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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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________________
Commission File Number 0-11244
GERMAN AMERICAN BANCORP
-----------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1547518
------- ----------
(State or other jurisdiction of (I.R.S. Employer
ncorporation 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:
Name of each exchange
Title of each class on which registered
NONE Not Applicable
---- --------------
Securities registered pursuant to Section 12 (g) of the Act:
Common Shares, No 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 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. [ ]
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 12, 2001 was approximately
$136,431,000.
As of March 12, 2001 there were outstanding 10,494,708 common shares, no
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of German American Bancorp for the Annual
Meeting of its Shareholders to be held April 26, 2001, to the extent stated
herein, are incorporated by reference into Part III.
- 1 -
GERMAN AMERICAN BANCORP
2000 ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1. Business............................................... 3
Item 2. Properties............................................. 6
Item 3. Legal Proceedings...................................... 6
Item 4. Submission of Matters to a Vote of Security Holders.... 7
Special Item. Executive Officers of the Registrant................... 8
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters........................ 8
Item 6. Selected Financial Data................................ 9
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 10-21
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk.......................... 22
Item 8. Financial Statements and Supplementary Data........... 23-48
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................. 49
PART III
Item 10. Directors and Executive Officers of the Registrant..... 49
Item 11. Executive Compensation................................. 49
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................. 49
Item 13. Certain Relationships and Related Transactions......... 49
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................ 50
SIGNATURES .......................................................... 51
INDEX OF EXHIBITS........................................................ 52-53
- 2 -
PART I
Item 1. Business.
General
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliated
community banks with 27 banking offices and 5 full-service independent insurance
agencies in the eight contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The Company's lines of
business include retail and commercial banking, mortgage banking, trust and
brokerage services, title insurance, and a full range of personal and corporate
property and casualty insurance products.
The Company's principal subsidiaries are described in the following table:
Names of Principal Subsidiaries Type of Business Location Parent Company
- -----------------------------------------------------------------------------------------------------------------------------
The German American Bank Commercial Bank Jasper, IN German American Bancorp
First American Bank Savings Bank Vincennes, IN German American Bancorp
First State Bank, Southwest Indiana Commercial Bank Tell City, IN German American Bancorp
German American Holdings Corporation 2nd Tier Holding Company Jasper, IN German American Bancorp
GAB Mortgage Corp. Inactive Jasper, IN German American Bancorp
German American Reinsurance Co., Ltd. Credit Life Insurance Turks & Caicos Islands German American Bancorp
Peoples National Bank Commercial Bank Washington, IN German American Holdings Corp.
Citizens State Bank Commercial Bank Petersburg, IN German American Holdings Corp.
The Doty Agency, Inc. Insurance Agency Petersburg, IN Citizens State Bank
First Title Insurance Company Title Insurance Agency Vincennes, IN Citizens State Bank
The Company over the five-year period ended December 31, 2000 has experienced
both internal growth and growth by acquiring other banks and insurance agencies.
For a description of acquisitions see Note 18 to the Company's consolidated
financial statements included in this report. Most of these acquisitions have
been accounted for under the pooling-of-interests method of accounting, with the
result that the financial statements for all periods prior to such acquisitions
were retroactively restated.
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 for deposits, loans and many other types of financial
services products with financial institutions that are located throughout
Southwest Indiana and adjoining areas. The Company's subsidiary banks compete
with commercial banks, savings and loan associations, savings banks, credit
unions, production credit associations, federal land banks, finance companies,
credit card companies, personal loan companies, brokerage firms, insurance
companies, lease finance companies, money market funds, mortgage companies and
other non-depository financial intermediaries. Many of these banks and other
organizations have substantially greater resources than the Corporation.
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 securities firms, insurance companies and other
financial service companies resulting from implementation of the
Gramm-Leach-Bliley Act of 1999 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 February 28, 2001 the Company and its subsidiaries employed approximately 407
full-time equivalent 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.
Under FRB policy, the Company is expected to act as a source of financial
strength to its bank subsidiaries and to commit resources to support them even
in circumstances where the Company might not do so absent such an FRB policy.
- 3 -
The Company's subsidiary banks are under the supervision of and subject to
examination by one or more of the Indiana Department of Financial Institutions
("DFI"), the Office of the Comptroller of Currency ("OCC"), the Federal Deposit
Insurance Corporation ("FDIC") and the Office of Thrift Supervision ("OTS").
Regulation and examination by banking regulatory agencies are primarily for the
benefit of depositors rather than shareholders.
With certain exceptions, 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 consumer finance; equipment leasing; credit life insurance;
computer service bureau and software operations; mortgage banking; and
securities brokerage.
Under the BHC Act, certain well-managed and well-capitalized bank holding
companies may elect to be treated as a "financial holding company" and, as a
result, be permitted to engage in a broader range of activities that are
"financial in nature" and in activities that are determined to be incidental or
complementary to activities that are financial in nature. These activities
include underwriting, dealing in and making a market in securities; insurance
underwriting and agency activities; and merchant banking. Banks may also engage
through financial subsidiaries in certain of the activities permitted for
financial holding companies, subject to certain conditions. The Company has not
elected to become a financial holding company and none of its subsidiary banks
have elected to form financial subsidiaries.
Indiana law, the National Bank Act, the Home Owners Loan Act, and the BHC Act
restrict certain types of expansion by the Company and its bank subsidiaries.
Under the Home Owners Loan Act, First American Bank may branch, subject to
certain conditions, anywhere within the United States. Under the BHC Act, the
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 DFI.
In 1994, Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act"), which substantially changed the
geographic constraints applicable to the banking industry. Effective September
29, 1995, the Riegle-Neal Act allowed bank holding companies to acquire banks
located in any state in the United States without regard to geographic
restrictions or reciprocity requirements imposed by state law. Effective June 1,
1997 (or earlier if expressly authorized by applicable state law), the
Riegle-Neal Act allowed banks to establish interstate branch networks through
acquisitions of other banks, subject to certain conditions. The establishment of
de novo interstate branches or the acquisition of individual branches of a bank
in another state (rather than the acquisition of an out-of-state bank in its
entirety) is allowed by the Riegle-Neal Act only if specifically authorized by
state law. The legislation allowed individual states to "opt-out" of certain
provisions of the Riegle-Neal Act by enacting appropriate legislation prior to
June 1, 1997.
In 1996, Indiana authorized out-of-state banks to establish branch offices in
Indiana. The Indiana Financial Institutions Act now permits, in appropriate
circumstances,
(A) with the approval of the DFI:
o the acquisition of all or substantially all of the assets of an
Indiana-chartered bank by an FDIC-insured bank, savings bank or
savings association located in another state,
o the acquisition by an Indiana-chartered bank of all or
substantially all of the assets of an FDIC-insured bank, savings
bank or savings association located in another state,
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located
in other states having laws permitting such consolidation, with
the resulting organization chartered by Indiana, and
o the organization of a branch in Indiana by FDIC-insured banks
located in other states, the District of Columbia or U.S.
territories or protectorates having laws permitting an
Indiana-chartered bank to establish a branch in such
jurisdiction, and
- 4 -
(B) upon written notice to the DFI:
o the acquisition by an Indiana-chartered bank of one or more
branches (not comprising all or substantially all of the assets)
of an FDIC-insured bank, savings bank or savings association
located in another state, the District of Columbia, or a U.S.
territory or protectorate,
o the establishment by Indiana-chartered banks of branches located
in other states, the District of Columbia, or U.S. territories or
protectorates, and
o the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located
in other states, with the resulting organization chartered by one
of such other states, and
(C) the sale by an Indiana-chartered bank of one or more of its branches
(not comprising all or substantially all of its assets) to an
FDIC-insured bank, savings bank or savings association located in a
state in which an Indiana-chartered bank could purchase one or more
branches of the purchasing entity.
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 and its bank subsidiaries are required by law 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
- -- Capital Resources," included in the Shareholders' Report.
Also, federal 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, 2000, the Company had a total risk-based capital ratio of 14.38%, a
Tier 1 risk-based capital ratio of 13.13% (based on Tier 1 capital of
$95,873,000 and total risk-weighted assets of $730,166,000), and a leverage
ratio of 8.91%. 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.
The Company is a corporation separate and distinct from its bank and other
subsidiaries. Most of the Company's revenues will be received by it in the form
of dividends or interest paid by its bank subsidiaries. These subsidiaries are
subject to statutory restrictions on its ability to pay dividends. The FRB has
issued a policy statement on the payment of cash dividends by bank holding
companies to the effect that a bank holding company should not pay cash
dividends exceeding its net income or which could only be funded in ways that
would weaken the bank holding company's financial health, such as by borrowing.
Additionally, the FRB possesses enforcement powers over bank holding companies
and their non-bank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability in appropriate cases to proscribe
the payment of dividends by banks and bank holding companies. The FDIC, OCC, OTS
and DFI possess similar enforcement powers over the respective bank subsidiaries
of the Company for which they have supervision. The "prompt corrective action"
provisions of federal banking law impose further restrictions on the payment of
dividends by insured banks which fail to meet specified capital levels and, in
some cases, their parent bank holding companies.
- 5 -
Forward-Looking Statements
The Company from time to time in its oral and written communications makes
statements relating to its expectations regarding the future. These types of
statements are considered "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward looking
statements can include statements about adequacy of allowance for loan losses
and the quality of the Company's loans and other assets; simulations of changes
in interest rates; litigation results; and dividend policy; estimated cost
savings, plans and objectives for future operations; and expectations about
performance as well as economic and market conditions and trends. They often can
be identified by the use of words like "expect," "may," "could," "intend,"
"project", "estimate," "believe" or "anticipate."
The Company may include forward-looking statements in filings with the
Securities and Exchange Commission ("SEC"), such as this Form 10-K, in other
written materials, and in oral statements made by senior management to analysts,
investors, representatives of the media, and others. It is intended that these
forward-looking statements speak only as of the date they are made, and the
Company undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the forward-looking
statement is made.
Readers are cautioned that, by their nature, forward-looking statements are
based on assumptions and are subject to risks, uncertainties, and other factors.
Actual results may differ materially from the expectations of the Company that
are expressed or implied by any forward-looking statement. The discussion in
Item 7 of this Form 10-K, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," lists some of the factors that could cause
the Company's actual results to vary materially from those expressed or implied
by any forward-looking statements. Other uncertainties that could cause the
Company's actual results to vary materially from those expressed or implied by
any forward-looking statement include the effects of competition, technological
changes and legal and regulatory developments; acquisitions of other businesses
by the Company and integrations of such acquired businesses; changes in fiscal,
monetary and tax policies; market, economic, operational, liquidity, credit and
interest rate risks associated with the Company's business; inflation;
competition in the financial services industry; changes in general economic
conditions, either nationally or regionally, resulting in, among other things,
credit quality deterioration; changes in the securities markets; and the
continued availability of earnings and excess capital sufficient for the lawful
and prudent declaration and payment of cash dividends. Investors should consider
these risks, uncertainties, and other factors in addition to those mentioned by
the Company in its other SEC filings from time to time when considering any
forward-looking statement.
Item 2. Properties.
The Company conducts its operations from the main office building of German
American Bank at 711 Main Street, in Jasper, Indiana. The main office building
contains approximately 23,600 square feet of office space. The Banks and other
subsidiaries conduct their operations from 33 other locations in Southwest
Indiana.
Item 3. Legal Proceedings.
There are no material pending legal proceedings, other than routine litigation
incidental to the business of the Company's subsidiary banks, to which the
Company or any of its subsidiaries is a party or of which any of their property
is the subject.
- 6 -
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of 2000 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 (65) Chairman of the Board for the
Company since January 1, 1999;
Chairman and Chief Executive
Officer of the Company from 1995
through 1998; Chairman of German
American Bank since 1995; Chairman
and President of German American
Bank prior thereto. Director of
Citizens State Bank and First
American Bank from date of
acquisition through April 1999.
Director of all other Bank
subsidiaries since acquisition by
the Company.
Mark A. Schroeder (47) President and Chief Executive
Officer of the Company since
January 1, 1999; President and
Chief Operating Officer of the
Company from 1995 through 1998;
Director of German American Bank
since 1991. Director of each of the
other subsidiaries since
acquisition by the Company.
Clay W. Ewing (45) Executive Vice President - Retail
Banking of German American Bancorp
since May, 1999; Director of First
American Bank since May, 1999;
President and Chief Executive
Officer of First State Bank from
1995 until March 2001; presently
Chairman of the Board of First
State Bank. Director of First State
Bank since 1994.
Stan J. Ruhe (49) Executive Vice President - Credit
Administration of the Company since
1995; Director of Citizens State
Bank since May, 1999; Executive
Vice President of German American
Bank since 1995.
Kenneth L. Sendelweck (46) Secretary/Treasurer of the Company
since May, 2000; President, Chief
Executive Officer and Director of
German American Bank since May,
1999; Vice President, Assistant
Treasurer of Kimball International,
Inc. prior thereto.
Richard E. Trent (42) Senior Vice President and Chief
Financial Officer since April 1999;
Vice President and 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.
Messrs. Schroeder, Ruhe and Astrike have been associated with the Company in
various capacities since 1972, 1982, and 1983, respectively.
There are no family relationships between any of the officers of the Company.
All officers are appointed annually and serve at the pleasure of the Company.
- 7 -
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
German American Bancorp's stock is traded on NASDAQ's National Market System
under the symbol GABC. The quarterly high and low closing prices for the
Company's common stock as reported by NASDAQ and quarterly cash dividends
declared and paid are set forth in the table below. All per share data are
retroactively restated for all stock dividends. Per share cash dividends have
not been restated for mergers accounted for as poolings of interests.
2000 1999
---- ----
Cash Cash
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
Fourth Quarter $13.27 $11.49 $0.133 $21.31 $16.43 $0.119
Third Quarter $12.86 $11.67 $0.133 $21.31 $15.53 $0.119
Second Quarter $15.00 $13.69 $0.133 $17.46 $15.53 $0.119
First Quarter $17.14 $14.52 $0.124 $20.64 $16.78 $0.105
------ ------
$0.523 $0.462
====== ======
The Common Stock was held of record by approximately 3,276 shareholders at March
1, 2001.
Cash dividends paid to the Company's shareholders are primarily funded 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 cash and stock dividends. 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.
Transfer Agent: UMB Bank, N.A. Regional J.J.B. Hilliard, W.L. Lyons, Inc.
Securities Transfer Division Market Makers: Louisville, Kentucky
P.O. Box 410064 Contact: George Morrin
Kansas City, MO 64141-0064 (800) 444-1854
Contact: Shareholder Relations
(800) 884-4225 NatCity Investments, Inc
Indianapolis, Indiana
Contact: Eric Wheeler
Shareholder (800) 321-7442
Information and Terri A. Eckerle
Corporate Office: German American Bancorp McDonald Investments, Inc.
P. O. Box 810 Evansville, Indiana
Jasper, Indiana 47547-0810 Contact: Kent Gourley
(812) 482-1314 (800) 513-0844
- 8 -
Item 6. Selected Financial Data.
The following selected data has been taken from the Company's consolidated
financial statements. It should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this annual report.
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
Summary of Operations:
Interest Income........................ $ 79,319 $ 72,135 $ 69,188 $ 66,909 $ 65,549
Interest Expense....................... 45,646 37,744 36,315 35,354 35,668
---------- ----------- ----------- ----------- -----------
Net Interest Income................ 33,673 34,391 32,873 31,555 29,881
Provision for Loan Losses.............. 2,231 1,749 1,344 779 428
---------- ----------- ----------- ----------- -----------
Net Interest Income after Provision
For Loan Losses.................... 31,442 32,642 31,529 30,776 29,453
Non-interest Income.................... 2,543(1) 6,385 5,249 5,866 13,063(2)
Non-interest Expense................... 28,238 26,357 23,751 25,651(2) 24,101
---------- ----------- ----------- ----------- -----------
Income before Income Taxes............. 5,747 12,670 13,027 10,991 18,415
Income Tax Expense..................... 459 3,316 3,805 3,179 6,524
---------- ----------- ----------- ----------- -----------
Net Income............................. $ 5,288 $ 9,354 $ 9,222 $ 7,812 $ 11,891
=========== =========== =========== =========== ===========
============================================================================================================================
Year-end Balances:
Total Assets........................... $ 1,079,808 $ 1,056,641 $ 952,930 $ 895,485 $ 844,920
Total Loans, Net of Unearned Income.... 709,744(1) 741,609 639,816 559,517 542,279
Total Deposits......................... 735,570 751,428 714,779 688,692 668,360
Total Long-term Debt................... 182,370 126,902 124,381 100,296 101,885
Total Shareholders' Equity............. 97,260 93,685 97,153 89,847 84,461
============================================================================================================================
Average Balances:
Total Assets........................... $ 1,070,093 $ 999,761 $ 919,750 $ 877,624 $ 869,251
Total Loans, Net of Unearned Income.... 766,533(1) 691,250 628,254 582,424 575,909
Total Deposits......................... 749,235 743,153 700,400 674,324 675,110
Total Shareholders' Equity............. 95,788 97,855 94,323 86,715 80,220
============================================================================================================================
Per Share Data (3):
Net Income............................. $ 0.50 $ 0.88 $ 0.87 $ 0.73 $ 1.12
Cash Dividends(4)...................... 0.52 0.46 0.41 0.33 0.27
Book Value at Year-end................. 9.28 8.81 9.13 8.45 7.95
============================================================================================================================
Other Data at Year-end:
Number of Shareholders................. 3,208 3,192 3,202 2,985 2,893
Number of Employees.................... 405 416 388 351 418
Weighted Average Number of Shares (3).. 10,485,818 10,632,589 10,643,389 10,635,464 10,627,053
============================================================================================================================
Selected Performance Ratios:
Return on Assets....................... 0.49% 0.94% 1.00% 0.89% 1.37%
Return on Equity....................... 5.52% 9.56% 9.78% 9.01% 14.82%
Equity to Assets....................... 9.01% 8.87% 10.20% 10.03% 10.00%
Dividend Payout........................ 98.54% 50.04% 36.09% 38.10% 21.38%
Net Charge-offs to Average Loans....... 0.27% 0.23% 0.27% 0.04% 0.14%
Allowance for Loan Losses to Loans..... 1.31% 1.23% 1.34% 1.57% 1.52%
Net Interest Margin.................... 3.57% 3.87% 4.02% 3.99% 3.80%
(1) In 2000, the Company reclassified out-of-market, subprime residential mortgage loans with a book value of $69.8 million
as held for sale. The difference between book value and market value resulted in a $5.2 million allowance for market
loss on loans held for sale.
(2) In 1997, 1ST BANCORP incurred a $1.3 million one-time special SAIF assessment. In 1996, 1ST BANCORP realized a gain of
$7.3 million on the sale of branch offices.
(3) Share and Per share data has been retroactively adjusted to give effect for stock dividends and splits, and excludes
the dilutive effect of stock options.
(4) Cash dividends represent historical dividends declared per share without retroactive restatement for poolings.
- 9 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
FORWARD-LOOKING STATEMENTS
This Item contains statements relating to future results of the Company that are
considered "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those expressed or implied therein as a result of certain risks and
uncertainties, including those risks and uncertainties expressed in this Item 7
and those risks and uncertainties that are described in Item 1 of this report,
"Business," under the caption "Forward-Looking Statements," which is
incorporated herein by reference.
INTRODUCTION AND OVERVIEW
German American Bancorp ("the Company") is a multi-bank holding company based in
Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National
Market System under the symbol GABC. The Company operates five affiliated
community banks with 27 banking offices and 5 full-service independent insurance
agencies in the eight contiguous Southwestern Indiana counties of Daviess,
Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The Company's lines of
business include retail and commercial banking, mortgage banking, trust and
brokerage services, title insurance, and a full range of personal and corporate
property and casualty insurance products.
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 1998
through 2000 and its financial condition as of December 31, 2000 and 1999. This
information should be read in conjunction with the accompanying consolidated
financial statements and footnotes contained elsewhere in this report.
MERGERS AND ACQUISITIONS
In October 2000, the Company completed a merger with Holland Bancorp, Inc.
Holland Bancorp was merged with and into the Company, with the simultaneous
merger of Holland's sole bank subsidiary, The Holland National Bank, into the
Company's subsidiary, The German American Bank. The Holland National Bank
operated four banking offices in Dubois County, Indiana. This merger was
accounted for as a pooling of interests and prior period financial information
has been restated accordingly.
In May 2000, the Company acquired the Fleck Insurance Agency, Inc. of Jasper,
Indiana. The Fleck Agency was merged into The Doty Agency, Inc. The Fleck Agency
was a general multi-line, full-service insurance agency with one office in
Jasper, Indiana. This merger was accounted for as a purchase. Accordingly,
operating results of the Fleck Agency are included only after the date of
merger.
In January 1999, the Company completed a merger with 1ST BANCORP of Vincennes,
Indiana. 1ST BANCORP's subsidiaries included First American Bank (formerly known
as First Federal Bank); First Financial Insurance Agency, Inc.; and First Title
Insurance Company. 1ST BANCORP's thrift operations through First American Bank
included mortgage banking activities, a heavy concentration of residential real
estate mortgages in the loan portfolio, and a heavy concentration of borrowings
as a long-term funding source. As such, the composition of 1ST BANCORP's loan
portfolio, funding sources, allowance for loan losses, and operating results
differed significantly from that of the Company in periods prior to the merger.
This merger was accounted for as a pooling of interests and prior to 1999, 1ST
BANCORP's financial statements were prepared on a June 30 fiscal year-end.
Accordingly, the Company's calendar period financial statements for periods
prior to 1999 have been restated to include 1ST BANCORP fiscal period financial
results.
Also in January 1999, the Company completed a merger with The Doty Agency, Inc.
of Petersburg, Indiana. Doty is a general multi-line, full-service insurance
agency and has offices in Gibson, Knox and Pike counties in Indiana. This merger
was accounted for as a pooling of interests. Prior years' results exclude the
effect of the merger, as restatement would not have had a material impact on
overall financial results.
In May 1999, the Company acquired Smith and Bell of Vincennes, Indiana. Smith
and Bell was a general multi-line, full-service insurance agency with offices in
Knox County, Indiana. This merger was accounted for as a purchase. Accordingly,
operating results of Smith and Bell are included only after the date of merger.
- 10 -
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
NET INCOME
Late in the fourth quarter of 2000, the Company initiated a repositioning of its
balance sheet within the mortgage banking component of the Company's operations
to facilitate a strengthening of the overall credit quality within the loan
portfolio, to allow for a reduction of the Company's wholesale funding and to
balance more evenly the level of interest rate risk between loans, deposits, and
other funding vehicles. This repositioning primarily involves the transfer of
the mortgage banking segment's mortgage loan portfolio to a larger bank
affiliate, subject to regulatory approval. In addition, approximately $69.8
million of subprime, out-of-market mortgage loans were reclassified as
held-for-sale in December 2000. The sale of these loans was completed in
February 2001, and the Company no longer originates these types of loans.
The recognition of an increased provision for loan losses for these types of
loans and the difference between the book value and market value of the loans
transferred to held-for-sale had a significant impact on earnings. Net income
for 2000 was $5,288,000 or $0.50 per share as compared to 1999 net income of
$9,354,000 or $0.88 per share. Net income for 1999 was $9,354,000 or $0.88 per
share compared to $9,222,000 or $0.87 per share reported for 1998. An increase
in net interest income and an expansion of the Company's insurance operation
were primarily responsible for the increased net income in 1999. These increases
were partially offset by an increase in loan loss provision and higher personnel
costs.
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 borrowed funds. Several factors contribute to
the determination of net interest income and net interest margin, including the
volume and mix of earning assets, interest rates, and income taxes. Many 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 in 2000 declined $718,000 or 2% from 1999 results while 1999
net interest income increased $1,518,000 or 5% over 1998. Net interest margin is
tax-equivalent net interest income expressed as a percentage of average earning
assets. For 2000 the net interest margin was 3.57% compared with 3.87% for 1999
and 4.02% for 1998.
The Company's net interest margin declined in 2000 and 1999, as did net interest
income in 2000. The decline in net interest margin resulted from a combination
of flat loan yields and loan growth, and increased costs of wholesale funding to
offset declines in core deposits. Wholesale funding represented a total of 35%
of total funding sources for 2000 compared with 27% of funding sources for 1999.
Further, the mortgage banking division's use of wholesale funding sources in a
rising interest rate environment reduced the division's net interest margin by
approximately 60 basis points in 2000 compared with 1999. Also contributing to
the increased cost of funds was the general rise in interest rates during the
latter half of 1999 and first half of 2000.
The Company's employment of various asset growth strategies during late 1998 and
throughout 1999 also contributed to the decline in the net interest margin.
These asset growth strategies consisted of affiliate banks investing proceeds
from FHLB borrowings in investment securities in order to more effectively
utilize capital in excess of requirements. While these strategies increased the
dollar amount of net interest income, they have net interest margins ranging
from 1.00% to 1.50%, and thus reduce the overall net interest margin percentage.
The increase in net interest income during 1999 was largely attributable to loan
growth. While net interest income increased the net interest margin declined.
The decline in net interest margin was attributable to a more competitive
pricing environment for loans and deposits and an increased reliance on
wholesale funding sources.
- 11 -
The following table summarizes net interest income (on a tax-equivalent basis)
for each of the past three years. For tax-equivalent adjustments, an effective
tax rate of 34% was used for all years presented (1).
Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)
Twelve Months Ended Twelve Months Ended Twelve Months Ended
December 31, 2000 December 31, 1999 December 31, 1998
----------------- ----------------- -----------------
Principal Income/ Yield/ Principal Income/ Yield/ Principal Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
ASSETS
Federal Funds Sold and Other
Short-term Investments..... $ 8,843 $ 496 5.61% $ 28,927 $ 1,403 4.85% $ 40,230 $ 2,227 5.54%
Securities:
Taxable.................... 160,653 11,195 6.97% 158,647 10,278 6.48% 142,585 8,962 6.29%
Non-taxable................ 66,345 5,230 7.88% 57,706 4,592 7.96% 51,933 4,397 8.47%
Total Loans and Leases (2).... 766,533 64,326 8.39% 691,250 57,699 8.35% 628,254 55,427 8.82%
----------- --------- ---------- --------- ---------- ---------
TOTAL INTEREST
EARNING ASSETS............. 1,002,374 81,247 8.11% 936,530 73,972 7.90% 863,002 71,013 8.23%
----------- --------- ---------- --------- ---------- ---------
Other Assets.................. 76,851 72,018 65,306
Less: Allowance for Loan Losses (9,132) (8,787) (8,558)
----------- ---------- ----------
TOTAL ASSETS.................. $ 1,070,093 $ 999,761 $ 919,750
=========== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest Bearing
Demand Deposits............... $ 71,996 $ 1,173 1.63% $ 85,158 $ 1,635 1.92% $ 73,513 $ 1,375 1.87%
Savings Deposits.............. 122,691 4,644 3.79% 116,365 3,593 3.09% 110,818 3,624 3.27%
Time Deposits................. 468,048 26,349 5.63% 463,482 24,475 5.28% 451,513 25,161 5.57%
FHLB Advances and
Other Borrowings........... 213,792 13,480 6.31% 147,915 8,041 5.44% 110,942 6,155 5.55%
----------- --------- ---------- --------- ---------- ---------
TOTAL INTEREST-BEARING
LIABILITIES................ 876,527 45,646 5.21% 812,920 37,744 4.64% 746,786 36,315 4.86%
----------- --------- ---------- --------- ---------- ---------
Demand Deposit Accounts....... 86,500 78,148 64,556
Other Liabilities............. 11,278 10,838 14,085
----------- ---------- ----------
TOTAL LIABILITIES............. 974,305 901,906 825,427
----------- ---------- ----------
Shareholders' Equity.......... 95,788 97,855 94,323
----------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $ 1,070,093 $ 999,761 $ 919,750
=========== ========== ==========
NET INTEREST INCOME........... $ 35,601 $ 36,228 $ 34,698
========= ========= =========
NET INTEREST MARGIN........... 3.57% 3.87% 4.02%
(1) Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was
fully taxable.
(2) Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees
of $952, $948, and $1,286 for 2000, 1999, and 1998, respectively.
- 12 -
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense resulting from changes in volume
and changes in rates:
Net Interest Income - Rate/Volume Analysis:
(Tax-Equivalent basis, dollars in thousands)
2000 compared to 1999 1999 compared to 1998
Increase/(Decrease) Due to (1) Increase/(Decrease) Due to (1)
-----------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------------------------
Interest Income:
Federal Funds Sold and Other
Short-term Investments............. $(1,098) $191 $(907) $(572) $(252) $ (824)
Taxable Securities..................... 131 786 917 1,034 282 1,316
Nontaxable Securities ................. 685 (165) 520 470 (275) 195
Loans and Leases....................... 6,315 430 6,745 5,363 (3,091) 2,272
------------------------------------------------------------------------------------------
Total Interest Income..................... 6,033 1,242 7,275 6,295 (3,336) 2,959
------------------------------------------------------------------------------------------
Interest Expense:
Savings and Interest-bearing Demand.... (182) 771 589 452 (223) 229
Time Deposits.......................... 243 1,631 1,874 655 (1,341) (686)
FHLB Advances and Other Borrowings..... 4,002 1,437 5,439 2,013 (127) 1,886
------------------------------------------------------------------------------------------
Total Interest Expense.................... 4,063 3,839 7,902 3,120 (1,691) 1,429
------------------------------------------------------------------------------------------
Net Interest Income....................... $1,970 $(2,597) $(627) $3,175 $(1,645) $1,530
==========================================================================================
(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.
See the Company's Average Balance Sheet and the discussions headed USES OF
FUNDS, SOURCES OF FUNDS, AND LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for
further information on the Company's net interest income, net interest margin,
and interest rate sensitivity position.
PROVISION FOR LOAN LOSSES
The Company provides for loan losses through regular provisions to the allowance
for loan losses, which totaled $2,231,000, $1,749,000 and $1,344,000 in 2000,
1999 and 1998, respectively. These provisions were made at a level deemed
necessary by management to absorb estimated losses in the loan portfolio. The
increase in provision in 2000 was due to an increase in charge-off experience in
the mortgage division's sub-prime, out-of-market residential mortgage loan
portfolio and overall loan growth throughout the Company. The increase in 1999
resulted from loan growth and an increase in the allowance for the mortgage
division's sub-prime, out-of-market residential mortgage loan portfolio. As
discussed previously, the Company sold its subprime, out-of-market residential
real estate portfolio in February 2001, and the Company no longer originates
these types of loans.
A detailed evaluation of the adequacy of the allowance for loan losses is
completed quarterly by management, the results of which will be used to
determine provisions for loan losses. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Refer also to the
section entitled LENDING AND LOAN ADMINISTRATION for further discussion of the
provision and allowance for loan losses.
NON-INTEREST INCOME
Non-interest income, excluding securities gains (losses) and the net gains on
sales of loans and related assets and provision for losses on loans
held-for-sale, increased $1,354,000 or 22% in 2000 after an increase of
$1,726,000 or 39% in 1999. Increases in the Company's insurance commissions and
- 13 -
fees and the expanded customer utilization of brokerage services resulted in the
overall increase in 2000. The increase in 1999 was primarily attributable to the
Company's expanded insurance operations. Including securities gains (losses) and
the net gains on sales of loans and related assets and provision for losses on
loans held-for-sale, non-interest income declined 60.2% in 2000 and increased
21.6% in 1999. The decline in 2000 is attributable to the provision for loan
losses related to the mortgage division's sub-prime, out-of-market residential
mortgage loans that were reclassified as held-for-sale in December 2000 and sold
in February 2001.
% Change From
Prior Year
Non-interest Income (dollars in thousands) ----------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Trust and Investment Product Fees....................... $ 1,373 $ 836 $ 834 64.2% 0.2%
Service Charges on Deposit Accounts..................... 2,139 1,934 1,778 10.6 8.8
Insurance Commissions & Fees (1)........................ 2,723 1,971 714 38.2 176.1
Other Operating Income.................................. 1,314 1,454 1,143 (9.6) 27.2
------- -------- --------
Subtotal ........................................... 7,549 6,195 4,469 21.9 38.6
Net Gains on Sales of Loans and Related Assets,
and Provision for Losses on Loans Held for Sale..... (4,998) 196 743 n/m(2) (73.6)
Securities Gains (Losses), net.......................... (8) (6) 37 33.3 (116.2)
------- -------- --------
TOTAL NON-INTEREST INCOME........................... $ 2,543 $ 6,385 $ 5,249 (60.2) 21.6
======= ======== ========
(1) 1998 results exclude the impact of 1999 and 2000 insurance acquisitions. See Note 18 to the Consolidated Financial
Statements.
(2) n/m = not meaningful
In an effort to provide customers an opportunity to fulfill all their financial
needs through the Company's affiliate banks and associated financial services
companies, the Company completed strategic insurance acquisitions in 1999 and
2000. As a result, the Company's insurance commissions and fees have grown
significantly. Customer utilization of the Company's investment services
expanded significantly during 2000 resulting in a 91% growth in brokerage
service revenue. Brokerage services income totaled $1,014,000 in 2000 compared
to $531,000 in 1999.
Net gains on sales of loans and related assets, and the provision for losses on
loans held-for-sale are derived predominantly from the Company's mortgage
banking division. These gains (losses), exclusive of the market adjustment for
subprime loans reclassified in December 2000, remained relatively flat in 2000
at $222,000 compared to $196,000 in 1999. The provision for loss on the subprime
loans reclassified in December 2000 totaled $5,220,000 resulting in the net loss
of $4,998,000 during 2000. The gain on sale of loans and related assets declined
74% in 1999 from 1998 as a result of lower volumes in residential real estate
loan production and correspondingly lower levels of loan sales caused by a
rising market interest rate environment.
NON-INTEREST EXPENSE
Non-interest expense increased $1,881,000 or 7% in 2000 following an increase of
$2,606,000 or 11% during 1999. The increase in 2000 resulted largely from
increased personnel costs, merger and acquisition related expenses and
collection costs primarily associated with the subprime, out-of-market
residential loan portfolio. The increase in 1999 resulted from insurance
acquisitions, establishment of the corporate identity program at a newly
acquired affiliate bank, implementing wide-area network technology, and Year
2000 preparation.
% Change From
Prior Year
Non-interest Income (dollars in thousands) ----------
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Salaries and Employee Benefits....................... $ 15,454 $ 14,308 $ 12,872 8.0% 11.2%
Occupancy, Furniture and Equipment Expense........... 3,900 3,792 3,479 2.8 9.0
FDIC Premiums........................................ 187 192 175 (2.6) 9.7
Data Processing Fees................................. 884 991 992 (10.8) (0.1)
Professional Fees ................................... 1,333 912 1,052 46.2 (13.3)
Advertising and Promotion............................ 870 963 737 (9.7) 30.7
Supplies............................................. 798 861 719 (7.3) 19.7
Other Operating Expenses............................. 4,812 4,338 3,725 10.9 16.5
-------- --------- ---------
TOTAL NON-INTEREST EXPENSE....................... $ 28,238 $ 26,357 $ 23,751 7.1 11.0
======== ========= =========
- 14 -
Salaries and Employee Benefits comprised approximately 55% of total non-interest
expense in 2000, and 54% in 1999 and 1998, respectively. Salaries and Employee
Benefits increased 8% in 2000 and 11% during 1999. In 2000, salaries increased
approximately 7% due to merit increases and staff additions to build necessary
infrastructure in technology and support functions. In addition, employee
medical insurance benefits increased 8%. Finally, the significant increase in
brokerage activity and fees resulted in increased incentive compensation in the
financial services function. The increase in Salaries and Employee Benefits
during 1999 was largely attributable to Company's insurance operations acquired
in 1999.
Occupancy, furniture and equipment expenses increased by 3% in 2000 following a
9% increase in 1999. The increase in both 2000 and 1999 includes additional
depreciation on new and recently renovated banking facilities. These facilities
were completed and placed into service in the latter half of 1999 and first half
of 2000. Also contributing to the increases was the continued implementation of
a wide-area network and associated operating and application systems at the
retail banking affiliates. These systems are expected to provide long-term
benefits with regard to improved quality of customer service and control of
personnel expenses, and in some cases were in preparation for the Year 2000.
Professional fees increased 46% in 2000 due in large part to merger and
acquisition activities in 2000. During 1999, professional fees declined 13%. A
significant portion of the costs associated with acquisitions completed in early
1999 was expensed during 1998, resulting in the lower level of professional fees
in 1999.
Advertising and promotion expenses declined 10% in 2000 following an increase of
31% in 1999. Increases in 1999 were attributable to the introduction of the
corporate identity program at new affiliates and to the implementation of a
customer information system for all banking affiliates.
Other operating expenses increased 11% during 2000 due primarily to increased
collection costs associated with subprime, out-of-market residential real estate
loans in the Company's mortgage banking division. Total collection costs
increased $345,000 or 119% during 2000. Other operating expenses increased 17%
during 1999. The 1999 increase was attributable to telecommunication charges,
collection costs associated with sub-prime residential mortgage loans, and costs
related to recording the survivor benefit obligation related to the death of a
director in 1999 in accordance with the directors' deferred compensation plan.
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, which are 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
investments and loans. Other components affecting the Company's effective tax
rate include affordable housing tax credit investments, state income taxes and
non-deductible merger costs. The Company's effective tax rate was 8.0%, 26.2%
and 29.2%, respectively, in 2000, 1999, and 1998. The lower effective tax rate
in 2000 was attributable to a lower level of taxable income due primarily to the
provision for losses on loans held for sale, a state tax law clarification in
2000 which allowed a portion of the Company's revenues to be apportioned outside
Indiana and an increase in the level of tax-exempt investments and affordable
housing credits. Note 11 to the consolidated financial statements provides
additional details relative to the Company's income tax provision.
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
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. The prompt corrective action regulations provide five
classifications, including "well-capitalized", and "critically
undercapitalized", although these terms are not used to represent overall
financial condition. The Company and all affiliate Banks at year-end 2000 were
categorized as "well-capitalized". See Note 9 to the consolidated financial
statements for actual and required capital ratios.
The Company continues to maintain a strong capital position. Shareholders'
equity totaled $97.3 million and $93.7 million at December 31, 2000 and 1999,
respectively. Total equity represented 9.0% and 8.9%, respectively, of year-end
total assets. The $3.6 million increase in shareholder's equity was primarily
attributable to an increase in market value of the Company's securities
available-for-sale.
The Company paid cash dividends of $5.2 million in 2000 and $4.7 million in
1999. The increase in 2000 dividends paid includes an increase in dividends per
share and an increased number of shares outstanding.
- 15 -
The Company implemented a stock repurchase plan during 1999, pursuant to which
it repurchased 216,885 shares of stock (as restated for subsequent 5% stock
dividends) for an aggregate of $4.3 million.
At December 31, 2000 the market value depreciation of securities
available-for-sale improved 80.7% or $3.2 million, net of tax, from year-end
1999. This increase in market value is recorded as an increase of shareholders'
equity, and was due to a decline in interest rates during latter part of 2000.
USES OF FUNDS
- --------------------------------------------------------------------------------
LOANS
Total loans at year-end 2000 declined by $31.8 million or 4%, primarily due to
the reclassification of subprime, out-of-market residential real estate loans to
held-for-sale in December 2000. Excluding this reclassification, total loans
increased $37.9 million or 5% during 2000. During 1999, loans grew by $101.5
million or 16%. During 2000 and 1999 growth was achieved across all segments of
the loan portfolio. During 2000, commercial and industrial loans grew 13%,
agricultural and poultry loans grew by 14% and consumer loans grew by 11%.
Excluding the reclassification of subprime residential real estate loans held
for sale, residential real estate loans remained stable with a modest 2%
decline. The Company's loan portfolio is diversified, with the heaviest
concentration in residential real estate loans. Residential real estate
represents 44% of the loan portfolio while commercial and industrial loans
represent 27%, consumer loans 19%, and agriculture and poultry loans 10%. The
Company's commercial lending is extended to various industries, including hotel,
agribusiness and manufacturing, as well as health care, wholesale, and retail
services.
Loan Portfolio December 31,
dollars in thousands 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Residential Mortgage Loans................. $ 312,199 $ 388,514 $ 323,045 $ 275,273 $ 265,720
Agricultural and Poultry................... 74,111 65,098 64,195 61,742 65,516
Commercial and Industrial Loans............ 188,213 166,476 141,031 125,251 127,549
Consumer Loans............................. 135,596 121,865 112,254 98,749 85,276
----------- ----------- ----------- ----------- ----------
Total Loans............................. 710,119 741,953 640,525 561,015 544,061
Less: Unearned Income................... (375) (344) (709) (1,498) (1,782)
----------- ---------- ----------- ----------- ----------
Subtotal................................ 709,744 741,609 639,816 559,517 542,279
Less: Allowance for Loan Losses......... (9,274) (9,101) (8,559) (8,803) (8,267)
----------- ---------- ----------- ----------- ----------
Loans, net.............................. $ 700,470 $ 732,508 $ 631,257 $ 550,714 $ 534,012
=========== =========== =========== =========== ==========
Ratio of Loans to Total Loans:
Residential Mortgage Loans................. 44% 52% 50% 49% 49%
Agricultural and Poultry................... 10% 9% 10% 11% 12%
Commercial and Industrial Loans............ 27% 23% 22% 22% 23%
Consumer Loans............................. 19% 16% 18% 18% 16%
----------- ----------- ----------- ----------- ----------
Totals.................................. 100% 100% 100% 100% 100%
=========== =========== =========== =========== ==========
The Company's policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southwestern Indiana.
Commercial extensions of credit outside this market area are generally
concentrated in real estate loans within a 120 mile radius of the Company's
primary market, are granted on a selective basis, and are generally further
limited to loans guaranteed by either the Small Business Administration (SBA) or
the Farm Service Agency (FSA).
With the acquisition of 1ST BANCORP, and its thrift subsidiary First Federal
Bank in January 1999, the Company acquired a mortgage banking operation and a
loan portfolio heavily concentrated in residential real estate loans. First
Federal concentrated primarily on residential real estate lending, but at the
same time offered consumer and commercial loans in its local market. Residential
real estate loans were originated by its retail office in its primary market
areas, as well as outside its designated lending areas through loan production
offices and a network of correspondent lenders. The Company discontinued new
sub-prime, out-of-market residential real estate lending in 1999, and the
portfolio of these loans was sold in February 2001.
- 16 -
The following table indicates the amounts of loans (excluding residential
mortgages on 1-4 family residences and consumer loans) outstanding as of
December 31, 2000 which, based on remaining scheduled repayments of principal,
are due in the periods indicated (dollars in thousands).
Within One to Five After
One Year Years Five Years Total
-------- ----- ---------- -----
Commercial, Agricultural and Poultry............. $147,473 $93,894 $20,957 $262,324
Interest Sensitivity
--------------------
Fixed Rate Variable Rate
Loans maturing after one year.................... $62,171 $52,680
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, uncollateralized U.S. Treasury and federal agency
securities, municipal obligations of state and political subdivisions,
asset-/mortgage-backed securities issued by U.S. government agencies and other
intermediaries, and corporate investments. Money market securities include
federal funds sold, interest-bearing balances with banks, and other short-term
investments. The composition of the year-end balances in the investment
portfolio is presented in Note 2 to the Consolidated Financial Statements and in
the table below:
Investment Portfolio, at Amortized Cost December 31,
dollars in thousands 2000 % 1999 % 1998 %
---- - ---- - ---- -
Federal Funds Sold and Short-term Investments.... $ 2,955 1.4% $ 11,266 4.7% $ 39,075 16.1%
U.S. Treasury and Agency Securities.............. 96,315 44.2 97,253 40.8 90,110 37.3
Obligations of State and Political Subdivisions.. 54,150 24.9 57,190 24.0 58,271 24.1
Asset- and Mortgage-backed Securities............ 52,365 24.0 62,417 26.2 54,378 22.5
Other Securities................................. 12,077 5.5 10,368 4.3 --- ---
---------- ----- ---------- ----- -------- -----
Total Securities Portfolio................... $ 217,862 100.0% $ 238,494 100.0% $241,834 100.0%
========== ===== ========== ===== ======== =====
In 2000 and 1999 the investment portfolio mix was relatively balanced and
remained stable in composition. During 2000, the decline in asset- and
mortgage-backed securities resulted from contractual repayments of the
underlying collateral. The increase in other securities was primarily in
tax-advantaged equity securities. During 1999, the increase in agencies,
mortgage-backed and other securities was the result of match-funded asset growth
strategies funded by FHLB advances. The overall decrease in investments was used
to fund loan growth in both 2000 and 1999.
Investment Securities, at Carrying Value
dollars in thousands
December 31,
Securities Held-to-Maturity: 2000 1999 1998
---- ---- ----
U.S. Treasury and other U.S.
Government Agencies and Corporations.................... $ --- $ 1,048 $ 21,908
State and Political Subdivisions............................. 28,093 30,593 29,168
Asset- / Mortgage-backed Securities.......................... 361 903 1,497
----------- ----------- -----------
Subtotal of Securities Held-to-Maturity................. 28,454 32,544 52,573
----------- ----------- -----------
Securities Available-for-Sale:
U.S. Treasury and other U.S.
Government Agencies and Corporations.................... $ 95,102 $ 92,326 $ 68,386
State and Political Subdivisions............................. 26,669 26,487 30,455
Asset-/ Mortgage-backed Securities........................... 51,336 58,967 52,686
Equity Securities............................................ 12,081 10,368 ---
----------- ----------- -----------
Subtotal of Securities Available-for-Sale............... 185,188 188,148 151,527
----------- ----------- -----------
Total Securities.................................... $ 213,642 $ 220,692 $ 204,100
=========== =========== ===========
- 17 -
The Company's $185 million available-for-sale portion of the investment
portfolio provides an additional funding source for the Company's liquidity
needs and for asset/liability management requirements. Although management has
the ability to 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.
In conjunction with the adoption of FAS 133 on January 1, 2001, the Company
reclassified investment securities from the held-to-maturity portfolio to the
available-for-sale portfolio. The reclassified securities had a carrying value
of $6.2 million and a market value of $6.4 million with a net positive effect on
equity of $108,000 at the time of transfer.
SOURCES OF FUNDS
- --------------------------------------------------------------------------------
The Company's primary source of funding is its base of core customer deposits.
Core deposits consist of demand deposits, savings, interest-bearing checking,
money market accounts, and certificates of deposit of less than $100,000. Other
sources of funds are certificates of deposit of $100,000 or more, brokered
deposits, overnight borrowings from other financial institutions and securities
sold under agreement to repurchase. The membership of the Company's affiliate
banks in the Federal Home Loan Bank System (FHLB) provides a significant
additional source for both long and short-term collateralized borrowings. The
following pages contain a discussion of changes in these areas.
The table below illustrates changes between years in the average balances of all
funding sources:
Funding Sources - Average Balances % Change From
dollars in thousands Prior Year
2000 1999 1998 2000 1999
---- ---- ---- ---- ----
Demand Deposits
Non-interest Bearing............... $ 86,500 $ 78,148 $ 64,556 10.7% 21.1%
Interest Bearing................... 71,996 85,158 73,513 15.5) 15.8
Savings Deposits....................... 51,073 52,361 59,750 (2.5) (12.4)
Money Market Accounts.................. 71,618 64,004 51,068 11.9 25.3
Other Time Deposits.................... 349,675 375,421 374,022 (6.9) 0.4
---------- ----------- ----------
Total Core Deposits................ 630,862 655,092 622,909 (3.7) 5.2
Certificates of Deposits of $100,000 or
more and Brokered Deposits......... 118,373 88,061 77,491 34.4 13.6
FHLB Advances and
Other Borrowings................... 213,792 147,915 110,942 44.5 33.3
---------- ----------- ----------
Total Funding Sources.............. $ 963,027 $ 891,068 $ 811,342 8.1% 9.8%
========== =========== ==========
Maturities of time certificates of deposit of $100,000 or more are summarized as
follows:
3 Months 3 thru 6 thru Over
Or Less 6 Months 12 Months 12 Months Total
------------------------------------------------------------
December 31, 2000...................... $61,052 11,751 17,429 11,741 $101,973
CORE DEPOSITS
The Company's level of average core deposits declined 4% in 2000 after growth of
5% in 1999. The Company's ability to attract core deposits continues to be
influenced by competition and the interest rate environment, as well as the
increased availability of alternative investment products.
Demand, savings and money market deposits have provided a relatively stable
source of funding for the company, despite fluctuations in the various
categories. Demand, savings and money market deposits totaled $281.2 million or
45% of core deposits in 2000 compared with $279.7 million or 43% in 1999 and
$248.9 million or 40% in 1998.
Other time deposits consist of certificates of deposits in denominations of less
than $100,000. These deposits declined 7% in 2000 and comprised 55% of average
core deposits. Other time deposits remained stable in 1999 and 1998 comprising
57% and 60% of average core deposits, respectively.
- 18 -
OTHER FUNDING SOURCES
Federal Home Loan Bank advances and other borrowings represent the Company's
most significant source of other funding. Average borrowed funds increased $65.9
million or 45% during 2000 and $37.0 million or 33% in 1999. The additional
reliance on borrowed funds in 2000 and 1999 was to fund loan growth and
supplement core deposits from the Company's primary market areas. In 1999, $20
million of the increase in borrowed funds was used in match-funded asset growth
strategies in the investment portfolio.
Certificates of deposits in denominations of $100,000 or more and brokered
deposits are an additional source of other funding. Large denomination
certificates and brokered deposits increased 34% in 2000 and 14% in 1999. In
addition to borrowed funds, these certificates served to fund loan growth and
supplement core deposits. Large certificates and brokered deposits comprised 12%
and 10% of total funding sources in 2000 and 1999.
The Company also utilizes short-term funding sources from time to time. These
sources consist of overnight federal funds purchased from other financial
institutions, secured repurchase agreements that generally mature within 30
days, and secured overnight variable rate borrowings from the FHLB. These
borrowings represent an important source of short-term liquidity for the
Company.
Long-term debt is in the form of FHLB advances, which are secured by the pledge
of certain investment securities and residential mortgage loans. These advances
were used to fund loan growth in both 2000 and 1999 and to fund asset growth
strategies in the investment portfolio in 1999. See Note 8 to the Consolidated
Financial Statements for further information.
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. 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 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, act as an approval body, and monitor the overall quality of the
banks' loan portfolios. The Corporate Loan Committee, comprised of members of
the Company's executive officers and board of directors, strive to ensure a
consistent application of the Company's lending policies. The Company also
maintains a comprehensive risk-weighting and loan review program for its
affiliate banks, which includes quarterly reviews of problem loans,
delinquencies and charge-offs. The purpose of this program is to evaluate loan
administration, credit quality, loan documentation and the adequacy of the
allowance for loan losses.
The Company maintains an allowance for loan losses to cover probable credit
losses identified during its loan review process. The allowance is increased by
the provision for loan losses and decreased by charge-offs less recoveries.
Management estimates the required level of allowance for loan losses using past
loan loss experience, the nature and volume of 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 judgement, should be charged-off. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed.
The allowance for loan losses is comprised of: (a) specific reserves on
individual credits; (b) allocated reserves for certain loan categories and
industries, large and out-of-market loans, and overall historical loss
experience; and (c) unallocated reserves based on trends in the type and volume
of the loan portfolios, current economic conditions, and other factors. Specific
reserves are provided for credits 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) the loan is on non-accrual; or, (d) other
reasons where the ultimate collectibility of the loan is in question, or the
loan characteristics require special monitoring.
- 19 -
Allowance for Loan Losses
dollars in thousands Year Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Balance of allowance for possible
losses at beginning of period.......................... $ 9,101 $ 8,559 $ 8,803 $ 8,267 $ 8,670
Allowance of Acquired subsidiaries & Adjustments
to Conform Fiscal Years................................ --- 356 80 --- ---
Loans charged-off:
Residential Mortgage Loans................................ 1,188 815 627 122 67
Agricultural and Poultry Loans ........................... 134 222 --- --- 286
Commercial and Industrial Loans........................... 347 192 348 407 486
Consumer Loans............................................ 748 823 1,080 545 331
--------- --------- --------- -------- --------
Total Loans charged-off................................ 2,417 2,052 2,055 1,074 1,170
Recoveries of previously charged-off Loans:
Residential Mortgage Loans................................ 14 100 76 1 27
Agricultural and Poultry Loans............................ 29 135 19 66 125
Commercial and Industrial Loans........................... 120 42 77 668 128
Consumer Loans............................................ 196 212 215 96 59
--------- --------- --------- -------- --------
Total Recoveries....................................... 359 489 387 831 339
--------- --------- --------- -------- ---------
Net Loans recovered / (charged-off)...................... (2,058) (1,563) (1,668) (243) (831)
Additions to allowance charged to expense................. 2,231 1,749 1,344 779 428
--------- --------- --------- -------- --------
Balance at end of period.................................. $ 9,274 $ 9,101 $ 8,559 $ 8,803 $ 8,267
========= ========= ========= ======== ========
Net Charge-offs to Average Loans Outstanding.............. 0.27% 0.23% 0.27% 0.04% 0.14%
Provision for Loan Losses to Average Loans Outstanding.... 0.29% 0.25% 0.21% 0.13% 0.07%
Allowance for Loan Losses to Total Loans at Year-end...... 1.31% 1.23% 1.34% 1.57% 1.52%
The following table indicates the breakdown of the allowance for loan losses for
the periods indicated (dollars in thousands):
Residential Mortgage Loans................................ $ 2,106 $ 2,048 $ 1,315 $ 1,044 $ 773
Agricultural and Poultry.................................. 777 620 910 1,010 1,329
Commercial and Industrial Loans........................... 4,618 3,987 2,905 3,109 3,026
Consumer Loans............................................ 348 915 1,047 1,083 844
Unallocated............................................... 1,425 1,531 2,382 2,557 2,295
--------- --------- --------- -------- --------
Total Loans............................................... $ 9,274 $ 9,101 $ 8,559 $ 8,803 $ 8,267
========= ========= ========= ======== ========
The upward trend in net charge-offs is primarily related to sub-prime
out-of-market residential real estate loans at the Company's mortgage banking
division. The Company discontinued new sub-prime out-of-market residential real
estate lending during 1999, and the portfolio of these loans was sold, as
discussed previously. Refer also to the section entitled PROVISION FOR LOAN
LOSSES in the discussion regarding the RESULTS OF OPERATIONS.
NONPERFORMING ASSETS
Non-performing assets consist of: (a) non-accrual loans; (b) loans which have
been renegotiated 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 or
when the borrower's ability to repay becomes doubtful. Uncollected interest
accrued in the current year is reversed against income at the time a loan is
placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if
deemed uncollectible. Exceptions to the non-accrual and charge-off policies are
made when the loan is well secured and in the process of collection.
- 20 -
The following table presents an analysis of the Company's non-performing assets.
The unfavorable trend in nonaccrual loans is primarily attributable to
sub-prime, out-of-market residential real estate loans. The repositioning of the
balance sheet regarding these types of loans during the fourth quarter of 2000
and subsequent sale of approximately $69 million in principal balance of loans
during the first quarter of 2001 is expected to mitigate the upward trend in
non-accrual loans. (This is a forward-looking statement; see the cautions
regarding "Forward-Looking Statements" included in Item 1 of this Report for
factors that could affect adversely the future levels of non-performing assets,
including non-accrual loans, which cautionary statement is herein incorporated
by reference). Approximately $1.1 million of the total other real estate owned
at year-end 2000 was attributable to properties acquired in satisfaction of
sub-prime, out-of-market residential real estate loans. Approximately $900,000
of the increase in other real estate owned in 1999 was related to one commercial
property.
Non-performing Assets December 31,
dollars in thousands 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Nonaccrual Loans.................................. $ 8,014 $ 7,237 $ 5,411 $ 3,568 $ 3,065
Past Due Loans.................................... 1,513 1,603 1,531 3,360 1,635
Restructured Loans................................ --- --- --- --- ---
-------- -------- -------- -------- --------
Total Nonperforming Loans..................... 9,527 8,840 6,942 6,928 4,700
Other Real Estate................................. 1,579 2,434 1,156 785 706
-------- -------- -------- -------- --------
Total Nonperforming Assets.................... $ 11,106 $ 11,274 $ 8,098 $ 7,713 $ 5,406
Non-performing Loans to Total Loans............... 1.34% 1.19% 1.08% 1.23% 0.86%
Allowance for Loan Losses to Nonperforming Loans.. 97.34% 102.95% 123.29% 127.06% 175.89%
Interest income recognized on nonperforming loans for 2000 was $517,000. The
gross interest income that would have been recognized in 2000 on nonperforming
loans if the loans had been current in accordance with their original terms is
$916,000. 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.
Accounting 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. The total dollar amount of impaired loans at December
31, 2000 was $4,806,000. For additional detail on impaired loans, see Note 3 of
the consolidated financial statements.
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
Liquidity is a measure of the Company's ability to fund new loan demand,
existing loan commitments and deposit withdrawals. 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, without
unduly penalizing earnings. Failure to properly manage liquidity requirements
can result in the need to satisfy customer withdrawals and other obligations on
less than desirable terms. The liquidity of the parent company is dependent upon
the receipt of dividends from its bank subsidiaries, which are subject to
certain regulatory limitations explained in Note 9 to the consolidated financial
statements, included in Item 8 of this report. The affiliate banks' source of
funding is predominately core deposits, maturities of securities, repayments of
loan principal and interest, federal funds purchased, securities sold under
agreements to repurchase and borrowings from the Federal Home Loan Bank.
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
monitors interest rate risk through computer-assisted simulation modeling of its
net interest income. The Company's simulation modeling monitors the potential
impact to net interest income under various interest rate scenarios. The
Company's objective is to actively manage its asset/liability position within a
one-year interval and to limit the risk in any of the interest rate scenarios to
a reasonable level of tax-equivalent net interest income within that interval.
Funds Management Committees at the holding company and each affiliate bank
monitor compliance within established guidelines of the Funds Management Policy.
See the following section for further discussion regarding interest rate risk.
- 21 -
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 liquidity risk and interest rate risk, as discussed above.
As discussed previously, the Company monitors interest rate risk by the use of
computer simulation modeling to estimate the potential impact on its net
interest income under various interest rate scenarios. Another method by which
the Company's interest rate risk position can be estimated is by computing
estimated changes in its net portfolio value ("NPV"). This method estimates
interest rate risk exposure from movements in interest rates by using interest
rate sensitivity analysis to determine the change in the NPV of discounted cash
flows from assets and liabilities. NPV represents the market value of portfolio
equity and is equal to the estimated market value of assets minus the estimated
market value of liabilities. Computations are based on a number of assumptions,
including the relative levels of market interest rates and prepayments in
mortgage loans and certain types of investments. These computations do not
contemplate any actions management may undertake in response to changes in
interest rates, and should not be relied upon as indicative of actual results.
In addition, certain shortcomings are inherent in the method of computing NPV.
Should interest rates remain or decrease below current levels, the proportion of
adjustable rate loans could decrease in future periods due to refinancing
activity. In the event of an interest rate change, prepayment levels would
likely be different from those assumed in the table. Lastly, the ability of many
borrowers to repay their adjustable rate debt may decline during a rising
interest rate environment.
The following table provides an assessment of the risk to NPV in the event of
sudden and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of December 31, 2000 the Company's estimated
NPV might be expected to decrease in the event of an increase in prevailing
interest rates, and might be expected to increase in the event of a decrease in
prevailing interest rates (dollars in thousands).
Interest Rate Sensitivity as of December 31, 2000
Net Portfolio Value
Net Portfolio as a % of Present Value
Value of Assets
----- ---------
Changes
in Rates $ Amount % Change NPV Ratio Change
-------- -------- -------- --------- ------
+2%..............$ 63,512 (29.1)% 6.15% (219) b.p.
+1%.............. 77,666 (13.3) 7.37 (97) b.p.
Base............. 89,530 --- 8.34 ---
-1%.............. 98,983 10.6 9.06 72 b.p.
-2%.............. 102,910 14.9 9.30 96 b.p.
The above discussion, and the portions of "MANAGEMENT'S DISCUSSION AND ANALYSIS"
that are referenced in the above discussion contains statements relating to
future results of the Company that are considered "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, simulation of the impact on net
interest income from changes in interest rates. Actual results may differ
materially from those expressed or implied therein as a result of certain risks
and uncertainties, including those risks and uncertainties expressed above,
those that are described in "MANAGEMENT'S DISCUSSION AND ANALYSIS" in Item 7 of
this report, and those that are described in Item 1 of this report, "Business,"
under the caption "Forward-Looking Statements," which discussions are
incorporated herein by reference.
- 22 -
Item 8. Financial Statements and Supplementary Data.
- --------------------------------------------------------------------------------
Independent Auditors' Report
Dollars in thousands
- --------------------------------------------------------------------------------
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, 2000 and 1999, 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, 2000. 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.
The consolidated balance sheet as of December 31, 1999 and related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1999 and 1998 have been restated to
reflect the Holland Bancorp and 1ST BANCORP poolings of interests, as described
in Note 18. We did not audit the separate 1999 and 1998 financial statements of
Holland Bancorp or the separate 1998 financial statements of 1ST BANCORP as
reflected in the poolings of interests, which statements reflect (in thousands)
total assets of $64,006 and total liabilities of $57,808 for 1999, and net
income of $532 and $2,563 for 1999 and 1998. Those statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included for Holland Bancorp for 1999 and 1998, and
for 1ST BANCORP for 1998, is based solely on the reports of the other auditors.
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, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of German American Bancorp as of
December 31, 2000 and 1999, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2000 in conformity
with generally accepted accounting principles.
Indianapolis, Indiana /s/ Crowe, Chizek and Company LLP
February 9, 2001 Crowe, Chizek and Company LLP
- 23 -
- --------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
Dollars in thousands, except per share data
- --------------------------------------------------------------------------------------------------------------
December 31,
2000 1999
---- ----
ASSETS
Cash and Due from Banks...................................................... $ 26,987 $ 25,764
Federal Funds Sold and Other Short-term Investments.......................... 1,460 3,814
----------- -----------
Cash and Cash Equivalents................................................ 28,447 29,578
Interest-bearing Time Deposits with Banks.................................... 1,495 7,452
Securities Available-for-Sale, at Market..................................... 185,188 188,148
Securities Held-to-Maturity, at Cost......................................... 28,454 32,544
Loans Held for Sale.......................................................... 71,372 2,845
Loans ...................................................................... 710,119 741,953
Less: Unearned Income...................................................... (375) (344)
Allowance for Loan Losses................................................ (9,274) (9,101)
----------- -----------
Loans, Net................................................................... 700,470 732,508
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost............ 12,596 9,939
Premises, Furniture and Equipment, Net....................................... 21,065 21,034
Other Real Estate............................................................ 1,579 2,434
Intangible Assets............................................................ 2,147 2,161
Accrued Interest Receivable and Other Assets................................. 26,995 27,998
----------- -----------
TOTAL ASSETS......................................................... $ 1,079,808 $ 1,056,641
=========== ===========
LIABILITIES
Non-interest-bearing Deposits................................................ $ 89,146 $ 79,159
Interest-bearing Deposits.................................................... 646,424 672,269
----------- -----------
Total Deposits........................................................... 735,570 751,428
FHLB Advances and Other Borrowings........................................... 235,230 200,017
Accrued Interest Payable and Other Liabilities............................... 11,748 11,511
----------- -----------
TOTAL LIABILITIES.................................................... 982,548 962,956
SHAREHOLDERS' EQUITY
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized.... 10,495 9,968
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued.. --- ---
Additional Paid-in Capital.............