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 September 30, 1998
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the Transition Period from _______________ to
___________________
Commission File Number 0-11244
German American Bancorp
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 1998
Common Stock, No par value 6,348,590
2
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997
Consolidated Statements of Income -- Three Months Ended
September 30, 1998 and 1997
Consolidated Statements of Income -- Nine Months Ended
September 30, 1998 and 1997
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1998 and 1997
Notes to Consolidated Financial Statements --
September 30, 1998
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
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEET
(unaudited, dollars in thousands except per share data)
September 30, December 31,
1998 1997
ASSETS
Cash and Due from Banks $ 18,199 $ 20,090
Federal Funds Sold 2,975 20,300
----------- -----------
Cash and Cash Equivalents 21,174 40,390
Interest-bearing Balances with Banks 2,446 2,798
Securities Available-for-Sale, at market 121,597 100,449
Securities Held-to-Maturity, at cost 30,369 35,382
Total Loans 416,020 378,380
Less: Unearned Income (899) (1,057)
Allowance for Loan Losses (6,853) (7,416)
----------- -----------
Loans, Net 408,268 369,907
Premises, Furniture and Equipment, Net 14,525 13,191
Other Real Estate 226 388
Intangible Assets 1,430 1,572
Accrued Interest Receivable and Other Assets 13,234 11,765
----------- -----------
TOTAL ASSETS $ 613,269 $ 575,842
=========== ===========
LIABILITIES
Noninterest-bearing Deposits $ 57,535 $ 62,502
Interest-bearing Deposits 473,440 438,531
----------- -----------
Total Deposits 530,975 501,033
Short-term Borrowings 7,379 5,548
FHLB Borrowings 1,000 --
Accrued Interest Payable and Other Liabilities 6,948 7,182
----------- -----------
TOTAL LIABILITIES 546,302 513,763
SHAREHOLDERS' EQUITY
Common Stock, No par value, $1 stated value;
20,000,000 shares authorized 6,349 6,279
Preferred Stock, $10 par value;
500,000 shares authorized, none issued -- --
Additional Paid-in Capital 39,590 38,088
Retained Earnings 19,898 16,945
Unrealized Appreciation on Securities
Available-for-Sale, net of tax 1,130 767
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 66,967 62,079
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 613,269 $ 575,842
=========== ===========
Common Shares issued and
outstanding at end of period 6,348,590 6,278,636
=========== ===========
See accompanying notes to consolidated financial statements.
4
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three Months Ended
September 30,
1998 1997
INTEREST INCOME
Interest and Fees on Loans $ 9,085 $ 8,676
Interest on Federal Funds Sold 152 239
Interest on Short-term Investments 38 47
Interest and Dividends on Securities 2,193 2,035
-------- --------
TOTAL INTEREST INCOME 11,468 10,997
-------- --------
INTEREST EXPENSE
Interest on Deposits 5,386 5,100
Interest on Borrowings 83 61
-------- --------
TOTAL INTEREST EXPENSE 5,469 5,161
-------- --------
NET INTEREST INCOME 5,999 5,836
Provision for Loan Losses 57 447
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,942 5,389
NONINTEREST INCOME
Income from Fiduciary Activities 76 83
Service Charges on Deposit Accounts 377 341
Investment Services Income 118 103
Other Charges, Commissions and Fees 180 231
Gain on Sales of Loans and Other Real Estate 12 6
Net Gain / (Loss) on Sales of Securities (9) --
-------- --------
TOTAL NONINTEREST INCOME 754 764
-------- --------
NONINTEREST EXPENSE
Salaries and Employee Benefits 2,305 2,105
Occupancy Expense 352 348
Furniture and Equipment Expense 288 231
Computer Processing Fees 220 145
Professional Fees 292 174
Other Operating Expenses 1,034 845
-------- --------
TOTAL NONINTEREST EXPENSE 4,491 3,848
-------- --------
Income before Income Taxes 2,205 2,305
Income Tax Expense 617 753
-------- --------
Net Income $ 1,588 $ 1,552
======== ========
Weighted Average Shares Outstanding:
Basic 6,348,101 6,339,465
Diluted 6,360,537 6,344,429
Earnings Per Share And Diluted Earnings Per Share $ 0.25 $ 0.24
Dividends Paid Per Share $ 0.12 $ 0.11
Comprehensive Income (See Note 1) $ 2,024 $ 1,832
See accompanying notes to consolidated financial statements.
5
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Nine Months Ended
September 30,
1998 1997
INTEREST INCOME
Interest and Fees on Loans $ 26,985 $ 25,206
Interest on Federal Funds Sold 720 686
Interest on Short-term Investments 123 129
Interest and Dividends on Securities 6,204 6,302
----------- -----------
TOTAL INTEREST INCOME 34,032 32,323
----------- -----------
INTEREST EXPENSE
Interest on Deposits 15,782 14,937
Interest on Borrowings 200 248
----------- -----------
TOTAL INTEREST EXPENSE 15,982 15,185
----------- -----------
NET INTEREST INCOME 18,050 17,138
Provision for Loan Losses 176 21
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 17,874 17,117
NONINTEREST INCOME
Income from Fiduciary Activities 250 256
Service Charges on Deposit Accounts 1,086 978
Investment Services Income 392 326
Other Charges, Commissions and Fees 564 535
Gain on Sales of Loans and Other Real Estate 20 8
Net Gain / (Loss) on Sales of Securities (2) --
----------- -----------
TOTAL NONINTEREST INCOME 2,310 2,103
----------- -----------
NONINTEREST EXPENSE
Salaries and Employee Benefits 6,944 6,257
Occupancy Expense 1,021 925
Furniture and Equipment Expense 844 756
Computer Processing Fees 549 435
Professional Fees 619 746
Other Operating Expenses 2,790 2,438
----------- -----------
TOTAL NONINTEREST EXPENSE 12,767 11,557
----------- -----------
Income before Income Taxes 7,417 7,663
Income Tax Expense 2,285 2,579
----------- -----------
Net Income $ 5,132 $ 5,084
=========== ===========
Weighted Average Shares Outstanding:
Basic 6,346,906 6,337,842
Diluted 6,359,342 6,342,806
Earnings Per Share And Diluted Earnings Per Share $ 0.81 $ 0.80
Dividends Paid Per Share $ 0.35 $ 0.33
Comprehensive Income (See Note 1) $ 5,495 $ 5,317
See accompanying notes to consolidated financial statements.
6
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Nine Months Ended
September 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 5,132 $ 5,084
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities:
Amortization and Accretion of Investments (13) 33
Depreciation and Amortization 997 928
Provision for Loan Losses (176) (21)
Net Gain / (Loss) on Sales of Securities 2 --
Gain of Sales of Loans and Other Real Estate (20 (8)
Change in Assets and Liabilities:
Unearned Income (158 (177)
Deferred Loan Fees (13 19
Other Assets (1,116 (320)
Deferred Taxes (60 54
Other Liabilities (338 505
-------- --------
Total Adjustments (895 1,013
-------- --------
Net Cash from Operating Activities 4,237 6,097
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash and Cash Equivalents of Acquired Subsidiary,
net of Purchase Price 3,715 --
Change in Interest-bearing Balances with Banks 400 (1,199)
Proceeds from Maturities of Other Short-term Investments -- 1,000
Proceeds from Maturities of Securities Available-for-Sale 71,125 32,591
Proceeds from Sales of Securities Available-for-Sale 15,955 --
Purchase of Securities Available-for-Sale (99,825 (28,262)
Proceeds from Maturities of Securities Held-to-Maturity 5,500 6,925
Proceeds from Sales of Securities Held-to-Maturity 377 --
Purchase of Securities Held-to-Maturity (7,515 (5,243)
Purchase of Loans (3,764 (1,152)
Loans Made to Customers net of Payments Received (24,698 (18,680)
Proceeds from Sales of Loans 384 19
Property and Equipment Expenditures (1,835 (1,514)
Proceeds from Sales of Other Real Estate 227 255
-------- --------
Net Cash from Investing Activities (39,954 (15,260)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits 15,746 5,857
Change in Short-term Borrowings 1,831 (7,235)
Advances of Long-term Debt 1,000 --
Repayments of Long-term Debt -- (1,000)
Dividends Paid (2,071) (1,695)
Issue / (Repurchase) of Common Stock -- 109
Purchase of interests in Fractional Shares (5) (5)
Exercise of Stock Options -- 3
-------- --------
Net Cash from Financing Activities 16,501 (3,966)
-------- --------
Net Change in Cash and Cash Equivalents (19,216) (13,129)
Cash and Cash Equivalents at Beginning of Year 40,390 54,152
-------- --------
Cash and Cash Equivalents at End of Period $ 21,174 $ 41,023
======== ========
Cash Paid During the Year for:
Interest $ 15,958 $ 14,645
Income Taxes 2,031 2,121
See accompanying notes to consolidated financial statements.
7
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
Note 1 -- Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
have been condensed or omitted. Except for adjustments resulting from the merger
transactions described below, all adjustments made by management to these
unaudited statements were 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, 1997 Annual Report to Shareholders.
German American Bancorp (referred to herein as the "Company," the
"Corporation," or the "Registrant") is a multi-bank holding company organized in
Indiana in 1982. The Company's principal subsidiaries are The German American
Bank, Jasper, Indiana ("German American Bank"), First State Bank, Southwest
Indiana, Tell City, Indiana ("First State Bank"), and German American Holdings
Corporation ("GAHC"), an Indiana corporation that owns all of the outstanding
capital stock of both Citizens State Bank, Petersburg, Indiana ("Citizens
State") and the Peoples National Bank, Washington, Indiana ("Peoples"). The
Company, through its four bank subsidiaries, operates 24 banking offices in
seven contiguous counties in southwestern Indiana.
On June 1, 1998 the Company consummated mergers with the parent companies
of Citizens State and FSB Bank of Francisco, Indiana ("FSB Bank"). FSB Bank and
an existing affiliate, Community Trust Bank of Petersburg, Indiana were merged
into the Citizens State charter on that date. These mergers were accounted for
as poolings of interests. Accordingly, the reported operating results for
periods prior to June 1, 1998 have been retroactively adjusted to give the
effect to the merger with Citizens State. Prior year results do not include the
effect of the merger with FSB Bank, as restatement would not have resulted in a
material change in overall financial results.
Under a new accounting standard, comprehensive income is now reported for
all periods. Comprehensive income includes both net income and other
comprehensive income. Other comprehensive income includes the change in
unrealized appreciation on securities available for sale, net of tax.
Note 2 -- Per Share Data
The Board of Directors declared and paid a 5 percent stock dividend in December
1997 and a two-for-one stock split in October 1997. In lieu of issuing
fractional shares, the company purchased from shareholders their fractional
interest. In addition, the Company issued 995,678 shares related to the mergers
with the parent companies of Citizens State and FSB Bank on June 1, 1998.
Earnings per share amounts have been retroactively computed as though these
additionally issued shares had been outstanding for all periods presented.
Dividends paid per share amounts represent historical dividends declared without
restatement for pooling. Per share data has not been adjusted for the pending 5
percent stock dividend payable on December 15, 1998 to shareholders of record on
November 30, 1998.
8
The computation of Earnings per Share and Diluted Earnings per Share are
provided as follows:
Three Months Ended
September 30,
1998 1997
Earnings per Share:
Net Income $ 1,588,000 $ 1,552,000
Weighted Average Shares Outstanding 6,348,101 6,339,465
Earnings per Share: $ 0.25 $ 0.24
Diluted Earnings per Share:
Net Income $ 1,588,000 $ 1,552,000
Weighted Average Shares Outstanding 6,348,101 6,339,465
Stock Options 28,612 28,122
Assumed Shares Repurchased upon Exercise of Options (16,176) (23,158)
----------- -----------
Diluted Weighted Average Shares Outstanding 6,360,537 6,344,429
Diluted Earnings per Share $ 0.25 $ 0.24
Nine Months Ended
September 30,
1998 1997
Earnings per Share:
Net Income $ 5,132,000 $ 5,084,000
Weighted Average Shares Outstanding 6,346,906 6,337,842
Earnings per Share: $ 0.81 $ .80
Diluted Earnings per Share:
Net Income $ 5,132,000 $ 5,084,000
Weighted Average Shares Outstanding 6,346,906 6,337,842
Stock Options 28,612 28,122
Assumed Shares Repurchased upon Exercise of Options (16,176) (23,158)
----------- -----------
Diluted Weighted Average Shares Outstanding 6,359,342 6,342,806
Diluted Earnings per Share $ 0.81 $ 0.80
9
Note 3 - Securities
The amortized cost and estimated market values of Securities as of September 30,
1998 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 54,448 $ 54,805
Obligations of State and Political Subdivisions 26,701 28,088
Asset-/Mortgage-backed Securities 34,174 34,305
Corporate Securities 4,400 4,399
-------- --------
Total $119,723 $121,597
======== ========
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
Obligations of State and Political Subdivisions $27,974 $29,003
Asset-/Mortgage-backed Securities 339 334
Other Securities 2,056 2,056
------- -------
Total $30,369 $31,393
======= =======
On the date of merger with Citizens State, investment securities with an
amortized cost of $8.0 million and estimated market value of $8.1 million were
reclassified from Held-to-Maturity to Available-for-Sale. This action was taken
as a result of the business combination and in order to conform Citizens State's
investment portfolio to the Company's asset/liability and interest rate risk
position.
The amortized cost and estimated market values of Securities as of December 31,
1997 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 58,544 $ 58,575
Obligations of State and Political Subdivisions 20,448 21,670
Asset-/Mortgage-backed Securities 15,668 15,661
Corporate Securities 4,528 4,529
Other Securities 1 14
-------- --------
Total $ 99,189 $100,449
======== ========
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
U.S. Treasury Securities and Obligations of U.S.
Government Corporation and Agencies $ 5,598 $ 5,601
Obligations of State and Political Subdivisions 24,980 26,167
Asset-/Mortgage-backed Securities 2,372 2,389
Corporate Securities 311 303
Other Securities 2,121 2,121
------- -------
Total $35,382 $36,581
======= =======
10
At September 30, 1998 and December 31, 1997, U.S. Government Agency
structured notes with an amortized cost of $200,000 and $5,000,000 respectively,
and fair value of $200,000 and $4,986,000 respectively, are included in
securities available-for-sale. These notes consist primarily of step-up and
single-index bonds. Securities classified as held-to-maturity with a market
value of $204,000 were sold during the second quarter, primarily due to their
small block sizes, which were not cost effective to maintain in the Company's
investment portfolio. Each of these securities had a de minimus book value
relative to the original purchase price at the dates of sale.
Note 4 -- Loans
Total loans, as presented on the balance sheet, are comprised of the
following classifications (dollars in thousands):
September 30, December 31,
1998 1997
Real Estate Loans Secured by 1-4
Family Residential Properties $135,063 $126,289
Agricultural Loans 65,482 60,421
Commercial and Industrial Loans 131,254 111,240
Loans to Individuals for Household,
Family and Other Personal Expenditures 83,648 79,385
Lease Financing 573 1,045
-------- --------
Total Loans $416,020 $378,380
======== ========
The overall loan portfolio is diversified among a variety of borrowers;
however, a significant portion of the debtors' ability to honor their contracts
is dependent upon the wood furniture manufacturing and agriculture industries,
including poultry. No unguaranteed concentration of credit in excess of 10
percent of total assets exists within any single industry group.
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows
(dollars in thousands):
1998 1997
Balance at January 1 $ 7,416 $ 7,144
Allowance of Acquired Subsidiary 72 --
Provision for Loan Losses 176 21
Recoveries of Prior Loan Losses 283 749
Loan Losses Charged to the Allowance (1,094) (662)
------- -------
Balance at September 30 $ 6,853 $ 7,252
======= =======
Note 6 - Business Combinations
On June 1, 1998 the Company acquired by merger CSB Bancorp of Petersburg,
Indiana (and its wholly owned subsidiary, Citizens State Bank of Petersburg) in
exchange for 928,475 shares of German American Bancorp common stock. Fractional
interests were paid in cash of $3. The transaction was accounted for as a
pooling of interests.
Also on June 1, 1998 the Company acquired by merger FSB Financial
Corporation of Francisco, Indiana (and its wholly owned subsidiary, FSB Bank of
Francisco, Indiana) in exchange for 67,203 shares of German American Bancorp
common stock. Fractional interests for this transaction were paid in cash of $2.
The transaction was accounted for as a pooling of interests; however, results
for 1997 do not include the effect of this transaction, as restatement would not
have resulted in a material change in overall financial results. Total assets
and equity of FSB Bank at the date of merger were $15.5 million and $1.4
million, respectively.
11
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp, CSB Bancorp and FSB Financial
Corporation for the periods prior to the acquisition:
GERMAN AMERICAN
BANCORP CSB FSB
(as previously reported) BANCORP FINANCIAL COMBINED
For the period January 1, 1998
through June 1, 1998
Net interest income $8,518 $1,186 $250 $9,954
Net income / (Loss) $2,548 $444 $(64) $2,928
For the three months ended
September 30, 1997
Net interest income $5,084 $752 $ --- $5,836
Net income $1,563 $(11) $ --- $1,552
For the nine months ended
September 30, 1997
Net interest income $14,936 $2,202 $ --- $17,138
Net income $4,687 $397 $ --- $5,084
Note 7 -- Proposed Acquisitions
In August 1998, the Company signed a definitive agreement providing for the
merger with 1st Bancorp, a $260 million banking company headquartered in
Vincennes, Indiana (Knox County).
Under the terms of the agreement, the shareholders of 1ST BANCORP would
receive shares of common stock of German American with a targeted aggregate
market value of $57,120,000 (based on market prices of German American common
stock during a period of 15 trading days ending on the second trading date
preceding closing) in a tax-free exchange, or approximately $50.94 per 1ST
BANCORP share (assuming exercise of all outstanding options). If the German
American share price is less than $28 per share or more than $33 per share
during the valuation period, however, then the number of shares to be issued in
the transaction will be based on a minimum or maximum share price, as the case
may be, of $28 or $33. Accordingly, to the extent that German American's share
price during the valuation period is less than $28 or more than $33, then the
market value of the transaction could vary from the targeted value.
The proposed merger is subject to the approval of 1ST BANCORP's and German
American's shareholders as well as the approval of the appropriate bank
regulatory agencies, receipt of a fairness opinion and other conditions. The
merger is expected to be effective in the first quarter of 1999. 1ST BANCORP has
also signed a Stock Option Agreement with German American, giving German
American an option to purchase up to 19.9% of 1ST BANCORP's outstanding shares,
exercisable at $50.94 per share upon the occurrence of certain events that
create the potential for another party to acquire control of 1ST BANCORP.
12
1ST BANCORP's subsidiaries include First Federal Bank, A Federal Savings
Bank; First Financial Insurance Agency, Inc.; and First Title Insurance Company,
Inc. First Federal Bank operates a loan origination office in Evansville,
Indiana. First Financial Insurance Agency has offices in Vincennes and
Princeton, Indiana. Following the merger, First Federal Bank and 1ST BANCORP's
insurance subsidiaries will remain intact as wholly owned direct or indirect
subsidiaries of German American and will continue to serve their existing
markets from their present facilities.
Note 8 -- Subsequent Events
On November 2, 1998 the Company announced that its Board of Directors had
declared its annual 5 percent stock dividend, payable on or before December 15,
1998 to shareholders of record on November 30, 1998. The Board of Directors also
declared a cash dividend of $0.12 per share payable on or before November 20,
1998 to shareholders of record November 10, 1998.
Effective November 10, 1998 1st BANCORP received the fairness opinion of
its financial advisor referred to in Note 7. Accordingly, this condition to the
1st BANCORP transaction has been satisfied.
13
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. Its four affiliate banks conduct business in 24
offices in Dubois, Daviess, Gibson, Martin, Pike, Perry and Spencer Counties in
Southwest Indiana. The banks provide a wide range of financial services,
including accepting deposits; making commercial, mortgage and consumer loans;
issuing credit life, accident and health insurance; providing trust services for
personal and corporate customers; providing safe deposit facilities; and
providing investment advisory and brokerage services.
This section presents an analysis of the consolidated financial condition
of the Company as of September 30, 1998 and December 31, 1997 and the
consolidated results of operations for the periods ended September 30, 1998 and
1997. This review 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, 1997 Annual Report to Shareholders.
On June 1, 1998 the Company consummated mergers with the parent companies
of Citizens State and FSB Bank of Francisco, Indiana ("FSB Bank"). Both
transactions were accounted for as poolings of interests. FSB Bank and an
existing affiliate, Community Trust Bank of Otwell, Indiana were merged into the
Citizens State charter on that date. Results for periods prior to June 1, 1998
have been retroactively adjusted to give effect for all stock splits and
dividends, and for the merger with the parent company of Citizens State Bank of
Petersburg, Indiana. Prior year results exclude the effect of the June 1, 1998
merger with the parent company of FSB Bank of Francisco, Indiana, as restatement
would not have resulted in a material change in overall financial results.
RESULTS OF OPERATIONS
Net Income:
Including the unusual items referred to below, reported net income for the
quarter and year-to-date ended September 30, 1998 was $1,588,000 or $0.25 per
share, and $5,132,000 or $0.81 per share, respectively. This compares to
reported net income for the third quarter of 1997 of $1,552,000 or $0.24 per
share, and for the year-to-date ended September 30, 1997 of $5,084,000 or $0.80
per share.
Net operating results reported above include the effects of certain
one-time or unusual items, primarily expenses and charges associated with the
Company's merger and acquisition activities. In addition, the third quarter of
1997 included a special provision of $350,000 at one of the Company's
affiliates. Year-to-date 1997 also included a negative provision of $750,000
related to the recovery of a single previously charged-off credit at another of
the Company's affiliates.
As adjusted for the effects of these one-time and unusual items, the
Company's operating results were $1,917,000 or $0.30 per share for the third
quarter of 1998, and $5,481,000 or $0.86 per share for the year-to-date ended
September 30, 1998. This represents a 6% increase from adjusted operating
results of $1,808,000 or $0.28 per share for the third quarter of 1997, and
$5,182,000 or $0.82 per share for the year-to-date ended September 30, 1997. For
further information regarding these one-time or unusual items, see Exhibit 99
which is incorporated herein by reference.
14
Net Interest Income:
The following table summarizes German American Bancorp's net interest
income (on a tax-equivalent basis, at an effective tax rate of 34 percent for
each period) for each of the periods presented herein (dollars in thousands):
Three Months Change from
Ended September 30, Prior Period
1998 1997 Amount Percent
Interest Income $11,937 $11,328 $ 609 5.4%
Interest Expense 5,469 5,161 308 6.0
------- ------- -------
Net Interest Income $ 6,468 $ 6,167 $ 301 4.9
======= ======= =======
Nine Months Change from
Ended September 30, Prior Period
1998 1997 Amount Percent
Interest Income $35,278 $33,324 $ 1,954 5.9%
Interest Expense 15,982 15,185 797 5.2
------- ------- ------
Net Interest Income $19,296 $18,139 $ 1,157 6.4
======= ======= =======
The increase in net interest income for the three and nine months ended
September 30, 1998 compared to the same periods of 1997 was primarily due to an
increase of loans, which generally provide a higher yield than investment
securities, in the mix of average earning assets. Net interest income, on a
tax-equivalent basis expressed as a percentage of average earning assets, is
referred to as the net interest margin, which represents the average net
effective yield on earning assets. For the first nine months of 1998, the net
interest margin declined somewhat to 4.61 percent from 4.65 percent for the
comparable period of 1997.
Provision For Loan Losses:
The Company provides for future loan losses through regular provisions to
the allowance for loan losses. These provisions are made at a level which is
considered necessary by management to absorb estimated losses in the loan
portfolio. A detailed evaluation of the adequacy of this loan loss reserve is
completed quarterly by management.
The consolidated provision for loan losses was $176,000 and $21,000 for the
first three quarters in 1998 and 1997 and $57,000 and $447,000 in the third
quarter in 1998 and 1997. The third quarter of 1997 included a special provision
of $350,000 at one of the Company's affiliates. Year to date 1997 also included
a negative provision of $750,000 related to the recovery of a single previously
charged-off credit at another of the Company's affiliates. The provision for
loan losses to be recorded in future periods will be subject to adjustment based
on the results of on-going evaluations of the adequacy of the allowance for loan
losses.
Net charge-offs were $337,000 or 0.08 percent of average loans for the
three months ended, and $811,000 or 0.20 percent of loans for the nine months
ended September 30, 1998. Net charge-offs (recoveries) for the third quarter of
1997 were $(149,000) or 0.04 percent of loans and were $(87,000) or 0.02 percent
of loans for the first nine months of 1997. The bulk of the 1998 charge-offs
occurred at Citizens State, in large part based on the results of a bank
examination earlier in the year. Citizens State had previously fully reserved a
specific allowance against the bulk of these loans. Non-performing loans as a
percentage of total loans were 0.85 percent and 0.86 percent, respectively on
September 30, 1998 and December 31, 1997. See discussion under "Financial
Condition" for more information regarding the allowance for loan losses and
non-performing assets.
15
Noninterest Income:
Noninterest income increased approximately 9.4 percent over the prior year
to date, excluding net gains on sales, and was $751,000 and $2,292,000 for the
third quarter and year-to-date ended September 30, 1998. This compares to
$758,000 and $2,095,000 for the same periods in 1997. Higher revenues resulted
from an 11 percent increase in service charges on deposits, a 20 percent
increase in investment services income and an increase of approximately $87,000
from other ventures.
Noninterest Expense:
The following analysis of changes in noninterest expense includes the
effects of one-time or unusual items, primarily expenses and charges associated
with the Company's merger and acquisition activities. In addition, 1997 results
below and their comparison to 1998 have not been restated for the effect of the
June 1, 1998 merger with the parent company of FSB Bank of Francisco, Indiana.
Noninterest expense was $4.4 million for the third quarter of 1998 compared
to $3.8 million for the third quarter of 1997. Year-to-date 1998 results were
$12.8 million versus $11.6 million for the first nine months of 1997. This
represented a 17 percent increase for the quarter and 10 percent for the
year-to-date ended September 30, 1998 over the comparative periods for the prior
year. Noninterest expense slightly increased as an annualized percentage of
average total assets to 2.86 percent in 1998 from 2.76 percent in the prior
year.
Salaries and Employee Benefits totaled $2.3 million and $6.9 million,
respectively, for the third quarter and year-to-date ended September 30, 1998 or
54 percent of total noninterest expense. These expenses increased approximately
11 percent over the same periods for 1997, when salaries and employee benefits
totaled $2.1 million and $6.3 million, respectively. Increases were incurred in
base compensation and selected benefits, including the Company's employee
computer purchase program, beginning in late 1997.
Total occupancy, furniture and equipment expense for the first nine months
of 1998 totaled $1.9 million. This was approximately $184,000 or 11 percent
greater than the $1.7 million incurred for the same period of the prior year.
These expenses are expected to continue to be higher in comparison to the prior
year, largely as a consequence of upgrading the Company's computer systems at
its existing and new affiliates. The Company is continuing its strategy to
implement state-of-the-art computer processing to provide the opportunities to,
over the long-term, better control the level of employee related expenses and
improve the quality of customer service provided by all of its affiliate
community banks.
Computer processing fees increased $114,000 in the first three quarters of
1998 from the first three quarters of 1997. Nearly all of this difference is
attributable to conversion of new affiliates to the Company's data processing
systems. Professional fees for the first nine months of 1998 totaled $619,000.
This was a reduction of $127,000 from the $746,000 recorded for the same period
of 1997, primarily due to a reserve for legal fees established in the third
quarter of 1997, related to an unasserted potential claim.
Other operating expenses increased approximately 15 percent from $845,000
and $2,438,000 in the first three and nine months of 1997 to $1,034,000 and
$2,790,000 in the first three and nine months of 1998. These increases were
incurred due to the introduction of new banking products, timing of employee
related expenses and a refund of SAIF assessment fees received in the first
quarter of 1997.
16
FINANCIAL CONDITION
Total assets at September 30, 1998 were $613 million. This was an increase
of $37 million from the December 31, 1997 total asset position and was due to an
increase in the loan portfolio.
Deposits at September 30, 1998 were $530 million, which was a $30 million
increase from year-end 1997. Transaction deposits experienced a seasonal decline
from year-end, while interest-bearing deposits increased $35 million. Combined
Short- and Long-term Borrowings at September 30, 1998 were $8.4 million, up $2.8
million from the December 31, 1997 position.
All of the Company's affiliate banks are members of the Federal Home Loan
Bank System ("FHLB"). The banks' membership in the FHLB provides an additional
source of liquidity for both long and short-term borrowing needs. The Company
had $1 million in FHLB borrowings outstanding at September 30, 1998.
Non-performing Assets:
The following is an analysis of the Company's non-performing assets at
September 30, 1998 and December 31, 1997 (dollars in thousands):
September 30, December 31,
1998 1997
Nonaccrual Loans $ 469 $ 562
Loans contractually past
due 90 days or more 3,056 2,710
Renegotiated Loans -- --
------ ------
Total Non-performing Loans 3,525 3,272
------ ------
Other Real Estate 226 146
------ ------
Total Non-performing Assets $3,751 $3,418
------ ======
Allowance for Loan Losses to
Non-performing Loans 194.41% 226.65%
Non-performing Loans to Total Loans 0.85% 0.86%
Allowance for Loan Losses to Total Loans 1.65% 1.96%
Capital Resources:
Shareholders' equity totaled $67.0 million at September 30, 1998 or 10.9
percent of total assets, and $62.1 million at December 31, 1997 or 10.8 percent
of total assets.
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill,
core deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital is defined as the amount of the allowance for loan
losses which does not exceed 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.
17
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 September 30, 1998 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 risk-based capital
structure and capital ratios under regulatory guidelines (dollars in thousands):
September 30, December 31,
1998 1997
Tier 1 Capital:
Shareholders' Equity as presented
on the Balance Sheet $ 66,967 $ 62,079
Less: Unrealized Appreciation on
Securities Available-for-Sale (1,130) (767)
Less: Intangible Assets and
Ineligible Deferred Tax Assets (1,525) (1,713)
--------- ---------
Total Tier 1 Capital 64,312 59,599
Tier 2 Capital:
Qualifying Allowance for Loan Loss 5,292 4,786
--------- ---------
Total Capital $ 69,604 $ 64,385
========= =========
Risk-adjusted Assets $ 421,825 $ 378,770
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action
Adequacy Provisions September 30, December 31,
Purposes (FDICIA) 1998 1997
Leverage Ratio 4.00% 5.00% 10.89% 10.59%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 15.25% 15.73%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 16.50% 17.00%
LIQUIDITY
The Consolidated Statement of Cash Flows details the elements of change in
the Company's cash and cash equivalents. During the first nine months of 1998,
operating activities provided $4.2 million of available cash, which included net
income of $5.1 million. Major cash outflows experienced during this nine month
period of 1998 included $2.1 million in dividends, $1.8 million in property and
equipment purchases and net loan outlays in the amount of $28.1 million. The net
cash outlay for securities was $14.0 million. Deposits and borrowings increased
by $18.6 million during the period. Total cash outflows for the period exceeded
inflows by $19.2 million, leaving cash and cash equivalents of $21.2 million at
September 30, 1998.
18
YEAR 2000
All banks and financial institutions are faced with addressing a potentially
materially adverse event should their computer and operating systems fail to
accurately process their customers' deposit, loan and other business in the Year
2000. The Company, like any financial institution, would suffer an interruption
in its ability to transact business should its systems fail due to Year 2000
programming inaccuracy.
An on-going formal review of the Company's computer systems and systems
providers is continuing, in order to determine the extent to which changes must
be implemented to avoid or minimize service issues associated with the Year
2000. The Company has developed a formal plan for the review, testing and
implementation of procedures to address certain issues that require attention
prior to the Year 2000, in order that its operations will not be materially
adversely affected. The Company's Year 2000 process is subject to banking agency
regulatory guidelines and examination. At this time the Company believes itself
to be in compliance with significant regulatory requirements.
The Company's service provider for all of its loan and deposit account
processing activity is Fiserv, a publicly listed company headquartered in
Milwaukee, Wisconsin. The Company has designated Fiserv's systems as mission
critical for the Year 2000 issue, as that term is defined by bank regulatory
requirements. Fiserv, a national service provider for over 3,300 financial
institutions, has confirmed to the Company that its renovation and testing of
all core systems will be largely completed by December 25, 1998. While the
Company can obviously give no assurance as to Fiserv's performance in the
completion of this matter, the Company is unaware of any issues that would cause
Fiserv to be unable to renovate mission critical systems satisfactorily and
therefore has no reason to believe that its reasonably likely worst case
scenario would include any material interruption in its ability to transact
business. The Company has also reviewed the Year 2000 implications of systems
other than its "mission critical" data processing information systems (such as
elevators, HVAC, copiers, and the like).
While the Company has incurred no material costs to date, approximately
$450,000 in cash outlays has been budgeted for the remainder of 1998 and 1999.
These outlays exclude the cost of implementing the Company's state-of-the-art
computer systems upgrade (previously discussed under Noninterest Expense on page
15), but include the Company's expected share of third party systems costs and
all other costs to address the Year 2000 issue. For financial statement
purposes, expenses associated with these outlays will impact the income
statement over a period of one to seven years.
The Year 2000 issue could also affect the ability of the Company's customers
to conduct operations in a timely and effective manner, and as such, could
adversely impact the quality of the Company's loan portfolio, its deposits, or
other sources of revenue and funding from customers. Although the Company has
not generally requested information from its customers regarding their potential
exposure to the Year 2000 issue or their plans to minimize any such exposure,
the Company is not aware of any specific significant customer which does not
expect to have this issue resolved prior to the Year 2000.
The above summary of the Company's Year 2000 preparations includes forward
looking statements, concerning the Company's present expectation that its
operations will not be materially adversely affected by Year 2000 issues.
However, the Year 2000 issue is pervasive, complex and can potentially affect
any computer process, including any equipment utilizing embedded technology like
microprocessors. Therefore, there can be no assurance that Year 2000 issues will
not be encountered or that their effect on the Company's operations, technology
expenditures or customer relationships will not be material.
19
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 Committee and the Boards of Directors of the holding company and
its affiliate banks. Other than as a result of the June 1, 1998 mergers with
Citizens State and FSB Bank, there have been no material changes in the
quantitative and qualitative disclosures about market risks from December 31,
1997. While these acquisitions added $93 million in assets and $10 million in
equity to the Company at the date of the mergers, the acquired banks
distribution of assets and liabilities do not materially impact the overall
market risk profile of the Company which was presented in the analysis and
disclosures provided in the Company's Form 10-K for the year ended December 31,
1997.
20
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Reorganization between the Registrant,
CSB Bancorp, and Affiliates, dated December 8, 1997. This
exhibit is incorporated by reference from Exhibit 2.1 to the
Registrant's Registration Statement on Form S-4 filed
February 26, 1998.
2.2 Agreement and Plan of Reorganization between the Registrant,
FSB Financial Corporation, and Affiliates, dated January 30,
1998. This exhibit is incorporated by reference from Exhibit
2.2 to the Registrant's Registration Statement on Form S-4
filed on February 26, 1998.
2.3 Agreement and Plan of Reorganization dated as of August 6,
1998 between 1st Bancorp and the Registrant. This exhibit is
incorporated by reference from exhibit 2.3 to the
registrants Quarterly report on Form 10Q for the quarter
ended June 30, 1998.
2.4 Stock Option Agreement dated as of August 6, 1998 between
1st Bancorp and Registrant. This exhibit is incorporated by
reference from exhibit 2.4 to the registrants Quarterly
report on Form 10Q for the quarter ended June 30, 1998.
10.1 Stock Option Agreement executed August 3, 1998 between the
Registrant and Stan J. Ruhe (306 shares).
10.2 Stock Option Agreement executed August 3, 1998 between the
Registrant and Urban R. Giesler (333 shares).
10.3 Stock Option Agreement between the Registrant and George W.
Astrike dated September 2, 1998. This exhibit is
incorporated by reference from Exhibit 10.9 to the
Registrant's Registration Statement on Form S-4 filed
October 14, 1998 (No. 333-65633).
27 Financial Data Schedule for the periods ended September 30,
1998 and 1997.
99 German American Bancorp reconciliation of earnings.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended September
30, 1998.
21
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 November 13, 1998 By/s/George W. Astrike
------------------------------------
George W. Astrike
Chairman
Date November 13, 1998 By/s/John M. Gutgsell
------------------------------------
John M. Gutgsell
Controller and Principal
Accounting Officer