primary revenues of the five affiliate community banks comprising the retail banking segment. The mortgage banking segment operates as a division of First American Bank. Primary revenues for the mortgage banking segment are net interest income from a residential real estate loan portfolio funded primarily by wholesale sources. Other revenues are gains on sales of loans and capitalization of mortgage servicing rights (MSR), and loan servicing income. The following segment financial information has been derived from the internal financial statements of German American Bancorp, which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the two segments are the same as those described in the summary of significant accounting policies. The evaluation process for segments does not include holding company income and expense. Holding company and non-banking subsidiaries amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the Other column below, along with minor amounts to eliminate transactions between segments.
Retail Mortgage Consolidated Year Ended December 31, 1999 Banking Banking Other Totals ------- ------- ----- ------ Net Interest Income................................ $27,464 $4,459 $247 $32,170 Gain on Sales of Loans and Capitalization of MSR............................ 16 304 --- 320 Servicing Income................................... --- 370 --- 370 Noncash Items: Provision for Loan Losses....................... 670 1,048 --- 1,718 MSR Amortization & Valuation.................... --- 241 --- 241 Provision for Income Taxes......................... 3,788 546 (1,285) 3,049 Segment Profit..................................... 9,536 833 (1,547) 8,822 Segment Assets..................................... 806,884 180,752 4,999 992,635
The financial results of the mortgage banking operation were not reported separately from retail banking operations prior to the acquisition of 1ST BANCORP in 1999. In addition, the mortgage banking segment's loans held for portfolio were not separately identified in the computer subsidiary ledger prior to the acquisition of 1ST BANCORP. Therefore, segment reporting for prior periods is not practical. - ------------------------------------------------------------------------------- 32 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - ------------------------------------------------------------------------------- NOTE 17 - Parent Company Financial Statements The condensed financial statements of German American Bancorp are presented below:
CONDENSED BALANCE SHEETS December 31, 1999 1998 ---- ---- ASSETS Cash........................................................... $5,763 $4,034 Securities Available-for-Sale, at Market....................... 3,255 3,471 Investment in Subsidiary Banks and Bank Holding Company........ 74,912 79,931 Investment in GAB Mortgage Corp................................ 291 291 Furniture and Equipment........................................ 1,420 2,095 Other Assets................................................... 1,910 1,837 ----- ----- Total Assets................................................ $87,551 $91,659 ======= ======= LIABILITIES........................................................ $ 64 $ 383 -------- --------- SHAREHOLDERS' EQUITY Common Stock................................................... 9,029 8,705 Additional Paid-in Capital..................................... 53,846 48,190 Retained Earnings.............................................. 28,559 33,570 Accumulated Other Comprehensive Income (Loss).................. (3,947) 811 ----- --- Total Shareholders' Equity.................................. 87,487 91,276 ------ ------ Total Liabilities and Shareholders' Equity.................. $87,551 $91,659 ======= =======
CONDENSED STATEMENTS OF INCOME Years ended December 31, 1999 1998 1997 ---- ---- ---- INCOME Dividends from Subsidiary Banks................................. $11,400 $12,550 $6,790 Dividend and Interest Income.................................... 247 256 129 Fee Income from Subsidiary Banks................................ 471 411 407 Securities Gains, net........................................... --- --- --- Other Income ................................................... 61 40 27 --- --- --- Total Income ................................................ 12,179 13,257 7,353 ------ ------ ----- EXPENSES Salaries and Benefits........................................... 2,475 1,827 1,434 Professional Fees............................................... 530 760 378 Occupancy and Equipment Expense................................. 355 286 246 Other Expenses.................................................. 536 544 520 --- --- --- Total Expenses............................................... 3,896 3,417 2,578 ----- ----- ----- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES............................ 8,283 9,840 4,775 Income Tax Benefit.................................................. 1,371 1,011 740 ----- ----- --- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES.......................................... 9,654 10,851 5,515 Equity in Undistributed Income of Subsidiaries...................... (832) (2,281) 1,755 --- ----- ----- NET INCOME.......................................................... 8,822 8,570 7,270 ----- ----- ----- Other Comprehensive Income: Unrealized gain/(loss) on Securities, net....................... (4,785) 153 408 ----- --- --- Total Comprehensive Income................................. $4,037 $8,723 $7,678 ====== ====== ======
- ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 33 Dollars in thousands - -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income.......................................................... $8,822 $8,570 $7,270 Adjustments to Reconcile Net Income to Net Cash from Operations Amortization on Securities................................... 22 38 36 Depreciation................................................. 206 157 140 Gain on Sale of Property and Equipment....................... (4) --- --- Change in Other Assets....................................... (47) (1,515) (21) Change in Other Liabilities.................................. (337) 175 (286) Equity in Undistributed Income of Subsidiaries............... 832 2,281 (1,755) --- ----- ------ Total Adjustments.......................................... 672 1,136 (1,886) --- ----- ------ Net Cash from Operating Activities........................... 9,494 9,706 5,384 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Capital Contribution to Subsidiaries............................. --- (299) (500) Purchase of Securities Available-for-Sale........................ (368) (2,229) --- Proceeds from Maturities of Securities Available-for-Sale........ 500 520 --- Property and Equipment Expenditures.............................. (520) (881) (726) Proceeds from Sale of Property and Equipment..................... 993 --- --- Acquire Affiliates and Adjust to Conform Fiscal Years............ 104 --- --- --- --- --- Net Cash from Investing Activities............................... 709 (2,889) (1,226) --- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of Long-term Debt...................................... --- (1,481) (197) Purchase / Retire Common Stock................................... (4,320) (360) (637) Issuance of Common Stock......................................... 348 196 817 Dividends Paid................................................... (4,467) (3,122) (2,797) Purchase of Interest in Fractional Shares........................ (35) (43) (38) -- -- -- Net Cash from Financing Activities............................ (8,474) (4,810) (2,852) ----- ----- ----- Net Change in Cash and Cash Equivalents.............................. 1,729 2,007 1,306 Cash and Cash Equivalents at Beginning of Year................... 4,034 2,027 721 ----- ----- --- Cash and Cash Equivalents at End of Year......................... $5,763 $4,034 $2,027 ====== ====== ======
- ------------------------------------------------------------------------------- 34 Notes to the Consolidated Financial Statements (continued) Dollars in thousands - ------------------------------------------------------------------------------- NOTE 18 - Business Combinations Information relating to mergers and acquisitions for which stock was issued for the three year period ended December 31, 1999, includes: Date Common Accounting Business Combination Location Acquired Shares Issued3 Method -------------------- -------- -------- -------------- ------ Peoples Bancorp Washington, Indiana March 4, 1997 1,424,538 Pooling CSB Bancorp Petersburg, Indiana June 1, 1998 1,023,642 Pooling FSB Financial Corporation Francisco, Indiana June 1, 1998 74,091 Pooling(1) The Doty Agency, Inc. Petersburg, Indiana January 1, 1999 65,100 Pooling(1) 1ST BANCORP Vincennes, Indiana January 4, 1999 2,141,648 Pooling Professional Insurance Markets, Inc., (Smith & Bell) Vincennes, Indiana May 1, 1999 8,400 Purchase(2) Certain of the above entities have had their name changed and/or have been merged into other subsidiaries of the Corporation. 1 Prior period results do not include the effect of the mergers, as restatement would not have resulted in a material change in overall financial results. 2 This merger was accounted for as a purchase, with assets acquired and liabilities assumed totaling $412, including goodwill of $345. The Company issued approximately 8,400 shares of common stock and approximately $26 in cash for all the outstanding shares of the corporate owner of Smith & Bell. Reported operating results for periods prior to the merger have not been restated. 3 Adjusted for all subsequent stock dividends and splits.
Prior to 1999, 1ST BANCORP's financial statements were prepared on a June 30 fiscal year-end. As a result of changing fiscal years from June 30 to December 31, retained earnings have been reduced by $72 attributable to the 1ST BANCORP net loss for the six months ended December 31, 1998. Retained earnings were reduced an additional $148 for cash dividends paid by 1ST BANCORP during the same period. Revenues and expenses for the six-month period totaled $10,679 and $10,751, respectively. Earnings during the six-month period were negatively impacted by merger related expenses including professional fees; health & pension benefits; deferred compensation plans; and other compensation. 1ST BANCORP also increased loan loss provision and amortization of mortgage servicing rights, due to conditions during the period. Also as a result of the change in fiscal years, common stock and surplus were increased by $572 due to the exercise of stock options and issuance of shares for 1ST BANCORP's employee stock purchase plan and dividend reinvestment plan. The following is a reconciliation of the separate and combined net interest income and net income of German American Bancorp and 1ST BANCORP for periods prior to the merger: 1998 1997 ---- ---- Net Interest Income German American Bancorp............ $24,082 $22,880 1ST BANCORP........................ 6,673 6,611 --------- --------- Combined........................ $30,755 $29,491 ======= ======= Net Income German American Bancorp............ $6,659 $6,449 1ST BANCORP........................ 1,911 821 ------- -------- Combined........................ $8,570 $7,270 ====== ====== - ------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) 35 Dollars in thousands - ------------------------------------------------------------------------------- NOTE 19 - Fair Values of Financial Instruments The estimated fair values of the Company's financial instruments are provided in the table below. Not all of the Company's assets and liabilities are considered financial instruments, and therefore are not included in the table. Because no active market exists for a significant portion of the Company's financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.
DECEMBER 31, 1999 DECEMBER 31, 1998 ----------------- ----------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----- ----- ----- ----- Financial Assets: Cash and Short-term Investments......................... $25,395 $25,395 $50,887 $50,877 Securities Available-for-Sale........................... 188,148 188,148 151,527 151,527 Securities Held-to-Maturity............................. 30,191 29,838 48,346 49,462 FHLB Stock and Other Restricted Stock................... 9,660 9,660 7,853 7,853 Loans, including loans held for sale, net............... 688,269 682,890 592,214 599,723 Accrued Interest Receivable............................. 8,572 8,572 8,456 8,456 Financial Liabilities: Demand, Savings and Money Market Deposits............... $(258,098) $(258,098) $(243,561) $(243,561) Other Time Deposits..................................... (440,163) (441,141) (421,552) (425,795) Short-term Borrowings................................... (73,115) (73,115) (7,028) (7,028) Long-term Debt.......................................... (122,902) (124,476) (124,381) (124,550) Accrued Interest Payable................................ (3,295) (3,295) (3,597) (3,597) Unrecognized Financial Instruments: Commitments to extend Credit............................ --- --- --- --- Standby Letters of Credit............................... --- --- --- ---
The carrying amounts of cash, short-term investments, FHLB and other restricted stock, and accrued interest receivable are a reasonable estimate of their fair values. The fair values of securities are based on quoted market prices or dealer quotes, if available, or by using quoted market prices for similar instruments. The fair value of loans held for sale are estimated using commitment prices or market quotes on similar loans. The fair value of loans are estimated by discounting future cash flows using the current rates at which similar loans would be made for the average remaining maturities. The fair value of demand deposits, savings accounts, money market deposits, short-term borrowings and accrued interest payable is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits and long-term borrowings are estimated using the rates currently offered on these instruments for similar remaining maturities. Commitments to extend credit and standby letters of credit are generally short-term or variable rate with minimal fees charged. These instruments have no carrying value, which is also assumed to be their fair value. NOTE 20 - Other Comprehensive Income Other comprehensive income components and related taxes were as follows:
1999 1998 1997 ---- ---- ---- Unrealized holding gains and losses on available-for-sale securities................................ $(7,929) $301 $647 Less: reclassification adjustments for gains and losses later recognized in income........................ (6) 38 (29) - -- -- Net unrealized gains and losses.................................. (7,923) 263 676 Tax Effect....................................................... 3,138 (110) (268) ----- --- --- Other comprehensive income....................................... $(4,785) $153 $408 ===== ==== ====
- ------------------------------------------------------------------------------- 36 Independent Auditors' Report Dollars in thousands - ------------------------------------------------------------------------------- Board of Directors and Shareholders German American Bancorp Jasper, Indiana We have audited the accompanying consolidated balance sheets of German American Bancorp as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated balance sheet as of December 31, 1998 and related consolidated statements of income, changes in shareholders' equity, and cash flows for the years ended December 31, 1998 and 1997 have been restated to reflect the 1ST BANCORP and CSB Bancorp poolings of interests, as described in Note 18. We did not audit the separate 1998 and 1997 financial statements of 1ST BANCORP or the separate 1997 financial statements of CSB Bancorp as reflected in the poolings of interests, which statements reflect (in thousands) total assets of $260,149 and total liabilities of $236,294 for 1998, and net income of $1,911 and $1,131 for 1998 and 1997. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for 1ST BANCORP for 1998 and 1997, and for CSB Bancorp for 1997, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of German American Bancorp as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Indianapolis, Indiana February 11, 2000 Crowe, Chizek and Company LLP THE COMPANY WILL PROVIDE A COPY OF ITS ANNUAL REPORT (FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS) FREE OF CHARGE TO ANY SHAREHOLDER, UPON WRITTEN REQUEST. SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO THE SHAREHOLDER INFORMATION AND CORPORATE OFFICE ADDRESS PROVIDED ABOVE. EX-21 8 SUBSIDIARIES OF THE REGISTRANT SUBSIDIARIES OF THE REGISTRANT (AS OF MARCH 24, 2000) STATE OF NAME INCORPORATION The German American Bank Indiana GAB Mortgage Corp Indiana German American Holdings Corporation Indiana Citizens State Bank Indiana First State Bank, Southwest Indiana Indiana Peoples National Bank United States of America The Doty Agency, Inc. Indiana First American Bank United States of America First Title Insurance Company Indiana German American Reinsurance Company, Ltd. Turks and Caicos Islands EX-23.1 9 CONSENT OF CROWE, CHIZEK AND COMPANY LLP Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements of German American Bancorp on Form S-3 (File No. 33-92202) and Form S-8 (File No. 333-80605, 333-81837, and 333-81839) of our report, dated February 11, 2000, on the consolidated financial statements of German American Bancorp as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, which report is incorporated by reference in this Form 10-K. Crowe, Chizek and Company LLP March 27, 2000 Indianapolis, Indiana EX-23.2 10 CONSENT OF GAITHER, RUTHERFORD & CO., LLP CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of German American Bancorp on Form S-3 (File No. 33-92202) and Form S-8 (File No. 333-80605, 333-81837, and 333-81839) of our report, dated February 16, 1998, on the consolidated financial statements of CSB Bancorp as of December 31, 1997 and for the year then ended, appearing in German American Bancorp's Annual Report on Form 10-K for the year ended December 31, 1999. Gaither Rutherford & Co., LLP March 28, 2000 Evansville, Indiana EX-23.3 11 CONSENT OF KPMG LLP KPMG 2400 First Indiana Plaza 135 North Pennsylvania Street Indianapolis, IN 46204-2452 Consent of KPMG LLP The Board of Directors German American Bancorp: We consent to the inclusion in the December 31, 1999 Annual Report on Form 10-K of German American Bancorp of our report dated July 23, 1998 (except as to note 17, which is as of August 6, 1998) relating to the consolidated statement of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the two-year period ended June 30, 1998. We also consent to the incorporation by reference in the registration statements of German American Bancorp on Form S-3 (File No. 33-92202) and Form S-8 (File No. 333-80605, 333-81837, and 333-81839) of our report dated July 23, 1998 (except for note 17, which is as of August 11, 1999), relating to the consolidated balance sheet of 1ST BANCORP and subsidiaries as of June 30, 1998, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the two-year period ended June 30, 1998, which report appears in the December 31, 1999, annual report on Form 10-K of German American Bancorp. KPMG LLP Indianapolis, Indiana March 27, 2000 EX-27 12 FINANCIAL DATA SCHEDULE
9 YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 23,707 18,097 1,688 32,615 0 175 0 0 188,148 151,527 30,191 48,346 29,838 49,462 697,137 600,537 8,868 8,323 992,635 896,925 698,261 665,113 73,115 7,028 10,870 9,127 122,902 124,381 0 0 0 0 9,029 8,705 78,458 82,571 992,635 896,925 53,868 51,980 14,024 12,508 37 872 67,929 65,360 27,860 28,450 35,759 34,605 32,170 30,755 1,718 1,338 (6) 38 24,832 22,318 11,871 12,095 11,871 12,095 0 0 0 0 8,822 8,570 0.96 0.93 0.96 0.93 3.66 3.76 7,237 5,411 1,564 1,522 0 0 6,021 9,475 8,323 8,654 2,005 2,044 476 375 8,868 8,323 8,868 8,323 0 0 1,531 3,382
EX-99.1 13 OPINION OF GAITHER, RUTHERFORD & CO., LLP Gaither Rutherford & Co., LLP Certified Public Accountants and Consu1tants 111 MAIN STREET - P.O. BOX 3526 - EVANSVILLE, INDIANA 47734-3526 TELEPHONE (812) 428-2600 FAX (812) 422-2019 Independent Auditors' Report Board of Directors CSB Bancorp We have audited the accompanying consolidated balance sheet of CSB Bancorp and Subsidiary as of December 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 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 financial position of CSB Bancorp and Subsidiary as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Gaither Rutherford & Co., LLP February 16, 1998 EX-99.2 14 OPINION OF KPMG LLP 2400 First Indiana Plaza 135 North Pennsylvania Street Indianapolis, IN 46204-2452 Independent Auditors' Report The Board of Directors 1ST RANCORP: We have audited the accompanying consolidated statement of financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998 and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the two-year period ended June 30, 1998. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 1ST BANCORP and subsidiaries as of June 30, 1998, and the results of their operations and their cash flows for each of the years in the two-year period ended June 30, 1998 in conformity with generally accepted accounting principles. KPMG LLP Indianapolis, Indiana July 23, 1998 except as to note 17, which is as of August 6, 1998 -----END PRIVACY-ENHANCED MESSAGE-----