UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 2000
Or
[ ] Transition Report pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934 for the Transition Period from _______________ to
___________________
Commission File Number 0-11244
German American Bancorp
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
711 Main Street, Jasper, Indiana 47546
--------------------------------------
(Address of Principal Executive Offices and Zip Code)
Registrant's telephone number, including area code: (812) 482-1314
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 4, 2000
----- -------------------------------
Common Stock, No par value 9,996,355
<PAGE>
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheets - September 30, 2000 and December 31, 1999
Consolidated Statements of Income and Comprehensive Income -- Three
and Nine months Ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows -- Nine months Ended September
30, 2000 and 1999
Notes to Consolidated Financial Statements -- September 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
PART II. OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- 2 -
<PAGE>
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)
September 30, December 31,
2000 1999
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and Due from Banks................................................ $ 22,595 $ 23,707
Federal Funds Sold and Other Short-term Investments.................... 766 1,189
------------ -----------
Cash and Cash Equivalents......................................... 23,361 24,896
Interest-bearing Time Deposits with Banks.............................. 100 499
Securities Available-for-Sale, at Market ............................. 182,272 188,148
Securities Held-to-Maturity, at Cost .................................. 27,999 30,191
Loans Held for Sale.................................................... 2,188 2,845
Total Loans............................................................ 726,679 694,636
Less: Unearned Income................................................. (549) (344)
Allowance for Loan Losses...................................... (8,791) (8,868)
------------ -----------
Loans, Net............................................................. 717,339 685,424
Stock in FHLB of Indianapolis, and Other Restricted Stock, at cost..... 12,684 9,660
Premises, Furniture and Equipment, Net................................. 19,623 19,782
Other Real Estate...................................................... 1,886 2,434
Intangible Assets...................................................... 2,227 2,161
Accrued Interest Receivable and Other Assets........................... 22,883 26,595
------------ -----------
TOTAL ASSETS.................................................... $ 1,012,562 $ 992,635
============ ===========
LIABILITIES
Noninterest-bearing Deposits........................................... $ 76,473 $ 71,671
Interest-bearing Deposits.............................................. 615,619 626,590
------------ -----------
Total Deposits.................................................... 692,092 698,261
FHLB Advances and Other Borrowings..................................... 218,318 196,017
Accrued Interest Payable and Other Liabilities......................... 10,720 10,870
------------ -----------
TOTAL LIABILITIES............................................... 921,130 905,148
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value;
20,000,000 shares authorized...................................... 9,049 9,029
Preferred Stock, $10 par value; 500,000
shares authorized, no shares issued .............................. --- ---
Additional Paid-in Capital............................................. 54,082 53,846
Retained Earnings...................................................... 31,550 28,559
Accumulated Other Comprehensive Income (Loss) ......................... (3,249) (3,947)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY...................................... 91,432 87,487
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $ 1,012,562 $ 992,635
============ ===========
End of period shares issued and outstanding............................ 9,048,593 9,029,109
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................................ $ 15,283 $ 13,589
Interest on Federal Funds Sold and Other Short-term Investments........... 18 126
Interest and Dividends on Securities:
Taxable................................................................ 2,792 2,683
Non-taxable............................................................ 849 742
--------- ---------
TOTAL INTEREST INCOME................................................ 18,942 17,140
INTEREST EXPENSE
Interest on Deposits...................................................... 7,606 6,955
Interest on FHLB Advances and Other Borrowings............................ 3,514 2,065
--------- ---------
TOTAL INTEREST EXPENSE............................................... 11,120 9,020
--------- ---------
NET INTEREST INCOME....................................................... 7,822 8,120
Provision for Loan Losses................................................. 341 298
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES........................................................ 7,481 7,822
NONINTEREST INCOME
Trust and Investment Product Fees......................................... 374 192
Service Charges on Deposit Accounts....................................... 525 453
Insurance Commissions and Fees............................................ 605 516
Other Operating Income.................................................... 291 242
Net Gain on Sales of Loans, Mortgage Servicing Rights,
and Other Real Estate.................................................. 106 (15)
Net Gain / (Loss) on Sales of Securities.................................. --- ---
--------- ---------
TOTAL NONINTEREST INCOME............................................. 1,901 1,388
--------- ---------
NONINTEREST EXPENSE
Salaries and Employee Benefits............................................ 3,646 3,307
Occupancy Expense......................................................... 439 450
Furniture and Equipment Expense........................................... 450 428
Data Processing Fees...................................................... 216 243
Professional Fees......................................................... 250 200
Advertising and Promotions................................................ 211 220
Supplies.................................................................. 197 216
Other Operating Expenses.................................................. 1,030 958
--------- ---------
TOTAL NONINTEREST EXPENSE............................................ 6,439 6,022
--------- ---------
Income before Income Taxes................................................ 2,943 3,188
Income Tax Expense........................................................ 594 874
--------- ---------
NET INCOME................................................................ $ 2,349 $ 2,314
========= =========
COMPREHENSIVE INCOME...................................................... $ 3,556 $ 1,474
========= =========
Earnings Per Share and Diluted Earnings Per Share......................... $ 0.26 $ 0.25
Dividends Per Share....................................................... $ 0.14 $ 0.12
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................................ $ 44,923 $ 39,635
Interest on Federal Funds Sold and Other Short-term Investments........... 115 864
Interest and Dividends on Securities:
Taxable................................................................ 8,389 7,357
Non-taxable............................................................ 2,573 2,203
--------- ---------
TOTAL INTEREST INCOME................................................ 56,000 50,059
INTEREST EXPENSE
Interest on Deposits...................................................... 22,269 20,632
Interest on FHLB Advances and Other Borrowings............................ 9,813 5,446
--------- ---------
TOTAL INTEREST EXPENSE............................................... 32,082 26,078
--------- ---------
NET INTEREST INCOME....................................................... 23,918 23,981
Provision for Loan Losses................................................. 1,006 939
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................................................... 22,912 23,042
NONINTEREST INCOME
Trust and Investment Product Fees......................................... 1,071 595
Service Charges on Deposit Accounts....................................... 1,434 1,281
Insurance Commissions and Fees............................................ 1,693 1,441
Other Operating Income.................................................... 894 869
Net Gain on Sales of Loans, Mortgage Servicing Rights,
and Other Real Estate.................................................. 157 218
Net Gain / (Loss) on Sales of Securities.................................. (9) (6)
--------- ---------
TOTAL NONINTEREST INCOME............................................. 5,240 4,398
--------- ---------
NONINTEREST EXPENSE
Salaries and Employee Benefits............................................ 10,867 9,832
Occupancy Expense......................................................... 1,364 1,305
Furniture and Equipment Expense........................................... 1,365 1,266
Data Processing Fees...................................................... 634 759
Professional Fees......................................................... 690 724
Advertising and Promotions................................................ 625 542
Supplies.................................................................. 584 586
Other Operating Expenses.................................................. 3,180 2,893
--------- ---------
TOTAL NONINTEREST EXPENSE............................................ 19,309 17,907
--------- ---------
Income before Income Taxes................................................ 8,843 9,533
Income Tax Expense........................................................ 2,148 2,713
--------- ---------
NET INCOME................................................................ $ 6,695 $ 6,820
========= =========
COMPREHENSIVE INCOME...................................................... $ 7,393 $ 3,016
========= =========
Earnings Per Share and Diluted Earnings Per Share......................... $ 0.74 $ 0.74
Dividends Per Share....................................................... $ 0.41 $ 0.36
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Nine months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................ $ 6,695 $ 6,820
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Depreciation and Amortization........................................ 1,662 1,583
Amortization of Mortgage Servicing Rights................................. 140 181
Net Change in Loans Held for Sale.................................... 657 6,480
Loss on Investment in Limited Partnership............................ 138 99
Provision for Loan Losses............................................ 1,006 939
Loss on Sales of Securities.......................................... 9 6
Loss / (Gain) on Sales of Loans, Mortgage Servicing
Rights and Other Real Estate....................................... (157) (218)
Change in Assets and Liabilities:
Interest Receivable and Other Assets............................... 2,821 (4,817)
Interest Payable and Other Liabilities............................. (150) (503)
--------- ---------
Total Adjustments............................................... 6,126 3,750
--------- ---------
Net Cash from Operating Activities................................. 12,821 10,570
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest Bearing Balances with Banks......................... 399 723
Proceeds from Maturities of Securities Available-for-Sale.............. 11,002 29,221
Proceeds from Sales of Securities Available-for-Sale................... 742 953
Purchase of Securities Available-for-Sale.............................. (4,717) (66,630)
Proceeds from Maturities of Securities Held-to-Maturity................ 2,188 5,186
Purchase of Securities Held-to-Maturity................................ (3,024) (3,449)
Purchase of Loans...................................................... (1,472) (8,627)
Proceeds from Sales of Loans........................................... 500 4,350
Loans Made to Customers, net of Payments Received...................... (35,227) (66,869)
Proceeds from Sale of Mortgage Servicing Rights........................ 481 ---
Proceeds from Sales of Other Real Estate............................... 3,652 1,065
Property and Equipment Expenditures.................................... (1,266) (3,018)
Acquire Affiliates and Adjust to Conform Fiscal Years.................. (298) (310)
--------- ---------
Net Cash from Investing Activities................................. (27,040) (107,405)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits..................................................... (6,169) 33,460
Change in Short-term Borrowings........................................... (28,913) 12,607
Advances of Long-term Debt............................................. 122,850 58,000
Repayments of Long-term Debt........................................... (71,636) (16,516)
Issuance of Common Stock............................................... 256 438
Purchase / Retire Common Stock......................................... --- (737)
Dividends Paid......................................................... (3,704) (3,334)
Purchase of Interest in Fractional Shares.............................. --- (8)
--------- ---------
Net Cash from Financing Activities................................. 12,684 83,910
--------- ---------
Net Change in Cash and Cash Equivalents................................... (1,535) (12,925)
Cash and Cash Equivalents at Beginning of Year............................ 24,896 49,588
--------- ---------
Cash and Cash Equivalents at End of Period............................. $ 23,361 $ 36,663
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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<PAGE>
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(unaudited)
Note 1 -- Basis of Presentation
German American Bancorp operates primarily in the banking industry. The
accounting and reporting policies of German American Bancorp and its
subsidiaries conform to Generally Accepted Accounting Principles and reporting
followed by the banking industry. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with Generally
Accepted Accounting Principles have been condensed or omitted. All adjustments
which are, in the opinion of management, necessary for a fair presentation of
the results for the periods reported have been included in the accompanying
unaudited consolidated financial statements, and all such adjustments are of a
normal recurring nature. It is suggested that these consolidated financial
statements and notes be read in conjunction with the financial statements and
notes thereto in the German American Bancorp's December 31, 1999 Annual Report
to Shareholders.
Comprehensive income includes both net income and other comprehensive
income. Other comprehensive income includes the change in unrealized
appreciation/depreciation on securities available-for-sale, net of tax.
Note 2 -- Per Share Data
Earnings and dividends per share have been retroactively computed as though
shares issued for stock dividends had been outstanding for all periods
presented. The computation of Earnings per Share and Diluted Earnings per Share
are provided as follows:
<TABLE>
<CAPTION>
Nine months Ended
September 30,
2000 1999
---- ----
<S> <C> <C>
Earnings per Share:
Net Income $ 2,349,000 $ 2,314,000
Weighted Average Shares Outstanding 9,048,593 9,212,677
----------- -----------
Earnings per Share: $ 0.26 $ 0.25
=========== ===========
Diluted Earnings per Share:
Net Income $ 2,349,000 $ 2,314,000
Weighted Average Shares Outstanding 9,048,593 9,212,677
Stock Options, Net 2 4,492
----------- -----------
Diluted Weighted Average
Shares Outstanding 9,048,595 9,217,169
----------- -----------
Diluted Earnings per Share $ 0.26 $ 0.25
=========== ===========
- 7 -
<PAGE>
Nine months Ended
September 30,
2000 1999
---- ----
Earnings per Share:
Net Income $ 6,695,000 $ 6,820,000
Weighted Average Shares Outstanding 9,036,718 9,207,189
----------- -----------
Earnings per Share: $ 0.74 $ 0.74
=========== ===========
Diluted Earnings per Share:
Net Income $ 6,695,000 $ 6,820,000
Weighted Average Shares Outstanding 9,036,718 9,207,189
Stock Options, Net 985 4,331
----------- -----------
Diluted Weighted Average
Shares Outstanding 9,037,703 9,211,520
----------- -----------
Diluted Earnings per Share $ 0.74 $ 0.74
=========== ===========
</TABLE>
Note 3 - Securities
The amortized cost and estimated market values of Securities as of
September 30, 2000 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---- -----
<S> <C> <C>
Securities Available-for-Sale:
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 96,132 $ 92,716
Obligations of State and Political
Subdivisions 26,016 26,323
Asset-/Mortgage-backed Securities 54,063 52,173
Equity Securities 11,441 11,060
----------- -----------
Total $ 187,652 $ 182,272
=========== ===========
Securities Held-to-Maturity:
Obligations of State and Political
Subdivisions $ 27,438 $ 27,597
Asset-/Mortgage-backed Securities 561 562
----------- -----------
Total $ 27,999 $ 28,159
=========== ===========
</TABLE>
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<PAGE>
The amortized cost and estimated market values of Securities as of December 31,
1999 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
---- -----
<S> <C> <C>
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 96,205 $ 92,326
Obligations of State and Political
Subdivisions 26,597 26,487
Asset-/Mortgage-backed Securities 61,514 58,967
Equity Securities 10,368 10,368
----------- -----------
Total $ 194,684 $ 188,148
============ ===========
Securities Held-to-Maturity:
Obligations of State and Political
Subdivisions $ 29,288 $ 28,934
Asset-/Mortgage-backed Securities 903 904
----------- -----------
Total $ 30,191 $ 29,838
=========== ===========
</TABLE>
Note 4 -- Loans
Total loans, as presented on the balance sheet, are comprised of the
following classifications (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Commercial and Industrial Loans $ 170,145 $ 161,711
Residential Mortgage Loans 364,726 356,001
Consumer Loans 122,319 112,870
Agricultural Loans 69,489 64,054
----------- -----------
Total Loans $ 726,679 $ 694,636
=========== ===========
</TABLE>
No concentration of credit in excess of 10 percent of total assets exists
within any single industry group.
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Balance at January 1 $ 8,868 $ 8,323
Allowance of Acquired Affiliate --- 356
Provision for Loan Losses 1,006 939
Recoveries of Prior Loan Losses 277 365
Loan Losses Charged to the Allowance (1,360) (1,536)
----------- -----------
Balance at September 30 $ 8,791 $ 8,447
=========== ===========
</TABLE>
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<PAGE>
Note 6 - Business Combinations
On October 1, 2000 the Company consummated a merger with Holland Bancorp,
Inc. ("Holland"). Holland was merged with and into the Company, with 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 operated four banking offices in Dubois County, Indiana. Holland's
assets and equity (unaudited) as of September 30, 2000 totaled $60.6 million and
$6.5 million, respectively.
Under the terms of the merger, the shareholders of Holland received 3.5
shares of common stock of the Company for each of their Holland shares, or an
aggregate of 947,762 shares of common stock of the Company.
This merger was accounted for as a pooling of interests. These financial
statements exclude the effects of this merger transaction. Proforma results of
operations for the nine-months ended September 30, 2000 are as follows,
including Holland Bancorp:
German American Holland
Bancorp (as reported) Bancorp Combined
Net Interest Income $23,918 $1,748 $25,666
Net Income 6,695 364 7,059
Diluted Earnings Per Share $ 0.74 --- $ 0.71
Note 7 - 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 is the primary revenue of the five affiliate
community banks comprising the retail-banking segment. The mortgage-banking
segment operates as a division of First American Bank. Primary revenues for the
mortgage-banking segment are net interest income from a residential real estate
loan portfolio funded primarily by wholesale sources. Other revenues are gains
on sales of loans and gain on sales of and capitalization of mortgage servicing
rights (MSR), and loan servicing income.
The following segment financial information has been derived from the
internal financial statements of German American Bancorp, which are used by
management to monitor and manage the financial performance of the Company. The
accounting policies of the two segments are the same as those of the Company.
The evaluation process for segments does not include holding company income and
expense. Holding company and non-banking subsidiaries amounts are the primary
differences between segment amounts and consolidated totals, and are reflected
in the Other column below, along with minor amounts to eliminate transactions
between segments.
<TABLE>
<CAPTION>
Three months Ended Retail Mortgage Consolidated
September 30, 2000 Banking Banking Other Totals
------- ------- ----- ------------
<S> <C> <C> <C> <C>
Net Interest Income $ 6,893 $ 877 $ 52 $ 7,822
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 99 --- 99
Servicing Income --- 81 --- 81
Noncash Items:
Provision for Loan Losses 203 138 --- 341
MSR Amortization & Valuation --- 41 --- 41
Provision for Income Taxes 1,136 91 (633) 594
Segment Profit 2,448 136 (235) 2,349
Segment Assets 832,116 173,939 6,507 1,012,562
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Three months Ended Retail Mortgage Consolidated
September 30, 1999 Banking Banking Other Totals
------- ------- ----- ------------
<S> <C> <C> <C> <C>
Net Interest Income $ 7,022 $ 1,025 $ 73 $ 8,120
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 26 --- 26
Servicing Income --- 99 --- 99
Noncash Items:
Provision for Loan Losses 95 203 --- 298
MSR Amortization & Valuation --- 60 --- 60
Provision for Income Taxes 994 141 (261) 874
Segment Profit 2,505 115 (306) 2,314
Segment Assets 796,127 171,523 7,496 975,146
</TABLE>
Note 7 - Segment Information (continued)
<TABLE>
<CAPTION>
Nine months Ended Retail Mortgage Consolidated
September 30, 2000 Banking Banking Other Totals
------- ------- ----- -------------
<S> <C> <C> <C> <C>
Net Interest Income $ 20,843 $ 2,857 218 $ 23,918
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 251 --- 251
Servicing Income --- 282 --- 282
Noncash Items:
Provision for Loan Losses 598 408 --- 1,006
MSR Amortization & Valuation --- 140 --- 140
Provision for Income Taxes 3,330 319 (1,501) 2,148
Segment Profit 7,194 485 (984) 6,695
Segment Assets 832,116 173,939 6,507 1,012,562
Nine months Ended Retail Mortgage Consolidated
September 30, 1999 Banking Banking Other Totals
------- ------- ----- ------------
Net Interest Income $ 20,476 $ 3,312 $193 $ 23,981
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 286 --- 286
Servicing Income --- 289 --- 289
Noncash Items:
Provision for Loan Losses 460 479 --- 939
MSR Amortization & Valuation --- 181 --- 181
Provision for Income Taxes 2,897 587 (771) 2,713
Segment Profit 7,049 849 (1,078) 6,820
Segment Assets 796,127 171,523 7,496 975,146
</TABLE>
- 11 -
<PAGE>
Note 8 - 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 9 - Subsequent Events
On October 31, 2000 the Company declared its annual 5% stock dividend,
payable on or before December 15, 2000 to shareholders of record on November 30,
2000. Since the stock dividend has not yet been issued, earnings and dividends
per share amounts have not been restated for this dividend. The Board of
Directors also declared a cash dividend of $0.14 per share payable on or before
November 20, 2000 to shareholders of record on November 10, 2000.
- 12 -
<PAGE>
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp ("the Company") is a multi-bank holding company
based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's
National Market System under the symbol GABC. The Company operates five
affiliate community banks with 25 banking offices and 5 full-service insurance
agencies 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.
This section presents an analysis of the consolidated financial condition
of the Company as of September 30, 2000 and December 31, 1999 and the
consolidated results of operations for the three and nine month periods ended
September 30, 2000 and 1999. This discussion should be read in conjunction with
the consolidated financial statements and other financial data presented
elsewhere herein and with the financial statements and other financial data, as
well as the Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's December 31, 1999 Annual Report
to Shareholders.
This section does not reflect the business combination with Holland
Bancorp, Inc. (See Note 6).
RESULTS OF OPERATIONS
Net Income:
Net income remained relatively stable at $2,349,000 or $0.26 per share for
the quarter ended September 30, 2000 compared to $2,314,000 or $0.25 per share
for the third quarter of 1999. Net income for the nine months ended September
30, 2000 was $6,695,000 or $0.74 per share compared with $6,820,000 or $0.74 per
share during the same period in 1999. The Company's retail banking segment
profit, inclusive of associated holding company administrative expenses,
increased $183,000 to $6,002,000 for the nine months ended September 30, 2000
compared to $5,819,000 for the nine months ended September 30, 1999. The
increase in the retail banking segment profit was offset by a decline in the
segment profit from the Company's mortgage banking operation. The decline
principally reflected the effects of decreased mortgage loan production
resulting from increases in general market interest rates during the latter half
of 1999 and the first quarter of 2000. The rising market interest rates also
negatively impacted the net interest margin in the mortgage banking operation by
increasing funding costs.
Net Interest Income:
The following table summarizes German American Bancorp's net interest
income (on a tax-equivalent basis, at an effective tax rate of 34%) for each of
the periods presented herein (dollars in thousands):
<TABLE>
<CAPTION>
Three months Change from
Ended September 30, Prior Period
2000 1999 Amount Percent
<S> <C> <C> <C> <C>
Interest Income (T/E) $ 19,418 $ 17,574 $ 1,844 10.5%
Interest Expense 11,120 9,020 2,100 23.3%
----------- ----------- ---------
Net Interest Income (T/E) $ 8,298 $ 8,554 $ (256) -3.0%
=========== =========== =========
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
Nine months Change from
Ended September 30, Prior Period
2000 1999 Amount Percent
<S> <C> <C> <C> <C>
Interest Income (T/E) $ 57,416 $ 51,355 $ 6,061 11.8%
Interest Expense 32,082 26,078 6,004 23.0%
----------- ----------- ---------
Net Interest Income (T/E) $ 25,334 $ 25,277 $ 57 0.2%
=========== =========== =========
</TABLE>
Net interest income decreased $298,000 or 3.7% ($256,000 or 3.0% on a
tax-equivalent basis) for the quarter ended September 30, 2000 compared with the
third quarter of 1999. Net interest margin is tax-equivalent net interest income
expressed as a percentage of average earning assets. For the third quarter of
2000, the net interest margin was 3.49% compared to 3.90% for the comparable
period of 1999.
Net interest income decreased $63,000 or 0.3% ( an increase of $57,000 or
0.2% on a tax-equivalent basis) for the nine months ended September 30, 2000
compared with the same period of 1999. For the nine months ended September 30,
2000, the net interest margin was 3.60% compared to 3.90% for the same period in
1999.
The decline in the Company's net interest income is largely attributable to
an increased cost of funds. The increased cost of funds is the product of an
increased utilization of wholesale sources, such as FHLB advances and public
fund deposits, to fund loan growth. These sources of funds represented a total
35% of total funding sources for the nine months ended September 30, 2000
compared with 25% for the same period of the prior year. Further, the mortgage
banking division's use of wholesale funding sources in a rising interest rate
environment has reduced the division's net interest margin by approximately 60
basis points for the nine months ended September 30, 2000 as compared with the
same period of the prior year. Also contributing to the increased cost of funds
was the general rise in interest rates during the latter half of 1999 and the
first half of 2000.
The Company's employment of various asset growth strategies during mid and
late 1999 also contributed to the decline in the net interest margin in the nine
months ended September 30, 2000. These asset growth strategies consisted of
affiliate banks investing proceeds from FHLB borrowings in investment 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%
reducing the overall net interest margin, while increasing net interest income.
Provision For Loan Losses:
The Company provides for loan losses through regular provisions to the
allowance for loan losses. These provisions are made at levels considered
necessary by management to absorb estimated losses in the loan portfolio. A
detailed evaluation of the adequacy of this loan loss reserve is completed
quarterly by management.
The consolidated provision for loan losses was $341,000 and $1,006,000 for
the three and nine months ended September 30, 2000, respectively. The
consolidated provision for loan losses was $298,000 and $939,000 for the three
and nine months ended September 30, 1999, respectively. The provision for loan
losses to be recorded in future periods will be adjusted based on the results of
on-going evaluations of the adequacy of the allowance for loan losses.
- 14 -
<PAGE>
Net charge-offs were $517,000 or 0.29% annualized of average loans and
$1,089,000 or 0.20% annualized of average loans for the three and nine months
ended September 30, 2000. Net charge-offs for the third quarter and nine months
ended September 30, 1999 were $340,000 or 0.21% annualized of average loans and
$1.2 million or 0.25% annualized of average loans, respectively. A majority of
net charge-offs during the nine months ended September 30, 2000 was related to
the sub-prime residential real estate loans housed in the mortgage banking
division. The Company discontinued new sub-prime out-of-market real estate
lending during 1999.
Nonperforming loans represented 1.27% of total loans at September 30, 2000
and December 31, 1999. See discussion under "Financial Condition" for more
information regarding nonperforming assets.
Noninterest Income:
Noninterest income for the quarter ended September 30, 2000 increased
$484,000 or 34.1% on an annualized basis. Growth occurred in nearly all
categories of noninterest income compared with the prior year with Trust and
Investment Product Fees representing the largest single increase.
Noninterest income for the nine months ended September 30, 2000 increased
$842,000 or 19.2% on an annualized basis. Growth during this period was
primarily in Trust and Investment Product Fees and Insurance Commissions and
Fees. The growth in these categories was somewhat tempered by a decline in Gain
on Sale of Loans, Mortgage Servicing Rights, and Other Real Estate.
Trust and Investment Product Fees increased $182,000 or 94.9% and $476,000
or 80.0% for the three and nine months ended September 30, 2000 compared with
the same periods of the prior year. These increases were attributable to
increased brokerage activity at the Company's lead bank and the implementation
of brokerage services at one affiliate during the second half of 1999.
Insurance Commissions and Fees increased $89,000 or 17.2% and $252,000 or
17.5% for the three and nine month periods ended September 30, 2000 compared
with the same periods during 1999. The increases were due to an overall growth
in the insurance operations of the Company and due to the acquisition of the
Smith & Bell agency in May 1999.
Net Gains on Sales of Loans, Mortgage Servicing Rights, and Other Real
Estate are derived predominantly from the Company's mortgage banking division.
The gain on sale increased $92,000 in the quarter ended September 30, 2000
compared with third quarter of 1999 primarily due to an increased level of loan
sales in the secondary markets. Loan sales totaled $9.5 million for the three
months ended September 30, 2000 compared with $6.7 million in same period of the
prior year.
Net Gain on Sale of Loans, Mortgage Servicing Rights, and Other Real Estate
declined by $61,000 during the nine months ended September 30, 2000 compared
with same period of the prior year. The decline was largely attributable to
lower volumes in residential real estate loan production and correspondingly
lower levels of loan sales. Lower loan production and sales compared with the
prior year was largely attributable to higher market interest rates in the
second half of 1999 and during 2000 compared with the first half of 1999. Loan
sales by the mortgage banking division totaled $20.7 million during the nine
months ended September 30, 2000 compared $45.7 million during the same period of
the prior year. A mitigating factor to the lower gain on sale of loans was a net
gain on of $109,000 on the sale of $42.5 million of mortgage servicing rights
during the second quarter of 2000. There were no sales of servicing rights
during 1999.
- 15 -
<PAGE>
Noninterest Expense:
Noninterest expenses increased $388,000 or 6.4% and $1.4 million or 7.8%
for the three and nine months period ended September 30, 2000, respectively, as
compared to the same periods of the prior year. The increases primarily occurred
in Salaries and Employee Benefits.
Total Salaries and Benefit Expenses increased $339,000 or 10.0% during the
quarter ended September 30, 2000 compared with the same period in 1999. Salaries
and Benefits Expense increased $1.0 million to $10.9 million in the nine months
ended September 30, 2000 over the prior year total of $9.9 million. Salary
expense increased approximately 7% from merit increases, the purchase of the
Smith and Bell insurance agency in May 1999, and staff additions to build
necessary infrastructure in technology and support functions. Performance
bonuses, along with payroll taxes, 401(k) and associated profit sharing
increased in 2000 over the prior year due to improved performance of the
retail-banking segment, which also contributed to the overall increase in
salaries and benefits expenses.
Total occupancy, furniture and equipment expense for the three and nine
months ended September 30, 2000 totaled $889,000 and $2,729,000 compared with
$878,000 and $2,571,000 during the same periods of the prior year. The increase
during the nine months ended September 30, 2000 included increased depreciation
at new and recently renovated banking locations. These facilities were completed
and placed into service during the second half of 1999 and the first half of
2000. Also contributing to the increase was the continued implementation of a
wide-area network and associated operating and application systems at the retail
banking affiliates during 1999 and 2000. These systems are expected to be
implemented in all subsidiaries by early next year, and are expected to provide
long-term benefits with regard to improved quality of customer service and
control of personnel expenses.
Data processing fees decreased $27,000 in the quarter ended September 30,
2000 and $125,000 in the nine months ended September 30, 2000 compared with the
same periods of the prior year. These declines were due primarily to the
discontinuance of an Internet access operation at one affiliate during the
second quarter of 1999.
Advertising expenses remained stable during the three months ended
September 30, 2000 compared with the same period of 1999. Advertising expenses
increase $83,000 for nine months ended September 30, 2000 as compared with 1999
due to costs associated with the customer information system implemented during
the last half of 1999 for all banking affiliates and fluctuations in the normal
course of business.
Other Operating Expenses increased $44,000 and $287,000 during the quarter
ended and nine months ended September 30, 2000 compared with 1999. The increases
during both the three and nine month periods were primarily attributable to
collection and telecommunication expenses. The increased telecommunication
charges were primarily attributable to network charges to support the Company's
new technology platforms and operating systems. The increased collection costs
were primarily at the mortgage banking division, 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
out-of-market lending during 1999. In addition, the Company expensed in the
second quarter of 2000, approximately $62,000 in interest charges stemming from
an Internal Revenue Service income tax audit of an acquired affiliate. The audit
covered periods prior to the affiliate's merger with the Company.
Income Taxes:
The Company's effective income tax rate approximates 20% and 24% of pre-tax
income during the three and nine months ended September 30, 2000 compared with
27% and 28% during the same periods for 1999. The lower effective tax rate was
primarily attributable to two factors. First, during the third quarter of 2000
the Company realized a refund of Indiana state income taxes attributable to the
1999 tax year. The state income tax refund was due to a tax law clarification in
2000, which allowed a portion of the Company's revenues to be apportioned
outside Indiana. Secondly, the lower effective rates also resulted from the
Company's tax-exempt investment income on securities and loans, and from income
tax credits generated from investments in affordable housing projects.
- 16 -
<PAGE>
FINANCIAL CONDITION
Total assets at September 30, 2000 increased 2.0% to $1.013 billion
compared with $992.6 million in total assets at December 31, 1999. Loan growth
comprised virtually all of the asset growth during the nine months ended
September 30, 2000. Loans, net of unearned income and allowance for loan losses,
increased by $31.9 million or 4.7%. Investments declined modestly to $223.0
million at September 30, 2000 compared with $228.0 million at year-end. Cash and
cash equivalents also declined modestly to $23.3 million at September 30, 2000
from $24.9 million at year-end. The declines in cash and securities have been
used to partially fund the strong loan growth.
Deposits at September 30, 2000 decreased by $6.2 million or 1.8% during the
nine months ended September 30, 2000. A continued competitive environment for
deposits led to the overall decline in deposits. To fund the loan growth
experienced during the first nine months of 2000, the Company's affiliate banks
have augmented their deposit base with additional borrowings from the FHLB.
Borrowings of all types increased by $22.3 million or 11.4% during the nine
months ended September 30, 2000.
Nonperforming Assets:
The following is an analysis of the Company's nonperforming assets at
September 30, 2000 and December 31, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
<S> <C> <C>
Nonaccrual Loans $ 8,065 $ 7,237
Loans contractually past due 90 days or more 1,142 1,564
Renegotiated Loans --- ---
----------- ----------
Total Nonperforming Loans 9,207 8,801
----------- ----------
Other Real Estate 1,886 2,434
----------- ----------
Total Nonperforming Assets $ 11,093 $ 11,235
=========== ==========
Allowance for Loan Loss to Nonperforming Loans 95.48% 100.76%
Nonperforming Loans to Total Loans 1.27% 1.27%
</TABLE>
Capital Resources:
Shareholders' equity totaled $91.4 million at September 30, 2000 or 9.0% of
total assets, an increase of $3.9 million from December 31, 1999.
Federal banking regulations provide guidelines for determining the capital
adequacy of bank holding companies and banks. These guidelines provide for a
more narrow definition of core capital and assign a measure of risk to the
various categories of assets. The Company is required to maintain minimum levels
of capital in proportion to total risk-weighted assets and off-balance sheet
exposures such as loan commitments and standby letters of credit.
Tier 1, or core capital, consists of shareholders' equity less goodwill,
core deposit intangibles, and certain deferred tax assets defined by bank
regulations. Tier 2 capital is defined as the amount of the allowance for loan
losses which does not exceed 1.25 percent of gross risk adjusted assets. Total
capital is the sum of Tier 1 and Tier 2 capital.
- 17 -
<PAGE>
The minimum requirements under these standards are generally at least a 4.0
percent leverage ratio, which is Tier 1 capital divided by defined "total
assets"; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent
total capital to risk-adjusted assets ratios. Under these guidelines, the
Company, on a consolidated basis, and each of its affiliate banks individually,
have capital ratios that substantially exceed the regulatory minimums.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
requires federal regulatory agencies to define capital tiers. These are:
well-capitalized, adequately-capitalized, under-capitalized, significantly
under-capitalized, and critically under-capitalized. Under these regulations, a
"well-capitalized" entity must achieve a Tier 1 Risk-based capital ratio of at
least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a
leverage ratio of at least 5.0 percent, and not be under a capital directive
order.
At September 30, 2000 management is not under such a capital directive, nor
is it aware of any current recommendations by banking regulatory authorities
which, if they were to be implemented, would have or are reasonably likely to
have, a material effect on the Company's liquidity, capital resources or
operations.
The table below presents the Company's consolidated capital ratios under
regulatory guidelines:
<TABLE>
<CAPTION>
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action At At
Adequacy Provisions September 30, December 31,
Purposes (FDICIA) 2000 1999
<S> <C> <C> <C> <C>
Leverage Ratio 4.00% 5.00% 9.19% 9.07%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 13.71% 13.53%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 14.96% 14.78%
</TABLE>
Liquidity:
The Consolidated Statement of Cash Flows details the elements of change in
the Company's cash and cash equivalents. During the first nine months of 2000,
operating activities provided $12.8 million of available cash, which included
net income of $6.7 million. Major cash outflows experienced during the nine
months ended September 30, 2000 included $3.7 million in dividends and net loan
outlays in the amount of $35.2 million.
The proceeds from the maturities and sales of securities exceeded the cash
outflows from the purchases of securities by approximately $6.2 million. Total
cash outflows for the period exceeded inflows by $1.5 million, leaving cash and
cash equivalents of $23.4 million at September 30, 2000.
Forward-looking Statements:
This Report contains statements relating to the future results of the
Company that are considered "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements relate
to, among other things, adequacy of allowance for loan losses; simulations of
changes in interest rates; litigation results; the effects of new accounting
pronouncements; 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.
- 18 -
<PAGE>
Results may also differ materially due to inflation; acquisitions and
integrations of acquired businesses; technological change; changes in law;
changes in fiscal, monetary, regulatory and tax policies; success in gaining
regulatory approvals when required; the continued availability of earnings and
excess capital sufficient for the lawful and prudent declaration and payment of
cash dividends; as well as other risks and uncertainties detailed elsewhere in
this Report and from time to time in the filings of the Company with the
Securities and Exchange Commission. Such forward-looking statements speak only
as of the date on which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk.
The liquidity of the parent company is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations. The affiliate banks' source of funding is predominately core
deposits, maturities of securities, repayments of loan principal and interest,
federal funds purchased, securities sold under agreements to repurchase and
long-term borrowings from the Federal Home Loan Bank.
The Company monitors interest rate risk by the use of computer simulation
modeling to estimate the potential impact on its net interest income under
various interest rate scenarios, and by estimating its static interest rate
sensitivity position. Another method by which the Company's interest rate risk
position can be estimated is by computing estimated changes in its net portfolio
value ("NPV"). This method estimates interest rate risk exposure from movements
in interest rates by using interest rate sensitivity analysis to determine the
change in the NPV of discounted cash flows from assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. Computations are based on a number of assumptions, including the
relative levels of market interest rates and prepayments in mortgage loans and
certain types of investments. These computations do not contemplate any actions
management may undertake in response to changes in interest rates, and should
not be relied upon as indicative of actual results. In addition, certain
shortcomings are inherent in the method of computing NPV. Should interest rates
remain or decrease below current levels, the proportion of adjustable rate loans
could decrease in future periods due to refinancing activity. In the event of an
interest rate change, prepayment levels would likely be different from those
assumed in the table. Lastly, the ability of many borrowers to repay their
adjustable rate debt may decline during a rising interest rate environment.
The table below provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of June 30, 2000 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).
- 19 -
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity as of June 30, 2000
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
Changes
In rates $ Amount $ Change NPV Ratio Change
-------- -------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
+2% $64,854 (24.2)% 6.75% (174) b.p.
+1% 78,568 (8.1) 7.94 (55) b.p.
Base 85,508 --- 8.49 ---
-1% 95,970 12.2 9.31 82 b.p.
-2% 95,434 11.6 9.20 71 b.p.
</TABLE>
The Company's risk profile as of September 30, 2000 does not materially
differ these June 30, 2000 estimates.
Item 3 includes forward-looking statements. See "Forward-looking
Statements" included in Item 2 of this Report for a discussion of certain
factors that could cause the Company's actual exposure to market risk to vary
materially from that expressed or implied above. These factors include possible
changes in economic conditions; interest rate fluctuations, competitive product
and pricing pressures within the Company's markets; and equity and fixed income
market fluctuations. Actual experience may also vary materially to the extent
that the Company's assumptions described above prove to be inaccurate.
- 20 -
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information
The Board of Directors has appointed J. David Lett as a director of the Company,
to serve the remaining unexpired term of his brother, Michael B. Lett, who
retired from the Board of Directors on November 1, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
3.1 Restatement of Articles of Incorporation of the Registrant is
incorporated by reference to Exhibit 3.01 to Registrant's Current
Report on Form 8-K filed May 5, 2000.
3.2 Restated Bylaws of the Registrant as amended April 27, 2000, are
incorporated by reference from Exhibit 3.2 to the Registrant's
Registration Statement on Form S-4 filed July 19, 2000 (File No.
333-41698).
4.1 Rights Agreement dated April 27, 2000 is incorporated by reference to
Exhibit 4.01 to Registrant's Current Report on Form 8-K filed May 5,
2000.
4.2 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.
4.3 Terms of Common Shares and Preferred Shares of German American Bancorp
found in Restatement of Articles of Incorporation are incorporated by
reference to Exhibit 3.01 to Registrant's Current Report on Form 8-K
filed May 5, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the period ended September
30, 2000.
- 21 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN AMERICAN BANCORP
Date November 14, 2000 By /s/ Mark A. Schroeder
--------------------------------- ---------------------------------
Mark A. Schroeder
President and CEO
Date November 14, 2000 By /s/Richard E. Trent
---------------------------------- ---------------------------------
Richard E. Trent
Chief Financial Officer and
Principal Accounting Officer
- 22 -
