German American(GABC) - 2019 Q4 - Annual Report

Glossary of Terms and Acronyms This section defines key terms and acronyms used in the report, clarifying company references and listing financial and regulatory terms Summary of Terms and Acronyms This section provides definitions for key terms and acronyms used throughout the report, clarifying references to 'Company,' 'parent company,' and 'Bank,' and listing various financial and regulatory terms such as Basel III, CECL, FDIC, and LIBOR - The report defines 'Company' as German American Bancorp, Inc. and its consolidated subsidiaries, 'parent company' or 'holding company' as German American Bancorp, Inc. only, and 'Bank' as German American Bank[10][18] - Key financial and regulatory acronyms include AOCI (Accumulated other comprehensive income), ASU (Accounting Standards Update), Basel III (Regulatory capital reforms), BHC Act (Bank Holding Company Act), BSA (Bank Secrecy Act), CECL (Current expected credit losses), CET1 (Common Equity Tier 1 Capital), CFPB (Consumer Financial Protection Bureau), CRA (Community Reinvestment Act), DFI (Indiana Department of Financial Institutions), DIF (Deposit Insurance Fund), Dodd-Frank Act, ERISA (Employee Retirement Income and Security Act), FASB (Financial Accounting Standards Board), FDIC (Federal Deposit Insurance Corporation), FHLB (Federal Home Loan Bank), FRB (Board of Governors of the Federal Reserve System), GAAP (Generally Accepted Accounting Principles), GLB Act (Gramm-Leach-Bliley Financial Modernization Act), LIBOR (London Interbank Offered Rate), MBS (Mortgage-backed securities), NPV (Net portfolio value), OCC (Office of the Comptroller of the Currency), OFAC (U.S. Treasury Department Office of Foreign Assets Control), OTTI (Other-than-temporary impairment), PCAOB (Public Company Accounting Oversight Board), SEC (Securities and Exchange Commission), Tax Act (Tax Cuts and Jobs Act), and USA Patriot Act[12][13] PART I Item 1. Business. German American Bancorp, Inc. is a financial holding company operating primarily in southern Indiana and Kentucky through its banking subsidiary, an investment brokerage, and an insurance agency. The company expanded significantly through acquisitions in 2018 and 2019, becoming a financial holding company in September 2019 to broaden its permissible activities. It operates in a highly competitive and regulated environment, subject to extensive oversight by federal and state authorities, including capital requirements and consumer protection laws - German American Bancorp, Inc. (GABC) is a financial holding company based in Jasper, Indiana, operating 75 banking offices across 20 southern Indiana counties, eight Kentucky counties, and one Tennessee county through German American Bank. It also owns German American Investment Services, Inc. and German American Insurance, Inc.[16][21] - The Company elected to be a 'financial holding company' effective September 24, 2019, allowing it to engage in broader financial activities without prior FRB approval, including operating GABC Risk Management, Inc. as a pooled captive insurance company[17][41] Acquisition Summary | Acquisition Date | Acquired Entity | Assets (approx.) | Loans (approx.) | Deposits (approx.) | Consideration (approx.) | |:-----------------|:----------------|:-----------------|:-----------------|:-------------------|:------------------------| | July 1, 2019 | Citizens First Corporation | $456.0 million | $364.6 million | $370.8 million | 1.7 million shares + $15.5 million cash | | Oct 15, 2018 | First Security, Inc. | $553.2 million | $390.1 million | $424.4 million | 2.0 million shares + $31.2 million cash | | May 18, 2018 | Five First Financial Bancorp Branches | N/A | $116.3 million | $175.7 million | $7.4 million premium on deposits | - The Company operates in a highly competitive environment, facing competition from various financial institutions and non-depository intermediaries, many with greater resources[34] - The Company and its subsidiaries are subject to extensive regulation and supervision by the FRB, DFI, and FDIC, including capital requirements (Basel III, Prompt Corrective Action), restrictions on dividends, and compliance with laws like the Dodd-Frank Act, CRA, GLB Act, BSA, USA Patriot Act, and OFAC rules[38][41][45][53][61][65][70][72][73][75] Regulatory Capital Ratios (as of Dec 31, 2019) | Capital Ratio | Consolidated | Bank | Minimum for Capital Adequacy | Well-Capitalized Guidelines | |:--------------|:-------------|:-----|:-----------------------------|:----------------------------| | Total Capital (to Risk Weighted Assets) | 14.28% | 12.82% | 8.00% | 10.00% | | Tier 1 (Core) Capital (to Risk Weighted Assets) | 12.67% | 12.35% | 6.00% | 8.00% | | Common Equity Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets) | 12.23% | 12.35% | 4.50% | 6.50% | | Tier 1 Capital (to Average Assets) | 10.53% | 10.27% | 4.00% | 5.00% | - The Bank was classified as 'well-capitalized' at December 31, 2019, exceeding all minimum regulatory capital requirements[57][234] - The Company expects to continue evaluating expansion opportunities through new offices and acquisitions[28] - The Company employed approximately 817 full-time equivalent employees as of February 20, 2020[36] General Business Overview Subsidiaries Business Developments Office Locations Competition Employees Regulation and Supervision Overview of Regulation Capital Requirements Prompt Corrective Action Classifications Restrictions on Bank Dividends and Parent Company Transactions Other Aspects of the Dodd-Frank Act Certain Other Laws and Regulations Federal Deposit Insurance Premiums and Assessments Internet Address and SEC Report Availability Forward-Looking Statements and Associated Risks Item 1A. Risk Factors. The Company faces significant risks including a highly regulated environment, potential adverse effects from changes in laws (e.g., Dodd-Frank Act, capital requirements), economic weakness in its geographic markets, and the possibility of loan losses exceeding estimates. Operational risks such as cyber-attacks and dependence on key personnel and third-party vendors are also critical. Expansion through acquisitions carries integration and financial risks, and the common stock price is subject to significant fluctuations - The Company operates in a highly regulated environment, and changes in federal and state laws (e.g., Dodd-Frank Act, capital requirements) could adversely affect its operations, increase compliance costs, and limit growth or capital distributions[90][91][93] - Economic weakness in the Company's primary geographic markets (southern Indiana and Kentucky) could negatively impact loan demand, repayment ability, collateral values, and increase delinquencies and credit losses[98] - The allowance for loan losses is inherently subjective and may not be adequate to cover actual losses, especially with the upcoming implementation of the CECL accounting standard, which is estimated to increase the allowance by $12 million to $20 million upon adoption in Q1 2020[100][102][103] - Interest rate fluctuations significantly impact net interest income; increases in deposit rates faster than loan rates, or vice versa, could adversely affect earnings. Uncertainty surrounding LIBOR's future after 2021 also poses a risk[105][106] - Operational risks include fraud, transaction processing errors, system breaches, cyber-attacks, and reliance on third-party vendors, which could lead to financial loss, regulatory action, and reputational damage[120][121][123][124][125][126][127] - Acquisitions pose risks such as exposure to unknown liabilities, asset quality issues, integration difficulties, loss of key personnel/customers, and potential dilution of tangible book value or EPS[129][130][131] - The Company's common stock price is subject to significant fluctuations due to various factors, including operating results, market conditions, industry trends, regulatory changes, and M&A activities[134][135] Risks Related to the Financial Services Industry Risks Related to Our Business and Financial Strategies Risks Related to Our Operations Risks Relating to Expansion of Our Businesses by Acquisition Risks Related to Our Common Stock Item 1B. Unresolved Staff Comments. There are no unresolved staff comments from the SEC - The Company has no unresolved staff comments from the Securities and Exchange Commission[136] Item 2. Properties. The Company's executive offices are located in Jasper, Indiana, within the main office building of German American Bank. The Company operates from 78 other locations across Southern Indiana, Kentucky, and Tennessee, with the majority being owned properties - The Company's executive offices are located at 711 Main Street, Jasper, Indiana, in the main office building of German American Bank, which has approximately 23,600 square feet of office space[137] - The Company and its subsidiaries operate from 59 other locations in Southern Indiana, 18 in Kentucky, and one in Tennessee, totaling 78 locations. Of these, 56 are owned by the Company and 23 are leased[137] Item 3. Legal Proceedings. The Company is not currently involved in any material legal proceedings beyond routine litigation incidental to its business operations - There are no material pending legal proceedings against the Company or its subsidiaries, other than routine litigation incidental to business operations[138] Item 4. Mine Safety Disclosures. This item is not applicable to the Company - Mine Safety Disclosures are not applicable to the Company[139] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. German American Bancorp, Inc.'s common stock trades on the Nasdaq Global Select Market under the symbol GABC. As of February 20, 2020, there were approximately 3,865 shareholders of record. The Company's stock performance is compared against the Russell 2000, Russell Microcap, and an Indiana Bank Peer Group. The Board of Directors approved a new plan to repurchase up to one million shares of common stock in January 2020, replacing a prior program. The Company also maintains equity compensation plans for employees and directors - German American Bancorp, Inc. common stock is traded on the Nasdaq Global Select Market under the symbol GABC[141] - As of February 20, 2020, there were approximately 3,865 shareholders of record[141] - The Company's stock performance is benchmarked against the Russell 2000 Stock Index, Russell Microcap Stock Index, and a custom Indiana Bank Peer Group[143] Stock Repurchase Program Activity (Q4 2019) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |:-------|:-------------------------------|:-----------------------------|:--------------------------------------------------------------------------|:-----------------------------------------------------------------------------| | Oct 2019 | — | — | — | 409,184 | | Nov 2019 | — | — | — | 409,184 | | Dec 2019 | — | — | — | 409,184 | - On January 27, 2020, the Board of Directors terminated the 2001 repurchase program and approved a new plan to repurchase up to one million shares of outstanding common stock, with no expiration date[147] Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants or Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans | |:--------------|:------------------------------------------------------------------------------------------|:--------------------------------------------------------------------------|:---------------------------------------------------------------------------------------------| | Approved by security holders | — | — | 1,734,824 | | Not approved by security holders | — | — | — | | Total | — | — | 1,734,824 | Market for Common Stock Stock Performance Graph Stock Repurchase Program Information Equity Compensation Plan Information Item 6. Selected Financial Data. This section presents a five-year summary of selected financial data for German American Bancorp, Inc., highlighting key trends in income, balance sheet items, per share data, and performance ratios. The comparability of year-to-year data is affected by significant merger and acquisition activities, including the acquisitions of River Valley Bancorp (2016), First Financial Bancorp branches (2018), First Security, Inc. (2018), and Citizens First Corporation (2019) - Year-to-year financial information comparability is affected by acquisition accounting treatment for mergers and acquisitions, including River Valley Bancorp (2016), First Financial Bancorp branches (2018), First Security, Inc. (2018), and Citizens First Corporation (2019)[150] Summary of Operations (Dollars in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---| | Interest Income | $176,474 | $133,749 | $111,030 | $103,365 | $81,620 | | Interest Expense | $31,249 | $19,139 | $11,121 | $8,461 | $6,068 | | Net Interest Income | $145,225 | $114,610 | $99,909 | $94,904 | $75,552 | | Provision for Loan Losses | $5,325 | $2,070 | $1,750 | $1,200 | $— | | Non-interest Income | $45,501 | $37,070 | $31,854 | $32,013 | $27,444 | | Non-interest Expense | $114,162 | $93,553 | $77,803 | $76,587 | $61,326 | | Income before Income Taxes | $71,239 | $56,057 | $52,210 | $49,130 | $41,670 | | Income Tax Expense | $12,017 | $9,528 | $11,534 | $13,946 | $11,606 | | Net Income | $59,222 | $46,529 | $40,676 | $35,184 | $30,064 | Year-end Balances (Dollars in thousands) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---|\n| Total Assets | $4,397,672 | $3,929,090 | $3,144,360 | $2,955,994 | $2,373,701 | | Total Loans, Net of Unearned Income | $3,077,091 | $2,728,059 | $2,141,638 | $1,989,955 | $1,564,347 | | Total Deposits | $3,430,021 | $3,072,632 | $2,484,052 | $2,349,551 | $1,826,376 | | Total Long-term Debt | $181,950 | $126,635 | $141,717 | $120,560 | $95,606 | | Total Shareholders' Equity | $573,820 | $458,640 | $364,571 | $330,267 | $252,348 | Per Share Data | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---| | Net Income (1) | $2.29 | $1.99 | $1.77 | $1.57 | $1.51 | | Cash Dividends | $0.68 | $0.60 | $0.52 | $0.48 | $0.45 | | Book Value at Year-end | $21.51 | $18.37 | $15.90 | $14.42 | $12.67 | | Tangible Book Value Per Share (2) | $16.49 | $13.81 | $13.45 | $11.94 | $11.57 | Selected Performance Ratios | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | |:---|:---|:---|:---|:---|:---| | Return on Assets | 1.43% | 1.38% | 1.35% | 1.24% | 1.33% | | Return on Equity | 11.41% | 12.07% | 11.59% | 10.94% | 12.47% | | Equity to Assets | 13.05% | 11.67% | 11.59% | 11.17% | 10.63% | | Dividend Payout | 29.64% | 30.25% | 29.11% | 30.21% | 29.97% | | Net Charge-offs (Recoveries) to Average Loans | 0.17% | 0.08% | 0.04% | 0.04% | 0.03% | | Allowance for Loan Losses to Loans | 0.53% | 0.58% | 0.73% | 0.74% | 0.92% | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis provides a detailed review of the Company's financial performance and condition for 2017-2019, emphasizing the impact of significant merger and acquisition activities. Net income increased substantially in 2019 and 2018, driven by M&A and lower tax rates. Key areas of discussion include net interest income, provision for loan losses, non-interest income and expense, capital resources, and liquidity and interest rate risk management. Critical accounting policies, particularly the allowance for loan losses and securities valuation, are also highlighted - Net income for 2019 increased by $12,693,000 (15% per share) to $59,222,000 ($2.29 per share) from 2018. Net income for 2018 increased by $5,853,000 (12% per share) to $46,529,000 ($1.99 per share) from 2017[160] - Net income in 2018 was positively impacted by lower federal income tax rates from the Tax Cuts and Jobs Act of 2017, contributing approximately $0.26 per share[161] - Merger and acquisition activities significantly impacted net income, with acquisition-related expenses of $3,360,000 ($0.10 per share after tax) in 2019 and $4,592,000 ($0.15 per share after tax) in 2018[162][187][188] - Net interest income, the largest source of earnings, increased by $30,615,000 (27%) in 2019 and $14,701,000 (15%) in 2018, primarily due to higher average earning assets from M&A and improved net interest margin[190][193] Net Interest Margin and Cost of Funds | Metric | 2019 | 2018 | 2017 | |:---|:---|:---|:---| | Tax Equivalent Net Interest Margin | 3.92% | 3.75% | 3.76% | | Tax Equivalent Yield on Earning Assets | 4.75% | 4.36% | 4.16% | | Cost of Funds (as % of average earning assets) | 0.83% | 0.61% | 0.40% | - Accretion of loan discounts and recoveries on acquired loans significantly boosted net interest margin, contributing approximately 30 basis points in 2019 and 8 basis points in 2018[192][195] - Provision for loan losses increased to $5,325,000 in 2019 (0.18% of average loans) from $2,070,000 in 2018 (0.09% of average loans), mainly due to higher net charge-offs, particularly on two commercial lending relationships[202][203][204] Non-interest Income (Dollars in thousands) | Category | 2019 | 2018 | 2017 | % Change 2019 | % Change 2018 | |:---|:---|:---|:---|:---|:---| | Trust and Investment Product Fees | $7,278 | $6,680 | $5,272 | 9% | 27% | | Service Charges on Deposit Accounts | $8,718 | $7,044 | $6,178 | 24% | 14% | | Insurance Revenues | $8,940 | $8,330 | $7,979 | 7% | 4% | | Company Owned Life Insurance | $2,005 | $1,243 | $1,341 | 61% | (7)% | | Interchange Fee Income | $9,450 | $7,278 | $4,567 | 30% | 59% | | Net Gains on Sales of Loans | $4,633 | $3,004 | $3,280 | 54% | (8)% | | Net Gains on Securities | $1,248 | $706 | $596 | 77% | 18% | Non-interest Expense (Dollars in thousands) | Category | 2019 | 2018 | 2017 | % Change 2019 | % Change 2018 | |:---|:---|:---|:---|:---|:---| | Salaries and Employee Benefits | $63,885 | $51,306 | $46,642 | 25% | 10% | | Occupancy, Furniture and Equipment Expense | $13,776 | $10,877 | $9,230 | 27% | 18% | | FDIC Premiums | $533 | $1,033 | $954 | (48)% | 8% | | Data Processing Fees | $7,927 | $6,942 | $4,276 | 14% | 62% | | Professional Fees | $4,674 | $5,362 | $2,817 | (13)% | 90% | | Advertising and Promotion | $4,230 | $3,492 | $3,543 | 21% | (1)% | | Intangible Amortization | $3,721 | $1,752 | $942 | 112% | 86% | | Other Operating Expenses | $15,416 | $12,789 | $9,399 | 21% | 36% | - Total loans increased by $350.2 million (13%) in 2019, primarily due to the Citizens First acquisition, and by $586.7 million in 2018, driven by the First Security and branch acquisitions[239][240] - The loan portfolio remains diversified, with commercial real estate loans being the largest concentration at 49% of the total portfolio at year-end 2019[241][243] - The investment portfolio, primarily consisting of mortgage-backed securities (60%) and municipal obligations (35%), increased by $25.5 million (3%) in 2019 and $86.5 million (11%) in 2018[246] - Core deposits increased by $444.1 million (18%) in 2019 and $245.1 million (11%) in 2018, significantly influenced by acquisition activities[255] - Non-performing assets totaled $14.4 million (0.33% of total assets) at year-end 2019, an increase from prior periods primarily due to M&A transactions[283] Introduction Management Overview Critical Accounting Policies and Estimates The Company's financial reporting relies on critical accounting policies and estimates, particularly for the allowance for loan losses, securities valuation, income tax expense, and goodwill/intangible asset valuation. These areas involve significant management judgment and are susceptible to change, with the upcoming CECL model expected to materially impact the allowance for loan losses - Critical accounting policies and estimates include the allowance for loan losses, valuation of securities available for sale, income tax expense, and valuation of goodwill and other intangible assets[168] - The allowance for loan losses is a subjective estimate based on expected future cash flows, collateral values, past loss experience, portfolio characteristics, and economic conditions. The CECL model, effective January 1, 2020, is expected to increase the allowance for credit losses by approximately $12 million to $20 million, primarily for the acquired loan portfolio[171][176][177] - Securities available-for-sale are carried at fair value, with unrealized gains/losses in AOCI. Declines in fair value are assessed for other-than-temporary impairment, which could impact earnings[179] - Income tax expense involves estimates for deferred tax asset valuation allowances and loss contingencies from tax examinations[180][181] - Goodwill and intangible assets are tested for impairment annually. Goodwill has an indefinite useful life, while other intangible assets (core deposit, customer relationships) are amortized over 6-10 years[182][183] Allowance for Loan Losses Securities Valuation Income Tax Expense Goodwill and Other Intangible Assets Results of Operations The Company experienced significant growth in net income in 2019 and 2018, driven by increased net interest income from M&A activities and improved margins, partially offset by higher loan loss provisions and non-interest expenses. Non-interest income saw strong growth across various categories, while non-interest expenses rose due to M&A-related operating costs and amortization. The effective tax rate remained lower than the statutory rate due to tax-exempt income and credits Net Income and EPS | Year | Net Income (in thousands) | Net Income Per Share | |:-----|:--------------------------|:---------------------| | 2019 | $59,222 | $2.29 | | 2018 | $46,529 | $1.99 | | 2017 | $40,676 | $1.77 | - Net interest income increased by $30,615,000 (27%) in 2019 and $14,701,000 (15%) in 2018, primarily due to higher average earning assets from M&A and improved tax-equivalent net interest margin (3.92% in 2019 vs. 3.75% in 2018)[190][191][193] - Provision for loan losses increased to $5,325,000 in 2019 from $2,070,000 in 2018, mainly due to increased net charge-offs of $4,870,000 (0.17% of average loans) in 2019, up from $1,941,000 (0.08%) in 2018[202][203][204] - Non-interest income increased by $8,431,000 (23%) in 2019 and $5,216,000 (16%) in 2018, driven by growth in trust and investment product fees, service charges on deposit accounts, insurance revenues, company-owned life insurance, interchange fees, and net gains on loan and securities sales[209][210][211][212][213][214][215][216] - Non-interest expense increased by $20,609,000 (22%) in 2019 and $15,750,000 (20%) in 2018, largely due to operating expenses from branch and bank acquisitions, including higher salaries and benefits, occupancy costs, data processing fees, and intangible amortization[217][218][219][221][224][225] - The effective tax rate was 16.9% in 2019, 17.0% in 2018, and 22.1% in 2017, lower than the statutory rate due to tax-exempt investment income, affordable housing tax credits, and income from subsidiaries in states with no income tax[226] Net Income Net Interest Income Provision for Loan Losses Non-Interest Income Non-Interest Expense Provision for Income Taxes Capital Resources The Company's shareholders' equity significantly increased in 2019, driven by common share issuance for acquisitions and growth in retained earnings and AOCI. The Company and its subsidiary bank consistently maintain capital ratios well above regulatory minimums, qualifying as 'well-capitalized' under Basel III guidelines. A new stock repurchase plan was approved in January 2020 - Shareholders' equity increased by $115.2 million to $573.8 million at December 31, 2019, from $458.6 million at year-end 2018[230] - The increase in shareholders' equity was attributed to the issuance of approximately 1.7 million common shares for the Citizens First acquisition ($50.0 million), a $41.7 million increase in retained earnings, and a $22.2 million increase in accumulated other comprehensive income[230] - Shareholders' equity represented 13.0% of total assets at December 31, 2019, up from 11.7% at December 31, 2018[230] - The Company and its subsidiary bank consistently maintained capital levels well in excess of minimum regulatory requirements under Basel III, qualifying as 'well-capitalized' at December 31, 2019[234][235] - On January 27, 2020, the Board approved a new plan to repurchase up to one million shares of common stock, replacing a prior program[231] Uses of Funds The Company's primary uses of funds include loan growth and investments. Total loans increased significantly in 2019 and 2018, largely driven by acquisitions, with commercial real estate loans remaining the largest segment. The investment portfolio also grew, primarily in mortgage-backed securities and municipal obligations, serving as a key source for funding loan growth and liquidity - Total loans increased by $350.2 million (13%) at December 31, 2019, compared to December 31, 2018, primarily due to the Citizens First acquisition ($320.3 million)[239] - Total loans increased by $586.7 million at December 31, 2018, compared to year-end 2017, largely due to the First Security acquisition ($374.5 million) and the branch acquisition ($106.0 million)[240] Loan Portfolio Composition (Dollars in thousands) | Loan Category | 2019 | % of Total Loans | 2018 | % of Total Loans | 2017 | % of Total Loans | |:---|:---|:---|:---|:---|:---|:---|\n| Commercial and Industrial Loans and Leases | $589,758 | 19% | $543,761 | 20% | $486,668 | 23% | | Commercial Real Estate Loans | $1,495,862 | 49% | $1,208,646 | 44% | $926,729 | 43% | | Agricultural Loans | $384,526 | 12% | $365,208 | 13% | $333,227 | 16% | | Home Equity and Consumer Loans | $306,972 | 10% | $285,534 | 11% | $219,662 | 10% | | Residential Mortgage Loans | $304,855 | 10% | $328,592 | 12% | $178,733 | 8% | | Total Loans | $3,081,973 | 100% | $2,731,741 | 100% | $2,145,019 | 100% | - The amortized cost of the investment securities portfolio increased by $25.5 million (3%) in 2019 and $86.5 million (11%) in 2018[246] - At December 31, 2019, mortgage-related securities constituted 60% ($526.9 million) and obligations of state and political subdivisions 35% ($307.9 million) of the total securities portfolio[246] Contractual Obligations (Dollars in thousands) | Obligation Category | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |:---|:---|:---|:---|:---|:---| | Long-term Borrowings | $179,355 | $40,573 | $58,000 | $25,000 | $55,782 | | Time Deposits | $631,396 | $473,080 | $130,960 | $27,139 | $217 | | Finance Lease Obligations | $6,406 | $487 | $1,013 | $1,056 | $3,850 | | Operating Lease Commitments | $7,762 | $1,713 | $2,738 | $1,937 | $1,374 | | Postretirement Benefit Payments | $1,292 | $96 | $224 | $246 | $726 | | Total Contractual Obligations | $826,211 | $515,949 | $192,935 | $55,378 | $61,949 | Loans Investments Sources of Funds The Company's primary funding source is core customer deposits, which saw significant growth in 2019 and 2018, largely due to acquisition activities. Other funding sources include large denomination certificates of deposit, brokered deposits, FHLB advances, and other borrowings. The parent company primarily relies on dividends from its bank subsidiary and has also raised funds through subordinated notes and a revolving line of credit - The Company's primary funding source is core customer deposits, which increased by $444.1 million (18%) in 2019 and $245.1 million (11%) in 2018, significantly driven by acquisition activity[253][255] - Demand, savings, and money market deposits provided a growing source of funding, increasing 16% in 2019 and 12% in 2018, totaling $2.623 billion in 2019[258] - Certificates of deposits of $100,000 or more and brokered deposits increased by $133.2 million (53%) in 2019 and $76.5 million (43%) in 2018, comprising 11% of average total funding sources in 2019[260] - Average FHLB advances and other borrowings increased by $21.9 million (9%) in 2019 and $24.4 million (10%) in 2018, representing approximately 8% of average total funding sources in 2019[261] - The parent company issued $40.0 million in 4.50% Fixed-to-Floating Rate Subordinated Notes due 2029 in June 2019, using proceeds for the Citizens First acquisition and to repay a $25.0 million term loan[265][266] - The parent company also assumed junior subordinated debentures totaling approximately $15.4 million from prior acquisitions (American Community Bancorp, River Valley Bancorp, Citizens First), which qualify as Tier 1 capital[270][271] Core Deposits Other Funding Sources Parent Company Funding Sources Risk Management The Company employs a comprehensive risk management program to address credit, liquidity, and interest rate risks. This includes a structured loan review process, quarterly evaluation of the allowance for loan losses, and monitoring of non-performing assets. Liquidity is managed by matching funding sources with obligations, while interest rate risk is assessed through simulation modeling of net interest income and net portfolio value under various scenarios - The Company manages credit, liquidity, and interest rate risks through various procedures, including a Corporate Credit Risk Management Committee and a comprehensive risk-grading and loan review program[274][275][276] - The allowance for loan losses is determined quarterly, comprising specific, general, and unallocated reserves, based on past experience, portfolio characteristics, economic conditions, and collateral values[277][278] Allowance for Loan Losses (Dollars in thousands) | Metric | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\n| Balance at End of Period | $16,278 | $15,823 | $15,694 | | Net Charge-offs (Recoveries) to Average Loans Outstanding | 0.17% | 0.08% | 0.04% | | Allowance for Loan Losses to Total Loans at Year-end | 0.53% | 0.58% | 0.73% | - Non-performing assets totaled $14.4 million (0.33% of total assets) at December 31, 2019, an increase from $13.5 million (0.34%) in 2018 and $11.9 million (0.38%) in 2017, primarily due to M&A transactions[283] Non-performing Assets (Dollars in thousands) | Category | 2019 | 2018 | 2017 | |:---|:---|:---|:---|\n| Non-accrual Loans | $13,802 | $12,579 | $11,091 | | Past Due Loans (90 days or more) | $190 | $633 | $719 | | Total Non-performing Loans | $13,992 | $13,212 | $11,810 | | Other Real Estate | $425 | $286 | $54 | | Total Non-performing Assets | $14,417 | $13,498 | $11,864 | | Non-performing Loans to Total Loans | 0.45% | 0.48% | 0.55% | | Allowance for Loan Losses to Non-performing Loans | 116.34% | 119.76% | 132.89% | - Liquidity management ensures a dependable funding base by matching sources with anticipated borrowings and withdrawals. Interest rate risk is monitored through computer-assisted simulation modeling of net interest income and net portfolio value, aiming to limit risk within a one-year interval[290][293] Lending and Loan Administration Non-Performing Assets Liquidity and Interest Rate Risk Management Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements other than stand-by letters of credit - The Company has no off-balance sheet arrangements other than stand-by letters of credit[294] Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The Company's market risk exposure, primarily liquidity and interest rate risk, is regularly reviewed. Liquidity depends on core deposits and other funding sources. Interest rate risk is assessed using computer simulation modeling for net interest income and net portfolio value (NPV) under various rate scenarios. While derivatives are used, they are not a major part of the risk management strategy. The models indicate potential impacts on net interest income and NPV from sudden interest rate changes - The Company's primary market risks are liquidity risk and interest rate risk, reviewed regularly by the Asset/Liability Committee and Boards of Directors[296] - Liquidity for the parent company relies on dividends from its subsidiary bank, while the Bank's funding comes from core deposits, securities maturities, loan repayments, federal funds purchased, repurchase agreements, and FHLB borrowings[297] - Interest rate risk is monitored using computer simulation modeling to estimate the impact on net interest income and net portfolio value (NPV) under various interest rate scenarios[298] Net Interest Income Sensitivity (as of Dec 31, 2019) | Changes in Rates | Amount (in thousands) | % Change | |:---|:---|:---| | +2% | $149,380 | (1.07)% | | +1% | $147,770 | (2.14)% | | Base | $151,003 | — | | -1% | $149,977 | (0.68)% | | -2% | $144,290 | (4.45)% | Net Portfolio Value Sensitivity (as of Dec 31, 2019) | Changes in Rates | Amount (in thousands) | % Change | NPV Ratio | Change (b.p.) | |:---|:---|:---|:---|:---| | +2% | $517,023 | (3.23)% | 12.70% | 14 | | +1% | $530,601 | (0.69)% | 12.74% | 18 | | Base | $534,289 | — | 12.56% | — | | -1% | $510,601 | (4.43)% | 11.80% | (76) | | -2% | $435,726 | (18.45)% | 9.96% | (260) | Item 8. Financial Statements and Supplementary Data. This section presents the audited consolidated financial statements of German American Bancorp, Inc. for the years ended December 31, 2019, 2018, and 2017, including balance sheets, statements of income, comprehensive income, changes in shareholders' equity, and cash flows. It also includes the Report of Independent Registered Public Accounting Firm, highlighting critical audit matters such as the allowance for loan losses and accounting for acquisitions. Extensive notes to the financial statements provide detailed disclosures on significant accounting policies, securities, derivatives, loans, deposits, borrowings, shareholders' equity, employee benefit plans, income taxes, revenue recognition, leases, commitments, fair value measurements, segment information, parent company financials, business combinations, and quarterly data - Crowe LLP, the independent registered public accounting firm, issued an unqualified opinion on the Company's consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2019[311] - Critical audit matters included the evaluation of the allowance for loan losses due to subjective judgments in migration analysis and qualitative factors, and the accounting for acquisitions, specifically the valuation of loans and core deposit intangibles[318][319][321] Consolidated Balance Sheets (Dollars in thousands) | Asset/Liability | Dec 31, 2019 | Dec 31, 2018 | |:---|:---|:---| | Total Assets | $4,397,672 | $3,929,090 | | Total Loans, Net | $3,060,813 | $2,712,236 | | Total Deposits | $3,430,021 | $3,072,632 | | Total Liabilities | $3,823,852 | $3,470,450 | | Total Shareholders' Equity | $573,820 | $458,640 | Consolidated Statements of Income (Dollars in thousands) | Metric | 2019 | 2018 | 2017 | |:---|:---|:---|:---| | Total Interest Income | $176,474 | $133,749 | $111,030 | | Total Interest Expense | $31,249 | $19,139 | $11,121 | | Net Interest Income | $145,225 | $114,610 | $99,909 | | Provision for Loan Losses | $5,325 | $2,070 | $1,750 | | Total Non-interest Income | $45,501 | $37,070 | $31,854 | | Total Non-interest Expense | $114,162 | $93,553 | $77,803 | | Income before Income Taxes | $71,239 | $56,057 | $52,210 | | Income Tax Expense | $12,017 | $9,528 | $11,534 | | Net Income | $59,222 | $46,529 | $40,676 | | Basic Earnings per Share | $2.29 | $1.99 | $1.77 | | Diluted Earnings per Share | $2.29 | $1.99 | $1.77 | Consolidated Statements of Cash Flows (Dollars in thousands) | Cash Flow Activity | 2019 | 2018 | 2017 | |:---|:---|:---|:---| | Net Cash from Operating Activities | $65,229 | $62,331 | $54,875 | | Net Cash from Investing Activities | $30,662 | $(38,798) | $(189,280) | | Net Cash from Financing Activities | $(88,557) | $2,658 | $139,948 | | Net Change in Cash and Cash Equivalents | $7,334 | $26,191 | $5,543 | | Cash and Cash Equivalents at End of Year | $103,884 | $96,550 | $70,359 | - The Company adopted ASU No. 2016-02 (Leases) on January 1, 2019, recording a right-of-use asset and corresponding lease liability of $9,034 for operating leases[378][379] - The CECL model (ASU No. 2016-13) will be effective for the Company in Q1 2020, with an estimated one-time cumulative effect adjustment increasing the allowance for loan losses by $12 million to $20 million[383][386] - The Company's allowance for loan losses totaled $16.3 million at December 31, 2019, representing 0.53% of total loans, a decrease from 0.58% in 2018 due to acquisition accounting where acquired loans are recorded at fair value[205][280] - The Company executed interest rate swaps with a notional amount of $102.4 million at December 31, 2019, which are simultaneously hedged with third parties to minimize net risk exposure[395] - At December 31, 2019, the Bank had $76.0 million in retained earnings available for dividend payments to the parent company without prior regulatory approval[453] - The Company's net deferred tax liability was $10,044 at December 31, 2019, compared to $1,693 at December 31, 2018[481] - The Company had no unrecognized tax benefits as of December 31, 2019, 2018, and 2017[486] - The Citizens First acquisition (July 1, 2019) involved $65.6 million in total consideration, resulting in $17.1 million of goodwill and $4.5 million of intangible assets. The First Security acquisition (October 15, 2018) involved $96.1 million in total consideration, resulting in $43.2 million of goodwill and $6.1 million of intangible assets[536][537][544][546] Report of Independent Registered Public Accounting Firm Critical Audit Matters Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to the Consolidated Financial Statements NOTE 1 – Summary of Significant Accounting Policies NOTE 2 – Securities NOTE 3 – Derivatives NOTE 4 – Loans NOTE 5 – Premises, Furniture, and Equipment NOTE 6 – Deposits NOTE 7 – FHLB Advances and Other Borrowings NOTE 8 - Shareholders' Equity NOTE 9 – Employee Benefit Plans NOTE 10 – Income Taxes NOTE 11 - Revenue Recognition NOTE 12 – Per Share Data NOTE 13 - Leases NOTE 14 – Commitments and Off-balance Sheet Items NOTE 15 - Fair Value NOTE 16 – Segment Information NOTE 17 - Parent Company Financial Statements NOTE 18 - Business Combinations, Goodwill and Intangible Assets NOTE 19 – Other Comprehensive Income (Loss) NOTE 20 – Quarterly Financial Data (Unaudited) NOTE 21 - Subsequent Events Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There have been no changes in or disagreements with accountants on accounting and financial disclosure matters - There have been no changes in or disagreements with accountants on accounting and financial disclosure matters[570] Item 9A. Controls and Procedures. As of December 31, 2019, the Company's management, including its principal executive and financial officers, concluded that its disclosure controls and procedures were effective. There were no material changes in internal control over financial reporting during the fourth fiscal quarter of 2019 - As of December 31, 2019, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective[571] - There were no changes in the Company's internal control over financial reporting during the fourth fiscal quarter of 2019 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[572] - Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019, based on COSO criteria, and concluded it was effective[574] Item 9B. Other Information. This item is not applicable to the Company - This item is not applicable to the Company[576] PART III Item 10. Directors, Executive Officers and Corporate Governance. Information regarding the Company's directors, executive officers, and corporate governance is incorporated by reference from the 2020 Proxy Statement - Information responsive to this item is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held in May 2020[578] Item 11. Executive Compensation. Information relating to executive compensation is incorporated by reference from the 2020 Proxy Statement - Information relating to compensation of the Company's executive officers and directors is incorporated by reference from the 'Executive and Director Compensation' section of the 2020 Proxy Statement[579] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Information on equity compensation plans is provided in Item 5 of this report, while details on security ownership of beneficial owners and management are incorporated by reference from the 2020 Proxy Statement - Information relating to equity compensation plans is set forth under 'Equity Compensation Plan Information' in Part II, Item 5 of this Report[580] - Information relating to security ownership of certain beneficial owners and the directors and executive officers is incorporated by reference from the 'Ownership of Our Common Shares by Our Directors and Executive Officers' and 'Principal Owners of Common Shares' sections of the 2020 Proxy Statement[580] Item 13. Certain Relationships and Related Transactions, and Director Independence. Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Proxy Statement - Information responsive to this item is incorporated by reference from the 'Election of Directors' and 'Transactions with Related Persons' sections of the 2020 Proxy Statement[581] Item 14. Principal Accounting Fees and Services. Information on principal accounting fees and services is incorporated by reference from the 2020 Proxy Statement - Information responsive to this item is incorporated by reference from the 'Principal Accountant Fees and Services' section of the 2020 Proxy Statement[582] PART IV Item 15. Exhibits, Financial Statement Schedules. This section lists all financial statements included in Item 8 of the report and provides a comprehensive list of exhibits filed with the report or incorporated by reference. It also includes important disclaimers regarding the nature and purpose of representations and warranties within these exhibits - This section includes a list of all financial statements and supplementary data found in Item 8 of the report[584] - A comprehensive list of exhibits, including agreements, bylaws, plans, and certifications, is provided, with indications of whether they are filed with the report or incorporated by reference[585][589] - Exhibits containing agreements are included for informational purposes regarding their terms, and representations/warranties within them are for the benefit of the parties, not necessarily categorical statements of fact, and may be qualified by disclosures not reflected in the agreement[590][591][593] Item 16. Form 10-K Summary. This item is not applicable to the Company - This item is not applicable to the Company[592] Signatures The report is duly signed on behalf of German American Bancorp, Inc. by its Chairman and Chief Executive Officer, Mark A. Schroeder, and other directors and executive officers, including the Executive Vice President and Chief Financial Officer, Bradley M. Rust, as of March 2, 2020 - The report is signed by Mark A. Schroeder, Chairman and Chief Executive Officer, and Bradley M. Rust, Executive Vice President and Chief Financial Officer, along with other directors, on March 2, 2020[595][596][597]