UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended: December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________________
Commission File Number 0-11244
GERMAN AMERICAN BANCORP
-----------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
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(State or other jurisdiction of (I.R.S. Employer
ncorporation or organization) Identification No.)
711 Main Street, Box 810, Jasper, Indiana 47546
- ----------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
NONE Not Applicable
---- --------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, No Par Value
---------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (assuming solely for purposes of this calculation that all directors
and executive officers of the Registrant are affiliates) valued at the last
trade price reported by NASDAQ as of March 12, 2001 was approximately
$136,431,000.
As of March 12, 2001 there were outstanding 10,494,708 common shares, no
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of German American Bancorp for the Annual
Meeting of its Shareholders to be held April 26, 2001, to the extent stated
herein, are incorporated by reference into Part III.
- 1 -
GERMAN AMERICAN BANCORP
2000 ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 6
Item 3. Legal Proceedings...................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.... 7
Special Item. Executive Officers of the Registrant................... 8
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters........................ 8
Item 6. Selected Financial Data................................ 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 10-21
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.......................... 22
Item 8. Financial Statements and Supplementary Data........... 23-48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 49
PART III
Item 10. Directors and Executive Officers of the Registrant..... 49
Item 11. Executive Compensation................................. 49
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 49
Item 13. Certain Relationships and Related Transactions......... 49
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................ 50
SIGNATURES .......................................................... 51
INDEX OF EXHIBITS........................................................ 52-53
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PART I
Item 1. Business.
General
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliated
community banks with 27 banking offices and 5 full-service independent insurance
agencies in the eight contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The Company's lines of
business include retail and commercial banking, mortgage banking, trust and
brokerage services, title insurance, and a full range of personal and corporate
property and casualty insurance products.
The Company's principal subsidiaries are described in the following table:
Names of Principal Subsidiaries Type of Business Location Parent Company
- -----------------------------------------------------------------------------------------------------------------------------
The German American Bank Commercial Bank Jasper, IN German American Bancorp
First American Bank Savings Bank Vincennes, IN German American Bancorp
First State Bank, Southwest Indiana Commercial Bank Tell City, IN German American Bancorp
German American Holdings Corporation 2nd Tier Holding Company Jasper, IN German American Bancorp
GAB Mortgage Corp. Inactive Jasper, IN German American Bancorp
German American Reinsurance Co., Ltd. Credit Life Insurance Turks & Caicos Islands German American Bancorp
Peoples National Bank Commercial Bank Washington, IN German American Holdings Corp.
Citizens State Bank Commercial Bank Petersburg, IN German American Holdings Corp.
The Doty Agency, Inc. Insurance Agency Petersburg, IN Citizens State Bank
First Title Insurance Company Title Insurance Agency Vincennes, IN Citizens State Bank
The Company over the five-year period ended December 31, 2000 has experienced
both internal growth and growth by acquiring other banks and insurance agencies.
For a description of acquisitions see Note 18 to the Company's consolidated
financial statements included in this report. Most of these acquisitions have
been accounted for under the pooling-of-interests method of accounting, with the
result that the financial statements for all periods prior to such acquisitions
were retroactively restated.
Competition
The banking business is highly competitive. The Company's subsidiary banks
compete not only with financial institutions that have offices in the same
counties but also compete for deposits, loans and many other types of financial
services products with financial institutions that are located throughout
Southwest Indiana and adjoining areas. The Company's subsidiary banks compete
with commercial banks, savings and loan associations, savings banks, credit
unions, production credit associations, federal land banks, finance companies,
credit card companies, personal loan companies, brokerage firms, insurance
companies, lease finance companies, money market funds, mortgage companies and
other non-depository financial intermediaries. Many of these banks and other
organizations have substantially greater resources than the Corporation.
Recent changes in federal and state law have resulted in and are expected to
continue to result in increased competition. The reductions in legal barriers to
the acquisition of banks by securities firms, insurance companies and other
financial service companies resulting from implementation of the
Gramm-Leach-Bliley Act of 1999 and other recent and proposed changes are
expected to continue to further stimulate competition in the markets in which
the Banks operate, although it is not possible to predict the extent or timing
of such increased competition.
Employees
At February 28, 2001 the Company and its subsidiaries employed approximately 407
full-time equivalent employees. There are no collective bargaining agreements,
and employee relations are considered to be good.
Regulation and Supervision
The Company is subject to the Bank Holding Company Act of 1956, as amended ("BHC
Act"), and is required to file with the Board of Governors of the Federal
Reserve System ("FRB") annual reports and such additional information as the FRB
may require. The FRB may also make examinations or inspections of the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to its bank subsidiaries and to commit resources to support them even
in circumstances where the Company might not do so absent such an FRB policy.
- 3 -
The Company's subsidiary banks are under the supervision of and subject to
examination by one or more of the Indiana Department of Financial Institutions
("DFI"), the Office of the Comptroller of Currency ("OCC"), the Federal Deposit
Insurance Corporation ("FDIC") and the Office of Thrift Supervision ("OTS").
Regulation and examination by banking regulatory agencies are primarily for the
benefit of depositors rather than shareholders.
With certain exceptions, the BHC Act prohibits a bank holding company from
engaging in, or acquiring direct or indirect control of more than 5 percent of
the voting shares of any company engaged in nonbanking activities. One of the
principal exceptions to this prohibition is for activities deemed by the FRB to
be "closely related to banking." Under current regulations, bank holding
companies and their subsidiaries are permitted to engage in such banking-related
business ventures as consumer finance; equipment leasing; credit life insurance;
computer service bureau and software operations; mortgage banking; and
securities brokerage.
Under the BHC Act, certain well-managed and well-capitalized bank holding
companies may elect to be treated as a "financial holding company" and, as a
result, be permitted to engage in a broader range of activities that are
"financial in nature" and in activities that are determined to be incidental or
complementary to activities that are financial in nature. These activities
include underwriting, dealing in and making a market in securities; insurance
underwriting and agency activities; and merchant banking. Banks may also engage
through financial subsidiaries in certain of the activities permitted for
financial holding companies, subject to certain conditions. The Company has not
elected to become a financial holding company and none of its subsidiary banks
have elected to form financial subsidiaries.
Indiana law, the National Bank Act, the Home Owners Loan Act, and the BHC Act
restrict certain types of expansion by the Company and its bank subsidiaries.
Under the Home Owners Loan Act, First American Bank may branch, subject to
certain conditions, anywhere within the United States. Under the BHC Act, the
Company may establish non-banking offices without geographical limitation. Under
the BHC Act, the Company must receive the prior written approval of the FRB or
its delegate before it may acquire ownership or control of more than 5 percent
of the voting shares of another bank, and under Indiana law it may not acquire
25 percent or more of the voting shares of another bank without the prior
approval of the DFI.
In 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), which substantially changed the
geographic constraints applicable to the banking industry. Effective September
29, 1995, the Riegle-Neal Act allowed bank holding companies to acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law. Effective June 1,
1997 (or earlier if expressly authorized by applicable state law), the
Riegle-Neal Act allowed banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions. The establishment of
de novo interstate branches or the acquisition of individual branches of a bank
in another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized by
state law. The legislation allowed individual states to "opt-out" of certain
provisions of the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997.
In 1996, Indiana authorized out-of-state banks to establish branch offices in
Indiana. The Indiana Financial Institutions Act now permits, in appropriate
circumstances,
(A) with the approval of the DFI:
o the acquisition of all or substantially all of the assets of an
Indiana-chartered bank by an FDIC-insured bank, savings bank or
savings association located in another state,
o the acquisition by an Indiana-chartered bank of all or
substantially all of the assets of an FDIC-insured bank, savings
bank or savings association located in another state,
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located
in other states having laws permitting such consolidation, with
the resulting organization chartered by Indiana, and
o the organization of a branch in Indiana by FDIC-insured banks
located in other states, the District of Columbia or U.S.
territories or protectorates having laws permitting an
Indiana-chartered bank to establish a branch in such
jurisdiction, and
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(B) upon written notice to the DFI:
o the acquisition by an Indiana-chartered bank of one or more
branches (not comprising all or substantially all of the assets)
of an FDIC-insured bank, savings bank or savings association
located in another state, the District of Columbia, or a U.S.
territory or protectorate,
o the establishment by Indiana-chartered banks of branches located
in other states, the District of Columbia, or U.S. territories or
protectorates, and
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located
in other states, with the resulting organization chartered by one
of such other states, and
(C) the sale by an Indiana-chartered bank of one or more of its branches
(not comprising all or substantially all of its assets) to an
FDIC-insured bank, savings bank or savings association located in a
state in which an Indiana-chartered bank could purchase one or more
branches of the purchasing entity.
The earnings of commercial banks and their holding companies are affected not
only by general economic conditions but also by the policies of various
governmental regulatory authorities. In particular, the FRB regulates money and
credit conditions and interest rates in order to influence general economic
conditions, primarily through open-market operations in U.S. Government
securities, varying the discount rate on bank borrowings, and setting reserve
requirements against bank deposits. These policies have a significant influence
on overall growth and distribution of bank loans, investments and deposits, and
affect interest rates charged on loans and earned on investments or paid for
time and savings deposits. FRB monetary policies have had a significant effect
on the operating results of commercial banks in the past and this is expected to
continue in the future. The general effect, if any, of such policies upon the
future business and earnings of the Company cannot accurately be predicted.
The Company and its bank subsidiaries are required by law to maintain minimum
levels of capital. These required capital levels are expressed in terms of
capital ratios, known as the leverage ratio and the capital to risk-based assets
ratios. The Company significantly exceeds the minimum required capital levels
for each measure of capital adequacy. See "Management's Discussion and Analysis
- -- Capital Resources," included in the Shareholders' Report.
Also, federal regulations define five categories of financial institutions for
purposes of implementing prompt corrective action and supervisory enforcement
requirements of the Federal Deposit Insurance Corporation Improvements Act of
1991. The category to which the most highly capitalized institutions are
assigned is termed "Well-Capitalized." Institutions falling into this category
must have a total risk-based capital ratio (the ratio of total capital to
risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the
ratio of Tier 1, or "core", capital to risk-weighted assets) of at least 6%, a
leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and
must not be subject to any written agreement, order or directive from its
regulator relative to meeting and maintaining a specific capital level. On
December 31, 2000, the Company had a total risk-based capital ratio of 14.38%, a
Tier 1 risk-based capital ratio of 13.13% (based on Tier 1 capital of
$95,873,000 and total risk-weighted assets of $730,166,000), and a leverage
ratio of 8.91%. The Company meets all of the requirements of the "Well
Capitalized" category and, accordingly, the Company does not expect these
regulations to significantly impact operations.
The Company is a corporation separate and distinct from its bank and other
subsidiaries. Most of the Company's revenues will be received by it in the form
of dividends or interest paid by its bank subsidiaries. These subsidiaries are
subject to statutory restrictions on its ability to pay dividends. The FRB has
issued a policy statement on the payment of cash dividends by bank holding
companies to the effect that a bank holding company should not pay cash
dividends exceeding its net income or which could only be funded in ways that
would weaken the bank holding company's financial health, such as by borrowing.
Additionally, the FRB possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability in appropriate cases to proscribe
the payment of dividends by banks and bank holding companies. The FDIC, OCC, OTS
and DFI possess similar enforcement powers over the respective bank subsidiaries
of the Company for which they have supervision. The "prompt corrective action"
provisions of federal banking law impose further restrictions on the payment of
dividends by insured banks which fail to meet specified capital levels and, in
some cases, their parent bank holding companies.
- 5 -
Forward-Looking Statements
The Company from time to time in its oral and written communications makes
statements relating to its expectations regarding the future. These types of
statements are considered "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward looking
statements can include statements about adequacy of allowance for loan losses
and the quality of the Company's loans and other assets; simulations of changes
in interest rates; litigation results; and dividend policy; estimated cost
savings, plans and objectives for future operations; and expectations about
performance as well as economic and market conditions and trends. They often can
be identified by the use of words like "expect," "may," "could," "intend,"
"project", "estimate," "believe" or "anticipate."
The Company may include forward-looking statements in filings with the
Securities and Exchange Commission ("SEC"), such as this Form 10-K, in other
written materials, and in oral statements made by senior management to analysts,
investors, representatives of the media, and others. It is intended that these
forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the forward-looking
statement is made.
Readers are cautioned that, by their nature, forward-looking statements are
based on assumptions and are subject to risks, uncertainties, and other factors.
Actual results may differ materially from the expectations of the Company that
are expressed or implied by any forward-looking statement. The discussion in
Item 7 of this Form 10-K, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," lists some of the factors that could cause
the Company's actual results to vary materially from those expressed or implied
by any forward-looking statements. Other uncertainties that could cause the
Company's actual results to vary materially from those expressed or implied by
any forward-looking statement include the effects of competition, technological
changes and legal and regulatory developments; acquisitions of other businesses
by the Company and integrations of such acquired businesses; changes in fiscal,
monetary and tax policies; market, economic, operational, liquidity, credit and
interest rate risks associated with the Company's business; inflation;
competition in the financial services industry; changes in general economic
conditions, either nationally or regionally, resulting in, among other things,
credit quality deterioration; changes in the securities markets; and the
continued availability of earnings and excess capital sufficient for the lawful
and prudent declaration and payment of cash dividends. Investors should consider
these risks, uncertainties, and other factors in addition to those mentioned by
the Company in its other SEC filings from time to time when considering any
forward-looking statement.
Item 2. Properties.
The Company conducts its operations from the main office building of German
American Bank at 711 Main Street, in Jasper, Indiana. The main office building
contains approximately 23,600 square feet of office space. The Banks and other
subsidiaries conduct their operations from 33 other locations in Southwest
Indiana.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation
incidental to the business of the Company's subsidiary banks, to which the
Company or any of its subsidiaries is a party or of which any of their property
is the subject.
- 6 -
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of 2000 to a vote of
security holders, by solicitation of proxies or otherwise.
Special Item. Executive Officers of the Registrant.
NAME AGE TITLE AND FIVE YEAR HISTORY
---- --- ---------------------------
George W. Astrike (65) Chairman of the Board for the
Company since January 1, 1999;
Chairman and Chief Executive
Officer of the Company from 1995
through 1998; Chairman of German
American Bank since 1995; Chairman
and President of German American
Bank prior thereto. Director of
Citizens State Bank and First
American Bank from date of
acquisition through April 1999.
Director of all other Bank
subsidiaries since acquisition by
the Company.
Mark A. Schroeder (47) President and Chief Executive
Officer of the Company since
January 1, 1999; President and
Chief Operating Officer of the
Company from 1995 through 1998;
Director of German American Bank
since 1991. Director of each of the
other subsidiaries since
acquisition by the Company.
Clay W. Ewing (45) Executive Vice President - Retail
Banking of German American Bancorp
since May, 1999; Director of First
American Bank since May, 1999;
President and Chief Executive
Officer of First State Bank from
1995 until March 2001; presently
Chairman of the Board of First
State Bank. Director of First State
Bank since 1994.
Stan J. Ruhe (49) Executive Vice President - Credit
Administration of the Company since
1995; Director of Citizens State
Bank since May, 1999; Executive
Vice President of German American
Bank since 1995.
Kenneth L. Sendelweck (46) Secretary/Treasurer of the Company
since May, 2000; President, Chief
Executive Officer and Director of
German American Bank since May,
1999; Vice President, Assistant
Treasurer of Kimball International,
Inc. prior thereto.
Richard E. Trent (42) Senior Vice President and Chief
Financial Officer since April 1999;
Vice President and Chief Financial
Officer of the Company since
December, 1997; Vice President,
Budgets & Financial Analysis of CNB
Bancshares from January, 1997;
Manager of Finance and Planning,
Wells Fargo Bank from August, 1996;
Various financial officer
capacities within American General
Finance, Inc. and subsidiaries
prior thereto.
Messrs. Schroeder, Ruhe and Astrike have been associated with the Company in
various capacities since 1972, 1982, and 1983, respectively.
There are no family relationships between any of the officers of the Company.
All officers are appointed annually and serve at the pleasure of the Company.
- 7 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
German American Bancorp's stock is traded on NASDAQ's National Market System
under the symbol GABC. The quarterly high and low closing prices for the
Company's common stock as reported by NASDAQ and quarterly cash dividends
declared and paid are set forth in the table below. All per share data are
retroactively restated for all stock dividends. Per share cash dividends have
not been restated for mergers accounted for as poolings of interests.
2000 1999
---- ----
Cash Cash
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
Fourth Quarter $13.27 $11.49 $0.133 $21.31 $16.43 $0.119
Third Quarter $12.86 $11.67 $0.133 $21.31 $15.53 $0.119
Second Quarter $15.00 $13.69 $0.133 $17.46 $15.53 $0.119
First Quarter $17.14 $14.52 $0.124 $20.64 $16.78 $0.105
------ ------
$0.523 $0.462
====== ======
The Common Stock was held of record by approximately 3,276 shareholders at March
1, 2001.
Cash dividends paid to the Company's shareholders are primarily funded 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 cash and stock dividends. 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.
Transfer Agent: UMB Bank, N.A. Regional J.J.B. Hilliard, W.L. Lyons, Inc.
Securities Transfer Division Market Makers: Louisville, Kentucky
P.O. Box 410064 Contact: George Morrin
Kansas City, MO 64141-0064 (800) 444-1854
Contact: Shareholder Relations
(800) 884-4225 NatCity Investments, Inc
Indianapolis, Indiana
Contact: Eric Wheeler
Shareholder (800) 321-7442
Information and Terri A. Eckerle
Corporate Office: German American Bancorp McDonald Investments, Inc.
P. O. Box 810 Evansville, Indiana
Jasper, Indiana 47547-0810 Contact: Kent Gourley
(812) 482-1314 (800) 513-0844
- 8 -
Item 6. Selected Financial Data.
The following selected data has been taken from the Company's consolidated
financial statements. It should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
Summary of Operations:
Interest Income........................ $ 79,319 $ 72,135 $ 69,188 $ 66,909 $ 65,549
Interest Expense....................... 45,646 37,744 36,315 35,354 35,668
---------- ----------- ----------- ----------- -----------
Net Interest Income................ 33,673 34,391 32,873 31,555 29,881
Provision for Loan Losses.............. 2,231 1,749 1,344 779 428
---------- ----------- ----------- ----------- -----------
Net Interest Income after Provision
For Loan Losses.................... 31,442 32,642 31,529 30,776 29,453
Non-interest Income.................... 2,543(1) 6,385 5,249 5,866 13,063(2)
Non-interest Expense................... 28,238 26,357 23,751 25,651(2) 24,101
---------- ----------- ----------- ----------- -----------
Income before Income Taxes............. 5,747 12,670 13,027 10,991 18,415
Income Tax Expense..................... 459 3,316 3,805 3,179 6,524
---------- ----------- ----------- ----------- -----------
Net Income............................. $ 5,288 $ 9,354 $ 9,222 $ 7,812 $ 11,891
=========== =========== =========== =========== ===========
============================================================================================================================
Year-end Balances:
Total Assets........................... $ 1,079,808 $ 1,056,641 $ 952,930 $ 895,485 $ 844,920
Total Loans, Net of Unearned Income.... 709,744(1) 741,609 639,816 559,517 542,279
Total Deposits......................... 735,570 751,428 714,779 688,692 668,360
Total Long-term Debt................... 182,370 126,902 124,381 100,296 101,885
Total Shareholders' Equity............. 97,260 93,685 97,153 89,847 84,461
============================================================================================================================
Average Balances:
Total Assets........................... $ 1,070,093 $ 999,761 $ 919,750 $ 877,624 $ 869,251
Total Loans, Net of Unearned Income.... 766,533(1) 691,250 628,254 582,424 575,909
Total Deposits......................... 749,235 743,153 700,400 674,324 675,110
Total Shareholders' Equity............. 95,788 97,855 94,323 86,715 80,220
============================================================================================================================
Per Share Data (3):
Net Income............................. $ 0.50 $ 0.88 $ 0.87 $ 0.73 $ 1.12
Cash Dividends(4)...................... 0.52 0.46 0.41 0.33 0.27
Book Value at Year-end................. 9.28 8.81 9.13 8.45 7.95
============================================================================================================================
Other Data at Year-end:
Number of Shareholders................. 3,208 3,192 3,202 2,985 2,893
Number of Employees.................... 405 416 388 351 418
Weighted Average Number of Shares (3).. 10,485,818 10,632,589 10,643,389 10,635,464 10,627,053
============================================================================================================================
Selected Performance Ratios:
Return on Assets....................... 0.49% 0.94% 1.00% 0.89% 1.37%
Return on Equity....................... 5.52% 9.56% 9.78% 9.01% 14.82%
Equity to Assets....................... 9.01% 8.87% 10.20% 10.03% 10.00%
Dividend Payout........................ 98.54% 50.04% 36.09% 38.10% 21.38%
Net Charge-offs to Average Loans....... 0.27% 0.23% 0.27% 0.04% 0.14%
Allowance for Loan Losses to Loans..... 1.31% 1.23% 1.34% 1.57% 1.52%
Net Interest Margin.................... 3.57% 3.87% 4.02% 3.99% 3.80%
<FN>
(1) In 2000, the Company reclassified out-of-market, subprime residential mortgage loans with a book value of $69.8 million
as held for sale. The difference between book value and market value resulted in a $5.2 million allowance for market
loss on loans held for sale.
(2) In 1997, 1ST BANCORP incurred a $1.3 million one-time special SAIF assessment. In 1996, 1ST BANCORP realized a gain of
$7.3 million on the sale of branch offices.
(3) Share and Per share data has been retroactively adjusted to give effect for stock dividends and splits, and excludes
the dilutive effect of stock options.
(4) Cash dividends represent historical dividends declared per share without retroactive restatement for poolings.
</FN>
- 9 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FORWARD-LOOKING STATEMENTS
This Item contains statements relating to future results of the Company that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied therein as a result of certain risks and
uncertainties, including those risks and uncertainties expressed in this Item 7
and those risks and uncertainties that are described in Item 1 of this report,
"Business," under the caption "Forward-Looking Statements," which is
incorporated herein by reference.
INTRODUCTION AND OVERVIEW
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliated
community banks with 27 banking offices and 5 full-service independent insurance
agencies in the eight contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The Company's lines of
business include retail and commercial banking, mortgage banking, trust and
brokerage services, title insurance, and a full range of personal and corporate
property and casualty insurance products.
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 1998
through 2000 and its financial condition as of December 31, 2000 and 1999. This
information should be read in conjunction with the accompanying consolidated
financial statements and footnotes contained elsewhere in this report.
MERGERS AND ACQUISITIONS
In October 2000, the Company completed a merger with Holland Bancorp, Inc.
Holland Bancorp was merged with and into the Company, with the simultaneous
merger of Holland's sole bank subsidiary, The Holland National Bank, into the
Company's subsidiary, The German American Bank. The Holland National Bank
operated four banking offices in Dubois County, Indiana. This merger was
accounted for as a pooling of interests and prior period financial information
has been restated accordingly.
In May 2000, the Company acquired the Fleck Insurance Agency, Inc. of Jasper,
Indiana. The Fleck Agency was merged into The Doty Agency, Inc. The Fleck Agency
was a general multi-line, full-service insurance agency with one office in
Jasper, Indiana. This merger was accounted for as a purchase. Accordingly,
operating results of the Fleck Agency are included only after the date of
merger.
In January 1999, the Company completed a merger with 1ST BANCORP of Vincennes,
Indiana. 1ST BANCORP's subsidiaries included First American Bank (formerly known
as First Federal Bank); First Financial Insurance Agency, Inc.; and First Title
Insurance Company. 1ST BANCORP's thrift operations through First American Bank
included mortgage banking activities, a heavy concentration of residential real
estate mortgages in the loan portfolio, and a heavy concentration of borrowings
as a long-term funding source. As such, the composition of 1ST BANCORP's loan
portfolio, funding sources, allowance for loan losses, and operating results
differed significantly from that of the Company in periods prior to the merger.
This merger was accounted for as a pooling of interests and prior to 1999, 1ST
BANCORP's financial statements were prepared on a June 30 fiscal year-end.
Accordingly, the Company's calendar period financial statements for periods
prior to 1999 have been restated to include 1ST BANCORP fiscal period financial
results.
Also in January 1999, the Company completed a merger with The Doty Agency, Inc.
of Petersburg, Indiana. Doty is a general multi-line, full-service insurance
agency and has offices in Gibson, Knox and Pike counties in Indiana. This merger
was accounted for as a pooling of interests. Prior years' results exclude the
effect of the merger, as restatement would not have had a material impact on
overall financial results.
In May 1999, the Company acquired Smith and Bell of Vincennes, Indiana. Smith
and Bell was a general multi-line, full-service insurance agency with offices in
Knox County, Indiana. This merger was accounted for as a purchase. Accordingly,
operating results of Smith and Bell are included only after the date of merger.
- 10 -
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NET INCOME
Late in the fourth quarter of 2000, the Company initiated a repositioning of its
balance sheet within the mortgage banking component of the Company's operations
to facilitate a strengthening of the overall credit quality within the loan
portfolio, to allow for a reduction of the Company's wholesale funding and to
balance more evenly the level of interest rate risk between loans, deposits, and
other funding vehicles. This repositioning primarily involves the transfer of
the mortgage banking segment's mortgage loan portfolio to a larger bank
affiliate, subject to regulatory approval. In addition, approximately $69.8
million of subprime, out-of-market mortgage loans were reclassified as
held-for-sale in December 2000. The sale of these loans was completed in
February 2001, and the Company no longer originates these types of loans.
The recognition of an increased provision for loan losses for these types of
loans and the difference between the book value and market value of the loans
transferred to held-for-sale had a significant impact on earnings. Net income
for 2000 was $5,288,000 or $0.50 per share as compared to 1999 net income of
$9,354,000 or $0.88 per share. Net income for 1999 was $9,354,000 or $0.88 per
share compared to $9,222,000 or $0.87 per share reported for 1998. An increase
in net interest income and an expansion of the Company's insurance operation
were primarily responsible for the increased net income in 1999. These increases
were partially offset by an increase in loan loss provision and higher personnel
costs.
NET INTEREST INCOME
Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. Several factors contribute to
the determination of net interest income and net interest margin, including the
volume and mix of earning assets, interest rates, and income taxes. Many factors
affecting net interest income are subject to control by management policies and
actions. Factors beyond the control of management include the general level of
credit demand, Federal Reserve Board monetary policy, and changes in tax laws.
Net interest income in 2000 declined $718,000 or 2% from 1999 results while 1999
net interest income increased $1,518,000 or 5% over 1998. Net interest margin is
tax-equivalent net interest income expressed as a percentage of average earning
assets. For 2000 the net interest margin was 3.57% compared with 3.87% for 1999
and 4.02% for 1998.
The Company's net interest margin declined in 2000 and 1999, as did net interest
income in 2000. The decline in net interest margin resulted from a combination
of flat loan yields and loan growth, and increased costs of wholesale funding to
offset declines in core deposits. Wholesale funding represented a total of 35%
of total funding sources for 2000 compared with 27% of funding sources for 1999.
Further, the mortgage banking division's use of wholesale funding sources in a
rising interest rate environment reduced the division's net interest margin by
approximately 60 basis points in 2000 compared with 1999. Also contributing to
the increased cost of funds was the general rise in interest rates during the
latter half of 1999 and first half of 2000.
The Company's employment of various asset growth strategies during late 1998 and
throughout 1999 also contributed to the decline in the net interest margin.
These asset growth strategies consisted of affiliate banks investing proceeds
from FHLB borrowings in investment securities in order to more effectively
utilize capital in excess of requirements. While these strategies increased the
dollar amount of net interest income, they have net interest margins ranging
from 1.00% to 1.50%, and thus reduce the overall net interest margin percentage.
The increase in net interest income during 1999 was largely attributable to loan
growth. While net interest income increased the net interest margin declined.
The decline in net interest margin was attributable to a more competitive
pricing environment for loans and deposits and an increased reliance on
wholesale funding sources.
- 11 -
The following table summarizes net interest income (on a tax-equivalent basis)
for each of the past three years. For tax-equivalent adjustments, an effective
tax rate of 34% was used for all years presented (1).
Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Principal Income/ Yield/ Principal Income/ Yield/ Principal Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
Federal Funds Sold and Other
Short-term Investments..... $ 8,843 $ 496 5.61% $ 28,927 $ 1,403 4.85% $ 40,230 $ 2,227 5.54%
Securities:
Taxable.................... 160,653 11,195 6.97% 158,647 10,278 6.48% 142,585 8,962 6.29%
Non-taxable................ 66,345 5,230 7.88% 57,706 4,592 7.96% 51,933 4,397 8.47%
Total Loans and Leases (2).... 766,533 64,326 8.39% 691,250 57,699 8.35% 628,254 55,427 8.82%
----------- --------- ---------- --------- ---------- ---------
TOTAL INTEREST
EARNING ASSETS............. 1,002,374 81,247 8.11% 936,530 73,972 7.90% 863,002 71,013 8.23%
----------- --------- ---------- --------- ---------- ---------
Other Assets.................. 76,851 72,018 65,306
Less: Allowance for Loan Losses (9,132) (8,787) (8,558)
----------- ---------- ----------
TOTAL ASSETS.................. $ 1,070,093 $ 999,761 $ 919,750
=========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Demand Deposits............... $ 71,996 $ 1,173 1.63% $ 85,158 $ 1,635 1.92% $ 73,513 $ 1,375 1.87%
Savings Deposits.............. 122,691 4,644 3.79% 116,365 3,593 3.09% 110,818 3,624 3.27%
Time Deposits................. 468,048 26,349 5.63% 463,482 24,475 5.28% 451,513 25,161 5.57%
FHLB Advances and
Other Borrowings........... 213,792 13,480 6.31% 147,915 8,041 5.44% 110,942 6,155 5.55%
----------- --------- ---------- --------- ---------- ---------
TOTAL INTEREST-BEARING
LIABILITIES................ 876,527 45,646 5.21% 812,920 37,744 4.64% 746,786 36,315 4.86%
----------- --------- ---------- --------- ---------- ---------
Demand Deposit Accounts....... 86,500 78,148 64,556
Other Liabilities............. 11,278 10,838 14,085
----------- ---------- ----------
TOTAL LIABILITIES............. 974,305 901,906 825,427
----------- ---------- ----------
Shareholders' Equity.......... 95,788 97,855 94,323
----------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $ 1,070,093 $ 999,761 $ 919,750
=========== ========== ==========
NET INTEREST INCOME........... $ 35,601 $ 36,228 $ 34,698
========= ========= =========
NET INTEREST MARGIN........... 3.57% 3.87% 4.02%
<FN>
(1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was
fully taxable.
(2) Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees
of $952, $948, and $1,286 for 2000, 1999, and 1998, respectively.
</FN>
- 12 -
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rates:
Net Interest Income - Rate/Volume Analysis:
(Tax-Equivalent basis, dollars in thousands)
2000 compared to 1999 1999 compared to 1998
Increase/(Decrease) Due to (1) Increase/(Decrease) Due to (1)
-----------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------------------
Interest Income:
Federal Funds Sold and Other
Short-term Investments............. $(1,098) $191 $(907) $(572) $(252) $ (824)
Taxable Securities..................... 131 786 917 1,034 282 1,316
Nontaxable Securities ................. 685 (165) 520 470 (275) 195
Loans and Leases....................... 6,315 430 6,745 5,363 (3,091) 2,272
------------------------------------------------------------------------------------------
Total Interest Income..................... 6,033 1,242 7,275 6,295 (3,336) 2,959
------------------------------------------------------------------------------------------
Interest Expense:
Savings and Interest-bearing Demand.... (182) 771 589 452 (223) 229
Time Deposits.......................... 243 1,631 1,874 655 (1,341) (686)
FHLB Advances and Other Borrowings..... 4,002 1,437 5,439 2,013 (127) 1,886
------------------------------------------------------------------------------------------
Total Interest Expense.................... 4,063 3,839 7,902 3,120 (1,691) 1,429
------------------------------------------------------------------------------------------
Net Interest Income....................... $1,970 $(2,597) $(627) $3,175 $(1,645) $1,530
==========================================================================================
<FN>
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
See the Company's Average Balance Sheet and the discussions headed USES OF
FUNDS, SOURCES OF FUNDS, AND LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for
further information on the Company's net interest income, net interest margin,
and interest rate sensitivity position.
</FN>
PROVISION FOR LOAN LOSSES
The Company provides for loan losses through regular provisions to the allowance
for loan losses, which totaled $2,231,000, $1,749,000 and $1,344,000 in 2000,
1999 and 1998, respectively. These provisions were made at a level deemed
necessary by management to absorb estimated losses in the loan portfolio. The
increase in provision in 2000 was due to an increase in charge-off experience in
the mortgage division's sub-prime, out-of-market residential mortgage loan
portfolio and overall loan growth throughout the Company. The increase in 1999
resulted from loan growth and an increase in the allowance for the mortgage
division's sub-prime, out-of-market residential mortgage loan portfolio. As
discussed previously, the Company sold its subprime, out-of-market residential
real estate portfolio in February 2001, and the Company no longer originates
these types of loans.
A detailed evaluation of the adequacy of the allowance for loan losses is
completed quarterly by management, the results of which will be used to
determine provisions for loan losses. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Refer also to the
section entitled LENDING AND LOAN ADMINISTRATION for further discussion of the
provision and allowance for loan losses.
NON-INTEREST INCOME
Non-interest income, excluding securities gains (losses) and the net gains on
sales of loans and related assets and provision for losses on loans
held-for-sale, increased $1,354,000 or 22% in 2000 after an increase of
$1,726,000 or 39% in 1999. Increases in the Company's insurance commissions and
- 13 -
fees and the expanded customer utilization of brokerage services resulted in the
overall increase in 2000. The increase in 1999 was primarily attributable to the
Company's expanded insurance operations. Including securities gains (losses) and
the net gains on sales of loans and related assets and provision for losses on
loans held-for-sale, non-interest income declined 60.2% in 2000 and increased
21.6% in 1999. The decline in 2000 is attributable to the provision for loan
losses related to the mortgage division's sub-prime, out-of-market residential
mortgage loans that were reclassified as held-for-sale in December 2000 and sold
in February 2001.
% Change From
Prior Year
Non-interest Income (dollars in thousands) ----------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Trust and Investment Product Fees....................... $ 1,373 $ 836 $ 834 64.2% 0.2%
Service Charges on Deposit Accounts..................... 2,139 1,934 1,778 10.6 8.8
Insurance Commissions & Fees (1)........................ 2,723 1,971 714 38.2 176.1
Other Operating Income.................................. 1,314 1,454 1,143 (9.6) 27.2
------- -------- --------
Subtotal ........................................... 7,549 6,195 4,469 21.9 38.6
Net Gains on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held for Sale..... (4,998) 196 743 n/m(2) (73.6)
Securities Gains (Losses), net.......................... (8) (6) 37 33.3 (116.2)
------- -------- --------
TOTAL NON-INTEREST INCOME........................... $ 2,543 $ 6,385 $ 5,249 (60.2) 21.6
======= ======== ========
<FN>
(1) 1998 results exclude the impact of 1999 and 2000 insurance acquisitions. See Note 18 to the Consolidated Financial
Statements.
(2) n/m = not meaningful
</FN>
In an effort to provide customers an opportunity to fulfill all their financial
needs through the Company's affiliate banks and associated financial services
companies, the Company completed strategic insurance acquisitions in 1999 and
2000. As a result, the Company's insurance commissions and fees have grown
significantly. Customer utilization of the Company's investment services
expanded significantly during 2000 resulting in a 91% growth in brokerage
service revenue. Brokerage services income totaled $1,014,000 in 2000 compared
to $531,000 in 1999.
Net gains on sales of loans and related assets, and the provision for losses on
loans held-for-sale are derived predominantly from the Company's mortgage
banking division. These gains (losses), exclusive of the market adjustment for
subprime loans reclassified in December 2000, remained relatively flat in 2000
at $222,000 compared to $196,000 in 1999. The provision for loss on the subprime
loans reclassified in December 2000 totaled $5,220,000 resulting in the net loss
of $4,998,000 during 2000. The gain on sale of loans and related assets declined
74% in 1999 from 1998 as a result of lower volumes in residential real estate
loan production and correspondingly lower levels of loan sales caused by a
rising market interest rate environment.
NON-INTEREST EXPENSE
Non-interest expense increased $1,881,000 or 7% in 2000 following an increase of
$2,606,000 or 11% during 1999. The increase in 2000 resulted largely from
increased personnel costs, merger and acquisition related expenses and
collection costs primarily associated with the subprime, out-of-market
residential loan portfolio. The increase in 1999 resulted from insurance
acquisitions, establishment of the corporate identity program at a newly
acquired affiliate bank, implementing wide-area network technology, and Year
2000 preparation.
% Change From
Prior Year
Non-interest Income (dollars in thousands) ----------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Salaries and Employee Benefits....................... $ 15,454 $ 14,308 $ 12,872 8.0% 11.2%
Occupancy, Furniture and Equipment Expense........... 3,900 3,792 3,479 2.8 9.0
FDIC Premiums........................................ 187 192 175 (2.6) 9.7
Data Processing Fees................................. 884 991 992 (10.8) (0.1)
Professional Fees ................................... 1,333 912 1,052 46.2 (13.3)
Advertising and Promotion............................ 870 963 737 (9.7) 30.7
Supplies............................................. 798 861 719 (7.3) 19.7
Other Operating Expenses............................. 4,812 4,338 3,725 10.9 16.5
-------- --------- ---------
TOTAL NON-INTEREST EXPENSE....................... $ 28,238 $ 26,357 $ 23,751 7.1 11.0
======== ========= =========
- 14 -
Salaries and Employee Benefits comprised approximately 55% of total non-interest
expense in 2000, and 54% in 1999 and 1998, respectively. Salaries and Employee
Benefits increased 8% in 2000 and 11% during 1999. In 2000, salaries increased
approximately 7% due to merit increases and staff additions to build necessary
infrastructure in technology and support functions. In addition, employee
medical insurance benefits increased 8%. Finally, the significant increase in
brokerage activity and fees resulted in increased incentive compensation in the
financial services function. The increase in Salaries and Employee Benefits
during 1999 was largely attributable to Company's insurance operations acquired
in 1999.
Occupancy, furniture and equipment expenses increased by 3% in 2000 following a
9% increase in 1999. The increase in both 2000 and 1999 includes additional
depreciation on new and recently renovated banking facilities. These facilities
were completed and placed into service in the latter half of 1999 and first half
of 2000. Also contributing to the increases was the continued implementation of
a wide-area network and associated operating and application systems at the
retail banking affiliates. These systems are expected to provide long-term
benefits with regard to improved quality of customer service and control of
personnel expenses, and in some cases were in preparation for the Year 2000.
Professional fees increased 46% in 2000 due in large part to merger and
acquisition activities in 2000. During 1999, professional fees declined 13%. A
significant portion of the costs associated with acquisitions completed in early
1999 was expensed during 1998, resulting in the lower level of professional fees
in 1999.
Advertising and promotion expenses declined 10% in 2000 following an increase of
31% in 1999. Increases in 1999 were attributable to the introduction of the
corporate identity program at new affiliates and to the implementation of a
customer information system for all banking affiliates.
Other operating expenses increased 11% during 2000 due primarily to increased
collection costs associated with subprime, out-of-market residential real estate
loans in the Company's mortgage banking division. Total collection costs
increased $345,000 or 119% during 2000. Other operating expenses increased 17%
during 1999. The 1999 increase was attributable to telecommunication charges,
collection costs associated with sub-prime residential mortgage loans, and costs
related to recording the survivor benefit obligation related to the death of a
director in 1999 in accordance with the directors' deferred compensation plan.
PROVISION FOR INCOME TAXES
The Company records a provision for current income taxes payable, along with a
provision for deferred taxes payable in the future. Deferred taxes arise from
temporary differences, which are items recorded for financial statement purposes
in a different period than for income tax returns. The major item affecting the
difference between the Company's effective tax rate recorded on its financial
statements and the federal statutory rate of 34% is interest on tax-exempt
investments and loans. Other components affecting the Company's effective tax
rate include affordable housing tax credit investments, state income taxes and
non-deductible merger costs. The Company's effective tax rate was 8.0%, 26.2%
and 29.2%, respectively, in 2000, 1999, and 1998. The lower effective tax rate
in 2000 was attributable to a lower level of taxable income due primarily to the
provision for losses on loans held for sale, a state tax law clarification in
2000 which allowed a portion of the Company's revenues to be apportioned outside
Indiana and an increase in the level of tax-exempt investments and affordable
housing credits. Note 11 to the consolidated financial statements provides
additional details relative to the Company's income tax provision.
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
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. The prompt corrective action regulations provide five
classifications, including "well-capitalized", and "critically
undercapitalized", although these terms are not used to represent overall
financial condition. The Company and all affiliate Banks at year-end 2000 were
categorized as "well-capitalized". See Note 9 to the consolidated financial
statements for actual and required capital ratios.
The Company continues to maintain a strong capital position. Shareholders'
equity totaled $97.3 million and $93.7 million at December 31, 2000 and 1999,
respectively. Total equity represented 9.0% and 8.9%, respectively, of year-end
total assets. The $3.6 million increase in shareholder's equity was primarily
attributable to an increase in market value of the Company's securities
available-for-sale.
The Company paid cash dividends of $5.2 million in 2000 and $4.7 million in
1999. The increase in 2000 dividends paid includes an increase in dividends per
share and an increased number of shares outstanding.
- 15 -
The Company implemented a stock repurchase plan during 1999, pursuant to which
it repurchased 216,885 shares of stock (as restated for subsequent 5% stock
dividends) for an aggregate of $4.3 million.
At December 31, 2000 the market value depreciation of securities
available-for-sale improved 80.7% or $3.2 million, net of tax, from year-end
1999. This increase in market value is recorded as an increase of shareholders'
equity, and was due to a decline in interest rates during latter part of 2000.
USES OF FUNDS
- --------------------------------------------------------------------------------
LOANS
Total loans at year-end 2000 declined by $31.8 million or 4%, primarily due to
the reclassification of subprime, out-of-market residential real estate loans to
held-for-sale in December 2000. Excluding this reclassification, total loans
increased $37.9 million or 5% during 2000. During 1999, loans grew by $101.5
million or 16%. During 2000 and 1999 growth was achieved across all segments of
the loan portfolio. During 2000, commercial and industrial loans grew 13%,
agricultural and poultry loans grew by 14% and consumer loans grew by 11%.
Excluding the reclassification of subprime residential real estate loans held
for sale, residential real estate loans remained stable with a modest 2%
decline. The Company's loan portfolio is diversified, with the heaviest
concentration in residential real estate loans. Residential real estate
represents 44% of the loan portfolio while commercial and industrial loans
represent 27%, consumer loans 19%, and agriculture and poultry loans 10%. The
Company's commercial lending is extended to various industries, including hotel,
agribusiness and manufacturing, as well as health care, wholesale, and retail
services.
Loan Portfolio December 31,
dollars in thousands 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Residential Mortgage Loans................. $ 312,199 $ 388,514 $ 323,045 $ 275,273 $ 265,720
Agricultural and Poultry................... 74,111 65,098 64,195 61,742 65,516
Commercial and Industrial Loans............ 188,213 166,476 141,031 125,251 127,549
Consumer Loans............................. 135,596 121,865 112,254 98,749 85,276
----------- ----------- ----------- ----------- ----------
Total Loans............................. 710,119 741,953 640,525 561,015 544,061
Less: Unearned Income................... (375) (344) (709) (1,498) (1,782)
----------- ---------- ----------- ----------- ----------
Subtotal................................ 709,744 741,609 639,816 559,517 542,279
Less: Allowance for Loan Losses......... (9,274) (9,101) (8,559) (8,803) (8,267)
----------- ---------- ----------- ----------- ----------
Loans, net.............................. $ 700,470 $ 732,508 $ 631,257 $ 550,714 $ 534,012
=========== =========== =========== =========== ==========
Ratio of Loans to Total Loans:
Residential Mortgage Loans................. 44% 52% 50% 49% 49%
Agricultural and Poultry................... 10% 9% 10% 11% 12%
Commercial and Industrial Loans............ 27% 23% 22% 22% 23%
Consumer Loans............................. 19% 16% 18% 18% 16%
----------- ----------- ----------- ----------- ----------
Totals.................................. 100% 100% 100% 100% 100%
=========== =========== =========== =========== ==========
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Commercial extensions of credit outside this market area are generally
concentrated in real estate loans within a 120 mile radius of the Company's
primary market, are granted on a selective basis, and are generally further
limited to loans guaranteed by either the Small Business Administration (SBA) or
the Farm Service Agency (FSA).
With the acquisition of 1ST BANCORP, and its thrift subsidiary First Federal
Bank in January 1999, the Company acquired a mortgage banking operation and a
loan portfolio heavily concentrated in residential real estate loans. First
Federal concentrated primarily on residential real estate lending, but at the
same time offered consumer and commercial loans in its local market. Residential
real estate loans were originated by its retail office in its primary market
areas, as well as outside its designated lending areas through loan production
offices and a network of correspondent lenders. The Company discontinued new
sub-prime, out-of-market residential real estate lending in 1999, and the
portfolio of these loans was sold in February 2001.
- 16 -
The following table indicates the amounts of loans (excluding residential
mortgages on 1-4 family residences and consumer loans) outstanding as of
December 31, 2000 which, based on remaining scheduled repayments of principal,
are due in the periods indicated (dollars in thousands).
Within One to Five After
One Year Years Five Years Total
-------- ----- ---------- -----
Commercial, Agricultural and Poultry............. $147,473 $93,894 $20,957 $262,324
Interest Sensitivity
--------------------
Fixed Rate Variable Rate
Loans maturing after one year.................... $62,171 $52,680
INVESTMENTS
The investment portfolio is a principal source for funding the Company's loan
growth and other liquidity needs. The Company's securities portfolio consists of
money market securities, uncollateralized U.S. Treasury and federal agency
securities, municipal obligations of state and political subdivisions,
asset-/mortgage-backed securities issued by U.S. government agencies and other
intermediaries, and corporate investments. Money market securities include
federal funds sold, interest-bearing balances with banks, and other short-term
investments. The composition of the year-end balances in the investment
portfolio is presented in Note 2 to the Consolidated Financial Statements and in
the table below:
Investment Portfolio, at Amortized Cost December 31,
dollars in thousands 2000 % 1999 % 1998 %
---- - ---- - ---- -
Federal Funds Sold and Short-term Investments.... $ 2,955 1.4% $ 11,266 4.7% $ 39,075 16.1%
U.S. Treasury and Agency Securities.............. 96,315 44.2 97,253 40.8 90,110 37.3
Obligations of State and Political Subdivisions.. 54,150 24.9 57,190 24.0 58,271 24.1
Asset- and Mortgage-backed Securities............ 52,365 24.0 62,417 26.2 54,378 22.5
Other Securities................................. 12,077 5.5 10,368 4.3 --- ---
---------- ----- ---------- ----- -------- -----
Total Securities Portfolio................... $ 217,862 100.0% $ 238,494 100.0% $241,834 100.0%
========== ===== ========== ===== ======== =====
In 2000 and 1999 the investment portfolio mix was relatively balanced and
remained stable in composition. During 2000, the decline in asset- and
mortgage-backed securities resulted from contractual repayments of the
underlying collateral. The increase in other securities was primarily in
tax-advantaged equity securities. During 1999, the increase in agencies,
mortgage-backed and other securities was the result of match-funded asset growth
strategies funded by FHLB advances. The overall decrease in investments was used
to fund loan growth in both 2000 and 1999.
Investment Securities, at Carrying Value
dollars in thousands
December 31,
Securities Held-to-Maturity: 2000 1999 1998
---- ---- ----
U.S. Treasury and other U.S.
Government Agencies and Corporations.................... $ --- $ 1,048 $ 21,908
State and Political Subdivisions............................. 28,093 30,593 29,168
Asset- / Mortgage-backed Securities.......................... 361 903 1,497
----------- ----------- -----------
Subtotal of Securities Held-to-Maturity................. 28,454 32,544 52,573
----------- ----------- -----------
Securities Available-for-Sale:
U.S. Treasury and other U.S.
Government Agencies and Corporations.................... $ 95,102 $ 92,326 $ 68,386
State and Political Subdivisions............................. 26,669 26,487 30,455
Asset-/ Mortgage-backed Securities........................... 51,336 58,967 52,686
Equity Securities............................................ 12,081 10,368 ---
----------- ----------- -----------
Subtotal of Securities Available-for-Sale............... 185,188 188,148 151,527
----------- ----------- -----------
Total Securities.................................... $ 213,642 $ 220,692 $ 204,100
=========== =========== ===========
- 17 -
The Company's $185 million available-for-sale portion of the investment
portfolio provides an additional funding source for the Company's liquidity
needs and for asset/liability management requirements. Although management has
the ability to sell these securities if the need arises, their designation as
available-for-sale should not be interpreted as an indication that management
anticipates such sales.
In conjunction with the adoption of FAS 133 on January 1, 2001, the Company
reclassified investment securities from the held-to-maturity portfolio to the
available-for-sale portfolio. The reclassified securities had a carrying value
of $6.2 million and a market value of $6.4 million with a net positive effect on
equity of $108,000 at the time of transfer.
SOURCES OF FUNDS
- --------------------------------------------------------------------------------
The Company's primary source of funding is its base of core customer deposits.
Core deposits consist of demand deposits, savings, interest-bearing checking,
money market accounts, and certificates of deposit of less than $100,000. Other
sources of funds are certificates of deposit of $100,000 or more, brokered
deposits, overnight borrowings from other financial institutions and securities
sold under agreement to repurchase. The membership of the Company's affiliate
banks in the Federal Home Loan Bank System (FHLB) provides a significant
additional source for both long and short-term collateralized borrowings. The
following pages contain a discussion of changes in these areas.
The table below illustrates changes between years in the average balances of all
funding sources:
Funding Sources - Average Balances % Change From
dollars in thousands Prior Year
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Demand Deposits
Non-interest Bearing............... $ 86,500 $ 78,148 $ 64,556 10.7% 21.1%
Interest Bearing................... 71,996 85,158 73,513 15.5) 15.8
Savings Deposits....................... 51,073 52,361 59,750 (2.5) (12.4)
Money Market Accounts.................. 71,618 64,004 51,068 11.9 25.3
Other Time Deposits.................... 349,675 375,421 374,022 (6.9) 0.4
---------- ----------- ----------
Total Core Deposits................ 630,862 655,092 622,909 (3.7) 5.2
Certificates of Deposits of $100,000 or
more and Brokered Deposits......... 118,373 88,061 77,491 34.4 13.6
FHLB Advances and
Other Borrowings................... 213,792 147,915 110,942 44.5 33.3
---------- ----------- ----------
Total Funding Sources.............. $ 963,027 $ 891,068 $ 811,342 8.1% 9.8%
========== =========== ==========
Maturities of time certificates of deposit of $100,000 or more are summarized as
follows:
3 Months 3 thru 6 thru Over
Or Less 6 Months 12 Months 12 Months Total
------------------------------------------------------------
December 31, 2000...................... $61,052 11,751 17,429 11,741 $101,973
CORE DEPOSITS
The Company's level of average core deposits declined 4% in 2000 after growth of
5% in 1999. The Company's ability to attract core deposits continues to be
influenced by competition and the interest rate environment, as well as the
increased availability of alternative investment products.
Demand, savings and money market deposits have provided a relatively stable
source of funding for the company, despite fluctuations in the various
categories. Demand, savings and money market deposits totaled $281.2 million or
45% of core deposits in 2000 compared with $279.7 million or 43% in 1999 and
$248.9 million or 40% in 1998.
Other time deposits consist of certificates of deposits in denominations of less
than $100,000. These deposits declined 7% in 2000 and comprised 55% of average
core deposits. Other time deposits remained stable in 1999 and 1998 comprising
57% and 60% of average core deposits, respectively.
- 18 -
OTHER FUNDING SOURCES
Federal Home Loan Bank advances and other borrowings represent the Company's
most significant source of other funding. Average borrowed funds increased $65.9
million or 45% during 2000 and $37.0 million or 33% in 1999. The additional
reliance on borrowed funds in 2000 and 1999 was to fund loan growth and
supplement core deposits from the Company's primary market areas. In 1999, $20
million of the increase in borrowed funds was used in match-funded asset growth
strategies in the investment portfolio.
Certificates of deposits in denominations of $100,000 or more and brokered
deposits are an additional source of other funding. Large denomination
certificates and brokered deposits increased 34% in 2000 and 14% in 1999. In
addition to borrowed funds, these certificates served to fund loan growth and
supplement core deposits. Large certificates and brokered deposits comprised 12%
and 10% of total funding sources in 2000 and 1999.
The Company also utilizes short-term funding sources from time to time. These
sources consist of overnight federal funds purchased from other financial
institutions, secured repurchase agreements that generally mature within 30
days, and secured overnight variable rate borrowings from the FHLB. These
borrowings represent an important source of short-term liquidity for the
Company.
Long-term debt is in the form of FHLB advances, which are secured by the pledge
of certain investment securities and residential mortgage loans. These advances
were used to fund loan growth in both 2000 and 1999 and to fund asset growth
strategies in the investment portfolio in 1999. See Note 8 to the Consolidated
Financial Statements for further information.
RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Company is exposed to various types of business risk on an on-going basis.
These risks include credit risk, liquidity risk and interest rate risk. Various
procedures are employed at the Company's affiliate banks to monitor and mitigate
risk in their loan and investment portfolios, as well as risks associated with
changes in interest rates. Following is a discussion of the Company's
philosophies and procedures to address these risks.
LENDING AND LOAN ADMINISTRATION
Primary responsibility and accountability for day-to-day lending activities
rests with the Company's affiliate banks. Loan personnel at each bank have the
authority to extend credit under guidelines approved by the bank's board of
directors. Executive and board loan committees active at each bank serve as
vehicles for communication and for the pooling of knowledge, judgment and
experience of its members. These committees provide valuable input to lending
personnel, act as an approval body, and monitor the overall quality of the
banks' loan portfolios. The Corporate Loan Committee, comprised of members of
the Company's executive officers and board of directors, strive to ensure a
consistent application of the Company's lending policies. The Company also
maintains a comprehensive risk-weighting and loan review program for its
affiliate banks, which includes quarterly reviews of problem loans,
delinquencies and charge-offs. The purpose of this program is to evaluate loan
administration, credit quality, loan documentation and the adequacy of the
allowance for loan losses.
The Company maintains an allowance for loan losses to cover probable credit
losses identified during its loan review process. The allowance is increased by
the provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the required level of allowance for loan losses using past
loan loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
The allowance for loan losses is comprised of: (a) specific reserves on
individual credits; (b) allocated reserves for certain loan categories and
industries, large and out-of-market loans, and overall historical loss
experience; and (c) unallocated reserves based on trends in the type and volume
of the loan portfolios, current economic conditions, and other factors. Specific
reserves are provided for credits when: (a) the customer's cash flow or net
worth appears insufficient to repay the loan; (b) the loan has been criticized
in a regulatory examination; (c) the loan is on non-accrual; or, (d) other
reasons where the ultimate collectibility of the loan is in question, or the
loan characteristics require special monitoring.
- 19 -
Allowance for Loan Losses
dollars in thousands Year Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance of allowance for possible
losses at beginning of period.......................... $ 9,101 $ 8,559 $ 8,803 $ 8,267 $ 8,670
Allowance of Acquired subsidiaries & Adjustments
to Conform Fiscal Years................................ --- 356 80 --- ---
Loans charged-off:
Residential Mortgage Loans................................ 1,188 815 627 122 67
Agricultural and Poultry Loans ........................... 134 222 --- --- 286
Commercial and Industrial Loans........................... 347 192 348 407 486
Consumer Loans............................................ 748 823 1,080 545 331
--------- --------- --------- -------- --------
Total Loans charged-off................................ 2,417 2,052 2,055 1,074 1,170
Recoveries of previously charged-off Loans:
Residential Mortgage Loans................................ 14 100 76 1 27
Agricultural and Poultry Loans............................ 29 135 19 66 125
Commercial and Industrial Loans........................... 120 42 77 668 128
Consumer Loans............................................ 196 212 215 96 59
--------- --------- --------- -------- --------
Total Recoveries....................................... 359 489 387 831 339
--------- --------- --------- -------- ---------
Net Loans recovered / (charged-off)...................... (2,058) (1,563) (1,668) (243) (831)
Additions to allowance charged to expense................. 2,231 1,749 1,344 779 428
--------- --------- --------- -------- --------
Balance at end of period.................................. $ 9,274 $ 9,101 $ 8,559 $ 8,803 $ 8,267
========= ========= ========= ======== ========
Net Charge-offs to Average Loans Outstanding.............. 0.27% 0.23% 0.27% 0.04% 0.14%
Provision for Loan Losses to Average Loans Outstanding.... 0.29% 0.25% 0.21% 0.13% 0.07%
Allowance for Loan Losses to Total Loans at Year-end...... 1.31% 1.23% 1.34% 1.57% 1.52%
The following table indicates the breakdown of the allowance for loan losses for
the periods indicated (dollars in thousands):
Residential Mortgage Loans................................ $ 2,106 $ 2,048 $ 1,315 $ 1,044 $ 773
Agricultural and Poultry.................................. 777 620 910 1,010 1,329
Commercial and Industrial Loans........................... 4,618 3,987 2,905 3,109 3,026
Consumer Loans............................................ 348 915 1,047 1,083 844
Unallocated............................................... 1,425 1,531 2,382 2,557 2,295
--------- --------- --------- -------- --------
Total Loans............................................... $ 9,274 $ 9,101 $ 8,559 $ 8,803 $ 8,267
========= ========= ========= ======== ========
The upward trend in net charge-offs is primarily related to sub-prime
out-of-market residential real estate loans at the Company's mortgage banking
division. The Company discontinued new sub-prime out-of-market residential real
estate lending during 1999, and the portfolio of these loans was sold, as
discussed previously. Refer also to the section entitled PROVISION FOR LOAN
LOSSES in the discussion regarding the RESULTS OF OPERATIONS.
NONPERFORMING ASSETS
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have
been renegotiated to provide for a reduction or deferral of interest or
principal because of deterioration in the financial condition of the borrower;
(c) loans past due ninety (90) days or more as to principal or interest; and,
(d) other real estate owned. Loans are placed on non-accrual status when
scheduled principal or interest payments are past due for 90 days or more or
when the borrower's ability to repay becomes doubtful. Uncollected interest
accrued in the current year is reversed against income at the time a loan is
placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if
deemed uncollectible. Exceptions to the non-accrual and charge-off policies are
made when the loan is well secured and in the process of collection.
- 20 -
The following table presents an analysis of the Company's non-performing assets.
The unfavorable trend in nonaccrual loans is primarily attributable to
sub-prime, out-of-market residential real estate loans. The repositioning of the
balance sheet regarding these types of loans during the fourth quarter of 2000
and subsequent sale of approximately $69 million in principal balance of loans
during the first quarter of 2001 is expected to mitigate the upward trend in
non-accrual loans. (This is a forward-looking statement; see the cautions
regarding "Forward-Looking Statements" included in Item 1 of this Report for
factors that could affect adversely the future levels of non-performing assets,
including non-accrual loans, which cautionary statement is herein incorporated
by reference). Approximately $1.1 million of the total other real estate owned
at year-end 2000 was attributable to properties acquired in satisfaction of
sub-prime, out-of-market residential real estate loans. Approximately $900,000
of the increase in other real estate owned in 1999 was related to one commercial
property.
Non-performing Assets December 31,
dollars in thousands 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonaccrual Loans.................................. $ 8,014 $ 7,237 $ 5,411 $ 3,568 $ 3,065
Past Due Loans.................................... 1,513 1,603 1,531 3,360 1,635
Restructured Loans................................ --- --- --- --- ---
-------- -------- -------- -------- --------
Total Nonperforming Loans..................... 9,527 8,840 6,942 6,928 4,700
Other Real Estate................................. 1,579 2,434 1,156 785 706
-------- -------- -------- -------- --------
Total Nonperforming Assets.................... $ 11,106 $ 11,274 $ 8,098 $ 7,713 $ 5,406
Non-performing Loans to Total Loans............... 1.34% 1.19% 1.08% 1.23% 0.86%
Allowance for Loan Losses to Nonperforming Loans.. 97.34% 102.95% 123.29% 127.06% 175.89%
Interest income recognized on nonperforming loans for 2000 was $517,000. The
gross interest income that would have been recognized in 2000 on nonperforming
loans if the loans had been current in accordance with their original terms is
$916,000. 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.
Accounting 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. The total dollar amount of impaired loans at December
31, 2000 was $4,806,000. For additional detail on impaired loans, see Note 3 of
the consolidated financial statements.
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is a measure of the Company's ability to fund new loan demand,
existing loan commitments and deposit withdrawals. The purpose of liquidity
management is to match sources of funds with anticipated customer borrowings and
withdrawals and other obligations to ensure a dependable funding base, without
unduly penalizing earnings. Failure to properly manage liquidity requirements
can result in the need to satisfy customer withdrawals and other obligations on
less than desirable terms. The liquidity of the parent company is dependent upon
the receipt of dividends from its bank subsidiaries, which are subject to
certain regulatory limitations explained in Note 9 to the consolidated financial
statements, included in Item 8 of this report. The affiliate banks' source of
funding is predominately core deposits, maturities of securities, repayments of
loan principal and interest, federal funds purchased, securities sold under
agreements to repurchase and borrowings from the Federal Home Loan Bank.
Interest rate risk is the exposure of the Company's financial condition to
adverse changes in market interest rates. In an effort to estimate the impact of
sustained interest rate movements to the Company's earnings, the Company
monitors interest rate risk through computer-assisted simulation modeling of its
net interest income. The Company's simulation modeling monitors the potential
impact to net interest income under various interest rate scenarios. The
Company's objective is to actively manage its asset/liability position within a
one-year interval and to limit the risk in any of the interest rate scenarios to
a reasonable level of tax-equivalent net interest income within that interval.
Funds Management Committees at the holding company and each affiliate bank
monitor compliance within established guidelines of the Funds Management Policy.
See the following section for further discussion regarding interest rate risk.
- 21 -
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk, as discussed above.
As discussed previously, the Company monitors interest rate risk by the use of
computer simulation modeling to estimate the potential impact on its net
interest income under various interest rate scenarios. Another method by which
the Company's interest rate risk position can be estimated is by computing
estimated changes in its net portfolio value ("NPV"). This method estimates
interest rate risk exposure from movements in interest rates by using interest
rate sensitivity analysis to determine the change in the NPV of discounted cash
flows from assets and liabilities. NPV represents the market value of portfolio
equity and is equal to the estimated market value of assets minus the estimated
market value of liabilities. Computations are based on a number of assumptions,
including the relative levels of market interest rates and prepayments in
mortgage loans and certain types of investments. These computations do not
contemplate any actions management may undertake in response to changes in
interest rates, and should not be relied upon as indicative of actual results.
In addition, certain shortcomings are inherent in the method of computing NPV.
Should interest rates remain or decrease below current levels, the proportion of
adjustable rate loans could decrease in future periods due to refinancing
activity. In the event of an interest rate change, prepayment levels would
likely be different from those assumed in the table. Lastly, the ability of many
borrowers to repay their adjustable rate debt may decline during a rising
interest rate environment.
The following table provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of December 31, 2000 the Company's estimated
NPV might be expected to decrease in the event of an increase in prevailing
interest rates, and might be expected to increase in the event of a decrease in
prevailing interest rates (dollars in thousands).
Interest Rate Sensitivity as of December 31, 2000
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
----- ---------
Changes
in Rates $ Amount % Change NPV Ratio Change
-------- -------- -------- --------- ------
+2%..............$ 63,512 (29.1)% 6.15% (219) b.p.
+1%.............. 77,666 (13.3) 7.37 (97) b.p.
Base............. 89,530 --- 8.34 ---
-1%.............. 98,983 10.6 9.06 72 b.p.
-2%.............. 102,910 14.9 9.30 96 b.p.
The above discussion, and the portions of "MANAGEMENT'S DISCUSSION AND ANALYSIS"
that are referenced in the above discussion contains statements relating to
future results of the Company that are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, simulation of the impact on net
interest income from changes in interest rates. Actual results may differ
materially from those expressed or implied therein as a result of certain risks
and uncertainties, including those risks and uncertainties expressed above,
those that are described in "MANAGEMENT'S DISCUSSION AND ANALYSIS" in Item 7 of
this report, and those that are described in Item 1 of this report, "Business,"
under the caption "Forward-Looking Statements," which discussions are
incorporated herein by reference.
- 22 -
Item 8. Financial Statements and Supplementary Data.
- --------------------------------------------------------------------------------
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, 2000 and 1999, 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, 2000. 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, 1999 and related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1999 and 1998 have been restated to
reflect the Holland Bancorp and 1ST BANCORP poolings of interests, as described
in Note 18. We did not audit the separate 1999 and 1998 financial statements of
Holland Bancorp or the separate 1998 financial statements of 1ST BANCORP as
reflected in the poolings of interests, which statements reflect (in thousands)
total assets of $64,006 and total liabilities of $57,808 for 1999, and net
income of $532 and $2,563 for 1999 and 1998. 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 Holland Bancorp for 1999 and 1998, and
for 1ST BANCORP for 1998, 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, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with generally accepted accounting principles.
Indianapolis, Indiana /s/ Crowe, Chizek and Company LLP
February 9, 2001 Crowe, Chizek and Company LLP
- 23 -
- --------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------------------------------------
December 31,
2000 1999
---- ----
ASSETS
Cash and Due from Banks...................................................... $ 26,987 $ 25,764
Federal Funds Sold and Other Short-term Investments.......................... 1,460 3,814
----------- -----------
Cash and Cash Equivalents................................................ 28,447 29,578
Interest-bearing Time Deposits with Banks.................................... 1,495 7,452
Securities Available-for-Sale, at Market..................................... 185,188 188,148
Securities Held-to-Maturity, at Cost......................................... 28,454 32,544
Loans Held for Sale.......................................................... 71,372 2,845
Loans ...................................................................... 710,119 741,953
Less: Unearned Income...................................................... (375) (344)
Allowance for Loan Losses................................................ (9,274) (9,101)
----------- -----------
Loans, Net................................................................... 700,470 732,508
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost............ 12,596 9,939
Premises, Furniture and Equipment, Net....................................... 21,065 21,034
Other Real Estate............................................................ 1,579 2,434
Intangible Assets............................................................ 2,147 2,161
Accrued Interest Receivable and Other Assets................................. 26,995 27,998
----------- -----------
TOTAL ASSETS......................................................... $ 1,079,808 $ 1,056,641
=========== ===========
LIABILITIES
Non-interest-bearing Deposits................................................ $ 89,146 $ 79,159
Interest-bearing Deposits.................................................... 646,424 672,269
----------- -----------
Total Deposits........................................................... 735,570 751,428
FHLB Advances and Other Borrowings........................................... 235,230 200,017
Accrued Interest Payable and Other Liabilities............................... 11,748 11,511
----------- -----------
TOTAL LIABILITIES.................................................... 982,548 962,956
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized.... 10,495 9,968
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.. --- ---
Additional Paid-in Capital................................................... 63,175 57,076
Retained Earnings............................................................ 24,353 30,588
Accumulated Other Comprehensive Income (Loss)................................ (763) (3,947)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY........................................... 97,260 93,685
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................... $ 1,079,808 $ 1,056,641
=========== ===========
End of period shares issued and outstanding.................................. $10,494,708 $ 9,968,121
See accompanying notes to consolidated financial statements.
- 24 -
- ---------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income
Dollars in thousands, except per share data
- ---------------------------------------------------------------------------------------------------------------
Years ended December 31,
2000 1999 1998
---- ---- ----
INTEREST INCOME
Interest and Fees on Loans............................................ $ 64,176 $ 57,423 $ 55,097
Interest on Federal Funds Sold and other Short-term Investments....... 496 1,403 2,227
Interest and Dividends on Securities:
Taxable........................................................... 11,195 10,278 8,962
Non-taxable....................................................... 3,452 3,031 2,902
-------- --------- --------
TOTAL INTEREST INCOME.......................................... 79,319 72,135 69,188
INTEREST EXPENSE
Interest on Deposits.................................................. 32,166 29,703 30,160
Interest on FHLB Advances and Other Borrowings........................ 13,480 8,041 6,155
-------- --------- --------
TOTAL INTEREST EXPENSE............................................ 45,646 37,744 36,315
-------- --------- --------
NET INTEREST INCOME................................................... 33,673 34,391 32,873
Provision for Loan Losses............................................. 2,231 1,749 1,344
-------- --------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................... 31,442 32,642 31,529
NON-INTEREST INCOME
Trust and Investment Product Fees..................................... 1,373 836 834
Service Charges on Deposit Accounts................................... 2,139 1,934 1,778
Insurance Commissions & Fees.......................................... 2,723 1,971 714
Other Operating Income................................................ 1,314 1,454 1,143
Net Gains on Sales of Loans and Related Assets, and Provision for
Losses on Loans Held for Sale..................................... (4,998) 196 743
Net Gain / (Loss) on Sales of Securities.............................. (8) (6) 37
-------- --------- --------
TOTAL NON-INTEREST INCOME......................................... 2,543 6,385 5,249
-------- --------- --------
NON-INTEREST EXPENSE
Salaries and Employee Benefits........................................ 15,454 14,308 12,872
Occupancy Expense..................................................... 1,854 1,853 1,805
Furniture and Equipment Expense....................................... 2,046 1,939 1,674
Data Processing Fees.................................................. 884 991 992
Professional Fees..................................................... 1,333 912 1,052
Advertising and Promotion............................................. 870 963 737
Supplies.............................................................. 798 861 719
Other Operating Expenses.............................................. 4,999 4,530 3,900
-------- --------- --------
TOTAL NON-INTEREST EXPENSE........................................ 28,238 26,357 23,751
-------- --------- --------
Income before Income Taxes............................................ 5,747 12,670 13,027
Income Tax Expense.................................................... 459 3,316 3,805
-------- --------- --------
NET INCOME............................................................ $ 5,288 $ 9,354 $ 9,222
======== ========= ========
Earnings per Share and Diluted Earnings per Share..................... $ .50 $ 0.88 $ 0.87
See accompanying notes to consolidated financial statements.
- 25 -
- ------------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
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, 1998
(as previously reported for German American Bancorp)......... $ 47,707 $ 36,047 $ 658 $ 84,412
Retroactive Restatement for
Pooling of Interests (947,762 shares in 2000)............... 2,370 3,065 --- 5,435
------------------------------------------------------
Balances, January 1, 1998 as restated........................... 50,077 39,112 658 89,847
Comprehensive Income:
Net Income................................................... 9,222 9,222
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale........................... 153 153
---------
Total Comprehensive Income............................... 9,375
Cash Dividends ($.31 per Share, as restated
for pooling of interests) (3,328) (3,328)
Issuance of Common Stock for:
Dividend Reinvestment Plan (2,233 shares).................... 36 36
Exercise of Stock Options (7,459 shares, net)................ 85 85
Employee Stock Purchase Plan (6,481 shares).................. 75 75
5% Stock Dividend (410,363 shares)........................... 8,146 (8,146) --
Stock Splits (1,258,730 shares).............................. 2,146 (2,146) --
Acquisition (67,203 shares).................................. 818 652 1,470
Purchase and Retirement of Common Stock (20,504 shares)......... (322) (42) (364)
Purchase of Interest in Fractional Shares....................... (43) (43)
--------------------------------------------------------
Balances, December 31, 1998 as restated......................... 61,061 35,281 811 97,153
Comprehensive Income:
Net Income................................................... 9,354 9,354
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale........................... (4,785) (4,785)
---------
Total Comprehensive Income............................... 4,569
Cash Dividends ($.44 per Share, as restated
for pooling of interests) (4,681) (4,681)
Issuance of Common Stock for:
Exercise of Stock Options (2,470 shares, net)................ 28 28
Director Stock Awards (17,177 shares)........................ 308 308
5% Stock Dividend (431,942 shares)........................... 9,179 (9,179) ---
Acquisitions (70,000 shares)................................. 173 96 269
Purchase and Retirement of Common Stock (196,722 shares)........ (4,277) (28) (4,305)
Purchase of Interest in Fractional Shares....................... (35) (35)
Adjustment to Conform Year-ends................................. 572 (220) 27 379
------------------------------------------------------
Balances, December 31, 1999 as restated......................... 67,044 30,588 (3,947) 93,685
Comprehensive Income:
Net Income................................................... 5,288 5,288
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale........................... 3,184 3,184
---------
Total Comprehensive Income................................. 8,472
Cash Dividends ($.50 per Share, as restated
for pooling of interests) (5,211) (5,211)
Issuance of Common Stock for:
Exercise of Stock Options (8,750 shares)..................... 78 78
Director Stock Awards (19,484 shares)........................ 296 296
5% Stock Dividend (498,353 shares)........................... 6,292 (6,292) ---
Employee Stock Purchase Plan.................................... (40) (40)
Purchase of Interest in Fractional Shares....................... (20) (20)
--------------------------------------------------------
Balances, December 31, 2000..................................... $ 73,670 $ 24,353 $ (763) $ 97,260
========================================================
See accompanying notes to consolidated financial statements.
- 26 -
- ---------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Dollars in thousands
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $ 5,288 $ 9,354 $ 9,222
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities:
Depreciation and Amortization........................................ 2,291 2,537 2,013
Amortization of Mortgage Servicing Rights ........................... 180 241 242
Net Change in Loans Held for Sale.................................... (3,773) 6,843 25,320
Loss in Investment in Limited Partnership............................ 203 108 113
Provision for Loan Losses............................................ 2,231 1,749 1,344
Loss (Gain) on Sale of Securities, net............................... 8 6 (37)
Loss (Gain) on Sales of Loans and Related Assets, and Provision
for Losses On Loans Held for Sale................................ 4,998 (196) (743)
Change in Assets and Liabilities:
Interest Receivable and Other Assets.............................. (1,557) (5,936) (2,577)
Interest Payable and Other Liabilities................................... 237 1,103 (1,665)
-------- --------- ---------
Total Adjustments.............................................. 4,818 6,455 24,010
-------- --------- ---------
Net Cash from Operating Activities 10,106 15,809 33,232
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... 5,957 (970) 1,554
Proceeds from Maturities of Securities Available-for-Sale............ 12,201 35,779 110,959
Proceeds from Sales of Securities Available-for-Sale................. 742 953 50,390
Purchase of Securities Available-for-Sale............................ (4,717) (83,512) (178,739)
Proceeds from Maturities of Securities Held-to-Maturity.............. 4,087 7,417 18,331
Proceeds from Sales of Securities Held-to-Maturity................... --- --- 362
Purchase of Securities Held-to-Maturity.............................. (2,657) (5,024) (9,304)
Purchase of Loans.................................................... (1,472) (9,884) (5,998)
Proceeds from Sales of Loans......................................... 500 5,875 463
Loans Made to Customers, net of Payments Received.................... (41,887) (92,514) (66,571)
Proceeds from Sales of Mortgage Servicing Rights..................... 528 --- ---
Proceeds from Sales of Other Real Estate............................. 3,320 1,604 310
Property and Equipment Expenditures.................................. (1,980) (4,122) (2,751)
Acquire Affiliates and Adjust to Conform Fiscal Years................ (317) (22) 2,934
-------- ---------- ---------
Net Cash from Investing Activities............................. (25,695) (144,420) (78,060)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... (15,858) 29,516 11,890
Change in Short-term Borrowings...................................... (20,255) 66,087 1,480
Advances in Long-term Debt........................................... 132,850 99,000 90,996
Repayments of Long-term Debt......................................... (77,382) (79,834) (66,911)
Issuance of Common Stock............................................. 334 348 196
Purchase / Retire Common Stock....................................... --- (4,316) (364)
Dividends Paid....................................................... (5,211) (4,682) (3,328)
Purchase of Interests in Fractional Shares........................... (20) (35) (43)
-------- --------- ---------
Net Cash from Financing Activities............................. 14,458 106,084 33,916
-------- --------- ---------
Net Change in Cash and Cash Equivalents.................................. (1,131) (22,527) (10,912)
Cash and Cash Equivalents at Beginning of Year....................... 29,578 52,105 63,017
-------- --------- ---------
Cash and Cash Equivalents at End of Year 28,447 $ 29,578 $ 52,105
======== ========= =========
Cash Paid During the Year for:
Interest............................................................. $ 44,957 $ 40,761 $ 36,083
Income Taxes......................................................... 3,233 3,899 4,164
See accompanying notes to consolidated financial statements.
- 27 -
- --------------------------------------------------------------------------------
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 for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
- 28 -
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 ($66 and $113 at
December 31, 2000 and 1999, respectively) and goodwill ($2,081 and $2,048 at
December 31, 2000 and 1999, 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.
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.
- 29 -
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, Financial Accounting
Standard No. 133 (FAS 133) required all derivatives to be recorded at fair
value. Unless designated as hedges, changes in these fair values will be
recorded in the income statement. At January 1, 2001 the Company's derivatives
include forward commitments to sell mortgage loans and interest rate caps. The
fair value of these derivatives at January 1, 2001 was not material to the
Company's financial statements.
In conjunction with the adoption of FAS 133, the Company reclassified certain
investment securities from the held-to-maturity portfolio to the
available-for-sale portfolio. The reclassified securities had a carrying value
of $6,188 and a market value of $6,366, resulting in a net increase in equity of
$108 at the time of transfer.
NOTE 2 - Securities
The amortized cost and estimated market values of Securities as of December 31,
2000 are as follows:
Gross Gross Estimated
Securities Available-for-Sale: Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $ 96,315 $ 52 $ (1,265) $ 95,102
Obligations of State and Political Subdivisions............. 26,057 761 (149) 26,669
Asset-/Mortgage-backed Securities........................... 52,004 11 (679) 51,336
Equity Securities........................................... 12,077 29 (25) 12,081
--------- ------ --------- --------
Total................................................... $ 186,453 $ 853 $ (2,118) $185,188
========= ====== ======== ========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions............. $ 28,093 $ 607 $ (110) $ 28,590
Asset-/Mortgage-backed Securities........................... 361 3 (1) 363
--------- ------ -------- --------
Total................................................... $ 28,454 $ 610 $ (111) $ 28,953
========= ====== ======== ========
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:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $ 1,048 $ 2 $ (1) $ 1,049
Obligations of State and Political Subdivisions............. 30,593 312 (644) 30,261
Asset-/Mortgage-backed Securities........................... 903 6 (5) 904
--------- ------ -------- --------
Total................................................... $ 32,544 $ 320 $ (650) $ 32,214
========= ====== ======== ========
- 30 -
The amortized cost and estimated market values of Securities at December 31,
2000 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
Asset-backed, Mortgage-backed and Equity Securities are not due at a single
maturity date and are shown separately.
Estimated
Amortized Market
Cost Value
---- -----
Securities Available-for-Sale:
Due in one year or less............................. $ 3,650 $ 3,662
Due after one year through five years............... 48,715 48,569
Due after five years through ten years.............. 51,777 51,715
Due after ten years................................. 18,230 17,825
Asset-/Mortgage-backed Securities................... 52,004 51,336
Equity Securities................................... 12,077 12,081
----------- ---------
Totals.......................................... $ 186,453 $185,188
=========== ========
Securities Held-to-Maturity:
Due in one year or less............................. $ 463 $ 463
Due after one year through five years............... 8,958 8,953
Due after five years through ten years.............. 10,137 10,414
Due after ten years................................. 8,535 8,760
Asset-/Mortgage-backed Securities................... 361 363
----------- ---------
Totals.......................................... $ 28,454 $ 28,953
=========== =========
The amortized cost of securities at December 31, 2000 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. Equity securities totaling $12,077 do not have contractual
maturities, and are excluded from the table below.
Maturities and Average Yields of Securities at December 31, 2000:
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.............. $ 1,800 6.20% $ 41,747 6.36% $ 44,984 6.66% $ 7,784 6.28%
State and Political
Subdivisions.......... 2,313 8.96% 15,926 7.14% 16,930 8.22% 18,981 8.10%
Asset- / Mortgage-backed
Securities............ 472 6.66% 31,665 6.49% 15,744 6.40% 4,484 6.41%
-------- --------- --------- -------
Totals............. $ 4,585 7.64% $ 89,338 6.55% $ 77,658 6.95% $31,249 7.40%
======== ========= ========= =======
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above
table.
At December 31, 2000 and 1999, U.S. Government Agency structured notes,
consisting of single-index bonds, with respective amortized costs of $7,784 and
$7,983 and fair values of $7,116 and $7,150 were included in securities
available-for-sale.
- 31 -
Proceeds from the Sales of Securities are summarized below:
2000 1999 1998
---- ---- ----
Available- Held-to- Available- Held-to- Available- Held-to-
Trading for-Sale Maturity Trading for-Sale Maturity Trading for-Sale Maturity
--------------------------- ---------------------------- ---------------------------
Proceeds from Sales and Calls $ --- $ 742 $ 387 $ --- $ 953 $ --- $14,046 $50,390 $ 362
Gross Gains on Sales and Calls --- --- 6 --- 6 --- 18 119 10
Gross Losses on Sales and Calls --- (6) (8) --- (12) --- (11) (92) (6)
Income Taxes
on Gross Gains.................. --- --- 2 --- 2 --- 7 48 4
Income Taxes
On Gross Losses................. --- (2) (3) --- (5) --- (4) (37) (2)
<FN>
The securities held-to-maturity proceeds and gross gains and losses in 2000
resulted from the call of securities. Sales of securities held-to-maturity in
1998 consisted of mortgage-backed securities for which payment of more than 85%
of principal had occurred.
The carrying value of securities pledged to secure repurchase agreements, public
and trust deposits, and for other purposes as required by law was $33,424 and
$33,740 as of December 31, 2000 and 1999, respectively.
</FN>
NOTE 3 - Loans
Loans, as presented on the balance sheet, are comprised of the following
classifications at December 31,
2000 1999
---- ----
Real Estate Loans Secured by 1- 4 Family Residential Properties............ $ 312,199 $ 388,514
Commercial and Industrial Loans............................................ 188,213 166,476
Loans to Individuals for Household, Family and Other
Personal Expenditures...................................................... 135,596 121,865
Loans to Finance Agricultural Production, Poultry and
Other Loans to Farmers..................................................... 74,111 65,098
----------- ----------
Totals................................................................. $ 710,119 $ 741,953
=========== ==========
Nonperforming loans were as follows at December 31:
Loans past due over 90 days and accruing................................... $ 1,513 $ 1,603
Non-accrual loans.......................................................... 8,014 7,237
----------- ----------
Totals................................................................. $ 9,527 $ 8,840
=========== ==========
Information regarding impaired loans: 2000 1999 1998
---- ---- ----
Year-end impaired loans with no allowance for loan losses allocated........ $ 1,457 $ 1,784
Year-end impaired loans with allowance for loan losses allocated........... 3,349 446
Amount of allowance allocated to impaired loans............................ 653 224
Average balance of impaired loans during the year.......................... 4,939 2,337 $ 2,297
Interest income recognized during impairment............................... 367 169 212
Interest income recognized on cash basis................................... 358 120 117
- 32 -
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 2000. A summary of
the activity of these loans follows:
Balance Changes Deductions Balance
January 1, in Persons December 31,
2000 Additions Included Collected Charged-off 2000
- ----------------------------------------------------------------------------------------------------
$20,953 $3,362 $(150) $(8,317) $--- $15,848
NOTE 4 - Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses follows:
2000 1999 1998
---- ---- ----
Balance as of January 1.................... $ 9,101 $ 8,559 $ 8,803
Allowance of Acquired Subsidiary........... --- --- 80
Adjustment to Conform Fiscal Years......... --- 356 ---
Provision for Loan Losses.................. 2,231 1,749 1,344
Recoveries of Prior Loan Losses............ 359 489 387
Loan Losses Charged to the Allowance....... (2,417) (2,052) (2,055)
-------- -------- --------
Balance as of December 31.................. $ 9,274 $ 9,101 $ 8,559
======== ======== ========
NOTE 5 - Mortgage Banking
The amount of loans serviced by the Company for the benefit of others was
$125,036 at December 31, 2000 and $154,407 at December 31, 1999.
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows:
2000 1999 1998
---- ---- ----
Servicing Rights:
Beginning of Year............................. $ 1,171 $ 1,012 $ 828
Additions..................................... 329 473 426
Sale of Servicing Asset....................... (402) --- ---
Amortized to Expense.......................... (180) (241) (242)
Adjustment to conform fiscal years............ --- (73) ---
------- ------- -------
End of Year................................... $ 918 $ 1,171 $ 1,012
======= ======= =======
Valuation Allowance:
Beginning of Year............................. $ --- $ --- $ ---
Additions Expensed............................ 53 --- ---
Reductions Credited to Expense................ --- --- ---
Direct Write-downs............................ --- --- ---
------- ------- -------
End of Year................................... $ 53 $ --- $ ---
- 33 -
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,
2000 1999
---- ----
Land.................................................. $ 3,780 $ 3,508
Buildings and Improvements............................ 21,615 20,656
Furniture and Equipment............................... 14,770 14,224
-------- --------
Total Premises, Furniture and Equipment........... 40,165 38,388
Less: Accumulated Depreciation................... (19,100) (17,354)
-------- --------
Total.......................................... $ 21,065 $ 21,034
======== ========
Depreciation expense was $1,960, $1,858 and $1,634 for 2000, 1999 and 1998,
respectively.
NOTE 7 - Deposits
At year-end 2000, interest-bearing deposits include $194,093 of demand and
savings deposits and $452,331 of time deposits. Stated maturities of time
deposits were as follows:
2001...................................... $ 316,589
2002...................................... 82,444
2003...................................... 32,242
2004...................................... 10,338
2005...................................... 10,510
Thereafter............................... 208
---------
Total.................................. $ 452,331
=========
Time deposits of $100 or more at December 31, 2000 and 1999 were $101,973 and
$110,387.
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,
2000 1999
---- ----
Long-term advances from the Federal Home Loan Bank
collateralized by qualifying mortgages, investment
securities, and mortgage-backed securities........................... $ 182,361 $ 126,815
Promissory notes payable............................................... 9 87
--------- ---------
Long-term borrowings............................................... 182,370 126,902
--------- ---------
Overnight variable rate advances from the Federal Home
Loan Bank collateralized by qualifying mortgages,
investment securities, and mortgage-backed securities.............. 40,500 40,000
Repurchase agreements.................................................. 12,360 24,015
Federal funds purchased................................................ --- 9,100
--------- ---------
Short-term borrowings.............................................. 52,860 73,115
--------- ---------
Total borrowings................................................ $ 235,230 $ 200,017
========= =========
- 34 -
At December 31, 2000 interest rates on the fixed rate long-term FHLB advances
ranged from 4.98% to 7.27% with a weighted average rate of 6.31%. Of the $182.4
million, $130.0 million or 71% of the advances contained options whereby the
FHLB may convert the fixed rate advance to an adjustable rate advance, at which
time the company may prepay the advance without penalty. The options on these
advances are subject to a variety of terms including LIBOR based strike rates.
At December 31, 1999 interest rates on the fixed rate long-term FHLB advances
ranged from 4.95% to 6.69% with a weighted average rate of 5.81%. Of the $126.8
million, $87.0 million or 69% 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 variable rate advances from the FHLB at
December 31, 2000 and 1999 was 6.30% and 4.05%.
Scheduled principal payments on long-term borrowings at December 31, 2000 are as
follows:
2001.................................. $ 25,644
2002.................................. 16,184
2003.................................. 32,725
2004.................................. 30,855
2005.................................. 41,250
Thereafter.......................... 35,712
--------
Total............................ $182,370
========
During 2000 the Company entered into interest rate caps as a means of managing
interest rate risk on borrowings. Under the caps, the Company will receive
payments during periods in which the three-month LIBOR index exceeds 6.75%
(three-month LIBOR was 6.40% at December 31, 2000). Payments under the caps are
based on an interest computation on the notional amount. At December 31, 2000
the Company held interest rate caps with a notional amount of $35,000, a
carrying value of $79 and maturity of December 2002. The caps are carried at
amortized cost with amortization recognized straight line over the lives of the
caps.
- 35 -
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.
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 2000, consolidated and 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....................... $105,000 14.38% $ 58,402 8.00% $ 73,002 10.00%
German American Bank............... 35,273 12.77 22,095 8.00 27,619 10.00
First American Bank................ 22,614 12.39 14,600 8.00 18,250 10.00
Peoples National Bank.............. 16,289 12.74 10,225 8.00 12,781 10.00
Citizens State Bank................ 13,023 13.30 7,836 8.00 9,795 10.00
First State Bank................... 4,950 10.33 3,833 8.00 4,791 10.00
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated....................... $ 95,873 13.13% $ 29,201 4.00% $ 43,801 6.00%
German American Bank............... 31,827 11.52 11,047 4.00 16,571 6.00
First American Bank................ 20,353 11.15 7,300 4.00 10,950 6.00
Peoples National Bank.............. 14,684 11.49 5,113 4.00 7,669 6.00
Citizens State Bank................ 11,938 12.19 3,918 4.00 5,877 6.00
First State Bank................... 4,496 9.38 1,916 4.00 2,875 6.00
Tier 1 Capital
(to Average Assets)
Consolidated....................... $ 95,873 8.91% $ 43,061 4.00% $ 53,826 5.00%
German American Bank............... 31,827 7.85 16,212 4.00 20,265 5.00
First American Bank................ 20,353 7.23 11,261 4.00 14,077 5.00
Peoples National Bank.............. 14,684 7.82 7,510 4.00 9,388 5.00
Citizens State Bank................ 11,938 7.35 6,501 4.00 8,126 5.00
First State Bank................... 4,496 6.98 2,578 4.00 3,223 5.00
Consolidated and bank capital ratios at December 31, 1999 were materially
similar to 2000 amounts.
The Company and all affiliate Banks at year-end 2000 and 1999 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, 2000 the affiliates had $7.2 million in retained
earnings available for dividends to the parent company without prior regulatory
approval.
- 36 -
Stock Options
The Company maintains Stock Option Plans and has reserved 663,290 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, directors and other employees of the Company. Options may
be designated as "incentive stock options" under the Internal Revenue Code of
1986, or as nonqualified options. While the date after which options are first
exercisable is determined by the 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 Plans must be no less than the fair market value of the
Common Stock on the date of the grant.
The Plans authorize an optionee to pay the exercise price of options in cash or
in common shares of the Company or in some combination of cash and common
shares. An optionee may tender already-owned common shares to the Company in
exercise of an option. 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.
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 1998............... 88,778 $ 13.78
Granted...................................... 69,219 21.32
Exercised.................................... (56,393) 10.03
-------
Outstanding, end of 1998..................... 101,604 19.10
Granted...................................... 27,218 13.77
Exercised.................................... (5,319) 8.08
Forfeited.................................... (1,103) 16.44
-------
Outstanding, end of 1999..................... 122,400 17.77
Granted...................................... 85,450 13.93
Exercised.................................... (9,188) 8.50
Forfeited.................................... (4,767) 19.83
-------
Outstanding, end of 2000..................... 193,895 16.87
=======
Options outstanding at year-end 2000 are as follows:
Outstanding Exercisable
----------- -----------
Weighted Average
Remaining Weighted
Contractual Life Weighted Average
Range of Exercise Prices Number (in years) Number Exercise Price
- ------------------------ ------------------------- ---------------------------
$ 8.08 - $ 13.81 70,529 4.50 1,229 $13.49
$ 14.46 - $ 16.76 55,869 5.33 53,369 15.58
$ 21.16 - $ 27.75 67,497 17.58 67,497 21.18
193,895 9.29 122,095 18.65
- 37 -
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.
2000 1999 1998
---- ---- ----
Pro forma Net Income....................... .$5,208 $9,300 $8,639
Pro forma Earnings Per Share
and Diluted Earnings per Share........... .$ 0.50 $ 0.87 $ 0.81
For options granted during 2000, 1999 and 1998, the weighted-average fair values
at grant date are $2.84, $3.00 and $9.29, respectively. The fair value of
options granted during 2000, 1999 and 1998 was estimated using the following
weighted-average information: risk-free interest rate of 6.14%, 4.75% and 5.11%,
expected life of 4.9, 4.1 and 9.7 years, expected volatility of stock price of
.24, .22 and .32, and expected dividends of 4.00%, 2.52% and 1.64% 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 468,562 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 216,885 shares of common stock during 1999 in
conjunction with the Plan at prices ranging from $16.21 to $20.97 per share.
Share and share prices have been adjusted for all subsequent stock dividends.
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. The
plan provides for the purchase of up to 446,250 shares of common stock, which
the Company may obtain by purchases on the open market or from private sources,
or by issuing authorized but unissued common shares. In August 2000, the Company
purchased 18,060 common shares on the open market for $239. Funding for the
purchase of the common stock was from employee contributions totaling $199 and
company contributions of $40.
NOTE 10 - Employee Benefit Plans
The Company and all its affiliate Banks 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 and employees of Citizens State and FSB Corporation in June 1998.
Employees of the former Holland Bancorp, Inc. participate in a plan similar to
German American Bancorp's plan. It is anticipated the German American Bancorp
plan and Holland Bancorp, Inc. plan will be merged in 2001. Contributions to
these plans were $596, $815, and $650 for 2000, 1999, and 1998, respectively.
Prior to their merger with the Company, Peoples had a non-contributory defined
benefit 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.
- 38 -
1ST BANCORP and Citizens State Bank had noncontributory 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 $147 was recorded on a partial
settlement of the 1ST BANCORP plan. On December 31, 1999, the Citizens State
Bank plan was merged into the 1ST BANCORP plan.
Accumulated plan benefit information for the Company's plan as of December 31,
2000 and 1999 is as follows:
Changes in Benefit Obligation: 2000 1999
---- ----
Obligation at beginning of year.........................$ 1,080 $ 1,392
Service cost............................................ --- ---
Interest cost........................................... 80 104
Benefits paid........................................... (79) (725)
Actuarial (gain) loss................................... 192 118
Adjustment in cost of settlement........................ --- 191
---------- ----------
Obligation at end of year............................... 1,273 1,080
---------- ----------
Changes in Plan Assets:
Fair value at beginning of year......................... 1,389 2,125
Actual return on plan assets............................ (31) (11)
Employer contributions.................................. --- ---
Benefits paid........................................... (79) (725)
---------- ----------
Fair value at end of year............................... 1,279 1,389
---------- ----------
Funded Status:
Funded status at end of year............................ 6 309
Unrecognized prior service cost......................... (17) (20)
Unrecognized net (gain) or loss......................... 373 75
Unrecognized transition asset........................... (19) (22)
---------- ----------
Prepaid benefit cost....................................$ 343 $ 342
========== ==========
Net periodic pension expense (benefit) for the years ended December 31, 2000,
1999 and 1998 is as follows:
2000 1999 1998
---- ---- ----
Service cost...................................... $ --- $ --- $ 62
Interest cost..................................... 80 104 79
Expected return on assets......................... (75) (160) (105)
Amortization of transition amount................. (3) (2) (2)
Amortization of prior service cost................ (3) (3) (1)
Recognition of net (gain) or loss................. --- 3 (14)
---------- ---------- ---------
Net periodic pension expense (benefit)............ $ (1) $ (58) $ 19
========== ========== =========
The weighted-average assumed rate of return on plan assets was 5.5% for 2000 and
8.0% for 1999 and 1998. The weighted-average assumed discount rate used in
determining the actuarial present value of accumulated benefit obligations at
December 31, 2000 and 1999 was 7.5%. The weighted-average rate of increase in
future compensation levels was not applicable for 2000 or 1999 but was 5.0% for
1998.
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 $763 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 $738, $604 and $526 for 2000, 1999
and 1998, respectively.
- 39 -
NOTE 11 - Income Taxes
The provision for income taxes consists of the following:
2000 1999 1998
---- ---- ----
Currently Payable..................................... $ 3,080 $ 3,874 $ 3,992
Deferred.............................................. (2,574) (511) (140)
Net Operating Loss Carryforward....................... (47) (47) (47)
-------- -------- --------
Total............................................. $ 459 $ 3,316 $ 3,805
======== ======== ========
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax
income as follows:
2000 1999 1998
---- ---- ----
Statutory Rate Times Pre-tax Income................... $ 1,954 $ 4,308 $ 4,429
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments...... (960) (1,016) (992)
Non-deductible Merger Costs....................... 94 14 119
State Income Tax, Net of Federal Tax Effect....... 124 621 770
Low Income Housing Credit......................... (665) (407) (343)
Dividends Received Deduction...................... (151) --- ---
Other Differences ................................ 63 (204) (178)
-------- -------- --------
Total Income Taxes.............................. $ 459 $ 3,316 $ 3,805
======== ======== ========
The net deferred tax asset at December 31 consists of the following:
2000 1999
---- ----
Deferred Tax Assets:
Allowance for Loan Losses......................... $ 2,490 $ 2,361
Net Operating Loss Carryforwards.................. 46 93
Deferred Compensation and Employee Benefits....... 1,778 1,412
Unrealized Depreciation on Securities............. 502 2,589
Valuation of Loans Held-for-Sale.................. 2,068 ---
Other............................................. 581 208
-------- --------
Total Deferred Tax Assets....................... 7,465 6,663
Deferred Tax Liabilities:
Depreciation...................................... (531) (490)
Leasing Activities, Net........................... (20) (18)
Purchase Accounting Adjustments................... --- (7)
Mortgage Servicing Rights......................... (343) (464)
Other............................................. (652) (252)
-------- --------
Total Deferred Tax Liabilities.................. (1,546) (1,231)
Valuation Allowance................................... (48) (48)
-------- --------
Net Deferred Tax Asset.......................... $ 5,871 $ 5,384
======== ========
The Company has $136 of federal tax net operating loss carryforwards expiring in
the following amounts:
Year Amount Year Amount
----------------------------------------------
2003 74 2008 62
Under the Internal Revenue Code, through 1996 First Federal Bank (now First
American 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. Retained earnings
at December 31, 2000, 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, 2000 was approximately $782.
- 40 -
NOTE 12 - Per Share Data
Basic Earnings and Diluted Earnings 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 Basic Earnings per
Share and Diluted Earnings per Share are provided below:
2000 1999 1998
---- ---- ----
Basic Earnings per Share:
Net Income.......................................... $ 5,288 $ 9,354 $ 9,222
Weighted Average Shares Outstanding................. 10,485,818 10,632,589 10,643,389
------------ ------------ -------------
Earnings per Share.............................. $ 0.50 $ 0.88 $ 0.87
============ ============ =============
Diluted Earnings per Share:
Net Income.......................................... $ 5,288 $ 9,354 $ 9,222
Weighted Average Shares Outstanding................. 10,485,818 10,632,589 10,643,389
Stock Options, Net.................................. 48 4,626 22,781
------------ ------------ -------------
Diluted Weighted Average Shares Outstanding......... 10,485,866 10,637,215 10,666,170
------------ ------------ -------------
Diluted Earnings per Share...................... $ 0.50 $ 0.88 $ 0.87
============ ============ =============
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31, 2000,
1999, and 1998 was $156, $175, and $151, respectively, including amounts paid
under short-term cancelable leases.
At December 31, 2000, 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 2001,
2005 and 2008 with various renewal options provided. Aggregate annual rental
payments to this Director's company totaled $59 for 2000. Exercise of the Bank's
sublease renewal options is contingent upon the Director's company renewing its
primary leases.
At December 31, 2000, the German American Bancorp leased space for office
facilities from a company controlled by a director and principal shareholder of
the Company. The lease expires in 2005 with various renewal options provided.
Aggregate annual rental payments to this Director's company totaled $14 for
2000.
The following is a schedule of future minimum lease payments:
Years Ending December 31: Premises Equipment Total
-------- --------- -----
2001...................... $ 107 $ 8 $ 115
2002...................... 98 1 99
2003...................... 98 --- 98
2004...................... 98 --- 98
2005...................... 76 --- 76
Thereafter................ 158 --- 158
-------- ------- -------
Total................... $ 635 $ 9 $ 644
======== ======= =======
- 41 -
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,
2000 1999
---- ----
Commitments to Fund Loans:
Home Equity....................................... $ 20,828 $ 13,692
Credit Card Lines................................. 8,515 8,835
Commercial Operating Lines........................ 47,210 50,202
Residential Mortgages............................. 6,936 8,358
-------- --------
Total Commitments to Fund Loans............... $ 83,489 $ 81,087
======== ========
Commitments to Sell Loans............................ $ 6,584 $ 3,304
Standby Letters of Credit............................ $ 1,985 $ 1,928
Since many commitments to make loans expire without being used, these amounts do
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower, and may include accounts receivable, inventory, property, land and
other items. The approximate duration of these commitments is generally one year
or less.
At December 31, 2000 and 1999, respectively, the affiliate banks were required
to have $4,351 and $4,994 on deposit with the Federal Reserve, or as cash on
hand. These reserves do not earn interest.
NOTE 15 - Non-cash Investing Activities
2000 1999 1998
---- ---- ----
Loans Transferred to Other Real Estate............. $ 3,473 $2,923 $3,958
Securities Transferred to Available-for-Sale....... 1,181 --- 8,034
Loans Transferred to Held-for-Sale................. 69,839 --- ---
The above data should be read in conjunction with the Consolidated Statements of
Cash Flows. On the date of merger with Holland National, investment securities
with an amortized cost and estimated market value of $1.2 million were
reclassified from Held-to-Maturity to Available-for-Sale. 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 combinations and in order to conform Holland National's and Citizens
State's investment portfolio to the Company's liquidity and interest rate risk
policies. See also Note 18 regarding purchase acquisitions in 1999 and 2000.
- 42 -
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 27 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. 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, 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, 2000 Banking Banking Other Totals
------- ------- ----- ------------
Net Interest Income................................ $ 30,102 $ 3,305 $ 266 $ 33,673
Net Gain on Sales of Loans and Provision for
Losses on Loans Held for Sale................... --- (4,842) --- (4,842)
Servicing Income................................... --- 361 --- 361
Noncash Items:
Provision for Loan Losses....................... 1,010 1,221 --- 2,231
MSR Amortization & Valuation.................... --- 233 --- 233
Provision for Income Taxes......................... 4,446 (2,129) (1,858) 459
Segment Profit..................................... 10,144 (3,147) (1,709) 5,288
Segment Assets..................................... 908,106 164,161 7,541 1,079,808
Retail Mortgage Consolidated
Year Ended December 31, 1999 Banking Banking Other Totals
------- -------- ----- ------------
Net Interest Income................................ $ 29,685 $ 4,459 $ 247 $ 34,391
Net Gain on Sales of Loans and Provision for
Losses on Loans Held for Sale................... 16 304 --- 320
Servicing Income................................... --- 370 --- 370
Noncash Items:
Provision for Loan Losses....................... 701 1,048 --- 1,749
MSR Amortization & Valuation.................... --- 241 --- 241
Provision for Income Taxes......................... 4,055 546 (1,285) 3,316
Segment Profit..................................... 10,068 833 (1,547) 9,354
Segment Assets..................................... 870,890 180,752 4,999 1,056,641
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 periods
prior to 1999 is not practical.
- 43 -
NOTE 17 - Parent Company Financial Statements
The condensed financial statements of German American Bancorp are presented
below:
CONDENSED BALANCE SHEETS
December 31,
2000 1999
---- ----
ASSETS
Cash......................................................... $ 6,401 $ 5,771
Securities Available-for-Sale, at Market..................... 1,717 3,255
Investment in Subsidiary Banks and Bank Holding Company...... 85,189 81,100
Investment in GAB Mortgage Corp.............................. 291 291
Investment in Reinsurance Co................................. 211 ---
Furniture and Equipment...................................... 1,604 1,420
Other Assets................................................. 2,034 1,912
-------- ---------
Total Assets.............................................. $ 97,447 $ 93,749
======== =========
LIABILITIES...................................................... $ 187 $ 64
-------- ---------
SHAREHOLDERS' EQUITY
Common Stock................................................. 10,495 9,968
Additional Paid-in Capital................................... 63,175 57,076
Retained Earnings............................................ 24,353 30,588
Accumulated Other Comprehensive Income (Loss)................ (763) (3,947)
-------- ---------
Total Shareholders' Equity................................ 97,260 93,685
-------- ---------
Total Liabilities and Shareholders' Equity................ $ 97,447 $ 93,749
======== =========
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
2000 1999 1998
---- ---- ----
INCOME
Dividends from Subsidiary Banks.............................. $ 6,695 $ 11,616 $ 12,759
Dividend and Interest Income..................................... 257 247 256
Fee Income from Subsidiary Banks............................. 577 471 411
Securities Losses, net........................................... (5) --- ---
Other Income................................................. 54 61 40
-------- --------- --------
Total Income..................................................... 7,578 12,395 13,466
EXPENSES
Salaries and Benefits........................................ 2,701 2,475 1,827
Professional Fees................................................ 734 530 761
Occupancy and Equipment Expense.................................. 525 355 286
Other Expenses............................................... 705 538 544
-------- --------- --------
Total Expenses................................................... 4,665 3,898 3,418
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES......................... 2,913 8,497 10,048
Income Tax Benefit............................................... 1,447 1,373 1,012
-------- --------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES....................................... 4,360 9,870 11,060
Equity in Undistributed Income of Subsidiaries................... 928 (516) (1,838)
-------- --------- --------
NET INCOME....................................................... 5,288 9,354 9,222
Other Comprehensive Income:
Unrealized gain/(loss) on Securities, net.................... 3,184 (4,785) 153
-------- --------- --------
Total Comprehensive Income.............................. $ 8,472 $ 4,569 $ 9,375
======== ========= ========
- 44 -
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income....................................................... $ 5,288 $ 9,354 $ 9,222
Adjustments to Reconcile Net Income to Net
Cash from Operations Amortization on Securities........... 15 22 38
Depreciation..................................................... 227 205 157
Loss / (Gain) on Sale of Securities, net.................. 5 --- ---
Gain on Sale of Property and Equipment.................... --- (4) ---
Change in Other Assets.................................... (83) (47) (1,515)
Change in Other Liabilities............................... 95 (21) 618
Equity in Undistributed Income of Subsidiaries............ (928) 516 1,838
-------- --------- --------
Total Adjustments....................................... (669) 671 1,136
--------- --------- --------
Net Cash from Operating Activities........................ 4,619 10,025 10,358
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to Subsidiaries......................... (200) (316) (742)
Purchase of Securities Available-for-Sale.................... (74) (368) (2,229)
Proceeds from Maturities of Securities Available-for-Sale.... 1,593 500 520
Property and Equipment Expenditures.......................... (411) (520) (881)
Proceeds from Sale of Property and Equipment................. --- 993 ---
Acquire Affiliates and Adjust to Conform Fiscal Years........ --- 104 ---
-------- --------- --------
Net Cash from Investing Activities........................... 908 393 (3,332)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-term Debt.................................. --- --- (1,480)
Purchase / Retire Common Stock............................... --- (4,316) (364)
Issuance of Common Stock..................................... 334 348 196
Dividends Paid............................................... (5,211) (4,682) (3,328)
Purchase of Interest in Fractional Shares.................... (20) (35) (43)
------ --------- --------
Net Cash from Financing Activities........................ (4,897) (8,685) (5,019)
-------- --------- --------
Net Change in Cash and Cash Equivalents.......................... 630 1,733 2,007
Cash and Cash Equivalents at Beginning of Year............... 5,771 4,038 2,031
-------- --------- --------
Cash and Cash Equivalents at End of Year..................... $ 6,401 $ 5,771 $ 4,038
======== ========= ========
- 45 -
NOTE 18 - Business Combinations
Information relating to mergers and acquisitions for the three year period
ended December 31, 2000, includes:
Date Common Accounting
Business Combination Acquired Shares Issued(4) Method
-------------------- -------- ---------------- ------
CSB Bancorp, Petersburg, Indiana 06/01/98 1,074,824 Pooling
FSB Financial Corporation, Francisco, Indiana 06/01/98 77,796 Pooling(1)
The Doty Agency, Inc., Petersburg, Indiana 01/01/99 68,355 Pooling(1)
1ST BANCORP, Vincennes, Indiana 01/04/99 2,248,730 Pooling
Professional Insurance Markets, Inc.,
(Smith & Bell), Vincennes, Indiana 05/01/99 8,820 Purchase(2)
Fleck Insurance Agency, Inc., Jasper, Indiana 05/01/00 --- Purchase(3)
Holland Bancorp Inc., Holland, Indiana 10/01/00 995,150 Pooling
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 8,820 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) This merger was accounted for as a purchase, with net assets acquired of
$300. The Company issued no stock in this transaction. The Company recorded
goodwill of $298 as a result of this acquisition. Reported operating
results for periods prior to the merger have not been restated.
(4) Adjusted for all subsequent stock dividends and splits.
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp and Holland Bancorp for periods
prior to merger:
January 1, 2000
Through
September 30, 2000 1999 1998
------------------ ---- ----
Net Interest Income
German American Bancorp................. $ 23,918 $ 32,170 $ 30,755
Holland Bancorp......................... 1,753 2,221 2,118
----------- ---------- ----------
Combined............................. $ 25,671 $ 34,391 $ 32,873
=========== ========== ==========
Net Income
German American Bancorp................. $ 6,695 $ 8,822 $ 8,570
Holland Bancorp......................... 364 532 652
----------- ---------- ----------
Combined............................. $ 7,059 $ 9,354 $ 9,222
=========== ========== ==========
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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, 2000 DECEMBER 31, 1999
----------------- -----------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
----- ---------- ----- ----------
Financial Assets:
Cash and Short-term Investments......................... $ 29,942 $ 29,942 $ 37,030 $ 37,030
Securities Available-for-Sale........................... 185,188 185,188 188,148 188,148
Securities Held-to-Maturity............................. 28,454 28,953 32,544 32,214
FHLB Stock and Other Restricted Stock................... 12,596 12,596 9,939 9,939
Loans, including loans held for sale, net............... 771,842 764,902 735,353 729,974
Accrued Interest Receivable............................. 9,418 9,418 8,939 8,939
Interest Rate Caps...................................... 79 78 --- ---
Financial Liabilities:
Demand, Savings and Money Market Deposits............... $ (283,239) $ (283,239) $ (282,700) $ (282,700)
Other Time Deposits..................................... (452,331) (450,530) (468,728) (469,706)
Short-term Borrowings................................... (52,860) (52,860) (73,115) (73,115)
Long-term Debt.......................................... (182,370) (185,763) (126,902) (128,476)
Accrued Interest Payable................................ (4,200) (4,200) (3,511) (3,511)
Unrecognized Financial Instruments:
Commitments to Extend Credit............................ --- --- --- ---
Standby Letters of Credit............................... --- --- --- ---
Commitments to Sell Loans............................... --- (52) --- (12)
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 interest rate caps is estimated by discounting expected cash flows using
current rates. 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. The fair value of commitments to sell
loans is the cost or benefit of settling the commitments with the counter-party
at the reporting date.
- 47 -
NOTE 20 - Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
2000 1999 1998
---- ---- ----
Unrealized holding gains and losses on
available-for-sale securities............................ $ 5,265 $ (7,929) $ 290
Less: reclassification adjustments for gains
and losses later recognized in income.................... (6) (6) 27
------- -------- ------
Net unrealized gains and losses.............................. 5,271 (7,923) 263
Tax Effect................................................... 2,087 3,138 (110)
------- -------- ------
Other comprehensive income (loss)............................ $ 3,184 $ (4,785) $ 153
======= ======== ======
NOTE 21 - Quarterly Financial Data (Unaudited)
The following table represents selected quarterly financial data for the
Company:
Interest Net Interest Net Earnings/(Loss) per Share
Income Income Income/(Loss) Basic Fully Diluted
------ ------ ------------- ----- -------------
2000
First Quarter....................$ 19,281 $ 8,601 $ 2,170 $ 0.21 $ 0.21
Second Quarter................... 19,949 8,641 2,467 0.23 0.23
Third Quarter.................... 20,098 8,429 2,431 0.23 0.23
Fourth Quarter................... 19,991 8,002 1,780) (0.17) (0.17)
1999
First Quarter....................$ 17,347 $ 8,435 $ 2,373 $ 0.22 $ 0.22
Second Quarter................... 17,589 8,530 2,410 0.23 0.23
Third Quarter.................... 18,229 8,685 2,448 0.23 0.23
Fourth Quarter................... 18,970 8,741 2,123 0.20 0.20
All quarterly financial information presented above including earnings per share
has been restated to reflect the acquisition of Holland Bancorp, Inc., which was
accounted for as a pooling of interests. This acquisition was completed as of
October 1, 2000. The Company has also retroactively restated quarterly earnings
per share to reflect the 5% stock dividend paid in December 2000.
During December 2000, the Company initiated a restructuring of its balance sheet
within its mortgage banking division. The restructuring was undertaken to
strengthen the overall credit quality within the loan portfolio, to allow for a
reduction of wholesale funding, and to improve the interest rate risk position.
The Company reclassified $69.8 million of subprime, out-of-market residential
mortgage loans as held-for-sale. These loans were reclassified at the lower of
cost or fair value, resulting in a loss of $5,220, which is included in the
statement of income in net gains on sales of loans and related assets, and
provision for losses on loans held-for-sale. This loss and an increased
provision for loan losses for these types of loans, net of the related tax
effect, had a significant negative impact on reported fourth quarter earnings
and earnings per share.
Provisions for loan losses increased in the fourth quarter of 1999 due to an
increase in non-performing assets during the period resulting in the lower
earnings and earnings per share.
- 48 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to Directors of the Corporation will be included under the
caption "Election of Directors" in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on April 26, 2001 which will be filed with
the Commission within 120 days of the end of the fiscal year covered by this
Report (the "2001 Proxy Statement"), which section is incorporated herein by
reference in partial answer to this Item.
Information relating to Executive Officers of the Corporation is included under
the caption "Executive Officers of the Registrant" under Part I of this Report
on Form 10-K, and is incorporated herein by reference.
Item 11. Executive Compensation.
Information relating to compensation of the Corporation's Executive Officers and
Directors will be included under the captions "Executive Compensation" and
"Election of Directors -- Compensation of Directors" in the 2001 Proxy Statement
of the Corporation, which sections are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners and
management of the Corporation will be included under the captions "Election of
Directors" and "Principal Owners of Common Shares" of the 2001 Proxy Statement
of the Corporation, which sections are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information responsive to this Item 13 will be included under the captions
"Executive Compensation - Certain Business Relationships and Transactions" and
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation" of the 2001 Proxy Statement of the Corporation, which sections
are incorporated herein by reference.
- 49 -
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a) Financial Statements
The following items are included in Item 8 of this report:
German American Bancorp and Subsidiaries: Page #
Independent Auditors' Report 23
Consolidated Balance Sheets at December 31,
2000 and December 31, 1999 24
Consolidated Statements of Income, years
ended December 31, 2000, 1999, and 1998 25
Consolidated Statements of Changes in
Shareholders' Equity, years ended
December 31, 2000, 1999, and 1998 26
Consolidated Statements of Cash Flows, years
ended December 31, 2000, 1999, and 1998 27
Notes to the Consolidated Financial
Statements 28-48
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 2000, except for its report filed October 10, 2000 reporting
under Item 5 effective October 1, 2000, the completion of its acquisition of
Holland Bancorp, Inc.
c) Exhibits
The Exhibits described in the Exhibit List immediately following the
"Signatures" pages of this report (which are incorporated herein by reference)
are hereby filed as part of this report.
- 50 -
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
(Registrant)
Date: March 22, 2001 /s/ Mark A. Schroeder
-------------- --------------------------------------------
Mark A. Schroeder, President and Director
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 22, 2001 /s/ Mark A. Schroeder
-------------- --------------------------------------------
Mark A. Schroeder, President and Director
(Chief Executive Officer)
Date:
-------------- --------------------------------------------
George W. Astrike, Director
Date: March 22, 2001 /s/ David G. Buehler
-------------- --------------------------------------------
David G. Buehler, Director
Date: March 22, 2001 /s/ David B. Graham
-------------- --------------------------------------------
David B. Graham, Director
Date: March 22, 2001 /s/ William R. Hoffman
-------------- --------------------------------------------
William R. Hoffman, Director
Date: March 22, 2001 /s/ J. David Lett
-------------- --------------------------------------------
J. David Lett, Director
Date:
-------------- --------------------------------------------
C. James McCormick
Date: March 22, 2001 /s/ Gene C. Mehne
-------------- --------------------------------------------
Gene C. Mehne, Director
Date: March 22, 2001 /s/ Robert L. Ruckriegel
-------------- --------------------------------------------
Robert L. Ruckriegel, Director
Date: March 22, 2001 /s/ Larry J. Seger
-------------- --------------------------------------------
Larry J. Seger, Director
Date: March 22, 2001 /s/ Joseph F. Steurer
-------------- --------------------------------------------
Joseph F. Steurer, Director
Date: March 22, 2001 /s/ C. L. Thompson
-------------- --------------------------------------------
C.L. Thompson, Director
Date: March 22, 2001 /s/ Michael J. Voyles
-------------- --------------------------------------------
Michael J. Voyles, Director
Date: March 22, 2001 /s/ Richard E. Trent
-------------- --------------------------------------------
Richard E. Trent, Senior Vice President
(Chief Financial Officer and
Principal Accounting Officer)
- 51 -
Executive
Compensation
Plans and Exhibit
Arrangements* Number Exhibit List
- ------------- ------ ------------
3.1 Restated Articles of Incorporation of the
Registrant as amended April 23, 1998 are
incorporated by reference to Exhibit 3 to
Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998.
3.2 Restated Bylaws of the Registrant, as amended
January 30, 2001.
4.1 Rights Agreement dated April 27, 2000 is
incorporated by reference to Exhibit 4.01 to
Registrant's Current Report on Form 8-K filed
May 5, 2000.
4.2 No long-term debt instrument issued by the
Registrant exceeds 10% of consolidated total
assets. In accordance with paragraph 4 (iii)
of Item 601(b) of Regulation S-K, the
Registrant will furnish the Securities and
Exchange Commission upon request copies of
long-term debt instruments and related
agreements.
4.3 Terms of Common Shares and Preferred Shares
of German American Bancorp found in
Restatement of Articles of Incorporation are
incorporated by reference to Exhibit 3.01 to
Registrant's Current Report on Form 8-K filed
May 5, 2000.
X 10.1 The Registrant's 1992 Stock Option Plan, as
amended, is incorporated by reference from
Exhibit 10.1 to the Registrant's Registration
Statement on Form S-4 filed October 14, 1998.
X 10.2 Schedule identifying material terms of
Incentive Stock Options (including
replacement options) granted to the
Registrant's executive officers under the
Registrant's 1992 Stock Option Plan.
X 10.3 Executive Deferred Compensation Agreement
dated December 1, 1992, between The German
American Bank and George W. Astrike, is
incorporated herein by reference from Exhibit
10.3 to the Registrant's Registration
Statement on Form S-4 filed January 21, 1993.
X 10.4 Amendment to Executive Deferred Compensation
Agreement dated August 31, 2000 between The
German American Bank and George W. Astrike.
- 52 -
X 10.5 Director Deferred Compensation Agreement
between The German American Bank and certain
of its Directors, is incorporated herein by
reference from Exhibit 10.4 to the
Registrant's Registration Statement on Form
S-4 filed January 21, 1993 (The Agreement
entered into by George W. Astrike, a copy of
which was filed as Exhibit 10.4 to the
Registrant's Registration Statement on Form
S-4 filed January 21, 1993, is substantially
identical to the Agreements entered into by
the other Directors.) The schedule following
Exhibit 10.4 lists the Agreements with the
other Directors and sets forth the material
detail in which such Agreements differ from
the Agreement filed as Exhibit 10.4.
X 10.6 Stock Option Agreement between the Registrant
and George W. Astrike dated September 2, 1998
is incorporated by reference or from Exhibit
10.9 to the Registrant's Registration
Statement on Form S-4 filed October 14, 1998.
X 10.7 Non-Qualified Index Executive Supplemental
Agreement dated September 1, 1998 between the
Registrant and George W. Astrike is
incorporated by reference from Exhibit 10.10
to the Registrant's 1998 Form 10-K filed
March 31, 1999.
X 10.8 Split Dollar Life Insurance Plan Agreement
dated November 5, 1998 between the Registrant
and George W. Astrike is incorporated by
reference from Exhibit 10.11 to the
Registrant's 1998 Form 10-K filed March 31,
1999.
X 10.9 Agreement for Consulting Services dated
August 21, 1998 between the Registrant and
George W. Astrike, is incorporated by
reference from Exhibit 10.8 to the
Registrant's 1999 Form 10-K, filed March 29,
2000.
X 10.10 Amendment to Agreement for Consulting
Services dated August 31, 2000, between the
Registrant and George W. Astrike.
10.11 Agreement and Plan of Reorganization dated
June 27, 2000 among the Registrant, Holland
Bancorp, Inc., The Holland National Bank, and
The German American Bank, is incorporated by
reference from Exhibit 2.1 to the
Registrant's Registration Statement on Form
S-4 filed July 19, 2000 (File No. 333-41698).
21 Subsidiaries of the Registrant.
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Krueger & Associates
23.3 Consent of KPMG LLP
99.1 Opinion of Krueger & Associates
99.2 Opinion of KPMG LLP
*Exhibits that describe or evidence all management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Report are
indicated by an "X" in this column.
- 53 -