-----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, UWu+LtWWc/g064ipmySc9rh4Tu+Cm62KwBUsH7S4S048yWJbkKUQHV/EzACENrBX /QjGNFfzZVqgtLXkxMhT7g== 0000941965-97-000027.txt : 19970401 0000941965-97-000027.hdr.sgml : 19970401 ACCESSION NUMBER: 0000941965-97-000027 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-11244 FILM NUMBER: 97568216 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-K405 1 FORM 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, 1996 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 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, $10.00 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 2 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 7, 1997 was approximately $75,922,000. As of March 7, 1997, there were outstanding 2,541,552 common shares, $10.00 par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Shareholders of German American Bancorp for 1996, 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 24, 1997, 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. |X| 3 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's principal subsidiaries, as of March 7, 1997, are The German American Bank, Jasper, Indiana ("German American Bank"), First State Bank, Southwest Indiana, Tell City, Indiana ("First State Bank"), and German American Holdings Corporation ("GAHC"), an Indiana corporation that owns all of the outstanding capital stock of both Community Trust Bank, Otwell, Indiana ("Community Bank") and The Peoples National Bank and Trust Company of Washington, Washington, Indiana ("Peoples"). The Company, through its four bank subsidiaries (sometimes referred to herein as the "Banks"), operated as of March 7, 1997, twenty (20) banking offices in six contiguous counties in southwestern Indiana and had total consolidated assets on a pro forma basis (giving effect to the Peoples acquisition) at year-end 1996 of approximately $489,000,000. German American Bank was organized under the law of Indiana in 1910. At December 31, 1996, German American Bank was the second largest of the six commercial banks with offices in Dubois County, Indiana, in terms of total assets and total deposits. German American Bank conducts its banking operations from its principal banking office in Jasper, Indiana, and from seven branch office locations throughout Dubois County. Peoples, organized under the National Bank Act in 1888, was acquired by the Company on March 4, 1997 pursuant to a merger of the parent corporation of Peoples into GAHC. Simultaneously with and as an integral part of this merger, The Union Bank of Loogootee, Indiana, a subsidiary of the Company, was merged with and into Peoples. On a combined basis, Peoples and Union at December 31, 1996 ranked second in asset size among the six commercial banks and thrifts headquartered in Martin and Daviess Counties, Indiana. The Union Bank had been acquired by the Registrant on March 8, 1993. 4 On April 1, 1993, the Registrant purchased all the shares of Winslow Bancorporation, Winslow, Indiana, (which was in 1996 renamed German American Holdings Corporation), and its subsidiary Southwestern Indiana Bank in a cash transaction. On April 1, 1994, the Registrant issued 113,286 shares in exchange for all the outstanding shares of The Otwell State Bank. Following the completion of this transaction, Otwell and Southwestern were merged into Community Trust Bank, a combined banking institution operating in the Pike County, Indiana market through three offices. On October 28, 1994, the Registrant acquired three branches of Regional Federal Savings Bank of New Albany, Indiana. The Huntingburg, Indiana branch was combined with an existing branch of the Registrant's lead bank, German American Bank. The other two former branches in Tell City and Rockport, Indiana were acquired by a new subsidiary bank of the Registrant named First State Bank, Southwest, Indiana. Each of the Company's subsidiary banks engages in a wide range of commercial and personal banking services, and German American Bank and Peoples provide a wide range of personal and corporate trust-related services. In addition, several of the Company's subsidiary banks share investment services income through an operating agreement with Invest Financial Corporation, a subsidiary of First American Corporation, which provides full-service brokerage operations at German American Bank's principal banking office and other affiliate banking offices. The Company and its subsidiary banks operate primarily in the banking industry, which accounts for over ninety percent (90%) of the Company's consolidated revenues, operating income and identifiable assets. Through its banking subsidiaries, the Company generates commercial, installment and mortgage loans and receives deposits from customers located primarily in the local market area. The overall loan portfolio is diversified among a variety of individual borrowers; however, a significant portion of such debtors depend upon the agriculture, poultry and wood furniture manufacturing industries for employment. Although wood manufacturers employ a significant number of people in the Company's market area, the Company does not have a concentration of credit to companies engaged in that industry. The majority of the Company's loans are secured by specific items of collateral including business assets, consumer assets and real property. 5 Additional information regarding the Company and its subsidiaries is included in the Company's Annual Report to Shareholders for 1996, 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. 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 with financial institutions that are located in other neighboring areas in obtaining deposits, making loans and providing many other types of financial services. The banking market in which the Company's banking subsidiaries operate is heavily influenced by larger financial institutions located in Evansville and Indianapolis, Indiana, Louisville, Kentucky and other cities. 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, money market funds, mortgage companies and other non-depository financial intermediaries. 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 out-of-state bank holding companies resulting from implementation of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 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 January 31, 1997 the Company and its subsidiaries employed approximately 174 employees. There are no collective bargaining agreements, and employee relations are considered to be good. 6 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. 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, computer service bureau and software operations, and mortgage banking. The BHC Act and Indiana law restrict banking expansion by banks and bank holding companies. Under current Indiana law, Indiana banks may establish an unlimited number of branches anywhere within the State of Indiana. A holding 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"). The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") provides for nationwide interstate banking and branching. Since September 30, 1995, well- capitalized bank holding companies have been authorized, pursuant to the legislation, to acquire banks and bank holding companies in any state. The Interstate Act also permits banks to merge across state lines, thereby creating a main bank in one state with branches in other sates. Interstate branching-by- merger provisions will become effective on June 1, 1997, unless a state takes legislative action prior to 7 that date. States may pass laws to either "opt in" before June 1, 1997 or to "opt-out" by expressly prohibiting merger transactions involving out-of-state banks, providing the legislative action is taken before June 1, 1997. Effective March 14, 1996, Indiana "opted in" to interstate branching provisions of the Interstate Act. The Company's subsidiary banks are under the supervision of and subject to examination by both the DFI and the Federal Deposit Insurance Corporation ("FDIC"). Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors rather than shareholders. 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 is required by the FRB and the FDIC 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 of Financial Condition and Results of Operations -- Capital Resources," included in the Shareholders' Report. 8 Also, FDIC 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, 1996, the Company had a total risk-based capital ratio of 15.70%, a Tier 1 risk-based capital ratio of 14.44% (based on Tier 1 capital of $36,842,000 and total risk-weighted assets of $255,141,000), and a leverage ratio of 9.56%. 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. Statistical Disclosures The following statistical data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7), Selected Financial Data (Item 6), and the financial statements and notes (Item 8) included elsewhere herein through incorporation by reference to the indicated pages of the Shareholders' Report. 9 Securities (in thousands) The following tables set forth the amortized cost of Securities at the dates indicated:
December 31, 1996 1995 1994 U.S. Treasury and other U.S. Government Agencies and Corporations . . . . . . . . . . . . . --- ---- $17,249 State and Political Subdivisions. . . . . . . $14,653 $9,869 21,237 Mortgage-backed Securities. . . . . . . . . . --- ---- 11,267 Corporate Securities. . . . . . . . . . . . . --- ---- 803 Other Securities. . . . . . . . . . . . . . . 1,014 738 717 _____ _____ _____ Subtotal of Securities Held-to-Maturity . . . . . . . . . . . $15,667 $10,607 $51,273 ======= ======= ======= U.S. Treasury and other U.S. Government Agencies and Corporations . . . . . . . . . . . . . $39,182 $23,727 $7,280 State and Political Subdivisions. . . . . . . 17,356 14,232 56 Mortgage-backed Securities. . . . . . . . . . 21,006 33,144 15,584 Corporate Securities. . . . . . . . . . . . . 7,221 6,375 212 ----- ----- ----- Subtotal of Securities Available-for-Sale . . . . . . . . . . 84,765 77,478 23,132 ------ ------ ------ Total Securities . . . . . . . . . . . $100,432 $88,085 $74,405 ======== ======= =======
10 The following table sets forth the contractual maturities of securities at December 31, 1996 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the maturity of each security.) Contractual maturities may differ from actual due to rights to prepay or call. Other securities totaling $1,014 are comprised of restricted stock which do not have contractual maturities and are excluded from the table below.
Maturing 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. Treasury and other Government Agencies and Corporations . . . $1,700 4.29% $29,484 6.33% $7,998 7.08% --- --- State and Political Subdivisions . . . 2,090 7.85% 7,749 9.28% 5,119 10.20% $17,051 9.42% Mortgage-backed Securities . . . . 264 5.95% 4,025 5.98% 5,924 5.71% 10,793 5.90% Corporate Securities. --- --- 3,429 6.41% 2,646 6.37% 1,146 7.29% _____ _____ _____ _____ _____ _____ ______ _____ Totals. . . . . $4,054 6.23% $44,687 6.82% $21,687 7.36% $28,990 8.03% ====== ===== ======= ===== =======
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above table. 11 The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates:
(dollar references in thousands) 1996 compared to 1995 1995 compared to 1994 Increase / (Decrease) Due to (1) Increase / (Decrease) Due to (1) Volume Rate Net Volume Rate Net Interest Income: Federal Funds Sold. . . . . . . . $(96) $(64) $(160) $83 $276 $359 Short-term Investments. . . . . . (504) (61) (565) 308 95 403 Taxable Securities. . . . . . . . 564 154 718 88 291 379 Nontaxable Securities (2) . . . . 641 (230) 411 379 (40) 339 Loans and Leases (3). . . . . . .1,131 (362) 769 1,372 2,529 3,901 ----- ----- ----- ----- ----- ----- Total Interest Income . . . . . . .1,736 (563) 1,173 2,230 3,151 5,381 ----- ----- ----- ----- ----- ----- Interest Paid: Savings . . . . . . . . . . . . . 147 62 209 77 290 367 Time Deposits . . . . . . . . . . 465 287 752 1,291 1,581 2,872 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase. . . . . . . . . . (57) --- (57) (99) 66 (33) Demand Notes Issued to the U.S. Treasury . . . . . . (18) (6) (24) 12 19 31 Notes Payable . . . . . . . . . . (52) --- (52) 53 --- 53 ---- --- ---- ---- --- ---- Total Interest Expense. . . . . . . 485 343 828 1,334 1,956 3,290 ---- -- --- ----- ----- ----- Net Interest Earnings . . . . . . .$1,251 $(906) $345 $896 $1,195 $2,091 ====== ====== ==== ==== ====== ======
(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 $326, $254, and $253 for 1996, 1995, and 1994, respectively. 12 The following is a schedule of loans by major category for each reported period:
December 31, (dollar references in thousands) 1996 1995 1994 1993 1992 Real Estate Loans Secured by 1-4 Family Residential Properties. . . . . . . . . . . . . $74,818 $68,826 $67,737 $55,225 $47,170 Loans to Finance Poultry Production and Other Related Operations. . . . . . . . . . . . . 16,266 23,784 25,599 30,505 30,621 Loans to Finance Agricultural Production and Other Loans to Farmers. . . . . . . . . . . . . 30,453 27,310 31,959 24,806 23,844 Commercial and Industrial Loans . . . . . . . . . . . . . . . 83,491 74,612 67,662 62,321 61,189 Loans to Individuals for Household, Family and Other Personal Expenditures . . . . . . . 41,741 34,685 29,248 26,684 24,183 Economic Development Commission Bonds. . . . . . . . . . 575 608 625 762 1,547 Lease Financings . . . . . . . . . . 580 1,302 1,820 2,323 2,666 ------ ------ ------ ------ ------ Total Loans . . . . . . . . . . . . $247,924 $231,127 $224,650 $202,626 $191,220 ======== ======== ======== ========= ========
The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences, installment loans and lease financing) outstanding as of December 31, 1996 which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Maturing (dollar references in thousands) Within After One After One But Within Five Year Five Years Years Total ------ ---------- ----- ----- Commercial, Financial, Agricultural, and Poultry . . . . . $51,371 $46,659 $32,755 $130,785 Interest Sensitivity Fixed Variable Rate Rate Loans maturing after one year . . . . . . . . . . . . . . $13,323 $66,091
13 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. The following table presents information concerning the aggregate amount of underperforming assets. Underperforming 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 Restructurings" ("restructured loans").
December 31, (dollar references in thousands) 1996 1995 1994 1993 1992 Nonaccrual Loans. . . . . . . . . . . . . $1,112 $803 $983 $1,395 $1,693 Past Due Loans. . . . . . . . . . . . . . 1,098 2,683 601 461 665 Restructured Loans. . . . . . . . . . . . --- --- --- --- 6 ----- ----- ---- ----- ----- Total Underperforming Loans. . . . . . . . . . . . . . . . . 2,210 3,486 1,584 1,856 2,364 Other Real Estate . . . . . . . . . . . . 203 286 497 698 660 ----- ----- ----- ----- ----- Total Underperforming Assets . . . . . . . . . . . . . . . . $2,413 $3,772 $2,081 $2,554 $3,024 ====== ====== ====== ====== ====== /TABLE 14 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. The gross interest income that would have been recognized in 1996 on underperforming loans if the loans had been current in accordance with their original terms is $224. Interest income recognized on underperforming loans for 1996 was $127. Statements of Financial Accounting Standards No. 114 and No. 118 were adopted January 1, 1995. These 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. No increase to the allowance for loan losses was required at January 1, 1995 as a result of the adoption of these new standards. The total dollar amount of impaired loans at December 31, 1996 was $3,472,000. For additional detail on impaired loans, see Note 3 of the consolidated financial statements included in the Shareholders' Report (Exhibit 13.4). At December 31, 1996, the Company had a total of $8,758,000 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, 1996 there were no material credits not already disclosed as underperforming, impaired and 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 15 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. At December 31, 1996 loans to finance poultry operations amounted to $16,266 or 6.6% of total loans. 16 Summary of Loan Loss Experience (in thousands) 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.
Year Ended December 31, 1996 1995 1994 1993 1992 Balance of allowance for possible losses at beginning of period . . . . . . . $5,933 $5,669 $4,935 $3,862 $3,204 Addition of Affiliate Banks . . . . . . . . . --- --- 195 164 --- Loans charged-off: Real Estate Loans Secured by 1-4 Family Residential Properties. . . . . . . . . 11 221 101 --- 96 Loans to Finance Poultry Production and Other Related Operations. . . . . . . . 286 --- --- --- --- Loans to Finance Agricultural Production and Other Loans to Farmers. . . . . . . . . --- --- --- 12 29 Commercial and Industrial Loans . . . . . . . 312 20 99 378 835 Loans to Individuals for Household, Family and Other Personal Expenditures . . . . . . 163 98 55 53 76 Economic Development Bonds. . . . . . . . . . --- --- --- --- --- Term Federal Funds Sold . . . . . . . . . . . --- --- --- --- --- ---- ---- ---- ---- ---- Total Loans charged-off . . . . . . . . . . 772 339 255 443 1,036 ---- ---- ---- ---- ----- Recoveries of previously charged-off Loans: Real Estate Loans Secured by 1-4 Family Residential Properties. . . . . . . . . 14 6 6 14 46 Loans to Finance Poultry Production and Other Related Operations. . . . . . . . . . 47 --- --- --- --- Loans to Finance Agricultural Production and Other Loans to Farmers. . . . . . . . . 78 538 --- 500 132 Commercial and Industrial Loans . . . . . . . 118 53 186 148 504 Loans to Individuals for Household, Family and Other Personal Expenditures . . . . . . 38 25 35 37 28 Economic Development Commission Bonds . . . . --- --- --- --- --- Term Federal Funds Sold . . . . . . . . . . . --- --- --- --- --- ---- ---- ---- ---- ---- Total Recoveries. . . . . . . . . . . . . . 295 622 227 699 710 ---- ---- ---- ---- ---- Net Loans recovered / (charged-off). . . . . (477) 283 (28) 256 (326) ----- ---- ---- ---- ------ Additions to allowance charged to expense . . 160 (19) 567 653 984 ---- ---- ---- ---- ---- Balance at end of period. . . . . . . . . . . $5,616 $5,933 $5,669 $4,935 $3,862 ====== ====== ===== ===== ===== Ratio of net recoveries / (charge-offs) during the period to average loans outstanding (.20%) .12% (.01%) 0.13% (.17%) ====== ====== ====== ====== ======
17 The following table indicates the breakdown of the allowance for loan losses for the periods indicated:
(dollar references in thousands) December 31, December 31, December 31, 1996 1995 1994 Allowance Ratio of Allowance Ratio of Allowance Ratio of Loans to Loans to Loans to Total Total Total Loans Loans Loans Real Estate Loans . . . . . . . $311 30.18% $202 29.78% $185 30.15% Poultry Loans . . . . . . . . . 518 6.56% 1,493 10.29% 918 11.40% Agricultural Loans. . . . . . . 506 12.28% 726 11.82% 944 14.23% Commercial and Industrial Loans. . . . . . . 2,019 33.91% 1,976 32.84% 1,101 30.92% Loans to Individuals. . . . . . 179 16.84% 152 15.01% 146 13.02% Economic Development Commission Bonds. . . . . . . --- 0.23% --- 0.26% --- 0.28% Term Federal Funds Sold. . . . . . . . . . . . . --- --- --- --- --- -- Unallocated . . . . . . . . . . 2,083 N/A 1,384 N/A 2,375 N/A ----- ----- ----- ----- ----- ----- Totals. . . . . . . . . . . . . $5,616 100.00% $5,933 100.00% $5,669 100.00% ====== ====== ====== (dollar references in thousands) December 31, December 31, 1993 1992 Allowance Ratio of Allowance Ratio of Loans to Loans to Total Total Loans Loans Real Estate Loans . . . . . . . $118 27.25% $29 24.67% Poultry Loans . . . . . . . . . 65 15.05% 60 16.01% Agricultural Loans. . . . . . . 872 12.24% 148 12.47% Commercial and Industrial Loans . . . . . . 906 31.91% 1,229 33.39% Loans to Individuals. . . . . . 128 13.17% 116 12.65% Economic Development Commission Bonds . . . . . . --- 0.38% --- .81% Term Federal Funds Sold . . . . . . . . . . . . --- --- --- --- Unallocated . . . . . . . . . . 2,846 N/A 2,280 N/A ----- ----- Totals. . . . . . . . . . . . . $4,935 100.00% $3,862 100.00% ====== ======
18 The average amount of deposits is summarized for the periods indicated in the following table:
(dollar references in thousands) December 31, 1996 1995 1994 Average Average Average Balance Rate Balance Rate Balance Rate Demand Deposits Non-interest Bearing . . . . . $35,971 --- $32,576 --- $30,279 --- Interest Bearing . . . . . . . 38,711 2.14% 40,134 2.29% 41,009 2.30% Savings Deposits. . . . . . . . . 58,951 3.17% 52,177 3.01% 48,166 2.45% Time Deposits . . . . . . . . . . 199,813 5.45% 191,202 5.30% 164,422 4.42% . ------- ------- ------- Totals . . . . . . . . . . . . $333,446 4.08% $316,089 4.00% $283,876 3.31% ======== ======== ========
Maturities of time certificates of deposit of $100,000 or more are summarized as follows: (in thousands) December 31, 1996 3 months or less $9,613 Over 3 through 6 months 5,609 Over 6 through 12 months 3,961 Over 12 months 8,749 ------- Total $27,932 =======
19 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, 1996 1995 1994 Percentage of Net Income to: Average Shareholders' Equity. . . . . . . . 10.77% 11.68% 10.85% Average Total Assets. . . . . . . . . . . . 1.08% 1.13% 1.08% Percentage of Dividends Declared per Common Share to Net Income per Common Share (1). . . . . . . . . . . . . 37.26% 34.55% 35.79% Percentage of Average Shareholders' Equity to Average Total Assets. . . . . . . . . . . . 10.05% 9.65% 9.91%
(1) Based on historical dividends declared by German American Bancorp without restatement for pooling. 20 FORWARD-LOOKING STATEMENTS This Form 10-K and future filings made by the Company with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by the Company and the Banks, and oral statements made by executive officers of the Company and the Banks, may include forward-looking statements relating to such matters as (a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Banks do business, (b) expectations regarding revenues, expenses, and earnings for the Company and the Banks, (c) the impact of future or pending acquisitions, (d) deposit and loan volume, and (e) new products or services. Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. To comply with the terms of a "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 that protects the making of such forward-looking statements from liability under certain circumstances, the Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. These risks and uncertainties that may affect the operations, performance, development and results of the Company's business include but are not limited to, the following: (a) the risk of adverse changes in business conditions generally and in specific markets in which the Banks operate, which might adversely affect credit quality and deposit and loan activity; (b) the risk of rapid increases or decreases in interest rates, which could adversely affect the Company's net interest margin if changes in its cost of funds do not correspond to the changes in income yields; (c) possible changes in the legislative and regulatory environment that might negatively impact the Company and the Banks through increased operating expenses or restrictions on authorized activities; (d) the possibility of increased competition from other financial and non-financial institutions; (e) the risk that borrowers may misrepresent information to management of the Banks, leading to loan losses, which is an inherent risk of the activity of lending money; (f) the risk that banks that the Company may acquire in the future may be subject to undisclosed asset quality problems, contingent 21 liabilities or other unanticipated problems; and (g) other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Company and the Banks do not undertake any obligation to update or revise any forward-looking statements subsequent to the date on which they are made. Item 2. Properties German American Bank conducts its operations from its main office building at 711 Main Street, in Jasper, Indiana. The main office building is owned by German American and contains approximately 23,600 square feet of office space. There is no indebtedness on such property on which German American Bank's main office is located. German American Bank has seven branches, three of which are located in Jasper, and one each in the Dubois County towns of Huntingburg, Ferdinand, Dubois and Ireland. Of these branch facilities, five are owned by German American Bank and two are leased. Peoples operates from its main office in Washington, Indiana, which contains approximately 22,500 square feet, and three branch offices, all of which (except for one leased branch) are owned by Peoples, plus its Union Banking Division facilities. The office of the Union Banking Division of Peoples in Loogootee, Indiana, contains approximately 12,000 square feet of space. The facility was constructed in 1988 and is owned by Peoples. Community Bank conducts its operations from three locations, all of which are owned by Community Bank. Community Bank's principal banking office is located in Otwell, Indiana, in a building containing approximately 2,850 square feet. First State Bank's main office facility, located in Tell City, Indiana, constructed in 1981, contains approximately 13,900 square feet. First State has three branches, two of which are located in Tell City and one in Rockport, Indiana. Of these branch facilities, two are owned by First State, with one being leased. 22 Item 3. Legal Proceedings. There are no pending legal proceedings, other than routine litigation incidental to the business of the Company's subsidiary banks, of a material nature in which the Company or any of its subsidiaries is involved. Item 4. Submission of Matters to a Vote of Security Holders. There was no matter submitted during the fourth quarter of 1996 to a vote of security holders, by solicitation of proxies or otherwise. 23 Special Item. Executive Officers of the Registrant.
NAME AGE TITLE AND FIVE YEAR HISTORY George W. Astrike (61) Chairman and CEO of the Company since 1995; Chairman and President / CEO prior thereto. Chairman of German American Bank since 1995; Chairman and President prior thereto. Director of each of the other Banks since acquisition by the Company. Mark A. Schroeder (43) President / Chief Operating Officer / Chief Financial Officer of the Company since 1995; Vice President / Chief Financial Officer prior thereto. Director of each of the other Banks since acquisition by the Company. Urban Giesler (59) Treasurer and Secretary of the Corporation; Senior Vice President - Personal Banking of German American Bank since January, 1993; Senior Vice President - Retail Lending of German American Bank prior thereto. John M. Gutgsell (41) Vice President and Controller of the Company since 1995; Vice President and Controller of German American Bank prior thereto. Stan J. Ruhe (45) Executive Vice President - Credit Administration of the Company since 1995. Executive Vice President of German American Bank since 1995; Senior Vice President - Credit Administration prior thereto. James E. Essany (42) Senior Vice President - Marketing of the Company since 1995; Senior Vice President - Operations / Administration of German American Bank prior thereto.
There are no family relationships between any of the officers of the Corporation. All officers are elected for a term of one year. 24 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, 1996 ("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. 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 of Financial Condition and Results of Operations" on pages 2 through 16 of the Shareholders' Report which is filed as Exhibit 13.3 to this report and is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. The financial statements of the Company and related notes on pages 17 through 35 of the Shareholders' Report and the 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 Interim Financial Data on page 3 of the Shareholders' Report, which is included as Table 1 of "Management's Discussion and Analysis of Financial Condition and Results of Operations" 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. 25 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 Corporation's Proxy Statement for the Annual Meeting of Shareholders to be held on April 24, 1997 which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Report (the "1997 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. 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 1997 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 1997 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 1997 Proxy Statement of the Corporation, which sections are incorporated herein by reference. 26 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. a) The following 1996, 1995, and 1994 consolidated financial statements of the Corporation, and the Auditors' Report thereon, included on pages 17 through 36 of the Shareholders' Reports, are incorporated into Item 8 of this report by reference.
Location in 1. Financial Statements Shareholders' Report German American Bancorp and Subsidiaries Consolidated Balance Sheets at December 31, 1996 and December 31, 1995 Page 17 Consolidated Statements of Income, years ended December 31, 1996, 1995, and 1994 Page 18 Consolidated Statements of Cash Flows, years ended December 31, 1996, 1995, and 1994 Page 19 Consolidated Statements of Changes in Shareholders' Equity, years ended December 31, 1996, 1995, and 1994 Page 20 Notes to the Consolidated Financial Statements Pages 21 - 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 during the three months ended December 31, 1996. c) Exhibits: The Exhibits described in the Exhibit List immediately following the "Signatures" page of this report (which is incorporated herein by reference) are hereby filed as part of this report. 27 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 15, 1997 By/s/George W. Astrike George W. Astrike, Chairman of the Board 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 15, 1997 By/s/George W. Astrike George W. Astrike, Chairman of the Board and Director (Chief Executive Officer) Date: March 15, 1997 By/s/Mark A. Schroeder Mark A. Schroeder, President and Director (Principal Financial Officer) Date: March 15, 1997 By/s/David G. Buehler David G. Buehler, Director Date: March ___, 1997 By Michael B. Lett, Director Date: March 15, 1997 By/s/Gene C. Mehne Gene C. Mehne, Director Date: March 15, 1997 By/s/Robert L. Ruckriegel Robert L. Ruckriegel, Director Date: March 15, 1997 By/s/William R. Hoffman William R. Hoffman, Director 28 Date: March 15, 1997 By/s/Joseph F. Steurer Joseph F. Steurer, Director Date: March __, 1997 By A. Wayne (Skip) Place Jr., Director Date: March __, 1997 By Larry J. Seger, Director Date: March 15, 1997 By/s/John M. Gutgsell John M. Gutgsell, Controller (Principal Accounting Officer)
29 EXHIBIT LIST Executive Compensation Plans and Exhibit Arrangements* Number Description of Exhibit 3.1 Restated Articles of Incorporation of the Registrant as amended April 24, 1995, are Incorporated by reference to Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 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. 10.1 Agreement and Plan of Reorganization by and among Peoples Bancorp of Washington, the Registrant, and certain affiliates, dated September 27, 1996, is incorporated by reference to Exhibit 2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 10.2 Sublease entered by and between Buehler Foods, Inc. and The German American Bank dated January 2, 1987 (Huntingburg Banking Center Branch) is incorporated by reference from Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 filed February 28, 1994 (No. 33-75762). 10.3 Sublease entered by and between Buehler Foods, Inc. and the Bank dated August 1, 1990 (The Crossing Shopping Center Branch) is incorporated by reference to Exhibit 10.12 of the Registrant's Report on Form 10-K for the year ended December 31, 1990. 30 10.4 Letter dated January 5, 1995 from the German American Bank to Buehler Foods, Inc. notifying Buehler Foods, Inc. of exercise of renewal option on The Crossing Shopping Center Branch is incorporated by reference to Exhibit 10.4 of the Registrant's Report on Form 10-K for the year ended December 31, 1994. X 10.5 The Company's 1992 Stock Option Plan is incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993 (No. 33- 55170) (the "Unibancorp S-4") X 10.6 Schedule identifying material terms of options (including replacement options) granted to the Registrant's executive officers under the Registrant's 1992 Stock Option Plan. X 10.7 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 Unibancorp S-4. X 10.8 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 Unibancorp S-4. (The Agreement entered into by George W. Astrike, a copy of which was filed as Exhibit 10.4 to the Unibancorp S-4, is substantially identical to the Agreements entered into by the other Directors.) The schedule following Exhibit 10.4 to the Unibancorp S-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 to the Unibancorp S-4. 31 10.9 Sublease entered by and between Buehler Foods, Inc. and First State Bank, dated July 25, 1996 (Tell City Branch). 11 Computation of Earnings Per Share. 13.1 Market and Dividend Information (page 37 of Registrant's Annual Report to Shareholders for the year ended December 31, 1996). 13.2 Five Year Summary of Consolidated Financial Statements and Related Statistics (page 1 of Registrant's Annual Report to Shareholders for the year ended December 31, 1996). 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 2 through 16 of Registrant's Annual Report to Shareholders for the year ended December 31, 1996). 13.4 Consolidated financial statements and related notes (pages 17 through 35 of Registrant's Annual Report to Shareholders for the year ended December 31, 1996), and Auditors' Report (page 36 of Registrant's Annual Report to Shareholders for the year ended December 31, 1996). 21 Subsidiaries of the Registrant. 23 Consent of Crowe Chizek and Company LLP. 27 Financial Data Schedule.
*Exhibits that describe or evidence all management contracts or compensatory plans or arrangements required to be filed as exhibits to this Report are indicated by an "X" in this column. EX-10 2 EXHIBIT 10.6 EXHIBIT 10.6 SCHEDULE IDENTIFYING MATERIAL TERMS OF OPTIONS GRANTED TO GERMAN AMERICAN BANCORP EXECUTIVE OFFICERS UNDER THE 1992 STOCK OPTION PLAN(1)
Name of Grantee Option Type of George Mark Stan Urban James Price Option (2) Astrike Schroeder Ruhe Giesler Essany Per Share ORIGINAL GRANT 4/20/93 9,922.5000 8,268.7500 4,961.2500 2,480.6300 2,480.6300 $19.6600 REPLACEMENT(3) 12/30/94 1,192.9100 1,102.5000 0.0000 0.0000 0.0000 $29.3700 REPLACEMENT(3) 7/10/95 2,080.4200 1,102.5000 0.0000 330.7500 158.7600 $28.3000 REPLACEMENT(3) 1/9/96 3,087.0000 0.0000 763.3500 326.5500 330.7500 $29.7600 REPLACEMENT(3) 7/15/96 0.0000 945.0000 593.2500 296.1000 378.0000 $32.8600
1. Numbers of options and per share exercise prices have been retroactively adjusted for subsequent stock splits and dividends. 2. The only new grants of options under the German American Bancorp 1992 Stock Option Plan (the "Plan") were made on April 20, 1993. All options expire ten years after the date of grant. 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 five anniversary dates beginning on the first anniversary date following 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 in 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. The only grants made under the Plan subsequent to April 20, 1993, are grant of such replacement options. EX-10 3 EXHIBIT 10.9 SUBLEASE THIS SUBLEASE, made and entered into as of the 25th day of July, 1996, by and between BUEHLER FOODS, INC., an Indiana Corporation, having as its principal address, 1100 West 12th Avenue, Jasper, Indiana, hereinafter referred to as "Buehler", and First State Bank, an Indiana financial institution, having its principal offices at 645 Main Street in Tell City, Indiana, hereinafter referred to as "Bank" ("Sublease"). WHEREAS, pursuant to a Lease, dated February 1, 1988, between William Tell Homes Company and Kmart Corporation, as amended by Modification of Leased Agreement, dated September 26, 1991 (collectively, the "Master Lease") Kmart leased a building of approximately 84,000 square feet, the "Leased Premises" located on the property in Tell City, Perry County, Indiana, described in Exhibit A attached hereto and made a part hereof and depicted on Exhibit B attached hereto and made a part hereof, which property, together with the buildings and improvements thereon, including the Leased Premises, are defined as the "Kmart Shopping Center", and a memorandum of the Master Lease was recorded in Miscellaneous Record 21, Pages 122-126 in the Office of the Recorder of Perry County; and WHEREAS, Buehler has entered into a sublease for the Leased Premises, with Kmart Corporation, dated December 2 4, 1995, which sublease is hereinafter referred to as the "Master Sublease," and a memorandum of the Master Sublease was recorded in Miscellaneous Record 33, Pages 644-650 in the Office of the Recorder of Perry County; and, WHEREAS, Bank desires to sublease from Buehler a portion of that Leased Premises currently leased by Buehler, upon which Buehler shall be operating a retail grocery business. NOW, THEREFORE, it is agreed by the parties that Bank shall sublease and occupy a portion of the Leased Premises leased by Buehler under the following terms and conditions: ARTICLE I THE DEMISE Section 1.01. The Sublet Premises. Buehler does hereby sublet to Bank, and Bank subleases from Buehler, upon the terms and conditions herein, a certain portion of the Leased Premises, including a part of the building to be occupied as a retail grocery supermarket and a part of the Common Areas, which subleased premises are more particularly depicted on "Exhibit B" attached hereto and made part hereof. That portion sublet under this Sublease may hereinafter be referred to as being the "Sublet Premises" and the Sublease thereof by Bank shall be subject to the terms and conditions set forth in the Master Lease and Master Sublease above described. 3 Section 1.02. Common Areas. Bank shall have the non-exclusive right to use common parking areas currently existing for use by its customers, but shall require Bank employees to park in spaces away from Buehler's customer parking near the place of customer access to Buehler's store. Bank's employees shall have non-exclusive right to use restrooms and employee "break" room in the Buehler store, and Bank's customers shall have access to the Sublet Premises through the Buehler store during normal business hours. Section 1.03. Services. Buehler shall furnish the Bank with heat, air conditioning; lights and all utility services except telephone. Such telephone expenses shall be paid by Bank, except that Buehler shall, in the construction of the Sublet Premises, provide all necessary telephone conduits and wiring. Said utilities shall be adequate to maintain a proper environment for operation of branch bank facilities. Buehler shall, at Buehler's expense, maintain the Sublet Premises and all of the HVAC and other building equipment not owned by Bank in good condition and repair. Bank shall, at Bank's expense, provide the day-to-day janitorial services, including carpet and floor maintenance, and the upkeep and repair of all interior 4 leasehold improvements added by Bank. Provided, however, that Bank also shall be responsible for the repair of any portion of the Sublet Premises to the extent damaged by Bank, its employees or representatives. Buehler shall maintain the driveways and parking areas in good condition and repair and reasonably free of snow, ice, dirt and debris as required by the Master Lease and Master Sublease. No trash, waste or other debris is to be located or placed by Bank outside the Sublet Premises or Buehler's store except in closed containers as provided by Buehler. Section 1.04. Construction Responsibilities. Buehler agrees that it will, at its own cost and expense, cause the construction of such necessary walls, roof and floor, to create the separate space for the Sublet Premises, which construction shall, except as otherwise mutually agreed, be according to the approved plans and specifications of the Sublet Premises. Buehler also will provide all heating and air conditioning systems, electrical system and sprinkler system. The electrical system shall include hook-up facilities for Bank's fixtures and banking equipment at locations mutually agreeable. Bank will furnish and install its own trade fixtures including, but not limited to, all special banking equipment, safes, alarm system and other security devices, interior finish work, furnishings and 5 decorations, all of which shall remain the property of the Bank. Bank may not change or alter the Sublet Premises in a manner which will adversely affect Buehler's operation without Buehler's prior approval and any approvals required by the Master Sublease. Section 1.05. Signs. Subject to provisions in the Master Lease and Master Sublease, the Bank shall have the right to erect appropriate signs on the exterior of Buehler's store, over any walk-up window and at the lobby entrance in the interior of the Buehler's store; provided, however, that no such sign shall be erected until drawings depicting the sign together with specifications of the methods by which such sign is to be affixed to the building (as well as approval of location of each sign), shall have been submitted to and approved by Buehler, the Master Lessor and Master Sublessor, as may be required. Section 1.06. Interior Development. Buehler agrees that it will not locate its displays of merchandise or shelving closer to the interior walk--up facilities of the Bank than the lobby area of the Sublet Premises and will not block access to the Sublet Premises from Buehler's store. Section 1.07. Taxes. Buehler agrees that during the Term of this Sublease, Buehler will pay all real estate taxes and assessments accruing against the Sublet 6 Premises to the extent Buehler shall be responsible for payment of same under the Master Lease or Master Sublease. Bank shall pay all such taxes accruing upon personal property placed thereon by Bank, including trade fixtures, furniture and equipment. ARTICLE II TERM Section 2.01. The Original Term. The initial term of this Sublease is for a period of five (5) years beginning on the Commencement Date, which shall be referred to hereinafter as the "Original Term." Section 2.02. Commencement Date. The Commencement Date of the Original Term shall be July 25, 1996. Section 2.03. Options for Extensions. If the Bank shall comply with and not be in default of any of the terms, provisions and conditions of this Sublease, then, subject to the terms and conditions of the Master Lease and Master Sublease, Bank shall have an option to extend this Sublease for (i) an additional consecutive term beginning on the next succeeding day after the expiration of the Original Term and ending on January 29, 2008 ("First Extended Term"); (ii) an additional consecutive term of five (5) years commencing at the expiration of the First Extended Term ("Second Extended Term"); and an additional consecutive term of five (5) years commencing at the expiration of the Second Extended Term ("Third 7 Extended Term"). The extended term or terms also may be referred to hereinafter collectively as the "Extended Term or Extended Terms". The Original Term and any Extended Term may be referred to hereinafter collectively as the "Granted Term". Notice of intention to exercise any extension above described shall be given by Bank to Buehler in writing at least one hundred eighty (180) days before the expiration of the Original Term or the prior Extended Term, and if the Bank fails to give any such notice within the time limited, any subsequent option or options to extend shall expire and be of no force or effect. Notwithstanding the foregoing, the Bank's right to extend this Sublease shall be subject to the renewal or extension by Buehler of the Master Sublease. The Extended Terms granted herein shall not obligate Buehler to extend the term of the Master Sublease. Section 2.04. Termination Option. In the event that the Master Lease or Master Sublease is terminated for any reason, or if Buehler should make an assignment of its Master Sublease to any other firm or corporation other than an affiliated entity, the Marjorie Buehler Real Estate Trust or a business successor for the continued operation of a retail grocery business, or if business operations in that portion of the Leased Premises occupied by Buehler should be discontinued for any period of time longer than one (1) month, except in 8 the instance of fire or other casualty, the Bank shall have the right to terminate this Sublease upon thirty (30) days' notice to Buehler. Should William Tell Homes Company under the Master Lease or Kmart Corporation under the Master Sublease elect to terminate either the Master Lease or Master Sublease, nothing herein shall prevent Bank from entering into a new lease arrangement with William Tell Homes Company or Kmart Corporation or from assuming Buehler's obligation under the Master Sublease, subject to the terms and provisions therein. Section 2.05. Approval of IDFI. Following the execution of this Sublease, Bank shall prepare and submit to the Indiana Department of Financial Institutions ("IDFI") its application for approval to open a branch office at the Kmart Shopping Center and shall prosecute same with all due diligence. If Bank is unable to secure such approval from the IDFI within a period of one hundred twenty (120) days from the execution of this Sublease, Bank shall be entitled to cancel this Sublease by notice given in the manner provided herein at any time within the eighteen (18) month period following the initial 120-day period. 9 ARTICLE III RENT Section 3.01. Rent. The Bank shall pay Buehler, at its principal office, or at such other place as Buehler shall designate from time to time in writing, rental: (a) During the first two (2) years of the Original Term, Seven Thousand Eight Hundred Dollars ($7,800.00) per year, payable in advance in equal monthly installments of Six Hundred Fifty Dollars ($650.00) per month, on the first day of each month. If the Bank should be open for business prior to the Commencement Date, the Bank shall pay a pro rata portion of the rental for the part of the month prior to the Commencement Date; and (b) After the first two (2) years and during the next three (3) years of the Original Term, Nine Thousand Three Hundred Dollars ($9,300.00) per year, payable in advance in equal monthly installments of Seven Hundred Seventy-Five Dollars ($775.00) per month, on the first day of each month. (collectively referred to as "Rent") Section 3.02. Rent During Extended Terms. In the event Bank should elect to exercise its option to extend this Sublease, as provided by Section 2.03, Bank shall pay rent to Buehler during the First Extended Term as follows: (i) in an annual amount during the first two 10 (2) years of Nine Thousand Three Hundred Dollars ($9,300.00) per year payable in advance in equal monthly installments of Seven Hundred Seventy-Five Dollars ($775.00) per month, on the first day of each month, and (ii) in an annual amount during the remainder of the First Extended Term of Ten Thousand Eight Hundred Dollars ($10,800.00) per year, payable in advance in equal monthly installments of Nine Hundred Dollars ($900.00) per month, on the first day of each month. In the event the Bank should elect to exercise its option to extend this Sublease for the Second Extended Term, as provided by Section 2.03, Bank shall pay rent to Buehler during the Second Extended Term in an annual amount of Fourteen Thousand Four Hundred Dollars ($14,400.00), which sum shall be payable in advance in equal monthly installments of One Thousand Two Hundred Dollars ($1,200.00) per month in the same manner provided in Section 3.01 hereof. In the event the Bank should elect to exercise its option to extend this Sublease for the Third Extended Term, as provided by Section 2.03, Bank shall pay rent to Buehler during the Third Extended Term in an annual amount of Eighteen Thousand Dollars ($18,000.00), which sum shall be payable in advance in equal monthly installments of One Thousand Five Hundred Dollars ($1,500.00) per month in the same manner provided in Section 3.01 hereof. 11 ARTICLE IV USE OF THE PREMISES Section 4.01. Business Use. The Sublet Premises are to be used and occupied for the operation of a branch banking facility, said operation being conducted in a manner consistent with accepted banking practices, and for no other purpose. The Bank will be entitled to further underlet the Sublet Premises to another bank or a saving association or any other financial institution with Buehler's prior written approval and subject to the approval and consent of William Tell Homes Company and Kmart Corporation. Section 4.02. Hours of Operation. Bank shall open the Subleased Premises for the transaction of regular banking business in the Sublet Premises for at least the same number of hours per week and on the same number of days per week that a majority of other branch facilities of the Bank are open for banking business of the same character (excluding operation of an ATM machine) as that conducted in the Sublet Premises. ARTICLE V SECURITY Section 5.01. Security Equipment. The Bank shall install such security equipment as is deemed by it to be necessary or desirable for prevention of robberies and thefts in the Sublet Premises. The expense of such 12 installation and maintenance shall be borne by the Bank except that Buehler shall furnish the necessary electricity for operation of such equipment. Buehler shall not be responsible for attempts to penetrate the Sublet Premises, even if such attempts occur through the Buehler store. Buehler shall not furnish any additional security not required for the protection of its business solely due to the Bank's presence in the Buehler store. The Bank shall have the right to retain security personnel; provided that, if said security personnel are to operate outside of the Sublet Premises, prior written consent of Buehler shall be obtained. Buehler shall in no event be liable for and the Bank hereby releases Buehler, its successors and assigns, from any liability for any direct, indirect or consequential losses or damages suffered or incurred by the Bank due to its lease of the Sublet Premises, whether by burglary, robbery, theft, embezzlement, mysterious disappearance or otherwise, and by reason of failure of the electrical service supplied by Buehler for operation of the security devices or equipment. ARTICLE VI DAMAGE BY FIRE OR OTHER CASUALTY Section 6.01. Partial or Total Destruction of Building. In the event of any damage to any improvement on the Leased Premises described in the Master Sublease 13 by fire or other casualty, Buehler's obligation to rebuild and restore the Leased Premises, including the Sublet Premises shall be subject to the terms and provisions of the Master Lease and Master Sublease. In the event that such damage renders it inadvisable for the Bank to continue its business during such period of restoration, all rental under this Sublease shall be abated during that period in which Bank ceases operation and until such restoration is completed. In the event that any such damage should not directly affect the Bank, but should cause the discontinuance of Buehler's business operations in the Leased Premises, the Bank shall have the right to discontinue its operation in the Sublet Premises until business operations are recommenced by Buehler, and rental under this Sublease shall be totally abated while the business operations of the Bank are suspended. If the Leased Premises should be destroyed or damaged due to casualty, and if the Master Lease or Master Sublease should on such occasion be terminated, then this Sublease also shall be terminated, effective on the termination of the Master Sublease. ARTICLE VII INDEMNIFICATION AND INSURANCE Section 7.01. Indemnification. Each party agrees to indemnify and save harmless the other party against and from any and all claims by or on behalf of any 14 person, firm or corporation arising from any breach or default in the performance of any covenant or agreement on its part to be performed under this Sublease. The indemnification herein provided shall include all costs, counsel fees, and expenses or liabilities incurred in connection with any such claim or action or proceeding brought thereon. Each party covenants and agrees to pay and to indemnify the other party against all legal costs and charges, including counsel fees, lawfully and reasonably incurred in enforcing any covenant or agreement contained in this Sublease. In the event of any litigation between Buehler and the Bank with respect to the terms of this Sublease or any matter arising thereunder, the successful party in such litigation shall be entitled to recover all of is costs, including attorney's fees, for the other party as a party of the judgment in such litigation. Section 7.02. Waiver of Subrogation. Buehler and the Bank each hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise, for any loss or damage to property caused by fire or other casualty, even if said fire or casualty shall have been the fault or negligence of the other party or anyone for whom such party may be responsible. Each party agrees to cause its fire and other hazard 15 insurance policies to contain provisions recognizing this release of liability and waiving all rights or subrogation against the other party to this Sublease. Section 7.03. Public Liability Insurance. Each party shall procure and maintain during the Granted Term such policies of general liability insurance against claims, demands or actions for personal or bodily injury or death and for damage to property arising from or related to or connected with the occupancy of an conduct of business in and about the Leased Premises and the Sublet Premises as each party may deem adequate for its own protection; provided, however, Buehler's policies of insurance shall comply with the requirements of the Master Sublease and the Bank's policies of insurance shall be in an amount not less than Five Hundred Thousand Dollars ($500,000.00). William Tell Homes Company, Kmart Corporation and Buehler Foods, Inc. shall be named as an additional party insured under the Bank's insurance policy. Section 7.04. Casualty Insurance. Buehler shall procure and maintain during the Granted Term fire and casualty insurance upon the Leased Premises, including the Sublet Premises, as required under the Master Lease and Master Sublease. Bank shall procure and maintain casualty insurance for the personal property placed upon the Sublet Premises by Bank. 16 ARTICLE VIII REMEDIES Section 8.01. Defaults. The happening of any one or more of the following events shall be deemed an "Event of Default": (a) The institution of proceedings in a court of competent jurisdiction or by the Indiana Department of Financial Institutions or the Federal Deposit Insurance Corporation or any other regulatory agency of state or federal government for the reorganization, liquidation or involuntary dissolution of the Bank, or for its adjudication as being insolvent, or for the appointment of a receiver or conservator of the property of the Bank, and said proceedings are not dismissed, and any receiver, conservator, trustee, or liquidator appointed therein discharged, within thirty (30) days after the institution of said proceedings; and (b) the commission or omission by the Bank of any act which results in the assertion of a mechanic's lien claim against the land or building of which the Sublet Premises is a part and the same is not released or otherwise provided for by indemnification within sixty (60) days; and (c) the failure of the Bank to pay an installment of rent when due and continuation of such default for ten (10) days after notice; and 17 (d) or the failure of the Bank to perform any of its other covenants under this Sublease and the continuation of such default for a period of twenty (20) days after notice. In the event that any such default (other than a default that can be cured by the payment of money) cannot be cured within the time limit, no event of default shall be deemed to have occurred so long as the Bank is diligently pursuing appropriate action to cure the default, continues to diligently pursue such action to cure, and if such action was commenced within the time limit. Section 8.02. Rights on Default. Upon the occurrence of any Event of Default, Buehler may, at its option, in addition to any other remedy or right it has hereunder or by law; (a) Re-enter the Sublet Premises, without demand, and resume possession by an action in law or equity or by force or otherwise and without being liable in trespass or for any damages and without terminating this Sublease. Buehler may remove all persons and property from the Sublet Premises after giving Bank ten (10) days' notice. If such property is not removed within such ten (10) days, such property shall be deemed abandoned and shall become the property of Buehler at its election. At any time after said ten (10) day period, Buehler may remove all persons and property from the Sublet Premises, with 18 or without process of law, and Bank shall be liable for the costs of such removal and storage of same. (b) Terminate this Sublease at any time upon the date specified in a notice to Bank. Bank's liability for damages shall survive such termination. Upon termination, such damages recoverable by Buehler from Bank shall, at Buehler's option, be either an amount equal to "liquidated damages" or an amount equal to "indemnity payments". "Liquidated damages" means an amount equal to the excess of the rentals provided for in this Sublease which would have been payable hereunder by Bank, had this Sublease not so terminated, for the period commencing with such termination and ending with the date set for the expiration of the Original Term granted (hereinafter referred to as "unexpired term") over the reasonable rental value of the Sublet Premises for such unexpired term. "Indemnity payments" means an amount equal to the rent and other payments provided for in this Sublease which would have become due and owing thereunder from time to time during the unexpired term plus the costs and expenses paid or incurred by Buehler from time to time in connection with: (1) Obtaining possession of the Sublet Premises; and (2) removal and storage of Bank's property; and 19 (3) care, maintenance and repair of the Sublet Premises while vacant; and (4) reletting the whole or any part of the Sublet Premises; and (5) making all repairs, alterations and improvements to be made by Bank hereunder and performing all covenants of the Bank relating to the condition of the Sublet Premises, less the rent and other payments, if any, actually collected and allocable to the Sublet Premises or to the portions thereof relet by Buehler. Bank shall make indemnity payments monthly and Buehler can sue for all indemnity payments as they accrue. Buehler shall have the duty to sublet the Sublet Premises upon repossession and Bank shall not be liable for any rental should Buehler allocate the Sublet Premises for use as part of Buehler's store. (c) Without terminating this Sublease, relet the Sublet Premises without the same being deemed an acceptance of the surrender of this Sublease nor a waiver of Buehler's right to remedies and Buehler shall be entitled to indemnity payments, as heretofore defined from Bank. Any reletting by Buehler may be for a period equal to or less than or extending beyond the remainder of the Original Term, for the whole or any part of the Sublet Premises, separately or with other premises, or 20 for any sums, or to any lessee or for any use Buehler deems appropriate subject to the terms and provisions of the Master Sublease. Should Buehler allocate the Sublet Premises to Buehler's store operation, then Bank shall not be liable for any rent due during that period of time. Section 8.03. Advances. In the event of any breach hereunder by either party, the other party, after thirty (30) day's written notice to the defaulting party, may cure such breach for the account and at the expense of the defaulting party. Any money spent or cost or expense incurred by either party incurring such a breach or default for the account of the other party shall be reimbursed by the defaulting party on the first day of the month following the payment, with interest at the rate of twelve percent (12%) per annum, or at four percent (4%) over the announced prime interest rate of the Bank, whichever is higher. In the event of the failure of Buehler to make prompt responses to emergency notification of the need for immediate repairs in order to maintain the usability of the Sublet Premises, such advance may be made by the Bank without the thirty (30) day written notice; provided, however, that Bank shall within twenty-four (24) hours following such advance give Buehler written notice thereof. In the event that Buehler fails to reimburse the Bank for any such 21 expenditure as provided herein, the Bank may deduct such amounts as it has properly expended pursuant to the terms hereof from the rental payment or payments thereafter due. ARTICLE IX ACCESS TO THE SUBLET PREMISES Section 9.01. Inspection and Repairs. Buehler shall have the right to enter upon the Sublet Premises during all regular business hours for the purpose of inspecting the same or of making repairs, additions or alterations thereto. Except in the case of fire or other emergency, Buehler shall not enter the Sublet Premises for any purpose at any time other than when the Sublet Premises are open for business except at a time agreed upon the Bank, and only when accompanied by an employee of the Bank. Said right of entry shall inure to the benefit of the William Tell Homes Company and Kmart Corporation as well as to Buehler, and William Tell Homes Company and Kmart Corporation also shall have the right to enter the Sublet Premises as contained in the Master Lease and Master Sublease. Any entry shall, however, be such as to maintain the effectiveness of Bank's security. ARTICLE X NOTICES Section 10.01. Manner of Giving. Whenever under this Sublease a provision is made for notice of any kind 22 such notice shall be given in writing and signed by or on behalf of the party giving or making the same, and it shall be deemed sufficient notice and service thereof if such notice is to the Bank and is sent by first-class mail, postage pre-paid, to the general offices of the Bank at 645 Main Street, Tell City, Indiana 47586; and if to Buehler, sent by first-class mail, postage pre-paid, at 1100 West 12th Avenue, Jasper, Indiana 47546. Either party hereto may change its address for notification purposes by written notice to the other party. In the event of the need for emergency notice to Buehler (e.g., failure of HVAC systems, casualty damage, serious roof leakage, etc.), the Bank may notify one of Buehler's officers or the store manager by telephone, but shall within twenty-four (24) hours thereafter give written notice thereof in the manner above provided. ARTICLE XI SURRENDER OF POSSESSION Section 11.01. Surrender in Good Condition. At the expiration of the subtenancy created hereunder, whether by lapse of time or otherwise, the Bank shall surrender the Sublet Premises in good condition and repair, reasonable wear and tear, loss by fire and other casualty, and acts of God excepted. The Bank shall remove its personal property from the Sublet Premises and shall repair any damage to the Leased Premises and the 23 Sublet Premises caused by the installation or removal of such property. All fixtures, partitions, equipment, trade fixtures, alterations or changes in the Sublet Premises installed by the Bank shall be and remain personal property, regardless of the manner of their annexation, and may be removed by the Bank, if it so elects, and shall be removed by the Bank if Buehler, William Tell Homes Company or Kmart Corporation so directs, in whole or in part, at the termination of the Granted Term or the sooner expiration or termination of the Sublease. Any damage to the Sublet Premises caused by the installation or removal or any such property shall be repaired by the Bank. Any such property remaining with said consent shall become the sole property of Buehler. Section 11.02. Holding Over. In the event the Bank remains in possession of the Sublet Premises with the consent of Buehler after the expiration of the Granted Term, and without the execution of a new Sublease, it shall be deemed to be occupying the Sublet Premises as a subtenant from month to month at the same monthly rent and subject to all other conditions and provisions of this Sublease insofar as the same are applicable to a month-to-month subtenancy. 24 ARTICLE XII GENERAL PROVISIONS Section 12.01. Remedies Cumulative - Non-Waiver. The various rights and remedies herein contained and reserved to each of the parties shall not be considered as exclusive of any other right or remedy or such party, which shall be construed as cumulative and shall be in addition to every other remedy now or hereafter existing at law, in equity, or by statute, and such rights and remedies may be exercised and enforced concurrently and whenever and as often as occasion therefor arises. No delay or omission of the right to exercise any power by either party shall impair any such right or power, or be construed of a waiver of any default or as acquiescence therein. One or more waivers of any covenants, term or condition, of this Sublease by either party shall not be construed by the other party as a waiver of subsequent or continuing breaches of the same covenants, term or condition. The consent or approval by either party to or of any act by the other party of a nature requiring consent or approval shall not be deemed to waive or render unnecessary consent to or approval of any subsequent similar act. Section 12.02. Complete Agreement. The headings of the several articles and sections contained herein are 25 for convenience only and do not define, limit or construe the contents of such articles and sections. All negotiations, considerations, representations and understandings between the parties are incorporated herein, and may be modified or altered only by agreement in writing signed by the party to be bound. Section 12.03. Agreement Binding on Successors. The covenants, agreements and obligations herein contained shall extend to, bind and inure to the benefit not only of the parties hereto, but their successors and assigns. Section 12.04. Authorization. Each party hereto executes this Sublease by its duly elected officers, who have been authorized by said party's Board of Directors to execute this instrument on behalf of that respective party. IN WITNESS WHEREOF, the parties have cause this Sublease to be executed as of the day and year first above set forth. "BUEHLER" BUEHLER FOODS, INC. By/s/ David G. Buehler ___________________________ David G. Buehler, President ATTEST: /s/ Joseph E. Buehler, Secretary _________________________________ Joseph E. Buehler, Secretary 26 "BANK" FIRST STATE BANK By/s/ Clay W. Ewing ____________________________ Clay W. Ewing, President ATTEST: /s/ Grant L. Taylor _________________________ Grant L. Taylor Vice President/Cashier STATE OF INDIANA ) ) SS: COUNTY OF DUBOIS ) Before me, the undersigned, a Notary Public in and for said County and State, personally appeared the within named DAVID G. BUEHLER and JOSEPH E. BUEHLER. known to me to be the President and Secretary, respectively, of BUEHLER FOODS, INC. who acknowledged the truth of the statements in the foregoing instrument to be its voluntary act and deed. WITNESS my hand and seal this 28 day of March, 1997. /s/ Karen S. Erny ______________________________ Notary Public Karen S. Erny ______________________________ Printed County of Residence: Dubois _________________________ My Commission Expires: June 21, 1998 _________________________ 27 STATE OF INDIANA ) ) SS: COUNTY OF PERRY ) Before me, the undersigned, a Notary Public in and for said County and State, personally appeared the within named CLAY W. EWING and GRANT L. TAYLOR, known to me to be the President and Vice President/Cashier, respectively, of FIRST STATE BANK, who acknowledged the truth of the statements in the foregoing instrument to be its voluntary act and deed. WITNESS my hand and seal this 19th day of March, 1997. /s/ Mary E. Reisz ______________________________ Notary Public Mary E. Reisz ______________________________ Printed County of Residence: Perry _________________________ My Commission Expires: August 21, 2000 _________________________ EX-11 4 German American Bancorp Computation of Earnings Per Share (1)
1996 1995 1994 Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted Average Shares: Outstanding Common Shares. . . . . . .1,920,053 1,920,053 1,916,482 1,916,482 1,915,900 1,915,900 Common Stock Equivalents: Stock Options (2). . . . . . . . . . 19,965 19,965 21,863 21,863 24,586 24,586 Assumed Repurchase of Shares . . . . . . (15,667) (13,539) (16,200) (15,441) (17,759) (17,185) Average Common and Common Equivalent Shares Outstanding. . . . .1,924,351 1,926,479 1,922,145 1,922,904 1,922,727 1,923,301 Net Income in Thousands: Net Income . . . . . . . . . . . . . . $4,065 $4,065 $4,018 $4,018 $3,474 $3,474 Earnings Per Share: (3) Net Income . . . . . . . . . . . . . . $2.11 $2.11 $2.09 $2.09 $1.81 $1.81
(1) Average outstanding common shares and net income have been restated for all periods presented to reflect 5% stock dividends in 1996 and 1995. (2) Stock options of 0, 3,672 and 2,295 have been excluded from the above calculations as they were anti- dilutive at December 31, 1996, 1995 and 1994, respectively. (3) Stock options are not materially dilutive and have been excluded from earnings per share reflected in the consolidated statements of income. Exhibit 11 AM\GAB10K\9610KGAB.11 EX-13 5 EXHIBIT 13.1 EXHIBIT 13.1 MARKET AND DIVIDEND INFORMATION The following table sets forth (a) the high and low closing prices for the Company's common stock as reported by NASDAQ by quarter for 1996 and 1995, and (b) dividends declared per share on the Company's common stock (not retroactively restated for pooling of interests transactions) by quarter during 1996 and 1995. All per share information has been retroactively restated for the Company's 5% stock dividend declared in October 1996 and October 1995. 1996 1995 High Low Dividend High Low Dividend First Quarter $32.26 $28.57 $.19 First Quarter $30.61 $28.12 $.18 Second Quarter $33.81 $30.48 $.20 Second Quarter $29.93 $27.21 $.18 Third Quarter $35.71 $32.14 $.20 Third Quarter $29.48 $27.21 $.18 Fourth Quarter $38.50 $34.76 $.20 Fourth Quarter $31.29 $28.57 $.18 ____ ____ $.79 $.72 === ===
The Common Stock was held of record by approximately 1,981 shareholders at March 5, 1997. Funds for payment by the Company of cash dividends are expected to be obtained 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 dividends. In addition, the Company's Board of Directors presently intends to consider declaring and issuing a stock dividend of 5% on an annual basis. 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. 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 REQUESTS SHOULD BE MADE TO JOHN M. GUTGSELL, CONTROLLER, GERMAN AMERICAN BANCORP, 711 MAIN STREET, JASPER, INDIANA, 47546. EX-13 6 EXHIBIT 13.2 EXHIBIT 13.2 Five Year Summary of Consolidated Financial Statements and Related Statistics (dollar references in thousands except share data) The following selected data have been taken from the Company's consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. See Note 17 to the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding a purchase acquisition during 1994 which affects the comparability of data. The historical data does not include a pooling of interests merger with Peoples Bancorp of Washington which was completed on March 4, 1997; the Company's financial statements on which such data is based will, however, be retroactively restated for the Peoples merger in future reports for all periods presented in accordance with the pooling of interests method. The pro forma selected data includes the Company and Peoples Bancorp of Washington combined as of and for the year ended December 31, 1996 as if the Company's March 4, 1997 acquisition of Peoples had occurred at the beginning of 1996. The pro forma data is derived from the Company's financial statements and the historical financial statements of Peoples and should be read in conjunction with discussions of the 1997 Peoples acquisition included in Note 17 to the consolidated financial statements and in "Management's Discussion and Analysis" contained elsewhere in this Annual Report. The pro forma data may not be indicative of the results that actually would have occurred if the acquisition of Peoples had occurred at the beginning of 1996 or may be obtained in the future. Pro Forma 1996 1996 1995 1994 1993 1992 Summary of Operations Interest and Fees on Loans. . . . . $27,846 $21,970 $21,210 $17,348 $16,312 $16,903 Interest on Investments . . . . . . 7,515 6,350 6,087 4,722 5,345 6,018 ______ ______ ______ ______ ______ _______ Total Interest Income. . . . . . 35,361 28,320 27,297 22,070 21,657 22,921 ______ ______ ______ ______ ______ _______ Interest on Deposits. . . . . . . . 16,405 13,594 12,633 9,394 9,844 11,197 Interest on Borrowings . . . . . . 278 51 184 133 50 72 ______ ______ ______ ______ ______ _______ Total Interest Expense . . . . . 16,683 13,645 12,817 9,527 9,894 11,269 ______ ______ ______ ______ ______ _______ Net Interest Income . . . . . . . . 18,678 14,675 14,480 12,543 11,763 11,652 Provision for Loan Losses . . . . . 210 160 (19) 567 653 984 ______ ______ ______ ______ ______ _______ Net Interest Income after Provision for Loan Losses. . . . . . . . . . . 18,468 14,515 14,499 11,976 11,110 10,668 ______ ______ ______ ______ ______ _______ Noninterest Income. . . . . . . . . 2,227 1,772 1,460 1,689 1,569 1,614 Noninterest Expenses. . . . . . . . 13,288 10,344 10,078 8,609 8,589 7,977 ______ ______ ______ ______ ______ _______ Income Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes. . 7,407 5,943 5,881 5,056 4,090 4,305 Income Tax Expense. . . . . . . . . 2,513 1,878 1,863 1,582 1,308 1,403 _____ ______ ______ ______ ______ _______ Income Before Cumulative Effect of Change in Accounting for Taxes. 4,894 4,065 4,018 3,474 2,782 2,902 Cumulative Effect of Change in Accounting for Income Taxes. . . --- --- --- --- 150 --- _____ ______ ______ ______ ______ _______ Net Income. . . . . . . . . . . . . $4,894 $4,065 $4,018 $3,474 $2,932 $2,902 Year-end Balances Total Assets. . . . . . . . . . . . $489,443 $397,506 $367,763 $346,526 $323,279 $305,022 Total Loans, Net. . . . . . . . . . 306,754 241,995 224,657 218,141 196,465 185,741 Total Long-term Debt. . . . . . . . 1,000 --- --- --- --- --- Total Deposits. . . . . . . . . . . 422,908 352,749 327,579 302,290 281,510 270,952 Total Shareholders' Equity. . . . . 48,793 39,341 36,956 32,925 31,341 29,470 Per Share Data (1 ) Income Before Cumulative Effect of Change in Accounting for Income Taxes . . . . . . . . . $1.93 $2.12 $2.10 $1.81 $1.45 $1.51 Net Income(3) . . . . . . . . . . . 1.93 2.12 2.10 1.81 1.53 1.51 Cash Dividends (2). . . . . . . . . .79 .79 .72 .65 .63 .54 Shareholders' Equity, End of Year . 19.22 20.45 19.28 17.19 16.36 15.38 Other Data at Year-end Number of Shareholders. . . . . . . 1,981 1,752 1,681 1,634 1,649 1,635 Number of Employees . . . . . . . . 218 174 167 157 143 133 Weighted Average Number of Shares . 2,636,470 1,920,053 1,916,482 1,915,900 1,915,894 1,915,894
(1) Per share data has been retroactively adjusted to give effect for stock dividends and stock splits. (2) Cash dividends represent historical dividends declared per share without retroactive restatement for pooling. (3) Pro forma net income per share for Peoples Bancorp and the Company combining as of January 1, 1994 is $1.91 for 1995 and $1.69 for 1994. EX-13 7 EXHIBIT 13.3 EXHIBIT 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations The following table summarizes the net interest income (on a tax- equivalent basis) for each of the past three years. For the tax- equivalent adjustments, an effective tax rate of 34% was used for all years presented. (1) Average Balance Sheet (Tax-equivalent / dollar references in thousands) Twelve Months Ended Twelve Months Ended Twelve Months Ended December 31, 1996 December 31, 1995 December 31, 199 Average Interest Average Interest Average Interest Principal Income/ Average Principal Income/ Average Principal Income/ Average Balance Expense Yield Balance Expense Yield Balance Expense Yield ASSETS Short-term Investments: Interest-bearing Balances with Banks. . . . . . $ 898 $ 49 5.46% $ 1,024 $ 49 4.79% $ 2,841 $ 123 4.34% Federal Funds Sold and Securities Purchased under Agreements to Resell . . . . . . 10,968 579 5.28% 12,716 739 5.81% 10,688 380 3.56% Other Short-term Investments 2,115 114 5.39% 11,247 679 6.04% 4,002 202 5.05% Securities: Taxable . . . . . . . . 66,222 3,947 5.96% 56,670 3,229 5.70% 55,014 2,850 5.18% Non-taxable . . . . . . 27,844 2,518 9.04% 20,937 2,107 10.06% 17,175 1,768 10.29% Total Loans and Leases (2) (3) 242,523 22,071 9.10% 230,143 21,302 9.26% 214,041 17,401 8.13% _______ ______ _______ ______ _______ ______ TOTAL INTEREST EARNING ASSETS. . . . . 350,570 29,278 8.35% 332,737 28,105 8.45% 303,761 22,724 7.48% _______ ______ _______ ______ _______ ______ Cash and Due from Banks . 12,549 11,159 10,222 Premises, Furniture & Equipment . . . . . . . 9,803 9,668 7,636 Other Assets. . . . . . . 8,641 8,769 6,810 Less: Allowance for Loan Losses (5,991) (5,790) (5,266) _______ _______ _______ TOTAL ASSETS. . . . . . . $375,572 $356,543 $323,163 ======= ======= ======= LIABILITIES AND SHARE- HOLDERS' EQUITY Savings and Interest-bearing Demand Deposits . . . . $ 97,662 2,699 2.76% $ 92,311 2,490 2.70% $ 89,175 2,123 2.38% Time Deposits . . . . . . 199,813 10,895 5.45% 191,202 10,143 5.30% 164,422 7,271 4.42% Federal Funds Purchased and Securities Sold under Agreements to Repurchase --- ------ 928 57 6.14% 3,572 90 2.52% Short-term Borrowings . . 989 51 5.16% 2,141 127 5.93% 1,081 43 4.01% _______ ______ _______ ______ _______ ______ TOTAL INTEREST-BEARING LIABILITIES . . . . . . 298,464 13,645 4.57% 286,582 12,817 4.47% 258,250 9,527 3.69% _______ ______ _______ ______ _______ ______ Demand Deposit Accounts . 35,971 32,576 30,279 Other Liabilities . . . . 3,393 2,993 2,603 _______ _______ _______ TOTAL LIABILITIES . . . . 337,828 322,151 291,132 _______ _______ _______ Shareholders' Equity. . . 37,744 34,392 32,031 _______ _______ _______ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY. . $375,572 $356,543 $323,163 ======= ======= ======= NET INTEREST INCOME . . . $15,633 $15,288 $13,197 ====== ====== ====== NET YIELD ON EARNING ASSETS. . . . . 4.46% 4.59% 4.34%
1. Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. 2. Nonaccruing loans have been included in the average loans. 3. Interest income on loans includes loan fees of $326, $254, and $253 for 1996, 1995, and 1994, respectively. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INTERIM FINANCIAL DATA (Table 1) (Unaudited, $ in thousands except share data) For the three months ended December September June March 31 30 30 31 1996 Interest Income . . . . . . . . . . . . . . . $7,268 $7,072 $7,019 $6,961 Interest Expense. . . . . . . . . . . . . . . 3,536 3,454 3,348 3,307 _____ _____ _____ _____ Net Interest Income . . . . . . . . . . . . 3,732 3,618 3,671 3,654 Provision for Loan Losses . . . . . . . . . . 15 67 68 10 Noninterest Income. . . . . . . . . . . . . . 452 459 467 394 Noninterest Expense . . . . . . . . . . . . . 2,555 2,794 2,544 2,451 _____ _____ _____ _____ Income before Income Taxes. . . . . . . . . 1,614 1,216 1,526 1,587 Income Tax Expense. . . . . . . . . . . . . . 554 359 469 496 _____ _____ _____ _____ Net Income. . . . . . . . . . . . . . . . $1,060 $857 $1,057 $1,091 ===== ===== ===== ===== Net Income per Share. . . . . . . . . . . . . $.55 $.45 $.55 $.57 ===== ===== ===== ===== Weighted Average Shares . . . . . . . . . . . 1,922,904 1,920,880 1,918,301 1,918,088 ========= ========= ========= ========= 1995 Interest Income . . . . . . . . . . . . . . . $7,148 $6,923 $6,819 $6,407 Interest Expense. . . . . . . . . . . . . . . 3,422 3,313 3,253 2,829 _____ _____ _____ _____ Net Interest Income . . . . . . . . . . . . 3,726 3,610 3,566 3,578 Provision for Loan Losses . . . . . . . . . . (34) (213) 114 114 Noninterest Income. . . . . . . . . . . . . . 353 353 354 400 Noninterest Expense . . . . . . . . . . . . . 2,715 2,418 2,509 2,436 _____ _____ _____ _____ Income before Income Taxes. . . . . . . . . 1,398 1,758 1,297 1,428 Income Tax Expense. . . . . . . . . . . . . . 403 598 392 470 _____ _____ _____ _____ Net Income. . . . . . . . . . . . . . . . $995 $1,160 $905 $958 ===== ===== ===== ===== Net Income per Share. . . . . . . . . . . . . $.52 $.61 $.47 $.50 ===== ===== ===== ===== Weighted Average Shares . . . . . . . . . . . 1,915,881 1,916,187 1,916,864 1,917,012 ========= ========== ========= =========
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INTRODUCTION AND OVERVIEW German American Bancorp ("the Company") is a multi-bank holding company based in Jasper, Indiana. As the result of its March 4, 1997 acquisition of The Peoples National Bank and Trust Company of Washington, the Company's four affiliate banks conduct business in 20 offices in the six contiguous counties of Dubois, Daviess, Martin, Pike, Perry and Spencer Counties in Southwest Indiana. The banks provide a wide range of financial services, including accepting deposits; making commercial and consumer loans; originating, marketing, and servicing mortgage loans; issuing credit life, accident and health insurance; providing trust services for personal and corporate customers; providing safe deposit facilities; and providing investment advisory and brokerage services. 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 1994 through 1996 and financial condition as of December 31, 1996 and 1995. The information should be used in conjunction with accompanying consolidated financial statements and footnotes contained elsewhere in this report. The information has been restated to reflect the merger with The Otwell State Bank which was accounted for as pooling of interests as if it had occurred as of the beginning of the first year presented. The acquisition of certain branches of Regional Federal Savings Bank ("Regional") have been accounted for as purchases and included in reported results from the date of acquisition. (See the discussion below for further information on mergers and acquisitions.) SIGNIFICANT EFFECTS OF RECENT PEOPLES BANCORP ACQUISITION On March 4, 1997, the Company completed a merger with Peoples Bancorp of Washington, Washington, Indiana, parent company of The Peoples National Bank and Trust Company of Washington (collectively, "Peoples") in which the Company issued approximately 615,417 shares for all the outstanding shares of Peoples. Concurrently with this transaction, The Union Bank, the Company's affiliate bank in Loogootee, Indiana, combined with Peoples under the Peoples name and charter creating a $150 million financial institution to better serve the Daviess and Martin County area markets. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As a result of the Peoples acquisition and the issuance of the additional shares, the Company's operations, loans, total assets, deposits, total liabilities, and capital resources, have significantly increased since December 31, 1996. The historical financial information presented in this report (and analyzed in this Discussion) has not been restated to reflect the Company's acquisition of Peoples because the transaction was consummated after the date of the financial statements presented in this report. The Company's financial statements will, however, be retroactively restated for the Peoples merger in future reports for all periods presented, because the merger was recorded utilizing the pooling-of-interests method of accounting. For a pro forma presentation of certain financial data as of and for the year ended December 31, 1996, which gives effect to the Peoples merger by combining the separate historical financial information of Peoples and the Company for 1996, see the data under the column "Pro Forma 1996" included in the "Five Year Summary of Consolidated Financial Statements and Related Statistics" (the "Five Year Summary") which is presented elsewhere in this report. As illustrated in the Five Year Summary, and Note 3, thereto, the Company's net income per share and shareholders' equity per share, as they will be retroactively restated to give effect to the Peoples merger, will be materially less for all past years than the Company's historical net income per share and shareholders' equity per share for those years reported by the Company's historical financial statements included in this report without giving effect to the Peoples merger. Although management expects that the Peoples merger will yield opportunities for revenue enhancements and cost savings and other efficiencies that will over time offset this dilution of per share net income, management expects that the Peoples merger will continue to have a dilutive impact on per share net income for at least the Company's fiscal years ending December 31, 1997, 1998 and 1999. This is a forward-looking statement, and various factors could cause the actual period of material dilutive effect of the merger on per share net income to be longer or shorter than presently anticipated, including the possibility that actual future earnings of the separate combining entities may differ compared to the earnings that were assumed in connection with preparing management's dilution estimates, and the possibility that the amounts of expense reduction and the pace by which the Company is able to achieve expense reductions may differ for various reasons from the estimated amounts and pace. In order for the merger not to be dilutive to the Company's net income per share for the year ended December 31, 1996, management estimates that the Company would have had to have realized revenue enhancements or efficiencies from the merger of approximately $785,000. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) OTHER MERGERS AND ACQUISITIONS On April 1, 1994, the Company acquired The Otwell State Bank, Otwell, Indiana ("Otwell"), by the issuance of 113,286 shares for all the outstanding shares of Otwell. This transaction was recorded utilizing the pooling of interests method of accounting. Following the completion of the transaction, Otwell and the Company's existing affiliate, Southwestern Indiana Bank, were merged into Community Trust Bank, a combined banking institution operating in the Pike County, Indiana market through offices in Otwell, Petersburg, and Winslow, Indiana. On October 28, 1994, the Company acquired the Regional branches in Huntingburg, Rockport and Tell City, Indiana. This transaction, resulting in the acquisition of approximately $25,000,000 in assets, was recorded utilizing the purchase method of accounting. As a result of the Regional acquisition, the Company recorded approximately $1,670,000 of intangible assets consisting of $1,353,000 of goodwill and $317,000 of core deposit intangible. Intangible assets are being amortized to expense on a straight line basis over a 15 year period in the case of goodwill and over 10 years on an accelerated basis for the core deposit intangible. Following the Regional acquisition, the Huntingburg office was combined into the Company's lead bank, German American Bank. The Tell City and Rockport offices were combined into a newly formed subsidiary bank, First State Bank, Southwest, Indiana ("First State"). The Company plans to continue to aggressively pursue merger and acquisition opportunities as they become available. The Company's management believes other community banks located in the Company's general geographic area will find the concept of the Company's localized community bank holding company an attractive alternative to merging with other larger regional multi-bank holding companies. The Company's approach offers these community banks the competitive advantages of operational efficiencies gained through the ability to spread fixed operating costs over a larger asset base without the loss of flexibility and independence generally associated with affiliation with the larger regional multi-bank holding companies. Through the Company, these community banks can retain ownership control within a group of shareholders who reside in their general market areas and who support the bank's commitment to their local communities. Because of this belief, the Company's management anticipates that additional mergers and acquisitions with like- minded community banks may occur in future years. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS NET INCOME Net Income in 1996 was $4,065,000 or $2.12 per share, an increase of 1.2% over the $4,018,000 or $2.10 per share reported in 1995. The comparison of 1996 earnings relative to those of a year earlier was materially impacted by an increase in net interest income and an increase in Investment Services Income and Deposit Service Charges. Partially offsetting these earnings improvements were an increase in the Provision for Loan Loss and an increase in Professional fees largely related to the Company's merger and acquisition activities. For 1995, net income was 15.7% higher than in 1994. This increase in 1995 earnings relative to 1994 was impacted by a $586,000 decline in the required level of Provision for Loan Loss and a $1,937,000 increase in Net Interest Income. Other factors materially impacting the earnings comparison of 1995 and 1994 were a decline in Investment Services Income as well as an increase in Salaries and Benefits largely related to the inclusion of First State throughout 1995. NET INTEREST INCOME Net interest income is the Company's single largest source of earnings. It represents the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Several factors contribute to the determination of net interest income, including the volume of earning assets, the mix of earning assets, interest rates, and income taxes. Many of these factors can be controlled 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 for 1996 on a tax-equivalent basis was 2.3% higher than that for 1995 while the net interest margin was 4.46% for 1996 versus 4.59% for 1995. Tax-equivalent net interest income for 1995 was 15.8% higher as compared to 1994 with net interest margin increasing to 4.59% in 1995 from 4.34% in 1994. Excluding the effect of First State, which was included in all 1996 and 1995 report data but only since October 28, 1994 in the 1994 data, tax-equivalent net interest income was $14,345,000 for 1995, a $1,271,000 or 9.7% increase over the $13,074,000 recorded in 1994, and net interest margins (exclusive of First State) were 4.73% in 1995 and 4.36% in 1994. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The increase in net interest income during 1996 and 1995 occurred as a result of the impact of increases in the level of interest earning assets and an increase in average yields in 1995 on loans, short-term investments and securities. Fluctuations in general short-term interest rates affect the average yields on most interest earning assets more quickly than the average rate paid on interest-bearing liabilities. The fluctuations in short- term interest rates which occurred during the periods presented resulted in a decline in Net Interest Margin in 1996 following an increase in the margin in 1995. See the discussion headed "Interest Rate Management" for a further explanation of the Company's interest rate sensitivity position. PROVISION FOR LOAN LOSSES The Company provides for future loan losses through regular provisions to the allowance for loan losses. These provisions are made at a level which is considered necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of this loan loss reserve is completed quarterly by management. The consolidated provision for loan losses was $160,000 in 1996, ($19,000) in 1995, and $567,000 in 1994. The decline in provision as compared to that recorded in 1994 primarily resulted from a negative provision for loan loss at Union Bank of $110,000 in 1996 and $475,000 in 1995. The negative provisions at Union Bank were due to collections of previous years' charged-off loans combined with management's determination that an adequate level of loan loss reserve existed prior to the loan recoveries. Because of the adequacy of the existing reserve, the recoveries resulted in the recording of a negative provision. The amount of future years' provision for loan loss will be subject to adjustment based on the findings of future evaluations of the adequacy of the loan loss reserve. The section entitled RISK MANAGEMENT expands this discussion further. NONINTEREST INCOME Exclusive of net security gains and gains on sales of loans and other real estate ("ORE"), noninterest income increased 20.5% in 1996 to $1,725,000 compared to $1,431,000 in 1995. The primary source of noninterest income continues to be trust fees (income from fiduciary activities), service charges on deposit accounts and investment services income. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) As presented on Table 2 on the following page, trust department income declined by 2.2% in 1996 while service charges on deposit accounts increased by 25.0% during 1996 because of a larger number of transactions and fee generating opportunities for the Company in this area. Investment services income increased significantly by $198,000 following a $212,000 decline in 1995. The level of earnings generated through Investment Services is directly tied to the customers' utilization and acceptance of the investment products offered through this service. This investment services income is generated through a full service brokerage operation which is available at several of the Company's affiliate banks through an operating agreement with INVEST FINANCIAL CORPORATION, a subsidiary of First American Corporation, Inc. The Company intends to expand the availability of investment services, as feasible, throughout its affiliate banks. Noninterest income exclusive of security gains and gains on sales of loans and ORE decreased 5.7% in 1995 compared to 1994 largely as a result of the decrease in the level of Investment Services Income discussed above. NONINTEREST INCOME (Table 2)($ in thousands) % Change From Prior Year ______________ 1996 1995 1994 1996 1995 ____ ____ ____ ____ ____ Income from Fiduciary Activities. . . . . . . . $181 $185 $171 (2.2)% 8.2% Service Charges on Deposit Accounts . . . . . . 775 620 567 25.0 9.4 Investment Services Income. . . . . . . . . . . 406 208 420 95.2 (50.5) Other Income. . . . . . . . . . . . . . . . . . 363 418 359 (13.2) 16.4 _____ _____ _____ Subtotal . . . . . . . . . . . . . . . . . . 1,725 1,431 1,517 20.5 (5.7) Gains on Sales of Loans and Other Real Estate . 47 29 92 62.1 (68.5) Security Gains. . . . . . . . . . . . . . . . . 0 0 80 N/M N/M _____ _____ TOTAL NONINTEREST INCOME . . . . . . . . . . $1,772 $1,460 $1,689 21.4 (13.6) ===== ===== ===== N/M = Not Meaningful
NONINTEREST EXPENSE Total noninterest expense increased 2.6% in 1996 over 1995 levels. As a percentage of average total assets, total noninterest expense was 2.75% in 1996 compared to 2.83% in 1995 and 2.66% in 1994. Salaries and employee benefits, which comprise Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) approximately 55% of total noninterest expense, increased by 7.3% in 1996 following an 18.4% increase in 1995. A significant portion of this increase is attributable to the inclusion of First State Bank throughout 1996 and 1995 and to effects of changes in the Company's organizational structure which occurred in mid 1995. Prior to July 1995, the Company's executive officers and support functions served both the Company and its lead affiliate bank, German American Bank. In recognition of the increased management and administrative demands existing under a multi-bank holding company environment, the management and administrative support functions of German American Bank and the Company were segmented into distinct groups with additional staffing implemented as deemed appropriate. Although this organizational change did result in an increased level of Salaries & Benefits, Company management believes the increased management focus at both the Bank and Bancorp level will result in increased operating efficiency. Occupancy expense and furniture and equipment expense combined, decreased by $12,000 or .8% in 1996 following a 20.4% increase in 1995. Approximately one-half of the 1995 increase resulted from First State with the balance of the increased 1995 expense level attributable to an upgrading of facilities and equipment at the Company's other affiliate banks. Computer processing expense increased by 6.0% and 13.4% in 1996 and 1995, respectively, reflecting an increased number of accounts processed and conversion expenses at the Company's newly acquired affiliates. Through the utilization of state-of-the-art equipment and computer processing, the Company's management believes it will, over the long-term, be able to better control the level of employee related expenses, the Company's major noninterest expense category, while improving the quality of customer service provided throughout the affiliate bank system. Professional fees increased significantly by $207,000 in 1996 following a $59,000 decrease in 1995 largely as a result of variations in the level of merger related professional fees. While it is not possible to predict the level of acquisition activity and the resulting level of costs associated thereto, management does intend to pursue acquisition opportunities and, therefore, increased and continued costs will be likely in future years. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) During the third quarter of 1996, the FDIC instituted a one-time special assessment against all deposits insured by the Savings Association Insurance Fund ("SAIF"). A small portion of the deposits of German American Bank and all the deposits of First State Bank are insured under SAIF. Therefore, the Company was subject to a special assessment of $157,000. Including the impact of this special assessment, FDIC premiums totaled $227,000 in 1996 as compared to $393,000 and $644,000 in 1995 and 1994, respectively. Premiums for 1997 are anticipated to be approximately $43,000 with future years' premiums expected to stabilize at or near $62,000 based on the current level of insured deposits. The statements in this paragraph relating to FDIC premiums for 1997 and future years are forward-looking statements which may or may not be accurate due to the impossibility of predicting future Congressional or regulatory actions or the future capitalization levels of the insurance funds. Other operating expenses decreased by 8.1% in 1996 following a 41.2% increase in 1995. The 1995 increase was largely attributable to the inclusion of the First State operation for the full year and increased advertising and supplies expenses related to the Company's introduction, throughout 1995, of a new company-wide corporate identity program. Additionally, amortization of goodwill and the core deposit intangible totaled $216,000, $231,000 and $112,000, for 1996, 1995 and 1994, respectively. First State Bank's operating results reflected a significant portion of the amortization expense. NONINTEREST EXPENSE (Table 3)($ in thousands) % Change From Prior Year ______________ 1996 1995 1994 1996 1995 ____ ____ ____ ____ ____ Salaries and Employee Benefits. . . . . . . . . $5,738 $5,349 $4,517 7.3% 18.4% Occupancy, Furniture and Equipment Expense. . . 1,549 1,561 1,297 (.8) 20.4 FDIC Premiums . . . . . . . . . . . . . . . . . 227 393 644 (42.2) (39.0) Computer Processing Fees. . . . . . . . . . . . 423 399 352 6.0 13.4 Professional Fees . . . . . . . . . . . . . . . 405 198 257 104.5 (23.0) Other Operating Expenses. . . . . . . . . . . . 2,002 2,178 1,542 (8.1) 41.2 ______ ______ _____ TOTAL NONINTEREST EXPENSE. . . . . . . . . . $10,344 $10,078 $8,609 2.6 17.1
====== ====== ===== Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) PROVISION FOR INCOME TAXES The Company records a provision for income taxes currently payable, along with a provision for taxes payable in the future. Such deferred taxes arise from differences in the timing of certain items for financial statement reporting versus for income tax reporting. The major difference between the effective tax rate applied to the Company's financial statement income and the federal statutory rate of 34% is interest on tax-exempt securities and loans. Other components affecting this calculation include state income taxes and nondeductible merger costs. Note 10 to the consolidated financial statements contains additional details relative to the Company's income tax provision. The Company's effective tax rate was 31.6%, 31.7% and 31.3% in 1996, 1995, and 1994, respectively. CAPITAL RESOURCES Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. Minimum levels of capital are required to be maintained in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit. Tier 1, or core capital, consists of shareholders' equity less goodwill, core deposit intangibles, and certain deferred tax assets defined by bank regulations. Tier 2 capital is defined as the amount of the allowance for loan losses which does not exceed 1.25% of gross risk adjusted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under these standards are generally at least a 4.0% leverage ratio, which is Tier 1 capital divided by defined "total assets", 4.0% Tier 1 capital to risk-adjusted assets and 8.0% total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and each of its affiliate banks individually, have capital ratios that substantially exceed the regulatory minimums. The Company's shareholders' equity of $39,341,000 and $36,956,000 at December 31, 1996 and December 31, 1995, respectively represented 9.9% and 10.0% of total assets. The Company paid cash dividends of $1,518,000 and $1,392,000 during 1996 and 1995, respectively. The increased level of dividends paid in 1996 and 1995 resulted from the issuance of additional shares in connection with the Company's Stock Dividend and Dividend Reinvestment Plan. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a "well-capitalized" entity must achieve a Tier 2 Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0% and a leverage ratio of at least 5.0% and not be under a capital directive order. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on financial statements. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At December 31, 1996 the Company and all affiliate banks were categorized as well capitalized. At December 31, 1996, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material effect on the Company's consolidated liquidity, capital resources or operations. The table below presents the Company's consolidated capital ratios under regulatory guidelines. RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) 1996 1995 ____ ____ Tier 1 Capital: Shareholders' Equity as presented on Balance Sheet . . . . . . . $39,341 $36,956 Subtract: Unrealized Appreciation on Securities Available-for-Sale. (575) (859) Less: Intangible Assets and Ineligible Deferred Tax Assets. . . . . (1,924) (2,140) ______ ______ Total Tier 1 Capital. . . . . . . . . . . . . . . . . . . . . . . . 36,842 33,957 Tier 2 Capital: Qualifying Allowance for Loan Loss . . . . . . . . . . . . . . . 3,219 2,943 ______ ______ Total Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,061 $36,900 ======= ======= Risk Weighted Assets. . . . . . . . . . . . . . . . . . . . . . . . $255,141 $232,272
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) (Continued) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: Amount Ratio Amount Ratio Amount Ratio ______ _____ ______ _____ ______ _____ As of December 31, 1996: Total Capital (to Risk Weighted Assets) . . $40,061 15.70% *$20,411 *8.0% *$25,514 *10.0% Tier 1 Capital (to Risk Weighted Assets) . . $36,842 14.44% *$10,206 *4.0% *$15,308 * 6.0% Tier 1 Capital (to Average Assets) . . . . . $36,842 9.56% *$15,416 *4.0% *$19,270 * 5.0% As of December 31, 1995: Total Capital (to Risk Weighted Assets) . . $36,900 15.89% *$18,582 *8.0% *$23,227 *10.0% Tier 1 Capital (to Risk Weighted Assets) . . $33,957 14.62% * $9,291 *4.0% *$13,936 * 6.0% Tier 1 Capital (to Average Assets) . . . . . $33,957 9.29% *$14,621 *4.0% *$18,276 * 5.0% *Greater or equal to amount stated
SOURCES OF FUNDS The Company's primary funding source is its base of core customer deposits, such as noninterest-bearing demand, regular savings and money market accounts and small denomination certificates of deposit of less than $100,000. Other shorter term sources of funds are larger denomination certificates of deposit, overnight borrowings from other financial institutions, securities sold under agreements to repurchase, short-term notes payable issued on an unsecured basis, and short-term borrowings consisting of interest-bearing demand notes issued to the U.S. Treasury. The Company did not have any long-term debt during the periods presented. The membership of the Company's affiliate banks in the Federal Home Loan Bank System provide an additional source for both long and short-term borrowings. No such advances were outstanding during the periods presented. The following page contains a discussion of changes in these areas. Table 5 below presents changes between years in the average balances of all funding sources. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) FUNDING SOURCES - AVERAGE BALANCES (Table 5) ($ in thousands) % Change From Prior Year ______________ 1996 1995 1994 1996 1995 ____ ____ ____ ____ ____ Demand. . . . . . . . . . . . . . . . . . . . . $35,971 $32,576 $30,279 10.4% 7.6% Savings and Interest-bearing Checking . . . . . 67,306 69,847 71,765 (3.6) (2.7) Money Market Accounts . . . . . . . . . . . . . 30,356 22,464 17,410 35.1 29.0 Other Time Deposits . . . . . . . . . . . . . . 171,534 158,428 135,742 8.3 16.7 _______ _______ _______ Total Core Deposits. . . . . . . . . . . . . 305,167 283,315 255,196 7.7 11.0 _______ _______ _______ Certificates of Deposits of $100,000 and Over . 28,279 32,774 28,680 (13.7) 14.3 Federal Funds Purchased and Securities Sold under Agreement to Repurchase . . . . . --- 928 3,572 N/M (74.0) Other Short-term Borrowings . . . . . . . . . . 989 2,141 1,081 (53.8) 98.1 _______ _______ _______ Total Funding Sources. . . . . . . . . . . . $334,435 $319,158 $288,529 4.8 10.6 ======= ======= ======= N/M = Not Meaningful
CORE DEPOSITS The Company's average core deposits have shown steady growth over the past several years, increasing by 7.7% and 11.0% in 1996 and 1995, respectively. In 1996 and 1995, the Company experienced a shift in the composition of its deposits toward money market deposits and longer term certificates of deposit. This movement is largely attributable to customer reaction to the higher level of interest rates paid on these products relative to that paid on the savings and interest-bearing checking products. In total, average savings, interest-bearing checking and money market deposits increased by 5.8% and 3.5% in 1996 and 1995, respectively while other time deposits consisting primarily of certificates of deposits in denominations of $100,000 or less increased by 8.3% in 1996 following a 16.7% increase in 1995. Average noninterest-bearing demand deposits increased by 10.4% in 1996 and 7.6% in 1995. These changes in the mix of deposits are influenced by customers' tendency to avoid committing to longer term instruments during periods of low or declining interest rates and their attempts to lock in rates on longer term instruments during periods of perceived higher rates. They are also subject to seasonal and other non-economic factors. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) OTHER FUNDING SOURCES Exclusive of core deposits, large denomination certificates of deposit provide the majority of other funding sources for the Company. These certificates declined by 13.7% in 1996 following a 14.3% increase in 1995. The remaining other funding sources consist of federal funds purchased from other financial institutions on an overnight basis, secured repurchase agreements which generally mature within 30 days, short-term notes payable extended on an unsecured basis, and borrowings under U.S. Treasury demand notes. These borrowings represent an important source of temporary short-term liquidity for the Company. These types of borrowings and large dollar denominated certificates 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. USES OF FUNDS INVESTMENTS The Company's securities portfolio, consisting of all components of the Company's investment securities, mortgage-backed securities, and securities available-for-sale, includes U.S. Treasury securities, obligations of U.S. government agencies, obligations of state and political subdivisions, corporate investments and mortgage-backed securities issued by U.S. government agencies and other intermediaries. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The maturities of the securities and money market portfolios are a principal source of funds for loan growth and other liquidity needs. The Company's available-for-sale portfolio provides an additional source of funds from which management can respond to liquidity needs and asset/liability management requirements. During 1996, a shift occurred in the composition of the Company's securities portfolio primarily between mortgage-backed securities and agency securities. As anticipated, a substantial portion of the Company's mortgage-backed securities were paid-down during the year. The funds generated from those pay-downs were utilized to purchase agency insured callable securities at yields generally equal to or greater than those which were carried in the mortgage-backed portfolio. During 1995, the Financial Accounting Standards Board authorized a one-time window of opportunity for the transfer of securities to available-for-sale portfolios. Company management utilized this opportunity to transfer a Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) significant portion of its securities portfolio to the available- for-sale classification. Although management may sell these securities if the need arises, their designation as available- for-sale should not be interpreted to indicate that management anticipates such sales. Securities available-for-sale are carried at market value. All other securities are carried at amortized cost because management intends to hold them until maturity and the Company has the ability to do so. Note 2 to the consolidated financial statements contains additional details regarding the Company's securities portfolio in 1996 and 1995. SECURITIES PORTFOLIO (Table 6) (carrying value, $ in thousands) December 31, 1996 % 1995 % Money Market Securities . . . . . . . . . $22,176 18.0% $19,376 17.8% U.S. Treasury and Agency Securities . . . 39,064 31.6 23,787 21.8 Municipal Securities. . . . . . . . . . . 32,674 26.4 25,255 23.2 Corporate Securities. . . . . . . . . . . 7,245 5.9 6,463 5.9 Mortgage-backed Securities. . . . . . . . 21,378 17.3 33,272 30.6 Other Securities. . . . . . . . . . . . . 1,014 .8 738 .7 _______ _____ _______ _____ Total Securities Portfolio . . . . . . $123,551 100.0% $108,891 100.0% ======= ===== ======= =====
LOANS Total loans grew by $16,797,000 or 7.3% between 1996 and 1995. The Company's newest affiliate bank, First State, achieved a significant market share of the lending opportunities available within its market. The Company's loan portfolio remains well diversified with 53% of the portfolio in commercial and agricultural loans (including economic development bonds), 30% in 1-4 family residential mortgages, and 17% in consumer loans at December 31, 1996. The Company's affiliate banks lend to commercial customers in various industries including agribusiness, manufacturing, health care services, wholesale, and retailing. The Company's policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southwestern Indiana. Extensions of credit outside this primary geographic market area (other than poultry-related loans described below) are generally concentrated in commercial real estate loans granted on a selective basis generally within a 120 mile radius of the Company's primary market. Loans outside the Company's general geographic market area are further limited to loans guaranteed by either the Small Business Administration (SBA) or the Farmers Home Administration (FmHA). Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The overall loan portfolio is diversified among a variety of borrowers; however, a significant portion of the debtors' ability to honor their contracts is dependent upon the agricultural, poultry and wood manufacturing industries. Although wood manufacturers employ a significant number of people in the market area, there is not a concentration of credit to companies engaged in that industry. The Company has historically been involved in the financing of poultry production and other related operations. Approximately $16,266,000 or 6.6% of total loans at December 31, 1996 consisted of such loans which compares to a balance of $23,784,000 or 10.3% of total loans as of December 31, 1995. This decline in outstandings reflects a reduction in lending opportunities within the poultry industry. This decline in lending opportunities is expected to continue in coming years. As a means of controlling risk from concentrations of credit within this industry, the Company has, during recent years, utilized guaranties from SBA and FmHA. Typically, the guaranties provide for SBA and FmHA, in the event of default, to absorb from 85% to 90% of the loan balance remaining after the application of collateral. Assuming the guarantors perform in accordance with their guaranties, the Company's net exposure is limited to the remaining 10% to 15% balance. At December 31, 1996, the net unguaranteed exposure to poultry and other related loans was $5,033,000 or 2.0% of total loans. Approximately $12,752,000 of loans to poultry and other related operations, substantially all of which are covered by 85% to 90% guaranties, were originated outside the Company's primary business market. No unguaranteed concentration of credit in excess of 10% of total assets exists within any single industry group. The composition of loan portfolio at December 31, 1996 and 1995 is presented in further detail in Note 3 to the consolidated financial statements and in Table 7 on the following page. LOAN PORTFOLIO (Table 7) ($ in thousands) 1996 1995 1994 1993 1992 ____ ____ ____ ____ ___ Commercial and Industrial . . . . . . . . $84,071 $75,914 $69,482 $64,644 $63,855 Agricultural and Poultry. . . . . . . . . 46,719 51,094 57,558 55,311 54,465 Economic Development Bonds. . . . . . . . 575 608 625 762 1,547 Residential Mortgage Loans. . . . . . . . 74,818 68,826 67,737 55,225 47,170 Consumer Loans. . . . . . . . . . . . . . 41,741 34,685 29,248 26,684 24,183 _______ _______ _______ _______ _______ Total Loans. . . . . . . . . . . . . . 247,924 231,127 224,650 202,626 191,220 _______ _______ _______ _______ _______ Less: Unearned Income. . . . . . . . . . . 313 537 840 1,226 1,617 Allowance for Loan Loss. . . . . . . 5,616 5,933 5,669 4,935 3,862 _______ _______ _______ _______ _______ Loans, Net. . . . . . . . . . . . . . . . $241,995 $224,657 $218,141 $196,465 $185,741 ======= ======= ======= ======= =======
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RISK MANAGEMENT Various procedures are employed at the Company's affiliate banks to monitor risk. The major risk addressed by the Company on a regular basis is the credit risk inherent in the loan portfolio and to a lesser extent, the investment portfolio. Another risk is that associated with changes in interest rates. The following is a discussion of the Company's philosophies and procedures to address risk. LENDING AND LOAN ADMINISTRATION The 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. Each bank also has executive and board loan committees that serve as vehicles for communication and the pooling of knowledge, judgment and experience of its members. These committees provide valuable input to lending personnel and act as an approval body. They also serve as a monitoring tool of the overall quality of the loan portfolios. Members of the Company's executive officers serve on the board loan committees of each of the affiliate banks to ensure a consistent application of company policies. The Company maintains a comprehensive loan review program for its affiliate banks. The purpose of these reviews is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses. This program also includes regular reviews of problem loan reports, delinquencies and charge-offs. The adequacy of the allowance for loan losses is also evaluated at the affiliate bank level on a quarterly basis. This evaluation of the allowances for loan losses is based on reviews of specific loans, changes in the type and volume of the loan portfolios given current and anticipated economic conditions, and historical loss experience. The review of specific loans includes loans where the customer's cash flow or net worth may not be sufficient to repay the loan, the loan has been criticized in a regulatory examination, the accrual of interest has been suspended, or for other reasons where either the ultimate collectibility of the loan is in question or the loan has characteristics requiring special monitoring. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Activity in the allowance for loan losses is summarized in Table 8 on the following page. Table 9 presents data for the underperforming assets. Underperforming assets consist of 1) nonaccrual loans; 2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower; 3) loans past due ninety (90) days or more as to principal or interest; and 4) other real estate owned. 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. Loans are charged-off when they are deemed uncollectible. During 1996, the Company's level of underperforming loans decreased from $3,486,000 or 1.51% of total loans as of December 31, 1995 to $2,210,000 or .89% of total loans at December 31, 1996. During 1996, the allowance for loan loss decreased by $317,000 which represents the amount by which the current year's charged-off loans exceeded the amount of recoveries of prior years' charge-offs and the current year provision for loan loss. See the discussion entitled "PROVISION FOR LOAN LOSS" elsewhere in this report for further details regarding the provision. ALLOWANCE FOR LOAN LOSSES (Table 8) ($ in thousands) 1996 1995 1994 _____ _____ _____ Balance as of January 1 . . . . . . . . . . . . $5,933 $5,669 $4,935 Addition of Affiliate Banks . . . . . . . . . . --- --- 195 Provision for Loan Losses . . . . . . . . . . . 160 (19) 567 Recoveries of Prior Loan Losses . . . . . . . . 295 622 227 Loan Losses Charged to the Allowance. . . . . . (772) (339) (255) _____ _____ _____ Balance as of December 31 . . . . . . . . . . . $5,616 $5,933 $5,669 UNDERPERFORMING ASSETS (Table 9) ($ in thousands) 1996 1995 1994 ____ ____ ____ Nonaccrual Loans. . . . . . . . . . . . . . . . $1,112 $803 $983 Past Due Loans (90 days or more). . . . . . . . 1,098 2,683 601 Renegotiated Loans. . . . . . . . . . . . . . . --- --- --- _____ _____ _____ Total Underperforming Loans. . . . . . . . . 2,210 3,486 1,584 _____ _____ _____ Other Real Estate Owned . . . . . . . . . . . . 203 286 497 _____ _____ _____ Total Underperforming Assets . . . . . . . . $2,413 $3,772 $2,081 ===== ===== ===== Allowance for Loan Losses to Underperforming Loans. . . . . . . . . . . . 254.12% 170.20% 357.89% Underperforming Loans to Total Loans. . . . . . .89% 1.51% .71% Allowance for Loan Losses to Total Loans . . . 2.27% 2.57% 2.53%
Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INVESTMENTS, LIQUIDITY, AND INFLATION Two of the more important and interrelated areas the Company and its affiliate banks manage very closely are the Company's liquidity requirements and its balance between interest-rate- sensitive assets and interest-rate-sensitive liabilities. Liquidity needs in a banking organization arise from new loan demand, the funding of existing loan commitments, and deposit withdrawals. One important objective in managing the securities portfolio is to ensure the Company has adequate liquidity. The purposes of liquidity management are to match sources of funds with anticipated customer borrowings and withdrawals and other obligations and to ensure a dependable funding base. As discussed in the "Investments" discussion contained elsewhere in this report, management significantly increased the available- for-sale portfolio during 1995. This action greatly enhanced the Company's ability to quickly react to changes in liquidity and asset and liability needs. 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's asset and liability structure is substantially different from that of an industrial company, in that virtually all assets and liabilities of a financial institution are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution's performance. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of other goods and services. Attention should be directed to the various analyses and schedules throughout Management's Discussion and Analysis which are useful in analyzing how the Company is positioned to react to changing interest rates. INTEREST RATE MANAGEMENT Interest rate sensitivity occurs when assets or liabilities are subject to rate and yield changes within a designated time period. The Company performs rate sensitivity analyses which place each of the Company's balance sheet components in its appropriate maturity category according to its repricing frequency. In addition to rate sensitivity analyses, the Company also utilizes other asset/liability measurements such as computer generated simulation modeling. This enables management to measure the effect on earnings of changes in interest rates. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Without regular monitoring and management of these critical areas, a movement in interest rates and its corresponding effect on the net interest margin may significantly affect profitability. The degree of any potential consequences of such interest rate changes can be mitigated by maintaining a proper asset/liability position given projected interest rates. The Company's policy is to actively manage its asset / liability position within a one-year interval with a goal to protect its earnings from being materially adversely impacted by changes in interest rates during the coming year. The Company has a Funds Management Policy which established guidelines under which the affiliate banks manage their securities portfolios. Funds Management Committees at each of the affiliate banks meet quarterly to monitor the established guidelines. The overall objective of these committees is to ensure the Company maintains an adequate level of liquidity and maximizes its net interest margins while implementing and monitoring programs for the matching of the mix and maturities of various asset and liability categories so as to avoid undue interest rate risk. The committees formulate short and long-term strategies, direct the acquisition and allocation of funds and monitor the level of interest rate sensitivity within the established guidelines. Table 10 reflects the Company's interest rate sensitivity position (interest rate-sensitive assets minus interest rate- sensitive liabilities) individually and cumulatively, over various time horizons. As indicated in the table, a significant portion of the Company's assets and liabilities reprice within 1- 181 days. While slightly more of its assets than liabilities are subject to repricing during this period, the Company believes its asset/liability management program allows adequate reaction time to adjust to changes in interest rate trends and believes the current asset/liability position does effectively protect the Company's net interest margin and the resulting net interest income from any material adverse impact during 1997 assuming a moderate rise or decline in interest rates. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1997 (Table 10) ($ in thousands) 1-3 3-6 6-12 1-5 Beyond Months Months Months Years 5 Years Total EARNING ASSETS Money Market Assets. . . . . . $20,600 $1,376 $200 --- --- $22,176 Securities . . . . . . . . . . 25,764 8,417 11,005 $31,671 $24,518 101,375 Loans (Net of Unearned). . . . 83,337 31,213 65,773 56,248 11,040 247,611 _______ ______ ______ ______ _______ _______ TOTAL EARNING ASSETS. . . . $129,701 $41,006 $76,978 $87,919 $35,558 $371,162 _______ ______ ______ ______ _______ _______ INTEREST BEARING LIABILITIES Retail Savings Money Market Deposits. . . . . . . . . . $98,577 --- --- --- --- $98,577 Retail Time Deposits . . . . . 30,671 $20,060 $50,828 $82,700 $127 184,386 Large Dollar Denominated Time Deposits . . . . . . . 9,613 5,610 3,961 8,748 --- 27,932 Other Borrowings . . . . . . . 2,127 --- --- --- --- 2,127 _______ ______ ______ ______ _______ _______ TOTAL INTEREST BEARING LIABILITIES. . . . . . . $140,988 $25,670 $54,789 $91,448 $127 $313,022 _______ ______ ______ ______ _______ _______ Periodic GAP. . . . . . . . . . .$(11,287) $15,336 $22,189 $(3,529) $35,431 Cumulative GAP. . . . . . . . . .$(11,287) $4,049 $26,238 $22,709 $58,140 Cumulative Ratio (1). . . . . . . 92% 102% 112% 107% 119% (1) Rate-sensitive Assets / Rate-sensitive Liabilities
EX-13 8 EXHIBIT 13.4 EXHIBIT 13.4 Consolidated Balance Sheets (dollar references in thousands except share data) December 31, ____________ 1996 1995 ____ _____ ASSETS Cash and Due from Banks . . . . . . . . . . . . . . . . . . . . $13,109 $15,421 Federal Funds Sold. . . . . . . . . . . . . . . . . . . . . . . 20,600 12,550 ______ ______ Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . 33,709 27,971 ______ ______ Interest-bearing Balances with Banks. . . . . . . . . . . . . . 597 897 Other Short-term Investments. . . . . . . . . . . . . . . . . . 979 5,929 Securities Available-for-Sale, at Market. . . . . . . . . . . . 85,708 78,908 Securities Held-to-Maturity, at Cost (Market Value of $16,270 and $11,237 on December 31, 1996 and 1995, respectively). . . . . 15,667 10,607 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247,924 231,127 Less: Unearned Income . . . . . . . . . . . . . . . . . . . . . . . (313) (537) Allowance for Loan Losses . . . . . . . . . . . . . . . . . . (5,616) (5,933) _______ _______ Loans, Net. . . . . . . . . . . . . . . . . . . . . . . . . . . 241,995 224,657 Premises, Furniture and Equipment, Net. . . . . . . . . . . . . 10,072 9,624 Other Real Estate . . . . . . . . . . . . . . . . . . . . . . . 203 286 Intangible Assets . . . . . . . . . . . . . . . . . . . . . . . 1,774 1,990 Accrued Interest Receivable and Other Assets. . . . . . . . . . 6,802 6,894 _______ _______ TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . $397,506 $367,763 ======= ======= LIABILITIES Noninterest-bearing Deposits. . . . . . . . . . . . . . . . . . $41,854 $40,855 Interest-bearing Deposits . . . . . . . . . . . . . . . . . . . 310,895 286,724 _______ _______ Total Deposits. . . . . . . . . . . . . . . . . . . . . . . . 352,749 327,579 Short-term Borrowings . . . . . . . . . . . . . . . . . . . . . 2,127 --- Accrued Interest Payable and Other Liabilities. . . . . . . . . 3,289 3,228 _______ _______ TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . 358,165 330,807 _______ _______ Commitments and Contingent Liabilities SHAREHOLDERS' EQUITY Common Stock, $10 par value; 5,000,000 shares authorized, 1,923,774 and 1,825,040 issued and outstanding in 1996 and 1995, respectively. . . . . . . . . . . . . . . . 19,238 18,250 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued. . . . . . . . . . . . . . . . . . . . . . . --- --- Additional Paid-in Capital. . . . . . . . . . . . . . . . . . . 8,098 5,449 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 11,430 12,398 Unrealized Appreciation on Securities Available-for-Sale, Net . . . . . . . . . . . . . . . . . . . 575 859 ______ ______ TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . 39,341 36,956 _______ ______ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . $397,506 $367,76 ======= ======= See accompanying notes to consolidated financial statements.
Consolidated Statements of Income (dollar references in thousands except earnings per share) Years ended December 31, ________________________ 1996 1995 1994 ____ ____ ____ INTEREST INCOME Interest and Fees on Loans. . . . . . . . . . . . . . . . . $21,970 $21,210$17,348 Interest on Federal Funds Sold. . . . . . . . . . . . . . . 579 739319 Interest on Short-term Investments. . . . . . . . . . . . . 162 728386 Interest and Dividends on Securities Taxable . . . . . . . . . . . . . . . . . . . . . . . . . 3,947 3,2292,850 Non-taxable . . . . . . . . . . . . . . . . . . . . . . . 1,662 1,3911,167 ______ ____________ TOTAL INTEREST INCOME. . . . . . . . . . . . . . . . . 28,320 27,29722,070 ______ ____________ INTEREST EXPENSE Interest on Deposits. . . . . . . . . . . . . . . . . . . . 13,594 12,6339,394 Interest on Short-term Borrowings . . . . . . . . . . . . . 51 184133 ______ ____________ TOTAL INTEREST EXPENSE. . . . . . . . . . . . . . . . . . 13,645 12,8179,527 ______ ____________ NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . 14,675 14,48012,543 Provision for Loan Losses . . . . . . . . . . . . . . . . . 160 (19)567 ______ ____________ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES . . . . . . . . . . . . . . . . . . . . . . . 14,515 14,49911,976 ______ ____________ NONINTEREST INCOME Income from Fiduciary Activities. . . . . . . . . . . . . . 181 185171 Service Charges on Deposit Accounts . . . . . . . . . . . . 775 620567 Investment Services Income. . . . . . . . . . . . . . . . . 406 208420 Other Service Charges, Commissions, and Fees. . . . . . . . 363 418359 Gains on Sales of Loans and Other Real Estate . . . . . . . 47 2992 Security Gains. . . . . . . . . . . . . . . . . . . . . . . --- ---80 ______ ____________ TOTAL NONINTEREST INCOME. . . . . . . . . . . . . . . . . 1,772 1,4601,689 ______ ____________ NONINTEREST EXPENSE Salaries and Employee Benefits. . . . . . . . . . . . . . . 5,738 5,3494,517 Occupancy Expense . . . . . . . . . . . . . . . . . . . . . 804 813678 Furniture and Equipment Expense . . . . . . . . . . . . . . 745 748619 FDIC Premiums . . . . . . . . . . . . . . . . . . . . . . . 227 393644 Computer Processing Fees. . . . . . . . . . . . . . . . . . 423 399352 Professional Fees . . . . . . . . . . . . . . . . . . . . . 405 198257 Other Operating Expenses. . . . . . . . . . . . . . . . . . 2,002 2,1781,542 ______ ____________ TOTAL NONINTEREST EXPENSE . . . . . . . . . . . . . . . . 10,344 10,0788,609 ______ ____________ Income before Income Taxes. . . . . . . . . . . . . . . . . 5,943 5,8815,056 Income Tax Expense. . . . . . . . . . . . . . . . . . . . . 1,878 1,8631,582 ______ ____________ NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,065 $ 4,018$ 3,474 ====== ============ EARNINGS PER SHARE. . . . . . . . . . . . . . . . . . . . . $ 2.12 $ 2.10$ 1.81 ====== ============ See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows (dollar references in thousands) Years Ended December 31, 1996 19951994 ____ ________ CASH FLOWS FROM OPERATING ACTIVITIES Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $4,065 $4,018$3,474 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Net Accretion on Investments. . . . . . . . . . . . . . . . (32) (662)(50) Depreciation and Amortization . . . . . . . . . . . . . . . 937 948712 Provision for Loan Losses . . . . . . . . . . . . . . . . . 160 (19)567 Gain on Sale of Securities. . . . . . . . . . . . . . . . . --- ---(80) Gain on Sales of Loans and Other Real Estate. . . . . . . . (47) (29)(92) Change in Assets and Liabilities: Deferred Taxes . . . . . . . . . . . . . . . . . . . . . 113 5(349) Deferred Loan Fees . . . . . . . . . . . . . . . . . . . (11) 34(157) Interest Receivable. . . . . . . . . . . . . . . . . . . (274) (632)(143) Interest Payable . . . . . . . . . . . . . . . . . . . . 75 34040 Other Assets . . . . . . . . . . . . . . . . . . . . . . 456 (649)316 Other Liabilities. . . . . . . . . . . . . . . . . . . . (14) 163(274) Unearned Income. . . . . . . . . . . . . . . . . . . . . (224) (303)(386) _____ _____ _____ Total Adjustments. . . . . . . . . . . . . . . . . . . 1,139 (804)104 _____ _____ _____ Net Cash from Operating Activities . . . . . . . . . . 5,204 3,214 3,578 _____ _____ _____ CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks. . . . . . . 300 295 5,172 Proceeds from Maturities of Other Short-term Investments. . 7,030 52,133 14,835 Purchase of Other Short-term Investments. . . . . . . . . . (1,966) (43,967)(22,049) Proceeds from Maturities of Securities Available-for-Sale . 35,807 8,518 10,661 Proceeds from Sales of Securities Available-for-Sale. . . . --- --- 3,354 Purchase of Securities Available-for-Sale . . . . . . . . . (43,172) (26,940)(3,391) Proceeds from Maturities of Securities Held-to-Maturity . . 204 8,967 11,972 Purchase of Securities Held-to-Maturity . . . . . . . . . . (5,268) (4,243)(16,153) Purchase of Loans . . . . . . . . . . . . . . . . . . . . . (1,576) (3,691)(7,332) Proceeds from Sales of Loans. . . . . . . . . . . . . . . . 1,870 500 7,625 Loans Made to Customers net of Payments Received. . . . . . (17,579) (3,186)(9,462) Proceeds from Sales of Other Real Estate. . . . . . . . . . 152 389 415 Property and Equipment Expenditures . . . . . . . . . . . . (1,169) (920)(956) Cash Acquired / (Paid) in Acquisition of Affiliates . . . . --- --- 8,934 _____ _____ _____ Net Cash from Investing Activities . . . . . . . . . . . (25,367) (12,145)3,625 ______ ______ _____ CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits. . . . . . . . . . . . . . . . . . . . . 25,170 25,289 (4,088) Change in Short-term Borrowings . . . . . . . . . . . . . . 2,127 (9,169)1,003 Purchase and Retire Common Stock. . . . . . . . . . . . . . --- (110)--- Issuance of Common Stock. . . . . . . . . . . . . . . . . . 145 --- --- Dividends Paid. . . . . . . . . . . . . . . . . . . . . . . (1,518) (1,392)(1,232) Exercise of Stock Options . . . . . . . . . . . . . . . . . 7 22 2 Purchase of Interests in Fractional Shares. . . . . . . . . (30) (24)(2) _____ _____ _____ Net Cash from Financing Activities . . . . . . . . . . . 25,901 14,616 (4,317) ______ ______ _____ Net Change in Cash and Cash Equivalents . . . . . . . . . . . 5,738 5,685 2,886 Cash and Cash Equivalents at Beginning of Year. . . . . . . 27,971 22,286 19,400 ______ ______ ______ Cash and Cash Equivalents at End of Year. . . . . . . . . . $33,709 $27,971 $22,286 ======= ============== Cash Paid During the Year for: Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $13,570 $12,477 $ 9,487 Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . 1,719 1,980 1,984 See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 (dollar references in thousands except per share data) Unrealized Appreciation / (Depreciation) Additional on Securities Total Common Paid-in Retained Available- Shareholders' Stock Capital Earnings for-Sale Equity Balances, January 1, 1994 . . . . . . $17,389 $3,509 $10,443 $31,341 Net Income for 1994 . . . . . . . . . 3,474 3,474 Change in Accounting for Securities . $274 274 Net Change in Unrealized Appreciation / (Depreciation) on Securities . . . . (932) (932) Purchase and Retirement of 2,082 Shares pursuant to Exercise of Stock Options . . . . . . . . . . . (21) (4) (42) (67) Issuance of 3,200 shares upon Exercise of Stock Options. . . . . . . . . . . . 32 37 69 Purchase of Interest in Fractional Shares (2) (2) Cash Dividends ($.65 per Common Share ) as restated for pooling of interests (1,232) (1,232) ______ ______ ______ ______ ______ Balances, December 31, 1994 . . . . . 17,400 3,542 12,641 (658) 32,925 Net Income for 1995 . . . . . . . . . 4,018 4,018 Unrealized Appreciation on Securities Transferred to Available-for-Sale. . 523 523 Net Change in Unrealized Appreciation / (Depreciation) on Securities . . . . 994 994 Purchase and Retirement of 3,600 Shares of Common Stock . . . . . . . . . . . . (36) (7) (67) (110) Purchase and Retirement of 3,331 Shares pursuant to Exercise of Stock Options. . . . . . . . . . . . (33) (7) (64) (104) Issuance of 5,800 Shares upon Exercise of Stock Options . . . . . . . . . . 58 68 126 5% Stock Dividend (86,177 Shares). . 861 1,853 (2,714) --- Purchase of Interest in Fractional Shares (24) (24) Cash Dividends ($.72 per Common Share) (1,392) (1,392) ______ ______ ______ ____ ______ Balances, December 31, 1995 . . . . . 18,250 5,449 12,398 859 36,956 Net Income for 1996 . . . . . . . . . 4,065 4,065 Net Change in Unrealized Appreciation/ (Depreciation) on Securities . . . . (284) (284) Issuance of 3,899 Shares of Common Stock Pursuant to Dividend Reinvestment Plan 39 106 145 Purchase and Retirement of 6,400 Shares pursuant to Exercise of Stock Options. . . . . . . . . . . . (64) (21) (123) (208) Issuance of 10,394 Shares upon Exercise of Stock Options. . . . . . . . . . . . 104 111 215 5% Stock Dividend (90,841 Shares) . . 909 2,453 (3,362) --- Purchase of Interest in Fractional Shares . . . . . . . . . . . . . . . (30) (30) Cash Dividends ($.79 per Common Share) . . . . . . . . . . . . . . . (1,518) (1,518) ______ _____ ______ ___ ______ Balances, December 31, 1996 . . . . . $19,238 $8,098 $11,430 $575 $39,341 ====== ===== ====== === ====== See accompanying notes to consolidated financial statements.
Notes to the Consolidated Financial Statements December 31, 1996, 1995, and 1994 (dollar references 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, which accounts for over 90% of its revenues, operating income and identifiable assets. German American Bancorp generates commercial, installment and mortgage loans and receives deposits from customers through its locations in the Indiana counties of Dubois, Martin, Pike, Perry and Spencer. The overall loan portfolio is diversified among a variety of individual borrowers; however, a significant portion of debtors' ability to honor their contracts is dependent on the agriculture, poultry and wood manufacturing industries. Although wood manufacturers employ a significant number of people in the Company's market area, the Company does not have a concentration of credit to companies engaged in that industry. The majority of the Company's loans are secured by specific items of collateral including business assets, consumer assets and real property. These financial statements include the accounts of German American Bancorp and its wholly-owned subsidiaries, The German American Bank, The Union Bank, German American Holdings Corporation, Inc., Community Trust Bank (wholly-owned by German American Holdings Corporation), First State Bank, Southwest Indiana and GAB Mortgage Corp. Significant intercompany balances and transactions have been eliminated in consolidation. Certain items in the 1995 and 1994 financial statements have been reclassified to correspond with the 1996 presentation. Use of Estimates Management must make estimates and assumptions in preparing financial statements that affect the amounts reported therein and the disclosures provided. These estimates and assumptions may change in the future and future results could differ. Estimates that are susceptible to change in the near term include the allowance for loan losses, the determination and carrying value of impaired loans, and the fair value of financial instruments. Short-term Investments Short-term Investments consist of interest-bearing balances with banks, which are generally limited to FDIC insured amounts, and Bankers Acceptances. These investments generally have terms to maturity of less than one year and are carried at cost, which approximates market value. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 1 - Summary of Significant Accounting Policies (continued) 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, and includes securities that management might 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 for similar reasons. Securities 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. Loans Interest is accrued over the term of the loans based on the principal balance outstanding. Loans are placed on a 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 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 bad debt expense, if reductions, or otherwise as interest income. The Company defers loan fees and certain direct loan origination costs. The amounts deferred are reported in the balance sheet as part of loans and are recognized into interest income over the term of the loan using the level yield method. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 1 - Summary of Significant Accounting Policies (continued) 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 balance 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. Loan impairment is reported when full payment under the loan terms 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. Smaller-balance homogenous 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. Commercial, agricultural, and poultry loans are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of more than 30 days. Nonaccrual loans are generally also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual and renegotiated loan disclosures. 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. Maintenance and repairs are expensed and major improvements are capitalized. At the time of sale or disposition of an asset, the applicable cost and accumulated depreciation amounts are removed from the accounting records. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 1 - Summary of Significant Accounting Policies (continued) 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 ($333 and $434 at December 31, 1996 and 1995, respectively) and goodwill ($1,441 and $1,556, at December 31, 1996 and 1995, respectively). Core deposit intangibles is being amortized on an accelerated method over ten years and goodwill is being amortized on a straight-line basis over fifteen years. Goodwill and Core Deposit Intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. 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. Income Taxes Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future amounts that will result from differences in the financial statement and tax basis of assets and liabilities. Recognition of deferred tax assets is limited by the establishment of a valuation reserve unless management concludes that the assets will more likely than not result in future tax benefits to the Company. Income tax expense is the amount due on the current year tax returns plus or minus the change in deferred taxes. 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. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 1 - Summary of Significant Accounting Policies (continued) Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately in Note 18. 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 does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. NOTE 2 - Securities The amortized cost and estimated market values of Securities as of December 31, 1996 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 . . . . . . $39,182 $72 $(190) $39,064 Obligations of State and Political Subdivisions . . 17,356 940 (275) 18,021 Corporate Securities. . . . . . . . . . . . . . . . 7,221 42 (18) 7,245 Mortgage-backed Securities. . . . . . . . . . . . . 21,006 481 (109) 21,378 ______ _____ ____ ______ Total. . . . . . . . . . . . . . . . . . . . . . $84,765 $1,535 $(592) $85,708 ====== ===== ==== ====== Securities Held-to-Maturity: Obligations of State and Political Subdivisions . . $14,653 $611 $(8) $15,256 Other Securities. . . . . . . . . . . . . . . . . . 1,014 --- --- 1,014 ______ _____ ____ ______ Total. . . . . . . . . . . . . . . . . . . . . . $15,667 $611 $(8) $16,270 ====== ===== ==== ======
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 2 - Securities (Continued) The amortized cost and estimated market values of Securities as of December 31, 1995 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 . . . . . . $23,727 $172 $(112) $23,787 Obligations of State and Political Subdivisions . . 14,232 1,154 --- 15,386 Corporate Securities. . . . . . . . . . . . . . . . 6,375 88 --- 6,463 Mortgage-backed Securities. . . . . . . . . . . . . 33,144 317 (189) 33,272 ______ _____ ____ ______ Total. . . . . . . . . . . . . . . . . . . . . . $77,478 $1,731 $(301) $78,908 ====== ===== ==== ====== Securities Held-to-Maturity: Obligations of State and Political Subdivisions . . $9,869 $659 $(29) $10,499 Other Securities. . . . . . . . . . . . . . . . . . 738 --- --- 738 ______ _____ ____ ______ Total. . . . . . . . . . . . . . . . . . . . . . $10,607 $659 $(29) $11,237 ====== ===== ==== ======
The amortized cost and estimated market value of Securities at December 31, 1996 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. Mortgaged-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 . . . . . . . . . . . . . . $3,100 $3,099 Due after one year through five years . . . . . . . 38,442 38,534 Due after five years through ten years. . . . . . . 13,613 13,833 Due after ten years . . . . . . . . . . . . . . . . 8,604 8,864 Mortgage-backed Securities. . . . . . . . . . . . . 21,006 21,378 ______ ______ Totals . . . . . . . . . . . . . . . . . . . . . $84,765 $85,708 Securities Held-to-Maturity: Due in one year or less . . . . . . . . . . . . . . $690 $696 Due after one year through five years . . . . . . . 2,220 2,277 Due after five years through ten years. . . . . . . 2,150 2,305 Due after ten years . . . . . . . . . . . . . . . . 9,593 9,978 Other Securities. . . . . . . . . . . . . . . . . . 1,014 1,014 ______ ______ Totals . . . . . . . . . . . . . . . . . . . . . $15,667 $16,270 ====== ======
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 2 - Securities (Continued) 1996 1995 1994 Available- Held-to- Available- Held-to- Available- Held-to- for-Sale Maturity for-Sale Maturity for-Sale Maturity ________________________________________________________________________ Sales of Securities are summarized below: Proceeds from Sales . . . . . . . . . $0 $0 $0 $0 $3,354 $0 Gross Gains on Sales. . . . . . . . . 0 0 0 0 82 0 Gross Losses on Sales . . . . . . . . 0 0 0 0 (2) 0 Income Taxes on Gross Gains . . . . . 0 0 0 0 33 0 Income Taxes on Gross Losses. . . . . 0 0 0 0 (1) 0
Securities with a carrying value of $7,604 and $8,488 as of December 31, 1996 and 1995, respectively, were pledged to secure public and trust deposits and for other purposes as required by law. No investment securities of an individual issuer exceeded ten percent of German American Bancorp shareholders' equity at December 31, 1996. The total dollar amount of Cash and Due from Banks, Federal Funds Sold and Other Short-term Investments with National City Bank, Louisville, Kentucky was $15,415 at December 31, 1996. Investments in state and political subdivisions and corporate obligations are generally required by policy to be investment grade as established by national rating organizations. However, the purchase of non-rated Indiana municipal securities is permitted by policy when the inherent quality of the issue is clearly evident to management. These investments are actively traded and have a readily available market valuation. Market values of these investments are reviewed quarterly with market values being obtained from an independent rating service or broker. At December 31, 1996 and 1995, U.S. Government Agency structured notes with an amortized cost of $3,000 and $9,250 and fair value of $2,932 and $9,201 are included in securities available-for-sale, consisting primarily of step-up and single- index bonds. Collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMIC's), all of which are issued by U.S. Government Agencies and the majority of which are fixed rate, comprised over 80% of Mortgage-backed securities. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 3 - Loans Loans, as presented on the balance sheet, are comprised of the following classifications as of December 31, 1996 1995 _____ ______ Real Estate Loans Secured by 1- 4 Family Residential Properties . . . . . . $74,818 $68,826 Loans to Finance Poultry Production and Other Related Operations. . . . . . 16,266 23,784 Loans to Finance Agricultural Production and Other Loans to Farmers . . . . 30,453 27,310 Commercial and Industrial Loans . . . . . . . . . . . . . . . . . . . . . . 83,491 74,612 Loans to Individuals for Household, Family and Other Personal Expenditures. 41,741 34,685 Economic Development Commission Bonds . . . . . . . . . . . . . . . . . . . 575 608 Lease Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580 1,302 _______ _______ Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $247,924 $231,127 ======= ======= Information regarding impaired loans is as follows: 1996 1995 _____ ______ Year-end loans with no allowance for loan losses allocated. . . . . . . . . $ 386 $ 215 Year-end loans with allowance for loan losses allocated . . . . . . . . . . 3,086 6,029 Amount of allowance allocated . . . . . . . . . . . . . . . . . . . . . . . 346 898 Average balance of impaired loans during the year . . . . . . . . . . . . . 3,688 4,233 Interest income recognized during impairment. . . . . . . . . . . . . . . . 265 353 Interest income recognized on cash basis. . . . . . . . . . . . . . . . . . 174 270
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 1996. A summary of the activity of these loans is as follows: Balance Changes Deductions Balance January 1, in Persons December 31, 1996 Additions Included Collected Charged-off 1996 ________________________________________________________________________________________________________________ $9,878 $3,668 $0 $(2,526) $0 $11,020
NOTE 4 - Allowance for Loan Losses A summary of the activity in the Allowance for Loan Losses is as follows: 1996 1995 1994 _____ _____ _____ Balance as of January 1 . . . . . . . . . . . . . . $5,933 $5,669 $4,935 Addition of Affiliate Banks . . . . . . . . . . . . --- --- 195 Provision for Loan Losses . . . . . . . . . . . . . 160 (19) 567 Recoveries of Prior Loan Losses . . . . . . . . . . 295 622 227 Loan Losses Charged to the Allowance. . . . . . . . (772) (339) (255) _____ _____ _____ Balance as of December 31 . . . . . . . . . . . . . $5,616 $5,933 $5,669
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 5 - Premises, Furniture, and Equipment Premises, furniture, and equipment as presented on the balance sheet is comprised of the following classifications: 1996 1995 _____ ____ Land . . . . . . . . . . . . . . . . . . . . . . . $1,688 $1,472 Buildings and Improvements. . . . . . . . . . . . . . 9,619 9,160 Furniture and Equipment . . . . . . . . . . . . . . . 5,062 4,578 ______ ______ Total Premises, Furniture and Equipment . . . . . . 16,369 15,210 Less: Accumulated Depreciation. . . . . . . . . (6,297) (5,586) ______ ______ Total . . . . . . . . . . . . . . . . . . . . $10,072 $9,624 ====== =====
Depreciation expense was $721, $717 and $614 for 1996, 1995 and 1994. NOTE 6 - Deposits The aggregate amount of interest-bearing deposits in denominations of $100 or more was $27,932 and $26,733 as of December 31, 1996 and 1995, respectively. At year-end 1996 interest-bearing deposits includes $98,577 of demand and savings deposits and $212,318 of time deposits. Stated maturities of time deposits were as follows: 1997 . . . . . . . . . . . . . . . . . . . . . . . $120,228 1998 . . . . . . . . . . . . . . . . . . . . . . . 64,737 1999 . . . . . . . . . . . . . . . . . . . . . . . 15,958 2000 . . . . . . . . . . . . . . . . . . . . . . . 8,706 2001 . . . . . . . . . . . . . . . . . . . . . . . 2,561 Thereafter . . . . . . . . . . . . . . . . . . . . 128 _______ Total. . . . . . . . . . . . . . . . . . . . . . $212,318 ======= NOTE 7 - Short-term Borrowings Short-term borrowings of $2,127 at December 31, 1996 consist entirely of Interest-bearing Demand Notes issued to the U.S. Treasury. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 8 - Employee Benefit Plans During 1996 and 1995, the Company and all its banking affiliates provided a trusteed noncontributory profit sharing plan which covered substantially all full-time employees. Contributions are discretionary and are subject to determination by the Board of Directors. Contributions to this plan were $200 and $184 for 1996 and 1995, respectively. During 1994, First State Bank did not participate in the plan. Contributions were $170 for 1994. During 1996 and 1995, the Company and all its banking affiliates offered 401(k) deferred compensation plans under which the banks agree to match certain employee contributions. Contributions to this plan were $198 and $196 for 1996 and 1995, respectively. During 1994, First State Bank did not participate in this plan. Contributions to these plans were $154 in 1994. NOTE 9 - Stock Options Financial Accounting Standard No. 123, which became effective for 1996, 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. Compensation cost actually recognized for stock options was $0 for 1996 and 1995. 1996 1995 ____ ____ Net income as reported. . . . . . . . . . . . . . . . . . . . . . . . $4,065 $4,018 Pro forma net income. . . . . . . . . . . . . . . . . . . . . . . . . $4,052 $4,010 Earnings per share as reported. . . . . . . . . . . . . . . . . . . . $2.12 $2.10 Pro forma earnings per share. . . . . . . . . . . . . . . . . . . . . $2.11 $2.09
In future years, the pro forma effect of not applying this standard is expected to increase as additional options are granted. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 9 - Stock Options (Continued) The Company maintains a Stock Option Plan which reserves 80,102 shares of Common Stock (as adjusted for subsequent stock splits and subject to further customary antidilution adjustments) for the purpose of grants of options to officers and other employees of the Company. The date on which options are first exercisable is determined by the Stock Option Committee of the Company, but no stock option may be exercised after ten years from the date of grant. Options may be designated as "incentive stock options" under the Internal Revenue Code of 1986, or as nonqualified options. The exercise price of incentive 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 or common shares. If an optionee tenders already-owned common shares to the Company to exercise an option, the Company is obligated to use its best efforts to issue to such optionee a replacement option for the number of shares tendered of the same type (either an incentive stock option or a nonqualified option) as the option exercised and with the same expiration date 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. Changes in options outstanding were as follows, as adjusted to reflect stock splits and stock dividends: Number Weighted-average of Options Exercise Price _________ ______________ Outstanding, beginning of 1994 28,114 $19.66 Granted 2,295 29.36 Exercised (3,528) 19.66 ______ ______ Outstanding, end of 1994 26,881 20.49 Granted 3,672 28.30 Exercised (6,395) 19.66 ______ ______ Outstanding, end of 1995 24,158 21.90 Granted 6,720 30.78 Exercised (10,913) 19.66 ______ ______ Outstanding, end of 1996 19,965 26.11 ====== ======
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 9 - Stock Options (Continued) Options exercisable at year-end are as follows: Number Weighted-average of Options Exercise Price __________ ________________ 1994. . . . . . . . . . . . . . . . . . . . 10,033 $19.66 1995. . . . . . . . . . . . . . . . . . . . 9,572 21.98 1996. . . . . . . . . . . . . . . . . . . . 5,969 28.71
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 9 - Stock Options (Continued) For options granted during 1996 and 1995, the weighted- average fair values at grant date are $1.91 and $2.30. The fair value of options granted during 1996 and 1995 is estimated using the following weighted-average information: risk-free interest rate of 5.41% and 5.43%, expected life of one year, expected volatility of stock price of .10 percent and expected dividends of 2.38% and 2.41% per year. At year-end 1996, options outstanding have a weighted average remaining life of 6.25 years, with exercise prices ranging from $19.66 to $32.86. NOTE 10 - Income Taxes The provision for income taxes consists of the following: 1996 1995 1994 ____ ____ ____ Currently Payable . . . . . . . . . . . . . . . $1,765 $1,858 $1,931 Deferred. . . . . . . . . . . . . . . . . . . . 160 52 (267) Net Operating Loss Carryforward . . . . . . . . (47) (47) (82) _____ _____ _____ Total . . . . . . . . . . . . . . . . . . . . $1,878 $1,863 $1,582 ===== ===== =====
Income tax expense is reconciled to the 34% statutory rate applied to pre- tax income as follows: 1996 1995 1994 ____ ____ ____ Statutory Rate Times Pre-tax Income . . . . . . . . . $2,021 $2,000 $1,719 Add/(Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments. . . . (629) (531) (435) Non-deductible Merger Costs . . . . . . . . . . . . 48 --- 26 Non-deductible Interest Expense . . . . . . . . . . 62 49 30 State Income Tax, Net of Federal Tax Effect . . . . 354 344 291 Other Differences . . . . . . . . . . . . . . . . . 22 1 (49) ____ _____ _____ Total Income Taxes. . . . . . . . . . . . . . . . . $1,878 $1,863 $1,582 ===== ===== =====
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 10 - Income Taxes (continued) The net deferred tax asset at December 31 consists of the following: 1996 1995 ____ ____ Deferred Tax Assets: Allowance for Loan Losses . . . . . . . . . . . . $1,298 $1,474 Net Operating Loss Carryforwards. . . . . . . . . 234 281 Other . . . . . . . . . . . . . . . . . . . . . . 164 271 _____ _____ Total Deferred Tax Assets . . . . . . . . . . . 1,696 2,026 _____ _____ Deferred Tax Liabilities: Leasing Activities, Net . . . . . . . . . . . . . (151) (227) Depreciation. . . . . . . . . . . . . . . . . . . (150) (122) Purchase Accounting Adjustments . . . . . . . . . (45) (63) Unrealized Appreciation on Securities . . . . . . (368) (571) Other . . . . . . . . . . . . . . . . . . . . . . (41) (145) ____ _____ Total Deferred Tax Liabilities. . . . . . . . . (755) (1,128) ___ _____ Valuation Allowance . . . . . . . . . . . . . . . . (48) (48) ___ _____ Net Deferred Tax Asset. . . . . . . . . . . . . . $893 $850 === =====
The Company's subsidiary, German American Holdings Corporation, Inc., has $688 of federal tax net operating loss carryforwards expiring in the following amounts: Year Amount Year Amount Year Amount 1997 $42 2000 $135 2007 $58 1998 80 2001 129 2008 4 1999 135 2002 105
NOTE 11 - Per Share Data In October 1995 and 1996, the Board of Directors declared a 5 percent stock dividend. In lieu of issuing fractional shares, the Company purchased from shareholders their fractional interest in both instances. Earnings and dividend per share amounts have been retroactively computed as though these additionally issued shares had been outstanding for all periods presented. The weighted average number of shares used in calculating earnings and dividends per share amounts were 1,920,053, 1,916,482, and 1,915,900 for 1996, 1995, and 1994, respectively. Stock Options (see Note 9) are not materially dilutive and have been excluded from weighted average shares. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 12 - Lease Commitments The total rental expense for all leases for the years ended December 31, 1996, 1995, and 1994 was $83, $73, and $67, respectively, including amounts paid under short-term cancelable leases. At December 31, 1996, 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 and 2001 with various renewal options provided. Aggregate annual rental payments to this Director's company totaled $38 for 1996. Exercise of the Bank's sublease renewal options are contingent upon the Director's company renewing its primary leases. The following is a schedule of future minimum lease payments: Years Ending December 31: Premises Equipment Total ________ _________ ______ 1997. . . . . . . . . . . . . . . . . . . . . . $63 $8 $71 1998. . . . . . . . . . . . . . . . . . . . . . 63 1 64 1999. . . . . . . . . . . . . . . . . . . . . . 62 --- 62 2000. . . . . . . . . . . . . . . . . . . . . . 56 --- 56 2001. . . . . . . . . . . . . . . . . . . . . . 33 --- 33 ___ ___ ___ Total. . . . . . . . . . . . . . . . . . . . $277 $9 $286 === === ===
NOTE 13 - Commitments and Off-balance Sheet Items In the normal course of business, there are various commitments and contingent liabilities, such as guarantees and commitments to extend credit, 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, standby letters of credit, and financial guarantees is represented by the contractual amount of those instruments. The Company uses the same credit policy to make such commitments as it uses for on- balance sheet items. These financial instruments at December 31, are summarized as follows: Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 13 - Commitments and Off-balance Sheet Items (Continued) 1996 1995 ____ ____ Commitments to Fund Loans Home Equity . . . . . . . . . . . . . . . . . . . . . . . $6,116 $5,760 Credit Card Lines . . . . . . . . . . . . . . . . . . . . 3,277 3,287 Commercial Real Estate Commitments. . . . . . . . . . . . --- 1,516 Commercial Operating Lines. . . . . . . . . . . . . . . . 18,203 22,913 ______ ______ Total Commitments to Fund Loans . . . . . . . . . . . $27,596 $33,476 ====== ====== Standby Letters of Credit . . . . . . . . . . . . . . . . . $1,671 $3,110
Since many commitments to make loans expire without being used, the amount does 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 interest rates associated with these commitments are generally variable rate. During 1996, the Company self-insured employee health benefits for all affiliates. Stop loss insurance covers losses exceeding $35 per covered individual and approximately $392 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 $326 and $269 for 1996 and 1995, respectively. The charge to earnings for 1994 was $230, but did not include First State Bank. At December 31, 1996, the affiliate banks were required to have $1,946 on deposit with the Federal Reserve or as cash on hand. These reserves do not earn interest. Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 14 - Non-cash Investing Activities 1996 1995 1994 ____ ____ ____ Loans Transferred to Other Real Estate. . . . . . . $25 $149 $122 Securities Transferred to Available-for-Sale. . . . 0 35,943 35,132
The data above should be read in conjunction with the Consolidated Statements of Cash Flows. In 1994, $32,732 of Securities were transferred to Available-for-Sale upon adoption of FAS 115, and $2,400 of Securities were transferred to Available-for-Sale upon acquisition of The Otwell State Bank. During December 1995, Securities were transferred from Held-to- Maturity to Available-for-Sale in accordance with the Financial Accounting Standards Board Special Report on Implementation of FAS 115. NOTE 15 - Parent Company Financial Statements The condensed financial statements of German American Bancorp as of December 31, 1996 and 1995, and for each of the three years ended December 31, 1996, 1995, and 1994 are as follows: CONDENSED BALANCE SHEETS December 31, 1996 AND 1995 1996 1995 ____ ____ ASSETS Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $323 $409 Securities Available-for-Sale, at Market. . . . . . . . . . . . . . 1,783 --- Investment in Subsidiary Banks and Bank Holding Company . . . . . . 36,112 35,833 Investment in GAB Mortgage Corp . . . . . . . . . . . . . . . . . . 278 274 Furniture and Equipment . . . . . . . . . . . . . . . . . . . . . . 785 313 Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 204 ______ ______ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . $39,528 $37,033 ====== ====== LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 187 $ 77 ______ ______ SHAREHOLDERS' EQUITY Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,238 18,250 Additional Paid-in Capital. . . . . . . . . . . . . . . . . . . . . 8,098 5,449 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 11,430 12,398 Unrealized Appreciation on Securities Available-for-Sale. . . . . . 575 859 ______ ______ Total Shareholders' Equity . . . . . . . . . . . . . . . . . . . 39,341 36,956 ______ ______ Total Liabilities and Shareholders' Equity . . . . . . . . . . . $39,528 $37,033 ====== ======
Notes to the Consolidated Financial Statements (Continued) (dollar references in thousands) NOTE 15 -- Parent Company Financial Statements (Continued)
CONDENSED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995, and 1994 1996 1995 1994 ____ ____ ____ INCOME Dividends from Subsidiary Banks . . . . . . . . . . . . . . $5,106 $2,511 $4,754 Interest Income . . . . . . . . . . . . . . . . . . . . . . 109 18 44 Fee Income. . . . . . . . . . . . . . . . . . . . . . . . . 374 178 --- ______ _____ ______ Total Income . . . . . . . . . . . . . . . . . . . . . . 5,589 2,707 4,798 ______ _____ ______ EXPENSES Salaries and Benefits . . . . . . . . . . . . . . . . . . . 1,330 922 533 Professional Fees . . . . . . . . . . . . . . . . . . . . . 254 95 157 Occupancy and Equipment Expense . . . . . . . . . . . . . . 257 130 2 Other Expenses. . . . . . . . . . . . . . . . . . . . . . . 174 104 24 ______ _____ ______ Total Expenses . . . . . . . . . . . . . . . . . . . . . 2,015 1,251 716 ______ _____ ______ INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES. . . . . . . . . . . . 3,574 1,456 4,082 Income Tax Benefit. . . . . . . . . . . . . . . . . . . . . . 556 415 286 ______ _____ ______ INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES. . . . . . . . . . . . . . . . . . . 4,130 1,871 4,368 Equity in Undistributed Income of Subsidiaries. . . . . . . . (65) 2,147 (894) ______ _____ _____ NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $4,065 $4,018 $3,474 ===== ===== ====== /TABLE
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995, and 1994 1996 1995 1994 ____ ____ ____ CASH FLOWS FROM OPERATING ACTIVITIES Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . $4,065 $4,018 $3,474 Adjustments to Reconcile Net Income to Net Cash from Operations Amortization on Securities. . . . . . . . . . 32 --- --- Depreciation . . . . . . . . . . . . . . . . . . . . . . 117 65 2 Change in Other Assets . . . . . . . . . . . . . . . . . (43) (74) (110) Change in Other Liabilities. . . . . . . . . . . . . . . 110 73 (66) Equity in Undistributed Income of Subsidiaries . . . . . 65 (2,147) 894 _____ _____ _____ Total Adjustments. . . . . . . . . . . . . . . . . . . 281 (2,083) 720 _____ _____ _____ Net Cash from Operating Activities . . . . . . . . . . . 4,346 1,935 4,194 _____ _____ _____ CASH FLOWS FROM INVESTING ACTIVITIES Investment in Subsidiaries. . . . . . . . . . . . . . . . . --- --- (3,818) Capital Contribution to First State Bank. . . . . . . . . . (632) --- --- Advances made to Subsidiaries . . . . . . . . . . . . . . . --- --- (1,000) Repayment of Advances by Subsidiaries . . . . . . . . . . . --- --- 2,100 Purchase of Securities Available-for-Sale . . . . . . . . . (1,815) --- --- Property and Equipment Expenditures . . . . . . . . . . . . (589) (362) (18) _____ _____ _____ Net Cash from Investing Activities . . . . . . . . . . . (3,036) (362) (2,736) _____ _____ _____ CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid. . . . . . . . . . . . . . . . . . . . . . . (1,518) (1,392) (1,232) Exercise of Stock Options . . . . . . . . . . . . . . . . . 7 22 2 Purchase and Retire Common Stock. . . . . . . . . . . . . . --- (110) --- Issuance of Common Stock Pursuant to Dividend Reinvestment Plan. . . . . . . . . . . . . . . . . . . 145 --- --- Purchase of Interest in Fractional Shares . . . . . . . . . (30) (24) (2) _____ _____ _____ Net Cash from Financing Activities . . . . . . . . . . . (1,396) (1,504) (1,232) _____ _____ _____ Net Change in Cash and Cash Equivalents . . . . . . . . . . . (86) 69 226 Cash and Cash Equivalents at Beginning of Year. . . . . . . 409 340 114 _____ _____ _____ Cash and Cash Equivalents at End of Year. . . . . . . . . . $323 $409 $340 ===== ===== =====
Notes to the Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 16 - Capital Requirements 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. 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. The minimum requirements are: Capital to risk- Tier 1 capital weighted assets to average assets Total Tier 1 Well capitalized. . . . . . . . . . . . . . . . . . . . . . 10% 6% 5% Adequately capitalized. . . . . . . . . . . . . . . . . . . 8% 4% 4% Undercapitalized. . . . . . . . . . . . . . . . . . . . . . 6% 3% 3%
At year end 1996, consolidated and German American Bank actual capital levels and minimum required levels are presented below. Capital ratios for the other affiliate banks are materially consistent with consolidated capital ratios. 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. . . . . . . . . $40,061 15.7% $20,411 8.0% $25,514 10.0% German American Bank. . . . . $24,183 13.6% $14,208 8.0% $17,759 10.0% Tier 1 Capital (to Risk Weighted Assets) Consolidated. . . . . . . . . $36,842 14.4% $10,206 4.0% $15,308 6.0% German American Bank. . . . . $21,953 12.4% $7,104 4.0% $10,656 6.0% Tier 1 Capital (to Average Assets) Consolidated. . . . . . . . . $36,842 9.6% $15,416 4.0% $19,270 5.0% German American Bank. . . . . $21,953 8.3% $10,559 4.0% $13,199 5.0%
The Company and all affiliate Banks at year-end 1996 were categorized as well capitalized. Notes to the Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 17 - Business Combinations On April 1, 1994, the Company acquired all of the outstanding shares of The Otwell State Bank of Otwell, Indiana in exchange for 113,286 shares of German American Bancorp common stock. The Otwell State Bank was subsequently merged into Community Trust Bank. Fractional interests were paid in cash of $2. The transaction was accounted for as a pooling of interests. On October 28, 1994, the Company acquired three Indiana branches of Regional Federal Savings Bank. The Huntingburg branch site was subsequently combined into an existing branch of the German American Bank in Huntingburg, while the other two sites in Tell City and Rockport were combined into a newly-formed commercial bank known as First State Bank, Southwest Indiana. The fair value of assets acquired was $16,048, the fair value of liabilities assumed was $24,982, and the Company received $8,934 of cash at settlement. Goodwill associated with this purchase was $1,353 while core deposit intangible was $317. On March 4, 1997, the Company acquired Peoples Bancorp of Washington, Indiana and its wholly owned subsidiary, Peoples National Bank and Trust Company, in a pooling of interests. Pursuant to the merger, the Company issued 615,417 common shares. The following summary financial information includes pro forma information as if the acquisition had occurred at the beginning of 1996. German American Peoples Pro forma Bancorp Bancorp Combined Total Assets. . . . . . . . . . . . . . $397,506 $91,937 $489,443 Shareholders' Equity. . . . . . . . . . 39,341 9,452 48,793 Net Interest Income . . . . . . . . . . 14,675 4,003 18,678 Net Income. . . . . . . . . . . . . . . 4,065 829 4,894 Earnings per share. . . . . . . . . . . 2.12 --- 1.93
NOTE 18 - Fair Values of Financial Instruments The following methods and assumptions were used to estimate fair values for financial instruments. For cash, short-term investments, short-term borrowings and accrued interest, the carrying amount is a reasonable estimate of fair value. The carrying value of commitments to extend credit and standby letters of credit, which is zero, is also a reasonable estimation of fair value. These instruments are generally short-term or variable rate with minimal fees charged. Notes to the Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 18 - Fair Values of Financial Instruments (Continued) In the case of securities, the fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. The fair value of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the remaining maturities. The fair value of demand deposits, savings accounts, and certain money market deposits, is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated using the rates currently offered on deposits of similar remaining maturities. DECEMBER 31, 1996 DECEMBER 31, 1995 CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE Financial Assets: Cash and Short-term Investments. . . . . . . . $35,285 $35,285 $34,797 $34,797 Securities Available-for-Sale. . . . . . . . . 85,708 85,708 78,908 78,908 Securities Held-to-Maturity. . . . . . . . . . 15,667 16,270 10,607 11,237 Loans, net . . . . . . . . . . . . . . . . . . 241,995 241,713 224,657 223,949 Accrued Interest Receivable. . . . . . . . . . 3,641 3,641 3,367 3,367 Financial Liabilities: Deposits . . . . . . . . . . . . . . . . . . . (352,749) (354,956) (327,579) (329,840) Short-term Borrowings. . . . . . . . . . . . . (2,127) (2,127) --- --- Accrued Interest Payable . . . . . . . . . . . (2,047) (2,047) (1,972) (1,972) Unrecognized Financial Instruments Commitments to extend Credit . . . . . . . . . --- --- --- --- Standby Letters of Credit. . . . . . . . . . . --- --- --- ---
NOTE 19 - Pending Accounting Changes Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements is not expected to be material. 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, 1996 and 1995, 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, 1996. 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. 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 German American Bancorp as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Indianapolis, Indiana January 30, 1997, except for Note 17, as to which the date is March 4, 1997 /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP EX-21 9 SUBSIDIARIES OF THE REGISTRANT (AS OF MARCH 7, 1997) STATE OF NAME INCORPORATION THE GERMAN AMERICAN BANK INDIANA GAB MORTGAGE CORP INDIANA GERMAN AMERICAN HOLDINGS CORP. INDIANA COMMUNITY TRUST BANK INDIANA FIRST STATE BANK, SOUTHWEST INDIANA INDIANA THE PEOPLES NATIONAL BANK AND TRUST COMPANY OF WASHINGTON UNITED STATES PEOPLES INVESTMENT CENTER, INC. INDIANA Exhibit 21 EX-23 10 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS Board of Directors German American Bancorp Jasper, Indiana We consent to the incorporation by reference in the Registration Statement on Form S-3 of German American Bancorp, which relates to the Dividend Reinvestment and Stock Purchase Plan and which is included by reference as an Exhibit in the December 31, 1996 Form 10-K, of our Independent Auditor's Report, dated January 30, 1997, except for Note 17, as to which the date is March 4, 1997, on the consolidated balance sheets of German American Bancorp as of December 31, 1995 and 1996 and on the consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. We also consent to the use of our name and the statements with respect to us appearing under the heading "Experts" in the Registration Statement Form S-3. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Indianapolis, Indiana March 28, 1997 AM\GAB10K\EXHIBIT.23 EX-27 11
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS CONTAINED IN THE FILER'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000714395 GERMAN AMERICAN BANCORP 1,000 YEAR DEC-31-1996 DEC-31-1996 13,109 597 20,600 0 85,708 15,667 16,270 247,611 5,616 397,506 352,749 2,127 3,289 0 0 0 19,238 20,103 397,506 21,970 5,609 741 13,645 13,594 51 14,675 160 0 10,344 5,943 5,943 0 0 4,065 2.12 2.12 4.19 1,112 1,098 0 2,210 5,933 772 295 5,616 5,616 0 2,083
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