UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
I X I Quarterly Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 1996
Or
I I Transition Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Transition Period from to
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Commission File Number 0-11244
German American Bancorp
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at
October 30, 1996
Common Stock, $10.00 par value 1,830,880
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets -- September 30, 1996 and
December 31, 1995
Consolidated Statements of Income -- Three Months
Ended September 30, 1996 and 1995
Consolidated Statements of Income -- Nine Months Ended
September 30, 1996 and 1995
Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements --
September 30, 1996
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART 1.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEET
(dollar references in thousands except share data)
(unaudited)
September 30, December 31,
1996 1995
ASSETS
Cash and Due from Banks $12,963 $15,421
Federal Funds Sold 9,525 12,550
Cash and Cash Equivalents 22,488 27,971
Interest-bearing Balances with Banks 699 897
Other Short-term Investments 499 5,929
Securities Available-for-Sale,
at market (Note 3) 82,192 78,908
Securities Held-to-Maturity, at cost
(Market Value of $14,461 and $11,237
on September 30, 1996 and December 31,
1995, respectively) (Note 3) 14,079 10,607
Loans (Note 4) 249,285 231,127
Less: Unearned Income (355) (537)
Allowance for Loan Losses (Note 5) (6,030) (5,933)
Loans, Net 242,900 224,657
Premises, Furniture and Equipment, Net 10,025 9,624
Other Real Estate 262 286
Intangible Assets 1,827 1,990
Accrued Interest Receivable
and Other Assets 6,857 6,894
TOTAL ASSETS $381,828 $367,763
LIABILITIES
Noninterest-bearing Deposits $34,929 $40,855
Interest-bearing Deposits 301,575 286,724
Total Deposits 336,504 327,579
Short-term Borrowings 3,196 ---
Accrued Interest Payable and
Other Liabilities 3,580 3,228
TOTAL LIABILITIES 343,280 330,807
SHAREHOLDERS' EQUITY
Common Stock, $10 par value; 5,000,000
shares authorized, and 1,830,880 and
1,825,040 issued and outstanding
in 1996 and 1995, respectively
(Note 6) 18,309 18,250
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued --- ---
Additional Paid-in Capital 5,587 5,449
Retained Earnings 14,146 12,398
Unrealized Appreciation on Securities
Available-for-Sale (Net of tax of $332
and $571 in 1996 and 1995,
respectively) 506 859
TOTAL SHAREHOLDERS' EQUITY 38,548 36,956
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $381,828 $367,763
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollar references in thousands except per share data)
(unaudited)
Three Months Ended
September 30,
1996 1995
INTEREST INCOME
Interest and Fees on Loans $5,500 $5,424
Interest on Federal Funds Sold 105 159
Interest on Short-term Investments 19 181
Interest and Dividends on Securities 1,448 1,159
TOTAL INTEREST INCOME 7,072 6,923
INTEREST EXPENSE
Interest on Deposits 3,439 3,277
Interest on Short-term Borrowings 15 36
TOTAL INTEREST EXPENSE 3,454 3,313
NET INTEREST INCOME 3,618 3,610
Provision for Loan Losses 67 (213)
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,551 3,823
NONINTEREST INCOME
Income from Fiduciary Activities 48 37
Service Charges on Deposit Accounts 210 161
Investment Services Income 107 55
Other Charges, Commissions, and Fees 94 100
Gains on Sales of Loans and
Other Real Estate 0 0
Gains on Sales of Securities 0 0
TOTAL NONINTEREST INCOME 459 353
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,452 1,350
Occupancy Expense 204 207
Furniture and Equipment Expense 188 187
FDIC Premiums 175 3
Computer Processing Fees 107 103
Professional Fees 122 44
Other Operating Expenses 546 524
TOTAL NONINTEREST EXPENSE 2,794 2,418
Income before Income Taxes 1,216 1,758
Income Tax Expense 359 598
Net Income $857 $1,160
Earnings Per Share (Note 2) $0.45 $0.61
Dividends Paid Per Share (Note 2) $0.20 $0.18
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollar references in thousands except per share data)
(unaudited)
Nine Months Ended
September 30,
1996 1995
INTEREST INCOME
Interest and Fees on Loans $16,343 $15,680
Interest on Federal Funds Sold 411 535
Interest on Short-term Investments 141 610
Interest and Dividends on Securities 4,157 3,323
TOTAL INTEREST INCOME 21,052 20,148
INTEREST EXPENSE
Interest on Deposits 10,072 9,226
Interest on Short-term Borrowings 37 168
TOTAL INTEREST EXPENSE 10,109 9,394
NET INTEREST INCOME 10,943 10,754
Provision for Loan Losses (Note 5) 145 15
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 10,798 10,739
NONINTEREST INCOME
Income from Fiduciary Activities 146 142
Service Charges on Deposit Accounts 555 456
Investment Services Income 329 155
Other Charges, Commissions, and Fees 288 333
Gains on Sales of Loans and
Other Real Estate 2 21
Gains on Sales of Securities 0 0
TOTAL NONINTEREST INCOME 1,320 1,107
NONINTEREST EXPENSE
Salaries and Employee Benefits 4,278 3,963
Occupancy Expense 609 606
Furniture and Equipment Expense 546 541
FDIC Premiums 210 351
Computer Processing Fees 313 297
Professional Fees 267 121
Other Operating Expenses 1,566 1,484
TOTAL NONINTEREST EXPENSE 7,789 7,363
Income before Income Taxes 4,329 4,483
Income Tax Expense 1,324 1,460
Net Income $3,005 $3,023
Earnings Per Share (Note 2) $1.57 $1.58
Dividends Paid Per Share (Note 2) $0.59 $0.54
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar references in thousands)
(unaudited)
Nine Months Ended
September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $3,005 $3,023
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities:
Amortization and Accretion of Investments (41) (567)
Depreciation and Amortization 695 707
Provision for Loan Losses 145 15
Gains on Sales of Securities --- ---
Gains on Sales of Loans and
Other Real Estate (2) (21)
Change in Assets and Liabilities:
Unearned Income (182) (224)
Interest Receivable (295) (377)
Other Assets 540 (248)
Interest Payable 77 362
Deferred Loan Fees (18) 64
Deferred Taxes 31 (489)
Other Liabilities 275 926
Total Adjustments 1,225 148
Net Cash from Operating Activities 4,230 3,171
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances
with Banks 198 696
Proceeds from Maturities of Other
Short-term Investments 7,000 46,632
Purchase of Other Short-term
Investments (1,466) (40,549)
Proceeds from Maturities of Securities
Available-for-Sale 23,605 3,553
Proceeds from Sales of Securities
Available-for-Sale --- ---
Purchase of Securities
Available-for-Sale (27,541) (15,044)
Proceeds from Maturities of Securities
Held-to-Maturity 204 6,975
Proceeds from Sales of Securities
Held-to-Maturity --- ---
Purchase of Securities Held-to-Maturity (3,679) (2,737)
Purchase of Loans (977) (3,509)
Loans Made to Customers net of
Payments Received (17,211) (7,620)
Proceeds from Sales of Loans --- 500
Property and Equipment Expenditures (933) (796)
Proceeds from Sales of Other Real Estate 26 147
Net Cash from Investing Activities (20,774) (11,752)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits 8,925 12,707
Change in Short-term Borrowings 3,196 (5,665)
Dividends Paid (1,133) (1,044)
Exercise of Stock Options 8 22
Issuance of Shares under Dividend
Reinvestment Plan 65 ---
Purchase and Retire Common Stock --- (110)
Net Cash from Financing Activities 11,061 5,910
Net Change in Cash and Cash Equivalents (5,483) (2,671)
Cash and Cash Equivalents at
Beginning of Year 27,971 22,286
Cash and Cash Equivalents at
End of Period $22,488 $19,615
Cash Paid During the Year for:
Interest $10,032 $9,032
Income Taxes 1,396 1,371
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(unaudited)
Note 1 -- Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
have been condensed or omitted. All adjustments made by management to these
unaudited statements were of a normal recurring nature. It is suggested that
these consolidated financial statements and notes be read in conjunction with
the financial statements and notes thereto in the German American Bancorp's
December 31, 1995 Annual Report to Shareholders.
German American Bancorp (the ``Company'') is a multi-bank holding company
based in Jasper, Indiana. Its four affiliate banks conduct business in sixteen
offices in Dubois, Martin, Pike, Perry and Spencer Counties, Indiana.
Note 2 -- Per Share Data
The weighted average number of shares used in calculating earnings and
dividends per share amounts were 1,921,583 and 1,916,890 for the third quarters
of 1996 and 1995, respectively. The weighted average number of shares for the
first nine months of 1996 and 1995 were 1,919,799 and 1,917,388, respectively.
The weighted average amounts have been retroactively restated for the effect of
5% stock dividends declared in October 1996 and October 1995.
Note 3 -- Securities
At September 30, 1996 and December 31, 1995, U.S. Government Agency
structured notes with an amortized cost of $3,000,000 and $9,250,000,
respectively and fair value of $2,916,000 and $9,201,000, respectively, are
included in securities available-for-sale, consisting primarily of step-up and
single-index bonds.
Information regarding collateralized mortgage obligations (CMO's) and real
estate mortgage investment conduits (REMIC's) is as follows:
September 30, December 31,
1996 1995
(dollar references in thousands)
Amortized Cost $24,466 $29,429
Fair Value 24,648 29,474
Fixed Rate 23,229 28,041
Variable Rate 1,419 1,433
Note 3 -- Securities (continued)
The amortized cost and estimated market values of Securities as of September 30,
1996 are as follows:
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $32,382 $32,117
Obligations of State and Political
Subdivisions 16,735 17,536
Corporate Securities 7,771 7,891
Mortgage-backed Securities 24,466 24,648
Total $81,354 $82,192
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
Obligations of State and Political
Subdivisions $13,065 $13,447
Other Securities 1,014 1,014
Total $14,079 $14,461
The amortized cost and estimated market values of Securities as of December 31,
1995 are as follows:
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $23,727 $23,787
Obligations of State and Political
Subdivisions 14,232 15,386
Corporate Securities 6,375 6,463
Mortgage-backed Securities 33,144 33,272
Total $77,478 $78,908
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
Obligations of State and Political
Subdivisions $9,869 $10,499
Other Securities 738 738
Total $10,607 $11,237
Note 4 -- Loans
Loans, as presented on the balance sheet, are comprised of the following
classifications:
September 30, December 31,
1996 1995
(dollar references in thousands)
Real Estate Loans Secured by 1-4
Family Residential Properties $73,428 $68,826
Loans to Finance Poultry Production
and other Related Operations 16,421 23,784
Loans to Finance Agricultural
Production and Other Loans
to Farmers 31,147 27,310
Commercial and Industrial Loans 87,301 74,612
Loans to Individuals for Household,
Family and Other Personal
Expenditures 39,683 34,685
Economic Development Commission Bonds 588 608
Lease Financing 717 1,302
Total Loans $249,285 $231,127
Information regarding impaired loans is as follows at September 30, 1996 and
December 31, 1995:
September 30, December 31,
1996 1995
(dollar references in thousands)
Balance of impaired loans $4,132 $6,244
Less: Portion for which no
allowance for loan loss is
allocated 237 215
Portion of impaired loan balance for
which an allowance
for credit losses is allocated $3,895 $6,029
Portion of allowance for loan losses
allocated to the impaired loan balance $996 $898
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows:
1996 1995
(dollar references in thousands)
Balance at January 1 $5,933 $5,669
Provision for Loan Losses 145 15
Recoveries of Prior Loan Losses 203 430
Loan Losses Charged to the Allowance (251) (280)
Balance at September 30 $6,030 $5,834
Note 6 -- Stock Dividend
The Company's Board of Directors declared a five percent stock dividend on
the Company's Common Stock in October 1996, payable December 6, 1996 to holders
of record November 8, 1996. These additional shares will be recorded during the
fourth quarter of 1996; however, the stock dividend has been given retroactive
effect for purposes of computing per share data in the consolidated financial
statements. See Note 2.
Note 7 -- Stock Options
As of January 1, 1996 Statement of Financial Accounting Standards No. 123
(FAS123), `Accounting for Stock-Based Compensation'' is applicable to the
Company. FAS123 encourages, but does not require, the use of a `fair value
based method''to account for stock-based compensation plans. The Company has
elected not to change its accounting for stock options to a fair value based
method, and no compensation expense was recorded for stock options granted
during the nine months ended September 30, 1996.
Note 8 -- Proposed Acquisition
The Company signed a definitive agreement in September 1996 providing for the
merger of Peoples Bancorp of Washington (Washington, Indiana) (`Peoples
Bancorp') with a subsidiary of the Company. Peoples Bancorp owns all of the
outstanding stock of Peoples National Bank and Trust Company, Washington,
Indiana (`Peoples Bank''). Peoples Bank operates four banking offices in
Daviess County, Indiana.
Under the terms of the agreement, the Company will issue to the shareholders
of Peoples Bancorp between 615,417 and 692,344 shares of Company Common Stock as
adjusted for the Company's five percent stock dividend declared in October 1996
(subject to further antidilution adjustments in the event of any future stock
dividends, splits and the like), depending upon the Company's average common
stock price during a period prior to the date of the merger closing. Based on
the reported bid / asked quotations for the Company's Common Stock during the
period preceding September 30, 1996, the Company would have issued the minimum
number of shares had the merger closed on September 30, 1996. The transaction
is expected to be accounted for as a pooling of interests.
The proposed merger is subject to approval by the shareholders of Peoples
Bancorp, approvals of bank regulatory agencies, and other conditions. The
parties contemplate that the merger will be effective in late 1996 or early
1997.
As of December 31, 1995 and for the year then ended, Peoples Bancorp reported
total assets of $90,841,580, shareholders' equity of $8,832,441 and net income
of $823,972.
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp (``the Company'') is a multi-bank holding company
based in Jasper, Indiana. Its four affiliate banks conduct business in sixteen
offices in Dubois, Martin, Pike, Perry and Spencer Counties, Indiana. The banks
provide a wide range of financial services, including accepting deposits; making
commercial, mortgage and consumer 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.
This section presents an analysis of the consolidated financial condition of
the Company as of September 30, 1996 and December 31, 1995 and the consolidated
results of operations for the periods ended September 30, 1996 and 1995. This
review should be read in conjunction with the consolidated financial statements
and other financial data presented elsewhere herein and with the financial
statements and other financial data and the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in the Company's
December 31, 1995 Annual Report to Shareholders.
RESULTS OF OPERATIONS
Net Income:
The Company's earnings for the third quarter of 1996 were $857,000 or $.45
per share, a decrease of $303,000 (or 26%) from the Company's third quarter
earnings for 1995 of $1,160,000 or $.61 per share. The Company's net income for
the nine months ended September 30, 1996, were $3,005,000 or $1.57 per share,
down slightly from net income for the comparable 1995 period of $3,023,000 or
$1.58 per share.
The earnings comparisons for both the three month period and the nine month
period were materially impacted by three factors. First, the FDIC made a
$157,000 special assessment against the Company's Savings Association Insurance
Fund (SAIF) deposits in the third quarter of 1996 compared to a $166,000 FDIC
premium refund recorded by the Company in the third quarter of 1995. Second,
the Company's third quarter 1995 operating results were positively impacted by a
significantly reduced level of provision for loan loss resulting from the 1995
recovery by one of its affiliate banks of a previously charged-off loan totaling
$327,000. Third, 1996 earnings have been affected by expenses associated with
the Company's pending acquisition of Peoples Bancorp of Washington, Indiana.
The Company's after-tax expenses for these three items increased by $339,000
($.18 per share) during the three month period, and by $77,000 ($.04 per share)
during the nine month period ended September 30, 1996, as compared to the prior
year periods.
Net Interest Income:
Net Interest Income is the Company's largest component of income and
represents the difference between interest and fees earned on loans and
investments and the interest paid on interest-bearing liabilities. In this
discussion net interest income is presented on a `tax-equivalent'' basis
whereby tax exempt income, such as interest on securities of state and political
subdivisions, has been increased to the amount that would have been earned on a
comparable taxable basis. This adjustment places taxable and non-taxable income
on a common basis and allows an accurate comparison of rates and yields.
The following table summarizes German American Bancorp's net interest income
(on a tax-equivalent basis) for each of the periods presented herein. An
effective tax rate of 34 percent is used on each period presented.
Nine Months Change from
Ended September 30, Prior Period
1996 1995 Amount Percent
(dollar references in thousands)
Interest Income $21,742 $20,739 $1,003 4.8%
Interest Expense 10,109 9,394 715 7.6%
Net Interest Income $11,633 $11,345 $288 2.5%
Three Months Change from
Ended September 30, Prior Period
1996 1995 Amount Percent
(dollar references in thousands)
Interest Income $7,318 $7,126 $192 2.7%
Interest Expense 3,454 3,313 141 4.3%
Net Interest Income $3,864 $3,813 $51 1.3%
For the first three quarters of 1996, the tax-equivalent net interest income
of $11,633,000 exceeded the 1995 amount by $288,000 or 2.5%. For the third
quarter of 1996, tax-equivalent net interest income of $3,864,000 increased by
$51,000 or 1.3% from the 1995 level. The net interest margin for the first nine
months of 1996 was 4.48% versus 4.61% for 1995. The increase in the level of
higher yielding assets, such as loans, which occurred during the period in 1996
resulted in a corresponding increase in net interest income. The decrease in
net interest margin reflects the effect of the decline in general interest rates
which occurred during the last half of 1995 and the majority of 1996. This
decrease in the net interest margin occurred as a result of the impact on the
average yields on loans and short-term investments which react more quickly to
changes in general short-term interest rates than the average yields on
investment securities and the average rates paid on interest-bearing deposits.
Provision For Loan Losses:
The Company provides for 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.
During the third quarter of 1995, it became evident that a single loan which
was previously charged against the allowance for loan losses in the amount of
$327,000 had returned to performing status. The full amount of the loan was
recognized during the third quarter of 1995 as a recovery of prior loan losses.
As a result of this recovery and based on Management's evaluation of the
adequacy of the allowance for loan losses, a negative charge to the provision
for loan losses was taken during the third quarter of 1995. Accordingly, the
provision for loan losses for the third quarter of 1995 was a negative $213,000
and for the first nine months of 1995 was only $15,000. The comparable
provision increased by $280,000 (to $67,000) for the third quarter of 1996 and
by $130,000 (to $145,000) for the nine months ended September 30, 1996.
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.
Net charge-offs were $48,000 or 0.02 percent of average loans for the first
nine months of 1996. For the same period of 1995, net recoveries were $150,000.
Underperforming loans, as a percentage of total loans were 1.24 and 1.51 percent
on September 30, 1996 and December 31, 1995, respectively. See discussion
headed `Financial Condition'' for more information regarding underperforming
assets.
Noninterest Income:
Noninterest income, exclusive of gains realized on the sales of Loans and
Other Real Estate, for the first three quarters of 1996 was $1,318,000. This
was $232,000 or 21.4 percent greater than the $1,086,000 posted for the same
period of 1995. Investment Services Income for 1996 increased by $174,000 from
that earned in 1995.
Third quarter noninterest income, exclusive of gains realized on the sales of
Loans and Other Real Estate, increased by $106,000 in 1996 primarily as a result
of the $52,000 increase in Investment Services Income.
The Company had no security sales during 1996 or 1995.
Noninterest Expense:
Total noninterest expense for the first nine months of 1996 was $7,789,000
which translates to a $426,000 or 5.8% increase over the $7,363,000 posted for
the same period in 1995. Total noninterest expense for the third quarter of 1996
was $2,794,000 which represents a $376,000 or 15.6% increase over the $2,418,000
posted for the same period in 1995.
The largest single component of noninterest expense, Salaries and Employee
Benefits, represents 54.9% of total noninterest expenses for 1996. This expense
category was $4,278,000 during the first nine months of 1996, an increase of
$315,000 or 7.9% from the 1995 level of $3,963,000. Salaries and employee
benefits were $1,452,000 during the third quarter of 1996, an increase of
$102,000 or 7.6% from the 1995 level of $1,350,000. 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.
Deposits held at the Company's affiliate banks are insured by the FDIC within
two different funds - Bank Insurance Fund (BIF) and Savings Association
Insurance Fund (SAIF). All of the deposits of First State Bank are covered
under SAIF whereas nearly all the deposits of the other three affiliate banks
are within BIF. During the third quarter of 1995, the FDIC refunded $166,000 to
BIF insured banks as a result of this particular fund having surpassed
a congressionally mandated level. The result of this refund was to reduce FDIC
Premium
expense to a mere $3,000 for the third quarter of 1995. However, on September
30, 1996, the Deposit Insurance Funds Act of 1996 was enacted into law. This
legislation imposed a one-time special assessment on SAIF - assessable deposits
for the purpose of boosting the capital of the Savings Association Insurance
Fund. This special assessment to the Company was $157,000 which increased the
third quarter 1996 FDIC expense to $175,000, an increase of $172,000 from the
prior year's third quarter. This Act also will require the Company's BIF-
insured subsidiary banks to assume a portion of the obligations (FICO bonds)
previously assessed only to SAIF institutions, commencing January 1997.
Beginning in 1997 and until December 31, 1999 the estimated assessment rate on
these obligations will be 1.3 basis points per $100 of insured deposit base for
BIF as opposed to 6.4 basis points for SAIF deposits. The Company's annualized
premium expense for 1997 would be approximately $57,000 based on September 30,
1996 deposit holdings. From the year 2000 until 2019, the estimated assessment
rate for the obligations is expected to be under 2.5 basis points for all
deposits.
The Company's anticipated deposit insurance premium expense for 1997 and
anticipated assessment rates included in the preceding paragraph are forward-
looking statements that are based solely on current levels of deposits (which
might change significantly due to acquisitions by the Company of other financial
institutions or branches) and FDIC estimates of assessment rates. These
assessment rates represent the rates the FDIC presently feels are sufficient to
generate the funds required to retire obligations known as FICO bonds which
mature in the year 2019. These assessment rates could rise in future years
above the levels illustrated here in the event certain actions (such as an
increased level of bank or thrift failures) deplete the fund(s) below certain
reserve levels thereby prompting a need to bolster the fund balance via higher
premium rates. Accordingly, actual future deposit insurance expense for 1997
and future years could vary materially from the amounts presently anticipated.
Professional Fees for the first nine months of 1996 were $267,000 or $146,000
higher than the $121,000 posted for the same three quarters of 1995. This
particular category rose primarily because of the Company's pending acquisition
of Peoples Bancorp of Washington, Indiana and certain other general acquisition-
related expenditures.
Professional Fees for the third quarter of 1996 were $122,000 versus $44,000
for the same three months of the prior year. Again merger activity accounted
for this increased expenditure level.
FINANCIAL CONDITION
As of September 30, 1996, total assets increased to $381,828,000 compared to
$367,763,000 at December 31, 1995. Deposits rose $8,925,000 in 1996 over that
of year-end 1995. Loans, net of unearned income rose by $18,340,000 or 8.0% from
the year-end mark of $230,590,000.
Underperforming Assets:
The following analyzes German American Bancorp's underperforming assets at
September 30, 1996 and December 31, 1995.
September 30, 1996 December 31, 1995
(dollar references in thousands)
Loans which are contractually
past due 90 days or more $1,529 $2,683
Nonaccrual Loans 1,567 803
Renegotiated Loans --- ---
Total Underperforming Loans 3,096 3,486
Other Real Estate 262 286
Total Underperforming Assets $3,358 $3,772
Allowance for Loan Loss to
Underperforming Loans 194.77% 170.20%
Underperforming Loans to
Total Loans 1.24% 1.51%
Underperforming loans at September 30, 1996 were 11.2% less than the
$3,486,000 of underperforming loans at December 31, 1995. Stated as a
percentage of total loans, underperforming loans were 1.24% and 1.51% for
September 30, 1996 and December 31, 1995, respectively. The allowance for loan
loss stated as a percentage of underperforming loans equaled 194.77% and 170.20%
for the same two dates respectively.
Underperforming loans include $1,906,000 and $2,646,000 of impaired loans at
September 30, 1996 and December 31, 1995 (See Note 4 to the consolidated
financial statements).
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 agricultural, 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 Company has historically been
involved in the financing of poultry production. As a means of controlling
risk from concentrations of credit within this industry, the Company has, during
recent years, utilized guaranties from the Small Business Administration (SBA)
and the Farmers Home Administration (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. No unguaranteed
concentration of credit in excess of 10% of total assets exists within any
single industry group.
Capital Resources:
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. Minimum levels of capital are required to be
maintained in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill, core
deposit intangibles, and certain 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 generally at least a 4.0%
leverage ratio, which is Tier 1 capital divided by defined `total assets'',
4.0% Tier 1 capital to risk-adjusted assets and 8.0% total capital to risk-
adjusted assets ratios. Under these guidelines, the Company, on a consolidated
basis, and each of its affiliate banks individually, have capital ratios that
substantially exceed the regulatory minimums.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are: well-
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
`well-capitalized'' entity must achieve a Tier One Risk-based capital ratio of
at least 6.0%, a total capital ratio of at least 10.0% and a leverage ratio of
at least 5.0% and not be under a capital directive order.
At September 30, 1996, management is not under such a capital directive nor
is it 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 liquidity, capital resources or
operations.
The table below presents the Company's consolidated capital ratios under
regulatory guidelines.
RISK BASED CAPITAL STRUCTURE ($ in thousands)
September 30,December 31,
1996 1995
Tier 1 Capital:
Shareholders' Equity as presented
on Balance Sheet $38,548 $36,956
Add / (Subtract): Unrealized
Depreciation / Appreciation on
Securities Available-for-Sale (506) (859)
Less: Intangible Assets and
Ineligible Deferred Tax Assets (1,986) (2,140)
Total Tier 1 Capital 36,056 33,957
Tier 2 Capital:
Qualifying Allowance for Loan Loss 3,195 2,943
Total Capital $39,251 $36,900
Risk-adjusted Assets $252,743 $232,272
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action
Adequacy Provisions Sept.30, Dec. 31,
Purposes (FDICIA) 1996 1995
Leverage Ratio 4.00% 5.00% 9.60% 9.29%
Tier 1 Capital to
Risk-adjusted Assets 4.00% 6.00% 14.27% 14.62%
Total Capital to
Risk-adjusted Assets 8.00% 10.00% 15.53% 15.89%
LIQUIDITY
The Consolidated Statement of Cash Flows details the elements of change in the
Company's cash and cash equivalents. During the first nine months of 1996, the
net cash from operating activities, including net income of $3,005,000 provided
$4,230,000 of available cash. Increases in deposits and short-term borrowings
made available an additional $12,121,000. Major cash outflows experienced
during this nine month period of 1996 included dividends of $1,133,000, property
and equipment purchases of $933,000 and the net funding outlay of loans in the
amount of $18,188,000. The purchase of securities and short-term investments
(net of proceeds from maturities) decreased cash by $1,679,000. Total cash
outflows for the period exceeded inflows by $5,483,000 leaving a cash and cash
equivalent balance of $22,488,000 at September 30, 1996.
PROPOSED PEOPLES BANCORP MERGER
The Company has agreed to acquire Peoples Bancorp of Washington, Washington,
Indiana (`Peoples Bancorp'') on the terms set forth in Note 8 to the financial
statements included in this report. In evaluating the terms of this
acquisition, the Company prepared estimates of the future earnings and financial
condition for the Company and for Peoples Bancorp which took into consideration
cost savings and efficiencies that Company management believes could be achieved
in future years. These estimates compared the estimated earnings per share of
the Company's common stock and its estimated shareholders' equity per share to
the estimated earnings per share and shareholders' equity per share on a
prospective pro forma basis giving effect to the acquisition on the agreed
terms. Based on such analysis, the proposed acquisition of Peoples Bancorp is
expected to be materially dilutive, in the early years, to the Company's
earnings per share and shareholders' equity per share compared to the amounts
that might be expected without the business combination with Peoples Bancorp.
The Company believes, however, that the anticipated dilution is acceptable given
the Company's belief that entry into the Daviess County banking market offers
strategic advantages to the Company.
PART II. -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
2 Agreement and Plan of Reorganization by and among
Peoples Bancorp of Washington, the Registrant, and
certain affiliates dated September 27, 1996.
27 Financial Data Schedule for the period ended
September 30, 1996.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
September 30, 1996, except a report filed July 17, 1996 reporting under Item 5
the Registrant's execution of an agreement to acquire Peoples Bancorp of
Washington, Washington, Indiana.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date 11/13/96 By/s/George W. Astrike
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George W. Astrike
Chairman
Date 11/13/96 By/s/John M. Gutgsell
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John M. Gutgsell
Controller and Principal
Accounting Officer