UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2000 Or [ ] Transition Report pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 for the Transition Period from _______________ to ___________________ Commission File Number 0-11244 German American Bancorp (Exact name of registrant as specified in its charter) INDIANA 35-1547518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 711 Main Street, Jasper, Indiana 47546 (Address of Principal Executive Offices and Zip Code) Registrant's telephone number, including area code: (812) 482-1314 Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---------- ---------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 4, 2000 Common Stock, No par value 9,048,593
GERMAN AMERICAN BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 Consolidated Statements of Income and Comprehensive Income -- Three and Six months Ended June 30, 2000 and 1999 Consolidated Statements of Cash Flows -- Six months Ended June 30, 2000 and 1999 Notes to Consolidated Financial Statements -- June 30, 2000 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Item 3. Quantitative and Qualitative Disclosures about Market Risk. PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Item 6. Exhibits and Reports on Form 8-K SIGNATURES
PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> GERMAN AMERICAN BANCORP CONSOLIDATED BALANCE SHEETS (unaudited, dollars in thousands except per share data) June 30, December 31, 2000 1999 <S> <C> <C> ASSETS Cash and Due from Banks................................................ $ 18,269 $ 23,707 Federal Funds Sold and Other Short-term Investments.................... 1,404 1,189 ------------ ----------- Cash and Cash Equivalents......................................... 19,673 24,896 Interest-bearing Time Deposits with Banks.............................. 299 499 Securities Available-for-Sale, at Market ............................. 185,647 188,148 Securities Held-to-Maturity, at Cost .................................. 29,145 30,191 Loans Held for Sale.................................................... 2,186 2,845 Total Loans............................................................ 721,612 694,636 Less: Unearned Income................................................. (483) (344) Allowance for Loan Losses...................................... (8,965) (8,868) ------------ ----------- Loans, Net............................................................. 712,164 685,424 Stock in FHLB of Indianapolis, and Other Restricted Stock, at cost..... 12,564 9,660 Premises, Furniture and Equipment, Net................................. 19,898 19,782 Other Real Estate...................................................... 1,817 2,434 Intangible Assets...................................................... 2,307 2,161 Accrued Interest Receivable and Other Assets........................... 26,740 26,595 ------------ ----------- TOTAL ASSETS.................................................... $ 1,012,440 $ 992,635 ============ =========== LIABILITIES Noninterest-bearing Deposits........................................... $ 67,873 $ 71,671 Interest-bearing Deposits.............................................. 603,979 626,590 ------------ ----------- Total Deposits.................................................... 671,852 698,261 FHLB Advances and Other Borrowings..................................... 242,288 196,017 Accrued Interest Payable and Other Liabilities......................... 9,117 10,870 ------------ ----------- TOTAL LIABILITIES............................................... 923,257 905,148 SHAREHOLDERS' EQUITY Common Stock, no par value, $1 stated value; 20,000,000 shares authorized...................................... 9,049 9,029 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued .............................. --- --- Additional Paid-in Capital............................................. 54,122 53,846 Retained Earnings...................................................... 30,468 28,559 Accumulated Other Comprehensive Income (Loss) ......................... (4,456) (3,947) ------------ ----------- TOTAL SHAREHOLDERS' EQUITY...................................... 89,183 87,487 ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $ 1,012,440 $ 992,635 ============ =========== End of period shares issued and outstanding............................ 9,048,593 9,029,109 ============ =========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
<TABLE> <CAPTION> GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited, dollars in thousands except per share data) Three months Ended June 30, 2000 1999 <S> <C> <C> INTEREST INCOME Interest and Fees on Loans................................................ $ 15,126 $ 13,038 Interest on Federal Funds Sold and Other Short-term Investments........... 33 300 Interest and Dividends on Securities: Taxable................................................................ 2,796 2,476 Non-taxable............................................................ 870 763 --------- --------- TOTAL INTEREST INCOME................................................ 18,825 16,577 INTEREST EXPENSE Interest on Deposits...................................................... 7,331 6,841 Interest on FHLB Advances and Other Borrowings............................ 3,436 1,750 --------- --------- TOTAL INTEREST EXPENSE............................................... 10,767 8,591 --------- --------- NET INTEREST INCOME....................................................... 8,058 7,986 Provision for Loan Losses................................................. 350 272 --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...................................................... 7,708 7,714 NONINTEREST INCOME Trust and Investment Product Fees......................................... 333 228 Service Charges on Deposit Accounts....................................... 479 440 Insurance Commissions and Fees............................................ 579 548 Other Operating Income.................................................... 304 278 Net Gain on Sales of Loans, Mortgage Servicing Rights, and Other Real Estate.................................................. 92 (1) Net Gain / (Loss) on Sales of Securities.................................. --- (1) --------- --------- TOTAL NONINTEREST INCOME............................................. 1,787 1,492 --------- --------- NONINTEREST EXPENSE Salaries and Employee Benefits............................................ 3,496 3,299 Occupancy Expense......................................................... 476 437 Furniture and Equipment Expense........................................... 453 423 Data Processing Fees...................................................... 202 243 Professional Fees......................................................... 238 300 Advertising and Promotions................................................ 200 165 Supplies.................................................................. 185 195 Other Operating Expenses.................................................. 1,070 915 --------- --------- TOTAL NONINTEREST EXPENSE............................................ 6,320 5,977 --------- --------- Income before Income Taxes................................................ 3,175 3,229 Income Tax Expense........................................................ 866 946 --------- --------- NET INCOME................................................................ $ 2,309 $ 2,283 ========= ========= COMPREHENSIVE INCOME...................................................... $ 2,156 $ 82 ========= ========= Earnings Per Share and Diluted Earnings Per Share......................... $ 0.25 $ 0.25 Dividends Per Share....................................................... $ 0.14 $ 0.12 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
<TABLE> <CAPTION> GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited, dollars in thousands except per share data) Six Months Ended June 30, 2000 1999 <S> <C> <C> INTEREST INCOME Interest and Fees on Loans................................................ $ 29,640 $ 26,046 Interest on Federal Funds Sold and Other Short-term Investments........... 97 738 Interest and Dividends on Securities: Taxable................................................................ 5,597 4,674 Non-taxable............................................................ 1,724 1,461 --------- --------- TOTAL INTEREST INCOME................................................ 37,058 32,919 INTEREST EXPENSE Interest on Deposits...................................................... 14,663 13,677 Interest on FHLB Advances and Other Borrowings............................ 6,299 3,381 --------- --------- TOTAL INTEREST EXPENSE............................................... 20,962 17,058 --------- --------- NET INTEREST INCOME....................................................... 16,096 15,861 Provision for Loan Losses................................................. 665 641 --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...................................................... 15,431 15,220 NONINTEREST INCOME Trust and Investment Product Fees......................................... 697 403 Service Charges on Deposit Accounts....................................... 909 828 Insurance Commissions and Fees............................................ 1,088 925 Other Operating Income.................................................... 603 627 Net Gain on Sales of Loans, Mortgage Servicing Rights, and Other Real Estate.................................................. 51 204 Net Gain / (Loss) on Sales of Securities.................................. (9) (6) --------- --------- TOTAL NONINTEREST INCOME............................................. 3,339 2,981 --------- --------- NONINTEREST EXPENSE Salaries and Employee Benefits............................................ 7,221 6,525 Occupancy Expense......................................................... 925 855 Furniture and Equipment Expense........................................... 915 838 Data Processing Fees...................................................... 418 516 Professional Fees......................................................... 440 524 Advertising and Promotions................................................ 414 322 Supplies.................................................................. 387 370 Other Operating Expenses.................................................. 2,150 1,906 --------- --------- TOTAL NONINTEREST EXPENSE............................................ 12,870 11,856 --------- --------- Income before Income Taxes................................................ 5,900 6,345 Income Tax Expense........................................................ 1,554 1,839 --------- --------- NET INCOME................................................................ $ 4,346 $ 4,506 ========= ========= COMPREHENSIVE INCOME...................................................... $ 3,837 $ 1,542 ========= ========= Earnings Per Share and Diluted Earnings Per Share......................... $ 0.48 $ 0.49 Dividends Per Share....................................................... $ 0.27 $ 0.24 <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
<TABLE> <CAPTION> GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, dollar references in thousands) Six months Ended June 30, 2000 1999 <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income................................................................. $ 4,346 $ 4,506 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Depreciation and Amortization......................................... 1,103 957 Amortization of Mortgage Servicing Rights.................................. 99 121 Net Change in Loans Held for Sale..................................... 659 8,647 Loss on Investment in Limited Partnership............................. 82 62 Provision for Loan Losses............................................. 665 641 Loss on Sales of Securities........................................... 9 6 Loss / (Gain) on Sales of Loans, Mortgage Servicing Rights and Other Real Estate........................................ (51) (204) Change in Assets and Liabilities: Interest Receivable and Other Assets................................ 130 (1,585) Interest Payable and Other Liabilities.............................. (1,753) (828) ---------- ---------- Total Adjustments................................................ 943 7,817 ----------- ---------- Net Cash from Operating Activities.................................. 5,289 12,323 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest Bearing Balances with Banks.......................... 200 523 Proceeds from Maturities of Securities Available-for-Sale............... 6,376 23,535 Proceeds from Sales of Securities Available-for-Sale.................... --- 953 Purchase of Securities Available-for-Sale............................... (4,717) (61,503) Proceeds from Maturities of Securities Held-to-Maturity................. 1,037 3,971 Purchase of Securities Held-to-Maturity................................. (2,904) (2,998) Purchase of Loans....................................................... (1,472) (4,059) Proceeds from Sales of Loans............................................ 500 850 Loans Made to Customers, net of Payments Received....................... (28,382) (30,515) Proceeds from Sale of Mortgage Servicing Rights......................... 111 --- Proceeds from Sales of Other Real Estate................................ 2,379 311 Property and Equipment Expenditures..................................... (1,063) (1,833) Acquire Affiliates and Adjust to Conform Fiscal Years................... (298) (155) ----------- ---------- Net Cash from Investing Activities.................................. (28,233) (70,920) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits...................................................... (26,409) 9,857 Change in Short-term Borrowings......................................... (3,952) 27,315 Advances of Long-term Debt.............................................. 92,850 7,000 Repayments of Long-term Debt............................................ (42,627) (498) Issuance of Common Stock................................................ 296 438 Dividends Paid.......................................................... (2,437) (2,192) Purchase of Interest in Fractional Shares............................... --- (8) ---------- ----------- Net Cash from Financing Activities.................................. 17,721 41,912 ---------- ---------- Net Change in Cash and Cash Equivalents.................................... (5,223) (16,685) Cash and Cash Equivalents at Beginning of Year............................. 24,896 49,588 ---------- ---------- Cash and Cash Equivalents at End of Period.............................. $ 19,673 $ 32,903 ========== ========== <FN> See accompanying notes to consolidated financial statements. </FN> </TABLE>
GERMAN AMERICAN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2000 (unaudited) Note 1 -- Basis of Presentation German American Bancorp operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp and its subsidiaries conform to Generally Accepted Accounting Principles and reporting followed by the banking industry. Certain information and footnote disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp's December 31, 1999 Annual Report to Shareholders. Comprehensive income includes both net income and other comprehensive income. Other comprehensive income includes the change in unrealized appreciation/depreciation on securities available-for-sale, net of tax. Note 2 -- Per Share Data Earnings and dividends per share have been retroactively computed as though shares issued for stock dividends had been outstanding for all periods presented. The computation of Earnings per Share and Diluted Earnings per Share are provided as follows: Three months Ended June 30, 2000 1999 Earnings per Share: Net Income $ 2,309,000 $ 2,283,000 Weighted Average Shares Outstanding 9,032,321 9,214,764 ------------ ----------- Earnings per Share: $ 0.25 $ 0.25 ============ =========== Diluted Earnings per Share: Net Income $ 2,309,000 $ 2,283,000 Weighted Average Shares Outstanding 9,032,321 9,214,764 Stock Options, Net 74 4,566 ------------- ----------- Diluted Weighted Average Shares Outstanding 9,032,395 9,219,330 ------------ ----------- Diluted Earnings per Share $ 0.25 $ 0.25 ============= ===========
Six months Ended June 30, 2000 1999 Earnings per Share: Net Income $ 4,346,000 $ 4,506,000 Weighted Average Shares Outstanding 9,030,715 9,206,694 ------------ -------------- Earnings per Share: $ 0.48 $ 0.49 ============ ============== Diluted Earnings per Share: Net Income $ 4,346,000 $ 4,506,000 Weighted Average Shares Outstanding 9,030,715 9,206,694 Stock Options, Net 130 5,309 ------------- -------------- Diluted Weighted Average Shares Outstanding 9,030,845 9,212,003 ------------ -------------- Diluted Earnings per Share $ 0.48 $ 0.49 ============= ============== Note 3 - Securities The amortized cost and estimated market values of Securities as of June 30, 2000 are as follows (dollars in thousands): Estimated Amortized Market Securities Available-for-Sale: Cost Value U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 96,210 $ 91,654 Obligations of State and Political Subdivisions 28,355 28,491 Asset-/Mortgage-backed Securities 57,019 54,458 Equity Securities 11,441 11,044 ------------ ------------- Total $ 193,025 $ 185,647 ============ ============= Securities Held-to-Maturity: Obligations of State and Political Subdivisions $ 28,473 $ 28,348 Asset-/Mortgage-backed Securities 672 672 ----------- ------------- Total $ 29,145 $ 29,020 ============ ============= The amortized cost and estimated market values of Securities as of December 31, 1999 are as follows (dollars in thousands): Estimated Amortized Market Securities Available-for-Sale: Cost Value U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 96,205 $ 92,326 Obligations of State and Political Subdivisions 26,597 26,487 Asset-/Mortgage-backed Securities 61,514 58,967 Equity Securities 10,368 10,368 ------------ ------------- Total $ 194,684 $ 188,148 ============ ============= Securities Held-to-Maturity: Obligations of State and Political Subdivisions $ 29,288 $ 28,934 Asset-/Mortgage-backed Securities 903 904 ----------- ------------- Total $ 30,191 $ 29,838 ============ =============
Note 4 -- Loans Total loans, as presented on the balance sheet, are comprised of the following classifications (dollars in thousands): June 30, December 31, 2000 1999 Commercial and Industrial Loans $ 165,561 $ 161,711 Residential Mortgage Loans 367,766 356,001 Consumer Loans 118,487 112,870 Agricultural Loans 69,798 64,054 ----------- ----------- Total Loans $ 721,612 $ 694,636 Less: Unearned Income (483) (344) Allowance for Loan Losses (8,965) (8,868) ----------- ----------- Loans, net $ 712,164 $ 685,424 =========== =========== No concentration of credit in excess of 10 percent of total assets exists within any single industry group. Note 5 -- Allowance for Loan Losses A summary of the activity in the Allowance for Loan Losses is as follows (dollars in thousands): 2000 1999 Balance at January 1 $ 8,868 $ 8,323 Allowance of Acquired Affiliate --- 356 Provision for Loan Losses 665 641 Recoveries of Prior Loan Losses 197 305 Loan Losses Charged to the Allowance (765) (1,136) ----------- ----------- Balance at June 30 $ 8,965 $ 8,489 =========== =========== Note 6 -- Proposed Acquisition On June 27, 2000 the Company entered into a definitive agreement to acquire Holland Bancorp, Inc. ("Holland"), through the merger of Holland with and into the Company, and the simultaneous merger of Holland's sole bank subsidiary, The Holland National Bank, into the Company's subsidiary, The German American Bank. The Holland National Bank operates four banking offices in Dubois County, Indiana. Holland's assets and equity (unaudited) as of June 30, 2000 totaled $61.8 million and $6.4 million, respectively. Net income (unaudited) totaled $288,000 for the six-month period ended June 30, 2000. Under the terms of the proposed merger, the shareholders of Holland would receive 3.5 shares of common stock of the Company for each of their Holland shares, or an aggregate of approximately 947,777 shares of common stock of the Company. The proposed merger is subject to the approval by shareholders of Holland, Holland's receipt of a fairness opinion, approval of the appropriate bank regulatory agencies and other conditions. It is contemplated that the merger will be consummated during the fourth quarter of 2000, and that it will be accounted for under the pooling of interests method of accounting.
Note 7 - Segment Information The Company's operations include two primary segments: retail banking and mortgage banking. The retail banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and single-family residential mortgage loans, primarily in the affiliate bank's local markets. The mortgage banking segment involves the origination and purchase of single-family residential mortgage loans; the sale of such loans in the secondary market; and the servicing of mortgage loans for investors. The retail segment is comprised of community banks with 25 banking offices in Southwestern Indiana. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue of the five affiliate community banks comprising the retail-banking segment. The mortgage-banking segment operates as a division of First American Bank. Primary revenues for the mortgage-banking segment are net interest income from a residential real estate loan portfolio funded primarily by wholesale sources. Other revenues are gains on sales of loans and gain on sales of and capitalization of mortgage servicing rights (MSR), and loan servicing income. The following segment financial information has been derived from the internal financial statements of German American Bancorp, which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the two segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company and non-banking subsidiaries amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the Other column below, along with minor amounts to eliminate transactions between segments. <TABLE> <CAPTION> Three months Ended Retail Mortgage Consolidated June 30, 2000 Banking Banking Other Totals ------- ------- ----- ------ <S> <C> <C> <C> <C> Net Interest Income $7,031 $953 $74 $8,058 Gain on Sales of Loans and Gain on Sales/Capitalization of MSR --- 141 --- 141 Servicing Income --- 101 --- 101 Noncash Items: Provision for Loan Losses 223 127 --- 350 MSR Amortization & Valuation --- 48 --- 48 Provision for Income Taxes 1,142 144 (420) 866 Segment Profit 2,462 221 (374) 2,309 Segment Assets 825,275 179,083 8,082 1,012,440 </TABLE> <TABLE> <CAPTION> Three months Ended Retail Mortgage Consolidated June 30, 1999 Banking Banking Other Totals ------- ------- ----- ------ <S> <C> <C> <C> <C> Net Interest Income $6,836 $1,101 $49 $7,986 Gain on Sales of Loans and Gain on Sales/Capitalization of MSR --- 48 --- 48 Servicing Income --- 97 --- 97 Noncash Items: Provision for Loan Losses 145 127 --- 272 MSR Amortization & Valuation --- 60 --- 60 Provision for Income Taxes 1,046 176 (276) 946 Segment Profit 2,358 306 (381) 2,283 Segment Assets 761,489 163,340 6,520 931,349 </TABLE>
Note 7 - Segment Information (continued) <TABLE> <CAPTION> Six months Ended Retail Mortgage Consolidated June 30, 2000 Banking Banking Other Totals ------- ------- ----- ------ <S> <C> <C> <C> <C> Net Interest Income $13,950 $1,980 $166 $16,096 Gain on Sales of Loans and Gain on Sales/Capitalization of MSR --- 152 --- 152 Servicing Income --- 201 --- 201 Noncash Items: Provision for Loan Losses 395 270 --- 665 MSR Amortization & Valuation --- 99 --- 99 Provision for Income Taxes 2,194 228 (868) 1,554 Segment Profit 4,746 349 (749) 4,346 Segment Assets 825,275 179,083 8,082 1,012,440 </TABLE> <TABLE> <CAPTION> Six months Ended Retail Mortgage Consolidated June 30, 1999 Banking Banking Other Totals ------- ------- ----- ------ <S> <C> <C> <C> <C> Net Interest Income $13,454 $2,287 $120 $15,861 Gain on Sales of Loans and Gain on Sales/Capitalization of MSR --- 260 --- 260 Servicing Income --- 190 --- 190 Noncash Items: Provision for Loan Losses 365 276 --- 641 MSR Amortization & Valuation --- 121 --- 121 Provision for Income Taxes 1,903 446 (510) 1,839 Segment Profit 4,544 734 (772) 4,506 Segment Assets 761,489 163,340 6,520 931,349 </TABLE>
ITEM 2. GERMAN AMERICAN BANCORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS German American Bancorp ("the Company") is a multi-bank holding company based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's National Market System under the symbol GABC. The Company operates five affiliate community banks with 25 banking offices and 5 full-service insurance offices in the eight contiguous Southwestern Indiana counties of Daviess, Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer. The banks' wide range of personal and corporate financial services include making commercial and consumer loans; marketing, originating, and servicing mortgage loans; providing trust, investment advisory and brokerage services; accepting deposits and providing safe deposit facilities. The Company's insurance activities include offering a full range of title, property, casualty, life and credit insurance products. Prior to the acquisition activity in January 1999, the Company operated primarily in the banking industry. This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2000 and December 31, 1999 and the consolidated results of operations for the three and six month periods ended June 30, 2000 and 1999. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's December 31, 1999 Annual Report to Shareholders. RESULTS OF OPERATIONS Net Income: Net income remained relatively stable at $2,309,000 or $0.25 per share for the quarter ended June 30, 2000 compared to $2,283,000 or $0.25 per share for the second quarter of 1999. Net income for the six months ended June 30, 2000 was $4,346,000 or $0.48 per share compared with $4,506,000 or $0.49 per share during the same period in 1999. The Company's retail banking segment profit, inclusive of associated holding company administrative expenses, increased $174,000 to $3,865,000 for the six months ended June 30, 2000 compared to $3,691,000 for the six months ended June 30, 1999. The increase in the retail banking segment profit was offset by a decline in the segment profit from the Company's mortgage banking operation. The decline principally reflected the effects of decreased mortgage loan production resulting from increases in general market interest rates during the latter half of 1999 and the first quarter of 2000. The rising market interest rates also negatively impacted the net interest margin in the mortgage banking operation by increasing funding costs.
Net Interest Income: The following table summarizes German American Bancorp's net interest income (on a tax-equivalent basis, at an effective tax rate of 34%) for each of the periods presented herein (dollars in thousands): <TABLE> <CAPTION> Three months Change from Ended June 30, Prior Period 2000 1999 Amount Percent <S> <C> <C> <C> <C> Interest Income (T/E) $ 19,302 $ 17,010 $ 2,292 13.5% Interest Expense 10,767 8,591 2,176 25.3% ----------- ----------- --------- Net Interest Income (T/E) $ 8,535 $ 8,419 $ 116 1.4% =========== =========== ========= </TABLE> <TABLE> <CAPTION> Six months Change from Ended June 30, Prior Period 2000 1999 Amount Percent <S> <C> <C> <C> <C> Interest Income (T/E) $ 37,999 $ 33,781 $ 4,218 12.5% Interest Expense 20,962 17,058 3,904 22.9% ----------- ----------- --------- Net Interest Income (T/E) $ 17,037 $ 16,723 $ 314 1.9% =========== =========== ========= </TABLE> Net interest income increased $72,000 or 1.0% ($116,000 or 1.4% on a tax-equivalent basis) for the quarter ended June 30, 2000 compared with the second quarter of 1999. Net interest margin is tax-equivalent net interest income expressed as a percentage of average earning assets. For the second quarter of 2000, the net interest margin was 3.61% compared to 3.91% for the comparable period of 1999. Net interest income increased $235,000 or 1.5% ($314,000 or 1.9% on a tax-equivalent basis) for the six months ended June 30, 2000 compared with the same period of 1999. For the six months ended June 30, 2000, the net interest margin was 3.63% compared to 3.91% for the same period in 1999. A significant portion of the increase in net interest income for both the three and six months ended June 30, 2000 resulted from loan growth. Two significant items have negatively impacted the Company's net interest margin. First, the mortgage banking division's use of wholesale funding sources in a rising interest rate environment has reduced the division's net interest margin by approximately 65 basis points for the six months ended June 30, 2000 as compared with the same period of the prior year. Secondly, the Company's employment of various asset growth strategies during mid and late 1999 also contributed to the decline in the net interest margin in the first half of 2000. These asset growth strategies consisted of affiliate banks investing proceeds from FHLB borrowings in investment securities in order to more effectively utilize capital in excess of requirements. These asset growth strategies have net interest margins ranging from 1.00% to 1.50% reducing the overall net interest margin, while increasing net interest income. Absent the two aforementioned items, the Company's net interest margin would have been 4.08% for the six months ended June 30, 2000. Provision For Loan Losses: The Company provides for loan losses through regular provisions to the allowance for loan losses. These provisions are made at a levels considered necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of this loan loss reserve is completed quarterly by management. The consolidated provision for loan losses was $350,000 and $665,000 for the three and six months ended June 30, 2000, respectively. The consolidated provision for loan losses was $272,000 and $641,000 for the three and six months ended June 30, 1999, respectively. The provision for loan losses to be recorded in future periods will be adjusted based on the results of on-going evaluations of the adequacy of the allowance for loan losses. Net charge-offs were $334,000 or 0.18% annualized of average loans and $568,000 or 0.16% annualized of average loans for the three and six months ended June 30, 2000. Net charge-offs for the second quarter and year-to-date ended June 30, 1999 were $528,000 or 0.34% annualized of average loans and $831,000 or 0.27% annualized of average loans, respectively. The majority of net charge-offs during the quarter and six months ended June 30, 2000 were related to the sub-prime residential real estate loans housed in the mortgage banking division. The Company discontinued new sub-prime out-of-market real estate lending during 1999. The net charge-offs during 1999 included a single large commercial loan. Nonperforming loans as a percent of total loans at June 30, 2000 were 1.29% of total loans, representing a slight increase from the 1.27% at December 31, 1999. See discussion under "Financial Condition" for more information regarding nonperforming assets.
Noninterest Income: Noninterest income for the quarter ended June 30, 2000 increased $295,000 or 19.8% on an annualized basis. Growth occurred in nearly all categories of noninterest income compared with the prior year. Overall growth in noninterest income occurred in Trust and Investment Product Fees and in Net Gain on Sales of Loans, Mortgage Servicing Rights, and Other Real Estate. Noninterest income for the six months ended June 30, 2000 increased $358,000 or 12.0% on an annualized basis. Growth during this period was primarily in Trust and Investment Product Fees and Insurance Commissions and Fees. The growth in these categories was tempered by a decline in Gain on Sale of Loans, Mortgage Servicing Rights, and Other Real Estate. Trust and Investment Product Fees increased $105,000 or 46.1% and $294,000 or 73.0% for the three and six months ended June 30, 2000 compared with the same periods of the prior year. These increases were partially attributable to the implementation of brokerage services at one affiliate during the second half of 1999. Increased brokerage activity at other affiliates also contributed to the increased level of income. Insurance Commissions and Fees increased $31,000 or 5.7% and $163,000 or 17.6% for the three and six month periods ended June 30, 2000 compared with the same periods during 1999. The increases were due to an overall growth in the insurance operations of the Company and due to the acquisition of the Smith & Bell agency in May 1999. Net Gains on Sales of Loans, Mortgage Servicing Rights, and Other Real Estate are derived predominantly from the Company's mortgage banking division. The gain on sale increased $93,000 in the quarter ended June 30, 2000 compared with second quarter of 1999. A net gain on of $109,000 on the sale of $42.5 million of mortgage servicing rights was primarily responsible for the increased gain during the quarter. There were no sales of servicing in the second quarter of 1999. Net Gain on Sale of Loans, Mortgage Servicing Rights, and Other Real Estate declined by $153,000 during the six months ended June 30, 2000 compared with same period of the prior year. The decline was largely attributable to lower volumes in residential real estate loan production and correspondingly lower levels of loan sales. Lower loan production and sales compared with the prior year was largely attributable to higher market interest rates. Also contributing to the decline in gain on sale was an increased level of losses on the sales of other real estate owned. Noninterest Expense: Noninterest expenses increased $343,000 or 5.7% and $1.0 million or 8.6% for the three and six months period ended June 30, 2000, respectively, as compared to the same periods of the prior year. The increases primarily occurred in Salaries and Employee Benefits and Occupancy, Furniture and Equipment Expense. Total Salaries and Benefit Expenses increased $197,000 or 6.0% during the quarter ended June 30, 2000 compared with the same period in 1999. Salaries and Benefits Expense increased $696,000 to $7.2 million in the six months ended June 30, 2000 over the prior year total of $6.5 million in the first six months of 1999. Salary expense increased approximately 7% from merit increases, the purchase of the Smith and Bell insurance agency in May 1999, and staff additions to build necessary infrastructure in technology and support functions. Performance bonuses, along with payroll taxes, 401(k) and associated profit sharing increased in 2000 over the prior year due to improved performance of the retail-banking segment, which also contributed to the overall increase in salaries and benefits expenses. Total occupancy, furniture and equipment expense for the three and six months ended June 30, 2000 totaled $929,000 and $1,840,000 compared with $960,000 and $1,693,000 during the same periods of the prior year. The increase during the six months ended June 30, 2000 included increased depreciation at new and recently renovated banking locations. These facilities were completed and placed into service during the second half of 1999 and the first half of 2000. Also contributing to the increase was the continued implementation of a wide-area network and associated operating and application systems at the retail banking affiliates during 1999 and the first half of 2000. These systems are expected to be implemented in all subsidiaries by early next year, and are expected to provide long-term benefits with regard to improved quality of customer service and control of personnel expenses.
Data processing fees decreased $41,000 in the quarter ended June 30, 2000 and $98,000 in the six months ended June 30, 2000 compared with the same periods of the prior year. These declines were due primarily to the discontinuance of an Internet access operation at one affiliate during the second quarter of 1999. Professional fees decreased $62,000 and $84,000 during the three and six-month periods ended June 30, 2000 compared with the same periods of 1999. Legal, accounting and other professional fees all declined during 2000 compared with the prior year. Advertising expenses increased $35,000 and $92,000 for the three and six months ended due to costs associated with the customer information system implemented during the last half of 1999 for all banking affiliates and fluctuations in the normal course of business. Advertising cost totaled 0.08% of average assets during 2000 compared with 0.07% of average assets in 1999. Other Operating Expenses increased $154,000 and $243,000 during the quarter ended and six months ended June 30, 2000 compared with 1999. The increases during both the three and six month periods were primarily attributable to collection and telecommunication expenses. The increased telecommunication charges were primarily attributable to network charges to support the Company's new technology platforms and operating systems. The increased collection costs were primarily at the mortgage banking division, as efforts continue to collect on delinquent sub-prime out-of-market residential real estate loans and to liquidate other real estate owned. The Company discontinued this type of lending during 1999. In addition, the Company expensed in the second quarter of 2000, approximately $62,000 in interest charges stemming from an Internal Revenue Service income tax audit of an acquired affiliate. The audit covered periods prior to the affiliate's merger with the Company. Income Taxes: The Company's effective income tax rate approximates 27% and 26% of pre-tax income during the three and six months ended June 30, 2000 compared with 29% during the same periods for 1999. The effective tax rate was lower in all periods than the combined federal and state statutory rate of 39.6%. The lower effective rates resulted primarily from the Company's tax-exempt investment income on securities and loans, and from income tax credits generated from investments in affordable housing projects. FINANCIAL CONDITION Total assets at June 30, 2000 increased 4.0% to $1.012 billion compared with $992.6 million in total assets at December 31, 1999. Loan growth comprised virtually all of the asset growth during the six months ended June 30, 2000. Loans, net of unearned income and allowance for loan losses, increased by $26.7 million or 7.8% on an annualized basis. To fund a portion of the strong loan growth in the first half of 2000, cash and cash equivalents declined by $5.2 million. Investments remained relatively stable at $227.7 million at June 30, 2000 compared with $228.5 million at year-end. Deposits at June 30, 2000 decreased by $26.4 million or 7.6% during the six months ended June 30, 2000. A continued competitive environment for deposits led to the overall decline in deposits. To fund the loan growth experienced during the first half of 2000, the Company's affiliate banks have augmented their deposit base with additional borrowings from the FHLB. Borrowings of all types increased by $46.3 million or 47.2% on an annualized basis during the six months ended June 30, 2000.
Nonperforming Assets: <TABLE> <CAPTION> The following is an analysis of the Company's nonperforming assets at June 30, 2000 and December 31, 1999 (dollars in thousands): June 30, December 31, 2000 1999 <S> <C> <C> Nonaccrual Loans $ 6,830 $ 7,237 Loans contractually past due 90 days or more 2,468 1,564 Renegotiated Loans --- --- ----------- ---------- Total Nonperforming Loans 9,298 8,801 ----------- ---------- Other Real Estate 1,817 2,434 ----------- ---------- Total Nonperforming Assets $ 11,115 $ 11,235 =========== ========== Allowance for Loan Loss to Nonperforming Loans 96.42% 100.76% Nonperforming Loans to Total Loans 1.29% 1.27% </TABLE> Capital Resources: Shareholders' equity totaled $89.2 million at June 30, 2000 or 8.8% of total assets, an increase of $1.7 million from December 31, 1999. Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit. Tier 1, or core capital, consists of shareholders' equity less goodwill, core deposit intangibles, and certain deferred tax assets defined by bank regulations. Tier 2 capital is defined as the amount of the allowance for loan losses which does not exceed 1.25 percent of gross risk adjusted assets. Total capital is the sum of Tier 1 and Tier 2 capital. The minimum requirements under these standards are generally at least a 4.0 percent leverage ratio, which is Tier 1 capital divided by defined "total assets"; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and each of its affiliate banks individually, have capital ratios that substantially exceed the regulatory minimums. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. Under these regulations, a "well-capitalized" entity must achieve a Tier 1 Risk-based capital ratio of at least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a leverage ratio of at least 5.0 percent, and not be under a capital directive order. At June 30, 2000 management is not under such a capital directive, nor is it aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material effect on the Company's liquidity, capital resources or operations.
The table below presents the Company's consolidated capital ratios under regulatory guidelines (dollars in thousands): <TABLE> <CAPTION> To be Well Capitalized Under Prompt Minimum for Corrective Capital Action At At Adequacy Provisions June 30, December 31, Purposes (FDICIA) 2000 1999 <S> <C> <C> <C> <C> Leverage Ratio 4.00% 5.00% 9.09% 9.07% Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 13.59% 13.53% Total Capital to Risk-adjusted Assets 8.00% 10.00% 14.84% 14.78% </TABLE> Liquidity: The Consolidated Statement of Cash Flows details the elements of change in the Company's cash and cash equivalents. During the first six months of 2000, operating activities provided $5.3 million of available cash, which included net income of $4.3 million. Major cash outflows experienced during this three-month period of 2000 included $2.4 million in dividends and net loan outlays in the amount of $28.3 million. Purchases of securities approximated the cash flows from the maturities and sales securities. Total cash outflows for the period exceeded inflows by $5.2 million, leaving cash and cash equivalents of $19.7 million at June 30, 2000. Forward-looking Statements: This Report contains statements relating to the future results of the Company that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, adequacy of allowance for loan losses; simulations of changes in interest rates; litigation results; and dividend policy. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in economic conditions; interest rate fluctuations; competitive product and pricing pressures within the Company's markets; equity and fixed income market fluctuations; and personal and corporate customers' bankruptcies. Results may also differ materially due to inflation; acquisitions and integrations of acquired businesses; technological change; changes in law; changes in fiscal, monetary, regulatory and tax policies; success in gaining regulatory approvals when required; the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends; as well as other risks and uncertainties detailed elsewhere in this Report and from time to time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committees and Boards of Directors of the holding company and its affiliate banks. Primary market risks which impact the Company's operations are liquidity risk and interest rate risk. The liquidity of the parent company is dependent upon the receipt of dividends from its bank subsidiaries, which are subject to certain regulatory limitations. The affiliate banks' source of funding is predominately core deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and long-term borrowings from the Federal Home Loan Bank. The Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios, and by estimating its static interest rate sensitivity position. Another method by which the Company's interest rate risk position can be estimated is by computing estimated changes in its net portfolio value ("NPV"). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities. NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities. Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment. The table below provides an assessment of the risk to NPV in the event of sudden and sustained 1% and 2% increases and decreases in prevailing interest rates. The table indicates that as of June 30, 2000 the Company's estimated NPV might be expected to decrease in the event of an increase in prevailing interest rates, and might be expected to increase in the event of a decrease in prevailing interest rates (dollars in thousands). Interest Rate Sensitivity as of June 30, 2000 Net Portfolio Value Net Portfolio as a % of Present Value Value of Assets ----- --------- Changes In rates $ Amount $ Change NPV Ratio Change -------- -------- -------- --------- ------ +2% $64,854 (24.2)% 6.75% (174) b.p. +1% 78,568 (8.1) 7.94 (55) b.p. Base 85,508 --- 8.49 --- -1% 95,970 12.2 9.31 82 b.p. -2% 95,434 11.6 9.20 71 b.p. Item 3 includes forward-looking statements. See "Forward-looking Statements" included in Item 2 of this Report for a discussion of certain factors that could cause the Company's actual exposure to market risk to vary materially from that expressed or implied above.
PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds The Company issued 19,484 common shares during June 2000 to members of the Board of Directors of the Company and its affiliate banks in payment of a portion of their fees for service as such. These issuances were made in reliance upon the Section 4(2) exemption. Item 4. Submission of Matter to a Vote of Security Holders. The Company held its Annual Meeting of Shareholders on April 27, 2000. At the Annual Meeting, the shareholders elected as Directors for an additional two-year term the seven nominees proposed by the Board of Directors. Votes Votes Broker Nominee Cast for Withheld Non-Votes Gene C. Mehne.......................... 6,899,863 280,942 0 Robert L. Ruckriegel................... 6,887,434 293,371 0 Mark A. Schroeder...................... 6,872,921 307,884 0 Larry J. Seger......................... 6,886,971 293,834 0 Joseph F. Steurer...................... 6,887,434 293,371 0 Chet L. Thompson....................... 6,887,434 293,371 0 Michael J. Voyles...................... 6,900,515 280,290 0 Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are filed herewith: 3.1 Restatement of Articles of Incorporation of the Registrant is incorporated by reference to Exhibit 3.01 to Registrant's Current Report on Form 8-K filed May 5, 2000. 3.2 Restated Bylaws of the Registrant as amended April 27, 2000, are incorporated by reference from Exhibit 3.2 to the Registrant's Registration Statement on Form S-4 filed July 19, 2000 (File No. 333-41698). 4.1 Rights Agreement dated April 27, 2000 is incorporated by reference to Exhibit 4.01 to Registrant's Current Report on Form 8-K filed May 5, 2000. 4.2 No long-term debt instrument issued by the Registrant exceeds 10% of consolidated total assets. In accordance with paragraph 4 (iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission upon request copes of long-term debt instruments and related agreements. 4.3 Terms of Common Shares and Preferred Shares of German American Bancorp found in Restatement of Articles of Incorporation are incorporated by reference to Exhibit 3.01 to Registrant's Current Report on Form 8-K filed May 5, 2000. 10.1 Agreement and Plan of Reorganization dated June 27, 2000 among the Registrant, Holland Bancorp, Inc., The Holland National Bank, and the German American Bank, is incorporated by reference from Exhibit 2.1 to the Registrant's Registration Statement on Form S-4 filed July 19, 2000 (File No. 333-41698). 27 Financial Data Schedule (b) Reports on Form 8-K The Registrant filed a Report on Form 8-K on May 5, 2000 to report that its Board of Directors had adopted a Shareholder Rights Plan.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GERMAN AMERICAN BANCORP Date August 14, 2000 By/s/Mark A. Schroeder --------------------------------- ---------------------------- Mark A. Schroeder President and CEO Date August 14, 2000 By/s/Richard E. Trent ---------------------------------- ---------------------------- Richard E. Trent Chief Financial Officer and Principal Accounting Officer