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German American Bancorp, Inc. (GABC) SEC Filing 10-Q Quarterly report for the period ending Wednesday, September 30, 2020

German American Bancorp, Inc.

CIK: 714395 Ticker: GABC
        Exhibit 99.1

NEWS RELEASE

For additional information, contact:
Mark A Schroeder, Chairman & Chief Executive Officer of German American Bancorp, Inc.
Bradley M Rust, Executive Vice President/CFO of German American Bancorp, Inc.
(812) 482-1314


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October 26, 2020    GERMAN AMERICAN BANCORP, INC. (GABC) REPORTS THIRD QUARTER 2020 EARNINGS

Jasper, Indiana: October 26, 2020 -- German American Bancorp, Inc. (Nasdaq: GABC) reported third quarter earnings of $14.6 million, or $0.55 per share, for the quarter ending on September 30, 2020. The third quarter 2020 performance was an increase of approximately 12%, on a per share basis, compared to third quarter 2019 net income of $13.1 million, or $0.49 per share. The current quarterly earnings also represented an increase of approximately 2%, on a per share basis, as compared to second quarter 2020 net income of $14.3 million, or $0.54 per share.

Relative to the year-over-year comparison, third quarter 2020 earnings were positively impacted by a $1.2 million increase in non-interest income and a $2.5 million decrease in non-interest expenses. Partially offsetting this $3.7 million positive operating earnings impact was a $1.7 million increase in the current quarter’s provision for credit losses, which primarily enhanced the level of the Company’s allowance for credit losses in response to developments related to the COVID-19 pandemic and its potential future economic impact.

End-of-period loans, as of September 30, 2020, were approximately $3.2 billion, which represented an increase of $164 million, or approximately 5%, from end of period loans as of September 30, 2019. This comparison is inclusive of PPP loans of $342 million, net of fees, as of September 30, 2020. Total deposits at September 30, 2020 of approximately $4.0 billion increased by $548 million, or approximately 16%, relative to third quarter 2019 end-of-period total deposits. Approximately 65% of the deposit growth during the year-over-year current quarter comparison occurred within the extremely valuable non-interest bearing demand deposit category.

Commenting on the Company’s third quarter performance, Mark A. Schroeder, German American’s Chairman & CEO, stated, "In the face of an extremely difficult environment, we’re pleased to be able to report another period of very solid profitability during the third quarter of 2020, producing $14.6 million, or $0.55 per share, in earnings for the quarter, which was inclusive of a $4.5 million provision for credit losses. This level of profitability represented a 12% increase over third quarter 2019 earnings and is reflected in third quarter 2020 end of period tangible book value per share of $17.82, which increased by 11% from 2019 third quarter end of period tangible book value of $16.09 per share.”

Schroeder continued, “The current environment of extremely low general market interest rates makes it very difficult to drive growth of net interest income. Additionally, it’s prudent to continue to enhance the level of our allowance for credit losses until the future economic impact of the pandemic is more readily determinable. In spite of these headwinds, we were, nevertheless, able to generate very strong 12% year-


The following information was filed by German American Bancorp, Inc. (GABC) on Tuesday, October 27, 2020 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.

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, 2020
 
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 every Interactive Data File required to be submitted 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 such files).
 
Yes   x      No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company:
Large accelerated filerx
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting companyEmerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
Yes         No x
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, no par valueGABCNasdaq Global Select Market

As of November 1, 2020, the registrant had 26,492,256 outstanding shares of Common Stock, no par value.



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, 2019, 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 and supplemented from time to time by our subsequent SEC filings, including by the discussion under the heading “Forward-Looking Statements and Associated Risks” at the conclusion of Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and by the additional risk factors set forth in Part II, Item 1A, “Risk Factors” of this Report.

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INDEX
 
Glossary of Terms and Acronyms
PART I.            FINANCIAL INFORMATION
   
Item 1.Unaudited Financial Statements
   
 Consolidated Balance Sheets – September 30, 2020 and December 31, 2019
   
 Consolidated Statements of Income – Three Months Ended September 30, 2020 and 2019
Consolidated Statements of Income – Nine Months Ended September 30, 2020 and 2019
   
 Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2020 and 2019
   
Consolidated Statements of Changes in Shareholders' Equity - Three and Nine Months Ended September 30, 2020 and 2019
 Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2020 and 2019
   
 Notes to Consolidated Financial Statements – September 30, 2020
   
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 1.Legal Proceedings
   
Item 1A.Risk Factors
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
   
Item 6.Exhibits
   
SIGNATURES
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GLOSSARY OF TERMS AND ACRONYMS
As used in this Report, references to “Company,” “we,” “our,” “us,” and similar terms refer to German American Bancorp, Inc. and its consolidated subsidiaries as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc. and the term “Bank” when we mean to refer only to German American Bank, the Company’s bank subsidiary.
The terms and acronyms identified below are used throughout this Report, including the Notes to Consolidated Financial Statements. You may find it helpful to refer to this Glossary as you read this Report.
2009 ESPP:     German American Bancorp, Inc. 2009 Employee Stock Purchase Plan
2019 ESPP:     German American Bancorp, Inc. 2019 Employee Stock Purchase Plan
2019 LTI Plan:     German American Bancorp, Inc. 2019 Long-Term Equity Incentive Plan
ASC:     Accounting Standards Codification
ASU:     Accounting Standards Update
Basel III:    Regulatory capital reforms agreed to by the Basel Committee on Banking Supervision, as reflected in the final rule issued by the FRB and OCC and published in the Federal Register on October 11, 2013
CARES Act:    Coronavirus Aid, Relief and Economic Security Act
CBLR:     Community bank leverage ratio
CECL:     Current expected credit losses
CET1:     Common Equity Tier 1
Citizens First:     Citizens First Corporation
CMO:     Collateralized mortgage obligations
COVID-19:    Novel coronavirus disease 2019 declared, in March 2020, by the World Health Organization as a global pandemic and by the President of the United States as a national emergency
Dodd-Frank Act:     Dodd-Frank Wall Street Reform and Consumer Protection Act
FASB:     Financial Accounting Standards Board
FDIC:     Federal Deposit Insurance Corporation
federal banking
regulators:    The FRB, the OCC, and the FDIC, collectively
FHLB:     Federal Home Loan Bank
FRB:     Board of Governors of the Federal Reserve System
GAAP:    Generally Accepted Accounting Principles in the United States of America
LIBOR:    London Interbank Offered Rate
MBS:     Mortgage-backed securities
NPV:     Net portfolio value
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OCC:     Office of the Comptroller of the Currency
PCD:     Purchased with credit deterioration
PCI:    Purchased credit impaired
PPP:    Paycheck Protection Program established under the CARES Act
PPPL Facility:    Paycheck Protection Program Liquidity Facility authorized by the FRB pursuant to the Federal Reserve Act
SBA:    Small Business Administration
SEC:    Securities and Exchange Commission
TDR:    Troubled Debt Restructurings



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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,
2020
December 31,
2019
ASSETS  
Cash and Due from Banks$56,706 $59,971 
Federal Funds Sold and Other Short-term Investments192,987 43,913 
Cash and Cash Equivalents249,693 103,884 
Interest-bearing Time Deposits with Banks1,489 1,985 
Securities Available-for-Sale, at Fair Value (Amortized Cost $997,074, No Allowance for
     Credit Losses as of September 30, 2020)
1,036,910 854,825 
Other Investments353 353 
Loans Held-for-Sale, at Fair Value27,993 17,713 
Loans3,225,232 3,081,973 
Less: Unearned Income(4,105)(4,882)
Allowance for Credit Losses(46,768)(16,278)
Loans, Net3,174,359 3,060,813 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost13,168 13,968 
Premises, Furniture and Equipment, Net96,682 96,651 
Other Real Estate425 425 
Goodwill121,956 121,306 
Intangible Assets9,827 12,656 
Company Owned Life Insurance68,893 68,883 
Accrued Interest Receivable and Other Assets51,082 44,210 
TOTAL ASSETS$4,852,830 $4,397,672 
LIABILITIES  
Non-interest-bearing Demand Deposits$1,185,814 $832,985 
Interest-bearing Demand, Savings, and Money Market Accounts2,278,826 1,965,640 
Time Deposits515,034 631,396 
Total Deposits3,979,674 3,430,021 
FHLB Advances and Other Borrowings214,544 349,686 
Accrued Interest Payable and Other Liabilities54,631 44,145 
TOTAL LIABILITIES4,248,849 3,823,852 
SHAREHOLDERS’ EQUITY  
Common Stock, no par value, $1 stated value; 45,000,000 shares authorized
26,493 26,671 
Additional Paid-in Capital274,166 278,954 
Retained Earnings272,579 253,090 
Accumulated Other Comprehensive Income 30,743 15,105 
TOTAL SHAREHOLDERS’ EQUITY603,981 573,820 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY$4,852,830 $4,397,672 
End of period shares issued and outstanding26,492,866 26,671,368 




See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 Three Months Ended 
September 30,
 20202019
INTEREST INCOME  
Interest and Fees on Loans$36,543 $40,921 
Interest on Federal Funds Sold and Other Short-term Investments45 163 
Interest and Dividends on Securities:  
Taxable2,350 3,400 
Non-taxable3,175 2,427 
TOTAL INTEREST INCOME42,113 46,911 
INTEREST EXPENSE  
Interest on Deposits2,492 6,399 
Interest on FHLB Advances and Other Borrowings1,233 1,934 
TOTAL INTEREST EXPENSE3,725 8,333 
NET INTEREST INCOME38,388 38,578 
Provision for Credit Losses4,500 2,800 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES33,888 35,778 
NON-INTEREST INCOME  
Trust and Investment Product Fees1,957 1,885 
Service Charges on Deposit Accounts1,773 2,395 
Insurance Revenues1,989 1,883 
Company Owned Life Insurance355 364 
Interchange Fee Income2,795 2,538 
Other Operating Income942 1,029 
Net Gains on Sales of Loans2,861 1,649 
Net Gains on Securities607 313 
TOTAL NON-INTEREST INCOME13,279 12,056 
NON-INTEREST EXPENSE  
Salaries and Employee Benefits17,409 17,579 
Occupancy Expense2,418 2,797 
Furniture and Equipment Expense944 954 
FDIC Premiums326 — 
Data Processing Fees1,693 2,860 
Professional Fees875 1,324 
Advertising and Promotion708 1,054 
Intangible Amortization860 1,064 
Other Operating Expenses4,187 4,329 
TOTAL NON-INTEREST EXPENSE29,420 31,961 
Income before Income Taxes17,747 15,873 
Income Tax Expense3,154 2,809 
NET INCOME$14,593 $13,064 
Basic Earnings per Share$0.55 $0.49 
Diluted Earnings per Share$0.55 $0.49 
 



See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(unaudited, dollars in thousands except per share data)
 Nine Months Ended
September 30,
 20202019
INTEREST INCOME  
Interest and Fees on Loans$112,481 $111,086 
Interest on Federal Funds Sold and Other Short-term Investments287 389 
Interest and Dividends on Securities:
Taxable8,166 10,554 
Non-taxable8,291 7,107 
TOTAL INTEREST INCOME129,225 129,136 
INTEREST EXPENSE  
Interest on Deposits11,892 17,574 
Interest on FHLB Advances and Other Borrowings4,230 5,752 
TOTAL INTEREST EXPENSE16,122 23,326 
NET INTEREST INCOME113,103 105,810 
Provision for Credit Losses15,550 3,725 
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES97,553 102,085 
NON-INTEREST INCOME  
Trust and Investment Product Fees5,855 5,365 
Service Charges on Deposit Accounts5,375 6,319 
Insurance Revenues7,048 7,017 
Company Owned Life Insurance1,933 1,552 
Interchange Fee Income7,753 6,965 
Other Operating Income2,251 2,361 
Net Gains on Sales of Loans7,378 3,660 
Net Gains on Securities2,190 984 
TOTAL NON-INTEREST INCOME39,783 34,223 
NON-INTEREST EXPENSE  
Salaries and Employee Benefits50,691 46,740 
Occupancy Expense7,461 7,367 
Furniture and Equipment Expense2,963 2,815 
FDIC Premiums449 533 
Data Processing Fees5,142 6,246 
Professional Fees3,041 3,825 
Advertising and Promotion2,661 2,860 
Intangible Amortization2,729 2,709 
Other Operating Expenses12,699 11,243 
TOTAL NON-INTEREST EXPENSE87,836 84,338 
Income before Income Taxes49,500 51,970 
Income Tax Expense8,180 8,568 
NET INCOME$41,320 $43,402 
Basic Earnings per Share$1.56 $1.70 
Diluted Earnings per Share$1.56 $1.70 




See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, dollars in thousands)
 
 Three Months Ended
September 30,
 20202019
NET INCOME$14,593 $13,064 
Other Comprehensive Income (Loss):  
Unrealized Gains (Losses) on Securities:  
Unrealized Holding Gain (Loss) Arising During the Period63 6,223 
Reclassification Adjustment for Gains Included in Net Income(607)(313)
Tax Effect138 (1,261)
Net of Tax(406)4,649 
Total Other Comprehensive Income (Loss)(406)4,649 
COMPREHENSIVE INCOME$14,187 $17,713 
 

 
 



 Nine Months Ended
September 30,
 20202019
NET INCOME$41,320 $43,402 
Other Comprehensive Income:  
Unrealized Gains (Losses) on Securities:  
Unrealized Holding Gain (Loss) Arising During the Period22,051 30,262 
Reclassification Adjustment for Gains Included in Net Income(2,190)(984)
Tax Effect(4,223)(6,324)
Net of Tax15,638 22,954 
Total Other Comprehensive Income15,638 22,954 
COMPREHENSIVE INCOME$56,958 $66,356 









See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited, dollars in thousands)
Common Stock
 SharesAmountAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Shareholders' Equity
Balances, December 31, 201926,671,368 $26,671 $278,954 $253,090 $15,105 $573,820 
Cumulative Effect of Change in Accounting Principles (See Note 2 - Recent Accounting Pronouncements)(6,717)(6,717)
Balances, January 1, 202026,671,368 26,671 278,954 246,373 15,105 567,103 
Net Income12,472 12,472 
Other Comprehensive Income 13,255 13,255 
Cash Dividends ($0.19 per share)
(5,065)(5,065)
Issuance of Common Stock for:
Restricted Share Grants41,752 42 228 270 
Stock Repurchase(173,089)(173)(4,322)(4,495)
Balances, March 31, 202026,540,031 $26,540 $274,860 $253,780 $28,360 $583,540 
Net Income 14,255 14,255 
Other Comprehensive Income 2,789 2,789 
Cash Dividends ($0.19 per share)
 (5,024)(5,024)
Issuance of Common Stock for:    
Restricted Share Grants1,426 281 282 
Stock Repurchase(44,166)(44)(1,124)(1,168)
Balances, June 30, 202026,497,291 $26,497 $274,017 $263,011 $31,149 $594,674 
Net Income 14,593 14,593 
Other Comprehensive Income (Loss) (406)(406)
Cash Dividends ($0.19 per share)
 (5,025)(5,025)
Issuance of Common Stock for:    
Restricted Share Grants(378)— 254 254 
Stock Repurchase(4,047)(4)(105)(109)
Balances, September 30, 202026,492,866 $26,493 $274,166 $272,579 $30,743 $603,981 













See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited, dollars in thousands)
Common Stock
 SharesAmountAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Total Shareholders' Equity
Balances, December 31, 201824,967,458 $24,967 $229,347 $211,424 $(7,098)$458,640 
Net Income15,067 15,067 
Other Comprehensive Income9,414 9,414 
Cash Dividends ($0.17 per share)
(4,245)(4,245)
Issuance of Common Stock for:
Restricted Share Grants24,780 25 286 311 
Balances, March 31, 201924,992,238 $24,992 $229,633 $222,246 $2,316 $479,187 
Net Income 15,271 15,271 
Other Comprehensive Income 8,891 8,891 
Cash Dividends ($0.17 per share)
 (4,248)(4,248)
Issuance of Common Stock for:    
Restricted Share Grants310 310 
Balances, June 30, 201924,992,238 $24,992 $229,943 $233,269 $11,207 $499,411 
Net Income 13,064 13,064 
Other Comprehensive Income 4,649 4,649 
Cash Dividends ($0.17 per share)
 (4,532)(4,532)
Issuance of Common Stock for:   
Acquisition of Citizens First Corporation1,663,954 1,664 48,360 50,024 
Restricted Share Grants5,886 305 311 
Balances, September 30, 201926,662,078 $26,662 $278,608 $241,801 $15,856 $562,927 



















See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)
 Nine Months Ended 
September 30,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES  
Net Income$41,320 $43,402 
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:  
Net Amortization on Securities4,097 2,845 
Depreciation and Amortization7,043 6,364 
Loans Originated for Sale(230,399)(143,041)
Proceeds from Sales of Loans Held-for-Sale226,237 131,921 
Provision for Credit Losses15,550 3,725 
Gain on Sale of Loans, net(7,378)(3,660)
Gain on Securities, net(2,190)(984)
Gain on Sales of Other Real Estate and Repossessed Assets(48)— 
Loss on Disposition and Donation of Premises and Equipment127 — 
Loss (Gain) on Disposition of Land30 (352)
Increase in Cash Surrender Value of Company Owned Life Insurance(1,092)(1,034)
Equity Based Compensation813 927 
Change in Assets and Liabilities:  
Interest Receivable and Other Assets(6,046)94 
Interest Payable and Other Liabilities8,114 5,581 
Net Cash from Operating Activities56,178 45,788 
CASH FLOWS FROM INVESTING ACTIVITIES  
Proceeds from Maturity of Other Short-term Investments496 496 
Proceeds from Maturities of Securities Available-for-Sale139,679 78,134 
Proceeds from Sales of Securities Available-for-Sale74,693 75,299 
Purchase of Securities Available-for-Sale(378,503)(119,010)
Proceeds from Redemption of Federal Home Loan Bank Stock800 1,145 
Purchase of Loans— (657)
Loans Made to Customers, net of Payments Received(138,132)24,832 
Proceeds from Sales of Other Real Estate316 369 
Property and Equipment Expenditures(5,162)(5,619)
Proceeds from Sale of Land612 1,022 
Proceeds from Life Insurance1,082 1,019 
Acquisition of Citizens First Corporation— 5,545 
Net Cash from Investing Activities(304,119)62,575 
CASH FLOWS FROM FINANCING ACTIVITIES  
Change in Deposits550,003 (11,975)
Change in Short-term Borrowings(94,756)(123,651)
Advances in Long-term Debt— 90,000 
Repayments of Long-term Debt(40,604)(57,134)
Issuance (Repurchase) of Common Stock(5,779)
Dividends Paid(15,114)(13,025)
Net Cash from Financing Activities393,750 (115,779)
Net Change in Cash and Cash Equivalents145,809 (7,416)
Cash and Cash Equivalents at Beginning of Year103,884 96,550 
Cash and Cash Equivalents at End of Period$249,693 $89,134 
Cash Paid During the Period for
Interest$16,796 $22,450 
Income Taxes8,000 7,039 
Supplemental Non Cash Disclosures  
Loans Transferred to Other Real Estate$— $708 
Reclassification of Land and Buildings to Other Assets— 1,471 
Right of Use Asset Obtained in Exchange for Lease Liabilities— 9,034 
See accompanying notes to consolidated financial statements.
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GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)
NOTE 1 – Basis of Presentation and Market Conditions
 
German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries (hereinafter collectively referred to as the "Company") conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. 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 shareholders' equity based on these reclassifications.

Impact of COVID-19
On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. While many states have lifted quarantine and lock-down orders on a limited basis and with certain social distancing restrictions, commercial activity has not yet returned to the levels existing prior to the pandemic outbreak. As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted.
Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of goodwill, right-of-use lease assets, and other real estate owned could decrease resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. As a result, it is not currently possible to ascertain the continued impact of COVID-19 on the Company’s business. However, if the pandemic continues as a prolonged worldwide health crisis, the disease could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows.

NOTE 2 - Recent Accounting Pronouncements

Loan Modifications and Troubled Debt Restructures due to COVID-19
On April 7, 2020, the Board of Governors of the Federal Reserve System (the "FRB"), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the FRB and OCC, the “federal banking regulators”) issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructures and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructures.

Recently Adopted Accounting Guidance
In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan
13


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 2 - Recent Accounting Pronouncements (continued)
receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). The new CECL model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgement with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses.

The Company adopted ASC 326 on January 1, 2020 using the modified restrospective approach. Results for reporting periods after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $6,717 upon adoption.

The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $6,886 of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020.

The Company expanded the loan portfolio segments used to determine the allowance for credit losses for loans into eight loan segments as opposed to six loan segments under the incurred loss methodology. The following table illustrates the impact of the segment expansion as of January 1, 2020.
(dollars in thousands)December 31, 2019 Statement BalanceSegment Portfolio ReclassificationsDecember 31, 2019 After Reclassification
Loans:
Commercial and Industrial Loans$589,758 $(57,257)$532,501 
Commercial Real Estate Loans1,495,862 N/A1,495,862 
Agricultural Loans384,526 N/A384,526 
LeasesN/A57,257 57,257 
Home Equity Loans225,755 N/A225,755 
Consumer Loans81,217 (11,953)69,264 
Credit CardsN/A11,953 11,953 
Residential Mortgage Loans304,855 N/A304,855 
  Total Loans$3,081,973 $— $3,081,973 


14


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 2 - Recent Accounting Pronouncements (continued)
The following table illustrates the impact of ASC 326:
(dollars in thousands)December 31, 2019 After ReclassificationImpact of ASC 326 AdoptionJanuary 1, 2020 Post-ASC 326 Adoption
Assets:
  Loans:
    Commercial and Industrial Loans$532,501 $2,191 $534,692 
    Commercial Real Estate Loans1,495,862 4,385 1,500,247 
    Agricultural Loans384,526 128 384,654 
    Leases57,257 — 57,257 
    Home Equity Loans225,755 35 225,790 
    Consumer Loans69,264 — 69,264 
    Credit Cards11,953 — 11,953 
    Residential Mortgage Loans304,855 147 305,002 
      Allowance for Credit Losses on Loans(16,278)(15,653)(31,931)
Liabilities:
Allowance for Credit Losses on Unfunded Loan Commitments$— $(173)$(173)

In December 2018, federal banking regulators approved a final rule to address changes to credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of the new accounting standard. On March 27, 2020, in an action related to the CARES Act, the federal banking regulators announced an interim final rule to delay the estimated impact on regulatory capital stemming from the implementation of CECL. The interim final rule maintains the three-year transition option in the previous rule and provides banks the option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). The Company is adopting the capital transition relief over the permissible five-year period.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. Amortized cost is the principal balance outstanding, net of purchase premiums and discounts, deferred loan fees and costs. Accrued interest receivable totaled $14,995 at September 30, 2020 and was reported in Accrued Interest Receivable and Other Assets on the Consolidated Balance Sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Purchase Credit Deteriorated (PCD) Loans
The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses on loans is determined using the same methodology as other loans held for investment. The initial allowance for credit losses on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on loans are recorded through provision expense.

Allowance for Credit Losses - Loans
The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.
15


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 2 - Recent Accounting Pronouncements (continued)

The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values.

The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods:

Commercial and Industrial Loans - The principal risk of commercial and industrial loans is that these loans are primarily based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most commercial loans are secured by accounts receivable, inventory and equipment. If cash flow from business operations is reduced, the borrower's ability to repay the loan may diminish, and over time, it may also be difficult to substantiate current value of inventory and equipment. Repayment of these loans are more sensitive than other types of loans to adverse conditions in the general economy.

Commercial Real Estate Loans - Commercial real estate lending is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans are collateralized by the borrower's underlying real estate. Therefore, diminished cash flows not only affects the ability to repay the loan, it may also reduce the underlying collateral value.

Agricultural Loans - This portfolio is diversified between real estate financing, equipment financing and lines of credit in various segments including grain production, poultry production and livestock production. Mitigating any concentration of risk that may exist in the Company's agricultural loan portfolio is the use of federal government guarantee programs.

Leases - Leases are primarily for equipment leased to varying types of businesses. If the cash flows from the business operations is reduced, the business's ability to repay the lease is diminished as well.

Home Equity Loans - Home equity loans are generally secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions.

Consumer Loans - Consumer loan repayment is typically dependent on the borrower remaining employed through the life of the loan as well as the borrower maintaining the underlying collateral adequately.

Credit Cards - Credit card loan are unsecured and repayment is primarily dependent on the personal income of the borrower.

Residential Mortgage Loans - Residential mortgage loans are typically secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs.

Troubled Debt Restructurings (“TDR”)
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The allowances for credit losses on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the
16


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 2 - Recent Accounting Pronouncements (continued)
rate specified within the restructuring. See “Loan Modifications and Troubled Debt Restructures due to COVID-19” at the beginning of this Note 2 for additional information.

Allowance for Credit Losses on Available-For-Sale Securities
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recorded in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense included in other expense on the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected utilization rates are compared to the current funded portion of the total commitment amount as a practical expedient for funded exposure at default.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update became effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and did not have a material impact on the Company's financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update became effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019 and did not have a material impact on the Company's financial statements. 

17


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 2 - Recent Accounting Pronouncements (continued)
Accounting Guidance Issued But Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements on an ongoing basis with no material expected impact at this time.

NOTE 3 – Per Share Data
 
The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows:
 Three Months Ended 
September 30,
 20202019
Basic Earnings per Share:  
Net Income$14,593 $13,064 
Weighted Average Shares Outstanding26,497,398 26,643,064 
Basic Earnings per Share$0.55 $0.49 
Diluted Earnings per Share:  
Net Income$14,593 $13,064 
Weighted Average Shares Outstanding26,497,398 26,643,064 
Potentially Dilutive Shares, Net— — 
Diluted Weighted Average Shares Outstanding26,497,398 26,643,064 
Diluted Earnings per Share$0.55 $0.49 
For the three months ended September 30, 2020 and 2019, there were no anti-dilutive shares.

 Nine Months Ended 
September 30,
 20202019
Basic Earnings per Share:  
Net Income$41,320 $43,402 
Weighted Average Shares Outstanding26,554,369 25,541,843 
Basic Earnings per Share$1.56 $1.70 
Diluted Earnings per Share:  
Net Income$41,320 $43,402 
Weighted Average Shares Outstanding26,554,369 25,541,843 
Potentially Dilutive Shares, Net— — 
Diluted Weighted Average Shares Outstanding26,554,369 25,541,843 
Diluted Earnings per Share$1.56 $1.70 
For the nine months ended September 30, 2020 and 2019, there were no anti-dilutive shares.
18


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)
NOTE 4 – Securities 

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows:
Securities Available-for-Sale: Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Allowance for Credit Losses Fair
Value
    
September 30, 2020    
Obligations of State and Political Subdivisions$489,070 $25,928 $(986)$— $514,012 
MBS/CMO508,004 14,957 (63)— 522,898 
Total$997,074 $40,885 $(1,049)$— $1,036,910 
December 31, 2019    
Obligations of State and Political Subdivisions$307,943 $16,366 $(9)$— $324,300 
MBS/CMO526,907 5,414 (1,796)— 530,525 
Total$834,850 $21,780 $(1,805)$— $854,825 
 
All mortgage-backed securities in the above table (identified above and throughout this Note 4 as "MBS/CMO") are residential and multi-family mortgage-backed securities and guaranteed by government sponsored entities.

The amortized cost and fair value of Securities at September 30, 2020 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 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$4,737 $4,806 
Due after one year through five years17,524 18,128 
Due after five years through ten years73,405 78,053 
Due after ten years393,404 413,025 
MBS/CMO508,004 522,898 
Total$997,074 $1,036,910 
  

Proceeds from the Sales of Securities are summarized below:
 Three Months EndedThree Months Ended
 September 30, 2020September 30, 2019
Proceeds from Sales$11,270 $53,025 
Gross Gains on Sales607 313 
Income Taxes on Gross Gains127 66 
19


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 4 - Securities (continued)
 Nine Months EndedNine Months Ended
 September 30, 2020September 30, 2019
Proceeds from Sales$74,693 $75,299 
Gross Gains on Sales2,190 984 
Income Taxes on Gross Gains464 207 
The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $224,379 and $245,664 as of September 30, 2020 and December 31, 2019, respectively.

Below is a summary of securities with unrealized losses as of September 30, 2020 and December 31, 2019, presented by length of time the securities have been in a continuous unrealized loss position:
 Less than 12 Months12 Months or MoreTotal
September 30, 2020Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Obligations of State and Political Subdivisions$66,378 $(986)$— $— $66,378 $(986)
MBS/CMO32,902 (63)— 32,906 (63)
Total$99,280 $(1,049)$$— $99,284 $(1,049)

 Less than 12 Months12 Months or MoreTotal
December 31, 2019Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Obligations of State and Political Subdivisions$4,631 $(9)$— $— $4,631 $(9)
MBS/CMO89,267 (241)155,989 (1,555)245,256 (1,796)
Total$93,898 $(250)$155,989 $(1,555)$249,887 $(1,805)

Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, the Company assesses whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was needed at September 30, 2020. Accrued interest receivable on available-for-sale debt securities totaled $5,255 at September 30, 2020 and is excluded from the estimate of credit losses.

The Company's equity securities are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at September 30, 2020 and December 31, 2019. The original investment totaled $1,350 and other-than-temporary impairment was previously recorded totaling $997. The Company's equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. At September 30, 2020, there was no additional impairment recognized through earnings.
20


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 5 – 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 $109.5 million at September 30, 2020 and $102.4 million at December 31, 2019. 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.
The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of:
 September 30, 2020December 31, 2019
 Notional
Amount
Fair ValueNotional
Amount
Fair Value
Included in Other Assets:    
Interest Rate Swaps$109,485 $9,636 $102,351 $2,607 
Included in Other Liabilities:    
Interest Rate Swaps$109,485 $10,293 $102,351 $2,829 

The following table presents 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,
 2020201920202019
Interest Rate Swaps:  
Included in Other Operating Income$64 $314 $(169)$108 

21


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)
NOTE 6 – Loans
 
Loans were comprised of the following classifications at September 30:
 September 30,
2020
December 31,
2019
Commercial:
Commercial and Industrial Loans$781,547 $532,501 
Commercial Real Estate Loans1,453,280 1,495,862 
Agricultural Loans376,215 384,526 
Leases57,475 57,257 
Retail:
Home Equity Loans218,640 225,755 
Consumer Loans64,919 69,264 
Credit Cards10,717 11,953 
Residential Mortgage Loans262,439 304,855 
Subtotal3,225,232 3,081,973 
Less: Unearned Income(4,105)(4,882)
Allowance for credit losses(46,768)(16,278)
Loans, net$3,174,359 $3,060,813 

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives. For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted. Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion. The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act. For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years. The vast majority of the Company's PPP loans have two-year maturities. PPP loans earn interest at a fixed rate of 1% and are fully guaranteed by the U.S. government. As of September 30, 2020, the Bank had approximately $351.3 million outstanding, on 3,070 PPP loan relationships under this program, all of which are included above in the Commercial and Industrial Loan category. The Company anticipates that the majority of the PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of October 31, 2020, 603 of our loans totaling $113 million have been submitted to the SBA for forgiveness.
22


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)
Allowance for Credit Losses for Loans

The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended September 30, 2020:
September 30, 2020Commercial and Industrial
Loans
Commercial Real Estate LoansAgricultural
Loans
LeasesConsumer LoansHome Equity LoansCredit CardsResidential Mortgage LoansUnallocatedTotal
Allowance for Credit Losses:
Beginning balance $8,787 $22,369 $7,030 $202 $496 $1,062 $125 $2,360 $— $42,431 
Provision for credit loss expense(1,017)5,931 (315)70 — 39 (212)— 4,500 
Loans charged-off(73)(9)— — (138)(67)(27)(8)— (322)
Recoveries collected91 — — 64 — — — 159 
Total ending allowance balance$7,700 $28,382 $6,715 $206 $492 $995 $137 $2,141 $— $46,768 


The following table presents the activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2020:
September 30, 2020Commercial and Industrial
Loans
Commercial Real Estate LoansAgricultural
Loans
LeasesConsumer LoansHome Equity LoansCredit CardsResidential Mortgage LoansUnallocatedTotal
Allowance for Credit Losses:
Beginning balance prior to adoption of ASC 326$4,799 $4,692 $5,315 $— $434 $200 $— $333 $505 $16,278 
Impact of adopting ASC 3262,245 3,063 1,438 105 (59)762 124 1,594 (505)8,767 
Impact of adopting ASC 326 - PCD Loans2,191 4,385 128 — — 35 — 147 — 6,886 
Provision for credit loss expense(1,182)16,145 (166)101 385 65 98 104 — 15,550 
Initial allowance on loans purchased with credit deterioration— — — — — — — — — — 
Loans charged-off(369)(9)— — (520)(67)(86)(39)— (1,090)
Recoveries collected16 106 — — 252 — — 377 
Total ending allowance balance$7,700 $28,382 $6,715 $206 $492 $995 $137 $2,141 $— $46,768 

The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist.

Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs.

The Company utilizes the Static Pool methodology in determining expected future credit losses. Static pool analysis means segmenting and tracking loans over a period of time based on similar risk characteristics such as loan structure, collateral type, industry of borrower and concentrations, contractual terms and credit risk indicators. Static pool calculates a loss rate on a closed pool of loans that existed on a specified start date based upon the remaining life of each segment.
23


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The Company's expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look-back period includes January 2014 through the current period, on a monthly basis.

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration industry and collateral concentrations, acquired loan portfolio characteristics and other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.
For the nine months ended September 30, 2020, the allowance for credit losses increased primarily due to macroeconomic factors surrounding the COVID-19 pandemic. While there continues to be great uncertainty related to COVID-19 on our borrowers and communities, we have recognized significant declines in employment and gross domestic product which are key indicators utilized in our forecasting for our allowance calculations. Based on the potential increased losses related to the economic impact of the COVID-19 pandemic, the bank has considered this loss experience may align with loss experience from the recessionary period from 2008-2011 and qualitative adjustments have been made accordingly. Since PPP loans are guaranteed by the Small Business Administration (SBA), they have minimal impact on the allowance for credit losses.

All classes of loans, including loans acquired with deteriorated credit quality, are generally placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection.

The following table presents the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing as of September 30, 2020:
September 30, 2020Non-Accrual With No Allowance for Credit LossNon-AccrualLoans Past Due Over 89 Days Still Accruing
Commercial and Industrial Loans$1,350 $8,519 $— 
Commercial Real Estate Loans5,657 10,282 — 
Agricultural Loans2,015 2,643 — 
Leases— — — 
Home Equity Loans200 200 — 
Consumer Loans61 105 — 
Credit Cards66 66 — 
Residential Mortgage Loans770 1,063 — 
Total$10,119 $22,878 $— 
Interest income on non-accrual loans recognized during the three and nine months ended September 30, 2020 totaled $1 and $17, respectively.
24


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)
The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2020:
September 30, 2020Real EstateEquipmentAccounts ReceivableOtherTotal
Commercial and Industrial Loans$4,973 $3,380 $699 $41 $9,093 
Commercial Real Estate Loans13,036 — — 1,604 14,640 
Agricultural Loans3,069 — — 3,070 
Leases— — — — — 
Home Equity Loans415 — — — 415 
Consumer Loans39 — 47 
Credit Cards— — — — — 
Residential Mortgage Loans1,043 — — — 1,043 
Total$22,575 $3,383 $699 $1,651 $28,308 

The following table presents the aging of the amortized cost basis in past due loans by class of loans as of September 30, 2020:
September 30, 202030-59 Days Past Due60-89 Days Past DueGreater Than 89 Days Past DueTotal
Past Due
Loans Not Past DueTotal
Commercial and Industrial Loans$35 $160 $4,488 $4,683 $776,864 $781,547 
Commercial Real Estate Loans1,637 — 958 2,595 1,450,685 1,453,280 
Agricultural Loans— 578 73 651 375,564 376,215 
Leases— — — — 57,475 57,475 
Home Equity Loans401 113 200 714 217,926 218,640 
Consumer Loans259 61 84 404 64,515 64,919 
Credit Cards147 29 66 242 10,475 10,717 
Residential Mortgage Loans3,281 1,947 812 6,040 256,399 262,439 
Total$5,760 $2,888 $6,681 $15,329 $3,209,903 $3,225,232 

Troubled Debt Restructurings:
 
In certain instances, the Company may choose to restructure the contractual terms of loans. A troubled debt restructuring occurs when the Bank grants a concession to the borrower that it would not otherwise consider due to a borrower’s financial difficulty.   In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Company’s internal underwriting policy. The Company uses the same methodology for loans acquired with deteriorated credit quality as for all other loans when determining whether the loan is a troubled debt restructuring.

As of September 30, 2020, the Company had troubled debt restructurings totaling $113. The Company had no specific allocation of allowance for these loans at September 30, 2020.
  
The Company had not committed to lending any additional amounts as of September 30, 2020 and December 31, 2019 to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and nine months ended September 30, 2020 and 2019, the Company had no loans modified as troubled debt restructurings. Additionally, there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2020 and 2019.

A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms.
25


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)
Loan Modifications and Troubled Debt Restructurings due to COVID-19

On April 7, 2020, the federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings. Accordingly, the Company is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due.

As of September 30, 2020, the following active payment modifications are still in effect. These payment modifications are significantly reduced from the level of active modifications as of June 30, 2020.
% of Loan Category
(Excludes PPP Loans)
Type of Loans
(dollars in thousands)
Number of LoansOutstanding Balance

As of 9/30/2020
As of 6/30/2020
Commercial & Industrial Loans24 $6,154 1.2 %10.8 %
Commercial Real Estate Loans44 82,986 5.7 %15.3 %
Agricultural Loans— — — %0.3 %
Consumer Loans
n/m (1)
0.4 %
Residential Mortgage Loans12 1,275 0.5 %8.2 %
Total81 $90,418 3.1 %10.4 %

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $250. This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings:
 
Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
 
Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
 
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.
26


GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)
Based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Term Loans Amortized Cost Basis by Origination Year
As of September 30, 202020202019201820172016PriorRevolving Loans Amortized Cost BasisTotal
Commercial and Industrial:
Risk Rating
   Pass$387,099 $95,812 $54,005 $37,396 $24,134 $55,538 $100,294 $754,278 
   Special Mention187 546 1,350 2,073 185 2,137 2,436 8,914 
   Substandard1,167 — 1,193 1,405 976 5,836 7,778 18,355 
   Doubtful— — — — — — — — 
Total Commercial & Industrial Loans$388,453 $96,358 $56,548 $40,874 $25,295 $63,511 $110,508 $781,547 
Commercial Real Estate:
Risk Rating
   Pass$195,078 $241,890 $204,211 $214,673 $186,951 $328,350 $35,405 $1,406,558 
   Special Mention527 3,038 1,798 4,511 2,025 15,173 247 27,319 
   Substandard— 1,119 1,995 1,777 4,343 10,169 — 19,403 
   Doubtful— — — — — — — — 
Total Commercial Real Estate Loans$195,605 $246,047 $208,004 $220,961 $193,319 $353,692 $35,652 $1,453,280 
Agricultural: