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EX-31.1 - EXHIBIT 31.1 - GERMAN AMERICAN BANCORP, INC.exhibit311-q32014.htm
EX-32.1 - EXHIBIT 32.1 - GERMAN AMERICAN BANCORP, INC.exhibit321-q32014.htm
EX-31.2 - EXHIBIT 31.2 - GERMAN AMERICAN BANCORP, INC.exhibit312-q32014.htm
EXCEL - IDEA: XBRL DOCUMENT - GERMAN AMERICAN BANCORP, INC.Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - GERMAN AMERICAN BANCORP, INC.exhibit322-q32014.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2014
 
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 ¨
 
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 ¨
 
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 ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
YES   ¨      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 November 1, 2014
Common Shares, no par value
 
13,210,395



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, 2013, 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 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.”

2


*****
 
INDEX
 
PART I.            FINANCIAL INFORMATION
 
 
 
Item 1.
Financial Statements
 
 
 
 
Consolidated Balance Sheets – September 30, 2014 and December 31, 2013
 
 
 
 
Consolidated Statements of Income – Three Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Income – Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2014 and 2013
 
 
 
 
Notes to Consolidated Financial Statements – September 30, 2014
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4. 
Controls and Procedures
 
 
 
PART II.             OTHER INFORMATION
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
 
 
INDEX OF EXHIBITS

3


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)
 
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
37,427

 
$
37,370

Federal Funds Sold and Other Short-term Investments
 
49,740

 
22,762

Cash and Cash Equivalents
 
87,167

 
60,132

 
 
 
 
 
Interest-bearing Time Deposits with Banks
 
100

 
100

Securities Available-for-Sale, at Fair Value
 
575,741

 
606,032

Securities Held-to-Maturity, at Cost (Fair value of $186 and $271 on September 30, 2014 and December 31, 2013, respectively)
 
184

 
268

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
7,590

 
9,265

 
 
 
 
 
Loans
 
1,436,774

 
1,385,212

Less: Unearned Income
 
(4,025
)
 
(2,830
)
Allowance for Loan Losses
 
(15,592
)
 
(14,584
)
Loans, Net
 
1,417,157

 
1,367,798

 
 
 
 
 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost
 
9,096

 
9,004

Premises, Furniture and Equipment, Net
 
40,322

 
40,430

Other Real Estate
 
521

 
1,029

Goodwill
 
20,535

 
20,536

Intangible Assets
 
2,353

 
3,328

Company Owned Life Insurance
 
31,809

 
31,178

Accrued Interest Receivable and Other Assets
 
13,346

 
14,727

TOTAL ASSETS
 
$
2,205,921

 
$
2,163,827

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
410,329

 
$
400,024

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,020,504

 
1,063,098

Time Deposits
 
333,638

 
349,034

Total Deposits
 
1,764,471

 
1,812,156

 
 
 
 
 
FHLB Advances and Other Borrowings
 
208,086

 
140,770

Accrued Interest Payable and Other Liabilities
 
13,099

 
10,804

TOTAL LIABILITIES
 
1,985,656

 
1,963,730

 
 
 
 
 
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
 
13,210

 
13,174

Additional Paid-in Capital
 
108,481

 
108,022

Retained Earnings
 
98,528

 
84,164

Accumulated Other Comprehensive Income (Loss)
 
46

 
(5,263
)
TOTAL SHAREHOLDERS’ EQUITY
 
220,265

 
200,097

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,205,921

 
$
2,163,827

End of period shares issued and outstanding
 
13,210,395

 
13,173,793


See accompanying notes to consolidated financial statements.

4


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 

Three Months Ended 
 September 30,
 

2014

2013
INTEREST INCOME

 


 

Interest and Fees on Loans

$
16,680


$
15,307

Interest on Federal Funds Sold and Other Short-term Investments

2


2

Interest and Dividends on Securities:

 


 

Taxable

2,531


2,768

Non-taxable

1,135


735

TOTAL INTEREST INCOME

20,348


18,812








INTEREST EXPENSE

 


 

Interest on Deposits

1,025


1,145

Interest on FHLB Advances and Other Borrowings

532


475

TOTAL INTEREST EXPENSE

1,557


1,620








NET INTEREST INCOME

18,791


17,192

Provision for Loan Losses



(400
)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

18,791


17,592








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

901


802

Service Charges on Deposit Accounts

1,300


1,029

Insurance Revenues

1,739


1,495

Company Owned Life Insurance

210


233

Interchange Fee Income

508


449

Other Operating Income

599


395

Net Gains on Sales of Loans

613


613

Net Gains on Securities

567


428

TOTAL NON-INTEREST INCOME

6,437


5,444








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

7,975


7,515

Occupancy Expense

1,262


1,155

Furniture and Equipment Expense

463


438

FDIC Premiums

277


261

Data Processing Fees

935


717

Professional Fees

516


970

Advertising and Promotion

613


447

Intangible Amortization

302


329

Other Operating Expenses

1,739


1,752

TOTAL NON-INTEREST EXPENSE

14,082


13,584








Income before Income Taxes

11,146


9,452

Income Tax Expense

3,438


2,969

NET INCOME

$
7,708


$
6,483








Basic Earnings Per Share

$
0.58


$
0.51

Diluted Earnings Per Share

$
0.58


$
0.51








Dividends Per Share

$
0.16


$
0.15

 
See accompanying notes to consolidated financial statements.

5


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
INTEREST INCOME
 
 

 
 

Interest and Fees on Loans
 
$
48,766

 
$
45,227

Interest on Federal Funds Sold and Other Short-term Investments
 
8

 
25

Interest and Dividends on Securities:
 
 

 
 

Taxable
 
7,944

 
8,380

Non-taxable
 
3,136

 
2,008

TOTAL INTEREST INCOME
 
59,854

 
55,640

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
3,098

 
3,533

Interest on FHLB Advances and Other Borrowings
 
1,448

 
1,978

TOTAL INTEREST EXPENSE
 
4,546

 
5,511

 
 
 
 
 
NET INTEREST INCOME
 
55,308

 
50,129

Provision for Loan Losses
 
550

 
(250
)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
54,758

 
50,379

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
2,728

 
2,433

Service Charges on Deposit Accounts
 
3,552

 
3,034

Insurance Revenues
 
5,777

 
4,658

Company Owned Life Insurance
 
603

 
716

Interchange Fee Income
 
1,467

 
1,392

Other Operating Income
 
1,579

 
1,547

Net Gains on Sales of Loans
 
1,475

 
2,176

Net Gains on Securities
 
1,039

 
1,508

TOTAL NON-INTEREST INCOME
 
18,220

 
17,464

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
24,285

 
22,926

Occupancy Expense
 
3,776

 
3,359

Furniture and Equipment Expense
 
1,472

 
1,379

FDIC Premiums
 
828

 
776

Data Processing Fees
 
2,892

 
2,054

Professional Fees
 
1,761

 
2,156

Advertising and Promotion
 
1,635

 
1,453

Intangible Amortization
 
975

 
1,044

Other Operating Expenses
 
5,687

 
5,160

TOTAL NON-INTEREST EXPENSE
 
43,311

 
40,307

 
 
 
 
 
Income before Income Taxes
 
29,667

 
27,536

Income Tax Expense
 
8,967

 
8,712

NET INCOME
 
$
20,700

 
$
18,824

 
 
 
 
 
Basic Earnings Per Share
 
$
1.57

 
$
1.49

Diluted Earnings Per Share
 
$
1.57

 
$
1.48

 
 
 
 
 
Dividends Per Share
 
$
0.48

 
$
0.45


See accompanying notes to consolidated financial statements.


6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 
 
Three Months Ended 
 September 30,
 
 
2014
 
2013
 
 
 
 
 
NET INCOME
 
$
7,708

 
$
6,483

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
871

 
(1,687
)
Reclassification Adjustment for Losses (Gains) Included in Net Income
 
(567
)
 
(428
)
Tax Effect
 
(96
)
 
742

Net of Tax
 
208

 
(1,373
)
 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
208

 
(1,373
)
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
7,916

 
$
5,110

 

 
 


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
 
 
 
 
NET INCOME
 
$
20,700

 
$
18,824

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
9,251

 
(18,984
)
Reclassification Adjustment for Losses (Gains) Included in Net Income
 
(1,039
)
 
(1,508
)
Tax Effect
 
(2,903
)
 
7,229

Net of Tax
 
5,309

 
(13,263
)
 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
5,309

 
(13,263
)
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
26,009

 
$
5,561








See accompanying notes to consolidated financial statements.

7


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
20,700

 
$
18,824

Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
 
 

 
 

Net Amortization on Securities
 
1,510

 
2,338

Depreciation and Amortization
 
3,611

 
3,308

Loans Originated for Sale
 
(70,603
)
 
(132,471
)
Proceeds from Sales of Loans Held-for-Sale
 
73,696

 
142,433

Provision for Loan Losses
 
550

 
(250
)
Gain on Sale of Loans, net
 
(1,475
)
 
(2,176
)
Gain on Securities, net
 
(1,039
)
 
(1,508
)
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets
 
(46
)
 
258

Loss (Gain) on Disposition and Impairment of Premises and Equipment
 
28

 
(70
)
Increase in Cash Surrender Value of Company Owned Life Insurance
 
(631
)
 
(709
)
Equity Based Compensation
 
482

 
247

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
(4,708
)
 
2,799

Interest Payable and Other Liabilities
 
2,214

 
278

Net Cash from Operating Activities
 
24,289

 
33,301

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturity of Other Short-term Investments
 

 
2,690

Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale
 
62,892

 
114,563

Proceeds from Sales of Securities Available-for-Sale
 
52,711

 
119,952

Purchase of Securities Available-for-Sale
 
(74,247
)
 
(231,085
)
Proceeds from Maturities of Securities Held-to-Maturity
 
84

 
78

Purchase of Federal Home Loan Bank Stock
 
(92
)
 

Purchase of Loans
 
(1,750
)
 
(744
)
Proceeds from Sales of Loans
 

 
3,250

Loans Made to Customers, net of Payments Received
 
(49,436
)
 
(80,564
)
Proceeds from Sales of Other Real Estate
 
1,831

 
1,479

Property and Equipment Expenditures
 
(2,492
)
 
(2,296
)
Proceeds from Sales of Property and Equipment
 
23

 
88

Net Cash from Investing Activities
 
(10,476
)
 
(72,589
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
(47,658
)
 
30,120

Change in Short-term Borrowings
 
66,977

 
31,258

Advances in Long-term Debt
 
20,321

 
50,000

Repayments of Long-term Debt
 
(20,095
)
 
(50,815
)
Issuance of Common Stock
 
50

 
13

Employee Stock Purchase Plan
 
(37
)
 
(9
)
Dividends Paid
 
(6,336
)
 
(5,695
)
Net Cash from Financing Activities
 
13,222

 
54,872

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
27,035

 
15,584

Cash and Cash Equivalents at Beginning of Year
 
60,132

 
49,087

Cash and Cash Equivalents at End of Year
 
$
87,167

 
$
64,671

 
 
 
 
 
Cash Paid During the Year for
 
 

 
 

Interest
 
$
4,650

 
$
6,096

Income Taxes
 
7,192

 
8,732

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
1,277

 
$
676

Accounts Receivable Transferred to Securities
 
(3,323
)
 
(45,803
)
See accompanying notes to consolidated financial statements.

8


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(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. 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, 2013 Annual Report on Form 10-K. Certain items included in the prior period financial statements were reclassified to conform to the current presentation. There was no effect on net income or total shareholder’s equity.

NOTE 2 – Per Share Data
 
The computations of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Three Months Ended 
 September 30,
 
 
2014
 
2013
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
7,708

 
$
6,483

Weighted Average Shares Outstanding
 
13,210,395

 
12,666,780

Basic Earnings per Share
 
$
0.58

 
$
0.51

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
7,708

 
$
6,483

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,210,395

 
12,666,780

Potentially Dilutive Shares, Net
 
20,280

 
24,384

Diluted Weighted Average Shares Outstanding
 
13,230,675

 
12,691,164

Diluted Earnings per Share
 
$
0.58

 
$
0.51

 
For the three months ended September 30, 2014 and 2013, there were no anti-dilutive shares.
 
The computations of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
20,700

 
$
18,824

Weighted Average Shares Outstanding
 
13,200,025

 
12,658,403

Basic Earnings per Share
 
$
1.57

 
$
1.49

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
20,700

 
$
18,824

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,200,025

 
12,658,403

Potentially Dilutive Shares, Net
 
20,975

 
19,950

Diluted Weighted Average Shares Outstanding
 
13,221,000

 
12,678,353

Diluted Earnings per Share
 
$
1.57

 
$
1.48

 
For the nine months ended September 30, 2014 and 2013, there were no anti-dilutive shares.


9


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(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 September 30, 2014 and December 31, 2013, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2014
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$
20,000

 
$

 
$
(637
)
 
$
19,363

Obligations of State and Political Subdivisions
 
134,763

 
5,858

 
(92
)
 
140,529

Mortgage-backed Securities - Residential
 
420,466

 
2,758

 
(7,728
)
 
415,496

Equity Securities
 
353

 

 

 
353

Total
 
$
575,582

 
$
8,616

 
$
(8,457
)
 
$
575,741

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$
20,000

 
$

 
$
(1,048
)
 
$
18,952

Obligations of State and Political Subdivisions
 
112,008

 
2,388

 
(899
)
 
113,497

Mortgage-backed Securities - Residential
 
481,724

 
3,497

 
(11,991
)
 
473,230

Equity Securities
 
353

 

 

 
353

Total
 
$
614,085

 
$
5,885

 
$
(13,938
)
 
$
606,032

 
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 September 30, 2014 and December 31, 2013, were as follows:
Securities Held-to-Maturity:
 
Carrying
Amount
 
Gross
Unrecognized
Gains
 
Gross
Unrecognized
Losses
 
Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2014
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
184

 
$
2

 
$

 
$
186

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
268

 
$
3

 
$

 
$
271
















10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 3 - Securities (continued)

The amortized cost and fair value of Securities at September 30, 2014 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.
Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
3,716

 
$
3,737

Due after one year through five years
 
20,274

 
20,174

Due after five years through ten years
 
65,615

 
67,862

Due after ten years
 
65,158

 
68,119

Mortgage-backed Securities - Residential
 
420,466

 
415,496

Equity Securities
 
353

 
353

Total
 
$
575,582

 
$
575,741

 

Securities Held-to-Maturity:
 
Carrying
Amount
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$

 
$

Due after one year through five years
 
184

 
186

Due after five years through ten years
 

 

Due after ten years
 

 

Total
 
$
184

 
$
186

 
Proceeds from the Sales of Securities are summarized below:
 
 
Three Months
Ended
 
Three Months
Ended
 
 
September 30, 2014
 
September 30, 2013
 
 
 
 
 
Proceeds from Sales
 
$
45,473

 
$
19,231

Gross Gains on Sales
 
567

 
428

Income Taxes on Gross Gains
 
198

 
150


 
 
Nine Months
Ended
 
Nine Months
Ended
 
 
September 30, 2014
 
September 30, 2013
 
 
 
 
 
Proceeds from Sales
 
$
52,711

 
$
119,952

Gross Gains on Sales
 
1,039

 
1,508

Income Taxes on Gross Gains
 
364

 
528




11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 3 - Securities (continued)

Below is a summary of securities with unrealized losses as of September 30, 2014 and December 31, 2013, presented by length of time the securities have been in a continuous unrealized loss position:
 
 
Less than 12 Months
 
12 Months or More
 
Total
September 30, 2014
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency Securities
 
$

 
$

 
$
19,363

 
$
(637
)
 
$
19,363

 
$
(637
)
Obligations of State and Political Subdivisions
 
4,849

 
(35
)
 
4,038

 
(57
)
 
8,887

 
(92
)
Mortgage-backed Securities - Residential
 
67,038

 
(543
)
 
239,488

 
(7,185
)
 
306,526

 
(7,728
)
Equity Securities
 

 

 

 

 

 

Total
 
$
71,887

 
$
(578
)
 
$
262,889

 
$
(7,879
)
 
$
334,776

 
$
(8,457
)

 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2013
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency Securities
 
$
18,952

 
$
(1,048
)
 
$

 
$

 
$
18,952

 
$
(1,048
)
Obligations of State and Political Subdivisions
 
38,878

 
(899
)
 

 

 
38,878

 
(899
)
Mortgage-backed Securities - Residential
 
346,028

 
(11,903
)
 
1,735

 
(88
)
 
347,763

 
(11,991
)
Equity Securities
 

 

 

 

 

 

Total
 
$
403,858

 
$
(13,850
)
 
$
1,735

 
$
(88
)
 
$
405,593

 
$
(13,938
)
 
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. All mortgage-backed securities in the Company’s portfolio are guaranteed by government sponsored entities, are investment grade, and are performing as expected.
 
NOTE 4 – Derivatives
 
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $23.2 million at September 30, 2014 and $17.9 million at December 31, 2013. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income. 
 
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.
 

12


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 4 - Derivatives (continued)

The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of:
 
 
September 30, 2014
 
December 31, 2013
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
23,233

 
$
470

 
$
17,853

 
$
866

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
23,233

 
$
412

 
$
17,853

 
$
737

 
The following tables present the effect of derivative instruments on the Consolidated Statements of Income for the periods presented:
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2014
 
2013
 
2014
 
2013
Interest Rate Swaps:
 
 

 
 

 
 

 
 

Included in Interest Income / (Expense)
 
$

 
$

 
$

 
$

Included in Other Income / (Expense)
 
(4
)
 
(34
)
 
74

 
517


NOTE 5 – Loans
 
Loans were comprised of the following classifications at September 30, 2014 and December 31, 2013: 
 
 
September 30,
2014
 
December 31,
2013
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
377,845

 
$
350,955

Commercial Real Estate Loans
 
586,012

 
582,066

Agricultural Loans
 
201,867

 
192,880

Retail:
 
 

 
 

Home Equity Loans
 
85,160

 
81,504

Consumer Loans
 
48,604

 
49,124

Residential Mortgage Loans
 
137,286

 
128,683

Subtotal
 
1,436,774

 
1,385,212

Less: Unearned Income
 
(4,025
)
 
(2,830
)
Allowance for Loan Losses
 
(15,592
)
 
(14,584
)
Loans, Net
 
$
1,417,157

 
$
1,367,798

 

13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following tables present the activity in the allowance for loan losses by portfolio class for the three months ending September 30, 2014 and 2013:
September 30, 2014
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
5,661

 
$
7,199

 
$
1,016

 
$
418

 
$
326

 
$
435

 
$
495

 
$
15,550

Provision for Loan Losses
 
(563
)
 
206

 
156

 
(33
)
 
77

 
(33
)
 
190

 

Recoveries
 
19

 
55

 

 

 
41

 
6

 

 
121

Loans Charged-off
 

 
(6
)
 

 
(7
)
 
(65
)
 
(1
)
 

 
(79
)
Ending Balance
 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685

 
$
15,592

September 30, 2013
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,258

 
$
8,636

 
$
817

 
$
313

 
$
199

 
$
280

 
$
760

 
$
15,263

Provision for Loan Losses
 
(361
)
 
(214
)
 
53

 
89

 
64

 
36

 
(67
)
 
(400
)
Recoveries
 
108

 
7

 

 

 
33

 
2

 

 
150

Loans Charged-off
 
(34
)
 
(212
)
 

 
(193
)
 
(93
)
 
(17
)
 

 
(549
)
Ending Balance
 
$
3,971

 
$
8,217

 
$
870

 
$
209

 
$
203

 
$
301

 
$
693

 
$
14,464


The following tables present the activity in the allowance for loan losses by portfolio class for the nine months ending September 30, 2014 and 2013:
September 30, 2014
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
3,983

 
$
8,335

 
$
946

 
$
239

 
$
188

 
$
281

 
$
612

 
$
14,584

Provision for Loan Losses
 
1,124

 
(1,546
)
 
226

 
148

 
296

 
229

 
73

 
550

Recoveries
 
97

 
785

 

 
42

 
127

 
14

 

 
1,065

Loans Charged-off
 
(87
)
 
(120
)
 

 
(51
)
 
(232
)
 
(117
)
 

 
(607
)
Ending Balance
 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685

 
$
15,592

September 30, 2013
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,555

 
$
8,931

 
$
989

 
$
141

 
$
214

 
$
186

 
$
504

 
$
15,520

Provision for Loan Losses
 
(618
)
 
(261
)
 
(119
)
 
326

 
100

 
133

 
189

 
(250
)
Recoveries
 
121

 
85

 

 

 
104

 
5

 

 
315

Loans Charged-off
 
(87
)
 
(538
)
 

 
(258
)
 
(215
)
 
(23
)
 

 
(1,121
)
Ending Balance
 
$
3,971

 
$
8,217

 
$
870

 
$
209

 
$
203

 
$
301

 
$
693

 
$
14,464


In determining the adequacy of the allowance for loan loss, 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 current economic factors and portfolio trends. 
 

14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

During the third quarter of 2014, a modification was made to the Company’s standard methodology for calculating the allowance for loan losses. This modification centered on commercial and agricultural loans that are graded as substandard and was undertaken as a part of the Company’s annual update of its migration analysis utilized in the allowance for loan losses calculations. Prior to the third quarter of 2014, the allocation for substandard, non-impaired commercial and agricultural loans was based on evaluating the amount of loss of each individual credit relationship internally graded substandard. Beginning in the third quarter of 2014, the Company adjusted its methodology to assign allocations for substandard commercial and agricultural credits based on migration analysis techniques utilizing three year migration periods for these types of credits. The modification to the methodology during the third quarter of 2014 resulted in a decrease of $63 to the overall required loan loss allowance.

Loan impairment is reported when full repayment under the terms of the loan is not expected. This methodology is used for all loans, including loans acquired with deteriorated credit quality. For purchased loans, the assessment is made at the time of acquisition as well as over the life of loan. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
 
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of September 30, 2014 and December 31, 2013:
September 30, 2014
 
Total
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
Allowance for Loan Losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
1,579

 
$
205

 
$
1,374

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,981

 
4,912

 
6,075

 
1,172

 
378

 
379

 
380

 
685

Acquired with Deteriorated Credit Quality
 
32

 

 
5

 

 

 

 
27

 

Total Ending Allowance Balance
 
$
15,592

 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
5,951

 
$
2,157

 
$
3,794

 
$

 
$

 
$

 
$

 
$

Loans Collectively Evaluated for Impairment
 
1,428,066

 
376,176

 
576,848

 
204,792

 
85,474

 
48,615

 
136,161

 

Loans Acquired with Deteriorated Credit Quality
 
8,731

 
387

 
6,724

 

 

 
122

 
1,498

 

Total Ending Loans Balance(1)
 
$
1,442,748

 
$
378,720

 
$
587,366

 
$
204,792

 
$
85,474

 
$
48,737

 
$
137,659

 
$


(1)Total recorded investment in loans includes $5,974 in accrued interest.

15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

December 31, 2013
 
Total
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
Allowance for Loan Losses:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
3,095

 
$
45

 
$
3,050

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
11,481

 
3,938

 
5,277

 
946

 
239

 
188

 
281

 
612

Acquired with Deteriorated Credit Quality
 
8

 

 
8

 

 

 

 

 

Total Ending Allowance Balance
 
$
14,584

 
$
3,983

 
$
8,335

 
$
946

 
$
239

 
$
188

 
$
281

 
$
612


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
8,458

 
$
2,114

 
$
6,344

 
$

 
$

 
$

 
$

 
$

Loans Collectively Evaluated for Impairment
 
1,367,591

 
347,808

 
566,389

 
195,171

 
81,812

 
49,131

 
127,280

 

Loans Acquired with Deteriorated Credit Quality
 
14,753

 
1,981

 
10,871

 

 

 
134

 
1,767

 

Total Ending Loans Balance(1)
 
$
1,390,802

 
$
351,903

 
$
583,604

 
$
195,171

 
$
81,812

 
$
49,265

 
$
129,047

 
$

 
(1)Total recorded investment in loans includes $5,590 in accrued interest.
 
The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2014 and December 31, 2013:
September 30, 2014
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,967

 
$
1,954

 
$

Commercial Real Estate Loans
 
2,660

 
1,537

 

Agricultural Loans
 

 

 

Subtotal
 
4,627

 
3,491

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
207

 
207

 
205

Commercial Real Estate Loans
 
2,772

 
2,618

 
1,379

Agricultural Loans
 

 

 

Subtotal
 
2,979

 
2,825

 
1,584

Total
 
$
7,606

 
$
6,316

 
$
1,584

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
1,109

 
$
359

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
30

 
$
5

 
$
5


(1) Unpaid Principal Balance is the remaining contractual payments without reduction of partial charge-offs.


16


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

December 31, 2013
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,163

 
$
2,072

 
$

Commercial Real Estate Loans
 
4,710

 
2,383

 

Agricultural Loans
 

 

 

Subtotal
 
6,873

 
4,455

 

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
45

 
45

 
45

Commercial Real Estate Loans
 
4,428

 
4,417

 
3,058

Agricultural Loans
 

 

 

Subtotal
 
4,473

 
4,462

 
3,103

Total
 
$
11,346

 
$
8,917

 
$
3,103

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
987

 
$
451

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
33

 
$
8

 
$
8


(1) Unpaid Principal Balance is the remaining contractual payments without reduction of partial charge-offs.
 
The following tables present loans individually evaluated for impairment by class of loans for the three month period ended September 30, 2014 and 2013:
September 30, 2014
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,005

 
$
29

 
$
30

Commercial Real Estate Loans
 
2,384

 
18

 
21

Agricultural Loans
 

 

 

Subtotal
 
4,389

 
47

 
51

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
211

 
1

 
1

Commercial Real Estate Loans
 
2,643

 
4

 
3

Agricultural Loans
 

 

 

Subtotal
 
2,854

 
5

 
4

Total
 
$
7,243

 
$
52

 
$
55

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
773

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
31

 
$
1

 
$
1



17


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

September 30, 2013
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,223

 
$
33

 
$
32

Commercial Real Estate Loans
 
1,956

 
1

 
2

Agricultural Loans
 
751

 
21

 
16

Subtotal
 
4,930

 
55

 
50

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
464

 
1

 
1

Commercial Real Estate Loans
 
5,415

 
5

 
4

Agricultural Loans
 

 

 

Subtotal
 
5,879

 
6

 
5

Total
 
$
10,809

 
$
61

 
$
55

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
119

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
214

 
$
1

 
$
1

 
The following tables present loans individually evaluated for impairment by class of loans for the nine month period ended September 30, 2014 and 2013:
September 30, 2014
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,106

 
$
105

 
$
107

Commercial Real Estate Loans
 
2,714

 
73

 
70

Agricultural Loans
 

 

 

Subtotal
 
4,820

 
178

 
177

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
1,600

 
1

 
1

Commercial Real Estate Loans
 
3,158

 
16

 
13

Agricultural Loans
 

 

 

Subtotal
 
4,758

 
17

 
14

Total
 
$
9,578

 
$
195

 
$
191

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
873

 
$
3

 
$
3

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
32

 
$
1

 
$
1

 

18


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

September 30, 2013
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
818

 
$
33

 
$
33

Commercial Real Estate Loans
 
2,196

 
1

 
2

Agricultural Loans
 
1,738

 
196

 
200

Subtotal
 
4,752

 
230

 
235

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
1,797

 
3

 
3

Commercial Real Estate Loans
 
5,745

 
17

 
13

Agricultural Loans
 

 

 

Subtotal
 
7,542

 
20

 
16

Total
 
$
12,294

 
$
250

 
$
251

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
39

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
182

 
$
2

 
$
2

 
All classes of loans, including loans acquired with deteriorated credit quality, are generally placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection.
 
The following table presents the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of September 30, 2014 and December 31, 2013:
 
 
Non-Accrual
 
Loans Past Due 90 Days
or More & Still Accruing
 
 
2014
 
2013
 
2014
 
2013
Commercial and Industrial Loans and Leases
 
$
279

 
$
31

 
$
83

 
$

Commercial Real Estate Loans
 
3,308

 
6,658

 

 
8

Agricultural Loans
 

 

 
13

 

Home Equity Loans
 
308

 
114

 

 

Consumer Loans
 
190

 
236

 

 

Residential Mortgage Loans
 
1,582

 
1,339

 

 

Total
 
$
5,667

 
$
8,378

 
$
96

 
$
8

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
1,164

 
$
1,705

 
$

 
$



19


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following table presents the aging of the recorded investment in past due loans by class of loans as of September 30, 2014 and December 31, 2013:
September 30, 2014
 
Total
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Loans Not Past Due
Commercial and Industrial Loans and Leases
 
$
378,720

 
$
265

 
$
40

 
$
307

 
$
612

 
$
378,108

Commercial Real Estate Loans
 
587,366

 
411

 

 
889

 
1,300

 
586,066

Agricultural Loans
 
204,792

 
105

 
74

 
13

 
192

 
204,600

Home Equity Loans
 
85,474

 
330

 

 
308

 
638

 
84,836

Consumer Loans
 
48,737

 
175

 
63

 
66

 
304

 
48,433

Residential Mortgage Loans
 
137,659

 
1,637

 
811

 
1,411

 
3,859

 
133,800

Total(1)
 
$
1,442,748

 
$
2,923

 
$
988

 
$
2,994

 
$
6,905

 
$
1,435,843

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
8,731

 
$

 
$

 
$
645

 
$
645

 
$
8,086


(1)Total recorded investment in loans includes $5,974 in accrued interest.
 
December 31, 2013
 
Total
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Loans Not Past Due
Commercial and Industrial Loans and Leases
 
$
351,903

 
$
256

 
$
78

 
$

 
$
334

 
$
351,569

Commercial Real Estate Loans
 
583,604

 
613

 
62

 
2,234

 
2,909

 
580,695

Agricultural Loans
 
195,171

 
62

 

 

 
62

 
195,109

Home Equity Loans
 
81,812

 
303

 
33

 
114

 
450

 
81,362

Consumer Loans
 
49,265

 
149

 
66

 
102

 
317

 
48,948

Residential Mortgage Loans
 
129,047

 
2,206

 
192

 
1,115

 
3,513

 
125,534

Total(1)
 
$
1,390,802

 
$
3,589

 
$
431

 
$
3,565

 
$
7,585

 
$
1,383,217

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
14,753

 
$
148

 
$

 
$
1,103

 
$
1,251

 
$
13,502

 
(1)Total recorded investment in loans includes $5,590 in accrued interest.
 
Troubled Debt Restructurings:
 
In certain instances, the Company may choose to restructure the contractual terms of loans. A troubled debt restructuring occurs when the Bank grants a concession to the borrower that it would not otherwise consider due to a borrower’s financial difficulty.   In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Company’s internal underwriting policy. The Company uses the same methodology for loans acquired with deteriorated credit quality as for all other loans when determining whether the loan is a troubled debt restructuring.
 
During the three months ended September 30, 2014 and 2013, there were no additional loans modified as troubled debt restructurings. There were no troubled debt restructurings for the three months ended September 30, 2014 and the year ended December 31, 2013 for loans acquired with deteriorated credit quality at the time of acquisition.

During the nine months ended September 30, 2014, there was one loan modified as troubled debt restructurings. The modification of the terms of this loan included a permanent reduction of the recorded investment in the loan. During the nine months ended September 30 2013, there was one loan modified as a troubled debt restructuring. There were no troubled debt restructurings for the nine months ended September 30, 2014 and the year ended December 31, 2013 for loans acquired with deteriorated credit quality at the time of acquisition.


20


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following tables present the recorded investment of troubled debt restructurings by class of loans as of September 30, 2014 and December 31, 2013:
September 30, 2014
 
Total
 
Performing
 
Non-Accrual(1)
Commercial and Industrial Loans and Leases
 
$
1,889

 
$
1,882

 
$
7

Commercial Real Estate Loans
 
2,838

 
842

 
1,996

Total
 
$
4,727

 
$
2,724

 
$
2,003

 
December 31, 2013
 
Total
 
Performing
 
Non-Accrual(1)
Commercial and Industrial Loans and Leases
 
$
2,092

 
$
2,086

 
$
6

Commercial Real Estate Loans
 
4,325

 
364

 
3,961

Total
 
$
6,417

 
$
2,450

 
$
3,967

 
(1)The non-accrual troubled debt restructurings are included in the Non-Accrual Loan table presented on previous page.
 
The Company had not committed to lending any additional amounts as of September 30, 2014 to customers with outstanding loans that are classified as troubled debt restructurings. The Company had committed to lending an additional amount of $40 as of December 31, 2013 to customers with outstanding loans that are classified as troubled debt restructurings. 
 
The following tables present loans by class modified as troubled debt restructurings that occurred during the three months ending September 30, 2014 and 2013: 
September 30, 2014
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Commercial and Industrial Loans and Leases
 

 
$

 
$

Commercial Real Estate Loans
 

 

 

Total
 

 
$

 
$

 
The troubled debt restructurings described above increased the allowance for loan losses by $0 and resulted in charge-offs of $0 during the three months ending September 30, 2014.
September 30, 2013
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Commercial and Industrial Loans and Leases
 
1

 
$
224

 
$
230

Commercial Real Estate Loans
 

 

 

Total
 
1

 
$
224

 
$
230

 
The troubled debt restructurings described above increased the allowance for loan losses by $0 and resulted in charge-offs of $0 during the three months ending September 30, 2013.


21


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following tables present loans by class modified as troubled debt restructurings that occurred during the nine months ending September 30, 2014 and 2013: 
September 30, 2014
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Commercial and Industrial Loans and Leases
 

 
$

 
$

Commercial Real Estate Loans
 
1

 
201

 
197

Total
 
1

 
$
201

 
$
197

 
The troubled debt restructurings described above increased the allowance for loan losses by $0 and resulted in charge-offs of $0 during the nine months ending September 30, 2014.
September 30, 2013
 
Number of Loans
 
Pre-Modification Outstanding Recorded Investment
 
Post-Modification Outstanding Recorded Investment
Commercial and Industrial Loans and Leases
 
1

 
$
224

 
$
230

Commercial Real Estate Loans
 
1

 
81

 
118

Total
 
2

 
$
305

 
$
348

 
The troubled debt restructurings described above decreased the allowance for loan losses by $210 and resulted in charge-offs of $0 during the nine months ending September 30, 2013.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ending September 30, 2014 and 2013:
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
September 30, 2014
 
 

 
 

Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 
1

 
186

Total
 
1

 
$
186

 
The troubled debt restructurings that subsequently defaulted described above resulted in no change to the allowance for loan losses and no charge-offs during the three months ending September 30, 2014.
 
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
September 30, 2013
 
 

 
 

Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 

 

Total
 

 
$

 
The troubled debt restructurings that subsequently defaulted described above resulted in no change to the allowance for loan losses and no charge-offs during the three months ending September 30, 2013.


22


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ending September 30, 2014 and 2013:
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
September 30, 2014
 
 

 
 
Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 
1

 
186

Total
 
1

 
$
186

 
The troubled debt restructurings that subsequently defaulted described above resulted in no change to the allowance for loan losses and no charge-offs during the nine months ending September 30, 2014.
 
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
September 30, 2013
 
 

 
 

Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 

 

Total
 

 
$

 
The troubled debt restructurings that subsequently defaulted described above resulted in no change to the allowance for loan losses and no charge-offs during the nine months ending September 30, 2013.
 
A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.

Credit Quality Indicators:
 
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $100. This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings:
 
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
 
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:


23


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

September 30, 2014
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Commercial and Industrial Loans and Leases
 
$
347,901

 
$
18,465

 
$
12,354

 
$

 
$
378,720

Commercial Real Estate Loans
 
548,043

 
22,959

 
16,364

 

 
587,366

Agricultural Loans
 
199,283

 
5,046

 
463

 

 
204,792

Total
 
$
1,095,227

 
$
46,470

 
$
29,181

 
$

 
$
1,170,878

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
641

 
$
1,748

 
$
4,722

 
$

 
$
7,111


 
December 31, 2013
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Commercial and Industrial Loans and Leases
 
$
324,685

 
$
15,485

 
$
11,733

 
$

 
$
351,903

Commercial Real Estate Loans
 
539,533

 
20,168

 
23,903

 

 
583,604

Agricultural Loans
 
192,609

 
2,357

 
205

 

 
195,171

Total
 
$
1,056,827

 
$
38,010

 
$
35,841

 
$

 
$
1,130,678

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
3,121

 
$
661

 
$
9,070

 
$

 
$
12,852

 
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity as of September 30, 2014 and December 31, 2013:
September 30, 2014
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
Performing
 
$
85,166

 
$
48,547

 
$
136,077

Nonperforming
 
308

 
190

 
1,582

Total
 
$
85,474

 
$
48,737

 
$
137,659

Loans Acquired With Deteriorated Credit Quality
(Included in the Total Above)
 
$

 
$
122

 
$
1,498

 
December 31, 2013
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
Performing
 
$
81,698

 
$
49,029

 
$
127,708

Nonperforming
 
114

 
236

 
1,339

Total
 
$
81,812

 
$
49,265

 
$
129,047

Loans Acquired With Deteriorated Credit Quality
(Included in the Total Above)
 
$

 
$
134

 
$
1,767

 

24


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows: 
 
 
September 30, 2014
 
 
 
Commercial and Industrial Loans
 
$
387

Commercial Real Estate Loans
 
6,724

Home Equity Loans
 

Consumer Loans
 
122

Residential Mortgage Loans
 
1,498

Total
 
$
8,731

 
 
 

Carrying Amount, Net of Allowance
 
$
8,699

 
 
 
December 31, 2013
 
 
 
Commercial and Industrial Loans
 
$
1,981

Commercial Real Estate Loans
 
10,871

Home Equity Loans
 

Consumer Loans
 
134

Residential Mortgage Loans
 
1,767

Total
 
$
14,753

 
 
 

Carrying Amount, Net of Allowance
 
$
14,745


Accretable yield, or income expected to be collected, is as follows:
 
 
2014
 
2013
 
 
 
 
 
Balance at July 1
 
$
2,637

 
$
182

New Loans Purchased
 

 

Accretion of Income
 
(89
)
 
(443
)
Reclassifications from Non-accretable Difference
 

 
444

Charge-off of Accretable Yield
 
(113
)
 

Balance at September 30
 
$
2,435

 
$
183



25


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

Accretable yield, or income expected to be collected, is as follows:
 
 
2014
 
2013
 
 
 
 
 
Balance at January 1
 
$
2,790

 
$
170

New Loans Purchased
 

 

Accretion of Income
 
(242
)
 
(889
)
Reclassifications from Non-accretable Difference
 

 
902

Charge-off of Accretable Yield
 
(113
)
 

Balance at September 30
 
$
2,435

 
$
183


For those purchased loans disclosed above, the Company increased the allowance for loan losses by $27 during the three and nine months ended September 30, 2014. For those purchased loans disclosed above, the Company decreased the allowance for loan losses by $141 and $80 during the three and nine months ended September 30, 2013. No allowances for loan losses were reversed during the reported periods.

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’s banking subsidiary’s local markets.
 
The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operated through 37 banking offices at September 30, 2014. 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 primarily consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.
 

26


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(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.
 

Core
Banking

Trust and Investment Advisory Services

Insurance

Other

Consolidated Totals
Three Months Ended

 


 


 


 


 

September 30, 2014

 


 


 





 

Net Interest Income

$
18,908


$
4


$
1


$
(122
)

$
18,791

Net Gains on Sales of Loans

613








613

Net Gains on Securities

567








567

Trust and Investment Product Fees

2


899






901

Insurance Revenues

15


22


1,702




1,739

Noncash Items:













 

Provision for Loan Losses










Depreciation and Amortization

1,120


5


26


38


1,189

Income Tax Expense (Benefit)

3,496


(15
)

147


(190
)

3,438

Segment Profit (Loss)

7,540


(30
)

216


(18
)

7,708

Segment Assets at September 30, 2014

2,213,848


11,452


6,442


(25,821
)

2,205,921

 
 

Core
Banking

Trust and Investment Advisory Services

Insurance

Other

Consolidated Totals
Three Months Ended

 


 


 


 


 

September 30, 2013

 


 


 


 


 

Net Interest Income

$
17,334


$
5


$
4


$
(151
)

$
17,192

Net Gains on Sales of Loans

613








613

Net Gains on Securities

415






13


428

Trust and Investment Product Fees

1


802




(1
)

802

Insurance Revenues

10


7


1,478




1,495

Noncash Items:

 


 


 


 


 

Provision for Loan Losses

(400
)







(400
)
Depreciation and Amortization

941


6


99


38


1,084

Income Tax Expense (Benefit)

3,218


(24
)

67


(292
)

2,969

Segment Profit (Loss)

6,581


(41
)

96


(153
)

6,483

Segment Assets at December 31, 2013

2,171,837


11,663


5,636


(25,309
)

2,163,827



27


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Segment Information (continued)

 
 
Core
Banking
 
Trust and Investment Advisory Services
 
Insurance
 
Other
 
Consolidated Totals
Nine Months Ended
 
 

 
 

 
 

 
 

 
 

September 30, 2014
 
 

 
 

 
 

 
 
 
 

Net Interest Income
 
$
55,655

 
$
12

 
$
3

 
$
(362
)
 
$
55,308

Net Gains on Sales of Loans
 
1,475

 

 

 

 
1,475

Net Gains on Securities
 
1,039

 

 

 

 
1,039

Trust and Investment Product Fees
 
4

 
2,724

 

 

 
2,728

Insurance Revenues
 
20

 
33

 
5,724

 

 
5,777

Noncash Items:
 
 
 
 
 
 
 
 
 


Provision for Loan Losses
 
550

 

 

 

 
550

Depreciation and Amortization
 
3,395

 
18

 
85

 
113

 
3,611

Income Tax Expense (Benefit)
 
8,940

 
(122
)
 
747

 
(598
)
 
8,967

Segment Profit (Loss)
 
19,908

 
(202
)
 
1,078

 
(84
)
 
20,700

Segment Assets at September 30, 2014
 
2,213,848

 
11,452

 
6,442

 
(25,821
)
 
2,205,921


 
 
Core
Banking
 
Trust and Investment Advisory Services
 
Insurance
 
Other
 
Consolidated Totals
Nine Months Ended
 
 

 
 

 
 

 
 

 
 

September 30, 2013
 
 

 
 

 
 
 
 

 
 

Net Interest Income
 
$
51,102

 
$
16

 
$
16

 
$
(1,005
)
 
$
50,129

Net Gains on Sales of Loans
 
2,176

 

 

 

 
2,176

Net Gains on Securities
 
1,495

 

 

 
13

 
1,508

Trust and Investment Product Fees
 
5

 
2,430

 

 
(2
)
 
2,433

Insurance Revenues
 
25

 
26

 
4,607

 

 
4,658

Noncash Items:
 
 

 
 

 
 

 
 

 


Provision for Loan Losses
 
(250
)
 

 

 

 
(250
)
Depreciation and Amortization
 
2,864

 
21

 
310

 
113

 
3,308

Income Tax Expense (Benefit)
 
9,588

 
(50
)
 
254

 
(1,080
)
 
8,712

Segment Profit (Loss)
 
19,262

 
(90
)
 
334

 
(682
)
 
18,824

Segment Assets at December 31, 2013
 
2,171,837

 
11,663

 
5,636

 
(25,309
)
 
2,163,827


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 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 are purchased. The Board of Directors established no expiration date for this program. As of September 30, 2014, the Company had purchased 334,965 shares under the program. No shares were purchased under the program during the three and nine months ended September 30, 2014 and 2013.


28


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 8 – Equity Plans and Equity Based Compensation
 
The Company maintains three equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted. At September 30, 2014, the Company has reserved 438,813 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 three and nine months ended September 30, 2014 and 2013, the Company granted no options, and accordingly, recorded no stock option expense related to option grants during the three and nine months ended September 30, 2014 and 2013. The Company recorded no other stock compensation expense applicable to options during the three and nine months ended September 30, 2014 and 2013 because all outstanding options were fully vested prior to 2007. In addition, there was no unrecognized option expense as all outstanding options were fully vested prior to September 30, 2014 and 2013. 
 
During the periods presented, awards of long-term incentives were granted in the form of restricted stock. Awards that were granted to management under a management incentive plan were granted in tandem with cash credit entitlements (in the form of 60% restricted stock grants and 40% cash credit entitlements for 2014 and 50% restricted stock grants and 50% cash credit entitlements prior to 2014). The management restricted stock grants and tandem cash credit entitlements awarded in 2013 will vest in three equal installments of 33.3% with the first annual vesting on December 5th of the year of the grant and on December 5th of the next two succeeding years.  Awards that were granted to directors as additional retainer for their services do not include any cash credit entitlement. These director restricted stock grants are subject to forfeiture in the event that the recipient of the grant does not continue in service as a director of the Company through December 5th of the year after grant or do not satisfy certain meeting attendance requirements, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. During the three months ended September 30, 2014 and 2013, the Company granted no shares of restricted stock. During the nine months ended September 30, 2014 and 2013, the Company granted awards of 31,080 and 29,170 shares of restricted stock, respectively. 
 
The following tables present expense recorded for restricted stock and cash entitlements as well as the related tax effect for the periods presented:
 

Three Months Ended
September 30,
 

2014

2013







Restricted Stock Expense

$
161


$
77

Cash Entitlement Expense

101


54

Tax Effect

(106
)

(53
)
Net of Tax

$
156


$
78


 
 
Nine Months Ended
September 30,
 
 
2014
 
2013
 
 
 
 
 
Restricted Stock Expense
 
$
482

 
$
247

Cash Entitlement Expense
 
300

 
162

Tax Effect
 
(317
)
 
(166
)
Net of Tax
 
$
465

 
$
243

 
Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $1,616 and $971 as of September 30, 2014 and 2013, respectively.
 
The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this Plan has been set at 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provided for the purchase of up to 500,000 shares of common stock, which the Company may obtain 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. 

29


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 8 - Equity Plans and Equity Based Compensation (continued)

 

The Employee Stock Purchase Plan is not considered compensatory.  There was no expense recorded for the employee stock purchase plan during the three and nine months ended September 30, 2014 and 2013, nor was there any unrecognized compensation expense as of September 30, 2014 and 2013 for the Employee Stock Purchase Plan.

NOTE 9 – 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). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At September 30, 2014, the Company held $10.5 million in Level 3 securities which consist of $10.1 million of non-rated Obligations of State and Political Subdivisions and $353 thousand of equity securities that are not actively traded. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these securities are reported by the Company in a Level 3 classification.
 
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
 
Impaired Loans: Fair values for impaired 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 by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.
 

30


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - 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 similar assets, adjusted for specific attributes of that loan resulting in a Level 2 classification.

Assets and Liabilities Measured on a Recurring Basis
 
Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:
 
 
Fair Value Measurements at September 30, 2014 Using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$

 
$
19,363

 
$

 
$
19,363

Corporate Securities
 

 

 

 

Obligations of State and Political Subdivisions
 

 
130,409

 
10,120

 
140,529

Mortgage-backed Securities-Residential
 

 
415,496

 

 
415,496

Equity Securities
 

 

 
353

 
353

Total Securities
 
$

 
$
565,268

 
$
10,473

 
$
575,741

 
 
 
 
 
 
 
 
 
Loans Held-for-Sale
 
$

 
$
7,590

 
$

 
$
7,590

 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$
470

 
$

 
$
470

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
$

 
$
412

 
$

 
$
412

 

31


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Fair Value (continued)

 
 
Fair Value Measurements at December 31, 2013 Using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable  Inputs (Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$

 
$
18,952

 
$

 
$
18,952

Corporate Securities
 

 

 

 

Obligations of State and Political Subdivisions
 

 
102,665

 
10,832

 
113,497

Mortgage-backed Securities-Residential
 

 
473,230

 

 
473,230

Equity Securities
 

 

 
353

 
353

Total Securities
 
$

 
$
594,847

 
$
11,185

 
$
606,032

 
 
 
 
 
 
 
 
 
Loans Held-for-Sale
 
$

 
$
9,265

 
$

 
$
9,265

 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$
866

 
$

 
$
866

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
$

 
$
737

 
$

 
$
737

 
There were no transfers between Level 1 and Level 2 for the periods ended September 30, 2014 and December 31, 2013.
 
At September 30, 2014, the aggregate fair value of the Loans Held-for-Sale was $7,590, aggregate contractual principal balance was $7,433 with a difference of $157. At December 31, 2013, the aggregate fair value of the Loans Held-for-Sale was $9,265, aggregate contractual principle balance was $9,129 with a difference of $136.

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2014 and 2013:
 
 
Obligations of State and Political Subdivisions
 
Equity Securities
 
Corporate Securities
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance of Recurring Level 3 Assets at July 1
 
$
10,562

 
$
11,439

 
$
353

 
$
353

 
$

 
$

Total Gains or Losses (realized/unrealized) Included in Earnings
 
(12
)
 
(12
)
 

 

 

 

Maturities / Calls
 
(430
)
 
(425
)
 

 

 

 

Purchases
 

 

 

 

 

 

Balance of Recurring Level 3 Assets at September 30
 
$
10,120

 
$
11,002

 
$
353

 
$
353

 
$

 
$


32


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Fair Value (continued)


 

Obligations of State and Political Subdivisions

Equity Securities

Corporate Securities
 

2014

2013

2014

2013

2014

2013



















Balance of Recurring Level 3 Assets at January 1

$
10,832


$
12,169


$
353


$
353


$


$

Total Gains or Losses (realized/unrealized) Included in Earnings

143


(162
)








Maturities / Calls

(855
)

(1,005
)








Purchases












Balance of Recurring Level 3 Assets at September 30

$
10,120


$
11,002


$
353


$
353


$


$


Of the total gain/loss included in earnings for the three and nine months ended September 30, 2014, $(12) and $143 was attributable to other changes in fair value. The three and nine months ended September 30, 2014 included no gain/loss attributable to interest income on securities. Of the total gain/loss included in earnings for the three and nine months ended September 30, 2013, $(12) and $(162) was attributable to other changes in fair value, respectively. The three and nine months ended September 30, 2013 included no gain/loss attributable to interest income on securities.
 
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 September 30, 2014 Using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable 
Inputs (Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Impaired Loans with Specific Allocations
 
 

 
 

 
 

 
 

Commercial and Industrial Loans
 
$

 
$

 
$
2

 
$
2

Commercial Real Estate Loans
 

 

 
1,223

 
1,223

Agricultural Loans
 

 

 

 

Other Real Estate
 
 

 
 

 
 

 
 

Commercial Real Estate
 

 

 
83

 
83

 
 
 
Fair Value Measurements at December 31, 2013 Using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable 
Inputs (Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Impaired Loans with Specific Allocations
 
 

 
 

 
 

 
 

Commercial and Industrial Loans
 
$

 
$

 
$

 
$

Commercial Real Estate Loans
 

 

 
1,346

 
1,346

Agricultural Loans
 

 

 

 

Other Real Estate
 
 

 
 

 
 

 
 

Commercial Real Estate
 

 

 
20

 
20

 
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,809 with a valuation allowance of $1,584, resulting in an additional provision for loan losses of $30 and

33


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Fair Value (continued)

$187 for the three and nine months ended September 30, 2014, respectively. For the three and nine months ended September 30, 2013, impaired loans resulted in an additional provision for loan losses of $229 and $608, respectively. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4,449 with a valuation allowance of $3,103, resulting in an additional provision for loan losses of $1,024 for the year ended December 31, 2013.
 
Other Real Estate is measured at the lower of carrying or fair value less costs to sell had a carrying value of $83 at September 30, 2014. A charge to earnings through Other Operating Income of $83 was included in the three and nine months ended September 2014. No charge to earnings was included in the three months ended September 30, 2013. A charge to earnings through Other Operating Income of $301 was included in the nine months ended September 30, 2013. Other Real Estate which is measured at the lower of carrying or fair value less costs to sell had a carrying value of $20 at December 31, 2013. 
 
The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2014 and December 31, 2013:
September 30, 2014 
 
Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average)

 








Impaired Loans - Commercial and Industrial Loans
 
$
2

 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
52%-90% (71%)
Impaired Loans - Commercial Real Estate Loans
 
$
1,223


Sales comparison approach

Adjustment for physical condition of comparable properties sold

12%-80% (63%)

 
 


Income approach

Adjustment for net operating income generated by the property


 
 
 


Cost approach

Adjustment for investor rates of return

 
Other Real Estate - Commercial Real Estate Loans
 
$
83

 
Sales comparison approach
 
Adjustment for physical condition of comparable properties sold
 
55% (55%)
 
 
 
 
Income approach
 
Adjustment for net operating income generated by the property
 
 
 
 
 
 
Cost approach
 
Adjustment for investor rates of return
 
 


34


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Fair Value (continued)

December 31, 2013 
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Weighted Average)
 
 
 
 
 
 
 
 
 
Impaired Loans - Commercial Real Estate Loans
 
$
1,346

 
Sales comparison approach
 
Adjustment for physical condition of comparable properties sold
 
12%-80% (53%)
 
 
 

 
Income approach
 
Adjustment for net operating income generated by the property
 
 
 
 
 

 
Cost approach
 
Adjustment for investor rates of return
 
 
Other Real Estate - Commercial Real Estate Loans
 
$
20

 
Sales comparison approach
 
Adjustment for physical condition of comparable properties sold
 
50% (50%)
 
 
 

 
Income approach
 
Adjustment for net operating income generated by the property
 
 
 
 
 

 
Cost approach
 
Adjustment for investor rates of return
 
 
 
The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending September 30, 2014 and December 31, 2013. 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.
 
 
 
 
Fair Value Measurements at
 September 30, 2014 Using
 
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and Short-term Investments
 
$
87,267

 
$
37,427

 
$
49,840

 
$

 
$
87,267

Securities Held-to-Maturity
 
184

 

 
186

 

 
186

FHLB Stock and Other Restricted Stock
 
9,096

 
N/A

 
N/A

 
N/A

 
N/A

Loans, Net
 
1,415,932

 

 

 
1,414,237

 
1,414,237

Accrued Interest Receivable
 
8,296

 

 
2,233

 
6,063

 
8,296

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Demand, Savings, and Money Market Deposits
 
(1,430,833
)
 
(1,430,833
)
 

 

 
(1,430,833
)
Time Deposits
 
(333,638
)
 

 
(329,839
)
 

 
(329,839
)
Short-term Borrowings
 
(120,510
)
 

 
(120,510
)
 

 
(120,510
)
Long-term Debt
 
(87,576
)
 

 
(83,331
)
 
(5,387
)
 
(88,718
)
Accrued Interest Payable
 
(673
)
 

 
(625
)
 
(48
)
 
(673
)
Unrecognized Financial Instruments:
 
 

 
 

 
 

 
 

 
 

Commitments to Extend Credit
 

 

 

 

 

Standby Letters of Credit
 

 

 

 

 

Commitments to Sell Loans
 

 

 

 

 

 

35


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Fair Value (continued)

 
 
 
 
Fair Value Measurements at
December 31, 2013 Using
 
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and Short-term Investments
 
$
60,232

 
$
37,370

 
$
22,862

 
$

 
$
60,232

Securities Held-to-Maturity
 
268

 

 
271

 

 
271

FHLB Stock and Other Restricted Stock
 
9,004

 
N/A

 
N/A

 
N/A

 
N/A

Loans, Net
 
1,366,452

 

 

 
1,370,339

 
1,370,339

Accrued Interest Receivable
 
7,470

 

 
1,918

 
5,552

 
7,470

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Demand, Savings, and Money Market Deposits
 
(1,463,122
)
 
(1,463,122
)
 

 

 
(1,463,122
)
Time Deposits
 
(349,034
)
 

 
(351,707
)
 

 
(351,707
)
Short-term Borrowings
 
(53,533
)
 

 
(53,533
)
 

 
(53,533
)
Long-term Debt
 
(87,237
)
 

 
(83,329
)
 
(5,311
)
 
(88,640
)
Accrued Interest Payable
 
(777
)
 

 
(732
)
 
(45
)
 
(777
)
Unrecognized Financial Instruments:
 
 

 
 

 
 

 
 

 
 

Commitments to Extend Credit
 

 

 

 

 

Standby Letters of Credit
 

 

 

 

 

Commitments to Sell Loans
 

 

 

 

 

 
Cash and Short-term Investments:
The carrying amount of cash and short-term investments approximate fair values and are classified as Level 1 or Level 2.

Securities Held-to-Maturity:
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).
 
FHLB Stock and Other Restricted Stock:
It is not practical to determine the fair values of FHLB stock and other restricted stock due to restrictions placed on their transferability.
 
Loans:
Fair values of loans, excluding loans held for sale and collateral dependent impaired loans having a specific allowance allocation, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued as described previously. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.
 
Accrued Interest Receivable:
The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the asset they are associated with.
 
Deposits:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate time deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. 
 

36


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Fair Value (continued)

Short-term Borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.
 
Long-term Debt:
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. 
 
The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. 
 
Accrued Interest Payable:
The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the liability they are associated with.
 
Off-balance Sheet Instruments:
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.


37


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 10 – Other Comprehensive Income (Loss)
 
The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2014, net of tax:


Unrealized Gains and Losses on Available-for-Sale Securities

Defined Benefit Pension Items

Postretirement Benefit Items

Total













Beginning Balance at July 1, 2014

$
(130
)

$


$
(32
)

$
(162
)
Other Comprehensive Income (Loss) Before Reclassification

577






577

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

(369
)





(369
)
Net Current Period Other Comprehensive Income (Loss)

208






208

Ending Balance at September 30, 2014

$
78


$


$
(32
)

$
46



Unrealized Gains and Losses on Available-for-Sale Securities

Defined Benefit Pension Items

Postretirement Benefit Items

Total













Beginning Balance at January 1, 2014

$
(5,231
)

$


$
(32
)

$
(5,263
)
Other Comprehensive Income (Loss) Before Reclassification

5,984






5,984

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

(675
)





(675
)
Net Current Period Other Comprehensive Income (Loss)

5,309






5,309

Ending Balance at September 30, 2014

$
78


$


$
(32
)

$
46


The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2013, net of tax:
 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Postretirement Benefit Items
 
Total
 
 
 
 
 
 
 
 
 
Beginning Balance at July 1, 2013
 
$
(1,247
)
 
$
(231
)
 
$
(61
)
 
$
(1,539
)
Other Comprehensive Income (Loss) Before Reclassification
 
(1,134
)
 

 

 
(1,134
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(239
)
 

 

 
(239
)
Net Current Period Other Comprehensive Income (Loss)
 
(1,373
)
 

 

 
(1,373
)
Ending Balance at September 30, 2013
 
$
(2,620
)
 
$
(231
)
 
$
(61
)
 
$
(2,912
)

38


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Other Comprehensive Income (Loss) (continued)


 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Postretirement Benefit Items
 
Total
 
 
 
 
 
 
 
 
 
Beginning Balance at January 1, 2013
 
$
10,643

 
$
(231
)
 
$
(61
)
 
$
10,351

Other Comprehensive Income (Loss) Before Reclassification
 
(12,192
)
 

 

 
(12,192
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(1,071
)
 

 

 
(1,071
)
Net Current Period Other Comprehensive Income (Loss)
 
(13,263
)
 

 

 
(13,263
)
Ending Balance at September 30, 2013
 
$
(2,620
)
 
$
(231
)
 
$
(61
)
 
$
(2,912
)

The tables below summarize the classifications out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2014:
Details about Accumulated Other Comprehensive Income (Loss) Components

Amount Reclassified From Accumulated Other Comprehensive Income (Loss)

Affected Line Item in the Statement Where Net Income is Presented






Unrealized Gains and Losses on Available-for-Sale Securities

$
(567
)

Net (Gain) Loss on Securities


198


Income Tax Expense
 

(369
)

Net of Tax






Total Reclassifications for the Three Months Ended September 30, 2014

$
(369
)

 
 
Details about Accumulated Other Comprehensive Income (Loss) Components

Amount Reclassified From Accumulated Other Comprehensive Income (Loss)

Affected Line Item in the Statement Where Net Income is Presented






Unrealized Gains and Losses on Available-for-Sale Securities

$
(1,039
)

Net (Gain) Loss on Securities
 

364


Income Tax Expense
 

(675
)

Net of Tax






Total Reclassifications for the Nine Months Ended September 30, 2014

$
(675
)

 


39


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Other Comprehensive Income (Loss) (continued)

The tables below summarize the classifications out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2013:

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income is Presented
 
 
 
 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
$
(428
)
 
Net (Gain) Loss on Securities
 
 
189

 
Income Tax Expense
 
 
(239
)
 
Net of Tax
 
 
 
 
 
Total Reclassifications for the Three Months Ended September 30, 2013
 
$
(239
)
 
 

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income is Presented
 
 
 
 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
$
(1,508
)
 
Net (Gain) Loss on Securities
 
 
437

 
Income Tax Expense
 
 
(1,071
)
 
Net of Tax
 
 
 
 
 
Total Reclassifications for the Nine Months Ended September 30, 2013
 
$
(1,071
)
 
 


40




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 NASDAQ-traded (symbol: GABC) financial services holding company based in Jasper, Indiana. German American, through its banking subsidiary German American Bancorp, operates 37 commercial and retail banking offices in 13 southern Indiana counties. The Company also owns a trust, brokerage, and financial planning subsidiary (German American Financial Advisors & Trust Company) and a full line property and casualty insurance agency (German American Insurance, Inc.).
 
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 September 30, 2014 and December 31, 2013 and the consolidated results of operations for the three and nine months ended September 30, 2014 and 2013. 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, 2013 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, 2013 Annual Report on Form 10-K and in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014.

Net income for the quarter ended September 30, 2014 improved by $1,225,000 to $7,708,000, or $0.58 per share, as compared to the quarter ended September 30, 2013 net income of $6,483,000, or $0.51 per share representing an increase of 14% on a per share basis. On a year-to-date basis, 2014 earnings improved to $20,700,000 or $1.57 per diluted share, as compared to $18,824,000, or $1.48 per diluted share for the first nine months of 2013 representing an increase of approximately 6% on a per share basis.

The Company’s third quarter and year-to-date 2014 earnings were positively impacted by improved levels of net interest income and non-interest income as compared with the same periods of 2013. Net interest income increased $1,599,000, or 9%, and $5,179,000, or 10%, in the three and nine months ended September 30, 2014 compared with the same periods of 2013. This improvement in both periods was driven by a higher level of earning assets due in large part to an increased loan portfolio and to an improved net interest margin. Non-interest income also increased $993,000, or 18%, and $756,000, or 4%, in the three and nine months ended September 30, 2014 compared with the same periods of 2013.

Partially mitigating the improvement in net interest income and non-interest income was an increased level of operating costs during the third quarter and first nine months of 2014 compared with the same periods of 2013. Operating expenses for the third quarter of 2014 increased $498,000, or 4%, and for the first nine months of 2014 increased $3,004,000, or 7%, as compared to the same periods of 2013. The increase in non-interest expenses was largely impacted by the inclusion of the United Commerce Bancorp operations which was acquired by the Company effective October 1, 2013, a new financial center in Columbus, Indiana, and the implementation of new digital banking systems.



41



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.
 
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 impaired 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 collectability 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 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.

During the third quarter of 2014, a modification was made to the Company’s standard methodology for calculating the allowance for loan losses. This modification centered on commercial and agricultural loans that are graded as substandard and was undertaken as a part of the Company’s annual update of its migration analysis utilized in the allowance for loan losses calculations. Prior to the third quarter of 2014, the allocation for substandard, non-impaired commercial and agricultural loans was based on evaluating the amount of loss of each individual credit relationship internally graded substandard. Beginning in the third quarter of 2014, the Company adjusted its methodology to assign allocations for substandard commercial and agricultural credits based on migration analysis techniques utilizing three year migration periods for these types of credits. The modification to the methodology during the third quarter of 2014 resulted in a decrease of $63,000 to the overall required loan loss allowance.



42



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, external and internal factors and portfolio trends. Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio. Internal factors include evaluating changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; and changes in experience, ability and depth of lending management and staff. In setting our external and internal factors we also consider the overall level of the allowance for loan losses to total loans; our allowance coverage as compared to similar size bank holding companies; and regulatory requirements.

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 September 30, 2014, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $8,457,000 and gross unrealized gains totaled approximately $8,616,000.  As of September 30, 2014, held-to-maturity securities had a gross unrecognized gain of approximately $2,000.



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.



RESULTS OF OPERATIONS
 
Net Income:
 
Net income for the quarter ended September 30, 2014 improved by $1,225,000 to $7,708,000, or $0.58 per share, as compared to the quarter ended September 30, 2013 net income of $6,483,000, or $0.51 per share representing an increase of 14% on a per share basis. On a year-to-date basis, 2014 earnings improved to $20,700,000 or $1.57 per diluted share, as compared to $18,824,000, or $1.48 per diluted share for the first nine months of 2013 representing an increase of approximately 6% on a per share basis.



43



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 35% was used for all periods presented(1).
 

Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)
 

Three Months Ended
September 30, 2014

Three Months Ended
September 30, 2013
 

Principal Balance

Income / Expense

Yield / Rate

Principal Balance

Income / Expense

Yield / Rate
Assets

 


 


 


 


 


 

Federal Funds Sold and Other
Short-term Investments

$
15,788


$
2


0.04
%

$
11,868


$
2


0.08
%
Securities:

 


 


 


 


 


 

Taxable

489,466


2,531


2.07
%

530,933


2,768


2.08
%
Non-taxable

137,632


1,746


5.07
%

86,542


1,130


5.23
%
Total Loans and Leases(2)

1,424,458


16,755


4.67
%

1,269,222


15,368


4.81
%
Total Interest Earning Assets

2,067,344


21,034


4.05
%

1,898,565


19,268


4.04
%
Other Assets

140,019


 


 


133,308


 


 

Less: Allowance for Loan Losses

(15,879
)

 


 


(15,497
)

 


 

Total Assets

$
2,191,484


 


 


$
2,016,376


 


 




















Liabilities and Shareholders’ Equity

 


 


 


 


 


 

Interest-bearing Demand, Savings
and Money Market Deposits

$
1,017,266


$
317


0.12
%

$
979,049


$
387


0.16
%
Time Deposits

330,494


708


0.85
%

333,000


758


0.90
%
FHLB Advances and Other Borrowings

213,205


532


0.99
%

161,092


475


1.17
%
Total Interest-bearing Liabilities

1,560,965


1,557


0.40
%

1,473,141


1,620


0.44
%
Demand Deposit Accounts

400,223


 


 


349,323


 


 

Other Liabilities

13,028


 


 


11,952


 


 

Total Liabilities

1,974,216


 


 


1,834,416


 


 

Shareholders’ Equity

217,268


 


 


181,960


 


 

Total Liabilities and Shareholders’ Equity

$
2,191,484


 


 


$
2,016,376


 


 




















Cost of Funds

 


 


0.30
%

 


 


0.34
%
Net Interest Income

 


$
19,477





 


$
17,648


 

Net Interest Margin

 


 


3.75
%

 


 


3.70
%
 
(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 $1,599,000 or 9% (an increase of $1,829,000 or 10% on a tax-equivalent basis) for the quarter ended September 30, 2014 compared with the same quarter of 2013. The increased level of net interest income during the third quarter of 2014 compared with the third quarter of 2013 was driven by a higher level of earning assets and a higher net interest margin (expressed as a percentage of average earning assets).

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin was 3.75% for the third quarter of 2014 compared to 3.70% during the third quarter of 2013.  The yield on earning assets totaled 4.05% during the quarter ended September 30, 2014 compared to 4.04% in the same period of 2013 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.30% during the quarter ended September 30, 2014 compared to 0.34% in the same period of 2013.

44




The improvement of the net interest margin and net interest income in the third quarter of 2014 compared with the third quarter of 2013 was attributable to an increased level of average loans outstanding and to the continued decline in the Company’s cost of funds. Accretion of loan discounts on acquired loans contributed approximately 6 basis points on an annualized basis to the net interest margin in the third quarter of 2014 and approximately 10 basis points in the third quarter of 2013.



 
 
Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)
 
 
Nine Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2013
 
 
Principal Balance
 
Income / Expense
 
Yield / Rate
 
Principal Balance
 
Income / Expense
 
Yield / Rate
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Federal Funds Sold and Other
Short-term Investments
 
$
13,490

 
$
8

 
0.08
%
 
$
14,483

 
$
25

 
0.23
%
Securities:
 
 

 
 

 
 

 
 

 
 

 
 

Taxable
 
499,404

 
7,944

 
2.12
%
 
548,144

 
8,380

 
2.04
%
Non-taxable
 
125,708

 
4,824

 
5.12
%
 
80,480

 
3,089

 
5.12
%
Total Loans and Leases(2)
 
1,395,529

 
48,989

 
4.69
%
 
1,238,243

 
45,392

 
4.90
%
Total Interest Earning Assets
 
2,034,131

 
61,765

 
4.06
%
 
1,881,350

 
56,886

 
4.04
%
Other Assets
 
140,725

 
 

 
 

 
134,983

 
 

 
 

Less: Allowance for Loan Losses
 
(15,615
)
 
 

 
 

 
(15,736
)
 
 

 
 

Total Assets
 
$
2,159,241

 
 

 
 

 
$
2,000,597

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing Demand, Savings
and Money Market Deposits
 
$
1,032,463

 
$
960

 
0.12
%
 
$
982,227

 
$
1,167

 
0.16
%
Time Deposits
 
335,816

 
2,138

 
0.85
%
 
334,024

 
2,366

 
0.95
%
FHLB Advances and Other Borrowings
 
166,276

 
1,448

 
1.16
%
 
140,210

 
1,978

 
1.89
%
Total Interest-bearing Liabilities
 
1,534,555

 
4,546

 
0.40
%
 
1,456,461

 
5,511

 
0.51
%
Demand Deposit Accounts
 
402,070

 
 

 
 

 
342,235

 
 

 
 

Other Liabilities
 
11,621

 
 

 
 

 
16,247

 
 

 
 

Total Liabilities
 
1,948,246

 
 

 
 

 
1,814,943

 
 

 
 

Shareholders’ Equity
 
210,995

 
 

 
 

 
185,654

 
 

 
 

Total Liabilities and Shareholders’ Equity
 
$
2,159,241

 
 

 
 

 
$
2,000,597

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Funds
 
 

 
 

 
0.30
%
 
 

 
 

 
0.39
%
Net Interest Income
 
 

 
$
57,219

 
 

 
 

 
$
51,375

 
 

Net Interest Margin
 
 

 
 

 
3.76
%
 
 

 
 

 
3.65
%

(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 $5,179,000 or 10% (an increase of $5,844,000 or 11% on a tax-equivalent basis) for the nine months ended September 30, 2014 compared with the same period of 2013. The increased level of net interest income during the first nine months of 2014 compared with the same period of 2013 was driven by a higher level of earning assets and a higher net interest margin (expressed as a percentage of average earning assets).

The tax equivalent net interest margin was 3.76% for the nine months ended September 30, 2014 compared to 3.65% during the same period of 2013.  The yield on earning assets totaled 4.06% during the nine months ended September 30, 2014 compared to 4.04% in the same period of 2013 while the cost of funds totaled 0.30% during the nine months ended September 30, 2014 compared to 0.39% in the same period of 2013.


45



The improvement of the net interest margin and net interest income in the first nine months of 2014 compared with the same period of 2013 was attributable to an increased level of average loans outstanding and to the continued decline in the Company’s cost of funds. Accretion of loan discounts on acquired loans contributed approximately 6 basis points on an annualized basis to the net interest margin in the nine months ended September 30, 2014 compared with approximately 8 basis points on an annualized basis in the nine months ended September 30, 2013.

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. During the quarter ended September 30, 2014, the Company recognized no provision for loan loss compared with a negative provision for loan loss of $400,000 in the third quarter of 2013. The provision for loan losses totaled $550,000 for the nine months ended September 30, 2014, an increase of $800,000 compared to the negative provision of $250,000 during the nine months ended September 30, 2013.
 
The Company realized net recoveries of $42,000 or (0.01)% on an annualized basis of average loans outstanding during the three months ended September 30, 2014, compared with net charge-offs of $399,000 or 0.13% on an annualized basis of average loans outstanding during the same period of 2013. The Company realized net recoveries of $458,000 or (0.04)% on an annualized basis of average loans outstanding during the nine months ended September 30, 2014, compared with net charge-offs of $806,000 or 0.09% on an annualized basis of average loans outstanding during the same period of 2013.

The provision for loan losses made during the three and nine months ended September 30, 2014 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.

During the quarter ended September 30, 2014, the Company adjusted it methodology for determining its allowance for loan losses and in particular for its assessment of the required allowance for commercial and agricultural loans classified as substandard. The adjustment in methodology had minimal monetary impact of approximately $63,000 on the allowance for loan less calculation and consequently did not significantly impact the provision for loan loss during the third quarter of 2014. The methodology for determining the allowance for loan losses is discussed in more detail in the “Critical Accounting Policies and Estimates” section of this report.

 
Non-interest Income:
 
During the quarter ended September 30, 2014, non-interest income totaled $6,437,000, an increase of $993,000, or 18%, compared with the third quarter of 2013. 

Non-interest Income
(dollars in thousands)

Three Months
Ended September 30,

Change From
Prior Period



Amount

Percent
 

2014

2013

Change

Change
Trust and Investment Product Fees

$
901


$
802


$
99


12
 %
Service Charges on Deposit Accounts

1,300


1,029


271


26

Insurance Revenues

1,739


1,495


244


16

Company Owned Life Insurance

210


233


(23
)

(10
)
Interchange Fee Income

508


449


59


13

Other Operating Income

599


395


204


52

Subtotal

5,257


4,403


854


19

Net Gains on Sales of Loans

613


613





Net Gains on Securities

567


428


139


32

Total Non-interest Income

$
6,437


$
5,444


$
993


18

 
Service charges on deposit accounts increased $271,000, or 26%, during the third quarter of 2014 compared with the same period of 2013. Insurance revenues increased $244,000, or 16%, during the quarter ended September 30, 2014, compared with the third quarter of 2013. The increase in insurance revenues was primarily related to commercial insurance revenue generated through the Company’s property and casualty insurance agency.

46




During the third quarter of 2014, the Company realized a net gain on the sale of securities of $567,000 related to the sale of $44.9 million of securities, compared with a net gain on the sale of securities of $428,000 related to the sale of approximately $18.8 million of securities in the third quarter of 2013.


During the nine months ended September 30, 2014, non-interest income totaled $18,220,000, an increase of $756,000, or 4%, compared with the first nine months of 2013.


Non-interest Income
(dollars in thousands)
 
Nine Months
Ended September 30,
 
Change From
Prior Period
 
 
 
Amount
 
Percent
 
 
2014
 
2013
 
Change
 
Change
Trust and Investment Product Fees
 
$
2,728

 
$
2,433

 
$
295

 
12
 %
Service Charges on Deposit Accounts
 
3,552

 
3,034

 
518

 
17

Insurance Revenues
 
5,777

 
4,658

 
1,119

 
24

Company Owned Life Insurance
 
603

 
716

 
(113
)
 
(16
)
Interchange Fee Income
 
1,467

 
1,392

 
75

 
5

Other Operating Income
 
1,579

 
1,547

 
32

 
2

Subtotal
 
15,706

 
13,780

 
1,926

 
14

Net Gains on Sales of Loans
 
1,475

 
2,176

 
(701
)
 
(32
)
Net Gains on Securities
 
1,039

 
1,508

 
(469
)
 
(31
)
Total Non-interest Income
 
$
18,220

 
$
17,464

 
$
756

 
4


During the nine months ended September 30, 2014, trust and investment product fees increased $295,000, or 12%, compared with the first nine months of 2013. The increase was due primarily to an increase in brokerage revenues. Service charges on deposit accounts increased $518,000, or 17%, during the nine months ended September 30, 2014 compared with the same period of 2013.

Insurance revenues increased $1,119,000, or 24%, during the nine months ended September 30, 2014, compared with the first nine months of 2013. The increase during the nine months ended September 30, 2014 compared with same period of 2013 was primarily due to increased contingency revenue and also due to increased commercial insurance revenue. Contingency revenue during the first nine months of 2014 totaled $1,049,000 compared with $246,000 during the same period of 2013. The fluctuation in contingency revenue during 2014 and 2013 is a normal course of business type of variance and is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency.

Net gains on sales of loans totaled $1,475,000 during the nine months ended September 30, 2014, a decline of $701,000, or 32%, compared with the first nine months of 2013. Loan sales totaled $72.2 million during the first nine months of 2014, compared with $139.9 million during the same period of 2013.

During the nine months ended September 30, 2014, the Company realized a net gain on the sale of securities of $1,039,000 related to the sale of $51.7 million of securities, compared with a net gain on the sale of securities of $1,508,000 related to the sale of $74.1 million in the first nine months of 2013.

47



Non-interest Expense:
 
During the quarter ended September 30, 2014, non-interest expense totaled $14,082,000, an increase of $498,000, or 4%, compared with the third quarter of 2013.

Non-interest Expense
(dollars in thousands)

Three Months
Ended September 30,

Change From
Prior Period



Amount

Percent
 

2014

2013

Change

Change
Salaries and Employee Benefits

$
7,975


$
7,515


$
460


6
 %
Occupancy, Furniture and Equipment Expense

1,725


1,593


132


8

FDIC Premiums

277


261


16


6

Data Processing Fees

935


717


218


30

Professional Fees

516


970


(454
)

(47
)
Advertising and Promotion

613


447


166


37

Intangible Amortization

302


329


(27
)

(8
)
Other Operating Expenses

1,739


1,752


(13
)

(1
)
Total Non-interest Expense

$
14,082


$
13,584


$
498


4


Salaries and benefits increased $460,000, or 6%, during the quarter ended September 30, 2014 compared with the third quarter of 2013. The increase in salaries and benefits during the third quarter of 2014 compared the same period of 2013 was primarily the result of an increased number of full-time equivalent employees which was largely the result of the acquisition of United Commerce Bancorp.

Data processing fees increased $218,000, or 30%, during the third quarter of 2014 compared with the same quarter of 2013. The increase was primarily attributable to costs associated with the implementation of new commercial and retail digital banking platforms late in the fourth quarter of 2013 and in the first quarter of 2014.

Professional fees declined $454,000, or 47%, during the quarter ended September 30, 2014 compared with the third quarter of 2014. The decline in professional fees during the third quarter of 2014 compared with the third quarter of 2013 was related to professional fees associated with the acquisition of United Commerce Bancorp and fees associated with the Company’s review of its overall operating effectiveness and efficiency that were incurred during the third quarter of 2013.


During the nine months ended September 30, 2014, non-interest expense totaled $43,311,000, an increase of $3,004,000, or 7%, compared with the first nine months of 2013.
  

Non-interest Expense
(dollars in thousands)
 
Nine Months
Ended June 30,
 
Change From
Prior Period
 
 
 
Amount
 
Percent
 
 
2014
 
2013
 
Change
 
Change
Salaries and Employee Benefits
 
$
24,285

 
$
22,926

 
$
1,359

 
6
 %
Occupancy, Furniture and Equipment Expense
 
5,248

 
4,738

 
510

 
11

FDIC Premiums
 
828

 
776

 
52

 
7

Data Processing Fees
 
2,892

 
2,054

 
838

 
41

Professional Fees
 
1,761

 
2,156

 
(395
)
 
(18
)
Advertising and Promotion
 
1,635

 
1,453

 
182

 
13

Intangible Amortization
 
975

 
1,044

 
(69
)
 
(7
)
Other Operating Expenses
 
5,687

 
5,160

 
527

 
10

Total Non-interest Expense
 
$
43,311

 
$
40,307

 
$
3,004

 
7


Salaries and benefits increased $1,359,000, or 6%, during the nine months ended September 30, 2014 compared with the first nine months of 2013. The increase in salaries and benefits during 2014 compared with 2013 was primarily the result of an increased number of full-time equivalent employees due in part to the acquisition of United Commerce Bancorp.


48



Occupancy, furniture and equipment expense increased $510,000, or 11%, during the nine months ended September 30, 2014 compared with the first nine months of 2013. The increase was largely related to a larger number of banking offices driven by the acquisition of United Commerce Bancorp and a new banking location in Columbus.

Data processing fees increased $838,000, or 41%, during the nine months ended September 30, 2014 compared with the first nine months of 2013. The increase was primarily attributable to costs associated with the implementation of new commercial and retail digital banking platforms late in the fourth quarter of 2013 and in the first quarter of 2014.

Professional fees declined $395,000, or 18%, during the nine months ended September 30, 2014 compared with the same period of 2014. The decline in professional fees was related to professional fees associated with the acquisition of United Commerce Bancorp and fees associated with the Company’s review of its overall operating effectiveness and efficiency that were incurred during 2013.


Income Taxes:
 
The Company’s effective income tax rate was 30.8% and 31.4% during the three months ended September 30, 2014 and 2013. The Company’s effective income tax rate approximated 30.2% and 31.6% during the nine months ended September 30, 2014 and 2013. The effective tax rate in all periods presented was lower than the blended statutory rate 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 a new markets tax credit project and affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.


 
FINANCIAL CONDITION
 
Total assets at September 30, 2014 increased $42.1 million to $2.206 billion compared with $2.164 billion in total assets at December 31, 2013.  The increase in total assets was attributable to an increase in period-end loan balances.

September 30, 2014 loans outstanding increased by $51.6 million, or approximately 5% on an annualized basis, compared with year-end 2013. The increase in loans was broad based across all segments of the Company’s loan portfolio and occurred throughout the Company’s market area.

End of Period Loan Balances:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
Current Period Change
Commercial & Industrial Loans
 
$
377,845

 
$
350,955

 
$
26,890

Commercial Real Estate Loans
 
586,012

 
582,066

 
3,946

Agricultural Loans
 
201,867

 
192,880

 
8,987

Home Equity & Consumer Loans
 
133,764

 
130,628

 
3,136

Residential Mortgage Loans
 
137,286

 
128,683

 
8,603

Total Loans
 
$
1,436,774

 
$
1,385,212

 
$
51,562


The Company’s allowance for loan losses totaled $15.6 million at September 30, 2014 representing an increase of $1.0 million, or 9% on an annualized basis, from December 31, 2013.  The allowance for loan losses represented 1.09% of period-end loans at September 30, 2014 compared with 1.05% of period-end loans at December 31, 2013.

The allowance for loan losses for commercial and agricultural impaired loans that are on non-accrual status totaled $1.5 million, or 9% of the total allowance, at September 30, 2014 compared with $3.0 million of allowance for loan losses for commercial and agricultural impaired loans that were on non-accrual status, or 20% of the total allowance, at December 31, 2013. The decline in the overall allowance for loan losses for impaired loans was attributable to a decline in the level of impaired loans at September 30, 2014 compared with year-end 2013.

Under acquisition accounting treatment, loans acquired are recorded at fair value which includes a credit risk component, and therefore the allowance on loans acquired is not carried over from the seller. The Company held a discount on acquired loans of $4.5 million as of September 30, 2014 and $5.9 million at year-end 2013.

49




The following is an analysis of the Company’s non-performing assets at September 30, 2014 and December 31, 2013:
 
Non-performing Assets:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
Non-accrual Loans
 
$
5,667

 
$
8,378

Past Due Loans (90 days or more and still accruing)
 
96

 
8

Total Non-performing Loans
 
5,763

 
8,386

Other Real Estate
 
521

 
1,029

Total Non-performing Assets
 
$
6,284

 
$
9,415

 
 
 
 
 
Restructured Loans
 
$
2,688

 
$
2,418

 
 
 
 
 
Non-performing Loans to Total Loans
 
0.40
%
 
0.61
%
Allowance for Loan Loss to Non-performing Loans
 
270.55
%
 
173.91
%

 Non-performing assets totaled $6.3 million or 0.28% of total assets at September 30, 2014 compared to $9.4 million or 0.44% of total assets at December 31, 2013.  Non-performing loans totaled $5.8 million or 0.40% of total loans at September 30, 2014 representing a $2.6 million, or 31%, decrease in non-performing loans compared to the $8.4 million of non-performing loans at December 31, 2013.

Non-accrual commercial real estate loans totaled $3.3 million at September 30, 2014 representing a decline of $3.4 million, or 50%, from the $6.7 million of non-accrual commercial real estate loans at year-end 2013.  Non-accrual commercial real estate loans represented 57% of the total non-performing loans at September 30, 2014 compared to 79% of total non-performing loans at year-end 2013. Non-accrual residential mortgage loans totaled $1.6 million at September 30, 2014 representing an increase of $234,000, or 18%, from the $1.3 million of non-accrual residential mortgage loans at year-end 2013.  Non-accrual residential mortgage loans represented 27% of the total non-performing loans at September 30, 2014 compared to 16% of total non-performing loans at year-end 2013.

At September 30, 2014 there was only one relationship included in non-performing loans that was greater than $1.0 million. This relationship was a $1.8 million commercial real estate loan secured by a commercial warehouse facility.  This loan was in non-performing status as of year-end 2013. The borrower has made all contractual payments due during 2014 and the principal balance of this relationship was reduced by $68,000 during the first nine months of 2014.
 
The Company purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.
 
Purchased loans that indicated evidence of credit deterioration since origination at the time of acquisition by the Company did not have a material adverse impact on the Company’s key credit metrics during 2013 or during the first nine months of 2014.  The key credit metrics the Company measures generally include non-performing loans, past due loans, and adversely classified loans.
 
Non-performing purchased loans with evidence of credit deterioration since origination totaled $1,164,000 at September 30, 2014 compared with $1,705,000 at December 31, 2013. The non-performing purchased loans with evidence of credit deterioration since origination represented approximately 20% of total non-performing loans at September 30, 2014 and December 31, 2013.
 
Past due purchased loans with evidence of credit deterioration since origination totaled $645,000 at September 30, 2014 and $1,250,000 at year-end 2013.  Past due purchased loans with evidence of credit deterioration since origination represented approximately 9% of total past due loans at September 30, 2014 and approximately 16% of total past due loans at year-end 2013.

Adversely classified purchased loans with evidence of credit deterioration since origination totaled $4.7 million at September 30, 2014 compared with $9.0 million at December 31, 2013. Adversely classified purchased loans with evidence of credit deterioration since origination represented approximately 16% of total adversely classified loans at September 30, 2014 compared with approximately 25% of total adversely classified loans at year-end 2013.

50



 
Loan impairment is reported when full repayment under the terms of the loan is not expected.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Total deposits decreased $47.7 million, or 4% on an annualized basis, as of September 30, 2014 compared with December 31, 2013 total deposits. The decline was primarily attributable to withdrawals from large balance deposit relationships. Many of these relationships continue to maintain significant deposit balances with the Company.

End of Period Deposit Balances:
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
Current Period Change
Non-interest-bearing Demand Deposits
 
$
410,329

 
$
400,024

 
$
10,305

Interest-bearing Demand, Savings, & Money Market Accounts
 
1,020,504

 
1,063,098

 
(42,594
)
Time Deposits < $100,000
 
205,980

 
224,361

 
(18,381
)
Time Deposits of $100,000 or more
 
127,658

 
124,673

 
2,985

Total Deposits
 
$
1,764,471

 
$
1,812,156

 
$
(47,685
)


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 plus certain amounts of instruments commonly referred to as trust preferred securities, 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 certain amounts of 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, had capital ratios that exceed the regulatory minimums at September 30, 2014.
 
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 September 30, 2014.
 
At September 30, 2014, 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.


51



The table below presents the Company’s consolidated capital ratios under regulatory guidelines:
 
 
Minimum for Capital Adequacy Purposes
 
At September 30, 2014
 
At December 31, 2013
Leverage Ratio
 
4.00
%
 
9.34
%
 
8.78
%
Tier 1 Capital to Risk-adjusted Assets
 
4.00
%
 
12.79
%
 
12.12
%
Total Capital to Risk-adjusted Assets
 
8.00
%
 
13.78
%
 
13.07
%


In July 2013, the two federal banking regulatory agencies that have authority to regulate the Company’s capital resources and capital structure (the Board of Governors of the Federal Reserve System (FRB) and Federal Deposit Insurance Corporation (FDIC)) took action to finalize the application to the United States banking industry of new regulatory capital requirements that are established by the international banking framework commonly referred to as “Basel III” and to implement certain other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. These rules make significant changes to the U.S. bank regulatory capital framework, and generally increase capital requirements for banking organizations. Although the Company believes that these new rules, as they are phased in over a multi-year period commencing January 1, 2015, will in general increase the amount of capital that the Company and the Bank may be required to maintain, the Company does not presently expect that any materially burdensome compliance efforts with these final capital rules will be required of the Company prior to January 1, 2015. For additional information, also see the discussion in Item 1 of the Company’s annual report on Form 10-K for the year ended December 31, 2013.

As of September 30, 2014, shareholders’ equity increased by $20.2 million, or 13% on an annualized basis, to $220.3 million compared with $200.1 million at year-end 2013. The increase in shareholders’ equity was primarily attributable to an increase of $14.4 million in retained earnings and an increase of $5.3 million in accumulated other comprehensive income related to a decrease in net unrealized losses in the Company’s securities available-for-sale portfolio. Shareholders’ equity represented 10.0% of total assets at September 30, 2014 and 9.3% of total assets at December 31, 2013. Shareholders’ equity included $22.9 million of goodwill and other intangible assets at September 30, 2014 compared to $23.9 million of goodwill and other intangible assets at year-end 2013.

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 $27.0 million during the nine months ended September 30, 2014 ending at $87.2 million.  During the nine months ended September 30, 2014, operating activities resulted in net cash inflows of $24.3 million. Investing activities resulted in net cash outflows of $10.5 million during the nine months ended September 30, 2014.  Financing activities resulted in net cash inflows for the nine months ended September 30, 2014 of $13.2 million.
 
The parent company is a corporation separate and distinct from its bank and other subsidiaries. The Company uses funds at the parent company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes including debt service. The parent company does not have access at the parent-company level to the deposits and certain other sources of funds that are available to its bank subsidiary to support its operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank subsidiary. The Company’s banking subsidiary is subject to statutory restrictions on its ability to pay dividends to the parent company. The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings. As of September 30, 2014, the parent company had approximately $16.8 million of cash and cash equivalents available to meet its cash flow needs.


52



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; changes in competitive conditions; the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies; changes in customer borrowing, repayment, investment and deposit practices; changes in fiscal, monetary and tax policies; changes in financial and capital markets; deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration; capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities; risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base of the acquired institution or branches, and difficulties in integration of the acquired operations; factors driving impairment charges on investments; the impact, extent and timing of technological changes; litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future; actions of the Federal Reserve Board; changes in accounting principles and interpretations; potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary; actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms; and the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends. 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. Readers are cautioned not to place undue reliance on these forward-looking statements.
 
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, 2013, 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.


53



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 Company from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Company’s risk management strategy.

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 September 30, 2014

 
 
Net Portfolio Value
 
 Net Portfolio Value as a % of Present Value of Assets
Changes in Rates
 
Amount
 
% Change
 
NPV Ratio
 
Change
 
 
 
 
 
 
 
 
 
+2%
 
$
272,311

 
(9.44
)%
 
12.95
%
 
(69) b.p.

Base
 
300,692

 

 
13.64
%
 

-2%
 
233,010

 
(22.51
)%
 
10.34
%
 
(330) 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.

Item 4.  Controls and Procedures
 
As of September 30, 2014, 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 third fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.




54



PART II. OTHER INFORMATION

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 September 30, 2014.
 
Period
 
Total Number
of Shares (or Units) Purchased
 
Average Price Paid Per Share (or Unit)
 
Total Number of Shares
(or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number
(or Approximate Dollar Value) of Shares (or Units) that
May Yet Be Purchased under the Plans or Programs (1)
7/1/14 – 7/31/14
 

 

 

 
272,789

8/1/14 – 8/31/14
 

 

 

 
272,789

9/1/14 – 9/30/14
 

 

 

 
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 September 30, 2014 (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 September 30, 2014.


55



Item 6.      Exhibits
 
The exhibits described by the Exhibit Index immediately following the Signature Page of this Report are incorporated herein by reference.

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: November 7, 2014
By/s/Mark A. Schroeder
 
Mark A. Schroeder
 
Chairman and Chief Executive Officer
 
 
Date: November 7, 2014
By/s/Bradley M. Rust
 
Bradley M. Rust
 
Executive Vice President and Chief Financial Officer


56



INDEX OF EXHIBITS
 
Exhibit No.
 
Description
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.
101**+
 
The following materials from German American Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended September 30, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii)  the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements.
 
*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.

**Exhibits that are furnished or filed with this Report (other than through incorporation by reference to other disclosures or exhibits) are indicated by a double asterisk.
 
+Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


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