ANNUAL REPORT TO SHAREHOLDERS FIVE YEAR SUMMARY OF CONSOLIDATED FINANCIAL STATEMENTS AND RELATED STATISTICS (DOLLAR REFERENCES IN THOUSANDS EXCEPT SHARE DATA) The following selected data have been taken from the Company's consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. See Note 18 to the consolidated financial statements and `Management's Discussion and Analysis of Financial Condition and Results of Operations''for information regarding certain purchase acquisitions during 1994 and 1993 which affect the comparability of data. 1995 1994 1993 SUMMARY OF OPERATIONS Interest and Fees on Loans $21,210 $17,348 $16,312 Interest on Investments 6,087 4,722 5,345 Total Interest Income 27,297 22,070 21,657 Interest on Deposits 12,633 9,394 9,844 interest on Short-term Borrowings 184 133 50 Interest on Long-term Debt --- --- --- Total Interest Expense 12,817 9,527 9,894 Net Interest Income 14,480 12,543 11,763 Provision for Loan Losses (19) 567 653 Net Interest Income after Provision for Loan Losses 14,499 11,976 11,110 Service Charges on Deposit Accounts 620 567 520 Other Income 840 1,122 1,049 Total Other Income 1,460 1,689 1,569 Salaries and Benefits 5,349 4,517 4,338 Other Expenses 4,729 4,092 4,251 Total Other Expenses 10,078 8,609 8,589 Income Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes 5,881 5,056 4,090 Income Tax Expense 1,863 1,582 1,308 Effect of Change in Accounting for Income Taxes 4,018 3,474 2,782 Cumulative Effect of Change in Accounting for Income Taxes --- --- 150 Net Income $4,018 $3,474 $2,932 YEAR-END BALANCES Total Assets $367,763 $346,526 $323,279 Total Loans, Net 224,657 218,141 196,465 Total Long-term Debt --- --- --- Total Deposits 327,579 302,290 281,510 Total Shareholders' Equity 36,956 32,925 31,341 PER SHARE DATA (1 ) Income Before Cumulative Effect of Change in Accounting for Income Taxes $2.20 $1.90 $1.53 Net Income 2.20 1.90 1.61 Cash Dividends (2) .76 .68 .66 Shareholders' Equity, End of Year 20.25 18.03 17.16 OTHER DATA AT YEAR-END Number of Shareholders 1,681 1,634 1,649 Number of Employees 167 157 143 Weighted Average Number of Shares 1,825,641 1,825,059 1,825,053 <FN> <F1> (1)Per share data has been retroactively adjusted to give effect for stock dividends and stock splits. (2)Cash dividends represent historical per share dividends declared without retroactive restatement for pooling. </FN> 1992 1991 SUMMARY OF OPERATIONS Interest and Fees on Loans $16,903 $17,739 Interest on Investments 6,018 7,956 Total Interest Income 22,921 25,695 Interest on Deposits 11,197 14,771 interest on Short-term Borrowings 69 185 Interest on Long-term Debt 3 5 Total Interest Expense 11,269 14,961 Net Interest Income 11,652 10,734 Provision for Loan Losses 984 1,943 Net Interest Income after Provision for Loan Losses 10,668 8,791 Service Charges on Deposit Accounts 439 466 Other Income 1,175 481 Total Other Income 1,614 947 Salaries and Benefits 4,096 3,716 Other Expenses 3,881 3,281 Total Other Expenses 7,977 6,997 Income Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes 4,305 2,741 Income Tax Expense 1,403 716 Income Before Cumulative Effect of Change in Accounting for Income Taxes 2,902 2,025 Cumulative Effect of Change in Accounting for Income Taxes --- --- Net Income $2,902 $2,025 YEAR-END BALANCES Total Assets $305,022 $291,625 Total Loans, Net 185,741 174,547 Total Long-term Debt --- 69 Total Deposits 270,952 258,133 Total Shareholders' Equity 29,470 27,446 PER SHARE DATA (1 ) Income Before Cumulative Effect of Change in Accounting for Income Taxes $1.59 $1.11 Net Income 1.59 1.11 Cash Dividends (2) .57 .60 Shareholders' Equity, End of Year 16.14 15.03 OTHER DATA AT YEAR-END Number of Shareholders 1,635 1,609 Number of Employees 133 132 Weighted Average Number of Shares 1,825,053 1,825,559 <FN> <F1> (1)Per share data has been retroactively adjusted to give effect for stock dividends and stock splits. (2)Cash dividends represent historical per share dividends declared without retroactive restatement for pooling. </FN> Exhibit 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table summarizes the net interest income (on a tax-equivalent basis) for each of the past three years. For the tax-equivalent adjustments, an effective tax rate of 34% was used for all years presented. (1) AVERAGE BALANCE SHEET (TAX-EQUIVALENT / DOLLAR REFERENCES IN THOUSANDS) Twelve Months Ended December 31, 1995 Average Interest Principal Income/ Average Balance Expense Yield Short-term Investments: Interest-bearing Balances with Banks $1,024 $49 4.79% Federal Funds Sold and Securities Purchased under Agreements to Resell 12,716 739 5.81% Other Short-term Investments 11,247 679 6.04% Securities: Taxable 56,670 3,229 5.70% Non-taxable 20,937 2,107 10.06% Total Loans and Leases (2) (3) 230,143 21,302 9.26% TOTAL INTEREST EARNING ASSETS 332,737 28,105 8.45% Cash and Due from Banks 11,159 Premises, Furniture & Equipment 9,668 Other Assets 8,769 Less: Allowance for Loan Losses (5,790) TOTAL ASSETS $356,543 LIABILITIES AND SHARE- HOLDERS' EQUITY Savings and Interest-bearing Demand Deposits $92,311 2,490 2.70% Time Deposits 191,202 10,143 5.30% Federal Funds Purchased and Securities Sold under Agreements to Repurchase 928 57 6.14% Short-term Borrowings 2,141 127 5.93% TOTAL INTEREST-BEARING LIABILITIES 286,582 12,817 4.47% Demand Deposit Accounts 32,576 Other Liabilities 2,993 TOTAL LIABILITIES 322,151 Shareholders' Equity 34,392 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $356,543 NET INTEREST INCOME $15,288 NET YIELD ON EARNING ASSETS 4.59% <FN> <F1> 1. Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. 2. Nonaccruing loans have been included in average loans. 3. Interest income on loans includes loan fees of $254, $253, and $206 for 1995, 1994, and 1993, respectively. </FN> AVERAGE BALANCE SHEET (TAX-EQUIVALENT / DOLLAR REFERENCES IN THOUSANDS) Twelve Months Ended December 31, 1994 Average Interest Principal Income/ Average Balance Expense Yield ASSETS Short-term Investments: Interest-bearing Balances with Banks $2,841 $123 4.34% Federal Funds Sold and Securities Purchased under Agreements to Resell 10,688 380 3.56% Other Short-term Investments 4,002 202 5.05% Securities: Taxable 55,014 2,850 5.18% Non-taxable 17,175 1,768 10.29% Total Loans and Leases (2) (3) 214,041 17,401 8.13% TOTAL INTEREST EARNING ASSETS 303,761 22,724 7.48% Cash and Due from Banks 10,222 Premises, Furniture & Equipment 7,636 Other Assets 6,810 Less: Allowance for Loan Losses (5,266) TOTAL ASSETS $323,163 LIABILITIES AND SHARE- HOLDERS' EQUITY Savings and Interest-bearing Demand Deposits $89,175 2,123 2.38% Time Deposits 164,422 7,271 4.42% Federal Funds Purchased and Securities Sold under Agreements to Repurchase 3,572 90 2.52% Short-term Borrowings 1,081 43 4.01% TOTAL INTEREST-BEARING LIABILITIES 258,250 9,527 3.69% Demand Deposit Accounts 30,279 Other Liabilities 2,603 TOTAL LIABILITIES 291,132 Shareholders' Equity 32,031 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $323,163 NET INTEREST INCOME $13,197 NET YIELD ON EARNING ASSETS 4.34% <FN> <F1> 1. Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. 2. Nonaccruing loans have been included in average loans. 3. Interest income on loans includes loan fees of $254, $253, and $206 for 1995, 1994, and 1993, respectively. </FN> AVERAGE BALANCE SHEET (TAX-EQUIVALENT / DOLLAR REFERENCES IN THOUSANDS) Twelve Months Ended December 31, 1993 Average Interest Principal Income/ Average Balance Expense Yield ASSETS Short-term Investments: Interest-bearing Balances with Banks $8,183 $335 4.09% Federal Funds Sold and Securities Purchased under Agreements to Resell 8,547 257 3.01% Other Short-term Investments 910 30 3.26% Securities: Taxable 59,532 3,582 6.02% Non-taxable 16,774 1,729 10.31% Total Loans and Leases (2) (3) 202,100 16,356 8.09% TOTAL INTEREST EARNING ASSETS 296,046 22,289 7.53% Cash and Due from Banks 8,779 Premises, Furniture & Equipment 7,365 Other Assets 6,436 Less: Allowance for Loan Losses (4,166) TOTAL ASSETS $314,460 LIABILITIES AND SHARE- HOLDERS' EQUITY Savings and Interest-bearing Demand Deposits $83,765 2,131 2.54% Time Deposits 168,659 7,713 4.57% Federal Funds Purchased and Securities Sold under Agreements to Repurchase 539 17 3.03% Short-term Borrowings 1,155 33 2.87% TOTAL INTEREST-BEARING LIABILITIES 254,118 9,894 3.89% Demand Deposit Accounts 27,278 Other Liabilities 2,596 TOTAL LIABILITIES 283,992 Shareholders' Equity 30,468 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $314,460 NET INTEREST INCOME $12,395 NET YIELD ON EARNING ASSETS 4.19% <FN> <F1> 1. Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. 2. Nonaccruing loans have been included in average loans. 3. Interest income on loans includes loan fees of $254, $253, and $206 for 1995, 1994, and 1993, respectively. </FN> INTERIM FINANCIAL DATA (Table 1) (Unaudited, $ in thousands except share data) FOR THE THREE MONTHS ENDED DECEMBER SEPTEMBER 31 30 1995 Interest Income $7,148 $6,923 Interest Expense 3,422 3,313 Net Interest Income 3,726 3,610 Provision for Loan Losses (34) (213) Noninterest Income 353 353 Noninterest Expense 2,715 2,418 Income before Income Taxes 1,398 1,758 Income Tax Expense 403 598 Net Income $995 $1,160 Net Income per Share $.55 $.63 Weighted Average Shares 1,825,040 1,825,346 1994 Interest Income $6,020 $5,466 Interest Expense 2,599 2,347 Net Interest Income 3,421 3,119 Provision for Loan Losses 105 105 Noninterest Income 370 478 Noninterest Expense 2,382 2,108 Income before Income Taxes 1,304 1,384 Income Tax Expense 419 390 Net Income $885 $994 Net Income per Share $.48 $.54 Weighted Average Shares 1,825,077 1,825,053 INTERIM FINANCIAL DATA (Table 1) (Unaudited, $ in thousands except share data) FOR THE THREE MONTHS ENDED JUNE MARCH 30 31 1995 Interest Income $6,819 $6,407 Interest Expense 3,253 2,829 Net Interest Income 3,566 3,578 Provision for Loan Losses 114 114 Noninterest Income 354 400 Noninterest Expense 2,509 2,436 Income before Income Taxes 1,297 1,428 Income Tax Expense 392 470 Net Income $905 $958 Net Income per Share $.50 $.52 Weighted Average Shares 1,826,023 1,826,171 1994 Interest Income $5,320 $5,264 Interest Expense 2,296 2,285 Net Interest Income 3,024 2,979 Provision for Loan Losses 107 250 Noninterest Income 439 402 Noninterest Expense 2,085 2,034 Income before Income Taxes 1,271 1,097 Income Tax Expense 439 334 Net Income $832 $763 Net Income per Share $.46 $.42 Weighted Average Shares 1,825,053 1,825,053 INTRODUCTION AND OVERVIEW German American Bancorp (`the Company'') is a multi-bank holding company based in Jasper, Indiana. Its four affiliate banks conduct business in fourteen offices in Dubois, Martin, Pike, Perry and Spencer Counties, Indiana. The banks provide a wide range of financial services, including accepting deposits; making commercial and consumer loans; originating, marketing, and servicing mortgage loans; issuing credit life, accident and health insurance; providing trust services for personal and corporate customers; providing safe deposit facilities; and providing investment advisory and brokerage services. The information in this Management's Discussion and Analysis is presented as an analysis of the major components of the Company's operations for the years 1993 through 1995 and financial condition as of December 31, 1995 and 1994. The information should be used in conjunction with accompanying consolidated financial statements and footnotes contained elsewhere in this report. The information has been restated to reflect the mergers with Unibancorp and The Otwell State Bank accounted for as poolings of interests as if they had occurred as of the beginning of the first year presented. The acquisition of Winslow Bancorporation and certain branches of Regional Federal Savings Bank (`Regional'') have been accounted for as purchases and included in reported results from the dates of acquisition. (See the discussion below for further information on mergers and acquisitions.) MERGERS AND ACQUISITIONS On March 8, 1993, the Company completed a merger with Unibancorp, Loogootee, Indiana, parent company of The Union Bank (`Union'') in which the Company issued 320,283 shares for all of the outstanding shares of Unibancorp. This merger was recorded utilizing the pooling of interests method of accounting. On April 1, 1993, the Company purchased all the shares of Winslow Bancorporation, Winslow, Indiana and its subsidiary South Western Indiana National Bank (`Southwestern'') in a cash transaction of $2,023,000, recorded utilizing the purchase method of accounting. As a result of the Winslow acquisition, the Company recorded approximately $730,000 of intangible assets consisting of $377,000 of goodwill and $353,000 of core deposit intangible. On April 1, 1994, the Company acquired The Otwell State Bank, Otwell, Indiana (`Otwell''), by the issuance of 113,286 shares for all the outstanding shares of Otwell. This transaction was recorded utilizing the pooling of interests method of accounting. Following the completion of the transaction, Otwell and Southwestern were merged into Community Trust Bank, a combined banking institution operating in the Pike County, Indiana market through offices in Otwell, Petersburg, and Winslow, Indiana. On October 28, 1994, the Company acquired the Regional branches in Huntingburg, Rockport and Tell City, Indiana. This transaction, resulting in the acquisition of approximately $25,000,000 in assets, was recorded utilizing the purchase method of accounting. As a result of the Regional acquisition, the Company recorded approximately $1,670,000 of intangible assets consisting of $1,353,000 of goodwill and $317,000 of core deposit intangible. Intangible assets are being amortized to expense on a straight line basis over a 15 year period in the case of goodwill and over 10 years on an accelerated basis for the core deposit intangible. Following the Regional acquisition, the Huntingburg office was combined into the Company's lead bank, German American Bank. The Tell City and Rockport offices were combined into the Company's newly formed subsidiary bank, First State Bank, Southwest, Indiana (`First State''). Due to the relative impact of First State's operating results in any analysis of the 1995 results as compared to those of previous years, this Management's Discussion and Analysis will attempt to quantify and identify that impact whenever it is deemed to be material in nature. First State provided the Company with an entrance to the Perry and Spencer County, Indiana markets which are adjacent to the general market areas served by the Company and thereby provided a logical extension to the Company's financial services marketing area. The Company does not have any pending mergers or acquisitions but does plan to continue to aggressively pursue such opportunities as they become available. The Company's management believes other community banks located in the Company's general geographic area will find the concept of the Company's localized community bank holding company an attractive alternative to merging with other larger regional multi-bank holding companies. The Company's approach offers these community banks the competitive advantages of operational efficiencies gained through the ability to spread fixed operating costs over a larger asset base without the loss of flexibility and independence generally associated with affiliation with the larger regional multi-bank holding companies. Through the Company, these community banks can retain ownership control within a group of shareholders who reside in their general market areas and who support the bank's commitment to their local communities. Because of this belief, the Company's management anticipates that additional mergers and acquisitions with like-minded community banks may occur in future years. RESULTS OF OPERATIONS NET INCOME Net Income in 1995 was $4,018,000 or $2.20 per share, an increase of 15.7% over the $3,474,000 or $1.90 per share reported in 1994. The increase in 1995 earnings relative to those of a year earlier was materially impacted by an increase in net interest income and a decline in the required level of provision for loan loss. Partially offsetting these earnings improvements were a decline in Investment Services Income and an increase in Salaries and Benefits largely related to the inclusion of First State and the effect of the Company's organizational structure changes discussed at more length below. For 1994, net income was 18.5% higher than in 1993. This increase in 1994 earnings relative to 1993 was impacted by a $150,000 positive cumulative effect of a change in the manner of accounting for income taxes required by the implementation of Financial Accounting Standard 109 during 1993. Excluding this cumulative effect, net income increased by $692,000 or 24.9% in 1994 as compared to 1993. Other factors materially impacting the earnings comparison of 1994 and 1993 were the recording of a significant increase in net interest income as well as an increase in other income and a reduction in the level of provision for loan loss. NET INTEREST INCOME Net interest income is the Company's single largest source of earnings. It represents the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Several factors contribute to the determination of net interest income, including the volume of earning assets, the mix of earning assets, interest rates, and income taxes. Many of these factors can be controlled by management policies and actions. Factors beyond the control of management include the general level of credit demand, Federal Reserve Board monetary policy, and changes in tax laws. Net interest income for 1995 on a tax-equivalent basis was 15.8% higher than that for 1994 while the net interest margin was 4.59% for 1995 versus 4.34% for 1994. Tax-equivalent net interest income for 1994 was 6.5% higher as compared to 1993 with net interest margin increasing to 4.34% in 1994 from 4.19% in 1993. Excluding the effect of First State, tax-equivalent net interest income was $14,345,000 for 1995, a $1,271,000 or 9.7% increase over the $13,074,000 recorded in 1994, and net interest margins (exclusive of First State) were 4.73% in 1995 and 4.36% in 1994. Management anticipates the tax-equivalent net interest margin of First State Bank will, over time, become more comparable to that of the Company's other affiliate banks because the relative asset and liability mix of First State Bank should become more homogeneous to that of the Company's other affiliate banks. The increase in net interest income during 1995 and 1994 occurred as a result of the impact of increases in average yields on loans and short-term investments and securities, which react more quickly to a rise in general short-term interest rates than the average yields on longer-term investment securities and the average rate paid on interest-bearing liabilities. The increase in short- term interest rates which occurred throughout 1994 and in early 1995 therefore resulted in a corresponding increase in both net interest income and net interest margin. See the discussion headed `Interest Rate Management'' for a further explanation of the Company's interest rate sensitivity position. PROVISION FOR LOAN LOSSES The Company provides for future loan losses through regular provisions to the allowance for loan losses. These provisions are made at a level which is considered necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of this loan loss reserve is completed quarterly by management. The consolidated provision for loan losses was ($19,000) in 1995, $567,000 in 1994, and $653,000 in 1993. The $586,000 decline in provision during 1995 primarily resulted from a $475,000 negative provision for loan loss at Union Bank. The negative provision at Union Bank was due to collections of previous years' charged-off loans combined with management's determination that an adequate level of loan loss reserve existed prior to the loan recoveries. Because of the adequacy that the existing reserve, the recoveries resulted in the recording of a negative provision. The amount of future years' provision for loan loss will be subject to adjustment based on the findings of future evaluations of the adequacy of the loan loss reserve. The section entitled RISK MANAGEMENT expands this discussion further. NONINTEREST INCOME Exclusive of net security gains and gains on sales of loans and other real estate (`ORE''), noninterest income decreased 5.7% in 1995 to $1,431,000 compared to $1,517,000 in 1994. First State's noninterest income increased by $67,000 during the full year of 1995 as compared to the income recorded by the bank for the two months of operation in 1994. The primary source of noninterest income continues to be trust fees (income from fiduciary activities), service charges on deposit accounts and investment services income. The decline in noninterest income during 1995 was directly attributable to a reduction of Investment Services Income discussed in further detail below. As presented on Table 2 below, trust department income grew by 8.2% in 1995 and resulted from higher levels of assets held in trust combined with an increase in trust fee schedules. Service charges on deposit accounts increased by 9.4% during 1995 because of a larger number of transactions and fee generating opportunities for the Company in this area. Investment services income declined significantly by $212,000 following a $73,000 decline in 1994 reversing a trend of the strong growth experienced in prior years. This investment services income is generated through a full service brokerage operation which is available at several of the Company's affiliate banks through an operating agreement with INVEST FINANCIAL CORPORATION, a subsidiary of Kemper Financial Companies, Inc. The Company intends to expand the availability of investment services throughout its affiliate banks. Noninterest income exclusive of security gains and gains on loan and ORE sales increased 1.7% in 1994 compared to 1993. Trust fees increased by 23.0% while deposit service charges increased by 9.0%. The gains on sales of loans and other real estate in 1995 were related to sales of other real estate while the 1994 gain was due primarily to the gain generated as a result of German American Bank's sale of a portion of excess real estate adjacent to one of its branch facilities. During 1993 the gain resulted primarily from Union's activities involving Small Business Administration loans purchased for resale. In 1993, Union sold the remaining loans held for resale and no longer carries any loans held for resale. The Company's management does not anticipate that Union or any other affiliate bank will engage in this activity in the future. NONINTEREST INCOME (Table 2)($ in thousands) 1995 1994 1993 Income from Fiduciary Activities $185 $171 $139 Service Charges on Deposit Accounts 620 567 520 Investment Services Income 208 420 493 Other Income 418 359 339 Subtotal 1,431 1,517 1,491 Gains on Sales of Loans and Other Real Estate 29 92 61 Security Gains 0 80 17 TOTAL NONINTEREST INCOME $1,460 $1,689 $1,569 N/M = Not Meaningful NONINTEREST INCOME (Table 2)($ in thousands) % CHANGE FROM PRIOR YEAR 1994 1993 Income from Fiduciary Activities 8.2% 23.0% Service Charges on Deposit Accounts 9.4 9.0 Investment Services Income (50.5) (14.8) Other Income 16.4 5.9 Subtotal (5.7) 1.7 Gains on Sales of Loans and Other Real Estate (68.5) 50.8 Security Gains N/M 370.6 TOTAL NONINTEREST INCOME (13.6) 7.7 N/M = Not Meaningful NONINTEREST EXPENSE Total noninterest expense increased 17.1% in 1995 over 1994 levels. As a percentage of average total assets, total noninterest expense was 2.83% in 1995 compared to 2.66% in 1994 and 2.73% in 1993. Excluding the impact of First State Bank, noninterest expense increased by $636,000 or 7.5% in 1995 as compared to 1994. Salaries and employee benefits, which comprise approximately 53% of total noninterest expense, increased by 18.4% in 1995 following a 4.1% increase in 1994. Again excluding the impact of First State, Salaries and Benefits increased by 11.1% in 1995. A significant portion of this increase is attributable to effects of changes in the Company's organizational structure which occurred in mid 1995. Prior to July 1995, the Company's executive officers and support functions served both the Company and its lead affiliate bank, German American Bank. In recognition of the increased management and administrative demands existing under a multi-bank holding company environment, the management and administrative support functions of German American Bank and the Company were segmented into distinct groups with additional staffing implemented as deemed appropriate. Although this organizational change did result in an increased level of Salaries & Benefits, Company management believes the increased management focus at both the Bank and Bancorp level will result in increased operating efficiency. Occupancy expense and furniture and equipment expense combined, increased by $264,000 or 20.4% in 1995 following a 4.9% increase in 1994. Approximately one- half of this increase resulted from First State with the balance of the increased 1995 expense level attributable to an upgrading of facilities and equipment at the Company's other affiliate banks. Computer processing expense increased by 13.4% and 18.5% in 1995 and 1994, respectively reflecting conversion expenses at the Company's newly acquired affiliates. Excluding First State Bank, computer processing fees increased by 5.4% and 17.5% in 1995 and 1994, respectively. Through the utilization of state-of-the-art equipment and computer processing, the Company's management believes it will, over the long-term, be able to better control the level of employee related expenses, the Company's major noninterest expense category, while improving the quality of customer service provided throughout the affiliate bank system. Professional fees declined significantly by 23.0% and 46.9% in 1995 and 1994, respectively, as a result of a reduction in merger related professional fees. While it is not possible to predict the level of acquisition activity and the resulting level of costs associated thereto, management does intend to pursue acquisition opportunities and, therefore, increased and continued costs will be likely in future years. During 1995, the FDIC reduced the commercial bank deposit insurance premium rates as a result of the Bank Insurance Fund (`BIF'') reaching full capitalization of its congressionally mandated level. The full impact of this rate reduction won't be evident until 1996 when FDIC premiums are anticipated to be approximately $60,000, plus any additional assessments or premiums that may arise from proposals before Congress which would result in the recapitalization of the Savings Association Insurance Fund (`SAIF''). Under this proposal, institutions holding deposits insured by SAIF would be subject to a one-time assessment followed by a reduction in ongoing FDIC premiums similar to that currently in place for BIF insured deposits. All of First State's deposits are insured under SAIF. Therefore, the implementation of this proposal would increase 1996 total FDIC premiums by approximately $150,000 to an estimated $210,000 for 1996. Subsequent years premiums following any such SAIF assessment are anticipated to be $2,000 per affiliate bank for a total of $8,000. The statements in this paragraph relating to FDIC premiums and assessments for 1996 and future years are forward-looking statements which may or may not be accurate due to the impossibility of predicting future Congressional or regulatory actions or the future capitalization levels of BIF and SAIF. Other operating expenses increased by 41.3% in 1995 following a 2.9% decrease in 1994. Excluding First State's other operating expense, this component of noninterest expense increased by $334,000 or 21.9% during 1995. This increase is largely attributable to increased advertising and supplies expenses related to the Company's introduction, throughout 1995, of a new company-wide corporate identity program . Additionally, amortization of goodwill and the core deposit intangible totaled $231,000 and $112,000, respectively for 1995 and 1994. First State Bank's operating results reflected a significant portion of the amortization expense. NONINTEREST EXPENSE (Table 3)($ in thousands) 1995 1994 1993 Salaries and Employee Benefits $5,349 $4,517 $4,338 Occupancy, Furniture and Equipment Expense 1,561 1,297 1,237 FDIC Premiums 393 644 645 Computer Processing Fees 399 352 297 Professional Fees 198 257 484 Other Operating Expenses 2,178 1,542 1,588 TOTAL NONINTEREST EXPENSE $10,078 $8,609 $8,589 NONINTEREST EXPENSE (Table 3)($ in thousands) % CHANGE FROM PRIOR YEAR 1994 1993 Salaries and Employee Benefits 18.4% 4.1% Occupancy, Furniture and Equipment Expense 20.4 4.9 FDIC Premiums (39.0) (.2) Computer Processing Fees 13.4 18.5 Professional Fees (23.0) (46.9) Other Operating Expenses 41.2 (2.9) TOTAL NONINTEREST EXPENSE 17.1 .2 PROVISION FOR INCOME TAXES The Company records a provision for income taxes currently payable, along with a provision for taxes payable in the future. Such deferred taxes arise from differences in the timing of certain items for financial statement reporting versus for income tax reporting. The major difference between the effective tax rate applied to the Company's financial statement income and the federal statutory rate of 34% is interest on tax-exempt securities and loans. Other components affecting this calculation include state income taxes and nondeductible merger costs. Note 10 to the consolidated financial statements contains additional details relative to the Company's income tax provision. The Company's effective tax rate was 31.7%, 31.3% and 32.0% in 1995, 1994, and 1993, respectively. Note 1 presents further information regarding the impact of the change in the manner of accounting for income taxes required by the implementation in 1993 of Financial Accounting Standard 109. CAPITAL RESOURCES Industry regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. Minimum levels of capital are required to be maintained in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit. Tier 1, or core capital, consists of shareholders' equity less goodwill, core deposit intangibles, and certain tax receivables defined by bank regulations. Tier 2 capital is defined as the amount of the allowance for loan losses which does not exceed 1.25% of gross risk adjusted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under these standards are a 3.0% leverage ratio, which is Tier 1 capital divided by defined `total assets'', and 4.0% Tier 1 capital to risk-adjusted assets and 8.0% total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and each of its affiliate banks individually, have capital ratios that substantially exceed the regulatory minimums. Table 4 below presents the Company's consolidated capital ratios under the regulatory guidelines. The Company's shareholders' equity of $36,956,000 and $32,925,000 at December 31, 1995 and December 31, 1994, respectively represented 10.0% and 9.5% of total assets. The Company paid cash dividends of $1,392,000 and $1,232,000 during 1995 and 1994, respectively. The increased level of dividends paid in 1995 and 1994 resulted from the issuance of additional shares in connection with the merger transactions and the higher level of the Company's dividend payout ratio relative to that of Unibancorp and The Otwell State Bank. At December 31, 1995, Management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material effect on the Company's consolidated liquidity, capital resources or operations. RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) 1995 1994 Tier 1 Capital: Shareholders' Equity as presented on Balance Sheet $36,956 $32,925 Add/(Subtract): Unrealized Depreciation/Appreciation on Securities Available-for-Sale (859) 658 Less: Intangible Assets and Ineligible Deferred Tax Assets (2,140) (2,439) Total 33,957 31,144 Tier 2 Capital: Qualifying Allowance for Loan Loss 2,943 2,712 Total Capital $36,900 $33,856 Risk-adjusted Assets $232,272 $213,827 Tier 1 Capital to Total Assets (leverage ratio) 9.29% 9.05% Tier 1 Capital to Risk-adjusted Assets 14.62% 14.57% Total Capital to Risk-adjusted Assets 15.87% 15.83% RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) 1993 Tier 1 Capital: Shareholders' Equity as presented on Balance Sheet $31,341 Add/(Subtract): Unrealized Depreciation/Appreciation on Securities Available-for-Sale --- Less: Intangible Assets and Ineligible Deferred Tax Assets (864) Total 30,477 Tier 2 Capital: Qualifying Allowance for Loan Loss 2,522 Total Capital $32,999 Risk-adjusted Assets $199,338 Tier 1 Capital to Total Assets (leverage ratio) 9.45% Tier 1 Capital to Risk-adjusted Assets 15.29% Total Capital to Risk-adjusted Assets 16.55% SOURCES OF FUNDS The Company's primary funding source is its base of core customer deposits, such as noninterest-bearing demand, regular savings and money market accounts and small denomination certificates of deposit of less than $100,000. Other shorter term sources of funds are larger denomination certificates of deposit, overnight borrowings from other financial institutions, securities sold under agreements to repurchase, short-term notes payable issued on an unsecured basis, and short- term borrowings consisting of interest-bearing demand notes issued to the U.S. Treasury. The Company did not have any long-term debt during the periods presented. The membership of the Company's lead affiliate bank, German American Bank, in the Federal Home Loan Bank System provides an additional source for both long and short-term borrowings. The Company's other affiliate banks are in the process of also obtaining membership in the Federal Home Loan Bank System. No such advances were outstanding during the periods presented. The following page contains a discussion of changes in these areas. Table 5 on the following page presents changes between years in the average balances of all funding sources. FUNDING SOURCES - AVERAGE BALANCES (Table 5) ($ in thousands) 1995 1994 1993 Demand $32,576 $30,279 $27,278 Savings and Interest- bearing Checking 69,847 71,765 68,135 Money Market Accounts 22,464 17,410 15,630 Other Time Deposits 158,428 135,742 138,581 Total Core Deposits 283,315 255,196 249,624 Certificates of Deposits of $100,000 and Over 32,774 28,680 30,078 Federal Funds Purchased and Securities Sold under Agreement to Repurchase 928 3,572 539 Other Short-term Borrowings 2,141 1,081 1,155 Total Funding Sources $319,158 $288,529 $281,396 N/M = Not Meaningful FUNDING SOURCES - AVERAGE BALANCES (Table 5) ($ in thousands) % CHANGE FROM PRIOR YEAR 1995 1994 Demand 7.6% 11.0% Savings and Interest- bearing Checking (2.7) 5.3 Money Market Accounts 29.0 11.4 Other Time Deposits 16.7 (2.0) Total Core Deposits 11.0 2.2 Certificates of Deposits of $100,000 and Over 14.3 (4.6) Federal Funds Purchased and Securities Sold under Agreement to Repurchase (74.0) N/M Other Short-term Borrowings 98.1 (6.4) Total Funding Sources 10.6 2.5 N/M = Not Meaningful CORE DEPOSITS The Company's average core deposits have shown steady growth over the past several years, increasing by 11.0% and 2.2% in 1995 and 1994, respectively. The inclusion of First State accounted for approximately three-fourths of the 11.0% increase experienced during 1995 and for approximately two-thirds of the 1994 increase. In 1995, the Company experienced a shift in the composition of its deposits toward money market deposits and longer term certificates of deposit. This movement is largely attributable to customer reaction to the increase in interest rates during 1995 relative to the prior years' level of interest rates. In total, average savings, interest-bearing checking and money market deposits increased by 3.5% and 6.5% in 1995 and 1994, respectively while other time deposits consisting primarily of certificates of deposits in denominations of $100,000 or less increased by 16.7% in 1995 following a 2.0% decrease in 1994. Average noninterest-bearing demand deposits increased by 7.6% in 1995 and 11.0% in 1994. These changes in the mix of deposits are influenced by customers' tendency to avoid committing to longer term instruments during periods of low or declining interest rates and their attempts to lock in rates on longer term instruments during periods of perceived higher rates. They are also subject to seasonal and other non-economic factors. OTHER FUNDING SOURCES Exclusive of core deposits, large denomination certificates of deposit provide the majority of other funding sources for the Company. These certificates increased by 14.3% in 1995 following a 4.6% decrease in 1994. This entire increase in 1995 was attributable to the inclusion of First State. The remaining other funding sources consist of federal funds purchased from other financial institutions on an overnight basis, secured repurchase agreements which generally mature within 30 days, short-term notes payable extended on an unsecured basis, and borrowings under U.S. Treasury demand notes. These borrowings represent an important source of temporary short-term liquidity for the Company. These types of borrowings and large dollar denominated certificates are considered to be more subject to periodic withdrawals than are core deposits, and, therefore, are generally not used as a permanent funding source for loans. INVESTMENTS The Company's securities portfolio, consisting of all components of the Company's investment securities, mortgage-backed securities, and securities available-for-sale, includes U.S. Treasury securities, obligations of U.S. government agencies, obligations of state and political subdivisions, corporate investments and mortgage-backed securities issued by U.S. government agencies and other intermediaries. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The maturities of the securities and money market portfolios are a principal source of funds for loan growth and other liquidity needs. The Company's available- for-sale portfolio provides an additional source of funds from which management can respond to liquidity needs and asset/liability management requirements. During 1995, the Financial Accounting Standards Board authorized a one-time window of opportunity for the transfer of securities to available-for-sale portfolios. Company management utilized this opportunity to transfer a significant portion of its securities portfolio to the available-for-sale classification. Although management may sell these securities if the need arises, their designation as available-for-sale should not be interpreted to indicate that management anticipates such sales. Securities available-for-sale are carried at market value. All other securities are carried at amortized cost because management intends to hold them until maturity and the Company has the ability to do so. Note 2 to the consolidated financial statements contains additional details regarding the Company's securities portfolio in 1995 and 1994. SECURITIES PORTFOLIO (Table 6) ($ in thousands) December 31, 1995 % Money Market Securities $19,376 17.8% U.S. Treasury and Agency Securities 23,787 21.8 Municipal Securities 25,255 23.2 Corporate Securities 6,463 5.9 Mortgage-backed Securities 33,272 30.6 Other Securities 738 .7 Total Securities Portfolio $108,891 100.0% SECURITIES PORTFOLIO (Table 6) ($ in thousands) December 31, 1994 % Money Market Securities $22,257 23.3% U.S. Treasury and Agency Securities 24,330 25.5 Municipal Securities 21,294 22.3 Corporate Securities 999 1.0 Mortgage-backed Securities 25,976 27.2 Other Securities 717 .7 Total Securities Portfolio $95,573 100.0% LOANS Total loans grew by $6,477,000 or 2.9% between 1995 and 1994. The inclusion of First State's loans in the year-end comparison accounted for $7,152,000 of this growth as the Company's newest affiliate bank achieved a significant market share of the lending opportunities available within its market. Excluding the effect of First State, total loan balances remained relatively unchanged declining by $675,000 or .3% between the two years. The Company's loan portfolio remains well diversified with 55% of the portfolio in commercial and agricultural loans (including economic development bonds), 30% in 1-4 family residential mortgages, and 15% in consumer loans at December 31, 1995. The Company's affiliate banks lend to commercial customers in various industries including agribusiness, manufacturing, health care services, wholesale, and retailing. The Company's policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southwestern Indiana. Extensions of credit outside this primary geographic market area (other than poultry-related loans described below) are generally concentrated in commercial real estate loans granted on a selective basis generally within a 120 mile radius of the Company's primary market. Loans outside the Company's general geographic market area are further limited to loans guaranteed by either the Small Business Administration (SBA) or the Farmers Home Administration (FmHA). The overall loan portfolio is diversified among a variety of borrowers with a substantial portion of the debtors' ability to honor their contracts dependent upon the agricultural, poultry and wood manufacturing industries. Although wood manufacturers employ a significant number of people in the market area, there is not a concentration of credit to companies engaged in that industry. The Company has historically been involved in the financing of poultry production and other agriculturally integrated related operations. Approximately $23,784,000 or 10.3% of total loans at December 31, 1995 consisted of such loans. As a means of controlling risk from concentrations of credit within this industry, the Company has, during recent years, utilized guaranties from SBA and FmHA. Typically, the guaranties provide for SBA and FmHA, in the event of default, to absorb from 85% to 90% of the loan balance remaining after the application of collateral. Assuming the guarantors perform in accordance with their guaranties, the Company's net exposure is limited to the remaining 10% to 15% balance. At December 31, 1995, the net unguaranteed amount of poultry and other agricultural integrated related loans was $8,221,000 or 3.6% of total loans. The Company intends to promote continued growth within this segment of the loan portfolio. Such growth, however, will be limited by the extent it can be supported by the Company's capital base and by the Company's ability to obtain further SBA and FmHA guaranties. Approximately $17,535,000 of loans to poultry and other agriculturally integrated related operations, substantially all of which are covered by guaranties as described above, were originated outside the Company's primary business market. No unguaranteed concentration of credit in excess of 10% of total assets exists within any single industry group. The composition of loan portfolio at December 31, 1995 and 1994 is presented in further detail in Note 3 to the consolidated financial statements and in Table 7 on the following page. LOAN PORTFOLIO (Table 7) ($ in thousands) 1995 1994 1993 Commercial and Industrial $75,914 $69,482 $64,644 Agricultural and Poultry 51,094 57,558 55,311 Financial --- --- --- Economic Development Bonds 608 625 762 Residential Mortgage Loans 68,826 67,737 55,225 Consumer Loans 34,685 29,248 26,684 Total Loans 231,127 224,650 202,626 Less: Unearned Income 537 840 1,226 Allowance for Loan Loss 5,933 5,669 4,935 Loans, Net $224,657 $218,141 $196,465 LOAN PORTFOLIO (Table 7) ($ in thousands) 1992 1991 Commercial and Industrial $63,855 $62,620 Agricultural and Poultry 54,465 44,876 Financial --- 4,000 Economic Development Bonds 1,547 2,181 Residential Mortgage Loans 47,170 41,042 Consumer Loans 24,183 24,594 Total Loans 191,220 179,313 Less: Unearned Income 1,617 1,562 Allowance for Loan Loss 3,862 3,204 Loans, Net $185,741 $174,547 RISK MANAGEMENT Various procedures are employed at the Company's affiliate banks to monitor risk. The major risk addressed by the Company on a regular basis is the credit risk inherent in the loan portfolio and to a lesser extent, the investment portfolio. Another risk is that associated with changes in interest rates. The following is a discussion of the Company's philosophies and procedures to address risk. LENDING AND LOAN ADMINISTRATION The primary responsibility and accountability for day-to-day lending activities rests with the Company's affiliate banks. Loan personnel at each bank have the authority to extend credit under guidelines approved by the bank's board of directors. Each bank also has executive and board loan committees that serve as vehicles for communication and the pooling of knowledge, judgment and experience of its members. These committees provide valuable input to lending personnel and act as an approval body. They also serve as a monitoring tool of the overall quality of the loan portfolios. Members of the Company's executive officers serve on the board loan committees of each of the affiliate banks to ensure a consistent application of company policies. The Company maintains a comprehensive loan review program for its affiliate banks. The purpose of these reviews is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses. This program also includes regular reviews of problem loan reports, delinquencies and charge-offs. The adequacy of the allowance for loan losses is also evaluated at the affiliate bank level on a quarterly basis. This evaluation of the allowances for loan losses is based on reviews of specific loans, changes in the type and volume of the loan portfolios given current and anticipated economic conditions, and historical loss experience. The review of specific loans includes loans where the customer's cash flow or net worth may not be sufficient to repay the loan, the loan has been criticized in a regulatory examination, the accrual of interest has been suspended, or for other reasons where either the ultimate collectibility of the loan is in question or the loan has characteristics requiring special monitoring. Activity in the allowance for loan losses is summarized in Table 8 on the following page. Table 9 presents data for the underperforming assets. Underperforming assets consist of 1) nonaccrual loans; 2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower; 3) loans past due ninety (90) days or more as to principal or interest; and 4) other real estate owned. Loans are placed on nonaccrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection. Loans are charged-off when they are deemed uncollectible. During 1995, the Company's level of underperforming loans increased from $1,584,000 or .71% of total loans as of December 31, 1994 to $3,486,000 or 1.51% of total loans at December 31, 1995. This increase in the amount of underperforming loans is largely attributable to the past-due status of a single large commercial real estate loan in the loan portfolio of the Company's lead bank, German American Bank. Although past due and a specific allocation of the loan loss reserve has been provided, this credit is not anticipated to present any significant exposure to loss; however, this forward-looking statement assumes the accuracy of financial information provided by the borrower, the borrower's willingness to comply with the promises made to German American Bank, the lack of any adverse change in the borrower's financial condition or results of operations, and the willingness of other creditors to cooperate with the borrower's plans. During 1995, the allowance for loan loss increased by $264,000 as the recoveries of prior years' charge-offs offset all of the loans charged-off during the year allowing for the small negative provision for loan losses recorded in 1995. See the discussion entitled `PROVISION FOR LOAN LOSS''elsewhere in this report for further details regarding the negative provision. ALLOWANCE FOR LOAN LOSSES (Table 8) ($ in thousands) 1995 1994 1993 Balance as of January 1 $5,669 $4,935 $3,862 Addition of Affiliate Banks --- 195 164 Provision for Loan Losses (19) 567 653 Recoveries of Prior Loan Losses 622 227 699 Loan Losses Charged to the Allowance (339) (255) (443) Balance as of December 31 $5,933 $5,669 $4,935 UNDERPERFORMING ASSETS (Table 9) ($ in thousands) 1995 1994 1993 Nonaccrual Loans $803 $983 $1,395 Past Due Loans (90 days or more) 2,683 601 461 Renegotiated Loans --- --- --- Total Underperforming Loans 3,486 1,584 1,856 Other Real Estate Owned 286 497 698 Total Underperforming Assets $3,772 $2,081 $2,554 Allowance for Loan Losses to Underperforming Loans 170.20% 357.89% 265.89% Underperforming Loans to Total Loans 1.51% .71% .92% INVESTMENTS, LIQUIDITY, AND INFLATION Two of the more important and interrelated areas the Company and its affiliate banks manage very closely are the Company's liquidity requirements and its balance between interest-rate-sensitive assets and interest-rate-sensitive liabilities. Liquidity needs in a banking organization arise from new loan demand, the funding of existing loan commitments, and deposit withdrawals. One important objective in managing the securities portfolio is to ensure the Company has adequate liquidity. The purposes of liquidity management are to match sources of funds with anticipated customer borrowings and withdrawals and other obligations and to ensure a dependable funding base. As discussed in the `Investments'' discussion contained elsewhere in this report, management significantly increased the available-for-sale portfolio during 1995. This action greatly enhanced the Company's ability to quickly react to changes in liquidity and asset and liability needs. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. The Company's asset and liability structure is substantially different from that of an industrial company, in that virtually all assets and liabilities of a financial institution are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution's performance. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of other goods and services. Attention should be directed to the various analyses and schedules throughout Management's Discussion and Analysis which are useful in analyzing how the Company is positioned to react to changing interest rates. INTEREST RATE MANAGEMENT Interest rate sensitivity occurs when assets or liabilities are subject to rate and yield changes within a designated time period. The Company performs rate sensitivity analyses which place each of the Company's balance sheet components in its appropriate maturity category according to its repricing frequency. In addition to rate sensitivity analyses, the Company also utilizes other asset/liability measurements such as computer generated simulation modeling. This enables management to measure the effect on earnings of changes in interest rates. Without regular monitoring and management of these critical areas, a movement in interest rates and its corresponding effect on the net interest margin may significantly affect profitability. The degree of any potential consequences of such interest rate changes can be mitigated by maintaining a proper asset/liability position given projected interest rates. The Company's policy is to actively manage its asset / liability position within a one-year interval with a goal to protect its earnings from being materially adversely impacted by changes in interest rates during the coming year. The Company has a Funds Management Policy which established guidelines under which the affiliate banks manage their securities portfolios. Funds Management Committees at each of the affiliate banks meet quarterly to monitor the established guidelines. The overall objective of these committees is to ensure the Company maintains an adequate level of liquidity and maximizes its net interest margins while implementing and monitoring programs for the matching of the mix and maturities of various asset and liability categories so as to avoid undue interest rate risk. The committees formulate short and long-term strategies, direct the acquisition and allocation of funds and monitor the level of interest rate sensitivity within the established guidelines. Table 10 below reflects the Company's interest rate sensitivity position (interest rate-sensitive assets minus interest rate-sensitive liabilities) individually and cumulatively, over various time horizons. As indicated in the table, a significant portion of the Company's assets and liabilities reprice within 1-181 days. While slightly more of its liabilities than assets are subject to repricing during this period, the Company believes its asset/liability management program allows adequate reaction time to adjust to changes in interest rate trends and believes the current asset/liability position does effectively protect the Company's net interest margin and the resulting net interest income from any material adverse impact during 1996 assuming a moderate rise or decline in interest rates. ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1995 (Table 10) ($ in thousands) 1-3 3-6 6-12 Months Months Months Money Market Assets $14,543 $4,434 $99 Securities 14,472 7,337 15,026 Loans (Net of Unearned) 81,348 34,594 68,423 TOTAL EARNING ASSETS $110,363 $46,365 $83,548 INTEREST BEARING LIABILITIES Retail Savings Deposits $96,165 --- --- Retail Time Deposits 26,010 $26,354 $43,534 Large Dollar Denominated Time Deposits 4,639 7,960 6,602 Other Borrowings --- --- --- TOTAL INTEREST BEARING LIABILITIES $126,814 $34,314 $50,136 Periodic GAP $(16,451) $12,051 $33,412 Cumulative GAP $(16,451) $(4,400) $29,012 Cumulative Ratio (1) 87% 97% 114% <FN> <F1> (1)Rate-sensitive Assets / Rate-sensitive Liabilities </FN> ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1995 (Table 10) ($ in thousands) 1-5 Beyond Years 5 Years Total EARNING ASSETS Money Market Assets $300 --- $19,376 Securities 33,963 $18,717 89,515 Loans (Net of Unearned) 36,989 9,236 230,590 TOTAL EARNING ASSETS $71,252 $27,953 $339,481 INTEREST BEARING LIABILITIES Retail Savings Deposits --- --- $96,165 Retail Time Deposits $67,742 $186 163,826 Large Dollar Denominated Time Deposits 7,532 --- 26,733 Other Borrowings --- --- --- TOTAL INTEREST BEARING LIABILITIES $75,274 $186 $286,724 Periodic GAP $(4,022) $27,767 Cumulative GAP $24,990 $52,757 Cumulative Ratio (1) 109% 118% <FN> <F1> (1)Rate-sensitive Assets / Rate-sensitive Liabilities </FN> CONSOLIDATED BALANCE SHEETS (DOLLAR REFERENCES IN THOUSANDS EXCEPT SHARE DATA) DECEMBER 31, 1995 1994 ASSETS Cash and Due from Banks (Note 13) $ 15,421 $ 14,636 Federal Funds Sold 12,550 7,650 Cash and Cash Equivalents 27,971 22,286 Interest-bearing Balances with Banks 897 1,192 Other Short-term Investments 5,929 13,415 Securities Available-for-Sale, at Market (Note 2) 78,908 22,043 Securities Held-to-Maturity, at Cost (Market Value of $11,237 and $50,316 on December 31, 1995 and 1994, respectively) (Note 2) 10,607 51,273 Loans (Note 3) 231,127 224,650 Less: Unearned Income (537) (840) Allowance for Loan Losses (Note 4) (5,933) (5,669) Loans, Net 224,657 218,141 Premises, Furniture and Equipment, Net (Note 5) 9,624 9,407 Other Real Estate 286 497 Intangible Assets 1,990 2,235 Accrued Interest Receivable and Other Assets 6,894 6,037 TOTAL ASSETS $ 367,763 $ 346,526 LIABILITIES Noninterest-bearing Deposits $ 40,855 $ 36,448 Interest-bearing Deposits (Note 6) 286,724 265,842 Total Deposits 327,579 302,290 Short-term Borrowings (Note 7) --- 9,169 Accrued Interest Payable and Other Liabilities 3,228 2,142 TOTAL LIABILITIES 330,807 313,601 Commitments and Contingent Liabilities (Notes 12 & 13) SHAREHOLDERS' EQUITY Common Stock, $10 par value; 5,000,000 shares authorized, and 1,825,040 and 1,739,994 issued and outstanding in 1995 and 1994, respectively 18,250 17,400 Preferred Stock, $10 par value; 5,000,000 shares authorized, no shares issued --- --- Additional Paid-in Capital 5,449 3,542 Retained Earnings 12,398 12,641 Unrealized Appreciation / (Depreciation) on Securities Available-for-Sale (Net of tax of $571 and ($431) in 1995 and 1994, respectively) 859 (658) TOTAL SHAREHOLDERS' EQUITY 36,956 32,925 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 367,763 $ 346,526 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME (DOLLAR REFERENCES IN THOUSANDS EXCEPT EARNINGS PER SHARE) YEARS ENDED DECEMBER 31, 1995 1994 1993 INTEREST INCOME Interest and Fees on Loans $21,210 $17,348 $16,312 Interest on Federal Funds Sold 739 319 161 Interest on Short-term Investments 728 386 461 Interest and Dividends on Securities Taxable 3,229 2,850 3,582 Non-taxable 1,391 1,167 1,141 TOTAL INTEREST INCOME 27,297 22,070 21,657 INTEREST EXPENSE Interest on Deposits 12,633 9,394 9,844 Interest on Short-term Borrowings 184 133 50 TOTAL INTEREST EXPENSE 12,817 9,527 9,894 NET INTEREST INCOME 14,480 12,543 11,763 Provision for Loan Losses (Note 4) (19) 567 653 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,499 11,976 11,110 NONINTEREST INCOME Income from Fiduciary Activities 185 171 139 Service Charges on Deposit Accounts 620 567 520 Investment Services Income 208 420 493 Other Service Charges, Commissions, and Fees 418 359 339 Gains on Sales of Loans and Other Real Estate 29 92 61 Security Gains --- 80 71 TOTAL NONINTEREST INCOME 1,460 1,689 1,569 NONINTEREST EXPENSE Salaries and Employee Benefits (Note 8) 5,349 4,517 4,338 Occupancy Expense 813 678 659 Furniture and Equipment Expense 748 619 578 FDIC Premiums 393 644 645 Computer Processing Fees 399 352 297 Professional Fees 198 257 484 Other Operating Expenses 2,178 1,542 1,588 TOTAL NONINTEREST EXPENSE 10,078 8,609 8,589 Income before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes 5,881 5,056 4,090 Income Tax Expense (Note 10) 1,863 1,582 1,308 Income before Cumulative Effect of Change in Accounting for Income Taxes 4,018 3,474 2,782 Cumulative Effect of Change in Accounting for Income Taxes (Note 1) --- --- 150 NET INCOME $ 4,018 $ 3,474 $ 2,932 EARNINGS PER SHARE (NOTE 11): Income before Cumulative Effect of Accounting Change $ 2.20 $ 1.90 $ 1.53 Cumulative Effect --- --- .08 Net Income $ 2.20 $ 1.90 $ 1.61 See Accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR REFERENCES IN THOUSANDS) YEARS ENDED DECEMBER 31, 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $4,018 $3,474 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Accretion and Amortization on Investments (662) (50) Depreciation and Amortization 948 712 Provision for Loan Losses (19) 567 Gain on Sale of Securities --- (80) Gain on Sales of Loans and Other Real Estate (29) (92) Change in Assets and Liabilities: Loans Purchased for Resale --- --- Deferred Taxes 5 (349) Deferred Loan Fees 34 (157) Interest Receivable (632) (143) Interest Payable 340 40 Other Assets (649) 316 Other Liabilities 163 (274) Unearned Income (303) (386) Total Adjustments (804) 104 NET CASH FROM OPERATING ACTIVITIES 3,214 3,578 CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks 295 5,172 Proceeds from Maturities of Other Short-term Investments 52,133 14,835 Purchase of Other Short-term Investments (43,967) (22,049) Proceeds from Maturities of Securities Available-for-Sale 8,518 10,661 Proceeds from Sales of Securities Available-for-Sale --- 3,354 Purchase of Securities Available-for-Sale (26,940) (3,391) Proceeds from Maturities of Securities Held-to-Maturity 8,967 11,972 Proceeds from Sales of Securities Held-to-Maturity --- --- Purchase of Securities Held-to-Maturity (4,243) (16,153) Purchase of Loans (3,691) (7,332) Proceeds from Sales of Loans 500 7,625 Loans Made to Customers net of Payments Received (3,186) (9,462) Proceeds from Sales of Other Real Estate 389 415 Property and Equipment Expenditures (920) (956) Cash Acquired / (Paid) in Acquisition of Affiliates --- 8,934 NET CASH FROM INVESTING ACTIVITIES (12,145) 3,625 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits 25,289 (4,088) Change in Short-term Borrowings (9,169) 1,003 Purchase and Retire Common Stock (110) --- Dividends Paid (1,392) (1,232) Exercise of Stock Option 22 2 Purchase of Interest in Fractional Shares (24) (2) NET CASH FROM FINANCING ACTIVITIES 14,616 (4,317) NET CHANGE IN CASH AND CASH EQUIVALENTS 5,685 2,886 Cash and Cash Equivalents at Beginning of Year 22,286 19,400 Cash and Cash Equivalents at End of Year $ 27,971 $ 22,286 CASH PAID DURING THE YEAR FOR: Interest $ 12,477 $ 9,487 Income Taxes 1,980 1,984 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR REFERENCES IN THOUSANDS) YEAR ENDED DECEMBER 31, 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $2,932 Adjustments to Reconcile Net Income to Net Cash from Operating Activities Accretion and Amortization on Investments 277 Depreciation and Amortization 557 Provision for Loan Losses 653 Gain on Sale of Securities (17) Gain on Sales of Loans and Other Real Estate (61) Change in Assets and Liabilities: Loans Purchased for Resale 1,862 Deferred Taxes (238) Deferred Loan Fees (28) Interest Receivable 118 Interest Payable (143) Other Assets 470 Other Liabilities (31) Unearned Income (364) Total Adjustments 3,055 NET CASH FROM OPERATING ACTIVITIES 5,987 CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks 6,882 Proceeds from Maturities of Other Short-term Investments 11,539 Purchase of Other Short-term Investments (9,021) Proceeds from Maturities of Securities Available-for-Sale 2,229 Proceeds from Sales of Securities Available-for-Sale 1,998 Purchase of Securities Available-for-Sale (13,906) Proceeds from Maturities of Securities Held-to-Maturity 36,835 Proceeds from Sales of Securities Held-to-Maturity 487 Purchase of Securities Held-to-Maturity (32,118) Purchase of Loans (5,208) Proceeds from Sales of Loans 632 Loans Made to Customers net of Payments Received 2,400 Proceeds from Sales of Other Real Estate 57 Property and Equipment Expenditures (488) Cash Acquired / (Paid) in Acquisition of Affiliates (963) NET CASH FROM INVESTING ACTIVITIES 1,355 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits (5,287) Change in Short-term Borrowings 5,581 Purchase and Retire Common Stock --- Dividends Paid (1,049) Exercise of Stock Option --- Purchase of Interest in Fractional Shares (12) NET CASH FROM FINANCING ACTIVITIES (767) NET CHANGE IN CASH AND CASH EQUIVALENTS 6,575 Cash and Cash Equivalents at Beginning of Year 12,825 Cash and Cash Equivalents at End of Year $ 19,400 CASH PAID DURING THE YEAR FOR: Interest $ 10,037 Income Taxes 1,201 See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLAR REFERENCES IN THOUSANDS EXCEPT SHARE DATA) ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS BALANCES, JANUARY 1, 1993 $11,973 $3,509 $13,988 Net Income for 1993 2,932 Stock Split (Note 11) (541,624 Shares) 5,416 (5,416) Purchase of Interest in Fractional Shares (Notes 11 & 18) (12) Cash Dividends ($.57 per Common Share) as restated for the pooling of interests (1,049) BALANCES, DECEMBER 31, 1993 17,389 3,509 10,443 Net Income for 1994 3,474 Changes in Accounting for Securities (Note 1) Net Change in Unrealized Appreciation / (Depreciation) on Securities Purchase and Retirement of 2,082 Shares pursuant to Exercise of Stock Options (Note 9) (21) (4) (42) Issuance of 3,200 shares upon Exercise of Stock Options (Note 9) 32 37 Purchase of Interest in Fractional Shares (Note 18) (2) Cash Dividends ($.68 per Common Share ) as restated for pooling of interests (1,232) BALANCES, DECEMBER 31, 1994 17,400 3,542 12,641 Net Income for 1995 4,018 Unrealized Appreciation on Securities Transferred to Available-for-Sale Net Change in Unrealized Appreciation / (Depreciation) on Securities Purchase and Retirement of 3,600 Shares of Common Stock (36) (7) (67) Purchase and Retirement of 3,331 Shares pursuant to Exercise of Stock Options (Note 9) (33) (7) (64) Issuance of 5,800 Shares upon Exercise of Stock Options (Note 9) 58 68 5% Stock Dividend (86,177 Shares) (Note 11) 861 1,853 (2,714) Purchase of Interest in Fractional Shares (Note 11) (24) Cash Dividends ($.76 per Common Share) (1,392) BALANCES, DECEMBER 31, 1995 $18,250 $5,449 $12,398 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DOLLAR REFERENCES IN THOUSANDS EXCEPT SHARE DATA) UNREALIZED APPRECIATION / (DEPRECIATION) ON SECURITIES TOTAL AVAILABLE- SHAREHOLDERS' FOR-SALE EQUITY BALANCES, JANUARY 1, 1993 $29,470 Net Income for 1993 2,932 Stock Split (Note 11) (541,624 Shares) --- Purchase of Interest in Fractional Shares (Notes 11 & 18) (12) Cash Dividends ($.57 per Common Share) as restated for the pooling of interests (1,049) BALANCES, DECEMBER 31, 1993 31,341 Net Income for 1994 3,474 Changes in Accounting for Securities (Note 1) $274 274 Net Change in Unrealized Appreciation / (Depreciation) on Securities (932) (932) Purchase and Retirement of 2,082 Shares pursuant to Exercise of Stock Options (Note 9) (67) Issuance of 3,200 shares upon Exercise of Stock Options (Note 9) 69 Purchase of Interest in Fractional Shares (Note 18) (2) Cash Dividends ($.68 per Common Share ) as restated for pooling of interests (1,232) BALANCES, DECEMBER 31, 1994 (658) 32,925 Net Income for 1995 4,018 Unrealized Appreciation on Securities Transferred to Available-for-Sale 523 523 Net Change in Unrealized Appreciation / (Depreciation) on Securities 994 994 Purchase and Retirement of 3,600 Shares of Common Stock (110) Purchase and Retirement of 3,331 Shares pursuant to Exercise of Stock Options (Note 9) (104) Issuance of 5,800 Shares upon Exercise of Stock Options (Note 9) 126 5% Stock Dividend (86,177 Shares) (Note 11) --- Purchase of Interest in Fractional Shares (Note 11) (24) Cash Dividends ($.76 per Common Share) (1,392) BALANCES, DECEMBER 31, 1995 $859 $36,956 See accompanying notes to consolidated financial statements. Notes to the Consolidated Financial Statements December 31, 1995, 1994, and 1993 (dollar references in thousands) NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION German American Bancorp, (formerly known as GAB Bancorp) operates primarily in the banking industry, which accounts for over 90% of its revenues, operating income and identifiable assets. German American Bancorp generates commercial, installment and mortgage loans and receives deposits from customers through its locations in the Indiana counties of Dubois, Martin, Pike, Perry and Spencer. The overall loan portfolio is diversified among a variety of individual borrowers, with a substantial portion of debtors' ability to honor their contracts dependent on the agriculture, poultry and wood manufacturing industries. Although wood manufacturers employ a significant number of people in the Company's market area, the Company does not have a concentration of credit to companies engaged in that industry. The majority of the Company's loans are secured by specific items of collateral including business assets, consumer assets and real property. These financial statements include the accounts of German American Bancorp and its wholly-owned subsidiaries, The German American Bank, The Union Bank, Winslow Bancorporation, Inc., Community Trust Bank (wholly-owned by Winslow Bancorporation), First State Bank, Southwest Indiana and GAB Mortgage Corp. Significant intercompany balances and transactions have been eliminated in consolidation. Certain items in the 1994 and 1993 financial statements have been reclassified to correspond with the 1995 presentation. USES OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS Management must make estimates and assumptions in preparing financial statements that affect the amounts reported therein and the disclosures provided. These estimates and assumptions may change in the future and future results could differ. Areas involving the use of management's estimates and assumptions include the allowance for loan losses, the realization of deferred tax assets, fair values of certain securities, the determination and carrying value of impaired loans, the carrying value of other real estate, the determination of other-than-temporary reductions in the fair value of securities, recognition and measurement of loss contingencies, depreciation of premises and equipment, and the carrying value and amortization of intangibles. Estimates that are more susceptible to change in the near term include the allowance for loan losses, the determination and carrying value of impaired loans, and the fair value of certain securities. SHORT-TERM INVESTMENTS Short-term Investments consist of interest-bearing balances with banks, which are generally limited to FDIC insured amounts, and Bankers Acceptances. These investments generally have terms to maturity of less than one year and are carried at cost, which approximates market value. SECURITIES On January 1, 1994, the Company adopted Financial Accounting Standard No. 115 (FAS 115), `Accounting for Certain Investments in Debt and Equity Securities.'' Upon adoption of FAS 115, securities were classified by management as available- for-sale or held-to-maturity. The adoption of FAS 115 in 1994 had no effect on net income, earnings per share or retained earnings, but did increase shareholders' equity by $274 on January 1, 1994, which is a market adjustment of $454 less $180 in deferred taxes. Securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity, and includes securities that management might use as part of its asset-liability strategy or that may be sold in response to changes in the interest rates, changes in prepayment risk, or for similar reasons. It is difficult to predict whether changes such as the above will occur or the degree or specific nature of such changes. The amount of securities reported as available-for-sale include securities that might be sold if a condition changes in a given way, whereas those securities might not be sold if the condition does not change or if it changes in a different way. Accordingly, many securities reported as available-for-sale may not be sold and thus the amount reported does not necessarily represent anticipated sales and resulting cash receipts. Securities available-for-sale are reported at market value with unrealized gains or losses included as a separate component of equity net of tax. Securities classified as held-to-maturity are securities that the Company has both the ability and positive intent to hold to maturity. Securities held-to- maturity are carried at amortized cost. Premium amortization is deducted from and discount accretion is added to interest income using the level yield method. The cost of securities sold is computed on the identified securities method. INTEREST INCOME ON LOANS Interest is accrued over the term of the loans based on the principal balance outstanding. Loans are placed on a nonaccrual status when scheduled principal or interest payments are past due 90 days or more, unless the loan is well secured and in the process of collection. Under FAS 114 and 118 (as explained below in ``Allowance for Loan Losses''), the carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as bad debt expense, if reductions, or otherwise as interest income. LOAN FEES AND COSTS The Company defers loan fees and certain direct loan origination costs. The amounts deferred are reported in the balance sheet as part of loans and are recognized into interest income over the term of the loan using the level yield method. ALLOWANCE FOR LOAN LOSSES Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases of the allowance are recorded by a provision for possible loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover possible losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that occur. A loan is charged- off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Statements of Financial Accounting Standards No. 114 and No. 118 were adopted January 1, 1995. These standards require recognition of loan impairment if a loan's full principal or interest payments are not expected to be received. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. No increase to the allowance for loan losses was required at January 1, 1995 as a result of the adoption of these new standards. Smaller-balance homogenous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Commercial, agricultural, and poultry loans are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of more than 30 days. Nonaccrual loans are generally also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual and renegotiated loan disclosures. PREMISES, FURNITURE, AND EQUIPMENT Premises, Furniture and Equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated on the straight- line method with useful lives ranging from 10 to 40 years. Furniture and equipment are primarily depreciated using straight-line methods with useful lives ranging from 3 to 12 years. Maintenance and repairs are expensed and major improvements are capitalized. At the time of sale or disposition of an asset, the applicable cost and accumulated depreciation amounts are removed from the accounting records. OTHER REAL ESTATE Other Real Estate is carried at the lower of cost or fair value less estimated selling costs. Expenses incurred in carrying Other Real Estate are charged to operations as incurred. INTANGIBLE ASSETS Intangible Assets are comprised of core deposit intangible ($434 and $548 at December 31, 1995 and 1994, respectively) and goodwill ($1,556 and $1,687, at December 31, 1995 and 1994, respectively). Core deposit intangible is being amortized on an accelerated method over ten years and goodwill is being amortized on a straight-line basis over fifteen years. CHANGE IN ACCOUNTING FOR INCOME TAXES The Company adopted, effective January 1, 1993, Statement of Financial Accounting Standards 109 (FAS 109). The adoption of FAS 109 changes the Company's accounting for income taxes from an income statement approach to an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The effect of adopting FAS 109 in 1993 was to increase net income by $150, which represents the cumulative effect of the accounting change on years prior to January 1, 1993. INCOME TAXES Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future amounts that will result from differences in the financial statement and tax basis of assets and liabilities. Recognition of deferred tax assets is limited by the establishment of a valuation reserve unless management concludes that the assets will more likely than not result in future tax benefits to the Company. Income tax expense is the amount due on the current year tax returns plus or minus the change in deferred taxes. STATEMENT OF CASH FLOWS 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. NOTE 2 - SECURITIES The amortized cost and estimated market values of Securities as of December 31, 1995 are as follows: GROSS AMORTIZED UNREALIZED COST GAINS Securities Available-for-Sale: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $23,727 $172 Obligations of State and Political Subdivisions 14,232 1,154 Corporate Securities 6,375 88 Mortgage-backed Securities 33,144 317 Total $77,478 $1,731 GROSS ESTIMATED UNREALIZED MARKET LOSSES VALUE Securities Available-for-Sale: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $(112) $23,787 Obligations of State and Political Subdivisions --- 15,386 Corporate Securities --- 6,463 Mortgage-backed Securities (189) 33,272 Total $(301) $78,908 GROSS AMORTIZED UNREALIZED COST GAINS Securities Held-to-Maturity: Obligations of State and Political Subdivisions $9,869 $659 Other Securities 738 --- Total $10,607 $659 GROSS ESTIMATED UNREALIZED MARKET LOSSES VALUE Securities Held-to-Maturity: Obligations of State and Political Subdivisions $(29) $10,499 Other Securities --- 738 Total $(29) $11,237 The amortized cost and estimated market values of Securities as of December 31, 1994 are as follows: GROSS AMORTIZED UNREALIZED COST GAINS Securities Available-for-Sale: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $7,280 $11 Obligations of State and Political Subdivisions 56 1 Corporate Securities 212 --- Mortgage-backed Securities 15,584 30 Total $23,132 $42 GROSS ESTIMATED UNREALIZED MARKET LOSSES VALUE Securities Available-for-Sale: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $(210) $7,081 Obligations of State and Political Subdivisions --- 57 Corporate Securities (16) 196 Mortgage-backed Securities (905) 14,709 Total $(1,131) $22,043 GROSS AMORTIZED UNREALIZED COST GAINS Securities Held-to-Maturity: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $17,249 $7 Obligations of State and Political Subdivisions 21,237 634 Corporate Securities 803 --- Mortgage-backed Securities 11,267 1 Other Securities 717 --- Total $51,273 $642 GROSS ESTIMATED UNREALIZED MARKET LOSSES VALUE Securities Held-to-Maturity: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $(769) $16,487 Obligations of State and Political Subdivisions (234) 21,637 Corporate Securities (1) 802 Mortgage-backed Securities (595) 10,673 Other Securities --- 717 Total $(1,599) $50,316 NOTE 2 - SECURITIES (CONTINUED) The amortized cost and estimated market value of Securities at December 31, 1995 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. ESTIMATED AMORTIZED MARKET COST VALUE Securities Available-for-Sale: Due in one year or less $9,794 $9,826 Due after one year through five years 21,861 22,091 Due after five years through ten years 6,770 7,216 Due after ten years 5,909 6,503 Mortgage-backed Securities 33,144 33,272 Totals $77,478 $78,908 ESTIMATED AMORTIZED MARKET COST VALUE Securities Held-to-Maturity: Due in one year or less $190 $201 Due after one year through five years 1,949 2,012 Due after five years through ten years 2,158 2,357 Due after ten years 5,572 5,929 Other Securities 738 738 Totals $10,607 $11,237 1995 AVAILABLE- HELD-TO- FOR-SALE MATURITY Sales of Securities are summarized below: Proceeds from Sales $0 $0 Gross Gains on Sales 0 0 Gross Losses on Sales 0 0 Income Taxes on Gross Gains 0 0 Income Taxes on Gross Losses 0 0 1994 AVAILABLE- HELD-TO- FOR-SALE MATURITY Sales of Securities are summarized below: Proceeds from Sales $3,354 $0 Gross Gains on Sales 82 0 Gross Losses on Sales 2 0 Income Taxes on Gross Gains 33 0 Income Taxes on Gross Losses 1 0 1993 AVAILABLE- HELD-TO- FOR-SALE MATURITY Sales of Securities are summarized below: Proceeds from Sales $1,998 $487 Gross Gains on Sales 0 48 Gross Losses on Sales 11 20 Income Taxes on Gross Gains 0 19 Income Taxes on Gross Losses 4 8 Upon acquisition of The Otwell State Bank in 1994, $2,400 of securities were transferred from held-to-maturity to available-for-sale. Securities with a carrying value of $8,488 and $13,349 as of December 31, 1995 and 1994, respectively, were pledged to secure public and trust deposits and for other purposes as required by law. No investment securities of an individual issuer exceeded ten percent of German American Bancorp shareholders' equity at December 31, 1995. The total dollar amount of Cash and Due from Banks, Federal Funds Sold and Other Short- term Investments with National City Bank, Louisville, Kentucky was $16,278 at December 31, 1995. Investments in state and political subdivisions and corporate obligations are generally required by policy to be investment grade as established by national rating organizations. However, the purchase of non-rated Indiana municipal securities is permitted by policy when the inherent quality of the issue is clearly evident to management. These investments are actively traded and have a readily available market valuation. Market values of these investments are reviewed quarterly with market values being obtained from an independent rating service or broker. At December 31, 1995, U.S. Government Agency structured notes with an amortized cost of $9,250 and fair value of $9,201 are included in securities available-for-sale, consisting primarily of step-up and single-index bonds. At December 31, 1995, mortgage-backed securities include collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMIC's) with an amortized cost of $29,429 and fair value of $29,474, all of which are issued by U.S. Government Agencies and of which approximately $28,041 are fixed rate and approximately $1,433 are single-index variable rate. NOTE 3 - LOANS Loans, as presented on the balance sheet, are comprised of the following classifications as of December 31, 1995 1994 Real Estate Loans Secured by 1- 4 Family Residential Properties $68,826 $67,737 Loans to Finance Poultry Production and Other Related Operations 23,784 25,599 Loans to Finance Agricul- tural Production and Other Loans to Farmers 27,310 31,959 Commercial and Industrial Loans 74,612 67,662 Loans to Individuals for Household, Family and Other Personal Expenditures 34,685 29,248 Economic Development Commission Bonds 608 625 Lease Financing 1,302 1,820 Total $231,127 $224,650 Underperforming loans are loans which are contractually past due 90 days or more as to interest or principal payments, loans accounted for on a nonaccrual basis and troubled debt restructurings. Underperforming assets at December 31 are as follows: 1995 1994 Underperforming Loans $3,486 $1,584 Other Real Estate Owned 286 497 Total Underperforming Assets $3,772 $2,081 Interest that would have been recognized at the original rate on Underperforming Loans $337 $136 Amount of interest recognized on Underperforming Loans $280 $123 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 1995. A summary of the activity of these loans is as follows: BALANCE CHANGES JANUARY 1, IN PERSONS 1995 ADDITIONS INCLUDED $9,740 $7,264 $0 DEDUCTIONS BALANCE DECEMBER 31, COLLECTED CHARGED-OFF 1995 $(7,126) $0 $9,878 NOTE 4 - ALLOWANCE FOR LOAN LOSSES A summary of the activity in the Allowance for Loan Losses is as follows: 1995 1994 1993 Balance as of January 1 $5,669 $4,935 $3,862 Addition of Affiliate Banks --- 195 164 Provision for Loan Losses (19) 567 653 Recoveries of Prior Loan Losses 622 227 699 Loan Losses Charged to the Allowance (339) (255) (443) Balance as of December 31 $5,933 $5,669 $4,935 NOTE 4 - ALLOWANCE FOR LOAN LOSSES (CONTINUED) Information regarding impaired loans is as follows for the year ended December 31, 1995: Average investment in impaired loans $4,233 Interest income recognized on impaired loans including interest income recognized on cash basis $353 Interest income recognized on impaired loans on cash basis 270 Information regarding impaired loans is as follows at December 31, 1995: Balance of impaired loans $6,244 Less: Portion for which no allowance for loan loss is allocated 215 Portion of impaired loan balance for which an allowance for credit losses is allocated $6,029 Portion of allowance for loan losses allocated to the impaired loan balance $898 At December 31, 1995, impaired loans of $2,646 are also included in Underperforming Loans (Note 3). NOTE 5 - PREMISES, FURNITURE, AND EQUIPMENT Premises, furniture, and equipment as presented on the balance sheet is comprised of the following classifications: 1995 1994 Land $1,472 $1,418 Buildings and Improvements 9,160 8,841 Furniture and Equipment 4,578 4,269 Total Premises, Furniture and Equipment 15,210 14,528 Less: Accumulated Depreciation (5,586) (5,121) Total $9,624 $9,407 NOTE 6 - DEPOSITS The aggregate amount of interest-bearing deposits in denominations of $100 or more was $26,733 and $26,868 as of December 31, 1995 and 1994, respectively. NOTE 7 - SHORT-TERM BORROWINGS Short-term borrowings, as presented in the balance sheet, consist of the following: 1995 1994 Interest-bearing Demand Notes issued to the U.S. Treasury $ --- $ 898 Securities Sold under Agreements to Repurchase --- 8,171 Federal Funds Purchased --- 100 Total Short-term Borrowings $ --- $9,169 NOTE 8 - EMPLOYEE BENEFIT PLANS During 1995, the Company and all its banking affiliates provided a trusteed noncontributory profit sharing plan which covered substantially all full-time employees. Contributions are discretionary and are subject to determination by the Board of Directors. Contributions to this plan for 1995 were $184. During 1994, First State Bank did not participate in the plan and, prior to 1994, only German American Bank had such a plan. Contributions were $170 and $121 for 1994 and 1993, respectively. During 1995, the Company and all its banking affiliates offered 401(k) deferred compensation plans under which the banks agree to match certain employee contributions. Contributions to this plan during 1995 were $196. During 1994, all affiliate banks of the Company except First State Bank offered this plan. Only German American and Union provided such plans in 1993. Contributions to these plans were $154 and $135 for 1994 and 1993, respectively. NOTE 9 - STOCK OPTION PLAN During 1992, the Company adopted a Stock Option Plan which reserved 76,287 shares of Common Stock (as adjusted for subsequent stock splits and subject to further customary antidilution adjustments) for the purpose of grants of options to officers and other employees of the Company. The date on which options are first exercisable is determined by the Stock Option Committee of the Company, but no stock option may be exercised after ten years from the date of grant. Options may be designated as `incentive stock options'' under the Internal Revenue Code of 1986, or as nonqualified options. The exercise price of incentive stock options granted pursuant to the Plan must be no less than the fair market value of the Common Stock on the date of the grant. The Plan authorizes an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash or common shares. If an optionee tenders already-owned common shares to the Company to exercise an option, the Company is obligated to use its best efforts to issue to such optionee a replacement option for the number of shares tendered of the same type (either an incentive stock option or a nonqualified option) as the option exercised and with the same expiration date priced at the fair market value of the stock on that date. Replacement options may not be exercised until one year from the date of grant. Changes in options outstanding were as follows, as adjusted to reflect stock splits and stock dividends: WEIGHTED AVERAGE OPTION PRICE 1995 1994 1993 Outstanding at beginning of year $21.51 $20.64 --- Granted during the year $29.71 $30.83 $20.64 Exercised during the year $20.64 $20.64 --- Outstanding at end of year $22.99 $21.51 $20.64 Exercisable at end of year $23.08 $20.64 $20.64 NUMBER OF OPTIONS 1995 1994 1993 Outstanding at beginning of year 25,601 26,775 --- Granted during the year 3,497 2,186 26,775 Exercised during the year (6,090) (3,360) --- Outstanding at end of year 23,008 25,601 26,775 Exercisable at end of year 9,116 9,555 4,725 There were 49,512 shares available for grant as of December 31, 1995. NOTE 10 - INCOME TAXES THE PROVISION FOR INCOME TAXES CONSISTS OF THE FOLLOWING: 1995 1994 1993 Currently Payable $1,858 $1,931 $1,546 Deferred 52 (267 ) (238 ) Net Operating Loss Carryforward (47) (82 ) --- Total $1,863 $1,582 $1,308 Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows: 1995 1994 1993 Statutory Rate Times Pre-tax Income $2,000 $1,719 $1,391 Add/(Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments (531) (435 ) (423 ) Non-deductible Merger Costs --- 26 74 Non-deductible Interest Expense 49 30 27 State Income Tax, Net of Federal Tax Effect 344 291 249 Tax Effect of Other Differences 1 (49) (10) Total Income Taxes $1,863 $1,582 $1,308 The net deferred tax asset at December 31 consists of the following: 1995 1994 Deferred Tax Assets: Allowance for Loan Losses $1,474 $1,521 Net Operating Loss Carryforwards 281 328 Unrealized Depreciation on Securities --- 431 Other 271 199 Total Deferred Tax Assets 2,026 2,479 Deferred Tax Liabilities: Leasing Activities, net (227 ) (286 ) Depreciation (122) (102 ) Purchase Accounting Adjustments (63) (80 ) Unrealized Appreciation on Securities (571) --- Other (145) (46 ) Total Deferred Tax Liabilities (1,128) (514 ) Valuation Allowance (48) (71 ) Net Deferred Tax Asset $850 $1,894 The Company's subsidiary, Winslow Bancorporation, has $826 of federal tax net operating loss carryforwards expiring in the following amounts: YEAR AMOUNT 1996 $52 1997 128 1998 80 1999 135 2000 135 2001 129 2002 105 2007 58 2008 4 NOTE 11 - PER SHARE DATA In July 1993, the Board of Directors authorized a three-for-two stock split effected in the form of a 50 percent stock dividend issued in August, 1993. In December 1995, the Board of Directors declared a 5 percent stock dividend payable on December 22, 1995. In lieu of issuing fractional shares, the Company purchased from shareholders their fractional interest in both instances. Earnings and dividend per share amounts have been retroactively computed as though these additionally issued shares had been outstanding for all periods presented. The weighted average number of shares used in calculating earnings and dividends per share amounts were 1,825,641, 1,825,059, and 1,825,053 for 1995, 1994, and 1993, respectively. Stock Options (see Note 9) are not materially dilutive and have been excluded from weighted average shares. NOTE 12 - LEASE COMMITMENTS The total rental expense for all leases for the years ended December 31, 1995, 1994, and 1993 was $73, $67, and $61, respectively, including amounts paid under short-term cancelable leases. At December 31, 1995, the German American Bank subleased space for two branch banking facilities from a company controlled by a director and principal shareholder of the Company. The subleases expire in 1996 and 2000 with various renewal options provided. Aggregate annual rental payments to this Director's company totaled $31 for 1995. Exercise of the Bank's sublease renewal options are contingent upon the Director's company renewing its primary leases. The following is a schedule of future minimum lease payments: Years Ending December 31: PREMISES EQUIPMENT TOTAL 1996 $25 $11 $36 1997 17 8 25 1998 17 1 18 1999 17 --- 17 2000 10 --- 10 Total $86 $20 $106 NOTE 13 - COMMITMENTS AND OFF-BALANCE SHEET ITEMS In the normal course of business, there are various commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans, standby letters of credit, and financial guarantees is represented by the contractual amount of those instruments. The Company uses the same credit policy to make such commitments as it uses for on-balance sheet items. These financial instruments at December 31, are summarized as follows: 1995 1994 Commitments to Fund Loans Home Equity $5,760 $5,036 Credit Card Lines 3,287 2,200 Commercial Real Estate Commitments 1,516 385 Commercial Operating Lines 22,913 14,593 Total Commitments to Fund Loans $33,476 $22,214 Standby Letters of Credit $3,110 $4,188 NOTE 13 - COMMITMENTS AND OFF-BALANCE SHEET ITEMS (CONTINUED) Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. the approximate duration of these commitments is generally one year or less. The interest rates associated with these commitments are generally variable rate. During 1995, the Company self-insured employee health benefits for all affiliates. Stop loss insurance covers losses exceeding $35 per covered individual and approximately $296 in the aggregate . Management's policy is to establish a reserve for claims not submitted by a charge to earnings based on prior experience. The charge to earnings for 1995 was $269. During 1994, the Company self-insured the benefits for all affiliates except First State Bank. Prior to 1994, only German American Bank self- insured the health benefits. The charges to earnings were $230 for 1994 and $187 for 1993. At December 31, 1995, the affiliate banks were required to have $1,950 on deposit with the Federal Reserve or as cash on hand. These reserves do not earn interest. NOTE 14 - NON-CASH INVESTING ACTIVITIES 1995 1994 1993 Loans Transferred to Other Real Estate $149 $122 $97 Securities Transferred to Available-for-Sale $35,943 $32,732 --- The data above should be read in conjunction with the Consolidated Statements of Cash Flows. Securities were transferred to Available-for-Sale in 1994 upon adoption of FAS 115 (Note 1). During December 1995, Securities were transferred from Held-to-Maturity to Available-for-Sale in accordance with the Financial Accounting Standards Board Special Report on implementation of FAS 115. NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS The condensed financial statements of German American Bancorp as of December 31, 1995 and 1994, and for each of the three years ended December 31, 1995, 1994, and 1993 are as follows: GERMAN AMERICAN BANCORP BALANCE SHEETS DECEMBER 31, 1995 1994 ASSETS Cash $409 $340 Investment in Subsidiary Banks and Bank Holding Company 35,833 32,174 Investment in GAB Mortgage Corp 274 269 Furniture and Equipment 313 16 Other Assets 204 130 TOTAL ASSETS $37,033 $32,929 LIABILITIES $77 $4 SHAREHOLDERS' EQUITY Common Stock 18,250 17,400 Additional Paid-in Capital 5,449 3,542 Retained Earnings 12,398 12,641 Unrealized Appreciation/ (Depreciation) on Securities Available-for-Sale 859 (658) TOTAL SHAREHOLDERS' EQUITY 36,956 32,925 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,033 $32,929 NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED) GERMAN AMERICAN BANCORP STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 1995 1994 1993 INCOME Dividends from Subsidiary Banks $2,511 $4,754 $4,531 Interest Income 18 44 29 Fee Income 178 --- --- Total Income 2,707 4,798 4,560 EXPENSES Salaries and Benefits 922 533 26 Professional Fees 95 157 187 Occupancy and Equipment Expense 130 2 --- Other Expenses 104 24 33 Total Expenses 1,251 716 246 INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,456 4,082 4,314 Income Tax Benefit 415 286 16 INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 1,871 4,368 4,330 Equity in Undistributed Income of Subsidiaries 2,147 (894) (1,398) NET INCOME $4,018 $3,474 $2,932 GERMAN AMERICAN BANCORP STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 1995 1994 1993 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $4,018 $3,474 $2,932 Adjustments to Reconcile Net Income to Net Cash from Operations Depreciation 65 2 --- Change in Other Assets (74) (110) 90 Change in Other Liabilities 73 (66) (45) Equity in Undistributed Income of Subsidiaries (2,147) 894 1,398 Total Adjustments (2,083) 720 1,443 Net Cash from Operating Activities 1,935 4,194 4,375 CASH FLOWS FROM INVESTING ACTIVITIES Investment in Subsidiaries --- (3,818) (2,339) Advances made to Subsidiaries --- (1,000) (3,400) Repayment of Advances by Subsidiaries --- 2,100 2,500 Property and Equipment Expenditures (362) (18) --- Net Cash from Investing Activities (362) (2,736) (3,239) CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid (1,392) (1,232) (1,049) Exercise of Stock Options 22 2 --- Purchase and Retire Common Stock (110) --- --- Purchase of Interest in Fractional Shares (24) (2) (12) Net Cash from Financing Activities (1,504) (1,232) (1,061) NET CHANGE IN CASH AND CASH EQUIVALENTS 69 226 75 Cash and Cash Equivalents at Beginning of Year 340 114 39 Cash and Cash Equivalents at End of Year $409 $340 $114 NOTE 16 - PENDING CHANGES IN ACCOUNTING POLICIES As of January 1, 1996 the following new Statements of Financial Accounting Standards (FAS) become applicable to the Company: FAS 121, `Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of'; FAS 122, ``Accounting for Mortgage Servicing Rights'; and FAS 123, ``Accounting for Stock-Based Compensation'. FAS 121 requires review of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Management does not expect the adoption of FAS 121 to have a material effect on the consolidated financial statements. FAS 122 eliminates the d istinction between purchased and originated mortgage servicing rights and causes an asset to be recorded for newly originated mortgage servicing rights. As the Company presently does not purchase or retain originated mortgage servicing rights, FAS 122 will have no effect on the consolidated financial statements. FAS 123 encourages entities to use a `fair value based method'' to account for stock-based compensation plans. If FAS 123 is not adopted, entities must disclose the proforma effect on net income and on earnings per share had the statement been adopted. The Company does not plan to use a fair value method to account for stock compensation plans, and, accordingly, the effect of FAS 123 will be limited to the additional disclosures of the required market values. NOTE 17 - DIVIDENDS AND CAPITAL REQUIREMENTS German American Bancorp's primary source of funds with which to pay dividends is its affiliate banks. The Banks and the Company are each required to maintain minimum capital amounts in accordance with regulatory requirements. Capital, as defined, is generally required to be at least 3% to 5% of total assets (leverage ratio), as defined, or at least 8% to 10% of risk-based assets (total risk-based capital ratio), as defined. At December 31, 1995 the Company's leverage and total risk-based capital ratios were 9.29% and 15.89%, respectively, which exceeded the minimum requirements by 6.29% and 7.89%, respectively. Under these requirements, the Company estimates as of December 31, 1995 that retained earnings available for payment by affiliate Banks to the Company approximated $3,272 and that approximately $12,398 of Company retained earnings are available for payment to shareholders. NOTE 18 - BUSINESS COMBINATIONS On April 1, 1994, the Company acquired all of the outstanding shares of The Otwell State Bank of Otwell, Indiana in exchange for 113,286 shares of German American Bancorp common stock. The Otwell State Bank was subsequently merged into Community Trust Bank. Fractional interests were paid in cash of $2. The transaction was accounted for as a pooling of interests. On March 8, 1993, the Company acquired all of the outstanding shares of Unibancorp and its wholly owned subsidiary, The Union Bank of Loogootee, Indiana in exchange for 320,283 shares of German American Bancorp common stock (Unibancorp was subsequently merged into German American Bancorp). Fractional interests were paid in cash of $1. The transaction was accounted for as a pooling of interests. On April 1, 1993, the Company acquired all of the outstanding stock of Winslow Bancorporation, Inc. and its subsidiary, then known as Southwestern Indiana Bank, of Winslow, Indiana, for total cash consideration of $2,023 plus direct expenses. The transaction was recorded under the purchase method of accounting and resulted in goodwill of $377 and core deposit intangible of $353. Winslow Bancorporation's consolidated financial statements reflected, on an unaudited basis, total assets of $17,692, total liabilities of $16,161, and shareholders' equity of $1,531 at April 1, 1993, and a net loss of $203 for the period January 1 through April 1, 1993. The Company's consolidated financial statements do not include the assets, liabilities, equity, revenue, and net loss of Winslow Bancorporation, Inc. prior to the April 1, 1993 purchase date. On October 28, 1994, the Company acquired three Indiana branches of Regional Federal Savings Bank. The Huntingburg branch site was subsequently combined into an existing branch of the German American Bank in Huntingburg, while the other two sites in Tell City and Rockport comprise a newly-formed commercial bank known as First State Bank, Southwest Indiana. The fair value of assets acquired was $16,048, the fair value of liabilities assumed was $24,982, and the Company received $8,934 of cash at settlement. Goodwill associated with this purchase was $1,353 while core deposit intangible was $317. NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT-TERM INVESTMENTS For short-term instruments, the carrying amount is a reasonable estimate of fair value. SECURITIES For securities, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. LOANS The fair value of loans is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed- maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS For short-term borrowings, the carrying amount is a reasonable estimate of fair value. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT These instruments are generally short-term or variable rate with minimal fees charged. Carrying value (which is zero) is a reasonable estimation of fair value. DECEMBER 31, 1995 CARRYING FAIR VALUE VALUE Financial Assets: Cash and Short-term Investments $34,797 $34,797 Securities Available-for-Sale 78,908 78,908 Securities Held-to-Maturity 10,607 11,237 Loans, net 224,657 223,949 Financial Liabilities: Deposits (327,579) (329,840) Short-term Borrowings --- --- Unrecognized Financial Instruments Commitments to extend credit --- --- Standby letters of credit --- --- DECEMBER 31, 1994 CARRYING FAIR VALUE VALUE Financial Assets: Cash and Short-term Investments $36,893 $36,893 Securities Available-for-Sale 22,043 22,043 Securities Held-to-Maturity 51,273 50,316 Loans, net 218,141 216,694 Financial Liabilities: Deposits (302,290) (301,694) Short-term Borrowings (9,169) (9,169) Unrecognized Financial Instruments Commitments to extend credit --- --- Standby letters of credit --- --- INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders German American Bancorp Jasper, Indiana We have audited the accompanying consolidated balance sheets of German American Bancorp as of December 31, 1995 and 1994, 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, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated statements of income, changes in shareholders' equity and cash flows for the year ended December 31, 1993 have been restated to reflect the pooling of interests in 1994, as described in Note 18. We did not audit the separate 1993 financial statements of the company acquired as reflected in the pooling of interests, which statements reflect (in thousands) net income of $104 for the year ended December 31, 1993. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the other company for the year ended December 31, 1993, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of German American Bancorp as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As described in Note 1 to the consolidated financial statements, the Corporation changed its method of accounting for certain loans in 1995, securities in 1994, and income taxes in 1993 to comply with new accounting pronouncements. Indianapolis, Indiana February 1, 1996 Crowe, Chizek and Company LLP MARKET AND DIVIDEND INFORMATION FOR GERMAN AMERICAN BANCORP COMMON STOCK MARKET AND DIVIDEND INFORMATION The following table sets forth (a) the high and low bid prices for the Company's common stock as reported by NASDAQ by quarter for 1995 and 1994, and (b) dividends declared per share on the Company's common stock (not retroactively restated for pooling of interests transactions) by quarter during 1995 and 1994. Bid prices in the table reflect interdealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. All per share information has been retroactively restated for the Company's 5% stock dividend in December 1995. 1995 High Bid Low Bid Dividend First Quarter $29.52 $29.05 $.19 Second Quarter $29.52 $28.57 $.19 Third Quarter $29.05 $28.10 $.19 Fourth Quarter $30.48 $28.10 $.19 $.76 1994 First Quarter $29.52 $27.62 $.17 Second Quarter $28.57 $27.62 $.17 Third Quarter $29.05 $28.10 $.17 Fourth Quarter $29.52 $28.57 $.17 $.68 The Common Stock was held of record by approximately 1,681 shareholders at February 22, 1996. Funds for payment by the Company of cash dividends are expected to be obtained from dividends received by the Company from its subsidiaries. The Company presently intends to follow its historical policy as to the amount, timing and frequency of the payment of dividends. In addition, the Company's Board of Directors presently intends to consider declaring and issuing a stock dividend of 5% on an annual basis. The declaration and payment of future dividends, however, will depend upon the earnings and financial condition of the Company and its subsidiaries, general economic conditions, compliance with regulatory requirements and other factors. THE COMPANY WILL PROVIDE A COPY OF ITS ANNUAL REPORT (FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION), WITHOUT EXHIBITS, FREE OF CHARGE, TO ANY SHAREHOLDER, UPON WRITTEN REQUEST. SUCH WRITTEN REQUESTS SHOULD BE MADE TO JOHN M. GUTGSELL, CONTROLLER, GERMAN AMERICAN BANCORP, 711 MAIN STREET, JASPER,