UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 2000
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the Transition Period from _______________ to
___________________
Commission File Number 0-11244
German American Bancorp
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 4, 2000
Common Stock, No par value 9,029,109
<PAGE>
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets - March 31, 2000 and December 31, 1999
Consolidated Statements of Income and Comprehensive Income --
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 2000 and 1999
Notes to Consolidated Financial Statements -- March 31, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands except per share data)
March 31, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and Due from Banks................................................... $19,299 $23,707
Federal Funds Sold and Other Short-term Investments....................... 1,945 1,189
--------- ---------
Cash and Cash Equivalents............................................. 21,244 24,896
Interest-bearing Time Deposits with Banks................................. 499 499
Securities Available-for-Sale, at Market ................................ 188,817 188,148
Securities Held-to-Maturity, at Cost ..................................... 29,379 30,191
Loans Held for Sale....................................................... 939 2,845
Total Loans ............................................................ 702,277 694,636
Less: Unearned Income.................................................... (399) (344)
Allowance for Loan Losses......................................... (8,948) (8,868)
--------- ---------
Loans, Net ............................................................. 692,930 685,424
Stock in FHLB of Indianapolis, and Other Restricted Stock, at cost........ 10,157 9,660
Premises, Furniture and Equipment, Net.................................... 19,859 19,782
Other Real Estate......................................................... 2,184 2,434
Intangible Assets......................................................... 2,087 2,161
Accrued Interest Receivable and Other Assets.............................. 25,158 26,595
--------- ---------
TOTAL ASSETS....................................................... $993,253 $992,635
========= =========
LIABILITIES
Noninterest-bearing Deposits.............................................. $72,694 $71,671
Interest-bearing Deposits................................................. 626,921 626,590
--------- ---------
Total Deposits........................................................ 699,615 698,261
FHLB Advances and Other Borrowings........................................ 195,010 196,017
Accrued Interest Payable and Other Liabilities............................ 10,634 10,870
--------- ---------
TOTAL LIABILITIES.................................................. 905,259 905,148
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized.......................................... 9,029 9,029
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued .................................. --- ---
Additional Paid-in Capital................................................ 53,846 53,846
Retained Earnings......................................................... 29,422 28,559
Accumulated Other Comprehensive Income (Loss) ............................ (4,303) (3,947)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY......................................... 87,994 87,487
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......................... $993,253 $992,635
========= =========
End of period shares issued and outstanding............................... 9,029,109 9,029,109
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................................ $14,514 $13,008
Interest on Federal Funds Sold and Short-term Investments................. 64 438
Interest and Dividends on Securities:
Taxable................................................................ 2,801 2,198
Non-taxable............................................................ 854 698
------- -------
TOTAL INTEREST INCOME................................................ 18,233 16,342
INTEREST EXPENSE
Interest on Deposits...................................................... 7,332 6,836
Interest on FHLB Advances and Other Borrowings............................ 2,863 1,631
------- -------
TOTAL INTEREST EXPENSE............................................... 10,195 8,467
------- -------
NET INTEREST INCOME....................................................... 8,038 7,875
Provision for Loan Losses................................................. 315 369
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................................................... 7,723 7,506
NONINTEREST INCOME
Trust and Investment Product Fees......................................... 364 175
Service Charges on Deposit Accounts....................................... 430 388
Insurance Commissions and Fees............................................ 509 377
Other Operating Income.................................................... 299 349
Gain on Sales of Loans and Other Real Estate.............................. (41) 205
Net Gain / (Loss) on Sales of Securities.................................. (9) (5)
- -
TOTAL NONINTEREST INCOME............................................. 1,552 1,489
------- -------
NONINTEREST EXPENSE
Salaries and Employee Benefits............................................ 3,725 3,226
Occupancy Expense......................................................... 449 418
Furniture and Equipment Expense........................................... 462 415
Data Processing Fees...................................................... 216 273
Professional Fees......................................................... 202 224
Advertising and Promotions................................................ 214 157
Supplies.................................................................. 202 175
Other Operating Expenses.................................................. 1,080 991
------- -------
TOTAL NONINTEREST EXPENSE............................................ 6,550 5,879
------- -------
Income before Income Taxes................................................ 2,725 3,116
Income Tax Expense........................................................ 688 893
------- -------
NET INCOME................................................................ $2,037 $2,223
======= =======
COMPREHENSIVE INCOME...................................................... $1,681 $1,460
======= =======
Earnings Per Share and Diluted Earnings Per Share......................... $0.23 $0.24
Dividends Per Share....................................................... $0.13 $0.11
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Three Months Ended
March 31,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.................................................................. $2,037 $2,223
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Depreciation and Amortization.......................................... 550 321
Amortization of Mortgage Servicing Rights.............................. 51 61
Net Change in Loans Held for Sale...................................... 1,858 2,683
Loss on Investment in Limited Partnership.............................. 46 25
Provision for Loan Losses.............................................. 315 369
Loss on Sales of Securities............................................ 9 5
Loss / (Gain) on Sales of Loans and Other Real Estate.................. 41 (205)
Change in Assets and Liabilities:
Interest Receivable and Other Assets................................. 1,399 1,847
Interest Payable and Other Liabilities............................... (236) (228)
-------- --------
Total Adjustments................................................. 4,033 4,878
-------- --------
Net Cash from Operating Activities................................... 6,070 7,101
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest Bearing Balances with Banks........................... --- 233
Proceeds from Maturities of Securities Available-for-Sale................ 3,517 7,534
Proceeds from Sales of Securities Available-for-Sale..................... --- 953
Purchase of Securities Available-for-Sale................................ (4,542) (23,523)
Proceeds from Maturities of Securities Held-to-Maturity.................. 803 3,967
Purchase of Securities Held-to-Maturity.................................. (497) ---
Purchase of Loans........................................................ (1,443) (4,059)
Loans Made to Customers, net of Payments Received........................ (7,215) (2,983)
Proceeds from Sales of Other Real Estate................................. 1,035 ---
Property and Equipment Expenditures...................................... (553) (648)
Acquire Affiliates and Adjust to Conform Fiscal Years.................... --- (155)
-------- --------
Net Cash from Investing Activities................................... (8,895) (18,681)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits....................................................... 1,354 6,943
Change in Short-term Borrowings.......................................... (23,766) 4,146
Advances of Long-term Debt............................................... 62,850 2,000
Repayments of Long-term Debt............................................. (40,091) (481)
Dividends Paid........................................................... (1,174) (1,052)
Purchase of Interest in Fractional Shares................................ --- (9)
-------- --------
Net Cash from Financing Activities................................... (827) 11,547
-------- --------
Net Change in Cash and Cash Equivalents..................................... (3,652) (33)
Cash and Cash Equivalents at Beginning of Year.............................. 24,896 49,588
-------- --------
Cash and Cash Equivalents at End of Period............................... $21,244 $49,555
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(unaudited)
Note 1 -- Basis of Presentation
German American Bancorp operates primarily in the banking industry. The
accounting and reporting policies of German American Bancorp and its
subsidiaries conform to Generally Accepted Accounting Principles and reporting
followed by the banking industry. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been condensed or omitted. All adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the periods reported have been included in the accompanying
unaudited consolidated financial statements, and all such adjustments are of a
normal recurring nature. It is suggested that these consolidated financial
statements and notes be read in conjunction with the financial statements and
notes thereto in the German American Bancorp's December 31, 1999 Annual Report
to Shareholders.
Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized
appreciation/depreciation on securities available-for-sale, net of tax.
Note 2 -- Per Share Data
Earnings and dividends per share have been retroactively computed as though
shares issued for stock dividends had been outstanding for all periods
presented. Earnings per share amounts for March 31, 1999 were not restated for
the issuance of 8,000 common shares related to the purchase of Smith & Bell in
May 1999. The computation of Earnings per Share and Diluted Earnings per Share
are provided as follows:
Three Months Ended
March 31,
2000 1999
Earnings per Share:
Net Income $2,037,000 $2,223,000
Weighted Average Shares Outstanding 9,029,109 9,198,534
---------- ----------
Earnings per Share: $ 0.23 $ 0.24
========== ==========
Diluted Earnings per Share:
Net Income $2,037,000 $2,223,000
Weighted Average Shares Outstanding 9,029,109 9,198,534
Stock Options, Net 910 6,060
---------- ----------
Diluted Weighted Average Shares Outstanding 9,030,019 9,204,594
---------- ----------
Diluted Earnings per Share $ 0.23 $ 0.24
========== ==========
<PAGE>
Note 3 - Securities
The amortized cost and estimated market values of Securities as of March
31, 2000 are as follows (dollars in thousands):
Estimated
Amortized Market
Cost Value
Securities Available-for-Sale:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $96,207 $91,989
Obligations of State and Political Subdivisions 28,385 28,363
Asset-/Mortgage-backed Securities 59,271 56,553
Equity Securities 12,080 11,912
-------- --------
Total $195,943 $188,817
======== ========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $28,614 $28,300
Asset-/Mortgage-backed Securities 765 766
------- -------
Total $ 29,379 $29,066
======== =======
The amortized cost and estimated market values of Securities as of December 31,
1999 are as follows (dollars in thousands):
Estimated
Amortized Market
Cost Value
Securities Available-for-Sale:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $96,205 $92,326
Obligations of State and Political Subdivisions 26,597 26,487
Asset-/Mortgage-backed Securities 61,514 58,967
Equity Securities 10,368 10,368
-------- --------
Total $194,684 $188,148
======== ========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $29,288 $28,934
Asset-/Mortgage-backed Securities 903 904
-------- --------
Total $ 30,191 $ 29,838
======== ========
At March 31, 2000 and December 31, 1999, U.S. Government Agency structured
notes with an amortized cost of $7,983 and $7,983 respectively, and fair values
of $7,060 and $7,150 respectively, are included in securities
available-for-sale. These notes consist of single-index bonds.
Note 4 -- Loans
Total loans, as presented on the balance sheet, are comprised of the
following classifications (dollars in thousands):
March 31, December 31,
2000 1999
Real Estate Loans Secured by 1-4
Family Residential Properties $362,611 $356,001
Agricultural Loans 63,203 64,054
Commercial and Industrial Loans 161,497 161,711
Loans to Individuals for Household,
Family and Other Personal Expenditures 114,966 112,870
------- -------
Total Loans $702,277 $694,636
======== ========
<PAGE>
No concentration of credit in excess of 10 percent of total assets exists
within any single industry group.
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows
(dollars in thousands):
2000 1999
Balance at January 1 $8,868 $8,323
Adjustment to Conform Fiscal Years --- 356
Provision for Loan Losses 315 369
Recoveries of Prior Loan Losses 108 181
Loan Losses Charged to the Allowance (343) (481)
--- ---
Balance at March 31 $8,948 $8,748
====== ======
Note 6 - Business Combinations
In January 1999, the Company issued 2,039,665 shares of common stock for
all the outstanding shares of 1ST BANCORP of Vincennes, Indiana and 62,000
shares of common stock for all the outstanding shares of The Doty Agency, Inc.
(Doty) of Petersburg, Indiana. These mergers were accounted for as poolings of
interest. 1ST BANCORP's subsidiaries included First Federal Bank, First
Financial Insurance Agency, Inc., and First Title Insurance Company, Inc. First
Federal Bank, now known as First American Bank, is headquartered in Vincennes,
Indiana. First Financial Insurance Agency has offices in Vincennes and
Princeton, Indiana. Doty is a general multi-line, full-service insurance agency
with offices in Pike and Knox counties in Indiana.
In May 1999, the Company issued 8,000 shares of common stock and
approximately $26,000 in cash for all the outstanding shares of Professional
Insurance Markets, Inc. (which did business as Smith & Bell) of Vincennes,
Indiana. This merger was accounted for as a purchase. Accordingly, reported
operating results for periods prior to the merger have not been restated. Smith
& Bell is a general multi-line, full-service insurance agency with offices in
Knox County, Indiana.
Note 7 -- Proposed Acquisition
On March 24, 2000 the Company announced that it had agreed in principle to
acquire Holland Bancorp, Inc. ("Holland"), through the merger of Holland with
and into the Company, and the simultaneous merger of Holland's sole bank
subsidiary, The Holland National Bank, into the Company's subsidiary, The German
American Bank. The Holland National Bank operates four banking offices in Dubois
County, Indiana.
Under the terms of the proposed merger, the shareholders of Holland would
receive 3.5 shares of common stock of the Company for each of their Holland
shares, or an aggregate of approximately 947,777 shares of common stock of the
Company.
The proposed merger is subject to the completion of due diligence and
execution of a definitive agreement, approval by shareholders of Holland,
Holland's receipt of a fairness opinion, approval of the appropriate bank
regulatory agencies and other conditions. It is contemplated that the merger
will be consummated during the fourth quarter of 2000, and that it will be
accounted for under the pooling of interests method of accounting.
Note 8 - Segment Information
The Company's operations include two primary segments: retail banking and
mortgage banking. The retail banking segment involves attracting deposits from
the general public and using such funds to originate consumer, commercial,
commercial real estate, and single-family residential mortgage loans, primarily
in the affiliate bank's local markets. The mortgage banking segment involves the
origination and purchase of single-family residential mortgage loans; the sale
of such loans in the secondary market; and the servicing of mortgage loans for
investors.
<PAGE>
The retail segment is comprised of community banks with 25 banking offices
in Southwestern Indiana. Net interest income from loans and investments funded
by deposits and borrowings is the primary revenue of the five affiliate
community banks comprising the retail-banking segment. The mortgage-banking
segment operates as a division of First American Bank. Primary revenues for the
mortgage-banking segment are net interest income from a residential real estate
loan portfolio funded primarily by wholesale funding sources. Other revenues are
gains on sales of loans and capitalization of mortgage servicing rights (MSR),
and loan servicing income.
The following segment financial information has been derived from the
internal financial statements of German American Bancorp, which are used by
management to monitor and manage the financial performance of the Company. The
accounting policies of the two segments are the same as those of the Company.
The evaluation process for segments does not include holding company income and
expense. Holding company and non-banking subsidiaries amounts are the primary
differences between segment amounts and consolidated totals, and are reflected
in the Other column below, along with minor amounts to eliminate transactions
between segments.
<TABLE>
<CAPTION>
Three Months Ended Retail Mortgage Consolidated
March 31, 2000 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income $6,920 $1,027 $91 $8,038
Gain on Sales of Loans and
Capitalization of MSR --- 12 --- 12
Servicing Income --- 101 --- 101
Noncash Items:
Provision for Loan Losses 173 142 --- 315
MSR Amortization & Valuation --- 51 --- 51
Provision for Income Taxes 1,052 84 (448) 688
Segment Profit 2,284 128 (375) 2,037
Segment Assets 807,092 177,957 8,204 993,253
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Retail Mortgage Consolidated
March 31, 1999 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income $6,618 $1,186 $71 $7,875
Gain on Sales of Loans and
Capitalization of MSR --- 212 --- 212
Servicing Income --- 93 --- 93
Noncash Items:
Provision for Loan Losses 220 149 --- 369
MSR Amortization & Valuation --- 61 --- 61
Provision for Income Taxes 857 270 (234) 893
Segment Profit 2,186 428 (391) 2,223
Segment Assets 738,703 152,356 10,443 901,502
</TABLE>
Note 9 - Subsequent Events
On April 27, 2000, the Company's Board of Directors adopted a shareholder rights
plan (the "Plan"). Under the Plan, rights attached to the outstanding common
shares of the Company at the rate of one right for each share held by
shareholders of record at the close of business on May 10, 2000. The rights will
become exercisable only if a person or group of affiliated persons (an
"Acquiring Person") acquires 15% or more of the Company's common shares or
announces a tender offer or exchange offer that would result in the acquisition
of 30% or more of the outstanding common shares. At that time, the rights may be
redeemed at the election of the Board of Directors of the Company. If not
redeemed, then prior to the acquisition by such person of 50% or more of the
outstanding common shares of the Company, the Company may exchange the rights
(other than rights owned by the Acquiring Person, which would have become void)
for common shares (or other securities) of the Company on a one-for-one basis.
If not exchanged, the rights may be exercised and the holders may acquire
preferred share units or common shares of the Company having a value of two
times the exercise price of $75.00. Each preferred share unit carries the same
voting rights as one common share. If the Acquiring Person engages in a merger
of other business combination with the Company, the rights would entitle the
holders to acquire shares of the Acquiring Person having a market value equal to
twice the exercise price of the rights. The Plan will expire on April 26, 2010.
The distribution of the rights is not a taxable event for shareholders of the
Company. In connection with the adoption of the Plan, the Board of Directors
also approved the terms of the Series A Preferred Shares and adopted the
Restatement of the Articles of Incorporation of the Company designating the
relative rights, preferences and limitations of the Series A Preferred Shares.
<PAGE>
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp ("the Company") is a multi-bank holding company
based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's
National Market System under the symbol GABC. The Company operates five
affiliate community banks with 25 banking offices and 5 full-service insurance
offices in the eight contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The banks' wide range of
personal and corporate financial services include making commercial and consumer
loans; marketing, originating, and servicing mortgage loans; providing trust,
investment advisory and brokerage services; accepting deposits and providing
safe deposit facilities. The Company's insurance activities include offering a
full range of title, property, casualty, life and credit insurance products.
Prior to the acquisition activity in January 1999, the Company operated
primarily in the banking industry.
This section presents an analysis of the consolidated financial condition
of the Company as of March 31, 2000 and December 31, 1999 and the consolidated
results of operations for the three month periods ended March 31, 2000 and 1999.
This discussion should be read in conjunction with the consolidated financial
statements and other financial data presented elsewhere herein and with the
financial statements and other financial data, as well as the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's December 31, 1999 Annual Report to Shareholders.
RESULTS OF OPERATIONS
Net Income:
Net income was $2,037,000 or $0.23 per share for the quarter ended March
31, 2000 compared to $2,223,000 or $0.24 per share for the first quarter of
1999. The Company's retail banking segment profit, inclusive of associated
holding company administrative expenses, increased $77,000 to $1,861,000 for the
quarter ended March 31, 2000 compared to $1,784,000 for the quarter ended March
31, 1999. The increase in the retail banking segment profit was offset by a
decline in the segment profit from the Company's mortgage banking operation. The
decline principally reflected the effects of decreased mortgage loan production
resulting from increases in general market interest rates during the latter half
of 1999 and the first quarter of 2000.
Net Interest Income:
The following table summarizes German American Bancorp's net interest
income (on a tax-equivalent basis, at an effective tax rate of 34%) for each of
the periods presented herein (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Change from
Ended March 31, Prior Period
2000 1999 Amount Percent
<S> <C> <C> <C> <C>
Interest Income (T/E) $18,696 $16,757 $1,939 11.6%
Interest Expense 10,195 8,467 1,728 20.4%
------- ------- ------
Net Interest Income (T/E) $8,501 $8,290 $211 2.5%
======= ======= ======
</TABLE>
<PAGE>
Net interest income increased $163,000 or 2.1% ($211,000 or 2.5% on a
tax-equivalent basis) for the quarter ended March 31, 2000 compared with the
first quarter of 1999. A significant portion of the increase resulted from loan
growth. Net interest margin is tax-equivalent net interest income expressed as a
percentage of average earning assets. For the first quarter of 2000, the net
interest margin was 3.65% compared to 3.90% for the comparable period of 1999.
The decline in net interest margin is attributable to a more competitive pricing
environment for loans and deposits and the employment of various asset growth
strategies.
The Company employed various asset growth strategies in mid and late 1999,
whereby affiliate banks invested proceeds from FHLB borrowings in equity
securities in order to more effectively utilize capital in excess of
requirements. These asset growth strategies have net interest margins ranging
from 1.00% to 1.50%, and increased net interest income while reducing the
overall net interest margin.
Provision For Loan Losses:
The Company provides for loan losses through regular provisions to the
allowance for loan losses. These provisions are made at a levels considered
necessary by management to absorb estimated losses in the loan portfolio. A
detailed evaluation of the adequacy of this loan loss reserve is completed
quarterly by management.
The consolidated provision for loan losses was $315,000 and $369,000 for
the three months ended March 31, 2000 and 1999, respectively. The provision for
loan losses to be recorded in future periods will be adjusted based on the
results of on-going evaluations of the adequacy of the allowance for loan
losses.
Net charge-offs were $235,000 for the three months ended March 31, 2000
compared with $300,000 for the three months ended March 31, 1999. The majority
of net charge-offs during the quarter ended March 31, 2000 were related to the
sub-prime residential real estate loans at one affiliate. The Company
discontinued new sub-prime out-of-market real estate lending during 1999.
Nonperforming loans as a percent of total loans at March 31, 2000 were
1.25% of total loans, representing a slight decline from the 1.27% at December
31, 1999. See discussion under "Financial Condition" for more information
regarding nonperforming assets.
Noninterest Income:
Noninterest income for the first quarter of 2000 increased $63,000 or 4.2%
on an annualized basis. Growth occurred in Trust and Investment Product Fees
($189,000), Service Charges on Deposit Accounts ($42,000), and Insurance
Commissions and Fees ($132,000). The growth in these areas was tempered by a
decline in Gain on Sale of Loans and Other Real Estate ($246,000) and in Other
Operating Income ($50,000).
The increased Trust and Investment Product Fees for the quarter ended March
31, 2000 compared with the same period of the prior year was partially
attributable to the implementation of brokerage services at one affiliate during
1999. Additionally, a significant increase in brokerage activity at another
affiliate, due in part to market conditions, also contributed to the increased
level of income.
Insurance Commissions and Fees also increased for the quarter ended March
31, 2000 compared with the quarter ended March 31, 1999. The increase was due to
an overall growth in the insurance operations of the Company and due to the
acquisition of Smith & Bell in May 1999.
Net Gains on Sales of Loans and Other Real Estate are derived predominantly
from the Company's mortgage banking division. The net loss on sales of loans and
other real estate in the first quarter of 2000 compared with the net gain during
the same period of 1999 was largely attributable to lower volumes in residential
real estate loan production and correspondingly lower levels of loan sales
caused by a rising market interest rate environment. Also contributing to the
net loss of $41,000 in the quarter ended March 31, 2000 was an increased level
of sales of other real estate owned.
The decline in Other Operating Income was largely attributable to a decline
in revenues generated by the Company's title insurance operation. The decline in
revenues was the result of a lower volume of residential loan production. In
addition, the discontinuance of an Internet access operation at one affiliate
contributed to the decline in Other Operating Income.
<PAGE>
Noninterest Expense:
Noninterest expense for the first quarter of 2000 increased $671,000 or
11.4% from the prior year. The increase primarily occurred in Salaries and
Employee Benefits ($499,000), Occupancy, Furniture and Equipment Expense
($78,000) and Other Operating Expenses ($89,000).
Total Salaries and Benefits Expense increased $499,000 to $3.7 million in
the three months ended March 31, 2000 over the prior year total of $3.2 million
in the first quarter of 1998. Salary expense increased approximately 7% from
merit increases and due to the purchase of Smith and Bell in May 1999.
Performance bonuses, along with payroll taxes, 401(k) and associated profit
sharing increased in 2000 over the prior year due to improved performance of the
retail-banking segment.
Total occupancy, furniture and equipment expense for the three months ended
March 31, 2000 totaled $911,000 compared with $833,000 during the same period of
the prior year. This increase includes depreciation on Citizen State Bank's new
main office in Petersburg, Indiana and for the new Cherry Tree branch for
Peoples National Bank in Washington, Indiana. These facilities were completed
and placed into service during 1999. Also contributing to the increase was the
continued implementation of a state-of-the-art wide-area network and associated
operating and application systems at the retail banking affiliates during 1999
and the first quarter of 2000. These systems are expected to provide long-term
benefits with regard to improved quality of customer service and control of
personnel expenses.
Computer processing fees decreased $57,000 in the first quarter of 2000
compared with the first quarter of 1999 due primarily to the discontinuance of
an Internet access operation at one affiliate. Advertising expenses increased
$57,000 due to costs associated with the customer information system implemented
during 1999 for all banking affiliates and fluctuations in the normal course of
business. Supplies expenses for the first quarter increased $27,000 over the
prior year due to normal increases due to volume.
First quarter Other Operating Expenses increased $89,000 over the first
quarter of 1999. This increase was primarily attributable to collection expenses
($52,000) and telecommunication expenses ($42,000). The increased
telecommunication charges were primarily attributable to network charges to
support the Company's new technology platforms and operating systems. The
increased collection costs were primarily at one affiliate bank, as efforts
continue to collect on delinquent sub-prime out-of-market residential real
estate loans and to liquidate other real estate owned. The Company discontinued
this type of lending during 1999.
Income Taxes:
The Company's effective income tax rate approximates 30% of pre-tax income
in all periods, and is lower than the combined federal and state statutory rate
of 39.6%. This lower effective rate results primarily from the Company's
tax-exempt investment income on securities and loans, and from income tax
credits generated from investments in affordable housing projects.
FINANCIAL CONDITION
Total assets at March 31, 2000 were flat at $993 million compared with
total assets at December 31, 1999. In comparison to year-end totals, loans
increased $7.6 million or 1.1% on an annualized basis. Loans held for sale
declined $1.9 million or 66.7%. This decline resulted from lower residential
real estate loan production and correspondingly lower loans held for sale caused
largely by a rising interest rate environment. Investments remained stable at
$229 million and cash equivalents declined $3.7 million or 14.7%.
Deposits at March 31, 2000 increased $1.4 million or less than one percent
compared to December 31, 1999 deposits. Borrowings declined by $1.0 million or
less than one percent. All of the Company's affiliate banks are members of the
Federal Home Loan Bank System ("FHLB"). The banks' membership in the FHLB
provides an additional source of liquidity for both long-term and short-term
borrowing needs.
<PAGE>
Nonperforming Assets:
The following is an analysis of the Company's nonperforming assets at March
31, 2000 and December 31, 1999 (dollars in thousands):
March 31, December 31,
2000 1999
Nonaccrual Loans $6,051 $7,237
Loans contractually past due 90 days or more 2,759 1,564
Renegotiated Loans --- ---
------- -------
Total Nonperforming Loans 8,810 8,801
------- -------
Other Real Estate 2,184 2,434
------- -------
Total Nonperforming Assets $10,994 $11,235
======= =======
Allowance for Loan Loss to Nonperforming Loans 101.57% 100.76%
Nonperforming Loans to Total Loans 1.25% 1.27%
Capital Resources:
Shareholders' equity totaled $88.0 million at March 31, 2000 or 8.9% of
total assets, an increase of $507,000 from December 31, 1999.
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill,
core deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital is defined as the amount of the allowance for loan
losses which does not exceed 1.25 percent of gross risk adjusted assets. Total
capital is the sum of Tier 1 and Tier 2 capital.
The minimum requirements under these standards are generally at least a 4.0
percent leverage ratio, which is Tier 1 capital divided by defined "total
assets"; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent
total capital to risk-adjusted assets ratios. Under these guidelines, the
Company, on a consolidated basis, and each of its affiliate banks individually,
have capital ratios that substantially exceed the regulatory minimums.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately-capitalized, under-capitalized, significantly
under-capitalized, and critically under-capitalized. Under these regulations, a
"well-capitalized" entity must achieve a Tier 1 Risk-based capital ratio of at
least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a
leverage ratio of at least 5.0 percent, and not be under a capital directive
order.
At March 31, 2000 management is not under such a capital directive, nor is
it aware of any current recommendations by banking regulatory authorities which,
if they were to be implemented, would have or are reasonably likely to have, a
material effect on the Company's liquidity, capital resources or operations.
<PAGE>
The table below presents the Company's consolidated capital ratios under
regulatory guidelines (dollars in thousands):
<TABLE>
<CAPTION>
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action At At
Adequacy Provisions March 31, December 31,
Purposes (FDICIA) 2000 1999
<S> <C> <C> <C> <C>
Leverage Ratio 4.00% 5.00% 9.07% 9.07%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 13.79% 13.53%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 15.04% 14.78%
</TABLE>
Liquidity:
The Consolidated Statement of Cash Flows details the elements of change in
the Company's cash and cash equivalents. During the first three months of 2000,
operating activities provided $6.1 million of available cash, which included net
income of $2.0 million. Major cash outflows experienced during this three-month
period of 2000 included $1.2 million in dividends and net loan outlays in the
amount of $8.7 million.
Purchases of securities approximated the cash flows from the maturities and
sales securities. Total cash outflows for the period exceeded inflows by $3.7
million, leaving cash and cash equivalents of $21.2 million at March 31, 2000.
Forward-looking Statements:
This Report contains statements relating to the future results of the
Company that are considered "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate
to, among other things, adequacy of allowance for loan losses; simulations of
changes in interest rates; litigation results; and dividend policy. Actual
results may differ materially from those expressed or implied as a result of
certain risks and uncertainties, including, but not limited to, changes in
economic conditions; interest rate fluctuations; competitive product and pricing
pressures within the Company's markets; equity and fixed income market
fluctuations; and personal and corporate customers' bankruptcies.
Results may also differ materially due to inflation; acquisitions and
integrations of acquired businesses; technological change; changes in law;
changes in fiscal, monetary, regulatory and tax policies; success in gaining
regulatory approvals when required; the continued availability of earnings and
excess capital sufficient for the lawful and prudent declaration and payment of
cash dividends; as well as other risks and uncertainties detailed elsewhere in
this Report and from time to time in the filings of the Company with the
Securities and Exchange Commission. Such forward-looking statements speak only
as of the date on which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk.
The liquidity of the parent company is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations. The affiliate banks' source of funding is predominately core
deposits, maturities of securities, repayments of loan principal and interest,
federal funds purchased, securities sold under agreements to repurchase and
long-term borrowings from the Federal Home Loan Bank.
The Company monitors interest rate risk by the use of computer simulation
modeling to estimate the potential impact on its net interest income under
various interest rate scenarios, and by estimating its static interest rate
sensitivity position. Another method by which the Company's interest rate risk
position can be estimated is by computing estimated changes in its net portfolio
value ("NPV"). This method estimates interest rate risk exposure from movements
in interest rates by using interest rate sensitivity analysis to determine the
change in the NPV of discounted cash flows from assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. Computations are based on a number of assumptions, including the
relative levels of market interest rates and prepayments in mortgage loans and
certain types of investments. These computations do not contemplate any actions
management may undertake in response to changes in interest rates, and should
not be relied upon as indicative of actual results. In addition, certain
shortcomings are inherent in the method of computing NPV. Should interest rates
remain or decrease below current levels, the proportion of adjustable rate loans
could decrease in future periods due to refinancing activity. In the event of an
interest rate change, prepayment levels would likely be different from those
assumed in the table. Lastly, the ability of many borrowers to repay their
adjustable rate debt may decline during a rising interest rate environment.
The table below provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of December 31, 1999 the Company's estimated
NPV might be expected to decrease in the event of an increase in prevailing
interest rates, and might be expected to increase in the event of a decrease in
prevailing interest rates (dollars in thousands).
Interest Rate Sensitivity as of December 31, 1999
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
----- ---------
Changes
In rates $ Amount $ Change NPV Ratio Change
-------- -------- -------- --------- ------
+2% $62,795 (23.0)% 6.66% 161 b.p.
+1% 73,014 (10.5) 7.57 70 b.p.
Base 81,584 --- 8.27 ---
-1% 90,506 10.9 8.95 68 b.p.
-2% 87,989 7.9 8.65 38 b.p.
The Company's risk profile as of March 31, 2000 does not materially differ
from these year-end estimates.
Item 3 includes forward-looking statements. See "Forward-looking
Statements" included in Item 2 of this Report for a discussion of certain
factors that could cause the Company's actual exposure to market risk to vary
materially from that expressed or implied above.
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 27, 2000, the Company's Board of Directors adopted a shareholder rights
plan (the "Plan"). Under the Plan, rights attached to the outstanding common
shares of the Company at the rate of one right for each share held by
shareholders of record at the close of business on May 10, 2000. The rights will
become exercisable only if a person or group of affiliated persons (an
"Acquiring Person") acquires 15% or more of the Company's common shares or
announces a tender offer or exchange offer that would result in the acquisition
of 30% or more of the outstanding common shares. At that time, the rights may be
redeemed at the election of the Board of Directors of the Company. If not
redeemed, then prior to the acquisition by such person of 50% or more of the
outstanding common shares of the Company, the Company may exchange the rights
(other than rights owned by the Acquiring Person, which would have become void)
for common shares (or other securities) of the Company on a one-for-one basis.
If not exchanged, the rights may be exercised and the holders may acquire
preferred share units or common shares of the Company having a value of two
times the exercise price of $75.00. Each preferred share unit carries the same
voting rights as one common share. If the Acquiring Person engages in a merger
of other business combination with the Company, the rights would entitle the
holders to acquire shares of the Acquiring Person having a market value equal to
twice the exercise price of the rights. The Plan will expire on April 26, 2010.
The distribution of the rights is not a taxable event for shareholders of the
Company. In connection with the adoption of the Plan, the Board of Directors
also approved the terms of the Series A Preferred Shares and adopted the
Restatement of the Articles of Incorporation of the Company designating the
relative rights, preferences and limitations of the Series A Preferred Shares.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
3.1 Restatement of Articles of Incorporation of the Registrant. The
copy of this exhibit filed as Exhibit 3.01 to Registrant's Current
Report on Form 8-K filed May 5, 2000, is incorporated by
reference.
3.2 Restated Bylaws of the Registrant as amended August 14, 1990, are
incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K
for the year ended December 31, 1995.
4 Rights Agreement dated as of April 27, 2000 between German
American Bancorp and UMB Bank, N.A., as Rights Agent. The copy of
this exhibit filed as Exhibit 4.01 to Registrant's Current Report
on Form 8-K filed May 5, 2000, is incorporated by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K on March 24, 2000 to report that
it had agreed in principle to acquire Holland Bancorp, Inc., Holland, Indiana. A
press release attached as Exhibit 99 to the March 24, 2000 8-K more fully
described the proposed transaction.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date May 12, 2000 By/s/Mark A. Schroeder
--------------------- --------------------------------------
Mark A. Schroeder
President and CEO
Date May 12, 2000 By/s/Richard E. Trent
--------------------- --------------------------------------
Richard E. Trent
Chief Financial Officer and
Principal Accounting Officer
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 19,299
<INT-BEARING-DEPOSITS> 2,444
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