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German American(GABC) - 2022 Q4 - Annual Report
German AmericanGerman American(US:GABC)2023-02-28 16:00

Glossary of Terms and Acronyms Defines key terms and acronyms like AOCI, Basel III, CECL, CET1, FDIC, FRB, GAAP, LIBOR, and SOFR for report clarity - The report defines key terms and acronyms to ensure clarity, including 'Company' referring to German American Bancorp, Inc. and its consolidated subsidiaries, and 'Bank' referring to German American Bank1119 - Important financial and regulatory terms such as Accumulated Other Comprehensive Income (AOCI), Basel III Rules, Current Expected Credit Losses (CECL), Common Equity Tier 1 Capital (CET1), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB), Generally Accepted Accounting Principles (GAAP), London Interbank Offered Rate (LIBOR), and Secured Overnight Financing Rate (SOFR) are explicitly defined131415 PART I Item 1. Business Provides an overview of German American Bancorp's business, including operations, recent developments, competition, human capital, and regulatory environment - German American Bancorp, Inc. (GABC) is a Nasdaq-traded financial holding company operating 77 banking offices across 20 southern Indiana counties and 14 Kentucky counties, alongside investment brokerage and property & casualty insurance subsidiaries182022 - On January 1, 2022, the Company completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc. (CUB), expanding its presence in Kentucky with 15 additional retail banking offices24174 CUB Acquisition Details (January 1, 2022) | Metric | Amount (approx.) | | :--------------------- | :----------------- | | Total Assets | $1.109 billion | | Total Loans | $683.8 million | | Total Deposits | $930.5 million | | Common Stock Issued | 2.9 million shares | | Cash Paid | $50.8 million | - In 2021, the Company executed an operating optimization plan, consolidating seven branch offices, implementing staff reductions, and selling two branches in Lexington, Kentucky, to enhance efficiency2527 - The Company operates in a highly competitive environment, facing competition from other financial institutions, non-depository financial intermediaries, and rapidly growing FinTech companies, many of which possess greater resources34119 - As of February 23, 2023, the Company employed approximately 866 full-time equivalent employees and emphasizes attracting, developing, and retaining talent through competitive compensation, comprehensive benefits, and continuous education programs36383940 - The Company is subject to extensive regulation by the FRB, DFI, and FDIC, including capital requirements (Basel III Rules), Prompt Corrective Action classifications, and restrictions on dividends and affiliate transactions. It maintains capital ratios well above 'well-capitalized' standards44516569238 - The Dodd-Frank Act has significantly impacted the Company's business through changes in regulatory authority, corporate governance, restrictions on proprietary trading, and the establishment of the CFPB, though the Volcker Rule's impact is not material for the Company due to its asset size737477 - The Company actively participated in the Paycheck Protection Program (PPP) during the COVID-19 pandemic, with all PPP loans forgiven or repaid by December 31, 202287187390 Item 1A. Risk Factors Outlines principal risks including economic weakness, loan losses, CECL volatility, interest rate changes, LIBOR transition, pandemics, PPP litigation, competition, and operational risks - Economic weakness, particularly in the Company's Southern Indiana and Kentucky markets, poses a significant risk, potentially impacting loan repayment ability, collateral values, and increasing delinquencies and credit losses100101 - The adoption of the CECL methodology introduces potential increases and volatility in the allowance for credit losses and related provision expense, as estimates rely on significant management judgments and forecasts103104 - Changes in interest rates, influenced by economic conditions and FRB policies, can adversely affect net interest income, loan origination, deposit acquisition, and the fair value of financial assets and liabilities105 - The transition from LIBOR to alternative reference rates like SOFR, mandated by the LIBOR Act and Federal Reserve regulations, could have adverse effects on the Company's business, financial condition, and results of operations, which are currently unknown106108111 - The Company faces risks from epidemics and pandemics, such as COVID-19, which can disrupt operations, increase cybersecurity risks, negatively impact loan demand and collateral values, and lead to increased delinquencies112113114115 - Participation in the SBA Paycheck Protection Program (PPP) exposes the Company to litigation risks from clients or other parties due to ambiguities in program rules, potentially leading to financial liability or reputational damage116117118 - Operational risks, including fraud, transaction processing errors, internal control breaches, cyber-attacks, and reliance on third-party vendors, could result in financial loss, regulatory action, and reputational damage140141143144147 - Future acquisitions of banks or financial service assets pose risks such as exposure to unknown liabilities, asset quality issues, integration difficulties, potential loss of key personnel/customers, and dilution of tangible book value or net income per share150151 Item 1B. Unresolved Staff Comments The Company has no unresolved staff comments from the SEC - There are no unresolved staff comments154 Item 2. Properties Executive offices are in Jasper, Indiana; the Company operates 78 locations, with 60 owned and 18 leased - The Company's executive offices are located at 711 Main Street, Jasper, Indiana, in the main office building of German American Bank, which spans approximately 23,600 square feet155 - The Company operates a total of 78 locations, including 50 in Southern Indiana and 28 in Kentucky, with 60 properties owned and 18 leased from third parties155 Item 3. Legal Proceedings The Company is not involved in any material pending legal proceedings beyond routine business litigation - There are no pending legal proceedings, other than routine litigation incidental to the business of the Company's subsidiaries, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject156 Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable157 PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Details the market for GABC common stock, including trading, shareholder information, performance, and the stock repurchase program - German American Bancorp, Inc.'s common stock is traded on the Nasdaq Global Select Market under the symbol GABC158 - As of February 23, 2023, the Company had approximately 3,164 shareholders of record159 - The Company's Board of Directors approved a new plan on January 31, 2022, to repurchase up to 1.0 million shares of its outstanding common stock, representing approximately 3% of outstanding shares at approval. No shares were repurchased under this plan in 2022164235447 - The Inflation Reduction Act of 2022 (IRA) imposes a new 1% excise tax on stock repurchases by publicly traded U.S. corporations after December 31, 2022236448 Item 6. [Reserved] This item is reserved and contains no information - This item is reserved166 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Analyzes German American Bancorp's financial condition and results of operations from 2020-2022, covering key metrics, accounting policies, funding, and risk management - The Company completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc. (CUB) on January 1, 2022, significantly impacting its financial condition and results of operations174 Net Income and EPS (2020-2022) | Year Ended December 31 | Net Income ($000s) | Basic EPS ($) | | :----------------------- | :------------------ | :------------ | | 2022 | 81,825 | 2.78 | | 2021 | 84,137 | 3.17 | | 2020 | 62,210 | 2.34 | - Net income in 2022 was negatively impacted by $12.323 million in acquisition-related expenses and a $6.3 million Day 1 provision for credit losses under the CECL model related to the CUB transaction177196 Net Interest Income and Margin (2020-2022) | Year Ended December 31 | Net Interest Income ($000s) | Net Interest Margin (%) | | :----------------------- | :-------------------------- | :---------------------- | | 2022 | 200,584 | 3.45 | | 2021 | 160,830 | 3.31 | | 2020 | 155,243 | 3.63 | - The increase in net interest income in 2022 was primarily due to higher earning assets from the CUB acquisition and an expanded net interest margin, partially offset by lower PPP loan fee recognition200 Provision for Credit Losses (2020-2022) | Year Ended December 31 | Provision for Credit Losses ($000s) | % of Average Loans Outstanding | | :----------------------- | :---------------------------------- | :----------------------------- | | 2022 | 6,350 | 0.17% | | 2021 | (6,500) | (0.21)% | | 2020 | 17,550 | 0.55% | - The negative provision in 2021 was driven by improvements in adversely criticized assets and pandemic-related stressed sectors210 Non-Interest Income (2020-2022) | Non-interest Income Category | 2022 ($000s) | 2021 ($000s) | 2020 ($000s) | | :--------------------------- | :------------- | :------------- | :------------- | | Wealth Management Fees | 10,076 | 10,321 | 8,005 | | Service Charges on Deposits | 11,457 | 7,723 | 7,334 | | Insurance Revenues | 10,020 | 9,268 | 8,922 | | Company Owned Life Insurance | 2,264 | 1,529 | 2,307 | | Interchange Fee Income | 15,820 | 13,116 | 10,529 | | Other Operating Income | 5,116 | 6,991 | 3,388 | | Net Gains on Sales of Loans | 3,818 | 8,267 | 9,908 | | Net Gains on Securities | 562 | 2,247 | 4,081 | | TOTAL | 59,133 | 59,462 | 54,474 | - Non-interest expense increased by 24% in 2022, largely due to $12.323 million in non-recurring acquisition-related expenses for the CUB transaction and CUB's operating costs220 Non-Interest Expense (2020-2022) | Non-interest Expense Category | 2022 ($000s) | 2021 ($000s) | 2020 ($000s) | | :---------------------------- | :------------- | :------------- | :------------- | | Salaries and Employee Benefits| 84,145 | 68,570 | 68,112 | | Occupancy, Furniture & Equip. | 14,921 | 14,831 | 14,024 | | FDIC Premiums | 1,860 | 1,419 | 740 | | Data Processing Fees | 15,406 | 7,611 | 6,889 | | Professional Fees | 6,295 | 5,009 | 3,998 | | Advertising and Promotion | 4,416 | 4,197 | 3,589 | | Intangible Amortization | 3,711 | 2,731 | 3,539 | | Other Operating Expenses | 23,437 | 19,639 | 16,232 | | TOTAL | 154,191 | 124,007 | 117,123 | - Total loans increased by $780.7 million (26%) in 2022, driven by the CUB acquisition and organic growth, partially offset by a decrease in PPP loans242 Loan Portfolio Composition (December 31, 2022) | Loan Category | Amount ($000s) | % of Total Loans | | :------------------------------ | :------------- | :--------------- | | Commercial Real Estate Loans | 1,966,884 | 52% | | Commercial and Industrial Loans | 676,502 | 18% | | Agricultural Loans | 417,413 | 11% | | Home Equity and Consumer Loans | 377,164 | 10% | | Residential Mortgage Loans | 350,682 | 9% | | Total Loans | 3,788,645 | 100% | - Non-performing assets totaled $14.3 million (0.23% of total assets) at December 31, 2022, a decrease from $14.8 million (0.26% of total assets) at December 31, 2021283 Non-Performing Assets (2020-2022) | Metric | Dec 31, 2022 ($000s) | Dec 31, 2021 ($000s) | Dec 31, 2020 ($000s) | | :----------------------------------------- | :------------------- | :------------------- | :------------------- | | Non-accrual Loans | 12,888 | 14,602 | 21,507 | | Past Due Loans (90+ days & accruing) | 1,427 | 156 | — | | Total Non-performing Loans | 14,315 | 14,758 | 21,507 | | Other Real Estate | — | — | 325 | | Total Non-performing Assets | 14,315 | 14,758 | 21,832 | | Non-performing Loans to Total Loans | 0.38% | 0.49% | 0.70% | | Allowance for Credit Losses to Non-perf. Loans | 308.54% | 250.83% | 217.88% | Item 7A. Quantitative and Qualitative Disclosures About Market Risk Details market risk management, focusing on liquidity and interest rate risk, using simulation modeling to assess impact on net interest income and NPV - The Company's primary market risks are liquidity risk and interest rate risk, regularly reviewed by the Asset/Liability Committee and Boards of Directors290 - Interest rate risk is monitored through computer-assisted simulation modeling to estimate the impact on net interest income and net portfolio value (NPV) under various interest rate scenarios292293 Net Interest Income Sensitivity (December 31, 2022) | Changes in Rates | Amount ($000s) | % Change | | :--------------- | :------------- | :------- | | +2% | 223,005 | 2.27% | | +1% | 220,788 | 1.25% | | Base | 218,060 | — | | -1% | 213,585 | (2.05)% | | -2% | 205,675 | (5.68)% | Net Portfolio Value (NPV) Sensitivity (December 31, 2022) | Changes in Rates | Amount ($000s) | % Change | NPV Ratio (%) | Change (b.p.) | | :--------------- | :------------- | :------- | :------------ | :------------ | | +2% | 809,819 | (8.71)% | 14.81 | (36) | | +1% | 848,905 | (4.31)% | 15.02 | (15) | | Base | 887,112 | — | 15.17 | — | | -1% | 914,987 | 3.14% | 15.14 | (3) | | -2% | 925,626 | 4.34% | 14.84 | (33) | Item 8. Financial Statements and Supplementary Data Presents audited consolidated financial statements for 2020-2022, including balance sheets, income statements, cash flows, and notes, with the independent auditor's report - 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, 2022304 - The Allowance for Credit Losses on Loans was identified as a critical audit matter due to the extensive auditor judgment and effort required to evaluate management's subjective and complex judgments in its calculation312313 Consolidated Balance Sheet Highlights (December 31, $000s) | Metric | 2022 | 2021 | | :----------------------------------------- | :---------- | :---------- | | Total Assets | 6,155,991 | 5,608,539 | | Cash and Cash Equivalents | 119,079 | 396,890 | | Securities Available-for-Sale (Fair Value) | 1,761,669 | 1,889,617 | | Loans, Net | 3,740,766 | 2,967,247 | | Total Deposits | 5,350,051 | 4,744,316 | | FHLB Advances and Other Borrowings | 203,806 | 152,183 | | Total Shareholders' Equity | 558,393 | 668,459 | Consolidated Statements of Income Highlights (Years Ended December 31, $000s) | Metric | 2022 | 2021 | 2020 | | :----------------------------------------- | :-------- | :-------- | :-------- | | Total Interest Income | 218,926 | 170,379 | 174,369 | | Total Interest Expense | 18,342 | 9,549 | 19,126 | | Net Interest Income | 200,584 | 160,830 | 155,243 | | Provision for Credit Losses | 6,350 | (6,500) | 17,550 | | Total Non-Interest Income | 59,133 | 59,462 | 54,474 | | Total Non-Interest Expense | 154,191 | 124,007 | 117,123 | | Income before Income Taxes | 99,176 | 102,785 | 75,044 | | Income Tax Expense | 17,351 | 18,648 | 12,834 | | Net Income | 81,825 | 84,137 | 62,210 | | Basic Earnings per Share | 2.78 | 3.17 | 2.34 | Consolidated Statements of Cash Flows Highlights (Years Ended December 31, $000s) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--------------------------------- | :---------- | :---------- | :---------- | | Net Cash from Operating Activities | 110,036 | 100,844 | 92,418 | | Net Cash from Investing Activities | (24,181) | (640,299) | (346,078) | | Net Cash from Financing Activities | (363,666) | 590,597 | 495,524 | | Net Change in Cash and Cash Equivalents | (277,811) | 51,142 | 241,864 | | Cash and Cash Equivalents at End of Year | 119,079 | 396,890 | 345,748 | - The Company's allowance for credit losses totaled $44.2 million at December 31, 2022, representing 1.17% of period-end loans, compared to $37.0 million (1.23%) at December 31, 2021278 - Shareholders' equity declined by $110.1 million in 2022, primarily due to a $278.9 million decrease in accumulated other comprehensive income (AOCI) related to unrealized losses on available-for-sale securities, partially offset by the issuance of common shares for the CUB acquisition and retained earnings232322 Regulatory Capital Ratios (December 31, 2022) | Capital Ratio (Consolidated) | Actual Ratio | Minimum for Capital Adequacy | | :--------------------------- | :----------- | :--------------------------- | | Total Capital | 15.45% | 8.00% | | Tier 1 Capital | 13.97% | 6.00% | | Common Tier 1 (CET1) Capital | 13.26% | 4.50% | | Tier 1 Capital (to Average Assets) | 10.50% | 4.00% | - The Company and its subsidiary bank consistently exceeded all 'well-capitalized' regulatory capital requirements at December 31, 202265238432433 - The Company adopted the five-year transition option for CECL's impact on regulatory capital, beginning the three-year phase-in of deferred capital impact on January 1, 2022239435 - The Company's primary funding source is core customer deposits, which represented 94% of average total funding sources in 2022, increasing by approximately $1.2 billion (27%) due to the CUB acquisition258260261 - The fair value of available-for-sale securities decreased by $127.9 million in 2022, primarily due to a $333.2 million fair value adjustment resulting from rising market interest rates252374378 Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Comprehensive Income (Loss) 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) Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes or disagreements with accountants on accounting and financial disclosure have occurred - There have been no changes in or disagreements with accountants on accounting and financial disclosure524 Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - As of December 31, 2022, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective525 - Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2022, based on COSO criteria, and concluded it was effective528 - There were no changes in the Company's internal control over financial reporting during the fourth fiscal quarter of 2022 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting526 Item 9B. Other Information This item is not applicable to the Company - This item is not applicable530 Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the Company - This item is not applicable531 PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the Company's 2023 Proxy Statement532 Item 11. Executive Compensation Executive compensation details, including committee interlocks, are incorporated by reference from the 2023 Proxy Statement - Information relating to executive compensation is incorporated by reference from the 'Executive and Director Compensation' section of the 2023 Proxy Statement533 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details security ownership and equity compensation plans, with 1,562,062 shares available for future issuance as of December 31, 2022 - Information on security ownership of beneficial owners and management 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 2023 Proxy Statement534 Equity Compensation Plan Information (December 31, 2022) | 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 | | :---------------------------------------------- | :----------------------------------------------------------------------- | :-------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | Equity compensation plans approved by security holders | — | — | 1,562,062 | | Equity compensation plans not approved by security holders | — | — | — | | Total | | | 1,562,062 | - The 1,562,062 shares available for future issuance include 750,000 shares under the 2019 ESPP and 812,062 shares under the 2019 LTI Plan535 Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information on certain relationships, related transactions, and director independence is incorporated by reference from the 'Election of Directors' and 'Transactions with Related Persons' sections of the 2023 Proxy Statement536 Item 14. Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the 2023 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the 'Principal Accountant Fees and Services' caption in the 2023 Proxy Statement537 PART IV Item 15. Exhibits, Financial Statement Schedules Lists all financial statements, schedules, and exhibits included or incorporated by reference into the Form 10-K report - The report includes audited consolidated financial statements for German American Bancorp, Inc. and Subsidiaries, such as Balance Sheets, Statements of Income, Comprehensive Income (Loss), Changes in Shareholders' Equity, and Cash Flows, along with accompanying notes539 - A comprehensive list of exhibits is provided, incorporating by reference various legal and corporate documents, including the Amended and Restated Articles of Incorporation, Bylaws, Indenture agreements, and descriptions of Director and Executive Compensation Arrangements541542 - Certifications under the Sarbanes-Oxley Act of 2002 (Sections 302 and 906) for the President and CEO, and Executive Vice President (Principal Financial Officer) are included as exhibits542 Item 16. Form 10-K Summary This item is not applicable to the Company - This item is not applicable548 SIGNATURES SIGNATURES Contains required signatures for the Form 10-K report from key executives and directors as of March 1, 2023 - The report is duly signed on behalf of German American Bancorp, Inc. by D. Neil Dauby, President and Chief Executive Officer, and other key executives and directors, as of March 1, 2023550551