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2009 ESPP:	German American Bancorp, Inc. 2009 Employee Stock Purchase Plan

2009 LTI Plan:	German American Bancorp, Inc. 2009 Long-Term Equity Incentive 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

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

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NPV:	Net portfolio value

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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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 overall impact of COVID-19 on the Company’s business. However, if the pandemic continues to evolve into 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.

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 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

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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 Balance				Segment Portfolio Reclassifications				December 31, 2019 After Reclassification
Loans:
	Commercial and Industrial Loans		$	589,758			$	(57,257	)		$	532,501
	Commercial Real Estate Loans		1,495,862				N/A				1,495,862
	Agricultural Loans		384,526				N/A				384,526
	Leases		N/A				57,257				57,257
	Home Equity Loans		225,755				N/A				225,755
	Consumer Loans		81,217				(11,953		)		69,264
	Credit Cards		N/A				11,953				11,953
	Residential Mortgage Loans		304,855				N/A				304,855
	Total Loans		$	3,081,973			$	—			$	3,081,973

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The following table illustrates the impact of ASC 326:

(dollars in thousands)		December 31, 2019 After Reclassification				Impact of ASC 326 Adoption				January 1, 2020 Post-ASC 326 Adoption
Assets:
Loans:
Commercial and Industrial Loans		$	532,501			$	2,191			$	534,692
Commercial Real Estate Loans		1,495,862				4,385				1,500,247
Agricultural Loans		384,526				128				384,654
Leases		57,257				—				57,257
Home Equity Loans		225,755				35				225,790
Consumer Loans		69,264				—				69,264
Credit Cards		11,953				—				11,953
Residential Mortgage Loans		304,855				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 $14,726 at June 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.

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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 rate specified within the restructuring.

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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. 

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

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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.

 

The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows:

		Three Months Ended  June 30,
		2020				2019
Basic Earnings per Share:
Net Income		$	14,255			$	15,271
Weighted Average Shares Outstanding		26,502,731				24,992,238
Basic Earnings per Share		$	0.54			$	0.61
Diluted Earnings per Share:
Net Income		$	14,255			$	15,271
Weighted Average Shares Outstanding		26,502,731				24,992,238
Potentially Dilutive Shares, Net		—				—
Diluted Weighted Average Shares Outstanding		26,502,731				24,992,238
Diluted Earnings per Share		$	0.54			$	0.61

         

For the three months ended June 30, 2020 and 2019, there were no anti-dilutive shares.

		Six Months Ended  June 30,
		2020				2019
Basic Earnings per Share:
Net Income		$	26,727			$	30,338
Weighted Average Shares Outstanding		26,583,167				24,982,107
Basic Earnings per Share		$	1.01			$	1.21
Diluted Earnings per Share:
Net Income		$	26,727			$	30,338
Weighted Average Shares Outstanding		26,583,167				24,982,107
Potentially Dilutive Shares, Net		—				—
Diluted Weighted Average Shares Outstanding		26,583,167				24,982,107
Diluted Earnings per Share		$	1.01			$	1.21

For the six months ended June 30, 2020 and 2019, there were no anti-dilutive shares.

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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
June 30, 2020
Obligations of State and Political Subdivisions		$	387,562			$	24,612			$	(57	)		$	—			$	412,117
MBS/CMO		534,328				15,894				(69		)		—				550,153
Total		$	921,890			$	40,506			$	(126	)		$	—			$	962,270
December 31, 2019
Obligations of State and Political Subdivisions		$	307,943			$	16,366			$	(9	)		$	—			$	324,300
MBS/CMO		526,907				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 June 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		$	4,450			$	4,464
Due after one year through five years		18,499				19,149
Due after five years through ten years		65,930				70,284
Due after ten years		298,683				318,220
MBS/CMO		534,328				550,153
Total		$	921,890			$	962,270

  

Proceeds from the Sales of Securities are summarized below:

		Three Months Ended				Three Months Ended
		June 30, 2020				June 30, 2019
Proceeds from Sales		$	52,435			$	10,459
Gross Gains on Sales		993				516
Income Taxes on Gross Gains		209				108

		Six Months Ended				Six Months Ended
		June 30, 2020				June 30, 2019
Proceeds from Sales		$	63,424			$	22,274
Gross Gains on Sales		1,583				671
Income Taxes on Gross Gains		336				141

The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $241,349 and $245,664 as of June 30, 2020 and December 31, 2019, respectively.

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Below is a summary of securities with unrealized losses as of June 30, 2020 and December 31, 2019, presented by length of time the securities have been in a continuous unrealized loss position:

		Less than 12 Months								12 Months or More								Total
June 30, 2020		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Obligations of State and Political Subdivisions		$	13,881			$	(57	)		$	—			$	—			$	13,881			$	(57	)
MBS/CMO		32,126				(69		)		—				—				32,126				(69		)
Total		$	46,007			$	(126	)		$	—			$	—			$	46,007			$	(126	)

		Less than 12 Months								12 Months or More								Total
December 31, 2019		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
Obligations of State and Political Subdivisions		$	4,631			$	(9	)		$	—			$	—			$	4,631			$	(9	)
MBS/CMO		89,267				(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 June 30, 2020. Accrued interest receivable on available-for-sale debt securities totaled $4,720 at June 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 June 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 June 30, 2020, there was no additional impairment recognized through earnings.

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 $110.3 million at June 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.

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The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of:

		June 30, 2020								December 31, 2019
		Notional Amount				Fair Value				Notional Amount				Fair Value
Included in Other Assets:
Interest Rate Swaps		$	110,341			$	10,207			$	102,351			$	2,607
Included in Other Liabilities:
Interest Rate Swaps		$	110,341			$	10,929			$	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 June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Interest Rate Swaps:
Included in Other Operating Income		$	46			$	(132	)		$	(234	)		$	(206	)

 

Loans at June 30, 2020 were as follows: 

		June 30, 2020				December 31, 2019
Commercial:
Commercial and Industrial Loans		$	795,688			$	532,501
Commercial Real Estate Loans		1,473,234				1,495,862
Agricultural Loans		373,483				384,526
Leases		56,728				57,257
Retail:
Home Equity Loans		216,366				225,755
Consumer Loans		64,972				69,264
Credit Cards		10,217				11,953
Residential Mortgage Loans		280,246				304,855
Subtotal		3,270,934				3,081,973
Less: Unearned Income		(4,587		)		(4,882		)
Allowance for credit losses		(42,431		)		(16,278		)
Loans, net		$	3,223,916			$	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

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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. The Company anticipates that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of June 30, 2020, the Bank has $349,546 in loans under this program, all of which are included above in the Commercial and Industrial Loan category.

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 June 30, 2020:

June 30, 2020		Commercial and Industrial Loans				Commercial Real Estate Loans				Agricultural Loans				Leases				Consumer Loans				Home Equity Loans				Credit Cards				Residential Mortgage Loans				Unallocated				Total
Allowance for Credit Losses:
Beginning balance		$	8,814			$	17,310			$	6,485			$	172			$	455			$	977			$	124			$	2,304			$	—			$	36,641
Provision for credit loss expense		(31		)		5,049				545				30				109				85				26				87				—				5,900
Loans charged-off		—				—				—				—				(144		)		—				(25		)		(31		)		—				(200		)
Recoveries collected		4				10				—				—				76				—				—				—				—				90
Total ending allowance balance		$	8,787			$	22,369			$	7,030			$	202			$	496			$	1,062			$	125			$	2,360			$	—			$	42,431

The following table presents the activity in the allowance for credit losses by portfolio segment for the six months ended June 30, 2020:

June 30, 2020		Commercial and Industrial Loans				Commercial Real Estate Loans				Agricultural Loans				Leases				Consumer Loans				Home Equity Loans				Credit Cards				Residential Mortgage Loans				Unallocated				Total
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 326		2,245				3,063				1,438				105				(59		)		762				124				1,594				(505		)		8,767
Impact of adopting ASC 326 - PCD Loans		2,191				4,385				128				—				—				35				—				147				—				6,886
Provision for credit loss expense		(166		)		10,215				149				97				314				65				60				316				—				11,050
Initial allowance on loans purchased with credit deterioration		—				—				—				—				—				—				—				—				—				—
Loans charged-off		(296		)		—				—				—				(381		)		—				(60		)		(31		)		—				(768		)
Recoveries collected		14				14				—				—				188				—				1				1				—				218
Total ending allowance balance		$	8,787			$	22,369			$	7,030			$	202			$	496			$	1,062			$	125			$	2,360			$	—			$	42,431

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

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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.

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 six months ended June 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 begun to recognize 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 June 30, 2020:

June 30, 2020		Non-Accrual With No Allowance for Credit Loss				Non-Accrual				Loans Past Due Over 89 Days Still Accruing
Commercial and Industrial Loans		$	61			$	7,194			$	354
Commercial Real Estate Loans		259				4,540				—
Agricultural Loans		2,082				2,715				2,594
Leases		—				—				—
Home Equity Loans		209				258				—
Consumer Loans		62				114				—
Credit Cards		191				191				—
Residential Mortgage Loans		988				1,171				—
Total		$	3,852			$	16,183			$	2,948

Interest income on non-accrual loans recognized during the three and six months ended June 30, 2020 totaled $13 and $16, respectively.

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The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2020:

June 30, 2020		Real Estate				Equipment				Accounts Receivable				Other				Total
Commercial and Industrial Loans		$	5,311			$	940			$	744			$	965			$	7,960
Commercial Real Estate Loans		8,937				—				—				1,667				10,604
Agricultural Loans		3,125				—				—				3				3,128
Leases		—				—				—				—				—
Home Equity Loans		464				—				—				—				464
Consumer Loans		41				4				—				10				55
Credit Cards		—				—				—				—				—
Residential Mortgage Loans		943				—				—				—				943
Total		$	18,821			$	944			$	744			$	2,645			$	23,154

The following table presents the aging of the amortized cost basis in past due loans by class of loans as of June 30, 2020:

June 30, 2020		30-59 Days Past Due				60-89 Days Past Due				Greater Than 89 Days Past Due				Total Past Due				Loans Not Past Due				Total
Commercial and Industrial Loans		$	238			$	171			$	5,126			$	5,535			$	790,153			$	795,688
Commercial Real Estate Loans		169				37				1,126				1,332				1,471,902				1,473,234
Agricultural Loans		927				89				2,594				3,610				369,873				373,483
Leases		—				—				—				—				56,728				56,728
Home Equity Loans		539				87				258				884				215,482				216,366
Consumer Loans		608				11				91				710				64,262				64,972
Credit Cards		70				34				191				295				9,922				10,217
Residential Mortgage Loans		3,279				1,476				985				5,740				274,506				280,246
Total		$	5,830			$	1,905			$	10,371			$	18,106			$	3,252,828			$	3,270,934

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 June 30, 2020, the Company had troubled debt restructurings totaling $114. The Company has no specific allocation of allowance for these loans at June 30, 2020.

  

The Company had not committed to lending any additional amounts as of June 30, 2020 and December 31, 2019 to customers with outstanding loans that are classified as troubled debt restructurings.

During the three and six months ended June 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 six months ended June 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.

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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 June 30, 2020, the following payment modifications have been made:

Type of Loans		Number of Loans			Loan Balance				% of Loan Type (excludes PPP Loans)
(dollars in thousands)
Commercial & Industrial Loans		257			$	54,300			10.8	%
Commercial Real Estate Loans		392			224,664				15.3	%
Agricultural Loans		8			1,175				0.3	%
Consumer Loans		80			1,115				0.4	%
Residential Mortgage Loans		110			23,103				8.2	%
Total		847			$	304,357			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.

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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 June 30, 2020		2020				2019				2018				2017				2016				Prior				Revolving Loans Amortized Cost Basis				Total
Commercial and Industrial:
Risk Rating
Pass		$	369,836			$	103,058			$	55,284			$	39,975			$	26,295			$	60,942			$	110,480			$	765,870
Special Mention		53				363				1,354				2,211				185				1,859				2,470				8,495
Substandard		1,980				—				1,393				1,427				1,164				7,396				7,963				21,323
Doubtful		—				—				—				—				—				—				—				—
Total Commercial & Industrial Loans		$	371,869			$	103,421			$	58,031			$	43,613			$	27,644			$	70,197			$	120,913			$	795,688
Commercial Real Estate:
Risk Rating
Pass		$	141,956			$	243,084			$	219,374			$	227,575			$	202,118			$	357,949			$	35,066			$	1,427,122
Special Mention		207				2,936				4,209				4,134				2,042				17,108				1,034				31,670
Substandard		—				403				2,212				1,915				1,348				8,564				—				14,442
Doubtful		—				—				—				—				—				—				—				—
Total Commercial Real Estate Loans		$	142,163			$	246,423			$	225,795			$	233,624			$	205,508			$	383,621			$	36,100			$	1,473,234
Agricultural:
Risk Rating
Pass		$	26,853			$	30,206			$	36,271			$	36,205			$	24,406			$	72,472			$	76,836			$	303,249
Special Mention		5,318				6,853				2,262				8,137				2,351				16,228				15,694				56,843
Substandard		598				162				393				1,309				4,504				6,245				180				13,391
Doubtful		—				—				—				—				—				—				—				—
Total Agricultural Loans		$	32,769			$	37,221			$	38,926			$	45,651			$	31,261			$	94,945			$	92,710			$	373,483
Leases:
Risk Rating
Pass		$	9,796			$	21,094			$	11,110			$	6,944			$	2,892			$	4,892			$	—			$	56,728
Special Mention		—				—				—				—				—				—				—				—
Substandard		—				—				—				—				—				—				—				—
Doubtful		—				—				—				—				—				—				—				—
Total Leases		$	9,796			$	21,094			$	11,110			$	6,944			$	2,892			$	4,892			$	—			$	56,728

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The Company considers the performance of the loan portfolio and its impact on the allowance for credit losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity.  The following table presents the amortized cost in residential, home equity and consumer loans based on payment activity.

		Term Loans Amortized Cost Basis by Origination Year
As of June 30, 2020		2020				2019				2018				2017				2016				Prior				Revolving Loans Amortized Cost Basis				Total
Consumer:
Payment performance
Performing		$	15,307			$	28,274			$	11,631			$	3,624			$	1,690			$	2,718			$	1,614			$	64,858
Nonperforming		—				10				—				2				3				68				31				114
Total Consumer Loans		$	15,307			$	28,284			$	11,631			$	3,626			$	1,693			$	2,786			$	1,645			$	64,972
Home Equity:
Payment performance
Performing		$	—			$	—			$	34			$	46			$	70			$	394			$	215,564			$	216,108
Nonperforming		—				—				—				—				—				—				258				258
Total Home Equity Loans		$	—			$	—			$	34			$	46			$	70			$	394			$	215,822			$	216,366
Residential Mortgage:
Payment performance
Performing		$	19,294			$	29,331			$	40,343			$	36,049			$	32,247			$	121,812			$	—			$	279,076
Nonperforming		—				—				—				—				162				1,008				—				1,170
Total Residential Mortgage Loans		$	19,294			$	29,331			$	40,343			$	36,049			$	32,409			$	122,820			$	—			$	280,246

The Company considers the performance of the loan portfolio and its impact on the allowance for credit loan losses. For certain retail loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in retail loans based on payment activity:

As of June 30, 2020		Credit Cards
Performing		$	10,026
Nonperforming		191
Total		$	10,217

The following table presents loans purchased and/or sold during the year by portfolio segment:

June 30, 2020		Commercial and Industrial Loans				Commercial Real Estate Loans				Agricultural Loans				Leases				Consumer Loans				Home Equity Loans				Credit Cards				Residential Mortgage Loans				Total
Purchases		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Sales		—				524				—				—				—				—				—				—				524

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Allowance for Loan Losses

Prior to the adoption of ASC 326 on January 1, 2020, the Company calculated the allowance for loan losses using the incurred loss methodology. The following tables are disclosures related to the allowance for loan losses in prior periods.

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ended June 30, 2019:

June 30, 2019		Commercial and Industrial Loans and Leases				Commercial Real Estate Loans				Agricultural Loans				Home Equity Loans				Consumer Loans				Residential Mortgage Loans				Unallocated				Total
Beginning Balance		$	3,317			$	5,741			$	5,453			$	214			$	483			$	429			$	606			$	16,243
Provision for Loan Losses		(303		)		104				272				54				124				(47		)		46				250
Recoveries		34				14				—				—				93				3				—				144
Loans Charged-off		(56		)		(18		)		—				(10		)		(278		)		(36		)		—				(398		)
Ending Balance		$	2,992			$	5,841			$	5,725			$	258			$	422			$	349			$	652			$	16,239

The following table presents the activity in the allowance for loan losses by portfolio class for the six months ended June 30, 2019:

June 30, 2019		Commercial and Industrial Loans and Leases				Commercial Real Estate Loans				Agricultural Loans				Home Equity Loans				Consumer Loans				Residential Mortgage Loans				Unallocated				Total
Beginning Balance		$	2,953			$	5,291			$	5,776			$	229			$	420			$	472			$	682			$	15,823
Provision for Loan Losses		44				669				(51		)		39				333				(79		)		(30		)		925
Recoveries		51				19				—				—				214				6				—				290
Loans Charged-off		(56		)		(138		)		—				(10		)		(545		)		(50		)		—				(799		)
Ending Balance		$	2,992			$	5,841			$	5,725			$	258			$	422			$	349			$	652			$	16,239

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of December 31, 2019:

December 31, 2019		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		$	2,971			$	2,412			$	559			$	—			$	—			$	—			$	—			$	—
Collectively Evaluated for Impairment		12,902				2,387				3,733				5,315				200				434				328				505
Acquired with Deteriorated Credit Quality		405				—				400				—				—				—				5				—
Total Ending Allowance Balance		$	16,278			$	4,799			$	4,692			$	5,315			$	200			$	434			$	333			$	505
Loans:
Loans Individually Evaluated for Impairment		$	6,269			$	4,707			$	1,562			$	—			$	—			$	—			$	—			n/m(2)
Loans Collectively Evaluated for Impairment		3,076,835				585,328				1,491,090				387,710				226,406				81,429				304,872				n/m(2)
Loans Acquired with Deteriorated Credit Quality		12,798				1,368				7,212				3,161				369				—				688				n/m(2)
Total Ending Loans Balance (1)		$	3,095,902			$	591,403			$	1,499,864			$	390,871			$	226,775			$	81,429			$	305,560			n/m(2)

 

⁽¹⁾ Total recorded investment in loans includes $13,929 in accrued interest.

⁽²⁾n/m = not meaningful

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2019:

December 31, 2019		Unpaid Principal Balance(1)				Recorded Investment				Allowance for Loan Losses Allocated
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases		$	3,638			$	524			$	—
Commercial Real Estate Loans		4,738				2,058				—
Agricultural Loans		3,294				2,738				—
Subtotal		11,670				5,320				—
With An Allowance Recorded:
Commercial and Industrial Loans and Leases		5,042				4,521				2,412
Commercial Real Estate Loans		2,187				1,865				959
Agricultural Loans		—				—				—
Subtotal		7,229				6,386				3,371
Total		$	18,899			$	11,706			$	3,371
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)		$	9,994			$	4,624			$	—
Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)		$	1,134			$	813			$	400

 

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

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The following table presents the average balance and related interest income of loans individually evaluated for impairment by class of loans for the three month period ended June 30, 2019:

June 30, 2019		Average Recorded Investment				Interest Income Recognized				Cash Basis Recognized
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases		$	164			$	2			$	—
Commercial Real Estate Loans		2,981				11				—
Agricultural Loans		1,412				—				—
Subtotal		4,557				13				—
With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,128				—				—
Commercial Real Estate Loans		3,957				—				—
Agricultural Loans		—				—				—
Subtotal		6,085				—				—
Total		$	10,642			$	13			$	—
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)		$	3,386			$	8			$	—
Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)		$	744			$	—			$	—

The following table presents the average balance and related interest income of loans individually evaluated for impairment by class of loans for the six month period ended June 30, 2019:

June 30, 2019		Average Recorded Investment				Interest Income Recognized				Cash Basis Recognized
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases		$	301			$	4			$	—
Commercial Real Estate Loans		3,291				28				—
Agricultural Loans		1,409				—				—
Subtotal		5,001				32				—
With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,207				—				—
Commercial Real Estate Loans		4,324				—				—
Agricultural Loans		—				—				—
Subtotal		6,531				—				—
Total		$	11,532			$	32			$	—
Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above)		$	4,414			$	15			$	—
Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above)		$	3,861			$	—			$	—

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The following table presents the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of December 31, 2019:

						Loans Past Due 90 Days or More
		Non-Accrual				& Still Accruing
		2019				2019
Commercial and Industrial Loans and Leases		$	4,940			$	190
Commercial Real Estate Loans		3,433				—
Agricultural Loans		2,739				—
Home Equity Loans		79				—
Consumer Loans		115				—
Residential Mortgage Loans		2,496				—
Total		$	13,802			$	190
Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)		$	5,393			$	—
Loans Acquired in Current Year (Included in the Total Above)		$	2,058			$	—

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2019:

December 31, 2019		Total				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due				Total Past Due				Loans Not Past Due
Commercial and Industrial Loans and Leases		$	591,403			$	4,689			$	83			$	799			$	5,571			$	585,832
Commercial Real Estate Loans		1,499,864				209				431				2,106				2,746				1,497,118
Agricultural Loans		390,871				499				—				329				828				390,043
Home Equity Loans		226,775				1,121				253				80				1,454				225,321
Consumer Loans		81,429				347				156				89				592				80,837
Residential Mortgage Loans		305,560				5,014				1,461				2,308				8,783				296,777
Total (1)		$	3,095,902			$	11,879			$	2,384			$	5,711			$	19,974			$	3,075,928
Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)		$	12,798			$	18			$	—			$	1,589			$	1,607			$	11,191
Loans Acquired in Current Year (Included in the Total Above)		$	321,464			$	639			$	1			$	797			$	1,437			$	320,027

 

⁽¹⁾ Total recorded investment in loans includes $13,929 in accrued interest.

The risk category of loans by class of loans at December 31, 2019 is as follows: 

December 31, 2019		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and Industrial Loans and Leases		$	556,706			$	19,671			$	15,026			$	—			$	591,403
Commercial Real Estate Loans		1,453,310				30,504				16,050				—				1,499,864
Agricultural Loans		325,991				49,053				15,827				—				390,871
Total		$	2,336,007			$	99,228			$	46,903			$	—			$	2,482,138
Loans Acquired With Deteriorated Credit Quality (Included in the Total Above)		$	68			$	613			$	11,060			$	—			$	11,741
Loans Acquired in Current Year (Included in the Total Above)		$	254,629			$	16,535			$	12,769			$	—			$	283,933

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The following table presents the recorded investment in home equity, consumer and residential mortgage loans based on payment activity as of December 31, 2019: 

December 31, 2019		Home Equity Loans				Consumer Loans				Residential Mortgage Loans
Performing		$	226,695			$	81,314			$	303,065
Nonperforming		80				115				2,495
Total		$	226,775			$	81,429			$	305,560

The following table presents financing receivables purchased and/or sold during the year by portfolio segment:

December 31, 2019		Commercial and Industrial Loans and Leases				Commercial Real Estate Loans				Total
Purchases		$	2,051			$	—			$	2,051
Sales		—				—				—

Repurchase agreements are short-term borrowings included in FHLB Advances and Other Borrowings and mature overnight and continuously. Repurchase agreements, which were secured by mortgage-backed securities, totaled $73,199 and $39,425 as of June 30, 2020 and December 31, 2019, respectively. Risk could arise when the collateral pledged to a repurchase agreement declines in fair value. The Company minimizes risk by consistently monitoring the value of the collateral pledged. At the point in time where the collateral has declined in fair value, the Company is required to provide additional collateral based on the value of the underlying securities.

 

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

 

The core banking segment is comprised by the Company’s banking subsidiary, German American Bank, which operated through 74 banking offices at June 30, 2020. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by the trust operations of the Company's banking subsidiary and by German American Investment Services, Inc. These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment primarily consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products. Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.

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

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		Core Banking				Trust and Investment Advisory Services				Insurance				Other				Consolidated Totals
Three Months Ended
June 30, 2020
Net Interest Income		$	39,157			$	4			$	3			$	(705	)		$	38,459
Net Gains on Sales of Loans		2,654				—				—				—				2,654
Net Gains on Securities		993				—				—				—				993
Trust and Investment Product Fees		—				1,867				—				—				1,867
Insurance Revenues		2				10				1,818				—				1,830
Noncash Items:
Provision for Credit Losses		5,900				—				—				—				5,900
Depreciation and Amortization		2,268				1				17				81				2,367
Income Tax Expense (Benefit)		3,126				111				40				(638		)		2,639
Segment Profit (Loss)		14,098				336				127				(306		)		14,255
Segment Assets at June 30, 2020		4,838,682				4,124				10,612				(2,367		)		4,851,051

 

		Core Banking				Trust and Investment Advisory Services				Insurance				Other				Consolidated Totals
Three Months Ended
June 30, 2019
Net Interest Income		$	34,182			$	4			$	4			$	(549	)		$	33,641
Net Gains on Sales of Loans		1,030				—				—				—				1,030
Net Gains on Securities		516				—				—				—				516
Trust and Investment Product Fees		1				1,912				—				—				1,913
Insurance Revenues		4				4				1,921				—				1,929
Noncash Items:
Provision for Loan Losses		250				—				—				—				250
Depreciation and Amortization		1,976				2				21				64				2,063
Income Tax Expense (Benefit)		3,437				128				50				(604		)		3,011
Segment Profit (Loss)		15,068				372				147				(316		)		15,271
Segment Assets at December 31, 2019		4,381,945				3,670				9,080				2,977				4,397,672

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		Core Banking				Trust and Investment Advisory Services				Insurance				Other				Consolidated Totals
Six Months Ended
June 30, 2020
Net Interest Income		$	76,109			$	8			$	7			$	(1,409	)		$	74,715
Net Gains on Sales of Loans		4,517				—				—				—				4,517
Net Gains on Securities		1,583				—				—				—				1,583
Trust and Investment Product Fees		1				3,897				—				—				3,898
Insurance Revenues		5				11				5,043				—				5,059
Noncash Items:
Provision for Loan Losses		11,050				—				—				—				11,050
Depreciation and Amortization		4,511				2				34				161				4,708
Income Tax Expense (Benefit)		5,367				228				400				(969		)		5,026
Segment Profit (Loss)		25,945				670				1,221				(1,109		)		26,727
Segment Assets at June 30, 2020		4,838,682				4,124				10,612				(2,367		)		4,851,051

		Core Banking				Trust and Investment Advisory Services				Insurance				Other				Consolidated Totals
Six Months Ended
June 30, 2019
Net Interest Income		$	68,317			$	6			$	9			$	(1,100	)		$	67,232
Net Gains on Sales of Loans		2,011				—				—				—				2,011
Net Gains on Securities		671				—				—				—				671
Trust and Investment Product Fees		2				3,478				—				—				3,480
Insurance Revenues		7				25				5,102				—				5,134
Noncash Items:
Provision for Loan Losses		925				—				—				—				925
Depreciation and Amortization		3,903				3				39				128				4,073
Income Tax Expense (Benefit)		6,092				204				407				(944		)		5,759
Segment Profit (Loss)		29,567				587				1,237				(1,053		)		30,338
Segment Assets at December 31, 2019		4,381,945				3,670				9,080				2,977				4,397,672

 

On January 27, 2020, the Company’s Board of Directors approved a plan to repurchase up to one million shares of the Company’s outstanding common stock. On a share basis, the amount of common stock subject to the repurchase plan represents approximately 4% of the Company’s outstanding shares. The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements. At the time it approved the new plan, the Board also terminated a similar program that had been adopted in 2001. At the time of its termination, the Company had been authorized to purchase up to 409,184 shares of common stock under the 2001 program. The Company has repurchased 217,255 shares of common stock under the 2020 plan.

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During the periods presented, the Company maintained two equity incentive plans under which stock options, restricted stock, and other equity incentive awards could be granted. Those plans include (i) the Company’s 2009 Long-Term Equity Incentive Plan, under which no new grants may be made (the “2009 LTI Plan”), and (ii) the Company’s 2019 Long-Term Equity Incentive Plan (the “2019 LTI Plan”). The 2019 LTI Plan, which authorizes a maximum aggregate issuance of 1,000,000 shares of common stock (subject to certain permitted adjustments), became effective on May 16, 2019, following approval of the Company’s shareholders. It will remain in effect until May 16, 2029, or until all shares of common stock subject to the 2019 LTI Plan are distributed, all awards have expired or terminated, or the plan is terminated pursuant to its terms, whichever occurs first.

 

For the three and six months ended June 30, 2020 and 2019, the Company granted no options.  The Company recorded no stock compensation expense applicable to options during the three and six months ended June 30, 2020 and 2019.  In addition, there was no unrecognized option expense. 

 

During the periods presented, awards of long-term incentives were granted in the form of restricted stock.  In 2019 and prior, awards that were granted to management and selected other employees under the Company's management incentive plan were granted in tandem with cash credit entitlements in the form of 60% restricted stock grants and 40% cash credit entitlements. Beginning in 2020, awards granted under the management incentive plan were granted in tandem with cash credit entitlements in the form of 66.67% restricted stock grants and 33.33% cash credit entitlements. In 2019 and prior, the restricted stock grants and tandem cash credit entitlements, generally, vested in three annual installments of 33.3% each. Beginning in 2020, 100% of the cash portion of an award vests towards the end of the year in which the grant was made followed by the restricted stock grants vesting 50% in each of the 2nd and 3rd years. Awards that are granted to directors as additional retainers for their services do not include any cash credit entitlement. These director restricted stock grants are subject to forfeiture in the event that the recipient of the grant does not continue in service as a director of the Company through December 31 of the year after grant or do not satisfy certain meeting attendance requirements, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. During the three and six months ended June 30, 2020, the Company awarded grants of 1,426 and 43,178 of restricted stock, respectively. During the six months ended June 30, 2019, the Company granted awards of 24,780 of restricted stock. No awards were granted during the three months ended June 30, 2019. Total unvested restricted stock awards at June 30, 2020 and December 31, 2019 were 86,457 and 43,279, respectively.

The following table presents expense recorded for restricted stock and cash entitlements as well as the related tax information for the periods presented:

		Three Months Ended June 30,
		2020				2019
Restricted Stock Expense		$	282			$	311
Cash Entitlement Expense		244				152
Tax Effect		(131		)		(120		)
Net of Tax		$	395			$	343

		Six Months Ended June 30,
		2020				2019
Restricted Stock Expense		$	552			$	622
Cash Entitlement Expense		488				302
Tax Effect		(259		)		(240		)
Net of Tax		$	781			$	684

     

Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $1,535 and $2,463 as of June 30, 2020 and 2019, respectively.

 

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Through August 16, 2019, the company maintained the 2009 Employee Stock Purchase Plan (the "2009 ESPP") whereby eligible employees had the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this plan was set at 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan had provided for the purchase of up to 750,000 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. 

The Company’s shareholders approved the Company’s new 2019 Employee Stock Purchase Plan (the “2019 ESPP”) on May 16, 2019. The 2019 ESPP replaces the 2009 ESPP, which expired by its own terms on August 16, 2019. The 2019 ESPP, which became effective as of October 1, 2019, provides for a series of 3-month offering periods, commencing on the first day and ending on the last trading day of each calendar quarter, for the purchase of the Company’s common stock by participating employees. The purchase price of the shares has been set at 95% of the fair market value of the Company’s common stock on the last trading day of the offering period. A total of 750,000 common shares has been reserved for issuance under the 2019 ESPP. The 2019 ESPP will continue until September 30, 2029, or, if earlier, until all of the shares of common stock allocated to the 2019 ESPP have been purchased. Funding for the purchase of common stock is from employee and Company contributions.

For the three months ended June 30, 2020, the Company recorded $3 of expense, $2 net of tax, for the employee stock purchase plan. For the six months ended June 30, 2020, the Company recorded $19 of expense, $14 net of tax, for the employee stock purchase plan. As an annual plan, the expense for the 2009 ESPP was recorded in the third quarter of each year. There was no expense recorded for the employee stock purchase plan during the three and six months ended June 30, 2019. There was no unrecognized compensation expense as of June 30, 2020 and 2019 for the employee stock purchase plan.

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

 

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

 

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

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

 

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For investment securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At June 30, 2020, the Company held $2.5 million in Level 3 securities which consist of non-rated Obligations of State and Political Subdivisions. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these investment securities are reported by the Company in a Level 3 classification.

 

Derivatives: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

 

Individually Analyzed Loans: Fair values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances includes consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investor's required return. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Comparable sales adjustments are based on known sales prices of similar type and similar use properties and duration of time that the property has been on the market to sell. Such adjustments made in the appraisal process are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s Risk Management Area reviews the assumptions and approaches utilized in the appraisal. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

 

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

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

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Assets and Liabilities Measured on a Recurring Basis

 

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

		Fair Value Measurements at June 30, 2020 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
Assets:
Obligations of State and Political Subdivisions		$	—			$	409,622			$	2,495			$	412,117
MBS/CMO		—				550,153				—				550,153
Total Securities		$	—			$	959,775			$	2,495			$	962,270
Loans Held-for-Sale		$	—			$	21,756			$	—			$	21,756
Derivative Assets		$	—			$	10,207			$	—			$	10,207
Derivative Liabilities		$	—			$	10,929			$	—			$	10,929

		Fair Value Measurements at December 31, 2019 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable  Inputs (Level 3)				Total
Assets:
Obligations of State and Political Subdivisions		$	—			$	320,279			$	4,021			$	324,300
MBS/CMO		—				530,525				—				530,525
Total Securities		$	—			$	850,804			$	4,021			$	854,825
Loans Held-for-Sale		$	—			$	17,713			$	—			$	17,713
Derivative Assets		$	—			$	2,607			$	—			$	2,607
Derivative Liabilities		$	—			$	2,829			$	—			$	2,829

 

As of June 30, 2020 and December 31, 2019, the aggregate fair value, contractual balance (including accrued interest), and gain or loss on Loans Held-for-Sale was as follows:

		June 30, 2020				December 31, 2019
Aggregate Fair Value		$	21,756			$	17,713
Contractual Balance		21,324				17,378
Gain (Loss)		432				335

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2020 were $92 and $97, respectively. The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2019 were $93 and $227, respectively.

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The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2020 and 2019:

		Obligations of State and Political Subdivisions
		2020				2019
Balance of Recurring Level 3 Assets at April 1		$	3,482			$	4,512
Total Gains or Losses Included in Other Comprehensive Income		(7		)		(6		)
Maturities / Calls		(980		)		—
Purchases		—				—
Balance of Recurring Level 3 Assets at June 30		$	2,495			$	4,506

		Obligations of State and Political Subdivisions
		2020				2019
Balance of Recurring Level 3 Assets at January 1		$	4,021			$	4,991
Total Gains or Losses Included in Other Comprehensive Income		(23		)		(15		)
Maturities / Calls		(1,503		)		(470		)
Purchases		—				—
Balance of Recurring Level 3 Assets at June 30		$	2,495			$	4,506

Of the total gain/loss included in earnings for the three and six months ended June 30, 2020 and 2019, ($7) and ($23) was attributable to other changes in fair value, respectively. Of the total gain/loss included in earnings for the three and six months ended June 30, 2019, ($6) and ($15) was attributable to other changes in fair value, respectively.

 Assets and Liabilities Measured on a Non-Recurring Basis

 

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

		Fair Value Measurements at June 30, 2020 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable  Inputs (Level 3)				Total
Assets:
Individually Analyzed Loans
Commercial and Industrial Loans		$	—			$	—			$	2,686			$	2,686
Commercial Real Estate Loans		$	—			$	—			$	4,942			$	4,942
Agricultural Loans		$	—			$	—			$	576			$	576
Consumer Loans		$	—			$	—			$	23			$	23
Home Equity Loans		$	—			$	—			$	367			$	367
Residential Mortgage Loans		$	—			$	—			$	93			$	93

 

Fair value for collateral dependent loans, had a carrying amount of $17,000 with a valuation allowance of $8,313, resulting in a decrease to the provision for credit losses of $163 for the three months ended June 30, 2020 and an increase to the provision for credit losses of $1,686 for the six months ended June 30, 2020.

As discussed in Note 2 - Recent Accounting Pronouncements, the Company adopted ASC 326 on January 1, 2020. The table below is based upon previously applicable GAAP.

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		Fair Value Measurements at December 31, 2019 Using
		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable  Inputs (Level 3)				Total
Assets:
Impaired Loans
Commercial and Industrial Loans		$	—			$	—			$	2,109			$	2,109
Commercial Real Estate Loans		—				—				493				493

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $5,574 with a valuation allowance of $2,971, resulting in a decrease to the provision for loan losses of $1,149 for the year ended December 31, 2019.

 

There was no Other Real Estate carried at fair value less costs to sell at June 30, 2020. No charge to earnings was included in the three or six months ended June 30, 2020 and 2019. There was no Other Real Estate carried at fair value less costs to sell at December 31, 2019. No charge to earnings was included in the year ended December 31, 2019.

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2020 and December 31, 2019:

June 30, 2020		Fair Value				Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
Individual Analyzed Loans - Commercial and Industrial Loans		$	2,686			Sales comparison approach		Adjustment for physical condition of comparable properties sold		26%-100% (65%)
Individual Analyzed Loans - Commercial Real Estate Loans		$	4,942			Sales comparison approach		Adjustment for physical condition of comparable properties sold		0%-100% (52%)
Individual Analyzed Loans - Agricultural Loans		$	576			Sales comparison approach		Adjustment for physical condition of comparable properties sold		30%-100% (64%)
Individual Analyzed Loans - Consumer Loans		$	23			Sales comparison approach		Adjustment for physical condition of comparable properties sold		49%-100% (57%)
Individual Analyzed Loans - Home Equity Loans		$	367			Sales comparison approach		Adjustment for physical condition of comparable properties sold		9%-100% (18%)
Individual Analyzed Loans - Residential Mortgage Loans		$	93			Sales comparison approach		Adjustment for physical condition of comparable properties sold		5%-90% (57%)

December 31, 2019		Fair Value				Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
Impaired Loans - Commercial and Industrial Loans		$	2,109			Sales comparison approach		Adjustment for physical condition of comparable properties sold		29%-100% (64%)
Impaired Loans - Commercial Real Estate Loans		$	493			Sales comparison approach		Adjustment for physical condition of comparable properties sold		47%-91% (64%)

     

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The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending June 30, 2020 and December 31, 2019. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the tables. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision. In accordance with the adoption of ASU 2016-01, the tables below for June 30, 2020 and December 31, 2019, present the fair values measured using an exit price notion.

						Fair Value Measurements at June 30, 2020 Using
		Carrying Value				Level 1				Level 2				Level 3				Total
Financial Assets:
Cash and Short-term Investments		$	278,371			$	53,081			$	225,290			$	—			$	278,371
Interest Bearing Time Deposits with Banks		1,985				—				1,985				—				1,985
Loans, Net		3,215,229				—				—				3,229,626				3,229,626
Accrued Interest Receivable		19,647				—				4,871				14,776				19,647
Financial Liabilities:
Demand, Savings, and Money Market Deposits		(3,407,020		)		(3,407,020		)		—				—				(3,407,020		)
Time Deposits		(572,413		)		—				(573,674		)		—				(573,674		)
Short-term Borrowings		(73,199		)		—				(73,199		)		—				(73,199		)
Long-term Debt		(146,501		)		—				(93,981		)		(55,378		)		(149,359		)
Accrued Interest Payable		(2,087		)		—				(2,038		)		(49		)		(2,087		)

						Fair Value Measurements at December 31, 2019 Using
		Carrying Value				Level 1				Level 2				Level 3				Total
Financial Assets:
Cash and Short-term Investments		$	103,884			$	59,971			$	43,913			$	—			$	103,884
Interest Bearing Time Deposits with Banks		1,985				—				1,985				—				1,985
Loans, Net		3,058,211				—				—				3,056,521				3,056,521
Accrued Interest Receivable		18,425				—				4,400				14,025				18,425
Financial Liabilities:
Demand, Savings, and Money Market Deposits		(2,798,625		)		(2,798,625		)		—				—				(2,798,625		)
Time Deposits		(631,396		)		—				(624,666		)		—				(624,666		)
Short-term Borrowings		(167,736		)		(128,311		)		(39,425		)		—				(167,736		)
Long-term Debt		(181,950		)		—				(127,174		)		(55,234		)		(182,408		)
Accrued Interest Payable		(2,442		)		—				(2,376		)		(66		)		(2,442		)

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The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2020 and 2019, net of tax:

June 30, 2020		Unrealized Gains and Losses on Available-for-Sale Securities				Postretirement Benefit Items				Total
Beginning Balance at April 1, 2020		$	28,928			$	(568	)		$	28,360
Other Comprehensive Income (Loss) Before Reclassification		3,573				—				3,573
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)		(784		)		—				(784		)
Net Current Period Other Comprehensive Income (Loss)		2,789				—				2,789
Ending Balance at June 30, 2020		$	31,717			$	(568	)		$	31,149

June 30, 2020		Unrealized Gains and Losses on Available-for-Sale Securities				Postretirement Benefit Items				Total
Beginning Balance at January 1, 2020		$	15,673			$	(568	)		$	15,105
Other Comprehensive Income (Loss) Before Reclassification		17,291				—				17,291
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)		(1,247		)		—				(1,247		)
Net Current Period Other Comprehensive Income (Loss)		16,044				—				16,044
Ending Balance at June 30, 2020		$	31,717			$	(568	)		$	31,149

June 30, 2019		Unrealized Gains and Losses on Available-for-Sale Securities				Postretirement Benefit Items				Total
Beginning Balance at April 1, 2019		$	2,655			$	(339	)		$	2,316
Other Comprehensive Income (Loss) Before Reclassification		9,299				—				9,299
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)		(408		)		—				(408		)
Net Current Period Other Comprehensive Income (Loss)		8,891				—				8,891
Ending Balance at June 30, 2019		$	11,546			$	(339	)		$	11,207

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June 30, 2019		Unrealized Gains and Losses on Available-for-Sale Securities				Postretirement Benefit Items				Total
Beginning Balance at January 1, 2019		$	(6,759	)		$	(339	)		$	(7,098	)
Other Comprehensive Income (Loss) Before Reclassification		18,835				—				18,835
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)		(530		)		—				(530		)
Net Current Period Other Comprehensive Income (Loss)		18,305				—				18,305
Ending Balance at June 30, 2019		$	11,546			$	(339	)		$	11,207

The tables below summarize the classifications out of accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2020 and 2019:

Details about Accumulated Other Comprehensive Income (Loss) Components		Amount Reclassified From Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized Gains and Losses on Available-for-Sale Securities		$	993			Net Gains on Securities
		(209		)		Income Tax Expense
		784				Net of Tax
Total Reclassifications for the Three Months Ended June 30, 2020		$	784

Details about Accumulated Other Comprehensive Income (Loss) Components		Amount Reclassified From Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized Gains and Losses on Available-for-Sale Securities		$	1,583			Net Gains on Securities
		(336		)		Income Tax Expense
		1,247				Net of Tax
Total Reclassifications for the Six Months Ended June 30, 2020		$	1,247

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Details about Accumulated Other Comprehensive Income (Loss) Components		Amount Reclassified From Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized Gains and Losses on Available-for-Sale Securities		$	516			Net Gains on Securities
		(108		)		Income Tax Expense
		408				Net of Tax
Total Reclassifications for the Three Months Ended June 30, 2019		$	408

Details about Accumulated Other Comprehensive Income (Loss) Components		Amount Reclassified From Accumulated Other Comprehensive Income (Loss)				Affected Line Item in the Statement Where Net Income is Presented
Unrealized Gains and Losses on Available-for-Sale Securities		$	671			Net Gains on Securities
		(141		)		Income Tax Expense
		530				Net of Tax
Total Reclassifications for the Six Months Ended June 30, 2019		$	530

The following tables present non-interest income, segregated by revenue streams in-scope and out-of-scope of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), for the three and six months ended June 30, 2020 and 2019. Trust and investment product fees are included in the trust and investment advisory services segment while insurance revenues are included in the insurance segment. All other revenue streams are primarily included in the banking segment.

		Three Months Ended
		June 30,
Non-interest Income		2020				2019
In-Scope of Topic 606:
Trust and Investment Product Fees		$	1,867			$	1,913
Service Charges on Deposit Accounts		1,365				2,024
Insurance Revenues		1,830				1,929
Interchange Fee Income		2,476				2,332
Other Operating Income		554				481
Non-interest Income (in-scope of Topic 606)		8,092				8,679
Non-interest Income (out-of-scope of Topic 606)		4,331				1,830
Total Non-interest Income		$	12,423			$	10,509

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		Six Months Ended
		June 30,
Non-interest Income		2020				2019
In-Scope of Topic 606:
Trust and Investment Product Fees		$	3,898			$	3,480
Service Charges on Deposit Accounts		3,602				3,924
Insurance Revenues		5,059				5,134
Interchange Fee Income		4,958				4,427
Other Operating Income		1,074				930
Non-interest Income (in-scope of Topic 606)		18,591				17,895
Non-interest Income (out-of-scope of Topic 606)		7,913				4,272
Total Non-interest Income		$	26,504			$	22,167

A description of the Company's revenue streams accounted for under Topic 606 follows:

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as stop payment charges and statement rendering, are recognized at the time the transaction is executed (the point in time the Company fills the customer's request). Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

Interchange Fee Income: The Company earns interchange fees from debit/credit cardholder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

Trust and Investment Product Fees: The Company earns trust and investment brokerage fees from its contracts with trust and brokerage customers to manage assets for investment and/or to transact their accounts. These fees are primarily earned over time as the Company provides the contracted monthly or quarterly services and are generally assessed based on the market value of assets under management at month-end. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed (trade date).

Insurance Revenues: The Company earns insurance revenue from commissions derived from the sale of personal and corporate property and casualty insurance products. These commissions are primarily earned over time as the Company provides the contracted insurance product to customers.

At the inception of a contract, an entity should determine whether the contract contains a lease. Topic 842 defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of an identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset.

German American has finance leases for branch offices as well as operating leases for branch offices, ATM locations and certain office equipment. The right-of-use asset is included in the 'Premises, Furniture and Equipment, Net' line of the consolidated balance sheet. The lease liability is included in the 'Accrued Interest Payable and Other Liabilities' line of the consolidated balance sheet.

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The Company used the implicit lease rate when determining the present value of lease payments for finance leases. The present value of lease payments for operating leases was determined using the incremental borrowing rate as of the date the Company adopted this standard.

The components of lease expense for the three months ended June 30, were as follows:

		Three Months Ended				Three Months Ended
		June 30, 2020				June 30, 2019
Finance Lease Cost:
Amortization of Right-of -Use Assets		$	53			$	52
Interest on Lease Liabilities		91				95
Operating Lease Cost		453				360
Short-term Lease Cost		9				15
Total Lease Cost		$	606			$	522

The components of lease expense for the six months ended June 30, were as follows:

		Six Months Ended				Six Months Ended
		June 30, 2020				June 30, 2019
Finance Lease Cost:
Amortization of Right-of -Use Assets		$	105			$	104
Interest on Lease Liabilities		183				191
Operating Lease Cost		906				720
Short-term Lease Cost		34				30
Total Lease Cost		$	1,228			$	1,045

The weighted average lease term and discount rates were as follows:

		June 30, 2020			June 30, 2019
Weighted Average Remaining Lease Term:
Finance Leases		12 years			13 years
Operating Leases		8 years			9 years
Weighted Average Discount Rate:
Finance Leases		11.48	%		11.49	%
Operating Leases		3.16	%		3.44	%

Supplemental balance sheet information related to leases was as follows:

		June 30, 2020				June 30, 2019
Finance Leases
Premises, Furniture and Equipment, Net		$	2,383			$	2,593
Other Borrowings		3,305				3,453
Operating Leases
Operating Lease Right-of-Use Assets		$	8,955			$	8,464
Operating Lease Liabilities		9,041				8,498

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Supplemental cash flow information related to leases was as follows:

		Six Months Ended				Six Months Ended
		June 30, 2020				June 30, 2019
Cash paid for amounts in the measurement of lease liabilities:
Operating Cash Flows from Finance Leases		$	183			$	191
Operating Cash Flows from Operating Leases		853				687
Financing Cash Flows from Finance Leases		61				53

The following table presents a maturity analysis of Finance and Operating Lease Liabilities:

		June 30, 2020
		Finance Leases				Operating Leases
Year 1		$	519			$	1,643
Year 2		519				1,425
Year 3		519				1,322
Year 4		519				1,154
Year 5		519				1,005
Thereafter		3,213				3,850
Total Lease Payments		5,808				10,399
Less Imputed Interest		(2,503		)		(1,358		)
Total		$	3,305			$	9,041

Citizens First Acquisition

Effective July 1, 2019, the Company acquired Citizens First Corporation (“Citizens First”) and its subsidiary, Citizens First Bank, Inc., pursuant to an Agreement and Plan of Reorganization dated February 22, 2019. The acquisition was accomplished by the merger of Citizens First with and into the Company, immediately followed by the merger of Citizens First Bank with and into the Company’s subsidiary bank, German American Bank. Citizens First Bank operated 8 banking offices in Barren, Hart, Simpson and Warren Counties in Kentucky. Citizens First's consolidated assets and equity (unaudited) as of July 1, 2019 totaled $456.0 million and $49.8 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.

In accordance with ASC 805, the Company has expensed approximately $3.3 million of direct acquisition costs and recorded $17.7 million of goodwill and $4.5 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $17.7 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as a part of the Citizens First acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

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Consideration
Cash for Options and Fractional Shares		$	216
Cash Consideration		15,294
Equity Instruments		50,118
Fair Value of Total Consideration Transferred		$	65,628
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash		$	21,055
Interest-bearing Time Deposits with Banks		2,231
Securities		43,839
Loans		356,970
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost		2,065
Premises, Furniture & Equipment		10,772
Other Real Estate		—
Intangible Assets		4,547
Company Owned Life Insurance		8,796
Accrued Interest Receivable and Other Assets		3,863
Deposits - Non-interest Bearing		(52,521		)
Deposits - Interest Bearing		(318,966		)
FHLB Advances and Other Borrowings		(31,068		)
Accrued Interest Payable and Other Liabilities		(3,694		)
Total Identifiable Net Assets		$	47,889
Goodwill		$	17,739

Under the terms of the merger agreement, each Citizens First common shareholder of record at the effective time of the merger (other than those holding shares in the Citizens First Bank 401(k) Profit Sharing Plan (the "CFB 401(k) Plan")) became entitled to receive a cash payment of $5.80 and a 0.6629 share of common stock of the Company for each of their former shares of Citizens First common stock. In addition, as record holder of shares of Citizens First common stock held in the CFB 401(k) Plan, the plan administrator was entitled to receive a cash payment of $25.77 for each share held by the CFB 401(k) Plan, which amount is equal to (i) the exchange ratio multiplied by the closing trading price of the Company's common stock on June 28, 2019, plus (ii) $5.80. As a result, in connection with the closing of the merger on July 1, 2019, the Company issued approximately 1,664,000 shares of its common stock to the former shareholders of Citizens First and paid cash consideration in the aggregate amount of $15.5 million.

This acquisition is consistent with the Company's strategy to build a regional presence in central and western Kentucky. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region.

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which are loans that have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements

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include non-impaired loans and customer receivables with a fair value of $349.9 million and unpaid principal of $353.3 million on the date of acquisition.

The following table presents unaudited pro forma information as if the acquisition had occured on January 1, 2019 after giving effect to certain adjustments. The unaudited pro forma information for the three and six months ended June 30, 2019 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

		Unaudited Three Months Ended 6/30/2020				Unaudited Pro Forma Three Months Ended 6/30/2019
Net Interest Income		$	38,459			$	38,053
Non-interest Income		12,423				11,478
Total Revenue		50,882				49,531
Provision for Loan Losses Expense		5,900				1,150
Non-interest Expense		28,088				29,109
Income Before Income Taxes		16,894				19,272
Income Tax Expense		2,639				3,394
Net Income		$	14,255			$	15,878
Earnings Per Share and Diluted Earnings Per Share		$	0.54			$	0.60

The above unaudited financial information includes approximately $1,226 of net income and $3,959 of total revenue related to the operations of Citizens First during the three months ended June 30, 2020.

		Unaudited Six Months Ended 6/30/2020				Unaudited Pro Forma Six Months Ended 6/30/2019
Net Interest Income		$	74,715			$	76,192
Non-interest Income		26,504				23,981
Total Revenue		101,219				100,173
Provision for Loan Losses Expense		11,050				1,825
Non-interest Expense		58,416				59,532
Income Before Income Taxes		31,753				38,816
Income Tax Expense		5,026				6,439
Net Income		$	26,727			$	32,377
Earnings Per Share and Diluted Earnings Per Share		$	1.01			$	1.13

The above unaudited financial information includes approximately $2,530 of net income and $7,938 of total revenue related to the operations of Citizens First during the six months ended June 30, 2020.

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(1)	Effective tax rates were determined as though interest earned on the Company’s investments in municipal bonds and loans was fully taxable.

(2)	Loans held-for-sale and non-accruing loans have been included in average loans.

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(1)	Effective tax rates were determined as though interest earned on the Company’s investments in municipal bonds and loans was fully taxable.

(2)	Loans held-for-sale and non-accruing loans have been included in average loans.

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