- -------------------------------------------------------------------------------
14 Consolidated Balance Sheets
Dollars in thousands
- -------------------------------------------------------------------------------
December 31,
1999 1998
---- ----
ASSETS
Cash and Due from Banks........................................................ $ 23,707 $ 18,097
Federal Funds Sold and Other Short-term Investments............................ 1,189 31,491
----------- -----------
Cash and Cash Equivalents.................................................. 24,896 49,588
Interest-bearing Time Deposits with Banks...................................... 499 1,299
Securities Available-for-Sale, at Market....................................... 188,148 151,527
Securities Held-to-Maturity, at Cost........................................... 30,191 48,346
Loans Held for Sale............................................................ 2,845 2,449
Loans ........................................................................ 694,636 598,797
Less: Unearned Income........................................................ (344) (709)
Allowance for Loan Losses.............................................. (8,868) (8,323)
----------- -----------
Loans, Net..................................................................... 685,424 589,765
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost.............. 9,660 7,853
Premises, Furniture and Equipment, Net......................................... 19,782 17,796
Other Real Estate.............................................................. 2,434 1,156
Intangible Assets.............................................................. 2,161 1,841
Accrued Interest Receivable and Other Assets................................... 26,595 25,305
----------- -----------
TOTAL ASSETS........................................................... $ 992,635 $ 896,925
=========== ===========
LIABILITIES
Noninterest-bearing Deposits................................................... $ 71,671 $ 67,218
Interest-bearing Deposits...................................................... 626,590 597,895
----------- -----------
Total Deposits............................................................. 698,261 665,113
FHLB Advances and Other Borrowings............................................. 196,017 131,409
Accrued Interest Payable and Other Liabilities................................. 10,870 9,127
----------- -----------
TOTAL LIABILITIES..................................................... 905,148 805,649
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized...... 9,029 8,705
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.... --- ---
Additional Paid-in Capital..................................................... 53,846 48,190
Retained Earnings.............................................................. 28,559 33,570
Accumulated Other Comprehensive Income (Loss).................................. (3,947) 811
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................................. 87,487 91,276
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 992,635 $ 896,925
=========== ===========
End of period shares issued and outstanding.................................... 9,029,109 8,704,592
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- -------------------------------------------------------------------------------
Consolidated Statements of Income 15
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
Years ended December 31,
1999 1998 1997
---- ---- ----
INTEREST INCOME
Interest and Fees on Loans.................................................. $53,868 $51,980 $49,160
Interest on Federal Funds Sold and other Short-term Investments............. 951 1,827 1,894
Interest and Dividends on Securities:
Taxable................................................................. 10,065 8,752 9,782
Non-taxable............................................................. 3,045 2,801 2,389
-------- -------- ------
TOTAL INTEREST INCOME................................................ 67,929 65,360 63,225
INTEREST EXPENSE
Interest on Deposits........................................................ 27,860 28,450 27,804
Interest on FHLB Advances and Other Borrowings.............................. 7,899 6,155 5,930
----- ----- -----
TOTAL INTEREST EXPENSE............................................... 35,759 34,605 33,734
-------- ------- --------
NET INTEREST INCOME......................................................... 32,170 30,755 29,491
Provision for Loan Losses................................................... 1,718 1,338 773
-------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......................... 30,452 29,417 28,718
NONINTEREST INCOME
Trust and Investment Product Fees........................................... 835 833 794
Service Charges on Deposit Accounts......................................... 1,757 1,599 1,429
Insurance Commissions & Fees................................................ 2,239 685 479
Other Operating Income...................................................... 1,013 958 845
Gains on Sales of Loans and Other Real Estate............................... 413 883 2,180
Net Gain/(Loss) on Sales of Securities...................................... (6) 38 (29)
-------- -------- -------
TOTAL NONINTEREST INCOME................................................ 6,251 4,996 5,698
-------- -------- -------
NONINTEREST EXPENSE
Salaries and Employee Benefits.............................................. 13,433 12,132 12,520
Occupancy Expense........................................................... 1,718 1,676 1,663
Furniture and Equipment Expense............................................. 1,683 1,393 1,356
FDIC Premiums............................................................... 160 170 1,593
Data Processing Fees........................................................ 990 988 855
Professional Fees........................................................... 871 1,029 1,292
Advertising and Promotion................................................... 888 684 652
Supplies.................................................................... 807 680 674
Other Operating Expenses.................................................... 4,282 3,566 3,673
-------- -------- -------
TOTAL NONINTEREST EXPENSE............................................... 24,832 22,318 24,278
-------- -------- -------
Income before Income Taxes.................................................. 11,871 12,095 10,138
Income Tax Expense.......................................................... 3,049 3,525 2,868
-------- -------- -------
NET INCOME.................................................................. $ 8,822 $ 8,570 $ 7,270
======= ======= =======
Earnings per Share and Diluted Earnings per Share........................... $ 0.96 $ 0.93 $ 0.79
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- -------------------------------------------------------------------------------
16 Consolidated Statements of Cash Flows
Dollars in thousands
- -------------------------------------------------------------------------------
Years Ended December 31,
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $ 8,822 $ 8,570 $ 7,270
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Accretion/(Amortization) on Investments........................ 318 18 24
Depreciation and Amortization........................................ 2,028 1,814 1,621
Amortization of Mortgage Servicing Rights ........................... 241 242 153
Net Change in Loans Held for Sale.................................... 6,843 25,320 (9,179)
Loss in Investment in Limited Partnership............................ 108 113 122
Provision for Loan Losses............................................ 1,718 1,338 773
Loss (Gain) on Sale of Securities, net............................... 6 (38) 29
Gain on Sales of Loans and Other Real Estate......................... (413) (883) (2,180)
Change in Assets and Liabilities:
Deferred Loan Fees................................................ (381) (13) (48)
Interest Receivable and Other Assets.............................. (5,970) (2,519) (2,879)
Interest Payable and Other Liabilities................................... 923 (1,751) 2,091
Unearned Income................................................... (365) (356) (205)
--- --- ---
Total Adjustments.............................................. 5,056 23,285 (9,678)
----- ------ -------------
Net Cash from Operating Activities....................................... 13,878 31,855 (2,408)
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... 823 1,547 (1,002)
Proceeds from Maturities of Other Short-term Investments............. --- --- 996
Proceeds from Maturities of Securities Available-for-Sale............ 35,779 110,959 58,833
Proceeds from Sales of Securities Available-for-Sale 953 50,390 29,826
Purchase of Securities Available-for-Sale............................ (83,512) (178,739) (90,514)
Proceeds from Maturities of Securities Held-to-Maturity.............. 5,544 16,532 6,195
Proceeds from Sales of Securities Held-to-Maturity................... --- 362 ---
Purchase of Securities Held-to-Maturity.............................. (4,982) (8,503) (7,730)
Purchase of Loans.................................................... (9,884) (5,998) (1,152)
Proceeds from Sales of Loans......................................... 5,875 463 1,926
Loans Made to Customers, net of Payments Received.................... (85,925) (58,530) (20,273)
Proceeds from Sales of Fixed Assets.................................. --- --- 41
Proceeds from Sales of Other Real Estate............................. 1,604 310 88
Property and Equipment Expenditures.................................. (3,616) (2,481) (2,557)
Acquire Affiliates and Adjust to Conform Fiscal Years................ (22) 2,934 ---
-- ----- ---
Net Cash from Investing Activities............................. (137,363) (70,754) (25,323)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... 26,014 5,567 20,947
Net Change in Short-term Borrowings.................................. 66,087 1,480 (7,540)
Purchase / Retire Common Stock....................................... (4,320) (360) (637)
Advances in Long-term Debt........................................... 95,000 90,996 83,769
Repayments of Long-term Debt......................................... (79,834) (66,911) (85,357)
Issuance of Common Stock............................................. 348 196 817
Dividends Paid....................................................... (4,467) (3,122) (2,797)
Purchase of Interests in Fractional Shares........................... (35) (43) (38)
-- -- --
Net Cash from Financing Activities............................. 98,793 27,803 9,164
------ ------ -----
Net Change in Cash and Cash Equivalents.................................. (24,692) (11,096) (18,567)
Cash and Cash Equivalents at Beginning of Year....................... 49,588 60,684 79,251
------ ------ ------
Cash and Cash Equivalents at End of Year............................. $ 24,896 $ 49,588 $ 60,684
====== ======== ========
Cash Paid During the Year for:
Interest.............................................................. $ 38,774 $ 34,391 $ 33,257
Income Taxes.......................................................... 3,695 3,834 3,298
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- -------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity 17
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
Common
Stock/ Accumulated
Additional Other Total
Paid-in Retained Comprehensive Shareholders'
Capital Earnings Income Equity
Balances, January 1, 1997
(as previously reported for German American Bancorp)... $33,040 $24,125 $ 495 $ 57,660
Retroactive Restatement for
Pooling of Interests (2,039,665 shares in 1999)....... 3,414 18,560 (245) 21,729
------------------------------------------------------
Balances, January 1, 1997 as restated..................... 36,454 42,685 250 79,389
Comprehensive Income:
Net Income............................................. 7,270 7,270
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale..................... 408 408
------------------------------------------------------
Total Comprehensive Income......................... 7,678
Cash Dividends ($.32 per Share,
as restated for pooling of interests).................. (2,797) (2,797)
Issuance of Common Stock for:
Dividend Reinvestment Plan (9,873 shares).............. 306 306
Exercise of Stock Options (15,818 shares).............. 432 432
Employee Stock Purchase Plan (6,492 shares)............ 79 79
5% Stock Dividend (313,986 shares)..................... 8,253 (8,253) -
Two for One Stock Split (2,546,041 shares)............. 2,546 (2,546) -
Purchase and Retirement of Common Stock (24,124 shares)... (363) (274) (637)
Purchase of Interest in Fractional Shares................. (38) (38)
-------------------------------------------------------
Balances, December 31, 1997 as restated................... 47,707 36,047 658 84,412
Comprehensive Income:
Net Income............................................. 8,570 8,570
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale..................... 153 153
------------------------------------------------------
Total Comprehensive Income......................... 8,723
Cash Dividends ($.36 per Common Share,
as restated for pooling of interests).................. (3,122) (3,122)
Issuance of Common Stock for:
Dividend Reinvestment Plan (2,233 shares).............. 36 36
Exercise of Stock Options (7,459 shares)............... 85 85
Employee Stock Purchase Plan (6,481 shares)............ 75 75
5% Stock Dividend (410,363 shares)..................... 8,146 (8,146) -
Three for Two Stock Split (628,730 shares)............. 346 (346) -
Acquisitions (67,203 shares)........................... 818 652 1,470
Purchase and Retirement of Common Stock (19,979 shares)... (318) (42) (360)
Purchase of Interest in Fractional Shares................. (43) (43)
-------------------------------------------------------
Balances, December 31, 1998 as restated................... 56,895 33,570 811 91,276
Comprehensive Income:
Net Income............................................. 8,822 8,822
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale..................... (4,785) (4,785)
-------------------------------------------------------
Total Comprehensive Income......................... 4,037
Cash Dividends ($.485 per Common Share,...................
as restated for pooling of interests).................. (4,467) (4,467)
Issuance of Common Stock for:.............................
Exercise of Stock Options (4,825 shares).................. 43 43
Director Stock Awards (6,481 shares)................... 305 305
5% Stock Dividend (431,942 shares)..................... 9,179 (9,179) -
Acquisitions (70,000 shares)........................... 173 96 269
Purchase and Retirement of Common Stock (199,077 shares).. (4,292) (28) (4,320)
Purchase of Interest in Fractional Shares................. (35) (35)
Adjustment to Conform Year-ends........................... 572 (220) 27 379
------------------------------------------------------
Balances, December 31, 1999............................... $ 62,875 $ 28,559 $ (3,947) $ 87,487
======================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
- -------------------------------------------------------------------------------
18 Notes to the Consolidated Financial Statements
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
German American Bancorp operates primarily in the banking industry. The
accounting and reporting policies of German American Bancorp and its
subsidiaries conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant policies are
described below. The consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all material intercompany
accounts and transactions. Certain prior year amounts have been reclassified to
conform with current classifications. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates. Estimates susceptible to
change in the near term include the allowance for loan losses, impaired loans,
and the fair value of financial instruments.
The Company acquired 1ST BANCORP in 1999 in a pooling of interests (see Note
18). Prior to 1999, 1ST BANCORP's financial statements were prepared on a June
30 fiscal year-end. The Company's calendar period financial statements for
periods prior to 1999 have been restated to include 1ST BANCORP fiscal period
financial statements (i.e. the Company's previously reported December 31, 1998
balances were combined with 1ST BANCORP June 30, 1998 balances). 1ST BANCORP is
combined with the Company on a calendar basis for all 1999 periods. As a result
of 1ST BANCORP's prior fiscal reporting, the 1999 statement of cash flows,
statement of changes in shareholder's equity, and certain notes include an
"adjustment to conform fiscal years" to adjust from fiscal to calendar period
reporting.
Securities
Securities classified as available-for-sale are securities that the Company
intends to hold for an indefinite period of time, but not necessarily until
maturity. These include securities that management may use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, or similar reasons. Securities held as
available-for-sale are reported at market value with unrealized gains or losses
included as a separate component of equity, net of tax. Securities classified as
held-to-maturity are securities that the Company has both the ability and
positive intent to hold to
maturity. Securities held-to-maturity are carried at amortized cost. Premium
amortization is deducted from, and discount accretion is added to, interest
income using the level yield method. The cost of securities sold is computed on
the identified securities method. Restricted stock, such as stock in the Federal
Home Loan Bank (FHLB), is carried at cost.
Loans
Interest is accrued over the term of the loans based on the principal
balance outstanding. Loans are placed on nonaccrual status when scheduled
principal or interest payments are past due 90 days or more, unless the loan is
well secured and in the process of collection. The Company defers loan fees and
certain direct loan origination costs. Deferred amounts are reported in the
balance sheet as part of loans and are recognized into interest income over the
term of the loan based on the level yield method.
The carrying values of impaired loans (as explained below in "Allowance for
Loan Losses") are periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such. Other cash payments are reported as reductions in
carrying value, while increases or decreases due to changes in estimates of
future payments and due to the passage of time are reported as increases or
decreases to bad debt expense.
Loans held for sale are carried at the lower of cost or fair value, in
aggregate.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance for loan losses required based on past loan
loss experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 19
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Loan impairment is reported when full repayment under the terms of the loan
is not expected. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported net, at the present value of estimated future cash
flows using the loan's existing rate, or at the fair value of collateral if
repayment is expected solely from the collateral. Commercial, agricultural and
poultry loans are evaluated individually for impairment. Smaller balance
homogeneous loans are evaluated for impairment in total. Such loans include real
estate loans secured by one-to-four family residences and loans to individuals
for household, family and other personal expenditures. Individually evaluated
loans on nonaccrual are generally considered impaired. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
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. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
Other Real Estate
Other Real Estate is carried at the lower of cost or fair value, less
estimated selling costs. Expenses incurred in carrying Other Real Estate are
charged to operations as incurred.
Intangible Assets
Intangible Assets are comprised of core deposit intangibles ($113 and $173
at December 31, 1999 and 1998, respectively) and goodwill ($2,048 and $1,668 at
December 31, 1999 and 1998, respectively). Core deposit intangibles are
amortized on an accelerated method over ten years and goodwill is amortized on a
straight-line basis over twelve to fifteen years. Core Deposit Intangibles and
Goodwill are assessed for impairment based on estimated undiscounted cash flows,
and written down if necessary.
Servicing Rights
Servicing rights are recognized and included with other assets for purchased
rights and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to type,
interest rates and age. Fair value is determined based upon discontinued cash
flows using market based assumptions.
Stock Compensation
Expense for employee compensation under stock option plans is reported only
if options are granted below market price at grant date. Pro forma disclosures
of net income and earnings per share are provided as if the fair value method of
Financial Accounting Standard No. 123 was used for stock-based compensation.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which are also recognized as a separate component of equity.
Income Taxes
Deferred tax liabilities and assets are determined at each balance sheet
date and are the result of differences in the financial statement and tax bases
of assets and liabilities. Income tax expense is the amount due on the current
year tax returns plus or minus the change in deferred taxes.
Earnings Per Share
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings per
share shows the potential dilutive effect of additional common shares issuable
under stock options.
- -------------------------------------------------------------------------------
20 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Cash Flow Reporting
The Company reports net cash flows for customer loan transactions, deposit
transactions and deposits made with other financial institutions. Cash and cash
equivalents are defined to include cash on hand, demand deposits in other
institutions and Federal Funds Sold.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 19. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on- and off-balance sheet financial
instruments do not include the value of anticipated future business, or the
values of assets and liabilities not considered financial instruments.
New Accounting Pronouncements
Beginning January 1, 2001 a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this pronouncement is not expected
to have a material effect on the Company's financial results, but the effect
will depend on derivative holdings when this standard is adopted.
NOTE 2 - Securities
The amortized cost and estimated market values of Securities as of December 31,
1999 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities Available-for-Sale:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $96,205 $ --- $(3,879) $92,326
Obligations of State and Political Subdivisions............. 26,597 462 (572) 26,487
Asset-/Mortgage-backed Securities........................... 61,514 6 (2,553) 58,967
Equity Securities........................................... 10,368 --- --- 10,368
------ --- --- ------
Total................................................... $194,684 $468 $(7,004) $188,148
======== ==== ======= ========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions............. $29,288 $289 $(643) $28,934
Asset-/Mortgage-backed Securities........................... 903 6 (5) 904
--- - - ---
Total................................................... $30,191 $295 $(648) $29,838
======= ==== ===== =======
The amortized cost and estimated market values of Securities as of December 31, 1998 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities Available-for-Sale:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $68,201 $219 $(34) $68,386
Obligations of State and Political Subdivisions............. 29,103 1,443 (91) 30,455
Asset-/Mortgage-backed Securities........................... 52,881 50 (245) 52,686
------ -- --- ------
Total................................................... $150,185 $1,712 $(370) $151,527
======== ====== ===== ========
Securities Held-to-Maturity:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $19,258 $ 2 $(46) $19,214
Obligations of State and Political Subdivisions............. 27,591 1,159 (13) 28,737
Asset-/Mortgage-backed Securities........................... 1,497 14 --- 1,511
----- -- --- -----
Total................................................... $48,346 $1,175 $(59) $49,462
======= ====== ===== =======
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 21
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
The amortized cost and estimated market values of Securities at December 31,
1999 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
Asset-backed, Mortgage-backed and certain Other Securities are not due at a
single maturity date and are shown separately.
Estimated
Amortized Market
Cost Value
---- -----
Securities Available-for-Sale:
Due in one year or less..................................... $2,681 $2,699
Due after one year through five years....................... 23,108 22,701
Due after five years through ten years...................... 76,551 73,992
Due after ten years......................................... 20,462 19,421
Asset-/Mortgage-backed Securities........................... 61,514 58,967
Equity Securities........................................... 10,368 10,368
------ ------
Totals.................................................. $194,684 $188,148
======== ========
Securities Held-to-Maturity:
Due in one year or less..................................... $1,236 $1,240
Due after one year through five years....................... 7,539 7,473
Due after five years through ten years...................... 9,960 9,923
Due after ten years......................................... 10,553 10,298
Asset-/Mortgage-backed Securities........................... 903 904
--- ---
Totals.................................................. $30,191 $29,838
======= =======
The amortized cost of securities at December 31, 1999 are shown in the following
table by contractual maturity, except for asset/mortgage-backed securities,
which are based on estimated average lives. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. Equity securities
totaling $10,368 do not have contractual maturities, and are excluded from the
table below.
Maturities and Average Yields of Securities at December 31, 1999:
Within After One But After Five But After Ten
One Year Within Five Years Within Ten Years Years
----------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------
U.S. Treasuries and
Agencies.............. $ --- --- $17,100 6.13% $71,122 6.60% $7,983 6.28%
State and Political
Subdivisions.......... 3,917 8.22% 13,547 7.88% 15,389 8.22% 23,032 8.56%
Asset- / Mortgage-backed
Securities............ 4,813 6.14% 37,163 6.43% 20,188 6.40% 253 6.58%
----- ------ ------ ---
Totals............. $8,730 7.07% $67,810 6.64% $106,699 6.80% $31,268 7.96%
====== ======= ======== =======
<FN>
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above
table.
</FN>
At December 31, 1999 and 1998, U.S. Government Agency structured notes,
consisting primarily of step-up and single-index bonds, with respective
amortized costs of $7,983 and $9,985 and fair values of $7,150 and $9,984 were
included in securities available-for-sale.
- -------------------------------------------------------------------------------
22 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
Proceeds from the Sales of Securities are summarized below:
1999 1998 1997
---- ---- ----
Available- Held-to- Available- Held-to- Available- Held-to-
Trading for-Sale Maturity Trading for-Sale Maturity Trading for-Sale Maturity
------- --------- -------- ------- --------- -------- ------- -------- --------
Proceeds from Sales..... $--- $ 953 $--- $14,046 $50,390 $ 362 $9,984 $29,826 $ ---
Gross Gains on Sales.... --- 6 --- 18 119 10 13 --- ---
Gross Losses on Sales... --- (12) --- (11) (92) (6) (23) (19) ---
Income Taxes
on Gross Gains........ --- 2 --- 7 48 4 5 --- ---
Income Taxes
On Gross Losses....... --- (5) --- (4) (37) (2) (9) (8) ---
<FN>
Sales of securities held-to-maturity in 1998 consisted of mortgage-backed
securities for which payment of more than 85% of principal had occurred.
</FN>
The carrying value of securities pledged to secure repurchase agreements,
public and trust deposits, and for other purposes as required by law was $33,740
and $50,079 as of December 31, 1999 and 1998, respectively.
NOTE 3 - Loans
Loans, as presented on the balance sheet, are comprised of the following classifications at December 31,
1999 1998
Real Estate Loans Secured by 1- 4 Family Residential Properties......................... $356,001 $295,788
Commercial and Industrial Loans......................................................... 161,711 136,249
Loans to Individuals for Household, Family and Other Personal Expenditures.............. 112,870 104,024
Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers............ 64,054 62,736
------ ------
Totals.............................................................................. $694,636 $598,797
======== ========
Nonperforming loans were as follows at December 31:
Loans past due over 90 days and accruing................................................ $1,564 $1,522
Non-accrual loans....................................................................... 7,237 5,411
----- -----
Totals.............................................................................. $8,801 $6,933
====== ======
Information regarding impaired loans: 1999 1998
---- ----
Year-end impaired loans with no allowance for loan losses allocated..................... $1,784 $ 613
Year-end impaired loans with allowance for loan losses allocated........................ 446 543
Amount of allowance allocated to impaired loans......................................... 224 151
Average balance of impaired loans during the year....................................... 2,337 2,297
Interest income recognized during impairment............................................ 169 212
Interest income recognized on cash basis................................................ 120 117
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 1999. A summary of
the activity of these loans follows:
Balance Changes Deductions Balance
January 1, in Persons December 31,
1999 Additions Included Collected Charged-off 1999
- -----------------------------------------------------------------------------------------------------------------------------------
$ 19,155 $ 12,363 $ (1,385) $ (9,180) $ --- $ 20,953
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 23
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 4 - Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses follows:
1999 1998 1997
---- ---- ----
Balance as of January 1................................ $8,323 $8,574 $8,040
Allowance of Acquired Subsidiary....................... --- 80 ---
Adjustment to Conform Fiscal Years..................... 356 --- ---
Provision for Loan Losses.............................. 1,718 1,338 773
Recoveries of Prior Loan Losses........................ 476 375 827
Loan Losses Charged to the Allowance................... (2,005) (2,044) (1,066)
----- ----- -----
Balance as of December 31.............................. $8,868 $8,323 $8,574
====== ====== ======
NOTE 5 - Mortgage Banking
The amount of loans serviced by the Company for the benefit of others was
$154,407 at December 31, 1999 and $123,356 at December 31, 1998.
At December 31, 1999 and 1998, unamortized loan servicing rights totaled
$1,171 and $1,012 respectively, and are included in Accrued Interest Receivable
and Other Assets in the Consolidated Balance Sheet. For the years ended December
31, 1999, 1998, and 1997, the Company capitalized $473, $426, and $366,
respectively, of servicing rights that were originated through its loan
origination network and retail banking offices. Capitalized amounts and
amortization reported in the statement of cash flows for 1999 exclude
adjustments to conform fiscal years, which amounted to a net reduction of
servicing rights of $74. There were no valuation allowances at December 31, 1999
or 1998.
NOTE 6 - Premises, Furniture, and Equipment
Premises, furniture, and equipment as presented on the balance sheet is
comprised of the following classifications at December 31,
1999 1998
---- ----
Land............................................................................... $3,072 $3,008
Buildings and Improvements......................................................... 19,758 17,281
Furniture and Equipment............................................................ 12,978 11,820
------ ------
Total Premises, Furniture and Equipment........................................ 35,808 32,109
Less: Accumulated Depreciation................................................ (16,026) (14,313)
------ ------
Total....................................................................... $19,782 $17,796
======= =======
Depreciation expense was $1,667, $1,453 and $1,437 for 1999, 1998 and 1997,
respectively.
NOTE 7 - Deposits
At year-end 1999, interest-bearing deposits include $186,427 of demand and
savings deposits and $440,163 of time deposits. Stated maturities of time
deposits were as follows:
2000.................................. $269,692
2001.................................. 110,534
2002.................................. 34,493
2003.................................. 13,323
2004.................................. 10,697
Thereafter........................... 1,424
------
Total.............................. $440,163
========
- -------------------------------------------------------------------------------
24 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 8 - FHLB Advances and Other Borrowed Money
The Company's funding sources include Federal Home Loan Bank advances,
repurchase agreements, and federal funds purchased. Information regarding each
of these types of borrowings is as follows:
December 31,
1999 1998
---- ----
Long-term advances from the Federal Home Loan Bank collateralized by
qualifying mortgages, investment securities, and mortgage-backed securities...... $122,815 $124,381
Promissory notes payable at a weighted average interest rate of 8.8%................. 87 ---
-- ---
Long-term borrowings............................................................. 122,902 124,381
------- -------
Overnight discount note advances from the Federal Home Loan Bank collateralized
by qualifying mortgages, investment securities, and mortgage-backed securities... 40,000 ---
Repurchase agreements................................................................ 24,015 6,903
Federal funds purchased.............................................................. 9,100 125
----- ---
Short-term borrowings............................................................ 73,115 7,028
------ -----
Total borrowings.............................................................. $196,017 $131,409
======== ========
At December 31, 1999 interest rates on the fixed rate long-term FHLB
advances ranged from 5.0% to 6.7% with a weighted average rate of 5.8%. Of the
$122.8 million, $84.0 million or 68% of the advances contained options whereby
the FHLB may convert the fixed rate advance to an adjustable rate advance, at
which time the company may prepay the advance without penalty.
At December 31, 1998 interest rates on the fixed rate long-term FHLB
advances ranged from 4.9% to 6.0% with a weighted average rate of 5.4%. Of the
$124.4 million, $87.0 million or 70% of the advances contained options whereby
the FHLB may convert the fixed rate advance to an adjustable rate advance, at
which time the company may prepay the advance without penalty.
The interest rate for the overnight discount note advances from the FHLB at
December 31, 1999 was 4.1%. There were no overnight discount notes outstanding
on December 31, 1998. All of the overnight discount notes were refinanced into
long-term advances during January 2000 at rates ranging from 6.1% to 6.4% with a
weighted average remaining maturity of 48 months.
Scheduled principal payments on long-term borrowings at December 31, 1999
are as follows:
2000........................................................ $13,135
2001........................................................ 18,225
2002........................................................ 25,636
2003........................................................ 12,249
2004........................................................ 30,441
Thereafter................................................ 23,216
------
Total.................................................. $122,902
========
NOTE 9 - Stockholders' Equity
The Company and affiliate Banks are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 25
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 9 - Stockholders' Equity (continued)
The prompt corrective action regulations provide five classifications,
including well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At year-end 1999, consolidated and selected affiliate bank actual capital
levels and minimum required levels are presented below:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Regulations:
------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital
(to Risk Weighted Assets)
Consolidated....................... $97,525 14.78% $52,770 8.00% $65,963 10.00%
German American Bank............... $26,974 12.49% $17,280 8.00% $21,600 10.00%
First American Bank................ $24,526 13.64% $14,382 8.00% $17,977 10.00%
Peoples National Bank.............. $15,547 13.28% $9,367 8.00% $11,709 10.00%
Citizens State Bank................ $12,399 12.76% $7,775 8.00% $9,718 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated....................... $89,272 13.53% $26,385 4.00% $39,578 6.00%
German American Bank............... $24,266 11.23% $8,640 4.00% $12,960 6.00%
First American Bank................ $22,567 12.55% $7,191 4.00% $10,786 6.00%
Peoples National Bank.............. $14,079 12.02% $4,684 4.00% $7,025 6.00%
Citizens State Bank................ $11,372 11.70% $3,887 4.00% $5,831 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated....................... $89,272 9.07% $39,367 4.00% $49,208 5.00%
German American Bank............... $24,266 7.42% $13,076 4.00% $16,345 5.00%
First American Bank................ $22,567 7.92% $11,402 4.00% $14,252 5.00%
Peoples National Bank.............. $14,079 7.88% $7,144 4.00% $8,930 5.00%
Citizens State Bank................ $11,372 7.28% $6,250 4.00% $7,813 5.00%
Capital ratios for First State Bank are materially consistent with
consolidated capital ratios. The Company and all affiliate Banks at year-end
1999 and 1998 were categorized as well capitalized. Regulations require the
maintenance of certain capital levels at each affiliate bank, and may limit the
dividends payable by the affiliates to the holding company, or by the holding
company to its shareholders. At December 31, 1999 the affiliates had $3.5
million in retained earnings available for dividends to the parent company
without prior regulatory approval.
Stock Options
The Company maintains a Stock Option Plan and has reserved 185,456 shares of
Common Stock (as adjusted for subsequent stock splits and dividends and subject
to further customary anti-dilution adjustments) for the purpose of grants of
options to officers and other employees of the Company. Options may be
designated as "incentive stock options" under the Internal Revenue Code of 1986,
or as nonqualified options. While the date after which options are first
exercisable is determined by the Stock Option Committee of the Company, no stock
option may be exercised after ten years from the date of grant (twenty years in
the case of nonqualified stock options). The exercise price of stock options
granted pursuant to the 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 and common
shares. An optionee may tender already-owned common shares to the Company in
exercise of an option. In this instance, the Company is obligated to use its
best efforts to issue to such optionee a replacement option for the number of
shares tendered, as follows: (a) of the same type as the option exercised
(either an incentive stock option or a non-qualified option); (b) with the same
expiration date; and, (c) 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.
- -------------------------------------------------------------------------------
26 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
NOTE 9 - Stockholders' Equity (continued)
Changes in options outstanding were as follows, as adjusted to reflect stock
dividends and splits:
Number Weighted-average
of Options Exercise Price
---------- --------------
Outstanding, beginning of 1997..................................... 46,224 $11.28
Granted............................................................ 74,949 12.57
Exercised.......................................................... (36,623) 11.83
------
Outstanding, end of 1997........................................... 84,550 14.47
Granted............................................................ 65,923 22.39
Exercised.......................................................... (53,708) 10.53
-------
Outstanding, end of 1998........................................... 96,765 20.05
Granted............................................................ 2,472 17.38
Exercised.......................................................... (5,066) 8.49
-----
Outstanding, end of 1999........................................... 94,171 20.59
======
Options exercisable at year-end are as follows:
1999............................................................... 91,698 $20.68
Financial Accounting Standard No. 123 requires pro forma disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation. Accordingly, the following pro forma information presents
net income and earnings per share had the Standard's fair value method been used
to measure compensation cost for stock option plans. No compensation cost was
recognized for stock options in any of the years presented. In future years, the
pro forma effect of not applying this standard may increase as additional
options are granted. At year-end 1999, options outstanding have a weighted
average remaining life of 13.72 years, with exercise prices ranging from $8.49
to $28.62.
1999 1998 1997
---- ---- ----
Pro forma Net Income............................................... $8,818 $7,987 $7,132
Pro forma Earnings Per Share and Diluted Earnings per Share........ $0.96 $0.87 $0.78
For options granted during 1999, 1998 and 1997, the weighted-average fair
values at grant date are $1.74, $9.29 and $7.36,
respectively. The fair value of options granted during 1999, 1998 and 1997 was
estimated using the following weighted-average information: risk-free interest
rate of 4.75%, 5.11% and 5.58%, expected life of 1.0, 9.7, and 3.6 years,
expected volatility of stock price of .22, .32 and .18, and expected dividends
of 2.52%, 1.64% and 2.06% per year.
Stock Repurchase Plan
On July 29, 1999 German American Bancorp announced that its Board of
Directors approved a stock repurchase program for up to 446,250 of the
outstanding Common Shares of the Company, representing nearly five percent of
then outstanding shares. Shares were purchased from time to time in the open
market and in large block privately negotiated transactions. The Company
commenced bidding for shares on August 3, 1999 and concluded bids and purchases
(even though not all shares authorized under the program had been repurchased)
on December 14, 1999. The Company repurchased 206,558 shares of common stock
during 1999 in conjunction with the Plan at prices ranging from $17.02 to $22.02
per share. Shares have been adjusted for the December 1999 stock dividend.
Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan whereby full-time
employees can purchase the Company's common stock at a discount. The purchase
price of the shares under this plan is 85% of the fair market value of such
stock at the beginning or end of the offering period, whichever is less. No
shares have been issued under this plan to date.
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 27
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 10 - Employee Benefit Plans
The Company and all its banking affiliates provide a contributory trusteed
401(k) deferred compensation and profit sharing plan, which covers substantially
all full-time employees. The companies agree to match certain employee
contributions under the 401(k) portion of the plan, while profit sharing
contributions are discretionary and are subject to determination by the Board of
Directors. The Doty Insurance Agency, Inc. provides a similar 401(k) deferred
compensation plan which covers full-time employees, except there is no profit
sharing component in the Doty plan. Employees of 1ST BANCORP joined the banking
affiliate plan in January 1999, employees of Citizens State and FSB Corporation
in June 1998, and employees of Peoples in April 1997. Contributions to these
plans were $779, 609, and $549 for 1999, 1998, and 1997, respectively.
Prior to their merger with the Company, Peoples had a non-contributory
defined benefit pension plan. The Projected Benefit Obligation under this plan
was suspended at April 30, 1997. The plan was terminated in 1998 resulting in an
$83 settlement gain, net of excise tax.
1ST BANCORP and Citizens State Bank had non-contributory defined benefit
pension plans with benefits based on years of service and compensation prior to
retirement. The benefits under the Citizens State Bank plan were suspended at
August 1, 1998. The benefits under the 1ST BANCORP plan were suspended at
December 31, 1998. During 1999, a loss of $147 was recorded on a partial
settlement of the 1ST BANCORP plan. As of December 31, 1999, the Citizens State
Bank plan was merged into the 1ST BANCORP plan.
Accumulated plan benefit information for the Company's plan as of December
31, 1999 and 1998 is as follows:
1999 1998
---- ----
Changes in Benefit Obligation:
Obligation at beginning of year............................................ $ 1,392 $ 1,636
Service cost............................................................... --- 62
Interest cost.............................................................. 104 79
Benefits paid.............................................................. (725) (54)
Actuarial (gain) loss...................................................... 118 (7)
Adjustment in cost of settlement........................................... 191 ---
Effect of curtailment...................................................... --- (324)
--- ---
Obligation at end of year.................................................. 1,080 1,392
----- -----
Changes in Plan Assets:
Fair Value at beginning of year............................................ 2,125 2,086
Actual return on plan assets............................................... (11) 58
Employer contributions..................................................... --- 35
Benefits paid.............................................................. (725) (54)
---- --
Fair value at end of year.................................................. 1,389 2,125
----- -----
Funded Status:
Funded status at end of year............................................... (309) (733)
Unrecognized prior service cost............................................ 20 24
Unrecognized net (gain) or loss............................................ (75) 255
Unrecognized transition asset.............................................. 22 24
-- --
Prepaid benefit cost....................................................... $ (342) $ (430)
=== ===
- -------------------------------------------------------------------------------
28 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
Net periodic pension expense (benefit) for the years ended December 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
Service cost................................................... $ --- $ 62 $ 126
Interest cost.................................................. 104 79 119
Expected return on assets...................................... (160) (105) (135)
Amortization of transition amount.............................. (2) (2) (2)
Amortization of prior service cost............................. (3) (1) (3)
Recognition of net (gain) or loss.............................. 3 (14) ---
- -- ---
Net periodic pension expense (benefit)......................... $ (58) $ 19 $ 105
== == ===
The weighted-average assumed rate of return used in determining the net
periodic pension cost for 1999, 1998 and 1997 was 8.0%. The weighted-average
assumed discount rate used in determining the actuarial present value of
accumulated benefit obligations at December 31, 1999, 1998 and 1997 was 7.5%.
The weighted-average rate of increase in future compensation levels was not
applicable for 1999 and was 5.0% for 1998 and 1997.
NOTE 11 - Income Taxes
The provision for income taxes consists of the following: 1999 1998 1997
---- ---- ----
Currently Payable............................................. $3,536 $3,722 $3,218
Deferred...................................................... (440) (150) (303)
Net Operating Loss Carryforward............................... (47) (47) (47)
-- --- ---
Total..................................................... $3,049 $3,525 $2,868
====== ====== ======
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows:
1999 1998 1997
---- ---- ----
Statutory Rate Times Pre-tax Income........................... $4,036 $4,112 $3,446
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments.............. (987) (965) (785)
Non-deductible Merger Costs............................... 14 119 73
State Income Tax, Net of Federal Tax Effect............... 581 725 629
Low Income Housing Credit................................. (407) (343) (343)
Other Differences ........................................ (188) (123) (152)
--- --- ---
Total Income Taxes...................................... $3,049 $3,525 $2,868
====== ====== ======
The net deferred tax asset at December 31 consists of the following: 1999 1998
---- ----
Deferred Tax Assets:
Allowance for Loan Losses................................. $2,359 $2,103
Net Operating Loss Carryforwards.......................... 93 140
Deferred Compensation and Employee Benefits............... 1,392 674
Unrealized Depreciation on Securities..................... 2,589 ---
Other..................................................... 158 310
--- ---
Total Deferred Tax Assets............................... 6,591 3,227
Deferred Tax Liabilities:
Depreciation.............................................. (490) (458)
Leasing Activities, Net................................... (18) (153)
Purchase Accounting Adjustments........................... (7) (17)
Unrealized Appreciation on Securities..................... --- (532)
Mortgage Servicing Rights................................. (464) (405)
Other..................................................... (251) (372)
--- ---
Total Deferred Tax Liabilities.......................... (1,230) (1,937)
Valuation Allowance........................................... (48) (48)
-- --
Net Deferred Tax Asset.................................. $5,313 $1,242
====== ======
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 29
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
The Company has $274 of federal tax net operating loss carryforwards expiring in
the following amounts:
Year Amount Year Amount
---------------------------------------------------------------
2002 107 2008 62
2003 105
Under the Internal Revenue Code, through 1996 First Federal Bank was allowed
a special bad debt deduction related to additions to tax bad debt reserves
established for the purpose of absorbing losses. Subject to certain limitations,
First Federal Bank was permitted to deduct from taxable income an allowance for
bad debts based on a percentage of taxable income before such deductions or
actual loss experience. First Federal Bank generally computed its annual
addition to its bad debt reserves using the percentage of taxable income method;
however, due to certain limitations in 1996, First Federal Bank was only allowed
a deduction based on actual loss experience.
Under legislation enacted in 1996, beginning in fiscal 1997, First Federal
Bank was no longer allowed a special bad debt deduction using a percentage of
taxable income method. Also, beginning in 1997, First Federal Bank was required
to recapture its excess bad debt reserve over its 1987 base year reserve over a
six-year period. The amount has been provided in First American Bank's deferred
tax liability.
Retained earnings at December 31, 1999, includes approximately $2,300 for
which no provision for federal income taxes has been made. This amount
represents allocations of income for allowable bad debt deductions. Reduction of
amounts so allocated for purposes other than tax bad debt losses will create
taxable income which will be subject to the then current corporate income tax
rate. It is not contemplated that amounts allocated to bad debt deductions will
be used in any manner to create taxable income. The unrecorded deferred income
tax liability on the above amount at December 31, 1999 was approximately $782.
NOTE 12 - Per Share Data
Earnings and dividend per share amounts have been retroactively computed as
though shares issued for stock dividends and splits had been outstanding for all
periods presented. The computation of Earnings per Share and Diluted Earnings
per Share are provided below:
1999 1998 1997
---- ---- ----
Earnings per Share:
Net Income.................................................... $8,822 $8,570 $7,270
Weighted Average Shares Outstanding........................... 9,186,474 9,197,274 9,189,349
Earnings per Share........................................ $0.96 $0.93 $0.79
Diluted Earnings per Share:
Net Income.................................................... $8,822 $8,570 $7,270
Weighted Average Shares Outstanding........................... 9,186,474 9,197,274 9,189,349
Stock Options, Net............................................ 3,788 21,696 9,416
----- ------ -----
Diluted Weighted Average Shares Outstanding............... 9,190,262 9,218,970 9,198,765
Diluted Earnings per Share................................ $0.96 $0.93 $0.79
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31,
1999, 1998, and 1997 was $175, $151, and $312, respectively, including amounts
paid under short-term cancelable leases.
At December 31, 1999, the German American Bank and First State Bank
subleased space for three branch-banking facilities from a company controlled by
a director and principal shareholder of the Company. The subleases expire in
2000, 2001 and 2008 with various renewal options provided. Aggregate annual
rental payments to this Director's company totaled $58 for 1999. Exercise of the
Bank's sublease renewal options is contingent upon the Director's company
renewing its primary leases.
- -------------------------------------------------------------------------------
30 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 13 - Lease Commitments (continued)
The following is a schedule of future minimum lease payments:
Years Ending December 31: Premises Equipment Total
-------- --------- -----
2000........................... $86 $16 $102
2001........................... 59 8 67
2002........................... 56 1 57
2003........................... 50 --- 50
2004........................... 50 --- 50
Thereafter..................... 205 --- 205
--- --- ---
Total........................ $506 $25 $531
==== === ====
NOTE 14 - Commitments and Off-balance Sheet Items
In the normal course of business, there are various commitments and
contingent liabilities, such as commitments to extend credit and commitments to
sell loans, which are not reflected in the accompanying consolidated financial
statements. The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to make loans
and standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policy to make commitments as it
uses for on-balance sheet items.
The Company's exposure to credit risk for commitments to sell loans is
dependent upon the ability of the counter-party to purchase the loans. This is
generally assured by the use of government sponsored entity counterparts. These
commitments are subject to market risk resulting from fluctuations in interest
rates.
Commitments and contingent liabilities are summarized as follows, at
December 31,
1999 1998
---- ----
Commitments to Fund Loans:
Home Equity.......................... $12,262 $15,782
Credit Card Lines.................... 8,813 6,030
Commercial Operating Lines........... 47,761 29,554
Residential Mortgages................ 8,357 18,143
----- ------
Total Commitments to Fund Loans.. $77,193 $69,509
======= =======
Commitments to Sell Loans............... $3,304 $5,255
Standby Letters of Credit............... $1,928 $1,690
Since many commitments to make loans expire without being used, these
amounts do not necessarily represent future cash commitments. Collateral
obtained upon exercise of the commitment is determined using management's credit
evaluation of the borrower, and may include accounts receivable, inventory,
property, land and other items. The approximate duration of these commitments is
generally one year or less.
The Company self-insures employee health benefits for the majority of its
affiliate banks. Stop loss insurance covers annual losses exceeding $70 per
covered individual and approximately $615 in the aggregate. Management's policy
is to establish a reserve for claims not submitted by a charge to earnings based
on prior experience. Charges to earnings were $604, $526 and $517 for 1999, 1998
and 1997, respectively.
At December 31, 1999 and 1998, respectively, the affiliate banks were
required to have $4,755 and $3,341 on deposit with the Federal Reserve, or as
cash on hand. These reserves do not earn interest.
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 31
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 15 - Non-cash Investing Activities
1999 1998 1997
---- ---- ----
Loans Transferred to Other Real Estate........ $2,923 $3,958 $4,153
Securities Transferred to Available-for-Sale.. --- 8,034 ---
The above data should be read in conjunction with the Consolidated Statements
of Cash Flows. On the date of merger with Citizens State, investment securities
with an amortized cost of $8.0 million and estimated market value of $8.1
million were reclassified from Held-to-Maturity to Available-for-Sale. This
action was taken as a result of the business combination and in order to conform
Citizens State's investment portfolio to the Company's liquidity and interest
rate risk policies. See also Note 18 regarding a purchase acquisition in 1999.
NOTE 16 - Segment Information
The Company's operations include two primary segments: retail banking and
mortgage banking. The retail banking segment involves attracting deposits from
the general public and using such funds to originate consumer, commercial,
commercial real estate, and single-family residential mortgage loans, primarily
in the affiliate bank's local markets. The mortgage banking segment involves the
origination and purchase of single-family residential mortgage loans; the sale
of such loans in the secondary market; and the servicing of mortgage loans for
investors.
The retail segment is comprised of community banks with 25 banking offices
in Southwestern Indiana. Net interest income from loans and investments funded
by deposits and borrowings are the primary revenues of the five affiliate
community banks comprising the retail banking segment. The mortgage banking
segment operates as a division of First American Bank. Primary revenues for the
mortgage banking segment are net interest income from a residential real estate
loan portfolio funded primarily by wholesale sources. Other revenues are gains
on sales of loans and capitalization of mortgage servicing rights (MSR), and
loan servicing income.
The following segment financial information has been derived from the
internal financial statements of German American Bancorp, which are used by
management to monitor and manage the financial performance of the Company. The
accounting policies of the two segments are the same as those described in the
summary of significant accounting policies. The evaluation process for segments
does not include holding company income and expense. Holding company and
non-banking subsidiaries amounts are the primary differences between segment
amounts and consolidated totals, and are reflected in the Other column below,
along with minor amounts to eliminate transactions between segments.
Retail Mortgage Consolidated
Year Ended December 31, 1999 Banking Banking Other Totals
------- ------- ----- ------
Net Interest Income................................ $27,464 $4,459 $247 $32,170
Gain on Sales of Loans and
Capitalization of MSR............................ 16 304 --- 320
Servicing Income................................... --- 370 --- 370
Noncash Items:
Provision for Loan Losses....................... 670 1,048 --- 1,718
MSR Amortization & Valuation.................... --- 241 --- 241
Provision for Income Taxes......................... 3,788 546 (1,285) 3,049
Segment Profit..................................... 9,536 833 (1,547) 8,822
Segment Assets..................................... 806,884 180,752 4,999 992,635
The financial results of the mortgage banking operation were not reported
separately from retail banking operations prior to the acquisition of 1ST
BANCORP in 1999. In addition, the mortgage banking segment's loans held for
portfolio were not separately identified in the computer subsidiary ledger prior
to the acquisition of 1ST BANCORP. Therefore, segment reporting for prior
periods is not practical.
- -------------------------------------------------------------------------------
32 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 17 - Parent Company Financial Statements
The condensed financial statements of German American Bancorp are presented
below:
CONDENSED BALANCE SHEETS
December 31,
1999 1998
---- ----
ASSETS
Cash........................................................... $5,763 $4,034
Securities Available-for-Sale, at Market....................... 3,255 3,471
Investment in Subsidiary Banks and Bank Holding Company........ 74,912 79,931
Investment in GAB Mortgage Corp................................ 291 291
Furniture and Equipment........................................ 1,420 2,095
Other Assets................................................... 1,910 1,837
----- -----
Total Assets................................................ $87,551 $91,659
======= =======
LIABILITIES........................................................ $ 64 $ 383
-------- ---------
SHAREHOLDERS' EQUITY
Common Stock................................................... 9,029 8,705
Additional Paid-in Capital..................................... 53,846 48,190
Retained Earnings.............................................. 28,559 33,570
Accumulated Other Comprehensive Income (Loss).................. (3,947) 811
----- ---
Total Shareholders' Equity.................................. 87,487 91,276
------ ------
Total Liabilities and Shareholders' Equity.................. $87,551 $91,659
======= =======
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
1999 1998 1997
---- ---- ----
INCOME
Dividends from Subsidiary Banks................................. $11,400 $12,550 $6,790
Dividend and Interest Income.................................... 247 256 129
Fee Income from Subsidiary Banks................................ 471 411 407
Securities Gains, net........................................... --- --- ---
Other Income ................................................... 61 40 27
--- --- ---
Total Income ................................................ 12,179 13,257 7,353
------ ------ -----
EXPENSES
Salaries and Benefits........................................... 2,475 1,827 1,434
Professional Fees............................................... 530 760 378
Occupancy and Equipment Expense................................. 355 286 246
Other Expenses.................................................. 536 544 520
--- --- ---
Total Expenses............................................... 3,896 3,417 2,578
----- ----- -----
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES............................ 8,283 9,840 4,775
Income Tax Benefit.................................................. 1,371 1,011 740
----- ----- ---
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES.......................................... 9,654 10,851 5,515
Equity in Undistributed Income of Subsidiaries...................... (832) (2,281) 1,755
--- ----- -----
NET INCOME.......................................................... 8,822 8,570 7,270
----- ----- -----
Other Comprehensive Income:
Unrealized gain/(loss) on Securities, net....................... (4,785) 153 408
----- --- ---
Total Comprehensive Income................................. $4,037 $8,723 $7,678
====== ====== ======
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 33
Dollars in thousands
- -------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................................... $8,822 $8,570 $7,270
Adjustments to Reconcile Net Income to Net Cash from Operations
Amortization on Securities................................... 22 38 36
Depreciation................................................. 206 157 140
Gain on Sale of Property and Equipment....................... (4) --- ---
Change in Other Assets....................................... (47) (1,515) (21)
Change in Other Liabilities.................................. (337) 175 (286)
Equity in Undistributed Income of Subsidiaries............... 832 2,281 (1,755)
--- ----- ------
Total Adjustments.......................................... 672 1,136 (1,886)
--- ----- ------
Net Cash from Operating Activities........................... 9,494 9,706 5,384
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to Subsidiaries............................. --- (299) (500)
Purchase of Securities Available-for-Sale........................ (368) (2,229) ---
Proceeds from Maturities of Securities Available-for-Sale........ 500 520 ---
Property and Equipment Expenditures.............................. (520) (881) (726)
Proceeds from Sale of Property and Equipment..................... 993 --- ---
Acquire Affiliates and Adjust to Conform Fiscal Years............ 104 --- ---
--- --- ---
Net Cash from Investing Activities............................... 709 (2,889) (1,226)
--- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-term Debt...................................... --- (1,481) (197)
Purchase / Retire Common Stock................................... (4,320) (360) (637)
Issuance of Common Stock......................................... 348 196 817
Dividends Paid................................................... (4,467) (3,122) (2,797)
Purchase of Interest in Fractional Shares........................ (35) (43) (38)
-- -- --
Net Cash from Financing Activities............................ (8,474) (4,810) (2,852)
----- ----- -----
Net Change in Cash and Cash Equivalents.............................. 1,729 2,007 1,306
Cash and Cash Equivalents at Beginning of Year................... 4,034 2,027 721
----- ----- ---
Cash and Cash Equivalents at End of Year......................... $5,763 $4,034 $2,027
====== ====== ======
- -------------------------------------------------------------------------------
34 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 18 - Business Combinations
Information relating to mergers and acquisitions for which stock was issued
for the three year period ended December 31, 1999, includes:
Date Common Accounting
Business Combination Location Acquired Shares Issued3 Method
-------------------- -------- -------- -------------- ------
Peoples Bancorp Washington, Indiana March 4, 1997 1,424,538 Pooling
CSB Bancorp Petersburg, Indiana June 1, 1998 1,023,642 Pooling
FSB Financial Corporation Francisco, Indiana June 1, 1998 74,091 Pooling(1)
The Doty Agency, Inc. Petersburg, Indiana January 1, 1999 65,100 Pooling(1)
1ST BANCORP Vincennes, Indiana January 4, 1999 2,141,648 Pooling
Professional Insurance
Markets, Inc., (Smith & Bell) Vincennes, Indiana May 1, 1999 8,400 Purchase(2)
<FN>
Certain of the above entities have had their name changed and/or have been merged into other subsidiaries of the Corporation.
1 Prior period results do not include the effect of the mergers, as restatement would not have resulted in a material change
in overall financial results.
2 This merger was accounted for as a purchase, with assets acquired and liabilities assumed totaling $412, including goodwill
of $345. The Company issued approximately 8,400 shares of common stock and approximately $26 in cash for all the outstanding
shares of the corporate owner of Smith & Bell. Reported operating results for periods prior to the merger have not been
restated.
3 Adjusted for all subsequent stock dividends and splits.
</FN>
Prior to 1999, 1ST BANCORP's financial statements were prepared on a June
30 fiscal year-end. As a result of changing fiscal years from June 30 to
December 31, retained earnings have been reduced by $72 attributable to the 1ST
BANCORP net loss for the six months ended December 31, 1998. Retained earnings
were reduced an additional $148 for cash dividends paid by 1ST BANCORP during
the same period. Revenues and expenses for the six-month period totaled $10,679
and $10,751, respectively. Earnings during the six-month period were negatively
impacted by merger related expenses including professional fees; health &
pension benefits; deferred compensation plans; and other compensation. 1ST
BANCORP also increased loan loss provision and amortization of mortgage
servicing rights, due to conditions during the period. Also as a result of the
change in fiscal years, common stock and surplus were increased by $572 due to
the exercise of stock options and issuance of shares for 1ST BANCORP's employee
stock purchase plan and dividend reinvestment plan.
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp and 1ST BANCORP for periods
prior to the merger:
1998 1997
---- ----
Net Interest Income
German American Bancorp............ $24,082 $22,880
1ST BANCORP........................ 6,673 6,611
--------- ---------
Combined........................ $30,755 $29,491
======= =======
Net Income
German American Bancorp............ $6,659 $6,449
1ST BANCORP........................ 1,911 821
------- --------
Combined........................ $8,570 $7,270
====== ======
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 35
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 19 - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are
provided in the table below. Not all of the Company's assets and liabilities are
considered financial instruments, and therefore are not included in the table.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates were based on subjective judgments,
and therefore cannot be determined with precision.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Financial Assets:
Cash and Short-term Investments......................... $25,395 $25,395 $50,887 $50,877
Securities Available-for-Sale........................... 188,148 188,148 151,527 151,527
Securities Held-to-Maturity............................. 30,191 29,838 48,346 49,462
FHLB Stock and Other Restricted Stock................... 9,660 9,660 7,853 7,853
Loans, including loans held for sale, net............... 688,269 682,890 592,214 599,723
Accrued Interest Receivable............................. 8,572 8,572 8,456 8,456
Financial Liabilities:
Demand, Savings and Money Market Deposits............... $(258,098) $(258,098) $(243,561) $(243,561)
Other Time Deposits..................................... (440,163) (441,141) (421,552) (425,795)
Short-term Borrowings................................... (73,115) (73,115) (7,028) (7,028)
Long-term Debt.......................................... (122,902) (124,476) (124,381) (124,550)
Accrued Interest Payable................................ (3,295) (3,295) (3,597) (3,597)
Unrecognized Financial Instruments:
Commitments to extend Credit............................ --- --- --- ---
Standby Letters of Credit............................... --- --- --- ---
The carrying amounts of cash, short-term investments, FHLB and other
restricted stock, and accrued interest receivable are a reasonable estimate of
their fair values. The fair values of securities are based on quoted market
prices or dealer quotes, if available, or by using quoted market prices for
similar instruments. The fair value of loans held for sale are estimated using
commitment prices or market quotes on similar loans. The fair value of loans are
estimated by discounting future cash flows using the current rates at which
similar loans would be made for the average remaining maturities. The fair value
of demand deposits, savings accounts, money market deposits, short-term
borrowings and accrued interest payable is the amount payable on demand at the
reporting date. The fair value of fixed-maturity time deposits and long-term
borrowings are estimated using the rates currently offered on these instruments
for similar remaining maturities. Commitments to extend credit and standby
letters of credit are generally short-term or variable rate with minimal fees
charged. These instruments have no carrying value, which is also assumed to be
their fair value.
NOTE 20 - Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
1999 1998 1997
---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities................................ $(7,929) $301 $647
Less: reclassification adjustments for gains
and losses later recognized in income........................ (6) 38 (29)
- -- --
Net unrealized gains and losses.................................. (7,923) 263 676
Tax Effect....................................................... 3,138 (110) (268)
----- --- ---
Other comprehensive income....................................... $(4,785) $153 $408
===== ==== ====
- -------------------------------------------------------------------------------
36 Independent Auditors' Report
Dollars in thousands
- -------------------------------------------------------------------------------
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, 1999 and 1998, 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, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
The consolidated balance sheet as of December 31, 1998 and related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1998 and 1997 have been restated to
reflect the 1ST BANCORP and CSB Bancorp poolings of interests, as described in
Note 18. We did not audit the separate 1998 and 1997 financial statements of 1ST
BANCORP or the separate 1997 financial statements of CSB Bancorp as reflected in
the poolings of interests, which statements reflect (in thousands) total assets
of $260,149 and total liabilities of $236,294 for 1998, and net income of $1,911
and $1,131 for 1998 and 1997. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included for 1ST BANCORP for 1998 and 1997, and for CSB Bancorp
for 1997, is based solely on the reports 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 reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of German American Bancorp as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
Indianapolis, Indiana
February 11, 2000 Crowe, Chizek and Company LLP
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 REQUEST SHOULD BE DIRECTED TO
THE SHAREHOLDER INFORMATION AND CORPORATE OFFICE ADDRESS PROVIDED ABOVE.