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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 March 31, 2018
 
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 x
Accelerated filer ¨
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 May 1, 2018
Common Shares, no par value
 
22,967,448



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, 2017, 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 – March 31, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Income – Three Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2018 and 2017
 
 
 
 
Notes to Consolidated Financial Statements – March 31, 2018
 
 
 
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

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)
 
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
32,023

 
$
58,233

Federal Funds Sold and Other Short-term Investments
 
8,187

 
12,126

Cash and Cash Equivalents
 
40,210

 
70,359

 
 
 
 
 
Securities Available-for-Sale, at Fair Value
 
737,604

 
740,641

Other Investments
 
353

 
353

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
6,628

 
6,719

 
 
 
 
 
Loans
 
2,153,848

 
2,145,019

Less: Unearned Income
 
(3,302
)
 
(3,381
)
Allowance for Loan Losses
 
(14,460
)
 
(15,694
)
Loans, Net
 
2,136,086

 
2,125,944

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

 
13,048

Premises, Furniture and Equipment, Net
 
58,024

 
54,246

Other Real Estate
 
68

 
54

Goodwill
 
54,058

 
54,058

Intangible Assets
 
1,896

 
2,102

Company Owned Life Insurance
 
46,386

 
46,385

Accrued Interest Receivable and Other Assets
 
30,657

 
30,451

TOTAL ASSETS
 
$
3,125,018

 
$
3,144,360

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
599,374

 
$
606,134

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,465,150

 
1,490,033

Time Deposits
 
402,597

 
387,885

Total Deposits
 
2,467,121

 
2,484,052

 
 
 
 
 
FHLB Advances and Other Borrowings
 
274,473

 
275,216

Accrued Interest Payable and Other Liabilities
 
19,419

 
20,521

TOTAL LIABILITIES
 
2,761,013

 
2,779,789

 
 
 
 
 
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
 
22,969

 
22,934

Additional Paid-in Capital
 
165,532

 
165,288

Retained Earnings
 
187,342

 
178,969

Accumulated Other Comprehensive Loss
 
(11,838
)
 
(2,620
)
TOTAL SHAREHOLDERS’ EQUITY
 
364,005

 
364,571

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
3,125,018

 
$
3,144,360

End of period shares issued and outstanding
 
22,968,813

 
22,934,403






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 
 March 31,
 

2018

2017
INTEREST INCOME

 


 

Interest and Fees on Loans

$
23,950


$
22,262

Interest on Federal Funds Sold and Other Short-term Investments

56


27

Interest and Dividends on Securities:

 


 

Taxable

2,998


2,719

Non-taxable

2,141


2,025

TOTAL INTEREST INCOME

29,145


27,033








INTEREST EXPENSE

 


 

Interest on Deposits

2,283


1,443

Interest on FHLB Advances and Other Borrowings

1,252


865

TOTAL INTEREST EXPENSE

3,535


2,308








NET INTEREST INCOME

25,610


24,725

Provision for Loan Losses

350


500

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

25,260


24,225








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

1,773


1,243

Service Charges on Deposit Accounts

1,471


1,484

Insurance Revenues

2,930


2,640

Company Owned Life Insurance

312


254

Interchange Fee Income

1,482


1,023

Other Operating Income

604


857

Net Gains on Sales of Loans

650


687

Net Gains on Securities

270



TOTAL NON-INTEREST INCOME

9,492


8,188








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

12,126


11,444

Occupancy Expense

1,744


1,549

Furniture and Equipment Expense

665


633

FDIC Premiums

237


239

Data Processing Fees

1,127


1,011

Professional Fees

871


803

Advertising and Promotion

701


778

Intangible Amortization

206


253

Other Operating Expenses

2,778


2,326

TOTAL NON-INTEREST EXPENSE

20,455


19,036








Income before Income Taxes

14,297


13,377

Income Tax Expense

2,484


3,821

NET INCOME

$
11,813


$
9,556








Basic Earnings per Share

$
0.51


$
0.42

Diluted Earnings per Share

$
0.51


$
0.42








Dividends per Share

$
0.15


$
0.13

 

See accompanying notes to consolidated financial statements.

5


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
 
 
 
 
 
NET INCOME
 
$
11,813

 
$
9,556

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities:
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
(11,452
)
 
6,179

Reclassification Adjustment for Gains Included in Net Income
 
(270
)
 

Tax Effect
 
2,504

 
(2,181
)
Net of Tax
 
(9,218
)
 
3,998

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
(9,218
)
 
3,998

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
2,595

 
$
13,554

 

 
 




 
 
 
 
 























See accompanying notes to consolidated financial statements.

6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
11,813

 
$
9,556

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

 
 

Net Amortization (Accretion) on Securities
 
(904
)
 
808

Depreciation and Amortization
 
1,199

 
1,127

Loans Originated for Sale
 
(29,822
)
 
(24,566
)
Proceeds from Sales of Loans Held-for-Sale
 
30,592

 
33,615

Provision for Loan Losses
 
350

 
500

Gain on Sale of Loans, net
 
(650
)
 
(687
)
Gain on Securities, net
 
(270
)
 

Loss (Gain) on Sales of Other Real Estate and Repossessed Assets
 
(13
)
 

Loss on Disposition and Donation of Premises and Equipment
 
(1
)
 

Increase in Cash Surrender Value of Company Owned Life Insurance
 
(252
)
 
(261
)
Equity Based Compensation
 
279

 
295

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
16

 
(1,602
)
Interest Payable and Other Liabilities
 
1,402

 
3,857

Net Cash from Operating Activities
 
13,739

 
22,642

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturity of Securities Available-for-Sale
 
22,930

 
21,154

Proceeds from Sales of Securities Available-for-Sale
 
7,295

 

Purchase of Securities Available-for-Sale
 
(37,736
)
 
(32,351
)
Purchase of Loans
 

 
(59
)
Proceeds from Sales of Loans
 
6,000

 

Loans Made to Customers, net of Payments Received
 
(16,519
)
 
6,182

Proceeds from Sales of Other Real Estate
 
26

 
152

Property and Equipment Expenditures
 
(4,790
)
 
(2,433
)
Proceeds from Sales of Property and Equipment
 
1

 

Net Cash from Investing Activities
 
(22,793
)
 
(7,355
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
(16,894
)
 
(23,003
)
Change in Short-term Borrowings
 
9,297

 
(40,985
)
Advances in Long-term Debt
 
35,000

 
25,000

Repayments of Long-term Debt
 
(45,058
)
 
(776
)
Dividends Paid
 
(3,440
)
 
(2,900
)
Net Cash from Financing Activities
 
(21,095
)
 
(42,664
)
 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
(30,149
)
 
(27,377
)
Cash and Cash Equivalents at Beginning of Year
 
70,359

 
64,816

Cash and Cash Equivalents at End of Period
 
$
40,210

 
$
37,439

 
 
 
 
 
Cash Paid During the Period for
 
 

 
 

Interest
 
$
3,641

 
$
2,361

Income Taxes
 

 

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
27

 
$
118






See accompanying notes to consolidated financial statements.

7


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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, 2017. 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 - Revenue Recognition

In May 2014, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). On January 1, 2018, the Company adopted ASU 2014-09 and all subsequent amendments to the ASU that modified Topic 606. Topic 606 creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets. Since the guidance does not apply to revenue associated with financial instruments, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The majority of the Company's revenues are from financial instruments and are not within the scope of Topic 606. The Company completed its overall assessment of revenue streams and related contracts, including service charges on deposit accounts, interchange income, and trust and investment brokerage fees. Based on the assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether certain revenue streams should be reported gross versus net of certain expenses. Based on its evaluation, the Company determined that the classification of certain debit card related costs should change and now be reported as expenses versus contra-revenue. This reclassification change resulted in an immaterial impact to both revenue and expense. The Company adopted ASU 2014-09 and its related amendments utilizing the modified retrospective approach. Since there was no net income impact upon adoption of this guidance, a cumulative adjustment to retained earnings was not deemed necessary. Consistent with the modified retrospective approach, the Company did not adjust prior period amounts for the debit card costs noted above.

A description of the Company's revenue streams accounted for under Topic 606 follows:

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed (the point in time the Company fills the customer's request). Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

Interchange Fee Income: The Company earns interchange fees from debit/credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Trust and Investment Product Fees: The Company earns trust and investment brokerage fees from its contracts with trust and brokerage customers to manage assets for investment and/or to transact their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (trade date).

Insurance Revenues: The Company earns insurance revenue from commissions derived from the sale of personal and corporate property and casualty insurance products. These commissions are primarily earned over time as the Company provides the contracted insurance product to customers.


8

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data


NOTE 2 - Revenue Recognition (continued)

The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three months ended March 31, 2018 and 2017.

 
 
Three Months Ended
 
 
March 31,
Non-interest Income
 
2018
 
2017
   In-Scope of Topic 606:
 
 
 
 
      Trust and Investment Product Fees
 
$
1,773

 
$
1,243

      Service Charges on Deposit Accounts
 
1,471

 
1,484

      Insurance Revenues
 
2,930

 
2,640

      Interchange Fee Income
 
1,482

 
1,023

      Other Operating Income
 
378

 
344

   Non-interest Income (in-scope of Topic 606)
 
8,034

 
6,734

   Non-interest Income (out-of-scope of Topic 606)
 
1,458

 
1,454

Total Non-interest Income
 
$
9,492

 
$
8,188



NOTE 3 – Per Share Data
 
The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
11,813

 
$
9,556

Weighted Average Shares Outstanding
 
22,940,402

 
22,908,648

Basic Earnings per Share
 
$
0.51

 
$
0.42

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
11,813

 
$
9,556

 
 
 
 
 
Weighted Average Shares Outstanding
 
22,940,402

 
22,908,648

Potentially Dilutive Shares, Net
 

 

Diluted Weighted Average Shares Outstanding
 
22,940,402

 
22,908,648

Diluted Earnings per Share
 
$
0.51

 
$
0.42

      
For the three months ended March 31, 2018 and 2017, there were no anti-dilutive shares.
 
 
 
 
 

9


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data

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 March 31, 2018 and December 31, 2017, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

March 31, 2018
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
271,135

 
$
3,893

 
$
(2,275
)
 
$
272,753

MBS/CMO - Residential
 
481,192

 
76

 
(16,417
)
 
464,851

Total
 
$
752,327

 
$
3,969

 
$
(18,692
)
 
$
737,604

 
 
 
 
 
 
 
 
 
December 31, 2017
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
267,437

 
$
6,733

 
$
(861
)
 
$
273,309

MBS/CMO - Residential
 
476,205

 
416

 
(9,289
)
 
467,332

Total
 
$
743,642

 
$
7,149

 
$
(10,150
)
 
$
740,641

 
   
All mortgage-backed securities in the above table (identified above and throughout this Note 4 as "MBS/CMO - Residential") are residential mortgage-backed securities and guaranteed by government sponsored entities.

Equity securities that do not have readily determinable fair values are included as "Other Investments" on the Consolidated Balance Sheet, are carried at historical cost and are evaluated for impairment on a periodic basis.  The Company's equity securities consist of one non-controlling investment in a single banking organization at March 31, 2018 and December 31, 2017. 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.

The amortized cost and fair value of securities at March 31, 2018 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 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
 
$
2,814

 
$
2,835

Due after one year through five years
 
20,970

 
21,520

Due after five years through ten years
 
80,105

 
81,462

Due after ten years
 
167,246

 
166,936

MBS/CMO - Residential
 
481,192

 
464,851

Total
 
$
752,327

 
$
737,604

  

Proceeds from the Sales of Securities are summarized below:
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2018
 
March 31, 2017
 
 
 
 
 
Proceeds from Sales
 
$
7,295

 
$

Gross Gains on Sales
 
270

 

Income Taxes on Gross Gains
 
57

 

 
 
 
 
 
    
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $226,893 and $165,404 as of March 31, 2018 and December 31, 2017, respectively.

10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data

NOTE 4 - Securities (continued)

Below is a summary of securities with unrealized losses as of March 31, 2018 and December 31, 2017, presented by length of time the securities have been in a continuous unrealized loss position:
 
 
Less than 12 Months
 
12 Months or More
 
Total
March 31, 2018
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$
74,634

 
$
(1,264
)
 
$
23,716

 
$
(1,011
)
 
$
98,350

 
$
(2,275
)
MBS/CMO - Residential
 
222,993

 
(5,380
)
 
236,726

 
(11,037
)
 
459,719

 
(16,417
)
Total
 
$
297,627

 
$
(6,644
)
 
$
260,442

 
$
(12,048
)
 
$
558,069

 
$
(18,692
)
 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2017
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$
33,230

 
$
(237
)
 
$
24,161

 
$
(624
)
 
$
57,391

 
$
(861
)
MBS/CMO - Residential
 
172,354

 
(2,048
)
 
250,520

 
(7,241
)
 
422,874

 
(9,289
)
Total
 
$
205,584

 
$
(2,285
)
 
$
274,681

 
$
(7,865
)
 
$
480,265

 
$
(10,150
)

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.
 
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 $87.3 million at March 31, 2018 and $87.8 million at December 31, 2017. 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.


11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Derivatives (continued)

The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of:
 
 
March 31, 2018
 
December 31, 2017
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
87,257

 
$
2,232

 
$
87,788

 
$
1,564

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
87,257

 
$
2,210

 
$
87,788

 
$
1,633


The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the periods presented:
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
Interest Rate Swaps:
 
 

 
 

Included in Other Operating Income
 
$
90

 
$
348


NOTE 6 – Loans
 
Loans were comprised of the following classifications at March 31, 2018 and December 31, 2017: 
 
 
March 31,
2018
 
December 31,
2017
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
482,219

 
$
486,668

Commercial Real Estate Loans
 
947,948

 
926,729

Agricultural Loans
 
329,138

 
333,227

Retail:
 
 

 
 

Home Equity Loans
 
151,943

 
152,187

Consumer Loans
 
64,492

 
67,475

Residential Mortgage Loans
 
178,108

 
178,733

Subtotal
 
2,153,848

 
2,145,019

Less: Unearned Income
 
(3,302
)
 
(3,381
)
Allowance for Loan Losses
 
(14,460
)
 
(15,694
)
Loans, Net
 
$
2,136,086

 
$
2,125,944

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following tables present the activity in the allowance for loan losses by portfolio class for the three months ended March 31, 2018 and 2017:
March 31, 2018
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural
Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,735

 
$
4,591

 
$
4,894

 
$
330

 
$
298

 
$
343

 
$
503

 
$
15,694

Provision for Loan Losses
 
367

 
25

 
(69
)
 
(44
)
 
97

 
(18
)
 
(8
)
 
350

Recoveries
 
1

 
6

 

 
2

 
89

 
2

 

 
100

Loans Charged-off
 
(1,500
)
 

 

 
(16
)
 
(168
)
 

 

 
(1,684
)
Ending Balance
 
$
3,603

 
$
4,622

 
$
4,825

 
$
272

 
$
316

 
$
327

 
$
495

 
$
14,460


12


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

March 31, 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
 
(115
)
 
278

 
267

 
17

 
118

 
19

 
(84
)
 
500

Recoveries
 
2

 
5

 

 

 
60

 
27

 

 
94

Loans Charged-off
 

 
(39
)
 

 
(1
)
 
(169
)
 
(27
)
 

 
(236
)
Ending Balance
 
$
3,612

 
$
5,696

 
$
4,361

 
$
299

 
$
244

 
$
348

 
$
606

 
$
15,166


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 the 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.
























13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 March 31, 2018 and December 31, 2017:
March 31, 2018
 
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
 
$
1,181

 
$
252

 
$
929

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,238

 
3,348

 
3,660

 
4,825

 
272

 
316

 
322

 
495

Acquired with Deteriorated Credit Quality
 
41

 
3

 
33

 

 

 

 
5

 

Total Ending Allowance Balance
 
$
14,460

 
$
3,603

 
$
4,622

 
$
4,825

 
$
272

 
$
316

 
$
327

 
$
495


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
9,793

 
$
4,249

 
$
5,401

 
$
143

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
2,144,933

 
478,473

 
938,731

 
332,888

 
152,527

 
64,655

 
177,659

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
8,819

 
790

 
6,194

 
957

 

 

 
878

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,163,545

 
$
483,512

 
$
950,326

 
$
333,988

 
$
152,527

 
$
64,655

 
$
178,537

 
n/m(2)

 
 
(1)Total recorded investment in loans includes $9,697 in accrued interest.
(2)n/m = not meaningful
December 31, 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
 
$
2,228

 
$
1,399

 
$
829

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,455

 
3,333

 
3,759

 
4,894

 
330

 
298

 
338

 
503

Acquired with Deteriorated Credit Quality
 
11

 
3

 
3

 

 

 

 
5

 

Total Ending Allowance Balance
 
$
15,694

 
$
4,735

 
$
4,591

 
$
4,894

 
$
330

 
$
298

 
$
343

 
$
503


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
11,633

 
$
5,918

 
$
5,552

 
$
163

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
2,133,752

 
481,152

 
917,036

 
336,849

 
152,757

 
67,647

 
178,311

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
9,117

 
988

 
6,452

 
789

 

 

 
888

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,154,502

 
$
488,058

 
$
929,040

 
$
337,801

 
$
152,757

 
$
67,647

 
$
179,199

 
n/m(2)

 
(1)Total recorded investment in loans includes $9,483 in accrued interest.
(2)n/m = not meaningful 

14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 March 31, 2018 and December 31, 2017:
March 31, 2018
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,186

 
$
1,145

 
$

Commercial Real Estate Loans
 
1,384

 
1,233

 

Agricultural Loans
 
858

 
686

 

Subtotal
 
3,428

 
3,064

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
3,333

 
3,113

 
255

Commercial Real Estate Loans
 
4,760

 
4,567

 
962

Agricultural Loans
 

 

 

Subtotal
 
8,093

 
7,680

 
1,217

Total
 
$
11,521

 
$
10,744

 
$
1,217

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
832

 
$
544

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
620

 
$
407

 
$
36

   
(1) Unpaid Principal Balance is the remaining contractual principal payments gross of partial charge-offs and discounts.

December 31, 2017
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,205

 
$
1,166

 
$

Commercial Real Estate Loans
 
1,812

 
1,495

 

Agricultural Loans
 
919

 
749

 

Subtotal
 
3,936

 
3,410

 

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
4,804

 
4,763

 
1,402

Commercial Real Estate Loans
 
4,489

 
4,465

 
832

Agricultural Loans
 

 

 

Subtotal
 
9,293

 
9,228

 
2,234

Total
 
$
13,229

 
$
12,638

 
$
2,234

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
1,255

 
$
797

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
252

 
$
208

 
$
6

    
(1) Unpaid Principal Balance is the remaining contractual principal payments gross of partial charge-offs and discounts.
 

15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 for the three month period ended March 31, 2018 and 2017:
March 31, 2018
 
Average Recorded
Investment
 
Interest Income Recognized
 
Cash Basis
Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,183

 
$
13

 
$
1

Commercial Real Estate Loans
 
1,407

 
13

 
6

Agricultural Loans
 
700

 

 

Subtotal
 
3,290

 
26

 
7

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
4,284

 
1

 

Commercial Real Estate Loans
 
4,623

 
3

 

Agricultural Loans
 

 

 

Subtotal
 
8,907

 
4

 

Total
 
$
12,197

 
$
30

 
$
7

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
563

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
412

 
$
4

 
$


March 31, 2017
 
Average Recorded
Investment
 
Interest Income Recognized
 
Cash Basis
Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
16

 
$

 
$

Commercial Real Estate Loans
 
522

 
4

 
4

Agricultural Loans
 
719

 
5

 

Subtotal
 
1,257

 
9

 
4

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
103

 
1

 
1

Commercial Real Estate Loans
 
2,423

 
6

 
6

Agricultural Loans
 
497

 

 

Subtotal
 
3,023

 
7

 
7

Total
 
$
4,280

 
$
16

 
$
11

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
209

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
1,007

 
$
7

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 







16


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

All classes of loans, including loans acquired with deteriorated credit quality, are generally 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. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are typically charged-off at 180 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 tables present the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of March 31, 2018 and December 31, 2017:
 
 
Non-Accrual Loans
 
Loans Past Due 90 Days
or More & Still Accruing
 
 
March 31,
 
December 31,
 
March 31,
 
December 31,
 
 
2018
 
2017
 
2018
 
2017
Commercial and Industrial Loans and Leases
 
$
3,105

 
$
4,753

 
$

 
$

Commercial Real Estate Loans
 
4,502

 
4,618

 
893

 
474

Agricultural Loans
 
697

 
748

 
228

 
268

Home Equity Loans
 
188

 
199

 

 

Consumer Loans
 
71

 
286

 

 

Residential Mortgage Loans
 
916

 
487

 

 

Total
 
$
9,479

 
$
11,091

 
$
1,121

 
$
742

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
822

 
$
866

 
$

 
$


The following tables present the aging of the recorded investment in past due loans by class of loans as of March 31, 2018 and December 31, 2017:
March 31, 2018
 
Total
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total
Past Due
 
Loans Not Past Due
Commercial and Industrial Loans and Leases
 
$
483,512

 
$
659

 
$
180

 
$
633

 
$
1,472

 
$
482,040

Commercial Real Estate Loans
 
950,326

 
1,195

 

 
2,237

 
3,432

 
946,894

Agricultural Loans
 
333,988

 
106

 

 
228

 
334

 
333,654

Home Equity Loans
 
152,527

 
529

 
94

 
188

 
811

 
151,716

Consumer Loans
 
64,655

 
303

 
62

 
71

 
436

 
64,219

Residential Mortgage Loans
 
178,537

 
3,860

 
123

 
701

 
4,684

 
173,853

Total(1)
 
$
2,163,545

 
$
6,652

 
$
459

 
$
4,058

 
$
11,169

 
$
2,152,376

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
8,819

 
$
518

 
$

 
$
27

 
$
545

 
$
8,274

(1)Total recorded investment in loans includes $9,697 in accrued interest.

17


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

December 31, 2017
 
Total
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total
Past Due
 
Loans Not Past Due
Commercial and Industrial Loans and Leases
 
$
488,058

 
$
209

 
$
1,365