GABC-2014.6.30-10Q
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 June 30, 2014
 
Commission File Number 001-15877
 
German American Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Indiana
 
35-1547518
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s telephone number, including area code: (812) 482-1314
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES   x      NO ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES   x      NO ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
YES   ¨      NO x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at August 1, 2014
Common Shares, no par value
 
13,210,395



CAUTION REGARDING FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
 
Information included in or incorporated by reference in this Quarterly Report on Form 10-Q, our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contains or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the discussions of our forward-looking statements and associated risks in our annual report on Form 10-K for the year ended December 31, 2013, in Item 1, “Business – Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” of that annual report on Form 10-K, as updated from time to time in our subsequent SEC filings, including by Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) at the conclusion of that Item 2 under the heading “Forward-Looking Statements and Associated Risks.”

2


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

3


PART  I.         FINANCIAL INFORMATION
Item 1.           Financial Statements
GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, dollars in thousands except share and per share data)
 
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 

 
 

Cash and Due from Banks
 
$
40,391

 
$
37,370

Federal Funds Sold and Other Short-term Investments
 
16,723

 
22,762

Cash and Cash Equivalents
 
57,114

 
60,132

 
 
 
 
 
Interest-bearing Time Deposits with Banks
 
100

 
100

Securities Available-for-Sale, at Fair Value
 
615,392

 
606,032

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

 
268

 
 
 
 
 
Loans Held-for-Sale, at Fair Value
 
8,812

 
9,265

 
 
 
 
 
Loans
 
1,413,331

 
1,385,212

Less: Unearned Income
 
(3,846
)
 
(2,830
)
Allowance for Loan Losses
 
(15,550
)
 
(14,584
)
Loans, Net
 
1,393,935

 
1,367,798

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

 
9,004

Premises, Furniture and Equipment, Net
 
40,479

 
40,430

Other Real Estate
 
935

 
1,029

Goodwill
 
20,536

 
20,536

Intangible Assets
 
2,655

 
3,328

Company Owned Life Insurance
 
31,591

 
31,178

Accrued Interest Receivable and Other Assets
 
12,744

 
14,727

TOTAL ASSETS
 
$
2,193,573

 
$
2,163,827

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
398,621

 
$
400,024

Interest-bearing Demand, Savings, and Money Market Accounts
 
1,010,367

 
1,063,098

Time Deposits
 
333,391

 
349,034

Total Deposits
 
1,742,379

 
1,812,156

 
 
 
 
 
FHLB Advances and Other Borrowings
 
225,546

 
140,770

Accrued Interest Payable and Other Liabilities
 
11,310

 
10,804

TOTAL LIABILITIES
 
1,979,235

 
1,963,730

 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
 

 
 

Preferred Stock, no par value; 500,000 shares authorized, no shares issued
 

 

Common Stock, no par value, $1 stated value; 30,000,000 shares authorized
 
13,210

 
13,174

Additional Paid-in Capital
 
108,356

 
108,022

Retained Earnings
 
92,934

 
84,164

Accumulated Other Comprehensive Loss
 
(162
)
 
(5,263
)
TOTAL SHAREHOLDERS’ EQUITY
 
214,338

 
200,097

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
2,193,573

 
$
2,163,827

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

 
13,173,793


See accompanying notes to consolidated financial statements.

4


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

Three Months Ended 
 June 30,
 

2014

2013
INTEREST INCOME

 


 

Interest and Fees on Loans

$
16,142


$
15,035

Interest on Federal Funds Sold and Other Short-term Investments

3


13

Interest and Dividends on Securities:

 


 

Taxable

2,654


2,771

Non-taxable

1,026


639

TOTAL INTEREST INCOME

19,825


18,458








INTEREST EXPENSE

 


 

Interest on Deposits

1,037


1,154

Interest on FHLB Advances and Other Borrowings

467


592

TOTAL INTEREST EXPENSE

1,504


1,746








NET INTEREST INCOME

18,321


16,712

Provision for Loan Losses

200


(200
)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

18,121


16,912








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

905


814

Service Charges on Deposit Accounts

1,191


1,050

Insurance Revenues

1,482


1,379

Company Owned Life Insurance

192


217

Interchange Fee Income

512


513

Other Operating Income

590


861

Net Gains on Sales of Loans

386


809

Net Gains on Securities

244


467

TOTAL NON-INTEREST INCOME

5,502


6,110








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

7,886


7,627

Occupancy Expense

1,198


1,099

Furniture and Equipment Expense

500


466

FDIC Premiums

276


260

Data Processing Fees

947


672

Professional Fees

553


525

Advertising and Promotion

544


516

Intangible Amortization

325


348

Other Operating Expenses

1,910


1,748

TOTAL NON-INTEREST EXPENSE

14,139


13,261








Income before Income Taxes

9,484


9,761

Income Tax Expense

2,797


3,229

NET INCOME

$
6,687


$
6,532








Basic Earnings Per Share

$
0.51


$
0.52

Diluted Earnings Per Share

$
0.51


$
0.52








Dividends Per Share

$
0.16


$
0.15

 
See accompanying notes to consolidated financial statements.

5


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

 
 

Interest and Fees on Loans
 
$
32,086

 
$
29,920

Interest on Federal Funds Sold and Other Short-term Investments
 
6

 
23

Interest and Dividends on Securities:
 
 

 
 

Taxable
 
5,413

 
5,612

Non-taxable
 
2,001

 
1,273

TOTAL INTEREST INCOME
 
39,506

 
36,828

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
2,073

 
2,388

Interest on FHLB Advances and Other Borrowings
 
916

 
1,503

TOTAL INTEREST EXPENSE
 
2,989

 
3,891

 
 
 
 
 
NET INTEREST INCOME
 
36,517

 
32,937

Provision for Loan Losses
 
550

 
150

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
 
35,967

 
32,787

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
1,827

 
1,631

Service Charges on Deposit Accounts
 
2,252

 
2,005

Insurance Revenues
 
4,038

 
3,163

Company Owned Life Insurance
 
393

 
483

Interchange Fee Income
 
959

 
943

Other Operating Income
 
980

 
1,152

Net Gains on Sales of Loans
 
862

 
1,563

Net Gains on Securities
 
472

 
1,080

TOTAL NON-INTEREST INCOME
 
11,783

 
12,020

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
16,310

 
15,411

Occupancy Expense
 
2,514

 
2,204

Furniture and Equipment Expense
 
1,009

 
941

FDIC Premiums
 
551

 
515

Data Processing Fees
 
1,957

 
1,337

Professional Fees
 
1,245

 
1,186

Advertising and Promotion
 
1,022

 
1,006

Intangible Amortization
 
673

 
715

Other Operating Expenses
 
3,948

 
3,408

TOTAL NON-INTEREST EXPENSE
 
29,229

 
26,723

 
 
 
 
 
Income before Income Taxes
 
18,521

 
18,084

Income Tax Expense
 
5,529

 
5,743

NET INCOME
 
$
12,992

 
$
12,341

 
 
 
 
 
Basic Earnings Per Share
 
$
0.98

 
$
0.98

Diluted Earnings Per Share
 
$
0.98

 
$
0.97

 
 
 
 
 
Dividends Per Share
 
$
0.32

 
$
0.30


See accompanying notes to consolidated financial statements.


6


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, dollars in thousands)
 
 
 
Three Months Ended 
 June 30,
 
 
2014
 
2013
 
 
 
 
 
NET INCOME
 
$
6,687

 
$
6,532

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
4,647

 
(14,462
)
Reclassification Adjustment for Losses (Gains) Included in Net Income
 
(244
)
 
(467
)
Tax Effect
 
(1,566
)
 
5,275

Net of Tax
 
2,837

 
(9,654
)
 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
2,837

 
(9,654
)
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
$
9,524

 
$
(3,122
)
 

 
 


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, dollars in thousands)
 
 
 
Six Months Ended 
 June 30,
 
 
2014
 
2013
 
 
 
 
 
NET INCOME
 
$
12,992

 
$
12,341

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
8,380

 
(17,297
)
Reclassification Adjustment for Losses (Gains) Included in Net Income
 
(472
)
 
(1,080
)
Tax Effect
 
(2,807
)
 
6,487

Net of Tax
 
5,101

 
(11,890
)
 
 
 
 
 
Total Other Comprehensive Income (Loss)
 
5,101

 
(11,890
)
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
 
$
18,093

 
$
451








See accompanying notes to consolidated financial statements.

7


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

 
 

Net Income
 
$
12,992

 
$
12,341

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

 
 

Net Amortization on Securities
 
976

 
1,731

Depreciation and Amortization
 
2,422

 
2,224

Loans Originated for Sale
 
(43,022
)
 
(99,547
)
Proceeds from Sales of Loans Held-for-Sale
 
44,295

 
98,490

Provision for Loan Losses
 
550

 
150

Gain on Sale of Loans, net
 
(862
)
 
(1,563
)
Gain on Securities, net
 
(472
)
 
(1,080
)
Loss on Sales of Other Real Estate and Repossessed Assets
 
44

 
253

Gain on Disposition and Impairment of Premises and Equipment
 

 
(70
)
Increase in Cash Surrender Value of Company Owned Life Insurance
 
(413
)
 
(478
)
Equity Based Compensation
 
320

 
170

Change in Assets and Liabilities:
 
 

 
 

Interest Receivable and Other Assets
 
(4,120
)
 
3,529

Interest Payable and Other Liabilities
 
520

 
(1,648
)
Net Cash from Operating Activities
 
13,230

 
14,502

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturity of Other Short-term Investments
 

 
1,445

Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale
 
41,415

 
81,734

Proceeds from Sales of Securities Available-for-Sale
 
7,237

 
100,721

Purchase of Securities Available-for-Sale
 
(47,284
)
 
(180,647
)
Proceeds from Maturities of Securities Held-to-Maturity
 
84

 
78

Proceeds from Redemption of Federal Home Loan Bank Stock
 
(92
)
 

Purchase of Loans
 

 
(712
)
Proceeds from Sales of Loans
 

 
2,000

Loans Made to Customers, net of Payments Received
 
(27,673
)
 
(40,420
)
Proceeds from Sales of Other Real Estate
 
1,036

 
459

Property and Equipment Expenditures
 
(1,743
)
 
(1,606
)
Proceeds from Sales of Property and Equipment
 

 
88

Net Cash used in Investing Activities
 
(27,020
)
 
(36,860
)
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 

 
 

Change in Deposits
 
(69,757
)
 
986

Change in Short-term Borrowings
 
64,453

 
35,371

Advances in Long-term Debt
 
21,500

 
30,000

Repayments of Long-term Debt
 
(1,252
)
 
(50,805
)
Issuance of Common Stock
 
50

 
9

Dividends Paid
 
(4,222
)
 
(3,795
)
Net Cash from Financing Activities
 
10,772

 
11,766

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
(3,018
)
 
(10,592
)
Cash and Cash Equivalents at Beginning of Year
 
60,132

 
49,087

Cash and Cash Equivalents at End of Period
 
$
57,114

 
$
38,495

 
 
 
 
 
Cash Paid During the Period for
 
 

 
 

Interest
 
$
2,980

 
$
4,349

Income Taxes
 
1,769

 
6,609

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
986

 
$
626

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

8


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


NOTE 1 – Basis of Presentation
 
German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp, Inc. December 31, 2013 Annual Report on Form 10-K.   

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

 
 

Net Income
 
$
6,687

 
$
6,532

Weighted Average Shares Outstanding
 
13,210,150

 
12,666,315

Basic Earnings per Share
 
$
0.51

 
$
0.52

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
6,687

 
$
6,532

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,210,150

 
12,666,315

Potentially Dilutive Shares, Net
 
20,662

 
16,812

Diluted Weighted Average Shares Outstanding
 
13,230,812

 
12,683,127

Diluted Earnings per Share
 
$
0.51

 
$
0.52

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

 
 

Net Income
 
$
12,992

 
$
12,341

Weighted Average Shares Outstanding
 
13,194,754

 
12,654,146

Basic Earnings per Share
 
$
0.98

 
$
0.98

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
12,992

 
$
12,341

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,194,754

 
12,654,146

Potentially Dilutive Shares, Net
 
21,330

 
17,560

Diluted Weighted Average Shares Outstanding
 
13,216,084

 
12,671,706

Diluted Earnings per Share
 
$
0.98

 
$
0.97

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


9


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

NOTE 3 – Securities 
 
The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at June 30, 2014 and December 31, 2013, were as follows:
Securities Available-for-Sale: 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 Fair
Value
 
 
 

 
 

 
 

 
 

June 30, 2014
 
 

 
 

 
 

 
 

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

 
$

 
$
(679
)
 
$
19,321

Obligations of State and Political Subdivisions
 
125,265

 
4,850

 
(159
)
 
129,956

Mortgage-backed Securities - Residential
 
469,919

 
3,733

 
(7,890
)
 
465,762

Equity Securities
 
353

 

 

 
353

Total
 
$
615,537

 
$
8,583

 
$
(8,728
)
 
$
615,392

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

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

 
$

 
$
(1,048
)
 
$
18,952

Obligations of State and Political Subdivisions
 
112,008

 
2,388

 
(899
)
 
113,497

Mortgage-backed Securities - Residential
 
481,724

 
3,497

 
(11,991
)
 
473,230

Equity Securities
 
353

 

 

 
353

Total
 
$
614,085

 
$
5,885

 
$
(13,938
)
 
$
606,032

 
Equity securities that do not have readily determinable fair values are included in the above totals, are carried at historical cost and are evaluated for impairment on a periodic basis. All mortgage-backed securities in the above table are residential mortgage-backed securities and guaranteed by government sponsored entities.
 
The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity at June 30, 2014 and December 31, 2013, were as follows:
Securities Held-to-Maturity:
 
Carrying
Amount
 
Gross
Unrecognized
Gains
 
Gross
Unrecognized
Losses
 
Fair
Value
 
 
 

 
 

 
 

 
 

June 30, 2014
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
184

 
$
2

 
$

 
$
186

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
268

 
$
3

 
$

 
$
271
















10


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

NOTE 3 - Securities (continued)

The amortized cost and fair value of Securities at June 30, 2014 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately.
Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
3,685

 
$
3,720

Due after one year through five years
 
20,649

 
20,574

Due after five years through ten years
 
62,544

 
64,374

Due after ten years
 
58,387

 
60,609

Mortgage-backed Securities - Residential
 
469,919

 
465,762

Equity Securities
 
353

 
353

Total
 
$
615,537

 
$
615,392

 

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

 
$

Due after one year through five years
 
184

 
186

Due after five years through ten years
 

 

Due after ten years
 

 

Total
 
$
184

 
$
186

 
Proceeds from the Sales of Securities are summarized below:
 
 
Three Months
Ended
 
Three Months
Ended
 
 
June 30, 2014
 
June 30, 2013
 
 
 
 
 
Proceeds from Sales
 
$
6,983

 
$
25,972

Gross Gains on Sales
 
244

 
467

Income Taxes on Gross Gains
 
85

 
163


 
 
Six Months
Ended
 
Six Months
Ended
 
 
June 30, 2014
 
June 30, 2013
 
 
 
 
 
Proceeds from Sales
 
$
7,237

 
$
100,721

Gross Gains on Sales
 
472

 
1,080

Income Taxes on Gross Gains
 
165

 
378




11


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

NOTE 3 - Securities (continued)

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

 
$

 
$
19,321

 
$
(679
)
 
$
19,321

 
$
(679
)
Obligations of State and Political Subdivisions
 
7,935

 
(33
)
 
4,835

 
(126
)
 
12,770

 
(159
)
Mortgage-backed Securities - Residential
 
80,549

 
(762
)
 
232,035

 
(7,128
)
 
312,584

 
(7,890
)
Equity Securities
 

 

 

 

 

 

Total
 
$
88,484

 
$
(795
)
 
$
256,191

 
$
(7,933
)
 
$
344,675

 
$
(8,728
)

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

 
$
(1,048
)
 
$

 
$

 
$
18,952

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

 
(899
)
 

 

 
38,878

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

 
(11,903
)
 
1,735

 
(88
)
 
347,763

 
(11,991
)
Equity Securities
 

 

 

 

 

 

Total
 
$
403,858

 
$
(13,850
)
 
$
1,735

 
$
(88
)
 
$
405,593

 
$
(13,938
)
 
Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The Company doesn’t intend to sell or expect to be required to sell these securities, and the decline in fair value is largely due to changes in market interest rates, therefore, the Company does not consider these securities to be other-than-temporarily impaired. All mortgage-backed securities in the Company’s portfolio are guaranteed by government sponsored entities, are investment grade, and are performing as expected.
 
NOTE 4 – Derivatives
 
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $23.3 million at June 30, 2014 and $17.9 million at December 31, 2013. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income. 
 
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.
 

12


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

NOTE 4 - Derivatives (continued)

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

 
 

 
 

 
 

Interest Rate Swaps
 
$
23,335

 
$
449

 
$
17,853

 
$
866

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
23,335

 
$
388

 
$
17,853

 
$
737

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

 
 

 
 

 
 

Included in Interest Income / (Expense)
 
$

 
$

 
$

 
$

Included in Other Income / (Expense)
 
116

 
549

 
78

 
551


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

 
 

Commercial and Industrial Loans and Leases
 
$
366,101

 
$
350,955

Commercial Real Estate Loans
 
594,681

 
582,066

Agricultural Loans
 
188,155

 
192,880

Retail:
 
 

 
 

Home Equity Loans
 
83,584

 
81,504

Consumer Loans
 
46,706

 
49,124

Residential Mortgage Loans
 
134,104

 
128,683

Subtotal
 
1,413,331

 
1,385,212

Less: Unearned Income
 
(3,846
)
 
(2,830
)
Allowance for Loan Losses
 
(15,550
)
 
(14,584
)
Loans, Net
 
$
1,393,935

 
$
1,367,798

 

13


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

NOTE 5 - Loans (continued)

The following tables present the activity in the allowance for loan losses by portfolio class for the three months ending June 30, 2014 and 2013:
June 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
 
$
5,374

 
$
7,870

 
$
930

 
$
209

 
$
186

 
$
257

 
$
658

 
$
15,484

Provision for Loan Losses
 
365

 
(695
)
 
86

 
181

 
171

 
255

 
(163
)
 
200

Recoveries
 
9

 
27

 

 
42

 
39

 
4

 

 
121

Loans Charged-off
 
(87
)
 
(3
)
 

 
(14
)
 
(70
)
 
(81
)
 

 
(255
)
Ending Balance
 
$
5,661

 
$
7,199

 
$
1,016

 
$
418

 
$
326

 
$
435

 
$
495

 
$
15,550

June 30, 2013
 
Commercial and Industrial
Loans and Leases
 
Commercial Real Estate Loans
 
Agricultural Loans
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
 
Unallocated
 
Total
Beginning Balance
 
$
4,753

 
$
8,879

 
$
766

 
$
118

 
$
189

 
$
300

 
$
729

 
$
15,734

Provision for Loan Losses
 
(452
)
 
(53
)
 
51

 
196

 
43

 
(16
)
 
31

 
(200
)
Recoveries
 
10

 
27

 

 

 
16

 
1

 

 
54

Loans Charged-off
 
(53
)
 
(217
)
 

 
(1
)
 
(49
)
 
(5
)
 

 
(325
)
Ending Balance
 
$
4,258

 
$
8,636

 
$
817

 
$
313

 
$
199

 
$
280

 
$
760

 
$
15,263


The following tables present the activity in the allowance for loan losses by portfolio class for the six months ending June 30, 2014 and 2013:
June 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
 
1,687

 
(1,752
)
 
70

 
181

 
219

 
262

 
(117
)
 
550

Recoveries
 
78

 
730

 

 
42

 
86

 
8

 

 
944

Loans Charged-off
 
(87
)
 
(114
)
 

 
(44
)
 
(167
)
 
(116
)
 

 
(528
)
Ending Balance
 
$
5,661

 
$
7,199

 
$
1,016

 
$
418

 
$
326

 
$
435

 
$
495

 
$
15,550

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

 
$
8,931

 
$
989

 
$
141

 
$
214

 
$
186

 
$
504

 
$
15,520

Provision for Loan Losses
 
(257
)
 
(47
)
 
(172
)
 
237

 
36

 
97

 
256

 
150

Recoveries
 
13

 
78

 

 

 
71

 
3

 

 
165

Loans Charged-off
 
(53
)
 
(326
)
 

 
(65
)
 
(122
)
 
(6
)
 

 
(572
)
Ending Balance
 
$
4,258

 
$
8,636

 
$
817

 
$
313

 
$
199

 
$
280

 
$
760

 
$
15,263


In determining the adequacy of the allowance for loan loss, general allocations are made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, judgmentally adjusted for current economic factors and portfolio trends. 
 

14


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

NOTE 5 - Loans (continued)

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
1,549

 
$
213

 
$
1,336

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
13,995

 
5,448

 
5,857

 
1,016

 
418

 
326

 
435

 
495

Acquired with Deteriorated Credit Quality
 
6

 

 
6

 

 

 

 

 

Total Ending Allowance Balance
 
$
15,550

 
$
5,661

 
$
7,199

 
$
1,016

 
$
418

 
$
326

 
$
435

 
$
495


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
7,108

 
$
2,245

 
$
4,863

 
$

 
$

 
$

 
$

 
$

Loans Collectively Evaluated for Impairment
 
1,399,929

 
364,083

 
581,919

 
190,368

 
83,888

 
46,708

 
132,963

 

Loans Acquired with Deteriorated Credit Quality
 
11,552

 
591

 
9,332

 

 

 
126

 
1,503

 

Total Ending Loans Balance(1)
 
$
1,418,589

 
$
366,919

 
$
596,114

 
$
190,368

 
$
83,888

 
$
46,834

 
$
134,466

 
$


(1)Total recorded investment in loans includes $5,258 in accrued interest.

15


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

NOTE 5 - Loans (continued)

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
3,095

 
$
45

 
$
3,050

 
$

 
$

 
$

 
$

 
$

Collectively Evaluated for Impairment
 
11,481

 
3,938

 
5,277

 
946

 
239

 
188

 
281

 
612

Acquired with Deteriorated Credit Quality
 
8

 

 
8

 

 

 

 

 

Total Ending Allowance Balance
 
$
14,584

 
$
3,983

 
$
8,335

 
$
946

 
$
239

 
$
188

 
$
281

 
$
612


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
8,458

 
$
2,114

 
$
6,344

 
$

 
$

 
$

 
$

 
$

Loans Collectively Evaluated for Impairment
 
1,367,591

 
347,808

 
566,389

 
195,171

 
81,812

 
49,131

 
127,280

 

Loans Acquired with Deteriorated Credit Quality
 
14,753

 
1,981

 
10,871

 

 

 
134

 
1,767

 

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

 
$
351,903

 
$
583,604

 
$
195,171

 
$
81,812

 
$
49,265

 
$
129,047

 
$

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

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,043

 
$
2,032

 
$

Commercial Real Estate Loans
 
3,843

 
2,843

 

Agricultural Loans
 

 

 

Subtotal
 
5,886

 
4,875

 

With An Allowance Recorded:
 
 

 
 

 


Commercial and Industrial Loans and Leases
 
216

 
215

 
213

Commercial Real Estate Loans
 
2,711

 
2,557

 
1,342

Agricultural Loans
 

 

 

Subtotal
 
2,927

 
2,772

 
1,555

Total
 
$
8,813

 
$
7,647

 
$
1,555

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
1,355

 
$
532

 
$

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

 
$
7

 
$
6


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


16


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

NOTE 5 - Loans (continued)

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

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,163

 
$
2,072

 
$

Commercial Real Estate Loans
 
4,710

 
2,383

 

Agricultural Loans
 

 

 

Subtotal
 
6,873

 
4,455

 

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
45

 
45

 
45

Commercial Real Estate Loans
 
4,428

 
4,417

 
3,058

Agricultural Loans
 

 

 

Subtotal
 
4,473

 
4,462

 
3,103

Total
 
$
11,346

 
$
8,917

 
$
3,103

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

 
$
451

 
$

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

 
$
8

 
$
8


(1) Unpaid Principal Balance is the remaining contractual payments inclusive of partial charge-offs.
 
The following tables present loans individually evaluated for impairment by class of loans for the three month period ended June 30, 2014 and 2013:
June 30, 2014
 
Average Recorded Investment
 
Interest Income Recognized
 
Cash Basis Recognized
With No Related Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,176

 
$
45

 
$
45

Commercial Real Estate Loans
 
3,326

 
53

 
46

Agricultural Loans
 

 

 

Subtotal
 
5,502

 
98

 
91

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
219

 
1

 
1

Commercial Real Estate Loans
 
2,588

 
6

 
5

Agricultural Loans
 

 

 

Subtotal
 
2,807

 
7

 
6

Total
 
$
8,309

 
$
105

 
$
97

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
950

 
$
1

 
$
1

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

 
$

 
$



17


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

NOTE 5 - Loans (continued)

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

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,993

 
$

 
$

Commercial Real Estate Loans
 
2,196

 

 

Agricultural Loans
 
2,041

 
127

 
168

Subtotal
 
6,230

 
127

 
168

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
522

 
1

 
1

Commercial Real Estate Loans
 
6,276

 
6

 
4

Agricultural Loans
 

 

 

Subtotal
 
6,798

 
7

 
5

Total
 
$
13,028

 
$
134

 
$
173

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
80

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
363

 
$
1

 
$
1

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

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
2,156

 
$
76

 
$
77

Commercial Real Estate Loans
 
2,879

 
55

 
48

Agricultural Loans
 

 

 

Subtotal
 
5,035

 
131

 
125

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
2,295

 
1

 
1

Commercial Real Estate Loans
 
3,416

 
11

 
10

Agricultural Loans
 

 

 

Subtotal
 
5,711

 
12

 
11

Total
 
$
10,746

 
$
143

 
$
136

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
974

 
$
3

 
$
3

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

 
$
1

 
$
1

 

18


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

NOTE 5 - Loans (continued)

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

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,052

 
$

 
$
1

Commercial Real Estate Loans
 
2,183

 

 

Agricultural Loans
 
2,231

 
175

 
184

Subtotal
 
5,466

 
175

 
185

With An Allowance Recorded:
 
 

 
 

 
 

Commercial and Industrial Loans and Leases
 
1,528

 
2

 
2

Commercial Real Estate Loans
 
6,042

 
11

 
9

Agricultural Loans
 

 

 

Subtotal
 
7,570

 
13

 
11

Total
 
$
13,036

 
$
188

 
$
196

 
 
 
 
 
 
 
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)
 
$
55

 
$

 
$

Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)
 
$
314

 
$
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 table presents the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of June 30, 2014 and December 31, 2013:
 
 
Non-Accrual
 
Loans Past Due 90 Days
or More & Still Accruing
 
 
2014
 
2013
 
2014
 
2013
Commercial and Industrial Loans and Leases
 
$
286

 
$
31

 
$
67

 
$

Commercial Real Estate Loans
 
3,720

 
6,658

 

 
8

Agricultural Loans
 

 

 

 

Home Equity Loans
 
328

 
114

 

 

Consumer Loans
 
212

 
236

 

 

Residential Mortgage Loans
 
1,356

 
1,339

 

 

Total
 
$
5,902

 
$
8,378

 
$
67

 
$
8

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
1,346

 
$
1,705

 
$

 
$



19


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

NOTE 5 - Loans (continued)

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2014 and December 31, 2013:
June 30, 2014
 
Total
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Loans Not Past Due
Commercial and Industrial Loans and Leases
 
$
366,919

 
$
415

 
$
46

 
$
143

 
$
604

 
$
366,315

Commercial Real Estate Loans
 
596,114

 
324

 
30

 
1,104

 
1,458

 
594,656

Agricultural Loans
 
190,368

 
266

 

 

 
266

 
190,102

Home Equity Loans
 
83,888

 
454

 
191

 
328

 
973

 
82,915

Consumer Loans
 
46,834

 
191

 
45

 
84

 
320

 
46,514

Residential Mortgage Loans
 
134,466

 
1,886

 
1,159

 
1,147

 
4,192

 
130,274

Total(1)
 
$
1,418,589

 
$
3,536

 
$
1,471

 
$
2,806

 
$
7,813

 
$
1,410,776

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
11,552

 
$
146

 
$

 
$
744

 
$
890

 
$
10,662


(1)Total recorded investment in loans includes $5,258 in accrued interest.
 
December 31, 2013
 
Total
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due
 
Total Past Due
 
Loans Not Past Due
Commercial and Industrial Loans and Leases
 
$
351,903

 
$
256

 
$
78

 
$

 
$
334

 
$
351,569

Commercial Real Estate Loans
 
583,604

 
613

 
62

 
2,234

 
2,909

 
580,695

Agricultural Loans
 
195,171

 
62

 

 

 
62

 
195,109

Home Equity Loans
 
81,812

 
303

 
33

 
114

 
450

 
81,362

Consumer Loans
 
49,265

 
149

 
66

 
102

 
317

 
48,948

Residential Mortgage Loans
 
129,047

 
2,206

 
192

 
1,115

 
3,513

 
125,534

Total(1)
 
$
1,390,802

 
$
3,589

 
$
431

 
$
3,565

 
$
7,585

 
$
1,383,217

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

 
$
148

 
$

 
$
1,103

 
$
1,251

 
$
13,502

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

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


20


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

NOTE 5 - Loans (continued)

The following tables present the recorded investment of troubled debt restructurings by class of loans as of June 30, 2014 and December 31, 2013:
June 30, 2014
 
Total
 
Performing
 
Non-Accrual(1)
Commercial and Industrial Loans and Leases
 
$
1,970

 
$
1,961

 
$
9

Commercial Real Estate Loans
 
3,694

 
1,674

 
2,020

Total
 
$
5,664

 
$
3,635

 
$
2,029

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

 
$
2,086

 
$
6

Commercial Real Estate Loans
 
4,325

 
364

 
3,961

Total
 
$
6,417

 
$
2,450

 
$
3,967

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

 
$

 
$

Commercial Real Estate Loans
 
1

 
81

 
118

Total
 
1

 
$
81

 
$
118

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

The following tables present loans by class modified as troubled debt restructurings that occurred during the six months ending June 30, 2014 and 2013: 
June 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

 
197

 
197

Total
 
1

 
$
197

 
$
197

 

21


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

NOTE 5 - Loans (continued)

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

 
$

 
$

Commercial Real Estate Loans
 
1

 
81

 
118

Total
 
1

 
$
81

 
$
118

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

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

 
 

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 June 30, 2014.
 
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
June 30, 2013
 
 

 
 

Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 

 

Total
 

 
$

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

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

 
 
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 six months ending June 30, 2014.

22


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

NOTE 5 - Loans (continued)

 
Troubled Debt Restructurings That Subsequently Defaulted:
 
Number of Loans
 
Recorded Investment
June 30, 2013
 
 

 
 

Commercial and Industrial Loans and Leases
 

 
$

Commercial Real Estate Loans
 

 

Total
 

 
$

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

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

June 30, 2014
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
Commercial and Industrial Loans and Leases
 
$
336,728

 
$
17,930

 
$
12,261

 
$

 
$
366,919

Commercial Real Estate Loans
 
556,501

 
23,560

 
16,053

 

 
596,114

Agricultural Loans
 
185,192

 
4,983

 
193

 

 
190,368

Total
 
$
1,078,421

 
$
46,473

 
$
28,507

 
$

 
$
1,153,401

Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)
 
$
3,101

 
$
1,740

 
$
5,082

 
$

 
$
9,923


 

23


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

NOTE 5 - Loans (continued)

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

 
$
15,485

 
$
11,733

 
$

 
$
351,903

Commercial Real Estate Loans
 
539,533

 
20,168

 
23,903

 

 
583,604

Agricultural Loans
 
192,609

 
2,357

 
205

 

 
195,171

Total
 
$
1,056,827

 
$
38,010

 
$
35,841

 
$

 
$
1,130,678

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

 
$
661

 
$
9,070

 
$

 
$
12,852

 
The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity as of June 30, 2014 and December 31, 2013:
June 30, 2014
 
Home Equity Loans
 
Consumer Loans
 
Residential Mortgage Loans
Performing
 
$
83,560

 
$
46,622

 
$
133,110

Nonperforming
 
328

 
212

 
1,356

Total
 
$
83,888

 
$
46,834

 
$
134,466

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

 
$
126

 
$
1,503

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

 
$
49,029

 
$
127,708

Nonperforming
 
114

 
236

 
1,339

Total
 
$
81,812

 
$
49,265

 
$
129,047

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

 
$
134

 
$
1,767

 
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: 
 
 
June 30, 2014
 
 
 
Commercial and Industrial Loans
 
$
591

Commercial Real Estate Loans
 
9,332

Home Equity Loans
 

Consumer Loans
 
126

Residential Mortgage Loans
 
1,503

Total
 
$
11,552

 
 
 

Carrying Amount, Net of Allowance
 
$
11,546

 

24


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

NOTE 5 - Loans (continued)

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

Commercial Real Estate Loans
 
10,871

Home Equity Loans
 

Consumer Loans
 
134

Residential Mortgage Loans
 
1,767

Total
 
$
14,753

 
 
 

Carrying Amount, Net of Allowance
 
$
14,745


Accretable yield, or income expected to be collected, is as follows:
 
 
2014
 
2013
 
 
 
 
 
Balance at April 1
 
$
2,712

 
$
208

New Loans Purchased
 

 

Accretion of Income
 
(75
)
 
(234
)
Reclassifications from Non-accretable Difference
 

 
208

Charge-off of Accretable Yield
 

 

Balance at June 30
 
$
2,637

 
$
182


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

 
$
170

New Loans Purchased
 

 

Accretion of Income
 
(153
)
 
(446
)
Reclassifications from Non-accretable Difference
 

 
458

Charge-off of Accretable Yield
 

 

Balance at June 30
 
$
2,637

 
$
182


For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three and six months ended June 30, 2014. For those purchased loans disclosed above, the Company increased the allowance for loan losses by $70 during the three months ended June 30, 2013. For those purchased loans disclosed above, the Company increased the allowance for loan losses by $61 during the six months ended June 30, 2013. No allowances for loan losses were reversed during the same period.

NOTE 6 – Segment Information
 
The Company’s operations include three primary segments: core banking, trust and investment advisory services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets. The core banking segment also involves the sale of residential mortgage loans in the secondary market. The trust and investment advisory services segment involves providing trust, investment advisory, and brokerage services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the Company’s banking subsidiary’s local markets.
 

25


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

NOTE 6 - Segment Information (continued)

The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operated through 37 banking offices at June 30, 2014. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company. These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment primarily consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.
 
The following segment financial information has been derived from the internal financial statements of German American Bancorp, Inc., which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments.
 

Core
Banking

Trust and Investment Advisory Services

Insurance

Other

Consolidated Totals
Three Months Ended

 


 


 


 


 

June 30, 2014

 


 


 





 

Net Interest Income

$
18,434


$
4


$
1


$
(118
)

$
18,321

Net Gains on Sales of Loans

386








386

Net Gains on Securities

244








244

Trust and Investment Product Fees



905






905

Insurance Revenues

8


6


1,468




1,482

Noncash Items:













 

Provision for Loan Losses

200








200

Depreciation and Amortization

1,132


7


30


37


1,206

Income Tax Expense (Benefit)

2,954


(65
)

99


(191
)

2,797

Segment Profit (Loss)

6,670


(103
)

144


(24
)

6,687

Segment Assets at June 30, 2014

2,201,207


11,501


5,873


(25,008
)

2,193,573

 
 

Core
Banking

Trust and Investment Advisory Services

Insurance

Other

Consolidated Totals
Three Months Ended

 


 


 


 


 

June 30, 2013

 


 


 


 


 

Net Interest Income

$
17,004


$
6


$
5


$
(303
)

$
16,712

Net Gains on Sales of Loans

809








809

Net Gains on Securities

467








467

Trust and Investment Product Fees

1


813






814

Insurance Revenues

6


6


1,367




1,379

Noncash Items:

 


 


 


 


 

Provision for Loan Losses

(200
)







(200
)
Depreciation and Amortization

973


8


106


38


1,125

Income Tax Expense (Benefit)

3,626


(24
)

40


(413
)

3,229

Segment Profit (Loss)

6,833


(41
)

27


(287
)

6,532

Segment Assets at December 31, 2013

2,171,837


11,663


5,636


(25,309
)

2,163,827



26


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

NOTE 6 - Segment Information (continued)

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

 
 

 
 

 
 

 
 

June 30, 2014
 
 

 
 

 
 

 
 
 
 

Net Interest Income
 
$
36,747

 
$
8

 
$
2

 
$
(240
)
 
$
36,517

Net Gains on Sales of Loans
 
862

 

 

 

 
862

Net Gains on Securities
 
472

 

 

 

 
472

Trust and Investment Product Fees
 
2

 
1,825

 

 

 
1,827

Insurance Revenues
 
5

 
11

 
4,022

 

 
4,038

Noncash Items:
 
 
 
 
 
 
 
 
 


Provision for Loan Losses
 
550

 

 

 

 
550

Depreciation and Amortization
 
2,275

 
13

 
59

 
75

 
2,422

Income Tax Expense (Benefit)
 
5,444

 
(107
)
 
600

 
(408
)
 
5,529

Segment Profit (Loss)
 
12,368

 
(172
)
 
862

 
(66
)
 
12,992

Segment Assets at June 30, 2014
 
2,201,207

 
11,501

 
5,873

 
(25,008
)
 
2,193,573


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

 
 

 
 

 
 

 
 

June 30, 2013
 
 

 
 

 
 
 
 

 
 

Net Interest Income
 
$
33,768

 
$
11

 
$
12

 
$
(854
)
 
$
32,937

Net Gains on Sales of Loans
 
1,563

 

 

 

 
1,563

Net Gains on Securities
 
1,080

 

 

 

 
1,080

Trust and Investment Product Fees
 
4

 
1,628

 

 
(1
)
 
1,631

Insurance Revenues
 
15

 
19

 
3,129

 

 
3,163

Noncash Items:
 
 

 
 

 
 

 
 

 


Provision for Loan Losses
 
150

 

 

 

 
150

Depreciation and Amortization
 
1,923

 
15

 
211

 
75

 
2,224

Income Tax Expense (Benefit)
 
6,370

 
(26
)
 
187

 
(788
)
 
5,743

Segment Profit (Loss)
 
12,681

 
(49
)
 
238

 
(529
)
 
12,341

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

 
11,663

 
5,636

 
(25,309
)
 
2,163,827


NOTE 7 – Stock Repurchase Plan
 
On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 607,754 of the outstanding Common Shares of the Company. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program are purchased. The Board of Directors established no expiration date for this program. As of June 30, 2014, the Company had purchased 334,965 shares under the program. No shares were purchased under the program during the three and six months ended June 30, 2014 and 2013.


27


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

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

Three Months Ended
June 30,
 

2014

2013







Restricted Stock Expense

$
161


$
85

Cash Entitlement Expense

101


54

Tax Effect

(106
)

(56
)
Net of Tax

$
156


$
83


 
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
 
 
 
 
Restricted Stock Expense
 
$
320

 
$
170

Cash Entitlement Expense
 
199

 
108

Tax Effect
 
(210
)
 
(112
)
Net of Tax
 
$
309

 
$
166

 
Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $1,873 and $1,112 as of June 30, 2014 and 2013, respectively.
 
The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this Plan has been set at 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provided for the purchase of up to 500,000 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. Funding for the purchase of common stock is from employee and Company contributions. 

28


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

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

 

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

NOTE 9 – Fair Value
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
               
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At June 30, 2014, the Company held $10.9 million in Level 3 securities which consist of $10.6 million of non-rated Obligations of State and Political Subdivisions and $353 thousand of equity securities that are not actively traded. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these securities are reported by the Company in a Level 3 classification.
 
Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).
 
Impaired Loans: Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.
 
Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.
 

29


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

NOTE 9 - Fair Value (continued)

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized.
 
Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for similar assets, adjusted for specific attributes of that loan resulting in a Level 2 classification.

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

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$

 
$
19,321

 
$

 
$
19,321

Corporate Securities
 

 

 

 

Obligations of State and Political Subdivisions
 

 
119,394

 
10,562

 
129,956

Mortgage-backed Securities-Residential
 

 
465,762

 

 
465,762

Equity Securities
 

 

 
353

 
353

Total Securities
 
$

 
$
604,477

 
$
10,915

 
$
615,392

 
 
 
 
 
 
 
 
 
Loans Held-for-Sale
 
$

 
$
8,812

 
$

 
$
8,812

 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$
449

 
$

 
$
449

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
$

 
$
388

 
$

 
$
388

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

 
 

 
 

 
 

U.S. Treasury and Agency Securities
 
$

 
$
18,952

 
$

 
$
18,952

Corporate Securities
 

 

 

 

Obligations of State and Political Subdivisions
 

 
102,665

 
10,832

 
113,497

Mortgage-backed Securities-Residential
 

 
473,230

 

 
473,230

Equity Securities
 

 

 
353

 
353

Total Securities
 
$

 
$
594,847

 
$
11,185

 
$
606,032

 
 
 
 
 
 
 
 
 
Loans Held-for-Sale
 
$

 
$
9,265

 
$

 
$
9,265

 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$
866

 
$

 
$
866

 
 
 
 
 
 
 
 
 
Derivative Liabilities
 
$

 
$
737

 
$

 
$
737

 
There were no transfers between Level 1 and Level 2 for the periods ended June 30, 2014 and December 31, 2013.

30


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

NOTE 9 - Fair Value (continued)

 
At June 30, 2014, the aggregate fair value of the Loans Held-for-Sale was $8,812, aggregate contractual principal balance was $8,660 with a difference of $152. At December 31, 2013, the aggregate fair value of the Loans Held-for-Sale was $9,265, aggregate contractual principle balance was $9,129 with a difference of $136.
 
The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2014 and 2013:
 
 
Obligations of State and Political Subdivisions
 
Equity Securities
 
Corporate Securities
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance of Recurring Level 3 Assets at April 1
 
$
10,476

 
$
11,728

 
$
353

 
$
353

 
$

 
$

Total Gains or Losses (realized/unrealized) Included in Earnings
 
86

 
(129
)
 

 

 

 

Maturities / Calls
 

 
(160
)
 

 

 

 

Purchases
 

 

 

 

 

 

Balance of Recurring Level 3 Assets at June 30
 
$
10,562

 
$
11,439

 
$
353

 
$
353

 
$

 
$


 

Obligations of State and Political Subdivisions

Equity Securities

Corporate Securities
 

2014

2013

2014

2013

2014

2013



















Balance of Recurring Level 3 Assets at January 1

$
10,832


$
12,169


$
353


$
353


$


$

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

155


(150
)








Maturities / Calls

(425
)

(580
)








Purchases












Balance of Recurring Level 3 Assets at June 30

$
10,562


$
11,439


$
353


$
353


$


$


Of the total gain/loss included in earnings for the three and six months ended June 30, 2014, $86 and $155 was attributable to other changes in fair value. The three and six months ended June 30, 2014 included no gain/loss attributable to interest income on securities. Of the total gain/loss included in earnings for the three and six months ended June 30, 2013, $(129) and $(150) was attributable to other changes in fair value, respectively. The three and six months ended June 30, 2013 included no gain/loss attributable to interest income on securities.
 

31


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

NOTE 9 - Fair Value (continued)

Assets and Liabilities Measured on a Non-Recurring Basis
 
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
 
 
Fair Value Measurements at June 30, 2014 Using
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable 
Inputs (Level 3)
 
Total
Assets:
 
 

 
 

 
 

 
 

Impaired Loans with Specific Allocations
 
 

 
 

 
 

 
 

Commercial and Industrial Loans
 
$

 
$

 
$
2

 
$
2

Commercial Real Estate Loans
 

 

 
1,200

 
1,200

Agricultural Loans
 

 

 

 

Other Real Estate
 
 

 
 

 
 

 
 

Commercial Real Estate
 

 

 

 

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

 
 

 
 

 
 

Impaired Loans with Specific Allocations
 
 

 
 

 
 

 
 

Commercial and Industrial Loans
 
$

 
$

 
$

 
$

Commercial Real Estate Loans
 

 

 
1,346

 
1,346

Agricultural Loans
 

 

 

 

Other Real Estate
 
 

 
 

 
 

 
 

Commercial Real Estate
 

 

 
20

 
20

 
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2,757 with a valuation allowance of $1,555, resulting in an additional provision for loan losses of $189 and $156 for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, impaired loans resulted in an additional provision for loan losses of $270 and $379, respectively. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4,449 with a valuation allowance of $3,103, resulting in an additional provision for loan losses of $1,024 for the year ended December 31, 2013.
 
Other Real Estate is measured at the lower of carrying or fair value less costs to sell. No charge to earnings was included in the three or six months ended June 30, 2014. A charge to earnings through Other Operating Income of $94 and $301 was included in the three and six months ended June 30, 2013, respectively. Other Real Estate which is measured at the lower of carrying or fair value less costs to sell had a carrying value of $20 at December 31, 2013. 
 

32


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

NOTE 9 - Fair Value (continued)

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 June 30, 2014 and December 31, 2013:
June 30, 2014 
 
Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted Average)

 








Impaired Loans - Commercial and Industrial Loans
 
$
2

 
Sales comparison approach
 
Adjustment for differences between comparable sales
 
42%-90% (53%)
Impaired Loans - Commercial Real Estate Loans
 
$
1,200


Sales comparison approach

Adjustment for physical condition of comparable properties sold

12%-80% (63%)

 
 


Income approach

Adjustment for net operating income generated by the property


 
 
 


Cost approach

Adjustment for investor rates of return

 

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

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

 
Income approach
 
Adjustment for net operating income generated by the property
 
 
 
 
 

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

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

 
Income approach
 
Adjustment for net operating income generated by the property
 
 
 
 
 

 
Cost approach
 
Adjustment for investor rates of return
 
 
 

33


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

NOTE 9 - 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 June 30, 2014 and December 31, 2013. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the table. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.
 
 
 
 
Fair Value Measurements at
 June 30, 2014 Using
 
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Financial Assets:
 
 

 
 

 
 

 
 

 
 

Cash and Short-term Investments
 
$
57,214

 
$
40,391

 
$
16,823

 
$

 
$
57,214

Securities Held-to-Maturity
 
184

 

 
186

 

 
186

FHLB Stock and Other Restricted Stock
 
9,096

 
N/A

 
N/A

 
N/A

 
N/A

Loans, Net
 
1,392,733

 

 

 
1,391,788

 
1,391,788

Accrued Interest Receivable
 
7,427

 

 
2,023

 
5,404

 
7,427

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

Demand, Savings, and Money Market Deposits
 
(1,408,988
)
 
(1,408,988
)
 

 

 
(1,408,988
)
Time Deposits
 
(333,391
)
 

 
(335,846
)
 

 
(335,846
)
Short-term Borrowings
 
(117,987
)
 

 
(117,987
)
 

 
(117,987
)
Long-term Debt
 
(107,559
)
 

 
(103,516
)
 
(5,358
)
 
(108,874
)
Accrued Interest Payable
 
(786
)
 

 
(734
)
 
(52
)
 
(786
)
Unrecognized Financial Instruments:
 
 

 
 

 
 

 
 

 
 

Commitments to Extend Credit
 

 

 

 

 

Standby Letters of Credit
 

 

 

 

 

Commitments to Sell Loans
 

 

 

 

 

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

 
 

 
 

 
 

 
 

Cash and Short-term Investments
 
$
60,232

 
$
37,370

 
$
22,862

 
$

 
$
60,232

Securities Held-to-Maturity
 
268

 

 
271

 

 
271

FHLB Stock and Other Restricted Stock
 
9,004

 
N/A

 
N/A

 
N/A

 
N/A

Loans, Net
 
1,366,452

 

 

 
1,370,339

 
1,370,339

Accrued Interest Receivable
 
7,470

 

 
1,918

 
5,552

 
7,470

Financial Liabilities:
 
 

 
 

 
 

 
 

 
 

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

 

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

 
(351,707
)
 

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

 
(53,533
)
 

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

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

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

 
 

 
 

 
 

 
 

Commitments to Extend Credit
 

 

 

 

 

Standby Letters of Credit
 

 

 

 

 

Commitments to Sell Loans
 

 

 

 

 

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

34


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

NOTE 9 - Fair Value (continued)


Securities Held-to-Maturity:
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).
 
FHLB Stock and Other Restricted Stock:
It is not practical to determine the fair values of FHLB stock and other restricted stock due to restrictions placed on their transferability.
 
Loans:
Fair values of loans, excluding loans held for sale and collateral dependent impaired loans having a specific allowance allocation, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued as described previously. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.
 
Accrued Interest Receivable:
The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the asset they are associated with.
 
Deposits:
The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate time deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. 
 
Short-term Borrowings:
The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.
 
Long-term Debt:
The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification. 
 
The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification. 
 
Accrued Interest Payable:
The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the liability they are associated with.
 
Off-balance Sheet Instruments:
Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.


35


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

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


Unrealized Gains and Losses on Available-for-Sale Securities

Defined Benefit Pension Items

Postretirement Benefit Items

Total













Beginning Balance at April 1, 2014

$
(2,967
)

$


$
(32
)

$
(2,999
)
Other Comprehensive Income (Loss) Before Reclassification

2,996






2,996

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

(159
)





(159
)
Net Current Period Other Comprehensive Income (Loss)

2,837






2,837

Ending Balance at June 30, 2014

$
(130
)

$


$
(32
)

$
(162
)


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

5,408






5,408

Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)

(307
)





(307
)
Net Current Period Other Comprehensive Income (Loss)

5,101






5,101

Ending Balance at June 30, 2014

$
(130
)

$


$
(32
)

$
(162
)

The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2013, net of tax:
 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Postretirement Benefit Items
 
Total
 
 
 
 
 
 
 
 
 
Beginning Balance at April 1, 2013
 
$
8,407

 
$
(231
)
 
$
(61
)
 
$
8,115

Other Comprehensive Income (Loss) Before Reclassification
 
(9,376
)
 

 

 
(9,376
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(278
)
 

 

 
(278
)
Net Current Period Other Comprehensive Income (Loss)
 
(9,654
)
 

 

 
(9,654
)
Ending Balance at June 30, 2013
 
$
(1,247
)
 
$
(231
)
 
$
(61
)
 
$
(1,539
)

36


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

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


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

 
$
(231
)
 
$
(61
)
 
$
10,351

Other Comprehensive Income (Loss) Before Reclassification
 
(11,247
)
 

 

 
(11,247
)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)
 
(643
)
 

 

 
(643
)
Net Current Period Other Comprehensive Income (Loss)
 
(11,890
)
 

 

 
(11,890
)
Ending Balance at June 30, 2013
 
$
(1,247
)
 
$
(231
)
 
$
(61
)
 
$
(1,539
)

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

Amount Reclassified From Accumulated Other Comprehensive Income (Loss)

Affected Line Item in the Statement Where Net Income is Presented






Unrealized Gains and Losses on Available-for-Sale Securities

$
(244
)

Net (Gain) Loss on Securities


85


Income Tax Expense
 

(159
)

Net of Tax






Total Reclassifications for the Three Months Ended June 30, 2014

$
(159
)

 
 
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

$
(472
)

Net (Gain) Loss on Securities
 

165


Income Tax Expense
 

(307
)

Net of Tax






Total Reclassifications for the Six Months Ended June 30, 2014

$
(307
)

 


37


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

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

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

Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified From Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement Where Net Income is Presented
 
 
 
 
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
$
(467
)
 
Net (Gain) Loss on Securities
 
 
189

 
Income Tax Expense
 
 
(278
)
 
Net of Tax
 
 
 
 
 
Total Reclassifications for the Three Months Ended June 30, 2013
 
$
(278
)
 
 

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
 
$
(1,080
)
 
Net (Gain) Loss on Securities
 
 
437

 
Income Tax Expense
 
 
(643
)
 
Net of Tax
 
 
 
 
 
Total Reclassifications for the Six Months Ended June 30, 2013
 
$
(643
)
 
 


38




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GERMAN AMERICAN BANCORP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
German American Bancorp, Inc., is a NASDAQ-traded (symbol: GABC) financial services holding company based in Jasper, Indiana. German American, through its banking subsidiary German American Bancorp, operates 37 commercial and retail banking offices in 13 southern Indiana counties. The Company also owns a trust, brokerage, and financial planning subsidiary (German American Financial Advisors & Trust Company) and a full line property and casualty insurance agency (German American Insurance, Inc.).
 
Throughout this Management’s Discussion and Analysis, as elsewhere in this report, when we use the term “Company,” we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2014 and December 31, 2013 and the consolidated results of operations for the three and six months ended June 30, 2014 and 2013. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s December 31, 2013 Annual Report on Form 10-K.


MANAGEMENT OVERVIEW

This updated discussion should be read in conjunction with the Management Overview that was included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s December 31, 2013 Annual Report on Form 10-K and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.

Net income for the quarter ended June 30, 2014 totaled $6,687,000, or $0.51 per share, an increase of $155,000 or 2% and a decline of $0.01 per share or 2%, from the quarter ended June 30, 2013 net income of $6,532,000, or $0.52 per share. On a year-to-date basis, 2014 earnings improved to $12,992,000 or $0.98 per diluted share, as compared to $12,341,000, or $0.97 per diluted share for the first six months of 2013 representing an increase of approximately 1% on a per share basis.

The Company’s second quarter and first half of 2014 earnings were positively impacted by improved levels of net interest income as compared with the same periods of 2013. Net interest income increased $1,609,000, or 10%, and $3,580,000, or 11%, in the three and six months ended June 30, 2014 compared with the same periods of 2013. This improvement in both periods was driven by a higher level of earning assets due in large part to an increased loan portfolio.

Partially mitigating the improvement in net interest income was a decline in the level of non-interest income and in increased level of operating costs during the second quarter and first six months of 2014 compared with the same periods of 2013. Non-interest income declined $608,000, or 10% and $237,000, or 2%, during the three and six months ended June 30, 2014 as compared to the same periods 2013 primarily due to the lower levels of gains from the sale of loans and securities. Operating expenses for the second quarter of 2014 increased $878,000, or 7%, and for the first half of 2014 increased $2,506,000, or 9%, as compared to the same periods of 2013. The increase in non-interest expenses was largely impacted by the inclusion of the United Commerce Bancorp operations which was acquired by the Company effective October 1, 2013, a new financial center in Columbus, Indiana, and the implementation of new digital banking systems.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for German American Bancorp, Inc. presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this Report, are, to a large degree, dependent upon the Company’s accounting policies. The selection of and application of these policies involve estimates, judgments, and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for loan losses, the valuation of securities available for sale, and the valuation allowance on deferred tax assets.


39




Allowance for Loan Losses
 
The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. A provision for loan losses is charged to operations based on management’s periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.
 
The Company has an established process to determine the adequacy of the allowance for loan losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for loan losses deemed adequate to cover losses inherent in the loan portfolio.
 
Commercial and agricultural loans are subject to a standardized grading process administered by an internal loan review function. The need for specific reserves is considered for credits when graded substandard or when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or, (d) other reasons where the ultimate collectibility of the loan is in question, or the loan characteristics require special monitoring. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired. Specific allocations on impaired loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds. Allocations are also applied to categories of loans not considered individually impaired but for which the rate of loss is expected to be greater than historical averages, including those graded substandard and non-performing consumer or residential real estate loans. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values.
 
General allocations are made for other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on a three-year historical average for loan losses for these portfolios, judgmentally adjusted for economic, 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.



40



Securities Valuation
 
Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, when securities are deemed to be other than temporarily impaired, a charge will be recorded through earnings; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Company intends to sell or believes it will be required to sell the securities prior to recovery.  As of June 30, 2014, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $8,728,000 and gross unrealized gains totaled approximately $8,583,000.  As of June 30, 2014, held-to-maturity securities had a gross unrecognized gain of approximately $2,000.


Income Tax Expense
 
Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.
 
A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. Tax related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment.


RESULTS OF OPERATIONS
 
Net Income:
 
Net income for the quarter ended June 30, 2014 totaled $6,687,000, or $0.51 per share, an increase of $155,000, or 2%, and a decline of $0.01 per share, or 2%, from the quarter ended June 30, 2013 net income of $6,532,000, or $0.52 per share. Net income for the six months ended June 30, 2014 totaled $12,992,000 or $0.98 per diluted share, compared to $12,341,000, or $0.97 per diluted share for the first six months of 2013 representing an increase of approximately $651,000, or 5%, and 1% 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.

 

41



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
June 30, 2014

Three Months Ended
June 30, 2013
 

Principal Balance

Income / Expense

Yield / Rate

Principal Balance

Income / Expense

Yield / Rate
Assets

 


 


 


 


 


 

Federal Funds Sold and Other
Short-term Investments

$
12,493


$
3


0.11
%

$
14,806


$
13


0.35
%
Securities:

 


 


 


 


 


 

Taxable

502,594


2,654


2.11
%

556,379


2,771


1.99
%
Non-taxable

123,463


1,578


5.11
%

77,782


983


5.05
%
Total Loans and Leases(2)

1,390,185


16,215


4.68
%

1,233,024


15,088


4.91
%
Total Interest Earning Assets

2,028,735


20,450


4.04
%

1,881,991


18,855


4.01
%
Other Assets

139,807


 


 


135,116


 


 

Less: Allowance for Loan Losses

(15,757
)

 


 


(15,964
)

 


 

Total Assets

$
2,152,785


 


 


$
2,001,143


 


 




















Liabilities and Shareholders’ Equity

 


 


 


 


 


 

Interest-bearing Demand, Savings
and Money Market Deposits

$
1,039,376


$
322


0.12
%

$
1,001,535


$
398


0.16
%
Time Deposits

336,901


715


0.85
%

334,412


756


0.91
%
FHLB Advances and Other Borrowings

153,989


467


1.22
%

118,947


592


2.00
%
Total Interest-bearing Liabilities

1,530,266


1,504


0.39
%

1,454,894


1,746


0.48
%
Demand Deposit Accounts

400,656


 


 


340,767


 


 

Other Liabilities

10,903


 


 


16,456


 


 

Total Liabilities

1,941,825


 


 


1,812,117


 


 

Shareholders’ Equity

210,960


 


 


189,026


 


 

Total Liabilities and Shareholders’ Equity

$
2,152,785


 


 


$
2,001,143


 


 




















Cost of Funds

 


 


0.30
%

 


 


0.37
%
Net Interest Income

 


$
18,946





 


$
17,109


 

Net Interest Margin

 


 


3.74
%

 


 


3.64
%
 
(1) 
Effective tax rates were determined as though interest earned on the Company’s investments in municipal bonds and loans was fully taxable.
(2) 
Loans held-for-sale and non-accruing loans have been included in average loans.

Net interest income increased $1,609,000 or 10% (an increase of $1,837,000 or 11% on a tax-equivalent basis) for the quarter ended June 30, 2014 compared with the same quarter of 2013. The increased level of net interest income during the second quarter of 2014 compared with the second quarter of 2013 was driven by a higher level of earning assets and a higher net interest margin (expressed as a percentage of average earning assets).

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin was 3.74% for the second quarter of 2014 compared to 3.64% during the second quarter of 2013.  The yield on earning assets totaled 4.04% during the quarter ended June 30, 2014 compared to 4.01% in the same period of 2013 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.30% during the quarter ended June 30, 2014 compared to 0.37% in the same period of 2013.

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



42



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

 
 

 
 

 
 

 
 

 
 

Federal Funds Sold and Other
Short-term Investments
 
$
12,322

 
$
6

 
0.11
%
 
$
15,813

 
$
23

 
0.29
%
Securities:
 
 

 
 

 
 

 
 

 
 

 
 

Taxable
 
504,456

 
5,413

 
2.15
%
 
556,893

 
5,612

 
2.02
%
Non-taxable
 
119,647

 
3,079

 
5.15
%
 
77,398

 
1,958

 
5.06
%
Total Loans and Leases(2)
 
1,380,825

 
32,233

 
4.70
%
 
1,222,497

 
30,024

 
4.95
%
Total Interest Earning Assets
 
2,017,250

 
40,731

 
4.06
%
 
1,872,601

 
37,617

 
4.04
%
Other Assets
 
141,083

 
 

 
 

 
135,833

 
 

 
 

Less: Allowance for Loan Losses
 
(15,481
)
 
 

 
 

 
(15,858
)
 
 

 
 

Total Assets
 
$
2,142,852

 
 

 
 

 
$
1,992,576

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders’ Equity
 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing Demand, Savings
and Money Market Deposits
 
$
1,040,188

 
$
643

 
0.12
%
 
$
983,842

 
$
780

 
0.16
%
Time Deposits
 
338,522

 
1,430

 
0.85
%
 
334,545

 
1,608

 
0.97
%
FHLB Advances and Other Borrowings
 
142,422

 
916

 
1.30
%
 
129,596

 
1,503

 
2.34
%
Total Interest-bearing Liabilities
 
1,521,132

 
2,989

 
0.40
%
 
1,447,983

 
3,891

 
0.54
%
Demand Deposit Accounts
 
403,008

 
 

 
 

 
338,631

 
 

 
 

Other Liabilities
 
10,906

 
 

 
 

 
18,430

 
 

 
 

Total Liabilities
 
1,935,046

 
 

 
 

 
1,805,044

 
 

 
 

Shareholders’ Equity
 
207,806

 
 

 
 

 
187,532

 
 

 
 

Total Liabilities and Shareholders’ Equity
 
$
2,142,852

 
 

 
 

 
$
1,992,576

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Funds
 
 

 
 

 
0.30
%
 
 

 
 

 
0.42
%
Net Interest Income
 
 

 
$
37,742

 
 

 
 

 
$
33,726

 
 

Net Interest Margin
 
 

 
 

 
3.76
%
 
 

 
 

 
3.62
%

(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 $3,580,000 or 11% (an increase of $4,016,000 or 12% on a tax-equivalent basis) for the six months ended June 30, 2014 compared with the same period of 2013. The increased level of net interest income during the first half of 2014 compared with the first half of 2013 was driven by a higher level of earning assets and a higher net interest margin (expressed as a percentage of average earning assets).

The tax equivalent net interest margin was 3.76% for the first half of 2014 compared to 3.62% during the first half of 2013.  The yield on earning assets totaled 4.06% during the six months ended June 30, 2014 compared to 4.04% in the same period of 2013 while the cost of funds totaled 0.30% during the six months ended June 30, 2014 compared to 0.42% in the same period of 2013.

The improvement of the net interest margin and net interest income in the first half of 2014 compared with the same period of 2013 was attributable to an increased level of average loans outstanding, to the improvement in the yield on the Company’s securities portfolio and to the continued decline in the Company’s cost of funds. Accretion of loan discounts on acquired loans contributed approximately 6 basis points on an annualized basis to the net interest margin in the six months ended June 30, 2014 compared with approximately 7 basis points on an annualized basis in the six months ended June 30, 2013.



43



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 June 30, 2014, the provision for loan losses totaled $200,000 which represented an increase of $400,000 from the second quarter of 2013 negative provision of $200,000. The provision for loan losses totaled $550,000 for the six months ended June 30, 2014, an increase of $400,000 compared to the provision of $150,000 during the six months ended June 30, 2013.
 
Net charge-offs totaled $134,000 or 0.04% on an annualized basis of average loans outstanding during the three months ended June 30, 2014, compared with $271,000 or 0.09% on an annualized basis of average loans outstanding during the same period of 2013. The Company realized net recoveries of $416,000 or (0.06)% on an annualized basis of average loans outstanding during the six months ended June 30, 2014, compared with net charge-offs of $407,000 or 0.07% on an annualized basis of average loans outstanding during the same period of 2013.

The provision for loan losses made during the three and six months ended June 30, 2014 was made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provision for loan losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. During the quarter ended June 30, 2014, the general allocations for commercial and industrial loans and commercial real estate loans were increased primarily based on the assessment of our qualitative factors. In setting our qualitative factors, we consider the risks of these types of loans and the losses that are inherent within these loan portfolios.

 
Non-interest Income:
 
During the quarter ended June 30, 2014, non-interest income totaled $5,502,000, a decline of $608,000, or 10%, compared with the second quarter of 2013. 

Non-interest Income
(dollars in thousands)

Three Months
Ended June 30,

Change From
Prior Period



Amount

Percent
 

2014

2013

Change

Change
Trust and Investment Product Fees

$
905


$
814


$
91


11
 %
Service Charges on Deposit Accounts

1,191


1,050


141


13

Insurance Revenues

1,482


1,379


103


7

Company Owned Life Insurance

192


217


(25
)

(12
)
Interchange Fee Income

512


513


(1
)


Other Operating Income

590


861


(271
)

(31
)
Subtotal

4,872


4,834


38


1

Net Gains on Sales of Loans

386


809


(423
)

(52
)
Net Gains on Securities

244


467


(223
)

(48
)
Total Non-interest Income

$
5,502


$
6,110


$
(608
)

(10
)
 
Other operating income decreased $271,000 or 31% during the quarter ended June 30, 2014 compared with the second quarter of 2013. The decline was related to fees and fair value adjustments associated with interest rate swap transactions with loan customers.

Net gains on sales of loans totaled $386,000 during the quarter ended June 30, 2014, a decrease of $423,000, or 52%, compared with the second quarter of 2013. Loan sales totaled $21.8 million during the second quarter of 2014, compared with $54.2 million during the second quarter of 2013.

During the second quarter of 2014, the Company realized a net gain on the sale of securities of $244,000 related to the sale of $3.6 million of securities, compared with a net gain on the sale of securities of $467,000 related to the sale of approximately $25.5 million of securities in the second quarter of 2013.


44



During the six months ended June 30, 2014, non-interest income totaled $11,783,000, a decrease of $237,000, or 2%, compared with the first half of 2013.


Non-interest Income
(dollars in thousands)
 
Six Months
Ended June 30,
 
Change From
Prior Period
 
 
 
Amount
 
Percent
 
 
2014
 
2013
 
Change
 
Change
Trust and Investment Product Fees
 
$
1,827

 
$
1,631

 
$
196

 
12
 %
Service Charges on Deposit Accounts
 
2,252

 
2,005

 
247

 
12

Insurance Revenues
 
4,038

 
3,163

 
875

 
28

Company Owned Life Insurance
 
393

 
483

 
(90
)
 
(19
)
Interchange Fee Income
 
959

 
943

 
16

 
2

Other Operating Income
 
980

 
1,152

 
(172
)
 
(15
)
Subtotal
 
10,449

 
9,377

 
1,072

 
11

Net Gains on Sales of Loans
 
862

 
1,563

 
(701
)
 
(45
)
Net Gains on Securities
 
472

 
1,080

 
(608
)
 
(56
)
Total Non-interest Income
 
$
11,783

 
$
12,020

 
$
(237
)
 
(2
)

Insurance revenues increased $875,000, or 28%, during the six months ended June 30, 2014, compared with the first half of 2013. The increase during the first half of 2014 compared with first half of 2013 was due to increased contingency revenue. Contingency revenue during the first six months of 2014 totaled $1,049,000 compared with $246,000 during the first half of 2013. The fluctuation in contingency revenue during 2014 and 2013 is a normal course of business type of variance and is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency.

Net gains on sales of loans totaled $862,000 during the six months ended June 30, 2014, a decline of $701,000, or 45%, compared with the first six months of 2013. Loan sales totaled $43.6 million during the first half of 2014, compared with $96.8 million during the same period of 2013.

During the six months ended June 30, 2014, the Company realized a net gain on the sale of securities of $472,000 related to the sale of $6.8 million of securities, compared with a net gain on the sale of securities of $1,080,000 related to the sale of $55.3 million in the first half of 2013.

Non-interest Expense:
 
During the quarter ended June 30, 2014, non-interest expense totaled $14,139,000, an increase of $878,000, or 7%, compared with the second quarter of 2013.

Non-interest Expense
(dollars in thousands)

Three Months
Ended June 30,

Change From
Prior Period



Amount

Percent
 

2014

2013

Change

Change
Salaries and Employee Benefits

$
7,886


$
7,627


$
259


3
 %
Occupancy, Furniture and Equipment Expense

1,698


1,565


133


8

FDIC Premiums

276


260


16


6

Data Processing Fees

947


672


275


41

Professional Fees

553


525


28


5

Advertising and Promotion

544


516


28


5

Intangible Amortization

325


348


(23
)

(7
)
Other Operating Expenses

1,910


1,748


162


9

Total Non-interest Expense

$
14,139


$
13,261


$
878


7


Salaries and benefits increased $259,000, or 3%, during the quarter ended June 30, 2014 compared with the second quarter of 2013. The increase in salaries and benefits during the second quarter of 2014 compared the same period of 2013 was primarily the result of an increased number of full-time equivalent employees which was largely the result of the acquisition of United Commerce Bancorp.


45



Data processing fees increased $275,000, or 41%, during the second quarter of 2014 compared with the same quarter of 2013. The increase was primarily attributable to costs associated with the implementation of new commercial and retail digital banking platforms late in the fourth quarter of 2013 and in the first quarter of 2014.

During the six months ended June 30, 2014, non-interest expense totaled $29,229,000, an increase of $2,506,000, or 9%, compared with the first half of 2013.
  

Non-interest Expense
(dollars in thousands)
 
Six Months
Ended June 30,
 
Change From
Prior Period
 
 
 
Amount
 
Percent
 
 
2014
 
2013
 
Change
 
Change
Salaries and Employee Benefits
 
$
16,310

 
$
15,411

 
$
899

 
6
 %
Occupancy, Furniture and Equipment Expense
 
3,523

 
3,145

 
378

 
12

FDIC Premiums
 
551

 
515

 
36

 
7

Data Processing Fees
 
1,957

 
1,337

 
620

 
46

Professional Fees
 
1,245

 
1,186

 
59

 
5

Advertising and Promotion
 
1,022

 
1,006

 
16

 
2

Intangible Amortization
 
673

 
715

 
(42
)
 
(6
)
Other Operating Expenses
 
3,948

 
3,408

 
540

 
16

Total Non-interest Expense
 
$
29,229

 
$
26,723

 
$
2,506

 
9


Salaries and benefits increased $899,000, or 6%, during the six months ended June 30, 2014 compared with the first half of 2013. The increase in salaries and benefits during the first half of 2014 compared with the first half of 2013 was primarily the result of an increased number of full-time equivalent employees due in part to the acquisition of United Commerce Bancorp.

Occupancy, furniture and equipment expense increased $378,000, or 12%, during the six months ended June 30, 2014 compared with the first half of 2013. The increase was largely related to a larger number of banking offices driven by the acquisition of United Commerce Bancorp and a new banking location in Columbus.

Data processing fees increased $620,000, or 46%, during the six months ended June 30, 2014 compared with the first half of 2013. The increase was primarily attributable to costs associated with the implementation of new commercial and retail digital banking platforms late in the fourth quarter of 2013 and in the first quarter of 2014.

Income Taxes:
 
The Company’s effective income tax rate was 29.5% and 33.1% during the three months ended June 30, 2014 and 2013. The Company’s effective income tax rate approximated 29.9% and 31.8% during the six months ended June 30, 2014 and 2013. The effective tax rate in all periods presented was lower than the blended statutory rate resulting primarily from the Company’s tax-exempt investment income on securities, loans and company owned life insurance, income tax credits generated from investments in a new markets tax credit project and affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

 
FINANCIAL CONDITION
 
Total assets at June 30, 2014 increased $29.7 million to $2.194 billion compared with $2.164 billion in total assets at December 31, 2013.  The increase in total assets was primarily attributable to an increase in period-end loan balances.

June 30, 2014 loans outstanding increased by $28.1 million, or approximately 4% on an annualized basis, compared with year-end 2013. The increase in loans was broad based including commercial and industrial loans, commercial real estate loans, and residential mortgage loans and occurred throughout the Company’s market area.
 

46



End of Period Loan Balances:
(dollars in thousands)
 
June 30,
2014
 
December 31,
2013
 
Current Period Change
Commercial & Industrial Loans
 
$
366,101

 
$
350,955

 
$
15,146

Commercial Real Estate Loans
 
594,681

 
582,066

 
12,615

Agricultural Loans
 
188,155

 
192,880

 
(4,725
)
Home Equity & Consumer Loans
 
130,290

 
130,628

 
(338
)
Residential Mortgage Loans
 
134,104

 
128,683

 
5,421

Total Loans
 
$
1,413,331

 
$
1,385,212

 
$
28,119

 
The Company’s allowance for loan losses totaled $15.6 million at June 30, 2014 representing an increase of $966,000, or 13% on an annualized basis, from December 31, 2013.  The allowance for loan losses represented 1.10% of period-end loans at June 30, 2014 compared with 1.05% of period-end loans at December 31, 2013.  Under acquisition accounting treatment, loans acquired are recorded at fair value which includes a credit risk component, and therefore the allowance on loans acquired is not carried over from the seller. The Company held a discount on acquired loans of $4.9 million as of June 30, 2014 and $5.9 million at year-end 2013.

Total deposits decreased $69.8 million, or 8% on an annualized basis, as of June 30, 2014 compared with December 31, 2013 total deposits. The decline was primarily attributable to withdrawals from large balance deposit relationships. These relationships continue to maintain significant deposit balances with the Company.

End of Period Deposit Balances:
(dollars in thousands)
 
June 30,
2014
 
December 31,
2013
 
Current Period Change
Non-interest-bearing Demand Deposits
 
$
398,621

 
$
400,024

 
$
(1,403
)
Interest-bearing Demand, Savings, & Money Market Accounts
 
1,010,367

 
1,063,098

 
(52,731
)
Time Deposits < $100,000
 
209,998

 
224,361

 
(14,363
)
Time Deposits of $100,000 or more
 
123,393

 
124,673

 
(1,280
)
Total Deposits
 
$
1,742,379

 
$
1,812,156

 
$
(69,777
)

The following is an analysis of the Company’s non-performing assets at June 30, 2014 and December 31, 2013:
 
Non-performing Assets:
(dollars in thousands)
 
June 30,
2014
 
December 31,
2013
Non-accrual Loans
 
$
5,902

 
$
8,378

Past Due Loans (90 days or more and still accruing)
 
67

 
8

Total Non-performing Loans
 
5,969

 
8,386

Other Real Estate
 
935

 
1,029

Total Non-performing Assets
 
$
6,904

 
$
9,415

 
 
 
 
 
Restructured Loans
 
$
3,596

 
$
2,418

 
 
 
 
 
Non-performing Loans to Total Loans
 
0.42
%
 
0.61
%
Allowance for Loan Loss to Non-performing Loans
 
260.51
%
 
173.91
%
 
Non-performing assets totaled $6.9 million or 0.31% of total assets at June 30, 2014 compared to $9.4 million or 0.44% of total assets at December 31, 2013.  Non-performing loans totaled $6.0 million or 0.42% of total loans at June 30, 2014 representing a $2.4 million, or 29%, decrease in non-performing loans compared to the $8.4 million of non-performing loans at December 31, 2013. 
 

47



Non-accrual commercial real estate loans totaled $3.7 million at June 30, 2014 representing a decline of $2.9 million, or 44%, from the $6.7 million of non-accrual commercial real estate loans at year-end 2013.  Non-accrual commercial real estate loans represented 62% of the total non-performing loans at June 30, 2014 compared to 79% of total non-performing loans at year-end 2013.  Non-accrual commercial and industrial loans totaled $0.3 million at June 30, 2014 representing an increase of $0.3 million from the $0.03 million of non-accrual commercial and industrial loans at December 31, 2013.  Non-accrual commercial and industrial loans represented 5% of the total non-performing loans at June 30, 2014 compared with less than 1% of total non-performing loans at year-end 2013.
 
At June 30, 2014 there was only one relationship included in non-performing loans that was greater than $1.0 million. This relationship was a $1.8 million commercial real estate loan secured by a commercial warehouse facility.  This loan was in non-performing status as of year-end 2013. The borrower has made all contractual payments due during 2014 and the principal balance of this relationship was reduced by $0.05 million during the first six months of 2014.
 
The Company purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.
 
Purchased loans that indicated evidence of credit deterioration since origination at the time of acquisition by the Company did not have a material adverse impact on the Company’s key credit metrics during 2013 or during the first quarter of 2014.  The key credit metrics the Company measures generally include non-performing loans, past due loans, and adversely classified loans.
 
Non-performing purchased loans with evidence of credit deterioration since origination totaled $1,346,000 at June 30, 2014 compared with $1,705,000 at December 31, 2013. The non-performing purchased loans with evidence of credit deterioration since origination represented approximately 23% of total non-performing loans at June 30, 2014 compared with approximately 20% of total non-performing loans at December 31, 2013.
 
Past due purchased loans with evidence of credit deterioration since origination totaled $889,000 at June 30, 2014 and $1,250,000 at year-end 2013.  Past due purchased loans with evidence of credit deterioration since origination represented approximately 11% of total past due loans at June 30, 2014 and approximately 16% of total past due loans at year-end 2013.

Adversely classified purchased loans with evidence of credit deterioration since origination totaled $5.1 million at June 30, 2014 compared with $9.0 million at December 31, 2013. Adversely classified purchased loans with evidence of credit deterioration since origination represented approximately 18% of total adversely classified loans at June 30, 2014 compared with approximately 25% of total adversely classified loans at year-end 2013.
 
Loan impairment is reported when full repayment under the terms of the loan is not expected.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial and industrial loans, commercial real estate loans, and agricultural loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Capital Resources:
 
Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures such as loan commitments and standby letters of credit.
 
Tier 1, or core capital, consists of shareholders’ equity plus certain amounts of instruments commonly referred to as trust preferred securities, less goodwill, core deposit intangibles, other identifiable intangibles and certain deferred tax assets defined by bank regulations. Tier 2 capital currently consists of the amount of the allowance for loan losses which does not exceed a defined maximum allowance limit of 1.25 percent of gross risk adjusted assets and certain amounts of subordinated debenture obligations. Total capital is the sum of Tier 1 and Tier 2 capital.
 

48



The minimum requirements under these standards are generally at least a 4.0 percent leverage ratio, which is Tier 1 capital divided by defined “total assets”; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and its subsidiary bank, have capital ratios that exceed the regulatory minimums.
 
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. Under these regulations, a “well-capitalized” entity must achieve a Tier 1 risk-based capital ratio of at least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a leverage ratio of at least 5.0 percent, and not be under a capital directive. The Company’s subsidiary bank was categorized as well-capitalized as of June 30, 2014.
 
At June 30, 2014, management was not under such a capital directive, nor was it aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material effect on the Company’s liquidity, capital resources or operations.

The table below presents the Company’s consolidated capital ratios under regulatory guidelines:
 
 
Minimum for Capital Adequacy Purposes
 
At June 30, 2014
 
At December 31, 2013
Leverage Ratio
 
4.00
%
 
9.22
%
 
8.78
%
Tier 1 Capital to Risk-adjusted Assets
 
4.00
%
 
12.52
%
 
12.12
%
Total Capital to Risk-adjusted Assets
 
8.00
%
 
13.51
%
 
13.07
%

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

As of June 30, 2014, shareholders’ equity increased by $14.2 million, or 14% on an annualized basis, to $214.3 million compared with $200.1 million at year-end 2013. The increase in shareholders’ equity was primarily attributable to an increase of $8.8 million in retained earnings and an increase of $5.1 million in accumulated other comprehensive income related to a decrease in net unrealized losses in the Company’s securities available-for-sale portfolio. Shareholders’ equity represented 9.8% of total assets at June 30, 2014 and 9.3% of total assets at December 31, 2013. Shareholders’ equity included $23.2 million of goodwill and other intangible assets at June 30, 2014 compared to $23.9 million of goodwill and other intangible assets at year-end 2013.

Liquidity:

The Consolidated Statement of Cash Flows details the elements of changes in the Company’s consolidated cash and cash equivalents. Total cash and cash equivalents decreased $3.0 million during the six months ended June 30, 2014 ending at $57.1 million.  During the six months ended June 30, 2014, operating activities resulted in net cash inflows of $13.2 million.  Investing activities resulted in net cash outflows of $27.0 million during the six months ended June 30, 2014.  Financing activities resulted in net cash inflows for the six months ended June 30, 2014 of $10.8 million.
 

49



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 June 30, 2014, the parent company had approximately $18.7 million of cash and cash equivalents available to meet its cash flow needs.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
 
The Company from time to time in its oral and written communications makes statements relating to its expectations regarding the future. These types of statements are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-Q, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. Such forward looking statements can include statements about the Company’s net interest income or net interest margin; its adequacy of allowance for loan losses, levels of provisions for loan losses, and the quality of the Company’s loans and other assets; simulations of changes in interest rates; expected results from mergers with or acquisitions of other businesses; litigation results; tax estimates and recognition; dividend policy; parent company cash resources and cash requirements, and parent company capital resources; estimated cost savings, plans and objectives for future operations; and expectations about the Company’s financial and business performance and other business matters as well as economic and market conditions and trends. They often can be identified by the use of words like “expect,” “may,” “will,” “would,” “could,” “should,” “intend,” “project,” “estimate,” “believe” or “anticipate,” or similar expressions.
 
Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made.
 
Readers are cautioned that, by their nature, all forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially and adversely from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussions in this Item 2 list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statements. Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates; changes in competitive conditions; the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies; changes in customer borrowing, repayment, investment and deposit practices; changes in fiscal, monetary and tax policies; changes in financial and capital markets; deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration; capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities; risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base of the acquired institution or branches, and difficulties in integration of the acquired operations; factors driving impairment charges on investments; the impact, extent and timing of technological changes; litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future; actions of the Federal Reserve Board; changes in accounting principles and interpretations; potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary; actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms; and the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends. Such statements reflect our views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements.
 
Investors should consider these risks, uncertainties, and other factors, in addition to those mentioned by the Company in its Annual Report on Form 10-K for its fiscal year ended December 31, 2013, and other SEC filings from time to time, when considering any forward-looking statement.


50



Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
The Company’s exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee and Boards of Directors of the parent company and its subsidiary bank. Primary market risks which impact the Company’s operations are liquidity risk and interest rate risk.

The liquidity of the parent company is dependent upon the receipt of dividends from its subsidiary bank, which is subject to certain regulatory limitations. The Bank’s source of funding is predominately core deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank.

The Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios, and by estimating its static interest rate sensitivity position. Another method by which the Company’s interest rate risk position can be estimated is by computing estimated changes in its net portfolio value (“NPV”). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities.
    
NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities. Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment.

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

The table below provides an assessment of the risk to NPV in the event of a sudden and sustained 2% increase and decrease in prevailing interest rates (dollars in thousands).
 
Interest Rate Sensitivity as of June 30, 2014

 
 
Net Portfolio Value
 
 Net Portfolio Value as a % of Present Value of Assets
Changes in Rates
 
Amount
 
% Change
 
NPV Ratio
 
Change
 
 
 
 
 
 
 
 
 
+2%
 
$
200,442

 
(17.16
)%
 
9.58
%
 
(144) b.p.

Base
 
241,954

 

 
11.02
%
 

-2%
 
215,705

 
(10.85
)%
 
9.63
%
 
(139) b.p.

 
This Item 3 includes forward-looking statements. See “Forward-looking Statements” included in Part I, Item 2 of this Report for a discussion of certain factors that could cause the Company’s actual exposure to market risk to vary materially from that expressed or implied above. These factors include possible changes in economic conditions; interest rate fluctuations, competitive product and pricing pressures within the Company’s markets; and equity and fixed income market fluctuations. Actual experience may also vary materially to the extent that the Company’s assumptions described above prove to be inaccurate.


51



Item 4.  Controls and Procedures
 
As of June 30, 2014, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were as of that date effective in timely alerting them to material information required to be included in the Company’s periodic reports filed with the Securities and Exchange Commission. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s second fiscal quarter of 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



52



PART II. OTHER INFORMATION

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
 
(e) The following table sets forth information regarding the Company’s purchases of its common shares during each of the three months ended June 30, 2014.
 
Period
 
Total Number
of Shares (or Units) Purchased
 
Average Price Paid Per Share (or Unit)
 
Total Number of Shares
(or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number
(or Approximate Dollar Value) of Shares (or Units) that
May Yet Be Purchased under the Plans or Programs (1)
4/1/14 – 4/30/14
 

 

 

 
272,789

5/1/14 – 5/31/14
 

 

 

 
272,789

6/1/14 – 6/30/14
 

 

 

 
272,789

 
 

 

 

 
 


(1) On April 26, 2001, the Company announced that its Board of Directors had approved a stock repurchase program for up to 607,754 of its outstanding common shares, of which the Company had purchased 334,965 common shares through June 30, 2014 (both such numbers adjusted for subsequent stock dividends). The Board of Directors established no expiration date for this program. The Company purchased no shares under this program during the three months ended June 30, 2014.


53



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: August 8, 2014
By/s/Mark A. Schroeder
 
Mark A. Schroeder
 
Chairman and Chief Executive Officer
 
 
Date: August 8, 2014
By/s/Bradley M. Rust
 
Bradley M. Rust
 
Executive Vice President and Chief Financial Officer


54



INDEX OF EXHIBITS
 
Exhibit No.
 
Description
10.1*
 
Description of Director Compensation Arrangements for the 12 month period ending June 30, 2015, is incorporated by reference from the description included in Exhibit 5.02 of the Registrant’s Current Report on Form 8-K filed July 3, 2014.
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 June 30, 2014, formatted in XBRL: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii)  the Consolidated Statements of Comprehensive Income (Loss), (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.


55