Edgar Filing: GERMAN AMERICAN BANCORP, INC.

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended September 30, 2010

¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from __________ to __________

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 ¨ 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 Act):

YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding at November 1, 2010
Common Shares, no par value		11,104,918

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, 2009, in Part 1, Item 1, “Business – Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Part 1, 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 (a) Item 1A of Part II of our Quarterly Report on Form 10-Q for our quarter ended June 30, 2010, (b) Item 1A of Part II of this Report and (c) 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.”

*****

INDEX

PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4

	Consolidated Balance Sheets – September 30, 2010 and December 31, 2009	4

	Consolidated Statements of Income and Comprehensive Income -
	Three Months Ended September 30, 2010 and 2009	5

	Consolidated Statements of Income and Comprehensive Income -
	Nine Months Ended September 30, 2010 and 2009	6

	Consolidated Statements of Cash Flows – Nine Months Ended
	September 30, 2010 and 2009	7

	Notes to Consolidated Financial Statements – September 30, 2010	8-20

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21-32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32-33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION	34

Item 1A.	Risk Factors	34-35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	35

SIGNATURES		36

INDEX OF EXHIBITS		37

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, dollars in thousands except share and per share data)

	September 30,			December 31,
	2010			2009

ASSETS
Cash and Due from Banks	$	19,203		$	16,052
Federal Funds Sold and Other Short-term Investments		26,112			12,002
Cash and Cash Equivalents		45,315			28,054

Securities Available-for-Sale, at Fair Value		301,070			250,940
Securities Held-to-Maturity, at Cost (Fair value of $1,630 and $2,801 on September 30, 2010 and December 31, 2009, respectively)		1,603			2,774

Loans Held-for-Sale		13,627			5,706

Loans		915,210			879,475
Less: Unearned Income		(1,587	)		(1,653	)
Allowance for Loan Losses		(11,700	)		(11,016	)
Loans, Net		901,923			866,806

Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost		10,621			10,621
Premises, Furniture and Equipment, Net		26,784			22,153
Other Real Estate		2,397			2,363
Goodwill		9,835			9,655
Intangible Assets		2,795			2,618
Company Owned Life Insurance		24,599			24,008
Accrued Interest Receivable and Other Assets		15,415			17,267
TOTAL ASSETS	$	1,355,984		$	1,242,965

LIABILITIES
Non-interest-bearing Demand Deposits	$	187,363		$	155,268
Interest-bearing Demand, Savings, and Money Market Accounts		532,877			484,699
Time Deposits		362,608			329,676
Total Deposits		1,082,848			969,643

FHLB Advances and Other Borrowings		137,173			148,121
Accrued Interest Payable and Other Liabilities		13,090			11,652
TOTAL LIABILITIES		1,233,111			1,129,416

SHAREHOLDERS’ EQUITY
Preferred Stock, no par value; 500,000 shares authorized, no shares issued		—			—
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized		11,105			11,077
Additional Paid-in Capital		69,089			68,816
Retained Earnings		34,635			29,041
Accumulated Other Comprehensive Income, Net of Tax		8,044			4,615
TOTAL SHAREHOLDERS’ EQUITY		122,873			113,549
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,355,984		$	1,242,965
End of period shares issued and outstanding		11,104,918			11,077,382

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(unaudited, dollars in thousands except share and per share data)

	Three Months Ended
	September 30,
	2010		2009
INTEREST INCOME
Interest and Fees on Loans	$	13,668	$	13,706
Interest on Federal Funds Sold and Other Short-term Investments		12		25
Interest and Dividends on Securities:
Taxable		2,426		2,156
Non-taxable		249		272
TOTAL INTEREST INCOME		16,355		16,159

INTEREST EXPENSE
Interest on Deposits		2,642		3,129
Interest on FHLB Advances and Other Borrowings		1,236		1,549
TOTAL INTEREST EXPENSE		3,878		4,678

NET INTEREST INCOME		12,477		11,481
Provision for Loan Losses		1,375		1,250
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		11,102		10,231

NON-INTEREST INCOME
Trust and Investment Product Fees		348		465
Service Charges on Deposit Accounts		1,053		1,131
Insurance Revenues		1,323		1,254
Company Owned Life Insurance		197		200
Other Operating Income		710		595
Net Gains on Sales of Loans		802		411
Net Gain (Loss) on Securities		—		—
TOTAL NON-INTEREST INCOME		4,433		4,056

NON-INTEREST EXPENSE
Salaries and Employee Benefits		5,470		5,427
Occupancy Expense		918		864
Furniture and Equipment Expense		619		668
FDIC Premiums		355		330
Data Processing Fees		330		321
Professional Fees		698		285
Advertising and Promotion		350		266
Supplies		158		138
Intangible Amortization		262		235
Other Operating Expenses		1,281		1,385
TOTAL NON-INTEREST EXPENSE		10,441		9,919

Income before Income Taxes		5,094		4,368
Income Tax Expense		1,500		1,177
NET INCOME	$	3,594	$	3,191

COMPREHENSIVE INCOME	$	4,201	$	5,100

Earnings Per Share and Diluted Earnings Per Share	$	0.32	$	0.29
Dividends Per Share	$	0.14	$	0.14

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(unaudited, dollars in thousands except share and per share data)

	Nine Months Ended
	September 30,
	2010		2009
INTEREST INCOME
Interest and Fees on Loans	$	39,701	$	40,573
Interest on Federal Funds Sold and Other Short-term Investments		48		64
Interest and Dividends on Securities:
Taxable		7,353		6,497
Non-taxable		777		805
TOTAL INTEREST INCOME		47,879		47,939

INTEREST EXPENSE
Interest on Deposits		7,940		10,469
Interest on FHLB Advances and Other Borrowings		3,898		4,231
TOTAL INTEREST EXPENSE		11,838		14,700

NET INTEREST INCOME		36,041		33,239
Provision for Loan Losses		3,875		3,000
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		32,166		30,239

NON-INTEREST INCOME
Trust and Investment Product Fees		1,134		1,312
Service Charges on Deposit Accounts		3,074		3,271
Insurance Revenues		4,092		4,031
Company Owned Life Insurance		585		638
Other Operating Income		2,299		1,467
Net Gains on Sales of Loans		1,619		1,437
Net Gain (Loss) on Securities		—		(34	)
TOTAL NON-INTEREST INCOME		12,803		12,122

NON-INTEREST EXPENSE
Salaries and Employee Benefits		16,307		16,556
Occupancy Expense		2,640		2,547
Furniture and Equipment Expense		1,871		1,984
FDIC Premiums		1,043		1,550
Data Processing Fees		1,054		1,022
Professional Fees		1,743		1,297
Advertising and Promotion		892		753
Supplies		599		415
Intangible Amortization		727		677
Other Operating Expenses		3,733		3,432
TOTAL NON-INTEREST EXPENSE		30,609		30,233

Income before Income Taxes		14,360		12,128
Income Tax Expense		4,107		3,231
NET INCOME	$	10,253	$	8,897

COMPREHENSIVE INCOME	$	13,682	$	11,497

Earnings Per Share and Diluted Earnings Per Share	$	0.92	$	0.80
Dividends Per Share	$	0.42	$	0.42

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

	Nine Months Ended
	September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	10,253		$	8,897
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net (Accretion) Amortization on Securities		694			(177	)
Depreciation and Amortization		2,768			2,748
Loans Originated for Sale		(83,298	)		(126,278	)
Proceeds from Sales of Loans Held-for-Sale		76,996			122,639
Loss in Investment in Limited Partnership		131			109
Provision for Loan Losses		3,875			3,000
Gain on Sale of Loans, net		(1,619	)		(1,437	)
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets		(234	)		328
Loss (Gain) on Disposition and Impairment of Premises and Equipment		(27	)		11
Other-than-temporary Impairment on Securities		—			34
Increase in Cash Surrender Value of Company Owned Life Insurance		(591	)		(647	)
Equity Based Compensation		300			356
Change in Assets and Liabilities:
Interest Receivable and Other Assets		1,874			2,665
Interest Payable and Other Liabilities		(559	)		(2,129	)
Net Cash from Operating Activities		10,563			10,119

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Securities Available-for-Sale		40,359			30,673
Proceeds from Sales of Securities Available-for-Sale		—			379
Purchase of Securities Available-for-Sale		(85,826	)		(54,873	)
Proceeds from Maturities of Securities Held-to-Maturity		1,175			554
Purchase of Loans		(496	)		(20,666	)
Proceeds from Sales of Loans		3,711			16,913
Loans Made to Customers, net of Payments Received		(1,145	)		3,264
Proceeds from Sales of Other Real Estate		2,036			457
Property and Equipment Expenditures		(1,994	)		(2,008	)
Proceeds from Sales of Property and Equipment		505			4
Acquire Bank Branches		855			—
Acquire Insurance Customer List		—			(386	)
Net Cash from Investing Activities		(40,820	)		(25,689	)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits		63,125			19,632
Change in Short-term Borrowings		9,851			(3,680	)
Advances in Long-term Debt		—			19,260
Repayments of Long-term Debt		(20,800	)		(47	)
Issuance of Common Stock		32			10
Employee Stock Purchase Plan		(31	)		(3	)
Dividends Paid		(4,659	)		(4,644	)
Net Cash from Financing Activities		47,518			30,528

Net Change in Cash and Cash Equivalents		17,261			14,958
Cash and Cash Equivalents at Beginning of Year		28,054			44,992
Cash and Cash Equivalents at End of Period	$	45,315		$	59,950

Cash Paid During the Period for
Interest	$	12,071		$	15,416
Income Taxes		4,763			3,200
Supplemental Non Cash Disclosures (1)
Loans Transferred to Other Real Estate	$	1,849		$	1,713

(1) See Note 11 for non-cash transactions included in the acquisition of bank branches.

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(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. Certain prior year amounts have been reclassified to conform with current classifications. 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, 2009 Annual Report on Form 10-K.

Note 2 – Per Share Data

The computations of Earnings per Share and Diluted Earnings per Share are as follows:

	Three Months Ended
	September 30,
Earnings per Share:	2010		2009
Net Income	$	3,594	$	3,191

Weighted Average Shares Outstanding		11,104,918		11,075,709
Earnings per Share	$	0.32	$	0.29

Diluted Earnings per Share:
Net Income	$	3,594	$	3,191

Weighted Average Shares Outstanding		11,104,918		11,075,709
Potentially Dilutive Shares, Net		5,943		9,059
Diluted Weighted Average Shares Outstanding		11,110,861		11,084,768

Diluted Earnings per Share	$	0.32	$	0.29

Stock options for 99,275 and 99,776 shares of common stock were not considered in computing diluted earnings per share for the quarters ended September 30, 2010 and 2009, respectively, because they were anti-dilutive.

The computations of Earnings per Share and Diluted Earnings per Share are as follows:

	Nine Months Ended
	September 30,
Earnings per Share:	2010		2009
Net Income	$	10,253	$	8,897

Weighted Average Shares Outstanding		11,096,650		11,062,053
Earnings per Share	$	0.92	$	0.80

Diluted Earnings per Share:
Net Income	$	10,253	$	8,897

Weighted Average Shares Outstanding		11,096,650		11,062,053
Potentially Dilutive Shares, Net		5,253		1,401
Diluted Weighted Average Shares Outstanding		11,101,903		11,063,454

Diluted Earnings per Share	$	0.92	$	0.80

Stock options for 99,275 and 118,399 shares of common stock were not considered in computing diluted earnings per share for the nine months ended September 30, 2010 and 2009, respectively, because they were anti-dilutive.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 3 – Securities

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at September 30, 2010 and December 31, 2009, were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
Securities Available-for-Sale:	Cost		Gains		Losses			Value

September 30, 2010
U.S. Treasury and Agency Securities	$	—	$	—	$	—		$	—
Obligations of State and Political Subdivisions		20,495		1,669		—			22,164
Mortgage-backed Securities - Residential		265,375		11,057		(56	)		276,376
Equity Securities		2,818		—		(288	)		2,530
Total	$	288,688	$	12,726	$	(344	)	$	301,070

December 31, 2009
U.S. Treasury and Agency Securities	$	5,000	$	—	$	(30	)	$	4,970
Obligations of State and Political Subdivisions		21,511		931		(64	)		22,378
Mortgage-backed Securities - Residential		214,591		7,065		(404	)		221,252
Equity Securities		2,818		13		(491	)		2,340
Total	$	243,920	$	8,009	$	(989	)	$	250,940

Equity securities that do not have readily determinable fair values are included in the above totals, are carried at historical cost and are evaluated for impairment on a periodic basis. All mortgage-backed securities in the above table are residential mortgage-backed securities and guaranteed by government sponsored entities.

The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity at September 30, 2010 and December 31, 2009, were as follows:

			Gross		Gross
Securities Held-to-Maturity:	Carrying		Unrecognized		Unrecognized		Fair
	Amount		Gains		Losses		Value
September 30, 2010
Obligations of State and Political Subdivisions	$	1,603	$	27	$	—	$	1,630

December 31, 2009
Obligations of State and Political Subdivisions	$	2,774	$	27	$	—	$	2,801

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 3 – Securities (continued)

The amortized cost and fair value of Securities at September 30, 2010 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.

	Amortized		Fair
	Cost		Value
Securities Available-for-Sale:
Due in one year or less	$	414	$	421
Due after one year through five years		3,400		3,620
Due after five years through ten years		4,452		4,651
Due after ten years		12,229		13,472
Mortgage-backed Securities - Residential		265,375		276,376
Equity Securities		2,818		2,530
Totals	$	288,688	$	301,070

	Carrying		Fair
	Amount		Value
Securities Held-to-Maturity:
Due in one year or less	$	175	$	177
Due after one year through five years		354		359
Due after five years through ten years		754		770
Due after ten years		320		324
Totals	$	1,603	$	1,630

Below is a summary of securities with unrealized losses as of September 30, 2010 and December 31, 2009, presented by length of time the securities have been in a continuous unrealized loss position:

At September 30, 2010:	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss

U.S. Treasury and Agency Securities	$	—	$	—		$	—	$	—		$	—	$	—
Obligations of State and Political Subdivisions		—		—			—		—			—		—
Mortgage-backed Securities - Residential		2,881		(56	)		—		—			2,881		(56	)
Equity Securities		377		(64	)		1,800		(224	)		2,177		(288	)
Total	$	3,258	$	(120	)	$	1,800	$	(224	)	$	5,058	$	(344	)

At December 31, 2009:	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loss

U.S. Treasury and Agency Securities	$	4,970	$	(30	)	$	—	$	—		$	4,970	$	(30	)
Obligations of State and Political Subdivisions		3,419		(64	)		—		—			3,419		(64	)
Mortgage-backed Securities - Residential		47,726		(403	)		40		(1	)		47,766		(404	)
Equity Securities		1,533		(491	)		—		—			1,533		(491	)
Total	$	57,648	$	(988	)	$	40	$	(1	)	$	57,688	$	(989	)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 3 – Securities (continued)

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. As a result of valuations of the Company’s equity securities portfolio during 2009, the Company recognized a $34 pre-tax charge for an other-than-temporary decline in fair value of this portfolio. All mortgage-backed securities in the Company’s portfolio are guaranteed by government sponsored entities, are investment grade, and are performing as expected.

The Company’s equity securities consist of non-controlling investments in other banking organizations. When a decline in fair value below cost is deemed to be other-than-temporary, the unrealized loss must be recognized as a charge to earnings. At September 30, 2010 and December 31, 2009, certain equity securities in the Company’s portfolio with fair values below amortized cost were deemed to not be other-than-temporarily impaired due in large part to the overall financial condition of the issuers which included continued profitability throughout the first nine months of 2010 and during 2009 and that the fair value of the securities has declined due to difficult macroeconomic conditions for equity security valuations of banking organizations. In addition, the length of time that fair value has been less than cost was assessed and it is reasonable to expect that fair value can recover to a level greater than cost in a reasonable period of time. Finally, subsequent to September 30, 2010, the equity securities that have been in an unrealized loss position for more than twelve months have recovered above the Company’s cost basis.

Proceeds from the sales of Available-for-Sale Securities are summarized below:

	Three Months		Nine Months
	Ended		Ended
	September 30, 2010		September 30, 2010

Proceeds from Sales and Calls	$	—	$	—
Gross Gains on Sales and Calls		—		—

Income Taxes on Gross Gains		—		—

Proceeds from the sales of Available-for-Sale Securities are summarized below:

	Three Months		Nine Months
	Ended		Ended
	September 30, 2009		September 30, 2009

Proceeds from Sales and Calls	$	—	$	379
Gross Gains on Sales and Calls		—		—

Income Taxes on Gross Gains		—		—

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 4 – Loans

Total loans, as presented on the balance sheet, are comprised of the following classifications:

	September 30,			December 31,
	2010			2009

Commercial and Industrial Loans	$	222,437		$	188,962
Commercial Real Estate Loans		342,716			334,255
Agricultural Loans		151,517			156,845
Consumer Loans		117,686			114,736
Residential Mortgage Loans		80,854			84,677
Total Loans	$	915,210		$	879,475
Less: Unearned Income		(1,587	)		(1,653	)
Allowance for Loan Losses		(11,700	)		(11,016	)
Loans, Net	$	901,923		$	866,806

Information Regarding Impaired Loans:

Impaired Loans with No Allowance for Loan Losses Allocated	$	4,245	$	1,213
Impaired Loans with Allowance for Loan Losses Allocated		6,425		6,932

Amount of Allowance Allocated to Impaired Loans		1,905		3,024

Note 5 – Allowance for Loan Losses

A summary of the activity in the Allowance for Loan Losses follows:

	September 30,			September 30,
	2010			2009

Balance as of January 1	$	11,016		$	9,522
Provision for Loan Losses		3,875			3,000
Recoveries of Prior Loan Losses		572			703
Loan Losses Charged to the Allowance		(3,763	)		(2,437	)
Balance as of September 30	$	11,700		$	10,788

Note 6 – Segment Information

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

The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operates through 30 retail banking offices. 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 consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products from seven offices; and German American Reinsurance Company, Ltd., which reinsures credit insurance products sold by the Company’s subsidiary bank. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 6 – Segment Information (continued)

The following segment financial information has been derived from the internal financial statements of German American Bancorp, Inc., which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments.

Three Months Ended

September 30, 2010

			Trust and
			Investment
	Core		Advisory									Consolidated
	Banking		Services			Insurance			Other			Totals

Net Interest Income	$	12,927	$	2		$	6		$	(458	)	$	12,477
Net Gains on Sales of Loans		802		—			—			—			802
Net Gain (Loss) on Securities		—		—			—			—			—
Trust and Investment Product Fees		—		349			—			(1	)		348
Insurance Revenues		17		14			1,296			(4	)		1,323
Noncash Items:
Provision for Loan Losses		1,375		—			—			—			1,375
Depreciation and Amortization		726		7			223			—			956
Income Tax Expense		1,931		(63	)		(39	)		(329	)		1,500
Segment Profit (Loss)		4,001		(92	)		(50	)		(265	)		3,594
Segment Assets		1,349,960		2,133			8,058			(4,167	)		1,355,984

Three Months Ended

September 30, 2009

			Trust and
			Investment
	Core		Advisory								Consolidated
	Banking		Services		Insurance			Other			Totals

Net Interest Income	$	11,917	$	4	$	20		$	(460	)	$	11,481
Net Gains on Sales of Loans		411		—		—			—			411
Net Gain (Loss) on Securities		—		—		—			—			—
Trust and Investment Product Fees		1		465		—			(1	)		465
Insurance Revenues		16		14		1,234			(10	)		1,254
Noncash Items:
Provision for Loan Losses		1,250		—		—			—			1,250
Depreciation and Amortization		700		8		243			—			951
Income Tax Expense		1,460		71		(21	)		(333	)		1,177
Segment Profit (Loss)		3,495		105		(35	)		(374	)		3,191
Segment Assets		1,226,495		2,304		8,418			(3,402	)		1,233,815

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 6 – Segment Information (continued)

Nine Months Ended

September 30, 2010

			Trust and
			Investment
	Core		Advisory									Consolidated
	Banking		Services			Insurance			Other			Totals

Net Interest Income	$	37,369	$	6		$	23		$	(1,357	)	$	36,041
Net Gains on Sales of Loans		1,619		—			—			—			1,619
Net Gain (Loss) on Securities		—		—			—			—			—
Trust and Investment Product Fees		2		1,135			—			(3	)		1,134
Insurance Revenues		47		21			4,042			(18	)		4,092
Noncash Items:
Provision for Loan Losses		3,875		—			—			—			3,875
Depreciation and Amortization		2,061		20			687			—			2,768
Income Tax Expense		5,252		(167	)		(31	)		(947	)		4,107
Segment Profit (Loss)		11,242		(249	)		(60	)		(680	)		10,253
Segment Assets		1,349,960		2,133			8,058			(4,167	)		1,355,984

Nine Months Ended

September 30, 2009

			Trust and
			Investment
	Core		Advisory							Consolidated
	Banking		Services		Insurance		Other			Totals

Net Interest Income	$	34,116	$	9	$	48	$	(934	)	$	33,239
Net Gains on Sales of Loans		1,437		—		—		—			1,437
Net Gain (Loss) on Securities		—		—		—		(34	)		(34	)
Trust and Investment Product Fees		3		1,312		—		(3	)		1,312
Insurance Revenues		66		18		3,984		(37	)		4,031
Noncash Items:
Provision for Loan Losses		3,000		—		—		—			3,000
Depreciation and Amortization		2,031		22		695		—			2,748
Income Tax Expense		4,013		27		26		(835	)		3,231
Segment Profit (Loss)		9,319		39		41		(502	)		8,897
Segment Assets		1,226,495		2,304		8,418		(3,402	)		1,233,815

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 (as adjusted for subsequent stock dividends) 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 is purchased. As of September 30, 2010, the Company had purchased 334,965 (as adjusted for subsequent stock dividends) shares under the program. No shares were purchased under the plan during the nine months ended September 30, 2010.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 8 – Equity Plans and Equity Based Compensation

The Company maintains equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted. At September 30, 2010, the Company has reserved 657,956 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 nine months ended September 30, 2010 and 2009, the Company granted no options, and accordingly, recorded no stock option expense related to option grants during the three or nine months ended September 30, 2010 and 2009. In addition, there was no unrecognized option expense as all outstanding options were fully vested prior to September 30, 2010 and 2009.

During the quarter ended September 30, 2010, the Company granted no restricted stock awards. During the three months ended September 30, 2009, the Company granted awards of 965 shares of restricted stock. During the nine months ended September 30, 2010 and 2009, the Company granted awards of 24,178 and 43,740 shares of restricted stock, respectively. The expense recorded for the restricted stock grants totaled $100 (or $60, net of an income tax benefit of $40) and $300 (or $181, net of an income tax benefit of $119) during the three and nine months ended September 30, 2010. The expense recorded for the restricted stock grants totaled $121 (or $73, net of an income tax benefit of $48) and $356 (or $215, net of an income tax benefit of $141) during the three and nine months ended September 30, 2009. Unrecognized expense associated with the restricted stock grants totaled $100 and $129 as of September 30, 2010 and 2009, 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 plan year for the Employee Stock Purchase Plan runs from August 17 through August 16 of the subsequent year.

The purchase price of the shares under this Plan is 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provides for the purchase of up to 500,000 shares of common stock. The Company may obtain shares for sale under the plan 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. The Employee Stock Purchase Plan was not considered compensatory and no expense was recorded during the 2008/2009 and 2009/2010 plan years.

Note 9 – Employee Benefit Plans

The Company acquired through previous bank mergers a noncontributory defined benefit pension plan with benefits based on years of service and compensation prior to retirement. The benefits under the plan were suspended in 1998. The following tables represent the components of net periodic benefit cost for the periods presented:

	Three Months Ended
	September 30,
	2010			2009
Service Cost	$	—		$	—
Interest Cost		8			9
Expected Return on Assets		(1	)		(1	)
Amortization of Transition Amount		—			—
Amortization of Prior Service Cost		—			(1	)
Recognition of Net (Gain) Loss		6			4
Net Periodic Benefit Cost	$	13		$	11

Loss on Settlements and Curtailments	None			None

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 9 – Employee Benefit Plans (continued)

	Nine Months Ended
	September 30,
	2010			2009
Service Cost	$	—		$	—
Interest Cost		25			27
Expected Return on Assets		(2	)		(5	)
Amortization of Transition Amount		—			—
Amortization of Prior Service Cost		(2	)		(2	)
Recognition of Net (Gain) Loss		19			12
Net Periodic Benefit Cost	$	40		$	32

Loss on Settlements and Curtailments	None			None

The Company previously disclosed in its financial statements for the year ended December 31, 2009, that it expected to contribute $75 to the pension plan during the fiscal year ending December 31, 2010. As of September 30, 2010, the Company has contributed $53 to the pension plan.

Note 10 – Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans: Values for 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 to adjust for differences between the comparable sale and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2010

(unaudited, dollars in thousands except share and per share data)

Note 10 – Fair Value (continued)

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

Loans Held-for-Sale: The fair values of loans held for sale are determined by using quoted prices for a similar asset, adjusted for specific attributes of that loan (Level 2).

Assets and Liabilities Measured on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at September 30, 2010 Using

Quoted Prices in

Active Markets for

Significant Other

Significant

Identical Assets

Observable Inputs

Unobservable Inputs

Carrying Value

(Level 1)

(Level 2)

(Level 3)

Assets: