-----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, RhISTHLxb5qH6bFeocVt2VOcaaJSCPIzMcCovblB/8cf2+GlLb+OXC6Qd1PgRO4f 5EsMTVC8SfEpwXPVpXt9ZQ== 0000941965-98-000041.txt : 19980401 0000941965-98-000041.hdr.sgml : 19980401 ACCESSION NUMBER: 0000941965-98-000041 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11244 FILM NUMBER: 98581263 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 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended: December 31, 1997 OR | ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________to_____________________ Commission File Number 0-11244 GERMAN AMERICAN BANCORP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) INDIANA 35-1547518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 711 Main Street, Box 810, Jasper, Indiana 47546 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (812) 482-1314 Securities registered pursuant to Section 12 (b) of the Act: Title of each class Name of each exchange on which registered NONE Not Applicable - --------------------- ------------------------------------ Securities registered pursuant to Section 12 (g) of the Act: Common Shares, $10.00 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The aggregate market value of the voting stock held by nonaffiliates of the Registrant (assuming solely for purposes of this calculation that all directors and executive officers of the Registrant are affiliates) valued at the last trade price reported by NASDAQ as of March 6, 1998 was approximately $132,556,000. As of March 6, 1998, there were outstanding 5,350,161 common shares, $10.00 par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Shareholders of German American Bancorp for 1997, to the extent stated herein, are incorporated by reference into Parts I and II. (2) Portions of the Proxy Statement of German American Bancorp for the Annual Meeting of its Shareholders to be held April 23, 1998, to the extent stated herein, are incorporated by reference into Part III. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | X | PART I Item 1. Business General German American Bancorp (referred to herein as the "Company", the "Corporation", or the "Registrant") is a multi-bank holding company organized in Indiana in 1982. The Company's principal subsidiaries are The German American Bank, Jasper, Indiana ("German American Bank"), First State Bank, Southwest Indiana, Tell City, Indiana ("First State Bank"), and German American Holdings Corporation ("GAHC"), an Indiana corporation that owns all of the outstanding capital stock of both Community Trust Bank, Otwell, Indiana ("Community Bank") and The Peoples National Bank and Trust Company of Washington, Washington, Indiana ("Peoples"). The Company, through its four bank subsidiaries, (sometimes referred to herein as the "Banks") operate 20 banking offices in six contiguous counties in southwestern Indiana and had total consolidated assets at year-end 1997 of approximately $499,000,000. German American Bank was organized under the law of Indiana in 1910. At December 31, 1997, German American Bank was the second largest of the six commercial banks with offices in Dubois County, Indiana, in terms of total assets and total deposits. German American Bank conducts its banking operations from its principal banking office in Jasper, Indiana, and from seven branch office locations throughout Dubois County. Peoples, organized under the National Bank Act in 1888, was acquired by the Company on March 4, 1997 pursuant to a merger of the parent corporation of Peoples into GAHC. Simultaneously with and as an integral part of this merger, The Union Bank of Loogootee, Indiana, a subsidiary of the Company, was merged with and into Peoples. Peoples, at December 31, 1997, ranked second in asset size among the five commercial banks and thrifts headquartered in Martin and Daviess Counties, Indiana. The Union Bank had been acquired by the Registrant on March 8, 1993. On April 1, 1993, the Registrant purchased all the shares of Winslow Bancorporation, Winslow, Indiana, (which was in 1996 renamed German American Holdings Corporation), and its subsidiary Southwestern Indiana Bank in a cash transaction. On April 1, 1994, the Registrant issued 113,286 shares in exchange for all the outstanding shares of The Otwell State Bank. Following the completion of this transaction, Otwell and Southwestern were merged into Community Trust Bank, a combined banking institution operating in the Pike County, Indiana market through three offices. On October 28, 1994, the Registrant acquired three branches of Regional Federal Savings Bank of New Albany, Indiana. The Huntingburg, Indiana branch was combined with an existing branch of the Registrant's lead bank, German American Bank. The other two former branches in Tell City and Rockport, Indiana were acquired by a new subsidiary bank of the Registrant named First State Bank, Southwest, Indiana. Each of the Company's subsidiary banks engages in a wide range of commercial and personal banking services, and German American Bank and Peoples provide a wide range of personal and corporate trust-related services. In addition, several of the Company's subsidiary banks provide investment services through a full-service brokerage operation. The Company and its subsidiary banks operate primarily in the banking industry, which accounts for over ninety percent (90%) of the Company's consolidated revenues, operating income and identifiable assets. Through its banking subsidiaries, the Company generates commercial, installment and mortgage loans and receives deposits from customers located primarily in the local market area. The overall loan portfolio is diversified among a variety of individual borrowers; however, a significant portion of such debtors depend upon the agriculture, poultry and wood furniture manufacturing industries for employment. 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. Additional information regarding the Company and its subsidiaries is included in the Company's Annual Report to Shareholders for 1997, selected portions of which are filed as Exhibit 13 to this Annual Report on Form 10-K (the "Shareholders' Report") and are incorporated herein by reference. Competition The banking business is highly competitive. The Company's subsidiary banks compete not only with financial institutions that have offices in the same counties but also compete with financial institutions that are located in other neighboring areas in obtaining deposits, making loans and providing many other types of financial services. The banking market in which the Company's banking subsidiaries operate is heavily influenced by larger financial institutions located in Evansville and Indianapolis, Indiana, Louisville, Kentucky and other cities. In addition to other commercial banks, the Company's subsidiary banks compete with savings and loan associations, savings banks, credit unions, production credit associations, federal land banks, finance companies, credit card companies, personal loan companies, money market funds, mortgage companies and other non-depository financial intermediaries. Recent changes in federal and state law have resulted in and are expected to continue to result in increased competition. The reductions in legal barriers to the acquisition of banks by out-of-state bank holding companies resulting from implementation of the Riegle-Neal Interstate Banking And Branching Efficiency Act of 1994 and other recent and proposed changes are expected to continue to further stimulate competition in the markets in which the Banks operate, although it is not possible to predict the extent or timing of such increased competition. Employees At January 31, 1998 the Company and its subsidiaries employed approximately 216 employees. There are no collective bargaining agreements, and employee relations are considered to be good. Regulation and Supervision The Company is subject to the Bank Holding Company Act of 1956, as amended ("BHC Act"), and is required to file with the Board of Governors of the Federal Reserve System ("FRB") annual reports and such additional information as the FRB may require. The FRB may also make examinations or inspections of the Company. The BHC Act prohibits a bank holding company from engaging in, or acquiring direct or indirect control of more than 5 percent of the voting shares of any company engaged in nonbanking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be "closely related to banking." Under current regulations, bank holding companies and their subsidiaries are permitted to engage in such banking-related business ventures as sales and consumer finance, equipment leasing, computer service bureau and software operations, and mortgage banking. The BHC Act and Indiana law restrict banking expansion by banks and bank holding companies. Under current Indiana law, Indiana banks may establish an unlimited number of branches anywhere within the State of Indiana. A holding company may establish non-banking offices without geographical limitation. Under the BHC Act, the Company must receive the prior written approval of the FRB or its delegate before it may acquire ownership or control of more than 5 percent of the voting shares of another bank, and under Indiana law it may not acquire 25 percent or more of the voting shares of another bank without the prior approval of the Indiana Department of Financial Institutions ("DFI"). The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") provides for nationwide interstate banking and branching. Since September 30, 1995, well-capitalized bank holding companies have been authorized, pursuant to the legislation, to acquire banks and bank holding companies in any state. The Interstate Act also permits banks to merge across state lines, thereby creating a main bank in one state with branches in other states. Interstate branching-by-merger provisions became effective on June 1, 1997, unless a state took legislative action prior to that date. Effective March 14, 1996, Indiana "opted-in" to the interstate branching provisions of the Interstate Act. The Company's subsidiary banks are under the supervision of and subject to examination by the Indiana Department of Financial Institutions, the Office of Comptroller of Currency and the Federal Deposit Insurance Corporation ("FDIC"). Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors rather than shareholders. The earnings of commercial banks and their holding companies are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, varying the discount rate on bank borrowings, and setting reserve requirements against bank deposits. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans and earned on investments or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks in the past and this is expected to continue in the future. The general effect, if any, of such policies upon the future business and earnings of the Company cannot accurately be predicted. The Company is required by the FRB and the FDIC to maintain minimum levels of capital. These required capital levels are expressed in terms of capital ratios, known as the leverage ratio and the capital to risk-based assets ratios. The Company significantly exceeds the minimum required capital levels for each measure of capital adequacy. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources," included in the Shareholders' Report. Also, FDIC regulations define five categories of financial institutions for purposes of implementing prompt corrective action and supervisory enforcement requirements of the Federal Deposit Insurance Corporation Improvements Act of 1991. The category to which the most highly capitalized institutions are assigned is termed "Well Capitalized." Institutions falling into this category must have a total risk-based capital ratio (the ratio of total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the ratio of Tier 1, or "core", capital to risk-weighted assets) of at least 6%, a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and must not be subject to any written agreement, order or directive from its regulator relative to meeting and maintaining a specific capital level. On December 31, 1997, the Company had a total risk-based capital ratio of 16.51%, a Tier 1 risk-based capital ratio of 15.24% (based on Tier 1 capital of $50,874,000 and total risk-weighted assets of $333,796,000), and a leverage ratio of 10.48%. The Company meets all of the requirements of the "Well Capitalized" category and, accordingly, the Company does not expect these regulations to significantly impact operations. Statistical Disclosures The following statistical data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7), Selected Financial Data (Item 6), and the financial statements and notes (Item 8) included elsewhere herein through incorporation by reference to the indicated pages of the Shareholders' Report. Securities (in thousands) The following tables set forth the carrying amount of Securities at the dates indicated: December 31, 1997 1996 1995 ---- ---- ---- Securities Held-to-Maturity: U.S. Treasury and other U.S. Government Agencies and Corporations $1,500 $2,519 $5,037 State and Political Subdivisions 20,154 18,253 14,472 Mortgage-backed Securities 695 999 1,435 Corporate Securities 111 47 --- Other Securities 1,763 1,395 1,119 ----- ----- ----- Subtotal of Securities Held-to-Maturity $24,223 $23,213 $22,063 ======= ======= ======= Securities Available-for-Sale: U.S. Treasury and other U.S. Government Agencies and Corporations $57,815 $47,041 $31,719 State and Political Subdivisions 21,620 20,186 17,558 Mortgage-backed Securities 15,661 24,078 37,060 Corporate Securities 4,529 7,245 6,463 Other Securities 14 7 87 -- - -- Subtotal of Securities Available-for-Sale 99,639 98,557 92,887 ------ ------ ------- Total Securities $123,862 $121,770 $114,950 ======== ======== ========
Statistical Disclosures (continued) The following table sets forth the contractual maturities of securities at December 31, 1997 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the maturity of each security.) Contractual maturities may differ from actual due to rights to prepay or call. Other securities totaling $1,764 are comprised of restricted stock which do not have contractual maturities and are excluded from the table below. Maturing --------- Within After One But After Five But After Ten One Year Within Five Years Within Ten Years Years --------- ------------------ ----------------- --------- Amount Yield Amount Yield Amount Yield Amount Yield ------- ------- -------- ------- -------- ------- -------- ------ U.S. Treasury and other Government Agencies and Corporations $11,498 5.45% $22,996 6.30% $24,801 6.87% --- --- State and Political Subdivisions 2,147 9.01% 10,250 9.16% 6,973 9.77% $21,182 9.21% Mortgage-backed Securities 85 5.00% 2,586 6.76% 3,241 5.94% 10,451 6.27% Corporate Securities 264 6.41% 1,585 7.55% 1,052 7.97% 1,738 7.02% --- ----- ----- ----- Totals $13,994 6.01% $37,417 7.17% $36,067 7.38% $33,371 8.18% ======= ======= ======= =======
A tax-equivalent adjustment using a tax rate of 34 percent was used in the above table. Statistical Disclosures (continued) The following table sets forth for the periods indicated a summary of the changes in interest earned and interest paid resulting from changes in volume and changes in rates: (dollar references in thousands) 1997 compared to 1996 1996 compared to 1995 --------------------- --------------------- Increase / (Decrease) Due to (1) Increase / (Decrease) Due to (1) -------------------------------- --------------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- Interest Income: Federal Funds Sold $(92) $31 $(61) (103) (69) (172) Short-term Investments (114) 5 (109) (504) (63) (567) Taxable Securities 151 381 532 241 147 388 Nontaxable Securities (2) 374 (8) 366 547 (173) 374 Loans and Leases (3) 1,481 (11) 1,470 1,931 (274) 1,657 ------ ----- ------ ------ ----- ------ Total Interest Income 1,800 398 2,198 2,112 (432) 1,680 ----- ----- ------ ------ ----- ------ Interest Paid: Savings 7 94 101 163 (149) 14 Time Deposits 1,003 (62) 941 537 477 1,014 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (51) (22) (73) (113) (78) (191) Demand Notes Issued to the U.S. Treasury (58) 18 (40) (61) (15) (76) Notes Payable (121) 30 (91) (16) (11) (27) ------- ---- ---- ---- --- ----- Total Interest Expense 780 58 838 510 224 734 ------ ---- --- --- --- ---- Net Interest Earnings $1,020 $340 $1,360 1,602 (656) 946 ======= ==== ====== ===== ===== =====
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. (2) Change in interest income include the effect of tax equivalent adjustments using a tax rate of 34 percent for all years presented. (3) Interest income on loans includes loan fees of $458, $516, and $339 for 1997, 1996, and 1995, respectively. Statistical Disclosures (continued) The following is a schedule of loans by major category for each reported period: December 31, (dollar references in thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Real Estate Loans Secured by 1-4 Family Residential Properties $107,943 $93,713 $85,543 $82,810 $69,088 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers 53,110 57,073 61,251 67,162 75,556 Commercial and Industrial Loans 106,843 110,894 98,563 90,346 69,910 Loans to Individuals for Household, Family and Other Personal Expenditures 61,297 50,200 41,944 35,124 32,154 Economic Development Commission Bonds 500 575 608 625 762 Lease Financings 1,045 1,279 2,167 2,603 3,216 ----- ----- ----- ----- ----- Total Loans $330,738 $313,734 $290,076 $278,670 $250,686 ======== ======== ======== ======== ========
The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences, installment loans and lease financing) outstanding as of December 31, 1997 which, based on remaining scheduled repayments of principal, are due in the periods indicated. Maturing (dollar references in thousands) -------------------------------- Within After One After One But Within Five Year Five Years Years Total Commercial, Agricultural and Poultry $46,170 $30,674 $83,609 $160,453
Interest Sensitivity Fixed Variable Rate Rate ---- ---- Loans maturing after one year $29,506 $84,777
Statistical Disclosures (continued) The Provision for Loan Losses provides a reserve (the Allowance for Loan Losses) to which loan losses are charged as those losses become identifiable. Management determines the appropriate level of the Allowance for Loan Losses on a quarterly basis through an independent review by the Bank's credit review section done by employees who have no direct lending responsibilities. Through this review, all commercial loans with outstanding balances in excess of $25,000 are analyzed with particular attention paid to those loans which are considered by management to have an above-average level of risk. This analysis is evaluated by Senior Management and serves as the basis for determining the adequacy of the Allowance for Loan Losses. Through this review process a specific portion of the reserve is allocated to impaired loans and to those loans which are considered to represent significant exposure to risk, and estimated potential losses are provided based on historic loan loss experience for consumer loans, residential mortgage loans, and commercial loans not specifically reviewed. In addition, a balance of the reserve is unallocated to provide an allowance for risk, such as concentrations of credit to specific industry groups, which are difficult to quantify in an absolute dollar amount. The following table presents information concerning the aggregate amount of underperforming assets. Underperforming loans comprise: (a) loans accounted for on a nonaccrual basis ("nonaccrual loans"); (b) loans contractually past due 90 days or more as to interest or principal payments (but not included in the loans in (a) above) ("past due loans"); and (c) loans not included above which are "troubled debt restructuring" as defined in Statement of Financial Standards No. 15 "FASB 15", "Accounting by Debtors and Creditors for Troubled Debt Restructuring" ("restructured loans"). December 31, (dollar references in thousands) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Nonaccrual Loans $562 $1,370 $1,093 $1,305 $1,400 Past Due Loans 2,710 1,102 2,689 639 461 Restructured Loans --- --- 122 26 --- --- --- --- -- --- Total Underperforming Loans 3,272 2,472 3,904 1,970 1,861 Other Real Estate 146 203 286 497 698 --- --- --- --- --- Total Underperforming Assets $3,418 $2,675 $4,190 $2,467 $2,559 ====== ====== ====== ====== ======
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. The gross interest income that would have been recognized in 1997 on underperforming loans if the loans had been current in accordance with their original terms is $284. Interest income recognized on underperforming loans for 1997 was $231. Statements of Financial Accounting Standards No. 114 and No. 118 were adopted January 1, 1995. These standards require recognition of loan impairment if a loan's full principal or interest payments are not expected to be received. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. No increase to the allowance for loan losses was required at January 1, 1995 as a result of the adoption of these new standards. The total dollar amount of impaired loans at December 31, 1997 was $2,272,000. For additional detail on impaired loans, see Note 3 of the consolidated financial statements included in the Shareholders' Report (Exhibit 13.4). At December 31, 1997, the Company had a total of $9,790,000 of loans on its commercial loan watch list. All loans on the watch list that are on non-accrual or are past due 90 days or more are included in the table above. Loans may be placed on the watch list as a result of delinquent status, concern about the borrower's financial condition or the value of the collateral securing the loan, substandard classification during regulatory examinations or simply as a result of management's desire to monitor more closely a borrower's financial condition and performance. It is management's belief that loans classified for regulatory purposes as loss, doubtful, substandard, or special mention that are not included in the table and discussion above, do not represent or result from trends or uncertainties which will have a material impact on future operating results, liquidity or capital resources. At December 31, 1997 there were no material credits not already disclosed as underperforming, impaired and as watch list about which management is aware of possible credit problems of borrowers which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms. This paragraph includes forward-looking statements that are based on management's assumptions concerning future economic and business conditions as they affect the local economy in general and the Company's borrowers in particular, which economic and business assumptions are inherently uncertain and subject to risk and may prove to be invalid. Readers are also cautioned that management relies upon the truthfulness of statements made by the borrowers, and that misrepresentation by borrowers is an inherent risk of the activity of lending money that could cause these forward-looking statements to be inaccurate. Statistical Disclosures (continued) Summary of Loan Loss Experience (in thousands) The following table summarizes changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category, and additions to the allowance which have been charged to expense. Year Ended December 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Balance of allowance for possible losses at beginning of period $6,528 $6,893 $6,602 $5,745 $4,496 Addition of Affiliate Banks --- --- --- 195 164 Loans charged-off: Real Estate Loans Secured by 1-4 Family Residential Properties 41 11 221 101 --- Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers --- 286 --- --- 12 Commercial and Industrial Loans 316 372 52 99 378 Loans to Individuals for Household, Family and Other Personal Expenditures 242 205 122 65 69 Economic Development Bonds --- --- --- --- --- Term Federal Funds Sold --- --- --- --- --- --- --- --- --- --- Total Loans charged-off 599 874 395 265 459 --- --- --- --- --- Recoveries of previously charged-off Loans: Real Estate Loans Secured by 1-4 Family Residential Properties --- 14 6 6 14 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers 25 125 538 --- 514 Commercial and Industrial Loans 648 118 61 187 162 Loans to Individuals for Household, Family and Other Personal Expenditures 61 42 32 47 57 Economic Development Commission Bonds --- --- --- --- -- Term Federal Funds Sold --- --- --- --- --- --- --- --- --- --- Total Recoveries 734 299 637 240 747 --- --- --- --- --- Net Loans recovered / (charged-off) 135 (575) 242 (25) 288 --- ----- --- ---- --- Additions to allowance charged to expense (408) 210 49 687 797 ----- --- -- --- --- Balance at end of period $6,255 $6,528 $6,893 $6,602 $5,745 ====== ====== ====== ====== ====== Ratio of net recoveries / (charge-offs) during the period to average loans outstanding .04% (.19)% .08% (.01)% .12% ==== ====== ==== ====== ====
Statistical Disclosures (continued) The following table indicates the breakdown of the allowance for loan losses for the periods indicated: (dollar references in thousands) December 31, December 31, December 31, 1997 1996 1995 ---- ---- ---- Allowance Ratio of Allowance Ratio of Allowance Ratio of Loans to Loans to Loans to Total Total Total Loans Loans Loans --------- -------- --------- -------- --------- -------- Residential Real Estate $270 32.64% $311 29.87% $202 29.49% Agricultural Loans 858 16.06% 1,250 18.19% 2,616 21.12% Commercial and Industrial Loans 2,394 32.62% 2,369 35.76% 2,067 34.72% Loans to Individuals 176 18.53% 303 16.00% 263 14.46% Economic Development Commission Bonds --- 0.15% --- 0.18% --- 0.21% Term Federal Funds Sold --- --- --- --- --- --- Unallocated 2,557 N/A 2,295 N/A 1,745 N/A ----- ----- ----- Totals $6,255 100.00% $6,528 100.00% $6,893 100.00% ====== ====== ======
(dollar references in thousands) December 31, December 31, 1994 1993 ---- ---- Allowance Ratio of Allowance Ratio of Loans to Loans to Total Total Loans Loans -------- -------- ---------- ------- Residential Real Estate $186 29.72% $118 27.56% Agricultural Loans 2,172 24.10% 1,083 25.52% Commercial and Industrial Loans 1,283 33.36% 1,113 33.79% Loans to Individuals 218 12.60% 230 12.83% Economic Development Commission Bonds --- 0.22% --- .30% Term Federal Funds Sold --- --- --- --- Unallocated 2,743 N/A 3,201 N/A ----- ----- Totals $6,602 100.00% $5,745 100.00% ====== ======
Statistical Disclosures (continued) The average amount of deposits is summarized for the periods indicated in the following table: (dollar references in thousands) December 31, 1997 1996 1995 ---- ---- ---- Average Average Average Balance Rate Balance Rate Balance Rate ------- ---- ------- ---- ------- ---- Demand Deposits Non-interest Bearing $47,335 --- $45,242 --- $40,200 --- Interest Bearing 52,000 2.04% 52,165 2.16% 53,907 2.27% Savings Deposits 74,861 3.23% 74,428 3.02% 66,696 3.20% Time Deposits 251,044 5.48% 232,729 5.50% 222,779 5.29% ------- ------- ------- Totals $425,240 4.05% $404,564 4.37% $383,582 4.24% ======== ======== ========
Maturities of time certificates of deposit of $100,000 or more are summarized as follows: December 31, 1997 (in thousands) 3 months or less $9,642 Over 3 through 6 months 8,950 Over 6 through 12 months 2,941 Over 12 months 4,128 ----- Total $25,661 ======= Return on Equity and Assets The ratio of net income to average shareholders' equity and to average total assets, and certain other ratios, are as follows: Year Ended December 31, 1997 1996 1995 ---- ---- ---- Percentage of Net Income to: Average Shareholders' Equity 12.13% 10.43% 11.32% Average Total Assets 1.26% 1.05% 1.09% Percentage of Dividends Declared per Common Share to Net Income per Common Share (1) 37.39% 42.39% 39.56% Percentage of Average Shareholders' Equity to Average Total Assets 10.39% 10.07% 9.63%
(1) Based on historical dividends declared by German American Bancorp without restatement for pooling. Forward-Looking Statements This Form 10-K and future filings made by the Company with the Securities and Exchange Commission, as well as other filings, reports and press releases made or issued by the Company and the Banks, and oral statements made by executive officers of the Company and the Banks, may include forward-looking statements relating to such matters as (a) assumptions concerning future economic and business conditions and their effect on the economy in general and on the markets in which the Banks do business, (b) expectations regarding revenues, expenses, and earnings for the Company and the Banks, (c) the impact of future or pending acquisitions, (d) deposit and loan volume, and (e) new products or services. Such forward-looking statements are based on assumptions rather than historical or current facts and, therefore, are inherently uncertain and subject to risk. To comply with the terms of a "safe harbor" provided by the Private Securities Litigation Reform Act of 1995 that protects the making of such forward-looking statements from liability under certain circumstances, the Company notes that a variety of factors could cause the actual results or experience to differ materially from the anticipated results or other expectations described or implied by such forward-looking statements. These risks and uncertainties that may affect the operations, performance, development and results of the Company's business include, but are not limited to, the following: (a) the risk of adverse changes in business and economic conditions generally and in the specific markets in which the Banks operate which might adversely affect credit quality and deposit and loan activity; (b) the risk of rapid increases or decreases in interest rates, which could adversely affect the Company's net interest margin if changes in its cost of funds do not correspond to the changes in income yields; (c) possible changes in the legislative and regulatory environment that might negatively impact the Company and the Banks through increased operating expenses or restrictions on authorized activities; (d) the possibility of increased competition from other financial and non-financial institutions; (e) the risk that borrowers may misrepresent information to management of the Banks, leading to loan losses, which is an inherent risk of the activity of lending money; and (f) the risk that banks that the Company may acquire in the future may be subject to undisclosed asset quality problems, contingent liabilities or other unanticipated problems; and (g) other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. The Corporation and the Banks do not undertake any obligation to update or revise any forward-looking statements subsequent to the date on which they are made. Item 2. Properties. German American Bank conducts its operations from its main office building at 711 Main Street, in Jasper, Indiana. The main office building is owned by German American and contains approximately 23,600 square feet of office space. There is no indebtedness on such property on which German American Bank's main office is located. German American Bank has seven branches, three of which are located in Jasper, and one each in the Dubois County towns of Huntingburg, Ferdinand, Dubois and Ireland. Of these branch facilities, five are owned by German American Bank and two are leased. Peoples operates from its main office in Washington, Indiana, which contains approximately 22,500 square feet, and three branch offices, all of which (except for one leased branch) are owned by Peoples, plus its Union Banking Division facilities. The office of the Union Banking Division of Peoples in Loogootee, Indiana, contains approximately 12,000 square feet of space. The facility was constructed in 1988 and is owned by Peoples. Community Bank conducts its operations from three locations, all of which are owned by Community Bank. Community Bank's principal banking office is located in Otwell, Indiana, in a building containing approximately 2,850 square feet. First State Bank's main office facility, located in Tell City, Indiana, constructed in 1981, contains approximately 13,900 square feet. First State has three branches, two of which are located in Tell City and one in Rockport, Indiana. Of these branch facilities, two are owned by First State, with one being leased. Item 3. Legal Proceedings. There are no pending legal proceedings, other than routine litigation incidental to the business of the Company's subsidiary banks, of a material nature in which the Company or any of its subsidiaries is involved. Item 4. Submission of Matters to a Vote of Security Holders. There was no matter submitted during the fourth quarter of 1996 to a vote of security holders, by solicitation of proxies or otherwise. Special Item. Executive Officers of the Registrant. NAME AGE TITLE AND FIVE YEAR HISTORY ---- ----- ---------------------------- George W. Astrike (62) Chairman and CEO of the Company since 1995; Chairman and President /CEO prior thereto. Chairman of German American Bank since 1995; Chairman and President prior thereto. Director of each of the other Banks since acquisition by the Company. Mark A. Schroeder (44) President / Chief Operating Officer of the Company since 1995; Vice President / Chief Financial Officer prior thereto. Director of each of the other Banks since acquisition by the Company. Richard E. Trent (39) Vice President / Chief Financial Officer of the Company since December, 1997; Vice President, Budgets & Financial Analysis of CNB Bancshares from January, 1997; Manager of Finance and Planning, Wells Fargo Bank from August, 1996; Various financial officer capacities within American General Finance, Inc. and Subsidiaries prior thereto. Urban Giesler (60) Treasurer and Secretary of the Corporation; Senior Vice President - Personal Banking of German American Bank since January, 1993; Senior Vice President - Retail Lending of German American Bank prior thereto. John M. Gutgsell (42) Vice President and Controller of the Company since 1995; Vice President and Controller of German American Bank prior thereto. Stan J. Ruhe (46) Executive Vice President - Credit Administration of the Company since 1995. Executive Vice President of German American Bank since 1995; Senior Vice President - Credit Administration prior thereto. James E. Essany (43) Senior Vice President - Marketing of the Company since 1995; Senior Vice President - Operations / Administration of German American Bank prior thereto.
There are no family relationships between any of the officers of the Corporation. All officers are elected for a term of one year. PART II The information in Part II of this report is incorporated by reference to the indicated sections of the Registrant's annual report to shareholders for the fiscal year ended December 31, 1997 ("Shareholders' Report"). Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. See "Market and Dividend Information" on page 38 of the Shareholders' Report which is filed as Exhibit 13.1 to this report and is incorporated herein by reference. Item 6. Selected Financial Data. See "Five Year Summary of Consolidated Financial Statements and Related Statistics" on page 1 of the Shareholders' Report which is filed as Exhibit 13.2 to this report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 2 through 15 of the Shareholders' Report which is filed as Exhibit 13.3 to this report and is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committees and Boards of Directors of the holding company and its affiliate banks. Primary market risks which impact the Company's operations are interest rate risk and liquidity risk. Management's approach to monitoring and mitigating these risks are explained in detail in the Risk Management section of Management's Discussion and Analysis in the Company's Annual Report. The following table sets forth the expected maturities of interest sensitive assets and liabilities as of December 31, 1997. However, from a risk management perspective, the Company believes that a repricing schedule of interest sensitive assets and liabilities may be more relevant in analyzing the value of such instruments. The information presented is subject to various limitations. Certain assets and liabilities in the same expected maturity period may react at different times and/or in differing degrees from the amounts shown during a given change in market interest rates. Certain assets, such as adjustable rate mortgages, have features that restrict changes in interest rates on a short-term basis, and over the life of the loans. In addition, repricing of certain categories of assets and liabilities are subject to competitive and other pressures beyond the Company's control. As a result, assets and liabilities in a given maturity period may in fact mature in different periods and in differing amounts than indicated in the accompanying table. The information presented also includes various assumptions. With regard to investment securities, it is assumed that callable securities mature at the first call date. The schedule of maturities of non-callable asset-backed and mortgage-backed securities is based on composite national prepayment estimates. The investment portfolio also includes restricted stock, which does not have a contractual maturity. Loan maturities are based on scheduled contractual payments, with no estimation for prepayments. Given the Company's demonstrated ability to attract and retain core deposits, no decay rates are assumed in the deposit portfolio. The Company's money market securities and short-term borrowings at December 31, 1997 consisted principally of overnight investments and repurchase agreements. SCHEDULE OF ESTIMATED CONTRACTUAL MATURITIES as of December 31, 1997 Fair Less than 1-2 2-3 3-4 4-5 More than Market 1 Year Years Years Years Years 5 Years Total Value -------- ------- ----- ----- ----- --------- ----- ------ EARNING ASSETS Federal Funds Sold and Other Short-term Investments $ 12,000 $ --- $ --- $ --- $ --- $ --- $ 12,000 $ 12,000 Investment Securities: Adjustable Rate 3,301 872 760 343 323 1,488 7,087 7,080 Fixed Rate 56,042 15,830 5,913 4,786 2,070 32,134 116,775 117,813 Loans (net of unearned): Adjustable Rate 51,427 14,975 14,657 13,067 12,213 100,588 206,927 209,929 Fixed Rate 45,235 19,296 15,552 9,528 5,788 28,143 123,542 123,542 ------ ------ ------ ------ ------ ------- ------- -------- TOTAL EARNING ASSETS $168,005 $ 50,973 $ 36,882 $ 27,724 $ 20,394 $ 162,353 $ 466,331 $ 470,364 ======== ======== ======== ======== ======== ========= ========= ======== INTEREST-BEARNING LIABILITIES Deposits: Adjustable Rate $ 56,528 $ 734 $ --- $ --- $ --- $ --- $ 57,262 $ 57,262 Fixed Rate 166,785 56,606 15,205 5,861 5,447 72,548 322,452 324,508 Short-term Borrowings 4,933 --- --- --- --- --- 4,933 4,933 ----- ------ ------ ------ ----- ------ -------- ------- TOTAL INTEREST BEARING LIABILITIES $228,246 $ 57,340 $ 15,205 $ 5,861 $ 5,447 $ 72,548 $ 384,647 $ 386,703 ======== ======== ======== ======= ======= ========= ========= =========
YEILDS AND RATES BY ESTIMATED CONTRACTUAL MATURITIES as of December 31, 1997 Less than 1-2 2-3 3-4 4-5 More than 1 Year Years Years Years Years 5 Years Total ------- ----- ----- ----- ----- -------- ------ EARNING ASSETS Federal Funds Sold and Other Short-term Investments 5.84% --- --- --- --- --- 5.84% Investment Securities: Adjustable Rate 4.71 6.15% 5.29% 5.62% 5.59% 5.96% 5.35 Fixed Rate 6.58 6.59 7.31 7.74 8.97 8.49 7.23 Loans (net of unearned): Adjustable Rate 9.08 8.97 8.95 8.91 8.89 8.56 8.79 Fixed Rate 9.07 9.16 9.07 8.96 8.87 8.85 9.02 ---- ---- ----- ----- ---- ----- ----- TOTAL EARNING ASSETS 7.93% 8.25% 8.66% 8.68% 8.84% 8.57% 8.33% ===== ====== ===== ===== ===== ===== ===== INTEREST-BEARNING LIABILITIES Deposits: Adjustable Rate 4.11% 5.25% --- --- --- --- 4.13% Fixed Rate 5.45 5.74 6.04% 5.58% 5.84% 2.11% 4.79 Short-term Borrowings 4.05 --- --- --- --- --- 4.05 ----- ----- ----- ----- ---- ----- ---- TOTAL INTEREST BEARING LIABILITIES 5.09% 5.67% 6.04% 5.58% 5.84% 2.11% 4.67% ===== ====== ===== ===== ===== ====== ====
See also "Interest Rate Risk Management" in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 14 through 15 of the Shareholders' Report filed as Exhibit 13.3 to this report and is incorporated by reference. Item 8. Financial Statements and Supplementary Data. The financial statements of the Company and related notes on pages 16 through 36 of the Shareholders' Report and the Auditors' Report thereon on page 37 of the Shareholders' Report which are filed as Exhibit 13.4 to this report, are incorporated herein by reference. The Interim Financial Data on page 3 of the Shareholders' Report, which is included as Table 1 of "Management's Discussion and Analysis of Financial Condition and Results of Operations" filed as Exhibit 13.3 to this report, is incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant. Information relating to Directors of the Corporation will be included under the caption "Election of Directors" in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 23, 1997 which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Report (the "1997 Proxy Statement"), which section is incorporated herein by reference in partial answer to this Item. Information relating to Executive Officers of the Corporation is included under the caption "Executive Officers of the Registrant" under Part I of this Report on Form 10-K. Item 11. Executive Compensation. Information relating to compensation of the Corporation's Executive Officers and Directors will be included under the captions "Executive Compensation" and "Election of Directors -- Compensation of Directors" in the 1998 Proxy Statement of the Corporation, which sections are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. Information relating to security ownership of certain beneficial owners and management of the Corporation will be included under the captions "Election of Directors" and "Principal Owners of Common Shares" of the 1998 Proxy Statement of the Corporation, which sections are incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information responsive to this Item 13 will be included under the captions "Executive Compensation - Certain Business Relationships and Transactions" and "Executive Compensation - Compensation Committee Interlocks and Insider Participation" of the 1998 Proxy Statement of the Corporation, which sections are incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. a) The following 1997, 1996, and 1995 consolidated financial statements of the Corporation, and the Auditors' Report thereon, included on pages 16 through 37 of the Shareholders' Reports, are incorporated into Item 8 of this report by reference. Location in 1. Financial Statements Shareholders' Report German American Bancorp and Subsidiaries Consolidated Balance Sheets at December 31, 1997 and December 31, 1996 Page 16 Consolidated Statements of Income, years ended December 31, 1997, 1996, and 1995 Page 17 Consolidated Statements of Cash Flows, years ended December 31, 1997, 1996, and 1995 Page 18 Consolidated Statements of Changes in Shareholders' Equity, years ended December 31, 1997, 1996, and 1995 Page 19 Notes to the Consolidated Financial Statements Pages 20 - 36 Independent Auditors' Report Page 37 2. Other financial statements and schedules are omitted because they are not required or because the required information is included in the consolidated financial statements or related notes. b) Reports on Form 8-K The following Report on Form 8-K was filed by the Registrant during the quarter ended December 31, 1997: Date Items Description ---- ------- ------------- 11/12/97 5 & 7 Reported agreements to acquire CSB Bancorp and FSB Financial Corporation.
c) Exhibits: The Exhibits described in the Exhibit List immediately following the "Signatures" page of this report (which is incorporated herein by reference) are hereby filed as part of this report. Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. GERMAN AMERICAN BANCORP (Registrant) Date: March 30, 1998 By/s/George W. Astrike George W. Astrike, Chairman of the Board Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 30, 1998 By/s/George W. Astrike George W. Astrike, Chairman of the Board and Director (Chief Executive Officer) Date: March 30, 1998 By/s/Mark A. Schroeder Mark A. Schroeder, President and Director (Chief Operating Officer) Date: March 30, 1998 By/s/David G. Buehler David G. Buehler, Director Date: March __, 1998 _______________________________ Michael B. Lett, Director Date: March __, 1998 _______________________________ Gene C. Mehne, Director Date: March 30, 1998 By/s/Robert L. Ruckriegel Robert L. Ruckriegel, Director Date: March 30, 1998 By/s/William R. Hoffman William R. Hoffman, Director Date: March 30, 1998 By/s/Joseph F. Steurer Joseph F. Steurer, Director Date: March 30, 1998 By/s/A.W. Place Jr. A. W. Place Jr., Director Date: March 30, 1998 By/s/Larry J. Seger Larry J. Seger, Director Date: March __, 1998 _______________________________ C.L. Thompson, Director Date: March __, 1998 _______________________________ David B. Graham, Director Date: March 30, 1998 By/s/John M. Gutgsell John M. Gutgsell, Controller (Principal Accounting Officer) Executive Compensation Plans and Exhibit Arrangements* Number Exhibit List 2.1 Agreement of Merger dated December 8, 1997, among the Registrant, CSB Bancorp and the Citizens State Bank of Petersburg, as amended, is incorporated by reference from Appendix A to the CSB Bancorp and FSB Financial Corporation S-4. 2.2 Agreement of Merger dated January 30, 1998, among the Registrant, FSB Corporation and the FSB Bank of Francisco, as amended, is incorporated by reference from Appendix A to the CSB Bancorp and FSB Financial Corporation S-4. 3.1 Restated Articles of Incorporation of the Registrant as amended April 24, 1995 are Incorporated by reference to Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. 3.2 Restated Bylaws of the Registrant as amended August 14, 1990, are incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 1995. 10.1 Agreement and Plan of Reorganization by and among Peoples Bancorp of Washington, the Registrant, and certain affiliates, dated September 27, 1996, is incorporated by reference to Exhibit 2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 10.2 Sublease entered by and between Buehler Foods, Inc. and The German American Bank dated January 2, 1987 (Huntingburg Banking Center Branch) is incorporated by reference from Exhibit 10.5 to the Registrant's Registration Statement on Form S-4 filed February 28, 1994 (No. 33-75762.) 10.3 Sublease entered by and between Buehler Foods, Inc. and the Bank dated August 1, 1990 (The Crossing Shopping Center Branch) is incorporated by reference to Exhibit 10.12 of the Registrant's Report on Form 10-K for the year ended December 31, 1990. 10.4 Letter dated January 5, 1995 from the German American Bank to Buehler Foods, Inc. notifying Buehler Foods, Inc. of exercise of renewal option on The Crossing Shopping Center Branch is incorporated by reference to Exhibit 10.4 of the Registrant's Report on Form 10-K for the year ended December 31, 1994. X 10.5 The Company's 1992 Stock Option Plan is incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993 (No. 33-55170) (the "Unibancorp S-4"). X 10.6 Schedule identifying material terms of options (including replacement options) granted to the Registrant's executive officers under the Registrant's 1992 Stock Option Plan. X 10.7 Executive Deferred Compensation Agreement dated December 1, 1992, between The German American Bank and George W. Astrike, is incorporated herein by reference from Exhibit 10.3 to the Unibancorp S-4. X 10.8 Director Deferred Compensation Agreement between The German American Bank and certain of its Directors, is incorporated herein by reference from Exhibit 10.4 to the Unibancorp S-4 (The Agreement entered into by George W. Astrike, a copy of which was filed as Exhibit 10.4 to the Unibancorp S-4, is substantially identical to the Agreements entered into by the other Directors.) The schedule following Exhibit 10.4 to the Unibancorp S-4 lists the Agreements with the other Directors and sets forth the material detail in which such Agreements differ from the Agreement filed as Exhibit 10.4 to the Unibancorp S-4. X 10.9 Sublease entered by and between Buehler Foods, Inc. and First State Bank, dated July 25, 1996 (Tell City Branch) is incorporated by reference to Exhibit 10.9 of the Registrant's Report on Form 10-K for the year ended December 31, 1996. 13.1 Market and Dividend Information (page 38) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. 13.2 Five Year Summary of Consolidated Financial Statements and Related Statistics (page 1) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. 13.3 Management's Discussion and Analysis of Financial Condition and Results of Operations (pages 2 through 15) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. 13.4 Consolidated financial statements and related notes (pages 16 through 36), Auditor's Report (page 37) of the Registrant's Annual Report to Shareholders for the year ended December 31, 1997. 21 Subsidiaries of the Registrant. 23.1 Consent of Crowe, Chizek and Company LLP 23.2 Consent of Crowe, Chizek and Company LLP 27 Financial Data Schedule. *Exhibits that describe or evidence all management contracts or compensatory plans or arrangements required to be filed as exhibits to this Report are indicated by an "X" in this column. EX-10 2 EXHIBIT 10.6 EXHIBIT 10.6 SCHEDULE IDENTIFYING MATERIAL TERMS OF OPTIONS GRANTED TO GERMAN AMERICAN BANCORP EXECUTIVE OFFICERS UNDER THE 1992 STOCK OPTION PLAN(1) Option Type of George Mark Stan Urban James Price Option (2) Astrike Schroeder Ruhe Giesler Essany Per Share ORIGINAL GRANT 4/20/93 20,837.2500 17,364.3750 10,418.6250 5,209.3230 5,209.3230 9.3600 REPLACEMENT (3) 12/30/94 2,505.1110 2,315.2500 - - - 13.9900 REPLACEMENT (3) 7/10/95 4,368.8820 2,315.2500 - 694.5750 333.3960 13.4800 REPLACEMENT (3) 1/9/96 6,482.7000 - 1,603.0350 685.7550 694.5750 14.1700 REPLACEMENT (3) 7/15/96 - 1,984.5000 1,245.8250 621.8100 793.8000 15.6500 REPLACEMENT (3) 1/16/97 5,622.0000 3,505.0000 2,371.0000 1,617.0000 1,501.0000 17.7900 REPLACEMENT (3) 1/28/97 4,796.0000 - - - - 17.7400 REPLACEMENT (3) 8/1/97 - 2,390.0000 104.0000 502.0000 502.0000 19.4000
1. Numbers of options and per share exercise prices have been retroactively adjusted for subsequent stock splits and dividends. 2. The only new grants of options under the German American Bancorp 1992 Stock Option Plan (the "Plan") where made on April 20, 1993. All options expire ten years after the date of grant. The options granted to Mr. Astrike become exercisable with respect to one-half of the shares immediately upon grant and with respect to the other one-half to the shares on the first anniversary of the grant date. The options granted to the other executive officers became exercisable with respect to twenty percent of the shares on each of the five anniversary dates beginning on the first anniversary date following the date of grant. 3. The Stock Option Plan provides that if the optionee tenders Common Shares of the Corporation already owned by the optionee as payment, in whole or in part, of the exercise price for the shares the optionee has elected to purchase under the option, then the Corporation is obligated to use its best efforts to issue a replacement option of the same type (incentive or non-qualified option), with the same expiration date as the option that was exercised, and covering a number of Common Shares equal to the number of Common Shares tendered. The only grants made under the Plan subsequent to April 20, 1993, are grant of such replacement options. EX-13 3 EXHIBIT 13.1 EXHIBIT 13.1 - -------------------------------------------------------------------------------- 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 1997 and 1996; and, (b) dividends declared per share on the Company's common stock (not retroactively restated for pooling of interests transactions) by quarter during 1997 and 1996. All per share information has been retroactively restated for all stock dividends and stock splits. 1997 1996 ---- ---- High Low Dividend High Low Dividend ---- --- -------- ----- --- ------- First Quarter $19.25 $18.25 $.10 First Quarter $15.36 $13.60 $.09 Second Quarter $20.00 $18.25 $.11 Second Quarter $16.10 $14.51 $.10 Third Quarter $22.75 $19.50 $.11 Third Quarter $17.00 $15.30 $.10 Fourth Quarter $33.57 $21.43 $.11 Fourth Quarter $18.33 $16.55 $.10 ---- ---- $.43 $.39 ==== ====
The Common Stock was held of record by approximately 2,083 shareholders at March 5, 1998. 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. THE COMPANY WILL PROVIDE A COPY OF ITS ANNUAL REPORT (FORM 10-K, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION), WITHOUT EXHIBITS, FREE OF CHARGE TO ANY SHAREHOLDER, UPON WRITTEN REQUEST. SUCH WRITTEN REQUESTS SHOULD BE MADE TO JOHN M. GUTGSELL, CONTROLLER, GERMAN AMERICAN BANCORP, 711 MAIN STREET, JASPER, INDIANA 47546. EX-13 4 EXHIBIT 13.2 EXHIBIT 13.2 - -------------------------------------------------------------------------------- Five Year Summary of Consolidated Financial Statements and Related Statistics (dollars in thousands, except per share data) - -------------------------------------------------------------------------------- The following selected data have been taken from the Company's consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this annual report. 1997 1996 1995 1994 1993 ---- ----- ---- ---- ---- Summary of Operations: Interest and Fees on Loans $29,350 $27,846 $26,197 $21,545 $20,238 Interest on Investments 8,118 7,515 7,619 6,378 7,133 ----- ----- ----- ----- ----- Total Interest Income 37,468 35,361 33,816 27,923 27,371 ------ ------ ------ ------ ------ Interest on Deposits 17,221 16,179 15,150 11,599 12,278 Interest on Borrowings 300 504 798 420 172 --- --- --- --- --- Total Interest Expense 17,521 16,683 15,948 12,019 12,450 ------ ------ ------ ------ ------ Net Interest Income 19,947 18,678 17,868 15,904 14,921 Provision for Loan Losses (408) 210 49 687 797 ---- --- -- --- --- Net Interest Income after Provision for Loan Losses 20,355 18,468 17,819 15,217 14,124 Noninterest Income 2,487 2,227 1,764 1,933 1,836 Noninterest Expenses 13,668 13,288 12,418 10,910 10,874 ------ ------ ------ ------ ------ Income Before Income Taxes and Cumulative Effect of Change in Accounting for Income Taxes 9,174 7,407 7,165 6,240 5,086 Income Tax Expense 3,035 2,513 2,323 1,958 1,642 ----- ----- ----- ----- ----- Income Before Cumulative Effect of Change in Accounting for Taxes 6,139 4,894 4,842 4,282 3,444 Cumulative Effect of Change in Accounting for Income Taxes --- --- --- --- 218 --- --- --- --- --- Net Income $6,139 $4,894 $4,842 $4,282 $3,662 ===================================================================================================================== Year-end Balances: Total Assets $498,831 $489,443 $458,604 $432,939 $412,203 Total Loans, Net 324,214 306,754 282,457 270,981 243,766 Total Long-term Debt --- 1,000 1,000 1,000 1,000 Total Deposits 433,948 422,906 395,553 369,180 353,056 Total Shareholders' Equity 53,332 48,793 45,788 40,779 38,880 ===================================================================================================================== Per Share Data (1): Income Before Cumulative Effect of Change in Accounting for Income Taxes $1.15 $0.92 $0.91 $0.80 $0.65 Net Income 1.15 0.92 0.91 0.80 0.69 Cash Dividends (2) 0.43 0.39 0.36 0.32 0.29 Book Value, End of Year 9.97 9.14 8.59 7.65 7.29 ===================================================================================================================== Other Data at Year-end: Number of Shareholders 2,083 1,981 1,910 1,863 1,878 Number of Employees 216 218 213 203 188 Weighted Average Number of Shares(1) 5,343,727 5,335,316 5,331,745 5,331,163 5,331,157
(1) Share and Per share data has been retroactively adjusted to give effect for stock dividends and stock splits and excludes the dilutive effect of stock options. (2) Cash dividends represent historical dividends declared per share without retroactive restatement for poolings. EX-13 5 EXHIBIT 13.3 EXHIBIT 13.3 - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- The following table summarizes net interest income (on a taxable-equivalent basis) for each of the past three years. For taxable-equivalent adjustments, an effective tax rate of 34% was used for all years presented (1). Average Balance Sheet (Taxable-equivalent basis / dollars in thousands) Twelve Months Ended Twelve Months Ended Twelve Months Ended December 31, 1997 December 31, 1996 December 31, 1995 ----------------- ----------------- ----------------- Principal Income/ Yield / Principal Income/ Yield / Principal Income/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- ASSETS Short-term Investments: Interest-bearing Balances with Banks $726 $41 5.65% $989 $53 5.36% $1,124 $55 4.89% Federal Funds Sold and Securities Purchased under Agreements to Resell 9,903 550 5.55% 11,589 611 5.27% 13,467 783 5.81% Other Short-term Investments 320 17 5.31% 2,115 114 5.39% 11,247 679 6.04% Securities: Taxable 83,751 5,320 6.35% 81,221 4,788 5.90% 77,078 4,400 5.71% Non-taxable 38,072 3,319 8.72% 33,791 2,953 8.74% 27,628 2,579 9.33% Total Loans and Leases (2) 322,536 29,417 9.12% 306,296 27,947 9.12% 285,154 26,290 9.22% ------- ------ ------- ------ ------- ------ TOTAL INTEREST EARNING ASSETS 455,308 38,664 8.49% 436,001 36,466 8.36% 415,698 34,786 8.37% ------- ------ ------- ------ ------- ------ Cash and Due from Banks 16,051 15,602 14,185 Premises, Furniture & Equipment 12,088 11,386 11,262 Other Assets 10,038 9,768 9,644 Less: Allowance for Loan Losses (6,382) (6,948) (6,749) ------ ------ ------ TOTAL ASSETS $487,103 $465,809 $444,040 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Savings and Interest-bearing Demand Deposits $126,861 3,476 2.74% $126,593 3,375 2.67% $120,603 3,361 2.79% Time Deposits 251,044 13,745 5.48% 232,729 12,804 5.50% 222,779 11,789 5.29% Short-term Borrowings 6,624 291 4.39% 8,635 404 4.68% 12,059 671 5.56% Long-term Debt 115 9 7.83% 1,851 100 5.40% 2,137 127 5.94% --- - ----- --- ----- --- TOTAL INTEREST-BEARING LIABILITIES 384,644 17,521 4.56% 369,808 16,683 4.51% 357,578 15,948 4.46% ------- ------ ------- ------ ------- ------ Demand Deposit Accounts 47,335 45,242 40,200 Other Liabilities 4,514 3,853 3,499 ----- ----- ----- TOTAL LIABILITIES 436,493 418,903 401,277 ------- ------- ------- Shareholders' Equity 50,610 46,906 42,763 ------ ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $487,103 $465,809 $444,040 ======== ======== ======== NET INTEREST INCOME $21,143 $19,783 $18,838 ====== ======= ======= NET INTEREST MARGIN 4.64% 4.54% 4.53%
(1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable. (2) Non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $458, $516, and $339 for 1997, 1996, and 1995, respectively. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- INTERIM FINANCIAL DATA (Table 1, Unaudited - dollars in thousands except per share data) For the three months ended -------------------------- December September June March 31 30 30 31 -------- --------- ---- ------ 1997: Interest Income $9,530 $9,511 $9,338 $9,089 Interest Expense 4,519 4,427 4,314 4,261 ----- ----- ----- ----- Net Interest Income 5,011 5,084 5,024 4,828 Provision for Loan Losses 68 67 (682) 139 Noninterest Income 595 696 650 546 Noninterest Expense 3,446 3,375 3,529 3,318 ----- ----- ----- ----- Income before Income Taxes 2,092 2,338 2,827 1,917 Income Tax Expense 640 775 977 643 --- --- --- --- Net Income $1,452 $1,563 $1,850 $1,274 ====== ====== ====== ====== Earnings per Share(1) $0.27 $0.29 $0.35 $0.24 ===== ===== ===== ===== Weighted Average Shares(1) 5,348,367 5,343,787 5,341,545 5,341,130 ========= ========= ========= ========= 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 ====== ====== ====== ====== Earnings per Share(1) $0.22 $0.21 $0.24 $0.25 ===== ===== ===== ===== Weighted Average Shares(1) 5,338,167 5,336,143 5,333,564 5,333,351 ========= ========= ========= =========
(1) Share and Per share data has been retroactively adjusted to give effect for stock dividends and stock splits and excludes the dilutive effect of stock options. - -------------------------------------------------------------------------------- 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. Its four affiliate banks conduct business in 20 offices in the six contiguous counties of Dubois, Daviess, Martin, Pike, Perry and Spencer Counties in Southwestern 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 1995 through 1997 and financial condition as of December 31, 1997 and 1996. The information should be used in conjunction with accompanying consolidated financial statements and footnotes contained elsewhere in this report, and has been restated to reflect the merger with People's Bancorp of Washington, which was accounted for as a pooling of interests. See the discussion below and Note 18 to the consolidated financial statements for further information on mergers and acquisitions. MERGERS AND ACQUISITIONS The Company signed a definitive agreement in December 1997 providing for a merger of a Company subsidiary with CSB Bancorp ("CSB"), which operates the Citizens State Bank of Petersburg, Indiana. Under terms of the agreement, the Company will issue to CSB shareholders between 928,572 and 1,137,500 shares of the Company's Common Stock, as adjusted for the two for one stock split declared in October 1997. The shares issued are subject to further anti-dilution adjustments in the event of any future stock dividends, splits and the like. The number of shares to be issued is dependent upon the Company's average common stock price during a period prior to the date of the merger closing. The Company expects to account for the transaction as a pooling of interests, and based on recent stock quotations, expects to issue the minimum number of shares required. The proposed merger is subject to approval by shareholders of CSB, bank regulatory agencies, and other conditions. The parties contemplate that the merger will be effective in the second quarter of 1998. The Company also signed a definitive agreement in January 1998 providing for a merger of a Company subsidiary with FSB Financial Corporation ("FSB"), which operates the FSB Bank in Princeton and Francisco, Indiana. Under terms of the agreement, the Company will issue to 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. The Company expects to account for the transaction as a pooling of interests and, based on recent stock quotations, expects to issue approximately 71,678 shares. The proposed merger is subject to approval by shareholders of FSB, bank regulatory agencies, and other conditions. The parties contemplate that the merger will be effective in the second quarter of 1998. Concurrent with the execution of these proposed transactions, the Company intends to merge both FSB Bank and an existing affiliate, Community Trust Bank, into the Citizens State Bank name and charter, creating a $130 million financial institution to better serve the Pike and Gibson County area markets. 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. Concurrent 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 serving the Daviess and Martin County area markets. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- The Company plans to continue to aggressively pursue merger and acquisition opportunities as they become available. The Company's management believes that community banks and other financial institutions 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 institutions 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 institutions 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 institutions may occur in future years. RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- NET INCOME Net income for 1997 increased 25% to $6,139,000 or $1.15 per share from 1996. The improvement in 1997 earnings primarily resulted from an increase in net interest income and a negative provision for loan losses. See management's discussion in the sections below for further information. Net Income in 1996 was $4,894,000 or $0.92 per share, versus $4,842,000 or $0.91 per share in 1995. Changes in 1996 earnings from the prior year were increases in net interest income, investment services income and service charges on deposit accounts, offset by increases in the provision for loan losses and professional fees. The bulk of the 1996 increase in professional fees was related to the Company's merger and acquisition activities. The record level of net income in 1997 generated a return on average assets of 1.26%, and a return on average equity of 12.13%. Both were significant improvements over prior years. Return on assets was 1.05% and 1.09% in 1996 and 1995, respectively. Return on equity for the same periods was 10.43% and 11.32%, respectively. NET INTEREST INCOME Net interest income is the Company's single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and other borrowed funds. 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 and mix of earning assets, interest rates, and income taxes. Many of the factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit demand, Federal Reserve Board monetary policy, and changes in tax laws. Net interest income of $21,143,000 for 1997 increased 6.9% on a taxable-equivalent basis over 1996 results of $19,783,000. This followed a 5.0% increase in 1996 over the $18,838,000 reported for 1995. A significant portion of the increase in both years resulted from growth in average loans, and improved yields on investment securities. Growth in earning assets was primarily funded by an increase in interest-bearing deposits, while improvements in yield were somewhat offset by a shift of short-term borrowings to higher rate time deposits. Net interest margin for 1997 improved 10 basis points, to 4.64% from 1996. Overall yield on earning assets increased 13 basis points, while the rate on interest-bearing liabilities rose only 5 basis points. Overall yield and net interest margin were relatively unchanged in 1996 from 1995. See the discussion headed INTEREST RATE RISK MANAGEMENT for an explanation of the Company's interest rate sensitivity position. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- 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 deemed 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 Company booked a negative provision for loan losses of $(408,000) in 1997. The consolidated provision for loan losses was $210,000 in 1996 and $49,000 in 1995. Provisions in all years presented were significantly impacted by negative provisions for loan losses at the Union banking division of Peoples, totaling $750,000 in 1997, $110,000 in 1996 and $475,000 in 1995. These negative provisions were due to collections of previous years' charged-off loans, combined with management's determination that certain specific reserve allocations were no longer necessary due to performance of the related loans. Based on management's evaluation of the adequacy of the reserve, a negative provision was recorded in 1997 to eliminate excess reserves created by these loan recoveries and reduced specific reserve allocations. The provision for loan losses to be recorded in future years will be subject to adjustment based on results of on-going evaluations of the adequacy of the allowance for loan losses. The section entitled LENDING AND LOAN ADMINISTRATION expands this discussion further. NONINTEREST INCOME The primary sources of noninterest income are income from fiduciary activities (trust fees), service charges on deposit accounts, and investment services income. Exclusive of net gains on the sale of investment securities, loans and other real estate, noninterest income increased 17.6% and 22.8%, to $2,468,000 and $2,099,000 in 1997 and 1996, respectively, over previous years results. An analysis of noninterest income is presented in Table 2. Trust fees rose $97,000 in 1997 to $307,000 after an increase of only $3,000 in 1996. Service charges on deposit accounts increased 17.3% and 27.4% in 1997 and 1996, respectively. This was due to an increase in billable transactions and revisions to the Company's pricing structure in the latter portion of 1996, which was based on a market review. Investment services income is generated through a full service brokerage operation which is available at several of the Company's affiliate banks. The level of earnings generated through this operation is directly tied to customer utilization and acceptance of the investment products offered. Brokerage income increased $53,000 in 1997 following an increase of $196,000 in 1996. The Company intends to expand the availability of investment services, as feasible, throughout its affiliate banks. NONINTEREST INCOME (Table 2, dollars in thousands) % Change From Prior Year ------------- 1997 1996 1995 1997 1996 ---- ---- ---- ---- ---- Income from Fiduciary Activities $307 $210 $207 46.2% 1.4% Service Charges on Deposit Accounts 1,145 976 766 17.3 27.4 Investment Services Income 456 403 207 13.2 94.7 Other Income 560 510 529 9.8 (3.6) --- --- --- Subtotal 2,468 2,099 1,709 17.6 22.8 Gains on Sales of Loans and Other Real Estate 19 55 36 (65.5) 52.8 Securities Gains, net --- 73 19 (100.0) 284.2 --- -- -- TOTAL NONINTEREST INCOME $2,487 $2,227 $1,764 11.7 26.2 ====== ====== ======
- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- NONINTEREST EXPENSE Noninterest expense is comprised of salaries and benefits, occupancy, furniture and equipment expenses, FDIC premiums, data processing fees, professional fees, advertising and promotion, and other operating expenses (see Table 3). Total noninterest expense increased 2.9% in 1997 versus 7.0% in 1996, over prior years. The Company's operational efficiency has also improved. As a percentage of average total assets, total noninterest expense was 2.81% in 1997, 2.85% in 1996 and 2.80% in 1995. The Company's efficiency ratio was 58%, 60% and 60% in 1997, 1996 and 1995, respectively. The efficiency ratio is defined as noninterest expenses as a percentage of the total of taxable-equivalent net interest income and noninterest income. Salaries and employee benefits comprised approximately 54% of total noninterest expense in all periods. These expenses increased 3.2% in 1997, following an 8.5% increase in 1996. A significant portion of the 1996 increase was due to growth in the Company's First State Bank affiliate and to the effects of changes beginning in mid-1995 in the Company's holding company and bank organizational structure. Although this organizational change resulted in an increased level of personnel expenses, management believes the increased management focus at both the bank and holding company has demonstrated improved operating efficiency. Occupancy, furniture and equipment expenses decreased by $24,000 or 1.2% in 1997 after an increase of $70,000 or 3.5% in 1996. However, these expenses are expected to increase in 1998 due to a planned upgrading of computer systems throughout the organization. The Company has initiated its strategy to implement a state-of-the-art technology platform and operating systems which are expected to provide long-term benefits with regard to improved quality of customer service and control of personnel expenses. FDIC premiums totaled $52,000 in 1997. 1996 premiums, exclusive of a one-time $157,000 Savings Association Insurance Fund ("SAIF") assessment in the third quarter, totaled $72,000. The SAIF assessment was applied to a portion of German American Bank's deposits and all of the deposits of First State Bank. Total 1996 expense of $229,000 was slightly less than half of the 1995 expense of $471,000. Data processing fees increased 17.8% and 6.2% in 1997 and 1996, respectively. This reflects an increase in the number of accounts processed and conversion expenses at the Company's newly acquired affiliate in 1997. 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 in 1997 by $38,000 or 4.7% following a significant $558,000 increase in 1996 over the 1995 total of $247,000. The 1997 increase included a $200,000 reserve for legal fees made in connection with an unasserted potential claim. Absent this special reserve, professional fees would have declined. These variations are largely due to merger related professional fees. While it is not possible to predict the level of future acquisition activity and the resulting level of costs associated thereto, management intends to continue to pursue acquisition opportunities, and therefore, increased and continued costs will be likely in future years. Advertising and promotion expenses totaled $536,000 in 1997, $451,000 in 1996 and $419,000 in 1995, representing approximately 0.1% of average total assets in each year. Increases in recent years were impacted by implementation of a corporate identity program at existing and new affiliates. Implementation of this program is substantially complete. Other operating expenses increased $156,000 in 1997 and decreased $134,000 in 1996. These fluctuations were also impacted by the corporate identity program in the areas of supplies and other charges and by increases in postage, telephone and other service and volume related expenses. Other operating expenses also include the amortization of goodwill and core deposit intangibles, totaling $216,000, $231,000 and $112,000 in 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- NONINTEREST EXPENSE (Table 3, dollars in thousands) % Change From Prior Year -------------- 1997 1996 1995 1997 1996 ---- ---- ---- ---- ---- Salaries and Employee Benefits $7,391 $7,165 $6,604 3.2% 8.5% Occupancy, Furniture and Equipment Expense 2,042 2,066 1,996 (1.2) 3.5 FDIC Premiums 52 229 471 (77.3) (51.4) Data Processing Fees 503 427 402 17.8 6.2 Professional Fees 843 805 247 4.7 225.9 Advertising and Promotion 536 451 419 18.8 7.6 Other Operating Expenses 2,301 2,145 2,279 7.3 (5.9) ----- ----- ----- TOTAL NONINTEREST EXPENSE $13,668 $13,288 $12,418 2.9 7.0 ======= ======= =======
PROVISION FOR INCOME TAXES The Company records a provision for current income taxes payable, along with a provision for deferred taxes, payable in the future. Deferred taxes arise from temporary differences, items recorded for financial statement purposes in a different period than for income tax returns. The major item affecting the difference between the Company's effective tax rate recorded on its financial statements and the federal statutory rate of 34% is interest on tax-exempt securities and loans. Other components affecting the Company's effective tax rate include state income taxes and non-deductible merger costs. Note 11 to the consolidated financial statements provides additional details relative to the Company's income tax provision. The Company's effective tax rate was 33.1%, 33.9% and 32.4%, respectively, in 1997, 1996, and 1995. CAPITAL RESOURCES - -------------------------------------------------------------------------------- The Company continues to maintain a strong capital position. Shareholders' equity totaled $53,332,000 and $48,793,000 at December 31, 1997 and 1996, respectively. This represented 10.69% and 9.97%, respectively, of total assets. The Company paid cash dividends of $2,083,000 in 1997 and $1,684,000 in 1996. Additional dividends paid in 1997 resulted from an increase in dividends per share and the issuance of additional shares in connection with the Company's Dividend Reinvestment and Stock Purchase Plan. The Company's dividend payout ratio was 34% in both 1997 and 1996 which is consistent with management's policy of retaining sufficient capital to provide for continued growth. Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures, such as loan commitments and standby letters of credit. Tier 1, or core capital, is comprised 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) a 4.0% leverage ratio, which is Tier 1 capital divided by defined "total assets"; (b) 4.0% Tier 1 capital to risk-adjusted assets; and, (c) 8.0% total capital to risk-adjusted assets. 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. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These tiers are: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. Under these regulations, a well-capitalized entity must achieve a Tier 1 Risk-based capital ratio of at least 6.0%, a total capital ratio of at least 10.0%, 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, 1997 the Company and all affiliate banks were categorized as well capitalized. At December 31, 1997 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, dollars in thousands) 1997 1996 ---- ---- Tier 1 Capital: Shareholders' Equity as presented on Balance Sheet $53,332 $48,793 Subtract: Unrealized Appreciation on Securities Available-for-Sale (756) (495) Less: Intangible Assets and Ineligible Deferred Tax Assets (1,702) (1,924) ------ ------ Total Tier 1 Capital 50,874 46,374 Tier 2 Capital: Qualifying Allowance for Loan Loss 4,219 4,028 ----- ----- Total Capital $55,093 $50,402 ======= ======= Risk Weighted Assets $333,796 $319,769 ======== ========
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1997: Total Capital (to Risk Weighted Assets) $55,093 16.51% >$26,704 >8.0% >$33,380 >10.0% - - - - Tier 1 Capital (to Risk Weighted Assets) $50,874 15.24% >$13,352 >4.0% >$20,028 > 6.0% - - - - Tier 1 Capital (to Average Assets) $50,874 10.48% >$19,416 >4.0% >$24,270 > 5.0% - - - - 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% - - - -
- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- SOURCES OF FUNDS - -------------------------------------------------------------------------------- The Company's primary funding source is its base of core customer deposits, such as non-interest bearing demand, regular savings and money market accounts, and certificates of deposit of less than $100,000. Other shorter term sources of funds are certificates of deposit of $100,000 or more, 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 pages contain 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, dollars in thousands) % Change From Prior Year 1997 1996 1995 1997 1996 ---- ---- ---- ---- ---- Demand $47,335 $45,242 $40,200 4.6% 12.5% Savings and Interest-bearing Checking 87,264 93,731 95,662 (6.9) (2.0) Money Market Accounts 39,597 32,862 24,941 20.5 31.8 Other Time Deposits 219,321 197,794 184,517 8.1 9.9 ------- ------- ------- Total Core Deposits 393,517 369,629 345,320 5.0 8.5 Certificates of Deposits of $100,000 or more 31,723 34,935 38,262 (9.2) (8.7) Federal Funds Purchased and Securities Sold under Agreement to Repurchase and Other Short-term Borrowings 6,624 8,635 12,059 (23.3) (28.4) Long-term Debt 115 1,851 2,137 (93.8) (13.4) --- ----- ----- Total Funding Sources $431,979 $415,050 $397,778 4.1 4.3 ======== ======== ========
CORE DEPOSITS The Company's has demonstrated the ability to attract and retain core deposits, achieving 5.0% growth in 1997 and 8.5% in 1996 over prior year average balances. The Company continues to experience a shift in the composition of its deposits from savings and interest-bearing checking toward money market deposits and 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. Total savings, interest-bearing checking and money market deposits constituted 32% of average core deposits in 1997, a decline from 34% in 1996. Other time deposits, consisting primarily of certificates of deposits in denominations of less than $100,000 increased by 8.1% in 1997 and comprised 56% of average core deposits. This compares to a 1996 increase of 9.9%, when other time deposits were 54% of average core deposits. Non-interest bearing demand deposits increased 4.6% in 1997 and 12.5% in 1996. Changes in the deposit mix continue to be influenced by customers' tendency to avoid commitment to longer term instruments during periods of low or declining interest rates, and their attempts to lock in rates on these instruments during periods of perceived higher rates. Changes in the mix are also subject to the increased availability of alternative investment products, seasonal and other non-economic factors. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- OTHER FUNDING SOURCES Certificates of deposit in denominations of $100,000 or more are the Company's most significant source of other funding. These large denomination certificates declined in both 1997 and 1996, by 9.2% and 8.7%, respectively. These certificates comprised only 7.3% of the Company's total funding sources in 1997, down from 8.4% in 1996, and 9.6% in 1995. The Company utilizes other short-term funding sources from time to time. These 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, which are secured by a blanket pledge of certain investment securities and residential mortgage loans. These borrowings represent an important source of temporary short-term liquidity for the Company. Short-term funding sources and large denomination 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 - -------------------------------------------------------------------------------- LOANS The Company grew total loans $17,004,000 or 5.4% in 1997, after experiencing $23,658,000 or 8.2% growth in 1996. The Company's loan portfolio is well diversified with 33% of the portfolio in commercial and industrial loans, 33% in 1-4 family residential mortgages, 18% in consumer loans, and 16% in agricultural and poultry loans at December 31, 1997. The Company has achieved significant growth in residential mortgage and consumer loans since 1995 while the percentage of the portfolio associated with agriculture and poultry loans continues to decline. The Company's commercial and agricultural lending is extended to various industries, including agribusiness, manufacturing, health care services, wholesale, and retail services. The Company's policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southwestern Indiana. Generally, extensions of credit outside this market area are 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 this market area are generally further limited to loans guaranteed by either the Small Business Administration (SBA) or the Farm Service Agency (FSA). 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 furniture manufacturing industries. Although wood furniture manufacturers employ a significant number of people in the market area, there is no concentration of credit to companies engaged in that industry. No unguaranteed concentration of credit in excess of 10% of total assets exists within any single industry group. The composition of the loan portfolio at December 31, 1997 and 1996 is presented in further detail in Note 3 to the consolidated financial statements and in Table 6 below: LOAN PORTFOLIO (Table 6, dollars in thousands) 1997 1996 1995 ---- ---- ---- Commercial and Industrial $108,388 $112,748 $101,338 Residential Mortgage Loans 107,943 93,713 85,543 Consumer Loans 61,297 50,200 41,944 Agricultural and Poultry 53,110 57,073 61,251 ------ ------ ------ Total Loans 330,738 313,734 290,076 ------- ------- ------- Less: Unearned Income 269 452 726 Allowance for Loan Losses 6,255 6,528 6,893 ----- ----- ----- Loans, net $324,214 $306,754 $282,457 ======== ======== ========
- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- INVESTMENTS The investment portfolio is a principal source for funding the Company's loan growth and other liquidity needs. The Company's securities portfolio consists of money market securities, obligations of the U.S. treasury and various federal agencies, municipal obligations of state and political subdivisions, corporate investments, and asset-/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 composition of the Company's investment portfolio continues to shift from asset-/mortgage-backed investments to agency securities. This expected shift in the portfolio has primarily resulted from accelerated prepayments on these securities due to greater incidences of refinancing. The funds generated from these prepayments were primarily reinvested in callable agency securities at yields generally equal to or greater than those carried in the asset-/mortgage-backed segment of the portfolio. The portion of the investment portfolio designated as available-for-sale provides an additional funding source for the Company's liquidity needs and for asset/liability management requirements. During 1995, the Financial Accounting Standards Board authorized a one-time window of opportunity for the transfer of securities previously classified as held-to-maturity to available-for-sale. 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 as an indication that management anticipates such sales. The carrying value of available-for-sale securities is equivalent to their market value. All other securities are carried at amortized cost due to management's intent and ability to hold these securities to maturity. Table 7 below, and Note 2 to the consolidated financial statements, contain additional information on the year-end investment portfolio balances. INVESTMENT PORTFOLIO, Amortized Cost (Table 7, dollars in thousands) December 31, 1997 % 1996 % ---- - ---- - Federal Funds Sold and Short-term Investments $12,000 8.9% $22,176 15.5% U.S. Treasury and Agency Securities 59,295 44.0 49,700 34.7 Obligations of State and Political Subdivisions 40,552 30.1 37,813 26.4 Asset-/Mortgage-backed Securities 16,363 12.2 24,782 17.3 Corporate Securities 4,639 3.5 7,268 5.1 Other Securities 1,764 1.3 1,396 1.0 ----- --- ----- --- Total Securities Portfolio $134,613 100.0% $143,135 100.0% ======== ===== ======== =====
RISK MANAGEMENT - -------------------------------------------------------------------------------- The Company is exposed to various types of business risk on an on-going basis. These risks include credit risk, liquidity risk and interest rate risk. Various procedures are employed at the Company's affiliate banks to monitor and mitigate risk in their loan and investment portfolios, as well as risks associated with changes in interest rates. The following is a discussion of the Company's philosophies and procedures to address these risks. LENDING AND LOAN ADMINISTRATION Primary responsibility and accountability for day-to-day lending activities rests with the Company's affiliate banks. Loan personnel at each bank have the authority to extend credit under guidelines approved by the bank's board of directors. Executive and board loan committees which are active at each bank serve as vehicles for communication and for the pooling of knowledge, judgment and experience of its members. These committees provide valuable input to lending personnel and act as an approval body. They also monitor the overall quality of the banks' loan portfolios. - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- The Corporate Loan Committee, comprised of members of the Company's and affiliate banks' executive officers and board of directors, ensure a consistent application of the Company's lending policies. The Company also maintains a comprehensive loan review program for its affiliate banks. The purpose of the program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses. This program 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 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. Specific reserve allocations occur when: (a) the customer's cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) accrual of interest has been suspended; or, (d) other reasons where either the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring. The allowance for loan losses decreased by $273,000 in 1997 and $365,000 in 1996, but remained strong at 1.89% of total loans as of December 31, 1997. As shown in Table 8 below, a significant dollar amount of the loan losses charged to the allowance in 1997 and 1996 were recovered in subsequent years. These significant recoveries, along with management's determination of allowance adequacy, influenced the level of provision for loan losses in these years. For additional information, see the discussion entitled PROVISION FOR LOAN LOSSES elsewhere in this report. ALLOWANCE FOR LOAN LOSSES (Table 8, dollars in thousands) 1997 1996 1995 ---- ---- ---- Balance as of January 1 $6,528 $6,893 $6,602 Provision for Loan Losses (408) 210 49 Recoveries of Prior Loan Losses 734 299 637 Loan Losses Charged to the Allowance (599) (874) (395) ---- ---- ---- Balance as of December 31 $6,255 $6,528 $6,893 ====== ====== ======
Underperforming assets consist of: (a) non-accrual loans; (b) loans which have been re-negotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due ninety (90) days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection. Loans are charged-off when they are deemed uncollectible. Underperforming loans were 0.99% of total loans at December 31, 1997. Table 9 below presents an analysis of the Company's underperforming assets at year-end 1997, 1996 and 1995. UNDERPERFORMING ASSETS (Table 9, dollars in thousands). December 31, 1997 1996 1995 ---- ---- ---- Non-accrual Loans $562 $1,370 $1,093 Past Due Loans (90 days or more) 2,710 1,102 2,689 Renegotiated Loans --- --- 122 --- --- --- Total Underperforming Loans 3,272 2,472 3,904 ----- ----- ----- Other Real Estate Owned 146 203 286 --- --- --- Total Underperforming Assets $3,418 $2,675 $4,190 ====== ====== ====== Allowance for Loan Losses to Underperforming Loans 191.17% 264.08% 176.56% Underperforming Loans to Total Loans 0.99% 0.79% 1.35% Allowance for Loan Losses to Total Loans . 1.89% 2.08% 2.38%
- -------------------------------------------------------------------------------- Management's Discussion and Analysis of Supplemental Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- INVESTMENTS AND LIQUIDITY Liquidity needs in a banking organization arise from new loan demand, funding of existing loan commitments, and deposit withdrawals. One important objective in managing the securities portfolio is to ensure the Company has adequate liquidity for these needs. The purpose of liquidity management is to match sources of funds with anticipated customer borrowings and withdrawals and other obligations to ensure a dependable funding base. As noted in the INVESTMENTS discussion contained elsewhere in this report, management significantly increased the available-for-sale portfolio in 1995, greatly enhancing the Company's ability to quickly react to changes in liquidity needs. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. INTEREST RATE RISK MANAGEMENT Interest rate risk is the exposure of the Company's financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company's earnings, the Company measures interest rate risk through computer-assisted simulation modeling of its net interest income and interest rate sensitivity gap. Interest rate sensitivity gap is defined as the difference between the principal amounts of interest sensitive assets and liabilities that will mature or reprice within given periods. A net interest income and interest rate sensitivity gap analysis is generated for each affiliate bank on a quarterly basis. The Company's simulation modeling monitors the potential impact to net interest income under four interest rate scenarios -- flat, rising, declining and most likely. The Company's policy is to actively manage its asset/liability position within a one-year interval and to limit the risk in any of the four interest rate scenarios to a reasonable level of taxable-equivalent net interest income in that interval. Funds Management Committees at the holding company and each affiliate bank monitor compliance within the established guidelines of the Funds Management Policy. ANALYSIS OF INTEREST RATE SENSITIVITY at December 31, 1997 (Table 10, dollars in thousands) 1-3 3-6 6-12 1-5 Beyond Months Months Months Years 5 Years Total ------ ------ ------ ----- ------ ----- EARNING ASSETS Federal Funds Sold and Other Short-term Investments $ 12,000 $ --- $ --- $ --- $ --- $ 12,000 Investment Securities: Adjustable Rate 5,835 806 446 --- --- 7,087 Fixed Rate 30,251 11,765 14,026 28,599 32,134 116,775 Loans (Net of Unearned): Adjustable Rate 78,233 21,662 52,616 53,644 772 206,927 Fixed Rate 17,020 12,503 15,712 50,164 28,143 123,542 ------ ------ ------ ------ ------ ------- TOTAL EARNING ASSETS $143,339 $46,736 $82,800 $132,407 $61,049 $466,331 ======== ======= ======= ======== ======= ======== INTEREST BEARING LIABILITIES Savings, NOW and Money Market Deposits $ 52,838 $ --- $ --- $ --- $72,366 $125,204 Time Deposits: Less than $100,000 58,086 42,341 49,249 78,991 182 228,849 $100,000 or more 9,641 8,950 2,942 4,128 --- 25,661 Short-term Borrowings 4,933 --- --- --- --- 4,933 ----- --- --- --- --- ----- TOTAL INTEREST BEARING LIABILITIES $125,498 $51,291 $52,191 $83,119 $72,548 $384,647 ======== ======= ======= ======= ======= ======== Periodic GAP $ 17,841 $ (4,555) $ 30,609 $ 49,288 $ (11,499) $ 81,684 ======== ========= ======== ======== ========== ======== Cumulative GAP $ 17,841 $ 13,286 $ 43,895 $ 93,183 $ 81,684 ======== ======== ======== ======== ========== Cumulative Ratio (1) 114% 108% 119% 130% 121% ==== ==== ==== ==== ====
(1) Rate-sensitive Assets / Rate-sensitive Liabilities - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) - -------------------------------------------------------------------------------- Table 10 on the previous page reflects the Company's interest rate sensitivity position (interest rate sensitive assets minus interest rate sensitive liabilities) individually and cumulatively, over various time horizons and based on current interest rates. As shown in the table, the Company had a cumulative positive gap of $44,844,000 in the one-year horizon at December 31, 1997. In financial institutions with positive gaps, net interest income tends to increase in rising interest rate environments, and decrease in declining interest rate environments. The Company believes its asset/liability management program allows adequate time to react to changes in interest rate trends and provides adequate protection to variability in the Company's net interest income during 1998. As of December 31, 1997 the Company had no derivatives, trading portfolio or unusual financial instruments which expose the Company to undue interest rate risk. For additional information regarding qualitative and quantitative market risk disclosures, see the Company's Annual Report on Form 10-K for the year ended December 31, 1997 which is available without charge, upon request. YEAR 2000 - -------------------------------------------------------------------------------- All banks and financial institutions are faced with addressing a potentially materially adverse event should their computer and operating systems fail to accurately process business in the Year 2000. The Company, like any financial institution, would suffer an interruption in its ability to transact business should its systems fail due to Year 2000 programming inaccuracy. A formal review is being conducted of the Company's computer systems and systems providers to determine the extent to which those systems and systems providers must implement changes to avoid or minimize service issues associated with the Year 2000. The Company has identified certain issues that require attention prior to the Year 2000 in order that its operations will not be materially adversely affected. The expenses associated with the resolution of these issues are not expected to be material. The Company contracts with Fiserv, a publicly listed company headquartered in Milwaukee, Wisconsin, for all of its loan and deposit account processing activity. Fiserv's applications have been identified as mission critical for the Company with regard to the Year 2000 issue. Fiserv, which is a national service provider for over 3,300 financial institutions, has confirmed to the Company that the renovation and testing of all core systems will be largely completely by December 25, 1998. While the Company can obviously give no assurance as to Fiserv's performance in the completion of this matter, the Company is unaware of any issues that would cause Fiserv to be unable to renovate mission critical systems satisfactorily. The Year 2000 issue could also affect the ability of the Company's customers to conduct operations in a timely and effective manner, and as such, could adversely impact the quality of the Company's loan portfolio, its deposits, or other sources of revenue and funding from customers. Although the Company has not generally requested information from its customers regarding their potential exposure to the Year 2000 issue or their plans to minimize any such exposure, the Company is not aware of any specific customer which does not expect to have this issue resolved prior to the Year 2000. EX-13 6 EXHIBIT 13.4 EXHIBIT 13.4 - -------------------------------------------------------------------------------- Consolidated Balance Sheets (dollars in thousands, except per share data) - -------------------------------------------------------------------------------- December 31, 1997 1996 ---- ---- ASSETS Cash and Due from Banks $ 14,250 $ 17,134 Federal Funds Sold 11,800 20,600 ------ ------ Cash and Cash Equivalents 26,050 37,734 ------ ------ Interest-bearing Balances with Banks 200 597 Other Short-term Investments --- 979 Securities Available-for-Sale, at Market 99,639 98,557 Securities Held-to-Maturity, at Cost 24,223 23,213 Loans 330,738 313,734 Less: Unearned Income (269) (452) Allowance for Loan Losses (6,255) (6,528) ------ ------ Loans, Net 324,214 306,754 Premises, Furniture and Equipment, Net 12,406 11,585 Other Real Estate 146 203 Intangible Assets 1,572 1,774 Accrued Interest Receivable and Other Assets 10,381 8,047 ------ ----- TOTAL ASSETS $ 498,831 $ 489,443 ============ ========== LIABILITIES Noninterest-bearing Deposits $ 54,234 $ 52,674 Interest-bearing Deposits 379,714 370,232 ------- ------- Total Deposits 433,948 422,906 Short-term Borrowings 4,933 12,527 Long-term Debt --- 1,000 Accrued Interest Payable and Other Liabilities 6,618 4,217 ----- ----- TOTAL LIABILITIES 445,499 440,650 ------- ------- SHAREHOLDERS' EQUITY Common Stock, $10 par value, $1 stated value; 20,000,000 shares authorized, 5,350,161 and 2,539,059 issued and outstanding in 1997 and 1996, respectively 5,350 2,539 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued --- --- Additional Paid-in Capital 35,018 26,501 Retained Earnings 12,208 19,258 Unrealized Appreciation on Securities Available-for-Sale, Net 756 495 --- --- TOTAL SHAREHOLDERS' EQUITY 53,332 48,793 ------ ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 498,831 $ 489,443 ========== =========
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Consolidated Statements of Income (dollars in thousands, except per share data) - -------------------------------------------------------------------------------- Years ended December 31, 1997 1996 1995 ---- ---- ---- INTEREST INCOME Interest and Fees on Loans $29,350 $27,846 $26,197 Interest on Federal Funds Sold 550 611 783 Interest on Short-term Investments 58 167 734 Interest and Dividends on Securities Taxable 5,320 4,788 4,400 Non-taxable 2,190 1,949 1,702 ----- ----- ----- TOTAL INTEREST INCOME 37,468 35,361 33,816 ------ ------ ------ INTEREST EXPENSE Interest on Deposits 17,221 16,179 15,150 Interest on Short-term Borrowings 291 404 671 Interest on Long-term Debt 9 100 127 - --- --- TOTAL INTEREST EXPENSE 17,521 16,683 15,948 ------ ------ ------ NET INTEREST INCOME 19,947 18,678 17,868 Provision for Loan Losses (408) 210 49 ----- --- -- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 20,355 18,468 17,819 ------ ------ ------ NONINTEREST INCOME Income from Fiduciary Activities 307 210 207 Service Charges on Deposit Accounts 1,145 976 766 Investment Services Income 456 403 207 Other Service Charges, Commissions, and Fees 560 510 529 Gains on Sales of Loans and Other Real Estate 19 55 36 Securities Gains, net --- 73 19 --- -- -- TOTAL NONINTEREST INCOME 2,487 2,227 1,764 ----- ----- ----- NONINTEREST EXPENSE Salaries and Employee Benefits 7,391 7,165 6,604 Occupancy Expense 1,104 1,048 1,041 Furniture and Equipment Expense 938 1,018 955 FDIC Premiums 52 229 471 Data Processing Fees 503 427 402 Professional Fees 843 805 247 Advertising and Promotion 536 451 419 Other Operating Expenses 2,301 2,145 2,279 ----- ----- ----- TOTAL NONINTEREST EXPENSE 13,668 13,288 12,418 ------ ------ ------ Income before Income Taxes 9,174 7,407 7,165 Income Tax Expense 3,035 2,513 2,323 ----- ----- ----- NET INCOME $ 6,139 $ 4,894 $ 4,842 ======= ======= ======= EARNINGS PER SHARE AND DILUTED EARNINGS PER SHARE $ 1.15 $ 0.92 $ 0.91 ======== ========= =======
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (dollars in thousands) - -------------------------------------------------------------------------------- Years Ended December 31, 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $6,139 $4,894 $4,842 ------ ------ ------ Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Accretion / (Amortization) on Investments 30 (13) (630) Depreciation and Amortization 1,162 1,166 1,145 Provision for Loan Losses (408) 210 49 Gain on Sale of Securities, net --- (73) (19) Gain on Sales of Loans and Other Real Estate (19) (55) (36) Change in Assets and Liabilities: Deferred Taxes (32) 254 44 Deferred Loan Fees (48) (11) 34 Interest Receivable and Other Assets (2,302) 30 (1,674) Interest Payable and Other Liabilities 2,401 358 673 Unearned Income (183) (274) (303) ---- ---- ---- Total Adjustments 601 1,592 (717) --- ----- ---- Net Cash from Operating Activities 6,740 6,486 4,125 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks 397 400 295 Proceeds from Maturities of Other Short-term Investments 996 7,030 52,133 Purchase of Other Short-term Investments --- (1,966) (43,967) Proceeds from Maturities of Securities Available-for-Sale 50,837 39,156 9,512 Proceeds from Sales of Securities Available-for-Sale --- 1,080 2,515 Purchase of Securities Available-for-Sale (51,714) (46,471) (29,764) Proceeds from Maturities of Securities Held-to-Maturity 3,133 4,092 11,312 Purchase of Securities Held-to-Maturity (4,134) (5,268) (4,243) Purchase of Loans (1,152) (1,576) (3,691) Proceeds from Sales of Loans 1,872 1,870 500 Loans Made to Customers, net of Payments Received (17,583) (24,530) (8,206) Proceeds from Sales of Other Real Estate 118 152 389 Property and Equipment Expenditures (1,781) (1,236) (1,407) ----- ------ ------ Net Cash from Investing Activities (19,011) (27,267) (14,622) ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits 11,042 27,353 26,373 Net Change in Short-term Borrowings (7,594) 123 (6,974) Advances in Long-term Debt --- 2,000 1,500 Repayments of Long-term Debt (1,000) (2,000) (1,500) Issuance / (Repurchase) of Common Stock 252 145 (110) Dividends Paid (2,083) (1,684) (1,554) Exercise of Stock Options 3 7 22 Purchase of Interests in Fractional Shares (33) (30) (25) --- --- --- Net Cash from Financing Activities 587 25,914 17,732 --- ------- ------ Net Change in Cash and Cash Equivalents (11,684) 5,133 7,235 Cash and Cash Equivalents at Beginning of Year 37,734 32,601 25,366 ------ ------ ------ Cash and Cash Equivalents at End of Year $26,050 $37,734 $ 32,601 ======= ======= ======== Cash Paid During the Year for: Interest $ 17,428 $ 16,612 $ 15,564 Income Taxes 2,821 2,332 2,431
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1997, 1996 and 1995 (dollars 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, 1995 (as previously reported for German American Bancorp) $ 20,942 $ 12,641 $ (658) $ 32,925 Retroactive restatement for Pooling of Interests (Peoples - 615,285 shares issued) 1,704 6,504 (354) 7,854 Balances, January 1, 1995 as restated 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 Net Income for 1996 6,139 6,139 Net Change in Unrealized Appreciation / (Depreciation) on Securities 261 261 Cash Dividends ($.39 per Common Share, as restated for pooling of interests) (2,083) (2,083) Issuance of 6,629 shares of Common Stock pursuant to Dividend Reinvestment Plan 252 252 Purchase and Retirement of 11,338 Shares pursuant to Exercise of Stock Options (156) (274) (430) Issuance of 15,818 Shares upon exercise of Stock Options 433 433 Two for One Stock Split (2,546,041 Shares) 2,546 (2,546) --- 5% Stock Dividend (253,952 Shares) 8,253 (8,253) --- Purchase of Interest in Fractional Shares (33) (33) Balances, December 31, 1997 $ 40,368 $ 12,208 $ 756 $ 53,332 ========= ======== ========= ========
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements December 31, 1997, 1996, and 1995 (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 1 - Summary of Significant Accounting Policies Description of Business and Basis of Presentation German American Bancorp operates primarily in the banking industry, 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 furniture manufacturing industries. Although wood furniture 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; German American Holdings Corporation, Inc. (parent of both Community Trust Bank and Peoples National Bank); and GAB Mortgage Corp. Significant intercompany balances and transactions have been eliminated in consolidation. Certain items in the 1996 and 1995 financial statements have been reclassified to correspond with the 1997 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 accordingly, 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 denominations, 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. These include securities that management may use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar reasons. Securities held as available-for-sale are reported at market value with unrealized gains or losses included as a separate component of equity, net of tax. Securities classified as held-to-maturity are securities that the Company has both the ability and positive intent to hold to maturity. Securities held-to-maturity are carried at amortized cost. Premium amortization is deducted from, and discount accretion is added to, interest income using the level yield method. The cost of securities sold is computed on the identified securities method. 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 increases or decreases to bad debt expense. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars 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 for loan losses required based on past loan loss experience, known and inherent risks in the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Loan impairment is reported when full repayment under the terms of the loan is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan's existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. 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. 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. 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 ($247 and $333 at December 31, 1997 and 1996, respectively) and goodwill ($1,325 and $1,441 at December 31, 1997 and 1996, respectively). Core deposit intangibles are amortized on an accelerated method over ten years and goodwill is amortized on a straight-line basis over fifteen years. Core Deposit Intangibles and Goodwill 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. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 1 - Summary of Significant Accounting Policies (continued) 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. Earnings Per Share Basic and diluted earnings per share are computed under a new accounting standard effective in the quarter ended December 31, 1997. All prior amounts have been restated to be comparable. Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock options. Cash Flow Reporting The Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial institutions. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold. Fair Values of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business, or the values of assets and liabilities not considered financial instruments. NOTE 2 - Securities The amortized cost and estimated market values of Securities as of December 31, 1997 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 $57,795 $88 $(68) $57,815 Obligations of State and Political Subdivisions 20,398 1,224 (2) 21,620 Asset-/Mortgage-backed Securities 15,668 88 (95) 15,661 Corporate Securities 4,528 23 (22) 4,529 Other Securities 1 13 --- 14 - -- --- -- Total $98,390 $1,436 $(187) $99,639 ======= ====== ===== ======= Securities Held-to-Maturity: U.S. Treasury Securities, and Obligations of U.S. Government Corporations and Agencies $1,500 $ --- $(1) $1,499 Obligations of State and Political Subdivisions 20,154 1,043 (10) 21,187 Asset-/Mortgage-backed Securities 695 14 (7) 702 Corporate Securities 111 --- (8) 103 Other Securities 1,763 --- --- 1,763 ----- --- --- ----- Total $24,223 $1,057 $(26) $25,254 ======= ====== ==== =======
- -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 2 - Securities (continued) The amortized cost and estimated market values of Securities as of December 31, 1996 are as follows: Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ---- ----- ------ ----- Securities Available-for-Sale: 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 Asset-/Mortgage-backed Securities 23,783 487 (192) 24,078 Corporate Securities 7,221 42 (18) 7,245 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 Subdivision 18,253 646 (18) 18,881 Asset-/Mortgage-backed Securities 999 12 (22) 989 Corporate Securities 47 --- --- 47 Other Securities 1,395 --- --- 1,395 ----- --- --- ----- Total $23,213 $658 $(61) $23,810 ======= ==== ===== =======
The amortized cost and estimated market value of Securities at December 31, 1997 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Asset-backed, Mortgaged-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 $11,433 $11,426 Due after one year through five years 31,041 31,261 Due after five years through ten years 29,002 29,218 Due after ten years 11,245 12,059 Asset-/Mortgage-backed Securities 15,668 15,661 Other Securities 1 14 - -- Totals $98,390 $99,639 ======= ======= Securities Held-to-Maturity: Due in one year or less $2,476 $ 2,472 Due after one year through five years 3,789 3,889 Due after five years through ten years 3,824 4,079 Due after ten years 11,676 12,349 Asset-/Mortgage-backed Securities 695 702 Other Securities 1,763 1,763 ----- ----- Totals $24,223 $25,254 ======= =======
- -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 2 - Securities (continued) 1997 1996 1995 ----- ---- ---- 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 $ --- $ 2,215 $ --- Gross Gains on Sales --- --- 76 --- 22 --- Gross Losses on Sales --- --- (3) --- (3) --- Income Taxes on Gross Gains --- --- 30 --- 9 --- Income Taxes on Gross Losses --- --- (1) --- (1) ---
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $10,767 and $17,004 as of December 31, 1997 and 1996, respectively. No investment securities of an individual issuer exceeded ten percent of German American Bancorp shareholders' equity at December 31, 1997. 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 $9,364 at December 31, 1997. 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, 1997 and 1996, U.S. Government Agency structured notes, consisting primarily of step-up and single-index bonds, with respective amortized costs of $5,000 and $6,000 and fair values of $4,986 and $5,901 were included in securities available-for-sale. 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 at December 31, 1997 1996 ---- ---- Real Estate Loans Secured by 1- 4 Family Residential Properties $107,943 $93,713 Commercial and Industrial Loans 106,843 110,894 Loans to Individuals for Household, Family and Other Personal Expenditures 61,297 50,200 Loans to Finance Agricultural Production, Poultry and Other Loans to Farmers 53,110 57,073 Economic Development Commission Bonds 500 575 Lease Financing 1,045 1,279 ----- ----- Totals $330,738 $313,734 ======== ========
- -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 3 - Loans (Continued) Information regarding impaired loans is as follows: 1997 1996 ---- ---- Year-end loans with no allowance for loan losses allocated $ 507 $ 386 Year-end loans with allowance for loan losses allocated 2,272 3,452 Amount of allowance allocated 358 452 Average balance of impaired loans during the year 2,910 4,129 Interest income recognized during impairment 217 322 Interest income recognized on cash basis 203 231
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 1997. A summary of the activity of these loans is as follows: Balance Changes Deductions Balance January 1, in Persons December 31, 1997 Additions Included Collected Charged-off 1997 ---- --------- -------- --------- ---------- ----------- ---- $ 12,074 $ 8,279 $ --- $ (8,084) $ --- $ 12,269
Total loans serviced for the Federal Home Loan Mortgage Corporation were $3,808 at December 31, 1997 and $4,440 at December 31, 1996. 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: 1997 1996 1995 ---- ---- ---- Balance as of January 1 $6,528 $6,893 $6,602 Provision for Loan Losses (408) 210 49 Recoveries of Prior Loan Losses 734 299 637 Loan Losses Charged to the Allowance (599) (874) (395) ---- ---- ---- Balance as of December 31 $6,255 $6,528 $6,893 ====== ====== ======
NOTE 5 - Premises, Furniture, and Equipment Premises, furniture, and equipment as presented on the balance sheet is comprised of the following classifications at December 31, 1997 1996 ---- ---- Land $2,238 $1,827 Buildings and Improvements 12,572 12,032 Furniture and Equipment 7,195 6,567 ----- ----- Total Premises, Furniture and Equipment 22,005 20,426 Less: Accumulated Depreciation (9,599) (8,841) ------ ------ Total $12,406 $11,585 ======= =======
Depreciation expense was $960, $950 and $914 for 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 6 - Deposits The aggregate amount of interest-bearing deposits in denominations of $100 or more was $25,661 and $32,589 as of December 31, 1997 and 1996, respectively. At year-end 1997, interest-bearing deposits include $125,204 of demand and savings deposits and $254,510 of time deposits. Stated maturities of time deposits were as follows: 1998 $170,473 1999 57,340 2000 15,207 2001 5,861 2002 5,447 Thereafter 182 --- Total $254,510 ======== NOTE 7 - Short-term Borrowings The Company's funding sources include repurchase agreements and short-term borrowings, primarily federal funds purchased and Interest Bearing Demand Notes issued to the U.S. Treasury. Repurchase agreements are essentially borrowings from customers secured by a pledge of securities. The Company retains possession of and control over such securities. Information regarding repurchase agreements and short-term borrowings at December 31, 1997 and 1996 is as follows: 1997 1996 ---- ---- Balances at December 31: Repurchase Agreements $4,933 $8,400 Federal Funds Purchased --- 2,000 Demand Notes Issued to the U.S. Treasury --- 2,127 --- ----- Total Short-term Borrowings $4,933 $12,527 ====== =======
NOTE 8 - Long-term Debt Long-term debt outstanding consists of the following at December 31, 1997 1996 ---- ---- Federal Home Loan Bank advances; interest payable monthly at 5.20%; principal matured on January 13, 1997 $ --- $ 1,000 =========== ========= NOTE 9 - Employee Benefit Plans The Company and all its banking affiliates provided a trusteed noncontributory profit sharing plan, which covered substantially all full-time employees. Peoples joined this plan in April 1997. Contributions are discretionary and are subject to determination by the Board of Directors. Contributions to this plan were $256, $200 and $184 for 1997, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 9 - Employee Benefit Plans (continued) 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 $255, $223 and $216 for 1997, 1996 and 1995, respectively. Peoples has a noncontributory defined benefit pension plan covering substantially all employees with benefits based on years of service and compensation prior to retirement. Peoples is in the process of terminating the plan. The projected benefit obligation was frozen at April 30, 1997, and the plan will be settled in 1998. Peoples did not record a curtailment gain in 1997 due to immateriality, and the net gain upon settlement is also expected to be immaterial. Upon settlement, approximately 25% of the prepaid pension asset will be utilized for discretionary contributions to the Company's existing noncontributory profit sharing plan. Plan assets consist primarily of U.S. Treasury bonds, corporate bonds and other various marketable equity securities. The following sets forth the Peoples Plan's funded status at December 31, 1997: Plan assets at fair value $1,022 Projected benefit obligation for service rendered to date (853) Unrecognized loss 122 Unrecognized transition asset (133) ----- Prepaid Pension Asset $ 158 ===== 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. An optionee may tender already-owned common shares to the Company in exercise of an option. In this instance, the Company is obligated to use its best efforts to issue to such optionee a replacement option for the number of shares tendered, as follows: (a) of the same type as the option exercised (either an incentive stock option or a non-qualified option); (b) with the same expiration date; and, (c) priced at the fair market value of the stock on that date. Replacement options may not be exercised until one year from the date of grant. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands except per share data) - -------------------------------------------------------------------------------- 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 1995 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 Granted 23,810 18.12 Exercised (33,218) 13.04 ------- Outstanding, end of 1997 32,519 15.95 ======= Options exercisable at year-end are as follows: Number Weighted-average of Options Exercise Price ---------- -------------- 1997 1,069 15.59
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 1997, 1996 and 1995. 1997 1996 1995 ---- ---- ---- Pro forma net income $6,098 $4,881 $4,834 Pro forma: Earnings per share $1.14 $0.91 $0.91 Diluted Earnings per share 1.14 0.91 0.90
In future years, the pro forma effect of not applying this standard may increase as additional options are granted. For options granted during 1997, 1996 and 1995, the weighted-average fair values at grant date are $1.73, $0.91 and $1.10, respectively. The fair value of options granted during 1997, 1996 and 1995 was estimated using the following weighted-average information: risk-free interest rate of 5.58%, 5.41% and 5.43%, expected life of one year, expected volatility of stock price of .18, .10 and .10, and expected dividends of 2.06%, 2.38% and 2.41% per year. At year-end 1997, options outstanding have a weighted average remaining life of 5.25 years, with exercise prices ranging from $9.36 to $15.95. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 11 - Income Taxes The provision for income taxes consists of the following: 1997 1996 1995 ---- ---- ---- Currently Payable $3,114 $2,306 $2,326 Deferred (32) 254 44 Net Operating Loss Carryforward (47) (47) (47) --- --- --- Total $3,035 $2,513 $2,323 ====== ====== ======
Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows: 1997 1996 1995 ---- ---- ---- Statutory Rate Times Pre-tax Income $3,119 $2,519 $2,436 Add/(Subtract) the Tax Effect of: Income from Tax-exempt Loans and Investments (681) (645) (561) Non-deductible Merger Costs 73 149 --- State Income Tax, Net of Federal Tax Effect 541 459 420 Other Differences (17) 31 28 --- -- -- Total Income Taxes $3,035 $2,513 $2,323 ====== ====== ======
The net deferred tax asset at December 31 consists of the following: 1997 1996 ---- ---- Deferred Tax Assets: Allowance for Loan Losses $1,378 $1,546 Net Operating Loss Carryforwards 187 234 Other 342 174 --- --- Total Deferred Tax Assets 1,907 1,954 ----- ----- Deferred Tax Liabilities: Depreciation (230) (192) Leasing Activities, Net (202) (282) Purchase Accounting Adjustments (29) (45) Unrealized Appreciation on Securities (493) (315) Other (43) (64) --- --- Total Deferred Tax Liabilities (997) (898) ---- ---- Valuation Allowance (48) (48) --- --- Net Deferred Tax Asset $862 $1,008 ==== ======
The Company's subsidiary, German American Holdings Corporation, Inc., has $550 of federal tax net operating loss carryforwards expiring in the following amounts: Year Amount Year Amount ---- ------ ---- ------ 1999 $119 2002 $105 2000 135 2007 58 2001 129 2008 4 - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands, except per share data) - -------------------------------------------------------------------------------- NOTE 12 - Per Share Data The Board of Directors declared and paid a 5% stock dividend in 1997, 1996 and 1995. In lieu of issuing fractional shares, the Company purchased from shareholders their fractional interest. Additionally, the Board declared and paid 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 computation of Earnings per Share and Diluted Earnings per Share are provided below: 1997 1996 1995 ---- ---- ---- Earnings per Share: Net Income $6,139 $4,894 $4,842 Weighted Average Shares Outstanding 5,343,727 5,335,316 5,331,745 Earnings per Share $1.15 $0.92 $0.91 ===== ===== ===== Diluted Earnings per Share: Net Income $6,139 $4,894 $4,842 Weighted Average Shares Outstanding 5,343,727 5,335,316 5,331,745 Stock Options 32,519 41,927 50,732 Assumed Shares Repurchased upon Exercise of Options (23,978) (32,900) (37,591) ------- ------- ------- Diluted Weighted Average Shares Outstanding 5,352,268 5,344,343 5,344,886 Diluted Earnings per Share $1.15 $0.92 $0.91 ===== ===== =====
NOTE 13 - Lease Commitments The total rental expense for all leases for the years ended December 31, 1997, 1996, and 1995 was $119, $106, and $100, respectively, including amounts paid under short-term cancelable leases. At December 31, 1997, 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 $44 for 1997. Exercise of the Bank's sublease renewal options is 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 -------- --------- ----- 1998 $78 $9 $87 1999 74 1 75 2000 68 --- 68 2001 55 --- 55 2002 50 --- 50 -- --- -- Total $325 $10 $335 ==== === ====
- -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- 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. Commitments and contingent liabilities are summarized as follows, at December 31, 1997 1996 ---- ---- Commitments to Fund Loans: Home Equity $9,726 $8,185 Credit Card Lines 4,634 4,480 Commercial Real Estate Commitments --- 67 Commercial Operating Lines 30,009 23,900 ------ ------ Total Commitments to Fund Loans $44,369 $36,632 ======= ======= Standby Letters of Credit $2,853 $2,009
Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management's credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less. These commitments are generally associated with variable interest rate agreements. The Company self-insured employee health benefits for all affiliates, including Peoples beginning in the second quarter of 1997. Stop loss insurance covers annual losses exceeding $35 per covered individual and approximately $500 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 $430, $326 and $269 for 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, the affiliate banks were required to have $2,715 and $2,504, respectively, on deposit with the Federal Reserve, or as cash on hand. These reserves do not earn interest. NOTE 15 - Non-cash Investing Activities 1997 1996 1995 ---- ---- ---- Loans Transferred to Other Real Estate $42 $25 $149 Securities Transferred to Available-for-Sale --- --- 40,279
The data above should be read in conjunction with the Consolidated Statements of Cash Flows. During December 1995, securities were transferred from the classification of Held-to-Maturity to Available-for-Sale in accordance with the Financial Accounting Standards Board Special Report on Implementation of FAS 115. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 16 - Parent Company Financial Statements The condensed financial statements of German American Bancorp as of December 31, 1997 and 1996, and for each of the three years ended December 31, 1997, 1996, and 1995 are as follows: CONDENSED BALANCE SHEETS December 31, 1997 and 1996 1997 1996 ---- ---- ASSETS Cash $1,324 $428 Securities Available-for-Sale, at Market 1,761 1,791 Investment in Subsidiary Banks and Bank Holding Company 48,513 45,740 Investment in GAB Mortgage Corp 286 278 Furniture and Equipment 1,371 785 Other Assets 268 248 --- --- Total Assets $53,523 $49,270 ======= ======= LIABILITIES $ 191 $ 477 --------- ---------- SHAREHOLDERS' EQUITY Common Stock 5,350 2,539 Additional Paid-in Capital 35,018 26,501 Retained Earnings 12,208 19,258 Unrealized Appreciation on Securities Available-for-Sale 756 495 --- --- Total Shareholders' Equity 53,332 48,793 ------ ------ Total Liabilities and Shareholders' Equity $53,523 $49,270 ======= =======
CONDENSED STATEMENTS OF INCOME For the years ended December 31, 1997, 1996, and 1995 1997 1996 1995 ---- ---- ---- INCOME Dividends from Subsidiary Banks $4,750 $5,386 $2,665 Dividend and Interest Income 129 110 18 Fee Income 407 374 178 Securities Gains, net --- 74 --- Other Income --- 5 5 --- - - Total Income 5,286 5,949 2,866 ----- ----- ----- EXPENSES Salaries and Benefits 1,434 1,330 922 Professional Fees 378 601 95 Occupancy and Equipment Expense 246 260 130 Other Expenses 278 219 108 --- --- --- Total Expenses 2,336 2,410 1,255 ----- ----- ----- INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 2,950 3,539 1,611 Income Tax Benefit 655 556 415 --- --- --- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 3,605 4,095 2,026 Equity in Undistributed Income of Subsidiaries 2,534 799 2,816 ----- --- ----- NET INCOME $6,139 $4,894 $4,842 ====== ====== ======
- -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 16 - Parent Company Financial Statements (continued) CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997, 1996, and 1995 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $6,139 $4,894 $4,842 ------ ------ ------ Adjustments to Reconcile Net Income to Net Cash from Operations Amortization on Securities 36 32 --- Depreciation 140 117 65 Gain on Sale of Securities, net --- (74) --- Change in Other Assets (12) (40) (72) Change in Other Liabilities (286) 338 84 Equity in Undistributed Income of Subsidiaries (2,534) (799) (2,816) ------ ---- ------ Total Adjustments (2,656) (426) (2,739) ------ ---- ------ Net Cash from Operating Activities 3,483 4,468 2,103 ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Capital Contribution to First State Bank --- (632) --- Purchase of Securities Available-for-Sale --- (1,815) --- Proceeds from Sales of Securities Available-for-Sale --- 88 --- Property and Equipment Expenditures (726) (589) (362) ---- ---- ---- Net Cash from Investing Activities (726) (2,948) (362) ---- ------ ---- CASH FLOWS FROM FINANCING ACTIVITIES Dividends Paid (2,083) (1,684) (1,554) Exercise of Stock Options 3 7 23 Issuance (Repurchase) of Common Stock 252 145 (110) Purchase of Interest in Fractional Shares (33) (30) (25) --- --- --- Net Cash from Financing Activities (1,861) (1,562) (1,666) ------ ------ ------ Net Change in Cash and Cash Equivalents 896 (42) 75 Cash and Cash Equivalents at Beginning of Year 428 470 395 --- --- --- Cash and Cash Equivalents at End of Year $1,324 $428 $470 ====== ==== ====
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. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars 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. At year-end 1997, consolidated and selected affiliate 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 $55,093 16.51% $26,704 8.00% $33,380 10.00% German American Bank $26,301 14.06% $14,967 8.00% $18,709 10.00% Peoples National Bank $15,680 16.19% $7,746 8.00% $9,683 10.00% Tier 1 Capital (to Risk Weighted Assets) Consolidated $50,874 15.24% $13,352 4.00% $20,028 6.00% German American Bank $23,947 12.80% $7,484 4.00% $11,225 6.00% Peoples National Bank $14,458 14.93% $3,873 4.00% $5,810 6.00% Tier 1 Capital (to Average Assets) Consolidated $50,874 10.48% $19,416 4.00% $24,270 5.00% German American Bank $23,947 8.52% $11,242 4.00% $14,053 5.00% Peoples National Bank $14,458 9.87% $5,861 4.00% $7,326 5.00%
The Company and all affiliate Banks at year-end 1997 were categorized as well capitalized. NOTE 18 - Business Combinations 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. This transaction has been accounted for as a pooling of interests. Concurrent 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. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- NOTE 18 - Business Combinations (continued) The following is a reconciliation of the separate and combined net interest income and net income of German American Bancorp and Peoples Bancorp for the 1997 pooling: German American Bancorp Peoples (as previously reported) Bancorp Combined ----------------------- ------- -------- For the period January 1, 1997 through March 4, 1997 Net interest income $2,558 $696 $3,254 Net income 698 218 916 For the year ended December 31, 1996 Net interest income 14,675 4,003 18,678 Net income 4,065 829 4,894 For the year ended December 31, 1995 Net interest income 14,480 3,388 17,868 Net income 4,018 824 4,842
In December 1997, the Company signed a definitive agreement providing for a merger of a Company subsidiary with CSB Bancorp, ("CSB") parent company of the Citizens State Bank of Petersburg, Indiana. Under terms of the agreement, the Company will issue to CSB shareholders between 928,572 and 1,137,500 shares of Company Common Stock, as adjusted for the Company's two for one stock split declared in October 1997. The number of shares to be issued is dependent upon the Company's average common stock price during a period prior to the date of the merger closing, and is also subject to further anti-dilution adjustments in the event of any future stock dividends, splits and the like. The proposed merger is subject to approval by the shareholders of CSB, bank regulatory agencies, and other conditions. The transaction is expected to be accounted for as a pooling of interests, and it is contemplated that the merger will be effective in the second quarter of 1998. In January 1998, the Company also signed a definitive agreement providing for a merger of a Company subsidiary with FSB Financial Corporation ("FSB") which operates the FSB Bank in Princeton and Francisco, Indiana. Under terms of the agreement, the Company will issue to 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. The proposed merger is subject to approval by the shareholders of FSB, bank regulatory agencies, and other conditions. The transaction is expected to be accounted for as a pooling of interests, and it is contemplated that the merger will be effective in the second quarter of 1998. - -------------------------------------------------------------------------------- Notes to the Consolidated Financial Statements (continued) (dollars in thousands) - -------------------------------------------------------------------------------- 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, 1997 DECEMBER 31, 1996 ----------------- ----------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE Financial Assets: Cash and Short-term Investments $26,250 $26,250 $39,310 $39,310 Securities Available-for-Sale 99,639 99,639 98,557 98,557 Securities Held-to-Maturity 24,223 25,254 23,213 23,810 Loans, net 324,214 327,421 306,754 306,397 Accrued Interest Receivable 4,798 4,798 4,533 4,533 Financial Liabilities: Deposits (433,948) (436,004) (422,906) (425,534) Short-term Borrowings (4,933) (4,933) (12,527) (12,527) Long-term Debt --- --- (1,000) (1,002) Accrued Interest Payable (2,372) (2,372) (2,279) (2,279) Unrecognized Financial Instruments: Commitments to extend Credit --- --- --- --- Standby Letters of Credit --- --- --- ---
- -------------------------------------------------------------------------------- Independent Auditors' Report - -------------------------------------------------------------------------------- Board of Directors and Shareholders German American Bancorp Jasper, Indiana We have audited the accompanying consolidated balance sheets of German American Bancorp as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of German American Bancorp as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Indianapolis, Indiana February 5, 1998 Crowe, Chizek and Company LLP EX-21 7 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT (AS OF MARCH 7, 1997) STATE OF NAME INCORPORATION The German American Bank Indiana GAB Mortgage Corp Indiana German American Holdings Corporation Indiana Community Trust Bank Indiana First State Bank, Southwest Indiana Indiana The Peoples National Bank and Trust Company of Washington Indiana Peoples Investment Center, Inc. Indiana EX-23 8 EXHIBIT 23.1 EXHIBIT 23.1 Consent of Independent Auditors Board of Directors German American Bancorp Jasper, Indiana We consent to the incorporation by reference in the Registration Statement Form S-3 of German American Bancorp, relating to the Dividend Reinvestment and Stock Purchase Plan and which is included by reference as an Exhibit in the December 31, 1997 Form 10-K, of our Independent Auditor's Report, dated February 5, 1998, on the consolidated financial statements of German American Bancorp as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997. Crowe, Chizek and Company LLP March 31, 1998 Indianapolis, Indiana EX-23 9 EXHIBIT 23.2 EXHIBIT 23.2 Consent of Independent Auditors Board of Directors German American Bancorp Jasper, Indiana We consent to the incorporation by reference in the Registration Statement Form S-4 and Prospectus of German American Bancorp, relating to the issuance of securities in the proposed mergers of CSB Bancorp and FSB Financial Corporation into a wholly owned subsidiary of German American Bancorp, of our Independent Auditor's Report, dated February 5, 1998, on the consolidated financial statements of German American Bancorp as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997. Crowe, Chizek and Company LLP March 31, 1998 Indianapolis, Indiana EX-27 10
9 0000714395 GERMAN AMERICAN BANCORP 1,000 YEAR DEC-31-1997 DEC-31-1997 14,250 200 11,800 0 99,639 24,223 25,254 330,469 6,255 498,831 433,948 4,933 6,618 0 0 0 5,350 47,982 498,831 29,350 7,510 608 37,468 17,221 17,521 19,947 (408) 0 13,668 9,174 9,174 0 0 6,139 1.15 1.15 4.64 562 2,710 0 0 6,528 599 734 6,255 6,255 0 2,557
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