-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HjXgU4fKoxe+jeqVqQyLQnsOOZdedpnlYIC6JwQblWHT/qnQGwZeQxPEKcUb2STi ERpwInBiFQDSe6kAjfTeGw== 0000941965-96-000050.txt : 19970102 0000941965-96-000050.hdr.sgml : 19970102 ACCESSION NUMBER: 0000941965-96-000050 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19961231 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GERMAN AMERICAN BANCORP CENTRAL INDEX KEY: 0000714395 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351547518 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-16331 FILM NUMBER: 96689148 BUSINESS ADDRESS: STREET 1: 711 MAIN ST STREET 2: P O BOX 810 CITY: JASPER STATE: IN ZIP: 47546 BUSINESS PHONE: 8124821314 MAIL ADDRESS: STREET 1: 711 MAIN STREET CITY: JASPER STATE: IN ZIP: 47546 FORMER COMPANY: FORMER CONFORMED NAME: GAB BANCORP DATE OF NAME CHANGE: 19950510 S-4/A 1 PRE-EFFECTIVE AMENDMENT NO. 1 1 As filed with the Securities and Exchange Commission on December 31, 1996 File No. 333-16331 _________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 to FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 GERMAN AMERICAN BANCORP (Exact name of Registrant as specified in its charter) INDIANA (State or other jurisdiction of incorporation or organization) 6711 (Primary Standard Industrial Classification Code Number) 35-1547518 (I.R.S. Employer Identification No.) 711 MAIN STREET, BOX 810 JASPER, INDIANA 47546-3042; (812) 482-1314 (Address, including Zip Code, and telephone number, including area code, of registrant's principal executive offices) GEORGE W. ASTRIKE, CHAIRMAN GERMAN AMERICAN BANCORP 711 MAIN STREET, BOX 810 JASPER, INDIANA 47546-3042; (812) 482-1314 Telecopier (812) 482-0745 (Name, address, including Zip Code, and telephone number, including area code, of agent for service) Copy to: Mark B. Barnes, Esq. John W. Tanselle, Esq. Leagre & Barnes Krieg, DeVault, Alexander 9100 Keystone Crossing & Capehart Suite 800 One Indiana Square P. O. Box 40609 Suite 2800 Indianapolis, IN 46240-0609 Indianapolis, IN 46204 Telephone (317) 843-1655 Telephone (317) 636-4341 Telecopier (317) 846-7900 Telecopier (317) 636-1507 2 Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] _______________________________________________________ The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. _______________________________________________________ 3 PEOPLES BANCORP OF WASHINGTON 201 EAST MAIN STREET WASHINGTON, INDIANA 47501-2912 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD , 1997 Notice is hereby given that a Special Meeting of Shareholders of Peoples Bancorp of Washington ("Peoples") will be held at the principal office of The Peoples National Bank and Trust Company, 201 East Main Street, Washington, Indiana 47501- 2912, on , , 1997, at .m. Washington time (the "Special Meeting"), for the following purposes: 1. To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Reorganization dated September 27, 1996, among Peoples; The Peoples National Bank and Trust Company, a wholly owned subsidiary of Peoples ("Peoples Bank"); German American Bancorp ("German American"); German American Holdings Corporation, a wholly owned subsidiary of German American ("GAHC"); and The Union Bank, a wholly owned subsidiary of German American (the "Reorganization Agreement"), and a Merger Agreement between Peoples and GAHC, and joined in by German American in the form attached to the Reorganization Agreement as Appendix A, and to approve the transactions contemplated thereby, including the merger of Peoples with and into GAHC (the "Merger"). 2. To transact such other business as may properly come before the Special Meeting or any adjournment or adjournments thereof. Holders of Peoples Common Stock of record at the close of business on _________, 1997, are entitled to notice of and to vote at the Special Meeting or any adjournment or adjournments thereof. SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ALL SHAREHOLDERS, EVEN IF THEY PLAN TO ATTEND THE MEETING, ARE REQUESTED TO COMPLETE, SIGN, AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. BY ORDER OF THE BOARD OF DIRECTORS Joseph A. Wellman, President , 1997 Washington, Indiana 4 GERMAN AMERICAN BANCORP 711 MAIN STREET JASPER, INDIANA 47546 NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD , 1997 Notice is hereby given that a Special Meeting of Shareholders of German American Bancorp ("German American") will be held at the principal office of The German American Bank, 711 Main Street, Jasper, Indiana 47546, on , , 1997, at .m. Jasper time (the "Special Meeting"), for the following purposes: 1. To consider and vote upon a proposal to approve and adopt an Agreement and Plan of Reorganization dated September 27, 1996, among Peoples Bancorp of Washington ("Peoples"); The Peoples National Bank and Trust Company, a wholly owned subsidiary of Peoples ("Peoples Bank"); German American; German American Holdings Corporation, a wholly owned subsidiary of German American ("GAHC"); and The Union Bank, a wholly owned subsidiary of German American (the "Reorganization Agreement"), and a Merger Agreement between Peoples and GAHC, and joined in by German American in the form attached to the Reorganization Agreement as Appendix A, and to approve the transactions contemplated thereby, including the issuance of up to an additional 692,344 shares of German American Common Stock in connection with the merger of Peoples with and into GAHC. 2. To transact such other business as may properly come before the Special Meeting or any adjournment or adjournments thereof. Holders of German American Common Stock of record at the close of business on _________, 1997, are entitled to notice of and to vote at the Special Meeting or any adjournment or adjournments thereof. SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ALL SHAREHOLDERS, EVEN IF THEY PLAN TO ATTEND THE MEETING, ARE REQUESTED TO COMPLETE, SIGN, AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. BY ORDER OF THE BOARD OF DIRECTORS George W. Astrike, Chairman , 1997 Jasper, Indiana 5 GERMAN AMERICAN BANCORP PROSPECTUS/PROXY STATEMENT PEOPLES BANCORP OF WASHINGTON PROXY STATEMENT This Prospectus/Proxy Statement relates to the proposed merger (the "Merger") of Peoples Bancorp of Washington, Washington, Indiana ("Peoples"), into German American Holdings Corporation ("GAHC"), a wholly owned subsidiary of German American Bancorp, Jasper, Indiana ("German American"), pursuant to and in accordance with an Agreement and Plan of Reorganization, dated September 27, 1996 (the "Reorganization Agreement"), among Peoples, German American, GAHC, The Peoples National Bank and Trust Company ("Peoples Bank") and The Union Bank ("Union"). Simultaneously with and as an integral part of the Merger, Union will merge with and into Peoples Bank. If the proposed Merger is consummated, German American will issue not fewer than 1.0372 nor more than 1.1669 shares of German American Common Stock for each of the 593,334 issued and outstanding shares of Peoples Common Stock, as adjusted for the five percent stock dividend declared by German American in October 1996 and subject to further adjustment in the event of any future stock dividends and the like. The exact number of shares to be issued by German American in the Merger will be determined by the average closing bid/asked quotations for German American's Common Stock during a ten business day period ending on the second business day preceding the closing date (the "Valuation Period"). On ____________, 1997 (the date immediately prior to the date of this Prospectus/Proxy Statement), the average of the closing bid/asked quotations for German American Common Stock was $_______ per share. Assuming that such average value remains not less than $34.29 during the Valuation Period (as to which there is no assurance), then the minimum number of shares specified by the Reorganization Agreement (1.0372 shares of German American for each Peoples common share and an aggregate of 615,417 shares of German American Common Stock) will be issued in the Merger. See "THE MERGER -- The Acquisition Agreements -- Terms of the Merger -- Conversion of Peoples Common Stock." The Merger is subject to the approval of the holders of a majority of the shares of the Peoples Common Stock eligible to vote thereon and the satisfaction of certain other conditions, including obtaining regulatory approval. The Merger is also being submitted for approval of the shareholders of German American in compliance with German American's agreement with the NASDAQ Stock Market in order for German American Common Stock to continue to be listed on the NASDAQ National Market System. For a more complete description of the Merger, see "THE MERGER." 6 The Special Meeting of the shareholders of Peoples will be held at the principal office of The Peoples National Bank and Trust Company, 201 East Main Street, Washington, Indiana 47501- 2912, at .m., Washington time, on ___, 1997 to (a) consider the Merger proposal, and (b) transact such other business as may properly come before the meeting. The Special Meeting of the shareholders of German American will be held at the principal office of The German American Bank, 711 Main Street, Jasper, Indiana, on , 1997, to (a) consider the Merger proposal and (b) transact such other business as may properly come before said meeting. This Prospectus/Proxy Statement constitutes both a Prospectus of German American covering the German American Common Stock to be issued by it pursuant to the Merger and a Proxy Statement in connection with the solicitation by the Boards of Directors of Peoples and German American of proxies to be voted at their respective Special Meetings. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus/Proxy Statement is , 1997. 7 AVAILABLE INFORMATION German American is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "1934 Act"). Accordingly, German American files proxy statements, annual and quarterly reports, and other information with the Securities and Exchange Commission (the "Commission"). Those proxy statements, reports, and other information may be inspected and copied at prescribed rates, at the public reference facilities maintained by the Commission at the addresses set forth below. German American has filed with the Commission a Registration Statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the shares of German American Common Stock to be issued in connection with the Merger. This Proxy Statement also constitutes the Prospectus of German American filed as part of that Registration Statement. This Proxy Statement does not contain all of the information set forth in the Registration Statement. The Registration Statement and the exhibits thereto can be inspected and copied at prescribed rates at the Commission's public reference room, Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, as well as the Commission's regional offices located at: Seven World Trade Center, Suite 1300, New York, New York 10048; and Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such materials may also be obtained at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission also maintains a site on the World Wide Web at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants (including German American) that file electronically with the SEC. ------------------------------- SOURCES OF INFORMATION The information in the above-described Registration Statement, including this Prospectus/Proxy Statement, concerning German American and its affiliates, on the one hand, and concerning Peoples and its affiliates, on the other hand, has been supplied by management of the respective companies. ------------------------------- NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT IN CONNECTION WITH THE SOLICITATION OR OFFERING MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY GERMAN AMERICAN OR PEOPLES. THIS PROSPECTUS/PROXY STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY 8 JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF THE SECURITIES MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY INFERENCE OR IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF GERMAN AMERICAN OR PEOPLES SINCE THE DATE HEREOF. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE German American's 1995 Annual Report to Shareholders is being delivered with this prospectus and German American's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 is included as Appendix D to this Prospectus/Proxy Statement. The following documents are incorporated by reference into this Prospectus/Proxy Statement: (1) German American's Annual Report on Form 10-K for the year ended December 31, 1995, which was filed on April 1, 1996, as amended; (2) German American's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, which was filed on May 14, 1996; (3) German American's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, which was filed on August 14, 1996, as amended August 20, 1996; (4) German American's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, which was filed November 13, 1996; and (5) German American's Current Report on Form 8-K, which was filed on July 17, 1996. Except as set forth in this Prospectus/Proxy Statement, there have been no material changes in the information set forth in such Reports. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus/Proxy Statement to the extent that a statement contained herein or in any other subsequently filed document which also is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as modified or superseded, to constitute a part of this Prospectus/Proxy Statement. THIS PROSPECTUS/PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO GERMAN AMERICAN WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (EXCLUDING UNINCORPORATED EXHIBITS) ARE AVAILABLE WITHOUT CHARGE TO EACH PERSON (INCLUDING ANY BENEFICIAL OWNER) TO WHOM THIS PROXY STATEMENT IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO JOHN M. GUTGSELL, GERMAN AMERICAN BANCORP, 711 MAIN STREET, BOX 810, JASPER, INDIANA 47546-3042 (812) 482-1314. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY 1997. 9 TABLE OF CONTENTS AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . SOURCES OF INFORMATION . . . . . . . . . . . . . . . . . . . . INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE. . . . . . . . INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY OF PROSPECTUS/PROXY STATEMENT. . . . . . . . . . . . . . THE SPECIAL MEETINGS . . . . . . . . . . . . . . . . . . . . . PEOPLES . . . . . . . . . . . . . . . . . . . . . . . . . . GERMAN AMERICAN . . . . . . . . . . . . . . . . . . . . . . PARTIES TO THE MERGER. . . . . . . . . . . . . . . . . . . . . GERMAN AMERICAN . . . . . . . . . . . . . . . . . . . . . . GAHC. . . . . . . . . . . . . . . . . . . . . . . . . . . . PEOPLES . . . . . . . . . . . . . . . . . . . . . . . . . . THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . THE BANK MERGER . . . . . . . . . . . . . . . . . . . . . . OPINION OF FINANCIAL ADVISOR. . . . . . . . . . . . . . . . RIGHTS OF DISSENTING SHAREHOLDERS . . . . . . . . . . . . . FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER . . . . . . . REGULATORY APPROVAL . . . . . . . . . . . . . . . . . . . . VOTES REQUIRED FOR APPROVAL . . . . . . . . . . . . . . . . PER SHARE MARKET VALUES AND EQUIVALENT PER SHARE MARKET VALUES. . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY SELECTED FINANCIAL INFORMATION. . . . . . . . . . . INFORMATION CONCERNING THE SPECIAL MEETING . . . . . . . . . . . THE PEOPLES SPECIAL MEETING. . . . . . . . . . . . . . . . . . GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . VOTES REQUIRED. . . . . . . . . . . . . . . . . . . . . . . THE GERMAN AMERICAN SPECIAL MEETING. . . . . . . . . . . . . . GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . VOTES REQUIRED. . . . . . . . . . . . . . . . . . . . . . . PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . SOLICITATION OF PROXIES. . . . . . . . . . . . . . . . . . . . THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . BACKGROUND AND REASONS FOR THE MERGER. . . . . . . . . . . . . PEOPLES . . . . . . . . . . . . . . . . . . . . . . . . . . GERMAN AMERICAN . . . . . . . . . . . . . . . . . . . . . . THE ACQUISITION AGREEMENTS . . . . . . . . . . . . . . . . . . EFFECT OF THE MERGER. . . . . . . . . . . . . . . . . . . . TERMS OF THE MERGER . . . . . . . . . . . . . . . . . . . . CONVERSION OF PEOPLES COMMON STOCK. . . . . . . . . . . . SURRENDER OF CERTIFICATES . . . . . . . . . . . . . . . . RIGHTS DETERMINED AT EFFECTIVE TIME . . . . . . . . . . . EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . TERMINATION OF ACQUISITION AGREEMENTS . . . . . . . . . . . 10 ACCOUNTING TREATMENT . . . . . . . . . . . . . . . . . . . . . FEDERAL INCOME TAX CONSEQUENCES. . . . . . . . . . . . . . . . REGISTRATION STATEMENT . . . . . . . . . . . . . . . . . . . . TRANSFER RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . MANAGEMENT OF GERMAN AMERICAN AFTER THE MERGER . . . . . . . . REGULATORY MATTERS. . . . . . . . . . . . . . . . . . . . . RIGHTS OF DISSENTING SHAREHOLDERS. . . . . . . . . . . . . . . OPINION OF FINANCIAL ADVISOR TO PEOPLES. . . . . . . . . . . . PRELIMINARY APPRAISAL OF PEOPLES. . . . . . . . . . . . . . THE PROCESS FOR SOLICITING INDICATIONS OF INTEREST FROM OTHER BANK HOLDING COMPANIES. . . .. COMPARATIVE PRICE ANALYSIS . . . . . . . . . . . . . . CONTRIBUTION ANALYSIS . . . . . . . . . . . . . . . . . . . DILUTION ANALYSIS . . . . . . . . . . . . . . . . . . . . . DIVIDENDS PRO FORMA FINANCIAL STATEMENTS OF GERMAN AMERICAN AND PEOPLES. . INFORMATION ABOUT GERMAN AMERICAN. . . . . . . . . . . . . . . . INFORMATION ABOUT PEOPLES. . . . . . . . . . . . . . . . . . . . GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . COMPETITION. . . . . . . . . . . . . . . . . . . . . . . . . . REGULATION AND SUPERVISION . . . . . . . . . . . . . . . . . . PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . MARKET PRICE AND DIVIDEND INFORMATION. . . . . . . . . . . . . STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS . . . PEOPLES BANCORP OF WASHINGTON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . OVERVIEW OF OPERATIONS . . . . . . . . . . . . . . . . . . . . NET INTEREST INCOME & INTEREST RATE RISK . . . . . . . . . . . LOAN QUALITY AND PROVISION FOR LOAN LOSSES . . . . . . . . . . NON-INTEREST INCOME. . . . . . . . . . . . . . . . . . . . . . NON-INTEREST EXPENSE . . . . . . . . . . . . . . . . . . . . . INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . . . . . . CAPITAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . DESCRIPTION OF GERMAN AMERICAN CAPITAL STOCK . . . . . . . . . . AUTHORIZED BUT UNISSUED SHARES . . . . . . . . . . . . . . . . COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . VOTING RIGHTS . . . . . . . . . . . . . . . . . . . . . . . DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . . . . . LIQUIDATION . . . . . . . . . . . . . . . . . . . . . . . . OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . PREFERRED STOCK. . . . . . . . . . . . . . . . . . . . . . . . ANTI-TAKEOVER PROVISIONS . . . . . . . . . . . . . . . . . . . POSSIBLE ISSUANCE OF COMMON STOCK . . . . . . . . . . . . . POSSIBLE ISSUANCE OF PREFERRED STOCK. . . . . . . . . . . . SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS COMBINATIONS . . . . . . . . . . . . . . . . . . CLASSIFIED BOARD. . . . . . . . . . . . . . . . . . . . . . REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . AMENDMENT, CHANGE, OR REPEAL OF CERTAIN ARTICLES. . . . . . 11 CONTROL SHARE RESTRICTIONS. . . . . . . . . . . . . . . . . POTENTIAL DISADVANTAGES TO SHAREHOLDERS . . . . . . . . . . COMPARISON OF PEOPLES COMMON STOCK AND GERMAN AMERICAN COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . NUMBER OF SHARES AUTHORIZED BUT UNISSUED . . . . . . . . . . . PREFERRED STOCK. . . . . . . . . . . . . . . . . . . . . . . . DIVIDEND RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . VOTING RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . LIQUIDATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . ABSENCE OF PREEMPTIVE RIGHTS . . . . . . . . . . . . . . . . . ANTI-TAKEOVER PROVISIONS . . . . . . . . . . . . . . . . . . . POSSIBLE ISSUANCE OF COMMON STOCK . . . . . . . . . . . . . SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS COMBINATIONS. . . . . . . . . . . . . . . . . . . . . . CLASSIFIED BOARD. . . . . . . . . . . . . . . . . . . . . . REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . . . AMENDMENT, CHANGE, OR REPEAL OF CERTAIN ARTICLES. . . . . . CONTROL SHARE RESTRICTIONS. . . . . . . . . . . . . . . . . LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . INDEX TO PEOPLES BANCORP OF WASHINGTON FINANCIAL STATEMENTS. . . 12 APPENDICES: APPENDIX A -- Agreement and Plan of Reorganization APPENDIX B -- Provisions of Chapter 44 of the Indiana Business Corporation Law Governing Dissenters' Rights APPENDIX C -- Fairness Opinion of Austin Associates, Inc. APPENDIX D -- German American Bancorp Quarterly Report on Form 10-Q for the Quarter ended September 30, 1996 MATERIALS DELIVERED WITH PROSPECTUS/PROXY STATEMENT: German American Bancorp 1995 Annual Report to Shareholders 13 MERGER OF PEOPLES BANCORP OF WASHINGTON INTO GERMAN AMERICAN HOLDINGS CORPORATION, A SUBSIDIARY OF GERMAN AMERICAN BANCORP SPECIAL MEETINGS OF SHAREHOLDERS OF PEOPLES BANCORP OF WASHINGTON AND OF GERMAN AMERICAN BANCORP INTRODUCTION This Prospectus/Proxy Statement is being furnished to shareholders of Peoples Bancorp of Washington ("Peoples") and German American Bancorp ("German American") in connection with the separate solicitations of proxies by the Boards of Directors of Peoples and of German American to be voted at Special Meetings of their Shareholders. The purpose of each of the Special Meetings is to consider and vote upon a proposal to merge Peoples into German American Holdings Corporation ("GAHC"), a wholly-owned subsidiary of German American Bancorp ("German American") (which transaction is hereafter referred to as the "Merger"). The Merger proposal is in accordance with the Agreement and Plan of Reorganization, dated September 27, 1996, among Peoples, German American, GAHC, The Peoples National Bank and Trust Company ("Peoples Bank"), and The Union Bank ("Union") (the "Reorganization Agreement"), and the Merger Agreement between Peoples and GAHC, joined in by German American, in the form attached to the Reorganization Agreement as Exhibit A (collectively the "Acquisition Agreements"). If the enclosed proxy is executed and returned, it may nevertheless be revoked at any time insofar as it has not been exercised. The proxy may be revoked by (a) delivering to the Secretary of the corporation holding the meeting (Peoples or German American, as the case may be), (i) a written instrument revoking the proxy or (ii) a subsequently dated proxy, or (b) attending the Special Meeting and voting in person. Unless revoked, the proxy will be voted at the meeting in accordance with the instructions of the shareholder as indicated on the proxy. If no instructions are given, the shares will be voted FOR the Merger and on other matters that may come before the meeting as recommended by the Directors. 14 Consummation of the Merger is subject to approval by the vote of the holders of a majority of the outstanding shares of the common stock of Peoples ("Peoples Common Stock"). The continued listing of German American Common Stock on the NASDAQ National Market System is subject to the approval of the issuance of additional shares pursuant to the Acquisition Agreements by a majority of the votes cast thereon at the German American Special Meeting. THE BOARD OF DIRECTORS OF PEOPLES AND THE BOARD OF DIRECTORS OF GERMAN AMERICAN EACH BELIEVE THAT THE MERGER IS IN THE BEST INTEREST OF THEIR RESPECTIVE CORPORATIONS AND THEIR RESPECTIVE SHAREHOLDERS AND UNANIMOUSLY RECOMMEND THAT THEIR SHAREHOLDERS VOTE FOR APPROVAL OF THE ACQUISITION AGREEMENTS. For information concerning the reasons for these recommendations, see "THE MERGER." SUMMARY OF PROSPECTUS/PROXY STATEMENT The following is a brief summary of certain information contained in this Prospectus/Proxy Statement. This summary is not intended to be complete and is qualified in all respects by the more detailed information appearing elsewhere in this Prospectus/Proxy Statement. Shareholders are urged to review carefully the entire Prospectus/Proxy Statement, including the Appendices and other documents referred to herein. THE SPECIAL MEETINGS PEOPLES. . . . . . . The Special Meeting is scheduled to be held on , , 1997, at the principal office of Peoples Bank, 201 E. Main Street, Washington, Indiana, at .m., to consider and vote upon adoption of the Acquisition Agreements and the Merger contemplated thereby. Only shareholders of record at the close of business on , 1997, will be entitled to vote at the Special Meeting. On such date, there were 593,334 shares of Peoples Common Stock outstanding. Approval of the Acquisition Agreements requires the affirmative vote of the holders of a majority of the outstanding shares of Peoples Common Stock. See "INFORMATION CONCERNING THE SPECIAL MEETING." 15 GERMAN AMERICAN. . . The German American Special Meeting is scheduled to be held on , , 1997 at the principal office of The German American Bank, 711 Main Street, 711 Main Street, Jasper, Indiana at .m., to consider and vote upon the Acquisition Agreements and the issuance of German American Common Stock contemplated thereby. Only shareholders of record at the close of business on , 1997, will be entitled to vote at the German American Special Meeting. On such date, there were _________ shares of German American Common Stock outstanding. Continued listing of German American's Common Stock on the NASDAQ National Market System requires the approval of the issuance of the additional German American Common Stock pursuant to the Acquisition Agreements by a majority of the votes cast thereon at the German American Special Meeting. See "INFORMATION CONCERNING THE SPECIAL MEETINGS." PARTIES TO THE MERGER GERMAN AMERICAN. . . German American is a multibank holding company incorporated under Indiana law in 1982 that owns all the outstanding capital stock of The German American Bank, Jasper, Indiana; The Union Bank, Loogootee, Indiana; First State Bank, Southwest Indiana, Tell City, Indiana; and GAHC and GAHC's subsidiary, Community Trust Bank, Otwell, Indiana. The mailing address and telephone number of the principal executive offices of German American are 711 Main Street, Jasper, Indiana 47546-3042; 812/482-1314. See "INFORMATION ABOUT GERMAN AMERICAN." GAHC . . . . . . . . GAHC is an Indiana corporation and a wholly owned subsidiary of German American, which owns all of the outstanding capital stock of Community Trust Bank, Otwell, Indiana. 16 PEOPLES. . . . . . . Peoples is an Indiana corporation that owns all of the issued and outstanding shares of Peoples Bank, a national banking association that was originally chartered in 1888. Peoples was incorporated in 1985. Peoples' principal executive offices are located at 201 East Main Street, Washington, Indiana 47501-2912 and its telephone number is 812/254-4630. See "INFORMATION ABOUT PEOPLES". THE MERGER GENERAL. . . . . . . The Acquisition Agreements, which have been approved unanimously by the Boards of Directors of Peoples and German American, provide that Peoples will be merged into GAHC, with GAHC being the surviving corporation. As a result of the Merger, the separate corporate existence of Peoples will cease. The Acquisition Agreements also provide that simultaneously with the Merger, The Union Bank, Loogootee, Indiana, a wholly owned banking subsidiary of German American, will be merged into Peoples Bank with Peoples Bank surviving the Merger. As a consequence of the Merger and the merger of Union into Peoples Bank, Peoples Bank will become a direct, wholly owned banking subsidiary of GAHC. See "THE MERGER--The Acquisition Agreements." The Acquisition Agreements are hereby incorporated into this Prospectus/Proxy Statement by reference. MERGER CONSIDERATION. . . . On the effective date of the Merger (the "Effective Time"), German American will issue not fewer than 1.0372 nor more than 1.1669 shares of German American Common Stock for each of the 593,334 issued and outstanding shares of Peoples Common Stock (as adjusted for the five percent stock dividend declared by German American in October 1996 and subject to further adjustment in the event of any future stock dividends and the like). The exact 17 number of shares to be issued by German American in the Merger will be determined by the average closing bid/asked quotations for German American Common Stock during the ten business day period ending on the second business day preceding the closing date (the "Valuation Period"). On ______, 1997 (the date immediately prior to the date of this Prospectus/Proxy Statement), the average of the closing bid/asked quotations for German American Common Stock was $_____ per share. Assuming that such average value remains not less than $34.29 during the Valuation Period (as to which there is no assurance), then the minimum number of shares specified by the Reorganization Agreement (1.0372 shares of German American for each Peoples common share and an aggregate of 615,417 shares of German American Common Stock) will be issued in the Merger. See "THE MERGER--The Acquisition Agreements-- Terms of the Merger--Conversion of Peoples Common Stock." THE BANK MERGER. . . Simultaneously with the Merger, Union, a wholly owned banking subsidiary of German American, will be merged into Peoples Bank (the "Bank Merger"). The bank surviving the Bank Merger will retain the name "The Peoples National Bank and Trust Company" and will operate as a nationally chartered bank under the Articles of Association and Bylaws of Peoples Bank that were in effect immediately prior to the Bank Merger. The main office of Union will become a branch of Peoples Bank. As a consequence of the Merger and the Bank Merger, Peoples Bank will become a wholly-owned subsidiary of GAHC, which in turn is a wholly owned subsidiary of German American. OPINION OF FINANCIAL ADVISOR. . . . . . . Peoples has received an opinion of Austin Associates, Inc. that the exchange ratio in the Merger is fair, from a financial point of view, to the 18 holders of Peoples Common Stock. See "THE MERGER--Opinion of Financial Advisor to Peoples" and the opinion of Austin Associates, Inc. attached hereto as Appendix C. RIGHTS OF DISSENTING SHAREHOLDERS . . . . Subject to certain conditions, a shareholder of Peoples who (a) before the time the vote is taken on the Merger at the Peoples Special Meeting, delivers to Peoples a written demand for payment of his or her shares of Peoples Common Stock, and (b) does not vote in favor of the Merger, will have the right to receive in cash the fair value of his or her shares of Peoples Common Stock as determined pursuant to Chapter 44 of the Indiana Business Corporation Law ("IBCL"). See "THE MERGER--Rights of Dissenting Shareholders" and Appendix B to this Prospectus/Proxy Statement. Shareholders of German American do not have any right to exercise dissenters rights with respect to the Merger and receive cash for their shares under the IBCL. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER . . . . . The Merger is intended to constitute a tax-free reorganization to Peoples, German American, and GAHC. Assuming the merger qualifies as a tax-free reorganization, (a) shareholders of Peoples will recognize no gain or loss upon the exchange of shares of Peoples for shares of German American Common Stock, (b) shareholders of Peoples who receive cash in exchange for shares of Peoples Common Stock either in lieu of a fractional shares or because they have perfected dissenters' rights under the IBCL will recognize gain or loss upon the receipt of cash for their shares, and (c) cash received by shareholders receiving cash in lieu of fractional share interests and cash received by shareholders perfecting dissenters' rights will be treated as a distribution in full payment of such 19 fractional share interests, or shares surrendered in exercise of dissenters' rights, resulting in capital gain or loss or ordinary income or loss, as the case may be, depending upon each shareholder's particular situation. See "THE MERGER -- Federal Income Tax Consequences." Each Peoples shareholder is urged to consult his or her own tax advisors regarding the specific tax consequences of the Merger to him or her. REGULATORY APPROVAL . . . . . . The Merger will not be made effective unless the Bank Merger occurs simultaneously. The Bank Merger is subject to the approval of the Office of the Comptroller of the Currency (the "OCC"), and the OCC approved the Bank Merger in December, 1996. VOTES REQUIRED FOR APPROVAL . . . . The affirmative vote of the holders of a majority of the outstanding shares of Peoples Common Stock is required to approve the Merger. All of the Directors of Peoples have agreed to vote the shares of Peoples Common Stock owned of record by them in favor of approval of the Acquisition Agreements. At September 30, 1996, the 52,420 shares of Peoples Common Stock owned of record by Directors of Peoples represented approximately nine percent of the shares entitled to vote at the Peoples Special Meeting. The Directors and executive officers of Peoples own beneficially (including not only shares owned of record but also shares owned by spouses, minor children and other close associates) an aggregate of 78,348 shares or approximately 13% of the shares entitled to vote at the Peoples Special Meeting. In addition, the approval of the issuance of additional shares pursuant to the Merger by a majority of the votes cast at the German American Special Meeting is being solicited in accordance with 20 German American's listing agreement with the NASDAQ Stock Market in order to assure continued listing of German American's Common Stock on the NASDAQ National Market System. As of October 31, 1996, the Directors and executive officers of German American (all of whom are expected to vote in favor of the proposal) owned beneficially approximately 26% of the shares of German American Common Stock entitled to vote at the German American Special Meeting. See "INFORMATION CONCERNING THE SPECIAL MEETING." PER SHARE MARKET VALUES AND EQUIVALENT PER SHARE MARKET VALUES . . . . . . . The following table sets forth the market value of German American Common Stock (as determined by the average of the closing bid and asked quotations as reported by NASDAQ, and as retroactively adjusted for German American's five percent stock dividend declared in October 1996) and of Peoples Common Stock (as determined by the price of the most recent trade known to Peoples management) as of July 5, 1996, the date preceding the first public announcement of the Merger, and the equivalent per share market value as of that date of the consideration to be received per Peoples share in the Merger calculated at the maximum, mid- point and minimum exchange ratios specified by the Reorganization Agreement. If the Merger had closed on ______________, 1997, the date immediately prior to the date of this Prospectus/Proxy Statement, the exchange ratio would have been the minimum (1.0372), and (based on the average of the closing bid and asked prices of the German American Common Stock as of that date, which was $______________) the equivalent value as of that date per Peoples Common Share at the minimum exchange ratio (calculated by multiplying $_________ by 1.0372) would have been $_________. The use of these assumed exchange ratios is for illustrative purposes 21 only and is not intended to predict the actual number of shares to be issued in the Merger. Equivalent Values as of Actual Market July 5, 1996 Per Peoples Values as of Common Share at Selected July 5, 1996 Exchange Ratios 1.1669 1.1021 1.0372 German American $32.86 N/A N/A N/A Peoples $20.00 $38.34 $36.22 $34.08 SUMMARY SELECTED FINANCIAL INFORMATION. . . . . The following tables set forth (a) pro forma consolidated selected financial data for Peoples and German American combined as of and for the years ended December 31, 1995, 1994 and 1993, and for the nine months ended September 30, 1996, (b) historical, pro forma and equivalent pro forma net income, cash dividends and book value of Peoples and German American on a per share basis as of such dates and for such periods, and (c) selected consolidated financial data for Peoples and German American as of and for each of the five years ended December 31, 1995 and for the nine months ended September 30, 1996 and 1995. This information is derived from and should be read in conjunction with the historical financial statements of German American and Peoples that appear elsewhere in this Prospectus (or in the German American Annual Report to shareholders that accompanies this Prospectus) and with the pro forma condensed consolidated financial statements of German American, which give effect to the Merger and which appear in this Prospectus under the caption "PRO FORMA FINANCIAL INFORMATION." The pro forma condensed consolidated financial information has been prepared based on the "pooling of interest" method of accounting and on the assumption that no Peoples shareholder will exercise dissenters' rights. The historical financial information of German American and Peoples has been combined for each 22 period presented. The equivalent pro forma per share information for Peoples has been determined by multiplying the German American pro forma per share information by assumed exchange ratios representing the maximum and minimum exchange ratios specified by the Reorganization Agreement, as well as a mid-point between the maximum and minimum exchange ratios. The maximum, mid-point and minimum assumed exchange ratios are 1.1669, 1.1021 and 1.0372, respectively. If the Merger had closed on _______, 1997, the date immediately prior to the date of this Prospectus/Proxy Statement, the exchange ratio would have been the minimum (1.0372). The use of these assumed exchange ratios is for illustrative purposes only and is not intended to predict the actual number of shares to be issued in the Merger. 23 GERMAN AMERICAN BANCORP AND PEOPLES BANCORP OF WASHINGTON PRO FORMA CONSOLIDATED SELECTED FINANCIAL DATA (Dollar amounts in thousands, except share and per share data)
09/30/96 12/31/95 12/31/94 12/31/93 -------- -------- -------- -------- SUMMARY OF OPERATIONS (A) Interest income $26,263 $33,816 $27,922 $27,371 Interest expense 12,385 15,948 12,019 12,450 ------- ------- ------- ------- Net interest income 13,878 17,868 15,903 14,921 Provision for loan losses 183 49 687 797 ------- ------- ------- ------- Net interest income after provision for loan losses 13,695 17,819 15,216 14,124 Non-interest income 1,550 1,764 1,933 1,836 Non-interest expense 9,735 12,418 10,910 10,874 ------- ------- ------- ------- Income before income tax 5,510 7,165 6,239 5,086 Income tax 1,770 2,323 1,958 1,642 ------- ------- ------- ------- Income before change in accounting principle $ 3,740 $ 4,842 $ 4,281 $ 3,444 ======= ======= ======= ======= PERIOD END BALANCES (A) Total assets $473,316 $458,605 $432,939 $412,203 Total loans, net 309,162 282,457 270,982 243,765 Total deposits 408,135 395,553 369,180 353,056 Long-term debt 1,500 1,000 1,000 1,000 Total shareholders' equity 47,956 45,788 40,779 38,880 Cash dividends declared (B) 1,133 1,392 1,232 1,026 Common shares outstanding (C) 2,537,840 2,532,000 2,533,131 2,532,013 PER SHARE DATA (A) (C) Income before change in accounting principle $1.48 $1.91 $1.69 $1.36 Cash dividends declared (B) 0.59 0.72 0.65 0.63 Shareholders' equity, end of year 18.90 18.08 16.10 15.36 Weighted average shares outstanding 2,535,216 2,532,602 2,532,020 2,532,014
(A) Pro forma information includes German American Bancorp, and Peoples Bancorp of Washington as if combined for all periods presented. Assumes an Exchange Ratio of 1.0372 and issuance of 615,417 common shares of German American Bancorp, which amounts are based on the number of shares that would have been issued had the Merger been effective September 30, 1996. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (B) Based upon German American Bancorp cash dividends declared, without restatement for poolings, because management believes acquisitions will have no significant effect on German American Bancorp dividend policy. (C) Retroactively restated for a 5% stock dividend in October, 1995 and a 5% stock dividend in October, 1996. 24 GERMAN AMERICAN BANCORP AND PEOPLES BANCORP OF WASHINGTON HISTORICAL AND PRO FORMA PER SHARE DATA
PEOPLES BANCORP GAB GAB PEOPLES OF WASHINGTON BANCORP BANCORP BANCORP EQUIVALENT PRO FORMA OF WASHINGTON PRO FORMA (C) (A) (D) -------------------------------------------------------------- 09/30/96 - -------- Assuming 1.1669 Exchange Ratio (maximum) Net income $ 1.57 $ 1.43 $ 1.24 $ 1.67 Cash dividends declared (B) 0.59 0.59 0.21 0.69 Shareholders' equity, end of period 20.05 18.34 15.86 21.40 Assuming 1.1021 Exchange Ratio (mid-point) Net income 1.57 1.45 1.24 1.60 Cash dividends declared (B) 0.59 0.59 0.21 0.65 Shareholders' equity, end of period 20.05 18.61 15.86 20.51 Assuming 1.0372 Exchange Ratio (minimum) Net income 1.57 1.48 1.24 1.54 Cash dividends declared (B) 0.59 0.59 0.21 0.61 Shareholders' equity, end of period 20.05 18.90 15.86 19.60 12/31/95 - -------- Assuming 1.1669 Exchange Ratio (maximum) Net income 2.10 1.86 1.39 2.17 Cash dividends declared (B) 0.72 0.72 0.27 0.84 Assuming 1.1021 Exchange Ratio (mid-point) Net income 2.10 1.88 1.39 2.07 Cash dividends declared (B) 0.72 0.72 0.27 0.79 Assuming 1.0372 Exchange Ratio (minimum) Net income 2.10 1.91 1.39 1.98 Cash dividends declared (B) 0.72 0.72 0.27 0.75 12/31/94 - -------- Assuming 1.1669 Exchange Ratio (maximum) Net income 1.81 1.64 1.36 1.91 Cash dividends declared (B) 0.65 0.65 0.23 0.76 Assuming 1.1021 Exchange Ratio (mid-point) Net income 1.81 1.67 1.36 1.84 Cash dividends declared (B) 0.65 0.65 0.23 0.72 Assuming 1.0372 Exchange Ratio (minimum) Net income 1.81 1.69 1.36 1.75 Cash dividends declared (B) 0.65 0.65 0.23 0.67 12/31/93 - -------- Assuming 1.1669 Exchange Ratio (maximum) Income before change in accounting pr 1.53 1.32 1.23 1.54 Cash dividends declared (B) 0.63 0.63 0.21 0.74 Assuming 1.1021 Exchange Ratio (mid-point) Net income 1.53 $1.34 1.23 1.48 Cash dividends declared (B) 0.63 0.63 0.21 0.69 Assuming 1.0372 Exchange Ratio (minimum) Net income 1.53 $1.36 1.23 1.41 Cash dividends declared (B) 0.63 0.63 0.21 0.65
(A) Pro forma information includes German American Bancorp, and Peoples Bancorp of Washington as if combined for all periods presented. 25 (B) Based upon German American Bancorp cash dividends declared, without restatement for poolings, because management believes acquisitions will have no significant effect on German American Bancorp dividend policy. (C) Retroactively restated for a 5% stock dividend in October, 1995 and a 5% stock dividend in October, 1996. (D) Computed by multiplying German American Bancorp pro forma per share information by the indicated Exchange Ratio. 26 PEOPLES BANCORP OF WASHINGTON SELECTED CONSOLIDATED FINANCIAL DATA (Dollar amounts in thousands, except share data) The following selected data have been derived from and should be read in conjunction with, the Peoples Bancorp of Washington audited and unaudited financial statements and Management's Discussion and Analysis.
Nine months ended September 30, Year ended December 31, -------------------- -------------------------------------------------------- 1996 1995 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- ---- ---- FOR THE PERIOD Interest Income $ 5,211 $ 4,799 $ 6,519 $ 5,852 $ 5,714 $ 6,241 $ 6,752 Interest Expense 2,276 2,304 3,131 2,492 2,556 3,117 4,038 Net interest income 2,935 2,495 3,388 3,360 3,158 3,124 2,714 Provision for loan losses 37 67 68 120 144 162 140 Non-interest income 230 269 304 244 267 297 199 Non-interest expense 1,946 1,834 2,340 2,301 2,285 2,279 2,135 Income before income taxes and accounting change 1,181 862 1,284 1,183 996 979 638 Net income 735 561 824 807 730 615 364 PER COMMON SHARE (3) Net income 1.24 0.95 1.39 1.36 1.23 1.04 0.61 Cash dividends 0.21 0.17 0.27 0.23 0.21 0.18 0.17 Divided payout ratio 16.94% 17.89% 19.42% 16.91% 17.07% 17.31% 27.87% Weighted average Shares (000) 593 593 593 593 593 593 593 AT PERIOD-END Loans $ 67,230 $ 56,057 $ 58,760 $ 53,774 $ 48,110 $ 44,565 $ 39,702 Earning assets 86,454 81,165 83,914 81,489 82,207 78,485 73,822 Total assets 91,488 87,586 90,842 86,413 88,924 83,320 82,305 Average total assets 89,451 86,552 87,497 85,394 83,124 82,813 80,740 Deposits 71,631 66,046 67,974 66,890 71,546 70,550 69,318 Long-term debt 1,500 2,000 1,000 1,000 1,000 - - Common shareholders' equity 9,408 8,601 8,832 7,854 7,539 6,931 6,425 Total shareholders' equity 9,408 8,601 8,832 7,854 7,539 6,931 6,425 Average shareholders' equity 9,104 8,254 8,371 7,755 7,254 6,678 6,208 PERFORMANCE RATIOS Return on average total assets 1.10% 0.86% 0.94% 0.95% 0.88% 0.74% 0.45% Return on average common equity 10.76 9.06 9.84 10.42 10.06 9.21 5.86 Efficiency (1) 61.48 66.35 63.38 63.83 66.72 66.62 73.29 Overhead (2) 58.47 62.73 60.09 61.20 63.90 63.44 71.33 Net interest margin 4.61 4.05 4.08 4.16 4.05 3.98 3.68 CAPITAL RATIOS AT PERIOD-END Tangible equity to tangible assets 10.36 9.91 9.76 9.09 8.48 8.32 7.81 Tier 1 risk-adjusted capital 14.45 14.88 14.64 13.74 14.39 14.67 14.96 Total risk-adjusted capital 15.70 16.13 15.89 14.99 15.63 15.92 16.21 ASSET QUALITY DATA Nonperforming loans $ 411 $ 407 $ 418 $ 501 $ 45 $ 95 $ 385 Nonperforming assets 411 407 418 501 45 95 385 Allowance for loan losses 968 968 960 933 810 634 622 Nonperforming loans to period-end loans 0.61% 0.73% 0.71% 0.93% 0.09% 0.21% 0.97% Non performing assets to period-end loans plus OREO and other nonperforming assets 0.61% 0.73% 0.71% 0.93% 0.09% 0.21% 0.97% Allowance for loan losses to nonperforming loans 235.52% 237.84% 229.67% 186.23% 1800.00% 667.37% 161.56% Allowance for loan losses to period-end loans 1.44% 1.73% 1.63% 1.74% 1.68% 1.42% 1.57% Net loan charge-offs to average loans 5.00% 8.00% 7.00% -1.00% -7.00% 36.00% 35.00%
(1) Calculated as noninterest expense divided by net interest income plus noninterest income. (2) Calculated as noninterest expense less noninterest income divided by net interest income. (3) Share data adjusted for 1995 stock split as appropriate. 27 GERMAN AMERICAN BANCORP SELECTED CONSOLIDATED FINANCIAL DATA (Dollar References In Thousands Except Share Data) The following selected data have been derived from, and should be read in conjunction with, the consolidated financial statements and related notes included in the German American Annual Report to Shareholders delivered with this Prospectus/Proxy Statement, and in German American's Quarterly Report on Form 10-Q for the three months ended September 30, 1996 (attached to this Prospectus/Proxy Statement as Appendix D). See Note 18 to the consolidated financial statements included in the German American Annual Report to Shareholders and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included therein for information regarding certain purchase acquisitions during 1994 and 1993 which affect the comparability of data. Nine Months Ended September 30, Year Ended December 31, ____________________ _______________________________________________ 1996 1995 1995 1994 1993 1992 1991 ____________________ _______________________________________________ SUMMARY OF OPERATIONS Interest and Fees on Loans $ 16,343 $ 15,680 $ 21,210 $ 17,348 $ 16,312 $ 16,903 $ 17,739 Interest on Investments 4,709 4,468 6,087 4,722 5,345 6,018 7,956 Total Interest Income 21,052 20,148 27,297 22,070 21,657 22,921 25,695 Interest on Deposits 10,072 9,226 12,633 9,394 9,844 11,197 14,771 Interest on Short-term Borrowings 37 168 184 133 50 69 185 Interest on Long-term Debt -- -- -- -- -- 3 5 Total Interest Expense 10,109 9,394 12,817 9,527 9,894 11,269 14,961 Net Interest Income 10,943 10,754 14,480 12,543 11,763 11,652 10,734 Provision for Loan Losses 145 15 (19) 567 653 984 1,943 Net Interest Income after Provision for Loan Losses 10,798 10,739 14,499 11,976 11,110 10,668 8,791 Service Charges on Deposit Accounts 555 456 620 567 520 439 466 Other Income 765 651 840 1,122 1,049 1,175 481 Total Non-Interest Income 1,320 1,107 1,460 1,689 1,569 1,614 947 Salaries and Benefits 4,278 3,963 5,349 4,517 4,338 4,096 3,716 Other Expenses 3,511 3,400 4,729 4,092 4,251 3,881 3,281 Total Non-Interest Expense 7,789 7,363 10,078 8,609 8,589 7,977 6,997 Income Before Income Taxes and Accounting Change 4,329 4,483 5,881 5,056 4,090 4,305 2,741 Income Tax Expense 1,324 1,460 1,863 1,582 1,308 1,403 716 Income Before Accounting Change 3,005 3,023 4,018 3,474 2,782 2,902 2,025 Cumulative Effect of change in Accounting for Income Taxes -- -- -- -- 150 -- -- Net Income 3,005 3,023 4,018 3,474 2,932 2,902 2,025 ________________________________________________________________________________________________________________ PERIOD END BALANCES Total Assets $381,828 $357,361 $367,763 $346,526 $323,279 $305,022 $291,625 Total Loans, Net 242,900 228,788 224,657 218,141 196,465 185,741 174,547 Total Long-term Debt -- -- -- -- -- -- 69 Total Deposits 336,504 314,997 327,579 302,290 281,510 270,952 258,133 Total Shareholders' Equity 38,548 35,430 36,956 32,925 31,341 29,470 27,446 ________________________________________________________________________________________________________________ PER SHARE DATA(1) Income Before Cumulative Effect of Change in Accounting for Income Taxes $ 1.57 $ 1.58 $ 2.10 $ 1.81 $ 1.45 $ 1.51 $ 1.06 Net Income 1.57 1.58 2.10 1.81 1.53 1.51 1.06 Cash Dividends(2) 0.59 0.54 .72 .65 .63 .54 .57 Shareholders' Equity, End of Period 20.05 18.49 19.29 17.17 16.34 15.37 14.31
(1) Per share data has been retroactively adjusted to give effect for stock dividends and stock splits, including the five percent stock dividend declared in October, 1996. (2) Cash dividends represent historical per share dividends declared without retroactive restatement for pooling. 28 INFORMATION CONCERNING THE SPECIAL MEETING THE PEOPLES SPECIAL MEETING GENERAL Each copy of this Prospectus/Proxy Statement mailed to a Peoples Shareholder is accompanied by a proxy, which is solicited by the Board of Directors of Peoples for use at the Special Meeting that will be held at the principal office of Peoples Bank, 201 East Main Street, Washington, Indiana, at .m., Peoples time, on , , 1997, and at any adjournment or adjournments thereof. Shareholders of Peoples who are the owners of Peoples Common Stock of record at the close of business on , 1997, will be entitled to vote at the Special Meeting. On such date, there were 593,334 shares of Peoples Common Stock outstanding and entitled to vote, with each such share entitled to one vote. VOTES REQUIRED The presence at the Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of Peoples Common Stock will constitute a quorum. Each share of Peoples Common Stock is entitled to one vote on any matter to come before the Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of Peoples Common Stock entitled to vote at the Special Meeting (at least 296,667 of the 593,334 shares of Peoples Common Stock outstanding) is required for approval and adoption of the Acquisition Agreements. Proxies marked as abstentions and shares held in street name that are designated by brokers on proxy cards as not voted will not be counted as votes cast and, as a result, will have the same effect as a vote against approval of the Acquisition Agreements. Proxies marked as abstentions or as broker non-votes, however, will be treated as shares present for the purpose of determining whether a quorum is present. All of the members of the Board of Directors of Peoples have agreed to vote all shares owned of record by them in favor of approval and adoption of the Acquisition Agreements at the Special Meeting. At September 30, 1996, the Directors of Peoples owned of record 52,420 shares or approximately nine percent of the outstanding shares thereof, and owned beneficially (including not only shares owned by 29 record but also shares owned by spouses, minor children, and other close associates) an aggregate of 78,348 shares, or approximately 13 percent. Accordingly, the vote of an additional 218,319 shares would be required to approve the Merger in addition to the 78,348 shares beneficially owned by the Directors of Peoples. THE GERMAN AMERICAN SPECIAL MEETING GENERAL The vote of German American's stockholders with respect to the Merger is not required by law or by the terms of the Acquisition Agreements. German American's listing agreement with the NASDAQ Stock Market (the "NASDAQ Listing Agreement"), however, requires that German American abide by certain NASDAQ policies in order to continue to be listed on the National Market System of NASDAQ. One of these policies requires that issuance of additional German American Common Stock in connection with an acquisition of stock or assets of another business that equals or exceeds 20 percent of the number of shares of German American Common Stock outstanding prior to the issuance must be approved by a majority of the votes cast by German American's shareholders at a meeting held to consider such acquisition. Accordingly, the Board of Directors of German American has called a Special Meeting of Shareholders of German American to consider the Merger and the issuance of additional shares pursuant to the Acquisition Agreements in order to assure continued listing of German American Common stock on the NASDAQ National Market System. Each copy of this Prospectus/Proxy Statement mailed to a German American Shareholder is accompanied by a proxy, which is solicited by the Board of Directors of German American for use at the Special Meeting that will be held at the principal office of German American Bank, 711 Main Street, Jasper, Indiana, at .m., German American time, on , , 1997, and at any adjournment or adjournments thereof. Shareholders of German American who are the owners of German American Common Stock of record at the close of business on , 1997, will be entitled to vote at the Special Meeting. On such date, there were _____________ shares of German American Common Stock outstanding and entitled to vote, with each such share entitled to one vote. 30 VOTES REQUIRED The presence at the Special Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of German American Common Stock will constitute a quorum. Each share of German American Common Stock is entitled to one vote on any matter to come before the Special Meeting. The affirmative vote of a majority of the votes cast at the Special Meeting is required by the NASDAQ Listing Agreement for approval of the proposed issuance of additional shares pursuant to the Acquisition Agreements. Proxies marked as abstentions and shares held in street name that are designated by brokers on proxy cards as not voted will not be counted as votes cast and, as a result, will not have the effect of a vote cast for or against approval of the Acquisition Agreements. Proxies marked as abstentions or as broker non-votes, however, will be treated as shares present for the purpose of determining whether a quorum is present. All of the members of the Board of Directors of German American are expected to vote all shares owned by them in favor of approval and adoption of the Acquisition Agreements at the Special Meeting. At October 31, 1996, the Directors and executive officers of German American owned beneficially approximately 26% of the outstanding shares of German American Common Stock. PROXIES If the enclosed proxy is executed and returned, it may nevertheless be revoked at any time insofar as it has not been exercised. The proxy may be revoked by (a) giving written notice of revocation to the Secretary of Peoples or German American (as the case may be) at the principal executive offices of such corporation set forth in the Summary, which written revocation notice is actually received by the Secretary prior to the proxy being exercised, (b) executing a subsequently dated proxy, or (c) attending the Special Meeting and voting in person. Unless revoked, the proxy will be voted at the meeting in accordance with the instructions of the shareholder as indicated on the proxy. If no instructions are given, the shares will be voted FOR the Merger and, on other matters that come before the meeting, as recommended by the Directors; provided, that, in no event will a proxy that has been voted against the Merger be voted in favor of any motion to adjourn the Special Meeting for the purpose of soliciting additional votes in favor of the Merger. 31 SOLICITATION OF PROXIES In addition to the use of the mails, Directors, officers, and certain employees of Peoples, Peoples Bank and German American may, without additional compensation therefor, solicit proxies in person or by telephone. Peoples and German American will bear the cost of soliciting proxies from shareholders of Peoples and the expense of preparing and printing this Prospectus/Proxy Statement. See "THE MERGER--The Acquisition Agreements--Terms of the Merger--Expenses." Brokers and other custodians, nominees, and fiduciaries are requested to forward proxies and proxy soliciting materials to the beneficial owners of shares held of record by such persons and will be reimbursed for their reasonable expenses in so doing. THE MERGER BACKGROUND AND REASONS FOR THE MERGER PEOPLES During 1995, Peoples received several unsolicited invitations to hold discussions concerning possible affiliations between Peoples and other financial institutions. Partly in response to these, Peoples' Board of Directors decided to retain an investment banker in order to assist it in its long-range strategic planning process. On January 31, 1996, Peoples retained Austin Associates, Inc. ("AAI") to assist in a strategic planning process. The purpose of the planning process was to develop a three year financial plan to assist in determining the impact of achieving alternative planning goals on the value of Peoples. To do this, the strategic planning process involved projecting (1) the value of Peoples in a "sale of control" context; (2) the level of performance Peoples would need to achieve in order to provide shareholders with the value projected in a "sale of control" context; and (3) the ability of Peoples to redeem shares of its common stock in order to provide liquidity to its shareholders. The Board of Directors of Peoples met on March 13, 1996, to review the results of the planning process and determined that a sale or merger of the company would likely provide greater shareholder value than remaining independent. The Board of Peoples reached this conclusion after analyzing the level of performance Peoples would need to achieve in order to provide shareholders with the value projected in a "sale of control" context and the probable changes required in Peoples methods of operations in order to achieve these 32 results. In reaching this conclusion, the Board of Peoples also acknowledged that even if Peoples obtained these operating results, there was no guaranty that Peoples' stock would increase in value. On March 15, 1996, Peoples received a proposal from another entity (the "Third Party") other than German American. The proposal indicated a fixed price of $18.5 million, payable in stock, cash or a combination of stock and cash. The Board retained AAI on March 19, 1996 to serve as financial advisor with respect to a possible sale or merger of Peoples. AAI prepared an overall assessment of the sale of control value of Peoples, including a review of the Third Party proposal. 33 On April 17, 1996, the Peoples Board met to review the AAI report. AAI concluded that a reasonable sale of control value range for the organization would be between $15.4 and $16.6 million as of December 31, 1995. The Board instructed AAI to further negotiate the financial terms with the Third Party. On April 23, 1996, German American submitted an unsolicited proposal to merge with Peoples in a stock for stock transaction. The offer indicated a fixed exchange of German American shares for all of Peoples shares outstanding. The transaction would have been valued at $20.5 million based on the April 22 average of the closing bid and asked prices of German American. Based on this development, the Board instructed AAI to contact five additional organizations to determine their potential interest in acquiring Peoples. The five organizations were selected based on asset size, geographic proximity, and financial performance and condition. In addition, the common stock of all five of the financial organizations was publicly traded. After receiving positive responses, AAI distributed confidential information packages to German American, the Third Party and the five companies. The 1996 Budget for Peoples, including projected net income of $913,450 for the year ended December 31, 1996, and projected total assets of $91,514,000, projected total loans of $60,775,000, and projected total deposits of $70,513,000 as of December 31, 1996, was included in the confidential information. A bid deadline of May 17 was established. On or before May 17, six proposals were received, including revised proposals from both German American and the Third Party. A special Board meeting of Peoples was held May 30 to review the proposals. After further negotiations and an exchange of additional information between the parties, the Peoples Board selected the German American proposal. The Peoples Board was informed by AAI that it would be able to render a fairness opinion with respect to both the German American proposal and the proposal from the Third Party. The Peoples Board chose the German American proposal over the proposal from the Third Party due in part to the higher price of the German American proposal based upon market conditions at that time and the belief of the Peoples Board that German American's philosophy and corporate culture with respect to operations, customers and shareholders more strategically matched that of Peoples. No one of the 34 above reasons was dominant but, instead, the decision of the Board was the result of all considerations. The importance of these factors relative to one another cannot precisely be determined or stated here. The final German American proposal, as described in detail elsewhere in this Prospectus/Proxy Statement, provides for a variable exchange of German American shares for Peoples shares. The variable exchange ratio formula is designed to assure Peoples shareholders that the aggregate value of the German American Common Stock to be issued in the Merger as calculated during the pre-closing Valuation Period will be not less than $21.1 million unless the Board of Directors of Peoples waives that minimum valuation condition. Although there can be no such assurance, the Board of Directors of Peoples presently anticipates that it would not waive the minimum condition without submitting the merger to another vote by Peoples' stockholders and resolicitation of their proxies. The average of the German American closing bid and ask prices on _________________, 1997 (the date immediately preceding the date of this Prospectus/Proxy Statement), was $______________. Assuming that the Merger had closed on that date, the Exchange Ratio would have been fixed at 1.0372 and the market value of German American stock to be exchanged for each share of Peoples would have been $______, or $_______ in the aggregate. 35 An Agreement between the parties fixing the general terms of the transaction was entered into on July 3, 1996. German American and Peoples entered into the Agreement and Plan of Reorganization ("Agreement") on September 27, 1996. German American and Peoples, and their respective representatives, negotiated the financial and other terms of the Agreement on an arms's-length basis. THE BOARD OF DIRECTORS OF PEOPLES HAS UNANIMOUSLY APPROVED THE ACQUISITION AGREEMENTS AND UNANIMOUSLY RECOMMENDS TO THE SHAREHOLDERS OF PEOPLES THAT THEY VOTE TO APPROVE SUCH AGREEMENTS AND THE MERGER PROPOSAL CONTEMPLATED THEREBY. Pursuant to the Reorganization Agreement, the Chairman of the Board of Peoples, David Graham, and another member of the present Board of Directors of Peoples (not yet designated), will be added to the German American Board of Directors as soon as practicable after the Effective Time. GERMAN AMERICAN German American's Board of Directors considered a number of financial and non-financial factors in connection with its approval of the Merger, including its respect for the ability and integrity of the Board of Directors, management, and staff of Peoples and Peoples Bank and its belief that entering the Daviess County banking market through the Merger offers important long range strategic benefits to German American. In connection with German American's evaluation of the financial terms of the Merger, German American's management prepared estimates of the future earnings and financial condition for German American and for Peoples. These estimates were based on the 1996 Budget of Peoples that had been supplied to German American as part of the confidential information package delivered to interested parties, and took into account cost savings and efficiencies that German American's management believed could reasonably be achieved in future years. These estimates compared the estimated earnings per share and estimated shareholders' equity per share of German American's Common Stock to its estimated earnings per share and shareholders' equity per share on a prospective pro forma basis giving effect to the Merger on the agreed terms. Based on such analysis, the proposed Merger of Peoples was expected to be materially dilutive, in the early years, to German American's earnings per share and shareholders' equity per share compared to the amounts that might be expected without the business combination with Peoples. See "GERMAN AMERICAN BANCORP 36 AND PEOPLES BANCORP OF WASHINGTON HISTORICAL AND PRO FORMA PER SHARE DATA" which illustrates the pro forma dilutive impact of the Merger on German American's net income per share and shareholders' equity per share for the nine months ended September 30, 1996 and each of the three years ended December 31, 1995, without taking into account any cost savings or efficiencies. German American's Board of Directors attached greater weight to the anticipated net income per share dilution than to the anticipated shareholders equity per share dilution when determining its offer of merger. German American's management believes that the anticipated dilution is acceptable given German American's belief that entry into the Daviess County banking market offers strategic advantages to German American. THE BOARD OF DIRECTORS OF GERMAN AMERICAN HAS UNANIMOUSLY APPROVED THE ACQUISITION AGREEMENTS AND UNANIMOUSLY RECOMMENDS TO THE SHAREHOLDERS OF GERMAN AMERICAN THAT THEY VOTE TO APPROVE SUCH AGREEMENTS AND THE ISSUANCE OF ADDITIONAL GERMAN AMERICAN COMMON STOCK CONTEMPLATED THEREBY. THE ACQUISITION AGREEMENTS The following summary of the terms of the Acquisition Agreements does not purport to be complete and is qualified in its entirety by reference to the Acquisition Agreements, which are incorporated herein by reference and attached as Appendix A to this Prospectus. If approved by the shareholders of Peoples, and if all other conditions to the consummation of the Merger specified by the Acquisition Agreements are satisfied or waived, and unless the Acquisition Agreements are terminated as provided therein, the Merger will be consummated and become effective upon the filing of the Merger Agreement with the Office of the Indiana Secretary of State (the "Effective Time"). Although no assurances can be given, it is anticipated that the Effective Time will occur on or before January 31, 1997. Simultaneously with the Merger, Union will be merged into Peoples Bank. The resulting bank will continue operation under the name "The Peoples National Bank and Trust Company." 37 EFFECT OF THE MERGER At the Effective Time of the Merger, the separate corporate existence of Peoples will cease and Peoples will be merged into and become a part of GAHC, which will survive the Merger. Following the Merger, shareholders of Peoples who do not perfect their dissenters' rights under Chapter 44 of the IBCL (see "THE MERGER--Rights of Dissenting Shareholders") will have the right, upon surrender of the certificates for their shares of Peoples Common Stock or other evidence of ownership of such shares acceptable to German American, to receive the Merger Consideration as further discussed below. 38 TERMS OF THE MERGER CONVERSION OF PEOPLES COMMON STOCK Pursuant to the Merger, German American will acquire all 593,334 issued and outstanding shares of Peoples Common Stock in exchange for shares of German American's Common Stock, $10 par value, at an exchange ratio calculated as follows. German American Common Stock will be valued solely for purposes of computing the exchange ratio at the average of the lowest closing asked prices and highest closing bid prices of German American Common Stock as reported by the NASDAQ National Market System for each of the ten consecutive business days that end on the second business day preceding the closing date (the "Valuation Period"). This valuation will be computed by averaging the asked prices separately from the bid prices over the ten days of the Valuation Period and then averaging the average bid price figure and the average asked price figure. Shareholders can obtain the daily closing bid/asked information as reported by NASDAQ for German American Common Stock by calling any member firm of the National Association of Securities Dealers (NASD) or by accessing NASDAQ's home page on the Internet (http://www.nasdaq.com) and entering the NASDAQ quotation symbol for German American Common Stock (GABC). Shareholders can also obtain this information by calling the German American Investor Relations office at (812)482-1314. The value of the German American Common Stock during the Valuation Period (computed as indicated above) shall then be divided into the sum of $21,100,000 to establish (to the nearest whole share) the aggregate number of shares of German American Common Stock into which all of the then issued and outstanding shares of Peoples Common Stock (which shall be not more than 593,334 shares) shall be converted at the Effective Time. This number of shares of German American Common Stock shall then be divided by 593,334, with the quotient therefrom (carried to the fourth figure past the decimal point) being the number of shares of German American Common Stock into which each share of Peoples Common, except for shares as to which dissenters rights under the Indiana Business Corporation Law (the "IBCL") have been perfected, shall be converted at the Effective Time. Notwithstanding the above, in no event shall the total number of shares of German American Common Stock into which the 593,334 shares of Peoples Common Stock shall be converted be more than 692,344 shares or fewer than 615,417 shares; and provided further, that in no event will the exchange ratio be more than 1.1669 or 39 less than 1.0372 shares of German American Common Stock for each of the 593,334 shares of Peoples Common Stock. The maximum and minimum exchange ratio, and the maximum and minimum number of shares of German American Common Stock for which the 593,334 shares of Peoples Common Stock shall be exchanged, have been adjusted by five percent from the figures set forth in the Reorganization Agreement for the five percent stock dividend declared by German American in October 1996, subsequent to the date of the Reorganization Agreement. The maximum and minimum exchange ratios, and the maximum and minimum numbers of shares, will be further adjusted in accordance with the anti-dilution provisions of the Reorganization Agreement in connection with any future stock dividends, stock splits and the like that German American might declare. German American does not anticipate, however, that it will declare or effect any such future stock splits or dividends or the like prior to the Effective Time. At times herein the shares of German American Common Stock to be received in exchange for the shares of Peoples Common Stock will be referred to as the "Merger Consideration". 40 On __________________, 1997 (the date immediately prior to the date of the Prospectus/Proxy Statement), the average of the closing bid/asked quotations ("Bid/Asked Value") for German American Common Stock was $__________ per share. Assuming that the Bid/Asked Value remains not less than $34.29 per share during the Valuation Period (as to which there is no assurance), then the minimum number of shares specified by the Reorganization Agreement (1.0372 shares of German American for each Peoples common share and an aggregate of 615,417 shares of German American Common Stock) will be issued in the Merger. If the Bid/Asked Value falls between $30.48 and $34.28 per share during the Valuation Period, then Peoples' shareholders will receive an aggregate number of shares of German American Common Stock that had an aggregate Bid/Asked Value as measured during the Valuation Period of $21,100,000 (but not more than 692,344 shares in the aggregate or 1.1669 shares of German American Common Stock for each Peoples common share). The Acquisition Agreements may be terminated by Peoples if the Bid/Asked Value of the German American Common Stock to be issued to the Peoples shareholders, as calculated pursuant to the Acquisition Agreements, would be less than $21,100,000. This termination right will become operative only if the average of the closing bid/asked quotations for German American Common Stock during the Valuation Period is less than $30.48 per share, and the product obtained by multiplying the maximum number of shares to be issued in the Merger (692,344 shares) by such average value therefore is less than $21,100,000. Although there can be no such assurance, the Peoples Board of Directors presently anticipates that it would not waive any right that Peoples may have to terminate the Merger by reason of the Bid/Asked Value of the German American Common Stock dropping below $30.48 during the Valuation Period unless it first submitted the Merger to the Peoples' shareholders for reapproval and resolicited proxies. If Peoples waives its right to terminate the Merger (with or without shareholder reapproval) on account of the Bid/Asked Value dropping below $30.48 during the Valuation Period, then Peoples Shareholders would receive the maximum number of shares specified by the Acquisition Agreements, which maximum number of shares would have a Bid/Asked Value as measured during the Valuation Period of less than $21,100,000. 41 The following table illustrates a range of possible values of the German American Common Stock to be received by the Peoples shareholders in the Merger:
Average Aggregate Bid/Asked Hypothetical Average Value During Average Bid/Asked the Bid/Asked Value During Shares Valuation Value Aggregate The Valuation To Be Period of During the Shares Period of Issued Per Shares To Be Valuation To Be Shares To Be Peoples Issued Per Period Issued* Issued Share* Peoples Share $37.00 615,417 $22,770,429 1.0372 $38.38 $35.00 615,417 $21,539,595 1.0372 $36.30 $34.29 615,417 $21,102,649 1.0372 $35.57 $33.00 639,394 $21,100,000 1.0776 $35.56 $31.00 680,645 $21,100,000 1.1472 $35.56 $30.47 692,344 $21,095,722 1.1669 $35.56 $29.00 692,344 $20,077,686 1.1669 $33.84
*Subject to possible adjustment on account of future stock dividends, stock splits, or the like. No fractional shares of German American Common Stock will be issued and, in lieu thereof, holders of shares of Peoples Common Stock who would otherwise be entitled to a fractional share interest (after taking into account all shares of Peoples Common Stock held by such holder) shall be paid an amount in cash equal to the product of such fractional share interest and the average of the highest bid and the lowest asked price of a share of German American Common as quoted on the NASDAQ National Market System on the last day of the Valuation Period. Any Peoples shareholders who perfect their dissenters' rights under the IBCL would receive cash for their shares of Peoples Common Stock rather than shares of German American's Common Stock. SURRENDER OF CERTIFICATES As soon as reasonably practicable after the Effective Time, German American or its designated exchange agent (the "Exchange Agent") shall mail to each record holder of Peoples Common Stock a letter of transmittal (which shall specify that delivery shall be effected, and the risk of loss and title to the 42 certificates of Peoples Stock shall pass, only upon proper delivery of the certificates to the Exchange Agent and shall be in such form and have such other provisions as German American shall reasonably specify) (each such letter, the "Merger Letter of Transmittal") and instructions for use in effecting the surrender of each Peoples stock certificate (the "Certificate") in exchange for the Merger Consideration. As soon as reasonably practicable after surrender to the Exchange Agent of a Certificate, together with a Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such Certificate the Merger Consideration. No dividends that are otherwise payable on shares of German American Common Stock constituting the Merger Consideration shall be paid to persons entitled to receive such shares of German American Common Stock until such persons surrender their Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common Stock shall be issued any dividends which shall have become payable with respect to such shares of German American Common Stock (without interest and less the amount of taxes, if any, which may have been imposed thereon) between the Effective Time and the time of such surrender. If the Merger Consideration is to be issued to a person other than a person in whose name a surrendered Certificate is registered, it shall be a condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the Peoples Shareholder in the event that such shareholder claims loss of a Certificate for Peoples Common Stock and requests that German American waive the requirement for surrender of such Certificate. 43 RIGHTS DETERMINED AT EFFECTIVE TIME Peoples will provide to German American a certified list of the Peoples shareholders from Peoples' stock records at the Effective Time. Persons who are not identified as registered holders of Peoples Common Stock on the records of Peoples as of the Effective Time but who have acquired beneficial interests in such shares of Peoples Common Stock and desire to register the transfer of those rights after the Effective Time will not be entitled to do so on the books of Peoples. Instead, such persons must present to German American appropriate instruments of transfer signed by the registered holder of such shares as of the Effective Time satisfactory to German American to obtain registration in their name of the Merger Consideration issuable by German American. EXPENSES All costs and expenses incurred in connection with the transactions contemplated by the Acquisition Agreements will be paid by the party incurring the expenses. However, if the Acquisition Agreements are terminated because one party has knowingly materially breached any of that party's representations and warranties made in the Acquisition Agreements and the breach is not cured within thirty (30) days of a written notice to cure the breach, then the non- breaching party may recover appropriate damages from the breaching party. In the event that the Acquisition Agreements are terminated (i) as a result of the willful failure of Peoples or Peoples Bank to perform its obligations in violation of the Acquisition Agreements or (ii) as the result of the making by any other person or entity not a party to the Acquisition Agreements of a proposal to Peoples or Peoples Bank contemplating a merger, consolidation, plan of stock exchange, sale of all or substantially all assets, or other business combination with Peoples or Peoples Bank, then, in addition to whatever other legal rights or remedies to which German American may be entitled, Peoples is obligated by Section 7.02 of the Reorganization Agreement, upon German American's demand, (x) pay to German American a termination fee of $422,000 within two business days of termination and (y) reimburse German American for all its out-of-pocket costs and expenses in connection with the Merger incurred from and after July 3, 1996, including its legal, accounting, environmental and 44 other consulting fees and expenses. If German American is entitled to collect the termination fee, Peoples shall, in addition thereto, pay to German American all costs, charges, expense (including without limitation the fees and expenses of counsel) and other amounts expended by German American in connection with or arising out of the obligations of Peoples to pay all or a portion of the fee. German American is obligated by Section 7.05 of the Reorganization Agreement to pay Peoples a termination fee of $422,000 within 90 days of the termination of the Acquisition Agreements if the termination is solely a result of certain adverse regulatory determinations. CONDITIONS Consummation of the Merger is subject to the satisfaction, at or prior to the Closing, of each of the following conditions precedent: (a) The Merger shall have been approved by a majority of the outstanding shares of Peoples and by German American as the sole shareholder of GAHC; (b) All required regulatory approvals shall have been obtained by the Merger and the Bank Merger; (c) Peoples shall have received from Austin Associates, Inc. an opinion dated the date of the mailing of this Prospectus/Proxy Statement that the terms of the Merger are fair to Peoples stockholders from a financial point of view (the opinion is attached as Appendix C hereto); (d) German American and Peoples shall have each received a letter, dated as of the Effective Time, from their independent public accountants to the effect that, in their opinion, the Merger qualifies for "pooling of interests" accounting treatment; (e) German American and Peoples shall have received an opinion from Leagre & Barnes, counsel for German American, concerning the expected federal income tax consequences of the Merger; and 45 (f) Other customary conditions and obligations of the parties set forth in the Acquisition Agreements shall have been satisfied. Prior to the Effective Time, the conditions to the consummation of the Acquisition Agreements may, to the extent not prohibited by law, be waived in writing by the party entitled to the benefits thereof. TERMINATION OF ACQUISITION AGREEMENTS The Acquisition Agreements may be terminated as follows: (a) By mutual agreement of all parties thereto; (b) By German American or Peoples in the event of a material breach by the other party of any of its representations and warranties or covenants under the Acquisitions Agreements and such breach is not cured within thirty (30) days after notice to cure such breach is given by the non-breaching party; (c) By German American or Peoples, if the Merger is not consummated by June 30, 1997; (d) By German American or Peoples, if the conditions to its obligations set forth in the Acquisition Agreements are not satisfied or waived on or prior to the Closing Date; (e) By German American or Peoples, if the Acquisition Agreements and consummation of the Merger are not approved by the affirmative vote of the holders of at least a majority of the outstanding shares of Peoples Common Stock entitled to vote at the Special Meeting; and (f) By Peoples if the value of the German American Common Stock to be issued to the Peoples Shareholders, as calculated during the Valuation Period solely for purposes of calculating the exchange ratio pursuant to the Acquisition Agreements, would be less than $21,100,000. See "THE MERGER-- The Acquisition Agreements." 46 The Acquisition Agreements also provide that German American may terminate the Acquisition Agreements if the environmental inspection reports on all real property owned or leased by Peoples provided to German American by Peoples pursuant to the Reorganization Agreement disclose any contamination or presence of hazardous wastes, the estimated remedial and corrective costs of which exceed $100,000, as reasonably estimated by an environmental expert retained for such purpose by German American and reasonably acceptable to Peoples or if the cost of such actions and measures cannot be so reasonably estimated by such expert with any reasonable degree of certainty; provided, however, that German American must exercise such termination right within ten business days following receipt of such estimate or indication that the cost of such actions and measures cannot be so reasonably estimated. The environmental inspection reports have not disclosed any basis for terminating the Acquisition Agreements pursuant to this environmental termination provision. In addition, if any regulatory application filed in connection with the Merger is finally denied or disapproved by the respective regulatory authority, then either German American or Peoples may terminate the Acquisition Agreements. German American may also terminate the Merger in the event that any bank regulatory agency takes action against Peoples or Peoples Bank seeking to enforce banking laws or regulations. ACCOUNTING TREATMENT The Merger is expected to qualify as a "pooling of interests" for accounting and financial reporting purposes. It is a condition of the Merger that German American and Peoples shall have each received a letter from their independent accountants to the effect that, in their opinion, the Merger will qualify as a pooling of interests transaction under generally accepted accounting principles. Crowe, Chizek and Company, LLP, are the independent accountants for both German American and Peoples. 47 FEDERAL INCOME TAX CONSEQUENCES The Merger is expected to qualify as a reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended ("Code"). Except for cash received by any shareholders perfecting their dissenters' rights and cash received by shareholders in lieu of a fractional share interest in German American Common Stock, the holders of shares of Peoples Common Stock will recognize no gain or loss on the receipt of German American Common Stock in the Merger, their aggregate basis in the shares of German American Common Stock received in the Merger will be the same as their aggregate basis in their shares of Peoples Common Stock converted in the Merger, and, provided the shares surrendered are held as a capital asset, the holding period of the German American Common Stock received by them will include the holding period of their shares of Peoples Common Stock converted in the Merger. Cash received by shareholders in lieu of fractional share interests and cash received by shareholders exercising their dissenters' rights under Chapter 44 of the IBCL will be treated as a distribution in full payment of such fractional share interests, or shares surrendered in exercise of dissenters' rights, resulting in capital gain or loss or ordinary income or loss, as the case may be, depending upon each shareholder's particular situation. Leagre & Barnes, attorneys for German American, has delivered an opinion dated November 18, 1996 to German American upon which German American has relied in preparing the above summary of the anticipated federal income tax consequences of the Merger. The Leagre & Barnes opinion, and Representation Certificates of German American and Peoples upon which Leagre & Barnes has relied as to certain factual matters in rendering its opinion, are filed as an exhibit to the Registration Statement. Although the obligations of German American and Peoples to consummate the Merger are conditioned upon the receipt of the tax opinion of Leagre & Barnes regarding the intended federal income tax consequences of the Merger, that opinion is not binding upon the Internal Revenue Service and no ruling has been sought from the Internal Revenue Service regarding the tax-free nature of the Merger. If the Merger is consummated, and it is later determined that the Merger did not qualify as a tax- free reorganization under the Code, Peoples shareholders would recognize taxable gain or loss in the Merger equal to the difference between the fair market value of the German American Common Stock such Peoples shareholder received and such Peoples shareholder's basis in his or her Peoples Common Stock. 48 THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF THE MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT CONSIDER THE FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PEOPLES SHAREHOLDER'S SITUATION. EACH PEOPLES SHAREHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC LEGAL AND TAX CONSEQUENCES OF THE MERGER TO HIM OR HER, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS. REGISTRATION STATEMENT German American has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission registering under the 1933 Act the shares of German American Common Stock to be issued pursuant to the Merger. German American intends to rely upon exemptions from the statutory registration requirements of the several states in which shareholders of Peoples reside and has not taken any steps to register the German American Common Stock under those statutes. TRANSFER RESTRICTIONS The German American Common Stock received by Peoples shareholders in the Merger will be freely transferable, except that "affiliates" of Peoples as of the date of the Special Meeting, as that term is defined in the rules and regulations under the Securities Act, may sell any German American Common Stock held by them during the three year period following the Merger (two years provided German American remains current in its reporting obligations under the Securities Exchange Act of 1934) only (a) in accordance with the provisions of Rule 145(d) under the Securities Act, (b) pursuant to an effective Registration Statement under the Securities Act, or (c) in transactions otherwise exempt from registration thereunder. In addition, Peoples shareholders who may become "affiliates" of German American will be subject to similar sale restrictions for so long as they remain affiliates of German American. Affiliates of Peoples also will be subject to prohibitions on sales until financial results covering at least 30 days of post- Merger combined operations have been published. Generally, persons who are not officers, Directors, or greater than ten percent shareholders of Peoples will not be considered "affiliates" in the absence of other factors indicating a control relationship. 49 MANAGEMENT OF GERMAN AMERICAN AFTER THE MERGER The Reorganization Agreement provides that as soon as practicable after the Merger has become effective, two Directors of Peoples will be appointed to the German American Board of Directors. The current Chairman of Peoples, David B. Graham, will be appointed as one such Director. Mr. Graham, who is 69 years old, is retired. Mr. Graham beneficially owns no shares of German American Common Stock, other than the shares that he has the right to acquire under the Acquisition Agreements with respect to the Peoples common shares beneficially owned by him. One other Director of Peoples, who has not yet been determined, will also be appointed to German American's Board of Directors as soon as practicable after the Merger in accordance with the Acquisition Agreements. REGULATORY MATTERS The Merger will not be made effective unless the Bank Merger occurs simultaneously. The Bank Merger is subject to the approval of the Office of the Comptroller of the Currency (the "OCC"). The OCC approved the Bank Merger in December, 1996. RIGHTS OF DISSENTING SHAREHOLDERS Pursuant to Chapter 44 of the IBCL, shareholders of Peoples have dissenters' rights with respect to the Merger. (Shareholders of German American do not have such rights with respect to the Merger). Chapter 44 of the IBCL provides that a shareholder of Peoples has the right to demand payment in cash for the fair value of his or her shares of Peoples Common Stock immediately before the Effective Time, excluding any appreciation or depreciation in value in anticipation of the Merger unless a court determines that such exclusion would be inequitable. To claim this right the shareholder (a) must, before the vote is taken, deliver to Peoples written notice of his intent to demand payment for his or her shares if the Merger is effectuated, and (b) must not vote in favor of the Merger in person or by proxy at the Special Meeting of the shareholders. 50 If the Merger is approved by the shareholders, Peoples will send a notice of dissenters' rights to those shareholders satisfying the above conditions within ten days after the shareholder approval. The Peoples' notice will state the procedures the dissenting shareholder thereafter must follow to exercise his or her dissenters' rights in accordance with Chapter 44 of the IBCL. A SHAREHOLDER WHO DOES NOT DELIVER WRITTEN NOTICE OF INTENT TO DEMAND PAYMENT AND EITHER VOTE AGAINST THE MERGER OR REFRAIN FROM VOTING WILL BE CONSIDERED NOT TO BE ENTITLED TO RIGHTS UNDER CHAPTER 44 OF THE IBCL. Shareholders who execute and return the enclosed proxy but do not specify a choice on the Merger proposal will be deemed to have voted in favor of the Merger and accordingly to have waived their dissenters' rights, unless they revoke the proxy prior to its being voted. Upon consummation of the Merger, Peoples will pay each dissenting shareholder who has complied with all requirements of Chapter 44 of the IBCL and of Peoples' notice Peoples' estimate of the fair value of the shares as of the time immediately prior to the Merger, EXCLUDING ANY APPRECIATION IN VALUE IN ANTICIPATION OF THE MERGER. The determination of the estimate of "fair value" will be based on the financial condition of Peoples, the trading history of Peoples Common Stock, and other factors normally used to determine the value of bank stock, and will likely involve the engagement by Peoples of a professional appraiser to advise it on these matters. Dissenters can object to the fair value established by Peoples by stating their estimate of the fair value and demanding payment of the additional amount claimed as fair value within 30 days after Peoples makes or offers payments for the dissenters' shares. Peoples can elect to agree to the dissenters' fair value demand or can commence an action in the Circuit or Superior Court of Daviess County, Indiana, within 60 days after receiving the demand for payment for a judicial determination of the fair value. The Court can appoint appraisers to determine the fair value. The costs of the proceeding, including compensation and expenses of the appraisers, counsel for the parties, and experts, will be assessed against all parties to the action in such amounts as the Court finds equitable. Each dissenter made a party to the action will be entitled to receive the amount, if any, by which the Court finds the fair value of the dissenters' shares, plus interest, exceeds the amount paid by Peoples. 51 See the full text of Chapter 44 set forth in Appendix B to this Prospectus/Proxy Statement. TO PERFECT RIGHTS OF DISSENT, A SHAREHOLDER MUST NOT VOTE IN FAVOR OF THE MERGER AND MUST DELIVER A WRITTEN DEMAND FOR PAYMENT IN ACCORDANCE WITH THE REQUIREMENTS OF CHAPTER 44 OF THE IBCL. THIS SUMMARY OF THE DISSENTERS' RIGHTS OF PEOPLES SHAREHOLDERS DOES NOT PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY THE STATUTORY PROVISIONS ATTACHED TO THIS PROSPECTUS AS APPENDIX B. ANY INDIVIDUAL CONSIDERING EXERCISING RIGHTS OF DISSENT SHOULD CAREFULLY READ AND CONSIDER THE INFORMATION DISCLOSED IN APPENDIX B AND CONSULT WITH AN INDEPENDENT INVESTMENT ADVISOR BEFORE EXERCISING RIGHTS OF DISSENT. OPINION OF FINANCIAL ADVISOR TO PEOPLES AAI has provided the following disclosures for inclusion in this Prospectus/Proxy Statement: AAI is a recognized investment banking firm regularly engaged in the valuation of financial institutions and other businesses and their securities in connection with mergers and acquisitions and in valuation for estate, corporate and other purposes. Peoples selected AAI to act as Peoples' financial adviser in connection with the Merger on the basis of its reputation and qualifications in evaluating financial institutions. AAI has rendered a written opinion dated the date of this Prospectus/Proxy Statement to the Board of Directors of Peoples to the effect that the terms of the Merger are fair from a financial point of view to the shareholders of Peoples as of the date of the opinion. A copy of AAI's fairness opinion is attached as Appendix C to this Prospectus/Proxy Statement and should be read in its entirety. AAI based its opinion upon: (1) a comparison of the financial statements and other financial information concerning Peoples and German American set forth or incorporated by reference in this Prospectus/Proxy Statement; (2) certain other financial information concerning Peoples, including, but not limited to, operating budgets and loan loss reserve adequacy reports; (3) financial and share price data of Peoples, German American and comparable banking organizations; (4) the financial terms, to the extent publicly available, of certain comparable transactions; 52 (5) the terms of certain other proposals received by Peoples from other banking institutions; and (6) discussions with the management of Peoples and German American. The terms of the Agreement were determined by German American and Peoples, and their representatives, after arm's-length negotiations between the parties. AAI participated in the negotiations on behalf of Peoples. In connection with rendering its opinion, AAI performed a variety of financial analyses, which are summarized below. AAI believes its analyses must be considered as a whole and that selecting portions of such analyses and the factors considered therein, without considering all factors and analyses, could create an incomplete view of the analyses and the process underlying the AAI opinion. The preparation of a fairness opinion is a complex process involving subjective judgments and is not necessarily susceptible to partial analyses or summary description. In its analyses, AAI made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond Peoples' or German American's control. Any estimates contained in AAI's analyses are not necessarily indicative of future results or values, which may be significantly more or less favorable than the estimates. PRELIMINARY APPRAISAL OF PEOPLES AAI completed a preliminary appraisal of Peoples as of December 31, 1995, which was presented to the Board of Directors of Peoples in April of 1996. AAI estimated that a reasonable sale of control value for Peoples would range from $15.4 million to $16.6 million, or approximately $26 to $28 per share. THE PROCESS FOR SOLICITING INDICATIONS OF INTEREST FROM OTHER BANK HOLDING COMPANIES After analysis and discussions between AAI and Peoples, seven banking organizations were contacted to determine their potential interest in acquiring Peoples. Of the organizations contacted, seven requested confidential information packages which provided detailed information regarding the business and operations of Peoples. Each organization provided information was requested to submit a specific proposal to acquire Peoples. AAI pursued discussions with each organization that had requested the confidential 53 information. As a result of this process, six organizations submitted proposals to acquire Peoples. The Peoples Board selected the German American proposal after extensive deliberation and negotiation. COMPARATIVE PRICE ANALYSIS AAI reviewed a comparison of prices paid in selected sale of control transactions announced in Indiana, Illinois and Kentucky between January 1, 1995 and September 30, 1996, for banks having assets of between $50 million and $150 million. The 21 transactions reviewed had an average price to book value ratio of 175 percent and a price to earnings multiple of 17.2 times. The median multiples were 172 percent of book value and 16.4 times earnings. The market value of the consideration to be received by Peoples shareholders in the Merger is estimated at 224 percent of Peoples' book value at September 30, 1996, based on an aggregate transaction value of $21.1 million. The market value of the consideration is further estimated to equal 21.1 times Peoples' consolidated earnings per share for the twelve months ended September 30, 1996. The $21.1 million transaction value and corresponding price to book value and price to earnings multiples would be operative if the average of the closing bid/asked quotations for German American Common Stock during the Valuation Period is between $30.48 and $34.29 per share. For German American quotation values above $34.29 per share, which would result in the minimum exchange ratio, the transaction value would exceed $21.1 million. For German American quotation values below $30.48 per share, which would result in the maximum exchange ratio, the transaction value would fall below $21.1 million. As of _____________, 1997, the average of the closing bid/asked quotations for German American Common Stock was $___________ per share. CONTRIBUTION ANALYSIS AAI compared the pro forma ownership interest in German American that Peoples shareholders would receive, in the aggregate, to the contribution by Peoples to the total assets, equity and net income in the combined organization. Assuming a September 30, 1996, closing date for the Merger and the minimum exchange ratio, Peoples shareholders would own approximately 24.2 percent of German American on a pro forma basis. Peoples' contribution of total assets would equal 19.3 percent, the contribution of total equity would equal 19.6 percent, and the contribution of net income for the twelve months ending September 30, 1996, would have equaled 20.0 percent. 54 DILUTION ANALYSIS AAI also reviewed the pro forma effect of the Merger to Peoples' and German American's September 30, 1996 earnings per share and book value per share, assuming the minimum exchange ratio. Peoples recorded year to date earnings per share of $1.24 and a book value of $15.86 per share as of September 30, 1996. Giving effect to the Merger, the equivalent Peoples earnings per share would have equaled $1.54, an increase of 24.2 percent over actual results. Book value per share would have increased to $19.60 per share, an increase of 23.6 percent over actual book value. Giving effect to the Merger, German American's book value per share would have been diluted from $20.05 to $18.90 or 5.7 percent, and earnings per share would have been diluted from $1.57 to $1.48 or 5.7 percent. DIVIDENDS AAI reviewed the current cash dividends paid by Peoples and German American. Based on the minimum exchange ratio of 1.0372 German American shares for each share of Peoples, equivalent dividends to Peoples shareholders would have been $0.61 for the nine months ended September 30, 1996, a 190 percent increase over actual dividends received by Peoples shareholders of $0.21 per share. The summary set forth above does not purport to be a complete description of the analyses performed by AAI. Further, AAI did not conduct a physical inspection of any of the properties or assets of Peoples or German American. AAI has assumed and relied upon the accuracy and completeness of the financial and other information provided to it or publicly available, has relied upon the representations and warranties of Peoples and German American made pursuant to the Agreement, and has not independently attempted to verify any of such information. AAI has also assumed that the conditions to the Merger as set forth in the Agreement would be satisfied and that the Merger would be consummated on a timely basis in the manner contemplated by the Agreement. No limitations were imposed by Peoples or German American on the scope of AAI's investigation nor were any specific instructions given to AAI in connection with its fairness opinion. For AAI's services as financial advisor, Peoples has paid AAI a fee of $27,500, plus has agreed to pay a contingent amount equal to 1.00 percent of the transaction value when the Merger is consummated. In 55 addition, Peoples has agreed to reimburse AAI for reasonable out-of-pocket expenses and indemnify AAI against certain liabilities, including liabilities under the securities laws. 56 PRO FORMA FINANCIAL STATEMENTS OF GERMAN AMERICAN AND PEOPLES The following unaudited pro forma condensed consolidated balance sheet as of September 30, 1996, and the unaudited pro forma condensed consolidated statements of income for the period ended September 30, 1996 and for each of the years in the three-year period ended December 31, 1995, give effect to the Merger based on the historical consolidated financial statements of German American and Peoples under the assumptions and adjustments set forth below and in the accompanying notes to the pro forma financial statements. The Peoples Merger is expected to be accounted for as a pooling of interests and, therefore, is included in the pro forma condensed consolidated balance sheet as of September 30, 1996, as if the transaction had become effective on such date. The pro forma condensed consolidated statements of income for the period ended September 30, 1996 and for each of the years in the three-year period ended December 31, 1995 also include the historical statements of income of Peoples as if the transaction had become effective at the beginning of the periods presented. If the proposed Merger is consummated, German American will issue not fewer than 1.0372 shares of German American Common Stock for each of the 593,334 Peoples Common Shares (an aggregate of 615,417 German American shares) or more than 1.1669 shares of German American Common Stock for each of the 593,334 Peoples common shares (an aggregate of 692,344 German American shares). (All such numbers have been adjusted for the five percent stock dividend declared by German American in October, 1996 and are subject to further adjustment in the event of any future stock dividends and the like.) The exact number of shares to be issued in the Merger will be determined within the above range by the average of the closing bid/asked quotations for German American Common Stock during a ten business day period ending on the second business day preceding the closing date of the Merger. The pro forma financial statements have been prepared assuming the issuance of 615,417 shares of German American common stock, which is the number of shares which would have been issued if the closing date of the Merger was September 30, 1996 in accordance with the formula included in the Acquisition Agreements. The use of such number of shares is for illustrative purposes only and does not attempt to predict the actual number of shares to be issued in the Merger. 57 The pro forma financial statements have been prepared by the management of German American based upon the historical consolidated financial statements of German American and Peoples. These pro forma statements may not be indicative of the results that actually would have occurred if the Merger had been in effect on the dates indicated or which may be obtained in the future. The pro forma financial statements should be read in conjunction with the historical consolidated financial statements and notes thereto of German American and Peoples presented elsewhere in this Prospectus/Proxy Statement or that accompany this Prospectus/Proxy Statement. German American and Peoples expect to incur total legal, accounting, professional and regulatory costs of approximately $630,000 that are directly attributable to the Merger, and some of these costs can reasonably be expected to be included in the consolidated expenses of German American during the next twelve months. Approximately $185,000 of these costs have already been paid and expensed or accrued and expensed by German American and Peoples. Those costs not previously paid or accrued were NOT considered in the preparation of the Pro Forma Financial Statements. 58 GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1996 (Dollar amounts in thousands) (Unaudited)
German American Peoples Bancorp Pro Forma Pro Forma ASSETS Bancorp of Washington Adjustments Consolidated - ------------------------------------- --------------- --------------- ------------ ------------ Cash and cash equivalents $22,488 $2,795 $25,283 Interest bearing deposits with banks 699 0 699 Other short-term investments 499 0 499 Investment in subsidiary 0 0 $9,408 (A) 0 (9,408)(B) Securities available for sale 82,192 11,754 93,946 Securities held to maturity 14,079 7,370 21,449 Loans 248,930 67,230 316,160 Allowance for loan and lease losses (6,030) (968) (6,998) Premises and equipment 10,025 1,592 11,617 Intangibles 1,827 (C) 0 1,827 Accrued interest receivable and other assets 7,119 1,715 8,834 -------- ------- ------ -------- Total assets $381,828 $91,488 $0 $473,316 ======== ======= ====== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ LIABILITIES Deposits $336,504 $71,631 $408,135 Short-term borrowings 3,196 8,392 11,588 FHLB advances 0 1,500 1,500 Other liabilities 3,580 557 4,137 -------- ------- -------- Total liabilities 343,280 82,080 425,360 -------- ------- -------- SHAREHOLDERS' EQUITY Common stock 18,309 593 $6,154 (A) 24,463 (593)(B) Surplus 5,587 1,110 (4,451)(A) 1,136 (1,110)(B) Retained earnings 14,146 7,777 7,777 (A) 21,923 (7,777)(B) Net unrealized gain/(loss) on securities available for sale 506 (72) (72)(A) 434 72 (B) -------- ------- ------ -------- Total shareholders' equity 38,548 9,408 0 47,956 -------- ------- ------ -------- Total liabilities and shareholders' equity $381,828 $91,488 $0 $473,316 ======== ======= ====== ========
ADJUSTMENTS: - ------------ (A) Assumed issuance of 615,417 common shares of German American Bancorp in exchange for all 593,334 shares of Peoples Bancorp of Washington. The actual number of shares to be issued is not yet known. Assumed shares issued are based on the number of shares that would have been issued had the Merger been effective September 30, 1996. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (B) To eliminate the investment in Peoples Bancorp of Washington. (C) Includes goodwill of $1,470 being amortized over 15 years and core deposit intangibles of $357 being amortized over 10 years. (D) No adjustments to these pro forma financial statements were necessary to conform to accounting methods as contemplated by APB Opinion 16. 59 GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the nine months ended September 30, 1996 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------- 1996 ------------------- German American Peoples Bancorp Pro Forma Bancorp of Washington Consolidated --------------- --------------- ------------ INTEREST INCOME Interest and fees on loans $16,343 $4,334 $20,677 Interest on securities 4,157 861 5,018 Other interest income 552 16 568 --------------- --------------- ------------ Total interest income 21,052 5,211 26,263 --------------- --------------- ------------ INTEREST EXPENSE Interest on deposits 10,072 1,946 12,018 Other interest expense 37 330 367 --------------- --------------- ------------ Total interest expense 10,109 2,276 12,385 --------------- --------------- ------------ NET INTEREST INCOME 10,943 2,935 13,878 Provision for loan losses 145 38 183 --------------- --------------- ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,798 2,897 13,695 NON-INTEREST INCOME 1,320 230 1,550 NON-INTEREST EXPENSE 7,789 1,946 9,735 --------------- --------------- ------------ INCOME BEFORE INCOME TAXES 4,329 1,181 5,510 Income taxes 1,324 446 1,770 --------------- --------------- ------------ NET INCOME $3,005 $735 $3,740 =============== =============== ============ EARNINGS PER SHARE Net income per share $1.57 (A) $1.48 (B) Weighted average number of shares outstanding 1,919,799 (A) 2,535,216 (B)
NOTES: - ------ (A) Retroactively restated for a 5% stock dividend in October, 1996. (B) Assumes issuance of 615,417 common shares of German American Bancorp in exchange for all shares of Peoples Bancorp of Washington at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (C) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. 60 GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 1995 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------- 1995 ------------------- German American Peoples Bancorp Pro Forma Bancorp of Washington Consolidated --------------- --------------- ------------ INTEREST INCOME Interest and fees on loans $21,210 $4,987 $26,197 Interest on securities 4,620 1,482 6,102 Other interest income 1,467 50 1,517 --------------- --------------- ------------ Total interest income 27,297 6,519 33,816 --------------- --------------- ------------ INTEREST EXPENSE Interest on deposits 12,633 2,517 15,150 Other interest expense 184 614 798 --------------- --------------- ------------ Total interest expense 12,817 3,131 15,948 --------------- --------------- ------------ NET INTEREST INCOME 14,480 3,388 17,868 Provision for loan losses (19) 68 49 --------------- --------------- ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,499 3,320 17,819 NON-INTEREST INCOME 1,460 304 1,764 NON-INTEREST EXPENSE 10,078 2,340 12,418 --------------- --------------- ------------ INCOME BEFORE INCOME TAXES 5,881 1,284 7,165 Income taxes 1,863 460 2,323 --------------- --------------- ------------ NET INCOME $4,018 $824 $4,842 =============== =============== ============ EARNINGS PER SHARE Net income per share $2.10 (A) $1.91 (B) Weighted average number of shares outstanding 1,917,185 (A) 2,532,602 (B)
NOTES: - ------ (A) Retroactively restated for a 5% stock dividend in October, 1995 and a 5% stock dividend in October, 1996. (B) Assumes issuance of 615,417 common shares of German American Bancorp in exchange for all shares of Peoples Bancorp of Washington at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (C) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. 61 GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 1994 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------- 1994 ------------------- German American Peoples Bancorp Pro Forma Bancorp of Washington Consolidated --------------- --------------- ------------ INTEREST INCOME Interest and fees on loans $17,348 $4,197 $21,545 Interest on securities 4,017 1,615 5,632 Other interest income 705 40 745 --------------- --------------- ------------ Total interest income 22,070 5,852 27,922 --------------- --------------- ------------ INTEREST EXPENSE Interest on deposits 9,394 2,205 11,599 Other interest expense 133 287 420 --------------- --------------- ------------ Total interest expense 9,527 2,492 12,019 --------------- --------------- ------------ NET INTEREST INCOME 12,543 3,360 15,903 Provision for loan losses 567 120 687 --------------- --------------- ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,976 3,240 15,216 NON-INTEREST INCOME 1,689 244 1,933 NON-INTEREST EXPENSE 8,609 2,301 10,910 --------------- --------------- ------------ INCOME BEFORE INCOME TAXES 5,056 1,183 6,239 Income taxes 1,582 376 1,958 --------------- --------------- ------------ NET INCOME $3,474 $807 $4,281 =============== =============== ============ EARNINGS PER SHARE Net income per share $1.81 (A) $1.69 (B) Weighted average number of shares outstanding 1,916,603 (A) 2,532,020 (B)
NOTES: - ------ (A) Retroactively restated for a 5% stock dividend in October, 1995 and a 5% stock dividend in October, 1996. (B) Assumes issuance of 615,417 common shares of German American Bancorp in exchange for all shares of Peoples Bancorp of Washington at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (C) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. 62 GERMAN AMERICAN BANCORP PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME For the year ended December 31, 1993 (Dollar amounts in thousands except share and per share amounts) (Unaudited)
--------------------- 1993 ------------------- German American Peoples Bancorp Pro Forma Bancorp of Washington Consolidated --------------- --------------- ------------ INTEREST INCOME Interest and fees on loans $16,312 $3,926 $20,238 Interest on securities 4,723 1,706 6,429 Other interest income 622 82 704 --------------- --------------- ------------ Total interest income 21,657 5,714 27,371 --------------- --------------- ------------ INTEREST EXPENSE Interest on deposits 9,844 2,434 12,278 Other interest expense 50 122 172 --------------- --------------- ------------ Total interest expense 9,894 2,556 12,450 --------------- --------------- ------------ NET INTEREST INCOME 11,763 3,158 14,921 Provision for loan losses 653 144 797 --------------- --------------- ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 11,110 3,014 14,124 NON-INTEREST INCOME 1,569 267 1,836 NON-INTEREST EXPENSE 8,589 2,285 10,874 --------------- --------------- ------------ INCOME BEFORE INCOME TAXES 4,090 996 5,086 Income taxes 1,308 334 1,642 --------------- --------------- ------------ INCOME BEFORE CHANGE IN ACCOUNTING PRINCIPLE (A) $2,782 $662 $3,444 =============== =============== ============ EARNINGS PER SHARE Income before change in accounting principle $1.45 (B) $1.36 (C) Weighted average number of shares outstanding 1,916,597 (B) 2,532,014 (C)
NOTES: - ------ (A) Increases to net income from the cumulative effect of change in accounting for income taxes (adoption of FAS 109) is excluded from Income Before Change in Accounting Principle in the amounts of $150 for German American Bancorp and $68 for Peoples Bancorp of Washington. (B) Retroactively restated for a 5% stock dividend in October, 1995 and a 5% stock dividend in October, 1996. (C) Assumes issuance of 615,417 common shares of German American Bancorp in exchange for all shares of Peoples Bancorp of Washington at the beginning of the period. The actual number of shares to be issued is not yet known. The assumed number of shares issued is for illustrative purposes only and is not an attempt to predict the actual number of shares to be issued in the Merger. (D) No adjustments to these pro forma financial statements were necessary to conform accounting methods as contemplated by APB Opinion 16. 63 INFORMATION ABOUT GERMAN AMERICAN German American is a multi-bank holding company organized in Indiana in 1982. German American's principal subsidiaries are The German American Bank, Jasper, Indiana; The Union Bank, Loogootee, Indiana ("Union"); First State Bank, Southwest Indiana, Tell City, Indiana; and German American Holdings Corporation, ("GAHC"), an Indiana corporation that owns all of the outstanding capital stock of Community Trust Bank, Otwell, Indiana. German American's principal executive offices are located at 711 Main Street, Jasper, Indiana 47546, and its telephone number is (812) 482-1314. This Prospectus/Proxy Statement is accompanied by German American's Annual Report to Shareholders for the year ended December 31, 1995, portions of which are incorporated herein by reference. Additional information concerning German American is contained in the following documents, which are incorporated in this Prospectus/Proxy Statement by reference: German American's Annual Report on Form 10-K for the year ended December 31, 1995, as amended; German American's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996; German American's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996; German American's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (also attached as Appendix D to this Prospectus/Proxy Statement); and German American's Current Report on Form 8-K which was filed on July 17, 1996. These documents are available without charge upon oral or written request to John M. Gutgsell, German American, 711 Main Street, Box 810, Jasper, Indiana 47546-3042 (812) 482-1314. In order to assure timely delivery of these documents, any requests should be made by , 1996. INFORMATION ABOUT PEOPLES GENERAL Peoples Bancorp of Washington, a bank holding company formed in 1985 ("Peoples"), owns 100% of the capital stock of Peoples National Bank and Trust Company of Washington ("Peoples Bank"). Peoples engages in the business of commercial banking and other permissible activities closely related to banking. Peoples relies primarily upon funds from Peoples Bank to pay the expenses of its operations and, to the extent applicable, any dividend on its outstanding shares of stock. In addition, Peoples owns 2,625 shares of common stock of Old National Bancorp with an approximate market value of $95,000. 64 Peoples Bank has operated as a traditional community bank since its founding in 1888. The primary source of its income is generated by its lending activities. It offers a wide-range of personal and business financial and trust services to individuals, corporations, partnerships, municipalities and other public and governmental entities. Peoples Bank's lending focus has been strongly real estate oriented but a significant portion of its loan portfolio is also composed of other consumer, commercial and agricultural loans. Peoples Bank offers a full line of deposit products. A wholly-owned subsidiary of Peoples Bank, Peoples Investment Center, Inc., began operating in 1995 and offers non-traditional, non-insured mutual funds and annuities to retail customers. COMPETITION Peoples Bank is the second largest financial institution domiciled in Daviess County, Indiana. The banking business in the area served by Peoples Bank is highly competitive. The bank competes for deposits with other commercial banks, savings associations, savings banks, and credit unions. For loan business, Peoples Bank competes with other commercial banks, savings associations, savings banks, federal farm credit system, consumer finance companies, and credit unions. Competition in both areas is affected by interest rates, convenience of location, availability of lendable funds, and general and local economic conditions. REGULATION AND SUPERVISION Peoples, as a bank holding company, is subject to supervision and regular examination by the Federal Reserve Board. Peoples Bank has as its primary regulator the Office of the Comptroller of the Currency but is also subject to regulation by the Federal Deposit Insurance Corporation. These regulations specify the types of activities in which bank holding companies and banks may engage and include regulations governing the extension of credit, the quality of loans and assets, maintenance of reserves against deposits, minimum capital requirements, and restrictions on dividends. PROPERTIES Peoples operations require minimal space and it operates from Peoples Bank's main office. Peoples Bank operates from several locations, all located in Daviess 65 County, Indiana. Its main office is located in downtown Washington, Indiana. Additional branch offices are located on the east side of Washington, in Plainville, Indiana, and in a rural area on the Odon/Cannelburg road, south of Odon, Indiana. All branch offices except for the east side Washington location are operated from properties owned by Peoples Bank. MARKET PRICE AND DIVIDEND INFORMATION Peoples Common Stock is not traded on any established market and information regarding transactions is not published. However, shares are traded directly between shareholders and through broker-dealers (primarily locally) from time to time. Management does not have knowledge of the prices paid in all transactions and has not verified the accuracy of those prices that have been reported. The range of reported prices is primarily based upon information provided by a local broker and by the parties to privately-negotiated transactions. The following table sets forth, for the periods indicated, the number of shares traded, the number of trades, and the high and low sales price per share of Peoples as reported to Peoples Management, and the per share dividends declared by Peoples on its stock. All numbers are adjusted for splits.
1994 First Quarter 400 13 $ 14.67 $ 14.17 $ 0.05 Second Quarter 3,687 19 14.50 14.50 0.05 Third Quarter* 2,500 6 15.33 14.50 0.05 Fourth Quarter* 2,650 10 15.33 15.33 0.08 1995 First Quarter 750 5 16.00 15.42 0.05 Second Quarter 2,700 6 15.67 15.67 0.06 Third Quarter* 7,900 14 17.50 16.00 0.06 Fourth Quarter* 2,450 2 18.00 18.00 0.10 1996 First Quarter 1,300 3 20.00 20.00 0.07 Second Quarter* no sales 0.07 Third Quarter 344 1 33.00 33.00 0.07 Fourth Quarter _____ __ _____ _____ ____ (Through ____, 1996) * 3rd Quarter, 1994 - 2,000 shares traded at unknown price. 4th Quarter, 1994 - 1,400 shares traded at unknown price. 3rd Quarter, 1995 - 7,200 shares traded at unknown price. 4th Quarter, 1995 - 450 shares traded at unknown price.
66 The most recent trade on or before July 5, 1996 (the last business day prior to the first public announcement of the Merger on July 8, 1996) known to Peoples management occurred during the first quarter of 1996 and involved 1,000 shares that were purchased and sold at $20.00 per share. The Reorganization Agreement provides that Peoples may declare a dividend in December 1996 of an additional $.07 per share (making a total of $.28 per share for all of 1996) and of an additional $.07 per share in the third month of each calendar quarter of 1997 if the Merger has not by then become effective. If the Merger becomes effective on January 31, 1997, as anticipated, Peoples' shareholders are expected to receive a cash dividend of up to $.07 per share during December 1996 (when and if declared by the Board of Directors of Peoples) and will be entitled to receive dividends from German American on their shares received in the Merger that have a record date on or after January 31, 1997. It is anticipated that the first such German American dividend will be considered by the Board of Directors of German American during April, 1997. Substantially all of Peoples' cash income is derived from Peoples Bank. As a national bank, Peoples Bank is subject to certain restrictions imposed by its primary regulator, the Comptroller of the Currency, with respect to the payment of dividends to Peoples. Peoples Bank must obtain the prior approval of the Comptroller of the Currency if the total of all dividends declared in any calendar year would exceed net income for the preceding two calendar years. STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS The following table sets forth the number of shares and percentage of Peoples Common Stock beneficially owned at September 30, 1996, by, and the effect of the Merger on such ownership amounts and percentages of, each person known to be the beneficial owner of more than five percent of the outstanding Peoples Common Stock, each Director, and all Directors and executive officers as a group. 67
Name of Number of Beneficial Owner Shares of and Position Peoples Common with Peoples Stock Beneficially Owned Percentage Bryan Bullock, Director 8,454 (1) 1.4% David Crane, Director 4,050 (2) * David B. Graham, Director 39,468 (3) 6.7% Ziba F. Graham, Jr., Director 5,433 (4) * John J. Hoefling, Director 7,410 (5) 1.2% Joel B. Smith, Sr. Vice President and Director 2,100 (6) * Randall Stoll, Director 180 * C.L. Thompson, Director 5,721 (7) 1.0% David Waller, Director 2,100 * Joseph A. Wellman, President and CEO and Director 3,432 (8) * __________ _______ Directors and Executive Officers as a Group (10 individuals) 78,348 13.2% James D. Bullock, Shareholder 59,000 (9) 9.9% John B. Graham, Vice President 28,747 (10) 4.8% Robert C. Graham, Jr., Shareholder 53,919 (11) 9.1% Thomas E. Graham, Shareholder 31,284 (12) 5.3% Ziba F. Graham, Sr., Shareholder 41,064 (13) 6.9% Peoples Bank Trust Department 33,600 (14) 5.7% *Less than 1%
(1) Includes 3,000 shares owned jointly with spouse and 4,500 shares owned by three minor children. (2) Includes 900 shares owned by spouse. (3) Includes 7,404 shares owned by spouse. (4) Includes 3,483 shares over which Mr. Graham can exercise voting power held in the name of WINCO, a partnership. Does not include 39,264 shares owned by Ziba F. Graham, Sr., his father, or 1,800 shares owned by his mother over which Mr. Graham can exercise voting power pursuant to Power of Attorney. (5) Includes 5,030 shares owned by spouse. (6) Includes 1,335 shares owned jointly with spouse and 540 shares owned by three minor children. (7) Includes 900 shares owned by spouse, 2,280 shares owned jointly with spouse and 2,361 shares held in wife's self-directed Individual Retirement Account. 68 (8) Includes 720 shares owned by spouse and 90 shares owned by three minor children. (9) All shares held jointly with spouse. (10) Includes 1,800 shares owned by spouse, 1,657 shares held as custodian for three minor children and 3,483 shares over which Mr. Graham can exercise voting power held in the name of WINCO, a partnership. Does not include 39,264 shares owned by Ziba F. Graham, Sr., his father, or 1,800 shares owned by his mother over which Mr. Graham can exercise voting power pursuant to Power of Attorney. (11) Includes 12,900 shares owned by spouse. (12) Includes 900 shares owned by spouse. (13) Includes 1,800 shares owned by spouse. (14) Includes 15,600 shares held in trust and 18,600 shares pursuant to a Power of Attorney. 69 PEOPLES BANCORP OF WASHINGTON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is presented to facilitate the understanding of the financial position and results of operations of Peoples Bancorp of Washington and its subsidiary, Peoples National Bank and Trust Company of Washington (referred to in this discussion and analysis on a consolidated basis as "Peoples"). It identifies trends and material changes that occurred during the reported periods and should be read in conjunction with the consolidated financial statements and accompanying notes. OVERVIEW OF OPERATIONS The primary goal of management of Peoples over the past few years has been to consistently improve earnings, with improvement in net interest income as the major component thereof. The emphasis has been to redirect funds from the company's investment securities portfolio into its loan portfolio. Consequently, between December 31, 1994 and September 30, 1996 investment securities have declined by $8.5 million, or 31%. Loan growth has also partially been funded by a more active use of borrowed funds by using the Bank's membership in the Federal Reserve System and Federal Home Loan Bank system, by deposit growth, and by use of other non-deposit funding sources. From December 31, 1995 to September 30, 1996 total loans outstanding increased by $8.5 million, or 14.4%. This followed a $5.0 million, or 9.3%, increase during 1995. Management has attained most of this loan growth by increasing loan market share within its traditional geographic market area. Some loan growth has been accomplished by selectively making loans in other areas of Indiana and Illinois. These loans have come from the Bank's direct lending efforts and by loans acquired as part of participations in large loans. Loans outside the Bank's traditional market area are generally secured by real estate, have conservative loan-to-value advance ratios, are well documented, and are considered to be good credits. Participation in these out-of-market loans have accomplished three goals for the Bank: (1) enabled Bank management to increase loans outstanding at a faster rate than was possible within the traditional market; (2) enabled management to diversify the loan portfolio in businesses not available within its traditional market; and (3) has resulted in lending staff becoming more knowledgeable about industries not participating in the Daviess County market. 70 The fact that these out-of-area loans have been made on a sound basis is evidenced by the fact that only one credit on the problem loan report is secured by property outside Peoples' traditional lending area. In this particular instance, this loan was outstanding prior to management's recent loan growth strategy. Within its traditional market area, Peoples has attempted over the last several years to increase its market presence. This has been accomplished through several means. Two new branch offices were opened in 1989. Management instituted a Bank-wide officer calling program that has resulted in personnel visiting customers and prospects. Most employees are involved in community-wide organizations outside the banking industry and management has supported economic growth organizations in the area. These efforts have had the desired result. Net income has increased from $662,000 (excluding the benefit of an accounting change) for 1993 to $824,000 for 1995. Net income through September 30, 1996 is $735,000, compared to $561,000 for the same period of 1995. NET INTEREST INCOME & INTEREST RATE RISK Net interest income is the most significant component of Peoples' earnings. Net interest income is the excess of interest income earned on assets over interest paid for funds supporting those assets. Net interest income is affected by the relative volume and mix of interest earning assets and interest-bearing liabilities and by the difference, or spread, between the yields earned on interest- earning assets and rates paid on interest-bearing liabilities. Table 1 shows average balances and rates and Table 2 depicts the dollar effect of volume and rate changes from 1993 to 1994, from 1994 to 1995 and from 1995 to 1996. Variances which were not specifically attributable to volume or rate were allocated proportionately between these two areas using the relative values of each as a basis for the allocation. As an absolute dollar value, Peoples net interest income has steadily increased over the period of this analysis. Net interest income for the first 9 months of 1996 exceeded that for the same period of 1995 by $440,000. 71 Net interest margin, another measure of the Bank's core profitability, is monitored continually by management. Net interest margin is the dollar amount of net interest income divided by average earning assets, on a tax equivalent basis. While this margin temporarily declined in 1995 due to increases in the Bank's funding costs, this margin, as shown in Table 1, has increased over the period of this analysis increasing from 4.22% in 1993 to 4.80% for the first nine months of 1996. The increase in net interest income and net interest margin has been largely attributable to volume and mix improvements by increasing total assets, and by shifting interest-bearing assets into the higher-yielding loan portfolio, as previously discussed. The use of shorter-term deposit liabilities and borrowed funds liabilities have enabled management to increase net interest margin as funds are successfully deployed in the loan portfolio. The Bank manages exposure to changes in interest rates through an active program of asset and liability management and pricing strategies, using simulation analysis. The process of interest rate risk management is the responsibility of the Asset/Liability Committee (ALCO). The simulation model is designed to provide the impact of changes in interest rates to net interest income in the future. The strategies adopted as a result of this analysis are dependent on the quality of the assumptions made in order to generate the analysis. Management believes the assumptions used are reasonable and produce a comprehensive risk management tool. Data presented in Table 3 reflects the interest rate exposure to the Bank over the next 12 months as of 9/30/96. Shown are the effects of both rising and declining rates as compared to a base case, or steady interest rate, simulation. Traditional Gap measurements, as shown in Table 4, indicate the Bank to be negatively gapped. This is due in large part to 100% of demand and savings account balances being placed in the 0 to 3 month time category. In reality, these balances, for instance, may not fully reprice immediately as rates change. Management believes, consequently, that the simulation analysis process is a better indication of the effect of future interest rate changes on the Bank's net interest income. The Bank's interest rate risk, as depicted in Table 3, is within satisfactory parameters as established by the Board of Directors. 72 LOAN QUALITY AND PROVISION FOR LOAN LOSSES The loan growth generated has not resulted in a material decline in loan quality. Underwriting and documentation standards have not been compromised in order to obtain this growth. Various measures of loan quality make this evident. Non-performing loans are defined as the total of loans contractually past due 90 days or more, non-accrual loans and loans whose terms have been restructured. Non-performing loans presently amount to 0.61% of total loans outstanding, down from 0.93% in 1994, as shown in Table 5. Loans past due 30 days or more continue to amount to 1% or less of outstanding loans. The interest foregone on non-accrual loans amounted to $21,000 for the 9 months ended September 30, 1996 and $33,000 for the year ended December 31, 1995. The provision for loan losses, a direct charge to expense, provides a reserve, the allowance for loan losses, to which loan losses are charged as those losses become evident. The level of provision is determined in conjunction with management's quarterly review of the loan portfolio which includes consideration of current economic conditions, changes in the character and size of the loan portfolio, prior and estimated future charge offs and other factors. The level of the provision has steadily declined over the past several years from $144,000 in 1993 to $68,000 for 1995. The $38,000 provision recorded through the first nine months of 1996 continues to reflect that trend. This reduction was implemented as a result of the Bank's overall asset quality and allowance position. As discussed above, during that same period, management increased the size of the loan portfolio, resulting in a decline in the allowance for loan losses as a percent of total loans from 1.74% at December 31, 1994 to 1.44% at September 30, 1996. The activity in the allowance for loan losses is shown in Table 6. Net charge-offs have remained at modest levels, $41,000 for 1995 and $29,000 through September 30, 1996. Loans are charged off when considered uncollectible or of such little value that their continued carrying as a Bank asset is not warranted, even though further collection efforts may be effected in the future. Loans are approved for charge off by the board of directors at management's recommendation. The results of management's loan review process is a determination of the dollar amounts of allowance needed for each category of loan. This amount is a 73 combination of specifically determined amounts needed for individually evaluated loans and an amount allocated to those loans not specifically reviewed that is determined based upon historical loss experience and management's expectations about the future. The results of management's analysis is presented in Table 7 which shows the amount of reserves allocated to each loan category. Regardless of the allocation process, the entire allowance is available for the charge-off of any loan deemed a loss. The total of all loans rated substandard or less on September 30, 1996 is 1.26% of loans outstanding and 8.27% of capital, down from 1.60% and 9.37% respectively one year earlier. All problem and watch loans are reviewed with loan officers and directors and are monitored and/or strengthened as applicable. While the reserve analysis is by its nature a judgmental process, management believes the Allowance for Loan Losses at September 30, 1996 is adequate to provide for risks within its loan portfolio. Effective January 1, 1995, Peoples adopted FAS 114. "Accounting by Creditors for Impairment of a Loan." Loans are identified as impaired when management concludes that it is probable that the customer will not comply with the contractual terms of the loan agreement. This evaluation is performed in conjunction with the quarterly analysis described above. Generally, all loans considered for specific reserves are evaluated for impairment and generally no consumer or 1-4 family residential real estate loans are so considered. If a loan is deemed to be impaired, management will evaluate the need for an impairment reserve, an allocation of the allowance for loan losses, on that credit. Generally, the value of the underlying collateral is used to evaluate impairment. The adoption of FAS 1114 did not significantly impact Peoples. At December 31, 1995, $392,000 of loans were deemed to be impaired and $142,000 of the allowance for loan losses was allocated to those loans. The Bank classifies its loan portfolio into the four primary categories shown in Table 8. Approximately 16% of Peoples loan portfolio is dependent on the agriculture industry. Agricultural production loans are included in the commercial loan category and farm loans secured by real estate are included in the real estate category. The majority of these loans are secured by specific items of collateral. The Bank has approximately $6.2 million in 74 loans secured by farm land and an additional $4.3 million in other loans to farmers. While the repayment of these loans is dependent on the health of the agricultural industry, management does not believe this is an undue concentration since the various segments of the agricultural industry are not necessarily dependent upon each other. Peoples has approximately $4.5 million in loans outstanding to the lodging industry. This amounts to approximately 7.4% of loans and 45% of capital. While as a group this is a sizable portion of the Bank's loan portfolio, these loans are diversified in types of hotel lodging (full vs. limited service) and geographically between Indiana, Illinois and Kentucky. NON-INTEREST INCOME Non-interest income consists of revenues generated by the Bank other than interest charged on earning assets. For the 9 month period ended September 30, 1996, service charges and fees (the largest component of non-interest income) increased $48,000 over the same period in 1995. Non-interest income includes deposit-related service charges and fees, trust fees, and net gains/losses on the sale of securities and mortgage loans. Non-interest income declined $23,000, or 8.6%, between 1993 and 1994, primarily as a result of lower trust fees and lower gains on the sales of securities available for sale and mortgage loans. Peoples sells securities from time to time and sells mortgage loans to the Federal Home Loan Mortgage Corporation. These sources of income are nominal and are not relied on by management to a significant extent. Non-interest income increased $60,000, 24.6%, between 1994 and 1995, primarily as a result of a non-recurring state tax refund. Exclusive of this one-time credit, total non-interest income for the 9 months ended September 30, 1996, increased $16,000, or 7.5%, over the same period for the prior year. NON-INTEREST EXPENSE Non-interest expense, commonly called overhead, consists of all expenses not related to interest paid on liabilities. Salaries and employee benefits make up the largest single component of non-interest expense. Total non-interest expense increased only $55,000 between 1993 and 1995. Deposit insurance expense declined substantially during the period. In 1995 it 75 was only $78,000 compared to $157,000 in 1994 and 1993. This expense further declined to $2,000 for the nine months ended September 30, 1996. This decline served to offset modest increases in other categories of non-interest expense. Included in non-interest expense for the nine months ended September 30, 1996, is approximately $82,000 in merger-related expenses. Exclusive of this, non-interest expense for the first nine months of 1996 increased $29,000, or 1.6%, over the same period in 1995. INCOME TAX EXPENSE Income tax expense is driven primarily by the level of income before tax and, accordingly, has steadily increased during all periods presented. CAPITAL Peoples is required by its primary regulator to comply with various capital requirements. Those requirements affect the ability of the company to pay dividends and can affect operations. The capital regulations require the maintenance of specified levels of Tier I Capital and total capital to risk adjusted assets (all as defined in those regulations). These regulations also require the maintenance of leverage ratio (Tier I Capital to average assets) of at least 3% for the most sound entities and a total risk based capital ratio of at least 8%. Further, regulations promulgated by the Federal Deposit Insurance Corporation defines specified levels of capitalization which affects the amount that a financial institution may be assessed for deposit insurance premiums. Financial institutions which have leverage ratios in excess of 5% and total risked based capital ratios in excess of 10% are deemed to be well-capitalized, pay the lowest deposit insurance assessment and are not subject to operational restrictions. At September 30, 1996 total risk-based capital of Peoples is substantially the same as that of Peoples Bancorp of Washington and exceeded the levels required to be deemed well-capitalized. Information regarding capital ratios is provided in Table 9. 76 Peoples Bancorp of Washington TABLE 1 -- RATE VOLUME ANALYSIS The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the dollar amount of interest income and interest expense and the resulting yields on average interest earning assets and rate on average interest-bearing liabilities. Average balances are also provided for non-interest earning assets and non-interest-bearing liabilities and shareholders' equity.
Nine months ended Sept. 30 --------------------------------------------------------------- 1996 1995 Average Average Average Average EARNING ASSETS Balance Interest Rate Balance Interest Rate - -------------- ------- -------- ------- ------- -------- ------- Interest-earning assets: Interest earning deposits $ 100 $ 5 6.06% $ 100 $ 5 6.03% Federal Funds Sold 397 16 5.32% 313 14 5.92% Investment Securities (taxable) 15,270 639 5.58% 20,829 896 5.74% Investment Securities (tax-exempt) 6,025 217 4.81% 6,638 229 4.60% Loans (net of unearned income)(1) 62,697 4,322 9.19% 54,268 3,652 8.97% Tax-exempt loans 297 12 5.45% 73 3 5.47% --------------------------------------------------------------- Total interest earning assets 84,786 5,211 8.19% 82,221 4,799 7.78% Non-earning assets: Cash and due from banks 2,955 2,970 Other nonearning assets 2,673 2,318 Allowance for loan losses (963) (957) -------- -------- Total Assets $ 89,451 $ 86,552 ======== ======== INT-BEARING LIABS - ----------------- Transaction accounts $ 16,185 307 2.53% $ 16,511 306 2.47% Savings deposits 13,696 385 3.75% 11,575 339 3.91% Time deposits 31,916 1,254 5.24% 31,373 1,206 5.13% Repurchase & Sweep Agreements 5,408 182 4.50% 6,609 259 5.23% FHLB advance 2,134 85 5.29% 2,314 102 5.85% Federal Funds Purchased and other 1,508 63 5.54% 2,016 92 6.07% --------------------------------------------------------------- Total interest bearing liabilities 70,847 2,276 4.28% 70,398 2,304 4.36% ------- ------- Non-Interest-bearing liabilities Demand deposits 9,030 7,480 Other liabilities 470 420 Shareholders' equity 9,104 8,254 -------- -------- Total Liabilities and shareholders' equity $ 89,451 $ 86,552 ======== ======== Net interest income $ 2,935 $ 2,495 ======= ======= Net Interest/Spread 3.91% 3.42% ===== ===== Net interest margin 4.61% 4.05% ===== ===== Tax equivalent data:(2) Tax equivalent adjustment 118 120 ------- ------- Adjusted net interest income $ 3,053 $ 2,615 ======= ======= Net Interest/Spread 4.10% 3.62% Net interest margin 4.80% 4.24%
(1) Average total loans include non-accrual loans and loan income includes loan fee income on loans held in the portfolio. (2) Tax-equivalent adjustment is computed using 34% statutory tax rate for all periods presented. 77 Peoples Bancorp of Washington TABLE 1a -- RATE VOLUME ANALYSIS The following table sets forth, for the periods indicated, information regarding the average balances of interest-earning assets and interest-bearing liabilities, the dollar amount of interest income and interest expense and the resulting yields on average interest earning assets and rate on average interest-bearing liabilities. Average balances are also provided for non-interest earning assets and non-interest-bearing liabilities and shareholders' equity.
Years ended December 31, -------------------------------------------------------------------------------------------------- 1995 1994 1993 Average Average Average Average Average Average EARNING ASSETS Balance Interest Rate Balance Interest Rate Balance Interest Rate - -------------- -------- -------- ------- -------- -------- ------- -------- ------- ------ Interest-earning assets: Interest earning deposits $ 100 $ 6 6.00% $ 837 $ 34 4.06% $ 1,395 $ 56 4.01% Federal Funds Sold 751 44 5.86% 169 6 3.55% 893 26 2.91% Investment Securities (taxable) 20,408 1,171 5.74% 23,124 1,286 5.56% 25,009 1,458 5.83% Investment Securities (tax-exempt) 6,691 310 4.63% 7,298 329 4.51% 5,462 248 4.54% Loans (net of unearned income)(1) 54,939 4,984 9.07% 49,207 4,192 8.52% 45,064 3,920 8.70% Tax-exempt loans 72 4 5.56% 102 6 5.88% 100 6 6.00% --------------------------------------------------------------------------------------- Total interest earning assets 82,961 6,519 7.86% 80,737 5,853 7.25% 77,923 5,714 7.33% Non-earning assets: Cash and due from banks 3,026 3,252 3,431 Other nonearning assets 2,469 2,273 2,501 Allowance for loan losses (959) (868) (731) -------- -------- -------- Total Assets $ 87,497 $ 85,394 $ 83,124 ======== ======== ======== INT-BEARING LIABS - ----------------- Transaction accounts $ 16,526 410 2.48% $ 19,592 452 2.31% $ 20,418 524 2.57% Savings deposits 11,766 461 3.92% 11,867 402 3.39% 10,613 346 3.26% Time deposits 31,577 1,645 5.21% 30,396 1,351 4.44% 32,581 1,564 4.80% Repurchase & Sweep Agreements 7,273 381 5.24% 4,960 162 3.27% 3,560 97 2.72% FHLB advance 2,137 127 5.94% 1,000 54 5.40% 319 16 5.02% Federal Funds Purchased and other 1,717 107 6.23% 1,538 71 4.62% 309 9 2.91% --------------------------------------------------------------------------------------- Total interest bearing liabilities 70,996 3,131 4.41% 69,353 2,492 3.59% 67,800 2,556 3.77% ------ ------ ------ Non-Interest-bearing liabilities Demand deposits 7,624 7,694 7,419 Other liabilities 506 592 651 Shareholders' equity 8,371 7,755 7,254 -------- -------- -------- Total Liabilities and shareholders' equity $ 87,497 $ 85,394 $ 83,124 ======== ======== ======== Net interest income $ 3,388 $ 3,361 $ 3,158 ======== ======= ======= Net Interest/Spread 3.45% 3.66% 3.56% ===== ===== ===== Net interest margin 4.08% 4.16% 4.05% ===== ===== ===== Tax equivalent data:(2) Tax equivalent adjustment 162 173 131 -------- ------- ------ Adjusted net interest income $ 3,550 $ 3,533 $ 3,289 ======== ======= ======= Net Interest/Spread 3.64% 3.87% 3.73% Net interest margin 4.28% 4.38% 4.22%
(1) Average total loans include non-accrual loans and loan income includes loan fee income on loans held in the loan portfolio. (2) Tax-equivalent adjustment is computed using 34% statutory tax rate for all periods presented. 78 Peoples Bancorp of Washington TABLE 2 -- RATE VOLUME ANALYSIS The following table sets forth, for the periods indicated, information regarding changes from year to year for interest-earning-assets and interest-bearing-liabilities due to volume and rate variances.
1996-1995 Change Change Total Due To Due To Change Volume Rate ------ ------ ------ EARNING ASSETS - -------------- Interest-earning assets: Interest earning deposits $ 0 $ - $ 0 Federal Funds Sold 2 3 (1) Investment Securities (taxable) (257) (233) (24) Investment Securities (tax-exempt) (12) (22) 10 Loans (net of unearned income) 670 579 91 Tax-exempt loans 9 9 - ----------------------- Total interest earning assets 412 336 76 ----------------------- INT-BEARING LIABS - ----------------- Transaction accounts 1 (6) 7 Savings deposits 46 60 (14) Time deposits 48 21 27 Repurchase & Sweep Agreements (77) (43) (34) FHLB advance (17) (8) (9) Federal Funds Purchased (29) (22) (7) ----------------------- Total interest bearing liabilities (28) 2 (30) ----------------------- Net interest income $ 440 $ 334 $ 106 =======================
79 Peoples Bancorp of Washington TABLE 2a -- RATE VOLUME ANALYSIS The following table sets forth, for the periods indicated, information regarding changes from year to year for interest-earning-assets and interest-bearing-liabilities due to volume and rate variances.
1995-1994 1994-1993 Change Change Change Change Total Due To Due To Total Due To Due To Change Volume Rate Change Volume Rate ------ ------ ------ ------ ------ ------ EARNING ASSETS - -------------- Interest-earning assets: Interest earning deposits $ (28) $ (39) $ 11 $ (22) $ (23) $ 1 Federal Funds Sold 38 32 6 (20) (25) 5 Investment Securities (taxable) (115) (155) 40 (172) (107) (65) Investment Securities (tax-exempt) (19) (28) 9 81 83 (2) Loans (net of unearned income) 792 509 283 272 354 (82) Tax-exempt loans (2) (2) (0) - - - ------------------------ ------------------------ Total interest earning assets 666 317 349 139 282 (143) ------------------------ ------------------------ INT-BEARING LIABS - ----------------- Transaction accounts (42) (74) 32 (72) (21) (51) Savings deposits 59 (3) 62 56 42 14 Time deposits 294 54 240 (213) (101) (112) Repurchase & Sweep Agreements 219 95 124 65 43 22 FHLB advance 73 67 6 38 37 1 Federal Funds Purchased 36 9 27 62 54 8 ------------------------ ------------------------ Total interest bearing liabilities 639 148 491 (64) 54 (118) ------------------------ ------------------------ Net interest income $ 27 $ 169 $ (142) $ 203 $ 228 $ (25) ======================== ========================
80 Peoples Bancorp of Washington TABLE 3 -- INTEREST RATE SENSITIVITY ANALYSIS The following graphs result from the Peoples interest rate simulation process and present management's estimate of the effect that an immediate and sustained 200 basis point interest rate increase or decrease would have on monthly interest income, interest expense and net interest income, as compared to a "base case" or flat interest rate environment. Interest rates on assets and liabilities that are contractually tied to a market rate or index are assumed to adjust at the earliest repricing opportunity. The timing and magnitude of assumed rate changes on those instruments whose rates are not contractually tied to a market rate or index are judgmental and are based on management's past experience. While a useful simulation tool, these results are not necessarily those that would occur if interest rates were to increase or decrease by 200 basis points. (Dollars in thousands). MONTHLY CHANGE IN INTEREST INCOME BASE CASE $7,242
FALLING RATES RISING RATES ------------- ------------ SEP $ -4 $ 4 OCT -10 10 NOV -16 16 DEC -29 30 JAN -44 47 FEB -59 65 MAR -85 94 APR -113 126 MAY -145 163 JUN -187 210 JUL -236 264 AUG -290 325
81 TABLE 3 (Continued) MONTHLY CHANGE IN INTEREST EXPENSE BASE CASE $3,255
FALLING RATES RISING RATES ------------- ------------ SEP $ -9 $ 4 OCT -19 18 NOV -30 28 DEC -52 48 JAN -77 71 FEB -100 93 MAR -137 130 APR -175 167 MAY -217 207 JUN -268 258 JUL -323 312 AUG -381 368
MONTHLY CHANGE IN NET INTEREST INCOME BASE CASE $3,987
FALLING RATES RISING RATES ------------- ------------ SEP $ -4 $ 5 OCT -8 9 NOV -12 14 DEC -18 23 JAN -24 32 FEB -28 41 MAR -36 52 APR -41 63 MAY -45 72 JUN -48 81 JUL -48 87 AUG -43 90
82 Peoples Bancorp of Washington TABLE 4 -- GAP TABLE The following table illustrates the repricing opportunities, or rate sensitivity, of interest-earning assets and interest-bearing liabilities as of September 30, 1996. The difference, or "gap", is indicated as a percentage of total assets. The information reflects the repricing opportunity for variable, or floating, rate assets and liabilities and the maturities and/or estimated cash flows for fixed rate assets and liabilities.
At September 30, 1996 Maturing or Repricing Within --------------------------------------------------------------------------- 6 Months 0 to 3 3 to 6 to 1 to 5 After 5 Months Months 1 year Years Years Total --------------------------------------------------------------------------- Interest-earning assets: (in thousands) Loans $ 17,374 $ 6,342 $ 12,097 $ 19,225 $ 12,192 $ 67,230 Securities 3,182 1,736 2,598 11,071 537 19,124 Federal funds sold - - - - - - Interest-bearing balances with financial institutions 100 100 --------------------------------------------------------------------------- Total interest-earning assets 20,656 8,078 14,695 30,296 12,729 86,454 --------------------------------------------------------------------------- Interest-bearing liabilities: Demand and savings accounts 24,189 - - - - 24,189 Time deposits 13,778 7,121 5,052 11,888 2 37,841 Borrowings 8,342 1,550 - - - 9,892 --------------------------------------------------------------------------- Total interest-bearing liabilities 46,309 8,671 5,052 11,888 2 71,922 --------------------------------------------------------------------------- Asset (liability) gap $(25,653) $ (593) $ 9,643 $ 18,408 $ 12,727 $ 14,532 =========================================================================== Cumulative asset (liability) gap $(25,653) $(26,246) $(16,603) $ 1,805 $ 14,532 =========================================================================== Cumulative gap to total assets -28.04% -28.69% -18.15% 1.97% 15.88% Total Assets 91,488
83 Peoples Bancorp of Washington TABLE 5 -- NON-PERFORMING LOANS (in thousands) The following table sets forth the composition of non-performing loans at the dates indicated:
September 30 December 31 1996 1995 1994 ------------ -------- -------- Non-accrual loans $ 262 $ 290 $ 322 Troubled debt restructurings 110 122 141 Loans contractually past due 90 days or more, and still accruing 39 6 38 -------- -------- -------- Total non-performing loans $ 411 $ 418 $ 501 ======== ======== ======== Non-performing loans as a percent of total loans 0.61% 0.71% 0.93% Total Loans $ 67,230 $ 58,760 $ 53,774
84 Peoples Bancorp of Washington TABLE 6 -- ALLOWANCE FOR LOAN LOSSES The following table presents activity in allowance for loan losses for the periods indicated (in thousands):
Nine Months Ended Sept. 30 Years Ended December 31, 1996 1995 1994 ------------------------------------------- Beginning Balance $ 960 $ 933 $ 810 Loans charged off: Commercial loans - 32 - Real estate loans - - - Installment loans 18 7 6 Credit card loans 13 17 4 Lease financing - - - ------------------------------------------- Total charge-offs 31 56 10 Recoveries on charged-off loans: Commercial loans - 8 1 Real estate loans - - - Installment loans 2 4 12 Credit card loans - 3 - Lease financing - - - ------------------------------------------- Total recoveries 2 15 13 Net charge-offs/recoveries 29 41 (3) Provision charged to operations 37 68 120 ------------------------------------------- Ending balance $ 968 $ 960 $ 933 =========================================== Allowance as a percent of total loans 1.44% 1.63% 1.74% Allowance as a percent of non-performing loans 235.52% 229.67% 186.23% Total Loans $67,230 $58,760 $53,774 Non-performing loans 411 418 501
85 Peoples Bancorp of Washington TABLE 7 -- ALLOCATION OF ALLOWANCE FOR LOAN LOSSES The following table sets forth the allocation of the Company's allowance for loan losses to the various categories of loans at the following dates (in thousands):
Sept. 30 December 31, 1996 % 1995 % 1994 % --------------------------------------------- Commercial loans $ 248 25.6% $ 160 16.7% $ 174 18.6% Real estate loans 378 39.1% 319 33.2% 309 33.2% Installment loans 124 12.8% 111 11.6% 72 7.7% Leases 7 0.7% 9 0.9% 10 1.1% Unallocated 211 21.8% 361 37.6% 368 39.4% --------------------------------------------- Total Allowance for Loan Losses $ 968 100% $ 960 100.0% $ 933 100% =============================================
86 Peoples Bancorp of Washington TABLE 8 -- LOAN PORTFOLIO SUMMARY (in thousands) The following table sets forth loans, by category, at the dates indicated:
September 30 December 31 December 31 1996 % 1995 % 1994 % -------------------------------------------------------------------------------- Commercial Loans $ 16,631 24.7% $ 13,339 22.7% $ 12,141 22.6% Real Estate Loans 41,472 61.7% 37,486 63.8% 34,974 65.0% Installment Loans 8,538 12.7% 7,259 12.3% 5,876 10.9% Lease Financing 589 0.9% 676 1.2% 783 1.5% -------------------------------------------------------------------------------- $ 67,230 100.0% $ 58,760 100.0% $ 53,774 100.0% ================================================================================
87 Peoples Bancorp of Washington TABLE 9 -- Regulatory Capital The following table provides information regarding Peoples' capital ratios at the dates indicated:
Sept. 30, Dec. 31, 1996 1995 ----------- ---------- (dollars in thousands) Total Assets $ 91,488 $ 90,842 Risk-based Assets 65,558 60,569 Tier I Capital 9,480 8,869 Total Capital 10,300 9,626 Leverage Ratio 10.362% 9.763% Tier I Risk-based Capital Ratio 14.454% 14.643% Total Risk-based Capital Ratio 15.704% 15.893%
88 DESCRIPTION OF GERMAN AMERICAN CAPITAL STOCK AUTHORIZED BUT UNISSUED SHARES German American's Articles of Incorporation authorize the issuance of 5,000,000 shares of German American Common Stock, of which 1,830,880 shares were issued and outstanding as of October 30, 1996 (not including the shares issuable December 6, 1996 pursuant to the five percent stock dividend declared in October 1996), and 500,000 shares of Preferred Stock, $10.00 par value, of which no shares are issued and outstanding. The Board of Directors has the power to determine the relative rights of and restriction on any series of Preferred Stock it may authorize in the future and may provide terms upon which Preferred Stock may be converted into shares of any other class of stock. All authorized but unissued shares may be issued upon authorization of the Board of Directors without prior shareholder approval. For information regarding shares reserved for issuance under the Company's Stock Option Plan, see Note 9 to German American's financial statements included in its annual report to shareholders, which accompanies this report. If additional shares of German American Common Stock are issued, the holders of shares prior to such issuance may thereafter own a proportionately smaller equity interest in German American. COMMON STOCK VOTING RIGHTS Each share of German American Common Stock entitles the holder thereof to one vote on all matters on which the holders of shares of German American Common Stock are entitled to vote. The affirmative vote of the holders of the majority of the votes cast at a meeting at which a quorum is present is sufficient to approve matters submitted for shareholder approval, except in the following circumstances: (a) pursuant to the IBCL, Directors are elected by a plurality of the votes cast; (b) German American's Articles of Incorporation provide that Business Combinations (such as mergers or sales or other transfers of a substantial part of German American's assets) involving Related Persons (such as an individual or entity that owns 10 percent or more of German American's Common Stock), must be approved by 80 percent of the outstanding 89 voting stock (excluding shares held by the Related Person) unless the Business Combination has been approved by the vote of two-thirds of the members of the Board of Directors who are not associated with the Related Person; (c) German American's Articles of Incorporation provide that any amendment, change or repeal of the Articles relating to Business Combinations with Related Persons must be approved by at least 80 percent of the outstanding shares unless such amendment, change or repeal has been approved by two-thirds of the Board of Directors (excluding members of the Board of Directors associated with the Related Person if the amendment, change or repeal is proposed by or on behalf of the Related Person); and (d) the IBCL provides that holders of the outstanding shares of a class are entitled to vote as a separate voting group on a proposed amendment to the Articles of Incorporation if the amendment would affect their rights as a class, such as by increasing or decreasing the number of authorized shares of the class, effecting an exchange or reclassification of the class, or changing the designation, rights, preferences or limitations of all or part of the shares of the class. For more information on Business Combinations, including the definitions of "Business Combination" and "Related Person," see "Description of German American Capital Stock -- Supermajority Vote and Minimum Price Required for Business Combinations" below. Shareholders do not have cumulative voting rights for the election of Directors. Directors may be removed, with or without cause, only by the vote of 80 percent of the shares entitled to vote at an election of Directors. DIVIDEND RIGHTS Subject to any preferential dividend rights of any series of shares of Preferred Stock that may in the future be issued, the holders of German American Common Stock are entitled to receive dividends as and when declared by the Board of Directors from funds legally available for their payment. A dividend may be paid by German American only if, after paying such dividend, (1) German American would be able to pay its debts as they become due in the usual course of business, and (2) German American's total assets would not be less than the sum of its total liabilities (and without regard to any amounts that would be needed, if German American were to be dissolved at the time of the dividend, to satisfy the preferential rights upon dissolution of any shareholders whose preferential rights are superior to those receiving the dividend, unless the terms of the shares having such preferential rights provide otherwise). 90 Funds for the payment of dividends by German American must come primarily from the earnings of its bank subsidiaries. Restrictions on the amount of dividends that such banks may pay also restrict the amount of funds available for payment of dividends by German American. LIQUIDATION Upon any liquidation, dissolution, or winding up of the affairs of German American, the holders of German American Common Stock are entitled to share ratably in the assets legally available for distribution to the holders of German American Common Stock after satisfaction in full of any liquidation preference to which holders of Preferred Stock, if any, may then be entitled. OTHER MATTERS Holders of German American Common Stock do not have preemptive or conversion rights with respect to any securities of German American. All outstanding shares of German American Common Stock are, and the shares offered hereby will be, when issued, fully paid and nonassessable. Such shares are not redeemable at the option of German American or holders thereof. Fifth Third Bank, Cincinnati, Ohio, serves as the transfer agent of German American Common Stock. PREFERRED STOCK German American's Articles of Incorporation authorize the Board of Directors, without further shareholder approval, to establish the relative rights, designations, preferences, and limitations or restrictions of the shares of Preferred Stock prior to the issuance thereof, including without limitation, dividend rights, conversion rights, voting rights, liquidation preferences, redemption rights, division into series, sinking fund provisions, and similar matters. Thus, the Board of Directors may authorize and issue Preferred Stock with rights and preferences that are superior to those of German American Common Stock, the issuance of which could affect the voting power and other rights of the holders of German American Common Stock. 91 The Board's authority to create and issue Preferred Stock could be used by management to create voting impediments (such as a required approval of mergers or other extraordinary corporate transactions) or to deter persons seeking to effect a merger or otherwise to gain control of German American. Preferred Stock may also be issued at some future time in connection with an acquisition by German American of additional financial institutions or other businesses permitted to be acquired by German American. However, no such future issuances are presently planned or contemplated. ANTI-TAKEOVER PROVISIONS German American's Articles of Incorporation and Bylaws contain certain anti-takeover provisions described below. These provisions may discourage or prevent tender or exchange offers by a corporation or group that intends to use the acquisition of a substantial number of shares of German American to initiate a takeover culminating in a merger or other business combination. In recent years a number of other companies have adopted similar charter or bylaw provisions for the same or similar reasons. These provisions may also have the effect of making the removal of current management more difficult. POSSIBLE ISSUANCE OF COMMON STOCK As of the date hereof, there were 5,000,000 authorized shares of German American Common Stock of which 1,830,880 shares were outstanding as of October 30, 1996 (not including shares that are reserved for issuance pursuant to the Merger, the October 1996 five percent stock dividend, and German American's stock option plan). The Board could use the authorized but unissued and unreserved shares at its discretion to resist the consummation of certain takeover attempts by, for example, diluting the ownership interest of a substantial shareholder or substantially increasing the amount of consideration necessary for a shareholder to obtain control. 92 POSSIBLE ISSUANCE OF PREFERRED STOCK German American's Articles of Incorporation authorize the Board of Directors to issue up to 500,000 shares of Preferred Stock in one or more series. The Board will be authorized to fix the number of shares to be included in the new series, the designation, powers, preferences, and voting and other rights of each such series, and the qualifications, limitations, or restrictions thereof. The Board could use the Preferred Stock at its discretion to resist the consummation of certain takeover attempts. SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS COMBINATIONS The Articles of Incorporation of German American include a provision imposing certain supermajority vote and minimum price requirements on any "Business Combination" with a "Related Person" unless the combination has been approved by the vote of two-thirds of certain members of the Board of Directors of German American who are not associated with the Related Person. This provision defines "Business Combination" very broadly to include, subject to certain conditions, (i) any merger or consolidation of German American or any of its subsidiaries into or with a Related Person, its affiliates or associates; (ii) any sale, exchange, lease, transfer or other disposition by German American or any of its subsidiaries of all or any substantial part of its or their assets or businesses to or with a Related Person, its affiliates or associates; (iii) the purchase, exchange, lease or acquisition by German American or any of its subsidiaries of all or any substantial part of the assets or business of a Related Person, its affiliates or associates; (iv) any reclassification of securities, recapitalization or other transaction that has the effect of increasing the proportionate amount of German American's Common Stock (or other voting capital security) beneficially owned by a Related Person; (v) any partial or complete liquidation, spinoff or splitup of German American or any of its subsidiaries; and (vi) the acquisition by a Related Person of beneficial ownership upon issuance of Common Stock (or other voting capital shares) of German American or any of its subsidiaries or any securities convertible into, or any rights, warrants or options to acquire, any such shares. "Related Person" also is defined broadly to mean any person (which includes any individual, corporation or entity other than German American or its subsidiaries) who (i) beneficially owns ten percent or more of German American Common Stock (or other voting capital security) (a "Ten Percent Shareholder"); (ii) any person who within the preceding 93 two-year period has been a Ten Percent Shareholder and who directly or indirectly controls, is controlled by, or is under common control with German American; or (iii) any person who has received, other than pursuant to or in a series of transactions involving a public offering within the meaning of the Securities Act of 1933, German American Common Stock (or other voting capital security) that has been owned by a Related Person within the preceding two-year period. In the absence of approval by the German American Directors who are not associated with the Related Person or, in the alternative, the agreement by the Related Person to pay all other stockholders a certain minimum price for their shares, a Business Combination with a Related Person would require the approval of 80 percent of the outstanding voting stock plus the approval of a majority of the outstanding shares that are not controlled by the Related Person. In general terms, the restrictions apply to mergers or consolidations of German American or any subsidiary with any Related Person, transfers or encumbrances of all or substantially all of the assets of German American to a Related Person, the adoption of any plan of liquidation proposed by a Related Person or any transaction which would have the effect, directly or indirectly, of increasing the proportionate share of any class of equity securities of German American or any stockholder (including affiliates and associates) who is the beneficial owner of more than 10 percent of the voting power of the then outstanding shares entitled to vote generally in the election of Directors of German American. Absent the provision regulating Business Combinations, mergers, consolidations, and sales of all or substantially all assets would require only the approval of a majority of the Board of Directors and (subject to the rights of any Preferred Stock issued in the future) the affirmative vote of a majority of the total number of outstanding shares of German American entitled to vote on the matter. CLASSIFIED BOARD The Bylaws of German American divide the Board of Directors into two equal (or as nearly equal as possible) classes of Directors serving staggered two- year terms. As a result, approximately one-half of the Board is elected each year. The Bylaws provide that any vacancy shall be filled by a majority vote of the remaining Directors. Any Director elected to fill such vacancy shall hold office for an unexpired term of the class of which he is a member. 94 REMOVAL OF DIRECTORS The Articles provide that any Director may be removed only by an 80 percent affirmative vote of the outstanding voting power at a shareholders' meeting called for that purpose, with or without good cause. AMENDMENT, CHANGE, OR REPEAL OF CERTAIN ARTICLES The Articles provide that any amendment, change, or repeal of certain of the articles of the Articles of Incorporation described above would require the approval of (a) at least 80 percent of the outstanding voting power, and (b) in the case of an amendment, change, or repeal of any of the above-stated provisions proposed by or on behalf of a Related Person, the approval by a majority of the shares not controlled by the Related Person. However, in the event that an amendment, change, or repeal of those provisions is approved by two-thirds of the Board of Directors, and, if the amendment is proposed by or on behalf of a Related Person, by the favorable vote of two-thirds of certain Directors who are not associated with the Related Person, the affirmative vote of a majority of the outstanding voting power would be sufficient to approve any such amendment, change, or repeal. CONTROL SHARE RESTRICTIONS German American has elected to be governed by Chapter 42 of the Indiana Business Corporation Law. Chapter 42, which deals with Control Share Acquisitions, provides that shares acquired by a person or a group in excess of certain percentages of the total outstanding shares (20%, 33-1/3%, and 50%) have only such voting rights as are approved by certain disinterested shareholders. In order to obtain shareholder approval of voting rights for the excess control shares, the acquiring person or group must give written notice of the control share acquisition and request a special shareholders' meeting. POTENTIAL DISADVANTAGES TO SHAREHOLDERS Although the purpose of these provisions is to insure fair treatment of all shareholders in the event of certain mergers, tender offers, or other attempts to acquire control of German American (a "takeover"), the provisions regarding Business Combinations (as well as the voting requirements regarding the removal of Directors) and the provisions of Chapter 42 may have certain adverse effects in that they may make more difficult the accomplishment of certain takeovers at 95 prices or on terms that some shareholders may consider beneficial, impede the assumption of control by principal shareholders in some cases, or make more difficult the removal of current management even if favored by a majority of the shareholders. COMPARISON OF PEOPLES COMMON STOCK AND GERMAN AMERICAN COMMON STOCK GENERAL The Peoples Common Stock is similar in many respects to the German American Common Stock to be issued pursuant to the Merger. Certain differences exist, however, because the Articles of Incorporation of Peoples differ from the Articles of Incorporation of German American. The following is a comparison of Peoples Common Stock with German American Common Stock and a description of certain material differences between them. NUMBER OF SHARES AUTHORIZED BUT UNISSUED The Articles of Incorporation Peoples authorize the issuance of 1,200,000 shares of Peoples Common Stock, $1.00 stated value per share. As of the date hereof, all shares of which are issued and outstanding. The Articles of Incorporation of German American authorize the issuance of 5,000,000 shares of Common Stock, $10.00 par value, of which, upon consummation of the Merger, 2,446,297 shares of German American Common Stock are expected to be issued and outstanding (assuming no shareholders of Peoples exercise dissenters' rights and the minimum number of shares specified by the Reorganization Agreement is issued in the Merger). The remaining shares of German American Common Stock will remain authorized but unissued and may be issued by the Board of Directors of German American without further shareholder approval for any proper corporate purpose, including possible issuance in connection with future mergers and acquisitions. Such shares could be issued either to existing shareholders of German American or to persons who are not then shareholders of German American. The Board of Directors has no present plans to issue the shares of German American Common Stock that will be authorized but unissued after the Merger, other than pursuant to the Company's established annual stock dividend program. 96 PREFERRED STOCK Unlike the Articles of Incorporation of Peoples, which provide only for the issuance of common stock, the Articles of Incorporation of German American authorize the Board of Directors to issue 500,000 shares of Preferred Stock, $10.00 par value. The Articles give the German American Board of Directors the authority to establish the relative rights, preferences, restrictions and limitations of rights of the Preferred Stock. The German American Board of Directors presently has no plans to issue any of the authorized shares of Preferred Stock. DIVIDEND RIGHTS Holders of Peoples Common Stock and German American Common Stock each have the right to receive, pro rata, such dividends as are declared by the Board of Directors out of funds legally available. Peoples' and German American's ability to pay dividends is dependent upon their receipt of dividends from their respective bank subsidiaries. Legal and regulatory restrictions limit the amount of dividends that may be paid by banks to their shareholders in order to assure that banks maintain adequate capital. Peoples' and German American's ability to pay dividends is also restricted by the IBCL, to which Peoples and German American are subject. The IBCL prohibits the payment of dividends if, after giving effect to the payment, the corporation would not be able to pay its debts as they come due in the usual course of business or the corporation's total assets would be less than the sum of its liabilities plus preferential rights of shareholders payable upon dissolution. VOTING RIGHTS Each holder of Peoples Common Stock and German American Common Stock is entitled to one vote per share on most matters submitted to a vote of shareholders. The shareholders of German American and Peoples do not have cumulative voting rights on the election of Directors, which means that the Directors standing for election at a particular meeting can be elected by a simple plurality of the votes cast. The affirmative vote of the holders of a majority of the shares entitled to vote is sufficient to approve most matters submitted to a shareholder vote of either corporation. Under the IBCL, a merger, consolidation, or sale of substantially all of a corporation's assets must be approved by the holders of a majority of the outstanding shares of Peoples Common Stock. 97 The Articles of Incorporation of both German American and Peoples in addition contain certain anti-takeover provisions which require a supermajority vote of shareholders in certain circumstances. LIQUIDATION RIGHTS In the event of liquidation of Peoples or German American, the holders of common stock will be entitled to receive, pro rata, all of the assets remaining for distribution to shareholders. ABSENCE OF PREEMPTIVE RIGHTS Neither the holders of Peoples Common Stock nor the holders of German American Common Stock have preemptive rights to purchase their proportionate share of any future offering of common stock by Peoples or German American. ANTI-TAKEOVER PROVISIONS Like the Articles of Incorporation of German American, the Articles of Incorporation of Peoples contain provisions that might deter the takeover or change-in-control of Peoples. See "DESCRIPTION OF GERMAN AMERICAN CAPITAL STOCK--Anti-Takeover Provisions" for a description of the anti-takeover provisions in German American's Articles of Incorporation. These provisions may discourage or prevent tender or exchange offers by a corporation or group that intends to use the acquisition of a substantial number of shares of Peoples to initiate a takeover culminating in a merger or other business combination. In recent years a number of other companies have adopted similar charter or bylaw provisions for the same or similar reasons. These provisions may also have the effect of making the removal of current management more difficult. POSSIBLE ISSUANCE OF COMMON STOCK As of the date hereof, there were 1,200,000 authorized shares of Peoples Common Stock of which 593,334 shares were outstanding. The Board could use the authorized but unissued shares at its discretion to resist the consummation of certain takeover attempts by, for example, diluting the ownership interest of a substantial shareholder or substantially increasing the amount of consideration necessary for a shareholder to obtain control. 98 SUPERMAJORITY VOTE AND MINIMUM PRICE REQUIRED FOR BUSINESS COMBINATIONS The Articles of Incorporation of Peoples provide that the affirmative vote of at least 80 percent of the outstanding common stock is required to approve a "business combination" that is (a) not recommended by the vote of 70 percent of the Peoples Directors or (b) is proposed by a person, whether an individual, partnership, corporation, group or otherwise, who separately or in association with one or more other persons holds at the date of the proposal ten percent or more of the then outstanding common stock of Peoples and such proposal does not offer all shareholders of Peoples consideration for their shares which is at least equal to the highest percent over market value paid by such person for the shares of Peoples held by it at the date of the proposal. CLASSIFIED BOARD Like German American, Peoples has a classified Board of Directors. The Articles of Incorporation of Peoples divide the Board of Directors into three equal (or as nearly equal as possible) classes of Directors serving staggered three-year terms. As a result, approximately one third of the Board is elected each year. The Bylaws provide that any vacancy shall be filled by a majority vote of the remaining Directors. Any Director elected to fill such vacancy shall hold office for an unexpired term of the class of which he is a member. REMOVAL OF DIRECTORS Like German American, the Articles provide that any Director may be removed without cause only by an 80 percent affirmative vote of the outstanding voting power at a shareholders' meeting called for that purpose. AMENDMENT, CHANGE, OR REPEAL OF CERTAIN ARTICLES Like German American, the Articles provide that any amendment, change, or repeal of certain of the articles of the Articles of Incorporation described above would require the approval of at least 80 percent of the outstanding voting power. 99 CONTROL SHARE RESTRICTIONS Like German American, Peoples has elected to be governed by Chapter 42 of the Indiana Business Corporation Law. Chapter 42, which deals with Control Share Acquisitions, provides that shares acquired by a person or a group equalling certain percentages of the total outstanding shares (20%, 33-1/3%, and 50%) have only such voting rights as are approved by certain disinterested shareholders. In order to obtain shareholder approval of voting rights for the excess control shares, the acquiring person or group must give written notice of the control share acquisition and request a special shareholders' meeting. LEGAL MATTERS The due authorization and valid issuance of the shares of German American Common Stock pursuant to the Merger, and the intended federal income tax consequences of the Merger, will be passed upon by Leagre & Barnes. EXPERTS The consolidated balance sheets of Peoples as of December 31, 1995 and 1994 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1995, 1994 and 1993 have been audited by Crowe, Chizek and Company LLP, independent certified public accountants, and their reports thereon, which appear elsewhere herein, have been included therein and herein in reliance upon their reports given upon their authority as experts in accounting and auditing. The consolidated balance sheets of German American as of December 31, 1995 and 1994 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the years ended December 31, 1995, 1994, and 1993 have been audited by Crowe, Chizek and Company LLP, independent certified public accountants, and their reports thereon, which appear elsewhere herein, have been included therein and herein in reliance upon their reports given upon their authority as experts in accounting and auditing. The opinion of Austin Associates, Inc. ("AAI"), and the information provided by AAI under "THE MERGER - - - Opinion of Financial Adviser to Peoples," has been included herein in reliance upon its authority as experts in valuation of financial institutions and their securities in connection with mergers and acquisitions. 100 OTHER MATTERS The Boards of Directors of Peoples and of German American do not know of any other matters that may come before the Special Meetings of Shareholders. 101 INDEX TO PEOPLES BANCORP OF WASHINGTON FINANCIAL STATEMENTS AUDITED FINANCIAL STATEMENTS Report of Independent Auditors F-1 Consolidated Balance Sheets as of December 31, 1995 and 1994 F-2 Consolidated Statements of Income for the Years Ended December 31, 1995, 1994 and 1993 F-3 Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993 F-4 Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993 F-5 Notes to Consolidated Financial Statements F-6 - F-23 UNAUDITED FINANCIAL STATEMENTS Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 F-24 Consolidated Statements of Income for the Three Months and the Nine Months Ended September 30, 1996, and 1995 F-25 Consolidated Statements of Changes in Shareholders' Equity for the Nine Months Ended September 30, 1996 and 1995 F-26 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1995 F-27 Notes to Financial Statements F-28 F-1 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders Peoples Bancorp of Washington Washington, Indiana We have audited the accompanying consolidated balance sheets of Peoples Bancorp of Washington as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three year period ended December 31, 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Bancorp of Washington as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1995 in conformity with generally accepted accounting principles. As disclosed in Note 1 to the financial statements, the Corporation changed its method of accounting for impaired loans in 1995. /s/ Crowe, Chizek and Company LLP __________________________________ Crowe, Chizek and Company LLP Indianapolis, Indiana January 11, 1996 F-2 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED BALANCE SHEETS December 31, 1995 and 1994
1995 1994 ---- ---- ASSETS Cash and cash equivalents (Note 11) $ 4,629,741 $ 3,079,893 Interest-bearing deposits in other financial institutions 100,000 100,000 Securities available for sale (Note 2) 13,978,960 9,817,287 Securities held to maturity (fair value of $10,989,141 and $17,051,578 in 1995 and 1994) (Note 2) 11,075,302 17,798,301 Loans (Note 3) 58,759,678 53,773,667 Less: Allowance for loan losses (Note 4) (959,510) (933,233) --------------- --------------- Loans, net 57,800,168 52,840,434 Non-marketable equity securities (at cost) 381,000 381,000 Premises, furniture and equipment (Note 5) 1,675,199 1,385,517 Accrued interest receivable 928,341 761,848 Other assets 272,869 249,088 --------------- --------------- $ 90,841,580 $ 86,413,368 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Noninterest-bearing deposits $ 8,754,730 $ 8,443,750 Interest-bearing deposits (Note 6) 59,218,839 58,445,899 --------------- --------------- Total deposits 67,973,569 66,889,649 Repurchase agreements (Note 7) 8,254,360 8,009,820 Short-term borrowings (Note 7) 4,150,000 2,200,000 Long-term debt (Note 8) 1,000,000 1,000,000 Accrued interest payable 237,103 192,652 Other liabilities 394,107 267,744 --------------- --------------- Total liabilities 82,009,139 78,559,865 Commitments and contingent liabilities (Note 12) Shareholders' equity Common stock, $1.00 stated value, 1,200,000 shares authorized, 593,334 shares issued and outstanding 593,334 197,778 Paid-in capital 1,109,599 1,109,599 Retained earnings (Note 10) 7,166,536 6,900,298 Net unrealized loss on securities available for sale, net of tax benefit ($19,075 and $182,451) (37,028) (354,172) --------------- --------------- Total shareholders' equity 8,832,441 7,853,503 --------------- --------------- $ 90,841,580 $ 86,413,368 =============== ===============
See accompanying notes to consolidated financial statements. F-3 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- INTEREST INCOME Loans, including related fees $ 4,987,439 $ 4,196,979 $ 3,926,732 Securities Taxable 1,171,246 1,286,276 1,458,369 Tax exempt 310,275 329,054 247,553 Other 50,051 40,282 81,827 ----------- ----------- ----------- 6,519,011 5,852,591 5,714,481 Interest expense Deposits 2,516,864 2,205,226 2,434,252 Repurchase agreements and other short-term borrowings 487,412 232,607 105,866 Long-term debt 127,126 53,950 15,912 ----------- ----------- ----------- 3,131,402 2,491,783 2,556,030 ----------- ----------- ----------- NET INTEREST INCOME 3,387,609 3,360,808 3,158,451 Provision for loan losses (Note 4) 67,500 120,000 144,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,320,109 3,240,808 3,014,451 Noninterest income Trust department income 21,878 21,010 31,034 Service charges on deposit accounts 146,102 152,872 153,697 Net realized gain on sales of securities 19,336 9,543 4,036 Net realized gain on sales of loans 7,309 9,829 28,695 Other noninterest income 109,431 50,858 49,548 ----------- ----------- ----------- 304,056 244,112 267,010 Noninterest expense Salaries and benefits (Note 10) 1,255,108 1,225,029 1,145,117 Occupancy expenses, net 228,193 204,173 238,851 Equipment expenses 207,089 222,978 223,191 Directors fees 72,000 72,000 68,300 Stationary and supplies 66,940 55,420 70,779 Deposit insurance expense 78,292 156,885 157,000 Other noninterest expenses 432,158 364,479 381,941 ----------- ----------- ----------- 2,339,780 2,300,964 2,285,179 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 1,284,385 1,183,956 996,282 Income taxes (Note 9) 460,413 376,390 334,397 ----------- ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 823,972 807,566 661,885 Cumulative effect on prior years of changing to a different method of accounting for income taxes - - 68,000 ----------- ----------- ----------- NET INCOME $ 823,972 $ 807,566 $ 729,885 =========== =========== =========== PER SHARE DATA: Income before cumulative effect of accounting change $ 1.39 $ 1.36 $ 1.12 Cumulative effect of accounting change - - .11 ----------- ----------- ----------- NET INCOME PER SHARE $ 1.39 $ 1.36 $ 1.23 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-4 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years ended December 31, 1995, 1994 and 1993
Net Unrealized Loss on Securities Total Paid-in Retained Available Shareholders' Common Stock Capital Earnings for Sale Equity ------------ ------- -------- -------- ------ BALANCE, JANUARY 1, 1993 $ 197,778 $ 1,109,599 $ 5,623,914 $ - $ 6,931,291 Net income - - 729,885 - 729,885 Cash dividends ($.21 per share) - - (122,622) - (122,622) ------------ ------------ ------------- ------------- ------------- Balance, December 31, 1993 197,778 1,109,599 6,231,177 - 7,538,554 Net income - - 807,566 - 807,566 Cash dividends ($.23 per share) - - (138,445) - (138,445) Net unrealized gain upon adoption of FAS 115 on January 1, 1994 16,256 16,256 Change in net unrealized loss on securities available for sale - - - (370,428) (370,428) ------------ ------------ ------------- ------------- ------------- Balance December 31, 1994 197,778 1,109,599 6,900,298 (354,172) 7,853,503 3-for-1 stock split (Note 14) 395,556 (395,556) Net income 823,972 823,972 Cash dividends ($ .27 per share) (162,178) (162,178) Change in net unrealized loss on securities available for sale - - - 317,144 317,144 ------------ ------------ ------------- ------------- ------------- BALANCE, DECEMBER 31, 1995 $ 593,334 $ 1,109,599 $ 7,166,536 $ (37,028) $ 8,832,441 ============ ============ ============= ============= =============
See accompanying notes to consolidated financial statements. F-5 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 823,972 $ 807,566 $ 729,885 Adjustments to reconcile net income to net cash from operating activities Cumulative effect of accounting change - - (68,000) Depreciation 196,888 200,600 230,937 Provision for loan losses 67,500 120,000 144,000 Amortization and accretion on securities, net 31,573 71,754 79,259 Net realized gain on sales of securities (19,336) (9,543) (4,036) Change in assets and liabilities Accrued interest receivable (166,493) (17,004) 121 Other assets (187,158) 149,884 (109,121) Accrued interest payable 44,451 (23,328) (54,057) Other liabilities 126,363 (67,784) (110,597) ------------- ------------- ------------- Net cash from operating activities 917,760 1,232,145 838,391 CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposits in other financial institutions - 1,798,000 497,000 Purchases of securities available for sale (2,824,397) (2,493,593) - Proceeds from sales of securities available for sale 2,515,279 3,931,984 - Proceeds from paydowns and maturities of securities available for sale 993,577 1,573,824 - Purchases of securities held to maturity - (3,452,611) (19,693,712) Proceeds from sales of securities held to maturity - - 3,829,757 Proceeds from paydowns and maturities of securities held to maturity 2,345,151 4,044,214 15,130,642 Loans made to customers, net of payments collected (5,027,234) (5,659,726) (3,513,642) Purchases of premises and equipment (486,570) (251,686) (88,750) ------------- ------------- ------------- Net cash from investing activities (2,484,194) (509,594) (3,838,705) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposit accounts 1,083,920 (4,656,535) 996,176 Dividends paid (162,178) (138,445) (122,622) Net change in short-term borrowings 1,950,000 1,300,000 250,000 Net change in repurchase agreements 244,540 621,634 2,915,439 Long-term debt - - 1,000,000 ------------- ------------- ------------- Net cash from financing activities 3,116,282 (2,873,346) 5,038,993 ------------- ------------- ------------- Net change in cash and cash equivalents 1,549,848 (2,150,795) 2,038,679 Cash and cash equivalents at beginning of year 3,079,893 5,230,688 3,192,009 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,629,741 $ 3,079,893 $ 5,230,688 ============= ============= ============= Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 3,086,951 $ 2,515,111 $ 2,610,087 Income taxes 451,079 236,100 334,922
See accompanying notes to consolidated financial statements. F-6 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business: The consolidated financial statements include the accounts of Peoples Bancorp of Washington ("Bancorp") and its wholly-owned subsidiary, Peoples National Bank and Trust Company ("Bank"). Upon consolidation, all significant intercompany accounts and transactions have been eliminated. The Bancorp operates primarily in the banking industry which accounts for more than 90% of its revenues, operating income and assets. The Bank is engaged in the business of commercial and retail banking and trust services, with operations conducted through its main office and 3 branches located in Daviess County, Indiana. The majority of the Bank's income is derived from commercial and retail business lending activities and investments. Although the overall loan portfolio is diversified, the repayment of existing borrower obligations is highly dependent on the economy of Daviess County and on the agricultural industry. The majority of the Bank's loans are secured by specific items of collateral including business assets, real property and consumer assets. Use of Estimates: Management must make estimates and assumptions in preparing financial statements that affect the amounts reported therein and the disclosures provided. These estimates and assumptions may change in the future and future results could differ. Estimates that are more susceptible to change in the near term include the allowance for loan losses and fair values of certain securities. Securities: The Bancorp classifies securities into held to maturity and available for sale, categories. Held to maturity securities are those which the Bancorp has the positive intent and ability to hold to maturity, and are reported at amortized cost. Available for sale securities are those which the Bancorp may decide to sell if needed for liquidity, asset-liability management, or other reasons. Available for sale securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. F-7 Realized gains or losses are determined based on the amortized cost of the specific security sold. Interest and dividend income, adjusted by amortization of purchase premium or discount, is included in earnings. Loans: Interest on real estate, commercial and consumer loans is accrued over the term of the loans based on the principal outstanding. The recognition of interest income is discontinued when, in management's judgment, the interest will not be collectible in the normal course of business. The Bank defers loan fees net of certain direct loan origination costs. The net amount deferred is reported in the balance sheet as part of loans and is recognized into interest income over the term of the loan using the level yield method. The balance in the allowance and the amount of the annual provision charged to expense are judgmentally determined based upon a number of factors. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations, including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, including impaired loans discussed below, the whole allowance is available for any loan losses that occur. Increases to the allowance are recorded by a provision for possible loan losses charged to expense. A loan is charged off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. Effective January 1, 1995, the Bancorp adopted Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of Loan" (SFAS 114) and No. 118. Under these standards, loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. The effect of adopting these standards is included in the 1995 provision for loan losses, and was not material. F-8 The carrying value of impaired loans is periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such and other cash payments are reported as reductions in carrying value. Increases or decreases in carrying value due to changes in estimates of future payments or the passage of time are reported as reductions or increases in the provision for loan losses. Management evaluates all loans selected for specific review during their analysis of the allowance for loan losses for impairment. Generally, that analysis does not consider small balance consumer credits or one to four family residential real estate loans which are evaluated collectively for impairment. In general, loans classified as doubtful or loss are considered impaired while loans classified as substandard are individually evaluated for impairment. Depending on the relative size of the credit relationship, late or insufficient payments of 30 to 90 days will cause management to reevaluate the credit under its normal evaluation procedures. Premises, Furniture and Equipment: Premises, furniture and equipment are stated at cost less accumulated depreciation. Depreciation is computed, principally, using the straight line method for premises and the declining-balance method for furniture and equipment based on the estimated useful lives of the assets. Maintenance and repairs are expensed and major improvements are capitalized. Other Real Estate: Real estate acquired through foreclosure or acceptance of a deed in lieu of foreclosure is recorded at the lower of cost (fair value at date of foreclosure) or fair value less estimated selling costs. Expenses incurred in carrying other real estate are charged to operations as incurred. Income Taxes: Effective January 1, 1993, the Bancorp adopted Financial Accounting Standard No. 109, "Accounting For Income Taxes", which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future taxable income or expense resulting from differences in the financial statement and tax basis of F-9 assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period on deferred tax assets and liabilities. Statement of Cash Flows: For purposes of this statement, cash and cash equivalents is defined to include cash on hand and amounts due from other banks. The Bank reports net cash flows for customer loan transactions, deposit transactions, deposits made with other financial institutions and short-term borrowings. Financial Statement Presentation: Certain items in the 1994 and 1993 financial statements have been reclassified to correspond with the 1995 presentation. F-10 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 2 - SECURITIES The amortized cost and fair value of securities are as follows at December 31:
1 9 9 5 ------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- AVAILABLE FOR SALE - ------------------ U.S. Treasury and government agency securities $ 7,990 $ - $ (58) $ 7,932 Obligations of states and political subdivisions 2,171 1 - 2,172 Mortgage-backed securities 3,858 - (70) 3,788 Other securities 16 71 - 87 ------------- ------------- -------------- ------------- $ 14,035 $ 72 $ (128) $ 13,979 ============= ============= ============== ============= HELD TO MATURITY - ---------------- U.S. Treasury and government agency securities $ 5,037 $ - $ (86) $ 4,951 Obligations of states and political subdivisions 4,603 14 - 4,617 Mortgage-backed securities 1,115 6 (21) 1,100 Collateralized mortgage obligations and other asset-backed securities 320 1 - 321 ------------- ------------- -------------- ------------- $ 11,075 $ 21 $ (107) $ 10,989 ============= ============= ============== =============
F-11 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 2 - SECURITIES (Continued)
1 9 9 4 ------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- AVAILABLE FOR SALE - ------------------ U.S. Treasury and government agency securities $ 6,001 $ - $ (211) $ 5,790 Mortgage-backed securities 4,072 6 (332) 3,746 Other securities 281 - - 281 ------------- ------------- -------------- ------------- $ 10,354 $ 6 $ (543) $ 9,817 ============= ============= ============== ============= HELD TO MATURITY - ---------------- U.S. Treasury and government agency securities $ 9,075 $ - $ (494) $ 8,581 Obligations of states and political subdivisions 6,773 10 (221) 6,562 Mortgage-backed securities 1,489 20 (64) 1,445 Other securities 461 3 - 464 ------------- ------------- -------------- ------------- $ 17,798 $ 33 $ (779) $ 17,052 ============= ============= ============== =============
Gross gains of $21,952, $12,183 and $4,036 and gross losses of $2,656, $2,640 and $0 were realized on sales of securities during 1995 and 1994 and 1993. During December 1995, securities with an amortized cost of $4,336,047 and a net unrealized loss of $24,811 were transferred from held to maturity to available for sale in accordance with the Financial Accounting Standards Board Special Report on implementation of FAS 115. F-12 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 2 - SECURITIES (Continued) The amortized cost and fair value of securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity ------------------ ---------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- Due in one year or less $ 2,270 $ 2,261 $ 1,383 $ 1,380 Due after one year through five years 7,056 7,006 7,850 7,779 Due after five years through ten years 835 837 407 409 Due after ten years - - - - ----------- ----------- ----------- ----------- Subtotal 10,161 10,104 9,640 9,568 Mortgage-backed securities 3,858 3,788 1,115 1,100 Other securities 16 87 320 321 ----------- ----------- ----------- ----------- $ 14,035 $ 13,979 $ 11,075 $ 10,989 =========== =========== =========== ===========
Securities with a carrying value of $9,261,442 and $12,495,986 at December 31, 1995 and 1994 were pledged to secure public deposits, Federal Home Loan Bank advances and for other purposes required or permitted by law. NOTE 3 - LOANS Loans as presented on the balance sheet are comprised of the following:
1995 1994 ---- ---- Commercial loans $ 10,062 $ 8,567 Agricultural production 3,277 3,574 Real estate loans ($6,880 and $6,030 secured by farm land) 37,486 34,974 Consumer loans 7,259 5,876 Lease financing 676 783 ----------- ----------- Total loans $ 58,760 $ 53,774 =========== =========== /TABLE F-13 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 3 - LOANS (Continued) Lease financing consists of the following:
1995 1994 ---- ---- Minimum lease payments receivable $ 718 $ 883 Unguaranteed residual value 147 147 Less: Unearned lease income (189) (247) ------------ ------------ Total lease financing $ 676 $ 783 ============ ============
Minimum lease payments are receivable as follows at December 31, 1995:
1996 $ 166 1997 113 1998 76 1999 76 2000 76 2001 and thereafter 211 ---------- Total $ 718 ==========
Nonperforming loans at December 31:
1995 1994 ---- ---- Nonaccruing loans $ 290 $ 322 Accruing loans past due 90 days or more 6 38 Restructured loans other than nonaccrual 122 141 ---------- ---------- Total $ 418 $ 501 ========== ==========
F-14 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 3 - LOANS (Continued) The Bank has entered into loan transactions with its executive officers, certain directors and principal shareholders. A schedule of aggregate activity in those loans, when total customer borrowings exceed $60,000, follows:
1995 ---- Balance, January 1, 1995 $ 1,249 Additions 1,499 Collected (1,608) ----------- Balance, December 31, 1995 $ 1,140 ==========
Total loans serviced for the Federal Home Loan Mortgage Corporation were $3,793,494 at December 31, 1995 and $3,255,527 at December 31, 1994. These loans are not reflected on the consolidated balance sheet. F-15 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 4 - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is as follows:
1995 1994 1993 ---- ---- ---- Balance, January 1 $ 933 $ 810 $ 634 Provision charged to operations 68 120 144 Loans charged off (56) (10) (16) Recoveries on loans previously charged off 15 13 48 ----------- ----------- ----------- Balance, December 31 $ 960 $ 933 $ 810 =========== =========== ===========
The balance of impaired loans was $391,151 at December 31, 1995. Allowance for loan loss allocations related to those impaired loans were $141,807. The average balance of impaired loans for 1995 was $409,667. Interest income recognized on impaired loans during 1995 was $7,446, all of which was received in cash. Nonaccrual loans at December 31, 1995 included $282,577 in loans that were also considered impaired, which amount is also included in the amount of impaired loans disclosed above. NOTE 5 - PREMISES, FURNITURE AND EQUIPMENT A summary of premises, furniture and equipment by major category follows:
1995 1994 ---- ---- Land and buildings $ 2,506 $ 2,112 Furniture and equipment 1,501 1,418 ----------- ----------- 4,007 3,530 Accumulated depreciation (2,332) (2,144) ----------- ----------- Premises, furniture and equipment, net $ 1,675 $ 1,386 =========== ===========
NOTE 6 - INTEREST-BEARING DEPOSITS Interest-bearing deposits issued in denominations of $100,000 or greater totaled $5,876,741 and $4,335,925 at December 31, 1995 and 1994. Interest expense on such deposits for 1995, 1994 and 1993 was $320, $204 and $251. F-16 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 7 - REPURCHASE AGREEMENTS AND SHORT-TERM BORROWINGS The Bank uses repurchase agreements and short-term borrowings, primarily federal funds purchased, as funding sources. Repurchase agreements are, essentially, borrowings from customers secured by a pledge of securities. Bancorp retains possession of and control over such securities. Information regarding repurchase agreements and short-term borrowings at and for the years ended December 31, 1995 and 1994 is as follows:
1995 1994 ---- ---- Average balance during the year Repurchase agreements $ 7,273 $ 4,960 Short-term borrowings 1,717 1,538 Average rate paid during the year Repurchase agreements 5.23% 3.26% Short-term borrowings 6.21 4.60 Maximum month end balance Repurchase agreements $ 10,353 $ 8,010 Short-term borrowings 4,600 4,800 Weighted average interest rate at year end Repurchase agreements 4.56% 5.62% Short-term borrowings 5.74 4.75
NOTE 8 - LONG-TERM DEBT Long-term debt outstanding consists of the following at December 31:
1995 1994 ---- ---- Federal Home Loan Bank advances: interest payable monthly at 4.51%; principal due at maturity on October 15, 1996; secured by certain investment securities. $ 500 $ 500 Federal Home Loan Bank advances: interest payable monthly at 6.28%; principal due at maturity on August 8, 2000; secured by certain investment securities. 500 500 ---------- ---------- Total long-term debt $ 1,000 $ 1,000 ========== ==========
F-17 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 9 - INCOME TAXES Income taxes consist of the following:
1995 1994 1993 ---- ---- ---- Current payable $ 468 $ 409 $ 358 Deferred income tax benefit (8) (33) (24) ------------ ------------ ------------ Total income taxes $ 460 $ 376 $ 334 ============ ============ ============
The following is a reconciliation of income taxes and the amount computed by applying the statutory federal income tax rates of 34% to income before income taxes:
1995 1994 1993 ---- ---- ---- Statutory rate applied to income before income taxes $ 436 $ 402 $ 339 Add (deduct) Tax exempt interest income (79) (86) (70) State income tax, net 76 69 59 Effect of graduated rates and other 27 (9) 6 ------------ ------------ ------------ Total income taxes $ 460 $ 376 $ 334 ============ ============ ============
The net deferred tax asset reflected in the consolidated balance sheet is composed of the following:
1995 1994 ---- ---- Deferred tax assets from Loan loss provision $ 267 $ 244 Pension expense 36 40 Unrealized loss on securities available for sale 19 182 Nonaccrual loan interest 14 - Accrued expenses 25 16 Other 27 17 ------------ ------------ 388 499 Deferred tax liabilities for: Depreciation expense (58) (44) Leases (146) (118) Other (9) (7) ------------ ------------ (213) (169) Valuation allowance for deferred tax assets - - ------------ ------------ $ 175 $ 330 ============ ============ /TABLE F-18 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 10 - EMPLOYEE BENEFIT PLANS The Bank has a noncontributory defined benefit pension plan covering substantially all employees. The Bank's funding policy is to contribute the minimum amount required by applicable IRS regulations. Plan assets consist primarily of U.S. Treasury bonds, corporate bonds and other various marketable equity securities. The following sets forth the Plan's funded status and amount recognized in the balance sheet at December 31 (amounts computed as of November 30th for 1995 and 1994):
1995 1994 ---- ---- Actuarial present value of obligations: Accumulated benefit obligation, including vested benefits of $494 and $451 $ 496 $ 455 =========== ============ Plan assets at fair value $ 809 $ 644 Projected benefit obligation for service rendered to date (749) (697) Unrecognized loss 89 194 Prior service cost not yet recognized (14) (15) Unrecognized transition asset (176) (198) ----------- ------------ Accrued pension liability $ (41) $ (72) =========== ============
1995 1994 1993 ---- ---- ---- Net pension expense included the following: Service cost-benefits earned $ 32 $ 45 $ 34 Interest cost on projected benefit obligation 57 51 48 Actual return on plan assets (135) 11 (50) Net amortization and deferral 65 (62) 2 ----------- ----------- ----------- Net pension expense $ 19 $ 45 $ 34 =========== =========== ===========
The weighted-average discount rate used in determining the actuarial present value of projected benefit obligation was 8.25% in 1995 and 1994 and 7% in 1993. Additionally, the rate of increase in future compensation assumed was 5% for each year. The expected long-term rate of return on plan assets was 8.25% in 1995 and 1994 and 7.5% in 1993. The Bank has a 401(k) defined contribution retirement plan in which substantially all employees may participate. The Bank matches employees' contributions at the rate of 50 percent on the first 8 percent of participant's salary contributions. The Bank's total 401(k) contributions were $20,168, $21,266 and $21,164 for 1995, 1994 and 1993. F-19 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 11 - CAPITAL RESTRICTIONS The Bank and the Bancorp are subject to regulations which require the maintenance of certain capital levels and, as a result, limit the amount of dividends which may be paid by the companies. The Bank is regulated by the Comptroller of the Currency, while the Bancorp is regulated by the Federal Reserve Board. The most restrictive of the regulations limits the amount of dividends the Bank may pay to the Bancorp in a single year without approval by the Comptroller of the Currency to the balance of retained net profits of the most recent two years. Additionally, the Bank must maintain a minimum leverage capital to asset ratio at a level defined by banking regulators. These requirements pose no practical restrictions on the Bancorp or Bank to pay dividends at historical levels. NOTE 12 COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business, the Bank has loans, commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policy to make such commitments as it uses for on-balance sheet items. At December 31, off-balance sheet financial instruments whose contract amount represents credit risk are summarized as follows: 1995 1994 ---- ---- Commitments to extend credit $ 8,435 $ 8,954 Standby letters of credit 268 465 The commitments to extend credit are predominantly available balances on commercial and consumer lines of credit which are mainly variable rate agreements. Since many commitments to make loans expire without being used, the amount does not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The Bank leases branch facilities and equipment under operating leases expiring in various years through 1999. Lease rental expense was $20,773, $19,132, and $18,641 for 1995, 1994 and 1993. The cash balance required to be maintained on hand or on deposit with the Federal Reserve was $474,000 and $490,000 at December 31, 1995 and 1994. These reserves do not earn interest. F-20 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 13- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and estimated fair value of the Bancorp's financial instruments as of December 31, 1995 are as follows:
Carrying Fair Value Value ----- ----- Financial assets: Cash and short-term investments $ 4,730 $ 4,730 Securities 25,054 24,968 Loans, less allowance for loan losses 57,800 57,870 Accrued interest receivable 928 928 Financial liabilities: Deposits 67,974 67,772 Short-term borrowings 12,404 12,404 Long-term debt 1,000 1,011 Accrued interest payable 237 237
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT-TERM INVESTMENTS: For those short-term instruments, the carrying amount is a reasonable estimate of fair value. SECURITIES: For securities, fair value equals quoted market price or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. LOANS: For commercial, real estate, consumer and other loans, fair value is estimated by discounting future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS: The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS: For short-term borrowings, which are generally over-night agreements, the carrying amount is a reasonable estimate of fair value. LONG-TERM DEBT: Rates currently available to the Bank for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. F-21 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) ACCRUED INTEREST: For these short-term assets/liabilities, the carrying amount is a reasonable estimate of fair value. COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL GUARANTEES WRITTEN: The estimated fair value for off-balance sheet loan commitments approximates carrying value and are not considered significant to this presentation. While these estimates of fair value are based on management's judgment of the most appropriate factors, there is no assurance that were the Bancorp to have disposed of such items at December 31, 1995, the estimated fair values would necessarily have been achieved at that date, since market values may differ depending on various circumstances. The estimated fair values at December 31, 1995 should not necessarily be considered to apply at subsequent dates. In addition, other assets and liabilities of the Bancorp that are not defined as financial instruments are not included in the above disclosures, such as property and equipment. Also, non-financial instruments typically not recognized in financial statements, nevertheless may have value, but are not included in the above disclosures. These include, among other items, the estimated earnings power of core deposit accounts, the earnings potential of the Bank's trust department, the trained work force, customer goodwill, and similar items. NOTE 14 - PER SHARE DATA In June 1995, the shareholders approved an increase in authorized common stock from 400,000 shares to 1,200,000 shares. Also, in June 1995, the Board of Directors authorized a 3-for-1 stock split effected in the form of a stock dividend. Earnings and dividend per share amounts have been retroactively restated for the stock split. The weighted-average number of shares used in calculating earnings and dividends per share amounts was 593,334 for 1995, 1994 and 1993. F-22 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 and 1994 (Table Dollar Amounts in Thousands) NOTE 15- PARENT COMPANY FINANCIAL STATEMENTS Presented below are the condensed balance sheets and statements of income and cash flows for the parent Company: CONDENSED BALANCE SHEETS December 31, 1995 and 1994
1995 1994 ---- ---- ASSETS Cash on deposit with subsidiary $ 61 $ 55 Securities available for sale 87 16 Investment in bank subsidiary 8,764 7,826 Other assets 4 6 --------------- --------------- $ 8,916 $ 7,903 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities $ 84 $ 49 Shareholders' equity Common stock 593 198 Additional paid-in capital 1,110 1,110 Retained earnings 7,166 6,900 Net unrealized loss on securities available-for-sale (37) (354) --------------- --------------- 8,832 7,854 --------------- --------------- $ 8,916 $ 7,903 =============== ===============
CONDENSED STATEMENTS OF INCOME Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- OPERATING INCOME Dividend income $ 154 $ 115 $ 130 Other income 5 5 2 -------------- -------------- -------------- Total operating income 159 120 132 OPERATING EXPENSES Other expenses 4 2 4 -------------- -------------- -------------- Total operating expenses 4 2 4 -------------- -------------- -------------- INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 155 118 128 Equity of undistributed earnings of subsidiary 669 690 602 -------------- -------------- -------------- NET INCOME $ 824 $ 808 $ 730 ============== ============== ============== /TABLE F-23 PEOPLES BANCORP OF WASHINGTON NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995, 1994 and 1993 (Table Dollar Amounts in Thousands) NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 1995, 1994 and 1993
1995 1994 1993 ---- ---- ---- Cash flows from operating activities Net income $ 824 $ 808 $ 730 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed earnings of subsidiary (669) (690) (602) Changes in: Other assets 2 3 3 Other liabilities 11 9 (1) ----------- ----------- ----------- Net cash provided by operating activity 168 130 130 Cash flows from financing activities Dividends paid (162) (138) (123) ----------- ----------- ----------- Net change in cash and cash equivalents 6 (8) 7 Cash and cash equivalents at beginning of year 55 63 56 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 61 $ 55 $ 63 =========== =========== ===========
F-24 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1996 1995 ---- ---- ASSETS Cash and Cash Equivalents $ 2,794,489 $ 4,729,741 Securities available for sale 11,754,027 13,978,960 Securities held to maturity 7,370,271 11,075,302 Loans held for sale (net) 827,736 0.00 Total loans 66,402,439 58,759,678 Less: Allowance for loan losses (968,089) (959,510) --------------- --------------- Net loans 66,262,086 57,800,168 Non-marketable equity securities 380,700 381,000 Premises and equipment, net 1,592,404 1,675,199 Accrued interest receivable 1,126,272 928,341 Other assets 207,891 272,869 --------------- --------------- Total assets $ 91,488,140 $ 90,841,580 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits $ 71,631,384 $ 67,973,569 Repurchase agreements 7,391,561 8,254,360 Short-term borrowings 1,000,000 4,150,000 Long term debt 1,500,000 1,000,000 Accrued interest payable 299,458 237,103 Accrued expenses and other liabilities 257,809 394,107 --------------- --------------- Total liabilities 82,080,212 82,009,139 SHAREHOLDERS' EQUITY Common stock 593,334 593,334 Additional paid-in capital 1,109,599 1,109,599 Retained earnings 7,776,812 7,166,536 Net unrealized loss on securities available for sale (71,817) (37,028) --------------- --------------- Total shareholders' equity 9,407,928 8,832,441 --------------- --------------- Total liabilities and shareholders' equity $ 91,488,140 $ 90,841,580 =============== ===============
See accompanying notes to consolidated financial statements. F-25 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended September 30, September 30, 1996 1995 1996 1995 ---- ---- ---- ---- INTEREST INCOME Loans, including related fees $ 1,518,632 $ 1,274,153 $ 4,334,153 $ 3,654,956 Securities 272,757 357,445 860,836 1,129,754 Other 8,713 13,660 15,999 13,892 --------------------------------------------------------- Total interest income 1,800,102 1,645,258 5,210,988 4,798,602 INTEREST EXPENSE Deposits 675,979 655,662 1,946,489 1,851,619 Borrowings 106,195 152,814 329,756 452,376 --------------------------------------------------------- Total interest expense 782,174 808,476 2,276,245 2,303,995 --------------------------------------------------------- NET INTEREST INCOME 1,017,928 836,782 2,934,743 2,494,607 Provision for loan losses (12,600) (22,375) (37,800) (67,375) --------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,005,328 814,407 2,896,943 2,427,232 NONINTEREST INCOME Service charges and fees 63,304 47,392 189,537 141,725 Gain/(loss) on securities 0 8,370 78 31,749 Other income 10,929 61,590 39,992 96,014 --------------------------------------------------------- Total noninterest income 74,233 117,352 229,607 269,488 Noninterest expense Salaries and benefits 346,911 313,776 1,061,465 945,283 Occupancy and equipment, net 62,587 61,300 185,866 179,891 Equipment expense 57,751 60,033 145,759 179,600 Directors fees Stationery and supplies Other operating expenses 192,160 158,689 552,704 529,558 --------------------------------------------------------- Total noninterest expense 659,409 593,798 1,945,794 1,834,332 --------------------------------------------------------- Income before income taxes 420,152 337,961 1,180,756 862,388 Less: income taxes (159,605) (119,867) (445,880) (301,179) --------------------------------------------------------- NET INCOME $ 260,547 $ 218,094 $ 734,876 $ 561,209 ========================================================= Earnings per share (Note 4) $ 0.44 $ 0.37 $ 1.24 $ 0.95 Average shares outstanding 593,334 593,334 593,334 593,334
See accompanying notes to consolidated financial statements. F-26 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
1996 1995 ---- ---- Balance January 1 $ 8,832,441 $ 7,853,503 Net income 734,876 561,209 Cash dividends ($.17 per share and $.21 per share in 1995 and 1996) (124,600) (102,845) Change in net unrealized loss on securities available for sale (34,789) 242,854 ------------- ------------- Balance September 30 $ 9,407,928 $ 8,554,721 ============= =============
See accompanying notes to consolidated financial statements. F-27 PEOPLES BANCORP OF WASHINGTON CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30: 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 734,876 $ 561,209 Adjustments to reconcile net income to net cash from operating activities 5,251 (90,345) ------------- ------------- Net cash from operating activities 740,127 470,864 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from paydowns and maturities of securities held to maturity 3,687,515 1,015,221 Proceeds from paydowns and maturities of securities available for sale 2,680,140 853,495 Purchases of securities held to maturity 0 0 Purchases of securities available for sale (1,497,031) (2,249,766) Sales of securities held to maturity 0 66,479 Sales of securities available for sale 990,938 2,520,591 Loans made, net of payments collected (8,499,718) (2,101,162) Property and equipment expenditures (57,639) (467,185) ------------- ------------- Net cash from investing activities (2,695,795) (362,327) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposit accounts 3,657,815 (843,395) Dividends paid (124,600) (102,845) Net change in federal funds purchased (3,150,000) (325,000) Net change in repurchase agreements (862,799) 547,768 FHLB advances 2,000,000 1,500,000 Repayment of FHLB advances (1,500,000) (500,000) ------------- ------------- Net cash from financing activities 20,416 276,528 ------------- ------------- Net change in cash and cash equivalents (1,935,252) 385,065 Cash and cash equivalents at beginning of period 4,629,741 3,079,893 ------------- ------------- Cash and cash equivalents at end of period $ 2,694,489 $ 3,464,958 ============= =============
See accompanying notes to consolidated financial statements. F-28 PEOPLES BANCORP OF WASHINGTON NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 Note 1 - Basis of Presentation The consolidated financial statements include the accounts of the Peoples Bancorp of Washington and its wholly owned subsidiary Peoples National Bank and Trust Company. Upon consolidation, all significant intercompany accounts and transactions have been eliminated. Note 2 - General The financial statements were prepared in accordance with the instructions for Form 10-QSB and, therefore, do not include all of the disclosures necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The September 30, 1995 and 1996 financial statements have been prepared on a basis consistent with the annual financial statements and include, in the opinion of management, all adjustments which consist of only normal recurring adjustments, necessary for a fair presentation of the results of operations and financial position for and at the end of such interim periods. Note 3 - Proposed Acquisition of the Company On September 27, 1996 the Company entered into a definitive agreement to merge with German American Bancorp. Pursuant to the agreement, each shareholder of the Company's common stock would exchange their stock in the Company for a specified number of shares of German American Bancorp common stock. The exchange ratio will be determined based upon the average price of German American Bancorp's common stock during the period prior to the effective date of the merger. Consummation of the merger requires the approval of Peoples Bancorp shareholders and various regulatory agencies. A-1 APPENDIX A _______________________________________________________ AGREEMENT AND PLAN OF REORGANIZATION by and among PEOPLES BANCORP OF WASHINGTON an Indiana corporation, THE PEOPLES NATIONAL BANK AND TRUST COMPANY a national banking association, GERMAN AMERICAN BANCORP, an Indiana corporation, GERMAN AMERICAN HOLDINGS CORPORATION, an Indiana corporation, and THE UNION BANK an Indiana banking corporation. _______________________________________________________ Dated: September 27, 1996 A-2 AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made September 27, 1996, by and among PEOPLES BANCORP OF WASHINGTON, an Indiana corporation ("Peoples"), THE PEOPLES NATIONAL BANK AND TRUST COMPANY, a national banking association ("Peoples Bank"), GERMAN AMERICAN HOLDINGS CORPORATION, an Indiana corporation ("GAHC"), GERMAN AMERICAN BANCORP, an Indiana corporation ("GERMAN AMERICAN"), and THE UNION BANK, an Indiana banking corporation ("Union"). Recitals A. Peoples is a corporation duly organized and existing under the Indiana Business Corporation Law ("IBCL") that is duly registered with the Board of Governors of the Federal Reserve System ("FRB") as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHC Act"). Peoples owns all of the outstanding capital stock of Peoples Bank. The principal place of business of Peoples is Washington, Daviess County, Indiana. B. Peoples Bank is a national banking association duly organized and existing under the National Bank Act, chartered by the Office of the Comptroller of the Currency ("OCC"), with its principal banking office located in Washington, Daviess County, Indiana. C. German American is a corporation duly organized and existing under the IBCL and that is duly registered as a bank holding company under the BHC Act. German American owns all of the outstanding capital stock of GAHC and Union. The principal place of business of German American is Jasper, Dubois County, Indiana. D. GAHC is a corporation duly organized and existing under the IBCL and that is duly registered as a bank holding company under the BHC Act with its principal place of business in Jasper, Dubois County, Indiana. GAHC owns all of the outstanding stock of Community Trust Bank, which is not a party hereto. E. Union is a banking corporation duly organized and existing under The Indiana Financial Institutional Act ("IFIA"), chartered by the Indiana Department of Financial Institutions ("DFI"), with its principal banking office in Loogootee, Martin County, Indiana. A-3 F. The parties desire to effect a transaction whereby Union will be merged with and into Peoples Bank and simultaneously Peoples will be merged with and into GAHC. AGREEMENTS In consideration of the premises and the mutual terms and provisions set forth in this Agreement, the parties agree as follows. ARTICLE ONE TERMS OF THE MERGERS & CLOSING SECTION 1.01. THE HOLDING COMPANY MERGER. Pursuant to the terms and provisions of this Agreement, the IBCL and the Plan of Merger attached hereto as Appendix A and incorporated herein by reference (the "Holding Company Plan of Merger"), Peoples shall merge with and into GAHC (the "Holding Company Merger") simultaneously with the Bank Merger (as defined below). Peoples shall be the "Merging Holding Company" in the Holding Company Merger and its corporate identity and existence, separate and apart from GAHC, shall cease on consummation of the Holding Company Merger. GAHC shall be the "Surviving Holding Company" in the Holding Company Merger, and its name shall not be changed pursuant to the Holding Company Merger. SECTION 1.02. EFFECT OF THE HOLDING COMPANY MERGER. The Holding Company Merger shall have all the effects provided by the IBCL. SECTION 1.03. THE HOLDING COMPANY MERGER - CONVERSION OF SHARES. (a) At the Effective Time (as defined below): (i) Each of the not more than 593,334 shares of common stock, $1.00 stated value, of Peoples ("Peoples Common") that are issued and outstanding immediately prior to the Effective Time shall thereupon and without further action be converted into shares of common stock, $10 par value, of German American ("German American Common") at the Exchange Ratio which shall be calculated as set forth in this Section 1.03(a)(i). Peoples's shareholders of record at the time the Merger shall become effective, for the shares of Peoples Common then held by them, respectively, shall be allocated and entitled to receive (upon surrender A-4 of certificates representing said shares for cancellation) shares of German American Common, which total number of shares of German American Common shall have a value (as hereinafter determined) of $21,100,000 subject, however, to (A) the provisions of this Section 1.03(a) with respect to the minimum and maximum exchange ratio and number of shares to be exchanged, (B) the anti-dilution provisions of Section 1.03(f) of this Agreement, and (C) the provisions of this Section 1.03(b) with respect to fractional shares. The consideration payable to Peoples shareholders hereunder is sometimes hereafter referred to as the "Merger Consideration." For purposes of establishing the number of shares of German American Common into which each share of Peoples Common shall be converted at the Effective Time(the "Exchange Ratio"), each share of German American Common shall be valued at the average of the lowest closing asked prices and highest closing bid prices of German American Common as reported by the NASDAQ National Market System for each of the ten consecutive business days that end on the second business day preceding the Closing Date (as defined by Section 1.09 hereof) (the "Valuation Period"). Such value shall then be divided into the sum of $21,100,000 to establish (to the nearest whole share) the aggregate number of shares of German American Common into which all of the then issued and outstanding shares of Peoples Common (which shall be not more than 593,334 shares) shall be converted at the Effective Time, which number of shares of German American Common shall then be divided by 593,334, with the quotient therefrom (carried to the fourth figure past the decimal point) being the number of shares of German American Common into which each share of Peoples Common shall be converted at the Effective Time; provided, however, that in no event shall the total number of shares of German American Common into which the 593,334 shares of Peoples Common shall be converted be more than 659,375 shares or fewer than 586,111 shares; and provided further, that in no event will the Exchange Ratio be more than 1.1113 or less than 0.9878 shares of German American Common for each of the 593,334 shares of Peoples Common. The maximum and minimum Exchange Ratio, and the maximum and minimum number of A-5 shares of German American Common for which the 593,334 shares of Peoples Common shall be exchanged shall be subject to adjustment in accordance with the anti-dilution provisions of Section 1.03(f) of this Agreement. (ii) The shares of German American Common issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding shares of German American. (b) No fractional shares of German American Common shall be issued and, in lieu thereof, holders of shares of Peoples Common who would otherwise be entitled to a fractional share interest (after taking into account all shares of Peoples Common held by such holder) shall be paid an amount in cash equal to the product of such fractional share and the average of the highest bid and the lowest asked price of a share of German American Common as quoted on the NASDAQ National Market System on the last day of the Valuation Period. (c) At the Effective Time, all of the outstanding shares of Peoples Common, by virtue of the Holding Company Merger and without any action on the part of the holders thereof, shall no longer be outstanding and shall be canceled and retired and shall cease to exist, and each holder of any certificate or certificates which immediately prior to the Effective Time represented outstanding shares of Peoples Common (the "Certificates") shall thereafter cease to have any rights with respect to such shares, except the right of such holders to receive, without interest, the Merger Consideration upon the surrender of such Certificate or Certificates in accordance with Section 1.08. (d) At the Effective Time, each share of Peoples Common, if any, held in the treasury of Peoples or by any direct or indirect subsidiary of Peoples (other than shares held in trust accounts for the benefit of others or in other fiduciary, nominee or similar capacities) immediately prior to the Effective Time shall be cancelled. (e) At the Effective Time, the shares of common stock of Peoples Bank outstanding immediately prior to the Effective Time shall be unchanged by the Holding Company Merger and shall be deemed owned by the Surviving Holding Company. A-6 (f) If (i) German American shall declare a stock dividend or other distribution of property or securities (other than a cash dividend) upon its shares of common stock or shall subdivide, split up, reclassify or combine its shares of common stock, and (ii) the record date for such transaction is prior to the date on which the Effective Time occurs, appropriate adjustment or adjustments will be made in the maximum and minimum total number of shares of German American Common for which the 593,334 shares of Peoples Common are to be exchanged and in the maximum and minimum ratio of shares of German American Common to be exchanged for each share of Peoples Common. (g) If any holders of Peoples Common dissent from the Holding Company Merger and demand dissenters' rights under the IBCL, any issued and outstanding shares of Peoples Common held by such dissenting holders shall not be converted as described in this Section 1.03 but shall from and after the Effective Time represent only the right to receive such consideration as may be determined to be due to such dissenting holders pursuant to the IBCL; provided, however, that each share of Peoples Common outstanding immediately prior to the Effective Time and held by a dissenting holder who shall, after the Effective Time, withdraw his demand for dissenters' rights or lose his right to exercise dissenters' rights shall have only such rights as provided under the IBCL. SECTION 1.04. THE BANK MERGER. Pursuant to the terms and provisions of this Agreement, the National Bank Act, the IFIA, and the Plan of Merger attached hereto as Appendix B and incorporated herein by reference (the "Bank Plan of Merger"), and simultaneously with the Holding Company Merger, Union shall merge with and into Peoples Bank (the "Bank Merger"). Union shall be the "Merging Bank" in the Bank Merger and its corporate identity and existence, separate and apart from Peoples Bank, shall cease on consummation of the Bank Merger. Peoples Bank shall be the "Surviving Bank" and shall continue its corporate existence under its charter under the provisions of the National Bank Act, and the name of Peoples Bank shall not be changed. SECTION 1.05. EFFECT OF THE BANK MERGER. The Bank Merger shall have all of the effects provided by the National Bank Act and the IFIA. A-7 SECTION 1.06. THE BANK MERGER - NO CONVERSION OF SHARES. At the Effective Time (as defined below), the shares of Peoples Bank that were issued and outstanding immediately prior to the Bank Merger shall continue to be issued and outstanding, and the shares of Union shall be cancelled. SECTION 1.07. THE CLOSING. The closing of the Mergers (the "Closing") shall take place at the offices of Leagre & Barnes (or at such other place as the parties may agree) at 9:00 A.M. Eastern Standard Time on the Closing Date described in Section 1.09 of this Agreement. SECTION 1.08. EXCHANGE PROCEDURES; SURRENDER OF CERTIFICATES. (a) The German American Bank shall act as Exchange Agent in the Holding Company Merger (the "Exchange Agent"). (b) As soon as reasonably practicable but in no event more than five days after the Effective Time, the Exchange Agent shall mail to each record holder of any Certificate or Certificates whose shares were converted into the right to receive the Merger Consideration, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as German American may reasonably specify) (each such letter the "Merger Letter of Transmittal") and instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consolidation. As soon as reasonably practical but in no event more than five days after surrender to the Exchange Agent of a Certificate, together with a Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such Certificate the Merger Consideration. No interest on the Merger Consideration issuable upon the surrender of the Certificates shall be paid or accrued for the benefit of holders of Certificates. If the Merger Consideration is to be issued to a person other than a person in whose name a surrendered Certificate is registered, it shall be a condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer A-8 or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the Peoples shareholder in the event that such shareholder claims loss of a Certificate and requests that German American waive the requirement for surrender of such Certificate. (c) No dividends that are otherwise payable on shares of German American Common constituting the Merger Consideration shall be paid to persons entitled to receive such shares of German American Common until such persons surrender their Certificates. Upon such surrender, there shall be paid to the person in whose name the shares of German American Common shall be issued any dividends which shall have become payable with respect to such shares of German American Common (without interest and less the amount of taxes, if any, which may have been imposed thereon), between the Effective Time and the time of such surrender. SECTION 1.09. THE CLOSING DATE. The Closing shall take place on January 31, 1997 or, if later, on the last business day of the month during which each of the conditions in Sections 6.01(d) and 6.02(d) is satisfied or waived by the appropriate party, or on such later or earlier date as Peoples and German American may agree (the "Closing Date"). The Bank Merger shall be effective upon the issuance of a certificate of merger by the OCC under the National Bank Act and the Holding Company Merger shall be effective upon the filing of Articles of Merger with the Secretary of State of the State of Indiana (the "Effective Time"). The parties shall use their best efforts to cause the Effective Time of both Mergers to occur as soon as practicable after the Closing Date. SECTION 1.10. ACTIONS AT CLOSING. (a) At the Closing, Peoples shall deliver to German American: (i) a certified copy of the Articles of Incorporation and Bylaws of Peoples, as amended, and a certified copy of the Articles of Association and Bylaws of Peoples Bank, as amended; A-9 (ii) a certificate or certificates signed by the chief executive officer of Peoples and Peoples Bank stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article Two hereof is true and correct in all material respects at the time of the Closing with the same force and effect as if such representations and warranties had been made at Closing, and (B) Peoples and Peoples Bank have performed and complied in all material respects, unless waived by German American, with all of their obligations and agreements required to be performed hereunder prior to the Closing Date; (iii) certified copies of the resolutions of Peoples's Board of Directors and shareholders, approving and authorizing the execution of this Agreement and the Plan of Merger and authorizing the consummation of the Holding Company Merger; (iv) a certified copy of the resolutions Peoples Bank's Board of Directors and shareholder, as required for valid approval of the execution of the Agreement and the consummation of the Bank Merger; (vi) a certificate of the Indiana Secretary of State, dated a recent date, stating that Peoples is duly organized and exists under the IBCL; (vii) a certificate of the OCC, dated a recent date, stating that Peoples Bank is duly organized and exists under the laws of the United States of America; and (viii) the legal opinion of Krieg, DeVault, Alexander & Capehart, counsel for Peoples, to the effect set forth as Exhibit 1.10(a)(vii). (b) At the Closing, German American shall deliver to Peoples: (i) a certificate signed by the Chief Executive Officer of German American stating, to the best of his knowledge and belief, after due inquiry, that (A) each of the representations and warranties contained in Article Three is true and correct in all material respects at the time of the Closing with the same force and effect as if A-10 such representations and warranties had been made at Closing and (B) German American and Union have performed and complied in all material respects, unless waived by Peoples, with all of its obligations and agreements required to be performed hereunder prior to the Closing Date; (ii) a certified copy of the resolutions of German American's Board of Directors authorizing the execution of this Agreement; (iii) a certified copy of the resolutions of GAHC's Board of Director's authorizing the execution of this Agreement and the consummation of the Holding Company Merger. (iv) a certified copy of the resolutions of Union's Board of Directors and shareholder, as required for valid approval of the execution of this Agreement and the consummation of the Bank Merger; (v) the legal opinion of Leagre & Barnes, counsel for German American, in the form attached hereto as Exhibit 1.10(b)(v); and (vi) certificates of the Indiana Secretary of State, dated a recent date, stating that German American and GAHC exist under the IBCL and that Union exists under the IFIA. (c) At the Closing, the parties shall insert the Exchange Ratio determined in accordance with Section 1.03 of this Agreement into the Plan of Merger, and shall execute and/or deliver to one another such Plan of Merger and such other documents and instruments and take such other actions as shall be necessary or appropriate to consummate the Mergers. ARTICLE TWO REPRESENTATIONS OF PEOPLES AND PEOPLES BANK Peoples and Peoples Bank hereby severally make the following representations and warranties: SECTION 2.01. ORGANIZATION AND CAPITAL STOCK. (a) Peoples is a corporation duly organized and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. A-11 (b) Peoples Bank is a national banking association duly organized and validly existing under the laws of the United States of America and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (c) Peoples has authorized capital stock of 1,200,000 shares of Peoples Common, of which 593,334 shares are issued and outstanding. All of the issued and outstanding shares of Peoples Common are duly and validly issued and outstanding, fully paid and non- assessable. None of the outstanding shares of Peoples Common has been issued in violation of any preemptive rights of the current or past shareholders of Peoples or in violation of any applicable federal or state securities laws or regulations. (d) Peoples Bank has authorized capital stock of 34,625 shares of common stock, $10.00 par value, all of which are issued and outstanding ("Peoples Bank Common"). All of the issued and outstanding shares of Peoples Bank Common are duly and validly issued and outstanding and are fully paid and nonassessable. None of the outstanding shares of Peoples Bank Common has been issued in violation of any preemptive rights of the current or past shareholders of Peoples Bank or in violation of any applicable federal or state securities laws or regulations. (e) There are no shares of capital stock or other equity securities of Peoples or Peoples Bank authorized, issued or outstanding (except as set forth in this Section 2.01) and no outstanding options, warrants, rights to subscribe for, calls, puts, or commitments of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, shares of the capital stock of Peoples or Peoples Bank, or contracts, commitments, understandings or arrangements by which Peoples or Peoples Bank are or may be obligated to issue additional shares of its capital stock or options, warrants or rights to purchase or acquire any additional shares of its capital stock. SECTION 2.02. AUTHORIZATION; NO DEFAULTS. The Boards of Directors of Peoples and Peoples Bank have each, by all appropriate action, approved this Agreement, the applicable Plan of Merger and the Merger contemplated thereby and have authorized the execution of this Agreement and the applicable Plan of Merger on their behalf by their duly authorized officers and the A-12 performance by Peoples and Peoples Bank of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of Peoples, as amended, or the Articles of Association or Bylaws of Peoples Bank, as amended, or in any material agreement or instrument, or any decree, proceeding, law or regulation (except as specifically referred to in or contemplated by this Agreement) by or to which Peoples or Peoples Bank is bound or subject, would prohibit Peoples or Peoples Bank from consummating, or would be violated or breached by Peoples's or Peoples Bank's consummation of, this Agreement and the Mergers and other transactions contemplated herein on the terms and conditions herein contained. This Agreement has been duly and validly executed and delivered by Peoples and Peoples Bank and constitutes a legal, valid and binding obligation of Peoples and Peoples Bank, enforceable against Peoples and Peoples Bank in accordance with its terms. Neither Peoples nor Peoples Bank is, nor will be by reason of the consummation of the transactions contemplated herein, in material default under or in material violation of any provision of, nor will the consummation of the transactions contemplated herein afford any party a right to accelerate any indebtedness under, its articles of incorporation or bylaws, any material promissory note, indenture or other evidence of indebtedness or security therefor, or any material lease, contract, or other commitment or agreement to which it is a party or by which it or its property is bound. SECTION 2.03. SUBSIDIARIES. Except as otherwise disclosed in a confidential writing delivered by Peoples and Peoples Bank to German American and executed by all the parties concurrently with the execution of this Agreement (the "Disclosure Schedule") and except for the ownership by Peoples of all the capital stock of Peoples Bank and the ownership by Peoples Bank of all the capital stock of Peoples Investment Center, Inc. ("PIC"), neither Peoples nor Peoples Bank has (or has had at any time in the last ten years) any direct or indirect ownership interest in any corporation, partnership, limited liability company, joint venture or other business. Peoples Bank and PIC shall be referred to jointly and severally (for purposes of simplicity) as "Peoples Bank" for the purposes of the remaining provisions of this Agreement, unless the context otherwise requires. A-13 SECTION 2.04. FINANCIAL INFORMATION. (a) Peoples has furnished to German American the consolidated balance sheet of Peoples as of December 31, 1995 and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. Such financial statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be reflected in the notes thereto), and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of Peoples in all material respects as of the date and for the period indicated. (b) Peoples Bank has furnished to German American its Consolidated Reports of Condition and Income as filed with the FFIEC for the quarters ended March 31, 1996 and June 30, 1996 (the "Call Reports"). The Call Reports were prepared in accordance with the applicable regulatory instructions on a consistent basis with previous such reports, and fairly present the financial position and results of operations of Peoples Bank in all material respects as of the dates and for the periods indicated, subject, however, to normal recurring year-end adjustments, none of which will be material. (c) Neither Peoples nor Peoples Bank has any material liability, fixed or contingent, except to the extent set forth in the financial statements and the Call Reports described in subsections (a) and (b) of this Section 2.04 (collectively, the "Peoples Financial Statements") or incurred in the ordinary course of business since the date of the most recent balance sheet of Peoples or Peoples Bank included in the Peoples Financial Statements. (d) Peoples does not engage in the lending business (except by and through Peoples Bank) or any other business or activity other than that which is incident to its ownership of all the capital stock of Peoples Bank, and does not own any investment securities (except the capital stock of Peoples Bank). A-14 SECTION 2.05. ABSENCE OF CHANGES. Since December 31, 1995, and except to the extent reflected in the Call Reports, there has not been any material adverse change in the financial condition, the results of operations or the business of Peoples or Peoples Bank, taken as a whole. SECTION 2.06. ABSENCE OF AGREEMENTS WITH BANKING AUTHORITIES. Neither Peoples nor Peoples Bank is subject to any order (other than orders applicable to bank holding companies or banks generally) and neither is a party to any agreement or memorandum of understanding with any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation the OCC, the Federal Deposit Insurance Company (the "FDIC"), the FRB, and the IDFI. SECTION 2.07. TAX MATTERS. Peoples and Peoples Bank have filed all federal, state and local tax returns due in respect of any of its business, income and properties in a timely fashion and has paid or made provision for all amounts shown due on such returns. All such returns fairly reflect the information required to be presented therein in all material respects. All provisions for accrued but unpaid taxes contained in the Peoples Financial Statements were made in accordance with generally accepted accounting principles. SECTION 2.08. ABSENCE OF LITIGATION. There is no material litigation, claim or other proceeding pending or, to the knowledge of Peoples, threatened, before any judicial, administrative or regulatory agency or tribunal, to which Peoples or Peoples Bank is a party or to which any of their properties are subject. SECTION 2.09. EMPLOYMENT MATTERS. (a) Neither Peoples nor Peoples Bank is a party to or bound by any material contract arrangement or understanding (written or otherwise) for the employment, retention or engagement of any past or present officer, employee, agent, consultant or other person or entity which, by its terms, is not terminable by Peoples or Peoples Bank, respectively, on thirty (30) days' written notice or less without the payment of any amount by reason of such termination. A-15 (b) Neither Peoples nor Peoples Bank has entered into any collective bargaining agreement with any labor organizations with respect to any group of employees of Peoples and Peoples Bank, and to the knowledge of Peoples, there is no present effort or existing proposal to attempt to unionize any group of employees of Peoples or Peoples Bank. (c) Peoples and Peoples Bank are and have been in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, any such laws respecting employment discrimination and occupational safety and health requirements, and neither Peoples nor Peoples Bank is engaged in any unfair labor practice; (ii) there is no unfair labor practice complaint against Peoples or Peoples Bank pending or, to the knowledge of Peoples, threatened before the National Labor Relations Board; (iii) there is no labor dispute, strike, slowdown or stoppage actually pending or, to the knowledge of Peoples, threatened against or directly affecting Peoples or Peoples Bank; and (iv) neither Peoples nor Peoples Bank has experienced any material work stoppage or other material labor difficulty during the past five years. (d) Except as set forth in the Disclosure Schedule, neither the execution nor the delivery of this Agreement, nor the consummation of any of the transactions contemplated hereby, will (i) result in any payment (including without limitation severance, unemployment compensation or golden parachute payment) becoming due to any director or employee of Peoples or Peoples Bank from either of such entities, (ii) increase any benefit otherwise payable under any of their employee plans or (iii) result in the acceleration of the time of payment of any such benefit. No amounts paid or payable by Peoples or Peoples Bank to or with respect to any employee or former employee of Peoples of Peoples Bank will fail to be deductible for federal income tax purposes by reason of Section 280G of the Internal Revenue Code of 1986, as amended ("Code") or otherwise. SECTION 2.10. REPORTS. Since January 1, 1993 Peoples and Peoples Bank have filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, if any, that they were required to file with (i) the Securities and Exchange Commission ("SEC"), (ii) the A-16 FRB, (iii) the FDIC, (iv) the OCC and (v) any other governmental authority with jurisdiction over Peoples or Peoples Bank. As of their respective dates, each of such reports and documents, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. SECTION 2.11. INVESTMENT PORTFOLIO. All United States Treasury securities, obligations of other United States Government agencies and corporations, obligations of States and political subdivisions of the United States and other investment securities held by Peoples Bank, as reflected in the Call Reports, are carried on the books of Peoples Bank in accordance with generally accepted accounting principles, consistently applied. Peoples Bank does not engage in activities that would require that it establish a trading account under applicable regulatory guidelines and interpretations. SECTION 2.12. LOAN PORTFOLIO. All loans and discounts shown in the Call Reports, or which were entered into after June 30, 1996, but before the Closing Date, were and will be made in all material respects for good, valuable and adequate consideration in the ordinary course of the business of Peoples Bank, in accordance in all material respects with Peoples Bank's lending policies and practices unless otherwise approved by Peoples Bank's Board of Directors, and are not subject to any material defenses, set offs or counterclaims, including without limitation any such as are afforded by usury or truth in lending laws, except as may be provided by bankruptcy, insolvency or similar laws or by general principles of equity. The notes or other evidences of indebtedness evidencing such loans and all forms of pledges, mortgages and other collateral documents and security agreements are and will be, in all material respects, enforceable, valid, true and genuine and what they purport to be. Peoples Bank has complied and will through the Closing Date continue to comply with all laws and regulations relating to such loans, or to the extent there has not been such compliance, such failure to comply will not materially interfere with the collection of any such loan. Peoples Bank has not sold, purchased or entered into any loan participation arrangement except where such participation is on a pro rata basis according to the respective contributions of the participants to such loan amount. Peoples has no knowledge that any condition of property in which Peoples Bank has an interest as collateral to secure a loan or that is held A-17 as an asset of any trust violates the Environmental Laws (defined in Section 2.15) in any material respect or obligates Peoples, or Peoples Bank, or the owner or operator of such property to remedy, stabilize, neutralize or otherwise alter the environmental condition of such property. SECTION 2.13. ERISA. (a) Except as disclosed in the Disclosure Schedule, no person participates in any "employee welfare benefit plan" or "employee pension benefit plan" (as those terms are respectively defined in Sections 3(1) and 3(2) of the Employee Retirement Income Security Act of 1974 ("ERISA")), nor may any person reasonably expect to participate in any such plan, in either case, on account of his or her past or present employment with Peoples or Peoples Bank. Peoples and Peoples Bank do not maintain any retirement or deferred compensation plan, savings, incentive, stock option or stock purchase plan, unemployment compensation plan, vacation pay, severance pay, bonus or benefit arrangement, insurance or hospitalization program or any other fringe benefit arrangements (referred to collectively hereinafter as "fringe benefit arrangements") for any past or present employee, consultant or agent of Peoples or Peoples Bank, whether pursuant to contract, arrangement, custom or informal understanding, which does not constitute an "employee benefit plan" (as defined in Section 3(3) of ERISA), except as listed in the Disclosure Schedule. (b) During the past sixty months, Peoples has not maintained any employee welfare benefit plans or employee pension benefit plans except for plans listed on the Disclosure Schedule. There have been no amendments to any of the employee pension benefit plans, employee welfare benefit plans or fringe benefit arrangements listed on the Disclosure Schedule since December 31, 1993. (c) All employee pension benefit plans, employee welfare benefit plans and fringe benefit arrangements listed on the Disclosure Schedule comply in form and in operation in all material respects with all applicable requirements of law and regulation. All employee pension benefit plans maintained by Peoples and Peoples Bank comply in form and in operation with all applicable requirements of Sections 401(a) and 401(k) of the Code. Except as disclosed in the Disclosure Schedule, neither Peoples nor Peoples Bank has (i) A-18 incurred any liability for tax under Section 4971 of the Code on account of any accumulated funding deficiency and no plan or arrangement listed in the Disclosure Schedule has incurred any accumulated funding deficiency within the meaning of Section 412 or 418(B) of the Code; (ii) applied for or obtained a waiver by the IRS of any minimum funding requirement under Section 412 of the Code; (iii) become subject to any disallowance of deductions under Sections 419 or 419(A) of the Code; (iv) incurred any liability for excise tax under Sections 4972, 4975, or 4976 of the Code or any liability under Section 406 of ERISA; (v) incurred any liability to the Pension Benefit Guaranty Corporation; (vi) had a reportable event (within the meaning of Section 4043 of ERISA); or (vii) breached any of the duties or failed to perform any of the obligations imposed upon the fiduciaries or plan administrators under Title I or ERISA. (d) A true and correct copy of each of the plans and arrangements listed on the Disclosure Schedule as in effect on the date hereof and each trust agreement relating to each such plan and arrangement, has been supplied to German American. A true and correct copy of the annual report (as described in Section 103 of ERISA) most recently filed for each plan listed in the Disclosure Schedule has been supplied to German American, and there have been no material changes in the financial condition in the respective plans from that stated in the annual reports supplied. In the case of any plan or arrangement which is not in written form, German American has been supplied with an accurate description of such plan or arrangement. Peoples and Peoples Bank have provided to German American a description of any liability or contingent liability which may be incurred by Peoples or Peoples Bank if any plan or arrangement listed on the Disclosure Schedule were terminated or if Peoples or Peoples Bank was to cease its participation therein. (e) In the case of each plan or arrangement listed in the Disclosure Schedule which is a defined benefit plan (within the meaning of Section 3(35) of ERISA), the net fair market value of the assets held to fund such plan or arrangement will equal or exceed the present value of all accrued benefits thereunder, both vested and nonvested, as determined in accordance with an actuarial costs method acceptable under section 3(31) of ERISA. A-19 (f) On a timely basis, Peoples and Peoples Bank have made all contributions or payments to or under each plan or arrangement listed in the Disclosure Schedule as required pursuant to each such plan or arrangement, any collective bargaining agreements or other provision for reserves to meet contributions and payments under such plans or arrangements which have not been made because they are not yet due. (g) None of the plans or arrangements listed in the Disclosure Schedule owns (or has owned within the past 60 months) any Peoples Common or other securities of Peoples, Peoples Bank or a related entity. SECTION 2.14. TITLE TO PROPERTIES; INSURANCE. Peoples and Peoples Bank have marketable title, insurable at standard rates, free and clear of all liens, charges and encumbrances (except taxes which are a lien but not yet payable and liens, charges or encumbrances reflected in the Peoples Financial Statements and easements, rights-of-way, and other restrictions which are not material and, in the case of Other Real Estate Owned, as such real estate is internally classified on the books of Peoples Bank, rights of redemption under applicable law) to all real properties reflected on the Peoples Financial Statements as being owned by Peoples or Peoples Bank, respectively. All material leasehold interests used by Peoples and Peoples Bank in their respective operations are held pursuant to lease agreements which are valid and enforceable in accordance with their terms. All such properties comply in all material respects with all applicable private agreements, zoning requirements and other governmental laws and regulations relating thereto and there are no condemnation proceedings pending or, to the knowledge of Peoples, threatened with respect to such properties. Peoples and Peoples Bank have valid title or other ownership or use rights under licenses to all material intangible personal or intellectual property used by Peoples and Peoples Bank in their respective business free and clear of any claim, defense or right of any other person or entity which is material to such property, subject only to rights of the licensor pursuant to applicable license agreements, which rights do not materially adversely interfere with the use or enjoyment of such property. All insurable properties owned or held by Peoples or Peoples Bank are insured in such amounts, and against fire and other risks insured against by extended coverage and public liability insurance, as is customary with companies of the same size and in the same business. A-20 SECTION 2.15. ENVIRONMENTAL MATTERS. (a) As used in this Agreement, "Environmental Laws" means all local, state and federal environmental, health and safety laws and regulations in all jurisdictions in which Peoples or Peoples Bank has done business or owned property, including, without limitation, the Federal Resource Conservation and Recovery Act, the Federal Comprehensive Environmental Response, Compensation and Liability Act, the Federal Clean Water Act, the Federal Clean Air Act, and the Federal Occupational Safety and Health Act. (b) Neither (i) the conduct by Peoples and Peoples Bank of operations at any property, nor (ii) any condition of any property owned by Peoples or Peoples Bank within the past ten (10) years and used in their business operations, nor (iii) to the knowledge of Peoples the condition of any property owned by them within the past ten (10) years but not used in their business operations, nor (iv) to the knowledge of Peoples the condition of any property held by them as a trust asset within the past ten (10) years, violates or violated Environmental Laws in any material respect, and no condition or event has occurred with respect to any such property that, with notice or the passage of time, or both, would constitute a material violation of Environmental Laws or obligate (or potentially obligate) Peoples or Peoples Bank to remedy, stabilize, neutralize or otherwise alter the environmental condition of any such property. Neither Peoples nor Peoples Bank has received any notice from any person or entity that Peoples or Peoples Bank or the operation of any facilities or any property owned by either of them, or held as a trust asset, are or were in violation of any Environmental Laws or that either of them is responsible (or potentially responsible) for the cleanup of any pollutants, contaminants, or hazardous or toxic wastes, substances or materials at, on or beneath any such property. SECTION 2.16. COMPLIANCE WITH LAW. Peoples and Peoples Bank each have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable it to conduct their respective businesses as presently conducted and are in compliance in all material respects with all applicable laws and regulations, the violation of which would be material. A-21 SECTION 2.17. BROKERAGE. Except as set forth in the Disclosure Schedule, there are no claims, agreements, arrangements, or understandings (written or otherwise) for brokerage commissions, finders' fees or similar compensation in connection with the Mergers payable by Peoples or Peoples Bank. SECTION 2.18. MATERIAL CONTRACTS. Except as set forth in the Disclosure Schedule, neither Peoples nor Peoples Bank is a party to or bound by any oral or written (i) material agreement, contract or indenture under which it has borrowed or will borrow money (not including federal funds and money deposited, including without limitation, checking and savings accounts and certificates of deposit and borrowings from the FHLBB and the FRB); (ii) material guaranty of any obligation for the borrowing of money or otherwise, excluding endorsements made for collection and guarantees made in the ordinary course of business and letters of credit issued in the ordinary course of business; (iii) contract, arrangement or understanding with any present or former officer, director or shareholder (except for deposit or loan agreements entered into in the ordinary course of business); (iv) material license, whether as licensor or licensee; (v) contract or commitment for the purchase of materials, supplies or other real or personal property in an amount in excess of $10,000 or for the performance of services over a period of more than thirty days and involving an amount in excess of $10,000; (vi) joint venture or partnership agreement or arrangement; (vii) contract arrangement or understanding with any present or former consultant, advisor, investment banker, broker, attorney or accountant; or (viii) contract, agreement or other commitment not made in the ordinary course of business. SECTION 2.19. COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT. (a) To the best of Peoples's knowledge, Peoples and Peoples Bank and their respective properties (including those held by either of them in a fiduciary capacity) are in compliance with all applicable provisions of the Americans with Disabilities Act (the "ADA"), and (b) no action under the ADA against Peoples, Peoples Bank or any of its properties has been initiated nor, to the best of Peoples's knowledge, has been threatened or contemplated. A-22 SECTION 2.20. STATEMENTS TRUE AND CORRECT. None of the information supplied or to be supplied by Peoples or Peoples Bank for inclusion in any documents to be filed with the FRB, the OCC, the SEC, the IDFI, or any other regulatory authority in connection with the Mergers will, at the respective times such documents are filed, be false or misleading with respect to any material fact or omit to state any material fact necessary in order to make the statements therein not misleading. SECTION 2.21. PEOPLES'S KNOWLEDGE. With respect to representations and warranties herein that are made or qualified as being made "to the knowledge of Peoples" or words of similar import, it is understood and agreed that matters within the knowledge of the directors and the officers of Peoples and Peoples Bank shall be considered to be within the knowledge of Peoples. ARTICLE THREE REPRESENTATIONS OF GERMAN AMERICAN, GAHC AND UNION German American, GAHC and Union hereby severally make the following representations and warranties: SECTION 3.01. ORGANIZATION AND CAPITAL STOCK. (a) German American is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (b) GAHC is a corporation duly incorporated and validly existing under the IBCL and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. (c) Union is a corporation duly incorporated and validly existing under the IFIA and has the corporate power to own all of its property and assets, to incur all of its liabilities and to carry on its business as now being conducted. A-23 (d) German American has authorized capital stock of (i) 5,000,000 shares of German American Common, of which, as of the date of this Agreement, 1,827,546 shares are issued and outstanding, and (ii) 500,000 shares of preferred stock, $10.00 par value per share, of which no shares are issued and outstanding. All of the issued and outstanding shares of German American Common are duly and validly issued and outstanding, fully paid and non-assessable. (e) GAHC has authorized capital stock of 200,000 shares of common stock, $1 par value per share (the "GAHC Common"), and 12,000 shares of preferred stock, $1 par value. As of the date of this Agreement, 9,999 of the issued and outstanding shares of GAHC Common are duly and validly issued and outstanding, fully paid and non-assessable, and none of the shares of GAHC preferred stock are issued or outstanding. (f) Union has authorized capital stock of 4,800 shares of common stock, $100 par value per share (the "Union Common"). As of the date of this Agreement, all of the shares of Union Common are duly and validly issued and outstanding, fully paid, and owned by German American. (g) The shares of German American Common that are to be issued to the shareholders of Peoples pursuant to the Holding Company Merger have been duly authorized and, when issued in accordance with the terms of this Agreement, will be validly issued and outstanding, fully paid and non-assessable. SECTION 3.02. AUTHORIZATION. The Boards of Directors of German American, GAHC and Union have each, by all appropriate action, approved this Agreement and the Mergers and authorized the execution hereof on their behalf by their duly authorized officers and the performance by each such entity of its obligations hereunder. Nothing in the Articles of Incorporation or Bylaws of German American, GAHC or Union, as amended, or any other agreement, instrument, decree, proceeding, law or regulation (except as specifically referred to in or contemplated by this Agreement) by or to which either of them or any of their subsidiaries is bound or subject would prohibit German American, GAHC or Union from entering into and consummating this Agreement and the Mergers on the terms and conditions herein contained. This Agreement has been duly and validly A-24 executed and delivered by German American, GAHC and Union and constitutes a legal, valid and binding obligation of German American, GAHC and Union enforceable against German American, GAHC and Union in accordance with its terms and no other corporate acts or proceedings are required to be taken by German American, GAHC or Union to authorize the execution, delivery and performance of this Agreement. Except for any requisite approvals of the FRB, OCC and IDFI and the filing of a registration statement with the SEC and certain state securities regulatory agencies, no notice to, filing with, authorization by, or consent or approval of, any federal or state regulatory authority is necessary for the execution and delivery of this Agreement or the consummation of the Mergers by German American, GAHC or Union. SECTION 3.03. SUBSIDIARIES. Each of German American's subsidiaries is duly organized and validly existing under the laws of the jurisdiction of its incorporation and has the corporate power to own its respective properties and assets, to incur its respective liabilities and to carry on its respective business as now being conducted. SECTION 3.04. FINANCIAL INFORMATION. The consolidated balance sheet of German American and its subsidiaries as of December 31, 1995 and related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended together with the notes thereto, included in German American's most recent Annual Report on Form 10- K, as filed with the SEC (the "10-K"), and the unaudited consolidated balance sheets of German American and its subsidiaries as of March 31 and June 30, 1996, and the related unaudited consolidated statements of income, changes in shareholders' equity and cash flows for the periods then ended included in German American's Quarterly Reports on Form 10-Q for the quarters ended March 31 and June 30, 1996 as filed with the SEC (the "10-Q Reports") (collectively the financial statements and notes thereto included in the 10-Q Reports and the 10-K are sometimes referred to as the "German American Financial Statements"), have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as disclosed therein) and fairly present the consolidated financial position and the consolidated results of operations, changes in shareholders' equity and cash flows of German American and its consolidated subsidiaries as of the dates and for the periods indicated (subject, in the case of interim financial statements, to normal recurring year-end adjustments, none of which will be material). A-25 SECTION 3.05. ABSENCE OF CHANGES. Since December 31, 1995 (and except to the extent reflected in the 10- Q Reports), there has not been any material adverse change in the consolidated financial condition or the consolidated results of operations or the business of German American and its subsidiaries, taken as a whole. SECTION 3.06. REPORTS. Since January 1, 1993 (or, in the case of subsidiaries of German American, the date of acquisition thereof by German American, if later), German American and each of its subsidiaries have filed all reports, notices and other statements, together with any amendments required to be made with respect thereto, that it was required to file with (i) the SEC, (ii) the FRB, (iii) the FDIC, (iv) the IDFI, (v) any applicable state securities or banking authorities, and (vi) any other governmental authority with jurisdiction over German American or any of its subsidiaries. As of their respective dates, each of such reports and documents, as amended, including the financial statements, exhibits and schedules thereto, complied in all material respects with the relevant statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. None of the information included in such reports or documents was, at their respective dates of filing, false or misleading with respect to any material fact, or omitted to state any material fact necessary in order to make the statements therein not misleading, on a consolidated basis, taking into account the circumstances under which such reports or documents were filed and considering the total mix of information that was at the time publicly available concerning German American and its subsidiaries. SECTION 3.07. ABSENCE OF LITIGATION. There is no material litigation, claim or other proceeding pending or, to the knowledge of German American, threatened, before any judicial, administrative or regulatory agency or tribunal against German American or any of its subsidiaries, or to which the property of German American or any of its subsidiaries is subject, which is required to be disclosed in SEC reports under Item 103 of Regulation S-K, and which has not been so disclosed. SECTION 3.08. ABSENCE OF AGREEMENTS WITH BANKING AUTHORITIES. Neither German American nor any of its subsidiaries is subject to any order (other than orders applicable to bank holding companies or banks generally) or is a party to any agreement or memorandum A-26 of understanding with any federal or state agency charged with the supervision or regulation of banks or bank holding companies, including without limitation the FDIC, the DFI and the FRB. SECTION 3.09. COMPLIANCE WITH LAW. German American and its subsidiaries have all material licenses, franchises, permits and other governmental authorizations that are legally required to enable them to conduct their respective businesses as presently conducted and are in compliance in all material respects with all applicable laws and regulations, the violation of which would be material. ARTICLE FOUR COVENANTS OF PEOPLES AND PEOPLES BANK SECTION 4.01. CONDUCT OF BUSINESS. (a) Peoples and Peoples Bank shall continue to carry on their respective businesses, and shall discharge or incur obligations and liabilities, only in the ordinary course of business as heretofore conducted and, by way of amplification and not limitation with respect to such obligation, neither Peoples nor Peoples Bank will, without the prior written consent of German American: (i) declare or pay any dividend or make any other distribution to shareholders, whether in cash, stock or other property, except as provided in Section 4.09 of this Agreement; or (ii) issue (or agree to issue) any common or other capital stock or any options, warrants or other rights to subscribe for or purchase common or any other capital stock or any securities convertible into or exchangeable for any capital stock; or (iii) directly or indirectly redeem, purchase or otherwise acquire (or agree to redeem, purchase or acquire) (except for shares acquired in satisfaction of a debt previously contracted) any of their own common or any other capital stock; or (iv) effect a split, reverse split, reclassification, or other similar change in, or of, any common or other capital stock or otherwise reorganize or recapitalize; or (v) change the Articles of Incorporation or Bylaws of Peoples or the Articles of Association or Bylaws of Peoples Bank; or A-27 (vi) pay or agree to pay, conditionally or otherwise, any bonus (other than year end bonuses up to a maximum of $120,000 in accordance with existing plans and policies consistent with past practice, provided that the income base used for purposes of calculating bonuses shall exclude net gain from the sale of investment securities, loans and other assets even if past bonus practice would not have excluded such net gain), additional compensation (other than ordinary and normal salary increases consistent with past practices) or severance benefit or otherwise make any changes out of the ordinary course of business with respect to the fees or compensation payable or to become payable to consultants, advisors, investment bankers, brokers, attorneys, accountants, directors, officers or employees or, except as required by law, adopt or make any change in any Employee Plan or other arrangement or payment made to, for or with any of such consultants, advisors, investment bankers, brokers, attorneys, accountants, directors, officers or employees; provided, however, that Peoples and Peoples Bank may pay the fees, expenses and other compensation of consultants, advisors, investment bankers, brokers, attorneys and accountants when, if, and as earned in accordance with the terms of the contracts, arrangements or understandings of Peoples or Peoples Bank specifically disclosed on the Disclosure Schedule; (vii) borrow or agree to borrow any material amount of funds except in the ordinary course of business, or directly or indirectly guarantee or agree to guarantee any material obligations of others except in the ordinary course of business or pursuant to outstanding letters of credit; or (viii) make or commit to make any new loan or issue or commit to issue any new letter of credit or any new or additional discretionary advance under any existing line of credit, or purchase or agree to purchase any interest in a loan participation, in aggregate principal amounts (A) in excess of $250,000 to any one borrower (or group of affiliated borrowers) or (B) that would cause Peoples Bank's credit extensions or commitments to any one borrower (or group of affiliated borrowers) to exceed $750,000 (German A-28 American's consent to credit extensions in the ordinary course of business will not be unreasonably withheld); or (ix) other than U.S. Treasury obligations or asset-backed securities issued or guaranteed by United States governmental agencies or financial institution certificates of deposit insured by the FDIC, in either case having an average remaining life of five years or less (except that maturities may extend to seven years on variable-rate securities), purchase or otherwise acquire any investment security for their own accounts, or sell any investment security owned by either of them which is designated as held-to-maturity, or engage in any activity that would require the establishment of a trading account for investment securities; or (x) increase or decrease the rate of interest paid on time deposits, or on certificates of deposit, except in a manner and pursuant to policies consistent with past practices; or (xi) enter into or amend any agreement, contract or commitment out of the ordinary course of business; or (xii) except in the ordinary course of business, place on any of their assets or properties any mortgage, pledge, lien, charge, or other encumbrance; or (xiii) except in the ordinary course of business, cancel, release, compromise or accelerate any material indebtedness owing to Peoples or Peoples Bank, or any claims which either of them may possess, or voluntarily waive any material rights with respect thereto; or (xiv) sell or otherwise dispose of any real property or any material amount of any personal property other than properties acquired in foreclosure or otherwise in the ordinary course of collection of indebtedness to Peoples or Peoples Bank; or A-29 (xv) foreclose upon or otherwise take title to or possession or control of any real property without first obtaining a phase one environmental report thereon, prepared by a reliable and qualified person or firm acceptable to German American, which indicates that the property is free of pollutants, contaminants or hazardous or toxic waste materials; provided, however, that neither Peoples nor Peoples Bank shall be required to obtain such a report with respect to single family, non-agricultural residential property of one acre or less to be foreclosed upon unless it has reason to believe that such property might contain such materials or otherwise might be contaminated; or (xvi) commit any act or fail to do any act which will cause a material breach of any material agreement, contract or commitment; or (xvii) violate any law, statute, rule, governmental regulation or order, which violation might have a material adverse effect on its business, financial condition, or earnings; or (xviii) purchase any real or personal property or make any other capital expenditure where the amount paid or committed therefor is in excess of $50,000 other than purchases of property made in the ordinary course of business in connection with loan collection activities or foreclosure sales in connection with any of Peoples's or Peoples Bank's loans, or (xix) issue certificate(s) for shares of Peoples Common to any Peoples shareholder in replacement of certificate(s) claimed to have been lost or destroyed without first obtaining from such shareholder(s), at the expense of such shareholder(s), a surety bond from a recognized insurance company in an amount that would indemnify Peoples (and its successors) against lost certificate(s) but not less than $50 per share of Peoples Common, and obtaining a usual and customary affidavit of loss and indemnity agreement from such shareholder(s); provided, however, that Peoples may waive the surety bond requirement in connection with the issuance of replacement certificates to any shareholder if the A-30 number of shares of Peoples Common so reissued (together with the number of shares previously reissued since July 3, 1996 to such shareholder and all other shareholders who are affiliated or associated with such shareholder) does not exceed an aggregate of 300 shares. (b) Neither Peoples nor Peoples Bank shall, without the prior written consent of German American, engage in any transaction or take any other action that would render untrue in any material respect any of the representations and warranties of Peoples or Peoples Bank contained in Article Two hereof if such representations and warranties were given as of the date of such transaction or action. (c) Peoples shall promptly notify German American in writing of the occurrence of any matter or event known to Peoples or Peoples Bank that is, or is likely to become, materially adverse to the business, operations, properties, assets or condition (financial or otherwise) of Peoples or Peoples Bank taken as a whole. (d) Neither Peoples nor Peoples Bank shall (a) directly or indirectly solicit, encourage or facilitate (nor shall they permit any of their respective officers, directors, employees or agents directly or indirectly to solicit, encourage or facilitate), including by way of furnishing information other than the terms of this Agreement, any inquiries or proposals from third parties for a merger, consolidation, share exchange or similar transaction involving Peoples or Peoples Bank or for the acquisition of the stock or substantially all of the assets or business of peoples or Peoples Bank, or (b) subject to the fiduciary duties of the Directors of Peoples as advised by counsel in a written opinion, discuss with or enter into conversations with any person concerning any such merger, consolidation, share exchange, acquisition or other transaction. Peoples shall promptly notify German American orally (to be confirmed in writing as soon as practicable thereafter) of all of the relevant details concerning any inquiries or proposals that it may receive relating to any such matters, including actions it intends to take with respect to such matters. A-31 SECTION 4.02. BREACHES. Peoples shall, in the event it has knowledge of the occurrence of any event or condition which would cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known prior to the date of this Agreement) of any of its or Peoples Bank's representations or agreements contained or referred to in this Agreement, give prompt notice thereof to German American and use its best efforts to prevent or promptly remedy the same. SECTION 4.03. SUBMISSION TO SHAREHOLDERS. Peoples shall cause to be duly called and held, on a date mutually selected by German American and Peoples, a special meeting of its shareholders (the "Peoples Shareholders' Meeting") for submission of this Agreement and the Holding Company Merger for approval of Peoples shareholders as required by the IBCL. In connection with the Peoples Shareholders' Meeting, (i) Peoples shall cooperate with and assist German American in preparing and filing a Proxy Statement/Prospectus (the "Proxy Statement/Prospectus") with the SEC in accordance with SEC requirements and Peoples shall mail it to its shareholders, (ii) Peoples shall furnish German American all information concerning itself that German American may reasonably request in connection with such Proxy Statement/Prospectus, and (iii) the Board of Directors of Peoples shall (unless in the written opinion of counsel for Peoples the fiduciary duties of the Board of Directors prohibit such a recommendation, in which event the individual members of the Board of Directors shall nevertheless remain personally obligated to support the Agreement and the Holding Company Merger pursuant to their personal undertakings on the signature page of this Agreement) unanimously recommend to its shareholders the approval of this Agreement and the Holding Company Merger contemplated hereby and use its best efforts to obtain such shareholder approval. SECTION 4.04. FINANCIAL INFORMATION. Peoples will, at its expense, commence preparation of financial statements, Guide 3 statistical data, selected financial data, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" (Items 301, 302, 303 and 304(b) of SEC Regulation S-K) ("MD&A") in compliance with SEC requirements for inclusion in the Registration Statement, including unaudited financial statements and related Guide 3 and MD&A as of and for the appropriate quarterly and year-to-date periods ending September 30, A-32 1996, and Peoples shall use its best efforts to provide such financial statements and data and MD&A to German American in EDGAR format as soon as practicable but in no event later than October 21, 1996. SECTION 4.05. CONSUMMATION OF AGREEMENT. Peoples shall use its best efforts to perform and fulfill all conditions and obligations on its part to be performed or fulfilled under this Agreement and to effect the Mergers in accordance with the terms and provisions hereof. Peoples shall furnish to German American in a timely manner all information, data and documents in the possession of Peoples or Peoples Bank requested by German American as may be required to obtain any necessary regulatory or other approvals of the Mergers (including the application of Peoples Bank to the OCC under the Bank Merger Act with respect to the Bank Merger) or to file with the SEC a registration statement on Form S-4 (the "Registration Statement") relating to the shares of German American Common to be issued to the shareholders of Peoples pursuant to the Mergers and this Agreement, and shall otherwise cooperate fully with German American to carry out the purpose and intent of this Agreement. SECTION 4.06. ENVIRONMENTAL REPORTS. Except as German American shall otherwise consent with respect to any residential real estate (which consent will not be unreasonably withheld by German American), Peoples shall, at German American's expense, cooperate with an environmental consulting firm designated by German American in connection with the conduct by such firm of a phase one environmental investigation on all real property owned or leased by Peoples or its subsidiaries as of the date of this Agreement, and any real property acquired or leased by Peoples or its subsidiaries after the date of this Agreement, except as otherwise provided in Section 4.01(a)(xv). If further investigation procedures are required as to any property by the report of the phase one investigation in German American's reasonable opinion, Peoples shall as soon as practicable, at Peoples's expense, commission the taking of such further procedures and provide a report of the results of such further procedures to German American. German American shall have fifteen (15) business days from the receipt of any such investigation report to notify Peoples of any objection to the contents of any such report. Should the cost of taking all remedial and corrective actions and measures (i) required by applicable law, or (ii) recommended or suggested by such report or reports A-33 and prudent in light of the findings of such report, in the aggregate, exceed the sum of $100,000, as reasonably estimated by the environmental expert retained for such purpose by German American and reasonably acceptable to Peoples, or if the cost of such actions and measures cannot be so reasonably estimated by such expert with any reasonable degree of certainty, then German American shall have the right pursuant to Section 7.03 hereof, for a period of 10 business days following receipt of such estimate or indication that the cost of such actions and measures cannot be so reasonably estimated, to terminate this Agreement without further obligation to Peoples, which shall be German American's sole remedy in such event. SECTION 4.07. RESTRICTION ON RESALES. Peoples shall obtain and deliver to German American, at least thirty (30) days prior to the Closing Date, signed representations, in form reasonably acceptable to German American, of each shareholder who may reasonably be deemed an "affiliate" of Peoples as of the date of the Shareholders' Meeting within the meaning of such term as used in Rule 145 under the Securities Act of 1933, as amended (the "Securities Act"), regarding their prospective compliance with the provisions of such Rule 145. Peoples shall also obtain and deliver to German American at least 30 days prior to the Closing Date, the signed agreements of each shareholder who may reasonably be deemed an "affiliate" (as such term is described in the preceding sentence) of Peoples as of the date of the Shareholders' Meeting agreeing not to sell any shares of German American Common or otherwise reduce his or her risk relative to such shares, until such time as financial results covering at least thirty (30) days of post-Merger combined operations have been filed by German American with the SEC in a quarterly report on Form 10-Q or in an annual report on Form 10-K. SECTION 4.08. ACCESS TO INFORMATION. Peoples shall permit German American reasonable access, in a manner which will avoid undue disruption or interference with Peoples's normal operations, to its and Peoples Bank's properties and shall disclose and make available to German American all books, documents, papers and records relating to its and Peoples Bank's assets, stock, ownership, properties, operations, obligations and liabilities, including, but not limited to, all books of account (including general ledgers), tax records, minute books of directors' and shareholders' meetings, organizational documents, A-34 material contracts and agreements, loan files, filings with any regulatory authority, accountants' workpapers, litigation files, plans affecting employees, and any other business activities or prospects in which German American may have an interest in light of the transactions contemplated by this Agreement. During the period from the date of this Agreement to the Effective Time, Peoples will cause one or more of it or Peoples Bank's designated representatives to confer on a regular basis with the President of German American, or any other person designated in a written notice given to Peoples by German American pursuant to this Agreement, to report the general status of the ongoing operations of Peoples and Peoples Bank. Peoples will promptly notify German American of any material change in the normal course of the operation of its business or properties and of any regulatory complaints, investigations or hearings (or communications indicating that the same may be contemplated), or the institution or the threat of litigation involving Peoples or Peoples Bank, and will keep German American fully informed of such events. German American will hold any such information which is nonpublic in confidence in accordance with the provisions of Section 8.01 hereof. SECTION 4.09. DIVIDENDS. Notwithstanding Section 4.01(a) of this Agreement, Peoples may (in the absence of any material adverse change in its consolidated financial condition, results of operations, or business other than the adverse change that is expected to result from the expenses associated with the Mergers), continue to declare and pay quarterly cash dividends (during September and December 1996 for the respective quarters ending September 30 and December 31, 1996 and during the third month of each subsequent calendar quarter with respect to that calendar quarter) to Peoples shareholders in a quarterly amount not exceeding $.07 per share of Peoples Common, or an aggregate of not more than $.28 per share for 1996. German American typically considers the declaration of cash dividends on German American Common at meetings of its Board of Directors held the first month of each calendar quarter, and typically declares any such dividends to be payable to holders of record of German American Common as of a subsequent date that is within the same calendar month as the month of declaration. In order to assure that Peoples shareholders will be entitled to receive, at the end of A-35 each calendar quarter, a dividend with respect to his or her Peoples Common, or a dividend with respect to the German American Common to be exchanged therefor pursuant to the Holding Company Merger, but not both, Peoples shall (commencing with its dividend for the first quarter of 1997 expected to be considered at the March 1997 meeting of the Peoples Board if the Effective Time has for any reason not then occurred) declare its quarterly dividends to be payable to its shareholders of record as of a date that is after the date in the following month that is established by German American as the record date for the following month's cash dividend with respect to German American Common. ARTICLE FIVE COVENANTS OF GERMAN AMERICAN AND UNION SECTION 5.01. REGULATORY APPROVALS AND REGISTRATION STATEMENT. (a) German American shall file (or cause GAHC and Union to file or cooperate with Peoples and Peoples Bank in filing) all regulatory applications required in order to consummate the Mergers, including all necessary applications for the prior approvals of the FRB, the OCC, and the IDFI. German American shall use its best efforts to cause such banking agency regulatory applications to be filed on or before September 16, 1996. German American shall keep Peoples reasonably informed as to the status of such applications and promptly send or deliver copies of such applications, and of any supplementally filed materials, to counsel for Peoples. (b) German American shall file with the SEC the Registration Statement relating to the shares of German American Common to be issued to the shareholders of Peoples pursuant to this Agreement, and shall use its best efforts to file such Registration Statement by November 7, 1996 and shall use its best efforts to cause the Registration Statement to become effective as soon as practicable. At the time the Registration Statement becomes effective, the form of the Registration Statement shall comply in all material respects with the provisions of the Securities Act and the published rules and regulations thereunder, and shall not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not false or misleading. At the time of the A-36 mailing thereof to the shareholders of Peoples and German American and at the time of the Peoples Shareholders' Meeting, and the German American Shareholder Meeting the Proxy Statement/Prospectus included as part of the Registration Statement, as amended or supplemented by any amendment or supplement, shall not contain any untrue statement of a material fact or omit to state any material fact regarding German American or the Holding Company Merger necessary to make the statements therein not false or misleading. German American shall timely file all documents required to obtain all necessary Blue Sky permits and approvals, if any, required to carry out the Merger shall pay all expenses incident thereto and shall use its best efforts to obtain such permits and approvals on a timely basis. German American shall promptly and properly prepare and file any other filings required under the Securities Exchange Act of 1934 (the "Exchange Act") relating to the Mergers, or otherwise required of it under the Exchange Act prior to the Effective Time, and shall deliver copies thereof to Peoples's counsel promptly upon the filing thereof with the SEC. SECTION 5.02. BREACHES. German American shall, in the event it has knowledge of the occurrence of any event or condition which would cause or constitute a breach (or would have caused or constituted a breach had such event occurred or been known prior to the date of this Agreement) of any of its representations or agreements contained or referred to in this Agreement, give prompt notice thereof to Peoples and use its best efforts to prevent or promptly remedy the same. SECTION 5.03. CONSUMMATION OF AGREEMENT. German American shall use its best efforts to perform and fulfill all conditions and obligations to be performed or fulfilled under this Agreement and to effect the Mergers in accordance with the terms and conditions of this Agreement, and use its best efforts to cause the Closing to occur on January 31, 1997 or as soon thereafter as practicable. SECTION 5.04. DIRECTORS' AND OFFICERS' INDEMNIFICATION. (a) Following the Effective Time, German American will provide the directors and officers of Peoples and Peoples Bank from time to time with the same directors' and officers' liability insurance coverage that German American provides to directors and officers of its other banking subsidiaries. A-37 (b) For six (6) years after the Effective Time, German American shall (and shall cause the Surviving Bank to) indemnify, defend and hold harmless the present and former officers and directors of Peoples and Peoples Bank (each, an "Indemnified Party") against all losses, expenses, claims, damages or liabilities arising out of actions or omissions (arising from their present or former status as officers or directors) occurring on or prior to the Effective Time to the full extent then permitted under the applicable provisions of the IBCL and the National Bank Act and public policy. (c) If during the six (6) year period after the Effective Time German American or the Surviving Bank or any of its or their successors or assigns (i) shall consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) shall transfer all or substantially all of its properties and assets to any individual, corporation or other entity, then and in each such case, proper provision shall be made so that the successors and assigns of German American and/or the Surviving Bank shall assume the obligations set forth in this Section 5.04. SECTION 5.05. BOARD OF DIRECTORS REPRESENTATION. German American shall cause the Chairman of the Board of Peoples and one other mutually acceptable representative of the Board of Peoples (as it is constituted immediately prior to the Effective Time) to be appointed to the Board of Directors of German American promptly after the Effective Time. SECTION 5.06. PRESERVATION OF BUSINESS. German American shall: (a) conduct its business substantially in the manner as is presently being conducted and in the ordinary course of business and not amend its articles of incorporation in any manner that requires the approval of shareholders of German American under the IBCL; (b) file, and cause its subsidiaries to file, all required reports with applicable regulatory authorities; (c) comply with all laws, statutes, ordinances, rules or regulations applicable to it and to the conduct of its business, the noncompliance with which results or could result in a material adverse effect on the financial condition, results of operations, business, assets or capitalization of German American on a consolidated basis; and (d) comply in all material respects with each contract, agreement, commitment, obligation, understanding, arrangement, A-38 lease or license to which it is a party by which it is or may be subject or bound, the breach of which could result in a material adverse effect on the financial condition, results of operations, business, assets or capitalization of German American on a consolidated basis. SECTION 5.07. SECURITIES AND EXCHANGE COMMISSION FILINGS. German American will provide Peoples with copies of all filings made by German American with the SEC under the Securities Exchange Act of 1934 ("1934 Act"), and the Securities Act of 1933 ("1933 Act") and the respective rules and regulations of the SEC thereunder as soon as practicable after such filings are made at any time prior to the Effective Time. SECTION 5.08. RULE 144(C) INFORMATION. For not less than the two-year period immediately following the Effective Time, German American shall make available adequate current public information about itself as that terminology is used in and as required by Rule 144(c) of the SEC under the 1933 Act. SECTION 5.09. AUTHORIZATION OF COMMON STOCK. On the Effective Time and on such subsequent dates when the former shareholders of Peoples surrender their Peoples share certificates for cancellation, the shares of German American Common to be exchanged with former shareholders of Peoples shall have been duly authorized and validly issued by German American and shall be fully paid and non-assessable and subject to no pre- emptive rights. SECTION 5.10. PAST SERVICE CREDIT. Employees of Peoples Bank shall receive full vesting and eligibility credit under German American's defined contribution retirement plans for their years of service to Peoples Bank. SECTION 5.11. COMMUNITY FOUNDATION. If Peoples Bank determines following the Effective Time to form a non-profit foundation, managed by its Board of Directors for the benefit of the communities served by Peoples Bank, German American will support the initial year's funding by Peoples Bank of such foundation of at least $28,000 and future years' fundings at levels not less than Peoples Bank's past charitable contributions practices. A-39 ARTICLE SIX CONDITIONS PRECEDENT TO THE MERGERS SECTION 6.01. CONDITIONS OF GERMAN AMERICAN'S AND UNION'S OBLIGATIONS. German American's and Union's obligations to effect the Mergers shall be subject to the satisfaction (or waiver by German American, GAHC and Union) prior to or on the Closing Date of the following conditions: (a) The representations and warranties made by Peoples and Peoples Bank in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on and as of the Closing Date. (b) Peoples and Peoples Bank shall have performed and complied in all material respects with all of its obligations and agreements required to be performed on or prior to the Closing Date under this Agreement. (c) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers shall be in effect, nor shall any proceeding by any bank regulatory authority, governmental agency or other person seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Mergers which makes the consummation of the Mergers illegal. (d) All necessary regulatory approvals, consents, authorizations and other approvals required by law for consummation of the Mergers shall have been obtained and all waiting periods required by law shall have expired. (e) German American shall have received the environmental reports required by Sections 4.06 and 4.01(a)(xv) hereof and shall not have elected, pursuant to Section 4.06 hereof, to terminate and cancel this Agreement. (f) German American shall have received all documents required to be received from Peoples or Peoples Bank on or prior to the Closing Date, all in form and substance reasonably satisfactory to German American. A-40 (g) German American shall have received a letter, dated as of the Effective Time, from Crowe, Chizek & Co., its independent public accountants, to the effect that the Mergers will qualify for pooling of interests accounting treatment under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with this Agreement. (h) The Registration Statement shall be effective under the Securities Act and no stop orders suspending the effectiveness of the Registration Statement shall be in effect or proceedings for such purpose pending before or threatened by the SEC. (i) German American shall have received from its counsel, Leagre & Barnes, an opinion to the effect that if the Mergers are consummated in accordance with the terms set forth in this Agreement, (i) the Holding Company Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by the holders of shares of Peoples Common upon receipt of the Merger consideration (except for cash received in lieu of fractional shares); (iii) the basis of shares of German American Common received by the shareholders of Peoples will be the same as the basis of shares of Peoples Common exchanged therefor; and (iv) the holding period of the shares of German American Common received by the shareholders of Peoples will include the holding period of the shares of Peoples Common exchanged therefor, provided such shares were held as capital assets as of the Effective Time. SECTION 6.02. CONDITIONS OF PEOPLES'S AND PEOPLES BANK'S OBLIGATIONS. Peoples's and Peoples Bank's obligations to effect the Mergers shall be subject to the satisfaction (or waiver by Peoples and Peoples Bank) prior to or on the Closing Date of the following conditions: (a) The representations and warranties made by German American, GAHC and Union in this Agreement shall be true in all material respects on and as of the Closing Date with the same effect as though such representations and warranties had been made or given on the Closing Date. (b) German American, GAHC and Union shall each have performed and complied in all material respects with all of its obligations and agreements required to be performed prior to the Closing Date under this Agreement. A-41 (c) No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Mergers shall be in effect, nor shall any proceeding by any bank regulatory authority, other governmental agency or other person seeking any of the foregoing be pending. There shall not be any action taken, or any statute, rule, regulation or order enacted, enforced or deemed applicable to the Mergers which makes the consummation of the Mergers illegal. (d) All necessary regulatory approvals, consents, authorizations and other approvals required by law for consummation of the Mergers, including the requisite approval of the Mergers by the shareholders of Peoples, shall have been obtained and all waiting periods required by law shall have expired. (e) Peoples shall have received all documents required to be received from German American, GAHC and Union on or prior to the Closing Date, all in form and substance reasonably satisfactory to Peoples. (f) The Registration Statement shall be effective under the Securities Act and no stop orders suspending the effectiveness of the Registration Statement shall be in effect or proceedings for such purpose pending before or threatened by the SEC. (g) Peoples shall have received from counsel for German American, Leagre & Barnes, an opinion reasonably satisfactory to Peoples to the effect that if the Mergers are consummated in accordance with the terms set forth in this Agreement, (i) the Holding Company Merger will constitute a reorganization within the meaning of Section 368(a) of the Code; (ii) no gain or loss will be recognized by the holders of shares of Peoples Common upon receipt of the Merger Consideration (except for cash received in lieu of fractional shares); (iii) the basis of German American Common received by the shareholders of Peoples will be the same as the basis of Peoples Common exchanged therefor; and (iv) the holding period of the shares of German American Common received by the shareholders of Peoples will include the holding period of the shares of Peoples Common exchanged therefor, provided such shares were held as capital assets as of the Effective Time. (h) Peoples shall have received an opinion of Austin Associates, Inc., or another qualified investment banking firm or other qualified financial expert, to the effect that, as of the date of the A-42 mailing of the Proxy Statement/Prospectus to the shareholders of Peoples, the Holding Company Merger was fair to the shareholders of Peoples from a financial point of view. (i) Peoples shall have received a letter, dated as of the Effective Time, from Crowe, Chizek & Co., its independent public accountants, to the effect that the Mergers will qualify for pooling of interests accounting treatment under Accounting Principles Board Opinion No. 16 if closed and consummated in accordance with this Agreement. (j) The German American Common to be exchanged for the Peoples Common pursuant to the Holding Company Merger shall have an aggregate value (as measured by the per share average value of the German American Common during the Valuation Period that is utilized to determine the Exchange Ratio pursuant to Section 1.03(a)) of at least $21,100,000. ARTICLE SEVEN TERMINATION OR ABANDONMENT SECTION 7.01. MUTUAL AGREEMENT. This Agreement may be terminated by the mutual written agreement of the parties approved by their respective Boards of Directors at any time prior to the Effective Time, regardless of whether shareholder approval of this Agreement and the Mergers by the shareholders of Peoples shall have been previously obtained. SECTION 7.02. BREACH OF REPRESENTATIONS, WARRANTIES OR COVENANTS. (a) In the event that there is a material breach in any of the representations and warranties or covenants of the parties, which breach is not cured within thirty (30) days after notice to cure such breach is given by the non-breaching party, then the Board of Directors of the non-breaching party, regardless of whether approval by the shareholders of this Agreement and the Mergers shall have been previously obtained, and in addition to any other remedies to which the non-breaching party may be entitled, may terminate and cancel this Agreement effective immediately by providing written notice thereof to the other party hereto. A-43 (b) In the event that this Agreement is terminated (i) as a result of the wilful failure of Peoples or Peoples Bank to perform its obligations in violation of this Agreement or (ii) as the result of the making by any other person or entity not a party to this Agreement of a proposal to Peoples or Peoples Bank contemplating a merger, consolidation, plan of stock exchange, sale of all or substantially all assets, or other business combination with Peoples or Peoples Bank, then, in addition to whatever other legal rights or remedies to which German American may be entitled, Peoples shall, upon German American's demand, (x) pay to German American a termination fee of $422,000 within two business days of termination and (y) reimburse German American for all its out-of-pocket costs and expenses in connection with the Mergers incurred from and after July 3, 1996, including its legal, accounting, environmental and other consulting fees and expenses. If German American is entitled to collect the termination fee, Peoples shall, in addition thereto, pay to German American all costs, charges, expenses (including without limitation the fees and expenses of counsel) and other amounts expended by German American in connection with or arising out of the obligations of Peoples to pay all or a portion of the fee. SECTION 7.03. ADVERSE ENVIRONMENTAL REPORTS. German American may terminate this Agreement as provided by Section 4.06 by giving written notice thereof to Peoples. SECTION 7.04. FAILURE OF CONDITIONS. In the event any of the conditions to the obligations of either party are not satisfied or waived on or prior to the Closing Date, and if any applicable cure period provided in Section 7.02 hereof has lapsed, then the Board of Directors of such party may, regardless of whether approval by its shareholders of this Agreement and the Mergers shall have been previously obtained, terminate and cancel this Agreement on the Closing Date by delivery of written notice thereof to the other party on such date. SECTION 7.05. TERMINATION UPON ADVERSE REGULATORY DETERMINATION. In connection with the filings that the German American, GAHC, Union, Peoples and/or Peoples Bank may be required to make in connection with the Mergers with banking, securities, and antitrust regulatory agencies A-44 ("Agencies"), each party shall use their best efforts to obtain all necessary approvals of, or clearances from, the Agencies, and shall cause their respective agents and advisors to cooperate and use their best efforts in connection therewith. German American (or its subsidiaries) shall be responsible for making the required Merger filings (except to the limited extent that the applicable law, regulations, or forms specify that Peoples (or Peoples Bank) is the appropriate filing party) with the Agencies, and for discussing such filings with the Agencies and responding to comments thereon. If any required filing is disapproved by any of the Agencies, or any determination is made by any of the Agencies that either of the Mergers cannot be consummated except on terms and conditions that are materially adverse from a financial point of view to German American or to the shareholders of Peoples (an "Adverse Determination"), then German American shall promptly advise Peoples of such Adverse Determination and German American's intended course of action with respect thereto. In the event that German American in its sole discretion determines to seek a judicial or regulatory appeal or review (formal or informal) of the Adverse Determination, Peoples and Peoples Bank (and their agents and advisors) shall continue to cooperate with such appeal and review procedure and use its best efforts to assist in connection with obtaining reversal or modification of such Adverse Determination. In the event that (a) German American in its sole discretion elects not to seek an appeal or review of the Adverse Determination or elects in its sole discretion at any time after seeking such an appeal or review to discontinue that effort, or (b) German American seeks such an appeal or review but all avenues for such appeal or review are exhausted without the Adverse Determination having been vacated or overruled or modified in such a manner that the Adverse Determination is no longer materially adverse ("Relief Determination"), or (c) German American seeks such an appeal or review but such appeal or review remains pending on June 30, 1997, without having resulted in a Relief Determination, then either German American or Peoples may terminate this Agreement without obligation to the other on account of the Adverse Determination; provided, however, that German American shall pay Peoples a termination fee of $422,000 within 90 days of any such termination if (x) the Agreement is terminated A-45 in accordance with this sentence solely as a result of an Adverse Determination relating to German American's eligibility to account for the Holding Company Merger under the pooling-of-interests method of accounting for reasons other than the exercise of statutory dissenters rights by shareholders of Peoples who would otherwise be entitled to receive ten percent or more of the German American Common issuable in the Merger, and (y) Peoples and Peoples Bank and their respective agents and advisors have abided by their obligations of cooperation and best efforts expressed in this Section 7.05. SECTION 7.06. SHAREHOLDER APPROVAL DENIAL. If this Agreement and consummation of the Holding Company Merger is not approved by the shareholders of Peoples at the Shareholders' Meeting, then either party may terminate this Agreement by giving written notice thereof to the other party. SECTION 7.07. REGULATORY ENFORCEMENT MATTERS. In the event that Peoples or Peoples Bank shall become a party or subject to any memorandum of understanding, cease and desist order, or civil money penalties imposed by any federal or state agency charged with the supervision or regulation of banks or bank holding companies after the date of this Agreement, then German American may terminate this Agreement by giving written notice thereof to Peoples. SECTION 7.08. LAPSE OF TIME. If the Closing Date does not occur on or prior to June 30, 1997, then this Agreement may be terminated by the Board of Directors of either Peoples or German American by giving written notice thereof to the other party. ARTICLE EIGHT GENERAL PROVISIONS SECTION 8.01. CONFIDENTIAL INFORMATION. The parties acknowledge the confidential and proprietary nature of "Information" (as hereinafter described) which has heretofore been exchanged and which will be received from each other hereunder and agree to hold and keep the same confidential. Such Information will include any and all financial, technical, commercial, marketing, customer or other information concerning the business, operations and affairs of a party that may be provided to the other, irrespective of the form of the communications, by such party's employees or agents. A-46 Such Information shall not include information which is or becomes generally available to the public other than as a result of a disclosure by a party or its representatives in violation of this Agreement. The parties agree that the Information will be used solely for the purposes contemplated by this Agreement and that such Information will not be disclosed to any person other than employees and agents of a party who are directly involved in evaluating the transaction contemplated herein. The Information shall not be used in any way detrimental to a party, including use directly or indirectly in the conduct of the party's business or any business or enterprise in which such party may have an interest, now or in the future, and whether or not now in competition with such other party. SECTION 8.02. RETURN OF DOCUMENTS. Upon termination of this Agreement without the Mergers becoming effective, each party shall deliver to the other originals and all copies of all Information made available to such party and will not retain any copies, extracts or other reproductions in whole or in part of such Information. SECTION 8.03. LIABILITIES. In the event that this Agreement is terminated or the Mergers are abandoned pursuant to the provisions of Article Seven hereof, no party hereto shall have any liability to any other party for costs, expenses, damages, termination fees, or otherwise except to the extent specifically set forth in Section 7.02(b) or the last proviso clause of Section 7.05. Directors, officers and employees of each party hereto shall have no personal liability under this Agreement with respect to the representations and warranties of their respective parties except for fraud or for their personal intentional and knowing participation in the making of false or misleading statements in such representation and warranties. SECTION 8.04. NOTICES. Any notice or other communication hereunder shall be in writing and shall be deemed to have been given or made (a) on the date of delivery, in the case of hand delivery, or (b) three (3) business days after deposit in the United States Registered or Certified Mail, with mailing receipt postmarked by the Postal Service to show date of mailing, postage prepaid, or (c) upon actual receipt if transmitted during business hours by facsimile (but only if receipt of a legible copy of such transmission is confirmed by the recipient); addressed (in any case) as follows: A-47 (a) If to German American, GAHC or Union: German American Bancorp 711 Main Street Box 810 Jasper, Indiana 47546 Attn: George W. Astrike, Chairman of the Board with a copy to: Leagre & Barnes 9100 Keystone Crossing Suite 800 P. O. Box 40609 Indianapolis, Indiana 46240-0609 Attn: Mark B. Barnes and (b) If to Peoples or Peoples Bank: Peoples Bancorp of Washington 201 East Main Street P.O. Box 560 Washington, IN 47501-0560 Attn: Joseph A. Wellman, President with a copy to: Krieg DeVault Alexander & Capehart One Indiana Square Suite 2800 Indianapolis, Indiana 46204-2017 Attn: John W. Tanselle or to such other address as any party may from time to time designate by notice to the other. SECTION 8.05. NON-SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. No representation, warranty or covenant contained in this Agreement shall survive (and no claims for the breach or nonperformance thereof may be brought after) the Effective Time except the covenants of German American in Sections 5.04, 5.05, 5.08, 5.09, 5.10 and 5.11 which shall survive the Effective Time. No representation, warranty or covenant contained in this Agreement shall survive (and no claims for the breach or nonperformance thereof may be brought after) the termination of this Agreement pursuant to Article Seven hereof except those matters addressed in Sections 8.01, 8.02 and 8.03 hereof. The obligations of the parties hereto in accordance with the terms and provisions hereof shall survive, and shall continue to be enforceable after, the Effective Time. A-48 SECTION 8.06. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes and cancels any and all prior discussions, negotiations, undertakings and agreements between the parties relating to the subject matter hereof, including, without limitation, the Offer of Merger dated July 3, 1996 of German American accepted by Peoples and the letter agreement dated May 2, 1996 between German American and Austin Associates, Inc., as agent of Peoples. SECTION 8.07. HEADINGS AND CAPTIONS. The captions of Articles and Sections hereof are for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement. SECTION 8.08. WAIVER, AMENDMENT OR MODIFICATION. The conditions of this Agreement which may be waived may only be waived by written notice specifically waiving such condition addressed to the party claiming the benefit of the waiver. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right of such party at a later time to enforce the same. This Agreement may not be amended or modified except by a written document duly executed by the parties hereto. SECTION 8.09. RULES OF CONSTRUCTION. Unless the context otherwise requires (a) a term used herein has the meaning assigned to it, and (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with generally accepted accounting principles. SECTION 8.10. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which shall be deemed one and the same instrument. SECTION 8.11. SUCCESSORS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors. There shall be no third party beneficiaries hereof. SECTION 8.12. GOVERNING LAW; ASSIGNMENT. This Agreement shall be governed by the laws of the State of Indiana and, with respect to the Bank Merger, the National Bank Act. This Agreement may not be assigned by any of the parties hereto. A-49 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written, with the unanimous approval of their respective Boards of Directors. GERMAN AMERICAN BANCORP By /s/ George W. Astrike -------------------------- George W. Astrike Chairman of the Board and Chief Executive Officer APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF GERMAN AMERICAN BANCORP: /s/ George W. Astrike DAVID G. BUEHLER* - ------------------------- --------------------------- George W. Astrike David G. Buehler WILLIAM R. HOFFMAN* MICHAEL B. LETT* - ------------------------- --------------------------- William R. Hoffman Michael B. Lett GENE C. MEHNE* SKIP PLACE* - ------------------------- --------------------------- Gene C. Mehne Skip Place ROBERT L. RUCKRIEGEL* MARK A. SCHROEDER* - ------------------------- --------------------------- Robert L. Ruckriegel Mark A. Schroeder LARRY J. SEGER* JOSEPH F. STEURER* - ------------------------- --------------------------- Larry J. Seger Joseph F. Steurer *By /s/ George W. Astrike ------------------------ George W. Astrike, as Attorney-In-Fact A-50 GERMAN AMERICAN HOLDINGS CORPORATION By /s/ George W. Astrike --------------------------- George W. Astrike Chief Executive Officer APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF THE GERMAN AMERICAN HOLDINGS CORPORATION: /s/ George W. Astrike MARK A. SCHROEDER* - ------------------------- ----------------------------- George W. Astrike Mark A. Schroeder *By /s/ George W. Astrike -------------------------- George W. Astrike, as Attorney-In-Fact A-51 THE UNION BANK By /s/ David L. Brown --------------------------- David L. Brown President APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF THE UNION BANK: JANE ASDELL* /s/ George W. Astrike - ------------------------ --------------------------- Jane Asdell George W. Astrike DAVID L. BROWN* DANNY J. GREGORY* - ------------------------ --------------------------- David L. Brown Danny J. Gregory J. DAVID LETT* MICHAEL B. LETT* - ------------------------ --------------------------- J. David Lett Michael B. Lett MARK A. SCHROEDER* - ------------------------ Mark A. Schroeder *By /s/ George W. Astrike -------------------------- George W. Astrike, as Attorney-In-Fact PEOPLES BANCORP OF WASHINGTON By /s/ Joseph A. Wellman --------------------------- Its President --------------------------- A-52 APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF PEOPLES BANCORP OF WASHINGTON: The undersigned Directors of Peoples Bancorp of Washington hereby (a) evidence their approval of this Agreement and the Mergers contemplated hereby and (b) agree to vote the shares of Peoples Common that are registered in their personal names (and agree to use their best efforts to cause all additional shares of Peoples Common over which they have voting control or influence to be voted) in favor of the Holding Company Merger at the Peoples Shareholders Meeting. /s/ David F. Crane /s/ Randall J. Stoll - ----------------------------- --------------------------- /s/ Ziba F. Graham, Jr. /s/ Joel B. Smith - ----------------------------- --------------------------- /s/ Chet L. Thompson /s/ Bryan S. Bullock - ----------------------------- --------------------------- /s/ David Waller /s/ Joseph A. Wellman - ----------------------------- ---------------------------- /s/ David B. Graham /s/ John J. Hoefling - ----------------------------- ---------------------------- THE PEOPLES NATIONAL BANK AND TRUST COMPANY By /s/ Joseph A. Wellman -------------------------- Its President & C.E.O. -------------------------- A-53 APPROVED BY THE MEMBERS OF THE BOARD OF DIRECTORS OF THE PEOPLES NATIONAL BANK AND TRUST COMPANY: /s/ David F. Crane /s/ Randall J. Stoll - ---------------------------- ------------------------------ /s/ Ziba F. Graham, Jr. /s/ Joel B. Smith - ----------------------------- ------------------------------ /s/ Chet L. Thompson /s/ Bryan S. Bullock - ----------------------------- ------------------------------ /s/ David Waller /S/ Joseph A. Wellman - ----------------------------- ------------------------------ /s/ David B. Graham /s/ John J. Hoefling - ----------------------------- ----------------------------- A-54 APPENDIX A ________________________________________________ PLAN OF MERGER among PEOPLES BANCORP OF WASHINGTON (an Indiana corporation) and GERMAN AMERICAN HOLDINGS CORPORATION (an Indiana corporation) and joined in by GERMAN AMERICAN BANCORP (an Indiana corporation) ________________________________________________ A-55 THIS PLAN OF MERGER, made and entered into as of ___________, 199__, between Peoples Bancorp of Washington, an Indiana corporation ("Peoples"), German American Holdings Corporation, an Indiana corporation ("GAHC"), and joined by German American Bancorp, an Indiana corporation ("German American"). W I T N E S S E T H: WHEREAS, GAHC is a wholly owned subsidiary of German American; and WHEREAS, Peoples, German American and GAHC deem it advisable for Peoples to merge with and into GAHC pursuant to this Plan of Merger in accordance with the IBCL (as defined in Section 1.01); and WHEREAS, the Boards of Directors of the parties hereto have approved an Agreement and Plan of Reorganization that was executed and delivered as of ______________, 1996 between them (the "Agreement and Plan of Reorganization"); NOW, THEREFORE, the parties hereby agree as follows: ARTICLE ONE THE HOLDING COMPANY MERGER SECTION 1.01. THE HOLDING COMPANY MERGER. Pursuant to the terms and provisions of this Plan of Merger and the Indiana Business Corporation Law ("IBCL"), Peoples shall merge with and into GAHC (the "Holding Company Merger"). The Holding Company Merger shall be effective upon the filing of this Plan of Merger in the Office of the Indiana Secretary of State (the "Effective Time"). SECTION 1.02. MERGING CORPORATION. Peoples shall be the merging corporation under the Holding Company Merger and its corporate identity and existence, separate and apart from GAHC, shall cease on consummation of the Holding Company Merger. SECTION 1.03. SURVIVING CORPORATION. GAHC shall be the surviving corporation in the Holding Company Merger and the Articles of Incorporation and Bylaws of GAHC in effect prior to the Holding Company Merger shall be the Articles of Incorporation and Bylaws of the Surviving Corporation. A-56 ARTICLE TWO TERMS OF THE HOLDING COMPANY MERGER AND CONVERSION OF SHARES SECTION 2.01. EFFECT OF THE HOLDING COMPANY MERGER. The Holding Company Merger shall have all of the effects provided by the IBCL. SECTION 2.02. CONVERSION OF SHARES. At the Effective Time: (a) Each of the not more than 593,334 shares of common stock, $1.00 stated value, of Peoples ("Peoples Common") that are issued and outstanding immediately prior to the Effective Time shall thereupon and without further action be converted into the right to receive X.XXXX [here insert Exchange Ratio to be determined in accordance with Agreement and Plan of Reorganization] shares of common stock, $10 par value, of German American ("German American Common") (the "Merger Consideration"). (b) The shares of German American Common issued and outstanding immediately prior to the Effective Time shall continue to be issued and outstanding shares of German American. (c)If any holders of Peoples Common dissent from the Holding Company Merger and demand dissenters' rights under the IBCL, any issued and outstanding shares of Peoples Common held by such dissenting holders shall not be converted as described in Section 2.02(a) but shall from and after the Effective Time represent only the right to receive such consideration as may be determined to be due to such dissenting holders pursuant to the IBCL; provided, however, that each share of Peoples Common outstanding immediately prior to the Effective Time and held by a dissenting holder who shall, after the Effective Time, withdraw his demand for dissenters' rights or lose his right to exercise dissenters' rights shall have only such rights as provided under the IBCL. A-57 SECTION 2.03. FRACTIONAL SHARES. No fractional shares of German American Common shall be issued and, in lieu thereof, holders of shares of Peoples Common who would otherwise be entitled to a fractional share interest (after taking into account all shares of Peoples Common held by such holder) shall be paid an amount in cash equal to the product of multiplying such fractional share by $______________[here insert the average of the highest bid and the lowest asked price of a share of German American Common as quoted on the NASDAQ National Market System on the last day of the Valuation Period.] SECTION 2.04. EXCHANGE PROCEDURES; SURRENDER OF CERTIFICATES. (a)The German American Bank shall act as Exchange Agent in the Holding Company Merger (the "Exchange Agent"). (b)As soon as reasonably practicable but in no event more than five days after the Effective Time, the Exchange Agent shall mail to each record holder of any Certificate or Certificates whose shares were converted into the right to receive the Merger Consideration, a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as German American may reasonably specify) (each such letter the "Merger Letter of Transmittal") and instructions for use in effecting the surrender of the Certificates in exchange for the Merger Consolidation. As soon as reasonably practical but in no event more than five days after surrender to the Exchange Agent of a Certificate, together with a Merger Letter of Transmittal duly executed and any other required documents, the Exchange Agent shall transmit to the holder of such Certificate the Merger Consideration. No interest on the Merger Consideration issuable upon the surrender of the Certificates shall be paid or accrued for the benefit of holders of Certificates. If the Merger Consideration is to be issued to a person other than a person in whose name a surrendered Certificate is registered, it shall be a A-58 condition of issuance that the surrendered Certificate shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such issuance shall pay to the Exchange Agent any required transfer or other taxes or establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. German American reserves the right in all cases to require that a surety bond on terms and in an amount satisfactory to German American be provided to German American at the expense of the Peoples shareholder in the event that such shareholder claims loss of a Certificate and requests that German American waive the requirement for surrender of such Certificate. ARTICLE THREE AMENDMENT; TERMINATION; ASSIGNMENT SECTION 3.01. AMENDMENT. At any time prior to the Effective Time, the parties to this Agreement by mutual written agreement authorized by their respective Boards of Directors (and whether before or after the shareholders of GAHC and Peoples have approved and adopted this Agreement) may amend this Agreement; provided, however, that if the shareholders of Peoples have approved and adopted this Agreement, any such amendment shall not have a material adverse effect on the shareholders of Peoples. SECTION 3.02. TERMINATION. This Plan of Merger may be terminated by the parties hereto prior to the Effective Time under the circumstances provided in, and strictly in accordance with, the provisions of the Agreement and Plan of Reorganization. SECTION 3.03. SUCCESSORS AND ASSIGNS. This Plan of Merger and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors but none of the provisions hereof shall inure to the benefit of any other person, firm, or corporation whomsoever. Neither this Plan of Merger nor any of the rights, interests, or obligations hereunder shall be assigned by either of the parties hereto. A-59 IN WITNESS WHEREOF, the parties hereto have executed this Plan of Merger as of the day and year first above written. PEOPLES BANCORP OF WASHINGTON By Joseph A. Wellman, President and Chief Executive Officer GERMAN AMERICAN HOLDINGS CORPORATION By George W. Astrike, Chairman of the Board and Chief Executive Officer German American Bancorp hereby joins in the foregoing Plan of Merger. GERMAN AMERICAN BANCORP By George W. Astrike, Chairman of the Board and Chief Executive Officer B-1 APPENDIX B INDIANA CODE 23-1-44 DISSENTERS RIGHTS Ind. Code 23-1-44-1. "Corporation" defined As used in this chapter, "corporation" means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer. Ind. Code 23-1-44-2. "Dissenter" defined As used in this chapter, "dissenter" means a shareholder who is entitled to dissent from corporate action under section 8 [IC 23-1-44-8] of this chapter and who exercises that right when and in the manner required by sections 10 through 18 [IC 23-1-44-10 through IC 23-1-44-18] of this chapter. Ind. Code 23-1-44-3. "Fair value" defined As used in this chapter, "fair value," with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable. Ind. Code 23-1-44-4. "Interest" defined As used in this chapter, "interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. Ind. Code 23-1-44-5. "Record shareholder" defined As used in this chapter, "record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent that treatment as a record shareholder is provided under a recognition procedure or a disclosure procedure established under IC 23-1-30-4. B-2 Ind. Code 23-1-44-6. "Beneficial shareholder" defined As used in this chapter, "beneficial shareholder" means the person who is a beneficial owner of shares held by a nominee as the record shareholder. Ind. Code 23-1-44-7. "Shareholder" defined As used in this chapter, "shareholder" means the record shareholder or the beneficial shareholder. Ind. Code 23-1-44-8. Shareholder dissent (a) A shareholder is entitled to dissent from, and obtain payment of the fair value of the shareholder's shares in the event of, any of the following corporate actions: (1) Consummation of a plan of merger to which the corporation is a party if: (A) Shareholder approval is required for the merger by IC 23-1-40-3 or the articles of incorporation; and (B) The shareholder is entitled to vote on the merger. (2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan. (3) Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one (1) year after the date of sale. (4) The approval of a control share acquisition under IC 23-1-42. (5) Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. B-3 (b) This section does not apply to the holders of shares of any class or series if, on the date fixed to determine the shareholders entitled to receive notice of and vote at the meeting of shareholders at which the merger, plan of share exchange, or sale or exchange of property is to be acted on, the shares of that class or series were: (1) Registered on a United States securities exchange registered under the Exchange Act (as defined in IC 23-1-43-9); or (2) Traded on the National Association of Securities Dealers, Inc. Automated Quotations System Over-the-Counter Markets ---- National Market Issues or a similar market. (c) A shareholder: (1) Who is entitled to dissent and obtain payment for the shareholder's shares under this chapter; or (2) Who would be so entitled to dissent and obtain payment but for the provisions of subsection (b); may not challenge the corporate action creating (or that, but for the provisions of subsection (b), would have created) the shareholder's entitlement. Ind. Code 23-1-44-9. Beneficial shareholder dissent (a) A record shareholder may assert dissenters' rights as to fewer than all the shares registered in the shareholder's name only if the shareholder dissents with respect to all shares beneficially owned by any one (1) person and notifies the corporation in writing of the name and address of each person on whose behalf the shareholder asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which the shareholder dissents and the shareholder's other shares were registered in the names of different shareholders. (b) A beneficial shareholder may assert dissenters' rights as to shares held on the shareholder's behalf only if: (1) The beneficial shareholder submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights; and B-4 (2) The beneficial shareholder does so with respect to all the beneficial shareholder's shares or those shares over which the beneficial shareholder has power to direct the vote. Ind. Code 23-1-44-10. Notice of dissenters' rights preceding shareholder vote (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters' rights under this chapter. (b) If corporate action creating dissenters' rights under section 8 of this chapter is taken without a vote of shareholders, the corporation shall notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in section 12 [IC 23-1-44-12] of this chapter. Ind. Code 23-1-44-11. Notice of intent to dissent (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights: (1) Must deliver to the corporation before the vote is taken written notice of the shareholder's intent to demand payment for the shareholder's shares if the proposed action is effectuated; and (2) Must not vote the shareholder's shares in favor of the proposed action. (b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to payment for the shareholder's shares under this chapter. Ind. Code 23-1-44-12. Notice of dissenters' rights following action creating rights (a) If proposed corporate action creating dissenters' rights under section 8 [IC 23-1-44-8] of this chapter is authorized at a shareholders' meeting, the corporation shall deliver a written dissenters' notice to all shareholders who satisfied the requirements of section 11 [IC 23-1-44-11] of this chapter. B-5 (b) The dissenters' notice must be sent no later than ten (10) days after approval by the shareholders, or if corporate action is taken without approval by the shareholders, then ten (10) days after the corporate action was taken. The dissenters' notice must: (1) State where the payment demand must be sent and where and when certificates for certificated shares must be deposited; (2) Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; (3) Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not the person acquired beneficial ownership of the shares before that date; (4) Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty (30) nor more than sixty (60) days after the date the subsection (a) notice is delivered; and (5) Be accompanied by a copy of this chapter. Ind. Code 23-1-44-13. Demand for payment by dissenter (a) A shareholder sent a dissenters' notice described in IC 23-1-42-11 or in section 12 [IC 23-1-44-12] of this chapter must demand payment, certify whether the shareholder acquired beneficial ownership of the shares before the date required to be set forth in the dissenter's notice under section 12(b)(3) [IC 23-1-44-12(b)(3)] of this chapter, and deposit the shareholder's certificates in accordance with the terms of the notice. (b) The shareholder who demands payment and deposits the shareholder's shares under subsection (a) retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. (c) A shareholder who does not demand payment or deposit the shareholder's share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for the shareholder's shares under this chapter and is considered, for purposes of this article, to have voted the shareholder's shares in favor of the proposed corporate action. B-6 Ind. Code 23-1-44-14. Transfer of shares restricted after demand for payment (a) The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under section 16 [IC 23-1-44-16] of this chapter. (b) The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. Ind. Code 23-1-44-15. Payment to dissenter (a) Except as provided in section 17 [IC 23-1-44-17] of this chapter, as soon as the proposed corporate action is taken, or, if the transaction did not need shareholder approval and has been completed, upon receipt of a payment demand, the corporation shall pay each dissenter who complied with section 13 [IC 23-1-44-13] of this chapter the amount the corporation estimates to be the fair value of the dissenter's shares. (b) The payment must be accompanied by: (1) The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen (16) months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year, and the latest available interim financial statements, if any; (2) A statement of the corporation's estimate of the fair value of the shares; and (3) A statement of the dissenter's right to demand payment under section 18 [IC 23-1-44-18] of this chapter. Ind. Code 23-1-44-16. Return of shares and release of restrictions (a) If the corporation does not take the proposed action within sixty (60) days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. B-7 (b) If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must send a new dissenters' notice under section 12 [IC 23-1-44-12] of this chapter and repeat the payment demand procedure. Ind. Code 23-1-44-17. Offer of fair value for shares obtained after first announcement (a) A corporation may elect to withhold payment required by section 15 [IC 23-1-44-15] of this chapter from a dissenter unless the dissenter was the beneficial owner of the shares before the date set forth in the dissenters' notice as the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action. (b) To the extent the corporation elects to withhold payment under subsection (a), after taking the proposed corporate action, it shall estimate the fair value of the shares and shall pay this amount to each dissenter who agrees to accept it in full satisfaction of the dissenter's demand. The corporation shall send with its offer a statement of its estimate of the fair value of the shares and a statement of the dissenter's right to demand payment under section 18 [IC 23-1-44-18] of this chapter. Ind. Code 23-1-44-18. Dissenter demand for fair value under certain conditions (a) A dissenter may notify the corporation in writing of the dissenter's own estimate of the fair value of the dissenter's shares and demand payment of the dissenter's estimate (less any payment under section 15 [IC 23-1-44-15] of this chapter), or reject the corporation's offer under section 17 [IC 23-1-44-17] of this chapter and demand payment of the fair value of the dissenter's shares, if: (1) The dissenter believes that the amount paid under section 15 of this chapter or offered under section 17 of this chapter is less than the fair value of the dissenter's shares; (2) The corporation fails to make payment under section 15 of this chapter within sixty (60) days after the date set for demanding payment; or (3) The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty (60) days after the date set for demanding payment. B-8 (b) A dissenter waives the right to demand payment under this section unless the dissenter notifies the corporation of the dissenter's demand in writing under subsection (a) within thirty (30) days after the corporation made or offered payment for the dissenter's shares. Ind. Code 23-1-44-19. Effect of failure to pay demand -- Commencement of judicial appraisal proceeding (a) If a demand for payment under IC 23-1-42-11 or under section 18 [IC 23-1-44-18] of this chapter remains unsettled, the corporation shall commence a proceeding within sixty (60) days after receiving the payment demand and petition the court to determine the fair value of the shares. If the corporation does not commence the proceeding within the sixty (60) day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. (b) The corporation shall commence the proceeding in the circuit or superior court of the county where a corporation's principal office (or, if none in Indiana, its registered office) is located. If the corporation is a foreign corporation without a registered office in Indiana, it shall commence the proceeding in the county in Indiana where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. (c) The corporation shall make all dissenters (whether or not residents of this state) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. (d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) is plenary and exclusive. The court may appoint one (1) or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. (e) Each dissenter made a party to the proceeding is entitled to judgment: (1) For the amount, if any, by which the court finds the fair value of the dissenter's shares, plus interest, exceeds the amount paid by the corporation; or B-9 (2) For the fair value, plus accrued interest, of the dissenter's after-acquired shares for which the corporation elected to withhold payment under section 17 [IC 23-1-44-17] of this chapter. Ind. Code 23-1-44-20. Judicial determination and assessment of costs (a) The court in an appraisal proceeding commenced under section 19 [IC 23-1-44-19] of this chapter shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against such parties and in such amounts as the court finds equitable. (b) The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: (1) Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of sections 10 through 18 [IC 23-1-44-10 through IC 23-1-44-18] of this chapter; or (2) Against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this chapter. (c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. C-1 APPENDIX C ________________, 1996 Board of Directors Peoples Bancorp of Washington 201 East Main Street Washington, IN 47501 Members of the Board: You have requested our opinion as to the fairness, from a financial point of view, to Peoples Bancorp of Washington ("Peoples") and its shareholders of the terms of the Agreement and Plan of Reorganization dated September 27, 1996 ("Agreement") by and among Peoples, The Peoples National Bank and Trust Company ("Peoples Bank"), German American Bancorp, Jasper, Indiana ("German American"), German American Holdings Corporation ("GAHC"), and The Union Bank ("Union") Peoples owns all of the stock of Peoples Bank, and German American owns all of the stock of GAHC and Union. The terms of the Agreement provide for the merger of Union with and into Peoples Bank and simultaneously Peoples will be merged with and into GAHC, with the result that Peoples Bank will become a wholly-owned subsidiary of German American. The terms of the Agreement provide for all of the outstanding shares of Peoples to be converted into shares of German American at an exchange ratio that will float between a minimum of 1.0372 and a maximum of 1.1669 shares of German American for each of the 593,334 shares of Peoples Common Stock outstanding, depending upon the market value of German American Common Stock during a pre-closing Valuation Period. This range has been adjusted for the five percent stock dividend declared by German American in October, 1996. If the German American Common Stock is valued between $30.48 and $34.29 per share during the Valuation Period, then the Exchange Ratio will be determined within the above range by dividing $21,100,000 by the per share market value of German American to determine the total number of German American shares to be issued in the transaction. The total number of shares will then be divided by 593,334 to determine the Exchange Ratio. If the German American stock value is equal to or less than $30.48 during the Valuation Period, the exchange ratio shall be 1.1669, provided, however, that Peoples may at its option terminate the Agreement in that event. If the stock value is equal to or greater than $34.29 during the Valuation Period, the exchange ratio shall be 1.0372. German American will pay cash for fractional shares. C-2 In carrying out our engagement, we have reviewed and analyzed material bearing upon the financial and operating condition of Peoples and German American, including but not limited to the following: (i) the Prospectus/Proxy Statement; (ii) the financial statements of Peoples and German American for the period 1992 through September, 1996; (iii) certain other publicly available information regarding Peoples and German American; (iv) publicly available information regarding the performance of certain other companies whose business activities were believed by Austin Associates to be generally comparable to those of Peoples and German American; (v) the financial terms, to the extent publicly available, of certain comparable transactions; and (vi) such other analysis and information as we deemed relevant. In our review and analysis, we relied upon and assumed the accuracy and completeness of the financial and other information provided to us or publicly available, and have not attempted to verify the same. We have made no independent verification as to the status of individual loans made by Peoples or German American, and have instead relied upon representations and information concerning loans of Peoples and German American in the aggregate. In rendering our opinion, we have assumed that the transaction will be a tax-free reorganization with no material adverse tax consequences to Peoples or German American, or to Peoples shareholders receiving German American stock. In addition, we have assumed in the course of obtaining the necessary regulatory approvals for the transaction, no condition will be imposed that will have a material adverse effect on the contemplated benefits of the transaction to Peoples and its shareholders. Based upon our analysis and subject to the qualifications described herein, we believe that as of the date of this letter, the terms of the Agreement are fair, from a financial point of view, to Peoples and its shareholders. For our services in rendering this opinion, Peoples will pay us a fee and indemnify us against certain liabilities. Austin Associates, Inc. D-1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) I X I Quarterly Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 1996 Or I I 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 October 30, 1996 Common Stock, $10.00 par value 1,830,880 D-2 GERMAN AMERICAN BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets -- September 30, 1996 and December 31, 1995 Consolidated Statements of Income -- Three Months Ended September 30, 1996 and 1995 Consolidated Statements of Income -- Nine Months Ended September 30, 1996 and 1995 Consolidated Statements of Cash Flows -- Nine Months Ended September 30, 1996 and 1995 Notes to Consolidated Financial Statements -- September 30, 1996 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K SIGNATURES D-3 PART 1.FINANCIAL INFORMATION ITEM 1.FINANCIAL STATEMENTS GERMAN AMERICAN BANCORP CONSOLIDATED BALANCE SHEET (dollar references in thousands except share data) (unaudited) September 30, December 31, 1996 1995 ASSETS Cash and Due from Banks $12,963 $15,421 Federal Funds Sold 9,525 12,550 Cash and Cash Equivalents 22,488 27,971 Interest-bearing Balances with Banks 699 897 Other Short-term Investments 499 5,929 Securities Available-for-Sale, at market (Note 3) 82,192 78,908 Securities Held-to-Maturity, at cost (Market Value of $14,461 and $11,237 on September 30, 1996 and December 31, 1995, respectively) (Note 3) 14,079 10,607 Loans (Note 4) 249,285 231,127 Less: Unearned Income (355) (537) Allowance for Loan Losses (Note 5) (6,030) (5,933) Loans, Net 242,900 224,657 Premises, Furniture and Equipment, Net 10,025 9,624 Other Real Estate 262 286 Intangible Assets 1,827 1,990 Accrued Interest Receivable and Other Assets 6,857 6,894 TOTAL ASSETS $381,828 $367,763 LIABILITIES Noninterest-bearing Deposits $34,929 $40,855 Interest-bearing Deposits 301,575 286,724 Total Deposits 336,504 327,579 Short-term Borrowings 3,196 --- Accrued Interest Payable and Other Liabilities 3,580 3,228 TOTAL LIABILITIES 343,280 330,807 D-4 SHAREHOLDERS' EQUITY Common Stock, $10 par value; 5,000,000 shares authorized, and 1,830,880 and 1,825,040 issued and outstanding in 1996 and 1995, respectively (Note 6) 18,309 18,250 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued --- --- Additional Paid-in Capital 5,587 5,449 Retained Earnings 14,146 12,398 Unrealized Appreciation on Securities Available-for-Sale (Net of tax of $332 and $571 in 1996 and 1995, respectively) 506 859 TOTAL SHAREHOLDERS' EQUITY 38,548 36,956 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $381,828 $367,763 See accompanying notes to consolidated financial statements. D-5 GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF INCOME (dollar references in thousands except per share data) (unaudited) Three Months Ended September 30, 1996 1995 INTEREST INCOME Interest and Fees on Loans $5,500 $5,424 Interest on Federal Funds Sold 105 159 Interest on Short-term Investments 19 181 Interest and Dividends on Securities 1,448 1,159 TOTAL INTEREST INCOME 7,072 6,923 INTEREST EXPENSE Interest on Deposits 3,439 3,277 Interest on Short-term Borrowings 15 36 TOTAL INTEREST EXPENSE 3,454 3,313 NET INTEREST INCOME 3,618 3,610 Provision for Loan Losses 67 (213) NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,551 3,823 NONINTEREST INCOME Income from Fiduciary Activities 48 37 Service Charges on Deposit Accounts 210 161 Investment Services Income 107 55 Other Charges, Commissions, and Fees 94 100 Gains on Sales of Loans and Other Real Estate 0 0 Gains on Sales of Securities 0 0 TOTAL NONINTEREST INCOME 459 353 NONINTEREST EXPENSE Salaries and Employee Benefits 1,452 1,350 Occupancy Expense 204 207 Furniture and Equipment Expense 188 187 FDIC Premiums 175 3 Computer Processing Fees 107 103 Professional Fees 122 44 Other Operating Expenses 546 524 TOTAL NONINTEREST EXPENSE 2,794 2,418 Income before Income Taxes 1,216 1,758 Income Tax Expense 359 598 Net Income $857 $1,160 Earnings Per Share (Note 2) $0.45 $0.61 Dividends Paid Per Share (Note 2) $0.20 $0.18 See accompanying notes to consolidated financial statements. D-6 GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF INCOME (dollar references in thousands except per share data) (unaudited) Nine Months Ended September 30, 1996 1995 INTEREST INCOME Interest and Fees on Loans $16,343 $15,680 Interest on Federal Funds Sold 411 535 Interest on Short-term Investments 141 610 Interest and Dividends on Securities 4,157 3,323 TOTAL INTEREST INCOME 21,052 20,148 INTEREST EXPENSE Interest on Deposits 10,072 9,226 Interest on Short-term Borrowings 37 168 TOTAL INTEREST EXPENSE 10,109 9,394 NET INTEREST INCOME 10,943 10,754 Provision for Loan Losses (Note 5) 145 15 NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,798 10,739 NONINTEREST INCOME Income from Fiduciary Activities 146 142 Service Charges on Deposit Accounts 555 456 Investment Services Income 329 155 Other Charges, Commissions, and Fees 288 333 Gains on Sales of Loans and Other Real Estate 2 21 Gains on Sales of Securities 0 0 TOTAL NONINTEREST INCOME 1,320 1,107 NONINTEREST EXPENSE Salaries and Employee Benefits 4,278 3,963 Occupancy Expense 609 606 Furniture and Equipment Expense 546 541 FDIC Premiums 210 351 Computer Processing Fees 313 297 Professional Fees 267 121 Other Operating Expenses 1,566 1,484 TOTAL NONINTEREST EXPENSE 7,789 7,363 Income before Income Taxes 4,329 4,483 Income Tax Expense 1,324 1,460 Net Income $3,005 $3,023 Earnings Per Share (Note 2) $1.57 $1.58 Dividends Paid Per Share (Note 2) $0.59 $0.54 See accompanying notes to consolidated financial statements. D-7 GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (dollar references in thousands) (unaudited) Nine Months Ended September 30, 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $3,005 $3,023 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Amortization and Accretion of Investments (41) (567) Depreciation and Amortization 695 707 Provision for Loan Losses 145 15 Gains on Sales of Securities --- --- Gains on Sales of Loans and Other Real Estate (2) (21) Change in Assets and Liabilities: Unearned Income (182) (224) Interest Receivable (295) (377) Other Assets 540 (248) Interest Payable 77 362 Deferred Loan Fees (18) 64 Deferred Taxes 31 (489) Other Liabilities 275 926 Total Adjustments 1,225 148 Net Cash from Operating Activities 4,230 3,171 CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks 198 696 Proceeds from Maturities of Other Short-term Investments 7,000 46,632 Purchase of Other Short-term Investments (1,466) (40,549) Proceeds from Maturities of Securities Available-for-Sale 23,605 3,553 Proceeds from Sales of Securities Available-for-Sale --- --- Purchase of Securities Available-for-Sale (27,541) (15,044) Proceeds from Maturities of Securities Held-to-Maturity 204 6,975 Proceeds from Sales of Securities Held-to-Maturity --- --- Purchase of Securities Held-to-Maturity (3,679) (2,737) Purchase of Loans (977) (3,509) Loans Made to Customers net of Payments Received (17,211) (7,620) Proceeds from Sales of Loans --- 500 Property and Equipment Expenditures (933) (796) Proceeds from Sales of Other Real Estate 26 147 Net Cash from Investing Activities (20,774) (11,752) D-8 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits 8,925 12,707 Change in Short-term Borrowings 3,196 (5,665) Dividends Paid (1,133) (1,044) Exercise of Stock Options 8 22 Issuance of Shares under Dividend Reinvestment Plan 65 --- Purchase and Retire Common Stock --- (110) Net Cash from Financing Activities 11,061 5,910 Net Change in Cash and Cash Equivalents (5,483) (2,671) Cash and Cash Equivalents at Beginning of Year 27,971 22,286 Cash and Cash Equivalents at End of Period $22,488 $19,615 Cash Paid During the Year for: Interest $10,032 $9,032 Income Taxes 1,396 1,371 See accompanying notes to consolidated financial statements. D-9 GERMAN AMERICAN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1996 (unaudited) Note 1 -- Basis of Presentation 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 made by management to these unaudited statements were 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, 1995 Annual Report to Shareholders. German American Bancorp (the ``Company'') is a multi-bank holding company based in Jasper, Indiana. Its four affiliate banks conduct business in sixteen offices in Dubois, Martin, Pike, Perry and Spencer Counties, Indiana. Note 2 -- Per Share Data The weighted average number of shares used in calculating earnings and dividends per share amounts were 1,921,583 and 1,916,890 for the third quarters of 1996 and 1995, respectively. The weighted average number of shares for the first nine months of 1996 and 1995 were 1,919,799 and 1,917,388, respectively. The weighted average amounts have been retroactively restated for the effect of 5% stock dividends declared in October 1996 and October 1995. Note 3 -- Securities At September 30, 1996 and December 31, 1995, U.S. Government Agency structured notes with an amortized cost of $3,000,000 and $9,250,000, respectively and fair value of $2,916,000 and $9,201,000, respectively, are included in securities available-for-sale, consisting primarily of step-up and single-index bonds. D-10 Information regarding collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMIC's) is as follows: September 30, December 31, 1996 1995 (dollar references in thousands) Amortized Cost $24,466 $29,429 Fair Value 24,648 29,474 Fixed Rate 23,229 28,041 Variable Rate 1,419 1,433 Note 3 -- Securities (continued) The amortized cost and estimated market values of Securities as of September 30, 1996 are as follows: Estimated Amortized Market Securities Available-for-Sale: Cost Value U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $32,382 $32,117 Obligations of State and Political Subdivisions 16,735 17,536 Corporate Securities 7,771 7,891 Mortgage-backed Securities 24,466 24,648 Total $81,354 $82,192 Estimated Amortized Market Securities Held-to-Maturity: Cost Value Obligations of State and Political Subdivisions $13,065 $13,447 Other Securities 1,014 1,014 Total $14,079 $14,461 D-11 The amortized cost and estimated market values of Securities as of December 31, 1995 are as follows: Estimated Amortized Market Securities Available-for-Sale: Cost Value U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $23,727 $23,787 Obligations of State and Political Subdivisions 14,232 15,386 Corporate Securities 6,375 6,463 Mortgage-backed Securities 33,144 33,272 Total $77,478 $78,908 Estimated Amortized Market Securities Held-to-Maturity: Cost Value Obligations of State and Political Subdivisions $9,869 $10,499 Other Securities 738 738 Total $10,607 $11,237 Note 4 -- Loans Loans, as presented on the balance sheet, are comprised of the following classifications: September 30, December 31, 1996 1995 (dollar references in thousands) Real Estate Loans Secured by 1-4 Family Residential Properties $73,428 $68,826 Loans to Finance Poultry Production and other Related Operations 16,421 23,784 Loans to Finance Agricultural Production and Other Loans to Farmers 31,147 27,310 Commercial and Industrial Loans 87,301 74,612 Loans to Individuals for Household, Family and Other Personal Expenditures 39,683 34,685 Economic Development Commission Bonds 588 608 Lease Financing 717 1,302 Total Loans $249,285 $231,127 D-12 Information regarding impaired loans is as follows at September 30, 1996 and December 31, 1995: September 30, December 31, 1996 1995 (dollar references in thousands) Balance of impaired loans $4,132 $6,244 Less: Portion for which no allowance for loan loss is allocated 237 215 Portion of impaired loan balance for which an allowance for credit losses is allocated $3,895 $6,029 Portion of allowance for loan losses allocated to the impaired loan balance $996 $898 Note 5 -- Allowance for Loan Losses A summary of the activity in the Allowance for Loan Losses is as follows: 1996 1995 (dollar references in thousands) Balance at January 1 $5,933 $5,669 Provision for Loan Losses 145 15 Recoveries of Prior Loan Losses 203 430 Loan Losses Charged to the Allowance (251) (280) Balance at September 30 $6,030 $5,834 Note 6 -- Stock Dividend The Company's Board of Directors declared a five percent stock dividend on the Company's Common Stock in October 1996, payable December 6, 1996 to holders of record November 8, 1996. These additional shares will be recorded during the fourth quarter of 1996; however, the stock dividend has been given retroactive effect for purposes of computing per share data in the consolidated financial statements. See Note 2. Note 7 -- Stock Options As of January 1, 1996 Statement of Financial Accounting Standards No. 123 (FAS123), `Accounting for Stock-Based Compensation'' is applicable to the Company. FAS123 encourages, but does not require, the use of a `fair value based method'' to account for stock-based compensation plans. The Company has D-13 elected not to change its accounting for stock options to a fair value based method, and no compensation expense was recorded for stock options granted during the nine months ended September 30, 1996. Note 8 -- Proposed Acquisition The Company signed a definitive agreement in September 1996 providing for the merger of Peoples Bancorp of Washington (Washington, Indiana) (`Peoples Bancorp') with a subsidiary of the Company. Peoples Bancorp owns all of the outstanding stock of Peoples National Bank and Trust Company, Washington, Indiana (`Peoples Bank''). Peoples Bank operates four banking offices in Daviess County, Indiana. Under the terms of the agreement, the Company will issue to the shareholders of Peoples Bancorp between 615,417 and 692,344 shares of Company Common Stock as adjusted for the Company's five percent stock dividend declared in October 1996 (subject to further antidilution adjustments in the event of any future stock dividends, splits and the like), depending upon the Company's average common stock price during a period prior to the date of the merger closing. Based on the reported bid / asked quotations for the Company's Common Stock during the period preceding September 30, 1996, the Company would have issued the minimum number of shares had the merger closed on September 30, 1996. The transaction is expected to be accounted for as a pooling of interests. The proposed merger is subject to approval by the shareholders of Peoples Bancorp, approvals of bank regulatory agencies, and other conditions. The parties contemplate that the merger will be effective in late 1996 or early 1997. As of December 31, 1995 and for the year then ended, Peoples Bancorp reported total assets of $90,841,580, shareholders' equity of $8,832,441 and net income of $823,972. ITEM 2. D-14 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. Its four affiliate banks conduct business in sixteen offices in Dubois, Martin, Pike, Perry and Spencer Counties, Indiana. The banks provide a wide range of financial services, including accepting deposits; making commercial, mortgage and consumer loans; issuing credit life, accident and health insurance; providing trust services for personal and corporate customers; providing safe deposit facilities; and providing investment advisory and brokerage services. This section presents an analysis of the consolidated financial condition of the Company as of September 30, 1996 and December 31, 1995 and the consolidated results of operations for the periods ended September 30, 1996 and 1995. This review 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 and the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's December 31, 1995 Annual Report to Shareholders. RESULTS OF OPERATIONS Net Income: The Company's earnings for the third quarter of 1996 were $857,000 or $.45 per share, a decrease of $303,000 (or 26%) from the Company's third quarter earnings for 1995 of $1,160,000 or $.61 per share. The Company's net income for the nine months ended September 30, 1996, were $3,005,000 or $1.57 per share, down slightly from net income for the comparable 1995 period of $3,023,000 or $1.58 per share. The earnings comparisons for both the three month period and the nine month period were materially impacted by three factors. First, the FDIC made a $157,000 special assessment against the Company's Savings Association Insurance Fund (SAIF) deposits in the third quarter of 1996 compared to a $166,000 FDIC premium refund recorded by the Company in the third quarter of 1995. Second, the Company's third quarter 1995 operating results were positively impacted by a significantly reduced level of provision for loan loss resulting from the 1995 recovery by one of its affiliate banks of a previously charged-off loan totaling $327,000. Third, 1996 earnings have been affected by expenses D-15 associated with the Company's pending acquisition of Peoples Bancorp of Washington, Indiana. The Company's after-tax expenses for these three items increased by $339,000 ($.18 per share) during the three month period, and by $77,000 ($.04 per share) during the nine month period ended September 30, 1996, as compared to the prior year periods. Net Interest Income: Net Interest Income is the Company's largest component of income and represents the difference between interest and fees earned on loans and investments and the interest paid on interest-bearing liabilities. In this discussion net interest income is presented on a `tax-equivalent'' basis whereby tax exempt income, such as interest on securities of state and political subdivisions, has been increased to the amount that would have been earned on a comparable taxable basis. This adjustment places taxable and non-taxable income on a common basis and allows an accurate comparison of rates and yields. The following table summarizes German American Bancorp's net interest income (on a tax-equivalent basis) for each of the periods presented herein. An effective tax rate of 34 percent is used on each period presented. Nine Months Change from Ended September 30, Prior Period 1996 1995 Amount Percent (dollar references in thousands) Interest Income $21,742 $20,739 $1,003 4.8% Interest Expense 10,109 9,394 715 7.6% Net Interest Income $11,633 $11,345 $288 2.5% D-16 Three Months Change from Ended September 30, Prior Period 1996 1995 Amount Percent (dollar references in thousands) Interest Income $7,318 $7,126 $192 2.7% Interest Expense 3,454 3,313 141 4.3% Net Interest Income $3,864 $3,813 $51 1.3% D-17 For the first three quarters of 1996, the tax-equivalent net interest income of $11,633,000 exceeded the 1995 amount by $288,000 or 2.5%. For the third quarter of 1996, tax-equivalent net interest income of $3,864,000 increased by $51,000 or 1.3% from the 1995 level. The net interest margin for the first nine months of 1996 was 4.48% versus 4.61% for 1995. The increase in the level of higher yielding assets, such as loans, which occurred during the period in 1996 resulted in a corresponding increase in net interest income. The decrease in net interest margin reflects the effect of the decline in general interest rates which occurred during the last half of 1995 and the majority of 1996. This decrease in the net interest margin occurred as a result of the impact on the average yields on loans and short-term investments which react more quickly to changes in general short-term interest rates than the average yields on investment securities and the average rates paid on interest-bearing deposits. 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 level which is considered necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of this loan loss reserve is completed quarterly by management. During the third quarter of 1995, it became evident that a single loan which was previously charged against the allowance for loan losses in the amount of $327,000 had returned to performing status. The full amount of the loan was recognized during the third quarter of 1995 as a recovery of prior loan losses. As a result of this recovery and based on Management's evaluation of the adequacy of the allowance for loan losses, a negative charge to the provision for loan losses was taken during the third quarter of 1995. Accordingly, the provision for loan losses for the third quarter of 1995 was a negative $213,000 and for the first nine months of 1995 was only $15,000. The comparable provision increased by $280,000 (to $67,000) for the third quarter of 1996 and by $130,000 (to $145,000) for the nine months ended September 30, 1996. The amount of future years' provision for loan loss will be subject to adjustment based on the findings of future evaluations of the adequacy of the loan loss reserve. Net charge-offs were $48,000 or 0.02 percent of average loans for the first nine months of 1996. For the same period of 1995, net recoveries were $150,000. Underperforming loans, as a percentage of total loans were 1.24 and 1.51 percent on September 30, 1996 and December 31, 1995, respectively. See discussion headed `Financial Condition'' for more information regarding underperforming assets. D-18 Noninterest Income: Noninterest income, exclusive of gains realized on the sales of Loans and Other Real Estate, for the first three quarters of 1996 was $1,318,000. This was $232,000 or 21.4 percent greater than the $1,086,000 posted for the same period of 1995. Investment Services Income for 1996 increased by $174,000 from that earned in 1995. Third quarter noninterest income, exclusive of gains realized on the sales of Loans and Other Real Estate, increased by $106,000 in 1996 primarily as a result of the $52,000 increase in Investment Services Income. The Company had no security sales during 1996 or 1995. Noninterest Expense: Total noninterest expense for the first nine months of 1996 was $7,789,000 which translates to a $426,000 or 5.8% increase over the $7,363,000 posted for the same period in 1995. Total noninterest expense for the third quarter of 1996 was $2,794,000 which represents a $376,000 or 15.6% increase over the $2,418,000 posted for the same period in 1995. The largest single component of noninterest expense, Salaries and Employee Benefits, represents 54.9% of total noninterest expenses for 1996. This expense category was $4,278,000 during the first nine months of 1996, an increase of $315,000 or 7.9% from the 1995 level of $3,963,000. Salaries and employee benefits were $1,452,000 during the third quarter of 1996, an increase of $102,000 or 7.6% from the 1995 level of $1,350,000. A significant portion of this increase is attributable to effects of changes in the Company's organizational structure which occurred in mid 1995. Prior to July 1995, the Company's executive officers and support functions served both the Company and its lead affiliate bank, German American Bank. In recognition of the increased management and administrative demands existing under a multi-bank holding company environment, the management and administrative support functions of German American Bank and the Company were segmented into distinct groups with additional staffing implemented as deemed appropriate. Although this organizational change did result in an increased level of Salaries & Benefits, Company management believes the increased management focus at both the Bank and Bancorp level will result in increased operating efficiency. D-19 Deposits held at the Company's affiliate banks are insured by the FDIC within two different funds - Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF). All of the deposits of First State Bank are covered under SAIF whereas nearly all the deposits of the other three affiliate banks are within BIF. During the third quarter of 1995, the FDIC refunded $166,000 to BIF insured banks as a result of this particular fund having surpassed a congressionally mandated level. The result of this refund was to reduce FDIC Premium expense to a mere $3,000 for the third quarter of 1995. However, on September 30, 1996, the Deposit Insurance Funds Act of 1996 was enacted into law. This legislation imposed a one-time special assessment on SAIF - assessable deposits for the purpose of boosting the capital of the Savings Association Insurance Fund. This special assessment to the Company was $157,000 which increased the third quarter 1996 FDIC expense to $175,000, an increase of $172,000 from the prior year's third quarter. This Act also will require the Company's BIF- insured subsidiary banks to assume a portion of the obligations (FICO bonds) previously assessed only to SAIF institutions, commencing January 1997. Beginning in 1997 and until December 31, 1999 the estimated assessment rate on these obligations will be 1.3 basis points per $100 of insured deposit base for BIF as opposed to 6.4 basis points for SAIF deposits. The Company's annualized premium expense for 1997 would be approximately $57,000 based on September 30, 1996 deposit holdings. From the year 2000 until 2019, the estimated assessment rate for the obligations is expected to be under 2.5 basis points for all deposits. The Company's anticipated deposit insurance premium expense for 1997 and anticipated assessment rates included in the preceding paragraph are forward- looking statements that are based solely on current levels of deposits (which might change significantly due to acquisitions by the Company of other financial institutions or branches) and FDIC estimates of assessment rates. These assessment rates represent the rates the FDIC presently feels are sufficient to generate the funds required to retire obligations known as FICO bonds which mature in the year 2019. These assessment rates could rise in future years above the levels illustrated here in the event certain actions (such as an increased level of bank or thrift failures) deplete the fund(s) below certain reserve levels thereby prompting a need to bolster the fund balance via higher premium rates. Accordingly, actual future deposit insurance expense for 1997 and future years could vary materially from the amounts presently anticipated. D-20 Professional Fees for the first nine months of 1996 were $267,000 or $146,000 higher than the $121,000 posted for the same three quarters of 1995. This particular category rose primarily because of the Company's pending acquisition of Peoples Bancorp of Washington, Indiana and certain other general acquisition- related expenditures. Professional Fees for the third quarter of 1996 were $122,000 versus $44,000 for the same three months of the prior year. Again merger activity accounted for this increased expenditure level. FINANCIAL CONDITION As of September 30, 1996, total assets increased to $381,828,000 compared to $367,763,000 at December 31, 1995. Deposits rose $8,925,000 in 1996 over that of year-end 1995. Loans, net of unearned income rose by $18,340,000 or 8.0% from the year-end mark of $230,590,000. Underperforming Assets: The following analyzes German American Bancorp's underperforming assets at September 30, 1996 and December 31, 1995. September 30, 1996 December 31, 1995 (dollar references in thousands) Loans which are contractually past due 90 days or more $1,529 $2,683 Nonaccrual Loans 1,567 803 Renegotiated Loans --- --- Total Underperforming Loans 3,096 3,486 Other Real Estate 262 286 Total Underperforming Assets $3,358 $3,772 Allowance for Loan Loss to Underperforming Loans 194.77% 170.20% Underperforming Loans to Total Loans 1.24% 1.51% Underperforming loans at September 30, 1996 were 11.2% less than the $3,486,000 of underperforming loans at December 31, 1995. Stated as a percentage of total loans, underperforming loans were 1.24% and 1.51% for September 30, 1996 and December 31, 1995, respectively. The allowance for loan loss stated as a percentage of underperforming loans equaled 194.77% and 170.20% for the same two dates respectively. D-21 Underperforming loans include $1,906,000 and $2,646,000 of impaired loans at September 30, 1996 and December 31, 1995 (See Note 4 to the consolidated financial statements). The overall loan portfolio is diversified among a variety of individual borrowers, with a substantial portion of debtors' ability to honor their contracts dependent on the agricultural, poultry and wood manufacturing industries. Although wood manufacturers employ a significant number of people in the Company's market area, the Company does not have a concentration of credit to companies engaged in that industry. The Company has historically been involved in the financing of poultry production. As a means of controlling risk from concentrations of credit within this industry, the Company has, during recent years, utilized guaranties from the Small Business Administration (SBA) and the Farmers Home Administration (FmHA). Typically, the guaranties provide for SBA and FmHA, in the event of default, to absorb from 85% to 90% of the loan balance remaining after the application of collateral. No unguaranteed concentration of credit in excess of 10% of total assets exists within any single industry group. Capital Resources: Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. Minimum levels of capital are required to be maintained in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit. Tier 1, or core capital, consists of shareholders' equity less goodwill, core deposit intangibles, and certain tax receivables defined by bank regulations. Tier 2 capital is defined as the amount of the allowance for loan losses which does not exceed 1.25% of gross risk adjusted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under these standards are generally at least a 4.0% leverage ratio, which is Tier 1 capital divided by defined `total assets'', 4.0% Tier 1 capital to risk-adjusted assets and 8.0% total capital to risk- adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and each of its affiliate banks individually, have capital ratios that substantially exceed the regulatory minimums. D-22 The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well- capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a `well-capitalized'' entity must achieve a Tier One Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0% and a leverage ratio of at least 5.0% and not be under a capital directive order. At September 30, 1996, 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. D-23 The table below presents the Company's consolidated capital ratios under regulatory guidelines. RISK BASED CAPITAL STRUCTURE ($ in thousands) September 30,December 31, 1996 1995 Tier 1 Capital: Shareholders' Equity as presented on Balance Sheet $38,548 $36,956 Add / (Subtract): Unrealized Depreciation / Appreciation on Securities Available-for-Sale (506) (859) Less: Intangible Assets and Ineligible Deferred Tax Assets (1,986) (2,140) Total Tier 1 Capital 36,056 33,957 Tier 2 Capital: Qualifying Allowance for Loan Loss 3,195 2,943 Total Capital $39,251 $36,900 Risk-adjusted Assets $252,743 $232,272 To be Well Capitalized Under Prompt Minimum for Corrective Capital Action Adequacy Provisions Sept.30, Dec. 31, Purposes (FDICIA) 1996 1995 Leverage Ratio 4.00% 5.00% 9.60% 9.29% Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 14.27% 14.62% Total Capital to Risk-adjusted Assets 8.00% 10.00% 15.53% 15.89% 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 1996, the net cash from operating activities, including net income of $3,005,000 provided $4,230,000 of available cash. Increases in deposits and short-term borrowings made available an additional $12,121,000. Major cash outflows experienced during this nine month period of 1996 included dividends of $1,133,000, property and equipment purchases of $933,000 and the net funding outlay of loans in the amount of $18,188,000. The purchase of securities and short-term investments (net of proceeds from maturities) decreased cash by $1,679,000. Total cash outflows for the period exceeded inflows by $5,483,000 leaving a cash and cash equivalent balance of $22,488,000 at September 30, 1996. D-24 PROPOSED PEOPLES BANCORP MERGER The Company has agreed to acquire Peoples Bancorp of Washington, Washington, Indiana (`Peoples Bancorp'') on the terms set forth in Note 8 to the financial statements included in this report. In evaluating the terms of this acquisition, the Company prepared estimates of the future earnings and financial condition for the Company and for Peoples Bancorp which took into consideration cost savings and efficiencies that Company management believes could be achieved in future years. These estimates compared the estimated earnings per share of the Company's common stock and its estimated shareholders' equity per share to the estimated earnings per share and shareholders' equity per share on a prospective pro forma basis giving effect to the acquisition on the agreed terms. Based on such analysis, the proposed acquisition of Peoples Bancorp is expected to be materially dilutive, in the early years, to the Company's earnings per share and shareholders' equity per share compared to the amounts that might be expected without the business combination with Peoples Bancorp. The Company believes, however, that the anticipated dilution is acceptable given the Company's belief that entry into the Daviess County banking market offers strategic advantages to the Company. D-25 PART II. -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit No. Description 2 Agreement and Plan of Reorganization by and among Peoples Bancorp of Washington, the Registrant, and certain affiliates dated September 27, 1996. 27 Financial Data Schedule for the period ended September 30, 1996. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the three months ended September 30, 1996, except a report filed July 17, 1996 reporting under Item 5 the Registrant's execution of an agreement to acquire Peoples Bancorp of Washington, Washington, Indiana. 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 11/13/96 By/s/George W. Astrike ------------------ ---------------------------- George W. Astrike Chairman Date 11/13/96 By/s/John M. Gutgsell ------------------- ----------------------------- John M. Gutgsell Controller and Principal Accounting Officer II-1 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Officers and Directors. Under the Indiana Business Corporation Law and Article IV of German American's Restated Bylaws, German American's officers, Directors, and employees are entitled to indemnification against all liability and expense with respect to any civil or criminal claim, action, suit or proceeding in which they are wholly successful. If they are not wholly successful and even if they are adjudged liable or guilty, they are entitled to indemnification if it is determined, with respect to a civil action, by disinterested Directors, a special legal counsel, or a majority vote of the shares of German American's voting stock held by disinterested shareholders, that they acted in good faith in what they reasonably believed to be the best interests of German American. With respect to any criminal action, it must also be determined that they had no reasonable cause to believe their conduct unlawful. Under the Indiana Business Corporation Law, a Director of German American cannot be held liable for actions that do not constitute wilful misconduct or recklessness. The Articles of Incorporation of German American provide that Directors of German American shall be immune from personal liability for any action taken as a Director, or any failure to take any action, to the fullest extent permitted by the applicable provisions of the Indiana Business Corporation Law from time to time in effect and by general principles of corporate law. In addition, a Director of German American against whom a shareholders' derivative suit has been filed cannot be held liable if a committee of disinterested Directors of German American, after a good faith investigation, determines either that the shareholder has no right or remedy or that pursuit of that right or remedy will not serve the best interests of German American. At present, there are no claims, actions, suits or proceedings pending where indemnification would be required under the above, and German American does not know of any threatened claims, actions, suits or proceedings which may result in a request for such indemnification. II-2 In addition, officers and Directors of German American are entitled to indemnification under an insurance policy of German American for expenditures incurred by them in connection with certain acts in their capacities as such, and providing reimbursement to German American for expenditures in indemnifying such Directors and officers for such acts. The maximum aggregate coverage for German American and insured individuals is $2,000,000 for claims made during each policy year, with the policies subject to self-retention and deductible provisions. Item 21. Exhibits and Financial Statement. The exhibits described in the Exhibit List immediately following the "Signatures" page of this Registration Statement (which Exhibit List is incorporated by reference) are hereby filed as part of this Registration Statement. Item 22. Undertakings. The undersigned registrant hereby undertakes that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other Items of the applicable form. The registrant undertakes that every prospectus (i) that is filed pursuant to the paragraph immediately proceeding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to Directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a Director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such Director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, 13 or 18 of this form within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; II-4 (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; and (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Pre-Effective Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jasper, State of Indiana, on December 31, 1996. GERMAN AMERICAN BANCORP By /s/George W. Astrike George W. Astrike, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 1 to Registration Statement has been signed on December 31, 1996 by the following persons in the capacities indicated. Principal Executive Officer: /s/George W. Astrike Chairman of George W. Astrike the Board and Chief Executive Officer Principal Financial Officer: /s/ Mark A. Schroeder Mark A. Schroeder President and Chief Financial Officer Principal Accounting Officer: /s/John M. Gutgsell John M. Gutgsell Vice President and Controller /s/George W. Astrike Director George W. Astrike DAVID G. BUEHLER* Director David G. Buehler WILLIAM R. HOFFMAN* Director William R. Hoffman MICHAEL B. LETT* Director Michael B. Lett GENE C. MEHNE* Director Gene C. Mehne A. WAYNE ("SKIP") PLACE, JR.* Director A. Wayne ("Skip") Place, Jr. ROBERT L. RUCKRIEGEL* Director Robert L. Ruckriegel /s/Mark A. Schroeder Director Mark A. Schroeder LARRY J. SEGER* Director Larry J. Seger JOSEPH F. STEURER* Director Joseph F. Steurer *By /s/ George W. Astrike George W. Astrike, as Attorney-In-Fact EXHIBIT INDEX Exhibit Number Description 2 Agreement and Plan of Reorganization between German American and Peoples (included as Appendix A to the Prospectus/Proxy Statement). 3.1 Restated Articles of Incorporation of German American Bancorp, as amended April 24, 1995. The copy of this exhibit filed as Exhibit 3.1 to German American's Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 3.2 Restated Bylaws of German American Bancorp, as amended August 14, 1990. The copy of this exhibit filed as Exhibit 3.2 to German American's Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 5* Opinion of Leagre & Barnes regarding legality of securities being offered, including consent. 8* Opinion of Leagre & Barnes regarding federal income tax consequences, including consent. 10.1 German American Bancorp 1992 Stock Option Plan. The copy of this exhibit filed as Exhibit 10.1 to Amendment No. 1 to German American's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) is incorporated herein by reference. 10.2 Executive Deferred Compensation Agreement dated December 1, 1992 between The German American Bank and George W. Astrike. The copy of this exhibit filed as Exhibit 10.3 to Amendment No. 1 to German American's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) and is incorporated herein by reference. 10.3 Director Deferred Compensation Agreement between The German American Bank and all but one of its Directors. The documents filed as Exhibit 10.4 to Amendment No. 1 to German American's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) are incorporated herein by reference. (The Agreement entered into by George W. Astrike, a copy of which was filed as Exhibit 10.4 to the S-4, is substantially identical to the Agreements entered into by the other Directors.) The schedule following Exhibit 10.4 to the S-4 lists the Agreements with the other Directors and sets forth the material detail in which such Agreements differ from the Agreement filed as Exhibit 10.4 to the Unibancorp S-4. 10.4 Sublease entered by and between Buehler Foods, Inc. and The German American Bank, dated January 2, 1987 (Huntingburg Banking Center Branch). The copy of this exhibit filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 filed February 28, 1994 (No. 33-75762) (the "Otwell S-4") is incorporated herein by reference. 10.5* Sublease entered by and between Buehler Foods, Inc. and The German American Bank dated August 1, 1990 (The Crossing Shopping Center Branch). 10.6 Letter dated January 5, 1995 from the German American Bank to Buehler Foods, Inc. notifying Buehler Foods, Inc. of exercise of renewal option on The Crossing Shopping Center Branch. The copy of this exhibit filed as Exhibit 10.4 of the Registrant's Report on Form 10-K for the year ended December 31, 1994 is incorporated herein by reference. 10.7 Incentive stock option agreement between German American and George W. Astrike dated April 20, 1993. The copy of this exhibit filed as Exhibit 10.6 to the Otwell S-4 is incorporated herein by reference. 10.8 Form of Incentive Stock Option Agreement. The copy of this exhibit filed as Exhibit 10.7 to the Otwell S-4 is incorporated herein by reference. The Incentive Stock Option Agreement between German American Bancorp and Mark A. Schroeder dated April 20, 1993, is substantially identical to the Form of Incentive Stock Option Agreements entered into by German American and the following other executive officers of German American, all on April 20, 1993: James E. Essany (1,500 shares); Urban R. Giesler (1,500 shares); Stan J. Ruhe (3,000 shares) (all numbers and prices unadjusted for subsequent stock splits). 13 Annual Report to Shareholders for the year ended December 31, 1995. The copy of this exhibit filed as Exhibit 13 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K") is incorporated herein by reference. This exhibit, except to the extent specifically incorporated by reference into the 1995 10-K, is furnished for the information of the Commission only and is not to be deemed "filed" as a part of the 1995 10-K or this Registration Statement. 21* Subsidiaries of German American. 23.1** Consent of Crowe, Chizek and Company, LLP. 23.2** Consent of Crowe, Chizek and Company, LLP. 23.3 Consents of counsel are filed as part of Exhibits 5 and 8 to this Registration Statement. 23.4* Consent of Austin Associates, Inc. 23.5* Consent of David B. Graham (a person named herein as about to become a Director of the registrant) 23.6** Consent of Paul E. Nonte, Certified Public Accountant 24* Power of Attorney, included on signature page. 99.1** Form of Proxy (Peoples). 99.2** Form of Proxy (German American). 99.3* Cover Letter to Shareholders (Peoples). 99.4* Cover Letter to Shareholders (German American). *Filed as part of original Registration Statement on November 19, 1996. **Filed (or refiled) with this Pre-Effective Amendment No. 1 EX-23 2 EXHIBIT 23.1 EXHIBIT 23.1 [CROWE, CHIZEK AND COMPANY LLP LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS Board of Directors Peoples Bancorp of Washington Washington, Indiana We consent to the inclusion in the Registration Statement Form S-4, to be filed by German American Bancorp, and in the Proxy Statement of Peoples Bancorp of Washington, both relating to the issuance of securities in the proposed merger of Peoples Bancorp of Washington into a wholly owned subsidiary of German American Bancorp, of our Independent Auditor's Report dated January 11, 1996, on the consolidated financial statements of Peoples Bancorp of Washington as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, and we consent to the use of our name and the statements with respect to us appearing under the heading "Experts" in the Prospectus. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP December 31, 1996 Indianapolis, Indiana EX-23 3 EXHIBIT 23.2 EXHIBIT 23.2 [CROWE, CHIZEK AND COMPANY LLP LETTERHEAD] CONSENT OF INDEPENDENT AUDITORS Board of Directors German American Bancorp Jasper, Indiana We consent to the inclusion in the Registration Statement Form S-4 and Prospectus of German American Bancorp, relating to the issuance of securities in the proposed merger of Peoples Bancorp of Washington into a wholly owned subsidiary of German American Bancorp, of our Independent Auditor's Report dated February 1, 1996, on the consolidated financial statements of German American Bancorp as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, and we consent to the use of our name and the statements with respect to us appearing under the heading "Experts" in the Prospectus. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP December 31, 1996 Indianapolis, Indiana EX-23 4 EXHIBIT 23.6 EXHIBIT 23.6 Consent of Independent Auditors Board of Directors German American Bancorp Jasper, Indiana We consent to the inclusion of the Registration Statement on Form S-4 and Prospectus of German American Bancorp, relating to the issuance of securities in the proposed merger of Peoples Bancorp of Washington into a wholly owned subsidiary of German American Bancorp, of our Independent Auditor's Report, dated January 30, 1994, on the financial statements of the Otwell State Bank for the year ended December 31, 1993, which Independent Auditor's Report is incorporated into the Registration Statement by reference from the Form 10-K/A Annual Report of German American Bancorp for the year ended December 31, 1995. /s/ Paul E. Nonte Paul E. Nonte, Certified Public Accountant December 31, 1996 Jasper, Indiana EX-99 5 EXHIBIT 99.1 Exhibit 99.1 PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS OF PEOPLES BANCORP OF WASHINGTON I hereby appoint _________________________ and ____________________________, and each of them, my proxies, with power of substitution, to vote all Common Shares of Peoples Bancorp of Washington that I am entitled to vote at the Special Meeting of Shareholders to be held at the principal office of The Peoples National Bank and Trust Company, 201 East Main Street, Washington, Indiana, on _______________, 1997 at _____ a.m., Washington time, and any adjournments thereof, as provided herein. THIS PROXY WILL BE VOTED AS SPECIFIED. IN THE ABSENCE OF SPECIFICATIONS, THIS PROXY WILL BE VOTED FOR ITEM 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1. This proxy may be revoked at any time prior to its exercise upon compliance with the procedures set forth in the Corporation's Prospectus/Proxy Statement, dated ________, 1997. SHAREHOLDERS SHOULD MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POST-PAID ENVELOPE. 1. MERGER OF PEOPLES BANCORP OF WASHINGTON WITH AND INTO A WHOLLY-OWNED SUBSIDIARY OF GERMAN AMERICAN BANCORP [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting, provided, however, that such proxies may not vote in favor of adjournment for the purpose of soliciting additional favorable votes on Item 1 if this Proxy is marked AGAINST Item 1. Dated: Signature or Signatures (Please sign exactly as your name appears on this proxy. If shares are issued in the name of two or more persons, all such persons should sign. Trustees, executors and others signing in a representative capacity should indicate the capacity in which they sign.) EX-99 6 EXHIBIT 99.2 Exhibit 99.2 PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS OF GERMAN AMERICAN BANCORP I hereby appoint _________________________ and ____________________________, and each of them, my proxies, with power of substitution, to vote all Common Shares of German American Bancorp that I am entitled to vote at the Special Meeting of Shareholders to be held at the principal office of The German American Bank, 711 Main Street, Jasper, Indiana, on _______________, 1997 at _____ a.m., Jasper time, and any adjournments thereof, as provided herein. THIS PROXY WILL BE VOTED AS SPECIFIED. IN THE ABSENCE OF SPECIFICATIONS, THIS PROXY WILL BE VOTED FOR ITEM 1. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1. This proxy may be revoked at any time prior to its exercise upon compliance with the procedures set forth in the Corporation's Prospectus/Proxy Statement, dated ________, 1997. SHAREHOLDERS SHOULD MARK, SIGN AND DATE THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED POST-PAID ENVELOPE. 1. ISSUANCE OF STOCK IN CONNECTION WITH THE PEOPLES BANCORP OF WASHINGTON MERGER [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. In their discretion, the proxies are authorized to vote upon such other business as may properly come before the meeting, provided, however, that such proxies may not vote in favor of adjournment for the purpose of soliciting additional favorable votes on Item 1 if this Proxy is marked AGAINST Item 1. Dated: _________________ __________________________ __________________________ Signature or Signatures (Please sign exactly as your name appears on this proxy. If shares are issued in the name of two or more persons, all such persons should sign. Trustees, executors and others signing in a representative capacity should indicate the capacity in which they sign.) -----END PRIVACY-ENHANCED MESSAGE-----