UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended: December 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Box 810, Jasper, Indiana 47546
- ----------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
NONE Not Applicable
---- --------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, No Par Value
---------------------------
Preferred Stock Purchase Rights
-------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (assuming solely for purposes of this calculation that all directors
and executive officers of the Registrant are affiliates) valued at the last
trade price reported by NASDAQ as of March 1, 2002 was approximately
$153,054,000.
As of March 1, 2002 there were outstanding 10,943,891 common shares, no par
value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of German American Bancorp for the Annual
Meeting of its Shareholders to be held April 25, 2002, to the extent stated
herein, are incorporated by reference into Part III.
GERMAN AMERICAN BANCORP
2001 ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1. Business.............................................. 3
Item 2. Properties............................................ 6
Item 3. Legal Proceedings..................................... 7
Item 4. Submission of Matters to a Vote of Security Holders... 7
Special Item. Executive Officers of the Registrant.................. 7
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................... 8
Item 6. Selected Financial Data............................... 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 10-24
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk..................................... 24
Item 8. Financial Statements and Supplementary Data........... 26-58
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 58
PART III
Item 10. Directors and Executive Officers of the Registrant.... 58
Item 11. Executive Compensation................................ 58
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................. 58
Item 13. Certain Relationships and Related Transactions........ 58
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K..................... 59
SIGNATURES ......................................................... 60
INDEX OF EXHIBITS........................................................ 61-63
- 2 -
PART I
Item 1. Business.
General
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliated
community banks with 27 banking offices and 5 full-service independent insurance
agencies in the nine contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike, Spencer and Vanderburgh. The Company
operates a business lending center in Evansville, Indiana. The Company's lines
of business include retail and commercial banking, mortgage banking, trust and
investment brokerage services, title insurance, and a full range of personal and
corporate property and casualty insurance products. Financial and other
information by segment is included in "Note 16 - Segment Information" of the
"Notes to the Consolidated Financial Statements" included in Item 8 of this
Report and is incorporated into this Item 1 by reference.
The Company's principal subsidiaries are described in the following table:
Names of Principal Subsidiaries Type of Business Location
- ------------------------------- ---------------- --------
The German American Bank Commercial Bank Jasper, IN
First American Bank Commercial Bank Vincennes, IN
First State Bank,
Southwest Indiana Commercial Bank Tell City, IN
German American Holdings
Corporation 2nd Tier Holding Company Jasper, IN
Peoples Bank Commercial Bank Washington, IN
Citizens State Bank Commercial Bank Petersburg, IN
The Doty Agency, Inc. Insurance Agency Petersburg, IN
First Title Insurance Company Title Insurance Agency Vincennes, IN
The Company intends during 2002 to consolidate and expand its German American
Financial Advisors business by establishing a new trust company subsidiary under
Indiana law to be named German American Financial Advisors and Trust Company.
This subsidiary will expand the offerings by the Company's subsidiary banks of
trust administration, risk management, asset allocation and management, and
estate planning products and services.
The Company over the five-year period ended December 31, 2001 has experienced
both internal growth and growth by acquiring other banks and insurance agencies.
For a description of acquisitions see Note 18 to the Company's consolidated
financial statements included in this report. Most of these acquisitions have
been accounted for under the pooling-of-interests method of accounting with the
result that the financial statements for all periods prior to such acquisitions
were retroactively restated.
Competition
The industries in which the Company operates are highly competitive. The
Company's subsidiary banks compete for commercial and retail banking business
within its core banking segment not only with financial institutions that have
offices in the same counties but also with financial institutions that compete
from other locations in Southwest Indiana and elsewhere. The Company's
subsidiaries compete with commercial banks, savings and loan associations,
savings banks, credit unions, production credit associations, federal land
banks, finance companies, credit card companies, personal loan companies,
investment brokerage firms, insurance agencies, insurance companies, lease
finance companies, money market funds, mortgage companies and other
non-depository financial intermediaries. Many of these banks and other
organizations have substantially greater resources than the Corporation.
Employees
At February 28, 2002 the Company and its subsidiaries employed approximately 423
full-time equivalent employees. There are no collective bargaining agreements,
and employee relations are considered to be good.
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Regulation and Supervision
The Company is subject to the Bank Holding Company Act of 1956, as amended ("BHC
Act"), and is required to file with the Board of Governors of the Federal
Reserve System ("FRB") annual reports and such additional information as the FRB
may require. The FRB may also make examinations or inspections of the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to its bank subsidiaries and to commit resources to support them even
in circumstances where the Company might not do so absent such an FRB policy.
The Company's five subsidiary banks are under the supervision of and subject to
examination by the Indiana Department of Financial Institutions ("DFI"), and the
Federal Deposit Insurance Corporation ("FDIC"). Regulation and examination by
banking regulatory agencies are primarily for the benefit of depositors rather
than shareholders.
With certain exceptions, the BHC Act prohibits a bank holding company from
engaging in, or acquiring direct or indirect control of more than 5 percent of
the voting shares of any company engaged in nonbanking activities. One of the
principal exceptions to this prohibition is for activities deemed by the FRB to
be "closely related to banking." Under current regulations, bank holding
companies and their subsidiaries are permitted to engage in such banking-related
business ventures as consumer finance; equipment leasing; credit life insurance;
computer service bureau and software operations; mortgage banking; and
securities brokerage.
Under the BHC Act, certain well-managed and well-capitalized bank holding
companies may elect to be treated as a "financial holding company" and, as a
result, be permitted to engage in a broader range of activities that are
"financial in nature" and in activities that are determined to be incidental or
complementary to activities that are financial in nature. These activities
include underwriting, dealing in and making a market in securities; insurance
underwriting and agency activities; and merchant banking. Banks may also engage
through financial subsidiaries in certain of the activities permitted for
financial holding companies, subject to certain conditions. The Company has not
elected to become a financial holding company and none of its subsidiary banks
have elected to form financial subsidiaries.
Indiana law and the BHC Act restrict certain types of expansion by the Company
and its bank subsidiaries. Under the BHC Act, the Company may establish
non-banking offices without geographical limitation. Under the BHC Act, the
Company must receive the prior written approval of the FRB or its delegate
before it may acquire ownership or control of more than 5 percent of the voting
shares of another bank, and under Indiana law it may not acquire 25 percent or
more of the voting shares of another bank without the prior approval of the DFI.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal Act"), allows bank holding companies to acquire banks located in
any state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law to establish interstate branch
networks through acquisitions of other banks, subject to certain conditions. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if
specifically authorized by state law. The legislation allowed individual states
to "opt-out" of certain provisions of the Riegle-Neal Act by enacting
appropriate legislation prior to June 1, 1997.
In 1996, Indiana authorized out-of-state banks to establish branch offices in
Indiana. The Indiana Financial Institutions Act now permits, in appropriate
circumstances,
(A) with the approval of the DFI:
o the acquisition of all or substantially all of the assets of an
Indiana-chartered bank by an FDIC-insured bank, savings bank or
savings association located in another state,
o the acquisition by an Indiana-chartered bank of all or substantially
all of the assets of an FDIC-insured bank, savings bank or savings
association located in another state,
- 4 -
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located in
other states having laws permitting such consolidation, with the
resulting organization chartered by Indiana, and
o the organization of a branch in Indiana by FDIC-insured banks located
in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting an Indiana-chartered bank to
establish a branch in such jurisdiction, and
(B) upon written notice to the DFI:
o the acquisition by an Indiana-chartered bank of one or more branches
(not comprising all or substantially all of the assets) of an
FDIC-insured bank, savings bank or savings association located in
another state, the District of Columbia, or a U.S. territory or
protectorate,
o the establishment by Indiana-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates, and
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located in
other states, with the resulting organization chartered by one of such
other states, and
(C) the sale by an Indiana-chartered bank of one or more of its branches
(not comprising all or substantially all of its assets) to an
FDIC-insured bank, savings bank or savings association located in a
state in which an Indiana-chartered bank could purchase one or more
branches of the purchasing entity.
The earnings of commercial banks and their holding companies are affected not
only by general economic conditions but also by the policies of various
governmental regulatory authorities. In particular, the FRB regulates money and
credit conditions and interest rates in order to influence general economic
conditions, primarily through open-market operations in U.S. Government
securities, varying the discount rate on bank borrowings, and setting reserve
requirements against bank deposits. These policies have a significant influence
on overall growth and distribution of bank loans, investments and deposits, and
affect interest rates charged on loans and earned on investments or paid for
time and savings deposits. FRB monetary policies have had a significant effect
on the operating results of commercial banks in the past and this is expected to
continue in the future. The general effect, if any, of such policies upon the
future business and earnings of the Company cannot accurately be predicted.
The Company and its bank subsidiaries are required by law to maintain minimum
levels of capital. These required capital levels are expressed in terms of
capital ratios, known as the leverage ratio and the capital to risk-based assets
ratios. The Company significantly exceeds the minimum required capital levels
for each measure of capital adequacy. See "Management's Discussion and Analysis
- -- Capital Resources," included in the Shareholders' Report.
Also, federal regulations define five categories of financial institutions for
purposes of implementing prompt corrective action and supervisory enforcement
requirements of the Federal Deposit Insurance Corporation Improvements Act of
1991. The category to which the most highly capitalized institutions are
assigned is termed "Well-Capitalized." Institutions falling into this category
must have a total risk-based capital ratio (the ratio of total capital to
risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the
ratio of Tier 1, or "core", capital to risk-weighted assets) of at least 6%, a
leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and
must not be subject to any written agreement, order or directive from its
regulator relative to meeting and maintaining a specific capital level. On
December 31, 2001, the Company had a total risk-based capital ratio of 14.86%, a
Tier 1 risk-based capital ratio of 13.69% (based on Tier 1 capital of
$99,296,000 and total risk-weighted assets of $725,126,000), and a leverage
ratio of 9.80%. The Company meets all of the requirements of the "Well
Capitalized" category and, accordingly, the Company does not expect these
regulations to significantly impact operations.
The Company is a corporation separate and distinct from its bank and other
subsidiaries. Most of the Company's revenues will be received by it in the form
of dividends or interest paid by its bank subsidiaries. These subsidiaries are
subject to statutory restrictions on its ability to pay dividends. The FRB has
issued a policy statement on the payment of cash dividends by bank holding
companies to the effect that a bank holding company should not pay cash
- 5 -
dividends exceeding its net income or which could only be funded in ways that
would weaken the bank holding company's financial health, such as by borrowing.
Additionally, the FRB possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability in appropriate cases to proscribe
the payment of dividends by banks and bank holding companies. The FDIC and DFI
possess similar enforcement powers over the respective bank subsidiaries of the
Company for which they have supervision. The "prompt corrective action"
provisions of federal banking law impose further restrictions on the payment of
dividends by insured banks which fail to meet specified capital levels and, in
some cases, their parent bank holding companies.
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 the Company's
financial and business performance and other business matters as well as
economic and market conditions and trends. They often can be identified by the
use of words like "expect," "may," "will," "would," "could," "should," "intend,"
"project," "estimate," "believe" or "anticipate," or similar expressions.
The Company may include forward-looking statements in filings with the
Securities and Exchange Commission ("SEC"), such as this Form 10-K, in other
written materials, and in oral statements made by senior management to analysts,
investors, representatives of the media, and others. It is intended that these
forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the forward-looking
statement is made.
Readers are cautioned that, by their nature, forward-looking statements are
based on assumptions and are subject to risks, uncertainties, and other factors.
Actual results may differ materially from the expectations of the Company that
are expressed or implied by any forward-looking statement. The discussion in
Item 7 of this Form 10-K, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," lists some of the factors that could cause
the Company's actual results to vary materially from those expressed or implied
by any forward-looking statements. Other risks, uncertainties, and factors that
could cause the Company's actual results to vary materially from those expressed
or implied by any forward-looking statement include the effects of changes in
competitive conditions; acquisitions of other businesses by the Company and
costs of integrations of such acquired businesses; the introduction, withdrawal,
success and timing of business initiatives and strategies; changes in customer
borrowing, repayment, investment and deposit practices; changes in fiscal,
monetary and tax policies; changes in interest rates and financial and capital
markets; changes in general economic conditions, either nationally or
regionally, resulting in, among other things, credit quality deterioration; the
impact, extent and timing of technological changes; capital management
activities; actions of the Federal Reserve Board and legislative and regulatory
actions and reforms; and the continued availability of earnings and excess
capital sufficient for the lawful and prudent declaration and payment of cash
dividends. Investors should consider these risks, uncertainties, and other
factors in addition to those mentioned by the Company in its other SEC filings
from time to time when considering any forward-looking statement.
Item 2. Properties.
The Company conducts its operations from the main office building of German
American Bank at 711 Main Street, Jasper, Indiana. The main office building
contains approximately 23,600 square feet of office space. The Banks and other
subsidiaries conduct their operations from 33 other locations in Southwest
Indiana.
- 6 -
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation
incidental to the business of the Company's subsidiary banks, to which the
Company or any of its subsidiaries is a party or of which any of their property
is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of 2001 to a vote of
security holders, by solicitation of proxies or otherwise.
Special Item. Executive Officers of the Registrant.
NAME AGE TITLE AND FIVE YEAR HISTORY
---- --- ---------------------------
George W. Astrike (66) Chairman of the Board of the Company
since January 1, 1999; Chairman and
Chief Executive Officer of the Company
from 1995 through 1998; Chairman of
German American Bank since 1995.
Director of Citizens State Bank and
First American Bank from date of
acquisition through April 1999.
Mark A. Schroeder (48) President and Chief Executive Officer of
the Company since January 1, 1999;
President and Chief Operating Officer of
the Company from 1995 through 1998;
Director of German American Bank since
1991. Director of each of the other
subsidiaries since acquisition by the
Company.
Clay W. Ewing (46) Executive Vice President - Retail
Banking of the Company since May, 1999;
Director of First American Bank since
May, 1999; President and Chief Executive
Officer of First State Bank from 1995
until March 2001; presently Chairman of
the Board of First State Bank. Director
of First State Bank since 1994.
Stan J. Ruhe (50) Executive Vice President - Credit
Administration of the Company since
1995; Director of Citizens State Bank
since May, 1999; Executive Vice
President of German American Bank since
1995.
Kenneth L. Sendelweck (47) Secretary / Treasurer of the Company
since May, 2000; Principal financial
officer of the Company since February,
2002; President, Chief Executive Officer
and Director of German American Bank
since May, 1999; Vice President,
Assistant Treasurer of Kimball
International, Inc. prior thereto.
Bradley M. Rust (35) Vice President and Controller of the
Company since September, 1999; Principal
accounting officer of the Company since
February, 2002; Secretary / Treasurer of
First American Bank (f/k/a First Federal
Bank, AFSB) since January, 1999; Senior
Vice President and Controller of First
American Bank prior thereto.
Messrs. Schroeder, Astrike and Ruhe have been associated with the Company in
various capacities since 1972, 1982, and 1983, respectively.
All officers are appointed annually and serve at the pleasure of the Company.
- 7 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
German American Bancorp's stock is traded on NASDAQ's National Market System
under the symbol GABC. The quarterly high and low closing prices for the
Company's common stock as reported by NASDAQ and quarterly cash dividends
declared and paid are set forth in the table below. All per share data are
retroactively restated for all stock dividends. Per share cash dividends have
not been restated for mergers accounted for as poolings of interests.
2001 2000
---- ----
Cash Cash
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
Fourth Quarter $18.50 $14.71 $0.133 $12.64 $10.94 $0.127
Third Quarter $18.10 $14.33 $0.133 $12.25 $11.11 $0.127
Second Quarter $15.33 $11.48 $0.133 $14.29 $13.04 $0.127
First Quarter $13.33 $11.55 $0.133 $16.33 $13.86 $0.118
------ ------
$0.532 $0.499
====== ======
The Common Stock was held of record by approximately 3,319 shareholders at March
1, 2002.
Cash dividends paid to the Company's shareholders are primarily funded from
dividends received by the Company from its subsidiaries. The Company presently
intends to follow its historical policy as to the amount, timing and frequency
of the payment of cash and stock dividends. The declaration and payment of
future dividends, however, will depend upon the earnings and financial condition
of the Company and its subsidiaries, general economic conditions, compliance
with regulatory requirements, and other factors.
Transfer Agent: UMB Bank, N.A. Regional J.J.B. Hilliard, W.L. Lyons, Inc.
Securities Transfer Division Market Makers: Louisville, Kentucky
P.O. Box 410064 Contact: George Morrin
Kansas City, MO 64141-0064 (800) 444-1854
Contact: Shareholder Relations
(800) 884-4225 NatCity Investments, Inc
Indianapolis, Indiana
Contact: Eric Wheeler
Shareholder (800) 321-7442
Information and Terri A. Eckerle
Corporate Office: German American Bancorp
P. O. Box 810
Jasper, Indiana 47547-0810
(812) 482-1314
- 8 -
Item 6. Selected Financial Data.
The following selected data has been taken from the Company's consolidated
financial statements. It should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Summary of Operations:
Interest Income........................ $ 71,069 $ 79,319 $ 72,135 $ 69,188 $ 66,909
Interest Expense....................... 38,917 45,646 37,744 36,315 35,354
----------- ----------- ----------- ----------- -----------
Net Interest Income................ 32,152 33,673 34,391 32,873 31,555
Provision for Loan Losses.............. 660 2,231 1,749 1,344 779
----------- ----------- ----------- ----------- -----------
Net Interest Income after Provision
For Loan Losses.................... 31,492 31,442 32,642 31,529 30,776
Non-interest Income.................... 9,772 2,543 (1) 6,385 5,249 5,866
Non-interest Expense................... 29,308 28,238 26,357 23,751 25,651 (2)
----------- ----------- ----------- ----------- -----------
Income before Income Taxes............. 11,956 5,747 12,670 13,027 10,991
Income Tax Expense..................... 2,763 459 3,316 3,805 3,179
----------- ----------- ----------- ----------- -----------
Net Income............................. $ 9,193 $ 5,288 $ 9,354 $ 9,222 $ 7,812
=========== =========== =========== =========== ===========
========================================================================================================================
Year-end Balances:
Total Assets........................... $ 1,015,111 $ 1,079,808 $ 1,056,641 $ 952,930 $ 895,485
Total Loans, Net of Unearned Income.... 657,166 709,744 (1) 741,609 639,816 559,517
Total Deposits......................... 726,874 735,570 751,428 714,779 688,692
Total Long-term Debt................... 156,726 182,370 126,902 124,381 100,296
Total Shareholders' Equity............. 102,209 97,260 93,685 97,153 89,847
========================================================================================================================
Average Balances:
Total Assets........................... $ 1,014,917 $ 1,070,093 $ 999,761 $ 919,750 $ 877,624
Total Loans, Net of Unearned Income.... 704,562 766,533 (1) 691,250 628,254 582,424
Total Deposits......................... 718,160 749,235 743,153 700,400 674,324
Total Shareholders' Equity............. 100,232 95,788 97,855 94,323 86,715
========================================================================================================================
Per Share Data (3):
Net Income............................. $ 0.83 $ 0.48 $ 0.84 $ 0.83 $ 0.70
Cash Dividends(4)...................... 0.53 0.50 0.44 0.39 0.31
Book Value at Year-end................. 9.26 8.83 8.52 8.75 8.14
========================================================================================================================
Other Data at Year-end:
Number of Shareholders................. 3,314 3,208 3,192 3,202 2,985
Number of Employees.................... 422 405 416 388 351
Weighted Average Number of Shares (3).. 11,028,876 11,010,344 11,157,115 11,167,915 11,159,990
========================================================================================================================
Selected Performance Ratios:
Return on Assets....................... 0.91% 0.49% 0.94% 1.00% 0.89%
Return on Equity....................... 9.17% 5.52% 9.56% 9.78% 9.01%
Equity to Assets....................... 10.07% 9.01% 8.87% 10.20% 10.03%
Dividend Payout........................ 62.75% 98.54% 50.04% 36.09% 38.10%
Net Charge-offs to Average Loans....... 0.22% 0.27% 0.23% 0.27% 0.04%
Allowance for Loan Losses to Loans..... 1.27% 1.31% 1.23% 1.34% 1.57%
Net Interest Margin.................... 3.62% 3.57% 3.87% 4.02% 3.99%
<FN>
- ------------------------
(1) In 2000, the Company reclassified $69.8 million of sub-prime, out-of-market residential mortgage loans as
held-for-sale. The difference between book value and market value resulted in a $5.2 million allowance for market
loss on loans held-for-sale.
(2) In 1997, 1ST BANCORP incurred a $1.3 million one-time special SAIF assessment.
(3) Share and Per Share Data has been retroactively adjusted to give effect for stock dividends and excludes the
dilutive effect of stock options.
(4) Cash Dividends represent historical dividends declared per share without retroactive restatement for poolings.
</FN>
- 9 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FORWARD-LOOKING STATEMENTS
This Item contains statements relating to future results of the Company that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Readers are cautioned that actual
results may differ materially from those expressed or implied therein as a
result of certain risks and uncertainties, including those risks and
uncertainties expressed in this Item 7 and those risks and uncertainties that
are described in Item 1 of this report, "Business," under the caption
"Forward-Looking Statements," which is incorporated herein by reference.
INTRODUCTION AND OVERVIEW
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliated
community banks with 27 banking offices and 5 full-service independent insurance
agencies in the nine contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike, Spencer and Vanderburgh. The Company
operates a business lending center in Evansville, Indiana. The Company's lines
of business include retail and commercial banking, mortgage banking, trust and
investment brokerage services, title insurance, and a full range of personal and
corporate property and casualty insurance products.
The information in this Management's Discussion and Analysis is presented as an
analysis of the major components of the Company's operations for the years 1999
through 2001 and its financial condition as of December 31, 2001 and 2000. This
information should be read in conjunction with the accompanying consolidated
financial statements and footnotes contained elsewhere in this report. Financial
and other information by segment is included in "Note 16 - Segment Information"
of the "Notes to the Consolidated Financial Statements" included in Item 8 of
this Report and is incorporated into this Item 7 by reference.
MERGERS AND ACQUISITIONS
There were no significant merger and acquisitions transactions completed during
2001. In October 2000, the Company completed a merger with Holland Bancorp, Inc.
Holland Bancorp was merged with and into the Company, with the simultaneous
merger of Holland's sole bank subsidiary, The Holland National Bank, into the
Company's subsidiary, The German American Bank. The Holland National Bank
operated four banking offices in Dubois County, Indiana. This merger was
accounted for as a pooling of interests and prior period financial information
has been restated accordingly.
In May 2000, the Company acquired the Fleck Insurance Agency, Inc. of Jasper,
Indiana. The Fleck Agency was merged into The Doty Agency, Inc. The Fleck Agency
was a general multi-line, full-service insurance agency with one office in
Jasper, Indiana. This merger was accounted for as a purchase. Accordingly,
operating results of the Fleck Agency are included only after the date of
merger.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NET INCOME
In 2001 the Company generated net income of $9,193,000 or $0.83 per share. The
2001 earnings increased by $3,905,000, or 74%, from the $5,288,000, or $0.48 per
share reported for 2000. Earnings during 2000 included $3,152,000 of after-tax
charges related to a balance sheet restructuring which occurred late in the
fourth quarter of 2000 as described below. Operating results for 2001
represented a 9% increase from the prior year's results, as adjusted for the
effects of the balance sheet restructuring. The increase in net income was
largely fueled by increases in insurance revenues and mortgage banking revenues
and a decrease in provision for loan losses. The increase in the non-interest
revenue sources helped to mitigate a decline of $1.5 million, or 5% in net
interest income.
- 10 -
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.
Approximately $69.8 million of sub-prime, out-of-market mortgage loans were
reclassified as held-for-sale in December 2000. The sale of these loans was
completed in February 2001, and the Company no longer originates these types of
loans. Net income for 2000 was $5,288,000 or $0.48 per share as compared to 1999
net income of $9,354,000 or $0.84 per share. The recognition of an increased
provision for loan losses for these types of loans and the difference between
the book value and market value of the loans transferred to held-for-sale during
the fourth quarter of 2000 had a significant impact on earnings for 2000.
NET INTEREST INCOME
Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. Several factors contribute to
the determination of net interest income and net interest margin, including the
volume and mix of earning assets, interest rates, and income taxes. Many factors
affecting net interest income are subject to control by management policies and
actions. Factors beyond the control of management include the general level of
credit and deposit demand, Federal Reserve Board monetary policy, and changes in
tax laws.
Net interest income in 2001 declined $1,521,000 or 5% from 2000 results, while
2000 net interest income declined $718,000 or 2% from 1999. Net interest margin
is tax-equivalent net interest income expressed as a percentage of average
earning assets. For 2001 the net interest margin improved modestly to 3.62%
compared with 3.57% for 2000. This improvement in net interest margin in 2001
was attributable to an increase in core deposits and the declining interest rate
environment tempered by a decline in the overall level of interest earning
assets. The net interest margin for 1999 was 3.87%.
The decline in the Company's net interest income during 2001 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 primarily to the call of investment
securities, refinance activity and residential real estate loans, and the
aforementioned sale of sub-prime mortgage loans. The declining interest rate
environment during 2001 resulted in the call of $88.1 million of the Company's
agency securities during 2001. The majority of these securities were called
during the first half of the year. 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 was held in federal funds sold and other investments for use as
collateral for borrowings and to reduce other short-term wholesale funds as
these reached maturity during 2001. The federal funds sold and other short-term
investments are typically lower yielding than the earning assets that were
called during 2001.
Average loans outstanding (including loans held-for-sale) declined $62.0 million
during 2001 compared with 2000. The sale of sub-prime residential mortgage loans
previously discussed was a significant factor in the reduced level of average
loans outstanding. Also contributing to the decline in average loans outstanding
during 2001 has been the sale of a majority of the Company's residential loan
production to the secondary market. While these sales have 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.
The Company's net interest margin and net interest income declined in 2000
compared with 1999. The decline in net interest margin resulted from a
combination of flat loan yields and loan growth, and increased costs of
wholesale funding to offset declines in core deposits. Wholesale funding
represented a total of 35% of total funding sources for 2000 compared with 27%
of funding sources for 1999. Further, the mortgage banking division's use of
wholesale funding sources in a rising interest rate environment reduced the
division's net interest margin by approximately 60 basis points in 2000 compared
with 1999. Also contributing to the increased cost of funds was the general rise
in interest rates during the latter half of 1999 and first half of 2000.
The Company's employment of various asset growth strategies throughout 1999 also
contributed to the decline in the net interest margin in 2000 compared to 1999.
These asset growth strategies consisted of affiliate banks investing proceeds
from FHLB borrowings in investment securities in order to more effectively
utilize capital in excess of requirements. While these strategies increased the
dollar amount of net interest income, the net interest margin of the strategies
range from 1.00% to 1.50%, and thus reduced the overall net interest margin
percentage.
- 11 -
The following table summarizes net interest income (on a tax-equivalent basis)
for each of the past three years. For tax-equivalent adjustments, an effective
tax rate of 34% was used for all years presented (1).
Average Balance Sheet
---------------------
(Tax-equivalent basis/dollars in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 2001 December 31, 2000 December 31, 1999
------------------------------- ------------------------------ -----------------------------
Principal Income/ Yield/ Principal Income/ Yield/ Principal Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
Federal Funds Sold and Other
Short-term Investments.... $ 63,197 $ 2,093 3.31% $ 8,843 $ 496 5.61% $ 28,927 $ 1,403 4.85%
Securities:
Taxable................... 106,756 6,868 6.43% 160,653 11,195 6.97% 158,647 10,278 6.48%
Non-taxable............... 74,568 5,550 7.44% 66,345 5,230 7.88% 57,706 4,592 7.96%
Total Loans and Leases (2)... 704,562 58,643 8.32% 766,533 64,326 8.39% 691,250 57,699 8.35%
----------- --------- ---------- ------- ---------- -------
TOTAL INTEREST
EARNING ASSETS............ 949,083 73,154 7.71% 1,002,374 81,247 8.11% 936,530 73,972 7.90%
----------- --------- ---------- ------- ---------- -------
Other Assets................. 74,744 76,851 72,018
Less: Allowance for Loan Losses (8,910) (9,132) (8,787)
----------- ---------- ----------
TOTAL ASSETS................. $ 1,014,917 $1,070,093 $ 999,761
=========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Demand Deposits $ 91,002 $ 1,379 1.52% $ 71,996 $ 1,173 1.63% $ 85,158 $ 1,635 1.92%
Savings Deposits............. 124,164 3,317 2.67% 122,691 4,644 3.79% 116,365 3,593 3.09%
Time Deposits................ 413,060 22,769 5.51% 468,048 26,349 5.63% 463,482 24,475 5.28%
FHLB Advances and
Other Borrowings.......... 185,384 11,452 6.18% 213,792 13,480 6.31% 147,915 8,041 5.44%
----------- --------- ---------- ------- ---------- -------
TOTAL INTEREST-BEARING
LIABILITIES............... 813,610 38,917 4.78% 876,527 45,646 5.21% 812,920 37,744 4.64%
----------- --------- ---------- ------- ----------
Demand Deposit Accounts...... 89,934 86,500 78,148
Other Liabilities............ 11,141 11,278 10,838
----------- ---------- ----------
TOTAL LIABILITIES............ 914,685 974,305 901,906
----------- ---------- ----------
Shareholders' Equity......... 100,232 95,788 97,855
----------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY...... $ 1,014,917 $1,070,093 $ 999,761
=========== ========== ==========
NET INTEREST INCOME.......... $ 34,237 $ 35,601 $ 36,228
=========== ========== ==========
NET INTEREST MARGIN.......... 3.62% 3.57% 3.87%
<FN>
- ------------------------
(1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was
fully taxable.
(2) Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees
of $958, $952, and $948 for 2001, 2000, and 1999, respectively.
</FN>
- 12 -
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rates:
Net Interest Income - Rate/Volume Analysis:
(Tax-Equivalent basis, dollars in thousands)
2001 compared to 2000 2000 compared to 1999
Increase/(Decrease) Due to (1) Increase/(Decrease) Due to (1)
----------------------------------- ----------------------------------
Volume Rate Net Volume Rate Net
----------------------------------- ----------------------------------
Interest Income:
Federal Funds Sold and Other
Short-term Investments............ $ 1,878 $ (281) $ 1,597 $ (1,098) $ 191 $ (907)
Taxable Securities.................... (3,521) (806) (4,327) 131 786 917
Nontaxable Securities ................ 623 (303) 320 685 (165) 520
Loans and Leases...................... (5,162) (521) (5,683) 6,315 430 6,745
----------------------------------- ----------------------------------
Total Interest Income.................... (6,182) (1,911) (8,093) 6,033 1,242 7,275
----------------------------------- ----------------------------------
Interest Expense:
Savings and Interest-bearing Demand... 566 (1,687) (1,121) (182) 771 589
Time Deposits......................... (3,041) (539) (3,580) 243 1,631 1,874
FHLB Advances and Other Borrowings.... (1,760) (268) (2,028) 4,002 1,437 5,439
----------------------------------- ----------------------------------
Total Interest Expense................... (4,235) (2,494) (6,729) 4,063 3,839 7,902
----------------------------------- ----------------------------------
Net Interest Income...................... $ (1,947) $ 583 $ (1,364) $ 1,970 $ (2,597) $ (627)
=================================== ==================================
<FN>
- ------------------------
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
</FN>
See the Company's Average Balance Sheet and the discussions headed USES OF
FUNDS, SOURCES OF FUNDS, AND LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for
further information on the Company's net interest income, net interest margin,
and interest rate sensitivity position.
PROVISION FOR LOAN LOSSES
The Company provides for loan losses through regular provisions to the allowance
for loan losses, which totaled $660,000, $2,231,000 and $1,749,000 in 2001, 2000
and 1999, respectively. These provisions were made at a level deemed necessary
by management to absorb estimated losses in the loan portfolio. 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
increase in provision in 2000 was due to an increase in estimated losses related
to the mortgage division's sub-prime, out-of-market residential mortgage loan
portfolio and overall loan growth throughout the Company. As discussed
previously, the Company sold its sub-prime, out-of-market residential real
estate portfolio in February 2001, and the Company no longer originates these
types of loans.
A detailed evaluation of the adequacy of the allowance for loan losses is
completed quarterly by management, the results of which will be used to
determine provisions for loan losses. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Refer also to the
section entitled LENDING AND LOAN ADMINISTRATION for further discussion of the
provision and allowance for loan losses.
- 13 -
NON-INTEREST INCOME
Non-interest income, excluding securities gains (losses) and the net gains on
sales of loans and related assets and provision for losses on loans
held-for-sale, increased $713,000 or 9% in 2001 after an increase of $1,354,000
or 22% in 2000. Increases in the Company's insurance revenues and an increased
level of service charge income on deposit accounts resulted in the overall
increase in 2001. Increases in the Company's insurance revenues and the expanded
customer utilization of investment brokerage services resulted in the overall
increase in 2000. Including securities gains (losses) and the net gains on sales
of loans and related assets and provision for losses on loans held-for-sale,
non-interest income increased 284% in 2001 and declined 60% in 2000. The
fluctuation in both years is primarily attributable to the provision for losses
on loans held-for-sale related to the mortgage division's sub-prime,
out-of-market residential mortgage loans that were reclassified as held-for-sale
in December 2000 and sold in February 2001.
% Change From
Non-interest Income (dollars in thousands) Prior Year
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Trust and Investment Product Fees....................... $ 1,290 $ 1,373 $ 836 (6)% 64%
Service Charges on Deposit Accounts..................... 2,485 2,139 1,934 16 11
Insurance Revenues...................................... 3,275 2,723 1,971 20 38
Other Operating Income.................................. 1,212 1,314 1,454 (8) (10)
------- -------- --------
Subtotal ........................................... 8,262 7,549 6,195 9 22
Net Gains (Losses) on Sales of Loans, Related Assets,
and Provision for Losses on Loans Held-for-Sale..... 1,509 (4,998) 196 n/m (1) n/m (1)
Securities Gains (Losses), net.......................... 1 (8) (6) 113 (33)
------- -------- --------
TOTAL NON-INTEREST INCOME........................... $ 9.772 $ 2,543 $ 6,385 284 (60)
======= ======== ========
<FN>
- ------------------------
(1) n/m = not meaningful
</FN>
Service charges on deposit accounts increased 16% and 11% in 2001 and 2000,
respectively. A change in fee structure implemented during 2001 and a general
increase in collections of fees were generally responsible for these increases.
In an effort to provide customers an opportunity to fulfill all their financial
needs through the Company's affiliate banks and associated financial services
companies, the Company completed strategic insurance acquisitions in 1999 and
2000. As a result, the Company's property and casualty insurance revenues have
grown steadily through the operations of Doty Insurance Agency, Inc. In
addition, insurance revenues have increased in both 2001 and 2000 due to the
initiation during 2000 of the Company's credit life and disability reinsurance
operation through German American Reinsurance Company, Ltd.
Customer utilization of the Company's investment product services expanded
significantly during 2000 resulting in a 91% growth in brokerage service revenue
compared with 1999. The level of brokerage revenues declined by 10% during 2001.
Investment brokerage services income, which is included in Trust and investment
product fees, totaled $908,000 in 2001, $1,014,000 in 2000 and $531,000 in 1999.
Net gains on sales of loans and related assets, and the provision for losses on
loans held-for-sale are derived from the Company's core banking and mortgage
banking segments. These gains in 2001, exclusive of the market adjustment for
sub-prime loans reclassified in December 2000, totaled $1,509,000 compared to
$222,000 in 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 2001. Loan sales totaled $135.3 million during 2001
- 14 -
(excluding the sub-prime sale) compared with $31.1 during 2000. These gains
(losses), exclusive of the market adjustment for sub-prime loans reclassified in
December 2000, remained relatively flat in 2000 at $222,000 compared to $196,000
in 1999. The provision for losses on loans held-for-sale on the sub-prime loans
reclassified in December 2000 totaled $5,220,000 resulting in the net loss on
sales of loans, related assets, and provision for losses on loans held-for-sale
of $4,998,000 during 2000.
NON-INTEREST EXPENSE
Non-interest expense increased $1,070,000 or 4% in 2001 following an increase of
$1,881,000 or 7% during 2000. The increase in 2001 resulted primarily from
personnel costs. The increase in 2000 resulted largely from increased personnel
costs, merger and acquisition related expenses and collection costs primarily
associated with the sub-prime, out-of-market residential loan portfolio.
% Change From
Non-interest Income (dollars in thousands) Prior Year
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Salaries and Employee Benefits....................... $ 16,669 $ 15,454 $ 14,308 8% 8%
Occupancy, Furniture and Equipment Expense........... 3,866 3,900 3,792 (1) 3
FDIC Premiums........................................ 163 187 192 (13) (3)
Data Processing Fees................................. 1,126 884 991 27 (11)
Professional Fees ................................... 950 1,333 912 (29) 46
Advertising and Promotion............................ 1,014 870 963 17 (10)
Supplies............................................. 721 798 861 (10) (7)
Other Operating Expenses............................. 4,799 4,812 4,338 --- 11
-------- --------- ---------
TOTAL NON-INTEREST EXPENSE....................... $ 29,308 $ 28,238 $ 26,357 4 7
======== ========= =========
Salaries and employee benefits comprised approximately 57% of total non-interest
expense in 2001, 55% in 2000 and 54% in 1999. Salaries and employee benefits
increased 8% in both 2001 and 2000. In 2001, the increase in salaries and
employee benefits was primarily attributable to two factors. The Company
transitioned to a pay-for-performance incentive plan in late 2000 and 2001
resulting in increased incentive compensation expense while salary expense has
remained flat. Employee medical insurance benefit costs increased 17% during
2001 compared with 2000. In 2000, salaries increased approximately 7% due to
merit increases and staff additions to build necessary infrastructure in
technology and support functions. In addition, employee medical insurance
benefits increased 8%. Finally, the significant increase in investment brokerage
activity and fees resulted in increased incentive compensation in 2000 in the
financial services function compared to 1999.
Professional fees decreased 29% during 2001 following an increase of 46% in
2000. The level of professional fees increased during 2000 due in large part to
merger and acquisition activities.
During 2001, data processing fees increased $242,000 or 27%. This level of
increase is due to a general rise in the number of accounts serviced by the
Company's third party data processor and an increase in fees associated with the
electronic banking services provided to the Company's customers. Data processing
fees declined modestly during 2000.
Other operating expenses remained flat in 2001 compared with 2000 following an
increase of 11% during 2000 compared with 1999. Collection costs declined
$209,000 or 33% during 2001 due primarily to the sale of the mortgage division's
sub-prime residential real estate loan portfolio in early 2001. The decline in
collection costs was in large part offset by the building of insurance reserves
by German American Reinsurance Company, Ltd. The increase in other operating
expenses during 2000 was primarily attributable to increased collection costs
associated with sub-prime, out-of-market residential real estate loans in the
Company's mortgage banking division. Total collection costs increased $345,000
or 119% during 2000.
- 15 -
PROVISION FOR INCOME TAXES
The Company records a provision for current income taxes payable, along with a
provision for deferred taxes payable in the future. Deferred taxes arise from
temporary differences, which are items recorded for financial statement purposes
in a different period than for income tax returns. The major item affecting the
difference between the Company's effective tax rate recorded on its financial
statements and the federal statutory rate of 34% is interest on tax-exempt
investments and loans. Other components affecting the Company's effective tax
rate include affordable housing tax credit investments and state income taxes.
The Company's effective tax rate was 23.1%, 8.0% and 26.2%, respectively, in
2001, 2000, and 1999. The lower effective tax rate in 2000 compared with the
other years presented was attributable to a lower level of taxable income due
primarily to the provision for losses on loans held-for-sale and reduced state
income tax due to a change in apportionment rules. Note 11 to the consolidated
financial statements provides additional details relative to the Company's
income tax provision.
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company and affiliate Banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. The prompt corrective action regulations provide five
classifications, including "well-capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" and "critically
undercapitalized", although these terms are not used to represent overall
financial condition. The Company and all affiliate Banks at year-end 2001 were
categorized as "well-capitalized", except First State Bank. At year end 2001,
First State Bank was categorized as "adequately capitalized", with capital of
$35,000 less than the requirement to be "well-capitalized." Adequately
capitalized institutions must receive regulatory approval to accept brokered
deposits, but management expects no other adverse consequences from First State
Bank's classification as adequately capitalized. See Note 9 to the Consolidated
Financial Statements for actual and required capital ratios.
The Company continues to maintain a strong capital position. Shareholders'
equity totaled $102.2 million and $97.3 million at December 31, 2001 and 2000,
respectively. Total equity represented 10.1% and 9.0%, respectively, of year-end
total assets. The $4.9 million increase in shareholder's equity was primarily
attributable to retained earnings generated by the Company's affiliate banks and
insurance companies. An increase in market value of the Company's securities
available-for-sale also contributed to the increased level of shareholder's
equity.
The Company paid cash dividends of $5.8 million in 2001 and $5.2 million in
2000. The increase in 2001 dividends paid includes an increased number of shares
outstanding arising from a merger transaction in late 2000 and the Company's 5%
stock dividend declarations.
At December 31, 2001 the market value change of securities available-for-sale
improved $1.6 million, net of tax, from year-end 2000. This increase in market
value is recorded as an increase of shareholders' equity, and was due to the
decline in interest rates throughout 2001.
- 16 -
USES OF FUNDS
- --------------------------------------------------------------------------------
LOANS
Total loans at year-end 2001 declined by $52.2 million or 7%. This decline was
primarily isolated to the Company's residential loan portfolio. Residential
mortgage loans declined $84.7 million or 27%. The Company sold a majority of new
residential loan production in the secondary market during 2001. The Company's
commercial and industrial loan portfolio increased $39.7 million or 21%.
Consumer loans declined $11.8 million or 8.7% during 2001.
During 2000, total loans declined $31.8 million or 4%, primarily due to the
reclassification of sub-prime, out-of-market residential real estate loans to
held-for-sale in December 2000. Excluding this reclassification, total loans
increased $37.9 million or 5% during 2000. During 2000, commercial and
industrial loans grew 13%, agricultural and poultry loans grew by 14% and
consumer loans grew by 11%. Excluding the reclassification of sub-prime
residential real estate loans held-for-sale, residential real estate loans
remained stable with a modest 2% decline.
The Company's loan portfolio is diversified, with the heaviest concentrations in
commercial and industrial loans and in residential real estate loans. The
Company's commercial lending is extended to various industries, including hotel,
agribusiness and manufacturing, as well as health care, wholesale, and retail
services.
Loan Portfolio December 31,
dollars in thousands 2001 2000 1999 1998 1997
---- ---- ----------- ----------- -----------
Residential Mortgage Loans................. $ 227,502 $ 312,199 $ 388,514 $ 323,045 $ 275,273
Agricultural and Poultry................... 78,675 74,111 65,098 64,195 61,742
Commercial and Industrial Loans............ 227,872 188,213 166,476 141,031 125,251
Consumer Loans............................. 123,840 135,596 121,865 112,254 98,749
----------- ----------- ----------- ----------- -----------
Total Loans............................. 657,889 710,119 741,953 640,525 561,015
Less: Unearned Income................... (723) (375) (344) (709) (1,498)
----------- ----------- ----------- ----------- ----------
Subtotal................................ 657,166 709,744 741,609 639,816 559,517
Less: Allowance for Loan Losses......... (8,388) (9,274) (9,101) (8,559) (8,803)
------------ ----------- ----------- ----------- -----------
Loans, net.............................. $ 648,778 $ 700,470 $ 732,508 $ 631,257 $ 550,714
=========== =========== =========== =========== ===========
Ratio of Loans to Total Loans:
Residential Mortgage Loans................. 34% 44% 52% 50% 49%
Agricultural and Poultry................... 12% 10% 9% 10% 11%
Commercial and Industrial Loans............ 35% 27% 23% 22% 22%
Consumer Loans............................. 19% 19% 16% 18% 18%
----------- ----------- ----------- ----------- -----------
Totals.................................. 100% 100% 100% 100% 100%
=========== =========== =========== =========== ===========
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Commercial extensions of credit outside this market area are generally
concentrated in real estate loans within a 120 mile radius of the Company's
primary market and are granted on a selective basis.
The following table indicates the amounts of loans (excluding residential
mortgages on 1-4 family residences and consumer loans) outstanding as of
December 31, 2001 which, based on remaining scheduled repayments of principal,
are due in the periods indicated (dollars in thousands).
- 17 -
Within One to Five After
One Year Years Five Years Total
-------- ----------- ---------- -----
Commercial, Agricultural and Poultry....... $ 93,676 $108,703 $104,168 $306,547
Interest Sensitivity
Fixed Rate Variable Rate
---------- -------------
Loans maturing after one year.............. $ 57,896 $154,975
INVESTMENTS
The investment portfolio is a principal source for funding the Company's loan
growth and other liquidity needs. The Company's securities portfolio consists of
money market securities, uncollateralized U.S. Treasury and federal agency
securities, municipal obligations of state and political subdivisions,
asset-/mortgage-backed securities issued by U.S. government agencies and other
intermediaries, and corporate investments. Money market securities include
federal funds sold, interest-bearing balances with banks, and other short-term
investments. The composition of the year-end balances in the investment
portfolio is presented in Note 2 to the Consolidated Financial Statements and in
the table below:
Investment Portfolio, at Amortized Cost December 31,
dollars in thousands 2001 % 2000 % 1999 %
---- - ---- - ---- -
Federal Funds Sold and Short-term Investments.... $ 62,534 25% $ 2,955 1% $ 11,266 5%
U.S. Treasury and Agency Securities.............. 3,000 1 96,315 44 97,253 41
Obligations of State and Political Subdivisions.. 76,546 30 54,150 25 57,190 24
Asset- / Mortgage-backed Securities.............. 93,491 37 52,365 24 62,417 26
Equity Securities................................ 16,813 7 12,077 6 10,368 4
---------- --- ---------- --- -------- ---
Total Securities Portfolio................... $ 252,384 100% $ 217,862 100% $238,494 100%
========== ==== ========== === ======== ===
The amortized cost of investment securities, exclusive of federal funds sold and
short-term investments, declined $25.1 million to $189.9 million at year-end
2001 compared with $214.9 million at year-end 2000. The composition of the
investment portfolio changed significantly during 2001. The overall decline and
the significant change in U.S. Treasury and Agency securities was the result of
the call and redemption of virtually all securities in this category during
2001. As these funds, along with other cash flows generated by the investment
portfolio have been reinvested during 2001, the composition of the portfolio has
changed. The funds were used to reinvest in tax advantaged obligations of state
and political subdivisions and tax advantaged equity securities issued by U.S.
governmental agencies. In addition, the funds were reinvested in asset- /
mortgage-backed securities to provide structured cash flows in the current
historically low interest rate environment.
The level of federal funds sold and short-term investments increased
significantly during 2001. This increased level was primarily due to significant
residential mortgage loan refinance activity driven by historically low interest
rates. A portion of these federal funds sold and other short-term investments
are being used as collateral for borrowings, are being held to further reduce
wholesale funds as these reach maturity, and will be used to fund loans and
securities.
- 18 -
Investment Securities, at Carrying Value
dollars in thousands
December 31,
Securities Held-to-Maturity: 2001 2000 1999
---- ---- ----
U.S. Treasury and other U.S.
Government Agencies and Corporations.................... $ --- $ --- $ 1,048
State and Political Subdivisions............................. 23,056 28,093 30,593
Asset-/Mortgage-backed Securities............................ --- 361 903
----------- ----------- -----------
Subtotal of Securities Held-to-Maturity................. 23,056 28,454 32,544
----------- ----------- -----------
Securities Available-for-Sale:
U.S. Treasury and other U.S.
Government Agencies and Corporations.................... $ 3,039 $ 95,102 $ 92,326
State and Political Subdivisions............................. 53,893 26,669 26,487
Asset-/Mortgage-backed Securities............................ 94,272 51,336 58,967
Equity Securities............................................ 16,890 12,081 10,368
----------- ----------- -----------
Subtotal of Securities Available-for-Sale............... 168,094 185,188 188,148
----------- ----------- -----------
Total Securities.................................... $ 191,150 $ 213,642 $ 220,692
=========== =========== ===========
The Company's $168.1 million available-for-sale portion of the investment
portfolio provides an additional funding source for the Company's liquidity
needs and for asset/liability management requirements. Although management has
the ability to sell these securities if the need arises, their designation as
available-for-sale should not be interpreted as an indication that management
anticipates such sales.
SOURCES OF FUNDS
- --------------------------------------------------------------------------------
The Company's primary source of funding is its base of core customer deposits.
Core deposits consist of demand deposits, savings, interest-bearing checking,
money market accounts, and certificates of deposit of less than $100,000. Other
sources of funds are certificates of deposit of $100,000 or more, brokered
deposits, overnight borrowings from other financial institutions and securities
sold under agreement to repurchase. The membership of the Company's affiliate
banks in the Federal Home Loan Bank System (FHLB) provides a significant
additional source for both long and short-term collateralized borrowings. The
following pages contain a discussion of changes in these areas.
The table below illustrates changes between years in the average balances of all
funding sources:
- 19 -
Funding Sources - Average Balances % Change From
dollars in thousands Prior Year
2001 2000 1999 2001 2000
---- ---- ---- ---- ----
Demand Deposits
Non-interest Bearing............... $ 89,934 $ 86,500 $ 78,148 4% 11%
Interest Bearing................... 91,002 71,996 85,158 26 (15)
Savings Deposits....................... 49,071 51,073 52,361 (4) (2)
Money Market Accounts.................. 75,093 71,618 64,004 5 12
Other Time Deposits.................... 347,969 349,675 375,422 -- (7)
---------- ----------- ----------
Total Core Deposits................ 653,069 630,862 655,093 4 (4)
Certificates of Deposits of $100,000 or
more and Brokered Deposits......... 65,091 118,373 88,060 (45) 34
FHLB Advances and
Other Borrowings................... 185,384 213,792 147,915 (13) 45
---------- ----------- ----------
Total Funding Sources.............. $ 903,544 $ 963,027 $ 891,068 (6) 8
========== =========== ==========
Maturities of time certificates of deposit of $100,000 or more are summarized as
follows:
3 Months 3 thru 6 thru Over
Or Less 6 Months 12 Months 12 Months Total
------------------------------------------------------------
December 31, 2001.................. $16,015 $8,621 $6,624 $18,973 $50,233
CORE DEPOSITS
The Company's level of average core deposits increased 4% in 2001 after a 4%
decline in 2000. The Company's ability to attract core deposits continues to be
influenced by competition and the interest rate environment, as well as the
increased availability of alternative investment products.
Demand, savings and money market deposits have provided a stable source of
funding for the company, despite fluctuations in the various categories. Average
demand, savings and money market deposits totaled $305.1 million or 47% of core
deposits in 2001 compared with $281.2 million or 45% in 2000 and $279.7 million
or 43% in 1999.
Other time deposits consist of certificates of deposits in denominations of less
than $100,000. These deposits remained stable in 2001 following a 7% decline in
2000. Other time deposits comprised 53% of core deposits in 2001 compared with
55% in 2000 and 57% in 1999.
OTHER FUNDING SOURCES
Federal Home Loan Bank advances and other borrowings represent the Company's
most significant source of other funding. Average borrowed funds decreased $28.4
million or 13% during 2001. This decline followed an increase of $65.9 million
or 45% in 2000. The decline in borrowed funds, both long-term and short-term,
was the result of an increase in core deposits from the Company's primary market
areas and the overall decline in outstanding loans. The additional reliance on
borrowed funds in 2000 was to fund loan growth and supplement core deposits.
- 20 -
Certificates of deposits in denominations of $100,000 or more and brokered
deposits are an additional source of other funding. Large denomination
certificates and brokered deposits decreased $53.3 million or 45% during 2001.
The decline followed an increase of 34% in 2000. The decline in these types of
deposits during 2001, as with the decline in borrowed funds, was the result of
an increase in core deposits and the overall decline in outstanding loans.
During 2000, in addition to borrowed funds, these certificates served to fund
loan growth and supplement core deposits. Large certificates and brokered
deposits comprised 7%, 12%, and 10% of total funding sources in 2001, 2000, and
1999.
The Company also utilizes short-term funding sources from time to time. These
sources consist of overnight federal funds purchased from other financial
institutions, secured repurchase agreements that generally mature within 30
days, and secured overnight variable rate borrowings from the FHLB. These
borrowings represent an important source of short-term liquidity for the
Company. Long-term debt is in the form of FHLB advances, which are secured by
the pledge of certain investment securities and residential mortgage loans. See
Note 8 to the Consolidated Financial Statements for further information
regarding borrowed funds.
RISK MANAGEMENT
- --------------------------------------------------------------------------------
The Company is exposed to various types of business risk on an on-going basis.
These risks include credit risk, liquidity risk and interest rate risk. Various
procedures are employed at the Company's affiliate banks to monitor and mitigate
risk in their loan and investment portfolios, as well as risks associated with
changes in interest rates. Following is a discussion of the Company's
philosophies and procedures to address these risks.
LENDING AND LOAN ADMINISTRATION
Primary responsibility and accountability for day-to-day lending activities
rests with the Company's affiliate banks. Loan personnel at each bank have the
authority to extend credit under guidelines approved by the bank's board of
directors. Executive and board loan committees active at each bank serve as
vehicles for communication and for the pooling of knowledge, judgment and
experience of its members. These committees provide valuable input to lending
personnel, act as an approval body, and monitor the overall quality of the
banks' loan portfolios. The Corporate Loan Committee, comprised of members of
the Company's executive officers and board of directors, strive to ensure a
consistent application of the Company's lending policies. The Company also
maintains a comprehensive risk-weighting and loan review program for its
affiliate banks, which includes quarterly reviews of problem loans,
delinquencies and charge-offs. The purpose of this program is to evaluate loan
administration, credit quality, loan documentation and the adequacy of the
allowance for loan losses.
The Company maintains an allowance for loan losses to cover probable credit
losses identified during its loan review process. The allowance is increased by
the provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the required level of allowance for loan losses using past
loan loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
- 21 -
The allowance for loan losses is comprised of: (a) specific reserves on
individual credits; (b) allocated reserves for certain loan categories and
industries, and overall historical loss experience; and (c) unallocated reserves
based on performance trends in the loan portfolios, current economic conditions,
and other factors that influence the level of estimated probable losses. The
need for specific reserves are considered for credits when: (a) the customer's
cash flow or net worth appears insufficient to repay the loan; (b) the loan has
been criticized in a regulatory examination; (c) the loan is on non-accrual; or,
(d) other reasons where the ultimate collectibility of the loan is in question,
or the loan characteristics require special monitoring.
Allowance for Loan Losses
dollars in thousands Years Ended December 31,
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Balance of allowance for possible
losses at beginning of period.......................... $ 9,274 $ 9,101 $ 8,559 $ 8,803 $ 8,267
Allowance of Acquired subsidiaries & Adjustments
to Conform Fiscal Years................................ --- --- 356 80 ---
Loans charged-off:
Residential Mortgage Loans................................ 637 1,188 815 627 122
Agricultural and Poultry Loans ........................... 66 134 222 --- ---
Commercial and Industrial Loans........................... 659 347 192 348 407
Consumer Loans............................................ 990 748 823 1,080 545
--------- --------- --------- -------- --------
Total Loans charged-off................................ 2,352 2,417 2,052 2,055 1,074
Recoveries of previously charged-off Loans:
Residential Mortgage Loans................................ 54 14 100 76 1
Agricultural and Poultry Loans............................ 191 29 135 19 66
Commercial and Industrial Loans........................... 374 120 42 77 668
Consumer Loans............................................ 187 196 212 215 96
--------- --------- --------- -------- --------
Total Recoveries....................................... 806 359 489 387 831
--------- --------- --------- -------- --------
Net Loans recovered / (charged-off)...................... (1,546) (2,058) (1,563) (1,668) (243)
Additions to allowance charged to expense................. 660 2,231 1,749 1,344 779
--------- --------- --------- -------- --------
Balance at end of period.................................. $ 8,388 $ 9,274 $ 9,101 $ 8,559 $ 8,803
========= ========= ========= ======== ========
Net Charge-offs to Average Loans Outstanding.............. 0.22% 0.27% 0.23% 0.27% 0.04%
Provision for Loan Losses to Average Loans Outstanding.... 0.09% 0.29% 0.25% 0.21% 0.13%
Allowance for Loan Losses to Total Loans at Year-end...... 1.27% 1.31% 1.23% 1.34% 1.57%
The following table indicates the breakdown of the
allowance for loan losses for the periods indicated
(dollars in thousands):
Residential Mortgage Loans................................ $ 1,813 $ 2,106 $ 2,048 $ 1,315 $ 1,044
Agricultural and Poultry.................................. 603 777 620 910 1,010
Commercial and Industrial Loans........................... 4,457 4,618 3,987 2,905 3,109
Consumer Loans............................................ 305 348 915 1,047 1,083
Unallocated............................................... 1,210 1,425 1,531 2,382 2,557
--------- --------- --------- -------- --------
Total Loans............................................... $ 8,388 $ 9,274 $ 9,101 $ 8,559 $ 8,803
========= ========= ========= ======== ========
- 22 -
The trend in net charge-offs improved during 2001 primarily as a result of a
decline in residential real estate loan charge-offs. The upward trend in net
charge-offs in 2000 was primarily related to sub-prime, out-of-market
residential real estate loans at the Company's mortgage banking division. The
Company discontinued new sub-prime, out-of-market residential real estate
lending during 1999, and the portfolio of these loans was sold in 2001, as
discussed previously. Refer also to the section entitled PROVISION FOR LOAN
LOSSES in the discussion regarding the RESULTS OF OPERATIONS.
NON-PERFORMING ASSETS
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have
been renegotiated to provide for a reduction or deferral of interest or
principal because of deterioration in the financial condition of the borrower;
(c) loans past due ninety (90) days or more as to principal or interest; and,
(d) other real estate owned. Loans are placed on non-accrual status when
scheduled principal or interest payments are past due for 90 days or more or
when the borrower's ability to repay becomes doubtful. Uncollected interest
accrued in the current year is reversed against income at the time a loan is
placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if
deemed uncollectible. Exceptions to the non-accrual and charge-off policies are
made when the loan is well secured and in the process of collection.
The following table presents an analysis of the Company's non-performing assets.
The decline in non-accrual loans in 2001 and unfavorable trend in non-accrual
loans prior to 2001 was primarily attributable to sub-prime, out-of-market
residential real estate loans. The repositioning of the balance sheet regarding
these types of loans during the fourth quarter of 2000 and subsequent sale of
approximately $69 million in principal balance of loans during the first quarter
of 2001 reversed the upward trend in non-accrual loans.
Non-performing Assets December 31,
dollars in thousands 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Non-accrual Loans................................. $ 3,452 $ 8,014 $ 7,237 $ 5,411 $ 3,568
Past Due Loans (90 days or more).................. 916 1,513 1,603 1,531 3,360
Restructured Loans................................ 367 --- --- --- ---
---------- ---------- ---------- -------- --------
Total Non-performing Loans.................... 4,735 9,527 8,840 6,942 6,928
Other Real Estate................................. 1,612 1,579 2,434 1,156 785
---------- ---------- ---------- -------- --------
Total Non-performing Assets................... $ 6,347 $ 11,106 $ 11,274 $ 8,098 $ 7,713
========== ========== ========== ======== ========
Non-performing Loans to Total Loans............... 0.72% 1.34% 1.19% 1.08% 1.23%
Allowance for Loan Losses to Non-performing Loans. 177.15% 97.34% 102.95% 123.29% 127.06%
Interest income recognized on non-performing loans for 2001 was $390,000. The
gross interest income that would have been recognized in 2001 on non-performing
loans if the loans had been current in accordance with their original terms is
$534,000. Loans are placed on non-accrual status when scheduled principal or
interest payments are past due for 90 days or more, unless the loan is well
secured and in the process of collection.
Accounting standards require recognition of loan impairment if a loan's full
principal or interest payments are not expected to be received. Loans considered
to be impaired are reduced to the present value of expected future cash flows or
to the fair value of collateral, by allocating a portion of the allowance for
loan losses to such loans. The total dollar amount of impaired loans at December
31, 2001 was $920,000. For additional detail on impaired loans, see Note 3 of
the Consolidated Financial Statements.
- 23 -
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is a measure of the Company's ability to fund new loan demand,
existing loan commitments and deposit withdrawals. The purpose of liquidity
management is to match sources of funds with anticipated customer borrowings and
withdrawals and other obligations to ensure a dependable funding base, without
unduly penalizing earnings. Failure to properly manage liquidity requirements
can result in the need to satisfy customer withdrawals and other obligations on
less than desirable terms. The liquidity of the parent company is dependent upon
the receipt of dividends from its bank subsidiaries, which are subject to
certain regulatory limitations explained in Note 9 to the Consolidated Financial
statements, included in Item 8 of this report. The affiliate banks' source of
funding is predominately core deposits, maturities of securities, repayments of
loan principal and interest, federal funds purchased, securities sold under
agreements to repurchase and borrowings from the Federal Home Loan Bank.
Interest rate risk is the exposure of the Company's financial condition to
adverse changes in market interest rates. In an effort to estimate the impact of
sustained interest rate movements to the Company's earnings, the Company
monitors interest rate risk through computer-assisted simulation modeling of its
net interest income. The Company's simulation modeling monitors the potential
impact to net interest income under various interest rate scenarios. The
Company's objective is to actively manage its asset/liability position within a
one-year interval and to limit the risk in any of the interest rate scenarios to
a reasonable level of tax-equivalent net interest income within that interval.
Funds Management Committees at the holding company and each affiliate bank
monitor compliance within established guidelines of the Funds Management Policy.
See the following section for further discussion regarding interest rate risk.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk, as discussed above.
As discussed previously, the Company monitors interest rate risk by the use of
computer simulation modeling to estimate the potential impact on its net
interest income under various interest rate scenarios. Another method by which
the Company's interest rate risk position can be estimated is by computing
estimated changes in its net portfolio value ("NPV"). This method estimates
interest rate risk exposure from movements in interest rates by using interest
rate sensitivity analysis to determine the change in the NPV of discounted cash
flows from assets and liabilities. NPV represents the market value of portfolio
equity and is equal to the estimated market value of assets minus the estimated
market value of liabilities. Computations are based on a number of assumptions,
including the relative levels of market interest rates and prepayments in
mortgage loans and certain types of investments. These computations do not
contemplate any actions management may undertake in response to changes in
interest rates, and should not be relied upon as indicative of actual results.
In addition, certain shortcomings are inherent in the method of computing NPV.
Should interest rates remain or decrease below current levels, the proportion of
adjustable rate loans could decrease in future periods due to refinancing
activity. In the event of an interest rate change, prepayment levels would
likely be different from those assumed in the table. Lastly, the ability of many
borrowers to repay their adjustable rate debt may decline during a rising
interest rate environment.
The following table provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of December 31, 2001 the Company's estimated
NPV might be expected to increase in the event of an increase in prevailing
interest rates, and might be expected to decrease in the event of a decrease in
prevailing interest rates (dollars in thousands).
- 24 -
Interest Rate Sensitivity as of December 31, 2001
Net Portfolio Value
Net Portfolio as a % of Present
Value Value of Assets
------------- -------------------
Changes 22
in Rates $ Amount % Change NPV Ratio Change
-------- -------- -------- --------- ------
+2%...................... $123,416 9.13% 11.95% 108 b.p.
+1%...................... 121,812 7.72 11.73 87 b.p.
Base..................... 113,086 --- 10.87 ---
-1%...................... 109,070 (3.55) 10.40 (46) b.p.
-2%...................... 102,527 (9.34) 9.73 (114) b.p.
The above discussion, and the portions of "MANAGEMENT'S DISCUSSION AND ANALYSIS"
that are referenced in the above discussion contains statements relating to
future results of the Company that are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, simulation of the impact on net
interest income from changes in interest rates. Actual results may differ
materially from those expressed or implied therein as a result of certain risks
and uncertainties, including those risks and uncertainties expressed above,
those that are described in "MANAGEMENT'S DISCUSSION AND ANALYSIS" in Item 7 of
this report, and those that are described in Item 1 of this report, "Business,"
under the caption "Forward-Looking Statements," which discussions are
incorporated herein by reference.
- 25 -
Item 8. Financial Statements and Supplementary Data.
Independent Auditors' Report
Dollars in thousands
Board of Directors and Shareholders
German American Bancorp
Jasper, Indiana
We have audited the accompanying consolidated balance sheets of German
American Bancorp as of December 31, 2001 and 2000, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
The consolidated statements of income, changes in shareholders' equity, and
cash flows for the year ended December 31, 1999 have been restated to reflect
the Holland Bancorp pooling of interests, as described in Note 18. We did not
audit the separate 1999 financial statements of Holland Bancorp as reflected in
the pooling of interests, which statements reflect (in thousands) net income of
$532. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Holland Bancorp for 1999, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of German American Bancorp as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.
Indianapolis, Indiana /s/ Crowe, Chizek and Company LLP
February 14, 2002 Crowe, Chizek and Company LLP
- 26 -
CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
December 31,
2001 2000
---- ----
ASSETS
Cash and Due from Banks............................................. $ 36,893 $ 26,987
Federal Funds Sold and Other Short-term Investments................. 62,235 1,460
----------- -----------
Cash and Cash Equivalents....................................... 99,128 28,447
Interest-bearing Time Deposits with Banks........................... 299 1,495
Securities Available-for-Sale, at Market............................ 168,094 185,188
Securities Held-to-Maturity, at Cost................................ 23,056 28,454
Loans Held-for-Sale................................................. 5,538 71,372
Loans ............................................................. 657,889 710,119
Less: Unearned Income............................................. (723) (375)
Allowance for Loan Losses....................................... (8,388) (9,274)
----------- -----------
Loans, Net.......................................................... 648,778 700,470
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost... 12,596 12,596
Premises, Furniture and Equipment, Net.............................. 20,016 21,065
Other Real Estate................................................... 1,612 1,579
Intangible Assets................................................... 1,985 2,147
Accrued Interest Receivable and Other Assets........................ 34,009 26,995
----------- -----------
TOTAL ASSETS................................................ $ 1,015,111 $ 1,079,808
=========== ===========
LIABILITIES
Non-interest-bearing Demand Deposits................................ $ 106,613 $ 89,146
Interest-bearing Demand, Savings, and Money Market Accounts......... 241,925 194,093
Time Deposits < $100,000............................................ 327,510 350,854
Time Deposits $100,000 or more and Brokered Deposits................ 50,826 101,477
----------- -----------
Total Deposits.................................................. 726,874 735,570
FHLB Advances and Other Borrowings.................................. 174,385 235,230
Accrued Interest Payable and Other Liabilities...................... 11,643 11,748
----------- -----------
TOTAL LIABILITIES........................................... 912,902 982,548
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized...................................... 11,039 10,495
Preferred Stock, $10 par value;
500,000 shares authorized, no shares issued....................... --- ---
Additional Paid-in Capital.......................................... 72,238 63,175
Retained Earnings................................................... 18,133 24,353
Accumulated Other Comprehensive Income (Loss)....................... 799 (763)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY.................................. 102,209 97,260
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $ 1,015,111 $ 1,079,808
=========== ===========
End of period shares issued and outstanding......................... 11,038,675 10,494,708
=========== ===========
See accompanying notes to consolidated financial statements.
- 27 -
CONSOLIDATED STATEMENTS OF INCOME
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Years ended December 31,
2001 2000 1999
---- ---- ----
INTEREST INCOME
Interest and Fees on Loans.......................................... $ 58,445 $ 64,176 $ 57,423
Interest on Federal Funds Sold and other Short-term Investments..... 2,093 496 1,403
Interest and Dividends on Securities:
Taxable......................................................... 6,868 11,195 10,278
Non-taxable..................................................... 3,663 3,452 3,031
----------- ----------- -----------
TOTAL INTEREST INCOME........................................ 71,069 79,319 72,135
INTEREST EXPENSE
Interest on Deposits................................................ 27,465 32,166 29,703
Interest on FHLB Advances and Other Borrowings...................... 11,452 13,480 8,041
----------- ----------- -----------
TOTAL INTEREST EXPENSE.......................................... 38,917 45,646 37,744
----------- ----------- -----------
NET INTEREST INCOME................................................. 32,152 33,673 34,391
Provision for Loan Losses........................................... 660 2,231 1,749
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................. 31,492 31,442 32,642
NON-INTEREST INCOME
Trust and Investment Product Fees................................... 1,290 1,373 836
Service Charges on Deposit Accounts................................. 2,485 2,139 1,934
Insurance Revenues.................................................. 3,275 2,723 1,971
Other Operating Income.............................................. 1,212 1,314 1,454
Net Gains on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held-for-Sale................ 1,509 (4,998) 196
Net Gain / (Loss) on Sales of Securities............................ 1 (8) (6)
----------- ----------- -----------
TOTAL NON-INTEREST INCOME....................................... 9,772 2,543 6,385
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and Employee Benefits...................................... 16,669 15,454 14,308
Occupancy Expense................................................... 2,003 1,854 1,853
Furniture and Equipment Expense..................................... 1,863 2,046 1,939
Data Processing Fees................................................ 1,126 884 991
Professional Fees................................................... 950 1,333 912
Advertising and Promotion........................................... 1,014 870 963
Supplies............................................................ 721 798 861
Other Operating Expenses............................................ 4,962 4,999 4,530
----------- ----------- -----------
TOTAL NON-INTEREST EXPENSE...................................... 29,308 28,238 26,357
----------- ----------- -----------
Income before Income Taxes.......................................... 11,956 5,747 12,670
Income Tax Expense.................................................. 2,763 459 3,316
----------- ----------- -----------
NET INCOME.......................................................... $ 9,193 $ 5,288 $ 9,354
=========== =========== ===========
Earnings per Share and Diluted Earnings per Share................... $ 0.83 $ 0.48 $ 0.84
See accompanying notes to consolidated financial statements.
- 28 -
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
Common
Stock/ Accumulated
Additional Other Total
Paid-in Retained Comprehensive Shareholders'
Capital Earnings Income Equity
----------- -------- ------------- -------------
Balances, January 1, 1999....................................... $ 61,061 $ 35,281 $ 811 $ 97,153
Comprehensive Income:
Net Income.................................................... 9,354 9,354
Change in Unrealized Gain/(Loss)
on Securities Available-for-Sale............................ (4,785) (4,785)
Total Comprehensive Income............................. 4,569
Cash Dividends ($.42 per Share, as restated
for pooling of interests) (4,681) (4,681)
Issuance of Common Stock for:
Exercise of Stock Options (2,593 shares)...................... 28 28
Director Stock Awards (18,036 shares)......................... 308 308
5% Stock Dividend (453,539 shares)............................ 9,179 (9,179) ---
Acquisitions (73,500 shares).................................. 173 96 269
Purchase and Retirement of Common Stock (206,558 shares)........ (4,277) (28) (4,305)
Purchase of Interest in Fractional Shares....................... (35) (35)
Adjustment to Conform Year-ends................................. 572 (220) 27 379
--------- --------- --------- ---------
Balances, December 31, 1999..................................... 67,044 30,588 (3,947) 93,685
Comprehensive Income:
Net Income.................................................... 5,288 5,288
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale............................ 3,184 3,184
---------
Total Comprehensive Income............................. 8,472
Cash Dividends ($.48 per Share, as restated
for pooling of interests) (5,211) (5,211)
Issuance of Common Stock for:
Exercise of Stock Options (9,187 shares)...................... 78 78
Director Stock Awards (20,458 shares)......................... 296 296
5% Stock Dividend (532,270 shares)............................ 6,292 (6,292) ---
Employee Stock Purchase Plan.................................... (40) (40)
Purchase of Interest in Fractional Shares....................... (20) (20)
--------- --------- --------- ---------
Balances, December 31, 2000..................................... 73,670 24,353 (763) 97,260
Comprehensive Income:
Net Income.................................................... 9,193 9,193
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale............................ 1,562 1,562
---------
Total Comprehensive Income.................................... 10,755
Cash Dividends ($.53 per Share)................................. (5,769) (5,769)
Issuance of Common Stock for:
Director Stock Awards (21,550 shares)......................... 311 311
Employee Benefit Plans (1,582 shares)......................... 26 26
Dividend Reinvestment Plan (6,785 shares)..................... 113 (113) ---
5% Stock Dividend (524,526 shares)............................ 9,507 (9,507) ---
Employee Stock Purchase Plan.................................... (201) (201)
Purchase and Retirement of Common Stock (9,332 shares).......... (149) (149)
Purchase of Interest in Fractional Shares....................... (24) (24)
--------- --------- --------- -----------
Balances, December 31, 2001..................................... $ 83,277 $ 18,133 $ 799 $ 102,209
========= ========= ========= ===========
See accompanying notes to consolidated financial statements.
- 29 -
CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
Years Ended December 31,
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................. $ 9,193 $ 5,288 $ 9,354
Adjustments to Reconcile Net Income to Net Cash from
Operating Activities:
Depreciation and Amortization........................................ 2,624 2,291 2,537
Amortization and Impairment of Mortgage Servicing Rights ............ 651 233 241
Net Change in Loans Held-for-Sale.................................... 65,834 (3,773) 6,843
Loss in Investment in Limited Partnership............................ 259 203 108
Provision for Loan Losses............................................ 660 2,231 1,749
Loss (Gain) on Sale of Securities, net............................... (1) 8 6
Loss (Gain) on Sales of Loans and Related Assets, and Provision
for Losses On Loans Held-for-Sale.................................. (1,509) 4,998 (196)
Loss/(Gain) on Disposition and Impairment of Premises and Equipment 57 13 ---
Director Stock Awards................................................ 311 296 308
Change in Assets and Liabilities:
Interest Receivable and Other Assets............................... (7,678) (1,625) (5,936)
Interest Payable and Other Liabilities................................. (105) 237 1,103
-------- --------- ----------
Net Cash from Operating Activities............................... 70,296 10,400 16,117
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... 1,196 5,957 (970)
Proceeds from Maturities of Securities Available-for-Sale............ 112,037 12,201 35,779
Proceeds from Sales of Securities Available-for-Sale................. --- 742 953
Purchase of Securities Available-for-Sale............................ (87,082) (4,717) (83,512)
Proceeds from Maturities of Securities Held-to-Maturity.............. 277 4,087 7,417
Purchase of Securities Held-to-Maturity.............................. (540) (2,657) (5,024)
Purchase of Loans.................................................... --- (1,472) (9,884)
Proceeds from Sales of Loans......................................... 2,290 500 5,875
Loans Made to Customers, net of Payments Received.................... 47,583 (41,887) (92,514)
Proceeds from Sales of Mortgage Servicing Rights..................... --- 528 ---
Proceeds from Sales of Other Real Estate............................. 1,916 3,320 1,604
Property and Equipment Expenditures.................................. (1,831) (1,994) (4,122)
Proceeds from Sales of Property and Equipment........................ 347 16 ---
Acquire Affiliates and Adjust to Conform Fiscal Years................ (150) (317) (22)
-------- --------- ----------
Net Cash from Investing Activities............................. 76,043 (25,693) (144,420)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... (8,696) (15,858) 29,516
Change in Short-term Borrowings...................................... (35,200) (20,255) 66,087
Advances in Long-term Debt........................................... --- 132,850 99,000
Repayments of Long-term Debt......................................... (25,645) (77,382) (79,834)
Issuance of Common Stock............................................. 26 78 28
Purchase / Retire Common Stock....................................... (149) --- (4,305)
Employee Stock Purchase Plan......................................... (201) (40) ---
Dividends Paid....................................................... (5,769) (5,211) (4,681)
Purchase of Interests in Fractional Shares........................... (24) (20) (35)
-------- --------- ----------
Net Cash from Financing Activities............................... (75,658) 14,162 105,776
-------- --------- ----------
Net Change in Cash and Cash Equivalents................................ 70,681 (1,131) (22,527)
Cash and Cash Equivalents at Beginning of Year....................... 28,447 29,578 52,105
Cash and Cash Equivalents at End of Year -------- --------- ----------
$ 99,128 $ 28,447 $ 29,578
======== ========= ==========
Cash Paid During the Year for:
Interest............................................................. $ 40,129 $ 44,957 $ 40,761
Income Taxes......................................................... 858 3,233 3,899
See accompanying notes to consolidated financial statements.
- 30 -
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DOLLARS IN THOUSANDS
NOTE 1 - Summary of Significant Accounting Policies
Description of Business and Basis of Presentation German American Bancorp
operates primarily in the banking industry. The accounting and reporting
policies of German American Bancorp and its subsidiaries conform to generally
accepted accounting principles and reporting practices followed by the banking
industry. The more significant policies are described below. The consolidated
financial statements include the accounts of the Company and its subsidiaries
after elimination of all material intercompany accounts and transactions.
Certain prior year amounts have been reclassified to conform with current
classifications. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures. Actual results
could differ from those estimates. Estimates susceptible to change in the near
term include the allowance for loan losses, impaired loans, and the fair value
of mortgage servicing rights and financial instruments.
The Company acquired 1ST BANCORP in 1999 in a pooling of interests (see Note
18). Prior to 1999, 1ST BANCORP's financial statements were prepared on a June
30 fiscal year-end. The Company's calendar period financial statements for
periods prior to 1999 were restated to include 1ST BANCORP fiscal period
financial statements (i.e. the Company's previously reported December 31, 1998
balances were combined with 1ST BANCORP June 30, 1998 balances). 1ST BANCORP is
combined with the Company on a calendar basis for all 1999 periods. As a result
of 1ST BANCORP's prior fiscal reporting, the 1999 statement of cash flows,
statement of changes in shareholders' equity, and certain notes include an
"adjustment to conform fiscal years" to adjust from fiscal to calendar period
reporting.
Securities
Securities classified as available-for-sale are securities that the Company
intends to hold for an indefinite period of time, but not necessarily until
maturity. These include securities that management may use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, or similar reasons. Securities held as
available-for-sale are reported at market value with unrealized gains or losses
included as a separate component of equity, net of tax.
Securities classified as held-to-maturity are securities that the Company has
both the ability and positive intent to hold to maturity. Securities
held-to-maturity are carried at amortized cost. Premium amortization is deducted
from, and discount accretion is added to, interest income using the level yield
method. The cost of securities sold is computed on the identified securities
method. Restricted stock, such as stock in the Federal Home Loan Bank (FHLB), is
carried at cost.
Loans
Interest is accrued over the term of the loans based on the principal balance
outstanding. Loans are placed on non-accrual status when impaired or when
scheduled principal or interest payments are past due 90 days or more, unless
the loan is well secured and in the process of collection. The Company defers
loan fees and certain direct loan origination costs. Deferred amounts are
reported in the balance sheet as part of loans and are recognized into interest
income over the term of the loan based on the level yield method.
Loans held-for-sale are carried at the lower of cost or fair value, in
aggregate.
- 31 -
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgement, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
Loan impairment is reported when full repayment under the terms of the loan is
not expected. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported net, at the present value of estimated future cash
flows using the loan's existing rate, or at the fair value of collateral if
repayment is expected solely from the collateral. Commercial, agricultural and
poultry loans are evaluated individually for impairment. Smaller balance
homogeneous loans are evaluated for impairment in total. Such loans include real
estate loans secured by one-to-four family residences and loans to individuals
for household, family and other personal expenditures. Individually evaluated
loans on non-accrual are generally considered impaired. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
Premises, Furniture, and Equipment
Premises, Furniture and Equipment are stated at cost less accumulated
depreciation. Premises and related components are depreciated on the
straight-line method with useful lives ranging from 10 to 40 years. Furniture
and equipment are primarily depreciated using straight-line methods with useful
lives ranging from 3 to 12 years. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
Other Real Estate
Other Real Estate is carried at the lower of cost or fair value, less estimated
selling costs. Expenses incurred in carrying Other Real Estate are charged to
operations as incurred.
Intangible Assets
Intangible Assets are comprised of core deposit intangibles ($32 and $66 at
December 31, 2001 and 2000, respectively) and goodwill ($1,952 and $2,081 at
December 31, 2001 and 2000, respectively). Core deposit intangibles are
amortized on an accelerated method over ten years and goodwill is amortized on a
straight-line basis over twelve to fifteen years. Core Deposit Intangibles and
Goodwill are assessed for impairment based on estimated undiscounted cash flows,
and written down if necessary. See New Accounting Pronouncements in this Note
for additional information.
- 32 -
Servicing Rights
Servicing rights are recognized and included with other assets for purchased
rights and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to type,
interest rates and age. Fair value is determined based upon discontinued cash
flows using market based assumptions.
Stock Compensation
Expense for employee compensation under stock option plans is reported only if
options are granted below market price at grant date. Pro forma disclosures of
net income and earnings per share are provided as if the fair value method of
Financial Accounting Standard No. 123 was used for stock-based compensation.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which are also recognized as a separate component of equity.
Income Taxes
Deferred tax liabilities and assets are determined at each balance sheet date
and are the result of differences in the financial statement and tax bases of
assets and liabilities. Income tax expense is the amount due on the current year
tax returns plus or minus the change in deferred taxes.
Earnings Per Share
Basic earnings per share is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted earnings per share shows
the potential dilutive effect of additional common shares issuable under stock
options. Earnings per share is retroactively restated for stock dividends.
Cash Flow Reporting
The Company reports net cash flows for customer loan transactions, deposit
transactions and deposits made with other financial institutions. Cash and cash
equivalents are defined to include cash on hand, demand deposits in other
institutions and Federal Funds Sold.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 19. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on- and off-balance sheet financial
instruments do not include the value of anticipated future business, or the
values of assets and liabilities not considered financial instruments.
- 33 -
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, requires all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. The Company's derivatives include mandatory forward
commitments to sell mortgage loans and interest rate caps. The Company uses both
mandatory and non-mandatory forward commitments. Mandatory commitments that
require net settlement with the counter-party in order to cancel the contracts
are recorded at fair value in the financial statements, while forward contracts
that do not require net settlement are not recorded in the financial statements.
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
$5,637 and a market value of $5,784, resulting in a net increase in equity of
$88 at the time of transfer.
A new accounting standard requires all business combinations to be recorded
using the purchase method of accounting for any transaction initiated after June
30, 2001. Under the purchase method, all identifiable tangible and intangible
assets and liabilities of the acquired company must be recorded at fair value at
date of acquisition, and the excess cost over fair value of net assets acquired
is recorded as goodwill. Identifiable intangible assets must be separated from
goodwill. Identifiable intangible assets with finite useful lives will continue
to amortize under the new standard, whereas goodwill will cease being amortized
starting in 2002. Annual impairment testing will be required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its implied
fair value. Amounts previously recorded as goodwill from depository institution
branch acquisitions are not presently considered to be goodwill under the new
standard and these amounts will continue to be amortized. Management is
currently evaluating the impact of this new standard, but the Corporation's
intangible assets of $1,985 include $763 that management expects to continue
amortizing.
NOTE 2 - Securities
The amortized cost, gains and losses recognized in accumulated other
comprehensive income (loss) and fair value of Securities Available-for-Sale were
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale: Cost Gains Losses Value
--------------------------------------------------------
2001
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies................. $ 3,000 $ 39 $ --- $ 3,039
Obligations of State and Political Subdivisions............. 53,490 909 (506) 53,893
Asset- / Mortgage-backed Securities......................... 93,491 885 (104) 94,272
Equity Securities........................................... 16,813 171 (94) 16,890
--------- ------- --------- --------
Total................................................... $ 166,794 $ 2,004 $ (704) $168,094
========= ======= ========= ========
2000
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies............... $ 96,315 $ 52 $ (1,265) $ 95,102
Obligations of State and Political Subdivisions............. 26,057 761 (149) 26,669
Asset- / Mortgage-backed Securities......................... 52,004 11 (679) 51,336
Equity Securities........................................... 12,077 29 (25) 12,081
--------- ------- -------- ---------
Total................................................... $ 186,453 $ 853 $ (2,118) $ 185,188
========= ======= ======== =========
- 34 -
The carrying amount, unrecognized gains and losses and fair value of Securities
Held-to-Maturity were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Held-to-Maturity Cost Gains Losses Value
--------------------------------------------------------
2001
Obligations of State and Political Subdivisions............. $ 23,056 $ 468 $ (80) $ 23,444
Asset- / Mortgage-backed Securities......................... --- --- --- ---
--------- ------- -------- ---------
Total................................................... $ 23,056 $ 468 $ (80) $ 23,444
========= ======= ======== =========
2000
Obligations of State and Political Subdivisions............. $ 28,093 $ 607 $ (110) $ 28,590
Asset- / Mortgage-backed Securities......................... 361 3 (1) 363
--------- ------- -------- ----------
Total................................................... $ 28,454 $ 610 $ (111) $ 28,953
========= ======= ======== ==========
The amortized cost and fair value of Securities at December 31, 2001 by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because some issuers have the right to call or prepay
certain obligations with or without call or prepayment penalties. Asset-backed,
Mortgage-backed and Equity Securities are not due at a single maturity date and
are shown separately.
Amortized Fair
Cost Value
--------- ---------
Securities Available-for-Sale:
Due in one year or less..................................... $ 3,000 $ 3,053
Due after one year through five years....................... 11,216 11,388
Due after five years through ten years...................... 12,988 13,382
Due after ten years......................................... 29,286 29,109
Asset- / Mortgage-backed Securities......................... 93,491 94,272
Equity Securities........................................... 16,813 16,890
--------- ---------
Totals.................................................. $ 166,794 $ 168,094
========= =========
Carrying Fair
Amount Value
--------- ---------
Securities Held-to-Maturity:
Due in one year or less..................................... $ 1,009 $ 1,013
Due after one year through five years....................... 7,155 7,267
Due after five years through ten years...................... 8,799 9,011
Due after ten years......................................... 6,093 6,153
Asset- / Mortgage-backed Securities......................... --- ---
--------- ---------
Totals.................................................. $ 23,056 $ 23,444
========= =========
The amortized cost of securities at December 31, 2001 are shown in the following
table by contractual maturity, except for asset- / mortgage-backed securities,
which are based on estimated average lives. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations. Equity securities totaling $16,813 do not have contractual
maturities, and are excluded from the table below.
- 35 -
Maturities and Average Yields of Securities at December 31, 2001:
Within After One But After Five But After Ten
One Year Within Five Years Within Ten Years Years
----------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------
U.S. Treasuries and
Agencies.............. $ 1,000 6.30% $ 2,000 4.50% $ --- N/A $ --- N/A
State and Political
Subdivisions.......... 3,009 7.72% 16,371 6.66% 21,787 7.88% 35,379 6.78%
Asset- / Mortgage-backed
Securities............ 16,403 5.92% 66,573 5.64% 5,425 5.92% 5,090 5.10%
-------- --------- --------- -------
Totals............. $ 20,412 6.20% $ 84,944 5.81% $ 27,212 7.49% $40,469 6.57%
======== ========= ========= =======
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above
table.
At December 31, 2001 and 2000, U.S. Government Agency structured notes,
consisting of single-index bonds, with respective amortized costs of $0 and
$7,784 and fair values of $0 and $7,116 were included in securities
available-for-sale.
Proceeds from the Sales of Securities are summarized below:
2001 2000 1999
---- ---- ----
Available- Held-to- Available- Held-to- Available- Held-to-
Trading for-Sale Maturity Trading for-Sale Maturity Trading for-Sale Maturity
------- ---------- -------- ------- ---------- -------- ------- ---------- --------
Proceeds from Sales and Calls.... $ --- $ --- $51 $ --- $742 $387 $ --- $953 $---
Gross Gains on Sales and Calls... --- --- 1 --- --- 6 --- 6 ---
Gross Losses on Sales and Calls.. --- --- --- --- (6) (8) --- (12) ---
Income Taxes
on Gross Gains................. --- --- --- --- --- 2 --- (2) ---
Income Taxes
On Gross Losses................ --- --- --- --- (2) (3) --- (5) ---
The securities held-to-maturity proceeds and gross gains and losses in 2000 and
2001 resulted from the call of securities.
The carrying value of securities pledged to secure repurchase agreements, public
and trust deposits, and for other purposes as required by law was $50,729 and
$33,424 as of December 31, 2001 and 2000, respectively.
- 36 -
NOTE 3 - Loans
Loans are comprised of the following classifications at December 31,
2001 2000
---- ----
Residential Mortgage Loans................................................. $ 227,502 $ 312,199
Agricultural and Poultry Loans............................................. 78,675 74,111
Commercial and Industrial Loans............................................ 227,872 188,213
Consumer Loans............................................................. 123,840 135,596
------------ -----------
Totals................................................................. $ 657,889 $ 710,119
============ ===========
Nonperforming loans were as follows at December 31:
Loans past due over 90 days and accruing and Restructured Loans............ $ 1,283 $ 1,513
Non-accrual loans.......................................................... 3,452 8,014
------------ -----------
Totals................................................................. $ 4,735 $ 9,527
============ ===========
Information regarding impaired loans: 2001 2000
---- ----
Year-end impaired loans with no allowance for loan losses allocated........ $ 549 $ 1,457
Year-end impaired loans with allowance for loan losses allocated........... 371 3,349
Amount of allowance allocated to impaired loans............................ 104 653
1999
----
Average balance of impaired loans during the year.......................... 1,628 4,939 $ 2,337
Interest income recognized during impairment............................... 249 367 169
Interest income recognized on cash basis................................... 212 358 120
Certain directors, executive officers, and principal shareholders of the
Company, including their immediate families and companies in which they are
principal owners, were loan customers of the Company during 2001. A summary of
the activity of these loans follows:
Balance Changes Balance
January 1, in Persons Deductions December 31,
2001 Additions Included Collected Charged-off 2001
- ----------------------------------------------------------------------------------------------
$ 15,848 $ 6,725 $ 22 $ (5,847) $ --- $ 16,748
- 37 -
NOTE 4 - Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses follows:
2001 2000 1999
---- ---- ----
Balance as of January 1...................... $ 9,274 $ 9,101 $ 8,559
Adjustment to Conform Fiscal Years........... --- --- 356
Provision for Loan Losses.................... 660 2,231 1,749
Recoveries of Prior Loan Losses.............. 806 359 489
Loan Losses Charged to the Allowance......... (2,352) (2,417) (2,052)
-------- -------- --------
Balance as of December 31.................... $ 8,388 $ 9,274 $ 9,101
======== ======== ========
NOTE 5 - Mortgage Banking
The amount of loans serviced by the Company for the benefit of others was
$204,683 and $125,036 at December 31, 2001 and 2000. These loans are owned by
outside parties and are not included in the assets of the Company.
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows. The net balance of mortgage servicing rights is
included in Other Assets.
2001 2000 1999
---- ---- ----
Servicing Rights:
Beginning of Year......................... $ 918 $ 1,171 $ 1,012
Additions................................. 1,248 329 473
Sale of Servicing Asset................... --- (402) ---
Amortized to Expense...................... (187) (180) (241)
Adjustment to conform fiscal years........ --- --- (73)
-------- -------- --------
End of Year............................... $ 1,979 $ 918 $ 1,171
======== ======== ========
Valuation Allowance:
Beginning of Year......................... $ 53 $ --- $ ---
Additions Expensed........................ 497 53 ---
Reductions Credited to Expense............ (33) --- ---
Direct Write-downs........................ --- --- ---
-------- -------- --------
End of Year............................... $ 517 $ 53 ---
======== ======== ========
The fair value of mortgage servicing rights was $1,480 and $1,080 at December
31, 2001 and 2000.
- 38 -
NOTE 6 - Premises, Furniture, and Equipment
Premises, furniture, and equipment is comprised of the following classifications
at December 31,
2001 2000
---- ----
Land.......................................... $ 3,441 $ 3,780
Buildings and Improvements.................... 20,534 21,615
Furniture and Equipment....................... 15,732 14,770
-------- --------
Total Premises, Furniture and Equipment... 39,707 40,165
Less: Accumulated Depreciation........... (19,691) (19,100)
-------- --------
Total.................................. $ 20,016 $ 21,065
======== ========
Depreciation expense was $1,946, $1,960 and $1,858 for 2001, 2000 and 1999,
respectively.
NOTE 7 - Deposits
At year-end 2001, stated maturities of time deposits were as follows:
2002...................................... $206,955
2003...................................... 66,443
2004...................................... 76,195
2005...................................... 21,208
2006...................................... 7,257
Thereafter................................ 278
--------
Total.................................. $378,336
========
Time deposits of $100 or more at December 31, 2001 and 2000 were $50,233 and
$98,447.
- 39 -
NOTE 8 - FHLB Advances and Other Borrowed Money
The Company's funding sources include Federal Home Loan Bank advances and
repurchase agreements. Information regarding each of these types of borrowings
is as follows:
December 31,
2001 2000
---- ----
Long-term advances from the Federal Home Loan Bank
collateralized by qualifying mortgages,
investment securities, and mortgage-backed
securities........................................... $ 156,726 $ 182,361
Promissory notes payable............................... --- 9
--------- ---------
Long-term borrowings............................... 156,726 182,370
--------- ---------
Overnight variable rate advances from the Federal
Home Loan Bank collateralized by qualifying
mortgages, investment securities, and
mortgage-backed securities........................... --- 40,500
Repurchase Agreements.................................... 17,659 12,360
--------- ---------
Short-term borrowings................................ 17,659 52,860
--------- ---------
Total borrowings.................................. $ 174,385 $ 235,230
========= =========
At December 31, 2001 interest rates on the fixed rate long-term FHLB advances
ranged from 4.98% to 7.27% with a weighted average rate of 6.24%. Of the $156.7
million, $110.0 million or 70% of the advances contained options whereby the
FHLB may convert the fixed rate advance to an adjustable rate advance, at which
time the company may prepay the advance without penalty. The options on these
advances are subject to a variety of terms including LIBOR based strike rates.
At December 31, 2000 interest rates on the fixed rate long-term FHLB advances
ranged from 4.98% to 7.27% with a weighted average rate of 6.31%. Of the $182.4
million, $130.0 million or 71% of the advances contained options whereby the
FHLB may convert the fixed rate advance to an adjustable rate advance, at which
time the company may prepay the advance without penalty. The options on these
advances are subject to a variety of terms including LIBOR based strike rates.
Scheduled principal payments on long-term borrowings at December 31, 2001 are as
follows:
2002..................................... $ 16,184
2003..................................... 32,725
2004..................................... 30,855
2005..................................... 41,250
2006..................................... 1,975
Thereafter............................. 33,737
--------
Total............................... $156,726
========
- 40 -
During 2000 the Company entered into interest rate caps as a means of managing
interest rate risk on borrowings. Under the caps, the Company will receive
payments during periods in which the three-month LIBOR index exceeds 6.75%
(three-month LIBOR was 1.88% at December 31, 2001). The Company has no
obligation to make payments to the counter-party under the caps. Payments under
the caps are based on an interest computation on a notional amount, but this
notional amount does not represent credit risk as credit risk is limited to the
interest amounts receivable under the caps. At December 31, 2001 the Company
held interest rate caps with a notional amount of $35,000, a carrying value of
$0 and maturity of December 2002. The caps are carried as an asset at fair
value.
NOTE 9 - Stockholders' Equity
The Company and affiliate Banks are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
At December 31, 2001, consolidated and affiliate bank actual capital and minimum
required levels are presented below:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Regulations:
------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total Capital
(to Risk Weighted Assets)
Consolidated....................... $107,731 14.86% $ 58,010 8.00% $ 72,513 10.00%
German American Bank............... 35,604 11.12 25,604 8.00 32,005 10.00
First American Bank................ 20,969 15.78 10,631 8.00 13,288 10.00
Peoples National Bank.............. 12,242 11.67 8,396 8.00 10,494 10.00
Citizens State Bank................ 16,397 10.72 12,234 8.00 15,293 10.00
First State Bank................... 5,019 9.93 4,043 8.00 5,054 10.00
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated....................... $ 99,296 13.69% $ 29,005 4.00% $ 43,508 6.00%
German American Bank............... 32,695 10.22 12,802 4.00 19,203 6.00
First American Bank................ 19,273 14.50 5,315 4.00 7,973 6.00
Peoples National Bank.............. 11,039 10.52 4,198 4.00 6,297 6.00
Citizens State Bank................ 14,708 9.62 6,117 4.00 9,176 6.00
First State Bank................... 4,462 8.83 2,022 4.00 3,032 6.00
Tier 1 Capital
(to Average Assets)
Consolidated....................... $ 99,296 9.80% $ 40,512 4.00% $ 50,640 5.00%
German American Bank............... 32,695 7.55 17,324 4.00 21,655 5.00
First American Bank................ 19,273 8.24 9,355 4.00 11,693 5.00
Peoples National Bank.............. 11,039 7.68 5,748 4.00 7,185 5.00
Citizens State Bank................ 14,708 7.67 7,667 4.00 9,583 5.00
First State Bank................... 4,462 7.11 2,510 4.00 3,138 5.00
- 41 -
At December 31, 2001 and 2000, the Company and all affiliate Banks except First
State Bank were categorized as well-capitalized. First State Bank was
categorized as well-capitalized at December 31, 2000, with Total Capital of
10.33%, Tier 1 to risk weighted assets of 9.38%, and Tier 1 to average assets of
6.98%. At December 31, 2001, First State Bank's Total Capital was approximately
$35 less than the amount required to be well-capitalized, and, accordingly,
First State Bank was classified as adequately capitalized at that date.
Consolidated and bank capital ratios at December 31, 2000 were materially
similar to 2001 amounts, except as previously described for First State Bank.
Regulations require the maintenance of certain capital levels at each affiliate
bank, and may limit the dividends payable by the affiliates to the holding
company, or by the holding company to its shareholders. At December 31, 2001 the
affiliates had $6.6 million in retained earnings available for dividends to the
parent company without prior regulatory approval.
Stock Options
The Company maintains Stock Option Plans and has reserved 696,455 shares of
Common Stock (as adjusted for subsequent stock dividends and subject to further
customary anti-dilution adjustments) for the purpose of grants of options to
officers, directors and other employees of the Company. Options may be
designated as "incentive stock options" under the Internal Revenue Code of 1986,
or as nonqualified options. While the date after which options are first
exercisable is determined by the Stock Option Committee of the Company, no stock
option may be exercised after ten years from the date of grant (twenty years in
the case of nonqualified stock options). The exercise price of stock options
granted pursuant to the Plans must be no less than the fair market value of the
Common Stock on the date of the grant.
The Plans authorize an optionee to pay the exercise price of options in cash or
in common shares of the Company or in some combination of cash and common
shares. An optionee may tender already-owned common shares to the Company in
exercise of an option. In this instance, the Company is obligated to use its
best efforts to issue to such optionee a replacement option for the number of
shares tendered, as follows: (a) of the same type as the option exercised
(either an incentive stock option or a non-qualified option); (b) with the same
expiration date; and, (c) priced at the fair market value of the stock on that
date. Replacement options may not be exercised until one year from the date of
grant.
Changes in options outstanding were as follows, as adjusted to reflect stock
dividends:
Number Weighted-average
of Options Exercise Price
---------- --------------
Outstanding, beginning of 1999.......... 106,684 $ 18.19
Granted................................. 28,579 13.11
Exercised.............................. . (5,585) 7.70
Forfeited............................... (1,158) 15.66
-------
Outstanding, end of 1999................ 128,520 16.92
Granted................................. 89,722 13.27
Exercised............................... (9,647) 8.10
Forfeited............................... (5,005) 18.89
-------
Outstanding, end of 2000................ 203,590 16.07
Granted................................. 56,621 14.10
Exercised............................... --- ---
Forfeited............................... (1,050) 13.81
-------
Outstanding, end of 2001................ 259,161 15.65
=======
- 42 -
Options outstanding at year-end 2001 are as follows:
Outstanding Exercisable
----------- -----------
Weighted Average
Range of Remaining Weighted
Exercise Contractual Life Average
Prices Number (in years) Number Exercise Price
- -------------------- --------------------------- ---------------------------
$ 12.87 - $ 13.81 130,309 4.14 30,700 $13.44
$ 14.41 - $ 16.86 57,980 4.58 55,355 15.01
$ 20.16 - $ 25.96 70,872 16.57 70,872 20.18
------- 7.64 ------- 17.04
259,161 156,927
======= =======
Financial Accounting Standard No. 123 requires pro forma disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation. Accordingly, the following pro forma information presents
net income and earnings per share had the Standard's fair value method been used
to measure compensation cost for stock option plans. No compensation cost was
recognized for stock options in any of the years presented. In future years, the
pro forma effect of not applying this standard may increase as additional
options are granted.
- 43 -
2001 2000 1999
---- ---- ----
Pro forma Net Income.............................................. $ 9,058 $ 5,208 $ 9,300
Pro forma Earnings Per Share and Diluted Earnings per Share....... $ 0.82 $ 0.47 $ 0.83
For options granted during 2001, 2000 and 1999, the weighted-average fair values
at grant date are $2.80, $2.70 and $2.86, respectively. The fair value of
options granted during 2001, 2000 and 1999 was estimated using the following
weighted-average information: risk-free interest rate of 4.94%, 6.14% and 4.75%,
expected life of 4.9, 4.9 and 4.1 years, expected volatility of stock price of
.26, .24 and .22, and expected dividends of 3.02%, 4.00% and 2.52% per year.
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan whereby full-time
employees can purchase the Company's common stock at a discount. The purchase
price of the shares under this plan is 85% of the fair market value of such
stock at the beginning or end of the period, whichever is less. The plan
provides for the purchase of up to 491,990 shares of common stock, which the
Company may obtain by purchases on the open market or from private sources, or
by issuing authorized but unissued common shares. In August 2001, the Company
purchased 26,664 common shares on the open market for $480. Funding for the
purchase of common stock was from employee contributions totaling $279 and
Company contributions of $201.
Stock Repurchase Plan
On April 26, 2001 the Company announced that its Board of Directors approved a
stock repurchase program for up to 551,250 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
December 31, 2001, the Company had purchased 5,670 shares under the program.
NOTE 10 - Employee Benefit Plans
The Company and all its affiliate Banks provide a contributory trusteed 401(k)
deferred compensation and profit sharing plan, which covers substantially all
full-time employees. The companies agree to match certain employee contributions
under the 401(k) portion of the plan, while profit sharing contributions are
discretionary and are subject to determination by the Board of Directors. The
Doty Insurance Agency, Inc. provides a similar 401(k) deferred compensation plan
which covers full-time employees, except there is no profit sharing component in
the Doty plan. Employees of the former Holland Bancorp, Inc. participated in a
plan similar to German American Bancorp's plan. These two plans were merged on
June 1, 2001. Contributions to these plans were $982, $596, and $815 for 2001,
2000, and 1999, respectively.
1ST BANCORP and Citizens State Bank had noncontributory defined benefit pension
plans with benefits based on years of service and compensation prior to
retirement. The benefits under the Citizens State Bank plan were suspended at
August 1, 1998. The benefits under the 1ST BANCORP plan were suspended at
December 31, 1998. During 1999, a loss of $147 was incurred on a partial
settlement of the 1ST BANCORP plan. On December 31, 1999, the Citizens State
Bank plan was merged into the 1ST BANCORP plan. During 2001, a loss of $83 was
incurred on a partial settlement of the plan.
- 44 -
Accumulated plan benefit information for the Company's plan as of December 31,
2001 and 2000 is as follows:
Changes in Benefit Obligation: 2001 2000
---- ----
Obligation at beginning of year.............. $ 1,273 $ 1,080
Service cost................................. --- ---
Interest cost................................ 94 80
Benefits paid................................ (448) (79)
Actuarial (gain) loss........................ (120) 192
Adjustment in cost of settlement............. 108 ---
--------- ---------
Obligation at end of year.................... 907 1,273
--------- ---------
Changes in Plan Assets:
Fair value at beginning of year.............. 1,279 1,389
Actual return on plan assets................. 107 (31)
Employer contributions....................... --- ---
Benefits paid................................ (448) (79)
--------- ---------
Fair value at end of year.................... 938 1,279
--------- ---------
Funded Status:
Funded status at end of year................. 31 6
Unrecognized prior service cost.............. (14) (17)
Unrecognized net (gain) or loss.............. 201 373
Unrecognized transition asset................ (12) (19)
--------- ---------
Prepaid benefit cost......................... $ 206 $ 343
========= =========
Net periodic pension expense (benefit) for the years ended December 31, 2001,
2000 and 1999 is as follows:
2001 2000 1999
---- ---- ----
Service cost..................................... $ --- $ --- $ ---
Interest cost.................................... 94 80 104
Expected return on assets........................ (69) (75) (160)
Amortization of transition amount................ (3) (3) (2)
Amortization of prior service cost............... (3) (3) (3)
Recognition of net (gain) or loss................ 35 --- 3
-------- --------- --------
Net periodic pension expense (benefit)........... $ 54 $ (1) $ (58)
======== ========= ========
The weighted-average assumed rate of return on plan assets was 5.5% for 2001 and
2000 and 8.0% for 1999. The weighted-average assumed discount rate used in
determining the actuarial present value of accumulated benefit obligations at
December 31, 2001, 2000 and 1999 was 7.5%. The weighted-average rate of increase
in future compensation levels was not applicable for all years presented.
The Company self-insures employee health benefits for the majority of its
affiliate banks. Stop loss insurance covers annual losses exceeding $70 per
covered individual and approximately $1,229 in the aggregate. Management's
policy is to establish a reserve for claims not submitted by a charge to
earnings based on prior experience. Charges to earnings were $861, $712 and $604
for 2001, 2000 and 1999, respectively.
- 45 -
NOTE 11 - Income Taxes
The provision for income taxes consists of the following:
2001 2000 1999
---- ---- ----
Currently Payable............................................. $ 855 $ 3,080 $ 3,874
Deferred...................................................... 1,954 (2,574) (511)
Net Operating Loss Carryforward............................... (46) (47) (47)
-------- -------- --------
Total..................................................... $ 2,763 $ 459 $ 3,316
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax
income as follows:
2001 2000 1999
---- ---- ----
Statutory Rate Times Pre-tax Income........................... $ 4,065 $ 1,954 $ 4,308
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments.............. (1,007) (960) (1,016)
Non-deductible Merger Costs............................... --- 94 14
State Income Tax, Net of Federal Tax Effect............... 560 124 621
Low Income Housing Credit................................. (520) (665) (407)
Dividends Received Deduction.............................. (204) (151) ---
Other Differences ........................................ (131) 63 (204)
-------- -------- --------
Total Income Taxes...................................... $ 2,763 $ 459 $ 3,316
======== ======== ========
The net deferred tax asset at December 31 consists of the following:
2001 2000
---- ----
Deferred Tax Assets:
Allowance for Loan Losses................................. $ 2,179 $ 2,490
Net Operating Loss Carryforwards.......................... --- 46
Deferred Compensation and Employee Benefits............... 1,801 1,778
Unrealized Depreciation on Securities..................... --- 502
Valuation of Loans Held-for-Sale.......................... --- 2,068
Purchase Accounting Adjustments........................... 136 88
Unused Tax Credits........................................ 995 ---
Other..................................................... 292 493
-------- --------
Total Deferred Tax Assets............................... 5,403 7,465
Deferred Tax Liabilities:
Depreciation.............................................. (564) (531)
Leasing Activities, Net................................... (131) (20)
Mortgage Servicing Rights................................. (563) (343)
Investment in Low Income Housing Partnerships............. (298) (163)
Unrealized Appreciation on Securities..................... (501) ---
Other..................................................... (384) (489)
-------- -------- -
Total Deferred Tax Liabilities.......................... (2,441) (1,546)
Valuation Allowance........................................... (48) (48)
-------- --------
Net Deferred Tax Asset.................................. $ 2,914 $ 5,871
======== ========
- 46 -
The Company has $520 of general business credit carryforward which will expire
in 2021. The Company also has $475 of alternative minimum tax credit
carryforward which under current tax law has no expiration period.
Under the Internal Revenue Code, through 1996 First Federal Bank (now First
American Bank) was allowed a special bad debt deduction related to additions to
tax bad debt reserves established for the purpose of absorbing losses. Subject
to certain limitations, First Federal Bank was permitted to deduct from taxable
income an allowance for bad debts based on a percentage of taxable income before
such deductions or actual loss experience. First Federal Bank generally computed
its annual addition to its bad debt reserves using the percentage of taxable
income method; however, due to certain limitations in 1996, First Federal Bank
was only allowed a deduction based on actual loss experience. Retained earnings
at December 31, 2001, include approximately $2,300 for which no provision for
federal income taxes has been made. This amount represents allocations of income
for allowable bad debt deductions. Reduction of amounts so allocated for
purposes other than tax bad debt losses will create taxable income which will be
subject to the then current corporate income tax rate. It is not contemplated
that amounts allocated to bad debt deductions will be used in any manner to
create taxable income. The unrecorded deferred income tax liability on the above
amount at December 31, 2001 was approximately $782.
NOTE 12 - Per Share Data
Basic Earnings and Diluted Earnings per Share amounts have been retroactively
computed as though shares issued for stock dividends had been outstanding for
all periods presented. The computation of Basic Earnings per Share and Diluted
Earnings per Share are provided below:
2001 2000 1999
---- ---- ----
Basic Earnings per Share:
Net Income.................................................... $ 9,193 $ 5,288 $ 9,354
Weighted Average Shares Outstanding........................... 1,028,876 11,010,344 11,157,115
----------- ------------- ------------
Basic Earnings per Share.................................. $ 0.83 $ 0.48 $ 0.84
=========== ============= ============
Diluted Earnings per Share:
Net Income.................................................... $ 9,193 $ 5,288 $ 9,354
Weighted Average Shares Outstanding........................... 1,028,876 11,010,344 11,157,115
Stock Options, Net............................................ 11,706 50 4,857
----------- ------------- ------------
Diluted Weighted Average Shares Outstanding................... 1,040,582 11,010,394 11,161,972
----------- ------------- ------------
Diluted Earnings per Share................................ $ 0.83 $ 0.48 $ 0.84
=========== ============= ============
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31, 2001,
2000, and 1999 was $180, $156, and $175, respectively, including amounts paid
under short-term cancelable leases.
At December 31, 2001, the German American Bank subleased space for two
branch-banking facilities from a company controlled by a director and principal
shareholder of the Company. The subleases expire in 2005 and 2008 with various
renewal options provided. Aggregate annual rental payments to this Director's
company totaled $56 for 2001. Exercise of the Bank's sublease renewal options is
contingent upon the Director's company renewing its primary leases.
At December 31, 2001, the German American Bancorp leased space for office
facilities from a company controlled by another director and principal
shareholder of the Company. The lease expires in 2005 with various renewal
options provided. Aggregate annual rental payments to this Director's company
totaled $29 for 2001.
- 47 -
The following is a schedule of future minimum lease payments:
Years Ending December 31: Premises
2002.......................................... $ 131
2003.......................................... 131
2004.......................................... 118
2005.......................................... 78
2006.......................................... 53
Thereafter.................................... 118
-------
Total....................................... $ 629
=======
NOTE 14 - Commitments and Off-balance Sheet Items
In the normal course of business, there are various commitments and contingent
liabilities, such as commitments to extend credit and commitments to sell loans,
which are not reflected in the accompanying consolidated financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to make loans and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policy to make commitments as it
uses for on-balance sheet items.
The Company's exposure to credit risk for commitments to sell loans is dependent
upon the ability of the counter-party to purchase the loans. This is generally
assured by the use of government sponsored entity counterparts. These
commitments are subject to market risk resulting from fluctuations in interest
rates. Beginning in 2001, the fair value of mandatory commitments to sell loans
are recorded in the financial statements. Commitments that are not mandatory
(i.e., do not require net settlement with the counter-party to cancel the
commitment) are not included in the financial statements. See Note 19 for the
fair value of sales commitments and the amount on and off the balance sheet.
Commitments and contingent liabilities are summarized as follows, at December 31,
2001 2000
---- ----
Commitments to Fund Loans:
Home Equity......................................... $ 24,029 $ 20,828
Credit Card Lines................................... 8,874 8,515
Commercial Operating Lines.......................... 40,330 47,210
Residential Mortgages............................... 14,236 6,936
---------- ----------
Total Commitments to Fund Loans................. $ 87,469 $ 83,489
========== ==========
Commitments to Sell Loans
Mandatory........................................... $ --- $ 6,584
Non-mandatory....................................... 16,115 ---
Standby Letters of Credit.............................. $ 5,880 $ 1,985
Since many commitments to make loans expire without being used, these amounts do
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower, and may include accounts receivable, inventory, property, land and
other items. The approximate duration of these commitments is generally one year
or less.
At December 31, 2001 and 2000, respectively, the affiliate banks were required
to have $2,739 and $4,351 on deposit with the Federal Reserve, or as cash on
hand. These reserves do not earn interest.
- 48 -
NOTE 15 - Non-cash Investing Activities
2001 2000 1999
---- ---- ----
Loans Transferred to Other Real Estate................... $ 1,766 $ 3,473 $ 2,923
Securities Transferred to Available-for-Sale............. 5,637 1,181 ---
Loans Transferred to Held-for-Sale....................... --- 69,839 ---
The above data should be read in conjunction with the Consolidated Statements of
Cash Flows. On the date of merger with Holland National Bank, investment
securities with an amortized cost and estimated market value of $1.2 million
were reclassified from Held-to-Maturity to Available-for-Sale. This action was
taken as a result of the business combination and in order to conform Holland
National's investment portfolio to the Company's liquidity and interest rate
risk policies.
In conjunction with the adoption of FAS 133 as of January 1, 2001, 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.
See also Note 18 regarding purchase acquisitions in 1999 and 2000.
- 49 -
NOTE 16 - Segment Information
The Company's operations include three primary segments: core banking, mortgage
banking, and insurance operations. The core 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 core banking segment also involves providing trust and investment brokerage
services to its customers. 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 core 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 and the
operations of German American Reinsurance Company, Ltd. (GARC). GARC's primary
business is credit life and disability reinsurance for credit insurance products
sold by the Company's five affiliate banks. 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.
- 50 -
Core Mortgage Consolidated
Banking Banking Insurance Other Totals
--------- -------- --------- -------- ------------
Year Ended December 31, 2001
Net Interest Income.......................... $ 30,581 $ 1,294 $ 36 $ 241 $ 32,152
Gain on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held
for Sale................................. 1,083 426 --- --- 1,509
Servicing Income............................. --- 646 --- (232) 414
Insurance Revenues........................... 18 184 3,073 --- 3,275
Noncash Items:
Provision for Loan Losses................ 660 --- --- --- 660
MSR Amortization & Valuation............. --- 651 --- --- 651
Provision for Income Taxes................... 4,661 24 293 (2,215) 2,763
Segment Profit............................... 10,759 28 501 (2,095) 9,193
Segment Assets............................... 906,286 105,711 4,393 (1,279) 1,015,111
Core Mortgage Consolidated
Banking Banking Insurance Other Totals
--------- -------- --------- -------- ------------
Year Ended December 31, 2000
Net Interest Income.......................... $ 30,102 $ 3,305 $ 10 $ 256 $ 33,673
Gain on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held
for Sale................................. 182 (5,180) --- --- (4,998)
Servicing Income............................. --- 418 --- (57) 361
Insurance Revenues........................... 279 9 2,472 (37) 2,723
Noncash Items:
Provision for Loan Losses................ 1,010 1,221 --- --- 2,231
MSR Amortization & Valuation............. --- 233 --- --- 233
Provision for Income Taxes................... 4,446 2,129) 190 (2,048) 459
Segment Profit............................... 10,144 (3,147) 271 (1,980) 5,288
Segment Assets............................... 908,106 164,161 3,868 3,673 1,079,808
Core Mortgage Consolidated
Banking Banking Insurance Other Totals
--------- -------- --------- -------- ------------
Year Ended December 31, 1999
Net Interest Income.......................... $ 29,685 $ 4,459 $ --- $ 247 $ 34,391
Gain on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held
for Sale................................. (33) 229 --- 196
Servicing Income............................. --- 391 --- --- 391
Insurance Revenues........................... 251 5 1,715 --- 1,971
Noncash Items:
Provision for Loan Losses................ 701 1,048 --- --- 1,749
MSR Amortization & Valuation............. --- 241 --- --- 241
Provision for Income Taxes................... 4,055 546 117 (1,402) 3,316
Segment Profit............................... 10,068 833 169 (1,716) 9,354
Segment Assets............................... 870,890 180,752 2,918 2,081 1,056,641
- 51 -
NOTE 17 - Parent Company Financial Statements
The condensed financial statements of German American Bancorp are presented
below:
CONDENSED BALANCE SHEETS
December 31,
2001 2000
---- ----
ASSETS
Cash....................................................... $ 8,909 $ 6,401
Securities Available-for-Sale, at Market................... 1,672 1,717
Investment in Subsidiary Banks and Bank Holding Company.... 87,719 85,189
Investment in GAB Mortgage Corp............................ 291 291
Investment in Reinsurance Co............................... 282 211
Furniture and Equipment.................................... 1,969 1,604
Other Assets............................................... 2,252 2,034
--------- ---------
Total Assets............................................ $ 103,094 $ 97,447
========= =========
LIABILITIES.................................................... $ 885 $ 187
SHAREHOLDERS' EQUITY
Common Stock............................................... 11,039 10,495
Additional Paid-in Capital................................. 72,238 63,175
Retained Earnings.......................................... 18,133 24,353
Accumulated Other Comprehensive Income / (Loss)............ 799 (763)
--------- ---------
Total Shareholders' Equity.............................. 102,209 97,260
--------- ---------
Total Liabilities and Shareholders' Equity.............. $ 103,094 $ 97,447
========= =========
- 52 -
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
2001 2000 1999
---- ---- ----
INCOME
Dividends from Subsidiary Banks............................ $ 10,615 $ 6,695 $ 11,616
Dividend and Interest Income............................... 241 257 247
Fee Income from Subsidiary Banks........................... 695 577 471
Securities Losses, net..................................... --- (5) ---
Other Income............................................... 136 54 61
--------- --------- ---------
Total Income............................................ 11,687 7,578 12,395
EXPENSES
Salaries and Benefits...................................... 3,383 2,701 2,475
Professional Fees.......................................... 730 734 530
Occupancy and Equipment Expense............................ 537 525 355
Other Expenses............................................. 441 705 538
--------- --------- ---------
Total Expenses.......................................... 5,091 4,665 3,898
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES....................... 6,596 2,913 8,497
Income Tax Benefit............................................. 1,581 1,447 1,373
--------- --------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES..................................... 8,177 4,360 9,870
Equity in Undistributed Income of Subsidiaries................. 1,016 928 (516)
--------- --------- ---------
NET INCOME..................................................... 9,193 5,288 9,354
Other Comprehensive Income:
Unrealized gain/(loss) on Securities, net.................. 1,562 3,184 (4,785)
--------- --------- ---------
TOTAL COMPREHENSIVE INCOME.............................. $ 10,755 $ 8,472 $ 4,569
========= ========= =========
- 53 -
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income..................................................... $ 9,193 $ 5,288 $ 9,354
Adjustments to Reconcile Net Income to Net
Cash from Operations
Amortization on Securities................................. 6 15 22
Depreciation................................................... 258 227 205
Loss / (Gain) on Sale of Securities, net................... --- 5 ---
Gain on Sale of Property and Equipment..................... --- --- (4)
Director Stock Awards...................................... 88 83 90
Change in Other Assets..................................... (202) (83) (47)
Change in Other Liabilities................................ 698 95 (21)
Equity in Undistributed Income of Subsidiaries............. (1,016) (928) 516
--------- --------- ---------
Net Cash from Operating Activities.................... 9,025 4,702 10,115
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to Subsidiaries....................... --- (200) (316)
Purchase of Securities Available-for-Sale.................. --- (74) (368)
Proceeds from Maturities of Securities Available-for-Sale.. --- 1,593 500
Property and Equipment Expenditures........................ (623) (411) (520)
Proceeds from Sale of Property and Equipment............... --- --------- 993
Acquire Affiliates and Adjust to Conform Fiscal Years...... --- --- 104
--------- --------- ---------
Net Cash from Investing Activities.................... (623) 908 393
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock................................... 249 291 247
Purchase / Retire Common Stock............................. (149) --- (4,305)
Employee Stock Purchase Plan............................... (201) (40) ---
Dividends Paid............................................. (5,769) (5,211) (4,682)
Purchase of Interest in Fractional Shares.................. (24) (20) (35)
--------- --------- ---------
Net Cash from Financing Activities.................... (5,894) (4,980) (8,775)
--------- --------- ---------
Net Change in Cash and Cash Equivalents........................ 2,508 630 1,733
Cash and Cash Equivalents at Beginning of Year............. 6,401 5,771 4,038
--------- --------- ---------
Cash and Cash Equivalents at End of Year................... $ 8,909 $ 6,401 $ 5,771
========= ========= =========
- 54 -
NOTE 18 - Business Combinations
Information relating to mergers and acquisitions for the three year period ended
December 31, 2001, includes:
Date Common Accounting
Business Combination Acquired Shares Issued(3) Method
- -------------------- -------- ---------------- ----------
The Doty Agency, Inc., Petersburg, Indiana 01/01/99 71,773 Pooling
1ST BANCORP, Vincennes, Indiana 01/04/99 2,361,167 Pooling
Professional Insurance Markets, Inc.,
(Smith & Bell), Vincennes, Indiana 05/01/99 9,261 Purchase(1)
Fleck Insurance Agency, Inc., Jasper, Indiana 05/01/00 --- Purchase(2)
Holland Bancorp Inc., Holland, Indiana 10/01/00 1,044,908 Pooling
- ------------------------
<FN>
Certain of the above entities changed their name and/or have been merged into
other subsidiaries of the Corporation.
(1) This merger was accounted for as a purchase, with assets acquired and
liabilities assumed totaling $412, including goodwill of $345. The Company
issued approximately 9,261 shares of common stock and approximately $26 in
cash for all the outstanding shares of the corporate owner of Smith & Bell.
Reported operating results for periods prior to the merger have not been
restated.
(2) This merger was accounted for as a purchase, with net assets acquired of
$300. The Company issued no stock in this transaction. The Company recorded
goodwill of $298 as a result of this acquisition. Reported operating
results for periods prior to the merger have not been restated.
(3) Adjusted for all subsequent stock dividends.
</FN>
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NOTE 19 - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are provided in
the table below. Not all of the Company's assets and liabilities are considered
financial instruments, and therefore are not included in the table. Because no
active market exists for a significant portion of the Company's financial
instruments, fair value estimates were based on subjective judgments, and
therefore cannot be determined with precision.
DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Financial Assets:
Cash and Short-term Investments......................... $ 99,427 99,427 $ 29,942 $ 29,942
Securities Available-for-Sale........................... 168,094 168,094 185,188 185,188
Securities Held-to-Maturity............................. 23,056 23,444 28,454 28,953
FHLB Stock and Other Restricted Stock................... 12,596 12,596 12,596 12,596
Loans, including loans held-for-sale, net............... 654,316 663,567 771,842 764,902
Accrued Interest Receivable............................. 7,228 7,228 9,418 9,418
Interest Rate Caps...................................... --- --- 79 78
Financial Liabilities:
Demand, Savings and Money Market Deposits............... (348,538) (348,538) $ (283,239) $ (283,239)
Other Time Deposits..................................... (378,336) (380,984) (452,331) (450,530)
Short-term Borrowings................................... (17,659) (17,659) (52,860) (52,860)
Long-term Debt.......................................... (156,726) (158,246) (182,370) (185,763)
Accrued Interest Payable................................ (2,988) (2,988) (4,200) (4,200)
Commitments to Sell Loans............................... --- --- --- ---
Unrecognized Financial Instruments:
Commitments to Extend Credit............................ --- --- --- ---
Standby Letters of Credit................................... --- --- --- ---
Commitments to Sell Loans............................... --- --- --- (52)
The carrying amounts of cash, short-term investments, FHLB and other restricted
stock, and accrued interest receivable are a reasonable estimate of their fair
values. The fair values of securities are based on quoted market prices or
dealer quotes, if available, or by using quoted market prices for similar
instruments. The fair value of loans held-for-sale are estimated using
commitment prices or market quotes on similar loans. The fair value of loans are
estimated by discounting future cash flows using the current rates at which
similar loans would be made for the average remaining maturities. The fair value
of interest rate caps is estimated by discounting expected cash flows using
current rates. The fair value of demand deposits, savings accounts, money market
deposits, short-term borrowings and accrued interest payable is the amount
payable on demand at the reporting date. The fair value of fixed-maturity time
deposits and long-term borrowings are estimated using the rates currently
offered on these instruments for similar remaining maturities. Commitments to
extend credit and standby letters of credit are generally short-term or variable
rate with minimal fees charged. These instruments have no carrying value, which
is also assumed to be their fair value. The fair value of commitments to sell
loans is the cost or benefit of settling the commitments with the counter-party
at the reporting date. Beginning in 2001, the fair value of mandatory
commitments to sell loans are recorded in the financial statements, while
non-mandatory commitments (those that do not require net settlement with the
counter-party to cancel the commitment) are not included in the financial
statements. At December 31, 2001, none of the Company's commitments to sell
loans were mandatory.
- 56 -
NOTE 20 - Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
2001 2000 1999
---- ---- ----
Unrealized holding gains and (losses) on
securities available-for-sale........................... $ 2,565 $ 5,277 $ (7,929)
Less: reclassification adjustments for gains
and losses later recognized in income................... --- (6) (6)
---------- --------- ----------
Net unrealized gains and (losses)........................... 2,565 5,271 (7,923)
Tax Effect.................................................. (1,003) (2,087) 3,138
---------- --------- ----------
Other comprehensive income (loss)........................... $ 1,562 $ 3,184 $ (4,785)
========== ========= ==========
NOTE 21 - Quarterly Financial Data (Unaudited)
The following table represents selected quarterly financial data for the
Company:
Interest Net Interest Net Earnings/(Loss) per Share
Income Income Income/(Loss) Basic Fully Diluted
------ ------ ------------- ----- -------------
2001
First Quarter........................... $ 19,366 $ 8,470 $ 2,391 $ 0.22 $ 0.22
Second Quarter.......................... 18,054 7,963 2,534 0.23 0.23
Third Quarter........................... 17,320 7,771 2,443 0.22 0.22
Fourth Quarter.......................... 16,329 7,948 1,825 0.16 0.16
2000
First Quarter........................... $ 19,297 $ 8,602 $ 2,167 $ 0.20 $ 0.20
Second Quarter.......................... 19,820 8,640 2,470 0.22 0.22
Third Quarter........................... 20,268 8,429 2,422 0.22 0.22
Fourth Quarter.......................... 19,934 8,002 (1,771) (0.16) (0.16)
During the fourth quarter 2001, the Company's operating results were impacted by
expenses associated with a branch office consolidation and office facility
dispositions and impairment, salaries and employee benefits expenses associated
with the Company's incentive based compensation, and mortgage servicing rights
impairment.
Year 2000 quarterly financial information presented above, including earnings
per share has been restated to reflect the acquisition of Holland Bancorp, Inc.,
which was accounted for as a pooling of interests. This acquisition was
completed as of October 1, 2000. The Company has also retroactively restated
quarterly earnings per share to reflect the 5% stock dividend paid in December
2001.
During December 2000, the Company initiated a restructuring of its balance sheet
within its mortgage banking division. The restructuring was undertaken to
strengthen the overall credit quality within the loan portfolio, to allow for a
reduction of wholesale funding, and to improve the interest rate risk position.
The Company reclassified $69.8 million of sub-prime, out-of-market residential
mortgage loans as held-for-sale. These loans were reclassified at the lower of
cost or fair value, resulting in a loss of $5,220, which is included in the
statement of income in net gains on sales of loans and related assets, and
provision for losses on loans held-for-sale. This loss and an increased
provision for loan losses for these types of loans, net of the related tax
effect, had a significant negative impact on reported fourth quarter earnings
and earnings per share.
- 57 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to Directors of the Corporation will be included under the
caption "Election of Directors" in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held on April 25, 2002 which will be filed with
the Commission within 120 days of the end of the fiscal year covered by this
Report (the "2002 Proxy Statement"), which section is incorporated herein by
reference in partial answer to this Item.
Information relating to Executive Officers of the Corporation is included under
the caption "Executive Officers of the Registrant" under Part I of this Report
on Form 10-K, and is incorporated herein by reference.
Information relating to compliance with Section 16(a) of the Securities Exchange
Act of 1934, as amended, will be included under the caption "Section 16(a):
Beneficial Ownership Reporting Compliance" in the 2002 Proxy Statement of the
Corporation, which captioned section is incorporated herein by reference.
Item 11. Executive Compensation.
Information relating to compensation of the Corporation's Executive Officers and
Directors will be included under the captions "Executive Compensation" and
"Election of Directors -- Compensation of Directors" in the 2002 Proxy Statement
of the Corporation, which sections are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners and
management of the Corporation will be included under the captions "Election of
Directors" and "Principal Owners of Common Shares" of the 2002 Proxy Statement
of the Corporation, which sections are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information responsive to this Item 13 will be included under the captions
"Executive Compensation - Certain Business Relationships and Transactions" and
"Executive Compensation - Compensation Committee Interlocks and Insider
Participation" of the 2002 Proxy Statement of the Corporation, which sections
are incorporated herein by reference.
- 58 -
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a) Financial Statements
The following items are included in Item 8 of this report:
Page #
------
German American Bancorp and Subsidiaries:
Independent Auditors' Report 23
Consolidated Balance Sheets at December 31,
2001 and December 31, 2000 24
Consolidated Statements of Income, years
ended December 31, 2001, 2000, and 1999 25
Consolidated Statements of Changes in
Shareholders' Equity, years ended
December 31, 2001, 2000, and 1999 26
Consolidated Statements of Cash Flows, years
ended December 31, 2001, 2000, and 1999 27
Notes to the Consolidated Financial
Statements 28-49
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter ended
December 31, 2001.
c) Exhibits
The Exhibits described in the Exhibit List immediately following the
"Signatures" pages of this report (which are incorporated herein by reference)
are hereby filed as part of this report.
- 59 -
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
(Registrant)
Date: March 22, 2002 By/s/Mark A. Schroeder
-------------- ----------------------------------------------
Mark A. Schroeder, President and Director
(Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 22, 2002 By/s/Mark A. Schroeder
-------------- ----------------------------------------------
Mark A. Schroeder, President and Director
(Chief Executive Officer)
Date: March 22, 2002 By/s/George W. Astrike
-------------- ----------------------------------------------
George W. Astrike, Director
Date: March 22, 2002 By/s/David G. Buehler
-------------- ----------------------------------------------
David G. Buehler, Director
Date:
-------------- ----------------------------------------------
David B. Graham, Director
Date: March 22, 2002 By/s/William R. Hoffman
-------------- ----------------------------------------------
William R. Hoffman, Director
Date: March 22, 2002 By/s/J. David Lett
-------------- ----------------------------------------------
J. David Lett, Director
Date:
-------------- ----------------------------------------------
C. James McCormick, Director
Date: March 22, 2002 By/s/Gene C. Mehne
-------------- ----------------------------------------------
Gene C. Mehne, Director
Date: March 22, 2002 By/s/Robert L. Ruckriegel
-------------- ----------------------------------------------
Robert L. Ruckriegel, Director
Date: March 22, 2002 By/s/Larry J. Seger
-------------- ----------------------------------------------
Larry J. Seger, Director
Date: March 22, 2002 By/s/Joseph F. Steurer
-------------- ----------------------------------------------
Joseph F. Steurer, Director
Date: March 22, 2002 By/s/C.L. Thompson
-------------- ----------------------------------------------
C.L. Thompson, Director
Date: March 22, 2002 By/s/Michael J. Voyles
-------------- ----------------------------------------------
Michael J. Voyles, Director
Date: March 22, 2002 By/s/Kenneth L. Sendelweck
-------------- ----------------------------------------------
Kenneth L. Sendelweck, Principal financial
officer
Date: March 22, 2002 By/s/Bradley M. Rust
-------------- ----------------------------------------------
Bradley M. Rust, Principal accounting officer
- 60 -
Executive
Compensation
Plans and Exhibit
Arrangements* Number Exhibit List
- ------------- ------ ------------
3.1 Restatement of Articles of Incorporation
of the Registrant is incorporated by
reference to Exhibit 3.01 to the
Registrant's Current Report on Form 8-K
filed May 5, 2000.
3.2 Restated Bylaws of the Registrant, as
amended April 26, 2001, is incorporated
by reference to Exhibit 3.2 to the
Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30,
2001.
4.1 Rights Agreement dated April 27, 2000 is
incorporated by reference to Exhibit
4.01 to Registrant's Current Report on
Form 8-K filed May 5, 2000.
4.2 No long-term debt instrument issued by
the Registrant exceeds 10% of
consolidated total assets. In accordance
with paragraph 4 (iii) of Item 601(b) of
Regulation S-K, the Registrant will
furnish the Securities and Exchange
Commission copies of long-term debt
instruments and related agreements upon
request.
4.3 Terms of Common Shares and Preferred
Shares of German American Bancorp found
in Restatement of Articles of
Incorporation are incorporated by
reference to Exhibit 3.01 to
Registrant's Current Report on Form 8-K
filed May 5, 2000.
X 10.1 The Registrant's 1992 Stock Option Plan,
as amended, is incorporated by reference
from Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 filed
October 14, 1998.
X 10.2 Executive Deferred Compensation
Agreement dated December 1, 1992,
between The German American Bank and
George W. Astrike, is incorporated
herein by reference from Exhibit 10.3 to
the Registrant's Registration Statement
on Form S-4 filed January 21, 1993.
X 10.3 Amendment to Executive Deferred
Compensation Agreement dated August 31,
2000 between The German American Bank
and George W. Astrike, is incorporated
by reference from Exhibit 10.4 to the
Registrant's Annual Report on Form 10-K
for its fiscal year ended December 31,
2000.
- 61 -
X 10.4 Director Deferred Compensation Agreement
between The German American Bank and
certain of its Directors, is
incorporated herein by reference from
Exhibit 10.4 to the Registrant's
Registration Statement on Form S-4 filed
January 21, 1993 (The Agreement entered
into by George W. Astrike, a copy of
which was filed as Exhibit 10.4 to the
Registrant's Registration Statement on
Form S-4 filed January 21, 1993, is
substantially identical to the
Agreements entered into by the other
Directors.) The schedule following
Exhibit 10.4 lists the Agreements with
the other Directors and sets forth the
material detail in which such Agreements
differ from the Agreement filed as
Exhibit 10.4.
X 10.5 Stock Option Agreement between the
Registrant and George W. dated September
2, 1998 is incorporated by reference or
from to the Registrant's Registration
Statement on Form S-4 filed 1998.
X 10.6 Non-Qualified Index Executive
Supplemental Agreement dated September
1, 1998 between the Registrant and
George W. Astrike is incorporated by
reference from Exhibit 10.10 to the
Registrant's 1998 Form 10-K filed March
31, 1999.
X 10.7 Split Dollar Life Insurance Plan
Agreement dated November 5, 998 between
the Registrant and George W. Astrike is
ncorporated by reference from Exhibit
10.11 to the egistrant's 1998 Form 10-K
filed March 31, 1999.
X 10.8 Agreement for Consulting Services dated
August 21, 1998 between the Registrant
and George W. Astrike, is incorporated
by reference from Exhibit 10.8 to the
Registrant's 1999 Form 10-K, filed March
29, 2000.
X 10.9 Amendment to Agreement for Consulting
Services dated August 31, 2000, between
the Registrant and George W. Astrike, is
incorporated by reference from Exhibit
10.10 to the Registrant's Annual Report
on Form 10-K for its fiscal year ended
December 31, 2000.
X 10.10 Agreement and Plan of Reorganization
dated June 27, 2000 among the
Registrant, Holland Bancorp, Inc., The
Holland National Bank, and The German
American Bank, is incorporated by
reference from Exhibit 2.1 to the
Registrant's Registration Statement on
Form S-4 filed July 19, 2000 (File No.
333-41698).
- 62 -
X 10.11 The Registrant's 1999 Long-Term Equity
Incentive Plan is incorporated herein by
reference from Appendix A to the
Registrant's definitive proxy statement
for its 1999 annual meeting filed March
26, 1999.
X 10.12 A written description of the
Registrant's Executive Management
Incentive Plan is set forth, under the
caption "EXECUTIVE COMPENSATION ---
Committee Report on Executive
Compensation - Incentive Awards", in the
Registrant's definitive proxy statement
for its 2002 annual meeting, which will
be filed on or about the date of filing
of this report, and is incorporated
herein by reference.
21 Subsidiaries of the Registrant.
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Krueger & Associates
99.1 Opinion of Krueger & Associates dated
January 8, 2000 is incorporated herein
by reference to Exhibit 99.1 to the
Registrant's Annual Report on Form 10-K
for its fiscal year ended December 31,
2000.
* Exhibits that describe or evidence all management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Report are
indicated by an "X" in this column.
- 63 -