Attached files
file | filename |
---|---|
EX-2.3 - GERMAN AMERICAN BANCORP, INC. | v192408_ex2-3.htm |
EX-2.4 - GERMAN AMERICAN BANCORP, INC. | v192408_ex2-4.htm |
EX-2.2 - GERMAN AMERICAN BANCORP, INC. | v192408_ex2-2.htm |
EX-31.2 - GERMAN AMERICAN BANCORP, INC. | v192408_ex31-2.htm |
EX-31.1 - GERMAN AMERICAN BANCORP, INC. | v192408_ex31-1.htm |
EX-32.2 - GERMAN AMERICAN BANCORP, INC. | v192408_ex32-2.htm |
EX-10.5 - GERMAN AMERICAN BANCORP, INC. | v192408_ex10-5.htm |
EX-32.1 - GERMAN AMERICAN BANCORP, INC. | v192408_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
x Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Quarterly Period Ended June 30, 2010
Or
o Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the Transition Period from
_______________ to ___________________
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
o
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
o
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 o Accelerated
filer x Non-accelerated
filer o Smaller
reporting company o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act):
YES o 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 August 2, 2010
|
Common
Stock, no par value
|
11,104,918
|
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, 2009, 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 1A of
Part II of this Report and 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.”
*****
INDEX
PART
I.
|
FINANCIAL
INFORMATION
|
3
|
|
Item
1.
|
Financial
Statements
|
3
|
|
Consolidated
Balance Sheets – June 30, 2010 and December 31, 2009
|
3
|
||
Consolidated
Statements of Income and Comprehensive Income - Three Months Ended
June 30, 2010 and 2009
|
4
|
||
Consolidated
Statements of Income and Comprehensive Income - Six Months Ended June
30, 2010 and 2009
|
5
|
||
Consolidated
Statements of Cash Flows – Six Months Ended June 30, 2010 and
2009
|
6
|
||
Notes
to Consolidated Financial Statements – June 30, 2010
|
7-19
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
20-30
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
30
|
|
Item
4.
|
Controls
and Procedures
|
31
|
|
PART
II.
|
OTHER
INFORMATION
|
32
|
|
Item
1A.
|
Risk
Factors
|
32
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
|
Item
5.
|
Other
Information
|
32-33
|
|
Item
6.
|
Exhibits
|
33
|
|
|
|||
SIGNATURES |
34
|
||
INDEX OF EXHIBITS |
35
|
2
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)
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
and Due from Banks
|
$ | 17,110 | $ | 16,052 | ||||
Federal
Funds Sold and Other Short-term Investments
|
19,399 | 12,002 | ||||||
Cash
and Cash Equivalents
|
36,509 | 28,054 | ||||||
Securities
Available-for-Sale, at Fair Value
|
298,555 | 250,940 | ||||||
Securities
Held-to-Maturity, at Cost (Fair value of $1,899 and $2,801 on June
30, 2010 and December 31, 2009, respectively)
|
1,886 | 2,774 | ||||||
Loans
Held-for-Sale
|
10,768 | 5,706 | ||||||
Loans
|
914,667 | 879,475 | ||||||
Less:
Unearned Income
|
(1,729 | ) | (1,653 | ) | ||||
Allowance
for Loan Losses
|
(10,813 | ) | (11,016 | ) | ||||
Loans,
Net
|
902,125 | 866,806 | ||||||
Stock
in FHLB of Indianapolis and Other Restricted Stock, at
Cost
|
10,621 | 10,621 | ||||||
Premises,
Furniture and Equipment, Net
|
26,182 | 22,153 | ||||||
Other
Real Estate
|
1,822 | 2,363 | ||||||
Goodwill
|
9,835 | 9,655 | ||||||
Intangible
Assets
|
3,056 | 2,618 | ||||||
Company
Owned Life Insurance
|
24,400 | 24,008 | ||||||
Accrued
Interest Receivable and Other Assets
|
15,169 | 17,267 | ||||||
TOTAL
ASSETS
|
$ | 1,340,928 | $ | 1,242,965 | ||||
LIABILITIES
|
||||||||
Non-interest-bearing
Demand Deposits
|
$ | 166,922 | $ | 155,268 | ||||
Interest-bearing
Demand, Savings, and Money Market Accounts
|
522,438 | 484,699 | ||||||
Time
Deposits
|
360,496 | 329,676 | ||||||
Total
Deposits
|
1,049,856 | 969,643 | ||||||
FHLB
Advances and Other Borrowings
|
157,861 | 148,121 | ||||||
Accrued
Interest Payable and Other Liabilities
|
13,054 | 11,652 | ||||||
TOTAL
LIABILITIES
|
1,220,771 | 1,129,416 | ||||||
SHAREHOLDERS’
EQUITY
|
||||||||
Preferred
Stock, $10 par value; 500,000 shares authorized, no shares
issued
|
— | — | ||||||
Common
Stock, no par value, $1 stated value; 20,000,000 shares
authorized
|
11,105 | 11,077 | ||||||
Additional
Paid-in Capital
|
69,020 | 68,816 | ||||||
Retained
Earnings
|
32,595 | 29,041 | ||||||
Accumulated
Other Comprehensive Income, Net of Tax
|
7,437 | 4,615 | ||||||
TOTAL
SHAREHOLDERS’ EQUITY
|
120,157 | 113,549 | ||||||
TOTAL
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$ | 1,340,928 | $ | 1,242,965 | ||||
End
of period shares issued and outstanding
|
11,104,918 | 11,077,382 |
See
accompanying notes to consolidated financial statements.
3
GERMAN
AMERICAN BANCORP, INC.
CONSOLIDATED
STATEMENTS OF INCOME
AND
COMPREHENSIVE INCOME
(unaudited,
dollars in thousands except share and per share data)
Three Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
INTEREST
INCOME
|
||||||||
Interest
and Fees on Loans
|
$ | 13,194 | $ | 13,473 | ||||
Interest
on Federal Funds Sold and Other Short-term Investments
|
27 | 22 | ||||||
Interest
and Dividends on Securities:
|
||||||||
Taxable
|
2,462 | 2,151 | ||||||
Non-taxable
|
258 | 277 | ||||||
TOTAL
INTEREST INCOME
|
15,941 | 15,923 | ||||||
INTEREST
EXPENSE
|
||||||||
Interest
on Deposits
|
2,686 | 3,335 | ||||||
Interest
on FHLB Advances and Other Borrowings
|
1,340 | 1,471 | ||||||
TOTAL
INTEREST EXPENSE
|
4,026 | 4,806 | ||||||
NET
INTEREST INCOME
|
11,915 | 11,117 | ||||||
Provision
for Loan Losses
|
1,000 | 1,000 | ||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
10,915 | 10,117 | ||||||
NON-INTEREST
INCOME
|
||||||||
Trust
and Investment Product Fees
|
395 | 457 | ||||||
Service
Charges on Deposit Accounts
|
1,075 | 1,080 | ||||||
Insurance
Revenues
|
1,083 | 1,290 | ||||||
Company
Owned Life Insurance
|
186 | 200 | ||||||
Other
Operating Income
|
553 | 368 | ||||||
Net
Gains on Sales of Loans
|
499 | 461 | ||||||
Net
Gain (Loss) on Securities
|
— | (34 | ) | |||||
TOTAL
NON-INTEREST INCOME
|
3,791 | 3,822 | ||||||
NON-INTEREST
EXPENSE
|
||||||||
Salaries
and Employee Benefits
|
5,288 | 5,515 | ||||||
Occupancy
Expense
|
835 | 816 | ||||||
Furniture
and Equipment Expense
|
600 | 654 | ||||||
FDIC
Premiums
|
336 | 885 | ||||||
Data
Processing Fees
|
365 | 344 | ||||||
Professional
Fees
|
524 | 405 | ||||||
Advertising
and Promotion
|
273 | 199 | ||||||
Supplies
|
246 | 142 | ||||||
Intangible
Amortization
|
247 | 221 | ||||||
Other
Operating Expenses
|
1,188 | 1,052 | ||||||
TOTAL
NON-INTEREST EXPENSE
|
9,902 | 10,233 | ||||||
Income
before Income Taxes
|
4,804 | 3,706 | ||||||
Income
Tax Expense
|
1,396 | 942 | ||||||
NET
INCOME
|
$ | 3,408 | $ | 2,764 | ||||
COMPREHENSIVE
INCOME
|
$ | 5,331 | $ | 2,092 | ||||
Earnings
Per Share and Diluted Earnings Per Share
|
$ | 0.31 | $ | 0.25 | ||||
Dividends
Per Share
|
$ | 0.14 | $ | 0.14 |
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)
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
INTEREST
INCOME
|
||||||||
Interest
and Fees on Loans
|
$ | 26,033 | $ | 26,867 | ||||
Interest
on Federal Funds Sold and Other Short-term Investments
|
36 | 39 | ||||||
Interest
and Dividends on Securities:
|
||||||||
Taxable
|
4,927 | 4,341 | ||||||
Non-taxable
|
528 | 533 | ||||||
TOTAL
INTEREST INCOME
|
31,524 | 31,780 | ||||||
INTEREST
EXPENSE
|
||||||||
Interest
on Deposits
|
5,298 | 7,340 | ||||||
Interest
on FHLB Advances and Other Borrowings
|
2,662 | 2,682 | ||||||
TOTAL
INTEREST EXPENSE
|
7,960 | 10,022 | ||||||
NET
INTEREST INCOME
|
23,564 | 21,758 | ||||||
Provision
for Loan Losses
|
2,500 | 1,750 | ||||||
NET
INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
|
21,064 | 20,008 | ||||||
NON-INTEREST
INCOME
|
||||||||
Trust
and Investment Product Fees
|
786 | 847 | ||||||
Service
Charges on Deposit Accounts
|
2,021 | 2,140 | ||||||
Insurance
Revenues
|
2,769 | 2,777 | ||||||
Company
Owned Life Insurance
|
388 | 438 | ||||||
Other
Operating Income
|
1,589 | 872 | ||||||
Net
Gains on Sales of Loans
|
817 | 1,026 | ||||||
Net
Gain (Loss) on Securities
|
— | (34 | ) | |||||
TOTAL
NON-INTEREST INCOME
|
8,370 | 8,066 | ||||||
NON-INTEREST
EXPENSE
|
||||||||
Salaries
and Employee Benefits
|
10,837 | 11,129 | ||||||
Occupancy
Expense
|
1,722 | 1,683 | ||||||
Furniture
and Equipment Expense
|
1,252 | 1,316 | ||||||
FDIC
Premiums
|
688 | 1,220 | ||||||
Data
Processing Fees
|
724 | 701 | ||||||
Professional
Fees
|
1,045 | 1,012 | ||||||
Advertising
and Promotion
|
542 | 487 | ||||||
Supplies
|
441 | 277 | ||||||
Intangible
Amortization
|
465 | 442 | ||||||
Other
Operating Expenses
|
2,452 | 2,047 | ||||||
TOTAL
NON-INTEREST EXPENSE
|
20,168 | 20,314 | ||||||
Income
before Income Taxes
|
9,266 | 7,760 | ||||||
Income
Tax Expense
|
2,607 | 2,054 | ||||||
NET
INCOME
|
$ | 6,659 | $ | 5,706 | ||||
COMPREHENSIVE
INCOME
|
$ | 9,481 | $ | 6,397 | ||||
Earnings
Per Share and Diluted Earnings Per Share
|
$ | 0.60 | $ | 0.52 | ||||
Dividends
Per Share
|
$ | 0.28 | $ | 0.28 |
See
accompanying notes to consolidated financial statements.
5
GERMAN
AMERICAN BANCORP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited,
dollars in thousands)
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
Income
|
$ | 6,659 | $ | 5,706 | ||||
Adjustments
to Reconcile Net Income to Net Cash from Operating
Activities:
|
||||||||
Net
(Accretion) Amortization on Securities
|
278 | (170 | ) | |||||
Depreciation
and Amortization
|
1,812 | 1,797 | ||||||
Loans
Originated for Sale
|
(40,891 | ) | (79,937 | ) | ||||
Proceeds
from Sales of Loans Held-for-Sale
|
36,646 | 71,754 | ||||||
Loss
in Investment in Limited Partnership
|
33 | 78 | ||||||
Provision
for Loan Losses
|
2,500 | 1,750 | ||||||
Gain
on Sale of Loans, net
|
(817 | ) | (1,026 | ) | ||||
Loss
(Gain) on Sales of Other Real Estate and Repossessed
Assets
|
(237 | ) | 314 | |||||
Loss
(Gain) on Disposition and Impairment of Premises and
Equipment
|
(55 | ) | 11 | |||||
Other-than-temporary
Impairment on Securities
|
— | 34 | ||||||
Increase
in Cash Surrender Value of Company Owned Life Insurance
|
(392 | ) | (444 | ) | ||||
Equity
Based Compensation
|
200 | 235 | ||||||
Change
in Assets and Liabilities:
|
||||||||
Interest
Receivable and Other Assets
|
2,218 | 3,431 | ||||||
Interest
Payable and Other Liabilities
|
(202 | ) | (1,844 | ) | ||||
Net
Cash from Operating Activities
|
7,752 | 1,689 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Proceeds
from Maturities of Securities Available-for-Sale
|
25,873 | 19,191 | ||||||
Proceeds
from Sales of Securities Available-for-Sale
|
— | 379 | ||||||
Purchase
of Securities Available-for-Sale
|
(69,406 | ) | (41,729 | ) | ||||
Proceeds
from Maturities of Securities Held-to-Maturity
|
889 | 309 | ||||||
Purchase
of Loans
|
(175 | ) | (20,666 | ) | ||||
Proceeds
from Sales of Loans
|
3,711 | 12,938 | ||||||
Loans
Made to Customers, net of Payments Received
|
472 | 373 | ||||||
Proceeds
from Sales of Other Real Estate
|
1,889 | 322 | ||||||
Property
and Equipment Expenditures
|
(652 | ) | (1,275 | ) | ||||
Proceeds
from Sales of Property and Equipment
|
491 | 4 | ||||||
Acquire
Bank Branches
|
855 | — | ||||||
Acquire
Insurance Customer List
|
— | (386 | ) | |||||
Net
Cash from Investing Activities
|
(36,053 | ) | (30,540 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Change
in Deposits
|
30,090 | 14,028 | ||||||
Change
in Short-term Borrowings
|
10,535 | (3,050 | ) | |||||
Advances
in Long-term Debt
|
— | 19,250 | ||||||
Repayments
of Long-term Debt
|
(796 | ) | (33 | ) | ||||
Issuance
of Common Stock
|
32 | 5 | ||||||
Dividends
Paid
|
(3,105 | ) | (3,094 | ) | ||||
Net
Cash from Financing Activities
|
36,756 | 27,106 | ||||||
Net
Change in Cash and Cash Equivalents
|
8,455 | (1,745 | ) | |||||
Cash
and Cash Equivalents at Beginning of Year
|
28,054 | 44,992 | ||||||
Cash
and Cash Equivalents at End of Period
|
$ | 36,509 | $ | 43,247 | ||||
Cash
Paid During the Period for
|
||||||||
Interest
|
$ | 7,858 | $ | 10,721 | ||||
Income
Taxes
|
2,678 | 2,270 | ||||||
Supplemental
Non Cash Disclosures(1)
|
||||||||
Loans
Transferred to Other Real Estate
|
$ | 1,112 | $ | 1,266 |
(1) See
Note 11 for non-cash transactions included in the acquisition of bank
branches.
See
accompanying notes to consolidated financial statements.
6
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(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 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, 2009 Annual Report on Form 10-K.
Note
2 – Per Share Data
The
computations of Earnings per Share and Diluted Earnings per Share are as
follows:
Three Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Earnings
per Share:
|
||||||||
Net
Income
|
$ | 3,408 | $ | 2,764 | ||||
Weighted
Average Shares Outstanding
|
11,103,095 | 11,073,081 | ||||||
Earnings
per Share
|
$ | 0.31 | $ | 0.25 | ||||
Diluted
Earnings per Share:
|
||||||||
Net
Income
|
$ | 3,408 | $ | 2,764 | ||||
Weighted
Average Shares Outstanding
|
11,103,095 | 11,073,081 | ||||||
Potentially
Dilutive Shares, Net
|
5,065 | 494 | ||||||
Diluted
Weighted Average Shares Outstanding
|
11,108,160 | 11,073,575 | ||||||
Diluted
Earnings per Share
|
$ | 0.31 | $ | 0.25 |
Stock
options for 99,275 and 138,003 shares of common stock were not considered in
computing diluted earnings per share for the quarters ended June 30, 2010 and
2009, respectively, because they were anti-dilutive.
The
computations of Earnings per Share and Diluted Earnings per Share are as
follows:
Six Months Ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Earnings
per Share:
|
||||||||
Net
Income
|
$ | 6,659 | $ | 5,706 | ||||
Weighted
Average Shares Outstanding
|
11,092,447 | 11,055,111 | ||||||
Earnings
per Share
|
$ | 0.60 | $ | 0.52 | ||||
Diluted
Earnings per Share:
|
||||||||
Net
Income
|
$ | 6,659 | $ | 5,706 | ||||
Weighted
Average Shares Outstanding
|
11,092,447 | 11,055,111 | ||||||
Potentially
Dilutive Shares, Net
|
4,896 | — | ||||||
Diluted
Weighted Average Shares Outstanding
|
11,097,343 | 11,055,111 | ||||||
Diluted
Earnings per Share
|
$ | 0.60 | $ | 0.52 |
Stock
options for 99,275 and 169,433 shares of common stock were not considered in
computing diluted earnings per share for the six months ended June 30, 2010 and
2009, respectively, because they were anti-dilutive.
7
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
3 – Securities
The
amortized cost, unrealized gross gains and losses recognized in accumulated
other comprehensive income (loss), and fair value of Securities
Available-for-Sale at June 30, 2010 and December 31, 2009, were as
follows:
Gross
|
Gross
|
|||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Securities Available-for-Sale:
|
||||||||||||||||
June
30, 2010
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Obligations
of State and Political Subdivisions
|
21,204 | 1,121 | (23 | ) | 22,302 | |||||||||||
Mortgage-backed
Securities - Residential
|
263,151 | 10,755 | (137 | ) | 273,769 | |||||||||||
Equity
Securities
|
2,818 | — | (334 | ) | 2,484 | |||||||||||
Total
|
$ | 287,173 | $ | 11,876 | $ | (494 | ) | $ | 298,555 | |||||||
December
31, 2009
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 5,000 | $ | — | $ | (30 | ) | $ | 4,970 | |||||||
Obligations
of State and Political Subdivisions
|
21,511 | 931 | (64 | ) | 22,378 | |||||||||||
Mortgage-backed
Securities - Residential
|
214,591 | 7,065 | (404 | ) | 221,252 | |||||||||||
Equity
Securities
|
2,818 | 13 | (491 | ) | 2,340 | |||||||||||
Total
|
$ | 243,920 | $ | 8,009 | $ | (989 | ) | $ | 250,940 |
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 June 30, 2010 and December 31, 2009, were as
follows:
Gross
|
Gross
|
|||||||||||||||
Carrying
|
Unrecognized
|
Unrecognized
|
Fair
|
|||||||||||||
Amount
|
Gains
|
Losses
|
Value
|
|||||||||||||
Securities Held-to-Maturity:
|
||||||||||||||||
June
30, 2010
|
||||||||||||||||
Obligations
of State and Political Subdivisions
|
$ | 1,886 | $ | 13 | $ | — | $ | 1,899 | ||||||||
December
31, 2009
|
||||||||||||||||
Obligations
of State and Political Subdivisions
|
$ | 2,774 | $ | 27 | $ | — | $ | 2,801 |
8
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
3 – Securities (continued)
The
amortized cost and fair value of Securities at June 30, 2010 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
|
$ | 785 | $ | 790 | ||||
Due
after one year through five years
|
3,419 | 3,588 | ||||||
Due
after five years through ten years
|
4,678 | 4,762 | ||||||
Due
after ten years
|
12,322 | 13,162 | ||||||
Mortgage-backed
Securities - Residential
|
263,151 | 273,769 | ||||||
Equity
Securities
|
2,818 | 2,484 | ||||||
Totals
|
$ | 287,173 | $ | 298,555 |
Carrying
|
Fair
|
|||||||
Amount
|
Value
|
|||||||
Securities
Held-to-Maturity:
|
||||||||
Due
in one year or less
|
$ | 175 | $ | 175 | ||||
Due
after one year through five years
|
454 | 456 | ||||||
Due
after five years through ten years
|
937 | 948 | ||||||
Due
after ten years
|
320 | 320 | ||||||
Totals
|
$ | 1,886 | $ | 1,899 |
Below is
a summary of securities with unrealized losses as of June 30, 2010 and December
31, 2009, presented by length of time the securities have been in a continuous
unrealized loss position:
At June 30, 2010:
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
|||||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Obligations
of State and Political Subdivisions
|
1,273 | (10 | ) | 987 | (13 | ) | 2,260 | (23 | ) | |||||||||||||||
Mortgage-backed
Securities - Residential
|
17,182 | (136 | ) | 39 | (1 | ) | 17,221 | (137 | ) | |||||||||||||||
Equity
Securities
|
— | — | 1,689 | (334 | ) | 1,689 | (334 | ) | ||||||||||||||||
Total
|
$ | 18,455 | $ | (146 | ) | $ | 2,715 | $ | (348 | ) | $ | 21,170 | $ | (494 | ) |
At December 31, 2009:
|
Less than 12 Months
|
12 Months or More
|
Total
|
|||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Loss
|
Value
|
Loss
|
Value
|
Loss
|
|||||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 4,970 | $ | (30 | ) | $ | — | $ | — | $ | 4,970 | $ | (30 | ) | ||||||||||
Obligations
of State and Political Subdivisions
|
3,419 | (64 | ) | — | — | 3,419 | (64 | ) | ||||||||||||||||
Mortgage-backed
Securities - Residential
|
47,726 | (403 | ) | 40 | (1 | ) | 47,766 | (404 | ) | |||||||||||||||
Equity
Securities
|
1,533 | (491 | ) | — | — | 1,533 | (491 | ) | ||||||||||||||||
Total
|
$ | 57,648 | $ | (988 | ) | $ | 40 | $ | (1 | ) | $ | 57,688 | $ | (989 | ) |
9
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
3 – Securities (continued)
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. As a
result of valuations of the Company’s equity securities portfolio during the
second quarter of 2009, the Company recognized a $34 pre-tax charge for an
other-than-temporary decline in fair value of this portfolio. 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’s equity securities consist of non-controlling investments in other
banking organizations. When a decline in fair value below cost is deemed
to be other-than-temporary, the unrealized loss must be recognized as a charge
to earnings. At June 30, 2010 and December 31, 2009, certain equity
securities in the Company’s portfolio with fair values below amortized cost were
deemed to not be other-than-temporarily impaired due in large part to the
overall financial condition of the issuers which included continued
profitability throughout the first half of 2010 and during 2009 and that the
fair value of the securities has declined due to difficult macroeconomic
conditions for equity security valuations of banking organizations. In
addition, the length of time that fair value has been less than cost was
assessed and it is reasonable to expect that fair value can recover to a level
greater than cost in a reasonable period of time.
Proceeds
from the sales of Available-for-Sale Securities are summarized
below:
Three Months
|
Six Months
|
|||||||
Ended
|
Ended
|
|||||||
June 30, 2010
|
June 30, 2010
|
|||||||
Proceeds
from Sales and Calls
|
$ | — | $ | — | ||||
Gross
Gains on Sales and Calls
|
— | — | ||||||
Income
Taxes on Gross Gains
|
— | — |
Proceeds
from the sales of Available-for-Sale Securities are summarized
below:
Three Months
|
Six Months
|
|||||||
Ended
|
Ended
|
|||||||
June 30, 2009
|
June 30, 2009
|
|||||||
Proceeds
from Sales and Calls
|
$ | — | $ | 379 | ||||
Gross
Gains on Sales and Calls
|
— | — | ||||||
Income
Taxes on Gross Gains
|
— | — |
10
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
4 – Loans
Total
loans, as presented on the balance sheet, are comprised of the following
classifications:
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Commercial
and Industrial Loans
|
$ | 226,876 | $ | 188,962 | ||||
Commercial
Real Estate Loans
|
340,229 | 334,255 | ||||||
Agricultural
Loans
|
150,462 | 156,845 | ||||||
Consumer
Loans
|
115,553 | 114,736 | ||||||
Residential
Mortgage Loans
|
81,547 | 84,677 | ||||||
Total
Loans
|
$ | 914,667 | $ | 879,475 | ||||
Less:
Unearned Income
|
(1,729 | ) | (1,653 | ) | ||||
Allowance
for Loan Losses
|
(10,813 | ) | (11,016 | ) | ||||
Loans,
Net
|
$ | 902,125 | $ | 866,806 |
Information
Regarding Impaired Loans:
Impaired
Loans with No Allowance for Loan Losses Allocated
|
$ | 1,469 | $ | 1,213 | ||||
Impaired
Loans with Allowance for Loan Losses Allocated
|
5,902 | 6,932 | ||||||
Amount
of Allowance Allocated to Impaired Loans
|
2,004 | 3,024 |
Note
5 – Allowance for Loan Losses
A summary
of the activity in the Allowance for Loan Losses follows:
June 30,
|
June 30,
|
|||||||
2010
|
2009
|
|||||||
Balance
as of January 1
|
$ | 11,016 | $ | 9,522 | ||||
Provision
for Loan Losses
|
2,500 | 1,750 | ||||||
Recoveries
of Prior Loan Losses
|
439 | 600 | ||||||
Loan
Losses Charged to the Allowance
|
(3,142 | ) | (1,577 | ) | ||||
Balance
as of June 30
|
$ | 10,813 | $ | 10,295 |
Note
6 – 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 banking subsidiary’s local
markets.
The core
banking segment is comprised by the Company’s banking subsidiary, German
American Bancorp, which operates through 30 retail banking offices. 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 consists of German American Insurance, Inc.,
which provides a full line of personal and corporate insurance products from
seven offices; and German American Reinsurance Company, Ltd., which reinsures
credit insurance products sold by the Company’s subsidiary bank.
Commissions derived from the sale of insurance products are the primary source
of revenue for the insurance segment.
11
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
6 – Segment Information (continued)
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.
Three
Months Ended
June
30, 2010
Trust
and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 12,356 | $ | 2 | $ | 9 | $ | (452 | ) | $ | 11,915 | |||||||||
Net
Gains on Sales of Loans
|
499 | — | — | — | 499 | |||||||||||||||
Net
Gain (Loss) on Securities
|
— | — | — | — | — | |||||||||||||||
Trust
and Investment Product Fees
|
1 | 395 | — | (1 | ) | 395 | ||||||||||||||
Insurance
Revenues
|
17 | 1 | 1,072 | (7 | ) | 1,083 | ||||||||||||||
Noncash
Item:
|
||||||||||||||||||||
Provision
for Loan Losses
|
1,000 | — | — | — | 1,000 | |||||||||||||||
Depreciation
and Amortization
|
615 | 7 | 227 | — | 849 | |||||||||||||||
Income
Tax Expense
|
1,883 | (53 | ) | (105 | ) | (329 | ) | 1,396 | ||||||||||||
Segment
Profit (Loss)
|
3,874 | (80 | ) | (171 | ) | (215 | ) | 3,408 | ||||||||||||
Segment
Assets
|
1,334,688 | 2,284 | 8,188 | (4,232 | ) | 1,340,928 |
Three
Months Ended
June
30, 2009
Trust and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 11,452 | $ | 4 | $ | 15 | $ | (354 | ) | $ | 11,117 | |||||||||
Net
Gains on Sales of Loans
|
461 | — | — | — | 461 | |||||||||||||||
Net
Gain (Loss) on Securities
|
— | — | — | (34 | ) | (34 | ) | |||||||||||||
Trust
and Investment Product Fees
|
1 | 457 | — | (1 | ) | 457 | ||||||||||||||
Insurance
Revenues
|
34 | 2 | 1,267 | (13 | ) | 1,290 | ||||||||||||||
Noncash
Item:
|
||||||||||||||||||||
Provision
for Loan Losses
|
1,000 | — | — | — | 1,000 | |||||||||||||||
Depreciation
and Amortization
|
666 | 7 | 226 | — | 899 | |||||||||||||||
Income
Tax Expense
|
1,211 | 9 | 24 | (302 | ) | 942 | ||||||||||||||
Segment
Profit (Loss)
|
2,874 | 14 | 40 | (164 | ) | 2,764 | ||||||||||||||
Segment
Assets
|
1,218,143 | 2,054 | 8,489 | (4,194 | ) | 1,224,492 |
12
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
6 – Segment Information (continued)
Six
Months Ended
June
30, 2010
Trust and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 24,442 | $ | 4 | $ | 17 | $ | (899 | ) | $ | 23,564 | |||||||||
Net
Gains on Sales of Loans
|
817 | — | — | — | 817 | |||||||||||||||
Net
Gain (Loss) on Securities
|
— | — | — | — | — | |||||||||||||||
Trust
and Investment Product Fees
|
2 | 786 | — | (2 | ) | 786 | ||||||||||||||
Insurance
Revenues
|
30 | 7 | 2,746 | (14 | ) | 2,769 | ||||||||||||||
Noncash
Item:
|
||||||||||||||||||||
Provision
for Loan Losses
|
2,500 | — | — | — | 2,500 | |||||||||||||||
Depreciation
and Amortization
|
1,335 | 13 | 464 | — | 1,812 | |||||||||||||||
Income
Tax Expense
|
3,321 | (104 | ) | 8 | (618 | ) | 2,607 | |||||||||||||
Segment
Profit (Loss)
|
7,241 | (157 | ) | (10 | ) | (415 | ) | 6,659 | ||||||||||||
Segment
Assets
|
1,334,688 | 2,284 | 8,188 | (4,232 | ) | 1,340,928 |
Six
Months Ended
June
30, 2009
Trust and
|
||||||||||||||||||||
Investment
|
||||||||||||||||||||
Core
|
Advisory
|
Consolidated
|
||||||||||||||||||
Banking
|
Services
|
Insurance
|
Other
|
Totals
|
||||||||||||||||
Net
Interest Income
|
$ | 22,199 | $ | 5 | $ | 28 | $ | (474 | ) | $ | 21,758 | |||||||||
Net
Gains on Sales of Loans
|
1,026 | — | — | — | 1,026 | |||||||||||||||
Net
Gain (Loss) on Securities
|
— | — | — | (34 | ) | (34 | ) | |||||||||||||
Trust
and Investment Product Fees
|
2 | 847 | — | (2 | ) | 847 | ||||||||||||||
Insurance
Revenues
|
50 | 4 | 2,750 | (27 | ) | 2,777 | ||||||||||||||
Noncash
Item:
|
||||||||||||||||||||
Provision
for Loan Losses
|
1,750 | — | — | — | 1,750 | |||||||||||||||
Depreciation
and Amortization
|
1,331 | 14 | 452 | — | 1,797 | |||||||||||||||
Income
Tax Expense
|
2,553 | (44 | ) | 47 | (502 | ) | 2,054 | |||||||||||||
Segment
Profit (Loss)
|
5,824 | (66 | ) | 76 | (128 | ) | 5,706 | |||||||||||||
Segment
Assets
|
1,218,143 | 2,054 | 8,489 | (4,194 | ) | 1,224,492 |
Note
7 – 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 June 30, 2010, the Company had purchased 334,965 (as
adjusted for subsequent stock dividends) shares under the program. No
shares were purchased under the plan during the six months ended June 30,
2010.
13
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
8 – Equity Plans and Equity Based Compensation
The
Company maintains equity incentive plans under which stock options, restricted
stock, and other equity incentive awards can be granted. At June 30,
2010, the Company has reserved 657,956 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
six months ended June 30, 2010 and 2009, the Company granted no options, and
accordingly, recorded no stock option expense related to option grants during
the three or six months ended June 30, 2010 and 2009. In addition,
there was no unrecognized option expense as all outstanding options were fully
vested prior to June 30, 2010 and 2009.
During
the quarter ended June 30, 2010 and 2009, the Company granted no restricted
stock awards. During the six months ended June 30, 2010 and 2009, the
Company granted awards of 24,178 and 42,775 shares of restricted stock,
respectively. The expense recorded for the restricted stock grants
totaled $100 (or $60, net of an income tax benefit of $40) and $200 (or $121,
net of an income tax benefit of $79) during the three and six months ended June
30, 2010. The expense recorded for the restricted stock grants
totaled $117 (or $71, net of an income tax benefit of $46) and $235 (or $142,
net of an income tax benefit of $93) during the three and six months ended June
30, 2009. Unrecognized expense associated with the restricted stock
grants totaled $200 and $235 as of June 30, 2010 and 2009,
respectively.
The
Company maintains an Employee Stock Purchase Plan (a 1999 plan that expired at
the end of the most recent plan year in August 2009; a 2009 plan that is
substantively the same in all material respects has succeeded the 1999 plan for
the annual offering period that commenced in August 2009) whereby eligible
employees have the option to purchase the Company’s common stock at a
discount. The plan year for the Employee Stock Purchase Plan runs
from August 17 through August 16 of the subsequent year.
The
purchase price of the shares under this Plan is 95% of the fair market value of
the Company’s common stock as of the last day of the plan year. The
1999 plan provided for the purchase of up to 542,420 shares of common stock, and
the 2009 plan provides for the purchase of up to 500,000 shares of common
stock. The Company may obtain shares for sale under both the 1999 and
2009 plans 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 was not considered
compensatory and no expense was recorded during the 2008/2009 and 2009/2010 plan
years.
Note
9 – Employee Benefit Plans
The
Company acquired through previous bank mergers a noncontributory defined benefit
pension plan with benefits based on years of service and compensation prior to
retirement. The benefits under the plan were suspended in
1998. The following tables represent the components of net periodic
benefit cost for the periods presented:
Three
Months Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
Service
Cost
|
$ | — | $ | — | ||||
Interest
Cost
|
8 | 9 | ||||||
Expected
Return on Assets
|
— | (2 | ) | |||||
Amortization
of Transition Amount
|
— | — | ||||||
Amortization
of Prior Service Cost
|
(1 | ) | — | |||||
Recognition
of Net (Gain) Loss
|
7 | 4 | ||||||
Net
Periodic Benefit Cost
|
$ | 14 | $ | 11 | ||||
Loss
on Settlements and Curtailments
|
None
|
None
|
14
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
9 – Employee Benefit Plans (continued)
Six
Months Ended
|
||||||||
June
30,
|
||||||||
2010
|
2009
|
|||||||
Service
Cost
|
$ | — | $ | — | ||||
Interest
Cost
|
17 | 18 | ||||||
Expected
Return on Assets
|
(1 | ) | (4 | ) | ||||
Amortization
of Transition Amount
|
— | — | ||||||
Amortization
of Prior Service Cost
|
(2 | ) | (1 | ) | ||||
Recognition
of Net (Gain) Loss
|
13 | 8 | ||||||
Net
Periodic Benefit Cost
|
$ | 27 | $ | 21 | ||||
Loss
on Settlements and Curtailments
|
None
|
None
|
The
Company previously disclosed in its financial statements for the year ended
December 31, 2009, that it expected to contribute $75 to the pension plan during
the fiscal year ending December 31, 2010. As of June 30, 2010, the
Company has contributed $39 to the pension plan.
Note
10 – 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).
Impaired
Loans: Values for 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 to adjust for differences between the comparable sale and
income data available. Such adjustments are typically significant and
result in a Level 3 classification of the inputs for determining fair
value.
15
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
10 – Fair Value (continued)
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 a similar asset, adjusted for specific
attributes of that loan (Level 2).
Assets and Liabilities
Measured on a Recurring Basis
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
Fair Value Measurements at June 30, 2010 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Obligations
of State and
|
||||||||||||||||
Political
Subdivisions
|
22,302 | — | 22,302 | — | ||||||||||||
Mortgage-backed
Securities-Residential
|
273,769 | — | 273,769 | — | ||||||||||||
Equity
Securities
|
2,484 | 2,131 | — | 353 | ||||||||||||
Loans
Held-for-Sale
|
10,768 | — | 10,768 | — |
Fair Value Measurements at December 31, 2009 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
U.S.
Treasury and Agency Securities
|
$ | 4,970 | $ | — | $ | 4,970 | $ | — | ||||||||
Obligations
of State and
|
||||||||||||||||
Political
Subdivisions
|
22,378 | — | 22,378 | — | ||||||||||||
Mortgage-backed
Securities-Residential
|
221,252 | — | 221,252 | — | ||||||||||||
Equity
Securities
|
2,340 | 1,987 | — | 353 | ||||||||||||
Loans
Held-for-Sale
|
5,706 | — | 5,706 | — |
The table
below presents a reconciliation and income statement classification of gains and
losses for equity securities that do not have readily determinable fair values
and are evaluated for impairment on a periodic basis. These assets were measured
at fair value using significant unobservable inputs (Level 3) for the period
ended June 30, 2010:
Fair Value Measurements
|
||||
Using Significant
|
||||
Unobservable Inputs
|
||||
(Level 3)
|
||||
Available-for-Sale
|
||||
Securities
|
||||
Three
Months Ended June 30, 2010:
|
||||
Balance
of Recurring Level 3 Assets at April 1, 2010
|
$ | 353 | ||
Sale
of Securities
|
— | |||
Other-than-temporary
Impairment Charges Recognized through Net Income
|
— | |||
Ending
Balance, June 30, 2010
|
$ | 353 |
16
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
10 – Fair Value (continued)
Fair Value Measurements
|
||||
Using Significant
|
||||
Unobservable Inputs
|
||||
(Level 3)
|
||||
Available-for-Sale
|
||||
Securities
|
||||
Six
Months Ended June 30, 2010:
|
||||
Balance
of Recurring Level 3 Assets at January 1, 2010
|
$ | 353 | ||
Sale
of Securities
|
— | |||
Other-than-temporary
Impairment Charges Recognized through Net Income
|
— | |||
Ending
Balance, June 30, 2010
|
$ | 353 |
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 June 30, 2010 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Impaired
Loans with Specific
|
||||||||||||||||
Allocations
|
$ | 3,898 | $ | — | $ | — | $ | 3,898 | ||||||||
Other
Real Estate
|
400 | — | — | 400 |
Fair Value Measurements at December 31, 2009 Using
|
||||||||||||||||
Quoted Prices in
|
||||||||||||||||
Active Markets for
|
Significant Other
|
Significant
|
||||||||||||||
Identical Assets
|
Observable Inputs
|
Unobservable Inputs
|
||||||||||||||
Carrying Value
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
|||||||||||||
Assets:
|
||||||||||||||||
Impaired
Loans with Specific
|
||||||||||||||||
Allocations
|
$ | 3,908 | $ | — | $ | — | $ | 3,908 | ||||||||
Other
Real Estate
|
507 | — | — | 507 |
Impaired
loans, which are measured for impairment using the fair value of the collateral
for collateral dependent loans, had a carrying amount of $5,902 with a valuation
allowance of $2,004, resulting in an additional provision for loan losses of
$234 and $850 for the three and six months ended June 30, 2010,
respectively. Impaired loans, which are measured for impairment using
the fair value of the collateral for collateral dependent loans, had a carrying
amount of $6,932 with a valuation allowance of $3,024, resulting in an
additional provision for loan losses of $2,632 for the year ended December 31,
2009.
Other
Real Estate which is measured at the lower of carrying or fair value less costs
to sell, had a carrying amount of $400 at June 30, 2010. A charge to
earnings through Other Operating Income of $100 was included in the three and
six months ended June 30, 2010. Other Real Estate which is measured
at the lower of carrying or fair value less costs to sell, had a carrying amount
of $507 at December 31, 2009, resulting in a write-down of $228 for the year
ending December 31, 2009.
17
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
10 – Fair Value (continued)
The
estimated fair values of the Company’s financial instruments not previously
presented are provided in the table below. 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.
June 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and Short-term Investments
|
$ | 36,509 | $ | 36,509 | $ | 28,054 | $ | 28,054 | ||||||||
Securities
Held-to-Maturity
|
1,886 | 1,899 | 2,774 | 2,801 | ||||||||||||
FHLB
Stock and Other Restricted Stock
|
10,621 | N/A | 10,621 | N/A | ||||||||||||
Loans,
Net
|
898,227 | 894,350 | 862,898 | 870,463 | ||||||||||||
Accrued
Interest Receivable
|
6,298 | 6,298 | 6,605 | 6,605 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Demand,
Savings, and Money Market Deposits
|
(689,360 | ) | (689,360 | ) | (639,967 | ) | (639,967 | ) | ||||||||
Other
Time Deposits
|
(360,496 | ) | (360,123 | ) | (329,676 | ) | (330,628 | ) | ||||||||
Short-term
Borrowings
|
(45,336 | ) | (45,336 | ) | (34,801 | ) | (34,801 | ) | ||||||||
Long-term
Debt
|
(112,525 | ) | (115,100 | ) | (113,320 | ) | (114,742 | ) | ||||||||
Accrued
Interest Payable
|
(2,395 | ) | (2,395 | ) | (2,292 | ) | (2,292 | ) | ||||||||
Unrecognized
Financial Instruments:
|
||||||||||||||||
Commitments
to Extend Credit
|
— | — | — | — | ||||||||||||
Standby
Letters of Credit
|
— | — | — | — | ||||||||||||
Commitments
to Sell Loans
|
— | — | — | — |
The fair
value for cash and short-term investments and accrued interest receivable is
estimated to be equal to their carrying value. The fair values of
securities held to maturity are based on quoted market prices or dealer quotes,
if available, or by using quoted market prices for similar
instruments. The fair value of loans are estimated by discounting
future cash flows using the current rates at which similar loans would be made
for the average remaining maturities. It was not practicable to
determine the fair value of FHLB stock and other restricted stock due to
restrictions placed on its transferability. The fair value of demand
deposits, savings accounts, money market deposits, short-term borrowings and
accrued interest payable is the amount payable on demand at the reporting
date. The fair value of fixed-maturity time deposits and long-term
borrowings are estimated using the rates currently offered on these instruments
for similar remaining maturities. 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 significant. 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 June 30, 2010 and December 31, 2009, none of the
Company’s commitments to sell loans were mandatory, and there is no cost or
benefit to settle these commitments.
Note
11 – Mergers and Acquisition Activity
German
American Bancorp, the banking subsidiary of the Company, completed the
acquisition of two branch offices from Farmers State Bank of Alto Pass, Ill. on
May 7, 2010. One of the branches is located in Evansville
(Vanderburgh County, Indiana) and the other in adjacent Newburgh (Warrick
County, Indiana). Pursuant to the terms of the purchase agreement,
Farmers State Bank of Alto Pass, Ill. paid the Company approximately
$368. In accordance with ASC 805, the Company has expensed
approximately $217 of direct acquisition costs and recorded goodwill of $181 and
$903 of intangible assets. The intangible assets are related to core
deposits and are being amortized on an accelerated basis over 10
years. For tax purposes, goodwill of $181 is deductible on a straight
line basis over 15 years. On the date of acquisition, the Company
assumed net deposit liabilities valued at approximately $50.2 million and other
liabilities of $66, acquired a net portfolio of loans valued at $42.9 million,
premises and equipment valued at $5.2 million and other assets of
$640.
18
GERMAN
AMERICAN BANCORP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2010
(unaudited,
dollars in thousands except share and per share data)
Note
11 – Mergers and Acquisition Activity (continued)
This
acquisition was consistent with the Company’s strategy to build a regional
presence in Southern Indiana. The acquisition offers the Company the
opportunity to increase profitability by introducing existing products and
services to the acquired customer base as well as add new customers in the
expanded region.
Note
12 – New Accounting Pronouncements
On June 12, 2009, the FASB issued new
guidance impacting FASB ASC 860, Transfers and Servicing. The new guidance amends ASC 860, and will require more
information about transfers of financial assets, including securitization
transactions, and where entities have continuing exposure to the risks related
to transferred financial assets. It eliminates the concept of a “qualifying
special-purpose entity,” changes the requirements for derecognizing financial
assets, and requires additional disclosures. The new standard was effective
January 1, 2010. The adoption of this standard did not have a
material effect on the Company’s consolidated results of operations or financial
position.
On June
12, 2009, the FASB issued new guidance impacting FASB ASC 810-10, Consolidation
(Statement No. 167 amends FIN 46(R)). The new guidance replaces the
quantitative-based risks and rewards calculation for determining which
enterprise, if any, has a controlling financial interest in a variable interest
entity with a qualitative approach focused on identifying which enterprise has
the power to direct the activities of a variable interest entity (VIE) that most
significantly impact the entity’s economic performance and (1) the obligation to
absorb losses of the entity or (2) the right to receive benefits from the
entity. Unlike previous guidance, this Statement requires ongoing
reconsideration of whether (1) an entity is a VIE and (2) an enterprise is the
primary beneficiary of a VIE. It is expected that the amendments will
result in more entities consolidating VIEs that previously were not consolidated
This new guidance will also require additional disclosures about the
Company’s involvement in variable interest entities. This new guidance
was effective January 1, 2010. The adoption of this standard did not
have a material effect on the Company’s consolidated results of operations or
financial position.
19
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 30 retail banking offices in the 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 June 30, 2010 and December 31, 2009 and the consolidated results
of operations for the three and six months ended June 30, 2010 and
2009. 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, 2009 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, 2009 Annual
Report on Form 10-K.
During
the second quarter and first half of 2010, the Company achieved a record level
earnings. The Company’s second quarter net income totaled $3,408,000,
or $0.31 per share, representing the highest level of quarterly earnings in the
Company’s history. This record earnings performance was an increase
of approximately 23%, from the $2,764,000, or $0.25 per share, recorded during
the same quarter last year. On a year-to-date basis, 2010 earnings
were also a record, increasing to $6,659,000, or $0.60 per share, as compared to
$5,706,000, or $0.52 per share for the first six months of 2009. The
improvement in year-to-date earnings represented an increase of approximately
17%.
In the
second quarter of 2010, the Company completed the acquisition of two branches
(including their related loan assets and deposit liabilities) of another bank in
the Evansville, Indiana banking market, which is a new market for the
Company. The record quarterly performance was reflective of both an
improvement in the level of the Company’s core operating results, and, to a
lesser extent, the inclusion of the two branch bank locations acquired effective
May 7, 2010.
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.
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.
20
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 special
mention, 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 or special mention 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 three-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 June 30, 2010, gross unrealized losses on
the securities available-for-sale portfolio totaled approximately $494,000 and
gross unrealized gains totaled approximately $11,876,000. As of June
30, 2010, held-to-maturity securities had a gross unrecognized gain of
approximately $13,000.
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.
21
RESULTS
OF OPERATIONS
Net
Income:
Net
income for the quarter ended June 30, 2010 totaled $3,408,000, an increase of
$644,000 or 23% from the quarter ended June 30, 2009 net income of
$2,764,000. Net income for the six months ended June 30, 2010 totaled
$6,659,000, an increase of $953,000 or 17% from the six months ended June 30,
2009 net income of $5,706,000.
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.
The
following table summarizes net interest income (on a tax-equivalent
basis). For tax-equivalent adjustments, an effective tax rate of 34%
was used for all periods presented (1).
Average Balance Sheet
|
||||||||||||||||||||||||
(Tax-equivalent basis / dollars in thousands)
|
||||||||||||||||||||||||
Three Months Ended
|
Three Months Ended
|
|||||||||||||||||||||||
June 30, 2010
|
June 30, 2009
|
|||||||||||||||||||||||
Principal
|
Income /
|
Yield /
|
Principal
|
Income /
|
Yield /
|
|||||||||||||||||||
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Federal
Funds Sold and Other
|
||||||||||||||||||||||||
Short-term
Investments
|
$ | 52,008 | $ | 27 | 0.21 | % | $ | 30,495 | $ | 22 | 0.29 | % | ||||||||||||
Securities:
|
||||||||||||||||||||||||
Taxable
|
248,889 | 2,462 | 3.96 | % | 188,486 | 2,151 | 4.57 | % | ||||||||||||||||
Non-taxable
|
26,080 | 390 | 5.98 | % | 24,911 | 419 | 6.73 | % | ||||||||||||||||
Total Loans and
Leases (2)
|
901,856 | 13,264 | 5.90 | % | 882,554 | 13,528 | 6.15 | % | ||||||||||||||||
Total
Interest Earning Assets
|
1,228,833 | 16,143 | 5.27 | % | 1,126,446 | 16,120 | 5.73 | % | ||||||||||||||||
Other
Assets
|
97,246 | 91,270 | ||||||||||||||||||||||
Less:
Allowance for Loan Losses
|
(11,232 | ) | (10,303 | ) | ||||||||||||||||||||
Total
Assets
|
$ | 1,314,847 | $ | 1,207,413 | ||||||||||||||||||||
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||
Interest-bearing
Demand, Savings
|
||||||||||||||||||||||||
and
Money Market Deposits
|
$ | 512,680 | $ | 461 | 0.36 | % | $ | 458,394 | $ | 819 | 0.72 | % | ||||||||||||
Time
Deposits
|
353,577 | 2,225 | 2.52 | % | 337,352 | 2,516 | 2.99 | % | ||||||||||||||||
FHLB
Advances and Other Borrowings
|
154,884 | 1,340 | 3.47 | % | 139,959 | 1,471 | 4.22 | % | ||||||||||||||||
Total
Interest-bearing Liabilities
|
1,021,141 | 4,026 | 1.58 | % | 935,705 | 4,806 | 2.06 | % | ||||||||||||||||
Demand
Deposit Accounts
|
163,227 | 148,214 | ||||||||||||||||||||||
Other
Liabilities
|
12,678 | 14,375 | ||||||||||||||||||||||
Total
Liabilities
|
1,197,046 | 1,098,294 | ||||||||||||||||||||||
Shareholders’
Equity
|
117,801 | 109,119 | ||||||||||||||||||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 1,314,847 | $ | 1,207,413 | ||||||||||||||||||||
Cost
of Funds
|
1.32 | % | 1.71 | % | ||||||||||||||||||||
Net
Interest Income
|
$ | 12,117 | $ | 11,314 | ||||||||||||||||||||
Net
Interest Margin
|
3.95 | % | 4.02 | % |
(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 $798,000 or 7% (an increase of $803,000 or 7% on a
tax-equivalent basis) for the quarter ended June 30, 2010 compared with the same
quarter of 2009. The net interest margin represents tax-equivalent
net interest income expressed as a percentage of average earning assets. The tax
equivalent net interest margin for the second quarter of 2010 was 3.95% compared
to 4.02% for the second quarter of 2009. The yield on earning assets
totaled 5.27% during the quarter ended June 30, 2010 compared to 5.73% in the
same period of 2009 while the cost of funds (expressed as a percentage of
average earning assets) totaled 1.32% during the quarter ended June 30, 2010
compared to 1.71% in the same period of 2009.
22
Average
earning assets increased by approximately $102.4 million or 9% during the three
months ended June 30, 2010 compared with the same period of
2009. Average loans outstanding increased by $19.3 million or 2%
during the three months ended June 30, 2010 compared with the second quarter of
2009. The average securities portfolio increased approximately $61.6
million or 29% in the three months ended June 30, 2010 compared with the second
quarter of 2009. The key driver of the increased securities portfolio
and overall increased average earnings assets was a higher 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). During the second quarter of 2010, average
core deposits increased $87.9 million or 10%, compared to the second quarter of
2009.
The
increase in average loans and average core deposits was positively impacted by
the acquisition of the two Evansville area (Indiana) branches on May 7,
2010. On a quarterly average basis, loans related to acquired
branches totaled approximately $26.4 million during the second quarter of 2010
while average core deposits totaled approximately $26.2 million.
Average Balance Sheet
|
||||||||||||||||||||||||
(Tax-equivalent basis / dollars in thousands)
|
||||||||||||||||||||||||
Six Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||
June 30, 2010
|
June 30, 2009
|
|||||||||||||||||||||||
Principal
|
Income /
|
Yield /
|
Principal
|
Income /
|
Yield /
|
|||||||||||||||||||
Balance
|
Expense
|
Rate
|
Balance
|
Expense
|
Rate
|
|||||||||||||||||||
Assets
|
||||||||||||||||||||||||
Federal
Funds Sold and Other
|
||||||||||||||||||||||||
Short-term
Investments
|
$ | 38,706 | $ | 36 | 0.19 | % | $ | 26,390 | $ | 39 | 0.30 | % | ||||||||||||
Securities:
|
||||||||||||||||||||||||
Taxable
|
243,579 | 4,927 | 4.05 | % | 184,642 | 4,341 | 4.70 | % | ||||||||||||||||
Non-taxable
|
26,334 | 800 | 6.07 | % | 24,010 | 807 | 6.72 | % | ||||||||||||||||
Total Loans and
Leases (2)
|
889,810 | 26,170 | 5.93 | % | 885,217 | 26,978 | 6.14 | % | ||||||||||||||||
Total
Interest Earning Assets
|
1,198,429 | 31,933 | 5.36 | % | 1,120,259 | 32,165 | 5.78 | % | ||||||||||||||||
Other
Assets
|
96,884 | 91,742 | ||||||||||||||||||||||
Less:
Allowance for Loan Losses
|
(11,270 | ) | (10,069 | ) | ||||||||||||||||||||
Total
Assets
|
$ | 1,284,043 | $ | 1,201,932 | ||||||||||||||||||||
Liabilities
and Shareholders’ Equity
|
||||||||||||||||||||||||
Interest-bearing
Demand, Savings and Money Market Deposits
|
$ | 494,564 | $ | 887 | 0.36 | % | $ | 451,995 | $ | 1,684 | 0.75 | % | ||||||||||||
Time
Deposits
|
348,063 | 4,411 | 2.56 | % | 345,381 | 5,656 | 3.30 | % | ||||||||||||||||
FHLB
Advances and Other Borrowings
|
153,111 | 2,662 | 3.51 | % | 135,940 | 2,682 | 3.98 | % | ||||||||||||||||
Total
Interest-bearing Liabilities
|
995,738 | 7,960 | 1.61 | % | 933,316 | 10,022 | 2.17 | % | ||||||||||||||||
Demand
Deposit Accounts
|
158,748 | 147,266 | ||||||||||||||||||||||
Other
Liabilities
|
13,032 | 13,504 | ||||||||||||||||||||||
Total
Liabilities
|
1,167,518 | 1,094,086 | ||||||||||||||||||||||
Shareholders’
Equity
|
116,525 | 107,846 | ||||||||||||||||||||||
Total
Liabilities and Shareholders’ Equity
|
$ | 1,284,043 | $ | 1,201,932 | ||||||||||||||||||||
Cost
of Funds
|
1.34 | % | 1.81 | % | ||||||||||||||||||||
Net
Interest Income
|
$ | 23,973 | $ | 22,143 | ||||||||||||||||||||
Net
Interest Margin
|
4.02 | % | 3.97 | % |
(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 $1,806,000 or 8% (an increase of $1,830,000 or 8% on a
tax-equivalent basis) for the six months ended June 30, 2010 compared with the
same period of 2009. The tax equivalent net interest margin for the
six months ended June 30, 2010 was 4.02% compared to 3.97% for the first half of
2009. The yield on earning assets totaled 5.36% during the six months
ended June 30, 2010 compared to 5.78% in the same period of 2009 while the cost
of funds (expressed as a percentage of average earning assets) totaled 1.34%
during the six months ended June 30, 2010 compared to 1.81% in the same period
of 2009.
Average
earning assets increased by approximately $78.2 million or 7% during the six
months ended June 30, 2010 compared with the same period of
2009. Average loans outstanding increased by $4.6 million or 1%
during the six months ended June 30, 2010 compared with the same period of
2009. The average securities portfolio increased approximately $61.3
million or 29% in the six months ended June 30, 2010 compared with the first
half of 2009. As was the case in the second quarter comparisons, the
key driver of the increased securities portfolio and overall increased average
earnings assets was a higher level of average core deposits. During
the first half of 2010, average core deposits increased $65.9 million or 8%,
compared to the first half of 2009.
23
The
increase in average loans and average core deposits during the first half of
2010 compared with the first half of 2009 was positively impacted by the
acquisition of the two Evansville area (Indiana) branches on May 7,
2010. On a year-to-date average basis, loans related to acquired
branches totaled approximately $13.3 million during the first half of 2010 while
average core deposits totaled approximately $13.2 million.
The
expansion of the Company’s net interest income in both the three months and six
months ended June 30, 2010 compared with the same periods of 2009 has been
augmented by utilization of interest rate floors on adjustable rate commercial
and agricultural loans. As of June 30, 2010, the Company’s commercial
and agricultural loan portfolio totaled $717.6 million of which approximately
70% were adjustable rate loans. Of these adjustable rate loans,
approximately 85% contain interest rate floors which range predominantly from 4%
to 7%. At June 30, 2010, approximately $268 million of these loans
were at their contractual floor.
Also
contributing to the expansion of the Company’s net interest income in the first
half of 2010 compared with the first half of 2009 has been the relative
liability sensitive nature of the Company’s balance sheet. The
Company has been able to effectively lower interest rates on its
interest-bearing non-maturity deposits while continuing to expand its core
deposit base. In addition, a significant level of time deposits
matured during the past several quarters allowing the Company to lower its cost
of funds of these deposits in a time of historically low interest
rates.
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 loss totaled $1,000,000 during both the quarter ended June
30, 2010, and the quarter ended June 30, 2009. The provision for loan
loss totaled $2,500,000 during the six months ended June 30, 2010 compared with
$1,750,000 for the first half of 2009.
During
the second quarter of 2010, the annualized provision for loan loss represented
0.44% of average loans outstanding compared with 0.45% on an annualized basis of
average loans outstanding during the second quarter of 2009. Net
charge-offs totaled $900,000 or 0.40% on an annualized basis of average loans
outstanding during the three months ended June 30, 2010 compared with $749,000
or 0.34% on an annualized basis of average loans outstanding during the same
period of 2009. During the six months ended June 30, 2010, the
annualized provision for loan loss represented 0.56% of average loans
outstanding compared with 0.40% on an annualized basis of average loans
outstanding during the first half of 2009. Net charge-offs totaled
$2,703,000 or 0.61% on an annualized basis of average loans outstanding during
the six months ended June 30, 2010 compared with $977,000 or 0.22% on an
annualized basis of average loans outstanding during the same period of
2009. The elevated level of net charge-offs during the first half of
2010 was largely the result of the disposition of three commercial real estate
loan relationships during the first six months of 2010. The resulting
net charge-offs of these three relationships totaled approximately $2.5 million,
a significant portion of which had been allocated in prior periods.
The
provision for loan losses made during the quarter ended and six months ended
June 30, 2010 was made at a level deemed necessary by management to absorb
estimated, probable incurred losses in the loan portfolio. A detailed
evaluation of the adequacy of the allowance for loan losses is completed
quarterly by management, the results of which are used to determine provision
for loan losses. Management estimates the allowance balance
required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors.
24
Non-interest
Income:
During
the quarter ended June 30, 2010, non-interest income declined approximately 1%
from the second quarter of 2009.
Change from
|
||||||||||||||||
Non-interest
Income
|
Three Months
|
Prior Period
|
||||||||||||||
($
in thousands)
|
Ended June
30,
|
Amount
|
Percent
|
|||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Trust
and Investment Product Fees
|
$ | 395 | $ | 457 | $ | (62 | ) | -14 | % | |||||||
Service
Charges on Deposit Accounts
|
1,075 | 1,080 | (5 | ) | — | % | ||||||||||
Insurance
Revenues
|
1,083 | 1,290 | (207 | ) | -16 | % | ||||||||||
Company
Owned Life Insurance
|
186 | 200 | (14 | ) | -7 | % | ||||||||||
Other
Operating Income
|
553 | 368 | 185 | 50 | % | |||||||||||
Subtotal
|
3,292 | 3,395 | (103 | ) | -3 | % | ||||||||||
Net
Gains on Sales of Loans
|
499 | 461 | 38 | 8 | % | |||||||||||
Net
Gain (Loss) on Securities
|
— | (34 | ) | 34 | 100 | % | ||||||||||
Total
Non-interest Income
|
$ | 3,791 | $ | 3,822 | $ | (31 | ) | -1 | % |
Trust and
investment product fees declined by 14% during the second quarter of 2010
compared with the second quarter of 2009 due primarily to lower retail brokerage
revenues. Insurance revenues decreased 16% during the quarter ended
June 30, 2010, compared with 2009 due in part to an administrative change in the
accounting for direct bill customers during the second quarter of 2010 to better
reconcile with the Company’s agency management system. Other operating income
increased $185,000 or 50% during the second quarter of 2010 compared with the
same period of 2009 due primarily to a higher level of write-downs on other real
estate owned properties in the second quarter of 2009 compared with the same
period of 2010.
During
six months ended June 30, 2010, non-interest income increased approximately 4%
over the first quarter of 2009.
Change from
|
||||||||||||||||
Non-interest Income
|
Six Months
|
Prior Period
|
||||||||||||||
($ in thousands)
|
Ended June 30,
|
Amount
|
Percent
|
|||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Trust
and Investment Product Fees
|
$ | 786 | $ | 847 | $ | (61 | ) | -7 | % | |||||||
Service
Charges on Deposit Accounts
|
2,021 | 2,140 | (119 | ) | -6 | % | ||||||||||
Insurance
Revenues
|
2,769 | 2,777 | (8 | ) | — | % | ||||||||||
Company
Owned Life Insurance
|
388 | 438 | (50 | ) | -11 | % | ||||||||||
Other
Operating Income
|
1,589 | 872 | 717 | 82 | % | |||||||||||
Subtotal
|
7,553 | 7,074 | 479 | 7 | % | |||||||||||
Net
Gains on Sales of Loans
|
817 | 1,026 | (209 | ) | -20 | % | ||||||||||
Net
Gain (Loss) on Securities
|
— | (34 | ) | 34 | 100 | % | ||||||||||
Total
Non-interest Income
|
$ | 8,370 | $ | 8,066 | $ | 304 | 4 | % |
Deposit
service charges and fees declined by 6% during the first half of 2010 compared
with the first half of 2009 due in large part to less customer utilization of
the Company’s overdraft protection program. Other operating income
increased $717,000 or 82% during the six months ended June 30, 2010 compared
with the same period of 2009. The increase was attributable to the
gain on sale of a commercial other real estate owned property and to a lesser
extent the sale of a former operations facility for the Company during the first
quarter of 2010 combined with write-downs on other real estate owned
properties during the second quarter of 2009.
During
the first half of 2010, the net gain on sale of residential loans decreased 20%
from the gain recognized in the first half of 2009 driven largely by a lower
level of loans sold into the secondary market during 2010 as compared to
2009. Loans sold during the six months ended June 30, 2010 totaled
$35.9 million compared to $71.0 million during the same period of
2009.
25
Non-interest
Expense:
During
the quarter ended June 30, 2010, non-interest expense declined approximately 3%
compared with the quarter ended June 30, 2009.
Change from
|
||||||||||||||||
Non-interest Expense
|
Three Months
|
Prior Period
|
||||||||||||||
($ in thousands)
|
Ended June 30,
|
Amount
|
Percent
|
|||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Salaries
and Employee Benefits
|
$ | 5,288 | $ | 5,515 | $ | (227 | ) | -4 | % | |||||||
Occupancy,
Furniture and Equipment Expense
|
1,435 | 1,470 | (35 | ) | -2 | % | ||||||||||
FDIC
Premiums
|
336 | 885 | (549 | ) | -62 | % | ||||||||||
Data
Processing Fees
|
365 | 344 | 21 | 6 | % | |||||||||||
Professional
Fees
|
524 | 405 | 119 | 29 | % | |||||||||||
Advertising
and Promotion
|
273 | 199 | 74 | 37 | % | |||||||||||
Intangible
Amortization
|
247 | 221 | 26 | 12 | % | |||||||||||
Other
Operating Expenses
|
1,434 | 1,194 | 240 | 20 | % | |||||||||||
Total
Non-interest Expense
|
$ | 9,902 | $ | 10,233 | $ | (331 | ) | -3 | % |
During
the six months ended June 30, 2010, non-interest expense decreased approximately
1% compared with the same period of 2009.
Change from
|
||||||||||||||||
Non-interest Expense
|
Six Months
|
Prior Period
|
||||||||||||||
($ in thousands)
|
Ended June 30,
|
Amount
|
Percent
|
|||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Salaries
and Employee Benefits
|
$ | 10,837 | $ | 11,129 | $ | (292 | ) | -3 | % | |||||||
Occupancy,
Furniture and Equipment Expense
|
2,974 | 2,999 | (25 | ) | -1 | % | ||||||||||
FDIC
Premiums
|
688 | 1,220 | (532 | ) | -44 | % | ||||||||||
Data
Processing Fees
|
724 | 701 | 23 | 3 | % | |||||||||||
Professional
Fees
|
1,045 | 1,012 | 33 | 3 | % | |||||||||||
Advertising
and Promotion
|
542 | 487 | 55 | 11 | % | |||||||||||
Intangible
Amortization
|
465 | 442 | 23 | 5 | % | |||||||||||
Other
Operating Expenses
|
2,893 | 2,324 | 569 | 24 | % | |||||||||||
Total
Non-interest Expense
|
$ | 20,168 | $ | 20,314 | $ | (146 | ) | -1 | % |
Salaries
and benefits expense declined approximately 4% during quarter ended June 30,
2010 and 3% during the six months ended June 30, 2010 compared with the same
periods of 2009. The decreases were primarily the result of lower
costs associated with the Company’s partially self-insured health insurance
plan.
The
Company’s FDIC deposit insurance assessments decreased $549,000, or 62%, during
the second quarter of 2010 and $532,000 or 44% during the six months ended June
30, 2010 compared with the same periods of 2009. These decreases were
due to an industry wide special assessment in the second quarter of 2009 of
approximately $550,000 which represented 5 basis points of the Company’s
subsidiary bank’s total assets less Tier 1 Capital.
Professional
fees increased 29% during the quarter ended June 30, 2010 compared with the same
quarter of 2009 primarily as a result of professional fees associated with the
acquisition of two branch offices during 2010.
Other
operating expenses increased by 20% during the quarter ended June 30, 2010
compared with 2009. The increase was largely attributable to costs
associated with the Company’s common identity initiative and amortization
expense related to a new markets tax credit project in which the Company
invested in the fourth quarter of 2009. Other operating expenses
increased by 24% during the six months ended June 30, 2010 compared with the
first half of 2009. The increase was largely attributable to costs
related to the Company’s common identity initiative, amortization expense
related to the new markets tax credit project, and to an increased level of loan
collection costs.
26
Income
Taxes:
The
Company’s effective income tax rate approximated 29.1% and 25.4% during the
three months ended June 30, 2010 and 2009. The Company’s effective
income tax rate approximated 28.1% and 26.5% during the six months ended June
30, 2010 and 2009. The effective tax rate in both 2010 and 2009 was
lower than the blended statutory rate of 39.6% 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 affordable
housing projects and a new markets tax credit project, and income generated by
subsidiaries domiciled in a state with no state or local income
tax.
FINANCIAL
CONDITION
Total
assets at June 30, 2010 increased $98.0 million to $1.341 billion compared with
$1.243 billion in total assets at December 31, 2009. Cash and cash
equivalents increased $8.4 million to $36.5 million at June 30, 2010 compared
with $28.1 million at year-end 2009. Securities available-for-sale
increased $47.7 million to $298.6 million at June 30, 2010 compared with $250.9
million at year-end 2009. The increase in cash and cash equivalents
and securities available-for-sale was primarily attributable to growth in the
Company’s deposit portfolio.
Premises,
furniture and equipment (net), at June 30, 2010 increased $4.0 million to $26.2
million compared with $22.2 million of such assets at December 31,
2009. This increase was primarily attributable to the purchase of
premises, furniture and equipment, with a fair value of approximately $5.2
million, as part of the acquisition of branches in the Evansville, Indiana
banking market during May 2010.
End-of-period
loans outstanding increased approximately 8% on an annualized basis during the
first half of 2010 compared with the year-ended December 31,
2009. The overall increase in the level of loans was primarily the
result of the acquisition of two branch offices previously discussed in this
report. The fair value of the loans acquired as a part of the branch
acquisition totaled approximately $42.9 million at the time of closing and were
predominantly commercial and industrial loans and commercial real estate
loans.
End of Period Loan Balances:
|
Current
|
Annualized
|
||||||||||||||
($ in thousands)
|
June 30,
|
December 31,
|
Period
|
Percent
|
||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Commercial
and Industrial Loans
|
$ | 226,876 | $ | 188,962 | $ | 37,914 | 40 | % | ||||||||
Commercial
Real Estate Loans
|
340,229 | 334,255 | 5,974 | 4 | % | |||||||||||
Agricultural
Loans
|
150,462 | 156,845 | (6,383 | ) | -8 | % | ||||||||||
Consumer
Loans
|
115,553 | 114,736 | 817 | 1 | % | |||||||||||
Residential
Mortgage Loans
|
81,547 | 84,677 | (3,130 | ) | -7 | % | ||||||||||
Total
Loans
|
$ | 914,667 | $ | 879,475 | $ | 35,192 | 8 | % |
The
Company’s allowance for loan losses totaled $10.8 million at June 30,
2010. This level of allowance represents a decline of $203,000 or 2%
from year-end 2009. The decline was attributable to the disposition
of three commercial real estate loan relationships during the first half of
2010. The resulting net charge-off on these three relationships
totaled approximately $2.5 million which had been nearly fully allocated in
prior periods. The allowance for loan losses represented 1.18% of
period end loans at June 30, 2010 compared with 1.25% at year-end
2009. The allowance for loan losses represented 123% of period
end non-performing loans at June 30, 2010 and 125% of period end non-performing
loans at December 31, 2009. The loans acquired as a part of the
Company’s branch acquisition completed during the second quarter of 2010 were
recorded at fair value which included a credit risk component; therefore, at
June 30, 2010 there was no allowance for loan loss associated with these
loans.
End-of-period
deposits increased approximately 17% on an annualized basis during the six
months ended June 30, 2010 compared with year-end December 31,
2009. The increase in deposits during the first half of 2010 was the
result of organic growth as well as deposits purchased as a part of the branch
acquisition previously discussed. The fair value of deposits acquired
totaled approximately $50.2 million at the time of closing, of which a majority
were core deposits.
End of Period Deposit Balances:
|
Current
|
Annualized
|
||||||||||||||
($ in thousands)
|
June 30,
|
December 31,
|
Period
|
Percent
|
||||||||||||
2010
|
2009
|
Change
|
Change
|
|||||||||||||
Non-interest-bearing
Demand Deposits
|
$ | 166,922 | $ | 155,268 | $ | 11,654 | 15 | % | ||||||||
Interest-bearing
Demand, Savings, & Money Market Accounts
|
522,438 | 484,699 | 37,739 | 16 | % | |||||||||||
Time
Deposits < $100,000
|
274,603 | 256,401 | 18,202 | 14 | % | |||||||||||
Time
Deposits of $100,000 or more & Brokered Deposits
|
85,893 | 73,275 | 12,618 | 34 | % | |||||||||||
Total
Deposits
|
$ | 1,049,856 | $ | 969,643 | $ | 80,213 | 17 | % |
27
Non-performing
Assets:
The
following is an analysis of the Company’s non-performing assets at June 30, 2010
and December 31, 2009 (dollars in thousands):
June 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Non-accrual
Loans
|
$ | 8,735 | $ | 8,374 | ||||
Past
Due Loans (90 days or more)
|
72 | 113 | ||||||
Restructured
Loans
|
— | 306 | ||||||
Total
Non-performing Loans
|
8,807 | 8,793 | ||||||
Other
Real Estate
|
1,822 | 2,363 | ||||||
Total
Non-performing Assets
|
$ | 10,629 | $ | 11,156 | ||||
Non-performing
Loans to Total Loans
|
0.96 | % | 1.00 | % | ||||
Allowance
for Loan Loss to Non-performing Loans
|
122.78 | % | 125.28 | % |
Non-performing
assets totaled $10.6 million at June 30, 2010 compared with $11.2 million at
December 31, 2009. Non-performing loans totaled $8.8 million at June
30, 2010 and December 31, 2009. Non-performing loans represented
0.96% of total outstanding loans at June 30, 2010 compared with 1.00% of total
loans outstanding at year-end 2009.
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 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 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 June 30, 2010.
At June
30, 2010, 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
|
June 30,
|
December 31,
|
||||||||||
Purposes
|
2010
|
2009
|
||||||||||
Leverage
Ratio
|
4.00 | % | 7.74 | % | 7.64 | % | ||||||
Tier
1 Capital to Risk-adjusted Assets
|
4.00 | % | 10.19 | % | 10.10 | % | ||||||
Total
Capital to Risk-adjusted Assets
|
8.00 | % | 13.86 | % | 14.09 | % |
28
As of
June 30, 2010, shareholders’ equity increased by $6.7 million to $120.2 million
compared with $113.5 million at year-end 2009. The increase in
shareholders’ equity was primarily attributable to an increase of $3.6 million
in retained earnings and an increase of $2.8 million in accumulated other
comprehensive income. Shareholders’ equity represented 9.0% of total
assets at June 30, 2010 and 9.1% at December 31,
2009. Shareholders’ equity included $12.9 million of goodwill
and other intangible assets at June 30, 2010 compared to $12.3 million of
goodwill and other intangible assets at December 31, 2009.
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 $8.4 million during the six months ended June 30, 2010
ending at $36.5 million. During the six months ended June 30, 2010,
operating activities resulted in net cash inflows of $7.7
million. Investing activities resulted in net cash outflows of $36.1
million during the six months ended June 30, 2010. The outflows from
investing activities were primarily attributable to the purchase of available
for sale securities during the first half of 2010. Financing
activities resulted in net cash inflows for the six month period ended June 30,
2010 of $36.8 million. The net inflows from financing activities were
primarily the result of increased deposits and to a lesser degree an increased
level of short-term borrowings in the form of repurchase agreements with deposit
customers.
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; the effects of changes in
competitive conditions; the possibility that the Company may acquire other
businesses or intangible customer relationships of other companies and the costs
of integrations of such acquired businesses and intangible customer
relationships, and the possible loss of the newly-acquired customer
relationships or key employee relationships following any such acquisitions; the
introduction, withdrawal, success, and timing of business initiatives and
strategies, including asset/liability management strategies; changes in customer
borrowing, repayment, investment, and deposit practices; changes in fiscal,
monetary, and tax policies; changes in financial and capital markets; the
possibility of a recession or other adverse change in general economic
conditions, either nationally or regionally, resulting in, among other things,
credit quality deterioration; the impact, extent and timing of
technological changes; possible future capital management activities that the
Company may utilize, including possible future sales or repurchases or
redemptions by the Company of debt or equity securities issued by it or that it
may issue; monetary policy actions of the Federal Reserve Board; regulatory
actions of governmental authorities under federal banking statutes, including
the Federal Deposit Insurance Act (and specifically actions of the Federal
Deposit Insurance Corporation in respect of possible future special assessments
of deposit insurance premiums) and the newly-enacted Dodd-Frank Act, and other
legislative and regulatory actions and reforms; changes in accounting principles
and interpretations; the inherent uncertainties involved in litigation and
regulatory proceedings which could result in the Company’s incurring loss or
damage regardless of the merits of the Company’s claims or defenses; and the
continued availability of earnings and excess capital sufficient for
the lawful and prudent declaration and payment of cash
dividends.
29
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, 2009, 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.
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 June 30, 2010
|
||||||||||||||||||
Net Portfolio Value
|
||||||||||||||||||
Net Portfolio
|
as a % of Present Value
|
|||||||||||||||||
Changes
|
Value
|
of Assets
|
||||||||||||||||
in rates
|
$ Amount
|
% Change
|
NPV Ratio
|
Change
|
||||||||||||||
+2%
|
133,980 | (6.50 | )% | 10.35 | % | (37 | )b.p. | |||||||||||
Base
|
143,293 | — | 10.72 | % | — | |||||||||||||
-2%
|
109,633 | (23.49 | )% | 8.12 | % |
(260
|
)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.
30
Item
4. Controls and Procedures
As of
June 30, 2010, 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 second fiscal quarter of 2010 that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.
31
PART
II. OTHER INFORMATION
Item
1A. Risk Factors
A wide
range of regulatory initiatives directed at the financial services industry have
been proposed in recent months. One of those initiatives, the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”),
was signed into law by President Obama on July 21, 2010. The
Dodd-Frank Act represents a comprehensive overhaul of the financial services
industry within the United States, establishes the new federal Bureau of
Consumer Financial Protection (the “BCFP”), and will require the BCFP and other
federal agencies to implement many new rules. At this time, it is
difficult to predict the extent to which the Dodd-Frank Act or the resulting
regulations will impact the Company’s business. However, compliance with
these new laws and regulations will result in additional costs, which may
adversely impact the Company’s results of operations, financial condition or
liquidity, any of which may impact the market price of the Company’s common
stock.
Other
than the additional risk factor mentioned above, there are no material changes
from the risk factors set forth under Part I, Item 1A. “Risk Factors”
in our Annual Report on Form 10-K for the year ended December 31,
2009.
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 June 30, 2010.
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)
|
||||||||||||
4/1/10 – 4/30/10
|
— | — | — | 272,789 | ||||||||||||
5/1/10
– 5/31/10
|
— | — | — | 272,789 | ||||||||||||
6/1/10
– 6/30/10
|
— | — | — | 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 June 30, 2010
(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 June 30,
2010.
Item
5. Other Information
On June
28, 2010, the Boards of Directors of German American Bancorp, Inc., and its bank
subsidiary, German American Bancorp, held their annual organizational
meetings.
At its
meeting, the Board of Directors of German American Bancorp, Inc., appointed
Director U. Butch Klem as Lead Director and appointed committee members and
committee chairpersons, as identified below.
The Board
also established a revised compensation schedule of retainers and meeting fees
for service on the Board of Directors (or committee thereof, including retainers
for service as the chairpersons of certain committees of the Board) of German
American Bancorp, Inc., and its subsidiaries. The revised
compensation schedule is described on Exhibit 10.5 to this Report on Form 10-Q
and such description is incorporated herein by reference.
Each of
the members of the Board of German American Bancorp, Inc., was also re-elected
on June 28, 2010, to the Board of Directors of its bank subsidiary, German
American Bancorp.
In
addition, the following non-employee members of the Board were elected to the
boards of directors of the following subsidiaries or regional advisory boards of
German American Bancorp:
German American Financial
Advisors & Trust Company
Directors
Bawel, Forbes, Lett and Mehne
32
German American Insurance,
Inc.
Directors
Bawel, Forbes, Lett and Mehne
East Region Advisory
Board
Director
Klem
West Region Advisory
Board
Directors
Ernst, Lett, and Voyles
The
following non-employee directors were elected to the following committees of the
Board of Directors of German American Bancorp, Inc., and/or its bank
subsidiary:
Compensation
/ Human Resources Committee — Directors Klem (Chairman), Bawel, and
Ernst
Audit
Committee — Directors Forbes (Chairman), Mehne and
Voyles
Credit
Risk Management Committee —Directors Bawel (Chairman), Klem and
Voyles
Finance
& Asset/Liability Management Committee (ALCO) — Directors Lett
(Chairman), Ernst, Forbes, and Mehne
Governance
/ Nominating Committee – Directors Klem (Chairman), Lett and Voyles
Investment
Committee — Directors Lett (Chairman), Ernst, Forbes, and
Mehne
Item
6. Exhibits
The
exhibits described by the Exhibit Index immediately following the Signature Page
of this Report are incorporated herein by reference.
33
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:
August 5,
2010
|
By/s/Mark A. Schroeder
|
Mark
A. Schroeder
|
|
Chairman
of the Board and Chief Executive Officer
|
|
Date:
August 5,
2010
|
By/s/Bradley M. Rust
|
Bradley
M. Rust
|
|
Executive
Vice President and Chief Financial
Officer
|
34
INDEX OF
EXHIBITS
Exhibit No.
|
Description
|
|
2.1
|
Branch
Purchase Agreement between German American Bancorp, as Buyer, Farmers
State Bank of Alto Pass, Ill., as Seller, and Farmers State Holding Corp.,
as the Seller Affiliate, dated February 17, 2010. 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. The copy of this exhibit filed as Exhibit 2 to
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2010 is incorporated herein by reference.
|
|
2.2
|
Bill
of Sale and Assignment between German American Bancorp, as Buyer, and
Farmers State Bank of Alto Pass, Ill., as Seller, dated May 7,
2010.
|
|
2.3
|
Assignment
and Assumption Agreement between German American Bancorp, as Assignee, and
Farmers State Bank of Alto Pass, Ill., as Assignor, dated May 7,
2010.
|
|
2.4
|
Limited
Warranty Deed granted by Farmers State Bank of Alto Pass, Ill., to German
American Bancorp, dated May 7, 2010.
|
|
10.1
|
Branch
Purchase Agreement between German American Bancorp, as Buyer, Farmers
State Bank of Alto Pass, Ill., as Seller, and Farmers State Holding Corp.,
as the Seller Affiliate, dated February 17, 2010. 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. The copy of this exhibit filed as Exhibit 2 to
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2010 is incorporated herein by reference.
|
|
10.2
|
Bill
of Sale and Assignment between German American Bancorp, as Buyer, and
Farmers State Bank of Alto Pass, Ill., as Seller, dated May 7,
2010. The copy of this exhibit filed as Exhibit 2.2 to this
Report is incorporated herein by reference.
|
|
10.3
|
Assignment
and Assumption Agreement between German American Bancorp, as Assignee, and
Farmers State Bank of Alto Pass, Ill., as Assignor, dated May 7,
2010. The copy of this exhibit filed as Exhibit 2.3 to this
Report is incorporated herein by reference.
|
|
10.4
|
Limited
Warranty Deed granted by Farmers State Bank of Alto Pass, Ill., to German
American Bancorp, dated May 7, 2010. The copy of this exhibit
filed as Exhibit 2.4 to this Report is incorporated herein by
reference.
|
|
10.5
|
Description
of Director Compensation Arrangements for the 12 month period ending at
the 2011 Annual Meeting of Shareholders.*
|
|
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.
|
*
Exhibits that describe or evidence all management contracts or compensatory
plans or arrangements required to be filed as exhibits to this Report are
indicated by an asterisk.
35