German American Bancorp, Inc.
Annual Report 2016

Plain-text annual report

2016 SummaryAnnualReport DRIVEN by our FUTURE The Numbers Net Income & Diluted Earnings Per Share (dollars in thousands, except per share amounts) $40,000 $35,000 $30,000 $25,000 $24,055 $35,184 $28,344 $30,064 $25,413 $1.90 $1.98 $2.14 $2.27 $2.36 Total Shareholders’ Equity (dollars in millions) Return on Equity $330 $252 $229 $185 $200 13.57% 13.40% 13.21% 12.47% 10.94% $350 $300 $250 $200 $150 $100 $50 $0 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 Total Loans, Net of Unearned Income (dollars in millions) Commercial and Agriculture Loans as % of Total Loans Total Assets (dollars in millions) Return on Assets $1,990 $1,448 $1,564 $1,382 $1,205 83% 81% 81% 82% 81% $2,956 $2,237 $2,164 $2,374 $2,006 1.24% 1.25% 1.31% 1.33% 1.24% $3,250 $3,000 $2,750 $2,500 $2,250 $2,000 $1,750 $1,500 $0 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 12/31/12 12/31/13 12/31/14 12/31/15 12/31/16 $20,000 $15,000 $10,000 $5,000 $0 $2,250 $2,000 $1,750 $1,500 $1,250 $1,000 $750 $0 Driven By Results Dear Shareholders: Letter from Mark A. Schroeder Chairman and CEO 2016 represented another year of record performance for German American. For the 7th consecutive year, your Company posted record earnings, reporting annual net income of $35.2 million, or $2.36 per share. These 2016 reported earnings were an approximately 4% improvement, on a per share basis, over the prior year record earnings of $30.1 million, or $2.27 per share. The 2016 financial performance also resulted in the achievement of the 12th consecutive year in which we have delivered a double- digit return on shareholders’ equity. While we are honored and humbled to receive this recognition, the theme of this year’s Summary Annual Report, Driven By Our Future, encapsulates our focus and mindset of continuous improvement and disciplined growth. Perhaps most impressive was the ability to post this record level of financial performance in 2016 in the face of current year reported earnings being impacted by merger expenses associated with the River Valley Bancorp merger transaction completed during the first quarter of 2016. These merger related expenses, which totaled approximately $4.3 million, or $2.7 million after tax, impacted reported earnings per share by approximately $0.18 per share, the level of reported return on shareholders’ equity by approximately .85%, and the level of reported return on average assets by .10%. While the merger costs associated with the River Valley Bancorp transaction did impact 2016 earnings, the completion of this merger transaction represented a significant strategic opportunity for German American, which we believe will positively impact your Company’s operating earnings going forward. The inclusion of the River Valley franchise along the I-65 corridor between Columbus and New Albany, Indiana, affords us significant opportunity for future organic balance sheet and earnings growth. The acquisition of River Valley expanded German American’s footprint into the greater Madison, Indiana market, which is very similar to our other heritage markets in Southern Indiana, and gave us a strong presence with five banking offices in the vibrant and rapidly growing market area of the Indiana side of the Louisville, Kentucky MSA, a market in which we previously operated a commercial loan production office. Additionally, River Valley had banking offices in the Seymour and North Vernon, Indiana markets, which complimented German American’s growing franchise in the adjacent Columbus, Indiana market. This opportunity to enhance our existing presence in two of German American’s newest markets, as well as allowing for a new market presence in Madison, Indiana, made this merger a perfect fit for your Company. In executing our vision for the future, we will continue to reinvest in your Company, building the capacity to support strong, long-term profitable customer relationships. While we recognize that we are in a people-centric business and that relationships are the key to developing long-term value, both for our clients and our shareholders, going forward it will take a combination of ever-changing, technology-based delivery channels and our traditional people-based approach to meet the expectations of our clients as to what defines customer service excellence in the future. To maintain our position as one of the nation’s leading community banking organizations, it is imperative that we continuously reinvest in our people and in our technology infrastructure. Disciplined growth has been one of the key factors in our past success. Therefore, we must also stay focused on the growth of your Company in the coming years. Within our existing markets, we will continue to drive organic growth through market share expansion, while also driving disciplined, strategic growth by expanding our footprint into adjacent new territories that offer dynamic, economically vibrant marketplaces. In both our existing and expansion markets, we will continue to bring together strong teams of local financial professionals with a like-minded community-based culture and a proven history of building relationships through customer service excellence. At German American, resting on past successes is not an option. Through a combination of continuous reinvestment in our people and new technology and organic and disciplined strategic growth, we will strive to build upon our past successes in creating long- term shareholder value through continued exceptional financial performance. As shareholders, you can be assured that all of us who work for you - directors, officers and staff - are committed to enhancing the value of your investment in German American, and we are all Driven By Our Future! The strength of your Company’s financial performance, in terms of not only 7 consecutive years of record earnings and 12 years of double-digit returns on shareholders’ equity, but also a consistent pattern of strong loan growth coupled with excellent credit quality and exceptional expense management, has resulted in German American receiving numerous recognitions as one of the best community banking organizations in the country. Sincerely, Mark A. Schroeder Chairman & CEO 1 Driven By Our Clients Bloomington MONROE COUNTY Bedford LAWRENCE COUNTY BARTHOLOMEW COUNTY Columbus JACKSON COUNTY Seymour Osgood RIPLEY COUNTY JENNINGS COUNTY North Vernon Dupont JEFFERSON COUNTY Madison Hanover Carrollton CARROLL COUNTY, KENTUCKY DAVIESS COUNTY Odon/Cannelburg Vincennes Washington KNOX COUNTY Loogootee MARTIN COUNTY CLARK COUNTY Charlestown Sellersburg Sellersburg Jeffersonville Jeffersonville New Albany New Albany FLOYD COUNTY Floyds Knobs Depicts areas of market expansion during 2016 Banking Insurance Investments Ag Services Petersburg Ireland Dubois Jasper DUBOIS COUNTY Huntingburg Holland Ferdinand SPENCER COUNTY PERRY COUNTY Tell City Princeton GIBSON COUNTY Oakland City VANDERBURGH VANDERBURGH COUNTY COUNTY Winslow PIKE COUNTY WARRICK COUNTY Evansville Newburgh Rockport 2 Our Mission German American is dedicated to helping individuals, families and businesses achieve greater prosperity and quality of life. Together, our financial team builds lasting client relationships based on integrity, responsive service, innovation, and shared value. We support the communities we serve and believe that when a community thrives, its people prosper. Our Values Integrity Our reputation relies on integrity. We value honesty, open communication, diverse perspectives, and high ethical principals. People People come first at German American. We invest in our communities and support social and economic development. We value respect and courtesy for every person and believe in the power of positive attitudes. Relationships We develop relationships based on a strong foundation of trust and mutual respect to help create loyal customers and a loyal team. Our unified goal is serving individuals, families and businesses to achieve financial success. Performance Performance is vital. German American employees must possess the determination and drive to succeed. Our vast knowledge base and expertise enables us to work efficiently while providing customer service excellence to support strong performance. 3 Driven By Our Future There is no better time to plan for the future than when you are experiencing record performance. 7th consecutive year German American has achieved record earnings Net income of $35.2million $2.36per share increase of approximately 4% in reported earnings per share in 2016 12th consecutive year of double digit return on equity American Banker named Mark A. Schroeder one of three Community Bankers of The Year in the nation for 2016 American Banker is an essential resource for breaking news, research, data, and opinion content for approximately 560,000 senior executives in the banking and financial services industry nationwide. 4 Vision for 2017 and Beyond German American’s strategic vision responds to challenges and opportunities of the competitive financial services environment. By executing on our vision for the future, we are building the capacity to support strong, long-term, profitable customer relationships and to drive shareholder value. The strategic vision that drives our future is based on five key areas: Client Experience, Technology, Human Capital, Growth, and Financial Performance. Client Experience With a sharp, focused strategy on the client experience, our commitment is to deliver customer service excellence through every delivery channel we offer. Developing relationships with our clients by truly listening to their needs has been the foundation of German American’s success since 1910. We believe our future success will continue to be based on client relationships, yet the shift will be in the delivery and communication channels. It is imperative that we have a clear understanding about the best products, services, and delivery channels to continue to make real connections with our clients and proactively serve their financial needs. We are in a people-centric business, and relationships are the key to developing long-term value. Serving our clients with integrity and honesty, along with making it easy to do business with us, will continue to provide opportunities to help families and individuals purchase or build homes, accumulate wealth, retire comfortably, and manage their everyday financial needs and to help businesses grow and flourish. Technology Since the 1970’s when ATMs became an industry standard in banking, the evolution to technology has been slowing rising. Today, it is evolving at a rapid pace with no indication of slowing down. At German American, we are leveraging technology to operate more efficiently and reduce manual processes. We are proactively analyzing our system applications, internal communication methods, employee training, and leadership culture to empower our team members to provide our clients with timely, accurate service. We offer our business and personal clients top technology in online and mobile banking service and are dedicated to proactively monitor and evaluate new technology offerings. We are proving our commitment to information security by expanding the security training for each of our team members and engaging in consistent information security testing, monitoring, and reporting. 5 Driven By Our Future Human Capital Success doesn’t just happen. It takes the hard work of every German American team member to achieve the record performance our company has experienced the last seven years. Our company is invested in offering our team members training and technology to help each member perform at a high level. Attracting and retaining top talent and preparing our team members for future roles within our company is crucial. We have implemented a new recruitment and training technology system to provide consistency throughout our company on these key initiatives. We invite all of our team members to participate in an annual employee satisfaction survey and use the feedback to implement new employee benefits, offer additional training, update equipment, and improve communication among our team members. Growth Our team is committed to deepening relationships with existing clients and growing market share in each market we serve. We will continue our path of disciplined strategic growth designed to allow us to enter into new territories adjacent to our existing footprint that offer dynamic, vibrant marketplaces, and bring together strong financial companies with similar, like-minded community bank cultures and a proven history of building relationships through customer service excellence. 6 Financial Performance Resting on German American’s past success is not an option. Maintaining strong financial performance is key for our shareholders, clients, employees and communities. Superior financial performance affords us opportunities to invest in tools and resources to measure and enhance the client experience and invest in top talented financial professionals. It allows us to grow into new, vibrant markets and invest in efficient and secure technology. It gives us the ability to influence the health of our local communities in key areas of economic development, education, and overall quality of life. We are committed to always being mindful of the purpose of our organization with the understanding that superior financial performance allows us to fulfill our mission. Executive Team D. Neil Dauby Executive Vice President, Chief Commercial Banking Officer Keith A. Leinenbach Executive Vice President, Chief Credit Officer Randall L. Braun Executive Vice President, Chief Retail Banking Officer and Chief Development Officer Mark A. Schroeder Chairman and Chief Executive Officer Bradley M. Rust Executive Vice President and Chief Financial Officer Clay W. Ewing President 7 Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders German American Bancorp, Inc. Jasper, Indiana We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated balance sheets of German American Bancorp, Inc. as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016, appearing in the Annual Report on Form 10-K, not appearing herein. In our report dated March 9, 2017, also appearing in the Annual Report on Form 10-K, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the consolidated balance sheets and consolidated statements of income presented on pages 10 and 11 is fairly stated, in all material respects, in relation to the consolidated financial statements from which they have been derived. Crowe Horwath LLP Indianapolis, Indiana March 9, 2017 8 Five Year Summary Dollars in thousands, except per share data The following selected data should be read in conjunction with the Company’s Annual Report on Form 10-K for 2016. Summary of Operations: Interest Income Interest Expense Net Interest Income Provision for Loan Losses Net Interest Income after Provision for Loan Losses Non-interest Income Non-interest Expense Income before Income Taxes Income Tax Expense Net Income Year-end Balances: Total Assets 2016 2015 2014 2013 2012 $ 103,365 $ 81,620 $ 80,386 $ 75,672 $ 77,160 8,461 94,904 1,200 93,704 32,013 76,587 49,130 13,946 6,068 75,552 - 75,552 27,444 61,326 41,670 11,606 6,047 74,339 150 74,189 23,937 57,713 40,413 12,069 7,155 68,517 350 68,167 23,615 54,905 36,877 11,464 10,912 66,248 2,412 63,836 21,811 50,923 34,724 10,669 $ 35,184 $ 30,064 $ 28,344 $ 25,413 $ 24,055 $ 2,955,994 $ 2,373,701 $ 2,237,099 $ 2,163,827 $ 2,006,300 Total Loans, Net of Unearned Income 1,989,955 1,564,347 1,447,982 1,382,382 1,204,866 Total Deposits Total Long-term Debt Total Shareholders’ Equity Average Balances: Total Assets 2,349,551 1,826,376 1,779,761 1,812,156 1,640,931 120,560 330,267 95,606 252,348 64,591 228,824 87,237 200,097 89,472 185,026 $ 2,841,096 $ 2,267,555 $ 2,170,761 $ 2,037,236 $ 1,934,123 Total Loans, Net of Unearned Income 1,904,779 1,483,752 1,406,000 1,272,055 1,147,891 Total Deposits Total Shareholders’ Equity Per Share Data: Net Income(1) Cash Dividends Book Value at Year-end Other Data at Year-end: Number of Shareholders Number of Employees 2,249,892 1,825,913 1,783,348 1,695,796 1,618,712 321,520 241,018 214,496 189,689 177,207 $ $ $ 2.36 0.72 21.64 3,513 605 2.27 0.68 19.00 3,343 479 2.14 0.64 17.31 3,398 473 $ 1.98 $ 0.60 15.19 3,444 478 1.90 0.56 14.64 3,105 439 Weighted Average Number of Shares(1) 14,927,410 13,258,916 13,223,178 12,807,678 12,637,743 Selected Performance Ratios: Return on Assets Return on Equity Equity to Assets Dividend Payout Net Charge-offs (Recoveries) to Average Loans Allowance for Loan Losses to Loans Net Interest Margin (1) Share and Per Share Data includes the dilutive effect of stock options. 1.24 % 10.94 % 11.17 % 30.21 % 0.04 % 0.74 % 3.75 % 1.33 % 12.47 % 10.63 % 29.97 % 0.03 % 0.92 % 3.70 % 1.31 % 13.21 % 10.23 % 29.81 % (0.01) % 1.03 % 3.76 % 1.25 % 13.40 % 9.25 % 30.18 % 0.10 % 1.05 % 3.67 % 1.24 % 13.57 % 9.22 % 29.38 % 0.19 % 1.29 % 3.74 % 9 Consolidated Balance Sheets Dollars in thousands, except per share data Assets Cash and Due from Banks Federal Funds Sold and Other Short-term Investments Cash and Cash Equivalents Securities Available-for-Sale, at Fair Value Securities Held-to-Maturity, at Cost (Fair value of $0 and $95 on December 31, 2016 and 2015, respectively) Loans Held-for-Sale, at Fair Value Loans Less: Unearned Income Allowance for Loan Losses Loans, Net Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost Premises, Furniture and Equipment, Net Other Real Estate Goodwill Intangible Assets Company Owned Life Insurance Accrued Interest Receivable and Other Assets TOTAL ASSETS Liabilities Non-interest-bearing Demand Deposits Interest-bearing Demand, Savings, and Money Market Accounts Time Deposits Total Deposits FHLB Advances and Other Borrowings Accrued Interest Payable and Other Liabilities TOTAL LIABILITIES Shareholders’ Equity Preferred Stock, no par value; 500,000 shares authorized, no shares issued Common Stock, no par value, $1 stated value; 30,000,000 shares authorized Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) Income TOTAL SHAREHOLDERS’ EQUITY TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY End of period shares issued and outstanding See Annual Report on Form 10-K. 10 December 31, 2016 2015 $ 48,467 16,349 64,816 709,786 $ 36,062 15,947 52,009 637,840 - 95 15,273 10,762 1,993,404 1,568,075 (3,449 ) (14,808 ) (3,728 ) (14,438 ) 1,975,147 1,549,909 13,048 48,230 242 54,058 2,835 46,642 25,917 8,571 37,817 169 20,536 1,283 32,732 21,978 $ 2,955,994 $ 2,373,701 $ 571,989 $ 465,357 1,399,381 1,054,983 378,181 306,036 2,349,551 1,826,376 258,114 18,062 273,323 21,654 2,625,727 2,121,353 - 15,261 171,744 149,666 (6,404 ) - 13,279 110,145 125,112 3,812 330,267 252,348 $ 2,955,994 $ 2,373,701 15,261,431 13,278,824 Consolidated Statements of Income Dollars in thousands, except per share data Interest Income Interest and Fees on Loans Interest on Federal Funds Sold and Other Short-term Investments Interest and Dividends on Securities: Taxable Non-taxable TOTAL INTEREST INCOME Interest Expense Interest on Deposits Interest on FHLB Advances and Other Borrowings TOTAL INTEREST EXPENSE NET INTEREST INCOME Provision for Loan Losses NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES Non-Interest Income Trust and Investment Product Fees Service Charges on Deposit Accounts Insurance Revenues Company Owned Life Insurance Debt Interchange Fee Income Other Operating Income Net Gains on Sales of Loans Net Gains on Securities TOTAL NON-INTEREST INCOME Non-Interest Expense Salaries and Employee Benefits Occupancy Expense Furniture and Equipment Expense FDIC Premiums Data Processing Fees Professional Fees Advertising and Promotion Intangible Amortization Other Operating Expenses TOTAL NON-INTEREST EXPENSE Income before Income Taxes Income Tax Expense Net Income Basic Earnings per Share Diluted Earnings per Share See Annual Report on Form 10-K. 2016 Years Ended December 31, 2015 2014 $ 86,202 74 $ 9,638 7,451 103,365 5,187 3,274 8,461 94,904 1,200 93,704 4,644 5,973 7,741 987 2,532 4,798 3,359 1,979 $ 66,740 13 9,017 5,850 81,620 3,976 2,092 6,068 75,552 - 75,552 3,957 4,826 7,489 846 2,127 4,515 2,959 725 65,597 12 10,409 4,368 80,386 4,128 1,919 6,047 74,339 150 74,189 3,675 4,829 7,255 826 1,961 2,018 1,892 1,481 32,013 27,444 23,937 43,961 6,297 2,261 1,151 5,686 3,672 2,657 1,062 9,840 76,587 49,130 13,946 35,184 2.36 2.36 $ $ $ 35,042 4,939 1,873 1,144 3,541 2,661 3,669 790 7,667 61,326 41,670 11,606 30,064 2.27 2.27 $ $ $ 32,710 5,094 1,953 1,113 3,675 2,294 1,977 1,254 7,643 57,713 40,413 12,069 28,344 2.15 2.14 $ $ $ 11 Board of Directors Douglas A. Bawel Lonnie D. Collins Christina M. Ernst Marc D. Fine U. Butch Klem J. David Lett Chris A. Ramsey M. Darren Root Mark A. Schroeder Thomas W. Seger Raymond W. Snowden Michael J. Voyles 12 Cautionary Note Regarding Forward-Looking Statements This Summary Annual Report, including our CEO’s letter to our Shareholders on Page 1, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, relating to our expectations concerning our opportunities for future growth and prosperity, and other matters. Readers are cautioned that actual results and performance may differ materially from any of our present expectations that are expressed or implied by any forward-looking statement due to the inherent uncertainties in predicting the future, and risks affecting German American and its stock, including those that are described in Item 1, “Business - Forward Looking Statements and Associated Risks” and in Item 1A, “Risk Factors,” in our accompanying Annual Report on Form 10-K. You may review that document (and our other SEC filings) via the internet through the Investor Relations section of our website, www.germanamerican.com. This report speaks only as of March 9, 2017, and we do not promise anyone that it will be updated for changes or events after that date. 13 001CSN27D0 

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