UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 2001
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
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Jasper, Indiana 47546
--------------------------------------
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 2001
Common Stock, No par value 10,494,708
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets - March 31, 2001 and December 31, 2000
Consolidated Statements of Income and Comprehensive Income -- Three
months Ended March 31, 2001 and 2000
Consolidated Statements of Cash Flows -- Three months Ended March 31,
2001 and 2000
Notes to Consolidated Financial Statements -- March 31, 2001
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
March 31, December 31,
2001 2000
------------ ------------
(unaudited)
ASSETS
Cash and Due from Banks............................................... $ 23,328 $ 26,987
Federal Funds Sold and Other Short-term Investments................... 35,023 1,460
------------ ------------
Cash and Cash Equivalents........................................ 58,351 28,447
Interest-bearing Time Deposits with Banks............................. 399 1,495
Securities Available-for-Sale, at Market ............................. 147,928 185,188
Securities Held-to-Maturity, at Cost ................................. 22,283 28,454
Loans Held for Sale................................................... 15,623 71,372
Total Loans........................................................... 697,045 710,119
Less: Unearned Income................................................ (505) (375)
Allowance for Loan Losses...................................... (8,874) (9,274)
------------ ------------
Loans, Net............................................................ 687,666 700,470
Stock in FHLB of Indianapolis, and Other Restricted Stock, at cost.... 12,596 12,596
Premises, Furniture and Equipment, Net................................ 20,900 21,065
Other Real Estate..................................................... 1,315 1,579
Intangible Assets..................................................... 2,219 2,147
Accrued Interest Receivable and Other Assets.......................... 23,164 26,995
------------ ------------
TOTAL ASSETS................................................... $ 992,444 $ 1,079,808
============ ============
LIABILITIES
Noninterest-bearing Deposits.......................................... $ 85,136 $ 89,146
Interest-bearing Deposits............................................. 619,630 646,424
------------ ------------
Total Deposits................................................... 704,766 735,570
FHLB Advances and Other Borrowings.................................... 179,701 235,230
Accrued Interest Payable and Other Liabilities........................ 8,058 11,748
------------ ------------
TOTAL LIABILITIES.............................................. 892,525 982,548
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized..................................... 10,495 10,495
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued ............................. --- ---
Additional Paid-in Capital............................................ 63,175 63,175
Retained Earnings..................................................... 25,274 24,353
Accumulated Other Comprehensive Income (Loss) ........................ 975 (763)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY..................................... 99,919 97,260
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $ 992,444 $ 1,079,808
============ ============
End of period shares issued and outstanding........................... $ 10,494,708 $ 10,494,708
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three months Ended
March 31,
2001 2000
------------ ------------
INTEREST INCOME
Interest and Fees on Loans............................................ $ 15,917 $ 15,425
Interest on Federal Funds Sold and Other Short-term Investments....... 247 226
Interest and Dividends on Securities:
Taxable............................................................ 2,354 2,821
Non-taxable........................................................ 848 867
------------ ------------
TOTAL INTEREST INCOME............................................ 19,366 19,339
INTEREST EXPENSE
Interest on Deposits.................................................. 7,663 7,808
Interest on FHLB Advances and Other Borrowings........................ 3,233 2,929
------------ ------------
TOTAL INTEREST EXPENSE........................................... 10,896 10,737
------------ ------------
NET INTEREST INCOME................................................... 8,470 8,602
Provision for Loan Losses............................................. 165 315
------------ ------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES.................................................. 8,305 8,287
NONINTEREST INCOME
Trust and Investment Product Fees..................................... 284 364
Service Charges on Deposit Accounts................................... 536 468
Insurance Revenues.................................................... 948 531
Net Gains on Sales of Loans and Related Assets, and Provision for
Losses on Loans Held for Sale...................................... 129 (44)
Net Gain / (Loss) on Sales of Securities.............................. 1 (8)
Other Income.......................................................... 397 307
------------ ------------
TOTAL NONINTEREST INCOME......................................... 2,295 1,618
------------ ------------
NONINTEREST EXPENSE
Salaries and Employee Benefits........................................ 4,303 3,960
Occupancy Expense..................................................... 519 475
Furniture and Equipment Expense....................................... 489 523
Data Processing Fees.................................................. 250 217
Professional Fees..................................................... 202 215
Advertising and Promotions............................................ 267 231
Supplies.............................................................. 165 216
Other Operating Expenses.............................................. 1,209 1,141
------------ ------------
TOTAL NONINTEREST EXPENSE........................................ 7,404 6,978
------------ ------------
Income before Income Taxes............................................ 3,196 2,927
Income Tax Expense.................................................... 805 760
------------ ------------
NET INCOME............................................................ $ 2,391 $ 2,167
============ ============
COMPREHENSIVE INCOME.................................................. $ 4,129 $ 1,681
============ ============
Earnings Per Share and Diluted Earnings Per Share..................... $ 0.23 $ 0.21
Dividends Per Share................................................... $ 0.14 $ 0.12
<FN>
See accompanying notes to consolidated financial statements.
</FN>
4
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Three months Ended
March 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................ $ 2,391 $ 2,167
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities:
Net (Accretion) / Amortization on Securities..................... (27) (39)
Depreciation and Amortization.................................... 607 550
Amortization of Mortgage Servicing Rights........................ 52 51
Net Change in Loans Held for Sale................................ 55,661 1,858
Loss on Investment in Limited Partnership........................ 46 46
Provision for Loan Losses........................................ 165 315
Loss / (Gain) on Sale of Securities.............................. 1 8
Loss / (Gain) on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held for Sale................ (129) 44
Loss / (Gain) on Sale of Property and Equipment.................. (208) ---
Change in Assets and Liabilities:
Interest Receivable and Other Assets........................... 2,713 1,212
Interest Payable and Other Liabilities......................... (3,690) (283)
------------ ------------
Total Adjustments........................................... 55,191 3,762
------------ ------------
Net Cash from Operating Activities........................... 57,582 5,929
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks..................... 1,096 601
Proceeds from Maturities of Securities Available-for-Sale.......... 46,428 3,517
Purchase of Securities Available-for-Sale.......................... (630) (4,542)
Proceeds from Maturities of Securities Held-to-Maturity............ 539 1,474
Purchase of Securities Held-to-Maturity............................ --- (497)
Purchase of Loans.................................................. --- (1,443)
Proceeds from Sales of Loans....................................... 1,640 ---
Loans Made to Customers, net of Payments Received.................. 10,817 (8,349)
Proceeds from Sales of Other Real Estate........................... 541 1,035
Property and Equipment Expenditures................................ (499) (556)
Proceeds from the Sale of Property and Equipment .................. 343 ---
Acquire Insurance Company.......................................... (150) ---
------------ ------------
Net Cash from Investing Activities............................. 60,125 (8,760)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................. (30,804) (2,385)
Change in Short-term Borrowings.................................... (45,417) (23,091)
Advances of Long-term Debt......................................... --- 62,850
Repayments of Long-term Debt....................................... (10,112) (40,091)
Dividends Paid..................................................... (1,470) (1,174)
------------ ------------
Net Cash from Financing Activities............................. (87,803) (3,891)
------------ ------------
Net Change in Cash and Cash Equivalents............................... 29,904 (6,722)
Cash and Cash Equivalents at Beginning of Year..................... 28,447 29,578
------------ ------------
Cash and Cash Equivalents at End of Period......................... $ 58,351 $ 22,856
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
5
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2001
(unaudited)
Note 1 -- 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
followed by the banking industry. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been condensed or omitted. All adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the periods reported have been included in the accompanying
unaudited consolidated financial statements, and all such adjustments are of a
normal recurring nature. It is suggested that these consolidated financial
statements and notes be read in conjunction with the financial statements and
notes thereto in the German American Bancorp's December 31, 2000 Annual Report
on Form 10-K.
On October 1, 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. This merger was accounted for as
a pooling of interests and prior period financial information has been restated
accordingly.
Comprehensive income includes both net income and other comprehensive income.
Other comprehensive income includes the change in unrealized
appreciation/depreciation on securities available-for-sale, net of tax.
Note 2 -- Per Share Data
Earnings and dividends per share have been retroactively computed as though
shares issued for stock dividends had been outstanding for all periods
presented. The computation of Earnings per Share and Diluted Earnings per Share
are provided as follows:
Three months Ended
March 31,
2001 2000
------------ ------------
Earnings per Share:
Net Income $ 2,391,000 $ 2,167,000
Weighted Average Shares Outstanding 10,494,708 10,475,224
------------ ------------
Earnings per Share: $ 0.23 $ 0.21
============ ============
Diluted Earnings per Share:
Net Income $ 2,391,000 $ 2,167,000
Weighted Average Shares Outstanding 10,494,708 10,475,224
Stock Options, Net --- 956
------------ --------------
Diluted Weighted Average Shares Outstanding 10,494,708 10,476,180
------------ ------------
Diluted Earnings per Share $ 0.23 $ 0.21
============ ============
6
Note 3 - Securities
The amortized cost and estimated market values of Securities as of March 31,
2001 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
------------ -------------
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $ 48,602 $ 48,443
Obligations of State and Political Subdivisions 31,006 32,192
Asset-/Mortgage-backed Securities 50,647 50,953
Equity Securities 16,058 16,340
------------ -------------
Total $ 146,313 $ 147,928
============ =============
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $ 22,283 $ 22,954
=========== =============
The amortized cost and estimated market values of Securities as of December 31,
2000 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
------------ -------------
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $ 96,315 $ 95,102
Obligations of State and Political Subdivisions 26,057 26,669
Asset-/Mortgage-backed Securities 52,004 51,336
Equity Securities 12,077 12,081
------------ -------------
Total $ 186,453 $ 185,188
============ =============
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $ 28,093 $ 28,590
Asset-/Mortgage-backed Securities 361 363
------------ -------------
Total $ 28,454 $ 28,953
============ =============
Note 4 - Deposits
Total deposits, as presented on the balance sheet, are comprised of the
following classifications (dollars in thousands):
March 31, December 31,
2001 2000
------------ -------------
Demand $ 85,136 $ 89,146
Savings and Interest-bearing Checking 120,964 123,867
Money Market Accounts 72,116 70,226
Other Time Deposits 354,760 350,854
------------ -------------
Total Core Deposits 632,976 634,093
Certificates of Deposit of $100,000 or more
And Brokered Deposits 71,790 101,477
------------ -------------
Total $ 704,766 $ 735,570
============ =============
7
Note 5 - Segment Information
The Company's operations include three primary segments: retail banking,
mortgage banking, and insurance operations. 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 insurance segment offers a
full range of personal and corporate property and casualty insurance products,
primarily in the affiliate bank's local markets.
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 is the primary revenue 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 and gain on sales of and capitalization of mortgage servicing
rights (MSR), and loan servicing income. The insurance segment consists of five
full-service independent insurance agencies in Southwestern Indiana. Commissions
derived from the sale of insurance products are the primary source of revenue
for the insurance segment.
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 three segments are the same as those of the Company. The
evaluation process for segments does not include holding company income and
expense. Holding company 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.
Three months Ended March 31, 2001
Retail Mortgage Consolidated
Banking Banking Insurance Other Totals
------- ------- --------- ----- ------
Net Interest Income $ 7,557 $ 834 $ 9 $ 70 $ 8,470
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale (5) 134 --- --- 129
Servicing Income --- 95 --- --- 95
Insurance Revenues 51 36 892 (31) 948
Noncash Items:
Provision for Loan Losses 165 --- --- --- 165
MSR Amortization & Valuation --- 219 --- --- 219
Provision for Income Taxes 1,169 81 90 (535) 805
Segment Profit 2,631 124 161 (525) 2,391
Segment Assets 862,495 122,623 3,792 3,534 992,444
Three months Ended March 31, 2000
Retail Mortgage Consolidated
Banking Banking Insurance Other Totals
------- ------- --------- ----- ------
Net Interest Income $ 7,484 $ 1,027 $ 2 $89 $ 8,602
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale (1) (43) --- --- (44)
Servicing Income --- 101 --- --- 101
Insurance Revenues 42 21 468 --- 531
Noncash Items:
Provision for Loan Losses 173 142 --- --- 315
MSR Amortization & Valuation --- 51 --- --- 51
Provision for Income Taxes 1,121 84 29 (474) 760
Segment Profit 2,417 127 49 (426) 2,167
Segment Assets 868,118 177,957 2,601 5,603 1,054,279
8
Note 6 - New Accounting Pronouncements
Beginning January 1, 2001 a new accounting standard, Financial Accounting
Standards No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging
Activities, 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 and March 31, 2001 the Company's derivatives
include forward commitments to sell mortgage loans and interest rate caps. The
effect of adopting FAS 133 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 $5,637 and a market value of $5,784, resulting in a net increase in equity of
$88 at the time of transfer.
Note 7 - Subsequent Events
On April 26, 2001 the Company announced that its Board of Directors has approved
a stock repurchase program for up to 525,000 of the outstanding Common Shares of
the Company, representing nearly five percent of its outstanding shares. Shares
may be purchased from time to time in the open market and in large block
privately negotiated transactions. The Company intends to commence bidding for
shares on May 14, 2001. The Company is not obligated to purchase any shares
under the program, and the program may be discontinued at any time before the
maximum number of shares specified by the program are purchased.
9
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliate
community banks with 27 banking offices and 5 full-service insurance agencies in
the eight contiguous Southwestern Indiana counties of Daviess, Dubois, Gibson,
Knox, Martin, Perry, Pike and Spencer. The banks' wide range of personal and
corporate financial services include making commercial and consumer loans;
marketing, originating, and servicing mortgage loans; providing trust,
investment advisory and brokerage services; accepting deposits and providing
safe deposit facilities. The Company's insurance activities include offering a
full range of title, property, casualty, life and credit insurance products.
This section presents an analysis of the consolidated financial condition of the
Company as of March 31, 2001 and December 31, 2000 and the consolidated results
of operations for the three-month periods ended March 31, 2001 and 2000. This
discussion should be read in conjunction with the consolidated financial
statements and other financial data presented elsewhere herein and with the
financial statements and other financial data, as well as the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's December 31, 2000 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net Income:
Net income increased $224,000 to $2,391,000 or $0.23 per share for the quarter
ended March 31, 2001 compared to $2,167,000 or $0.21 per share for the first
quarter of 2000. The increased earnings were primarily attributable to
non-interest income growth within both the Company's core retail banking
operation and its insurance operations.
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. The following table
summarizes German American Bancorp's net interest income (on a tax-equivalent
basis, at an effective tax rate of 34%) for each of the periods presented herein
(dollars in thousands):
Three months Change from
Ended March 31, Prior Period
2001 2000 Amount Percent
----------- ----------- --------- -------
Interest Income (T/E) $ 19,855 $ 19,812 $ 43 0.2%
Interest Expense 10,896 10,737 159 1.5%
----------- ----------- ---------
Net Interest Income (T/E) $ 8,959 $ 9,075 $ (116) -1.3%
=========== =========== =========
Net interest income decreased $132,000 or 1.5% ($116,000 or 1.3% on a
tax-equivalent basis) for the quarter ended March 31, 2001 compared with the
first quarter of 2000. Net interest margin is tax-equivalent net interest income
expressed as a percentage of average earning assets. For the first quarter of
2001, the net interest margin was 3.74% compared to 3.67% for the comparable
period of 2000.
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 involved the
reclassification of approximately $69.8 million of sub-prime, out-of-market
mortgage loans as held-for-sale in December 2000 and the subsequent sale of
these loans in February 2001. The Company no longer originates these types of
loans.
10
The decline in the Company's net interest income is largely attributable to a
decline in the level of interest earning assets. The decline in interest earning
assets is attributable to the call of $46.7 million of investment securities due
to the declining interest rate environment during the first quarter of 2001 and
the aforementioned sale of sub-prime mortgage loans. Average loans outstanding
declined $7.4 million during the first quarter of 2001 compared with the same
period of the prior year as strong loan growth during the last nine months of
2000 largely offset the impact on average loans outstanding of the sale of
sub-prime out-of-market residential mortgage loans during February 2001.
Proceeds from the called investment securities and sale of sub-prime residential
mortgage loans were used to reduce short-term wholesale funding, including jumbo
and brokered deposits and FHLB advances.
Provision For Loan Losses:
The Company provides for loan losses through regular provisions to the allowance
for loan losses. These provisions are made at levels considered necessary by
management to absorb estimated losses in the loan portfolio. A detailed
evaluation of the adequacy of this loan loss reserve is completed quarterly by
management.
The consolidated provision for loan losses was $165,000 for the three months
ended March 31, 2001 compared to $315,000 for the same period of 2000. The
provision for loan losses to be recorded in future periods will be adjusted
based on the results of on-going evaluations of the adequacy of the allowance
for loan losses. The lower level of provision was a result of the liquidation of
the Company's sub-prime out-of-market residential mortgage loan portfolio.
Net charge-offs were $566,000 or 0.31% annualized of average loans the three
months ended March 31, 2001 compared to $236,000 or 0.13% annualized of average
loans in the first quarter of 2000. A significant amount of the net charge-offs
during 2001 and 2000 were related to the sub-prime residential real estate loans
housed in the mortgage banking division. Certain non-performing sub-prime loans
that were not sold as a part of the balance sheet restructuring have been
charged-off against the Company's allowance as the properties were acquired in
satisfaction of the loans.
Non-performing loans represented 0.67% of total loans at March 31, 2001 compared
to 1.34% at December 31, 2000. The significant improvement is related to the
liquidation substantially all of the Company's out-of-market sub-prime
residential real estate portfolio. See discussion of "Financial Condition" for
more information regarding nonperforming assets.
Non-interest Income:
Non-interest income for the quarter ended March 31, 2001 increased $677,000 or
42% compared with the first quarter of 2000. The increase resulted primarily
from growth in Insurance Revenues and Net Gains on Sales of Loans and Related
Assets and gains on sales of property and equipment.
Insurance Revenues increased $417,000 or 79% for the three months ended March
31, 2001 compared with the same period during 2000. The increases were primarily
due to an overall growth in the property and casualty insurance operations of
Doty Insurance Agency, Inc. In addition, Insurance Revenues increased due to the
initiation during 2000 of the Company's credit life and disability reinsurance
operation through German American Reinsurance Company, Ltd. (GARC). No insurance
income was realized by GARC until late 2000.
Net Gains on Sales of Loans and Related Assets, and Provision for Market Losses
on Loans Held for Sale are derived predominantly from the Company's mortgage
banking division. The net gain increased $173,000 in the quarter ended March 31,
2001 compared with 2000. The increased gain on sales of loans resulted from the
lowering interest rate environment during the first quarter of 2001 and an
increased level of loan sales to the secondary markets. Loans sales totaled
$13.0 million during the first three months of 2001 compared with $5.5 million
in 2000.
The Net Gain on Sale of Loans and Related Assets was reduced in the first
quarter of 2001 by an $87,000 valuation of the forward commitments to sell
mortgage loans used to manage interest rate risk associated with the mortgage
banking division's residential mortgage loan pipeline. This valuation resulted
from the Company's first quarter following a new accounting standard, FAS 133.
This valuation included $52,000 of expense at adoption on January 1, 2001, and
$35,000 of additional expense during the quarter.
Other non-interest income increased $90,000 due primarily to the gain on a sale
of a former branch office facility. The Company sold a duplicative branch office
facility acquired in a recent acquisition for a gain of $214,000. The branch
operations were merged into an existing branch location. The increase from the
gain on sale reported in other non-interest income was partially offset by an
impairment adjustment recognized during the quarter on mortgage servicing
rights. The impairment adjustment totaled $167,000 and was caused by the decline
in market interest rates.
11
Non-interest Expense:
Non-interest expenses increased $426,000 or 6% for the three months ended March
31, 2001 as compared to the same period of the prior year. The increases
primarily occurred in Salaries and Employee Benefits.
Salaries and Employee Benefits increased $343,000 or 9% during the quarter ended
March 31, 2001 compared with the same period in 2000. Salaries and Employee
Benefits comprised approximately 58% of total non-interest expense in the first
quarter of 2001 and 57% in 2000. The increase in Salaries and Employee Benefits
was primarily attributable to two factors. First, the Company transitioned to a
pay-for-performance incentive plan in late 2000 and the first quarter of 2001
resulting in increased compensation expense. Second, employee medical insurance
benefits increased 58% during the first quarter of 2001 compared with the same
period in 2000.
Income Taxes:
The Company's effective income tax rate approximated 25% and 26% of pre-tax
income during the three months ended March 31, 2001 and 2000, respectively, and
is lower than the blended statutory rate of 39.6%. This lower effective rate
results primarily from the Company's tax-exempt investment income on securities
and loans, and from income tax credits generated from investments in affordable
housing projects.
FINANCIAL CONDITION
Total assets at March 31, 2001 decreased $87.4 million to $992.4 million
compared with $1.080 billion in total assets at December 31, 2000. Loans, net of
unearned income and allowance for loan losses, decreased by $13.1 million during
the first quarter of 2001. Loans Held for Sale declined by $55.7 million as a
result of the sale of sub-prime residential mortgage loans that was completed in
February 2001. Investment securities declined $43.4 million to $170.2 million at
March 31, 2001 compared with $213.6 million at year-end. The decline was the
result of the call of $46.7 million of investment securities during the first
quarter of 2001.
Interest-bearing Deposits decreased by $26.8 million during the three months
ended March 31, 2001. These declines were primarily in jumbo and brokered
deposits. FHLB Advances and Other Borrowings declined by $55.5 million during
the three months ended March 31, 2001. The bulk of the proceeds from the called
securities and sub-prime residential mortgage loan sale were used to reduce
wholesale funding including short-term borrowings from the FHLB and jumbo and
brokered deposits.
Federal Funds Sold and Other Short-term Investments increased $33.6 million
during the quarter as a result of the called securities and sale of sub-prime
residential mortgage loans. These balances will be used in future periods to
continue to liquidate short-term wholesale funding sources utilized by the
Company.
Non-performing Assets:
The following is an analysis of the Company's non-performing assets at March 31,
2001 and December 31, 2000 (dollars in thousands):
March 31, December 31,
2001 2000
----------- -------------
Non-accrual Loans $ 3,178 $ 8,014
Loans contractually past due 90 days or more 1,487 1,513
Renegotiated Loans --- ---
----------- -------------
Total Non-performing Loans 4,665 9,527
----------- -------------
Other Real Estate 1,315 1,579
----------- -------------
Total Non-performing Assets $ 5,980 $ 11,106
=========== =============
Allowance for Loan Loss to Non-performing Loans 190.23% 97.34%
Non-performing Loans to Total Loans 0.67% 1.34%
The significant decline in non-performing loans was the result of the
liquidation of substantially all of the mortgage banking division's sub-prime
out-of-market residential real estate loan portfolio.
12
Capital Resources:
Shareholders' equity totaled $99.9 million at March 31, 2001 or 10.1% of total
assets, an increase of $2.7 million from December 31, 2000.
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill, core
deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital currently consists of the amount of the allowance
for loan losses which does not exceed a defined maximum allowance limit of 1.25
percent of gross risk adjusted assets. Total capital is the sum of Tier 1 and
Tier 2 capital.
The minimum requirements under these standards are generally at least a 4.0
percent leverage ratio, which is Tier 1 capital divided by defined "total
assets"; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent
total capital to risk-adjusted assets ratios. Under these guidelines, the
Company, on a consolidated basis, and each of its affiliate banks individually,
have capital ratios that substantially exceed the regulatory minimums.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately-capitalized, under-capitalized, significantly
under-capitalized, and critically under-capitalized. Under these regulations, a
"well-capitalized" entity must achieve a Tier 1 Risk-based capital ratio of at
least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a
leverage ratio of at least 5.0 percent, and not be under a capital directive
order.
At March 31, 2001 management is not under such a capital directive, nor is it
aware of any current recommendations by banking regulatory authorities which, if
they were to be implemented, would have or are reasonably likely to have, a
material effect on the Company's liquidity, capital resources or operations.
The table below presents the Company's consolidated capital ratios under
regulatory guidelines:
To be Well
Capitalized
Under Prompt
Minimum Corrective
for Capital Action At At
Adequacy Provisions March 31, December 31,
Purposes (FDICIA) 2001 2000
------------ ------------ ---------- ------------
Leverage Ratio 4.00% 5.00% 9.39% 8.91%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 13.97% 13.13%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 15.26% 14.38%
Liquidity:
The Consolidated Statement of Cash Flows details the elements of change in the
Company's cash and cash equivalents. During the first three months of 2001,
operating activities provided $57.6 million of available cash, which included
net income of $2.4 million. Major cash outflows experienced during the three
months ended March 31, 2001 included $1.5 million in dividends, a $30.8 million
decrease in deposits, and $55.5 million in repayment on borrowings.
The proceeds from the maturities and sales of securities exceeded the cash
outflows from the purchases of securities by approximately $46.3 million. Total
cash inflows for the period exceeded outflows by $29.9 million, leaving cash and
cash equivalents of $58.4 million at March 31, 2001.
13
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-Q, 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. Factors that could
cause the Company's actual results to vary materially from those expressed or
implied by any forward-looking statements 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 Form 10-K report for the year
ended December 31, 2000 and from time to time in the Company's other SEC reports
when considering any forward-looking statement.
Item 3. 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.
The liquidity of the parent company is dependent upon the receipt of dividends
from its bank subsidiaries, which are subject to certain regulatory limitations.
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.
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, and by estimating its static interest rate
sensitivity position. 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.
14
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 table below provides an assessment of the risk to NPV in the event of sudden
and sustained 2% increase and decrease in prevailing interest rates. The table
indicates that as of March 31, 2001 the Company's estimated NPV has shown
significant improvement over year-end results in a sudden and sustained 2%
increase in rates (dollars in thousands).
Interest Rate Sensitivity as of March 31, 2001
Net Portfolio Value
Net Portfolio as a % of Present
Value Value of Assets
Changes
In rates $ Amount $ Change NPV Ratio Change
-------- -------- -------- --------- ------
+2% $78,542 (19.6)% 8.16% (164) b.p.
Base 97,668 --- 9.80 ---
-2% 100,251 2.6 9.84 4 b.p.
Item 3 includes forward-looking statements. See "Forward-looking Statements"
included in Item 2 of this Report for a discussion of certain factors that could
cause the Company's actual exposure to market risk to vary materially from that
expressed or implied above. These factors include possible changes in economic
conditions; interest rate fluctuations, competitive product and pricing
pressures within the Company's markets; and equity and fixed income market
fluctuations. Actual experience may also vary materially to the extent that the
Company's assumptions described above prove to be inaccurate.
15
PART II. OTHER INFORMATION
Item 5. Other Information
On April 26, 2001 the Company announced that its Board of Directors has approved
a stock repurchase program for up to 525,000 of the outstanding Common Shares of
the Company, representing nearly five percent of its outstanding shares. Shares
may be purchased from time to time in the open market and in large block
privately negotiated transactions. The Company intends to commence bidding for
shares on May 14, 2001. The Company is not obligated to purchase any shares
under the program, and the program may be discontinued at any time before the
maximum number of shares specified by the program are purchased.
The Company intends to use the repurchased shares principally to fund the
Company's 5% annual stock dividend that has been paid in December of each year
since 1995, if and when such dividend is declared and issued. The Company may
also use the repurchased shares for the Company's stock option and other
stock-based employee benefit plans, its direct stock purchase and dividend
reinvestment plan, and for general corporate purposes.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
3.1 Restatement of Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3.01 to Registrant's Current
Report on Form 8-K filed May 5, 2000.
3.2 Restated Bylaws of the Registrant as amended January 31, 2001, are
incorporated by reference from Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000.
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 copes 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.
(b) Reports on Form 8-K
Therewere no reports on Form 8-K filed during the period ended March 31, 2001.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date May 15, 2001 By /s/ Mark A. Schroeder
------------------------ ---------------------------------------
Mark A. Schroeder
President and CEO
Date May 15, 2001 By /s/Richard E. Trent
------------------------ ---------------------------------------
Richard E. Trent
Chief Financial Officer and
Principal Accounting Officer
17