Edgar Filing: GERMAN AMERICAN BANCORP, INC.

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.”

*****

INDEX



PART I. FINANCIAL INFORMATION		4

Item 1.	Financial Statements	4

	Consolidated Balance Sheets – June 30, 2014 and December 31, 2013	4

	Consolidated Statements of Income – Three Months Ended June 30, 2014 and 2013	5

	Consolidated Statements of Income – Six Months Ended June 30, 2014 and 2013	6

	Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2014 and 2013	7

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2014 and 2013	8

	Notes to Consolidated Financial Statements – June 30, 2014	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51

Item 4.	Controls and Procedures	52

PART II. OTHER INFORMATION		53

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6.	Exhibits	54

SIGNATURES		54

INDEX OF EXHIBITS		55

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.

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.

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.

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.

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.

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.

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

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

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.

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

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.

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.

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	—		—		—