UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended: December 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________to_____________
Commission File Number 0-11244
GERMAN AMERICAN BANCORP
-----------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
- ------------------------------------ ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Box 810, Jasper, Indiana 47546
- ----------------------------------------- --------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class Name of each exchange on which registered
NONE Not Applicable
- --------------------- ------------------------------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, No Par Value
- ---------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant (assuming solely for purposes of this calculation that all directors
and executive officers of the Registrant are affiliates) valued at the last
trade price reported by NASDAQ as of March 10, 2000 was approximately
$146,723,000.
As of March 10, 2000, there were outstanding 9,029,109 common shares, no
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Shareholders of German American
Bancorp for 1999, to the extent stated herein, are incorporated by reference
into Parts I and II.
(2) Portions of the Proxy Statement of German American Bancorp for the
Annual Meeting of its Shareholders to be held April 27, 2000, to the extent
stated herein, are incorporated by reference into Part III.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. | |
<PAGE>
PART I
Item 1. Business.
General
German American Bancorp (referred to herein as the "Company", the
"Corporation", or the "Registrant") is a multi-bank holding company organized in
Indiana in 1982. The Company operates five affiliate community banks with 25
banking offices and two insurance subsidiaries with 5 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. The Company's
subsidiaries are described in the following table:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Names of Principal Subsidiaries Type of Business Location Parent Company
- ------------------------------------------------- ---------------------------- ------------------- ---------------------------------
German American Bank Commercial Bank Jasper, IN German American Bancorp
First American Bank Savings Bank Vincennes, IN German American Bancorp
First State Bank, Southwest Indiana Commercial Bank Tell City, IN German American Bancorp
German American Holdings Corporation 2nd Tier Holding Company Jasper, IN German American Bancorp
GAB Mortgage Corp. Inactive Jasper, IN German American Bancorp
German American Reinsurance Co., Ltd. Credit Life Insurance Jasper, IN German American Bancorp
Peoples National Bank Commercial Bank Washington, IN German American Holdings Corp.
Citizens State Bank Commercial Bank Petersburg, IN German American Holdings Corp.
The Doty Agency, Inc. Insurance Agency Petersburg, IN Citizens State Bank
First Title Insurance Company Title Insurance Agency Vincennes, IN Citizens State Bank
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company over the five-year period ended December 31, 1999 has
experienced both internal growth and growth by acquiring other banks, thrifts
and insurance agencies. For a description of acquisitions see note 18 to the
Company's consolidated financial statements included in the Company's annual
report to shareholders for 1999 and filed as Exhibit 13.4 to this report. Most
of these acquisitions have been accounted for under the pooling-of-interests
method of accounting, with the result that the financial statements for all
periods prior to such acquisitions were retroactively restated.
In January 1999, the Company completed a merger with 1ST BANCORP of
Vincennes, Indiana. 1ST BANCORP's subsidiaries included First American Bank
(formerly known as First Federal Bank); First Financial Insurance Agency, Inc.;
and First Title Insurance Company. 1ST BANCORP's thrift operations through First
American Bank included mortgage banking activities. First Financial Insurance
Agency, Inc. operated an office in Gibson County, Indiana, which now operates as
a part of The Doty Agency.
Also in January 1999, the Company completed a merger with The Doty Agency,
Inc. of Petersburg, Indiana. Doty is a general multi-line, full-service
insurance agency and that now has offices in Gibson, Knox, Pike and Dubois
counties in Indiana.
In May 1999, the Company acquired Smith and Bell, a general multi-line,
full-service insurance agency in Vincennes, Indiana. Smith and Bell now operates
offices in Knox County, Indiana as part of The Doty Agency.
Additional information regarding the Company and its subsidiaries is
included in the Company's Annual Report to Shareholders for 1999, selected
portions of which are filed as Exhibit 13 to this Annual Report on Form 10-K
(the "Shareholders' Report") and are incorporated herein by reference.
Recent Development - Holland Bancorp Merger
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.
At December 31, 1999, Holland had total assets of and total shareholders'
equity of $64 million and $6 million, respectively. Holland reported net income
of $532 thousand for the year ended December 31, 1999.
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 mergers
will be consummated during the third quarter of 2000, and that they will be
accounted for under the pooling of interests method of accounting.
<PAGE>
Competition
The banking business is highly competitive. The Company's subsidiary banks
compete not only with financial institutions that have offices in the same
counties but also compete for deposits, loans and many other types of financial
services products with financial institutions that are located throughout
Southwest Indiana and adjoining areas. In addition to other commercial banks,
the Company's subsidiary banks compete with savings and loan associations,
savings banks, credit unions, production credit associations, federal land
banks, finance companies, credit card companies, personal loan companies,
brokerage firms, insurance companies, lease finance companies, money market
funds, mortgage companies and other non-depository financial intermediaries.
Many of these banks and other organizations have substantially greater resources
than the Corporation.
Recent changes in federal and state law have resulted in and are expected
to continue to result in increased competition. The reductions in legal barriers
to the acquisition of banks by securities firms, insurance companies and other
financial service companies resulting from implementation of the
Gramm-Leach-Bliley Act of 1999 and other recent and proposed changes are
expected to continue to further stimulate competition in the markets in which
the Banks operate, although it is not possible to predict the extent or timing
of such increased competition.
Employees
At February 29, 2000 the Company and its subsidiaries employed
approximately 385 full-time equivalent employees. There are no collective
bargaining agreements, and employee relations are considered to be good.
Regulation and Supervision
The Company is subject to the Bank Holding Company Act of 1956, as amended
("BHC Act"), and is required to file with the Board of Governors of the Federal
Reserve System ("FRB") annual reports and such additional information as the FRB
may require. The FRB may also make examinations or inspections of the Company.
Under FRB policy, the Company is expected to act as a source of financial
strength to its bank subsidiaries and to commit resources to support them even
in circumstances where the Company might not do so absent such an FRB policy.
The Company's subsidiary banks are under the supervision of and subject to
examination by one or more of the Indiana Department of Financial Institutions
("DFI"), the Office of Comptroller of Currency ("OCC"), the Federal Deposit
Insurance Corporation ("FDIC") and the Office of Thrift Supervision ("OTS").
Regulation and examination by banking regulatory agencies are primarily for the
benefit of depositors rather than shareholders.
With certain exceptions, the BHC Act prohibits a bank holding company from
engaging in, or acquiring direct or indirect control of more than 5 percent of
the voting shares of any company engaged in nonbanking activities. One of the
principal exceptions to this prohibition is for activities deemed by the FRB to
be "closely related to banking." Under current regulations, bank holding
companies and their subsidiaries are permitted to engage in such banking-related
business ventures as sales and consumer finance; equipment leasing; credit life
insurance; computer service bureau and software operations; mortgage banking;
and securities brokerage. As a result of recent amendments to the BHC Act, many
of these acquisitions may be effected by bank holding companies that satisfy
certain statutory criteria concerning management, capitalization, and regulatory
compliance if written notice is given to the FRB within 10 business days after
the transaction. In other cases, prior written notice to the FRB will be
required.
In evaluating a written notice of such an acquisition, the FRB will
consider various factors, including among others the financial and managerial
resources of the notifying bank holding company and the relative public benefits
and adverse effects which may be expected to result from the performance of the
activity by an affiliate of such company. The FRB may apply different standards
to activities proposed to be commenced de novo and activities commenced by
acquisition, in whole or in part, of a going concern.
Effective March 11, 2000 the Gramm-Leach-Bliley Act of 1999, which was
signed into law on November 12, 1999, permits a bank holding company to qualify
as a "financial holding company" and, as a result, be permitted to engage in a
broader range of activities that are "financial in nature" and in activities
that are determined to be incidental or complementary to activities that are
financial in nature. The Gramm-Leach-Bliley Act amends the BHC Act to include a
list of activities that are financial in nature, and the list includes
activities such as underwriting, dealing in and making a market in securities;
insurance underwriting and agency activities; and merchant banking. The Federal
Reserve Board is authorized to determine other activities that are financial in
nature or incidental or complementary to such activities. The Gramm-Leach-Bliley
Act also authorizes banks to engage through financial subsidiaries in certain of
the activities permitted for financial holding companies.
Indiana law, the National Bank Act, the Home Owners Loan Act, and the BHC
Act restrict certain types of expansion by the Company and its bank
subsidiaries. Under the Home Owners Loan Act, First American Bank may branch,
subject to certain conditions, anywhere within the United States. Under the BHC
Act, the Company may establish non-banking offices without geographical
limitation. Under the BHC Act, the Company must receive the prior written
approval of the FRB or its delegate before it may acquire ownership or control
of more than 5 percent of the voting shares of another bank, and under Indiana
law it may not acquire 25 percent or more of the voting shares of another bank
without the prior approval of the Indiana Department of Financial Institutions
("DFI").
<PAGE>
In 1994, the Congress enacted the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), which substantially
changed the geographic constraints applicable to the banking industry. Effective
September 29, 1995, the Riegle-Neal Act allowed bank holding companies to
acquire banks located in any state in the United States without regard to
geographic restrictions or reciprocity requirements imposed by state law.
Effective June 1, 1997 (or earlier if expressly authorized by applicable state
law), the Riegle-Neal Act allowed banks to establish interstate branch networks
through acquisitions of other banks, subject to certain conditions.. The
establishment of de novo interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an
out-of-state bank in its entirety) is allowed by the Riegle-Neal Act only if
specifically authorized by state law. The legislation allowed individual states
to "opt-out" of certain provisions of the Riegle-Neal Act by enacting
appropriate legislation prior to June 1, 1997.
In 1996, Indiana authorized out-of-state banks to establish branch offices
in Indiana. The Indiana Financial Institutions Act now permits, in appropriate
circumstances,
(A) with the approval of the DFI:
o the acquisition of all or substantially all of the assets of an
Indiana-chartered bank by an FDIC-insured bank, savings bank or savings
association located in another state,
o the acquisition by an Indiana-chartered bank of all or substantially
all of the assets of an FDIC-insured bank, savings bank or savings
association located in another state,
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located in
other states having laws permitting such consolidation, with the
resulting organization chartered by Indiana, and
o the organization of a branch in Indiana by FDIC-insured banks located
in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting an Indiana-chartered bank to
establish a branch in such jurisdiction, and
(B) upon written notice to the DFI:
o the acquisition by an Indiana-chartered bank of one or more branches
(not comprising all or substantially all of the assets) of an
FDIC-insured bank, savings bank or savings association located in
another state, the District of Columbia, or a U.S. territory or
protectorate,
o the establishment by Indiana-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates, and
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located in
other states, with the resulting organization chartered by one of such
other states, and
(C) the sale by an Indiana-chartered bank of one or more of its branches
(not comprising all or substantially all of its assets) to an FDIC-insured
bank, savings bank or savings association located in a state in which an
Indiana-chartered bank could purchase one or more branches of the
purchasing entity.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act. Among other things, the Gramm-Leach-Bliley Act repealed
the restrictions on banks affiliating with securities firms contained in
sections 20 and 32 of the Glass-Steagall Act. This act also created a new
"financial holding company" under the BHC Act, which will permit holding
companies to engage in a statutorily provided list of financial activities,
including insurance and securities underwriting and agency activities, merchant
banking, and insurance company portfolio investment activities, and authorizes
such other financial activities as may be determined by rule or order of the
FRB. In addition, the Gramm-Leach-Bliley Act imposes significant new financial
privacy obligations and reporting requirements on all financial institutions,
including banks. Among other things, it will require financial institutions (a)
to establish privacy policies and disclose them to customers both at the
commencement of a customer relationship and on an annual basis and (b) to permit
customers to opt out of a financial institution's disclosure of financial
information to nonaffiliated third parties. The Gramm-Leach-Bliley Act requires
the federal financial regulators to promulgate regulations implementing these
provisions within six months of enactment, and the statute's privacy
requirements will take effect one year after enactment.
<PAGE>
The earnings of commercial banks and their holding companies are affected
not only by general economic conditions but also by the policies of various
governmental regulatory authorities. In particular, the FRB regulates money and
credit conditions and interest rates in order to influence general economic
conditions, primarily through open-market operations in U.S. Government
securities, varying the discount rate on bank borrowings, and setting reserve
requirements against bank deposits. These policies have a significant influence
on overall growth and distribution of bank loans, investments and deposits, and
affect interest rates charged on loans and earned on investments or paid for
time and savings deposits. FRB monetary policies have had a significant effect
on the operating results of commercial banks in the past and this is expected to
continue in the future. The general effect, if any, of such policies upon the
future business and earnings of the Company cannot accurately be predicted.
The Company and its bank subsidiaries are required by law to maintain
minimum levels of capital. These required capital levels are expressed in terms
of capital ratios, known as the leverage ratio and the capital to risk-based
assets ratios. The Company significantly exceeds the minimum required capital
levels for each measure of capital adequacy. See "Management's Discussion and
Analysis -- Capital Resources," included in the Shareholders' Report.
Also, federal regulations define five categories of financial institutions
for purposes of implementing prompt corrective action and supervisory
enforcement requirements of the Federal Deposit Insurance Corporation
Improvements Act of 1991. The category to which the most highly capitalized
institutions are assigned is termed "Well-Capitalized." Institutions falling
into this category must have a total risk-based capital ratio (the ratio of
total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based
capital ratio (the ratio of Tier 1, or "core", capital to risk-weighted assets)
of at least 6%, a leverage ratio (the ratio of Tier 1 capital to total assets)
of at least 5%, and must not be subject to any written agreement, order or
directive from its regulator relative to meeting and maintaining a specific
capital level. On December 31, 1999, the Company had a total risk-based capital
ratio of 14.78%, a Tier 1 risk-based capital ratio of 13.53% (based on Tier 1
capital of $89,272,000 and total risk-weighted assets of $659,631,000), and a
leverage ratio of 9.07%. The Company meets all of the requirements of the "Well
Capitalized" category and, accordingly, the Company does not expect these
regulations to significantly impact operations.
The Company is a corporation separate and distinct from its bank and other
subsidiaries. Most of the Company' revenues will be received by it in the form
of dividends or interest paid by its bank subsidiaries. These subsidiaries are
subject to statutory restrictions on its ability to pay dividends. The FRB has
issued a policy statement on the payment of cash dividends by bank holding
companies to the effect that a bank holding company should not pay cash
dividends exceeding its net income or which could only be funded in ways that
would weaken the bank holding company's financial health, such as by borrowing.
Additionally, the FRB possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability in appropriate cases to proscribe
the payment of dividends by banks and bank holding companies. The FDIC, OCC, OTS
and DFI possess similar enforcement powers over the respective bank subsidiaries
of the Company for which they have supervision. The "prompt corrective action"
provisions of federal banking law impose further restrictions on the payment of
dividends by insured banks which fail to meet specified capital levels and, in
some cases, their parent bank holding companies.
<PAGE>
Statistical Disclosures
The following statistical data should be read in conjunction with
Management's Discussion and Analysis (Item 7), Selected Financial Data (Item 6),
and the Financial Statements and Supplementary Data (Item 8) included elsewhere
herein through incorporation by reference to the indicated pages of the
Shareholders' Report.
<TABLE>
<CAPTION>
Securities (dollars in thousands)
The following tables set forth the carrying amount of Securities at the dates
indicated:
December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Securities Held-to-Maturity:
U.S. Treasury and other
U.S. Government Agencies
and Corporations................................. $ --- $ 19,258 $ 49,345
State and Political Subdivisions...................... 29,288 27,591 24,983
Asset- / Mortgage-backed Securities................... 903 1,497 2,998
----------- ----------- ----------
Subtotal of SecuritiesHeld-to-Maturity........... 30,191 48,346 77,326
----------- ----------- ----------
Securities Available-for-Sale:
U.S. Treasury and other U.S.
Government Agencies and Corporations............. $ 92,326 $ 68,386 $ 67,990
State and Political Subdivisions...................... 26,487 30,455 21,670
Asset- / Mortgage-backed Securities................... 58,967 52,686 22,377
Equity Securities.................................... 10,368 --- ---
----------- ----------- ----------
Subtotal of Securities Available-for-Sale........ 188,148 151,527 112,037
----------- ----------- ----------
Total Securities............................. $ 218,339 $ 199,873 $189,363
=========== =========== ========
</TABLE>
<PAGE>
Statistical Disclosures (continued)
<TABLE>
<CAPTION>
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rates (dollars in thousands):
.........
......... 1999 compared to 1998 1998 compared to 1997
--------------------- ---------------------
Increase / (Decrease) Due to (1) Increase / (Decrease) Due to (1)
----------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal Funds Sold and.................
Other Short-term Investments....... $(691) $(185) $(876) $(103) $36 $ (67)
Taxable Securities..................... 1,115 198 1,313 (915) (115) (1,030)
Nontaxable Securities (2).............. 504 (149) 355 625 (2) 623
Loans and Leases (3)................... 4,708 (2,891) 1,817 3,817 (784) 3,033
------------------------------------------------------------------------------
Total Interest Income..................... 5,636 (3,027) 2,609 3,424 (865) 2,559
----------------------------------------------------------------------------
Interest Expense:
Savings and Interest-bearing Demand.... 385 (232) 153 282 (161) 121
Time Deposits.......................... 571 (1,314) (743) 584 (59) 525
FHLB Advances and Other Borrowings..... 1,781 (37) 1,744 218 7 225
------------------------------------------------------------------------------
Total Interest Expense.................... 2,737 (1,583) 1,154 1,084 (213) 871
------------------------------------------------------------------------------
Net Interest Income....................... $2,899 $(1,444) $1,455 $2,340 $(652) $1,688
==============================================================================
<FN>
(1) The change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
(2) Change in interest income include the effect of tax equivalent adjustments
using a tax rate of 34 percent for all years presented.
(3) Interest income on loans includes loan fees of $877, $1,230, and $1,029 for 1999, 1998, and 1997, respectively.
</FN>
</TABLE>
<TABLE>
<CAPTION>
The following is a schedule of loans by major category for each reported period
(dollars in thousands):
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real Estate Loans Secured by 1-4
Family Residential Properties............. $356,001 $295,788 $252,828 $244,414 $278,931
Loans to Finance Agricultural Production,
Poultry and Other Loans to Farmers........ 64,054 62,736 60,421 64,415 69,000
Commercial and Industrial Loans.............. 161,711 136,249 121,444 123,101 113,215
Loans to Individuals for Household, Family
and Other Personal Expenditures........... 112,870 104,024 92,126 77,990 76,675
------- ------- ------ ------ ------
Total Loans............................... $694,636 $598,797 $526,819 $509,920 $537,821
======== ======== ======== ======== ========
</TABLE>
<PAGE>
Statistical Disclosures (continued)
The following table indicates the amounts of loans (excluding residential
mortgages on 1-4 family residences and consumer loans) outstanding as of
December 31, 1999 which, based on remaining scheduled repayments of principal,
are due in the periods indicated (dollars in thousands).
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------
Within After One After
One But Within Five
Year Five Years Years Total
---- ---------- ----- -----
<S> <C> <C> <C> <C>
Commercial, Agricultural and Poultry............. $64,023 $49,824 $111,918 $225,765
</TABLE>
Interest Sensitivity
Fixed Variable
Rate Rate
Loans maturing after one year.... $100,956 $60,786
The Provision for Loan Losses provides a reserve (the Allowance for Loan
Losses) to which loan losses are charged as those losses become identifiable.
Management determines the appropriate level of the Allowance for Loan Losses on
a quarterly basis through an independent review by the Bank's credit review
section done by employees who have no direct lending responsibilities. Through
this review, all commercial loans with outstanding balances in excess of $25,000
are analyzed with particular attention paid to those loans which are considered
by management to have an above-average level of risk. This analysis is evaluated
by Senior Management and serves as the basis for determining the adequacy of the
Allowance for Loan Losses. Through this review process a specific portion of the
reserve is allocated to impaired loans and to those loans which are considered
to represent significant exposure to risk, and estimated potential losses are
provided based on historic loan loss experience for consumer loans, residential
mortgage loans, and commercial loans not specifically reviewed. In addition, a
balance of the reserve is unallocated to provide an allowance for risk, such as
concentrations of credit to specific industry groups, which are difficult to
quantify in an absolute dollar amount.
Nonperforming loans comprise: (a) loans accounted for on a nonaccrual basis
("nonaccrual loans"); (b) loans contractually past due 90 days or more as to
interest or principal payments (but not included in the loans in (a) above)
("past due loans"); and (c) loans not included above which are "troubled debt
restructuring" as defined in Statement of Financial Standards No. 15 "FASB 15",
"Accounting by Debtors and Creditors for Troubled Debt Restructuring"
("restructured loans"). The following table presents information concerning the
aggregate amount of nonperforming assets (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual Loans................................. $7,237 $5,411 $3,568 $3,065 $2,478
Past Due Loans................................... 1,564 1,522 3,358 1,622 3,282
Restructured Loans............................... --- --- --- --- 122
--- --- --- --- ---
Total Nonperforming Loans.................... 8,801 6,933 6,926 4,687 5,882
Other Real Estate................................ 2,434 1,156 785 706 968
----- ----- --- --- ---
Total Nonperforming Assets................... $11,235 $8,089 $7,711 $5,393 $6,850
======= ====== ====== ====== ======
</TABLE>
Interest income recognized on nonperforming loans for 1999 was $428,000.
The gross interest income that would have been recognized in 1999 on
nonperforming loans if the loans had been current in accordance with their
original terms is $815,000. 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.
Accounting standards require recognition of loan impairment if a loan's
full principal or interest payments are not expected to be received. Loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. The total dollar amount of impaired
loans at December 31, 1999 was $2,230,000 and are included in the table above.
For additional detail on impaired loans, see Note 3 of the consolidated
financial statements included in the Shareholders' Report (Exhibit 13.4).
<PAGE>
Statistical Disclosures (continued)
At December 31, 1999, in addition to nonperforming and impaired loans
above, the Company had a total of $6,021,000 of loans on its commercial loan
watch list. Loans may be placed on the watch list as a result of delinquent
status, concern about the borrower's financial condition or the value of the
collateral securing the loan, substandard classification during regulatory
examinations or simply as a result of management's desire to monitor more
closely a borrower's financial condition and performance.
It is management's belief that loans classified for regulatory purposes as
loss, doubtful, substandard, or special mention that are not included in the
table and discussion above, do not represent or result from trends or
uncertainties which will have a material impact on future operating results,
liquidity or capital resources. At December 31, 1999 there were no material
credits not already disclosed as nonperforming, impaired or as watch list about
which management is aware of possible credit problems of borrowers which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms. This paragraph includes forward-looking
statements that are based on management's assumptions concerning future economic
and business conditions as they affect the local economy in general and the
Company's borrowers in particular, which economic and business assumptions are
inherently uncertain and subject to risk and may prove to be invalid. Readers
are also cautioned that management relies upon the truthfulness of statements
made by the borrowers, and that misrepresentation by borrowers is an inherent
risk of the activity of lending money that could cause these forward-looking
statements to be inaccurate. Actual results may differ materially from those
expressed or implied by the foregoing forward-looking statements due to the
above risks and other factors.
Summary of Loan Loss Experience
The following table summarizes changes in the allowance for loan losses
arising from loans charged-off and recoveries on loans previously charged-off,
by loan category, and additions to the allowance which have been charged to
expense (dollars in thousands).
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance of allowance for possible
losses at beginning of period...................... $8,323 $8,574 $8,040 $8,430 $8,142
Addition of Affiliate Banks........................... 356 80 --- --- ---
Loans charged-off:
Real Estate Loans Secured by 1-4 Family
Residential Properties......................... 815 627 122 67 236
Loans to Finance Agricultural Production, Poultry
and Other Loans to Farmers......................... 222 --- --- 286 ---
Commercial and Industrial Loans....................... 184 342 401 481 107
Loans to Individuals for Household, Family
and Other Personal Expenditures.................... 784 1,075 543 321 281
--- ----- --- --- ---
Total Loans charged-off............................ 2,005 2,044 1,066 1,155 624
----- ----- ----- ----- ---
Recoveries of previously charged-off Loans:
Real Estate Loans Secured by 1-4 Family
Residential Properties......................... 100 76 1 27 6
Loans to Finance Agricultural Production, Poultry
and Other Loans to Farmers......................... 135 19 66 125 560
Commercial and Industrial Loans....................... 37 73 665 126 66
Loans to Individuals for Household, Family
and Other Personal Expenditures.................... 204 207 95 59 83
--- --- -- -- --
Total Recoveries................................... 476 375 827 337 715
--- --- --- --- ---
Net Loans recovered / (charged-off).................. (1,529) (1,669) (239) (818) 91
------ ------ ---- ---- --
Additions to allowance charged to expense............. 1,718 1,338 773 428 197
----- ----- --- --- ---
Balance at end of period.............................. $8,868 $8,323 $8,574 $8,040 $8,430
====== ====== ====== ====== ======
Ratio of net recoveries / (charge-offs) during
the period to average loans outstanding.......... (0.24)% (0.28)% (0.04)% (0.15)% 0.02%
===== ===== ===== ==== ====
</TABLE>
<PAGE>
Statistical Disclosures (continued)
<TABLE>
<CAPTION>
The following table indicates the breakdown of the allowance for loan losses
for the periods indicated (dollars in thousands):
December 31, December 31, December 31,
1999 1998 1997
---- ---- ----
Ratio of Ratio of Ratio of
Loans to Loans to Loans to
Total Total Total
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Residential Real Estate.............. $1,888 51.25% $1,161 49.40% $893 47.99%
Agricultural Loans................... 615 9.22% 902 10.48% 1,001 11.47%
Commercial and
Industrial Loans.................. 3,963 23.28% 2,878 22.75% 3,084 23.05%
Loans to Individuals................. 871 16.25% 1,000 17.37% 1,039 17.49%
Unallocated.......................... 1,531 N/A 2,382 N/A 2,557 N/A
----- ----- -----
Totals............................... $8,868 100.00% $8,323 100.00% $8,574 100.00%
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
---- ----
Ratio of Ratio of
Loans to Loans to
Total Total
Allowance Loans Allowance Loans
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Residential Real Estate.............. $631 47.94% $482 51.86%
Agricultural Loans................... 1,322 12.63% 2,693 12.83%
Commercial and
Industrial Loans................. 2,997 24.14% 2,722 21.05%
Loans to Individuals................. 795 15.29% 788 14.26%
Unallocated.......................... 2,295 N/A 1,745 N/A
----- -----
Totals ............................. $8,040 100.00% $8,430 100.00%
====== ======
</TABLE>
Return on Equity and Assets
<TABLE>
<CAPTION>
The ratio of net income to average shareholders' equity and to average total
assets, and certain other ratios, are as follows:
Year Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Percentage of Net Income to:
Average Shareholders' Equity..................... 9.61% 9.67% 8.93%
Average Total Assets............................. .94% .99% .88%
Percentage of Dividends
Declared per Common Share
to Net Income per Common Share (1)............... 51.04% 46.24% 44.30%
Percentage of Average Shareholders' Equity to
Average Total Assets............................. 9.77% 10.21% 9.83%
<FN>
(1) Based on historical dividends declared by German American Bancorp without
restatement for pooling.
</FN>
</TABLE>
<PAGE>
Statistical Disclosures (continued)
<TABLE>
<CAPTION>
The average amount of deposits is summarized for the periods indicated in
the following table (dollars in thousands):
December 31,
1999 1998 1997
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Demand Deposits
Non-interest Bearing............... $70,665 --- $58,267 --- $55,483 ---
Interest Bearing................... 80,822 1.90% 69,492 1.84% 69,491 2.23%
Savings Deposits....................... 104,303 3.13% 101,025 3.33% 90,792 3.27%
Time Deposits.......................... 435,922 5.29% 425,534 5.59% 415,093 5.61%
------- ------- -------
Totals............................. $691,712 4.03% $654,318 4.35% $630,859 4.41%
======== ======== ========
</TABLE>
Maturities of time certificates of deposit of $100,000 or more are summarized
as follows:
December 31,
1999
3 months or less............................... $53,410
Over 3 through 6 months........................ 12,419
Over 6 through 12 months....................... 11,453
Over 12 months................................. 26,390
------
Total....................................... $103,672
========
<PAGE>
Forward-Looking Statements
This Report contains statements relating to 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 Annual 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.
Item 2. Properties.
- ------------------
The Company conducts its operations from the main office building of
German American Bank at 711 Main Street, in Jasper, Indiana. The main office
building contains approximately 23,600 square feet of office space. The Banks
and other subsidiaries conduct their operations from 29 other locations in
Southwest Indiana.
Item 3. Legal Proceedings.
- -------------------------
There are no material pending legal proceedings, other than routine
litigation incidental to the business of the Company's subsidiary banks, to
which the Company or any of its subsidiaries is a party or of which any of their
property is the subject.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
There were no matters submitted during the fourth quarter of 1999 to a
vote of security holders, by solicitation of proxies or otherwise.
<PAGE>
<TABLE>
<CAPTION>
Special Item. Executive Officers of the Registrant.
- ------------- -------------------------------------
<S> <C> <C>
NAME AGE TITLE AND FIVE YEAR HISTORY
George W. Astrike (64) Chairman of the Board for the Company since January 1, 1999; Chairman and Chief
Executive Officer of the Company from 1995 through 1998; Chairman of German American
Bank since 1995; Chairman and President of German American Bank prior thereto.
Director of Citizens State Bank and First American Bank from date of Acquisition
through April 1999. Director of all other subsidiaries since acquisition by the
Company.
Mark A. Schroeder (46) President and Chief Executive Officer since January 1, 1999; President and Chief
Operating Officer of the Company from 1995 through 1998; Vice President / Chief
Operating Officer prior thereto. Director of each of the other subsidiaries since
acquisition by the Company.
Clay W. Ewing (44) Executive Vice President - Retail Banking of German American Bancorp since May, 1999;
Director of First American Bank since May, 1999; President and Chief Executive Officer
of First State Bank since 1995. Director of First State Bank since 1994.
Stan J. Ruhe (48) Executive Vice President - Credit Administration of the Company since 1995; Director of
Citizens State Bank since May, 1999; Executive Vice President of German American Bank
since 1995; Senior Vice President - Credit Administration prior thereto.
Richard E. Trent (41) Senior Vice President and Chief Financial Officer since April 1999; Vice President and
Chief Financial Officer of the Company since December, 1997; Vice President, Budgets &
Financial Analysis of CNB Bancshares from January, 1997; Manager of Finance and
Planning, Wells Fargo Bank from August, 1996; Various financial officer capacities
within American General Finance, Inc. and subsidiaries prior thereto.
<FN>
Messrs. Schroeder, Ruhe and Astrike have been associated with the Company in various capacities since 1972, 1982, and 1983,
respectively.
There are no family relationships between any of the officers of the
Corporation. All officers are elected for a term of one year.
</FN>
</TABLE>
<PAGE>
PART II
The information in Part II of this report is incorporated by reference to
the indicated sections of the Registrant's annual report to shareholders for the
fiscal year ended December 31, 1999 ("Shareholders' Report").
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------------------------------------------------------------------------------
See "Market and Dividend Information" on page 37 of the Shareholders'
Report which is filed as Exhibit 13.1 to this report and is incorporated herein
by reference. "Market and Dividend Information" that is incorporated by
reference herein contains statements relating to future results of the Company
that are considered "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including dividend policy.
Actual results may differ materially from those expressed or implied therein as
a result of certain risks and uncertainties, including those risks and
uncertainties expressed in "Market and Dividend Information," and those risks
and uncertainties that are described in Item 1 of this report, "Business," under
the caption "Forward-Looking Statements," which description is incorporated
herein by reference.
Item 6. Selected Financial Data.
- ---------------------------------
See "Five Year Summary of Consolidated Financial Statements and Related
Statistics" on page 1 of the Shareholders' Report which is filed as Exhibit 13.2
to this report and is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
- --------------------------------------------------------------------------------
See "Management's Discussion and Analysis" on pages 2 through 13 of the
Shareholders' Report which is filed as Exhibit 13.3 to this report and is
incorporated herein by reference.
"Management's Discusision and Analysis" that is incorporated by reference
herein contains statements relating to 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 of loan losses; simulation of changes in
interest rates; litigation results; and dividend policy. Actual results may
differ materially from those expressed or implied therein as a result of certain
risks and uncertainties, including those risks and uncertainties expressed in
"Management's Discussion and Analysis," and those risks and uncertainties that
are described in Item 1 of this report, "Business," under the caption
"Forward-Looking Statements," which description is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ---------------------------------------------------------------------
The Company's exposure to market risk is reviewed on a regular basis by
the Asset/Liability Committees and Boards of Directors of the holding company
and its affiliate banks. Primary market risks which impact the Company's
operations are 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 explained in Note 9 to the consolidated financial statements in the
Company's Shareholders' Report. 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. Further detail is provided in the sections entitled SOURCES OF FUNDS and
USES OF FUNDS contained in Management's Discussion and Analysis in the Company's
Shareholders' Report, which is filed as Exhibit 13.3 to this report and is
incorporated by reference herein.
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. Management's approach to monitoring and mitigating these
risks is explained in the LIQUIDITY AND INTEREST RATE RISK MANAGEMENT section of
Management's Discussion and Analysis in the Company's Shareholders' Report.
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.
<PAGE>
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 above discussion, and the portions of "Management's Discusision and
Analysis" that are incorporated by reference into the above discussion, contains
statements relating to 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,
simulation of changes in interest rates. Actual results may differ materially
from those expressed or implied therein as a result of certain risks and
uncertainties, including those risks and uncertainties expressed above, those
that are described in "Management's Discussion and Analysis," and those that are
described in Item 1 of this report, "Business," under the caption
"Forward-Looking Statements," which description is incorporated herein by
reference.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
The financial statements of the Company and related notes on pages 14
through 35 of the Shareholders' Report and the Independent Auditors' Report
thereon on page 36 of the Shareholders' Report which are filed as Exhibit 13.4
to this report, are incorporated herein by reference.
The financial statements of the Company and related notes that are
incorporated by reference herein may contain statements relating to 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 of loan losses;
simulation of changes in interest rates; litigation results; and dividend
policy. Actual results may differ materially from those expressed or implied
therein as a result of certain risks and uncertainties, including those risks
and uncertainties expressed in such financial statements and those risks and
uncertainties that are described in Item 1 of this report, "Business," under the
caption "Forward-Looking Statements," which description is incorporated herein
by reference.
The Interim Financial Data on page 6 of the Shareholders' Report, which
is included in the "Management's Discussion and Analysis" filed as Exhibit 13.3
to this report, is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not Applicable.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------------------------------------------------------------
Information relating to Directors of the Corporation will be included
under the caption "Election of Directors" in the Company's Proxy Statement for
the Annual Meeting of Shareholders to be held on April 27, 2000 which will be
filed with the Commission within 120 days of the end of the fiscal year covered
by this Report (the "2000 Proxy Statement"), which section is incorporated
herein by reference in partial answer to this Item.
Information relating to Executive Officers of the Corporation is included
under the caption "Executive Officers of the Registrant" under Part I of this
Report on Form 10-K, and is incorporated herein by reference.
Item 11. Executive Compensation.
- ---------------------------------
Information relating to compensation of the Corporation's Executive
Officers and Directors will be included under the captions "Executive
Compensation" and "Election of Directors -- Compensation of Directors" in the
2000 Proxy Statement of the Corporation, which sections are incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
Information relating to security ownership of certain beneficial owners
and management of the Corporation will be included under the captions "Election
of Directors" and "Principal Owners of Common Shares" of the 2000 Proxy
Statement of the Corporation, which sections are incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
Information responsive to this Item 13 will be included under the
captions "Executive Compensation - Certain Business Relationships and
Transactions" and "Executive Compensation - Compensation Committee Interlocks
and Insider Participation" of the 2000 Proxy Statement of the Corporation, which
sections are incorporated herein by reference.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ---------------------------------------------------------------------------
a) The following Consolidated Financial Statements of the Corporation, and the
Auditors' Report therein, included on pages 14 through 36 of the Shareholders'
Report, are incorporated into Item 8 of this report by reference.
Location in
Shareholders' Report
--------------------
1. Financial Statements
German American Bancorp and Subsidiaries
Consolidated Balance Sheets at December 31,
1999 and December 31, 1998 Page 14
Consolidated Statements of Income, years
ended December 31, 1999, 1998, and 1997 Page 15
Consolidated Statements of Cash Flows, years
ended December 31, 1999, 1998, and 1997 Page 16
Consolidated Statements of Changes in
Shareholders' Equity, years ended
December 31, 1999, 1998, and 1997 Page 17
Notes to the Consolidated Financial
Statements Pages 18 - 35
Independent Auditors' Report Page 36
2. Other financial statements and schedules are omitted because they are
not required or because the required information is included in the
consolidated financial statements or related notes.
b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1999.
c) Exhibits:
The Exhibits described in the Exhibit List immediately following the
"Signatures" pages of this report (which are incorporated herein by reference)
are hereby filed as part of this report.
<PAGE>
Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
(Registrant)
Date: March 28 , 2000 By/s/Mark A. Schroeder
---------------- ----------------------
Mark A. Schroeder, President and Director
Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 28 , 2000 By/s/Mark A. Schroeder
---------------- ----------------------
Mark A. Schroeder, President and Director
(Chief Executive Officer)
Date: March 28 , 2000 By/s/George W. Astrike
---------------- ----------------------
George W. Astrike, Director
Date: March 28 , 2000 By/s/David G. Buehler
---------------- ---------------------
David G. Buehler, Director
Date:
---------------- --------------------
David B. Graham, Director
Date:
---------------- -----------------------
William R. Hoffman, Director
Date:
---------------- --------------------
Michael B. Lett, Director
Date:
---------------- -----------------------
C. James McCormick, Director
Date: March 28 , 2000 By/s/Gene C. Mehne
---------------- ------------------
Gene C. Mehne, Director
Date: March 28 , 2000 By/s/Robert L. Ruckriegel
---------------- -------------------------
Robert L. Ruckriegel, Director
Date: March 28 , 2000 By/s/Larry J. Seger
---------------- -------------------
Larry J. Seger, Director
Date: March 28 , 2000 By/s/Joseph F. Steurer
---------------- ----------------------
Joseph F. Steurer, Director
Date:
---------------- ------------------
C.L. Thompson, Director
Date:
---------------- ----------------------
Michael J. Voyles, Director
Date: March 28 , 2000 By/s/Richard E. Trent
---------------- ---------------------
Richard E. Trent, Senior Vice President
(Chief Financial Officer and
Principal Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Executive
Compensation
Plans and Exhibit
Arrangements* Number Exhibit List
- ------------- ------ ------------
2.1 Agreement of Merger dated December 8, 1997, among the Registrant, CSB Bancorp
and the Citizens State Bank of Petersburg, as amended, is incorporated by
reference from Exhibit 2.1 to the Registrant's Registration Statement on Form
S-4 filed February 26, 1998.
2.2 Agreement of Merger dated January 30, 1998, among the Registrant, FSB
Corporation and the FSB Bank of Francisco, as amended, is incorporated by
reference from Exhibit 2.2 to the Registrant's Registration Statement on Form
S-4 filed February 26, 1998.
2.3 Agreement and Plan of Reorganization between the Registrant and 1ST BANCORP
dated August 6, 1998, is incorporated by reference from Exhibit 2 to the
Registrant's Registration Statement on Form S-4 filed October 14, 1998.
3.1 Restated Articles of Incorporation of the Registrant as amended April 23, 1998
are Incorporated by reference to Exhibit 3 to Registrant''s Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998.
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 No long-term debt instrument issued by the Registrant exceeds 10% of
consolidated total assets. In accordance with paragraph 4 (iii) of Item 601(b)
of Regulation S-K, the Registrant will furnish the Securities and Exchange
Commission upon request copes of long-term debt instruments and related
agreements.
X 10.1 The Registrant's 1992 Stock Option Plan, as ammended, is incorporated by
reference from Exhibit 10.1 to the Registrant's Registration Statement on Form
S-4 filed October 14, 1998.
X 10.2 Schedule identifying material terms of Incentive Stock Options (including
replacement options) granted to the Registrant's executive officers under the
Registrant's 1992 Stock Option Plan.
X 10.3 Executive Deferred Compensation Agreement dated December 1, 1992, between The
German American Bank and George W. Astrike, is incorporated herein by reference
from Exhibit 10.3 to the Registrant's Registration Statement on Form S-4 filed
January 21, 1993.
X 10.4 Director Deferred Compensation Agreement between The German American Bank and
certain of its Directors, is incorporated herein by reference from Exhibit 10.4
to the Registrant's Registration Statement on Form S-4 filed January 21, 1993
(The Agreement entered into by George W. Astrike, a copy of which was filed as
Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 filed
January 21, 1993, is substantially identical to the Agreements entered into by
the other Directors.) The schedule following Exhibit 10.4 lists the Agreements
with the other Directors and sets forth the material detail in which such
Agreements differ from the Agreement filed as Exhibit 10.4.
<PAGE>
Executive
Compensation
Plans and Exhibit
Arrangements* Number Exhibit List
- ------------- ------ ------------
X 10.5 Stock Option Agreement between the Registrant and George W. Astrike dated
September 2, 1998 is incorporated by reference or from Exhibit 10.9 to the
Registrant's Registration Statement on Form S-4 filed October 14, 1998.
X 10.6 Non-Qualified Index Executive Supplemental Agreement dated September 1, 1998
between the Registant and George W. Astrike is incorporated by reference from
Exhibit 10.10 to the Registrant's 1998 form 10-K filed March 26, 1999.
X 10.7 Split Dollar Life Insurance Plan Agreement dated November 5, 1998 between the
Registrant and George W. Astrike is incorporated by reference from Exhibit
10.11 to the Registrant's 1998 form 10-K filed March 26, 1999.
X 10.8 Consulting Agreement dated August 21, 1998 between the Registrant and George W.
Astrike.
13.1 Market and Dividend Information (page 37) of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1999.
13.2 Five Year Summary of Consolidated Financial Statements and Related Statistics
(page 1) of the Registrant's Annual Report to Shareholders for the year ended
December 31, 1999.
13.3 Management's Discussion and Analysis of Financial Condition and Results of
Operations (pages 2 through 13) of the Registrant's Annual Report to
Shareholders for the year ended December 31, 1999.
13.4 Consolidated financial statements and related notes (pages 14 through 35),
Auditor's Report (page 36) of the Registrant's Annual Report to Shareholders
for the year ended December 31, 1999.
21 Subsidiaries of the Registrant.
23.1 Consent of Crowe, Chizek and Company LLP
23.2 Consent of Gaither, Rutherford & Co., LLP
23.3 Consent of KPMG LLP
27 Financial Data Schedule.
99.1 Opinion of Gaither, Rutherford & Co., LLP
99.2 Opinion of KPMG LLP
</TABLE>
<TABLE>
<CAPTION>
Schedule Identifying Material
Terms of Options Granted To
German American Bancorp Executive Officers
Option
Type of George Mark Stan Urban James Price
Option Date Astrike Schroeder Ruhe Giesler Essany per Share
- ------ ---- ------- --------- ---- ------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Original Grant (2) 4/20/93 22,973.07 19,144.22 11,486.53 5,743.27 5,743.27 $8.49
Replacement (3) 12/30/94 2,761.87 2,552.56 ------- ------- ------- 12.68
Replacement (3) 7/10/95 4,816.69 2,552.56 ------- 765.77 367.57 12.22
Replacement (3) 1/9/96 7,147.18 ------- 1,767.35 756.04 765.77 12.85
Replacement (3) 7/15/96 ------- 2,187.91 1,373.52 685.55 875.16 14.19
Replacement (3) 1/16/97 6,197.92 3,864.15 2,613.92 1,782.74 1,655.40 16.13
Replacement (3) 1/28/97 5,288.03 ------- ------- ------- ------- 16.09
Replacement (3) 8/1/97 ------- 2,634.75 1,106.69 553.34 553.34 17.60
Replacement (3) 5/1/98 ------- ------- ------- ------- 1,273.39 28.62
Replacement (3) 8/3/98 ------- ------- 337.37 367.13 ------- 26.55
Additional Grant (4) 9/2/98 63,945.00 ------- ------- ------- ------- 22.22
Replacement (3) 5/4/99 ------- 1,869.00 603.75 ------- ------- 17.38
<FN>
(1) Number of options and per share exercise price have been retroactively adjusted for subsequent stock splits and
dividends.
(2) These options under the German American Bancorp 1992 Stock Option Plan (the "Plan") were made on April 20, 1993.
These options expire ten years after the grant date. The options granted to Mr. Astrike became exercisable with
respect to one-half of the shares immediately upon grant and with respect to the other one-half of the shares on
the first anniversary of the grant date. The options granted to the other executive officers became exercisable
with respect to twenty percent of the shares on each of the anniversary dates beginning on the first anniversary of
the date of grant.
(3) The Stock Option Plan provides that if the optionee tenders Common Shares of the Corporation already owned by the
optionee as payment, in whole or part, of the exercise price for the shares the optionee has elected to purchase
under the option, then the Corporation is obligated to use its best efforts to issue a replacement option of the
same type (incentive or non-qualified option). With the same expiration date as the option that was exercised, and
covering a number of Common Shares equal to the number of Common Shares tendered. Replacement options may not be
exercised until one year after the date of grant.
(4) These options were granted to Mr. Astrike on September 2, 1998. These non-qualified options expire in twenty years
and are immediately exercisable.
</FN>
</TABLE>
Exhibit 10.8
AGREEMENT FOR CONSULTING SERVICES
THIS AGREEMENT, made and entered into this 21st day of August, 1998, by
and between German American Bancorp, a bank holding company incorporated
pursuant to the laws of the State of Indiana, (hereinafter "German American")
and George W. Astrike (hereafter "Astrike").
WITNESSETH:
WHEREAS, it is the consensus of the Board of Directors of German
American that Astrike's services in the past have been of exceptional merit and
have constituted an invaluable contribution to the growth and profitability of
German American, and have brought it to its present status of operating
efficiency and its present position of exceptional stature in the community;
and,
WHEREAS, the experience of Astrike, his knowledge of the affairs of
German American, and his reputation and contacts in the industry are so valuable
that assurance of his continued services is essential for German American's
future growth and profitability, and it is in the best interest of German
American to arrange terms of continued service for Astrike so as to reasonably
assure his remaining availability to German American as Chairman of the Board of
Directors and as a Consultant; and,
WHEREAS, Astrike is willing to continue to provide services to German
American in accordance with the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of services performed in the past and
to be performed in the future as well as of the mutual promises and covenants
herein contained, it is agreed as follows:
I. For the period commencing with the date hereof and ending on December
31, 1998, Astrike shall be, and remain, Chairman of the Board and Chief
Executive Officer of German American.
Astrike shall be compensated for the services during the period
described in Paragraph I hereinabove in an amount not less than, and in
the same manner as he is being compensated on the date hereof,
including all existing fringe benefits offered by German American and
all fringe benefits offered by German American through December 31,
1998 to the executive officers of German American.
II. For the period commencing on January 1, 1999 and ending on the last day
of the month in which the 1999 Annual Meeting of German American is
held, Astrike shall be and remain as the Chairman of the Board and a
full-time employee of German American concentrating on bank
acquisitions, real estate development and the transition of the new
Chief Executive Officer.
Astrike shall be compensated for the services during the period
described in Paragraph II hereinabove in an amount not less than, and
in the same manner as he is being compensated on the date hereof,
including all existing fringe benefits offered by German American and
all fringe benefits offered by German American through the date of the
1999 Annual Meeting to the executive officers of German American.
1
<PAGE>
III. For the period commencing on the 1st of the month immediately following
the 1999 Annual Meeting of German American and ending September 1, 2003
(Consulting Period), Astrike shall be a Consultant to German American.
A. From the beginning of the Consulting Period until the Annual
Meeting in 2001, Astrike agrees to act as Chairman of the
Board of German American.
B. During that portion of the Consulting Period ending September
1, 2000, (the "Prime Period") Astrike shall provide services
during a maximum of ten (10) days per month to German
American. For the remainder of the Consulting Period, Astrike
will provide services during a maximum of three (3) days per
month. During these days of service, he will be available at
reasonable times and places as may be mutually agreed upon to
provide services to the Senior Management and Board of
Directors of German American.
C. During the Prime Period of the Consulting Period, German
American shall pay Astrike Twenty Thousand Two Hundred Fifty
Dollars ($20,250.00) per month. Following the Prime Period and
for the remainder of the Consulting Period, German American
will pay Astrike One Thousand Two Hundred and Fifty Dollars
($1,250.00) per month. Payments made to Astrike under the
Consulting Agreement will be subject to withholding for
applicable Federal, State and Local income taxes and will be
reportable on form W2.
D. Astrike will keep himself informed concerning the affairs of
German American by reference to reports, which German American
will supply, and such other means as may be agreed upon.
Astrike shall not be required to travel from whatever place he
may then be living or staying for the purposes of such
consultation unless all expenses incurred by him shall be paid
by German American.
E. During the Consulting Period, Astrike shall not become the
owner of, nor engage, directly or indirectly, in any business
which is substantially similar to the business of German
American either as a partner, greater than a 5% stockholder,
officer, director, employee or otherwise, within an area of
one hundred (100) miles from German American's principal
location, unless German American has first consented, in
writing, thereto.
F. German American shall not merge or consolidate into or with
another corporation, or reorganize, or sell substantially all
of its assets to another corporation, firm, or person unless
it agrees to assume and discharge the obligations of German
American under this Agreement.
2
<PAGE>
IV. Within thirty (30) days of the date hereof, German American shall
implement the following programs by written agreement for the benefit
of Astrike, which shall be in addition to any existing retirement plan
that Astrike is participating in :
A. Non-Statutory (Non-Qualified) Stock Option Plan that grants
Astrike the right to purchase no fewer than 58,000 shares of
German American for a price equal to the current fair market
value as of the date of grant.
B. BENMARK Non-Qualified Deferred Contribution Index Executive
Supplemental Retirement Plan with a single premium of no less
that $1,305,000 providing for lifetime annual supplemental
benefit payments commencing September 1, 2003 in substantially
the form and substance as illustrated on the attached
indicative Participant Plan Summary. Said benefit payments
shall be based upon an accumulated cash surrender value equal
to the single premium amount plus accumulated premium earnings
which shall be calculated annually utilizing the weighted
average portfolio yield on all company owned life insurance
policies in effect for the full calendar year. The amount of
the lifetime annual supplemental benefit payments shall be
computed by multiplying the accumulated cash surrender value
by a benefit crediting rate equal to the weighted average
portfolio yield on all company owned life insurance policies
in effect for the full calendar year less an after-tax
opportunity rate based upon a rate of interest equal to the
average annual two-year treasury instrument plus 37.5 basis
points.
C. BENMARK Endorsement Split Dollar Life Insurance Plan that will
provide Astrike with a life insurance benefit of at least $1
million on his death; payable to Astrike's designated
beneficiary(ies).
V. This Agreement shall be binding upon and inure to the benefit of
Astrike and German American and any successor organization which shall
succeed to substantially all of its assets and business. During the
lifetime of Astrike, this Agreement may be amended or revoked at any
time, in whole or in part, by mutual written agreement of the parties.
VI. Any notice, consent or demand required or permitted to be given under
the provisions of this Agreement shall be in writing, and shall be
signed by the party giving or making the same. If such notice, consent
or demand is mailed to a party hereto, it shall be sent by United
States certified mail, postage prepaid, addressed to such party's last
known address as shown on the records of German American. The date of
such mailing shall be deemed the date of notice, consent or demand.
3
<PAGE>
VII. This Agreement shall be governed by the laws of the State of Indiana.
This Agreement is solely between German American and Astrike and shall
not be assignable by either, but shall be binding upon the designated
recipients, beneficiaries, heirs, executors and administrators of the
Consultant and upon the successors of German American.
GERMAN AMERICAN BANCORP
ATTEST
__________________________ BY THE HUMAN RESOURCE COMMITTEE
Mark A. Schroeder, President OF THE BOARD OF DIRECTORS
_________________________Chairman
--------------------------
--------------------------
--------------------------
--------------------------
WITNESS
- -------------------------- ------------------------------
George W. Astrike
<TABLE>
<CAPTION>
Participant Plan Summary
German American Bancorp Plan begins in September
George W. Astrike Premium: $ 1,305,000 Single Premium
October 20, 1999
Current Age: 63
Retirement Age: 68
Age at Death: 85
5.88%
Bank's After-Tax Benefit Split FICA and
Policy Portion of Annual Annual Index Annual From Index Total Dollar Tax On
Surrender Death Policy Opportunity Liability Index Pre-Retire Post-Retire Annual Death Economic
Value Benefit Income Cost Balance Expense Index Accrual Benefit Benefit Benefit Value
----- ------- ------ ---- ------- ------- ------------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1 63 1,317,716 2,781,743 12,716 (15,447) 1,000,000 924
1999 2 64 1,375,968 2,812,944 58,252 (46,888) 14,063 14,063 1,000,000 1,257
2000 3 65 1,437,761 2,625,441 61,794 (48,553) 35,630 21,568 1,000,000 1,394
2001 4 66 1,507,216 1,995,785 69,454 (50,277) 66,868 31,238 1,000,000 1,825
2002 5 67 1,580,213 2,080,078 72,998 (52,063) 100,970 34,102 1,000,000 2,136
2003 6 68 1,655,824 2,167,211 75,611 (53,911) 80,776 35,347 20,194 35,347 55,541 1,000,000 1,887
2004 7 69 1,733,200 2,257,209 77,377 (57,017) 60,582 33,165 20,194 33,165 53,359 1,000,000 2,104
2005 8 70 1,813,786 2,350,031 80,585 (60,185) 40,388 33,230 20,194 33,230 53,424 1,000,000 2,296
2006 9 71 1,898,153 2,445,626 84,367 (63,468) 20,194 34,043 20,194 34,043 54,237 1,000,000 2,580
2007 10 72 1,985,560 2,543,878 87,407 (66,885) 33,429 20,194 33,429 53,623 1,000,000 2,846
2008 11 73 2,078,651 2,646,438 93,091 (70,410) 36,946 36,946 36,946 1,000,000 3,122
2009 12 74 2,184,569 2,759,012 105,918 (73,702) 52,477 52,477 52,477 1,000,000 3,497
2010 13 75 2,295,851 2,879,529 111,282 (77,445) 55,118 55,118 55,118 1,000,000 3,917
2011 14 76 2,411,604 3,003,892 115,753 (81,377) 55,997 55,997 55,997 1,000,000 4,386
2012 15 77 2,532,265 3,131,976 120,661 (85,467) 57,328 57,328 57,328 1,000,000 4,911
2013 16 78 2,656,418 3,263,636 124,153 (89,732) 56,070 56,070 56,070 1,000,000 5,499
2014 17 79 2,785,916 3,398,895 129,498 (94,120) 57,628 57,628 57,628 1,000,000 6,160
2015 18 80 2,919,803 3,537,640 133,887 (98,698) 57,321 57,321 57,321 1,000,000 7,462
2016 19 81 3,058,133 3,679,975 138,330 (103,432) 56,846 56,846 56,846 1,000,000 12,107
2017 20 82 3,200,941 3,825,927 142,808 (108,324) 56,172 56,172 56,172 1,000,000 14,308
2018 21 83 3,350,315 3,977,896 149,375 (113,375) 58,641 58,641 58,641 1,000,000 16,776
2019 22 84 3,512,127 4,142,351 161,811 (118,658) 70,293 70,293 70,293 1,000,000 19,614
<FN>
Benmark Projected values are based primarily on current non-guaranteed elements and assumptions.
(See Introduction Section for more details)
</FN>
</TABLE>
- -------------------------------------------------------------------------------
Market and Dividend Information for 37
German American Bancorp Common Stock
- -------------------------------------------------------------------------------
MARKET AND DIVIDEND INFORMATION
German American Bancorp's stock is traded on NASDAQ's National Market System
under the symbol GABC. The quarterly high and low closing prices for the
Company's common stock as reported by NASDAQ and quarterly cash dividends
declared and paid are set forth in the table below. Per share closing prices are
retroactively restated for all stock dividends. Per share cash dividends
declared and paid on the Company's common stock have not been restated for
mergers accounted for as poolings of interests.
<TABLE>
1999 1998
---- ----
Cash Cash
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter $22.38 $17.25 $0.125 $24.94 $21.32 $0.110
Third Quarter $22.38 $16.31 $0.125 $27.44 $21.32 $0.110
Second Quarter $18.33 $16.31 $0.125 $29.02 $26.98 $0.110
First Quarter $21.67 $17.62 $0.110 $29.25 $26.30 $0.100
------ ------
$0.485 $0.430
====== ======
</TABLE>
The Common Stock was held of record by approximately 2,920 shareholders at
March 1, 2000.
Cash dividends paid to the Company's shareholders are primarily funded 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 cash and stock dividends. 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.
<TABLE>
<S> <C> <C> <C>
Transfer Agent: UMB Bank, N.A. Regional J.J.B. Hilliard, W.L. Lyons, Inc.
Securities Transfer Division Market Makers: Louisville, Kentucky
P.O. Box 410064 Contact: George Morrin
Kansas City, MO 64141-0064 (800) 444-1854
Contact: Shareholder Relations
(800) 884-4225 NatCity Investments, Inc
Indianapolis, Indiana
Contact: Eric Wheeler
Shareholder (800) 321-7442
Information and Terri A. Eckerle
Corporate Office: German American Bancorp McDonald Investments, Inc.
P. O. Box 810 Evansville, Indiana
Jasper, Indiana 47547-0810 Contact: Kent Gourley
(812) 482-1314 800) 513-0844
</TABLE>
- -------------------------------------------------------------------------------
Five Year Summary of Consolidated Financial Statements and Related 1
Statistics Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
The following selected data has been taken from the Company's consolidated
financial statements. It should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
<TABLE>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Summary of Operations:
Interest and Fees on Loans............. $53,868 $51,980 $49,160 $48,316 $45,493
Interest on Investments................ 14,061 13,380 14,065 13,572 13,448
------ ------ ------ ------ ------
Total Interest Income.............. 67,929 65,360 63,225 61,888 58,941
------ ------ ------ ------ ------
Interest on Deposits................... 27,860 28,450 27,804 28,037 26,626
Interest on Borrowings................. 7,899 6,155 5,930 5,965 5,240
----- ----- ----- ----- -----
Total Interest Expense............. 35,759 34,605 33,734 34,002 31,866
------ ------ ------ ------ ------
Net Interest Income.................... 32,170 30,755 29,491 27,886 27,075
Provision for Loan Losses.............. 1,718 1,338 773 428 197
----- ----- --- --- ---
Net Interest Income after
Provision for Loan Losses............ 30,452 29,417 28,718 27,458 26,878
Noninterest Income..................... 6,251 4,996 5,698 12,869 (1) 7,418
Noninterest Expenses................... 24,832 22,318 24,278 (1) 22,714 22,205
------ ------ ------ ------ ------
Income Before Income Taxes............. 11,871 12,095 10,138 17,613 12,091
Income Tax Expense..................... 3,049 3,525 2,868 6,230 4,101
----- ----- ----- ----- -----
Net Income............................. $8,822 $8,570 $7,270 $11,383 $7,990
===================================================================================================================================
===================================================================================================================================
Year-end Balances:
Total Assets........................... $992,635 $896,925 $846,332 $795,555 $839,237
Total Loans, Net....................... 685,424 589,765 516,747 500,132 527,431
Total Deposits......................... 698,261 665,113 645,349 624,401 664,134
Total Long-term Debt................... 122,902 124,381 100,296 101,885 80,387
Total Shareholders' Equity............. 87,487 91,276 84,412 79,389 70,717
===================================================================================================================================
===================================================================================================================================
Per Share Data (2):
Net Income............................. $0.96 $0.93 $0.79 $1.24 $0.87
Net Income - as adjusted (3) .......... 0.96 0.93 0.88 0.76 0.87
Cash Dividends (4)..................... 0.49 0.43 0.35 0.28 0.25
===================================================================================================================================
===================================================================================================================================
Other Data at Year-end:
Number of Shareholders................. 2,918 2,920 2,709 2,622 2,564
Number of Employees.................... 392 364 327 394 384
Weighted Average Number of Shares (2).. 9,186,474 9,197,274 9,189,349 9,180,938 9,177,367
<FN>
(1) In 1997, 1ST BANCORP incurred a $1.3 million one-time special SAIF assessment. In 1996, 1ST BANCORP realized a gain of $7.3
million on the sale of branch offices.
(2) Share and Per share data has been retroactively adjusted to give effect for stock dividends and splits, and excludes the
dilutive effect of stock options.
(3) Excludes $1.3 million SAIF assessment in 1997 and $7.3 million gain on sale in 1996. See Management's Discussion and Analysis
for further information.
(4) Cash dividends represent historical dividends declared per share without retroactive restatement for poolings.
</FN>
</TABLE>
- -------------------------------------------------------------------------------
2 Management's Discussion and Analysis
- -------------------------------------------------------------------------------
INTRODUCTION AND OVERVIEW
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.
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 1997
through 1999 and its financial condition as of December 31, 1999 and 1998. This
information should be read in conjunction with the accompanying consolidated
financial statements and footnotes contained elsewhere in this report. Results
have been retroactively adjusted for the effect of all stock dividends and
splits.
MERGERS AND ACQUISITIONS
In January 1999, the Company completed a merger with 1ST BANCORP of Vincennes,
Indiana. 1ST BANCORP's subsidiaries included First American Bank (formerly known
as First Federal Bank); First Financial Insurance Agency, Inc.; and First Title
Insurance Company. 1ST BANCORP's thrift operations through First American Bank
included mortgage banking activities, a heavy concentration of residential real
estate mortgages in their loan portfolio, and a heavy concentration of
borrowings as a long-term funding source. As such, the composition of 1ST
BANCORP's loan portfolio, funding sources, allowance for loan losses, and
operating results differed significantly from that of the Company in periods
prior to the merger. This merger was accounted for as a pooling of interests and
prior to 1999, 1ST BANCORP's financial statements were prepared on a June 30
fiscal year-end. Accordingly, the Company's calendar period financial statements
for periods prior to 1999 have been restated to include 1ST BANCORP fiscal
period financial results.
Also in January 1999, the Company completed a merger with The Doty Agency, Inc.
of Petersburg, Indiana. Doty is a general multi-line, full-service insurance
agency and has offices in Gibson, Knox and Pike counties in Indiana. This merger
was accounted for as a pooling of interests. Prior years' results exclude the
effect of the merger, as restatement would not have had a material impact on
overall financial results.
In May 1999, the Company acquired Smith and Bell of Vincennes, Indiana. Smith
and Bell is a general multi-line, full-service insurance agency with offices in
Knox County, Indiana. This merger was accounted for as a purchase. Accordingly,
operating results of Smith and Bell are included only after the date of merger.
Management anticipates that additional mergers and acquisitions with like-minded
institutions may occur in future years. The Company's approach offers these
institutions the advantage of competitive operational efficiencies gained by
spreading fixed operating costs over a larger asset base, without the loss of
flexibility and independence associated with acquisition by large regional
multi-bank holding companies. Through affiliation with the Company, ownership is
predominantly held within a group of shareholders who reside in the banks'
general market areas and who support the banks' commitment to their local
communities.
<PAGE>
- -------------------------------------------------------------------------------
Management's Discussion and Analysis 3
(continued)
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
NET INCOME
Net income of $8,822,000 or $0.96 per share for the year ended December 31, 1999
compared favorably to net income of $8,570,000 or $0.93 per share for the prior
year. 1998 net income of $8,570,000 or $0.93 per share represented an 18%
increase over 1997 earnings of $7,270,000 or $0.79 per share. Continued growth
in earnings has been facilitated by steady growth in loans and net interest
income. In 1999 and 1998, loan growth along with declining credit quality in
specific segments of the portfolio has required the Company to increase its
provision for loan losses over prior years. 1997 results included a one-time
Savings Association Insurance Fund ("SAIF") industry-wide assessment by the
FDIC.
NET INTEREST INCOME
Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. Net interest margin is this
difference expressed on a tax-equivalent basis as a percentage of average
earning assets. Several factors contribute to the determination of net interest
income and net interest margin, including the volume and mix of earning assets,
interest rates, and income taxes. Many factors affecting net interest income are
subject to control by management policies and actions. Factors beyond the
control of management include the general level of credit demand, Federal
Reserve Board monetary policy, and changes in tax laws.
Net interest income in 1999 increased $1,415,000 or 4.6% over 1998 results while
1998 increased $1,264,000 or 4.3% over 1997. A significant portion of the
increase in both years resulted from loan growth. Net interest margin for 1999,
1998 and 1997 was 3.94%, 3.99% and 3.95%, respectively, excluding the impact of
asset growth strategies employed in late 1998 and throughout 1999. Yields on
earning assets and rates on interest-bearing liabilities declined in 1999
compared to the prior year. The decline in net interest margin is attributable
to a more competitive pricing environment for loans and deposits.
The Company employed various asset growth strategies in late 1998 and throughout
1999, whereby affiliate banks invested proceeds from FHLB borrowings in agency,
municipal, mortgage-backed and 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%, which reduced overall net
interest margin by 7 basis points in 1999 and improved net interest income by
$235,000. See the Company's Average Balance Sheet and the discussion headed
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for further information on the
Company's net interest income, net interest margin, and interest rate
sensitivity position.
PROVISION FOR LOAN LOSSES
The Company provides for loan losses through regular provisions to the allowance
for loan losses, which totaled $1,718,000, $1,338,000 and $773,000 in 1999, 1998
and 1997, respectively. These provisions were made at a level deemed necessary
by management to absorb estimated losses in the loan portfolio. The increase in
provision in 1999 and 1998 was due to growth in residential real estate mortgage
loans, an increase in charge-off experience in consumer loans at one affiliate,
and an increase in allowance for substandard loans in the sub-prime,
out-of-market residential mortgage loan portfolio of another affiliate. The
Company discontinued new sub-prime, out-of-market residential real estate
lending in 1999.
A detailed evaluation of the adequacy of the allowance for loan losses is
completed quarterly by management, the results of which will be used to
determine future provisions for loan losses. Refer also to the section entitled
LENDING AND LOAN ADMINISTRATION for further discussion of the provision and
allowance for loan losses.
NONINTEREST INCOME
Noninterest income of $6,251,000 for 1999 represents an increase of 25.1% over
the 1998 results of $4,996,000. This followed a decline of 12.3% in 1998 from
the $5,698,000 reported in 1997. Increases in insurance commissions and service
charges on deposit accounts, tempered by a decline in the gains on sales of
mortgage loans, resulted in the overall increase in noninterest income in 1999.
The 1998 decline in noninterest income was attributable to a lower gain on sale
of mortgage loans. Excluding net gains on the sales of loans, other real estate
and securities, noninterest income increased by 43.4% and 14.9% in 1999 and
1998, respectively.
<PAGE>
- -------------------------------------------------------------------------------
4 Management's Discussion and Analysis
(continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Noninterest Income % Change From
dollars in thousands Prior Year
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Trust and Investment Product Fees....................... $835 $833 $794 0.2% 4.9%
Service Charges on Deposit Accounts..................... 1,757 1,599 1,429 9.9 11.9
Insurance Commissions & Fees (1)........................ 2,239 685 479 226.9 43.0
Other Income............................................ 1,013 958 845 5.7 13.4
----- --- ---
Subtotal ........................................... 5,844 4,075 3,547 43.4 14.9
Gains on Sales of Loans and Other Real Estate........... 413 883 2,180 (53.2) (59.5)
Securities Gains, net................................... (6) 38 (29) (115.8) 231.0
- -- --
TOTAL NONINTEREST INCOME............................ $6,251 $4,996 $5,698 25.1 (12.3)
====== ====== ======
<FN>
(1) Prior year results exclude the impact of 1999 insurance acquisitions. See Note 18 to the Consolidated Financial Statements.
</FN>
</TABLE>
In an effort to provide customers an opportunity to fulfill all their financial
needs through the Company's affiliate banks and associated financial services
companies, the Company completed strategic insurance acquisitions in 1999. As a
result, the Company's insurance commission income has grown significantly.
Insurance commissions increased to $2,239,000 and $685,000 in 1999 and 1998,
respectively.
Gains on sales of loans and other real estate are derived predominantly from the
Company's mortgage banking division. These gains declined by $470,000 or 53.2%
in 1999 compared with 1998. This followed a decrease of $1,297,000 or 59.5% in
1998 over 1997 reported results. During 1999, lower volumes in residential real
estate loan production and correspondingly lower levels of loan sales caused by
a rising market interest rate environment resulted in the decreased gain on sale
of loans. The decrease in 1998 was primarily caused by First Federal Bank's
decision to portfolio current loan production to generate additional net
interest income rather than sell loans to the secondary market.
NONINTEREST EXPENSE
Noninterest expense of $24,832,000 for 1999 represents an 11.3% increase over
the 1998 results of $22,318,000. This followed a decline of 8.1% from the
$24,278,000 reported in 1997. The increase in 1999 resulted from insurance
acquisitions, establishment of the corporate identity program at First American
Bank, implementing wide-area network technology, and Year 2000 preparation. The
decline in 1998 resulted largely from First Federal Bank's decision to close
outlying mortgage loan production offices near the end of 1997. These closures
resulted in declines in personnel, occupancy, and other expenses. In addition,
1997 noninterest operating expenses included a one-time special FDIC assessment
of $1.3 million at First Federal Bank.
<TABLE>
<CAPTION>
Noninterest Expense % Change From
dollars in thousands Prior Year
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Salaries and Employee Benefits.......................... $13,433 $12,132 $12,520 10.7% (3.1)%
Occupancy, Furniture and Equipment Expense.............. 3,401 3,069 3,019 10.8 1.7
FDIC Premiums........................................... 160 170 1,593 (5.9) (89.3)
Data Processing Fees.................................... 990 988 855 0.2 15.6
Professional Fees ...................................... 871 1,029 1,292 (15.4) (20.4)
Advertising and Promotion............................... 888 684 652 29.8 4.9
Supplies................................................ 807 680 674 18.7 .9
Other Operating Expenses................................ 4,282 3,566 3,673 20.1 (2.9)
----- ----- -----
TOTAL NONINTEREST EXPENSE........................... $24,832 $22,318 $24,278 11.3 (8.1)
======= ======= =======
</TABLE>
Salaries and Employee Benefits comprised approximately 54% of total noninterest
expense in 1999 and 1998 and 52% in 1997. Salaries and Employee Benefits
increased $1,301,000 or 10.7% during 1999. Excluding the Company's insurance
operations acquired in 1999, these expenses increased $537,000 or 4.4%.
Personnel costs declined $388,000 or 3.1% in 1998. This decline was due to the
closure of loan production offices at First Federal Bank, offset by merger and
acquisition related expenses, an increase in base compensation at other
affiliates and costs associated with the Company's employee computer purchase
program, which was implemented in late 1997.
<PAGE>
- -------------------------------------------------------------------------------
Management's Discussion and Analysis 5
(continued)
- -------------------------------------------------------------------------------
Occupancy, furniture and equipment expenses increased by $332,000 or 10.8% in
1999, after a modest increase of $50,000 or 1.7% in 1998. The 1999 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. Also contributing to the 1999 increase was the
implementation of a state-of-the-art wide-area network and associated operating
and application systems at the retail banking affiliates. These systems are
expected to provide long-term benefits with regard to improved quality of
customer service and control of personnel expenses, and in some cases were in
preparation for the Year 2000.
FDIC premiums totaled $160,000 in 1999, $170,000 in 1998 and $1,593,000 in 1997.
1997 premiums included a $1,330,000 one-time SAIF industry-wide assessment by
the FDIC, which was applied to all of the deposits of First Federal Bank.
Data processing fees remained stable in 1999 after an increase of $133,000 in
1998. The 1998 increase reflected an increase in the number of accounts
processed and conversion expenses at the Company's newly acquired affiliates in
1998.
Professional fees totaled $871,000 in 1999, $1,029,000 in 1998 and $1,292,000 in
1997. Expenses incurred by the holding company for merger and acquisition and
other professional fees totaled $530,000 in 1999, $723,000 in 1998 and $342,000
in 1997. A significant portion of the costs associated with acquisitions
completed in early 1999 was expensed during 1998, resulting in the lower level
of professional fees. While it is not possible to predict the level of future
acquisition activity and the resulting level of associated costs, management
intends to continue to pursue acquisition opportunities, and therefore,
continued costs will be likely in future years. 1997 also included a $200,000
reserve for legal fees made in connection with an unasserted potential claim at
one of the affiliate banks. After payment of certain expenses associated with
this unasserted claim, the remainder of this accrual was reversed in late 1998.
Advertising and promotion expenses totaled $888,000 in 1999, $684,000 in 1998
and $652,000 in 1997, representing approximately 0.1% of average total assets in
each year. Increases in 1999 were attributable to the introduction of the
corporate identity program at new affiliates and to the implementation of a
customer information system for all banking affiliates. The customer information
system is being used to improve customer service, analyze customer profitability
and identify cross-selling opportunities.
Supplies and other operating expenses increased $843,000 in 1999 after a
decrease of $101,000 in 1998. Excluding the Company's insurance acquisitions in
1999, these expenses increased $636,000 or 15.0%. The increase was attributable
to telecommunication charges, collection costs associated with sub-prime
residential mortgage loans, and costs related to the survivor benefits
associated with the existing directors' deferred compensation plan.
Telecommunication charges increased $179,000 and are primarily attributable to
network charges to support the Company's new technology platforms and operating
systems. Collection costs increased $197,000 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.
Director compensation increased due to recording the survivors benefit
obligation related to the death of a director in 1999. Increases also occurred
in volume related expenses such as postage and other services. Other operating
expenses include the amortization of goodwill and core deposit intangibles,
totaling $301,000, $294,000 and $280,000 in 1999, 1998 and 1997, respectively.
PROVISION FOR INCOME TAXES
The Company records a provision for current income taxes payable, along with a
provision for deferred taxes payable in the future. Deferred taxes arise from
temporary differences, which are items recorded for financial statement purposes
in a different period than for income tax returns. The major item affecting the
difference between the Company's effective tax rate recorded on its financial
statements and the federal statutory rate of 34% is interest on tax-exempt
investments and loans. Other components affecting the Company's effective tax
rate include affordable housing tax credit investments, state income taxes and
non-deductible merger costs.
Note 11 to the consolidated financial statements provides additional details
relative to the Company's income tax provision. The Company's effective tax rate
was 25.7%, 29.1% and 28.3%, respectively, in 1999, 1998, and 1997.
<PAGE>
- -------------------------------------------------------------------------------
6 Management's Discussion and Analysis
(continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTERIM FINANCIAL DATA
Unaudited - dollars in thousands except per share data
For the three months ended
<S> <C> <C> <C> <C>
December September June March
-------- --------- ---- -----
31 30 30 31
1999:
Interest Income....................................... $17,870 $17,140 $16,577 $16,342
Interest Expense...................................... 9,681 9,020 8,591 8,467
----- ----- ----- -----
Net Interest Income................................ 8,189 8,120 7,986 7,875
Provision for Loan Losses............................. 779 298 272 369
Noninterest Income.................................... 1,707 1,464 1,575 1,505
Noninterest Expense................................... 6,779 6,098 6,060 5,895
----- ----- ----- -----
Income before Income Taxes......................... 2,338 3,188 3,229 3,116
Income Tax Expense................................. 336 874 946 893
--- --- --- ---
Net Income....................................... $2,002 $2,314 $2,283 $2,223
====== ====== ====== ======
Earnings per Share and Diluted Earnings per Share (1). $0.22 $0.25 $0.25 $0.24
===== ===== ===== =====
Weighted Average Shares (1)........................... 9,125,004 9,217,241 9,214,764 9,203,098
========= ========= ========= =========
1998:
Interest Income $16,708 $16,277 $16,151 $16,224
Interest Expense...................................... 8,809 8,637 8,553 8,606
----- ----- ----- -----
Net Interest Income................................ 7,899 7,640 7,598 7,618
Provision for Loan Losses............................. 862 177 145 154
Noninterest Income.................................... 1,311 1,363 1,227 1,095
Noninterest Expense................................... 5,678 5,829 5,481 5,330
----- ----- ----- -----
Income before Income Taxes......................... 2,670 2,997 3,199 3,229
Income Tax Expense................................. 683 850 967 1,025
--- --- --- -----
Net Income....................................... $1,987 $2,147 $2,232 $2,204
====== ====== ====== ======
Earnings per Share and Diluted Earnings per Share (1). $0.22 $0.23 $0.24 $0.24
===== ===== ===== =====
Weighted Average Shares (1)........................... 9,198,534 9,198,045 9,196,698 9,195,783
========= ========= ========= =========
<FN>
(1) Share and Per share data has been retroactively adjusted to give effect for stock dividends.
</FN>
</TABLE>
Provision for loan losses increased in the fourth quarter of 1999 primarily due
to an increase in non-performing assets during the period. Provision for loan
losses increased in the fourth quarter of 1998 due to implementation of more
conservative collection practices at a new affiliate, which led to an increase
in charge-offs during the period. See LENDING AND LOAN ADMINISTRATION in the
section entitled RISK MANAGEMENT for more information.
CAPITAL RESOURCES
- -------------------------------------------------------------------------------
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. The prompt corrective action regulations provide five
classifications, including well-capitalized, and critically undercapitalized,
although these terms are not used to represent overall financial condition. The
Company and all affiliate Banks at year-end 1999 were categorized as well
capitalized. See Note 9 to the consolidated financial statements for actual and
required capital ratios.
<PAGE>
- -------------------------------------------------------------------------------
Management's Discussion and Analysis 7
(continued)
- -------------------------------------------------------------------------------
The Company continues to maintain a strong capital position. Shareholders'
equity totaled $87.5 million and $91.3 million at December 31, 1999 and 1998,
respectively. Total equity represented 8.81% and 10.18%, respectively, of
year-end total assets. The $3.8 million decline in shareholder's equity is
attributable to an increased level of cash dividends paid, implementation of a
stock repurchase plan, and a decline in market value of the Company's
available-for-sale investment portfolio. In addition, the capital to asset ratio
was reduced by asset growth strategies in the investment portfolio, which were
implemented in late 1998 and throughout 1999 to more effectively utilize excess
capital.
The Company paid cash dividends of $4.5 million in 1999 and $3.1 million in
1998. The increase in 1999 dividends paid includes an increase in dividends per
share and the issuance of shares in connection with merger and acquisition
activities, the 5% stock dividend paid in late 1998, and the Company's Dividend
Reinvestment Plan.
The Company implemented a stock repurchase plan during 1999, pursuant to which
it repurchased 206,558 shares of stock (as restated for subsequent 5% stock
dividend) for an aggregate of $4.3 million.
At December 31, 1999 the market value of the available-for-sale investment
portfolio had declined 4.2% or $4.8 million, net of tax, from year-end 1998.
This decline in market value is recorded as a reduction of shareholders' equity,
and was due to a rise in interest rates during 1999. This decline compared
favorably to the 8.3% decline in similar maturity U.S. Treasury bonds during the
same period.
SOURCES OF FUNDS
- -------------------------------------------------------------------------------
The Company's primary source of funding is its base of core customer deposits.
Core deposits consist of demand deposits, savings, interest-bearing checking,
money market accounts, and certificates of deposit of less than $100,000. Other
sources of funds are certificates of deposit of $100,000 or more, brokered
deposits, overnight borrowings from other financial institutions and securities
sold under agreement to repurchase. The membership of the Company's affiliate
banks in the Federal Home Loan Bank System (FHLB) provides a significant
additional source for both long and short-term collateralized borrowings. The
following pages contain a discussion of changes in these areas.
The table below illustrates changes between years in the average balances of all
funding sources:
<TABLE>
<CAPTION>
Funding Sources - Average Balances % Change From
dollars in thousands Prior Year
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1999 1998
---- ---- ---- ---- ----
Demand........................................... $70,665 $58,267 $55,483 21.3% 5.0%
Savings and Interest-bearing Checking............ 125,972 122,174 117,514 3.1 4.0
Money Market Accounts............................ 59,153 48,343 42,769 22.4 13.0
Other Time Deposits.............................. 353,938 353,313 318,113 0.2 11.1
------- ------- -------
Total Core Deposits........................... 609,728 582,097 533,879 4.7 9.0
Certificates of Deposits of $100,000 or more
and Brokered Deposits......................... 81,984 72,221 96,980 13.5 (25.5)
FHLB Advances and Other Borrowings............... 145,595 110,942 107,217 31.2 3.5
------- ------- -------
Total Funding Sources......................... $837,307 $765,260 $738,076 9.4 3.7
======== ======== ========
</TABLE>
CORE DEPOSITS
The Company achieved 4.7% core deposit growth in 1999 and 9.0% in 1998 over
prior year average balances. Deposit growth will continue to be influenced by
competition and the interest rate environment, as well as the increased
availability of alternative investment products, seasonal and other non-economic
factors.
Average non-interest bearing demand deposits increased by $12.4 million or 21%
in 1999 after a 5% increase in 1998. Double-digit growth was also obtained in
money market accounts in 1999 and 1998, primarily because this demand product
provides a higher interest rate than interest-bearing checking products. Demand,
savings and money market deposits represent a stable source of funding for the
company, totaling approximately 42% of core deposits in 1999, 39% in 1998 and
40% in 1997.
<PAGE>
- -------------------------------------------------------------------------------
8 Management's Discussion and Analysis
(continued)
- -------------------------------------------------------------------------------
Other time deposits consist of certificates of deposits in denominations of less
than $100,000. These deposits remained stable in 1999 versus 1998 and comprised
58% of average core deposits. Other time deposits increased 11.1% in 1998 and
comprised approximately 61% of average core deposits.
OTHER FUNDING SOURCES
Federal Home Loan Bank advances and other borrowings represent the Company's
most significant source of other funding. Borrowed funds totaled $145.6 million,
$110.9 million, and $107.2 million in 1999, 1998, and 1997 respectively. In
1999, $20 million of the increase in borrowed funds was used in match-funded
asset growth strategies in the investment portfolio. The additional reliance on
borrowed funds in 1999 was to supplement core deposits from the Company's
primary market areas.
Certificates of deposits in denominations of $100,000 or more and brokered
deposits are an additional source of other funding. Large denomination
certificates and brokered deposits increased 13.5% in 1999 after a 25.5% decline
in 1998. These certificates remained stable as a component of total funding
sources at 9.8% in 1999 and 9.4% in 1998.
The Company also utilizes short-term funding sources from time to time. These
sources consist of overnight federal funds purchased from other financial
institutions, secured repurchase agreements which generally mature within 30
days, and overnight discount notes secured from the FHLB. These borrowings
represent an important source of short-term liquidity for the Company.
Short-term funding sources, large denomination certificates, and brokered funds
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.
Long-term debt is in the form of FHLB advances, which are secured by the pledge
of certain investment securities and residential mortgage loans. In 1999,
long-term FHLB advances were used primarily to fund the residential real estate
portfolio in the Company's mortgage banking segment and to fund asset growth
strategies in the investment portfolio. See Note 8 to the Consolidated Financial
Statements for further information.
USES OF FUNDS
- -------------------------------------------------------------------------------
LOANS
Total loans grew $95.8 million or 16.0% in 1999 and $72.0 million or 13.7% in
1998. The Company's loan portfolio is diversified, with the heaviest
concentration in residential real estate loans. Commercial and industrial loans
represent 24% of the loan portfolio while residential real estate loans
represent 51%, consumer loans 16%, and agriculture and poultry loans 9%. In 1999
and 1998 the Company achieved growth across all segments of the portfolio. In
1999, commercial and industrial loans grew 19%, residential real estate loans
grew 20% and consumer loans grew 9%. The Company's commercial lending is
extended to various industries, including hotel, agribusiness and manufacturing,
as well as health care, wholesale, and retail services.
The table below presents year-end balances of the loan portfolio:
<TABLE>
<CAPTION>
Loan Portfolio
dollars in thousands
December 31,
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Commercial and Industrial....................................... $161,711 $136,249 $121,444
Residential Mortgage Loans...................................... 356,001 295,788 252,828
Consumer Loans.................................................. 112,870 104,024 92,126
Agricultural and Poultry........................................ 64,054 62,736 60,421
------ ------ ------
Total Loans................................................. 694,636 598,797 526,819
Less: Unearned Income...................................... (344) (709) (1,498)
Allowance for Loan Losses............................ (8,868) (8,323) (8,574)
----- ----- -----
Loans, net.................................................. $685,424 $589,765 $516,747
======== ======== ========
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Management's Discussion and Analysis 9
(continued)
- -------------------------------------------------------------------------------
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Commercial extensions of credit outside this market area are generally
concentrated in real estate loans within a 120 mile radius of the Company's
primary market, and are granted on a selective basis.
Commercial loans outside this radius are generally further limited to loans
guaranteed by either the Small Business Administration (SBA) or the Farm Service
Agency (FSA).
With the acquisition of 1ST BANCORP, and its thrift subsidiary First Federal
Bank in January 1999, the Company acquired a mortgage banking operation and a
loan portfolio heavily concentrated in residential real estate loans. First
Federal concentrated primarily on residential real estate lending, but at the
same time offered consumer and commercial loans in its local market. Residential
real estate loans were originated by its retail office in its primary market
areas as well as in areas outside its designated lending areas through loan
production offices and a network of correspondent lenders. The Company
discontinued new sub-prime, out-of-market residential real estate lending in
1999.
The overall loan portfolio is diversified among a variety of borrowers; however,
a significant portion of borrowers are dependent upon the agricultural, poultry
and wood furniture manufacturing industries. Although wood furniture
manufacturers employ a significant number of people in the market area, there is
no concentration of credit to companies engaged in that industry. No
concentration of credit in excess of 10% of total assets exists within any
single industry group.
INVESTMENTS
The investment portfolio is a principal source for funding the Company's loan
growth and other liquidity needs. The Company's securities portfolio consists of
money market securities, uncollateralized U.S. Treasury and federal agency
securities, municipal obligations of state and political subdivisions,
asset-/mortgage-backed securities issued by U.S. government agencies and other
intermediaries, and corporate investments. Money market securities include
federal funds sold, interest-bearing balances with banks, and other short-term
investments. The composition of the year-end balances in the investment
portfolio is presented in Note 2 to the Consolidated Financial Statements and in
the table below:
<TABLE>
<CAPTION>
Investment Portfolio, at Amortized Cost
dollars in thousands
December 31,
<S> <C> <C> <C> <C> <C> <C>
1999 % 1998 % 1997 %
---- - ---- - ---- -
Federal Funds Sold and Short-term Investments.... $1,688 0.7% $32,790 13.7% $43,107 18.1%
U.S. Treasury and Agency Securities.............. 96,205 40.7 87,459 36.6 117,452 49.2
Obligations of State and Political Subdivisions.. 55,885 23.7 56,694 23.7 45,431 19.1
Asset- and Mortgage-backed Securities............ 62,418 26.4 54,378 22.7 20,561 8.6
Corporate Securities............................. --- --- --- --- 4,839 2.0
Other Securities................................. 20,027 8.5 7,853 3.3 7,063 3.0
------ --- ----- --- ----- ---
Total Securities Portfolio................... $236,223 100.0% $239,174 100.0% $238,453 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
In 1999 and 1998 the investment portfolio mix was relatively balanced. In 1999,
the decrease in federal funds sold and short-term investments was used to fund
loan growth. The increase in agencies, mortgage-backed and other securities were
the result of match-funded asset growth strategies funded by FHLB advances. The
$188 million available-for-sale portion of the investment portfolio provides an
additional funding source for the Company's liquidity needs and for
asset/liability management requirements. Although management has the ability to
sell these securities if the need arises, their designation as
available-for-sale should not be interpreted as an indication that management
anticipates such sales.
RISK MANAGEMENT
- -------------------------------------------------------------------------------
The Company is exposed to various types of business risk on an on-going basis.
These risks include credit risk, liquidity risk and interest rate risk. Various
procedures are employed at the Company's affiliate banks to monitor and mitigate
risk in their loan and investment portfolios, as well as risks associated with
changes in interest rates. Following is a discussion of the Company's
philosophies and procedures to address these risks.
<PAGE>
- -------------------------------------------------------------------------------
10 Management's Discussion and Analysis
(continued)
- -------------------------------------------------------------------------------
LENDING AND LOAN ADMINISTRATION
Primary responsibility and accountability for day-to-day lending activities
rests with the Company's affiliate banks. Loan personnel at each bank have the
authority to extend credit under guidelines approved by the bank's board of
directors. Executive and board loan committees active at each bank serve as
vehicles for communication and for the pooling of knowledge, judgment and
experience of its members. These committees provide valuable input to lending
personnel, act as an approval body, and monitor the overall quality of the
banks' loan portfolios. The Corporate Loan Committee, comprised of members of
the Company's executive officers and board of directors, strive to ensure a
consistent application of the Company's lending policies. The Company also
maintains a comprehensive risk-weighting and loan review program for its
affiliate banks, which includes quarterly reviews of problem loan reports,
delinquencies and charge-offs. The purpose of this program is to evaluate loan
administration, credit quality, loan documentation and the adequacy of the
allowance for loan losses.
The Company maintains an allowance for loan losses to cover potential losses
identified during its loan review process. The allowance for loan losses is
comprised of: (a) specific reserves on individual credits; (b) allocated
reserves for certain loan categories and industries, large and out-of-market
loans, and overall historical loss experience; and (c) unallocated reserves
based on trends in the type and volume of the loan portfolios, current and
anticipated economic conditions, and other factors. Specific reserves are
provided for credits when: (a) the customer's cash flow or net worth appears
insufficient to repay the loan; (b) the loan has been criticized in a regulatory
examination; (c) the loan is on non-accrual; or, (d) other reasons where the
ultimate collectibility of the loan is in question, or the loan characteristics
require special monitoring.
The table below provides a comparative analysis of activity in the allowance for
loan losses:
<TABLE>
<CAPTION>
Allowance for Loan Losses
dollars in thousands
December 31,
<S> <C> <C> <C> <C>
1999 1998 1997
---- ---- ----
Balance as of January 1.......................................... $8,323 $8,574 $8,040
Allowance of Acquired Subsidiary................................. --- 80 ---
Adjustment to Conform Fiscal Years............................... 356 --- ---
Provision for Loan Losses........................................ 1,718 1,338 773
Recoveries of Prior Loan Losses.................................. 476 375 827
Loan Losses Charged to the Allowance............................. (2,005) (2,044) (1,066)
----- ----- -----
Balance as of December 31........................................ $8,868 $8,323 $8,574
====== ====== ======
Net Charge-offs to Average Loans Outstanding..................... 0.24% 0.28% 0.04%
Provision for Loan Losses to Average Loans Outstanding........... 0.27% 0.23% 0.14%
Allowance for Loan Losses to Total Loans at Year-End............. 1.28% 1.39% 1.63%
<FN>
Net charge-offs increased significantly in 1999 and 1998 from 1997.
Approximately $1.3 million of the net charge-offs in both years related to
installment loan losses at one affiliate and losses on sub-prime residential
real estate loans at another affiliate. The increased charge-off experience in
1999 and 1998 resulted in higher provisions for loan losses. The Company
discontinued new sub-prime out-of-market residential real estate lending during
1999. Refer also to the section entitled PROVISION FOR LOAN LOSSES in the
discussion regarding the RESULTS OF OPERATIONS.
</FN>
</TABLE>
NONPERFORMING ASSETS
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have
been renegotiated to provide for a reduction or deferral of interest or
principal because of deterioration in the financial condition of the borrower;
(c) loans past due ninety (90) days or more as to principal or interest; and,
(d) other real estate owned. Loans are placed on non-accrual status when
scheduled principal or interest payments are past due for 90 days or more or
when the borrower's ability to repay becomes doubtful. Uncollected interest
accrued in the current year is reversed against income at the time a loan is
placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if
deemed uncollectible. Exceptions to the non-accrual and charge-off policies are
made when the loan is well secured and in the process of collection.
<PAGE>
- -------------------------------------------------------------------------------
Management's Discussion and Analysis 11
(continued)
- -------------------------------------------------------------------------------
The table below presents an analysis of the Company's non-performing assets. The
unfavorable trend in nonaccrual loans is primarily attributable to sub-prime
out-of-market residential real estate loans. Approximately $900,000 of the
increased other real estate owned is related to one loan.
<TABLE>
<CAPTION>
Non-performing Assets
dollars in thousands
December 31,
<S> <C> <C> <C>
1999 1998 1997
---- ---- ----
Non-accrual Loans................................................ $7,237 $5,411 $3,568
Past Due Loans (90 days or more)................................. 1,564 1,522 3,358
Restructured Notes............................................... --- --- ---
--- --- ---
Total Non-performing Loans................................... 8,801 6,933 6,926
Other Real Estate Owned.......................................... 2,434 1,156 785
----- ----- ---
Total Non-performing Assets.................................. $11,235 $8,089 $7,711
======= ====== ======
Non-performing Loans to Total Loans.............................. 1.27% 1.16% 1.31%
</TABLE>
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is a measure of the Company's ability to fund new loan demand,
existing loan commitments and deposit withdrawals. The purpose of liquidity
management is to match sources of funds with anticipated customer borrowings and
withdrawals and other obligations to ensure a dependable funding base, without
unduly penalizing earnings. 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 provides for its liquidity needs by
maintaining money market assets, managing cash flows from its investment
portfolio, through growth in core deposits, and by maintaining various short-
and long-term borrowing sources.
Interest rate risk is the exposure of the Company's financial condition to
adverse changes in market interest rates. In an effort to estimate the impact of
sustained interest rate movements to the Company's earnings, the Company
monitors interest rate risk through computer-assisted simulation modeling of its
net interest income. The Company's simulation modeling monitors the potential
impact to net interest income under four interest rate scenarios -- flat,
rising, declining and most likely. The Company's objective is to actively manage
its asset/liability position within a one-year interval and to limit the risk in
any of the four interest rate scenarios to a reasonable level of tax-equivalent
net interest income within that interval. Funds Management Committees at the
holding company and each affiliate bank monitor compliance within established
guidelines of the Funds Management Policy.
The Company also monitors interest rate risk by estimating its static interest
rate sensitivity position. Static interest rate sensitivity is an analysis of
the relationship between rate sensitive assets and rate sensitive liabilities at
a point in time, and quantifies interest rate risk as the difference, or "gap",
between assets and liabilities expected to mature or reprice in given time
intervals. Static interest rate sensitivity is also expressed as a ratio of rate
sensitive assets to rate sensitive liabilities. A ratio of 100% suggests a
balanced position between rate sensitive assets and liabilities within a given
repricing period.
The table on the following page reflects the Company's static interest rate
sensitivity position as of December 31, 1999 over various time intervals and
based on current interest rates. Interest earning assets and interest bearing
liabilities have been distributed based on their actual or expected repricing
dates.
<PAGE>
- -------------------------------------------------------------------------------
12 Management's Discussion and Analysis
(continued)
- -------------------------------------------------------------------------------
Although rate sensitivity gaps constantly change as funds are acquired and
invested, a significant portion of the Company's assets and liabilities reprice
within 1 year and are closely matched at 89%. At financial institutions with
negative gaps, net interest income tends to increase in declining interest rate
environments, and decrease in rising interest rate environments.
As of December 31, 1999 the Company had no derivatives, trading portfolio or
unusual financial instruments which expose the Company to undue interest rate
risk.
<TABLE>
<CAPTION>
STATIC INTEREST RATE SENSITIVITY at December 31, 1999
dollars in thousands Maturing or Repricing
-----------------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Money Market and Investment Securities, at amortized cost $ 21,430 $ 88,979 $ 125,814 $ 236,223
Loans and Loans Held for Sale, net of unearned income 369,525 244,640 82,972 697,137
------------ ------------- ----------- -----------
Total Rate Sensitive Assets $ 390,955 $ 333,619 $ 208,786 $ 933,360
=========== =========== =========== ===========
RATE SENSITIVE LIABILITIES
Interest Bearing Deposits (1) $ 349,997 $ 162,175 $ 114,418 $ 626,590
Borrowings (2) 90,263 71,538 34,216 196,017
----------- ----------- ----------- -----------
Total Rate Sensitive Liabilities $ 440,260 $ 233,713 $ 148,634 $ 822,607
=========== =========== =========== ===========
Cumulative Rate Sensitivity Gap $ (49,305) $ 50,601 $ 110,753
=========== ========== ===========
Cumulative Ratio (3) 89% 108% 114%
<FN>
(1) Although interest-bearing checking and savings deposits are subject to immediate withdrawal and repricing, a portion of these
balances has been included in the Over 5 Years category to reflect management's assumption that these accounts are not rate
sensitive.
(2) Rate sensitivity of borrowings includes effect of refinancing $40 million of overnight funds at December 31, 1999 into long-
term borrowings in January 2000. See Note 8 to the Consolidated Financial Statements.
(3) Rate Sensitive Assets/Rate Sensitive Liabilities
</FN>
</TABLE>
YEAR 2000
- -------------------------------------------------------------------------------
The Company expended approximately $500,000 on Year 2000 related items,
including approximately $200,000 in cash outlays in 1999. These outlays exclude
the cost of implementing the Company's state-of-the art platform and computer
systems upgrade, but include the Company's share of third party systems costs
and other costs to prepare for the Year 2000.
The Company updated all contingency plans on an on-going basis and performed
tests of those plans in the third and fourth quarters of 1999 to ensure all
departments were equipped in the event implementation was necessary. The Company
increased its cash position in the fourth quarter of 1999 in the event that
customers desired to withdraw large amounts of cash from their accounts. The
Company did not experience unusual cash requests from customers, either from the
time leading up to the year-end or in the period following year-end. Management
was on-site to monitor the date rollover at year-end 1999. No problems were
encountered with any of the Company's systems.
While all of the effects, as they relate to the Company's customers, may not be
fully known until a future date, management is not aware of customers who have
encountered significant problems relating to the Year 2000. Management is not
aware of any remaining uncertainties or contingencies with respect to the Year
2000.
<PAGE>
- -------------------------------------------------------------------------------
Management's Discussion and Analysis 13
(continued)
- -------------------------------------------------------------------------------
The following table summarizes net interest income (on a tax-equivalent basis)
for each of the past three years. For tax-equivalent adjustments, an effective
tax rate of 34% was used for all years presented (1).
<TABLE>
<CAPTION>
Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Principal Income/ Yield/ Principal Income/ Yield/ Principal Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Federal Funds Sold and Other
Short-term Investments..... $19,413 $951 4.90% $32,282 $1,827 5.66% $34,118 $1,894 5.55%
Securities:
Taxable.................... 156,996 10,065 6.41% 139,541 8,752 6.27% 154,113 9,782 6.35%
Non-taxable................ 56,346 4,599 8.16% 50,218 4,244 8.45% 42,821 3,621 8.46%
Total Loans and Leases (2).... 646,439 54,077 8.37% 591,291 52,260 8.84% 548,218 49,227 8.98%
------- ------ ------- ------ ------- ------
TOTAL INTEREST
EARNING ASSETS............. 879,194 69,692 7.93% 813,332 67,083 8.25% 779,270 64,524 8.28%
------- ------ ------- ------ ------- ------
Other Assets.................. 68,822 62,524 57,125
Less: Allowance for Loan Losses (8,554) (8,326) (7,974)
----- ----- -----
TOTAL ASSETS.................. $939,462 $867,530 $828,421
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Savings and Interest-bearing
Demand Deposits............ $185,125 4,797 2.59% $170,517 4,644 2.72% $160,283 4,523 2.82%
Time Deposits................. 435,922 23,063 5.29% 425,534 23,806 5.59% 415,093 23,281 5.61%
FHLB Advances and
Other Borrowings........... 145,595 7,899 5.43% 110,942 6,155 5.55% 107,217 5,930 5.53%
------- ----- ------- ----- ------- -----
TOTAL INTEREST-BEARING
LIABILITIES................ 766,642 35,759 4.66% 706,993 34,605 4.89% 682,593 33,734 4.94%
------- ------ ------- ------ ------- ------
Demand Deposit Accounts....... 70,665 58,267 55,483
Other Liabilities............. 10,376 13,675 8,922
------ ------ -----
TOTAL LIABILITIES............. 847,683 778,935 746,998
------- ------- -------
Shareholders' Equity.......... 91,779 88,595 81,423
------ ------ ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $939,462 $867,530 $828,421
======== ======== ========
NET INTEREST INCOME........... $33,933 $32,478 $30,790
======= ======= =======
NET INTEREST MARGIN........... 3.87%(3) 3.99% 3.95%
<FN>
(1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was
fully taxable.
(2) Non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $877, $1,230, and $1,029
for 1999, 1998, and 1997, respectively.
(3) Net interest margin in 1999 was 3.94% excluding asset growth strategies that averaged $25 million, which were funded by FHLB
borrowings and were employed during the year at tax-equivalent net interest margins ranging from 1.00% to 1.50%. These growth
strategies were employed in order to more effectively utilize equity capital in excess of requirements. See the discussion regarding
NET INTEREST INCOME in the section entitled RESULTS OF OPERATIONS for further information.
</FN>
</TABLE>
- -------------------------------------------------------------------------------
14 Consolidated Balance Sheets
Dollars in thousands
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and Due from Banks........................................................ $ 23,707 $ 18,097
Federal Funds Sold and Other Short-term Investments............................ 1,189 31,491
----------- -----------
Cash and Cash Equivalents.................................................. 24,896 49,588
Interest-bearing Time Deposits with Banks...................................... 499 1,299
Securities Available-for-Sale, at Market....................................... 188,148 151,527
Securities Held-to-Maturity, at Cost........................................... 30,191 48,346
Loans Held for Sale............................................................ 2,845 2,449
Loans ........................................................................ 694,636 598,797
Less: Unearned Income........................................................ (344) (709)
Allowance for Loan Losses.............................................. (8,868) (8,323)
----------- -----------
Loans, Net..................................................................... 685,424 589,765
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost.............. 9,660 7,853
Premises, Furniture and Equipment, Net......................................... 19,782 17,796
Other Real Estate.............................................................. 2,434 1,156
Intangible Assets.............................................................. 2,161 1,841
Accrued Interest Receivable and Other Assets................................... 26,595 25,305
----------- -----------
TOTAL ASSETS........................................................... $ 992,635 $ 896,925
=========== ===========
LIABILITIES
Noninterest-bearing Deposits................................................... $ 71,671 $ 67,218
Interest-bearing Deposits...................................................... 626,590 597,895
----------- -----------
Total Deposits............................................................. 698,261 665,113
FHLB Advances and Other Borrowings............................................. 196,017 131,409
Accrued Interest Payable and Other Liabilities................................. 10,870 9,127
----------- -----------
TOTAL LIABILITIES..................................................... 905,148 805,649
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized...... 9,029 8,705
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.... --- ---
Additional Paid-in Capital..................................................... 53,846 48,190
Retained Earnings.............................................................. 28,559 33,570
Accumulated Other Comprehensive Income (Loss).................................. (3,947) 811
----------- -----------
TOTAL SHAREHOLDERS' EQUITY............................................. 87,487 91,276
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 992,635 $ 896,925
=========== ===========
End of period shares issued and outstanding.................................... 9,029,109 8,704,592
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Consolidated Statements of Income 15
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans.................................................. $53,868 $51,980 $49,160
Interest on Federal Funds Sold and other Short-term Investments............. 951 1,827 1,894
Interest and Dividends on Securities:
Taxable................................................................. 10,065 8,752 9,782
Non-taxable............................................................. 3,045 2,801 2,389
-------- -------- ------
TOTAL INTEREST INCOME................................................ 67,929 65,360 63,225
INTEREST EXPENSE
Interest on Deposits........................................................ 27,860 28,450 27,804
Interest on FHLB Advances and Other Borrowings.............................. 7,899 6,155 5,930
----- ----- -----
TOTAL INTEREST EXPENSE............................................... 35,759 34,605 33,734
-------- ------- --------
NET INTEREST INCOME......................................................... 32,170 30,755 29,491
Provision for Loan Losses................................................... 1,718 1,338 773
-------- -------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES......................... 30,452 29,417 28,718
NONINTEREST INCOME
Trust and Investment Product Fees........................................... 835 833 794
Service Charges on Deposit Accounts......................................... 1,757 1,599 1,429
Insurance Commissions & Fees................................................ 2,239 685 479
Other Operating Income...................................................... 1,013 958 845
Gains on Sales of Loans and Other Real Estate............................... 413 883 2,180
Net Gain/(Loss) on Sales of Securities...................................... (6) 38 (29)
-------- -------- -------
TOTAL NONINTEREST INCOME................................................ 6,251 4,996 5,698
-------- -------- -------
NONINTEREST EXPENSE
Salaries and Employee Benefits.............................................. 13,433 12,132 12,520
Occupancy Expense........................................................... 1,718 1,676 1,663
Furniture and Equipment Expense............................................. 1,683 1,393 1,356
FDIC Premiums............................................................... 160 170 1,593
Data Processing Fees........................................................ 990 988 855
Professional Fees........................................................... 871 1,029 1,292
Advertising and Promotion................................................... 888 684 652
Supplies.................................................................... 807 680 674
Other Operating Expenses.................................................... 4,282 3,566 3,673
-------- -------- -------
TOTAL NONINTEREST EXPENSE............................................... 24,832 22,318 24,278
-------- -------- -------
Income before Income Taxes.................................................. 11,871 12,095 10,138
Income Tax Expense.......................................................... 3,049 3,525 2,868
-------- -------- -------
NET INCOME.................................................................. $ 8,822 $ 8,570 $ 7,270
======= ======= =======
Earnings per Share and Diluted Earnings per Share........................... $ 0.96 $ 0.93 $ 0.79
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
16 Consolidated Statements of Cash Flows
Dollars in thousands
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................... $ 8,822 $ 8,570 $ 7,270
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Accretion/(Amortization) on Investments........................ 318 18 24
Depreciation and Amortization........................................ 2,028 1,814 1,621
Amortization of Mortgage Servicing Rights ........................... 241 242 153
Net Change in Loans Held for Sale.................................... 6,843 25,320 (9,179)
Loss in Investment in Limited Partnership............................ 108 113 122
Provision for Loan Losses............................................ 1,718 1,338 773
Loss (Gain) on Sale of Securities, net............................... 6 (38) 29
Gain on Sales of Loans and Other Real Estate......................... (413) (883) (2,180)
Change in Assets and Liabilities:
Deferred Loan Fees................................................ (381) (13) (48)
Interest Receivable and Other Assets.............................. (5,970) (2,519) (2,879)
Interest Payable and Other Liabilities................................... 923 (1,751) 2,091
Unearned Income................................................... (365) (356) (205)
--- --- ---
Total Adjustments.............................................. 5,056 23,285 (9,678)
----- ------ -------------
Net Cash from Operating Activities....................................... 13,878 31,855 (2,408)
------ ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks....................... 823 1,547 (1,002)
Proceeds from Maturities of Other Short-term Investments............. --- --- 996
Proceeds from Maturities of Securities Available-for-Sale............ 35,779 110,959 58,833
Proceeds from Sales of Securities Available-for-Sale 953 50,390 29,826
Purchase of Securities Available-for-Sale............................ (83,512) (178,739) (90,514)
Proceeds from Maturities of Securities Held-to-Maturity.............. 5,544 16,532 6,195
Proceeds from Sales of Securities Held-to-Maturity................... --- 362 ---
Purchase of Securities Held-to-Maturity.............................. (4,982) (8,503) (7,730)
Purchase of Loans.................................................... (9,884) (5,998) (1,152)
Proceeds from Sales of Loans......................................... 5,875 463 1,926
Loans Made to Customers, net of Payments Received.................... (85,925) (58,530) (20,273)
Proceeds from Sales of Fixed Assets.................................. --- --- 41
Proceeds from Sales of Other Real Estate............................. 1,604 310 88
Property and Equipment Expenditures.................................. (3,616) (2,481) (2,557)
Acquire Affiliates and Adjust to Conform Fiscal Years................ (22) 2,934 ---
-- ----- ---
Net Cash from Investing Activities............................. (137,363) (70,754) (25,323)
------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits................................................... 26,014 5,567 20,947
Net Change in Short-term Borrowings.................................. 66,087 1,480 (7,540)
Purchase / Retire Common Stock....................................... (4,320) (360) (637)
Advances in Long-term Debt........................................... 95,000 90,996 83,769
Repayments of Long-term Debt......................................... (79,834) (66,911) (85,357)
Issuance of Common Stock............................................. 348 196 817
Dividends Paid....................................................... (4,467) (3,122) (2,797)
Purchase of Interests in Fractional Shares........................... (35) (43) (38)
-- -- --
Net Cash from Financing Activities............................. 98,793 27,803 9,164
------ ------ -----
Net Change in Cash and Cash Equivalents.................................. (24,692) (11,096) (18,567)
Cash and Cash Equivalents at Beginning of Year....................... 49,588 60,684 79,251
------ ------ ------
Cash and Cash Equivalents at End of Year............................. $ 24,896 $ 49,588 $ 60,684
====== ======== ========
Cash Paid During the Year for:
Interest.............................................................. $ 38,774 $ 34,391 $ 33,257
Income Taxes.......................................................... 3,695 3,834 3,298
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity 17
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
Stock/ Accumulated
Additional Other Total
Paid-in Retained Comprehensive Shareholders'
Capital Earnings Income Equity
<S> <C> <C> <C> <C>
Balances, January 1, 1997
(as previously reported for German American Bancorp)... $33,040 $24,125 $ 495 $ 57,660
Retroactive Restatement for
Pooling of Interests (2,039,665 shares in 1999)....... 3,414 18,560 (245) 21,729
------------------------------------------------------
Balances, January 1, 1997 as restated..................... 36,454 42,685 250 79,389
Comprehensive Income:
Net Income............................................. 7,270 7,270
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale..................... 408 408
------------------------------------------------------
Total Comprehensive Income......................... 7,678
Cash Dividends ($.32 per Share,
as restated for pooling of interests).................. (2,797) (2,797)
Issuance of Common Stock for:
Dividend Reinvestment Plan (9,873 shares).............. 306 306
Exercise of Stock Options (15,818 shares).............. 432 432
Employee Stock Purchase Plan (6,492 shares)............ 79 79
5% Stock Dividend (313,986 shares)..................... 8,253 (8,253) -
Two for One Stock Split (2,546,041 shares)............. 2,546 (2,546) -
Purchase and Retirement of Common Stock (24,124 shares)... (363) (274) (637)
Purchase of Interest in Fractional Shares................. (38) (38)
-------------------------------------------------------
Balances, December 31, 1997 as restated................... 47,707 36,047 658 84,412
Comprehensive Income:
Net Income............................................. 8,570 8,570
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale..................... 153 153
------------------------------------------------------
Total Comprehensive Income......................... 8,723
Cash Dividends ($.36 per Common Share,
as restated for pooling of interests).................. (3,122) (3,122)
Issuance of Common Stock for:
Dividend Reinvestment Plan (2,233 shares).............. 36 36
Exercise of Stock Options (7,459 shares)............... 85 85
Employee Stock Purchase Plan (6,481 shares)............ 75 75
5% Stock Dividend (410,363 shares)..................... 8,146 (8,146) -
Three for Two Stock Split (628,730 shares)............. 346 (346) -
Acquisitions (67,203 shares)........................... 818 652 1,470
Purchase and Retirement of Common Stock (19,979 shares)... (318) (42) (360)
Purchase of Interest in Fractional Shares................. (43) (43)
-------------------------------------------------------
Balances, December 31, 1998 as restated................... 56,895 33,570 811 91,276
Comprehensive Income:
Net Income............................................. 8,822 8,822
Change in Unrealized Gain / (Loss)
on Securities Available-for-Sale..................... (4,785) (4,785)
-------------------------------------------------------
Total Comprehensive Income......................... 4,037
Cash Dividends ($.485 per Common Share,...................
as restated for pooling of interests).................. (4,467) (4,467)
Issuance of Common Stock for:.............................
Exercise of Stock Options (4,825 shares).................. 43 43
Director Stock Awards (6,481 shares)................... 305 305
5% Stock Dividend (431,942 shares)..................... 9,179 (9,179) -
Acquisitions (70,000 shares)........................... 173 96 269
Purchase and Retirement of Common Stock (199,077 shares).. (4,292) (28) (4,320)
Purchase of Interest in Fractional Shares................. (35) (35)
Adjustment to Conform Year-ends........................... 572 (220) 27 379
------------------------------------------------------
Balances, December 31, 1999............................... $ 62,875 $ 28,559 $ (3,947) $ 87,487
======================================================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
18 Notes to the Consolidated Financial Statements
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
Description of Business and Basis of Presentation
German American Bancorp operates primarily in the banking industry. The
accounting and reporting policies of German American Bancorp and its
subsidiaries conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant policies are
described below. The consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all material intercompany
accounts and transactions. Certain prior year amounts have been reclassified to
conform with current classifications. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates. Estimates susceptible to
change in the near term include the allowance for loan losses, impaired loans,
and the fair value of financial instruments.
The Company acquired 1ST BANCORP in 1999 in a pooling of interests (see Note
18). Prior to 1999, 1ST BANCORP's financial statements were prepared on a June
30 fiscal year-end. The Company's calendar period financial statements for
periods prior to 1999 have been restated to include 1ST BANCORP fiscal period
financial statements (i.e. the Company's previously reported December 31, 1998
balances were combined with 1ST BANCORP June 30, 1998 balances). 1ST BANCORP is
combined with the Company on a calendar basis for all 1999 periods. As a result
of 1ST BANCORP's prior fiscal reporting, the 1999 statement of cash flows,
statement of changes in shareholder's equity, and certain notes include an
"adjustment to conform fiscal years" to adjust from fiscal to calendar period
reporting.
Securities
Securities classified as available-for-sale are securities that the Company
intends to hold for an indefinite period of time, but not necessarily until
maturity. These include securities that management may use as part of its
asset/liability strategy, or that may be sold in response to changes in interest
rates, changes in prepayment risk, or similar reasons. Securities held as
available-for-sale are reported at market value with unrealized gains or losses
included as a separate component of equity, net of tax. Securities classified as
held-to-maturity are securities that the Company has both the ability and
positive intent to hold to
maturity. Securities held-to-maturity are carried at amortized cost. Premium
amortization is deducted from, and discount accretion is added to, interest
income using the level yield method. The cost of securities sold is computed on
the identified securities method. Restricted stock, such as stock in the Federal
Home Loan Bank (FHLB), is carried at cost.
Loans
Interest is accrued over the term of the loans based on the principal
balance outstanding. Loans are placed on 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 Company defers loan fees and
certain direct loan origination costs. Deferred amounts are reported in the
balance sheet as part of loans and are recognized into interest income over the
term of the loan based on the level yield method.
The carrying values of impaired loans (as explained below in "Allowance for
Loan Losses") are periodically adjusted to reflect cash payments, revised
estimates of future cash flows, and increases in the present value of expected
cash flows due to the passage of time. Cash payments representing interest
income are reported as such. Other cash payments are reported as reductions in
carrying value, while increases or decreases due to changes in estimates of
future payments and due to the passage of time are reported as increases or
decreases to bad debt expense.
Loans held for sale are carried at the lower of cost or fair value, in
aggregate.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance, increased by the
provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the allowance for loan losses required based on past loan
loss experience, known and inherent risks in the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Allocations of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged off.
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 19
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Loan impairment is reported when full repayment under the terms of the loan
is not expected. If a loan is impaired, a portion of the allowance is allocated
so that the loan is reported net, at the present value of estimated future cash
flows using the loan's existing rate, or at the fair value of collateral if
repayment is expected solely from the collateral. Commercial, agricultural and
poultry loans are evaluated individually for impairment. Smaller balance
homogeneous loans are evaluated for impairment in total. Such loans include real
estate loans secured by one-to-four family residences and loans to individuals
for household, family and other personal expenditures. Individually evaluated
loans on nonaccrual are generally considered impaired. Impaired loans, or
portions thereof, are charged off when deemed uncollectible.
Premises, Furniture, and Equipment
Premises, Furniture and Equipment are stated at cost less accumulated
depreciation. Premises and related components are depreciated on the
straight-line method with useful lives ranging from 10 to 40 years. Furniture
and equipment are primarily depreciated using straight-line methods with useful
lives ranging from 3 to 12 years. 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 ($113 and $173
at December 31, 1999 and 1998, respectively) and goodwill ($2,048 and $1,668 at
December 31, 1999 and 1998, respectively). Core deposit intangibles are
amortized on an accelerated method over ten years and goodwill is amortized on a
straight-line basis over twelve to fifteen years. Core Deposit Intangibles and
Goodwill are assessed for impairment based on estimated undiscounted cash flows,
and written down if necessary.
Servicing Rights
Servicing rights are recognized and included with other assets for purchased
rights and for the allocated value of retained servicing rights on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to type,
interest rates and age. Fair value is determined based upon discontinued cash
flows using market based assumptions.
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.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income.
Other comprehensive income includes unrealized gains and losses on securities
available for sale, which are also recognized as a separate component of equity.
Income Taxes
Deferred tax liabilities and assets are determined at each balance sheet
date and are the result of differences in the financial statement and tax bases
of assets and liabilities. Income tax expense is the amount due on the current
year tax returns plus or minus the change in deferred taxes.
Earnings Per Share
Basic earnings per share is based on net income divided by the weighted
average number of shares outstanding during the period. Diluted earnings per
share shows the potential dilutive effect of additional common shares issuable
under stock options.
<PAGE>
- -------------------------------------------------------------------------------
20 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies (continued)
Cash Flow Reporting
The Company reports net cash flows for customer loan transactions, deposit
transactions and deposits made with other financial institutions. Cash and cash
equivalents are defined to include cash on hand, demand deposits in other
institutions and Federal Funds Sold.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 19. Fair
value estimates involve uncertainties and matters of significant judgment
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in
assumptions or in market conditions could significantly affect the estimates.
The fair value estimates of existing on- and off-balance sheet financial
instruments do not include the value of anticipated future business, or the
values of assets and liabilities not considered financial instruments.
New Accounting Pronouncements
Beginning January 1, 2001 a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this pronouncement is not expected
to have a material effect on the Company's financial results, but the effect
will depend on derivative holdings when this standard is adopted.
NOTE 2 - Securities
The amortized cost and estimated market values of Securities as of December 31,
1999 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $96,205 $ --- $(3,879) $92,326
Obligations of State and Political Subdivisions............. 26,597 462 (572) 26,487
Asset-/Mortgage-backed Securities........................... 61,514 6 (2,553) 58,967
Equity Securities........................................... 10,368 --- --- 10,368
------ --- --- ------
Total................................................... $194,684 $468 $(7,004) $188,148
======== ==== ======= ========
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions............. $29,288 $289 $(643) $28,934
Asset-/Mortgage-backed Securities........................... 903 6 (5) 904
--- - - ---
Total................................................... $30,191 $295 $(648) $29,838
======= ==== ===== =======
</TABLE>
<TABLE>
<CAPTION>
The amortized cost and estimated market values of Securities as of December 31, 1998 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $68,201 $219 $(34) $68,386
Obligations of State and Political Subdivisions............. 29,103 1,443 (91) 30,455
Asset-/Mortgage-backed Securities........................... 52,881 50 (245) 52,686
------ -- --- ------
Total................................................... $150,185 $1,712 $(370) $151,527
======== ====== ===== ========
Securities Held-to-Maturity:
U.S. Treasury Securities, and Obligations of
U.S. Government Corporations and Agencies............... $19,258 $ 2 $(46) $19,214
Obligations of State and Political Subdivisions............. 27,591 1,159 (13) 28,737
Asset-/Mortgage-backed Securities........................... 1,497 14 --- 1,511
----- -- --- -----
Total................................................... $48,346 $1,175 $(59) $49,462
======= ====== ===== =======
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 21
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
The amortized cost and estimated market values of Securities at December 31,
1999 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because some issuers have the right to call or
prepay certain obligations with or without call or prepayment penalties.
Asset-backed, Mortgage-backed and certain Other Securities are not due at a
single maturity date and are shown separately.
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated
Amortized Market
Cost Value
---- -----
Securities Available-for-Sale:
Due in one year or less..................................... $2,681 $2,699
Due after one year through five years....................... 23,108 22,701
Due after five years through ten years...................... 76,551 73,992
Due after ten years......................................... 20,462 19,421
Asset-/Mortgage-backed Securities........................... 61,514 58,967
Equity Securities........................................... 10,368 10,368
------ ------
Totals.................................................. $194,684 $188,148
======== ========
Securities Held-to-Maturity:
Due in one year or less..................................... $1,236 $1,240
Due after one year through five years....................... 7,539 7,473
Due after five years through ten years...................... 9,960 9,923
Due after ten years......................................... 10,553 10,298
Asset-/Mortgage-backed Securities........................... 903 904
--- ---
Totals.................................................. $30,191 $29,838
======= =======
</TABLE>
The amortized cost of securities at December 31, 1999 are shown in the following
table by contractual maturity, except for asset/mortgage-backed securities,
which are based on estimated average lives. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties. Equity securities
totaling $10,368 do not have contractual maturities, and are excluded from the
table below.
<TABLE>
<CAPTION>
Maturities and Average Yields of Securities at December 31, 1999:
Within After One But After Five But After Ten
One Year Within Five Years Within Ten Years Years
----------------------------------------------------------------------------------------------
Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasuries and
Agencies.............. $ --- --- $17,100 6.13% $71,122 6.60% $7,983 6.28%
State and Political
Subdivisions.......... 3,917 8.22% 13,547 7.88% 15,389 8.22% 23,032 8.56%
Asset- / Mortgage-backed
Securities............ 4,813 6.14% 37,163 6.43% 20,188 6.40% 253 6.58%
----- ------ ------ ---
Totals............. $8,730 7.07% $67,810 6.64% $106,699 6.80% $31,268 7.96%
====== ======= ======== =======
<FN>
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above
table.
</FN>
</TABLE>
At December 31, 1999 and 1998, U.S. Government Agency structured notes,
consisting primarily of step-up and single-index bonds, with respective
amortized costs of $7,983 and $9,985 and fair values of $7,150 and $9,984 were
included in securities available-for-sale.
<PAGE>
- -------------------------------------------------------------------------------
22 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 2 - Securities (continued)
Proceeds from the Sales of Securities are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Available- Held-to- Available- Held-to- Available- Held-to-
Trading for-Sale Maturity Trading for-Sale Maturity Trading for-Sale Maturity
------- --------- -------- ------- --------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Proceeds from Sales..... $--- $ 953 $--- $14,046 $50,390 $ 362 $9,984 $29,826 $ ---
Gross Gains on Sales.... --- 6 --- 18 119 10 13 --- ---
Gross Losses on Sales... --- (12) --- (11) (92) (6) (23) (19) ---
Income Taxes
on Gross Gains........ --- 2 --- 7 48 4 5 --- ---
Income Taxes
On Gross Losses....... --- (5) --- (4) (37) (2) (9) (8) ---
<FN>
Sales of securities held-to-maturity in 1998 consisted of mortgage-backed
securities for which payment of more than 85% of principal had occurred.
</FN>
</TABLE>
The carrying value of securities pledged to secure repurchase agreements,
public and trust deposits, and for other purposes as required by law was $33,740
and $50,079 as of December 31, 1999 and 1998, respectively.
NOTE 3 - Loans
<TABLE>
<CAPTION>
Loans, as presented on the balance sheet, are comprised of the following classifications at December 31,
1999 1998
<S> <C> <C>
Real Estate Loans Secured by 1- 4 Family Residential Properties......................... $356,001 $295,788
Commercial and Industrial Loans......................................................... 161,711 136,249
Loans to Individuals for Household, Family and Other Personal Expenditures.............. 112,870 104,024
Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers............ 64,054 62,736
------ ------
Totals.............................................................................. $694,636 $598,797
======== ========
Nonperforming loans were as follows at December 31:
Loans past due over 90 days and accruing................................................ $1,564 $1,522
Non-accrual loans....................................................................... 7,237 5,411
----- -----
Totals.............................................................................. $8,801 $6,933
====== ======
Information regarding impaired loans: 1999 1998
---- ----
Year-end impaired loans with no allowance for loan losses allocated..................... $1,784 $ 613
Year-end impaired loans with allowance for loan losses allocated........................ 446 543
Amount of allowance allocated to impaired loans......................................... 224 151
Average balance of impaired loans during the year....................................... 2,337 2,297
Interest income recognized during impairment............................................ 169 212
Interest income recognized on cash basis................................................ 120 117
</TABLE>
<TABLE>
<CAPTION>
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 1999. A summary of
the activity of these loans follows:
Balance Changes Deductions Balance
January 1, in Persons December 31,
1999 Additions Included Collected Charged-off 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 19,155 $ 12,363 $ (1,385) $ (9,180) $ --- $ 20,953
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 23
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 4 - Allowance for Loan Losses
<TABLE>
<CAPTION>
A summary of the activity in the Allowance for Loan Losses follows:
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance as of January 1................................ $8,323 $8,574 $8,040
Allowance of Acquired Subsidiary....................... --- 80 ---
Adjustment to Conform Fiscal Years..................... 356 --- ---
Provision for Loan Losses.............................. 1,718 1,338 773
Recoveries of Prior Loan Losses........................ 476 375 827
Loan Losses Charged to the Allowance................... (2,005) (2,044) (1,066)
----- ----- -----
Balance as of December 31.............................. $8,868 $8,323 $8,574
====== ====== ======
</TABLE>
NOTE 5 - Mortgage Banking
The amount of loans serviced by the Company for the benefit of others was
$154,407 at December 31, 1999 and $123,356 at December 31, 1998.
At December 31, 1999 and 1998, unamortized loan servicing rights totaled
$1,171 and $1,012 respectively, and are included in Accrued Interest Receivable
and Other Assets in the Consolidated Balance Sheet. For the years ended December
31, 1999, 1998, and 1997, the Company capitalized $473, $426, and $366,
respectively, of servicing rights that were originated through its loan
origination network and retail banking offices. Capitalized amounts and
amortization reported in the statement of cash flows for 1999 exclude
adjustments to conform fiscal years, which amounted to a net reduction of
servicing rights of $74. There were no valuation allowances at December 31, 1999
or 1998.
NOTE 6 - Premises, Furniture, and Equipment
<TABLE>
<CAPTION>
Premises, furniture, and equipment as presented on the balance sheet is
comprised of the following classifications at December 31,
1999 1998
---- ----
<S> <C> <C>
Land............................................................................... $3,072 $3,008
Buildings and Improvements......................................................... 19,758 17,281
Furniture and Equipment............................................................ 12,978 11,820
------ ------
Total Premises, Furniture and Equipment........................................ 35,808 32,109
Less: Accumulated Depreciation................................................ (16,026) (14,313)
------ ------
Total....................................................................... $19,782 $17,796
======= =======
</TABLE>
Depreciation expense was $1,667, $1,453 and $1,437 for 1999, 1998 and 1997,
respectively.
NOTE 7 - Deposits
At year-end 1999, interest-bearing deposits include $186,427 of demand and
savings deposits and $440,163 of time deposits. Stated maturities of time
deposits were as follows:
2000.................................. $269,692
2001.................................. 110,534
2002.................................. 34,493
2003.................................. 13,323
2004.................................. 10,697
Thereafter........................... 1,424
------
Total.............................. $440,163
========
<PAGE>
- -------------------------------------------------------------------------------
24 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 8 - FHLB Advances and Other Borrowed Money
<TABLE>
<CAPTION>
The Company's funding sources include Federal Home Loan Bank advances,
repurchase agreements, and federal funds purchased. Information regarding each
of these types of borrowings is as follows:
December 31,
1999 1998
---- ----
<S> <C> <C>
Long-term advances from the Federal Home Loan Bank collateralized by
qualifying mortgages, investment securities, and mortgage-backed securities...... $122,815 $124,381
Promissory notes payable at a weighted average interest rate of 8.8%................. 87 ---
-- ---
Long-term borrowings............................................................. 122,902 124,381
------- -------
Overnight discount note advances from the Federal Home Loan Bank collateralized
by qualifying mortgages, investment securities, and mortgage-backed securities... 40,000 ---
Repurchase agreements................................................................ 24,015 6,903
Federal funds purchased.............................................................. 9,100 125
----- ---
Short-term borrowings............................................................ 73,115 7,028
------ -----
Total borrowings.............................................................. $196,017 $131,409
======== ========
</TABLE>
At December 31, 1999 interest rates on the fixed rate long-term FHLB
advances ranged from 5.0% to 6.7% with a weighted average rate of 5.8%. Of the
$122.8 million, $84.0 million or 68% of the advances contained options whereby
the FHLB may convert the fixed rate advance to an adjustable rate advance, at
which time the company may prepay the advance without penalty.
At December 31, 1998 interest rates on the fixed rate long-term FHLB
advances ranged from 4.9% to 6.0% with a weighted average rate of 5.4%. Of the
$124.4 million, $87.0 million or 70% of the advances contained options whereby
the FHLB may convert the fixed rate advance to an adjustable rate advance, at
which time the company may prepay the advance without penalty.
The interest rate for the overnight discount note advances from the FHLB at
December 31, 1999 was 4.1%. There were no overnight discount notes outstanding
on December 31, 1998. All of the overnight discount notes were refinanced into
long-term advances during January 2000 at rates ranging from 6.1% to 6.4% with a
weighted average remaining maturity of 48 months.
Scheduled principal payments on long-term borrowings at December 31, 1999
are as follows:
2000........................................................ $13,135
2001........................................................ 18,225
2002........................................................ 25,636
2003........................................................ 12,249
2004........................................................ 30,441
Thereafter................................................ 23,216
------
Total.................................................. $122,902
========
NOTE 9 - Stockholders' Equity
The Company and affiliate Banks are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance sheet items calculated
under regulatory accounting practices. Capital amounts and classifications are
also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can initiate
regulatory action that could have a direct material effect on the financial
statements.
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 25
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 9 - Stockholders' Equity (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.
<TABLE>
<CAPTION>
At year-end 1999, consolidated and selected affiliate bank actual capital
levels and minimum required levels are presented below:
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....................... $97,525 14.78% $52,770 8.00% $65,963 10.00%
German American Bank............... $26,974 12.49% $17,280 8.00% $21,600 10.00%
First American Bank................ $24,526 13.64% $14,382 8.00% $17,977 10.00%
Peoples National Bank.............. $15,547 13.28% $9,367 8.00% $11,709 10.00%
Citizens State Bank................ $12,399 12.76% $7,775 8.00% $9,718 10.00%
Tier 1 Capital
(to Risk Weighted Assets)
Consolidated....................... $89,272 13.53% $26,385 4.00% $39,578 6.00%
German American Bank............... $24,266 11.23% $8,640 4.00% $12,960 6.00%
First American Bank................ $22,567 12.55% $7,191 4.00% $10,786 6.00%
Peoples National Bank.............. $14,079 12.02% $4,684 4.00% $7,025 6.00%
Citizens State Bank................ $11,372 11.70% $3,887 4.00% $5,831 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated....................... $89,272 9.07% $39,367 4.00% $49,208 5.00%
German American Bank............... $24,266 7.42% $13,076 4.00% $16,345 5.00%
First American Bank................ $22,567 7.92% $11,402 4.00% $14,252 5.00%
Peoples National Bank.............. $14,079 7.88% $7,144 4.00% $8,930 5.00%
Citizens State Bank................ $11,372 7.28% $6,250 4.00% $7,813 5.00%
</TABLE>
Capital ratios for First State Bank are materially consistent with
consolidated capital ratios. The Company and all affiliate Banks at year-end
1999 and 1998 were categorized as well capitalized. Regulations require the
maintenance of certain capital levels at each affiliate bank, and may limit the
dividends payable by the affiliates to the holding company, or by the holding
company to its shareholders. At December 31, 1999 the affiliates had $3.5
million in retained earnings available for dividends to the parent company
without prior regulatory approval.
Stock Options
The Company maintains a Stock Option Plan and has reserved 185,456 shares of
Common Stock (as adjusted for subsequent stock splits and dividends and subject
to further customary anti-dilution adjustments) for the purpose of grants of
options to officers and other employees of the Company. Options may be
designated as "incentive stock options" under the Internal Revenue Code of 1986,
or as nonqualified options. While the date after which options are first
exercisable is determined by the Stock Option Committee of the Company, no stock
option may be exercised after ten years from the date of grant (twenty years in
the case of nonqualified stock options). The exercise price of stock options
granted pursuant to the Plan must be no less than the fair market value of the
Common Stock on the date of the grant.
The Plan authorizes an optionee to pay the exercise price of options in cash
or in common shares of the Company or in some combination of cash and common
shares. An optionee may tender already-owned common shares to the Company in
exercise of an option. In this instance, the Company is obligated to use its
best efforts to issue to such optionee a replacement option for the number of
shares tendered, as follows: (a) of the same type as the option exercised
(either an incentive stock option or a non-qualified option); (b) with the same
expiration date; and, (c) priced at the fair market value of the stock on that
date. Replacement options may not be exercised until one year from the date of
grant.
<PAGE>
- -------------------------------------------------------------------------------
26 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
NOTE 9 - Stockholders' Equity (continued)
<TABLE>
<CAPTION>
Changes in options outstanding were as follows, as adjusted to reflect stock
dividends and splits:
Number Weighted-average
of Options Exercise Price
---------- --------------
<S> <C> <C> <C>
Outstanding, beginning of 1997..................................... 46,224 $11.28
Granted............................................................ 74,949 12.57
Exercised.......................................................... (36,623) 11.83
------
Outstanding, end of 1997........................................... 84,550 14.47
Granted............................................................ 65,923 22.39
Exercised.......................................................... (53,708) 10.53
-------
Outstanding, end of 1998........................................... 96,765 20.05
Granted............................................................ 2,472 17.38
Exercised.......................................................... (5,066) 8.49
-----
Outstanding, end of 1999........................................... 94,171 20.59
======
Options exercisable at year-end are as follows:
1999............................................................... 91,698 $20.68
</TABLE>
Financial Accounting Standard No. 123 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. No compensation cost was
recognized for stock options in any of the years presented. In future years, the
pro forma effect of not applying this standard may increase as additional
options are granted. At year-end 1999, options outstanding have a weighted
average remaining life of 13.72 years, with exercise prices ranging from $8.49
to $28.62.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Pro forma Net Income............................................... $8,818 $7,987 $7,132
Pro forma Earnings Per Share and Diluted Earnings per Share........ $0.96 $0.87 $0.78
</TABLE>
For options granted during 1999, 1998 and 1997, the weighted-average fair
values at grant date are $1.74, $9.29 and $7.36,
respectively. The fair value of options granted during 1999, 1998 and 1997 was
estimated using the following weighted-average information: risk-free interest
rate of 4.75%, 5.11% and 5.58%, expected life of 1.0, 9.7, and 3.6 years,
expected volatility of stock price of .22, .32 and .18, and expected dividends
of 2.52%, 1.64% and 2.06% per year.
Stock Repurchase Plan
On July 29, 1999 German American Bancorp announced that its Board of
Directors approved a stock repurchase program for up to 446,250 of the
outstanding Common Shares of the Company, representing nearly five percent of
then outstanding shares. Shares were purchased from time to time in the open
market and in large block privately negotiated transactions. The Company
commenced bidding for shares on August 3, 1999 and concluded bids and purchases
(even though not all shares authorized under the program had been repurchased)
on December 14, 1999. The Company repurchased 206,558 shares of common stock
during 1999 in conjunction with the Plan at prices ranging from $17.02 to $22.02
per share. Shares have been adjusted for the December 1999 stock dividend.
Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan whereby full-time
employees can purchase the Company's common stock at a discount. The purchase
price of the shares under this plan is 85% of the fair market value of such
stock at the beginning or end of the offering period, whichever is less. No
shares have been issued under this plan to date.
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 27
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 10 - Employee Benefit Plans
The Company and all its banking affiliates provide a contributory trusteed
401(k) deferred compensation and profit sharing plan, which covers substantially
all full-time employees. The companies agree to match certain employee
contributions under the 401(k) portion of the plan, while profit sharing
contributions are discretionary and are subject to determination by the Board of
Directors. The Doty Insurance Agency, Inc. provides a similar 401(k) deferred
compensation plan which covers full-time employees, except there is no profit
sharing component in the Doty plan. Employees of 1ST BANCORP joined the banking
affiliate plan in January 1999, employees of Citizens State and FSB Corporation
in June 1998, and employees of Peoples in April 1997. Contributions to these
plans were $779, 609, and $549 for 1999, 1998, and 1997, respectively.
Prior to their merger with the Company, Peoples had a non-contributory
defined benefit pension plan. The Projected Benefit Obligation under this plan
was suspended at April 30, 1997. The plan was terminated in 1998 resulting in an
$83 settlement gain, net of excise tax.
1ST BANCORP and Citizens State Bank had non-contributory defined benefit
pension plans with benefits based on years of service and compensation prior to
retirement. The benefits under the Citizens State Bank plan were suspended at
August 1, 1998. The benefits under the 1ST BANCORP plan were suspended at
December 31, 1998. During 1999, a loss of $147 was recorded on a partial
settlement of the 1ST BANCORP plan. As of December 31, 1999, the Citizens State
Bank plan was merged into the 1ST BANCORP plan.
Accumulated plan benefit information for the Company's plan as of December
31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Changes in Benefit Obligation:
Obligation at beginning of year............................................ $ 1,392 $ 1,636
Service cost............................................................... --- 62
Interest cost.............................................................. 104 79
Benefits paid.............................................................. (725) (54)
Actuarial (gain) loss...................................................... 118 (7)
Adjustment in cost of settlement........................................... 191 ---
Effect of curtailment...................................................... --- (324)
--- ---
Obligation at end of year.................................................. 1,080 1,392
----- -----
Changes in Plan Assets:
Fair Value at beginning of year............................................ 2,125 2,086
Actual return on plan assets............................................... (11) 58
Employer contributions..................................................... --- 35
Benefits paid.............................................................. (725) (54)
---- --
Fair value at end of year.................................................. 1,389 2,125
----- -----
Funded Status:
Funded status at end of year............................................... (309) (733)
Unrecognized prior service cost............................................ 20 24
Unrecognized net (gain) or loss............................................ (75) 255
Unrecognized transition asset.............................................. 22 24
-- --
Prepaid benefit cost....................................................... $ (342) $ (430)
=== ===
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
28 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net periodic pension expense (benefit) for the years ended December 31,
1999, 1998 and 1997 is as follows:
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Service cost................................................... $ --- $ 62 $ 126
Interest cost.................................................. 104 79 119
Expected return on assets...................................... (160) (105) (135)
Amortization of transition amount.............................. (2) (2) (2)
Amortization of prior service cost............................. (3) (1) (3)
Recognition of net (gain) or loss.............................. 3 (14) ---
- -- ---
Net periodic pension expense (benefit)......................... $ (58) $ 19 $ 105
== == ===
</TABLE>
The weighted-average assumed rate of return used in determining the net
periodic pension cost for 1999, 1998 and 1997 was 8.0%. The weighted-average
assumed discount rate used in determining the actuarial present value of
accumulated benefit obligations at December 31, 1999, 1998 and 1997 was 7.5%.
The weighted-average rate of increase in future compensation levels was not
applicable for 1999 and was 5.0% for 1998 and 1997.
NOTE 11 - Income Taxes
<TABLE>
<CAPTION>
The provision for income taxes consists of the following: 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Currently Payable............................................. $3,536 $3,722 $3,218
Deferred...................................................... (440) (150) (303)
Net Operating Loss Carryforward............................... (47) (47) (47)
-- --- ---
Total..................................................... $3,049 $3,525 $2,868
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows:
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Statutory Rate Times Pre-tax Income........................... $4,036 $4,112 $3,446
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments.............. (987) (965) (785)
Non-deductible Merger Costs............................... 14 119 73
State Income Tax, Net of Federal Tax Effect............... 581 725 629
Low Income Housing Credit................................. (407) (343) (343)
Other Differences ........................................ (188) (123) (152)
--- --- ---
Total Income Taxes...................................... $3,049 $3,525 $2,868
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
The net deferred tax asset at December 31 consists of the following: 1999 1998
---- ----
<S> <C> <C>
Deferred Tax Assets:
Allowance for Loan Losses................................. $2,359 $2,103
Net Operating Loss Carryforwards.......................... 93 140
Deferred Compensation and Employee Benefits............... 1,392 674
Unrealized Depreciation on Securities..................... 2,589 ---
Other..................................................... 158 310
--- ---
Total Deferred Tax Assets............................... 6,591 3,227
Deferred Tax Liabilities:
Depreciation.............................................. (490) (458)
Leasing Activities, Net................................... (18) (153)
Purchase Accounting Adjustments........................... (7) (17)
Unrealized Appreciation on Securities..................... --- (532)
Mortgage Servicing Rights................................. (464) (405)
Other..................................................... (251) (372)
--- ---
Total Deferred Tax Liabilities.......................... (1,230) (1,937)
Valuation Allowance........................................... (48) (48)
-- --
Net Deferred Tax Asset.................................. $5,313 $1,242
====== ======
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 29
Dollars in thousands, except per share data
- -------------------------------------------------------------------------------
The Company has $274 of federal tax net operating loss carryforwards expiring in
the following amounts:
Year Amount Year Amount
---------------------------------------------------------------
2002 107 2008 62
2003 105
Under the Internal Revenue Code, through 1996 First Federal Bank was allowed
a special bad debt deduction related to additions to tax bad debt reserves
established for the purpose of absorbing losses. Subject to certain limitations,
First Federal Bank was permitted to deduct from taxable income an allowance for
bad debts based on a percentage of taxable income before such deductions or
actual loss experience. First Federal Bank generally computed its annual
addition to its bad debt reserves using the percentage of taxable income method;
however, due to certain limitations in 1996, First Federal Bank was only allowed
a deduction based on actual loss experience.
Under legislation enacted in 1996, beginning in fiscal 1997, First Federal
Bank was no longer allowed a special bad debt deduction using a percentage of
taxable income method. Also, beginning in 1997, First Federal Bank was required
to recapture its excess bad debt reserve over its 1987 base year reserve over a
six-year period. The amount has been provided in First American Bank's deferred
tax liability.
Retained earnings at December 31, 1999, includes approximately $2,300 for
which no provision for federal income taxes has been made. This amount
represents allocations of income for allowable bad debt deductions. Reduction of
amounts so allocated for purposes other than tax bad debt losses will create
taxable income which will be subject to the then current corporate income tax
rate. It is not contemplated that amounts allocated to bad debt deductions will
be used in any manner to create taxable income. The unrecorded deferred income
tax liability on the above amount at December 31, 1999 was approximately $782.
NOTE 12 - Per Share Data
Earnings and dividend per share amounts have been retroactively computed as
though shares issued for stock dividends and splits had been outstanding for all
periods presented. The computation of Earnings per Share and Diluted Earnings
per Share are provided below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Earnings per Share:
Net Income.................................................... $8,822 $8,570 $7,270
Weighted Average Shares Outstanding........................... 9,186,474 9,197,274 9,189,349
Earnings per Share........................................ $0.96 $0.93 $0.79
Diluted Earnings per Share:
Net Income.................................................... $8,822 $8,570 $7,270
Weighted Average Shares Outstanding........................... 9,186,474 9,197,274 9,189,349
Stock Options, Net............................................ 3,788 21,696 9,416
----- ------ -----
Diluted Weighted Average Shares Outstanding............... 9,190,262 9,218,970 9,198,765
Diluted Earnings per Share................................ $0.96 $0.93 $0.79
</TABLE>
NOTE 13 - Lease Commitments
The total rental expense for all leases for the years ended December 31,
1999, 1998, and 1997 was $175, $151, and $312, respectively, including amounts
paid under short-term cancelable leases.
At December 31, 1999, 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, 2001 and 2008 with various renewal options provided. Aggregate annual
rental payments to this Director's company totaled $58 for 1999. Exercise of the
Bank's sublease renewal options is contingent upon the Director's company
renewing its primary leases.
<PAGE>
- -------------------------------------------------------------------------------
30 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 13 - Lease Commitments (continued)
The following is a schedule of future minimum lease payments:
Years Ending December 31: Premises Equipment Total
-------- --------- -----
2000........................... $86 $16 $102
2001........................... 59 8 67
2002........................... 56 1 57
2003........................... 50 --- 50
2004........................... 50 --- 50
Thereafter..................... 205 --- 205
--- --- ---
Total........................ $506 $25 $531
==== === ====
NOTE 14 - Commitments and Off-balance Sheet Items
In the normal course of business, there are various commitments and
contingent liabilities, such as commitments to extend credit and commitments to
sell loans, 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
and standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policy to make commitments as it
uses for on-balance sheet items.
The Company's exposure to credit risk for commitments to sell loans is
dependent upon the ability of the counter-party to purchase the loans. This is
generally assured by the use of government sponsored entity counterparts. These
commitments are subject to market risk resulting from fluctuations in interest
rates.
Commitments and contingent liabilities are summarized as follows, at
December 31,
1999 1998
---- ----
Commitments to Fund Loans:
Home Equity.......................... $12,262 $15,782
Credit Card Lines.................... 8,813 6,030
Commercial Operating Lines........... 47,761 29,554
Residential Mortgages................ 8,357 18,143
----- ------
Total Commitments to Fund Loans.. $77,193 $69,509
======= =======
Commitments to Sell Loans............... $3,304 $5,255
Standby Letters of Credit............... $1,928 $1,690
Since many commitments to make loans expire without being used, these
amounts do not necessarily represent future cash commitments. Collateral
obtained upon exercise of the commitment is determined using management's credit
evaluation of the borrower, and may include accounts receivable, inventory,
property, land and other items. The approximate duration of these commitments is
generally one year or less.
The Company self-insures employee health benefits for the majority of its
affiliate banks. Stop loss insurance covers annual losses exceeding $70 per
covered individual and approximately $615 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 $604, $526 and $517 for 1999, 1998
and 1997, respectively.
At December 31, 1999 and 1998, respectively, the affiliate banks were
required to have $4,755 and $3,341 on deposit with the Federal Reserve, or as
cash on hand. These reserves do not earn interest.
<PAGE>
- --------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 31
Dollars in thousands
- --------------------------------------------------------------------------------
NOTE 15 - Non-cash Investing Activities
1999 1998 1997
---- ---- ----
Loans Transferred to Other Real Estate........ $2,923 $3,958 $4,153
Securities Transferred to Available-for-Sale.. --- 8,034 ---
The above data should be read in conjunction with the Consolidated Statements
of Cash Flows. On the date of merger with Citizens State, investment securities
with an amortized cost of $8.0 million and estimated market value of $8.1
million were reclassified from Held-to-Maturity to Available-for-Sale. This
action was taken as a result of the business combination and in order to conform
Citizens State's investment portfolio to the Company's liquidity and interest
rate risk policies. See also Note 18 regarding a purchase acquisition in 1999.
NOTE 16 - 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.
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 are the primary revenues 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 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 described in the
summary of significant accounting policies. 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>
Retail Mortgage Consolidated
Year Ended December 31, 1999 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income................................ $27,464 $4,459 $247 $32,170
Gain on Sales of Loans and
Capitalization of MSR............................ 16 304 --- 320
Servicing Income................................... --- 370 --- 370
Noncash Items:
Provision for Loan Losses....................... 670 1,048 --- 1,718
MSR Amortization & Valuation.................... --- 241 --- 241
Provision for Income Taxes......................... 3,788 546 (1,285) 3,049
Segment Profit..................................... 9,536 833 (1,547) 8,822
Segment Assets..................................... 806,884 180,752 4,999 992,635
</TABLE>
The financial results of the mortgage banking operation were not reported
separately from retail banking operations prior to the acquisition of 1ST
BANCORP in 1999. In addition, the mortgage banking segment's loans held for
portfolio were not separately identified in the computer subsidiary ledger prior
to the acquisition of 1ST BANCORP. Therefore, segment reporting for prior
periods is not practical.
<PAGE>
- -------------------------------------------------------------------------------
32 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 17 - Parent Company Financial Statements
The condensed financial statements of German American Bancorp are presented
below:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash........................................................... $5,763 $4,034
Securities Available-for-Sale, at Market....................... 3,255 3,471
Investment in Subsidiary Banks and Bank Holding Company........ 74,912 79,931
Investment in GAB Mortgage Corp................................ 291 291
Furniture and Equipment........................................ 1,420 2,095
Other Assets................................................... 1,910 1,837
----- -----
Total Assets................................................ $87,551 $91,659
======= =======
LIABILITIES........................................................ $ 64 $ 383
-------- ---------
SHAREHOLDERS' EQUITY
Common Stock................................................... 9,029 8,705
Additional Paid-in Capital..................................... 53,846 48,190
Retained Earnings.............................................. 28,559 33,570
Accumulated Other Comprehensive Income (Loss).................. (3,947) 811
----- ---
Total Shareholders' Equity.................................. 87,487 91,276
------ ------
Total Liabilities and Shareholders' Equity.................. $87,551 $91,659
======= =======
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from Subsidiary Banks................................. $11,400 $12,550 $6,790
Dividend and Interest Income.................................... 247 256 129
Fee Income from Subsidiary Banks................................ 471 411 407
Securities Gains, net........................................... --- --- ---
Other Income ................................................... 61 40 27
--- --- ---
Total Income ................................................ 12,179 13,257 7,353
------ ------ -----
EXPENSES
Salaries and Benefits........................................... 2,475 1,827 1,434
Professional Fees............................................... 530 760 378
Occupancy and Equipment Expense................................. 355 286 246
Other Expenses.................................................. 536 544 520
--- --- ---
Total Expenses............................................... 3,896 3,417 2,578
----- ----- -----
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES............................ 8,283 9,840 4,775
Income Tax Benefit.................................................. 1,371 1,011 740
----- ----- ---
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES.......................................... 9,654 10,851 5,515
Equity in Undistributed Income of Subsidiaries...................... (832) (2,281) 1,755
--- ----- -----
NET INCOME.......................................................... 8,822 8,570 7,270
----- ----- -----
Other Comprehensive Income:
Unrealized gain/(loss) on Securities, net....................... (4,785) 153 408
----- --- ---
Total Comprehensive Income................................. $4,037 $8,723 $7,678
====== ====== ======
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 33
Dollars in thousands
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income.......................................................... $8,822 $8,570 $7,270
Adjustments to Reconcile Net Income to Net Cash from Operations
Amortization on Securities................................... 22 38 36
Depreciation................................................. 206 157 140
Gain on Sale of Property and Equipment....................... (4) --- ---
Change in Other Assets....................................... (47) (1,515) (21)
Change in Other Liabilities.................................. (337) 175 (286)
Equity in Undistributed Income of Subsidiaries............... 832 2,281 (1,755)
--- ----- ------
Total Adjustments.......................................... 672 1,136 (1,886)
--- ----- ------
Net Cash from Operating Activities........................... 9,494 9,706 5,384
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to Subsidiaries............................. --- (299) (500)
Purchase of Securities Available-for-Sale........................ (368) (2,229) ---
Proceeds from Maturities of Securities Available-for-Sale........ 500 520 ---
Property and Equipment Expenditures.............................. (520) (881) (726)
Proceeds from Sale of Property and Equipment..................... 993 --- ---
Acquire Affiliates and Adjust to Conform Fiscal Years............ 104 --- ---
--- --- ---
Net Cash from Investing Activities............................... 709 (2,889) (1,226)
--- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of Long-term Debt...................................... --- (1,481) (197)
Purchase / Retire Common Stock................................... (4,320) (360) (637)
Issuance of Common Stock......................................... 348 196 817
Dividends Paid................................................... (4,467) (3,122) (2,797)
Purchase of Interest in Fractional Shares........................ (35) (43) (38)
-- -- --
Net Cash from Financing Activities............................ (8,474) (4,810) (2,852)
----- ----- -----
Net Change in Cash and Cash Equivalents.............................. 1,729 2,007 1,306
Cash and Cash Equivalents at Beginning of Year................... 4,034 2,027 721
----- ----- ---
Cash and Cash Equivalents at End of Year......................... $5,763 $4,034 $2,027
====== ====== ======
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
34 Notes to the Consolidated Financial Statements (continued)
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 18 - Business Combinations
Information relating to mergers and acquisitions for which stock was issued
for the three year period ended December 31, 1999, includes:
<TABLE>
Date Common Accounting
Business Combination Location Acquired Shares Issued3 Method
-------------------- -------- -------- -------------- ------
<S> <C> <C> <C> <C>
Peoples Bancorp Washington, Indiana March 4, 1997 1,424,538 Pooling
CSB Bancorp Petersburg, Indiana June 1, 1998 1,023,642 Pooling
FSB Financial Corporation Francisco, Indiana June 1, 1998 74,091 Pooling(1)
The Doty Agency, Inc. Petersburg, Indiana January 1, 1999 65,100 Pooling(1)
1ST BANCORP Vincennes, Indiana January 4, 1999 2,141,648 Pooling
Professional Insurance
Markets, Inc., (Smith & Bell) Vincennes, Indiana May 1, 1999 8,400 Purchase(2)
<FN>
Certain of the above entities have had their name changed and/or have been merged into other subsidiaries of the Corporation.
1 Prior period results do not include the effect of the mergers, as restatement would not have resulted in a material change
in overall financial results.
2 This merger was accounted for as a purchase, with assets acquired and liabilities assumed totaling $412, including goodwill
of $345. The Company issued approximately 8,400 shares of common stock and approximately $26 in cash for all the outstanding
shares of the corporate owner of Smith & Bell. Reported operating results for periods prior to the merger have not been
restated.
3 Adjusted for all subsequent stock dividends and splits.
</FN>
</TABLE>
Prior to 1999, 1ST BANCORP's financial statements were prepared on a June
30 fiscal year-end. As a result of changing fiscal years from June 30 to
December 31, retained earnings have been reduced by $72 attributable to the 1ST
BANCORP net loss for the six months ended December 31, 1998. Retained earnings
were reduced an additional $148 for cash dividends paid by 1ST BANCORP during
the same period. Revenues and expenses for the six-month period totaled $10,679
and $10,751, respectively. Earnings during the six-month period were negatively
impacted by merger related expenses including professional fees; health &
pension benefits; deferred compensation plans; and other compensation. 1ST
BANCORP also increased loan loss provision and amortization of mortgage
servicing rights, due to conditions during the period. Also as a result of the
change in fiscal years, common stock and surplus were increased by $572 due to
the exercise of stock options and issuance of shares for 1ST BANCORP's employee
stock purchase plan and dividend reinvestment plan.
The following is a reconciliation of the separate and combined net interest
income and net income of German American Bancorp and 1ST BANCORP for periods
prior to the merger:
1998 1997
---- ----
Net Interest Income
German American Bancorp............ $24,082 $22,880
1ST BANCORP........................ 6,673 6,611
--------- ---------
Combined........................ $30,755 $29,491
======= =======
Net Income
German American Bancorp............ $6,659 $6,449
1ST BANCORP........................ 1,911 821
------- --------
Combined........................ $8,570 $7,270
====== ======
<PAGE>
- -------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (continued) 35
Dollars in thousands
- -------------------------------------------------------------------------------
NOTE 19 - Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are
provided in the table below. Not all of the Company's assets and liabilities are
considered financial instruments, and therefore are not included in the table.
Because no active market exists for a significant portion of the Company's
financial instruments, fair value estimates were based on subjective judgments,
and therefore cannot be determined with precision.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Financial Assets:
Cash and Short-term Investments......................... $25,395 $25,395 $50,887 $50,877
Securities Available-for-Sale........................... 188,148 188,148 151,527 151,527
Securities Held-to-Maturity............................. 30,191 29,838 48,346 49,462
FHLB Stock and Other Restricted Stock................... 9,660 9,660 7,853 7,853
Loans, including loans held for sale, net............... 688,269 682,890 592,214 599,723
Accrued Interest Receivable............................. 8,572 8,572 8,456 8,456
Financial Liabilities:
Demand, Savings and Money Market Deposits............... $(258,098) $(258,098) $(243,561) $(243,561)
Other Time Deposits..................................... (440,163) (441,141) (421,552) (425,795)
Short-term Borrowings................................... (73,115) (73,115) (7,028) (7,028)
Long-term Debt.......................................... (122,902) (124,476) (124,381) (124,550)
Accrued Interest Payable................................ (3,295) (3,295) (3,597) (3,597)
Unrecognized Financial Instruments:
Commitments to extend Credit............................ --- --- --- ---
Standby Letters of Credit............................... --- --- --- ---
</TABLE>
The carrying amounts of cash, short-term investments, FHLB and other
restricted stock, and accrued interest receivable are a reasonable estimate of
their fair values. The fair values of securities are based on quoted market
prices or dealer quotes, if available, or by using quoted market prices for
similar instruments. The fair value of loans held for sale are estimated using
commitment prices or market quotes on similar loans. The fair value of loans are
estimated by discounting future cash flows using the current rates at which
similar loans would be made for the average remaining maturities. The fair value
of demand deposits, savings accounts, money market deposits, short-term
borrowings and accrued interest payable is the amount payable on demand at the
reporting date. The fair value of fixed-maturity time deposits and long-term
borrowings are estimated using the rates currently offered on these instruments
for similar remaining maturities. Commitments to extend credit and standby
letters of credit are generally short-term or variable rate with minimal fees
charged. These instruments have no carrying value, which is also assumed to be
their fair value.
NOTE 20 - Other Comprehensive Income
Other comprehensive income components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Unrealized holding gains and losses on
available-for-sale securities................................ $(7,929) $301 $647
Less: reclassification adjustments for gains
and losses later recognized in income........................ (6) 38 (29)
- -- --
Net unrealized gains and losses.................................. (7,923) 263 676
Tax Effect....................................................... 3,138 (110) (268)
----- --- ---
Other comprehensive income....................................... $(4,785) $153 $408
===== ==== ====
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
36 Independent Auditors' Report
Dollars in thousands
- -------------------------------------------------------------------------------
Board of Directors and Shareholders
German American Bancorp
Jasper, Indiana
We have audited the accompanying consolidated balance sheets of German
American Bancorp as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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.
The consolidated balance sheet as of December 31, 1998 and related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1998 and 1997 have been restated to
reflect the 1ST BANCORP and CSB Bancorp poolings of interests, as described in
Note 18. We did not audit the separate 1998 and 1997 financial statements of 1ST
BANCORP or the separate 1997 financial statements of CSB Bancorp as reflected in
the poolings of interests, which statements reflect (in thousands) total assets
of $260,149 and total liabilities of $236,294 for 1998, and net income of $1,911
and $1,131 for 1998 and 1997. Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion, insofar as it relates
to the amounts included for 1ST BANCORP for 1998 and 1997, and for CSB Bancorp
for 1997, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of German American Bancorp as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
Indianapolis, Indiana
February 11, 2000 Crowe, Chizek and Company LLP
<PAGE>
THE COMPANY WILL PROVIDE A COPY OF ITS ANNUAL REPORT (FORM 10-K, AS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS) FREE OF CHARGE TO ANY
SHAREHOLDER, UPON WRITTEN REQUEST. SUCH WRITTEN REQUEST SHOULD BE DIRECTED TO
THE SHAREHOLDER INFORMATION AND CORPORATE OFFICE ADDRESS PROVIDED ABOVE.
SUBSIDIARIES OF THE REGISTRANT
(AS OF MARCH 24, 2000)
STATE OF
NAME INCORPORATION
The German American Bank Indiana
GAB Mortgage Corp Indiana
German American Holdings Corporation Indiana
Citizens State Bank Indiana
First State Bank, Southwest Indiana Indiana
Peoples National Bank United States of America
The Doty Agency, Inc. Indiana
First American Bank United States of America
First Title Insurance Company Indiana
German American Reinsurance Company, Ltd. Turks and Caicos Islands
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements of
German American Bancorp on Form S-3 (File No. 33-92202) and Form S-8 (File No.
333-80605, 333-81837, and 333-81839) of our report, dated February 11, 2000, on
the consolidated financial statements of German American Bancorp as of December
31, 1999 and 1998 and for each of the three years in the period ended December
31, 1999, which report is incorporated by reference in this Form 10-K.
Crowe, Chizek and Company LLP
March 27, 2000
Indianapolis, Indiana
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
German American Bancorp on Form S-3 (File No. 33-92202) and Form S-8 (File No.
333-80605, 333-81837, and 333-81839) of our report, dated February 16, 1998, on
the consolidated financial statements of CSB Bancorp as of December 31, 1997 and
for the year then ended, appearing in German American Bancorp's Annual Report on
Form 10-K for the year ended December 31, 1999.
Gaither Rutherford & Co., LLP
March 28, 2000
Evansville, Indiana
KPMG
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
Consent of KPMG LLP
The Board of Directors
German American Bancorp:
We consent to the inclusion in the December 31, 1999 Annual Report on Form 10-K
of German American Bancorp of our report dated July 23, 1998 (except as to note
17, which is as of August 6, 1998) relating to the consolidated statement of
financial condition of 1ST BANCORP and subsidiaries as of June 30, 1998, and the
related consolidated statements of earnings, stockholders' equity and cash flows
for each of the years in the two-year period ended June 30, 1998.
We also consent to the incorporation by reference in the registration statements
of German American Bancorp on Form S-3 (File No. 33-92202) and Form S-8 (File
No. 333-80605, 333-81837, and 333-81839) of our report dated July 23, 1998
(except for note 17, which is as of August 11, 1999), relating to the
consolidated balance sheet of 1ST BANCORP and subsidiaries as of June 30, 1998,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for each of the years in the two-year period ended June 30, 1998,
which report appears in the December 31, 1999, annual report on Form 10-K of
German American Bancorp.
KPMG LLP
Indianapolis, Indiana
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 23,707 18,097
<INT-BEARING-DEPOSITS> 1,688 32,615
<FED-FUNDS-SOLD> 0 175
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 188,148 151,527
<INVESTMENTS-CARRYING> 30,191 48,346
<INVESTMENTS-MARKET> 29,838 49,462
<LOANS> 697,137 600,537
<ALLOWANCE> 8,868 8,323
<TOTAL-ASSETS> 992,635 896,925
<DEPOSITS> 698,261 665,113
<SHORT-TERM> 73,115 7,028
<LIABILITIES-OTHER> 10,870 9,127
<LONG-TERM> 122,902 124,381
0 0
0 0
<COMMON> 9,029 8,705
<OTHER-SE> 78,458 82,571
<TOTAL-LIABILITIES-AND-EQUITY> 992,635 896,925
<INTEREST-LOAN> 53,868 51,980
<INTEREST-INVEST> 14,024 12,508
<INTEREST-OTHER> 37 872
<INTEREST-TOTAL> 67,929 65,360
<INTEREST-DEPOSIT> 27,860 28,450
<INTEREST-EXPENSE> 35,759 34,605
<INTEREST-INCOME-NET> 32,170 30,755
<LOAN-LOSSES> 1,718 1,338
<SECURITIES-GAINS> (6) 38
<EXPENSE-OTHER> 24,832 22,318
<INCOME-PRETAX> 11,871 12,095
<INCOME-PRE-EXTRAORDINARY> 11,871 12,095
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 8,822 8,570
<EPS-BASIC> 0.96 0.93
<EPS-DILUTED> 0.96 0.93
<YIELD-ACTUAL> 3.66 3.76
<LOANS-NON> 7,237 5,411
<LOANS-PAST> 1,564 1,522
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 6,021 9,475
<ALLOWANCE-OPEN> 8,323 8,654
<CHARGE-OFFS> 2,005 2,044
<RECOVERIES> 476 375
<ALLOWANCE-CLOSE> 8,868 8,323
<ALLOWANCE-DOMESTIC> 8,868 8,323
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 1,531 3,382
</TABLE>
Gaither Rutherford & Co., LLP
Certified Public Accountants and Consu1tants
111 MAIN STREET - P.O. BOX 3526 - EVANSVILLE, INDIANA 47734-3526
TELEPHONE (812) 428-2600 FAX (812) 422-2019
Independent Auditors' Report
Board of Directors
CSB Bancorp
We have audited the accompanying consolidated balance sheet of CSB Bancorp and
Subsidiary as of December 31, 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CSB Bancorp and
Subsidiary as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Gaither Rutherford & Co., LLP
February 16, 1998
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
Independent Auditors' Report
The Board of Directors
1ST RANCORP:
We have audited the accompanying consolidated statement of financial condition
of 1ST BANCORP and subsidiaries as of June 30, 1998 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the two-year period ended June 30, 1998. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of 1ST BANCORP and
subsidiaries as of June 30, 1998, and the results of their operations and their
cash flows for each of the years in the two-year period ended June 30, 1998 in
conformity with generally accepted accounting principles.
KPMG LLP
Indianapolis, Indiana
July 23, 1998 except as to note 17,
which is as of August 6, 1998
