UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1999
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the Transition Period from _______________ to
___________________
Commission File Number 0-11244
German American Bancorp
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1999
Common Stock, No par value 8,766,592
2
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets - March 31, 1999 and
December 31, 1998
Consolidated Statements of Income and Comprehensive Income --
Three Months Ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1999 and 1998
Notes to Consolidated Financial Statements --
March 31, 1999
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
b) Reports on form 8-K
SIGNATURES
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands except per share data)
March 31, December 31,
1999 1998
ASSETS
Cash and Noninterest-bearing Deposits $17,805 $18,097
Interest-bearing Deposits with Banks 31,750 31,316
Federal Funds Sold --- 175
--- ---
Cash and Cash Equivalents 49,555 49,588
Loans Held for Sale 7,005 2,449
Certificates of Deposit 1,089 1,299
Securities Available-for-Sale, at Market 160,716 151,527
Securities Held-to-Maturity, at Cost 28,143 48,346
Total Loans 614,583 598,936
Less: Unearned Income (592) (848)
Allowance for Loan Losses (8,748) (8,323)
----- -----
Loans, Net 605,243 589,765
Stock in FHLB of Indianapolis, at Cost 8,306 7,853
Premises, Furniture and Equipment, Net 18,213 17,796
Other Real Estate 1,738 1,156
Intangible Assets 1,903 1,841
Accrued Interest Receivable and Other Assets 19,591 25,305
------ ------
TOTAL ASSETS $901,502 $896,925
======== ========
LIABILITIES
Noninterest-bearing Deposits $65,829 $67,218
Interest-bearing Deposits 613,361 597,895
------- -------
Total Deposits 679,190 665,113
Short-term Borrowings 11,174 7,028
FHLB Advances and Other Long-term Debt 109,255 124,381
Accrued Interest Payable and Other Liabilities 9,719 9,127
----- -----
TOTAL LIABILITIES 809,338 805,649
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized 8,766 8,705
Preferred Stock, $10 par value; 500,000
shares authorized, none issued --- ---
Additional Paid-in Capital 48,395 47,844
Retained Earnings 34,955 33,916
Accumulated Other Comprehensive Income 48 811
-- ---
TOTAL SHAREHOLDERS' EQUITY 92,164 91,276
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $901,502 $896,925
======== ========
Common Shares issued and outstanding at end of period 8,766,592 8,704,592
========= =========
See accompanying notes to consolidated financial statements.
4
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three Months Ended
March 31,
1999 1998
INTEREST INCOME
Interest and Fees on Loans $13,008 $12,702
Interest on Federal Funds Sold 27 291
Interest on Short-term Investments 411 338
Interest and Dividends on Securities 2,896 2,893
----- -----
TOTAL INTEREST INCOME 16,342 16,224
------ ------
INTEREST EXPENSE
Interest on Deposits 6,836 7,122
Interest on Short-term Borrowings 171 51
Interest on Long-term Debt 1,460 1,433
----- -----
TOTAL INTEREST EXPENSE 8,467 8,606
----- -----
NET INTEREST INCOME 7,875 7,618
Provision for Loan Losses 369 154
--- ---
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 7,506 7,464
NONINTEREST INCOME
Income from Fiduciary Activities 69 82
Service Charges on Deposit Accounts 388 403
Investment Services Income 106 134
Insurance Premiums and Commissions 334 142
Other Charges, Commissions and Fees 392 265
Gain on Sales of Loans and Other Real Estate 221 61
Net Gain/(Loss) on Sales of Securities (5) 8
- -
TOTAL NONINTEREST INCOME 1,505 1,095
----- -----
NONINTEREST EXPENSE
Salaries and Employee Benefits 3,226 2,933
Occupancy Expense 418 394
Furniture and Equipment Expense 415 348
Computer Processing Fees 273 234
Professional Fees 224 223
Advertising and Promotions 157 155
Supplies 175 146
Other Operating Expenses 1,007 897
----- ---
TOTAL NONINTEREST EXPENSE 5,895 5,330
----- -----
Income before Income Taxes 3,116 3,229
Income Tax Expense 893 1,025
--- -----
Net Income $2,223 $2,204
====== ======
Earnings Per Share and Diluted
Earnings Per Share $0.25 $0.25
Dividends Paid per Share $0.12 $0.10
Comprehensive Income $1,460 $2,073
====== ======
See accompanying notes to consolidated financial statements.
5
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Three Months Ended
March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $2,223 $2,204
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Depreciation and Amortization 321 395
Provision for Loan Losses 369 154
Net Gain on Sales of Securities 5 (8)
Gain of Sales of Loans and Other Real Estate (221) (61)
Net Change in Loans Held for Sale 2,683 420
Loss on Investment in Limited Partnership 25 32
Change in Assets and Liabilities:
Interest Receivable and Other Assets 1,908 4,931
Interest Payable and Other Liabilities (228) (1,125)
--- -----
Total Adjustments 4,862 4,738
Net Cash from Operating Activities 7,085 6,942
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Certificates of Deposit 233 (13)
Proceeds from Maturities of Securities Available-for-Sale 7,534 25,335
Proceeds from Sales of Securities Available-for-Sales 953 6,017
Purchase of Securities Available-for-Sale (23,523) (20,240)
Proceeds from Maturities of Securities Held-to-Maturity 3,967 6,613
Proceeds from Sales of Securities Held-to-Maturity --- 388
Purchase of Securities Held-to-Maturity --- (325)
Proceeds from Sales of Loans --- 255
Purchase of Loans (4,059) ---
Loans Made to Customers, net of Payments Received (2,983) (14,901)
Acquire Affiliate (155) ---
Property and Equipment Expenditures (632) (120)
Proceeds from Sales of Other Real Estate --- 68
Other --- (11)
--- --
Net Cash from Investing Activities (18,665) 3,066
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits 6,943 (15,486)
Change in Short-term Borrowings 4,146 (805)
Advances of Long-term Debt 2,000 11,996
Repayments of Long-term Debt (481) (11,045)
Dividends Paid (1,052) (657)
Issue / (Repurchase ) of Common Stock --- (220)
Purchase Fractional Shares (9) ---
- ---
Net Cash from Financing Activities 11,547 (16,217)
Net Change in Cash and Cash Equivalents (33) (6,209)
Cash and Cash Equivalents at Beginning of Year 49,588 63,594
------ ------
Cash and Cash Equivalents at End of Period $49,555 $57,385
======= =======
See accompanying notes to consolidated financial statements.
6
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(unaudited)
Note 1 -- Basis of Presentation
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with Generally Accepted Accounting Principles
have been condensed or omitted. Except for adjustments resulting from the merger
transactions described below, all adjustments made by management to these
unaudited statements were of a normal recurring nature. It is suggested that
these consolidated financial statements and notes be read in conjunction with
the financial statements and notes thereto in the German American Bancorp's
December 31, 1998 Annual Report to Shareholders.
German American Bancorp (referred to herein as the "Company," the
"Corporation," or the "Registrant") is a multi-bank holding company organized in
Indiana in 1982. The Company's principal subsidiaries are The German American
Bank, Jasper, Indiana ("German American Bank"), First State Bank, Southwest
Indiana, Tell City, Indiana ("First State Bank"), First American Bank,
Vincennes, Indiana ("First American"), and German American Holdings Corporation
("GAHC"), an Indiana corporation that owns all of the outstanding capital stock
of both Citizens State Bank, Petersburg, Indiana ("Citizens State") and the
Peoples National Bank, Washington, Indiana ("Peoples"). The Company, through its
five bank subsidiaries, operates 25 banking offices and five full-service
insurance offices in eight contiguous counties in southwestern Indiana.
On June 1, 1998 the Company consummated mergers with the parent companies
of Citizens State and FSB Bank of Francisco, Indiana ("FSB Bank"). FSB Bank and
an existing affiliate, Community Trust Bank of Petersburg, Indiana were merged
into the Citizens State charter on that date. These mergers were accounted for
as poolings of interests. The reported operating results for periods prior to
June 1, 1998 have been retroactively adjusted to give the effect to the merger
with Citizens State. Prior period results do not include the effect of the
merger with FSB Bank, as restatement would not have resulted in a material
change in overall financial results.
In January 1999, the Company issued 2,039,665 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 interest. The reported
operating results for periods prior to the 1999 merger date have been
retroactively adjusted to give effect to the merger with 1ST BANCORP. Prior
period results do not include the effect of the merger with Doty, as restatement
would not have resulted in a material change in overall financial results. 1ST
BANCORP's subsidiaries included First Federal Bank, First Financial Insurance
Agency, Inc., and First Title Insurance Company, Inc. First Federal Bank, now
known as First American Bank, is headquartered in Vincennes, 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.
Prior to 1999, 1ST BANCORP'S financial statements were prepared on a June
30 fiscal year. Accordingly, the Company's calendar period financial statements
for periods prior to 1999 have been restated to include 1ST BANCORP fiscal
period financial statements (i.e., the Company's previously reported December
31, 1998 balances were combined with 1ST BANCORP June 30, 1998 balances). 1ST
BANCORP is combined with the Company on a calendar period basis for all 1999
periods. As a result of 1ST BANCORP'S prior fiscal reporting, the 1999 statement
of cash flows and Note 5 include "acquired affiliate" amounts to adjust from
fiscal to calendar period reporting.
Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized
appreciation on securities available-for-sale, net of tax.
7
Note 2 -- Per Share Data
The Board of Directors declared and paid a 5 percent stock dividend in
December 1998. In lieu of issuing fractional shares, the company purchased from
shareholders their fractional interest. The Company issued 995,678 shares
related to the mergers with the parent companies of Citizens State and FSB Bank
on June 1, 1998 and 2,101,665 shares related to the mergers of 1ST BANCORP and
Doty in January of 1999. Earnings 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 as follows:
Three Months Ended
March 31,
1999 1998
Earnings per Share:
Net Income $2,223,000 $2,204,000
Weighted Average Shares Outstanding 8,766,592 8,763,841
--------- ---------
Earnings per Share: $ 0.25 $ 0.25
========== ==========
Diluted Earnings per Share:
Net Income $2,223,000 $2,204,000
Weighted Average Shares Outstanding 8,766,592 8,763,841
Stock Options 29,373 34,145
Assumed Shares Repurchased upon Exercise of Options (23,313) (17,353)
---------- ---------
Diluted Weighted Average Shares Outstanding 8,772,652 8,780,633
---------- ----------
Diluted Earnings per Share $ 0.25 $ 0.25
========== ===========
Note 3 - Securities
The amortized cost and estimated market values of Securities as of March 31,
1999 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $80,496 $80,060
Obligations of State and Political Subdivisions 26,676 27,877
Asset-/Mortgage-backed Securities 53,176 52,779
------ ------
Total $160,348 $160,716
======== ========
Estimated
Amortized Market
Cost Value
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $26,834 $27,867
Asset-/Mortgage-backed Securities 1,309 1,313
----- -----
Total $28,143 $29,180
======== =======
8
The amortized cost and estimated market values of Securities as of December 31,
1998 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $68,201 $68,386
Obligations of State and Political Subdivisions 29,103 30,455
Asset-/Mortgage-backed Securities 52,881 52,686
------ ------
Total $150,185 $151,527
======== ========
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
U.S. Treasury Securities and Obligations of
U.S. Government Corporation and Agencies $46,849 $47,951
Asset-/Mortgage-backed Securities 1,497 1,511
----- -----
Total $48,346 $49,462
======= =======
At March 31, 1999 and December 31, 1998, U.S. Government Agency structured
notes with an amortized cost of $7,983,000 and $5,985,000 respectively, and fair
value of $7,923,000 and $5,985,000 respectively, are included in securities
available-for-sale. These notes consist of single-index bonds.
Note 4 -- Loans
Total loans, as presented on the balance sheet, are comprised of the
following classifications (dollars in thousands):
March 31, December 31,
1999 1998
Real Estate Loans Secured by 1-4
Family Residential Properties $308,333 $303,047
Agricultural Loans 60,723 62,736
Commercial and Industrial Loans 138,847 136,649
Loans to Individuals for Household,
Family and Other Personal Expenditures 105,882 95,683
Lease Financing 798 821
--- ---
Total Loans $614,583 $598,936
======== ========
No unguaranteed concentration of credit in excess of 10 percent of total assets
exists within any single industry group.
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows
(dollars in thousands):
1999 1998
Balance at January 1 $8,323 $8,645
Allowance of Acquired Affiliate 359 ---
Provision for Loan Losses 369 154
Recoveries of Prior Loan Losses 181 97
Loan Losses Charged to the Allowance (484) (181)
--- ---
Balance at March 31 $8,748 $8,715
====== ======
9
Note 6 - Business Combinations
On June 1, 1998 the Company acquired by merger CSB Bancorp of Petersburg,
Indiana (and its wholly owned subsidiary, Citizens State Bank of Petersburg) in
exchange for 928,475 shares of German American Bancorp common stock. Fractional
interests were paid in cash of $3. The transaction was accounted for as a
pooling of interests.
Also on June 1, 1998 the Company acquired by merger FSB Financial
Corporation of Francisco, Indiana (and its wholly owned subsidiary, FSB Bank of
Francisco, Indiana) in exchange for 67,203 shares of German American Bancorp
common stock. Fractional interests for this transaction were paid in cash of $2.
The transaction was accounted for as a pooling of interests; however, results
for 1997 do not include the effect of this transaction, as restatement would not
have resulted in a material change in overall financial results. Total assets
and equity of FSB Bank at the date of merger were $15.5 million and $1.4
million, respectively.
Effective the first business day of January 1999, the Company issued 2,039,665
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.
The reported operating results for periods prior to the 1999 merger date have
been retroactively adjusted to give effect to the merger with 1ST BANCORP. Prior
period results do not include the effect of the merger with Doty, as restatement
would not have resulted in a material change in overall financial results.
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp, 1ST BANCORP and Doty for the
period prior to the acquisition:
GERMAN AMERICAN
BANCORP 1ST
(as previously reported) BANCORP DOTY COMBINED
For the three months ended
March 31, 1998
Net interest income $6,040 $1,578 $--- $7,618
Net income / (Loss) $1,749 $455 $--- $2,204
Note 7 -- Subsequent Events
On March 26, 1999, the Company's Board of Directors adopted (subject to
shareholder approval at the 1999 annual meeting of shareholders) a Long-term
Equity Incentive Plan and an Employee Stock Purchase Plan. The shareholders
approved both plans on April 22, 1999.
10
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp ("the Company") is a multi-bank holding company
based in Jasper, Indiana. Its five affiliate banks conduct business in 25
offices in Dubois, Daviess, Gibson, Knox, Martin, Pike, Perry and Spencer
Counties in Southwest Indiana. Its full-service insurance agencies operate
offices in Pike and Knox Counties. The banks provide a wide range of financial
services, including accepting deposits; making commercial, mortgage and consumer
loans; issuing property and casualty, credit life, accident and health
insurance; providing trust services for personal and corporate customers;
providing safe deposit facilities; and providing investment advisory and
brokerage services.
This section presents an analysis of the consolidated financial condition
of the Company as of March 31, 1999 and December 31, 1998 and the consolidated
results of operations for the periods ended March 31, 1999 and 1998. This review
should be read in conjunction with the consolidated financial statements and
other financial data presented elsewhere herein and with the financial
statements and other financial data, as well as the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Company's December 31, 1998 Annual Report to Shareholders.
On June 1, 1998 the Company consummated mergers with the parent companies
of Citizens State and FSB Bank of Francisco, Indiana ("FSB Bank"). FSB Bank and
an existing affiliate, Community Trust Bank of Otwell, Indiana were merged into
the Citizens State charter on that date. The reported operating results for
periods prior to June 1, 1998 have been retroactively adjusted to give the
effect to the merger with Citizens State. Prior year results do not include the
effect of the merger with FSB Bank, as restatement would not have resulted in a
material change in overall financial results.
In January 1999, the Company issued 2,039,665 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. The reported
operating results for periods prior to the 1999 merger date have been
retroactively adjusted to give effect to the merger with 1ST BANCORP. Prior
period results do not include the effect of the merger with Doty, as restatement
would not have resulted in a material change in overall financial results.
RESULTS OF OPERATIONS
Net Income:
Net income was $2,223,000 or $0.25 per share for the first three months of
1999 compared to $2,204,000 or $0.25 per share for the first quarter of 1998.
Net interest income increased $260,000, or 11.8 percent, while the Provision for
Loan Losses increased by $215,000. This increase in provision was primarily due
to growth in non-conforming mortgage loans and an increase in charge-off
experience in consumer loans.
Net overhead (noninterest expense less noninterest income) increased $155,000
for the first quarter of 1999 over the first quarter of 1998. This 3.60 percent
net increase in expenses included increases of $18,000 for the Company's
comprehensive management and customer service excellence training program (which
began in the third quarter of 1998), $28,000 in collection expenses, $35,000 in
telecommunication expenses, and $73,000 in losses on sale of Other Real Estate
Owned and miscellaneous write-offs of other assets. The increase in
telecommunication expenses includes network charges, as the Company begins its
implementation of a Wide Area Network.
11
Net Interest Income:
The following table summarizes German American Bancorp's net interest
income (on a tax-equivalent basis, at an effective tax rate of 34 percent for
each period) for each of the periods presented herein (dollars in thousands):
Three Months Change from
Ended March 31, Prior Period
1999 1998 Amount Percent
Interest Income (T/E) $16,757 $16,613 $144 0.87%
Interest Expense 8,467 8,606 (139) (1.62)%
----- ----- ---
Net Interest Income (T/E) $8,290 $8,007 $283 3.53%
====== ====== ====
The increase in net interest income for the three months ended March 31,
1999 compared to the same period of 1998 was due to an increase in loans and
investments, offset by a decline in net interest margin. Net interest margin,
which represents the average net effective yield on earning assets, is
tax-equivalent net interest income expressed as a percentage of average earning
assets. For the first three months of 1999, the net interest margin was 3.90
percent compared to 4.02 percent for the comparable period of 1998.
This decline was due to lower interest rates and a change in mix in the
investment portfolio.
Provision For Loan Losses:
The Company provides for future loan losses through regular provisions to
the allowance for loan losses. These provisions are made at a levels considered
necessary by management to absorb estimated losses in the loan portfolio. A
detailed evaluation of the adequacy of this loan loss reserve is completed
quarterly by management.
The consolidated provision for loan losses was $369,000 and $154,000 for
the first three months in 1999 and 1998, respectively. The provision for loan
losses to be recorded in future periods will be adjusted based on the results of
on-going evaluations of the adequacy of the allowance for loan losses.
Net charge-offs were $303,000 or 0.05 percent of average loans for the
three months ended March 31, 1999. Net charge-offs for the first quarter of 1998
were $84,000 or 0.01 percent of loans. The increase in net charge-offs occurred
primarily in non-conforming mortgage loans, based on the increase in that
segment of the portfolio, and included a single large commercial loan.
Nonperforming loans increased slightly to 1.28 percent of total loans at March
31, 1999 versus 1.16 percent at December 31, 1998. See discussion under
"Financial Condition" for more information regarding nonperforming assets.
Noninterest Income:
Excluding net gains on sales of assets, noninterest income was $1,289,000
for the first quarter of 1999, an increase of approximately 25.6 percent over
$1,026,000 recorded for the prior year. Higher revenues included a $192,000
increase in Insurance Premiums and Commissions.
Noninterest Expense:
Noninterest expense was $5.9 million for the first quarter of 1999 compared
to $5.3 million for the first quarter of 1998.
Salaries and Employee Benefits totaled $3.23 million for the first quarter
of 1999, or 54.7 percent of total noninterest expense. Excluding an increase of
$219,000 for salaries and commissions in the Company's insurance operations,
these expenses increased approximately $74,000, or 2.6 percent, over the same
period in 1998.
12
Total occupancy, furniture and equipment expense for the first three months
of 1999 totaled $833,000. This was approximately $91,000 greater than the
$742,000 incurred for the same period of the prior year. These expenses are
expected to continue to be higher in comparison to the prior year, largely due
to upgrading the Company's computer systems at its existing and new affiliates.
This strategy is expected, over the long-term, to better control employee
related expenses and improve the quality of customer service provided by all of
its affiliate community banks.
Computer processing fees increased $39,000 in the first three months of
1999 from the first three months of 1998. $25,000 of this increase was related
to Year 2000 preparation. Professional fees and advertising, respectively, for
the first three months of 1999 were relatively unchanged from the prior year at
$224,000 and $157,000. Supplies expenses increased $29,000 to $175,000. This
increase included $19,000 at our newest affiliate, and normal increases due to
volume.
Other operating expenses were $1,007,000 for the first three months of 1999
compared to $897,000 in the first three months in 1998. This increase of
$110,000 included $73,000 in net loss on sale and write-downs in Other Real
Estate Owned and other miscellaneous assets, and increases in management and
customer service excellence training expenses ($18,000), telecommunication
expenses, including network charges ($35,000), collection expenses ($28,000).
Expenses were reduced in examination fees ($10,000), Director/Committee Fees
($22,000), and other operating expenses ($12,000).
FINANCIAL CONDITION
Total assets at March 31, 1999 were $902 million. This was an increase of
$5 million from the December 31, 1998 total asset position and was primarily due
to a $15 million increase in the loan portfolio and $11 decrease in the
investment portfolio.
Deposits at March 31, 1999 were $679 million, which was a $14 million or
2.1 percent increase from year-end 1998. Borrowings at March 31, 1999 were $120
million, an $11 million or 8.4 percent, decrease from year-end.
All of the Company's affiliate banks are members of the Federal Home Loan
Bank System ("FHLB"). The banks' membership in the FHLB provides an additional
source of liquidity for both Long-term and Short-term borrowing needs. The
Company had $109 million in Long-term FHLB borrowings outstanding at March 31,
1999.
Nonperforming Assets:
The following is an analysis of the Company's nonperforming assets at March
31, 1999 and December 31, 1998 (dollars in thousands):
March 31, December 31,
1999 1998
Nonaccrual Loans $6,194 $5,411
Loans contractually past due 90 days or more 1,678 1,522
Renegotiated Loans --- ---
--- ---
Total Nonperforming Loans 7,872 6,933
----- -----
Other Real Estate 1,738 1,156
----- -----
Total Nonperforming Assets $9,610 $8,089
====== ======
Allowance for Loan Loss to Nonperforming Loans 111.13% 120.05%
Nonperforming Loans to Total Loans 1.28% 1.16%
13
Capital Resources:
Shareholders' equity totaled $92.1 million at March 31, 1999 or 10.2
percent of total assets, an increase of $0.9 million from December 31, 1998.
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill,
core deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital is defined as the amount of the allowance for loan
losses which does not exceed 1.25 percent of gross risk adjusted assets. Total
capital is the sum of Tier 1 and Tier 2 capital.
The minimum requirements under these standards are generally at least a 4.0
percent leverage ratio, which is Tier 1 capital divided by defined "total
assets"; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent
total capital to risk-adjusted assets ratios. Under these guidelines, the
Company, on a consolidated basis, and each of its affiliate banks individually,
have capital ratios that substantially exceed the regulatory minimums.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are: well
capitalized, adequately capitalized, under-capitalized, significantly
under-capitalized, and critically under-capitalized. Under these regulations, a
"well-capitalized" entity must achieve a Tier 1 Risk-based capital ratio of at
least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a
leverage ratio of at least 5.0 percent, and not be under a capital directive
order.
At March 31, 1999 management is not under such a capital directive, nor is
it aware of any current recommendations by banking regulatory authorities which,
if they were to be implemented, would have or are reasonably likely to have, a
material effect on the Company's liquidity, capital resources or operations.
The table below presents the Company's consolidated risk-based capital
structure and capital ratios under regulatory guidelines (dollars in thousands):
March 31, December 31,
1999 1998
Tier 1 Capital:
Shareholders' Equity as presented
on the Balance Sheet $92,164 $91,276
Less: Unrealized Appreciation on
Securities Available-for-Sale (48) (811)
Less: Intangible Assets and
Ineligible Deferred Tax Assets (1,903) (1,497)
----- -----
Total Tier 1 Capital 90,213 88,968
Tier 2 Capital:
Qualifying Allowance for Loan Loss 7,339 6,328
----- -----
Total Capital $97,552 $95,296
======= =======
Risk-adjusted Assets $585,688 $583,500
14
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action At At
Adequacy Provisions March 31, December 31,
Purposes (FDICIA) 1999 1998
Leverage Ratio 4.00% 5.00% 9.97% 10.28%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 15.40% 15.25%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 16.66% 16.33%
Liquidity:
The Consolidated Statement of Cash Flows details the elements of change in
the Company's cash and cash equivalents. During the first three months of 1999,
operating activities provided $7.1 million of available cash, which included net
income of $2.2 million. Deposits and borrowings provided $12.6 million of cash
during the period. Major cash outflows experienced during this three month
period of 1999 included $1.1 million in dividends, $632,000 in property and
equipment purchases and net loan outlays in the amount of $7.1 million.
Purchases of securities and short-term investments required $10.8 million in
cash above the dollar amount of maturities and sales. Total cash outflows for
the period exceeded inflows by $33,000, leaving cash and cash equivalents of
$49.6 million at March 31, 1999.
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.
The Company is nearing completion of all testing and implementation
procedures that are contemplated by its formal plan to address potential Year
2000 issues, 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 has expended approximately $300,000 to date on Year 2000 related
items, and anticipates another $200,000 in cash outlays in 1999. These outlays
exclude the cost of implementing the Company's state-of-the-art platform and
computer systems upgrade, 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.
15
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk.
The liquidity of the parent company is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations. The affiliate banks source of funding is predominately core
deposits, maturities of securities, repayments of loan principal and interest,
federal funds purchased, securities sold under agreements to repurchase and
long-term borrowings from the Federal Home Loan Bank.
The Company monitors interest rate risk by the use of computer simulation
modeling to estimate the potential impact on its net interest income under
various interest rate scenarios, and by estimating its static interest rate
sensitivity position. Another method by which the Company's interest rate risk
position can be estimated is by computing estimated changes in its net portfolio
value ("NPV"). This method estimates interest rate risk exposure from adverse
movements in interest rates by using interest rate sensitivity analysis to
determine the change in the NPV of the net present value of discounted cash
flows from assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. Computations are based on a number of assumptions, including the
relative levels of market interest rates and prepayments in mortgage loans and
certain types of investments. These computations do not contemplate any actions
management may undertake in response to changes in interest rates, and should
not be relied upon as indicative of actual results. In addition, certain
shortcomings are inherent in the method of computing NPV. Should interest rates
remain or decrease below current levels, the proportion of adjustable rate loans
could decrease in future periods due to refinancing activity. In the event of an
interest rate change, prepayment levels would likely be different from those
assumed in the table. Lastly, the ability of many borrowers to repay their
adjustable rate debt may decline during a rising interest rate environment.
16
The table below provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. These estimates have been restated from those presented in the Company's
1998 Annual Report for the effect of the January 4, 1999 acquisition, on a
pooling of interests basis, of 1ST BANCORP. The table indicates that as of
December 31, 1998 the Company's estimated NPV might be expected to decrease in
the event of an increase in prevailing interest rates, and that a decrease in
prevailing interest rates might have little or no impact on estimated NPV. The
Company's risk profile as of March 31, 1999 does not materially differ from
these year-end estimates.
Change in Estimated Net Portfolio Value
As of December 31, 1998
Net Portfolio Value
Changes in Rates In Thousands Dollar Change % Change
+2%...................$88,621..............$(22,784).................(20%)
+1%....................99,131...............(12,274).................(11%)
Base...................111,405..... .............---...................---
-1%...................112,695.................1,290................... 1%
-2%...................111,844...................439...................---
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company issued 62,000 shares of common stock to the two former
shareholders of the Doty Agency, Inc., in January 1999 in payment of the
purchase price for Doty in reliance upon the private offering exemption (Section
4(2)) from registration under the Securities Act of 1933.
Item 5. Other Information
The shareholders of the Company, at the annual shareholders meeting in
April 1999, approved the Company's 1999 Long-term Equity Incentive Plan and 1999
Employee Stock Purchase Plan
On April 29, 1999, the Company announced that the Board of Directors had
increased the Company's quarterly cash dividend by 8%, declaring a $0.13 per
share dividend payable on or before May 20, 1999, to shareholders of record as
of May 10, 1999.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
10.1 1999 Long-term Equity Incentive Plan. This exhibit is
incorporated by reference from Appendix A to the Company's
definitive proxy statement for its 1999 annual meeting filed
March 26, 1999.
10.2 1999 Employee Stock Purchase Plan. This exhibit is incorporated
by reference from Appendix B to the Company's definitive proxy
statement for its 1999 annual meeting filed March 26, 1999.
27 Financial Data Schedule for the periods ended March 31, 1999 and
1998.
17
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended March 31,
1999, except for a report filed January 15, 1999 reporting under Item 2 the
acquisition of 1ST BANCORP and under Item 5, the Doty acquisition, a change in
the Board of Directors, and the implementation of the Company's management
succession plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date May 17, 1999 By/s/Mark A. Schroeder
------------ --------------------------------
Mark A. Schroeder
President and CEO
Date May 17, 1999 By/s/John M. Gutgsell
------------ --------------------------------
John M. Gutgsell
Principal Accounting Officer