GERMAN AMERICAN BANCORP, INC. 10-Q

Item 1. Financial Statements GERMAN AMERICAN BANCORP, INC. CONSOLIDATED BALANCE SHEETS (unaudited, dollars in thousands except share and per share data) June 30, 2020 December 31, 2019 ASSETS Cash and Due from Banks $ 53,081 $ 59,971 Federal Funds Sold and Other Short-term Investments 225,290 43,913 Cash and Cash Equivalents 278,371 103,884 Interest-bearing Time Deposits with Banks 1,985 1,985 Securities Available-for-Sale, at Fair Value (Amortized Cost $921,890, No Allowance for Credit Losses) 962,270 854,825 Other Investments 353 353 Loans Held-for-Sale, at Fair Value 21,756 17,713 Loans 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 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 13,368 13,968 Premises, Furniture and Equipment, Net 96,748 96,651 Other Real Estate 425 425 Goodwill 121,956 121,306 Intangible Assets 10,720 12,656 Company Owned Life Insurance 68,533 68,883 Accrued Interest Receivable and Other Assets 50,650 44,210 TOTAL ASSETS $ 4,851,051 $ 4,397,672 LIABILITIES Non-interest-bearing Demand Deposits $ 1,139,928 $ 832,985 Interest-bearing Demand, Savings, and Money Market Accounts 2,267,092 1,965,640 Time Deposits 572,413 631,396 Total Deposits 3,979,433 3,430,021 FHLB Advances and Other Borrowings 219,700 349,686 Accrued Interest Payable and Other Liabilities 57,244 44,145 TOTAL LIABILITIES 4,256,377 3,823,852 SHAREHOLDERS’ EQUITY Common Stock, no par value, $1 stated value; 45,000,000 shares authorized 26,497 26,671 Additional Paid-in Capital 274,017 278,954 Retained Earnings 263,011 253,090 Accumulated Other Comprehensive Income 31,149 15,105 TOTAL SHAREHOLDERS’ EQUITY 594,674 573,820 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 4,851,051 $ 4,397,672 End of period shares issued and outstanding 26,497,291 26,671,368 See accompanying notes to consolidated financial statements. 6 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited, dollars in thousands except per share data) Three Months Ended June 30, 2020 2019 INTEREST INCOME Interest and Fees on Loans $ 38,080 $ 35,046 Interest on Federal Funds Sold and Other Short-term Investments 84 85 Interest and Dividends on Securities: Taxable 2,706 3,555 Non-taxable 2,671 2,350 TOTAL INTEREST INCOME 43,541 41,036 INTEREST EXPENSE Interest on Deposits 3,743 5,759 Interest on FHLB Advances and Other Borrowings 1,339 1,636 TOTAL INTEREST EXPENSE 5,082 7,395 NET INTEREST INCOME 38,459 33,641 Provision for Credit Losses 5,900 250 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 32,559 33,391 NON-INTEREST INCOME Trust and Investment Product Fees 1,867 1,913 Service Charges on Deposit Accounts 1,365 2,024 Insurance Revenues 1,830 1,929 Company Owned Life Insurance 356 304 Interchange Fee Income 2,476 2,332 Other Operating Income 882 461 Net Gains on Sales of Loans 2,654 1,030 Net Gains on Securities 993 516 TOTAL NON-INTEREST INCOME 12,423 10,509 NON-INTEREST EXPENSE Salaries and Employee Benefits 15,882 14,117 Occupancy Expense 2,473 2,279 Furniture and Equipment Expense 1,008 933 FDIC Premiums 123 245 Data Processing Fees 1,763 1,803 Professional Fees 1,082 1,174 Advertising and Promotion 882 936 Intangible Amortization 909 802 Other Operating Expenses 3,966 3,329 TOTAL NON-INTEREST EXPENSE 28,088 25,618 Income before Income Taxes 16,894 18,282 Income Tax Expense 2,639 3,011 NET INCOME $ 14,255 $ 15,271 Basic Earnings per Share $ 0.54 $ 0.61 Diluted Earnings per Share $ 0.54 $ 0.61 See accompanying notes to consolidated financial statements. 7 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited, dollars in thousands except per share data) Six Months Ended June 30, 2020 2019 INTEREST INCOME Interest and Fees on Loans $ 75,938 $ 70,165 Interest on Federal Funds Sold and Other Short-term Investments 242 226 Interest and Dividends on Securities: Taxable 5,816 7,154 Non-taxable 5,116 4,680 TOTAL INTEREST INCOME 87,112 82,225 INTEREST EXPENSE Interest on Deposits 9,400 11,175 Interest on FHLB Advances and Other Borrowings 2,997 3,818 TOTAL INTEREST EXPENSE 12,397 14,993 NET INTEREST INCOME 74,715 67,232 Provision for Credit Losses 11,050 925 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 63,665 66,307 NON-INTEREST INCOME Trust and Investment Product Fees 3,898 3,480 Service Charges on Deposit Accounts 3,602 3,924 Insurance Revenues 5,059 5,134 Company Owned Life Insurance 1,578 1,188 Interchange Fee Income 4,958 4,427 Other Operating Income 1,309 1,332 Net Gains on Sales of Loans 4,517 2,011 Net Gains on Securities 1,583 671 TOTAL NON-INTEREST INCOME 26,504 22,167 NON-INTEREST EXPENSE Salaries and Employee Benefits 33,282 29,161 Occupancy Expense 5,043 4,570 Furniture and Equipment Expense 2,019 1,861 FDIC Premiums 123 533 Data Processing Fees 3,449 3,386 Professional Fees 2,166 2,501 Advertising and Promotion 1,953 1,806 Intangible Amortization 1,869 1,645 Other Operating Expenses 8,512 6,914 TOTAL NON-INTEREST EXPENSE 58,416 52,377 Income before Income Taxes 31,753 36,097 Income Tax Expense 5,026 5,759 NET INCOME $ 26,727 $ 30,338 Basic Earnings per Share $ 1.01 $ 1.21 Diluted Earnings per Share $ 1.01 $ 1.21 See accompanying notes to consolidated financial statements. 8 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited, dollars in thousands) Three Months Ended June 30, 2020 2019 NET INCOME $ 14,255 $ 15,271 Other Comprehensive Income: Unrealized Gains (Losses) on Securities: Unrealized Holding Gain (Loss) Arising During the Period 4,509 11,838 Reclassification Adjustment for Gains Included in Net Income ( 993 ) ( 516 ) Tax Effect ( 727 ) ( 2,431 ) Net of Tax 2,789 8,891 Total Other Comprehensive Income 2,789 8,891 COMPREHENSIVE INCOME $ 17,044 $ 24,162 Six Months Ended June 30, 2020 2019 NET INCOME $ 26,727 $ 30,338 Other Comprehensive Income (Loss): Unrealized Gains (Losses) on Securities: Unrealized Holding Gain (Loss) Arising During the Period 21,988 24,039 Reclassification Adjustment for Gains Included in Net Income ( 1,583 ) ( 671 ) Tax Effect ( 4,361 ) ( 5,063 ) Net of Tax 16,044 18,305 Total Other Comprehensive Income (Loss) 16,044 18,305 COMPREHENSIVE INCOME $ 42,771 $ 48,643 See accompanying notes to consolidated financial statements. 9 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited, dollars in thousands) Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balances, December 31, 2019 26,671,368 $ 26,671 $ 278,954 $ 253,090 $ 15,105 $ 573,820 Cumulative Effect of Change in Accounting Principles (See Note 2 - Recent Accounting Pronouncements) ( 6,717 ) ( 6,717 ) Balances, January 1, 2020 26,671,368 26,671 278,954 246,373 15,105 567,103 Net Income 12,472 12,472 Other Comprehensive Income 13,255 13,255 Cash Dividends ($0.19 per share) ( 5,065 ) ( 5,065 ) Issuance of Common Stock for: Restricted Share Grants 41,752 42 228 270 Stock Repurchase ( 173,089 ) ( 173 ) ( 4,322 ) ( 4,495 ) Balances, March 31, 2020 26,540,031 $ 26,540 $ 274,860 $ 253,780 $ 28,360 $ 583,540 Net Income 14,255 14,255 Other Comprehensive Income 2,789 2,789 Cash Dividends ($0.19 per share) ( 5,024 ) ( 5,024 ) Issuance of Common Stock for: Restricted Share Grants 1,426 1 281 282 Stock Repurchase ( 44,166 ) ( 44 ) ( 1,124 ) ( 1,168 ) Balances, June 30, 2020 26,497,291 $ 26,497 $ 274,017 $ 263,011 $ 31,149 $ 594,674 See accompanying notes to consolidated financial statements. 10 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited, dollars in thousands) Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balances, December 31, 2018 24,967,458 $ 24,967 $ 229,347 $ 211,424 $ ( 7,098 ) $ 458,640 Net Income 15,067 15,067 Other Comprehensive Income 9,414 9,414 Cash Dividends ($0.17 per share) ( 4,245 ) ( 4,245 ) Issuance of Common Stock for: Restricted Share Grants 24,780 25 286 311 Balances, March 31, 2019 24,992,238 $ 24,992 $ 229,633 $ 222,246 $ 2,316 $ 479,187 Net Income 15,271 15,271 Other Comprehensive Income 8,891 8,891 Cash Dividends ($0.17 per share) ( 4,248 ) ( 4,248 ) Issuance of Common Stock for: Restricted Share Grants 310 310 Balances, June 30, 2019 24,992,238 $ 24,992 $ 229,943 $ 233,269 $ 11,207 $ 499,411 See accompanying notes to consolidated financial statements. 11 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, dollars in thousands) Six Months Ended June 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 26,727 $ 30,338 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Amortization on Securities 2,432 1,784 Depreciation and Amortization 4,708 4,073 Loans Originated for Sale ( 140,767 ) ( 78,128 ) Proceeds from Sales of Loans Held-for-Sale 140,221 70,003 Provision for Credit Losses 11,050 925 Gain on Sale of Loans, net ( 4,517 ) ( 2,011 ) Gain on Securities, net ( 1,583 ) ( 671 ) Gain on Sales of Other Real Estate and Repossessed Assets ( 48 ) — Loss on Disposition and Donation of Premises and Equipment 128 — Gain on Disposition of Land ( 19 ) ( 262 ) Increase in Cash Surrender Value of Company Owned Life Insurance ( 732 ) ( 659 ) Equity Based Compensation 552 621 Change in Assets and Liabilities: Interest Receivable and Other Assets ( 5,494 ) ( 14,718 ) Interest Payable and Other Liabilities 10,054 1,584 Net Cash from Operating Activities 42,712 12,879 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Maturities of Securities Available-for-Sale 78,832 45,980 Proceeds from Sales of Securities Available-for-Sale 63,424 22,274 Purchase of Securities Available-for-Sale ( 230,144 ) ( 74,078 ) Proceeds from Redemption of Federal Home Loan Bank Stock 600 — Purchase of Loans — ( 521 ) Loans Made to Customers, net of Payments Received ( 183,189 ) 10,335 Proceeds from Sales of Other Real Estate 316 359 Property and Equipment Expenditures ( 3,383 ) ( 3,172 ) Proceeds from Sale of Land 426 722 Proceeds from Life Insurance 1,082 1,019 Net Cash from Investing Activities ( 272,036 ) 2,918 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits 549,686 56,707 Change in Short-term Borrowings ( 94,538 ) ( 107,456 ) Advances in Long-term Debt — 65,000 Repayments of Long-term Debt ( 35,585 ) ( 28,098 ) Retirement of Common Stock ( 5,663 ) — Dividends Paid ( 10,089 ) ( 8,493 ) Net Cash from Financing Activities 403,811 ( 22,340 ) Net Change in Cash and Cash Equivalents 174,487 ( 6,543 ) Cash and Cash Equivalents at Beginning of Year 103,884 96,550 Cash and Cash Equivalents at End of Period $ 278,371 $ 90,007 Cash Paid During the Period for Interest $ 12,042 $ 14,891 Income Taxes 23 4,525 Supplemental Non Cash Disclosures Loans Transferred to Other Real Estate $ — $ 708 Right of Use Asset Obtained in Exchange for Lease Liabilities 249 9,034 See accompanying notes to consolidated financial statements. 12 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 1 – Basis of Presentation and Market Conditions German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries (hereinafter collectively referred to as the "Company") conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Certain items included in the prior period financial statements were reclassified to conform to the current presentation. There was no effect on net income or total shareholders' equity based on these reclassifications. Impact of COVID-19 On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. While many states have lifted quarantine and lock-down orders on a limited basis and with certain social distancing restrictions, commercial activity has not yet returned to the levels existing prior to the pandemic outbreak. As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted. Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of goodwill, right-of-use lease assets, and other real estate owned could decrease resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. As a result, it is not currently possible to ascertain the 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. NOTE 2 - Recent Accounting Pronouncements Loan Modifications and Troubled Debt Restructures due to COVID-19 On April 7, 2020, the Board of Governors of the Federal Reserve System (the "FRB"), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the FRB and OCC, the “federal banking regulators”) issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructures and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructures. Recently Adopted Accounting Guidance In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan 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 13 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) 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 14 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) The following table illustrates the impact of ASC 326: (dollars in thousands) December 31, 2019 After 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. 15 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods: Commercial and Industrial Loans - The principal risk of commercial and industrial loans is that these loans are primarily based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most commercial loans are secured by accounts receivable, inventory and equipment. If cash flow from business operations is reduced, the borrower's ability to repay the loan may diminish, and over time, it may also be difficult to substantiate current value of inventory and equipment. Repayment of these loans are more sensitive than other types of loans to adverse conditions in the general economy. Commercial Real Estate Loans - Commercial real estate lending is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans are collateralized by the borrower's underlying real estate. Therefore, diminished cash flows not only affects the ability to repay the loan, it may also reduce the underlying collateral value. Agricultural Loans - This portfolio is diversified between real estate financing, equipment financing and lines of credit in various segments including grain production, poultry production and livestock production. Mitigating any concentration of risk that may exist in the Company's agricultural loan portfolio is the use of federal government guarantee programs. Leases - Leases are primarily for equipment leased to varying types of businesses. If the cash flows from the business operations is reduced, the business's ability to repay the lease is diminished as well. Home Equity Loans - Home equity loans are generally secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Consumer Loans - Consumer loan repayment is typically dependent on the borrower remaining employed through the life of the loan as well as the borrower maintaining the underlying collateral adequately. Credit Cards - Credit card loan are unsecured and repayment is primarily dependent on the personal income of the borrower. Residential Mortgage Loans - Residential mortgage loans are typically secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs. Troubled Debt Restructurings (“TDR”) A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The allowances for credit losses on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the rate specified within the restructuring. 16 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) 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 17 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements on an ongoing basis with no material expected impact at this time. NOTE 3 – Per Share Data The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows: Three Months Ended 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. 18 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 4 – Securities The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows: Securities Available-for-Sale: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value 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. 19 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 4 - Securities (continued) 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. NOTE 5 – Derivatives The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $ 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. 20 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 5 - Derivatives (continued) 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 ) NOTE 6 – Loans 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 21 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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 22 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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. 23 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of 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 no t 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. 24 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Loan Modifications and Troubled Debt Restructurings due to COVID-19 On April 7, 2020, the federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings. Accordingly, the Company is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. As of 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. 25 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Term Loans Amortized Cost Basis by Origination Year As of 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 26 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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 27 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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 28 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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. 29 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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 $ — $ — 30 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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 31 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) 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 — — — NOTE 7 – Repurchase Agreements Accounted for as Secured Borrowings 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. NOTE 8 – Segment Information The Company’s operations include three primary segments: core banking, trust and investment advisory services, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial and agricultural, commercial and agricultural real estate, and residential mortgage loans, primarily in the Company’s local markets. The core banking segment also involves the sale of residential mortgage loans in the secondary market. The trust and investment advisory services segment involves providing trust, investment advisory, and brokerage services to customers. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the Company’s banking subsidiary’s local markets. The core banking segment is comprised by the Company’s banking subsidiary, German American 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. 32 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 8 - Segment Information (continued) 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 33 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 8 - Segment Information (continued) 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 NOTE 9 – Stock Repurchase Plan 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. 34 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 10 – Equity Plans and Equity Based Compensation 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. 35 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 10 - Equity Plans and Equity Based Compensation (continued) 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. 36 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 – Fair Value Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument: Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For 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. 37 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 - Fair Value (continued) 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. 38 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 - Fair Value (continued) 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. 39 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 - Fair Value (continued) 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%) 40 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 - Fair Value (continued) 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 ) 41 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 12 - Other Comprehensive Income (Loss) 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 42 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 12 - Other Comprehensive Income (Loss) (continued) 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 43 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 12 - Other Comprehensive Income (Loss) (continued) 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 NOTE 13 - Revenue Recognition 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 44 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 13 - Revenue Recognition (continued) 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. NOTE 14 – Leases 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. 45 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 14 - Leases (continued) 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 46 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 14 - Leases (continued) 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 NOTE 15 - Business Combinations 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. 47 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 15 - Business Combinations (continued) 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 48 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 15 - Business Combinations (continued) 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. 49