UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended: December 31, 1997
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, Box 810, Jasper, Indiana 47546
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
NONE Not Applicable
- --------------------- ------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, $10.00 Par Value
(Title of Class)
Indicate by check mark 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
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (assuming solely for purposes of this calculation that all directors
and executive officers of the Registrant are affiliates) valued at the last
trade price reported by NASDAQ as of March 6, 1998 was approximately
$132,556,000.
As of March 6, 1998, there were outstanding 5,350,161 common shares, $10.00
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Shareholders of German American
Bancorp for 1997, to the extent stated herein, are incorporated by reference
into Parts I and II.
(2) Portions of the Proxy Statement of German American Bancorp for the
Annual Meeting of its Shareholders to be held April 23, 1998, to the extent
stated herein, are incorporated by reference into Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | X |
<PAGE>
PART I
Item 1. Business
General
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, (sometimes
referred to herein as the "Banks") operate 20 banking offices in six contiguous
counties in southwestern Indiana and had total consolidated assets at year-end
1997 of approximately $499,000,000.
German American Bank was organized under the law of Indiana in 1910. At
December 31, 1997, German American Bank was the second largest of the six
commercial banks with offices in Dubois County, Indiana, in terms of total
assets and total deposits. German American Bank conducts its banking operations
from its principal banking office in Jasper, Indiana, and from seven branch
office locations throughout Dubois County.
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. Peoples, at December 31, 1997, ranked second in asset
size among the five commercial banks and thrifts headquartered in Martin and
Daviess Counties, Indiana. The Union Bank had been acquired by the Registrant on
March 8, 1993.
On April 1, 1993, the Registrant purchased all the shares of Winslow
Bancorporation, Winslow, Indiana, (which was in 1996 renamed German American
Holdings Corporation), and its subsidiary Southwestern Indiana Bank in a cash
transaction. On April 1, 1994, the Registrant issued 113,286 shares in exchange
for all the outstanding shares of The Otwell State Bank. Following the
completion of this transaction, Otwell and Southwestern were merged into
Community Trust Bank, a combined banking institution operating in the Pike
County, Indiana market through three offices.
On October 28, 1994, the Registrant acquired three branches of Regional
Federal Savings Bank of New Albany, Indiana. The Huntingburg, Indiana branch was
combined with an existing branch of the Registrant's lead bank, German American
Bank. The other two former branches in Tell City and Rockport, Indiana were
acquired by a new subsidiary bank of the Registrant named First State Bank,
Southwest, Indiana.
Each of the Company's subsidiary banks engages in a wide range of
commercial and personal banking services, and German American Bank and Peoples
provide a wide range of personal and corporate trust-related services. In
addition, several of the Company's subsidiary banks provide investment services
through a full-service brokerage operation.
The Company and its subsidiary banks operate primarily in the banking
industry, which accounts for over ninety percent (90%) of the Company's
consolidated revenues, operating income and identifiable assets. Through its
banking subsidiaries, the Company generates commercial, installment and mortgage
loans and receives deposits from customers located primarily in the local market
area. The overall loan portfolio is diversified among a variety of individual
borrowers; however, a significant portion of such debtors depend upon the
agriculture, poultry and wood furniture manufacturing industries for employment.
Although wood 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.
<PAGE>
Additional information regarding the Company and its subsidiaries is
included in the Company's Annual Report to Shareholders for 1997, selected
portions of which are filed as Exhibit 13 to this Annual Report on Form 10-K
(the "Shareholders' Report") and are incorporated herein by reference.
Competition
The banking business is highly competitive. The Company's subsidiary banks
compete not only with financial institutions that have offices in the same
counties but also compete with financial institutions that are located in other
neighboring areas in obtaining deposits, making loans and providing many other
types of financial services. The banking market in which the Company's banking
subsidiaries operate is heavily influenced by larger financial institutions
located in Evansville and Indianapolis, Indiana, Louisville, Kentucky and other
cities. In addition to other commercial banks, the Company's subsidiary banks
compete with savings and loan associations, savings banks, credit unions,
production credit associations, federal land banks, finance companies, credit
card companies, personal loan companies, money market funds, mortgage companies
and other non-depository financial intermediaries.
Recent changes in federal and state law have resulted in and are expected
to continue to result in increased competition. The reductions in legal barriers
to the acquisition of banks by out-of-state bank holding companies resulting
from implementation of the Riegle-Neal Interstate Banking And Branching
Efficiency Act of 1994 and other recent and proposed changes are expected to
continue to further stimulate competition in the markets in which the Banks
operate, although it is not possible to predict the extent or timing of such
increased competition.
Employees
At January 31, 1998 the Company and its subsidiaries employed approximately
216 employees. There are no collective bargaining agreements, and employee
relations are considered to be good.
Regulation and Supervision
The Company is subject to the Bank Holding Company Act of 1956, as amended
("BHC Act"), and is required to file with the Board of Governors of the Federal
Reserve System ("FRB") annual reports and such additional information as the FRB
may require. The FRB may also make examinations or inspections of the Company.
The BHC Act prohibits a bank holding company from engaging in, or acquiring
direct or indirect control of more than 5 percent of the voting shares of any
company engaged in nonbanking activities. One of the principal exceptions to
this prohibition is for activities deemed by the FRB to be "closely related to
banking." Under current regulations, bank holding companies and their
subsidiaries are permitted to engage in such banking-related business ventures
as sales and consumer finance, equipment leasing, computer service bureau and
software operations, and mortgage banking.
The BHC Act and Indiana law restrict banking expansion by banks and bank
holding companies. Under current Indiana law, Indiana banks may establish an
unlimited number of branches anywhere within the State of Indiana. A holding
company may establish non-banking offices without geographical limitation.
Under the BHC Act, the Company must receive the prior written approval of
the FRB or its delegate before it may acquire ownership or control of more than
5 percent of the voting shares of another bank, and under Indiana law it may not
acquire 25 percent or more of the voting shares of another bank without the
prior approval of the Indiana Department of Financial Institutions ("DFI"). The
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") provides for nationwide interstate banking and branching.
Since September 30, 1995, well-capitalized bank holding companies have been
authorized, pursuant to the legislation, to acquire banks and bank holding
companies in any state. The Interstate Act also permits banks to merge across
state lines, thereby creating a main bank in one state with branches in other
states. Interstate branching-by-merger provisions became effective on June 1,
1997, unless a state took legislative action prior to that date. Effective March
14, 1996, Indiana "opted-in" to the interstate branching provisions of the
Interstate Act.
The Company's subsidiary banks are under the supervision of and subject to
examination by the Indiana Department of Financial Institutions, the Office of
Comptroller of Currency and the Federal Deposit Insurance Corporation ("FDIC").
Regulation and examination by banking regulatory agencies are primarily for the
benefit of depositors rather than shareholders.
<PAGE>
The earnings of commercial banks and their holding companies are affected
not only by general economic conditions but also by the policies of various
governmental regulatory authorities. In particular, the FRB regulates money and
credit conditions and interest rates in order to influence general economic
conditions, primarily through open-market operations in U.S. Government
securities, varying the discount rate on bank borrowings, and setting reserve
requirements against bank deposits. These policies have a significant influence
on overall growth and distribution of bank loans, investments and deposits, and
affect interest rates charged on loans and earned on investments or paid for
time and savings deposits. FRB monetary policies have had a significant effect
on the operating results of commercial banks in the past and this is expected to
continue in the future. The general effect, if any, of such policies upon the
future business and earnings of the Company cannot accurately be predicted.
The Company is required by the FRB and the FDIC to maintain minimum levels
of capital. These required capital levels are expressed in terms of capital
ratios, known as the leverage ratio and the capital to risk-based assets ratios.
The Company significantly exceeds the minimum required capital levels for each
measure of capital adequacy. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources," included in
the Shareholders' Report.
Also, FDIC regulations define five categories of financial institutions for
purposes of implementing prompt corrective action and supervisory enforcement
requirements of the Federal Deposit Insurance Corporation Improvements Act of
1991. The category to which the most highly capitalized institutions are
assigned is termed "Well Capitalized." Institutions falling into this category
must have a total risk-based capital ratio (the ratio of total capital to
risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the
ratio of Tier 1, or "core", capital to risk-weighted assets) of at least 6%, a
leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and
must not be subject to any written agreement, order or directive from its
regulator relative to meeting and maintaining a specific capital level. On
December 31, 1997, the Company had a total risk-based capital ratio of 16.51%, a
Tier 1 risk-based capital ratio of 15.24% (based on Tier 1 capital of
$50,874,000 and total risk-weighted assets of $333,796,000), and a leverage
ratio of 10.48%. The Company meets all of the requirements of the "Well
Capitalized" category and, accordingly, the Company does not expect these
regulations to significantly impact operations.
<PAGE>
Statistical Disclosures
The following statistical data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations (Item 7), Selected Financial Data (Item 6), and the financial
statements and notes (Item 8) included elsewhere herein through incorporation by
reference to the indicated pages of the Shareholders' Report.
Securities (in thousands)
The following tables set forth the carrying amount of Securities at the dates
indicated:
<TABLE>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Securities Held-to-Maturity:
U.S. Treasury and other
U.S. Government Agencies
and Corporations $1,500 $2,519 $5,037
State and Political Subdivisions 20,154 18,253 14,472
Mortgage-backed Securities 695 999 1,435
Corporate Securities 111 47 ---
Other Securities 1,763 1,395 1,119
----- ----- -----
Subtotal of Securities
Held-to-Maturity $24,223 $23,213 $22,063
======= ======= =======
Securities Available-for-Sale:
U.S. Treasury and other U.S.
Government Agencies
and Corporations $57,815 $47,041 $31,719
State and Political Subdivisions 21,620 20,186 17,558
Mortgage-backed Securities 15,661 24,078 37,060
Corporate Securities 4,529 7,245 6,463
Other Securities 14 7 87
-- - --
Subtotal of Securities
Available-for-Sale 99,639 98,557 92,887
------ ------ -------
Total Securities $123,862 $121,770 $114,950
======== ======== ========
</TABLE>
<PAGE>
Statistical Disclosures (continued)
The following table sets forth the contractual maturities of securities at
December 31, 1997 and the weighted average yields of such securities (calculated
on the basis of the cost and effective yields weighted for the maturity of each
security.) Contractual maturities may differ from actual due to rights to prepay
or call. Other securities totaling $1,764 are comprised of restricted stock
which do not have contractual maturities and are excluded from the table below.
<TABLE>
Maturing
---------
Within After One But After Five But After Ten
One Year Within Five Years Within Ten Years Years
--------- ------------------ ----------------- ---------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- -------- ------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and
other Government
Agencies and
Corporations $11,498 5.45% $22,996 6.30% $24,801 6.87% --- ---
State and Political
Subdivisions 2,147 9.01% 10,250 9.16% 6,973 9.77% $21,182 9.21%
Mortgage-backed
Securities 85 5.00% 2,586 6.76% 3,241 5.94% 10,451 6.27%
Corporate Securities 264 6.41% 1,585 7.55% 1,052 7.97% 1,738 7.02%
--- ----- ----- -----
Totals $13,994 6.01% $37,417 7.17% $36,067 7.38% $33,371 8.18%
======= ======= ======= =======
</TABLE>
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above
table.
<PAGE>
Statistical Disclosures (continued)
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
(dollar references in thousands)
1997 compared to 1996 1996 compared to 1995
--------------------- ---------------------
Increase / (Decrease) Due to (1) Increase / (Decrease) Due to (1)
-------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal Funds Sold $(92) $31 $(61) (103) (69) (172)
Short-term Investments (114) 5 (109) (504) (63) (567)
Taxable Securities 151 381 532 241 147 388
Nontaxable Securities (2) 374 (8) 366 547 (173) 374
Loans and Leases (3) 1,481 (11) 1,470 1,931 (274) 1,657
------ ----- ------ ------ ----- ------
Total Interest Income 1,800 398 2,198 2,112 (432) 1,680
----- ----- ------ ------ ----- ------
Interest Paid:
Savings 7 94 101 163 (149) 14
Time Deposits 1,003 (62) 941 537 477 1,014
Federal Funds Purchased
and Securities Sold
Under Agreements to
Repurchase (51) (22) (73) (113) (78) (191)
Demand Notes Issued to
the U.S. Treasury (58) 18 (40) (61) (15) (76)
Notes Payable (121) 30 (91) (16) (11) (27)
------- ---- ---- ---- --- -----
Total Interest Expense 780 58 838 510 224 734
------ ---- --- --- --- ----
Net Interest Earnings $1,020 $340 $1,360 1,602 (656) 946
======= ==== ====== ===== ===== =====
</TABLE>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
(2) Change in interest income include the effect of tax equivalent adjustments
using a tax rate of 34 percent for all years presented.
(3) Interest income on loans includes loan fees of $458, $516, and $339 for
1997, 1996, and 1995, respectively.
<PAGE>
Statistical Disclosures (continued)
The following is a schedule of loans by major category for each reported
period:
<TABLE>
December 31,
(dollar references in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real Estate Loans Secured
by 1-4 Family Residential
Properties $107,943 $93,713 $85,543 $82,810 $69,088
Loans to Finance Agricultural
Production, Poultry and Other
Loans to Farmers 53,110 57,073 61,251 67,162 75,556
Commercial and Industrial
Loans 106,843 110,894 98,563 90,346 69,910
Loans to Individuals for
Household, Family and Other
Personal Expenditures 61,297 50,200 41,944 35,124 32,154
Economic Development
Commission Bonds 500 575 608 625 762
Lease Financings 1,045 1,279 2,167 2,603 3,216
----- ----- ----- ----- -----
Total Loans $330,738 $313,734 $290,076 $278,670 $250,686
======== ======== ======== ======== ========
</TABLE>
The following table indicates the amounts of loans (excluding residential
mortgages on 1-4 family residences, installment loans and lease financing)
outstanding as of December 31, 1997 which, based on remaining scheduled
repayments of principal, are due in the periods indicated.
<TABLE>
Maturing
(dollar references in thousands)
--------------------------------
Within After One After
One But Within Five
Year Five Years Years Total
<S> <C> <C> <C> <C>
Commercial, Agricultural
and Poultry $46,170 $30,674 $83,609 $160,453
</TABLE>
<TABLE>
Interest Sensitivity
Fixed Variable
Rate Rate
---- ----
<S> <C> <C>
Loans maturing after
one year $29,506 $84,777
</TABLE>
<PAGE>
Statistical Disclosures (continued)
The Provision for Loan Losses provides a reserve (the Allowance for Loan
Losses) to which loan losses are charged as those losses become identifiable.
Management determines the appropriate level of the Allowance for Loan Losses on
a quarterly basis through an independent review by the Bank's credit review
section done by employees who have no direct lending responsibilities. Through
this review, all commercial loans with outstanding balances in excess of $25,000
are analyzed with particular attention paid to those loans which are considered
by management to have an above-average level of risk. This analysis is evaluated
by Senior Management and serves as the basis for determining the adequacy of the
Allowance for Loan Losses. Through this review process a specific portion of the
reserve is allocated to impaired loans and to those loans which are considered
to represent significant exposure to risk, and estimated potential losses are
provided based on historic loan loss experience for consumer loans, residential
mortgage loans, and commercial loans not specifically reviewed. In addition, a
balance of the reserve is unallocated to provide an allowance for risk, such as
concentrations of credit to specific industry groups, which are difficult to
quantify in an absolute dollar amount.
The following table presents information concerning the aggregate amount of
underperforming assets. Underperforming loans comprise: (a) loans accounted for
on a nonaccrual basis ("nonaccrual loans"); (b) loans contractually past due 90
days or more as to interest or principal payments (but not included in the loans
in (a) above) ("past due loans"); and (c) loans not included above which are
"troubled debt restructuring" as defined in Statement of Financial Standards No.
15 "FASB 15", "Accounting by Debtors and Creditors for Troubled Debt
Restructuring" ("restructured loans").
<TABLE>
December 31,
(dollar references in thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans $562 $1,370 $1,093 $1,305 $1,400
Past Due Loans 2,710 1,102 2,689 639 461
Restructured Loans --- --- 122 26 ---
--- --- --- -- ---
Total Underperforming
Loans 3,272 2,472 3,904 1,970 1,861
Other Real Estate 146 203 286 497 698
--- --- --- --- ---
Total Underperforming
Assets $3,418 $2,675 $4,190 $2,467 $2,559
====== ====== ====== ====== ======
</TABLE>
Loans are placed on nonaccrual status when scheduled principal or interest
payments are past due for 90 days or more, unless the loan is well secured and
in the process of collection. The gross interest income that would have been
recognized in 1997 on underperforming loans if the loans had been current in
accordance with their original terms is $284. Interest income recognized on
underperforming loans for 1997 was $231.
Statements of Financial Accounting Standards No. 114 and No. 118 were
adopted January 1, 1995. These standards require recognition of loan impairment
if a loan's full principal or interest payments are not expected to be received.
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral, by allocating a portion of
the allowance for loan losses to such loans. No increase to the allowance for
loan losses was required at January 1, 1995 as a result of the adoption of these
new standards. The total dollar amount of impaired loans at December 31, 1997
was $2,272,000. For additional detail on impaired loans, see Note 3 of the
consolidated financial statements included in the Shareholders' Report (Exhibit
13.4).
At December 31, 1997, the Company had a total of $9,790,000 of loans on its
commercial loan watch list. All loans on the watch list that are on non-accrual
or are past due 90 days or more are included in the table above. Loans may be
placed on the watch list as a result of delinquent status, concern about the
borrower's financial condition or the value of the collateral securing the loan,
substandard classification during regulatory examinations or simply as a result
of management's desire to monitor more closely a borrower's financial condition
and performance.
<PAGE>
It is management's belief that loans classified for regulatory purposes as
loss, doubtful, substandard, or special mention that are not included in the
table and discussion above, do not represent or result from trends or
uncertainties which will have a material impact on future operating results,
liquidity or capital resources. At December 31, 1997 there were no material
credits not already disclosed as underperforming, impaired and as watch list
about which management is aware of possible credit problems of borrowers which
causes management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms. This paragraph includes forward-looking
statements that are based on management's assumptions concerning future economic
and business conditions as they affect the local economy in general and the
Company's borrowers in particular, which economic and business assumptions are
inherently uncertain and subject to risk and may prove to be invalid. Readers
are also cautioned that management relies upon the truthfulness of statements
made by the borrowers, and that misrepresentation by borrowers is an inherent
risk of the activity of lending money that could cause these forward-looking
statements to be inaccurate.
<PAGE>
Statistical Disclosures (continued)
Summary of Loan Loss Experience
(in thousands)
The following table summarizes changes in the allowance for loan losses
arising from loans charged-off and recoveries on loans previously charged-off,
by loan category, and additions to the allowance which have been charged to
expense.
<TABLE>
Year Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance of allowance for possible
losses at beginning of period $6,528 $6,893 $6,602 $5,745 $4,496
Addition of Affiliate Banks --- --- --- 195 164
Loans charged-off:
Real Estate Loans Secured by 1-4 Family
Residential Properties 41 11 221 101 ---
Loans to Finance Agricultural Production, Poultry
and Other Loans to Farmers --- 286 --- --- 12
Commercial and Industrial Loans 316 372 52 99 378
Loans to Individuals for Household, Family
and Other Personal Expenditures 242 205 122 65 69
Economic Development Bonds --- --- --- --- ---
Term Federal Funds Sold --- --- --- --- ---
--- --- --- --- ---
Total Loans charged-off 599 874 395 265 459
--- --- --- --- ---
Recoveries of previously charged-off Loans:
Real Estate Loans Secured by 1-4 Family
Residential Properties --- 14 6 6 14
Loans to Finance Agricultural Production, Poultry
and Other Loans to Farmers 25 125 538 --- 514
Commercial and Industrial Loans 648 118 61 187 162
Loans to Individuals for Household, Family
and Other Personal Expenditures 61 42 32 47 57
Economic Development Commission Bonds --- --- --- --- --
Term Federal Funds Sold --- --- --- --- ---
--- --- --- --- ---
Total Recoveries 734 299 637 240 747
--- --- --- --- ---
Net Loans recovered / (charged-off) 135 (575) 242 (25) 288
--- ----- --- ---- ---
Additions to allowance charged to expense (408) 210 49 687 797
----- --- -- --- ---
Balance at end of period $6,255 $6,528 $6,893 $6,602 $5,745
====== ====== ====== ====== ======
Ratio of net recoveries / (charge-offs) during
the period to average loans outstanding .04% (.19)% .08% (.01)% .12%
==== ====== ==== ====== ====
</TABLE>
<PAGE>
Statistical Disclosures (continued)
The following table indicates the breakdown of the allowance for loan losses for
the periods indicated:
<TABLE>
(dollar references in thousands)
December 31, December 31, December 31,
1997 1996 1995
---- ---- ----
Allowance Ratio of Allowance Ratio of Allowance Ratio of
Loans to Loans to Loans to
Total Total Total
Loans Loans Loans
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Residential Real Estate $270 32.64% $311 29.87% $202 29.49%
Agricultural Loans 858 16.06% 1,250 18.19% 2,616 21.12%
Commercial and
Industrial Loans 2,394 32.62% 2,369 35.76% 2,067 34.72%
Loans to Individuals 176 18.53% 303 16.00% 263 14.46%
Economic Development
Commission Bonds --- 0.15% --- 0.18% --- 0.21%
Term Federal Funds
Sold --- --- --- --- --- ---
Unallocated 2,557 N/A 2,295 N/A 1,745 N/A
----- ----- -----
Totals $6,255 100.00% $6,528 100.00% $6,893 100.00%
====== ====== ======
</TABLE>
<TABLE>
(dollar references in thousands)
December 31, December 31,
1994 1993
---- ----
Allowance Ratio of Allowance Ratio of
Loans to Loans to
Total Total
Loans Loans
-------- -------- ---------- -------
<S> <C> <C> <C> <C>
Residential Real Estate $186 29.72% $118 27.56%
Agricultural Loans 2,172 24.10% 1,083 25.52%
Commercial and
Industrial Loans 1,283 33.36% 1,113 33.79%
Loans to Individuals 218 12.60% 230 12.83%
Economic Development
Commission Bonds --- 0.22% --- .30%
Term Federal Funds
Sold --- --- --- ---
Unallocated 2,743 N/A 3,201 N/A
----- -----
Totals $6,602 100.00% $5,745 100.00%
====== ======
</TABLE>
<PAGE>
Statistical Disclosures (continued)
The average amount of deposits is summarized for the periods indicated in the
following table:
<TABLE>
(dollar references in thousands)
December 31,
1997 1996 1995
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Non-interest Bearing $47,335 --- $45,242 --- $40,200 ---
Interest Bearing 52,000 2.04% 52,165 2.16% 53,907 2.27%
Savings Deposits 74,861 3.23% 74,428 3.02% 66,696 3.20%
Time Deposits 251,044 5.48% 232,729 5.50% 222,779 5.29%
------- ------- -------
Totals $425,240 4.05% $404,564 4.37% $383,582 4.24%
======== ======== ========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more are summarized
as follows:
December 31,
1997
(in thousands)
3 months or less $9,642
Over 3 through 6 months 8,950
Over 6 through 12 months 2,941
Over 12 months 4,128
-----
Total $25,661
=======
Return on Equity and Assets
The ratio of net income to average shareholders' equity and to average total
assets, and certain other ratios, are as follows:
<TABLE>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Percentage of Net Income to:
Average Shareholders' Equity 12.13% 10.43% 11.32%
Average Total Assets 1.26% 1.05% 1.09%
Percentage of Dividends
Declared per Common Share
to Net Income per
Common Share (1) 37.39% 42.39% 39.56%
Percentage of Average
Shareholders' Equity to
Average Total Assets 10.39% 10.07% 9.63%
</TABLE>
(1) Based on historical dividends declared by German American Bancorp without
restatement for pooling.
<PAGE>
Forward-Looking Statements
This Form 10-K and future filings made by the Company with the Securities
and Exchange Commission, as well as other filings, reports and press releases
made or issued by the Company and the Banks, and oral statements made by
executive officers of the Company and the Banks, may include forward-looking
statements relating to such matters as (a) assumptions concerning future
economic and business conditions and their effect on the economy in general and
on the markets in which the Banks do business, (b) expectations regarding
revenues, expenses, and earnings for the Company and the Banks, (c) the impact
of future or pending acquisitions, (d) deposit and loan volume, and (e) new
products or services. Such forward-looking statements are based on assumptions
rather than historical or current facts and, therefore, are inherently uncertain
and subject to risk.
To comply with the terms of a "safe harbor" provided by the Private
Securities Litigation Reform Act of 1995 that protects the making of such
forward-looking statements from liability under certain circumstances, the
Company notes that a variety of factors could cause the actual results or
experience to differ materially from the anticipated results or other
expectations described or implied by such forward-looking statements. These
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include, but are not limited to, the
following: (a) the risk of adverse changes in business and economic conditions
generally and in the specific markets in which the Banks operate which might
adversely affect credit quality and deposit and loan activity; (b) the risk of
rapid increases or decreases in interest rates, which could adversely affect the
Company's net interest margin if changes in its cost of funds do not correspond
to the changes in income yields; (c) possible changes in the legislative and
regulatory environment that might negatively impact the Company and the Banks
through increased operating expenses or restrictions on authorized activities;
(d) the possibility of increased competition from other financial and
non-financial institutions; (e) the risk that borrowers may misrepresent
information to management of the Banks, leading to loan losses, which is an
inherent risk of the activity of lending money; and (f) the risk that banks that
the Company may acquire in the future may be subject to undisclosed asset
quality problems, contingent liabilities or other unanticipated problems; and
(g) other risks detailed from time to time in the Company's filings with the
Securities and Exchange Commission. The Corporation and the Banks do not
undertake any obligation to update or revise any forward-looking statements
subsequent to the date on which they are made.
Item 2. Properties.
German American Bank conducts its operations from its main office
building at 711 Main Street, in Jasper, Indiana. The main office building is
owned by German American and contains approximately 23,600 square feet of office
space. There is no indebtedness on such property on which German American Bank's
main office is located. German American Bank has seven branches, three of which
are located in Jasper, and one each in the Dubois County towns of Huntingburg,
Ferdinand, Dubois and Ireland. Of these branch facilities, five are owned by
German American Bank and two are leased.
Peoples operates from its main office in Washington, Indiana, which
contains approximately 22,500 square feet, and three branch offices, all of
which (except for one leased branch) are owned by Peoples, plus its Union
Banking Division facilities. The office of the Union Banking Division of Peoples
in Loogootee, Indiana, contains approximately 12,000 square feet of space. The
facility was constructed in 1988 and is owned by Peoples.
Community Bank conducts its operations from three locations, all of which
are owned by Community Bank. Community Bank's principal banking office is
located in Otwell, Indiana, in a building containing approximately 2,850 square
feet.
First State Bank's main office facility, located in Tell City, Indiana,
constructed in 1981, contains approximately 13,900 square feet. First State has
three branches, two of which are located in Tell City and one in Rockport,
Indiana. Of these branch facilities, two are owned by First State, with one
being leased.
Item 3. Legal Proceedings.
There are no pending legal proceedings, other than routine litigation
incidental to the business of the Company's subsidiary banks, of a material
nature in which the Company or any of its subsidiaries is involved.
Item 4. Submission of Matters to a Vote of Security Holders.
There was no matter submitted during the fourth quarter of 1996 to a vote
of security holders, by solicitation of proxies or otherwise.
<PAGE>
Special Item. Executive Officers of the Registrant.
<TABLE>
NAME AGE TITLE AND FIVE YEAR HISTORY
---- ----- ----------------------------
<S> <C> <C>
George W. Astrike (62) Chairman and CEO of the Company since 1995; Chairman and President
/CEO prior thereto. Chairman of German American Bank since 1995;
Chairman and President prior thereto. Director of each of the other Banks
since acquisition by the Company.
Mark A. Schroeder (44) President / Chief Operating Officer of the Company since 1995; Vice President /
Chief Financial Officer prior thereto. Director of each of the other Banks since
acquisition by the Company.
Richard E. Trent (39) Vice President / Chief Financial Officer of the Company since
December, 1997; Vice President, Budgets & Financial Analysis of
CNB Bancshares from January, 1997; Manager of Finance and Planning, Wells Fargo
Bank from August, 1996; Various financial officer capacities within
American General Finance, Inc. and Subsidiaries prior thereto.
Urban Giesler (60) Treasurer and Secretary of the Corporation; Senior Vice President -
Personal Banking of German American Bank since January, 1993;
Senior Vice President - Retail Lending of German American Bank prior thereto.
John M. Gutgsell (42) Vice President and Controller of the Company since 1995; Vice
President and Controller of German American Bank prior thereto.
Stan J. Ruhe (46) Executive Vice President - Credit Administration of the Company since
1995. Executive Vice President of German American Bank since 1995;
Senior Vice President - Credit Administration prior thereto.
James E. Essany (43) Senior Vice President - Marketing of the Company since
1995; Senior Vice President - Operations / Administration of German American
Bank prior thereto.
</TABLE>
There are no family relationships between any of the officers of the
Corporation. All officers are elected for a term of one year.
<PAGE>
PART II
The information in Part II of this report is incorporated by reference to
the indicated sections of the Registrant's annual report to shareholders for the
fiscal year ended December 31, 1997 ("Shareholders' Report").
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
See "Market and Dividend Information" on page 38 of the Shareholders'
Report which is filed as Exhibit 13.1 to this report and is incorporated herein
by reference.
Item 6. Selected Financial Data.
See "Five Year Summary of Consolidated Financial Statements and Related
Statistics" on page 1 of the Shareholders' Report which is filed as Exhibit 13.2
to this report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 2 through 15 of the Shareholders' Report which
is filed as Exhibit 13.3 to this report and is incorporated herein by reference.
Item 7A. 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 interest rate risk and liquidity risk. Management's approach to
monitoring and mitigating these risks are explained in detail in the Risk
Management section of Management's Discussion and Analysis in the Company's
Annual Report. The following table sets forth the expected maturities of
interest sensitive assets and liabilities as of December 31, 1997. However, from
a risk management perspective, the Company believes that a repricing schedule of
interest sensitive assets and liabilities may be more relevant in analyzing the
value of such instruments.
The information presented is subject to various limitations. Certain
assets and liabilities in the same expected maturity period may react at
different times and/or in differing degrees from the amounts shown during a
given change in market interest rates. Certain assets, such as adjustable rate
mortgages, have features that restrict changes in interest rates on a short-term
basis, and over the life of the loans. In addition, repricing of certain
categories of assets and liabilities are subject to competitive and other
pressures beyond the Company's control. As a result, assets and liabilities in a
given maturity period may in fact mature in different periods and in differing
amounts than indicated in the accompanying table.
The information presented also includes various assumptions. With regard
to investment securities, it is assumed that callable securities mature at the
first call date. The schedule of maturities of non-callable asset-backed and
mortgage-backed securities is based on composite national prepayment estimates.
The investment portfolio also includes restricted stock, which does not have a
contractual maturity. Loan maturities are based on scheduled contractual
payments, with no estimation for prepayments. Given the Company's demonstrated
ability to attract and retain core deposits, no decay rates are assumed in the
deposit portfolio. The Company's money market securities and short-term
borrowings at December 31, 1997 consisted principally of overnight investments
and repurchase agreements.
<PAGE>
SCHEDULE OF ESTIMATED CONTRACTUAL MATURITIES as of December 31, 1997
<TABLE>
Fair
Less than 1-2 2-3 3-4 4-5 More than Market
1 Year Years Years Years Years 5 Years Total Value
-------- ------- ----- ----- ----- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal Funds Sold and
Other Short-term Investments $ 12,000 $ --- $ --- $ --- $ --- $ --- $ 12,000 $ 12,000
Investment Securities:
Adjustable Rate 3,301 872 760 343 323 1,488 7,087 7,080
Fixed Rate 56,042 15,830 5,913 4,786 2,070 32,134 116,775 117,813
Loans (net of unearned):
Adjustable Rate 51,427 14,975 14,657 13,067 12,213 100,588 206,927 209,929
Fixed Rate 45,235 19,296 15,552 9,528 5,788 28,143 123,542 123,542
------ ------ ------ ------ ------ ------- ------- --------
TOTAL EARNING ASSETS $168,005 $ 50,973 $ 36,882 $ 27,724 $ 20,394 $ 162,353 $ 466,331 $ 470,364
======== ======== ======== ======== ======== ========= ========= ========
INTEREST-BEARNING LIABILITIES
Deposits:
Adjustable Rate $ 56,528 $ 734 $ --- $ --- $ --- $ --- $ 57,262 $ 57,262
Fixed Rate 166,785 56,606 15,205 5,861 5,447 72,548 322,452 324,508
Short-term Borrowings 4,933 --- --- --- --- --- 4,933 4,933
----- ------ ------ ------ ----- ------ -------- -------
TOTAL INTEREST BEARING
LIABILITIES $228,246 $ 57,340 $ 15,205 $ 5,861 $ 5,447 $ 72,548 $ 384,647 $ 386,703
======== ======== ======== ======= ======= ========= ========= =========
</TABLE>
YEILDS AND RATES BY ESTIMATED CONTRACTUAL MATURITIES as of December 31, 1997
<TABLE>
Less than 1-2 2-3 3-4 4-5 More than
1 Year Years Years Years Years 5 Years Total
------- ----- ----- ----- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal Funds Sold and
Other Short-term Investments 5.84% --- --- --- --- --- 5.84%
Investment Securities:
Adjustable Rate 4.71 6.15% 5.29% 5.62% 5.59% 5.96% 5.35
Fixed Rate 6.58 6.59 7.31 7.74 8.97 8.49 7.23
Loans (net of unearned):
Adjustable Rate 9.08 8.97 8.95 8.91 8.89 8.56 8.79
Fixed Rate 9.07 9.16 9.07 8.96 8.87 8.85 9.02
---- ---- ----- ----- ---- ----- -----
TOTAL EARNING ASSETS 7.93% 8.25% 8.66% 8.68% 8.84% 8.57% 8.33%
===== ====== ===== ===== ===== ===== =====
INTEREST-BEARNING LIABILITIES
Deposits:
Adjustable Rate 4.11% 5.25% --- --- --- --- 4.13%
Fixed Rate 5.45 5.74 6.04% 5.58% 5.84% 2.11% 4.79
Short-term Borrowings 4.05 --- --- --- --- --- 4.05
----- ----- ----- ----- ---- ----- ----
TOTAL INTEREST BEARING
LIABILITIES 5.09% 5.67% 6.04% 5.58% 5.84% 2.11% 4.67%
===== ====== ===== ===== ===== ====== ====
</TABLE>
See also "Interest Rate Risk Management" in Management's Discussion and
Analysis of Financial Condition and Results of Operations on pages 14 through 15
of the Shareholders' Report filed as Exhibit 13.3 to this report and is
incorporated by reference.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The financial statements of the Company and related notes on pages 16
through 36 of the Shareholders' Report and the Auditors' Report thereon on page
37 of the Shareholders' Report which are filed as Exhibit 13.4 to this report,
are incorporated herein by reference.
The Interim Financial Data on page 3 of the Shareholders' Report, which
is included as Table 1 of "Management's Discussion and Analysis of Financial
Condition and Results of Operations" filed as Exhibit 13.3 to this report, is
incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not Applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information relating to Directors of the Corporation will be included
under the caption "Election of Directors" in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 23, 1997 which will be
filed with the Commission within 120 days of the end of the fiscal year covered
by this Report (the "1997 Proxy Statement"), which section is incorporated
herein by reference in partial answer to this Item.
Information relating to Executive Officers of the Corporation is included
under the caption "Executive Officers of the Registrant" under Part I of this
Report on Form 10-K.
Item 11. Executive Compensation.
Information relating to compensation of the Corporation's Executive
Officers and Directors will be included under the captions "Executive
Compensation" and "Election of Directors -- Compensation of Directors" in the
1998 Proxy Statement of the Corporation, which sections are incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information relating to security ownership of certain beneficial owners
and management of the Corporation will be included under the captions "Election
of Directors" and "Principal Owners of Common Shares" of the 1998 Proxy
Statement of the Corporation, which sections are incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
Information responsive to this Item 13 will be included under the
captions "Executive Compensation - Certain Business Relationships and
Transactions" and "Executive Compensation - Compensation Committee Interlocks
and Insider Participation" of the 1998 Proxy Statement of the Corporation, which
sections are incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a) The following 1997, 1996, and 1995 consolidated financial statements of
the Corporation, and the Auditors' Report thereon, included on pages 16 through
37 of the Shareholders' Reports, are incorporated into Item 8 of this report by
reference.
Location in
1. Financial Statements Shareholders' Report
German American Bancorp and Subsidiaries
Consolidated Balance Sheets at December 31,
1997 and December 31, 1996 Page 16
Consolidated Statements of Income, years
ended December 31, 1997, 1996, and 1995 Page 17
Consolidated Statements of Cash Flows, years
ended December 31, 1997, 1996, and 1995 Page 18
Consolidated Statements of Changes in
Shareholders' Equity, years ended
December 31, 1997, 1996, and 1995 Page 19
Notes to the Consolidated Financial
Statements Pages 20 - 36
Independent Auditors' Report Page 37
2. Other financial statements and schedules are omitted because they are not
required or because the required information is included in the consolidated
financial statements or related notes.
b) Reports on Form 8-K
The following Report on Form 8-K was filed by the Registrant during the
quarter ended December 31, 1997:
<TABLE>
Date Items Description
---- ------- -------------
<S> <C> <C>
11/12/97 5 & 7 Reported agreements to acquire CSB
Bancorp and FSB Financial Corporation.
</TABLE>
c) Exhibits:
The Exhibits described in the Exhibit List immediately following the
"Signatures" page of this report (which is incorporated herein by reference) are
hereby filed as part of this report.
<PAGE>
Pursuant to the requirements of Section 13 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
(Registrant)
Date: March 30, 1998 By/s/George W. Astrike
George W. Astrike,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 1998 By/s/George W. Astrike
George W. Astrike, Chairman of the
Board and Director
(Chief Executive Officer)
Date: March 30, 1998 By/s/Mark A. Schroeder
Mark A. Schroeder, President and
Director (Chief Operating Officer)
Date: March 30, 1998 By/s/David G. Buehler
David G. Buehler, Director
Date: March __, 1998 _______________________________
Michael B. Lett, Director
Date: March __, 1998 _______________________________
Gene C. Mehne, Director
Date: March 30, 1998 By/s/Robert L. Ruckriegel
Robert L. Ruckriegel, Director
Date: March 30, 1998 By/s/William R. Hoffman
William R. Hoffman, Director
Date: March 30, 1998 By/s/Joseph F. Steurer
Joseph F. Steurer, Director
Date: March 30, 1998 By/s/A.W. Place Jr.
A. W. Place Jr., Director
Date: March 30, 1998 By/s/Larry J. Seger
Larry J. Seger, Director
Date: March __, 1998 _______________________________
C.L. Thompson, Director
Date: March __, 1998 _______________________________
David B. Graham, Director
Date: March 30, 1998 By/s/John M. Gutgsell
John M. Gutgsell, Controller
(Principal Accounting Officer)
<PAGE>
Executive
Compensation
Plans and Exhibit
Arrangements* Number Exhibit List
2.1 Agreement of Merger dated December 8, 1997, among the
Registrant, CSB Bancorp and the Citizens State Bank of
Petersburg, as amended, is incorporated by reference from
Appendix A to the CSB Bancorp and FSB Financial Corporation
S-4.
2.2 Agreement of Merger dated January 30, 1998, among the
Registrant, FSB Corporation and the FSB Bank of Francisco,
as amended, is incorporated by reference from Appendix A to
the CSB Bancorp and FSB Financial Corporation S-4.
3.1 Restated Articles of Incorporation of the Registrant as
amended April 24, 1995 are Incorporated by reference to
Exhibit 3.1 to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1995.
3.2 Restated Bylaws of the Registrant as amended August 14,
1990, are incorporated by reference to Exhibit 3.2 to
Registrant's Form 10-K for the year ended December 31, 1995.
10.1 Agreement and Plan of Reorganization by and among Peoples
Bancorp of Washington, the Registrant, and certain
affiliates, dated September 27, 1996, is incorporated by
reference to Exhibit 2 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
10.2 Sublease entered by and between Buehler Foods, Inc. and The
German American Bank dated January 2, 1987 (Huntingburg
Banking Center Branch) is incorporated by reference from
Exhibit 10.5 to the Registrant's Registration Statement on
Form S-4 filed February 28, 1994 (No. 33-75762.)
<PAGE>
10.3 Sublease entered by and between Buehler Foods, Inc. and the
Bank dated August 1, 1990 (The Crossing Shopping Center
Branch) is incorporated by reference to Exhibit 10.12 of the
Registrant's Report on Form 10-K for the year ended December
31, 1990.
10.4 Letter dated January 5, 1995 from the German American Bank
to Buehler Foods, Inc. notifying Buehler Foods, Inc. of
exercise of renewal option on The Crossing Shopping Center
Branch is incorporated by reference to Exhibit 10.4 of the
Registrant's Report on Form 10-K for the year ended December
31, 1994.
X 10.5 The Company's 1992 Stock Option Plan is incorporated by
reference from Exhibit 10.1 to the Registrant's Registration
Statement on Form S-4 filed January 21, 1993 (No. 33-55170)
(the "Unibancorp S-4").
X 10.6 Schedule identifying material terms of options (including
replacement options) granted to the Registrant's executive
officers under the Registrant's 1992 Stock Option Plan.
X 10.7 Executive Deferred Compensation Agreement dated December 1,
1992, between The German American Bank and George W.
Astrike, is incorporated herein by reference from Exhibit
10.3 to the Unibancorp S-4.
X 10.8 Director Deferred Compensation Agreement between The German
American Bank and certain of its Directors, is incorporated
herein by reference from Exhibit 10.4 to the Unibancorp S-4
(The Agreement entered into by George W. Astrike, a copy of
which was filed as Exhibit 10.4 to the Unibancorp S-4, is
substantially identical to the Agreements entered into by
the other Directors.) The schedule following Exhibit 10.4 to
the Unibancorp S-4 lists the Agreements with the other
Directors and sets forth the material detail in which such
Agreements differ from the Agreement filed as Exhibit 10.4
to the Unibancorp S-4.
X 10.9 Sublease entered by and between Buehler Foods, Inc. and
First State Bank, dated July 25, 1996 (Tell City Branch) is
incorporated by reference to Exhibit 10.9 of the
Registrant's Report on Form 10-K for the year ended December
31, 1996.
13.1 Market and Dividend Information (page 38) of the
Registrant's Annual Report to Shareholders for the year
ended December 31, 1997.
13.2 Five Year Summary of Consolidated Financial Statements and
Related Statistics (page 1) of the Registrant's Annual
Report to Shareholders for the year ended December 31, 1997.
13.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations (pages 2 through 15) of the
Registrant's Annual Report to Shareholders for the year
ended December 31, 1997.
13.4 Consolidated financial statements and related notes (pages
16 through 36), Auditor's Report (page 37) of the
Registrant's Annual Report to Shareholders for the year
ended December 31, 1997.
21 Subsidiaries of the Registrant.
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Crowe, Chizek and Company LLP
27 Financial Data Schedule.
*Exhibits that describe or evidence all management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Report are
indicated by an "X" in this column.
EXHIBIT 10.6
SCHEDULE IDENTIFYING MATERIAL
TERMS OF OPTIONS GRANTED TO
GERMAN AMERICAN BANCORP EXECUTIVE OFFICERS
UNDER THE 1992
STOCK OPTION PLAN(1)
<TABLE>
Option
Type of George Mark Stan Urban James Price
Option (2) Astrike Schroeder Ruhe Giesler Essany Per Share
<S> <C> <C> <C> <C> <C> <C> <C>
ORIGINAL GRANT 4/20/93 20,837.2500 17,364.3750 10,418.6250 5,209.3230 5,209.3230 9.3600
REPLACEMENT (3) 12/30/94 2,505.1110 2,315.2500 - - - 13.9900
REPLACEMENT (3) 7/10/95 4,368.8820 2,315.2500 - 694.5750 333.3960 13.4800
REPLACEMENT (3) 1/9/96 6,482.7000 - 1,603.0350 685.7550 694.5750 14.1700
REPLACEMENT (3) 7/15/96 - 1,984.5000 1,245.8250 621.8100 793.8000 15.6500
REPLACEMENT (3) 1/16/97 5,622.0000 3,505.0000 2,371.0000 1,617.0000 1,501.0000 17.7900
REPLACEMENT (3) 1/28/97 4,796.0000 - - - - 17.7400
REPLACEMENT (3) 8/1/97 - 2,390.0000 104.0000 502.0000 502.0000 19.4000
</TABLE>
1. Numbers of options and per share exercise prices have been
retroactively adjusted for subsequent stock splits and dividends.
2. The only new grants of options under the German American Bancorp 1992
Stock Option Plan (the "Plan") where made on April 20, 1993. All
options expire ten years after the date of grant. The options granted
to Mr. Astrike become exercisable with respect to one-half of the
shares immediately upon grant and with respect to the other one-half to
the shares on the first anniversary of the grant date. The options
granted to the other executive officers became exercisable with respect
to twenty percent of the shares on each of the five anniversary dates
beginning on the first anniversary date following the date of grant.
3. The Stock Option Plan provides that if the optionee tenders Common
Shares of the Corporation already owned by the optionee as payment, in
whole or in part, of the exercise price for the shares the optionee has
elected to purchase under the option, then the Corporation is obligated
to use its best efforts to issue a replacement option of the same type
(incentive or non-qualified option), with the same expiration date as
the option that was exercised, and covering a number of Common Shares
equal to the number of Common Shares tendered. The only grants made
under the Plan subsequent to April 20, 1993, are grant of such
replacement options.
EXHIBIT 13.1
- --------------------------------------------------------------------------------
Market and Dividend Information for
German American Bancorp Common Stock
- --------------------------------------------------------------------------------
MARKET AND DIVIDEND INFORMATION
The following table sets forth: (a) the high and low closing prices for the
Company's common stock as reported by NASDAQ by quarter for 1997 and 1996; and,
(b) dividends declared per share on the Company's common stock (not
retroactively restated for pooling of interests transactions) by quarter during
1997 and 1996. All per share information has been retroactively restated for all
stock dividends and stock splits.
<TABLE>
1997 1996
---- ----
High Low Dividend High Low Dividend
---- --- -------- ----- --- -------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $19.25 $18.25 $.10 First Quarter $15.36 $13.60 $.09
Second Quarter $20.00 $18.25 $.11 Second Quarter $16.10 $14.51 $.10
Third Quarter $22.75 $19.50 $.11 Third Quarter $17.00 $15.30 $.10
Fourth Quarter $33.57 $21.43 $.11 Fourth Quarter $18.33 $16.55 $.10
---- ----
$.43 $.39
==== ====
</TABLE>
The Common Stock was held of record by approximately 2,083 shareholders at
March 5, 1998.
Funds for payment by the Company of cash dividends are expected to be
obtained from dividends received by the Company from its subsidiaries. The
Company presently intends to follow its historical policy as to the amount,
timing and frequency of the payment of dividends. In addition, the Company's
Board of Directors presently intends to consider declaring and issuing a stock
dividend of 5% on an annual basis. The declaration and payment of future
dividends, however, will depend upon the earnings and financial condition of the
Company and its subsidiaries, general economic conditions, compliance with
regulatory requirements, and other factors.
THE COMPANY WILL PROVIDE A COPY OF ITS ANNUAL REPORT (FORM 10-K, AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION), WITHOUT EXHIBITS, FREE OF CHARGE TO ANY
SHAREHOLDER, UPON WRITTEN REQUEST. SUCH WRITTEN REQUESTS SHOULD BE MADE TO JOHN
M. GUTGSELL, CONTROLLER, GERMAN AMERICAN BANCORP, 711 MAIN STREET, JASPER,
INDIANA 47546.
EXHIBIT 13.2
- --------------------------------------------------------------------------------
Five Year Summary of Consolidated Financial Statements and Related Statistics
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
The following selected data have been taken from the Company's consolidated
financial statements and should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
<TABLE>
1997 1996 1995 1994 1993
---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Interest and Fees on Loans $29,350 $27,846 $26,197 $21,545 $20,238
Interest on Investments 8,118 7,515 7,619 6,378 7,133
----- ----- ----- ----- -----
Total Interest Income 37,468 35,361 33,816 27,923 27,371
------ ------ ------ ------ ------
Interest on Deposits 17,221 16,179 15,150 11,599 12,278
Interest on Borrowings 300 504 798 420 172
--- --- --- --- ---
Total Interest Expense 17,521 16,683 15,948 12,019 12,450
------ ------ ------ ------ ------
Net Interest Income 19,947 18,678 17,868 15,904 14,921
Provision for Loan Losses (408) 210 49 687 797
---- --- -- --- ---
Net Interest Income after Provision for
Loan Losses 20,355 18,468 17,819 15,217 14,124
Noninterest Income 2,487 2,227 1,764 1,933 1,836
Noninterest Expenses 13,668 13,288 12,418 10,910 10,874
------ ------ ------ ------ ------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting for Income Taxes 9,174 7,407 7,165 6,240 5,086
Income Tax Expense 3,035 2,513 2,323 1,958 1,642
----- ----- ----- ----- -----
Income Before Cumulative Effect of
Change in Accounting for Taxes 6,139 4,894 4,842 4,282 3,444
Cumulative Effect of Change in
Accounting for Income Taxes --- --- --- --- 218
--- --- --- --- ---
Net Income $6,139 $4,894 $4,842 $4,282 $3,662
=====================================================================================================================
Year-end Balances:
Total Assets $498,831 $489,443 $458,604 $432,939 $412,203
Total Loans, Net 324,214 306,754 282,457 270,981 243,766
Total Long-term Debt --- 1,000 1,000 1,000 1,000
Total Deposits 433,948 422,906 395,553 369,180 353,056
Total Shareholders' Equity 53,332 48,793 45,788 40,779 38,880
=====================================================================================================================
Per Share Data (1):
Income Before Cumulative Effect of
Change in Accounting for
Income Taxes $1.15 $0.92 $0.91 $0.80 $0.65
Net Income 1.15 0.92 0.91 0.80 0.69
Cash Dividends (2) 0.43 0.39 0.36 0.32 0.29
Book Value, End of Year 9.97 9.14 8.59 7.65 7.29
=====================================================================================================================
Other Data at Year-end:
Number of Shareholders 2,083 1,981 1,910 1,863 1,878
Number of Employees 216 218 213 203 188
Weighted Average Number of Shares(1) 5,343,727 5,335,316 5,331,745 5,331,163 5,331,157
</TABLE>
(1) Share and Per share data has been retroactively adjusted to give effect for
stock dividends and stock splits and excludes the dilutive effect of stock
options.
(2) Cash dividends represent historical dividends declared per share without
retroactive restatement for poolings.
EXHIBIT 13.3
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
- --------------------------------------------------------------------------------
The following table summarizes net interest income (on a taxable-equivalent
basis) for each of the past three years. For taxable-equivalent adjustments, an
effective tax rate of 34% was used for all years presented (1).
<TABLE>
Average Balance Sheet
(Taxable-equivalent basis / dollars in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
Principal Income/ Yield / Principal Income/ Yield / Principal Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term Investments:
Interest-bearing Balances
with Banks $726 $41 5.65% $989 $53 5.36% $1,124 $55 4.89%
Federal Funds Sold and Securities
Purchased under Agreements
to Resell 9,903 550 5.55% 11,589 611 5.27% 13,467 783 5.81%
Other Short-term Investments 320 17 5.31% 2,115 114 5.39% 11,247 679 6.04%
Securities:
Taxable 83,751 5,320 6.35% 81,221 4,788 5.90% 77,078 4,400 5.71%
Non-taxable 38,072 3,319 8.72% 33,791 2,953 8.74% 27,628 2,579 9.33%
Total Loans and Leases (2) 322,536 29,417 9.12% 306,296 27,947 9.12% 285,154 26,290 9.22%
------- ------ ------- ------ ------- ------
TOTAL INTEREST
EARNING ASSETS 455,308 38,664 8.49% 436,001 36,466 8.36% 415,698 34,786 8.37%
------- ------ ------- ------ ------- ------
Cash and Due from Banks 16,051 15,602 14,185
Premises, Furniture &
Equipment 12,088 11,386 11,262
Other Assets 10,038 9,768 9,644
Less: Allowance for Loan Losses (6,382) (6,948) (6,749)
------ ------ ------
TOTAL ASSETS $487,103 $465,809 $444,040
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings and Interest-bearing
Demand Deposits $126,861 3,476 2.74% $126,593 3,375 2.67% $120,603 3,361 2.79%
Time Deposits 251,044 13,745 5.48% 232,729 12,804 5.50% 222,779 11,789 5.29%
Short-term Borrowings 6,624 291 4.39% 8,635 404 4.68% 12,059 671 5.56%
Long-term Debt 115 9 7.83% 1,851 100 5.40% 2,137 127 5.94%
--- - ----- --- ----- ---
TOTAL INTEREST-BEARING
LIABILITIES 384,644 17,521 4.56% 369,808 16,683 4.51% 357,578 15,948 4.46%
------- ------ ------- ------ ------- ------
Demand Deposit Accounts 47,335 45,242 40,200
Other Liabilities 4,514 3,853 3,499
----- ----- -----
TOTAL LIABILITIES 436,493 418,903 401,277
------- ------- -------
Shareholders' Equity 50,610 46,906 42,763
------ ------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $487,103 $465,809 $444,040
======== ======== ========
NET INTEREST INCOME $21,143 $19,783 $18,838
====== ======= =======
NET INTEREST MARGIN 4.64% 4.54% 4.53%
</TABLE>
(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 $458, $516, and $339 for 1997, 1996, and 1995,
respectively.
<PAGE>
- --------------------------------------------------------------------------------
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)
<TABLE>
For the three months ended
--------------------------
December September June March
31 30 30 31
-------- --------- ---- ------
<S> <C> <C> <C> <C>
1997:
Interest Income $9,530 $9,511 $9,338 $9,089
Interest Expense 4,519 4,427 4,314 4,261
----- ----- ----- -----
Net Interest Income 5,011 5,084 5,024 4,828
Provision for Loan Losses 68 67 (682) 139
Noninterest Income 595 696 650 546
Noninterest Expense 3,446 3,375 3,529 3,318
----- ----- ----- -----
Income before Income Taxes 2,092 2,338 2,827 1,917
Income Tax Expense 640 775 977 643
--- --- --- ---
Net Income $1,452 $1,563 $1,850 $1,274
====== ====== ====== ======
Earnings per Share(1) $0.27 $0.29 $0.35 $0.24
===== ===== ===== =====
Weighted Average Shares(1) 5,348,367 5,343,787 5,341,545 5,341,130
========= ========= ========= =========
1996:
Interest Income $9,098 $8,872 $8,741 $8,650
Interest Expense 4,298 4,236 4,095 4,054
----- ----- ----- -----
Net Interest Income 4,800 4,636 4,646 4,596
Provision for Loan Losses 27 80 80 23
Noninterest Income 674 533 558 462
Noninterest Expense 3,549 3,441 3,209 3,089
----- ----- ----- -----
Income before Income Taxes 1,898 1,648 1,915 1,946
Income Tax Expense 743 519 625 626
--- --- --- ---
Net Income $1,155 $1,129 $1,290 $1,320
====== ====== ====== ======
Earnings per Share(1) $0.22 $0.21 $0.24 $0.25
===== ===== ===== =====
Weighted Average Shares(1) 5,338,167 5,336,143 5,333,564 5,333,351
========= ========= ========= =========
</TABLE>
(1) Share and Per share data has been retroactively adjusted to give effect for
stock dividends and stock splits and excludes the dilutive effect of stock
options.
<PAGE>
- --------------------------------------------------------------------------------
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. Its four affiliate banks conduct business in 20 offices in the
six contiguous counties of Dubois, Daviess, Martin, Pike, Perry and Spencer
Counties in Southwestern Indiana. The banks provide a wide range of financial
services, including accepting deposits; making commercial and consumer loans;
originating, marketing, and servicing mortgage 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.
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 1995
through 1997 and financial condition as of December 31, 1997 and 1996. The
information should be used in conjunction with accompanying consolidated
financial statements and footnotes contained elsewhere in this report, and has
been restated to reflect the merger with People's Bancorp of Washington, which
was accounted for as a pooling of interests. See the discussion below and Note
18 to the consolidated financial statements for further information on mergers
and acquisitions.
MERGERS AND ACQUISITIONS
The Company signed a definitive agreement in December 1997 providing for a
merger of a Company subsidiary with CSB Bancorp ("CSB"), which operates the
Citizens State Bank of Petersburg, Indiana. Under terms of the agreement, the
Company will issue to CSB shareholders between 928,572 and 1,137,500 shares of
the Company's Common Stock, as adjusted for the two for one stock split declared
in October 1997. The shares issued are subject to further anti-dilution
adjustments in the event of any future stock dividends, splits and the like. The
number of shares to be issued is dependent upon the Company's average common
stock price during a period prior to the date of the merger closing. The Company
expects to account for the transaction as a pooling of interests, and based on
recent stock quotations, expects to issue the minimum number of shares required.
The proposed merger is subject to approval by shareholders of CSB, bank
regulatory agencies, and other conditions. The parties contemplate that the
merger will be effective in the second quarter of 1998.
The Company also signed a definitive agreement in January 1998 providing for a
merger of a Company subsidiary with FSB Financial Corporation ("FSB"), which
operates the FSB Bank in Princeton and Francisco, Indiana. Under terms of the
agreement, the Company will issue to shareholders of FSB shares of Company
Common Stock with market value equal to 150% of the sum of FSB's shareholders'
equity. The market value of the shares issued will be based upon FSB shareholder
equity as of the end of the month immediately preceding the closing date,
subject to certain adjustments described in the definitive agreement. The
Company expects to account for the transaction as a pooling of interests and,
based on recent stock quotations, expects to issue approximately 71,678 shares.
The proposed merger is subject to approval by shareholders of FSB, bank
regulatory agencies, and other conditions. The parties contemplate that the
merger will be effective in the second quarter of 1998.
Concurrent with the execution of these proposed transactions, the Company
intends to merge both FSB Bank and an existing affiliate, Community Trust Bank,
into the Citizens State Bank name and charter, creating a $130 million financial
institution to better serve the Pike and Gibson County area markets.
On March 4, 1997 the Company completed a merger with Peoples Bancorp of
Washington, Washington, Indiana, parent company of The Peoples National Bank and
Trust Company of Washington (collectively, "Peoples") in which the Company
issued 615,285 shares for all the outstanding shares of Peoples. 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 area
markets.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
The Company plans to continue to aggressively pursue merger and acquisition
opportunities as they become available. The Company's management believes that
community banks and other financial institutions located in the Company's
general geographic area will find the concept of the Company's localized
community bank holding company an attractive alternative to merging with other
larger regional multi-bank holding companies.
The Company's approach offers these institutions the competitive advantages of
operational efficiencies gained through the ability to spread fixed operating
costs over a larger asset base, without the loss of flexibility and independence
generally associated with affiliation with the larger regional multi-bank
holding companies. Through the Company, these institutions can retain ownership
control within a group of shareholders who reside in their general market areas
and who support the banks' commitment to their local communities. Because of
this belief, the Company's management anticipates that additional mergers and
acquisitions with like-minded institutions may occur in future years.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NET INCOME
Net income for 1997 increased 25% to $6,139,000 or $1.15 per share from 1996.
The improvement in 1997 earnings primarily resulted from an increase in net
interest income and a negative provision for loan losses. See management's
discussion in the sections below for further information.
Net Income in 1996 was $4,894,000 or $0.92 per share, versus $4,842,000 or $0.91
per share in 1995. Changes in 1996 earnings from the prior year were increases
in net interest income, investment services income and service charges on
deposit accounts, offset by increases in the provision for loan losses and
professional fees. The bulk of the 1996 increase in professional fees was
related to the Company's merger and acquisition activities.
The record level of net income in 1997 generated a return on average assets of
1.26%, and a return on average equity of 12.13%. Both were significant
improvements over prior years. Return on assets was 1.05% and 1.09% in 1996 and
1995, respectively. Return on equity for the same periods was 10.43% and 11.32%,
respectively.
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, 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.
Net interest income of $21,143,000 for 1997 increased 6.9% on a
taxable-equivalent basis over 1996 results of $19,783,000. This followed a 5.0%
increase in 1996 over the $18,838,000 reported for 1995. A significant portion
of the increase in both years resulted from growth in average loans, and
improved yields on investment securities. Growth in earning assets was primarily
funded by an increase in interest-bearing deposits, while improvements in yield
were somewhat offset by a shift of short-term borrowings to higher rate time
deposits.
Net interest margin for 1997 improved 10 basis points, to 4.64% from 1996.
Overall yield on earning assets increased 13 basis points, while the rate on
interest-bearing liabilities rose only 5 basis points. Overall yield and net
interest margin were relatively unchanged in 1996 from 1995. See the discussion
headed INTEREST RATE RISK MANAGEMENT for an explanation of the Company's
interest rate sensitivity position.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
The Company provides for future loan losses through regular provisions to the
allowance for loan losses. These provisions are made at a level deemed 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 Company booked a negative provision for loan losses of $(408,000) in 1997.
The consolidated provision for loan losses was $210,000 in 1996 and $49,000 in
1995. Provisions in all years presented were significantly impacted by negative
provisions for loan losses at the Union banking division of Peoples, totaling
$750,000 in 1997, $110,000 in 1996 and $475,000 in 1995. These negative
provisions were due to collections of previous years' charged-off loans,
combined with management's determination that certain specific reserve
allocations were no longer necessary due to performance of the related loans.
Based on management's evaluation of the adequacy of the reserve, a negative
provision was recorded in 1997 to eliminate excess reserves created by these
loan recoveries and reduced specific reserve allocations.
The provision for loan losses to be recorded in future years will be subject to
adjustment based on results of on-going evaluations of the adequacy of the
allowance for loan losses. The section entitled LENDING AND LOAN ADMINISTRATION
expands this discussion further.
NONINTEREST INCOME
The primary sources of noninterest income are income from fiduciary activities
(trust fees), service charges on deposit accounts, and investment services
income. Exclusive of net gains on the sale of investment securities, loans and
other real estate, noninterest income increased 17.6% and 22.8%, to $2,468,000
and $2,099,000 in 1997 and 1996, respectively, over previous years results.
An analysis of noninterest income is presented in Table 2. Trust fees rose
$97,000 in 1997 to $307,000 after an increase of only $3,000 in 1996. Service
charges on deposit accounts increased 17.3% and 27.4% in 1997 and 1996,
respectively. This was due to an increase in billable transactions and revisions
to the Company's pricing structure in the latter portion of 1996, which was
based on a market review.
Investment services income is generated through a full service brokerage
operation which is available at several of the Company's affiliate 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 $53,000 in 1997 following an increase of $196,000 in 1996. The Company
intends to expand the availability of investment services, as feasible,
throughout its affiliate banks.
<TABLE>
NONINTEREST INCOME (Table 2, dollars in thousands)
% Change From
Prior Year
-------------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income from Fiduciary Activities $307 $210 $207 46.2% 1.4%
Service Charges on Deposit Accounts 1,145 976 766 17.3 27.4
Investment Services Income 456 403 207 13.2 94.7
Other Income 560 510 529 9.8 (3.6)
--- --- ---
Subtotal 2,468 2,099 1,709 17.6 22.8
Gains on Sales of Loans and Other Real Estate 19 55 36 (65.5) 52.8
Securities Gains, net --- 73 19 (100.0) 284.2
--- -- --
TOTAL NONINTEREST INCOME $2,487 $2,227 $1,764 11.7 26.2
====== ====== ======
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
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, and other operating expenses (see Table 3). Total
noninterest expense increased 2.9% in 1997 versus 7.0% in 1996, over prior
years. The Company's operational efficiency has also improved. As a percentage
of average total assets, total noninterest expense was 2.81% in 1997, 2.85% in
1996 and 2.80% in 1995. The Company's efficiency ratio was 58%, 60% and 60% in
1997, 1996 and 1995, respectively. The efficiency ratio is defined as
noninterest expenses as a percentage of the total of taxable-equivalent net
interest income and noninterest income.
Salaries and employee benefits comprised approximately 54% of total noninterest
expense in all periods. These expenses increased 3.2% in 1997, following an 8.5%
increase in 1996. A significant portion of the 1996 increase was due to growth
in the Company's First State Bank affiliate and to the effects of changes
beginning in mid-1995 in the Company's holding company and bank organizational
structure. Although this organizational change resulted in an increased level of
personnel expenses, management believes the increased management focus at both
the bank and holding company has demonstrated improved operating efficiency.
Occupancy, furniture and equipment expenses decreased by $24,000 or 1.2% in 1997
after an increase of $70,000 or 3.5% in 1996. However, these expenses are
expected to increase in 1998 due to a planned upgrading of computer systems
throughout the organization. The Company has initiated its strategy to implement
a state-of-the-art technology platform and operating systems which are expected
to provide long-term benefits with regard to improved quality of customer
service and control of personnel expenses.
FDIC premiums totaled $52,000 in 1997. 1996 premiums, exclusive of a one-time
$157,000 Savings Association Insurance Fund ("SAIF") assessment in the third
quarter, totaled $72,000. The SAIF assessment was applied to a portion of German
American Bank's deposits and all of the deposits of First State Bank. Total 1996
expense of $229,000 was slightly less than half of the 1995 expense of $471,000.
Data processing fees increased 17.8% and 6.2% in 1997 and 1996, respectively.
This reflects an increase in the number of accounts processed and conversion
expenses at the Company's newly acquired affiliate in 1997. Through the
utilization of state-of-the-art equipment and computer processing, the Company's
management believes it will, over the long-term, be able to better control the
level of employee related expenses, the Company's major noninterest expense
category, while improving the quality of customer service provided throughout
the affiliate bank system.
Professional fees increased in 1997 by $38,000 or 4.7% following a significant
$558,000 increase in 1996 over the 1995 total of $247,000. The 1997 increase
included a $200,000 reserve for legal fees made in connection with an unasserted
potential claim. Absent this special reserve, professional fees would have
declined. These variations are largely due to merger related professional fees.
While it is not possible to predict the level of future acquisition activity and
the resulting level of costs associated thereto, 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 $536,000 in 1997, $451,000 in 1996
and $419,000 in 1995, representing approximately 0.1% of average total assets in
each year. Increases in recent years were impacted by implementation of a
corporate identity program at existing and new affiliates. Implementation of
this program is substantially complete.
Other operating expenses increased $156,000 in 1997 and decreased $134,000 in
1996. These fluctuations were also impacted by the corporate identity program in
the areas of supplies and other charges and by increases in postage, telephone
and other service and volume related expenses. Other operating expenses also
include the amortization of goodwill and core deposit intangibles, totaling
$216,000, $231,000 and $112,000 in 1997, 1996 and 1995, respectively.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
<TABLE>
NONINTEREST EXPENSE (Table 3, dollars in thousands)
% Change From
Prior Year
--------------
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Salaries and Employee Benefits $7,391 $7,165 $6,604 3.2% 8.5%
Occupancy, Furniture and Equipment Expense 2,042 2,066 1,996 (1.2) 3.5
FDIC Premiums 52 229 471 (77.3) (51.4)
Data Processing Fees 503 427 402 17.8 6.2
Professional Fees 843 805 247 4.7 225.9
Advertising and Promotion 536 451 419 18.8 7.6
Other Operating Expenses 2,301 2,145 2,279 7.3 (5.9)
----- ----- -----
TOTAL NONINTEREST EXPENSE $13,668 $13,288 $12,418 2.9 7.0
======= ======= =======
</TABLE>
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, 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. 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 33.1%,
33.9% and 32.4%, respectively, in 1997, 1996, and 1995.
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
The Company continues to maintain a strong capital position. Shareholders'
equity totaled $53,332,000 and $48,793,000 at December 31, 1997 and 1996,
respectively. This represented 10.69% and 9.97%, respectively, of total assets.
The Company paid cash dividends of $2,083,000 in 1997 and $1,684,000 in 1996.
Additional dividends paid in 1997 resulted from 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 34% in both 1997 and 1996 which is consistent with management's policy
of retaining sufficient capital to provide for continued growth.
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, is comprised 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% 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.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
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, 1997 the Company and all
affiliate banks were categorized as well capitalized.
At December 31, 1997 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 following table presents the Company's consolidated capital ratios under
regulatory guidelines:
<TABLE>
RISK BASED CAPITAL STRUCTURE (Table 4, dollars in thousands)
1997 1996
---- ----
<S> <C> <C>
Tier 1 Capital:
Shareholders' Equity as presented on Balance Sheet $53,332 $48,793
Subtract: Unrealized Appreciation on Securities Available-for-Sale (756) (495)
Less: Intangible Assets and Ineligible Deferred Tax Assets (1,702) (1,924)
------ ------
Total Tier 1 Capital 50,874 46,374
Tier 2 Capital:
Qualifying Allowance for Loan Loss 4,219 4,028
----- -----
Total Capital $55,093 $50,402
======= =======
Risk Weighted Assets $333,796 $319,769
======== ========
</TABLE>
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $55,093 16.51% >$26,704 >8.0% >$33,380 >10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $50,874 15.24% >$13,352 >4.0% >$20,028 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $50,874 10.48% >$19,416 >4.0% >$24,270 > 5.0%
- - - -
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) $50,402 15.76% >$25,582 >8.0% >$31,977 >10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) $46,374 14.50% >$12,791 >4.0% >$19,186 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) $46,374 9.96% >$18,632 >4.0% >$23,290 > 5.0%
- - - -
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
SOURCES OF FUNDS
- --------------------------------------------------------------------------------
The Company's primary funding source is its base of core customer deposits, such
as non-interest bearing demand, regular savings and money market accounts, and
certificates of deposit of less than $100,000. Other shorter term sources of
funds are certificates of deposit of $100,000 or more, overnight borrowings from
other financial institutions, securities sold under agreements 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
borrowings. The following pages contain a discussion of changes in these areas.
Table 5 below presents changes between years in the average balances of all
funding sources.
FUNDING SOURCES - AVERAGE BALANCES (Table 5, dollars in thousands)
<TABLE>
% Change From
Prior Year
1997 1996 1995 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Demand $47,335 $45,242 $40,200 4.6% 12.5%
Savings and Interest-bearing Checking 87,264 93,731 95,662 (6.9) (2.0)
Money Market Accounts 39,597 32,862 24,941 20.5 31.8
Other Time Deposits 219,321 197,794 184,517 8.1 9.9
------- ------- -------
Total Core Deposits 393,517 369,629 345,320 5.0 8.5
Certificates of Deposits of $100,000 or more 31,723 34,935 38,262 (9.2) (8.7)
Federal Funds Purchased and Securities
Sold under Agreement to Repurchase and
Other Short-term Borrowings 6,624 8,635 12,059 (23.3) (28.4)
Long-term Debt 115 1,851 2,137 (93.8) (13.4)
--- ----- -----
Total Funding Sources $431,979 $415,050 $397,778 4.1 4.3
======== ======== ========
</TABLE>
CORE DEPOSITS
The Company's has demonstrated the ability to attract and retain core deposits,
achieving 5.0% growth in 1997 and 8.5% in 1996 over prior year average balances.
The Company continues to experience a shift in the composition of its deposits
from savings and interest-bearing checking toward money market deposits and term
certificates of deposit. This movement is largely attributable to customer
reaction to the higher level of interest rates paid on these products relative
to that paid on the savings and interest-bearing checking products. Total
savings, interest-bearing checking and money market deposits constituted 32% of
average core deposits in 1997, a decline from 34% in 1996.
Other time deposits, consisting primarily of certificates of deposits in
denominations of less than $100,000 increased by 8.1% in 1997 and comprised 56%
of average core deposits. This compares to a 1996 increase of 9.9%, when other
time deposits were 54% of average core deposits. Non-interest bearing demand
deposits increased 4.6% in 1997 and 12.5% in 1996.
Changes in the deposit mix 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, seasonal and other
non-economic factors.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
OTHER FUNDING SOURCES
Certificates of deposit in denominations of $100,000 or more are the Company's
most significant source of other funding. These large denomination certificates
declined in both 1997 and 1996, by 9.2% and 8.7%, respectively. These
certificates comprised only 7.3% of the Company's total funding sources in 1997,
down from 8.4% in 1996, and 9.6% in 1995.
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. Long-term debt was in the form of FHLB
advances, which are secured by a blanket pledge of certain investment securities
and residential mortgage loans. 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.
USES OF FUNDS
- --------------------------------------------------------------------------------
LOANS
The Company grew total loans $17,004,000 or 5.4% in 1997, after experiencing
$23,658,000 or 8.2% growth in 1996. The Company's loan portfolio is well
diversified with 33% of the portfolio in commercial and industrial loans, 33% in
1-4 family residential mortgages, 18% in consumer loans, and 16% in agricultural
and poultry loans at December 31, 1997. The Company has achieved significant
growth in residential mortgage and consumer loans since 1995 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.
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Generally, extensions of credit outside this market area are concentrated in
commercial real estate loans granted on a selective basis, generally within a
120 mile radius of the Company's primary market. Loans outside this market area
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 the debtors' ability to honor their contracts is
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.
The composition of the loan portfolio at December 31, 1997 and 1996 is presented
in further detail in Note 3 to the consolidated financial statements and in
Table 6 below:
LOAN PORTFOLIO (Table 6, dollars in thousands)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Commercial and Industrial $108,388 $112,748 $101,338
Residential Mortgage Loans 107,943 93,713 85,543
Consumer Loans 61,297 50,200 41,944
Agricultural and Poultry 53,110 57,073 61,251
------ ------ ------
Total Loans 330,738 313,734 290,076
------- ------- -------
Less:
Unearned Income 269 452 726
Allowance for Loan Losses 6,255 6,528 6,893
----- ----- -----
Loans, net $324,214 $306,754 $282,457
======== ======== ========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
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 Company's investment portfolio continues to shift from
asset-/mortgage-backed investments to agency securities. This expected shift in
the portfolio has primarily resulted from accelerated prepayments on these
securities due to greater incidences of refinancing. The funds generated from
these prepayments were primarily reinvested in callable agency securities at
yields generally equal to or greater than those carried in the
asset-/mortgage-backed segment of the portfolio.
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. During 1995, the Financial Accounting
Standards Board authorized a one-time window of opportunity for the transfer of
securities previously classified as held-to-maturity to available-for-sale.
Company management utilized this opportunity to transfer a significant portion
of its securities portfolio to the available-for-sale classification. Although
management may sell these securities if the need arises, their designation as
available-for-sale should not be interpreted as an indication that management
anticipates such sales. The carrying value of available-for-sale securities is
equivalent to their market value. All other securities are carried at amortized
cost due to management's intent and ability to hold these securities to
maturity. Table 7 below, and Note 2 to the consolidated financial statements,
contain additional information on the year-end investment portfolio balances.
INVESTMENT PORTFOLIO, Amortized Cost (Table 7, dollars in thousands)
<TABLE>
December 31,
1997 % 1996 %
---- - ---- -
<S> <C> <C> <C> <C>
Federal Funds Sold and Short-term Investments $12,000 8.9% $22,176 15.5%
U.S. Treasury and Agency Securities 59,295 44.0 49,700 34.7
Obligations of State and Political Subdivisions 40,552 30.1 37,813 26.4
Asset-/Mortgage-backed Securities 16,363 12.2 24,782 17.3
Corporate Securities 4,639 3.5 7,268 5.1
Other Securities 1,764 1.3 1,396 1.0
----- --- ----- ---
Total Securities Portfolio $134,613 100.0% $143,135 100.0%
======== ===== ======== =====
</TABLE>
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. The 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 which are 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 and act as an approval body. They also monitor the overall
quality of the banks' loan portfolios.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
The Corporate Loan Committee, comprised of members of the Company's and
affiliate banks' executive officers and board of directors, ensure a consistent
application of the Company's lending policies. The Company also maintains a
comprehensive loan review program for its affiliate banks. The purpose of the
program is to evaluate loan administration, credit quality, loan documentation
and the adequacy of the allowance for loan losses. This program includes regular
reviews of problem loan reports, delinquencies and charge-offs.
The adequacy of the allowance for loan losses is also evaluated at the affiliate
bank level on a quarterly basis. This evaluation is based on reviews of specific
loans, changes in the type and volume of the loan portfolios given current and
anticipated economic conditions, and historical loss experience. Specific
reserve allocations occur 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) accrual of interest has been suspended; or, (d)
other reasons where either the ultimate collectibility of the loan is in
question, or the loan characteristics require special monitoring.
The allowance for loan losses decreased by $273,000 in 1997 and $365,000 in
1996, but remained strong at 1.89% of total loans as of December 31, 1997. As
shown in Table 8 below, a significant dollar amount of the loan losses charged
to the allowance in 1997 and 1996 were recovered in subsequent years. These
significant recoveries, along with management's determination of allowance
adequacy, influenced the level of provision for loan losses in these years. For
additional information, see the discussion entitled PROVISION FOR LOAN LOSSES
elsewhere in this report.
ALLOWANCE FOR LOAN LOSSES (Table 8, dollars in thousands)
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance as of January 1 $6,528 $6,893 $6,602
Provision for Loan Losses (408) 210 49
Recoveries of Prior Loan Losses 734 299 637
Loan Losses Charged to the Allowance (599) (874) (395)
---- ---- ----
Balance as of December 31 $6,255 $6,528 $6,893
====== ====== ======
</TABLE>
Underperforming 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,
unless the loan is well secured and in the process of collection. Loans are
charged-off when they are deemed uncollectible.
Underperforming loans were 0.99% of total loans at December 31, 1997. Table 9
below presents an analysis of the Company's underperforming assets at year-end
1997, 1996 and 1995.
UNDERPERFORMING ASSETS (Table 9, dollars in thousands).
<TABLE>
December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Non-accrual Loans $562 $1,370 $1,093
Past Due Loans (90 days or more) 2,710 1,102 2,689
Renegotiated Loans --- --- 122
--- --- ---
Total Underperforming Loans 3,272 2,472 3,904
----- ----- -----
Other Real Estate Owned 146 203 286
--- --- ---
Total Underperforming Assets $3,418 $2,675 $4,190
====== ====== ======
Allowance for Loan Losses to
Underperforming Loans 191.17% 264.08% 176.56%
Underperforming Loans to Total Loans 0.99% 0.79% 1.35%
Allowance for Loan Losses to Total Loans . 1.89% 2.08% 2.38%
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Supplemental Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
INVESTMENTS AND LIQUIDITY
Liquidity needs in a banking organization arise from new loan demand, funding of
existing loan commitments, and deposit withdrawals. One important objective in
managing the securities portfolio is to ensure the Company has adequate
liquidity for these needs. 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. As noted in the INVESTMENTS
discussion contained elsewhere in this report, management significantly
increased the available-for-sale portfolio in 1995, greatly enhancing the
Company's ability to quickly react to changes in liquidity needs. Failure to
properly manage liquidity requirements can result in the need to satisfy
customer withdrawals and other obligations on less than desirable terms.
INTEREST RATE RISK MANAGEMENT
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
measures interest rate risk through computer-assisted simulation modeling of its
net interest income and interest rate sensitivity gap. Interest rate sensitivity
gap is defined as the difference between the principal amounts of interest
sensitive assets and liabilities that will mature or reprice within given
periods.
A net interest income and interest rate sensitivity gap analysis is generated
for each affiliate bank on a quarterly basis. 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 policy 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 taxable-equivalent net interest income in that interval. Funds Management
Committees at the holding company and each affiliate bank monitor compliance
within the established guidelines of the Funds Management Policy.
ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1997 (Table 10, dollars in
thousands)
<TABLE>
1-3 3-6 6-12 1-5 Beyond
Months Months Months Years 5 Years Total
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
EARNING ASSETS
Federal Funds Sold and
Other Short-term Investments $ 12,000 $ --- $ --- $ --- $ --- $ 12,000
Investment Securities:
Adjustable Rate 5,835 806 446 --- --- 7,087
Fixed Rate 30,251 11,765 14,026 28,599 32,134 116,775
Loans (Net of Unearned):
Adjustable Rate 78,233 21,662 52,616 53,644 772 206,927
Fixed Rate 17,020 12,503 15,712 50,164 28,143 123,542
------ ------ ------ ------ ------ -------
TOTAL EARNING ASSETS $143,339 $46,736 $82,800 $132,407 $61,049 $466,331
======== ======= ======= ======== ======= ========
INTEREST BEARING LIABILITIES
Savings, NOW and
Money Market Deposits $ 52,838 $ --- $ --- $ --- $72,366 $125,204
Time Deposits:
Less than $100,000 58,086 42,341 49,249 78,991 182 228,849
$100,000 or more 9,641 8,950 2,942 4,128 --- 25,661
Short-term Borrowings 4,933 --- --- --- --- 4,933
----- --- --- --- --- -----
TOTAL INTEREST BEARING
LIABILITIES $125,498 $51,291 $52,191 $83,119 $72,548 $384,647
======== ======= ======= ======= ======= ========
Periodic GAP $ 17,841 $ (4,555) $ 30,609 $ 49,288 $ (11,499) $ 81,684
======== ========= ======== ======== ========== ========
Cumulative GAP $ 17,841 $ 13,286 $ 43,895 $ 93,183 $ 81,684
======== ======== ======== ======== ==========
Cumulative Ratio (1) 114% 108% 119% 130% 121%
==== ==== ==== ==== ====
</TABLE>
(1) Rate-sensitive Assets / Rate-sensitive Liabilities
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations (continued)
- --------------------------------------------------------------------------------
Table 10 on the previous page reflects the Company's interest rate sensitivity
position (interest rate sensitive assets minus interest rate sensitive
liabilities) individually and cumulatively, over various time horizons and based
on current interest rates. As shown in the table, the Company had a cumulative
positive gap of $44,844,000 in the one-year horizon at December 31, 1997. In
financial institutions with positive gaps, net interest income tends to increase
in rising interest rate environments, and decrease in declining interest rate
environments. The Company believes its asset/liability management program allows
adequate time to react to changes in interest rate trends and provides adequate
protection to variability in the Company's net interest income during 1998.
As of December 31, 1997 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, 1997 which is available without charge, upon request.
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 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.
A formal review is being conducted of the Company's computer systems and systems
providers to determine the extent to which those systems and systems providers
must implement changes to avoid or minimize service issues associated with the
Year 2000. The Company has identified certain issues that require attention
prior to the Year 2000 in order that its operations will not be materially
adversely affected. The expenses associated with the resolution of these issues
are not expected to be material.
The Company contracts with Fiserv, a publicly listed company headquartered in
Milwaukee, Wisconsin, for all of its loan and deposit account processing
activity. Fiserv's applications have been identified as mission critical for the
Company with regard to the Year 2000 issue. Fiserv, which is a national service
provider for over 3,300 financial institutions, has confirmed to the Company
that the renovation and testing of all core systems will be largely completely
by December 25, 1998. While the Company can obviously give no assurance as to
Fiserv's performance in the completion of this matter, the Company is unaware of
any issues that would cause Fiserv to be unable to renovate mission critical
systems satisfactorily.
The Year 2000 issue could also affect the ability of the Company's customers to
conduct operations in a timely and effective manner, and as such, could
adversely impact the quality of the Company's loan portfolio, its deposits, or
other sources of revenue and funding from customers. Although the Company has
not generally requested information from its customers regarding their potential
exposure to the Year 2000 issue or their plans to minimize any such exposure,
the Company is not aware of any specific customer which does not expect to have
this issue resolved prior to the Year 2000.
EXHIBIT 13.4
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 14,250 $ 17,134
Federal Funds Sold 11,800 20,600
------ ------
Cash and Cash Equivalents 26,050 37,734
------ ------
Interest-bearing Balances with Banks 200 597
Other Short-term Investments --- 979
Securities Available-for-Sale, at Market 99,639 98,557
Securities Held-to-Maturity, at Cost 24,223 23,213
Loans 330,738 313,734
Less: Unearned Income (269) (452)
Allowance for Loan Losses (6,255) (6,528)
------ ------
Loans, Net 324,214 306,754
Premises, Furniture and Equipment, Net 12,406 11,585
Other Real Estate 146 203
Intangible Assets 1,572 1,774
Accrued Interest Receivable and Other Assets 10,381 8,047
------ -----
TOTAL ASSETS $ 498,831 $ 489,443
============ ==========
LIABILITIES
Noninterest-bearing Deposits $ 54,234 $ 52,674
Interest-bearing Deposits 379,714 370,232
------- -------
Total Deposits 433,948 422,906
Short-term Borrowings 4,933 12,527
Long-term Debt --- 1,000
Accrued Interest Payable and Other Liabilities 6,618 4,217
----- -----
TOTAL LIABILITIES 445,499 440,650
------- -------
SHAREHOLDERS' EQUITY
Common Stock, $10 par value, $1 stated value; 20,000,000
shares authorized, 5,350,161 and 2,539,059 issued
and outstanding in 1997 and 1996, respectively 5,350 2,539
Preferred Stock, $10 par value; 500,000 shares
authorized, no shares issued --- ---
Additional Paid-in Capital 35,018 26,501
Retained Earnings 12,208 19,258
Unrealized Appreciation on Securities
Available-for-Sale, Net 756 495
--- ---
TOTAL SHAREHOLDERS' EQUITY 53,332 48,793
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 498,831 $ 489,443
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Income
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
Years ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $29,350 $27,846 $26,197
Interest on Federal Funds Sold 550 611 783
Interest on Short-term Investments 58 167 734
Interest and Dividends on Securities
Taxable 5,320 4,788 4,400
Non-taxable 2,190 1,949 1,702
----- ----- -----
TOTAL INTEREST INCOME 37,468 35,361 33,816
------ ------ ------
INTEREST EXPENSE
Interest on Deposits 17,221 16,179 15,150
Interest on Short-term Borrowings 291 404 671
Interest on Long-term Debt 9 100 127
- --- ---
TOTAL INTEREST EXPENSE 17,521 16,683 15,948
------ ------ ------
NET INTEREST INCOME 19,947 18,678 17,868
Provision for Loan Losses (408) 210 49
----- --- --
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 20,355 18,468 17,819
------ ------ ------
NONINTEREST INCOME
Income from Fiduciary Activities 307 210 207
Service Charges on Deposit Accounts 1,145 976 766
Investment Services Income 456 403 207
Other Service Charges, Commissions, and Fees 560 510 529
Gains on Sales of Loans and Other Real Estate 19 55 36
Securities Gains, net --- 73 19
--- -- --
TOTAL NONINTEREST INCOME 2,487 2,227 1,764
----- ----- -----
NONINTEREST EXPENSE
Salaries and Employee Benefits 7,391 7,165 6,604
Occupancy Expense 1,104 1,048 1,041
Furniture and Equipment Expense 938 1,018 955
FDIC Premiums 52 229 471
Data Processing Fees 503 427 402
Professional Fees 843 805 247
Advertising and Promotion 536 451 419
Other Operating Expenses 2,301 2,145 2,279
----- ----- -----
TOTAL NONINTEREST EXPENSE 13,668 13,288 12,418
------ ------ ------
Income before Income Taxes 9,174 7,407 7,165
Income Tax Expense 3,035 2,513 2,323
----- ----- -----
NET INCOME $ 6,139 $ 4,894 $ 4,842
======= ======= =======
EARNINGS PER SHARE
AND DILUTED EARNINGS PER SHARE $ 1.15 $ 0.92 $ 0.91
======== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
Years Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $6,139 $4,894 $4,842
------ ------ ------
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Accretion / (Amortization) on Investments 30 (13) (630)
Depreciation and Amortization 1,162 1,166 1,145
Provision for Loan Losses (408) 210 49
Gain on Sale of Securities, net --- (73) (19)
Gain on Sales of Loans and Other Real Estate (19) (55) (36)
Change in Assets and Liabilities:
Deferred Taxes (32) 254 44
Deferred Loan Fees (48) (11) 34
Interest Receivable and Other Assets (2,302) 30 (1,674)
Interest Payable and Other Liabilities 2,401 358 673
Unearned Income (183) (274) (303)
---- ---- ----
Total Adjustments 601 1,592 (717)
--- ----- ----
Net Cash from Operating Activities 6,740 6,486 4,125
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks 397 400 295
Proceeds from Maturities of Other Short-term Investments 996 7,030 52,133
Purchase of Other Short-term Investments --- (1,966) (43,967)
Proceeds from Maturities of Securities Available-for-Sale 50,837 39,156 9,512
Proceeds from Sales of Securities Available-for-Sale --- 1,080 2,515
Purchase of Securities Available-for-Sale (51,714) (46,471) (29,764)
Proceeds from Maturities of Securities Held-to-Maturity 3,133 4,092 11,312
Purchase of Securities Held-to-Maturity (4,134) (5,268) (4,243)
Purchase of Loans (1,152) (1,576) (3,691)
Proceeds from Sales of Loans 1,872 1,870 500
Loans Made to Customers, net of Payments Received (17,583) (24,530) (8,206)
Proceeds from Sales of Other Real Estate 118 152 389
Property and Equipment Expenditures (1,781) (1,236) (1,407)
----- ------ ------
Net Cash from Investing Activities (19,011) (27,267) (14,622)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits 11,042 27,353 26,373
Net Change in Short-term Borrowings (7,594) 123 (6,974)
Advances in Long-term Debt --- 2,000 1,500
Repayments of Long-term Debt (1,000) (2,000) (1,500)
Issuance / (Repurchase) of Common Stock 252 145 (110)
Dividends Paid (2,083) (1,684) (1,554)
Exercise of Stock Options 3 7 22
Purchase of Interests in Fractional Shares (33) (30) (25)
--- --- ---
Net Cash from Financing Activities 587 25,914 17,732
--- ------- ------
Net Change in Cash and Cash Equivalents (11,684) 5,133 7,235
Cash and Cash Equivalents at Beginning of Year 37,734 32,601 25,366
------ ------ ------
Cash and Cash Equivalents at End of Year $26,050 $37,734 $ 32,601
======= ======= ========
Cash Paid During the Year for:
Interest $ 17,428 $ 16,612 $ 15,564
Income Taxes 2,821 2,332 2,431
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
Unrealized
Common Appreciation /
Stock/ (Depreciation)
Additional on Securities Total
Paid-in Retained Available- Shareholders'
Capital Earnings for-Sale Equity
------- -------- -------- ------
<S> <C> <C> <C> <C>
Balances, January 1, 1995
(as previously reported for
German American Bancorp) $ 20,942 $ 12,641 $ (658) $ 32,925
Retroactive restatement for Pooling of
Interests (Peoples - 615,285 shares issued) 1,704 6,504 (354) 7,854
Balances, January 1, 1995 as restated 22,646 19,145 (1,012) 40,779
Net Income for 1995 4,842 4,842
Unrealized Appreciation on Securities
Transferred to Available-for-Sale 523 523
Net Change in Unrealized Appreciation /
(Depreciation) on Securities 1,311 1,311
Cash Dividends ($.29 per Common Share,
as restated for pooling of interests) (1,554) (1,554)
Purchase and Retirement of 3,600 Shares of
Common Stock (43) (67) (110)
Purchase and Retirement of 3,331 Shares
pursuant to Exercise of Stock Options (40) (64) (104)
Issuance of 5,800 Shares upon Exercise
of Stock Options 126 126
5% Stock Dividend (86,177 Shares) 2,714 (2,714) ---
Purchase of Interest in Fractional Shares (25) (25)
Balances, December 31, 1995 25,403 19,563 822 45,788
Net Income for 1996 4,894 4,894
Net Change in Unrealized Appreciation /
(Depreciation) on Securities (327) (327)
Cash Dividends ($.32 per Common Share,
as restated for pooling of interests) (1,684) (1,684)
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) ---
Purchase of Interest in Fractional Shares (30) (30)
Balances, December 31, 1996 29,040 19,258 495 48,793
Net Income for 1996 6,139 6,139
Net Change in Unrealized Appreciation /
(Depreciation) on Securities 261 261
Cash Dividends ($.39 per Common Share,
as restated for pooling of interests) (2,083) (2,083)
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 433 433
Two for One Stock Split (2,546,041 Shares) 2,546 (2,546) ---
5% Stock Dividend (253,952 Shares) 8,253 (8,253) ---
Purchase of Interest in Fractional Shares (33) (33)
Balances, December 31, 1997 $ 40,368 $ 12,208 $ 756 $ 53,332
========= ======== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(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, Martin, Pike, Perry and Spencer. The overall loan portfolio
is diversified among a variety of individual borrowers; however, a significant
portion of debtors' ability to honor their contracts is 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, Inc. (parent of
both Community Trust Bank and Peoples National Bank); and GAB Mortgage Corp.
Significant intercompany balances and transactions have been eliminated in
consolidation. Certain items in the 1996 and 1995 financial statements have been
reclassified to correspond with the 1997 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.
Short-term Investments
Short-term Investments consist of interest-bearing balances with banks,
which are generally limited to FDIC insured denominations, and Bankers
Acceptances. These investments generally have terms to maturity of less than one
year and are carried at cost, which approximates market value.
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.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
The Company defers loan fees and certain direct loan origination costs. The
amounts deferred are reported in the balance sheet as part of loans and are
recognized into interest income over the term of the loan using the level yield
method.
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 30 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 ($247 and $333
at December 31, 1997 and 1996, respectively) and goodwill ($1,325 and $1,441 at
December 31, 1997 and 1996, 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.
<PAGE>
- --------------------------------------------------------------------------------
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.
NOTE 2 - Securities
The amortized cost and estimated market values of Securities as of December 31,
1997 are as follows:
<TABLE>
Gross Gross Estimated
Securities Available-for-Sale: Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies $57,795 $88 $(68) $57,815
Obligations of State and Political Subdivisions 20,398 1,224 (2) 21,620
Asset-/Mortgage-backed Securities 15,668 88 (95) 15,661
Corporate Securities 4,528 23 (22) 4,529
Other Securities 1 13 --- 14
- -- --- --
Total $98,390 $1,436 $(187) $99,639
======= ====== ===== =======
Securities Held-to-Maturity:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies $1,500 $ --- $(1) $1,499
Obligations of State and Political Subdivisions 20,154 1,043 (10) 21,187
Asset-/Mortgage-backed Securities 695 14 (7) 702
Corporate Securities 111 --- (8) 103
Other Securities 1,763 --- --- 1,763
----- --- --- -----
Total $24,223 $1,057 $(26) $25,254
======= ====== ==== =======
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
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,
1996 are as follows:
<TABLE>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
Securities Available-for-Sale:
<S> <C> <C> <C> <C>
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies $47,181 $81 $(221) $47,041
Obligations of State and Political Subdivisions 19,560 947 (321) 20,186
Asset-/Mortgage-backed Securities 23,783 487 (192) 24,078
Corporate Securities 7,221 42 (18) 7,245
Other Securities 1 6 --- 7
- - --- -
Total $97,746 $1,563 $(752) $98,557
======= ====== ===== =======
Securities Held-to-Maturity:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies $2,519 $ --- $(21) $2,498
Obligations of State and Political Subdivision 18,253 646 (18) 18,881
Asset-/Mortgage-backed Securities 999 12 (22) 989
Corporate Securities 47 --- --- 47
Other Securities 1,395 --- --- 1,395
----- --- --- -----
Total $23,213 $658 $(61) $23,810
======= ==== ===== =======
</TABLE>
The amortized cost and estimated market value of Securities at December 31,
1997 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, Mortgaged-backed and certain other Securities are not due at a
single maturity date and are shown separately.
<TABLE>
Estimated
Amortized Market
Cost Value
---- -----
Securities Available-for-Sale:
<S> <C> <C>
Due in one year or less $11,433 $11,426
Due after one year through five years 31,041 31,261
Due after five years through ten years 29,002 29,218
Due after ten years 11,245 12,059
Asset-/Mortgage-backed Securities 15,668 15,661
Other Securities 1 14
- --
Totals $98,390 $99,639
======= =======
Securities Held-to-Maturity:
Due in one year or less $2,476 $ 2,472
Due after one year through five years 3,789 3,889
Due after five years through ten years 3,824 4,079
Due after ten years 11,676 12,349
Asset-/Mortgage-backed Securities 695 702
Other Securities 1,763 1,763
----- -----
Totals $24,223 $25,254
======= =======
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
<TABLE>
1997 1996 1995
----- ---- ----
Available- Held-to- Available- Held-to- Available- Held-to-
for-Sale Maturity for-Sale Maturity for-Sale Maturity
-------- -------- -------- -------- -------- --------
Sales of Securities are summarized below:
<S> <C> <C> <C> <C> <C> <C>
Proceeds from Sales $ --- $ --- $ 1,080 $ --- $ 2,215 $ ---
Gross Gains on Sales --- --- 76 --- 22 ---
Gross Losses on Sales --- --- (3) --- (3) ---
Income Taxes on Gross Gains --- --- 30 --- 9 ---
Income Taxes on Gross Losses --- --- (1) --- (1) ---
</TABLE>
The carrying value of securities pledged to secure repurchase agreements,
public and trust deposits, and for other purposes as required by law was $10,767
and $17,004 as of December 31, 1997 and 1996, respectively.
No investment securities of an individual issuer exceeded ten percent of
German American Bancorp shareholders' equity at December 31, 1997. The total
dollar amount of Cash and Due from Banks, Federal Funds Sold and Other
Short-term Investments with National City Bank, Louisville, Kentucky was $9,364
at December 31, 1997.
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, 1997 and 1996, U.S. Government Agency structured notes,
consisting primarily of step-up and single-index bonds, with respective
amortized costs of $5,000 and $6,000 and fair values of $4,986 and $5,901 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 over 80% of
Mortgage-backed securities.
NOTE 3 - Loans
Loans, as presented on the balance sheet, are comprised of the following
classifications at December 31,
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Real Estate Loans Secured by 1- 4 Family Residential Properties $107,943 $93,713
Commercial and Industrial Loans 106,843 110,894
Loans to Individuals for Household, Family and Other Personal Expenditures 61,297 50,200
Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers 53,110 57,073
Economic Development Commission Bonds 500 575
Lease Financing 1,045 1,279
----- -----
Totals $330,738 $313,734
======== ========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 3 - Loans (Continued)
<TABLE>
Information regarding impaired loans is as follows:
1997 1996
---- ----
<S> <C> <C>
Year-end loans with no allowance for loan losses allocated $ 507 $ 386
Year-end loans with allowance for loan losses allocated 2,272 3,452
Amount of allowance allocated 358 452
Average balance of impaired loans during the year 2,910 4,129
Interest income recognized during impairment 217 322
Interest income recognized on cash basis 203 231
</TABLE>
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 1997. A summary of
the activity of these loans is as follows:
<TABLE>
Balance Changes Deductions Balance
January 1, in Persons December 31,
1997 Additions Included Collected Charged-off 1997
---- --------- -------- --------- ---------- ----------- ----
<S> <C> <C> <C> <C> <C> <C>
$ 12,074 $ 8,279 $ --- $ (8,084) $ --- $ 12,269
</TABLE>
Total loans serviced for the Federal Home Loan Mortgage Corporation were
$3,808 at December 31, 1997 and $4,440 at December 31, 1996. 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:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance as of January 1 $6,528 $6,893 $6,602
Provision for Loan Losses (408) 210 49
Recoveries of Prior Loan Losses 734 299 637
Loan Losses Charged to the Allowance (599) (874) (395)
---- ---- ----
Balance as of December 31 $6,255 $6,528 $6,893
====== ====== ======
</TABLE>
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,
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Land $2,238 $1,827
Buildings and Improvements 12,572 12,032
Furniture and Equipment 7,195 6,567
----- -----
Total Premises, Furniture and Equipment 22,005 20,426
Less: Accumulated Depreciation (9,599) (8,841)
------ ------
Total $12,406 $11,585
======= =======
</TABLE>
Depreciation expense was $960, $950 and $914 for 1997, 1996 and 1995,
respectively.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 6 - Deposits
The aggregate amount of interest-bearing deposits in denominations of $100
or more was $25,661 and $32,589 as of December 31, 1997 and 1996, respectively.
At year-end 1997, interest-bearing deposits include $125,204 of demand and
savings deposits and $254,510 of time deposits. Stated maturities of time
deposits were as follows:
1998 $170,473
1999 57,340
2000 15,207
2001 5,861
2002 5,447
Thereafter 182
---
Total $254,510
========
NOTE 7 - Short-term Borrowings
The Company's funding sources include repurchase agreements and short-term
borrowings, primarily federal funds purchased and Interest Bearing Demand Notes
issued to the U.S. Treasury. Repurchase agreements are essentially 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, 1997 and 1996 is as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Balances at December 31:
Repurchase Agreements $4,933 $8,400
Federal Funds Purchased --- 2,000
Demand Notes Issued to the U.S. Treasury --- 2,127
--- -----
Total Short-term Borrowings $4,933 $12,527
====== =======
</TABLE>
NOTE 8 - Long-term Debt
Long-term debt outstanding consists of the following at December 31,
1997 1996
---- ----
Federal Home Loan Bank advances;
interest payable monthly
at 5.20%; principal matured on
January 13, 1997 $ --- $ 1,000
=========== =========
NOTE 9 - Employee Benefit Plans
The Company and all its banking affiliates provided a trusteed
noncontributory profit sharing plan, which covered substantially all full-time
employees. Peoples joined this plan in April 1997. Contributions are
discretionary and are subject to determination by the Board of Directors.
Contributions to this plan were $256, $200 and $184 for 1997, 1996 and 1995,
respectively.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 9 - Employee Benefit Plans (continued)
The Company and all its banking affiliates offered 401(k) deferred
compensation plans under which the banks agree to match certain employee
contributions. Contributions to this plan were $255, $223 and $216 for 1997,
1996 and 1995, respectively.
Peoples has a noncontributory defined benefit pension plan covering
substantially all employees with benefits based on years of service and
compensation prior to retirement. Peoples is in the process of terminating the
plan. The projected benefit obligation was frozen at April 30, 1997, and the
plan will be settled in 1998. Peoples did not record a curtailment gain in 1997
due to immateriality, and the net gain upon settlement is also expected to be
immaterial. Upon settlement, approximately 25% of the prepaid pension asset will
be utilized for discretionary
contributions to the Company's existing noncontributory profit sharing plan.
Plan assets consist primarily of U.S. Treasury bonds, corporate bonds and other
various marketable equity securities.
The following sets forth the Peoples Plan's funded status at December 31,
1997:
Plan assets at fair value $1,022
Projected benefit obligation for service rendered to date (853)
Unrecognized loss 122
Unrecognized transition asset (133)
-----
Prepaid Pension Asset $ 158
=====
NOTE 10 - Stock Options
The Company maintains a Stock Option Plan which reserves 168,214 shares of
Common Stock (as adjusted for subsequent stock splits and subject to further
customary antidilution adjustments) for the purpose of grants of options to
officers and other employees of the Company. The date on which options are first
exercisable is determined by the Stock Option Committee of the Company, but no
stock option may be exercised after ten years from the date of grant. Options
may be designated as "incentive stock options" under the Internal Revenue Code
of 1986, or as nonqualified options. The exercise price of incentive 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.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands except per share data)
- --------------------------------------------------------------------------------
NOTE 10 - Stock Options (Continued)
Changes in options outstanding were as follows, as adjusted to reflect stock
splits and stock dividends:
<TABLE>
Number Weighted-average
of Options Exercise Price
---------- --------------
<S> <C> <C>
Outstanding, beginning of 1995 56,450 $ 9.76
Granted 7,711 13.48
Exercised (13,429) 9.36
-------
Outstanding, end of 1995 50,732 10.43
Granted 14,112 14.66
Exercised (22,917) 9.36
--------
Outstanding, end of 1996 41,927 12.43
Granted 23,810 18.12
Exercised (33,218) 13.04
-------
Outstanding, end of 1997 32,519 15.95
=======
Options exercisable at year-end are as follows:
Number Weighted-average
of Options Exercise Price
---------- --------------
1997 1,069 15.59
</TABLE>
Financial Accounting Standard No. 123, which became effective for 1996,
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 1997, 1996 and 1995.
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net income $6,098 $4,881 $4,834
Pro forma:
Earnings per share $1.14 $0.91 $0.91
Diluted Earnings per share 1.14 0.91 0.90
</TABLE>
In future years, the pro forma effect of not applying this standard may
increase as additional options are granted.
For options granted during 1997, 1996 and 1995, the weighted-average fair values
at grant date are $1.73, $0.91 and $1.10, respectively. The fair value of
options granted during 1997, 1996 and 1995 was estimated using the following
weighted-average information: risk-free interest rate of 5.58%, 5.41% and 5.43%,
expected life of one year, expected volatility of stock price of .18, .10 and
.10, and expected dividends of 2.06%, 2.38% and 2.41% per year.
At year-end 1997, options outstanding have a weighted average remaining life
of 5.25 years, with exercise prices ranging from $9.36 to $15.95.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 11 - Income Taxes
The provision for income taxes consists of the following:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Currently Payable $3,114 $2,306 $2,326
Deferred (32) 254 44
Net Operating Loss Carryforward (47) (47) (47)
--- --- ---
Total $3,035 $2,513 $2,323
====== ====== ======
</TABLE>
Income tax expense is reconciled to the 34% statutory rate applied to
pre-tax income as follows:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Rate Times Pre-tax Income $3,119 $2,519 $2,436
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments (681) (645) (561)
Non-deductible Merger Costs 73 149 ---
State Income Tax, Net of Federal Tax Effect 541 459 420
Other Differences (17) 31 28
--- -- --
Total Income Taxes $3,035 $2,513 $2,323
====== ====== ======
</TABLE>
The net deferred tax asset at December 31 consists of the following:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses $1,378 $1,546
Net Operating Loss Carryforwards 187 234
Other 342 174
--- ---
Total Deferred Tax Assets 1,907 1,954
----- -----
Deferred Tax Liabilities:
Depreciation (230) (192)
Leasing Activities, Net (202) (282)
Purchase Accounting Adjustments (29) (45)
Unrealized Appreciation on Securities (493) (315)
Other (43) (64)
--- ---
Total Deferred Tax Liabilities (997) (898)
---- ----
Valuation Allowance (48) (48)
--- ---
Net Deferred Tax Asset $862 $1,008
==== ======
</TABLE>
The Company's subsidiary, German American Holdings Corporation, Inc., has
$550 of federal tax net operating loss carryforwards expiring in the following
amounts:
Year Amount Year Amount
---- ------ ---- ------
1999 $119 2002 $105
2000 135 2007 58
2001 129 2008 4
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
NOTE 12 - Per Share Data
The Board of Directors declared and paid a 5% stock dividend in 1997, 1996 and
1995. 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:
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Earnings per Share:
Net Income $6,139 $4,894 $4,842
Weighted Average Shares Outstanding 5,343,727 5,335,316 5,331,745
Earnings per Share $1.15 $0.92 $0.91
===== ===== =====
Diluted Earnings per Share:
Net Income $6,139 $4,894 $4,842
Weighted Average Shares Outstanding 5,343,727 5,335,316 5,331,745
Stock Options 32,519 41,927 50,732
Assumed Shares Repurchased upon Exercise of Options (23,978) (32,900) (37,591)
------- ------- -------
Diluted Weighted Average Shares Outstanding 5,352,268 5,344,343 5,344,886
Diluted Earnings per Share $1.15 $0.92 $0.91
===== ===== =====
</TABLE>
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31,
1997, 1996, and 1995 was $119, $106, and $100, respectively, including amounts
paid under short-term cancelable leases.
At December 31, 1997, 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 and 2001 with various renewal options provided. Aggregate annual rental
payments to this Director's company totaled $44 for 1997. 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:
<TABLE>
Premises Equipment Total
-------- --------- -----
<S> <C> <C> <C>
1998 $78 $9 $87
1999 74 1 75
2000 68 --- 68
2001 55 --- 55
2002 50 --- 50
-- --- --
Total $325 $10 $335
==== === ====
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
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,
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Commitments to Fund Loans:
Home Equity $9,726 $8,185
Credit Card Lines 4,634 4,480
Commercial Real Estate Commitments --- 67
Commercial Operating Lines 30,009 23,900
------ ------
Total Commitments to Fund Loans $44,369 $36,632
======= =======
Standby Letters of Credit $2,853 $2,009
</TABLE>
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-insured employee health benefits for all affiliates,
including Peoples beginning in the second quarter of 1997. Stop loss insurance
covers annual losses exceeding $35 per covered individual and approximately $500
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 $430, $326 and $269 for 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, the affiliate banks were required to have
$2,715 and $2,504, respectively, on deposit with the Federal Reserve, or as cash
on hand. These reserves do not earn interest.
NOTE 15 - Non-cash Investing Activities
<TABLE>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loans Transferred to Other Real Estate $42 $25 $149
Securities Transferred to Available-for-Sale --- --- 40,279
</TABLE>
The data above should be read in conjunction with the Consolidated Statements
of Cash Flows. During December 1995, securities were transferred from the
classification of Held-to-Maturity to Available-for-Sale in accordance with the
Financial Accounting Standards Board Special Report on Implementation of FAS
115.
<PAGE>
- --------------------------------------------------------------------------------
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, 1997 and 1996, and for each of the three years ended December 31, 1997,
1996, and 1995 are as follows:
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash $1,324 $428
Securities Available-for-Sale, at Market 1,761 1,791
Investment in Subsidiary Banks and Bank Holding Company 48,513 45,740
Investment in GAB Mortgage Corp 286 278
Furniture and Equipment 1,371 785
Other Assets 268 248
--- ---
Total Assets $53,523 $49,270
======= =======
LIABILITIES $ 191 $ 477
--------- ----------
SHAREHOLDERS' EQUITY
Common Stock 5,350 2,539
Additional Paid-in Capital 35,018 26,501
Retained Earnings 12,208 19,258
Unrealized Appreciation on Securities Available-for-Sale 756 495
--- ---
Total Shareholders' Equity 53,332 48,793
------ ------
Total Liabilities and Shareholders' Equity $53,523 $49,270
======= =======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from Subsidiary Banks $4,750 $5,386 $2,665
Dividend and Interest Income 129 110 18
Fee Income 407 374 178
Securities Gains, net --- 74 ---
Other Income --- 5 5
--- - -
Total Income 5,286 5,949 2,866
----- ----- -----
EXPENSES
Salaries and Benefits 1,434 1,330 922
Professional Fees 378 601 95
Occupancy and Equipment Expense 246 260 130
Other Expenses 278 219 108
--- --- ---
Total Expenses 2,336 2,410 1,255
----- ----- -----
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES 2,950 3,539 1,611
Income Tax Benefit 655 556 415
--- --- ---
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 3,605 4,095 2,026
Equity in Undistributed Income of Subsidiaries 2,534 799 2,816
----- --- -----
NET INCOME $6,139 $4,894 $4,842
====== ====== ======
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 16 - Parent Company Financial Statements (continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $6,139 $4,894 $4,842
------ ------ ------
Adjustments to Reconcile Net Income to Net Cash from Operations
Amortization on Securities 36 32 ---
Depreciation 140 117 65
Gain on Sale of Securities, net --- (74) ---
Change in Other Assets (12) (40) (72)
Change in Other Liabilities (286) 338 84
Equity in Undistributed Income of Subsidiaries (2,534) (799) (2,816)
------ ---- ------
Total Adjustments (2,656) (426) (2,739)
------ ---- ------
Net Cash from Operating Activities 3,483 4,468 2,103
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to First State Bank --- (632) ---
Purchase of Securities Available-for-Sale --- (1,815) ---
Proceeds from Sales of Securities Available-for-Sale --- 88 ---
Property and Equipment Expenditures (726) (589) (362)
---- ---- ----
Net Cash from Investing Activities (726) (2,948) (362)
---- ------ ----
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid (2,083) (1,684) (1,554)
Exercise of Stock Options 3 7 23
Issuance (Repurchase) of Common Stock 252 145 (110)
Purchase of Interest in Fractional Shares (33) (30) (25)
--- --- ---
Net Cash from Financing Activities (1,861) (1,562) (1,666)
------ ------ ------
Net Change in Cash and Cash Equivalents 896 (42) 75
Cash and Cash Equivalents at Beginning of Year 428 470 395
--- --- ---
Cash and Cash Equivalents at End of Year $1,324 $428 $470
====== ==== ====
</TABLE>
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.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 17 - Capital Requirements (continued)
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.
At year-end 1997, consolidated and selected affiliate bank actual capital
levels and minimum required levels are presented below. Capital ratios for the
other affiliate banks are materially consistent with consolidated capital
ratios.
<TABLE>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Regulations:
------ ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets)
Consolidated $55,093 16.51% $26,704 8.00% $33,380 10.00%
German American Bank $26,301 14.06% $14,967 8.00% $18,709 10.00%
Peoples National Bank $15,680 16.19% $7,746 8.00% $9,683 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated $50,874 15.24% $13,352 4.00% $20,028 6.00%
German American Bank $23,947 12.80% $7,484 4.00% $11,225 6.00%
Peoples National Bank $14,458 14.93% $3,873 4.00% $5,810 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated $50,874 10.48% $19,416 4.00% $24,270 5.00%
German American Bank $23,947 8.52% $11,242 4.00% $14,053 5.00%
Peoples National Bank $14,458 9.87% $5,861 4.00% $7,326 5.00%
</TABLE>
The Company and all affiliate Banks at year-end 1997 were categorized as well
capitalized.
NOTE 18 - Business Combinations
On March 4, 1997, the Company completed a merger with Peoples Bancorp of
Washington, Washington, Indiana, parent company of The Peoples National Bank and
Trust Company of Washington (collectively, "Peoples") in which the Company
issued 615,285 shares for all the outstanding shares of Peoples. This
transaction has been 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 to better serve the Daviess and Martin County
area markets.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 18 - Business Combinations (continued)
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp and Peoples Bancorp for the
1997 pooling:
<TABLE>
German American
Bancorp Peoples
(as previously reported) Bancorp Combined
----------------------- ------- --------
<S> <C> <C> <C>
For the period January 1, 1997 through
March 4, 1997
Net interest income $2,558 $696 $3,254
Net income 698 218 916
For the year ended December 31, 1996
Net interest income 14,675 4,003 18,678
Net income 4,065 829 4,894
For the year ended December 31, 1995
Net interest income 14,480 3,388 17,868
Net income 4,018 824 4,842
</TABLE>
In December 1997, the Company signed a definitive agreement providing for a
merger of a Company subsidiary with CSB
Bancorp, ("CSB") parent company of the Citizens State Bank of Petersburg,
Indiana. Under terms of the agreement, the Company will issue to CSB
shareholders between 928,572 and 1,137,500 shares of Company Common Stock, as
adjusted for the Company's two for one stock split declared in October 1997. The
number of shares to be issued is dependent upon the Company's average common
stock price during a period prior to the date of the merger closing, and is also
subject to further anti-dilution adjustments in the event of any future stock
dividends, splits and the like. The proposed merger is subject to approval by
the shareholders of CSB, bank regulatory agencies, and other conditions. The
transaction is expected to be accounted for as a pooling of interests, and it is
contemplated that the merger will be effective in the second quarter of 1998.
In January 1998, the Company also signed a definitive agreement providing
for a merger of a Company subsidiary with FSB Financial Corporation ("FSB")
which operates the FSB Bank in Princeton and Francisco, Indiana. Under terms of
the agreement, the Company will issue to shareholders of FSB shares of Company
Common Stock with market value equal to 150% of the sum of FSB's shareholders'
equity. The market value of the shares issued will be based upon FSB shareholder
equity as of the end of the month immediately preceding the closing date,
subject to certain adjustments described in the definitive agreement. The
proposed merger is subject to approval by the shareholders of FSB, bank
regulatory agencies, and other conditions. The transaction is expected to be
accounted for as a pooling of interests, and it is contemplated that the merger
will be effective in the second quarter of 1998.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued)
(dollars in thousands)
- --------------------------------------------------------------------------------
NOTE 19 - Fair Values of Financial Instruments
The following methods and assumptions were used to estimate fair values for
financial instruments.
For cash, short-term investments, short-term borrowings and accrued
interest, the carrying amount is a reasonable estimate of fair value. The
carrying value of commitments to extend credit and standby letters of credit,
which is zero, is also a reasonable estimation of fair value. These instruments
are generally short-term or variable rate with minimal fees charged.
In the case of securities, the fair values are based on quoted market prices
or dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar instruments.
The fair value of loans is estimated by discounting future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the remaining maturities.
The fair value of demand deposits, savings accounts, and certain money
market deposits and accrued interest, is the amount payable on demand at the
reporting date. The fair value of fixed-maturity time deposits is estimated
using the rates currently offered on deposits of similar remaining maturities.
<TABLE>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Short-term Investments $26,250 $26,250 $39,310 $39,310
Securities Available-for-Sale 99,639 99,639 98,557 98,557
Securities Held-to-Maturity 24,223 25,254 23,213 23,810
Loans, net 324,214 327,421 306,754 306,397
Accrued Interest Receivable 4,798 4,798 4,533 4,533
Financial Liabilities:
Deposits (433,948) (436,004) (422,906) (425,534)
Short-term Borrowings (4,933) (4,933) (12,527) (12,527)
Long-term Debt --- --- (1,000) (1,002)
Accrued Interest Payable (2,372) (2,372) (2,279) (2,279)
Unrecognized Financial Instruments:
Commitments to extend Credit --- --- --- ---
Standby Letters of Credit --- --- --- ---
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
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, 1997 and 1996, 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, 1997. 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.
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of German
American Bancorp as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Indianapolis, Indiana
February 5, 1998 Crowe, Chizek and Company LLP
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
(AS OF MARCH 7, 1997)
STATE OF
NAME INCORPORATION
The German American Bank Indiana
GAB Mortgage Corp Indiana
German American Holdings Corporation Indiana
Community Trust Bank Indiana
First State Bank, Southwest Indiana Indiana
The Peoples National Bank and Trust Company
of Washington Indiana
Peoples Investment Center, Inc. Indiana
EXHIBIT 23.1
Consent of Independent Auditors
Board of Directors
German American Bancorp
Jasper, Indiana
We consent to the incorporation by reference in the Registration Statement Form
S-3 of German American Bancorp, relating to the Dividend Reinvestment and Stock
Purchase Plan and which is included by reference as an Exhibit in the December
31, 1997 Form 10-K, of our Independent Auditor's Report, dated February 5, 1998,
on the consolidated financial statements of German American Bancorp as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997.
Crowe, Chizek and Company LLP
March 31, 1998
Indianapolis, Indiana
EXHIBIT 23.2
Consent of Independent Auditors
Board of Directors
German American Bancorp
Jasper, Indiana
We consent to the incorporation by reference in the Registration Statement Form
S-4 and Prospectus of German American Bancorp, relating to the issuance of
securities in the proposed mergers of CSB Bancorp and FSB Financial Corporation
into a wholly owned subsidiary of German American Bancorp, of our Independent
Auditor's Report, dated February 5, 1998, on the consolidated financial
statements of German American Bancorp as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997.
Crowe, Chizek and Company LLP
March 31, 1998
Indianapolis, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000714395
<NAME> GERMAN AMERICAN BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,250
<INT-BEARING-DEPOSITS> 200
<FED-FUNDS-SOLD> 11,800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,639
<INVESTMENTS-CARRYING> 24,223
<INVESTMENTS-MARKET> 25,254
<LOANS> 330,469
<ALLOWANCE> 6,255
<TOTAL-ASSETS> 498,831
<DEPOSITS> 433,948
<SHORT-TERM> 4,933
<LIABILITIES-OTHER> 6,618
<LONG-TERM> 0
0
0
<COMMON> 5,350
<OTHER-SE> 47,982
<TOTAL-LIABILITIES-AND-EQUITY> 498,831
<INTEREST-LOAN> 29,350
<INTEREST-INVEST> 7,510
<INTEREST-OTHER> 608
<INTEREST-TOTAL> 37,468
<INTEREST-DEPOSIT> 17,221
<INTEREST-EXPENSE> 17,521
<INTEREST-INCOME-NET> 19,947
<LOAN-LOSSES> (408)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 13,668
<INCOME-PRETAX> 9,174
<INCOME-PRE-EXTRAORDINARY> 9,174
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,139
<EPS-PRIMARY> 1.15
<EPS-DILUTED> 1.15
<YIELD-ACTUAL> 4.64
<LOANS-NON> 562
<LOANS-PAST> 2,710
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,528
<CHARGE-OFFS> 599
<RECOVERIES> 734
<ALLOWANCE-CLOSE> 6,255
<ALLOWANCE-DOMESTIC> 6,255
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,557
</TABLE>
