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 March 31, 2019
 
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 every Interactive Data File required to be submitted 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 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
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, no par value
GABC
NASDAQ Global Select Market

As of May 1, 2019, the registrant had 24,992,238 outstanding shares of Common Stock, no par value.



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, 2018, 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, 2019 and December 31, 2018
 
 
 
 
Consolidated Statements of Income – Three Months Ended March 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31, 2019 and 2018
 
 
 
 
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2019 and 2018
 
 
 
 
Notes to Consolidated Financial Statements – March 31, 2019
 
 
 
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,
2019
 
December 31,
2018
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
45,038

 
$
64,549

Federal Funds Sold and Other Short-term Investments
 
14,490

 
32,001

Cash and Cash Equivalents
 
59,528

 
96,550

 
 
 
 
 
Interest-bearing Time Deposits with Banks
 
250

 
250

Securities Available-for-Sale, at Fair Value
 
824,597

 
812,611

Other Investments
 
353

 
353

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
8,586

 
4,263

 
 
 
 
 
Loans
 
2,712,414

 
2,731,741

Less: Unearned Income
 
(3,582
)
 
(3,682
)
Allowance for Loan Losses
 
(16,243
)
 
(15,823
)
Loans, Net
 
2,692,589

 
2,712,236

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

 
13,048

Premises, Furniture and Equipment, Net
 
89,600

 
80,627

Other Real Estate
 
685

 
286

Goodwill
 
103,799

 
103,681

Intangible Assets
 
9,121

 
9,964

Company Owned Life Insurance
 
59,208

 
59,896

Accrued Interest Receivable and Other Assets
 
34,160

 
35,325

TOTAL ASSETS
 
$
3,895,524

 
$
3,929,090

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
723,995

 
$
715,972

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,706,913

 
1,768,177

Time Deposits
 
634,262

 
588,483

Total Deposits
 
3,065,170

 
3,072,632

 
 
 
 
 
FHLB Advances and Other Borrowings
 
317,480

 
376,409

Accrued Interest Payable and Other Liabilities
 
33,687

 
21,409

TOTAL LIABILITIES
 
3,416,337

 
3,470,450

 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
 

 
 

Common Stock, no par value, $1 stated value; 45,000,000 shares authorized
 
24,992

 
24,967

Additional Paid-in Capital
 
229,633

 
229,347

Retained Earnings
 
222,246

 
211,424

Accumulated Other Comprehensive Income (Loss)
 
2,316

 
(7,098
)
TOTAL SHAREHOLDERS’ EQUITY
 
479,187

 
458,640

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
3,895,524

 
$
3,929,090

End of period shares issued and outstanding
 
24,992,238

 
24,967,458





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,
 

2019

2018
INTEREST INCOME

 


 

Interest and Fees on Loans

$
35,119


$
23,950

Interest on Federal Funds Sold and Other Short-term Investments

141


56

Interest and Dividends on Securities:

 


 

Taxable

3,599


2,998

Non-taxable

2,330


2,141

TOTAL INTEREST INCOME

41,189


29,145








INTEREST EXPENSE

 


 

Interest on Deposits

5,416


2,283

Interest on FHLB Advances and Other Borrowings

2,182


1,252

TOTAL INTEREST EXPENSE

7,598


3,535








NET INTEREST INCOME

33,591


25,610

Provision for Loan Losses

675


350

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

32,916


25,260








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

1,567


1,773

Service Charges on Deposit Accounts

1,900


1,471

Insurance Revenues

3,205


2,930

Company Owned Life Insurance

884


312

Interchange Fee Income

2,095


1,482

Other Operating Income

871


604

Net Gains on Sales of Loans

981


650

Net Gains on Securities

155


270

TOTAL NON-INTEREST INCOME

11,658


9,492








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

15,044


12,126

Occupancy Expense

2,291


1,744

Furniture and Equipment Expense

928


665

FDIC Premiums

288


237

Data Processing Fees

1,583


1,127

Professional Fees

1,327


871

Advertising and Promotion

870


701

Intangible Amortization

843


206

Other Operating Expenses

3,585


2,778

TOTAL NON-INTEREST EXPENSE

26,759


20,455








Income before Income Taxes

17,815


14,297

Income Tax Expense

2,748


2,484

NET INCOME

$
15,067


$
11,813








Basic Earnings per Share

$
0.60


$
0.51

Diluted Earnings per Share

$
0.60


$
0.51








Dividends per Share

$
0.17


$
0.15

 

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,
 
 
2019
 
2018
 
 
 
 
 
NET INCOME
 
$
15,067

 
$
11,813

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities:
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
12,201

 
(11,452
)
Reclassification Adjustment for Gains Included in Net Income
 
(155
)
 
(270
)
Tax Effect
 
(2,632
)
 
2,504

Net of Tax
 
9,414

 
(9,218
)
 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
9,414

 
(9,218
)
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
24,481

 
$
2,595

 

 
 




 
 
 
 
 


























See accompanying notes to consolidated financial statements.

6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited, dollars in thousands)

 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
Balances, December 31, 2018
 
24,967,458

 
$
24,967

 
$
229,347

 
$
211,424

 
$
(7,098
)
 
$
458,640

 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 

 
 
 
 
 
15,067

 
 
 
15,067

Other Comprehensive Income (Loss)
 
 

 
 
 
 
 
 
 
9,414

 
9,414

Cash Dividends ($0.17 per share)
 
 

 
 
 
 
 
(4,245
)
 
 
 
(4,245
)
Issuance of Common Stock for:
 
 

 
 
 
 
 
 

 
 

 
 

Restricted Share Grants
 
24,780

 
25

 
286

 
 
 
 
 
311

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, March 31, 2019
 
24,992,238

 
$
24,992

 
$
229,633

 
$
222,246

 
$
2,316

 
$
479,187



 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Shareholders' Equity
Balances, December 31, 2017
 
22,934,403

 
$
22,934

 
$
165,288

 
$
178,969

 
$
(2,620
)
 
$
364,571

 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income
 
 

 
 
 
 
 
11,813

 
 
 
11,813

Other Comprehensive Income (Loss)
 
 

 
 
 
 
 
 
 
(9,218
)
 
(9,218
)
Cash Dividends ($0.15 per share)
 
 

 
 
 
 
 
(3,440
)
 
 
 
(3,440
)
Issuance of Common Stock for:
 
 

 
 
 
 
 
 

 
 

 
 

Restricted Share Grants
 
34,410

 
35

 
244

 
 
 
 
 
279

 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, March 31, 2018
 
22,968,813

 
$
22,969

 
$
165,532

 
$
187,342

 
$
(11,838
)
 
$
364,005



7


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
 
Three Months Ended 
March 31,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
15,067

 
$
11,813

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

 
 

Net Amortization (Accretion) on Securities
 
868

 
(904
)
Depreciation and Amortization
 
2,010

 
1,199

Loans Originated for Sale
 
(33,043
)
 
(29,822
)
Proceeds from Sales of Loans Held-for-Sale
 
29,622

 
30,592

Provision for Loan Losses
 
675

 
350

Gain on Sale of Loans, net
 
(981
)
 
(650
)
Gain on Securities, net
 
(155
)
 
(270
)
Gain on Sales of Other Real Estate and Repossessed Assets
 

 
(13
)
Loss (Gain) on Disposition and Donation of Premises and Equipment
 

 
(1
)
Gain on Disposition of Land
 
(262
)
 

Increase in Cash Surrender Value of Company Owned Life Insurance
 
(331
)
 
(252
)
Equity Based Compensation
 
311

 
279

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
683

 
16

Interest Payable and Other Liabilities
 
879

 
1,402

Net Cash from Operating Activities
 
15,343

 
13,739

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturity of Securities Available-for-Sale
 
18,123

 
22,930

Proceeds from Sales of Securities Available-for-Sale
 
11,815

 
7,295

Purchase of Securities Available-for-Sale
 
(30,591
)
 
(37,736
)
Purchase of Loans
 
(521
)
 

Proceeds from Sales of Loans
 

 
6,000

Loans Made to Customers, net of Payments Received
 
18,808

 
(16,519
)
Proceeds from Sales of Other Real Estate
 
286

 
26

Property and Equipment Expenditures
 
(1,629
)
 
(4,790
)
Proceeds from Sales of Property and Equipment
 

 
1

Proceeds from Sale of Land
 
722

 

Proceeds from Life Insurance
 
1,019

 

Net Cash from Investing Activities
 
18,032

 
(22,793
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
(7,184
)
 
(16,894
)
Change in Short-term Borrowings
 
(83,904
)
 
9,297

Advances in Long-term Debt
 
25,000

 
35,000

Repayments of Long-term Debt
 
(64
)
 
(45,058
)
Dividends Paid
 
(4,245
)
 
(3,440
)
Net Cash from Financing Activities
 
(70,397
)
 
(21,095
)
 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
(37,022
)
 
(30,149
)
Cash and Cash Equivalents at Beginning of Year
 
96,550

 
70,359

Cash and Cash Equivalents at End of Period
 
$
59,528

 
$
40,210

 
 
 
 
 
Cash Paid During the Period for
 
 

 
 

Interest
 
$
7,468

 
$
3,641

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
685

 
$
27

Right of Use Asset Obtained in Exchange for Lease Liabilities
 
9,034

 

See accompanying notes to consolidated financial statements.

8


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2018. 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
March 31, 2019
(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, 2019 and 2018. 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
 
 
March 31,
Non-interest Income
 
2019
 
2018
   In-Scope of Topic 606:
 
 
 
 
      Trust and Investment Product Fees
 
$
1,567

 
$
1,773

      Service Charges on Deposit Accounts
 
1,900

 
1,471

      Insurance Revenues
 
3,205

 
2,930

      Interchange Fee Income
 
2,095

 
1,482

      Other Operating Income
 
412

 
378

   Non-interest Income (in-scope of Topic 606)
 
9,179

 
8,034

   Non-interest Income (out-of-scope of Topic 606)
 
2,479

 
1,458

Total Non-interest Income
 
$
11,658

 
$
9,492

 
 
 
 
 

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,
 
 
2019
 
2018
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
15,067

 
$
11,813

Weighted Average Shares Outstanding
 
24,971,863

 
22,940,402

Basic Earnings per Share
 
$
0.60

 
$
0.51

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
15,067

 
$
11,813

 
 
 
 
 
Weighted Average Shares Outstanding
 
24,971,863

 
22,940,402

Potentially Dilutive Shares, Net
 

 

Diluted Weighted Average Shares Outstanding
 
24,971,863

 
22,940,402

Diluted Earnings per Share
 
$
0.60

 
$
0.51

         
For the three months ended March 31, 2019 and 2018, there were no anti-dilutive shares.
 
 
 
 
 




10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019 and December 31, 2018, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

March 31, 2019
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
283,892

 
$
8,640

 
$
(215
)
 
$
292,317

MBS/CMO - Residential
 
537,302

 
2,487

 
(7,509
)
 
532,280

Total
 
$
821,194

 
$
11,127

 
$
(7,724
)
 
$
824,597

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
291,449

 
$
4,407

 
$
(1,323
)
 
$
294,533

MBS/CMO - Residential
 
529,805

 
1,029

 
(12,756
)
 
518,078

Total
 
$
821,254

 
$
5,436

 
$
(14,079
)
 
$
812,611

 
   
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.

The amortized cost and fair value of securities at March 31, 2019 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.
Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
2,206

 
$
2,216

Due after one year through five years
 
16,102

 
16,431

Due after five years through ten years
 
76,237

 
78,748

Due after ten years
 
189,347

 
194,922

MBS/CMO - Residential
 
537,302

 
532,280

Total
 
$
821,194

 
$
824,597

  

Proceeds from the Sales of Securities are summarized below:
 
 
Three Months Ended
 
Three Months Ended
 
 
March 31, 2019
 
March 31, 2018
 
 
 
 
 
Proceeds from Sales
 
$
11,815

 
$
7,295

Gross Gains on Sales
 
155

 
270

Income Taxes on Gross Gains
 
33

 
57

 
 
 
 
 
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $209,016 and $211,239 as of March 31, 2019 and December 31, 2018, respectively.


11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019 and December 31, 2018, 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, 2019
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$

 
$

 
$
18,574

 
$
(215
)
 
$
18,574

 
$
(215
)
MBS/CMO - Residential
 
2

 

 
353,617

 
(7,509
)
 
353,619

 
(7,509
)
Total
 
$
2

 
$

 
$
372,191

 
$
(7,724
)
 
$
372,193

 
$
(7,724
)
 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2018
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
Obligations of State and Political Subdivisions
 
$
37,936

 
$
(286
)
 
$
49,071

 
$
(1,037
)
 
$
87,007

 
$
(1,323
)
MBS/CMO - Residential
 
56,386

 
(601
)
 
356,218

 
(12,155
)
 
412,604

 
(12,756
)
Total
 
$
94,322

 
$
(887
)
 
$
405,289

 
$
(13,192
)
 
$
499,611

 
$
(14,079
)

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 are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at March 31, 2019 and December 31, 2018. The original investment totaled $1,350 and other-than-temporary impairment was previously recorded totaling $997. The Company's equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. At March 31, 2019, there was no additional impairment recognized through 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 $85.0 million at March 31, 2019 and $85.6 million at December 31, 2018. 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.


12


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019
 
December 31, 2018
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
84,977

 
$
1,377

 
$
85,587

 
$
1,713

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
84,977

 
$
1,471

 
$
85,587

 
$
1,734


The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the periods presented:
 
 
Three Months Ended
March 31,
 
 
 
2019
 
2018
 
Interest Rate Swaps:
 
 

 
 

 
Included in Other Operating Income
 
$
(74
)
 
$
90

 

NOTE 6 – Loans
 
Loans were comprised of the following classifications at March 31, 2019 and December 31, 2018: 
 
 
March 31,
2019
 
December 31,
2018
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
555,967

 
$
543,761

Commercial Real Estate Loans
 
1,212,090

 
1,208,646

Agricultural Loans
 
347,999

 
365,208

Retail:
 
 

 
 

Home Equity Loans
 
203,611

 
207,987

Consumer Loans
 
78,113

 
77,547

Residential Mortgage Loans
 
314,634

 
328,592

Subtotal
 
2,712,414

 
2,731,741

Less: Unearned Income
 
(3,582
)
 
(3,682
)
Allowance for Loan Losses
 
(16,243
)
 
(15,823
)
Loans, Net
 
$
2,692,589

 
$
2,712,236




13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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 March 31, 2019 and 2018:
March 31, 2019
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural
Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
2,953

 
$
5,291

 
$
5,776

 
$
229

 
$
420

 
$
472

 
$
682

 
$
15,823

Provision for Loan Losses
 
347

 
565

 
(323
)
 
(15
)
 
209

 
(32
)
 
(76
)
 
675

Recoveries
 
17

 
5

 

 

 
121

 
3

 

 
146

Loans Charged-off
 

 
(120
)
 

 

 
(267
)
 
(14
)
 

 
(401
)
Ending Balance
 
$
3,317

 
$
5,741

 
$
5,453

 
$
214

 
$
483

 
$
429

 
$
606

 
$
16,243


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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.


14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019 and December 31, 2018:
March 31, 2019
 
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
 
$
1,427

 
$
104

 
$
1,323

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
14,534

 
3,213

 
4,141

 
5,453

 
214

 
483

 
424

 
606

Acquired with Deteriorated Credit Quality
 
282

 

 
277

 

 

 

 
5

 

Total Ending Allowance Balance
 
$
16,243

 
$
3,317

 
$
5,741

 
$
5,453

 
$
214

 
$
483

 
$
429

 
$
606


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
6,815

 
$
2,410

 
$
4,405

 
$

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
2,707,925

 
554,348

 
1,205,000

 
351,808

 
204,258

 
78,356

 
314,155

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
10,472

 
902

 
6,127

 
1,798

 
368

 

 
1,277

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,725,212

 
$
557,660

 
$
1,215,532

 
$
353,606

 
$
204,626

 
$
78,356

 
$
315,432

 
n/m(2)

 
 
(1)Total recorded investment in loans includes $12,798 in accrued interest.
(2)n/m = not meaningful
December 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
 
$
1,823

 
$
143

 
$
1,680

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,992

 
2,810

 
3,608

 
5,776

 
229

 
420

 
467

 
682

Acquired with Deteriorated Credit Quality
 
8

 

 
3

 

 

 

 
5

 

Total Ending Allowance Balance
 
$
15,823

 
$
2,953

 
$
5,291

 
$
5,776

 
$
229

 
$
420

 
$
472

 
$
682


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
9,619

 
$
3,536

 
$
6,083

 
$

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
2,722,867

 
540,768

 
1,198,806

 
368,817

 
208,644

 
77,761

 
328,071

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
11,556

 
1,038

 
6,993

 
1,877

 
365

 

 
1,283

 
n/m(2)

Total Ending Loans Balance(1)
 
$
2,744,042

 
$
545,342

 
$
1,211,882

 
$
370,694

 
$
209,009

 
$
77,761

 
$
329,354

 
n/m(2)

 
(1)Total recorded investment in loans includes $12,301 in accrued interest.
(2)n/m = not meaningful 


15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(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, 2019 and December 31, 2018:
March 31, 2019
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,410

 
$
186

 
$

Commercial Real Estate Loans
 
4,519

 
3,261

 

Agricultural Loans
 
1,669

 
1,399

 

Subtotal
 
8,598

 
4,846

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
2,223

 
2,223

 
104

Commercial Real Estate Loans
 
4,549

 
4,108

 
1,600

Agricultural Loans
 

 

 

Subtotal
 
6,772

 
6,331

 
1,704

Total
 
$
15,370

 
$
11,177

 
$
1,704

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
7,151

 
$
3,525

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
1,159

 
$
837

 
$
277

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

December 31, 2018
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
3,721

 
$
1,183

 
$

Commercial Real Estate Loans
 
5,828

 
4,383

 

Agricultural Loans
 
1,726

 
1,450

 

Subtotal
 
11,275

 
7,016

 

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
2,353

 
2,353

 
143

Commercial Real Estate Loans
 
4,404

 
4,212

 
1,683

Agricultural Loans
 

 

 

Subtotal
 
6,757

 
6,565

 
1,826

Total
 
$
18,032

 
$
13,581

 
$
1,826

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
8,060

 
$
3,958

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
196

 
$
4

 
$
3

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

16


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2019
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The following tables present the average balance and related interest income of loans individually evaluated for impairment by class of loans for the three month period ended March 31, 2019 and 2018:
March 31, 2019
 
Average Recorded
Investment
 
Interest Income Recognized
 
Cash Basis
Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
438

 
$
2

 
$
2

Commercial Real Estate Loans
 
3,601

 
19

 
9

Agricultural Loans
 
1,405

 

 

Subtotal
 
5,444

 
21

 
11

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
2,286

 

 

Commercial Real Estate Loans
 
4,691

 

 

Agricultural Loans
 

 

 

Subtotal
 
6,977

 

 

Total
 
$
12,421

 
$
21

 
$
11

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
3,547

 
$
8

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
762

 
$

 
$


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

 
$