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 June 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 August 4, 2000
Common Stock, No par value 9,048,593
<PAGE>
GERMAN AMERICAN BANCORP
INDEX
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999
Consolidated Statements of Income and Comprehensive Income -- Three and
Six months Ended June 30, 2000 and 1999
Consolidated Statements of Cash Flows -- Six months Ended
June 30, 2000 and 1999
Notes to Consolidated Financial Statements -- June 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands except per share data)
June 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Cash and Due from Banks................................................ $ 18,269 $ 23,707
Federal Funds Sold and Other Short-term Investments.................... 1,404 1,189
------------ -----------
Cash and Cash Equivalents......................................... 19,673 24,896
Interest-bearing Time Deposits with Banks.............................. 299 499
Securities Available-for-Sale, at Market ............................. 185,647 188,148
Securities Held-to-Maturity, at Cost .................................. 29,145 30,191
Loans Held for Sale.................................................... 2,186 2,845
Total Loans............................................................ 721,612 694,636
Less: Unearned Income................................................. (483) (344)
Allowance for Loan Losses...................................... (8,965) (8,868)
------------ -----------
Loans, Net............................................................. 712,164 685,424
Stock in FHLB of Indianapolis, and Other Restricted Stock, at cost..... 12,564 9,660
Premises, Furniture and Equipment, Net................................. 19,898 19,782
Other Real Estate...................................................... 1,817 2,434
Intangible Assets...................................................... 2,307 2,161
Accrued Interest Receivable and Other Assets........................... 26,740 26,595
------------ -----------
TOTAL ASSETS.................................................... $ 1,012,440 $ 992,635
============ ===========
LIABILITIES
Noninterest-bearing Deposits........................................... $ 67,873 $ 71,671
Interest-bearing Deposits.............................................. 603,979 626,590
------------ -----------
Total Deposits.................................................... 671,852 698,261
FHLB Advances and Other Borrowings..................................... 242,288 196,017
Accrued Interest Payable and Other Liabilities......................... 9,117 10,870
------------ -----------
TOTAL LIABILITIES............................................... 923,257 905,148
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............................................. 54,122 53,846
Retained Earnings...................................................... 30,468 28,559
Accumulated Other Comprehensive Income (Loss) ......................... (4,456) (3,947)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY...................................... 89,183 87,487
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $ 1,012,440 $ 992,635
============ ===========
End of period shares issued and outstanding............................ 9,048,593 9,029,109
============ ===========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Three months Ended
June 30,
2000 1999
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................................ $ 15,126 $ 13,038
Interest on Federal Funds Sold and Other Short-term Investments........... 33 300
Interest and Dividends on Securities:
Taxable................................................................ 2,796 2,476
Non-taxable............................................................ 870 763
--------- ---------
TOTAL INTEREST INCOME................................................ 18,825 16,577
INTEREST EXPENSE
Interest on Deposits...................................................... 7,331 6,841
Interest on FHLB Advances and Other Borrowings............................ 3,436 1,750
--------- ---------
TOTAL INTEREST EXPENSE............................................... 10,767 8,591
--------- ---------
NET INTEREST INCOME....................................................... 8,058 7,986
Provision for Loan Losses................................................. 350 272
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................................................... 7,708 7,714
NONINTEREST INCOME
Trust and Investment Product Fees......................................... 333 228
Service Charges on Deposit Accounts....................................... 479 440
Insurance Commissions and Fees............................................ 579 548
Other Operating Income.................................................... 304 278
Net Gain on Sales of Loans, Mortgage Servicing Rights,
and Other Real Estate.................................................. 92 (1)
Net Gain / (Loss) on Sales of Securities.................................. --- (1)
--------- ---------
TOTAL NONINTEREST INCOME............................................. 1,787 1,492
--------- ---------
NONINTEREST EXPENSE
Salaries and Employee Benefits............................................ 3,496 3,299
Occupancy Expense......................................................... 476 437
Furniture and Equipment Expense........................................... 453 423
Data Processing Fees...................................................... 202 243
Professional Fees......................................................... 238 300
Advertising and Promotions................................................ 200 165
Supplies.................................................................. 185 195
Other Operating Expenses.................................................. 1,070 915
--------- ---------
TOTAL NONINTEREST EXPENSE............................................ 6,320 5,977
--------- ---------
Income before Income Taxes................................................ 3,175 3,229
Income Tax Expense........................................................ 866 946
--------- ---------
NET INCOME................................................................ $ 2,309 $ 2,283
========= =========
COMPREHENSIVE INCOME...................................................... $ 2,156 $ 82
========= =========
Earnings Per Share and Diluted Earnings Per Share......................... $ 0.25 $ 0.25
Dividends Per Share....................................................... $ 0.14 $ 0.12
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(unaudited, dollars in thousands except per share data)
Six Months Ended
June 30,
2000 1999
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans................................................ $ 29,640 $ 26,046
Interest on Federal Funds Sold and Other Short-term Investments........... 97 738
Interest and Dividends on Securities:
Taxable................................................................ 5,597 4,674
Non-taxable............................................................ 1,724 1,461
--------- ---------
TOTAL INTEREST INCOME................................................ 37,058 32,919
INTEREST EXPENSE
Interest on Deposits...................................................... 14,663 13,677
Interest on FHLB Advances and Other Borrowings............................ 6,299 3,381
--------- ---------
TOTAL INTEREST EXPENSE............................................... 20,962 17,058
--------- ---------
NET INTEREST INCOME....................................................... 16,096 15,861
Provision for Loan Losses................................................. 665 641
--------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES...................................................... 15,431 15,220
NONINTEREST INCOME
Trust and Investment Product Fees......................................... 697 403
Service Charges on Deposit Accounts....................................... 909 828
Insurance Commissions and Fees............................................ 1,088 925
Other Operating Income.................................................... 603 627
Net Gain on Sales of Loans, Mortgage Servicing Rights,
and Other Real Estate.................................................. 51 204
Net Gain / (Loss) on Sales of Securities.................................. (9) (6)
--------- ---------
TOTAL NONINTEREST INCOME............................................. 3,339 2,981
--------- ---------
NONINTEREST EXPENSE
Salaries and Employee Benefits............................................ 7,221 6,525
Occupancy Expense......................................................... 925 855
Furniture and Equipment Expense........................................... 915 838
Data Processing Fees...................................................... 418 516
Professional Fees......................................................... 440 524
Advertising and Promotions................................................ 414 322
Supplies.................................................................. 387 370
Other Operating Expenses.................................................. 2,150 1,906
--------- ---------
TOTAL NONINTEREST EXPENSE............................................ 12,870 11,856
--------- ---------
Income before Income Taxes................................................ 5,900 6,345
Income Tax Expense........................................................ 1,554 1,839
--------- ---------
NET INCOME................................................................ $ 4,346 $ 4,506
========= =========
COMPREHENSIVE INCOME...................................................... $ 3,837 $ 1,542
========= =========
Earnings Per Share and Diluted Earnings Per Share......................... $ 0.48 $ 0.49
Dividends Per Share....................................................... $ 0.27 $ 0.24
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollar references in thousands)
Six months Ended
June 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................................. $ 4,346 $ 4,506
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Depreciation and Amortization......................................... 1,103 957
Amortization of Mortgage Servicing Rights.................................. 99 121
Net Change in Loans Held for Sale..................................... 659 8,647
Loss on Investment in Limited Partnership............................. 82 62
Provision for Loan Losses............................................. 665 641
Loss on Sales of Securities........................................... 9 6
Loss / (Gain) on Sales of Loans, Mortgage Servicing
Rights and Other Real Estate........................................ (51) (204)
Change in Assets and Liabilities:
Interest Receivable and Other Assets................................ 130 (1,585)
Interest Payable and Other Liabilities.............................. (1,753) (828)
---------- ----------
Total Adjustments................................................ 943 7,817
----------- ----------
Net Cash from Operating Activities.................................. 5,289 12,323
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest Bearing Balances with Banks.......................... 200 523
Proceeds from Maturities of Securities Available-for-Sale............... 6,376 23,535
Proceeds from Sales of Securities Available-for-Sale.................... --- 953
Purchase of Securities Available-for-Sale............................... (4,717) (61,503)
Proceeds from Maturities of Securities Held-to-Maturity................. 1,037 3,971
Purchase of Securities Held-to-Maturity................................. (2,904) (2,998)
Purchase of Loans....................................................... (1,472) (4,059)
Proceeds from Sales of Loans............................................ 500 850
Loans Made to Customers, net of Payments Received....................... (28,382) (30,515)
Proceeds from Sale of Mortgage Servicing Rights......................... 111 ---
Proceeds from Sales of Other Real Estate................................ 2,379 311
Property and Equipment Expenditures..................................... (1,063) (1,833)
Acquire Affiliates and Adjust to Conform Fiscal Years................... (298) (155)
----------- ----------
Net Cash from Investing Activities.................................. (28,233) (70,920)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits...................................................... (26,409) 9,857
Change in Short-term Borrowings......................................... (3,952) 27,315
Advances of Long-term Debt.............................................. 92,850 7,000
Repayments of Long-term Debt............................................ (42,627) (498)
Issuance of Common Stock................................................ 296 438
Dividends Paid.......................................................... (2,437) (2,192)
Purchase of Interest in Fractional Shares............................... --- (8)
---------- -----------
Net Cash from Financing Activities.................................. 17,721 41,912
---------- ----------
Net Change in Cash and Cash Equivalents.................................... (5,223) (16,685)
Cash and Cash Equivalents at Beginning of Year............................. 24,896 49,588
---------- ----------
Cash and Cash Equivalents at End of Period.............................. $ 19,673 $ 32,903
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
<PAGE>
GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 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:
Three months Ended
June 30,
2000 1999
Earnings per Share:
Net Income $ 2,309,000 $ 2,283,000
Weighted Average Shares Outstanding 9,032,321 9,214,764
------------ -----------
Earnings per Share: $ 0.25 $ 0.25
============ ===========
Diluted Earnings per Share:
Net Income $ 2,309,000 $ 2,283,000
Weighted Average Shares Outstanding 9,032,321 9,214,764
Stock Options, Net 74 4,566
------------- -----------
Diluted Weighted Average Shares Outstanding 9,032,395 9,219,330
------------ -----------
Diluted Earnings per Share $ 0.25 $ 0.25
============= ===========
<PAGE>
Six months Ended
June 30,
2000 1999
Earnings per Share:
Net Income $ 4,346,000 $ 4,506,000
Weighted Average Shares Outstanding 9,030,715 9,206,694
------------ --------------
Earnings per Share: $ 0.48 $ 0.49
============ ==============
Diluted Earnings per Share:
Net Income $ 4,346,000 $ 4,506,000
Weighted Average Shares Outstanding 9,030,715 9,206,694
Stock Options, Net 130 5,309
------------- --------------
Diluted Weighted Average Shares Outstanding 9,030,845 9,212,003
------------ --------------
Diluted Earnings per Share $ 0.48 $ 0.49
============= ==============
Note 3 - Securities
The amortized cost and estimated market values of Securities as of June 30,
2000 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies $ 96,210 $ 91,654
Obligations of State and Political Subdivisions 28,355 28,491
Asset-/Mortgage-backed Securities 57,019 54,458
Equity Securities 11,441 11,044
------------ -------------
Total $ 193,025 $ 185,647
============ =============
Securities Held-to-Maturity:
Obligations of State and Political Subdivisions $ 28,473 $ 28,348
Asset-/Mortgage-backed Securities 672 672
----------- -------------
Total $ 29,145 $ 29,020
============ =============
The amortized cost and estimated market values of Securities as of December 31,
1999 are as follows (dollars in thousands):
Estimated
Amortized Market
Securities Available-for-Sale: Cost Value
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
============ =============
<PAGE>
Note 4 -- Loans
Total loans, as presented on the balance sheet, are comprised of the
following classifications (dollars in thousands):
June 30, December 31,
2000 1999
Commercial and Industrial Loans $ 165,561 $ 161,711
Residential Mortgage Loans 367,766 356,001
Consumer Loans 118,487 112,870
Agricultural Loans 69,798 64,054
----------- -----------
Total Loans $ 721,612 $ 694,636
Less: Unearned Income (483) (344)
Allowance for Loan Losses (8,965) (8,868)
----------- -----------
Loans, net $ 712,164 $ 685,424
=========== ===========
No concentration of credit in excess of 10 percent of total assets exists
within any single industry group.
Note 5 -- Allowance for Loan Losses
A summary of the activity in the Allowance for Loan Losses is as follows
(dollars in thousands):
2000 1999
Balance at January 1 $ 8,868 $ 8,323
Allowance of Acquired Affiliate --- 356
Provision for Loan Losses 665 641
Recoveries of Prior Loan Losses 197 305
Loan Losses Charged to the Allowance (765) (1,136)
----------- -----------
Balance at June 30 $ 8,965 $ 8,489
=========== ===========
Note 6 -- Proposed Acquisition
On June 27, 2000 the Company entered into a definitive agreement 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. Holland's assets and equity (unaudited) as of June 30, 2000 totaled
$61.8 million and $6.4 million, respectively. Net income (unaudited) totaled
$288,000 for the six-month period ended June 30, 2000.
Under the terms of the proposed merger, the shareholders of Holland would
receive 3.5 shares of common stock of the Company for each of their Holland
shares, or an aggregate of approximately 947,777 shares of common stock of the
Company.
The proposed merger is subject to the approval by shareholders of Holland,
Holland's receipt of a fairness opinion, approval of the appropriate bank
regulatory agencies and other conditions. It is contemplated that the merger
will be consummated during the fourth quarter of 2000, and that it will be
accounted for under the pooling of interests method of accounting.
<PAGE>
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
June 30, 2000 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income $7,031 $953 $74 $8,058
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 141 --- 141
Servicing Income --- 101 --- 101
Noncash Items:
Provision for Loan Losses 223 127 --- 350
MSR Amortization & Valuation --- 48 --- 48
Provision for Income Taxes 1,142 144 (420) 866
Segment Profit 2,462 221 (374) 2,309
Segment Assets 825,275 179,083 8,082 1,012,440
</TABLE>
<TABLE>
<CAPTION>
Three months Ended Retail Mortgage Consolidated
June 30, 1999 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income $6,836 $1,101 $49 $7,986
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 48 --- 48
Servicing Income --- 97 --- 97
Noncash Items:
Provision for Loan Losses 145 127 --- 272
MSR Amortization & Valuation --- 60 --- 60
Provision for Income Taxes 1,046 176 (276) 946
Segment Profit 2,358 306 (381) 2,283
Segment Assets 761,489 163,340 6,520 931,349
</TABLE>
<PAGE>
Note 7 - Segment Information (continued)
<TABLE>
<CAPTION>
Six months Ended Retail Mortgage Consolidated
June 30, 2000 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income $13,950 $1,980 $166 $16,096
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 152 --- 152
Servicing Income --- 201 --- 201
Noncash Items:
Provision for Loan Losses 395 270 --- 665
MSR Amortization & Valuation --- 99 --- 99
Provision for Income Taxes 2,194 228 (868) 1,554
Segment Profit 4,746 349 (749) 4,346
Segment Assets 825,275 179,083 8,082 1,012,440
</TABLE>
<TABLE>
<CAPTION>
Six months Ended Retail Mortgage Consolidated
June 30, 1999 Banking Banking Other Totals
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net Interest Income $13,454 $2,287 $120 $15,861
Gain on Sales of Loans and Gain on
Sales/Capitalization of MSR --- 260 --- 260
Servicing Income --- 190 --- 190
Noncash Items:
Provision for Loan Losses 365 276 --- 641
MSR Amortization & Valuation --- 121 --- 121
Provision for Income Taxes 1,903 446 (510) 1,839
Segment Profit 4,544 734 (772) 4,506
Segment Assets 761,489 163,340 6,520 931,349
</TABLE>
<PAGE>
ITEM 2.
GERMAN AMERICAN BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
German American Bancorp ("the Company") is a multi-bank holding company
based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's
National Market System under the symbol GABC. The Company operates five
affiliate community banks with 25 banking offices and 5 full-service insurance
offices in the eight contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The banks' wide range of
personal and corporate financial services include making commercial and consumer
loans; marketing, originating, and servicing mortgage loans; providing trust,
investment advisory and brokerage services; accepting deposits and providing
safe deposit facilities. The Company's insurance activities include offering a
full range of title, property, casualty, life and credit insurance products.
Prior to the acquisition activity in January 1999, the Company operated
primarily in the banking industry.
This section presents an analysis of the consolidated financial condition
of the Company as of June 30, 2000 and December 31, 1999 and the consolidated
results of operations for the three and six month periods ended June 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.
RESULTS OF OPERATIONS
Net Income:
Net income remained relatively stable at $2,309,000 or $0.25 per share for
the quarter ended June 30, 2000 compared to $2,283,000
or $0.25 per share for the second quarter of 1999. Net income for the six months
ended June 30, 2000 was $4,346,000 or $0.48 per share compared with $4,506,000
or $0.49 per share during the same period in 1999. The Company's retail banking
segment profit, inclusive of associated holding company administrative expenses,
increased $174,000 to $3,865,000 for the six months ended June 30, 2000 compared
to $3,691,000 for the six months ended June 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.
<PAGE>
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 June 30, Prior Period
2000 1999 Amount Percent
<S> <C> <C> <C> <C>
Interest Income (T/E) $ 19,302 $ 17,010 $ 2,292 13.5%
Interest Expense 10,767 8,591 2,176 25.3%
----------- ----------- ---------
Net Interest Income (T/E) $ 8,535 $ 8,419 $ 116 1.4%
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
Six months Change from
Ended June 30, Prior Period
2000 1999 Amount Percent
<S> <C> <C> <C> <C>
Interest Income (T/E) $ 37,999 $ 33,781 $ 4,218 12.5%
Interest Expense 20,962 17,058 3,904 22.9%
----------- ----------- ---------
Net Interest Income (T/E) $ 17,037 $ 16,723 $ 314 1.9%
=========== =========== =========
</TABLE>
Net interest income increased $72,000 or 1.0% ($116,000 or 1.4% on a
tax-equivalent basis) for the quarter ended June 30, 2000 compared with the
second quarter of 1999. Net interest margin is tax-equivalent net interest
income expressed as a percentage of average earning assets. For the second
quarter of 2000, the net interest margin was 3.61% compared to 3.91% for the
comparable period of 1999.
Net interest income increased $235,000 or 1.5% ($314,000 or 1.9% on a
tax-equivalent basis) for the six months ended June 30, 2000 compared with the
same period of 1999. For the six months ended June 30, 2000, the net interest
margin was 3.63% compared to 3.91% for the same period in 1999. A significant
portion of the increase in net interest income for both the three and six months
ended June 30, 2000 resulted from loan growth.
Two significant items have negatively impacted the Company's net interest
margin. First, 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 65 basis points for the six months ended June 30, 2000
as compared with the same period of the prior year. Secondly, 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 first half of 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. Absent the two
aforementioned items, the Company's net interest margin would have been 4.08%
for the six months ended June 30, 2000.
Provision For Loan Losses:
The Company provides for loan losses through regular provisions to the
allowance for loan losses. These provisions are made at a levels considered
necessary by management to absorb estimated losses in the loan portfolio. A
detailed evaluation of the adequacy of this loan loss reserve is completed
quarterly by management.
The consolidated provision for loan losses was $350,000 and $665,000 for
the three and six months ended June 30, 2000, respectively. The consolidated
provision for loan losses was $272,000 and $641,000 for the three and six months
ended June 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.
Net charge-offs were $334,000 or 0.18% annualized of average loans and
$568,000 or 0.16% annualized of average loans for the three and six months ended
June 30, 2000. Net charge-offs for the second quarter and year-to-date ended
June 30, 1999 were $528,000 or 0.34% annualized of average loans and $831,000 or
0.27% annualized of average loans, respectively. The majority of net charge-offs
during the quarter and six months ended June 30, 2000 were 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. The net charge-offs during 1999 included a single large commercial loan.
Nonperforming loans as a percent of total loans at June 30, 2000 were 1.29%
of total loans, representing a slight increase from the 1.27% at December 31,
1999. See discussion under "Financial Condition" for more information regarding
nonperforming assets.
<PAGE>
Noninterest Income:
Noninterest income for the quarter ended June 30, 2000 increased $295,000
or 19.8% on an annualized basis. Growth occurred in nearly all categories of
noninterest income compared with the prior year. Overall growth in noninterest
income occurred in Trust and Investment Product Fees and in Net Gain on Sales of
Loans, Mortgage Servicing Rights, and Other Real Estate.
Noninterest income for the six months ended June 30, 2000 increased
$358,000 or 12.0% 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 tempered by a decline in Gain on Sale
of Loans, Mortgage Servicing Rights, and Other Real Estate.
Trust and Investment Product Fees increased $105,000 or 46.1% and $294,000
or 73.0% for the three and six months ended June 30, 2000 compared with the same
periods of the prior year. These increases were partially attributable to the
implementation of brokerage services at one affiliate during the second half of
1999. Increased brokerage activity at other affiliates also contributed to the
increased level of income.
Insurance Commissions and Fees increased $31,000 or 5.7% and $163,000 or
17.6% for the three and six month periods ended June 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 $93,000 in the quarter ended June 30, 2000 compared
with second quarter of 1999. A net gain on of $109,000 on the sale of $42.5
million of mortgage servicing rights was primarily responsible for the increased
gain during the quarter. There were no sales of servicing in the second quarter
of 1999.
Net Gain on Sale of Loans, Mortgage Servicing Rights, and Other Real Estate
declined by $153,000 during the six months ended June 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. Also contributing
to the decline in gain on sale was an increased level of losses on the sales of
other real estate owned.
Noninterest Expense:
Noninterest expenses increased $343,000 or 5.7% and $1.0 million or 8.6%
for the three and six months period ended June 30, 2000, respectively, as
compared to the same periods of the prior year. The increases primarily occurred
in Salaries and Employee Benefits and Occupancy, Furniture and Equipment
Expense.
Total Salaries and Benefit Expenses increased $197,000 or 6.0% during the
quarter ended June 30, 2000 compared with the same period in 1999. Salaries and
Benefits Expense increased $696,000 to $7.2 million in the six months ended June
30, 2000 over the prior year total of $6.5 million in the first six months of
1999. 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 six
months ended June 30, 2000 totaled $929,000 and $1,840,000 compared with
$960,000 and $1,693,000 during the same periods of the prior year. The increase
during the six months ended June 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 the first half of 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.
<PAGE>
Data processing fees decreased $41,000 in the quarter ended June 30, 2000
and $98,000 in the six months ended June 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.
Professional fees decreased $62,000 and $84,000 during the three and
six-month periods ended June 30, 2000 compared with the same periods of 1999.
Legal, accounting and other professional fees all declined during 2000 compared
with the prior year. Advertising expenses increased $35,000 and $92,000 for the
three and six months ended 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. Advertising cost totaled 0.08% of
average assets during 2000 compared with 0.07% of average assets in 1999.
Other Operating Expenses increased $154,000 and $243,000 during the quarter
ended and six months ended June 30, 2000 compared with 1999. The increases
during both the three and six 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 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 27% and 26% of pre-tax
income during the three and six months ended June 30, 2000 compared with 29%
during the same periods for 1999. The effective tax rate was lower in all
periods than the combined federal and state statutory rate of 39.6%. The lower
effective rates resulted primarily from the Company's tax-exempt investment
income on securities and loans, and from income tax credits generated from
investments in affordable housing projects.
FINANCIAL CONDITION
Total assets at June 30, 2000 increased 4.0% to $1.012 billion compared
with $992.6 million in total assets at December 31, 1999. Loan growth comprised
virtually all of the asset growth during the six months ended June 30, 2000.
Loans, net of unearned income and allowance for loan losses, increased by $26.7
million or 7.8% on an annualized basis. To fund a portion of the strong loan
growth in the first half of 2000, cash and cash equivalents declined by $5.2
million. Investments remained relatively stable at $227.7 million at June 30,
2000 compared with $228.5 million at year-end.
Deposits at June 30, 2000 decreased by $26.4 million or 7.6% during the six
months ended June 30, 2000. A continued competitive environment for deposits led
to the overall decline in deposits. To fund the loan growth experienced during
the first half of 2000, the Company's affiliate banks have augmented their
deposit base with additional borrowings from the FHLB. Borrowings of all types
increased by $46.3 million or 47.2% on an annualized basis during the six months
ended June 30, 2000.
<PAGE>
Nonperforming Assets:
<TABLE>
<CAPTION>
The following is an analysis of the Company's nonperforming assets at
June 30, 2000 and December 31, 1999 (dollars in thousands):
June 30, December 31,
2000 1999
<S> <C> <C>
Nonaccrual Loans $ 6,830 $ 7,237
Loans contractually past due 90 days or more 2,468 1,564
Renegotiated Loans --- ---
----------- ----------
Total Nonperforming Loans 9,298 8,801
----------- ----------
Other Real Estate 1,817 2,434
----------- ----------
Total Nonperforming Assets $ 11,115 $ 11,235
=========== ==========
Allowance for Loan Loss to Nonperforming Loans 96.42% 100.76%
Nonperforming Loans to Total Loans 1.29% 1.27%
</TABLE>
Capital Resources:
Shareholders' equity totaled $89.2 million at June 30, 2000 or 8.8% of
total assets, an increase of $1.7 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.
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 June 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.
<PAGE>
The table below presents the Company's consolidated capital ratios under
regulatory guidelines (dollars in thousands):
<TABLE>
<CAPTION>
To be Well
Capitalized
Under Prompt
Minimum for Corrective
Capital Action At At
Adequacy Provisions June 30, December 31,
Purposes (FDICIA) 2000 1999
<S> <C> <C> <C> <C>
Leverage Ratio 4.00% 5.00% 9.09% 9.07%
Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 13.59% 13.53%
Total Capital to Risk-adjusted Assets 8.00% 10.00% 14.84% 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 six months of 2000,
operating activities provided $5.3 million of available cash, which included net
income of $4.3 million. Major cash outflows experienced during this three-month
period of 2000 included $2.4 million in dividends and net loan outlays in the
amount of $28.3 million.
Purchases of securities approximated the cash flows from the maturities and
sales securities. Total cash outflows for the period exceeded inflows by $5.2
million, leaving cash and cash equivalents of $19.7 million at June 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; and dividend policy. Actual
results may differ materially from those expressed or implied as a result of
certain risks and uncertainties, including, but not limited to, changes in
economic conditions; interest rate fluctuations; competitive product and pricing
pressures within the Company's markets; equity and fixed income market
fluctuations; and personal and corporate customers' bankruptcies.
Results may also differ materially due to inflation; acquisitions and
integrations of acquired businesses; technological change; changes in law;
changes in fiscal, monetary, regulatory and tax policies; success in gaining
regulatory approvals when required; the continued availability of earnings and
excess capital sufficient for the lawful and prudent declaration and payment of
cash dividends; as well as other risks and uncertainties detailed elsewhere in
this Report and from time to time in the filings of the Company with the
Securities and Exchange Commission. Such forward-looking statements speak only
as of the date on which such statements are made, and the Company undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committees and Boards of Directors of the holding company and
its affiliate banks. Primary market risks which impact the Company's operations
are liquidity risk and interest rate risk.
The liquidity of the parent company is dependent upon the receipt of
dividends from its bank subsidiaries, which are subject to certain regulatory
limitations. The affiliate banks' source of funding is predominately core
deposits, maturities of securities, repayments of loan principal and interest,
federal funds purchased, securities sold under agreements to repurchase and
long-term borrowings from the Federal Home Loan Bank.
The Company monitors interest rate risk by the use of computer simulation
modeling to estimate the potential impact on its net interest income under
various interest rate scenarios, and by estimating its static interest rate
sensitivity position. Another method by which the Company's interest rate risk
position can be estimated is by computing estimated changes in its net portfolio
value ("NPV"). This method estimates interest rate risk exposure from movements
in interest rates by using interest rate sensitivity analysis to determine the
change in the NPV of discounted cash flows from assets and liabilities.
NPV represents the market value of portfolio equity and is equal to the
estimated market value of assets minus the estimated market value of
liabilities. Computations are based on a number of assumptions, including the
relative levels of market interest rates and prepayments in mortgage loans and
certain types of investments. These computations do not contemplate any actions
management may undertake in response to changes in interest rates, and should
not be relied upon as indicative of actual results. In addition, certain
shortcomings are inherent in the method of computing NPV. Should interest rates
remain or decrease below current levels, the proportion of adjustable rate loans
could decrease in future periods due to refinancing activity. In the event of an
interest rate change, prepayment levels would likely be different from those
assumed in the table. Lastly, the ability of many borrowers to repay their
adjustable rate debt may decline during a rising interest rate environment.
The table below provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of 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).
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
-------- -------- -------- --------- ------
+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.
Item 3 includes forward-looking statements. See "Forward-looking
Statements" included in Item 2 of this Report for a discussion of certain
factors that could cause the Company's actual exposure to market risk to vary
materially from that expressed or implied above.
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company issued 19,484 common shares during June 2000 to members of the
Board of Directors of the Company and its affiliate banks in payment of a
portion of their fees for service as such. These issuances were made in reliance
upon the Section 4(2) exemption.
Item 4. Submission of Matter to a Vote of Security Holders.
The Company held its Annual Meeting of Shareholders on April 27, 2000. At
the Annual Meeting, the shareholders elected as Directors for an additional
two-year term the seven nominees proposed by the Board of Directors.
Votes Votes Broker
Nominee Cast for Withheld Non-Votes
Gene C. Mehne.......................... 6,899,863 280,942 0
Robert L. Ruckriegel................... 6,887,434 293,371 0
Mark A. Schroeder...................... 6,872,921 307,884 0
Larry J. Seger......................... 6,886,971 293,834 0
Joseph F. Steurer...................... 6,887,434 293,371 0
Chet L. Thompson....................... 6,887,434 293,371 0
Michael J. Voyles...................... 6,900,515 280,290 0
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.
10.1 Agreement and Plan of Reorganization dated June 27, 2000 among the
Registrant, Holland Bancorp, Inc., The Holland National Bank, and the
German American Bank, is incorporated by reference from Exhibit 2.1 to
the Registrant's Registration Statement on Form S-4 filed July 19,
2000 (File No. 333-41698).
27 Financial Data Schedule
(b) Reports on Form 8-K
The Registrant filed a Report on Form 8-K on May 5, 2000 to report that its
Board of Directors had adopted a Shareholder Rights Plan.
<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 August 14, 2000 By/s/Mark A. Schroeder
--------------------------------- ----------------------------
Mark A. Schroeder
President and CEO
Date August 14, 2000 By/s/Richard E. Trent
---------------------------------- ----------------------------
Richard E. Trent
Chief Financial Officer and
Principal Accounting Officer
