Attached files
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EX-23 - GERMAN AMERICAN BANCORP, INC. | v176625_ex23.htm |
EX-21 - GERMAN AMERICAN BANCORP, INC. | v176625_ex21.htm |
EX-31.1 - GERMAN AMERICAN BANCORP, INC. | v176625_ex31-1.htm |
EX-32.1 - GERMAN AMERICAN BANCORP, INC. | v176625_ex32-1.htm |
EX-32.2 - GERMAN AMERICAN BANCORP, INC. | v176625_ex32-2.htm |
EX-31.2 - GERMAN AMERICAN BANCORP, INC. | v176625_ex31-2.htm |
EX-10.18 - GERMAN AMERICAN BANCORP, INC. | v176625_ex10-18.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended: December 31, 2009
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 001-15877
GERMAN AMERICAN BANCORP, INC.
(Exact
name of registrant as specified in its charter)
INDIANA
|
35-1547518
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
711 Main Street, Box 810, Jasper,
Indiana
|
47546
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (812) 482-1314
Securities
registered pursuant to Section 12 (b) of the Act
Title
of Each Class
|
Name
of each exchange on which registered
|
Common
Shares, No Par Value
|
The
NASDAQ Stock Market LLC
|
Preferred
Stock Purchase Rights
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
|
¨ Yes
|
þ
No
|
|
||
Indicate
by check mark if the registrant is not required to file reports pursuant
to Section 13 or Section 15(d) of the Act.
|
¨ Yes
|
þ
No
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
|
þ Yes
|
¨
No
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such
files). ¨
|
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer, or a smaller reporting
company:
Large
accelerated filer ¨
Accelerated filer þ Non-accelerated
filer ¨
Smaller reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
|
¨
Yes
|
þ
No
|
The
aggregate market value of the registrant’s common shares held by non-affiliates
of the registrant, computed by reference to the price at which the common shares were last sold,
as of June 30, 2009 (the last business day of the registrant’s most recently
completed second fiscal quarter) was approximately $149,073,000. This
calculation does not reflect a determination that persons are affiliates for any
other purposes.
As of March 1, 2010, there were
outstanding 11,077,382 common shares, no par value, of the
registrant.
DOCUMENTS INCORPORATED BY
REFERENCE
Portions of the Proxy Statement of
German American Bancorp, Inc., for the Annual Meeting of its Shareholders to be
held May 13, 2010, to the extent stated herein, are incorporated by reference
into Part III.
GERMAN
AMERICAN BANCORP, INC.
ANNUAL
REPORT ON FORM 10-K
For
Fiscal Year Ended December 31, 2009
Table of
Contents
PART
I
|
||
Item
1.
|
Business
|
3-7
|
Item
1A.
|
Risk
Factors
|
7-11
|
Item
1B.
|
Unresolved
Staff Comments
|
11
|
Item
2.
|
Properties
|
11
|
Item
3.
|
Legal
Proceedings
|
11
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
11
|
PART
II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
12-13
|
Item
6.
|
Selected
Financial Data
|
14
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15-31
|
Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
31
|
Item
8.
|
Financial
Statements and Supplementary Data
|
32-67
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
68
|
Item
9A.
|
Controls
and Procedures
|
68
|
Item
9B.
|
Other
Information
|
68
|
PART
III
|
||
Item
10.
|
Directors
and Executive Officers of the Registrant
|
69
|
Item
11.
|
Executive
Compensation
|
69
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
69-70
|
Item
13.
|
Certain
Relationships and Related Transactions
|
70
|
Item
14.
|
Principal
Accountant Fees and Services
|
70
|
PART
IV
|
||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
71
|
SIGNATURES
|
72
|
|
INDEX
OF EXHIBITS
|
73-76
|
2
Information
included in or incorporated by reference in this Annual Report on Form 10-K, our
other filings with the Securities and Exchange Commission and our press releases
or other public statements, contain or may contain “forward-looking statements”
within the meaning of the Private Securities Litigation Reform Act of
1995. Please refer to a discussion of our forward- looking statements
and associated risks in Item 1, “Business – Forward-Looking Statements and
Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors”
in this Annual Report on Form 10-K.
PART I
Item 1.
Business.
General.
German
American Bancorp, Inc. is a financial services holding company based in Jasper,
Indiana. The Company’s Common Stock is traded on NASDAQ’s Global
Select Market under the symbol GABC. The principal subsidiary of
German American Bancorp, Inc., is its banking subsidiary, German American
Bancorp, which operates through 28 retail banking offices in the ten contiguous
Southern Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin,
Monroe, Perry, Pike, and Spencer. The banking subsidiary in February
2010 agreed to purchase two branches of another bank in Vanderburgh and Warrick
Counties, which are part of the Evansville (Indiana) metropolitan
area. For further information regarding this branch purchase, which
is proposed to be completed in the second quarter of 2010, see Note 20 in the
Notes to the Consolidated Financial Statements included in Item 8 of this Report
and is incorporated into this Item 1 by reference. German American
Bancorp, Inc., also owns a trust, brokerage, and financial planning subsidiary,
which operates from the banking offices of the bank subsidiary and a full line property and casualty
insurance agency with seven insurance agency offices throughout its
market area.
Throughout
this report, when we use the term “Company”, we will usually be referring to the
business and affairs (financial and otherwise) of the Company and its
consolidated subsidiaries as a whole. Occasionally, we will refer to
the term “parent company” or “holding company” when we mean to refer to only
German American Bancorp, Inc.
The
Company’s lines of business include retail and commercial banking, mortgage
banking, comprehensive financial planning, full service brokerage and trust
administration, and a full range of personal and corporate insurance
products. Financial and other information by segment is included in
Note 15 – Segment Information of the Notes to the Consolidated Financial
Statements included in Item 8 of this Report and is incorporated into this Item
1 by reference. Substantially all of the Company’s revenues are
derived from customers located in, and substantially all of its assets are
located in, the United States.
Subsidiaries.
The
Company’s principal operating subsidiaries are described in the following
table:
1) Name
|
2) Type of Business
|
3) Principal Office Location
|
||
German American
Bancorp
|
Commercial
Bank
|
Jasper,
IN
|
||
German
American Insurance, Inc.
|
Multi-Line
Insurance Agency
|
Jasper,
IN
|
||
German
American Financial Advisors & Trust Company
|
|
Trust,
Brokerage, Financial Planning
|
|
Jasper,
IN
|
Two of
these subsidiaries (German American Bancorp and German American Insurance, Inc.)
conducted business during 2009 in the various communities served by the Company
under distinctive trade names that relate to the names under which the Company
(or a predecessor) has done banking or insurance business with the public in
those communities in prior years.
Competition.
The
industries in which the Company operates are highly competitive. The Company’s
subsidiary bank competes for commercial and retail banking business within its
core banking segment not only with financial institutions that have offices in
the same counties but also with financial institutions that compete from other
locations in Southern Indiana and elsewhere. The Company’s
subsidiaries compete with commercial banks, savings and loan associations,
savings banks, credit unions, production credit associations, federal land
banks, finance companies, credit card companies, personal loan companies,
investment brokerage firms, insurance agencies, insurance companies, lease
finance companies, money market funds, mortgage companies, and other
non-depository financial intermediaries. Many of these banks and
other organizations have substantially greater resources than the
Company.
Employees.
At March
1, 2010 the Company and its subsidiaries employed approximately 335 full-time
equivalent employees. There are no collective bargaining agreements,
and employee relations are considered to be good.
3
Regulation and
Supervision.
The
Company is subject to regulation and supervision by the Board of Governors of
the Federal Reserve System (“FRB”) under the Bank Holding Company Act of 1956,
as amended (“BHC Act”), and is required to file with the FRB annual reports and
such additional information as the FRB may require. The FRB may also
make examinations or inspections of the Company. Under FRB
policy, the Company is expected to act as a source of financial strength to its
bank subsidiary, and to commit resources to support that subsidiary, even in
circumstances where the Company might not do so absent such an FRB
policy.
The
Company’s subsidiary bank is under the supervision of and subject to examination
by the Indiana Department of Financial Institutions (“DFI”), and the Federal
Deposit Insurance Corporation (“FDIC”). Regulation and examination by
banking regulatory agencies are primarily for the benefit of depositors rather
than shareholders.
With
certain exceptions, the BHC Act prohibits a bank holding company from engaging
in (or acquiring direct or indirect control of more than 5 percent of the voting
shares of any company engaged in) nonbanking activities. One of the
principal exceptions to this prohibition is for activities deemed by the FRB to
be “closely related to banking.” Under current regulations, bank
holding companies and their subsidiaries are permitted to engage in such
banking-related business ventures as consumer finance; equipment leasing; credit
life insurance; computer service bureau and software operations; mortgage
banking; and
securities brokerage.
Under the
BHC Act, certain well-managed and well-capitalized bank holding companies may
elect to be treated as a “financial holding company” and, as a result, be
permitted to engage in a broader range of activities that are “financial in
nature” and in activities that are determined to be incidental or complementary
to activities that are financial in nature. These activities include
underwriting; dealing in and making a market in securities; insurance
underwriting and agency activities; and merchant banking. Banks may also engage
through financial subsidiaries in certain of the activities permitted for
financial holding companies, subject to certain conditions. The
Company has not elected to become a financial holding company and its subsidiary
bank has not elected to form financial subsidiaries.
The
Company's bank subsidiary and that bank’s subsidiaries may generally engage in
activities that are permissible activities for state chartered banks under
Indiana banking law, without regard to the limitations that might apply to such
activities under the BHC Act if the Company were to engage directly in such
activities at the parent company level or through parent company subsidiaries
that were not also bank subsidiaries.
Indiana
law and the BHC Act restrict certain types of expansion by the Company and its
bank subsidiary. The Company and its subsidiaries may be
required to apply for prior approval from (or give prior notice and an
opportunity for review to) the FRB, the DFI, and/or other bank regulatory or
other regulatory agencies, as a condition to the acquisition or establishment of
new offices, or the acquisition (by merger or consolidation, purchase or
otherwise) of the stock, business or properties of other banks or other
companies.
The
earnings of commercial banks and their holding companies are affected not only
by general economic conditions but also by the policies of various governmental
regulatory authorities. In particular, the FRB regulates money and
credit conditions and interest rates in order to influence general economic
conditions, primarily through open-market operations in U.S. Government
securities, varying the discount rate on bank borrowings, and setting reserve
requirements against bank deposits. These policies have a significant
influence on overall growth and distribution of bank loans, investments and
deposits, and affect interest rates charged on loans and earned on investments
or paid for time and savings deposits. FRB monetary policies have had
a significant effect on the operating results of commercial banks in the past
and this is expected to continue in the future. The general effect,
if any, of such policies upon the future business and earnings of the Company
cannot accurately be predicted.
The
Company and its bank subsidiary are required by law to maintain minimum levels
of capital. These required capital levels are expressed in terms of
capital ratios, known as the leverage ratio and the capital to risk-based assets
ratios. The Company and its bank subsidiary each exceeded the minimum
required capital levels for each measure of capital adequacy as of December 31,
2009. See Note 8 to the Company's consolidated financial statements
that are presented in Item 8 of this Report, which Note 8 is incorporated herein
by reference.
Also,
federal regulations define five categories of financial institutions for
purposes of implementing prompt corrective action and supervisory enforcement
requirements of the Federal Deposit Insurance Corporation Improvements Act of
1991. The category to which the most highly capitalized institutions
are assigned is termed “well-capitalized.” Institutions falling into
this category must have a total risk-based capital ratio (the ratio of total
capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital
ratio (the ratio of Tier 1, or “core”, capital to risk-weighted assets) of at
least 6%, a leverage ratio (the ratio of Tier 1 capital to total assets) of at
least 5%, and must not be subject to any written agreement, order, or directive
from its regulator relative to meeting and maintaining a specific capital
level. On December 31, 2009, the Company had a total risk-based
capital ratio of 14.09%, a Tier 1 risk-based capital ratio of 10.10% (based on
Tier 1 capital of $96,887,000 and total risk-weighted assets of $959,229,000),
and a leverage ratio of 7.64%. The Company’s affiliate bank met all of the
requirements of the “well-capitalized” category. In addition the
Company meets the requirements of the FRB to be considered a “well-capitalized”
bank holding company. Accordingly, the Company does not expect these
regulations to significantly impact operations.
4
The
parent company is a corporation separate and distinct from its bank and other
subsidiaries. Most of the parent company’s revenues historically have
been comprised of dividends, fees, and interest paid to it by its bank
subsidiary, and this is expected to continue in the future. This subsidiary is
subject to statutory restrictions on its ability to pay dividends. The FRB
possesses enforcement powers over bank holding companies and their non-bank
subsidiaries that enable it to prevent or remedy actions that in its view may
represent unsafe or unsound practices or violations of applicable statutes and
regulations. Among these powers is the ability in appropriate cases to proscribe
the payment of dividends by banks and bank holding companies. During 2009, the
FRB advised all bank holding companies that they should inform the FRB
reasonably in advance of declaring or paying a dividend that exceeds earnings
for the period for which the dividend is being paid or that could result in a
material adverse change to the bank holding company’s capital structure. The
FDIC and DFI possess similar enforcement powers over the bank subsidiary. The
“prompt corrective action” provisions of federal banking law impose further
restrictions on the payment of dividends by insured banks which fail to meet
specified capital levels and, in some cases, their parent bank holding
companies.
Extraordinary Government
Programs.
Since
October of 2008, the federal government, through the United States Treasury, the
federal reserve banking system administered by the FRB and the FDIC, have made a
number of programs available to banks and other financial institutions in an
effort to ensure a well-functioning U.S. financial system.
During
2009, the Company declined the opportunity to participate in the United States
Treasury's Capital Purchase Program, part of the program commonly known as
TARP.
The
Company's banking subsidiary has elected to participate in the Temporary
Liquidity Guarantee Program (“TLGP”), created by the
FDIC. Established by final rule of the FDIC in November 2008, the
TLGP provides two limited guarantee programs: One, the Debt Guarantee Program,
guarantees newly-issued senior unsecured debt, and another, the Transaction
Account Guarantee program (“TAG”) guarantees certain non-interest-bearing
transaction accounts at insured depository institutions. All insured depository
institutions that offer non-interest-bearing transaction accounts had the option
to participate in either program. The Company’s bank subsidiary elected to
participate in both parts of the TLGP.
Under the
TAG, FDIC provides a guarantee for the entire account balance for eligible
non-interest-bearing transaction accounts in exchange for an additional
insurance premium paid by the depository institution. This additional protection
is currently scheduled to terminate on June 30, 2010 (as extended by
FDIC). The Company’s subsidiary bank pays an annualized premium for
that additional deposit insurance protection of 10-basis points on the aggregate
amount of its non-interest bearing transaction accounts.
Federal Deposit Insurance
Assessments.
The
deposits of the Company’s bank subsidiary are insured up to applicable limits by
the Deposit Insurance Fund, or the DIF, of the FDIC and are subject to deposit
insurance assessments to maintain the DIF. Like every other insured
institution, the Company's bank subsidiary’s assessment rate depends on the
capital category and supervisory category to which it is assigned. The FDIC has
authority to raise or lower assessment rates on insured deposits in order to
achieve statutorily required reserve ratios in the DIF and to impose special
additional assessments.
In light
of the significant increase in depository institution failures in 2008 and
2009 and the temporary increase of general deposit insurance limits to $250,000
per depositor (scheduled to expire on December 31, 2013), the DIF incurred
substantial losses in 2008 and 2009. Accordingly, the FDIC took action during
2009 to revise its risk-based assessment system, to collect certain special
assessments, and to accelerate the payment of assessments. Under the new
risk-based assessment system, adjusted deposit insurance assessments can range
from a low of 7 basis points to a high of 77.5 basis points. The premiums will
further increase uniformly by 3 basis points in 2011.
On
September 30, 2009, the FDIC collected a special assessment from each insured
institution that generally totaled 5 basis points of total assets less Tier 1
Capital. In addition, on December 30, 2009, the FDIC collected 13
quarters of deposit insurance premiums from all insured
institutions. Notwithstanding these actions, there is a risk that the
bank’s deposit insurance premiums will continue to increase if failures of
insured depository institutions continue to deplete the DIF.
In
addition, the Deposit Insurance Fund Act of 1996 authorizes the Financing
Corporation (“FICO”) to impose assessments on all DIF assessable
deposits in order to service the interest on FICO’s bond obligations. The amount
assessed each FDIC-insured institution is in addition to the amount, if any,
paid for deposit insurance under the FDIC’s risk-related assessment rate
schedule. FICO assessment rates may be adjusted quarterly to reflect a change in
assessment base. That assessment rate is established quarterly, and during the
calendar year ending December 31, 2009, averaged on an annualized basis 1.06
cents per $100 of deposits. These assessments will continue until the
FICO bonds mature in 2019.
5
Any
increase in the risk category of the Company’s bank subsidiary or reduction of
its capital category as established by the risk-based DIF assessment program,
and any adjustments to the base assessment rates or special FDIC assessments,
could result in a material increase in our expense for federal deposit
insurance.
Internet Address; Internet
Availability of SEC Reports.
The
Company's Internet address is www.germanamerican.com.
The
Company makes available, free of charge through the Shareholder Information
section of its Internet website, a link to the Internet website of the
Securities and Exchange Commission (SEC) by which the public may view the
Company’s annual report on Form 10-K, its quarterly reports on Form 10-Q, its
current reports on Form 8-K and any amendments to those reports filed or
furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after those reports are filed with or
furnished to the SEC.
Forward-Looking Statements
and Associated Risks.
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 the Company’s net interest income or net interest margin; adequacy of
allowance for loan losses, and the quality of the Company’s loans, investment
securities and other assets; simulations of changes in interest rates;
litigation results; dividend policy; acquisitions or mergers; 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. All statements other than
statements of historical fact included in this report, including statements
regarding our financial position, business strategy and the plans and objectives
of our management for future operations, are forward-looking
statements. When used in this report, words such as “anticipate”,
“believe”, “estimate”, “expect”, “intend”, and similar expressions, as they
relate to us or our management, identify forward-looking
statements.
Such
forward-looking statements are based on the beliefs of our management, as well
as assumptions made by and information currently available to our management,
and are subject to risks, uncertainties, and other factors.
Actual
results may differ materially and adversely from the expectations of the Company
that are expressed or implied by any forward-looking statement. The
discussions in Item 1A, “Risk Factors,” and in Item 7 of this Form 10-K,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” list 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 but not limited
to:
|
·
|
the
unknown future direction of interest rates and the timing and magnitude of
any changes in interest rates;
|
|
·
|
changes
in competitive conditions;
|
|
·
|
the
introduction, withdrawal, success and timing of asset/liability management
strategies or of mergers and acquisitions and other business initiatives
and strategies;
|
|
·
|
changes
in customer borrowing, repayment, investment and deposit
practices;
|
|
·
|
changes
in fiscal, monetary and tax
policies;
|
|
·
|
changes
in financial and capital markets;
|
|
·
|
continued
deterioration in general economic conditions, either nationally or
locally, resulting in, among other things, credit quality
deterioration;
|
6
|
·
|
capital
management activities, including possible future sales of new securities,
or possible repurchases or redemptions by the Company of outstanding debt
or equity securities;
|
|
·
|
risks
of expansion through acquisitions and mergers, such as unexpected credit
quality problems of the acquired loans or other assets, unexpected
attrition of the customer base of the acquired institution or branches,
and difficulties in integration of the acquired
operations;
|
|
·
|
factors
driving impairment charges on
investments;
|
|
·
|
the
impact, extent and timing of technological
changes;
|
|
·
|
litigation
liabilities, including related costs, expenses, settlements and judgments,
or the outcome of matters before regulatory agencies, whether pending or
commencing in the future;
|
|
·
|
actions
of the Federal Reserve Board;
|
|
·
|
changes
in accounting principles and
interpretations;
|
|
·
|
potential
increases of federal deposit insurance premium expense, and possible
future special assessments of FDIC premiums, either industry wide or
specific to the Company’s banking
subsidiary;
|
|
·
|
actions
of the Department of the Treasury and the Federal Deposit Insurance
Corporation under the Emergency Economic Stabilization Act and the Federal
Deposit Insurance Act and other 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.
|
Such
statements reflect our views with respect to future events and are subject to
these and other risks, uncertainties and assumptions relating to the operations,
results of operations, growth strategy and liquidity of the
Company. Readers are cautioned not to place undue reliance on these
forward-looking statements. It is intended that these forward-looking
statements speak only as of the date they are made. We do not undertake any
obligation to release publicly any revisions to these forward-looking statements
to reflect future events or circumstances or to reflect the occurrence of
unanticipated events.
Item 1A. Risk
Factors.
While we
have a history of profitability and operate with capital that exceeds the
requirements of bank regulatory agencies, the financial services industry in
which we operate has been adversely affected by the current weak economic
environment. Further, an investment in our common stock (like an
investment in the equity securities of any business enterprise) is subject to
other investment risks and uncertainties. The following describes
some of the principal risks and uncertainties to which our industry in general,
and we and our assets and businesses specifically, are subject; other risks are
briefly identified in our cautionary statement that is included under the
heading “Forward-Looking Statements and Associated Risks” in Part I, Item 1,
“Business.” Although we seek ways to manage these risks and
uncertainties and to develop programs to control those that we can, we
ultimately cannot predict the future. Future results may differ
materially from past results, and from our expectations and plans.
Risks Related to the
Financial Services Industry
Difficult
market conditions have adversely affected our industry.
The U.S.
economy entered a recession during the third quarter of 2008, and the housing
and real estate markets have been experiencing extraordinary slowdowns since
2007. Additionally, unemployment rates continually rose during these periods.
These factors have had a significant negative effect on companies in the
financial services industry. As a lending institution, our business is directly
affected by the ability of our borrowers to repay their loans, as well as by the
value of collateral, such as real estate, that secures many of our loans. Market
turmoil has led to an increase in charge-offs and has negatively impacted
consumer confidence and the level of business activity. Continued
weakness or further deterioration in the economy, real estate markets or
unemployment rates, particularly in the markets in which we operate, can place
downward pressure on the credit worthiness of bank customers and their
inclinations to borrow. A continued or worsening disruption and
volatility could negatively impact customers' ability to seek new loans or to
repay existing loans, diminish the values of any collateral securing such loans
and could cause increases in delinquencies, problem assets, charge-offs and
provision for credit losses, all of which could materially adversely affect our
financial condition and results of operations. Further, the
underwriting and credit monitoring policies and procedures that we have adopted
may not prevent losses that could have a material adverse effect on our
business, financial condition, results of operations and cash
flows. Since our business is concentrated in southern Indiana,
declines in the economy of this region could adversely affect our
business.
7
Our FDIC insurance premiums
may increase, and special assessments could be made, which could negatively
impact our results of operations.
Recent
insured institution failures, as well as deterioration in banking and economic
conditions, have significantly increased FDIC loss provisions, resulting in a
decline of its deposit insurance fund to historical lows. The FDIC expects a
higher rate of insured institution failures in the next few years compared to
recent years; thus, the reserve ratio may continue to decline. In addition, the
Emergency Economic Stabilization Act of 2008, as amended, increased the limit on
FDIC coverage to $250,000 through December 31, 2013. These developments have
caused our FDIC insurance premiums to increase, and may cause additional
increases. On September 30, 2009, the FDIC collected a special assessment from
each insured institution, and additional assessments are possible. In
addition, the FDIC also collected 13 quarters of prepaid insurance premiums on
December 30, 2009.
We
operate in a highly regulated environment and changes in laws and regulations to
which we are subject may adversely affect our results of operations.
The
banking industry in which we operate is subject to extensive regulation and
supervision under federal and state laws and regulations. The
restrictions imposed by such laws and regulations limit the manner in which we
conduct our business, undertake new investments and activities and obtain
financing. These regulations are designed primarily for the protection of the
deposit insurance funds and consumers and not to benefit our
shareholders. Financial institution regulation has been the subject
of significant legislation in recent years and may be the subject of further
significant legislation, none of which is in our control. Significant
new laws or changes in, or repeals of, existing laws (including changes in
federal or state laws affecting corporate taxpayers generally or financial
institutions specifically) could have a material adverse effect on our business,
financial condition, results of operations or liquidity. Further, federal
monetary policy, particularly as implemented through the Federal Reserve System,
significantly affects credit conditions, and any unfavorable change in these
conditions could have a material adverse effect on our business, financial
condition, results of operations or liquidity.
Legislative and regulatory
actions taken now or in the future regarding the financial services industry may
significantly increase our costs or limit our ability to conduct our business in
a profitable manner.
As a
result of the ongoing financial crisis and challenging market conditions and
concerns regarding the consumer lending practices of certain institutions, we
expect to face increased regulation and regulatory and political scrutiny of the
financial services industry. We are already subject to extensive federal and
state regulation and supervision. The cost of compliance with such laws and
regulations can be substantial and adversely affect our ability to operate
profitably. While we are unable to predict the scope or impact of any potential
legislation or regulatory action, bills that would result in significant changes
to financial institutions have been introduced in Congress and it is possible
that such legislation or implementing regulations could significantly increase
our regulatory compliance costs, impede the efficiency of our internal business
processes, negatively impact the recoverability of certain of our recorded
assets, require us to increase our regulatory capital, interfere with our
executive compensation plans, or limit our ability to pursue business
opportunities (such as potential opportunities to acquire assets or other
institutions or businesses) in an efficient manner.
Additional Risks Related to
Our Operations and Business and Financial Strategies
If our
actual loan losses exceed our estimates, our earnings and financial condition
will be impacted.
A
significant source of risk for any bank or other enterprise that lends money
arises from the possibility that losses will be sustained because borrowers,
guarantors and related parties may fail (because of financial difficulties or
other reasons) to perform in accordance with the terms of their loan
agreements. In our case, we originate many loans that are secured,
but some loans are unsecured depending on the nature of the loan. With respect
to secured loans, the collateral securing the repayment of these loans includes
a wide variety of real and personal property that may be insufficient to cover
the obligations owed under such loans, due to adverse changes in collateral
values caused by changes in prevailing economic, environmental and other
conditions, including declines in the value of real estate and other external
events.
8
We could
be adversely affected by changes in interest rates.
Our
earnings and cash flows are largely dependent upon our net interest income.
Interest rates are highly sensitive to many factors that are beyond our control,
including general economic conditions, demand for loans, securities and
deposits, and policies of various governmental and regulatory agencies and, in
particular, the monetary policies of the Board of Governors of the Federal
Reserve System. If the interest rates paid on deposits and other
borrowings increase at a faster rate than the interest rates received on loans
and other investments, our net interest income, and therefore earnings, could be
adversely affected. Earnings could also be adversely affected if the interest
rates received on loans and other investments fall more quickly than the
interest rates paid on deposits and other borrowings. Any
substantial, unexpected, prolonged change in market interest rates could have a
material adverse effect on our financial condition, results of operations, and
cash flows.
Our
success is tied to the economic vitality of our Southern Indiana
markets.
We
conduct business from offices that are exclusively located in ten contiguous
counties of Southern Indiana, from which substantially all of our customer base
is drawn. Because of the geographic concentration of our operations
and customer base, our results depend largely upon economic conditions in this
area. If current levels of market disruption and volatility
worsen in our primary service areas, the quality of our loan portfolio, and the
demand for our products and services, could be adversely affected, and this
could have a material adverse effect on our business, financial condition,
results of operations or liquidity.
We face
substantial competition.
The
banking and financial services business in our markets is highly competitive. We
compete with much larger regional, national, and international competitors,
including competitors that have no (or only a limited number of) offices
physically located within our markets. In addition, new banks could
be organized in our market area which might bid aggressively for new business to
capture market share in these markets. Developments increasing
the nature or level of our competition, or decreasing the effectiveness by which
we compete, could have a material adverse effect on our business, financial
condition, results of operations or liquidity. See also Part I, Item
1, of this report, “Business—Competition,” and “Business—Regulation and
Supervision.”
The
manner in which we report our financial condition and results of operations may
be affected by accounting changes.
Our
financial condition and results of operations that are presented in our
consolidated financial statements, accompanying notes to the consolidated
financial statements, and selected financial data appearing in this report, are,
to a large degree, dependent upon our accounting policies. The
selection of and application of these policies involve estimates, judgments and
uncertainties that are subject to change, and the effect of any change in
estimates or judgments that might be caused by future developments or resolution
of uncertainties could be materially adverse to our reported financial condition
and results of operations. In addition, authorities that prescribe
accounting principles and standards for public companies from time to time
change those principles or standards or adopt formal or informal interpretations
of existing principles or standards. Such changes or interpretations
(to the extent applicable to us) could result in changes that would be
materially adverse to our reported financial condition and results of
operations.
Liquidity
risk could impair our ability to fund operations and jeopardize our financial
condition.
Liquidity
is essential to our business. An inability to raise funds through deposits,
borrowings, the sale of securities or loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding
sources in amounts adequate to finance our activities or the terms of which are
acceptable to us could be impaired by factors that affect us specifically or the
financial services industry or economy in general. Although we have
historically been able to replace maturing deposits and borrowings as necessary,
we might not be able to replace such funds in the future if, among other things,
our results of operations or financial condition or the results of operations or
financial condition of our lenders or market conditions were to
change.
The
value of securities in our investment securities portfolio may be negatively
affected by continued disruptions in securities markets.
The
market for investment securities has become extremely volatile over the past
twelve months. Volatile market conditions may detrimentally affect the value of
securities that we hold in our investment portfolio, such as through reduced
valuations due to the perception of heightened credit and liquidity risks. There
can be no assurance that declines in market value associated with these
disruptions will not result in other than temporary impairments of these assets,
which would lead to accounting charges that could have a material adverse effect
on our net income and capital levels.
9
The
soundness of other financial institutions could adversely affect us.
Our
ability to engage in routine funding transactions could be adversely affected by
the actions and commercial soundness of other financial
institutions. Financial services companies are interrelated as a
result of trading, clearing, counterparty, or other relationships. We have
exposure to many different industries and counterparties, and we routinely
execute transactions with counterparties in the financial services industry,
including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds, and other institutional clients. As a result, defaults
by, or even rumors or questions about, one or more financial services companies,
or the financial services industry generally, have led to market-wide liquidity
problems and could lead to losses or defaults by us or by other
institutions. Many of these transactions expose us to credit risk in
the event of default of our counterparty or client. In
addition, our credit risk may be exacerbated when the collateral held by us
cannot be realized or is liquidated at prices not sufficient to recover the full
amount due us.
We are dependent on key
personnel and the loss of one or more of those key personnel could harm our
business.
Competition
for qualified employees and personnel in the financial services industry
(including banking personnel, trust and investments personnel, and insurance
personnel) is intense and there are a limited number of qualified
persons with knowledge of and experience in our local Southern Indiana
markets. Our success depends to a significant degree upon our ability
to attract and retain qualified loan origination executives, sales executives
for our trust and investment products and services, and sales executives for our
insurance products and services. We also depend upon the
continued contributions of our management personnel, and in particular upon the
abilities of our senior executive management, and the loss of the services of
one or more of them could harm our business.
Our controls and procedures
may fail or be circumvented.
Management
regularly reviews and updates our internal controls, disclosure controls and
procedures, and corporate governance policies and procedures. Any
system of controls, however well designed and operated, is based in part on
certain assumptions and can provide only reasonable, not absolute, assurances
that the objectives of the system are met. Any failure or circumvention of our
controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on our business,
results of operations, cash flows and financial condition.
We are
subject to security and operational risks relating to our use of technology that
could damage our reputation and our business.
We rely
heavily on communications and information systems to conduct our
business. Any failure, interruption or breach in security of these
systems could result in failures or disruptions in our customer relationship
management, general ledger, deposit, loan and other systems. The
occurrence of any failures, interruptions or security breaches of information
systems used to process customer transactions could damage our reputation,
result in a loss of customer business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial
liability.
We are exposed to risk of
environmental liabilities with respect to properties to which we take
title.
In the
course of our business, we may own or foreclose and take title to real estate,
and could be subject to environmental liabilities with respect to these
properties (including liabilities for property damage, personal injury,
investigation and clean-up costs incurred by these parties in connection with
environmental contamination), or may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a property.
Any acquisitions of banks,
bank branches, or loans or other financial service assets pose risks to
us.
In the
past several years, we have completed several purchases of loan portfolios from
other banks and have agreed to expand into the Evansville, Indiana market by
buying two branches of another bank. We may continue to buy banks,
bank branches and other financial-service-related businesses and assets in the
future. Acquiring other banks, businesses, or branches involves
various risks commonly associated with acquisitions, including, among other
things:
|
·
|
potential
exposure to unknown or contingent liabilities or asset quality issues of
the acquired assets, operations or
company;
|
|
·
|
potential
exposure to unknown or contingent liabilities of the acquired assets,
operations or company;
|
|
·
|
exposure
to potential asset quality issues of the acquired assets, operations or
company;
|
10
|
·
|
environmental
liability with acquired real estate collateral or other real
estate;
|
|
·
|
difficulty
and expense of integrating the operations, systems and personnel of the
acquired assets, operations or
company;
|
|
·
|
potential
disruption to our ongoing business, including diversion of our
management’s time and attention;
|
|
·
|
the
possible loss of key employees and customers of the acquired operations or
company;
|
|
·
|
difficulty
in estimating the value of the acquired assets, operations or company;
and
|
|
·
|
potential
changes in banking or tax laws or regulations that may affect the acquired
assets, operations or company.
|
We may
not be successful in overcoming these risks or any other problems encountered in
connection with mergers or acquisitions.
Acquisitions
typically involve the payment of a premium over book and market values, and,
therefore, some dilution of the Company's tangible book value and net income per
common share may occur in connection with any future transaction. Furthermore,
failure to realize the expected revenue increases, cost savings, increases in
geographic or product presence, and/or other projected benefits from an
acquisition could have a material adverse effect on our financial condition and
results of operations.
We may participate in
FDIC-assisted acquisitions, which could present additional risks to our
financial condition.
We may
make opportunistic whole or partial acquisitions of troubled financial
institutions in transactions facilitated by the FDIC. In addition to the risks
frequently associated with acquisitions, an acquisition of a troubled financial
institution may involve a greater risk that the acquired assets underperform
compared to our expectations. Because these acquisitions are structured in a
manner that would not allow us the time normally associated with preparing for
and evaluating an acquisition, including preparing for integration of an
acquired institution, we may face additional risks including, among other
things, the loss of customers, strain on management resources related to
collection and management of problem loans and problems related to integration
of personnel and operating systems. Additionally, while the FDIC may agree to
assume certain losses in transactions that it facilitates, there can be no
assurances that we would not be required to raise additional capital as a
condition to, or as a result of, participation in an FDIC-assisted transaction.
Any such transactions and related issuances of stock may have dilutive effect on
earnings per share and share ownership.
Item 1B.
Unresolved Staff Comments. None.
Item 2.
Properties.
The
Company’s executive offices are located in the main office building of its bank
subsidiary, German American Bancorp, at 711 Main Street, Jasper,
Indiana. The main office building contains approximately 23,600
square feet of office space. The Company’s subsidiaries conduct their
operations from 33 other locations in Southern Indiana.
Item 3. Legal
Proceedings.
There are
no material pending legal proceedings, other than routine litigation incidental
to the business of the Company’s subsidiaries, to which the Company or any of
its subsidiaries is a party or of which any of their property is the
subject.
Item 4. Submission of
Matters to a Vote of Security Holders.
There
were no matters submitted during the fourth quarter of 2009 to a vote of
security holders, by solicitation of proxies or otherwise.
11
PART II
Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
Market
and Dividend Information
German
American Bancorp, Inc.’s stock is traded on NASDAQ’s Global Select Market under
the symbol GABC. The quarterly high and low closing prices for the
Company’s common stock as reported by NASDAQ and quarterly cash dividends
declared and paid are set forth in the table below.
2009
|
2008
|
|||||||||||||||||||||||
Cash
|
Cash
|
|||||||||||||||||||||||
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
|||||||||||||||||||
Fourth
Quarter
|
$ | 17.31 | $ | 14.24 | $ | 0.140 | $ | 12.90 | $ | 10.65 | $ | 0.140 | ||||||||||||
Third
Quarter
|
$ | 18.33 | $ | 14.25 | $ | 0.140 | $ | 13.60 | $ | 11.00 | $ | 0.140 | ||||||||||||
Second
Quarter
|
$ | 16.04 | $ | 11.33 | $ | 0.140 | $ | 13.23 | $ | 11.39 | $ | 0.140 | ||||||||||||
First
Quarter
|
$ | 12.50 | $ | 10.40 | $ | 0.140 | $ | 13.29 | $ | 11.31 | $ | 0.140 | ||||||||||||
$ | 0.560 | $ | 0.560 |
The
Common Stock was held of record by approximately 3,308 shareholders at February
28, 2010.
Cash
dividends paid to the Company’s shareholders are primarily funded from dividends
received by the parent company from its bank subsidiary. The
declaration and payment of future dividends will depend upon the earnings and
financial condition of the Company and its subsidiaries, general economic
conditions, compliance with regulatory requirements affecting the ability of the
bank subsidiary and the Company to declare dividends, and other
factors.
Transfer Agent:
|
Computershare
|
Shareholder
|
Terri
A. Eckerle
|
Priority
Processing
|
Information and
|
German
American Bancorp, Inc.
|
|
250
Royall St
|
Corporate Office:
|
P.
O. Box 810
|
|
Canton,
MA 02021
|
Jasper,
Indiana 47547-0810
|
||
Contact:
Shareholder Relations
|
(812)
482-1314
|
||
(800)
884-4225
|
(800)
482-1314
|
Stock
Performance Graph
The
following graph compares the Company’s five-year cumulative total returns with
those of the Russell 2000 Stock Index, Russell Microcap Stock Index, and the
Indiana Bank Peer Group. The Indiana Bank Peer Group (which is a
custom peer group identified by Company management) includes all Indiana-based
commercial bank holding companies (excluding companies owning thrift
institutions that are not regulated as bank holding companies) that have been in
existence as commercial bank holding companies throughout the five-year period
ended December 2009, the stocks of which have been traded on an established
securities market (NYSE, AMEX, NASDAQ) throughout that five-year
period. The companies comprising the Indiana Bank Peer Group for
purposes of the December 2009 comparison were: 1st Source Corp.,
Community Bank Shares of IN, First Financial Corp., First Merchants Corp.,
Integra Bank Corp., Lakeland Financial Corp., MainSource Financial Group, Old
National Bancorp, Indiana Community Bancorp, Horizon Bancorp, Monroe Bancorp,
and Tower Financial Corp. The returns of each company in the Indiana Bank Peer
Group have been weighted to reflect the company’s market
capitalization. The Russell 2000 Stock Index, which is designed to
measure the performance of the small-cap segment of the U.S. equity universe, is
a subset of the Russell 3000 Index (which measures the performance of the
largest 3,000 U.S. companies) that includes approximately 2,000 of the smallest
securities in that index based on a combination of their market cap and current
index membership, and is annually reconstituted at the end of each
June. The Russell Microcap Stock Index is an index representing the
smallest 1,000 securities in the small-cap Russell 2000 Index plus the next
1,000 securities, which is also annually reconstituted at the end of each
June. The Company’s stock is currently included in the Russell 2000
Index and Russell Microcap Index.
12
Stock
Repurchase Program Information
The
following table sets forth information regarding the Company's purchases of its
common shares during each of the three months ended December 31,
2009.
Total
|
Maximum Number
|
|||||||||||||||
Number
|
Total Number of Shares
|
(or Approximate Dollar
|
||||||||||||||
Of Shares
|
Average Price
|
(or Units) Purchased as Part
|
Value) of Shares (or Units)
|
|||||||||||||
(or Units)
|
Paid Per Share
|
of Publicly Announced Plans
|
that May Yet Be Purchased
|
|||||||||||||
Period
|
Purchased
|
(or Unit)
|
or Programs
|
Under the Plans or Programs (1)
|
||||||||||||
October
2009
|
— | — | — | 272,789 | ||||||||||||
November
2009
|
— | — | — | 272,789 | ||||||||||||
December
2009
|
— | — | — | 272,789 |
(1) On
April 26, 2001, the Company announced that its Board of Directors had approved a
stock repurchase program for up to 607,754 of its outstanding common shares, of
which the Company had purchased 334,965 common shares through December 31, 2008
(both such numbers adjusted for subsequent stock dividends). The
Board of Directors established no expiration date for this program. The Company
purchased no shares under this program during the quarter ended December 31,
2009.
13
Item 6. Selected
Financial Data.
The
following selected data should be read in conjunction with the consolidated
financial statements and related notes that are included in Item 8 of this
Report, and “Management's Discussion and Analysis of Financial Condition and
Results of Operations,” which is included in Item 7 of this Report (dollars in
thousands, except per share data).
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Summary
of Operations:
|
||||||||||||||||||||
Interest
Income
|
$ | 63,736 | $ | 67,845 | $ | 72,261 | $ | 63,594 | $ | 50,197 | ||||||||||
Interest
Expense
|
19,223 | 26,908 | 33,646 | 27,398 | 17,984 | |||||||||||||||
Net
Interest Income
|
44,513 | 40,937 | 38,615 | 36,196 | 32,213 | |||||||||||||||
Provision
for Loan Losses
|
3,750 | 3,990 | 3,591 | 925 | 1,903 | |||||||||||||||
Net
Interest Income after Provision
|
||||||||||||||||||||
For
Loan Losses
|
40,763 | 36,947 | 35,024 | 35,271 | 30,310 | |||||||||||||||
Non-interest
Income
|
15,859 | 18,210 | 15,704 | 15,993 | 14,502 | |||||||||||||||
Non-interest
Expense
|
40,391 | 36,716 | 37,221 | 37,059 | 31,756 | |||||||||||||||
Income
before Income Taxes
|
16,231 | 18,441 | 13,507 | 14,205 | 13,056 | |||||||||||||||
Income
Tax Expense
|
4,013 | 5,638 | 4,102 | 3,984 | 3,335 | |||||||||||||||
Net
Income
|
$ | 12,218 | $ | 12,803 | $ | 9,405 | $ | 10,221 | $ | 9,721 | ||||||||||
Year-end
Balances:
|
||||||||||||||||||||
Total
Assets
|
$ | 1,242,965 | $ | 1,190,828 | $ | 1,131,710 | $ | 1,093,424 | $ | 946,467 | ||||||||||
Total
Loans, Net of Unearned Income
|
877,822 | 890,436 | 867,721 | 796,259 | 651,956 | |||||||||||||||
Total
Deposits
|
969,643 | 941,750 | 877,421 | 867,618 | 746,821 | |||||||||||||||
Total
Long-term Debt
|
113,320 | 105,608 | 86,786 | 68,333 | 66,606 | |||||||||||||||
Total
Shareholders’ Equity
|
113,549 | 105,174 | 97,116 | 92,391 | 82,255 | |||||||||||||||
Average
Balances:
|
||||||||||||||||||||
Total
Assets
|
$ | 1,230,596 | $ | 1,174,583 | $ | 1,114,140 | $ | 1,029,838 | $ | 925,851 | ||||||||||
Total
Loans, Net of Unearned Income
|
891,322 | 880,630 | 840,849 | 715,260 | 634,526 | |||||||||||||||
Total
Deposits
|
963,928 | 922,137 | 889,736 | 814,440 | 730,220 | |||||||||||||||
Total
Shareholders’ Equity
|
109,887 | 99,711 | 93,677 | 88,451 | 84,479 | |||||||||||||||
Per
Share Data (1):
|
||||||||||||||||||||
Net
Income
|
$ | 1.10 | $ | 1.16 | $ | 0.85 | $ | 0.93 | $ | 0.89 | ||||||||||
Cash
Dividends
|
0.56 | 0.56 | 0.56 | 0.56 | 0.56 | |||||||||||||||
Book
Value at Year-end
|
10.25 | 9.54 | 8.81 | 8.39 | 7.73 | |||||||||||||||
Other
Data at Year-end:
|
||||||||||||||||||||
Number
of Shareholders
|
3,364 | 3,684 | 3,647 | 3,438 | 3,494 | |||||||||||||||
Number
of Employees
|
332 | 348 | 371 | 397 | 367 | |||||||||||||||
Weighted Average Number of Shares (1)
|
11,065,917 | 11,029,519 | 11,009,536 | 10,994,739 | 10,890,987 | |||||||||||||||
Selected
Performance Ratios:
|
||||||||||||||||||||
Return
on Assets
|
0.99 | % | 1.09 | % | 0.84 | % | 0.99 | % | 1.05 | % | ||||||||||
Return
on Equity
|
11.12 | % | 12.84 | % | 10.04 | % | 11.56 | % | 11.51 | % | ||||||||||
Equity
to Assets
|
9.14 | % | 8.83 | % | 8.58 | % | 8.45 | % | 8.69 | % | ||||||||||
Dividend
Payout
|
50.71 | % | 48.25 | % | 65.65 | % | 60.29 | % | 62.83 | % | ||||||||||
Net
Charge-offs to Average Loans
|
0.25 | % | 0.29 | % | 0.32 | % | 0.50 | % | 0.26 | % | ||||||||||
Allowance
for Loan Losses to Loans
|
1.25 | % | 1.07 | % | 0.93 | % | 0.90 | % | 1.42 | % | ||||||||||
Net
Interest Margin
|
3.95 | % | 3.82 | % | 3.83 | % | 3.96 | % | 3.92 | % |
(1)
|
Share
and Per Share Data excludes the dilutive effect of stock
options.
|
Year to
year financial information comparability is affected by the purchase accounting
treatment for mergers and acquisitions.
14
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.
INTRODUCTION
German
American Bancorp, Inc. is a financial services holding company based in Jasper,
Indiana. The Company’s Common Stock is traded on NASDAQ’s Global Select Market,
under the symbol GABC. The principal subsidiary of German American
Bancorp, Inc., is its banking subsidiary, German American Bancorp, which
operates through 28 retail banking offices in the ten contiguous Southern
Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin, Monroe,
Perry, Pike, and Spencer. German American Bancorp, Inc., also owns a
trust, brokerage, and financial planning subsidiary, which operates from the
banking offices of the bank subsidiary, and full line property and casualty
insurance agency with seven insurance agency offices throughout its
market area.
Throughout
this Management’s Discussion and Analysis, as elsewhere in this report, when we
use the term “Company”, we will usually be referring to the business and affairs
(financial and otherwise) of the Company and its subsidiaries and affiliates as
a whole. Occasionally, we will refer to the term “parent company” or
“holding company” when we mean to refer to only German American Bancorp,
Inc.
The
information in this Management’s Discussion and Analysis is presented as an
analysis of the major components of the Company’s operations for the years 2007
through 2009 and its financial condition as of December 31, 2009 and
2008. This information should be read in conjunction with the
accompanying consolidated financial statements and footnotes contained elsewhere
in this report and with the description of business included in Item 1 of this
Report (including the cautionary disclosure regarding “Forward Looking
Statements and Associated Risks”). Financial and other information by
segment is included in Note 15 to the Company’s consolidated financial
statements included in Item 8 of this Report and is incorporated into this Item
7 by reference.
The
statements of management’s expectations and goals concerning the Company’s
future operations and performance that are set forth in the following
Management Overview and in other sections of this Item 7 are forward-looking
statements, and readers are cautioned that these 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 is expressed or implied by any forward-looking
statement. This Item 7, as well as the discussions in Item 1
(“Business”) entitled “Forward-Looking Statements and Associated Risks”
and in Item 1A (“Risk Factors”) (which discussions are incorporated
in this Item 7 by reference) list some of the factors that could cause the
Company's actual results to vary materially from those expressed or implied by
any such forward-looking statements.
MANAGEMENT
OVERVIEW
The Company’s net income decreased
$585,000 or 5% to $12,218,000 or $1.10 per share in 2009 compared to $12,803,000
or $1.16 per share in 2008. The level of earnings achieved in 2009
represented the second highest level of financial performance in the Company’s
history, while 2008 earnings represented the highest level of earnings in the
Company’s history.
The
Company’s 2009 performance was positively impacted by an approximately 9%
improvement in net interest income. The improvement in net interest
income was the result of approximately 6% growth in earning assets driven by
core deposit growth and an improved net interest margin. The Company
also strengthened its level of loan loss reserves by adding approximately $1.5
million to the allowance for loan losses during 2009. The
Company also significantly enhanced its equity and regulatory
capital during 2009. Largely the result of strong retained
earnings in 2009, the Company’s total shareholder’s equity increased
approximately 8%, and the Company’s regulatory capital was augmented by the
Company’s issuance during 2009 of $19.3 million of ten-year subordinated
redeemable debentures.
In a
direct reflection of the weakened economic environment in which the Company
operated during 2009, the Company’s earnings were negatively impacted by lower
levels of non-interest income and higher levels of operating
costs. The lower levels of non-interest income in 2009 were the
result of declines of approximately 20% in revenues and fees generated by the
Company’s insurance, investment, and trust activities while fees derived from
deposit service charges declined by approximately 11%. The higher
level of non-interest expenses in 2009 were directly related to significantly
higher levels of FDIC insurance premiums (an increase of approximately $1.7
million) and health insurance costs (an increase of approximately $1.0
million).
In the
second quarter of 2010, the Company plans to complete its acquisition of two
branches (including their related loan assets and deposit liabilities) of
another bank in the Evansville, Indiana banking market, which is a new market
for the Company. For further information see Note 20 to the Company’s
consolidated financial statements included in Item 8 of this
Report.
15
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
financial condition and results of operations for German American Bancorp, Inc.
presented in the Consolidated Financial Statements, accompanying Notes to the
Consolidated Financial Statements, and selected financial data appearing
elsewhere within this report, are, to a large degree, dependent upon the
Company’s accounting policies. The selection of and application of
these policies involve estimates, judgments and uncertainties that are subject
to change. The critical accounting policies and estimates that the
Company has determined to be the most susceptible to change in the near term
relate to the determination of the allowance for loan losses, the valuation of
securities available for sale, and the valuation allowance on deferred tax
assets.
ALLOWANCE
FOR LOAN LOSSES
The Company maintains an allowance for
loan losses to cover probable incurred credit losses at the balance sheet
date. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance. Allocations of the allowance may be made for specific
loans, but the entire allowance is available for any loan that, in management’s
judgment, should be charged-off. A provision for loan losses is
charged to operations based on management's periodic evaluation of the necessary
allowance balance. Evaluations are conducted at least quarterly and
more often if deemed necessary. The ultimate recovery of all loans is
susceptible to future market factors beyond the Company's
control.
The Company has an established process
to determine the adequacy of the allowance for loan losses. The determination of
the allowance is inherently subjective, as it requires significant estimates,
including the amounts and timing of expected future cash flows on impaired
loans, estimated losses on other classified loans and pools of homogeneous
loans, and consideration of 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, all of which may be
susceptible to significant change. The allowance consists of two
components of allocations, specific and general. These two components
represent the total allowance for loan losses deemed adequate to cover losses
inherent in the loan portfolio.
Commercial and agricultural loans are
subject to a standardized grading process administered by an internal loan
review function. The need for specific reserves is considered for
credits when graded substandard or special mention, or when: (a) the customer’s
cash flow or net worth appears insufficient to repay the loan; (b) the loan has
been criticized in a regulatory examination; (c) the loan is on non-accrual; or,
(d) other reasons where the ultimate collectibility of the loan is in question,
or the loan characteristics require special monitoring. Specific
allowances are established in cases where management has identified significant
conditions or circumstances related to an individual credit that we believe
indicates the loan is impaired. Specific allocations on impaired
loans are determined by comparing the loan balance to the present value of
expected cash flows or expected collateral proceeds. Allocations are
also applied to categories of loans not considered individually impaired but for
which the rate of loss is expected to be greater than historical averages,
including those graded substandard or special mention and non-performing
consumer or residential real estate loans. Such allocations are based
on past loss experience and information about specific borrower situations and
estimated collateral values.
General allocations are made for other
pools of loans, including non-classified loans, homogeneous portfolios of
consumer and residential real estate loans, and loans within certain industry
categories believed to present unique risk of loss. General
allocations of the allowance are primarily made based on a three-year historical
average for loan losses for these portfolios, judgmentally adjusted for economic
factors and portfolio trends.
Due to the imprecise nature of
estimating the allowance for loan losses, the Company’s allowance for loan
losses includes a minor unallocated component. The unallocated
component of the allowance for loan losses incorporates the Company’s judgmental
determination of inherent losses that may not be fully reflected in other
allocations, including factors such as economic uncertainties, lending staff
quality, industry trends impacting specific portfolio segments, and broad
portfolio quality trends. Therefore, the ratio of
allocated to unallocated components within the total allowance may fluctuate
from period to period.
SECURITIES VALUATION
Securities available-for-sale are
carried at fair value, with unrealized holding gains and losses reported
separately in accumulated other comprehensive income (loss), net of
tax. The Company obtains market values from a third party on a
monthly basis in order to adjust the securities to fair value. Equity
securities that do not have readily determinable fair values are carried at
cost. Additionally, all securities are required to be written down to
fair value when a decline in fair value is other than temporary; therefore,
future changes in the fair value of securities could have a significant impact
on the Company’s operating results. In determining whether a market
value decline is other-than-temporary, management considers the reason for the
decline, the extent of the decline and the duration of the
decline. As of December 31, 2009, gross unrealized losses on the
securities available-for-sale portfolio totaled approximately
$989,000.
16
INCOME TAX EXPENSE
Income tax expense involves estimates
related to the valuation allowance on deferred tax assets and loss contingencies
related to exposure from tax examinations.
A valuation allowance reduces deferred
tax assets to the amount management believes is more likely than not to be
realized. In evaluating the realization of deferred tax assets,
management considers the likelihood that sufficient taxable income of
appropriate character will be generated within carryback and carryforward
periods, including consideration of available tax planning strategies.
Tax related loss contingencies,
including assessments arising from tax examinations and tax strategies, are
recorded as liabilities when the likelihood of loss is probable and an amount or
range of loss can be reasonably estimated. In considering the
likelihood of loss, management considers the nature of the contingency, the
progress of any examination or related protest or appeal, the views of legal
counsel and other advisors, experience of the Company or other enterprises in
similar matters, if any, and management’s intended response to any
assessment.
RESULTS
OF OPERATIONS
NET
INCOME
Net income declined $585,000 or 5% to
$12,218,000 or $1.10 per share in 2009 compared to $12,803,000 or $1.16 per
share in 2008. The decline in earnings during 2009 compared with 2008
was largely the result of lower non-interest revenues and higher levels of
non-interest expense partially mitigated by an increase in net interest
income.
Net income increased $3,398,000 or 36%
to $12,803,000 or $1.16 per share in 2008 compared to $9,405,000 or $0.85 per
share in 2007. The increase in earnings in 2008 compared with 2007
was attributable to improvement in net interest income, non-interest income, and
non-interest expense, partially offset by a higher provision for loan
losses.
NET
INTEREST INCOME
Net
interest income is the Company’s single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. Several factors
contribute to the determination of net interest income and net interest margin,
including the volume and mix of earning assets, interest rates, and income
taxes. Many factors affecting net interest income are subject to
control by management policies and actions. Factors beyond the
control of management include the general level of credit and deposit demand,
Federal Reserve Board monetary policy, and changes in tax laws.
Net interest income increased $3,576,000
or 9% (an increase of $3,798,000 or 9% on a tax-equivalent basis) for the year
ended December 31, 2009 compared with the year ended 2008. The increase
in net interest income was primarily attributable to an increased level of
average earning assets and an expanded net interest margin in 2009 compared with
2008. The tax equivalent net interest margin for 2009 was 3.95%
compared to 3.82% for 2008. The yield on earning assets totaled 5.62%
during 2009 compared to 6.30% in 2008 while the cost of funds (expressed as a
percentage of average earning assets) totaled 1.67% during 2009 compared to
2.48% in 2008.
Average
earning assets increased by approximately $61.9 million or 6% during 2009
compared with 2008. Average loans outstanding increased by $10.7
million or 1% during 2009 compared with 2008. The remainder of the
increase in average earning assets was primarily related to an increased
securities portfolio in 2009. The key driver of the increased
securities portfolio and overall increased average earnings assets was a higher
level of average core deposits (core deposits defined as demand deposits - both
interest and non-interest bearing, savings, money market and time deposits in
denominations of less than $100,000). During 2009 average core
deposits increased $53.5 million or 7%, compared to 2008.
The
expansion of the Company’s net interest income and net interest margin during
2009 compared with 2008 was aided by utilization of interest rate floors on
adjustable rate commercial and industrial, commercial real estate and
agricultural loans. As of December 31, 2009 the Company’s commercial
and agricultural loan portfolios totaled $680.1 million of which approximately
67% were adjustable rate loans. Of these adjustable rate loans,
approximately 83% contain interest rate floors which range predominantly from 4%
to 7%. At year-end 2009, approximately $223.6 million of these loans
were at their contractual floor.
Also
contributing to the expansion of the Company’s net interest income and net
interest margin during 2009 compared with 2008 has been the relative liability
sensitive nature of the Company’s balance sheet. The Company was able
to effectively lower interest rates on both its interest-bearing non-maturity
deposits while continuing to expand its core deposit base. In
addition, a significant level of time deposits matured during 2009 allowing the
Company to lower its cost of these deposits in a time of historically low
interest rates.
17
Net
interest income increased $2,322,000 or 6% (an increase of $2,320,000 or 6% on a
tax-equivalent basis) for the year ended 2008 compared with 2007. The
increase in net interest income was primarily attributable to an increased level
of average earning assets for the year ended 2008 compared with
2007. Average earning assets totaled $1.086 billion during 2008
compared with $1.023 billion during 2007. During 2008, average loans outstanding
totaled $880.6 million, an increase of $39.8 million or 5%, compared to the
$840.8 million in average loans outstanding during 2007. Average
commercial and agricultural loans totaled $639.4 million, an increase of $50.4
million or 9% during 2008 compared with 2007. Average residential
mortgage loans and consumer loans totaled $241.2 million during 2008
representing a decline of $10.6 million or 4% from 2007.
For 2008,
the net interest margin remained relatively stable at 3.82% compared to 3.83%
during 2007. The Company’s yield on earning assets totaled 6.30%
compared with a cost of funds of 2.48% netting to a net interest margin of 3.82%
for the year ended December 31, 2008. The Company’s yield on earning
assets was 7.12% compared with a cost of funds of 3.29% netting to a net
interest margin of 3.83% for the year ended December 31, 2007.
18
The
following table summarizes net interest income (on a tax-equivalent basis) for
each of the past three years. For tax-equivalent adjustments, an
effective tax rate of 34% was used for all years presented (1).
Average Balance Sheet
|
||||||||||||||||||||||||||||||||||||
(Tax-equivalent basis / dollars in thousands)
|
||||||||||||||||||||||||||||||||||||
Twelve Months Ended
|
Twelve Months Ended
|
Twelve Months Ended
|
||||||||||||||||||||||||||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||||||||||||||||||||||||||
Principal
|
Income /
|
Yield /
|
Principal
|
Income /
|
Yield /
|
Principal
|
Income /
|
Yield /
|
||||||||||||||||||||||||||||
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
||||||||||||||||||||||||||||
ASSETS
|
||||||||||||||||||||||||||||||||||||
Federal
Funds Sold and Other
|
||||||||||||||||||||||||||||||||||||
Short-term
Investments
|
$ | 41,085 | $ | 106 | 0.26 | % | $ | 35,064 | $ | 593 | 1.69 | % | $ | 9,626 | $ | 478 | 4.96 | % | ||||||||||||||||||
Securities:
|
||||||||||||||||||||||||||||||||||||
Taxable
|
192,074 | 8,660 | 4.51 | % | 152,710 | 8,007 | 5.24 | % | 149,108 | 6,992 | 4.69 | % | ||||||||||||||||||||||||
Non-taxable
|
23,920 | 1,614 | 6.75 | % | 18,061 | 1,164 | 6.44 | % | 23,913 | 1,423 | 5.95 | % | ||||||||||||||||||||||||
Total Loans and
Leases (2)
|
891,322 | 54,166 | 6.08 | % | 880,630 | 58,669 | 6.66 | % | 840,849 | 63,958 | 7.61 | % | ||||||||||||||||||||||||
TOTAL
INTEREST EARNING ASSETS
|
1,148,401 | 64,546 | 5.62 | % | 1,086,465 | 68,433 | 6.30 | % | 1,023,496 | 72,851 | 7.12 | % | ||||||||||||||||||||||||
Other
Assets
|
92,699 | 97,275 | 98,389 | |||||||||||||||||||||||||||||||||
Less:
Allowance for Loan Losses
|
(10,504 | ) | (9,157 | ) | (7,745 | ) | ||||||||||||||||||||||||||||||
TOTAL
ASSETS
|
$ | 1,230,596 | $ | 1,174,583 | $ | 1,114,140 | ||||||||||||||||||||||||||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||||||||||||||||||||||||||||||
Interest-bearing
Demand Deposits
|
$ | 245,811 | $ | 1,710 | 0.70 | % | $ | 212,467 | $ | 3,439 | 1.62 | % | $ | 153,033 | $ | 3,280 | 2.14 | % | ||||||||||||||||||
Savings
Deposits
|
227,403 | 1,531 | 0.67 | % | 209,593 | 3,407 | 1.63 | % | 177,001 | 4,858 | 2.74 | % | ||||||||||||||||||||||||
Time
Deposits
|
341,041 | 10,254 | 3.01 | % | 359,115 | 14,366 | 4.00 | % | 425,878 | 19,151 | 4.50 | % | ||||||||||||||||||||||||
FHLB
Advances and Other Borrowings
|
143,332 | 5,728 | 4.00 | % | 138,888 | 5,696 | 4.10 | % | 117,084 | 6,357 | 5.43 | % | ||||||||||||||||||||||||
TOTAL
INTEREST-BEARING LIABILITIES
|
957,587 | 19,223 | 2.01 | % | 920,063 | 26,908 | 2.92 | % | 872,996 | 33,646 | 3.85 | % | ||||||||||||||||||||||||
Demand
Deposit Accounts
|
149,673 | 140,962 | 133,824 | |||||||||||||||||||||||||||||||||
Other
Liabilities
|
13,449 | 13,847 | 13,643 | |||||||||||||||||||||||||||||||||
TOTAL
LIABILITIES
|
1,120,709 | 1,074,872 | 1,020,463 | |||||||||||||||||||||||||||||||||
Shareholders’
Equity
|
109,887 | 99,711 | 93,677 | |||||||||||||||||||||||||||||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 1,230,596 | $ | 1,174,583 | $ | 1,114,140 | ||||||||||||||||||||||||||||||
COST
OF FUNDS
|
1.67 | % | 2.48 | % | 3.29 | % | ||||||||||||||||||||||||||||||
NET
INTEREST INCOME
|
$ | 45,323 | $ | 41,525 | $ | 39,205 | ||||||||||||||||||||||||||||||
NET
INTEREST MARGIN
|
3.95 | % | 3.82 | % | 3.83 | % |
(1)
|
Effective
tax rates were determined as though interest earned on the Company’s
investments in municipal bonds and loans was fully
taxable.
|
(2)
|
Loans
held-for-sale and non-accruing loans have been included in average loans.
Interest income on loans includes loan fees of $545, $127, and $806 for
2009, 2008, and 2007, respectively.
|
19
The
following table sets forth for the periods indicated a summary of the changes in
interest income and interest expense resulting from changes in volume and
changes in rates:
Net
Interest Income – Rate / Volume Analysis
(Tax-Equivalent
basis, dollars in thousands)
|
2009 compared to 2008
|
2008 compared to 2007
|
||||||||||||||||||||||
Increase / (Decrease) Due to (1)
|
Increase / (Decrease) Due to (1)
|
|||||||||||||||||||||||
Volume
|
Rate
|
Net
|
Volume
|
Rate
|
Net
|
|||||||||||||||||||
Interest
Income:
|
||||||||||||||||||||||||
Federal
Funds Sold and Other
|
||||||||||||||||||||||||
Short-term
Investments
|
$ | 87 | $ | (574 | ) | $ | (487 | ) | $ | 597 | $ | (482 | ) | $ | 115 | |||||||||
Taxable
Securities
|
1,876 | (1,223 | ) | 653 | 172 | 843 | 1,015 | |||||||||||||||||
Non-taxable
Securities
|
393 | 57 | 450 | (370 | ) | 111 | (259 | ) | ||||||||||||||||
Loans
and Leases
|
705 | (5,208 | ) | (4,503 | ) | 2,922 | (8,211 | ) | (5,289 | ) | ||||||||||||||
Total
Interest Income
|
3,061 | (6,948 | ) | (3,887 | ) | 3,321 | (7,739 | ) | (4,418 | ) | ||||||||||||||
Interest
Expense:
|
||||||||||||||||||||||||
Savings
and Interest-bearing Demand
|
747 | (4,352 | ) | (3,605 | ) | 1,921 | (3,212 | ) | (1,291 | ) | ||||||||||||||
Time
Deposits
|
(693 | ) | (3,419 | ) | (4,112 | ) | (2,808 | ) | (1,978 | ) | (4,786 | ) | ||||||||||||
FHLB
Advances and Other Borrowings
|
180 | (148 | ) | 32 | 1,059 | (1,720 | ) | (661 | ) | |||||||||||||||
Total
Interest Expense
|
234 | (7,919 | ) | (7,685 | ) | 172 | (6,910 | ) | (6,738 | ) | ||||||||||||||
Net
Interest Income
|
$ | 2,827 | $ | 971 | $ | 3,798 | $ | 3,149 | $ | (829 | ) | $ | 2,320 |
(1)
|
The
change in interest due to both rate and volume has been allocated to
volume and rate changes in proportion
to the relationship
of the absolute dollar amounts of the change in
each.
|
See the
Company’s Average Balance Sheet and the discussions headed USES OF FUNDS,
SOURCES OF FUNDS, and “RISK MANAGEMENT – Liquidity and Interest Rate Risk
Management” for further information on the Company’s net interest income, net
interest margin, and interest rate sensitivity position.
PROVISION
FOR LOAN LOSSES
The
Company provides for loan losses through regular provisions to the allowance for
loan losses. The provision is affected by net charge-offs on loans
and changes in specific and general allocations required on the allowance for
loan losses. Provisions for loan losses totaled $3,750,000,
$3,990,000, and $3,591,000 in 2009, 2008, and 2007, respectively.
The level
of provision for loan losses declined by $240,000 or 6% during 2009 compared
with 2008. The decline in provision during 2009 compared with 2008
was largely the result of a lower level of net charge-offs and a relatively
stable level of non-performing loans. During 2009, the provision for
loan losses totaled 0.42% of average outstanding loans while net charge-offs
represented 0.25% of average loans outstanding. As a result, the
Company’s allowance for loan losses increased to 1.25% of total loans at
year-end 2009 compared with 1.07% at year-end 2008.
The level
of provision increased by $399,000 or 11% in 2008 compared with
2007. The increase in provision was largely attributable to an
increased level of non-performing loans in 2008 and overall growth in the
Company’s loan portfolio. The level of provision for loan losses
totaled 0.45% of average outstanding loans during 2008 while net charge-offs
represented 0.29% of average loans outstanding during
2008. Accordingly, the Company’s allowance for loan losses increased
to 1.07% of total loans at year-end 2008 compared with 0.93% at year-end
2007.
Provisions
for loan losses in all periods were made at a level deemed necessary by
management to absorb estimated, probable incurred 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 qualitative factors.
Refer also to the sections entitled CRITICAL ACCOUNTING POLICIES AND ESTIMATES
and “RISK MANAGEMENT – Lending and Loan Administration” for further discussion
of the provision and allowance for loan losses.
20
NON-INTEREST
INCOME
During
2009, Non-interest Income decreased $2,351,000 or 13% compared with 2008 and
during 2008 increased $2,506,000 or 16% compared with 2007.
% Change From
|
||||||||||||||||||||
Non-interest Income (dollars in thousands)
|
Years Ended December 31,
|
Prior Year
|
||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
||||||||||||||||
Trust
and Investment Product Fees
|
$ | 1,617 | $ | 2,288 | $ | 2,590 | (29 | )% | (12 | )% | ||||||||||
Service
Charges on Deposit Accounts
|
4,395 | 4,920 | 4,361 | (11 | ) | 13 | ||||||||||||||
Insurance
Revenues
|
5,296 | 6,306 | 5,794 | (16 | ) | 9 | ||||||||||||||
Company
Owned Life Insurance
|
1,104 | 791 | 823 | 40 | (4 | ) | ||||||||||||||
Other
Operating Income
|
2,110 | 2,412 | 1,994 | (13 | ) | 21 | ||||||||||||||
Subtotal
|
14,522 | 16,717 | 15,562 | (13 | ) | 7 | ||||||||||||||
Net
Gains on Sales of Loans and Related Assets
|
1,760 | 1,399 | 822 | 26 | 70 | |||||||||||||||
Net
Gain (Loss) on Securities
|
(423 | ) | 94 | (680 | ) | n/m |
(1)
|
n/m |
(1)
|
|||||||||||
TOTAL
NON-INTEREST INCOME
|
$ | 15,859 | $ | 18,210 | $ | 15,704 | (13 | ) | 16 |
(1) n/m
= not meaningful
Trust and
Investment Product Fees totaled $1,617,000 during the year ended December 31,
2009 representing a decline of $671,000 or 29% from 2008, following a decline of
$302,000 or 12% during 2008 as compared to 2007. These changes were
driven by varying levels of brokerage commission revenue. During
2009, the decline in brokerage commission revenue was largely attributable to
continued difficult market conditions, changes in customers’ investment
preferences, and internal reorganizations including a change in the Company’s
broker dealer relationship for retail investment products.
Service
Charges on Deposit Accounts totaled $4,395,000 during the year ended December
31, 2009 representing a decline of 11% due in large part to less customer
utilization of the Company’s overdraft protection program. During
2008, Service Charges on Deposit Accounts increased of $559,000 or 13% over
2007. The increase was attributable to a combination of increased
gross fees and a reduced level of refunded and waived fees.
During
the year ended December 31, 2009, Insurance Revenues totaled $5,296,000 which
was a decline of $1,010,000 or 16% compared to 2008. The decline was
largely attributable to decreases in contingency revenue and lower levels of
commercial insurance revenues in the Company’s property and casualty insurance
subsidiary. During 2008, Insurance Revenues increased $512,000 or 9%
compared to 2007. The increase was primarily the result of an
increase in contingency revenue at the Company’s property and casualty insurance
subsidiary.
During
the year ended December 31, 2009, the net gain on sale of residential loans
totaled $1,760,000, an increase of $361,000 or 26% over the gain of $1,399,000
recognized during 2008 following an increase of $577,000 or 70% in 2008 compared
with 2007. The increases in both 2009 and 2008 were largely attributable to
higher levels of residential loan sales during 2009 compared with 2008 and
during 2008 compared with 2007. Loan sales for 2009, 2008, and 2007
totaled $143.6 million, $108.0 million, and $66.9 million,
respectively.
During
2009, the Company recognized a net loss on securities of $423,000 related to the
recognition of other-than-temporary impairment charges on the Company’s
portfolio of non-controlling investments in other banking
organizations. The Company recognized a net gain on securities of
$94,000 during the year ended December 31, 2008. The Company
recognized gains on securities sold of $1,031,000 during 2008 and
other-than-temporary impairment expense of $937,000 on its portfolio of
non-controlling investments in other banking organizations. During
2007, the Company recognized a $680,000 net loss on securities related to its
portfolio of non-controlling investments in other banking
organizations. The net loss resulted from the sale of one of the
investment holdings at a modest gain and the recognition of an
other-than-temporary impairment charge in connection with the valuation of other
holdings within the portfolio.
21
NON-INTEREST
EXPENSE
During
the year ended December 31, 2009, Non-interest Expense totaled $40,391,000, an
increase of $3,675,000 or 10% from the year ended 2008. During 2008,
Non-interest Expense declined $505,000 or 1% as compared with 2007.
% Change From
|
||||||||||||||||||||
Non-interest Expense (dollars in thousands)
|
Years Ended December 31,
|
Prior Year
|
||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
2008
|
||||||||||||||||
Salaries
and Employee Benefits
|
$ | 21,961 | $ | 20,786 | $ | 21,671 | 6 | % | (4 | )% | ||||||||||
Occupancy,
Furniture and Equipment Expense
|
6,035 | 5,677 | 5,379 | 6 | 6 | |||||||||||||||
FDIC
Premiums
|
1,863 | 209 | 103 | 791 | 103 | |||||||||||||||
Data
Processing Fees
|
1,368 | 1,493 | 1,370 | (8 | ) | 9 | ||||||||||||||
Professional
Fees
|
1,740 | 1,670 | 1,418 | 4 | 18 | |||||||||||||||
Advertising
and Promotion
|
993 | 1,078 | 957 | (8 | ) | 13 | ||||||||||||||
Supplies
|
528 | 570 | 625 | (7 | ) | (9 | ) | |||||||||||||
Intangible
Amortization
|
909 | 889 | 894 | 2 | (1 | ) | ||||||||||||||
Other
Operating Expenses
|
4,994 | 4,344 | 4,804 | 15 | (10 | ) | ||||||||||||||
TOTAL
NON-INTEREST EXPENSE
|
$ | 40,391 | $ | 36,716 | $ | 37,221 | 10 | (1 | ) |
Salaries
and Employee Benefits totaled $21,961,000 during the year ended December 31,
2009 representing an increase of $1,175,000 or 6% from the year ended December
31, 2008. The increase was attributable to increased costs associated
with the Company’s partially self-insured health insurance
plan. Salaries and Employee Benefits expense declined $885,000 or 4%
during 2008 compared with 2007. The decline was largely attributable
to a decrease of approximately 28 full-time equivalent employees, or 7% of total
FTEs, during the year ended December 31, 2008 compared with year ended
2007.
Occupancy,
Furniture and Equipment Expense totaled $6,035,000 during the year ended
December 31, 2009 representing an increase of $358,000 or 6% from the year ended
2008. The increase was attributable to depreciation expense associated with
renovations to existing branch facilities and upgrades to and purchases of
information technology systems. Occupancy, Furniture and Equipment
Expense increased $298,000 or 6% during 2008 compared with 2007 largely the
result of higher levels of furniture, fixtures and equipment
depreciation.
The
Company’s FDIC deposit insurance assessments totaled $1,863,000 representing an
increase of 791% during the year-ended December 31, 2009 compared with
2008. This increase resulted from an industry-wide increase in
quarterly assessments as the FDIC began to recapitalize the deposit insurance
fund, in addition to an industry wide special assessment in the second quarter
of 2009 of approximately $550,000 which represented 5 basis points of the
Company’s subsidiary bank’s total assets less Tier 1 Capital. FDIC
premiums increased $106,000 or 103% during 2008 compared with 2007.
Other
Operating Expenses totaled $4,994,000 during 2009, an increase of $650,000 or
15% from 2008. The increase during 2009 was largely attributable to
an increased level of loan collection costs and amortization expense related to
a new market tax credit project in which the Company invested in the fourth
quarter of 2009. Other Operating Expenses decreased $460,000 or 10%
during 2008 compared with 2007. The decline in costs was primarily
attributable to a lower level of collection costs and a lower level of losses
associated with fraudulent ATM and debit card transactions.
PROVISION
FOR INCOME TAXES
The
Company records a provision for current income taxes payable, along with a
provision for deferred taxes payable in the future. Deferred taxes
arise from temporary differences, which are items recorded for financial
statement purposes in a different period than for income tax
returns. The Company’s effective tax rate was 24.7%, 30.6%, and
30.4%, respectively, in 2009, 2008, and 2007. The effective tax rate
in all periods is lower than the blended statutory rate of 39.6%. The
lower effective rate in all periods primarily resulted from the Company’s
tax-exempt investment income on securities, loans, and company owned life
insurance, income tax credits generated by investments in affordable housing
projects, and income generated by subsidiaries domiciled in a state with no
state or local income tax. In addition, during 2009 the Company’s
effective tax rate was reduced as a result of tax credits attributable to a new
markets tax credit in which the Company invested in 2009. See Note 10
to the Company’s consolidated financial statements included in Item 8 of this
Report for additional details relative to the Company’s income tax
provision.
22
CAPITAL
RESOURCES
The
Company and its affiliate bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines
and prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance sheet items calculated under
regulatory accounting practices. The prompt corrective action
regulations provide five classifications, including well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically
undercapitalized, although these terms are not used to represent overall
financial condition. The Company and its affiliate bank at year-end
2009 were categorized as well-capitalized as that term is defined by applicable
regulations. See Note 8 to the Company’s consolidated financial
statements included in Item 8 of this Report for actual and required capital
ratios and for additional information regarding capital adequacy.
The
Company continues to maintain a strong capital
position. Shareholders’ equity totaled $113.5 million and $105.2
million at December 31, 2009 and 2008, respectively. Total equity
represented 9.1% and 8.8%, respectively, of year-end 2009 and 2008 total
assets. The Company paid cash dividends of $6.2 million or $0.56 per
share in 2009 and 2008. The increase in shareholders’ equity during
2009 compared with 2008 was primarily the result of increased retained earnings
of $6.0 million and a change in the unrealized gain on available-for-sale
securities of $1.9 million.
On April
30, 2009, the Company issued $19.3 million of 8% redeemable subordinated
debentures that will mature in a single payment of principal on March 30, 2019
for gross proceeds to the Company (before offering expenses) of $19.3
million. The Company has the right to redeem the debentures without
penalty or premium on or after March 30, 2012 subject to prior consultation with
the Federal Reserve Board. The entire principal amount was includable
in the Company’s Tier 2 regulatory capital under banking agency regulatory
standards at December 31, 2009.
USES
OF FUNDS
LOANS
Total
loans at year-end 2009 decreased $13.0 million or 1% compared with year-end
2008. Commercial and industrial loans increased $13.1 million or 7%
and commercial real estate loans increased $4.9 million or 1% during 2009 while
agricultural loans decreased $3.1 million or 2%, consumer loans decreased $12.6
million or 10%, and residential mortgage loans decreased $15.3 million or 15%
during 2009. The decline in the residential loan portfolio was the
result of historically low market interest rates during 2009 that spurred
refinancing activity. The Company continued to actively originate
residential mortgage loans, with the vast majority of production being sold into
the secondary market.
Total
loans at year-end 2008 increased $21.9 million or 3% compared with year-end
2007. Commercial and industrial loans increased $17.3 million or 11%
and commercial real estate loans increased $30.9 million or 10% during 2008,
while agricultural loans decreased $5.7 million or 3%, residential mortgage
loans decreased $16.8 million or 14%, and consumer loans declined $3.8 million
or 3% during 2008. The decrease in residential mortgage loans was the
result of a declining interest rate environment during 2008 and the sale of the
majority of the Company’s fixed rate residential mortgage production into the
secondary market rather than hold in its portfolio.
The
composition of the loan portfolio has remained relatively stable over the past
several years including 2009. The portfolio is most heavily
concentrated in commercial real estate loans at 38% of the
portfolio. While this is the largest component of total portfolio,
the Company has only limited exposure in construction and development lending
with this segment representing approximately 2% of the total loan
portfolio. In addition, the Company’s exposure to non-owner occupied
commercial real estate is limited to 16% of the total loan portfolio at year-end
2009. The Company’s commercial lending is extended to various
industries, including hotel, agribusiness and manufacturing, as well as health
care, wholesale, and retail services.
23
Loan Portfolio
|
December 31,
|
|||||||||||||||||||
(dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Commercial
and Industrial Loans
|
$ | 188,962 | $ | 175,828 | $ | 158,556 | $ | 158,502 | $ | 157,646 | ||||||||||
Commercial
Real Estate Loans
|
334,255 | 329,363 | 298,477 | 243,783 | 162,035 | |||||||||||||||
Agricultural
Loans
|
156,845 | 159,923 | 165,592 | 148,872 | 101,355 | |||||||||||||||
Consumer
Loans
|
114,736 | 127,343 | 131,110 | 132,791 | 129,587 | |||||||||||||||
Residential
Mortgage Loans
|
84,677 | 100,054 | 116,908 | 114,687 | 102,891 | |||||||||||||||
Total
Loans
|
879,475 | 892,511 | 870,643 | 798,635 | 653,514 | |||||||||||||||
Less: Unearned
Income
|
(1,653 | ) | (2,075 | ) | (2,922 | ) | (2,376 | ) | (1,558 | ) | ||||||||||
Subtotal
|
877,822 | 890,436 | 867,721 | 796,259 | 651,956 | |||||||||||||||
Less: Allowance
for Loan Losses
|
(11,016 | ) | (9,522 | ) | (8,044 | ) | (7,129 | ) | (9,265 | ) | ||||||||||
Loans,
Net
|
$ | 866,806 | $ | 880,914 | $ | 859,677 | $ | 789,130 | $ | 642,691 | ||||||||||
Ratio of Loans to Total
Loans
|
||||||||||||||||||||
Commercial
and Industrial Loans
|
21 | % | 20 | % | 18 | % | 20 | % | 24 | % | ||||||||||
Commercial
Real Estate Loans
|
38 | % | 37 | % | 35 | % | 30 | % | 25 | % | ||||||||||
Agricultural
Loans
|
18 | % | 18 | % | 19 | % | 19 | % | 15 | % | ||||||||||
Consumer
Loans
|
13 | % | 14 | % | 15 | % | 17 | % | 20 | % | ||||||||||
Residential
Mortgage Loans
|
10 | % | 11 | % | 13 | % | 14 | % | 16 | % | ||||||||||
Total
Loans
|
100 | % | 100 | % | 100 | % | 100 | % | 100 | % |
The
Company’s policy is generally to extend credit to consumer and commercial
borrowers in its primary geographic market area in Southern
Indiana. Commercial extensions of credit outside this market area are
generally concentrated in real estate loans within a 120 mile radius of the
Company’s primary market and are granted on a selective basis. These
out-of-market credits include participations that the Company may purchase from
time to time in loans that are originated by banks in which the Company owns (or
previously owned) non-controlling common stock investments.
The
following table indicates the amounts of loans (excluding residential mortgages
on 1-4 family residences and consumer loans) outstanding as of December 31,
2009, which, based on remaining scheduled repayments of principal, are due in
the periods indicated (dollars in thousands).
Within
|
One to Five
|
After
|
||||||||||||||
One Year
|
Years
|
Five Years
|
Total
|
|||||||||||||
Commercial
and Agricultural
|
$ | 299,615 | $ | 294,346 | $ | 86,101 | $ | 680,062 |
Interest Sensitivity
|
||||||||||||||||
Fixed Rate
|
Variable Rate
|
|||||||||||||||
Loans
maturing after one year
|
$ | 120,821 | $ | 259,626 |
INVESTMENTS
The
investment portfolio is a principal source for funding the Company’s loan growth
and other liquidity needs of its subsidiaries. The Company’s securities
portfolio consists of money market securities, uncollateralized federal agency
securities, municipal obligations of state and political subdivisions, and
mortgage-backed securities issued by U.S. government agencies. Money
market securities include federal funds sold, interest-bearing balances with
banks, and other short-term investments. The composition of the
year-end balances in the investment portfolio is presented in Note 2 to the
Company’s consolidated financial statements included in Item 8 of this Report
and in the table below:
Investment Portfolio, at Amortized Cost
|
December 31,
|
|||||||||||||||||||||||
(dollars in thousands)
|
2009
|
%
|
2008
|
%
|
2007
|
%
|
||||||||||||||||||
Federal
Funds Sold and Short-term Investments
|
$ | 12,002 | 5 | % | $ | 27,791 | 14 | % | $ | 2,631 | 2 | % | ||||||||||||
U.S.
Treasury and Agency Securities
|
5,000 | 2 | — | — | 25,306 | 16 | ||||||||||||||||||
Obligations
of State and Political Subdivisions
|
24,285 | 9 | 19,887 | 10 | 15,851 | 10 | ||||||||||||||||||
Mortgage-backed
Securities
|
214,591 | 83 | 151,499 | 74 | 105,302 | 69 | ||||||||||||||||||
Equity
Securities
|
2,818 | 1 | 3,620 | 2 | 4,557 | 3 | ||||||||||||||||||
Total
Securities Portfolio
|
$ | 258,696 | 100 | % | $ | 202,797 | 100 | % | $ | 153,647 | 100 | % |
The
amortized cost of investment securities, including federal funds sold and
short-term investments, increased $55.9 million at year-end 2009 compared with
year-end 2008 and increased $49.2 million at year-end 2008 compared with
year-end 2007. The increase in the portfolio during 2009 and 2008 was
largely due to the growth of the Company’s core deposit base at a greater pace
than the Company’s loan portfolio.
24
The
largest concentration in the investment portfolio continues to be in mortgage
related securities representing 83% of the total securities portfolio at
December 31, 2009. The Company’s level of obligations of state and political
subdivisions increased to $24.3 million or 9% of the portfolio at December 31,
2009.
The
Company’s equity securities portfolio at year-end 2009 consisted of
non-controlling common stock investments in three unaffiliated banking
companies. The decline in the amortized cost of equity securities at
December 31, 2009 compared with December 31, 2008 was largely related to
$423,000 of other-than-temporary impairment charges recognized on the Company’s
equity securities portfolio during 2009. In addition, the decline was
attributable to the sale of the holdings in another unaffiliated banking company
during 2009.
Investment
Securities, at Carrying Value
(dollars
in thousands)
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Securities
Held-to-Maturity
|
||||||||||||
Obligations
of State and Political Subdivisions
|
$ | 2,774 | $ | 3,326 | $ | 4,464 | ||||||
Securities
Available-for-Sale
|
||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 4,970 | $ | — | $ | 25,739 | ||||||
Obligations
of State and Political Subdivisions
|
22,378 | 16,868 | 11,602 | |||||||||
Mortgage-backed
Securities
|
221,252 | 155,627 | 105,489 | |||||||||
Equity
Securities
|
2,340 | 3,345 | 5,470 | |||||||||
Subtotal
of Securities Available-for-Sale
|
250,940 | 175,840 | 148,300 | |||||||||
Total
Securities
|
$ | 253,714 | $ | 179,166 | $ | 152,764 |
The
Company’s $250.9 million available-for-sale portion of the investment portfolio
provides an additional funding source for the liquidity needs of the Company’s
subsidiaries and for asset/liability management
requirements. Although management has the ability to sell these
securities if the need arises, their designation as available-for-sale should
not necessarily be interpreted as an indication that management anticipates such
sales.
The
amortized cost of debt securities at December 31, 2009 are shown in the
following table by expected maturity. Mortgage-backed securities are
based on estimated average lives. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations. Equity securities do not have contractual maturities,
and are excluded from the table below.
Maturities
and Average Yields of Securities at December 31, 2009
(dollars
in thousands)
Within
|
After One But
|
After Five But
|
After Ten
|
|||||||||||||||||||||||||||||
One Year
|
Within Five Years
|
Within Ten Years
|
Years
|
|||||||||||||||||||||||||||||
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||
U.S.
Treasuries and
|
||||||||||||||||||||||||||||||||
Agencies
|
$ | — | N/A | $ | 5,000 | 3.20 | % | $ | — | N/A | $ | — | N/A | |||||||||||||||||||
State
and Political
|
||||||||||||||||||||||||||||||||
Subdivisions
|
2,040 | 8.20 | % | 4,065 | 6.82 | % | 5,550 | 5.72 | % | 12,630 | 7.37 | % | ||||||||||||||||||||
Mortgage-backed
|
||||||||||||||||||||||||||||||||
Securities
|
12,615 | 5.28 | % | 171,016 | 4.63 | % | 30,735 | 3.64 | % | 225 | 3.88 | % | ||||||||||||||||||||
Total
Securities
|
$ | 14,655 | 5.69 | % | $ | 180,081 | 4.64 | % | $ | 36,285 | 3.96 | % | $ | 12,855 | 7.31 | % |
A
tax-equivalent adjustment using a tax rate of 34 percent was used in the above
table.
In
addition to the other uses of funds discussed previously, the Company had
certain long-term contractual obligations as of December 31,
2009. These contractual obligations primarily consisted of long-term
borrowings with the FHLB, JPMorgan Chase Bank N.A., and subordinated debentures
issued during 2009 through a shareholders’ rights offering, time deposits, and
lease commitments for certain office facilities. Scheduled principal
payments on long-term borrowings, time deposits, and future minimum lease
payments are outlined in the table below.
25
Contractual Obligations
|
Payments Due By Period
|
|||||||||||||||||||
(dollars in thousands)
|
Total
|
Less Than 1 Year
|
1-3 Years
|
3-5 Years
|
More Than 5 Years
|
|||||||||||||||
Long-term
Borrowings
|
$ | 112,619 | $ | 30,787 | $ | 23,063 | $ | 28,075 | $ | 30,694 | ||||||||||
Time
Deposits
|
329,676 | 109,685 | 209,160 | 10,466 | 365 | |||||||||||||||
Capital
Lease Obligation
|
1,427 | 81 | 162 | 162 | 1,022 | |||||||||||||||
Operating
Lease Commitments
|
1,745 | 256 | 289 | 166 | 1,034 | |||||||||||||||
Total
Contractual Obligations
|
$ | 445,467 | $ | 140,809 | $ | 232,674 | $ | 38,869 | $ | 33,115 |
SOURCES
OF FUNDS
The
Company’s primary source of funding is its base of core customer
deposits. Core deposits consist of demand deposits, savings,
interest-bearing checking, money market accounts, and certificates of deposit of
less than $100,000. Other sources of funds are certificates of
deposit of $100,000 or more, brokered deposits, overnight borrowings from other
financial institutions and securities sold under agreement to
repurchase. The membership of the Company’s affiliate bank in the
Federal Home Loan Bank System (FHLB) provides a significant additional source
for both long and short-term collateralized borrowings. In addition,
the Company, as a separate and distinct corporation from its bank and other
subsidiaries, also has the ability to borrow funds from other financial
institutions and to raise debt or equity capital from the capital markets and
other sources. The following pages contain a discussion of changes in
these areas.
The table
below illustrates changes between years in the average balances of all funding
sources:
Funding Sources - Average Balances
|
% Change From
|
|||||||||||||||||||
(dollars in thousands)
|
December 31,
|
Prior Year
|
||||||||||||||||||
2009
|
2008
|
2007
|
2009
|
|
2008
|
|||||||||||||||
Demand
Deposits
|
||||||||||||||||||||
Non-interest-bearing
|
$ | 149,673 | $ | 140,962 | $ | 133,824 | 6 | % | 5 | % | ||||||||||
Interest-bearing
|
245,811 | 212,467 | 153,033 | 16 | 39 | |||||||||||||||
Savings
Deposits
|
63,182 | 57,948 | 57,266 | 9 | 1 | |||||||||||||||
Money
Market Accounts
|
164,221 | 151,645 | 119,735 | 8 | 27 | |||||||||||||||
Other
Time Deposits
|
251,906 | 258,314 | 283,994 | (2 | ) | (9 | ) | |||||||||||||
Total
Core Deposits
|
874,793 | 821,336 | 747,852 | 7 | 10 | |||||||||||||||
Certificates
of Deposits of $100,000 or
|
||||||||||||||||||||
more
and Brokered Deposits
|
89,135 | 100,801 | 141,884 | (12 | ) | (29 | ) | |||||||||||||
FHLB
Advances and
|
||||||||||||||||||||
Other
Borrowings
|
143,332 | 138,888 | 117,084 | 3 | 19 | |||||||||||||||
Total
Funding Sources
|
$ | 1,107,260 | $ | 1,061,025 | $ | 1,006,820 | 4 | 5 |
Maturities
of certificates of deposit of $100,000 or more are summarized as
follows:
(dollars
in thousands)
3 Months
|
3 thru
|
6 thru
|
Over
|
|||||||||||||||||
Or Less
|
6 Months
|
12 Months
|
12 Months
|
Total
|
||||||||||||||||
December
31, 2009
|
$ | 10,059 | $ | 6,177 | $ | 5,873 | $ | 41,167 | $ | 63,276 |
CORE
DEPOSITS
The
Company’s overall level of average core deposits increased approximately 7%
during 2009 following a 10% increase during 2008. The Company’s
ability to attract core deposits continues to be influenced by competition and
the interest rate environment, as well as the increased availability of
alternative investment products. Core deposits continue to represent
a stable and viable funding source for the Company’s operations. Core
deposits represented 79% of average total funding sources during 2009 compared
with 77% during 2008 and 74% during 2007.
Demand,
savings, and money market deposits have provided a growing source of funding for
the Company in each of the periods reported. Average demand, savings,
and money market deposits increased 11% during 2009 following a 21% increase in
2008. Average demand, savings, and money market deposits totaled
$622.9 million or 71% of core deposits (56% of total funding sources) in 2009
compared with $563.0 million or 69% of core deposits (53% of total funding
sources) in 2008 and $463.9 million or 62% of core deposits (46% of total
funding sources) in 2007.
26
Other
time deposits consist of certificates of deposits in denominations of less than
$100,000. These deposits declined by 2% during 2009 following a
decrease of 9% in 2008. Other time deposits comprised 29% of core
deposits in 2009, 31% in 2008 and 38% in 2007.
OTHER
FUNDING SOURCES
Federal
Home Loan Bank advances and other borrowings represent the Company’s most
significant source of other funding. Average borrowed funds increased
$4.4 million or 3% during 2009 following an increase of $21.8 million or 19% in
2008. Borrowings comprised approximately 13% of average total funding
sources in 2009 and 2008 and 12% in 2007.
Certificates
of deposits in denominations of $100,000 or more and brokered deposits are an
additional source of other funding for the Company’s bank
subsidiary. Large denomination certificates and brokered deposits
decreased $11.7 million or 12% during 2009 following a decline of $41.1 million
or 29% during 2008. Large certificates and brokered deposits
comprised approximately 8% of average total funding sources in 2009, 10% in 2008
and 14% in 2007. This type of funding is used as both long-term and
short-term funding sources.
The bank
subsidiary of the Company also utilizes short-term funding sources from time to
time. These sources consist of overnight federal funds purchased from
other financial institutions, secured repurchase agreements that generally
mature within one day of the transaction date, and secured overnight variable
rate borrowings from the FHLB. These borrowings represent an
important source of short-term liquidity for the Company’s bank
subsidiary. Long-term debt at the Company’s bank subsidiary is in the
form of FHLB advances, which are secured by the pledge of certain investment
securities, residential and housing-related mortgage loans, and certain other
commercial real estate loans. See Note 7 to the Company’s
consolidated financial statements included in Item 8 of this Report for further
information regarding borrowed funds.
PARENT
COMPANY FUNDING SOURCES
The
parent company is a corporation separate and distinct from its bank and other
subsidiaries. For information regarding the financial condition,
result of operations, and cash flows of the Company, presented on a
parent-company-only basis, see Note 16 to the Company’s consolidated financial
statements included in Item 8 of this Report.
The
Company uses funds at the parent company level to pay dividends to its
shareholders, to acquire or make other investments in other businesses or their
securities or assets, to repurchase its stock from time to time, and for other
general corporate purposes. The parent company does not have access at the
parent-company level to the deposits and certain other sources of funds that are
available to its bank subsidiary to support its operations. Instead,
the parent company has historically derived most of its revenues from dividends
paid to the parent company by its bank subsidiary. The Company’s
banking subsidiary is subject to statutory restrictions on its ability to pay
dividends to the parent company. The parent company has in recent
years supplemented the dividends received from its subsidiaries with borrowings,
which are discussed in detail below.
At
year-end 2009, the Company had borrowing obligations with JPMorgan Chase Bank,
N.A. (the “Lender”) in the form a $10 million Subordinated Debenture, a $10
million Term Note and a $10 million Revolving Note. The Company's
obligations under the Term Note and Revolving Note are secured by a pledge of
all of the Company's stock in its sole depository institution subsidiary, German
American Bancorp, pursuant to a pledge agreement.
The
subordinated loan established under the Restated Agreement is evidenced by a
subordinated debenture in the principal amount of $10 million, and matures in a
single installment of principal on January 1, 2014. Interest is
payable quarterly on the outstanding principal balance.
The term
loan matures on the following schedule: $1.0 million principal amount
was payable on January 1, 2008 and $1.5 million payable on January 1 of each of
the years 2009 through 2014, inclusive. Interest is payable quarterly
on the outstanding principal balance, and the balance was $6.0 million at
year-end 2009 (the $1.5 million principal payment due January 1, 2010 was made
in late December 2009).
The revolving note matures September
30, 2010, with the interest rate payable by the Company to the Lender in respect
of LIBOR-based advances is LIBOR plus 300 basis points, and includes a provision
for a non-refundable fee on the unused portion of the maximum amount available
under the line of credit of 35 basis points per annum, due quarterly in
arrears. At December 31, 2009, there was no outstanding balance on
the revolving note.
27
The
Company made certain representations and warranties to the Lender, and agreed to
comply with certain affirmative and negative covenants with the
Lender. Among the affirmative covenants are provisions requiring that
(a) the Company maintain the capital ratios of the Company and of its subsidiary
bank(s) at levels that would be considered “well-capitalized” under the prompt
corrective action regulations of the federal banking agencies, and (b) the
Company maintain a consolidated ratio of (i) the sum of its non-performing loans
plus other real estate owned (real estate that is neither used in the ordinary
course of the business of the Company or its subsidiaries nor held for future
use) (OREO) to (ii) the sum of the Company's loans plus OREO, of not greater
than 3.25%. At December 31, 2009, this ratio was 1.27%.
On April
30, 2009, the Company issued $19.3 million of 8% redeemable subordinated
debentures that will mature in a single payment of principal on March 30, 2019
for gross proceeds to the Company (before offering expenses) of $19.3
million. The Company has the right to redeem the debentures without
penalty or premium on or after March 30, 2012 subject to prior consultation with
the Federal Reserve Board. The entire principal amount was includable
in the Company’s Tier 2 regulatory capital under banking agency regulatory
standards at December 31, 2009.
See Note
7 to the Company’s consolidated financial statements included in Item 8 of this
Report for further information regarding the parent company borrowed
funds.
RISK
MANAGEMENT
The
Company is exposed to various types of business risk on an on-going
basis. These risks include credit risk, liquidity risk and interest
rate risk. Various procedures are employed at the Company’s affiliate
banks to monitor and mitigate risk in the loan and investment portfolios, as
well as risks associated with changes in interest rates. Following is
a discussion of the Company’s philosophies and procedures to address these
risks.
LENDING
AND LOAN ADMINISTRATION
Primary
responsibility and accountability for day-to-day lending activities rests with
the Company’s subsidiary bank. Loan personnel at the subsidiary bank
have the authority to extend credit under guidelines approved by the bank’s
board of directors. The executive loan committee serves as a vehicle
for communication and for the pooling of knowledge, judgment and experience of
its members. The committee provides valuable input to lending
personnel, acts as an approval body, and monitors the overall quality of the
bank’s loan portfolio. The Corporate Credit Risk Management
Committee, comprised of members of the Company’s and its subsidiary bank’s
executive officers and board of directors, strives to ensure a consistent
application of the Company’s lending policies. The Company also
maintains a comprehensive risk-grading and loan review program, which includes
quarterly reviews of problem loans, delinquencies and
charge-offs. The purpose of this program is to evaluate loan
administration, credit quality, loan documentation and the adequacy of the
allowance for loan losses.
The
Company maintains an allowance for loan losses to cover probable, incurred
credit losses identified during its loan review process. Management estimates
the required level of allowance for loan losses using past loan loss experience,
the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in management’s
judgment, should be charged-off. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance is
confirmed.
The
allowance for loan losses is comprised of: (a) specific reserves on individual
credits; (b) general reserves for certain loan categories and industries, and
overall historical loss experience; and (c) unallocated reserves based on
performance trends in the loan portfolios, current economic conditions, and
other factors that influence the level of estimated probable
losses. The need for specific reserves are considered for credits
when: (a) the customer’s cash flow or net worth appears insufficient to repay
the loan; (b) the loan has been criticized in a regulatory examination; (c) the
loan is on non-accrual; or, (d) other reasons where the ultimate collectibility
of the loan is in question, or the loan characteristics require special
monitoring.
28
Allowance
for Loan Losses
|
||||||||||||||||||||
(dollars in thousands)
|
Years Ended December 31,
|
|||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
Balance
of Allowance for Possible
|
||||||||||||||||||||
Losses
at Beginning of Period
|
$ | 9,522 | $ | 8,044 | $ | 7,129 | $ | 9,265 | $ | 8,801 | ||||||||||
Loans
Charged-off:
|
||||||||||||||||||||
Commercial
and Industrial Loans
|
941 | 148 | 506 | 870 | 539 | |||||||||||||||
Commercial
Real Estate Loans
|
1,248 | 2,005 | 1,601 | 2,187 | 739 | |||||||||||||||
Agricultural
Loans
|
— | 28 | 360 | — | 3 | |||||||||||||||
Consumer
Loans
|
640 | 686 | 508 | 706 | 624 | |||||||||||||||
Residential
Mortgage Loans
|
345 | 257 | 269 | 185 | 238 | |||||||||||||||
Total
Loans Charged-off
|
3,174 | 3,124 | 3,244 | 3,948 | 2,143 | |||||||||||||||
Recoveries
of Previously Charged-off Loans:
|
||||||||||||||||||||
Commercial
and Industrial Loans
|
— | 49 | 53 | 78 | 120 | |||||||||||||||
Commercial
Real Estate Loans
|
588 | 285 | 270 | 35 | 85 | |||||||||||||||
Agricultural
Loans
|
17 | — | 55 | 30 | 53 | |||||||||||||||
Consumer
Loans
|
192 | 267 | 172 | 226 | 149 | |||||||||||||||
Residential
Mortgage Loans
|
121 | 11 | 18 | 34 | 58 | |||||||||||||||
Total
Recoveries
|
918 | 612 | 568 | 403 | 465 | |||||||||||||||
Net
Loans Recovered (Charged-off)
|
(2,256 | ) | (2,512 | ) | (2,676 | ) | (3,545 | ) | (1,678 | ) | ||||||||||
Additions
to Allowance Charged to Expense
|
3,750 | 3,990 | 3,591 | 925 | 1,903 | |||||||||||||||
Allowance
from Acquired Subsidiary
|
— | — | — | 484 | 239 | |||||||||||||||
Balance
at End of Period
|
$ | 11,016 | $ | 9,522 | $ | 8,044 | $ | 7,129 | $ | 9,265 | ||||||||||
Net
Charge-offs to Average Loans Outstanding
|
0.25 | % | 0.29 | % | 0.32 | % | 0.50 | % | 0.26 | % | ||||||||||
Provision
for Loan Losses to Average Loans Outstanding
|
0.42 | % | 0.45 | % | 0.43 | % | 0.13 | % | 0.30 | % | ||||||||||
Allowance
for Loan Losses to Total Loans at Year-end
|
1.25 | % | 1.07 | % | 0.93 | % | 0.90 | % | 1.42 | % | ||||||||||
The
following table indicates the breakdown of the allowance for loan losses
for the periods indicated (dollars in thousands):
|
||||||||||||||||||||
Commercial
and Industrial Loans
|
$ | 2,146 | $ | 2,476 | $ | 1,830 | $ | 1,799 | $ | 2,570 | ||||||||||
Commercial
Real Estate Loans
|
6,477 | 4,909 | 4,068 | 3,365 | 3,916 | |||||||||||||||
Agricultural
Loans
|
872 | 1,258 | 1,343 | 971 | 822 | |||||||||||||||
Consumer
Loans
|
520 | 481 | 483 | 602 | 1,127 | |||||||||||||||
Residential
Mortgage Loans
|
545 | 398 | 320 | 341 | 710 | |||||||||||||||
Unallocated
|
456 | — | — | 51 | 120 | |||||||||||||||
Total
Allowance for Loan Losses
|
$ | 11,016 | $ | 9,522 | $ | 8,044 | $ | 7,129 | $ | 9,265 |
The
allowance for loan losses at year-end 2009 increased to $11.0 million or 1.25%
of total loans compared to $9.5 million or 1.07% of total loans at year-end
2008. The increase in the allowance for loan losses during 2009 was
largely attributable to an increased level of commercial watch list, adversely
classified, and impaired loans. While this increased level has not
necessarily translated into a significant increase in the Company’s
non-performing loan portfolio or increase in net charge-offs, the Company’s
methodology for determining the allowance indicated a higher level of allowance
for loan losses was warranted when compared with prior years. A significant
qualitative factor considered by the Company in determining the higher level of
allowance for loan losses was the volatility and disruption experienced in the
credit markets over the past several quarters and the possibility that these
conditions will place additional pressure on the Company’s credit
quality. As these difficult economic conditions continue, the risk
that real estate values could further decline, business profits could continue
to be stressed, and the financial strength of borrowers and guarantors may
continue to be negatively impacted indicated that the Company’s credit quality
may be under downward pressure in the coming quarters and was a key driver in
determining the level of necessary allowance for loan loss during
2009.
The
allowance for loan loss at year-end 2009 represented 125% of non-performing
loans compared to 114% at year-end 2008. Net charge-offs totaled $2.3
million or 0.25% of average loans during 2009. This compares to net
charge-offs of $2.5 million or 0.29% of average loans outstanding during 2008
and $2.7 million or 0.32% of average loans outstanding during 2007.
Please
see “RESULTS OF OPERATIONS – Provision for Loan Losses” and “CRITICAL ACCOUNTING
POLICIES AND ESTIMATES – Allowance for Loan Losses” for additional information
regarding the allowance.
29
NON-PERFORMING
ASSETS
Non-performing
assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated
to provide for a reduction or deferral of interest or principal because of
deterioration in the financial condition of the borrower; (c) loans past due 90
days or more as to principal or interest; and, (d) other real estate
owned. Loans are placed on non-accrual status when scheduled
principal or interest payments are past due for 90 days or more or when the
borrower’s ability to repay becomes doubtful. Uncollected accrued
interest is reversed against income at the time a loan is placed on
non-accrual. Loans are typically charged-off at 120 days past due, or
earlier if deemed uncollectible. Exceptions to the non-accrual and
charge-off policies are made when the loan is well secured and in the process of
collection. The following table presents an analysis of the Company’s
non-performing assets.
Non-performing Assets
|
December 31,
|
|||||||||||||||||||
(dollars in thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Non-accrual
Loans
|
$ | 8,374 | $ | 8,316 | $ | 4,356 | $ | 9,652 | $ | 14,763 | ||||||||||
Past
Due Loans (90 days or more)
|
113 | 34 | 8 | — | 944 | |||||||||||||||
Restructured
Loans
|
306 | — | — | — | — | |||||||||||||||
Total
Non-performing Loans
|
8,793 | 8,350 | 4,364 | 9,652 | 15,707 | |||||||||||||||
Other
Real Estate
|
2,363 | 1,818 | 1,517 | 845 | 506 | |||||||||||||||
Total
Non-performing Assets
|
$ | 11,156 | $ | 10,168 | $ | 5,881 | $ | 10,497 | $ | 16,213 | ||||||||||
Non-performing
Loans to Total Loans
|
1.00 | % | 0.94 | % | 0.50 | % | 1.21 | % | 2.41 | % | ||||||||||
Allowance
for Loan Losses to Non-performing Loans
|
125.28 | % | 114.04 | % | 184.33 | % | 73.86 | % | 58.99 | % |
The level
of non-performing loans remained relatively stable during 2009, and considerably
lower than the Company’s peer group. The Company’s level of overall
non-performing assets increased by approximately $988,000 and non-performing
loans increased by approximately $443,000 during 2009 compared with year-end
2008. This level of non-performing loans represents 1.00% of total loans
outstanding at December 31, 2009, a modest increase from 0.94% as of year-end
2008. As economic pressures continue to build as a result of
difficult economic conditions, increasing numbers of the Company’s borrowers
could be negatively impacted resulting in an increased level of non-performing
loans in future periods.
Loan
impairment is reported when full repayment under the terms of the loan is not
expected. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported net, at the present value of estimated
future cash flows using the loan’s existing rate, or at the fair value of
collateral if repayment is expected solely from the
collateral. Commercial and industrial loans, commercial real estate
loans, and agricultural loans are evaluated individually for
impairment. Smaller balance homogeneous loans are evaluated for
impairment in total. Such loans include real estate loans secured by
one-to-four family residences and loans to individuals for household, family and
other personal expenditures. Individually evaluated loans on
non-accrual are generally considered impaired. Impaired loans, or
portions thereof, are charged off when deemed uncollectible. The
total dollar amount of impaired loans at December 31, 2009 was
$8,145,000. For additional detail on impaired loans, see Note 3 to
the Company’s consolidated financial statements included in Item 8 of this
Report.
Interest
income recognized on non-performing loans for 2009 was $338,000. The
gross interest income that would have been recognized in 2009 on non-performing
loans if the loans had been current in accordance with their original terms was
$1,006,000. Loans are typically placed on non-accrual status when
scheduled principal or interest payments are past due for 90 days or more,
unless the loan is well secured and in the process of collection.
LIQUIDITY
AND INTEREST RATE RISK MANAGEMENT
Liquidity
is a measure of the ability of the Company’s subsidiary bank to fund new loan
demand, existing loan commitments and deposit withdrawals. The purpose of
liquidity management is to match sources of funds with anticipated customer
borrowings and withdrawals and other obligations to ensure a dependable funding
base, without unduly penalizing earnings. Failure to properly manage
liquidity requirements can result in the need to satisfy customer withdrawals
and other obligations on less than desirable terms. The liquidity of the parent
company is dependent upon the receipt of dividends from its bank subsidiary,
which are subject to certain regulatory limitations explained in Note 8 to the
Company’s consolidated financial statements included in Item 8 of this Report,
as enhanced by its ability to draw upon term financing arrangements and a line
of credit established by the parent company with a correspondent bank lender as
described under “SOURCES OF FUNDS – Parent Company Funding Sources”,
above. The subsidiary bank’s source of funding is predominately core
deposits, time deposits in excess of $100,000 and brokered certificates of
deposit, 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 and Federal Reserve
Bank.
30
Interest
rate risk is the exposure of the Company’s financial condition to adverse
changes in market interest rates. In an effort to estimate the impact
of sustained interest rate movements to the Company’s earnings, the Company
monitors interest rate risk through computer-assisted simulation modeling of its
net interest income. The Company’s simulation modeling monitors the
potential impact to net interest income under various interest rate
scenarios. The Company’s objective is to actively manage its
asset/liability position within a one-year interval and to limit the risk in any
of the interest rate scenarios to a reasonable level of tax-equivalent net
interest income within that interval. The Company’s Asset/Liability
Committee monitors compliance within established guidelines of the Funds
Management Policy. See Item 7A. Quantitative and Qualitative
Disclosures About Market Risk section for further discussion regarding interest
rate risk.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has no off-balance sheet arrangements other than stand-by letters of
credit as disclosed in Note 13 to the Company’s consolidated financial
statements included in Item 8 of this Report.
Item
7A. Quantitative and Qualitative Disclosures About Market
Risk.
The
Company’s exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee and Board of Directors. Primary market
risks, which impact the Company’s operations, are liquidity risk and interest
rate risk, as discussed above.
As
discussed previously, the Company monitors interest rate risk by the use of
computer simulation modeling to estimate the potential impact on its net
interest income under various interest rate scenarios. Another method
by which the Company’s interest rate risk position can be estimated is by
computing estimated changes in its net portfolio value (“NPV”). This
method estimates interest rate risk exposure from movements in interest rates by
using interest rate sensitivity analysis to determine the change in the NPV of
discounted cash flows from assets and liabilities. NPV represents the
market value of portfolio equity and is equal to the estimated market value of
assets minus the estimated market value of liabilities. Computations
are based on a number of assumptions, including the relative levels of market
interest rates and prepayments in mortgage loans and certain types of
investments. These computations do not contemplate any actions
management may undertake in response to changes in interest rates, and should
not be relied upon as indicative of actual results. In addition,
certain shortcomings are inherent in the method of computing
NPV. Should interest rates remain or decrease below current levels,
the proportion of adjustable rate loans could decrease in future periods due to
refinancing activity. In the event of an interest rate change,
prepayment levels would likely be different from those assumed in the
table. Lastly, the ability of many borrowers to repay their
adjustable rate debt may decline during a rising interest rate
environment.
The
following table provides an assessment of the risk to NPV in the event of sudden
and sustained 1% and 2% increases and decreases in prevailing interest
rates. The table indicates that as of December 31, 2009 the Company’s
estimated NPV might be expected to decrease under both an increase or decrease
of 2% in prevailing interest rates (dollars in thousands).
Interest
Rate Sensitivity as of December 31, 2009
|
||||||||||||||||
Net Portfolio Value
|
||||||||||||||||
Net Portfolio
|
as a % of Present Value
|
|||||||||||||||
Value
|
of Assets
|
|||||||||||||||
Changes
|
||||||||||||||||
in Rates
|
Amount
|
% Change
|
NPV Ratio
|
Change
|
||||||||||||
+2%
|
$ | 126,472 | (12.94 | )% | 10.64 | % |
(108)
|
b.p. | ||||||||
+1%
|
136,585 | (5.98 | )% | 11.25 | % |
(47)
|
b.p. | |||||||||
Base
|
145,273 | — | 11.72 | % | — | |||||||||||
-1%
|
132,022 | (9.12 | )% | 10.57 | % |
(115)
|
b.p. | |||||||||
-2%
|
115,247 | (20.67 | )% | 9.17 | % |
(255)
|
b.p. |
The above
discussion, and the portions of MANAGEMENT’S DISCUSSION AND ANALYSIS in Item 7
of this Report that are referenced in the above discussion contain statements
relating to future results of the Company that are considered “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements relate to, among other things, simulation
of the impact on net interest income from changes in interest
rates. Actual results may differ materially from those expressed or
implied therein as a result of certain risks and uncertainties, including those
risks and uncertainties expressed above, those that are described in
MANAGEMENT’S DISCUSSION AND ANALYSIS in Item 7 of this Report, and those that
are described in Item 1 of this Report, “Business,” under the caption
“Forward-Looking Statements and Associated Risks,” which discussions are
incorporated herein by reference.
31
Item 8. Financial
Statements and Supplementary Data.
Report of Independent Registered Public
Accounting Firm
Board of
Directors and Shareholders
German
American Bancorp, Inc.
Jasper,
Indiana
We have
audited the accompanying consolidated balance sheets of German American Bancorp,
Inc. as of December 31, 2009 and 2008 and the related consolidated statements of
income, changes in shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2009. We also have audited
German American Bancorp, Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). German American Bancorp, Inc.’s
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these
financial statements and an opinion on the company's internal control over
financial reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of German American Bancorp,
Inc. as of December 31, 2009 and 2008, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion German American Bancorp, Inc.
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the COSO.
Louisville,
Kentucky
|
/s/ Crowe Horwath LLP
|
March
5, 2010
|
Crowe
Horwath LLP
|
32
Consolidated
Balance Sheets
Dollars
in thousands, except per share data
December 31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
and Due from Banks
|
$ | 16,052 | $ | 17,201 | ||||
Federal
Funds Sold and Other Short-term Investments
|
12,002 | 27,791 | ||||||
Cash
and Cash Equivalents
|
28,054 | 44,992 | ||||||
Securities
Available-for-Sale, at Fair Value
|
250,940 | 175,840 | ||||||
Securities
Held-to-Maturity, at Cost (Fair value of $2,801 and $3,358
on
|
||||||||
December
31, 2009 and 2008, respectively)
|
2,774 | 3,326 | ||||||
Loans
Held-for-Sale
|
5,706 | 3,166 | ||||||
Loans
|
879,475 | 892,511 | ||||||
Less: Unearned
Income
|
(1,653 | ) | (2,075 | ) | ||||
Allowance for Loan Losses
|
(11,016 | ) | (9,522 | ) | ||||
Loans,
Net
|
866,806 | 880,914 | ||||||
Stock
in FHLB of Indianapolis and Other Restricted Stock, at
Cost
|
10,621 | 10,621 | ||||||
Premises,
Furniture and Equipment, Net
|
22,153 | 22,330 | ||||||
Other
Real Estate
|
2,363 | 1,818 | ||||||
Goodwill
|
9,655 | 9,655 | ||||||
Intangible
Assets
|
2,618 | 3,141 | ||||||
Company
Owned Life Insurance
|
24,008 | 23,338 | ||||||
Accrued
Interest Receivable and Other Assets
|
17,267 | 11,687 | ||||||
TOTAL
ASSETS
|
$ | 1,242,965 | $ | 1,190,828 | ||||
LIABILITIES
|
||||||||
Non-interest-bearing
Demand Deposits
|
$ | 155,268 | $ | 147,977 | ||||
Interest-bearing
Demand, Savings, and Money Market Accounts
|
484,699 | 439,305 | ||||||
Time
Deposits
|
329,676 | 354,468 | ||||||
Total
Deposits
|
969,643 | 941,750 | ||||||
FHLB
Advances and Other Borrowings
|
148,121 | 131,664 | ||||||
Accrued
Interest Payable and Other Liabilities
|
11,652 | 12,240 | ||||||
TOTAL
LIABILITIES
|
1,129,416 | 1,085,654 | ||||||
Commitments
and Contingencies (Note 13)
|
||||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Preferred
Stock, $10 par value; 500,000 shares authorized, no shares
issued
|
— | — | ||||||
Common
Stock, no par value, $1 stated value; 20,000,000 shares
authorized
|
11,077 | 11,030 | ||||||
Additional
Paid-in Capital
|
68,816 | 68,371 | ||||||
Retained
Earnings
|
29,041 | 23,019 | ||||||
Accumulated
Other Comprehensive Income
|
4,615 | 2,754 | ||||||
TOTAL
SHAREHOLDERS’ EQUITY
|
113,549 | 105,174 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 1,242,965 | $ | 1,190,828 | ||||
End
of period shares issued and outstanding
|
11,077,382 | 11,030,288 |
See
accompanying notes to consolidated financial statements.
33
Consolidated Statements of
Income
Dollars
in thousands, except per share data
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
INTEREST
INCOME
|
||||||||||||
Interest
and Fees on Loans
|
$ | 53,905 | $ | 58,477 | $ | 63,852 | ||||||
Interest
on Federal Funds Sold and Other Short-term Investments
|
106 | 593 | 478 | |||||||||
Interest
and Dividends on Securities:
|
||||||||||||
Taxable
|
8,660 | 8,007 | 6,992 | |||||||||
Non-taxable
|
1,065 | 768 | 939 | |||||||||
TOTAL
INTEREST INCOME
|
63,736 | 67,845 | 72,261 | |||||||||
INTEREST
EXPENSE
|
||||||||||||
Interest
on Deposits
|
13,495 | 21,212 | 27,289 | |||||||||
Interest
on FHLB Advances and Other Borrowings
|
5,728 | 5,696 | 6,357 | |||||||||
TOTAL
INTEREST EXPENSE
|
19,223 | 26,908 | 33,646 | |||||||||
NET
INTEREST INCOME
|
44,513 | 40,937 | 38,615 | |||||||||
Provision
for Loan Losses
|
3,750 | 3,990 | 3,591 | |||||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
40,763 | 36,947 | 35,024 | |||||||||
NON-INTEREST
INCOME
|
||||||||||||
Trust
and Investment Product Fees
|
1,617 | 2,288 | 2,590 | |||||||||
Service
Charges on Deposit Accounts
|
4,395 | 4,920 | 4,361 | |||||||||
Insurance
Revenues
|
5,296 | 6,306 | 5,794 | |||||||||
Company
Owned Life Insurance
|
1,104 | 791 | 823 | |||||||||
Other
Operating Income
|
2,110 | 2,412 | 1,994 | |||||||||
Net
Gains on Sales of Loans and Related Assets
|
1,760 | 1,399 | 822 | |||||||||
Net
Gain (Loss) on Securities
|
(423 | ) | 94 | (680 | ) | |||||||
TOTAL
NON-INTEREST INCOME
|
15,859 | 18,210 | 15,704 | |||||||||
NON-INTEREST
EXPENSE
|
||||||||||||
Salaries
and Employee Benefits
|
21,961 | 20,786 | 21,671 | |||||||||
Occupancy
Expense
|
3,382 | 3,249 | 3,144 | |||||||||
Furniture
and Equipment Expense
|
2,653 | 2,428 | 2,235 | |||||||||
FDIC
Premiums
|
1,863 | 209 | 103 | |||||||||
Data
Processing Fees
|
1,368 | 1,493 | 1,370 | |||||||||
Professional
Fees
|
1,740 | 1,670 | 1,418 | |||||||||
Advertising
and Promotion
|
993 | 1,078 | 957 | |||||||||
Supplies
|
528 | 570 | 625 | |||||||||
Intangible
Amortization
|
909 | 889 | 894 | |||||||||
Other
Operating Expenses
|
4,994 | 4,344 | 4,804 | |||||||||
TOTAL
NON-INTEREST EXPENSE
|
40,391 | 36,716 | 37,221 | |||||||||
Income
before Income Taxes
|
16,231 | 18,441 | 13,507 | |||||||||
Income
Tax Expense
|
4,013 | 5,638 | 4,102 | |||||||||
NET
INCOME
|
$ | 12,218 | $ | 12,803 | $ | 9,405 | ||||||
Earnings
per Share
|
$ | 1.10 | $ | 1.16 | $ | 0.85 | ||||||
Diluted
Earnings per Share
|
$ | 1.10 | $ | 1.16 | $ | 0.85 |
See
accompanying notes to consolidated financial statements.
34
Consolidated
Statements of Changes in Shareholders’ Equity
Dollars
in thousands, except per share data
Accumulated
|
||||||||||||||||||||||||
Additional
|
Other
|
Total
|
||||||||||||||||||||||
Common Stock
|
Paid-in
|
Retained
|
Comprehensive
|
Shareholders’
|
||||||||||||||||||||
Shares
|
Amount
|
Capital
|
Earnings
|
Income / (Loss)
|
Equity
|
|||||||||||||||||||
Balances,
January 1, 2007
|
11,008,562 | $ | 11,008 | $ | 68,216 | $ | 13,450 | $ | (283 | ) | $ | 92,391 | ||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||
Net
Income
|
9,405 | 9,405 | ||||||||||||||||||||||
Changes
in Unrealized Gain (Loss) on
|
1,210 | 1,210 | ||||||||||||||||||||||
Securities
Available for Sale, net
|
||||||||||||||||||||||||
Change
in Unrecognized Loss on
|
||||||||||||||||||||||||
Postretirement
Benefit Obligation
|
30 | 30 | ||||||||||||||||||||||
Change
in Unrecognized Amounts in Pension
|
41 | 41 | ||||||||||||||||||||||
Total
Comprehensive Income
|
10,686 | |||||||||||||||||||||||
Cash
Dividends ($.56 per share)
|
(6,174 | ) | (6,174 | ) | ||||||||||||||||||||
Employee
Stock Purchase Plan
|
(70 | ) | (70 | ) | ||||||||||||||||||||
Restricted
Share Grants
|
20,922 | 21 | 262 | 283 | ||||||||||||||||||||
Balances,
December 31, 2007
|
11,029,484 | 11,029 | 68,408 | 16,681 | 998 | 97,116 | ||||||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||
Net
Income
|
12,803 | 12,803 | ||||||||||||||||||||||
Changes
in Unrealized Gain (Loss) on
|
||||||||||||||||||||||||
Securities
Available for Sale, net
|
1,612 | 1,612 | ||||||||||||||||||||||
Change
in Unrecognized Loss on
|
||||||||||||||||||||||||
Postretirement
Benefit Obligation
|
144 | 144 | ||||||||||||||||||||||
Total
Comprehensive Income
|
14,559 | |||||||||||||||||||||||
Cash
Dividends ($.56 per share)
|
(6,177 | ) | (6,177 | ) | ||||||||||||||||||||
Adjustment
to Initially Apply ASC 715-60
|
(288 | ) | (288 | ) | ||||||||||||||||||||
Employee
Stock Purchase Plan
|
(46 | ) | (46 | ) | ||||||||||||||||||||
Restricted
Share Grants
|
804 | 1 | 9 | 10 | ||||||||||||||||||||
Balances,
December 31, 2008
|
11,030,288 | 11,030 | 68,371 | 23,019 | 2,754 | 105,174 | ||||||||||||||||||
Comprehensive
Income:
|
||||||||||||||||||||||||
Net
Income
|
12,218 | 12,218 | ||||||||||||||||||||||
Changes
in Unrealized Gain (Loss) on
|
||||||||||||||||||||||||
Securities
Available for Sale, net
|
1,908 | 1,908 | ||||||||||||||||||||||
Change
in Unrecognized Amounts in Pension
|
(47 | ) | (47 | ) | ||||||||||||||||||||
Total
Comprehensive Income
|
14,079 | |||||||||||||||||||||||
Cash
Dividends ($.56 per share)
|
(6,196 | ) | (6,196 | ) | ||||||||||||||||||||
Issuance
of Common Stock for:
|
||||||||||||||||||||||||
Exercise
of Stock Options
|
3,354 | 3 | 6 | 9 | ||||||||||||||||||||
Employee
Stock Purchase Plan
|
(2 | ) | (2 | ) | ||||||||||||||||||||
Restricted
Share Grants
|
43,740 | 44 | 441 | 485 | ||||||||||||||||||||
Balances,
December 31, 2009
|
11,077,382 | $ | 11,077 | $ | 68,816 | $ | 29,041 | $ | 4,615 | $ | 113,549 |
See
accompanying notes to consolidated financial statements.
35
Consolidated
Statements of Cash Flows
Dollars
in thousands
Years Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|||||||||
Net
Income
|
$ | 12,218 | $ | 12,803 | $ | 9,405 | ||||||
Adjustments
to Reconcile Net Income to Net Cash from Operating
Activities:
|
||||||||||||
Net
Accretion on Securities
|
(144 | ) | (812 | ) | (383 | ) | ||||||
Depreciation
and Amortization
|
3,688 | 3,362 | 3,140 | |||||||||
Loans
Originated for Sale
|
(145,993 | ) | (105,448 | ) | (71,091 | ) | ||||||
Proceeds
from Sales of Loans Held-for-Sale
|
145,213 | 109,378 | 67,817 | |||||||||
Loss
in Investment in Limited Partnership
|
138 | 141 | 178 | |||||||||
Provision
for Loan Losses
|
3,750 | 3,990 | 3,591 | |||||||||
Gain
on Sale of Loans, net
|
(1,760 | ) | (1,399 | ) | (822 | ) | ||||||
Gain
on Securities, net
|
— | (1,031 | ) | (62 | ) | |||||||
Loss
(Gain) on Sales of Other Real Estate and Repossessed
Assets
|
364 | 62 | (52 | ) | ||||||||
Loss
(Gain) on Disposition and Impairment of Premises and
Equipment
|
11 | (25 | ) | 120 | ||||||||
Other-than-temporary
Impairment on Securities
|
423 | 937 | 742 | |||||||||
Increase
in Cash Surrender Value of Company Owned Life Insurance
|
(670 | ) | (805 | ) | (823 | ) | ||||||
Equity
Based Compensation
|
485 | 10 | 331 | |||||||||
Change
in Assets and Liabilities:
|
||||||||||||
Interest
Receivable and Other Assets
|
(4,236 | ) | 1,798 | 1,070 | ||||||||
Interest
Payable and Other Liabilities
|
(3,062 | ) | (827 | ) | (406 | ) | ||||||
Net
Cash from Operating Activities
|
10,425 | 22,134 | 12,755 | |||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Proceeds
from Maturity of Other Short-term Investments
|
— | — | 200 | |||||||||
Proceeds
from Maturities of Securities Available-for-Sale
|
54,294 | 52,304 | 41,899 | |||||||||
Proceeds
from Sales of Securities Available-for-Sale
|
379 | 53,641 | 998 | |||||||||
Purchase
of Securities Available-for-Sale
|
(127,192 | ) | (130,170 | ) | (10,434 | ) | ||||||
Proceeds
from Maturities of Securities Held-to-Maturity
|
554 | 1,140 | 1,671 | |||||||||
Purchase
of Loans
|
(24,078 | ) | (29,574 | ) | (23,065 | ) | ||||||
Proceeds
from Sales of Loans
|
21,057 | 5,369 | 3,953 | |||||||||
Loans
Made to Customers, net of Payments Received
|
10,678 | (4,447 | ) | (58,503 | ) | |||||||
Proceeds
from Sales of Other Real Estate
|
1,756 | 3,068 | 2,987 | |||||||||
Property
and Equipment Expenditures
|
(2,637 | ) | (2,122 | ) | (1,372 | ) | ||||||
Proceeds
from Sales of Property and Equipment
|
4 | 65 | 62 | |||||||||
Acquire
Capitalized Lease
|
— | — | (13 | ) | ||||||||
Acquire
Insurance Agencies
|
(386 | ) | — | — | ||||||||
Net
Cash from Investing Activities
|
(65,571 | ) | (50,726 | ) | (41,617 | ) | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Change
in Deposits
|
27,952 | 64,388 | 9,862 | |||||||||
Change
in Short-term Borrowings
|
8,745 | (31,328 | ) | 5,828 | ||||||||
Advances
in Long-term Debt
|
29,250 | 25,000 | 30,000 | |||||||||
Repayments
of Long-term Debt
|
(21,541 | ) | (6,167 | ) | (12,317 | ) | ||||||
Employee
Stock Purchase Plan
|
(2 | ) | (46 | ) | (118 | ) | ||||||
Dividends
Paid
|
(6,196 | ) | (6,177 | ) | (6,174 | ) | ||||||
Net
Cash from Financing Activities
|
38,208 | 45,670 | 27,081 | |||||||||
Net
Change in Cash and Cash Equivalents
|
(16,938 | ) | 17,078 | (1,781 | ) | |||||||
Cash
and Cash Equivalents at Beginning of Year
|
44,992 | 27,914 | 29,695 | |||||||||
Cash
and Cash Equivalents at End of Year
|
$ | 28,054 | $ | 44,992 | $ | 27,914 | ||||||
Cash
Paid During the Year for
|
||||||||||||
Interest
|
$ | 19,815 | $ | 27,246 | $ | 33,781 | ||||||
Income
Taxes
|
4,305 | 6,122 | 2,395 | |||||||||
Supplemental
Non Cash Disclosures
|
||||||||||||
Loans
Transferred to Other Real Estate
|
$ | 2,665 | $ | 3,353 | $ | 4,919 |
See
accompanying notes to consolidated financial statements.
36
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
1 – Summary of Significant Accounting Policies
Description
of Business and Basis of Presentation
German
American Bancorp, Inc. operations are primarily comprised of three business
segments: core banking, trust and investment advisory services, and insurance
operations. The accounting and reporting policies of German American
Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting
principles. The more significant policies are described
below. The consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all material intercompany
accounts and transactions. Certain prior year amounts have been
reclassified to conform with current classifications. The preparation
of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts and disclosures. Actual results could differ from
those estimates. Estimates susceptible to change in the near term
include the allowance for loan losses, other-than-temporary impairment of
securities, the valuation allowance on deferred tax assets, and loss
contingencies.
Securities
Securities
classified as available-for-sale are securities that the Company intends to hold
for an indefinite period of time, but not necessarily until
maturity. These include securities that management may use as part of
its asset/liability strategy, or that may be sold in response to changes in
interest rates, changes in prepayment risk, or similar
reasons. Equity securities with readily determinable fair values are
classified as available-for-sale. Equity securities that do not have
readily determinable fair values are carried at historical cost and evaluated
for impairment on a periodic basis. Securities classified as
available-for-sale are reported at market value with unrealized gains or losses
included as a separate component of equity, net of tax. Securities
classified as held-to-maturity are securities that the Company has both the
ability and positive intent to hold to maturity. Securities
held-to-maturity are carried at amortized cost.
Premium
amortization is deducted from, and discount accretion is added to, interest
income using the level yield method without anticipating prepayments, except for
mortgage-backed securities where prepayments are anticipated. Gains
and losses on sales are recorded on trade date and are computed on the
identified securities method. Management evaluates securities for
other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more
frequently when economic conditions or market conditions warrant such an
evaluation.
Loans
Held for Sale
Mortgage
loans originated and intended for sale in the secondary market are carried at
fair value. Fair value is determined based on collateral value and
prevailing market prices for loans with similar characteristics. Net
unrealized gains or losses are recorded through earnings. Mortgage
loans held for sale are generally sold on a servicing released
basis.
Mortgage
loans held for sale are generally sold on a servicing released
basis. Gains and losses on sales of mortgage loans are based on the
difference between the selling price and the carrying value of the related loan
sold.
Loans
Loans
that management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off are reported at the principal balance outstanding, net
of unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is accrued on unpaid principal balance and
includes amortization of net deferred loan fees and costs over the loan term
without anticipating prepayments.
Interest
income is discontinued on impaired loans and loans past due 90 days or more,
unless the loan is well secured and in process of collection. All
interest accrued but not received for loans placed on non-accrual is reversed
against interest income. Interest received on such loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
37
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
1 – Summary of Significant Accounting Policies (continued)
Certain Purchased
Loans
The
Company purchases individual loans and groups of loans. Purchased
loans that show evidence of credit deterioration since origination are recorded
at the amount paid (or allocated fair value in a purchase business combination),
such that there is no carryover of the seller’s allowance for loan
losses. After acquisition, incurred losses are recognized by an
increase in the allowance for loan losses.
Such
purchased loans are accounted for individually or aggregated into pools of loans
based on common risk characteristics (e.g., credit score, loan type, and date of
origination). The Company estimates the amount and timing of expected
cash flows for each purchased loan or pool, and the expected cash flows in
excess of amount paid is recorded as interest income over the remaining life of
the loan or pool (accretable yield). The excess of the loan’s or
pool’s contractual principal and interest over expected cash flows is not
recorded (nonaccretable difference).
Over the
life of the loan or pool, expected cash flows continue to be
estimated. If the present value of expected cash flows is less than
the carrying amount, a loss is recorded. If the present value of
expected cash flows is greater than the carrying amount, it is recognized as
part of future interest income.
Allowance
for Loan Losses
The
allowance for loan losses is a valuation allowance for probable incurred credit
losses. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance. 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. Allocations of the allowance may be
made for specific loans, but the entire allowance is available for any loan
that, in management’s judgment, should be charged-off. The allowance
consists of specific and general components. The specific component
relates to loans that are individually classified as impaired or loans otherwise
classified as substandard or special mention. The general component
covers non-classified loans and is based on historical loss experience adjusted
for current factors.
Loan
impairment is reported when full repayment under the terms of the loan is not
expected. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported net, at the present value of estimated
future cash flows using the loan’s existing rate, or at the fair value of
collateral if repayment is expected solely from the collateral. Commercial and
agricultural loans are evaluated individually for impairment. Smaller
balance homogeneous loans are evaluated for impairment in total. Such
loans include real estate loans secured by one-to-four family residences and
loans to individuals for household, family and other personal
expenditures. Individually evaluated loans on non-accrual are
generally considered impaired. Impaired loans, or portions thereof,
are charged off when deemed uncollectible.
Federal
Home Loan Bank (FHLB) Stock
The Bank
is a member of the FHLB of Indianapolis. Members are required to own
a certain amount of stock based on the level of borrowings and other factors,
and may invest in additional amounts. FHLB stock is carried at cost,
classified as a restricted security, and periodically evaluated for impairment
based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.
Premises,
Furniture and Equipment
Land is
carried at cost. Premises, furniture, and equipment are stated at
cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line method with useful lives ranging from 10
to 40 years. Furniture, fixtures, and equipment are depreciated using
the straight-line method with useful lives ranging from 3 to 10
years.
Other
Real Estate
Assets
acquired through or instead of loan foreclosure are initially recorded at fair
value less costs to sell when acquired, establishing a new cost
basis. If fair value declines subsequent to foreclosure, a valuation
allowance is recorded through expense. Operating costs after
acquisition are expensed.
38
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
1 – Summary of Significant Accounting Policies (continued)
Goodwill
and Other Intangible Assets
Goodwill
resulting from business combinations prior to January 1, 2009 represents the
excess of the purchase price over the fair value of the net assets of businesses
acquired. Goodwill resulting from business combinations after January
1, 2009, is generally determined as the excess of the fair value of the
consideration transferred, plus the fair value of any noncontrolling interests
in the acquiree, over the fair value of the net assets acquired and liabilities
assumed as of the acquisition date. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an
indefinite useful life are not amortized, but tested for impairment at least
annually. The Company has selected December 31 as the date to perform the annual
impairment test. Intangible assets with definite useful lives are
amortized over their estimated useful lives to their estimated residual values.
Goodwill is the only intangible asset with an indefinite life on our balance
sheet.
Other
intangible assets consist of core deposit and acquired customer relationship
intangible assets. They are initially measured at fair value and then
are amortized over their estimated useful lives, which range from 7 to 10
years.
Company
Owned Life Insurance
The
Company has purchased life insurance policies on certain directors and
executives. This life insurance is recorded at its cash surrender
value or the amount that can be realized, which considers any adjustments or
changes that are probable at settlement.
Loss
Contingencies
Loss
contingencies, including claims and legal actions arising in the ordinary course
of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably
estimated. Management does not believe currently that there are any
such matters that will have a material impact on the financial
statements.
Loan
Commitments and Related Financial Instruments
Financial
instruments include off-balance sheet credit instruments, such as commitments to
make loans and commercial letters of credit issued to meet customer financing
needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to
repay. Such financial instruments are recorded when they are
funded.
Restrictions
on Cash
At
December 31, 2009 and 2008, respectively, the company was required to have
$3,223 and $945 on deposit with the Federal Reserve, or as cash on
hand.
Long-term
Assets
Premises
and equipment, core deposit and other intangible assets, and other long-term
assets are reviewed for impairment when events indicate their carrying amount
may not be recoverable from future undiscounted cash flows. If
impaired, the assets are recorded at fair value.
Stock Based
Compensation
Compensation
cost is recognized for stock options and restricted stock awards issued to
employees, based on the fair value of these awards at the date of grant. A
Black-Scholes model is utilized to estimate the fair value of stock options,
while the market price of the Corporation’s common stock at the date of grant is
used for restricted stock awards. Compensation cost is recognized over the
required service period, generally defined as the vesting period.
Comprehensive
Income
Comprehensive
income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities
available for sale and changes in unrecognized amounts in pension and other
postretirement benefits, which are also recognized as a separate component of
equity.
Income
Taxes
Deferred
tax liabilities and assets are determined at each balance sheet date and are the
result of differences in the financial statement and tax bases of assets and
liabilities. Income tax expense is the amount due on the current year
tax returns plus or minus the change in deferred taxes. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
39
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
1 – Summary of Significant Accounting Policies (continued)
A tax
position is recognized as a benefit only if it is “more likely than not” that
the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded.
Retirement Plans
Pension expense under the suspended
defined benefit plan is the net of interest cost, return on plan assets and
amortization of gains and losses not immediately recognized. Employee
401(k) and profit sharing plan expense is the amount of matching
contributions. Deferred compensation and supplemental retirement plan
expense allocates the benefits over years of service.
Earnings
Per Share
Earnings
per share are based on net income divided by the weighted average number of
shares outstanding during the period. Diluted earnings per share show
the potential dilutive effect of additional common shares issuable under the
Company’s stock based compensation plans. Earnings per share are
retroactively restated for stock dividends.
Cash
Flow Reporting
The
Company reports net cash flows for customer loan transactions, deposit
transactions, deposits made with other financial institutions and short-term
borrowings. Cash and cash equivalents are defined to include cash on
hand, demand deposits in other institutions and Federal Funds Sold.
Fair
Values of Financial Instruments
Fair
values of financial instruments are estimated using relevant market information
and other assumptions, as more fully disclosed in Note 14. Fair value
estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the
absence of broad markets for particular items. Changes in assumptions
or in market conditions could significantly affect the estimates.
Reclassifications
Some
items in the prior year financial statements were reclassified to conform to the
current presentation.
New
Accounting Pronouncements
In
September 2006, the FASB issued new guidance impacting FASB ASC 820-10, Fair
Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. This Statement also establishes a fair value hierarchy
about the assumptions used to measure fair value and clarifies assumptions about
risk and the effect of a restriction on the sale or use of an
asset. The standard was effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB issued Staff Position
(FSP) No. 157-2, Effective Date of FASB Statement No. 157, which is currently
FASB ASC 820-10. This FSP delayed the effective date of FAS 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. The adoption of this update did not have a
material effect on the results of operations or financial position.
In
December 2007, the FASB issued an update to FASB ASC 805, Business
Combinations, which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. This update became effective for the Company on
January 1, 2009. The impact of the adoption of this standard will
depend upon the nature of any future acquisitions.
In
December 2007, the FASB issued an update to FASB ASC 810, Consolidation,
which changes the accounting and reporting for minority interests, which is
recharacterized as noncontrolling interests and classified as a component of
equity within the consolidated balance sheets. This update became
effective for the Company on January 1, 2009. The adoption did not
have a significant impact on the Company’s results of operations or financial
position.
40
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
1 – Summary of Significant Accounting Policies (continued)
In June
2009, the FASB issued an update to FASB ASC 105, Generally Accepted Accounting
Principles. The update is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. The FASB
Accounting Standards Codification TM will become the source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. On the effective date of this Statement, the Codification will
supersede all then-existing non-SEC accounting and reporting standards and all
the contents in the Codification will carry the same level of
authority. Following this Statement, the FASB will not issue new
standards in the form of Statements, FASB Staff Positions, or Emerging Issues
Task Force Abstracts. The adoption of this standard did not have a
material effect on the Company’s results of operations or financial
position.
In
June 2008, the FASB issued guidance which addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, included in the earnings allocation in computing
earnings per share (EPS) under the two-class method. Unvested
share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of EPS pursuant to the two-class
method. This guidance was effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those years. All prior-period EPS data presented were to be adjusted
retrospectively (including interim financial statements, summaries of earnings,
and selected financial data) to conform to the provisions of this
guidance. The adoption of this standard did not have a material
impact on the Company’s earnings per share.
In April
2009, the FASB issued an update to FASB ASC 320, Recognition and Presentation of
Other-Than-Temporary Impairments that amends existing
guidance for determining whether impairment is other-than-temporary for debt
securities. The update requires an entity to assess whether it
intends to sell, or it is more likely than not that it will be required to sell
a security in an unrealized loss position before recovery of its amortized cost
basis. If either of these criteria is met, the entire difference
between amortized cost and fair value is recognized as impairment through
earnings. For securities that do not meet the aforementioned
criteria, the amount of impairment recognized in earnings is limited to the
amount related to credit losses, while impairment related to other factors is
recognized in other comprehensive income. The credit loss is
determined as the difference between the present value of the cash flows
expected to be collected and the amortized cost basis. Additionally,
the update expands and increases the frequency of existing disclosures about
other-than-temporary impairments for debt and equity securities. This
update is effective for interim and annual reporting periods ending after June
15, 2009. The adoption of this update on April 1, 2009 did not have a
significant impact on the Company’s results of operations or financial
position.
In April
2009, the FASB issued an update to ASC 820, Fair Value Measurement and
Disclosures, that emphasizes that even if there has been a significant decrease
in the volume and level of activity, the objective of a fair value measurement
remains the same. Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction (that
is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. The update
provides a number of factors to consider when evaluating whether there has been
a significant decrease in the volume and level of activity for an asset or
liability in relation to normal market activity. In addition,
when transactions or quoted prices are not considered orderly, adjustments to
those prices based on the weight of available information may be needed to
determine the appropriate fair value. The update also requires
increased disclosures. This update is effective for interim and
annual reporting periods ending after June 15, 2009, and shall be applied
prospectively. The adoption of this update did not have a material
effect on the results of operations or financial position.
In August
2009, the FASB issued guidance impacting FASB ASC 820, Fair Value Measurements
and Disclosures. The update is effective for the first reporting
period including interim periods after the issuance. The update
reduces potential ambiguity in financial reporting when measuring the fair value
of liabilities by providing clarification for circumstances in which quoted
prices in an active market for the identical liability is not
available. A reporting entity is required to measure fair value using
one or more of the following techniques: A valuation technique that
uses the quoted price of the identical liability when traded as an asset, quoted
prices for similar liabilities or similar liabilities when traded as an
asset. Another valuation technique consistent with the principals of
FASB ASC 820 would be an income approach such as a present value technique or a
market approach based on the amount at the measurement date that the reporting
entity would pay to transfer the identical liability or would receive to enter
into the identical liability. The adoption of this standard did not
have a material effect on the Corporation’s results of operations or financial
position.
41
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
1 – Summary of Significant Accounting Policies (continued)
Effect
of Newly Issued but Not Yet Effective Accounting Standards
On June
12, 2009, the FASB issued new guidance impacting FASB ASC 860, Transfers and
Servicing. The new
guidance amends ASC 860, and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. The new standard will be
effective January 1, 2010 and the adoption of this standard is not expected to
have a material effect on the Company’s results of operations or financial
position.
On June
12, 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation
(Statement No. 167 amends FIN 46(R)). The new guidance replaces the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with a qualitative approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity (VIE) that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. Unlike previous guidance, this Statement requires ongoing
reconsideration of whether (1) an entity is a VIE and (2) an enterprise is the
primary beneficiary of a VIE. It is expected that the amendments will
result in more entities consolidating VIEs that previously were not consolidated
This new guidance will also require additional disclosures about the
Company’s involvement in variable interest entities. This new guidance
will be effective January 1, 2010 and the adoption of this standard is not
expected to have a material effect on the Company’s results of operations or
financial position.
NOTE
2 – Securities
The
amortized cost, unrealized gross gains and losses recognized in accumulated
other comprehensive income (loss), and fair value of Securities
Available-for-Sale were as follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Securities
Available-for-Sale:
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
2009
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 5,000 | $ | — | $ | (30 | ) | $ | 4,970 | |||||||
Obligations
of State and Political Subdivisions
|
21,511 | 931 | (64 | ) | 22,378 | |||||||||||
Mortgage-backed
Securities - Residential
|
214,591 | 7,065 | (404 | ) | 221,252 | |||||||||||
Equity
Securities
|
2,818 | 13 | (491 | ) | 2,340 | |||||||||||
Total
|
$ | 243,920 | $ | 8,009 | $ | (989 | ) | $ | 250,940 | |||||||
2008
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Obligations
of State and Political Subdivisions
|
16,561 | 307 | — | 16,868 | ||||||||||||
Mortgage-backed
Securities - Residential
|
151,499 | 4,132 | (4 | ) | 155,627 | |||||||||||
Equity
Securities
|
3,620 | 44 | (319 | ) | 3,345 | |||||||||||
Total
|
$ | 171,680 | $ | 4,483 | $ | (323 | ) | $ | 175,840 |
The
carrying amount, unrecognized gains and losses and fair value of Securities
Held-to-Maturity were as follows:
Gross
|
Gross
|
|||||||||||||||
Securities
Held-to-Maturity:
|
Carrying
|
Unrecognized
|
Unrecognized
|
Fair
|
||||||||||||
Amount
|
Gains
|
Losses
|
Value
|
|||||||||||||
2009
|
||||||||||||||||
Obligations
of State and Political Subdivisions
|
$ | 2,774 | $ | 27 | $ | — | $ | 2,801 | ||||||||
2008
|
||||||||||||||||
Obligations
of State and Political Subdivisions
|
$ | 3,326 | $ | 32 | $ | — | $ | 3,358 |
42
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
2 – Securities (continued)
The
amortized cost and fair value of Securities at December 31, 2009 by contractual
maturity are shown below. Expected maturities may differ from
contractual maturities because some issuers have the right to call or prepay
certain obligations with or without call or prepayment
penalties. Mortgage-backed and Equity Securities are not due at a
single maturity date and are shown separately.
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
Securities
Available-for-Sale:
|
||||||||
Due
in one year or less
|
$ | 1,695 | $ | 1,701 | ||||
Due
after one year through five years
|
3,320 | 3,467 | ||||||
Due
after five years through ten years
|
9,186 | 9,157 | ||||||
Due
after ten years
|
12,310 | 13,023 | ||||||
Mortgage-backed
Securities - Residential
|
214,591 | 221,252 | ||||||
Equity
Securities
|
2,818 | 2,340 | ||||||
Total
|
$ | 243,920 | $ | 250,940 |
Carrying
|
Fair
|
|||||||
Amount
|
Value
|
|||||||
Securities
Held-to-Maturity:
|
||||||||
Due
in one year or less
|
$ | 345 | $ | 346 | ||||
Due
after one year through five years
|
744 | 754 | ||||||
Due
after five years through ten years
|
1,365 | 1,380 | ||||||
Due
after ten years
|
320 | 321 | ||||||
Total
|
$ | 2,774 | $ | 2,801 |
Proceeds
from the Sales of Securities are summarized below:
2009
|
2008
|
2007
|
||||||||||
Available-
|
Available-
|
Available-
|
||||||||||
for-Sale
|
for-Sale
|
for-Sale
|
||||||||||
Proceeds
from Sales and Calls
|
$ | 379 | $ | 53,641 | $ | 998 | ||||||
Gross
Gains on Sales and Calls
|
— | 1,031 | 62 | |||||||||
Income
Taxes on Gross Gains
|
— | 351 | 25 |
The
carrying value of securities pledged to secure repurchase agreements, public and
trust deposits, and for other purposes as required by law was $87,940 and
$101,333 as of December 31, 2009 and 2008, respectively.
Below is
a summary of securities with unrealized losses as of year-end 2009 and 2008,
presented by length of time the securities have been in a continuous unrealized
loss position:
At December 31,
2009:
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
|||||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 4,970 | $ | (30 | ) | $ | — | $ | — | $ | 4,970 | $ | (30 | ) | ||||||||||
Obligations
of State and Political Subdivisions
|
3,419 | (64 | ) | — | — | 3,419 | (64 | ) | ||||||||||||||||
Mortgage-backed
Securities -
Residential
|
47,726 | (403 | ) | 40 | (1 | ) | 47,766 | (404 | ) | |||||||||||||||
Equity
Securities
|
1,533 | (491 | ) | — | — | 1,533 | (491 | ) | ||||||||||||||||
Total
|
$ | 57,648 | $ | (988 | ) | $ | 40 | $ | (1 | ) | $ | 57,688 | $ | (989 | ) |
At December 31,
2008:
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
|||||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Obligations
of State and Political Subdivisions
|
— | — | — | — | — | — | ||||||||||||||||||
Mortgage-backed
Securities -
Residential
|
1,253 | (2 | ) | 617 | (2 | ) | 1,870 | (4 | ) | |||||||||||||||
Equity
Securities
|
1,705 | (319 | ) | — | — | 1,705 | (319 | ) | ||||||||||||||||
Total
|
$ | 2,958 | $ | (321 | ) | $ | 617 | $ | (2 | ) | $ | 3,575 | $ | (323 | ) |
43
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
2 – Securities (continued)
Securities are written down to fair
value when a decline in fair value is not considered temporary. In
estimating other-than-temporary losses, management considers many factors,
including: (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near-term prospects of the
issuer, (3) whether the market decline was affected by macroeconomic conditions,
and (4) whether the Company has the intent to sell the debt security or more
likely than not will be required to sell the debt security before its
anticipated recovery. The Company doesn’t intend to sell or expect to
be required to sell these securities, and the decline in fair value is largely
due to changes in market interest rates, therefore, the Company does not
consider these securities to be other-than-temporarily impaired. All
mortgage-backed securities in the Company’s portfolio are guaranteed by
government sponsored entities, are investment grade, and are performing as
expected.
The
Company’s equity securities consist of non-controlling investments in other
banking organizations. When a decline in fair value below cost is
deemed to be other-than-temporary, the unrealized loss must be recognized as a
charge to earnings. At December 31, 2009 and December 31,
2008, certain equity securities in the Company’s portfolio with fair values
below amortized cost were deemed to not be other-than-temporarily impaired due
in large part to the overall financial condition of the issuers which included
continued profitability throughout 2009 and 2008 and that the fair value of the
securities has declined due to difficult macroeconomic conditions for equity
security valuations of banking organizations. In addition, the length
of time that fair value has been less than cost was assessed and it is fair to
expect that fair value can recover to a level greater than cost in a reasonable
period of time.
As a
result of valuations of the Company’s equity securities portfolio during 2009,
the Company recognized a $423 pre-tax charge for an other-than-temporary decline
in fair value of this portfolio. Accordingly, the
other-than-temporary impairment was recognized in the income statement as an
investment securities loss during 2009. A pre-tax charge of $937 for
other-than-temporary impairment was also recognized for this portfolio during
2008.
NOTE 3 – Loans
Loans
were comprised of the following classifications at December 31:
2009
|
2008
|
|||||||
Commercial
and Industrial Loans
|
$ | 188,962 | $ | 175,828 | ||||
Commercial
Real Estate Loans
|
334,255 | 329,363 | ||||||
Agricultural
Loans
|
156,845 | 159,923 | ||||||
Consumer
Loans
|
114,736 | 127,343 | ||||||
Residential
Mortgage Loans
|
84,677 | 100,054 | ||||||
Total
|
$ | 879,475 | $ | 892,511 |
Nonperforming
loans were as follows at December 31:
Loans
past due over 90 days and accruing and Restructured Loans
|
$ | 419 | $ | 34 | ||||
Non-accrual
Loans
|
8,374 | 8,316 | ||||||
Total
|
$ | 8,793 | $ | 8,350 |
Information
regarding impaired loans:
|
2009
|
2008
|
|||||||
Year-end
impaired loans with no allowance for loan losses allocated
|
$ | 1,213 | $ | 1,713 | |||||
Year-end
impaired loans with allowance for loan losses allocated
|
6,932 | 4,232 | |||||||
Amount
of allowance allocated to impaired loans
|
3,024 | 1,797 |
2009
|
2008
|
2007
|
||||||||||
Average
balance of impaired loans during the year
|
$ | 6,676 | $ | 5,787 | $ | 7,376 | ||||||
Interest
income recognized during impairment
|
73 | 161 | 314 | |||||||||
Interest
income recognized on cash basis
|
71 | 161 | 304 |
44
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
3 – Loans (continued)
Certain
directors, executive officers, and principal shareholders of the Company,
including their immediate families and companies in which they are principal
owners, were loan customers of the Company during 2009. A summary of
the activity of these loans follows:
Balance
|
Changes
|
Balance
|
||||||||||||||
January
1,
|
in
Persons
|
Deductions
|
December
31,
|
|||||||||||||
2009
|
Additions
|
Included
|
Collected
|
Charged-off
|
2009
|
|||||||||||
$7,386
|
$3,633
|
$(1,260)
|
$(5,330)
|
$—
|
$4,429
|
NOTE
4 – Allowance for Loan Losses
A summary
of the activity in the Allowance for Loan Losses follows:
2009
|
2008
|
2007
|
||||||||||
Balance
as of January 1
|
$ | 9,522 | $ | 8,044 | $ | 7,129 | ||||||
Provision
for Loan Losses
|
3,750 | 3,990 | 3,591 | |||||||||
Recoveries
of Prior Loan Losses
|
918 | 612 | 568 | |||||||||
Loan
Losses Charged to the Allowance
|
(3,174 | ) | (3,124 | ) | (3,244 | ) | ||||||
Balance
as of December 31
|
$ | 11,016 | $ | 9,522 | $ | 8,044 |
NOTE
5 – Premises, Furniture, and Equipment
Premises,
furniture, and equipment was comprised of the following classifications at
December 31:
2009
|
2008
|
|||||||
Land
|
$ | 4,653 | $ | 4,540 | ||||
Buildings
and Improvements
|
29,353 | 28,114 | ||||||
Furniture
and Equipment
|
17,397 | 16,922 | ||||||
Total
Premises, Furniture and Equipment
|
51,403 | 49,576 | ||||||
Less: Accumulated
Depreciation
|
(29,250 | ) | (27,246 | ) | ||||
Total
|
$ | 22,153 | $ | 22,330 |
Depreciation
expense was $2,772, $2,509, and $2,368 for 2009, 2008, and 2007,
respectively.
The
Company leases one of its branch buildings under a capital lease. The
lease arrangement requires monthly payments through 2027.
The
Company has included this lease in buildings and improvements as
follows:
2009
|
2008
|
|||||||
Capital
Lease
|
$ | 743 | $ | 743 | ||||
Less:
Accumulated Depreciation
|
(108 | ) | (72 | ) | ||||
Total
|
$ | 635 | $ | 671 |
The
following is a schedule of future minimum lease payments under the capital
lease, together with the present value of net minimum lease payments at year end
2009:
2010
|
$ | 81 | ||
2011
|
81 | |||
2012
|
81 | |||
2013
|
81 | |||
2014
|
81 | |||
Thereafter
|
1,022 | |||
Total
minimum lease payments
|
1,427 | |||
Less:
Amount representing interest
|
(726 | ) | ||
Present
Value of Net Minimum Lease Payments
|
$ | 701 |
45
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
6 – Deposits
At
year-end 2009, stated maturities of time deposits were as follows:
2010
|
$ | 109,685 | ||
2011
|
134,195 | |||
2012
|
74,965 | |||
2013
|
9,076 | |||
2014
|
1,390 | |||
Thereafter
|
365 | |||
Total
|
$ | 329,676 |
Time
deposits of $100 or more at December 31, 2009 and 2008 were $63,276 and $69,129,
respectively.
Time
deposits originated from outside the geographic area, generally through brokers,
totaled $10,000 and $35,000 at December 31, 2009 and 2008,
respectively.
NOTE
7 – FHLB Advances and Other Borrowed Money; Subordinated Debentures
The
Company’s funding sources include Federal Home Loan Bank advances, borrowings
from other third party correspondent financial institutions, issuance and sale
of subordinated debt and other capital securities, and repurchase
agreements. Information regarding each of these types of borrowings
or other indebtedness is as follows:
December
31,
|
||||||||
2009
|
2008
|
|||||||
Long-term
Advances from Federal Home Loan Bank collateralized by qualifying
mortgages, investment securities, and mortgage-backed
securities
|
$ | 77,369 | $ | 87,392 | ||||
Term
Loans
|
6,000 | 7,500 | ||||||
Subordinated
Debentures
|
29,250 | 10,000 | ||||||
Capital
Lease Obligation
|
701 | 716 | ||||||
Long-term
Borrowings
|
113,320 | 105,608 | ||||||
Overnight
Variable Rate Advances from Federal Home Loan Bank collateralized by
qualifying mortgages, investment securities, and mortgage-backed
securities
|
$ | 1,300 | $ | — | ||||
Repurchase
Agreements
|
33,501 | 26,056 | ||||||
Short-term
Borrowings
|
34,801 | 26,056 | ||||||
Total
Borrowings
|
$ | 148,121 | $ | 131,664 |
Repurchase
agreements, which are classified as secured borrowings, generally mature within
one day of the transaction date. Repurchase agreements are reflected
at the amount of cash received in connection with the
transaction. The Company may be required to provide additional
collateral based on the value of the underlying securities.
2009
|
2008
|
|||||||
Average
Daily Balance During the Year
|
$ | 24,231 | $ | 30,995 | ||||
Average
Interest Rate During the Year
|
0.73 | % | 1.52 | % | ||||
Maximum
Month-end Balance During the Year
|
$ | 33,501 | $ | 42,975 | ||||
Weighted
Average Interest at Year-end
|
0.50 | % | 0.82 | % |
At
December 31, 2009 interest rates on the fixed rate long-term FHLB advances
ranged from .47% to 7.22% with a weighted average rate of 4.08%. Of
the $78.7 million, $55.0 million or 70% of the advances contained options
whereby the FHLB may convert the fixed rate advance to an adjustable rate
advance, at which time the Company may prepay the advance without
penalty.
At
December 31, 2008 interest rates on the fixed rate long-term FHLB advances
ranged from 2.76% to 7.22% with a weighted average rate of 4.66%. Of
the $87.4 million, $65.0 million or 74% of the advances contained options
whereby the FHLB may convert the fixed rate advance to an adjustable rate
advance, at which time the Company may prepay the advance without
penalty. The options on these advances are subject to a variety of
terms including LIBOR based strike rates.
46
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
7 – FHLB Advances and Other Borrowed Money; Subordinated Debentures
(continued)
The
long-term borrowings shown above includes $6 million and $7.5 million
outstanding on a term loan owed by the parent company as of December 31, 2009
and 2008, respectively. Interest on the term loan is based upon
90-day LIBOR plus 1.15%. The term loan matures January 1,
2014. At December 31, 2009, the parent company had a $10 million line
of credit with no outstanding balance. The line of credit matures
September 30, 2010. Interest on the line of credit is based upon
90-day LIBOR plus 3.00% and includes an unused commitment fee of
0.35%. At December 31, 2008, the parent company had a $10 million
line of credit with no outstanding balance. Interest on the line of
credit is based upon 90-day LIBOR plus 1.65% and includes an unused commitment
fee of 0.35%. The line of credit was renewed and extended in December
2009 and September 2008.
At
December 31, 2009, the long-term borrowings shown above includes an aggregate of
$29.3 million of indebtedness represented by subordinated debentures issued by
the Company’s parent company in two separate transactions. A $10
million subordinated debenture issued by the parent company to another bank,
bears interest based upon 90-day LIBOR plus 1.35%. This subordinated
debenture matures on January 1, 2014. 80% of this subordinated
debenture was treated as Tier 2 capital for regulatory capital purposes as of
December 31, 2009. On April 30, 2009 the parent company issued $19.3
million principal amount of 8% redeemable subordinated debentures to the
public. These debentures will mature in a single payment of principal
on March 30, 2019. The Company has the right to redeem these
debentures without penalty or premium on or after March 30, 2012 subject to
prior consultation with the Federal Reserve Board. The entire
principal amount of these debentures was treated as Tier 2 capital for
regulatory capital purposes as of December 31, 2009.
At
December 31, 2008, the long-term borrowings shown above included the
above-described $10 million subordinated debenture owed by the parent
company. The entire principal amount of the subordinated debenture
was treated as Tier 2 capital for regulatory capital purposes as of December 31,
2008.
Scheduled
principal payments on long-term borrowings, excluding the capitalized lease
obligation, at December 31, 2009 are as follows:
2010
|
$ | 30,787 | ||
2011
|
1,530 | |||
2012
|
21,533 | |||
2013
|
16,536 | |||
2014
|
11,539 | |||
Thereafter
|
30,694 | |||
Total
|
$ | 112,619 |
See also
Note 5 regarding the capital lease obligation.
NOTE
8 – Stockholders’ Equity
The
Company and affiliate bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines
and prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance sheet items calculated under
regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower classifications in
certain cases. Failure to meet various capital requirements can
initiate regulatory action that could have a direct material effect on the
financial statements. Management believes as of December 31, 2009,
the Company and Bank meet all capital adequacy requirements to which it is
subject.
The
prompt corrective action regulations provide five classifications, including
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as
is asset growth and expansion, and plans for capital restoration are
required.
47
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
8 – Stockholders’ Equity (continued)
At
December 31, 2009, consolidated and affiliate bank actual capital and minimum
required levels are presented below:
Minimum
Required
|
||||||||||||||||||||||||
To
Be Well-
|
||||||||||||||||||||||||
Minimum
Required
|
Capitalized
Under
|
|||||||||||||||||||||||
For
Capital
|
Prompt
Corrective
|
|||||||||||||||||||||||
Actual
|
Adequacy Purposes:
|
Action Regulations:
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
Total
Capital
|
||||||||||||||||||||||||
(to
Risk Weighted Assets)
|
||||||||||||||||||||||||
Consolidated
|
$ | 135,153 | 14.09 | % | $ | 76,738 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank
|
129,874 | 13.62 | 76,266 | 8.00 | $ | 95,333 | 10.00 | % | ||||||||||||||||
Tier
1 Capital
|
||||||||||||||||||||||||
(to
Risk Weighted Assets)
|
||||||||||||||||||||||||
Consolidated
|
$ | 96,887 | 10.10 | % | $ | 38,369 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank
|
118,858 | 12.47 | 38,133 | 4.00 | $ | 57,200 | 6.00 | % | ||||||||||||||||
Tier
1 Capital
|
||||||||||||||||||||||||
(to
Average Assets)
|
||||||||||||||||||||||||
Consolidated
|
$ | 96,887 | 7.64 | % | $ | 50,730 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank
|
118,858 | 9.50 | 50,048 | 4.00 | $ | 62,560 | 5.00 | % |
At
December 31, 2008, consolidated and affiliate bank actual capital and minimum
required levels are presented below:
Minimum
Required
|
||||||||||||||||||||||||
To
Be Well-
|
||||||||||||||||||||||||
Minimum
Required
|
Capitalized
Under
|
|||||||||||||||||||||||
For
Capital
|
Prompt
Corrective
|
|||||||||||||||||||||||
Actual
|
Adequacy Purposes:
|
Action Regulations:
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
Total
Capital
|
||||||||||||||||||||||||
(to
Risk Weighted Assets)
|
||||||||||||||||||||||||
Consolidated
|
$ | 109,029 | 11.42 | % | $ | 76,387 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank
|
107,243 | 11.32 | 75,782 | 8.00 | $ | 94,727 | 10.00 | % | ||||||||||||||||
Tier
1 Capital
|
||||||||||||||||||||||||
(to
Risk Weighted Assets)
|
||||||||||||||||||||||||
Consolidated
|
$ | 89,507 | 9.37 | % | $ | 38,193 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank
|
97,721 | 10.32 | 37,891 | 4.00 | $ | 56,836 | 6.00 | % | ||||||||||||||||
Tier
1 Capital
|
||||||||||||||||||||||||
(to
Average Assets)
|
||||||||||||||||||||||||
Consolidated
|
$ | 89,507 | 7.54 | % | $ | 47,512 | 4.00 | % | N/A | N/A | ||||||||||||||
Bank
|
97,721 | 8.29 | 47,161 | 4.00 | $ | 58,952 | 5.00 | % |
The
Company and the affiliate bank at year-end 2009 and 2008 were categorized as
well-capitalized. There have been no conditions or events that
management believes have changed the classification of the Company or affiliate
bank under the prompt corrective action regulations since the last notification
from regulators. Regulations require the maintenance of certain
capital levels at the affiliate bank, and may limit the dividends payable by the
affiliate to the holding company, or by the holding company to its
shareholders. At December 31, 2009, the affiliate bank had $34,500 in
retained earnings available for payment of dividends to the parent company
without prior regulatory approval.
Equity Plans and Equity
Based Compensation
The
Company maintains three equity incentive plans under which stock options,
restricted stock, and other equity incentive awards can be
granted. At December 31, 2009, the Company has reserved 657,956
shares of Common Stock (as adjusted for subsequent stock dividends and subject
to further customary anti-dilution adjustments) for the purpose of issuance
pursuant to outstanding and future grants of options, restricted stock, and
other equity awards to officers, directors and other employees of the
Company.
48
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
8 – Stockholders’ Equity (continued)
Stock
Options
Options
may be designated as “incentive stock options” under the Internal Revenue Code
of 1986, or as nonqualified options. While the date after which
options are first exercisable is determined by the Long-Term Incentive Award
Committee of the Company or, in the case of options granted to directors, by the
Board of Directors, no stock option may be exercised after ten years from the
date of grant (twenty years in the case of nonqualified stock options). The
exercise price of stock options granted pursuant to the Plans must be no less
than the fair market value of the Common Stock on the date of the
grant.
The Plans
authorize an optionee to pay the exercise price of options in cash or in common
shares of the Company or in some combination of cash and common
shares. An optionee may tender already-owned common shares to the
Company in exercise of an option. The Company typically issues
authorized but unissued common shares upon the exercise of options.
The
following table presents activity for stock options under the Company’s equity
incentive plan for 2009:
Year Ended December 31,
2009
|
||||||||||||||||
|
Weighted
Average
|
|
||||||||||||||
Number
of
|
Weighted
Average
Price
|
Life
of
Options
|
Aggregate
Intrinsic
|
|||||||||||||
Options
|
of Options
|
(in years)
|
Value
|
|||||||||||||
Outstanding
at Beginning of Period
|
248,871 | $ | 16.25 | |||||||||||||
Granted
|
— | — | ||||||||||||||
Exercised
|
(30,035 | ) | 14.50 | |||||||||||||
Forfeited
|
(2,992 | ) | 13.49 | |||||||||||||
Expired
|
(57,888 | ) | 16.77 | |||||||||||||
Outstanding
& Exercisable at End of Period
|
157,956 | $ | 16.44 | 5.90 | $ | 150 |
The
following table presents information related to stock options under the
Company’s equity incentive plan during the years ended 2009, 2008, and
2007:
2009
|
2008
|
2007
|
||||||||||
Intrinsic
Value of Options Exercised
|
$ | 55 | $ | — | $ | — | ||||||
Cash
Received from Option Exercises
|
$ | — | $ | — | $ | — | ||||||
Tax
Benefit of Option Exercises
|
$ | 10 | $ | — | $ | — | ||||||
Weighted
Average Fair Value of Options Granted
|
$ | — | $ | — | $ | — |
The
intrinsic value for stock options is calculated based on the exercise price of
the underlying awards and the market price of common stock as of the reporting
date.
During
2009 and 2008, the Company granted no options, and accordingly, recorded no
stock compensation expense related to option grants. The Company
recorded no other stock compensation expense applicable to options during the
years ended December 31, 2009, 2008, and 2007 because all outstanding options
were fully vested prior to 2007. As of December 31, 2009 and 2008,
there was no unrecognized option expense as all outstanding options were fully
vested.
Restricted
Stock
During
the periods presented, awards of long-term incentives were granted in the form
of restricted stock, granted in tandem with cash credit
entitlements. The incentive awards will typically be in the form of
50% restricted stock grants and 50% cash credit entitlements. The
restricted stock grants and tandem cash credit entitlements are subject to
forfeiture in the event that the recipient of the grant does not continue
employment with the Company through December 15 of the year of grant, at which
time they generally vest 100 percent. For measuring compensation
costs, restricted stock awards are valued based upon the market value of the
common shares on the date of grant.
49
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
8 – Stockholders’ Equity (continued)
The
expense recorded for the restricted stock grants totaled $485 (or $293, net of
an income tax benefit of $192) during the year ended December 31,
2009. The expense recorded for the restricted stock grants totaled
$10 (or $6, net of an income tax benefit of $4) during the year ended December
31, 2008. The expense recorded for the restricted stock grants
totaled $283 (or $171, net of an income tax benefit of $112) during the year
ended December 31, 2007. There was no unrecognized expense associated
with the restricted stock grants as of December 31, 2009 and 2008.
The
following table presents information on restricted stock grants outstanding for
the period shown:
Year
Ended
|
||||||||
December 31, 2009
|
||||||||
Weighted
|
||||||||
Restricted
|
Average
Market
|
|||||||
Shares
|
Price at Grant
|
|||||||
Outstanding
at Beginning of Period
|
— | $ | — | |||||
Granted
|
43,740 | 11.08 | ||||||
Issued
and Vested
|
43,740 | 11.08 | ||||||
Forfeited
|
— | — | ||||||
Outstanding
at End of Period
|
— | — |
Employee Stock Purchase
Plan
The Company maintains an Employee Stock
Purchase Plan whereby eligible employees have the option to purchase the
Company’s common stock at a discount. The plan year for the Employee
Stock Purchase Plan runs from August 17 through August 16 of the subsequent
year. For years prior to the plan year beginning August 17, 2007, the
purchase price of the shares was determined annually and in the range from 85%
to 100% of the fair market value of such stock at either the beginning or end of
the plan year. For subsequent plan years, the purchase price of the shares under
this Plan has been set
at 95% of the fair market
value of the Company’s common stock as of the last day of the plan
year. The plan provides for the purchase of up to 542,420 shares of
common stock, which the Company may obtain by purchases on the open market or
from private sources, or by issuing authorized but unissued common
shares. Funding for the purchase of common stock is from employee and
Company contributions.
Based on the above referenced setting of
the purchase price at 95% of the fair market value of the Company’s common stock
and elimination of the look-back feature for the 2007/2008, 2008/2009, and the
2009/2010 plan years, the Employee Stock Purchase Plan was not and will not be
considered compensatory and no expense was or will be recorded during the
2007/2008, 2008/2009, and the 2009/2010 plan years. There was
no expense recorded for the employee stock purchase plan in 2009 and
2008. The expense recorded for the employee stock purchase plan
totaled $47 (or $28, net of an income tax benefit of $19) during the year ended
December 31, 2007. There was no unrecognized compensation expense as
of December 31, 2009 and 2008 for the Employee Stock Purchase Plan.
In 2009, the Company adopted an Employee
Stock Purchase Plan to replace the existing Employee Stock Purchase Plan that
expired at the end of the 2008/2009 plan year. The Plan adopted
during 2009 has substantially the same terms as the existing Plan and 500,000
shares of common stock have been reserved for issuance under the newly adopted
plan. No shares have been issued under the newly adopted
Plan.
Stock Repurchase
Plan
On April
26, 2001, the Company announced that its Board of Directors approved a stock
repurchase program for up to 607,754 of the outstanding Common Shares of the
Company. 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. As of December 31, 2009, the Company had
purchased 334,965 shares under the program. No shares were purchased under the
program during the year ended December 31, 2009.
50
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
9 – Employee Benefit Plans
The
Company provides a contributory trusteed 401(k) deferred compensation and profit
sharing plan, which covers substantially all employees. The Company
agrees to match certain employee contributions under the 401(k) portion of the
plan, while profit sharing contributions are discretionary and are subject to
determination by the Board of Directors. Company contributions were
$562, $560, and $552 for 2009, 2008 and 2007, respectively.
The
Company self-insures employee health benefits. Stop loss insurance
covers annual losses exceeding $85 per covered
individual. Management’s policy is to establish a reserve for claims
not submitted by a charge to earnings based on prior
experience. Charges to earnings were $2,476, $1,387, and $1,495 for
2009, 2008 and 2007, respectively.
The
Company maintains deferred compensation plans for the benefit of certain
directors and officers. Under the plans, the Company agrees in return
for the directors and officers deferring the receipt of a portion of their
current compensation, to pay a retirement benefit computed as the amount of the
compensation deferred plus accrued interest at a variable
rate. Accrued benefits payable totaled $2,735 and $2,678 at December
31, 2009 and 2008. Deferred compensation expense was $429, $229, and
$121 for 2009, 2008 and 2007, respectively. In conjunction with the
plans, the Company purchased life insurance on certain directors and
officers.
The
Company entered into early retirement agreements with certain officers of the
Company during 2008. Accrued benefits payable as a result of the
agreements totaled $615 and $701 at December 31, 2009 and 2008,
respectively. Expense associated with these agreements totaled $110
and $718 during 2009 and 2008, respectively. The benefits under the
agreements will be paid through 2017.
The
Company acquired through previous bank mergers a noncontributory defined benefit
pension plan with benefits based on years of service and compensation prior to
retirement. The benefits under the plan were suspended in
1998. During the years ended 2009 and 2008, there were no losses
incurred on partial settlements of the plan. Partial settlements of
the plan were $46 during the year ended 2007.
In
September 2006, the Financial Accounting Standards Board (FASB) issued guidance
which requires that defined benefit plan assets and obligations to be measured
as of the date of the employer’s fiscal year-end, starting in
2008. Through 2007, the Company utilized the early measurement date,
and measured the funded status of the defined benefit plan assets and
obligations as of September 30 each year. The net periodic benefit
cost for the period between the September 30 measurement date and the 2008
fiscal year end measurement was simply recognized during 2008 given the nature
of this suspended plan and immateriality of the net periodic pension cost for
this additional quarter.
Accumulated
plan benefit information for the Company’s plan as of December 31, 2009 and 2008
was as follows:
Changes
in Benefit Obligation:
|
2009
|
2008
|
||||||
Obligation
at Beginning of Year
|
$ | 620 | $ | 615 | ||||
Interest
Cost
|
36 | 46 | ||||||
Benefits
Paid
|
(65 | ) | (52 | ) | ||||
Actuarial
(Gain) Loss
|
83 | 11 | ||||||
Obligation
at End of Year
|
674 | 620 | ||||||
Changes
in Plan Assets:
|
||||||||
Fair
Value at Beginning of Year
|
331 | 270 | ||||||
Actual
Return on Plan Assets
|
(1 | ) | 14 | |||||
Employer
Contributions
|
24 | 99 | ||||||
Benefits
Paid
|
(65 | ) | (52 | ) | ||||
Fair
Value at End of Year
|
289 | 331 | ||||||
Funded
Status:
|
||||||||
Funded
Status at End of Year
|
$ | (385 | ) | $ | (289 | ) |
51
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
9 – Employee Benefit Plans (continued)
Amounts
recognized in accumulated other comprehensive income at December 31 consist
of:
Net
Loss (Gain)
|
$ | 268 | $ | 193 | ||||
Prior
Service Cost
|
12 | 9 | ||||||
$ | 280 | $ | 202 |
The
accumulated benefit obligation was $674 and $620 at year-end 2009 and 2008,
respectively.
Because
the plan has been suspended, the projected benefit obligation and accumulated
benefit obligation are the same. The accumulated benefit obligation
for the defined benefit pension plan exceeds the fair value of the assets
included in the plan.
Components of Net Periodic
Benefit Cost and Other Amounts Recognized in Other Comprehensive
Income
2009
|
2008
|
2007
|
||||||||||
Interest
Cost
|
$ | 36 | $ | 37 | $ | 37 | ||||||
Expected
Return on Assets
|
(7 | ) | (13 | ) | (12 | ) | ||||||
Amortization
of Transition Amount
|
— | (1 | ) | (1 | ) | |||||||
Amortization
of Prior Service Cost
|
(3 | ) | (3 | ) | (3 | ) | ||||||
Recognition
of Net Loss
|
16 | 21 | 27 | |||||||||
Net
Periodic Benefit Cost
|
$ | 42 | $ | 41 | $ | 48 | ||||||
Net
Loss During the Period
|
91 | 11 | 2 | |||||||||
Amortization
of Unrecognized Loss
|
(16 | ) | (16 | ) | (74 | ) | ||||||
Amortization
of Transition Cost
|
— | 1 | 1 | |||||||||
Amortization
of Prior Service Cost
|
3 | 4 | 3 | |||||||||
Total
Recognized in Other Comprehensive Income
|
78 | — | (68 | ) | ||||||||
Total
Recognized in Net Periodic Benefit Cost and Other
|
||||||||||||
Comprehensive
Income
|
$ | 120 | $ | 41 | $ | (20 | ) |
The
estimated net loss, prior service costs, and net transition obligation (asset)
for the defined benefit pension plan that will be amortized from accumulated
other comprehensive income into net periodic benefit cost over the next fiscal
year are $25, $(3), and $0, respectively.
Assumptions
Weighted-average
assumptions used to determine benefit obligations at year-end:
2009
|
2008
|
2007
|
||||||||||
Discount
Rate
|
5.29 | % | 6.17 | % | 6.25 | % | ||||||
Rate
of Compensation Increase (1)
|
N/A | N/A | N/A | |||||||||
Weighted-average
assumptions used to determine net periodic pension cost:
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Discount
Rate
|
6.17 | % | 6.25 | % | 5.75 | % | ||||||
Expected
Return on Plan Assets
|
2.20 | % | 4.50 | % | 4.75 | % | ||||||
Rate
of Compensation Increase (1)
|
N/A | N/A | N/A |
(1) Benefits
under the plan were suspended in 1998; therefore, the weighted-average rate of
increase in future compensation levels was not applicable for all years
presented.
52
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
9 – Employee Benefit Plans (continued)
The
expected return on plan assets was determined based upon rates that are expected
to be available for future reinvestment of earnings and maturing investments
along with consideration given to the current mix of plan assets.
Plan
Assets
The
Company’s defined benefit pension plan asset allocation at year-end 2009 and
2008 and target allocation for 2010 by asset category are as
follows:
Target
Allocation
|
Percentage
of Plan Assets
at
Year-end
|
|||||||||||
Asset Category
|
2010
|
2009
|
2008
|
|||||||||
Cash
|
50 | % | 100 | % | 71 | % | ||||||
Certificates
of Deposit
|
50 | % | — | % | 29 | % | ||||||
Total
|
100 | % | 100 | % | 100 | % |
Plan
benefits are suspended. Therefore, the Company has invested
predominantly in relatively short-term investments over the past two
years. No significant changes to investing strategies are
anticipated.
Fair Value of Plan
Assets
Fair
value is the exchange price that would be received for an asset in the principal
or most advantageous market for the asset in an orderly transaction between
market participants on the measurement date. Since plan assets
consist of cash, there are no estimates or assumptions applied to determine fair
value.
Postretirement Medical and
Life Benefit Plan
The
Company has an unfunded postretirement benefit plan covering substantially all
of its employees. The medical plan is contributory with the
participants’ contributions adjusted annually; the life insurance plans are
noncontributory.
Changes
in Accumulated Postretirement Benefits Obligations
2009
|
2008
|
|||||||
Obligation
at the Beginning of Year
|
$ | 450 | $ | 619 | ||||
Unrecognized
Loss (Gain)
|
7 | (174 | ) | |||||
Components
of Net Periodic Postretirement Benefit Cost
|
||||||||
Service
Cost
|
17 | 35 | ||||||
Interest
Cost
|
25 | 34 | ||||||
Net
Expected Benefit Payments
|
(53 | ) | (64 | ) | ||||
Obligation
at End of Year
|
$ | 446 | $ | 450 |
Components
of Postretirement Benefit Expense
2009
|
2008
|
|||||||
Service
Cost
|
$ | 17 | $ | 35 | ||||
Interest
Cost
|
25 | 34 | ||||||
Net
Postretirement Benefit Expense
|
42 | 69 | ||||||
Net
Gain During Period Recognized in Other Comprehensive
Income
|
— | (238 | ) | |||||
Total
Recognized in Net Postretirement Benefit Expense
|
||||||||
and
Other Comprehensive Income
|
$ | 42 | $ | (169 | ) |
53
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
9 – Employee Benefit Plans (continued)
Assumptions
Used to Determine Net Periodic Cost and Benefit Obligations:
2009
|
2008
|
2007
|
||||||||||
Discount
Rate
|
6.00 | % | 6.00 | % | 5.50 | % |
Assumed
Health Care Cost Trend Rates at Year-end:
2009
|
2008
|
|||||||
Health
Care Cost Trend Rate Assumed for Next Year
|
8.00 | % | 8.00 | % | ||||
Rate
that the Cost Trend Rate Gradually Declines to
|
4.50 | % | 4.50 | % | ||||
Year
that the Rate Reaches the Rate it is Assumed to Remain at
|
2016
|
2015
|
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
One-Percentage-Point
|
One-Percentage-Point
|
|||||||
Increase
|
Decrease
|
|||||||
Effect
on Total of Service and Interest Cost
|
$ | 3 | $ | (3 | ) | |||
Effect
on Postretirement Benefit Obligation
|
$ | 25 | $ | (23 | ) |
Pension and Other Benefit
Plans
Contributions
The
Company expects to contribute $75 to its defined benefit pension plan and $38 to
its postretirement medical and life insurance plan in 2010.
Estimated Future
Benefits
The
following benefit payments, which reflect expected future service, are expected
to be paid:
Pension
|
Postretirement
|
|||||||
Year
|
Benefits
|
Benefits
|
||||||
2010
|
$ | 58 | $ | 38 | ||||
2011
|
53 | 48 | ||||||
2012
|
49 | 40 | ||||||
2013
|
104 | 42 | ||||||
2014
|
41 | 39 | ||||||
2015-2019
|
303 | 272 |
54
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
10 – Income Taxes
The
provision for income taxes consists of the following:
|
2009
|
2008
|
2007
|
|||||||||
Current
Federal
|
$ | 4,424 | $ | 4,604 | $ | 2,991 | ||||||
Current
State
|
25 | 476 | 504 | |||||||||
Deferred
Federal
|
(192 | ) | 719 | 634 | ||||||||
Deferred
State
|
(244 | ) | (161 | ) | (27 | ) | ||||||
Total
|
$ | 4,013 | $ | 5,638 | $ | 4,102 |
Income
tax expense is reconciled to the 34% statutory rate applied to pre-tax income as
follows:
2009
|
2008
|
2007
|
||||||||||
Statutory
Rate Times Pre-tax Income
|
$ | 5,518 | $ | 6,270 | $ | 4,592 | ||||||
Add
(Subtract) the Tax Effect of:
|
||||||||||||
Income
from Tax-exempt Loans and Investments
|
(512 | ) | (351 | ) | (346 | ) | ||||||
State
Income Tax, Net of Federal Tax Effect
|
(145 | ) | 208 | 315 | ||||||||
General
Business Tax Credits
|
(466 | ) | (182 | ) | (182 | ) | ||||||
Dividends
Received Deduction
|
(5 | ) | (22 | ) | — | |||||||
Company
Owned Life Insurance
|
(375 | ) | (269 | ) | (280 | ) | ||||||
Other
Differences
|
(2 | ) | (16 | ) | 3 | |||||||
Total
Income Taxes
|
$ | 4,013 | $ | 5,638 | $ | 4,102 |
The net
deferred tax asset (liability) at December 31 consists of the
following:
2009
|
2008
|
||||||||
Deferred
Tax Assets:
|
|||||||||
Allowance
for Loan Losses
|
$ | 3,815 | $ | 2,871 | |||||
Deferred
Compensation and Employee Benefits
|
1,585 | 1,535 | |||||||
Other-than-temporary
Impairment
|
401 | 676 | |||||||
Accrued
Expenses
|
440 | 487 | |||||||
Business
Combination Fair Value Adjustments
|
14 | 23 | |||||||
Pension
and Postretirement Plans
|
1 | — | |||||||
Other
|
271 | 113 | |||||||
Total
Deferred Tax Assets
|
6,527 | 5,705 | |||||||
Deferred
Tax Liabilities:
|
|||||||||
Depreciation
|
(179 | ) | (345 | ) | |||||
Leasing
Activities, Net
|
(3,580 | ) | (3,254 | ) | |||||
Investment
in Low Income Housing Partnerships
|
(392 | ) | (262 | ) | |||||
Unrealized
Appreciation on Securities
|
(2,404 | ) | (1,451 | ) | |||||
FHLB
Stock Dividends
|
(440 | ) | (440 | ) | |||||
Prepaid
Expenses
|
(394 | ) | (408 | ) | |||||
Intangibles
|
(105 | ) | (254 | ) | |||||
Pension
and Postretirement Plans
|
— | (30 | ) | ||||||
Other
|
(276 | ) | (18 | ) | |||||
Total
Deferred Tax Liabilities
|
(7,770 | ) | (6,462 | ) | |||||
Valuation
Allowance
|
(45 | ) | (45 | ) | |||||
Net
Deferred Tax Asset (Liability)
|
$ | (1,288 | ) | $ | (802 | ) |
Under the
Internal Revenue Code, through 1996 two acquired banking companies, which are
now a part of the Company’s single banking subsidiary, were allowed a special
bad debt deduction related to additions to tax bad debt reserves established for
the purpose of absorbing losses. The acquired banks were formerly known as
Peoples Community Bank (acquired in October 2005) and First American Bank
(acquired in January 1999). Subject to certain limitations, these
Banks were permitted to deduct from taxable income an allowance for bad debts
based on a percentage of taxable income before such deductions or actual loss
experience. The Banks generally computed its annual addition to its
bad debt reserves using the percentage of taxable income method; however, due to
certain limitations in 1996, the Banks were only allowed a deduction based on
actual loss experience.
55
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
10 – Income Taxes (continued)
Retained
earnings at December 31, 2009, include approximately $2,995 for which no
provision for federal income taxes has been made. This amount
represents allocations of income for allowable bad debt
deductions. Reduction of amounts so allocated for purposes other than
tax bad debt losses will create taxable income, which will be subject to the
then current corporate income tax rate. It is not contemplated that
amounts allocated to bad debt deductions will be used in any manner to create
taxable income. The unrecorded deferred income tax liability on the
above amount at December 31, 2009 was approximately $1,018.
Unrecognized Tax
Benefits
The Company had no unrecognized tax
benefits as of December 31, 2009, 2008, and 2007, and did not recognize any
increase in unrecognized benefits during 2009 relative to any tax positions
taken in 2009. Should the accrual of any interest or penalties
relative to unrecognized tax benefits be necessary, it is the Company’s policy
to record such accruals in its income tax expense accounts; no such accruals
existed as of December 31, 2009, 2008, and 2007. The Company and its
corporate subsidiaries file a consolidated U.S. Federal income tax return, which
is subject to examination for all years after 2005. The Company and its
corporate subsidiaries doing business in Indiana file a combined Indiana unitary
return, which is subject to examination for years 2003, 2004, and all years
after 2005.
NOTE
11 – Per Share Data
The
computation of Earnings per Share and Diluted Earnings per Share are provided
below:
2009
|
2008
|
2007
|
||||||||||
Earnings
per Share:
|
||||||||||||
Net
Income
|
$ | 12,218 | $ | 12,803 | $ | 9,405 | ||||||
Weighted
Average Shares Outstanding
|
11,065,917 | 11,029,519 | 11,009,536 | |||||||||
Earnings
per Share
|
$ | 1.10 | $ | 1.16 | $ | 0.85 | ||||||
Diluted
Earnings per Share:
|
||||||||||||
Net
Income
|
$ | 12,218 | $ | 12,803 | $ | 9,405 | ||||||
Weighted
Average Shares Outstanding
|
11,065,917 | 11,029,519 | 11,009,536 | |||||||||
Stock
Options, Net
|
3,071 | 392 | 15,690 | |||||||||
Diluted
Weighted Average Shares Outstanding
|
11,068,988 | 11,029,911 | 11,025,226 | |||||||||
Diluted
Earnings per Share
|
$ | 1.10 | $ | 1.16 | $ | 0.85 |
Stock
options for 117,898, 248,871, and 257,063 shares of common stock were not
considered in computing diluted earnings per common share for 2009, 2008, and
2007, respectively, because they were anti-dilutive.
NOTE
12 – Lease Commitments
The total
rental expense for all operating leases for the years ended December 31, 2009,
2008, and 2007 was $316, $338, and $355, respectively, including amounts paid
under short-term cancelable leases.
The
following is a schedule of future minimum lease payments:
Years
Ending December 31:
|
Premises and Equipment
|
|||
2010
|
$ | 256 | ||
2011
|
157 | |||
2012
|
132 | |||
2013
|
84 | |||
2014
|
82 | |||
Thereafter
|
1,034 | |||
Total
|
$ | 1,745 |
56
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
13 – Commitments and Off-balance Sheet Items
In the
normal course of business, there are various commitments and contingent
liabilities, such as commitments to extend credit and commitments to sell loans,
which are not reflected in the accompanying consolidated financial
statements. The Company’s exposure to credit loss in the event of
nonperformance by the other party to the financial instruments for commitments
to make loans and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policy
to make commitments as it uses for on-balance sheet items.
The
Company’s exposure to credit risk for commitments to sell loans is dependent
upon the ability of the counter-party to purchase the loans. This is
generally assured by the use of government sponsored entity
counterparts. These commitments are subject to market risk resulting
from fluctuations in interest rates. Commitments to sell loans are
not mandatory (i.e., do not require net settlement with the counter-party to
cancel the commitment).
Commitments
and contingent liabilities are summarized as follows, at December
31:
2009
|
2008
|
|||||||||||||||
Fixed
|
Variable
|
Fixed
|
Variable
|
|||||||||||||
Rate
|
Rate
|
Rate
|
Rate
|
|||||||||||||
Commitments
to Fund Loans:
|
||||||||||||||||
Consumer
Lines
|
$ | 1,839 | $ | 102,628 | $ | 3,488 | $ | 98,592 | ||||||||
Commercial
Operating Lines
|
7,733 | 120,732 | 4,779 | 122,882 | ||||||||||||
Residential
Mortgages
|
8,324 | 1,387 | — | 858 | ||||||||||||
Total
Commitments to Fund Loans
|
$ | 17,896 | $ | 224,747 | $ | 8,267 | $ | 222,332 | ||||||||
Commitments
to Sell Loans
|
$ | 15,263 | $ | — | $ | 27,219 | $ | — | ||||||||
Standby
Letters of Credit
|
$ | 970 | $ | 2,517 | $ | 975 | $ | 7,580 |
The fixed
rate commitments to fund loans have interest rates ranging from 2.000% to
18.000% and maturities ranging from less than 1 year to 15
years. Since many commitments to make loans expire without being
used, these amounts do not necessarily represent future cash
commitments. Collateral obtained upon exercise of the commitment is
determined using management’s credit evaluation of the borrower, and may include
accounts receivable, inventory, property, land, and other items.
NOTE
14 – Fair Value
Fair value as the exchange price that
would be received for an asset or paid to transfer a liability (exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement
date. There are three levels of inputs that may be used to measure
fair values:
Level 1: Quoted prices
(unadjusted) for identical assets or liabilities in active markets that the
entity has the ability to access as of the measurement date.
Level 2: Significant other
observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data.
Level 3: Significant unobservable inputs that
reflect a reporting entity’s own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The Company used the following methods
and significant assumptions to estimate the fair value of each type of financial
instrument:
Investment
Securities: The
fair values for investment securities are determined by quoted market prices, if
available (Level 1). For securities where quoted prices are not
available, fair values are calculated based on market prices of similar
securities (Level 2). For securities where quoted prices or market
prices of similar securities are not available, fair values are calculated using
discounted cash flows or other market indicators (Level
3).
57
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
14 – Fair Value (continued)
Impaired
Loans: Values for collateral dependent loans are generally
based on appraisals obtained from licensed real estate appraisers and in certain
circumstances consideration of offers obtained to purchase properties prior to
foreclosure. Appraisals for commercial real estate generally use
three methods to derive value: cost, sales or market comparison and income
approach. The cost method bases value in the cost to replace the
current property. Value of market comparison approach evaluates the
sales price of similar properties in the same market area. The income
approach considers net operating income generated by the property and an
investors required return. Adjustments are routinely made in the
appraisal process to adjust for differences between the comparable sale and
income data available. Such adjustments are typically significant and
result in a Level 3 classification of the inputs for determining fair
value.
Other Real Estate
Owned: Nonrecurring adjustments to certain commercial and
residential real estate properties classified as other real estate owned (OREO)
are measured at the lower of carrying amount or fair value, less costs to
sell. Fair values are generally based on third party appraisals of
the property utilizing similar techniques as discussed above for Impaired Loans,
resulting in a Level 3 classification. In cases where the carrying
amount exceeds the fair value, less costs to sell, impairment loss is
recognized.
Loans
Held-for-Sale: The fair values of loans held for sale are
determined by using quoted prices for a similar asset, adjusted for specific
attributes of that loan (Level 2).
Assets and Liabilities
Measured on a Recurring Basis
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
Fair Value Measurements at December 31, 2009 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 4,970 | $ | — | $ | 4,970 | $ | — | ||||||||
Obligations
of State and Political Subdivisions
|
22,378 | — | 22,378 | — | ||||||||||||
Mortgage-backed
Securities - Residential
|
221,252 | — | 221,252 | — | ||||||||||||
Equity
Securities
|
2,340 | 1,987 | — | 353 | ||||||||||||
Loans
Held-for-Sale
|
5,706 | — | 5,706 | — |
Fair Value Measurements at December 31, 2008 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Obligations
of State and Political Subdivisions
|
16,868 | — | 16,868 | — | ||||||||||||
Mortgage-backed
Securities - Residential
|
155,627 | — | 155,627 | — | ||||||||||||
Equity
Securities
|
3,345 | 2,190 | — | 1,155 |
58
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
14 – Fair Value (continued)
The table
below presents a reconciliation and income statement classification of gains and
losses for equity securities that do not have readily determinable fair values
and are evaluated for impairment on a periodic basis. These assets were measured
at fair value on a recurring basis using significant unobservable inputs (Level
3) for the year ended December 31, 2009:
Fair Value Measurements
|
||||
Using Significant
|
||||
Unobservable Inputs
|
||||
(Level 3)
|
||||
Available-for-Sale
|
||||
Securities
|
||||
Year
Ended December 31, 2009:
|
||||
Balance
of Recurring Level 3 Assets at January 1, 2009
|
$ | 1,155 | ||
Sale
of Securities
|
(379 | ) | ||
Other-than-temporary
Impairment Charges Recognized through Net Income
|
(423 | ) | ||
Ending
Balance, December 31, 2009
|
$ | 353 |
Fair Value Measurements
|
||||
Using Significant
|
||||
Unobservable Inputs
|
||||
(Level 3)
|
||||
Available-for-Sale
|
||||
Securities
|
||||
Year
Ended December 31, 2008:
|
||||
Balance
of Recurring Level 3 Assets at January 1, 2008
|
$ | 2,092 | ||
Other-than-temporary
Impairment Charges Recognized through Net Income
|
(937 | ) | ||
Ending
Balance, December 31, 2008
|
$ | 1,155 |
Assets and Liabilities
Measured on a Non-Recurring Basis
Assets
and liabilities measured at fair value on a non-recurring basis are summarized
below:
Fair Value Measurements at December 31, 2009 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Impaired
Loans
|
$ | 3,699 | $ | — | $ | — | $ | 3,699 | ||||||||
Other
Real Estate
|
$ | 2,363 | $ | — | $ | — | $ | 2,363 |
Fair Value Measurements at December 31, 2008 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Impaired
Loans
|
$ | 2,284 | $ | — | $ | — | $ | 2,284 | ||||||||
Other
Real Estate
|
$ | 1,818 | $ | — | $ | — | $ | 1,818 |
59
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
14 – Fair Value (continued)
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $6,602, with a
valuation allowance of $2,903, resulting in an additional provision for loan
losses of $2,517 for the year ended December 31, 2009. At December
31, 2008, impaired loans had a carrying amount of $3,755, with a valuation
allowance of $1,471, resulting in an additional provision for loan losses of
$1,017 for the year ended December 31, 2008.
Other
Real Estate which is measured at the lower of carrying or fair value less costs
to sell, had a carrying amount of $2,363 at December 31, 2009, resulting in a
write-down of $228 for the year ending December 31, 2009.
Fair
Value of Financial Instruments
The
estimated fair values of the Company’s financial instruments not previously
disclosed are provided in the table below. Not all of the Company’s
assets and liabilities are considered financial instruments, and therefore are
not included in the table. Because no active market exists for a
significant portion of the Company’s financial instruments, fair value estimates
were based on subjective judgments, and therefore cannot be determined with
precision.
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and Short-term Investments
|
$ | 28,054 | $ | 28,054 | $ | 44,992 | $ | 44,992 | ||||||||
Securities
Held-to-Maturity
|
2,774 | 2,801 | 3,326 | 3,358 | ||||||||||||
FHLB
Stock and Other Restricted Stock
|
10,621 | N/A | 10,621 | N/A | ||||||||||||
Loans,
including Loans Held-for-Sale, Net
|
872,512 | 880,077 | 884,080 | 892,785 | ||||||||||||
Accrued
Interest Receivable
|
6,605 | 6,605 | 7,215 | 7,215 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Demand,
Savings, and Money Market Deposits
|
(639,967 | ) | (639,967 | ) | (587,282 | ) | (587,282 | ) | ||||||||
Time
Deposits
|
(329,676 | ) | (330,628 | ) | (354,468 | ) | (357,089 | ) | ||||||||
Short-term
Borrowings
|
(34,801 | ) | (34,801 | ) | (26,056 | ) | (26,056 | ) | ||||||||
Long-term
Debt
|
(113,320 | ) | (114,742 | ) | (105,608 | ) | (111,092 | ) | ||||||||
Accrued
Interest Payable
|
(2,292 | ) | (2,292 | ) | (2,884 | ) | (2,884 | ) | ||||||||
Unrecognized
Financial Instruments:
|
||||||||||||||||
Commitments
to Extend Credit
|
— | — | — | — | ||||||||||||
Standby
Letters of Credit
|
— | — | — | — | ||||||||||||
Commitments
to Sell Loans
|
— | — | — | — |
The fair
values of securities held to maturity are based on quoted market prices or
dealer quotes, if available, or by using quoted market prices for similar
instruments. The fair value of loans held-for-sale is estimated using
commitment prices or market quotes on similar loans. The fair value
of loans are estimated by discounting future cash flows using the current rates
at which similar loans would be made for the average remaining
maturities. It was not practicable to determine the fair value of
FHLB stock and other restricted stock due to restrictions placed on its
transferability. The fair value of demand deposits, savings accounts,
money market deposits, short-term borrowings and accrued interest payable is the
amount payable on demand at the reporting date. The fair value of
fixed-maturity time deposits and long-term borrowings are estimated using the
rates currently offered on these instruments for similar remaining
maturities. Commitments to extend credit and standby letters of
credit are generally short-term or variable rate with minimal fees
charged. These instruments have no carrying value, and the fair value
is not significant. The fair value of commitments to sell loans is
the cost or benefit of settling the commitments with the counter-party at the
reporting date. At December 31, 2009 and 2008, none of the Company’s
commitments to sell loans were mandatory, and there is no cost or benefit to
settle these commitments.
NOTE
15 – Segment Information
The
Company’s operations include three primary segments: core banking, trust and
investment advisory services, and insurance operations. The core
banking segment involves attracting deposits from the general public and using
such funds to originate consumer, commercial and agricultural, commercial and
agricultural real estate, and residential mortgage loans, primarily in the
Company’s local markets. The core banking segment also involves the
sale of residential mortgage loans in the secondary market.
60
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
15 – Segment Information (continued)
The trust
and investment advisory services segment involves providing trust, investment
advisory, and brokerage services to customers. 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
banking segment is comprised by the Company’s banking subsidiary, German
American Bancorp, which operates through 28 retail banking
offices. Net interest income from loans and investments funded by
deposits and borrowings is the primary revenue for the core-banking
segment. The trust and investment advisory services segment’s
revenues are comprised primarily of fees generated by German American Financial
Advisors & Trust Company (“GAFA”). These fees are derived by
providing trust, investment advisory, and brokerage services to its customers.
The insurance segment consists of German American Insurance, Inc., which
provides a full line of personal and corporate insurance products from seven
offices; and German American Reinsurance Company, Ltd. (“GARC”), which reinsures
credit insurance products sold by the Company’s affiliate
bank. 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, Inc., 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 column labeled “Other” below, along with amounts to
eliminate transactions between segments.
Year
ended December 31, 2009
Trust
and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 45,825 | $ | 13 | $ | 59 | $ | (1,384 | ) | $ | 44,513 | |||||||||
Net
Gains on Sales of Loans and Related Assets
|
1,760 | — | — | — | 1,760 | |||||||||||||||
Net
Gain (Loss) on Securities
|
— | — | — | (423 | ) | (423 | ) | |||||||||||||
Trust
and Investment Product Fees
|
4 | 1,617 | — | (4 | ) | 1,617 | ||||||||||||||
Insurance
Revenues
|
82 | 18 | 5,241 | (45 | ) | 5,296 | ||||||||||||||
Noncash
Items:
|
||||||||||||||||||||
Provision
for Loan Losses
|
3,750 | — | — | — | 3,750 | |||||||||||||||
Depreciation
and Amortization
|
2,727 | 27 | 934 | — | 3,688 | |||||||||||||||
Income
Tax Expense
|
5,298 | 15 | (29 | ) | (1,271 | ) | 4,013 | |||||||||||||
Segment
Profit (Loss)
|
13,140 | 20 | (44 | ) | (898 | ) | 12,218 | |||||||||||||
Segment
Assets
|
1,236,745 | 2,182 | 8,432 | (4,394 | ) | 1,242,965 |
Year
ended December 31, 2008
Trust
and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 41,725 | $ | 60 | $ | 71 | $ | (919 | ) | $ | 40,937 | |||||||||
Net
Gains on Sales of Loans and Related Assets
|
1,399 | — | — | — | 1,399 | |||||||||||||||
Net
Gain (Loss) on Securities
|
1,031 | — | — | (937 | ) | 94 | ||||||||||||||
Trust
and Investment Product Fees
|
4 | 2,312 | — | (28 | ) | 2,288 | ||||||||||||||
Insurance
Revenues
|
75 | 43 | 6,256 | (68 | ) | 6,306 | ||||||||||||||
Noncash
Items:
|
||||||||||||||||||||
Provision
for Loan Losses
|
3,990 | — | — | — | 3,990 | |||||||||||||||
Depreciation
and Amortization
|
2,490 | 25 | 847 | — | 3,362 | |||||||||||||||
Income
Tax Expense
|
6,383 | 230 | 256 | (1,231 | ) | 5,638 | ||||||||||||||
Segment
Profit (Loss)
|
13,185 | 338 | 413 | (1,133 | ) | 12,803 | ||||||||||||||
Segment
Assets
|
1,183,773 | 1,992 | 8,930 | (3,867 | ) | 1,190,828 |
61
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
15 – Segment Information (continued)
Year
ended December 31, 2007
Trust
and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 39,677 | $ | 94 | $ | 111 | $ | (1,267 | ) | $ | 38,615 | |||||||||
Net
Gains on Sales of Loans and Related Assets
|
822 | — | — | — | 822 | |||||||||||||||
Net
Gain (Loss) on Securities
|
— | — | — | (680 | ) | (680 | ) | |||||||||||||
Trust
and Investment Product Fees
|
3 | 2,690 | — | (103 | ) | 2,590 | ||||||||||||||
Insurance
Revenues
|
102 | 42 | 5,727 | (77 | ) | 5,794 | ||||||||||||||
Noncash
Items:
|
||||||||||||||||||||
Provision
for Loan Losses
|
3,591 | — | — | — | 3,591 | |||||||||||||||
Depreciation
and Amortization
|
2,319 | 21 | 800 | — | 3,140 | |||||||||||||||
Income
Tax Expense
|
4,896 | 316 | 262 | (1,372 | ) | 4,102 | ||||||||||||||
Segment
Profit (Loss)
|
10,153 | 481 | 396 | (1,625 | ) | 9,405 | ||||||||||||||
Segment
Assets
|
1,121,183 | 2,201 | 9,675 | (1,349 | ) | 1,131,710 |
62
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
16 – Parent Company Financial Statements
The
condensed financial statements of German American Bancorp, Inc. are presented
below:
CONDENSED
BALANCE SHEETS
December
31,
|
||||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Cash
|
$ | 4,848 | $ | 1,121 | ||||
Securities
Available-for-Sale, at Fair Value
|
2,340 | 3,345 | ||||||
Investment
in Subsidiary Bank
|
135,491 | 113,364 | ||||||
Investment
in Non-banking Subsidiaries
|
2,783 | 2,188 | ||||||
Other
Assets
|
5,422 | 4,347 | ||||||
Total
Assets
|
$ | 150,884 | $ | 124,365 | ||||
LIABILITIES
|
||||||||
Borrowings
|
$ | 35,250 | $ | 17,500 | ||||
Other
Liabilities
|
2,085 | 1,691 | ||||||
Total
Liabilities
|
37,335 | 19,191 | ||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Common
Stock
|
11,077 | 11,030 | ||||||
Additional
Paid-in Capital
|
68,816 | 68,371 | ||||||
Retained
Earnings
|
29,041 | 23,019 | ||||||
Accumulated
Other Comprehensive Income
|
4,615 | 2,754 | ||||||
Total
Shareholders’ Equity
|
113,549 | 105,174 | ||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 150,884 | $ | 124,365 |
CONDENSED
STATEMENTS OF INCOME
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
INCOME
|
||||||||||||
Dividends
from Subsidiaries
|
||||||||||||
Bank
|
$ | 8,000 | $ | 13,000 | $ | 2,000 | ||||||
Non-bank
|
— | — | 500 | |||||||||
Dividend
and Interest Income
|
57 | 57 | 101 | |||||||||
Net
Loss on Securities
|
(423 | ) | (937 | ) | (680 | ) | ||||||
Other
Income
|
119 | 39 | 66 | |||||||||
Total
Income
|
7,753 | 12,159 | 1,987 | |||||||||
EXPENSES
|
||||||||||||
Salaries
and Employee Benefits
|
364 | 163 | 367 | |||||||||
Professional
Fees
|
342 | 245 | 309 | |||||||||
Occupancy
and Equipment Expense
|
7 | 8 | 6 | |||||||||
Interest
Expense
|
1,459 | 981 | 1,369 | |||||||||
Other
Expenses
|
292 | 324 | 413 | |||||||||
Total
Expenses
|
2,464 | 1,721 | 2,464 | |||||||||
INCOME
BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED INCOME OF
SUBSIDIARIES
|
5,289 | 10,438 | (477 | ) | ||||||||
Income
Tax Benefit
|
1,237 | 1,212 | 1,364 | |||||||||
INCOME
BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES
|
6,526 | 11,650 | 887 | |||||||||
Equity
in Undistributed Income of Subsidiaries
|
5,692 | 1,153 | 8,518 | |||||||||
NET
INCOME
|
12,218 | 12,803 | 9,405 | |||||||||
Other
Comprehensive Income:
|
||||||||||||
Unrealized
Gain on Securities, Net
|
1,908 | 1,612 | 1,210 | |||||||||
Changes
in Unrecognized Amounts in Pension
|
(47 | ) | — | 41 | ||||||||
Changes
in Unrecognized Loss in Postretirement Benefit Obligation
|
— | 144 | 30 | |||||||||
TOTAL
COMPREHENSIVE INCOME
|
$ | 14,079 | $ | 14,559 | $ | 10,686 |
63
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
16 – Parent Company Financial Statements (continued)
CONDENSED
STATEMENTS OF CASH FLOWS
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
Net
Income
|
$ | 12,218 | $ | 12,803 | $ | 9,405 | ||||||
Adjustments
to Reconcile Net Income to Net Cash from Operations
|
||||||||||||
Loss
on Securities, net
|
423 | 937 | 680 | |||||||||
Change
in Other Assets
|
(963 | ) | (39 | ) | (191 | ) | ||||||
Change
in Other Liabilities
|
325 | (493 | ) | (843 | ) | |||||||
Equity
Based Compensation
|
485 | 10 | 331 | |||||||||
Equity
in Undistributed Income of Subsidiaries
|
(5,692 | ) | (1,153 | ) | (8,518 | ) | ||||||
Net
Cash from Operating Activities
|
6,796 | 12,065 | 864 | |||||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
Capital
Contribution to Subsidiaries
|
(15,000 | ) | (250 | ) | (5,000 | ) | ||||||
Proceeds
from Sales of Securities Available-for-Sale
|
379 | — | 998 | |||||||||
Net
Cash from Investing Activities
|
(14,621 | ) | (250 | ) | (4,002 | ) | ||||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
Change
in Short-term Borrowings
|
— | (3,250 | ) | 3,250 | ||||||||
Advances
in Long-term Debt
|
19,250 | — | — | |||||||||
Repayment
of Long-term Debt
|
(1,500 | ) | (1,500 | ) | (1,000 | ) | ||||||
Employee
Stock Purchase Plan
|
(2 | ) | (46 | ) | (118 | ) | ||||||
Dividends
Paid
|
(6,196 | ) | (6,177 | ) | (6,174 | ) | ||||||
Net
Cash from Financing Activities
|
11,552 | (10,973 | ) | (4,042 | ) | |||||||
Net
Change in Cash and Cash Equivalents
|
3,727 | 842 | (7,180 | ) | ||||||||
Cash
and Cash Equivalents at Beginning of Year
|
1,121 | 279 | 7,459 | |||||||||
Cash
and Cash Equivalents at End of Year
|
$ | 4,848 | $ | 1,121 | $ | 279 |
64
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
17 – Business Combinations, Goodwill and Intangible Assets
On June
26, 2009, the Company acquired certain assets of an existing insurance agency
office located in Tell City, Indiana. The assets became a part of
German American Insurance, Inc., the Company’s property and casualty insurance
entity.
The
purchase price for this transaction was $386 in cash and resulted in $386 in
customer list intangible. The customer relationship intangible is
being amortized over seven years utilizing the straight-line method and deducted
for tax purposes over 15 years using the straight line method.
The
changes in the carrying amount of goodwill for the periods ended December 31,
2009, 2008, and 2007 were classified as follows:
2009
|
2008
|
2007
|
||||||||||
Beginning
of Year
|
$ | 9,655 | $ | 9,655 | $ | 9,655 | ||||||
Acquired
Goodwill
|
— | — | — | |||||||||
Impairment
|
— | — | — | |||||||||
End
of Year
|
$ | 9,655 | $ | 9,655 | $ | 9,655 |
Of the
$9,655 carrying amount of goodwill, $8,323 is allocated to the core banking
segment and $1,332 is allocated to the insurance segment for the periods ended
December 31, 2009, 2008, and 2007.
Acquired intangible assets were as
follows as of year end:
2009
|
||||||||
Gross
|
Accumulated
|
|||||||
Amount
|
Amortization
|
|||||||
Core
Banking
|
||||||||
Core
Deposit Intangible
|
$ | 2,372 | $ | 1,435 | ||||
Unidentified
Branch Acquisition Intangible
|
257 | 257 | ||||||
Insurance
|
||||||||
Customer
List
|
5,199 | 3,518 | ||||||
Total
|
$ | 7,828 | $ | 5,210 | ||||
2008
|
||||||||
Gross
|
Accumulated
|
|||||||
Amount
|
Amortization
|
|||||||
Core
Banking
|
||||||||
Core
Deposit Intangible
|
$ | 2,372 | $ | 1,253 | ||||
Unidentified
Branch Acquisition Intangible
|
257 | 243 | ||||||
Insurance
|
||||||||
Customer
List
|
4,813 | 2,805 | ||||||
Total
|
$ | 7,442 | $ | 4,301 |
Amortization
Expense was $909, $889, and $894 for 2009, 2008, and 2007.
Estimated
amortization expense for each of the next five years is as follows:
2010
|
$ | 782 | ||
2011
|
512 | |||
2012
|
512 | |||
2013
|
442 | |||
2014
|
232 |
65
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
18 – Other Comprehensive Income
Other
comprehensive income components and related taxes were as follows:
2009
|
2008
|
2007
|
||||||||||
Unrealized
Holding Gains on Securities
Available-for-Sale
|
$ | 2,437 | $ | 2,506 | $ | 1,158 | ||||||
Reclassification
Adjustments for (Gains) Losses Later Realized in Income
|
423 | (94 | ) | 680 | ||||||||
Net
Unrealized Gains
|
2,860 | 2,412 | 1,838 | |||||||||
Amortization
of Amounts Included in Net Periodic Pension Costs
|
13 | 11 | 70 | |||||||||
Unrecognized
Loss on Pension
|
(91 | ) | (11 | ) | (2 | ) | ||||||
Unrecognized
Gain on Postretirement Benefits
|
— | 238 | 49 | |||||||||
Tax
Effect
|
(921 | ) | (894 | ) | (674 | ) | ||||||
Other
Comprehensive Income
|
$ | 1,861 | $ | 1,756 | $ | 1,281 |
The
following is a summary of the accumulated other comprehensive income balances,
net of tax:
Balance
|
Current
|
Balance
|
||||||||||
At
|
Period
|
at
|
||||||||||
12/31/2008
|
Change
|
12/31/2009
|
||||||||||
Unrealized
Gains on Securities Available-for-Sale
|
$ | 2,708 | $ | 1,908 | $ | 4,616 | ||||||
Unrecognized
Losses on Pension Benefits
|
(128 | ) | (47 | ) | (175 | ) | ||||||
Unrecognized
Gains on Postretirement Benefits
|
174 | — | 174 | |||||||||
Total
|
$ | 2,754 | $ | 1,861 | $ | 4,615 |
NOTE
19 – Quarterly Financial Data (Unaudited)
The
following table represents selected quarterly financial data for the
Company:
Interest
|
Net Interest
|
Net
|
Earnings
per Share
|
|||||||||||||||||
Income
|
Income
|
Income
|
Basic
|
Diluted
|
||||||||||||||||
2009
|
||||||||||||||||||||
First
Quarter
|
$ | 15,857 | $ | 10,641 | $ | 2,942 | $ | 0.27 | $ | 0.27 | ||||||||||
Second
Quarter
|
15,923 | 11,117 | 2,764 | 0.25 | 0.25 | |||||||||||||||
Third
Quarter
|
16,159 | 11,481 | 3,191 | 0.29 | 0.29 | |||||||||||||||
Fourth
Quarter
|
15,797 | 11,274 | 3,321 | 0.30 | 0.30 | |||||||||||||||
2008
|
||||||||||||||||||||
First
Quarter
|
$ | 17,825 | $ | 10,119 | $ | 3,020 | $ | 0.27 | $ | 0.27 | ||||||||||
Second
Quarter
|
16,778 | 10,065 | 3,111 | 0.28 | 0.28 | |||||||||||||||
Third
Quarter
|
16,729 | 10,446 | 3,319 | 0.30 | 0.30 | |||||||||||||||
Fourth
Quarter
|
16,513 | 10,307 | 3,353 | 0.30 | 0.30 |
66
Notes to the
Consolidated Financial Statements
Dollars
in thousands, except per share data
NOTE
20 – Subsequent Events
German
American Bancorp, the banking subsidiary of the Company, entered into a Branch
Purchase Agreement with Farmers State Bank of Alto Pass, Ill. dated February 17,
2009. Under the Agreement, German American Bancorp has agreed to
purchase the two branches of Farmers in metropolitan Evansville,
Indiana. One of the branches is located in Evansville
(Vanderburgh County, Indiana) and the other in adjacent Newburgh (Warrick
County, Indiana).
In
general, German American Bancorp has agreed to buy and assume from Farmers all
of Farmers' interest in the physical assets associated with the branches
(including the real estate of the Branches, automated teller
machines, and furniture, fixtures and equipment) and most of the
loans and deposits of the branches. Loans to be purchased are
expected to total approximately $40 million and deposits to be assumed are
expected to approximate $50 million at the time of closing. In
addition, a fixed sum of $4.9 million will be paid by German American Bancorp
for all assets other than loans and cash balances.
Consummation
of the transaction is subject to approval by the Federal Deposit Insurance
Corporation and the Indiana Department of Financial Institutions, the receipt of
certain required consents, and other usual and customary closing conditions, and
is currently expected to be completed within the second quarter of
2010.
67
Item 9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
Not
Applicable.
Item 9A. Controls and
Procedures.
Disclosure
Controls and Procedures
As of
December 31, 2009, the Company carried out an evaluation, under the supervision
and with the participation of its principal executive officer and principal
financial officer, of the effectiveness of the design and operation of its
disclosure controls and procedures. Based on this evaluation, the Company’s
principal executive officer and principal financial officer concluded that the
Company’s disclosure controls and procedures are effective in timely alerting
them to material information required to be included in the Company’s periodic
reports filed with the Securities and Exchange Commission. There are inherent
limitations to the effectiveness of systems of disclosure controls and
procedures, including the possibility of human error and the circumvention or
overriding of the controls and procedures. Accordingly, even effective systems
of disclosure controls and procedures can provide only reasonable assurances of
achieving their control objectives.
Changes
in Internal Control Over Financial Reporting in Most Recent Fiscal
Quarter
There was
no change in the Company’s internal control over financial reporting that
occurred during the Company’s fourth fiscal quarter of 2009 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
The Company’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles. The Company’s internal control
over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. generally accepted accounting principles, and that receipts
and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. Management assessed
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated
Framework. Based on our assessment and those criteria, management
concluded that the Company maintained effective internal control over financial
reporting as of December 31, 2009.
The
Company’s independent registered public accounting firm has issued their report
on the Company’s internal control over financial reporting. That report is
included in Item 8. Financial Statement and Supplementary Data of this Report
under the heading, Report of Independent Registered Public Accounting
Firm.
Item
9B. Other Information.
Not
applicable.
68
PART III
Item
10. Directors and Executive Officers of the
Registrant.
Information
relating to directors and executive officers of the Company will be included
under the captions “Election of Directors” and “Our Executive Officers” in the
Company’s Proxy Statement for the Annual Meeting of Shareholders to be held in
May 2010, which will be filed within 120 days of the end of the fiscal year
covered by this Report (the “2010 Proxy Statement”), which sections are
incorporated herein in partial response to this Item’s informational
requirements.
Section 16(a)
Compliance. Information relating to Section 16(a) compliance
will be included in the 2010 Proxy Statement under the caption of “Section
16(a): Beneficial Ownership Reporting Compliance” and is incorporated
herein by reference.
Code of Business Conduct. The
Company’s Board of Directors has adopted a Code of Business Conduct, which
constitutes a “code of ethics” as that term is defined by SEC rules adopted
under the Sarbanes-Oxley Act of 2002 (“SOA”). The Company has posted
a copy of the Code of Business Conduct on its Internet website
(www.germanamerican.com). The Company intends to satisfy its
disclosure requirements under Item 5.05 of Form 8-K regarding certain amendments
to, or waivers of, the Code of Business Conduct, by posting such information on
its Internet website, except that waivers that must under NASDAQ rules be filed
with the SEC on Form 8-K will be so filed.
Audit Committee
Identification. The Board of Directors of the Company has a
separately-designated standing audit committee established in accordance with
Section 3(a) (58) (A) of the Securities Exchange Act of 1934. The description of
the Audit Committee of the Board of Directors, and the identification of its
members, will be set forth in the 2010 Proxy Statement under the caption
“ELECTION OF DIRECTORS”, which section is incorporated herein by
reference.
Audit Committee Financial
Expert. The Board of Directors has determined that Richard E.
Forbes, a director who serves on the Audit Committee of the Board of Directors
and who is an independent director as defined by NASDAQ listing standards, is an
“audit committee financial expert” as that term is defined by SEC rules adopted
under SOA by reason of his experience as the former chief executive officer and
former chief financial officer of a subsidiary of a Fortune 500
company.
Item
11. Executive Compensation.
Information
relating to compensation of the Company’s executive officers and directors,
(including the required disclosures under the subheadings “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee
Report”) will be included under the caption “Executive and Director
Compensation” in the 2010 Proxy Statement of the Company, which section is
incorporated herein by reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Information
relating to security ownership of certain beneficial owners and the directors
and executive officers of the Company will be included under the captions
“Ownership of Our Common Stock by Our Directors and Executive Officers” and
“Principal Owners of Common Shares” of the 2010 Proxy Statement of the Company,
which sections are incorporated herein by reference.
69
Equity
Compensation Plan Information
The
Company maintains four plans under which it has authorized the issuance of its
Common Shares to employees and non-employee directors as
compensation: its 1992 Stock Option Plan (under which no new grants
may be made), its 1999 Long-Term Equity Incentive Plan (under which no new
grants may be made), its 2009 Long-Term Equity Incentive Plan, and its 2009
Employee Stock Purchase Plan. Each of these four plans was approved
by the requisite vote of the Company's common shareholders in the year of
adoption by the Board of Directors. The Company is not a party to any
individual compensation arrangement involving the authorization for issuance of
its equity securities to any single person, other than option agreements and
restricted stock award agreements that have been granted under the terms of one
of the four plans identified above. The following table sets
forth information regarding these plans as of December 31, 2009:
Plan Category
|
Number of Securities
to be Issued upon Exercise
of Outstanding Options,
Warrants or Rights
|
Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation
Plans (Excluding
Securities Reflected in
First Column)
|
|||||||||
Equity compensation plans approved by security holders
|
157,956 |
(a)
|
$ | 16.44 | 1,000,000 |
(b)
|
||||||
Equity
compensation plans not approved by security holders
|
— | — | — | |||||||||
Total
|
157,956 | $ | 16.44 | 1,000,000 |
(a) Does
not include any shares that employees may have the right to purchase under the
Employee Stock Purchase Plan in August 2010 in respect of employee payroll
deductions of participating employees that had accumulated as of December 31,
2009 during the plan year that commenced in August 2009. Although
these employees have the right under this Plan to have their accumulated payroll
deductions applied to the purchase of Common Shares at a discounted price in
August 2010, the price at which such shares may be purchased and the number of
shares that may be purchased under that Plan at that time is not presently
determinable.
(b)
Represents 500,000 shares that the Company may in the future issue to employees
under the Employee Stock Purchase Plan (although the Company typically purchases
the shares needed for sale to participating employees on the open market rather
than issuing new issue shares to such employees) and 500,000 shares that were
available for grant or issuance at December 31, 2009 under the 2009 Long-Term
Equity Incentive Plan. Under the Long-Term Equity Incentive
Plan, the aggregate number of Common Shares available for the grant of awards in
any given fiscal year is equal to the sum of (i) one percent of the number of
Common Shares outstanding as of the last day of the Company's prior fiscal year,
plus (ii) the number of Common Shares that were available for the grant of
awards, but were not granted, under the Plan in any previous fiscal
year. Under no circumstances, however, may the number of Common
Shares available for the grant of awards in any fiscal year under the Long-Term
Equity Incentive Plan exceed one and one-half percent of the Common Shares
outstanding as of the last day of the prior fiscal year.
For
additional information regarding the Company’s equity incentive plans and
employee stock purchase plan, see Note 8 to the consolidated financial
statements in Item 8 of this Report.
Item 13. Certain
Relationships and Related Transactions.
Information
responsive to this Item 13 will be included under the captions “Election of
Directors” and “Transactions with Related Persons” of the 2010 Proxy Statement
of the Company, which sections are incorporated herein by
reference.
Item
14. Principal
Accountant Fees and Services.
Information
responsive to this Item 14 will be included in the 2010 Proxy Statement under
the caption “Principal Accountant Fees and Services”, which section is
incorporated herein by reference.
70
PART IV
Item 15. Exhibits
and Financial Statement Schedules.
a) Financial
Statements
The
following items are included in Item 8 of this Report:
Page
#
|
|
German
American Bancorp, Inc. and Subsidiaries:
|
|
Report
of Independent Registered Public Accounting Firm on Financial
Statements
|
32
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
33
|
Consolidated
Statements of Income, years ended December 31, 2009, 2008, and
2007
|
34
|
Consolidated
Statements of Changes in Shareholders’ Equity, years
ended December 31, 2009, 2008, and 2007
|
35
|
Consolidated
Statements of Cash Flows, years ended December 31, 2009, 2008, and
2007
|
36
|
Notes
to the Consolidated Financial Statements
|
37-67
|
b) Exhibits
The
Exhibits described in the Exhibit List immediately following the “Signatures”
page of this Report (which Exhibit List is incorporated herein by reference) are
hereby filed as part of this Report.
c)
Financial Statement Schedules
None.
71
Pursuant
to the requirements of Section 13 of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
GERMAN
AMERICAN BANCORP, INC.
|
||
(Registrant)
|
||
Date:
March 5,
2010
|
By/s/Mark A. Schroeder
|
|
Mark
A. Schroeder, Chairman and
|
||
Chief
Executive
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date:
March 5,
2010
|
By/s/Mark A. Schroeder
|
|
Mark
A. Schroeder, Chairman and Chief Executive
|
||
Officer
(principal executive officer), Director
|
||
Date:
March 5,
2010
|
By/s/Douglas A. Bawel
|
|
Douglas
A. Bawel, Director
|
||
Date:
March 5,
2010
|
By/s/Christina M. Ernst
|
|
Christina
M. Ernst, Director
|
||
Date:
March 5,
2010
|
By/s/Richard E. Forbes
|
|
Richard
E. Forbes, Director
|
||
Date:
March 5,
2010
|
By/s/U. Butch Klem
|
|
U.
Butch Klem, Director
|
||
Date:
March 5,
2010
|
By/s/J. David Lett
|
|
J.
David Lett, Director
|
||
Date:
March 5,
2010
|
By/s/Gene C. Mehne
|
|
Gene
C. Mehne, Director
|
||
Date:
March 5,
2010
|
By/s/Michael J. Voyles
|
|
Michael
J. Voyles, Director
|
||
Date:
March 5,
2010
|
By/s/Bradley M. Rust
|
|
Bradley
M. Rust, Executive Vice President and
|
||
Chief
Financial Officer (principal accounting officer
|
||
and
principal financial
officer)
|
72
INDEX OF
EXHIBITS
Exhibit No.
|
Description
|
|
3.1
|
Restatement
of the Articles of Incorporation of the Registrant is incorporated by
reference from Exhibit 3 to the Registrant’s Current Report on
8-K filed May 22, 2006.
|
|
3.2
|
Restated
Bylaws of German American Bancorp, Inc., as amended and restated July 27,
2009. The copy of this exhibit filed as Exhibit 3 to the
current report on Form 8-K of the Registrant filed July 31, 2009 is
incorporated herein by reference.
|
|
4.1
|
Rights
Agreement dated April 27, 2000, is incorporated by reference from Exhibit
4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2005.
|
|
4.2
|
No
long-term debt instrument issued by the Registrant exceeds 10% of
consolidated total assets or is registered. 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
request.
|
|
4.3
|
Terms
of Common Shares and Preferred Shares of the Registrant (included in
Restatement of Articles of Incorporation) are incorporated by reference
from Exhibit 3 to the Registrant’s Current Report on
8-K filed May 22, 2006.
|
|
4.4
|
Indenture
dated as of April 30, 2009 by and between Wells Fargo Bank, N.A. and
German American Bancorp, Inc., including Exhibit A thereto the form of the
certificate for the 8% redeemable subordinated debentures due 2019 issued
thereunder. This exhibit is incorporated by reference from
Exhibit 4 to the Registrant’s Current Report on Form 8-K filed May 4,
2009.
|
|
10.1
|
The
Registrant’s 1992 Stock Option Plan, as amended, is incorporated by
reference from Exhibit 10.1 to the Registrant’s Registration Statement on
Form S-4 filed October 14, 1998.*
|
|
10.2
|
Form
of Director Deferred Compensation Agreement between The German American
Bank and certain of its Directors is incorporated herein by reference from
Exhibit 10.4 to the Registrant’s Registration Statement on Form S-4 filed
January 21, 1993 (the Agreement entered into by former director George W.
Astrike, a copy of which was filed as Exhibit 10.4 to the Registrant’s
Registration Statement on Form S-4 filed January 21, 1993, is
substantially identical to the Agreements entered into by the other
Directors, some of whom remain directors of the Registrant). The schedule
following such Exhibit 10.4 lists the Agreements with the other Directors
and sets forth the material detail in which such Agreements differ from
the Agreement filed as such Exhibit 10.4.*
|
|
10.3
|
The
Registrant’s 1999 Long-Term Equity Incentive Plan, as amended through
February 22, 2008 is incorporated by reference from Exhibit 10.3 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007.*
|
|
10.4
|
The
Registrant’s 1999 Long-Term Equity Incentive Plan, as amended through
February 22, 2008 is incorporated by reference from Exhibit 10.3 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31,
2007.*
|
73
10.5
|
Basic
Plan Document for the Registrant’s Nonqualified Savings Plan is
incorporated by reference from Exhibit 10.4 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2004.*
|
|
10.6
|
Adoption
Agreement for the Registrant’s Nonqualified Savings Plan dated August 17,
2004, is incorporated by reference from Exhibit 10.5 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2004.*
|
|
10.7
|
First
Amendment to the Registrant’s Nonqualified Savings Plan dated August 17,
2004, is incorporated by reference from Exhibit 10.6 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31,
2004.*
|
|
10.8
|
Form
of Employee Stock Option Agreement (new grant, five-year expiration, five
year 20% vesting) typically issued during 2005 and prior periods to
executive officers and other key employees as incentives is incorporated
by reference from Exhibit 10.7 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2004.*
|
|
10.9
|
Form
of Employee Stock Option Agreement (Replacement Grant) typically issued
during 2005 and prior periods to persons who exercise other stock options
using common shares as payment for the exercise price (one year vesting)
is incorporated by reference from Exhibit 10.8 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2004.*
|
|
10.10
|
Form
of Non-Employee Director Stock Option Agreement (new grant, ten year
expiration, no vesting) that in prior periods was typically issued to
non-employee members of the Board of Directors as part of annual director
fee retainer (not Incentive Stock Option for tax purposes) is incorporated
by reference from Exhibit 10.9 to the Registrant’s Annual Report on Form
10-K for the year ended December 31, 2004.*
|
|
10.11
|
Form
of Employee Director Stock Option Agreement (new grant, ten year
expiration, no vesting) that in prior periods was typically issued to
employee members of the Board of Directors as part of annual director fee
retainer (intended to be Incentive Stock Option for tax purposes) is
incorporated by reference from Exhibit 10.10 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31,
2004.*
|
|
10.12
|
Description
of Director Compensation Arrangements for the 12 month period ending at
2008 Annual Meeting of Shareholders is incorporated by reference from the
description included in the Company’s definitive proxy statement for the
2008 Annual Meeting of Shareholders, filed March 20, 2008, under the
caption “DIRECTOR COMPENSATION.”*
|
|
10.13
|
Description
of Director Compensation Arrangements for the 12 month period ending at
the 2009 Annual Meeting of Shareholders is incorporated by reference from
Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2008.*
|
|
10.14
|
Description
of Director Compensation Arrangements for the 12 month period ending at
the 2010 Annual Meeting of Shareholders is
incorporated by reference from Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30,
2009.*
|
|
10.15
|
Description
of Executive Management Incentive Plan for 2007 (awards payable in 2008)
is incorporated by reference from the description contained in Item 5.02
of the Registrant’s Current Report on Form 8-K filed February 12,
2007.*
|
74
10.16
|
Description
of Executive Management Incentive Plan for 2008 (awards payable in 2009)
is incorporated by reference from the description contained in Item 5.02
of the Registrant’s Current Report on Form 8-K filed February 28,
2008.*
|
|
10.17
|
Description
of Executive Management Incentive Plan for 2009 (awards payable in 2010)
is incorporated by reference from the description contained in Item 5.02
of the Registrant’s Current Report on Form 8-K filed February 28, 2009.
*
|
|
10.18
|
Executive
Supplemental Retirement Income Agreement dated October 1, 1996, between
First Federal Bank, F.S.B. and Bradley M. Rust as amended by a First
Amendment between Bradley M. Rust and the Registrant dated December 30,
2008.*
|
|
10.19
|
Form
of Restricted Stock Award Agreement that evidences the terms of awards of
restricted stock grants and related cash entitlements granted under the
1999 Long-Term Equity Incentive Plan is incorporated by reference from
Exhibit 99 to the Registrant’s Current Report on Form 8-K filed February
17, 2006.*
|
|
10.20
|
Resolutions
of Stock Option Committee of Board of Directors of the Registrant amending
outstanding stock options by accelerating in full all vesting periods and
exercise date restrictions and terminating replacement stock option
privileges in connection with future option exercises, adopted by written
consent effective December 29, 2005, is incorporated by reference from
Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for its
fiscal year ended December 31, 2005.*
|
|
10.21
|
Early
Retirement and General Release Agreement dated May 7, 2008 between German
American Bancorp and Stan Ruhe, is incorporated by reference from exhibit
10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2008.*
|
|
10.22
|
Second
Amended and Restated Loan and Subordinated Debenture Purchase Agreement
dated as of December 29, 2006, by and between JPMorgan Chase Bank, N.A.,
and German American Bancorp, Inc., is
incorporated by reference from Exhibit 99.1 to the Registrant’s
Current Report on 8-K filed January 5,
2007.
|
|
10.23
|
Agreed
Upon Terms and Procedures dated December 29, 2006, executed and delivered
by German American Bancorp, Inc. to JPMorgan Chase Bank, N.A., is
incorporated by reference from Exhibit 99.2 to the Registrant’s
Current Report on 8-K filed January 5,
2007.
|
|
10.24
|
Amendment
to Second Amended and Restated Loan and Subordinated Debenture Purchase
Agreement dated as of December 29, 2006, by and between JPMorgan Chase
Bank, N.A. and German American Bancorp, Inc., dated September 28,
2007, is
incorporated by reference from Exhibit 99 to the Registrant’s
Current Report on 8-K filed October 1,
2007.
|
|
10.25
|
Second
Amendment to Second Amended and Restated Loan and Subordinated Debenture
Purchase Agreement dated as of December 29, 2006, by and between JPMorgan
Chase Bank, N.A. and German American Bancorp, Inc., dated September 30,
2008, is incorporated by reference from Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30,
2008.
|
|
10.26
|
Third
Amendment dated March 20, 2009, to Second Amended and Restated Loan and
Subordinated Debenture Purchase Agreement dated as of December 29, 2006,
by and between JPMorgan Chase Bank, N.A. and German American Bancorp,
Inc., is incorporated by reference from Exhibit 10.1 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009.
|
75
10.27
|
Fourth
Amendment to Second Amended and Restated Loan and Subordinated Debenture
Purchase Agreement dated as of December 10, 2009, by and between JPMorgan
Chase Bank, N.A., and German American Bancorp, Inc. is incorporated by
reference from Exhibit 99 to the Registrant’s Current Report on
Form 8-K filed December 15, 2009.
|
|
10.28
|
German
American Bancorp, Inc., 2009 Long Term Equity Incentive Plan. This exhibit
is incorporated by reference from Exhibit 99.1 to the Registrant’s
Registration Statement on Form S-8 (No. 333-160749) filed July
23, 2009.*
|
|
10.29
|
German
American Bancorp, Inc., 2009 Employee Stock Purchase Plan. This
exhibit is incorporated by reference from Exhibit 99.2 to the Registrant’s
Registration Statement on Form S-8 (No. 333-160749) filed July
23, 2009.*
|
|
21
|
Subsidiaries
of the Registrant
|
|
23
|
Consent
of Crowe Horwath LLP
|
|
31.1
|
Sarbanes-Oxley
Act of 2002, Section 302 Certification for Chairman and Chief Executive
Officer.
|
|
31.2
|
Sarbanes-Oxley
Act of 2002, Section 302 Certification for Executive Vice President
(Principal Financial Officer).
|
|
32.1
|
Sarbanes-Oxley
Act of 2002, Section 906 Certification for Chairman and Chief Executive
Officer.
|
|
32.2
|
Sarbanes-Oxley
Act of 2002, Section 906 Certification for Executive Vice President
(Principal Financial
Officer).
|
*Exhibits
that describe or evidence all management contracts or compensatory plans or
arrangements required to be filed as exhibits to this Report are indicated by an
asterisk.
GERMAN
AMERICAN BANCORP, INC. WILL FURNISH TO ANY SHAREHOLDER AS OF MARCH 1,
2010 A COPY OF ANY OF THE ABOVE-LISTED EXHIBITS UPON THE PAYMENT OF A CHARGE OF
$.50 PER PAGE IN ORDER TO DEFRAY ITS EXPENSES IN PROVIDING SUCH
EXHIBIT. SUCH REQUEST SHOULD BE ADDRESSED TO GERMAN AMERICAN BANCORP,
INC., ATTN: TERRI A. ECKERLE, SHAREHOLDER RELATIONS, P.O. BOX 810, JASPER,
INDIANA, 47547-0810.
76