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EX-32.1 - EXHIBIT 32.1 - GERMAN AMERICAN BANCORP, INC.exhibit321-q32015.htm
EX-31.2 - EXHIBIT 31.2 - GERMAN AMERICAN BANCORP, INC.exhibit312-q32015.htm
EX-32.2 - EXHIBIT 32.2 - GERMAN AMERICAN BANCORP, INC.exhibit322-q32015.htm
EX-31.1 - EXHIBIT 31.1 - GERMAN AMERICAN BANCORP, INC.exhibit311-q32015.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, 2015
 
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, 2015
Common Shares, no par value
 
13,275,678



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, 2014, 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.
Unaudited Financial Statements
 
 
 
 
Consolidated Balance Sheets – September 30, 2015 and December 31, 2014
 
 
 
 
Consolidated Statements of Income – Three Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Income – Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2015 and 2014
 
 
 
 
Notes to Consolidated Financial Statements – September 30, 2015
 
 
 
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,
2015
 
December 31,
2014
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
39,998

 
$
33,481

Federal Funds Sold and Other Short-term Investments
 
22,140

 
8,965

Cash and Cash Equivalents
 
62,138

 
42,446

 
 
 
 
 
Interest-bearing Time Deposits with Banks
 
100

 
100

Securities Available-for-Sale, at Fair Value
 
625,144

 
630,995

Securities Held-to-Maturity, at Cost (Fair value of $95 and $186 on September 30, 2015 and December 31, 2014, respectively)
 
95

 
184

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
6,410

 
6,311

 
 
 
 
 
Loans
 
1,517,285

 
1,451,990

Less: Unearned Income
 
(3,705
)
 
(4,008
)
Allowance for Loan Losses
 
(14,770
)
 
(14,929
)
Loans, Net
 
1,498,810

 
1,433,053

 
 
 
 
 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost
 
8,167

 
7,040

Premises, Furniture and Equipment, Net
 
37,905

 
39,930

Other Real Estate
 
123

 
356

Goodwill
 
20,536

 
20,536

Intangible Assets
 
1,443

 
2,074

Company Owned Life Insurance
 
32,497

 
32,043

Accrued Interest Receivable and Other Assets
 
19,842

 
22,031

TOTAL ASSETS
 
$
2,313,210

 
$
2,237,099

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
418,947

 
$
428,016

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,039,520

 
1,018,320

Time Deposits
 
345,368

 
333,425

Total Deposits
 
1,803,835

 
1,779,761

 
 
 
 
 
FHLB Advances and Other Borrowings
 
239,072

 
206,064

Accrued Interest Payable and Other Liabilities
 
22,951

 
22,450

TOTAL LIABILITIES
 
2,065,858

 
2,008,275

 
 
 
 
 
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
 
13,273

 
13,216

Additional Paid-in Capital
 
109,839

 
108,660

Retained Earnings
 
119,656

 
104,058

Accumulated Other Comprehensive Income
 
4,584

 
2,890

TOTAL SHAREHOLDERS’ EQUITY
 
247,352

 
228,824

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,313,210

 
$
2,237,099

End of period shares issued and outstanding
 
13,273,349

 
13,215,800





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,
 

2015

2014
INTEREST INCOME

 


 

Interest and Fees on Loans

$
16,702


$
16,680

Interest on Federal Funds Sold and Other Short-term Investments

3


2

Interest and Dividends on Securities:

 


 

Taxable

2,176


2,531

Non-taxable

1,538


1,135

TOTAL INTEREST INCOME

20,419


20,348








INTEREST EXPENSE

 


 

Interest on Deposits

987


1,025

Interest on FHLB Advances and Other Borrowings

573


532

TOTAL INTEREST EXPENSE

1,560


1,557








NET INTEREST INCOME

18,859


18,791

Provision for Loan Losses

(500
)


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

19,359


18,791








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

1,051


901

Service Charges on Deposit Accounts

1,237


1,300

Insurance Revenues

1,752


1,739

Company Owned Life Insurance

205


210

Interchange Fee Income

547


508

Other Operating Income

2,134


599

Net Gains on Sales of Loans

831


613

Net Gains on Securities



567

TOTAL NON-INTEREST INCOME

7,757


6,437








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

8,998


7,975

Occupancy Expense

1,305


1,262

Furniture and Equipment Expense

456


463

FDIC Premiums

284


277

Data Processing Fees

901


935

Professional Fees

787


516

Advertising and Promotion

2,198


613

Intangible Amortization

183


302

Other Operating Expenses

1,854


1,739

TOTAL NON-INTEREST EXPENSE

16,966


14,082








Income before Income Taxes

10,150


11,146

Income Tax Expense

2,429


3,438

NET INCOME

$
7,721


$
7,708








Basic Earnings per Share

$
0.58


$
0.58

Diluted Earnings per Share

$
0.58


$
0.58








Dividends per Share

$
0.17


$
0.16

 


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,
 
 
2015
 
2014
INTEREST INCOME
 
 

 
 

Interest and Fees on Loans
 
$
49,538

 
$
48,766

Interest on Federal Funds Sold and Other Short-term Investments
 
10

 
8

Interest and Dividends on Securities:
 
 

 


Taxable
 
6,830

 
7,944

Non-taxable
 
4,219

 
3,136

TOTAL INTEREST INCOME
 
60,597

 
59,854

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
3,002

 
3,098

Interest on FHLB Advances and Other Borrowings
 
1,481

 
1,448

TOTAL INTEREST EXPENSE
 
4,483

 
4,546

 
 
 
 
 
NET INTEREST INCOME
 
56,114

 
55,308

Provision for Loan Losses
 

 
550

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
56,114

 
54,758

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
2,974

 
2,728

Service Charges on Deposit Accounts
 
3,594

 
3,552

Insurance Revenues
 
5,812

 
5,777

Company Owned Life Insurance
 
617

 
603

Interchange Fee Income
 
1,593

 
1,467

Other Operating Income
 
3,341

 
1,579

Net Gains on Sales of Loans
 
2,364

 
1,475

Net Gains on Securities
 
725

 
1,039

TOTAL NON-INTEREST INCOME
 
21,020

 
18,220

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
26,082

 
24,285

Occupancy Expense
 
3,732

 
3,776

Furniture and Equipment Expense
 
1,417

 
1,472

FDIC Premiums
 
850

 
828

Data Processing Fees
 
2,608

 
2,892

Professional Fees
 
2,073

 
1,761

Advertising and Promotion
 
3,125

 
1,635

Intangible Amortization
 
630

 
975

Other Operating Expenses
 
5,597

 
5,687

TOTAL NON-INTEREST EXPENSE
 
46,114

 
43,311

 
 
 
 
 
Income before Income Taxes
 
31,020

 
29,667

Income Tax Expense
 
8,668

 
8,967

NET INCOME
 
$
22,352

 
$
20,700

 
 
 
 
 
Basic Earnings per Share
 
$
1.69

 
$
1.57

Diluted Earnings per Share
 
$
1.69

 
$
1.57

 
 
 
 
 
Dividends per Share
 
$
0.51

 
$
0.48




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,
 
 
2015
 
2014
 
 
 
 
 
NET INCOME
 
$
7,721

 
$
7,708

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
6,420

 
871

Reclassification Adjustment for Losses (Gains) Included in Net Income
 

 
(567
)
Tax Effect
 
(2,259
)
 
(96
)
Net of Tax
 
4,161

 
208

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
4,161

 
208

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
11,882

 
$
7,916

 

 
 




 
 
Nine Months Ended 
 September 30,
 
 
2015
 
2014
 
 
 
 
 
NET INCOME
 
$
22,352

 
$
20,700

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
3,333

 
9,251

Reclassification Adjustment for Losses (Gains) Included in Net Income
 
(725
)
 
(1,039
)
Tax Effect
 
(914
)
 
(2,903
)
Net of Tax
 
1,694

 
5,309

 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
1,694

 
5,309

 
 
 
 
 
COMPREHENSIVE INCOME
 
$
24,046

 
$
26,009










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,
 
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 

 
 

Net Income
 
$
22,352

 
$
20,700

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

 
 

Net Amortization on Securities
 
1,869

 
1,510

Depreciation and Amortization
 
3,254

 
3,611

Loans Originated for Sale
 
(111,296
)
 
(70,603
)
Proceeds from Sales of Loans Held-for-Sale
 
113,472

 
73,696

Provision for Loan Losses
 

 
550

Gain on Sale of Loans, net
 
(2,364
)
 
(1,475
)
Gain on Securities, net
 
(725
)
 
(1,039
)
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets
 
53

 
(46
)
Loss (Gain) on Disposition and Donation of Premises and Equipment
 
389

 
28

Increase in Cash Surrender Value of Company Owned Life Insurance
 
(454
)
 
(631
)
Equity Based Compensation
 
737

 
482

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
2,278

 
(4,708
)
Interest Payable and Other Liabilities
 
(412
)
 
2,214

Net Cash from Operating Activities
 
29,153

 
24,289

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale
 
71,026

 
62,892

Proceeds from Sales of Securities Available-for-Sale
 
18,999

 
52,711

Purchase of Securities Available-for-Sale
 
(82,711
)
 
(74,247
)
Proceeds from Maturities of Securities Held-to-Maturity
 
89

 
84

Purchase of Federal Home Loan Bank Stock
 
(1,127
)
 
(92
)
Purchase of Loans
 
(1,852
)
 
(1,750
)
Loans Made to Customers, net of Payments Received
 
(64,708
)
 
(49,436
)
Proceeds from Sales of Other Real Estate
 
983

 
1,831

Property and Equipment Expenditures
 
(886
)
 
(2,492
)
Proceeds from Sales of Property and Equipment
 

 
23

Net Cash from Investing Activities
 
(60,187
)
 
(10,476
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
24,085

 
(47,658
)
Change in Short-term Borrowings
 
(1,993
)
 
66,977

Advances in Long-term Debt
 
75,000

 
20,321

Repayments of Long-term Debt
 
(40,111
)
 
(20,095
)
Issuance of Common Stock
 
52

 
50

Employee Stock Purchase Plan
 
447

 
(37
)
Dividends Paid
 
(6,754
)
 
(6,336
)
Net Cash from Financing Activities
 
50,726

 
13,222

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
19,692

 
27,035

Cash and Cash Equivalents at Beginning of Year
 
42,446

 
60,132

Cash and Cash Equivalents at End of Period
 
$
62,138

 
$
87,167

 
 
 
 
 
Cash Paid During the Year for
 
 

 
 

Interest
 
$
4,610

 
$
4,650

Income Taxes
 
6,219

 
7,192

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
864

 
$
1,277

Securities Sold Pending Settlement
 

 
(3,323
)
See accompanying notes to consolidated financial statements.

8


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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 (hereinafter collectively referred to as the "Company") 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 Company's Annual Report on Form 10-K for the year ended December 31, 2014. 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 based on these reclassifications.

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,
 
 
2015
 
2014
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
7,721

 
$
7,708

Weighted Average Shares Outstanding
 
13,265,893

 
13,210,395

Basic Earnings per Share
 
$
0.58

 
$
0.58

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
7,721

 
$
7,708

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,265,893

 
13,210,395

Potentially Dilutive Shares, Net
 
7,617

 
20,280

Diluted Weighted Average Shares Outstanding
 
13,273,510

 
13,230,675

Diluted Earnings per Share
 
$
0.58

 
$
0.58

 
For the three months ended September 30, 2015 and 2014, 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,
 
 
2015
 
2014
Basic Earnings per Share:
 
 

 
 

Net Income
 
$
22,352

 
$
20,700

Weighted Average Shares Outstanding
 
13,247,954

 
13,200,025

Basic Earnings per Share
 
$
1.69

 
$
1.57

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
22,352

 
$
20,700

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,247,954

 
13,200,025

Potentially Dilutive Shares, Net
 
7,556

 
20,975

Diluted Weighted Average Shares Outstanding
 
13,255,510

 
13,221,000

Diluted Earnings per Share
 
$
1.69

 
$
1.57


For the nine months ended September 30, 2015 and 2014, there were no anti-dilutive shares.

9


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015 and December 31, 2014, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2015
 
 

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$
10,000

 
$

 
$
(30
)
 
$
9,970

Obligations of State and Political Subdivisions
 
187,819

 
5,885

 
(362
)
 
193,342

Mortgage-backed Securities - Residential
 
419,753

 
4,091

 
(2,365
)
 
421,479

Equity Securities
 
353

 

 

 
353

Total
 
$
617,925

 
$
9,976

 
$
(2,757
)
 
$
625,144

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

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

 
$

 
$
(439
)
 
$
19,561

Obligations of State and Political Subdivisions
 
147,321

 
6,515

 
(59
)
 
153,777

Mortgage-backed Securities - Residential
 
458,709

 
3,615

 
(5,020
)
 
457,304

Equity Securities
 
353

 

 

 
353

Total
 
$
626,383

 
$
10,130

 
$
(5,518
)
 
$
630,995

 

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, 2015 and December 31, 2014, were as follows:
Securities Held-to-Maturity:
 
Carrying
Amount
 
Gross
Unrecognized
Gains
 
Gross
Unrecognized
Losses
 
Fair
Value
 
 
 

 
 

 
 

 
 

September 30, 2015
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
95

 
$

 
$

 
$
95

 
 
 
 
 
 
 
 
 
December 31, 2014
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
184

 
$
2

 
$

 
$
186



10


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015 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 in the table below.

Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
7,109

 
$
7,213

Due after one year through five years
 
19,186

 
19,449

Due after five years through ten years
 
66,484

 
69,404

Due after ten years
 
105,040

 
107,246

Mortgage-backed Securities - Residential
 
419,753

 
421,479

Equity Securities
 
353

 
353

Total
 
$
617,925

 
$
625,144

 

Securities Held-to-Maturity:
 
Carrying
Amount
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
95

 
$
95

Due after one year through five years
 

 

Due after five years through ten years
 

 

Due after ten years
 

 

Total
 
$
95

 
$
95

 
Proceeds from the Sales of Securities are summarized below:
 
 
Three Months Ended
 
Three Months Ended
 
 
September 30, 2015
 
September 30, 2014
 
 
 
 
 
Proceeds from Sales
 
$

 
$
45,473

Gross Gains on Sales
 

 
567

Income Taxes on Gross Gains
 

 
198

 
 
Nine Months Ended
 
Nine Months Ended
 
 
September 30, 2015
 
September 30, 2014
 
 
 
 
 
Proceeds from Sales
 
$
18,999

 
$
52,711

Gross Gains on Sales
 
725

 
1,039

Income Taxes on Gross Gains
 
254

 
364



11


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015 and December 31, 2014, 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, 2015
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency Securities
 
$

 
$

 
$
9,970

 
$
(30
)
 
$
9,970

 
$
(30
)
Obligations of State and Political Subdivisions
 
32,447

 
(356
)
 
353

 
(6
)
 
32,800

 
(362
)
Mortgage-backed Securities - Residential
 
50,786

 
(236
)
 
136,030

 
(2,129
)
 
186,816

 
(2,365
)
Equity Securities
 

 

 

 

 

 

Total
 
$
83,233

 
$
(592
)
 
$
146,353

 
$
(2,165
)
 
$
229,586

 
$
(2,757
)

 
 
Less than 12 Months
 
12 Months or More
 
Total
December 31, 2014
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and Agency Securities
 
$

 
$

 
$
19,561

 
$
(439
)
 
$
19,561

 
$
(439
)
Obligations of State and Political Subdivisions
 
3,765

 
(25
)
 
4,298

 
(34
)
 
8,063

 
(59
)
Mortgage-backed Securities - Residential
 
26,606

 
(191
)
 
209,679

 
(4,829
)
 
236,285

 
(5,020
)
Equity Securities
 

 

 

 

 

 

Total
 
$
30,371

 
$
(216
)
 
$
233,538

 
$
(5,302
)
 
$
263,909

 
$
(5,518
)
 
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, which may be at maturity.  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 $31.1 million at September 30, 2015 and $23.1 million at December 31, 2014. 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, 2015
(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, 2015
 
December 31, 2014
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
Included in Other Assets:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
31,068

 
$
1,433

 
$
23,104

 
$
507

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
31,068

 
$
1,462

 
$
23,104

 
$
508

 

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,
 
 
2015
 
2014
 
2015
 
2014
Interest Rate Swaps:
 
 

 
 

 
 

 
 

Included in Interest Income / (Expense)
 
$

 
$

 
$

 
$

Included in Other Income / (Expense)
 
179

 
(4
)
 
344

 
74


NOTE 5 – Loans
 
Loans were comprised of the following classifications at September 30, 2015 and December 31, 2014: 
 
 
September 30,
2015
 
December 31,
2014
Commercial:
 
 

 
 

Commercial and Industrial Loans and Leases
 
$
404,946

 
$
380,079

Commercial Real Estate Loans
 
600,688

 
583,086

Agricultural Loans
 
236,619

 
216,774

Retail:
 
 

 
 

Home Equity Loans
 
90,907

 
86,234

Consumer Loans
 
47,480

 
48,613

Residential Mortgage Loans
 
136,645

 
137,204

Subtotal
 
1,517,285

 
1,451,990

Less: Unearned Income
 
(3,705
)
 
(4,008
)
Allowance for Loan Losses
 
(14,770
)
 
(14,929
)
Loans, Net
 
$
1,498,810

 
$
1,433,053

 

13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ending September 30, 2015 and 2014:
September 30, 2015
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,659

 
$
7,315

 
$
1,223

 
$
350

 
$
382

 
$
619

 
$
710

 
$
15,258

Provision for Loan Losses
 
(337
)
 
(568
)
 
754

 
(41
)
 
(105
)
 
(172
)
 
(31
)
 
(500
)
Recoveries
 
16

 
30

 

 
2

 
39

 
3

 

 
90

Loans Charged-off
 
(5
)
 

 

 
(2
)
 
(71
)
 

 

 
(78
)
Ending Balance
 
$
4,333

 
$
6,777

 
$
1,977

 
$
309

 
$
245

 
$
450

 
$
679

 
$
14,770


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


The following table presents the activity in the allowance for loan losses by portfolio class for the nine months ending September 30, 2015 and 2014:
September 30, 2015
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,627

 
$
7,273

 
$
1,123

 
$
246

 
$
354

 
$
622

 
$
684

 
$
14,929

Provision for Loan Losses
 
(350
)
 
(566
)
 
854

 
88

 
(65
)
 
44

 
(5
)
 

Recoveries
 
83

 
81

 

 
8

 
193

 
14

 

 
379

Loans Charged-off
 
(27
)
 
(11
)
 

 
(33
)
 
(237
)
 
(230
)
 

 
(538
)
Ending Balance
 
$
4,333

 
$
6,777

 
$
1,977

 
$
309

 
$
245

 
$
450

 
$
679

 
$
14,770


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


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 historical averages for loan losses for these portfolios, judgmentally adjusted for current economic factors and portfolio trends.  Overall the allowance

14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

for loan and lease losses was increased in the agricultural sector as a result of qualitative considerations for current economic conditions and trends.

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 table presents 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, 2015 and December 31, 2014:
September 30, 2015
 
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
 
$
1,688

 
$
171

 
$
1,517

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,082

 
4,162

 
5,260

 
1,977

 
309

 
245

 
450

 
679

Acquired with Deteriorated Credit Quality
 

 

 

 

 

 

 

 

Total Ending Allowance Balance
 
$
14,770

 
$
4,333

 
$
6,777

 
$
1,977

 
$
309

 
$
245

 
$
450

 
$
679


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
6,116

 
$
2,219

 
$
3,885

 
$
12

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
1,510,330

 
403,027

 
592,735

 
239,660

 
91,178

 
47,602

 
136,128

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
6,924

 
674

 
5,376

 

 

 

 
874

 
n/m(2)

Total Ending Loans Balance(1)
 
$
1,523,370

 
$
405,920

 
$
601,996

 
$
239,672

 
$
91,178

 
$
47,602

 
$
137,002

 
n/m(2)


(1)Total recorded investment in loans includes $6,085 in accrued interest.
(2)n/m = not meaningful

15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

December 31, 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
 
$
1,532

 
$
87

 
$
1,445

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,343

 
4,540

 
5,818

 
1,123

 
246

 
354

 
578

 
684

Acquired with Deteriorated Credit Quality
 
54

 

 
10

 

 

 

 
44

 

Total Ending Allowance Balance
 
$
14,929

 
$
4,627

 
$
7,273

 
$
1,123

 
$
246

 
$
354

 
$
622

 
$
684


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
6,044

 
$
1,964

 
$
4,080

 
$

 
$

 
$

 
$

 
n/m(2)

Loans Collectively Evaluated for Impairment
 
1,443,363

 
378,533

 
573,961

 
219,640

 
86,570

 
48,614

 
136,045

 
n/m(2)

Loans Acquired with Deteriorated Credit Quality
 
8,361

 
354

 
6,385

 

 

 
118

 
1,504

 
n/m(2)

Total Ending Loans Balance(1)
 
$
1,457,768

 
$
380,851

 
$
584,426

 
$
219,640

 
$
86,570

 
$
48,732

 
$
137,549

 
n/m(2)

 
(1)Total recorded investment in loans includes $5,778 in accrued interest.
(2)n/m = not meaningful 

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2015 and December 31, 2014:
September 30, 2015
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
262

 
$
259

 
$

Commercial Real Estate Loans
 
1,081

 
962

 

Agricultural Loans
 
12

 
12

 

Subtotal
 
1,355

 
1,233

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
1,945

 
1,960

 
171

Commercial Real Estate Loans
 
3,584

 
2,923

 
1,517

Agricultural Loans
 

 

 

Subtotal
 
5,529

 
4,883

 
1,688

Total
 
$
6,884

 
$
6,116

 
$
1,688

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
530

 
$

 
$

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

 
$

 
$


(1) Unpaid Principal Balance is the remaining contractual payments inclusive of partial charge-offs.



16


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

December 31, 2014
 
Unpaid Principal Balance(1)
 
 Recorded Investment
 
Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,887

 
$
1,877

 
$

Commercial Real Estate Loans
 
1,944

 
1,447

 

Agricultural Loans
 

 

 

Subtotal
 
3,831

 
3,324

 

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
84

 
87

 
87

Commercial Real Estate Loans
 
3,653

 
2,975

 
1,455

Agricultural Loans
 

 

 

Subtotal
 
3,737

 
3,062

 
1,542

Total
 
$
7,568

 
$
6,386

 
$
1,542

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
289

 
$
133

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
759

 
$
209

 
$
10


(1) Unpaid Principal Balance is the remaining contractual payments inclusive 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, 2015 and 2014:
September 30, 2015
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
366

 
$
12

 
$
12

Commercial Real Estate Loans
 
1,008

 
11

 
11

Agricultural Loans
 
12

 
1

 
1

Subtotal
 
1,386

 
24

 
24

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
1,974

 
22

 
22

Commercial Real Estate Loans
 
3,067

 
2

 
1

Agricultural Loans
 

 

 

Subtotal
 
5,041

 
24

 
23

Total
 
$
6,427

 
$
48

 
$
47

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
127

 
$

 
$

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

 
$

 
$




17


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

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





The following tables present loans individually evaluated for impairment by class of loans for the nine month period ended September 30, 2015 and 2014:
September 30, 2015
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
471

 
$
24

 
$
24

Commercial Real Estate Loans
 
1,228

 
92

 
92

Agricultural Loans
 
8

 
1

 
1

Subtotal
 
1,707

 
117

 
117

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
1,821

 
68

 
68

Commercial Real Estate Loans
 
3,093

 
3

 
2

Agricultural Loans
 

 

 

Subtotal
 
4,914

 
71

 
70

Total
 
$
6,621

 
$
188

 
$
187

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
237

 
$

 
$

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

 
$

 
$




18


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

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


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 tables present 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, 2015 and December 31, 2014:
 
 
Non-Accrual
 
Loans Past Due 90 Days
or More & Still Accruing
 
 
2015
 
2014
 
2015
 
2014
Commercial and Industrial Loans and Leases
 
$
680

 
$
161

 
$
10

 
$
68

Commercial Real Estate Loans
 
3,077

 
3,460

 

 

Agricultural Loans
 

 

 

 
75

Home Equity Loans
 
226

 
268

 

 

Consumer Loans
 
94

 
196

 

 

Residential Mortgage Loans
 
1,249

 
1,885

 

 

Total
 
$
5,326

 
$
5,970

 
$
10

 
$
143

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
71

 
$
1,154

 
$

 
$



19


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)


The following tables present the aging of the recorded investment in past due loans by class of loans as of September 30, 2015 and December 31, 2014:
September 30, 2015
 
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
 
$
405,920

 
$
444

 
$
44

 
$
68

 
$
556

 
$
405,364

Commercial Real Estate Loans
 
601,996

 

 
39

 
1,210

 
1,249

 
600,747

Agricultural Loans
 
239,672

 

 

 

 

 
239,672

Home Equity Loans
 
91,178

 
364

 
45

 
226

 
635

 
90,543

Consumer Loans
 
47,602

 
409

 
60

 
94

 
563

 
47,039

Residential Mortgage Loans
 
137,002

 
2,138

 
210

 
1,104

 
3,452

 
133,550

Total(1)
 
$
1,523,370

 
$
3,355

 
$
398

 
$
2,702

 
$
6,455

 
$
1,516,915

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
6,924

 
$
36

 
$

 
$

 
$
36

 
$
6,888


(1)Total recorded investment in loans includes $6,085 in accrued interest.
 
December 31, 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
 
$
380,851

 
$
628

 
$

 
$
148

 
$
776

 
$
380,075

Commercial Real Estate Loans
 
584,426

 
504

 
10

 
753

 
1,267

 
583,159

Agricultural Loans
 
219,640

 
25

 

 
75

 
100

 
219,540

Home Equity Loans
 
86,570

 
197

 
4

 
268

 
469

 
86,101

Consumer Loans
 
48,732

 
132

 
28

 
75

 
235

 
48,497

Residential Mortgage Loans
 
137,549

 
2,046

 
329

 
1,720

 
4,095

 
133,454

Total(1)
 
$
1,457,768

 
$
3,532

 
$
371

 
$
3,039

 
$
6,942

 
$
1,450,826

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
8,361

 
$

 
$

 
$
648

 
$
648

 
$
7,713

 
(1)Total recorded investment in loans includes $5,778 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, 2015 and 2014, there were no new troubled debt restructurings. During the nine months ended September 30, 2015, there were no new troubled debt restructurings. During the nine months ended September 30, 2014, there was one loan modified as a troubled debt restructurings. The modification of the terms of this loan included a permanent reduction of the recorded investment in the loan.

20


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015 and December 31, 2014:

September 30, 2015
 
Total
 
Performing
 
Non-Accrual(1)
Commercial and Industrial Loans and Leases
 
$
1,541

 
$
1,539

 
$
2

Commercial Real Estate Loans
 
2,494

 
807

 
1,687

Total
 
$
4,035

 
$
2,346

 
$
1,689


December 31, 2014
 
Total
 
Performing
 
Non-Accrual(1)
Commercial and Industrial Loans and Leases
 
$
1,809

 
$
1,803

 
$
6

Commercial Real Estate Loans
 
2,841

 
960

 
1,881

Total
 
$
4,650

 
$
2,763

 
$
1,887

 
(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, 2015 and December 31, 2014 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, 2015 and 2014: 
September 30, 2015
 
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, 2015.

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.

21


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015 and 2014: 
September 30, 2015
 
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 nine months ending September 30, 2015.

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.

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, 2015 and 2014:
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
September 30, 2015
 
 

 
 

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, 2015.

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.







22


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015 and 2014:
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
September 30, 2015
 
 

 
 
Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 
1

 
95

Total
 
1

 
$
95

The troubled debt restructurings that subsequently defaulted described above resulted in no change to the allowance for loan losses and charge-offs of $95 during the nine months ending September 30, 2015.

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.

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.
 

23


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 5 - Loans (continued)

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:
September 30, 2015
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Commercial and Industrial Loans and Leases
 
$
377,189

 
$
16,682

 
$
12,049

 
$

 
$
405,920

Commercial Real Estate Loans
 
565,396

 
23,879

 
12,721

 

 
601,996

Agricultural Loans
 
232,762

 
6,809

 
101

 

 
239,672

Total
 
$
1,175,347

 
$
47,370

 
$
24,871

 
$

 
$
1,247,588

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
926

 
$
1,723

 
$
3,401

 
$

 
$
6,050


December 31, 2014
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Commercial and Industrial Loans and Leases
 
$
351,250

 
$
18,387

 
$
11,214

 
$

 
$
380,851

Commercial Real Estate Loans
 
545,804

 
23,421

 
15,201

 

 
584,426

Agricultural Loans
 
214,974

 
4,211

 
455

 

 
219,640

Total
 
$
1,112,028

 
$
46,019

 
$
26,870

 
$

 
$
1,184,917

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
651

 
$
1,697

 
$
4,391

 
$

 
$
6,739

 

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, 2015 and December 31, 2014:

September 30, 2015
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
Performing
 
$
90,952

 
$
47,508

 
$
135,753

Nonperforming
 
226

 
94

 
1,249

Total
 
$
91,178

 
$
47,602

 
$
137,002

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

 
$

 
$
874

 
December 31, 2014
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
Performing
 
$
86,302

 
$
48,536

 
$
135,664

Nonperforming
 
268

 
196

 
1,885

Total
 
$
86,570

 
$
48,732

 
$
137,549

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

 
$
118

 
$
1,504

 

24


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(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, 2015
 
December 31, 2014
 
 
 
 
 
Commercial and Industrial Loans
 
$
674

 
$
354

Commercial Real Estate Loans
 
5,376

 
6,385

Home Equity Loans
 

 

Consumer Loans
 

 
118

Residential Mortgage Loans
 
874

 
1,504

Total
 
$
6,924

 
$
8,361

 
 
 

 
 

Carrying Amount, Net of Allowance
 
$
6,924

 
$
8,307

 
Accretable yield, or income expected to be collected, is as follows:
 
 
2015
 
2014
 
 
 
 
 
Balance at July 1
 
$
1,680

 
$
1,126

New Loans Purchased
 

 

Accretion of Income
 
(251
)
 
(89
)
Reclassifications from Non-accretable Difference
 

 

Charge-off of Accretable Yield
 

 
(113
)
Balance at September 30
 
$
1,429

 
$
924


 
 
2015
 
2014
 
 
 
 
 
Balance at January 1
 
$
1,685

 
$
1,279

New Loans Purchased
 

 

Accretion of Income
 
(333
)
 
(242
)
Reclassifications from Non-accretable Difference
 
104

 

Charge-off of Accretable Yield
 
(27
)
 
(113
)
Balance at September 30
 
$
1,429

 
$
924


For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three and nine months ended September 30, 2015 and 2014. No allowances for loan losses were reversed during the same period.

The carrying amount of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $123 as of September 30, 2015 and $288 as of December 31, 2014.


NOTE 6 – Repurchase Agreements Accounted for as Secured Borrowings

Repurchase agreements are short term borrowings included in FHLB Advances and Other Borrowings and mature overnight and continuously. Repurchase agreements totaled $17,079 as of September 30, 2015 and were secured by mortgage-backed securities. Risk could arise when the collateral pledged to repurchase agreement declines in fair value. The Company minimizes risk by consistently monitoring the value of the collateral pledged. At the point in time where the collateral has declined in fair value, the Company is required to provide additional collateral based on the value of the underlying securities.


25


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 7 – 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, 2015. 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 the trust operations of the Company's banking subsidiary and by German American Investment Services, Inc. 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.
 
The following segment financial information has been derived from the internal financial statements of the Company which are used by management to monitor and manage financial performance. 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, 2015

 


 


 





 

Net Interest Income

$
18,961


$


$
2


$
(104
)

$
18,859

Net Gains on Sales of Loans

831








831

Net Gains on Securities










Trust and Investment Product Fees

1


1,053




(3
)

1,051

Insurance Revenues

8


15


1,729




1,752

Noncash Items:













 

Provision for Loan Losses

(500
)







(500
)
Depreciation and Amortization

980


2


27


38


1,047

Income Tax Expense (Benefit)

2,571


(1
)

84


(225
)

2,429

Segment Profit (Loss)

7,702


(14
)

140


(107
)

7,721

Segment Assets at September 30, 2015

2,307,765


1,493


7,410


(3,458
)

2,313,210

 

26


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 7 - Segment Information (continued)

 

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 December 31, 2014

2,242,456


11,401


6,429


(23,187
)

2,237,099


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

 
 

 
 

 
 

 
 

September 30, 2015
 
 

 
 

 
 

 
 
 
 

Net Interest Income
 
$
56,402

 
$
8

 
$
4

 
$
(300
)
 
$
56,114

Net Gains on Sales of Loans
 
2,364

 

 

 

 
2,364

Net Gains on Securities
 
698

 

 

 
27

 
725

Trust and Investment Product Fees
 
3

 
2,974

 

 
(3
)
 
2,974

Insurance Revenues
 
19

 
33

 
5,760

 

 
5,812

Noncash Items:
 
 
 
 
 
 
 
 
 


Provision for Loan Losses
 

 

 

 

 

Depreciation and Amortization
 
3,045

 
15

 
81

 
113

 
3,254

Income Tax Expense (Benefit)
 
8,709

 
(13
)
 
576

 
(604
)
 
8,668

Segment Profit (Loss)
 
21,650

 
(47
)
 
874

 
(125
)
 
22,352

Segment Assets at September 30, 2015
 
2,307,765

 
1,493

 
7,410

 
(3,458
)
 
2,313,210


27


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 7 - 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 December 31, 2014
 
2,242,456

 
11,401

 
6,429

 
(23,187
)
 
2,237,099


NOTE 8 – 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 shares of common stock 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, 2015, 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, 2015 and 2014.


28


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 9 – 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, 2015, the Company has reserved 390,033 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, 2015 and 2014, the Company granted no options.  The Company recorded no stock compensation expense applicable to options during the three and nine months ended September 30, 2015 and 2014 because all outstanding options were fully vested prior to 2007. In addition, there was no unrecognized option expense. 
 
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 (typically in the form of 60% restricted stock grants and 40% cash credit entitlements). The management and employee restricted stock grants and tandem cash credit entitlements awarded 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, 2015, the Company granted awards of 102 shares of restricted stock. During the three months ended September 30, 2014, the Company granted no shares of restricted stock.  During the nine months ended September 30, 2015 and 2014, the Company granted awards of 33,480 and 31,080 shares of restricted stock, respectively. 
 
The following tables present expense recorded for restricted stock and cash entitlements as well as the related tax information for the periods presented:
 

Three Months Ended
September 30,
 

2015

2014







Restricted Stock Expense

$
227


$
161

Cash Entitlement Expense

134


101

Tax Effect

(146
)

(106
)
Net of Tax

$
215


$
156


 
 
Nine Months Ended
September 30,
 
 
2015
 
2014
 
 
 
 
 
Restricted Stock Expense
 
$
737

 
$
482

Cash Entitlement Expense
 
438

 
300

Tax Effect
 
(476
)
 
(317
)
Net of Tax
 
$
699

 
$
465


Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $1,808 and $1,616 as of September 30, 2015 and 2014, 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, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 9 - Equity Plans and Equity Based Compensation (continued)


The Employee Stock Purchase Plan is not considered compensatory.  There was $22 expense recorded for the employee stock purchase plan during the three and nine months ended September 30, 2015. There was no expense recorded for the employee stock purchase plan during the three and nine months ended September 30, 2014. There was no unrecognized compensation expense as of September 30, 2015 and 2014 for the Employee Stock Purchase Plan.

NOTE 10 – Fair Value
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
               
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). 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, 2015, the Company held $9.4 million in Level 3 securities which consist of $9.0 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 investor's 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, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Fair Value (continued)

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized.
 
Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for 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, 2015 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
 
$

 
$
9,970

 
$

 
$
9,970

Obligations of State and Political Subdivisions
 

 
184,336

 
9,006

 
193,342

Mortgage-backed Securities-Residential
 

 
421,479

 

 
421,479

Equity Securities
 

 

 
353

 
353

Total Securities
 
$

 
$
615,785

 
$
9,359

 
$
625,144

 
 
 
 
 
 
 
 
 
Loans Held-for-Sale
 
$

 
$
6,410

 
$

 
$
6,410

 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$
1,433

 
$

 
$
1,433

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
$

 
$
1,462

 
$

 
$
1,462

 
 
 
Fair Value Measurements at December 31, 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
 
$

 
$
19,561

 
$

 
$
19,561

Obligations of State and Political Subdivisions
 

 
143,636

 
10,141

 
153,777

Mortgage-backed Securities-Residential
 

 
457,304

 

 
457,304

Equity Securities
 

 

 
353

 
353

Total Securities
 
$

 
$
620,501

 
$
10,494

 
$
630,995

 
 
 
 
 
 
 
 
 
Loans Held-for-Sale
 
$

 
$
6,311

 
$

 
$
6,311

 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$
507

 
$

 
$
507

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
$

 
$
508

 
$

 
$
508

 
There were no transfers between Level 1 and Level 2 for the periods ended September 30, 2015 and December 31, 2014.
 

31


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Fair Value (continued)

At September 30, 2015, the aggregate fair value of the Loans Held-for-Sale was $6,410, aggregate contractual principal balance was $6,290 with a difference of $120. At December 31, 2014, the aggregate fair value of the Loans Held-for-Sale was $6,311, aggregate contractual principal balance was $6,227 with a difference of $84.

The table below presents 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, 2015 and 2014:
 
 
Obligations of State and Political Subdivisions
 
Equity Securities
 
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
 
Balance of Recurring Level 3 Assets at July 1
 
$
9,521

 
$
10,562

 
$
353

 
$
353

Total Gains or Losses (realized/unrealized) Included in Other Comprehensive Income
 
25

 
(12
)
 

 

Maturities / Calls
 
(540
)
 
(430
)
 

 

Purchases
 

 

 

 

Balance of Recurring Level 3 Assets at September 30
 
$
9,006

 
$
10,120

 
$
353

 
$
353


 

Obligations of State and Political Subdivisions

Equity Securities
 

2015

2014

2015

2014













Balance of Recurring Level 3 Assets at January 1

$
10,141


$
10,832


$
353


$
353

Total Gains or Losses (realized/unrealized) Included in Other Comprehensive Income

(20
)

143





Maturities / Calls

(1,115
)

(855
)




Purchases








Balance of Recurring Level 3 Assets at September 30

$
9,006


$
10,120


$
353


$
353


Of the total gain/loss included in other comprehensive income for the three and nine months ended September 30, 2015, $25 and $(20), respectively, was attributable to other changes in fair value. The three and nine months ended September 30, 2015 included no gain/loss attributable to interest income on securities. Of the total gain/loss included in other comprehensive income for the three and nine months ended September 30, 2014, $(12) and $143, respectively, 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.
 
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, 2015 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
 
 

 
 

 
 

 
 

Commercial and Industrial Loans
 
$

 
$

 
$
426

 
$
426

Commercial Real Estate Loans
 

 

 
1,386

 
1,386

Agricultural Loans
 

 

 

 

Other Real Estate
 
 

 
 

 
 

 
 

Commercial Real Estate
 

 

 

 


32


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Fair Value (continued)

 
 
 
Fair Value Measurements at December 31, 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
 
 

 
 

 
 

 
 

Commercial and Industrial Loans
 
$

 
$

 
$

 
$

Commercial Real Estate Loans
 

 

 
1,504

 
1,504

Agricultural Loans
 

 

 

 

Other Real Estate
 
 

 
 

 
 

 
 

Commercial Real Estate
 

 

 
68

 
68

 
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $3,467 with a valuation allowance of $1,655, resulting in an additional provision for loan losses of $78 and $113 for the three and nine months ended September 30, 2015, respectively. For the three and nine months ended September 30, 2014, impaired loans resulted in an additional provision for loan losses of $30 and $187, respectively. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $3,043 with a valuation allowance of $1,539, resulting in an additional provision for loan losses of $261 for the year ended December 31, 2014.
 
There was no Other Real Estate carried at fair value less costs to sell at September 30, 2015. No charge to earnings was included in the three or nine months ended September 30, 2015. A charge to earnings through Other Operating Income of $83 was included in the three and nine months ended September 30, 2014. Other Real Estate which is measured at the lower of carrying or fair value less costs to sell had a carrying value of $68 at December 31, 2014.
 
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, 2015 and December 31, 2014:
September 30, 2015 
 
Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average)

 








Impaired Loans - Commercial and Industrial Loans
 
$
426

 
Sales comparison approach
 
Adjustment for physical condition of comparable properties sold
 
100%-69%
(69%)
Impaired Loans - Commercial Real Estate Loans
 
$
1,386


Sales comparison approach

Adjustment for physical condition of comparable properties sold

93%-30%
(74%)

December 31, 2014
 
Fair Value
 
Valuation Technique(s)
 
Unobservable Input(s)
 
Range (Weighted Average)
 
 
 
 
 
 
 
 
 
Impaired Loans - Commercial Real Estate Loans
 
$
1,504

 
Sales comparison approach
 
Adjustment for physical condition of comparable properties sold
 
30%-86%
(71%)
Other Real Estate - Commercial Real Estate Loans
 
$
68

 
Sales comparison approach
 
Adjustment for physical condition of comparable properties sold
 
55%
(55%)
 

33


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Fair Value (continued)

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, 2015 and December 31, 2014. 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, 2015 Using
 
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and Short-term Investments
 
$
62,238

 
$
39,998

 
$
22,240

 
$

 
$
62,238

Securities Held-to-Maturity
 
95

 

 
95

 

 
95

Loans, Net
 
1,496,998

 

 

 
1,500,221

 
1,500,221

FHLB Stock and Other Restricted Stock
 
8,167

 
N/A

 
N/A

 
N/A

 
N/A

Accrued Interest Receivable
 
8,978

 

 
2,819

 
6,159

 
8,978

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Demand, Savings, and Money Market Deposits
 
(1,458,467
)
 
(1,458,467
)
 

 

 
(1,458,467
)
Time Deposits
 
(345,368
)
 

 
(345,415
)
 

 
(345,415
)
Short-term Borrowings
 
(139,479
)
 

 
(139,479
)
 

 
(139,479
)
Long-term Debt
 
(99,593
)
 

 
(95,393
)
 
(5,513
)
 
(100,906
)
Accrued Interest Payable
 
(627
)
 

 
(620
)
 
(7
)
 
(627
)
 
 
 
 
 
Fair Value Measurements at
December 31, 2014 Using
 
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and Short-term Investments
 
$
42,546

 
$
33,481

 
$
9,065

 
$

 
$
42,546

Securities Held-to-Maturity
 
184

 

 
186

 

 
186

Loans, Net
 
1,431,549

 

 

 
1,432,622

 
1,432,622

FHLB Stock and Other Restricted Stock
 
7,040

 
N/A

 
N/A

 
N/A

 
N/A

Accrued Interest Receivable
 
8,162

 

 
2,240

 
5,922

 
8,162

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Demand, Savings, and Money Market Deposits
 
(1,446,336
)
 
(1,446,336
)
 

 

 
(1,446,336
)
Time Deposits
 
(333,425
)
 

 
(335,134
)
 

 
(335,134
)
Short-term Borrowings
 
(141,473
)
 

 
(141,473
)
 

 
(141,473
)
Long-term Debt
 
(64,591
)
 

 
(60,289
)
 
(5,429
)
 
(65,718
)
Accrued Interest Payable
 
(754
)
 

 
(704
)
 
(50
)
 
(754
)
 
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.
 

34


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Fair Value (continued)

Loans:
Fair values of loans, excluding loans held for sale and collateral dependent impaired loans carried at fair value, 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 analysis, 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. 
 
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.
 
NOTE 11 – 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, 2015 and 2014, net of tax:
September 30, 2015

Unrealized Gains and Losses on Available-for-Sale Securities

Defined Benefit Pension Items

Postretirement Benefit Items

Total













Beginning Balance at July 1, 2015

$
491


$


$
(68
)

$
423

Other Comprehensive Income (Loss) Before Reclassification

4,161






4,161

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)








Net Current Period Other Comprehensive Income (Loss)

4,161






4,161

Ending Balance at September 30, 2015

$
4,652


$


$
(68
)

$
4,584


35


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 11 - 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, 2015

$
2,958


$


$
(68
)

$
2,890

Other Comprehensive Income (Loss) Before Reclassification

2,165






2,165

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

(471
)





(471
)
Net Current Period Other Comprehensive Income (Loss)

1,694






1,694

Ending Balance at September 30, 2015

$
4,652


$


$
(68
)

$
4,584


September 30, 2014
 
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


36


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 11 - Other Comprehensive Income (Loss) (continued)


The tables below summarize the reclassifications out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2015 and 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

$


Net Gain (Loss) on Securities




Income Tax Expense
 



Net of Tax






Total Reclassifications for the Three Months Ended September 30, 2015

$


 

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

$
725


Net Gain (Loss) on Securities
 

(254
)

Income Tax Expense
 

471


Net of Tax






Total Reclassifications for the Nine Months Ended September 30, 2015

$
471


 

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

 
 

37


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 12 – Newly Issued Accounting Pronouncements

In January 2014, the FASB amended existing guidance clarifying that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. This update did not have a material impact on the Company's consolidated financial statements.

In January 2014, the FASB issued guidance for accounting for investments in qualified affordable housing projects. The new guidance allows a limited liability investor that meets certain conditions to use the proportional amortization methods. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit).

The Company adopted the proportional amortization method of accounting for its low income housing investments in the first quarter of 2015. The Company quantified the impact of adopting the proportional amortization method compared to the equity method to its current year and prior period financial statements. The Company determined that the adoption of the proportional amortization method did not have a material impact to its consolidated financial statements; therefore, the Company did not adjust its prior period consolidated financial statements. The low income housing investment losses, net of the tax benefits received, are included in income tax expense on the consolidated statements of income for the three and nine months ended September 30, 2015. At September 30, 2015 and December 31, 2014, the Company had investments in qualified housing projects totaling $5.8 million and $6.1 million, respectively. These investments are reported in the Accrued Interest Receivable and Other Assets line of the Consolidated Balance Sheet. The Company had an unfunded investment in qualified affordable housing investments of $4.4 million at September 30, 2015 and $4.8 million at December 31, 2014, which are reported in the Accrued Interest Payable and Other Liabilities line of the Consolidated Balance Sheet. For the three months ended September 30, 2015, the Company recognized $42 of low income housing investment tax credit through the income tax line of the Consolidated Statements of Income. The Company recognized $38 of low income housing investment losses net of tax credits during nine months ended September 30, 2015 through the income tax line of the Consolidated Statements of Income. Of this amount, $161 was due to the adoption of the proportional amortization method. For the third quarter and nine months ended September 30, 2014, the Company recognized $22 and $65 in the Other Operating Expense line, respectively, and $35 and $105 benefit in the Income Tax Expense line, respectively, of the Consolidated Statements of Income.

NOTE 13 – Subsequent Events

On October 26, 2015 the Company entered into a definitive agreement to acquire River Valley Bancorp (“RIVR”), through the merger of RIVR with and into the Company, and the merger of RIVR’s sole banking subsidiary, River Valley Financial Bank, into the Company’s subsidiary bank, German American Bancorp. River Valley Bank operates 14 banking offices in Southeast Indiana. RIVR’s assets and equity (unaudited) as of September 30, 2015 totaled $513.7 million and $55.6 million, respectively. Net income (unaudited) totaled $4.3 million for the nine month period ended September 30, 2015.

Under the terms of the proposed merger, the shareholders of RIVR would receive 0.770 shares of common stock of the Company and $9.90 of cash for each of their RIVR shares. Based upon the $30.02 per share 20-day volume weighted average price of the Company’s common shares on October 22, 2015 (the valuation upon which the exchange ratio was established) the transaction had a present indicated value of approximately $33.00 per RIVR common share. Because the value of the transaction to holders of RIVR common shares as of any future date will in large part be a function of the then-current market price of the Company’s common stock, the transaction value is expected to vary over the period of time prior to and at closing in the same direction as the market price of the Company’s common shares varies over that same time period.

Based on RIVR’s number of common shares outstanding at the time of entering into the definitive agreement, the Company expects to issue approximately 1.94 million shares of its common stock, and pay approximately $25 million in cash, in exchange for all

38

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2015
(unaudited, dollars in thousands except share and per share data)

NOTE 13 - Subsequent Events (continued)


of the issued and outstanding common shares of RIVR. On this basis, the basic transaction has an aggregate indicated value (valuing the German American’s common shares at the 20-day volume weighted average price ending on October 22, 2015, NASDAQ closing price) of approximately $83.5 million. The basic transaction value also includes approximately $500,000 in cash payments to be made in cancellation of stock options.

The proposed merger is subject to the approval by shareholders of RIVR, approval of the appropriate bank regulatory agencies and other conditions customary for transactions of this nature. It is contemplated that the merger will be consummated in the first quarter of 2016.


39



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 Bancorp, Inc., through its banking subsidiary German American Bancorp, operates 37 banking offices in 13 southern Indiana counties. The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and casualty insurance agency (German American Insurance, Inc.).
 
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 German American Bancorp, Inc. 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, 2015 and December 31, 2014 and the consolidated results of operations for the three and nine months ended September 30, 2015 and 2014. 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 Annual Report on Form 10-K for the year ended December 31, 2014.

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 Annual Report on Form 10-K for the year ended December 31, 2014 and in the Company’s Quarterly Report on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015.

Net income for the quarter ended September 30, 2015 totaled $7,721,000, or $0.58 per diluted share, which was relatively flat compared to the quarter ended September 30, 2014 net income of $7,708,000, or $0.58 per diluted share. On a year-to-date basis, 2015 earnings improved to $22,352,000, or $1.69 per diluted share, as compared to $20,700,000, or $1.57 per diluted share for the first nine months of 2014 representing an increase of 8% on a per share basis.

On October 26, 2015, the Company and River Valley Bancorp (“River Valley”) entered into a definitive agreement to merge River Valley into the Company. Immediately following this transaction, River Valley’s subsidiary bank, River Valley Financial Bank, would merge into German American’s similarly-named subsidiary bank, German American Bancorp. This transaction provides a strategic opportunity for German American to enhance its presence in the Southeast Indiana market area.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for the Company 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 income tax expense.

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.
 

40



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 non-performing consumer or residential real estate loans. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values.

General allocations are made for commercial and agricultural loans that are graded as substandard based on migration analysis techniques to determine historical average losses for similar types of loans. General allocations are also 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 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, 2015, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $2,757,000 and gross unrealized gains totaled approximately $9,976,000.  

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.

41



 
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 carry-back and carry-forward 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, 2015 totaled $7,721,000, or $0.58 per diluted share, which was relatively flat to the quarter ended September 30, 2014 net income of $7,708,000, or $0.58 per diluted share. On a year-to-date basis, 2015 earnings improved to $22,352,000, or $1.69 per diluted share, as compared to $20,700,000, or $1.57 per diluted share for the first nine months of 2014 representing an increase of 8% on a per share basis.

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.


42



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, 2015

Three Months Ended
September 30, 2014
 

Principal Balance

Income / Expense

Yield / Rate

Principal Balance

Income / Expense

Yield / Rate
Assets

 


 


 


 


 


 

Federal Funds Sold and Other
Short-term Investments

$
22,155


$
3


0.06
%

$
15,788


$
2


0.04
%
Securities:

 


 


 


 





 

Taxable

442,907


2,176


1.97
%

489,466


2,531


2.07
%
Non-taxable

186,563


2,365


5.07
%

137,632


1,746


5.07
%
Total Loans and Leases(2)

1,492,772


16,796


4.47
%

1,424,458


16,755


4.67
%
Total Interest Earning Assets

2,144,397


21,340


3.96
%

2,067,344


21,034


4.05
%
Other Assets

145,019


 


 


140,019


 


 

Less: Allowance for Loan Losses

(15,382
)

 


 


(15,879
)

 


 

Total Assets

$
2,274,034


 


 


$
2,191,484


 


 




















Liabilities and Shareholders’ Equity

 


 


 


 


 


 

Interest-bearing Demand, Savings
and Money Market Deposits

$
1,027,035


$
329


0.13
%

$
1,017,266


$
317


0.12
%
Time Deposits

355,853


658


0.73
%

330,494


708


0.85
%
FHLB Advances and Other Borrowings

200,831


573


1.13
%

213,205


532


0.99
%
Total Interest-bearing Liabilities

1,583,719


1,560


0.39
%

1,560,965


1,557


0.40
%
Demand Deposit Accounts

428,380


 


 


400,223


 


 

Other Liabilities

19,628


 


 


13,028


 


 

Total Liabilities

2,031,727


 


 


1,974,216


 


 

Shareholders’ Equity

242,307


 


 


217,268


 


 

Total Liabilities and Shareholders’ Equity

$
2,274,034


 


 


$
2,191,484


 


 




















Cost of Funds

 


 


0.29
%

 


 


0.30
%
Net Interest Income

 


$
19,780





 


$
19,477


 

Net Interest Margin

 


 


3.67
%

 


 


3.75
%
 
(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 $68,000, or less than 1%, (an increase of $303,000 or 2% on a tax-equivalent basis) for the quarter ended September 30, 2015 compared with the same quarter of 2014. The increased level of net interest income during the third quarter of 2015 compared with the third quarter of 2014 was driven by a higher level of earning assets and in particular growth of the loan portfolio. In addition, the increased level of net interest income was attributable to a shift from the taxable securities portfolio to the non-taxable securities portfolio.

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 3.67% for the third quarter of 2015 compared to 3.75% during the third quarter of 2014. The yield on earning assets totaled 3.96% during the quarter ended September 30, 2015 compared to 4.05% in the same period of 2014 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.29% during the quarter ended September 30, 2015 compared to 0.30% in the same period of 2014.

The decline in the net interest margin in the third quarter of 2015 compared with the third quarter of 2014 was largely attributable to the continued downward pressure on earning asset yields being driven by the low market interest rate environment and a competitive marketplace for lending opportunities. Partially mitigating the decline in earning asset yields was the continued modest decline in the Company's cost of funds. Accretion of loan discounts on acquired loans contributed approximately 4 basis points on an annualized basis to the net interest margin in the third quarter of 2015 and approximately 6 basis points in the third quarter of 2014.


43



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)
 
 
Nine Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2014
 
 
Principal Balance
 
Income / Expense
 
Yield / Rate
 
Principal Balance
 
Income / Expense
 
Yield / Rate
Assets
 
 

 
 

 
 

 
 

 
 

 
 

Federal Funds Sold and Other
Short-term Investments
 
$
19,755

 
$
10

 
0.07
%
 
$
13,490

 
$
8

 
0.08
%
Securities:
 
 

 
 

 
 

 
 

 
 
 
 

Taxable
 
460,499

 
6,830

 
1.98
%
 
499,404

 
7,944

 
2.12
%
Non-taxable
 
172,007

 
6,490

 
5.03
%
 
125,708

 
4,824

 
5.12
%
Total Loans and Leases(2)
 
1,464,632

 
49,815

 
4.55
%
 
1,395,529

 
48,989

 
4.69
%
Total Interest Earning Assets
 
2,116,893

 
63,145

 
3.98
%
 
2,034,131

 
61,765

 
4.06
%
Other Assets
 
145,749

 
 

 
 

 
140,725

 
 

 
 

Less: Allowance for Loan Losses
 
(15,247
)
 
 

 
 

 
(15,615
)
 
 

 
 

Total Assets
 
$
2,247,395

 
 

 
 

 
$
2,159,241

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing Demand, Savings
and Money Market Deposits
 
$
1,033,107

 
$
986

 
0.13
%
 
$
1,032,463

 
$
960

 
0.12
%
Time Deposits
 
352,444

 
2,016

 
0.76
%
 
335,816

 
2,138

 
0.85
%
FHLB Advances and Other Borrowings
 
177,138

 
1,481

 
1.12
%
 
166,276

 
1,448

 
1.16
%
Total Interest-bearing Liabilities
 
1,562,689

 
4,483

 
0.38
%
 
1,534,555

 
4,546

 
0.40
%
Demand Deposit Accounts
 
425,379

 
 

 
 

 
402,070

 
 

 
 

Other Liabilities
 
21,223

 
 

 
 

 
11,621

 
 

 
 

Total Liabilities
 
2,009,291

 
 

 
 

 
1,948,246

 
 

 
 

Shareholders’ Equity
 
238,104

 
 

 
 

 
210,995

 
 

 
 

Total Liabilities and Shareholders’ Equity
 
$
2,247,395

 
 

 
 

 
$
2,159,241

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Funds
 
 

 
 

 
0.28
%
 
 

 
 

 
0.30
%
Net Interest Income
 
 

 
$
58,662

 
 
 
 

 
$
57,219

 
 

Net Interest Margin
 
 

 
 

 
3.70
%
 
 

 
 

 
3.76
%

(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 $806,000 or 1% (an increase of $1,444,000 or 3% on a tax-equivalent basis) for the nine months ended September 30, 2015 compared with the same period of 2014. The increased level of net interest income during the first nine months of 2015 compared with the same period of 2014 was driven by a higher level of earning assets and in particular growth of the loan portfolio. In addition, the increased level of net interest income was attributable to a shift from the taxable securities portfolio to the non-taxable securities portfolio.

The tax equivalent net interest margin was 3.70% for the nine months ended September 30, 2015 compared to 3.76% during the first nine months of 2014.  The yield on earning assets totaled 3.98% during the nine months ended September 30, 2015 compared to 4.06% in the same period of 2014 while the cost of funds totaled 0.28% during the nine months ended September 30, 2015 compared to 0.30% in the same period of 2014.

The decline in the net interest margin in the first nine months of 2015 compared with the same period of 2014 was largely attributable to the continued downward pressure on earning asset yields being driven by the low market interest rate environment and a competitive marketplace for lending opportunities. Partially mitigating the decline in earning asset yields was the continued decline in the Company's cost of funds. Accretion of loan discounts on acquired loans contributed approximately 5 basis points on an annualized basis to the net interest margin during the nine months ended September 30, 2015 compared with 6 basis points during the same period of 2014.


44



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, 2015, the Company recognized a negative provision for loan losses of $500,000 which represented an decrease of $500,000 from the third quarter of 2014 when no provision was recorded. The negative provision for loan losses during the third quarter of 2015 was attributable to continued improvement in the asset quality metrics of the Company as well as a reduction in the historical loss allocation as a result of years of higher losses migrating out of the look-back period that is used in the Company's standard methodology for determining the adequacy of its allowance for loan and lease losses. The Company recorded no provision for loan losses during the nine months ended September 30, 2015, a decrease of $550,000 compared to the provision of $550,000 during the nine months ended September 30, 2014.

The Company recorded net recoveries $12,000 during the three months ended September 30, 2015, compared with net recoveries of $42,000 during the same period of 2014. The Company realized net charge-offs of $159,000 or 1 basis point on an annualized basis of average loans outstanding during the nine months ended September 30, 2015, compared with net recoveries of $458,000 or 4 basis points on an annualized basis of average loans outstanding during the same period of 2014.

The provision for loan losses made during the three and nine months ended September 30, 2015 was made at a level deemed necessary by management to absorb changes in 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.

Non-interest Income:
 
During the quarter ended September 30, 2015, non-interest income totaled $7,757,000, an increase of $1,320,000, or 21%, compared with the third quarter of 2014. 
Non-interest Income
(dollars in thousands)

Three Months
Ended September 30,

Change From
Prior Period



Amount

Percent
 

2015

2014

Change

Change
Trust and Investment Product Fees

$
1,051


$
901


$
150


17
 %
Service Charges on Deposit Accounts

1,237


1,300


(63
)

(5
)
Insurance Revenues

1,752


1,739


13


1

Company Owned Life Insurance

205


210


(5
)

(2
)
Interchange Fee Income

547


508


39


8

Other Operating Income

2,134


599


1,535


256

Subtotal

6,926


5,257


1,669


32

Net Gains on Sales of Loans

831


613


218


36

Net Gains on Securities



567


(567
)

(100
)
Total Non-interest Income

$
7,757


$
6,437


$
1,320


21


Trust and investment product fees increased $150,000, or 17%, during the quarter ended September 30, 2015 compared with the third quarter of 2014. The increase in revenue was primarily attributable to continued growth in assets under management within in the Company's trust advisory group.

Other operating income increased $1,535,000 during the quarter ended September 30, 2015 compared with the third quarter of 2014. The donation of a building and accompanying real estate to an economic development foundation in one of the Company's market areas that had a net book value of approximately $360,000 and an estimated fair value of approximately $1.75 million resulted in a net gain on the disposition of fixed assets of approximately $1.4 million. This transaction was the primary driver of the increase in other operating income. A corresponding contribution expense of $1.75 million was recognized in advertising and promotion expense of the Company's income statement.

Net gains on sales of loans increased $218,000, or 36%, during the third quarter of 2015 compared with the third quarter of 2014. Loan sales totaled $39.1 million during the quarter ended September 30, 2015 compared with $28.6 million during the third quarter of 2014.

45



During the three months ended September 30, 2015, there were no sales of securities. During the three months ended September 30, 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.

During the nine months ended September 30, 2015, non-interest income totaled $21,020,000, an increase of $2,800,000, or 15%, compared with the first nine months of 2014.

Non-interest Income
(dollars in thousands)
 
Nine Months
Ended September 30,
 
Change From
Prior Period
 
 
 
Amount
 
Percent
 
 
2015
 
2014
 
Change
 
Change
Trust and Investment Product Fees
 
$
2,974

 
$
2,728

 
$
246

 
9
 %
Service Charges on Deposit Accounts
 
3,594

 
3,552

 
42

 
1

Insurance Revenues
 
5,812

 
5,777

 
35

 
1

Company Owned Life Insurance
 
617

 
603

 
14

 
2

Interchange Fee Income
 
1,593

 
1,467

 
126

 
9

Other Operating Income
 
3,341

 
1,579

 
1,762

 
112

Subtotal
 
17,931

 
15,706

 
2,225

 
14

Net Gains on Sales of Loans
 
2,364

 
1,475

 
889

 
60

Net Gains on Securities
 
725

 
1,039

 
(314
)
 
(30
)
Total Non-interest Income
 
$
21,020

 
$
18,220

 
$
2,800

 
15


Trust and investment product fees increased $246,000, or 9%, during the nine months ended September 30, 2015 compared with the same period of 2014. The increase in revenue was primarily attributable to continued growth in assets under management within in the Company's trust advisory group.

Other operating income increased $1,762,000 during the nine months ended September 30, 2015 compared with the same period of 2014. The increase was primarily related to the aforementioned donation of a building and accompanying real estate which occurred during the third quarter of 2015 and to a lesser degree to fees and fair value adjustments associated with interest rate swap transactions with loan customers.

Net gains on sales of loans increased $889,000, or 60%, during the nine months ended September 30, 2015 compared with the first nine months of 2014. Loan sales totaled $110.6 million during the first nine moths of 2015, compared with $72.2 million during the same period of 2014.

During the nine months ended September 30, 2015, the Company realized a net gain on the sale of securities of $725,000 related to the sale of $18.3 million of securities, compared with a net gain on the sale of securities of $1,039,000 related to the sale of $51.7 million in the first nine months of 2014.

Non-interest Expense:
 
During the quarter ended September 30, 2015, non-interest expense totaled $16,966,000, an increase of $2,884,000, or 20%, compared with the third quarter of 2014.

46



Non-interest Expense
(dollars in thousands)

Three Months
Ended September 30,

Change From
Prior Period



Amount

Percent
 

2015

2014

Change

Change
Salaries and Employee Benefits

$
8,998


$
7,975


$
1,023


13
 %
Occupancy, Furniture and Equipment Expense

1,761


1,725


36


2

FDIC Premiums

284


277


7


3

Data Processing Fees

901


935


(34
)

(4
)
Professional Fees

787


516


271


53

Advertising and Promotion

2,198


613


1,585


259

Intangible Amortization

183


302


(119
)

(39
)
Other Operating Expenses

1,854


1,739


115


7

Total Non-interest Expense

$
16,966


$
14,082


$
2,884


20


Salaries and employee benefits increased $1,023,000, or 13%, during the quarter ended September 30, 2015 compared with the third quarter of 2014. The increase in salaries and benefits during the third quarter of 2015 compared with the third quarter of 2014 was primarily attributable to increased costs associated with the Company's partially self insured health insurance plan. Also contributing to the increased level of salaries and benefits were costs of the Company's long-term equity and short-term cash incentive compensation plans and retirement benefits for certain long-term employees.

Advertising and promotion increased $1,585,000 during the quarter ended September 30, 2015 compared with the third quarter of 2014. The primary driver of the increase in advertising and promotion was the recognition of a $1,750,000 contribution expense related to the donation of a building and accompanying real estate to an economic development foundation in one of the Company's market areas.

Professional fees increased $271,000, or 53%, during the third quarter of 2015 compared with the third quarter of 2014. This increase was largely attributable to professional fees associated with the recently announced pending acquisition of River Valley Bancorp by the Company. Also contributing to the increased professional fees were increased legal costs for the Company and also to professional fees related to the conversion to a new agency management system by the Company's property and casualty insurance agency.

Intangible amortization declined $119,000, or 39%, during the quarter ended September 30, 2015 compared with the third quarter of 2014. The decline was attributable to a reduced level of core deposit intangible amortization expense that resulted from previous bank acquisition transactions.

During the nine months ended September 30, 2015, total non-interest expense increased $2,803,000, or 6%, compared with the nine months ended September 30, 2014.
Non-interest Expense
(dollars in thousands)
 
Nine Months
Ended September 30,
 
Change From
Prior Period
 
 
 
Amount
 
Percent
 
 
2015
 
2014
 
Change
 
Change
Salaries and Employee Benefits
 
$
26,082

 
$
24,285

 
$
1,797

 
7
 %
Occupancy, Furniture and Equipment Expense
 
5,149

 
5,248

 
(99
)
 
(2
)
FDIC Premiums
 
850

 
828

 
22

 
3

Data Processing Fees
 
2,608

 
2,892

 
(284
)
 
(10
)
Professional Fees
 
2,073

 
1,761

 
312

 
18

Advertising and Promotion
 
3,125

 
1,635

 
1,490

 
91

Intangible Amortization
 
630

 
975

 
(345
)
 
(35
)
Other Operating Expenses
 
5,597

 
5,687

 
(90
)
 
(2
)
Total Non-interest Expense
 
$
46,114

 
$
43,311

 
$
2,803

 
6


Salaries and employee benefits increased $1,797,000, or 7%, during the nine months ended September 30, 2015 compared with the same nine month period of 2014. The increase in salaries and benefits during 2015 compared with 2014 was attributable to increased costs associated with the Company's partially self insured health insurance plan, costs related to the Company's long-term equity and short-term cash incentive compensation plans and variable compensation related to an increased level of secondary market mortgage loan production.
  

47



Data processing fees decreased $284,000, or 10%, during the nine months ended September 30, 2015 compared with the same period of 2014. The decrease was primarily attributable to costs associated with the implementation of new commercial and retail digital banking platforms in 2014.

Professional fees increased $312,000, or 18%, during the nine months ended September 30, 2015 compared with the third quarter of 2014. Increase was largely attributable to professional fees associated with the recently announced pending acquisition of River Valley Bancorp by the Company. Also contributing to the increased professional fees were increased legal costs for the Company and also to professional fees related to the conversion to a new agency management system by the Company's property and casualty insurance agency.

Advertising and promotion expense increased $1,490,000 during the nine months ended September 30, 2015 compared with the same period of 2014. The increase was primarily due to the aforementioned donation of a building and accompanying real estate to an economic development foundation in one of the Company's market areas.

Intangible amortization declined $345,000, or 35%, during the nine months ended September 30, 2015 compared with the first nine months of the same period of 2014. The decline was attributable to lower levels of amortization of core deposit intangible from previous bank acquisition transactions.


Income Taxes:

The Company’s effective income tax rate was 23.9% and 30.8%, respectively, during the three months ended September 30, 2015 and 2014. The Company’s effective income tax rate was 27.9% and 30.2%, respectively, during the nine months ended September 30, 2015 and 2014. 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. The decline in the effective tax rate during three months and nine months ended September 30, 2015 compared with the same periods of 2014 were primarily impacted by the aforementioned donation of a building and accompanying real estate, the overall percentage change in revenue generated from tax-advantaged sources, and the timing of the reversal of certain deferred tax items.

FINANCIAL CONDITION
 
Total assets at September 30, 2015 increased $76.1 million, or 5% on an annualized basis, to $2.313 billion compared with $2.237 billion in total assets at December 31, 2014.  The increase in total assets was primarily attributable to an increase in period-end loan balances.

Loans outstanding at September 30, 2015 increased $65.3 million, or 6% on an annualized basis, compared with year-end 2014. The increase in loans was primarily centered in the commercial and industrial loan, agricultural loan, and commercial real estate loan portfolios.
End of Period Loan Balances:
(dollars in thousands)
 
September 30,
2015
 
December 31,
2014
 
Current Period Change
Commercial & Industrial Loans
 
$
404,946

 
$
380,079

 
$
24,867

Commercial Real Estate Loans
 
600,688

 
583,086

 
17,602

Agricultural Loans
 
236,619

 
216,774

 
19,845

Home Equity & Consumer Loans
 
138,387

 
134,847

 
3,540

Residential Mortgage Loans
 
136,645

 
137,204

 
(559
)
Total Loans
 
$
1,517,285

 
$
1,451,990

 
$
65,295


The Company’s allowance for loan losses totaled $14.8 million at September 30, 2015 representing a decline of $159,000, or 1% on an annualized basis, from December 31, 2014.  The allowance for loan losses represented 0.98% of period-end loans at September 30, 2015 compared with 1.03% of period-end loans at December 31, 2014. 




48



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 $3.1 million as of September 30, 2015 and $4.1 million at year-end 2014.

The following is an analysis of the Company’s non-performing assets at September 30, 2015 and December 31, 2014:
Non-performing Assets:
(dollars in thousands)
 
September 30,
2015
 
December 31,
2014
Non-accrual Loans
 
$
5,326

 
$
5,970

Past Due Loans (90 days or more and still accruing)
 
10

 
140

Total Non-performing Loans
 
5,336

 
6,110

Other Real Estate
 
123

 
356

Total Non-performing Assets
 
$
5,459

 
$
6,466

 
 
 
 
 
Restructured Loans
 
$
2,309

 
$
2,726

 
 
 
 
 
Non-performing Loans to Total Loans
 
0.35
%
 
0.42
%
Allowance for Loan Loss to Non-performing Loans
 
276.80
%
 
244.34
%

Non-performing assets totaled $5.5 million, or 0.24% of total assets at September 30, 2015 compared to $6.5 million, or 0.29% of total assets at December 31, 2014.  Non-performing loans totaled $5.3 million, or 0.35% of total loans at September 30, 2015 compared to $6.1 million, or 0.42% of total loans at December 31, 2014. 

Non-accrual commercial real estate loans totaled $3.1 million at September 30, 2015 representing a decline of $383,000, or 11%, from the $3.5 million of non-accrual commercial real estate loans at year-end 2014.  Non-accrual commercial real estate loans represented 58% of the total non-performing loans at both September 30, 2015 and year-end 2014. There were no non-accrual agricultural loans at September 30, 2015 or December 31, 2014. Non-accrual commercial and industrial loans totaled $680,000 at September 30, 2015 representing an increase of $519,000 from the $161,000 on non-accrual commercial and industrial loans at year-end 2014. Non-accrual commercial and industrial loans represented 13% of non-performing loans at September 30, 2015 compared to 3% at year-end 2014. Non-accrual home equity loans totaled 4% of non-performing loans at both September 30, 2015 and year-end 2014. Non-accrual consumer loans totaled 2% of non-performing loans at September 30, 2015 compared with 3% at year-end 2014. Non-accrual residential mortgage loans totaled $1.2 million at September 30, 2015 representing a decline of $636,000, or 34%, from the $1.9 million of non-accrual residential mortgage loans at year-end 2014.  Non-accrual residential mortgage loans represented 23% of the total non-performing loans at September 30, 2015 compared to 32% of the total non-performing loans at year-end 2014.

At September 30, 2015, there was only one relationship included in non-performing loans that was greater than $1.0 million. This relationship was a $1.7 million commercial real estate loan secured by a commercial warehouse facility.  This loan was in non-performing status as of year-end 2014. The borrower has made all contractual payments due during 2015 and the principal balance of this relationship was reduced by $101,000 during the first nine months of 2015.
 
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 2014 or during the first nine months of 2015.  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 $71,000 at September 30, 2015 compared with $1,154,000 at December 31, 2014. The non-performing purchased loans with evidence of credit deterioration since origination represented approximately 1% of total non-performing loans at September 30, 2015 and 19% at December 31, 2014.
 

49



As of September 30, 2015, past due purchased loans with evidence of credit deterioration since origination totaled $36,000 compared with $648,000 at year-end 2014.  Past due purchased loans with evidence of credit deterioration since origination represented 1% of total past due loans at September 30, 2015 and 9% at year-end 2014.

Adversely classified purchased loans with evidence of credit deterioration since origination totaled $3.4 million at September 30, 2015 compared with $4.4 million at December 31, 2014. Adversely classified purchased loans with evidence of credit deterioration since origination represented approximately 14% of total adversely classified loans at September 30, 2015 compared with approximately 16% of total adversely classified loans at year-end 2014.
 
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 specifically 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 increased $24.1 million, or 2% on an annualized basis, as of September 30, 2015 compared with December 31, 2014 total deposits.
End of Period Deposit Balances:
(dollars in thousands)
 
September 30,
2015
 
December 31,
2014
 
Current Period Change
Non-interest-bearing Demand Deposits
 
$
418,947

 
$
428,016

 
$
(9,069
)
Interest-bearing Demand, Savings, & Money Market Accounts
 
1,039,520

 
1,018,320

 
21,200

Time Deposits < $100,000
 
194,408

 
198,916

 
(4,508
)
Time Deposits of $100,000 or more
 
150,960

 
134,509

 
16,451

Total Deposits
 
$
1,803,835

 
$
1,779,761

 
$
24,074


Capital Resources:

As of September 30, 2015, shareholders’ equity increased by $18.5 million, or 11% on an annualized basis, to $247.4 million compared with $228.8 million at year-end 2014. The increase in shareholders’ equity was primarily attributable to an increase of $15.6 million in retained earnings. Shareholders’ equity represented 10.7% of total assets at September 30, 2015 and 10.2% of total assets at December 31, 2014. Shareholders’ equity included $22.0 million of goodwill and other intangible assets at September 30, 2015 compared to $22.6 million of goodwill and other intangible assets at year-end 2014.

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.
 
As of March 31, 2015, the Company and its subsidiary bank adopted the new Basel III regulatory capital framework. The adoption of this new framework modified the regulatory capital calculations, minimum capital levels and well-capitalized thresholds and added the new Common Equity Tier 1 capital ratio. Additionally, under the new rules, in order to avoid limitations on capital distributions, including dividend payments, the Company will be required to maintain a capital conservation buffer above the adequately capitalized Common Equity Tier 1 capital ratio. The capital conservation buffer is being phased in from 0.00% in 2015 to 2.50% in 2019. At September 30, 2015, the capital levels for the Company and its subsidiary bank remained well in excess of of the minimum amounts needed for capital adequacy purposes and the bank's capital levels met the necessary requirements to be considered well-capitalized.


50



The tables below presents the Company’s consolidated and the subsidiary bank's capital ratios under regulatory guidelines:
 
 
9/30/2015
Ratio (1)
 
12/31/2014
Ratio
 
Minimum for Capital Adequacy Purposes (2)
 
Well-Capitalized Guidelines (2)
Common Equity Tier 1 Capital Ratio
 
 
 
 
 
 
 
 
Consolidated
 
12.68
%
 
N/A

 
4.50
%
 
N/A

Bank
 
11.50
%
 
N/A

 
4.50
%
 
6.50
%
Tier 1 Capital Ratio
 
 
 
 
 
 
 
 
Consolidated
 
12.97
%
 
12.95
%
 
6.00
%
 
N/A

Bank
 
11.50
%
 
11.64
%
 
6.00
%
 
8.00
%
Total Capital Ratio
 
 
 
 
 
 
 
 
Consolidated
 
13.81
%
 
13.88
%
 
8.00
%
 
N/A

Bank
 
12.34
%
 
12.57
%
 
8.00
%
 
10.00
%
Tier 1 Leverage Ratio
 
 
 
 
 
 
 
 
Consolidated
 
10.11
%
 
9.57
%
 
4.00
%
 
N/A

Bank
 
8.97
%
 
8.59
%
 
4.00
%
 
5.00
%
(1)The 9/30/2015 capital ratios are calculated based on the new Basel III regulatory capital framework.
(2)The Minimum for Capital Adequacy Purposes and Well-Capitalized Guidelines are based on the new Basel III regulatory capital framework.

Under the the final rules provided for by Basel III, accumulated other comprehensive income ("AOCI") was to be included in a banking organization's Common Tier 1 capital. The final rules allowed community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. The opt-out election was to be made in the first regulatory filings (call report and FRY-9) that were made after the banking organizations became subject to the final rules. The Company elected to opt-out and continue the existing treatment of AOCI for regulatory capital purposes. 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, 2014.

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 $19.7 million during the nine months ended September 30, 2015 ending at $62.1 million.  During the nine months ended September 30, 2015, operating activities resulted in net cash inflows of $29.2 million. Investing activities resulted in net cash outflows of $60.2 million during the nine months ended September 30, 2015.  Financing activities resulted in net cash inflows for the nine months ended September 30, 2015 of $50.7 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, 2015, the parent company had approximately $22.3 million of cash and cash equivalents available to meet its cash flow needs.


51



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; potential cyber-attacks, information security breaches and other criminal activities; 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, 2014, 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.


52



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 for measuring both net interest income and NPV 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 both net interest income and 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 modeling. 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 net interest income over the next 12 months in the event of a sudden and sustained 1% and 2% increase and decrease in prevailing interest rates (dollars in thousands).

Interest Rate Sensitivity as of September 30, 2015 - Net Interest Income
 
 
Net Interest Income
 
 
 
 
 
 
 
Changes in Rates
 
Amount

 
% Change

 
+2%
 
$
70,097

 
(7.23
)%
 
+1%
 
72,741

 
(3.74
)%
 
Base
 
75,564

 

 
-1%
 
74,116

 
(1.92
)%
 
-2%
 
72,370

 
(4.23
)%
 
 
The above table is a measurement of the Company’s net interest income at risk, assuming a static balance sheet as of September 30, 2015 and instantaneous parallel changes in interest rates. The Company also monitors interest rate risk under other scenarios including a more gradual movement in market interest rates. This type of scenario can at times produce different modeling results in measuring interest rate risk sensitivity. As an example, a gradual change in rates compared with a sudden and significant change in interest rates can impact rate movement of the Company’s variable rate commercial and agricultural loan portfolio due to the Company’s extensive utilization of interest rate floors in its commercial and agricultural portfolio.

The Company’s loan portfolio as of September 30, 2015 totaled approximately $1.5 billion of which approximately $1.2 billion were commercial and industrial, commercial real estate, and agricultural loans and leases. Within the commercial and agricultural portfolio, approximately 24% were fixed rate and 76% were variable rate loans. Of the total commercial and agricultural variable rate loans, approximately one-third are currently at their interest rate floors, which are, on a weighted average basis, approximately 75 basis points above their fully indexed rate based on current market interest rates.

53




The table below provides an assessment of the risk to NPV in the event of a sudden and sustained 1% and 2% increase and decrease in prevailing interest rates (dollars in thousands).

Interest Rate Sensitivity as of September 30, 2015 - Net Portfolio Value
 
 
Net Portfolio Value
 
 Net Portfolio Value as a % of Present Value of Assets
Changes in Rates
 
Amount
 
% Change
 
NPV Ratio
 
Change
 
 
 
 
 
 
 
 
 
+2%
 
$
272,057

 
(9.00
)%
 
12.46
%
 
(60) b.p.

+1%
 
286,187

 
(4.27
)%
 
12.80
%
 
(26) b.p.

Base
 
298,949

 

 
13.06
%
 

-1%
 
264,089

 
(11.66
)%
 
11.38
%
 
(168) b.p.

-2%
 
222,673

 
(25.51
)%
 
9.55
%
 
(351) b.p.

 
This Item 3 includes forward-looking statements. See “Forward-looking Statements and Associated Risks” 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, 2015, 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 2015 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
 
(c) The following table sets forth information regarding the Company’s purchases of its common shares during each of the three months ended September 30, 2015.
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)
July 2015
 

 

 

 
272,789

August 2015
 

 

 

 
272,789

September 2015
 

 

 

 
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, 2015 (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, 2015.



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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 9, 2015
By/s/Mark A. Schroeder
 
Mark A. Schroeder
 
Chairman and Chief Executive Officer
 
 
Date: November 9, 2015
By/s/Bradley M. Rust
 
Bradley M. Rust
 
Executive Vice President and Chief Financial Officer


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INDEX OF EXHIBITS
 
Exhibit No.
 
Description
2.1
 
Agreement and Plan of Reorganization between German American Bancorp, Inc. and River Valley Bancorp, dated October 26, 2015 is incorporated by reference to the Registrant's Current Report on Form 8-K filed October 26, 2015.
3.1
 
Restatement of the Articles of Incorporation of the Registrant is incorporated by reference from Exhibit 3.1 to the Registrant’s Current Report on 8-K filed July 1, 2011.
3.2
 
Restated Bylaws of German American Bancorp, Inc., as amended and restated July 27, 2009, is incorporated by reference from Exhibit 3.2 to the Registrant's Annual Report on Form 10-K filed March 9, 2015.
4.1
 
No long-term debt instrument issued by the Registrant exceeds 10% of consolidated total assets or is registered. In accordance with paragraph 4 (iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request.
4.2
 
Terms of Common Shares and Preferred Shares of the Registrant (included in Restatement of Articles of Incorporation) are incorporated by reference from Exhibit 3.1 to the Registrant’s Current Report on 8-K filed July 1, 2011.
4.3
 
Specimen stock certificate for Common Shares of the Registrant is incorporated by reference from Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed October 21, 2010.
10.1
 
Voting Agreement, dated October 26, 2015, among German American Bancorp, Inc. and certain shareholders of River Valley Bancorp is incorporated by reference to the Registrant's Current Report on Form 8-K Filed October 26, 2015.
10.2*
 
Description of Director Compensation Arrangements for the 12 month period ending June 30, 2016, is incorporated by reference from the description included in Item 5.02 of the Registrant’s Current Report on Form 8-K filed July 1, 2015.
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, 2015, 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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