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
June 30, 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 August 1, 2001
Common Stock, No par value 10,510,139
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets - June 30, 2001 and December 31, 2000
Consolidated Statements of Income and Comprehensive Income -- Three
and Six months Ended June 30, 2001 and 2000
Consolidated Statements of Cash Flows -- Six months Ended June 30,
2001 and 2000
Notes to Consolidated Financial Statements -- June 30, 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 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
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)
June 30, December 31,
2001 2000
------------ -----------
(unaudited)
ASSETS
Cash and Due from Banks................................................ $ 23,458 $ 26,987
Federal Funds Sold and Other Short-term Investments.................... 88,025 1,460
------------ -----------
Cash and Cash Equivalents......................................... 111,483 28,447
Interest-bearing Time Deposits with Banks.............................. 299 1,495
Securities Available-for-Sale, at Market .............................. 121,959 185,188
Securities Held-to-Maturity, at Cost .................................. 22,180 28,454
Loans Held for Sale.................................................... 11,129 71,372
Total Loans............................................................ 685,023 710,119
Less: Unearned Income................................................. (629) (375)
Allowance for Loan Losses....................................... (8,832) (9,274)
------------ -----------
Loans, Net............................................................. 675,562 700,470
Stock in FHLB of Indianapolis, and Other Restricted Stock, at cost..... 12,596 12,596
Premises, Furniture and Equipment, Net................................. 20,579 21,065
Other Real Estate...................................................... 732 1,579
Intangible Assets...................................................... 2,141 2,147
Accrued Interest Receivable and Other Assets........................... 31,105 26,995
------------ -----------
TOTAL ASSETS.................................................... $ 1,009,765 $ 1,079,808
============ ===========
LIABILITIES
Noninterest-bearing Demand Deposits.................................... $ 84,051 $ 89,146
Interest-bearing Demand, Savings and Money Market Accounts............. 214,214 194,093
Time Deposits < $100,000............................................... 355,983 350,854
Time Deposits $100,000 or more and Brokered Deposits................... 58,933 101,477
------------ -----------
Total Deposits.................................................... 713,181 735,570
FHLB Advances and Other Borrowings..................................... 184,877 235,230
Accrued Interest Payable and Other Liabilities......................... 10,571 11,748
------------ -----------
TOTAL LIABILITIES............................................... 908,629 982,548
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized...................................... 10,510 10,495
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued .............................. --- ---
Additional Paid-in Capital............................................. 63,389 63,175
Retained Earnings...................................................... 26,339 24,353
Accumulated Other Comprehensive Income (Loss) ......................... 898 (763)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY...................................... 101,136 97,260
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $ 1,009,765 $ 1,079,808
============ ===========
End of period shares issued and outstanding............................ 10,509,956 10,494,708
============ ===========
See accompanying notes to consolidated financial statements.
3
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three months Ended
June 30,
2001 2000
------------ -----------
INTEREST INCOME
Interest and Fees on Loans............................................. $ 14,802 $ 16,020
Interest on Federal Funds Sold and Other Short-term Investments........ 723 205
Interest and Dividends on Securities:
Taxable............................................................. 1,664 2,815
Non-taxable......................................................... 865 882
------------ -----------
TOTAL INTEREST INCOME............................................. 18,054 19,922
INTEREST EXPENSE
Interest on Deposits................................................... 7,248 7,805
Interest on FHLB Advances and Other Borrowings......................... 2,843 3,477
------------ -----------
TOTAL INTEREST EXPENSE............................................ 10,091 11,282
------------ -----------
NET INTEREST INCOME.................................................... 7,963 8,640
Provision for Loan Losses.............................................. 165 350
------------ -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................................................... 7,798 8,290
NONINTEREST INCOME
Trust and Investment Product Fees...................................... 307 334
Service Charges on Deposit Accounts.................................... 621 523
Insurance Revenues..................................................... 842 610
Other Income........................................................... 389 312
Net Gains on Sales of Loans and Related Assets, and Provision for
Losses on Loans Held for Sale....................................... 594 83
Net Gain / (Loss) on Sales of Securities............................... --- ---
------------ -----------
TOTAL NONINTEREST INCOME.......................................... 2,753 1,862
------------ -----------
NONINTEREST EXPENSE
Salaries and Employee Benefits......................................... 3,944 3,741
Occupancy Expense...................................................... 479 507
Furniture and Equipment Expense........................................ 476 516
Data Processing Fees................................................... 264 202
Professional Fees...................................................... 259 249
Advertising and Promotions............................................. 268 214
Supplies............................................................... 184 192
Other Operating Expenses............................................... 1,213 1,112
------------ -----------
TOTAL NONINTEREST EXPENSE......................................... 7,087 6,733
------------ -----------
Income before Income Taxes............................................. 3,464 3,419
Income Tax Expense..................................................... 930 949
------------ -----------
NET INCOME............................................................. $ 2,534 $ 2,470
============ ===========
COMPREHENSIVE INCOME................................................... $ 2,457 $ 2,317
============ ===========
Earnings Per Share and Diluted Earnings Per Share...................... $ 0.24 $ 0.23
Dividends Per Share.................................................... $ 0.14 $ 0.13
See accompanying notes to consolidated financial statements.
4
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Six months Ended
June 30,
2001 2000
------------ -----------
INTEREST INCOME
Interest and Fees on Loans............................................. $ 30,719 $ 31,445
Interest on Federal Funds Sold and Other Short-term Investments........ 970 431
Interest and Dividends on Securities:
Taxable............................................................. 4,018 5,636
Non-taxable......................................................... 1,713 1,749
------------ -----------
TOTAL INTEREST INCOME............................................. 37,420 39,261
INTEREST EXPENSE
Interest on Deposits................................................... 14,911 15,613
Interest on FHLB Advances and Other Borrowings......................... 6,076 6,406
------------ -----------
TOTAL INTEREST EXPENSE............................................ 20,987 22,019
------------ -----------
NET INTEREST INCOME.................................................... 16,433 17,242
Provision for Loan Losses.............................................. 330 665
------------ -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................................................... 16,103 16,577
NONINTEREST INCOME
Trust and Investment Product Fees...................................... 591 698
Service Charges on Deposit Accounts.................................... 1,157 991
Insurance Revenues..................................................... 1,790 1,141
Other Income........................................................... 786 619
Net Gains on Sales of Loans and Related Assets, and Provision for
Losses on Loans Held for Sale....................................... 723 39
Net Gain / (Loss) on Sales of Securities............................... 1 (8)
------------ -----------
TOTAL NONINTEREST INCOME.......................................... 5,048 3,480
------------ -----------
NONINTEREST EXPENSE
Salaries and Employee Benefits......................................... 8,247 7,701
Occupancy Expense...................................................... 998 982
Furniture and Equipment Expense........................................ 965 1,039
Data Processing Fees................................................... 514 419
Professional Fees...................................................... 461 464
Advertising and Promotions............................................. 535 445
Supplies............................................................... 349 408
Other Operating Expenses............................................... 2,422 2,253
------------ -----------
TOTAL NONINTEREST EXPENSE......................................... 14,491 13,711
------------ -----------
Income before Income Taxes............................................. 6,660 6,346
Income Tax Expense..................................................... 1,735 1,709
------------ -----------
NET INCOME............................................................. $ 4,925 $ 4,637
============ ===========
COMPREHENSIVE INCOME................................................... $ 6,586 $ 4,128
============ ===========
Earnings Per Share and Diluted Earnings Per Share...................... $ 0.47 $ 0.44
Dividends Per Share.................................................... $ 0.28 $ 0.26
See accompanying notes to consolidated financial statements.
5
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Six months Ended
June 30,
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................. $ 4,925 $ 4,637
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities:
Net (Accretion) / Amortization on Securities...................... (59) (76)
Depreciation and Amortization..................................... 1,211 1,191
Amortization of Mortgage Servicing Rights.............................. 97 99
Net Change in Loans Held for Sale................................. 60,195 659
Loss on Investment in Limited Partnership......................... 112 82
Provision for Loan Losses......................................... 330 665
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..................... (723) (39)
Loss / (Gain) on Sale of Property and Equipment................... (194) ---
Change in Assets and Liabilities:
Interest Receivable and Other Assets............................ (4,575) 207
Interest Payable and Other Liabilities.......................... (1,177) (1,836)
------------ -----------
Total Adjustments............................................ 55,216 960
------------ -----------
Net Cash from Operating Activities............................ 60,141 5,597
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks...................... 1,196 2,691
Proceeds from Maturities of Securities Available-for-Sale........... 79,697 6,376
Purchase of Securities Available-for-Sale........................... (8,032) (4,717)
Proceeds from Maturities of Securities Held-to-Maturity............. 649 1,845
Purchase of Securities Held-to-Maturity............................. --- (2,947)
Purchase of Loans................................................... --- (1,472)
Proceeds from Sales of Loans........................................ 2,290 500
Loans Made to Customers, net of Payments Received................... 22,039 (30,474)
Proceeds from Sale of Mortgage Servicing Rights..................... --- 111
Proceeds from Sales of Other Real Estate............................ 1,344 2,379
Property and Equipment Expenditures................................. (719) (1,114)
Proceeds from the Sale of Property and Equipment ................... 344 ---
Acquire Affiliates and Adjust to Conform Fiscal Years............... --- (298)
Acquire Insurance Agency............................................ (150) ---
------------ -----------
Net Cash from Investing Activities.............................. 98,658 (27,120)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits.................................................. (22,389) (28,715)
Change in Short-term Borrowings........................................ (40,239) (5,627)
Advances of Long-term Debt.......................................... --- 92,850
Repayments of Long-term Debt........................................ (10,114) (42,627)
Issuance of Common Stock............................................ 2 8
Purchase / Retirement of Common Stock............................... (84)
Dividends Paid...................................................... (2,939) (2,549)
------------ -----------
Net Cash from Financing Activities.............................. (75,763) 13,340
------------ -----------
Net Change in Cash and Cash Equivalents................................ 83,036 (8,183)
Cash and Cash Equivalents at Beginning of Year...................... 28,447 29,578
------------ -----------
Cash and Cash Equivalents at End of Period.......................... $ 111,483 $ 21,395
============ ===========
Non-cash Investing Activities -- See Note 5
See accompanying notes to consolidated financial statements.
6
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 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
June 30,
2001 2000
------------ -----------
Earnings per Share:
Net Income $ 2,534,000 $ 2,470,000
Weighted Average Shares Outstanding 10,499,538 10,478,436
------------ -----------
Earnings per Share: $ 0.24 $ 0.23
============ ===========
Diluted Earnings per Share:
Net Income $ 2,534,000 $ 2,470,000
Weighted Average Shares Outstanding 10,499,538 10,478,513
Stock Options, Net 1,462 77
------------ -----------
Diluted Weighted Average Shares Outstanding 10,501,000 10,478,513
------------ -----------
Diluted Earnings per Share $ 0.24 $ 0.23
============ ===========
7
Three months Ended
June 30,
2001 2000
------------ -----------
Earnings per Share:
Net Income $ 4,925,000 $ 4,637,000
Weighted Average Shares Outstanding 10,497,136 10,476,830
------------ -----------
Earnings per Share: $ 0.47 $ 0.44
============ ===========
Diluted Earnings per Share:
Net Income $ 4,925,000 $ 4,637,000
Weighted Average Shares Outstanding 10,497,136 10,476,830
Stock Options, Net 7 137
------------ -----------
Diluted Weighted Average Shares Outstanding 10,497,143 10,476,967
------------ -----------
Diluted Earnings per Share $ 0.47 $ 0.44
============ ===========
Note 3 - Securities
The amortized cost and estimated market values of Securities as of June 30, 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 $ 18,753 $ 18,569
Obligations of State and Political Subdivisions 31,932 32,911
Asset-/Mortgage-backed Securities 53,730 54,108
Equity Securities 16,058 16,371
------------ -----------
Total $ 120,473 $ 121,959
============ ===========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $ 22,180 $ 22,678
============ ===========
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
============ ===========
8
Note 4 - 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 banks' 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 June 30, 2001
Retail Mortgage Consolidated
Banking Banking Insurance Other Totals
-------------------------------------------------------------------------
Net Interest Income $ 7,701 $ 197 $ 9 $ 56 $ 7,963
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale 223 371 --- --- 594
Servicing Income --- 143 --- (53) 90
Insurance Revenues 61 53 747 (19) 842
Noncash Items:
Provision for Loan Losses 165 --- --- --- 165
MSR Amortization & Valuation --- 12 --- --- 12
Provision for Income Taxes 1,243 118 72 (503) 930
Segment Profit 2,759 179 74 (478) 2,534
Segment Assets 880,615 122,665 3,658 2,827 1,009,765
Three months Ended June 30, 2000
Retail Mortgage Consolidated
Banking Banking Insurance Other Totals
-------------------------------------------------------------------------
Net Interest Income $ 7,613 $ 953 $ 4 $ 70 $ 8,640
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale 26 57 --- --- 83
Servicing Income --- 111 --- (10) 101
Insurance Revenues 77 28 505 --- 610
Noncash Items:
Provision for Loan Losses 222 128 --- --- 350
MSR Amortization & Valuation --- 48 --- --- 48
Provision for Income Taxes 1,227 145 52 (475) 949
Segment Profit 2,620 222 83 (455) 2,470
Segment Assets 885,405 179,082 2,650 5,432 1,072,569
9
Six months Ended June 30, 2001
Retail Mortgage Consolidated
Banking Banking Insurance Other Totals
-------------------------------------------------------------------------
Net Interest Income $ 15,258 $ 1,031 $ 18 $ 126 $ 16,433
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale 373 350 --- --- 723
Servicing Income --- 274 --- (90) 184
Insurance Revenues 112 89 1,639 (50) 1,790
Noncash Items:
Provision for Loan Losses 330 --- --- --- 330
MSR Amortization & Valuation --- 231 --- --- 231
Provision for Income Taxes 2,412 199 162 (1,038) 1,735
Segment Profit 5,390 303 235 (1,003) 4,925
Segment Assets 880,615 122,665 3,658 2,827 1,009,765
Six months Ended June 30, 2000
Retail Mortgage Consolidated
Banking Banking Insurance Other Totals
-------------------------------------------------------------------------
Net Interest Income $ 15,097 $ 1,980 $ 6 $ 159 $ 17,242
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale 52 (13) --- --- 39
Servicing Income --- 222 --- (20) 202
Insurance Revenues 119 49 973 --- 1,141
Noncash Items:
Provision for Loan Losses 395 270 --- --- 665
MSR Amortization & Valuation --- 99 --- --- 99
Provision for Income Taxes 2,348 229 81 (949) 1,709
Segment Profit 5,037 349 132 (881) 4,637
Segment Assets 885,405 179,082 2,650 5,432 1,072,569
Note 5 - 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 June 30, 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 6 - Stock Repurchase Plan
On April 26, 2001 the Company announced that its Board of Directors 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 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. As of June
30, 2001, the Company had purchased 5,400 shares under the program.
10
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 June 30, 2001 and December 31, 2000 and the consolidated results
of operations for the three-month and six-month periods ended June 30, 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 $64,000 to $2,534,000 or $0.24 per share for the quarter
ended June 30, 2001 compared to $2,470,000 or $0.23 per share for quarter ended
June 30, 2000. Net income increased $288,000 to $4,925,000 or $0.47 per share
for the six months ended June 30, 2001 compared to $4,637,000 or $0.44 per share
for six months ended June 30, 2000. The increased earnings in both the three-
and six-month periods were primarily attributable to non-interest income growth
from increased gains on sales of mortgage loans and increased insurance revenues
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 June 30, Prior Period
2001 2000 Amount Percent
-------- -------- --------- ---------
Interest Income (T/E) $ 18,551 $ 20,435 $ (1,884) -9.2%
Interest Expense 10,091 11,309 (1,218) -10.8%
-------- -------- ---------
Net Interest Income (T/E) $ 8,460 $ 9,126 $ (666) -7.3%
======== ======== =========
Net interest income decreased $677,000 or 7.8% ($666,000 or 7.3% on a
tax-equivalent basis) for the quarter ended June 30, 2001 compared with the
second quarter of 2000. Net interest margin is tax-equivalent net interest
income expressed as a percentage of average earning assets. For the second
quarter of 2001, the net interest margin was 3.61% compared to 3.64% for the
comparable period of 2000.
Three months Change from
Ended June 30, Prior Period
2001 2000 Amount Percent
-------- -------- --------- ---------
Interest Income (T/E) $ 37,421 $ 39,288 $ (1,867) -4.8%
Interest Expense 20,987 22,046 (1,059) -4.8%
-------- -------- ---------
Net Interest Income (T/E) $ 16,434 $ 17,242 $ (808) -4.7%
======== ======== =========
11
Net interest income decreased $809,000 or 4.7% ($808,000 or 4.7% on a
tax-equivalent basis) for the six months ended June 30, 2001 compared with the
first six months of 2000. For the first six months of 2001, the net interest
margin was 3.67% compared to 3.66% 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 strengthen 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.
The decline in the Company's net interest income is largely attributable to a
decline in the overall level of interest earning assets and an increase in
federal funds sold and other short-term investments. The decline in interest
earning assets is attributable to the call of $78.8 million of investment
securities due to the declining interest rate environment during the first six
months of 2001 and the aforementioned sale of sub-prime mortgage loans. Proceeds
from the called investment securities and sale of sub-prime residential mortgage
loans were used to reduce short-term wholesale funding, including time deposits
of $100,000 or more, brokered deposits and FHLB advances. In addition, a
significant portion of these proceeds have been held in federal funds sold and
other investments for use as collateral for borrowings and to reduce other
short-term wholesale funds as these reach maturity during 2001. Alternative
short-term investment yields have been insufficient to warrant extending the
maturities of these funds.
Average loans outstanding (including loans held for sale) declined $57.5 million
and $32.5 million during the three month and six months ended June 30, 2001
compared with the same periods of the prior year. The sale of sub-prime
residential mortgage loans previously discussed was the primary factor in the
reduced level of average loans outstanding. Also contributing to the decline in
average loans outstanding during the first six months of 2001 has been the sale
of a majority of the Company's residential loan production to the secondary
market. While this has not improved the Company's net interest income, the
increase in the level of loans sold has contributed to the Company's
non-interest income growth.
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 and $330,000 for the
three and six months ended June 30, 2001 compared to $350,000 and $665,000 for
the same periods of 2000. The lower level of provision during 2001 was primarily
a result of the liquidation of the Company's sub-prime out-of-market residential
mortgage loan portfolio. 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.
Net charge-offs were $206,000 or 0.12% and $772,000 or 0.21% annualized of
average loans for the three and six months ended June 30, 2001 compared to
$232,000 or 0.12% and $468,000 or 0.12% annualized of average loans in the three
and six months ended June 30, 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
partial satisfaction of the loans.
Non-performing loans represented 0.57% of total loans at June 30, 2001 compared
to 1.34% at December 31, 2000. The significant improvement is primarily related
to the liquidation of 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 June 30, 2001 increased $891,000 or
48% compared with the quarter ended June 30, 2000. Non-interest income for the
six months ended June 30, 2001 increased $1,568,000 or 45% compared with the six
months ended June 30, 2000. The increase resulted primarily from growth in
Insurance Revenues and Net Gains on Sales of Loans and Related Assets.
12
Insurance Revenues increased $232,000 or 38% and $649,000 or 57% for the three
and six months ended June 30, 2001 compared with the same periods 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 $328,000 during the six months ended June 30, 2001
compared with the prior year because of the initiation during 2000 of the
Company's credit life and disability reinsurance operation through German
American Reinsurance Company, Ltd. (GARC). No insurance revenues were 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 $511,000 and $684,000 in the quarter
and six months ended June 30, 2001 compared with 2000. The increased gain on
sales of loans resulted from an increased level of residential loan production
and a corresponding increase in loan sales to the secondary markets. A lowering
interest rate environment fueled these increases during the first half of 2001.
Loan sales totaled $45.0 million and $58.0 million during the three and six
months ended June 30, 2001 compared with $5.7 and $11.2 million in the same
periods of 2000.
Other non-interest income increased $167,000 during the six months ended June
30, 2001 compared with 2000 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 impairment
adjustments of $136,000 recognized during the period on mortgage servicing
rights. The impairment adjustments were caused by the decline in market interest
rates.
Non-interest Expense:
Non-interest expenses increased $354,000 or 5% and $780,000 or 6% for the three
and six months ended months ended June 30, 2001 as compared to the same periods
of the prior year. The increases primarily occurred in Salaries and Employee
Benefits.
Salaries and Employee Benefits increased $203,000 or 5% and $546,000 or 7%
during the quarter and six months ended June 30, 2001 compared with the same
periods in 2000. Salaries and Employee Benefits comprised approximately 57% of
total non-interest expense in the first half of 2001 and 56% 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 half of 2001 resulting in increased compensation
expense. Second, employee medical insurance benefit costs increased 35% during
the six months ended June 30, 2001 compared with the same period in 2000.
The Other Operating Expense category of non-interest expense increased $101,000
or 9% and $169,000 or 8% during the three and six months ended June 30, 2001
compared with the same periods of 2000. These increases were largely related to
costs of building insurance claim reserves by GARC. No expenses associated with
building these claim reserves were realized by GARC until late 2000.
Income Taxes:
The Company's effective income tax rate approximated 27% and 26% of pre-tax
income during the three and six months ended June 30, 2001 and 28% and 27% of
pre-tax income during the same periods of 2000. The effective tax rates in all
periods were lower than the blended statutory rate of 39.6%. The lower effective
rates result 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 June 30, 2001 decreased $70.0 million to $1.010 billion compared
with $1.080 billion in total assets at December 31, 2000. Loans, net of unearned
income and allowance for loan losses, decreased by $25.1 million during the six
months ended June 30, 2001. This decline was isolated to the Company's
residential loan portfolio. In the current interest rate environment, the
Company has sold a majority of new residential loan production in the secondary
market. Loans Held for Sale declined by $60.2 million as a result of the sale of
sub-prime residential mortgage loans that was completed in February 2001.
Investment securities declined $69.5 million to $144.1 million at June 30, 2001
compared with $213.6 million at year-end. The decline was the result of the call
of $78.8 million of investment securities during the first half of 2001.
13
Federal Funds Sold and Other Short-term Investments have increased $86.6 million
during the first six months of 2001 as a result of the called securities and
sale of sub-prime residential mortgage loans. A significant portion of these
proceeds have been held in Federal Funds Sold and Other Short-term Investments
for use as collateral for borrowings and to reduce other short-term wholesale
funds as these reach maturity during 2001. Alternative investment yields have
been insufficient to warrant extending the maturities of these funds.
Total deposits decreased by $22.4 million during the six months ended June 30,
2001 with the majority of the decline in Time Deposits $100,000 or more and
Brokered Deposits. These types of deposits have been reduced by $42.5 million
since year-end. FHLB Advances and Other Borrowings declined by $50.4 million
during the six months ended June 30, 2001. Proceeds from the called securities
and sub-prime residential mortgage loan sale were used to reduce jumbo deposits
and borrowings.
Non-performing Assets:
The following is an analysis of the Company's non-performing assets at June 30,
2001 and December 31, 2000 (dollars in thousands):
June 30, December 31,
2001 2000
----------- ------------
Non-accrual Loans $ 2,384 $ 8,014
Loans contractually past due 90 days or more 1,504 1,513
Renegotiated Loans --- ---
----------- ------------
Total Non-performing Loans 3,888 9,527
----------- ------------
Other Real Estate 732 1,579
----------- ------------
Total Non-performing Assets $ 4,620 $ 11,106
=========== ============
Allowance for Loan Loss to Non-performing Loans 227.16% 97.34%
Non-performing Loans to Total Loans 0.57% 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.
Capital Resources:
Shareholders' equity totaled $101.1 million at June 30, 2001 or 10.0% of total
assets, an increase of $3.9 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.
14
At June 30, 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 for Corrective
Capital Action At At
Adequacy Provisions June 30, December 31,
Purposes (FDICIA) 2001 2000
----------- ------------ -------- ------------
Leverage Ratio 4.00% 5.00% 9.79% 8.91%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 14.25% 13.13%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 15.53% 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 six months of 2001,
operating activities provided $60.1 million of available cash, which included
net income of $4.9 million. Major cash outflows experienced during the six
months ended June 30, 2001 included $2.9 million in dividends, a $22.4 million
decrease in deposits and $50.4 million in repayment of borrowings.
The proceeds from the maturities and sales of securities exceeded the cash
outflows from the purchases of securities by approximately $72.3 million. Total
cash inflows for the period exceeded outflows by $83.0 million, leaving cash and
cash equivalents of $111.5 million at June 30, 2001.
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; dividend policy; estimated cost savings,
plans and objectives for future operations; and expectations about performance
and 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 integration 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
15
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.
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 (dollars in
thousands).
Interest Rate Sensitivity as of June 30, 2001
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
----- ---------
Changes
In rates $ Amount % Change NPV Ratio Change
- -------- -------- -------- --------- ------
+2% $ 79,080 (21.1)% 8.05% (180) b.p.
Base 100,210 --- 9.85 ---
-2% 103,285 3.1 9.95 10 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.
16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company issued 20,524 common shares, which were valued by the Company at
date of issuance at an aggregate of $311,000, during June 2001 to members of the
Board of Directors of the Company and its affiliate banks in payment of a
portion of their fees for service as such. These issuances were made in reliance
upon Section 4(2) exemption.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on April 26, 2001. At the
Annual Meeting, the shareholders elected the following Directors for two-year
terms expiring in the year 2003:
Votes Votes Broker
Nominee Cast for Withheld/Abstained Non-Votes
David G. Buehler....................... 6,060,123 269,994 0
David B. Graham........................ 6,067,855 262,262 0
C. James McCormick..................... 5,935,271 394,847 0
Joseph F. Steurer...................... 6,082,556 247,561 0
Michael J. Voyles...................... 6,089,045 241,072 0
At the Annual Meeting, the shareholders elected the following Directors for
three-year terms expiring in the year 2004:
Votes Votes Broker
Nominee Cast for Withheld/Abstained Non-Votes
George W. Astrike...................... 6,072,130 257,987 0
William R. Hoffman..................... 6,082,556 247,561 0
J. David Lett.......................... 6,082,928 247,189 0
Chet L. Thompson....................... 6,097,225 232,892 0
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 April 26, 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 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
There were no reports on Form 8-K filed during the period ended June 30,
2001.
17
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 August 13, 2001 By /s/ Mark A. Schroeder
------------------ -----------------------------------------
Mark A. Schroeder
President and CEO
Date August 13, 2001 By /s/ Richard E. Trent
------------------ -----------------------------------------
Richard E. Trent
Chief Financial Officer and
Principal Accounting Officer
18