v 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 March 31, 2002 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 May 1, 2002 Common Stock, No par value 10,945,959 - 1 -
GERMAN AMERICAN BANCORP INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 Consolidated Statements of Income and Comprehensive Income -- Three Months Ended March 31, 2002 and 2001 Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2002 and 2001 Notes to Consolidated Financial Statements -- March 31, 2002 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 6. Exhibits and Reports on Form 8-K SIGNATURES - 2 -
<TABLE> <CAPTION> PART 1. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GERMAN AMERICAN BANCORP CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share data) March 31, December 31, 2002 2001 ----------- ------------ (unaudited) <S> <C> <C> ASSETS Cash and Due from Banks................................................ $ 22,545 $ 36,893 Federal Funds Sold and Other Short-term Investments.................... 55,100 62,235 ----------- ----------- Cash and Cash Equivalents............................................ 77,645 99,128 Interest-bearing Time Deposits with Banks.............................. --- 299 Securities Available-for-Sale, at Market .............................. 193,031 168,094 Securities Held-to-Maturity, at Cost .................................. 21,707 23,056 Loans Held for Sale.................................................... 6,013 5,538 Total Loans............................................................ 638,263 657,889 Less: Unearned Income................................................. (700) (723) Allowance for Loan Losses....................................... (8,307) (8,388) ----------- ----------- Loans, Net............................................................. 629,256 648,778 Stock in FHLB of Indianapolis and Other Restricted Stock, at cost...... 12,462 12,596 Premises, Furniture and Equipment, Net................................. 20,271 20,016 Other Real Estate...................................................... 1,349 1,612 Goodwill............................................................... 1,221 1,221 Intangible Assets...................................................... 731 764 Accrued Interest Receivable and Other Assets........................... 23,356 34,009 ----------- ----------- TOTAL ASSETS.................................................... $ 987,042 $ 1,015,111 =========== =========== LIABILITIES Noninterest-bearing Demand Deposits.................................... $ 93,976 $ 106,613 Interest-bearing Demand, Savings, and Money Market Accounts............ 240,340 241,925 Time Deposits < $100,000............................................... 324,844 327,510 Time Deposits $100,000 or more and Brokered Deposits................... 51,429 50,826 ----------- ----------- Total Deposits..................................................... 710,589 726,874 FHLB Advances and Other Borrowings..................................... 165,201 174,385 Accrued Interest Payable and Other Liabilities......................... 10,015 11,643 ----------- ----------- TOTAL LIABILITIES............................................... 885,805 912,902 SHAREHOLDERS' EQUITY Common Stock, no par value, $1 stated value; 20,000,000 shares authorized......................................... 10,944 11,039 Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued ................................. --- --- Additional Paid-in Capital............................................. 70,921 72,238 Retained Earnings...................................................... 18,944 18,133 Accumulated Other Comprehensive Income (Loss) ......................... 428 799 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY...................................... 101,237 102,209 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $ 987,042 $ 1,015,111 =========== =========== End of period shares issued and outstanding............................ 10,944,188 11,038,675 =========== =========== See accompanying notes to consolidated financial statements. </TABLE> - 3 -
<TABLE> <CAPTION> GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited, dollars in thousands except per share data) Three months Ended March 31, 2002 2001 ---------- ----------- <S> <C> <C> INTEREST INCOME Interest and Fees on Loans............................................. $ 12,584 $ 15,917 Interest on Federal Funds Sold and Other Short-term Investments........ 303 247 Interest and Dividends on Securities: Taxable.............................................................. 1,527 2,354 Non-taxable.......................................................... 1,047 848 ----------- ----------- TOTAL INTEREST INCOME.............................................. 15,461 19,366 INTEREST EXPENSE Interest on Deposits................................................... 4,966 7,663 Interest on FHLB Advances and Other Borrowings......................... 2,461 3,233 ----------- ----------- TOTAL INTEREST EXPENSE............................................. 7,427 10,896 ----------- ----------- NET INTEREST INCOME.................................................... 8,034 8,470 Provision for Loan Losses.............................................. 248 165 ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...................................................... 7,786 8,305 NONINTEREST INCOME Trust and Investment Product Fees...................................... 330 284 Service Charges on Deposit Accounts.................................... 580 536 Insurance Revenues..................................................... 739 948 Other Operating Income................................................. 411 397 Net Gains on Sales of Loans and Related Assets, and Provision for Losses on Loans Held for Sale.......................... 381 129 Net Gain/(Loss) on Sales of Securities................................. --- 1 ----------- ----------- TOTAL NONINTEREST INCOME........................................... 2,441 2,295 NONINTEREST EXPENSE Salaries and Employee Benefits......................................... 4,445 4,303 Occupancy Expense...................................................... 506 519 Furniture and Equipment Expense........................................ 427 489 Data Processing Fees................................................... 262 250 Professional Fees...................................................... 294 202 Advertising and Promotions............................................. 170 267 Supplies............................................................... 173 165 Other Operating Expenses............................................... 821 1,209 ----------- ----------- TOTAL NONINTEREST EXPENSE.......................................... 7,098 7,404 ----------- ----------- Income before Income Taxes............................................. 3,129 3,196 Income Tax Expense..................................................... 611 805 ----------- ----------- NET INCOME............................................................. $ 2,518 $ 2,391 =========== =========== COMPREHENSIVE INCOME................................................... $ 2,147 $ 4,129 =========== =========== Earnings Per Share and Diluted Earnings Per Share...................... $ 0.23 $ 0.22 Dividends Per Share.................................................... $ 0.14 $ 0.13 See accompanying notes to consolidated financial statements. </TABLE> - 4 -
<TABLE> <CAPTION> GERMAN AMERICAN BANCORP CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, dollar in thousands) Three months Ended March 31, 2002 2001 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................. $ 2,518 $ 2,391 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net (Accretion)/Amortization on Securities........................... 272 27 Depreciation and Amortization........................................ 511 607 Amortization and Impairment of Mortgage Servicing Rights............... 61 219 Net Change in Loans Held for Sale.................................... (475) 55,661 (Income)/Loss on Investment in Limited Partnership................... (42) 46 Provision for Loan Losses............................................ 248 165 Loss/(Gain) on Sale of Securities, net............................... --- 1 Loss/(Gain) on Sales of Loans and Related Assets, and Provision for Losses on Loans Held for Sale...................................... (381) (129) Loss/(Gain) on Disposition and Impairment of Premises and Equipment.......................................................... (3) (208) Change in Assets and Liabilities: Interest Receivable and Other Assets............................... 11,142 2,546 Interest Payable and Other Liabilities............................. (1,628) (3,690) ----------- ----------- Net Cash from Operating Activities.............................. 12,223 57,636 CASH FLOWS FROM INVESTING ACTIVITIES Change in Interest-bearing Balances with Banks....................... 299 1,096 Proceeds from Maturities of Securities Available-for-Sale............ 14,673 46,374 Proceeds from Sales of Securities Available-for-Sale................. 134 --- Purchase of Securities Available-for-Sale............................ (40,550) (630) Proceeds from Maturities of Securities Held-to-Maturity.............. 1,353 539 Proceeds from Sales of Loans......................................... 280 1,640 Loans Made to Customers, net of Payments Received.................... 18,957 10,817 Proceeds from Sales of Other Real Estate............................. 465 541 Property and Equipment Expenditures.................................. (734) (499) Proceeds from the Sale of Property and Equipment .................... 5 343 Acquire Insurance Company............................................ --- (150) ----------- ----------- Net Cash from Investing Activities.............................. (5,118) 60,071 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits................................................... (16,285) (30,804) Change in Short-term Borrowings...................................... (7,505) (45,417) Advances of Long-term Debt........................................... 920 --- Repayments of Long-term Debt......................................... (2,599) (10,112) Issuance of Common Stock............................................. 36 --- Purchase / Retire Common Stock....................................... (1,610) --- Dividends Paid....................................................... (1,545) (1,470) ----------- ----------- Net Cash from Financing Activities.............................. (28,588) (87,803) ----------- ----------- Net Change in Cash and Cash Equivalents................................ (21,483) 29,904 Cash and Cash Equivalents at Beginning of Year....................... 99,128 28,447 ----------- ----------- Cash and Cash Equivalents at End of Period........................... $ 77,645 $ 58,351 =========== =========== See accompanying notes to consolidated financial statements. </TABLE> - 5 -
GERMAN AMERICAN BANCORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2002 (unaudited, dollars in thousands except per share data) 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, 2001 Annual Report on Form 10-K. Note 2 -- Per Share Data <TABLE> <CAPTION> 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 March 31, 2002 2001 ----------- ----------- <S> <C> <C> Earnings per Share: Net Income $ 2,518 $ 2,391 Weighted Average Shares Outstanding 10,995,449 11,019,234 ----------- ----------- Earnings per Share: $ 0.23 $ 0.22 =========== =========== Diluted Earnings per Share: Net Income $ 2,518 $ 2,391 Weighted Average Shares Outstanding 10,995,449 11,019,234 Stock Options, Net 23,494 --- ----------- ----------- Diluted Weighted Average Shares Outstanding 11,018,943 11,019,234 ----------- ----------- Diluted Earnings per Share $ 0.23 $ 0.22 =========== =========== </TABLE> - 6 -
Note 3 - Securities <TABLE> <CAPTION> The fair values of Securities Available-for-Sale are as follows: March 31, December 31, 2002 2001 ------------ ------------- <S> <C> <C> U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 3,012 $ 3,039 Obligations of State and Political Subdivisions 51,408 53,893 Asset-/Mortgage-backed Securities 121,940 94,272 Equity Securities 16,671 16,890 ------------ ------------- Total $ 193,031 $ 168,094 ============ ============= </TABLE> <TABLE> <CAPTION> The total carrying values and fair values of Securities Held-to-Maturity are as follows (dollars in thousands): Carrying Fair Value Value ------------ ------------- <S> <C> <C> March 31, 2002: Obligations of State and Political Subdivisions $ 21,707 $ 22,156 ============ ============= December 31, 2001: Obligations of State and Political Subdivisions $ 23,056 $ 23,444 ============ ============= </TABLE> Note 4 - Segment Information The Company's operations include three primary segments: core banking, mortgage banking, and insurance operations. The core 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 core banking segment also involves providing trust and investment brokerage services to its customers. 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 insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the affiliate banks' local markets. The core segment is comprised of community banks with 27 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 core banking segment. 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 insurance segment consists of five full-service independent insurance agencies in Southwestern Indiana and the operations of German American Reinsurance Company, Ltd. (GARC). GARC's primary business is credit life and disability reinsurance for credit insurance products sold by the Company's five affiliate banks. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment. 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 three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the Other column in the following table, along with minor amounts to eliminate transactions between segments. - 7 -
<TABLE> <CAPTION> Three months Ended March 31, 2002 Core Mortgage Consolidated Banking Banking Insurance Other Totals ------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net Interest Income $ 8,025 $ (36) $ 5 $ 40 $ 8,034 Gain on Sales of Loans and Related Assets and Provision for Losses on Loans Held for Sale 205 176 --- --- 381 Servicing Income --- 202 --- (69) 133 Insurance Revenues 33 41 698 (33) 739 Noncash Items: Provision for Loan Losses 248 --- --- --- 248 MSR Amortization & Valuation --- 61 --- --- 61 Provision for Income Taxes 1,126 4 107 (626) 611 Segment Profit 2,945 6 98 (531) 2,518 Segment Assets 881,178 107,527 4,154 (5,817) 987,042 </TABLE> <TABLE> <CAPTION> Three months Ended March 31, 2001 Core Mortgage Consolidated Banking Banking Insurance Other Totals ------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net Interest Income $ 7,557 $ 834 $ 9 $ 70 $ 8,470 Gain on Sales of Loans and Related Assets and Provision for Losses on Loans Held for Sale 150 (21) --- --- 129 Servicing Income --- 132 --- (37) 95 Insurance Revenues 51 36 892 (31) 948 Noncash Items: Provision for Loan Losses 165 --- --- --- 165 MSR Amortization & Valuation --- 219 --- --- 219 Provision for Income Taxes 1,169 81 90 (535) 805 Segment Profit 2,631 124 161 (525) 2,391 Segment Assets 862,495 122,623 3,792 3,534 992,444 </TABLE> Note 5 - Stock Repurchase Plan On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 551,250 of the outstanding Common Shares of the Company, representing nearly five percent of its outstanding shares. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program are purchased. During the quarter ended March 31, 2002 the Company purchased 100,000 shares under the program and through March 31, 2002 the Company had purchased 105,670 shares in total under the program. Note 6 - New Accounting Pronouncements A new accounting standard requires all business combinations to be recorded using the purchase method of accounting. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets with finite useful lives will continue to amortize under the new standard, whereas goodwill ceased being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Amounts previously recorded as goodwill from depository institution branch acquisitions are not presently considered to be goodwill under the new standard and these amounts will continue to be amortized. - 8 -
No goodwill was acquired during the first quarter of 2002, and $150 was acquired during the first quarter of 2001. Goodwill at March 31, 2002 is allocated $1,064 to the insurance segment and $157 to the core banking segment. The Corporation expects to complete the first step of its impairment testing of goodwill by the end of the second quarter. Goodwill is not being amortized in 2002, but was amortized in 2001. If goodwill had not been amortized in 2001, the effect on March 31, 2001 net income would have been a net increase of $28, consisting of reduced amortization expense of $42 and increased income tax expense of $14, and earnings per share would have been unchanged. <TABLE> <CAPTION> All intangible assets are subject to amortization, and amortization expense was $33 and $36 for the first quarter of 2002 and 2001. Estimated amortization expense for the next five years is as follows: 2002 $130, 2003 $104, 2004 $93, 2005 $90, 2006 $90. Intangible assets subject to amortization are as follows, by segment: Gross Accumulated March 31, 2002: Amount Amortization -------- ------------ <S> <C> <C> Core Banking Core deposit intangible $ 670 $ 643 Unidentified branch acquisition intangible 1,353 669 Mortgage Banking Customer List 99 79 -------- ------- Total $ 2,122 $ 1,391 ======== ======= Gross Accumulated December 31, 2001: Amount Amortization -------- ------------ Core Banking Core deposit intangible $ 670 $ 638 Unidentified branch acquisition intangible 1,353 646 Mortgage Banking Customer List 99 74 -------- ------- Total $ 2,122 $ 1,358 ======== ======= </TABLE> Effective January 1, 2002, the Corporation adopted a new accounting standard on impairment and disposal of long-lived assets. The effect of this new standard is not expected to be material to the financial statements. A new accounting standard regarding asset retirement obligations will apply for 2003. Management does not believe this standard will have a material effect on the Corporation's financial statements. - 9 -
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 26 retail banking offices in the eight contiguous Southwestern Indiana counties of Daviess, Dubois, Gibson, Knox, Martin, Perry, Pike and Spencer and a business lending center in Evansville, Indiana. The Company also operates five independent insurance agencies throughout its market area. 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. This section presents an analysis of the consolidated financial condition of the Company as of March 31, 2002 and December 31, 2001 and the consolidated results of operations for the three-month periods ended March 31, 2002 and 2001. 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, 2001 Annual Report on Form 10-K. RESULTS OF OPERATIONS Net Income: Net income increased $127,000 to $2,518,000 or $0.23 per share for the quarter ended March 31, 2002 compared to $2,391,000 or $0.22 per share for the first quarter of 2001. The increased earnings were primarily attributable to an increase in the gain on sale of residential mortgage loans and an overall decline in non-interest operating expenses. The Company's core banking operations posted a 12% earnings increase during the first quarter compared with the same period of the prior year. Partially offsetting the earnings increase in core banking were declines in the level of revenues and earnings attributable to the Company's insurance and mortgage banking segments. <TABLE> <CAPTION> 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. 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): Three months Change from Ended March 31, Prior Period 2002 2001 Amount Percent ---- ---- --------------------- <S> <C> <C> <C> <C> Interest Income (T/E) $ 16,045 $ 19,855 $ (3,810) -19.2% Interest Expense 7,427 10,896 (3,469) -31.8% -------- -------- -------- Net Interest Income (T/E) $ 8,618 $ 8,959 $ (341) -3.8% ======== ======== ======== </TABLE> Net interest income decreased $436,000 or 5.1% ($341,000 or 3.8% on a tax-equivalent basis) for the quarter ended March 31, 2002 compared with the first quarter of 2001. Net interest margin is tax-equivalent net interest income expressed as a percentage of average earning assets. For the first quarter of 2002, the net interest margin remained relatively flat at 3.72% compared to 3.74% for the first quarter of 2001. The decline in the Company's net interest income is primarily attributable to a decline in the level of interest earning assets and more specifically due to a decline in residential real estate loans. Average loans outstanding (including loans held for sale) declined $88.1 million during the three months ended March 31, 2002, compared with the same period of 2001. Average residential real estate loans declined $116.6 million in the first quarter 2002 compared with 2001. The sale of sub-prime residential real estate loans totaling nearly $70 million in February 2001 combined with the sale of a majority of the Company's residential real estate production over the past year to the secondary market are primarily responsible for the decline. This decline has been somewhat offset by an increase of $43.7 million in commercial loans outstanding in 2002 compared with 2001. - 10 -
Provision For Loan Losses: The Company provides for loan losses through regular provisions to the allowance for loan losses, which totaled $248,000 and $165,000 for the quarters ended March 31, 2002 and 2001, respectively. These provisions are made at levels deemed necessary by management to absorb estimated losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are 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. Net charge-offs were $329,000 or 0.20% annualized of average loans the three months ended March 31, 2002 compared to $566,000 or 0.31% annualized of average loans in the first quarter of 2001. The decline in net charge-offs in the first quarter 2002 compared with 2001 was primarily attributable to the sale of sub-prime residential real estate loans in the first quarter of 2001. Non-performing loans represented 0.69% of total loans at March 31, 2002 compared to 0.72% at December 31, 2001. See discussion of "Financial Condition" for more information regarding nonperforming assets. Non-interest Income: Non-interest income for the quarter ended March 31, 2002 increased $146,000 or 6% compared with the first quarter of 2001. The increase resulted primarily from an increase in Net Gains on Sales of Loans and Related Assets offset by a decline in Insurance Revenues. Insurance Revenues declined $209,000 or 22% for the three months ended March 31, 2002 compared with the same period during 2001. The decline was attributable to a decline in contingency income from the property and casualty insurance operations of Doty Insurance Agency, Inc. and a decline in revenues generated by the Company's credit life and disability reinsurance operation through German American Reinsurance Company, Ltd. (GARC). Contingency income will fluctuate, as it represents amounts received from insurance companies based on claims experience. The decline in credit reinsurance revenues is largely attributable to a decline in consumer loan production. Net Gains on Sales of Loans and Related Assets, and Provision for Market Losses on Loans Held for Sale increased $252,000 in the quarter ended March 31, 2002 compared with 2001. The increased gain on sales of loans resulted from an increased level of loan sales to the secondary markets. Loans sales totaled $37.4 million during the first three months of 2002 compared with $13.8 million in 2001. The net gain on sales of loans was reduced in the first quarter of 2001 by an $87,000 loss on mandatory forward commitments to sell mortgage loans used to manage interest rate risk associated with the mortgage banking division's residential mortgage loan pipeline. No such loss was recognized in the first quarter of 2002, as only non-mandatory forward commitments were held. Non-interest Expense: Non-interest expenses decreased $306,000 or 4% for the three months ended March 31, 2002 as compared to the same period of the prior year. Salaries and Employee Benefits increased $142,000 or 3% during the quarter ended March 31, 2002 compared with the same period in 2001. Salaries and Employee Benefits comprised approximately 63% of total non-interest expense in the first quarter of 2002 and 58% in 2001. This change was primarily the result of the overall decline in non-interest expenses. Professional Fees Expense increased $92,000 or 46% in the first quarter of 2002 compared with 2001. The increased professional fees resulted from the formation in late 2001 and the first quarter of 2002 of investment subsidiaries domiciled in the state of Nevada at three of the Company's subsidiary banks. The increased professional fee expense was for investment portfolio management services and subsidiary management services provided by third parties. - 11 -
Advertising and Promotion Expense decreased $97,000 or 36% during the three months ended March 31, 2002 compared with the prior year. This decline was attributable to the initiation of an image campaign by the Company in the first quarter of 2001. Other Operating Expenses declined $388,000 or 32% during the first quarter of 2002 compared with the same period of the prior year. The declines were primarily attributable to a lower level of operating losses from the Company's affordable housing tax credit limited partnership investments, a lower level of allowance for insurance reserves required by the Company's credit reinsurance subsidiary, a lower level of collection costs at the Company's mortgage banking division, and a lower level of amortization expense for intangible assets. Income Taxes: The Company's effective income tax rate approximated 19.5% and 25.1% of pre-tax income during the three months ended March 31, 2002 and 2001, respectively, and is lower than the blended statutory rate of 39.6%. The lower effective rate in both 2002 and 2001 primarily resulted from the Company's tax-exempt investment income on securities and loans, and from income tax credits generated from investments in affordable housing projects. Also contributing to the lower effective tax rate in 2002 compared to the prior year was state income tax savings resulting from the formation of investment subsidiaries in the state of Nevada by three of the Company's banking subsidiaries. FINANCIAL CONDITION Total assets at March 31, 2002 decreased $28.1 million to $987.0 million compared with $1.015 billion in total assets at December 31, 2001. Loans, net of unearned income and allowance for loan losses, decreased by $19.5 million during the first quarter of 2002. This decline was primarily attributable to a decline in residential real estate loans. Cash and Cash Equivalents declined $21.4 million while Investment Securities increased $23.5 million to $214.7 million at March 31, 2002 compared with $191.2 million at year-end. FHLB Advances and Other Borrowings declined $9.2 million to $165.2 million at March 31, 2002, due to expected maturities and required payments. <TABLE> <CAPTION> Non-performing Assets: The following is an analysis of the Company's non-performing assets at March 31, 2002 and December 31, 2001 (dollars in thousands): March 31, December 31, 2002 2001 ----------- ------------- <S> <C> <C> Non-accrual Loans $ 2,437 $ 3,452 Past Due Loans (90 days or more) 1,611 916 Restructured Loans 367 367 --------- --------- Total Non-performing Loans 4,415 4,735 --------- --------- Other Real Estate 1,349 1,612 --------- --------- Total Non-performing Assets $ 5,764 $ 6,347 ========= ========= Allowance for Loan Loss to Non-performing Loans 188.15% 177.15% Non-performing Loans to Total Loans 0.69% 0.72% </TABLE> Capital Resources: Shareholders' equity totaled $101.2 million at March 31, 2002 or 10.3% of total assets, a decrease of $972,000 from December 31, 2001. The decline in shareholder's equity primarily resulted from the Company's activity regarding its share repurchase plan discussed in Note 5 of this report. 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. - 12 -
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 currently consists of the amount of the allowance for loan losses which does not exceed a defined maximum allowance limit of 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 March 31, 2002 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. <TABLE> <CAPTION> The table below presents the Company's consolidated capital ratios under regulatory guidelines: To be Well Capitalized Under Prompt Minimum for Corrective Capital Action At At Adequacy Provisions March 31, December 31, Purposes (FDICIA) 2002 2001 ------------ ------------ --------- ------------ <S> <C> <C> <C> <C> Leverage Ratio 4.00% 5.00% 9.91% 9.80% Tier 1 Capital to Risk-adjusted Assets 4.00% 6.00% 14.01% 13.69% Total Capital to Risk-adjusted Assets 8.00% 10.00% 15.19% 14.86% </TABLE> Liquidity: The Consolidated Statement of Cash Flows details the elements of change in the Company's cash and cash equivalents. During the first three months of 2002, operating activities provided $12.2 million of available cash, which included net income of $2.5 million. Major cash outflows experienced during the three months ended March 31, 2002 included $1.5 million in dividends, $1.6 million from the purchase and retirement of common stock, and a $16.3 million decrease in deposits. The cash outflows from the purchase of securities exceeded the proceeds from the maturities and sales of securities by approximately $24.4 million. Total cash outflows for the period exceeded inflows by $21.5 million, leaving cash and cash equivalents of $77.6 million at March 31, 2002. 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; dividend policy; estimated cost savings, plans and objectives for future operations; and expectations about the Company's financial and business performance and other business matters as well as economic and market conditions and trends. They often can be identified by the use of words like "expect," "may," "will," "would," "could," "should," "intend," "project," "estimate," "believe" or "anticipate," or similar expressions. - 13 -
The Company may include forward-looking statements in filings with the Securities and Exchange Commission ("SEC"), such as this Form 10-Q, 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 2 of this Form 10-Q, "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 risks, uncertainties, and factors 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 changes in competitive conditions; acquisitions of other businesses by the Company and costs of integrations of such acquired businesses; the introduction, withdrawal, success and timing of business initiatives and strategies; changes in customer borrowing, repayment, investment and deposit practices; changes in fiscal, monetary and tax policies; changes in interest rates and financial and capital markets; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; the impact, extent and timing of technological changes; capital management activities; actions of the Federal Reserve Board and legislative and regulatory actions and reforms; 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 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 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. - 14 -
The table below provides an assessment of the risk to NPV in the event of sudden and sustained 2% increase and decrease in prevailing interest rates (dollars in thousands). <TABLE> <CAPTION> Interest Rate Sensitivity as of March 31, 2002 Net Portfolio Value Net Portfolio as a % of Present Value Value of Assets ----- --------- Changes In rates $ Amount % Change NPV Ratio Change -------- -------- -------- --------- ------ <S> <C> <C> <C> <C> <C> +2% $81,717 (14.9)% 8.51% (116) b.p. Base 96,012 --- 9.66 --- -2% 100,341 4.5 9.84 18 b.p. </TABLE> 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. These factors include possible changes in economic conditions; interest rate fluctuations, competitive product and pricing pressures within the Company's markets; and equity and fixed income market fluctuations. Actual experience may also vary materially to the extent that the Company's assumptions described above prove to be inaccurate. - 15 -
PART II. OTHER INFORMATION 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 the Registrant's Current Report on Form 8-K filed May 5, 2000. 3.2 Restated Bylaws of the Registrant, as amended April 26, 2001, is incorporated by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. 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 copies of long-term debt instruments and related agreements upon requests. 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 From 8-K filed May 5, 2000. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the period ended March 31, 2002. - 16 -
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 May 14, 2002 By /s/ Mark A. Schroeder ------------ --------------------------------------------------- Mark A. Schroeder President and CEO Date May 14, 2002 By /s/ Bradley M. Rust ------------ --------------------------------------------------- Bradley M. Rust Senior Vice President and Principal Accounting Officer - 17 -