Toggle SGML Header (+)


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 June 30, 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 August 1, 2018
Common Shares, no par value
 
22,968,078



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 – June 30, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Income – Three Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Income – Six Months Ended June 30, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows – Six Months Ended June 30, 2018 and 2017
 
 
 
 
Notes to Consolidated Financial Statements – June 30, 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)
 
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
60,244

 
$
58,233

Federal Funds Sold and Other Short-term Investments
 
11,038

 
12,126

Cash and Cash Equivalents
 
71,282

 
70,359

 
 
 
 
 
Securities Available-for-Sale, at Fair Value
 
739,481

 
740,641

Other Investments
 
353

 
353

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
9,552

 
6,719

 
 
 
 
 
Loans
 
2,321,845

 
2,145,019

Less: Unearned Income
 
(3,335
)
 
(3,381
)
Allowance for Loan Losses
 
(15,637
)
 
(15,694
)
Loans, Net
 
2,302,873

 
2,125,944

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

 
13,048

Premises, Furniture and Equipment, Net
 
66,641

 
54,246

Other Real Estate
 
40

 
54

Goodwill
 
60,913

 
54,058

Intangible Assets
 
5,065

 
2,102

Company Owned Life Insurance
 
46,655

 
46,385

Accrued Interest Receivable and Other Assets
 
28,641

 
30,451

TOTAL ASSETS
 
$
3,344,544

 
$
3,144,360

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
629,724

 
$
606,134

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,611,583

 
1,490,033

Time Deposits
 
360,133

 
387,885

Total Deposits
 
2,601,440

 
2,484,052

 
 
 
 
 
FHLB Advances and Other Borrowings
 
354,803

 
275,216

Accrued Interest Payable and Other Liabilities
 
17,761

 
20,521

TOTAL LIABILITIES
 
2,974,004

 
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
 
22,968

 
22,934

Additional Paid-in Capital
 
165,917

 
165,288

Retained Earnings
 
194,994

 
178,969

Accumulated Other Comprehensive Loss
 
(13,339
)
 
(2,620
)
TOTAL SHAREHOLDERS’ EQUITY
 
370,540

 
364,571

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
3,344,544

 
$
3,144,360

End of period shares issued and outstanding
 
22,967,898

 
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 
June 30,
 

2018

2017
INTEREST INCOME

 


 

Interest and Fees on Loans

$
26,308


$
22,602

Interest on Federal Funds Sold and Other Short-term Investments

54


27

Interest and Dividends on Securities:

 


 

Taxable

2,962


2,702

Non-taxable

2,209


2,070

TOTAL INTEREST INCOME

31,533


27,401








INTEREST EXPENSE

 


 

Interest on Deposits

2,848


1,626

Interest on FHLB Advances and Other Borrowings

1,216


962

TOTAL INTEREST EXPENSE

4,064


2,588








NET INTEREST INCOME

27,469


24,813

Provision for Loan Losses

1,220


350

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

26,249


24,463








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

1,677


1,350

Service Charges on Deposit Accounts

1,643


1,478

Insurance Revenues

1,696


1,744

Company Owned Life Insurance

260


480

Interchange Fee Income

1,714


1,156

Other Operating Income

913


630

Net Gains on Sales of Loans

905


959

Net Gains on Securities

74



TOTAL NON-INTEREST INCOME

8,882


7,797








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

12,019


11,460

Occupancy Expense

1,811


1,570

Furniture and Equipment Expense

716


654

FDIC Premiums

238


232

Data Processing Fees

1,398


1,044

Professional Fees

1,361


913

Advertising and Promotion

857


630

Intangible Amortization

306


242

Other Operating Expenses

3,002


2,251

TOTAL NON-INTEREST EXPENSE

21,708


18,996








Income before Income Taxes

13,423


13,264

Income Tax Expense

2,326


3,425

NET INCOME

$
11,097


$
9,839








Basic Earnings per Share

$
0.48


$
0.43

Diluted Earnings per Share

$
0.48


$
0.43








Dividends per Share

$
0.15


$
0.13

 

See accompanying notes to consolidated financial statements.

5


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 
 
Six Months Ended
June 30,
 
 
2018
 
2017
INTEREST INCOME
 
 

 
 

Interest and Fees on Loans
 
$
50,258

 
$
44,864

Interest on Federal Funds Sold and Other Short-term Investments
 
110

 
54

Interest and Dividends on Securities:
 


 


Taxable
 
5,960

 
5,421

Non-taxable
 
4,350

 
4,095

TOTAL INTEREST INCOME
 
60,678

 
54,434

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
5,131

 
3,069

Interest on FHLB Advances and Other Borrowings
 
2,468

 
1,827

TOTAL INTEREST EXPENSE
 
7,599

 
4,896

 
 
 
 
 
NET INTEREST INCOME
 
53,079

 
49,538

Provision for Loan Losses
 
1,570

 
850

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
51,509

 
48,688

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
3,450

 
2,593

Service Charges on Deposit Accounts
 
3,114

 
2,962

Insurance Revenues
 
4,626

 
4,384

Company Owned Life Insurance
 
572

 
734

Interchange Fee Income
 
3,196

 
2,179

Other Operating Income
 
1,517

 
1,487

Net Gains on Sales of Loans
 
1,555

 
1,646

Net Gains on Securities
 
344

 

TOTAL NON-INTEREST INCOME
 
18,374

 
15,985

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
24,145

 
22,904

Occupancy Expense
 
3,555

 
3,119

Furniture and Equipment Expense
 
1,381

 
1,287

FDIC Premiums
 
475

 
471

Data Processing Fees
 
2,525

 
2,055

Professional Fees
 
2,232

 
1,716

Advertising and Promotion
 
1,558

 
1,408

Intangible Amortization
 
512

 
495

Other Operating Expenses
 
5,780

 
4,577

TOTAL NON-INTEREST EXPENSE
 
42,163

 
38,032

 
 
 
 
 
Income before Income Taxes
 
27,720

 
26,641

Income Tax Expense
 
4,810

 
7,246

NET INCOME
 
$
22,910

 
$
19,395

 
 
 
 
 
Basic Earnings per Share
 
$
1.00

 
$
0.85

Diluted Earnings per Share
 
$
1.00

 
$
0.85

 
 
 
 
 
Dividends per Share
 
$
0.30

 
$
0.26



See accompanying notes to consolidated financial statements.

6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 
 
Three Months Ended
June 30,
 
 
2018
 
2017
 
 
 
 
 
NET INCOME
 
$
11,097

 
$
9,839

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities:
 
 

 
 

Unrealized Holding Gain (Loss)Arising During the Period
 
(1,840
)
 
10,133

Reclassification Adjustment for Gains Included in Net Income
 
(74
)
 

Tax Effect
 
413

 
(3,567
)
Net of Tax
 
(1,501
)
 
6,566

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
(1,501
)
 
6,566

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
9,596

 
$
16,405

 

 
 




 
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
 
 
 
 
NET INCOME
 
$
22,910

 
$
19,395

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities:
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
(13,292
)
 
16,312

Reclassification Adjustment for Gains Included in Net Income
 
(344
)
 

Tax Effect
 
2,917

 
(5,748
)
Net of Tax
 
(10,719
)
 
10,564

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
(10,719
)
 
10,564

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
12,191

 
$
29,959










See accompanying notes to consolidated financial statements.

7


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
 
Six Months Ended 
June 30,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
22,910

 
$
19,395

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

 
 

Net Amortization on Securities
 
1,793

 
1,669

Depreciation and Amortization
 
2,601

 
2,317

Loans Originated for Sale
 
(65,071
)
 
(57,304
)
Proceeds from Sales of Loans Held-for-Sale
 
63,710

 
64,286

Provision for Loan Losses
 
1,570

 
850

Gain on Sale of Loans, net
 
(1,555
)
 
(1,646
)
Gain on Securities, net
 
(344
)
 

Gain on Sales of Other Real Estate and Repossessed Assets
 
(13
)
 
(7
)
Loss (Gain) on Disposition and Donation of Premises and Equipment
 
(36
)
 
2

Increase in Cash Surrender Value of Company Owned Life Insurance
 
(521
)
 
(759
)
Equity Based Compensation
 
562

 
637

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
2,924

 
(196
)
Interest Payable and Other Liabilities
 
90

 
(751
)
Net Cash from Operating Activities
 
28,620

 
28,493

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturity of Securities Available-for-Sale
 
37,481

 
40,792

Proceeds from Sales of Securities Available-for-Sale
 
17,515

 

Purchase of Securities Available-for-Sale
 
(68,923
)
 
(56,941
)
Purchase of Loans
 

 
(59
)
Proceeds from Sales of Loans
 
6,000

 

Loans Made to Customers, net of Payments Received
 
(66,922
)
 
(43,297
)
Proceeds from Sales of Other Real Estate
 
54

 
190

Property and Equipment Expenditures
 
(8,862
)
 
(3,302
)
Proceeds from Sales of Property and Equipment
 
40

 

Acquire Bank Branches
 
41,392

 

Net Cash from Investing Activities
 
(42,225
)
 
(62,617
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
(58,239
)
 
13,909

Change in Short-term Borrowings
 
89,640

 
(18,851
)
Advances in Long-term Debt
 
35,000

 
50,000

Repayments of Long-term Debt
 
(45,089
)
 
(25,804
)
Issuance (Retirement) of Common Stock
 
101

 
(29
)
Dividends Paid
 
(6,885
)
 
(5,880
)
Net Cash from Financing Activities
 
14,528

 
13,345

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
923

 
(20,779
)
Cash and Cash Equivalents at Beginning of Year
 
70,359

 
64,816

Cash and Cash Equivalents at End of Period
 
$
71,282

 
$
44,037

 
 
 
 
 
Cash Paid During the Period for
 
 

 
 

Interest
 
$
7,641

 
$
4,913

Income Taxes
 
2,150

 
7,239

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
27

 
$
1,230




See accompanying notes to consolidated financial statements.

8


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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.


9


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six months ended June 30, 2018 and 2017. Trust and investment product fees are included in the trust and investment advisory services segment while insurance revenues are included in the insurance segment. All other revenue streams are primarily included in the banking segment.
 
 
Three Months Ended
 
 
June 30,
Non-interest Income
 
2018
 
2017
   In-Scope of Topic 606:
 
 
 
 
      Trust and Investment Product Fees
 
$
1,677

 
$
1,350

      Service Charges on Deposit Accounts
 
1,643

 
1,478

      Insurance Revenues
 
1,696

 
1,744

      Interchange Fee Income
 
1,714

 
1,156

      Other Operating Income
 
442

 
387

   Non-interest Income (in-scope of Topic 606)
 
7,172

 
6,115

   Non-interest Income (out-of-scope of Topic 606)
 
1,710

 
1,682

Total Non-interest Income
 
$
8,882

 
$
7,797


 
 
Six Months Ended
 
 
June 30,
Non-interest Income
 
2018
 
2017
   In-Scope of Topic 606:
 
 
 
 
      Trust and Investment Product Fees
 
$
3,450

 
$
2,593

      Service Charges on Deposit Accounts
 
3,114

 
2,962

      Insurance Revenues
 
4,626

 
4,384

      Interchange Fee Income
 
3,196

 
2,179

      Other Operating Income
 
820

 
731

   Non-interest Income (in-scope of Topic 606)
 
15,206

 
12,849

   Non-interest Income (out-of-scope of Topic 606)
 
3,168

 
3,136

Total Non-interest Income
 
$
18,374

 
$
15,985




10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 3 – Per Share Data
 
The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Three Months Ended 
June 30,
 
 
2018
 
2017
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
11,097

 
$
9,839

Weighted Average Shares Outstanding
 
22,968,178

 
22,929,426

Basic Earnings per Share
 
$
0.48

 
$
0.43

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
11,097

 
$
9,839

 
 
 
 
 
Weighted Average Shares Outstanding
 
22,968,178

 
22,929,426

Potentially Dilutive Shares, Net
 

 

Diluted Weighted Average Shares Outstanding
 
22,968,178

 
22,929,426

Diluted Earnings per Share
 
$
0.48

 
$
0.43

         
For the three months ended June 30, 2018 and 2017, there were no anti-dilutive shares.

 
 
Six Months Ended 
June 30,
 
 
2018
 
2017
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
22,910

 
$
19,395

Weighted Average Shares Outstanding
 
22,954,367

 
22,919,094

Basic Earnings per Share
 
$
1.00

 
$
0.85

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
22,910

 
$
19,395

 
 
 
 
 
Weighted Average Shares Outstanding
 
22,954,367

 
22,919,094

Potentially Dilutive Shares, Net
 

 

Diluted Weighted Average Shares Outstanding
 
22,954,367

 
22,919,094

Diluted Earnings per Share
 
$
1.00

 
$
0.85


For the six months ended June 30, 2018 and 2017, there were no anti-dilutive shares.


11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2018 and December 31, 2017, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

June 30, 2018
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
277,135

 
$
3,732

 
$
(2,030
)
 
$
278,837

MBS/CMO - Residential
 
478,983

 
57

 
(18,396
)
 
460,644

Total
 
$
756,118

 
$
3,789

 
$
(20,426
)
 
$
739,481

 
 
 
 
 
 
 
 
 
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 June 30, 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 June 30, 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
 
$
2,588

 
$
2,602

Due after one year through five years
 
21,074

 
21,560

Due after five years through ten years
 
75,427

 
76,655

Due after ten years
 
178,046

 
178,020

MBS/CMO - Residential
 
478,983

 
460,644

Total
 
$
756,118

 
$
739,481

  

Proceeds from the Sales of Securities are summarized below:
 
 
Three Months Ended
 
Three Months Ended
 
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
Proceeds from Sales
 
$
10,220

 
$

Gross Gains on Sales
 
74

 

Income Taxes on Gross Gains
 
16

 


12


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited, dollars in thousands except share and per share data

NOTE 4 - Securities (continued)

 
 
Six Months Ended
 
Six Months Ended
 
 
June 30, 2018
 
June 30, 2017
 
 
 
 
 
Proceeds from Sales
 
$
17,515

 
$

Gross Gains on Sales
 
344

 

Income Taxes on Gross Gains
 
73

 

    
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $206,633 and $165,404 as of June 30, 2018 and December 31, 2017, respectively.

Below is a summary of securities with unrealized losses as of June 30, 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
June 30, 2018
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$
71,937

 
$
(1,096
)
 
$
23,735

 
$
(934
)
 
$
95,672

 
$
(2,030
)
MBS/CMO - Residential
 
226,405

 
(6,454
)
 
226,703

 
(11,942
)
 
453,108

 
(18,396
)
Total
 
$
298,342

 
$
(7,550
)
 
$
250,438

 
$
(12,876
)
 
$
548,780

 
$
(20,426
)
 
 
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 $86.7 million at June 30, 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.


13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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:
 
 
June 30, 2018
 
December 31, 2017
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
86,739

 
$
2,845

 
$
87,788

 
$
1,564

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
86,739

 
$
2,797

 
$
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
June 30,
 
Six Months Ended
June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest Rate Swaps:
 
 

 
 

 
 
 
 
Included in Other Operating Income
 
$
26

 
$

 
$
116

 
$
348


NOTE 6 – Loans
 
Loans were comprised of the following classifications at June 30, 2018 and December 31, 2017: 
 
 
June 30,
2018
 
December 31,
2017
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
518,299

 
$
486,668

Commercial Real Estate Loans
 
986,486

 
926,729

Agricultural Loans
 
352,308

 
333,227

Retail:
 
 

 
 

Home Equity Loans
 
169,456

 
152,187

Consumer Loans
 
71,859

 
67,475

Residential Mortgage Loans
 
223,437

 
178,733

Subtotal
 
2,321,845

 
2,145,019

Less: Unearned Income
 
(3,335
)
 
(3,381
)
Allowance for Loan Losses
 
(15,637
)
 
(15,694
)
Loans, Net
 
$
2,302,873

 
$
2,125,944


As further described in Note 14, during 2018 the Company acquired loans with a fair value of $117,619 as part of a branch acquisition. This was made up of loans with an acquired balance of $120,499, net of $2,880 of fair value discounts at date of acquisition. At June 30, 2018, the remaining carrying amount of such loans totaled $115,713, which is included in the table above. This amount is made up of loans with a remaining balance of $118,517 net of remaining fair value discounts of $2,804. No loans with deteriorated credit quality were acquired as part of the branch acquisition described in Note 14.


14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(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 three months ended June 30, 2018 and 2017:
June 30, 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
 
$
3,603

 
$
4,622

 
$
4,825

 
$
272

 
$
316

 
$
327

 
$
495

 
$
14,460

Provision for Loan Losses
 
(44
)
 
335

 
753

 
86

 
107

 
19

 
(36
)
 
1,220

Recoveries
 
4

 
5

 

 
8

 
68

 
29

 

 
114

Loans Charged-off
 

 
(4
)
 

 

 
(144
)
 
(9
)
 

 
(157
)
Ending Balance
 
$
3,563

 
$
4,958

 
$
5,578

 
$
366

 
$
347

 
$
366

 
$
459

 
$
15,637


June 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
 
$
3,612

 
$
5,696

 
$
4,361

 
$
299

 
$
244

 
$
348

 
$
606

 
$
15,166

Provision for Loan Losses
 
62

 
(259
)
 
468

 
16

 
54

 
19

 
(10
)
 
350

Recoveries
 
7

 
34

 

 
2

 
67

 
8

 

 
118

Loans Charged-off
 
(9
)
 
(155
)
 

 
(17
)
 
(111
)
 
(22
)
 

 
(314
)
Ending Balance
 
$
3,672

 
$
5,316

 
$
4,829

 
$
300

 
$
254

 
$
353

 
$
596

 
$
15,320


The following tables present the activity in the allowance for loan losses by portfolio class for the six months ended June 30, 2018 and 2017:
June 30, 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
 
323

 
360

 
684

 
42

 
204

 
1

 
(44
)
 
1,570

Recoveries
 
5

 
11

 

 
10

 
157

 
31

 

 
214

Loans Charged-off
 
(1,500
)
 
(4
)
 

 
(16
)
 
(312
)
 
(9
)
 

 
(1,841
)
Ending Balance
 
$
3,563

 
$
4,958

 
$
5,578

 
$
366

 
$
347

 
$
366

 
$
459

 
$
15,637


June 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
 
(53
)
 
19

 
735

 
33

 
172

 
38

 
(94
)
 
850

Recoveries
 
9

 
39

 

 
2

 
127

 
35

 

 
212

Loans Charged-off
 
(9
)
 
(194
)
 

 
(18
)
 
(280
)
 
(49
)
 

 
(550
)
Ending Balance
 
$
3,672

 
$
5,316

 
$
4,829

 
$
300

 
$
254

 
$
353

 
$
596

 
$
15,320


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.


15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

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.

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 June 30, 2018 and December 31, 2017:
June 30, 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
 
$
1,372

 
$
233

 
$
1,139

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
14,228

 
3,327

 
3,790

 
5,578

 
366

 
347

 
361

 
459

Acquired with Deteriorated Credit Quality
 
37

 
3

 
29

 

 

 

 
5

 

Total Ending Allowance Balance
 
$
15,637

 
$
3,563

 
$
4,958

 
$
5,578

 
$
366

 
$
347

 
$
366

 
$
459


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
9,897

 
$
3,840

 
$
6,057

 
$

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
2,313,658

 
515,126

 
977,762

 
355,566

 
170,141

 
72,045

 
223,018

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
7,776

 
783

 
5,174

 
951

 

 

 
868

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,331,331

 
$
519,749

 
$
988,993

 
$
356,517

 
$
170,141

 
$
72,045

 
$
223,886

 
n/m(2)

 
 
(1)Total recorded investment in loans includes $9,486 in accrued interest.
(2)n/m = not meaningful

16


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

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 

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2018 and December 31, 2017:
June 30, 2018
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,135

 
$
1,139

 
$

Commercial Real Estate Loans
 
1,203

 
1,177

 

Agricultural Loans
 
663

 
538

 

Subtotal
 
3,001

 
2,854

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
2,923

 
2,706

 
236

Commercial Real Estate Loans