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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, 2012

 

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 May 1, 2012
Common Shares, no par value 12,627,243

 

 
 

 

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, 2011, 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 4
     
Item 1. Financial Statements 4
     
  Consolidated Balance Sheets – March 31, 2012 and December 31, 2011 4
     
  Consolidated Statements of Income and Comprehensive Income - Three Months Ended March 31, 2012 and 2011 5
     
  Consolidated Statements of Cash Flows – Three Months Ended March 31, 2012 and 2011 6
     
  Notes to Consolidated Financial Statements – March 31, 2012 7-24
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25-33
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33-34
     
Item 4. Controls and Procedures 34
     
PART II. OTHER INFORMATION 35
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
     
Item 6. Exhibits 35
     
SIGNATURES 36
   
INDEX OF EXHIBITS 37

 

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,   December 31, 
   2012   2011 
         
ASSETS          
Cash and Due from Banks  $26,365   $28,366 
Federal Funds Sold and Other Short-term Investments   86,630    32,737 
Cash and Cash Equivalents   112,995    61,103 
           
Interest-bearing Time Deposits with Banks   4,977    5,986 
Securities Available-for-Sale, at Fair Value   585,788    516,844 
Securities Held-to-Maturity, at Cost (Fair value of $351 and $697 on March 31, 2012 and December 31, 2011, respectively)   346    690 
           
Loans Held-for-Sale, at Fair Value   12,679    21,485 
           
Loans   1,096,556    1,123,549 
Less:   Unearned Income   (2,845)   (2,556)
Allowance for Loan Losses   (15,766)   (15,312)
Loans, Net   1,077,945    1,105,681 
           
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost   8,340    8,340 
Premises, Furniture and Equipment, Net   36,765    37,706 
Other Real Estate   2,971    2,343 
Goodwill   18,865    18,865 
Intangible Assets   3,905    4,346 
Company Owned Life Insurance   29,503    29,263 
Accrued Interest Receivable and Other Assets   15,451    61,115 
TOTAL ASSETS  $1,910,530   $1,873,767 
           
LIABILITIES          
Non-interest-bearing Demand Deposits  $298,555   $282,335 
Interest-bearing Demand, Savings, and Money Market Accounts   942,435    899,584 
Time Deposits   363,865    374,279 
Total Deposits   1,604,855    1,556,198 
           
FHLB Advances and Other Borrowings   115,170    130,993 
Accrued Interest Payable and Other Liabilities   18,409    18,966 
TOTAL LIABILITIES   1,738,434    1,706,157 
           
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   12,627    12,594 
Additional Paid-in Capital   95,178    95,039 
Retained Earnings   53,273    49,434 
Accumulated Other Comprehensive Income   11,018    10,543 
TOTAL SHAREHOLDERS’ EQUITY   172,096    167,610 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $1,910,530   $1,873,767 
End of period shares issued and outstanding   12,627,365    12,594,258 

 

See accompanying notes to consolidated financial statements.

 

4
 

 

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(unaudited, dollars in thousands except share and per share data)

 

   Three Months Ended 
   March 31, 
   2012   2011 
INTEREST INCOME          
Interest and Fees on Loans  $15,785   $16,241 
Interest on Federal Funds Sold and Other Short-term Investments   33    65 
Interest and Dividends on Securities:          
Taxable   3,326    2,844 
Non-taxable   583    369 
TOTAL INTEREST INCOME   19,727    19,519 
           
INTEREST EXPENSE          
Interest on Deposits   2,046    3,393 
Interest on FHLB Advances and Other Borrowings   1,069    1,019 
TOTAL INTEREST EXPENSE   3,115    4,412 
           
NET INTEREST INCOME   16,612    15,107 
Provision for Loan Losses   690    1,300 
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES   15,922    13,807 
           
NON-INTEREST INCOME          
Trust and Investment Product Fees   696    464 
Service Charges on Deposit Accounts   935    941 
Insurance Revenues   1,391    2,049 
Company Owned Life Insurance   244    353 
Interchange Fee Income   431    353 
Other Operating Income   373    400 
Net Gains on Sales of Loans   713    409 
Net Gain on Securities   18    1,045 
TOTAL NON-INTEREST INCOME   4,801    6,014 
           
NON-INTEREST EXPENSE          
Salaries and Employee Benefits   7,320    7,401 
Occupancy Expense   1,092    1,050 
Furniture and Equipment Expense   680    805 
FDIC Premiums   297    514 
Data Processing Fees   114    1,105 
Professional Fees   605    605 
Advertising and Promotion   373    303 
Intangible Amortization   442    517 
Other Operating Expenses   1,670    1,570 
TOTAL NON-INTEREST EXPENSE   12,593    13,870 
           
Income before Income Taxes   8,130    5,951 
Income Tax Expense   2,528    1,306 
NET INCOME  $5,602   $4,645 
           
Other Comprehensive Income:          
Changes in Unrealized Gain on Securities Available-for-Sale, Net   475    188 
Total Other Comprehensive Income  $475   $188 
           
COMPREHENSIVE INCOME  $6,077   $4,833 
           
Basic Earnings Per Share and Diluted Earnings Per Share  $0.44   $0.37 
Dividends Per Share  $0.14   $0.14 

 

See accompanying notes to consolidated financial statements.

 

5
 

 

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

 

   Three Months Ended 
   March 31, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Income  $5,602   $4,645 
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:          
Net Amortization on Securities   1,117    429 
Depreciation and Amortization   1,256    1,326 
Loans Originated for Sale   (45,416)   (23,620)
Proceeds from Sales of Loans Held-for-Sale   54,996    33,017 
Provision for Loan Losses   690    1,300 
Gain on Sale of Loans, net   (713)   (409)
Gain on Securities, net   (18)   (1,045)
Loss on Sales of Other Real Estate and Repossessed Assets   34    8 
Loss (Gain) on Disposition and Impairment of Premises and Equipment   (1)   5 
Increase in Cash Surrender Value of Company Owned Life Insurance   (240)   (353)
Equity Based Compensation   168    153 
Change in Assets and Liabilities:          
Interest Receivable and Other Assets   3,118    5,423 
Interest Payable and Other Liabilities   (803)   (1,620)
Net Cash from Operating Activities   19,790    19,259 
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Proceeds from Maturity of Other Short-term Investments   995    1,890 
Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale   29,328    20,331 
Redemption of Federal Reserve Bank Stock       694 
Proceeds from Sales of Securities Available-for-Sale   43,497     
Purchase of Securities Available-for-Sale   (98,980)   (116,977)
Proceeds from Maturities of Securities Held-to-Maturity   344    161 
Loans Made to Customers, net of Payments Received   26,265    38,868 
Proceeds from Sales of Other Real Estate   118    532 
Property and Equipment Expenditures   (538)   (1,063)
Proceeds from Sales of Property and Equipment   1    12 
Acquisition of American Community Bancorp, Inc.       55,780 
Net Cash from Investing Activities   1,030    228 
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Change in Deposits   48,671    95,002 
Change in Short-term Borrowings   (15,798)   (52,696)
Repayments of Long-term Debt   (42)   (5,035)
Issuance of Common Stock   4     
Dividends Paid   (1,763)   (1,758)
Net Cash from Financing Activities   31,072    35,513 
           
Net Change in Cash and Cash Equivalents   51,892    55,000 
Cash and Cash Equivalents at Beginning of Year   61,103    19,271 
Cash and Cash Equivalents at End of Period  $112,995   $74,271 
           
Cash Paid During the Period for          
Interest  $3,617   $4,745 
Income Taxes       410 
           
Supplemental Non Cash Disclosures          
Loans Transferred to Other Real Estate  $781   $723 
Accounts Receivable Transferred to Securities   (43,167)    

 

See accompanying notes to consolidated financial statements.

 

6
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(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 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. Certain prior year amounts have been reclassified to conform with current year classifications. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp, Inc. December 31, 2011 Annual Report on Form 10-K.

 

Note 2 – Per Share Data

 

The computations of Basic Earnings per Share and Diluted Earnings per Share are as follows:

 

   Three Months Ended 
   March 31, 
   2012   2011 
Basic Earnings per Share:          
Net Income  $5,602   $4,645 
Weighted Average Shares Outstanding   12,600,435    12,546,310 
Basic Earnings per Share  $0.44   $0.37 
           
Diluted Earnings per Share:          
Net Income  $5,602   $4,645 
           
Weighted Average Shares Outstanding   12,600,435    12,546,310 
Potentially Dilutive Shares, Net   19,479    8,566 
Diluted Weighted Average Shares Outstanding   12,619,914    12,554,876 
Diluted Earnings per Share  $0.44   $0.37 

 

Stock options for 89,275 shares of common stock were not considered in computing diluted earnings per share for the quarter ended March 31, 2011 because they were anti-dilutive.

 

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 March 31, 2012 and December 31, 2011, were as follows:

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
Securities Available-for-Sale:  Cost   Gains   Losses   Value 
March 31, 2012                    
U.S. Treasury and Agency Securities  $4,836   $67   $   $4,903 
Obligations of State and Political Subdivisions   61,961    4,047    (39)   65,969 
Mortgage-backed Securities - Residential   500,870    13,396    (34)   514,232 
Equity Securities   684            684 
Total  $568,351   $17,510   $(73)  $585,788 
                     
December 31, 2011                    
U.S. Treasury and Agency Securities  $6,340   $82   $   $6,422 
Corporate Securities   1,003    2        1,005 
Obligations of State and Political Subdivisions   60,606    4,195    (2)   64,799 
Mortgage-backed Securities - Residential   431,495    12,529    (90)   443,934 
Equity Securities   684            684 
Total  $500,128   $16,808   $(92)  $516,844 

 

7
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 3 – Securities (continued)

 

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 March 31, 2012 and December 31, 2011, were as follows:

 

       Gross   Gross     
Securities Held-to-Maturity:  Carrying   Unrecognized   Unrecognized   Fair 
   Amount   Gains   Losses   Value 
March 31, 2012                    
Obligations of State and Political Subdivisions  $346   $5   $   $351 
                     
December 31, 2011                    
Obligations of State and Political Subdivisions  $690   $7   $   $697 

 

The amortized cost and fair value of Securities at March 31, 2012 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.

 

   Amortized   Fair 
   Cost   Value 
Securities Available-for-Sale:          
Due in one year or less  $408   $412 
Due after one year through five years   12,458    12,870 
Due after five years through ten years   20,059    21,436 
Due after ten years   33,872    36,154 
Mortgage-backed Securities - Residential   500,870    514,232 
Equity Securities   684    684 
Totals  $568,351   $585,788 

 

   Carrying   Fair 
   Amount   Value 
Securities Held-to-Maturity:          
Due in one year or less  $   $ 
Due after one year through five years   346    351 
Due after five years through ten years        
Due after ten years        
Totals  $346   $351 

 

8
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(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 March 31, 2012 and December 31, 2011, presented by length of time the securities have been in a continuous unrealized loss position:

 

   Less than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loss 
At March 31, 2012:                              
U.S. Treasury and Agency Securities  $   $   $   $   $   $ 
Corporate Securities                        
Obligations of State and Political Subdivisions   955    (39)           955    (39)
Mortgage-backed Securities - Residential   14,428    (34)           14,428    (34)
Equity Securities                        
Total  $15,383   $(73)  $   $   $15,383   $(73)

 

   Less than 12 Months   12 Months or More   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Loss   Value   Loss   Value   Loss 
At December 31, 2011:                              
U.S. Treasury and Agency Securities  $   $   $   $   $   $ 
Corporate Securities                        
Obligations of State and Political Subdivisions   203    (2)           203    (2)
Mortgage-backed Securities - Residential   39,947    (90)           39,947    (90)
Equity Securities                        
Total  $40,150   $(92)  $   $   $40,150   $(92)

 

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 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.

 

The Company held a minority interest in American Community Bancorp, Inc., prior to the acquisition on January 1, 2011. For the three months ended March 31, 2011, the Company recognized a gain of $1.045 million on the stock held of American Community Bancorp, Inc. as a result of the acquisition.

 

9
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 4 – Loans

 

Loans were comprised of the following classifications at March 31, 2012 and December 31, 2011:

 

   March 31,   December 31, 
   2012   2011 
         
Commercial:          
Commercial and Industrial Loans and Leases  $296,185   $293,172 
Commercial Real Estate Loans   450,874    452,071 
Agricultural Loans   147,295    167,693 
Retail:          
Home Equity Loans   74,273    77,070 
Consumer Loans   42,161    47,409 
Residential Mortgage Loans   85,768    86,134 
Subtotal   1,096,556    1,123,549 
Less:  Unearned Income   (2,845)   (2,556)
Allowance for Loan Losses   (15,766)   (15,312)
Loans, net  $1,077,945   $1,105,681 

 

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ending March 31, 2012 and 2011:

 

   Commercial                             
   and                             
   Industrial   Commercial       Home       Residential         
   Loans and   Real Estate   Agricultural   Equity   Consumer   Mortgage         
   Leases   Loans   Loans   Loans   Loans   Loans   Unallocated   Total 
March 31, 2012                                        
Beginning Balance  $3,493   $9,297   $926   $258   $190   $402   $746   $15,312 
Provision for Loan Losses   961    58    (175)   (13)   46    79    (266)   690 
Recoveries   45    19        1    31    2        98 
Loans Charged-off   (39)   (140)       (42)   (71)   (42)       (334)
Ending Balance  $4,460   $9,234   $751   $204   $196   $441   $480   $15,766 

 

   Commercial                             
   and                             
   Industrial   Commercial       Home       Residential         
   Loans and   Real Estate   Agricultural   Equity   Consumer   Mortgage         
   Leases   Loans   Loans   Loans   Loans   Loans   Unallocated   Total 
March 31, 2011                                        
Beginning Balance  $3,713   $7,497   $750   $220   $362   $543   $232   $13,317 
Provision for Loan Losses   105    572    (96)   104    84    223    308    1,300 
Recoveries   3    92        2    32            129 
Loans Charged-off   (1)   (453)       (55)   (46)   (18)       (573)
Ending Balance  $3,820   $7,708   $654   $271   $432   $748   $540   $14,173 

 

10
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 4 – Loans (continued)

 

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 March 31, 2012 and December 31, 2011:

 

       Commercial                         
       and                         
       Industrial   Commercial       Home       Residential     
       Loans and   Real Estate   Agricultural   Equity   Consumer   Mortgage     
   Total   Leases   Loans   Loans   Loans   Loans   Loans   Unallocated 
March 31, 2012                                        
Allowance for Loan Losses:                                        
Ending Allowance Balance Attributable to Loans:                                        
Individually Evaluated for Impairment  $5,618   $1,270   $4,348   $   $   $   $   $ 
Collectively Evaluated for Impairment   10,071    3,190    4,809    751    204    196    441    480 
Acquired with Deteriorated Credit Quality   77        77                     
Total Ending Allowance Balance  $15,766   $4,460   $9,234   $751   $204   $196   $441   $480 
                                         
Loans:                                        
Loans Individually Evaluated for Impairment  $14,985   $2,866   $12,119   $   $   $   $   $ 
Loans Collectively Evaluated for Impairment   1,073,319    292,474    428,821    149,428    74,513    42,156    85,927     
Loans Acquired with Deteriorated Credit Quality   13,240    1,773    11,156            160    151     
Total Ending Loans Balance (1)  $1,101,544   $297,113   $452,096   $149,428   $74,513   $42,316   $86,078   $ 

 

(1) Total recorded investment in loans includes $4,988 in accrued interest.

 

       Commercial                         
       and                         
       Industrial   Commercial       Home       Residential     
       Loans and   Real Estate   Agricultural   Equity   Consumer   Mortgage     
   Total   Leases   Loans   Loans   Loans   Loans   Loans   Unallocated 
December 31, 2011                                        
Allowance for Loan Losses:                                        
Ending Allowance Balance Attributable to Loans:                                        
Individually Evaluated for Impairment  $4,834   $466   $4,368   $   $   $   $   $ 
Collectively Evaluated for Impairment   10,401    3,027    4,852    926    258    190    402    746 
Acquired with Deteriorated Credit Quality   77        77                     
Total Ending Allowance Balance  $15,312   $3,493   $9,297   $926   $258   $190   $402   $746 
                                         
Loans:                                        
Loans Individually Evaluated for Impairment  $16,613   $3,567   $13,046   $   $   $   $   $ 
Loans Collectively Evaluated for Impairment   1,096,571    287,924    427,063    170,513    77,323    47,431    86,317     
Loans Acquired with Deteriorated Credit Quality   16,121    2,596    13,209            164    152     
Total Ending Loans Balance (1)  $1,129,305   $294,087   $453,318   $170,513   $77,323   $47,595   $86,469   $ 

 

(1) Total recorded investment in loans includes $5,756 in accrued interest.

 

11
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 4 – Loans (continued)

 

The following table presents loans individually evaluated for impairment by class of loans including purchase credit impaired loans that subsequently result in additional allowance for loan losses as of March 31, 2012 and December 31, 2011:

 

   Unpaid       Allowance for 
   Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
March 31, 2012               
With No Related Allowance Recorded:               
Commercial and Industrial Loans and Leases  $48   $46   $ 
Commercial Real Estate Loans   5,191    5,125     
Agricultural Loans            
                
With An Allowance Recorded:               
Commercial and Industrial Loans and Leases   2,820    2,820    1,270 
Commercial Real Estate Loans   7,239    7,071    4,425 
Agricultural Loans            
Total  $15,298   $15,062   $5,695 

 

   Unpaid       Allowance for 
   Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
December 31, 2011               
With No Related Allowance Recorded:               
Commercial and Industrial Loans and Leases  $1,084   $1,066   $ 
Commercial Real Estate Loans   5,959    5,894     
Agricultural Loans            
                
                
With An Allowance Recorded:               
Commercial and Industrial Loans and Leases   2,502    2,501    466 
Commercial Real Estate Loans   7,400    7,230    4,445 
Agricultural Loans            
Total  $16,945   $16,691   $4,911 

 

12
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 4 – Loans (continued)

 

The following table presents loans individually evaluated for impairment by class of loans including purchase credit impaired loans that subsequently result in additional allowance for loan losses for the three month period ended March 31, 2012 and 2011:

 

   Average   Interest   Cash 
   Recorded   Income   Basis 
   Investment   Recognized   Recognized 
March 31, 2012               
With No Related Allowance Recorded:               
Commercial and Industrial Loans and Leases  $655   $1   $1 
Commercial Real Estate Loans   5,550    4    4 
Agricultural Loans            
                
With An Allowance Recorded:               
Commercial and Industrial Loans and Leases   2,841    1    1 
Commercial Real Estate Loans   7,283    6    4 
Agricultural Loans            
Total  $16,329   $12   $10 

 

   Average   Interest   Cash 
   Recorded   Income   Basis 
   Investment   Recognized   Recognized 
March 31, 2011               
With No Related Allowance Recorded:               
Commercial and Industrial Loans and Leases  $366   $1   $1 
Commercial Real Estate Loans   2,773    3    3 
Agricultural Loans   55         
                
With An Allowance Recorded:               
Commercial and Industrial Loans and Leases   4,638    3    3 
Commercial Real Estate Loans   12,030    30    30 
Agricultural Loans            
Total  $19,862   $37   $37 

 

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and December 31, 2011:

 

       Loans Past Due 
       Over 90 Days 
   Non-Accrual   & Still Accruing 
   2012   2011   2012   2011 
                 
Commercial and Industrial Loans and Leases  $2,778   $3,471   $   $ 
Commercial Real Estate Loans   12,352    13,289         
Agricultural Loans           208     
Home Equity Loans   56    90         
Consumer Loans   213    259         
Residential Mortgage Loans   273    748         
Total  $15,672   $17,857   $208   $ 

 

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

13
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 4 – Loans (continued)

 

The following table presents the aging of the recorded investment in past due loans by class of loans as of March 31, 2012 and December 31, 2011:

 

               Greater than         
       30-59 Days   60-89 Days   90 Days   Total   Loans Not 
   Total   Past Due   Past Due   Past Due   Past Due   Past Due 
March 31, 2012                              
Commercial and Industrial Loans and Leases  $297,113   $307   $37   $453   $797   $296,316 
Commercial Real Estate Loans   452,096    705        5,306    6,011    446,085 
Agricultural Loans   149,428    37        208    245    149,183 
Home Equity Loans   74,513    55    8    55    118    74,395 
Consumer Loans   42,316    381    43    42    466    41,850 
Residential Mortgage Loans   86,078    1,696    614    272    2,582    83,496 
Total (1)  $1,101,544   $3,181   $702   $6,336   $10,219   $1,091,325 

 

(1) Total recorded investment in loans includes $4,988 in accrued interest.

 

               Greater than         
       30-59 Days   60-89 Days   90 Days   Total   Loans Not 
   Total   Past Due   Past Due   Past Due   Past Due   Past Due 
December 31, 2011                              
Commercial and Industrial Loans and Leases  $294,087   $220   $   $1,141   $1,361   $292,726 
Commercial Real Estate Loans   453,318    381    148    5,920    6,449    446,869 
Agricultural Loans   170,513    10            10    170,503 
Home Equity Loans   77,323    176    6    90    272    77,051 
Consumer Loans   47,595    287    117    221    625    46,970 
Residential Mortgage Loans   86,469    2,752    893    748    4,393    82,076 
Total (1)  $1,129,305   $3,826   $1,164   $8,120   $13,110   $1,116,195 

 

(1) Total recorded investment in loans includes $5,756 in accrued interest.

 

Troubled Debt Restructurings:

 

The Company has allocated $197 of specific reserves on $397 in principal to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2012. The Company had allocated $198 of specific reserves on $409 in principal to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011. The Company has not committed to lending any additional amounts as of March 31, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

 

For the three months ended March 31, 2012, no troubled debt restructurings occurred. The troubled debt restructurings resulted in no charge-offs for the three months ended March 31, 2012.

 

For the three months ended March 31, 2012, there were no payment defaults within the twelve months following modification for troubled debt restructurings.

 

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the company's internal underwriting policy.

 

14
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 4 – Loans (continued)

 

Credit Quality Indicators:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $100. This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class of loans is a follows:

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
March 31, 2012                         
Commercial and Industrial Loans and Leases  $268,860   $16,520   $11,733   $   $297,113 
Commercial Real Estate Loans   398,505    28,205    25,386        452,096 
Agricultural Loans   144,901    1,995    2,532        149,428 
Total  $812,266   $46,720   $39,651   $   $898,637 

 

       Special             
   Pass   Mention   Substandard   Doubtful   Total 
December 31, 2011                         
Commercial and Industrial Loans and Leases  $264,037   $16,188   $13,862   $   $294,087 
Commercial Real Estate Loans   396,057    28,272    28,989        453,318 
Agricultural Loans   165,153    2,744    2,616        170,513 
Total  $825,247   $47,204   $45,467   $   $917,918 

  

15
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 4 – Loans (continued)

 

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity as of March 31, 2012 and December 31, 2011:

 

   Home Equity   Consumer   Residential 
   Loans   Loans   Mortgage Loans 
March 31, 2012               
Performing  $74,458   $42,103   $85,806 
Nonperforming   55    213    272 
Total  $74,513   $42,316   $86,078 

 

   Home Equity   Consumer   Residential 
   Loans   Loans   Mortgage Loans 
December 31, 2011               
Performing  $77,233   $47,336   $85,721 
Nonperforming   90    259    748 
Total  $77,323   $47,595   $86,469 

 

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows:

 

   March 31, 2012 
     
Commercial and Industrial Loans  $1,773 
Commercial Real Estate Loans   11,156 
Home Equity Loans    
Consumer Loans   160 
Residential Mortgage Loans   151 
Total  $13,240 
      
Carrying amount, Net of Allowance  $13,163 

 

   December  31, 2011 
     
Commercial and Industrial Loans  $2,596 
Commercial Real Estate Loans   13,209 
Home Equity Loans    
Consumer Loans   164 
Residential Mortgage Loans   152 
Total  $16,121 
      
Carrying amount, Net of Allowance  $16,044 

 

Accretable yield, or income expected to be collected, is as follows:

 

   March 31, 2012   March 31, 2011 
         
Balance at January 1  $967   $ 
New Loans Purchased       2,042 
Accretion of Income   (543)   (250)
Reclassifications from Non-accretable Difference   206     
Charge-off of Accretable Yield        
Balance at March 31  $630   $1,792 

 

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2012 and 2011. No allowances for loan losses were reversed during the same periods.

 

16
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 5 – Segment Information

 

The Company’s operations include three primary segments: core banking, trust and investment advisory services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets. The core banking segment also involves the sale of residential mortgage loans in the secondary market. The trust and investment advisory services segment involves providing trust, investment advisory, and brokerage services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the Company’s banking subsidiary’s local markets.

 

The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operated through 34 retail banking offices at March 31, 2012. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company. These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment primarily consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.

 

The following segment financial information has been derived from the internal financial statements of German American Bancorp, Inc., which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments.

 

       Trust and             
       Investment             
   Core   Advisory           Consolidated 
Three Months Ended  Banking   Services   Insurance   Other   Totals 
March 31, 2012                         
Net Interest Income  $17,141   $3   $7   $(539)  $16,612 
Net Gains on Sales of Loans   713                713 
Net Gain on Securities   18                18 
Trust and Investment Product Fees   1    696        (1)   696 
Insurance Revenues   10    18    1,363        1,391 
Noncash Items:                         
Provision for Loan Losses   690                690 
Depreciation and Amortization   1,109    5    105    37    1,256 
Income Tax Expense (Benefit)   2,875    (48)   40    (339)   2,528 
Segment Profit (Loss)   5,932    (77)   56    (309)   5,602 
Segment Assets at March 31, 2012   1,913,838    11,728    7,681    (22,717)   1,910,530 

 

17
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

NOTE 5 – Segment Information (continued)

 

       Trust and             
       Investment             
   Core   Advisory           Consolidated 
Three Months Ended  Banking   Services   Insurance   Other   Totals 
March 31, 2011                         
Net Interest Income  $15,639   $2   $7   $(541)  $15,107 
Net Gains on Sales of Loans   409                409 
Net Gain on Securities               1,045    1,045 
Trust and Investment Product Fees   1    464        (1)   464 
Insurance Revenues   21        2,031    (3)   2,049 
Noncash Items:                         
Provision for Loan Losses   1,300                1,300 
Depreciation and Amortization   1,145    8    136    37    1,326 
Income Tax Expense (Benefit)   1,369    (26)   315    (352)   1,306 
Segment Profit (Loss)   3,561    (38)   450    672    4,645 
Segment Assets at December 31, 2011   1,875,417    11,801    7,948    (21,399)   1,873,767 

 

Note 6 – Stock Repurchase Plan

 

On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 607,754 (as adjusted for subsequent stock dividends) of the outstanding Common Shares of the Company. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program is purchased. As of March 31, 2012, the Company had purchased 334,965 (as adjusted for subsequent stock dividends) shares under the program. No shares were purchased under the program during the three months ended March 31, 2012 and 2011.

 

Note 7 – Equity Plans and Equity Based Compensation

 

The Company maintains three equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted. At March 31, 2012, the Company has reserved 611,548 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options, restricted stock, and other equity awards to officers, directors and other employees of the Company.

 

For the three months ended March 31, 2012 and 2011, the Company granted no options, and accordingly, recorded no stock option expense related to option grants during the three months ended March 31, 2012 and 2011. The Company recorded no other stock compensation expense applicable to options during the quarters ended March 31, 2012 and 2011 because all outstanding options were fully vested prior to 2007. In addition, there was no unrecognized option expense as all outstanding options were fully vested prior to March 31, 2012 and 2011.

 

During the periods presented, awards of long-term incentives were granted in the form of restricted stock, granted in tandem with cash credit entitlements. The incentive awards will typically be in the form of 50% restricted stock grants and 50% cash credit entitlements. The restricted stock grants and tandem cash credit entitlements are subject to forfeiture in the event that the recipient of the grant does not continue employment with the Company through December 5 of the year of grant, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. During the quarters ended March 31, 2012 and 2011, the Company granted awards of 32,641 and 36,201 shares of restricted stock, respectively.

 

18
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 7 – Equity Plans and Equity Based Compensation (continued)

 

The following table presents expense recorded for restricted stock and cash entitlements as well as the related tax effect for the periods presented:

 

   Three Months Ended 
   March 31, 
   2012   2011 
Restricted Stock Expense  $168   $153 
Cash Entitlement Expense   159    139 
Tax Effect   (132)   (118)
Net of Tax  $195   $174 

 

Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $981 and $876 as of March 31, 2012 and 2011, respectively.

 

The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this Plan has been set at 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provides for the purchase of up to 500,000 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. Funding for the purchase of common stock is from employee and Company contributions.

 

The Employee Stock Purchase Plan is not considered compensatory. There was no expense recorded for the employee stock purchase plan during the quarters ended March 31, 2012 and 2011, nor was there any unrecognized compensation expense as of March 31, 2012 and 2011 for the Employee Stock Purchase Plan.

 

Note 8 – Fair Value

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

 

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). At March 31, 2012, the Company held $4.1 million in Level 3 securities which consist of non-rated Obligations of State and Political Subdivisions that are not actively traded. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these securities are reported by the Company in a Level 3 classification.

 

19
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 8 – Fair Value (continued)

 

Impaired Loans: Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

 

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized.

 

Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for similar assets, adjusted for specific attributes of that loan resulting in a Level 2 classification.

 

Assets and Liabilities Measured on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

 

   Fair Value Measurements at March 31, 2012 Using 
   Quoted Prices in             
   Active Markets for   Significant Other   Significant     
   Identical Assets   Observable Inputs   Unobservable Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
Assets:                    
U.S. Treasury and Agency Securities  $   $4,903   $   $4,903 
Corporate Securities                
Obligations of State and Political Subdivisions       61,894    4,075    65,969 
Mortgage-backed Securities-Residential       514,232        514,232 
Equity Securities   331        353    684 
Total Securities  $331   $581,029   $4,428   $585,788 
                     
Loans Held-for-Sale  $   $12,679   $   $12,679 

 

20
 

 

 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 8 – Fair Value (continued)

 

   Fair Value Measurements at December 31, 2011 Using 
   Quoted Prices in             
   Active Markets for   Significant Other   Significant     
   Identical Assets   Observable Inputs   Unobservable Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
Assets:                    
U.S. Treasury and Agency Securities  $   $6,422   $   $6,422 
Corporate Securities           1,005    1,005 
Obligations of State and Political Subdivisions       60,027    4,772    64,799 
Mortgage-backed Securities-Residential       443,934        443,934 
Equity Securities   331        353    684 
Total Securities  $331   $510,383   $6,130   $516,844 
                     
Loans Held-for-Sale  $   $21,485   $   $21,485 

 

There were no transfers between Level 1 and Level 2 for the periods ended March 31, 2012 and December 31, 2011.

 

At March 31, 2012, the aggregate fair value of the Loans Held-for-Sale was $12,679, aggregate contractual principal balance was $12,520 with a difference of $159. At December 31, 2011, the aggregate fair value of the Loans Held-for-Sale was $21,485, aggregate contractual principle balance was $21,225 with a difference of $260.

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 and 2011:

 

   Obligations of State         
   and Political         
   Subdivisions   Equity Securities   Corporate Securities 
   2012   2011   2012   2011   2012   2011 
                         
Balance of Recurring Level 3 Assets at January 1  $4,772   $   $353   $353   $1,005   $ 
Maturities / Calls   (697)               (1,005)    
Transfers into Level 3       4,772                1,005 
Balance of Recurring Level 3 Assets at March 31  $4,075   $4,772   $353   $353   $   $1,005 

 

21
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 8 – Fair Value (continued)

 

Assets and Liabilities Measured on a Non-Recurring Basis

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

   Fair Value Measurements at March 31, 2012 Using 
   Quoted Prices in             
   Active Markets for   Significant Other   Significant     
   Identical Assets   Observable Inputs   Unobservable Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
Assets:                    
Impaired Loans with Specific Allocations                    
Commercial and Industrial Loans  $   $   $1,550   $1,550 
Commercial Real Estate Loans           2,642    2,642 
Other Real Estate                    
Commercial Real Estate                
Residential                

 

   Fair Value Measurements at December 31, 2011 Using 
   Quoted Prices in             
   Active Markets for   Significant Other   Significant     
   Identical Assets   Observable Inputs   Unobservable Inputs     
   (Level 1)   (Level 2)   (Level 3)   Total 
Assets:                    
Impaired Loans with Specific Allocations                    
Commercial and Industrial Loans  $   $   $2,035   $2,035 
Commercial Real Estate Loans           2,783    2,783 
Other Real Estate                    
Commercial Real Estate           250    250 
Residential                

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $9,887 with a valuation allowance of $5,695, resulting in an additional provision for loan losses of $828 for the three months ended March 31, 2012. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $9,729 with a valuation allowance of $4,911, resulting in an additional provision for loan losses of $4,226 for the year ended December 31, 2011.

 

Other Real Estate is measured at the lower of carrying or fair value less costs to sell. No charge to earnings was included in the three months ended March 31, 2012 and 2011. Other Real Estate which is measured at the lower of carrying or fair value less costs to sell had a carrying amount of $250 at December 31, 2011.

 

22
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 8 – Fair Value (continued)

 

The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the table below for the periods ending March 31, 2012 and December 31, 2012. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the table. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.

 

   Fair Value Measurements at 
   March 31, 2012 Using 
   Carrying Value   Level 1   Level 2   Level 3   Total 
Financial Assets:                         
Cash and Short-term Investments  $117,972   $26,365   $91,607   $   $117,972 
Securities Held-to-Maturity   346        351        351 
FHLB Stock and Other Restricted Stock   8,340    N/A    N/A    N/A    N/A 
Loans, Net   1,073,753            1,083,304    1,083,304 
Accrued Interest Receivable   7,106        2,052    5,054    7,106 
Financial Liabilities:                         
Demand, Savings, and Money Market Deposits   (1,240,990)   (1,240,990)           (1,240,990)
Time Deposits   (363,865)       (369,162)       (369,162)
Short-term Borrowings   (24,221)       (24,221)       (24,221)
Long-term Debt   (90,949)       (68,514)   (26,209)   (94,723)
Accrued Interest Payable   (1,382)       (1,259)   (123)   (1,382)
Unrecognized Financial Instruments:                         
Commitments to Extend Credit                    
Standby Letters of Credit                    
Commitments to Sell Loans                    

 

   December 31, 2011 
   Carrying   Fair 
   Value   Value 
Financial Assets:          
Cash and Short-term Investments  $67,089   $67,089 
Securities Held-to-Maturity   690    697 
FHLB Stock and Other Restricted Stock   8,340    N/A 
Loans, Net   1,100,863    1,111,532 
Accrued Interest Receivable   7,793    7,793 
Financial Liabilities:          
Demand, Savings, and Money Market Deposits   (1,181,919)   (1,181,919)
Time Deposits   (374,279)   (380,584)
Short-term Borrowings   (40,019)   (40,019)
Long-term Debt   (90,974)   (96,047)
Accrued Interest Payable   (1,884)   (1,884)
Unrecognized Financial Instruments:          
Commitments to Extend Credit        
Standby Letters of Credit        
Commitments to Sell Loans        

 

Cash and Cash Equivalents:

The carrying amount of cash and short-term investments approximate fair values and are classified as Level 1 or Level 2.

 

Securities Held-to-Maturity:

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

 

23
 

 

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited, dollars in thousands except share and per share data)

 

Note 8 – Fair Value (continued)

 

FHLB Stock and Other Restricted Stock:

It is not practical to determine the fair values of FHLB stock and other restricted stock due to restrictions placed on its transferability.

 

Loans:

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued as described previously. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.

 

Accrued Interest Receivable:

The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the asset they are associated with.

 

Deposits:

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate time deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

Short-term Borrowings:

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

 

Other Borrowings:

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

Accrued Interest Payable:

The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the liability they are associated with.

 

Off-balance Sheet Instruments:

Commitments to extend credit and standby letters of credit are generally short-term or variable rate with minimal fees charged. These instruments have no carrying value, and the fair value is not material. The fair value of commitments to sell loans is the cost or benefit of settling the commitments with the counter-party at the reporting date. At March 31, 2012 and December 31, 2011, none of the Company’s commitments to sell loans were mandatory, and there is no cost or benefit to settle these commitments.

 

Note 9 – Newly Issued but Not Yet Effective Accounting Pronouncements

 

In December 2011, the FASB issued new guidance ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This new guidance requires expanded information about financial instruments or derivatives that are either presented on a net basis in the balance sheet or subject to an enforceable master netting arrangement or similar arrangement. The new guidance does not change existing offsetting criteria in U.S. GAAP or the permitted balance sheet presentation for items meeting the criteria. The new disclosure requirements in the ASU are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared using IFRS. The Company does not expect this guidance to have an impact on its consolidated financial statements.

 

24
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

GERMAN AMERICAN BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

German American Bancorp, Inc. is a financial services holding company based in Jasper, Indiana. The Company’s Common Stock is traded on NASDAQ’s Global Select Market, under the symbol GABC. The principal subsidiary of German American Bancorp, Inc. is its banking subsidiary, German American Bancorp, which operates through 34 retail banking offices in twelve contiguous Southern Indiana counties. German American Bancorp owns a trust, brokerage, and financial planning subsidiary, which operates from its banking offices, and a full line property and casualty insurance agency with seven insurance agency offices throughout its market area.

 

Throughout this Management’s Discussion and Analysis, as elsewhere in this report, when we use the term “Company,” we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.

 

This section presents an analysis of the consolidated financial condition of the Company as of March 31, 2012 and December 31, 2011 and the consolidated results of operations for the three months ended March 31, 2012 and 2011. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s December 31, 2011 Annual Report on Form 10-K.

 

MANAGEMENT OVERVIEW

 

This updated discussion should be read in conjunction with the Management Overview that was included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s December 31, 2011 Annual Report on Form 10-K.

 

The Company’s first quarter of 2012 net income totaled $5,602,000, or $0.44 per share, as compared to the $4,645,000, or $0.37 per share, recorded during the first quarter of 2011. The improvement in the first quarter 2012 earnings from the first quarter of 2011 represented an increase of approximately 21% and approximately 19% on a per share basis.

 

The Company’s first quarter 2012 earnings were positively impacted by a $1,505,000, or 10%, increase in the level of net interest income as compared to the same period of 2011. The current year net interest income improvement was largely the result of a higher level of earning assets driven by growth in the Company’s deposit base. Also contributing to the improved level of earnings was lower level of loan loss provision in the first quarter of 2012 compared with the first quarter of 2011.

 

The Company’s first quarter 2012 earnings as compared with the first quarter of 2011 were also positively impacted by a lower level of operating expenses. This reduction was largely related to an elevated level of expenses in the first quarter of 2011 related to the acquisition of American Community Bancorp, Inc. effective January 1, 2011. Somewhat offsetting the positive impact of improved net interest income, a lower level provision for loan losses, and a lower level non-interest expense was a lower level of non-interest revenue. The largest component of the decline was the recognition of a security gain in the first quarter of 2011 related to the acquisition accounting treatment of the existing equity ownership position the Company held in American Community Bancorp, Inc. at the time of acquisition. Also, contributing to the decline in non-interest revenues was a decline in the level of the Company’s contingency revenue generated by its insurance agency subsidiary.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The financial condition and results of operations for German American Bancorp, Inc. presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this Report, are, to a large degree, dependent upon the Company’s accounting policies. The selection of and application of these policies involve estimates, judgments, and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of securities available for sale, and the valuation allowance on deferred tax assets.

 

25
 

 

Allowance for Loan Losses

 

The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. A provision for loan losses is charged to operations based on management’s periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

 

The Company has an established process to determine the adequacy of the allowance for loan losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio.

 

Commercial and agricultural loans are subject to a standardized grading process administered by an internal loan review function. The need for specific reserves is considered for credits when graded substandard or when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired. 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 those graded substandard and 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.

 

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 a one-year historical average for loan losses for these portfolios, judgmentally adjusted for economic factors and portfolio trends.

 

Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes a minor unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.

 

Securities Valuation

 

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, when securities are deemed to be other than temporarily impaired, a charge will be recorded through earnings; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Company intends to sell or believes it will be required to sell the securities prior to recovery. As of March 31, 2012, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $73,000 and gross unrealized gains totaled approximately $17,510,000. As of March 31, 2012, held-to-maturity securities had a gross unrecognized gain of approximately $5,000.

 

26
 

 

Income Tax Expense

 

Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.

 

A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. Tax related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment.

 

RESULTS OF OPERATIONS

 

Net Income:

 

Net income for the quarter ended March 31, 2012 totaled $5,602,000, or $0.44 per share, an increase of $957,000 or 21% from the quarter ended March 31, 2011 net income of $4,645,000, or $0.37 per share. The improvement in the first quarter 2012 earnings from the first quarter of 2011 represented an increase of approximately 19% on a per share basis.

 

Net Interest Income:

 

Net interest income is the Company’s single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

 

27
 

 

The following table summarizes net interest income (on a tax-equivalent basis). For tax-equivalent adjustments, an effective tax rate of 35% was used for all periods presented (1).

 

   Average Balance Sheet 
   (Tax-equivalent basis / dollars in thousands) 
   Three Months Ended   Three Months Ended 
   March 31, 2012   March 31, 2011 
   Principal   Income /   Yield /   Principal   Income /   Yield / 
   Balance   Expense   Rate   Balance   Expense   Rate 
Assets                              
Federal Funds Sold and Other Short-term Investments  $60,139   $33    0.22%  $110,226   $65    0.24%
Securities:                              
Taxable   518,514    3,326    2.57%   355,654    2,844    3.20%
Non-taxable   66,861    898    5.37%   39,701    568    5.73%
Total Loans and Leases (2)   1,113,987    15,848    5.72%   1,114,310    16,303    5.92%
Total Interest Earning Assets   1,759,501    20,105    4.59%   1,619,891    19,780    4.93%
Other Assets   138,555              143,919           
Less: Allowance for Loan Losses   (15,899)             (13,768)          
Total Assets  $1,882,157             $1,750,042           
                               
Liabilities and Shareholders’ Equity                              
Interest-bearing Demand, Savings and Money Market Deposits  $917,422   $526    0.23%  $804,944   $1,266    0.64%
Time Deposits   364,499    1,520    1.68%   400,483    2,127    2.16%
FHLB Advances and Other Borrowings   118,979    1,069    3.61%   130,977    1,019    3.16%
Total Interest-bearing Liabilities   1,400,900    3,115    0.89%   1,336,404    4,412    1.34%
Demand Deposit Accounts   291,863              243,622           
Other Liabilities   19,423              13,957           
Total Liabilities   1,712,186              1,593,983           
Shareholders’ Equity   169,971              156,059           
Total Liabilities and Shareholders’ Equity  $1,882,157             $1,750,042           
                               
Cost of Funds             0.71%             1.10%
Net Interest Income       $16,990             $15,368      
Net Interest Margin             3.88%             3.83%

 

(1)Effective tax rates were determined as though interest earned on the Company’s investments in municipal bonds and loans was fully taxable.
(2)Loans held-for-sale and non-accruing loans have been included in average loans.

 

Net interest income increased $1,505,000 or 10% (an increase of $1,622,000 or 11% on a tax-equivalent basis) for the quarter ended March 31, 2012 compared with the same quarter of 2011. The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin was 3.88% for the first quarter of 2012 compared to 3.83% during the first quarter of 2011. The yield on earning assets totaled 4.59% during the quarter ended March 31, 2012 compared to 4.93% in the same period of 2011 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.71% during the quarter ended March 31, 2012 compared to 1.10% in the same period of 2011. The increased net interest income during the first quarter of 2012 compared with the first quarter of 2011 was driven by a higher level of earning assets resulting from growth of the Company’s deposit base. The improvement in the interest margin expressed as a percentage was largely the result of the Company’s ability to lower its cost of funds and in particular its cost of deposits. Also, contributing to the improvement was the growth of the Company’s non-interest-bearing demand deposits and interest-bearing non-maturity deposits.

 

Average earning assets increased by approximately $139.6 million for the three months ended March 31, 2012 compared with the same period of 2011. Average loans outstanding remained basically unchanged during the three months ended March 31, 2012 compared with the first quarter of 2011. Average federal funds sold and other short-term investments decreased by $50.1 million during the first quarter of 2012 compared with the same quarter of 2011. The average securities portfolio increased approximately $190.0 million, or 48%, in the three months ended March 31, 2012 compared with the first quarter of 2011. The key driver of the increased securities portfolio was the decline in the federal funds sold position and an increased level of average core deposits (core deposits defined as demand deposits - both interest and non-interest bearing, savings, money market and time deposits in denominations of less than $100,000). The increase in average core deposits totaled $136.4 million, or approximately 10%, during the first quarter of 2012 compared with the first quarter of 2011.

 

28
 

 

Provision for Loan Losses:

 

The Company provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance. The provision for loan losses totaled $690,000 during the quarter ended March 31, 2012, a decrease of $610,000 or 47% compared to the provision of $1,300,000 during the quarter ended March 31, 2011. The decline in the provision for loan losses in the first quarter of 2012 compared with the first quarter of 2011 was attributable to a reduced level of net charge-offs and a lower level of non-performing and adversely classified loans.

 

During the first quarter of 2012, the annualized provision for loan losses represented 0.25% of average loans outstanding compared with 0.47% on an annualized basis of average loans outstanding during the first quarter of 2011. Net charge-offs totaled $236,000 or 0.08% on an annualized basis of average loans outstanding during the three months ended March 31, 2012, compared with $444,000 or 0.16% on an annualized basis of average loans outstanding during the same period of 2011.

 

The provision for loan losses made during the quarter ended March 31, 2012 was made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provision for loan losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

 

Non-interest Income:

 

During the quarter ended March 31, 2012, non-interest income totaled $4,801,000, a decrease of $1,213,000 or 20% compared with the first quarter of 2011.

 

       Change from 
Non-interest Income  Three Months   Prior Period 
(dollars in thousands)  Ended March 31,   Amount   Percent 
   2012   2011   Change   Change 
Trust and Investment Product Fees  $696   $464   $232    50%
Service Charges on Deposit Accounts   935    941    (6)   (1)
Insurance Revenues   1,391    2,049    (658)   (32)
Company Owned Life Insurance   244    353    (109)   (31)
Interchange Fee Income   431    353    78    22 
Other Operating Income   373    400    (27)   (7)
Subtotal   4,070    4,560    (490)   (11)
Net Gains on Sales of Loans   713    409    304    74 
Net Gain on Securities   18    1,045    (1,027)   (98)
Total Non-interest Income  $4,801   $6,014   $(1,213)   (20)

 

Trust and investment product fees increased $232,000, or 50%, during the three months ended March 31, 2012 compared with the same period of 2011. The increase was attributable to increased retail brokerage revenues as well as increased trust revenues.

 

Insurance revenues decreased approximately 32% during the three months ended March 31, 2012 as compared to the first three months of 2011 primarily as a result of lower contingency revenue. Contingency revenue totaled $52,000 during the first quarter of 2012 compared with contingency revenue of $784,000 during the first quarter of 2011. The fluctuation in contingency revenue during 2012 and 2011 is a normal course of business type of variance and is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency.

 

Company owned life insurance revenue decreased 31%, during the three months ended March 31, 2012 as compared with the same period of the prior year. The decline was primarily attributable to a 1035 exchange transaction on a portion of the Company’s portfolio that was completed during the first quarter 2011 that contained a component of non-recurring fees that were recognized at the time of exchange.

 

Net gains on sales of loans increased $304,000, or 74%, during the first quarter of 2012 compared with the first quarter of 2011. Loan sales totaled $54.1 million during the first quarter of 2012 compared with $36.5 million during the first quarter of 2011.

 

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The net gain on securities declined $1,027,000, or 98%, during the first quarter of 2012 compared with the first quarter of 2011. The Company realized a net gain on securities of $1,045,000 during the first quarter of 2011 related to the acquisition accounting treatment of the existing equity ownership position the Company held in American Community at the time of acquisition.

 

Non-interest Expense:

 

During the quarter ended March 31, 2012, non-interest expense totaled $12,593,000, a decrease of $1,277,000 or 9% compared with the first quarter of 2011.

 

       Change from 
Non-interest Expense  Three Months   Prior Period 
(dollars in thousands)  Ended March 31,   Amount   Percent 
   2012   2011   Change   Change 
Salaries and Employee Benefits  $7,320   $7,401   $(81)   (1)%
Occupancy, Furniture and Equipment Expense   1,772    1,855    (83)   (4)
FDIC Premiums   297    514    (217)   (42)
Data Processing Fees   114    1,105    (991)   (90)
Professional Fees   605    605         
Advertising and Promotion   373    303    70    23 
Intangible Amortization   442    517    (75)   (15)
Other Operating Expenses   1,670    1,570    100    6 
Total Non-interest Expense  $12,593   $13,870   $(1,277)   (9)

 

The Company’s FDIC deposit insurance assessments decreased $217,000, or 42% during the first quarter of 2012 compared with first quarter of 2011. The decline in comparison to the first quarter 2011 was attributable to changes in the deposit insurance assessment calculation which became effective in the second quarter 2011 related to the Dodd Frank Act.

 

Data processing fees declined $991,000, or 90%, during the quarter ended March 31, 2012 compared the first quarter 2011. The decline was largely related to running the Company’s existing core processing system and the Bank of Evansville’s core processing system during the first quarter of 2011 and the resolution of a contractual dispute during the first quarter of 2012 related to the acquisition of American Community Bancorp and its banking subsidiary the Bank of Evansville. An expense for the cancellation of a data processing contract was recorded in the first quarter of 2011, and upon resolution of the contractual dispute, a portion of that accrued expense was reversed in the first quarter of 2012. The customers of the Bank of Evansville were moved to the Company’s core processing system during April 2011.

 

Income Taxes:

 

The Company’s effective income tax rate was 31.1% and 22.0% during the three months ended March 31, 2012 and 2011. The effective tax rate in all periods presented was lower than the blended statutory rate of 40.5% resulting primarily from the Company’s tax-exempt investment income on securities, loans and company owned life insurance, income tax credits generated from investments in a new markets tax credit project, and income generated by subsidiaries domiciled in a state with no state or local income tax. Further lowering the effective tax rate during the three months ended March 31, 2011 was the non-taxability of the $1.045 million gain on securities related to the acquisition accounting treatment of the existing equity ownership position the Company held in American Community Bancorp, Inc. at the time of acquisition.

 

FINANCIAL CONDITION

 

Total assets at March 31, 2012 increased $36.8 million to $1.911 billion compared with $1.874 billion in total assets at December 31, 2011. Cash and cash equivalents increased $51.9 million to $113.0 million at March 31, 2012 compared with $61.1 million at year-end 2011. The increase was largely attributable to a decline in loan balances during the quarter and an increased level of deposits. Securities available-for-sale increased $69.0 million to $585.8 million at March 31, 2012 compared with $516.8 million at year-end 2011. This increase was primarily the result of the re-investment of funds early during the first quarter of 2012 following a security sale transaction late in the fourth quarter of 2011.

 

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Total loans outstanding decreased approximately $27.0 million, or approximately 10% on an annualized basis, at March 31, 2012 compared with year-end 2011. The reduction in loans during the first quarter of 2012 compared with year-end 2011 was largely related to a seasonal decline in agricultural loans and to a lesser extent a reduction in total consumer loans.

 

End of Period Loan Balances:          Current 
(dollars in thousands)  March 31,   December 31,   Period 
   2012   2011   Change 
             
Commercial & Industrial Loans  $296,185   $293,172   $3,013 
Commercial Real Estate Loans   450,874    452,071    (1,197)
Agricultural Loans   147,295    167,693    (20,398)
Home Equity & Consumer Loans   116,434    124,479    (8,045)
Residential Mortgage Loans   85,768    86,134    (366)
Total Loans  $1,096,556   $1,123,549   $(26,993)

 

The Company’s allowance for loan losses totaled $15.8 million at March 31, 2012 representing an increase of $454,000 or 12% on an annualized basis from year end 2011. The allowance for loan losses represented 1.44% of period end loans at March 31, 2012 compared with 1.37% at year-end 2011. Under acquisition accounting treatment, loans acquired are recorded at fair value which includes a credit risk component, and therefore the allowance on loans acquired is not carried over from the seller. As of March 31, 2012, the Company held a discount on acquired loans of $5.6 million.

 

Total deposits increased $48.7 million or approximately 13% on an annualized basis, as of March 31, 2012 compared with year-end 2011 total deposits.

 

End of Period Deposit Balances:          Current 
(dollars in thousands)  March 31,   December 31,   Period 
   2012   2011   Change 
             
Non-interest-bearing Demand Deposits  $298,555   $282,335   $16,220 
Interest-bearing Demand, Savings, & Money Market Accounts   942,435    899,584    42,851 
Time Deposits < $100,000   264,360    273,663    (9,303)
Time Deposits of $100,000 or more & Brokered Deposits   99,505    100,616    (1,111)
Total Deposits  $1,604,855   $1,556,198   $48,657 

 

The following is an analysis of the Company’s non-performing assets at March 31, 2012 and December 31, 2011:

 

Non-performing Assets:

(dollars in thousands)

 

   March 31,   December 31, 
   2012   2011 
Non-accrual Loans  $15,672   $17,857 
Past Due Loans (90 days or more and still accruing)   200     
Restructured Loans   398    409 
Total Non-performing Loans   16,270    18,266 
Other Real Estate   2,971    2,343 
Total Non-performing Assets  $19,241   $20,609 
           
Non-performing Loans to Total Loans   1.49%   1.63%
Allowance for Loan Loss to Non-performing Loans   96.90%   83.83%

 

Non-performing assets totaled $19.2 million at March 31, 2012 compared to $20.6 million of non-performing assets at December 31, 2011. Non-performing assets represented 1.01% of total assets at March 31, 2012 compared to 1.10% of total assets at year end 2011. Non-performing loans totaled $16.3 million at March 31, 2012 compared to $18.3 million at year end 2011. Non-performing loans represented 1.49% of total loans at March 31, 2012 compared with 1.63% of total outstanding loans at year end 2011. The reduction in non-performing loans during the first quarter of 2012 was spread across multiple credit relationships.

 

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Capital Resources:

 

Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit.

 

Tier 1, or core capital, consists of shareholders’ equity plus certain amounts of instruments commonly referred to as trust preferred securities, less goodwill, core deposit intangibles, other identifiable intangibles and certain deferred tax assets defined by bank regulations. Tier 2 capital currently consists of the amount of the allowance for loan losses which does not exceed a defined maximum allowance limit of 1.25 percent of gross risk adjusted assets and certain amounts of subordinated debenture obligations. Total capital is the sum of Tier 1 and Tier 2 capital.

 

The minimum requirements under these standards are generally at least a 4.0 percent leverage ratio, which is Tier 1 capital divided by defined “total assets”; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and its subsidiary bank, have capital ratios that exceed the regulatory minimums.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. Under these regulations, a “well-capitalized” entity must achieve a Tier 1 risk-based capital ratio of at least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a leverage ratio of at least 5.0 percent, and not be under a capital directive. The Company’s subsidiary bank was categorized as well-capitalized as of March 31, 2012.

 

At March 31, 2012, management was not under such a capital directive, nor was it aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material effect on the Company’s liquidity, capital resources or operations.

 

The table below presents the Company’s consolidated capital ratios under regulatory guidelines:

 

   Minimum for         
   Capital   At   At 
   Adequacy   March 31,   December 31, 
   Purposes   2012   2011 
             
Leverage Ratio   4.00%   7.78%   7.46%
Tier 1 Capital to Risk-adjusted Assets   4.00%   11.37%   10.58%
Total Capital to Risk-adjusted Assets   8.00%   14.30%   13.52%

 

As of March 31, 2012, shareholders’ equity increased by $4.5 million to $172.1 million compared with $167.6 million at year-end 2011. The increase in shareholders’ equity was primarily attributable to an increase of $3.8 million in retained earnings and an increase of $475,000 in accumulated other comprehensive income related to an increase in net unrealized gains in the Company’s securities available-for-sale portfolio. Shareholders’ equity represented 9.0% of total assets at March 31, 2012 and 8.9% of total assets at December 31, 2011. Shareholders’ equity included $22.8 million of goodwill and other intangible assets at March 31, 2012 compared to $23.2 million of goodwill and other intangible assets at December 31, 2011.

 

Liquidity:

 

The Consolidated Statement of Cash Flows details the elements of changes in the Company’s consolidated cash and cash equivalents. Total cash and cash equivalents increased $51.9 million during the three months ended March 31, 2012 ending at $113.0 million. During the three months ended March 31, 2012, operating activities resulted in net cash inflows of $19.1 million. Investing activities resulted in net cash inflows of $1.7 million during the three months ended March 31, 2012. Financing activities resulted in net cash inflows for the three months ended March 31, 2012 of $31.1 million. The net inflows from financing activities was primarily the result of increased deposits partially offset by a reduction of short-term borrowings in the form of repurchase agreements with deposit customers.

 

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The parent company is a corporation separate and distinct from its bank and other subsidiaries. The Company uses funds at the parent company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes including debt service. The parent company does not have access at the parent-company level to the deposits and certain other sources of funds that are available to its bank subsidiary to support its operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank subsidiary. The Company’s banking subsidiary is subject to statutory restrictions on its ability to pay dividends to the parent company. The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings. As of March 31, 2012, the parent company had approximately $19.1 million of cash and cash equivalents available to meet its cash flow needs.

 

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

 

The Company from time to time in its oral and written communications makes statements relating to its expectations regarding the future. These types of statements are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-Q, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. Such forward looking statements can include statements about the Company’s net interest income or net interest margin; its adequacy of allowance for loan losses, levels of provisions for loan losses, and the quality of the Company’s loans and other assets; simulations of changes in interest rates; expected results from mergers with or acquisitions of other businesses; litigation results; tax estimates and recognition; dividend policy; parent company cash resources and cash requirements, and parent company capital resources; estimated cost savings, plans and objectives for future operations; and expectations about the Company’s financial and business performance and other business matters as well as economic and market conditions and trends. They often can be identified by the use of words like “expect,” “may,” “will,” “would,” “could,” “should,” “intend,” “project,” “estimate,” “believe” or “anticipate,” or similar expressions.

 

Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made.

 

Readers are cautioned that, by their nature, all forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially and adversely from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussions in this Item 2 list some of the factors that could cause the Company's actual results to vary materially from those expressed or implied by any forward-looking statements. Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates; changes in competitive conditions; the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies; changes in customer borrowing, repayment, investment and deposit practices; changes in fiscal, monetary and tax policies; changes in financial and capital markets; deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration; capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities; risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base of the acquired institution or branches, and difficulties in integration of the acquired operations; factors driving impairment charges on investments; the impact, extent and timing of technological changes; litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future; actions of the Federal Reserve Board; changes in accounting principles and interpretations; potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary; actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms; and the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends. Such statements reflect our views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements.

 

Investors should consider these risks, uncertainties, and other factors, in addition to those mentioned by the Company in its Annual Report on Form 10-K for its fiscal year ended December 31, 2011, and other SEC filings from time to time, when considering any forward-looking statement.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company’s exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee and Boards of Directors of the parent company and its subsidiary bank. Primary market risks which impact the Company’s operations are liquidity risk and interest rate risk.

 

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The liquidity of the parent company is dependent upon the receipt of dividends from its subsidiary bank, which is subject to certain regulatory limitations. The Bank’s source of funding is predominately core deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank.

 

The Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios, and by estimating its static interest rate sensitivity position. Another method by which the Company’s interest rate risk position can be estimated is by computing estimated changes in its net portfolio value (“NPV”). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities.

 

NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities. Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment.

 

The table below provides an assessment of the risk to NPV in the event of a sudden and sustained 2% increase and decrease in prevailing interest rates (dollars in thousands).

 

Interest Rate Sensitivity as of March 31, 2012

 

        Net Portfolio Value 
    Net Portfolio   as a % of Present Value 
    Value   of Assets 
Changes                 
in rates   Amount   % Change   NPV Ratio   Change 
 +2%  $170,641    (12.65)%   9.26%   (91)b.p.
 Base    195,350        10.17%    
 -2%   152,724    (21.82)%   7.88%   (229)b.p.

 

This Item 3 includes forward-looking statements. See “Forward-looking Statements” included in Part I, Item 2 of this Report for a discussion of certain factors that could cause the Company’s actual exposure to market risk to vary materially from that expressed or implied above. These factors include possible changes in economic conditions; interest rate fluctuations, competitive product and pricing pressures within the Company’s markets; and equity and fixed income market fluctuations. Actual experience may also vary materially to the extent that the Company’s assumptions described above prove to be inaccurate.

 

Item 4. Controls and Procedures

 

As of March 31, 2012, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were as of that date effective in timely alerting them to material information required to be included in the Company's periodic reports filed with the Securities and Exchange Commission. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s first fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

 

(e) The following table sets forth information regarding the Company's purchases of its common shares during each of the three months ended March 31, 2012.

 

   Total           Maximum Number 
   Number       Total Number of Shares   (or Approximate Dollar 
   Of Shares   Average Price   (or Units) Purchased as Part   Value) of Shares (or Units) 
   (or Units)   Paid Per Share   of Publicly Announced Plans   that May Yet Be Purchased 
Period  Purchased   (or Unit)   or Programs   under the Plans or Programs (1) 
1/1/12 – 1/31/12               272,789 
2/1/12 – 2/29/12               272,789 
3/1/12 – 3/31/12               272,789 
                  

 

(1) On April 26, 2001, the Company announced that its Board of Directors had approved a stock repurchase program for up to 607,754 of its outstanding common shares, of which the Company had purchased 334,965 common shares through March 31, 2012 (both such numbers adjusted for subsequent stock dividends). The Board of Directors established no expiration date for this program. The Company purchased no shares under this program during the three months ended March 31, 2012.

 

Item 6.      Exhibits

 

The exhibits described by the Exhibit Index immediately following the Signature Page of this Report are incorporated herein by reference.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  GERMAN AMERICAN BANCORP, INC.
   
Date: May 8, 2012 By/s/Mark A. Schroeder
  Mark A. Schroeder
  Chairman of the Board and Chief Executive Officer
   
Date: May 8, 2012 By/s/Bradley M. Rust
  Bradley M. Rust
  Executive Vice President and Chief Financial Officer

 

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INDEX OF EXHIBITS

 

Exhibit No.   Description
2.1   Agreement and Plan of Reorganization by and among the Registrant, American Community Bancorp, Inc., Bank of Evansville, and German American Bancorp, dated October 4, 2010, as amended by First Amendment of Agreement and Plan of Reorganization dated October 27, 2010. The copy of this exhibit included as Annex A to the proxy statement/prospectus included in Amendment No. 1 to the Registrant’s Registration Statement on Form S-4, filed November 15, 2010 (File No. 333-170068) is incorporated herein by reference. Schedules identified in the list of Schedules to this Agreement are not filed as part of this Exhibit, but the Registrant agrees to furnish to the Commission supplementally any omitted schedule upon request.
     
31.1   Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.
     
31.2   Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.
     
32.1   Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.
     
32.2   Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.
     
101*   The following materials from German American Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended March 31, 2012, formatted in XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statement of Cash Flows, and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.

 

*Exhibits that are furnished, not filed.

 

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