10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2015
 
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, or a smaller reporting company:
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
YES   ¨      NO x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 1, 2015
Common Shares, no par value
 
13,275,678



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, 2014, in Item 1, “Business – Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” of that Annual Report on Form 10-K, as updated from time to time in our subsequent SEC filings, including by Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) at the conclusion of that Item 2 under the heading “Forward-Looking Statements and Associated Risks.”

2


*****
 
INDEX
 
PART I.            FINANCIAL INFORMATION
 
 
 
Item 1.
Unaudited Financial Statements
 
 
 
 
Consolidated Balance Sheets – September 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income – Three Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Income – Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Notes to Consolidated Financial Statements – September 30, 2015
 
 
 
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 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
 
 
INDEX OF EXHIBITS

3


PART  I.         FINANCIAL INFORMATION
Item 1.           Financial Statements
GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands except share and per share data)
 
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
39,998

 
$
33,481

Federal Funds Sold and Other Short-term Investments
 
22,140

 
8,965

Cash and Cash Equivalents
 
62,138

 
42,446

 
 
 
 
 
Interest-bearing Time Deposits with Banks
 
100

 
100

Securities Available-for-Sale, at Fair Value
 
625,144

 
630,995

Securities Held-to-Maturity, at Cost (Fair value of $95 and $186 on September 30, 2015 and December 31, 2014, respectively)
 
95

 
184

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
6,410

 
6,311

 
 
 
 
 
Loans
 
1,517,285

 
1,451,990

Less: Unearned Income
 
(3,705
)
 
(4,008
)
Allowance for Loan Losses
 
(14,770
)
 
(14,929
)
Loans, Net
 
1,498,810

 
1,433,053

 
 
 
 
 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost
 
8,167

 
7,040

Premises, Furniture and Equipment, Net
 
37,905

 
39,930

Other Real Estate
 
123

 
356

Goodwill
 
20,536

 
20,536

Intangible Assets
 
1,443

 
2,074

Company Owned Life Insurance
 
32,497

 
32,043

Accrued Interest Receivable and Other Assets
 
19,842

 
22,031

TOTAL ASSETS
 
$
2,313,210

 
$
2,237,099

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
418,947

 
$
428,016

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,039,520

 
1,018,320

Time Deposits
 
345,368

 
333,425

Total Deposits
 
1,803,835

 
1,779,761

 
 
 
 
 
FHLB Advances and Other Borrowings
 
239,072

 
206,064

Accrued Interest Payable and Other Liabilities
 
22,951

 
22,450

TOTAL LIABILITIES
 
2,065,858

 
2,008,275

 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
 

 
 

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

 

Common Stock, no par value, $1 stated value; 30,000,000 shares authorized
 
13,273

 
13,216

Additional Paid-in Capital
 
109,839

 
108,660

Retained Earnings
 
119,656

 
104,058

Accumulated Other Comprehensive Income
 
4,584

 
2,890

TOTAL SHAREHOLDERS’ EQUITY
 
247,352

 
228,824

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,313,210

 
$
2,237,099

End of period shares issued and outstanding
 
13,273,349

 
13,215,800





See accompanying notes to consolidated financial statements.

4


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

Three Months Ended 
 September 30,
 

2015

2014
INTEREST INCOME

 


 

Interest and Fees on Loans

$
16,702


$
16,680

Interest on Federal Funds Sold and Other Short-term Investments

3


2

Interest and Dividends on Securities:

 


 

Taxable

2,176


2,531

Non-taxable

1,538


1,135

TOTAL INTEREST INCOME

20,419


20,348








INTEREST EXPENSE

 


 

Interest on Deposits

987


1,025

Interest on FHLB Advances and Other Borrowings

573


532

TOTAL INTEREST EXPENSE

1,560


1,557








NET INTEREST INCOME

18,859


18,791

Provision for Loan Losses

(500
)


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

19,359


18,791








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

1,051


901

Service Charges on Deposit Accounts

1,237


1,300

Insurance Revenues

1,752


1,739

Company Owned Life Insurance

205


210

Interchange Fee Income

547


508

Other Operating Income

2,134


599

Net Gains on Sales of Loans

831


613

Net Gains on Securities



567

TOTAL NON-INTEREST INCOME

7,757


6,437








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

8,998


7,975

Occupancy Expense

1,305


1,262

Furniture and Equipment Expense

456


463

FDIC Premiums

284


277

Data Processing Fees

901


935

Professional Fees

787


516

Advertising and Promotion

2,198


613

Intangible Amortization

183


302

Other Operating Expenses

1,854


1,739

TOTAL NON-INTEREST EXPENSE

16,966


14,082








Income before Income Taxes

10,150


11,146

Income Tax Expense

2,429


3,438

NET INCOME

$
7,721


$
7,708








Basic Earnings per Share

$
0.58


$
0.58

Diluted Earnings per Share

$
0.58


$
0.58








Dividends per Share

$
0.17


$
0.16

 


See accompanying notes to consolidated financial statements.

5


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
INTEREST INCOME
 
 

 
 

Interest and Fees on Loans
 
$
49,538

 
$
48,766

Interest on Federal Funds Sold and Other Short-term Investments
 
10

 
8

Interest and Dividends on Securities:
 
 

 


Taxable
 
6,830

 
7,944

Non-taxable
 
4,219

 
3,136

TOTAL INTEREST INCOME
 
60,597

 
59,854

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
3,002

 
3,098

Interest on FHLB Advances and Other Borrowings
 
1,481

 
1,448

TOTAL INTEREST EXPENSE
 
4,483

 
4,546

 
 
 
 
 
NET INTEREST INCOME
 
56,114

 
55,308

Provision for Loan Losses
 

 
550

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
56,114

 
54,758

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
2,974

 
2,728

Service Charges on Deposit Accounts
 
3,594

 
3,552

Insurance Revenues
 
5,812

 
5,777

Company Owned Life Insurance
 
617

 
603

Interchange Fee Income
 
1,593

 
1,467

Other Operating Income
 
3,341

 
1,579

Net Gains on Sales of Loans
 
2,364

 
1,475

Net Gains on Securities
 
725

 
1,039

TOTAL NON-INTEREST INCOME
 
21,020

 
18,220

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
26,082

 
24,285

Occupancy Expense
 
3,732

 
3,776

Furniture and Equipment Expense
 
1,417

 
1,472

FDIC Premiums
 
850

 
828

Data Processing Fees
 
2,608

 
2,892

Professional Fees
 
2,073

 
1,761

Advertising and Promotion
 
3,125

 
1,635

Intangible Amortization
 
630

 
975

Other Operating Expenses
 
5,597

 
5,687

TOTAL NON-INTEREST EXPENSE
 
46,114

 
43,311

 
 
 
 
 
Income before Income Taxes
 
31,020

 
29,667

Income Tax Expense
 
8,668

 
8,967

NET INCOME
 
$
22,352

 
$
20,700

 
 
 
 
 
Basic Earnings per Share
 
$
1.69

 
$
1.57

Diluted Earnings per Share
 
$
1.69

 
$
1.57

 
 
 
 
 
Dividends per Share
 
$
0.51

 
$
0.48




See accompanying notes to consolidated financial statements.

6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 
 
Three Months Ended 
 September 30,
 
 
2015
 
2014
 
 
 
 
 
NET INCOME
 
$
7,721

 
$
7,708

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
6,420

 
871

Reclassification Adjustment for Losses (Gains) Included in Net Income
 

 
(567
)
Tax Effect
 
(2,259
)
 
(96
)
Net of Tax
 
4,161

 
208

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
4,161

 
208

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
11,882

 
$
7,916

 

 
 




 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
 
 
 
 
NET INCOME
 
$
22,352

 
$
20,700

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
3,333

 
9,251

Reclassification Adjustment for Losses (Gains) Included in Net Income
 
(725
)
 
(1,039
)
Tax Effect
 
(914
)
 
(2,903
)
Net of Tax
 
1,694

 
5,309

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
1,694

 
5,309

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
24,046

 
$
26,009










See accompanying notes to consolidated financial statements.

7


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
22,352

 
$
20,700

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

 
 

Net Amortization on Securities
 
1,869

 
1,510

Depreciation and Amortization
 
3,254

 
3,611

Loans Originated for Sale
 
(111,296
)
 
(70,603
)
Proceeds from Sales of Loans Held-for-Sale
 
113,472

 
73,696

Provision for Loan Losses
 

 
550

Gain on Sale of Loans, net
 
(2,364
)
 
(1,475
)
Gain on Securities, net
 
(725
)
 
(1,039
)
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets
 
53

 
(46
)
Loss (Gain) on Disposition and Donation of Premises and Equipment
 
389

 
28

Increase in Cash Surrender Value of Company Owned Life Insurance
 
(454
)
 
(631
)
Equity Based Compensation
 
737

 
482

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
2,278

 
(4,708
)
Interest Payable and Other Liabilities
 
(412
)
 
2,214

Net Cash from Operating Activities
 
29,153

 
24,289

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale
 
71,026

 
62,892

Proceeds from Sales of Securities Available-for-Sale
 
18,999

 
52,711

Purchase of Securities Available-for-Sale
 
(82,711
)
 
(74,247
)
Proceeds from Maturities of Securities Held-to-Maturity
 
89

 
84

Purchase of Federal Home Loan Bank Stock
 
(1,127
)
 
(92
)
Purchase of Loans
 
(1,852
)
 
(1,750
)
Loans Made to Customers, net of Payments Received
 
(64,708
)
 
(49,436
)
Proceeds from Sales of Other Real Estate
 
983

 
1,831

Property and Equipment Expenditures
 
(886
)
 
(2,492
)
Proceeds from Sales of Property and Equipment
 

 
23

Net Cash from Investing Activities
 
(60,187
)
 
(10,476
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
24,085

 
(47,658
)
Change in Short-term Borrowings
 
(1,993
)
 
66,977

Advances in Long-term Debt
 
75,000

 
20,321

Repayments of Long-term Debt
 
(40,111
)
 
(20,095
)
Issuance of Common Stock
 
52

 
50

Employee Stock Purchase Plan
 
447

 
(37
)
Dividends Paid
 
(6,754
)
 
(6,336
)
Net Cash from Financing Activities
 
50,726

 
13,222

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
19,692

 
27,035

Cash and Cash Equivalents at Beginning of Year
 
42,446

 
60,132

Cash and Cash Equivalents at End of Period
 
$
62,138

 
$
87,167

 
 
 
 
 
Cash Paid During the Year for
 
 

 
 

Interest
 
$
4,610

 
$
4,650

Income Taxes
 
6,219

 
7,192

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
864

 
$
1,277

Securities Sold Pending Settlement
 

 
(3,323
)
See accompanying notes to consolidated financial statements.

8


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2014. 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 shareholder’s equity based on these reclassifications.

NOTE 2 – Per Share Data
 
The computations of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Three Months Ended 
 September 30,
 
 
2015
 
2014
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
7,721

 
$
7,708

Weighted Average Shares Outstanding
 
13,265,893

 
13,210,395

Basic Earnings per Share
 
$
0.58

 
$
0.58

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
7,721

 
$
7,708

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,265,893

 
13,210,395

Potentially Dilutive Shares, Net
 
7,617

 
20,280

Diluted Weighted Average Shares Outstanding
 
13,273,510

 
13,230,675

Diluted Earnings per Share
 
$
0.58

 
$
0.58

 
For the three months ended September 30, 2015 and 2014, there were no anti-dilutive shares.


The computations of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
22,352

 
$
20,700

Weighted Average Shares Outstanding
 
13,247,954

 
13,200,025

Basic Earnings per Share
 
$
1.69

 
$
1.57

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
22,352

 
$
20,700

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,247,954

 
13,200,025

Potentially Dilutive Shares, Net
 
7,556

 
20,975

Diluted Weighted Average Shares Outstanding
 
13,255,510

 
13,221,000

Diluted Earnings per Share
 
$
1.69

 
$
1.57


For the nine months ended September 30, 2015 and 2014, there were no anti-dilutive shares.

9


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 3 – Securities 

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at September 30, 2015 and December 31, 2014, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2015
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$
10,000

 
$

 
$
(30
)
 
$
9,970

Obligations of State and Political Subdivisions
 
187,819

 
5,885

 
(362
)
 
193,342

Mortgage-backed Securities - Residential
 
419,753

 
4,091

 
(2,365
)
 
421,479

Equity Securities
 
353

 

 

 
353

Total
 
$
617,925

 
$
9,976

 
$
(2,757
)
 
$
625,144

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$
20,000

 
$

 
$
(439
)
 
$
19,561

Obligations of State and Political Subdivisions
 
147,321

 
6,515

 
(59
)
 
153,777

Mortgage-backed Securities - Residential
 
458,709

 
3,615

 
(5,020
)
 
457,304

Equity Securities
 
353

 

 

 
353

Total
 
$
626,383

 
$
10,130

 
$
(5,518
)
 
$
630,995

 

Equity securities that do not have readily determinable fair values are included in the above totals, are carried at historical cost and are evaluated for impairment on a periodic basis. All mortgage-backed securities in the above table are residential mortgage-backed securities and guaranteed by government sponsored entities.
 
The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity at September 30, 2015 and December 31, 2014, were as follows:
Securities Held-to-Maturity:
 
Carrying
Amount
 
Gross
Unrecognized
Gains
 
Gross
Unrecognized
Losses
 
Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2015
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
95

 
$

 
$

 
$
95

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
184

 
$
2

 
$

 
$
186



10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 3 - Securities (continued)

The amortized cost and fair value of securities at September 30, 2015 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately in the table below.

Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
7,109

 
$
7,213

Due after one year through five years
 
19,186

 
19,449

Due after five years through ten years
 
66,484

 
69,404

Due after ten years
 
105,040

 
107,246

Mortgage-backed Securities - Residential
 
419,753

 
421,479

Equity Securities
 
353

 
353

Total
 
$
617,925

 
$
625,144

 

Securities Held-to-Maturity:
 
Carrying
Amount
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
95

 
$
95

Due after one year through five years
 

 

Due after five years through ten years
 

 

Due after ten years
 

 

Total
 
$
95

 
$
95

 
Proceeds from the Sales of Securities are summarized below:
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2015
 
September 30, 2014
 
 
 
 
 
Proceeds from Sales
 
$

 
$
45,473

Gross Gains on Sales
 

 
567

Income Taxes on Gross Gains
 

 
198

 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2015
 
September 30, 2014
 
 
 
 
 
Proceeds from Sales
 
$
18,999

 
$
52,711

Gross Gains on Sales
 
725

 
1,039

Income Taxes on Gross Gains
 
254

 
364



11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 3 - Securities (continued)

Below is a summary of securities with unrealized losses as of September 30, 2015 and December 31, 2014, presented by length of time the securities have been in a continuous unrealized loss position:
 
 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2015
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency Securities
 
$

 
$

 
$
9,970

 
$
(30
)
 
$
9,970

 
$
(30
)
Obligations of State and Political Subdivisions
 
32,447

 
(356
)
 
353

 
(6
)
 
32,800

 
(362
)
Mortgage-backed Securities - Residential
 
50,786

 
(236
)
 
136,030

 
(2,129
)
 
186,816

 
(2,365
)
Equity Securities
 

 

 

 

 

 

Total
 
$
83,233

 
$
(592
)
 
$
146,353

 
$
(2,165
)
 
$
229,586

 
$
(2,757
)

 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2014
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency Securities
 
$

 
$

 
$
19,561

 
$
(439
)
 
$
19,561

 
$
(439
)
Obligations of State and Political Subdivisions
 
3,765

 
(25
)
 
4,298

 
(34
)
 
8,063

 
(59
)
Mortgage-backed Securities - Residential
 
26,606

 
(191
)
 
209,679

 
(4,829
)
 
236,285

 
(5,020
)
Equity Securities
 

 

 

 

 

 

Total
 
$
30,371

 
$
(216
)
 
$
233,538

 
$
(5,302
)
 
$
263,909

 
$
(5,518
)
 
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, which may be at maturity.  The Company doesn’t intend to sell or expect to be required to sell these securities, and the decline in fair value is largely due to changes in market interest rates, therefore, the Company does not consider these securities to be other-than-temporarily impaired. All mortgage-backed securities in the Company’s portfolio are guaranteed by government sponsored entities, are investment grade, and are performing as expected.
 
NOTE 4 – 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 $31.1 million at September 30, 2015 and $23.1 million at December 31, 2014. 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
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 4 - Derivatives (continued)

The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of:

 
 
September 30, 2015
 
December 31, 2014
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
31,068

 
$
1,433

 
$
23,104

 
$
507

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
31,068

 
$
1,462

 
$
23,104

 
$
508

 

The following tables present the effect of derivative instruments on the Consolidated Statements of Income for the periods presented:

 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
2015
 
2014
Interest Rate Swaps:
 
 

 
 

 
 

 
 

Included in Interest Income / (Expense)
 
$

 
$

 
$

 
$

Included in Other Income / (Expense)
 
179

 
(4
)
 
344

 
74


NOTE 5 – Loans
 
Loans were comprised of the following classifications at September 30, 2015 and December 31, 2014: 
 
 
September 30,
2015
 
December 31,
2014
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
404,946

 
$
380,079

Commercial Real Estate Loans
 
600,688

 
583,086

Agricultural Loans
 
236,619

 
216,774

Retail:
 
 

 
 

Home Equity Loans
 
90,907

 
86,234

Consumer Loans
 
47,480

 
48,613

Residential Mortgage Loans
 
136,645

 
137,204

Subtotal
 
1,517,285

 
1,451,990

Less: Unearned Income
 
(3,705
)
 
(4,008
)
Allowance for Loan Losses
 
(14,770
)
 
(14,929
)
Loans, Net
 
$
1,498,810

 
$
1,433,053

 

13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ending September 30, 2015 and 2014:
September 30, 2015
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,659

 
$
7,315

 
$
1,223

 
$
350

 
$
382

 
$
619

 
$
710

 
$
15,258

Provision for Loan Losses
 
(337
)
 
(568
)
 
754

 
(41
)
 
(105
)
 
(172
)
 
(31
)
 
(500
)
Recoveries
 
16

 
30

 

 
2

 
39

 
3

 

 
90

Loans Charged-off
 
(5
)
 

 

 
(2
)
 
(71
)
 

 

 
(78
)
Ending Balance
 
$
4,333

 
$
6,777

 
$
1,977

 
$
309

 
$
245

 
$
450

 
$
679

 
$
14,770


September 30, 2014
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
5,661

 
$
7,199

 
$
1,016

 
$
418

 
$
326

 
$
435

 
$
495

 
$
15,550

Provision for Loan Losses
 
(563
)
 
206

 
156

 
(33
)
 
77

 
(33
)
 
190

 

Recoveries
 
19

 
55

 

 

 
41

 
6

 

 
121

Loans Charged-off
 

 
(6
)
 

 
(7
)
 
(65
)
 
(1
)
 

 
(79
)
Ending Balance
 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685

 
$
15,592


The following table presents the activity in the allowance for loan losses by portfolio class for the nine months ending September 30, 2015 and 2014:
September 30, 2015
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,627

 
$
7,273

 
$
1,123

 
$
246

 
$
354

 
$
622

 
$
684

 
$
14,929

Provision for Loan Losses
 
(350
)
 
(566
)
 
854

 
88

 
(65
)
 
44

 
(5
)
 

Recoveries
 
83

 
81

 

 
8

 
193

 
14

 

 
379

Loans Charged-off
 
(27
)
 
(11
)
 

 
(33
)
 
(237
)
 
(230
)
 

 
(538
)
Ending Balance
 
$
4,333

 
$
6,777

 
$
1,977

 
$
309

 
$
245

 
$
450

 
$
679

 
$
14,770


September 30, 2014
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
3,983

 
$
8,335

 
$
946

 
$
239

 
$
188

 
$
281

 
$
612

 
$
14,584

Provision for Loan Losses
 
1,124

 
(1,546
)
 
226

 
148

 
296

 
229

 
73

 
550

Recoveries
 
97

 
785

 

 
42

 
127

 
14

 

 
1,065

Loans Charged-off
 
(87
)
 
(120
)
 

 
(51
)
 
(232
)
 
(117
)
 

 
(607
)
Ending Balance
 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685

 
$
15,592


In determining the adequacy of the allowance for loan loss, general allocations are made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on historical averages for loan losses for these portfolios, judgmentally adjusted for current economic factors and portfolio trends.  Overall the allowance

14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

for loan and lease losses was increased in the agricultural sector as a result of qualitative considerations for current economic conditions and 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. For purchased loans, the assessment is made at the time of acquisition as well as over the life of loan. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2015 and December 31, 2014:
September 30, 2015
 
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
 
$
1,688

 
$
171

 
$
1,517

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,082

 
4,162

 
5,260

 
1,977

 
309

 
245

 
450

 
679

Acquired with Deteriorated Credit Quality
 

 

 

 

 

 

 

 

Total Ending Allowance Balance
 
$
14,770

 
$
4,333

 
$
6,777

 
$
1,977

 
$
309

 
$
245

 
$
450

 
$
679


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
6,116

 
$
2,219

 
$
3,885

 
$
12

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
1,510,330

 
403,027

 
592,735

 
239,660

 
91,178

 
47,602

 
136,128

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
6,924

 
674

 
5,376

 

 

 

 
874

 
n/m(2)

Total Ending Loans Balance(1)
 
$
1,523,370

 
$
405,920

 
$
601,996

 
$
239,672

 
$
91,178

 
$
47,602

 
$
137,002

 
n/m(2)


(1)Total recorded investment in loans includes $6,085 in accrued interest.
(2)n/m = not meaningful

15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

December 31, 2014
 
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
 
$
1,532

 
$
87

 
$
1,445

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,343

 
4,540

 
5,818

 
1,123

 
246

 
354

 
578

 
684

Acquired with Deteriorated Credit Quality
 
54

 

 
10

 

 

 

 
44

 

Total Ending Allowance Balance
 
$
14,929

 
$
4,627

 
$
7,273

 
$
1,123

 
$
246

 
$
354

 
$
622

 
$
684


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
6,044

 
$
1,964

 
$
4,080

 
$

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
1,443,363

 
378,533

 
573,961

 
219,640

 
86,570

 
48,614

 
136,045

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
8,361

 
354

 
6,385

 

 

 
118

 
1,504

 
n/m(2)

Total Ending Loans Balance(1)
 
$
1,457,768

 
$
380,851

 
$
584,426

 
$
219,640

 
$
86,570

 
$
48,732

 
$
137,549

 
n/m(2)

 
(1)Total recorded investment in loans includes $5,778 in accrued interest.
(2)n/m = not meaningful 

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2015 and December 31, 2014:
September 30, 2015
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
262

 
$
259

 
$

Commercial Real Estate Loans
 
1,081

 
962

 

Agricultural Loans
 
12

 
12

 

Subtotal
 
1,355

 
1,233