UNITED STATES SECURITIES AND EXCHANGE COMMISSION
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2005 |
For the fiscal year ended: December 31, 2006
OR
|
| o | OR
|
o
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ |
|
For the transition period from __________ to __________
Commission File Number 0-11244
GERMAN AMERICAN BANCORP,
INC.
(Exact name of registrant as specified in its charter)
INDIANA | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
711 Main Street, Box 810, Jasper, Indiana | |
| (Address of Principal Executive Offices) | 35-1547518
(I.R.S. Employer Identification No.)
47546
(Zip Code) |
Registrant’s telephone number, including area code: (812) 482-1314
Securities registered pursuant to Section 12 (b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, No Par ValuePreferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. | o Yes | x No |
| | |
| Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | o Yes | x No |
| | |
| 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. | x Yes | o No |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer:
Large accelerated filer oAccelerated filer xNon-accelerated filer o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K:
| | o
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer:
|
Large accelerated filer o
| Accelerated filer x
| Non-accelerated filer o
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). | o Yes | xNo |
| | | | | | |
The aggregate market value of the registrant’s common shares held by non-affiliates of the registrant, computed by reference to the price at which the common shares were last sold, as of June 30,
20052006 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately
$133,094,000.$132,632,000. This calculation does not reflect a determination that persons are affiliates for any other purposes.
As of March 1,
2006,2007, there were outstanding
11,006,684 11,029,612 common shares, no par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of German American Bancorp,
Inc., for the Annual Meeting of its Shareholders to be held April
27, 2006,26, 2007, to the extent stated herein, are incorporated by reference into Part III.
1
GERMAN AMERICAN BANCORP,
INC.
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31,
20052006
PART I | | | |
Item 1 1. | Business | | 3-5 |
Item 1A. | Risk Factors | | 6-7 |
Item 1B. | Unresolved Staff Comments | | 7 |
Item 2. | Properties | 7
| 8 |
Item 3 3. | Legal Proceedings | 7
| 8 |
Item 4. | Submission of Matters to a Vote of Security Holders | 7
| 8 |
| | | |
PART II | | | |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases | | |
| of Equity Securities | | 8-9 |
Item 6. | Selected Financial Data | | 10 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 11-28 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 28-29
| 29 |
Item 8. | Financial Statements and Supplementary Data | 30-60
| 30-65 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 61
| 66 |
Item 9A. | Controls and Procedures | 61-62
| 66-67 |
Item 9B. | Other Information | 63
| 68 |
| | | |
PART III | | | |
Item 10. | Directors and Executive Officers of the Registrant | 63
| 68 |
Item 11. | Executive Compensation | 63
| 68 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 63-64
| |
| Matters | | 68-69 |
| Item 13. | Certain Relationships and Related Transactions | 64
| 69 |
Item 14. | Principal Accountant Fees and Services | 64
| 69 |
| | | |
PART IV | | | |
Item 15. | Exhibits and Financial Statement Schedules | 65
| 70 |
SIGNATURES | 66
| 71 |
| | |
| INDEX OF EXHIBITS | 67-69
| 72-74 |
2Information included in or incorporated by reference in this Annual Report on Form 10-K, our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contain or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to a discussion of our forward- looking statements and associated risks in Item 1, “Business –- Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” in this Annual Report on Form 10-K.
Item 1. Business.
German American Bancorp, (“the Company”)Inc. is a financial services holding company based in Jasper, Indiana. The Company’s Common Stock is traded on NASDAQ’s National Market SystemGlobal Select Market. under the symbol GABC. The Companyprincipal subsidiary of German American Bancorp, Inc., is its banking subsidiary, German American Bancorp which operates through six affiliated community banksbanking affiliates with 2930 retail banking offices in the nineten contiguous Southern Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin, Monroe, Perry, Pike, and Spencer. The CompanyGerman American Bancorp, Inc., also operatesowns a trust, brokerage, and financial planning subsidiary, which operates from the banking offices of the bank subsidiaries,subsidiary and two insurance agencies with fivesix insurance agency offices throughout its market area.
Throughout this report, when we use the term “Company”, we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.
The Company’s lines of business include retail and commercial banking, mortgage banking, comprehensive financial planning, full service brokerage and trust administration, title insurance, and a full range of personal and corporate insurance products. Financial and other information by segment is included in Note 16
–- Segment Information of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and is incorporated into this Item 1 by reference. Substantially all of the Company’s revenues are derived from customers located in, and substantially all of its assets are located in, the United States.
During 2005, the Company expanded its business
Developments in the Tell City, Indiana market by acquiringCompany’s Business
Since January 1, 2006, the Company’s business of the former Peoples Community Bank. In addition,has grown through both organic internal growth and acquisitions. Effective January 1, 2006, the Company completed its acquisition effective as of January 1, 2006, of all of the stock ofStone City Bancshares, Inc. and its subsidiary Stone City Bank of Bedford, Indiana, and as a result now operates ineffective October 1, 2006, the Bedford/Lawrence County banking market.Company completed the acquisition of the insurance agency business of Keach and Grove Insurance, Inc. also of Bedford, Indiana. For a description of these two acquisitions, see Note 18 to the consolidated financial statements included in Item 8 of this Report, which description is incorporated into this Item 1 by reference Thereference. During the first quarter of 2007, the Company alsoestablished its first branch in Bloomington, Indiana, which is located in Monroe County, Indiana (immediately north of Lawrence County, in which Bedford is located). As a result of this acquisition and branching activity, the Company now operates in both the Bloomington (Monroe County) and Bedford (Lawrence County) banking markets.
In addition, during
2005the second quarter of 2006, the Company purchased
as ana non-controlling investment
shares ofin the common stock
of a small banking company based in Dana, Indiana (near Terre Haute, Indiana) that
represented 9.0%has since branched into Lafayette, Indiana. As a result of
making this investment, the
initial stock issueCompany has the opportunity to bid to purchase participations in loans that may be originated by this other banking company from time to time, if and to the extent that the banking company desires to sell participations in such loans to third parties. During the fourth quarter of
Eclipse Bank, Inc.,2006, the Company expanded its agricultural lending business by acquiring the Southern Indiana based agricultural loan portfolio of a
new bank that commencedregional banking
operations during 2005 in Saint Matthews, Kentucky (part of the Louisville, Kentucky banking market), and shares of common stock that represented 9.7% of the initial stock issue of Symphony Bancorp, a bank holding company for Symphony Bank, a newly-chartered bank which commenced serving Hamilton County, Indiana, and northern Indianapolis, Indiana markets during 2005.company.
Subsidiaries
The Company’s principal operating subsidiaries are described in the following table:
1)Name |
| 2)Type of Business |
| 3)Principal Office Location |
The German American Bank
Bancorp | | Commercial Bank | | Jasper, IN |
First American Bank
| Commercial Bank
| Vincennes, IN
|
First Title Insurance Company | | Title Insurance Agency | | Vincennes, IN |
First State Bank, Southwest Indiana
| Commercial Bank
| Tell City, IN
|
Peoples Bank
| Commercial Bank
| Washington, IN
|
Citizens State Bank
| Commercial Bank
| Petersburg, IN
|
Stone City Bank of Bedford, Indiana
| Commercial Bank
| Bedford, IN
|
German American Insurance, Inc. | | Multi-Line Insurance Agency | | Petersburg, IN |
German American Financial Advisors & Trust Company | | Trust, Brokerage, Financial Planning | | Jasper, IN |
Two of these subsidiaries (German American Bancorp and German American Insurance, Inc.) do business in the various communities served by the Company under distinctive trade names that relate to the names under which the Company (or a predecessor) has done banking and insurance business with the public in those communities in prior years.
The industries in which the Company operates are highly competitive. The Company’s subsidiary
banks competebank competes for commercial and retail banking business within its core banking segment not only with financial institutions that have offices in the same counties but also with financial institutions that compete from other locations in Southern Indiana and elsewhere. The Company’s subsidiaries compete with commercial banks, savings and loan associations, savings banks, credit unions, production credit associations, federal land banks, finance companies, credit card companies, personal loan companies, investment brokerage firms, insurance agencies, insurance companies, lease finance companies, money market funds, mortgage companies, and other non-depository financial intermediaries. Many of these banks and other organizations have substantially greater resources than the
Corporation.3
Company.
At March 1,
20062007 the Company and its subsidiaries employed approximately
402395 full-time equivalent employees. There are no collective bargaining agreements, and employee relations are considered to be good.
Regulation and SupervisionSupervision. The Company is subject to
regulation and supervision by the Board of Governors of the Federal Reserve System (“FRB”) under 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”)FRB annual reports and such additional information as the FRB may require. The FRB may also make examinations or inspections of the Company. Under FRB policy, the Company is expected to act as a source of financial strength to its bank
subsidiariessubsidiary and to commit resources to support
themthat subsidiary even in circumstances where the Company might not do so absent such an FRB policy.
The Company’s
six subsidiary
banks arebank is under the supervision of and subject to examination by the Indiana Department of Financial Institutions (“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.
With certain exceptions, the BHC Act prohibits a bank holding company from engaging in (or acquiring direct or indirect control of more than 5 percent of the voting shares of any company engaged in) nonbanking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be
"closely“closely related to banking.
"” Under current regulations, bank holding companies and their subsidiaries are permitted to engage in such banking-related business ventures as consumer finance; equipment leasing; credit life insurance; computer service bureau and software operations; mortgage banking; and securities brokerage.
Under the BHC Act, certain well-managed and well-capitalized bank holding companies may elect to be treated as a “financial holding company” and, as a result, be permitted to engage in a broader range of activities that are “financial in nature” and in activities that are determined to be incidental or complementary to activities that are financial in nature. These activities include underwriting, dealing in and making a market in securities; insurance underwriting and agency activities; and merchant banking. Banks may also engage through financial subsidiaries in certain of the activities permitted for financial holding companies, subject to certain conditions. The Company has not elected to become a financial holding company and
none of its subsidiary
banks havebank has not elected to form financial subsidiaries.
The
Company's banksCompany’s bank subsidiary and
theirthat bank’s subsidiaries may generally engage in activities that are permissible activities for state chartered banks under Indiana banking law, without regard to the limitations that might apply to such activities under the BHC Act if the Company were to engage directly in such
activities.activities at the parent company level or through parent company subsidiaries that were not also bank subsidiaries.
Indiana law and the BHC Act restrict certain types of expansion by the Company and its bank
subsidiaries.subsidiary. The Company and its subsidiaries may be required to apply for prior approval from (or give prior notice and an opportunity for review to) the FRB, the DFI, and/or other bank regulatory or other regulatory agencies, as a condition to the acquisition or establishment of new offices, or the acquisition (by merger or consolidation, purchase or otherwise) of the stock, business or properties of other banks or other companies.
The earnings of commercial banks and their holding companies are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, varying the discount rate on bank borrowings, and setting reserve requirements against bank deposits. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans and earned on investments or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks in the past and this is expected to continue in the future. The general effect, if any, of such policies upon the future business and earnings of the Company cannot accurately be predicted.
The Company and its bank
subsidiariessubsidiary are required by law to maintain minimum levels of capital. These required capital levels are expressed in terms of capital ratios, known as the leverage ratio and the capital to risk-based assets ratios. The Company
and its bank subsidiary each significantly
exceedsexceeded the minimum required capital levels for each measure of capital
adequacy.adequacy as of December 31, 2006. See Note 9 to the
Company'sCompany’s consolidated financial statements that are presented in Item 8 of this Report, which Note 9 is incorporated herein by reference.
4
Also, federal regulations define five categories of financial institutions for purposes of implementing prompt corrective action and supervisory enforcement requirements of the Federal Deposit Insurance Corporation Improvements Act of 1991. The category to which the most highly capitalized institutions are assigned is termed “well-capitalized.” Institutions falling into this category must have a total risk-based capital ratio (the ratio of total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the ratio of Tier 1, or “core”, capital to risk-weighted assets) of at least 6%, a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and must not be subject to any written agreement, order or directive from its regulator relative to meeting and maintaining a specific capital level. On December 31,
2005,2006, the Company had a total risk-based capital ratio of
11.27%10.66%, a Tier 1 risk-based capital ratio of
10.01%8.69% (based on Tier 1 capital of
$75,119,000$77,926,000 and total risk-weighted assets of
$750,302,000)$896,450,000), and a leverage ratio of
8.01%7.41%.
All of the Company'sThe Company’s affiliate
banks meetbank met all of the requirements of the “well-capitalized” category. In addition the Company meets the requirements of the FRB to be considered a “well-capitalized” bank holding company. Accordingly, the Company does not expect these regulations to significantly impact operations.
The Company is a corporation separate and distinct from its bank and other subsidiaries. Most of the Company’s revenues will be received by it in the form of dividends, fees, and interest paid by its bank
subsidiaries. These subsidiaries aresubsidiary. This subsidiary is subject to statutory restrictions on
theirits ability to pay dividends. The FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries that enable it to prevent or remedy actions that in its view may represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability in appropriate cases to proscribe the payment of dividends by banks and bank holding companies. The FDIC and DFI possess similar enforcement powers over the
respective bank
subsidiariessubsidiary of the Company for which they have supervision. The “prompt corrective action” provisions of federal banking law impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies.
Internet Address; Internet Availability of SEC Reports. The
Company'sCompany’s Internet address is www.germanamericanbancorp.com.
Forward-Looking Statements and Associated Risks.
The Company from time to time in its oral and written communications makes statements relating to its expectations regarding the future. These types of statements are considered
"forward-looking statements"“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements can include statements about the Company’s net interest income or net interest margin; adequacy of allowance for loan losses, and the quality of the Company’s loans, investment securities and other assets; simulations of changes in interest rates; litigation results; dividend policy; estimated cost savings, plans and objectives for future operations; and expectations about the Company’s financial and business performance and other business matters as well as economic and market conditions and trends. They often can be identified by the use of words like
"expect," "may,"“expect,” “may,” “will,” “would,”
"could,"“could,” “should,”
"intend," "project," "estimate," "believe"“intend,” “project,” “estimate,” “believe” or
"anticipate,"“anticipate,” or similar expressions.
The Company may include forward-looking statements in filings with the SEC, such as this Form 10-K, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. It is intended that these forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made.
Readers are cautioned that, by their nature, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussions in Item 1A, “Risk Factors,” and in Item 7 of this Form 10-K,
"Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations,
"” list some of the factors that could cause the
Company'sCompany’s actual results to vary materially from those expressed or implied by any forward-looking statements. Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates; the effects of changes in competitive conditions; acquisitions of other businesses
or intangible customer relationships of other companies by the Company and costs of integrations of such acquired
businesses;businesses and intangible customer relationships; the introduction, withdrawal, success, and timing of business initiatives and strategies; changes in customer borrowing, repayment, investment, and deposit practices; changes in fiscal, monetary, and tax policies; changes in financial and capital markets; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; the impact, extent and timing of technological changes; capital management activities; actions of the Federal Reserve Board and legislative and regulatory actions and reforms; changes in accounting principles and interpretations; the inherent uncertainties involved in litigation and regulatory proceedings which could result in the Company’s incurring loss or damage regardless of the merits of the Company’s claims or defenses; and the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends. Investors should consider these risks, uncertainties, and other factors in addition to those mentioned by the Company in its other SEC filings from time to time when considering any forward-looking statement.
Item 1A. Risk FactorsFactors.
While
the Company haswe a have a history of profitability and
operatesoperate in mature industries with capital that substantially exceeds the requirements of bank regulatory agencies, an investment in
theour common stock
of the Company (like an investment in the equity securities of any business enterprise) is subject to investment risks and uncertainties. The following describes some of the principal risks and uncertainties to which
the Companywe and
itsour assets and
businessbusinesses are subject; other risks are briefly identified in our cautionary statement that is included “Forward-Looking Statements and Associated Risks” in Part I, Item 1, “Business.” Although
the Company seekswe seek ways to manage these risks and uncertainties and to develop programs to control those that
managementwe can,
the Companywe ultimately cannot predict the future. Future results may differ materially from past results, and from
management'sour expectations and plans.
If our actual loan losses exceed our estimates, our earnings and financial condition will be impactedAsset Quality..
A significant source of risk for any bank or other enterprise that lends money arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail (because of financial difficulties or other reasons) to perform in accordance with the terms of their loan agreements. In theour case, of the Company,we originate many loans originated by the Companythat are secured, but some loans are unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination, natural disasters, and other external events. The Company hasWe have adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for loan losses and regular review of appraisals and borrower financial statements, that management believeswe believe are appropriate to mitigate the risk of loss by assessing the likelihood of nonperformance and the value of available collateral, monitoring loan performance and diversifying the Company'sour credit portfolio. Such policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Company'sour business, financial condition, results of operations or liquidity. For additional information regarding the Company’sour asset quality, see Part II, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations.”)
We could be adversely affected by changes in interest rates.Interest Rate Risk
.The Company's
Our earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities and the level of non-performing assets. Fluctuations in interest rates affect the demand of customers for
the Company'sour products and services.
The Company isWe are subject to interest rate risk to the degree that
itsour interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest-earning assets. Significant fluctuations in interest rates could have a material adverse effect on
the Company'sour business, financial condition, results of operations or liquidity. For additional information regarding interest rate risk, see Part II, Item 7A,
"Quantitative(“Quantitative and Qualitative Disclosures About Market Risk.
"”)
Our success is tied to the economic vitality of our Southern Indiana marketsEconomic Conditions, Limited Geographic Diversification..The Company conducts
We conduct business from offices that are exclusively located in
nineten contiguous counties of Southern Indiana, from which substantially all of
itsour customer base is drawn. Because of the geographic concentration of
itsour operations and customer base,
the Company'sour results depend largely upon economic conditions in this area. Deterioration in economic conditions in this area could adversely affect the quality of
the Company'sour loan portfolio and the demand for
itsour products and services, and accordingly, could have a material adverse effect on
the Company'sour business, financial condition, results of operations or liquidity. See also Part I, Item 1,
"Business“Business --- Competition.
"”
We face substantial competitionCompetition..
The banking and financial services business in
the Company'sour markets is highly competitive.
The Company competes in its geographic marketsWe compete with
much larger regional, national, and international
competitors that are much larger in total assets and capitalization than the Company.competitors. In addition, new banks could be organized in
the Company’sour market area which might bid aggressively for new business to capture market share in these markets. Developments increasing the nature or level of
our competition,
or decreasing the effectiveness by which we compete, could have a material adverse effect on
the Company'sour business, financial condition, results of operations or liquidity. See also
"Competition,"“Competition,” and
"Supervision“Regulation and
Regulation of Banking Activities."6
Supervision.”
Risks of Future Changes in Our Businessesbusiness expansion and Capital Structurecapital management strategies may be less successful than planned..The Company
We from time to time
considersconsider opportunities to expand
the Company’s businesses byour business including strategies for launching new internal business initiatives and
by buying or investing in other
businesses. The Company’sbusinesses or business assets. Our earnings and financial condition could be adversely affected to the extent that the acquisitions or other business initiatives and strategies are not successful (or take longer than expected to achieve expected results) and such initiative or strategies could even result in
losses to the Company. The Companylosses. We also from time to time
engagesengage in activities (such as repurchasing and issuing
itsour capital stock or other securities, and utilizing the borrowing capacity of
itsour parent company to borrow funds from third party lenders on short and long term bases) in order to manage
itsour capital structure
and to finance acquisitions in a manner that
it believeswe believe is most advantageous. These capital management
activities and financing activities, however, also carry risks in the event that
the Company’sour business does not develop as expected or there are changes in the market for
the Company’sour common stock or in the capital and financial markets generally.
Government Regulation, Legislative Changes,We operate in a highly regulated environment and Monetary Policy.The Companychanges in laws and theregulations to which we are subject may adversely affect our results of operations
.
The banking industry arein which we operate is subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Company conducts itswe conduct our business, undertakesundertake new investments and activities and obtainsobtain financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Company'sour shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation, in the future, none of which is in the control of the Company.our control. Significant new laws or changes in, or repeals of, existing laws (including changes in federal or state laws affecting corporate taxpayers generally or financial institutions specifically) could have a material adverse effect on the Company'sour business, financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions, for the Company, and any unfavorable change in these conditions could have a material adverse effect on the Company'sour business, financial condition, results of operations or liquidity. See also Part I, Item 1, “Business -- Supervision and Regulation of Banking Activities."”
Risk of ChangesThe manner in Accounting Policies or Requirements or Accounting Estimates or Judgments.Thewhich we report our financial condition and results of operations may be affected by accounting changes
.
Our financial condition and results of
the Companyoperations that are presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report, are, to a large degree, dependent upon
the Company’sour accounting policies. The selection of and application of these policies involve estimates, judgments and uncertainties that are subject to change, and the effect of any change in estimates or judgments that might be caused by future developments or resolution of uncertainties could be materially adverse to
the Company’sour reported financial condition and results of operations. See the discussion of critical accounting policies and estimates that
the Company haswe have determined to be the most susceptible to change in the near term that is included in the section captioned “Critical Accounting Policies and Estimates” in Part II, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) for a complete discussion. In addition, authorities that prescribe accounting principles and standards for public companies from time to time change those principles or standards or adopt formal or informal interpretations of existing principles or standards, which changes or interpretations (to the extent applicable to
the Company)us) could result in changes that would be materially adverse to
the Company’sour reported financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
None.
.None.
Item 2. Properties.
The
Company conducts its operations fromCompany’s executive offices are located in the main office building of
Theits bank subsidiary, German American
BankBancorp, at 711 Main Street, Jasper, Indiana. The main office building contains approximately 23,600 square feet of office space. The Company’s subsidiaries conduct their operations from
3336 other locations in Southern Indiana.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation incidental to the business of the Company’s subsidiaries, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of
20052006 to a vote of security holders, by solicitation of proxies or otherwise.
7
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market and Dividend Information
German American
Bancorp’sBancorp, Inc.’s stock is traded on NASDAQ’s
NationalGlobal Select Market
System under the symbol GABC. The quarterly high and low closing prices for the Company’s common stock as reported by NASDAQ and quarterly cash dividends declared and paid are set forth in the table below.
All per share data are retroactively restated for all stock dividends. | 2005
| | 2004
|
|---|
| High
| Low
| Cash
Dividend
| | High
| Low
| Cash
Dividend
|
|---|
| Fourth Quarter | $13.64 | $12.71 | $0.140 | | $17.24 | $15.95 | $0.140 |
| Third Quarter | $14.74 | $13.30 | $0.140 | | $17.75 | $15.75 | $0.140 |
| Second Quarter | $15.21 | $12.53 | $0.140 | | $17.23 | $15.80 | $0.140 |
| First Quarter | $15.98 | $15.18 | $0.140 | | $18.02 | $16.81 | $0.140 |
|
| | |
|
| | | | $0.560 | | | | $0.560 |
|
| | |
|
| | | 2006 | | 2005 | |
| | | High | | | | Cash Dividend | | High | | Low | | | |
| | | | | | | | | | | | | | |
Fourth Quarter | | $ | 14.41 | | $ | 13.59 | | $ | 0.140 | | $ | 13.64 | | $ | 12.71 | | $ | 0.140 | |
Third Quarter | | $ | 14.39 | | $ | 12.89 | | $ | 0.140 | | $ | 14.74 | | $ | 13.30 | | $ | 0.140 | |
Second Quarter | | $ | 13.65 | | $ | 12.90 | | $ | 0.140 | | $ | 15.21 | | $ | 12.53 | | $ | 0.140 | |
First Quarter | | $ | 13.70 | | $ | 12.83 | | $ | 0.140 | | $ | 15.98 | | $ | 15.18 | | $ | 0.140 | |
| | | | | | | | | $ | 0.560 | | | | | | | | $ | 0.560 | |
The Common Stock was held of record by approximately
3,4803,425 shareholders at March 1,
2006.2007.
Cash dividends paid to the Company’s shareholders are primarily funded from dividends received by the Company from its subsidiaries.bank subsidiary. The declaration and payment of future dividends will depend upon the earnings and financial condition of the Company and its subsidiaries, general economic conditions, compliance with regulatory requirements affecting the ability of the bank subsidiary to declare dividends, and other factors.
Transfer Agent: | | UMB Bank, N.A.
| | Shareholder | | Terri A. Eckerle |
| | Securities Transfer Division
| | Information and | | German American Bancorp, Inc |
| | P.O. Box 410064
| | Corporate Office: | | P. O. Box 810 |
| | Kansas City, MO 64141-0064
Contact: Shareholder Relations
|
Shareholder
Information and
Corporate Office: | Terri A. Eckerle
German American Bancorp
P. O. Box 810
| | | Jasper, Indiana 47547-0810
(812) 482-1314
(800) 482-1314
(812) 482-1314 |
Stock Performance Graph
The following graph compares the Corporation’s five-year cumulative total returns with those of the Russell 2000 Stock Index and the Indiana Bank Peer Group. The Indiana Bank Peer Group (which is a custom peer group identified by Company management) includes all Indiana-based commercial bank holding companies (excluding companies owning thrift institutions that are not regulated as bank holding companies) that have been in existence as commercial bank holding companies throughout the five-year period ended December 2006, the stocks of which have been traded on an established securities market (NYSE, AMEX, NASDAQ) throughout that five-year period. The returns of each company in the Indiana Bank Peer Group have been weighted to reflect the company’s market capitalization. The Russell 2000 Stock Index is an index consisting of the 1,001st through 3,000th largest United States traded stocks, based on market capitalization, which is annually reconstituted at the end of each June. The Company’s stock was included in the Russell 2000 Index as it was constituted from July 2001 through June 2005.
Stock Repurchase Program Information The following table sets forth information regarding the Company’s purchases of its common shares during each of the three months ended December 31,
2005.Period
| Total
Number
Of Shares
(or Units)
Purchased
| Average Price
Paid Per Share
(or Unit)
| Total Number of Shares
(or Units) Purchases as Part
of Publicly Announced Plans
or Programs
| Maximum Number
(or Approximate Dollar
Value) of Shares (or Units)
that May Yet Be Purchased
Under the Plans or Programs(1)
|
|---|
| | | | |
|---|
| October 2005 | | | | — | | | — | | | — | | | 272,789 | |
| November 2005 | | | | — | | | — | | | — | | | 272,789 | |
| December 2005 | | | | 441,299 | (2)(3) | $ | 12.50 | | | — | | | 272,789 | |
(1)Period
| On April 26, 2001, the Company announced | Total Number Of Shares (or Units) Purchased | | Average Price Paid Per Share (or Unit) | | Total Number of Shares (or Units) Purchases as Part of Publicly Announced Plans or Programs | | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that its Board of Directors had approved a stock repurchase program for up to 607,754 of its outstanding common shares, of which the Company had purchased 334,965 common shares through December 31, 2005. The Board of Directors established no expiration date for this program. |
| May Yet Be Purchased (2)
| During December 2005, 552 shares were acquired by the Company from certain persons who held options ("optionees") to acquire the Company's common shares under its 1999 Long-Term Equity Incentive Plan ("Plan") in connection with the exercises by such optionees of their options during December 2005. Under the terms of the Plan, optionees are generally entitled to pay somePlans or all of the exercise price of their options by delivering to the Company common shares that the optionee may already own, subject to certain conditions. The Company is generally obligated to purchase any such common shares delivered to it by such optionees for this purpose and to apply the market value of those tendered shares as of the date of exercise of the options toward the exercise prices due upon exercise of the options. Shares acquired by the Company pursuant to option exercises under the Plan are not made pursuant to the repurchase program described in note 1 above and by Note 9 to the Company's consolidated financial statements that are presented in Item 8 this Report and do not reduce the number of shares available for purchase under that program.Programs (1) | |
| | | | | | | | | |
| October 2006 | | | — | | | | | | | | | 272,789 | |
| | | | | | | | | | | | 272,789 | |
| December 2006 | | | | | | | | | | | | 272,789 | |
(3) | During December 2005 the Company completed the purchase, in a private unsolicited transaction not from or through any broker or dealer, of a block of 440,747 shares of the Company's issued and outstanding common stock from a corporation currently in reorganization proceedings under Chapter 11 of the United States Bankruptcy Code at a price of $12.50 per share. The block purchase represented approximately 4% of the shares of the Company's common shares that were outstanding immediately prior to consummation of the purchase. The Company's Board of Directors specifically approved the block purchase, and such purchase therefore will not reduce the number of shares authorized for repurchase under the repurchase program described by note 1above and in Note 9 to the Company's consolidated financial statements that are presented in Item 8 this Report. |
(1) On April 26, 2001, the Company announced that its Board of Directors had approved a stock repurchase program for up to 607,754 of its outstanding common shares, of which the Company had purchased 334,965 common shares through December 31, 2006 (both such numbers adjusted for subsequent stock dividends). The Board of Directors established no expiration date for this program. The Company purchased no shares under this program during the quarter ended December 31, 2006.
Item 6. Selected Financial Data.
The following selected data should be read in conjunction with the consolidated financial statements and related notes that are included in Item 8 of this Report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Report (dollars in thousands, except per share data).
| 2005
| 2004
| 2003
| 2002
| 2001
|
|---|
| Summary of Operations: | | | | | | | | | | | | | | | | | |
| Interest Income | | | $ | 50,197 | | $ | 47,710 | | $ | 50,619 | | $ | 60,494 | | $ | 71,069 | |
| Interest Expense | | | | 17,984 | | | 16,471 | | | 21,084 | | | 28,492 | | | 38,917 | |
|
| |
| |
| |
| |
| |
| Net Interest Income | | | | 32,213 | | | 31,239 | | | 29,535 | | | 32,002 | | | 32,152 | |
| Provision for Loan Losses | | | | 1,903 | | | 2,015 | | | 811 | | | 1,115 | | | 660 | |
|
| |
| |
| |
| |
| |
| Net Interest Income after Provision | | |
| For Loan Losses | | | | 30,310 | | | 29,224 | | | 28,724 | | | 30,887 | | | 31,492 | |
| Non-interest Income | | | | 14,194 | | | 9,620 | (1) | | 12,934 | | | 9,509 | | | 9,772 | |
| Non-interest Expense | | | | 31,448 | | | 30,609 | | | 32,219 | (2) | | 28,967 | | | 29,308 | |
|
| |
| |
| |
| |
| |
| Income before Income Taxes | | | | 13,056 | | | 8,235 | | | 9,439 | | | 11,429 | | | 11,956 | |
| Income Tax Expense | | | | 3,335 | | | 996 | | | 1,271 | | | 1,987 | | | 2,763 | |
|
| |
| |
| |
| |
| |
| Net Income | | | $ | 9,721 | | $ | 7,239 | | $ | 8,168 | | $ | 9,442 | | $ | 9,193 | |
|
| |
| |
| |
| |
| |
|
| Year-end Balances: | | |
| Total Assets | | | $ | 946,467 | | $ | 942,094 | | $ | 925,946 | | $ | 957,005 | | $ | 1,015,111 | |
| Total Loans, Net of Unearned Income | | | | 651,956 | | | 629,793 | | | 611,866 | | | 610,741 | | | 657,166 | |
| Total Deposits | | | | 746,821 | | | 750,383 | | | 717,133 | | | 707,194 | | | 726,874 | |
| Total Long-term Debt | | | | 66,606 | | | 69,941 | | | 76,880 | (2) | | 121,687 | | | 156,726 | |
| Total Shareholders' Equity | | | | 82,255 | | | 83,669 | | | 83,126 | (3) | | 104,519 | | | 102,209 | |
|
| Average Balances: | | |
| Total Assets | | | $ | 925,851 | | $ | 927,528 | | $ | 938,992 | | $ | 1,000,167 | | $ | 1,014,917 | |
| Total Loans, Net of Unearned Income | | | | 634,526 | | | 622,240 | | | 618,340 | | | 644,990 | | | 704,562 | |
| Total Deposits | | | | 730,220 | | | 731,467 | | | 711,310 | | | 718,763 | | | 718,160 | |
| Total Shareholders' Equity | | | | 84,479 | | | 82,558 | | | 87,703 | (3) | | 103,301 | | | 100,232 | |
|
| Per Share Data (4): | | |
| Net Income | | | $ | 0.89 | | $ | 0.66 | | $ | 0.73 | (3) | $ | 0.79 | | $ | 0.76 | |
| Cash Dividends | | | | 0.56 | | | 0.56 | | | 0.53 | | | 0.51 | | | 0.48 | |
| Book Value at Year-end | | | | 7.73 | | | 7.68 | | | 7.60 | (3) | | 8.72 | | | 8.44 | |
|
| Other Data at Year-end: | | |
| Number of Shareholders | | | | 3,494 | | | 3,219 | | | 3,198 | | | 3,299 | | | 3,314 | |
| Number of Employees | | | | 367 | | | 372 | | | 383 | | | 390 | | | 422 | |
| Weighted Average Number of Shares (4) | | | | 10,890,987 | | | 10,914,622 | | | 11,176,766 | (3) | | 12,007,009 | | | 12,093,160 | |
|
| Selected Performance Ratios: | | |
| Return on Assets | | | | 1.05% | | | 0.78% | | | 0.87% | | | 0.94% | | | 0.91% | |
| Return on Equity | | | | 11.51% | | | 8.77% | | | 9.31% | (3) | | 9.14% | | | 9.17% | |
| Equity to Assets | | | | 8.69% | | | 8.88% | | | 8.98% | (3) | | 10.92% | | | 10.07% | |
| Dividend Payout | | | | 62.83% | | | 84.46% | | | 73.26% | | | 64.99% | | | 63.98% | |
| Net Charge-offs to Average Loans | | | | 0.26% | | | 0.24% | | | 0.14% | | | 0.19% | | | 0.22% | |
| Allowance for Loan Losses to Loans | | | | 1.42% | | | 1.40% | | | 1.35% | | | 1.36% | | | 1.27% | |
| Net Interest Margin | | | | 3.92% | | | 3.86% | | | 3.61% | | | 3.67% | | | 3.61% | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
Summary of Operations: | | | | | | | | | | | |
| Interest Income | | $ | 63,594 | | $ | 50,197 | | $ | 47,710 | | $ | 50,619 | | $ | 60,494 | |
| Interest Expense | | | 27,398 | | | 17,984 | | | 16,471 | | | 21,084 | | | 28,492 | |
| Net Interest Income | | | 36,196 | | | 32,213 | | | 31,239 | | | 29,535 | | | 32,002 | |
| Provision for Loan Losses | | | 925 | | | 1,903 | | | 2,015 | | | 811 | | | 1,115 | |
| Net Interest Income after Provision | | | | | | | | | | | | | | | | |
| For Loan Losses | | | 35,271 | | | 30,310 | | | 29,224 | | | 28,724 | | | 30,887 | |
| Non-interest Income | | | 15,390 | | | 14,194 | | | 9,620 | (1) | | 12,934 | | | 9,509 | |
| Non-interest Expense | | | 36,456 | | | 31,448 | | | 30,609 | | | 32,219 | (2) | | 28,967 | |
| Income before Income Taxes | | | 14,205 | | | 13,056 | | | 8,235 | | | 9,439 | | | 11,429 | |
| Income Tax Expense | | | 3,984 | | | 3,335 | | | 996 | | | 1,271 | | | 1,987 | |
| Net Income | | $ | 10,221 | | $ | 9,721 | | $ | 7,239 | | $ | 8,168 | | $ | 9,442 | |
| | |
Year-end Balances: | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 1,093,424 | | $ | 946,467 | | $ | 942,094 | | $ | 925,946 | | $ | 957,005 | |
| Total Loans, Net of Unearned Income | | | 796,259 | | | 651,956 | | | 629,793 | | | 611,866 | | | 610,741 | |
| Total Deposits | | | 867,618 | | | 746,821 | | | 750,383 | | | 717,133 | | | 707,194 | |
| Total Long-term Debt | | | 68,333 | | | 66,606 | | | 69,941 | | | 76,880 | (2) | | 121,687 | |
| Total Shareholders’ Equity | | | 92,391 | | | 82,255 | | | 83,669 | | | 83,126 | (3) | | 104,519 | |
| | |
Average Balances: | | | | | | | | | | | | | | | | |
| Total Assets | | $ | 1,029,838 | | $ | 925,851 | | $ | 927,528 | | $ | 938,992 | | $ | 1,000,167 | |
| Total Loans, Net of Unearned Income | | | 715,260 | | | 634,526 | | | 622,240 | | | 618,340 | | | 644,990 | |
| Total Deposits | | | 814,440 | | | 730,220 | | | 731,467 | | | 711,310 | | | 718,763 | |
| Total Shareholders’ Equity | | | 88,451 | | | 84,479 | | | 82,558 | | | 87,703 | (3) | | 103,301 | |
| | |
Per Share Data (4): | | | | | | | | | | | | | | | | |
| Net Income | | $ | 0.93 | | $ | 0.89 | | $ | 0.66 | | $ | 0.73 | (3) | $ | 0.79 | |
| Cash Dividends | | | 0.56 | | | 0.56 | | | 0.56 | | | 0.53 | | | 0.51 | |
| Book Value at Year-end | | | 8.39 | | | 7.73 | | | 7.68 | | | 7.60 | (3) | | 8.72 | |
| | |
Other Data at Year-end: | | | | | | | | | | | | | | | | |
| Number of Shareholders | | | 3,438 | | | 3,494 | | | 3,219 | | | 3,198 | | | 3,299 | |
| Number of Employees | | | 397 | | | 367 | | | 372 | | | 383 | | | 390 | |
Weighted Average Number of Shares (4) | | | 10,994,739 | | | 10,890,987 | | | 10,914,622 | | | 11,176,766 | (3) | | 12,007,009 | |
| | |
Selected Performance Ratios: | | | | | | | | | | | | | | | | |
| Return on Assets | | | 0.99 | % | | 1.05 | % | | 0.78 | % | | 0.87 | % | | 0.94 | % |
| Return on Equity | | | 11.56 | % | | 11.51 | % | | 8.77 | % | | 9.31 | %(3) | | 9.14 | % |
| Equity to Assets | | | 8.45 | % | | 8.69 | % | | 8.88 | % | | 8.98 | %(3) | | 10.92 | % |
| Dividend Payout | | | 60.30 | % | | 62.83 | % | | 84.46 | % | | 73.26 | % | | 64.99 | % |
| Net Charge-offs to Average Loans | | | 0.50 | % | | 0.26 | % | | 0.24 | % | | 0.14 | % | | 0.19 | % |
| | | 0.90 | % | | 1.42 | % | | 1.40 | % | | 1.35 | % | | 1.36 | % |
| Net Interest Margin | | | 3.96 | % | | 3.92 | % | | 3.86 | % | | 3.61 | % | | 3.67 | % |
(1) | In 2004,the Company recognized a $3.7 million non-cash pre-tax charge (which reduced Non-interest Income) for the other-than-temporary decline in value of its FHLMC and FNMA preferred stock portfolio. In 2006, the Company sold these same FHLMC and FNMA preferred stocks and recognized a pre-tax gain of $951. |
(2) | In 2003,the Company prepaid $40.0 million of FHLB borrowings within its mortgage banking segment. The prepayment fees associated with the extinguishment of these borrowings totaled $1.9 million. |
(3) | In March 2003, the Company purchased 1,110,444 (approximately 9% of the number of shares that were then outstanding) of its common shares at $19.05 per share pursuant to a self tender offer at a total cost, including fees and expenses incurred in connection with the offer, of approximately $21.4 million. |
(4) | Share and Per Share Data has been retroactively adjusted to give effect for stock dividends and excludes the dilutive effect of stock options. |
Year to year financial information comparability is affected by the purchase accounting treatment for mergers and acquisitions. See Note 18 to the Company’s consolidated financial statements included in Item 8 of this Report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
German American Bancorp, (“the Company”)Inc. is a financial services holding company based in Jasper, Indiana. The Company’s Common Stock is traded on NASDAQ’s NationalGlobal Select Market, System under the symbol GABC. The Companyprincipal subsidiary of German American Bancorp, Inc., is its banking subsidiary, German American Bancorp, which operates through six affiliated community banksbanking affiliates with 2930 retail banking offices in the nineten contiguous Southern Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin, Monroe, Perry, Pike, and Spencer. The CompanyGerman American Bancorp, Inc., also operatesowns a trust, brokerage, and financial planning subsidiary, which operates from the banking offices of the bank subsidiaries,subsidiary, and two insurance agencies with fivesix insurance agency offices throughout its market area. The Company’s lines
Throughout this Management’s Discussion and Analysis, as elsewhere in this report, when we use the term “Company”, we will usually be referring to the business and affairs (financial and otherwise) of
business include retailthe Company and
commercial banking, mortgage banking, comprehensive financial planning, full service brokerageits subsidiaries and
trust administration, title insurance, andaffiliates as a
full range of personal and corporate insurance products.whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.
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
20032004 through
20052006 and its financial condition as of December 31,
20052006 and
2004.2005. This information should be read in conjunction with the accompanying consolidated financial statements and footnotes contained elsewhere in this report and with the description of business included in Item 1 of this Report (including the cautionary disclosure regarding “Forward Looking Statements and Associated Risks”). Financial and other information by segment is included in Note 16 to the Company’s consolidated financial statements included in Item 8 of this Report and is incorporated into this Item 7 by reference.
MANAGEMENT OVERVIEWThe Company’s level of net income increased 34% in 2005 compared with 2004. The Company’s 2005 net income totaled $9,721,000, or $0.89 per share, compared with $7,239,000, or $0.66 per share, for 2004. The Company’s performance in 2004 was affected by the recording in the fourth quarter of 2004 a non-cash, other-than-temporary impairment charge of approximately $2.4 million after-tax, or $0.23 per share, related to certain investments in Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) preferred stock. Exclusive of the impairment charge, 2004 earnings would have been $9,669,000, or $0.89 per share. In addition to the effect of the securities impairment charge, the earnings comparison of 2005 to 2004 was positively impacted by improvements in net interest income of $974,000, as well as increases in the level of other non-interest income. Non-interest income, excluding the impairment charge on equity securities in 2004, increased by approximately $891,000 or 7% in 2005 compared to 2004. These increases were partially mitigated by increased non-interest expense of $839,000, a significant portion of which relates to increased employee health insurance costs, and increased income tax expense of $2,339,000 ($1,087,000 excluding the tax effect of the impairment charge in 2004).
The Company’s level of non-performing loans increased significantly during 2005 compared with year-end 2004. Most of this increase was identified during the second quarter of 2005 and previously reported. Non-performing loans totaled $15.7 at year end 2005 compared with $6.6 million as of year end 2004. The increase in non-performing loans was primarily attributable to three specific credit facilities. Although each of these credits had been internally adversely classified in previous periods, management determined these credits should be placed on non-accrual status during 2005 due to changes in circumstances with each borrower. For further discussion of non-performing loans refer to “RISK MANAGEMENT – Non-Performing Assets.”
During 2005, the Company completed one in-market acquisition of a financial institution and has invested in minority interests in two de novo financial institutions in larger markets that are within a 150 mile radius of the Company’s primary market area. Subsequent to year end 2005, the Company also completed an additional acquisition of a financial institution in an adjacent market to its primary market area. This strategy of bank acquisitions and de novo investing has been undertaken to supplement organic growth within the Company’s primary markets. Management does expect to continue to pursue similar strategic acquisition and investing opportunities should opportunities become available.
The statements of management'smanagement’s expectations and goals concerning the Company'sCompany’s future operations and performance that are set forth in thisthe following Management Overview and in other sections of this Item 7 are forward-looking statements, and readers are cautioned that these forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that areis expressed or implied by any forward-looking statement. The following discussion,This Item 7, as well as the discussions in Item 1 ("Business"(“Business”) entitled "Forward-Looking“Forward-Looking Statements and Associated Risks"Risks” and in Item 1A (“Risk Factors”) (which discussions are incorporated in this Item 7 by reference) listslist some of the factors that could cause the Company'sCompany’s actual results to vary materially from those expressed or implied by any such forward-looking statements.
MANAGEMENT OVERVIEW
The Company’s net income increased 5% in 2006 compared with 2005. The Company’s 2006 net income totaled $10,221,000, or $0.93 per share, compared with $9,721,000, or $0.89 per share, for 2005. Current year earnings were positively affected by increases within the Company’s net interest income and non-interest income as well as a reduced level of provision for loan losses. The improvement in the level of net interest income was largely attributable to strong loan growth. Loans outstanding grew by $145.1 million or 22% during 2006. The increase in non-interest income was primarily credited to the gain derived from the sale of the Company’s portfolio of agency-issued preferred stock during the third quarter of 2006 and an increased level of insurance revenues. An offsetting factor to these positive earnings contributors was an increased level of non-interest related operating expenses due in large part to the inclusion of the recent banking and insurance acquisitions.
Effective January 1, 2006, the Company completed the acquisition of Stone City Bancshares, Inc. which was in an adjacent market to its primary market area and effective October 1, 2005, the Company completed the in-market acquisition of PCB Holding Company. In addition to these acquisitions, during the three-year period ended December 31, 2006, the Company invested in non-controlling interests in the common stocks of four separate banking companies that operate in the Indianapolis, Evansville, Louisville, and Terre Haute/Lafayette (Indiana) banking markets. As a result of making these four non-controlling investments, the Company has the opportunity to bid to purchase participations in loans that may be originated by these other banking companies from time to time, if and to the extent that the banking company desires to sell participations in such loans to third parties. During the fourth quarter of 2006, the Company expanded its agricultural lending business by acquiring the Southern Indiana-based agricultural loan portfolio of a regional banking company. Finally, effective October 1, 2006, the Company completed the acquisition of the insurance agency business of Keach and Grove Insurance, Inc. of Bedford, Indiana which was in the market of the Company’s recent banking acquisition of Stone City Bancshares, Inc. These acquisitions, purchases and investments have been undertaken to supplement organic growth within the Company’s primary markets. Management expects to continue to pursue similar strategic acquisition and investing opportunities should opportunities become available.
Effective September 30, 2006, the Company combined the charters of its six subsidiary banks into a single bank charter in order to simplify its corporate structure and better serve its customers, while retaining local direction of affiliate bank operations under the existing distinctive bank trade names in each of the markets served by the Company.
On October 1, 2005 PCB Holding Company (“PCB”) merged with and into the
Company, andCompany. PCB’s sole banking subsidiary,
Peoples Community Bank, was merged into the Company’s subsidiary, First State Bank, Southwest Indiana. Peoples Community Bank, operated two banking offices in Tell City, Indiana. PCB’s assets and equity (unaudited) as of September 30, 2005 totaled $34.6 million and $4.8 million, respectively. Under the terms of the merger, the shareholders of PCB received an aggregate of 257,029 shares of common stock of the Company valued at approximately $3.5 million and approximately $3.2 million of cash, representing a total transaction value of $6.7 million. This merger was accounted for under the purchase method of accounting.
On January 1, 2006, Stone City Bancshares, Inc. (“Stone City”) merged with and into the Company, and as a result acquired all of the stock of Stone City’s sole banking subsidiary, Stone City Bank of Bedford, Indiana, which
operatesoperated two banking offices in Bedford, Indiana. Stone City’s assets and equity as of December 31, 2005 totaled $61.2 million and $5.4 million, respectively. Under the terms of the merger, the shareholders of Stone City received aggregate cash payments of approximately $6.4 million and 349,468 common shares of the Company valued during
ata pre-closing valuation period of approximately $4.6 million, representing a total transaction value of approximately $11.0 million. This merger was accounted for under the purchase method of accounting.
On October 1, 2006 the Company acquired substantially all of the assets, net of certain assumed liabilities of Keach and Grove Insurance, Inc. of Bedford, Indiana. The agency operations became a part of German American Insurance, Inc., the Company’s property and casualty insurance entity. The purchase price for this transaction was $2.26 million in cash. This merger was accounted for under the purchase method of accounting.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The financial condition and results of operations for German American Bancorp,
Inc. presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this report, are, to a large degree, dependent upon the Company’s accounting policies. The selection of and application of these policies involve estimates, judgments and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of
mortgage servicing rights, the valuation of securities available for sale, and the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.
Allowance for Loan Losses The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 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. A provision for loan losses is charged to operations based on
management'smanagement’s periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the
Company'sCompany’s control.
The Company has an established process to determine the adequacy of the allowance for loan losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio.
Commercial
agricultural and
poultryagricultural loans are subject to a standardized grading process administered by an internal loan review function. The need for specific reserves is considered for credits when graded substandard or special mention, or when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired. Specific allocations on impaired loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds. Allocations are also applied to categories of loans not considered individually impaired but for which the rate of loss is expected to be greater than historical averages, including those graded substandard or special mention and non-performing consumer or residential real estate loans. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values.
General allocations are made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a five-year historical average for loan losses for these portfolios, judgmentally adjusted for economic factors and portfolio trends.
Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes a minor unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.
Mortgage Servicing Rights Valuation
Mortgage servicing rights (MSRs)
arewere recognized and included with other assets for the allocated value of retained servicing rights on loans sold. Servicing rights
arewere expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment
iswas evaluated based on the fair value of the rights, using groupings of the underlying loans as to type and age. Fair value
iswas determined based upon discounted cash flows using market-based assumptions.
To determine the fair value of MSRs, the Company usesused a valuation model that calculatescalculated the present value of estimated future net servicing income. In using this valuation method, the Company incorporatesincorporated assumptions that market participants would use in estimating future net servicing income, which includeincluded estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income.
The Company
periodically validatessold its
valuation model by obtaining an independent valuation of its MSRs.The most significant assumption used to value MSRs is prepayment rate. In general, during periods of declining interest rates, the value of MSRs decline due to increasing prepayment speeds attributable to increased mortgage refinancing activity. Prepayment rates are estimated based on published industry consensus prepayment rates. Prepayments will increase or decrease in correlation with market interest rates, and actual prepayments generally differ from initial estimates. If actual prepayment rates are different than originally estimated, the Company may receive less mortgage servicing income, which could reducerights portfolio during the valuesecond quarter of 2006. Currently, all residential loans that are sold in the MSRs. Other assumptions used in estimating the fair value of MSRs do not generally fluctuate to the same degree as prepayment rates, and therefore the fair value of MSRs is less sensitive to changes in these other assumptions.
Onsecondary market are sold on a quarterly basis, the Company evaluates the possible impairment of MSRs based on the difference between the carrying amount and the current fair value of MSRs. For purposes of evaluating and measuring impairment, the Company stratifies its portfolios on the basis of certain risk characteristics, including loan type and age. If temporary impairment exists, a valuation allowance is established for any excess of amortized cost over the current fair value, by risk stratification, through a charge to income. If the Company later determines that all or a portion of the temporary impairment no longer exists for a particular strata, a reduction of the valuation allowance may be recorded as an increase to income.
The Company annually reviews MSRs for other-than-temporary impairment and recognizes a direct write-down when the recoverability of a recorded valuation allowance is determined to be remote. In determining whether other-than-temporary impairment has occurred, the Company considers both historical and projected trends in interest rates, prepayment activity within the strata, and the potential for impairment recovery through interest rate increases. Unlike a valuation allowance, a direct-write down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries.
As of December 31, 2005, the Company analyzed the sensitivity of its MSRs to changes in prepayment rates. In estimating the changes in prepayment rates, market interest rates were assumed to be increased and decreased by 1.0%. At December 31, 2005 the Company’s MSRs had a fair value of $3,353,000 using a weighted average prepayment rate of 12%. Assuming a 1.0% increase in market interest rates the estimated fair value of MSRs would be $3,724,000 with a weighted average prepayment rate of 9%. Assuming a 1.0% decline in market interest rates the estimated fair value of MSRs would be $2,201,000 with a weighted average prepayment rate of 26%.
servicing released basis.
Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Additionally, all securities are required to be written down to fair value when a decline in fair value is other than temporary; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. See Note 2 in the accompanying Consolidated Financial Statements for information regarding unrealized losses on the securities.
13
In the fourth quarter of 2004, the Company recognized a $3.68 million non-cash pre-tax charge for the other-than-temporary decline in value on its FHLMC and FNMA floating rate preferred stock portfolio. The Company accounts for these securities in accordance with SFAS No. 115, which requires that if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss must be recognized as expense in the income statement. During the quarter ended December 31, 2004, public disclosures regarding accounting practices at FNMA and a multi-billion dollar FNMA preferred stock issuance with a substantially different structure and higher yield than previous offerings had a detrimental effect on the fair value of both the FHLMC and FNMA preferred stock holdings. In connection with the preparation of the Company’s financial statements included elsewhere in this Report, management in January 2005 concluded, as a result of the factors identified in the preceding sentence and the magnitude and length of time the market value had been below cost, that management could not forecast full recovery of the fair values of these securities in a reasonable time period. Accordingly, management determined to recognize the other-than-temporary impairment in the income statement for the fourth quarter of 2004 as an investment securities loss. There was no additional other-than-temporary impairment determined for year end 2005 on this segment or any segments of the Company’s securities portfolio.
Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.
A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. As of December 31,
2005,2006, the Company
hashad a deferred tax asset of
$2.4$1.9 million representing various tax credit carryforwards. Based on the long carryforward periods available, management has assessed it more likely than not that these credits will be realized and no valuation allowance has been established on this asset.
At December 31, 2005, the Company also has a deferred tax asset representing unrealized capital losses on equity securities. Should these capital losses be realized, management believes the Company has the ability to generate sufficient capital gains to realize the tax benefit of the capital losses during the available carryforward period, including the use of tax planning strategies related to mortgage servicing rights, appreciated securities and appreciated FHLB stock. As a result, no valuation allowance has been established on this asset.
Loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the opinionsviews of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment.
During the first quarter of 2005, the Company received notices of proposed assessments of unpaid financial institutions tax for the years 2001 and 2002 of approximately $691,000 ($456,000 net of federal tax), including interest and penalties of approximately $100,000. The Company filed a protest with the Indiana Department of Revenue contesting the proposed assessments and
intends to vigorously
defenddefended its position that the income of the Nevada subsidiaries
iswas not subject to the Indiana financial institutions tax.
Although there can be no such assurance, at this time management does not believe that it is probable that this potential assessment will result in additional tax liability. Therefore, no tax provision
has beenwas recognized for the potential assessment of additional financial institutions tax for 2001 and 2002 or for financial institutions tax with respect to any of the Nevada subsidiaries in any period subsequent to 2002, including the year ended December 31,
2005.2006.
During the first quarter of 2007, the Company and the Indiana Department of Revenue entered into an agreement regarding the proposed assessment for tax years 2001 and 2002. As a result of this agreement the Company was not required to pay any tax liability as assessed by the Indiana Department of Revenue for tax years 2001 and 2002. In addition, tax years 2001 and 2002 are closed to further examination.
Net income increased $500,000 or 5% to $10,221,000 or $0.93 per share in 2006 compared to $9,721,000 or $0.89 per share during 2005. The increase in net income during 2006 compared with 2005 was attributable principally to an increase in net interest income of $3,983,000, a reduction in provision for loan losses of $978,000, and a gain on the sale of the Company’s portfolio of agency preferred stock of $951,000, which were partially mitigated by an increase of $5,008,000 in non-interest expense. The increases in net interest income and non-interest expenses were largely attributable to acquisitions of PCB Holding Company and Stone City Bancshares, Inc., which are discussed in Note 18 to the consolidated financial statements included in Item 8 of this Report.
Net income increased $2,482,000 or 34% to $9,721,000 or $0.89 per share in 2005 compared to $7,239,000 or $0.66 per share during 2004. The earnings increase was largely attributable to
athe inclusion in 2004’s results of an after-tax charge of $2,430,000
after tax, or $0.23 per share,
related to other-than-temporary impairment
charge onof the Company’s portfolio of
FHLMCFederal Home Loan Mortgage Corporation (“FHLMC”) and
FNMAFederal National Mortgage Association (“FNMA”) preferred stocks.
Excluding the effect of this other-than-temporary impairment charge, net income for 2004 would have been $9,669,000 or $0.89 per share. In addition to the effect of the securities impairment charge, the earnings comparison of 2005 to 2004 was positively impacted by improvements in net interest income of $974,000, as well as increases in the level of other non-interest income. Non-interest income, excluding the impairment charge on equity securities in 2004, increased by approximately $891,000 in 2005 compared to 2004.
TheseThose increases were partially mitigated by increased non-interest expense of $839,000, a significant portion of which
relatesrelated to increased employee health insurance costs, and increased income tax expense of $2,339,000 ($1,087,000 excluding the tax effect of the impairment charge in 2004).
14
Net income declined $929,000 or 11% to $7,239,000 or $0.66 per share in 2004 compared to $8,168,000 or $0.73 per share during 2003. The earnings decline was directly attributable to a $2,430,000 after tax, or $0.23 per share, other-than-temporary impairment charge on the Company’s portfolio of FHLMC and FNMA preferred stocks. Excluding the effect of this other-than-temporary impairment charge, net income for 2004 would have been $9,669,000 or $0.89 per share. In comparing reported earnings for 2004 to 2003, the impairment charge was mitigated to some degree by increased net interest income, increased trust and investment product fees and insurance fees, and no net loss on the extinguishment of borrowings during 2004. Also contributing to the lower level of earnings in 2004 compared with 2003 was a decline in mortgage loan originations and subsequent sales of mortgage loans and an increased provision for loan losses.
Net interest income is the Company’s single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.
Net interest income increased $3,983,000 or 12% (an increase of $3,809,000 or 11% on a tax-equivalent basis) for the year ended 2006 compared with 2005. The increase in net interest income was primarily attributable to an increased level of average earning assets and an increased net interest margin for the year ended 2006 compared with 2005. The higher level of earning assets was primarily attributable to an increase in the average level of loans outstanding that resulted from new loan activity and from the previously discussed banking acquisitions completed effective October 1, 2005 and effective January 1, 2006. Average earning assets totaled $941.6 million during 2006 compared with $853.3 million during 2005.
For 2006, the net interest margin increased to 3.96% compared to 3.92% during 2005. Net interest margin is tax equivalent net interest income expressed as a percentage of average earning assets. The Company’s yield on earning assets totaled 6.87% compared with a cost of funds (expressed as a percentage of average earning assets) of 2.91% producing the net interest margin of 3.96% for the year ended December 31, 2006. The Company’s yield on earning assets was 6.03% compared with a cost of funds of 2.11% netting to a net interest margin of 3.92% for the year ended December 31, 2005.
Net interest income increased $974,000 or 3% ($576,000 or 2% on a tax-equivalent basis) in 2005 compared with 2004.
Net interest margin is tax equivalent net interest income expressed as a percentage of average earning assets. For 2005, the net interest margin increased to 3.92% compared with 3.86% in 2004. The Company’s increase in net interest income during 2005 compared with 2004 was largely attributable to the increase in the net interest margin. The Company’s yield on earning assets increased to 6.03% during 2005 compared with 5.79% for 2004. The increased yield on earning assets was primarily attributable to higher short-term interest rates and an increased level of loans outstanding during 2005 compared with 2004. The Company’s cost of funds (expressed as a percentage of average earning assets) during 2005 was
2.10%2.11% compared with 1.93% for 2004. The increase in the cost of funds was due to a rise in short-term market interest rates tempered by an increased level of non-maturity deposits including non-interest bearing demand accounts, less reliance on time deposits and borrowings and a decline in interest rates on outstanding borrowings from the Federal Home Loan Bank due to repayments of higher-cost advances that were outstanding in 2004.
Net interest income increased during 2004 by $1,704,000 or 6% ($1,336,000 or 4% on a tax equivalent basis) compared to 2003. For 2004, the net interest margin increased to 3.86% compared with 3.61% in 2003. The Company’s increase in net interest income in 2004 compared with 2003 was largely attributable to the increased net interest margin that was largely driven by a decline in the Company’s cost of funds. The Company’s cost of funds was reduced due to a number of factors including the historically low level of interest rates during 2003 and 2004 and the change in the mix of the deposit base to a higher dependence on non-maturity deposits and less dependence on time deposits. Also contributing to the lower cost of funds during 2004 was the repayment of higher costing FHLB advances during 2003 in the Company’s mortgage banking segment.
The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years. For tax-equivalent adjustments, an effective tax rate of 34% was used for all years presented (1).
Average Balance Sheet
(Tax-equivalent basis/basis / dollars in thousands) | Twelve Months Ended
December 31, 2005 | | Twelve Months Ended
December 31, 2004 | | Twelve Months Ended
December 31, 2003 |
|---|
| |
| Principal
Balance
|
| Income/
Expense
|
| Yield/
Rate
| | Principal
Balance
|
| Income/
Expense
|
| Yield/
Rate
| | Principal
Balance
|
| Income/
Expense
|
| Yield/
Rate
|
|---|
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal Funds Sold and Other | | |
| Short-term Investments | | | $ | 10,632 | | $ | 316 | | | 2.97 | % | $ | 10,635 | | $ | 129 | | | 1.21 | % | $ | 25,007 | | $ | 270 | | | 1.08 | % |
| | | | | | | | | | |
| Securities: | | |
| Taxable | | | | 161,499 | | | 5,954 | | | 3.69 | % | | 161,601 | | | 5,455 | | | 3.38 | % | | 159,618 | | | 5,023 | | | 3.15 | % |
| Non-taxable | | | | 46,666 | | | 3,297 | | | 7.07 | % | | 57,729 | | | 4,347 | | | 7.53 | % | | 70,835 | | | 5,371 | | | 7.58 | % |
| Total Loans and Leases (2) | | | | 634,526 | | | 41,860 | | | 6.60 | % | | 622,240 | | | 39,407 | | | 6.33 | % | | 618,340 | | | 41,951 | | | 6.78 | % |
| |
| | |
| | | |
| | |
| | | |
| | |
|
| |
| TOTAL INTEREST | | |
| EARNING ASSETS | | | | 853,323 | | | 51,427 | | | 6.03 | % | | 852,205 | | | 49,338 | | | 5.79 | % | | 873,800 | | | 52,615 | | | 6.02 | % |
| |
| | |
| | | |
| | |
| | | |
| | |
|
| |
| Other Assets | | | | 81,771 | | | | | | | | | 83,960 | | | | | | | | | 73,670 | | | | | | | |
| Less: Allowance for Loan Losses | | | | (9,243 | ) | | | | | | | | (8,637 | ) | | | | | | | | (8,478 | ) | | | | | | | | | |
| |
| | | | | | |
| | | | | | |
| | |
| |
| |
| TOTAL ASSETS | | | $ | 925,851 | | | | | | | | $ | 927,528 | | | | | | | | $ | 938,992 | | | | | | | | | | |
|
| | | | | |
| | | | | |
| | |
| |
| |
| LIABILITIES AND | | |
| SHAREHOLDERS' EQUITY | | |
| Interest-Bearing Demand Deposits | | | $ | 137,318 | | $ | 1,436 | | | 1.05 | % | $ | 121,173 | | $ | 557 | | | 0.46 | % | $ | 110,544 | | $ | 612 | | | 0.55 | % |
| Savings Deposits | | | | 156,820 | | | 2,212 | | | 1.41 | % | | 163,272 | | | 1,188 | | | 0.73 | % | | 142,198 | | | 1,149 | | | 0.81 | % |
| Time Deposits | | | | 314,420 | | | 9,741 | | | 3.10 | % | | 330,898 | | | 10,002 | | | 3.02 | % | | 354,703 | | | 12,236 | | | 3.45 | % |
| FHLB Advances and | | |
| Other Borrowings | | | | 98,932 | | | 4,595 | | | 4.64 | % | | 101,067 | | | 4,724 | | | 4.67 | % | | 130,165 | | | 7,087 | | | 5.44 | % |
| |
| | |
| | | |
| | |
| | | |
| | |
|
| |
| TOTAL INTEREST-BEARING | | |
| LIABILITIES | | | | 707,490 | | | 17,984 | | | 2.54 | % | | 716,410 | | | 16,471 | | | 2.30 | % | | 737,610 | | | 21,084 | | | 2.86 | % |
| |
| | |
| | | |
| | |
| | | |
| | |
|
| |
| Demand Deposit Accounts | | | | 121,662 | | | | | | | | | 116,124 | | | | | | | | | 103,865 | |
| Other Liabilities | | | | 12,220 | | | | | | | | | 12,436 | | | | | | | | | 9,814 | |
| |
| | | | | | |
| | | | | | |
| | |
| TOTAL LIABILITIES | | | | 841,372 | | | | | | | | | 844,970 | | | | | | | | | 851,289 | |
| |
| | | | | | |
| | | | | | |
| | |
| |
| Shareholders' Equity | | | | 84,479 | | | | | | | | | 82,558 | | | | | | | | | 87,703 | |
| |
| | | | | | |
| | | | | | |
| | |
| |
| TOTAL LIABILITIES AND | | |
| SHAREHOLDERS' EQUITY | | | $ | 925,851 | | | | | | | | $ | 927,528 | | | | | | | | $ | 938,992 | | | | |
|
| | | | | |
| | | | | |
| | |
| |
| NET INTEREST INCOME | | | | | | $ | 33,443 | | | | | | | | $ | 32,867 | | | | | | | | $ | 31,531 | | | | | | | |
| | | |
| | | | | |
| | | | | |
| | |
| |
| NET INTEREST MARGIN | | | | | | | | | | 3.92 | % | | | | | | | | 3.86 | % | | | | | | | | 3.61 | % |
| | | Twelve Months Ended | | Twelve Months Ended | | Twelve Months Ended | |
| | | December 31, 2006 | | December 31, 2005 | | December 31, 2004 | |
| | Principal | | Income/ | | Yield / | | Principal | | Income/ | | Yield / | | Principal | | Income/ | | Yield / | |
| | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | |
| | | | | | | | | | | | | | | | | | | | |
ASSETS | | | | | | | | | | | | | | | | | | | |
Federal Funds Sold and Other | | | | | | | | | | | | | | | | | | | |
| Short-term Investments | | $ | 10,971 | | $ | 545 | | | 4.97 | % | $ | 10,632 | | $ | 316 | | | 2.97 | % | $ | 10,635 | | $ | 129 | | | 1.21 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Taxable | | | 174,007 | | | 7,763 | | | 4.46 | % | | 161,499 | | | 5,954 | | | 3.69 | % | | 161,601 | | | 5,455 | | | 3.38 | % |
| Non-taxable | | | 41,312 | | | 2,721 | | | 6.59 | % | | 46,666 | | | 3,297 | | | 7.07 | % | | 57,729 | | | 4,347 | | | 7.53 | % |
Total Loans and Leases (2) | | | 715,260 | | | 53,621 | | | 7.50 | | | 634,526 | | | 41,860 | | | 6.60 | % | | 622,240 | | | 39,407 | | | 6.33 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL INTEREST | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| EARNING ASSETS | | | 941,550 | | | 64,650 | | | 6.87 | | | 853,323 | | | 51,427 | | | 6.03 | % | | 852,205 | | | 49,338 | | | 5.79 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Assets | | | 97,570 | | | | | | | | | 81,771 | | | | | | | | | 83,960 | | | | | | | |
| Less: Allowance for Loan Losses | | | (9,282 | ) | | | | | | | | (9,243 | ) | | | | | | | | (8,637 | ) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL ASSETS | | $ | 1,029,838 | | | | | | | | $ | 925,851 | | | | | | | | $ | 927,528 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest-Bearing Demand Deposits | | $ | 140,786 | | $ | 2,625 | | | 1.86 | % | $ | 137,318 | | $ | 1,436 | | | 1.05 | % | $ | 121,173 | | $ | 557 | | | 0.46 | % |
| Savings Deposits | | | 174,095 | | | 4,263 | | | 2.45 | % | | 156,820 | | | 2,212 | | | 1.41 | % | | 163,272 | | | 1,188 | | | 0.73 | % |
| Time Deposits | | | 369,800 | | | 14,441 | | | 3.91 | % | | 314,420 | | | 9,741 | | | 3.10 | % | | 330,898 | | | 10,002 | | | 3.02 | % |
| FHLB Advances and | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Borrowings | | | 113,559 | | | 6,069 | | | 5.34 | % | | 98,932 | | | 4,595 | | | 4.64 | % | | 101,067 | | | 4,724 | | | 4.67 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL INTEREST-BEARING | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LIABILITIES | | | 798,240 | | | 27,398 | | | 3.43 | % | | 707,490 | | | 17,984 | | | 2.54 | % | | 716,410 | | | 16,471 | | | 2.30 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Demand Deposit Accounts | | | 129,759 | | | | | | | | | 121,662 | | | | | | | | | 116,124 | | | | | | | |
| Other Liabilities | | | 13,388 | | | | | | | | | 12,220 | | | | | | | | | 12,436 | | | | | | | |
| TOTAL LIABILITIES | | | 941,387 | | | | | | | | | 841,372 | | | | | | | | | 844,970 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ Equity | | | 88,451 | | | | | | | | | 84,479 | | | | | | | | | 82,558 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| TOTAL LIABILITIES AND | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| SHAREHOLDERS’ EQUITY | | $ | 1,029,838 | | | | | | | | $ | 925,851 | | | | | | | | $ | 927,528 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INTEREST INCOME | | | | | $ | 37,252 | | | | | | | | $ | 33,443 | | | | | | | | $ | 32,867 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NET INTEREST MARGIN | | | | | | | | | 3.96 | % | | | | | | | | 3.92 | % | | | | | | | | 3.86 | % |
(1) | | Effective tax rates were determined as though interest earned on the Company'sCompany’s investments in municipal bonds and loans was fully taxable. |
| (2) | Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $1,727, $1,326, and $1,442 for 2006, 2005, and $1,340 for 2005, 2004, and 2003, respectively. |
The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates:
Net Interest Income - Rate/Volume Analysis:
(Tax-Equivalent basis, dollars in thousands) | 2005 compared to 2004
Increase/(Decrease) Due to(1)
| 2004 compared to 2003
Increase/(Decrease) Due to(1)
|
|---|
| Volume
| Rate
| Net
| Volume
| Rate
| Net
|
|---|
| Interest Income: | | | | | | | | | | | | | | | | | | | | |
| Federal Funds Sold and Other | | |
| Short-term Investments | | | $ | — | | $ | 187 | | $ | 187 | | $ | (171 | ) | $ | 30 | | $ | (141 | ) |
| Taxable Securities | | | | (3 | ) | | 502 | | | 499 | | | 63 | | | 369 | | | 432 | |
| Non-taxable Securities | | | | (794 | ) | | (256 | ) | | (1,050 | ) | | (987 | ) | | (37 | ) | | (1,024 | ) |
| Loans and Leases | | | | 788 | | | 1,665 | | | 2,453 | | | 263 | | | (2,807 | ) | | (2,544 | ) |
|
| |
| Total Interest Income | | | | (9 | ) | | 2,098 | | | 2,089 | | | (832 | ) | | (2,445 | ) | | (3,277 | ) |
|
| |
| |
| Interest Expense: | | |
| Savings and Interest-bearing Demand | | | | 61 | | | 1,842 | | | 1,903 | | | 207 | | | (223 | ) | | (16 | ) |
| Time Deposits | | | | (506 | ) | | 245 | | | (261 | ) | | (785 | ) | | (1,449 | ) | | (2,234 | ) |
| FHLB Advances and Other Borrowings | | | | (99 | ) | | (30 | ) | | (129 | ) | | (1,447 | ) | | (916 | ) | | (2,363 | ) |
|
| |
| Total Interest Expense | | | | (544 | ) | | 2,057 | | | 1,513 | | | (2,025 | ) | | (2,588 | ) | | (4,613 | ) |
|
| |
| |
| Net Interest Income | | | $ | 535 | | $ | 41 | | $ | 576 | | $ | 1,193 | | $ | 143 | | $ | 1,336 | |
|
| |
| | | 2006 compared to 2005 | | 2005 compared to 2004 | |
| | Increase / (Decrease) Due to (1) | | Increase / (Decrease) Due to (1) | |
| | Volume | | Rate | | Net | | Volume | | Rate | | Net | |
| Interest Income: | | | | | | | | | | | | | |
| Federal Funds Sold and Other | | | | | | | | | | | | | |
| Short-term Investments | | $ | 10 | | $ | 219 | | $ | 229 | | $ | — | | $ | 187 | | $ | 187 | |
| Taxable Securities | | | 487 | | | 1,322 | | | 1,809 | | | (3 | ) | | 502 | | | 499 | |
| Non-taxable Securities | | | (362 | ) | | (214 | ) | | (576 | ) | | (794 | ) | | (256 | ) | | (1,050 | ) |
| Loans and Leases | | | 5,677 | | | 6,084 | | | 11,761 | | | 788 | | | 1,665 | | | 2,453 | |
| Total Interest Income | | | 5,812 | | | 7,411 | | | 13,223 | | | (9 | ) | | 2,098 | | | 2,089 | |
| | | | | | | | | | | | | | | | | | | | |
| Interest Expense: | | | | | | | | | | | | | | | | | | | |
| Savings and Interest-bearing Demand | | | 274 | | | 2,966 | | | 3,240 | | | 61 | | | 1,842 | | | 1,903 | |
| Time Deposits | | | 1,896 | | | 2,804 | | | 4,700 | | | (506 | ) | | 245 | | | (261 | ) |
| FHLB Advances and Other Borrowings | | | 730 | | | 744 | | | 1,474 | | | (99 | ) | | (30 | ) | | (129 | ) |
| Total Interest Expense | | | 2,900 | | | 6,514 | | | 9,414 | | | (544 | ) | | 2,057 | | | 1,513 | |
| | | | | | | | | | | | | | | | | | | | |
| Net Interest Income | | $ | 2,912 | | $ | 897 | | $ | 3,809 | | $ | 535 | | $ | 41 | | $ | 576 | |
| (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. |
See the Company’s Average Balance Sheet and the discussions headed USES OF FUNDS, SOURCES OF FUNDS, and “RISK MANAGEMENT
–- Liquidity and Interest Rate Risk Management” for further information on the Company’s net interest income, net interest margin, and interest rate sensitivity position.
PROVISION FOR LOAN LOSSES
The Company provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations required on the allowance.allowance for loan losses. Provisions for loan losses totaled $925,000, $1,903,000, and $2,015,000, in 2006, 2005 and $811,0002004, respectively.
The Company’s provision for loan losses declined during 2006 in
conjunction with a decline in the Company’s level of non-performing loans. The largest factor in the Company’s ability to recognize the reduced level of provision for loan losses was the finalization of settlement of a previously identified large nonperforming credit in the second quarter of 2006. The Company recognized a charge-off of approximately $393,000 on this individual credit facility. The specific allocation as of year end 2005
2004was for considerably more than the level of charge-off allowing the Company to recover the balance of the specific allocation assigned to this credit. For further discussion of non-performing loans refer to “Risk Management - Lending and
2003, respectively.Loan Administration.”
Loan loss provision remained relatively stable during 2005 compared with 2004. While net charge-offs increased in 2005, a portion of the increase in charge-offs was provided for prior to 2005.
As discussed in additional detail in the NON-PERFORMING ASSETS section of this Report, non-performing loans increased in 2005 due primarily to three large commercial and industrial credits for which loss allocations have been provided. Two of these loans were internally classified prior to 2005.The provision for loan losses increased by $1,204,000 during 2004 compared with 2003. The significant increase in provision for loan losses during 2004 compared with 2003 was largely attributable to the continued change in the composition of the Company’s loan portfolio toward a greater concentration in commercial and agricultural loans and less concentration in residential mortgage loans. Also contributing to the increased provision for loan losses was an increase in specific allocations on internally classified loans and an overall higher level of net charge-offs during 2004 compared with 2003.
These provisions were made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provisions for loan losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Refer also to the
sectionsections entitled CRITICAL ACCOUNTING POLICIES AND ESTIMATES and “RISK MANAGEMENT
–- Lending and Loan Administration” for further discussion of the provision and allowance for loan losses.
During 2006, Non-interest Income totaled $15,390,000, an increase of 8% compared with 2005. The increase during 2006 was largely attributable to the gain on the sale of the Company’s FHLMC and FNMA preferred stock portfolio and an increase in revenues generated by the Company’s insurance operations. During 2005, all categories of Non-interest Income increased. Non-interest Income for 2005 was $14,194,000, an increase of $4,574,000 or 48%, as compared to $9,620,000 in 2004.
Non-interest Income for 2004 declined $3,314,000 or 26% as compared to $12,934,000 in 2003. The increase in 2005
and the decline in 2004 werewas predominantly attributable to an other-than-temporary impairment charge on the Company’s FHLMC and FNMA preferred stock portfolio recognized in the fourth quarter of 2004.
| Non-interest Income (dollars in thousands) | Years Ended December 31, | | % Change From
Prior Year |
|---|
| 2005
| | 2004
| | 2003
| | 2005
| | 2004
|
|---|
| |
| Trust and Investment Product Fees | | | $ | 2,081 | | $ | 2,046 | | $ | 1,627 | | | 2 | % | | 26 | % |
| Service Charges on Deposit Accounts | | | | 3,723 | | | 3,537 | | | 3,391 | | | 5 | | | 4 | |
| Insurance Revenues | | | | 4,703 | | | 4,666 | | | 3,692 | | | 1 | | | 26 | |
| Other Operating Income | | | | 2,687 | | | 2,074 | | | 1,556 | | | 30 | | | 33 | |
|
| |
| |
| |
| Subtotal | | | | 13,194 | | | 12,323 | | | 10,266 | | | 7 | | | 20 | |
| Net Gains on Sales of Loans and Related Assets | | | | 1,000 | | | 975 | | | 2,588 | | | 3 | | | (62 | ) |
| Net Gain / (Loss) on Securities | | | | — | | | (3,678 | ) | | 80 | | | n/m | (1) | | n/m | (1) |
|
| |
| |
| |
| TOTAL NON-INTEREST INCOME | | | $ | 14,194 | | $ | 9,620 | | $ | 12,934 | | | 48 | | | (26 | ) |
|
| |
| |
| |
| | Years Ended December 31, | | % Change From Prior Year | |
Non-interest Income (dollars in thousands) | | | 2006 | | | 2005 | | | 2004 | | | 2006 | | | 2005 | |
| | | | | | | | | | | | | | | | | |
| Trust and Investment Product Fees | | $ | 2,210 | | $ | 2,081 | | $ | 2,046 | | | 6% | | | 2% | |
| Service Charges on Deposit Accounts | | | 3,901 | | | 3,723 | | | 3,537 | | | 5 | | | 5 | |
| Insurance Revenues | | | 5,094 | | | 4,703 | | | 4,666 | | | 8 | | | 1 | |
| Other Operating Income | | | 2,384 | | | 2,687 | | | 2,074 | | | (11) | | | 30 | |
| Subtotal | | | 13,589 | | | 13,194 | | | 12,323 | | | 3 | | | 7 | |
| Net Gains on Sales of Loans and Related Assets | | | 850 | | | 1,000 | | | 975 | | | (15) | | | 3 | |
| Net Gain / (Loss) on Securities | | | 951 | | | — | | | (3,678 | ) | | n/m(1) | | | n/m(1) | |
| TOTAL NON-INTEREST INCOME | | $ | 15,390 | | $ | 14,194 | | $ | 9,620 | | | 8 | | | 48 | |
Trust and Investment Product Fees remained relatively stable in 2005 as compared to the prior year with a slight increase of 2% following a 26% increase in 2004 from 2003. An increase in fees was primarily attributable to increased production from the Company’s Trust and Investment Advisory Services segment.
Insurance Revenues remained relatively stable for the year ended December 31, 2005 compared with 2004.
Insurance Revenues increased
26%8% for
20042006 as compared
to the same period of 2003.2005. The increased Insurance Revenues were primarily the result of
a higher level of contingency revenues during 2006 compared with 2005 and the revenues generated from the insurance agency
acquisitionsacquisition completed in the
thirdfourth quarter of
2003. These acquisitions significantly impacted the Company’s insurance revenues during 2004.2006. For more information on the business combination, see Note 18 to the Company’s consolidated financial statements included in Item 8 of this Report.
Insurance Revenues remained relatively stable for the year ended December 31, 2005 compared with 2004.
For the year ended 2006, Other Operating Income declined 11% compared with 2005. The decline for the year ended December 31, 2006 was predominately due to a gain on the sale of a former branch facility of approximately $313,000 that was recorded during the second quarter of 2005 and a higher level of recovery of mortgage servicing rights impairment charges during 2005 than during 2006. For the year ended 2005, Other Operating Income increased 30% as compared to the prior year. The increase
was partially due to an impairment recovery for mortgage servicing rights totaling $412,000 induring 2005 compared with
an impairment charge of $37,000 for 2004. Also contributing2004 was primarily due to the
increase in Other Operating Income foraforementioned gain from the
year ended 2005 as compared to 2004 was the gain on sale of a former branch facility
of $313,000. Partially mitigating the positive variance was an increasedand a higher level of
impairment recovery for mortgage servicing
rights amortization of $246,000 for 2005.For the year ended 2004, Other Operating Income increased 33%. The increase was partially attributable to an increase in the cash surrender value of Company Owned Life Insurance. The Company purchased $10.0 million of COLI during the third quarter of 2003. Also contributing to the increase in Other Operating Income was a reduced amount of mortgage servicing right impairment charges. During 2004, mortgage servicing right impairment charges were $37,000 as compared to $240,000 during 2003.
rights.
Net Gains on Sales of Loans and Related Assets
increaseddeclined 15% during 2006 following an increase of 3% in
2005 following a decrease of 62% in 2004.2005. Loan sales for
2006, 2005,
and 2004
and 2003 were
$55.6 million, $64.1 million,
and $61.4 million,
respectively. The decline during 2006 compared with the 2005 was largely due to a reduced level of sales of residential mortgage loans and
$181.2 million, respectively.a lower margin on those loans sold in the secondary market. The decline in gains from the sales of loans was somewhat offset by the sale of the Company’s mortgage servicing rights portfolio during the second quarter of 2006. The Company sold its mortgage servicing rights relating to approximately $344.5 million of mortgage loans serviced for others for a total sales price of $3.6 million resulting in a net gain of $198,000.
The Company recognized a gain on the sale of its portfolio of FHLMC and FNMA preferred stock during the third quarter of 2006. The gain from the sale of this agency preferred stock portfolio totaled $951,000. The portfolio had a book value at the time of the sale of approximately $12.1 million. The Company had previously recorded a non-cash other-than-temporary impairment charge of $3,682,000 ($2,430,000 after-tax) related to certain investments$3.7 million on this portfolio during 2004.
NON-INTEREST EXPENSE
For the year ended 2006, Non-interest Expense increased 16%. These increases in
FHLMC and FNMA preferred stock in the fourth quarter of 2004. For further discussion of the other-than-temporary charge, see the MANAGEMENT OVERVIEW, CRITICAL ACCOUNTING POLICIES AND ESTIMATES and USES OF FUNDS sections of this Report as well as Note 2non-interest expense were largely attributable to the
Company’s consolidated financial statements included in Item 8acquisitions of
this Report.18
NON-INTEREST EXPENSE
PCB Holding Company as of October 1, 2005 and Stone City Bancshares, Inc. as of January 1, 2006. For the year ended 2005, Non-interest Expense increased 3%.
| | Years Ended December 31, | | % Change From Prior Year | |
Non-interest Expense (dollars in thousands) | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | |
| | | | | | | | | | | | | | | | | |
| Salaries and Employee Benefits | | $ | 21,491 | | $ | 18,511 | | $ | 17,814 | | | 16% | | | 4% | |
| Occupancy, Furniture and Equipment Expense | | | 4,988 | | | 4,404 | | | 4,292 | | | 13 | | | 3 | |
| FDIC Premiums | | | 108 | | | 101 | | | 106 | | | 7 | | | (5) | |
| Data Processing Fees | | | 1,646 | | | 1,322 | | | 1,186 | | | 25 | | | 11 | |
| Professional Fees | | | 1,786 | | | 1,703 | | | 1,690 | | | 5 | | | 1 | |
| Advertising and Promotion | | | 940 | | | 784 | | | 888 | | | 20 | | | (12) | |
| Supplies | | | 619 | | | 544 | | | 527 | | | 14 | | | 3 | |
| Other Operating Expenses | | | 4,878 | | | 4,079 | | | 4,106 | | | 20 | | | (1) | |
| TOTAL NON-INTEREST EXPENSE | | $ | 36,456 | | $ | 31,448 | | $ | 30,609 | | | 16 | | | 3 | |
Salaries and Employee Benefits increased 16% during 2006. The increase
in Salaries and Employee Benefits Expense was primarily due to an increase in
full-time equivalent employees attributable to the banking acquisitions completed effective October 1, 2005 and January 1, 2006 and to a lesser degree the insurance agency acquisition completed effective October 1, 2006. Also contributing to the increase in Salaries and Employee Benefits
and Occupancy, Furniture and Equipment Expense. ForExpense to a lesser degree was the
year ended 2004, Non-interest Expense decreased 5%adoption of FAS 123R, “Share Based Payments,” as
compared to 2003. The decline was primarily attributable to decreased Salaries and Employee Benefits and Occupancy Expense and no Net Loss on Extinguishment of
Borrowings during 2004, offset by an increase in Professional Fees and Other Operating Expenses.| Non-interest Expense (dollars in thousands) | Years Ended December 31, | | % Change From
Prior Year |
|---|
| 2005
| | 2004
| | 2003
| | 2005
| | 2004
|
|---|
| |
| Salaries and Employee Benefits | | | $ | 18,511 | | $ | 17,814 | | $ | 18,062 | | | 4 | % | | (1 | )% |
| Occupancy, Furniture and Equipment Expense | | | | 4,404 | | | 4,292 | | | 4,574 | | | 3 | | | (6 | ) |
| FDIC Premiums | | | | 101 | | | 106 | | | 114 | | | (5 | ) | | (7 | ) |
| Data Processing Fees | | | | 1,322 | | | 1,186 | | | 1,126 | | | 11 | | | 5 | |
| Professional Fees | | | | 1,703 | | | 1,690 | | | 1,227 | | | 1 | | | 38 | |
| Advertising and Promotion | | | | 784 | | | 888 | | | 853 | | | (12 | ) | | 4 | |
| Supplies | | | | 544 | | | 527 | | | 633 | | | 3 | | | (17 | ) |
| Net Loss on Extinguishment of Borrowings | | | | — | | | — | | | 1,898 | | | — | | | n/m | (1) |
| Other Operating Expenses | | | | 4,079 | | | 4,106 | | | 3,732 | | | (1 | ) | | 10 | |
|
| |
| |
| |
| TOTAL NON-INTEREST EXPENSE | | | $ | 31,448 | | $ | 30,609 | | $ | 32,219 | | | 3 | | | (5 | ) |
|
| |
| |
| |
January 1, 2006. In 2005, Salaries and Employee Benefits Expense increased 4%. The increase was primarily attributable to increased employee health insurance costs of $528,000. For
Occupancy, Furniture and Equipment Expense increased 13% during 2006 compared with 2005. The increase was primarily attributable to the
year ended 2004, Salariesacquisition activity during 2005 and
Employee Benefits Expense remained relatively stable with a modest 1% decline.2006. Occupancy, Furniture and Equipment Expense increased 3% in 2005. The increase was primarily attributable to a lowered amount of real estate and personal property tax expense recognized in 2004. In the state
Data Processing Fees increased 25% during 2006 following an increase of
Indiana, counties reassessed real property in 2002 which carried over into 2003 and resulted in a delay of some tax billings until 2004. Due11% during 2005. These increases were largely attributable to the
billing delay, the Company adjusted property tax accruals and expense during 2004 which resulted in a lowered amount of real estate and personal property tax expense. Partially mitigating the increasebanking acquisition activity completed during 2005
wasand 2006. Advertising and Promotion expense increased 20% following a
reduced amountdecline of
depreciation expense recognized for certain computer network related fixed assets which fully depreciated12% in
2004. In 2004, Occupancy, Furniture and Equipment Expense decreased 6% predominately attributable to a reduced level of real estate and personal property tax expense as discussed above.During 2005 and 2004, Professional Fees increased 1% and 38%, respectively.2005. The increase in 20042006 compared with 2005 was primarilylargely attributable to the result of costs associated with ensuring the Company’s compliance with the requirements of Section 404 of the Sarbanes Oxley Act. Inacquisition activity during 2006. The decline during 2005 Advertising and Promotion decreased 12% which was the result of more directed marketing campaigns during the year. Advertising and Promotion increased 4% in 2004 as compared to the prior year.
The Company did not recognize any Net Loss on Extinguishment of Borrowings during 2005 or 2004; during 2003 the Company’s mortgage banking segment prepaid $40 million of FHLB Advances which resulted in a $1,898,000 net loss on extinguishment of borrowings.
Other Operating Expenses remained stable during 2005. For the year ended 2004,
Other Operating Expenses increased
10%. This20% during 2006 following a modest decline of 1% during 2005. The increase
in 2004 was primarily
dueattributable to
increased customer lista higher level of intangible amortization of
$371,000$265,000 which resulted from the Company’s
propertybanking and
casualty acquisition activity ininsurance acquisitions during 2005 and 2006 and increased amortization and impairment charges during 2006 associated with one of the
third quarter 2003.Company’s affordable housing limited partnership investments of $313,000. For further discussion of intangible amortization, see Note 18 to the Company’s consolidated financial statements included in Item 8 of this Report.
PROVISION FOR INCOME TAXES
The Company records a provision for current income taxes payable, along with a provision for deferred taxes payable in the future. Deferred taxes arise from temporary differences, which are items recorded for financial statement purposes in a different period than for income tax returns. The Company’s effective tax rate was 25.5%28.0%, 12.1%25.5%, and 13.5%12.1%, respectively, in 2006, 2005, 2004, and 2003.2004. The higher effective tax rate in 20052006 compared with both 20042005 and 20032004 was the result of higher levels of before tax net income combined with a lower level of tax-exempt investment income and a lower level of tax credits generated by investments in affordable housing projects. The effective tax rate in all periods is lower than the blended statutory rate of 39.6%. The lower effective rate in all periods primarily resulted from the Company’s tax-exempt investment income on securities and loans, income tax credits generated by investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax. See Note 11 to the Company’s consolidated financial statements included in Item 8 of this Report for additional details relative to the Company’s income tax provision.
Since December 31, 2001, the Company’s effective tax rate has been favorably impacted by Indiana financial institution tax savings resulting from the Company’s formation of investment subsidiaries in the state of Nevada by four of the Company’s banking subsidiaries. The state of Nevada has no state or local income tax. During the first quarter of 2005, the Company received notices of proposed assessments of unpaid Indiana financial institutions tax for the years 2001 and 2002 of approximately $691,000 ($456,000 net of federal tax), including interest and penalties of approximately $100,000. The Company filed a protest with the Indiana Department of Revenue contesting the proposed assessments and
intends to vigorously
defenddefended its position that the income of the Nevada subsidiaries
iswas not subject to the Indiana financial institutions tax.
Although there can be no such assurance, at this time management does not believe that it is probable that this potential assessment will result in additional tax liability. Therefore, no tax provision
has beenwas recognized for the potential assessment of additional financial institutions tax for 2001 and 2002 or for financial institutions tax with respect to any of the Nevada subsidiaries in any period subsequent to 2002, including
2005.the year ended December 31, 2006.
During the first quarter of 2007, the Company and the Indiana Department of Revenue entered into an agreement regarding the proposed assessment for tax years 2001 and 2002. As a result of this agreement the Company was not required to pay any tax liability as assessed by the Indiana Department of Revenue for tax years 2001 and 2002. In addition, tax years 2001 and 2002 are closed to further examination.
The Company and
its affiliate
banksbank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. The Company and
allits affiliate
banksbank at year-end
20052006 were categorized as well-capitalized as that term is defined by applicable regulations. The Company has agreed with its parent-company correspondent bank lender, JPMorgan Chase Bank, N.A., as a term of its credit facilities with that lender (see “SOURCES OF FUNDS
–- Parent Company Funding sources”, below) that it will maintain the capital ratios of the Company and its affiliate
banksbank at levels that would qualify it as well-capitalized as that term is defined by the prompt corrective action regulations. See Note 9 to the Company’s consolidated financial statements included in Item 8 of this Report for actual and required capital ratios and for additional information regarding capital adequacy.
The Company continues to maintain a strong capital position. Shareholders’ equity totaled
$82.3$92.4 million and
$83.7$82.3 million at December 31,
20052006 and
2004,2005, respectively. Total equity represented
8.7%8.5% and
8.9%8.7%, respectively, of year-end total assets. The Company paid cash dividends of
$6.2 million and $6.1 million or $0.56 per share in
2006 and 2005. The increase in shareholders’ equity during 2006 compared with 2005
was primarily the result of retained earnings, shares issued in conjunction with the Stone City Bancshares, Inc. acquisition, and
2004. During 2005, the Company purchased 83,000 shares of its common stock under an on-going repurchase program and 440,747 in a
privately negotiated repurchase transaction at a total cost of $6.8 million. These repurchases were the primary contributorsreduction in the
decline in total shareholder’s equity.unrealized loss on available for sale securities.
Total loans at year-end 2006 increased $145.1 million or 22% compared with year-end 2005 including increases in each category of loans. The Company’s commercial and industrial loans increased $82.6 million or 26% and agricultural based loans increased $47.5 million or 47% during 2006. Consumer loans increased $3.2 million or 2% and residential mortgage loans increased $11.8 million or 11% during 2006. The growth during 2006 was generated from a variety of sources, including approximately $55.0 million of internally generated growth, $48.0 million related to the acquisition of Stone City Bancshares, Inc., and $42.1 million from the purchase of a Southern Indiana-based agricultural loan portfolio of a regional banking company in December 2006.
Total loans at year-end 2005 increased
$22.0$22.5 million or
3%4% compared with year-end 2004 including increases in each category of loans. The Company’s commercial and industrial loans increased
$5.4$5.9 million or 2% and agricultural based loans increased $1.8 million or 2% during 2005. Consumer loans increased $6.7 million or 6% during 2005. Residential mortgage loans increased $8.1 million or 9% during 2005. This increase reversed a trend over the past several years and was due in large part to the acquisition of Peoples Community Bank during the fourth quarter of 2005.
Total loans at year-end 2004 increased $17.8 million or 3% compared with year-end 2003. The composition of the loan portfolio continued a shift toward a commercial and agricultural base with less concentration in residential mortgage loans during 2004. The Company’s commercial and industrial loans increased $17.8 million or 6% and agricultural based loans increased $7.5 million or 8% during 2004. Consumer loans increased $8.1 million or 7% during 2004. The increases in these categories were partially mitigated by the decline in the residential mortgage loan portfolio. Residential mortgage loans declined $15.5 million or 14% during 2004 due primarily to the Company’s continued sale of a majority of residential loan production into the secondary market.
The Company’s loan portfolio is diversified, with the heaviest concentration in commercial and industrial loans. The composition of the loan portfolio remained relatively stable at year-end 20052006 compared with year-end 2004.2005. The acquisition of the agricultural loan portfolio in December 2006 increased the concentration of agricultural based loans to approximately 19% of the total loan portfolio. The largest concentration of loans continued to be in commercial and industrial loans, which comprised 49%50% of the total loan portfolio at year-end 20052006, compared with 50%49% in 2004.2005. The Company’s commercial lending is extended to various industries, including hotel, agribusiness and manufacturing, as well as health care, wholesale, and retail services. The Company’s concentration in residential mortgage loans has declined over the past several years with a modest increase in 2005 (due principally to the Peoples Community Bank acquisition discussed above).
Loan Portfolio | | December 31, | |
| | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | | | | | | | | | | | |
| Residential Mortgage Loans | | $ | 114,687 | | $ | 102,891 | | $ | 94,800 | | $ | 110,325 | | $ | 156,180 | |
| Agricultural Loans | | | 148,872 | | | 101,355 | | | 99,557 | | | 92,095 | | | 84,984 | |
| Commercial and Industrial Loans | | | 402,285 | | | 319,681 | | | 314,354 | | | 296,661 | | | 254,776 | |
| Consumer Loans | | | 132,791 | | | 129,587 | | | 122,888 | | | 114,816 | | | 116,987 | |
| Total Loans | | | 798,635 | | | 653,514 | | | 631,599 | | | 613,897 | | | 612,927 | |
| Less: Unearned Income | | | (2,376 | ) | | (1,558 | ) | | (1,806 | ) | | (2,031 | ) | | (2,186 | ) |
| Subtotal | | | 796,259 | | | 651,956 | | | 629,793 | | | 611,866 | | | 610,741 | |
| Less: Allowance for Loan Losses | | | (7,129 | ) | | (9,265 | ) | | (8,801 | ) | | (8,265 | ) | | (8,301 | ) |
| Loans, Net | | $ | 789,130 | | $ | 642,691 | | $ | 620,992 | | $ | 603,601 | | $ | 602,440 | |
| | | | | | | | | | | | | | | | | |
Ratio of Loans to Total Loans: | | | | | | | | | | | | | | | | |
| Residential Mortgage Loans | | | 14 | % | | 16 | % | | 15 | % | | 18 | % | | 26 | % |
| Agricultural Loans | | | 19 | % | | 15 | % | | 16 | % | | 15 | % | | 14 | % |
| Commercial and Industrial Loans | | | 50 | % | | 49 | % | | 50 | % | | 48 | % | | 41 | % |
| Consumer Loans | | | 17 | % | | 20 | % | | 19 | % | | 19 | % | | 19 | % |
| Totals | | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
20
Loan Portfolio
dollars in thousands | December 31, |
|---|
| 2005
| | 2004
| | 2003
| | 2002
| | 2001
|
|---|
| |
| Residential Mortgage Loans | | | $ | 102,891 | | $ | 94,800 | | $ | 110,325 | | $ | 156,180 | | $ | 227,502 | |
| Agricultural Loans | | | | 101,355 | | | 99,557 | | | 92,095 | | | 84,984 | | | 75,755 | |
| Commercial and Industrial Loans | | | | 319,241 | | | 313,798 | | | 296,019 | | | 254,024 | | | 230,792 | |
| Consumer Loans | | | | 129,587 | | | 122,888 | | | 114,816 | | | 116,987 | | | 123,840 | |
|
| |
| |
| |
| |
| |
| Total Loans | | | | 653,074 | | | 631,043 | | | 613,255 | | | 612,175 | | | 657,889 | |
| Less: Unearned Income | | | | (1,118 | ) | | (1,250 | ) | | (1,389 | ) | | (1,434 | ) | | (723 | ) |
|
| |
| |
| |
| |
| |
| Subtotal | | | | 651,956 | | | 629,793 | | | 611,866 | | | 610,741 | | | 657,166 | |
| Less: Allowance for Loan Losses | | | | (9,265 | ) | | (8,801 | ) | | (8,265 | ) | | (8,301 | ) | | (8,388 | ) |
|
| |
| |
| |
| |
| |
| Loans, Net | | | $ | 642,691 | | $ | 620,992 | | $ | 603,601 | | $ | 602,440 | | $ | 648,778 | |
|
| |
| |
| |
| |
| |
| |
| Ratio of Loans to Total Loans: | | |
| Residential Mortgage Loans | | | | 16 | % | | 15 | % | | 18 | % | | 26 | % | | 34 | % |
| Agricultural Loans | | | | 15 | % | | 16 | % | | 15 | % | | 14 | % | | 12 | % |
| Commercial and Industrial Loans | | | | 49 | % | | 50 | % | | 48 | % | | 41 | % | | 35 | % |
| Consumer Loans | | | | 20 | % | | 19 | % | | 19 | % | | 19 | % | | 19 | % |
|
| |
| |
| |
| |
| |
| Totals | | | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
|
| |
| |
| |
| |
| |
The Company’s policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southern Indiana. Commercial extensions of credit outside this market area are generally concentrated in real estate loans within a 120 mile radius of the Company’s primary market and are granted on a selective basis.
These out-of-market credits include participations that the Company may purchase from time to time in loans that are originated by the four banks in which the Company owns non-controlling common stock investments. These banks operate from headquarters in Indianapolis, Evansville, and Dana, Indiana (near Terre Haute) and Louisville, Kentucky; the bank in Dana, Indiana has branched into Lafayette, Indiana.
The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences and consumer loans) outstanding as of December 31,
20052006, which, based on remaining scheduled repayments of principal, are due in the periods indicated (dollars in thousands).
| Within
One Year
| One to Five
Years
| After
Five Years
| Total
|
|---|
| Commercial, Agricultural and Poultry | | | | $ 145,384 | | | $ 125,663 | | | $ 149,549 | | | $ 420,596 | |
| |
| Interest Sensitivity |
|---|
| Fixed Rate
| Variable Rate
|
|---|
| Loans maturing after one year | | | | $ 42,382 | | | $ 232,830 | |
| | | Within One Year | | One to Five Years | | After Five Years | | Total | |
| | | | | | | | | | |
| Commercial and Agricultural | | $ | 211,032 | | $ | 229,485 | | $ | 110,640 | | $ | 551,157 | |
| | | Interest Sensitivity | |
| | | Fixed Rate | | Variable Rate | |
| | | | | | |
| Loans maturing after one year | | $ | 96,265 | | $ | 243,860 | |
The investment portfolio is a principal source for funding the Company’s loan growth and other liquidity needs of its subsidiaries. The Company’s securities portfolio consists of money market securities, uncollateralized U.S. Treasury and federal agency securities, municipal obligations of state and political subdivisions, asset- / mortgage-backed securities issued by U.S. government agencies and other intermediaries, and corporate investments. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The composition of the year-end balances in the investment portfolio is presented in Note 2 to the Company’s consolidated financial statements included in Item 8 of this Report and in the table below:
Investment Portfolio, at Amortized Cost
dollars in thousands | December 31, |
|---|
| 2005
| | %
| | 2004
| | %
| | 2003
| | %
|
|---|
| |
| Federal Funds Sold and Short-term Investments | | | $ | 5,287 | | | 3 | % | $ | 24,354 | | | 11 | % | $ | 3,804 | | | 2 | % |
| U.S. Treasury and Agency Securities | | | | 13,631 | | | 7 | | | 4,060 | | | 2 | | | 4,112 | | | 2 | |
| Obligations of State and Political Subdivisions | | | | 31,759 | | | 16 | | | 43,125 | | | 20 | | | 54,838 | | | 25 | |
| Asset- / Mortgage-backed Securities | | | | 128,602 | | | 65 | | | 131,614 | | | 60 | | | 136,674 | | | 63 | |
| Corporate Securities | | | | 500 | | | n/m | (1) | | 503 | | | n/m | (1) | | 506 | | | n/m | (1) |
| Equity Securities | | | | 17,350 | | | 9 | | | 15,149 | | | 7 | | | 16,808 | | | 8 | |
|
| |
| |
| |
| |
| |
| |
| Total Securities Portfolio | | | $ | 197,129 | | | 100 | % | $ | 218,805 | | | 100 | % | $ | 216,742 | | | 100 | % |
|
| |
| |
| |
| |
| |
| |
Investment Portfolio, at Amortized Cost | | December 31, | |
dollars in thousands | | 2006 | | % | | | 2005 | | % | | | 2004 | | % | |
| | | | | | | | | | | | | | | | |
| Federal Funds Sold and Short-term Investments | | $ | 5,935 | | | 3 | % | | $ | 5,287 | | | 3 | % | | $ | 24,354 | | | 11% | |
| U.S. Treasury and Agency Securities | | | 28,083 | | | 15 | | | | 13,631 | | | 7 | | | | 4,060 | | | 2 | |
| Obligations of State and Political Subdivisions | | | 25,788 | | | 13 | | | | 31,759 | | | 16 | | | | 43,125 | | | 20 | |
| Asset- / Mortgage-backed Securities | | | 125,340 | | | 66 | | | | 128,602 | | | 65 | | | | 131,614 | | | 60 | |
| Corporate Securities | | | — | | | — | | | | 500 | | | n/m(1) | | | | 503 | | | n/m(1) | |
| Equity Securities | | | 6,236 | | | 3 | | | | 17,350 | | | 9 | | | | 15,149 | | | 7 | |
| Total Securities Portfolio | | $ | 191,382 | | | 100 | % | | $ | 197,129 | | | 100 | % | | $ | 218,805 | | | 100% | |
The amortized cost of investment securities, including federal funds sold and short-term investments, decreased
$21.7$5.7 million at year-end
20052006 compared with year-end
2004.2005. The
majority of this decline during 2005 was the result of a lower level of federal funds sold and short-term investments. At year-end 2004, the level of federal funds sold and short-term investments was elevated from the levels throughout 2004. This increased level resulted from the cash flow nature of the Company's portfolio with itslargest concentration in
mortgage related securities and the
timing of reinvestment of this cash flow back into other types of securities at year-end 2004. The Company has continued its strategy during 2005 of investinginvestment portfolio continues to be in mortgage related securities. The
mortgage related securities provide structured cash flows in what has continued to be a relatively low longer term interest rate environment.The Company'sCompany’s level of obligations of state and political subdivisions declined $6.0 million or 19% during 2006 and $11.4 million or 26% during 2005 and $11.7 million or 21% in 2004.2005. The decline in obligations of state and political subdivisions has been primarily the result of the Company'sCompany’s strategy to not invest in these traditionally longer-term securities during periods of relatively low longer termlonger-term interest rates. The Company continues to believe that at the proper time, investment in tax-advantaged obligations of state and political subdivisions is prudent. However, in the relatively low longer termlonger-term interest rate environment, investments in these types of securities have not been undertaken.
The
Company'sCompany’s equity
securities portfolio at year-end
2005 included2006 consisted of non-controlling common stock investments in
the table above was comprised of approximately $5.3 million of minority equity interests infive unaffiliated banking
companies and approximately $12.1 million of floating rate preferred stock issued to FHLMC and FNMA. For further discussion regardingcompanies. In prior years the
investments inequity securities also included the
unaffiliated banking companies refer to Item 1 - Business of this Report. The Company's equityCompany’s portfolio
in prior periods disclosed in the table above was primarily comprised of floating rate preferred stock issued by FHLMC and FNMA.
In the year ended December 31, 2004, theThe Company
recognized a $3.68 million non-cash pre-tax charge for the other-than-temporary decline in value on this floating ratesold its portfolio of FHLMC and FNMA preferred stock
portfolio.during the third quarter of 2006. The gain from the sale of this agency preferred stock portfolio totaled $951,000. The portfolio had a book value at the time of the sale of approximately $12.1 million. The Company
accounts for these securities in accordance with SFAS No. 115, which requires that if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss must be recognized as expense in the income statement. Refer also to the sections entitled CRITICAL ACCOUNTING POLICIES AND ESTIMATES and "RESULTS OF OPERATIONS - Non-Interest Income in this Report and Note 2 to the Company's consolidated financial statements included in Item 8 of this Report for further discussion of the equity securities portfolio and thehad previously recorded a non-cash other-than-temporary impairment charge
recognizedof $3.7 million on this portfolio during 2004.
The amortized cost of investment securities, including federal funds sold and short-term investments, increased $2.1 million or 1%
Investment Securities, at year-end 2004 compared with year-end 2003. The increase was directly related to the elevated level of federal funds sold and short-term investments at year end 2004 as discussed above. Overall there were modest declinesCarrying Value
dollars in each other category of securities at year-end 2004 compared with 2003.Investment Securities, at Carrying Value
dollars in thousands |
|---|
| December 31, |
|---|
| 2005
| | 2004
| | 2003
|
|---|
| |
| Securities Held-to-Maturity: | | | | | | | | | | | |
| Obligations of State and Political Subdivisions | | | $ | 8,684 | | $ | 13,318 | | $ | 17,417 | |
| |
| Securities Available-for-Sale: | | |
| U.S. Treasury Securities and Obligations of | | |
| U.S. Government Corporations and Agencies | | | $ | 13,492 | | $ | 4,034 | | $ | 4,090 | |
| Obligations of State and Political Subdivisions | | | | 23,527 | | | 30,621 | | | 38,579 | |
| Asset-/Mortgage-backed Securities | | | | 125,844 | | | 131,201 | | | 136,585 | |
| Corporate Securities | | | | 500 | | | 503 | | | 515 | |
| Equity Securities | | | | 17,787 | | | 15,317 | | | 16,024 | |
|
| |
| |
| |
| Subtotal of Securities Available-for-Sale | | | | 181,150 | | | 181,676 | | | 195,793 | |
|
| |
| |
| |
| |
| Total Securities | | | $ | 189,834 | | $ | 194,994 | | $ | 213,210 | |
|
| |
| |
| |
thousands
| | | December 31, | |
Securities Held-to-Maturity: | | 2006 | | 2005 | | 2004 | |
| Obligations of State and Political Subdivisions | | $ | 6,135 | | $ | 8,684 | | $ | 13,318 | |
| | | | | | | | | | | |
Securities Available-for-Sale: | | | | | | | | | | |
| | | | | | | | | | | |
| U.S. Treasury and Agency Securities | | $ | 28,133 | | $ | 13,492 | | $ | 4,034 | |
| Obligations of State and Political Subdivisions | | | 19,928 | | | 23,527 | | | 30,621 | |
| Asset- / Mortgage-backed Securities | | | 123,859 | | | 125,844 | | | 131,201 | |
| Corporate Securities | | | — | | | 500 | | | 503 | |
| Equity Securities | | | 7,302 | | | 17,787 | | | 15,317 | |
| Subtotal of Securities Available-for-Sale | | | 179,222 | | | 181,150 | | | 181,676 | |
| | | | | | | | | | | |
| Total Securities | | $ | 185,357 | | $ | 189,834 | | $ | 194,994 | |
The Company’s
$181.2$179.2 million available-for-sale portion of the investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements. Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not be interpreted as an indication that management anticipates such sales.
The amortized cost of debt securities at December 31, 20052006 are shown in the following table by expected maturity. Asset- / mortgage-backed securities are based on estimated average lives. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations. Equity securities do not have contractual maturities, and are excluded from the table below.
Maturities and Average Yields of Securities at December 31,
2005: | Within
One Year
|
| After One But
Within Five Years
|
| After Five But
Within Ten Years
|
| After Ten
Years
|
|---|
|
| Amount
|
| Yield
|
| Amount
|
| Yield
|
| Amount
|
| Yield
|
| Amount
|
| Yield
|
|---|
| U.S. Treasuries and | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agencies | | | $ | 505 | | | 1 | .87% | $ | 13,126 | | | 4 | .28% | $ | — | | | | N/A | $ | — | | | | N/A |
| State and Political | | |
| Subdivisions | | | | 1,723 | | | 7 | .85% | | 8,733 | | | 7 | .75% | | 10,735 | | | 7 | .36% | | 10,568 | | | 7 | .50% |
| Asset-/Mortgage-backed | | |
| Securities | | | | 19,278 | | | 3 | .19% | | 99,713 | | | 4 | .01% | | 9,611 | | | 5 | .38% | | — | | | | N/A |
| Corporate Securities | | | | — | | | | N/A | | 500 | | | 3 | .42% | | — | | | | N/A | | — | | | | N/A |
|
| | | |
| | | |
| | | |
| | | |
| Totals | | | $ | 21,506 | | | 3 | .53% | $ | 122,072 | | | 4 | .30% | $ | 20,346 | | | 6 | .42% | $ | 10,568 | | | 7 | .50% |
|
| | | |
| | | |
| | | |
| | | |
2006 (dollars in thousands):
| | | Within One Year | | After One But Within Five Years | | After Five But Within Ten Years | | After Ten Years | |
| | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | |
| U.S. Treasuries and | | | | | | | | | | | | | | | | | |
| Agencies | | $ | 3,005 | | | 3.14% | | $ | 25,078 | | | 5.05% | | $ | — | | | N/A | | $ | — | | | N/A | |
| State and Political | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subdivisions | | | 2,955 | | | 6.89% | | | 7,813 | | | 7.27% | | | 10,187 | | | 7.42% | | | 4,833 | | | 7.49% | |
| Asset- / Mortgage-backed | | | | | | | | | | | | | | | | | | | | | | | | | |
| Securities | | | 18,404 | | | 3.27% | | | 85,686 | | | 4.61% | | | 21,040 | | | 5.56% | | | 210 | | | 3.52% | |
| Corporate Securities | | | — | | | N/A | | | — | | | N/A | | | — | | | N/A | | | — | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Totals | | $ | 24,364 | | | 3.69% | | $ | 118,577 | | | 4.88% | | $ | 31,227 | | | 6.17% | | $ | 5,043 | | | 7.32% | |
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above table.
In addition to the other uses of funds discussed previously, the Company had certain long-term contractual obligations as of December 31,
2005.2006. These contractual obligations primarily consisted of long-term borrowings with the FHLB and JPMorgan Chase Bank, N.A., time deposits, and lease commitments for certain office facilities. Scheduled principal payments on long-term borrowings, time deposits, and future minimum lease payments are outlined in the table below.
Contractual Obligations
dollars in thousands | Payments Due By Period
|
|---|
| Total
| | Less Than 1 Year
| | 1-3 Years
| | 3-5 Years
| | More than 5 Years
|
|---|
| |
| Long-Term Borrowings | | | $ | 66,606 | | $ | 6,485 | | $ | 9,985 | | $ | 48,554 | | $ | 1,582 | |
| Time Deposits | | | | 308,774 | | | 137,223 | | | 157,662 | | | 13,812 | | | 77 | |
| Lease Commitments | | | | 462 | | | 123 | | | 206 | | | 129 | | | 4 | |
|
| |
| |
| |
| |
| |
| Total | | | $ | 375,842 | | $ | 143,831 | | $ | 167,853 | | $ | 62,495 | | $ | 1,663 | |
|
| |
| |
| |
| |
| |
| | | Payments Due By Period | |
Contractual Obligations dollars in thousands | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years | |
| | | | | | | | | | | | | | | | | |
| Long-Term Borrowings | | $ | 68,333 | | $ | 11,277 | | $ | 17,187 | | $ | 23,817 | | $ | 16,052 | |
| Time Deposits | | | 400,257 | | | 291,532 | | | 96,658 | | | 9,533 | | | 2,534 | |
| Lease Commitments | | | 567 | | | 201 | | | 267 | | | 99 | | | — | |
| Total | | $ | 469,157 | | $ | 303,010 | | $ | 114,112 | | $ | 33,449 | | $ | 18,586 | |
The Company’s primary source of funding is its base of core customer deposits. Core deposits consist of demand deposits, savings, interest-bearing checking, money market accounts, and certificates of deposit of less than $100,000. Other sources of funds are certificates of deposit of $100,000 or more, brokered deposits, overnight borrowings from other financial institutions and securities sold under agreement to repurchase. The membership of the Company’s affiliate
banksbank in the Federal Home Loan Bank System (FHLB) provides a significant additional source for both long and short-term collateralized borrowings.
In addition, the Company, as a separate and distinct corporation from its bank and other subsidiaries, also has the ability to borrow funds from other financial institutions. The following pages contain a discussion of changes in these areas.
The table below illustrates changes between years in the average balances of all funding sources:
Funding Sources - Average Balances
dollars in thousands | December 31, | | % Change From
Prior Year |
|---|
| 2005
| | 2004
| | 2003
| | 2005
| | 2004
|
|---|
| | | | | |
|---|
| Demand Deposits | | | | | | | | | | | | | | | | | |
| Non-interest Bearing | | | $ | 121,662 | | $ | 116,124 | | $ | 103,865 | | | 5 | % | | 12 | % |
| Interest Bearing | | | | 137,318 | | | 121,173 | | | 110,544 | | | 13 | | | 10 | |
| Savings Deposits | | | | 66,091 | | | 65,757 | | | 61,295 | | | 1 | | | 7 | |
| Money Market Accounts | | | | 90,729 | | | 97,515 | | | 80,903 | | | (7 | ) | | 21 | |
| Other Time Deposits | | | | 242,887 | | | 268,842 | | | 298,430 | | | (10 | ) | | (10 | ) |
|
| |
| |
| |
| Total Core Deposits | | | | 658,687 | | | 669,411 | | | 655,037 | | | (2 | ) | | 2 | |
| Certificates of Deposits of $100,000 or | | |
| more and Brokered Deposits | | | | 71,533 | | | 62,056 | | | 56,273 | | | 15 | | | 10 | |
| FHLB Advances and | | |
| Other Borrowings | | | | 98,932 | | | 101,067 | | | 130,165 | | | (2 | ) | | (22 | ) |
|
| |
| |
| |
| Total Funding Sources | | | $ | 829,152 | | $ | 832,534 | | $ | 841,475 | | | — | | | (1 | ) |
|
| |
| |
| |
Funding Sources - Average Balances dollars in thousands | | December 31, | | % Change From Prior Year | |
| | | 2006 | | 2005 | | 2004 | | 2006 | | 2005 | |
| Demand Deposits | | | | | | | | | | | |
| Non-interest Bearing | | $ | 129,759 | | $ | 121,662 | | $ | 116,124 | | | 7 | % | | 5 | % |
| Interest Bearing | | | 140,786 | | | 137,318 | | | 121,173 | | | 3 | | | 13 | |
| Savings Deposits | | | 61,453 | | | 66,091 | | | 65,757 | | | (7 | ) | | 1 | |
| Money Market Accounts | | | 112,642 | | | 90,729 | | | 97,515 | | | 24 | | | (7 | ) |
| Other Time Deposits | | | 276,815 | | | 242,887 | | | 268,842 | | | 14 | | | (10 | ) |
| Total Core Deposits | | | 721,455 | | | 658,687 | | | 669,411 | | | 10 | | | (2 | ) |
| Certificates of Deposits of $100,000 or | | | | | | | | | | | | | | | | |
| more and Brokered Deposits | | | 92,985 | | | 71,533 | | | 62,056 | | | 30 | | | 15 | |
| FHLB Advances and | | | | | | | | | | | | | | | | |
| Other Borrowings | | | 113,559 | | | 98,932 | | | 101,067 | | | 15 | | | (2 | ) |
| Total Funding Sources | | $ | 927,999 | | $ | 829,152 | | $ | 832,534 | | | 12 | | | n/m | (1) |
Maturities of certificates of deposit of $100,000 or more are summarized as
follows: | 3 Months
or Less
| 3 thru
6 Months
| 6 thru
12 Months
| Over
12 Months
| Total
|
|---|
| |
| December 31, 2005 | | | | $ 20,322 | | | $ 4,652 | | | $ 10,046 | | | $ 26,325 | | | $ 61,345 | |
follows (dollars in thousands):
| | | 3 Months | | 3 thru | | 6 thru | | Over | | | |
| | | Or Less | | 6 Months | | 12 Months | | 12 Months | | Total | |
| | | | | | | | | | | | |
December 31, 2006 | | $ | 54,351 | | $ | 13,625 | | $ | 31,918 | | $ | 20,653 | | $ | 120,547 | |
The Company’s overall level of average core deposits
has remained relatively stableincreased approximately 10% during
2005 and 2004, with2006 following a
2% decline
of 2% in 2005 and an increase of 2% in 2004.during 2005. The Company’s ability to attract core deposits continues to be influenced by competition and the interest rate environment, as well as the increased availability of alternative investment products. Management believes that core deposits continue to represent a stable and viable funding source for the Company’s operations.
Demand, savings and money market deposits have provided a growing source of funding for the company in each of the periods reported. Average demand, savings and money market deposits totaled
$444.6 million or 62% of core deposits in 2006 compared with $415.8 million or 63%
of core deposits in 2005
compared withand $400.6 million or 60% in
2004 and $356.6 million or 54% in 2003. These increases have contributed to the Company’s increased net interest margin as was discussed in the “RESULTS OF OPERATIONS – Net Interest Income” section of this Report.2004.
Other time deposits consist of certificates of deposits in denominations of less than $100,000. These deposits
declinedincreased by
14% during 2006 following a decline of 10% in
both 2005 and 2004.2005. Other time deposits comprised
37%38% of core deposits in
20052006 compared with
37% in 2005 and 40% in
2004 and 46% in 2003.2004.
Federal Home Loan Bank advances and other borrowings represent the Company’s most significant source of other
funding for its bank subsidiaries.funding. Average borrowed funds
decreasedincreased $14.6 million or 15% during 2006 following a decline of $2.1 million or 2%
during 2005 following a decline of $29.1 million or 22% in
2004.2005. Borrowings comprised
approximately 12%
, 12%, and 15% of total funding sources in
2006, 2005,
2004, and
2003, respectively.2004. The
declineincrease in average borrowed funds during
2006 was largely attributable to parent company borrowings that resulted from the banking acquisition activity during late 2005 and
2004 was primarily the result of repayment of FHLB advances.early 2006.
Certificates of deposits in denominations of $100,000 or more and brokered deposits are an additional source of other funding for the Company’s bank
subsidiaries.subsidiary. Large denomination certificates and brokered deposits increased
$21.5 million or 30% during 2006 following an increase of $9.5 million or 15%
during 2005 following an increase of $5.8 million or 10% in
2004.2005. Large certificates and brokered deposits comprised approximately
9%10% of total funding sources in
2006, 9% in 2005 and 7% in
both 2004 and 2003. These large certificates are2004. This type of funding is used as both long-term and short-term funding sources.
The bank
subsidiariessubsidiary of the Company also
utilizeutilizes short-term funding sources from time to time. These sources consist of overnight federal funds purchased from other financial institutions, secured repurchase agreements that generally mature within one day of the transaction date, and secured overnight variable rate borrowings from the FHLB. These borrowings represent an important source of short-term liquidity for the
Company’s bank
subsidiaries of the Company.subsidiary. Long-term debt
at the Company’s bank subsidiary is in the form of FHLB advances, which are secured by the pledge of certain investment securities and residential mortgage loans. See Note 8 to the Company’s consolidated financial statements included in Item 8 of this Report for further information regarding borrowed funds.
PARENT COMPANY FUNDING SOURCES
The Company is a corporation separate and distinct from its bank and other subsidiaries. For information regarding the financial condition, result of operations, and cash flows of the Company, presented on a parent-company-only basis, see Note 17 to the Company’s consolidated financial statements included in Item 8 of this Report.
The Company uses funds at the parent company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes. The parent company does not have access at the parent-company level to the deposits and certain other sources of funds that are available to its bank
subsidiariessubsidiary to support
theirits operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank
subsidiaries. These subsidiaries aresubsidiary. The Company’s banking subsidiary is subject to statutory restrictions on
theirits ability to pay dividends to the parent company. The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings, which are discussed in detail below.
On September 28, 2005 (but effective as of September 20, 2005),December 29, 2006, the Company and JPMorgan Chase Bank, N.A. (the “Lender”) executed and delivered to each other ana Second Amended and Restated Loan and Subordinated Debenture Purchase Agreement (“AmendedRestated Agreement”), and the Company executed and delivered to the Lender a $25$10 million Subordinated Debenture, a $10 million Term Note and a $15 million Revolving Note pursuant to the AmendedRestated Agreement to evidence its obligations for amounts that may from time to time be borrowed thereunder. This AmendedThe Company’s obligations under the Term Note and Revolving Note are secured by a pledge of all of the Company’s stock in its sole depository institution subsidiary, German American Bancorp, pursuant to a pledge agreement.
The Restated Agreement
providesestablished new credit facilities that replace the
Company’s prior credit facilities with the Lender. Among other changes, the Restated Agreement (a) continued through January 1, 2008 the Company’s ability under the Prior Agreement to access a $15 million revolving credit line in order to support parent company
liquidity needs from time to time, all of which was available for borrowing as of December 31, 2006; (b) restructured $10 million of the prior $25 million term loan as a new subordinated seven-year loan that is intended to qualify as Tier 2 capital for regulatory capital purposes; and (c) lengthened the maturity schedule for repaying another $10 million of the prior $25 million term loan. The remaining $5 million of the $25 million that was outstanding under the term loan with
an additional source of liquidity and long-term financing.24
Under the revolving line of credit establishedthis lender was prepaid by the AmendedCompany on December 29, 2006, from parent company working capital.
The new term loan established under the Restated Agreement andis evidenced by a new term note in the Revolving Note,principal amount of $10 million, which matures on the Company may borrowfollowing schedule: $1.0 million principal amount payable on January 1, 2008 and re-borrow up to$1.5 million payable on January 1 of each of the years 2009 through 2014, inclusive. Interest is payable quarterly on the outstanding principal balance.
The new subordinated loan established under the Restated Agreement is evidenced by a subordinated debenture in the principal amount of $10 million, and matures in a single installment of principal on January 1, 2014. Interest is payable quarterly on the outstanding principal balance.
The new revolving loan established under the Restated Agreement is evidenced by a new revolving note in the principal amount of $15 million, at any one time through September 20, 2006,and matures on January 1, 2008, at which time all amounts borrowed under the revolving line of creditloan will become due and payable. As of December 31, 2005,Interest is payable quarterly on the outstanding principal balance.
Pursuant to the Restated Agreement, the Company
had $2.5 million outstanding on its revolving line of credit.Of the $25 million non-revolving term loan availability established by the Amended Agreementmade certain representations and evidenced by the Term Note,warranties to the Lender, advanced $18.5 million during 2005. The Lender advanced the remaining $6.5 million available under the term loanand agreed to the Company in January 2006, which advance was primarily used to fund the cash payment of the merger consideration for the acquisition of Stone City Bancshares, Inc. The Company is obligated to make annual principal reduction payments under the term loan of up to $2.5 million on each anniversary date of the term loan, commencing in September 2007, in order to reduce the principal balance owed under the term loan to $19 million by September 2009,comply with certain affirmative and is obligated to pay all remaining outstanding principal plus interest during September, 2010 (at maturity of the term loan).
Under the Amended Agreement, Term Note, and Revolving Note, the Company is obligated to paynegative covenants with the Lender, interest on amounts advanced underwhich are substantially the term loansame as the representations, warranties, and covenants that were included in the revolving loan based upon 90-day LIBOR plus 1.15% per annum.
The Amended Agreement includes usual and customaryPrior Agreement. Among the affirmative covenants and conditions, including a covenantare provisions requiring that requires that(a) the Company maintain the capital ratios of the Company and of its affiliate bankssubsidiary bank(s) at levels that would be considered “well-capitalized” under the prompt corrective action regulations of the federal banking agencies. In addition,agencies, and (b) the Company agreed in the Amended Agreement that it would maintain a consolidated ratio of (a)(i) the sum of its non-performing loans plus other real estate owned (real estate that is neither used in the ordinary course of the business of the Company or its subsidiaries nor held for future use) (OREO) to (b)(ii) the sum of the Company’s loans plus OREO, of not greater 3.75% until September 30, 2006, and of not greater than 3.25% at September 30, 2006, and at all times thereafter.. At December 31, 2005,2006, this ratio was 2.48%1.32%.
Among the Company’s negative covenants are provisions that generally prohibit the Company and its subsidiaries, without the consent of the Lender, from (a) becoming liable in respect of any indebtedness for borrowed money, other than in the ordinary course of business of the bank subsidiaries, (b) incurring liens on their assets, other than to secure borrowings in the ordinary course of business of the bank subsidiaries, (c) issuing trust preferred securities, and (d) acquiring other businesses in acquisition transactions that would be significant when measured by certain size restrictions described by the Restated Agreement.
Upon the occurrence of an event of default under the Restated Agreement, the Lender may terminate the availability of future credit under the revolving loan facility and declare all amounts outstanding under the revolving loan and term loan to be due and payable in full. In addition, in certain limited circumstances defined by the Restated Agreement, an event of default may entitle the Lender to declare all amounts outstanding under the subordinated loan to be due and payable in full.
See Note 8 to the Company’s consolidated financial statements included in Item 8 of this Report for further information regarding the parent company borrowed funds.
The Company is exposed to various types of business risk on an on-going basis. These risks include credit risk, liquidity risk and interest rate risk. Various procedures are employed at the Company’s affiliate banks to monitor and mitigate risk in
theirthe loan and investment portfolios, as well as risks associated with changes in interest rates. Following is a discussion of the Company’s philosophies and procedures to address these risks.
LENDING AND LOAN ADMINISTRATION
Primary responsibility and accountability for day-to-day lending activities rests with the Company’s
affiliate banks.subsidiary bank. Loan personnel at
eachthe subsidiary bank have the authority to extend credit under guidelines approved by the bank’s board of directors.
Executive and boardThe executive loan
committees active at each bank servecommittee serves as
vehiclesa vehicle for communication and for the pooling of knowledge, judgment and experience of its members.
These committees provideThe committee provides valuable input to lending personnel,
actacts as an approval body, and
monitormonitors the overall quality of the
banks’bank’s loan
portfolios.portfolio. The Corporate Risk Management Committee, comprised of members of the Company’s
and its subsidiary bank’s executive officers and board of directors,
strivestrives to ensure a consistent application of the Company’s lending policies. The Company also maintains a comprehensive
risk-weightingrisk-grading and loan review program,
for its affiliate banks, which includes quarterly reviews of problem loans, delinquencies and charge-offs. The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses.
The Company maintains an allowance for loan losses to cover probable, incurred credit losses identified during its loan review process. Management estimates the required level of allowance for loan losses using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgement, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.
The allowance for loan losses is comprised of: (a) specific reserves on individual credits; (b) general reserves for certain loan categories and industries, and overall historical loss experience; and (c) unallocated reserves based on performance trends in the loan portfolios, current economic conditions, and other factors that influence the level of estimated probable losses. The need for specific reserves are considered for credits when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring.
Allowance for Loan Losses dollars in thousands | | Years Ended December 31, | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| Balance of allowance for possible | | | | | | | | | | | |
| losses at beginning of period | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | | $ | 8,388 | |
| Loans charged-off: | | | | | | | | | | | | | | | | |
| Residential Mortgage Loans | | | 184 | | | 238 | | | 292 | | | 360 | | | 437 | |
| Agricultural Loans | | | — | | | 3 | | | — | | | 42 | | | 89 | |
| Commercial and Industrial Loans | | | 3,059 | | | 1,278 | | | 904 | | | 571 | | | 183 | |
| Consumer Loans | | | 705 | | | 624 | | | 654 | | | 658 | | | 876 | |
| Total Loans charged-off | | | 3,948 | | | 2,143 | | | 1,850 | | | 1,631 | | | 1,585 | |
| | | | | | | | | | | | | | | | | |
| Recoveries of previously charged-off Loans: | | | | | | | | | | | | | | | | |
| Residential Mortgage Loans | | | 35 | | | 58 | | | 24 | | | 220 | | | 66 | |
| Agricultural Loans | | | 30 | | | 53 | | | 11 | | | 56 | | | 2 | |
| Commercial and Industrial Loans | | | 98 | | | 205 | | | 118 | | | 316 | | | 59 | |
| Consumer Loans | | | 240 | | | 149 | | | 218 | | | 192 | | | 256 | |
| Total Recoveries | | | 403 | | | 465 | | | 371 | | | 784 | | | 383 | |
| | | | | | | | | | | | | | | | | |
| Net Loans recovered / (charged-off) | | | (3,545 | ) | | (1,678 | ) | | (1,479 | ) | | (847 | ) | | (1,202 | ) |
| Additions to allowance charged to expense | | | 925 | | | 1,903 | | | 2,015 | | | 811 | | | 1,115 | |
| Allowance from Acquired Subsidiary | | | 484 | | | 239 | | | — | | | — | | | — | |
| Balance at end of period | | $ | 7,129 | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | |
| | | | | | | | | | | | | | | | | |
| Net Charge-offs to Average Loans Outstanding | | | 0.50 | % | | 0.26 | % | | 0.24 | % | | 0.14 | % | | 0.19 | % |
| Provision for Loan Losses to Average Loans Outstanding | | | 0.13 | % | | 0.30 | % | | 0.32 | % | | 0.13 | % | | 0.17 | % |
| Allowance for Loan Losses to Total Loans at Year-end | | | 0.90 | % | | 1.42 | % | | 1.40 | % | | 1.35 | % | | 1.36 | % |
| | | | | | | | | | | | | | | | | |
| The following table indicates the breakdown of the allowance for loan losses for the periods indicated (dollars in thousands): | |
| | | | | | | | | | | | | | | | | |
| Residential Mortgage Loans | | $ | 341 | | $ | 710 | | $ | 790 | | $ | 839 | | $ | 1,126 | |
| Agricultural Loans | | | 1,001 | | | 822 | | | 982 | | | 704 | | | 781 | |
| Commercial and Industrial Loans | | | 5,134 | | | 6,486 | | | 5,906 | | | 5,358 | | | 4,687 | |
| Consumer Loans | | | 602 | | | 1,127 | | | 1,043 | | | 1,158 | | | 1,140 | |
| Unallocated | | | 51 | | | 120 | | | 80 | | | 206 | | | 567 | |
| | | | | | | | | | | | | | | | | |
| Total Loans | | $ | 7,129 | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | |
25
Allowance for Loan Losses
dollars in thousands | Years Ended December 31, |
|---|
| 2005
| | 2004
| | 2003
| | 2002
| | 2001
|
|---|
| |
| Balance of allowance for possible | | | | | | | | | | | | | | | | | |
| losses at beginning of period | | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | | $ | 8,388 | | $ | 9,274 | |
| Loans charged-off: | | |
| Residential Mortgage Loans | | | | 238 | | | 292 | | | 360 | | | 437 | | | 637 | |
| Agricultural Loans | | | | 3 | | | — | | | 42 | | | 89 | | | 66 | |
| Commercial and Industrial Loans | | | | 1,278 | | | 904 | | | 571 | | | 183 | | | 659 | |
| Consumer Loans | | | | 624 | | | 654 | | | 658 | | | 876 | | | 990 | |
|
| |
| |
| |
| |
| |
| Total Loans charged-off | | | | 2,143 | | | 1,850 | | | 1,631 | | | 1,585 | | | 2,352 | |
| |
| Recoveries of previously charged-off Loans: | | |
| Residential Mortgage Loans | | | | 58 | | | 24 | | | 220 | | | 66 | | | 54 | |
| Agricultural Loans | | | | 53 | | | 11 | | | 56 | | | 2 | | | 191 | |
| Commercial and Industrial Loans | | | | 205 | | | 118 | | | 316 | | | 59 | | | 374 | |
| Consumer Loans | | | | 149 | | | 218 | | | 192 | | | 256 | | | 187 | |
|
| |
| |
| |
| |
| |
| Total Recoveries | | | | 465 | | | 371 | | | 784 | | | 383 | | | 806 | |
|
| |
| |
| |
| |
| |
| |
| Net Loans recovered / (charged-off) | | | | (1,678 | ) | | (1,479 | ) | | (847 | ) | | (1,202 | ) | | (1,546 | ) |
| Additions to allowance charged to expense | | | | 1,903 | | | 2,015 | | | 811 | | | 1,115 | | | 660 | |
| Allowance from Acquired Subsidiary | | | | 239 | | | — | | | — | | | — | | | — | |
|
| |
| |
| |
| |
| |
| Balance at end of period | | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | | $ | 8,388 | |
|
| |
| |
| |
| |
| |
| |
| Net Charge-offs to Average Loans Outstanding | | | | 0.26 | % | | 0.24 | % | | 0.14 | % | | 0.19 | % | | 0.22 | % |
| Provision for Loan Losses to Average Loans Outstanding | | | | 0.30 | % | | 0.32 | % | | 0.13 | % | | 0.17 | % | | 0.09 | % |
| Allowance for Loan Losses to Total Loans at Year-end | | | | 1.42 | % | | 1.40 | % | | 1.35 | % | | 1.36 | % | | 1.27 | % |
The following table indicates the breakdown of the allowance for loan losses for the periods indicated (dollars in thousands):
| Residential Mortgage Loans | | | $ | 710 | | $ | 790 | | $ | 839 | | $ | 1,126 | | $ | 1,958 | |
| Agricultural Loans | | | | 822 | | | 982 | | | 704 | | | 781 | | | 812 | |
| Commercial and Industrial Loans | | | | 6,486 | | | 5,906 | | | 5,358 | | | 4,687 | | | 3,487 | |
| Consumer Loans | | | | 1,127 | | | 1,043 | | | 1,158 | | | 1,140 | | | 921 | |
| Unallocated | | | | 120 | | | 80 | | | 206 | | | 567 | | | 1,210 | |
|
| |
| |
| |
| |
| |
| |
| Total Loans | | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | | $ | 8,388 | |
|
| |
| |
| |
| |
| |
The allowance for loan losses at year-end 2005 increased2006 declined to $7.1 million or 0.90% of total loans compared to $9.3 million or 1.42% of total loans compared toat year-end 2005 and $8.8 million or 1.40% of total loans at year-end 2004 and $8.3 million or 1.35% at year-end 2003.2004. The increasedecline in the allowance for loan losses was largely attributable to a higher level of net charge-offs, primarily related to commercial and industrial loans, during 2006 as compared with previous years. Net charge-offs increased to $3.5 million or 0.50% of average loans outstanding during 2006. This level compares to $1.7 million or 0.26% of average loans outstanding in 2005 and $1.5 million or 0.24% of average loans outstanding during 2004. The increase in the level of net charge-offs during 2006 was primarily attributable to three commercial credit facilities. The increased level of net charge-offs during 2006 and to a lesser degree in 2005 had been provided for during 2004 and 2005. Therefore, the provision for loan growth, changesloss declined by $978,000 in 2006 compared with 2005 while the loan loss provision remained relatively stable during 2005 compared with 2004.
The charge-off on the three previously mentioned credit facilities totaled approximately $2.5 million or approximately 0.35% of average loans outstanding. As of year-end 2005, the specific allocations andon these credits totaled approximately $2.2 million or 0.34% of average loans outstanding while at year-end 2006 there were only nominal allocations for these credits due to the allowance from an acquired subsidiary. Ascharge-off activity during 2006. These credit facilities are discussed in additional detail in the NON-PERFORMING ASSETSfollowing section of this Report,report titled NON-PERFORMING ASSETS.
The Company continues to monitor trends and patterns in loan charge-offs by various product types. Through use of migration analysis for commercial loans and continued analysis of charge-off information for homogenous loan pools, data as of and for the
increased level of non-performing assets was primarily attributable to three larger commercial and industrial credits.Increased net-charge-offs during 2005 compared with 2004 limited the amount of increase in therelevant time periods ended December 31, 2006, suggested a lower level of allowance forwas needed to support probable incurred loan losseslosses. This, along with the previously discussed charge-offs, resulted in a lower level of allowance at year-end 2005 compared with year-end 2004. A portion of these increased net-charge-offs during 2005 was provided for in the significant increase in provision for loan losses in 2004 compared with prior periods. The provision for loan loss remained relatively stable during 2005, declining approximately $112,000, compared with 2004 following an increase of $1.2 million in 2004 compared with 2003.
Net charge-offs increased to $1,678,000 or 0.26% of average outstanding loans during 2005. This level compares to net charge-offs of $1,479,000 or 0.24% of average outstanding loans in 2004 and $847,000 or 0.14% of average outstanding loans in 2003. The increase in the level of loan charge-offs in 2005 was attributable primarily to commercial and industrial loans, but was not necessarily attributable to a particular segment within the commercial and industrial portfolio. The increase in 2004 was attributable to a modestly higher level of loan charge-offs coupled with a significant reduction in the level of recoveries of previously charged-off loans.
The trend in the decline in residential mortgage loan allocations, indicated in the table above, has resulted from the trend of declining net charge-offs and the lower concentration of this type of loans. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance has fluctuated from period to period.
2006. Please see “RESULTS OF OPERATIONS
–- Provision for Loan Losses” and “CRITICAL ACCOUNTING POLICIES AND ESTIMATES
–- Allowance for Loan Losses” for additional information regarding the allowance.
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due 90 days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. Uncollected interest accrued in the current year is reversed against income at the time a loan is placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following table presents an analysis of the Company’s non-performing assets.
Non-performing Assets
dollars in thousands | December 31, |
|---|
| 2005
| | 2004
| | 2003
| | 2002
| | 2001
|
|---|
| Non-accrual Loans | | | $ | 14,763 | | $ | 5,750 | | $ | 1,817 | | $ | 1,773 | | $ | 3,452 | |
| Past Due Loans (90 days or more) | | | | 944 | | | 831 | | | 962 | | | 1,095 | | | 916 | |
| Restructured Loans | | | | — | | | — | | | — | | | 365 | | | 367 | |
|
| |
| |
| |
| |
| |
| Total Non-performing Loans | | | | 15,707 | | | 6,581 | | | 2,779 | | | 3,233 | | | 4,735 | |
| Other Real Estate | | | | 506 | | | 213 | | | 749 | | | 1,812 | | | 1,612 | |
|
| |
| |
| |
| |
| |
| Total Non-performing Assets | | | $ | 16,213 | | $ | 6,794 | | $ | 3,528 | | $ | 5,045 | | $ | 6,347 | |
|
| |
| |
| |
| |
| |
| |
| Non-performing Loans to Total Loans | | | | 2.41 | % | | 1.04 | % | | 0.45 | % | | 0.53 | % | | 0.72 | % |
| Allowance for Loan Losses to Non-performing Loans | | | | 58.99 | % | | 133.73 | % | | 297.41 | % | | 256.76 | % | | 177.15 | % |
During 2005,
| Non-performing Assets | | December 31, | |
dollars in thousands | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | | | | | | | | | | | |
| Non-accrual Loans | | $ | 9,652 | | $ | 14,763 | | $ | 5,750 | | $ | 1,817 | | $ | 1,773 | |
| Past Due Loans (90 days or more) | | | — | | | 944 | | | 831 | | | 962 | | | 1,095 | |
| Restructured Loans | | | — | | | — | | | — | | | — | | | 365 | |
| Total Non-performing Loans | | | 9,652 | | | 15,707 | | | 6,581 | | | 2,779 | | | 3,233 | |
| Other Real Estate | | | 845 | | | 506 | | | 213 | | | 749 | | | 1,812 | |
| Total Non-performing Assets | | $ | 10,497 | | $ | 16,213 | | $ | 6,794 | | $ | 3,528 | | $ | 5,045 | |
| | | | | | | | | | | | | | | | | |
| Non-performing Loans to Total Loans | | | 1.21 | % | | 2.41 | % | | 1.04 | % | | 0.45 | % | | 0.53 | % |
| Allowance for Loan Losses to Non-performing Loans | | | 73.86 | % | | 58.99 | % | | 133.73 | % | | 297.41 | % | | 256.76 | % |
The Company’s level of overall non-performing assets declined by approximately $5.7 million and non-performing loans declined by approximately $6.1 million during 2006 compared with year-end 2005. The decline in the level of non-accrual loans largely resulted from the resolution of an approximately $4.2 million credit facility, which was extended to a borrower operating a retail grocery store chain. Under an approved bankruptcy plan, the Company was paid approximately 90% of the amount owed to it during April 2006. The remaining decline in accordance with its standard methodology fornon-accrual loans was principally the identificationresult of potential problem credits, downgraded the internal risk classificationpartial charge-offs that totaled $2.1 million on two largeother commercial credit facilities that remain in work-out status and placed these credits along with one additional large commercial credit on non-accrual status. are discussed in detail below.
The
net effect of this activity has been to increase the level of non-performing loans
for the Companyremains at
year-end 2005 as compared with year-end 2004. The increased level at year-end 2004 as compared with 2003 was the result of one commercial real estate credit that was resolved on terms consistent with management’s expectations during the first quarter of 2005.The Companyhigher than historic levels, but is closely monitoring developments in the status of the three largerlargely attributable to two specific credit facilities that were placed on non-accrual status during 2005. The first of these credits is an approximately $881,000 loan (after a $1.1 million loanpartial charge-off during 2006) to a manufacturing entity which has ceased operations. During the latter part of the third quarter of 2005, the real estate and equipment of the manufacturing entity were sold at auction.auction to an unrelated third party. The closing of this auction sale is expected tohas been delayed on a number of instances as various covenants and conditions included in the sales agreement have not been fully performed or satisfied. Based on current information available, the Company expects that this sale will be completed duringby the secondend of the third quarter of 2006.2007. The indebtedness owed the Company on this credit is secured by a first priority lien on substantially all of the borrower’s assets, including those sold at auction.
The second of these specific credits, which totals approximately
$5.2$3.6 million
is(after a partial charge-off during 2006), was extended to a borrower operating two hotel facilities. This credit is secured by a first priority lien on the hotel facilities. The
borrower is currently operatingCompany has initiated foreclosure action and taken steps to place the
hotels and is actively attempting to negotiate the saleproperties under control of
the facilities. The thirdan independent management company upon receipt of
these specific credits, which is extended to a borrower operating a retail grocery store chain, is a 10% interest (the Company’s current balance is approximately $4.6 million) in a credit facility that is led by Harris, N.A., Chicago, Illinois. The borrower, which filed for Chapter 11 bankruptcy relief on May 4, 2005, has submitted a plan of reorganization with the bankruptcy court and it is anticipated, based on current available information, the plan will be (subject to court approval after consideration of any objectionstitle to the
plan) confirmed by the end of the second quarter of 2006. Under the plan as filed with the court, the Company would be paid approximately 90% of the amount owed to it, which is consistent with the projected payment that the Company has assumed for purposes of establishing a special allocation of possible loss for this credit as part of the Company’s determination of its allowance for loan losses.properties.
The Company will continue to assess the internal classification of these credits and the level of specific allocation of the loan loss reserve attributable to these credits based upon the best information that is available from time to time, including the status of the sale of the manufacturing facility and the status of the hotel facilities,facilities.
During 2005, the Company, in accordance with its standard methodology for the identification of potential problem credits, downgraded the internal risk classification on the above mentioned credits and
developments inplaced them on non-accrual status. The net effect of this activity was to increase the
grocery store chain bankruptcy case.The increased level of non-performing loans for the Company at year-end 20042005 as compared with 2003 was the result of one commercial real estate credit. This credit had successful resolution that allowed for its removal from non-accrual status during the first quarter of 2005.
year-end 2004. Interest income recognized on non-performing loans for 20052006 was $395,000.$351,000. The gross interest income that would have been recognized in 20052006 on non-performing loans if the loans had been current in accordance with their original terms was $1,211,000.$1,846,000. Loans are typically placed on non-accrual 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.
Loan impairment is reported when full repayment under the terms of the loan is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial
agricultural and
poultryagricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The total dollar amount of impaired loans at December 31,
20052006 was
$13,286,000.$8,155,000. For additional detail on impaired loans, see Note 3 to the Company’s consolidated financial statements included in Item 8 of this Report.
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is a measure of the ability of the Company’s subsidiary
banksbank to fund new loan demand, existing loan commitments and deposit withdrawals. The purpose of liquidity management is to match sources of funds with anticipated customer borrowings and withdrawals and other obligations to ensure a dependable funding base, without unduly penalizing earnings. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. The liquidity of the parent company is dependent upon the receipt of dividends from its bank
subsidiaries,subsidiary, which are subject to certain regulatory limitations explained in Note 9 to the Company’s consolidated financial statements included in Item 8 of this Report, as enhanced by its ability to draw upon term financing
arrangementarrangements and a line of credit established by the parent company
in September 2005 with a correspondent bank lender as described under “SOURCES OF FUNDS
–- Parent Company Funding Sources”, above. The affiliate
banks’bank’s source of funding is predominately core deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank.
Interest rate risk is the exposure of the Company’s financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company’s earnings, the Company monitors interest rate risk through computer-assisted simulation modeling of its net interest income. The Company’s simulation modeling monitors the potential impact to net interest income under various interest rate scenarios. The Company’s objective is to actively manage its asset/liability position within a one-year interval and to limit the risk in any of the interest rate scenarios to a reasonable level of tax-equivalent net interest income within that interval.
Funds Management Committees at the holding company and each affiliate bank monitorThe Company’s Asset/Liability Committee monitors compliance within established guidelines of the Funds Management Policy. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements other than stand-by letters of credit as disclosed in Note 14 to the Company’s consolidated financial statements included in Item 8 of this Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company’s exposure to market risk is reviewed on a regular basis by the Asset/Liability Committees and
BoardsBoard of
Directors of the holding company and its affiliate banks.Directors. Primary market risks, which impact the Company’s operations, are liquidity risk and interest rate risk, as discussed above.
As discussed previously, the Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios. Another method by which the Company’s interest rate risk position can be estimated is by computing estimated changes in its net portfolio value (“NPV”). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities. NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities. Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment.
The following table provides an assessment of the risk to NPV in the event of sudden and sustained 1% and 2% increases and decreases in prevailing interest rates. The table indicates that as of December 31,
20052006 the Company’s estimated NPV might be expected to
increase in the event ofdecrease under both an increase
in prevailing interest rates, and might be expected to decrease in the event of aor decrease in prevailing interest rates (dollars in thousands).
Interest Rate Sensitivity as of December 31, 20052006 | Net Portfolio
Value | Net Portfolio Value
as a % of Present Value
of Assets |
|---|
| |
| Changes in Rates | $ Amount | % Change | NPV Ratio | Change |
|---|
| +2% | $ 114,713 | 0.12% | 12.54% | 33b.p. |
| +1% | 115,062 | 0.42% | 12.42% | 21b.p. |
| Base | 114,577 | — | 12.21% | — |
| -1% | 112,620 | -1.71% | 11.87% | (34)b.p. |
| -2% | 107,048 | -6.57% | 11.16% | (105)b.p. |
Changes | | Net Portfolio Value | | Net Portfolio Value as a % of Present Value of Assets | |
| | $ Amount | | % Change | | NPV Ratio | | Change | |
| +2% | | $ | 123,537 | | | -5.53 | % | | 11.61 | % | | (34 | )b.p. |
| +1% | | | 127,349 | | | -2.61 | % | | 11.80 | % | | (15 | )b.p. |
| Base | | | 130,763 | | | — | | | 11.95 | % | | — | |
| -1% | | | 129,271 | | | -1.14 | % | | 11.68 | % | | (27 | )b.p. |
| -2% | | | 125,102 | | | -4.33 | % | | 11.21 | % | | (74 | )b.p. |
The above discussion, and the portions of MANAGEMENT’S DISCUSSION AND ANALYSIS in Item 7 of this Report that are referenced in the above discussion
containscontain statements relating to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, simulation of the impact on net interest income from changes in interest rates. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed above, those that are described in MANAGEMENT’S DISCUSSION AND ANALYSIS in Item 7 of this Report, and those that are described in Item 1 of this Report, “Business,” under the caption “Forward-Looking Statements and Associated Risks,” which discussions are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data. Report of Independent Registered Public Accounting Firm on Financial Statements
Board of Directors and Shareholders
German American Bancorp,
Inc.
We have audited the accompanying consolidated balance sheets of German American Bancorp, Inc. as of December 31, 20052006 and 2004,2005, 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, 2005.2006. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, Inc. as of December 31, 20052006 and 2004,2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20052006 in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005,2006, based on criteria established in Internal Control –- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 200627, 2007 expressed an unqualified opinion thereon.
Indianapolis, Indiana
February 21, 2006Louisville, Kentucky | /s/ Crowe Chizek and Company LLC
|
| February 27, 2007 | Crowe Chizek and Company LLC |
Consolidated Balance Sheets
Dollars in thousands, except per share data
| December 31, |
|---|
| 2005
| | 2004
|
|---|
| ASSETS | | | | | | | | |
| Cash and Due from Banks | | | $ | 27,644 | | $ | 23,312 | |
| Federal Funds Sold and Other Short-term Investments | | | | 5,287 | | | 24,354 | |
|
| |
| |
| Cash and Cash Equivalents | | | | 32,931 | | | 47,666 | |
| |
| Securities Available-for-Sale, at Fair Value | | | | 181,150 | | | 181,676 | |
| Securities Held-to-Maturity, at Cost (Fair value of $8,811 and $13,636 on | | |
| December 31, 2005 and 2004, respectively) | | | | 8,684 | | | 13,318 | |
| |
| Loans Held-for-Sale | | | | 1,901 | | | 3,122 | |
| |
| Loans | | | | 653,074 | | | 631,043 | |
| Less: Unearned Income | | | | (1,118 | ) | | (1,250 | ) |
| Allowance for Loan Losses | | | | (9,265 | ) | | (8,801 | ) |
|
| |
| |
| Loans, Net | | | | 642,691 | | | 620,992 | |
| |
| Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost | | | | 14,095 | | | 13,542 | |
| Premises, Furniture and Equipment, Net | | | | 20,233 | | | 20,231 | |
| Other Real Estate | | | | 506 | | | 213 | |
| Goodwill | | | | 3,813 | | | 1,794 | |
| Intangible Assets | | | | 2,388 | | | 2,378 | |
| Company Owned Life Insurance | | | | 19,067 | | | 18,540 | |
| Accrued Interest Receivable and Other Assets | | | | 19,008 | | | 18,622 | |
|
| |
| |
| |
| TOTAL ASSETS | | | $ | 946,467 | | $ | 942,094 | |
|
| |
| |
| |
| LIABILITIES | | |
| Non-interest-bearing Demand Deposits | | | $ | 130,383 | | $ | 123,127 | |
| Interest-bearing Demand, Savings, and Money Market Accounts | | | | 307,664 | | | 305,341 | |
| Time Deposits | | | | 308,774 | | | 321,915 | |
|
| |
| |
| Total Deposits | | | | 746,821 | | | 750,383 | |
| |
| FHLB Advances and Other Borrowings | | | | 105,394 | | | 95,614 | |
| Accrued Interest Payable and Other Liabilities | | | | 11,997 | | | 12,428 | |
|
| |
| |
| |
| TOTAL LIABILITIES | | | | 864,212 | | | 858,425 | |
| |
| SHAREHOLDERS' EQUITY | | |
| Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued | | | | — | | | — | |
| Common Stock, no par value, $1 stated value; 20,000,000 shares authorized | | | | 10,643 | | | 10,898 | |
| Additional Paid-in Capital | | | | 63,784 | | | 66,817 | |
| Retained Earnings | | | | 9,391 | | | 5,778 | |
| Accumulated Other Comprehensive Income / (Loss) | | | | (1,563 | ) | | 176 | |
|
| |
| |
| |
| TOTAL SHAREHOLDERS' EQUITY | | | | 82,255 | | | 83,669 | |
|
| |
| |
| |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | | | $ | 946,467 | | $ | 942,094 | |
|
| |
| |
| |
| End of period shares issued and outstanding | | | | 10,643,514 | | | 10,898,241 | |
|
| |
| |
| | | December 31, | |
| | | 2006 | | 2005 | |
ASSETS | | | | | |
| Cash and Due from Banks | | $ | 23,960 | | $ | 27,644 | |
| Federal Funds Sold and Other Short-term Investments | | | 5,735 | | | 5,287 | |
| Cash and Cash Equivalents | | | 29,695 | | | 32,931 | |
| | | | | | | | |
| Interest-bearing Time Deposits with Banks | | | 200 | | | — | |
| Securities Available-for-Sale, at Fair Value | | | 179,222 | | | 181,150 | |
| Securities Held-to-Maturity, at Cost (Fair value of $6,192 and $8,811 on | | | | | | | |
| December 31, 2006 and 2005, respectively) | | | 6,135 | | | 8,684 | |
| | | | | | | | |
| Loans Held-for-Sale | | | 1,601 | | | 1,901 | |
| | | | | | | | |
| Loans | | | 798,635 | | | 653,514 | |
| Less: Unearned Income | | | (2,376 | ) | | (1,558 | ) |
| Allowance for Loan Losses | | | (7,129 | ) | | (9,265 | ) |
| Loans, Net | | | 789,130 | | | 642,691 | |
| | | | | | | | |
| Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost | | | 10,621 | | | 14,095 | |
| Premises, Furniture and Equipment, Net | | | 23,245 | | | 20,233 | |
| Other Real Estate | | | 845 | | | 506 | |
| Goodwill | | | 9,655 | | | 3,813 | |
| Intangible Assets | | | 4,924 | | | 2,388 | |
| Company Owned Life Insurance | | | 21,710 | | | 19,067 | |
| Accrued Interest Receivable and Other Assets | | | 16,441 | | | 19,008 | |
| | | | | | | | |
| TOTAL ASSETS | | $ | 1,093,424 | | $ | 946,467 | |
| | | | | | | | |
LIABILITIES | | | | | | | |
| Non-interest-bearing Demand Deposits | | $ | 137,671 | | $ | 130,383 | |
| Interest-bearing Demand, Savings, and Money Market Accounts | | | 329,690 | | | 307,007 | |
| Time Deposits | | | 400,257 | | | 309,431 | |
| Total Deposits | | | 867,618 | | | 746,821 | |
| | | | | | | | |
| FHLB Advances and Other Borrowings | | | 119,889 | | | 105,394 | |
| Accrued Interest Payable and Other Liabilities | | | 13,526 | | | 11,997 | |
| | | | | | | | |
| TOTAL LIABILITIES | | | 1,001,033 | | | 864,212 | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | |
| Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued | | | — | | | — | |
| Common Stock, no par value, $1 stated value; 20,000,000 shares authorized | | | 11,008 | | | 10,643 | |
| Additional Paid-in Capital | | | 68,216 | | | 63,784 | |
| Retained Earnings | | | 13,450 | | | 9,391 | |
| Accumulated Other Comprehensive Loss | | | (283 | ) | | (1,563 | ) |
| | | | | | | | |
| TOTAL SHAREHOLDERS’ EQUITY | | | 92,391 | | | 82,255 | |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | | $ | 1,093,424 | | $ | 946,467 | |
| End of period shares issued and outstanding | | | 11,008,562 | | | 10,643,514 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
Dollars in thousands, except per share data
| Years ended December 31, |
|---|
| 2005
| | 2004
| | 2003
|
|---|
| |
| INTEREST INCOME | | | | | | | | | | | |
| Interest and Fees on Loans | | | $ | 41,751 | | $ | 39,257 | | $ | 41,781 | |
| Interest on Federal Funds Sold and Other Short-term Investments | | | | 316 | | | 129 | | | 270 | |
| Interest and Dividends on Securities: | | |
| Taxable | | | | 5,954 | | | 5,455 | | | 5,023 | |
| Non-taxable | | | | 2,176 | | | 2,869 | | | 3,545 | |
|
| |
| |
| |
| TOTAL INTEREST INCOME | | | | 50,197 | | | 47,710 | | | 50,619 | |
| |
| INTEREST EXPENSE | | |
| Interest on Deposits | | | | 13,389 | | | 11,747 | | | 13,997 | |
| Interest on FHLB Advances and Other Borrowings | | | | 4,595 | | | 4,724 | | | 7,087 | |
|
| |
| |
| |
| |
| TOTAL INTEREST EXPENSE | | | | 17,984 | | | 16,471 | | | 21,084 | |
|
| |
| |
| |
| |
| NET INTEREST INCOME | | | | 32,213 | | | 31,239 | | | 29,535 | |
| Provision for Loan Losses | | | | 1,903 | | | 2,015 | | | 811 | |
|
| |
| |
| |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | | | | 30,310 | | | 29,224 | | | 28,724 | |
| |
| NON-INTEREST INCOME | | |
| Trust and Investment Product Fees | | | | 2,081 | | | 2,046 | | | 1,627 | |
| Service Charges on Deposit Accounts | | | | 3,723 | | | 3,537 | | | 3,391 | |
| Insurance Revenues | | | | 4,703 | | | 4,666 | | | 3,692 | |
| Other Operating Income | | | | 2,687 | | | 2,074 | | | 1,556 | |
| Net Gains on Sales of Loans and Related Assets | | | | 1,000 | | | 975 | | | 2,588 | |
| Net Gain / (Loss) on Securities | | | | — | | | (3,678 | ) | | 80 | |
|
| |
| |
| |
| |
| TOTAL NON-INTEREST INCOME | | | | 14,194 | | | 9,620 | | | 12,934 | |
|
| |
| |
| |
| |
| NON-INTEREST EXPENSE | | |
| Salaries and Employee Benefits | | | | 18,511 | | | 17,814 | | | 18,062 | |
| Occupancy Expense | | | | 2,396 | | | 2,121 | | | 2,354 | |
| Furniture and Equipment Expense | | | | 2,008 | | | 2,171 | | | 2,220 | |
| Data Processing Fees | | | | 1,322 | | | 1,186 | | | 1,126 | |
| Professional Fees | | | | 1,703 | | | 1,690 | | | 1,227 | |
| Advertising and Promotion | | | | 784 | | | 888 | | | 853 | |
| Supplies | | | | 544 | | | 527 | | | 633 | |
| Net Loss on Extinguishment of Borrowings | | | | — | | | — | | | 1,898 | |
| Other Operating Expenses | | | | 4,180 | | | 4,212 | | | 3,846 | |
|
| |
| |
| |
| |
| TOTAL NON-INTEREST EXPENSE | | | | 31,448 | | | 30,609 | | | 32,219 | |
|
| |
| |
| |
| |
| Income before Income Taxes | | | | 13,056 | | | 8,235 | | | 9,439 | |
| Income Tax Expense | | | | 3,335 | | | 996 | | | 1,271 | |
|
| |
| |
| |
| NET INCOME | | | $ | 9,721 | | $ | 7,239 | | $ | 8,168 | |
|
| |
| |
| |
| |
| Earnings per Share | | | $ | 0.89 | | $ | 0.66 | | $ | 0.73 | |
| |
| Diluted Earnings per Share | | | $ | 0.89 | | $ | 0.66 | | $ | 0.73 | |
| | | Years ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
INTEREST INCOME | | | | | | | |
| Interest and Fees on Loans | | $ | 53,490 | | $ | 41,751 | | $ | 39,257 | |
| Interest on Federal Funds Sold and Other Short-term Investments | | | 545 | | | 316 | | | 129 | |
| Interest and Dividends on Securities: | | | | | | | | | | |
| Taxable | | | 7,763 | | | 5,954 | | | 5,455 | |
| Non-taxable | | | 1,796 | | | 2,176 | | | 2,869 | |
| TOTAL INTEREST INCOME | | | 63,594 | | | 50,197 | | | 47,710 | |
| | | | | | | | | | | |
INTEREST EXPENSE | | | | | | | | | | |
| Interest on Deposits | | | 21,329 | | | 13,389 | | | 11,747 | |
| Interest on FHLB Advances and Other Borrowings | | | 6,069 | | | 4,595 | | | 4,724 | |
| TOTAL INTEREST EXPENSE | | | 27,398 | | | 17,984 | | | 16,471 | |
NET INTEREST INCOME | | | 36,196 | | | 32,213 | | | 31,239 | |
| Provision for Loan Losses | | | 925 | | | 1,903 | | | 2,015 | |
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | | | 35,271 | | | 30,310 | | | 29,224 | |
| | | | | | | | | | | |
NON-INTEREST INCOME | | | | | | | | | | |
| Trust and Investment Product Fees | | | 2,210 | | | 2,081 | | | 2,046 | |
| Service Charges on Deposit Accounts | | | 3,901 | | | 3,723 | | | 3,537 | |
| Insurance Revenues | | | 5,094 | | | 4,703 | | | 4,666 | |
| Other Operating Income | | | 2,384 | | | 2,687 | | | 2,074 | |
| Net Gains on Sales of Loans and Related Assets | | | 850 | | | 1,000 | | | 975 | |
| Net Gain / (Loss) on Securities | | | 951 | | | — | | | (3,678 | ) |
| TOTAL NON-INTEREST INCOME | | | 15,390 | | | 14,194 | | | 9,620 | |
| | | | | | | | | | | |
NON-INTEREST EXPENSE | | | | | | | | | | |
| Salaries and Employee Benefits | | | 21,491 | | | 18,511 | | | 17,814 | |
| Occupancy Expense | | | 2,797 | | | 2,396 | | | 2,121 | |
| Furniture and Equipment Expense | | | 2,191 | | | 2,008 | | | 2,171 | |
| Data Processing Fees | | | 1,646 | | | 1,322 | | | 1,186 | |
| Professional Fees | | | 1,786 | | | 1,703 | | | 1,690 | |
| Advertising and Promotion | | | 940 | | | 784 | | | 888 | |
| Supplies | | | 619 | | | 544 | | | 527 | |
| Other Operating Expenses | | | 4,986 | | | 4,180 | | | 4,212 | |
| TOTAL NON-INTEREST EXPENSE | | | 36,456 | | | 31,448 | | | 30,609 | |
| | | | | | | | | | | |
| Income before Income Taxes | | | 14,205 | | | 13,056 | | | 8,235 | |
| Income Tax Expense | | | 3,984 | | | 3,335 | | | 996 | |
NET INCOME | | $ | 10,221 | | $ | 9,721 | | $ | 7,239 | |
| Earnings per Share | | $ | 0.93 | | $ | 0.89 | | $ | 0.66 | |
| Diluted Earnings per Share | | $ | 0.93 | | $ | 0.89 | | $ | 0.66 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders'Shareholders’ Equity
Dollars in thousands, except per share data
| Common Stock | | Additional
Paid-in | | Retained | | Accumulated
Other
Comprehensive | | Total
Shareholders' |
|---|
| Shares
| | Amount
|
| Capital
|
| Earnings
|
| Income
|
| Equity
|
|---|
| Balances, January 1, 2003 | | | | 11,460,731 | | $ | 11,461 | | $ | 78,836 | | $ | 12,298 | | $ | 1,924 | | $ | 104,519 | |
| |
| Comprehensive Income: | | |
| Net Income | | | | | | | | | | | | | 8,168 | | | | | | 8,168 | |
| Changes in Unrealized Gain/(Loss) on | | |
| Securities Available for Sale, net | | | | | | | | | | | | | | | | (1,747 | ) | | (1,747 | ) |
| Change in Minimum Pension Liability | | | | | | | | | | | | | | | | (169 | ) | | (169 | ) |
| | |
| |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | | 6,252 | |
| Cash Dividends ($.53 per share) | | | | | | | | | | | | | (5,984 | ) | | | | | (5,984 | ) |
| Issuance of Common Stock for: | | |
| Exercise of Stock Options | | | | 14,807 | | | 15 | | | 555 | | | (542 | ) | | | | | 28 | |
| Director Stock Awards | | | | 15,939 | | | 16 | | | 288 | | | | | | | | | 304 | |
| 5% Stock Dividend | | | | 520,233 | | | 520 | | | 8,740 | | | (9,260 | ) | | | | | — | |
| Employee Stock Purchase Plan | | | | | | | | | | (120 | ) | | | | | | | | (120 | ) |
| Purchase and Retirement of Common Stock | | | | (1,078,828 | ) | | (1,079 | ) | | (20,767 | ) | | | | | | | | (21,846 | ) |
| Purchase of Interest in Fractional Shares | | | | | | | | | | | | | (27 | ) | | | | | (27 | ) |
|
| |
| |
| |
| Balances, December 31, 2003 | | | | 10,932,882 | | | 10,933 | | | 67,532 | | | 4,653 | | | 8 | | | 83,126 | |
| |
| Comprehensive Income: | | |
| Net Income | | | | | | | | | | | | | 7,239 | | | | | | 7,239 | |
| Changes in Unrealized Gain/(Loss) on | | |
| Securities Available for Sale, net | | | | | | | | | | | | | | | | 178 | | | 178 | |
| Change in Minimum Pension Liability | | | | | | | | | | | | | | | | (10 | ) | | (10 | ) |
| | |
| |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | | 7,407 | |
| Cash Dividends ($.56 per share) | | | | | | | | | | | | | (6,114 | ) | | | | | (6,114 | ) |
| Issuance of Common Stock for: | | |
| Exercise of Stock Options | | | | 9,359 | | | 9 | | | 25 | | | | | | | | | 34 | |
| Employee Stock Purchase Plan | | | | | | | | | | (76 | ) | | | | | | | | (76 | ) |
| Purchase and Retirement of Common Stock | | | | (44,000 | ) | | (44 | ) | | (664 | ) | | | | | | | | (708 | ) |
|
| |
| |
| |
| Balances, December 31, 2004 | | | | 10,898,241 | | | 10,898 | | | 66,817 | | | 5,778 | | | 176 | | | 83,669 | |
| |
| Comprehensive Income: | | |
| Net Income | | | | | | | | | | | | | 9,721 | | | | | | 9,721 | |
| Changes in Unrealized Gain/(Loss) on | | |
| Securities Available for Sale, net | | | | | | | | | | | | | | | | (1,711 | ) | | (1,711 | ) |
| Change in Minimum Pension Liability | | | | | | | | | | | | | | | | (28 | ) | | (28 | ) |
| | |
| |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | | 7,982 | |
| Cash Dividends ($.56 per share) | | | | | | | | | | | | | (6,108 | ) | | | | | (6,108 | ) |
| Issuance of Common Stock for: | | |
| Exercise of Stock Options | | | | 11,991 | | | 12 | | | 36 | | | | | | | | | 48 | |
| Business Combination | | | | 257,029 | | | 257 | | | 3,241 | | | | | | | | | 3,498 | |
| Employee Stock Purchase Plan | | | | | | | | | | (63 | ) | | | | | | | | (63 | ) |
| Purchase and Retirement of Common Stock | | | | (523,747 | ) | | (524 | ) | | (6,247 | ) | | | | | | | | (6,771 | ) |
|
| |
| |
| |
| Balances, December 31, 2005 | | | | 10,643,514 | | $ | 10,643 | | $ | 63,784 | | $ | 9,391 | | $ | (1,563 | ) | $ | 82,255 | |
|
| |
| |
| | | Common Stock | | Additional Paid-in | | Retained | | Accumulated Other Comprehensive | | Total Shareholders’ | |
| | | Shares | | Amount | | Capital | | Earnings | | Income / (Loss) | | Equity | |
| | | | | | | | | | | | | | |
Balances, January 1, 2004 | | | 10,932,882 | | $ | 10,933 | | $ | 67,532 | | $ | 4,653 | | $ | 8 | | $ | 83,126 | |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | 7,239 | | | | | | 7,239 | |
| Changes in Unrealized Gain/(Loss) on | | | | | | | | | | | | | | | | | | | |
| Securities Available for Sale, net | | | | | | | | | | | | | | | 178 | | | 178 | |
| Change in Minimum Pension Liability | | | | | | | | | | | | | | | (10 | ) | | (10 | ) |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | 7,407 | |
| Cash Dividends ($.56 per share) | | | | | | | | | | | | (6,114 | ) | | | | | (6,114 | ) |
| Issuance of Common Stock for: | | | | | | | | | | | | | | | | | | | |
| Exercise of Stock Options | | | 9,359 | | | 9 | | | 25 | | | | | | | | | 34 | |
| Employee Stock Purchase Plan | | | | | | | | | (76 | ) | | | | | | | | (76 | ) |
| Purchase and Retirement of Common Stock | | | (44,000 | ) | | (44 | ) | | (664 | ) | | | | | | | | (708 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2004 | | | 10,898,241 | | | 10,898 | | | 66,817 | | | 5,778 | | | 176 | | | 83,669 | |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | 9,721 | | | | | | 9,721 | |
| Changes in Unrealized Gain/(Loss) on | | | | | | | | | | | | | | | | | | | |
| Securities Available for Sale, net | | | | | | | | | | | | | | | (1,711 | ) | | (1,711 | ) |
| Change in Minimum Pension Liability | | | | | | | | | | | | | | | (28 | ) | | (28 | ) |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | 7,982 | |
| Cash Dividends ($.56 per share) | | | | | | | | | | | | (6,108 | ) | | | | | (6,108 | ) |
| Issuance of Common Stock for: | | | | | | | | | | | | | | | | | | | |
| Exercise of Stock Options | | | 11,991 | | | 12 | | | 36 | | | | | | | | | 48 | |
| Mergers and Acquisitions | | | 257,029 | | | 257 | | | 3,241 | | | | | | | | | 3,498 | |
| Employee Stock Purchase Plan | | | | | | | | | (63 | ) | | | | | | | | (63 | ) |
| Purchase and Retirement of Common Stock | | | (523,747 | ) | | (524 | ) | | (6,247 | ) | | | | | | | | (6,771 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2005 | | | 10,643,514 | | | 10,643 | | | 63,784 | | | 9,391 | | | (1,563 | ) | | 82,255 | |
| | | | | | | | | | | | | | | | | | | | |
| Comprehensive Income: | | | | | | | | | | | | | | | | | | | |
| Net Income | | | | | | | | | | | | 10,221 | | | | | | 10,221 | |
| Changes in Unrealized Gain/(Loss) on | | | | | | | | | | | | | | | | | | | |
| Securities Available for Sale, net | | | | | | | | | | | | | | | 1,242 | | | 1,242 | |
| Change in Minimum Pension Liability | | | | | | | | | | | | | | | 38 | | | 38 | |
| Total Comprehensive Income | | | | | | | | | | | | | | | | | | 11,501 | |
| Cash Dividends ($.56 per share) | | | | | | | | | | | | (6,162 | ) | | | | | (6,162 | ) |
| Issuance of Common Stock for: | | | | | | | | | | | | | | | | | | | |
| Exercise of Stock Options | | | 1,704 | | | 2 | | | 15 | | | | | | | | | 17 | |
| Mergers and Acquisitions | | | 349,468 | | | 349 | | | 4,252 | | | | | | | | | 4,601 | |
| Employee Stock Purchase Plan | | | | | | | | | (30 | ) | | | | | | | | (30 | ) |
| Restricted Share Grants | | | 13,876 | | | 14 | | | 166 | | | | | | | | | 180 | |
| Stock Option Grants | | | | | | | | | 29 | | | | | | | | | 29 | |
| | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2006 | | | 11,008,562 | | $ | 11,008 | | $ | 68,216 | | $ | 13,450 | | $ | (283 | ) | $ | 92,391 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Dollars in thousands
| Years Ended December 31, |
|---|
| 2005
| | 2004
| | 2003
|
|---|
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | |
| Net Income | | | $ | 9,721 | | $ | 7,239 | | $ | 8,168 | |
| Adjustments to Reconcile Net Income to Net Cash from Operating Activities: | | |
| Net Amortization on Securities | | | | 524 | | | 1,042 | | | 2,134 | |
| Depreciation and Amortization | | | | 2,564 | | | 2,734 | | | 2,585 | |
| Amortization and Impairment of Mortgage Servicing Rights | | | | 301 | | | 504 | | | 660 | |
| Loans Originated for Sale | | | | (62,886 | ) | | (63,158 | ) | | (169,538 | ) |
| Proceeds from Sales Of Loans Held-for-Sale | | | | 64,327 | | | 61,768 | | | 182,378 | |
| Loss in Investment in Limited Partnership | | | | 83 | | | 162 | | | 223 | |
| Provision for Loan Losses | | | | 1,903 | | | 2,015 | | | 811 | |
| Gain on Sales of Loans, net | | | | (927 | ) | | (959 | ) | | (2,808 | ) |
| Loss / (Gain) on Securities, net | | | | — | | | 3,678 | | | (80 | ) |
| Loss / (Gain) on Sales of Other Real Estate and Repossessed Assets | | | | (73 | ) | | (17 | ) | | 222 | |
| Loss / (Gain) on Disposition and Impairment of Premises and Equipment | | | | (312 | ) | | 30 | | | 20 | |
| Loss on Extinguishment of Borrowings | | | | — | | | — | | | 1,898 | |
| Director Stock Awards | | | | — | | | — | | | 304 | |
| FHLB Stock Dividends | | | | (287 | ) | | (598 | ) | | (482 | ) |
| Increase in Cash Surrender Value of Company Owned Life Insurance (COLI) | | | | (527 | ) | | (709 | ) | | (432 | ) |
| Change in Assets and Liabilities: | | |
| Interest Receivable and Other Assets | | | | 905 | | | (1,272 | ) | | (531 | ) |
| Interest Payable and Other Liabilities | | | | (865 | ) | | (717 | ) | | (125 | ) |
|
| |
| |
| |
| Net Cash from Operating Activities | | | | 14,451 | | | 11,742 | | | 25,407 | |
| |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Proceeds from Maturities of Securities Available-for-Sale | | | | 54,565 | | | 36,745 | | | 140,227 | |
| Proceeds from Sales of Securities Available-for-Sale | | | | — | | | 1,986 | | | 18,239 | |
| Purchase of Securities Available-for-Sale | | | | (57,004 | ) | | (29,059 | ) | | (135,116 | ) |
| Proceeds from Maturities of Securities Held-to-Maturity | | | | 4,639 | | | 4,095 | | | 3,420 | |
| Purchase of Loans | | | | (8,490 | ) | | (12,837 | ) | | (5,570 | ) |
| Proceeds from Sales of Loans | | | | 12,260 | | | 2,894 | | | 2,644 | |
| Loans Made to Customers, net of Payments Received | | | | 343 | | | (10,216 | ) | | 219 | |
| Proceeds from Sales of Other Real Estate | | | | 1,014 | | | 1,306 | | | 1,576 | |
| Property and Equipment Expenditures | | | | (1,414 | ) | | (1,328 | ) | | (2,083 | ) |
| Proceeds from Sales of Property and Equipment | | | | 446 | | | 364 | | | 6 | |
| Purchase of Company Owned Life Insurance | | | | — | | | — | | | (10,000 | ) |
| Acquire Banking Entities | | | | 1,000 | | | — | | | — | |
| Acquire Insurance Agencies | | | | — | | | — | | | (2,513 | ) |
|
| |
| |
| |
| Net Cash from Investing Activities | | | | 7,359 | | | (6,050 | ) | | 11,049 | |
| |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Change in Deposits | | | | (31,431 | ) | | 33,250 | | | 9,939 | |
| Change in Short-term Borrowings | | | | 13,115 | | | (10,006 | ) | | 25,047 | |
| Advances in Long-term Debt | | | | 36,500 | | | 4,500 | | | 8,000 | |
| Repayments of Long-term Debt | | | | (41,835 | ) | | (11,439 | ) | | (54,705 | ) |
| Issuance of Common Stock | | | | 48 | | | 34 | | | 28 | |
| Purchase / Retire Common Stock | | | | (6,771 | ) | | (708 | ) | | (21,846 | ) |
| Employee Stock Purchase Plan | | | | (63 | ) | | (76 | ) | | (120 | ) |
| Dividends Paid | | | | (6,108 | ) | | (6,114 | ) | | (5,984 | ) |
| Purchase of Interests in Fractional Shares | | | | — | | | — | | | (27 | ) |
|
| |
| |
| |
| Net Cash from Financing Activities | | | | (36,545 | ) | | 9,441 | | | (39,668 | ) |
|
| |
| |
| |
| |
| Net Change in Cash and Cash Equivalents | | | | (14,735 | ) | | 15,133 | | | (3,212 | ) |
| Cash and Cash Equivalents at Beginning of Year | | | | 47,666 | | | 32,533 | | | 35,745 | |
|
| |
| |
| |
| Cash and Cash Equivalents at End of Year | | | $ | 32,931 | | $ | 47,666 | | $ | 32,533 | |
|
| |
| |
| |
| Cash Paid During the Year for: | | |
| Interest | | | $ | 17,625 | | $ | 16,813 | | $ | 21,627 | |
| Income Taxes | | | | 3,210 | | | 786 | | | 1,026 | |
| | | Years Ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
| Net Income | | $ | 10,221 | | $ | 9,721 | | $ | 7,239 | |
| Adjustments to Reconcile Net Income to Net Cash from Operating Activities: | | | | | | | | | | |
| Net (Accretion) / Amortization on Securities | | | (180 | ) | | 524 | | | 1,042 | |
| Depreciation and Amortization | | | 2,818 | | | 2,578 | | | 2,739 | |
| Amortization and Impairment of Mortgage Servicing Rights | | | 271 | | | 301 | | | 504 | |
| Loans Originated for Sale | | | (55,281 | ) | | (62,886 | ) | | (63,158 | ) |
| Proceeds from Sales of Loans Held-for-Sale | | | 55,985 | | | 64,327 | | | 61,768 | |
| Loss in Investment in Limited Partnership | | | 397 | | | 83 | | | 162 | |
| Provision for Loan Losses | | | 925 | | | 1,903 | | | 2,015 | |
| Gain on Sale of Loans and Mortgage Servicing Rights, net | | | (915 | ) | | (927 | ) | | (959 | ) |
| Loss / (Gain) on Securities, net | | | (951 | ) | | — | | | 3,678 | |
| Loss / (Gain) on Sales of Other Real Estate and Repossessed Assets | | | 23 | | | (73 | ) | | (17 | ) |
| Loss / (Gain) on Disposition and Impairment of Premises and Equipment | | | 23 | | | (312 | ) | | 30 | |
| FHLB Stock Dividends | | | — | | | (287 | ) | | (598 | ) |
| Increase in Cash Surrender Value of Company Owned Life Insurance | | | (865 | ) | | (527 | ) | | (709 | ) |
| Equity Based Compensation | | | 284 | | | — | | | — | |
| Change in Assets and Liabilities: | | | | | | | | | | |
| Interest Receivable and Other Assets | | | (1,300 | ) | | 905 | | | (1,272 | ) |
| Interest Payable and Other Liabilities | | | 633 | | | (865 | ) | | (717 | ) |
Net Cash from Operating Activities | | | 12,088 | | | 14,465 | | | 11,747 | |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Proceeds from Maturities of Securities Available-for-Sale | | | 60,033 | | | 54,565 | | | 36,745 | |
| Proceeds from Sales of Securities Available-for-Sale | | | 13,001 | | | — | | | 1,986 | |
| Purchase of Securities Available-for-Sale | | | (62,006 | ) | | (57,004 | ) | | (29,059 | ) |
| Proceeds from Maturities of Securities Held-to-Maturity | | | 2,558 | | | 4,639 | | | 4,095 | |
| Proceeds from Redemption of Federal Home Loan Bank Stock | | | 3,862 | | | — | | | — | |
| Purchase of Loans | | | (22,043 | ) | | (8,490 | ) | | (12,837 | ) |
| Proceeds from Sales of Loans | | | 30,520 | | | 12,260 | | | 2,894 | |
| Loans Made to Customers, net of Payments Received | | | (109,862 | ) | | 345 | | | (10,194 | ) |
| Proceeds from Sale of Mortgage Servicing Rights | | | 3,554 | | | — | | | — | |
| Proceeds from Sales of Other Real Estate | | | 890 | | | 1,014 | | | 1,306 | |
| Property and Equipment Expenditures | | | (3,461 | ) | | (1,441 | ) | | (1,355 | ) |
| Proceeds from Sales of Property and Equipment | | | 292 | | | 446 | | | 364 | |
| Acquire Banking Entities | | | (4,111 | ) | | 1,000 | | | — | |
| Acquire Insurance Agencies | | | (2,260 | ) | | — | | | — | |
Net Cash from Investing Activities | | | (89,033 | ) | | 7,334 | | | (6,055 | ) |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| Change in Deposits | | | 73,366 | | | (31,420 | ) | | 33,250 | |
| Change in Short-term Borrowings | | | 12,623 | | | 13,115 | | | (10,006 | ) |
| Advances in Long-term Debt | | | 26,500 | | | 36,500 | | | 4,500 | |
| Repayments of Long-term Debt | | | (32,530 | ) | | (41,835 | ) | | (11,439 | ) |
| Issuance of Common Stock | | | 17 | | | 48 | | | 34 | |
| Purchase / Retire Common Stock | | | — | | | (6,771 | ) | | (708 | ) |
| Employee Stock Purchase Plan | | | (105 | ) | | (63 | ) | | (76 | ) |
| Dividends Paid | | | (6,162 | ) | | (6,108 | ) | | (6,114 | ) |
Net Cash from Financing Activities | | | 73,709 | | | (36,534 | ) | | 9,441 | |
| | | | | | | | | | | |
Net Change in Cash and Cash Equivalents | | | (3,236 | ) | | (14,735 | ) | | 15,133 | |
| Cash and Cash Equivalents at Beginning of Year | | | 32,931 | | | 47,666 | | | 32,533 | |
| Cash and Cash Equivalents at End of Year | | $ | 29,695 | | $ | 32,931 | | $ | 47,666 | |
| | | | | | | | | | | |
Cash Paid During the Year for: | | | | | | | | | | |
| Interest | | $ | 25,805 | | $ | 17,625 | | $ | 16,813 | |
| Income Taxes | | | 3,605 | | | 3,210 | | | 786 | |
See accompanying notes to consolidated financial statements.
Notes to the Consolidated Financial Statements
Dollars in thousands, except per share data NOTE 1 –- Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
German American Bancorp, Inc. operations are primarily comprised of fourthree business segments: core banking, mortgage banking, financialtrust and investment advisory services, and insurance operations. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting principles. The more significant policies are described below. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. Certain prior year amounts have been reclassified to conform with current classifications. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Estimates susceptible to change in the near term include the allowance for loan losses, other-than-temporary impairment of securities, the fair value of mortgage servicing rights and financial instruments, the valuation allowance on deferred tax assets, and loss contingencies.
Securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity. These include securities that management may use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar reasons. Equity
Securitiessecurities with readily determinable fair values are classified as available-for-sale. Securities held as available-for-sale are reported at market value with unrealized gains or losses included as a separate component of equity, net of tax. Securities classified as held-to-maturity are securities that the Company has both the ability and positive intent to hold to maturity. Securities held-to-maturity are carried at amortized cost.
Premium amortization is deducted from, and discount accretion is added to, interest income using the level yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. The cost of securities sold is computed on the identified securities method. Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market value, in aggregate. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold
withon a servicing
rights retained. The carrying value of mortgage loans sold is reduced by the cost allocated to the servicing right.released basis. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on unpaid principal balance and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments.
Interest income is discontinued on impaired loans and loans past due 90 days or more, unless the loan is well secured and in process of collection. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Purchased Loans: The Company purchases individual loans and groups of loans. Beginning in 2005, purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.
Purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 1 –- Summary of Significant Accounting Policies (continued) Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.
Loan impairment is reported when full repayment under the terms of the loan is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial
agricultural and
poultryagricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Premises, Furniture and Equipment
Land is carried at cost. Premises, furniture, and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years. Furniture, fixtures, and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.
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.
Goodwill and Other Intangible Assets
Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is not amortized, but is assessed at least annually for impairment with any such impairment recognized in the period identified.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets. They are initially measured at fair value and then are amortized
on a straight-line method over their estimated useful lives, which range from 7 to 10 years.
Company Owned Life Insurance
The Company has purchased life insurance policies on certain directors and executives. This life insurance is recorded at its cash surrender value or the amount that can be realized.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 1 –- Summary of Significant Accounting Policies (continued)
Servicing Rights
Servicing
During the second quarter of 2006, the Company sold its mortgage loan servicing rights
areportfolio and commenced selling all secondary market residential mortgage loans on a servicing-released basis. Prior to the second quarter of 2006 servicing rights were recognized and included with other assets for purchased rights and for the allocated value of retained servicing rights on loans sold. Servicing rights
arewere expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment
iswas evaluated based on the fair value of the rights, using groupings of the underlying loans as to type and age, with any impairment of a grouping reported as a valuation allowance. Fair value
iswas determined based upon discounted cash flows using market based assumptions.
Loss contingencies
Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stock Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment.” The Company elected to utilize the modified prospective transition method, therefore, prior period results have not been
restated. Prior to the adoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Additional information related to stock based compensation is included in Note 9 to the Consolidated Financial Statements.
Compensation expense under stock options iswas reported, if applicable, using the intrinsic value method. Under this method, no compensation expense iswas recognized for stock options granted at or above fair market value. Compensation expense iswas recognized for stock option modifications, if applicable. Financial Accounting Standard No. 123 requiresrequired pro forma disclosures for companies that dodid 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.plans in periods prior to 2006. | 2005
| | 2004
| | 2003
|
|---|
| |
| Net Income as Reported | | $ 9,721 | | $ 7,239 | | $ 8,168 | |
| Compensation Expense Under Fair Value Method, Net of Tax | | 317 | | 246 | | 268 | |
|
| |
| |
| |
| Pro forma Net Income | | $ 9,404 | | $ 6,993 | | $ 7,900 | |
| Pro forma Earnings per Share | | $ 0.86 | | $ 0.64 | | $ 0.71 | |
| Proforma Diluted Earnings per Share | | $ 0.86 | | $ 0.64 | | $ 0.70 | |
| Earnings per Share as Reported | | $ 0.89 | | $ 0.66 | | $ 0.73 | |
| Diluted Earnings per Share as Reported | | $ 0.89 | | $ 0.66 | | $ 0.73 | |
| | | 2005 | | 2004 | |
| | | | | | |
| Net Income as Reported | | $ | 9,721 | | $ | 7,239 | |
| Compensation Expense Under Fair Value Method, Net of Tax | | | 317 | | | 246 | |
| Pro forma Net Income | | $ | 9,404 | | $ | 6,993 | |
| Pro forma Earnings per Share and Diluted Earnings per Share | | $ | 0.86 | | $ | 0.64 | |
| Earnings per Share and Diluted Earnings per Share as Reported | | $ | 0.89 | | $ | 0.66 | |
For options granted during 2005
2004 and
2003,2004, the weighted-average fair values at grant date
arewere $1.65
$2.89 and
$3.04,$2.89, respectively. The fair value of options granted during 2005
2004 and
20032004 was estimated using the following weighted-average information: risk-free interest rate of 3.41%
, and 2.79%
and 2.56%, expected life of 3.4
4.3 and
4.44.3 years, expected volatility of stock price of 17%
, and 24%
and 25%, and expected dividends of 3.56%
, and 3.20%
and 3.11% per year.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in minimum pension liability, which are also recognized as a separate component of equity.
Income Taxes
Deferred tax liabilities and assets are determined at each balance sheet date and are the result of differences in the financial statement and tax bases of assets and liabilities. Income tax expense is the amount due on the current year tax returns plus or minus the change in deferred taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
Retirement Plans
Pension expense under the suspended defined benefit plan is the net of interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 1 –- Summary of Significant Accounting Policies (continued)
Earnings Per Share
Earnings per share
isare based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share
showsshow the potential dilutive effect of additional common shares issuable under
the Company’s stock
options.based compensation plans. Earnings per share
isare retroactively restated for stock dividends.
Cash Flow Reporting
The Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial institutions. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business, or the values of assets and liabilities not considered financial instruments.
New Accounting Pronouncements
Effective January 1, 2006, the Company adopted SFAS No. 123R, Share-based Payment. See “Stock Based Compensation” above for further discussion of the effect of adopting this standard. For 2006, adopting this standard resulted in a reduction of net income of $64 or less than $0.01 per share.
FAS 123R
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132R. This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet, beginning with year end 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end, starting in 2008. Adoption had no impact on the financial statements of the Company because the suspended plan was fully funded.
SAB 108 - In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108) - Financial Statements - Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a potential current year misstatement. Prior to SAB 108, companies might evaluate the materiality of financial statement misstatements using either the income statement (rollover) or balance sheet (iron curtain) approach, with the income statement approach focusing on new misstatements added in the current year, and the balance sheet approach focusing on the cumulative amount of misstatements present in a company’s balance sheet. Misstatements that would be material under one approach could be viewed as immaterial under another approach, and not be corrected. SAB 108 now requires that companies view financial statement misstatements as material if they are material according to either the income statement or balance sheet approach. This statement is effective as of the end of the fiscal year ending after December 15, 2006. The adoption of SAB 108 had no effect on the Company’s financial statements for the year ending December 31, 2006.
Effect of Newly Issued but Not Yet Effective Accounting Standards
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 1 - Summary of Significant Accounting Policies (continued)
In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all public companiesseparately recognized servicing assets and servicing liabilities to record compensation costbe initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for share-based payments providedsecurities which are identified as offsetting the entity’s exposure to employeeschanges in return for employee service. The cost is measured at the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the share-based payment awards when granted,statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Management does not expect the adoption of this coststatement will have a material impact on its consolidated financial position or results of operations.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is expensed overeffective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the employeeimpact of the adoption of this standard.
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 will not have a material effect on the financial statements.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period which is normallywhen a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the vesting period of optionspost-employment benefit cost for the continuing life insurance or the period of participation in the stock purchase plan. FAS 123R will apply to awards granted or modified on or after January 1, 2006. Compensation cost will also be recorded for prior award grants that vest after the date of adoption. The effect on results of operations will dependbased on the levelfuture death benefit depending on the contractual terms of future stock option grants, the future levelunderlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company has not completed its evaluation of participation and annual pricingthe impact of adoption of EITF 06-4.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the employee stock purchase plan,insurance contract. It also requires that if the calculationcontract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of this issue will have a material impact on the fair value offinancial statements.
Notes to the stock option and purchase plan awards grantedConsolidated Financial StatementsDollars in the future, as well as stock option vesting periods, and cannot currently be predicted. All existing stock options are fully vested and will result in no compensation expense after adoption. Employee stock purchase plan participation from January 1, 2006 through the plan year end of August 16, 2006 is expected to result in approximately $52 of compensation expense in 2006.thousands, except per share data
The amortized cost, gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows: | Amortized
Cost
|
| Gross
Unrealized
Gains
|
| Gross
Unrealized
Losses
|
| Fair
Value
|
|---|
| |
| Securities Available-for-Sale: | | | | | | | | | | | | | | |
| 2005 | | |
| U.S. Treasury Securities and Obligations of | | |
| U.S. Government Corporations and Agencies | | | $ | 13,631 | | $ | 11 | | $ | (150 | ) | $ | 13,492 | |
| Obligations of State and Political Subdivisions | | | | 23,075 | | | 463 | | | (11 | ) | | 23,527 | |
| Asset- / Mortgage-backed Securities | | | | 128,602 | | | 49 | | | (2,807 | ) | | 125,844 | |
| Corporate Securities | | | | 500 | | | — | | | — | | | 500 | |
| Equity Securities | | | | 17,350 | | | 1,287 | | | (850 | ) | | 17,787 | |
|
| |
| |
| |
| |
| Total | | | $ | 183,158 | | $ | 1,810 | | $ | (3,818 | ) | $ | 181,150 | |
|
| |
| |
| |
| |
| |
| 2004 | | |
| U.S. Treasury Securities and Obligations of | | |
| U.S. Government Corporations and Agencies | | | $ | 4,060 | | $ | — | | $ | (26 | ) | $ | 4,034 | |
| Obligations of State and Political Subdivisions | | | | 29,807 | | | 829 | | | (15 | ) | | 30,621 | |
| Asset- / Mortgage-backed Securities | | | | 131,614 | | | 455 | | | (868 | ) | | 131,201 | |
| Corporate Securities | | | | 503 | | | — | | | — | | | 503 | |
| Equity Securities | | | | 15,149 | | | 168 | | | — | | | 15,317 | |
|
| |
| |
| |
| |
| Total | | | $ | 181,133 | | $ | 1,452 | | $ | (909 | ) | $ | 181,676 | |
|
| |
| |
| |
| |
| | | | | Gross | | Gross | | | |
| | | Amortized | | Unrealized | | Unrealized | | Fair | |
Securities Available-for-Sale: | | Cost | | Gains | | Losses | | Value | |
2006 | | | | | | | | | |
| U.S. Treasury and Agency Securities | | $ | 28,083 | | $ | 155 | | $ | (105 | ) | $ | 28,133 | |
| Obligations of State and Political Subdivisions | | | 19,653 | | | 278 | | | (3 | ) | | 19,928 | |
| Asset- / Mortgage-backed Securities | | | 125,340 | | | 350 | | | (1,831 | ) | | 123,859 | |
| Corporate Securities | | | — | | | — | | | — | | | — | |
| Equity Securities | | | 6,236 | | | 1,066 | | | — | | | 7,302 | |
| Total | | $ | 179,312 | | $ | 1,849 | | $ | (1,939 | ) | $ | 179,222 | |
38
Notes to the Consolidated Financial Statements (continued)2005 | | | | | | | | | |
| U.S. Treasury and Agency Securities | | $ | 13,631 | | $ | 11 | | $ | (150 | ) | $ | 13,492 | |
| Obligations of State and Political Subdivisions | | | 23,075 | | | 463 | | | (11 | ) | | 23,527 | |
| Asset- / Mortgage-backed Securities | | | 128,602 | | | 49 | | | (2,807 | ) | | 125,844 | |
| Corporate Securities | | | 500 | | | — | | | — | | | 500 | |
| Equity Securities | | | 17,350 | | | 1,287 | | | (850 | ) | | 17,787 | |
| Total | | $ | 183,158 | | $ | 1,810 | | $ | (3,818 | ) | $ | 181,150 | |
Dollars in thousands, except per share data
NOTE 2 – Securities (continued)
The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity were as follows:
| Carrying
Amount
|
| Gross
Unrecognized
Gains
|
| Gross
Unrecognized
Losses
|
| Fair
Value
|
|---|
| |
| Securities Held-to-Maturity: | | | | | | | | | | | | | | |
| 2005 | | |
| Obligations of State and Political Subdivisions | | | $ | 8,684 | | $ | 127 | | $ | — | | $ | 8,811 | |
| |
| 2004 | | |
| Obligations of State and Political Subdivisions | | | $ | 13,318 | | $ | 319 | | $ | (1 | ) | $ | 13,636 | |
| | | | | Gross | | Gross | | | |
| | | Carrying | | Unrecognized | | Unrecognized | | Fair | |
Securities Held-to-Maturity: | | Amount | | Gains | | Losses | | Value | |
2006 | | | | | | | | | |
| Obligations of State and Political Subdivisions | | $ | 6,135 | | $ | 57 | | $ | — | | $ | 6,192 | |
| | | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | |
| Obligations of State and Political Subdivisions | | $ | 8,684 | | $ | 127 | | $ | — | | $ | 8,811 | |
The amortized cost and fair value of Securities at December 31, 20052006 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Asset-backed, Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately. | Amortized
Cost
| | Fair
Value
|
|---|
| |
| Securities Available-for-Sale: | | | | | | | | |
| Due in one year or less | | | $ | 1,616 | | $ | 1,613 | |
| Due after one year through five years | | | | 18,151 | | | 18,116 | |
| Due after five years through ten years | | | | 9,432 | | | 9,662 | |
| Due after ten years | | | | 8,007 | | | 8,128 | |
| Asset- / Mortgage-backed Securities | | | | 128,602 | | | 125,844 | |
| Equity Securities | | | | 17,350 | | | 17,787 | |
|
| |
| |
| Totals | | | $ | 183,158 | | $ | 181,150 | |
|
| |
| |
| |
| Carrying
Amount
| | Fair
Value
|
|---|
| |
| Securities Held-to-Maturity: | | |
| Due in one year or less | | | $ | 1,112 | | $ | 1,116 | |
| Due after one year through five years | | | | 3,708 | | | 3,764 | |
| Due after five years through ten years | | | | 1,303 | | | 1,325 | |
| Due after ten years | | | | 2,561 | | | 2,606 | |
|
| |
| |
| Totals | | | $ | 8,684 | | $ | 8,811 | |
|
| |
| |
| | | Amortized | | Fair | |
| | | Cost | | Value | |
Securities Available-for-Sale: | | | | | |
| Due in one year or less | | $ | 4,551 | | $ | 4,517 | |
| Due after one year through five years | | | 30,587 | | | 30,731 | |
| Due after five years through ten years | | | 9,182 | | | 9,359 | |
| Due after ten years | | | 3,416 | | | 3,454 | |
| Asset- / Mortgage-backed Securities | | | 125,340 | | | 123,859 | |
| Equity Securities | | | 6,236 | | | 7,302 | |
| Totals | | $ | 179,312 | | $ | 179,222 | |
| | | Carrying | | Fair | |
| | | Amount | | Value | |
Securities Held-to-Maturity: | | | | | |
| Due in one year or less | | $ | 1,409 | | $ | 1,411 | |
| Due after one year through five years | | | 2,304 | | | 2,327 | |
| Due after five years through ten years | | | 1,005 | | | 1,028 | |
| Due after ten years | | | 1,417 | | | 1,426 | |
| Totals | | $ | 6,135 | | $ | 6,192 | |
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 2 - Securities (continued)
Proceeds from the Sales of Securities are summarized below:
| 2005
Available-
for-Sale | | 2004
Available-
for-Sale | | 2003
Available-
for-Sale |
|---|
| | | |
|---|
| |
| Proceeds from Sales and Calls | | | $ — | | | $ | 1,986 | | $ | 18,239 | |
| Gross Gains on Sales and Calls | | | — | | | | 5 | | | 126 | |
| Gross Losses on Sales and Calls | | | — | | | | — | | | (46 | ) |
| |
| Income Taxes on Gross Gains | | | — | | | | 2 | | | 43 | |
| Income Taxes on Gross Losses | | | — | | | | — | | | (16 | ) |
| | | 2006 | | 2005 | | 2004 | |
| | Available- | | Available- | | Available- | |
| | for-Sale | | for-Sale | | for-Sale | |
| | | | | | | | |
| Proceeds from Sales and Calls | | $ | 13,001 | | $ | — | | | 1,986 | |
| Gross Gains on Sales and Calls | | | 951 | | | — | | | 5 | |
| Gross Losses on Sales and Calls | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Income Taxes on Gross Gains | | | 323 | | | — | | | 2 | |
| Income Taxes on Gross Losses | | | — | | | — | | | — | |
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $116,683$105,798 and $94,995$116,683 as of December 31, 2006 and 2005 and 2004, respectively.
39
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 2 – Securities (continued)
Below is a summary of securities with unrealized losses as of year-end
20052006 and
2004,2005, presented by length of time the securities have been in
ana continuous unrealized loss position:
| At December 31, 2005: | Less than 12 Months
| | 12 Months or More
| | Total
|
|---|
| Fair
Value
| | Unrealized
Loss
| | Fair
Value
| | Unrealized
Loss
| | Fair
Value
| | Unrealized
Loss
|
|---|
| U.S. Treasury Securities and Obligations of | | | | | | | | | | | | | | | | | | | | |
| Government Corporations and Agencies | | | $ | 8,125 | | $ | (105 | ) | $ | 1,978 | | $ | (45 | ) | $ | 10,103 | | $ | (150 | ) |
| Obligations of State and Political Subdivisions | | | | — | | | — | | | 444 | | | (11 | ) | | 444 | | | (11 | ) |
| Asset- / Mortgage-backed Securities | | | | 65,906 | | | (1,419 | ) | | 58,586 | | | (1,388 | ) | | 124,492 | | | (2,807 | ) |
| Corporate Securities | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity Securities | | | | 7,050 | | | (850 | ) | | — | | | — | | | 7,050 | | | (850 | ) |
|
| |
| |
| |
| |
| |
| |
| Total | | | $ | 81,081 | | $ | (2,374 | ) | $ | 61,008 | | $ | (1,444 | ) | $ | 142,089 | | $ | (3,818 | ) |
|
| |
| |
| |
| |
| |
| |
| |
| |
| At December 31, 2004: | Less than 12 Months
| | 12 Months or More
| | Total
|
|---|
| Fair
Value
| | Unrealized
Loss
| | Fair
Value
| | Unrealized
Loss
| | Fair
Value
| | Unrealized
Loss
|
|---|
| U.S. Treasury Securities and Obligations of | | |
| Government Corporations and Agencies | | | $ | 2,534 | | $ | (26 | ) | $ | — | | $ | — | | $ | 2,534 | | $ | (26 | ) |
| Obligations of State and Political Subdivisions | | | | 2,085 | | | (16 | ) | | — | | | — | | | 2,085 | | | (16 | ) |
| Asset- / Mortgage-backed Securities | | | | 74,038 | | | (570 | ) | | 19,458 | | | (298 | ) | | 93,496 | | | (868 | ) |
| Corporate Securities | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity Securities | | | | — | | | — | | | — | | | — | | | — | | | — | |
|
| |
| |
| |
| |
| |
| |
| Total | | | $ | 78,657 | | $ | (612 | ) | $ | 19,458 | | $ | (298 | ) | $ | 98,115 | | $ | (910 | ) |
|
| |
| |
| |
| |
| |
| |
At December 31, 2006: | | Less than 12 Months | | 12 Months or More | | Total | |
| | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | |
| U.S. Treasury Securities and Obligations of | | | | | | | | | | | | | |
| Government Corporations and Agencies | | $ | 5,835 | | $ | (19 | ) | $ | 6,511 | | $ | (86 | ) | $ | 12,346 | | $ | (105 | ) |
| Obligations of State and Political Subdivisions | | | 1,232 | | | (3 | ) | | — | | | — | | | 1,232 | | | (3 | ) |
| Asset- / Mortgage-backed Securities | | | 7,123 | | | (33 | ) | | 84,439 | | | (1,798 | ) | | 91,562 | | | (1,831 | ) |
| Corporate Securities | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity Securities | | | — | | | — | | | — | | | — | | | — | | | — | |
| Total | | $ | 14,190 | | $ | (55 | ) | $ | 90,950 | | $ | (1,884 | ) | $ | 105,140 | | $ | (1,939 | ) |
At December 31, 2005: | | Less than 12 Months | | 12 Months or More | | | | Total | |
| | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | |
| U.S. Treasury Securities and Obligations of | | | | | | | | | | | | | |
| Government Corporations and Agencies | | $ | 8,125 | | $ | (105 | ) | $ | 1,978 | | $ | (45 | ) | $ | 10,103 | | $ | (150 | ) |
| Obligations of State and Political Subdivisions | | | — | | | — | | | 444 | | | (11 | ) | | 444 | | | (11 | ) |
| Asset- / Mortgage-backed Securities | | | 65,906 | | | (1,419 | ) | | 58,586 | | | (1,388 | ) | | 124,492 | | | (2,807 | ) |
| Corporate Securities | | | — | | | — | | | — | | | — | | | — | | | — | |
| Equity Securities | | | 7,050 | | | (850 | ) | | — | | | — | | | 7,050 | | | (850 | ) |
| Total | | $ | 81,081 | | $ | (2,374 | ) | $ | 61,008 | | $ | (1,444 | ) | $ | 142,089 | | $ | (3,818 | ) |
Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
TheAt December 31, 2006 and 2005, the Company had the intent and ability to hold these securities for the foreseeable future, and the decline in fair value was largely due to changes in market interest rates, therefore, the Company does not consider these securities to be other-than-temporarily impaired.
The Company’s equity portfolio is primarily comprised of floating rate preferred stock issued by the Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA). In the year ended December 31, 2004, the Company recognized a $3.68 million non-cash, pre-tax charge for the other-than-temporary decline in value on its floating rate preferred stock portfolio. The Company accounts for these securities in accordance with SFAS No. 115, which requires that if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss must be recognized as expense in the income statement. During the quarter ended December 31, 2004, public disclosures regarding accounting practices at FNMA and a multi-billion dollar FNMA preferred stock issuance with a substantially different structure and higher yield than previous offerings had a detrimental effect on the fair value of both the FHLMC and FNMA preferred stock holdings. As a result of these factors and the magnitude and length of time the market value had been below cost, management could not forecast full recovery of the fair values in a reasonable time period and concluded that the preferred stock is other than temporarily impaired. Accordingly, the other-than-temporary impairment was recognized in the income statement as an investment securities loss.
A portion of the floating rate preferred stock portfolio has declined in value during 2005 and this decline is considered to be largely due to changes in market interest rates. Based on the length of time, extent and nature of this decline, as well as market performance subsequent to December 31, 2005, the Company does not consider these securities to have additional other-than-temporary impairment.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 3 –- Loans | 2005
| | 2004
| |
|---|
| | | |
|---|
| Loans were comprised of the following classifications at December 31: | | | | | | | | | | | |
| |
| Residential Mortgage Loans | | | $ | 102,891 | | $ | 94,800 | |
| Agricultural Loans | | | | 101,355 | | | 99,557 | |
| Commercial and Industrial Loans | | | | 319,241 | | | 313,798 | |
| Consumer Loans | | | | 129,587 | | | 122,888 | |
|
| |
| |
| |
| Totals | | | $ | 653,074 | | $ | 631,043 | |
|
| |
| |
| |
| Nonperforming loans were as follows at December 31: | | |
| |
| Loans past due over 90 days and accruing and Restructured Loans | | | $ | 944 | | $ | 831 | |
| Non-accrual Loans | | | | 14,763 | | | 5,750 | |
|
| |
| |
| |
| Totals | | | $ | 15,707 | | $ | 6,581 | |
|
| |
| |
| |
| 2005
| | 2004
| |
|---|
| Information regarding impaired loans: | | |
| |
| Year-end impaired loans with no allowance for loan losses allocated | | | $ | 1,546 | | $ | 905 | |
| | | |
| Year-end impaired loans with allowance for loan losses allocated | | | | 11,740 | | | 4,618 | |
| | | |
| |
| Amount of allowance allocated to impaired loans | | | | 2,515 | | | 992 | | | 2003 | |
| | |
|
| |
| Average balance of impaired loans during the year | | | | 10,465 | | | 4,400 | | $ | 1,313 | |
| | | |
| |
| Interest income recognized during impairment | | | | 62 | | | 263 | | | 103 | |
| Interest income recognized on cash basis | | | | 52 | | | 243 | | | 102 | |
| | | |
Loans were comprised of the following classifications at December 31:
| | | 2006 | | 2005 | |
| | | | | | |
| Residential Mortgage Loans | | $ | 114,687 | | $ | 102,891 | |
| Agricultural Loans | | | 148,872 | | | 101,355 | |
| Commercial and Industrial Loans | | | 402,285 | | | 319,681 | |
| Consumer Loans | | | 132,791 | | | 129,587 | |
| | | | | | | | |
| Totals | | $ | 798,635 | | $ | 653,514 | |
| Nonperforming loans were as follows at December 31: |
| Loans past due over 90 days and accruing and Restructured Loans | | $ | — | | | 944 | |
| Non-accrual Loans | | | 9,652 | | | 14,763 | |
| Totals | | $ | 9,652 | | $ | 15,707 | |
Information regarding impaired loans:
| | | 2006 | | 2005 | | | |
| | | | | | | | |
| Year-end impaired loans with no allowance for loan losses allocated | | $ | 5,672 | | $ | 1,546 | | | | |
| Year-end impaired loans with allowance for loan losses allocated | | | 2,483 | | | 11,740 | | | | |
| | | | | | | | | | | |
| Amount of allowance allocated to impaired loans | | | 704 | | | 2,515 | | | 2004 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Average balance of impaired loans during the year | | | 10,202 | | | 10,465 | | $ | 4,400 | |
| | | | | | | | | | | |
| Interest income recognized during impairment | | | 157 | | | 62 | | | 263 | |
| Interest income recognized on cash basis | | | 149 | | | 52 | | | 243 | |
The Company purchased a Southern Indiana-based agricultural loan portfolio from a regional banking company in December 2006 totaling $42.1 million. There was no evidence of credit deterioration since origination on these loans as defined in Statement of Position (SOP) 03-3.
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
2005.2006. A summary of the activity of these loans follows:
Balance
January 1, | | Changes
in Persons | Deductions | Balance
December 31, |
|---|
2005
| Additions
| Included
| Collected
| Charged-off
| 2005
|
|---|
| $ 23,869 | | | $ 11,800 | | | $ 3,854 | | | $ (2,948 | ) | | $ — | | | $ 36,575 | |
Balance January 1, | | | | Changes in Persons | | Deductions | | Balance December 31, | |
2006 | | Additions | | Included | | Collected | | Charged-off | | 2006 | |
| $ 36,575 | | $ | 8,595 | | $ | (24,846) | | $ | (15,401) | | $ | — | | $ | $ 4,923 | |
NOTE 4 –- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses follows:
| 2005
| | 2004
| | 2003
|
|---|
| | | |
|---|
| Balance as of January 1 | | | $ | 8,801 | | $ | 8,265 | | $ | 8,301 | |
| Provision for Loan Losses | | | | 1,903 | | | 2,015 | | | 811 | |
| Allowance from Acquired Subsidiary | | | | 239 | | | — | | | — | |
| Recoveries of Prior Loan Losses | | | | 465 | | | 371 | | | 784 | |
| Loan Losses Charged to the Allowance | | | | (2,143 | ) | | (1,850 | ) | | (1,631 | ) |
|
| |
| |
| |
| Balance as of December 31 | | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | |
| |
| |
| |
| |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Balance as of January 1 | | $ | 9,265 | | $ | 8,801 | | $ | 8,265 | |
| Provision for Loan Losses | | | 925 | | | 1,903 | | | 2,015 | |
| Allowance from Acquired Subsidiary | | | 484 | | | 239 | | | — | |
| Recoveries of Prior Loan Losses | | | 403 | | | 465 | | | 371 | |
| Loan Losses Charged to the Allowance | | | (3,948 | ) | | (2,143 | ) | | (1,850 | ) |
| Balance as of December 31 | | $ | 7,129 | | $ | 9,265 | | $ | 8,801 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 5 –- Mortgage Banking
The amount of loans serviced by the Company for the benefit of others was
$335,531$0 and
$316,948$335,531 at December 31,
20052006 and
2004.2005. These loans are owned by outside parties and are not included in the assets of the Company.
Activity for capitalized mortgage servicing rights and the related valuation allowance was as follows. The net balance of mortgage servicing rights is included in Other Assets.
| 2005
| | 2004
| | 2003
|
|---|
| | | |
|---|
| Servicing Rights: | | | | | | | | | | | |
| Beginning of Year | | | $ | 3,399 | | $ | 3,368 | | $ | 2,694 | |
| Additions | | | | 707 | | | 643 | | | 1,687 | |
| Amortized to Expense | | | | (713 | ) | | (467 | ) | | (420 | ) |
| Direct Write-downs | | | | — | | | (145 | ) | | (593 | ) |
|
| |
| |
| |
| End of Year | | | $ | 3,393 | | $ | 3,399 | | | 3,368 | |
|
| |
| |
| |
| |
| Valuation Allowance: | | |
| Beginning of Year | | | $ | 777 | | $ | 885 | | $ | 1,238 | |
| Additions Expensed | | | | 131 | | | 363 | | | 706 | |
| Reductions Credited to Expense | | | | (543 | ) | | (326 | ) | | (466 | ) |
| Direct Write-downs | | | | — | | | (145 | ) | | (593 | ) |
|
| |
| |
| |
| End of Year | | | $ | 365 | | $ | 777 | | $ | 885 | |
|
| |
| |
| |
| | | 2006 | | 2005 | | 2004 | |
| Servicing Rights: | | | | | | | |
| Beginning of Year | | $ | 3,393 | | $ | 3,399 | | $ | 3,368 | |
| Additions | | | 313 | | | 707 | | | 643 | |
| Amortized to Expense | | | (316 | ) | | (713 | ) | | (467 | ) |
| Direct Write-downs | | | — | | | — | | | (145 | ) |
| Sale of Servicing | | | (3,390 | ) | | — | | | — | |
| End of Year | | $ | — | | $ | 3,393 | | $ | 3,399 | |
| | | | | | | | | | | |
| Valuation Allowance: | | | | | | | | | | |
| Beginning of Year | | $ | 365 | | $ | 777 | | $ | 885 | |
| Additions Expensed | | | — | | | 131 | | | 363 | |
| Reductions Credited to Expense | | | (45 | ) | | (543 | ) | | (326 | ) |
| Direct Write-downs | | | — | | | — | | | (145 | ) |
| Sale of Servicing | | | (320 | ) | | — | | | — | |
| End of Year | | $ | — | | $ | 365 | | $ | 777 | |
During the second quarter of 2006, the Company sold its mortgage loan servicing rights portfolio and commenced selling all secondary market residential mortgage loans on a servicing released basis. A gain of $198 was recorded on the sale of the mortgage loan servicing rights portfolio.
The fair value of servicing rights was $3,353
and $2,695 at December 31,
2005 and 2004.2005. For purposes of determining fair value, a discount rate of 9% was assumed at December 31,
2005 and 2004. Weighted2005. The weighted average prepayment
speedsspeed applied
werewas 12%
and 19% at December 31,
2005 and 2004.2005. Fair
values werevalue was determined using a discounted cash-flow model.
NOTE 6 –- Premises, Furniture, and Equipment
Premises, furniture, and equipment was comprised of the following classifications at December 31:
| 2005
| | 2004
|
|---|
| |
| | |
|---|
| Land | | | $ | 4,201 | | $ | 3,947 | |
| Buildings and Improvements | | | | 23,914 | | | 23,256 | |
| Furniture and Equipment | | | | 16,014 | | | 15,158 | |
|
| |
| |
| Total Premises, Furniture and Equipment | | | | 44,129 | | | 42,361 | |
| Less: Accumulated Depreciation | | | | (23,896 | ) | | (22,130 | ) |
|
| |
| |
| Total | | | $ | 20,233 | | $ | 20,231 | |
|
| |
| |
| | | 2006 | | 2005 | |
| | | | | | |
| Land | | $ | 4,541 | | $ | 4,201 | |
| Buildings and Improvements | | | 27,127 | | | 23,914 | |
| Furniture and Equipment | | | 17,191 | | | 16,014 | |
| Total Premises, Furniture and Equipment | | | 48,859 | | | 44,129 | |
| Less: Accumulated Depreciation | | | (25,614 | ) | | (23,896 | ) |
| Total | | $ | 23,245 | | $ | 20,233 | |
Depreciation expense was
$2,265, $2,131
and $2,308
for 2006, 2005 and
$2,418 for 2005, 2004,
and 2003, respectively.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
At year-end
2005,2006, stated maturities of time deposits were as follows:
| |
|---|
| |
|---|
| 2006 | | | $ | 137,223 | |
| 2007 | | | | 83,288 | |
| 2008 | | | | 74,374 | |
| 2009 | | | | 7,766 | |
| 2010 | | | | 6,046 | |
| Thereafter | | | | 77 | |
|
| |
| Total | | | $ | 308,774 | |
|
| |
| 2007 | | $ | 291,532 | |
| 2008 | | | 85,499 | |
| 2009 | | | 11,159 | |
| 2010 | | | 6,908 | |
| 2011 | | | 2,625 | |
| Thereafter | | | 2,534 | |
| Total | | $ | 400,257 | |
Time deposits of $100 or more at December 31, 2006 and 2005 were $120,547 and 2004 were $61,345 and $69,583.$61,345.
42
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 8 –- FHLB Advances and Other Borrowed Money
The Company’s funding sources include Federal Home Loan Bank advances and repurchase agreements. Information regarding each of these types of borrowings is as follows:
| December 31, |
|---|
| 2005
| | 2004
|
|---|
| Long-term Advances from the Federal Home Loan Bank collateralized by | | | | | | | | |
| qualifying mortgages, investment securities, and mortgage-backed securities | | | $ | 48,106 | | $ | 59,366 | |
| Promissory Notes Payable | | | | 18,500 | | | 10,575 | |
|
| |
| |
| Long-term Borrowings | | | $ | 66,606 | | | 69,941 | |
|
| |
| |
| |
| Overnight Variable Rate Advances from Federal Home Loan Bank collateralized by | | |
| qualifying mortgages, investment securities, and mortgage-backed securities | | | $ | 8,600 | | $ | — | |
| Federal Funds Purchased | | | | 7,271 | | | — | |
| Repurchase Agreements | | | | 20,417 | | | 25,673 | |
| Promissory Notes Payable | | | | 2,500 | | | — | |
|
| |
| |
| Short-term Borrowings | | | | 38,788 | | | 25,673 | |
|
| |
| |
| |
| Total Borrowings | | | $ | 105,394 | | $ | 95,614 | |
|
| |
| |
| | | December 31, | |
| | | 2006 | | 2005 | |
| Long-term Advances from the Federal Home Loan Bank collateralized by | | | | | |
| qualifying mortgages, investment securities, and mortgage-backed securities | | $ | 48,333 | | $ | 48,106 | |
| Term Loans | | | 10,000 | | | 18,500 | |
| Subordinated Debenture | | | 10,000 | | | — | |
| Long-term Borrowings | | $ | 68,333 | | $ | 66,606 | |
| | | | | | | | |
| Overnight Variable Rate Advances from Federal Home Loan Bank collateralized by | | | | | | | |
| qualifying mortgages, investment securities, and mortgage-backed securities | | $ | 34,600 | | $ | 8,600 | |
| Federal Funds Purchased | | | — | | | 7,271 | |
| Repurchase Agreements | | | 16,956 | | | 20,417 | |
| Promissory Notes Payable | | | — | | | 2,500 | |
| Short-term Borrowings | | | 51,556 | | | 38,788 | |
| | | | | | | | |
| Total Borrowings | | $ | 119,889 | | $ | 105,394 | |
Repurchase agreements, which are classified as secured borrowings, generally mature within one day of the transaction date. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The
corporationCompany may be required to provide additional collateral based on the value of the underlying securities.
| | | 2006 | | 2005 | |
| Average Daily Balance During the Year | | $ | 24,903 | | $ | 20,985 | |
| Average Interest Rate During the Year | | | 4.25 | % | | 2.90 | % |
| Maximum Month-end Balance During the Year | | | 37,776 | | | 28,960 | |
| Weighted Average Interest at Year-end | | | 4.53 | % | | 3.47 | % |
At December 31, 2006, interest rates on the fixed rate long-term FHLB advances ranged from 2.65% to 7.22% with a weighted average rate of 5.09%. Of the $48.3 million, $30.0 million or 62% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. The options on these advances are subject to a variety of terms including LIBOR based strike rates.
At December 31, 2005, interest rates on the fixed rate long-term FHLB advances ranged from 2.93% to 7.22% with a weighted average rate of 5.35%. Of the $48.1 million, $30.0 million or 62% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. The options on these advances
arewere subject to a variety of terms including LIBOR based strike rates.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 8 - FHLB Advances and Other Borrowed Money (continued)
At December 31,
2004, interest rates on the fixed rate long-term FHLB advances ranged from 2.50% to 7.22% with a weighted average rate of 5.93%. Of the $59.4 million, $50.0 million or 84% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. The options on these advances are subject to a variety of terms including LIBOR based strike rates.At December 31, 2005,2006, the long-term borrowings shown above includes $18.5$10 million outstanding on a $25.0 million term loan held atowed by the Parent Company.parent company. Interest on the term loan is based upon 90-day LIBOR plus 1.15%. The term loan matures September 20, 2010.January 1, 2014. At December 31, 2005,2006, the short-term borrowings shown above includes $2.5 million outstanding onparent company had a $15.0$15 million line of credit at the Parent Company.with no outstanding balance. Interest on the line of credit is based upon 90-day LIBOR plus 1.15%. The line of credit matures on September 20, 2006.January 1, 2008. Under the terms of these notes, the Company and all of its bank subsidiariessubsidiary must maintain a "well-capitalized"“well-capitalized” status, and this status was maintained at December 31, 2005.
2006.
At December 31, 2006, the long-term borrowings shown above also includes a $10 million subordinated debenture owed by the parent company. Interest on the subordinated debenture is based upon 90-day LIBOR plus 1.35%. The subordinated debenture matures on January 1, 2014. The entire principal amount of the subordinated debenture was treated as Tier 2 capital for regulatory capital purposes as of December 31, 2006.
At December 31, 2005, the long-term borrowings shown above included $18.5 million outstanding on a $25.0 million term loan owed by the parent company. Interest on the term loan was based upon 90-day LIBOR plus 1.15%. The term loan was scheduled to mature September 20, 2010. This loan was paid-off in 2006. At December 31, 2005, the short-term borrowings shown above included $2.5 million outstanding on a $15.0 million line of credit owed by the parent company. Interest on the line of credit was based upon 90-day LIBOR plus 1.15%. The line of credit matured on September 20, 2006.
Scheduled principal payments on long-term borrowings at December 31,
20052006 are as follows:
| |
|---|
| |
|---|
| 2006 | | | $ | 6,485 | |
| 2007 | | | | 5,317 | |
| 2008 | | | | 4,668 | |
| 2009 | | | | 10,026 | |
| 2010 | | | | 38,528 | |
| Thereafter | | | | 1,582 | |
|
| |
| Total | | | $ | 66,606 | |
|
| |
43
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
| 2007 | | $ | 11,277 | |
| 2008 | | | 5,664 | |
| 2009 | | | 11,523 | |
| 2010 | | | 22,287 | |
| 2011 | | | 1,530 | |
| Thereafter | | | 16,052 | |
| Total | | $ | 68,333 | |
NOTE 9 –- Stockholders’ Equity (share and per share amounts adjusted for stock dividends)
The Company and affiliate
banksbank 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
applicable to banks 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.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 9 - Stockholders’ Equity (continued)
Effective September 30, 2006, the Company combined the charters of its six subsidiary banks into a single bank charter. At December 31, 2006, consolidated and affiliate bank actual capital and minimum required levels are presented below:
| | | Actual | | Minimum Required For Capital Adequacy Purposes: | | Minimum Required To Be Well- Capitalized Under Prompt Corrective Action Regulations: | |
| | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
Total Capital | | | | | | | | | | | | | |
(to Risk Weighted Assets) | | | | | | | | | | | | | |
Consolidated | | $ | 95,535 | | | 10.66 | % | $ | 71,716 | | | 8.00 | % | | N/A | | | N/A | |
German American Bancorp | | | 88,169 | | | 10.05 | | | 70,205 | | | 8.00 | | $ | 87,757 | | | 10.00 | % |
| | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital | | | | | | | | | | | | | | | | | | | |
(to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 77,926 | | | 8.69 | % | $ | 35,858 | | | 4.00 | % | | N/A | | | N/A | |
German American Bancorp | | | 81,040 | | | 9.23 | | | 35,103 | | | 4.00 | | $ | 52,654 | | | 6.00 | % |
| | | | | | | | | | | | | | | | | | | | |
Tier 1 Capital | | | | | | | | | | | | | | | | | | | |
(to Average Assets) | | | | | | | | | | | | | | | | | | | |
Consolidated | | $ | 77,926 | | | 7.41 | % | $ | 42,065 | | | 4.00 | % | | N/A | | | N/A | |
German American Bancorp | | | 81,040 | | | 7.82 | | | 41,476 | | | 4.00 | | $ | 51,845 | | | 5.00 | % |
At December 31, 2005, consolidated and affiliate bank actual capital and minimum required levels are presented below:
| Actual
| | Minimum Required
For Capital
Adequacy Purposes:
| | Minimum Required
To Be Well-
Capitalized Under
Prompt Corrective
Action Regulations:
|
|---|
| Amount
| | Ratio
| | Amount
| | Ratio
| | Amount
| | Ratio
|
|---|
| |
| Total Capital | | | | | | | | | | | | | | | | | | | | |
| (to Risk Weighted Assets) | | |
| Consolidated | | | $ | 84,581 | | | 11.27 | % | $ | 60,024 | | | 8.00 | % | | N/A | | | N/A | |
| German American Bank | | | | 36,911 | | | 10.99 | % | | 26,857 | | | 8.00 | | $ | 33,572 | | | 10.00 | % |
| First American Bank | | | | 15,897 | | | 17.89 | % | | 7,108 | | | 8.00 | | | 8,885 | | | 10.00 | |
| Peoples Bank | | | | 16,199 | | | 11.47 | % | | 11,300 | | | 8.00 | | | 14,125 | | | 10.00 | |
| Citizens State Bank | | | | 10,570 | | | 11.23 | % | | 7,529 | | | 8.00 | | | 9,411 | | | 10.00 | |
| First State Bank | | | | 11,326 | | | 14.09 | % | | 6,431 | | | 8.00 | | | 8,039 | | | 10.00 | |
| |
| Tier 1 Capital | | |
| (to Risk Weighted Assets) | | |
| Consolidated | | | $ | 75,119 | | | 10.01 | % | $ | 30,012 | | | 4.00 | % | | N/A | | | N/A | |
| German American Bank | | | | 32,822 | | | 9.78 | % | | 13,429 | | | 4.00 | | $ | 20,143 | | | 6.00 | % |
| First American Bank | | | | 14,781 | | | 16.64 | % | | 3,554 | | | 4.00 | | | 5,331 | | | 6.00 | |
| Peoples Bank | | | | 15,173 | | | 10.74 | % | | 5,650 | | | 4.00 | | | 8,475 | | | 6.00 | |
| Citizens State Bank | | | | 9,638 | | | 10.24 | % | | 3,764 | | | 4.00 | | | 5,647 | | | 6.00 | |
| First State Bank | | | | 10,415 | | | 12.96 | % | | 3,215 | | | 4.00 | | | 4,823 | | | 6.00 | |
| |
| Tier 1 Capital | | |
| (to Average Assets) | | |
| Consolidated | | | $ | 75,119 | | | 8.01 | % | $ | 37,506 | | | 4.00 | % | | N/A | | | N/A | |
| German American Bank | | | | 32,822 | | | 7.83 | % | | 16,769 | | | 4.00 | | $ | 20,961 | | | 5.00 | % |
| First American Bank | | | | 14,781 | | | 12.51 | % | | 4,724 | | | 4.00 | | | 5,906 | | | 5.00 | |
| Peoples Bank | | | | 15,173 | | | 7.89 | % | | 7,690 | | | 4.00 | | | 9,612 | | | 5.00 | |
| Citizens State Bank | | | | 9,638 | | | 8.11 | % | | 4,752 | | | 4.00 | | | 5,941 | | | 5.00 | |
| First State Bank | | | | 10,415 | | | 8.75 | % | | 4,759 | | | 4.00 | | | 5,949 | | | 5.00 | |
| | | Actual | | Minimum Required For Capital Adequacy Purposes: | | Minimum Required To Be Well- Capitalized Under Prompt Corrective Action Regulations: | |
| | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
| Total Capital | | | | | | | | | | | | | |
| (to Risk Weighted Assets) | | | | | | | | | | | | | |
| Consolidated | | $ | 84,581 | | | 11.27 | % | $ | 60,024 | | | 8.00 | % | | N/A | | | N/A | |
| German American Bank | | | 36,911 | | | 10.99 | | | 26,857 | | | 8.00 | | $ | 33,572 | | | 10.00 | % |
| First American Bank | | | 15,897 | | | 17.89 | | | 7,108 | | | 8.00 | | | 8,885 | | | 10.00 | |
| Peoples Bank | | | 16,199 | | | 11.47 | | | 11,300 | | | 8.00 | | | 14,125 | | | 10.00 | |
| Citizens State Bank | | | 10,570 | | | 11.23 | | | 7,529 | | | 8.00 | | | 9,411 | | | 10.00 | |
| First State Bank | | | 11,326 | | | 14.09 | | | 6,431 | | | 8.00 | | | 8,039 | | | 10.00 | |
| | | | | | | | | | | | | | | | | | | | |
| Tier 1 Capital | | | | | | | | | | | | | | | | | | | |
| (to Risk Weighted Assets) | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 75,119 | | | 10.01 | % | $ | 30,012 | | | 4.00 | % | | N/A | | | N/A | |
| German American Bank | | | 32,822 | | | 9.78 | | | 13,429 | | | 4.00 | | $ | 20,143 | | | 6.00 | % |
| First American Bank | | | 14,781 | | | 16.64 | | | 3,554 | | | 4.00 | | | 5,331 | | | 6.00 | |
| Peoples Bank | | | 15,173 | | | 10.74 | | | 5,650 | | | 4.00 | | | 8,475 | | | 6.00 | |
| Citizens State Bank | | | 9,638 | | | 10.24 | | | 3,764 | | | 4.00 | | | 5,647 | | | 6.00 | |
| First State Bank | | | 10,415 | | | 12.96 | | | 3,215 | | | 4.00 | | | 4,823 | | | 6.00 | |
| | | | | | | | | | | | | | | | | | | | |
| Tier 1 Capital | | | | | | | | | | | | | | | | | | | |
| (to Average Assets) | | | | | | | | | | | | | | | | | | | |
| Consolidated | | $ | 75,119 | | | 8.01 | % | $ | 37,506 | | | 4.00 | % | | N/A | | | N/A | |
| German American Bank | | | 32,822 | | | 7.83 | | | 16,769 | | | 4.00 | | $ | 20,961 | | | 5.00 | % |
| First American Bank | | | 14,781 | | | 12.51 | | | 4,724 | | | 4.00 | | | 5,906 | | | 5.00 | |
| Peoples Bank | | | 15,173 | | | 7.89 | | | 7,690 | | | 4.00 | | | 9,612 | | | 5.00 | |
| Citizens State Bank | | | 9,638 | | | 8.11 | | | 4,752 | | | 4.00 | | | 5,941 | | | 5.00 | |
| First State Bank | | | 10,415 | | | 8.75 | | | 4,759 | | | 4.00 | | | 5,949 | | | 5.00 | |
The Company and the
Consolidated Financial Statements (continued)Dollars in thousands, except per share data
NOTE 9 – Stockholders’ Equity (continued)
At December 31, 2004, consolidated and affiliate bank actual capital and minimum required levels are presented below:
| Actual
| | Minimum Required
For Capital
Adequacy Purposes:
| | Minimum Required
To Be Well-
Capitalized Under
Prompt Corrective
Action Regulations:
|
|---|
| Amount
| | Ratio
| | Amount
| | Ratio
| | Amount
| | Ratio
|
|---|
| |
| Total Capital | | | | | | | | | | | | | | | | | | | | |
| (to Risk Weighted Assets) | | |
| Consolidated | | | $ | 87,821 | | | 11.83 | % | $ | 59,386 | | | 8.00 | % | | N/A | | | N/A | |
| German American Bank | | | | 37,180 | | | 10.85 | | | 27,402 | | | 8.00 | | $ | 34,252 | | | 10.00 | % |
| First American Bank | | | | 13,396 | | | 14.85 | | | 7,218 | | | 8.00 | | | 9,023 | | | 10.00 | |
| Peoples Bank | | | | 16,692 | | | 12.32 | | | 10,835 | | | 8.00 | | | 13,543 | | | 10.00 | |
| Citizens State Bank | | | | 12,528 | | | 12.06 | | | 8,309 | | | 8.00 | | | 10,386 | | | 10.00 | |
| First State Bank | | | | 6,636 | | | 10.72 | | | 4,954 | | | 8.00 | | | 6,192 | | | 10.00 | |
| |
| Tier 1 Capital | | |
| (to Risk Weighted Assets) | | |
| Consolidated | | | $ | 78,945 | | | 10.63 | % | $ | 29,693 | | | 4.00 | % | | N/A | | | N/A | |
| German American Bank | | | | 33,510 | | | 9.78 | | | 13,701 | | | 4.00 | | $ | 20,551 | | | 6.00 | % |
| First American Bank | | | | 12,260 | | | 13.59 | | | 3,609 | | | 4.00 | | | 5,414 | | | 6.00 | |
| Peoples Bank | | | | 15,203 | | | 11.23 | | | 5,417 | | | 4.00 | | | 8,126 | | | 6.00 | |
| Citizens State Bank | | | | 11,345 | | | 10.92 | | | 4,154 | | | 4.00 | | | 6,232 | | | 6.00 | |
| First State Bank | | | | 5,949 | | | 9.61 | | | 2,477 | | | 4.00 | | | 3,715 | | | 6.00 | |
| |
| Tier 1 Capital | | |
| (to Average Assets) | | |
| Consolidated | | | $ | 78,945 | | | 8.50 | % | $ | 37,143 | | | 4.00 | % | | N/A | | | N/A | |
| German American Bank | | | | 33,510 | | | 7.99 | | | 16,774 | | | 4.00 | | $ | 20,968 | | | 5.00 | % |
| First American Bank | | | | 12,260 | | | 9.50 | | | 5,159 | | | 4.00 | | | 6,449 | | | 5.00 | |
| Peoples Bank | | | | 15,203 | | | 7.80 | | | 7,792 | | | 4.00 | | | 9,740 | | | 5.00 | |
| Citizens State Bank | | | | 11,345 | | | 9.19 | | | 4,938 | | | 4.00 | | | 6,172 | | | 5.00 | |
| First State Bank | | | | 5,949 | | | 7.76 | | | 3,065 | | | 4.00 | | | 3,831 | | | 5.00 | |
All of the Company’s affiliate Banksbank(s) at year-end 20052006 and 20042005 were categorized as well-capitalized. There have been no conditions or events that management believes have changed the classification of the Company’sCompany or affiliate Banksbank(s) under the prompt corrective action regulations since the last notification from regulators. Regulations require the maintenance of certain capital levels at eachthe affiliate bank, and may limit the dividends payable by the affiliatesaffiliate(s) to the holding company, or by the holding company to its shareholders. At December 31, 20052006, the affiliatesaffiliate bank had $16.3 million$450 in retained earnings available for dividends to the parent company without prior regulatory approval.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 9 - Stockholders’ Equity (continued)
Equity Incentive Plans and Equity Based Compensation
The Company maintains two equity incentive plans under which stock options, restricted stock,
awards, and other equity incentive awards can be granted. At December 31,
2005,2006, the Company has reserved 620,144 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options,
restricted stock, and other equity awards to officers, directors and other employees of the Company.
Options may be designated as “incentive stock options” under the Internal Revenue Code of 1986, or as nonqualified options. While the date after which options are first exercisable is determined by the
Long-Term Incentive Award Committee (formerly known as the Stock Option
CommitteeCommittee) of the Company or, in the case of options granted to directors, by the Board of Directors, no stock option may be exercised after ten years from the date of grant (twenty years in the case of nonqualified stock options). The exercise price of stock options granted pursuant to the Plans must be no less than the fair market value of the Common Stock on the date of the grant.
The Plans authorize an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. An optionee may tender already-owned common shares to the Company in exercise of an option. The Company typically issues authorized but unissued common shares upon the exercise of options.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment.” The Company elected to utilize the modified prospective transition method, therefore, prior period results have not been restated. Prior to the
Consolidated Financial Statements (continued)Dollarsadoption of SFAS 123R, stock-based compensation expense related to stock options was not recognized in
thousands, except per share data
the results of operations if the exercise price was at least equal to the market value of the common stock on the grant date, in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.”
SFAS 123R requires all share-based payments to employees, including grants of employee stock options and grants of restricted shares, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. For options with graded vesting, the Company values the stock option grants and recognizes compensation expense as if each vesting portion of the award was a single award. Under the modified prospective method, unvested awards, awards that are granted, modified, or settled on or after January 1, 2006 are measured and accounted for in accordance with SFAS 123R. The impact of forfeitures that may occur prior to vesting is also estimated and considered in the amount recognized.
NOTE 9 – Stockholders’ Equity (continued)Stock OptionsOn December 29, 2005, the
Stock OptionLong-Term Incentive Award Committee of the Company approved the accelerated vesting of all currently outstanding unvested stock options awarded to recipients under its 1999 Long Term Equity Incentive Plan effective December 29, 2005. The decision to accelerate the vesting was made primarily to reduce non-cash compensation expense that
German Americanthe Company would have recorded in its income statement in future periods upon the adoption of
FASSFAS 123R in January 2006. The
Stock OptionLong-Term Incentive Award Committee believed it was in the best interest of the Company’s shareholders to accelerate the vesting of these Options to eliminate compensation expense in future periods. This future expense was estimated to be $143. As a result of the acceleration action, options to purchase up to 161,601 shares of common stock became exercisable immediately. Without the acceleration, the options would have vested on dates ranging from December 31, 2005 to August 29, 2010.
Approximately 8,260 options or 5.1% of the accelerated options had exercise prices below the closing market price at the time of acceleration (the “in-the-money options”). Without the acceleration, in-the-money options would have vested at various times and would have been fully vested by March 15, 2006. The Company expensed approximately $4 as a result of the acceleration of the in-the-money stock options during the fourth quarter of 2005.In conjunction with the acceleration of all vesting periods, the
Stock OptionLong-Term Incentive Award Committee also took action to amend all outstanding options to eliminate any obligation to grant new options in replacement of shares tendered in payment of the exercise price of options, effective January 1, 2006. All other terms and conditions applicable to
Options,options, including the exercise prices and exercise periods, remain unchanged.
Changes in options outstanding were as follows, as adjusted to reflect stock dividends:
| Number
of Options
| | Weighted-average
Exercise Price
|
|---|
| Outstanding, beginning of 2003 | | | | 344,936 | | $ | 14.56 |
| Granted | | | | 101,587 | | | 17.99 |
| Exercised | | | | (66,660 | ) | | 13.81 |
| Forfeited | | | | (2,303 | ) | | 15.16 |
| Expired | | | | (430 | ) | | 21.34 |
|
| |
| Outstanding, end of 2003 | | | | 377,130 | | | 15.61 |
| Granted | | | | 87,685 | | | 17.36 |
| Exercised | | | | (32,608 | ) | | 13.00 |
| Forfeited | | | | (2,040 | ) | | 16.12 |
| Expired | | | | — | | | — | |
|
| |
| Outstanding, end of 2004 | | | | 430,167 | | | 16.16 |
| Granted | | | | 77,967 | | | 14.92 |
| Exercised | | | | (56,356 | ) | | 12.53 |
| Forfeited | | | | (3,521 | ) | | 15.42 |
| Expired | | | | (43,238 | ) | | 16.69 |
|
| |
| Outstanding, end of 2005 | | | | 405,019 | | | 16.37 |
|
| |
Options outstanding at year-end 2005 are as follows:
| Outstanding
| Exercisable
|
Range of
Exercise
Prices
| Number
| Weighted Average
Remaining
Contractual Life
(in years)
| Number
| Weighted
Average
Exercise Price
| |
| $12.49 - $14.92 | 117,879 | 3.60 | 117,879 | 13.81 | |
| $15.29 - $17.55 | 127,162 | 3.26 | 127,162 | 16.53 |
| $17.96 - $18.28 | 159,978 | 7.52 | 159,978 | 18.14 |
|
| |
| |
| 405,019 | 5.04 | 405,019 | 16.37 | |
|
| |
| |
Options exercisable and the weighted average exercise price at December 31, 2004 and 2003 were 238,212 at $16.08 and 185,759 at $15.73, respectively.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 9 –- Stockholders’ Equity (continued)
The following table presents activity for stock options under the Company’s equity incentive plan for 2006:
| | | | | Year Ended December 31, 2006 | | | |
| | | | | Weighted Avg. | | Weighted Avg. | | Aggregate | |
| | Number of | | Price of | | Life of Options | | Intrinsic | |
| | Options | | Options | | (in years) | | Value | |
| | | | | | | | | | |
| Outstanding at beginning of period | | | 405,019 | | $ | 16.37 | | | | | | | |
| Granted | | | 11,000 | | | 13.25 | | | | | | | |
| Exercised | | | (12,663 | ) | | 12.58 | | | | | | | |
| Forfeited | | | (11,833 | ) | | 16.96 | | | | | | | |
| Expired | | | (21,110 | ) | | 16.53 | | | | | | | |
| Outstanding & Exercisable at end of period | | | 370,413 | | $ | 16.38 | | | 4.73 | | $ | 73 | |
The following table presents information related to stock options under the Company’s equity incentive plan during the years ended 2006, 2005, and 2004:
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Intrinsic Value of Options Exercised | | $ | 5 | | $ | 130 | | $ | 144 | |
| Cash Received from Option Exercises | | $ | 17 | | $ | 47 | | $ | 18 | |
| Tax Benefit of Option Exercises | | $ | — | | $ | 2 | | $ | 2 | |
| Weighted Average Fair Value of Options Granted | | $ | 2.68 | | $ | 1.65 | | $ | 2.89 | |
The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of common stock as of the reporting date.
The Company recorded $19 in stock compensation expense, net of an income tax benefit of $10, during the year ended December 31, 2006 related to the granting of 11,000 options granted in the second quarter of 2006. To calculate the fair value of this option grant, the following assumptions were used as of the grant date: risk free interest rate 5.11%, expected option life 10.0 years, expected stock price volatility of 22.4%, and dividend yield of 4.20%. The resulting weighted average fair value of the options granted in the second quarter of 2006 was $2.68 for each option granted. The Company recorded no other stock compensation expense applicable to options during the year ended December 31, 2006 because all outstanding options as of January 1, 2006 were fully vested prior to 2006.
The fair value of each stock option granted was estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that may have a significant impact on the fair value estimate. Expected volatility was based on historical volatility of the Company’s stock, and other factors. Expected dividends were based on dividend trends and the market price of the Company’s stock price at the time of the grant. The Company used historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option was based on the U.S. Treasury yield curve in effect at the time of the grant.
SFAS 123R requires the recognition of stock based compensation for the number of awards that are ultimately expected to vest. The Company did not reduce its compensation expense for estimated forfeitures prior to vesting because all grants made during 2006 were immediately vested. Estimated forfeitures will continue to be reassessed in future periods and may change based on new facts and circumstances.
As of December 31, 2006, there was no unrecognized option expense as all outstanding options were fully vested.
Restricted Stock
Effective February 15, 2006, the Long-Term Incentive Award Committee awarded a new type of long-term incentive award under one of its existing plans. In prior years, awards of long-term incentives were granted in the form of incentive stock options. The Long-Term Incentive Award Committee effective February 15, 2006 determined that future awards of long-term incentives under the plan should generally be made in the form of restricted stock, granted in tandem with cash credit entitlements. The incentive awards will typically be in the form of 50% restricted stock grants and 50% cash credit entitlements. The restricted stock grants and tandem cash credit entitlements are subject to forfeiture in the event that the recipient of the grant does not continue employment with the Company through December 15 of the year of grant, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 9 - Stockholders’ Equity (continued)
The expense recorded for the restricted stock grants totaled $109, net of an income tax benefit of $71, during the year ended December 31, 2006. There was no unrecognized expense associated with the restricted stock grants as of December 31, 2006.
The following table presents information on restricted stock grants outstanding for the period shown:
| | | Year Ended December 31, 2006 | |
| | | Restricted Shares | | Weighted Average Market Price at Grant | |
| | | | | | |
| Outstanding at Beginning of Period | | | — | | $ | — | |
| Granted | | | 14,501 | | | 12.98 | |
| Issued | | | (13,876 | ) | | 12.99 | |
| Forfeited | | | (625 | ) | | 12.94 | |
| Outstanding at End of Period | | | — | | | — | |
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this plan is determined annually and shall be in the range from 85% to 100% of the fair market value of such stock at either the beginning or end of the plan year. The plan provides for the purchase of up to 542,420 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares.
The Company purchased common shares on the open market in 2005, 2004, and 2003. Funding for the purchase of common stock
wasis from employee
contributions and Company contributions.
Company contributions totaled $63, $76, and $120 for 2005, 2004, and 2003. The plan
iswas considered non-compensatory under APB No. 25, and as a result no compensation expense
iswas recorded
in periods prior to 2006 and Company contributions
arewere a reduction to additional paid-in capital.
As a result of the adoption of SFAS 123R on January 1, 2006, the Company was required to record compensation expense for plan participation beginning January 1, 2006. The plan year for the Employee Stock Purchase Plan runs from August 17 through August 16 of the subsequent year. As of the beginning of the plan year, participants were granted the option to purchase Company stock at 85% of the lesser of the market value at the beginning or end of the plan year. The fair value of options granted as a part of plan was estimated on the date of grant similarly to those stock options granted under the Company’s equity incentive plans utilizing a Black-Scholes stock option valuation model. The inputs for expected volatility, expected dividends, and risk-free rate are the same as previously discussed. The fair value of options granted was also affected by the estimate of employee participation in the plan, which is based upon historical experience. The grant date fair value of options granted for the plan year ending August 16, 2006 was estimated to be $3.08. The grant date fair value of options granted for the plan year ending August 16, 2007 was estimated to be $2.50. The expense recorded for the employee stock purchase plan totaled $75 during the year ended December 31, 2006. Unrecognized compensation expense as of December 31, 2006 totaled $47 for the Employee Stock Purchase Plan.
On April 26, 2001, the Company announced that its Board of Directors approved a stock repurchase program for up to 607,754 of the outstanding Common Shares of the Company. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program are purchased. As of December 31,
2005,2006, the Company had purchased 334,965 shares under the program.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 9 - Stockholders’ Equity (continued)
During December 2005, the Company completed the purchase, in a private unsolicited transaction not from or through any broker or dealer, of a block of 440,747 shares of the Company’s issued and outstanding common stock from a corporation
currentlythat was in reorganization proceedings under Chapter 11 of the United States Bankruptcy Code at a price of $12.50 per share. The block purchase represented approximately 4%
of the shares of the Company’s common shares that were outstanding immediately prior to consummation of the purchase. The Company’s Board of Directors specifically approved the block purchase, and such purchase therefore
willdid not reduce the number of shares authorized for repurchase under the repurchase program described above.
NOTE 10 –- Employee Benefit Plans
The Company provides a contributory trusteed 401(k) deferred compensation and profit sharing plan, which covers substantially all
full-time employees. The Company agrees to match certain employee contributions under the 401(k) portion of the plan, while profit sharing contributions are discretionary and are subject to determination by the Board of Directors. Company contributions were
$544, $465
and $495
for 2006, 2005 and
$1,137 for 2005, 2004,
and 2003, respectively.
The Company self-insures employee health benefits.
During the fourth quarter of 2005, the employees from the Company’s most recent banking acquisition were not covered by the Company’s self-insured health plan, but remained covered under their existing fully insured health insurance program. As of the first quarter 2006, those employees were brought into the Company’s self-insured health plan. Stop loss insurance covers annual losses exceeding
$75$85 per covered individual. 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
$1,895, $1,642
and $1,145
for 2006, 2005 and
$868 for 2005, 2004,
and 2003, respectively.
The Company maintains deferred compensation plans for the benefit of certain directors and officers. Under the plans, the Company agrees in return for the directors and officers deferring the receipt of a portion of their current compensation, to pay a retirement benefit computed as the amount of the compensation deferred plus accrued interest at a variable rate. Accrued benefits payable totaled
$3,409$3,110 and
$3,577$3,409 at December 31,
20052006 and
2004.2005. Deferred compensation expense was
$115, $322
and $315
for 2006, 2005 and
$895 for 2005, 2004,
and 2003.respectively. In conjunction with the plans, the Company purchased life insurance on certain directors and officers.
The Company acquired through previous bank mergers a noncontributory defined benefit pension plan with benefits based on years of service and compensation prior to retirement. The benefits under the plan were suspended in 1998. DuringPartial settlements of the plan were $68, $0 and $52 during the years ended 2006, 2005 and 2003, there were no losses incurred on partial settlements of the plan. During 2004, the Company incurred $52 on partial settlements of the plan.respectively. The Company uses a September 30 measurement date for its plan.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 10 –- Employee Benefit Plans (continued)
Accumulated plan benefit information for the Company’s plan as of December 31, 20052006 and 20042005 was as follows: | 2005
| | 2004
| | |
|---|
Changes in Benefit Obligation:
Obligation at beginning of year | | | $ | 859 | | $ | 936 | | | | |
| Service cost | | | | — | | | — | |
| Interest cost | | | | 50 | | | 54 | |
| Benefits paid | | | | (51 | ) | | (200 | ) |
| Actuarial loss | | | | 22 | | | 42 | |
| Adjustment in cost of settlement | | | | — | | | 27 | |
|
| |
| |
| Obligation at end of year | | | | 880 | | | 859 | |
|
| |
| |
| Changes in Plan Assets: | | |
| Fair value at beginning of year | | | | 552 | | | 744 | |
| Actual return on plan assets | | | | (27 | ) | | 8 | |
| Employer contributions | | | | 27 | | | — | |
| Benefits paid | | | | (51 | ) | | (200 | ) |
|
| |
| |
| Fair value at end of year | | | | 501 | | | 552 | |
|
| |
| |
| Funded Status: | | |
| Funded status at end of year | | | | (379 | ) | | (307 | ) |
| Unrecognized prior service cost | | | | (2 | ) | | (5 | ) |
| Unrecognized net loss | | | | 348 | | | 306 | |
| Unrecognized transition asset | | | | (4 | ) | | (5 | ) |
|
| |
| |
| Pension liability | | | $ | (37 | ) | $ | (11 | ) |
|
| |
| |
| Amounts recognized in the balance sheet consist of: | | |
| | | | | 2005
| | | 2004
| |
| Accrued benefit cost | | | $ | (37 | ) | $ | (11 | ) |
| Minimum pension liability | | | | (342 | ) | | (296 | ) |
| Accumulated other comprehensive income | | | | 207 | | | 179 | |
| Changes in Benefit Obligation: | | 2006 | | 2005 | |
| Obligation at beginning of year | | $ | 880 | | $ | 859 | |
| Service cost | | | — | | | — | |
| Interest cost | | | 48 | | | 50 | |
| Benefits paid | | | (221 | ) | | (51 | ) |
| Actuarial (gain)/loss | | | (8 | ) | | 22 | |
| Adjustment in cost of settlement | | | 44 | | | — | |
| Obligation at end of year | | | 743 | | | 880 | |
| | | | | | | | |
| Changes in Plan Assets: | | | | | | | |
| Fair value at beginning of year | | | 501 | | | 552 | |
| Actual return on plan assets | | | 19 | | | (27 | ) |
| Employer contributions | | | 53 | | | 27 | |
| Benefits paid | | | (221 | ) | | (51 | ) |
| Fair value at end of year | | | 352 | | | 501 | |
| | | | | | | | |
| Funded Status: | | | | | | | |
| Funded status at end of year | | | (391 | ) | | (379 | ) |
| Unrecognized prior service cost | | | — | | | (2 | ) |
| Unrecognized net loss | | | — | | | 348 | |
| Unrecognized transition asset | | | — | | | (4 | ) |
| Pension liability | | $ | (391 | ) | $ | (37 | ) |
Prior to adoption of FAS Statement 158, amounts recognized in the balance sheet at December 31, 2005 consist of:
| Accrued benefit cost | | $ | (37 | ) |
| Minimum pension liability | | | (342 | ) |
| Net amount recognized | | $ | (379 | ) |
Amounts recognized in accumulated other comprehensive income at December 31, 2006 consist of:
| Net loss | | $ | 280 | |
| Prior service cost | | | 2 | |
| Transition asset | | | (2 | ) |
| | | $ | 280 | |
The accumulated benefit obligation was $743 and $880 at year-end 2006 and 2005, respectively.
Because the plan has been suspended, the projected benefits obligationsbenefit obligation and accumulated benefit obligationsobligation are the same. The accumulated benefit obligation for the defined benefit pension plan exceeds the fair value of the assets included in the plan.
Net periodic pension expense for the years ended December 31, 2005, 2004, and 2003 was as follows: | 2005
| | 2004
| | 2003
|
|---|
| Interest cost | | | $ | 50 | | $ | 54 | | $ | 61 | |
| Expected return on assets | | | | (24 | ) | | (31 | ) | | (38 | ) |
| Amortization of transition amount | | | | (1 | ) | | (2 | ) | | (1 | ) |
| Amortization of prior service cost | | | | (3 | ) | | (3 | ) | | (3 | ) |
| Recognition of net loss | | | | 31 | | | 29 | | | 34 | |
|
| |
| |
| |
| Net periodic pension expense | | | $ | 53 | | $ | 47 | | $ | 53 | |
|
| |
| |
| |
| |
| Additional Information | | | | 2005
| | | 2004
|
| |
| Increase in minimum liability included in other | | |
| comprehensive income | | | $ | 28 | | $ | 10 | |
48
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 10 –- Employee Benefit Plans (continued)
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| Interest cost | | $ | 48 | | $ | 50 | | $ | 54 | |
| Expected return on assets | | | (20 | ) | | (24 | ) | | (31 | ) |
| Amortization of transition amount | | | (1 | ) | | (1 | ) | | (2 | ) |
| Amortization of prior service cost | | | (3 | ) | | (3 | ) | | (3 | ) |
| Recognition of net loss | | | 36 | | | 31 | | | 29 | |
| Net periodic pension expense | | $ | 60 | | $ | 53 | | $ | 47 | |
The estimated net loss, prior service costs, and transition asset for the defined benefit plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $29, $3, and $(1).
Weighted-average assumptions used to determine benefit obligations at year-end:
| 2005
| 2004
| |
|---|
| Discount rate | 5.75% | 6.00% | |
| Rate of compensation increase | N/A | N/A(1) | |
| |
| Weighted-average assumptions used to determine net cost: |
| | 2005
| 2004
| 2003
|
| Discount rate | 6.00% | 6.25% | 6.50% |
| Expected return on plan assets | 4.50% | 5.00% | 5.00% |
| Rate of compensation increase | N/A | N/A | N/A(1) |
| | | 2006 | | 2005 | | 2004 | |
| Discount rate | | | 5.75 | % | | 5.75 | % | | 6.00 | % |
| Rate of compensation increase | | | N/A | | | N/A | | | N/A | (1) |
Weighted-average assumptions used to determine net periodic pension cost:
| | | 2006 | | 2005 | | 2004 | |
| Discount rate | | | 5.75 | % | | 6.00 | % | | 6.25 | % |
| Expected return on plan assets | | | 4.25 | % | | 4.50 | % | | 5.00 | % |
| Rate of compensation increase | | | N/A | | | N/A | | | N/A | |
| (1) | Benefits under the plan were suspended in 1998; therefore, the weighted-average rate of increase in future compensation levels was not applicable for all years presented. |
The expected return on plan assets was determined based upon rates that are expected to be available for future reinvestment of earnings and maturing investments along with consideration given to the current mix of plan assets.
The Company’s defined benefit pension plan asset allocation at year-end
20052006 and
20042005 and target allocation for
20062007 by asset category are as follows:
| | Target
Allocation | Percentage of Plan Assets
at Year-end |
|---|
| Asset Category | 2006
| | 2005
| | 2004
|
|---|
| Cash | | | | 30% | | | 31% | | | 1% | |
| Certificate of Deposits | | | | 65% | | | 62% | | | 76% | |
| Equity Securities | | | | 5% | | | 7% | | | 23% | |
|
| |
| |
| |
| Total | | | | 100% | | | 100% | | | 100% | |
|
| |
| |
| |
| | | | | Target | | Percentage of Plan Assets | |
| | | | Allocation | | at Year-end | |
| Asset Category | | | | 2007 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Cash | | | | | 15 | % | | 9 | % | | 31 | % |
| Certificates of Deposit | | | | 80 | % | | 88 | % | | 62 | % |
| Equity Securities | | | | 5 | % | | 3 | % | | 7 | % |
| Total | | | | | 100 | % | | 100 | % | | 100 | % |
Plan benefits are suspended. Therefore, the Company has invested predominantly in relatively short-term investments over the past two years. No significant changes to investing strategies are anticipated.
The above mentioned Equity Securities consist of the Company’s stock for all periods presented.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 10 - Employee Benefit Plans (continued)
Post-retirement Medical and Life Benefit Plan
The Company has an unfunded post-retirement benefit plan covering substantially all of its employees. The medical plan is contributory with the participants’ contributions adjusted annually; the life insurance plans are noncontributory.
Changes in Accumulated Post-retirement Benefits Obligations:
| | | 2006 | | 2005 | |
| Obligation at the beginning of year | | $ | 582 | | $ | 367 | |
| Unrecognized loss | | | 29 | | | 185 | |
| | | | | | | | |
| Components of net periodic postretirement benefit cost: | | | | | | | |
| Service cost | | | 28 | | | 21 | |
| Interest cost | | | 32 | | | 22 | |
| | | | | | | | |
| Net expected benefit payments | | | (67 | ) | | (13 | ) |
| Obligation at end of year | | $ | 604 | | $ | 582 | |
| | | | | | | | |
| Components of Postretirement Benefit Expense: | | | | | | | |
| | | | | | | | |
| | | 2006 | | 2005 | |
| Service cost | | $ | 28 | | $ | 21 | |
| Interest cost | | | 32 | | | 22 | |
| Expected return on assets | | | — | | | — | |
| Amortization of transition amount | | | — | | | — | |
| Amortization of unrecognized prior service cost | | | — | | | — | |
| Amortization of unrecognized net (gain)/loss | | | — | | | — | |
| Net postretirement benefit expense | | $ | 60 | | $ | 43 | |
Assumptions used to determine net periodic cost and benefit obligations:
| | | | | | | | |
| | | 2006 | | 2005 | | 2004 | |
| Discount rate | | | 5.50 | % | | 5.50 | % | | 6.00 | % |
| | | | | | | | | | | |
| Assumed health care cost trend rates at year-end: | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | | |
| Health care cost trend rate assumed for next year | | | 7.00 | % | | 7.00 | % | | | |
| Rate that the cost trend rate gradually declines to | | | 5.00 | % | | 5.00 | % | | | |
| Year that the rate reaches the rate it is assumed to remain at | | | 2009 | | | 2008 | | | | |
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
| | | One-Percentage-Point | | One-Percentage-Point | |
| | | Increase | | Decrease | |
| Effect on total of service and interest cost | | $ | 71 | | $ | 59 | |
| Effect on postretirement benefit obligation | | $ | 647 | | $ | 566 | |
Pension and Other Benefit Plans:
The Company expects to contribute $61$73 to its defined benefit pension plan and $42 to its post-retirement medical and life insurance plan in 2007.
Notes to the pension plan during the fiscal year ending December 31, 2006.Consolidated Financial Statements
Dollars in thousands, except per share data
NOTE 10 - Employee Benefit Plans (continued)
Estimated Future Benefits The following benefit payments, which reflect expected future service, are expected to be paid:
| Year | Benefits |
|---|
| 2006 | $ 39 |
| 2007 | 39 |
| 2008 | 37 |
| 2009 | 36 |
| 2010 | 40 |
| 2011-2015 | 232 |
Year | | Pension Benefits | | Postretirement Benefits | |
| 2007 | | $ | 39 | | $ | 72 | |
| 2008 | | | 38 | | | 63 | |
| 2009 | | | 37 | | | 52 | |
| 2010 | | | 35 | | | 39 | |
| 2011 | | | 33 | | | 40 | |
| 2012-2016 | | | 199 | | | 204 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 11 –- Income Taxes| The provision for income taxes consists of the following: | | | | | | | | | | | |
| | | | | 2005
| | | 2004
| | | 2003
| |
| Current Federal | | | $ | 3,137 | | $ | 1,666 | | $ | 883 | |
| Current State | | | | 557 | | | 145 | | | — | |
| Deferred Federal | | | | (202 | ) | | (708 | ) | | 391 | |
| Deferred State | | | | (157 | ) | | 89 | | | (199 | ) |
| Change in Valuation Allowance | | | | — | | | (196 | ) | | 196 | |
|
| |
| |
| |
| Total | | | $ | 3,335 | | $ | 996 | | $ | 1,271 | |
|
| |
| |
| |
| |
| Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows: | | |
| |
| | | | | 2005
| | | 2004
| | | 2003
| |
| Statutory Rate Times Pre-tax Income | | | $ | 4,439 | | $ | 2,800 | | $ | 3,209 | |
| Add/(Subtract) the Tax Effect of: | | |
| Income from Tax-exempt Loans and Investments | | | | (635 | ) | | (845 | ) | | (1,035 | ) |
| State Income Tax, Net of Federal Tax Effect | | | | 264 | | | 25 | | | (2 | ) |
| Low Income Housing Credit | | | | (392 | ) | | (525 | ) | | (520 | ) |
| Dividends Received Deduction | | | | (128 | ) | | (165 | ) | | (183 | ) |
| Company Owned Life Insurance | | | | (216 | ) | | (241 | ) | | (147 | ) |
| Other Differences | | | | 3 | | | (53 | ) | | (51 | ) |
|
| |
| |
| |
| Total Income Taxes | | | $ | 3,335 | | $ | 996 | | $ | 1,271 | |
|
| |
| |
| |
| |
| The net deferred tax asset at December 31 consists of the following: | | |
| |
| | | | | 2005
| | | 2004
| |
| |
| Deferred Tax Assets: | | |
| Allowance for Loan Losses | | | $ | 2,729 | | | 2,543 | |
| Deferred Compensation and Employee Benefits | | | | 1,604 | | | 1,596 | |
| Intangibles | | | | 45 | | | 40 | |
| Unused Tax Credits | | | | 2,407 | | | 3,337 | |
| Unrealized Capital Loss on Equity Securities | | | | 1,252 | | | 1,252 | |
| Unrealized Appreciation on Securities | | | | 651 | | | — | |
| Minimum Pension Liability | | | | 136 | | | 117 | |
| Net Operating Loss Carryforward | | | | 262 | | | — | |
| Other | | | | 224 | | | 244 | |
|
| |
| |
| Total Deferred Tax Assets | | | | 9,310 | | | 9,129 | |
| |
| Deferred Tax Liabilities: | | |
| Depreciation | | | | (658 | ) | | (861 | ) |
| Leasing Activities, Net | | | | (2,245 | ) | | (3,227 | ) |
| Mortgage Servicing Rights | | | | (1,193 | ) | | (1,032 | ) |
| Investment in Low Income Housing Partnerships | | | | (389 | ) | | (372 | ) |
| Unrealized Appreciation on Securities | | | | — | | | (188 | ) |
| FHLB Stock Dividends | | | | (599 | ) | | (540 | ) |
| Business Combination Fair Value Adjustments | | | | (118 | ) | | — | |
| Other | | | | (36 | ) | | (263 | ) |
|
| |
| |
| Total Deferred Tax Liabilities | | | | (5,238 | ) | | (6,483 | ) |
| Valuation Allowance | | | | (45 | ) | | (45 | ) |
|
| |
| |
| Net Deferred Tax Asset | | | $ | 4,027 | | $ | 2,601 | |
|
| |
| |
The provision for income taxes consists of the following:
| | | 2006 | | 2005 | | 2004 | |
| Current Federal | | $ | 2,070 | | $ | 3,137 | | $ | 1,666 | |
| Current State | | | 416 | | | 557 | | | 145 | |
| Deferred Federal | | | 1,560 | | | (202 | ) | | (708 | ) |
| Deferred State | | | (62 | ) | | (157 | ) | | 89 | |
| Change in Valuation Allowance | | | — | | | — | | | (196 | ) |
| Total | | $ | 3,984 | | $ | 3,335 | | $ | 996 | |
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows:
| | | | | | | | |
| | | | | | | | |
| | | 2006 | | 2005 | | 2004 | |
| Statutory Rate Times Pre-tax Income | | $ | 4,830 | | $ | 4,439 | | $ | 2,800 | |
| Add/(Subtract) the Tax Effect of: | | | | | | | | | | |
| Income from Tax-exempt Loans and Investments | | | (530 | ) | | (635 | ) | | (845 | ) |
| State Income Tax, Net of Federal Tax Effect | | | 234 | | | 264 | | | 25 | |
| Low Income Housing Credit | | | (182 | ) | | (392 | ) | | (525 | ) |
| Dividends Received Deduction | | | (105 | ) | | (128 | ) | | (165 | ) |
| Company Owned Life Insurance | | | (294 | ) | | (216 | ) | | (241 | ) |
| Other Differences | | | 31 | | | 3 | | | (53 | ) |
| Total Income Taxes | | $ | 3,984 | | $ | 3,335 | | $ | 996 | |
| | | | | | | | | | | |
| The net deferred tax asset at December 31 consists of the following: | | | | | | | | | | |
| | | | | | | | | | | |
| | | | 2006 | | | 2005 | | | | |
| Deferred Tax Assets: | | | | | | | | | | |
| Allowance for Loan Losses | | $ | 1,886 | | $ | 2,729 | | | | |
| Deferred Compensation and Employee Benefits | | | 1,520 | | | 1,604 | | | | |
| Intangibles | | | 68 | | | 45 | | | | |
| Unused Tax Credits | | | 1,870 | | | 2,407 | | | | |
| Unrealized Capital Loss on Equity Securities | | | — | | | 1,252 | | | | |
| Unrealized Depreciation on Securities | | | — | | | 651 | | | | |
| Minimum Pension Liability | | | 111 | | | 136 | | | | |
| Net Operating Loss Carryforward | | | 146 | | | 262 | | | | |
| Other | | | 404 | | | 224 | | | | |
| Total Deferred Tax Assets | | | 6,005 | | | 9,310 | | | | |
| Deferred Tax Liabilities: | | | | | | | | | | |
| Depreciation | | �� | (508 | ) | | (658 | ) | | | |
| Leasing Activities, Net | | | (2,137 | ) | | (2,245 | ) | | | |
| Mortgage Servicing Rights | | | — | | | (1,193 | ) | | | |
| Investment in Low Income Housing Partnerships | | | (396 | ) | | (389 | ) | | | |
| Unrealized Appreciation on Securities | | | (25 | ) | | — | | | | |
| FHLB Stock Dividends | | | (449 | ) | | (599 | ) | | | |
| Business Combination Fair Value Adjustments | | | (460 | ) | | (118 | ) | | | |
| Other | | | (55 | ) | | (36 | ) | | | |
| Total Deferred Tax Liabilities | | | (4,030 | ) | | (5,238 | ) | | | |
| Valuation Allowance | | | (45 | ) | | (45 | ) | | | |
| Net Deferred Tax Asset | | $ | 1,930 | | $ | 4,027 | | | | |
The Company has $888$351 of general business credit carryforward, which will expire in years 20242025 and 2025.2026. The Company also has $1,519 of alternative minimum tax credit carryforward, which under current tax law has no expiration period. The Company has federal and state net operating loss carryforwards (acquired in the PCB Holdings business combination) of $649$363 (federal) and $738$395 (state). These carryforwards expire in 2025, and the use of these federal and state carryforwards are each limited to $285 annually.
50
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 11 – Income Taxes (continued)Under the Internal Revenue Code, through 1996 Peoples Community Bank (which wastwo acquired by and merged into First State Bank in October 2005) and First Federal Bank (now First American Bank)banking companies, which are now a part of the Company’s single banking subsidiary, were allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. The acquired banks were formerly known as Peoples Community Bank (acquired in October 2005) and First American Bank (acquired in January 1999). Subject to certain limitations, these Banks were permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. The Banks generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, the Banks were only allowed a deduction based on actual loss experience. Retained earnings at December 31, 2005,2006, include approximately $2,995 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income, which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 20052006 was approximately $1,018.
Notes to the Consolidated Financial StatementsDollars in thousands, except per share data
NOTE 11 - Income Taxes (continued)
Since December 31, 2001, the Company’s effective tax rate has been favorably impacted by Indiana financial institution tax savings resulting from the Company’s formation of investment subsidiaries in the state of Nevada by four of the Company’s banking subsidiaries. The state of Nevada has no state or local income tax. During the first quarter of 2005, the Company received notices of proposed assessments of unpaid Indiana financial institutions tax for the years 2001 and 2002 of approximately $691 ($456 net of federal tax), including interest and penalties of approximately $100. The Company filed a protest with the Indiana Department of Revenue contesting the proposed assessments and
intends to vigorously
defenddefended its position that the income of the Nevada subsidiaries
iswas not subject to the Indiana financial institutions tax.
Although there can be no such assurance, at this time management does not believe that it is probable that this potential assessment will result in additional tax liability. Therefore, no tax provision
has beenwas recognized for the potential assessment of additional financial institutions tax for 2001 and 2002 or for financial institutions tax with respect to any of the Nevada subsidiaries in any period subsequent to 2002, including the year ended December 31,
2005.2006.
During the first quarter of 2007, the Company and the Indiana Department of Revenue entered into an agreement regarding the proposed assessment for tax years 2001 and 2002. As a result of this agreement the Company was not required to pay any tax liability as assessed by the Indiana Department of Revenue for tax years 2001 and 2002. In addition, tax years 2001 and 2002 are closed to further examination.
NOTE 12 –- Per Share Data
Earnings and Diluted Earnings per Share amounts have been retroactively computed as though shares issued for stock dividends had been outstanding for all periods presented. The computation of Earnings per Share and Diluted Earnings per Share are provided below:
| 2005
| | 2004
| | 2003
|
|---|
| Earnings per Share: | | | | | | | | | | | |
| Net Income | | | $ | 9,721 | | $ | 7,239 | | $ | 8,168 | |
| |
| Weighted Average Shares Outstanding | | | | 10,890,987 | | | 10,914,622 | | | 11,176,766 | |
|
| |
| |
| |
| |
| Earnings per Share | | | $ | 0.89 | | $ | 0.66 | | $ | 0.73 | |
|
| |
| |
| |
| |
| Diluted Earnings per Share: | | |
| Net Income | | | $ | 9,721 | | $ | 7,239 | | $ | 8,168 | |
| |
| Weighted Average Shares Outstanding | | | | 10,890,987 | | | 10,914,622 | | | 11,176,766 | |
| Stock Options, Net | | | | 4,668 | | | 33,509 | | | 45,577 | |
|
| |
| |
| |
| |
| Diluted Weighted Average Shares Outstanding | | | | 10,895,655 | | | 10,948,131 | | | 11,222,343 | |
|
| |
| |
| |
| |
| Diluted Earnings per Share | | | $ | 0.89 | | $ | 0.66 | | $ | 0.73 | |
|
| |
| |
| |
| | | 2006 | | 2005 | | 2004 | |
| Earnings per Share: | | | | | | | |
| Net Income | | $ | 10,221 | | $ | 9,721 | | $ | 7,239 | |
| Weighted Average Shares Outstanding | | | 10,994,739 | | | 10,890,987 | | | 10,914,622 | |
| Earnings per Share | | $ | 0.93 | | $ | 0.89 | | $ | 0.66 | |
| | | | | | | | | | | |
| Diluted Earnings per Share: | | | | | | | | | | |
| Net Income | | $ | 10,221 | | $ | 9,721 | | $ | 7,239 | |
| Weighted Average Shares Outstanding | | | 10,994,739 | | | 10,890,987 | | | 10,914,622 | |
| Stock Options, Net | | | 10,928 | | | 5,835 | | | 33,509 | |
| | | | | | | | | | | |
| Diluted Weighted Average Shares Outstanding | | | 11,005,667 | | | 10,896,822 | | | 10,948,131 | |
| Diluted Earnings per Share | | $ | 0.93 | | $ | 0.89 | | $ | 0.66 | |
Stock options for 320,309, 351,085, 253,913, and 177,974274,394 shares of common stock were not considered in computing diluted earnings per common share for 2006, 2005, 2004, and 2003,2004, respectively, because they were anti-dilutive.
51
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 13 –- Lease Commitments
The total rental expense for all leases for the years ended December 31,
2006, 2005,
and 2004
was $224, $175, and
2003 was $175, $213,
and $165 respectively, including amounts paid under short-term cancelable leases.
The following is a schedule of future minimum lease payments:
| Years Ending December 31: | | Premises
|
|---|
| |
| 2006 | | | $ | 123 | | |
| 2007 | | | | 120 | |
| 2008 | | | | 86 | |
| 2009 | | | | 79 | |
| 2010 | | | | 50 | |
| Thereafter | | | | 4 | |
|
| |
| Total | | | $ | 462 | |
|
| |
Years Ending December 31:
| | Premises | |
| | | | |
| 2007 | | $ | 201 | |
| 2008 | | | 147 | |
| 2009 | | | 120 | |
| 2010 | | | 77 | |
| 2011 | | | 22 | |
| Thereafter | | | — | |
| Total | | $ | 567 | |
NOTE 14 –- Commitments and Off-balance Sheet Items
In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and commitments to sell loans, which are not reflected in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make commitments as it uses for on-balance sheet items.
The Company’s exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of government sponsored entity counterparts. These commitments are subject to market risk resulting from fluctuations in interest rates. Commitments to sell loans are not mandatory (i.e., do not require net settlement with the counter-party to cancel the commitment).
Commitments and contingent liabilities are summarized as follows, at December 31:
| 2005
| | 2004
|
|---|
| |
| Commitments to Fund Loans: | | | | | | | | |
| Home Equity | | | $ | 44,611 | | $ | 40,158 | |
| Credit Card Lines | | | | 13,581 | | | 12,737 | |
| Commercial Operating Lines | | | | 74,351 | | | 51,826 | |
| Residential Mortgages | | | | 4,197 | | | 6,584 | |
|
| |
| |
| Total Commitments to Fund Loans | | | $ | 136,740 | | $ | 111,305 | |
|
| |
| |
| |
| Commitments to Sell Loans | | | $ | 8,591 | | $ | 8,934 | |
| |
| Standby Letters of Credit | | | $ | 7,624 | | $ | 6,245 | |
| | | 2006 | | 2005 | |
| Commitments to Fund Loans: | | | | | |
| Home Equity | | $ | 49,527 | | $ | 44,611 | |
| Credit Card Lines | | | 15,061 | | | 13,581 | |
| Commercial Operating Lines | | | 105,944 | | | 74,351 | |
| Residential Mortgages | | | 4,760 | | | 4,197 | |
| Total Commitments to Fund Loans | | $ | 175,292 | | $ | 136,740 | |
| Commitments to Sell Loans | | $ | 5,594 | | $ | 8,591 | |
| Standby Letters of Credit | | $ | 7,845 | | $ | 7,624 | |
The majority of commercial operating lines and home equity lines are variable rate, while the majority of other commitments to fund loans are fixed rate. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less.
At December 31,
20052006 and
2004,2005, respectively, the affiliate banks were required to have
$3,581$350 and
$4,982$3,581 on deposit with the Federal Reserve, or as cash on hand. These reserves do not earn interest.
NOTE 15 –- Non-cash Investing Activities | 2005
| | 2004
| | 2003
|
|---|
| Loans Transferred to Other Real Estate | | | $ | 1,280 | | $ | 800 | | $ | 834 | |
| | | 2006 | | 2005 | | 2004 | |
| Loans Transferred to Other Real Estate | | $ | 1,016 | | $ | 1,280 | | $ | 800 | |
See also Note 18 regarding purchase acquisitions.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data NOTE 16 –- Segment Information
The Company’s operations include
fourthree primary segments: core
banking, mortgage banking, trust and investment advisory services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the
affiliate banks’Company’s local markets. The
mortgagecore banking segment
also involves
the origination and purchase of single-family residential mortgage loans; the sale of
suchresidential mortgage loans in the secondary
market; the servicing of mortgage loans for investors;market and the operation of a title insurance company.
During the second quarter of 2006, the Company sold its mortgage loan servicing rights portfolio and commenced selling all secondary market residential mortgage loans on a servicing released basis. The trust and investment advisory services segment involves providing trust, investment advisory, and brokerage services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the affiliate banks’ local markets.
The core banking segment is comprised
of fiveby the Company’s banking subsidiary, German American Bancorp, which operates through six community
banksbanking affiliates with
2729 retail banking
offices.offices as of December 31, 2006. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue
of the five affiliate community banks comprisingfor the core-banking segment.
Revenues for the mortgage-banking segment consist of net interest income from a residential real estate loan portfolio funded primarily by wholesale sources, gains on sales of loans and gains on sales of and capitalization of mortgage servicing rights (MSR), loan servicing income, title insurance commissions and loan closing fees. The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company (“GAFA”). These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products as agent under
fivesix distinctive insurance agency names from
fivesix offices; and German American Reinsurance Company, Ltd. (“GARC”), which reinsures credit insurance products sold by the Company’s
five affiliate banks. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.
The following segment financial information has been derived from the internal financial statements of German American Bancorp,
Inc., which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the
fourthree segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the Holding Company and Other column below, along with amounts to eliminate transactions between segments.
| Year Ended December 31, 2005 | | Core
Banking
| Mortgage
Banking
| Trust and
Investment
Advisory
Services
| Insurance
| Holding
Company
and
Other
| Consolidated
Totals
|
|---|
| |
| Net Interest Income | | | $ | 32,355 | | $ | 554 | | $ | 40 | | $ | 38 | | $ | (774 | ) | $ | 32,213 | |
| Gain on Sales of Loans and | | |
| Related Assets | | | | 692 | | | 308 | | | — | | | — | | | — | | | 1,000 | |
| Net Gain/(Loss) on Securities | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Servicing Income | | | | — | | | 945 | | | — | | | — | | | (135 | ) | | 810 | |
| Trust and Investment Product | | |
| Fees | | | | 5 | | | — | | | 2,163 | | | — | | | (87 | ) | | 2,081 | |
| Insurance Revenues | | | | 141 | | | 72 | | | 29 | | | 4,542 | | | (81 | ) | | 4,703 | |
| Loss on Extinguishment of | | |
| Borrowings | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Noncash Items: | | |
| Provision for Loan Losses | | | | 1,133 | | | (80 | ) | | — | | | — | | | 850 | | | 1,903 | |
| MSR Amortization & Valuation | | | | — | | | 301 | | | — | | | — | | | — | | | 301 | |
| Provision for Income Taxes | | | | 6,025 | | | 131 | | | 134 | | | 335 | | | (3,290 | ) | | 3,335 | |
| Segment Profit (Loss) | | | | 13,507 | | | 199 | | | 201 | | | 558 | | | (4,744 | ) | | 9,721 | |
| Segment Assets | | | | 914,804 | | | 17,922 | | | 2,107 | | | 8,103 | | | 3,531 | | | 946,467 | |
Year ended December 31, 2006
| | | | | Trust and | | | | Holding | | | |
| | | | Investment | | | | Company | | | |
| | Core | | Advisory | | | | and | | Consolidated | |
| | Banking | | Services | | Insurance | | Other | | Totals | |
| | | | | | | | | | | | |
| Net Interest Income | | $ | 37,474 | | $ | 75 | | $ | 110 | | $ | (1,463 | ) | $ | 36,196 | |
| Gain on Sales of Loans and | | | | | | | | | | | | | | | | |
| Related Assets | | | 850 | | | — | | | — | | | — | | | 850 | |
| Net Gain / (Loss) on Securities | | | 951 | | | — | | | — | | | — | | | 951 | |
| Trust and Investment Product Fees | | | 4 | | | 2,295 | | | — | | | (89 | ) | | 2,210 | |
| Insurance Revenues | | | 213 | | | 15 | | | 4,950 | | | (84 | ) | | 5,094 | |
| Noncash Items: | | | | | | | | | | | | | | | | |
| Provision for Loan Losses | | | 1,382 | | | — | | | — | | | (457 | ) | | 925 | |
| Provision for Income Taxes | | | 6,990 | | | 147 | | | 364 | | | (3,517 | ) | | 3,984 | |
| Segment Profit / (Loss) | | | 14,243 | | | 217 | | | 639 | | | (4,878 | ) | | 10,221 | |
| Segment Assets | | | 1,079,212 | | | 2,139 | | | 9,658 | | | 2,415 | | | 1,093,424 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 16 –- Segment Information (continued)| Year Ended December 31, 2004 | Core
Banking
| Mortgage
Banking
| Trust and
Investment
Advisory
Services
| Insurance
| Holding
Company
and
Other
| Consolidated
Totals
|
|---|
| |
| Net Interest Income | | | $ | 31,279 | | $ | 251 | | $ | 32 | | $ | 4 | | $ | (327 | ) | $ | 31,239 | |
| Gain on Sales of Loans and | | |
| Related Assets | | | | 583 | | | 392 | | | — | | | — | | | — | | | 975 | |
| Net Gain/(Loss) on Securities | | | | (3,678 | ) | | — | | | — | | | — | | | — | | | (3,678 | ) |
| Servicing Income | | | | — | | | 925 | | | — | | | — | | | (154 | ) | | 771 | |
| Trust and Investment Product | | |
| Fees | | | | 4 | | | — | | | 2,129 | | | — | | | (87 | ) | | 2,046 | |
| Insurance Revenues | | | | 76 | | | 60 | | | 53 | | | 4,598 | | | (121 | ) | | 4,666 | |
| Loss on Extinguishment of | | |
| Borrowings | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Noncash Items: | | |
| Provision for Loan Losses | | | | 2,250 | | | (235 | ) | | — | | | — | | | — | | | 2,015 | |
| MSR Amortization & Valuation | | | | — | | | 504 | | | — | | | — | | | — | | | 504 | |
| Provision for Income Taxes | | | | 3,512 | | | (26 | ) | | 106 | | | 305 | | | (2,901 | ) | | 996 | |
| Segment Profit (Loss) | | | | 9,491 | | | (39 | ) | | 159 | | | 646 | | | (3,018 | ) | | 7,239 | |
| Segment Assets | | | | 904,633 | | | 24,928 | | | 2,200 | | | 7,959 | | | 2,374 | | | 942,094 | |
| |
| Year Ended December 31, 2003 | Core
Banking
| Mortgage
Banking
| Trust and
Investment
Advisory
Services
| Insurance
| Holding
Company
and
Other
| Consolidated
Totals
|
|---|
| |
| Net Interest Income | | | $ | 30,284 | | $ | (622 | ) | $ | 22 | | $ | 10 | | $ | (159 | ) | $ | 29,535 | |
| Gain on Sales of Loans and | | |
| Related Assets | | | | 1,284 | | | 1,304 | | | — | | | — | | | — | | | 2,588 | |
| Net Gain/(Loss) on Securities | | | | 56 | | | — | | | — | | | — | | | 24 | | | 80 | |
| Servicing Income | | | | — | | | 893 | | | — | | | — | | | (189 | ) | | 704 | |
| Trust and Investment Product | | |
| Fees | | | | 4 | | | — | | | 1,716 | | | — | | | (93 | ) | | 1,627 | |
| Insurance Revenues | | | | 124 | | | 166 | | | 17 | | | 3,543 | | | (158 | ) | | 3,692 | |
| Loss on Extinguishment of | | |
| Borrowings | | | | — | | | 1,898 | | | — | | | — | | | — | | | 1,898 | |
| Noncash Items: | | |
| Provision for Loan Losses | | | | 1,352 | | | (541 | ) | | — | | | — | | | — | | | 811 | |
| MSR Amortization & Valuation | | | | — | | | 660 | | | — | | | — | | | — | | | 660 | |
| Provision for Income Taxes | | | | 4,515 | | | (783 | ) | | 15 | | | 261 | | | (2,737 | ) | | 1,271 | |
| Segment Profit (Loss) | | | | 11,579 | | | (1,122 | ) | | 20 | | | 589 | | | (2,898 | ) | | 8,168 | |
| Segment Assets | | | | 883,639 | | | 27,536 | | | 2,141 | | | 9,448 | | | 3,182 | | | 925,946 | |
Year ended December 31, 2005
| | | | | Trust and | | | | Holding | | | |
| | | | | Investment | | | | Company | | | |
| | | Core | | Advisory | | | | and | | Consolidated | |
| | | Banking | | Services | | Insurance | | Other | | Totals | |
| | | | | | | | | | | | |
| Net Interest Income | | $ | 32,849 | | $ | 40 | | $ | 38 | | $ | (714 | ) | $ | 32,213 | |
| Gain on Sales of Loans and | | | | | | | | | | | | | | | | |
| Related Assets | | | 1,000 | | | — | | | — | | | — | | | 1,000 | |
| Net Gain / (Loss) on Securities | | | — | | | — | | | — | | | — | | | — | |
| Trust and Investment Product Fees | | | 5 | | | 2,163 | | | — | | | (87 | ) | | 2,081 | |
| Insurance Revenues | | | 213 | | | 29 | | | 4,542 | | | (81 | ) | | 4,703 | |
| Noncash Items: | | | | | | | | | | | | | | | | |
| Provision for Loan Losses | | | 1,053 | | | — | | | — | | | 850 | | | 1,903 | |
| Provision for Income Taxes | | | 6,156 | | | 134 | | | 335 | | | (3,290 | ) | | 3,335 | |
| Segment Profit / (Loss) | | | 13,706 | | | 201 | | | 558 | | | (4,744 | ) | | 9,721 | |
| Segment Assets | | | 930,682 | | | 2,107 | | | 8,103 | | | 5,575 | | | 946,467 | |
Year ended December 31, 2004
| | | | | Trust and | | | | Holding | | | |
| | | | | Investment | | | | Company | | | |
| | | Core | | Advisory | | | | and | | Consolidated | |
| | | Banking | | Services | | Insurance | | Other | | Totals | |
| | | | | | | | | | | | |
| Net Interest Income | | $ | 31,472 | | $ | 32 | | $ | 4 | | $ | (269 | ) | $ | 31,239 | |
| Gain on Sales of Loans and | | | | | | | | | | | | | | | | |
| Related Assets | | | 975 | | | — | | | — | | | — | | | 975 | |
| Net Gain / (Loss) on Securities | | | (3,678 | ) | | — | | | — | | | — | | | (3,678 | ) |
| Trust and Investment Product Fees | | | 4 | | | 2,129 | | | — | | | (87 | ) | | 2,046 | |
| Insurance Revenues | | | 136 | | | 53 | | | 4,598 | | | (121 | ) | | 4,666 | |
| Noncash Items: | | | | | | | | | | | | | | | | |
| Provision for Loan Losses | | | 2,015 | | | — | | | — | | | — | | | 2,015 | |
| Provision for Income Taxes | | | 3,486 | | | 106 | | | 305 | | | (2,901 | ) | | 996 | |
| Segment Profit / (Loss) | | | 9,452 | | | 159 | | | 646 | | | (3,018 | ) | | 7,239 | |
| Segment Assets | | | 925,359 | | | 2,200 | | | 7,959 | | | 6,576 | | | 942,094 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 17 –- Parent Company Financial Statements (continued) The condensed financial statements of German American Bancorp,
Inc. are presented below:
CONDENSED BALANCE SHEETS | December 31, |
|---|
| 2005
| | 2004
|
|---|
| ASSETS | | | | | | | | | | | |
| Cash | | | $ | 1,064 | | $ | 1,012 | |
| Securities Available-for-Sale, at Fair Value | | | | 6,074 | | | 2,623 | |
| Loan, net | | | | 3,790 | | | — | |
| Investment in Subsidiary Banks and Bank Holding Company | | | | 90,257 | | | 86,285 | |
| Investment in Non-banking Subsidiaries | | | | 711 | | | 645 | |
| Furniture and Equipment | | | | 2,590 | | | 2,083 | |
| Other Assets | | | | 2,762 | | | 3,361 | |
|
| |
| |
| Total Assets | | | $ | 107,248 | | $ | 96,009 | |
|
| |
| |
| |
| LIABILITIES | | |
| Promissory Notes Payable | | | $ | 21,000 | | $ | 10,500 | |
| Other Liabilities | | | | 2,186 | | | 1,840 | |
|
| |
| |
| Total Liabilities | | | | 23,186 | | | 12,340 | |
| |
| SHAREHOLDERS' EQUITY | | |
| Common Stock | | | | 10,643 | | | 10,898 | |
| Additional Paid-in Capital | | | | 63,784 | | | 66,817 | |
| Retained Earnings | | | | 11,198 | | | 5,778 | |
| Accumulated Other Comprehensive Income (Loss) | | | | (1,563 | ) | | 176 | |
|
| |
| |
| Total Shareholders' Equity(1) | | | | 84,062 | | | 83,669 | |
|
| |
| |
| Total Liabilities and Shareholders' Equity | | | $ | 107,248 | | $ | 96,009 | |
|
| |
| |
| |
| CONDENSED STATEMENTS OF INCOME | Years ended December 31, |
|---|
| 2005
| | 2004
| | 2003
|
|---|
| |
| INCOME | | |
| Dividends from Subsidiaries | | |
| Bank | | | $ | 14,750 | | $ | 7,675 | | $ | 14,200 | |
| Nonbank | | | | 1,500 | | | 1,750 | | | 300 | |
| Dividend and Interest Income | | | | (46 | ) | | 18 | | | 79 | |
| Fee Income from Subsidiaries | | | | 663 | | | 677 | | | 688 | |
| Securities Gains, Net | | | | — | | | — | | | 23 | |
| Other Income | | | | 49 | | | 1 | | | 54 | |
|
| |
| |
| |
| Total Income | | | | 16,916 | | | 10,121 | | | 15,344 | |
| |
| EXPENSES | | |
| Salaries and Benefits | | | | 4,109 | | | 3,602 | | | 5,463 | |
| Professional Fees | | | | 937 | | | 1,068 | | | 621 | |
| Occupancy and Equipment Expense | | | | 715 | | | 766 | | | 784 | |
| Interest Expense | | | | 669 | | | 287 | | | 165 | |
| Provision for Loan and Lease Losses | | | | 850 | | | — | | | — | |
| Other Expenses | | | | 621 | | | 552 | | | 532 | |
|
| |
| |
| |
| Total Expenses | | | | 7,901 | | | 6,275 | | | 7,565 | |
| INCOME BEFORE INCOME TAXES AND EQUITY IN | | |
| UNDISTRIBUTED INCOME OF SUBSIDIARIES | | | | 9,015 | | | 3,846 | | | 7,779 | |
| Income Tax Benefit | | | | 2,857 | | | 2,301 | | | 2,656 | |
|
| |
| |
| |
| INCOME BEFORE EQUITY IN UNDISTRIBUTED | | |
| INCOME OF SUBSIDIARIES | | | | 11,872 | | | 6,147 | | | 10,435 | |
| Equity in Undistributed Income of Subsidiaries | | | | (344 | ) | | 1,092 | | | (2,267 | ) |
|
| |
| |
| |
| NET INCOME(1) | | | | 11,528 | | | 7,239 | | | 8,168 | |
| |
| Other Comprehensive Income: | | |
| Unrealized Gain/(Loss) on Securities, Net | | | | (1,711 | ) | | 178 | | | (1,747 | ) |
| Changes in Minimum Pension Liability | | | | (28 | ) | | (10 | ) | | (169 | ) |
|
| |
| |
| |
| TOTAL COMPREHENSIVE INCOME | | | $ | 9,789 | | $ | 7,407 | | $ | 6,252 | |
|
| |
| |
| |
| | | December 31, | |
| | | 2006 | | 2005 | |
ASSETS | | | | | |
| Cash | | $ | 7,459 | | $ | 1,064 | |
| Securities Available-for-Sale, at Fair Value | | | 7,302 | | | 6,074 | |
| Loan, net | | | — | | | 3,790 | |
| Investment in Subsidiary Banks and Bank Holding Company | | | 94,835 | | | 90,257 | |
| Investment in Non-banking Subsidiaries | | | 2,153 | | | 711 | |
| Furniture and Equipment | | | — | | | 2,590 | |
| Other Assets | | | 3,723 | | | 2,762 | |
Total Assets | | $ | 115,472 | | $ | 107,248 | |
LIABILITIES | | | | | | | |
| Borrowings | | $ | 20,000 | | $ | 21,000 | |
| Other Liabilities | | | 3,081 | | | 2,186 | |
Total Liabilities | | | 23,081 | | | 23,186 | |
SHAREHOLDERS’ EQUITY | | | | | | | |
| Common Stock | | | 11,008 | | | 10,643 | |
| Additional Paid-in Capital | | | 68,216 | | | 63,784 | |
| Retained Earnings | | | 13,450 | | | 11,198 | |
| Accumulated Other Comprehensive (Loss) | | | (283 | ) | | (1,563 | ) |
Total Shareholders’ Equity (1) | | | 92,391 | | | 84,062 | |
Total Liabilities and Shareholders’ Equity | | $ | 115,472 | | $ | 107,248 | |
CONDENSED STATEMENTS OF INCOME
| | | Years ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
INCOME | | | | | | | |
| Dividends from Subsidiaries | | | | | | | |
| Bank | | $ | 24,325 | | $ | 14,750 | | $ | 7,675 | |
| Nonbank | | | — | | | 1,500 | | | 1,750 | |
| Dividend and Interest Income | | | 164 | | | (46 | ) | | 18 | |
| Fee Income from Subsidiaries | | | 379 | | | 663 | | | 677 | |
| Other Income | | | 185 | | | 49 | | | 1 | |
| Total Income | | | 25,053 | | | 16,916 | | | 10,121 | |
EXPENSES | | | | | | | | | | |
| Salaries and Benefits | | | 5,025 | | | 4,109 | | | 3,602 | |
| Professional Fees | | | 896 | | | 937 | | | 1,068 | |
| Occupancy and Equipment Expense | | | 812 | | | 715 | | | 766 | |
| Interest Expense | | | 1,627 | | | 669 | | | 287 | |
| Provision for Loan and Lease Losses | | | (457 | ) | | 850 | | | — | |
| Other Expenses | | | 982 | | | 621 | | | 552 | |
| Total Expenses | | | 8,885 | | | 7,901 | | | 6,275 | |
| INCOME BEFORE INCOME TAXES AND EQUITY IN | | | | | | | | | | |
| UNDISTRIBUTED INCOME OF SUBSIDIARIES | | | 16,168 | | | 9,015 | | | 3,846 | |
| Income Tax Benefit | | | 3,423 | | | 2,857 | | | 2,301 | |
| INCOME BEFORE EQUITY IN UNDISTRIBUTED | | | | | | | | | | |
| INCOME OF SUBSIDIARIES | | | 19,591 | | | 11,872 | | | 6,147 | |
| Equity in Undistributed Income of Subsidiaries | | | (9,370 | ) | | (344 | ) | | 1,092 | |
NET INCOME (1) | | | 10,221 | | | 11,528 | | | 7,239 | |
Other Comprehensive Income: | | | | | | | | | | |
| Unrealized Gain / (Loss) on Securities, Net | | | 1,242 | | | (1,711 | ) | | 178 | |
| Changes in Minimum Pension Liability | | | 38 | | | (28 | ) | | (10 | ) |
TOTAL COMPREHENSIVE INCOME | | $ | 11,501 | | $ | 9,789 | | $ | 7,407 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 17 –- Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF CASH FLOWS | Years ended December 31, | | |
|---|
| 2005
| | 2004
| | 2003
|
|---|
| |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | |
| Net Income | | | $ | 11,528 | | $ | 7,239 | | $ | 8,168 | |
| Adjustments to Reconcile Net Income to Net Cash from Operations | | |
| Amortization on Securities | | | | — | | | — | | | 1 | |
| Depreciation | | | | 388 | | | 426 | | | 479 | |
| Gain on Sale of Securities, Net | | | | — | | | — | | | (23 | ) |
| Director Stock Awards | | | | — | | | — | | | 72 | |
| Provision for Loan Losses | | | | 850 | | | — | | | — | |
| Change in Other Assets | | | | 427 | | | 719 | | | (997 | ) |
| Change in Other Liabilities | | | | 235 | | | (551 | ) | | 916 | |
| Equity in Undistributed Income of Subsidiaries | | | | 344 | | | (1,092 | ) | | 2,267 | |
|
| |
| |
| |
| Net Cash from Operating Activities | | | | 13,772 | | | 6,741 | | | 10,883 | |
| |
| CASH FLOWS FROM INVESTING ACTIVITIES | | |
| Capital Contribution to Subsidiaries | | | | — | | | — | | | (2,600 | ) |
| Purchase of Securities Available-for-Sale | | | | (2,835 | ) | | (2,024 | ) | | — | |
| Proceeds from Maturities of Securities Available-for-Sale | | | | — | | | — | | | 6,280 | |
| Property and Equipment Expenditures | | | | (895 | ) | | (143 | ) | | (694 | ) |
| Proceeds from Sale of Property and Equipment | | | | — | | | 206 | | | — | |
| Acquire Banking Entities | | | | (2,956 | ) | | — | | | — | |
| Purchase of Loans from Subsidiary Bank | | | | (4,640 | ) | | — | | | — | |
|
| |
| |
| |
| Net Cash from Investing Activities | | | | (11,326 | ) | | (1,961 | ) | | 2,986 | |
| |
| CASH FLOWS FROM FINANCING ACTIVITIES | | |
| Change in Short-term Borrowings | | | | 2,500 | | | — | | | — | |
| Advances in Long-term Debt | | | | 27,000 | | | 2,500 | | | 8,000 | |
| Repayment of Long-term Debt | | | | (19,000 | ) | | — | | | — | |
| Issuance of Common Stock | | | | 48 | | | 34 | | | 260 | |
| Purchase / Retire Common Stock | | | | (6,771 | ) | | (708 | ) | | (21,846 | ) |
| Employee Stock Purchase Plan | | | | (63 | ) | | (76 | ) | | (120 | ) |
| Dividends Paid | | | | (6,108 | ) | | (6,114 | ) | | (5,984 | ) |
| Purchase of Interest in Fractional Shares | | | | — | | | — | | | (27 | ) |
|
| |
| |
| |
| Net Cash from Financing Activities | | | | (2,394 | ) | | (4,364 | ) | | (19,717 | ) |
|
| |
| |
| |
| |
| Net Change in Cash and Cash Equivalents | | | | 52 | | | 416 | | | (5,848 | ) |
| Cash and Cash Equivalents at Beginning of Year | | | | 1,012 | | | 596 | | | 6,444 | |
|
| |
| |
| |
| Cash and Cash Equivalents at End of Year | | | $ | 1,064 | | $ | 1,012 | | $ | 596 | |
|
| |
| |
| |
| | | Years ended December 31, | |
| | | 2006 | | 2005 | | 2004 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
| Net Income | | $ | 10,221 | | $ | 11,528 | | $ | 7,239 | |
| Adjustments to Reconcile Net Income to Net Cash from Operations | | | | | | | | | | |
| Depreciation | | | 430 | | | 388 | | | 426 | |
| Provision for Loan Losses | | | (457 | ) | | 850 | | | — | |
| Change in Other Assets | | | (40 | ) | | 427 | | | 719 | |
| Change in Other Liabilities | | | 263 | | | 235 | | | (551 | ) |
| Equity Based Compensation | | | 284 | | | — | | | — | |
| Equity in Undistributed Income of Subsidiaries | | | 9,370 | | | 344 | | | (1,092 | ) |
| Net Cash from Operating Activities | | | 20,071 | | | 13,772 | | | 6,741 | |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | |
| Capital Contribution to Subsidiaries | | | (1,881 | ) | | — | | | — | |
| Purchase of Securities Available-for-Sale | | | (937 | ) | | (2,835 | ) | | (2,024 | ) |
| Proceeds from Maturities of Securities Available-for-Sale | | | 1 | | | — | | | — | |
| Property and Equipment Expenditures | | | (1,320 | ) | | (895 | ) | | (143 | ) |
| Proceeds from Sale of Property and Equipment | | | 70 | | | — | | | 206 | |
| Acquire Banking Entities | | | (6,606 | ) | | (2,956 | ) | | — | |
| Purchase of Loans from Subsidiary Bank | | | — | | | (4,640 | ) | | — | |
| Loans Made to Customers, Net of Payments Received | | | 4,247 | | | — | | | — | |
| Net Cash from Investing Activities | | | (6,426 | ) | | (11,326 | ) | | (1,961 | ) |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | |
| Change in Short-term Borrowings | | | (2,500 | ) | | 2,500 | | | — | |
| Advances in Long-term Debt | | | 26,500 | | | 27,000 | | | 2,500 | |
| Repayment of Long-term Debt | | | (25,000 | ) | | (19,000 | ) | | — | |
| Issuance of Common Stock | | | 17 | | | 48 | | | 34 | |
| Purchase / Retire Common Stock | | | — | | | (6,771 | ) | | (708 | ) |
| Employee Stock Purchase Plan | | | (105 | ) | | (63 | ) | | (76 | ) |
| Dividends Paid | | | (6,162 | ) | | (6,108 | ) | | (6,114 | ) |
| Net Cash from Financing Activities | | | (7,250 | ) | | (2,394 | ) | | (4,364 | ) |
| | | | | | | | | | | |
Net Change in Cash and Cash Equivalents | | | 6,395 | | | 52 | | | 416 | |
| Cash and Cash Equivalents at Beginning of Year | | | 1,064 | | | 1,012 | | | 596 | |
| Cash and Cash Equivalents at End of Year | | $ | 7,459 | | $ | 1,064 | | $ | 1,012 | |
| (1) | Parent Company Shareholders'Shareholders’ Equity and Net Income differ from consolidated Shareholders'Shareholders’ Equity and Net Income due to an intercompany gain related to the ownership reorganization of German American Insurance among the Company'sCompany’s banking subsidiaries during 2005. This difference no longer applies in 2006. |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 18 –- Business Combinations, Goodwill and Intangible Assets
Information relating to mergers and acquisitions for the three year period ended December 31, 2005,2006, includes:
Business Combination
| Date
Acquired
| Accounting
Method
|
|---|
| | |
|---|
Hoosierland Insurance Agency, Inc., Jasper, Indiana | 09/02/03 | PurchaseDate | | Accounting | |
Stafford-Williams Insurance Agency, Inc., Washington, IndianaBusiness Combination | 09/02/03 | PurchaseAcquired | | Method | |
| PCB Holding Company | | | 10/01/05 | | | Purchase | |
| Stone City Bancshares, Inc. | | | 01/01/06 | | | Purchase | |
| Keach and Grove Insurance, Inc | | | 10/01/06 | | | Purchase | |
Certain of the above entities changed their name and/or have been merged into other subsidiaries of the Corporation.Hoosierland Insurance Agency, Inc. was accounted for as a purchase, with net assets acquired of $1,553. The Company issued no stock in this transaction. The Company recorded customer list intangible of $1,534 as a result of this transaction. The acquired company is included in operating results beginning with the date of acquisition.
Stafford-Williams Insurance Agency, Inc. was accounted for as a purchase, with net assets acquired of $998. The Company issued no stock in this transaction. The Company recorded customer list intangible of $979 as a result of this transaction. The acquired company is included in operating results beginning with the date of acquisition.
On October 1, 2005 the Company consummated a merger with PCB Holding Company (“PCB”). PCB was merged with and into the Company, andCompany. PCB’s sole banking subsidiary, Peoples Community Bank, was merged into the Company’s subsidiary, First State Bank, Southwest Indiana. Peoples Community Bank, operated two banking offices in Tell City, Indiana. PCB’s assets and equity (unaudited) as of September 30, 2005 totaled $34.6 million and $4.8 million, respectively. Net loss (unaudited) totaled $586 for the nine-month period ended September 30, 2005.
Under the terms of the merger, the shareholders of PCB received
.7143 shares of common stock of the Company and $9.00 of cash for each of their PCB shares, or an aggregate of 257,029 shares of common stock of the Company
valued at approximately $3.5 million and approximately $3.2 million of
cash, representing a total transaction value of $6.7 million.cash.
This merger was accounted for under the purchase method of accounting. The purchase resulted in approximately $2,019 in goodwill and $443 in core deposit intangible. The core deposit intangible is being amortized over 10 years. Goodwill will not be amortized but instead evaluated periodically for impairment.
For income tax purposes, the core deposit intangible amortization and goodwill impairment (if any would arise) are non-deductible.
As a result of the PCB acquisition, on October 1, 2005 the Company acquired loans with evidence of credit deterioration since origination (as defined in Statement of Position (SOP) 03-3) with an outstanding principal balance of $982 and a net carrying amount of $826 at the acquisition date. This net carrying amount is believed to approximate fair value and the cash flows expected to be collected, net of accretable yield. At year end
2005,2006, the
acquired loans had an outstanding principal balance
of $168 and
a net carrying amount of
these loans is not materially different from acquisition date.$160. Subsequent to the acquisition, the Company increased the allowance for loan losses for
thesethe remaining acquired loans by
$89$7 and no allowance for loan losses was reversed.
On January 1, 2006, the Company consummated a merger with Stone City Bancshares, Inc. (“Stone City”) Stone City was merged with and into the
Company, andCompany. Stone City’s sole banking subsidiary, Stone City Bank of Bedford, Indiana,
will continue operations as an independent, state chartered banking institution operatingoperated two banking offices in Bedford, Indiana. Stone City’s assets and equity as of December 31, 2005 totaled
$ 61.2$61.2 million and $5.4 million, respectively. Net loss totaled $332 for the year ended December 31, 2005. This net loss includes no provision for income taxes as Stone City had elected under Internal Revenue Service Code to be an S Corporation. As such, in lieu of corporate income taxes, the shareholders of Stone City were taxed on their proportionate share of the Company’s taxable
loss.income.
Under the terms of the merger, the shareholders of Stone City received aggregate cash payments of approximately $6.4 million and 349,468 common shares of the Company valued
atduring a pre-closing valuation period of approximately $4.6 million, representing a total transaction value of approximately $11.0 million.
This merger was accounted for under the purchase method of accounting. The purchase resulted in approximately $5,576 in goodwill and $1,259 in core deposit intangible. The core deposit intangible is being amortized over 10 years. Goodwill will not be amortized but instead evaluated periodically for impairment. For income tax purposes, the core deposit intangible amortization and goodwill impairment (if any would arise ) are non-deductible.
As a result of the Stone City acquisition, on January 1, 2006 the Company acquired loans with evidence of credit deterioration since origination (as defined in Statement of Position (SOP) 03-3) with an outstanding principal balance of $1,238 and a net carrying amount of $1,064 at the acquisition date. This net carrying amount is inbelieved to approximate fair value and the processcash flows expected to be collected, net of evaluatingaccretable yield. At year end 2006, the purchase price allocation.
57
acquired loans had an outstanding principal balance of $747 and a net carrying amount of $683. Subsequent to the acquisition, the Company increased the allowance for loan losses for the remaining acquired loans by $144 and no allowance for loan losses was reversed.
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 18 –- Business Combinations, Goodwill and Intangible Assets (continued)
On October 1, 2006, the Company acquired substantially all of the assets, net of certain assumed liabilities of Keach and Grove Insurance, Inc. of Bedford, Indiana. The agency operations became a part of German American Insurance, Inc., the Company’s property and casualty insurance entity.
The purchase price for this transaction was $2.26 million in cash. This merger was accounted for under the purchase method of accounting. The purchase resulted in approximately $1,975 in customer list intangible and $266 in goodwill. The customer relationship intangible is being amortized over seven years and deducted for tax purposes over 15 years using the straight line method. Goodwill will not be amortized but instead evaluated periodically for impairment for book purposes and will be amortized over a 15 year period for tax purposes using the straight line method.
The changes in the carrying amount of goodwill for the periods ended December 31,
20052006 and
20042005 were classified as follows:
| 2005
| | 2004
|
|---|
| | |
|---|
| Beginning of Year | | | $ | 1,794 | | $ | 1,794 | |
| Goodwill from acquisitions | | | | 2,019 | | | — | |
|
| |
| |
| End of Year | | | $ | 3,813 | | $ | 1,794 | |
|
| |
| |
| | | 2006 | | 2005 | |
| Beginning of Year | | $ | 3,813 | | $ | 1,794 | |
| Goodwill from acquisitions | | | 5,842 | | | 2,019 | |
| End of Year | | $ | 9,655 | | $ | 3,813 | |
Of the $9,655 carrying amount of goodwill for December 31, 2006, $8,323 is allocated to the core banking segment and $1,332 is allocated to the insurance segment. Of the $3,813 carrying amount of goodwill for December 31, 2005, $2,749 is allocated to the core banking segment and $1,064 is allocated to the insurance segment.
Of the $1,794 carrying amount of goodwill for December 31, 2004, $730 is allocated to the core banking segment and $1,064 is allocated to the insurance segment. Acquired intangible assets were as follows as of year end: | 2005
| |
|---|
| Gross
Amount
| | Accumulated
Amortization
|
|---|
| |
| Core Banking | | | | | | | | |
| Core Deposit Intangible | | | $ | 1,113 | | $ | 681 | |
| Unidentified Branch Acquisition Intangible | | | | 257 | | | 192 | |
| Insurance | | |
| Customer List | | | | 2,838 | | | 947 | |
|
| |
| |
| Total | | | $ | 4,208 | | $ | 1,820 | |
|
| |
| |
| |
| 2004
| |
|---|
| Gross
Amount
| | Accumulated
Amortization
|
|---|
| |
| Core Banking | | |
| Core Deposit Intangible | | | $ | 670 | | $ | 670 | |
| Unidentified Branch Acquisition Intangible | | | | 257 | | | 175 | |
| Insurance | | |
| Customer List | | | | 2,838 | | | 542 | |
|
| |
| |
| Total | | | $ | 3,765 | | $ | 1,387 | |
|
| |
| |
| | | 2006 | |
| | | Gross | | Accumulated | |
| | | Amount | | Amortization | |
| Core Banking | | | | | |
| Core Deposit Intangible | | $ | 2,372 | | $ | 877 | |
| Unidentified Branch Acquisition Intangible | | | 257 | | | 209 | |
| Insurance | | | | | | | |
| Customer List | | | 4,813 | | | 1,432 | |
| Total | | $ | 7,442 | | $ | 2,518 | |
| | | 2005 | |
| | | Gross | | Accumulated | |
| | | Amount | | Amortization | |
| Core Banking | | | | | |
| Core Deposit Intangible | | $ | 1,113 | | $ | 681 | |
| Unidentified Branch Acquisition Intangible | | | 257 | | | 192 | |
| Insurance | | | | | | | |
| Customer List | | | 2,838 | | | 947 | |
| Total | | $ | 4,208 | | $ | 1,820 | |
Amortization Expense was
$698, $433,
and $426
for 2006, 2005, and
$167 for 2005, 2004, and 2003.2004.
Estimated amortization expense for each of the next five years is as follows: | |
|---|
| |
|---|
| 2006 | | | $ | 467 | |
| 2007 | | | | 467 | |
| 2008 | | | | 467 | |
| 2009 | | | | 464 | |
| 2010 | | | | 313 | |
| 2007 | | $ | 894 | |
| 2008 | | | 889 | |
| 2009 | | | 882 | |
| 2010 | | | 726 | |
| 2011 | | | 457 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 19 – Fair Values of Financial Instruments
The estimated fair values of the Company’s financial instruments are provided in the table below. Since not all of the Company’s assets and liabilities are considered financial instruments, some assets and liabilities are not included in the table. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.
| December 31, 2005
| | December 31, 2004
|
|---|
| Carrying
Value
| | Fair
Value
| | Carrying
Value
| | Fair
Value
|
|---|
| |
| Financial Assets: | | | | | | | | | | | | | | |
| Cash and Short-term Investments | | | $ | 32,931 | | $ | 32,931 | | $ | 47,666 | | $ | 47,666 | |
| Securities Available-for-Sale | | | | 181,150 | | | 181,150 | | | 181,676 | | | 181,676 | |
| Securities Held-to-Maturity | | | | 8,684 | | | 8,811 | | | 13,318 | | | 13,636 | |
| FHLB Stock and Other Restricted Stock | | | | 14,095 | | | 14,095 | | | 13,542 | | | 13,542 | |
| Loans, including Loans Held-for-Sale, Net | | | | 644,592 | | | 637,134 | | | 624,114 | | | 621,135 | |
| Accrued Interest Receivable | | | | 5,941 | | | 5,941 | | | 5,431 | | | 5,431 | |
| Financial Liabilities: | | |
| Demand, Savings, and Money Market Deposits | | | | (438,047 | ) | | (438,047 | ) | | (428,468 | ) | | (428,468 | ) |
| Other Time Deposits | | | | (308,774 | ) | | (302,911 | ) | | (321,915 | ) | | (320,128 | ) |
| Short-term Borrowings | | | | (38,788 | ) | | (38,788 | ) | | (25,673 | ) | | (25,673 | ) |
| Long-term Debt | | | | (66,606 | ) | | (67,907 | ) | | (69,941 | ) | | (73,239 | ) |
| Accrued Interest Payable | | | | (1,764 | ) | | (1,764 | ) | | (1,406 | ) | | (1,406 | ) |
| Unrecognized Financial Instruments: | | |
| Commitments to Extend Credit | | | | — | | | — | | | — | | | — | |
| Standby Letters of Credit | | | | — | | | — | | | — | | | — | |
| Commitments to Sell Loans | | | | — | | | — | | | — | | | — | |
| | | December 31, 2006 | | December 31, 2005 | |
| | | Carrying | | Fair | | Carrying | | Fair | |
| | | Value | | Value | | Value | | Value | |
| Financial Assets: | | | | | | | | | |
| Cash and Short-term Investments | | $ | 29,895 | | $ | 29,895 | | $ | 32,931 | | $ | 32,931 | |
| Securities Available-for-Sale | | | 179,222 | | | 179,222 | | | 181,150 | | | 181,150 | |
| Securities Held-to-Maturity | | | 6,135 | | | 6,192 | | | 8,684 | | | 8,811 | |
| FHLB Stock and Other Restricted Stock | | | 10,621 | | | 10,621 | | | 14,095 | | | 14,095 | |
| Loans, including Loans Held-for-Sale, Net | | | 790,731 | | | 790,638 | | | 644,592 | | | 637,134 | |
| Accrued Interest Receivable | | | 8,747 | | | 8,747 | | | 5,941 | | | 5,941 | |
| Financial Liabilities: | | | | | | | | | | | | | |
| Demand, Savings, and Money Market Deposits | | | (467,361 | ) | | (467,361 | ) | | (437,390 | ) | | (437,390 | ) |
| Other Time Deposits | | | (400,257 | ) | | (398,037 | ) | | (309,431 | ) | | (303,568 | ) |
| Short-term Borrowings | | | (51,556 | ) | | (51,556 | ) | | (38,788 | ) | | (38,788 | ) |
| Long-term Debt | | | (68,333 | ) | | (69,084 | ) | | (66,606 | ) | | (67,907 | ) |
| Accrued Interest Payable | | | (3,357 | ) | | (3,357 | ) | | (1,764 | ) | | (1,764 | ) |
| Unrecognized Financial Instruments: | | | | | | | | | | | | | |
| Commitments to Extend Credit | | | — | | | — | | | — | | | — | |
| Standby Letters of Credit | | | — | | | — | | | — | | | — | |
| Commitments to Sell Loans | | | — | | | — | | | — | | | — | |
The carrying amounts of cash, short-term investments, FHLB and other restricted stock, and accrued interest receivable are a reasonable estimate of their fair values. The fair values of securities are based on quoted market prices or dealer quotes, if available, or by using quoted market prices for similar instruments. The fair value of loans held-for-sale is estimated using commitment prices or market quotes on similar loans. The fair value of loans are estimated by discounting future cash flows using the current rates at which similar loans would be made for the average remaining maturities. The fair value of demand deposits, savings accounts, money market deposits, short-term borrowings and accrued interest payable is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits and long-term borrowings are estimated using the rates currently offered on these instruments for similar remaining maturities. Commitments to extend credit and standby letters of credit are generally short-term or variable rate with minimal fees charged. These instruments have no carrying value, and the fair value is not significant. The fair value of commitments to sell loans is the cost or benefit of settling the commitments with the counter-party at the reporting date. At December 31, 20052006 and 2004,2005, none of the Company’s commitments to sell loans were mandatory, and there is no cost or benefit to settle these commitments.
NOTE 20 –20- Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
| 2005
| | 2004
| | 2003
|
|---|
| | | |
|---|
| Unrealized Holding Losses on | | | | | | | | | | | |
| Securities Available-for-Sale | | | $ | (2,551 | ) | $ | (3,407 | ) | $ | (2,567 | ) |
| Reclassification Adjustments for (Gains) and Losses | | |
| later Recognized in Income | | | | — | | | 3,678 | | | (80 | ) |
|
| |
| |
| |
| |
| Net Unrealized Gains and (Losses) | | | | (2,551 | ) | | 271 | | | (2,647 | ) |
| |
| Recognition of Minimum Pension Liability | | | | (46 | ) | | (17 | ) | | (279 | ) |
| |
| Tax Effect | | | | 858 | | | (86 | ) | | 1,010 | |
|
| |
| |
| |
| |
| Other Comprehensive Income / (Loss) | | | $ | (1,739 | ) | $ | 168 | | $ | (1,916 | ) |
|
| |
| |
| |
| | 2006 | | 2005 | | 2004 | |
| Unrealized Holding Gains (Losses) on | | | | | | | |
| Securities Available-for-Sale | | $ | 2,869 | | $ | (2,551 | ) | $ | (3,407 | ) |
| Reclassification Adjustments for (Gains) and Loss | | | | | | | | | | |
| later Recognized in Income | | | (951 | ) | | — | | | 3,678 | |
| Net Unrealized Gains and (Losses) | | | 1,918 | | | (2,551 | ) | | 271 | |
| Recognition of Minimum Pension Liability | | | 62 | | | (46 | ) | | (17 | ) |
| | | (700 | ) | | 858 | | | (86 | ) |
| Other Comprehensive Income / (Loss) | | $ | 1,280 | | $ | (1,739 | ) | $ | 168 | |
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
NOTE 21 –21- Quarterly Financial Data (Unaudited)
The following table represents selected quarterly financial data for the Company:
| Interest | | Net Interest | | Net | | Earnings per Share |
|---|
| Income
| | Income
| | Income
| | Basic
| | Diluted
|
|---|
| 2005 | | | | | | | | | | | | | | | | | |
| First Quarter | | | $ | 12,004 | | $ | 7,999 | | $ | 2,411 | | $ | 0.22 | $ | 0.22 |
| Second Quarter | | | | 12,172 | | | 7,975 | | | 2,408 | | | 0.22 | | 0.22 |
| Third Quarter | | | | 12,576 | | | 7,981 | | | 2,471 | | | 0.23 | | 0.23 |
| Fourth Quarter | | | | 13,445 | | | 8,258 | | | 2,431 | | | 0.22 | | 0.22 |
| |
| 2004 | | |
| First Quarter | | | $ | 11,776 | | $ | 7,478 | | $ | 1,952 | | $ | 0.18 | $ | 0.18 |
| Second Quarter | | | | 11,888 | | | 7,735 | | | 2,332 | | | 0.21 | | 0.21 |
| Third Quarter | | | | 11,957 | | | 7,900 | | | 2,376 | | | 0.22 | | 0.22 |
| Fourth Quarter | | | | 12,089 | | | 8,126 | | | 579 | | | 0.05 | | 0.05 |
During the fourth quarter 2004, the Company’s operating results were impacted by a $3.68 million other-than-temporary impairment charge on the Company’s portfolio of FHLMC and FNMA preferred stocks. See Note 2 to the consolidated financial statements for further discussion of this charge.
| | | Interest | | Net Interest | | Net | | Earnings per Share | |
| | Income | | Income | | Income | | Basic | | Diluted | |
2006 | | | | | | | | | | | |
| First Quarter | | $ | 14,748 | | $ | 8,876 | | $ | 2,563 | | $ | 0.23 | | $ | 0.23 | |
| Second Quarter | | | 15,377 | | | 8,898 | | | 2,488 | | | 0.23 | | | 0.23 | |
| Third Quarter | | | 16,374 | | | 9,109 | | | 2,732 | | | 0.25 | | | 0.25 | |
| Fourth Quarter | | | 17,095 | | | 9,313 | | | 2,438 | | | 0.22 | | | 0.22 | |
| | | | | | | | | | | | | | | | | |
2005 | | | | | | | | | | | | | | | | |
| First Quarter | | $ | 12,004 | | $ | 7,999 | | $ | 2,411 | | $ | 0.22 | | $ | 0.22 | |
| Second Quarter | | | 12,172 | | | 7,975 | | | 2,408 | | | 0.22 | | | 0.22 | |
| Third Quarter | | | 12,576 | | | 7,981 | | | 2,471 | | | 0.23 | | | 0.23 | |
| Fourth Quarter | | | 13,445 | | | 8,258 | | | 2,431 | | | 0.22 | | | 0.22 | |
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As of December 31,
2005,2006, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic reports filed with the Securities and Exchange Commission. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.
Changes in Internal Control overOver Financial Reporting in Most Recent Fiscal Quarter
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fourth fiscal quarter of
20052006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31,
2005.2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
This assessment excluded internal control over financial reporting for the Company’s banking affiliate, Stone City Bank, as allowed by the SEC for current year acquisitions. The banking affiliate, Stone City Bank, was acquired on January 1, 2006 and represented approximately 6% of assets at December 31, 2006 and approximately 2% of net income for the year ended December 31, 2006. Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31,
2005.2006.
The Company’s independent registered public accounting firm has issued their report on management’s assessment of the Company’s internal control over financial reporting. That report follows under the heading, Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Board of Directors and Shareholders
German American Bancorp,
Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that German American Bancorp, Inc. maintained effective internal control overfinancial reporting as of December 31, 2005,2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). German American Bancorp’sBancorp, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’sCompany’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
U. S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
U. S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As permitted, the Company excluded Stone City Bancshares, Inc., which was acquired during 2006, from the scope of management’s report on internal control over financial reporting. As such, this entity has also been excluded from the scope of our audit of internal control over financial reporting.
In our opinion, management’s assessment that German American Bancorp, Inc. maintained effective internal control over financial reporting as of December 31, 2005,2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, German American Bancorp, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005,2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of German American Bancorp, Inc. as of December 31, 20052006 and 2004,2005, 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, 20052006 and our report dated February 21, 200627, 2007 expressed an unqualified opinion on those consolidated financial statements.
| Louisville, Kentucky | /s/ Crowe Chizek and Company LLC
|
| February 27, 2007 | Crowe Chizek and Company LLC |
Indianapolis, Indiana
February 21, 2006
62
Item 9B. Other Information
Item 10. Directors and Executive Officers of the Registrant.
Information relating to directors and executive officers of the Corporation will be included under the
captioncaptions “Election of Directors”
and “Our Executive Officers” in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held in April
2006,2007, which will be filed within 120 days of the end of the fiscal year covered by this Report (the
“2006“2007 Proxy Statement”), which
section issections are incorporated herein in partial response to this Item’s informational requirements.
Section 16(a) ComplianceCompliance.. Information relating to Section 16(a) compliance will be included in the 20062007 Proxy Statement under the caption of “Section 16(a): Beneficial Ownership Reporting Compliance” and is incorporated herein by reference. Code of Business Conduct. The Corporation’s Board of Directors has adopted a Code of Business Conduct, which constitutes a “code of ethics” as that term is defined by SEC rules adopted under the Sarbanes-Oxley Act of 2002 (“SOA”). The Corporation has posted a copy of the Code of Business Conduct on its Internet website (www.germanamericanbancorp.com). The Corporation intends to satisfy its disclosure requirements under Item 105.05 of Form 8-K regarding certain amendments to, or waivers of, the Code of Business Conduct, by posting such information on its Internet website.website, except that waivers that must under NASDAQ rules be filed with the SEC on Form 8-K will be so filed. Audit Committee IdentificationIdentification.. The Board of Directors of the Corporation has a separately-designated standing audit committee established in accordance with Section 3(a) (58) (A) of the Securities Exchange Act of 1934. The description of the Audit Committee of the Board of Directors, and the identification of its members, will be set forth in the 20062007 Proxy Statement under the caption “ELECTION OF DIRECTORS – Committees and Attendance”DIRECTORS”, which section is incorporated herein by reference. Audit Committee Financial ExpertExpert.. The Board of Directors has determined that none of its membersRichard E. Forbes, a director who serveserves on the Audit Committee of the Board of Directors and who is an “audit committee financial expert”independent director as that term is defined by SEC rules adopted under SOA. The Board of Directors has determined, however, that the absence from its Audit Committee of a person who would qualify as an audit committee financial expert does not impair the ability of its Audit Committee to provide effective oversight of the Corporation’s external financial reporting and internal control over financial reporting. In reaching its determination that the members of the Audit Committee, as itNASDAQ listing standards, is presently constituted, have sufficient knowledge and experience to exercise effective oversight without the addition of an audit committee financial expert, the Board of Directors considered the knowledge gained by the current members of the Audit Committee in connection with their prior years of service on the Corporation’s Audit Committee. The Board of Directors also considered the experience in financial and accounting matters that Mr. Steurer, Chairman of the Board of JOFCO, Inc., a privately-held manufacturing company, has gained in connection with his active supervision of the accounting and finance personnel of that company. Mr. Steurer is a member of the Corporation’s Audit Committee. Mr. Steurer is retiring from service as a director of the Corporation effective at the annual meeting of shareholders in April 2006 including from service as a member of the Audit Committee; however, the Board of Directors has nominated Richard Forbes for election as a director of the Corporation at the annual meeting and, assuming that Mr. Forbes is elected, the Board expects that Mr. Forbes will be appointed to the Audit Committee. The Corporation believes that Mr. Forbes will qualify, if and when elected and appointed, as an “audit committee financial expert” as that term is defined by SEC rules adopted under SOA by reason of his experience as the current chief executive officer and former chief financial officer of a subsidiary of a Fortune 500 company.
Item 11. Executive Compensation.
Information relating to compensation of the Corporation’s executive officers and directors,
(including the required disclosures under the subheadings “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”) will be included under the
captionscaption “Executive
Compensation” and
“Election of Directors — Compensation of Directors”Director Compensation” in the
20062007 Proxy Statement of the Corporation, which
sections aresection is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersMatters..
Information relating to security ownership of certain beneficial owners and the directors and executive officers of the Corporation will be included under the captions “Election“Ownership of Directors”Our Common Stock by Our Directors and Executive Officers” and “Principal Owners of Common Shares” of the 20062007 Proxy Statement of the Corporation, which sections are incorporated herein by reference.
Equity Compensation Plan InformationInformation. The Company maintains three plans under which it has authorized the issuance of its Common Shares to employees and non-employee directors as compensation: its 1992 Stock Option Plan (under which no new grants may be made), its 1999 Long-Term Equity Incentive Plan, and its 1999 Employee Stock Purchase Plan. Each of these three plans was approved by the requisite vote of the Company’s common shareholders in the year of adoption by the Board of Directors. The Company is not a party to any individual compensation arrangement involving the authorization for issuance of its equity securities to any single person, other than option agreements and restricted stock award agreements that have been granted under the terms of one of the three plans identified above. The following table sets forth information regarding these plans as of December 31,
2005:Plan Category
| | Number of Securities
to be Issued upon Exercise
of Outstanding Options,
Warrants or Rights
| | Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
| | Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected
in First Column)
|
|---|
| | | |
|---|
Equity compensation plans approved by
security holders | | | | 405,019(a) | | | $ 16.37 | | | 747,324(a) | |
|
Equity compensation plans not approved
by security holders | | | | —
| | | —
| | | —
| | Total | | | | 405,019
| | | $ 16.37
| | | 747,324
| |
2006:Plan Category | | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants or Rights | | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in First Column) | |
| Equity compensation plans approved by security holders | | | 370,413 | (a) | $ | 16.38 | | | 841,376 | (b) |
| | | | | | | | | | | |
| Equity compensation plans not approved by security holders | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Total | | | 370,413 | | $ | 16.38 | | | 841,376 | |
| (a) | Does not include any shares that employees may have the right to purchase under the Employee Stock Purchase Plan in August 20062007 in respect of employee payroll deductions of participating employees that had accumulated as of December 31, 20052006 during the plan year that commenced in August 2005.2006. Although these employees have the right under this Plan to have their accumulated payroll deductions applied to the purchase of Common Shares at a discounted price in August 2006,2007, the price at which such shares may be purchased and the number of shares that may be purchased under that Plan at that time is not presently determinable. |
| (b) | Represents 384,500350,174 shares that the Company may in the future issue to employees under the Employee Stock Purchase Plan (although the Company typically purchases the shares needed for sale to participating employees on the open market rather than issuing new issue shares to such employees) and 362,824491,202 shares that were available for grant or issuance at December 31, 20052006 under the 1999 Long-Term Equity Incentive Plan. Under the Long-Term Equity Incentive Plan, the aggregate number of Common Shares available for the grant of awards in any given fiscal year is equal to the sum of (i) one percent of the number of Common Shares outstanding as of the last day of the Corporation’s prior fiscal year, plus (ii) the number of Common Shares that were available for the grant of awards, but were not granted, under the Plan in any previous fiscal year. Under no circumstances, however, may the number of Common Shares available for the grant of awards in any fiscal year under the Long-Term Equity Incentive Plan exceed one and one-half percent of the Common Shares outstanding as of the last day of the prior fiscal year. The 362,824491,202 shares available at December 31, 20052006 and included in the above table represent only the carryover of shares that may be the subject of grants of awards under the Long-Term Equity Incentive Plan in 20062007 and future years; the Corporation during 20062007 and future years (in addition to this carryover amount) may grant an additional 106,435110,086 shares, representing one percent of the number of Common Shares that were outstanding at December 31, 2005,2006, under the Long-Term Equity Incentive Plan.
For additional information regarding the Company’s equity incentive plans and employee stock purchase plan, see Note 9 to the consolidated financial statements in Item 8 of this Report. |
For additional information regarding the Company’s equity incentive plans and employee stock purchase plan, see Note 9 to the consolidated financial statements in Item 8 of this Report.
Item 13. Certain Relationships and Related Transactions.
Information responsive to this Item 13 will be included under the captions
“Executive Compensation — Certain Business Relationships“Election of Directors” and
Transactions” and “Executive Compensation — Compensation Committee Interlocks and Insider Participation”“Transactions with Related Persons” of the
20062007 Proxy Statement of the Corporation, which sections are incorporated herein by reference.
Item 14.Principal Accountant Fees and Services.
Information responsive to this item 14 will be included in the 20062007 Proxy Statement under the Captioncaption “Principal AccountingAccountant Fees and Services,” which section is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedulesa) Financial Statements
The following items are included in Item 8 of this report:
| |
|---|
| | | Page # |
|---|
German American Bancorp, Inc. and Subsidiaries: | Page # |
| |
| Report of Independent Registered Public Accounting Firm on Financial Statements | 30 |
| |
| Consolidated Balance Sheets at December 31, | |
20052006 and December 31, 20042005 | 31 |
| |
| Consolidated Statements of Income, years | |
ended December 31, 2006, 2005, 2004, and 20032004 | 32 |
| |
| Consolidated Statements of Changes in | |
| Shareholders’ Equity, years ended | |
December 31, 2006, 2005, 2004, and 20032004 | 33 |
| |
| Consolidated Statements of Cash Flows, years | |
ended December 31, 2006, 2005, 2004, and 20032004 | 34 |
| |
| Notes to the Consolidated Financial | |
| Statements | 35-6035-65 |
b) Exhibits
The Exhibits described in the Exhibit List immediately following the “Signatures” page of this report (which Exhibit List is incorporated herein by reference) are hereby filed as part of this report.
c) Financial Statement Schedules
| c) | Financial Statement Schedules |
None.
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.
Date: March 10, 2006
| | |
| GERMAN AMERICAN BANCORP, INC (Registrant) |
(Registrant)
|
|
|
By/Date: March 9, 2007 | By | /s/Mark A. Schroeder |
|
Mark A. Schroeder, President and
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| | |
Date: March 10, 20069, 2007
| By | By//s/Mark A. Schroeder |
|
Mark A. Schroeder, President and Chief Executive
Officer (principal executive officer), Director
|
| | |
Date:March 10, 20065, 2007
| By/By | /s/Douglas A. Bawel |
|
Douglas A. Bawel, Director
|
| | |
Date: March 10, 20065, 2007
| By/By | /s/Christina M. Ernst |
|
Christina M. Ernst, Director
|
| | |
Date:March 13, 20065, 2007 | By | /s/ Richard E. Forbes |
|
Richard E. Forbes, Director |
| | |
| Date:March 5, 2007 | By | By//s/William R. Hoffman |
|
William R. Hoffman, Director |
| | |
Date: March 10, 20066, 2007
| By/By | /s/U. Butch Klem |
|
|
| | |
Date:March 12, 20065, 2007
| By/By | /s/J. David Lett |
|
|
| | |
Date:March 13, 20065, 2007
| By/By | /s/Gene C. Mehne |
|
|
| | |
Date: March 11, 20066, 2007
| By/By | /s/Larry J. Seger |
|
|
| | |
Date: March 11, 20065, 2007
| By/By | /s/Joseph F. Steurer C.L. Thompson |
|
Joseph F. Steurer, |
| | |
Date: March 13, 20065, 2007
| By/s/C.L. Thompson
C.L. Thompson, Director |
Date: March 13, 2006
By | By//s/Michael J. Voyles |
|
Michael J. Voyles, Director
|
| | |
Date: March 10, 20069, 2007
| By/By | /s/Bradley M. Rust |
|
Bradley M. Rust, Senior Vice President and
Chief Financial Officer (principal accounting officer and principal financial officer) |
66
Executive Compensation Plans and Arrangements*
| Exhibit No. | | Description |
| 3.1 | 2.1
| Agreement and Plan of Reorganization by and among the Registrant, First State Bank, Southwest Indiana, PCB Holding Company, and Peoples Community Bank, dated May 23, 2005, is incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 filed with the SEC on July 19, 2005 (File No. 333-126704).**
|
| 2.2
| Agreement and Plan of Reorganization by and among the Registrant and Stone City Bancshares, Inc., and joined in by the shareholders of Stone City Bancshares, Inc., dated October 25, 2005, is incorporated by reference from Exhibit 2 to the Registrant’s Current Report on Form 8-K filed October 31, 2005.**
|
| 3.1
| Restatement of the Articles of Incorporation of the Registrant is incorporated by reference from Exhibit 3.13 to the Registrant's QuarterlyRegistrant’s Current Report on Form 10-Q for the quarter ended March 31, 2005. 8-K filed May 22, 2006. |
| 3.2
| |
| 3.2 | | Restated Bylaws of the Registrant, as amended April 22, 2004,through February 12, 2007, is incorporated by reference from Exhibit 3.23 to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended June 30, 2004.8-K filed February 16, 2007. |
| 4.1
| |
| 4.1 | | Rights Agreement dated April 27, 2000, is incorporated by reference from Exhibit 4.1 to the Registrant'sRegistrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005. |
| 4.2
| |
| 4.2 | | No long-term debt instrument issued by the Registrant exceeds 10% of consolidated total assets or is registered. In accordance with paragraph 4 (iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request. |
| 4.3
| |
| 4.3 | | Terms of Common Shares and Preferred Shares of the Registrant (included in Restatement of Articles of Incorporation) are incorporated by reference tofrom Exhibit 3.13 to the Registrant's QuarterlyRegistrant’s Current Report on Form 10-Q for the quarter ended March 31, 2005.8-K filed May 22, 2006. |
X
| 10.1
| |
| 10.1 | | The Registrant’s 1992 Stock Option Plan, as amended, is incorporated by reference from Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4 filed October 14, 1998.* |
X
| 10.2
| |
| 10.2 | | Form of Director Deferred Compensation Agreement between The German American Bank and certain of its Directors is incorporated herein by reference from Exhibit 10.4 to the Registrant'sRegistrant’s Registration Statement on Form S-4 filed January 21, 1993 (the Agreement entered into by former director George W. Astrike, a copy of which was filed as Exhibit 10.4 to the Registrant'sRegistrant’s Registration Statement on Form S-4 filed January 21, 1993, is substantially identical to the Agreements entered into by the other Directors, some of whom remain directors of the Registrant.). The schedule following Exhibit 10.4 lists the Agreements with the other Directors and sets forth the material detail in which such Agreements differ from the Agreement filed as Exhibit 10.4.* |
X
| 10.3
| |
| 10.3 | | The Registrant’s 1999 Long-Term Equity Incentive Plan is incorporated herein by reference from Appendix A to the Registrant’s definitive proxy statement for its 1999 annual meeting filed March 26, 1999.Plan* |
X
| 10.4
| |
| 10.4 | | Basic Plan Document for the Registrant’s Nonqualified Savings Plan is incorporated by reference from Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
67
Executive Compensation Plans and Arrangements* | Exhibit No. | Description |
X | 10.5 | Adoption Agreement for the Registrant’s Nonqualified Savings Plan dated August 17, 2004, is incorporated by reference from Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.6 | First Amendment to the Registrant’s Nonqualified Savings Plan dated August 17, 2004, is incorporated by reference from Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.7 | Form of Employee Stock Option Agreement (new grant, five-year expiration, five year 20% vesting) typically issued during 2005 and prior periods to executive officers and other key employees as incentives is incorporated by reference from Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.8 | Form of Employee Stock Option Agreement (Replacement Grant) typically issued during 2005 and prior periods to persons who exercise other stock options using common shares as payment for the exercise price (one year vesting) is incorporated by reference from Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.9 | Form of Non-Employee Director Stock Option Agreement (new grant, ten year expiration, no vesting) typically issued to non-employee members of the Board of Directors as part of annual director fee retainer (not Incentive Stock Option for tax purposes) is incorporated by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.10 | Form of Employee Director Stock Option Agreement (new grant, ten year expiration, no vesting) typically issued to employee members of the Board of Directors as part of annual director fee retainer (intended to be Incentive Stock Option for tax purposes) is incorporated by reference from Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 . |
X | 10.11 | Description of Director Compensation Arrangements for 12 month period ending at 2005 Annual Meeting of Shareholders is incorporated by reference from Exhibit 10.11 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.12 | Description of Director Compensation Arrangements for 12 month period ending at 2006 Annual Meeting of Shareholders is incorporated by reference from the description contained in Item 1.01 to the Registrant's Current Report on Form 8-K filed May 4, 2005. |
X | 10.13 | Description of Executive Management Incentive Plan for 2004 (awards payable in 2005) is incorporated by reference from Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. |
X | 10.14 | Description of Executive Management Incentive Plan for 2005 (awards payable in 2006) is incorporated by reference from the description contained in Item 1.01 to the Registrant's Current Report on Form 8-K filed May 4, 2005. |
X | 10.15 | Description of Executive Management Incentive Plan for 2006 (awards payable in 2007) is incorporated by reference from the description contained in Item 1.01 to the Registrant's Current Report on Form 8-K filed February 17, 2006. |
68
Executive Compensation Plans and Arrangements*
| Exhibit No.
| Description
* |
X
| 10.16
| |
| 10.5 | | Adoption Agreement for the Registrant’s Nonqualified Savings Plan dated August 17, 2004, is incorporated by reference from Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.* |
| | |
| 10.6 | | First Amendment to the Registrant’s Nonqualified Savings Plan dated August 17, 2004, is incorporated by reference from Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.* |
| | |
| 10.7 | | Form of Employee Stock Option Agreement (new grant, five-year expiration, five year 20% vesting) typically issued during 2005 and prior periods to executive officers and other key employees as incentives is incorporated by reference from Exhibit 10.7 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.* |
| 10.8 | | Form of Employee Stock Option Agreement (Replacement Grant) typically issued during 2005 and prior periods to persons who exercise other stock options using common shares as payment for the exercise price (one year vesting) is incorporated by reference from Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.* |
| | |
| 10.9 | | Form of Non-Employee Director Stock Option Agreement (new grant, ten year expiration, no vesting) typically issued to non-employee members of the Board of Directors as part of annual director fee retainer (not Incentive Stock Option for tax purposes) is incorporated by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004.* |
| | |
| 10.10 | | Form of Employee Director Stock Option Agreement (new grant, ten year expiration, no vesting) typically issued to employee members of the Board of Directors as part of annual director fee retainer (intended to be Incentive Stock Option for tax purposes) is incorporated by reference from Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 .* |
| | |
| 10.11 | | Description of Director Compensation Arrangements for 12 month period ending at 2006 Annual Meeting of Shareholders is incorporated by reference from the description contained in Item 1.01 of the Registrant’s Current Report on Form 8-K filed May 4, 2005.* |
| | |
| 10.12 | | Description of Director Compensation Arrangements for 12 month period ending at 2007 Annual Meeting of Shareholders is incorporated by reference from the description contained in Item 1.01 of the Registrant’s Current Report on Form 8-K filed May 2, 2006.* |
| | |
| 10.13 | | Description of Executive Management Incentive Plan for 2005 (awards payable in 2006) is incorporated by reference from the description contained in Item 1.01 of the Registrant’s Current Report on Form 8-K filed May 4, 2005.* |
| | |
| 10.14 | | Description of Executive Management Incentive Plan for 2006 (awards payable in 2007) is incorporated by reference from the description contained in Item 1.01 of the Registrant’s Current Report on Form 8-K filed February 17, 2006.* |
| | |
| 10.15 | | Description of Executive Management Incentive Plan for 2007 (awards payable in 2008) is incorporated by reference from the description contained in Item 5.02 of the Registrant’s Current Report on Form 8-K filed February 16, 2007.* |
| | |
| 10.16 | | Executive Supplemental Retirement Income Agreement dated October 1, 1996, between First Federal Bank, F.S.B. and Bradley M. Rust is incorporated by reference from Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for its fiscal year ended December 31, 2002.* |
X
| 10.17
| |
| 10.17 | | Form of Restricted Stock Award Agreement that evidences the terms of awards of restricted stock grants and related cash entitlements granted under the 1999 Long-Term Equity Incentive Plan is incorporated by reference from Exhibit 99 to the Registrant'sRegistrant’s Current Report on Form 8-K filed February 17, 2006.* |
X
| 10.18
| |
| 10.18 | | Resolutions of Stock Option Committee of Board of Directors of the Registrant amending outstanding stock options by accelerating in full all vesting periods and exercise date restrictions and terminating replacement stock option privileges in connection with future option exercises, adopted by written consent effective December 29, 2005, is incorporated by reference from Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005.* |
| 10.19 | 10.19
| Second Amended and Restated Loan and Subordinated Debenture Purchase Agreement dated as of September 20, 2005,December 29, 2006, by and between JPMorgan Chase Bank, N.A., and the RegistrantGerman American Bancorp, Inc., is incorporated by reference from Exhibit 9999.1 to the Registrant'sRegistrant’s Current Report on Form 8-K filed September 30, 2005.** January 5, 2007. |
| 10.20
| |
| 10.20 | | Agreed Upon Terms and Procedures dated December 29, 2006, executed and delivered by German American Bancorp, Inc. to JPMorgan Chase Bank, N.A., is incorporated by reference from Exhibit 99.2 to the Registrant’s Current Report on 8-K filed January 5, 2007. |
| | |
| 10.21 | | Stock Purchase Agreement dated as of December 16, 2005 between the Registrant and Buehler Foods, Inc.** is incorporated by reference from Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2005. ** |
| 21
| |
| 10.22 | | Agreement and Plan of Reorganization by and among the Registrant, First State Bank, Southwest Indiana, PCB Holding Company, and Peoples Community Bank, dated May 23, 2005, is incorporated by reference to Exhibit 2.1 to the Registrant’s Registration Statement on Form S-4 filed with the SEC on July 19, 2005 (File No. 333-126704).** |
| | |
| 10.23 | | Agreement and Plan of Reorganization by and among the Registrant and Stone City Bancshares, Inc., and joined in by the shareholders of Stone City Bancshares, Inc., dated October 25, 2005, is incorporated by reference from Exhibit 2 to the Registrant’s Current Report on Form 8-K filed October 31, 2005.** |
| | |
| 21 | | Subsidiaries of the Registrant.Registrant |
| 23
| |
| 23 | | Consent of Crowe Chizek and Company LLC. |
| 24
| Power of Attorney.
|
| 31.1 | 31.1
| Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer. |
| 31.2
| |
| 31.2 | | Sarbanes-Oxley Act of 2002, Section 302 Certification for Senior Vice President (Principal Financial Officer). |
| 32.1
| |
| 32.1 | | Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer. |
| 32.2
| |
| 32.2 | | Sarbanes-Oxley Act of 2002, Section 906 Certification for Senior Vice President (Principal Financial Officer). |
*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.
** Certain exhibits to these documents have been omitted from the text filed with the SEC. The omitted information is considered immaterial from an investor's perspective. The Registrant will furnish supplementally a copy of any of any such omitted exhibit to the SEC upon request from the SEC.
| * | 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 asterisk. |
| ** | Certain exhibits to these documents have been omitted from the text filed with the SEC. The omitted information is considered immaterial from an investor’s perspective. The Registrant will furnish supplementally a copy of any of any such omitted exhibit to the SEC upon request from the SEC. |
GERMAN AMERICAN BANCORP, INC. WILL FURNISH TO ANY SHAREHOLDER AS OF MARCH 1, 2006,2007, A COPY OF ANY OF THE ABOVE-LISTED EXHIBITS UPON THE PAYMENT OF A CHARGE OF $.50 PER PAGE IN ORDER TO DEFRAY ITS EXPENSES IN PROVIDING SUCH EXHIBIT. SUCH REQUEST SHOULD BE ADDRESSED TO GERMAN AMERICAN BANCORP, INC., ATTN: TERRI A. ECKERLE, SHAREHOLDER RELATIONS, P.O. BOX 810, JASPER, INDIANA, 47546.69
