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) September 30, 2020 December 31, 2019 ASSETS Cash and Due from Banks $ 56,706 $ 59,971 Federal Funds Sold and Other Short-term Investments 192,987 43,913 Cash and Cash Equivalents 249,693 103,884 Interest-bearing Time Deposits with Banks 1,489 1,985 Securities Available-for-Sale, at Fair Value (Amortized Cost $ 997,074 , No Allowance for Credit Losses as of September 30, 2020) 1,036,910 854,825 Other Investments 353 353 Loans Held-for-Sale, at Fair Value 27,993 17,713 Loans 3,225,232 3,081,973 Less: Unearned Income ( 4,105 ) ( 4,882 ) Allowance for Credit Losses ( 46,768 ) ( 16,278 ) Loans, Net 3,174,359 3,060,813 Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost 13,168 13,968 Premises, Furniture and Equipment, Net 96,682 96,651 Other Real Estate 425 425 Goodwill 121,956 121,306 Intangible Assets 9,827 12,656 Company Owned Life Insurance 68,893 68,883 Accrued Interest Receivable and Other Assets 51,082 44,210 TOTAL ASSETS $ 4,852,830 $ 4,397,672 LIABILITIES Non-interest-bearing Demand Deposits $ 1,185,814 $ 832,985 Interest-bearing Demand, Savings, and Money Market Accounts 2,278,826 1,965,640 Time Deposits 515,034 631,396 Total Deposits 3,979,674 3,430,021 FHLB Advances and Other Borrowings 214,544 349,686 Accrued Interest Payable and Other Liabilities 54,631 44,145 TOTAL LIABILITIES 4,248,849 3,823,852 SHAREHOLDERS’ EQUITY Common Stock, no par value, $ 1 stated value; 45,000,000 shares authorized 26,493 26,671 Additional Paid-in Capital 274,166 278,954 Retained Earnings 272,579 253,090 Accumulated Other Comprehensive Income 30,743 15,105 TOTAL SHAREHOLDERS’ EQUITY 603,981 573,820 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 4,852,830 $ 4,397,672 End of period shares issued and outstanding 26,492,866 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 September 30, 2020 2019 INTEREST INCOME Interest and Fees on Loans $ 36,543 $ 40,921 Interest on Federal Funds Sold and Other Short-term Investments 45 163 Interest and Dividends on Securities: Taxable 2,350 3,400 Non-taxable 3,175 2,427 TOTAL INTEREST INCOME 42,113 46,911 INTEREST EXPENSE Interest on Deposits 2,492 6,399 Interest on FHLB Advances and Other Borrowings 1,233 1,934 TOTAL INTEREST EXPENSE 3,725 8,333 NET INTEREST INCOME 38,388 38,578 Provision for Credit Losses 4,500 2,800 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 33,888 35,778 NON-INTEREST INCOME Trust and Investment Product Fees 1,957 1,885 Service Charges on Deposit Accounts 1,773 2,395 Insurance Revenues 1,989 1,883 Company Owned Life Insurance 355 364 Interchange Fee Income 2,795 2,538 Other Operating Income 942 1,029 Net Gains on Sales of Loans 2,861 1,649 Net Gains on Securities 607 313 TOTAL NON-INTEREST INCOME 13,279 12,056 NON-INTEREST EXPENSE Salaries and Employee Benefits 17,409 17,579 Occupancy Expense 2,418 2,797 Furniture and Equipment Expense 944 954 FDIC Premiums 326 — Data Processing Fees 1,693 2,860 Professional Fees 875 1,324 Advertising and Promotion 708 1,054 Intangible Amortization 860 1,064 Other Operating Expenses 4,187 4,329 TOTAL NON-INTEREST EXPENSE 29,420 31,961 Income before Income Taxes 17,747 15,873 Income Tax Expense 3,154 2,809 NET INCOME $ 14,593 $ 13,064 Basic Earnings per Share $ 0.55 $ 0.49 Diluted Earnings per Share $ 0.55 $ 0.49 See accompanying notes to consolidated financial statements. 7 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (unaudited, dollars in thousands except per share data) Nine Months Ended September 30, 2020 2019 INTEREST INCOME Interest and Fees on Loans $ 112,481 $ 111,086 Interest on Federal Funds Sold and Other Short-term Investments 287 389 Interest and Dividends on Securities: Taxable 8,166 10,554 Non-taxable 8,291 7,107 TOTAL INTEREST INCOME 129,225 129,136 INTEREST EXPENSE Interest on Deposits 11,892 17,574 Interest on FHLB Advances and Other Borrowings 4,230 5,752 TOTAL INTEREST EXPENSE 16,122 23,326 NET INTEREST INCOME 113,103 105,810 Provision for Credit Losses 15,550 3,725 NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 97,553 102,085 NON-INTEREST INCOME Trust and Investment Product Fees 5,855 5,365 Service Charges on Deposit Accounts 5,375 6,319 Insurance Revenues 7,048 7,017 Company Owned Life Insurance 1,933 1,552 Interchange Fee Income 7,753 6,965 Other Operating Income 2,251 2,361 Net Gains on Sales of Loans 7,378 3,660 Net Gains on Securities 2,190 984 TOTAL NON-INTEREST INCOME 39,783 34,223 NON-INTEREST EXPENSE Salaries and Employee Benefits 50,691 46,740 Occupancy Expense 7,461 7,367 Furniture and Equipment Expense 2,963 2,815 FDIC Premiums 449 533 Data Processing Fees 5,142 6,246 Professional Fees 3,041 3,825 Advertising and Promotion 2,661 2,860 Intangible Amortization 2,729 2,709 Other Operating Expenses 12,699 11,243 TOTAL NON-INTEREST EXPENSE 87,836 84,338 Income before Income Taxes 49,500 51,970 Income Tax Expense 8,180 8,568 NET INCOME $ 41,320 $ 43,402 Basic Earnings per Share $ 1.56 $ 1.70 Diluted Earnings per Share $ 1.56 $ 1.70 See accompanying notes to consolidated financial statements. 8 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited, dollars in thousands) Three Months Ended September 30, 2020 2019 NET INCOME $ 14,593 $ 13,064 Other Comprehensive Income (Loss): Unrealized Gains (Losses) on Securities: Unrealized Holding Gain (Loss) Arising During the Period 63 6,223 Reclassification Adjustment for Gains Included in Net Income ( 607 ) ( 313 ) Tax Effect 138 ( 1,261 ) Net of Tax ( 406 ) 4,649 Total Other Comprehensive Income (Loss) ( 406 ) 4,649 COMPREHENSIVE INCOME $ 14,187 $ 17,713 Nine Months Ended September 30, 2020 2019 NET INCOME $ 41,320 $ 43,402 Other Comprehensive Income: Unrealized Gains (Losses) on Securities: Unrealized Holding Gain (Loss) Arising During the Period 22,051 30,262 Reclassification Adjustment for Gains Included in Net Income ( 2,190 ) ( 984 ) Tax Effect ( 4,223 ) ( 6,324 ) Net of Tax 15,638 22,954 Total Other Comprehensive Income 15,638 22,954 COMPREHENSIVE INCOME $ 56,958 $ 66,356 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 Net Income 14,593 14,593 Other Comprehensive Income (Loss) ( 406 ) ( 406 ) Cash Dividends ($ 0.19 per share) ( 5,025 ) ( 5,025 ) Issuance of Common Stock for: Restricted Share Grants ( 378 ) — 254 254 Stock Repurchase ( 4,047 ) ( 4 ) ( 105 ) ( 109 ) Balances, September 30, 2020 26,492,866 $ 26,493 $ 274,166 $ 272,579 $ 30,743 $ 603,981 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 Net Income 13,064 13,064 Other Comprehensive Income 4,649 4,649 Cash Dividends ($ 0.17 per share) ( 4,532 ) ( 4,532 ) Issuance of Common Stock for: Acquisition of Citizens First Corporation 1,663,954 1,664 48,360 50,024 Restricted Share Grants 5,886 6 305 311 Balances, September 30, 2019 26,662,078 $ 26,662 $ 278,608 $ 241,801 $ 15,856 $ 562,927 See accompanying notes to consolidated financial statements. 11 GERMAN AMERICAN BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, dollars in thousands) Nine Months Ended September 30, 2020 2019 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 41,320 $ 43,402 Adjustments to Reconcile Net Income to Net Cash from Operating Activities: Net Amortization on Securities 4,097 2,845 Depreciation and Amortization 7,043 6,364 Loans Originated for Sale ( 230,399 ) ( 143,041 ) Proceeds from Sales of Loans Held-for-Sale 226,237 131,921 Provision for Credit Losses 15,550 3,725 Gain on Sale of Loans, net ( 7,378 ) ( 3,660 ) Gain on Securities, net ( 2,190 ) ( 984 ) Gain on Sales of Other Real Estate and Repossessed Assets ( 48 ) — Loss on Disposition and Donation of Premises and Equipment 127 — Loss (Gain) on Disposition of Land 30 ( 352 ) Increase in Cash Surrender Value of Company Owned Life Insurance ( 1,092 ) ( 1,034 ) Equity Based Compensation 813 927 Change in Assets and Liabilities: Interest Receivable and Other Assets ( 6,046 ) 94 Interest Payable and Other Liabilities 8,114 5,581 Net Cash from Operating Activities 56,178 45,788 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Maturity of Other Short-term Investments 496 496 Proceeds from Maturities of Securities Available-for-Sale 139,679 78,134 Proceeds from Sales of Securities Available-for-Sale 74,693 75,299 Purchase of Securities Available-for-Sale ( 378,503 ) ( 119,010 ) Proceeds from Redemption of Federal Home Loan Bank Stock 800 1,145 Purchase of Loans — ( 657 ) Loans Made to Customers, net of Payments Received ( 138,132 ) 24,832 Proceeds from Sales of Other Real Estate 316 369 Property and Equipment Expenditures ( 5,162 ) ( 5,619 ) Proceeds from Sale of Land 612 1,022 Proceeds from Life Insurance 1,082 1,019 Acquisition of Citizens First Corporation — 5,545 Net Cash from Investing Activities ( 304,119 ) 62,575 CASH FLOWS FROM FINANCING ACTIVITIES Change in Deposits 550,003 ( 11,975 ) Change in Short-term Borrowings ( 94,756 ) ( 123,651 ) Advances in Long-term Debt — 90,000 Repayments of Long-term Debt ( 40,604 ) ( 57,134 ) Issuance (Repurchase) of Common Stock ( 5,779 ) 6 Dividends Paid ( 15,114 ) ( 13,025 ) Net Cash from Financing Activities 393,750 ( 115,779 ) Net Change in Cash and Cash Equivalents 145,809 ( 7,416 ) Cash and Cash Equivalents at Beginning of Year 103,884 96,550 Cash and Cash Equivalents at End of Period $ 249,693 $ 89,134 Cash Paid During the Period for Interest $ 16,796 $ 22,450 Income Taxes 8,000 7,039 Supplemental Non Cash Disclosures Loans Transferred to Other Real Estate $ — $ 708 Reclassification of Land and Buildings to Other Assets — 1,471 Right of Use Asset Obtained in Exchange for Lease Liabilities — 9,034 See accompanying notes to consolidated financial statements. 12 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 1 – Basis of Presentation and Market Conditions German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries (hereinafter collectively referred to as the "Company") conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Certain items included in the prior period financial statements were reclassified to conform to the current presentation. There was no effect on net income or total shareholders' equity based on these reclassifications. Impact of COVID-19 On January 30, 2020, the World Health Organization (“WHO”) announced that the outbreak of the novel coronavirus disease 2019 (COVID-19) constituted a public health emergency of international concern. On March 11, 2020, WHO declared COVID-19 to be a global pandemic and, on March 13, 2020, the President of the United States declared the COVID-19 outbreak a national emergency. The health concerns relating to the COVID-19 outbreak and related governmental actions taken to reduce the spread of the virus have significantly impacted the global economy (including the states and local economies in which we operate), disrupted supply chains, lowered equity market valuations, and created significant volatility and disruption in financial markets. The outbreak has resulted in authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place or total lock-down orders and business limitations and shutdowns. Such measures have significantly contributed to rising unemployment and negatively impacted consumer and business spending. While many states have lifted quarantine and lock-down orders on a limited basis and with certain social distancing restrictions, commercial activity has not yet returned to the levels existing prior to the pandemic outbreak. As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted. Furthermore, the outbreak could negatively impact our employees and customers’ ability to engage in banking and other financial transactions. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of goodwill, right-of-use lease assets, and other real estate owned could decrease resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. As a result, it is not currently possible to ascertain the continued impact of COVID-19 on the Company’s business. However, if the pandemic continues as a prolonged worldwide health crisis, the disease could have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. NOTE 2 - Recent Accounting Pronouncements Loan Modifications and Troubled Debt Restructures due to COVID-19 On April 7, 2020, the Board of Governors of the Federal Reserve System (the "FRB"), the Office of the Comptroller of the Currency (the “OCC”), and the Federal Deposit Insurance Corporation (the “FDIC” and, together with the FRB and OCC, the “federal banking regulators”) issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructures and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructures. Recently Adopted Accounting Guidance In June 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan 13 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). The new CECL model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers reasonable and supportable forecasts of future economic conditions in addition to information about past events and current conditions. The standard provides significant flexibility and requires a high degree of judgement with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. The Company adopted ASC 326 on January 1, 2020 using the modified restrospective approach. Results for reporting periods after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net reduction of retained earnings of $ 6,717 upon adoption. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $ 6,886 of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2020. The Company expanded the loan portfolio segments used to determine the allowance for credit losses for loans into eight loan segments as opposed to six loan segments under the incurred loss methodology. The following table illustrates the impact of the segment expansion as of January 1, 2020. (dollars in thousands) December 31, 2019 Statement 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 September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) The following table illustrates the impact of ASC 326: (dollars in thousands) December 31, 2019 After 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 $ 14,995 at September 30, 2020 and was reported in Accrued Interest Receivable and Other Assets on the Consolidated Balance Sheets. Interest income is accrued on the unpaid principal balance. Loan origination fees and costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Purchase Credit Deteriorated (PCD) Loans The Company has purchased loans, some of which have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses on loans is determined using the same methodology as other loans held for investment. The initial allowance for credit losses on loans determined on a collective basis is allocated to individual loans. The sum of the loan’s purchase price and allowance for credit losses on loans becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses on loans are recorded through provision expense. Allowance for Credit Losses - Loans The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. 15 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. The Company has identified the following portfolio segments and measures the allowance for credit losses using the following methods: Commercial and Industrial Loans - The principal risk of commercial and industrial loans is that these loans are primarily based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. Most commercial loans are secured by accounts receivable, inventory and equipment. If cash flow from business operations is reduced, the borrower's ability to repay the loan may diminish, and over time, it may also be difficult to substantiate current value of inventory and equipment. Repayment of these loans are more sensitive than other types of loans to adverse conditions in the general economy. Commercial Real Estate Loans - Commercial real estate lending is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be adversely affected by conditions in the real estate markets or in the general economy. Commercial real estate loans are collateralized by the borrower's underlying real estate. Therefore, diminished cash flows not only affects the ability to repay the loan, it may also reduce the underlying collateral value. Agricultural Loans - This portfolio is diversified between real estate financing, equipment financing and lines of credit in various segments including grain production, poultry production and livestock production. Mitigating any concentration of risk that may exist in the Company's agricultural loan portfolio is the use of federal government guarantee programs. Leases - Leases are primarily for equipment leased to varying types of businesses. If the cash flows from the business operations is reduced, the business's ability to repay the lease is diminished as well. Home Equity Loans - Home equity loans are generally secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Consumer Loans - Consumer loan repayment is typically dependent on the borrower remaining employed through the life of the loan as well as the borrower maintaining the underlying collateral adequately. Credit Cards - Credit card loan are unsecured and repayment is primarily dependent on the personal income of the borrower. Residential Mortgage Loans - Residential mortgage loans are typically secured by 1-4 family residences that are owner-occupied. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by unemployment levels in the market area due to economic conditions. Repayment may also be impacted by changes in residential property values. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are also not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs. Troubled Debt Restructurings (“TDR”) A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, is considered to be a TDR. The allowances for credit losses on loans on a TDR is measured using the same method as all other loans held for investment, except that the original interest rate is used to discount the expected cash flows, not the 16 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) rate specified within the restructuring. See “Loan Modifications and Troubled Debt Restructures due to COVID-19” at the beginning of this Note 2 for additional information. Allowance for Credit Losses on Available-For-Sale Securities For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available for sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recorded in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for, or reversal of, credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Allowance for Credit Losses on Off-Balance Sheet Credit Exposures The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The allowance for credit losses on off-balance sheet credit exposures is adjusted as a provision for credit loss expense included in other expense on the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. Expected utilization rates are compared to the current funded portion of the total commitment amount as a practical expedient for funded exposure at default. In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, the amendments eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update became effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and did not have a material impact on the Company's financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendment removes certain disclosures required by Topic 820 related to transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The update also adds certain disclosure requirements related to changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this update became effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019 and did not have a material impact on the Company's financial statements. 17 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 2 - Recent Accounting Pronouncements (continued) Accounting Guidance Issued But Not Yet Adopted In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of adopting the new guidance on the consolidated financial statements on an ongoing basis with no material expected impact at this time. NOTE 3 – Per Share Data The computation of Basic Earnings per Share and Diluted Earnings per Share are as follows: Three Months Ended September 30, 2020 2019 Basic Earnings per Share: Net Income $ 14,593 $ 13,064 Weighted Average Shares Outstanding 26,497,398 26,643,064 Basic Earnings per Share $ 0.55 $ 0.49 Diluted Earnings per Share: Net Income $ 14,593 $ 13,064 Weighted Average Shares Outstanding 26,497,398 26,643,064 Potentially Dilutive Shares, Net — — Diluted Weighted Average Shares Outstanding 26,497,398 26,643,064 Diluted Earnings per Share $ 0.55 $ 0.49 For the three months ended September 30, 2020 and 2019, there were no anti-dilutive shares. Nine Months Ended September 30, 2020 2019 Basic Earnings per Share: Net Income $ 41,320 $ 43,402 Weighted Average Shares Outstanding 26,554,369 25,541,843 Basic Earnings per Share $ 1.56 $ 1.70 Diluted Earnings per Share: Net Income $ 41,320 $ 43,402 Weighted Average Shares Outstanding 26,554,369 25,541,843 Potentially Dilutive Shares, Net — — Diluted Weighted Average Shares Outstanding 26,554,369 25,541,843 Diluted Earnings per Share $ 1.56 $ 1.70 For the nine months ended September 30, 2020 and 2019, there were no anti-dilutive shares. 18 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 4 – Securities The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows: Securities Available-for-Sale: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Allowance for Credit Losses Fair Value September 30, 2020 Obligations of State and Political Subdivisions $ 489,070 $ 25,928 $ ( 986 ) $ — $ 514,012 MBS/CMO 508,004 14,957 ( 63 ) — 522,898 Total $ 997,074 $ 40,885 $ ( 1,049 ) $ — $ 1,036,910 December 31, 2019 Obligations of State and Political Subdivisions $ 307,943 $ 16,366 $ ( 9 ) $ — $ 324,300 MBS/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 September 30, 2020 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed Securities are not due at a single maturity date and are shown separately. Securities Available-for-Sale: Amortized Cost Fair Value Due in one year or less $ 4,737 $ 4,806 Due after one year through five years 17,524 18,128 Due after five years through ten years 73,405 78,053 Due after ten years 393,404 413,025 MBS/CMO 508,004 522,898 Total $ 997,074 $ 1,036,910 Proceeds from the Sales of Securities are summarized below: Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 Proceeds from Sales $ 11,270 $ 53,025 Gross Gains on Sales 607 313 Income Taxes on Gross Gains 127 66 19 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 4 - Securities (continued) Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 Proceeds from Sales $ 74,693 $ 75,299 Gross Gains on Sales 2,190 984 Income Taxes on Gross Gains 464 207 The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $ 224,379 and $ 245,664 as of September 30, 2020 and December 31, 2019, respectively. Below is a summary of securities with unrealized losses as of September 30, 2020 and December 31, 2019, presented by length of time the securities have been in a continuous unrealized loss position: Less than 12 Months 12 Months or More Total September 30, 2020 Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss Obligations of State and Political Subdivisions $ 66,378 $ ( 986 ) $ — $ — $ 66,378 $ ( 986 ) MBS/CMO 32,902 ( 63 ) 4 — 32,906 ( 63 ) Total $ 99,280 $ ( 1,049 ) $ 4 $ — $ 99,284 $ ( 1,049 ) 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 September 30, 2020. Accrued interest receivable on available-for-sale debt securities totaled $ 5,255 at September 30, 2020 and is excluded from the estimate of credit losses. The Company's equity securities are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at September 30, 2020 and December 31, 2019. The original investment totaled $ 1,350 and other-than-temporary impairment was previously recorded totaling $ 997 . The Company's equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. At September 30, 2020, there was no additional impairment recognized through earnings. 20 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 5 – Derivatives The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $ 109.5 million at September 30, 2020 and $ 102.4 million at December 31, 2019. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand-alone derivatives and changes in the fair value of derivatives are reported in earnings as non-interest income. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures. The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of: September 30, 2020 December 31, 2019 Notional Amount Fair Value Notional Amount Fair Value Included in Other Assets: Interest Rate Swaps $ 109,485 $ 9,636 $ 102,351 $ 2,607 Included in Other Liabilities: Interest Rate Swaps $ 109,485 $ 10,293 $ 102,351 $ 2,829 The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Interest Rate Swaps: Included in Other Operating Income $ 64 $ 314 $ ( 169 ) $ 108 21 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 – Loans Loans were comprised of the following classifications at September 30: September 30, 2020 December 31, 2019 Commercial: Commercial and Industrial Loans $ 781,547 $ 532,501 Commercial Real Estate Loans 1,453,280 1,495,862 Agricultural Loans 376,215 384,526 Leases 57,475 57,257 Retail: Home Equity Loans 218,640 225,755 Consumer Loans 64,919 69,264 Credit Cards 10,717 11,953 Residential Mortgage Loans 262,439 304,855 Subtotal 3,225,232 3,081,973 Less: Unearned Income ( 4,105 ) ( 4,882 ) Allowance for credit losses ( 46,768 ) ( 16,278 ) Loans, net $ 3,174,359 $ 3,060,813 On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law, providing an approximately $2 trillion stimulus package that includes direct payments to individual taxpayers, economic stimulus to significantly impacted industry sectors, emergency funding for hospitals and providers, small business loans, increased unemployment benefits, and a variety of tax incentives. For small businesses, eligible nonprofits and certain others, the CARES Act established a Paycheck Protection Program (“PPP”), which is administered by the Small Business Administration (“SBA”). On April 24, 2020, the Paycheck Protection Program and Health Care Enhancement Act was enacted. Among other things, this legislation amends the initial CARES Act program by raising the appropriation level for PPP loans from $349 billion to $670 billion. The PPP was further modified on June 5, 2020 with the adoption of the Paycheck Protection Program Flexibility Act (the “Flexibility Act”), which extended the maturity date for PPP loans from two years to five years for loans disbursed on or after the date of enactment of the Flexibility Act. For PPP loans disbursed prior to such enactment, the Flexibility Act permits the borrower and lender to mutually agree to extend the term of the loan to five years. The vast majority of the Company's PPP loans have two-year maturities. PPP loans earn interest at a fixed rate of 1% and are fully guaranteed by the U.S. government. As of September 30, 2020, the Bank had approximately $ 351.3 million outstanding, on 3,070 PPP loan relationships under this program, all of which are included above in the Commercial and Industrial Loan category. The Company anticipates that the majority of the PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of October 31, 2020, 603 of our loans totaling $ 113 million have been submitted to the SBA for forgiveness. 22 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Allowance for Credit Losses for Loans The following table presents the activity in the allowance for credit losses by portfolio segment for the three months ended September 30, 2020: September 30, 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 $ 8,787 $ 22,369 $ 7,030 $ 202 $ 496 $ 1,062 $ 125 $ 2,360 $ — $ 42,431 Provision for credit loss expense ( 1,017 ) 5,931 ( 315 ) 4 70 — 39 ( 212 ) — 4,500 Loans charged-off ( 73 ) ( 9 ) — — ( 138 ) ( 67 ) ( 27 ) ( 8 ) — ( 322 ) Recoveries collected 3 91 — — 64 — — 1 — 159 Total ending allowance balance $ 7,700 $ 28,382 $ 6,715 $ 206 $ 492 $ 995 $ 137 $ 2,141 $ — $ 46,768 The following table presents the activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2020: September 30, 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 ( 1,182 ) 16,145 ( 166 ) 101 385 65 98 104 — 15,550 Initial allowance on loans purchased with credit deterioration — — — — — — — — — — Loans charged-off ( 369 ) ( 9 ) — — ( 520 ) ( 67 ) ( 86 ) ( 39 ) — ( 1,090 ) Recoveries collected 16 106 — — 252 — 1 2 — 377 Total ending allowance balance $ 7,700 $ 28,382 $ 6,715 $ 206 $ 492 $ 995 $ 137 $ 2,141 $ — $ 46,768 The Company estimates the allowance balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for changes in underwriting standards, portfolio mix, delinquency level, changes in environmental conditions, unemployment rates, risk classifications and collateral values. The allowance for credit losses is measured on a collective (pooled) basis when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not included in the collective evaluation. When the borrower is experiencing financial difficulty at the reporting date and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs. The Company utilizes the Static Pool methodology in determining expected future credit losses. Static pool analysis means segmenting and tracking loans over a period of time based on similar risk characteristics such as loan structure, collateral type, industry of borrower and concentrations, contractual terms and credit risk indicators. Static pool calculates a loss rate on a closed pool of loans that existed on a specified start date based upon the remaining life of each segment. 23 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The Company's expected loss estimate is anchored in historical credit loss experience, with an emphasis on all available portfolio data. The Company's historical look-back period includes January 2014 through the current period, on a monthly basis. Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration industry and collateral concentrations, acquired loan portfolio characteristics and other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible. For the nine months ended September 30, 2020, the allowance for credit losses increased primarily due to macroeconomic factors surrounding the COVID-19 pandemic. While there continues to be great uncertainty related to COVID-19 on our borrowers and communities, we have recognized significant declines in employment and gross domestic product which are key indicators utilized in our forecasting for our allowance calculations. Based on the potential increased losses related to the economic impact of the COVID-19 pandemic, the bank has considered this loss experience may align with loss experience from the recessionary period from 2008-2011 and qualitative adjustments have been made accordingly. Since PPP loans are guaranteed by the Small Business Administration (SBA), they have minimal impact on the allowance for credit losses. All classes of loans, including loans acquired with deteriorated credit quality, are generally placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. For purchased loans, the determination is made at the time of acquisition as well as over the life of the loan. Uncollected accrued interest for each class of loans is reversed against income at the time a loan is placed on non-accrual. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. All classes of loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans are typically charged-off at 180 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following table presents the amortized cost basis of loans on non-accrual status and loans past due over 89 days still accruing as of September 30, 2020: September 30, 2020 Non-Accrual With No Allowance for Credit Loss Non-Accrual Loans Past Due Over 89 Days Still Accruing Commercial and Industrial Loans $ 1,350 $ 8,519 $ — Commercial Real Estate Loans 5,657 10,282 — Agricultural Loans 2,015 2,643 — Leases — — — Home Equity Loans 200 200 — Consumer Loans 61 105 — Credit Cards 66 66 — Residential Mortgage Loans 770 1,063 — Total $ 10,119 $ 22,878 $ — Interest income on non-accrual loans recognized during the three and nine months ended September 30, 2020 totaled $ 1 and $ 17 , respectively. 24 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2020: September 30, 2020 Real Estate Equipment Accounts Receivable Other Total Commercial and Industrial Loans $ 4,973 $ 3,380 $ 699 $ 41 $ 9,093 Commercial Real Estate Loans 13,036 — — 1,604 14,640 Agricultural Loans 3,069 — — 1 3,070 Leases — — — — — Home Equity Loans 415 — — — 415 Consumer Loans 39 3 — 5 47 Credit Cards — — — — — Residential Mortgage Loans 1,043 — — — 1,043 Total $ 22,575 $ 3,383 $ 699 $ 1,651 $ 28,308 The following table presents the aging of the amortized cost basis in past due loans by class of loans as of September 30, 2020: September 30, 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 $ 35 $ 160 $ 4,488 $ 4,683 $ 776,864 $ 781,547 Commercial Real Estate Loans 1,637 — 958 2,595 1,450,685 1,453,280 Agricultural Loans — 578 73 651 375,564 376,215 Leases — — — — 57,475 57,475 Home Equity Loans 401 113 200 714 217,926 218,640 Consumer Loans 259 61 84 404 64,515 64,919 Credit Cards 147 29 66 242 10,475 10,717 Residential Mortgage Loans 3,281 1,947 812 6,040 256,399 262,439 Total $ 5,760 $ 2,888 $ 6,681 $ 15,329 $ 3,209,903 $ 3,225,232 Troubled Debt Restructurings: In certain instances, the Company may choose to restructure the contractual terms of loans. A troubled debt restructuring occurs when the Bank grants a concession to the borrower that it would not otherwise consider due to a borrower’s financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed under the Company’s internal underwriting policy. The Company uses the same methodology for loans acquired with deteriorated credit quality as for all other loans when determining whether the loan is a troubled debt restructuring. As of September 30, 2020, the Company had troubled debt restructurings totaling $ 113 . The Company had no specific allocation of allowance for these loans at September 30, 2020. The Company had no t committed to lending any additional amounts as of September 30, 2020 and December 31, 2019 to customers with outstanding loans that are classified as troubled debt restructurings. During the three and nine months ended September 30, 2020 and 2019, the Company had no loans modified as troubled debt restructurings. Additionally, there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and nine months ended September 30, 2020 and 2019. A loan is considered to be in payment default once it is 30 days contractually past due under the modified terms. 25 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Loan Modifications and Troubled Debt Restructurings due to COVID-19 On April 7, 2020, the federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings. Accordingly, the Company is offering short-term modifications made in response to COVID-19 to borrowers who are current and otherwise not past due. As of September 30, 2020, the following active payment modifications are still in effect. These payment modifications are significantly reduced from the level of active modifications as of June 30, 2020. % of Loan Category (Excludes PPP Loans) Type of Loans (dollars in thousands) Number of Loans Outstanding Balance As of 9/30/2020 As of 6/30/2020 Commercial & Industrial Loans 24 $ 6,154 1.2 % 10.8 % Commercial Real Estate Loans 44 82,986 5.7 % 15.3 % Agricultural Loans — — — % 0.3 % Consumer Loans 1 3 n/m (1) 0.4 % Residential Mortgage Loans 12 1,275 0.5 % 8.2 % Total 81 $ 90,418 3.1 % 10.4 % Credit Quality Indicators: The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $ 250 . This analysis is typically performed on at least an annual basis. The Company uses the following definitions for risk ratings: Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. 26 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Based on the most recent analysis performed, the risk category of loans by class of loans is as follows: Term Loans Amortized Cost Basis by Origination Year As of September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Total Commercial and Industrial: Risk Rating Pass $ 387,099 $ 95,812 $ 54,005 $ 37,396 $ 24,134 $ 55,538 $ 100,294 $ 754,278 Special Mention 187 546 1,350 2,073 185 2,137 2,436 8,914 Substandard 1,167 — 1,193 1,405 976 5,836 7,778 18,355 Doubtful — — — — — — — — Total Commercial & Industrial Loans $ 388,453 $ 96,358 $ 56,548 $ 40,874 $ 25,295 $ 63,511 $ 110,508 $ 781,547 Commercial Real Estate: Risk Rating Pass $ 195,078 $ 241,890 $ 204,211 $ 214,673 $ 186,951 $ 328,350 $ 35,405 $ 1,406,558 Special Mention 527 3,038 1,798 4,511 2,025 15,173 247 27,319 Substandard — 1,119 1,995 1,777 4,343 10,169 — 19,403 Doubtful — — — — — — — — Total Commercial Real Estate Loans $ 195,605 $ 246,047 $ 208,004 $ 220,961 $ 193,319 $ 353,692 $ 35,652 $ 1,453,280 Agricultural: Risk Rating Pass $ 36,822 $ 28,368 $ 33,653 $ 34,303 $ 24,056 $ 70,059 $ 77,605 $ 304,866 Special Mention 5,444 7,803 2,974 8,713 2,138 15,763 15,439 58,274 Substandard 611 73 394 1,255 4,467 6,025 250 13,075 Doubtful — — — — — — — — Total Agricultural Loans $ 42,877 $ 36,244 $ 37,021 $ 44,271 $ 30,661 $ 91,847 $ 93,294 $ 376,215 Leases: Risk Rating Pass $ 14,950 $ 19,334 $ 10,342 $ 6,297 $ 2,194 $ 4,358 $ — $ 57,475 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful — — — — — — — — Total Leases $ 14,950 $ 19,334 $ 10,342 $ 6,297 $ 2,194 $ 4,358 $ — $ 57,475 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. 27 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Term Loans Amortized Cost Basis by Origination Year As of September 30, 2020 2020 2019 2018 2017 2016 Prior Revolving Loans Amortized Cost Basis Total Consumer: Payment performance Performing $ 25,189 $ 21,676 $ 9,777 $ 2,876 $ 1,292 $ 2,444 $ 1,560 $ 64,814 Nonperforming 5 3 2 2 — 62 31 105 Total Consumer Loans $ 25,194 $ 21,679 $ 9,779 $ 2,878 $ 1,292 $ 2,506 $ 1,591 $ 64,919 Home Equity: Payment performance Performing $ — $ — $ 34 $ 46 $ 68 $ 425 $ 217,866 $ 218,439 Nonperforming — — — — — — 201 201 Total Home Equity Loans $ — $ — $ 34 $ 46 $ 68 $ 425 $ 218,067 $ 218,640 Residential Mortgage: Payment performance Performing $ 27,378 $ 28,514 $ 33,281 $ 32,530 $ 29,701 $ 109,972 $ — $ 261,376 Nonperforming — — — — 87 976 — 1,063 Total Residential Mortgage Loans $ 27,378 $ 28,514 $ 33,281 $ 32,530 $ 29,788 $ 110,948 $ — $ 262,439 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 September 30, 2020 Credit Cards Performing $ 10,651 Nonperforming 66 Total $ 10,717 The following table presents loans purchased and/or sold during the year by portfolio segment: September 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 — 527 — — — — — — 527 28 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) Allowance for 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 September 30, 2019: September 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 $ 2,992 $ 5,841 $ 5,725 $ 258 $ 422 $ 349 $ 652 $ 16,239 Provision for Loan Losses 4,468 ( 1,410 ) ( 373 ) ( 72 ) 174 25 ( 12 ) 2,800 Recoveries 2 5 — 8 99 — — 114 Loans Charged-off ( 2,859 ) ( 136 ) — — ( 277 ) ( 12 ) — ( 3,284 ) Ending Balance $ 4,603 $ 4,300 $ 5,352 $ 194 $ 418 $ 362 $ 640 $ 15,869 The following table presents the activity in the allowance for loan losses by portfolio class for the nine months ended September 30, 2019: September 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 4,512 ( 741 ) ( 424 ) ( 33 ) 507 ( 54 ) ( 42 ) 3,725 Recoveries 53 24 — 8 313 6 — 404 Loans Charged-off ( 2,915 ) ( 274 ) — ( 10 ) ( 822 ) ( 62 ) — ( 4,083 ) Ending Balance $ 4,603 $ 4,300 $ 5,352 $ 194 $ 418 $ 362 $ 640 $ 15,869 29 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The following table presents the 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. 30 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The following table presents the average balance and related interest income of loans individually evaluated for impairment by class of loans for the three month period ended September 30, 2019: September 30, 2019 Average Recorded Investment Interest Income Recognized Cash Basis Recognized With No Related Allowance Recorded: Commercial and Industrial Loans and Leases $ 2,868 $ 8 $ — Commercial Real Estate Loans 2,699 45 5 Agricultural Loans 1,539 1 — Subtotal 7,106 54 5 With An Allowance Recorded: Commercial and Industrial Loans and Leases 5,708 — — Commercial Real Estate Loans 2,010 — 3 Agricultural Loans — — — Subtotal 7,718 — 3 Total $ 14,824 $ 54 $ 8 Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above) $ 3,381 $ 43 $ — Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above) $ 815 $ — $ — The following table presents the average balance and related interest income of loans individually evaluated for impairment by class of loans for the nine month period ended September 30, 2019: September 30, 2019 Average Recorded Investment Interest Income Recognized Cash Basis Recognized With No Related Allowance Recorded: Commercial and Industrial Loans and Leases $ 1,157 $ 11 $ 2 Commercial Real Estate Loans 3,093 72 5 Agricultural Loans 1,452 1 — Subtotal 5,702 84 7 With An Allowance Recorded: Commercial and Industrial Loans and Leases 3,374 — — Commercial Real Estate Loans 3,553 — — Agricultural Loans — — — Subtotal 6,927 — — Total $ 12,629 $ 84 $ 7 Loans Acquired With Deteriorated Credit Quality With No Related Allowance Recorded (Included in the Total Above) $ 4,070 $ 58 $ — Loans Acquired With Deteriorated Credit Quality With An Additional Allowance Recorded (Included in the Total Above) $ 2,083 $ — $ — 31 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The following table presents the 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 32 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 6 - Loans (continued) The following table presents the 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 $ 72,981 and $ 39,425 as of September 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, wealth management 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 wealth management 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 73 banking offices at September 30, 2020. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The wealth management 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. 33 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 8 - Segment Information (continued) Core Banking Wealth Management Services Insurance Other Consolidated Totals Three Months Ended September 30, 2020 Net Interest Income $ 39,039 $ 4 $ 2 $ ( 657 ) $ 38,388 Net Gains on Sales of Loans 2,861 — — — 2,861 Net Gains on Securities 607 — — — 607 Trust and Investment Product Fees 2 1,955 — — 1,957 Insurance Revenues 6 1 1,982 — 1,989 Noncash Items: Provision for Credit Losses 4,500 — — — 4,500 Depreciation and Amortization 2,237 2 16 80 2,335 Income Tax Expense (Benefit) 3,268 108 71 ( 293 ) 3,154 Segment Profit (Loss) 14,628 321 216 ( 572 ) 14,593 Segment Assets at September 30, 2020 4,837,899 4,283 10,247 401 4,852,830 Core Banking Wealth Management Services Insurance Other Consolidated Totals Three Months Ended September 30, 2019 Net Interest Income $ 39,302 $ 4 $ 5 $ ( 733 ) $ 38,578 Net Gains on Sales of Loans 1,649 — — — 1,649 Net Gains on Securities 313 — — — 313 Trust and Investment Product Fees 1 1,884 — — 1,885 Insurance Revenues 14 2 1,867 — 1,883 Noncash Items: Provision for Loan Losses 2,800 — — — 2,800 Depreciation and Amortization 2,196 1 14 80 2,291 Income Tax Expense (Benefit) 3,025 137 51 ( 404 ) 2,809 Segment Profit (Loss) 13,538 406 145 ( 1,025 ) 13,064 Segment Assets at December 31, 2019 4,381,945 3,670 9,080 2,977 4,397,672 34 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 8 - Segment Information (continued) Core Banking Wealth Management Services Insurance Other Consolidated Totals Nine Months Ended September 30, 2020 Net Interest Income $ 115,148 $ 12 $ 9 $ ( 2,066 ) $ 113,103 Net Gains on Sales of Loans 7,378 — — — 7,378 Net Gains on Securities 2,190 — — — 2,190 Trust and Investment Product Fees 3 5,852 — — 5,855 Insurance Revenues 11 12 7,025 — 7,048 Noncash Items: Provision for Loan Losses 15,550 — — — 15,550 Depreciation and Amortization 6,748 4 50 241 7,043 Income Tax Expense (Benefit) 8,635 336 471 ( 1,262 ) 8,180 Segment Profit (Loss) 40,573 991 1,437 ( 1,681 ) 41,320 Segment Assets at September 30, 2020 4,837,899 4,283 10,247 401 4,852,830 Core Banking Wealth Management Services Insurance Other Consolidated Totals Nine Months Ended September 30, 2019 Net Interest Income $ 107,619 $ 10 $ 14 $ ( 1,833 ) $ 105,810 Net Gains on Sales of Loans 3,660 — — — 3,660 Net Gains on Securities 984 — — — 984 Trust and Investment Product Fees 3 5,362 — — 5,365 Insurance Revenues 21 27 6,969 — 7,017 Noncash Items: Provision for Loan Losses 3,725 — — — 3,725 Depreciation and Amortization 6,099 4 53 208 6,364 Income Tax Expense (Benefit) 9,117 341 458 ( 1,348 ) 8,568 Segment Profit (Loss) 43,105 993 1,382 ( 2,078 ) 43,402 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 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 221,302 shares of common stock under the 2020 plan. 35 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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, 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 nine months ended September 30, 2020 and 2019, the Company granted no options. The Company recorded no stock compensation expense applicable to options during the three and nine months ended September 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 nine months ended September 30, 2020, the Company awarded grants of 1,192 and 44,370 of restricted stock, respectively. During the three and nine months ended September 30, 2019, the Company granted awards of 5,466 and 31,329 of restricted stock. Total unvested restricted stock awards at September 30, 2020 and December 31, 2019 were 86,079 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 September 30, 2020 2019 Restricted Stock Expense $ 254 $ 311 Cash Entitlement Expense 249 167 Tax Effect ( 125 ) ( 124 ) Net of Tax $ 378 $ 354 Nine Months Ended September 30, 2020 2019 Restricted Stock Expense $ 806 $ 972 Cash Entitlement Expense 737 509 Tax Effect ( 384 ) ( 386 ) Net of Tax $ 1,159 $ 1,095 Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $ 1,071 and $ 2,356 as of September 30, 2020 and 2019, respectively. 36 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 September 30, 2020, the Company recorded $ 11 of expense, $ 8 net of tax, for the employee stock purchase plan. For the nine months ended September 30, 2020, the Company recorded $ 30 of expense, $ 23 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. For the three and nine months ended September 30, 2020, the Company recorded $ 30 of expense, $ 22 net of tax, for the employee stock purchase plan. There was no unrecognized compensation expense as of September 30, 2020 and 2019 for the employee stock purchase plan. 37 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 September 30, 2020, the Company held $ 497 thousand 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. 38 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 - Fair Value (continued) 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. 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 September 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 $ — $ 513,515 $ 497 $ 514,012 MBS/CMO — 522,898 — 522,898 Total Securities $ — $ 1,036,413 $ 497 $ 1,036,910 Loans Held-for-Sale $ — $ 27,993 $ — $ 27,993 Derivative Assets $ — $ 9,636 $ — $ 9,636 Derivative Liabilities $ — $ 10,293 $ — $ 10,293 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 September 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: September 30, 2020 December 31, 2019 Aggregate Fair Value $ 27,993 $ 17,713 Contractual Balance 27,328 17,378 Gain (Loss) 665 335 The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2020 were $ 233 and $ 330 , respectively. The total amount of gains and losses from changes in fair value included in earnings for the three and nine months ended September 30, 2019 were $ 112 and $ 339 , respectively. 39 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 nine months ended September 30, 2020 and 2019: Obligations of State and Political Subdivisions 2020 2019 Balance of Recurring Level 3 Assets at July 1 $ 2,495 $ 4,506 Total Gains or Losses Included in Other Comprehensive Income ( 3 ) ( 1 ) Maturities / Calls ( 1,995 ) ( 475 ) Purchases — — Balance of Recurring Level 3 Assets at September 30 $ 497 $ 4,030 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 ( 26 ) ( 16 ) Maturities / Calls ( 3,498 ) ( 945 ) Purchases — — Balance of Recurring Level 3 Assets at September 30 $ 497 $ 4,030 Of the total gain/loss included in earnings for the three and nine months ended September 30, 2020, ($ 3 ) and ($ 26 ) was attributable to other changes in fair value, respectively. Of the total gain/loss included in earnings for the three and nine months ended September 30, 2019, ($ 1 ) and ($ 16 ) 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 September 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 $ — $ — $ 4,778 $ 4,778 Commercial Real Estate Loans $ — $ — $ 9,372 $ 9,372 Agricultural Loans $ — $ — $ 550 $ 550 Consumer Loans $ — $ — $ 18 $ 18 Home Equity Loans $ — $ — $ 368 $ 368 Residential Mortgage Loans $ — $ — $ 191 $ 191 Fair value for collateral dependent loans, had a carrying amount of $ 22,621 with a valuation allowance of $ 7,344 , resulting in an increase to the provision for credit losses of $ 136 for the three months ended September 30, 2020 and an increase to the provision for credit losses of $ 1,822 for the nine months ended September 30, 2020. 40 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 11 - Fair Value (continued) 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. 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 September 30, 2020. No charge to earnings was included in the three or nine months ended September 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 September 30, 2020 and December 31, 2019: September 30, 2020 Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted Average) Individual Analyzed Loans - Commercial and Industrial Loans $ 4,778 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 %- 100 % ( 60 %) Individual Analyzed Loans - Commercial Real Estate Loans $ 9,372 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 %- 100 % ( 39 %) Individual Analyzed Loans - Agricultural Loans $ 550 Sales comparison approach Adjustment for physical condition of comparable properties sold 30 %- 100 % ( 66 %) Individual Analyzed Loans - Consumer Loans $ 18 Sales comparison approach Adjustment for physical condition of comparable properties sold 24 %- 99 % ( 34 %) Individual Analyzed Loans - Home Equity Loans $ 368 Sales comparison approach Adjustment for physical condition of comparable properties sold 9 %- 9 % ( 9 %) Individual Analyzed Loans - Residential Mortgage Loans $ 191 Sales comparison approach Adjustment for physical condition of comparable properties sold 19 %- 93 % ( 47 %) 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 %) 41 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 September 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 September 30, 2020 and December 31, 2019, present the fair values measured using an exit price notion. Fair Value Measurements at September 30, 2020 Using Carrying Value Level 1 Level 2 Level 3 Total Financial Assets: Cash and Short-term Investments $ 249,693 $ 56,706 $ 192,987 $ — $ 249,693 Interest Bearing Time Deposits with Banks 1,489 — 1,489 — 1,489 Loans, Net 3,159,082 — — 3,175,885 3,175,885 Accrued Interest Receivable 20,452 — 5,435 15,017 20,452 Financial Liabilities: Demand, Savings, and Money Market Deposits ( 3,464,640 ) ( 3,464,640 ) — — ( 3,464,640 ) Time Deposits ( 515,034 ) — ( 514,811 ) — ( 514,811 ) Short-term Borrowings ( 72,981 ) — ( 72,891 ) — ( 72,891 ) Long-term Debt ( 141,563 ) — ( 88,629 ) ( 55,449 ) ( 144,078 ) Accrued Interest Payable ( 1,768 ) — ( 1,731 ) ( 37 ) ( 1,768 ) 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 ) 42 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 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 nine months ended September 30, 2020 and 2019, net of tax: September 30, 2020 Unrealized Gains and Losses on Available-for-Sale Securities Postretirement Benefit Items Total Beginning Balance at July 1, 2020 $ 31,717 $ ( 568 ) $ 31,149 Other Comprehensive Income (Loss) Before Reclassification 74 — 74 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 480 ) — ( 480 ) Net Current Period Other Comprehensive Income (Loss) ( 406 ) — ( 406 ) Ending Balance at September 30, 2020 $ 31,311 $ ( 568 ) $ 30,743 September 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 17,364 — 17,364 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 1,726 ) — ( 1,726 ) Net Current Period Other Comprehensive Income (Loss) 15,638 — 15,638 Ending Balance at September 30, 2020 $ 31,311 $ ( 568 ) $ 30,743 September 30, 2019 Unrealized Gains and Losses on Available-for-Sale Securities Postretirement Benefit Items Total Beginning Balance at July 1, 2019 $ 11,546 $ ( 339 ) $ 11,207 Other Comprehensive Income (Loss) Before Reclassification 4,896 — 4,896 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 247 ) — ( 247 ) Net Current Period Other Comprehensive Income (Loss) 4,649 — 4,649 Ending Balance at September 30, 2019 $ 16,195 $ ( 339 ) $ 15,856 September 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 23,731 — 23,731 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 777 ) — ( 777 ) Net Current Period Other Comprehensive Income (Loss) 22,954 — 22,954 Ending Balance at September 30, 2019 $ 16,195 $ ( 339 ) $ 15,856 43 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 12 - Other Comprehensive Income (Loss) (continued) The tables below summarize the classifications out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 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 $ 607 Net Gains on Securities ( 127 ) Income Tax Expense 480 Net of Tax Total Reclassifications for the Three Months Ended September 30, 2020 $ 480 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 $ 2,190 Net Gains on Securities ( 464 ) Income Tax Expense 1,726 Net of Tax Total Reclassifications for the Nine Months Ended September 30, 2020 $ 1,726 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 $ 313 Net Gains on Securities ( 66 ) Income Tax Expense 247 Net of Tax Total Reclassifications for the Three Months Ended September 30, 2019 $ 247 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 $ 984 Net Gains on Securities ( 207 ) Income Tax Expense 777 Net of Tax Total Reclassifications for the Nine Months Ended September 30, 2019 $ 777 44 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) 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 nine months ended September 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 September 30, Non-interest Income 2020 2019 In-Scope of Topic 606: Trust and Investment Product Fees $ 1,957 $ 1,885 Service Charges on Deposit Accounts 1,773 2,395 Insurance Revenues 1,989 1,883 Interchange Fee Income 2,795 2,538 Other Operating Income 653 590 Non-interest Income (in-scope of Topic 606) 9,167 9,291 Non-interest Income (out-of-scope of Topic 606) 4,112 2,765 Total Non-interest Income $ 13,279 $ 12,056 Nine Months Ended September 30, Non-interest Income 2020 2019 In-Scope of Topic 606: Trust and Investment Product Fees $ 5,855 $ 5,365 Service Charges on Deposit Accounts 5,375 6,319 Insurance Revenues 7,048 7,017 Interchange Fee Income 7,753 6,965 Other Operating Income 1,727 1,520 Non-interest Income (in-scope of Topic 606) 27,758 27,186 Non-interest Income (out-of-scope of Topic 606) 12,025 7,037 Total Non-interest Income $ 39,783 $ 34,223 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 45 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 13 - Revenue Recognition (continued) 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. 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 September 30, were as follows: Three Months Ended Three Months Ended September 30, 2020 September 30, 2019 Finance Lease Cost: Amortization of Right-of -Use Assets $ 52 $ 83 Interest on Lease Liabilities 91 188 Operating Lease Cost 446 514 Short-term Lease Cost — 15 Total Lease Cost $ 589 $ 800 The components of lease expense for the nine months ended September 30, were as follows: Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 Finance Lease Cost: Amortization of Right-of -Use Assets $ 157 $ 187 Interest on Lease Liabilities 274 379 Operating Lease Cost 1,352 1,234 Short-term Lease Cost 34 45 Total Lease Cost $ 1,817 $ 1,845 46 GERMAN AMERICAN BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2020 (unaudited, dollars in thousands except share and per share data) NOTE 14 - Leases (continued) The weighted average lease term and discount rates were as follows: September 30, 2020 September 30, 2019 Weighted Average Remaining Lease Term: Finance Leases 11 years 12 years Operating Leases 8 years 8 years Weighted Average Discount Rate: Finance Leases 11.48 % 11.49 % Operating Leases 3.18 % 3.39 % Supplemental balance sheet information related to leases was as follows: September 30, 2020 September 30, 2019 Finance Leases Premises, Furniture and Equipment, Net $ 2,330 $ 2,540 Other Borrowings 3,265 3,418 Operating Leases Operating Lease Right-of-Use Assets $ 8,579 $ 9,802 Operating Lease Liabilities 8,675 9,900 Supplemental cash flow information related to leases was as follows: Nine Months Ended Nine Months Ended September 30, 2020 September 30, 2019 Cash paid for amounts in the measurement of lease liabilities: Operating Cash Flows from Finance Leases $ 274 $ 285 Operating Cash Flows from Operating Leases 1,292 1,181 Financing Cash Flows from Finance Leases 92 81 The following table presents a maturity analysis of Finance and Operating Lease Liabilities: September 30, 2020 Finance Leases Operating Leases Year 1 $ 519 $ 1,594 Year 2 519 1,385 Year 3 519 1,275 Year 4 519 1,115 Year 5 519 964 Thereafter 3,083 3,631 Total Lease Payments 5,678 9,964 Less Imputed Interest ( 2,413 ) ( 1,289 ) Total $ 3,265 $ 8,675 47