What changed in this filing

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Item 1. Business

2023-03-01 compared with 2022-03-01 · 38 added, 49 removed, 290 unchanged (23% of the section changed)

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The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and casualty insurance agency (German American Insurance, Inc.).

The Company was formed in 1982 as a bank holding company under the Bank Holding Company Act of 1956, as amended.

Effective September 24, 2019, the Company elected to be a “financial holding company” as permitted under the Gramm-Leach-Bliley Act of 1999, as amended.

As a financial holding company, the Company is generally permitted to engage in certain otherwise prohibited nonbanking activities and certain other broader securities, insurance, merchant banking and other activities that the Board of Governors of the Federal Reserve System (the “FRB”) has determined to be “financial in nature,” or are incidental or complementary to activities that are financial in nature, without prior approval from the FRB (subject to certain exceptions).

Upon becoming a financial holding company, we began operating GABC Risk Management, Inc., a wholly-owned subsidiary, as a pooled captive insurance company subsidiary to provide additional insurance coverage for the Company and its subsidiaries related to the operations of the Company for which insurance may not be economically feasible.

Throughout this Report, when we use the term “Company”, we will usually be referring to the business and affairs (financial and otherwise) of German American Bancorp, Inc.

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and the term “Bank” when we mean to refer only to the Company’s bank subsidiary.

The Company’s lines of business include retail and commercial banking, comprehensive financial planning, full service brokerage and trust administration, and a full range of personal and corporate insurance products.

The Company’s lines of business include retail and commercial banking, wealth management services, and insurance operations.

Our retail and commercial banking business involves attracting deposits from the general public and using those funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets.

These core banking activities also include the sale of residential mortgage loans in the secondary market.

Our wealth management services involve providing trust, investment advisory, brokerage and retirement planning services to customers.

In our insurance operations, we offer a full range of personal and corporate property and casualty insurance products, primarily in the Company’s banking subsidiary’s local markets.

Financial and other information by segment is included in Note 16 (Segment Information) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and is incorporated into this Item 1 by reference.

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The Company issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB.

For further information regarding this merger and acquisition transaction, see Note 20 (Subsequent Events) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which Note 20 is incorporated into this Item 1 by reference.

During 2021, the Company commenced an operating optimization plan, pursuant to which its banking subsidiary, German American Bank, would consolidate seven branch offices and implement various staff reductions during 2021.

In making its decision to consolidate these branches, which were generally integrated with other nearby bank branches, the Company considered, among other factors, the operating costs of the branches, certain physical limitations impacting the bank facilities, and their proximity to other branch locations.

For further information regarding this merger and acquisition transaction, see Note 18 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which Note 18 is incorporated into this Item 1 by reference.

During 2021, the Company executed an operating optimization plan, pursuant to which its banking subsidiary, German American Bank, consolidated seven branch offices and implemented various staff reductions.

In making its decision to

consolidate these branches, which were generally integrated with other nearby bank branches, the Company considered, among other factors, the operating costs of the branches, certain physical limitations impacting the bank facilities, and their proximity to other branch locations.

In addition, the Company’s evaluation of the branch consolidations and the reductions in staff also took into consideration the numbers and types of transactions being conducted by its customers and the increased usage of online and mobile banking.

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HSLC assumed approximately $17.6 million in total deposits and purchased approximately $17.8 million in total loans as part of the sale.

On July 1, 2019, the Company completed the acquisition of Citizens First Corporation (“Citizens First”) through the merger of Citizens First with and into the Company.

Immediately following completion of the Citizens First holding company merger, Citizens First's subsidiary bank, Citizen First Bank, Inc., was merged with and into the Company’s subsidiary bank, German American Bank.

Citizens First, headquartered in Bowling Green, Kentucky operated eight retail banking offices through Citizens First Bank, Inc.

in Barren, Hart, Simpson and Warren Counties in Kentucky.

As of the closing of the transaction, Citizens First had total assets of approximately $456.0 million, total loans of approximately $364.6 million, and total deposits of approximately $370.8 million.

The Company issued approximately 1.7 million shares of its common stock, and paid approximately $15.5 million in cash, in exchange for all of the issued and outstanding shares of common stock of Citizens First.

For further information regarding this merger and acquisition transaction, see Note 18 (Business Combinations) in the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which Note 18 is incorporated into this Item 1 by reference.

The Company expects to continue to evaluate opportunities to expand its business through opening of new banking, insurance or trust, brokerage and financial planning offices, and through acquisitions of other banks, bank branches, portfolios of loans or other assets, and other financial-service-related businesses and assets in the future.

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There are numerous alternative providers (including national providers that advertise extensively and provide their services via e-mail, direct mail, telephone and the Internet) for the insurance products and services offered by German American Insurance, Inc., trust and financial planning services offered by the Bank and the brokerage products and financial planning services offered by German American Investment Services, Inc.

In addition, financial technology, or “FinTech,” companies continue to emerge in key areas of banking.

In addition, financial technology, or “FinTech,” companies continue their rapid growth into key areas of banking.

Many of these competitors have substantially greater resources than the Company.

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As a result, our employees have demonstrated a desire and determination to succeed.

Our culture encourages them to take initiative, accept challenges, and achieve goals.

Their vast knowledge base and expertise enables them to work efficiently while providing customer service excellence to support strong performance.

Our culture encourages them to take initiative, accept challenges, and be collaborative to achieve performance and operating excellence for our customers, shareholders, and communities.

German American’s reputation relies on integrity.

Our team trusts each other in words and actions, which enables our customers to trust our brand.

We value honesty, open communication, diverse perspectives, and high ethical principles.

We value honesty, transparency, and diverse perspectives with high ethical standards in all we do.

We have long been committed to comprehensive and competitive compensation and benefits programs as we recognize that we operate in an intensely competitive environment for employees.

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Furthering our philosophy to attract and retain talented and motivated employees who will continue to advance our purpose and contribute to our overall success, our compensation and benefits programs include:

medical, dental and vision plans;

medical (including telemedicine and behavioral health care services), dental and vision plans;

a 401(k) deferred compensation plan, with matching contribution, which covers substantially all employees;

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These programs focus on enhancing current skills as well as developing our next generation of leaders, bankers, commercial lenders and other financial professional roles.

In order to develop a workforce that aligns with our corporate values, we regularly sponsor local community events.

We are committed to employee care and helping our employees improve their quality of life and place.

As a result, we remain focused on continuous improvement throughout all departments in order to create positive outcomes and experiences for all.

Most recently, we implemented a paid family bonding leave program, a paid-time off (PTO) donation program, and flexible work guidelines.

In order to develop a workforce that aligns with our purpose, we regularly sponsor local community events.

We believe that the well-being of our employees and their personal and professional development is furthered by our outreach to the communities we serve.

Our employees’ desire for active community involvement enables us to sponsor many local community events and initiatives, including leading financial literacy classes in community schools and volunteering to enhance the arts, education, economic development, and overall community enrichment in our footprint.

The health and well-being of our employees and customers will always be our top priority.

This, of course, came to the forefront as COVID-19 began to spread exponentially in early 2020 and continued throughout 2021.

In response, we have continued to adapt and adjust our Pandemic Response Plans within the Company to protect the health of our employees, customers and communities.

Those plans included business continuity remote work options, support of vaccination through different vaccination incentive programs, paid leave, and more.

Regulation and Supervision

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Beginning on January 1, 2022, the Company began the required three-year phase-in by reflecting 25% of the previously deferred estimated capital impact of CECL in its regulatory capital.

An additional 25% is to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2025.

An additional 25% was phased in on January 1, 2023 and another 25% will be phased in on each of January 1, 2024 and January 1, 2025 (at which time the adverse cumulative effects of adopting CECL will have been fully phased into our regulatory capital).

Under this 2020 rule, the amount of adjustments to regulatory capital that could be deferred until the phase-in period included both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

For information about the one-time cumulative adjustment to our allowance for credit losses and changes in the allowance during 2020, please see Note 1 (Summary of Significant Accounting Policies) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

For information about the one-time cumulative adjustment to our allowance for credit losses on January 1, 2020 and changes in the allowance during the subsequent two-year period, please see Note 1 (Summary of Significant Accounting Policies) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report.

In April 2020, federal banking regulators modified the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the Paycheck Protection Program (“PPP”) established under the CARES Act to neutralize the regulatory capital effects of participating in the program by allowing PPP loans to receive a zero percent risk weight for purposes of determining risk-weighted assets and the CET1, Tier 1 and Total Risk-Based capital ratios.

At December 31, 2021, risk-weighted assets included $19.5 million of PPP loans (net of deferred fees) at a zero risk weight.

While there were no outstanding PPP loans at December 31, 2022, at December 31, 2021, risk-weighted assets included $19.5 million of PPP loans (net of deferred fees) at a zero risk weight.

See “COVID-19 and Related Legislative and Regulatory Actions” below for additional information on the PPP.

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As of December 31, 2022, the Bank exceeded the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well-capitalized”, and is unaware of any material violation or alleged violation of these regulations, policies or directives.

For a tabular presentation of our regulatory capital ratios and those of the Bank as of December 31, 2021, see Note 8 (Shareholders’ Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which Note 8 is incorporated herein by reference.

For a tabular presentation of our regulatory capital ratios and those of the Bank as of December 31, 2022, see Note 8 (Shareholders’

Equity) of the Notes to the Consolidated Financial Statements included in Item 8 of this Report, which Note 8 is incorporated herein by reference.

In October 2019, the FRB, the FDIC and the Office of the Comptroller of the Currency (the “OCC”) adopted a final rule to simplify the regulatory capital requirements for eligible community banks and holding companies that opt-in to the community bank leverage ratio framework (“CBLR framework”), as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018 (the “Economic Growth Act”).

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In addition, the prior approval of the DFI is required for the payment of a dividend by an Indiana state-chartered bank if the total of all dividends declared in a calendar year would exceed the total of its net income for the year combined with its retained net income for the two preceding years, unless such a payment qualifies under certain exemptive criteria that exempt certain dividend payments by certain qualified banks from the prior approval requirement.

At December 31, 2021, the Bank was eligible for payment of dividends under the exemptive criteria established by DFI policy for this purpose, and could have declared and paid to the holding company $75 million of its undivided profits without approval by the DFI in accordance with such criteria.

At December 31, 2022, the Bank was eligible for payment of dividends under the exemptive criteria established by DFI policy for this purpose, and could have declared and paid to the holding company approximately $125 million of its undivided profits without approval by the DFI in accordance with such criteria.

See Note 8 (Shareholders’ Equity) of the Notes to Consolidated Financial Statements included in Item 8 of this Report for further discussion.

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The Dodd-Frank Act (in addition to the regulatory changes discussed elsewhere in this “Regulation and Supervision” discussion and below under “Federal Deposit Insurance Premiums and Assessments”) made a variety of changes that affect the business and affairs of the Company and the Bank in other ways.

For instance, the Dodd-Frank Act (or agency regulations adopted and

implemented (or to be adopted and implemented) under the Dodd-Frank Act) altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions;

For instance, the Dodd-Frank Act (or agency regulations adopted and implemented (or to be adopted and implemented) under the Dodd-Frank Act) altered the authority and duties of the federal banking and securities regulatory agencies, implemented certain corporate governance requirements for all public companies including financial institutions with regard to executive compensation, proxy access by shareholders, and certain whistleblower provisions;

restricted certain proprietary trading and hedge fund and private equity activities of banks and their affiliates;

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The Bank Secrecy Act (the “BSA”) requires financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, and mandates that every bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA.

In addition, banks are required to adopt a customer identification program as part of its

BSA compliance program, and are required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.

In addition, banks are required to adopt a customer identification program as part of its BSA compliance program, and are required to file Suspicious Activity Reports when they detect certain known or suspected violations of federal law or suspicious transactions related to a money laundering activity or a violation of the BSA.

The Bank is also required to (1) identify and verify, subject to certain exceptions, the identity of the beneficial owners of all legal entity customers at the time a new account is opened, and (2) include, in its anti-money laundering program, risk-based procedures for conducting ongoing customer due diligence, which must include procedures that:

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In addition, each FDIC insured institution has been required to pay to the FDIC an assessment on the institution’s total assets less tangible capital in order to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund.

With the Financing

Corporation having made its final bond payment in September 2019, the Bank made its last assessment payment, which was equal to a per annum rate of 0.12 basis points, in March 2019.

With the Financing Corporation having made its final bond payment in September 2019, the Bank made its last assessment payment, which was equal to a per annum rate of 0.12 basis points, in March 2019.

COVID-19 and Related Legislative and Regulatory Actions

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The Company actively participated in assisting its customers with PPP funding during all phases of the program.

The vast majority of the Company’s PPP loans made in 2020 have two-year maturities, while the loans made in 2021 have five-year maturities.

Loans under the program earn interest at a fixed rate of 1 percent.

As of December 31, 2021, the Company had $19.5 million of PPP loans outstanding compared to the December 31, 2020 balance of $182.0 million.

The Company will continue to monitor legislative, regulatory, and supervisory developments related to the PPP.

However, it anticipates that the majority of the Company's remaining PPP loans will be forgiven by the SBA in accordance with the terms of the program.

The vast majority of the Company’s PPP loans made in 2020 had two-year maturities, while the loans made in 2021 had five-year maturities.

Loans under the program earned interest at a fixed rate of 1 percent.

Consistent with the terms of the program, virtually all of the Company’s PPP loans have been forgiven by the SBA and those that were not have otherwise been repaid by the customer.

As a result, the Company did not have any PPP loans outstanding as of December 31, 2022, as compared to having $19.5 million outstanding at December 31, 2021.

Loan Modifications and Troubled Debt Restructures .

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Such forward-looking statements can include statements about the Company’s net interest income or net interest margin;

the impact of the COVID-19 pandemic;

adequacy of the Company’s capital under regulatory requirements and of its allowance for loan losses, and the quality of the Company’s loans, investment securities and other assets;

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All statements other than statements of historical fact included in this Report, including statements regarding our financial position, business strategy and the plans and objectives of our management for future operations, are forward-looking statements.

When used in this Report, words such as “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend”, “should”, “would”, “could”, “can”, “may”, “will”, “might” and similar expressions, as they relate to us or our management, identify forward-looking statements.

When used in this Report, words such as “anticipate”, “believe”, “estimate”,

“expect”, “plan”, “intend”, “should”, “would”, “could”, “can”, “may”, “will”, “might” and similar expressions, as they relate to us or our management, identify forward-looking statements.

Such forward-looking statements are based on the beliefs of our management, as well as assumptions made by and information currently available to our management, and are subject to risks, uncertainties, and other factors.

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The discussions in Item 1A, “Risk Factors,” and in Item 7 of this Form 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” 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 but not limited to :

• the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

Those risks, and 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 but are not limited to :

• changes in interest rates and the timing and magnitude of any such changes;

• unfavorable economic conditions, including a prolonged period of inflation, and the resulting adverse impact on, among other things, credit quality;

• the impacts of epidemics, pandemics or other infectious disease outbreaks, including the continuation of the COVID-19 pandemic;

• changes in competitive conditions;

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• changes in financial and capital markets;

• potential deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration;

• the severity and duration of the COVID-19 pandemic and its impact on general economic and financial market conditions and our business, results of operations and financial condition;

• capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities;

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• the possible effects of the replacement of the London Interbank Offering Rate (LIBOR);

• the impact of the current expected credit loss (CECL) standard;

• the potential for increases to, and volatility in, the balance of our allowance for credit losses and related provision expense due to the current expected credit loss (CECL) standard;

• changes in accounting principles and interpretations;

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• the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends;

• with respect to the merger with CUB, the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies, unexpected credit quality problems of the acquired loans or other assets, or unexpected attrition of the customer base of the acquired institution or branches.

• with respect to the merger with CUB, the possibility that the benefits of the transaction, including cost savings and strategic gains, do not continue as anticipated, including as a result of the impact of, or problems arising from, the continued integration of the two companies, unexpected credit quality problems of the acquired loans or other assets, or unexpected attrition of the customer base of the acquired institution or branches.

Such statements reflect our views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business