SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported):
February 24, 1998
GERMAN AMERICAN BANCORP
(Exact Name of Registrant as Specified in its Charter)
INDIANA
(State or Other Jurisdiction of Incorporation)
0-11244 35-1547518
(Commission File No.) (I.R.S. Employer
Identification No.)
711 Main Street, Jasper, Indiana
(Address of Principal Executive Officer)
47546
(Zip Code)
(812) 482-1314
(Registrant's Telephone Number, Including Area Code)
<PAGE>
<PAGE>2
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
Attached as Exhibit 99 to this report are supplemental
consolidated financial statements of the Registrant that give
retroactive effect to the merger of the Registrant and Peoples
Bancorp of Washington on March 4, 1997, which has been accounted
for as a pooling of interests, and related summary financial data
and Managements' Discussion and Analysis disclosures based upon
the supplemental consolidated financial statements.
Exhibit No. Description Page
99.1 Supplemental Consolidated Financial 4
Statements, Data, and Discussion:
Five Year Summary of Supplemental 4
Consolidated Financial Statements and
Related Statistics
Management's Discussion and Analysis 5
of Financial Condition and Results of
Operations
Supplemental Consolidated Financial 19
Statements, December 31, 1996, 1995,
and 1994
Independent Auditors' Report 41
Market and Dividend Information for 42
German American Bancorp Common Stock
<PAGE>
<PAGE>3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
Date: February 24,1998 GERMAN AMERICAN BANCORP
By /s/ George W. Astrike,
George W. Astrike, Chairman of
the Board and Chief Executive
Officer
By /s/ Richard E. Trent
Richard E. Trent,
Vice President and Chief
(Principal Financial Officer)
10364
<PAGE>4
EXHIBIT 99.1
Five Year Summary of Supplemental Consolidated Financial Statements
and Related Statistics
(dollar references in thousands except share data)
The following selected data have been taken from the Company's supplemental
consolidated financial statements and should be read in conjunction with the
supplemental consolidated financial statements and related notes included
elsewhere in this annual report. See Note 18 to the supplemental consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for information regarding a purchase
acquisition during 1994 which affects the comparability of data.
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest and Fees on Loans................ $27,846 $26,197 $21,545 $20,238 $20,863
Interest on Investments................... 7,515 7,619 6,378 7,133 8,299
----- ----- ----- ----- -----
Total Interest Income................. 35,361 33,816 27,923 27,371 29,162
------ ------ ------ ------ ------
Interest on Deposits...................... 16,179 15,150 11,599 12,278 14,168
Interest on Borrowings................... 504 798 420 172 218
--- --- --- --- ---
Total Interest Expense................ 16,683 15,948 12,019 12,450 14,386
------ ------ ------ ------ ------
Net Interest Income....................... 18,678 17,868 15,904 14,921 14,776
Provision for Loan Losses................. 210 49 687 797 1,146
--- -- --- --- -----
Net Interest Income after Provision for
Loan Losses........................... 18,468 17,819 15,217 14,124 13,630
Noninterest Income........................ 2,227 1,764 1,933 1,836 1,911
Noninterest Expenses...................... 13,288 12,418 10,910 10,874 10,257
------ ------ ------ ------ ------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting for Income Taxes......... 7,407 7,165 6,240 5,086 5,284
Income Tax Expense........................ 2,513 2,323 1,958 1,642 1,767
----- ----- ----- ----- -----
Income Before Cumulative Effect of
Change in Accounting for Taxes....... 4,894 4,842 4,282 3,444 3,517
Cumulative Effect of Change in
Accounting for Income Taxes........... --- --- --- 218 ---
--- --- --- --- ---
Net Income................................ $4,894 $4,842 $4,282 $3,662 $3,517
=========================================================================================================================
Year-end Balances
Total Assets.............................. $489,443 $458,604 $432,939 $412,203 $388,359
Total Loans, Net.......................... 306,754 282,457 270,981 243,766 229,671
Total Long-term Debt...................... 1,000 1,000 1,000 1,000 ---
Total Deposits............................ 422,906 395,553 369,180 353,056 334,087
Total Shareholders' Equity................ 48,793 45,788 40,779 38,880 36,401
=========================================================================================================================
Per Share Data (1 )
Income Before Cumulative Effect of
Change in Accounting for
Income Taxes........................ $0.92 $0.91 $0.80 $0.65 $0.66
Net Income................................ 0.92 0.91 0.80 0.69 0.66
Cash Dividends (2)........................ 0.39 0.36 0.32 0.29 0.26
Shareholders' Equity, End of Year......... 9.14 8.59 7.65 7.29 6.83
=========================================================================================================================
Other Data at Year-end
Number of Shareholders.................... 1,981 1,910 1,863 1,878 1,764
Number of Employees....................... 218 213 203 188 177
Weighted Average Number of Shares......... 5,335,316 5,331,745 5,331,163 5,331,157 5,331,157
</TABLE>
(1) Per share data has been retroactively adjusted to give effect for stock
dividends and stock splits.
(2) Cash dividends represent historical dividends declared per share without
retroactive restatement for pooling.
<PAGE> 5
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following table summarizes the net interest income (on a tax-equivalent
basis) for each of the past three years. For the tax-equivalent adjustments, an
effective tax rate of 34% was used for all years presented. (1)
<TABLE>
<CAPTION>
Average Balance Sheet
(Tax-equivalent / dollar references in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 1996 December 31, 1995 December 31, 1994
Average Interest Average Interest Average Interest
Principal Income/ Average Principal Income/ Average Principal
Income/ Average
Balance Expense Yield Balance Expense Yield Balance
Expense Yield
----------------------------- ----------------------------
- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
ASSETS
Short-term Investments:
Interest-bearing Balances
with Banks............... $989 $53 5.36% $1,124 $55 4.89% $3,678
$158 4.30%
Federal Funds Sold and Securities
Purchased under Agreements
to Resell................ 11,589 611 5.27% 13,467 783 5.81% 10,857
386 3.56%
Other Short-term Investments 2,115 114 5.39% 11,247 679 6.04% 4,002
202 5.05%
Securities:
Taxable.................... 81,221 4,788 5.90% 77,078 4,400 5.71% 78,138
4,136 5.29%
Non-taxable................ 33,791 2,953 8.74% 27,628 2,579 9.33% 24,473
2,269 9.27%
Total Loans and Leases (2)(3). 306,296 27,947 9.12% 285,154 26,290 9.22% 263,350
21,599 8.20%
------- ------ ------- ------ ------- ------
TOTAL INTEREST
EARNING ASSETS............. 436,001 36,466 8.36% 415,698 34,786 8.37% 384,498
28,750 7.48%
------- ------ ------- ------ ------- ------
Cash and Due from Banks....... 15,602 14,185 13,474
Premises, Furniture &
Equipment.................. 11,386 11,262 8,996
Other Assets.................. 9,768 9,644 7,723
Less: Allowance for Loan Losses (6,948) (6,749) (6,134)
------ ------ ------
TOTAL ASSETS.................. $465,809 $444,040 $408,557
======== ======== ========
LIABILITIES AND SHARE-
HOLDERS' EQUITY
Savings and Interest-bearing
Demand Deposits............ $126,593 3,375 2.67% $120,603 3,361 2.79% $120,634
2,977 2.47%
Time Deposits................. 232,729 12,804 5.50% 222,779 11,789 5.29% 194,818
8,622 4.43%
Federal Funds Purchased,
Securities Sold under
Agreements to Repurchase and
Other Short-term Borrowings 8,635 404 4.68% 12,059 671 5.56% 11,151
366 3.28%
Long-term Debt................ 1,851 100 5.40% 2,137 127 5.94% 1,000
54 5.40%
----- --- ----- --- ----- --
TOTAL INTEREST-BEARING
LIABILITIES................ 369,808 16,683 4.51% 357,578 15,948 4.46% 327,603
12,019 3.67%
------- ------ ------- ------ ------- ------
Demand Deposit Accounts....... 45,242 40,200 37,973
Other Liabilities............. 3,853 3,499 3,195
----- ----- -----
TOTAL LIABILITIES............. 418,903 401,277 368,771
------- ------- -------
Shareholders' Equity.......... 46,906 42,763 39,786
------ ------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $465,809 $444,040 $408,557
======== ======== ========
NET INTEREST INCOME........... $19,783 $18,838 $16,731
======= ======= =======
NET YIELD ON
EARNING ASSETS............. 4.54%
4.53% 4.35%
</TABLE>
1. Effective tax rates were determined as though interest earned on the
Company's investments in municipal bons and loans was fully taxable.
2. Nonaccruing loans have been included in average loans.
3. Interest income on loans includes loan fees of $516, $339, and $368 for
1996, 1995, and 1994, respectively.
<PAGE> 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
INTERIM FINANCIAL DATA (Table 1) (Unaudited, $ in thousands except share data)
<TABLE>
<CAPTION>
For the three months ended
December September June
March
31 30 30
31
--------- --------- --------
- -------
<S> <C> <C> <C>
<C>
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
====== ====== ======
======
Net Income per Share.................................. $.22 $.21 $.24
$.25
==== ==== ====
====
Weighted Average Shares............................... 5,338,167 5,336,143 5,333,564
5,333,351
========= ========= =========
=========
1995
Interest Income....................................... $8,870 $8,568 $8,408
$7,970
Interest Expense...................................... 4,249 4,121 4,026
3,552
----- ----- -----
- -----
Net Interest Income................................ 4,621 4,447 4,382
4,418
Provision for Loan Losses............................. (33) (191) 136
137
Noninterest Income.................................... 388 470 437
469
Noninterest Expense................................... 3,219 3,012 3,127
3,060
----- ----- -----
- -----
Income before Income Taxes......................... 1,823 2,096 1,556
1,690
Income Tax Expense.................................... 562 718 478
565
--- --- ---
- ---
Net Income....................................... $1,261 $1,378 $1,078
$1,125
====== ====== ======
======
Net Income per Share.................................. $.24 $.26 $.20
$.21
==== ==== ====
====
Weighted Average Shares............................... 5,331,144 5,331,450 5,332,127
5,332,275
========= ========= =========
=========
</TABLE>
<PAGE> 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
INTRODUCTION AND OVERVIEW
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's four affiliate banks conduct business in 20
offices in the six contiguous counties of Dubois, Daviess, Martin, Pike, Perry
and Spencer Counties in Southwest Indiana. The banks provide a wide range of
financial services, including accepting deposits; making commercial 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 1994
through 1996 and financial condition as of December 31, 1996 and 1995. The
information should be used in conjunction with accompanying supplemental
consolidated financial statements and footnotes contained elsewhere in this
report. The information has been restated to reflect the merger with The Otwell
State Bank and People's National Bank and Trust Company of Washington which were
both accounted for as pooling of interests. The acquisition of certain branches
of Regional Federal Savings Bank ("Regional") have been accounted for as
purchases and included in reported results from the date of acquisition. (See
the discussion below for further information on mergers and acquisitions.)
MERGERS AND ACQUISITIONS
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. Concurrently
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.
On April 1, 1994, the Company acquired The Otwell State Bank, Otwell, Indiana
("Otwell"), by the issuance of 113,286 shares for all the outstanding shares of
Otwell. This transaction was recorded utilizing the pooling of interests method
of accounting. Following the completion of the transaction, Otwell and the
Company's existing affiliate, Southwestern Indiana Bank, were merged into
Community Trust Bank, a combined banking institution operating in the Pike
County, Indiana market through offices in Otwell, Petersburg, and Winslow,
Indiana.
On October 28, 1994, the Company acquired the Regional branches in Huntingburg,
Rockport and Tell City, Indiana. This transaction, resulting in the acquisition
of approximately $25,000,000 in assets, was recorded utilizing the purchase
method of accounting. As a result of the Regional acquisition, the Company
recorded approximately $1,670,000 of intangible assets consisting of $1,353,000
of goodwill and $317,000 of core deposit intangible. Intangible assets are being
amortized to expense on a straight line basis over a 15 year period in the case
of goodwill and over 10 years on an accelerated basis for the core deposit
intangible. Following the Regional acquisition, the Huntingburg office was
combined into the Company's lead bank, German American Bank. The Tell City and
Rockport offices were combined into a newly formed subsidiary bank, First State
Bank, Southwest, Indiana ("First State").
The Company plans to continue to aggressively pursue merger and acquisition
opportunities as they become available. The Company's management believes other
community banks 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 community banks 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 community banks 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 community banks may occur in future
years.
<PAGE> 8
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
RESULTS OF OPERATIONS
NET INCOME
Net Income in 1996 was $4,894,000 or $0.92 per share, an increase of 1.1% over
the $4,842,000 or $0.91 per share reported in 1995. The comparison of 1996
earnings relative to those of a year earlier was impacted by an increase in net
interest income and an increase in Investment Services Income and Deposit
Service Charges. Partially offsetting these earnings improvements were an
increase in the Provision for Loan Loss and an increase in Professional fees
largely related to the Company's merger and acquisition activities.
For 1995, net income was 13.1% higher than in 1994. This increase in 1995
earnings relative to 1994 was impacted by a $638,000 decline in the required
level of Provision for Loan Loss and a $1,964,000 increase in Net Interest
Income. Other factors materially impacting the earnings comparison of 1995 and
1994 were a decline in Investment Services Income as well as an increase in
Salaries and Benefits largely related to the inclusion of First State throughout
1995.
NET INTEREST INCOME
Net interest income is the Company's single largest source of earnings. It
represents the difference between interest and fees realized on earning assets,
primarily loans and securities, and interest paid on deposits and other borrowed
funds. The 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 of earning assets, the mix of earning
assets, interest rates, and income taxes. Many of these factors can be
controlled 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 for 1996 on a tax-equivalent basis was 5.0% higher than that
for 1995 while the net interest margin was 4.54% for 1996 versus 4.53% for 1995.
Tax-equivalent net interest income for 1995 was 12.6% higher as compared to 1994
with net interest margin increasing to 4.53% in 1995 from 4.35% in 1994.
Excluding the effect of First State, which was included in all 1996 and 1995
report data but only since October 28, 1994 in the 1994 data, tax-equivalent net
interest income was $17,895,000 for 1995, a $1,287,000 or 7.7% increase over the
$16,608,000 recorded in 1994.
The increase in net interest income during 1996 and 1995 occurred as a result of
the impact of increases in the level of interest earning assets and an increase
in average yields in 1995 on loans, short-term investments and securities.
Fluctuations in general short-term interest rates affect the average yields on
most interest earning assets more quickly than the average rate paid on
interest-bearing liabilities. The fluctuations in short-term interest rates
which occurred during the periods presented resulted in a slight increase in Net
Interest Margin in 1996 following a significant increase in the margin in 1995.
See the discussion headed "Interest Rate Management" for a further explanation
of the Company's interest rate sensitivity position.
PROVISION FOR LOAN LOSSES
The Company provides for future loan losses through regular provisions to the
allowance for loan losses. These provisions are made at a level which is
considered necessary by management to absorb estimated losses in the loan
portfolio. A detailed evaluation of the adequacy of this loan loss reserve is
completed quarterly by management.
The consolidated provision for loan losses was $210,000 in 1996, $49,000 in
1995, and $687,000 in 1994. The decline in provision as compared to that
recorded in 1994 primarily resulted from a negative provision for loan loss at
the Union banking division of Peoples of $110,000 in 1996 and $475,000 in 1995.
The negative provisions at Union were due to collections of previous years'
charged-off loans combined with management's determination that an adequate
level of loan loss reserve existed prior to the loan recoveries. Because of the
adequacy of the existing reserve, the recoveries resulted in the recording of a
negative provision.
<PAGE> 9
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The amount of future years' provision for loan loss will be subject to
adjustment based on the findings of future evaluations of the adequacy of the
loan loss reserve. The section entitled RISK MANAGEMENT expands this discussion
further.
NONINTEREST INCOME
Exclusive of net security gains and gains on sales of loans and other real
estate ("ORE"), noninterest income increased 22.8% in 1996 to $2,099,000
compared to $1,709,000 in 1995. The primary source of noninterest income
continues to be trust fees (income from fiduciary activities), service charges
on deposit accounts and investment services income.
As presented on Table 2 below, trust department income rose by 1.4% in 1996
while service charges on deposit accounts increased by 27.4% during 1996 because
of a larger number of transactions and fee generating opportunities for the
Company in this area. Investment services income increased significantly by
$196,000 following a $213,000 decline in 1995. The level of earnings generated
through Investment Services is directly tied to the customers' utilization and
acceptance of the investment products offered through this service. This
investment services income is generated through a full service brokerage
operation which is available at several of the Company's affiliate banks. The
Company intends to expand the availability of investment services, as feasible,
throughout its affiliate banks.
Noninterest income exclusive of security gains and gains on sales of loans and
ORE decreased 2.5% in 1995 compared to 1994 largely as a result of the decrease
in the level of Investment Services Income discussed above.
<PAGE> 10
<TABLE>
<CAPTION>
NONINTEREST INCOME (Table 2)($ in thousands)
% Change From
Prior Year
1996 1995 1994 1996
1995
---- ---- ---- ----
- ----
<S> <C> <C> <C> <C>
<C>
Income from Fiduciary Activities........................ $210 $207 $192 1.4%
7.8%
Service Charges on Deposit Accounts..................... 976 766 720 27.4
6.0
Investment Services Income.............................. 403 207 420 94.7
(50.7)
Other Income............................................ 510 529 420 (3.6)
25.6
--- --- ---
Subtotal ........................................... 2,099 1,709 1,752 22.8
(2.5)
Gains on Sales of Loans and Other Real Estate........... 55 36 91 52.8
(60.4)
Security Gains, net..................................... 73 19 90 284.2
(78.9)
-- -- --
TOTAL NONINTEREST INCOME............................ $2,227 $1,764 $1,933 26.2
(8.7)
====== ====== ======
</TABLE>
NONINTEREST EXPENSE
Total noninterest expense increased 7.0% in 1996 over 1995 levels. As a
percentage of average total assets, total noninterest expense was 2.85% in 1996
compared to 2.80% in 1995 and 2.67% in 1994. Salaries and employee benefits,
which comprise approximately 55% of total noninterest expense, increased by 8.5%
in 1996 following a 15.0% increase in 1995. A significant portion of this
increase is attributable to the inclusion of First State Bank throughout 1996
and 1995 and to effects of changes in the Company's organizational structure
which occurred in mid 1995. Prior to July 1995, the Company's executive officers
and support functions served both the Company and its lead affiliate bank,
German American Bank. In recognition of the increased management and
administrative demands existing under a multi-bank holding company environment,
the management and administrative support functions of German American Bank and
the Company were segmented into distinct groups with additional staffing
implemented as deemed appropriate. Although this organizational change did
result in an increased level of Salaries & Benefits, Company management believes
the increased management focus at both the Bank and Bancorp level will result in
increased operating efficiency.
<PAGE> 11
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Occupancy expense and furniture and equipment expense combined, increased by
$70,000 or 3.5% in 1996 following a 14.6% increase in 1995. Approximately
one-half of the 1995 increase resulted from First State with the balance of the
increased 1995 expense level attributable to an upgrading of facilities and
equipment at the Company's other affiliate banks.
Computer processing expense increased by 6.2% and 13.6% in 1996 and 1995,
respectively, reflecting an increased number of accounts processed and
conversion expenses at the Company's newly acquired affiliates. 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 significantly by $558,000 in 1996 following a
$45,000 decrease in 1995 largely as a result of variations in the level of
merger related professional fees. While it is not possible to predict the level
of acquisition activity and the resulting level of costs associated thereto,
management does intend to pursue acquisition opportunities and, therefore,
increased and continued costs will be likely in future years.
During the third quarter of 1996, the FDIC instituted a one-time special
assessment against all deposits insured by the Savings Association Insurance
Fund ("SAIF"). A small portion of the deposits of German American Bank and all
the deposits of First State Bank are insured under SAIF. Therefore, the Company
was subject to a special assessment of $157,000. Including the impact of this
special assessment, FDIC premiums totaled $229,000 in 1996 as compared to
$471,000 and $801,000 in 1995 and 1994, respectively. Premiums for 1997 are
anticipated to be approximately $52,000.
Other operating expenses decreased by 3.8% in 1996 following a 36.3% increase in
1995. The 1995 increase was largely attributable to the inclusion of the First
State operation for the full year and increased advertising and supplies
expenses related to the Company's introduction, throughout 1995, of a new
company-wide corporate identity program. Additionally, amortization of goodwill
and the core deposit intangible totaled $216,000, $231,000 and $112,000, for
1996, 1995 and 1994, respectively. First State Bank's operating results
reflected a significant portion of the amortization expense.
<TABLE>
<CAPTION>
NONINTEREST EXPENSE (Table 3)($ in thousands)
% Change From
Prior Year
1996 1995 1994 1996
1995
---- ---- ---- ----
- ----
<S> <C> <C> <C> <C>
<C>
Salaries and Employee Benefits.......................... $7,165 $6,604 $5,742 8.5%
15.0%
Occupancy, Furniture and Equipment Expense.............. 2,066 1,996 1,742 3.5
14.6
FDIC Premiums........................................... 229 471 801 (105.7)
(41.2)
Computer Processing Fees................................ 427 402 354 6.2
13.6
Professional Fees ...................................... 805 247 292 225.9
(18.2)
Other Operating Expenses................................ 2,596 2,698 1,979 (3.8)
36.3
----- ----- -----
TOTAL NONINTEREST EXPENSE........................... $13,288 $12,418 $10,910 7.0
13.8
======= ======= =======
</TABLE>
PROVISION FOR INCOME TAXES
The Company records a provision for income taxes currently payable, along with a
provision for taxes payable in the future. Such deferred taxes arise from
differences in the timing of certain items for financial statement reporting
versus for income tax reporting. The major difference between the effective tax
rate applied to the Company's financial statement income and the federal
statutory rate of 34% is interest on tax-exempt securities and loans. Other
components affecting this calculation include state income taxes and
nondeductible merger costs. Note 10 to the consolidated financial statements
contains additional details relative to the Company's income tax provision. The
Company's effective tax rate was 33.9%, 32.4% and 31.4% in 1996, 1995, and 1994,
respectively.
<PAGE> 12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
CAPITAL RESOURCES
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. Minimum levels of capital are required to be
maintained in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill, core
deposit intangibles, and certain 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 4.0%
leverage ratio, which is Tier 1 capital divided by defined "total assets", 4.0%
Tier 1 capital to risk-adjusted assets and 8.0% total capital to risk-adjusted
assets ratios. Under these guidelines, the Company, on a consolidated basis, and
each of its affiliate banks individually, have capital ratios that substantially
exceed the regulatory minimums.
The Company's shareholders' equity of $48,793,000 and $45,788,000 at December
31, 1996 and December 31, 1995, respectively represented 9.97% and 9.98% of
total assets. The Company paid cash dividends of $1,684,000 and $1,554,000
during 1996 and 1995, respectively. The increased level of dividends paid in
1996 and 1995 resulted from the issuance of additional shares in connection with
the Company's Stock Dividend and Dividend Reinvestment Plan.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under these regulations, a
"well-capitalized" entity must achieve a Tier 2 Risk-based capital ratio of at
least 6.0%, a total capital ratio of at least 10.0% and a leverage ratio of at
least 5.0% and not be under a capital directive order. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on financial statements. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and plans for
capital restoration are required. At December 31, 1996 the Company and all
affiliate banks were categorized as well capitalized.
At December 31, 1996, management is not aware of any current recommendations by
banking regulatory authorities which, if they were to be implemented, would
have, or are reasonably likely to have, a material effect on the Company's
consolidated liquidity, capital resources or operations.
The following table presents the Company's consolidated capital ratios under
regulatory guidelines.
<TABLE>
<CAPTION>
RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands)
1996 1995
---- ----
<S> <C> <C>
Tier 1 Capital:
Shareholders' Equity as presented on Balance Sheet.......................... $48,793 $45,788
Subtract: Unrealized Appreciation on Securities Available-for-Sale.............. (495) (822)
Less: Intangible Assets and Ineligible Deferred Tax Assets...................... (1,924) (2,140)
------ ------
Total Tier 1 Capital............................................................ 46,374 42,826
Tier 2 Capital:
Qualifying Allowance for Loan Loss.......................................... 4,028 3,700
----- -----
Total Capital................................................................... $50,402 $46,526
======= =======
Risk Weighted Assets............................................................ $319,769 $292,841
</TABLE>
<PAGE> 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
<TABLE>
<CAPTION>
RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) (continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisons:
Amount Ratio Amount Ratio Amount
Ratio
<S> <C> <C> <C> <C> <C> <C>
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%
- - - -
As of December 31, 1995:
Total Capital
(to Risk Weighted Assets).......... $46,526 15.89% >$23,427 >8.0% >$29,284 >10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets).......... $42,826 14.62% >$11,714 >4.0% >$17,570 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets)................ $42,826 9.64% >$17,762 >4.0% >$22,202 > 5.0%
- - - -
</TABLE>
SOURCES OF FUNDS
The Company's primary funding source is its base of core customer deposits, such
as noninterest-bearing demand, regular savings and money market accounts and
small denomination certificates of deposit of less than $100,000. Other shorter
term sources of funds are larger denomination certificates of deposit, overnight
borrowings from other financial institutions, securities sold under agreements
to repurchase, short-term notes payable issued on an unsecured basis, and
short-term borrowings consisting of interest-bearing demand notes issued to the
U.S. Treasury. The membership of the Company's affiliate banks in the Federal
Home Loan Bank System (FHLB) provides an additional source for both long and
short-term borrowings. The following page contains a discussion of changes in
these areas. Table 5 below presents changes between years in the average
balances of all funding sources.
<TABLE>
<CAPTION>
FUNDING SOURCES - AVERAGE BALANCES (Table 5) ($ in thousands)
% Change From
Prior Year
1996 1995 1994 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
<C>
Demand........................................... $45,242 $40,200 $37,973 12.5%
5.9%
Savings and Interest-bearing Checking............ 93,731 95,662 99,957 (2.0)
(4.3)
Money Market Accounts............................ 32,862 24,941 20,677 31.8 20.6
Other Time Deposits.............................. 197,794 184,517 161,866 9.9 14.0
------- ------- -------
Total Core Deposits........................... 369,629 345,320 320,473 8.5 7.8
------- ------- -------
Certificates of Deposits of $100,000 and Over.... 34,935 38,262 32,952 (8.7) 16.1
Federal Funds Purchased, Securities
Sold under Agreement to Repurchase and
Other Short-term Borrowings................... 8,635 12,059 11,151 (28.4) 8.1
Long-term Debt................................... 1,851 2,137 1,000 (13.4) N/M
----- ----- -----
Total Funding Sources......................... $415,050 $397,778 $365,576 4.3 8.8
======== ======== ========
</TABLE>
N/M = Not Meaningful
<PAGE> 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
CORE DEPOSITS
The Company's average core deposits have shown steady growth over the past
several years, increasing by 8.5% and 7.8% in 1996 and 1995, respectively. In
1996 and 1995, the Company experienced a shift in the composition of its
deposits toward money market deposits and longer 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. In total, average savings,
interest-bearing checking and money market deposits increased by 6.9% and 1.4%
in 1996 and 1995, respectively, while other time deposits consisting primarily
of certificates of deposits in denominations of $100,000 or less increased by
9.9% in 1996 following a 10.6% increase in 1995. Average noninterest-bearing
demand deposits increased by 12.5% in 1996 and 5.9% in 1995. These changes in
the mix of deposits are influenced by customers' tendency to avoid committing to
longer term instruments during periods of low or declining interest rates and
their attempts to lock in rates on longer term instruments during periods of
perceived higher rates. They are also subject to seasonal and other non-economic
factors.
OTHER FUNDING SOURCES
Exclusive of core deposits, large denomination certificates of deposit provide
the majority of other funding sources for the Company. These certificates
declined by 8.7% in 1996 following a 16.1% increase in 1995. The remaining other
short-term funding 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, secured by certain investment securities.
These borrowings represent an important source of temporary short-term liquidity
for the Company. These types of borrowings and large dollar denominated
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
INVESTMENTS
The Company's securities portfolio, consisting of all components of the
Company's investment securities, mortgage-backed securities, and securities
available-for-sale, includes U.S. Treasury securities, obligations of U.S.
government agencies, obligations of state and political subdivisions, corporate
investments and 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
maturities of the securities and money market portfolios are a principal source
of funds for loan growth and other liquidity needs. The Company's
available-for-sale portfolio provides an additional source of funds from which
management can respond to liquidity needs and asset/liability management
requirements. During 1996, a shift occurred in the composition of the Company's
securities portfolio primarily between mortgage-backed securities and agency
securities. As anticipated, a substantial portion of the Company's
mortgage-backed securities were paid-down during the year. The funds generated
from those pay-downs were utilized to purchase agency insured securities at
yields generally equal to or greater than those which were carried in the
mortgage-backed portfolio. During 1995, the Financial Accounting Standards Board
authorized a one-time window of opportunity for the transfer of securities to
available-for-sale portfolios. 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 to indicate that management anticipates such sales. Securities
available-for-sale are carried at market value. All other securities are carried
at amortized cost because management intends to hold them until maturity and the
Company has the ability to do so. Note 2 to the consolidated financial
statements contains additional details regarding the Company's securities
portfolio in 1996 and 1995.
<PAGE> 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO (Table 6) (carrying value, $ in thousands)
December 31,
1996 % 1995 %
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Securities........................... $22,176 15.5% $19,476 14.6%
U.S. Treasury and Agency Securities............... 49,700 34.7 36,754 27.6
Municipal Securities.............................. 37,813 26.4 30,875 23.2
Corporate Securities.............................. 7,268 5.1 6,375 4.8
Mortgage-backed Securities........................ 24,782 17.3 38,437 28.9
Other Securities.................................. 1,396 1.0 1,135 .9
----- --- ----- --
Total Securities Portfolio.................... $143,135 100.0% $133,052 100.0%
======== ===== ======== =====
</TABLE>
LOANS
Total loans grew by $23,658,000 or 8.2% between 1996 and 1995. The Company's
newest affiliate bank, First State, achieved a significant market share of the
lending opportunities available within its market. The Company's loan portfolio
remains well diversified with 54% of the portfolio in commercial and
agricultural loans (including economic development bonds), 30% in 1-4 family
residential mortgages, and 16% in consumer loans at December 31, 1996. The
Company's affiliate banks lend to commercial customers in various industries
including agribusiness, manufacturing, health care services, wholesale, and
retailing.
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Extensions of credit outside this primary geographic market area are generally
concentrated in commercial real estate loans granted on a selective basis
generally within a 120 mile radius of the Company's primary market. Loans
outside the Company's general geographic market area are further limited to
loans guaranteed by either the Small Business Administration (SBA) or the
Farmers Home Administration (FmHA).
The overall loan portfolio is diversified among a variety of borrowers; however,
a significant portion of the debtors' ability to honor their contracts is
dependent upon the agricultural, poultry and wood manufacturing industries.
Although wood manufacturers employ a significant number of people in the market
area, there is not a concentration of credit to companies engaged in that
industry. No unguaranteed concentration of credit in excess of 10% of total
assets exists within any single industry group.
The composition of loan portfolio at December 31, 1996 and 1995 is presented in
further detail in Note 3 to the consolidated financial statements and in Table 7
below.
<TABLE>
<CAPTION>
\LOAN PORTFOLIO (Table 7) ($ in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Commercial and Industrial........................ $112,748 $101,338 $93,574
Agricultural and Poultry......................... 57,073 61,251 67,162
Residential Mortgage Loans....................... 93,713 85,543 82,810
Consumer Loans................................... 50,200 41,944 35,124
------ ------ ------
Total Loans.................................. 313,734 290,076 278,670
------- ------- -------
Less:
Unearned Income........................... 452 726 1,087
Allowance for Loan Loss...................... 6,528 6,893 6,602
----- ----- -----
Loans, Net....................................... $306,754 $282,457 $270,981
======== ======== ========
</TABLE>
<PAGE> 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
RISK MANAGEMENT
Various procedures are employed at the Company's affiliate banks to monitor
risk. The major risk addressed by the Company on a regular basis is the credit
risk inherent in the loan portfolio and to a lesser extent, the investment
portfolio. Another risk is that associated with changes in interest rates. The
following is a discussion of the Company's philosophies and procedures to
address risk.
LENDING AND LOAN ADMINISTRATION
The 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. Each bank also has executive and board loan committees that serve as
vehicles for communication and 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 serve as a monitoring tool of the overall
quality of the loan portfolios. Members of the Company's executive officers
serve on the board loan committees of each of the affiliate banks to ensure a
consistent application of company policies.
The Company maintains a comprehensive loan review program for its affiliate
banks. The purpose of these reviews is to evaluate loan administration, credit
quality, loan documentation and the adequacy of the allowance for loan losses.
This program also 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
of the allowances for loan losses 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. The review of specific
loans includes loans where the customer's cash flow or net worth may not be
sufficient to repay the loan, the loan has been criticized in a regulatory
examination, the accrual of interest has been suspended, or for other reasons
where either the ultimate collectibility of the loan is in question or the loan
has characteristics requiring special monitoring.
Activity in the allowance for loan losses is summarized in Table 8 below. Table
9 on the following page presents data for the underperforming assets.
Underperforming assets consist of 1) nonaccrual loans; 2) loans which have been
renegotiated to provide for a reduction or deferral of interest or principal
because of a deterioration in the financial condition of the borrower; 3) loans
past due ninety (90) days or more as to principal or interest; and 4) other real
estate owned. 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. Loans are charged-off when they are
deemed uncollectible.
During 1996, the Company's level of underperforming loans decreased from
$3,904,000 or 1.35% of total loans as of December 31, 1995 to $2,472,000 or .79%
of total loans at December 31, 1996. During 1996, the allowance for loan loss
decreased by $365,000 which represents the amount by which the current year's
charged-off loans exceeded the amount of recoveries of prior years' charge-offs
and the current year provision for loan loss. See the discussion entitled
"PROVISION FOR LOAN LOSS" elsewhere in this report for further details regarding
the provision.
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES (Table 8) ($ in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance as of January 1................................ $6,893 $6,602 $5,745
Addition of Affiliate Banks............................ --- --- 195
Provision for Loan Losses.............................. 210 49 687
Recoveries of Prior Loan Losses........................ 299 637 240
Loan Losses Charged to the Allowance................... (874) (395) (265)
----- ----- -----
Balance as of December 31.............................. $6,528 $6,893 $6,602
====== ====== ======
</TABLE>
<PAGE> 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
<TABLE>
<CAPTION>
UNDERPERFORMING ASSETS (Table 9) ($ in thousands)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Nonaccrual Loans....................................... $1,370 $1,093 $1,305
Past Due Loans (90 days or more)....................... 1,102 2,689 639
Renegotiated Loans..................................... --- 122 26
--- --- --
Total Underperforming Loans........................ 2,472 3,904 1,970
----- ----- -----
Other Real Estate Owned................................ 203 286 497
--- --- ---
Total Underperforming Assets....................... $2,675 $4,190 $2,467
====== ====== ======
Allowance for Loan Losses to
Underperforming Loans.............................. 264.08% 176.56% 335.13%
Underperforming Loans to Total Loans................... .79% 1.35% .71%
Allowance for Loan Losses to Total Loans.............. 2.08% 2.38% 2.37%
</TABLE>
INVESTMENTS, LIQUIDITY, AND INFLATION
Two of the more important and interrelated areas the Company and its affiliate
banks manage very closely are the Company's liquidity requirements and its
balance between interest-rate-sensitive assets and interest-rate-sensitive
liabilities.
Liquidity needs in a banking organization arise from new loan demand, the
funding of existing loan commitments, and deposit withdrawals. One important
objective in managing the securities portfolio is to ensure the Company has
adequate liquidity. The purposes of liquidity management are to match sources of
funds with anticipated customer borrowings and withdrawals and other obligations
and to ensure a dependable funding base. As discussed in the "Investments"
discussion contained elsewhere in this report, management significantly
increased the available-for-sale portfolio during 1995. This action greatly
enhanced the Company's ability to quickly react to changes in liquidity and
asset and liability needs. Failure to properly manage liquidity requirements can
result in the need to satisfy customer withdrawals and other obligations on less
than desirable terms.
The Company's asset and liability structure is substantially different from that
of an industrial company, in that virtually all assets and liabilities of a
financial institution are monetary in nature. Accordingly, changes in interest
rates may have a significant impact on a financial institution's performance.
Interest rates do not necessarily move in the same direction, or in the same
magnitude, as the prices of other goods and services.
Attention should be directed to the various analyses and schedules throughout
Management's Discussion and Analysis which are useful in analyzing how the
Company is positioned to react to changing interest rates.
INTEREST RATE MANAGEMENT
Interest rate sensitivity occurs when assets or liabilities are subject to rate
and yield changes within a designated time period. The Company performs rate
sensitivity analyses which place each of the Company's balance sheet components
in its appropriate maturity category according to its repricing frequency. In
addition to rate sensitivity analyses, the Company also utilizes other
asset/liability measurements such as computer generated simulation modeling.
This enables management to measure the effect on earnings of changes in interest
rates.
Without regular monitoring and management of these critical areas, a movement in
interest rates and its corresponding effect on the net interest margin may
significantly affect profitability. The degree of any potential consequences of
such interest rate changes can be mitigated by maintaining a proper
asset/liability position given projected interest rates. The Company's policy is
to actively manage its asset / liability position within a one-year interval
with a goal to protect its earnings from being materially adversely impacted by
changes in interest rates during the coming year.
<PAGE> 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The Company has a Funds Management Policy which establishes guidelines under
which the affiliate banks manage their securities portfolios. Funds Management
Committees at each of the affiliate banks meet quarterly to monitor the
established guidelines. The overall objective of these committees is to ensure
the Company maintains an adequate level of liquidity and maximizes its net
interest margins while implementing and monitoring programs for the matching of
the mix and maturities of various asset and liability categories so as to avoid
undue interest rate risk. The committees formulate short and long-term
strategies, direct the acquisition and allocation of funds and monitor the level
of interest rate sensitivity within the established guidelines.
Table 10 reflects the Company's interest rate sensitivity position (interest
rate-sensitive assets minus interest rate-sensitive liabilities) individually
and cumulatively, over various time horizons. As indicated in the table, a
significant portion of the Company's assets and liabilities reprice within 1-181
days. While slightly more of its assets than liabilities are subject to
repricing during this period, the Company believes its asset/liability
management program allows adequate reaction time to adjust to changes in
interest rate trends and believes the current asset/liability position does
effectively protect the Company's net interest margin and the resulting net
interest income from any material adverse impact during 1997 assuming a moderate
rise or decline in interest rates.
ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1996 (Table 10) ($ in
thousands)
<TABLE>
<CAPTION>
1-3 3-6 6-12 1-5 Beyond
Months Months Months Years 5 Years
Total
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<C>
EARNING ASSETS
Money Market Assets................ $20,600 $1,376 $200 --- ---
$22,176
Securities......................... 28,026 9,318 14,224 $41,650 $28,552
121,770
Loans (Net of Unearned)............ 95,206 36,317 83,294 72,375 26,090
313,282
TOTAL EARNING ASSETS............ $143,832 $47,011 $97,718 $114,025 $54,642
$457,228
INTEREST BEARING LIABILITIES
Retail Savings Money Market
Deposits........................ $129,090 --- --- --- ---
$129,090
Retail Time Deposits............... 32,862 $24,125 $60,438 $90,999 $129
208,553
Large Dollar Denominated
Time Deposits................... 10,020 6,159 6,649 9,761 ---
32,589
Other Borrowings................... 2,127 --- --- --- ---
2,127
Federal Funds Purchased and
Securities Sold Under Agreements
to Repurchase................... 9,900 500 --- --- ---
10,400
Long-term Debt..................... 1,000 --- --- --- ---
1,000
TOTAL INTEREST BEARING
LIABILITIES.................. $184,999 $30,784 $67,087 $100,760 $129
$383,759
Periodic GAP........................... $(41,167) $16,227 $30,631 $13,265 $54,513
Cumulative GAP......................... $(41,167) $(24,940) $5,691 $18,956 $73,469
Cumulative Ratio (1)................... 78% 88% 102% 105% 119%
(1) Rate-sensitive Assets / Rate-sensitive Liabilities
</TABLE>
<PAGE> 19
Supplemental Consolidated Balance Sheets
(dollar references in thousands except share data)
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and Due from Banks....................................................... $ 17,134 $ 20,051
Federal Funds Sold............................................................ 20,600 12,550
------ ------
Cash and Cash Equivalents................................................. 37,734 32,601
------ ------
Interest-bearing Balances with Banks.......................................... 597 997
Other Short-term Investments.................................................. 979 5,929
Securities Available-for-Sale, at Market...................................... 98,557 92,887
Securities Held-to-Maturity, at Cost.......................................... 23,213 22,063
Loans ....................................................................... 313,734 290,076
Less: Unearned Income....................................................... (452) (726)
Allowance for Loan Losses............................................. (6,528) (6,893)
------ ------
Loans, Net.................................................................... 306,754 282,457
Premises, Furniture and Equipment, Net........................................ 11,585 11,299
Other Real Estate............................................................. 203 286
Intangible Assets............................................................. 1,774 1,990
Accrued Interest Receivable and Other Assets.................................. 8,047 8,095
----- -----
TOTAL ASSETS.......................................................... $ 489,443 $ 458,604
============ ============
LIABILITIES
Noninterest-bearing Deposits.................................................. $ 52,674 $ 49,610
Interest-bearing Deposits..................................................... 370,232 345,943
------- -------
Total Deposits............................................................ 422,906 395,553
Short-term Borrowings......................................................... 12,527 12,404
Long-term Debt................................................................ 1,000 1,000
Accrued Interest Payable and Other Liabilities................................ 4,217 3,859
----- -----
TOTAL LIABILITIES..................................................... 440,650 412,816
------- -------
SHAREHOLDERS' EQUITY
Common Stock, $10 par value; 5,000,000 shares authorized,
2,539,059 and 2,440,325 issued and outstanding
in 1996 and 1995, respectively............................................ 25,391 24,403
Preferred Stock, $10 par value; 500,000 shares authorized,
no shares issued.......................................................... --- ---
Additional Paid-in Capital.................................................... 3,649 1,000
Retained Earnings............................................................. 19,258 19,563
Unrealized Appreciation on Securities
Available-for-Sale, Net................................................... 495 822
--- ---
TOTAL SHAREHOLDERS' EQUITY............................................ 48,793 45,788
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 489,443 $ 458,604
============ ============
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE> 20
Supplemental Consolidated Statements of Income
(dollar references in thousands except earnings per share)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans............................................ $27,846 $26,197 $21,545
Interest on Federal Funds Sold........................................ 611 783 386
Interest on Short-term Investments.................................... 167 734 360
Interest and Dividends on Securities
Taxable........................................................... 4,788 4,400 4,136
Non-taxable....................................................... 1,949 1,702 1,496
----- ----- -----
TOTAL INTEREST INCOME.......................................... 35,361 33,816 27,923
------ ------ ------
INTEREST EXPENSE
Interest on Deposits.................................................. 16,179 15,150 11,599
Interest on Short-term Borrowings..................................... 404 671 366
Interest on Long-term Debt............................................ 100 127 54
--- --- --
TOTAL INTEREST EXPENSE............................................ 16,683 15,948 12,019
------ ------ ------
NET INTEREST INCOME................................................... 18,678 17,868 15,904
Provision for Loan Losses............................................. 210 49 687
--- -- ---
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES....................................................... 18,468 17,819 15,217
------ ------ ------
NONINTEREST INCOME
Income from Fiduciary Activities...................................... 210 207 192
Service Charges on Deposit Accounts................................... 976 766 720
Investment Services Income............................................ 403 207 420
Other Service Charges, Commissions, and Fees.......................... 510 529 420
Gains on Sales of Loans and Other Real Estate......................... 55 36 91
Security Gains........................................................ 73 19 90
-- -- --
TOTAL NONINTEREST INCOME.......................................... 2,227 1,764 1,933
----- ----- -----
NONINTEREST EXPENSE
Salaries and Employee Benefits........................................ 7,165 6,604 5,742
Occupancy Expense..................................................... 1,048 1,041 935
Furniture and Equipment Expense....................................... 1,018 955 807
FDIC Premiums......................................................... 229 471 801
Computer Processing Fees.............................................. 427 402 354
Professional Fees..................................................... 805 247 292
Other Operating Expenses.............................................. 2,596 2,698 1,979
----- ----- -----
TOTAL NONINTEREST EXPENSE......................................... 13,288 12,418 10,910
------ ------ ------
Income before Income Taxes............................................ 7,407 7,165 6,240
Income Tax Expense.................................................... 2,513 2,323 1,958
----- ----- -----
NET INCOME............................................................ $ 4,894 $ 4,842 $ 4,282
======= ======= =======
EARNINGS PER SHARE.................................................... $ 0.92 $ 0.91 $ 0.80
======== ========= ========
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE> 21
Supplemental Consolidated Statements of Cash Flows
(dollar references in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $4,894 $4,842 $4,282
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Accretion on Investments......................................... (13) (630) 21
Depreciation and Amortization............................................ 1,166 1,145 912
Provision for Loan Losses................................................ 210 49 687
Gain on Sale of Securities............................................... (73) (19)
(90)
Gain on Sales of Loans and Other Real Estate......................... (55) (36)
(91)
Change in Assets and Liabilities:
Deferred Taxes.................................................... 254 44
(300)
Deferred Loan Fees................................................ (11) 34
(157)
Interest Receivable and Other Assets.............................. 30 (1,674) 257
Interest Payable and Other Liabilities................................... 358 673
(325)
Unearned Income................................................... (274) (303)
(386)
---- ---- ----
Total Adjustments.............................................. 1,592 (717) 528
----- ---- ---
Net Cash from Operating Activities................................ 6,486 4,125 4,810
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... 400 295 6,970
Proceeds from Maturities of Other Short-term Investments............. 7,030 52,133 14,835
Purchase of Other Short-term Investments................................. (1,966) (43,967)
(22,049)
Proceeds from Maturities of Securities Available-for-Sale................ 39,156 9,512 12,235
Proceeds from Sales of Securities Available-for-Sale..................... 1,080 2,515 7,286
Purchase of Securities Available-for-Sale............................ (46,471) (29,764)
(5,885)
Proceeds from Maturities of Securities Held-to-Maturity.............. 4,092 11,312 16,016
Purchase of Securities Held-to-Maturity.............................. (5,268) (4,243)
(19,605)
Purchase of Loans.................................................... (1,576) (3,691)
(7,332)
Proceeds from Sales of Loans......................................... 1,870 500 7,625
Loans Made to Customers net of Payments Received..................... (24,530) (8,206)
(15,122)
Proceeds from Sales of Other Real Estate............................. 152 389 415
Cash Acquired in Acquisition of Affiliates........................... ---- ---- 8,934
Property and Equipment Expenditures.................................. (1,236) (1,407)
(1,208)
------- ------- -------
Net Cash from Investing Activities............................. (27,267) (14,622) 3,115
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... 27,353 26,373 (8,745)
Net Change in Short-term Borrowings.................................. 123 (6,974) 2,925
Advances in Long-term Debt........................................... 2,000 1,500 ---
Repayments of Long-term Debt......................................... (2,000) (1,500) ---
Net Issuance / (Repurchase) of Common Stock.......................... 145 (110) ---
Dividends Paid....................................................... (1,684) (1,554) (1,370)
Exercise of Stock Options............................................ 7 22 2
Purchase of Interests in Fractional Shares........................... (30) (25) (2)
--- --- --
Net Cash from Financing Activities............................. 25,914 17,732 (7,190)
------ ------ ------
Net Change in Cash and Cash Equivalents.................................. 5,133 7,235 735
Cash and Cash Equivalents at Beginning of Year....................... 32,601 25,366 24,631
------ ------ ------
Cash and Cash Equivalents at End of Year................................. $ 37,734 $32,601 $ 25,366
========== ======= ==========
Cash Paid During the Year for:
Interest.............................................................. $ 16,612 $ 15,564 $ 12,002
Income Taxes.......................................................... 2,332 2,431 2,220
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE> 22
Supplemental Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
(dollar references in thousands except per share data)
<TABLE>
<CAPTION>
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, 1994
(as previously reported for
German American Bancorp)................. $20,898 $10,443 $31,341
Retroactive restatement for Pooling of
Interests (Peoples - 615,285 shares issued). 1,704 5,835 7,539
Balances, January 1, 1994 as restated....... 22,602 16,278 38,880
Net Income for 1994......................... 4,282 4,282
Net Unrealized Gain upon adoption of SFAS
on January 1, 1994....................... $290 290
Net Change in Unrealized Appreciation /
(Depreciation) on Securities............. (1,302) (1,302)
Cash Dividends ($.26 per Common Share,
as restated for pooling of interests).... (1,371) (1,371)
Purchase and Retirement of 2,082 Shares pursuant
to Exercise of Stock Options ............ (25 ) (42) (67)
Issuance of 3,200 shares upon Exercise of
Stock Options............................ 69 69
Purchase of Interest in Fractional Shares .. (2) (2)
------ ------ ------- ------
Balances, December 31, 1994................. 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
======== ======= ==== =======
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE> 23
Notes to the Supplemental Consolidated Financial Statements
December 31, 1996, 1995, and 1994
(dollar references 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 manufacturing industries. 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. These financial statements include the accounts of German American
Bancorp and its wholly-owned subsidiaries, The German American Bank, First State
Bank, Southwest Indiana, GAB Mortgage Corp and German American Holdings
Corporation, Inc., the parent of both Community Trust Bank and Peoples National
Bank. Significant intercompany balances and transactions have been eliminated in
consolidation. Certain items in the 1995 and 1994 financial statements have been
reclassified to correspond with the 1996 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 future
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 amounts, 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, and includes securities that management might 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 for similar reasons. Securities
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 bad debt expense,
if reductions, or otherwise as interest income.
<PAGE> 24
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references 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 balance 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 payment under the loan terms 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 homogenous 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. The nature of disclosures for impaired loans is considered
generally comparable to prior nonaccrual and renegotiated loan disclosures.
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. At the time of sale or disposition of an asset,
the applicable cost and accumulated depreciation amounts are removed from the
accounting records. 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 ($333 and $434
at December 31, 1996 and 1995, respectively) and goodwill ($1,441 and $1,556, at
December 31, 1996 and 1995, respectively). Core deposit intangibles is being
amortized on an accelerated method over ten years and goodwill is being
amortized on a straight-line basis over fifteen years. Goodwill and Core Deposit
Intangibles 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.
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.
<PAGE> 25
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
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 separately in Note
18. 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 does 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,
1996 are as follows:
<TABLE>
<CAPTION>
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.................... $47,181 $81 $(221)
$47,041
Obligations of State and Political Subdivisions............. 19,560 947 (321)
20,186
Corporate Securities........................................ 7,221 42 (18)
7,245
Mortgage-backed and Asset-backed Securities................. 23,783 487 (192)
24,078
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 Subdivisions............. 18,253 $646 (18)
18,881
Mortgage-backed and Asset-backed Securities................. 999 12
(22) 989
Corporates.................................................. 47 ---
- --- 47
Other Securities............................................ 1,395 --- ---
1,395
----- --- ---
- -----
Total................................................... $23,213 $658 $(61)
$23,810
======= ==== =====
=======
</TABLE>
<PAGE> 26
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 2 - Securities (continued)
The amortized cost and estimated market values of Securities as of December 31,
1995 are as follows:
<TABLE>
<CAPTION>
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.................... $31,717 $172 $(170)
$31,719
Obligations of State and Political Subdivisions............. 16,403 1,155 ---
17,558
Corporate Securities........................................ 6,375 88 ---
6,463
Mortgage-backed and Asset-backed Securities................. 37,002 317 (259)
37,060
Other Securities............................................ 16 71
- --- 87
-- --
- --- --
Total................................................... $91,513 $1,803 $(429)
$92,887
======= ====== =====
=======
Securities Held-to-Maturity:
U.S. Treasury Securities and Obligations of
Government & Corporations and Agencies.................. $5,037 --- $(86)
$4,951
Obligations of State and Political Subdivisions............. 14,472 673 (29)
15,116
Mortgage-backed and Asset-backed Securities................. 1,435 7 (21)
1,421
Other Securities............................................ 1,119 --- ---
1,119
----- --- ---
- -----
Total................................................... $22,063 $680 $(136)
$22,607
======= ==== =====
=======
</TABLE>
The amortized cost and estimated market value of Securities at December 31,
1996 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.
Mortgaged-backed, Asset-backed and certain other Securities are not due at a
single maturity date and are shown separately.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
Securities Available-for-Sale: --------- ---------
<S> <C> <C>
Due in one year or less..................................... $4,840 $4,825
Due after one year through five years....................... 44,229 44,391
Due after five years through ten years...................... 16,289 16,392
Due after ten years......................................... 8,604 8,864
Mortgage-backed and Asset-backed Securities................. 23,783 24,078
Other Securities............................................ 1 7
- -
Totals.................................................. $97,746 $98,557
======= =======
Securities Held-to-Maturity:
Due in one year or less..................................... $3,127 $3,108
Due after one year through five years....................... 5,449 5,532
Due after five years through ten years...................... 2,603 2,761
Due after ten years......................................... 9,593 9,978
Mortgage-backed and Asset-backed Securities................. 999 989
Other Securities............................................ 1,442 1,442
----- -----
Totals.................................................. $23,213 $23,810
======= =======
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
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 $0 $2,515 $0 $7,286 $0
Gross Gains on Sales....................... 76 0 22 0 94 0
Gross Losses on Sales...................... (3) 0 (3) 0 (4) 0
Income Taxes on Gross Gains................ 30 0 9 0 37 0
Income Taxes on Gross Losses............... (1) 0 (1) 0 (2) 0
</TABLE>
<PAGE> 28
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 2 - Securities (continued)
Securities with a carrying value of $17,004 and $17,749 as of December 31,
1996 and 1995, respectively, were pledged to secure repurchase agreements,
public and trust deposits and for other purposes as required by law.
No investment securities of an individual issuer exceeded ten percent of
German American Bancorp shareholders' equity at December 31, 1996. 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 $15,415
at December 31, 1996.
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, 1996 and 1995, U.S. Government Agency structured notes with
an amortized cost of $6,000 and $13,250 and fair value of $5,901 and $13,064,
respectively, are included in securities available-for-sale, consisting
primarily of step-up single-index bonds.
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 as of December 31,
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Real Estate Loans Secured by 1- 4 Family Residential Properties......................... $93,713 $85,543
Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers............ 57,073 61,251
Commercial and Industrial Loans......................................................... 110,894 98,563
Loans to Individuals for Household, Family and Other Personal Expenditures.............. 50,200 41,944
Economic Development Commission Bonds................................................... 575 608
Lease Financing......................................................................... 1,279 2,167
----- -----
Totals.............................................................................. $313,734 $290,076
======== ========
Information regarding impaired loans is as follows:
1996 1995
---- ----
Year-end loans with no allowance for loan losses allocated.............................. $ 386 $ 215
Year-end loans with allowance for loan losses allocated................................. 3,452 6,420
Amount of allowance allocated........................................................... 452 1,040
Average balance of impaired loans during the year....................................... 4,129 4,643
Interest income recognized during impairment............................................ 322 360
Interest income recognized on cash basis................................................ 231 277
</TABLE>
<PAGE> 29
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 3 - Loans (Continued)
Certain directors, executive officers, and principal shareholders of the
Company, including their immediate families and companies in which they are
principal owners, were loan customers of the Company during 1996. A summary of
the activity of these loans is as follows:
<TABLE>
<CAPTION>
Balance Changes Deductions
Balance
January 1, in Persons December
31,
1996 Additions Included Collected Charged-off 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
<C>
$11,018 $5,360 $(1) $(3,773) $0
$12,604
</TABLE>
Total Loans serviced for the Federal Home Loan Mortgage Corporation were
$4,440 at December 31, 1996 and $3,793 at December 31, 1995. 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>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
Balance as of January 1...................................... $6,893 $6,602 $5,745
Addition of Affiliate Banks.................................. --- --- 195
Provision for Loan Losses.................................... 210 49 687
Recoveries of Prior Loan Losses.............................. 299 637 240
Loan Losses Charged to the Allowance......................... (874) (395) (265)
---- ---- ----
Balance as of December 31.................................... $6,528 $6,893 $6,602
====== ====== ======
</TABLE>
NOTE 5 - Premises, Furniture, and Equipment
Premises, furniture, and equipment as presented on the balance sheet is
comprised of the following classifications:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land............................................................................... $1,827 $1,611
Buildings and Improvements......................................................... 12,032 11,527
Furniture and Equipment............................................................ 6,567 6,079
----- -----
Total Premises, Furniture and Equipment........................................ 20,426 19,217
Less: Accumulated Depreciation............................................. (8,841) (7,918)
------ ------
Total..................................................................... $11,585 $11,299
======= =======
</TABLE>
Depreciation expense was $950, $914 and $815 for 1996, 1995 and 1994.
NOTE 6 - Deposits
The aggregate amount of interest-bearing deposits in denominations of $100
or more was $32,589 and $32,610 as of December 31, 1996 and 1995, respectively.
At year-end 1996 interest-bearing deposits includes $129,090 of demand and
savings deposits and $241,142 of time deposits. Stated maturities of time
deposits were as follows:
1997............................................ $139,740
1998............................................ 70,315
1999............................................ 17,340
2000............................................ 9,910
2001............................................ 3,708
Thereafter...................................... 129
---
Total........................................ $241,142
========
<PAGE> 30
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 7 - Short-term Borrowings
The Bancorp uses repurchase agreements and short-term borrowings, primarily
federal funds purchased and Interest Bearing Demand Notes issued to the U.S.
Treasury, as funding sources. Repurchase agreements are essentially borrowings
from customers secured by a pledge of securities. The Bancorp retains possession
of and control over such securities. Information regarding repurchase agreements
and short-term borrowings at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balances at year-end:
Repurchase agreements............................................. $8,400 8,254
Federal Funds Purchased........................................... 2,000 4,150
Demand Notes Issued to the U.S. Treasury.......................... 2,127 0
</TABLE>
NOTE 8 - Long-term Debt
Long-term debt outstanding consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Federal Home Loan Bank advances: interest payable monthly
at 5.20%; principal due at maturity on January 13, 1997....................... $1,000 $ ---
Federal Home Loan Bank advances: interest payable monthly
at 4.51%; principal due at maturity on October 15, 1996....................... --- 500
Federal Home Loan Bank advances: interest payable monthly
at 6.28%; principal due at maturity on August 8, 2000......................... --- 500
--- ---
Total long-term debt.............................................. $1,000 $1,000
====== ======
</TABLE>
These advances are secured by a blanket pledge of residential mortgage loans and
U.S. Government and Agency and Mortgage-backed securities.
NOTE 9 - Employee Benefit Plans
During 1996 and 1995, the Company and all its banking affiliates except
Peoples provided a trusteed noncontributory profit sharing plan which covered
substantially all full-time employees. Contributions are discretionary and are
subject to determination by the Board of Directors. Contributions to this plan
were $200 and $184 for 1996 and 1995, respectively. During 1994, First State
Bank did not participate in the plan. Contributions were $170 for 1994.
During 1996 and 1995, 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 $223 and $216 for 1996
and 1995, respectively. During 1994, First State Bank did not participate in
this plan. Contributions to these plans were $175 in 1994.
Peoples has a noncontributory defined benefit pension plan covering
substantially all employees with benefits based on years of service and
compensation prior to retirement. The funding policy is to contribute the
minimum amount required by applicable IRS regulations. Plan assets consist
primarily of U.S. Treasury bonds, corporate bonds and other various marketable
equity securities.
<PAGE> 31
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 9 - Employee Benefit Plans (continued)
The following sets forth the Peoples Plan's funded status and amount
recognized in the balance sheet at December 31 (amounts computed as of November
30th for 1996 and 1995):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of obligations:
Accumulated benefit obligation, including benefits
of $548 and $494............................................................ $551 $496
==== ====
Plan assets at fair value...................................................... $956 $809
Projected benefit obligation for
service rendered to date.................................................... (838) (749)
Unrecognized loss.............................................................. 77 89
Prior service cost not yet recognized.......................................... (13) (14)
Unrecognized transition asset.................................................. (154) (176)
----- -----
Prepaid Pension Asset / (Accrued Pension Liability)............................ $ 28 $ (41)
===== ======
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
Net pension expense included the following:
<S> <C> <C> <C>
Service cost-benefits earned.................................. $36 $32 $45
Interest cost on projected benefit obligation................. 61 57 51
Actual return on plan assets.................................. (97) (135) 11
Net amortization and deferral.............................. 6 65 (62)
- -- ----
Net pension expense........................................ $6 $19 $45
== === ===
</TABLE>
The computation of pension liability and expense is based upon several key
assumptions. The weighted-average discount rate, the rate of increase in future
compensation and expected long-term rate of return on plan assets were 8.25%,
5.0% and 8.25% for all years presented.
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. If an optionee tenders already-owned common shares to the Company to
exercise an option, the Company is obligated to use its best efforts to issue to
such optionee a replacement option for the number of shares tendered of the same
type (either an incentive stock option or a nonqualified option) as the option
exercised and with the same expiration date 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> 32
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 10 - Stock Options (Continued)
Changes in options outstanding were as follows, as adjusted to reflect stock
splits and stock dividends:
<TABLE>
<CAPTION>
Number Weighted-average
of Options Exercise Price
<S> <C> <C> <C>
Outstanding, beginning of 1994..................................... 59,039 $ 9.36
Granted............................................................ 4,820 13.98
Exercised.......................................................... (7,409) 9.36
------
Outstanding, end of 1994........................................... 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
=======
</TABLE>
Options exercisable at year-end are as follows:
<TABLE>
<CAPTION>
Number Weighted-average
of Options Exercise Price
--------- ----------------
<S> <C> <C>
1994............................................................... 21,069 $ 9.36
1995............................................................... 20,101 10.47
1996............................................................... 12,535 13.67
</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 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net income as reported............................................................. $4,894 $4,842
Pro forma net income............................................................... $4,881 $4,834
Earnings per share as reported..................................................... $0.92 $0.91
Pro forma earnings per share....................................................... $0.91 $0.91
</TABLE>
In future years, the pro forma effect of not applying this standard is
expected to increase as additional options are granted.
For options granted during 1996 and 1995, the weighted-average fair values
at grant date are $0.91 and $1.10.
The fair value of options granted during 1996 and 1995 is estimated using
the following weighted-average information: risk-free interest rate of 5.41% and
5.43%, expected life of one year, expected volatility of stock price of .10
percent and expected dividends of 2.38% and 2.41% per year.
At year-end 1996, options outstanding have a weighted average remaining life
of 6.25 years, with exercise prices ranging from $9.36 to $15.65.
<PAGE> 33
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 11 - Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995
1994
---- ----
- ----
<S> <C> <C>
<C>
Currently Payable............................................. $2,306 $2,326
$2,340
Deferred...................................................... 254 44
(300)
Net Operating Loss Carryforward............................... (47) (47)
(82)
--- ---
- ---
Total..................................................... $2,513 $2,323
$1,958
====== ======
======
</TABLE>
Income tax expense is reconciled to the 34% statutory rate applied to
pre-tax income as follows:
<TABLE>
<CAPTION>
1996 1995
1994
---- ----
- ----
<S> <C> <C>
<C>
Statutory Rate Times Pre-tax Income........................... $2,519 $2,436
$2,121
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments.............. (645) (561)
(491)
Non-deductible Merger Costs............................... 149 ---
26
State Income Tax, Net of Federal Tax Effect............... 459 420
360
Other Differences......................................... 31 28
(58)
-- --
- --
Total Income Taxes...................................... $2,513 $2,323
$1,958
====== ======
======
</TABLE>
The net deferred tax asset at December 31 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses................................. $1,546 $1,741
Pension Expense........................................... 6 36
Net Operating Loss Carryforwards.......................... 234 281
Other..................................................... 168 337
--- ---
Total Deferred Tax Assets............................... 1,954 2,395
----- -----
Deferred Tax Liabilities:
Depreciation.............................................. (192) (180)
Leasing Activities, Net................................... (282) (373)
Purchase Accounting Adjustments........................... (45) (63)
Unrealized Appreciation on Securities..................... (315) (552)
Other..................................................... (64) (154)
--- ----
Total Deferred Tax Liabilities.......................... (898) (1,322)
---- ------
Valuation Allowance........................................... (48) (48)
--- ---
Net Deferred Tax Asset.................................... $1,008 $1,025
====== ======
The Company's subsidiary, German American Holdings Corporation, Inc., has
$688 of federal tax net operating loss carryforwards expiring in the following
amounts:
Year Amount Year Amount Year Amount
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
1997 $42 2000 $135 2007 $58
1998 80 2001 129 2008 4
1999 135 2002 105
</TABLE>
<PAGE> 34
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 12 - Per Share Data
In 1995, 1996 and 1997, the Board of Directors declared a 5 percent stock
dividend. In lieu of issuing fractional shares, the Company purchased from
shareholders their fractional interest. Additionally, the Board declared 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 weighted average number of shares
used in calculating earnings and dividends per share amounts were 5,335,316,
5,331,745, and 5,331,163 for 1996, 1995, and 1994, respectively. Stock Options
(see Note 10) are not materially dilutive and have been excluded from weighted
average shares.
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31,
1996, 1995, and 1994 was $106, $100, and $91, respectively, including amounts
paid under short-term cancelable leases.
At December 31, 1996, 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 $38 for 1996. Exercise of the Bank's
sublease renewal options are 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>
<CAPTION>
Premises Equipment
Total
<S> <C> <C> <C> <C>
1997.................................................... $78 $19 $97
1998.................................................... 67 9 76
1999.................................................... 62 1 63
2000.................................................... 56 --- 56
2001.................................................... 33 --- 33
-- --- --
Total................................................ $296 $29 $325
==== === ====
</TABLE>
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. These financial
instruments at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Commitments to Fund Loans
Home Equity.................................................... $8,185 $7,495
Credit Card Lines.............................................. 4,480 4,528
Commercial Real Estate Commitments............................. 67 2,298
Commercial Operating Lines..................................... 23,900 27,590
------ ------
Total Commitments to Fund Loans............................ $36,632 $41,911
======= =======
Standby Letters of Credit......................................... $2,009 $3,378
</TABLE>
<PAGE> 35
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 14 - Commitments and Off-balance Sheet Items (continued)
Since many commitments to make loans expire without being used, the amount
does 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. The interest rates associated with these commitments are generally
variable rate.
The Company self-insured employee health benefits for all affiliates except
Peoples. Stop loss insurance covers annual losses exceeding $35 per covered
individual and approximately $392 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 $326 and $269 for 1996 and 1995,
respectively. The charge to earnings for 1994 was $230, but did not include
First State Bank.
At December 31, 1996 and 1995, the affiliate banks were required to have
$2,504 and $2,424 on deposit with the Federal Reserve or as cash on hand. These
reserves do not earn interest.
NOTE 15 - Non-cash Investing Activities
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loans Transferred to Other Real Estate..................... $25 $149 $122
Securities Transferred to Available-for-Sale............... --- 40,279 44,132
</TABLE>
The data above should be read in conjunction with the Consolidated Statements
of Cash Flows. In 1994, Securities were transferred to Available-for-Sale upon
adoption of FAS 115, and $2,400 of Securities were transferred to
Available-for-Sale upon acquisition of The Otwell State Bank. During December
1995, Securities were transferred from Held-to-Maturity to Available-for-Sale in
accordance with the Financial Accounting Standards Board Special Report on
Implementation of FAS 115.
<PAGE> 36
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 16 - Parent Company Financial Statements
The condensed financial statements of German American Bancorp as of December
31, 1996 and 1995, and for each of the three years ended December 31, 1996,
1995, and 1994 are as follows:
<TABLE>
CONDENSED BALANCE SHEETS
December 31, 1996 AND 1995
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash........................................................................... $428 $470
Securities Available-for-Sale, at Market....................................... 1,791 87
Investment in Subsidiary Banks and Bank Holding Company........................ 45,740 44,597
Investment in GAB Mortgage Corp................................................ 278 274
Furniture and Equipment........................................................ 785 313
Other Assets................................................................... 248 208
--- ---
Total Assets................................................................ $49,270 $45,949
======= =======
LIABILITIES........................................................................ $ 477 $ 161
--------- ----------
SHAREHOLDERS' EQUITY
Common Stock................................................................... 25,391 24,403
Additional Paid-in Capital..................................................... 3,649 1,000
Retained Earnings.............................................................. 19,258 19,563
Unrealized Appreciation on Securities Available-for-Sale....................... 495 822
--- ---
Total Shareholders' Equity.................................................. 48,793 45,788
------ ------
Total Liabilities and Shareholders' Equity.................................. $49,270 $45,949
======= =======
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995
1994
---- ----
- ----
<S> <C> <C> <C>
INCOME
Dividends from Subsidiary Banks...................................... $5,386 $2,665 $4,869
Dividend and Interest Income......................................... 110 18 44
Fee Income........................................................... 374 178 ---
Gain on Security Sales............................................... 74 ---
- ---
Other Income......................................................... 5 5
5
- -
- -
Total Income...................................................... 5,949 2,866 4,918
----- ----- -----
EXPENSES
Salaries and Benefits................................................ 1,330 922 533
Professional Fees.................................................... 601 95 157
Occupancy and Equipment Expense...................................... 260 130 2
Other Expenses....................................................... 219 108 26
--- --- --
Total Expenses.................................................... 2,410 1,255 718
----- ----- ---
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES................................. 3,539 1,611 4,200
Income Tax Benefit....................................................... 556 415 286
--- --- ---
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES............................................... 4,095 2,026 4,486
Equity in Undistributed Income of Subsidiaries........................... 799 2,816
(204)
--- -----
- ----
NET INCOME............................................................... $4,894 $4,842
$4,282
====== ======
======
</TABLE>
<PAGE> 37
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 16 - Parent Company Financial Statements (continued)
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1996, 1995, and 1994
<CAPTION>
1996 1995
1994
---- ----
- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $4,894 $4,842 $4,282
Adjustments to Reconcile Net Income to Net Cash from Operations
Amortization on Securities........................................ 32 ---
- ---
Depreciation............................................................. 117 65
2
Net Realized Gain on Sale of Securities........................... (74) ---
- ---
Change in Other Assets............................................ (40) (72)
(107)
Change in Other Liabilities....................................... 338 84
(57)
Equity in Undistributed Income of Subsidiaries.................... (799) (2,816)
204
---- ------
- ---
Total Adjustments............................................... (426) (2,739)
42
---- ------
- --
Net Cash from Operating Activities................................ 4,468 2,103
4,324
----- -----
- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Subsidiaries........................................... --- ---
(3,818)
Capital Contribution to First State Bank................................. (632) ---
- ---
Advances made to Subsidiaries........................................ --- ---
(1,000)
Repayment of Advances by Subsidiaries................................ --- ---
2,100Purchase of Securities Available-for-Sale........................... (1,815) ---
- ---
Proceeds from Sales of Securities Available-for-Sale................. 88 --- ---
Property and Equipment Expenditures.................................. (589) (362)
(18)
---- ----
- ---
Net Cash from Investing Activities................................ (2,948) (362)
(2,736)
------ ----
- ------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends Paid....................................................... (1,684) (1,554) (1,371)
Exercise of Stock Options............................................ 7 23
3
Purchase and Retire Common Stock..................................... --- (110)
- ---
Issuance of Common Stock Pursuant to Dividend Reinvestment Plan.......... 145 ---
- ---
Purchase of Interest in Fractional Shares............................ (30) (25)
(2)
--- ---
- --
Net Cash from Financing Activities................................ (1,562) (1,666)
(1,370)
------ ------
- ------
Net Change in Cash and Cash Equivalents.................................. (42) 75
218
Cash and Cash Equivalents at Beginning of Year....................... 470 395
177
--- ---
- ---
Cash and Cash Equivalents at End of Year............................. $428 $470
$395
==== ====
====
</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> 38
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references 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. The minimum
requirements are:
<TABLE>
<CAPTION>
Capital to risk- Tier 1
capital
weighted assets to average
assets
Total Tier 1
<S> <C> <C> <C>
Well capitalized...................................................... 10% 6% 5%
Adequately capitalized................................................ 8% 4% 4%
Undercapitalized...................................................... 6% 3% 3%
At year-end 1996, consolidated and German American 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>
<TABLE>
<CAPTION>
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....................... $50,402 15.8% $25,582 8.0% $31,977 10.0%
German American Bank............... $24,183 13.6% $14,208 8.0% $17,759 10.0%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated....................... $46,374 14.5% $12,791 4.0% $19,186 6.0%
German American Bank............... $21,953 12.4% $7,104 4.0% $10,656 6.0%
Tier 1 Capital
(to Average Assets)
Consolidated....................... $46,374 10.0% $18,632 4.0% $23,290 5.0%
German American Bank............... $21,953 8.3% $10,559 4.0% $13,199 5.0%
</TABLE>
The Company and all affiliate Banks at year-end 1996 were categorized as well
capitalized.
NOTE 18 - Business Combinations
On April 1, 1994, the Company acquired all of the outstanding shares of The
Otwell State Bank of Otwell, Indiana in exchange for 113,286 shares of German
American Bancorp common stock. The Otwell State Bank was subsequently merged
into Community Trust Bank. Fractional interests were paid in cash of $2. The
transaction was accounted for as a pooling of interests.
On October 28, 1994, the Company acquired three Indiana branches of Regional
Federal Savings Bank. The Huntingburg branch site was subsequently combined into
an existing branch of the German American Bank in Huntingburg, while the other
two sites in Tell City and Rockport were combined into a newly formed commercial
bank known as First State Bank, Southwest Indiana. The fair value of assets
acquired was $16,048, the fair value of liabilities assumed was $24,982, and the
Company received $8,934 of cash at settlement. Goodwill associated with this
purchase was $1,353 while core deposit intangible was $317.
On March 4, 1997, the company acquired Peoples Bancorp of Washington,
Indiana and its Wholly-owned subsidiary, Peoples National Bank and Trust
Company, in a pooling-of-interests. Pursuant to the merger, the Company issued
615,285 common shares.
<PAGE> 39
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 18 - Business Combinations (Continued)
The supplemental consolidated financial statements give retroactive effect
to the merger with Peoples Bancorp, which has been accounted for using the
pooling-of-interests method and, as a result, the financial position, results of
operations and cash flows are presented as if the combining companies had been
consolidated for all periods presented. The supplemental consolidated statements
of changes in shareholders' equity reflect the accounts of the Company as if the
additional common stock had been issued during all periods presented. As
required by generally accepted accounting principles, the supplemental
consolidated financial statements will become the historical financial
statements upon issuance of the financial statements for the period that
includes the date of the merger. The supplemental consolidated financial
statements, including the notes thereto, should be read in conjunction with the
historical consolidated financial statements of the Company and Peoples Bancorp
included in the Company's 1996 annual report on Form 10-K.
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>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31,
1995
-----------------
- -----------------
CARRYING FAIR CARRYING
FAIR
VALUE VALUE VALUE
VALUE
- -----------------------------------------------------------
<S> <C> <C> <C>
<C>
Financial Assets:
Cash and Short-term Investments......................... $39,310 $39,310 $39,527
$39,527
Securities Available-for-Sale........................... 98,557 98,557 92,887
92,887
Securities Held-to-Maturity............................. 23,213 23,810 22,063
22,607
Loans, net.............................................. 306,754 306,397 282,457
281,819
Accrued Interest Receivable............................. 4,533 4,533 4,435
4,435
Financial Liabilities:
Deposits................................................ (422,906) (425,534) (395,553)
(397,112)
Short-term Borrowings................................... (12,527) (12,527) (12,404)
(12,404)
Long-term Debt.......................................... (1,000) (1,002) (1,000)
(1,011)
Accrued Interest Payable................................ (2,279) (2,279) (2,207)
(2,207)
Unrecognized Financial Instruments
Commitments to extend Credit............................ --- ---
- --- ---
Standby Letters of Credit............................... --- ---
- --- ---
</TABLE>
Notes to the Supplemental Consolidated Financial Statements (continued)
(dollar references in thousands)
NOTE 20 - Pending Accounting Changes
Financial Accounting Standard No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
is not expected to be material.
<PAGE> 40
NOTE 21 - Subsequent Events (Unaudited)
The Company signed a definitive agreement in January 1998 providing for the
merger with CSB Bancorp, ("CSB") which operates Citizens State Bank of
Petersburg, Indiana. CSB operates one banking office in Pike County, Indiana.
Under the terms of the agreement, the Company will issue to the shareholders of
CSB between 928,572 and 1,137,500 shares of Company Common Stock, as adjusted
for the Company's two for one stock split and five percent stock dividend, both
declared in October 1997 (subject to further antidilution adjustments in the
event of any future stock dividends, splits and the like). The number of shares
issued is dependent upon the Company's average common stock price during a
period prior to the date of the merger closing. Based on the reported bid /
asked quotations for the Company's Common Stock during the period preceding
January 31, 1998, the Company would issue the minimum number of shares. The
transaction is expected to be accounted for as a pooling of interests.
The proposed merger is subject to approval by the shareholders of CSB, bank
regulatory agencies, and other conditions. The parties contemplate that the
merger will be effective in the second quarter of 1998. As of September 30, 1997
and for the nine months then ended, CSB reported total assets of $76,717,000,
shareholders' equity of $9,113,000 and net income of $398,000.
The Company also signed a definitive agreement in January 1998 providing
for the merger with FSB Financial Corporation ("FSB") which operates FSB of
Francisco, Indiana. FSB operates one banking office in Pike County, Indiana and
one in Gibson County, Indiana. Under the terms of the agreement, the Company
will issue to the 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. Based on FSB's shareholder equity as of
September 30, 1997, and the average bid / asked quotations for the Company's
Common Stock during the period preceding January 31, 1998, the Company would
issue approximately 71,678 shares. The transaction is expected to be accounted
for as a pooling of interests.
The proposed merger is subject to approval by the shareholders of FSB, bank
regulatory agencies, and other conditions. The parties contemplate that the
merger will be effective in the second quarter of 1998. As of September 30,
1997 and for the nine months then ended, FSB reported total assets of
$15,699,000, shareholders' equity of $1,481,000 and net loss of $23,000.
<PAGE> 41
Independent Auditors' Report
Board of Directors and Shareholders
German American Bancorp
Jasper, Indiana
We have audited the accompanying supplemental consolidated balance sheets of
German American Bancorp as of December 31, 1996 and 1995, and the related
supplemental consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. 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.
The supplemental financial statements give retroactive effect to the merger
of German American Bancorp and Peoples Bancorp of Washington on March 4, 1997,
which has been accounted for as a pooling of interests as discussed in Note 18.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling of interests method in
financial statements that do not include the date of consummation. These
financial statements do not extend through the date of consummation; however,
they will become the historical consolidated financial statements of German
American Bancorp after financial statements covering the date of consummation of
the business combination are issued.
In our opinion, the supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
German American Bancorp as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
/s/ Crowe, Chizek and Company LLP
Indianapolis, Indiana
March 4, 1997 Crowe, Chizek and Company LLP
<PAGE> 42
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 1996 and 1995, and
(b) dividends declared per share on the Company's common stock (not
retroactively restated for pooling of interests transactions) by quarter during
1996 and 1995. All per share information has been retroactively restated for the
Company's 5% stock dividends declared in 1997, 1996 and 1995 and the 2-for-1
stock split effective November 1, 1997.
<TABLE>
<CAPTION>
1996 1995
---- ----
High Low Dividend High Low
Dividend
<S> <C> <C> <C> <S> <C>
<C> <C>
First Quarter $15.36 $13.60 $.09 First Quarter $14.57
$13.38 $.09
Second Quarter $16.10 $14.51 $.10 Second Quarter $14.23
$12.98 $.09
Third Quarter $17.00 $15.30 $.10 Third Quarter $14.06
$12.98 $.09
Fourth Quarter $18.33 $16.55 $.10 Fourth Quarter $14.68
$13.61 $.09
- ---- ----
$.39 $.36
==== ====
</TABLE>
The Common Stock was held of record by approximately 1,981 shareholders at
March 5, 1997.
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.
