- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
The following table summarizes net interest income (on a tax-equivalent basis)
for each of the past three years. For tax-equivalent adjustments, an effective
tax rate of 34% was used for all years presented (1).
Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997 December 31, 1996
Principal Income/ Yield/ Principal Income/ Yield/ Principal Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
ASSETS
Short-term Investments:
Interest-bearing Balances
with Banks............... $6,137 $334 5.44% $2,825 $160 5.66% $2,288 $133 5.81%
Federal Funds Sold......... 14,836 872 5.88% 18,394 1,040 5.65% 22,095 1,101 4.98%
Other Short-term Investments --- --- --- 320 17 5.31% 2,115 114 5.39%
Securities:
Taxable.................... 90,289 5,655 6.26% 91,876 5,912 6.43% 88,572 5,269 5.95%
Non-taxable................ 50,218 4,244 8.45% 42,821 3,621 8.46% 37,437 3,192 8.53%
Total Loans and Leases (2).... 406,414 36,301 8.93% 369,472 33,871 9.17% 350,859 32,390 9.23%
------- ------ ------- ------ ------- ------
TOTAL INTEREST
EARNING ASSETS............. 567,894 47,406 8.35% 525,708 44,621 8.49% 503,366 42,199 8.38%
------- ------ ------- ------ ------- ------
Cash and Due from Banks....... 17,415 20,000 19,059
Premises, Furniture &
Equipment.................. 13,951 12,872 12,083
Other Assets.................. 14,012 11,489 11,314
Less: Allowance for Loan Losses (7,154) (6,995) (7,576)
----- ----- -----
TOTAL ASSETS.................. $606,118 $563,074 $538,246
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings and Interest-bearing
Demand Deposits............ $148,513 3,711 2.50% $141,056 3,832 2.72% $140,514 3,756 2.67%
Time Deposits................. 319,054 17,431 5.46% 296,218 16,294 5.50% 275,424 15,208 5.52%
Short-term Borrowings......... 7,123 313 4.39% 6,920 307 4.44% 9,027 418 4.63%
Long-term Debt................ 2,811 146 5.19% 115 9 7.83% 1,851 100 5.40%
----- --- --- - ----- --- -
TOTAL INTEREST-BEARING
LIABILITIES................ 477,501 21,601 4.52% 444,309 20,442 4.60% 426,816 19,482 4.56%
------- ------ ------- ------ ------- ------
Demand Deposit Accounts....... 56,249 53,911 51,332
Other Liabilities............. 6,839 5,101 4,344
----- ----- -----
TOTAL LIABILITIES............. 540,589 503,321 482,492
------- ------- -------
Shareholders' Equity.......... 65,529 59,753 55,754
------ ------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $606,118 $563,074 $538,246
======== ======== ========
NET INTEREST INCOME........... $25,805 $24,179 $22,717
======= ======= =======
NET INTEREST MARGIN........... 4.54% 4.60% 4.51%
<FN>
(1) Effective tax rates were determined as though interest earned on the
Company's investments in municipal bonds and loans was fully taxable.
(2) Non-accruing loans have been included in average loans. Interest income on
loans includes loan fees of $827, $610, and $658 for 1998, 1997, and 1996,
respectively.
</FN>
13.3-2
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
INTERIM FINANCIAL DATA
Table 1, Unaudited - dollars in thousands except per share data
For the three months ended
December September June March
31 30 30 31
1998:
Interest Income....................................... $11,651 $11,468 $11,315 $11,249
Interest Expense...................................... 5,619 5,469 5,307 5,206
----- ----- ----- -----
Net Interest Income................................ 6,032 5,999 6,008 6,043
Provision for Loan Losses............................. 407 57 55 64
Noninterest Income.................................... 768 754 830 726
Noninterest Expense................................... 4,242 4,491 4,180 4,096
----- ----- ----- -----
Income before Income Taxes......................... 2,151 2,205 2,603 2,609
Income Tax Expense................................. 624 617 808 860
--- --- --- ---
Net Income....................................... $1,527 $1,588 $1,795 $1,749
====== ====== ====== ======
Earnings per Share (1)................................ $0.23 $0.24 $0.27 $0.26
===== ===== ===== =====
Weighted Average Shares (1)........................... 6,664,927 6,664,438 6,663,091 6,662,176
========= ========= ========= =========
1997:
Interest Income....................................... $10,999 $10,997 $10,800 $10,526
Interest Expense...................................... 5,257 5,161 5,049 4,975
----- ----- ----- -----
Net Interest Income................................ 5,742 5,836 5,751 5,551
Provision for Loan Losses............................. 379 447 (652) 226
Noninterest Income.................................... 706 764 709 630
Noninterest Expense................................... 4,166 3,848 3,967 3,742
----- ----- ----- -----
Income before Income Taxes......................... 1,903 2,305 3,145 2,213
Income Tax Expense................................. 538 753 1,083 743
--- --- ----- ---
Net Income....................................... $1,365 $1,552 $2,062 $1,470
====== ====== ====== ======
Earnings per Share (1)................................ $0.21 $0.23 $0.31 $0.22
===== ===== ===== =====
Weighted Average Shares (1)........................... 6,660,382 6,655,802 6,653,560 6,653,145
========= ========= ========= =========
<FN>
(1) Share and Per share data has been retroactively adjusted to give effect for
stock dividends and splits, and excludes the dilutive effect of stock
options.
</FN>
13.3-3
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
INTRODUCTION AND OVERVIEW
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. Including its recent mergers with The Doty
Agency, Inc. of Petersburg, Indiana and 1ST BANCORP of Vincennes, Indiana, the
Company operates five affiliate community banks with 25 banking offices and 5
full-service insurance offices in the eight contiguous Southwestern Indiana
counties of Daviess, Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The
banks' wide range of personal and corporate financial services include making
commercial and consumer loans; marketing, originating, and servicing mortgage
loans; providing trust, investment advisory and brokerage services; accepting
deposits and providing safe deposit facilities. The Company's insurance
activities include issuing a full range of property, casualty, life and credit
insurance products. Prior to the January 1999 mergers, the Company operated
primarily in the banking industry.
The information in this Management's Discussion and Analysis is presented as an
analysis of the major components of the Company's operations for the years 1996
through 1998 and its financial condition as of December 31, 1998 and 1997. This
information should be read in conjunction with the accompanying consolidated
financial statements and footnotes contained elsewhere in this report, and may
contain "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. With regard to such statements, a variety of
factors could cause the Company's actual results to differ from those described
herein, including general and local economic conditions, interest rate changes,
risks associated with acquisitions, credit risks, regulatory risks and
competition.
Results have been retroactively adjusted for the effect of all stock dividends
and splits, and for the June 1, 1998 merger with the parent company of Citizens
State Bank of Petersburg, Indiana. Prior years' 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 had a material impact on overall
financial results. See the discussion below and Note 18 to the consolidated
financial statements for further information on mergers and acquisitions.
MERGERS AND ACQUISITIONS
In January 1999, the Company issued 2,040,000 shares for all the outstanding
shares of 1ST BANCORP of Vincennes Indiana and 62,000 shares for all the
outstanding shares of The Doty Agency, Inc. (Doty) of Petersburg, Indiana. These
mergers were accounted for as poolings of interests. 1ST BANCORP's subsidiaries
include First Federal Bank; First Financial Insurance Agency, Inc.; and First
Title Insurance Company, Inc. First Federal Bank operates a mortgage loan
origination office in Evansville, Indiana. First Financial Insurance Agency has
offices in Vincennes and Princeton, Indiana. Doty is a general multi-line,
full-service insurance agency with offices in Pike and Knox counties in Indiana.
The information in this Management's Discussion and Analysis and the
accompanying financial statements exclude the results of the mergers with 1ST
BANCORP and Doty. Financial statements for all periods prior to the mergers will
be retroactively restated in all future reports to give effect to these
combinations. 1ST BANCORP's thrift operations include mortgage banking
activities, a heavy concentration of residential real estate mortgages in their
loan portfolio, and a heavy concentration of borrowings as a long-term funding
source. As such, the composition of 1ST BANCORP's loan portfolio, funding
sources, allowance for loan losses, and operating results differ significantly
from that of the Company.
In June 1998, the Company consummated mergers with the parent companies of
Citizens State Bank of Petersburg, Indiana ("CSB") and FSB Bank of Francisco,
Indiana ("FSB"). The Company issued 974,898 shares for all the outstanding
shares of CSB, and 70,563 shares for all the outstanding shares of FSB, as
adjusted for the December 1998 5% stock dividend. These mergers were accounted
for as poolings of interests. FSB Bank and an existing affiliate, Community
Trust Bank of Petersburg, Indiana were merged into the Citizens State Bank
charter, creating a $130 million financial institution serving the Pike and
Gibson County markets.
13.3-4
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
In March 1997, the Company completed a merger with the parent company of Peoples
National Bank of Washington, Indiana ("Peoples") in which the Company issued
1,356,703 shares for all the outstanding shares of Peoples, as adjusted for all
subsequent stock splits and stock dividends. This merger was accounted for as a
pooling of interests. Concurrent with this transaction, The Union Bank, the
Company's affiliate bank in Loogootee, Indiana, combined with Peoples under the
Peoples name and charter, creating a $150 million financial institution serving
the Daviess and Martin County markets.
Management anticipates that additional mergers and acquisitions with like-minded
institutions may occur in future years. The Company's approach offers these
institutions the advantage of competitive operational efficiencies gained by
spreading fixed operating costs over a larger asset base, without the loss of
flexibility and independence associated with acquisition by large regional
multi-bank holding companies. Through affiliation with the Company, ownership is
predominantly held within a group of shareholders who reside in the banks'
general market areas and who support the banks' commitment to their local
communities.
RESULTS OF OPERATIONS
-----------------------------------------------------
NET INCOME
Net income of $6,659,000 or $1.00 per share for the year ended December 31, 1998
compared favorably to net income of $6,449,000 or $0.97 per share for the prior
year. Both years' results reflect the impact of charges related to the Company's
merger and acquisition activities. After-tax merger and acquisition expenses in
1998 totaled $598,000 or $0.09 per share, while similar expenses in 1997
impacted net income by $275,000 or $0.04 per share. Excluding these charges, net
income for 1998 was $7,257,000 or $1.09 per share, an 8% increase over 1997
adjusted earnings of $6,724,000 or $1.01 per share.
1997 net income of $6,449,000 or $0.97 per share represented a 15% increase over
1996 earnings of $5,621,000 or $0.85 per share. 1997 net interest income and
noninterest income, respectively, increased $1,349,000 and $331,000 over 1996
results, offset by an increase of $537,000 in operating expenses, primarily in
personnel expenses and professional fees associated with merger and acquisition
activities.
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 other borrowed funds. Net interest margin is
this difference expressed as a percentage of average earning assets. Several
factors contribute to the determination of net interest income and net interest
margin, including the volume and mix of earning assets, interest rates, and
income taxes. Many of the factors affecting net interest income are subject to
control by management policies and actions. Factors beyond the control of
management include the general level of credit demand, Federal Reserve Board
monetary policy, and changes in tax laws.
1998 tax-equivalent net interest income of $25,805,000 reported on page 2
increased 6.7% over 1997 results of $24,179,000. This followed a 6.4% increase
in 1997 over the $22,717,000 reported for 1996. A significant portion of the
increase in both years resulted from loan growth. Net interest margin for 1998,
1997 and 1996 was 4.54%, 4.60% and 4.51%, respectively. Yields on earning assets
and rates on interest-bearing liabilities declined in 1998 compared to the prior
year. This was primarily due to an overall decline in interest rates in late
1998. See the discussion headed LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for
an explanation of the Company's interest rate sensitivity position.
PROVISION FOR LOAN LOSSES
The Company provides for future loan losses through regular provisions to the
allowance for loan losses, which totaled $583,000, $400,000 and $345,000 in
1998, 1997 and 1996, respectively. These provisions were made at a level deemed
necessary by management to absorb estimated losses in the loan portfolio. The
fourth quarter of 1998 included additional provisions due to specific concerns
over recent price declines in the swine industry, an increase in charge-off
experience on consumer loans and a specific reserve on a single large loan. The
negative provision of $652,000 in the second quarter of 1997 resulted from the
recovery of a single previously charged-off credit at another of the Company's
affiliates.
13.3-5
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
A detailed evaluation of the adequacy of the allowance for loan losses is
completed quarterly by management, the results of which will be used to
determine future provisions for loan losses. Refer also to the section entitled
LENDING AND LOAN ADMINISTRATION for further discussion of the provision and
allowance for loan losses.
NONINTEREST INCOME
The primary sources of noninterest income are income from fiduciary activities
(trust), investment services income (brokerage fees), and service charges on
deposit accounts. Excluding net gains on the sales of loans, other real estate
and securities, noninterest income increased 9.2% and 18.7% in 1998 and 1997,
respectively, over the previous year.
An analysis of noninterest income is presented in Table 2. Trust fees decreased
slightly by $12,000 to $326,000 in 1998 after an increase of $108,000 in 1997.
Service charges on deposit accounts increased 12.5% and 16.2% in 1998 and 1997,
respectively, due to periodic revisions in the Company's pricing structure.
Investment services income is generated through a full service brokerage
operation provided at the Company's community banks. The level of earnings
generated through this operation is directly tied to customer utilization and
acceptance of the investment products offered. Brokerage income increased
$51,000 in 1998 following an increase of $53,000 in 1997.
NONINTEREST INCOME % Change From
Table 2, dollars in thousands Prior Year
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Income from Fiduciary Activities........................ $326 $338 $230 (3.6)% 47.0%
Service Charges on Deposit Accounts..................... 1,471 1,307 1,125 12.5 16.2
Investment Services Income.............................. 507 456 403 11.2 13.2
Other Income............................................ 744 689 592 8.0 16.4
--- --- ---
Subtotal ........................................... 3,048 2,790 2,350 9.2 18.7
Gains on Sales of Loans and Other Real Estate........... 24 19 55 26.3 (65.5)
Securities Gains, net................................... 6 --- 73 N/A (100.0)
- --- --
TOTAL NONINTEREST INCOME............................ $3,078 $2,809 $2,478 9.6 13.4
====== ====== ======
NONINTEREST EXPENSE
Noninterest expense is comprised of salaries and benefits, occupancy, furniture
and equipment expenses, FDIC premiums, data processing fees, professional fees,
advertising and promotion, supplies and other operating expenses (see Table 3).
Noninterest expenses increased $1.3 million in 1998 and $537,000 in 1997, over
the previous year. 1998 expenses include merger and acquisition costs of
$226,000 in affiliate expenses for personnel, data processing and pension costs,
and $723,000 in professional fees incurred by the holding company.
Despite these increases, the Company's efficiency ratio was relatively stable at
59%, 58% and 60% in 1998, 1997 and 1996, respectively. The efficiency ratio is
defined as noninterest expenses as a percentage of the total of tax-equivalent
net interest income and noninterest income. Expressed differently, the Company
expended approximately $0.59 to generate each $1.00 of net revenue in 1998.
Salaries and employee benefits comprised approximately 54% of total noninterest
expense in all periods. The 1998 increase in personnel costs includes $95,000 in
merger and acquisition related expenses, an increase in base compensation at
some of the existing affiliates and costs associated with the Company's employee
computer purchase program, which was implemented in late 1997.
Occupancy, furniture and equipment expenses increased by $233,000 or 10.1% in
1998 after a decrease of $14,000 or 0.6% in 1997. This increase was primarily
due to an upgrade of computer systems, as the Company continues its strategy of
implementing state-of-the-art technology platforms and operating systems
throughout the organization. These systems are expected to provide long-term
benefits with regard to improved quality of customer service and control of
personnel expenses, and in some cases are necessary in order to address Year
2000 issues.
13.3-6
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
FDIC premiums totaled $84,000 in 1998, $59,000 in 1997 and $231,000 in 1996.
1996 premiums included a $157,000 one-time Savings Association Insurance Fund
("SAIF") assessment. This assessment was applied to some of German American
Bank's deposits and all of the deposits of First State Bank. A portion of this
assessment was refunded to the Company in 1997.
Data processing fees increased $163,000 and $109,000 in 1998 and 1997,
respectively. This reflects an increase in the number of accounts processed and
conversion expenses at the Company's newly acquired affiliates in 1998 and 1997.
The 1998 increase includes $88 in conversion related expenses.
Professional fees totaled $837,000 in 1998, $1,025,000 in 1997 and $854,000 in
1996. Expenses incurred by the holding company for merger, acquisition and other
professional fees totaled $723,000 in 1998, $342,000 in 1997 and $228,000 in
1996. 1997 included a $200,000 reserve for legal fees made in connection with an
unasserted potential claim at one of the affiliate banks. After payment of
certain expenses associated with this unasserted claim, the remainder of this
accrual was reversed in late 1998. While it is not possible to predict the level
of future acquisition activity and the resulting level of associated costs,
management intends to continue to pursue acquisition opportunities, and
therefore, increased and continued costs will be likely in future years.
Advertising and promotion expenses totaled $611,000 in 1998, $591,000 in 1997
and $499,000 in 1996, representing approximately 0.1% of average total assets in
each year. Increases in 1997 and 1998 included the implementation of a corporate
identity program at existing and new affiliates, and by the introduction of new
products and services.
Supplies and other operating expenses increased $219,000 in 1998 and $123,000 in
1997. The 1998 increase includes $113,000 from the implementation of a
comprehensive management and customer service excellence training program and
$43,000 in net pension expense due to the settlement and curtailment,
respectively, of the former pension plans at Peoples and Citizens State. 1998
and 1997 expenses were also impacted by the acquisition of new affiliates and by
the corporate identity program in the areas of supplies and other charges.
Increases also occurred in volume related expenses such as postage, telephone
and other services. Other operating expenses include the amortization of
goodwill and core deposit intangibles, totaling $189,000, $216,000 and $231,000
in 1998, 1997 and 1996, respectively.
NONINTEREST EXPENSE % Change From
Table 3, dollars in thousands Prior Year
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Salaries and Employee Benefits.......................... $9,139 $8,325 $8,097 9.8% 2.8%
Occupancy, Furniture and Equipment Expense.............. 2,533 2,300 2,314 10.1 (0.6)
FDIC Premiums........................................... 84 59 231 42.4 (74.5)
Data Processing Fees.................................... 755 592 483 27.5 22.6
Professional Fees ...................................... 837 1,025 854 (18.3) 20.0
Advertising and Promotion............................... 611 591 499 3.4 18.4
Supplies................................................ 581 540 519 7.6 4.0
Other Operating Expenses................................ 2,469 2,291 2,189 7.8 4.7
----- ----- -----
TOTAL NONINTEREST EXPENSE........................... $17,009 $15,723 $15,186 8.2 3.5
======= ======= =======
PROVISION FOR INCOME TAXES
The Company records a provision for current income taxes payable, along with a
provision for deferred taxes payable in the future. Deferred taxes arise from
temporary differences, which are items recorded for financial statement purposes
in a different period than for income tax returns. The major item affecting the
difference between the Company's effective tax rate recorded on its financial
statements and the federal statutory rate of 34% is interest on tax-exempt
securities and loans. Other components affecting the Company's effective tax
rate include state income taxes and non-deductible merger costs.
13.3-7
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
Note 11 to the consolidated financial statements provides additional details
relative to the Company's income tax provision. The Company's effective tax rate
was 30.4%, 32.6% and 33.7%, respectively, in 1998, 1997, and 1996. The declining
effective tax rate corresponds with increases in tax-exempt interest income.
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
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.
The Company continues to maintain a strong capital position. Shareholders'
equity totaled $67.4 million and $62.1 million at December 31, 1998 and 1997,
respectively. This represented 11.12% and 11.02%, respectively, of total assets.
The following table presents the Company's consolidated capital ratios under
regulatory guidelines:
RISK BASED CAPITAL STRUCTURE
Table 4, dollars in thousands
1998 1997
---- ----
Tier 1 Capital:
Shareholders' Equity as presented on Balance Sheet.......................... $67,421 $62,079
Subtract: Unrealized Appreciation on Securities Available-for-Sale.......... (847) (767)
Less: Intangible Assets and Ineligible Deferred Tax Assets.................. (1,460) (1,713)
----- -----
Total Tier 1 Capital.................................................... 65,114 59,599
Tier 2 Capital:
Qualifying Allowance for Loan Loss.......................................... 5,328 4,786
----- -----
Total Capital............................................................... $70,442 $64,385
======= =======
Risk Weighted Assets............................................................ $424,605 $378,599
======== ========
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998:
To Risk-Weighted Assets:
Total Capital........................ $70,442 16.59% >$33,968 >8.0% >$42,461 >10.0%
- - - -
Tier 1 Capital....................... $65,114 15.34% >$16,984 >4.0% >$25,476 > 6.0%
- - - -
To Average Assets:
Tier 1 Capital....................... $65,114 10.77% >$24,183 >4.0% >$30,229 > 5.0%
- - - -
As of December 31, 1997:
To Risk-Weighted Assets:
Total Capital........................ $64,385 17.01% >$30,288 >8.0% >$37,860 >10.0%
- - - -
Tier 1 Capital....................... $59,599 15.74% >$15,144 >4.0% >$22,716 > 6.0%
- - - -
To Average Assets:
Tier 1 Capital....................... $59,599 11.00% >$21,664 >4.0% >$27,080 > 5.0%
- - - -
13.3-8
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
Tier 1, or core capital, is comprised of shareholders' equity less goodwill,
core deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital is comprised of the amount of the allowance for loan
losses, up to 1.25% 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) a
4.0% leverage ratio, which is Tier 1 capital divided by defined "total assets";
(b) 4.0% Tier 1 capital to risk-adjusted assets; and, (c) 8.0% total capital to
risk-adjusted assets. 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 tiers 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%, a total capital ratio of at least 10.0%, a leverage ratio of at
least 5.0%, and not be under a capital directive order. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on financial statements. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans for
capital restoration are required. At December 31, 1998 the Company and all
affiliate banks were categorized as well capitalized.
At December 31, 1998 management is not 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
consolidated liquidity, capital resources or operations.
The Company paid cash dividends of $2,834,000 in 1998 and $2,523,000 in 1997.
1998 dividends paid includes an increase in dividends per share and the issuance
of additional shares in connection with the Company's Dividend Reinvestment and
Stock Purchase Plan. The Company's dividend payout ratio was 43% in 1998 and 45%
in 1997, consistent with management's policy of retaining sufficient capital to
provide for continued growth.
SOURCES OF FUNDS
- --------------------------------------------------------------------------------
Table 5 below illustrates changes between years in the average balances of all
funding sources:
FUNDING SOURCES - Average Balances % Change From
Table 5, dollars in thousands Prior Year
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
Demand........................................... $56,249 $53,911 $51,332 4.3% 5.0%
Savings and Interest-bearing Checking............ 103,415 101,459 107,652 1.9 (5.8)
Money Market Accounts............................ 45,098 39,597 32,862 13.9 20.5
Other Time Deposits.............................. 277,067 253,562 230,643 9.3 9.9
------- ------- -------
Total Core Deposits........................... 481,829 448,529 422,489 7.4 6.2
Certificates of Deposits of $100,000 or more..... 41,987 42,656 44,781 (1.6) (4.7)
Federal Funds Purchased, Repurchase
Agreements, and Other Short-term
Borrowings................................ 7,123 6,920 9,027 2.9 (23.3)
FHLB Advances and Long-term Borrowings.......... 2,811 115 1,851 * *
----- --- -----
Total Funding Sources......................... $533,750 $498,220 $478,148 7.1 4.2
======== ======== ========
<FN>
* Not meaningful
</FN>
13.3-9
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
The Company's primary source of funding is its base of core customer deposits.
Core deposits consist of demand deposits, savings, interest-bearing checking,
money market accounts, and certificates of deposit of less than $100,000. Other
sources of funds are certificates of deposit of $100,000 or more, overnight
borrowings from other financial institutions, securities sold under agreement to
repurchase, short-term notes payable issued on an unsecured basis, and
short-term borrowings consisting of interest-bearing demand notes issued to the
U.S. Treasury. The membership of the Company's affiliate banks in the Federal
Home Loan Bank System (FHLB) provides an additional source for both long and
short-term collateralized borrowings. The following pages contain a discussion
of changes in these areas.
CORE DEPOSITS
The Company has demonstrated the ability to attract and retain core deposits,
achieving 7.4% growth in 1998 and 6.2% in 1997 over prior year average balances.
Non-interest bearing demand deposits represent a fairly stable source of funding
for the company, totaling approximately 12% of core deposits in 1998, 1997 and
1996. The Company grew average demand deposits by 4% in 1998 and 5% in 1997 over
prior year averages.
Double-digit growth was obtained in money market accounts in 1998 and 1997,
primarily because this demand product provides a higher interest rate than
interest-bearing checking products. Other time deposits consist primarily of
certificates of deposits in denominations of less than $100,000. These deposits
increased by 9.3% in 1998, by 9.9% in 1997 and comprised approximately 58% of
average core deposits in both years.
Changes in the deposit mix will continue to be influenced by customers' tendency
to avoid commitment to longer term instruments during periods of low or
declining interest rates, and their attempts to lock in rates on these
instruments during periods of perceived higher rates. Changes in the mix are
also subject to the increased availability of alternative investment products
and seasonal and other non-economic factors.
OTHER FUNDING SOURCES
Certificates of deposits in denominations of $100,000 or more are the Company's
most significant source of other funding. These large denomination certificates
declined in both 1998 and 1997, by 1.6% and 4.7%, respectively. These
certificates comprised only 7.9% of the Company's total funding sources in 1998,
down from 8.6% in 1997, and 9.4% in 1996.
The Company utilizes other short-term funding sources from time to time. These
sources consist of federal funds purchased from other financial institutions on
an overnight basis, secured repurchase agreements which generally mature within
30 days, short-term notes payable extended on an unsecured basis, and borrowings
under U.S. Treasury demand notes. These borrowings represent an important source
of temporary short-term liquidity for the Company. Short-term funding sources
and large denomination certificates are considered to be more subject to
periodic withdrawals than are core deposits, and therefore, are generally not
used as a permanent funding source for loans. Long-term debt is in the form of
FHLB advances, which are secured by a blanket pledge of certain investment
securities and residential mortgage loans. In 1998, long-term FHLB advances were
used to lock in the funding cost for certain long-term assets.
USES OF FUNDS
----------------------------------------------------
LOANS
Total loans grew $33.6 million or 8.9% in 1998 and $20.6 million or 5.8% in
1997. The Company's loan portfolio is well diversified with 31% of the portfolio
in commercial and industrial loans, 34% in 1-4 family residential mortgages, 20%
in consumer loans, and 15% in agricultural and poultry loans at December 31,
1998. The Company has achieved significant growth in residential mortgage and
consumer loans since 1996 while the percentage of the portfolio associated with
agriculture and poultry loans continues to decline. The Company's commercial and
agricultural lending is extended to various industries, including agribusiness,
manufacturing, health care services, wholesale, and retail services.
13.3-10
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
The composition of the year-end balances of the loan portfolio is presented in
Note 3 to the consolidated financial statements, and in Table 6 below:
LOAN PORTFOLIO December 31,
Table 6, dollars in thousands 1998 1997 1996
---- ---- ----
Commercial and Industrial......................................... $128,705 $112,294 $114,946
Residential Mortgage Loans........................................ 138,710 126,287 110,448
Consumer Loans.................................................... 81,891 79,378 67,980
Agricultural and Poultry.......................................... 62,736 60,421 64,415
------ ------ ------
Total Loans................................................... 412,042 378,380 357,789
Less: Unearned Income........................................ (709) (1,057) (1,262)
Allowance for Loan Losses.............................. (6,858) (7,416) (7,144)
------ ----- ------
Loans, net.................................................... $404,475 $369,907 $349,383
======== ======== ========
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Extensions of credit outside this market area are generally concentrated in
commercial real estate loans within a 120 mile radius of the Company's primary
market, and are granted on a selective basis. Loans outside this radius are
generally further limited to loans guaranteed by either the Small Business
Administration (SBA) or the Farm Service Agency (FSA).
The overall loan portfolio is diversified among a variety of borrowers; however,
a significant portion of borrowers are dependent upon the agricultural, poultry
and wood furniture manufacturing industries. Although wood furniture
manufacturers employ a significant number of people in the market area, there is
no concentration of credit to companies engaged in that industry. No
unguaranteed concentration of credit in excess of 10% of total assets exists
within any single industry group.
INVESTMENTS
The investment portfolio is a principal source for funding the Company's loan
growth and other liquidity needs. The Company's securities portfolio consists of
money market securities, obligations of the U.S. treasury and various federal
agencies, municipal obligations of state and political subdivisions, corporate
investments, and asset-/mortgage-backed securities issued by U.S. government
agencies and other intermediaries. Money market securities include federal funds
sold, interest-bearing balances with banks, and other short-term investments.
The composition of the year-end balances in the investment portfolio is
presented in Note 2 to the consolidated financial statements and in Table 7
below:
INVESTMENT PORTFOLIO, at Amortized Cost December 31,
Table 7, dollars in thousands 1998 % 1997 %
---- - ---- -
Federal Funds Sold and Short-term Investments..................... $16,959 9.3% $23,098 14.7%
U.S. Treasury and Agency Securities............................... 63,605 34.9 64,142 40.7
Obligations of State and Political Subdivisions................... 56,694 31.1 45,431 28.8
Asset- and Mortgage-backed Securities............................. 43,115 23.6 18,037 11.4
Corporate Securities.............................................. --- --- 4,839 3.1
Other Securities.................................................. 2,084 1.1 2,122 1.3
----- --- ----- ---
Total Securities Portfolio.................................... $182,457 100.0% $157,669 100.0%
======== ===== ======== =====
13.3-11
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
At December 31, 1998 the Company achieved a relatively balanced investment
portfolio mix, which includes a larger allocation to asset-backed and
mortgage-backed securities than at the prior year-end. The portion of the
investment portfolio designated as available-for-sale provides an additional
funding source for the Company's liquidity needs and for asset/liability
management requirements. Although management has the ability to sell these
securities if the need for liquidity arises, their designation as
available-for-sale should not be interpreted as an indication that management
anticipates such sales. Available-for-sale securities are carried at their
market value. All other securities are carried at amortized cost, due to
management's intent and ability to hold these securities to maturity.
RISK MANAGEMENT
------------------------------------------------
The Company is exposed to various types of business risk on an on-going basis.
These risks include credit risk, liquidity risk and interest rate risk. Various
procedures are employed at the Company's affiliate banks to monitor and mitigate
risk in their loan and investment portfolios, as well as risks associated with
changes in interest rates. Following is a discussion of the Company's
philosophies and procedures to address these risks.
LENDING AND LOAN ADMINISTRATION
Primary responsibility and accountability for day-to-day lending activities
rests with the Company's affiliate banks. Loan personnel at each bank have the
authority to extend credit under guidelines approved by the bank's board of
directors. Executive and board loan committees active at each bank serve as
vehicles for communication and for the pooling of knowledge, judgment and
experience of its members. These committees provide valuable input to lending
personnel, act as an approval body, and monitor the overall quality of the
banks' loan portfolios. The Corporate Loan Committee, comprised of members of
the Company's executive officers and board of directors, ensure a consistent
application of the Company's lending policies. The Company also maintains a
comprehensive risk-weighting and loan review program for its affiliate banks,
which includes quarterly reviews of problem loan reports, delinquencies and
charge-offs. The purpose of this program is to evaluate loan administration,
credit quality, loan documentation and the adequacy of the allowance for loan
losses.
The Company maintains an allowance for loan losses to cover potential losses
identified during its loan review process. The allowance for loan losses is
comprised of: (a) specific reserves on individual credits; (b) allocated
reserves for certain loan categories and industries, large and out-of-market
loans, and overall historical loss experience; and (c) unallocated reserves
based on trends in the type and volume of the loan portfolios, current and
anticipated economic conditions, and other factors. Specific reserves are
provided for credits when: (a) the customer's cash flow or net worth appears
insufficient to repay the loan; (b) the loan has been criticized in a regulatory
examination; (c) the loan is on non-accrual; or, (d) other reasons where either
the ultimate collectibility of the loan is in question, or the loan
characteristics require special monitoring.
Table 8 provides a comparative analysis of activity in the allowance for loan
losses:
ALLOWANCE FOR LOAN LOSSES December 31,
Table 8, dollars in thousands 1998 1997 1996
---- ---- ----
Balance as of January 1.................................... $7,416 $7,144 $7,552
Allowance of Acquired Subsidiary........................... 80 --- ---
Provision for Loan Losses.................................. 583 400 345
Recoveries of Prior Loan Losses............................ 362 819 320
Loan Losses Charged to the Allowance....................... (1,583) (947) (1,073)
----- --- -----
Balance as of December 31.................................. $6,858 $7,416 $7,144
====== ====== ======
Net Charge-offs to Average Loans Outstanding............... 0.30% 0.03% 0.21%
Provision for Loan Losses to Average Loans Outstanding..... 0.14% 0.11% 0.10%
Allowance for Loan Losses to Total Loans at Year-End....... 1.66% 1.96% 2.00%
13.3-12
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
During 1998, specific reserves in the allowance for loan losses increased for
large and out-of-market loans due to growth in that segment of the portfolio,
and for agricultural loans associated with recent price declines in the swine
industry. Reserves associated with consumer loans decreased in 1998 due to the
charge-off of a group of loans at one of the affiliate banks. A specific reserve
for this group of loans had been established in 1997. These charge-offs
contributed to an increase in that portion of allocated reserves which is based
on historical losses. Unallocated reserves declined during the year, due in part
to a reduction in non-performing loans. Refer also to the section entitled
PROVISION FOR LOAN LOSSES in the discussion regarding the RESULTS OF OPERATIONS.
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have
been re-negotiated to provide for a reduction or deferral of interest or
principal because of deterioration in the financial condition of the borrower;
(c) loans past due ninety (90) days or more as to principal or interest; and,
(d) other real estate owned. Loans are placed on non-accrual status when
scheduled principal or interest payments are past due for 90 days or more or
when the borrower's ability to repay becomes doubtful. Uncollected interest
accrued in the current year is reversed against income at the time a loan is
placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if
deemed uncollectible. Exceptions to the non-accrual and charge-off policies are
made when the loan is well secured and in the process of collection.
Table 9 below presents an analysis of the Company's non-performing assets:
NON-PERFORMING ASSETS December 31,
Table 9, dollars in thousands 1998 1997 1996
---- ---- ----
Non-accrual Loans...................................... $1,920 $1,238 $2,003
Past Due Loans (90 days or more)....................... 1,169 2,832 1,168
----- ----- -----
Total Non-performing Loans......................... 3,089 4,070 3,171
Other Real Estate Owned................................ 226 388 529
--- --- ---
Total Non-performing Assets........................ $3,315 $4,458 $3,700
====== ====== ======
Non-performing Loans to Total Loans.................... 0.75% 1.08% 0.89%
Allowance for Loan Losses to Non-performing Loans...... 222% 182% 225%
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is a measure of the Company's ability to fund new loan demand,
existing loan commitments and deposit withdrawals. The purpose of liquidity
management is to match sources of funds with anticipated customer borrowings and
withdrawals and other obligations to ensure a dependable funding base, without
unduly penalizing earnings. Failure to properly manage liquidity requirements
can result in the need to satisfy customer withdrawals and other obligations on
less than desirable terms. The Company provides for its liquidity needs by
maintaining money market assets, managing cash flows from its investment
portfolio, through growth in core deposits, and by maintaining various short-
and long-term borrowing sources.
Interest rate risk is the exposure of the Company's financial condition to
adverse changes in market interest rates. In an effort to estimate the impact of
sustained interest rate movements to the Company's earnings, the Company
monitors interest rate risk through computer-assisted simulation modeling of its
net interest income. The Company's simulation modeling monitors the potential
impact to net interest income under four interest rate scenarios -- flat,
rising, declining and most likely. The Company's objective is to actively manage
its asset/liability position within a one-year interval and to limit the risk in
any of the four interest rate scenarios to a reasonable level of tax-equivalent
net interest income within that interval. Funds Management Committees at the
holding company and each affiliate bank monitor compliance within established
guidelines of the Funds Management Policy.
13.3-13
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
The Company also monitors interest rate risk by estimating its static interest
rate sensitivity position. Static interest rate sensitivity is an analysis of
the relationship between rate sensitive assets and rate sensitive liabilities at
a point in time, and quantifies interest rate risk as the difference, or "gap",
between assets and liabilities expected to mature or reprice in given time
intervals. Static interest rate sensitivity is expressed as a ratio of rate
sensitive assets to rate sensitive liabilities and as a dollar amount known as
the "gap". A ratio of 100% suggests a balanced position between rate sensitive
assets an liabilities within a given repricing period.
Table 10 reflects the Company's static interest rate sensitivity position as of
December 31, 1998 over various time intervals and based on current interest
rates. Interest earning assets and interest bearing liabilities have been
distributed based on their actual or expected repricing dates. A significant
assumption in the table is that all interest-bearing demand and savings deposits
are subject to immediate repricing even though rates on these deposits are not
generally tied to specific indices, and experience suggests these deposits are
somewhat resistant to rate sensitivity.
Although rate sensitivity gaps constantly change as funds are acquired and
invested, a significant portion of the Company's assets and liabilities reprice
within 180 days, and are closely matched at 85% in the one year or less
cumulative time frame. At financial institutions with negative gaps, net
interest income tends to increase in declining rate environments, and decrease
in rising rate environments.
As of December 31, 1998 the Company had no derivatives, trading portfolio or
unusual financial instruments which expose the Company to undue interest rate
risk. For additional information regarding qualitative and quantitative market
risk disclosures, see the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 which is available without charge, upon written request.
STATIC INTEREST RATE SENSITIVITY at December 31, 1998
Table 10, dollars in thousands
Maturing or Repricing
Non-Sensitive
1-180 181 to Over 1 Year and Over
Days 365 Days to 5 Years 5 Years Total
-------------------------------------------------------------------
ASSETS
Money Market Investments $ 16,959 $ --- $ --- $ --- $ 16,959
Investment Securities 50,829 14,215 58,470 43,386 166,900
Loans (Net of Unearned Income) 166,407 70,080 148,833 26,013 411,333
---------- --------- ---------- ---------- ----------
Total Rate Sensitive Assets 234,195 84,295 207,303 69,399 595,192
Non-Earning Assets --- --- --- 41,584 41,584
---------- --------- ---------- ---------- ----------
TOTAL ASSETS $ 234,195 $ 84,295 $ 207,303 $ 110,983 $ 636,776
========== ========= ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Demand and Savings $ 115,226 $ --- $ --- $ --- $ 115,226
Money Market Deposits 39,440 --- --- --- 39,440
Other Time Deposits 118,677 95,506 112,615 16 326,814
Borrowings 7,064 299 4,087 4,578 16,028
---------- --------- ---------- ---------- ----------
Total Rate Sensitive Liabilities 280,407 95,805 116,702 4,594 497,508
Non-Interest Bearing Deposits --- --- --- 65,870 65,870
Other Liabilities --- --- --- 5,977 5,977
Shareholders' Equity --- --- --- 67,421 67,421
---------- --------- ---------- ---------- ----------
TOTAL LIABILITIES AND EQUITY $ 280,407 $ 95,805 $ 116,702 $ 143,862 $ 636,776
========== ========= ========== ========== ==========
Periodic Interest Sensitivity Gap $( 46,212) $( 11,510) $ 90,601 $( 32,879)
========== ========= ========== ==========
Cumulative Interest Sensitivity Gap $( 46,212) $( 57,722) $ 32,879
========== ========= ==========
Cumulative Ratio (1) 84% 85% 107%
<FN>
(1) Rate Sensitive Assets / Rate Sensitive Liabilities
</FN>
13.3-14
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
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 is executing the review, testing and implementation of
procedures to address certain issues that require attention prior to the Year
2000 in accordance with its formal plan, 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 all 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 customers, has
largely completed its renovation and testing of the Company's mission critical
systems. While the Company has extensively tested Fiserv's systems for Year 2000
capabilities, it can obviously give no absolute assurance as to the actual
performance of Fiserv's systems in the Year 2000. However, based on this
testing, the Company is unaware of any issues that would cause any material
interruption in its ability to transact business. The Company has also completed
its assessment of the Year 2000 implications of systems other than its "mission
critical" data processing information systems (such as elevators, HVAC, copiers,
and the like).
The Company expended approximately $275,000 in 1998 on Year 2000 related items,
and anticipates another $175,000 in cash outlays in 1999. These outlays exclude
the cost of implementing the Company's state-of-the-art platform and computer
systems upgrade (see also the section entitled NONINTEREST EXPENSE under the
discussion of RESULTS OF OPERATIONS), 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, the depreciation and operating 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. The Company has completed
an assessment of its commercial customers' potential exposure to the Year 2000
issue and their plans to minimize any such exposure. The Company is unaware of
any specific significant customer Year 2000 issues that are not expected to be
resolved prior to the end of the year.
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 could potentially affect
any computer process, including any equipment utilizing embedded technology like
microprocessors. Although the Company believes it is taking all necessary steps
to address Year 2000 issues, no assurances can be given that some problems will
not occur or that the Company will not incur significant additional expenses in
future periods, any of which could have a material adverse impact on the
Company's results of operations.
13.3-15
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
Dollars in thousands
- --------------------------------------------------------------------------------
December 31,
1998 1997
---- ----
ASSETS
Cash and Due from Banks.............................................................. $ 17,765 $ 20,090
Federal Funds Sold................................................................... 175 20,300
----------- -----------
Cash and Cash Equivalents........................................................ 17,940 40,390
Interest-bearing Balances with Banks................................................. 16,784 2,798
Securities Available-for-Sale, at Market............................................. 136,023 100,449
Securities Held-to-Maturity, at Cost................................................. 30,877 35,382
Loans .............................................................................. 412,042 378,380
Less: Unearned Income.............................................................. (709) (1,057)
Allowance for Loan Losses........................................................ (6,858) (7,416)
----------- -----------
Loans, Net........................................................................... 404,475 369,907
Premises, Furniture and Equipment, Net............................................... 14,719 13,191
Other Real Estate.................................................................... 226 388
Intangible Assets.................................................................... 1,383 1,572
Accrued Interest Receivable and Other Assets......................................... 14,349 11,765
----------- -----------
TOTAL ASSETS................................................................. $ 636,776 $ 575,842
=========== ===========
LIABILITIES
Noninterest-bearing Deposits......................................................... $ 65,870 $ 62,502
Interest-bearing Deposits............................................................ 481,480 438,531
----------- -----------
Total Deposits................................................................... 547,350 501,033
Short-term Borrowings................................................................ 7,028 5,548
Long-term Debt....................................................................... 9,000 ---
Accrued Interest Payable and Other Liabilities....................................... 5,977 7,182
----------- -----------
TOTAL LIABILITIES............................................................ 569,355 513,763
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized............ 6,665 6,279
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.......... --- ---
Additional Paid-in Capital........................................................... 46,708 38,088
Retained Earnings.................................................................... 13,201 16,945
Accumulated Other Comprehensive Income............................................... 847 767
----------- -----------
TOTAL SHAREHOLDERS' EQUITY................................................... 67,421 62,079
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 636,776 $ 575,842
=========== ===========
End of period shares issued and outstanding.......................................... 6,664,927 6,278,636
=========== ===========
See accompanying notes to consolidated financial statements.
13.3-16
- --------------------------------------------------------------------------------
Consolidated Statements of Income
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------
Years ended December 31,
1998 1997 1996
---- ---- ----
INTEREST INCOME
Interest and Fees on Loans.................................................. $36,021 $33,804 $32,289
Interest on Federal Funds Sold.............................................. 872 1,040 1,101
Interest on Short-term Investments.......................................... 334 177 247
Interest and Dividends on Securities:
Taxable................................................................. 5,655 5,912 5,269
Non-taxable............................................................. 2,801 2,389 2,107
-------- -------- ------
TOTAL INTEREST INCOME................................................ 45,683 43,322 41,013
INTEREST EXPENSE
Interest on Deposits........................................................ 21,142 20,126 18,964
Interest on Short-term Borrowings........................................... 313 307 418
-
Interest on Long-term Debt.................................................. 146 9 100
-------- -------- -------
TOTAL INTEREST EXPENSE.................................................. 21,601 20,442 19,482
-------- -------- --------
NET INTEREST INCOME......................................................... 24,082 22,880 21,531
Provision for Loan Losses................................................... 583 400 345
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......................... 23,499 22,480 21,186
NONINTEREST INCOME
Income from Fiduciary Activities............................................ 326 338 230
Service Charges on Deposit Accounts......................................... 1,471 1,307 1,125
Investment Services Income.................................................. 507 456 403
Other Service Charges, Commissions, and Fees................................ 744 689 592
Gains on Sales of Loans and Other Real Estate............................... 24 19 55
Securities Gains, net....................................................... 6 --- 73
-------- -------- --------
TOTAL NONINTEREST INCOME................................................ 3,078 2,809 2,478
-------- -------- -------
NONINTEREST EXPENSE
Salaries and Employee Benefits.............................................. 9,139 8,325 8,097
Occupancy Expense........................................................... 1,378 1,202 1,140
Furniture and Equipment Expense............................................. 1,155 1,098 1,174
FDIC Premiums............................................................... 84 59 231
Data Processing Fees........................................................ 755 592 483
Professional Fees........................................................... 837 1,025 854
Advertising and Promotion................................................... 611 591 499
Supplies.................................................................... 581 540 519
Other Operating Expenses.................................................... 2,469 2,291 2,189
-------- -------- -------
TOTAL NONINTEREST EXPENSE............................................... 17,009 15,723 15,186
-------- -------- -------
Income before Income Taxes.................................................. 9,568 9,566 8,478
Income Tax Expense.......................................................... 2,909 3,117 2,857
-------- -------- --------
NET INCOME.................................................................. $ 6,659 $ 6,449 $ 5,621
======= ======= =======
Earnings per Share.......................................................... $ 1.00 $ 0.97 $ 0.85
Diluted Earnings per Share.................................................. $ 1.00 $ 0.97 $ 0.84
See accompanying notes to consolidated financial statements.
13.3-17
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
Dollars in thousands
- --------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $ 6,659 $ 6,449 $ 5,621
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Accretion / (Amortization) on Investments........................ 18 24 (10)
Depreciation and Amortization........................................ 1,335 1,273 1,265
Provision for Loan Losses............................................ 583 400 345
Gain on Sale of Securities, net...................................... (6 ) --- (73)
Gain on Sales of Loans and Other Real Estate......................... (24 ) (19 ) (55)
Change in Assets and Liabilities:
Deferred Taxes.................................................... (20 ) (195 ) 233
Deferred Loan Fees................................................ (13 ) (48 ) (11)
Interest Receivable and Other Assets.............................. (2,316 ) (2,297 ) (78)
Interest Payable and Other Liabilities................................... (1,308 ) 2,393 428
Unearned Income................................................... (356 ) (205 ) (332)
---- ---- ----
Total Adjustments.............................................. (2,107 ) 1,326 1,712
----- ----- -----
Net Cash from Operating Activities....................................... 4,552 7,775 7,333
----- ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... (13,938 ) (1,002 ) 740
Proceeds from Maturities of Other Short-term Investments............. --- 996 7,030
Purchase of Other Short-term Investments............................. --- --- (1,966)
Proceeds from Maturities of Securities Available-for-Sale............ 86,449 57,641 39,156
Proceeds from Sales of Securities Available-for-Sale................. 15,051 --- 1,080
Purchase of Securities Available-for-Sale............................ (129,030 ) (58,601 ) (46,471)
Proceeds from Maturities of Securities Held-to-Maturity.............. 6,002 3,133 12,017
Proceeds from Sales of Securities Held-to-Maturity................... 362 --- ---
Purchase of Securities Held-to-Maturity.............................. (7,675 ) (4,134 ) (13,294)
Purchase of Loans.................................................... (5,998 ) (1,152 ) (1,576)
Proceeds from Sales of Loans......................................... 419 1,872 1,870
Loans Made to Customers, net of Payments Received.................... (19,317 ) (21,432 ) (23,947)
Proceeds from Sales of Fixed Assets.................................. --- 41 ---
Proceeds from Sales of Other Real Estate............................. 326 105 152
Property and Equipment Expenditures.................................. (2,320 ) (1,942 ) (1,405)
Acquire Affiliate.................................................... 2,934 --- ---
-----
Net Cash from Investing Activities............................. (66,735 ) (24,475 ) (26,614)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... 32,120 13,779 32,924
Net Change in Short-term Borrowings.................................. 1,480 (7,540 ) 683
Advances in Long-term Debt........................................... 9,000 --- 2,000
Repayments of Long-term Debt......................................... --- (1,000 ) (2,000)
Issuance / (Repurchase) of Common Stock.............................. --- 252 145
Dividends Paid....................................................... (2,834 ) (2,523 ) (2,124)
Exercise of Stock Options............................................ --- 3 7
Purchase of Interests in Fractional Shares........................... (33 ) (33 ) (30)
-- -- --
Net Cash from Financing Activities............................. 39,733 2,938 31,605
------ ----- -------
Net Change in Cash and Cash Equivalents.................................. (22,450 ) (13,762 ) 12,324
Cash and Cash Equivalents at Beginning of Year....................... 40,390 54,152 41,828
------ ------ ------
Cash and Cash Equivalents at End of Year............................. $ 17,940 $ 40,390 $ 54,152
======== ======== ========
Cash Paid During the Year for:
Interest.............................................................. $ 20,824 $ 20,340 $ 19,432
Income Taxes.......................................................... 2,838 3,011 2,677
See accompanying notes to consolidated financial statements.
13.3-18
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------
Common
Stock/ Accumulated
Additional Other Total
Paid-in Retained Comprehensive Shareholders'
Capital Earnings Income Equity
Balances, January 1, 1996
(as previously reported for
German American Bancorp)................. $ 25,403 $ 19,563 $ 822 $ 45,788
Retroactive restatement for Pooling of
Interests (Citizens - 928,475 shares
issued).................................. 4,000 4,580 16 8,596
Balances, January 1, 1996 as restated....... 29,403 24,143 838 54,384
Comprehensive Income:
Net Income............................... 5,621 5,621
Change in Net Unrealized Gain / (Loss)
on Securities Available-for-Sale...... (343 ) (343)
Total Comprehensive Income.......... 5,278
Cash Dividends ($.32 per Common Share,
as restated for pooling of interests).... (2,124) (2,124)
Issuance of 3,899 Shares of Common Stock
pursuant to Dividend Reinvestment Plan... 145 145
Purchase and Retirement of 6,400 Shares
pursuant to Exercise of Stock Options.... (85 ) (123) (208)
Issuance of 10,394 Shares upon Exercise
of Stock Options......................... 215 215
5% Stock Dividend (90,841 Shares).......... 3,362 (3,362) 0
Purchase of Interest in Fractional Shares... (30) (30)
Balances, December 31, 1996 as restated..... 33,040 24,125 495 57,660
Comprehensive Income:
Net Income............................... 6,449 6,449
Change in Net Unrealized Gain / (Loss)
on Securities Available-for-Sale...... 272 272
Total Comprehensive Income.......... 6,721
Cash Dividends ($.38 per Common Share,
as restated for pooling of interests).... (2,523) (2,523)
Issuance of 6,629 Shares of Common Stock
pursuant to Dividend Reinvestment Plan... 252 252
Purchase and Retirement of 11,338 Shares
pursuant to Exercise of Stock Options.... (156 ) (274) (430)
Issuance of 15,818 Shares upon Exercise of
Stock Options............................ 432 432
Two for One Stock Split (2,546,041 Shares).. 2,546 (2,546) 0
5% Stock Dividend (253,952 Shares).......... 8,253 (8,253) 0
Purchase of Interest in Fractional Shares... (33) (33)
Balances, December 31, 1997 as restated..... 44,367 16,945 767 62,079
Add: Acquired Affiliate (Francisco - 67,203
shares Issued)........................... 818 652 1,470
Comprehensive Income:
Net Income............................... 6,659 6,659
Change in Net Unrealized Gain / (Loss)
on Securities Available-for-Sale...... 80 80
Total Comprehensive Income.......... 6,739
Cash Dividends ($.43 per Common Share,
as restated for pooling of interests).... (2,834) (2,834)
Purchase and Retirement of 1,794 Shares
pursuant to Exercise of Stock Options ... (13 ) (42) (55)
Issuance of 4,545 Shares upon exercise of
Stock Options............................ 55 55
5% Stock Dividend (316,337 Shares).......... 8,146 (8,146) 0
Purchase of Interest in Fractional Shares .. (33) (33)
Balances, December 31, 1998................. $ 53,373 $ 13,201 $ 847 $ 67,421
========= ======== ========= ========
See accompanying notes to consolidated financial statements.
13.3-19
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
German American Bancorp operates primarily in the banking industry, which
accounts for over 90% of its revenues, operating income and identifiable assets.
German American Bancorp generates commercial, installment and mortgage loans and
receives deposits from customers through its locations in the Indiana counties
of Dubois, Daviess, Gibson, Knox, Martin, Pike, Perry and Spencer. While the
overall loan portfolio is diversified among a variety of individual borrowers, a
significant portion of these borrowers are dependent on the agriculture,
poultry, and wood furniture manufacturing industries. Although wood furniture
manufacturers employ a significant number of people in the Company's market
area, the Company does not have a concentration of credit to companies engaged
in that industry. The majority of the Company's loans are secured by specific
items of collateral including business assets, consumer assets and real
property. These financial statements include the accounts of German American
Bancorp and its wholly-owned subsidiaries, The German American Bank; First State
Bank, Southwest Indiana; German American Holdings Corporation, (parent of both
Citizens State Bank and Peoples National Bank); and GAB Mortgage Corp.
Significant intercompany balances and transactions have been eliminated in
consolidation. Certain items in the 1997 and 1996 financial statements have been
reclassified to correspond with the 1998 presentation.
Use of Estimates
Management must make estimates and assumptions in preparing financial
statements that affect the amounts reported therein and the disclosures
provided. These estimates and assumptions may change in the future and
accordingly, results could differ. Estimates that are susceptible to change in
the near term include the allowance for loan losses, the determination and
carrying value of impaired loans, and the fair value of financial instruments.
Securities
Securities classified as available-for-sale are securities that the Company
intends to hold for an indefinite period of time, but not necessarily until
maturity. These include securities that management may use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, or similar reasons. Securities held as
available-for-sale are reported at market value with unrealized gains or losses
included as a separate component of equity, net of tax.
Securities classified as held-to-maturity are securities that the Company
has both the ability and positive intent to hold to maturity. Securities
held-to-maturity are carried at amortized cost.
Premium amortization is deducted from, and discount accretion is added to,
interest income using the level yield method. The cost of securities sold is
computed on the identified securities method.
Loans
Interest is accrued over the term of the loans based on the principal
balance outstanding. Loans are placed on a nonaccrual status when scheduled
principal or interest payments are past due 90 days or more, unless the loan is
well secured and in the process of collection.
The carrying values of impaired loans (as explained below in "Allowance for
Loan Losses") are periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such. Other cash payments are reported as reductions in
carrying value, while increases or decreases due to changes in estimates of
future payments and due to the passage of time are reported as increases or
decreases to bad debt expense.
The Company defers loan fees and certain direct loan origination costs.
Deferred amounts are reported in the balance sheet as part of loans and are
recognized into interest income over the term of the loan based on the level
yield method.
13.3-20
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance for loan losses required based on past loan
loss experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
Loan impairment is reported when full repayment under the terms of the loan
is not expected. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported net, at the present value of estimated future cash
flows using the loan's existing rate, or at the fair value of collateral if
repayment is expected solely from the collateral. Smaller balance homogeneous
loans are evaluated for impairment in total. Such loans include real estate
loans secured by one-to-four family residences and loans to individuals for
household, family and other personal expenditures. Commercial, agricultural and
poultry loans are evaluated individually for impairment. When analysis of
borrower operating results and financial condition indicates that underlying
cash flows of the borrower's business are not adequate to meet its debt service
requirements, the loan is evaluated for impairment. Often this is associated
with a delay or shortfall in payments of more than 60 days. Nonaccrual loans are
generally also considered impaired. Impaired loans, or portions thereof, are
charged off when deemed uncollectible.
Premises, Furniture, and Equipment
Premises, Furniture and Equipment are stated at cost less accumulated
depreciation. Premises and related components are depreciated on the
straight-line method with useful lives ranging from 10 to 40 years. Furniture
and equipment are primarily depreciated using straight-line methods with useful
lives ranging from 3 to 12 years. Maintenance and repairs are expensed and major
improvements are capitalized. These assets are reviewed for impairment when
events indicate the carrying amount may not be recoverable.
Other Real Estate
Other Real Estate is carried at the lower of cost or fair value, less
estimated selling costs. Expenses incurred in carrying Other Real Estate are
charged to operations as incurred.
Intangible Assets
Intangible Assets are comprised of core deposit intangibles ($173 and $247
at December 31, 1998 and 1997, respectively) and goodwill ($1,210 and $1,325 at
December 31, 1998 and 1997, respectively). Core deposit intangibles are
amortized on an accelerated method over ten years and goodwill is amortized on a
straight-line basis over fifteen years. Core Deposit Intangibles and Goodwill
are assessed for impairment based on estimated undiscounted cash flows, and
written down if necessary.
Stock Compensation
Expense for employee compensation under stock option plans is reported only
if options are granted below market price at grant date. Pro forma disclosures
of net income and earnings per share are provided as if the fair value method of
Financial Accounting Standard No. 123 was used for stock-based compensation.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which are also recognized as a separate component of equity.
The accounting standard that requires reporting comprehensive income first
applies for 1998, with prior information comparably restated.
13.3-21
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Income Taxes
Deferred tax liabilities and assets are determined at each balance sheet
date. They are measured by applying enacted tax laws to future amounts that will
result from differences in the financial statement and tax basis of assets and
liabilities. Recognition of deferred tax assets is limited by the establishment
of a valuation reserve unless management concludes that the assets will more
likely than not result in future tax benefits to the Company. Income tax expense
is the amount due on the current year tax returns plus or minus the change in
deferred taxes.
Earnings Per Share
Basic and diluted earnings per share are computed under a new accounting
standard effective in the quarter ended December 31, 1997. All prior amounts
have been restated to be comparable. Basic earnings per share is based on net
income divided by the weighted average number of shares outstanding during the
period. Diluted earnings per share shows the dilutive effect of additional
common shares issuable under stock options.
Cash Flow Reporting
The Company reports net cash flows for customer loan transactions, deposit
transactions and deposits made with other financial institutions. Cash and cash
equivalents are defined to include cash on hand, demand deposits in other
institutions and Federal Funds Sold.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 19. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on- and off-balance sheet financial
instruments do not include the value of anticipated future business, or the
values of assets and liabilities not considered financial instruments.
New Accounting Pronouncements
Beginning January 1, 2000, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this pronouncement is not expected
to have a material effect on the Company's financial results, but the effect
will depend on derivative holdings when this standard is adopted.
NOTE 2 - Securities
The amortized cost and estimated market values of Securities as of December
31, 1998 are as follows:
Gross Gross Estimated
Securities Available-for-Sale: Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $63,605 $213 $(30) $63,788
Obligations of State and Political Subdivisions............. 29,103 1,443 (91) 30,455
Asset-/Mortgage-backed Securities........................... 41,913 50 (183) 41,780
------ -- ---- ------
Total................................................... $134,621 $1,706 $(304) $136,023
======== ====== ===== ========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions............. $27,591 $1,159 $(13) $28,737
Asset-/Mortgage-backed Securities........................... 1,202 9 --- 1,211
Other Securities............................................ 2,084 --- --- 2,084
----- --- --- -----
Total................................................... $30,877 $1,168 $(13) $32,032
======= ====== ==== =======
13.3-22
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
The amortized cost and estimated market values of Securities as of December 31,
1997 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
Securities Available-for-Sale:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $58,544 $99 $(68) $58,575
Obligations of State and Political Subdivisions............. 20,448 1,224 (2) 21,670
Asset-/Mortgage-backed Securities........................... 15,668 88 (95) 15,661
Corporate Securities........................................ 4,528 23 (22) 4,529
Other Securities............................................ 1 13 --- 14
- -- --- --
Total................................................... $99,189 $1,447 $(187) $100,449
======= ====== ===== ========
Securities Held-to-Maturity:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $5,598 $ 4 $(1) $5,601
Obligations of State and Political Subdivisions............. 24,983 1,197 (15) 26,165
Asset-/Mortgage-backed Securities........................... 2,369 32 (14) 2,387
Corporate Securities........................................ 311 --- (8) 303
Other Securities............................................ 2,121 --- --- 2,121
----- --- --- -----
Total................................................... $35,382 $1,233 $(38) $36,577
======= ====== ===== =======
The amortized cost and estimated market values of Securities at December 31,
1998 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
Asset-backed, Mortgage-backed and certain Other Securities are not due at a
single maturity date and are shown separately.
Estimated
Amortized Market
Cost Value
Securities Available-for-Sale:
Due in one year or less..................................... $3,135 $3,161
Due after one year through five years....................... 35,853 36,271
Due after five years through ten years...................... 34,734 35,042
Due after ten years......................................... 18,986 19,769
Asset-/Mortgage-backed Securities........................... 41,913 41,780
------ ------
Totals.................................................. $134,621 $136,023
======== ========
Securities Held-to-Maturity:
Due in one year or less..................................... $2,126 $2,135
Due after one year through five years....................... 4,350 4,452
Due after five years through ten years...................... 8,889 9,282
Due after ten years......................................... 12,226 12,868
Asset-/Mortgage-backed Securities........................... 1,202 1,211
Other Securities............................................ 2,084 2,084
----- -----
Totals.................................................. $30,877 $32,032
======= =======
Sales of Securities are summarized below:
1998 1997 1996
---- ---- ----
Available- Held-to- Available- Held-to- Available- Held-to-
for-Sale Maturity for-Sale Maturity for-Sale Maturity
Proceeds from Sales........................ $15,051 $ 362 $ --- $ --- $1,080 $ ---
Gross Gains on Sales....................... 77 10 --- --- 76 ---
Gross Losses on Sales...................... (75 ) (6 ) --- --- (3) ---
Income Taxes on Gross Gains................ 30 4 --- --- 30 ---
Income Taxes on Gross Losses............... (30 ) (2 ) --- --- (1) ---
13.3-23
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
Sales of securities held-to-maturity in 1998 consisted of mortgage-backed
securities for which payment of more than 85% of principal had occurred.
The carrying value of securities pledged to secure repurchase agreements,
public and trust deposits, and for other purposes as required by law was $19,851
and $10,967 as of December 31, 1998 and 1997, respectively.
No investment securities of an individual issuer exceeded ten percent of
German American Bancorp shareholders' equity at December 31, 1998.
Investments in state and political subdivisions and corporate obligations
are generally required by policy to be investment grade as established by
national rating organizations. However, the purchase of non-rated Indiana
municipal securities is permitted by policy when the inherent quality of the
issue is clearly evident to management. These investments are actively traded
and have a readily available market valuation. Market values of these
investments are reviewed quarterly with market values being obtained from an
independent rating service or broker.
At December 31, 1998 and 1997, U.S. Government Agency structured notes,
consisting primarily of step-up and single-index bonds, with respective
amortized costs of $5,985 and $5,200 and fair values of $5,985 and $5,186 were
included in securities available-for-sale.
Collateralized mortgage obligations (CMO's) and real estate mortgage
investment conduits (REMIC's), all of which are issued by U.S. Government
Agencies and the majority of which are fixed rate, comprised 75% of
Mortgage-backed securities.
NOTE 3 - Loans
Loans, as presented on the balance sheet, are comprised of the following
classifications at December 31,
1998 1997
Real Estate Loans Secured by 1- 4 Family Residential Properties......................... $138,710 $126,287
Commercial and Industrial Loans......................................................... 127,384 110,749
Loans to Individuals for Household, Family and Other Personal Expenditures.............. 81,891 79,378
Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers............ 62,736 60,421
Economic Development Commission Bonds................................................... 500 500
Lease Financing......................................................................... 821 1,045
--- -----
Totals.............................................................................. $412,042 $378,380
======== ========
Nonperforming loans were as follows at December 31:
Loans past due over 90 days and accruing................................................ $1,169 $2,832
Non-accrual loans....................................................................... 1,920 1,238
----- -----
Totals.............................................................................. $3,089 $4,070
====== ======
Information regarding impaired loans is as follows:
1998 1997
Year-end loans with no allowance for loan losses allocated.............................. $ 613 $ 507
Year-end loans with allowance for loan losses allocated................................. 543 2,272
Amount of allowance allocated........................................................... 151 358
Average balance of impaired loans during the year....................................... 2,297 2,910
Interest income recognized during impairment............................................ 212 217
Interest income recognized on cash basis................................................ 117 203
13.3-24
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 3 - Loans (Continued)
Certain directors, executive officers, and principal shareholders of the
Company, including their immediate families and companies in which they are
principal owners, were loan customers of the Company during 1998. A summary of
the activity of these loans is as follows:
Balance Changes Deductions Balance
January 1, in Persons December 31,
1998 Additions Included Collected Charged-off 1998
- -------------------------------------------------------------------------------------------------------------------------------
$ 12,269 $ 18,677 $ --- $ (11,791) $ --- $ 19,155
Total loans serviced for the Federal Home Loan Mortgage Corporation were
$2,545 at December 31, 1998 and $3,808 at December 31, 1997. These loans are not
reflected on the consolidated balance sheet.
NOTE 4 - Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows:
1998 1997 1996
---- ---- ----
Balance as of January 1................................ $7,416 $7,144 $7,552
Allowance of Acquired Subsidiary....................... 80 --- ---
Provision for Loan Losses.............................. 583 400 345
Recoveries of Prior Loan Losses........................ 362 819 320
Loan Losses Charged to the Allowance................... (1,583) (947) (1,073)
----- --- -----
Balance as of December 31.............................. $6,858 $7,416 $7,144
====== ====== ======
NOTE 5 - Premises, Furniture, and Equipment
Premises, furniture, and equipment as presented on the balance sheet is
comprised of the following classifications at December 31,
1998 1997
---- ----
Land............................................................................... $2,663 $2,376
Buildings and Improvements......................................................... 14,325 13,511
Furniture and Equipment............................................................ 9,871 8,225
----- -----
Total Premises, Furniture and Equipment........................................ 26,859 24,112
Less: Accumulated Depreciation................................................ (12,140) (10,921)
------ ------
Total....................................................................... $14,719 $13,191
======= =======
Depreciation expense was $1,146, $1,151 and $1,136 for 1998, 1997 and 1996,
respectively.
NOTE 6 - Deposits
At year-end 1998, interest-bearing deposits include $154,666 of demand and
savings deposits and $326,814 of time deposits. Stated maturities of time
deposits were as follows:
1999............................................................. $214,183
2000............................................................. 81,649
2001............................................................. 16,467
2002............................................................. 7,107
2003............................................................. 7,392
Thereaft......................................................... 16
---
Total........................................................... $326,814
========
13.3-25
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 7 - Short-term Borrowings
The Company's funding sources include repurchase agreements and federal
funds purchased. Repurchase agreements are borrowings from customers secured by
a pledge of securities. The Company retains possession of and control over such
securities. Information regarding repurchase agreements and short-term
borrowings at December 31, 1998 and 1997 is as follows:
1998 1997
Balances at December 31:
Repurchase Agreements............................. $6,903 $5,548
Federal Funds Purchased........................... 125 ---
--- ---
Total Short-term Borrowings.................... $7,028 $5,548
====== ======
NOTE 8 - Long-term Debt
Long-term debt outstanding consists of the following at December 31:
1998 1997
Advances from FHLB collateralized by qualifying
mortgages, investment securities and
mortgage-backed securities.................. $ 9,000 $ ---
======= ===========
The interest rates on the advances from FHLB at December 31, 1998 were as
follows: $1,000,000 at 5.02%, $500,000 at 5.04%, $5,000,000 at 5.07%, $1,500,000
at 5.19%, and $1,000,000 at 5.95%. All of these advances are at fixed rates. The
weighted average interest rate on all borrowings was 5.18%.
Scheduled principal payments on advances from FHLB at December 31, 1998 are as
follows:
1999...................................................... $335
2000...................................................... 541
2001...................................................... 693
2002...................................................... 619
2003...................................................... 2,233
Thereafter................................................ 4,579
-----
Total..................................................... $9,000
======
NOTE 9 - Employee Benefit Plans
The Company and all its banking affiliates provide a non-contributory
trusteed 401(k) deferred compensation and profit sharing plan, which covers
substantially all full-time employees. The banks agree to match certain employee
contributions under the 401K portion of the plan, while profit sharing
contributions are discretionary and are subject to determination by the Board of
Directors. Employees of Citizens State and FSB Financial Corporation joined this
plan in June 1998 while Peoples joined in April 1997.
Contributions to this plan were $609, $549 and $445 for 1998, 1997 and 1996,
respectively.
Citizens State has a noncontributory defined benefit pension plan with
benefits based on years of service and compensation prior to retirement. The
Projected Benefit Obligation under this plan was frozen at August 1, 1998, and a
$126 loss was recorded at curtailment. The Company plans to terminate the plan.
The plan's funded status at December 31, 1998 is as follows:
Plan assets at fair value $648
Projected benefit obligation for service rendered to date (829)
Unrecognized loss 40
Unrecognized transition asset (24)
---
Accrued Pension Payable $(165)
13.3-26
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
Prior to their merger with the Company, Peoples had a non-contributory
defined benefit pension plan. The Projected Benefit Obligation under this plan
was frozen at April 30, 1997. The plan was terminated in 1998. No curtailment
gain was recorded in 1997, due to immateriality. An $83 termination settlement
gain, net of excise tax, was recognized in 1998.
NOTE 10 - Stock Options
The Company maintains a Stock Option Plan which reserves 176,625 shares of
Common Stock (as adjusted for subsequent stock splits and subject to further
customary anti-dilution adjustments) for the purpose of grants of options to
officers and other employees of the Company. Options may be designated as
"incentive stock options" under the Internal Revenue Code of 1986, or as
nonqualified options. While the date after which options are first exercisable
is determined by the Stock Option Committee of the Company, no stock option may
be exercised after ten years from the date of grant (twenty years in the case of
nonqualified stock options). The exercise price of stock options granted
pursuant to the Plan must be no less than the fair market value of the Common
Stock on the date of the grant.
The Plan authorizes an optionee to pay the exercise price of options in cash
or in common shares of the Company or in some combination of cash and common
shares. An optionee may tender already-owned common shares to the Company in
exercise of an option. In this instance, the Company is obligated to use its
best efforts to issue to such optionee a replacement option for the number of
shares tendered, as follows: (a) of the same type as the option exercised
(either an incentive stock option or a non-qualified option); (b) with the same
expiration date; and, (c) priced at the fair market value of the stock on that
date. Replacement options may not be exercised until one year from the date of
grant.
Changes in options outstanding were as follows, as adjusted to reflect stock
dividends and splits:
Number Weighted-average
of Options Exercise Price
Outstanding, beginning of 1996..................................... 53,268 $ 9.93
Granted............................................................ 14,818 13.96
Exercised.......................................................... (24,063 ) 8.91
------
Outstanding, end of 1996........................................... 44,023 11.84
Granted............................................................ 25,001 17.26
Exercised.......................................................... (34,879 ) 12.42
-------
Outstanding, end of 1997........................................... 34,145 15.19
Granted............................................................ 62,784 23.51
Exercised.......................................................... (4,772 ) 11.56
-----
Outstanding, end of 1998........................................... 92,157 21.05
======
Options exercisable at year-end are as follows:
1998............................................................... 90,273 $20.87
Financial Accounting Standard No. 123 requires pro forma disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation. Accordingly, the following pro forma information presents
net income and earnings per share had the Standard's fair value method been used
to measure compensation cost for stock option plans. Compensation cost actually
recognized for stock options was $0 for 1998, 1997 and 1996. In future years,
the pro forma effect of not applying this standard may increase as additional
options are granted. At year-end 1998, options outstanding have a weighted
average remaining life of 14.44 years, with exercise prices ranging from $8.91
to $30.05.
1998 1997 1996
---- ---- ----
Pro forma Net Income............................................... $6,076 $6,408 $5,608
Pro forma:
Earnings per Share............................................. $0.91 $0.96 $0.84
Diluted Earnings per share..................................... $0.91 $0.96 $0.84
13.3-27
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------
NOTE 10 - Stock Options (Continued)
For options granted during 1998, 1997 and 1996, the weighted-average fair
values at grant date are $9.75, $1.65 and $0.87, respectively. The fair value of
options granted during 1998, 1997 and 1996 was estimated using the following
weighted-average information: risk-free interest rate of 5.11%, 5.58% and 5.41%,
expected life of 9.7, 1.0, and 1.0 years, expected volatility of stock price of
.32, .18 and .10, and expected dividends of 1.64%, 2.06% and 2.38% per year.
NOTE 11 - Income Taxes
The provision for income taxes consists of the following:
1998 1997 1996
---- ---- ----
Currently Payable............................................. $2,976 $3,360 $2,671
Deferred...................................................... (20) (196) 233
Net Operating Loss Carryforward............................... (47) (47) (47)
-- --- ---
Total..................................................... $2,909 $3,117 $2,857
====== ====== ======
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax
income as follows:
1998 1997 1996
---- ---- ----
Statutory Rate Times Pre-tax Income........................... $3,253 $3,252 $2,883
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments.............. (965) (785) (739)
Non-deductible Merger Costs............................... 119 73 149
State Income Tax, Net of Federal Tax Effect............... 569 582 526
Other Differences......................................... (67) (5) 38
-- -- --
Total Income Taxes...................................... $2,909 $3,117 $2,857
====== ====== ======
The net deferred tax asset at December 31 consists of the following:
1998 1997
---- ----
Deferred Tax Assets:
Allowance for Loan Losses................................. $1,783 $1,697
Net Operating Loss Carryforwards.......................... 140 187
Deferred Compensation and Employee Benefits............... 367 330
Other..................................................... 185 78
--- --
Total Deferred Tax Assets............................... 2,475 2,292
----- -----
Deferred Tax Liabilities:
Depreciation.............................................. (372) (349)
Leasing Activities, Net................................... (153) (202)
Purchase Accounting Adjustments........................... (17) (29)
Unrealized Appreciation on Securities..................... (556) (493)
Other..................................................... (203) (49)
--- ---
Total Deferred Tax Liabilities.......................... (1,301) (1,122)
----- -----
Valuation Allowance........................................... (48) (48)
-- --
Net Deferred Tax Asset.................................. $1,126 $1,122
====== ======
13.3-28
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
The Company has $411 of federal tax net operating loss carryforwards expiring in
the following amounts:
Year Amount Year Amount
---------------------------------------------------------------
2001 $116 2007 $105
2002 128 2008 62
NOTE 12 - Per Share Data
The Board of Directors declared and paid a 5% stock dividend in 1998, 1997
and 1996. In lieu of issuing fractional shares, the Company purchased from
shareholders their fractional interest. Additionally, the Board declared and
paid a two-for-one stock split in 1997. Earnings and dividend per share amounts
have been retroactively computed as though these additionally issued shares had
been outstanding for all periods presented. The computation of Earnings per
Share and Diluted Earnings per Share are provided below:
1998 1997 1996
---- ---- ----
Earnings per Share:
Net Income.................................................... $6,659 $6,449 $5,621
Weighted Average Shares Outstanding........................... 6,663,667 6,655,742 6,647,331
Earnings per Share........................................ $1.00 $0.97 $0.85
Diluted Earnings per Share:
Net Income.................................................... $6,659 $6,449 $5,621
Weighted Average Shares Outstanding........................... 6,663,667 6,655,742 6,647,331
Stock Options................................................. 90,273 34,145 44,023
Assumed Shares Repurchased upon Exercise of Options........... (69,610) (25,177) (34,545)
------- ------- -------
Diluted Weighted Average Shares Outstanding............... 6,684,330 6,664,710 6,656,809
Diluted Earnings per Share................................ $1.00 $0.97 $0.84
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31,
1998, 1997, and 1996 was $125, $119, and $106, respectively, including amounts
paid under short-term cancelable leases.
At December 31, 1998, the German American Bank and First State Bank
subleased space for three branch-banking facilities from a company controlled by
a director and principal shareholder of the Company. The subleases expire in
2000, 2001 and 2008 with various renewal options provided. Aggregate annual
rental payments to this Director's company totaled $56 for 1998. Exercise of the
Bank's sublease renewal options is contingent upon the Director's company
renewing its primary leases. The following is a schedule of future minimum lease
payments:
Years Ending December 31:
Premises Equipment Total
1999................ $79 $1 $80
2000................ 68 --- 68
2001................ 55 --- 55
2002................ 50 --- 50
2003................ 50 --- 50
Thereafter.......... 258 --- 258
--- --- ---
Total............ $560 $1 $561
==== == ====
13.3-29
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------
NOTE 14 - Commitments and Off-balance Sheet Items
In the normal course of business, there are various commitments and
contingent liabilities, such as guarantees and commitments to extend credit,
which are not reflected in the accompanying consolidated financial statements.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to make loans, standby
letters of credit, and financial guarantees is represented by the contractual
amount of those instruments. The Company uses the same credit policy to make
such commitments as it uses for on-balance sheet items.
Commitments and contingent liabilities are summarized as follows, at December
31,
1998 1997
---- ----
Commitments to Fund Loans:
Home Equity.......................... $11,016 $9,726
Credit Card Lines.................... 6,030 4,634
Commercial Operating Lines........... 28,470 32,225
------ ------
Total Commitments to Fund Loans.... $45,516 $46,585
======= =======
Standby Letters of Credit............... $1,690 $2,871
Since many commitments to make loans expire without being used, these
amounts do not necessarily represent future cash commitments. Collateral
obtained upon exercise of the commitment is determined using management's credit
evaluation of the borrower, and may include accounts receivable, inventory,
property, land and other items. The approximate duration of these commitments is
generally one year or less. These commitments are generally associated with
variable interest rate agreements.
The Company self-insures employee health benefits for all affiliates,
including employees of Citizens State and FSB Financial Corporation beginning
with the third quarter of 1998. Stop loss insurance covers annual losses
exceeding $50 per covered individual and approximately $623 in the aggregate.
Management's policy is to establish a reserve for claims not submitted by a
charge to earnings based on prior experience. Charges to earnings were $526,
$517 and $487 for 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, respectively, the affiliate banks were
required to have $3,220 and $3,054 on deposit with the Federal Reserve, or as
cash on hand. These reserves do not earn interest.
NOTE 15 - Non-cash Investing Activities
1998 1997 1996
---- ---- ----
Loans Transferred to Other Real Estate..................... $95 $42 $25
Securities Transferred to Available-for-Sale............... 8,034 --- ---
The above data should be read in conjunction with the Consolidated Statements
of Cash Flows. 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 liquidity and interest
rate risk policies.
13.3-30
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 16 - Parent Company Financial Statements
The condensed financial statements of German American Bancorp as of December
31, 1998 and 1997, and for each of the three years ended December 31, 1998,
1997, and 1996 are as follows:
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
---- ----
ASSETS
Cash........................................................................... $3,704 $1,336
Securities Available-for-Sale, at Market....................................... 3,471 1,761
Investment in Subsidiary Banks and Bank Holding Company........................ 56,418 57,248
Investment in GAB Mortgage Corp................................................ 291 286
Furniture and Equipment........................................................ 2,095 1,371
Other Assets................................................................... 1,823 268
----- ---
Total Assets................................................................ $67,802 $62,270
======= =======
LIABILITIES........................................................................ $ 381 $ 191
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock................................................................... 6,665 6,279
Additional Paid-in Capital..................................................... 46,708 38,088
Retained Earnings.............................................................. 13,201 16,945
Accumulated Other Comprehensive Income......................................... 847 767
--- ---
Total Shareholders' Equity.................................................. 67,421 62,079
------ ------
Total Liabilities and Shareholders' Equity.................................. $67,802 $62,270
======= =======
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
INCOME
Dividends from Subsidiary Banks...................................... $10,750 $5,190 $5,826
Dividend and Interest Income......................................... 256 129 110
Fee Income........................................................... 411 407 374
Securities Gains, net................................................ --- --- 74
Other Income............................................................. 19 --- 5
-- --- -
Total Income............................................................. 11,436 5,726 6,389
------ ----- -----
EXPENSES
Salaries and Benefits................................................ 1,827 1,434 1,330
Professional Fees.................................................... 760 378 601
Occupancy and Equipment Expense...................................... 286 246 260
Other Expenses....................................................... 376 278 251
--- --- ---
Total Expenses........................................................... 3,249 2,336 2,442
----- ----- -----
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES................................. 8,187 3,390 3,947
Income Tax Benefit....................................................... 953 655 556
--- --- ---
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES............................................... 9,140 4,045 4,503
Equity in Undistributed Income of Subsidiaries........................... (2,481) 2,404 1,118
------- ----- -----
NET INCOME............................................................... 6,659 6,449 5,621
Other Comprehensive Income:
Unrealized gain/(loss) on Securities, net............................ 80 272 (343)
-- --- ---
Total Comprehensive Income...................................... $6,739 $6,721 $5,278
====== ====== ======
13.3-31
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 16 - Parent Company Financial Statements (continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $6,659 $6,449 $5,621
Adjustments to Reconcile Net Income to Net Cash from Operations
Amortization on Securities........................................ 38 36 32
Depreciation............................................................. 157 140 117
Gain on Sale of Securities, net................................... --- --- (74)
Change in Other Assets............................................ (1,550) (12) (40)
Change in Other Liabilities....................................... 190 (286) 370
Equity in Undistributed Income of Subsidiaries.................... 2,481 (2,404) (1,118)
----- ------ ------
Total Adjustments............................................... 1,316 (2,526) (713)
----- ------ ----
Net Cash from Operating Activities................................ 7,975 3,923 4,908
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to Affiliate Banks.............................. (150) --- (632)
Purchase of Securities Available-for-Sale............................ (2,229) --- (1,815)
Proceeds from Sales of Securities Available-for-Sale................. --- --- 88
Proceeds from Maturities of Securities Available-for-Sale............ 520 --- ---
Property and Equipment Expenditures.................................. (881) (726) (589)
--- --- ---
Net Cash from Investing Activities................................ (2,740) (726) (2,948)
----- --- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid....................................................... (2,834) (2,523) (2,124)
Exercise of Stock Options............................................ --- 3 7
Issuance (Repurchase) of Common Stock................................ --- 252 145
Purchase of Interest in Fractional Shares............................ (33) (33) (30)
-- -- --
Net Cash from Financing Activities................................ (2,867) (2,301) (2,002)
----- ----- -----
Net Change in Cash and Cash Equivalents.................................. 2,368 896 (42)
Cash and Cash Equivalents at Beginning of Year....................... 1,336 440 482
----- --- ---
Cash and Cash Equivalents at End of Year............................. $3,704 $1,336 $440
====== ====== ====
NOTE 17 - Capital Requirements
The Company and affiliate Banks are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
The prompt corrective action regulations provide five classifications,
including well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
13.3-32
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 17 - Capital Requirements (continued)
At year-end 1998, consolidated and selected affiliate bank actual capital
levels and minimum required levels are presented below:
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Regulations:
Amount Ratio Amount Ratio Amount Ratio
Total Capital
(to Risk Weighted Assets)
Consolidated....................... $70,442 16.59% $33,968 8.00% $42,461 10.00%
German American Bank............... $25,226 13.05% $15,462 8.00% $19,328 10.00%
Peoples National Bank.............. $15,139 13.93% $8,693 8.00% $10,867 10.00%
Citizens State Bank................ $14,795 18.51% $6,393 8.00% $7,992 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated....................... $65,114 15.34% $16,984 4.00% $25,476 6.00%
German American Bank............... $22,810 11.80% $7,731 4.00% $11,597 6.00%
Peoples National Bank.............. $13,781 12.68% $4,347 4.00% $6,520 6.00%
Citizens State Bank................ $13,796 17.26% $3,197 4.00% $4,795 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated....................... $65,114 10.77% $24,183 4.00% $30,229 5.00%
German American Bank............... $22,810 7.94% $11,494 4.00% $14,367 5.00%
Peoples National Bank.............. $13,781 9.21% $5,980 4.00% $7,475 5.00%
Citizens State Bank................ $13,796 10.47% $5,270 4.00% $6,588 5.00%
Capital ratios for First State Bank are materially consistent with consolidated
capital ratios. The Company and all affiliate Banks at year-end 1998 were
categorized as well capitalized. Regulations require the maintenance of certain
capital levels at each affiliate bank, and may limit the dividends payable by
the affiliates to the holding company, or by the holding company to its
shareholders. At December 31, 1998 the affiliates had $1.5 million in retained
earnings available for dividends to the parent company without prior regulatory
approval.
NOTE 18 - Business Combinations
On March 4, 1997 the Company completed a merger with the parent company of
Peoples National Bank of Washington, Indiana ("Peoples") in which the Company
issued 1,356,703 shares for all the outstanding shares of Peoples, as adjusted
for all subsequent stock splits and stock dividends. This merger was accounted
for as a pooling of interests, with prior periods restated. Concurrent with this
transaction, The Union Bank, the Company's affiliate bank in Loogootee, Indiana,
combined with Peoples under the Peoples name and charter, creating a $150
million financial institution serving the Daviess and Martin County, Indiana
markets.
On June 1, 1998 the Company consummated mergers with the parent companies of
Citizens State Bank of Petersburg, Indiana ("CSB") and FSB Bank of Francisco,
Indiana ("FSB"). The Company issued 974,898 shares for all the outstanding
shares of CSB, and 70,563 shares for all the outstanding shares of FSB, as
adjusted for the December 1998 5% stock dividend. These mergers were accounted
for as poolings of interests. Prior periods were restated for the merger with
CSB, but were not restated for the merger with FSB, as restatement would not
have had a material impact on overall financial results. FSB Bank and an
existing affiliate, Community Trust Bank of Petersburg, were merged into the
Citizens State Bank charter, creating a $130 million financial institution
serving the Pike and Gibson County, Indiana markets.
13.3-33
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 18 - Business Combinations (continued)
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 their acquisitions:
January 1, 1998
Through
June 1, 1998 1997 1996
------------ ---- ----
Net Interest Income:
German American $8,518 $19,947 $18,678
CSB Bancorp 1,186 2,933 2,853
FSB Financial Corporation 250 --- (1) --- (1)
--- ---------- ----------
Combined $9,954 $22,880 $21,531
====== ======= =======
Net Income:
German American $2,548 $6,139 $4,894
CSB Bancorp 444 310 727
FSB Financial Corporation (64) --- (1) --- (1)
--- -------- --------
Combined $2,928 $6,449 $5,621
====== ===== ======
<FN>
(1) Prior year results were not adjusted for the effect of the merger with FSB
Financial Corporation, as restatement would not have had a material impact
on overall financial results. For the fiscal years ended September 30, 1997
and 1996, respectively, FSB Financial Corporation net interest income
totaled $604 and $542, and net losses totaled $41 and $16.
</FN>
On January 1, 1999 the Company acquired all the outstanding shares of The
Doty Agency, Inc. (Doty) for 62,000 shares of the Company's stock. Doty is a
general multi-line, full-service insurance agency with offices in Pike and Knox
Counties in Indiana. At December 31, 1998 Doty had unaudited total assets and
total shareholders' equity of $1,072 and $282, respectively.
On January 4, 1999, the Company acquired all the outstanding shares of 1ST
BANCORP for 2,040,000 shares of the Company's stock. 1ST BANCORP operates retail
and mortgage banking offices, a full-service insurance agency and a title
insurance company in Vincennes, Indiana. At December 31, 1998 1ST BANCORP had
unaudited total assets and total shareholder's equity of $251,049 and $24,235,
respectively.
Both mergers were accounted for as poolings of interests. These financial
statements exclude the effects of these mergers. Proforma results of operations
for the year ended December 31, 1998 are as follows, including 1ST BANCORP
results based on its fiscal year ended June 30, 1998:
German
American
(as reported 1ST
herein) BANCORP Doty Combined
Net Interest Income $24,082 $6,449 --- (2) $30,531
Net Income 6,659 1,911 --- (2) 8,570
Diluted Earnings Per Share $1.00 --- --- $0.98
<FN>
(2) Prior year results will not be adjusted for the effect of the merger with
Doty, as restatement would not have a material impact on overall financial
results. For the year ended December 31, 1998, Doty had net interest income
of $(24) and net income of $325.
</FN>
13.3-34
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 19 - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are
provided in the table below. Not all of the Company's assets and liabilities are
considered financial instruments, and therefore are not included in the table.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates were based on subjective judgments,
and therefore cannot be determined with precision.
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
Financial Assets:
Cash and Short-term Investments......................... 34,724 34,724 $43,188 $43,188
Securities Available-for-Sale........................... 136,023 136,023 100,449 100,449
Securities Held-to-Maturity............................. 30,877 32,032 35,382 36,577
Loans, net.............................................. 404,475 410,701 369,907 373,966
Accrued Interest Receivable............................. 6,727 6,727 5,771 5,771
Financial Liabilities:
Demand, Savings and Money Market Deposits............... (220,536) (220,536) (201,498) (201,498)
Other Time Deposits..................................... (326,814) (331,251) (299,535) (301,722)
Short-term Borrowings................................... (7,028) (7,028) (5,548) (5,548)
Long-term Debt.......................................... (9,000) (8,815) --- ---
Accrued Interest Payable................................ (2,741) (2,741) (2,632) (2,632)
Unrecognized Financial Instruments:
Commitments to extend Credit............................ --- --- --- ---
Standby Letters of Credit............................... --- --- --- ---
The carrying amounts of cash, short-term investments, and accrued interest
receivable are a reasonable estimate of their fair values. The fair values of
securities are based on quoted market prices or dealer quotes, if available, or
by using quoted market prices for similar instruments. The fair value of loans
are estimated by discounting future cash flows using the current rates at which
similar loans would be made for the average remaining maturities. The fair value
of demand deposits, savings accounts, money market deposits, short-term
borrowings and accrued interest payable is the amount payable on demand at the
reporting date. The fair value of fixed-maturity time deposits and long-term
borrowings are estimated using the rates currently offered on these instruments
for similar remaining maturities. Commitments to extend credit and standby
letters of credit are generally short-term or variable rate with minimal fees
charged. These instruments have no carrying value, which is also assumed to be
their fair value.
NOTE 20 - Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
1998 1997 1996
---- ---- ----
Unrealized holding gains and losses on
available-for-sale............................................ $148 $449 $(435)
Less: reclassification adjustments for gains
and losses later recognized in income......................... 6 --- 73
- --- --
Net unrealized gains and losses................................... 142 449 (508)
Tax Effect........................................................ 62 177 (165)
-- --- ---
Other comprehensive income........................................ $80 $272 $(343)
=== ==== ======
13.3-35
- --------------------------------------------------------------------------------
Independent Auditors' Report
Dollars in thousands
- --------------------------------------------------------------------------------
Board of Directors and Shareholders
German American Bancorp
Jasper, Indiana
We have audited the accompanying consolidated balance sheets of German
American Bancorp as of December 31, 1998 and 1997, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
The consolidated balance sheet as of December 31, 1997 and related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1997 and 1996 have been restated to
reflect the CSB Bancorp pooling of interests in 1998, as described in Note 18.
We did not audit the separate 1997 and 1996 financial statements of CSB Bancorp
as reflected in the pooling of interests, which statements reflect (in
thousands) total assets of $77,011 and total liabilities of $68,264 as of
December 31, 1997, and net income of $310 and $727 for the years ended December
31, 1997 and 1996. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for CSB Bancorp as of December 31, 1997 and for the years ended
December 31, 1997 and 1996, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of German American Bancorp as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998 in conformity
with generally accepted accounting principles.
Indianapolis, Indiana
February 11, 1999 Crowe, Chizek and Company LLP