v UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 2002
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
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(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, Jasper, Indiana 47546
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(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 1, 2002
Common Stock, No par value 10,945,959
- 1 -
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002
and December 31, 2001
Consolidated Statements of Income and Comprehensive
Income -- Three Months Ended March 31, 2002 and 2001
Consolidated Statements of Cash Flows -- Three Months
Ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements --
March 31, 2002
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- 2 -
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
March 31, December 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
Cash and Due from Banks................................................ $ 22,545 $ 36,893
Federal Funds Sold and Other Short-term Investments.................... 55,100 62,235
----------- -----------
Cash and Cash Equivalents............................................ 77,645 99,128
Interest-bearing Time Deposits with Banks.............................. --- 299
Securities Available-for-Sale, at Market .............................. 193,031 168,094
Securities Held-to-Maturity, at Cost .................................. 21,707 23,056
Loans Held for Sale.................................................... 6,013 5,538
Total Loans............................................................ 638,263 657,889
Less: Unearned Income................................................. (700) (723)
Allowance for Loan Losses....................................... (8,307) (8,388)
----------- -----------
Loans, Net............................................................. 629,256 648,778
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost...... 12,462 12,596
Premises, Furniture and Equipment, Net................................. 20,271 20,016
Other Real Estate...................................................... 1,349 1,612
Goodwill............................................................... 1,221 1,221
Intangible Assets...................................................... 731 764
Accrued Interest Receivable and Other Assets........................... 23,356 34,009
----------- -----------
TOTAL ASSETS.................................................... $ 987,042 $ 1,015,111
=========== ===========
LIABILITIES
Noninterest-bearing Demand Deposits.................................... $ 93,976 $ 106,613
Interest-bearing Demand, Savings, and Money Market Accounts............ 240,340 241,925
Time Deposits < $100,000............................................... 324,844 327,510
Time Deposits $100,000 or more and Brokered Deposits................... 51,429 50,826
----------- -----------
Total Deposits..................................................... 710,589 726,874
FHLB Advances and Other Borrowings..................................... 165,201 174,385
Accrued Interest Payable and Other Liabilities......................... 10,015 11,643
----------- -----------
TOTAL LIABILITIES............................................... 885,805 912,902
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized......................................... 10,944 11,039
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued ................................. --- ---
Additional Paid-in Capital............................................. 70,921 72,238
Retained Earnings...................................................... 18,944 18,133
Accumulated Other Comprehensive Income (Loss) ......................... 428 799
----------- -----------
TOTAL SHAREHOLDERS' EQUITY...................................... 101,237 102,209
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $ 987,042 $ 1,015,111
=========== ===========
End of period shares issued and outstanding............................ 10,944,188 11,038,675
=========== ===========
See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three months Ended
March 31,
2002 2001
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INTEREST INCOME
Interest and Fees on Loans............................................. $ 12,584 $ 15,917
Interest on Federal Funds Sold and Other Short-term Investments........ 303 247
Interest and Dividends on Securities:
Taxable.............................................................. 1,527 2,354
Non-taxable.......................................................... 1,047 848
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TOTAL INTEREST INCOME.............................................. 15,461 19,366
INTEREST EXPENSE
Interest on Deposits................................................... 4,966 7,663
Interest on FHLB Advances and Other Borrowings......................... 2,461 3,233
----------- -----------
TOTAL INTEREST EXPENSE............................................. 7,427 10,896
----------- -----------
NET INTEREST INCOME.................................................... 8,034 8,470
Provision for Loan Losses.............................................. 248 165
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NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................................................... 7,786 8,305
NONINTEREST INCOME
Trust and Investment Product Fees...................................... 330 284
Service Charges on Deposit Accounts.................................... 580 536
Insurance Revenues..................................................... 739 948
Other Operating Income................................................. 411 397
Net Gains on Sales of Loans and Related Assets, and
Provision for Losses on Loans Held for Sale.......................... 381 129
Net Gain/(Loss) on Sales of Securities................................. --- 1
----------- -----------
TOTAL NONINTEREST INCOME........................................... 2,441 2,295
NONINTEREST EXPENSE
Salaries and Employee Benefits......................................... 4,445 4,303
Occupancy Expense...................................................... 506 519
Furniture and Equipment Expense........................................ 427 489
Data Processing Fees................................................... 262 250
Professional Fees...................................................... 294 202
Advertising and Promotions............................................. 170 267
Supplies............................................................... 173 165
Other Operating Expenses............................................... 821 1,209
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TOTAL NONINTEREST EXPENSE.......................................... 7,098 7,404
----------- -----------
Income before Income Taxes............................................. 3,129 3,196
Income Tax Expense..................................................... 611 805
----------- -----------
NET INCOME............................................................. $ 2,518 $ 2,391
=========== ===========
COMPREHENSIVE INCOME................................................... $ 2,147 $ 4,129
=========== ===========
Earnings Per Share and Diluted Earnings Per Share...................... $ 0.23 $ 0.22
Dividends Per Share.................................................... $ 0.14 $ 0.13
See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar in thousands)
Three months Ended
March 31,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................. $ 2,518 $ 2,391
Adjustments to Reconcile Net Income to Net Cash
from Operating Activities:
Net (Accretion)/Amortization on Securities........................... 272 27
Depreciation and Amortization........................................ 511 607
Amortization and Impairment of Mortgage Servicing Rights............... 61 219
Net Change in Loans Held for Sale.................................... (475) 55,661
(Income)/Loss on Investment in Limited Partnership................... (42) 46
Provision for Loan Losses............................................ 248 165
Loss/(Gain) on Sale of Securities, net............................... --- 1
Loss/(Gain) on Sales of Loans and Related Assets, and Provision for
Losses on Loans Held for Sale...................................... (381) (129)
Loss/(Gain) on Disposition and Impairment of Premises and
Equipment.......................................................... (3) (208)
Change in Assets and Liabilities:
Interest Receivable and Other Assets............................... 11,142 2,546
Interest Payable and Other Liabilities............................. (1,628) (3,690)
----------- -----------
Net Cash from Operating Activities.............................. 12,223 57,636
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... 299 1,096
Proceeds from Maturities of Securities Available-for-Sale............ 14,673 46,374
Proceeds from Sales of Securities Available-for-Sale................. 134 ---
Purchase of Securities Available-for-Sale............................ (40,550) (630)
Proceeds from Maturities of Securities Held-to-Maturity.............. 1,353 539
Proceeds from Sales of Loans......................................... 280 1,640
Loans Made to Customers, net of Payments Received.................... 18,957 10,817
Proceeds from Sales of Other Real Estate............................. 465 541
Property and Equipment Expenditures.................................. (734) (499)
Proceeds from the Sale of Property and Equipment .................... 5 343
Acquire Insurance Company............................................ --- (150)
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Net Cash from Investing Activities.............................. (5,118) 60,071
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... (16,285) (30,804)
Change in Short-term Borrowings...................................... (7,505) (45,417)
Advances of Long-term Debt........................................... 920 ---
Repayments of Long-term Debt......................................... (2,599) (10,112)
Issuance of Common Stock............................................. 36 ---
Purchase / Retire Common Stock....................................... (1,610) ---
Dividends Paid....................................................... (1,545) (1,470)
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Net Cash from Financing Activities.............................. (28,588) (87,803)
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Net Change in Cash and Cash Equivalents................................ (21,483) 29,904
Cash and Cash Equivalents at Beginning of Year....................... 99,128 28,447
----------- -----------
Cash and Cash Equivalents at End of Period........................... $ 77,645 $ 58,351
=========== ===========
See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
(unaudited, dollars in thousands except per share data)
Note 1 -- Basis of Presentation
German American Bancorp operates primarily in the banking industry. The
accounting and reporting policies of German American Bancorp and its
subsidiaries conform to Generally Accepted Accounting Principles and reporting
followed by the banking industry. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been condensed or omitted. All adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the periods reported have been included in the accompanying
unaudited consolidated financial statements, and all such adjustments are of a
normal recurring nature. It is suggested that these consolidated financial
statements and notes be read in conjunction with the financial statements and
notes thereto in the German American Bancorp's December 31, 2001 Annual Report
on Form 10-K.
Note 2 -- Per Share Data
Earnings and dividends per share have been retroactively computed as though
shares issued for stock dividends had been outstanding for all periods
presented. The computation of Earnings per Share and Diluted Earnings per Share
are provided as follows:
Three months Ended
March 31,
2002 2001
----------- -----------
Earnings per Share:
Net Income $ 2,518 $ 2,391
Weighted Average Shares Outstanding 10,995,449 11,019,234
----------- -----------
Earnings per Share: $ 0.23 $ 0.22
=========== ===========
Diluted Earnings per Share:
Net Income $ 2,518 $ 2,391
Weighted Average Shares Outstanding 10,995,449 11,019,234
Stock Options, Net 23,494 ---
----------- -----------
Diluted Weighted Average Shares Outstanding 11,018,943 11,019,234
----------- -----------
Diluted Earnings per Share $ 0.23 $ 0.22
=========== ===========
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Note 3 - Securities
The fair values of Securities Available-for-Sale are as follows:
March 31, December 31,
2002 2001
------------ -------------
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $ 3,012 $ 3,039
Obligations of State and Political Subdivisions 51,408 53,893
Asset-/Mortgage-backed Securities 121,940 94,272
Equity Securities 16,671 16,890
------------ -------------
Total $ 193,031 $ 168,094
============ =============
The total carrying values and fair values of Securities Held-to-Maturity are as
follows (dollars in thousands):
Carrying Fair
Value Value
------------ -------------
March 31, 2002:
Obligations of State and Political Subdivisions $ 21,707 $ 22,156
============ =============
December 31, 2001:
Obligations of State and Political Subdivisions $ 23,056 $ 23,444
============ =============
Note 4 - 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 core 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 in the
following table, along with minor amounts to eliminate transactions between
segments.
- 7 -
Three months Ended March 31, 2002
Core Mortgage Consolidated
Banking Banking Insurance Other Totals
-------------------------------------------------------------------
Net Interest Income $ 8,025 $ (36) $ 5 $ 40 $ 8,034
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale 205 176 --- --- 381
Servicing Income --- 202 --- (69) 133
Insurance Revenues 33 41 698 (33) 739
Noncash Items:
Provision for Loan Losses 248 --- --- --- 248
MSR Amortization & Valuation --- 61 --- --- 61
Provision for Income Taxes 1,126 4 107 (626) 611
Segment Profit 2,945 6 98 (531) 2,518
Segment Assets 881,178 107,527 4,154 (5,817) 987,042
Three months Ended March 31, 2001
Core Mortgage Consolidated
Banking Banking Insurance Other Totals
-------------------------------------------------------------------
Net Interest Income $ 7,557 $ 834 $ 9 $ 70 $ 8,470
Gain on Sales of Loans and Related
Assets and Provision for Losses
on Loans Held for Sale 150 (21) --- --- 129
Servicing Income --- 132 --- (37) 95
Insurance Revenues 51 36 892 (31) 948
Noncash Items:
Provision for Loan Losses 165 --- --- --- 165
MSR Amortization & Valuation --- 219 --- --- 219
Provision for Income Taxes 1,169 81 90 (535) 805
Segment Profit 2,631 124 161 (525) 2,391
Segment Assets 862,495 122,623 3,792 3,534 992,444
Note 5 - 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. During the
quarter ended March 31, 2002 the Company purchased 100,000 shares under the
program and through March 31, 2002 the Company had purchased 105,670 shares in
total under the program.
Note 6 - New Accounting Pronouncements
A new accounting standard requires all business combinations to be recorded
using the purchase method of accounting. 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 with finite useful lives will continue to
amortize under the new standard, whereas goodwill ceased 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.
- 8 -
No goodwill was acquired during the first quarter of 2002, and $150 was acquired
during the first quarter of 2001. Goodwill at March 31, 2002 is allocated $1,064
to the insurance segment and $157 to the core banking segment. The Corporation
expects to complete the first step of its impairment testing of goodwill by the
end of the second quarter. Goodwill is not being amortized in 2002, but was
amortized in 2001. If goodwill had not been amortized in 2001, the effect on
March 31, 2001 net income would have been a net increase of $28, consisting of
reduced amortization expense of $42 and increased income tax expense of $14, and
earnings per share would have been unchanged.
All intangible assets are subject to amortization, and amortization expense was
$33 and $36 for the first quarter of 2002 and 2001. Estimated amortization
expense for the next five years is as follows: 2002 $130, 2003 $104, 2004 $93,
2005 $90, 2006 $90. Intangible assets subject to amortization are as follows, by
segment:
Gross Accumulated
March 31, 2002: Amount Amortization
-------- ------------
Core Banking
Core deposit intangible $ 670 $ 643
Unidentified branch acquisition intangible 1,353 669
Mortgage Banking
Customer List 99 79
-------- -------
Total $ 2,122 $ 1,391
======== =======
Gross Accumulated
December 31, 2001: Amount Amortization
-------- ------------
Core Banking
Core deposit intangible $ 670 $ 638
Unidentified branch acquisition intangible 1,353 646
Mortgage Banking
Customer List 99 74
-------- -------
Total $ 2,122 $ 1,358
======== =======
Effective January 1, 2002, the Corporation adopted a new accounting standard on
impairment and disposal of long-lived assets. The effect of this new standard is
not expected to be material to the financial statements.
A new accounting standard regarding asset retirement obligations will apply for
2003. Management does not believe this standard will have a material effect on
the Corporation's financial statements.
- 9 -
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliate
community banks with 26 retail banking offices in the eight contiguous
Southwestern Indiana counties of Daviess, Dubois, Gibson, Knox, Martin, Perry,
Pike and Spencer and a business lending center in Evansville, Indiana. The
Company also operates five independent insurance agencies throughout its market
area. The banks' wide range of personal and corporate financial services include
making commercial and consumer loans; marketing, originating, and servicing
mortgage loans; providing trust, investment advisory and brokerage services;
accepting deposits and providing safe deposit facilities. The Company's
insurance activities include offering a full range of title, property, casualty,
life and credit insurance products.
This section presents an analysis of the consolidated financial condition of the
Company as of March 31, 2002 and December 31, 2001 and the consolidated results
of operations for the three-month periods ended March 31, 2002 and 2001. This
discussion should be read in conjunction with the consolidated financial
statements and other financial data presented elsewhere herein and with the
financial statements and other financial data, as well as the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's December 31, 2001 Annual Report on Form 10-K.
RESULTS OF OPERATIONS
Net Income:
Net income increased $127,000 to $2,518,000 or $0.23 per share for the quarter
ended March 31, 2002 compared to $2,391,000 or $0.22 per share for the first
quarter of 2001. The increased earnings were primarily attributable to an
increase in the gain on sale of residential mortgage loans and an overall
decline in non-interest operating expenses. The Company's core banking
operations posted a 12% earnings increase during the first quarter compared with
the same period of the prior year. Partially offsetting the earnings increase in
core banking were declines in the level of revenues and earnings attributable to
the Company's insurance and mortgage banking segments.
Net Interest Income:
Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. The following table
summarizes German American Bancorp's net interest income (on a tax-equivalent
basis, at an effective tax rate of 34%) for each of the periods presented herein
(dollars in thousands):
Three months Change from
Ended March 31, Prior Period
2002 2001 Amount Percent
---- ---- ---------------------
Interest Income (T/E) $ 16,045 $ 19,855 $ (3,810) -19.2%
Interest Expense 7,427 10,896 (3,469) -31.8%
-------- -------- --------
Net Interest Income (T/E) $ 8,618 $ 8,959 $ (341) -3.8%
======== ======== ========
Net interest income decreased $436,000 or 5.1% ($341,000 or 3.8% on a
tax-equivalent basis) for the quarter ended March 31, 2002 compared with the
first quarter of 2001. Net interest margin is tax-equivalent net interest income
expressed as a percentage of average earning assets. For the first quarter of
2002, the net interest margin remained relatively flat at 3.72% compared to
3.74% for the first quarter of 2001. The decline in the Company's net interest
income is primarily attributable to a decline in the level of interest earning
assets and more specifically due to a decline in residential real estate loans.
Average loans outstanding (including loans held for sale) declined $88.1 million
during the three months ended March 31, 2002, compared with the same period of
2001. Average residential real estate loans declined $116.6 million in the first
quarter 2002 compared with 2001. The sale of sub-prime residential real estate
loans totaling nearly $70 million in February 2001 combined with the sale of a
majority of the Company's residential real estate production over the past year
to the secondary market are primarily responsible for the decline. This decline
has been somewhat offset by an increase of $43.7 million in commercial loans
outstanding in 2002 compared with 2001.
- 10 -
Provision For Loan Losses:
The Company provides for loan losses through regular provisions to the allowance
for loan losses, which totaled $248,000 and $165,000 for the quarters ended
March 31, 2002 and 2001, respectively. These provisions are made at levels
deemed necessary by management to absorb estimated losses in the loan portfolio.
A detailed evaluation of the adequacy of the allowance for loan losses is
completed quarterly by management, the results of which are 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.
Net charge-offs were $329,000 or 0.20% annualized of average loans the three
months ended March 31, 2002 compared to $566,000 or 0.31% annualized of average
loans in the first quarter of 2001. The decline in net charge-offs in the first
quarter 2002 compared with 2001 was primarily attributable to the sale of
sub-prime residential real estate loans in the first quarter of 2001.
Non-performing loans represented 0.69% of total loans at March 31, 2002 compared
to 0.72% at December 31, 2001. See discussion of "Financial Condition" for more
information regarding nonperforming assets.
Non-interest Income:
Non-interest income for the quarter ended March 31, 2002 increased $146,000 or
6% compared with the first quarter of 2001. The increase resulted primarily from
an increase in Net Gains on Sales of Loans and Related Assets offset by a
decline in Insurance Revenues.
Insurance Revenues declined $209,000 or 22% for the three months ended March 31,
2002 compared with the same period during 2001. The decline was attributable to
a decline in contingency income from the property and casualty insurance
operations of Doty Insurance Agency, Inc. and a decline in revenues generated by
the Company's credit life and disability reinsurance operation through German
American Reinsurance Company, Ltd. (GARC). Contingency income will fluctuate, as
it represents amounts received from insurance companies based on claims
experience. The decline in credit reinsurance revenues is largely attributable
to a decline in consumer loan production.
Net Gains on Sales of Loans and Related Assets, and Provision for Market Losses
on Loans Held for Sale increased $252,000 in the quarter ended March 31, 2002
compared with 2001. The increased gain on sales of loans resulted from an
increased level of loan sales to the secondary markets. Loans sales totaled
$37.4 million during the first three months of 2002 compared with $13.8 million
in 2001. The net gain on sales of loans was reduced in the first quarter of 2001
by an $87,000 loss on mandatory forward commitments to sell mortgage loans used
to manage interest rate risk associated with the mortgage banking division's
residential mortgage loan pipeline. No such loss was recognized in the first
quarter of 2002, as only non-mandatory forward commitments were held.
Non-interest Expense:
Non-interest expenses decreased $306,000 or 4% for the three months ended March
31, 2002 as compared to the same period of the prior year.
Salaries and Employee Benefits increased $142,000 or 3% during the quarter ended
March 31, 2002 compared with the same period in 2001. Salaries and Employee
Benefits comprised approximately 63% of total non-interest expense in the first
quarter of 2002 and 58% in 2001. This change was primarily the result of the
overall decline in non-interest expenses.
Professional Fees Expense increased $92,000 or 46% in the first quarter of 2002
compared with 2001. The increased professional fees resulted from the formation
in late 2001 and the first quarter of 2002 of investment subsidiaries domiciled
in the state of Nevada at three of the Company's subsidiary banks. The increased
professional fee expense was for investment portfolio management services and
subsidiary management services provided by third parties.
- 11 -
Advertising and Promotion Expense decreased $97,000 or 36% during the three
months ended March 31, 2002 compared with the prior year. This decline was
attributable to the initiation of an image campaign by the Company in the first
quarter of 2001. Other Operating Expenses declined $388,000 or 32% during the
first quarter of 2002 compared with the same period of the prior year. The
declines were primarily attributable to a lower level of operating losses from
the Company's affordable housing tax credit limited partnership investments, a
lower level of allowance for insurance reserves required by the Company's credit
reinsurance subsidiary, a lower level of collection costs at the Company's
mortgage banking division, and a lower level of amortization expense for
intangible assets.
Income Taxes:
The Company's effective income tax rate approximated 19.5% and 25.1% of pre-tax
income during the three months ended March 31, 2002 and 2001, respectively, and
is lower than the blended statutory rate of 39.6%. The lower effective rate in
both 2002 and 2001 primarily resulted from the Company's tax-exempt investment
income on securities and loans, and from income tax credits generated from
investments in affordable housing projects. Also contributing to the lower
effective tax rate in 2002 compared to the prior year was state income tax
savings resulting from the formation of investment subsidiaries in the state of
Nevada by three of the Company's banking subsidiaries.
FINANCIAL CONDITION
Total assets at March 31, 2002 decreased $28.1 million to $987.0 million
compared with $1.015 billion in total assets at December 31, 2001. Loans, net of
unearned income and allowance for loan losses, decreased by $19.5 million during
the first quarter of 2002. This decline was primarily attributable to a decline
in residential real estate loans. Cash and Cash Equivalents declined $21.4
million while Investment Securities increased $23.5 million to $214.7 million at
March 31, 2002 compared with $191.2 million at year-end.
FHLB Advances and Other Borrowings declined $9.2 million to $165.2 million at
March 31, 2002, due to expected maturities and required payments.
Non-performing Assets:
The following is an analysis of the Company's non-performing assets at March 31,
2002 and December 31, 2001 (dollars in thousands):
March 31, December 31,
2002 2001
----------- -------------
Non-accrual Loans $ 2,437 $ 3,452
Past Due Loans (90 days or more) 1,611 916
Restructured Loans 367 367
--------- ---------
Total Non-performing Loans 4,415 4,735
--------- ---------
Other Real Estate 1,349 1,612
--------- ---------
Total Non-performing Assets $ 5,764 $ 6,347
========= =========
Allowance for Loan Loss to Non-performing Loans 188.15% 177.15%
Non-performing Loans to Total Loans 0.69% 0.72%
Capital Resources:
Shareholders' equity totaled $101.2 million at March 31, 2002 or 10.3% of total
assets, a decrease of $972,000 from December 31, 2001. The decline in
shareholder's equity primarily resulted from the Company's activity regarding
its share repurchase plan discussed in Note 5 of this report.
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
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Tier 1, or core capital, consists of shareholders' equity less goodwill, core
deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital currently consists of the amount of the allowance
for loan losses which does not exceed a defined maximum allowance limit of 1.25
percent of gross risk adjusted assets. Total capital is the sum of Tier 1 and
Tier 2 capital.
The minimum requirements under these standards are generally at least a 4.0
percent leverage ratio, which is Tier 1 capital divided by defined "total
assets"; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent
total capital to risk-adjusted assets ratios. Under these guidelines, the
Company, on a consolidated basis, and each of its affiliate banks individually,
have capital ratios that substantially exceed the regulatory minimums. The
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires
federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately-capitalized, under-capitalized, significantly
under-capitalized, and critically under-capitalized. Under these regulations, a
"well-capitalized" entity must achieve a Tier 1 Risk-based capital ratio of at
least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a
leverage ratio of at least 5.0 percent, and not be under a capital directive
order.
At March 31, 2002 management is not under such a capital directive, nor is it
aware of any current recommendations by banking regulatory authorities which, if
they were to be implemented, would have or are reasonably likely to have, a
material effect on the Company's liquidity, capital resources or operations.
The table below presents the Company's consolidated capital ratios under
regulatory guidelines:
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action At At
Adequacy Provisions March 31, December 31,
Purposes (FDICIA) 2002 2001
------------ ------------ --------- ------------
Leverage Ratio 4.00% 5.00% 9.91% 9.80%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 14.01% 13.69%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 15.19% 14.86%
Liquidity:
The Consolidated Statement of Cash Flows details the elements of change in the
Company's cash and cash equivalents. During the first three months of 2002,
operating activities provided $12.2 million of available cash, which included
net income of $2.5 million. Major cash outflows experienced during the three
months ended March 31, 2002 included $1.5 million in dividends, $1.6 million
from the purchase and retirement of common stock, and a $16.3 million decrease
in deposits.
The cash outflows from the purchase of securities exceeded the proceeds from the
maturities and sales of securities by approximately $24.4 million. Total cash
outflows for the period exceeded inflows by $21.5 million, leaving cash and cash
equivalents of $77.6 million at March 31, 2002.
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.
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The Company may include forward-looking statements in filings with the
Securities and Exchange Commission ("SEC"), such as this Form 10-Q, in other
written materials, and in oral statements made by senior management to analysts,
investors, representatives of the media, and others. It is intended that these
forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the forward-looking
statement is made.
Readers are cautioned that, by their nature, forward-looking statements are
based on assumptions and are subject to risks, uncertainties, and other factors.
Actual results may differ materially from the expectations of the Company that
are expressed or implied by any forward-looking statement. The discussion in
Item 2 of this Form 10-Q, "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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk.
The liquidity of the parent company is dependent upon the receipt of dividends
from its bank subsidiaries, which are subject to certain regulatory limitations.
The affiliate banks' source of funding is predominately core deposits,
maturities of securities, repayments of loan principal and interest, federal
funds purchased, securities sold under agreements to repurchase and borrowings
from the Federal Home Loan Bank.
The Company monitors interest rate risk by the use of computer simulation
modeling to estimate the potential impact on its net interest income under
various interest rate scenarios, and by estimating its static interest rate
sensitivity position. Another method by which the Company's interest rate risk
position can be estimated is by computing estimated changes in its net portfolio
value ("NPV"). This method estimates interest rate risk exposure from movements
in interest rates by using interest rate sensitivity analysis to determine the
change in the NPV of discounted cash flows from assets and liabilities.
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.
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The table below provides an assessment of the risk to NPV in the event of sudden
and sustained 2% increase and decrease in prevailing interest rates (dollars in
thousands).
Interest Rate Sensitivity as of March 31, 2002
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
----- ---------
Changes
In rates $ Amount % Change NPV Ratio Change
-------- -------- -------- --------- ------
+2% $81,717 (14.9)% 8.51% (116) b.p.
Base 96,012 --- 9.66 ---
-2% 100,341 4.5 9.84 18 b.p.
Item 3 includes forward-looking statements. See "Forward-looking Statements"
included in Item 2 of this Report for a discussion of certain factors that could
cause the Company's actual exposure to market risk to vary materially from that
expressed or implied above. These factors include possible changes in economic
conditions; interest rate fluctuations, competitive product and pricing
pressures within the Company's markets; and equity and fixed income market
fluctuations. Actual experience may also vary materially to the extent that the
Company's assumptions described above prove to be inaccurate.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
3.1 Restatement of Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3.01 to 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 requests.
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 From 8-K filed May 5, 2000.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date May 14, 2002 By /s/ Mark A. Schroeder
------------ ---------------------------------------------------
Mark A. Schroeder
President and CEO
Date May 14, 2002 By /s/ Bradley M. Rust
------------ ---------------------------------------------------
Bradley M. Rust
Senior Vice President and
Principal Accounting Officer
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