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.
NOTE 2 - SECURITIES (CONTINUED)
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
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,