UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
I X I Quarterly Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 1997
Or
I I Transition Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Transition Period from to
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 1997
Common Stock, $10.00 par value 5,092,082
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets -- September 30, 1997 and
December 31, 1996
Consolidated Statements of Income -- Three Months Ended
September 30, 1997 and 1996
Consolidated Statements of Income -- Nine Months Ended
September 30, 1997 and 1996
Consolidated Statements of Cash Flows -- Nine Months Ended
September 30, 1997 and 1996
Notes to Consolidated Financial Statements --
September 30, 1997
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K
SIGNATURES
PART 1.FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEET
(dollar references in thousands except share data)
(unaudited)
September 30, December 31,
1997 1996
ASSETS
Cash and Due from Banks $15,773 $17,134
Federal Funds Sold 14,500 20,600
Cash and Cash Equivalents 30,273 37,734
Interest-bearing Balances with Banks 397 597
Other Short-term Investments --- 979
Securities Available-for-Sale,
at market 93,539 98,557
Securities Held-to-Maturity, at cost 21,277 22,832
Total Loans 327,762 313,734
Less: Unearned Income (299) (452)
Allowance for Loan Losses (6,265) (6,528)
Loans, Net 321,198 306,754
Premises, Furniture and Equipment, Net 12,306 11,585
Other Real Estate 148 203
Intangible Assets 1,622 1,774
Accrued Interest Receivable and
Other Assets 8,168 8,428
TOTAL ASSETS $488,928 $489,443
LIABILITIES
Noninterest-bearing Deposits $47,914 $52,674
Interest-bearing Deposits 378,453 370,232
Total Deposits 426,367 422,906
Short-term Borrowings 5,533 12,527
FHLB Borrowings --- 1,000
Accrued Interest Payable and
Other Liabilities 4,740 4,217
TOTAL LIABILITIES 436,640 440,650
SHAREHOLDERS' EQUITY
Common Stock, $10.00 par value;
20,000,000 shares authorized,
and 2,546,041 and 2,539,059 issued
and outstanding in 1997 and 1996,
respectively 25,460 25,390
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued --- ---
Additional Paid-in Capital 3,965 3,649
Retained Earnings 22,144 19,259
Unrealized Appreciation on Securities
Available-for-Sale, net of tax 719 495
TOTAL SHAREHOLDERS' EQUITY 52,288 48,793
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $488,928 $489,443
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollar references in thousands except per share data)
(unaudited)
Three Months Ended
September 30,
1997 1996
INTEREST INCOME
Interest and Fees on Loans $7,531 $7,018
Interest on Federal Funds Sold 147 114
Interest on Short-term Investments 9 21
Interest and Dividends on Securities 1,824 1,719
TOTAL INTEREST INCOME 9,511 8,872
INTEREST EXPENSE
Interest on Deposits 4,371 4,115
Interest on Short-term Borrowings 56 121
TOTAL INTEREST EXPENSE 4,427 4,236
NET INTEREST INCOME 5,084 4,636
Provision for Loan Losses 67 80
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,017 4,556
NONINTEREST INCOME
Income from Fiduciary Activities 80 53
Service Charges on Deposit Accounts 300 261
Investment Services Income 102 109
Other Charges, Commissions, and Fees 208 110
Gains on Sales of Loans and Other Real Estate 6 0
Gains on Sales of Securities 0 0
TOTAL NONINTEREST INCOME 696 533
NONINTEREST EXPENSE
Salaries and Employee Benefits 1,859 1,802
Occupancy Expense 277 271
Furniture and Equipment Expense 229 241
Computer Processing Fees 127 108
Professional Fees 154 174
Other Operating Expenses 729 845
TOTAL NONINTEREST EXPENSE 3,375 3,441
Income before Income Taxes 2,338 1,648
Income Tax Expense 775 519
Net Income $1,563 $1,129
Earnings Per Share $0.31 $0.22
Dividends Paid Per Share $0.11 $0.10
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
(dollar references in thousands except per share data)
(unaudited)
Nine Months Ended
September 30,
1997 1996
INTEREST INCOME
Interest and Fees on Loans $21,890 $20,677
Interest on Federal Funds Sold 309 427
Interest on Short-term Investments 50 146
Interest and Dividends on Securities 5,689 5,013
TOTAL INTEREST INCOME 27,938 26,263
INTEREST EXPENSE
Interest on Deposits 12,765 12,018
Interest on Short-term Borrowings 237 367
TOTAL INTEREST EXPENSE 13,002 12,385
NET INTEREST INCOME 14,936 13,878
Provision for Loan Losses (476) 183
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,412 13,695
NONINTEREST INCOME
Income from Fiduciary Activities 229 170
Service Charges on Deposit Accounts 865 701
Investment Services Income 325 326
Other Charges, Commissions, and Fees 465 354
Gains on Sales of Loans and Other Real Estate 8 2
Gains on Sales of Securities 0 0
TOTAL NONINTEREST INCOME 1,892 1,553
NONINTEREST EXPENSE
Salaries and Employee Benefits 5,554 5,343
Occupancy Expense 813 803
Furniture and Equipment Expense 682 687
Computer Processing Fees 374 316
Professional Fees 713 403
Other Operating Expenses 2,086 2,187
TOTAL NONINTEREST EXPENSE 10,222 9,739
Income before Income Taxes 7,082 5,509
Income Tax Expense 2,395 1,770
Net Income $4,687 $3,739
Earnings Per Share $0.92 $0.74
Dividends Paid Per Share $0.33 $0.28
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollar references in thousands)
(unaudited)
Nine Months Ended
September 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $4,687 $3,739
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities:
Amortization and Accretion of Investments 28 (27)
Depreciation and Amortization 849 805
Provision for Loan Losses (476) 183
Gains on Sales of Securities --- ---
Gains on Sales of Loans and
Other Real Estate (8) (2)
Change in Assets and Liabilities:
Unearned Income (153) (23)
Interest Receivable (866) (493)
Other Assets 1,057 250
Interest Payable 541 207
Deferred Loan Fees (19) (33)
Deferred Taxes 69 (73)
Other Liabilities (17) 348
Total Adjustments 1,005 1,142
Net Cash from Operating Activities 5,692 4,881
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing
Balances with Banks 200 198
Proceeds from Maturities of
Other Short-term Investments 996 7,000
Purchase of Other Short-term Investments --- (1,466)
Proceeds from Maturities of
Securities Available-for-Sale 32,353 28,114
Proceeds from Sales of
Securities Available-for-Sale --- ---
Purchase of Securities
Available-for-Sale (27,162) (30,016)
Proceeds from Maturities of
Securities Held-to-Maturity 3,133 4,290
Proceeds from Sales of
Securities Held-to-Maturity --- ---
Purchase of Securities
Held-to-Maturity (1,572) (3,679)
Purchase of Loans (1,152) (977)
Loans Made to Customers net of
Payments Received (12,663) (25,855)
Proceeds from Sales of Loans 19 ---
Proceeds from Maturities of
Long-term Borrowings
Property and Equipment Expenditures (1,418) (988)
Proceeds from Sales of Other Real Estate 63 26
Net Cash from Investing Activities (7,203) (23,353)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits 3,461 12,673
Proceeds from Maturities of
Short-term Borrowings (6,995) 684
Change in Long-term Borrowings (1,000) (1,000)
Dividends Paid (1,523) (1,287)
Exercise of Stock Options 3 8
Purchase of Fractional Shares (5) ---
Issuance of Shares under Dividend
Reinvestment Plan 109 65
Net Cash from Financing Activities (5,950) 11,143
Net Change in Cash and Cash Equivalents (7,461) (7,329)
Cash and Cash Equivalents
at Beginning of Year 37,734 32,601
Cash and Cash Equivalents
at End of Period $30,273 $25,272
Cash Paid During the Year for:
Interest $12,461 $12,178
Income Taxes 1,857 1,856
See accompanying notes to consolidated financial statements.
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(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. 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, 1996 Annual Report to Shareholders.
German American Bancorp (referred to herein as the ``Company,'' the
`Corporation,'' or the ``Registrant'') is a multi-bank holding company organized
in Indiana in 1982. The Company's principal subsidiaries are The German
American Bank, Jasper, Indiana (`German American Bank''), First State Bank,
Southwest Indiana, Tell City, Indiana (`First State Bank''), and German
American Holdings Corporation (`GAHC''), an Indiana corporation that owns all
of the outstanding capital stock of both Community Trust Bank, Otwell, Indiana
(`Community Bank'') and The Peoples National Bank and Trust Company of
Washington, Washington, Indiana (`Peoples''). The Company, through its four
bank subsidiaries operates twenty banking offices in six contiguous counties in
southwestern Indiana.
Peoples, organized under the National Bank Act in 1888, was acquired by the
Company on March 4, 1997 pursuant to a merger of the parent corporation of
Peoples into GAHC. Simultaneously with and as an integral part of this merger,
The Union Bank of Loogootee, Indiana, a subsidiary of the Company, was merged
with and into Peoples. At December 31, 1996 Peoples had assets of $91,937,000
and equity of $9,452,000.
The Company's financial statements for all periods prior to the merger date
have been retroactively restated to include the accounts of Peoples because the
merger was recorded utilizing the pooling-of-interests method of accounting.
Note 2 -- Per Share Data
The weighted average number of shares used in calculating earnings and
dividends per share amounts were 5,089,835 and 5,082,199 for the third quarters
of 1997 and 1996, respectively. The weighted average number of shares for the
first three quarters of 1997 and 1996 was 5,088,212 and 5,080,474, respectively.
The weighted average number of shares have been retroactively restated for the
November 1, 1997 two-for-one stock split, stock dividends, and poolings of
interests. Dividends paid per share amounts represent historical dividends
declared without retroactive restatement for pooling.
Note 3 -- Securities
The amortized cost and estimated market values of Securities as of September 30,
1997 are as follows:
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
(dollar references in thousands)
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $51,233 $51,291
Obligations of State and
Political Subdivisions 19,924 21,013
Corporate Securities 5,801 5,809
Mortgage-backed Securities 15,437 15,426
------ ------
Total $92,395 $93,539
======= =======
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
U.S. Treasury Securities and
Obligations of U.S. Government
Corporation and Agencies $1,504 $1,504
Obligations of State and
Political Subdivisions 17,141 17,995
Corporate Securities 31 16
Mortgage and Asset-backed Securities 825 832
Other Securities 1,776 1,776
----- -----
Total $21,277 $22,123
======= =======
The amortized cost and estimated market values of Securities as of December 31,
1996 are as follows:
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
(dollar references in thousands)
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $47,181 $47,041
Obligations of State and
Political Subdivisions 19,560 20,186
Corporate Securities 7,221 7,245
Mortgage-backed Securities 23,783 24,078
Other Securities 1 7
- -
Total $97,746 $98,557
======= =======
Estimated
Amortized Market
Securities Held-to-Maturity: Cost Value
U.S. Treasury Securities and
Obligations of U.S. Government
Corporation and Agencies $2,519 $2,498
Obligations of State and
Political Subdivisions 18,253 18,881
Corporate Securities 47 47
Mortgage and Asset-backed Securities 999 989
Other Securities 1,014 1,014
----- -----
Total $22,832 $23,429
======= =======
Note 4 -- Loans
Loans, as presented on the balance sheet, are comprised of the following
classifications:
September 30,December 31,
1997 1996
(dollar references in thousands)
Real Estate Loans Secured by 1-4
Family Residential Properties $102,319 $93,713
Agricultural Loans 54,472 57,073
Commercial and Industrial Loans 110,367 111,469
Loans to Individuals for Household,
Family and Other Personal
Expenditures 59,404 50,200
Lease Financing 1,200 1,279
----- -----
Total Loans $327,762 $313,734
======== ========
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows:
1997 1996
(dollar references in thousands)
Balance at January 1 $6,528 $6,893
Provision for Loan Losses (476) 183
Recoveries of Prior Loan Losses 674 205
Loan Losses Charged to the Allowance (461) (283)
----- -----
Balance at September 30 $6,265 $6,998
====== ======
Note 6 -- Business Combinations
On March 4, 1997, the Company acquired all of the outstanding shares of
Peoples Bancorp of Washington, Indiana (and its wholly owned subsidiary, The
Peoples National Bank and Trust Company of Washington) in exchange for 615,285
shares of German American Bancorp common stock. Fractional interests were paid
in cash of $5. The transaction was accounted for as a pooling of interests.
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp and Peoples Bancorp of
Washington for the periods prior to the acquisition:
GERMAN AMERICAN PEOPLES
BANCORP BANCORP
(as previously reported) OF WASHINGTON COMBINED
(dollar references in thousands)
For the period January 1, 1997 through
February 28, 1997
Net interest income $2,558 $696 $3,254
Net income 698 218 916
For the three months ended
September 30, 1996
Net interest income 3,618 1,018 4,636
Net income 857 272 1,129
For the nine months ended
September 30, 1996
Net interest income 10,943 2,935 13,878
Net income 3,005 734 3,739
Note 7 -- Proposed Acquisitions
The Company signed two separate documents in October 1997 providing for the
mergers of both CSB Bancorp (`CSB - Petersburg'') of Petersburg, Indiana and
FSB Financial Corporation (`FSB - Francisco'') of Francisco, Indiana. CSB
Petersburg owns all the outstanding shares of Citizens State Bank of Petersburg,
Indiana which operates two banking offices in Pike County, Indiana. FSB
Francisco owns all of the outstanding shares of The Francisco State Bank which
operates two banking offices in Gibson County, Indiana.
Under the terms of the CSB - Petersburg agreement, the Company will issue to
the shareholders of CSB - Petersburg no less than 928,572 shares of Company
Common Stock (subject to antidilution adjustments in the event of stock
dividends, splits and the like, other than the Company's 1997 100% and 5% stock
dividends), depending upon the Company's average common stock price during a
period prior to the date of the merger closing. Based on the reported bid /
asked quotations for the Company's Common Stock during the period preceding
September 30, 1997, the Company would have issued the minimum number of shares
had the merger closed on September 30, 1997.
The October 29, 1997 letter of intent for the merger of FSB - Francisco
provides for the issuance of approximately $2,000,000 of Company Common Stock to
FSB shareholders.
Each of the proposed mergers is subject to approval of a definitive merger
agreement by the Boards of Directors of all the parties, by shareholders, by
bank regulatory agencies, and other conditions. The parties contemplate that
both transactions will be effective in early 1998. It is expected that both
transactions will be accounted for as pooling of interests.
CSB - Petersburg had Total Assets of $76,961,000 and Total Shareholder Equity
of $9,339,000 at September 30, 1997. Net Income was $632,000 for the nine
months ended September 30, 1997. FSB - Francisco had Total Assets of
$15,705,000, Shareholder Equity of $1,474,000 and a net loss of $23,000 for the
same periods.
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp (``the Company'') is a multi-bank holding company
based in Jasper, Indiana. Its four affiliate banks conduct business in twenty
offices in Dubois, Daviess, Martin, Pike, Perry and Spencer Counties in
Southwest Indiana. The banks provide a wide range of financial services,
including accepting deposits; making commercial, mortgage and consumer loans;
issuing credit life, accident and health insurance; providing trust services for
personal and corporate customers; providing safe deposit facilities; and
providing investment advisory and brokerage services.
This section presents an analysis of the consolidated financial condition of
the Company as of September 30, 1997 and December 31, 1996 and the consolidated
results of operations for the periods ended September 30, 1997 and 1996. 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 and the Management's Discussion and Analysis
of Financial Condition and Results of Operations included in the Company's
December 31, 1996 Annual Report to Shareholders.
Because of the Peoples National Bank acquisition on March 4, 1997 under the
pooling-of-interests method of accounting, all financial statements have been
retroactively restated for all periods. Also see Footnote 6 `Business
Combinations.''
RESULTS OF OPERATIONS
Net Income:
The Company's earnings for the third quarter of 1997 were $1,563,000 or $.31
per share, an increase of $434,000 (or 38.4%) from the Company's third quarter
earnings for 1996 of $1,129,000 or $.22 per share. Net income for the first
nine months of 1997 was $4,687,000 or $.92 per share, which was $948,000 or
25.4% greater than the $3,739,000 or $.74 per share recorded for the same period
of 1996.
The comparison of 1997 earnings for both the nine and three month periods
relative to those of the same periods of 1996 was materially impacted by an
increase in net interest income and Deposit Service Charges and Fees. Earnings
for 1997 were also largely impacted by a negative provision for loan losses,
which was due to the collection of significant dollar amounts of previously
charged-off loans.
Return on average assets (ROA) was 1.30% and return on average equity was
12.58% for the first nine months of 1997 versus 1.07% and 10.64%, respectively
for the same periods of 1996.
Net Interest Income:
The following table summarizes German American Bancorp's net interest income
(on a tax-equivalent basis) for each of the periods presented herein. An
effective tax rate of 34 percent is used on each period presented.
Three Months Change from
Ended September 30, Prior Period
1997 1996 Amount Percent
(dollar references in thousands)
Interest Income $9,806 $9,148 $658 7.2%
Interest Expense 4,427 4,236 191 4.5%
----- ----- ---
Net Interest Income $5,379 $4,912 $467 9.5%
====== ====== ====
Nine Months Change from
Ended September 30, Prior Period
1997 1996 Amount Percent
(dollar references in thousands)
Interest Income $28,824 $27,049 $1,775 6.6%
Interest Expense 13,002 12,385 617 5.0%
------ ------ ---
Net Interest Income $15,822 $14,664 $1,158 7.9%
======= ======= ======
Net interest income is the difference between interest income (which
includes yield-related fees) and interest expense. The increase in net interest
income for the first nine months and the third quarter of 1997 compared to the
same periods of 1996 was primarily due to an increase of loans in the mix of
average earning assets. Loans generally provide a higher yield than that earned
on investment securities and Federal Funds Sold.
Net interest income on a tax-equivalent basis expressed as a percentage of
average earning assets is referred to as the net interest margin, which
represents the average net effective yield on earning assets. For the first
three quarters of 1997, the net interest margin was 4.69 percent compared to
4.51 percent for the comparable period of 1996; for the third quarter of 1997,
net interest margin was 4.69% compared to 4.43% for 1996.
Provision For Loan Losses:
The Company provides for loan losses through regular provisions to the
allowance for loan losses. These provisions are made at a level which is
considered necessary by management to absorb estimated losses in the loan
portfolio. A detailed evaluation of the adequacy of this loan loss reserve is
completed quarterly by management.
The consolidated provision for loan losses was $(476,000) and $183,000 for
the first nine months of 1997 and 1996, respectively and $67,000 and $80,000 for
the third quarter of 1997 and 1996, respectively. The negative provision for
1997 was due to collections during the second quarter of previous years'
charged-off loans, combined with management's determination during the second
quarter that certain specific reserve allocations were no longer necessary due
to the performance of the related loans. Based on Management's evaluation of
the adequacy of the reserve, a negative provision was recorded to eliminate
excess reserves created by loan recoveries and reduced specific reserve
allocations.
The amount of future periods' provision for loan loss will be subject to
adjustment based on the findings of future evaluations of the adequacy of the
loan loss reserve.
Net recoveries were $213,000 or less than one percent of average loans for
the first nine months of 1997. For the same period of 1996, net charge-offs
were $78,000. Underperforming loans, as a percentage of total loans were 0.69%
and 0.79% on September 30, 1997 and December 31, 1996, respectively. See
discussion headed `Financial Condition'' for more information regarding
underperforming assets.
Noninterest Income:
Noninterest income, exclusive of gains realized on the sales of loans, for
the first nine months of 1997 was $1,884,000. This was $333,000 or 21.5 percent
greater than the $1,551,000 recorded for the same nine months of 1996. For the
third quarter of 1997, noninterest income was $157,000 or 29.5 percent greater
than the identical period of 1996.
Service charges on deposit accounts for the first three quarters of 1997 rose
$164,000 or 23.4 percent over 1996. The Company made revisions to its pricing
structure during the latter part of 1996 based on a market review.
Noninterest Expense:
Total noninterest expense for the first nine months of 1997 was $10,222,000
which translates to a $483,000 or five percent increase over the $9,739,000
posted for the same period in 1996. Total noninterest expense for the third
quarter of 1997 was $3,375,000 which represents a $66,000 or 1.9 percent
increase over the $3,441,000 posted for the same period in 1996.
Salaries and Employee Benefits expense constituted 54% of total noninterest
expense. For the first nine months of 1997 this amounted to $5,554,000. This
was $211,000 or 3.9 percent more than the $5,343,000 recorded for the same
period of the prior year. Salaries and employee benefits were $1,859,000 during
the third quarter of 1997, an increase of $57,000 or 3.2% over the 1996 level of
$1,802,000. The Company's active full-time equivalent (FTE) staff was 215 at
September 30, 1997.
Occupancy expense combined with Furniture and Equipment expense for the first
nine months of 1997 equaled $1,495,000. This was only $5,000 greater than the
$1,490,000 posted for the same period of the prior year. These expenses are
expected, however, to moderately increase throughout the remainder of 1997
largely as a consequence of a planned upgrading of computer systems. The
Company has recently embarked upon a strategy to implement state-of-the-art
computer processing to provide the opportunities to, over the long-term, better
control the level of employee related expenses and improve the quality of
customer service provided throughout the affiliate bank system. The upgrade of
computer equipment at Peoples concurrent with the merger represents the
Company's first step in this process. Systems at all affiliate banks will be
upgraded on a systematic basis throughout 1997 and 1998.
Professional fees for the first nine months of 1997 were $713,000. This was
$310,000 greater than the $403,000 recorded for the same period of 1996.
Professional fees for the third quarter of 1997 were $154,000, a $20,000 decline
from the $174,000 recorded for 1996. This year-to-date increase stems from the
costs associated with the March 4,1997 merger of Peoples and a $200,000 special
contingency reserve made in connection with an unasserted potential claim.
FINANCIAL CONDITION
Total assets at September 30, 1997 stood at $488,928,000. This was a decline
of $515,000 from the December 31, 1996 total asset position. The largest
decline in assets was concentrated in the holdings of Federal Funds Sold while
total loans increased $14,028,000.
Deposits at September 30, 1997 stood at $426,367,000 which was a $3,461,000
or less than one percent rise from the total deposits held nine months earlier.
Short-term and Long-term Borrowings at September 30, 1997 were $5,533,000. This
represents a $7,994,000 decline from the December 31, 1996 position as the
Company utilized Federal Funds Sold to reduce its level of borrowings.
All of the Company's Banks are members of the Federal Home Loan Bank System
(``HLB''). The banks' membership in the FHLB provides a ready alternative for
both long and short-term borrowing needs.
Underperforming Assets:
The following analyzes German American Bancorp's underperforming assets at
September 30, 1997 and December 31, 1996.
September 30, 1997 December 31, 1996
(dollar references in thousands)
Nonaccrual Loans $595 $1,370
Loans which are contractually
past due 90 days or more 1,679 1,102
Renegotiated Loans --- ---
--- ---
Total Underperforming Loans 2,274 2,472
----- -----
Other Real Estate 148 203
--- ---
Total Underperforming Assets $2,422 $2,675
====== ======
Allowance for Loan Loss to
Underperforming Loans 275.5% 264.08%
Underperforming Loans to
Total Loans 0.69% 0.79%
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. Minimum levels of capital are required to be
maintained 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 tax receivables defined by bank regulations.
Tier 2 capital is defined as the amount of the allowance for loan losses which
does not exceed 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 4.0%
leverage ratio, which is Tier 1 capital divided by defined `total assets'',
4.0% Tier 1 capital to risk-adjusted assets and 8.0% 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, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
`well-capitalized'' entity must achieve a Tier One Risk-based capital ratio of
at least 6.0%, a total capital ratio of at least 10.0% and a leverage ratio of
at least 5.0% and not be under a capital directive order.
At September 30, 1997, management is not under such a capital directive nor
is it aware of any current recommendations by banking regulatory authorities
which, if they were to be implemented, would have, or are reasonably likely to
have, a material effect on the Company's liquidity, capital resources or
operations.
The table below presents the Company's consolidated capital ratios under
regulatory guidelines.
RISK BASED CAPITAL STRUCTURE ($ in thousands)
September 30, December 31,
1997 1996
Tier 1 Capital:
Shareholders' Equity as presented
on Balance Sheet $52,288 $48,793
Add / (Subtract): Unrealized
Depreciation / (Appreciation) on
Securities Available-for-Sale (719) (495)
Less: Intangible Assets and
Ineligible Deferred Tax Assets (1,736) (1,924)
------- -------
Total Tier 1 Capital 49,833 46,374
Tier 2 Capital:
Qualifying Allowance for Loan Loss 4,196 4,028
----- -----
Total Capital $54,029 $50,402
======= =======
Risk-adjusted Assets $333,578 $319,718
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action
Adequacy Provisions September 30, December 31,
Purposes (FDICIA) 1997 1996
Leverage Ratio 4.00% 5.00% 10.35% 9.70%
Tier 1 Capital to
Risk-adjusted Assets 4.00% 6.00% 14.94% 14.50%
Total Capital to
Risk-adjusted Assets 8.00% 10.00% 16.20% 15.76%
LIQUIDITY
The Consolidated Statement of Cash Flows details the elements of change in the
Company's cash and cash equivalents. During the first nine months of 1997, the
net cash from operating activities, including net income of $4,687,000 provided
$5,692,000 of available cash. The maturities of securities and short-term
investments brought in $7,948,000 in cash above the dollar amount of purchases.
Major cash outflows experienced during this nine month period of 1997 included
dividends of $1,523,000, property and equipment purchases, primarily related to
computer upgrading, of $1,418,000 and the net funding outlay of loans in the
amount of $13,796,000. Decreases occurring in deposits and short-term as well
as long-term borrowings reduced cash by an additional $4,534,000. Total cash
outflows for the period exceeded inflows by $7,461,000 leaving a cash and cash
equivalent balance of $30,273,000 at September 30, 1997.
PART II. -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
2 Incorporated by reference to Form 8K.
27 Financial Data Schedule for the period ended
September 30, 1997.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date November 14, 1997 By/s/George W. Astrike
----------------- -------------------------
George W. Astrike
Chairman
Date November 14, 1997 By/s/John M. Gutgsell
----------------- -------------------------
John M. Gutgsell
Controller and Principal
Accounting Officer
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