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Section 1: 10-Q (10-Q)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2017
 
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
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s telephone number, including area code: (812) 482-1314
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES   x      NO ¨
 
Indicate by check mark 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES   x      NO ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company:
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
Emerging growth company ¨
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
YES   ¨      NO x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 1, 2017
Common Shares, no par value
 
22,930,017



CAUTION REGARDING FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
 
Information included in or incorporated by reference in this Quarterly Report on Form 10-Q, our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contains or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the discussions of our forward-looking statements and associated risks in our Annual Report on Form 10-K for the year ended December 31, 2016, in Item 1, “Business – Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” of that Annual Report on Form 10-K, as updated from time to time in our subsequent SEC filings, including by Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) at the conclusion of that Item 2 under the heading “Forward-Looking Statements and Associated Risks.”

2


*****
 
INDEX
 
PART I.            FINANCIAL INFORMATION
 
 
 
Item 1.
Unaudited Financial Statements
 
 
 
 
Consolidated Balance Sheets – September 30, 2017 and December 31, 2016
 
 
 
 
Consolidated Statements of Income – Three Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Income – Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016
 
 
 
 
Notes to Consolidated Financial Statements – September 30, 2017
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4. 
Controls and Procedures
 
 
 
PART II.           OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
 
 
INDEX OF EXHIBITS

3


PART  I.         FINANCIAL INFORMATION
Item 1.           Financial Statements
GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands except share and per share data)
 
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
44,804

 
$
48,467

Federal Funds Sold and Other Short-term Investments
 
9,758

 
16,349

Cash and Cash Equivalents
 
54,562

 
64,816

 
 
 
 
 
Securities Available-for-Sale, at Fair Value
 
741,710

 
709,786

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
8,484

 
15,273

 
 
 
 
 
Loans
 
2,089,713

 
1,993,404

Less: Unearned Income
 
(3,388
)
 
(3,449
)
Allowance for Loan Losses
 
(15,321
)
 
(14,808
)
Loans, Net
 
2,071,004

 
1,975,147

 
 
 
 
 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost
 
13,048

 
13,048

Premises, Furniture and Equipment, Net
 
51,355

 
48,230

Other Real Estate
 
568

 
242

Goodwill
 
54,058

 
54,058

Intangible Assets
 
2,320

 
2,835

Company Owned Life Insurance
 
46,104

 
46,642

Accrued Interest Receivable and Other Assets
 
29,676

 
25,917

TOTAL ASSETS
 
$
3,072,889

 
$
2,955,994

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
589,315

 
$
571,989

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,454,073

 
1,399,381

Time Deposits
 
381,184

 
378,181

Total Deposits
 
2,424,572

 
2,349,551

 
 
 
 
 
FHLB Advances and Other Borrowings
 
261,941

 
258,114

Accrued Interest Payable and Other Liabilities
 
25,751

 
18,062

TOTAL LIABILITIES
 
2,712,264

 
2,625,727

 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
 

 
 

Preferred Stock, no par value; 500,000 shares authorized, no shares issued
 

 

Common Stock, no par value, $1 stated value; 45,000,000 shares authorized (1)
 
22,930

 
15,261

Additional Paid-in Capital
 
164,987

 
171,744

Retained Earnings
 
169,859

 
149,666

Accumulated Other Comprehensive (Loss) Income
 
2,849

 
(6,404
)
TOTAL SHAREHOLDERS’ EQUITY
 
360,625

 
330,267

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
3,072,889

 
$
2,955,994

End of period shares issued and outstanding (1)
 
22,930,017

 
22,904,157

(1) Share data has been adjusted to reflect a 3-for-2 stock split on April 21, 2017.





See accompanying notes to consolidated financial statements.

4


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 

Three Months Ended 
 September 30,
 

2017

2016
INTEREST INCOME

 


 

Interest and Fees on Loans

$
23,182


$
22,311

Interest on Federal Funds Sold and Other Short-term Investments

46


25

Interest and Dividends on Securities:

 


 

Taxable

2,688


2,491

Non-taxable

2,070


1,907

TOTAL INTEREST INCOME

27,986


26,734








INTEREST EXPENSE

 


 

Interest on Deposits

1,959


1,323

Interest on FHLB Advances and Other Borrowings

1,110


851

TOTAL INTEREST EXPENSE

3,069


2,174








NET INTEREST INCOME

24,917


24,560

Provision for Loan Losses

250



NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

24,667


24,560








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

1,301


1,191

Service Charges on Deposit Accounts

1,608


1,612

Insurance Revenues

1,728


1,661

Company Owned Life Insurance

317


247

Interchange Fee Income

1,186


965

Other Operating Income

608


1,246

Net Gains on Sales of Loans

952


1,004

Net Gains on Securities

575


458

TOTAL NON-INTEREST INCOME

8,275


8,384








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

11,570


10,572

Occupancy Expense

1,694


1,656

Furniture and Equipment Expense

678


568

FDIC Premiums

241


373

Data Processing Fees

1,067


1,261

Professional Fees

551


777

Advertising and Promotion

1,315


687

Intangible Amortization

230


280

Other Operating Expenses

2,425


2,479

TOTAL NON-INTEREST EXPENSE

19,771


18,653








Income before Income Taxes

13,171


14,291

Income Tax Expense

3,511


4,106

NET INCOME

$
9,660


$
10,185








Basic Earnings per Share (1)

$
0.42


$
0.45

Diluted Earnings per Share (1)

$
0.42


$
0.45








Dividends per Share (1)

$
0.13


$
0.12

(1) Per share data has been adjusted to reflect a 3-for-2 stock split on April 21, 2017. 

See accompanying notes to consolidated financial statements.

5


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
INTEREST INCOME
 
 

 
 

Interest and Fees on Loans
 
$
68,046

 
$
63,645

Interest on Federal Funds Sold and Other Short-term Investments
 
100

 
62

Interest and Dividends on Securities:
 


 


Taxable
 
8,109

 
7,055

Non-taxable
 
6,165

 
5,502

TOTAL INTEREST INCOME
 
82,420

 
76,264

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
5,028

 
3,804

Interest on FHLB Advances and Other Borrowings
 
2,937

 
2,445

TOTAL INTEREST EXPENSE
 
7,965

 
6,249

 
 
 
 
 
NET INTEREST INCOME
 
74,455

 
70,015

Provision for Loan Losses
 
1,100

 
1,200

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
73,355

 
68,815

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
3,894

 
3,435

Service Charges on Deposit Accounts
 
4,570

 
4,379

Insurance Revenues
 
6,112

 
5,993

Company Owned Life Insurance
 
1,051

 
709

Interchange Fee Income
 
3,365

 
2,626

Other Operating Income
 
2,095

 
2,481

Net Gains on Sales of Loans
 
2,598

 
2,607

Net Gains on Securities
 
575

 
1,426

TOTAL NON-INTEREST INCOME
 
24,260

 
23,656

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
34,474

 
32,357

Occupancy Expense
 
4,813

 
4,649

Furniture and Equipment Expense
 
1,965

 
1,680

FDIC Premiums
 
712

 
1,040

Data Processing Fees
 
3,122

 
4,607

Professional Fees
 
2,267

 
2,875

Advertising and Promotion
 
2,723

 
1,860

Intangible Amortization
 
725

 
800

Other Operating Expenses
 
7,002

 
7,364

TOTAL NON-INTEREST EXPENSE
 
57,803

 
57,232

 
 
 
 
 
Income before Income Taxes
 
39,812

 
35,239

Income Tax Expense
 
10,757

 
10,120

NET INCOME
 
$
29,055

 
$
25,119

 
 
 
 
 
Basic Earnings per Share (1)
 
$
1.27

 
$
1.13

Diluted Earnings per Share (1)
 
$
1.27

 
$
1.13

 
 
 
 
 
Dividends per Share (1)
 
$
0.39

 
$
0.36

(1) Per share data has been adjusted to reflect a 3-for-2 stock split on April 21, 2017. 

See accompanying notes to consolidated financial statements.

6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 
 
Three Months Ended 
 September 30,
 
 
2017
 
2016
 
 
 
 
 
NET INCOME
 
$
9,660

 
$
10,185

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
(1,450
)
 
1,898

Reclassification Adjustment for Gains Included in Net Income
 
(575
)
 
(458
)
Tax Effect
 
714

 
(510
)
Net of Tax
 
(1,311
)
 
930

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
(1,311
)
 
930

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
8,349

 
$
11,115

 

 
 




 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
 
 
 
 
NET INCOME
 
$
29,055

 
$
25,119

 
 
 
 
 
Other Comprehensive Income:
 
 

 
 

Unrealized Gains on Securities
 
 

 
 

Unrealized Holding Gain Arising During the Period
 
14,862

 
14,241

Reclassification Adjustment for Gains Included in Net Income
 
(575
)
 
(1,426
)
Tax Effect
 
(5,034
)
 
(4,502
)
Net of Tax
 
9,253

 
8,313

 
 
 
 
 
Total Other Comprehensive Income
 
9,253

 
8,313

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
38,308

 
$
33,432










See accompanying notes to consolidated financial statements.

7


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
29,055

 
$
25,119

Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
 
 

 
 

Net Amortization on Securities
 
2,591

 
2,794

Depreciation and Amortization
 
3,496

 
3,366

Loans Originated for Sale
 
(95,278
)
 
(95,244
)
Proceeds from Sales of Loans Held-for-Sale
 
104,639

 
95,765

Provision for Loan Losses
 
1,100

 
1,200

Gain on Sale of Loans, net
 
(2,598
)
 
(2,607
)
Gain on Securities, net
 
(575
)
 
(1,426
)
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets
 
(8
)
 
(95
)
Loss on Disposition and Donation of Premises and Equipment
 
873

 
5

Increase in Cash Surrender Value of Company Owned Life Insurance
 
(1,089
)
 
(769
)
Equity Based Compensation
 
941

 
796

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
(1,985
)
 
4,805

Interest Payable and Other Liabilities
 
2,656

 
(911
)
Net Cash from Operating Activities
 
43,818

 
32,798

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Purchase of Other Short-term Investments
 

 
(1,000
)
Proceeds from Maturity of Other Short-term Investments
 

 
1,248

Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale
 
61,763

 
74,179

Proceeds from Sales of Securities Available-for-Sale
 
48,343

 
141,451

Purchase of Securities Available-for-Sale
 
(129,760
)
 
(166,857
)
Proceeds from Maturities of Securities Held-to-Maturity
 

 
95

Purchase of Federal Home Loan Bank Stock
 

 
(1,350
)
Purchase of Loans
 
(211
)
 
(5,608
)
Proceeds from Sales of Loans
 

 
1,063

Loans Made to Customers, net of Payments Received
 
(97,976
)
 
(116,801
)
Proceeds from Sales of Other Real Estate
 
912

 
1,071

Property and Equipment Expenditures
 
(7,277
)
 
(2,855
)
Proceeds from Sales of Property and Equipment
 
2

 

Acquisition of River Valley Bancorp
 

 
(793
)
Net Cash from Investing Activities
 
(124,204
)
 
(76,157
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
75,211

 
98,036

Change in Short-term Borrowings
 
(20,354
)
 
(19,189
)
Advances in Long-term Debt
 
75,000

 

Repayments of Long-term Debt
 
(50,834
)
 
(24,883
)
Issuance of Common Stock
 
(29
)
 
54

Dividends Paid
 
(8,862
)
 
(7,884
)
Net Cash from Financing Activities
 
70,132

 
46,134

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
(10,254
)
 
2,775

Cash and Cash Equivalents at Beginning of Year
 
64,816

 
52,009

Cash and Cash Equivalents at End of Period
 
$
54,562

 
$
54,784

 
 
 
 
 
Cash Paid During the Period for
 
 

 
 

Interest
 
$
7,823

 
$
6,201

Income Taxes
 
10,661

 
7,064

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
1,230

 
$
55

Reclassification of Land to Other Assets
 
330

 

See accompanying notes to consolidated financial statements.

8


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

  
NOTE 1 – Basis of Presentation
 
German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries (hereinafter collectively referred to as the "Company") conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2016. Certain items included in the prior period financial statements were reclassified to conform to the current presentation. There was no effect on net income or total shareholders' equity based on these reclassifications.

NOTE 2 - Common Stock Split

On March 27, 2017, the Company declared a 3-for-2 stock split on the Company's authorized and outstanding common shares. The stock split was distributed on April 21, 2017, to shareholders of record as of April 6, 2017. All share and per share data in this Quarterly Report on Form 10-Q relating to a date or period that precedes April 21, 2017 have been adjusted to retroactively reflect the stock split.

NOTE 3 – Per Share Data
 
The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Three Months Ended 
 September 30,
 
 
2017
 
2016
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
9,660

 
$
10,185

Weighted Average Shares Outstanding (1)
 
22,929,864

 
22,886,721

Basic Earnings per Share
 
$
0.42

 
$
0.45

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
9,660

 
$
10,185

 
 
 
 
 
Weighted Average Shares Outstanding (1)
 
22,929,864

 
22,886,721

Potentially Dilutive Shares, Net
 

 

Diluted Weighted Average Shares Outstanding (1)
 
22,929,864

 
22,886,721

Diluted Earnings per Share
 
$
0.42

 
$
0.45

 (1) Share and per share data has been adjusted to reflect a 3-for-2 stock split on April 21, 2017.
      
For the three months ended September 30, 2017 and 2016, there were no anti-dilutive shares.


9


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 3 - Per Share Data (continued)

 
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
29,055

 
$
25,119

Weighted Average Shares Outstanding (1)
 
22,922,724

 
22,221,780

Basic Earnings per Share
 
$
1.27

 
$
1.13

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
29,055

 
$
25,119

 
 
 
 
 
Weighted Average Shares Outstanding (1)
 
22,922,724

 
22,221,780

Potentially Dilutive Shares, Net
 

 
2,639

Diluted Weighted Average Shares Outstanding (1)
 
22,922,724

 
22,224,419

Diluted Earnings per Share
 
$
1.27

 
$
1.13

 (1) Share and per share data has been adjusted to reflect a 3-for-2 stock split on April 21, 2017.

For the nine months ended September 30, 2017 and 2016, there were no anti-dilutive shares.

NOTE 4 – Securities 

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at September 30, 2017 and December 31, 2016, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2017
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
258,244

 
$
8,822

 
$
(570
)
 
$
266,496

MBS/CMO - Residential
 
478,595

 
1,189

 
(4,923
)
 
474,861

Equity Securities
 
353

 

 

 
353

Total
 
$
737,192

 
$
10,011

 
$
(5,493
)
 
$
741,710

 
 
 
 
 
 
 
 
 
December 31, 2016
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
247,350

 
$
3,847

 
$
(3,678
)
 
$
247,519

MBS/CMO - Residential
 
471,852

 
480

 
(10,418
)
 
461,914

Equity Securities
 
353

 

 

 
353

Total
 
$
719,555

 
$
4,327

 
$
(14,096
)
 
$
709,786

 
   
Equity securities that do not have readily determinable fair values are included in the above totals, are carried at historical cost and are evaluated for impairment on a periodic basis. All mortgage-backed securities in the above table are residential mortgage-backed securities and guaranteed by government sponsored entities.
 

10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 4 - Securities (continued)

The amortized cost and fair value of securities at September 30, 2017 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 in the table below.
Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
1,680

 
$
1,699

Due after one year through five years
 
19,818

 
20,716

Due after five years through ten years
 
78,342

 
81,862

Due after ten years
 
158,404

 
162,219

MBS/CMO - Residential
 
478,595

 
474,861

Equity Securities
 
353

 
353

Total
 
$
737,192

 
$
741,710

  

Proceeds from the Sales of Securities are summarized below:
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
Proceeds from Sales
 
$
48,343

 
$
36,112

Gross Gains on Sales
 
575

 
458

Income Taxes on Gross Gains
 
201

 
160

 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2017
 
September 30, 2016
 
 
 
 
 
Proceeds from Sales
 
$
48,343

 
$
141,451

Gross Gains on Sales
 
575

 
1,426

Income Taxes on Gross Gains
 
201

 
499

    
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $165,767 and $186,572 as of September 30, 2017 and December 31, 2016, respectively.

Below is a summary of securities with unrealized losses as of September 30, 2017 and December 31, 2016, presented by length of time the securities have been in a continuous unrealized loss position:
 
 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2017
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$
33,584

 
$
(337
)
 
$
6,115

 
$
(233
)
 
$
39,699

 
$
(570
)
MBS/CMO - Residential
 
294,132

 
(3,665
)
 
47,985

 
(1,258
)
 
342,117

 
(4,923
)
Equity Securities
 

 

 

 

 

 

Total
 
$
327,716

 
$
(4,002
)
 
$
54,100

 
$
(1,491
)
 
$
381,816

 
$
(5,493
)
 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2016
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$
108,918

 
$
(3,678
)
 
$

 
$

 
$
108,918

 
$
(3,678
)
MBS/CMO - Residential
 
356,040

 
(8,782
)
 
47,271

 
(1,636
)
 
403,311

 
(10,418
)
Equity Securities
 

 

 

 

 

 

Total
 
$
464,958

 
$
(12,460
)
 
$
47,271

 
$
(1,636
)
 
$
512,229

 
$
(14,096
)

11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 4 - 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 does not 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 and collateralized mortgage obligations (MBS/CMO - Residential) 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 one non-controlling investment in a single banking organization at September 30, 2017 and December 31, 2016. The original investment totaled $1,350 and other-than-temporary impairment was previously recorded totaling $997. 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.
 
NOTE 5 – Derivatives

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $88.3 million at September 30, 2017 and $67.9 million at December 31, 2016. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income.  

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.

The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of:
 
 
September 30, 2017
 
December 31, 2016
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
88,303

 
$
1,750

 
$
67,902

 
$
1,291

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
88,303

 
$
1,848

 
$
67,902

 
$
1,238


The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the periods presented:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2017
 
2016
 
2017
 
2016
Interest Rate Swaps:
 
 

 
 

 
 

 
 

Included in Other Operating Income
 
$
101

 
$
670

 
$
449

 
$
828



12


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 6 – Loans
 
Loans were comprised of the following classifications at September 30, 2017 and December 31, 2016: 
 
 
September 30,
2017
 
December 31,
2016
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
474,917

 
$
457,372

Commercial Real Estate Loans
 
898,752

 
856,094

Agricultural Loans
 
327,026

 
303,128

Retail:
 
 

 
 

Home Equity Loans
 
145,877

 
133,575

Consumer Loans
 
63,660

 
59,945

Residential Mortgage Loans
 
179,481

 
183,290

Subtotal
 
2,089,713

 
1,993,404

Less: Unearned Income
 
(3,388
)
 
(3,449
)
Allowance for Loan Losses
 
(15,321
)
 
(14,808
)
Loans, Net
 
$
2,071,004

 
$
1,975,147


The following tables present the activity in the allowance for loan losses by portfolio class for the three months ended September 30, 2017 and 2016:
September 30, 2017
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural
Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
3,672

 
$
5,316

 
$
4,829

 
$
300

 
$
254

 
$
353

 
$
596

 
$
15,320

Provision for Loan Losses
 
204

 
(81
)
 
(10
)
 
37

 
135

 
56

 
(91
)
 
250

Recoveries
 
1

 
4

 
9

 
6

 
78

 
3

 

 
101

Loans Charged-off
 
(140
)
 
(6
)
 

 

 
(204
)
 

 

 
(350
)
Ending Balance
 
$
3,737

 
$
5,233

 
$
4,828

 
$
343

 
$
263

 
$
412

 
$
505

 
$
15,321


September 30, 2016
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural
Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,190

 
$
6,533

 
$
2,704

 
$
350

 
$
242

 
$
559

 
$
726

 
$
15,304

Provision for Loan Losses
 
(378
)
 
(1,111
)
 
1,408

 
20

 
119

 
(7
)
 
(51
)
 

Recoveries
 
1

 
2

 

 
1

 
59

 
2

 

 
65

Loans Charged-off
 

 

 
(10
)
 
(15
)
 
(173
)
 
(17
)
 

 
(215
)
Ending Balance
 
$
3,813

 
$
5,424

 
$
4,102

 
$
356

 
$
247

 
$
537

 
$
675

 
$
15,154


13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The following tables present the activity in the allowance for loan losses by portfolio class for the nine months ended September 30, 2017 and 2016:
September 30, 2017
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural
Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
3,725

 
$
5,452

 
$
4,094

 
$
283

 
$
235

 
$
329

 
$
690

 
$
14,808

Provision for Loan Losses
 
151

 
(62
)
 
725

 
70

 
307

 
94

 
(185
)
 
1,100

Recoveries
 
10

 
43

 
9

 
8

 
205

 
38

 

 
313

Loans Charged-off
 
(149
)
 
(200
)
 

 
(18
)
 
(484
)
 
(49
)
 

 
(900
)
Ending Balance
 
$
3,737

 
$
5,233

 
$
4,828

 
$
343

 
$
263

 
$
412

 
$
505

 
$
15,321

September 30, 2016
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural
Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,242

 
$
6,342

 
$
2,115

 
$
383

 
$
230

 
$
414

 
$
712

 
$
14,438

Provision for Loan Losses
 
(453
)
 
(923
)
 
1,997

 
60

 
212

 
344

 
(37
)
 
1,200

Recoveries
 
29

 
5

 

 
2

 
147

 
11

 

 
194

Loans Charged-off
 
(5
)
 

 
(10
)
 
(89
)
 
(342
)
 
(232
)
 

 
(678
)
Ending Balance
 
$
3,813

 
$
5,424

 
$
4,102

 
$
356

 
$
247

 
$
537

 
$
675

 
$
15,154


In determining the adequacy of the allowance for loan loss, general allocations are made for 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 historical averages for loan losses for these portfolios, judgmentally adjusted for current economic factors and portfolio trends.

Loan impairment is reported when full repayment under the terms of the loan is not expected. This methodology is used for all loans, including loans acquired with deteriorated credit quality if such loans perform worse than what was expected at the time of acquisition. For purchased loans, the assessment is made at the time of acquisition as well as over the life of loan. 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.

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 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.












14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2017 and December 31, 2016:
September 30, 2017
 
Total
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
Allowance for Loan Losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
1,843

 
$
323

 
$
1,450

 
$
70

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,467

 
3,411

 
3,780

 
4,758

 
343

 
263

 
407

 
505

Acquired with Deteriorated Credit Quality
 
11

 
3

 
3

 

 

 

 
5

 

Total Ending Allowance Balance
 
$
15,321

 
$
3,737

 
$
5,233

 
$
4,828

 
$
343

 
$
263

 
$
412

 
$
505


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
9,289

 
$
4,127

 
$
4,771

 
$
391

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
2,080,338

 
471,095

 
889,674

 
330,323

 
146,393

 
63,816

 
179,037

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
9,099

 
945

 
6,492

 
768

 

 

 
894

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,098,726

 
$
476,167

 
$
900,937

 
$
331,482

 
$
146,393

 
$
63,816

 
$
179,931

 
n/m(2)

 
 
(1)Total recorded investment in loans includes $9,013 in accrued interest.
(2)n/m = not meaningful
December 31, 2016
 
Total
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
Allowance for Loan Losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
255

 
$
24

 
$
231

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
14,448

 
3,698

 
5,172

 
4,046

 
283

 
230

 
329

 
690

Acquired with Deteriorated Credit Quality
 
105

 
3

 
49

 
48

 

 
5

 

 

Total Ending Allowance Balance
 
$
14,808

 
$
3,725

 
$
5,452

 
$
4,094

 
$
283

 
$
235

 
$
329

 
$
690


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
1,239

 
$
113

 
$
832

 
$
294

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
1,989,128

 
456,769

 
849,510

 
305,946

 
134,032

 
60,046

 
182,825

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
11,048

 
1,656

 
7,688

 
706

 

 
53

 
945

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,001,415

 
$
458,538

 
$
858,030

 
$
306,946

 
$
134,032

 
$
60,099

 
$
183,770

 
n/m(2)

 
(1)Total recorded investment in loans includes $8,011 in accrued interest.
(2)n/m = not meaningful 

15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2017 and December 31, 2016:
September 30, 2017
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,223

 
$
1,182

 
$

Commercial Real Estate Loans
 
1,916

 
1,573

 

Agricultural Loans
 
921

 
733

 

Subtotal
 
4,060

 
3,488

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
3,000

 
2,959

 
326

Commercial Real Estate Loans
 
3,620

 
3,614

 
1,453

Agricultural Loans
 
228

 
228

 
70

Subtotal
 
6,848

 
6,801

 
1,849

Total
 
$
10,908

 
$
10,289

 
$
1,849

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
1,273

 
$
788

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
257

 
$
212

 
$