-----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, O8mtOWsYGk5xE6kf4BuyBWZmBZIZMwSX3fib/D7Q1dRpH0xHJhIM0paNRgMex70n M2LTVfwMxLmTHI5Wbh8GIg== 0000941965-98-000021.txt : 19980225 0000941965-98-000021.hdr.sgml : 19980225 ACCESSION NUMBER: 0000941965-98-000021 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980224 ITEM INFORMATION: FILED AS OF DATE: 19980224 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: 8-K SEC ACT: SEC FILE NUMBER: 000-11244 FILM NUMBER: 98548067 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 8-K 1 FORM 8-K GERMAN AMERICAN BANCORP SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of Earliest Event Reported): February 24, 1998 GERMAN AMERICAN BANCORP (Exact Name of Registrant as Specified in its Charter) INDIANA (State or Other Jurisdiction of Incorporation) 0-11244 35-1547518 (Commission File No.) (I.R.S. Employer Identification No.) 711 Main Street, Jasper, Indiana (Address of Principal Executive Officer) 47546 (Zip Code) (812) 482-1314 (Registrant's Telephone Number, Including Area Code) 2 Item 7. FINANCIAL STATEMENTS AND EXHIBITS Attached as Exhibit 99 to this report are supplemental consolidated financial statements of the Registrant that give retroactive effect to the merger of the Registrant and Peoples Bancorp of Washington on March 4, 1997, which has been accounted for as a pooling of interests, and related summary financial data and Managements' Discussion and Analysis disclosures based upon the supplemental consolidated financial statements. Exhibit No. Description Page 99.1 Supplemental Consolidated Financial 4 Statements, Data, and Discussion: Five Year Summary of Supplemental 4 Consolidated Financial Statements and Related Statistics Management's Discussion and Analysis 5 of Financial Condition and Results of Operations Supplemental Consolidated Financial 19 Statements, December 31, 1996, 1995, and 1994 Independent Auditors' Report 41 Market and Dividend Information for 42 German American Bancorp Common Stock 3 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 hereunto duly authorized. Date: February 24,1998 GERMAN AMERICAN BANCORP By /s/ George W. Astrike, George W. Astrike, Chairman of the Board and Chief Executive Officer By /s/ Richard E. Trent Richard E. Trent, Vice President and Chief (Principal Financial Officer) 10364 EX-99 2 4 EXHIBIT 99.1 Five Year Summary of Supplemental Consolidated Financial Statements and Related Statistics (dollar references in thousands except share data) The following selected data have been taken from the Company's supplemental consolidated financial statements and should be read in conjunction with the supplemental consolidated financial statements and related notes included elsewhere in this annual report. See Note 18 to the supplemental consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding a purchase acquisition during 1994 which affects the comparability of data.
1996 1995 1994 1993 1992 --------------------------------------------------------------- Summary of Operations Interest and Fees on Loans................ $27,846 $26,197 $21,545 $20,238 $20,863 Interest on Investments................... 7,515 7,619 6,378 7,133 8,299 ----- ----- ----- ----- ----- Total Interest Income................. 35,361 33,816 27,923 27,371 29,162 ------ ------ ------ ------ ------ Interest on Deposits...................... 16,179 15,150 11,599 12,278 14,168 Interest on Borrowings................... 504 798 420 172 218 --- --- --- --- --- Total Interest Expense................ 16,683 15,948 12,019 12,450 14,386 ------ ------ ------ ------ ------ Net Interest Income....................... 18,678 17,868 15,904 14,921 14,776 Provision for Loan Losses................. 210 49 687 797 1,146 --- -- --- --- ----- Net Interest Income after Provision for Loan Losses........................... 18,468 17,819 15,217 14,124 13,630 Noninterest Income........................ 2,227 1,764 1,933 1,836 1,911 Noninterest Expenses...................... 13,288 12,418 10,910 10,874 10,257 ------ ------ ------ ------ ------ Income Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes......... 7,407 7,165 6,240 5,086 5,284 Income Tax Expense........................ 2,513 2,323 1,958 1,642 1,767 ----- ----- ----- ----- ----- Income Before Cumulative Effect of Change in Accounting for Taxes....... 4,894 4,842 4,282 3,444 3,517 Cumulative Effect of Change in Accounting for Income Taxes........... --- --- --- 218 --- --- --- --- --- --- Net Income................................ $4,894 $4,842 $4,282 $3,662 $3,517 ========================================================================================================================= Year-end Balances Total Assets.............................. $489,443 $458,604 $432,939 $412,203 $388,359 Total Loans, Net.......................... 306,754 282,457 270,981 243,766 229,671 Total Long-term Debt...................... 1,000 1,000 1,000 1,000 --- Total Deposits............................ 422,906 395,553 369,180 353,056 334,087 Total Shareholders' Equity................ 48,793 45,788 40,779 38,880 36,401 ========================================================================================================================= Per Share Data (1 ) Income Before Cumulative Effect of Change in Accounting for Income Taxes........................ $0.92 $0.91 $0.80 $0.65 $0.66 Net Income................................ 0.92 0.91 0.80 0.69 0.66 Cash Dividends (2)........................ 0.39 0.36 0.32 0.29 0.26 Shareholders' Equity, End of Year......... 9.14 8.59 7.65 7.29 6.83 ========================================================================================================================= Other Data at Year-end Number of Shareholders.................... 1,981 1,910 1,863 1,878 1,764 Number of Employees....................... 218 213 203 188 177 Weighted Average Number of Shares......... 5,335,316 5,331,745 5,331,163 5,331,157 5,331,157
(1) Per share data has been retroactively adjusted to give effect for stock dividends and stock splits. (2) Cash dividends represent historical dividends declared per share without retroactive restatement for pooling. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations The following table summarizes the net interest income (on a tax-equivalent basis) for each of the past three years. For the tax-equivalent adjustments, an effective tax rate of 34% was used for all years presented. (1)
Average Balance Sheet (Tax-equivalent / dollar references in thousands) Twelve Months Ended Twelve Months Ended Twelve Months Ended December 31, 1996 December 31, 1995 December 31, 1994 Average Interest Average Interest Average Interest Principal Income/ Average Principal Income/ Average Principal Income/ Average Balance Expense Yield Balance Expense Yield Balance Expense Yield ----------------------------- ---------------------------- - ----------------------------- ASSETS Short-term Investments: Interest-bearing Balances with Banks............... $989 $53 5.36% $1,124 $55 4.89% $3,678 $158 4.30% Federal Funds Sold and Securities Purchased under Agreements to Resell................ 11,589 611 5.27% 13,467 783 5.81% 10,857 386 3.56% Other Short-term Investments 2,115 114 5.39% 11,247 679 6.04% 4,002 202 5.05% Securities: Taxable.................... 81,221 4,788 5.90% 77,078 4,400 5.71% 78,138 4,136 5.29% Non-taxable................ 33,791 2,953 8.74% 27,628 2,579 9.33% 24,473 2,269 9.27% Total Loans and Leases (2)(3). 306,296 27,947 9.12% 285,154 26,290 9.22% 263,350 21,599 8.20% ------- ------ ------- ------ ------- ------ TOTAL INTEREST EARNING ASSETS............. 436,001 36,466 8.36% 415,698 34,786 8.37% 384,498 28,750 7.48% ------- ------ ------- ------ ------- ------ Cash and Due from Banks....... 15,602 14,185 13,474 Premises, Furniture & Equipment.................. 11,386 11,262 8,996 Other Assets.................. 9,768 9,644 7,723 Less: Allowance for Loan Losses (6,948) (6,749) (6,134) ------ ------ ------ TOTAL ASSETS.................. $465,809 $444,040 $408,557 ======== ======== ======== LIABILITIES AND SHARE- HOLDERS' EQUITY Savings and Interest-bearing Demand Deposits............ $126,593 3,375 2.67% $120,603 3,361 2.79% $120,634 2,977 2.47% Time Deposits................. 232,729 12,804 5.50% 222,779 11,789 5.29% 194,818 8,622 4.43% Federal Funds Purchased, Securities Sold under Agreements to Repurchase and Other Short-term Borrowings 8,635 404 4.68% 12,059 671 5.56% 11,151 366 3.28% Long-term Debt................ 1,851 100 5.40% 2,137 127 5.94% 1,000 54 5.40% ----- --- ----- --- ----- -- TOTAL INTEREST-BEARING LIABILITIES................ 369,808 16,683 4.51% 357,578 15,948 4.46% 327,603 12,019 3.67% ------- ------ ------- ------ ------- ------ Demand Deposit Accounts....... 45,242 40,200 37,973 Other Liabilities............. 3,853 3,499 3,195 ----- ----- ----- TOTAL LIABILITIES............. 418,903 401,277 368,771 ------- ------- ------- Shareholders' Equity.......... 46,906 42,763 39,786 ------ ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $465,809 $444,040 $408,557 ======== ======== ======== NET INTEREST INCOME........... $19,783 $18,838 $16,731 ======= ======= ======= NET YIELD ON EARNING ASSETS............. 4.54% 4.53% 4.35%
1. Effective tax rates were determined as though interest earned on the Company's investments in municipal bons and loans was fully taxable. 2. Nonaccruing loans have been included in average loans. 3. Interest income on loans includes loan fees of $516, $339, and $368 for 1996, 1995, and 1994, respectively. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INTERIM FINANCIAL DATA (Table 1) (Unaudited, $ in thousands except share data)
For the three months ended December September June March 31 30 30 31 --------- --------- -------- - ------- 1996 Interest Income....................................... $9,098 $8,872 $8,741 $8,650 Interest Expense...................................... 4,298 4,236 4,095 4,054 ----- ----- ----- - ----- Net Interest Income................................ 4,800 4,636 4,646 4,596 Provision for Loan Losses............................. 27 80 80 23 Noninterest Income.................................... 674 533 558 462 Noninterest Expense................................... 3,549 3,441 3,209 3,089 ----- ----- ----- - ----- Income before Income Taxes......................... 1,898 1,648 1,915 1,946 Income Tax Expense.................................... 743 519 625 626 --- --- --- - --- Net Income....................................... $1,155 $1,129 $1,290 $1,320 ====== ====== ====== ====== Net Income per Share.................................. $.22 $.21 $.24 $.25 ==== ==== ==== ==== Weighted Average Shares............................... 5,338,167 5,336,143 5,333,564 5,333,351 ========= ========= ========= ========= 1995 Interest Income....................................... $8,870 $8,568 $8,408 $7,970 Interest Expense...................................... 4,249 4,121 4,026 3,552 ----- ----- ----- - ----- Net Interest Income................................ 4,621 4,447 4,382 4,418 Provision for Loan Losses............................. (33) (191) 136 137 Noninterest Income.................................... 388 470 437 469 Noninterest Expense................................... 3,219 3,012 3,127 3,060 ----- ----- ----- - ----- Income before Income Taxes......................... 1,823 2,096 1,556 1,690 Income Tax Expense.................................... 562 718 478 565 --- --- --- - --- Net Income....................................... $1,261 $1,378 $1,078 $1,125 ====== ====== ====== ====== Net Income per Share.................................. $.24 $.26 $.20 $.21 ==== ==== ==== ==== Weighted Average Shares............................... 5,331,144 5,331,450 5,332,127 5,332,275 ========= ========= ========= =========
7 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) INTRODUCTION AND OVERVIEW German American Bancorp ("the Company") is a multi-bank holding company based in Jasper, Indiana. The Company's four affiliate banks conduct business in 20 offices in the six contiguous counties of Dubois, Daviess, Martin, Pike, Perry and Spencer Counties in Southwest Indiana. The banks provide a wide range of financial services, including accepting deposits; making commercial and consumer loans; originating, marketing, and servicing mortgage 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. The information in this Management's Discussion and Analysis is presented as an analysis of the major components of the Company's operations for the years 1994 through 1996 and financial condition as of December 31, 1996 and 1995. The information should be used in conjunction with accompanying supplemental consolidated financial statements and footnotes contained elsewhere in this report. The information has been restated to reflect the merger with The Otwell State Bank and People's National Bank and Trust Company of Washington which were both accounted for as pooling of interests. The acquisition of certain branches of Regional Federal Savings Bank ("Regional") have been accounted for as purchases and included in reported results from the date of acquisition. (See the discussion below for further information on mergers and acquisitions.) MERGERS AND ACQUISITIONS On March 4, 1997, the Company completed a merger with Peoples Bancorp of Washington, Washington, Indiana, parent company of The Peoples National Bank and Trust Company of Washington (collectively, "Peoples") in which the Company issued 615,285 shares for all the outstanding shares of Peoples. Concurrently with this transaction, The Union Bank, the Company's affiliate bank in Loogootee, Indiana, combined with Peoples under the Peoples name and charter creating a $150 million financial institution to better serve the Daviess and Martin County area markets. On April 1, 1994, the Company acquired The Otwell State Bank, Otwell, Indiana ("Otwell"), by the issuance of 113,286 shares for all the outstanding shares of Otwell. This transaction was recorded utilizing the pooling of interests method of accounting. Following the completion of the transaction, Otwell and the Company's existing affiliate, Southwestern Indiana Bank, were merged into Community Trust Bank, a combined banking institution operating in the Pike County, Indiana market through offices in Otwell, Petersburg, and Winslow, Indiana. On October 28, 1994, the Company acquired the Regional branches in Huntingburg, Rockport and Tell City, Indiana. This transaction, resulting in the acquisition of approximately $25,000,000 in assets, was recorded utilizing the purchase method of accounting. As a result of the Regional acquisition, the Company recorded approximately $1,670,000 of intangible assets consisting of $1,353,000 of goodwill and $317,000 of core deposit intangible. Intangible assets are being amortized to expense on a straight line basis over a 15 year period in the case of goodwill and over 10 years on an accelerated basis for the core deposit intangible. Following the Regional acquisition, the Huntingburg office was combined into the Company's lead bank, German American Bank. The Tell City and Rockport offices were combined into a newly formed subsidiary bank, First State Bank, Southwest, Indiana ("First State"). The Company plans to continue to aggressively pursue merger and acquisition opportunities as they become available. The Company's management believes other community banks located in the Company's general geographic area will find the concept of the Company's localized community bank holding company an attractive alternative to merging with other larger regional multi-bank holding companies. The Company's approach offers these community banks the competitive advantages of operational efficiencies gained through the ability to spread fixed operating costs over a larger asset base without the loss of flexibility and independence generally associated with affiliation with the larger regional multi-bank holding companies. Through the Company, these community banks can retain ownership control within a group of shareholders who reside in their general market areas and who support the banks' commitment to their local communities. Because of this belief, the Company's management anticipates that additional mergers and acquisitions with like-minded community banks may occur in future years. 8 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RESULTS OF OPERATIONS NET INCOME Net Income in 1996 was $4,894,000 or $0.92 per share, an increase of 1.1% over the $4,842,000 or $0.91 per share reported in 1995. The comparison of 1996 earnings relative to those of a year earlier was impacted by an increase in net interest income and an increase in Investment Services Income and Deposit Service Charges. Partially offsetting these earnings improvements were an increase in the Provision for Loan Loss and an increase in Professional fees largely related to the Company's merger and acquisition activities. For 1995, net income was 13.1% higher than in 1994. This increase in 1995 earnings relative to 1994 was impacted by a $638,000 decline in the required level of Provision for Loan Loss and a $1,964,000 increase in Net Interest Income. Other factors materially impacting the earnings comparison of 1995 and 1994 were a decline in Investment Services Income as well as an increase in Salaries and Benefits largely related to the inclusion of First State throughout 1995. NET INTEREST INCOME Net interest income is the Company's single largest source of earnings. It represents the difference between interest and fees realized on earning assets, primarily loans and securities, and interest paid on deposits and other borrowed funds. The net interest margin is this difference expressed as a percentage of average earning assets. Several factors contribute to the determination of net interest income, including the volume of earning assets, the mix of earning assets, interest rates, and income taxes. Many of these factors can be controlled by management policies and actions. Factors beyond the control of management include the general level of credit demand, Federal Reserve Board monetary policy, and changes in tax laws. Net interest income for 1996 on a tax-equivalent basis was 5.0% higher than that for 1995 while the net interest margin was 4.54% for 1996 versus 4.53% for 1995. Tax-equivalent net interest income for 1995 was 12.6% higher as compared to 1994 with net interest margin increasing to 4.53% in 1995 from 4.35% in 1994. Excluding the effect of First State, which was included in all 1996 and 1995 report data but only since October 28, 1994 in the 1994 data, tax-equivalent net interest income was $17,895,000 for 1995, a $1,287,000 or 7.7% increase over the $16,608,000 recorded in 1994. The increase in net interest income during 1996 and 1995 occurred as a result of the impact of increases in the level of interest earning assets and an increase in average yields in 1995 on loans, short-term investments and securities. Fluctuations in general short-term interest rates affect the average yields on most interest earning assets more quickly than the average rate paid on interest-bearing liabilities. The fluctuations in short-term interest rates which occurred during the periods presented resulted in a slight increase in Net Interest Margin in 1996 following a significant increase in the margin in 1995. See the discussion headed "Interest Rate Management" for a further explanation of the Company's interest rate sensitivity position. PROVISION FOR LOAN LOSSES The Company provides for future 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. The consolidated provision for loan losses was $210,000 in 1996, $49,000 in 1995, and $687,000 in 1994. The decline in provision as compared to that recorded in 1994 primarily resulted from a negative provision for loan loss at the Union banking division of Peoples of $110,000 in 1996 and $475,000 in 1995. The negative provisions at Union were due to collections of previous years' charged-off loans combined with management's determination that an adequate level of loan loss reserve existed prior to the loan recoveries. Because of the adequacy of the existing reserve, the recoveries resulted in the recording of a negative provision. 9 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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. The section entitled RISK MANAGEMENT expands this discussion further. NONINTEREST INCOME Exclusive of net security gains and gains on sales of loans and other real estate ("ORE"), noninterest income increased 22.8% in 1996 to $2,099,000 compared to $1,709,000 in 1995. The primary source of noninterest income continues to be trust fees (income from fiduciary activities), service charges on deposit accounts and investment services income. As presented on Table 2 below, trust department income rose by 1.4% in 1996 while service charges on deposit accounts increased by 27.4% during 1996 because of a larger number of transactions and fee generating opportunities for the Company in this area. Investment services income increased significantly by $196,000 following a $213,000 decline in 1995. The level of earnings generated through Investment Services is directly tied to the customers' utilization and acceptance of the investment products offered through this service. This investment services income is generated through a full service brokerage operation which is available at several of the Company's affiliate banks. The Company intends to expand the availability of investment services, as feasible, throughout its affiliate banks. Noninterest income exclusive of security gains and gains on sales of loans and ORE decreased 2.5% in 1995 compared to 1994 largely as a result of the decrease in the level of Investment Services Income discussed above. 10
NONINTEREST INCOME (Table 2)($ in thousands) % Change From Prior Year 1996 1995 1994 1996 1995 ---- ---- ---- ---- - ---- Income from Fiduciary Activities........................ $210 $207 $192 1.4% 7.8% Service Charges on Deposit Accounts..................... 976 766 720 27.4 6.0 Investment Services Income.............................. 403 207 420 94.7 (50.7) Other Income............................................ 510 529 420 (3.6) 25.6 --- --- --- Subtotal ........................................... 2,099 1,709 1,752 22.8 (2.5) Gains on Sales of Loans and Other Real Estate........... 55 36 91 52.8 (60.4) Security Gains, net..................................... 73 19 90 284.2 (78.9) -- -- -- TOTAL NONINTEREST INCOME............................ $2,227 $1,764 $1,933 26.2 (8.7) ====== ====== ======
NONINTEREST EXPENSE Total noninterest expense increased 7.0% in 1996 over 1995 levels. As a percentage of average total assets, total noninterest expense was 2.85% in 1996 compared to 2.80% in 1995 and 2.67% in 1994. Salaries and employee benefits, which comprise approximately 55% of total noninterest expense, increased by 8.5% in 1996 following a 15.0% increase in 1995. A significant portion of this increase is attributable to the inclusion of First State Bank throughout 1996 and 1995 and 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. 11 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Occupancy expense and furniture and equipment expense combined, increased by $70,000 or 3.5% in 1996 following a 14.6% increase in 1995. Approximately one-half of the 1995 increase resulted from First State with the balance of the increased 1995 expense level attributable to an upgrading of facilities and equipment at the Company's other affiliate banks. Computer processing expense increased by 6.2% and 13.6% in 1996 and 1995, respectively, reflecting an increased number of accounts processed and conversion expenses at the Company's newly acquired affiliates. Through the utilization of state-of-the-art equipment and computer processing, the Company's management believes it will, over the long-term, be able to better control the level of employee related expenses, the Company's major noninterest expense category, while improving the quality of customer service provided throughout the affiliate bank system. Professional fees increased significantly by $558,000 in 1996 following a $45,000 decrease in 1995 largely as a result of variations in the level of merger related professional fees. While it is not possible to predict the level of acquisition activity and the resulting level of costs associated thereto, management does intend to pursue acquisition opportunities and, therefore, increased and continued costs will be likely in future years. During the third quarter of 1996, the FDIC instituted a one-time special assessment against all deposits insured by the Savings Association Insurance Fund ("SAIF"). A small portion of the deposits of German American Bank and all the deposits of First State Bank are insured under SAIF. Therefore, the Company was subject to a special assessment of $157,000. Including the impact of this special assessment, FDIC premiums totaled $229,000 in 1996 as compared to $471,000 and $801,000 in 1995 and 1994, respectively. Premiums for 1997 are anticipated to be approximately $52,000. Other operating expenses decreased by 3.8% in 1996 following a 36.3% increase in 1995. The 1995 increase was largely attributable to the inclusion of the First State operation for the full year and increased advertising and supplies expenses related to the Company's introduction, throughout 1995, of a new company-wide corporate identity program. Additionally, amortization of goodwill and the core deposit intangible totaled $216,000, $231,000 and $112,000, for 1996, 1995 and 1994, respectively. First State Bank's operating results reflected a significant portion of the amortization expense.
NONINTEREST EXPENSE (Table 3)($ in thousands) % Change From Prior Year 1996 1995 1994 1996 1995 ---- ---- ---- ---- - ---- Salaries and Employee Benefits.......................... $7,165 $6,604 $5,742 8.5% 15.0% Occupancy, Furniture and Equipment Expense.............. 2,066 1,996 1,742 3.5 14.6 FDIC Premiums........................................... 229 471 801 (105.7) (41.2) Computer Processing Fees................................ 427 402 354 6.2 13.6 Professional Fees ...................................... 805 247 292 225.9 (18.2) Other Operating Expenses................................ 2,596 2,698 1,979 (3.8) 36.3 ----- ----- ----- TOTAL NONINTEREST EXPENSE........................... $13,288 $12,418 $10,910 7.0 13.8 ======= ======= =======
PROVISION FOR INCOME TAXES The Company records a provision for income taxes currently payable, along with a provision for taxes payable in the future. Such deferred taxes arise from differences in the timing of certain items for financial statement reporting versus for income tax reporting. The major difference between the effective tax rate applied to the Company's financial statement income and the federal statutory rate of 34% is interest on tax-exempt securities and loans. Other components affecting this calculation include state income taxes and nondeductible merger costs. Note 10 to the consolidated financial statements contains additional details relative to the Company's income tax provision. The Company's effective tax rate was 33.9%, 32.4% and 31.4% in 1996, 1995, and 1994, respectively. 12 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) 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 deferred tax assets defined by bank regulations. Tier 2 capital is defined as the amount of the allowance for loan losses which does not exceed 1.25% 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. The Company's shareholders' equity of $48,793,000 and $45,788,000 at December 31, 1996 and December 31, 1995, respectively represented 9.97% and 9.98% of total assets. The Company paid cash dividends of $1,684,000 and $1,554,000 during 1996 and 1995, respectively. The increased level of dividends paid in 1996 and 1995 resulted from the issuance of additional shares in connection with the Company's Stock Dividend and Dividend Reinvestment Plan. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under these regulations, a "well-capitalized" entity must achieve a Tier 2 Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0% and a leverage ratio of at least 5.0% and not be under a capital directive order. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on financial statements. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. At December 31, 1996 the Company and all affiliate banks were categorized as well capitalized. At December 31, 1996, management is not aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material effect on the Company's consolidated liquidity, capital resources or operations. The following table presents the Company's consolidated capital ratios under regulatory guidelines.
RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) 1996 1995 ---- ---- Tier 1 Capital: Shareholders' Equity as presented on Balance Sheet.......................... $48,793 $45,788 Subtract: Unrealized Appreciation on Securities Available-for-Sale.............. (495) (822) Less: Intangible Assets and Ineligible Deferred Tax Assets...................... (1,924) (2,140) ------ ------ Total Tier 1 Capital............................................................ 46,374 42,826 Tier 2 Capital: Qualifying Allowance for Loan Loss.......................................... 4,028 3,700 ----- ----- Total Capital................................................................... $50,402 $46,526 ======= ======= Risk Weighted Assets............................................................ $319,769 $292,841
13 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
RISK BASED CAPITAL STRUCTURE (Table 4) ($ in thousands) (continued) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisons: Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996: Total Capital (to Risk Weighted Assets).......... $50,402 15.76% >$25,582 >8.0% >$31,977 >10.0% - - - - Tier 1 Capital (to Risk Weighted Assets).......... $46,374 14.50% >$12,791 >4.0% >$19,186 > 6.0% - - - - Tier 1 Capital (to Average Assets)................ $46,374 9.96% >$18,632 >4.0% >$23,290 > 5.0% - - - - As of December 31, 1995: Total Capital (to Risk Weighted Assets).......... $46,526 15.89% >$23,427 >8.0% >$29,284 >10.0% - - - - Tier 1 Capital (to Risk Weighted Assets).......... $42,826 14.62% >$11,714 >4.0% >$17,570 > 6.0% - - - - Tier 1 Capital (to Average Assets)................ $42,826 9.64% >$17,762 >4.0% >$22,202 > 5.0% - - - -
SOURCES OF FUNDS The Company's primary funding source is its base of core customer deposits, such as noninterest-bearing demand, regular savings and money market accounts and small denomination certificates of deposit of less than $100,000. Other shorter term sources of funds are larger denomination certificates of deposit, overnight borrowings from other financial institutions, securities sold under agreements to repurchase, short-term notes payable issued on an unsecured basis, and short-term borrowings consisting of interest-bearing demand notes issued to the U.S. Treasury. The membership of the Company's affiliate banks in the Federal Home Loan Bank System (FHLB) provides an additional source for both long and short-term borrowings. The following page contains a discussion of changes in these areas. Table 5 below presents changes between years in the average balances of all funding sources.
FUNDING SOURCES - AVERAGE BALANCES (Table 5) ($ in thousands) % Change From Prior Year 1996 1995 1994 1996 1995 ---- ---- ---- ---- ---- Demand........................................... $45,242 $40,200 $37,973 12.5% 5.9% Savings and Interest-bearing Checking............ 93,731 95,662 99,957 (2.0) (4.3) Money Market Accounts............................ 32,862 24,941 20,677 31.8 20.6 Other Time Deposits.............................. 197,794 184,517 161,866 9.9 14.0 ------- ------- ------- Total Core Deposits........................... 369,629 345,320 320,473 8.5 7.8 ------- ------- ------- Certificates of Deposits of $100,000 and Over.... 34,935 38,262 32,952 (8.7) 16.1 Federal Funds Purchased, Securities Sold under Agreement to Repurchase and Other Short-term Borrowings................... 8,635 12,059 11,151 (28.4) 8.1 Long-term Debt................................... 1,851 2,137 1,000 (13.4) N/M ----- ----- ----- Total Funding Sources......................... $415,050 $397,778 $365,576 4.3 8.8 ======== ======== ========
N/M = Not Meaningful 14 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) CORE DEPOSITS The Company's average core deposits have shown steady growth over the past several years, increasing by 8.5% and 7.8% in 1996 and 1995, respectively. In 1996 and 1995, the Company experienced a shift in the composition of its deposits toward money market deposits and longer term certificates of deposit. This movement is largely attributable to customer reaction to the higher level of interest rates paid on these products relative to that paid on the savings and interest-bearing checking products. In total, average savings, interest-bearing checking and money market deposits increased by 6.9% and 1.4% in 1996 and 1995, respectively, while other time deposits consisting primarily of certificates of deposits in denominations of $100,000 or less increased by 9.9% in 1996 following a 10.6% increase in 1995. Average noninterest-bearing demand deposits increased by 12.5% in 1996 and 5.9% in 1995. These changes in the mix of deposits are influenced by customers' tendency to avoid committing to longer term instruments during periods of low or declining interest rates and their attempts to lock in rates on longer term instruments during periods of perceived higher rates. They are also subject to seasonal and other non-economic factors. OTHER FUNDING SOURCES Exclusive of core deposits, large denomination certificates of deposit provide the majority of other funding sources for the Company. These certificates declined by 8.7% in 1996 following a 16.1% increase in 1995. The remaining other short-term funding sources consist of federal funds purchased from other financial institutions on an overnight basis, secured repurchase agreements which generally mature within 30 days, short-term notes payable extended on an unsecured basis, and borrowings under U.S. Treasury demand notes. Long-term debt was in the form of FHLB advances, secured by certain investment securities. These borrowings represent an important source of temporary short-term liquidity for the Company. These types of borrowings and large dollar denominated certificates are considered to be more subject to periodic withdrawals than are core deposits, and, therefore, are generally not used as a permanent funding source for loans. USES OF FUNDS INVESTMENTS The Company's securities portfolio, consisting of all components of the Company's investment securities, mortgage-backed securities, and securities available-for-sale, includes U.S. Treasury securities, obligations of U.S. government agencies, obligations of state and political subdivisions, corporate investments and mortgage-backed securities issued by U.S. government agencies and other intermediaries. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The maturities of the securities and money market portfolios are a principal source of funds for loan growth and other liquidity needs. The Company's available-for-sale portfolio provides an additional source of funds from which management can respond to liquidity needs and asset/liability management requirements. During 1996, a shift occurred in the composition of the Company's securities portfolio primarily between mortgage-backed securities and agency securities. As anticipated, a substantial portion of the Company's mortgage-backed securities were paid-down during the year. The funds generated from those pay-downs were utilized to purchase agency insured securities at yields generally equal to or greater than those which were carried in the mortgage-backed portfolio. During 1995, the Financial Accounting Standards Board authorized a one-time window of opportunity for the transfer of securities to available-for-sale portfolios. Company management utilized this opportunity to transfer a significant portion of its securities portfolio to the available-for-sale classification. Although management may sell these securities if the need arises, their designation as available-for-sale should not be interpreted to indicate that management anticipates such sales. Securities available-for-sale are carried at market value. All other securities are carried at amortized cost because management intends to hold them until maturity and the Company has the ability to do so. Note 2 to the consolidated financial statements contains additional details regarding the Company's securities portfolio in 1996 and 1995. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
SECURITIES PORTFOLIO (Table 6) (carrying value, $ in thousands) December 31, 1996 % 1995 % -------------------------------------------------------------- Money Market Securities........................... $22,176 15.5% $19,476 14.6% U.S. Treasury and Agency Securities............... 49,700 34.7 36,754 27.6 Municipal Securities.............................. 37,813 26.4 30,875 23.2 Corporate Securities.............................. 7,268 5.1 6,375 4.8 Mortgage-backed Securities........................ 24,782 17.3 38,437 28.9 Other Securities.................................. 1,396 1.0 1,135 .9 ----- --- ----- -- Total Securities Portfolio.................... $143,135 100.0% $133,052 100.0% ======== ===== ======== =====
LOANS Total loans grew by $23,658,000 or 8.2% between 1996 and 1995. The Company's newest affiliate bank, First State, achieved a significant market share of the lending opportunities available within its market. The Company's loan portfolio remains well diversified with 54% of the portfolio in commercial and agricultural loans (including economic development bonds), 30% in 1-4 family residential mortgages, and 16% in consumer loans at December 31, 1996. The Company's affiliate banks lend to commercial customers in various industries including agribusiness, manufacturing, health care services, wholesale, and retailing. The Company's policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southwestern Indiana. Extensions of credit outside this primary geographic market area are generally concentrated in commercial real estate loans granted on a selective basis generally within a 120 mile radius of the Company's primary market. Loans outside the Company's general geographic market area are further limited to loans guaranteed by either the Small Business Administration (SBA) or the Farmers Home Administration (FmHA). The overall loan portfolio is diversified among a variety of borrowers; however, a significant portion of the debtors' ability to honor their contracts is dependent upon the agricultural, poultry and wood manufacturing industries. Although wood manufacturers employ a significant number of people in the market area, there is not a concentration of credit to companies engaged in that industry. No unguaranteed concentration of credit in excess of 10% of total assets exists within any single industry group. The composition of loan portfolio at December 31, 1996 and 1995 is presented in further detail in Note 3 to the consolidated financial statements and in Table 7 below.
\LOAN PORTFOLIO (Table 7) ($ in thousands) 1996 1995 1994 ---- ---- ---- Commercial and Industrial........................ $112,748 $101,338 $93,574 Agricultural and Poultry......................... 57,073 61,251 67,162 Residential Mortgage Loans....................... 93,713 85,543 82,810 Consumer Loans................................... 50,200 41,944 35,124 ------ ------ ------ Total Loans.................................. 313,734 290,076 278,670 ------- ------- ------- Less: Unearned Income........................... 452 726 1,087 Allowance for Loan Loss...................... 6,528 6,893 6,602 ----- ----- ----- Loans, Net....................................... $306,754 $282,457 $270,981 ======== ======== ========
16 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) RISK MANAGEMENT Various procedures are employed at the Company's affiliate banks to monitor risk. The major risk addressed by the Company on a regular basis is the credit risk inherent in the loan portfolio and to a lesser extent, the investment portfolio. Another risk is that associated with changes in interest rates. The following is a discussion of the Company's philosophies and procedures to address risk. LENDING AND LOAN ADMINISTRATION The primary responsibility and accountability for day-to-day lending activities rests with the Company's affiliate banks. Loan personnel at each bank have the authority to extend credit under guidelines approved by the bank's board of directors. Each bank also has executive and board loan committees that serve as vehicles for communication and the pooling of knowledge, judgment and experience of its members. These committees provide valuable input to lending personnel and act as an approval body. They also serve as a monitoring tool of the overall quality of the loan portfolios. Members of the Company's executive officers serve on the board loan committees of each of the affiliate banks to ensure a consistent application of company policies. The Company maintains a comprehensive loan review program for its affiliate banks. The purpose of these reviews is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses. This program also includes regular reviews of problem loan reports, delinquencies and charge-offs. The adequacy of the allowance for loan losses is also evaluated at the affiliate bank level on a quarterly basis. This evaluation of the allowances for loan losses is based on reviews of specific loans, changes in the type and volume of the loan portfolios given current and anticipated economic conditions, and historical loss experience. The review of specific loans includes loans where the customer's cash flow or net worth may not be sufficient to repay the loan, the loan has been criticized in a regulatory examination, the accrual of interest has been suspended, or for other reasons where either the ultimate collectibility of the loan is in question or the loan has characteristics requiring special monitoring. Activity in the allowance for loan losses is summarized in Table 8 below. Table 9 on the following page presents data for the underperforming assets. Underperforming assets consist of 1) nonaccrual loans; 2) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower; 3) loans past due ninety (90) days or more as to principal or interest; and 4) other real estate owned. Loans are placed on nonaccrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection. Loans are charged-off when they are deemed uncollectible. During 1996, the Company's level of underperforming loans decreased from $3,904,000 or 1.35% of total loans as of December 31, 1995 to $2,472,000 or .79% of total loans at December 31, 1996. During 1996, the allowance for loan loss decreased by $365,000 which represents the amount by which the current year's charged-off loans exceeded the amount of recoveries of prior years' charge-offs and the current year provision for loan loss. See the discussion entitled "PROVISION FOR LOAN LOSS" elsewhere in this report for further details regarding the provision.
ALLOWANCE FOR LOAN LOSSES (Table 8) ($ in thousands) 1996 1995 1994 ---- ---- ---- Balance as of January 1................................ $6,893 $6,602 $5,745 Addition of Affiliate Banks............................ --- --- 195 Provision for Loan Losses.............................. 210 49 687 Recoveries of Prior Loan Losses........................ 299 637 240 Loan Losses Charged to the Allowance................... (874) (395) (265) ----- ----- ----- Balance as of December 31.............................. $6,528 $6,893 $6,602 ====== ====== ======
17 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
UNDERPERFORMING ASSETS (Table 9) ($ in thousands) 1996 1995 1994 ---- ---- ---- Nonaccrual Loans....................................... $1,370 $1,093 $1,305 Past Due Loans (90 days or more)....................... 1,102 2,689 639 Renegotiated Loans..................................... --- 122 26 --- --- -- Total Underperforming Loans........................ 2,472 3,904 1,970 ----- ----- ----- Other Real Estate Owned................................ 203 286 497 --- --- --- Total Underperforming Assets....................... $2,675 $4,190 $2,467 ====== ====== ====== Allowance for Loan Losses to Underperforming Loans.............................. 264.08% 176.56% 335.13% Underperforming Loans to Total Loans................... .79% 1.35% .71% Allowance for Loan Losses to Total Loans.............. 2.08% 2.38% 2.37%
INVESTMENTS, LIQUIDITY, AND INFLATION Two of the more important and interrelated areas the Company and its affiliate banks manage very closely are the Company's liquidity requirements and its balance between interest-rate-sensitive assets and interest-rate-sensitive liabilities. Liquidity needs in a banking organization arise from new loan demand, the funding of existing loan commitments, and deposit withdrawals. One important objective in managing the securities portfolio is to ensure the Company has adequate liquidity. The purposes of liquidity management are to match sources of funds with anticipated customer borrowings and withdrawals and other obligations and to ensure a dependable funding base. As discussed in the "Investments" discussion contained elsewhere in this report, management significantly increased the available-for-sale portfolio during 1995. This action greatly enhanced the Company's ability to quickly react to changes in liquidity and asset and liability needs. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. The Company's asset and liability structure is substantially different from that of an industrial company, in that virtually all assets and liabilities of a financial institution are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a financial institution's performance. Interest rates do not necessarily move in the same direction, or in the same magnitude, as the prices of other goods and services. Attention should be directed to the various analyses and schedules throughout Management's Discussion and Analysis which are useful in analyzing how the Company is positioned to react to changing interest rates. INTEREST RATE MANAGEMENT Interest rate sensitivity occurs when assets or liabilities are subject to rate and yield changes within a designated time period. The Company performs rate sensitivity analyses which place each of the Company's balance sheet components in its appropriate maturity category according to its repricing frequency. In addition to rate sensitivity analyses, the Company also utilizes other asset/liability measurements such as computer generated simulation modeling. This enables management to measure the effect on earnings of changes in interest rates. Without regular monitoring and management of these critical areas, a movement in interest rates and its corresponding effect on the net interest margin may significantly affect profitability. The degree of any potential consequences of such interest rate changes can be mitigated by maintaining a proper asset/liability position given projected interest rates. The Company's policy is to actively manage its asset / liability position within a one-year interval with a goal to protect its earnings from being materially adversely impacted by changes in interest rates during the coming year. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) The Company has a Funds Management Policy which establishes guidelines under which the affiliate banks manage their securities portfolios. Funds Management Committees at each of the affiliate banks meet quarterly to monitor the established guidelines. The overall objective of these committees is to ensure the Company maintains an adequate level of liquidity and maximizes its net interest margins while implementing and monitoring programs for the matching of the mix and maturities of various asset and liability categories so as to avoid undue interest rate risk. The committees formulate short and long-term strategies, direct the acquisition and allocation of funds and monitor the level of interest rate sensitivity within the established guidelines. Table 10 reflects the Company's interest rate sensitivity position (interest rate-sensitive assets minus interest rate-sensitive liabilities) individually and cumulatively, over various time horizons. As indicated in the table, a significant portion of the Company's assets and liabilities reprice within 1-181 days. While slightly more of its assets than liabilities are subject to repricing during this period, the Company believes its asset/liability management program allows adequate reaction time to adjust to changes in interest rate trends and believes the current asset/liability position does effectively protect the Company's net interest margin and the resulting net interest income from any material adverse impact during 1997 assuming a moderate rise or decline in interest rates. ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1996 (Table 10) ($ in thousands)
1-3 3-6 6-12 1-5 Beyond Months Months Months Years 5 Years Total - ------------------------------------------------------------------------------- EARNING ASSETS Money Market Assets................ $20,600 $1,376 $200 --- --- $22,176 Securities......................... 28,026 9,318 14,224 $41,650 $28,552 121,770 Loans (Net of Unearned)............ 95,206 36,317 83,294 72,375 26,090 313,282 TOTAL EARNING ASSETS............ $143,832 $47,011 $97,718 $114,025 $54,642 $457,228 INTEREST BEARING LIABILITIES Retail Savings Money Market Deposits........................ $129,090 --- --- --- --- $129,090 Retail Time Deposits............... 32,862 $24,125 $60,438 $90,999 $129 208,553 Large Dollar Denominated Time Deposits................... 10,020 6,159 6,649 9,761 --- 32,589 Other Borrowings................... 2,127 --- --- --- --- 2,127 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase................... 9,900 500 --- --- --- 10,400 Long-term Debt..................... 1,000 --- --- --- --- 1,000 TOTAL INTEREST BEARING LIABILITIES.................. $184,999 $30,784 $67,087 $100,760 $129 $383,759 Periodic GAP........................... $(41,167) $16,227 $30,631 $13,265 $54,513 Cumulative GAP......................... $(41,167) $(24,940) $5,691 $18,956 $73,469 Cumulative Ratio (1)................... 78% 88% 102% 105% 119% (1) Rate-sensitive Assets / Rate-sensitive Liabilities
19 Supplemental Consolidated Balance Sheets (dollar references in thousands except share data)
December 31, 1996 1995 ---- ---- ASSETS Cash and Due from Banks....................................................... $ 17,134 $ 20,051 Federal Funds Sold............................................................ 20,600 12,550 ------ ------ Cash and Cash Equivalents................................................. 37,734 32,601 ------ ------ Interest-bearing Balances with Banks.......................................... 597 997 Other Short-term Investments.................................................. 979 5,929 Securities Available-for-Sale, at Market...................................... 98,557 92,887 Securities Held-to-Maturity, at Cost.......................................... 23,213 22,063 Loans ....................................................................... 313,734 290,076 Less: Unearned Income....................................................... (452) (726) Allowance for Loan Losses............................................. (6,528) (6,893) ------ ------ Loans, Net.................................................................... 306,754 282,457 Premises, Furniture and Equipment, Net........................................ 11,585 11,299 Other Real Estate............................................................. 203 286 Intangible Assets............................................................. 1,774 1,990 Accrued Interest Receivable and Other Assets.................................. 8,047 8,095 ----- ----- TOTAL ASSETS.......................................................... $ 489,443 $ 458,604 ============ ============ LIABILITIES Noninterest-bearing Deposits.................................................. $ 52,674 $ 49,610 Interest-bearing Deposits..................................................... 370,232 345,943 ------- ------- Total Deposits............................................................ 422,906 395,553 Short-term Borrowings......................................................... 12,527 12,404 Long-term Debt................................................................ 1,000 1,000 Accrued Interest Payable and Other Liabilities................................ 4,217 3,859 ----- ----- TOTAL LIABILITIES..................................................... 440,650 412,816 ------- ------- SHAREHOLDERS' EQUITY Common Stock, $10 par value; 5,000,000 shares authorized, 2,539,059 and 2,440,325 issued and outstanding in 1996 and 1995, respectively............................................ 25,391 24,403 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.......................................................... --- --- Additional Paid-in Capital.................................................... 3,649 1,000 Retained Earnings............................................................. 19,258 19,563 Unrealized Appreciation on Securities Available-for-Sale, Net................................................... 495 822 --- --- TOTAL SHAREHOLDERS' EQUITY............................................ 48,793 45,788 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................ $ 489,443 $ 458,604 ============ ============
See accompanying notes to supplemental consolidated financial statements. 20 Supplemental Consolidated Statements of Income (dollar references in thousands except earnings per share)
Years ended December 31, 1996 1995 1994 ---- ---- ---- INTEREST INCOME Interest and Fees on Loans............................................ $27,846 $26,197 $21,545 Interest on Federal Funds Sold........................................ 611 783 386 Interest on Short-term Investments.................................... 167 734 360 Interest and Dividends on Securities Taxable........................................................... 4,788 4,400 4,136 Non-taxable....................................................... 1,949 1,702 1,496 ----- ----- ----- TOTAL INTEREST INCOME.......................................... 35,361 33,816 27,923 ------ ------ ------ INTEREST EXPENSE Interest on Deposits.................................................. 16,179 15,150 11,599 Interest on Short-term Borrowings..................................... 404 671 366 Interest on Long-term Debt............................................ 100 127 54 --- --- -- TOTAL INTEREST EXPENSE............................................ 16,683 15,948 12,019 ------ ------ ------ NET INTEREST INCOME................................................... 18,678 17,868 15,904 Provision for Loan Losses............................................. 210 49 687 --- -- --- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES....................................................... 18,468 17,819 15,217 ------ ------ ------ NONINTEREST INCOME Income from Fiduciary Activities...................................... 210 207 192 Service Charges on Deposit Accounts................................... 976 766 720 Investment Services Income............................................ 403 207 420 Other Service Charges, Commissions, and Fees.......................... 510 529 420 Gains on Sales of Loans and Other Real Estate......................... 55 36 91 Security Gains........................................................ 73 19 90 -- -- -- TOTAL NONINTEREST INCOME.......................................... 2,227 1,764 1,933 ----- ----- ----- NONINTEREST EXPENSE Salaries and Employee Benefits........................................ 7,165 6,604 5,742 Occupancy Expense..................................................... 1,048 1,041 935 Furniture and Equipment Expense....................................... 1,018 955 807 FDIC Premiums......................................................... 229 471 801 Computer Processing Fees.............................................. 427 402 354 Professional Fees..................................................... 805 247 292 Other Operating Expenses.............................................. 2,596 2,698 1,979 ----- ----- ----- TOTAL NONINTEREST EXPENSE......................................... 13,288 12,418 10,910 ------ ------ ------ Income before Income Taxes............................................ 7,407 7,165 6,240 Income Tax Expense.................................................... 2,513 2,323 1,958 ----- ----- ----- NET INCOME............................................................ $ 4,894 $ 4,842 $ 4,282 ======= ======= ======= EARNINGS PER SHARE.................................................... $ 0.92 $ 0.91 $ 0.80 ======== ========= ========
See accompanying notes to supplemental consolidated financial statements. 21 Supplemental Consolidated Statements of Cash Flows (dollar references in thousands)
Years Ended December 31, 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................... $4,894 $4,842 $4,282 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Accretion on Investments......................................... (13) (630) 21 Depreciation and Amortization............................................ 1,166 1,145 912 Provision for Loan Losses................................................ 210 49 687 Gain on Sale of Securities............................................... (73) (19) (90) Gain on Sales of Loans and Other Real Estate......................... (55) (36) (91) Change in Assets and Liabilities: Deferred Taxes.................................................... 254 44 (300) Deferred Loan Fees................................................ (11) 34 (157) Interest Receivable and Other Assets.............................. 30 (1,674) 257 Interest Payable and Other Liabilities................................... 358 673 (325) Unearned Income................................................... (274) (303) (386) ---- ---- ---- Total Adjustments.............................................. 1,592 (717) 528 ----- ---- --- Net Cash from Operating Activities................................ 6,486 4,125 4,810 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks....................... 400 295 6,970 Proceeds from Maturities of Other Short-term Investments............. 7,030 52,133 14,835 Purchase of Other Short-term Investments................................. (1,966) (43,967) (22,049) Proceeds from Maturities of Securities Available-for-Sale................ 39,156 9,512 12,235 Proceeds from Sales of Securities Available-for-Sale..................... 1,080 2,515 7,286 Purchase of Securities Available-for-Sale............................ (46,471) (29,764) (5,885) Proceeds from Maturities of Securities Held-to-Maturity.............. 4,092 11,312 16,016 Purchase of Securities Held-to-Maturity.............................. (5,268) (4,243) (19,605) Purchase of Loans.................................................... (1,576) (3,691) (7,332) Proceeds from Sales of Loans......................................... 1,870 500 7,625 Loans Made to Customers net of Payments Received..................... (24,530) (8,206) (15,122) Proceeds from Sales of Other Real Estate............................. 152 389 415 Cash Acquired in Acquisition of Affiliates........................... ---- ---- 8,934 Property and Equipment Expenditures.................................. (1,236) (1,407) (1,208) ------- ------- ------- Net Cash from Investing Activities............................. (27,267) (14,622) 3,115 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits................................................... 27,353 26,373 (8,745) Net Change in Short-term Borrowings.................................. 123 (6,974) 2,925 Advances in Long-term Debt........................................... 2,000 1,500 --- Repayments of Long-term Debt......................................... (2,000) (1,500) --- Net Issuance / (Repurchase) of Common Stock.......................... 145 (110) --- Dividends Paid....................................................... (1,684) (1,554) (1,370) Exercise of Stock Options............................................ 7 22 2 Purchase of Interests in Fractional Shares........................... (30) (25) (2) --- --- -- Net Cash from Financing Activities............................. 25,914 17,732 (7,190) ------ ------ ------ Net Change in Cash and Cash Equivalents.................................. 5,133 7,235 735 Cash and Cash Equivalents at Beginning of Year....................... 32,601 25,366 24,631 ------ ------ ------ Cash and Cash Equivalents at End of Year................................. $ 37,734 $32,601 $ 25,366 ========== ======= ========== Cash Paid During the Year for: Interest.............................................................. $ 16,612 $ 15,564 $ 12,002 Income Taxes.......................................................... 2,332 2,431 2,220
See accompanying notes to supplemental consolidated financial statements. 22 Supplemental Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 (dollar references in thousands except per share data)
Unrealized Common Appreciation / Stock/ (Depreciation) Additional on Securities Total Paid-in Retained Available- Shareholders' Capital Earnings for-Sale Equity - ------------------------------------------------------------------- Balances, January 1, 1994 (as previously reported for German American Bancorp)................. $20,898 $10,443 $31,341 Retroactive restatement for Pooling of Interests (Peoples - 615,285 shares issued). 1,704 5,835 7,539 Balances, January 1, 1994 as restated....... 22,602 16,278 38,880 Net Income for 1994......................... 4,282 4,282 Net Unrealized Gain upon adoption of SFAS on January 1, 1994....................... $290 290 Net Change in Unrealized Appreciation / (Depreciation) on Securities............. (1,302) (1,302) Cash Dividends ($.26 per Common Share, as restated for pooling of interests).... (1,371) (1,371) Purchase and Retirement of 2,082 Shares pursuant to Exercise of Stock Options ............ (25 ) (42) (67) Issuance of 3,200 shares upon Exercise of Stock Options............................ 69 69 Purchase of Interest in Fractional Shares .. (2) (2) ------ ------ ------- ------ Balances, December 31, 1994................. 22,646 19,145 (1,012) 40,779 Net Income for 1995......................... 4,842 4,842 Unrealized Appreciation on Securities Transferred to Available-for-Sale........ 523 523 Net Change in Unrealized Appreciation / (Depreciation) on Securities............. 1,311 1,311 Cash Dividends ($.29 per Common Share, as restated for pooling of interests).... (1,554) (1,554) Purchase and Retirement of 3,600 Shares of Common Stock............................. (43) (67) (110) Purchase and Retirement of 3,331 Shares pursuant to Exercise of Stock Options............. (40) (64) (104) Issuance of 5,800 Shares upon Exercise of Stock Options......................... 126 126 5% Stock Dividend (86,177 Shares).......... 2,714 (2,714) --- ------ ------- ------ ------- Purchase of Interest in Fractional Shares... (25) (25) Balances, December 31, 1995................. 25,403 19,563 822 45,788 Net Income for 1996......................... 4,894 4,894 Net Change in Unrealized Appreciation / (Depreciation) on Securities............. (327) (327) Cash Dividends ($.32 per Common Share, as restated for pooling of interests).... (1,684) (1,684) Issuance of 3,899 Shares of Common Stock Pursuant to Dividend Reinvestment Plan... 145 145 Purchase and Retirement of 6,400 Shares pursuant to Exercise of Stock Options............. (85) (123) (208) Issuance of 10,394 Shares upon Exercise of Stock Options............................ 215 215 5% Stock Dividend (90,841 Shares)........... 3,362 (3,362) --- Purchase of Interest in Fractional Shares... (30) (30) -------- ------- ---- ------- Balances, December 31, 1996................. $29,040 $19,258 $495 $48,793 ======== ======= ==== =======
See accompanying notes to supplemental consolidated financial statements. 23 Notes to the Supplemental Consolidated Financial Statements December 31, 1996, 1995, and 1994 (dollar references in thousands) NOTE 1 - Summary of Significant Accounting Policies Description of Business and Basis of Presentation German American Bancorp operates primarily in the banking industry, which accounts for over 90% of its revenues, operating income and identifiable assets. German American Bancorp generates commercial, installment and mortgage loans and receives deposits from customers through its locations in the Indiana counties of Dubois, Daviess, Martin, Pike, Perry and Spencer. The overall loan portfolio is diversified among a variety of individual borrowers; however, a significant portion of debtors' ability to honor their contracts is dependent on the agriculture, 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 majority of the Company's loans are secured by specific items of collateral including business assets, consumer assets and real property. These financial statements include the accounts of German American Bancorp and its wholly-owned subsidiaries, The German American Bank, First State Bank, Southwest Indiana, GAB Mortgage Corp and German American Holdings Corporation, Inc., the parent of both Community Trust Bank and Peoples National Bank. Significant intercompany balances and transactions have been eliminated in consolidation. Certain items in the 1995 and 1994 financial statements have been reclassified to correspond with the 1996 presentation. 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 susceptible to change in the near term include the allowance for loan losses, the determination and carrying value of impaired loans, and the fair value of financial instruments. Short-term Investments Short-term Investments consist of interest-bearing balances with banks, which are generally limited to FDIC insured amounts, and Bankers Acceptances. These investments generally have terms to maturity of less than one year and are carried at cost, which approximates market value. Securities Securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity, and includes securities that management might use as part of its asset-liability strategy or that may be sold in response to changes in interest rates, changes in prepayment risk, or for similar reasons. Securities available-for-sale are reported at market value with unrealized gains or losses included as a separate component of equity, net of tax. Securities classified as held-to-maturity are securities that the Company has both the ability and positive intent to hold to maturity. Securities held-to-maturity are carried at amortized cost. Premium amortization is deducted from and discount accretion is added to interest income using the level yield method. The cost of securities sold is computed on the identified securities method. Loans Interest is accrued over the term of the loans based on the principal balance outstanding. Loans are placed on a nonaccrual status when scheduled principal or interest payments are past due 90 days or more, unless the loan is well secured and in the process of collection. The carrying values of impaired loans (as explained below in "Allowance for Loan Losses") are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as bad debt expense, if reductions, or otherwise as interest income. 24 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 1 - Summary of Significant Accounting Policies (continued) The Company defers loan fees and certain direct loan origination costs. The amounts deferred are reported in the balance sheet as part of loans and are recognized into interest income over the term of the loan using the level yield method. Allowance for Loan Losses The allowance for loan losses is a valuation allowance, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged -off. Loan impairment is reported when full payment under the loan terms is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Smaller-balance homogenous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Commercial, agricultural, and poultry loans are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicates that underlying cash flows of the borrower's business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of more than 30 days. Nonaccrual loans are generally also considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The nature of disclosures for impaired loans is considered generally comparable to prior nonaccrual and renegotiated loan disclosures. Premises, Furniture, and Equipment Premises, Furniture and Equipment are stated at cost less accumulated depreciation. Premises and related components are depreciated on the straight-line method with useful lives ranging from 10 to 40 years. Furniture and equipment are primarily depreciated using straight-line methods with useful lives ranging from 3 to 12 years. Maintenance and repairs are expensed and major improvements are capitalized. At the time of sale or disposition of an asset, the applicable cost and accumulated depreciation amounts are removed from the accounting records. These assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. Other Real Estate Other Real Estate is carried at the lower of cost or fair value less estimated selling costs. Expenses incurred in carrying Other Real Estate are charged to operations as incurred. Intangible Assets Intangible Assets are comprised of core deposit intangibles ($333 and $434 at December 31, 1996 and 1995, respectively) and goodwill ($1,441 and $1,556, at December 31, 1996 and 1995, respectively). Core deposit intangibles is being amortized on an accelerated method over ten years and goodwill is being amortized on a straight-line basis over fifteen years. Goodwill and Core Deposit Intangibles are assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. Stock Compensation Expense for employee compensation under stock option plans is reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Financial Accounting Standard No. 123 was used for stock-based compensation. Income Taxes Deferred tax liabilities and assets are determined at each balance sheet date. They are measured by applying enacted tax laws to future amounts that will result from differences in the financial statement and tax basis of assets and liabilities. Recognition of deferred tax assets is limited by the establishment of a valuation reserve unless management concludes that the assets will more likely than not result in future tax benefits to the Company. Income tax expense is the amount due on the current year tax returns plus or minus the change in deferred taxes. 25 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) Cash Flow Reporting The Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial institutions. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold. Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately in Note 18. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on-and off-balance sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. NOTE 2 - Securities The amortized cost and estimated market values of Securities as of December 31, 1996 are as follows:
Gross Gross Estimated Securities Available-for-Sale: Amortized Unrealized Unrealized Market Cost Gains Losses Value - -------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies.................... $47,181 $81 $(221) $47,041 Obligations of State and Political Subdivisions............. 19,560 947 (321) 20,186 Corporate Securities........................................ 7,221 42 (18) 7,245 Mortgage-backed and Asset-backed Securities................. 23,783 487 (192) 24,078 Other Securities............................................ 1 6 - --- 7 - - - --- - Total................................................... $97,746 $1,563 $(752) $98,557 ======= ====== ===== ======= Securities Held-to-Maturity: U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies............................... $2,519 --- $(21) $2,498 Obligations of State and Political Subdivisions............. 18,253 $646 (18) 18,881 Mortgage-backed and Asset-backed Securities................. 999 12 (22) 989 Corporates.................................................. 47 --- - --- 47 Other Securities............................................ 1,395 --- --- 1,395 ----- --- --- - ----- Total................................................... $23,213 $658 $(61) $23,810 ======= ==== ===== =======
26 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 2 - Securities (continued) The amortized cost and estimated market values of Securities as of December 31, 1995 are as follows:
Gross Gross Estimated Securities Available-for-Sale: Amortized Unrealized Unrealized Market Cost Gains Losses Value - ------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies.................... $31,717 $172 $(170) $31,719 Obligations of State and Political Subdivisions............. 16,403 1,155 --- 17,558 Corporate Securities........................................ 6,375 88 --- 6,463 Mortgage-backed and Asset-backed Securities................. 37,002 317 (259) 37,060 Other Securities............................................ 16 71 - --- 87 -- -- - --- -- Total................................................... $91,513 $1,803 $(429) $92,887 ======= ====== ===== ======= Securities Held-to-Maturity: U.S. Treasury Securities and Obligations of Government & Corporations and Agencies.................. $5,037 --- $(86) $4,951 Obligations of State and Political Subdivisions............. 14,472 673 (29) 15,116 Mortgage-backed and Asset-backed Securities................. 1,435 7 (21) 1,421 Other Securities............................................ 1,119 --- --- 1,119 ----- --- --- - ----- Total................................................... $22,063 $680 $(136) $22,607 ======= ==== ===== =======
The amortized cost and estimated market value of Securities at December 31, 1996 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgaged-backed, Asset-backed and certain other Securities are not due at a single maturity date and are shown separately.
Estimated Amortized Market Cost Value Securities Available-for-Sale: --------- --------- Due in one year or less..................................... $4,840 $4,825 Due after one year through five years....................... 44,229 44,391 Due after five years through ten years...................... 16,289 16,392 Due after ten years......................................... 8,604 8,864 Mortgage-backed and Asset-backed Securities................. 23,783 24,078 Other Securities............................................ 1 7 - - Totals.................................................. $97,746 $98,557 ======= ======= Securities Held-to-Maturity: Due in one year or less..................................... $3,127 $3,108 Due after one year through five years....................... 5,449 5,532 Due after five years through ten years...................... 2,603 2,761 Due after ten years......................................... 9,593 9,978 Mortgage-backed and Asset-backed Securities................. 999 989 Other Securities............................................ 1,442 1,442 ----- ----- Totals.................................................. $23,213 $23,810 ======= =======
27
1996 1995 1994 ---- ---- ---- Available- Held-to- Available- Held-to- Available- Held-to- for-Sale Maturity for-Sale Maturity for-Sale Maturity Sales of Securities are summarized below: Proceeds from Sales........................ $1,080 $0 $2,515 $0 $7,286 $0 Gross Gains on Sales....................... 76 0 22 0 94 0 Gross Losses on Sales...................... (3) 0 (3) 0 (4) 0 Income Taxes on Gross Gains................ 30 0 9 0 37 0 Income Taxes on Gross Losses............... (1) 0 (1) 0 (2) 0
28 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 2 - Securities (continued) Securities with a carrying value of $17,004 and $17,749 as of December 31, 1996 and 1995, respectively, were pledged to secure repurchase agreements, public and trust deposits and for other purposes as required by law. No investment securities of an individual issuer exceeded ten percent of German American Bancorp shareholders' equity at December 31, 1996. The total dollar amount of Cash and Due from Banks, Federal Funds Sold and Other Short-term Investments with National City Bank, Louisville, Kentucky was $15,415 at December 31, 1996. Investments in state and political subdivisions and corporate obligations are generally required by policy to be investment grade as established by national rating organizations. However, the purchase of non-rated Indiana municipal securities is permitted by policy when the inherent quality of the issue is clearly evident to management. These investments are actively traded and have a readily available market valuation. Market values of these investments are reviewed quarterly with market values being obtained from an independent rating service or broker. At December 31, 1996 and 1995, U.S. Government Agency structured notes with an amortized cost of $6,000 and $13,250 and fair value of $5,901 and $13,064, respectively, are included in securities available-for-sale, consisting primarily of step-up single-index bonds. Collateralized mortgage obligations (CMO's) and real estate mortgage investment conduits (REMIC's), all of which are issued by U.S. Government Agencies and the majority of which are fixed rate, comprised over 80% of Mortgage-backed securities. NOTE 3 - Loans Loans, as presented on the balance sheet, are comprised of the following classifications as of December 31,
1996 1995 ---- ---- Real Estate Loans Secured by 1- 4 Family Residential Properties......................... $93,713 $85,543 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers............ 57,073 61,251 Commercial and Industrial Loans......................................................... 110,894 98,563 Loans to Individuals for Household, Family and Other Personal Expenditures.............. 50,200 41,944 Economic Development Commission Bonds................................................... 575 608 Lease Financing......................................................................... 1,279 2,167 ----- ----- Totals.............................................................................. $313,734 $290,076 ======== ======== Information regarding impaired loans is as follows: 1996 1995 ---- ---- Year-end loans with no allowance for loan losses allocated.............................. $ 386 $ 215 Year-end loans with allowance for loan losses allocated................................. 3,452 6,420 Amount of allowance allocated........................................................... 452 1,040 Average balance of impaired loans during the year....................................... 4,129 4,643 Interest income recognized during impairment............................................ 322 360 Interest income recognized on cash basis................................................ 231 277
29 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 3 - Loans (Continued) Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 1996. A summary of the activity of these loans is as follows:
Balance Changes Deductions Balance January 1, in Persons December 31, 1996 Additions Included Collected Charged-off 1996 - -------------------------------------------------------------------------------------------------------------------------- $11,018 $5,360 $(1) $(3,773) $0 $12,604
Total Loans serviced for the Federal Home Loan Mortgage Corporation were $4,440 at December 31, 1996 and $3,793 at December 31, 1995. These loans are not reflected on the consolidated balance sheet. NOTE 4 - Allowance for Loan Losses A summary of the activity in the Allowance for Loan Losses is as follows:
1996 1995 1994 ---- ---- ---- Balance as of January 1...................................... $6,893 $6,602 $5,745 Addition of Affiliate Banks.................................. --- --- 195 Provision for Loan Losses.................................... 210 49 687 Recoveries of Prior Loan Losses.............................. 299 637 240 Loan Losses Charged to the Allowance......................... (874) (395) (265) ---- ---- ---- Balance as of December 31.................................... $6,528 $6,893 $6,602 ====== ====== ======
NOTE 5 - Premises, Furniture, and Equipment Premises, furniture, and equipment as presented on the balance sheet is comprised of the following classifications:
1996 1995 ---- ---- Land............................................................................... $1,827 $1,611 Buildings and Improvements......................................................... 12,032 11,527 Furniture and Equipment............................................................ 6,567 6,079 ----- ----- Total Premises, Furniture and Equipment........................................ 20,426 19,217 Less: Accumulated Depreciation............................................. (8,841) (7,918) ------ ------ Total..................................................................... $11,585 $11,299 ======= =======
Depreciation expense was $950, $914 and $815 for 1996, 1995 and 1994. NOTE 6 - Deposits The aggregate amount of interest-bearing deposits in denominations of $100 or more was $32,589 and $32,610 as of December 31, 1996 and 1995, respectively. At year-end 1996 interest-bearing deposits includes $129,090 of demand and savings deposits and $241,142 of time deposits. Stated maturities of time deposits were as follows: 1997............................................ $139,740 1998............................................ 70,315 1999............................................ 17,340 2000............................................ 9,910 2001............................................ 3,708 Thereafter...................................... 129 --- Total........................................ $241,142 ======== 30 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 7 - Short-term Borrowings The Bancorp uses repurchase agreements and short-term borrowings, primarily federal funds purchased and Interest Bearing Demand Notes issued to the U.S. Treasury, as funding sources. Repurchase agreements are essentially borrowings from customers secured by a pledge of securities. The Bancorp retains possession of and control over such securities. Information regarding repurchase agreements and short-term borrowings at December 31, 1996 and 1995 is as follows:
1996 1995 ---- ---- Balances at year-end: Repurchase agreements............................................. $8,400 8,254 Federal Funds Purchased........................................... 2,000 4,150 Demand Notes Issued to the U.S. Treasury.......................... 2,127 0
NOTE 8 - Long-term Debt Long-term debt outstanding consists of the following at December 31:
1996 1995 ---- ---- Federal Home Loan Bank advances: interest payable monthly at 5.20%; principal due at maturity on January 13, 1997....................... $1,000 $ --- Federal Home Loan Bank advances: interest payable monthly at 4.51%; principal due at maturity on October 15, 1996....................... --- 500 Federal Home Loan Bank advances: interest payable monthly at 6.28%; principal due at maturity on August 8, 2000......................... --- 500 --- --- Total long-term debt.............................................. $1,000 $1,000 ====== ======
These advances are secured by a blanket pledge of residential mortgage loans and U.S. Government and Agency and Mortgage-backed securities. NOTE 9 - Employee Benefit Plans During 1996 and 1995, the Company and all its banking affiliates except Peoples provided a trusteed noncontributory profit sharing plan which covered substantially all full-time employees. Contributions are discretionary and are subject to determination by the Board of Directors. Contributions to this plan were $200 and $184 for 1996 and 1995, respectively. During 1994, First State Bank did not participate in the plan. Contributions were $170 for 1994. During 1996 and 1995, the Company and all its banking affiliates offered 401(k) deferred compensation plans under which the banks agree to match certain employee contributions. Contributions to this plan were $223 and $216 for 1996 and 1995, respectively. During 1994, First State Bank did not participate in this plan. Contributions to these plans were $175 in 1994. Peoples has a noncontributory defined benefit pension plan covering substantially all employees with benefits based on years of service and compensation prior to retirement. The 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. 31 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 9 - Employee Benefit Plans (continued) The following sets forth the Peoples Plan's funded status and amount recognized in the balance sheet at December 31 (amounts computed as of November 30th for 1996 and 1995):
1996 1995 ---- ---- Actuarial present value of obligations: Accumulated benefit obligation, including benefits of $548 and $494............................................................ $551 $496 ==== ==== Plan assets at fair value...................................................... $956 $809 Projected benefit obligation for service rendered to date.................................................... (838) (749) Unrecognized loss.............................................................. 77 89 Prior service cost not yet recognized.......................................... (13) (14) Unrecognized transition asset.................................................. (154) (176) ----- ----- Prepaid Pension Asset / (Accrued Pension Liability)............................ $ 28 $ (41) ===== ======
1996 1995 1994 ---- ---- ---- Net pension expense included the following: Service cost-benefits earned.................................. $36 $32 $45 Interest cost on projected benefit obligation................. 61 57 51 Actual return on plan assets.................................. (97) (135) 11 Net amortization and deferral.............................. 6 65 (62) - -- ---- Net pension expense........................................ $6 $19 $45 == === ===
The computation of pension liability and expense is based upon several key assumptions. The weighted-average discount rate, the rate of increase in future compensation and expected long-term rate of return on plan assets were 8.25%, 5.0% and 8.25% for all years presented. NOTE 10 - Stock Options The Company maintains a Stock Option Plan which reserves 168,214 shares of Common Stock (as adjusted for subsequent stock splits and subject to further customary antidilution adjustments) for the purpose of grants of options to officers and other employees of the Company. The date on which options are first exercisable is determined by the Stock Option Committee of the Company, but no stock option may be exercised after ten years from the date of grant. Options may be designated as "incentive stock options" under the Internal Revenue Code of 1986, or as nonqualified options. The exercise price of incentive stock options granted pursuant to the Plan must be no less than the fair market value of the Common Stock on the date of the grant. The Plan authorizes an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. If an optionee tenders already-owned common shares to the Company to exercise an option, the Company is obligated to use its best efforts to issue to such optionee a replacement option for the number of shares tendered of the same type (either an incentive stock option or a nonqualified option) as the option exercised and with the same expiration date priced at the fair market value of the stock on that date. Replacement options may not be exercised until one year from the date of grant. 32 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 10 - Stock Options (Continued) Changes in options outstanding were as follows, as adjusted to reflect stock splits and stock dividends:
Number Weighted-average of Options Exercise Price Outstanding, beginning of 1994..................................... 59,039 $ 9.36 Granted............................................................ 4,820 13.98 Exercised.......................................................... (7,409) 9.36 ------ Outstanding, end of 1994........................................... 56,450 9.76 Granted............................................................ 7,711 13.48 Exercised.......................................................... (13,429) 9.36 ------- Outstanding, end of 1995........................................... 50,732 10.43 Granted............................................................ 14,112 14.66 Exercised.......................................................... (22,917) 9.36 -------- Outstanding, end of 1996........................................... 41,927 12.43 =======
Options exercisable at year-end are as follows:
Number Weighted-average of Options Exercise Price --------- ---------------- 1994............................................................... 21,069 $ 9.36 1995............................................................... 20,101 10.47 1996............................................................... 12,535 13.67
Financial Accounting Standard No. 123, which became effective for 1996, requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock option plans. Compensation cost actually recognized for stock options was $0 for 1996 and 1995.
1996 1995 ---- ---- Net income as reported............................................................. $4,894 $4,842 Pro forma net income............................................................... $4,881 $4,834 Earnings per share as reported..................................................... $0.92 $0.91 Pro forma earnings per share....................................................... $0.91 $0.91
In future years, the pro forma effect of not applying this standard is expected to increase as additional options are granted. For options granted during 1996 and 1995, the weighted-average fair values at grant date are $0.91 and $1.10. The fair value of options granted during 1996 and 1995 is estimated using the following weighted-average information: risk-free interest rate of 5.41% and 5.43%, expected life of one year, expected volatility of stock price of .10 percent and expected dividends of 2.38% and 2.41% per year. At year-end 1996, options outstanding have a weighted average remaining life of 6.25 years, with exercise prices ranging from $9.36 to $15.65. 33 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 11 - Income Taxes The provision for income taxes consists of the following:
1996 1995 1994 ---- ---- - ---- Currently Payable............................................. $2,306 $2,326 $2,340 Deferred...................................................... 254 44 (300) Net Operating Loss Carryforward............................... (47) (47) (82) --- --- - --- Total..................................................... $2,513 $2,323 $1,958 ====== ====== ======
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows:
1996 1995 1994 ---- ---- - ---- Statutory Rate Times Pre-tax Income........................... $2,519 $2,436 $2,121 Add/(Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments.............. (645) (561) (491) Non-deductible Merger Costs............................... 149 --- 26 State Income Tax, Net of Federal Tax Effect............... 459 420 360 Other Differences......................................... 31 28 (58) -- -- - -- Total Income Taxes...................................... $2,513 $2,323 $1,958 ====== ====== ======
The net deferred tax asset at December 31 consists of the following:
1996 1995 ---- ---- Deferred Tax Assets: Allowance for Loan Losses................................. $1,546 $1,741 Pension Expense........................................... 6 36 Net Operating Loss Carryforwards.......................... 234 281 Other..................................................... 168 337 --- --- Total Deferred Tax Assets............................... 1,954 2,395 ----- ----- Deferred Tax Liabilities: Depreciation.............................................. (192) (180) Leasing Activities, Net................................... (282) (373) Purchase Accounting Adjustments........................... (45) (63) Unrealized Appreciation on Securities..................... (315) (552) Other..................................................... (64) (154) --- ---- Total Deferred Tax Liabilities.......................... (898) (1,322) ---- ------ Valuation Allowance........................................... (48) (48) --- --- Net Deferred Tax Asset.................................... $1,008 $1,025 ====== ====== The Company's subsidiary, German American Holdings Corporation, Inc., has $688 of federal tax net operating loss carryforwards expiring in the following amounts: Year Amount Year Amount Year Amount - ------------------------------------------------------------------------------------------------------------------ 1997 $42 2000 $135 2007 $58 1998 80 2001 129 2008 4 1999 135 2002 105
34 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 12 - Per Share Data In 1995, 1996 and 1997, the Board of Directors declared a 5 percent stock dividend. In lieu of issuing fractional shares, the Company purchased from shareholders their fractional interest. Additionally, the Board declared a two-for-one stock split in 1997. Earnings and dividend per share amounts have been retroactively computed as though these additionally issued shares had been outstanding for all periods presented. The weighted average number of shares used in calculating earnings and dividends per share amounts were 5,335,316, 5,331,745, and 5,331,163 for 1996, 1995, and 1994, respectively. Stock Options (see Note 10) are not materially dilutive and have been excluded from weighted average shares. NOTE 13 - Lease Commitments The total rental expense for all leases for the years ended December 31, 1996, 1995, and 1994 was $106, $100, and $91, respectively, including amounts paid under short-term cancelable leases. At December 31, 1996, the German American Bank and First State Bank subleased space for three branch banking facilities from a company controlled by a director and principal shareholder of the Company. The subleases expire in 2000 and 2001 with various renewal options provided. Aggregate annual rental payments to this Director's company totaled $38 for 1996. Exercise of the Bank's sublease renewal options are contingent upon the Director's company renewing its primary leases. The following is a schedule of future minimum lease payments: Years Ending December 31:
Premises Equipment Total 1997.................................................... $78 $19 $97 1998.................................................... 67 9 76 1999.................................................... 62 1 63 2000.................................................... 56 --- 56 2001.................................................... 33 --- 33 -- --- -- Total................................................ $296 $29 $325 ==== === ====
NOTE 14 - Commitments and Off-balance Sheet Items In the normal course of business, there are various commitments and contingent liabilities, such as guarantees and commitments to extend credit, which are not reflected in the accompanying consolidated financial statements. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans, standby letters of credit, and financial guarantees is represented by the contractual amount of those instruments. The Company uses the same credit policy to make such commitments as it uses for on-balance sheet items. These financial instruments at December 31, are summarized as follows:
1996 1995 ---- ---- Commitments to Fund Loans Home Equity.................................................... $8,185 $7,495 Credit Card Lines.............................................. 4,480 4,528 Commercial Real Estate Commitments............................. 67 2,298 Commercial Operating Lines..................................... 23,900 27,590 ------ ------ Total Commitments to Fund Loans............................ $36,632 $41,911 ======= ======= Standby Letters of Credit......................................... $2,009 $3,378
35 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 14 - Commitments and Off-balance Sheet Items (continued) 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 approximate duration of these commitments is generally one year or less. The interest rates associated with these commitments are generally variable rate. The Company self-insured employee health benefits for all affiliates except Peoples. Stop loss insurance covers annual losses exceeding $35 per covered individual and approximately $392 in the aggregate. Management's policy is to establish a reserve for claims not submitted by a charge to earnings based on prior experience. Charges to earnings were $326 and $269 for 1996 and 1995, respectively. The charge to earnings for 1994 was $230, but did not include First State Bank. At December 31, 1996 and 1995, the affiliate banks were required to have $2,504 and $2,424 on deposit with the Federal Reserve or as cash on hand. These reserves do not earn interest. NOTE 15 - Non-cash Investing Activities
1996 1995 1994 ---- ---- ---- Loans Transferred to Other Real Estate..................... $25 $149 $122 Securities Transferred to Available-for-Sale............... --- 40,279 44,132
The data above should be read in conjunction with the Consolidated Statements of Cash Flows. In 1994, Securities were transferred to Available-for-Sale upon adoption of FAS 115, and $2,400 of Securities were transferred to Available-for-Sale upon acquisition of The Otwell State Bank. During December 1995, Securities 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. 36 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 16 - Parent Company Financial Statements The condensed financial statements of German American Bancorp as of December 31, 1996 and 1995, and for each of the three years ended December 31, 1996, 1995, and 1994 are as follows: CONDENSED BALANCE SHEETS December 31, 1996 AND 1995
1996 1995 ---- ---- ASSETS Cash........................................................................... $428 $470 Securities Available-for-Sale, at Market....................................... 1,791 87 Investment in Subsidiary Banks and Bank Holding Company........................ 45,740 44,597 Investment in GAB Mortgage Corp................................................ 278 274 Furniture and Equipment........................................................ 785 313 Other Assets................................................................... 248 208 --- --- Total Assets................................................................ $49,270 $45,949 ======= ======= LIABILITIES........................................................................ $ 477 $ 161 --------- ---------- SHAREHOLDERS' EQUITY Common Stock................................................................... 25,391 24,403 Additional Paid-in Capital..................................................... 3,649 1,000 Retained Earnings.............................................................. 19,258 19,563 Unrealized Appreciation on Securities Available-for-Sale....................... 495 822 --- --- Total Shareholders' Equity.................................................. 48,793 45,788 ------ ------ Total Liabilities and Shareholders' Equity.................................. $49,270 $45,949 ======= =======
CONDENSED STATEMENTS OF INCOME For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- - ---- INCOME Dividends from Subsidiary Banks...................................... $5,386 $2,665 $4,869 Dividend and Interest Income......................................... 110 18 44 Fee Income........................................................... 374 178 --- Gain on Security Sales............................................... 74 --- - --- Other Income......................................................... 5 5 5 - - - - Total Income...................................................... 5,949 2,866 4,918 ----- ----- ----- EXPENSES Salaries and Benefits................................................ 1,330 922 533 Professional Fees.................................................... 601 95 157 Occupancy and Equipment Expense...................................... 260 130 2 Other Expenses....................................................... 219 108 26 --- --- -- Total Expenses.................................................... 2,410 1,255 718 ----- ----- --- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES................................. 3,539 1,611 4,200 Income Tax Benefit....................................................... 556 415 286 --- --- --- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES............................................... 4,095 2,026 4,486 Equity in Undistributed Income of Subsidiaries........................... 799 2,816 (204) --- ----- - ---- NET INCOME............................................................... $4,894 $4,842 $4,282 ====== ====== ======
37 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 16 - Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- - ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................... $4,894 $4,842 $4,282 Adjustments to Reconcile Net Income to Net Cash from Operations Amortization on Securities........................................ 32 --- - --- Depreciation............................................................. 117 65 2 Net Realized Gain on Sale of Securities........................... (74) --- - --- Change in Other Assets............................................ (40) (72) (107) Change in Other Liabilities....................................... 338 84 (57) Equity in Undistributed Income of Subsidiaries.................... (799) (2,816) 204 ---- ------ - --- Total Adjustments............................................... (426) (2,739) 42 ---- ------ - -- Net Cash from Operating Activities................................ 4,468 2,103 4,324 ----- ----- - ----- CASH FLOWS FROM INVESTING ACTIVITIES Investment in Subsidiaries........................................... --- --- (3,818) Capital Contribution to First State Bank................................. (632) --- - --- Advances made to Subsidiaries........................................ --- --- (1,000) Repayment of Advances by Subsidiaries................................ --- --- 2,100Purchase of Securities Available-for-Sale........................... (1,815) --- - --- Proceeds from Sales of Securities Available-for-Sale................. 88 --- --- Property and Equipment Expenditures.................................. (589) (362) (18) ---- ---- - --- Net Cash from Investing Activities................................ (2,948) (362) (2,736) ------ ---- - ------ CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid....................................................... (1,684) (1,554) (1,371) Exercise of Stock Options............................................ 7 23 3 Purchase and Retire Common Stock..................................... --- (110) - --- Issuance of Common Stock Pursuant to Dividend Reinvestment Plan.......... 145 --- - --- Purchase of Interest in Fractional Shares............................ (30) (25) (2) --- --- - -- Net Cash from Financing Activities................................ (1,562) (1,666) (1,370) ------ ------ - ------ Net Change in Cash and Cash Equivalents.................................. (42) 75 218 Cash and Cash Equivalents at Beginning of Year....................... 470 395 177 --- --- - --- Cash and Cash Equivalents at End of Year............................. $428 $470 $395 ==== ==== ====
NOTE 17 - Capital Requirements The Company and affiliate Banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. 38 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 17 - Capital Requirements (continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:
Capital to risk- Tier 1 capital weighted assets to average assets Total Tier 1 Well capitalized...................................................... 10% 6% 5% Adequately capitalized................................................ 8% 4% 4% Undercapitalized...................................................... 6% 3% 3% At year-end 1996, consolidated and German American Bank actual capital levels and minimum required levels are presented below. Capital ratios for the other affiliate banks are materially consistent with consolidated capital ratios.
Minimum Required To Be Well Minimum Required Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Regulations: Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------- - ----- Total Capital (to Risk Weighted Assets) Consolidated....................... $50,402 15.8% $25,582 8.0% $31,977 10.0% German American Bank............... $24,183 13.6% $14,208 8.0% $17,759 10.0% Tier 1 Capital (to Risk Weighted Assets) Consolidated....................... $46,374 14.5% $12,791 4.0% $19,186 6.0% German American Bank............... $21,953 12.4% $7,104 4.0% $10,656 6.0% Tier 1 Capital (to Average Assets) Consolidated....................... $46,374 10.0% $18,632 4.0% $23,290 5.0% German American Bank............... $21,953 8.3% $10,559 4.0% $13,199 5.0%
The Company and all affiliate Banks at year-end 1996 were categorized as well capitalized. NOTE 18 - Business Combinations On April 1, 1994, the Company acquired all of the outstanding shares of The Otwell State Bank of Otwell, Indiana in exchange for 113,286 shares of German American Bancorp common stock. The Otwell State Bank was subsequently merged into Community Trust Bank. Fractional interests were paid in cash of $2. The transaction was accounted for as a pooling of interests. On October 28, 1994, the Company acquired three Indiana branches of Regional Federal Savings Bank. The Huntingburg branch site was subsequently combined into an existing branch of the German American Bank in Huntingburg, while the other two sites in Tell City and Rockport were combined into a newly formed commercial bank known as First State Bank, Southwest Indiana. The fair value of assets acquired was $16,048, the fair value of liabilities assumed was $24,982, and the Company received $8,934 of cash at settlement. Goodwill associated with this purchase was $1,353 while core deposit intangible was $317. On March 4, 1997, the company acquired Peoples Bancorp of Washington, Indiana and its Wholly-owned subsidiary, Peoples National Bank and Trust Company, in a pooling-of-interests. Pursuant to the merger, the Company issued 615,285 common shares. 39 Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 18 - Business Combinations (Continued) The supplemental consolidated financial statements give retroactive effect to the merger with Peoples Bancorp, which has been accounted for using the pooling-of-interests method and, as a result, the financial position, results of operations and cash flows are presented as if the combining companies had been consolidated for all periods presented. The supplemental consolidated statements of changes in shareholders' equity reflect the accounts of the Company as if the additional common stock had been issued during all periods presented. As required by generally accepted accounting principles, the supplemental consolidated financial statements will become the historical financial statements upon issuance of the financial statements for the period that includes the date of the merger. The supplemental consolidated financial statements, including the notes thereto, should be read in conjunction with the historical consolidated financial statements of the Company and Peoples Bancorp included in the Company's 1996 annual report on Form 10-K. NOTE 19 - Fair Values of Financial Instruments The following methods and assumptions were used to estimate fair values for financial instruments. For cash, short-term investments, short-term borrowings and accrued interest, the carrying amount is a reasonable estimate of fair value. The carrying value of commitments to extend credit and standby letters of credit, which is zero, is also a reasonable estimation of fair value. These instruments are generally short-term or variable rate with minimal fees charged. In the case of securities, the fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar instruments. The fair value of loans 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 remaining maturities. The fair value of demand deposits, savings accounts, and certain money market deposits and accrued interest, is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits is estimated using the rates currently offered on deposits of similar remaining maturities.
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- - ----------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE - ----------------------------------------------------------- Financial Assets: Cash and Short-term Investments......................... $39,310 $39,310 $39,527 $39,527 Securities Available-for-Sale........................... 98,557 98,557 92,887 92,887 Securities Held-to-Maturity............................. 23,213 23,810 22,063 22,607 Loans, net.............................................. 306,754 306,397 282,457 281,819 Accrued Interest Receivable............................. 4,533 4,533 4,435 4,435 Financial Liabilities: Deposits................................................ (422,906) (425,534) (395,553) (397,112) Short-term Borrowings................................... (12,527) (12,527) (12,404) (12,404) Long-term Debt.......................................... (1,000) (1,002) (1,000) (1,011) Accrued Interest Payable................................ (2,279) (2,279) (2,207) (2,207) Unrecognized Financial Instruments Commitments to extend Credit............................ --- --- - --- --- Standby Letters of Credit............................... --- --- - --- ---
Notes to the Supplemental Consolidated Financial Statements (continued) (dollar references in thousands) NOTE 20 - Pending Accounting Changes Financial Accounting Standard No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, was issued by the Financial Accounting Standards Board in 1996. It revises the accounting for transfers of financial assets, such as loans and securities, and for distinguishing between sales and secured borrowings. It is effective for some transactions in 1997 and others in 1998. The effect on the financial statements is not expected to be material. 40 NOTE 21 - Subsequent Events (Unaudited) The Company signed a definitive agreement in January 1998 providing for the merger with CSB Bancorp, ("CSB") which operates Citizens State Bank of Petersburg, Indiana. CSB operates one banking office in Pike County, Indiana. Under the terms of the agreement, the Company will issue to the shareholders of CSB between 928,572 and 1,137,500 shares of Company Common Stock, as adjusted for the Company's two for one stock split and five percent stock dividend, both declared in October 1997 (subject to further antidilution adjustments in the event of any future stock dividends, splits and the like). The number of shares issued is dependent 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 January 31, 1998, the Company would issue the minimum number of shares. The transaction is expected to be accounted for as a pooling of interests. The proposed merger is subject to approval by the shareholders of CSB, bank regulatory agencies, and other conditions. The parties contemplate that the merger will be effective in the second quarter of 1998. As of September 30, 1997 and for the nine months then ended, CSB reported total assets of $76,717,000, shareholders' equity of $9,113,000 and net income of $398,000. The Company also signed a definitive agreement in January 1998 providing for the merger with FSB Financial Corporation ("FSB") which operates FSB of Francisco, Indiana. FSB operates one banking office in Pike County, Indiana and one in Gibson County, Indiana. Under the terms of the agreement, the Company will issue to the shareholders of FSB shares of Company Common Stock with market value equal to 150% of the sum of FSB's shareholders' equity. The market value of the shares issued will be based upon FSB shareholder equity as of the end of the month immediately preceding the closing date, subject to certain adjustments described in the definitive agreement. Based on FSB's shareholder equity as of September 30, 1997, and the average bid / asked quotations for the Company's Common Stock during the period preceding January 31, 1998, the Company would issue approximately 71,678 shares. The transaction is expected to be accounted for as a pooling of interests. The proposed merger is subject to approval by the shareholders of FSB, bank regulatory agencies, and other conditions. The parties contemplate that the merger will be effective in the second quarter of 1998. As of September 30, 1997 and for the nine months then ended, FSB reported total assets of $15,699,000, shareholders' equity of $1,481,000 and net loss of $23,000. 41 Independent Auditors' Report Board of Directors and Shareholders German American Bancorp Jasper, Indiana We have audited the accompanying supplemental consolidated balance sheets of German American Bancorp as of December 31, 1996 and 1995, and the related supplemental consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. 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. The supplemental financial statements give retroactive effect to the merger of German American Bancorp and Peoples Bancorp of Washington on March 4, 1997, which has been accounted for as a pooling of interests as discussed in Note 18. Generally accepted accounting principles prohibit giving effect to a consummated business combination accounted for by the pooling of interests method in financial statements that do not include the date of consummation. These financial statements do not extend through the date of consummation; however, they will become the historical consolidated financial statements of German American Bancorp after financial statements covering the date of consummation of the business combination are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of German American Bancorp as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the date of consummation of the business combination. /s/ Crowe, Chizek and Company LLP Indianapolis, Indiana March 4, 1997 Crowe, Chizek and Company LLP 42 Market and Dividend Information for German American Bancorp Common Stock MARKET AND DIVIDEND INFORMATION The following table sets forth (a) the high and low closing prices for the Company's common stock as reported by NASDAQ by quarter for 1996 and 1995, and (b) dividends declared per share on the Company's common stock (not retroactively restated for pooling of interests transactions) by quarter during 1996 and 1995. All per share information has been retroactively restated for the Company's 5% stock dividends declared in 1997, 1996 and 1995 and the 2-for-1 stock split effective November 1, 1997.
1996 1995 ---- ---- High Low Dividend High Low Dividend First Quarter $15.36 $13.60 $.09 First Quarter $14.57 $13.38 $.09 Second Quarter $16.10 $14.51 $.10 Second Quarter $14.23 $12.98 $.09 Third Quarter $17.00 $15.30 $.10 Third Quarter $14.06 $12.98 $.09 Fourth Quarter $18.33 $16.55 $.10 Fourth Quarter $14.68 $13.61 $.09 - ---- ---- $.39 $.36 ==== ====
The Common Stock was held of record by approximately 1,981 shareholders at March 5, 1997. Funds for payment by the Company of cash dividends are expected to be obtained from dividends received by the Company from its subsidiaries. The Company presently intends to follow its historical policy as to the amount, timing and frequency of the payment of dividends. In addition, the Company's Board of Directors presently intends to consider declaring and issuing a stock dividend of 5% on an annual basis. The declaration and payment of future dividends, however, will depend upon the earnings and financial condition of the Company and its subsidiaries, general economic conditions, compliance with regulatory requirements and other factors. -----END PRIVACY-ENHANCED MESSAGE-----