GABC-2014.9.30-10Q
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 September 30, 2014
 
Commission File Number 001-15877
 
German American Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Indiana
 
35-1547518
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
711 Main Street, Jasper, Indiana 47546
(Address of Principal Executive Offices and Zip Code)
 
Registrant’s telephone number, including area code: (812) 482-1314
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES   x      NO ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES   x      NO ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
YES   ¨      NO x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at November 1, 2014
Common Shares, no par value
 
13,210,395


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

2

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

3

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

 
 

Cash and Due from Banks
 
$
37,427

 
$
37,370

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

 
22,762

Cash and Cash Equivalents
 
87,167

 
60,132

 
 
 
 
 
Interest-bearing Time Deposits with Banks
 
100

 
100

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

 
606,032

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

 
268

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

 
9,265

 
 
 
 
 
Loans
 
1,436,774

 
1,385,212

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

 
1,367,798

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

 
9,004

Premises, Furniture and Equipment, Net
 
40,322

 
40,430

Other Real Estate
 
521

 
1,029

Goodwill
 
20,535

 
20,536

Intangible Assets
 
2,353

 
3,328

Company Owned Life Insurance
 
31,809

 
31,178

Accrued Interest Receivable and Other Assets
 
13,346

 
14,727

TOTAL ASSETS
 
$
2,205,921

 
$
2,163,827

 
 
 
 
 
LIABILITIES
 
 

 
 

Non-interest-bearing Demand Deposits
 
$
410,329

 
$
400,024

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

 
1,063,098

Time Deposits
 
333,638

 
349,034

Total Deposits
 
1,764,471

 
1,812,156

 
 
 
 
 
FHLB Advances and Other Borrowings
 
208,086

 
140,770

Accrued Interest Payable and Other Liabilities
 
13,099

 
10,804

TOTAL LIABILITIES
 
1,985,656

 
1,963,730

 
 
 
 
 
SHAREHOLDERS’ EQUITY
 
 

 
 

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

 
—

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

 
13,174

Additional Paid-in Capital
 
108,481

 
108,022

Retained Earnings
 
98,528

 
84,164

Accumulated Other Comprehensive Income (Loss)
 
46

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

 
200,097

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

 
$
2,163,827

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

 
13,173,793


See accompanying notes to consolidated financial statements.

4

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

Three Months Ended 
 September 30,
 

2014

2013
INTEREST INCOME

 


 

Interest and Fees on Loans

$
16,680


$
15,307

Interest on Federal Funds Sold and Other Short-term Investments

2


2

Interest and Dividends on Securities:

 


 

Taxable

2,531


2,768

Non-taxable

1,135


735

TOTAL INTEREST INCOME

20,348


18,812








INTEREST EXPENSE

 


 

Interest on Deposits

1,025


1,145

Interest on FHLB Advances and Other Borrowings

532


475

TOTAL INTEREST EXPENSE

1,557


1,620








NET INTEREST INCOME

18,791


17,192

Provision for Loan Losses

—


(400
)
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

18,791


17,592








NON-INTEREST INCOME

 


 

Trust and Investment Product Fees

901


802

Service Charges on Deposit Accounts

1,300


1,029

Insurance Revenues

1,739


1,495

Company Owned Life Insurance

210


233

Interchange Fee Income

508


449

Other Operating Income

599


395

Net Gains on Sales of Loans

613


613

Net Gains on Securities

567


428

TOTAL NON-INTEREST INCOME

6,437


5,444








NON-INTEREST EXPENSE

 


 

Salaries and Employee Benefits

7,975


7,515

Occupancy Expense

1,262


1,155

Furniture and Equipment Expense

463


438

FDIC Premiums

277


261

Data Processing Fees

935


717

Professional Fees

516


970

Advertising and Promotion

613


447

Intangible Amortization

302


329

Other Operating Expenses

1,739


1,752

TOTAL NON-INTEREST EXPENSE

14,082


13,584








Income before Income Taxes

11,146


9,452

Income Tax Expense

3,438


2,969

NET INCOME

$
7,708


$
6,483








Basic Earnings Per Share

$
0.58


$
0.51

Diluted Earnings Per Share

$
0.58


$
0.51








Dividends Per Share

$
0.16


$
0.15

 
See accompanying notes to consolidated financial statements.

5

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

 
 

Interest and Fees on Loans
 
$
48,766

 
$
45,227

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

 
25

Interest and Dividends on Securities:
 
 

 
 

Taxable
 
7,944

 
8,380

Non-taxable
 
3,136

 
2,008

TOTAL INTEREST INCOME
 
59,854

 
55,640

 
 
 
 
 
INTEREST EXPENSE
 
 

 
 

Interest on Deposits
 
3,098

 
3,533

Interest on FHLB Advances and Other Borrowings
 
1,448

 
1,978

TOTAL INTEREST EXPENSE
 
4,546

 
5,511

 
 
 
 
 
NET INTEREST INCOME
 
55,308

 
50,129

Provision for Loan Losses
 
550

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

 
50,379

 
 
 
 
 
NON-INTEREST INCOME
 
 

 
 

Trust and Investment Product Fees
 
2,728

 
2,433

Service Charges on Deposit Accounts
 
3,552

 
3,034

Insurance Revenues
 
5,777

 
4,658

Company Owned Life Insurance
 
603

 
716

Interchange Fee Income
 
1,467

 
1,392

Other Operating Income
 
1,579

 
1,547

Net Gains on Sales of Loans
 
1,475

 
2,176

Net Gains on Securities
 
1,039

 
1,508

TOTAL NON-INTEREST INCOME
 
18,220

 
17,464

 
 
 
 
 
NON-INTEREST EXPENSE
 
 

 
 

Salaries and Employee Benefits
 
24,285

 
22,926

Occupancy Expense
 
3,776

 
3,359

Furniture and Equipment Expense
 
1,472

 
1,379

FDIC Premiums
 
828

 
776

Data Processing Fees
 
2,892

 
2,054

Professional Fees
 
1,761

 
2,156

Advertising and Promotion
 
1,635

 
1,453

Intangible Amortization
 
975

 
1,044

Other Operating Expenses
 
5,687

 
5,160

TOTAL NON-INTEREST EXPENSE
 
43,311

 
40,307

 
 
 
 
 
Income before Income Taxes
 
29,667

 
27,536

Income Tax Expense
 
8,967

 
8,712

NET INCOME
 
$
20,700

 
$
18,824

 
 
 
 
 
Basic Earnings Per Share
 
$
1.57

 
$
1.49

Diluted Earnings Per Share
 
$
1.57

 
$
1.48

 
 
 
 
 
Dividends Per Share
 
$
0.48

 
$
0.45


See accompanying notes to consolidated financial statements.


6

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

 
$
6,483

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

Unrealized Holding Gain (Loss) Arising During the Period
 
871

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

Net of Tax
 
208

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

 
(1,373
)
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
7,916

 
$
5,110

 

 
 


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

 
$
18,824

 
 
 
 
 
Other Comprehensive Income (Loss):
 
 

 
 

Unrealized Gains (Losses) on Securities
 
 

 
 

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

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

Net of Tax
 
5,309

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

 
(13,263
)
 
 
 
 
 
COMPREHENSIVE INCOME
 
$
26,009

 
$
5,561








See accompanying notes to consolidated financial statements.

7

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

 
 

Net Income
 
$
20,700

 
$
18,824

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

 
 

Net Amortization on Securities
 
1,510

 
2,338

Depreciation and Amortization
 
3,611

 
3,308

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

 
142,433

Provision for Loan Losses
 
550

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

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

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

 
247

Change in Assets and Liabilities:
 
 

 
 

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

Interest Payable and Other Liabilities
 
2,214

 
278

Net Cash from Operating Activities
 
24,289

 
33,301

 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 

 
 

Proceeds from Maturity of Other Short-term Investments
 
—

 
2,690

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

 
114,563

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

 
119,952

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

 
78

Purchase of Federal Home Loan Bank Stock
 
(92
)
 
—

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

 
3,250

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

 
1,479

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

 
88

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

 
 

Change in Deposits
 
(47,658
)
 
30,120

Change in Short-term Borrowings
 
66,977

 
31,258

Advances in Long-term Debt
 
20,321

 
50,000

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

 
13

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

 
54,872

 
 
 
 
 
Net Change in Cash and Cash Equivalents
 
27,035

 
15,584

Cash and Cash Equivalents at Beginning of Year
 
60,132

 
49,087

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

 
$
64,671

 
 
 
 
 
Cash Paid During the Year for
 
 

 
 

Interest
 
$
4,650

 
$
6,096

Income Taxes
 
7,192

 
8,732

 
 
 
 
 
Supplemental Non Cash Disclosures
 
 

 
 

Loans Transferred to Other Real Estate
 
$
1,277

 
$
676

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

8

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


NOTE 1 – Basis of Presentation
 
German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp, Inc. December 31, 2013 Annual Report on Form 10-K. Certain items included in the prior period financial statements were reclassified to conform to the current presentation. There was no effect on net income or total shareholder’s equity.

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

 
 

Net Income
 
$
7,708

 
$
6,483

Weighted Average Shares Outstanding
 
13,210,395

 
12,666,780

Basic Earnings per Share
 
$
0.58

 
$
0.51

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
7,708

 
$
6,483

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,210,395

 
12,666,780

Potentially Dilutive Shares, Net
 
20,280

 
24,384

Diluted Weighted Average Shares Outstanding
 
13,230,675

 
12,691,164

Diluted Earnings per Share
 
$
0.58

 
$
0.51

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

 
 

Net Income
 
$
20,700

 
$
18,824

Weighted Average Shares Outstanding
 
13,200,025

 
12,658,403

Basic Earnings per Share
 
$
1.57

 
$
1.49

 
 
 
 
 
Diluted Earnings per Share:
 
 

 
 

Net Income
 
$
20,700

 
$
18,824

 
 
 
 
 
Weighted Average Shares Outstanding
 
13,200,025

 
12,658,403

Potentially Dilutive Shares, Net
 
20,975

 
19,950

Diluted Weighted Average Shares Outstanding
 
13,221,000

 
12,678,353

Diluted Earnings per Share
 
$
1.57

 
$
1.48

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


9

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

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

 
 

 
 

 
 

September 30, 2014
 
 

 
 

 
 

 
 

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

 
$
—

 
$
(637
)
 
$
19,363

Obligations of State and Political Subdivisions
 
134,763

 
5,858

 
(92
)
 
140,529

Mortgage-backed Securities - Residential
 
420,466

 
2,758

 
(7,728
)
 
415,496

Equity Securities
 
353

 
—

 
—

 
353

Total
 
$
575,582

 
$
8,616

 
$
(8,457
)
 
$
575,741

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

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

 
$
—

 
$
(1,048
)
 
$
18,952

Obligations of State and Political Subdivisions
 
112,008

 
2,388

 
(899
)
 
113,497

Mortgage-backed Securities - Residential
 
481,724

 
3,497

 
(11,991
)
 
473,230

Equity Securities
 
353

 
—

 
—

 
353

Total
 
$
614,085

 
$
5,885

 
$
(13,938
)
 
$
606,032

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

 
 

 
 

 
 

September 30, 2014
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
184

 
$
2

 
$
—

 
$
186

 
 
 
 
 
 
 
 
 
December 31, 2013
 
 

 
 

 
 

 
 

Obligations of State and Political Subdivisions
 
$
268

 
$
3

 
$
—

 
$
271
















10

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

NOTE 3 - Securities (continued)

The amortized cost and fair value of Securities at September 30, 2014 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately.
Securities Available-for-Sale:
 
Amortized
Cost
 
Fair
Value
 
 
 
 
 
Due in one year or less
 
$
3,716

 
$
3,737

Due after one year through five years
 
20,274

 
20,174

Due after five years through ten years
 
65,615

 
67,862

Due after ten years
 
65,158

 
68,119

Mortgage-backed Securities - Residential
 
420,466

 
415,496

Equity Securities
 
353

 
353

Total
 
$
575,582

 
$
575,741

 

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

 
$
—

Due after one year through five years
 
184

 
186

Due after five years through ten years
 
—

 
—

Due after ten years
 
—

 
—

Total
 
$
184

 
$
186

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

 
$
19,231

Gross Gains on Sales
 
567

 
428

Income Taxes on Gross Gains
 
198

 
150


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

 
$
119,952

Gross Gains on Sales
 
1,039

 
1,508

Income Taxes on Gross Gains
 
364

 
528




11

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

NOTE 3 - Securities (continued)

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

 
$
—

 
$
19,363

 
$
(637
)
 
$
19,363

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

 
(35
)
 
4,038

 
(57
)
 
8,887

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

 
(543
)
 
239,488

 
(7,185
)
 
306,526

 
(7,728
)
Equity Securities
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
71,887

 
$
(578
)
 
$
262,889

 
$
(7,879
)
 
$
334,776

 
$
(8,457
)

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

 
$
(1,048
)
 
$
—

 
$
—

 
$
18,952

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

 
(899
)
 
—

 
—

 
38,878

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

 
(11,903
)
 
1,735

 
(88
)
 
347,763

 
(11,991
)
Equity Securities
 
—

 
—

 
—

 
—

 
—

 
—

Total
 
$
403,858

 
$
(13,850
)
 
$
1,735

 
$
(88
)
 
$
405,593

 
$
(13,938
)
 
Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The Company doesn’t intend to sell or expect to be required to sell these securities, and the decline in fair value is largely due to changes in market interest rates, therefore, the Company does not consider these securities to be other-than-temporarily impaired. All mortgage-backed securities in the Company’s portfolio are guaranteed by government sponsored entities, are investment grade, and are performing as expected.
 
NOTE 4 – Derivatives
 
The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $23.2 million at September 30, 2014 and $17.9 million at December 31, 2013. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income. 
 
Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.
 

12

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

NOTE 4 - Derivatives (continued)

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

 
 

 
 

 
 

Interest Rate Swaps
 
$
23,233

 
$
470

 
$
17,853

 
$
866

 
 
 
 
 
 
 
 
 
Included in Other Liabilities:
 
 

 
 

 
 

 
 

Interest Rate Swaps
 
$
23,233

 
$
412

 
$
17,853

 
$
737

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

 
 

 
 

 
 

Included in Interest Income / (Expense)
 
$
—

 
$
—

 
$
—

 
$
—

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

 
517


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

 
 

Commercial and Industrial Loans and Leases
 
$
377,845

 
$
350,955

Commercial Real Estate Loans
 
586,012

 
582,066

Agricultural Loans
 
201,867

 
192,880

Retail:
 
 

 
 

Home Equity Loans
 
85,160

 
81,504

Consumer Loans
 
48,604

 
49,124

Residential Mortgage Loans
 
137,286

 
128,683

Subtotal
 
1,436,774

 
1,385,212

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

 
$
1,367,798

 

13

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

NOTE 5 - Loans (continued)

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

 
$
7,199

 
$
1,016

 
$
418

 
$
326

 
$
435

 
$
495

 
$
15,550

Provision for Loan Losses
 
(563
)
 
206

 
156

 
(33
)
 
77

 
(33
)
 
190

 
—

Recoveries
 
19

 
55

 
—

 
—

 
41

 
6

 
—

 
121

Loans Charged-off
 
—

 
(6
)
 
—

 
(7
)
 
(65
)
 
(1
)
 
—

 
(79
)
Ending Balance
 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685

 
$
15,592

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

 
$
8,636

 
$
817

 
$
313

 
$
199

 
$
280

 
$
760

 
$
15,263

Provision for Loan Losses
 
(361
)
 
(214
)
 
53

 
89

 
64

 
36

 
(67
)
 
(400
)
Recoveries
 
108

 
7

 
—

 
—

 
33

 
2

 
—

 
150

Loans Charged-off
 
(34
)
 
(212
)
 
—

 
(193
)
 
(93
)
 
(17
)
 
—

 
(549
)
Ending Balance
 
$
3,971

 
$
8,217

 
$
870

 
$
209

 
$
203

 
$
301

 
$
693

 
$
14,464


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

 
$
8,335

 
$
946

 
$
239

 
$
188

 
$
281

 
$
612

 
$
14,584

Provision for Loan Losses
 
1,124

 
(1,546
)
 
226

 
148

 
296

 
229

 
73

 
550

Recoveries
 
97

 
785

 
—

 
42

 
127

 
14

 
—

 
1,065

Loans Charged-off
 
(87
)
 
(120
)
 
—

 
(51
)
 
(232
)
 
(117
)
 
—

 
(607
)
Ending Balance
 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685

 
$
15,592

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

 
$
8,931

 
$
989

 
$
141

 
$
214

 
$
186

 
$
504

 
$
15,520

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

 
100

 
133

 
189

 
(250
)
Recoveries
 
121

 
85

 
—

 
—

 
104

 
5

 
—

 
315

Loans Charged-off
 
(87
)
 
(538
)
 
—

 
(258
)
 
(215
)
 
(23
)
 
—

 
(1,121
)
Ending Balance
 
$
3,971

 
$
8,217

 
$
870

 
$
209

 
$
203

 
$
301

 
$
693

 
$
14,464


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

14

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

NOTE 5 - Loans (continued)

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

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
1,579

 
$
205

 
$
1,374

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively Evaluated for Impairment
 
13,981

 
4,912

 
6,075

 
1,172

 
378

 
379

 
380

 
685

Acquired with Deteriorated Credit Quality
 
32

 
—

 
5

 
—

 
—

 
—

 
27

 
—

Total Ending Allowance Balance
 
$
15,592

 
$
5,117

 
$
7,454

 
$
1,172

 
$
378

 
$
379

 
$
407

 
$
685


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
5,951

 
$
2,157

 
$
3,794

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans Collectively Evaluated for Impairment
 
1,428,066

 
376,176

 
576,848

 
204,792

 
85,474

 
48,615

 
136,161

 
—

Loans Acquired with Deteriorated Credit Quality
 
8,731

 
387

 
6,724

 
—

 
—

 
122

 
1,498

 
—

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

 
$
378,720

 
$
587,366

 
$
204,792

 
$
85,474

 
$
48,737

 
$
137,659

 
$
—


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

15

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

NOTE 5 - Loans (continued)

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Ending Allowance Balance Attributable to Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Individually Evaluated for Impairment
 
$
3,095

 
$
45

 
$
3,050

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Collectively Evaluated for Impairment
 
11,481

 
3,938

 
5,277

 
946

 
239

 
188

 
281

 
612

Acquired with Deteriorated Credit Quality
 
8

 
—

 
8

 
—

 
—

 
—

 
—

 
—

Total Ending Allowance Balance
 
$
14,584

 
$
3,983

 
$
8,335

 
$
946

 
$
239

 
$
188

 
$
281

 
$
612


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Loans Individually Evaluated for Impairment
 
$
8,458

 
$
2,114

 
$
6,344

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Loans Collectively Evaluated for Impairment
 
1,367,591

 
347,808

 
566,389

 
195,171

 
81,812

 
49,131

 
127,280

 
—

Loans Acquired with Deteriorated Credit Quality
 
14,753

 
1,981

 
10,871

 
—

 
—

 
134

 
1,767

 
—

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

 
$
351,903

 
$
583,604

 
$
195,171

 
$
81,812

 
$
49,265

 
$
129,047

 
$
—

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

 
 

 
 

Commercial and Industrial Loans and Leases
 
$
1,967

 
$
1,954

 
$
—

Commercial Real Estate Loans
 
2,660