Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x           Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2010

Or

o           Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from _______________  to  ___________________

Commission File Number 001-15877

German American Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Indiana
35-1547518
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

711 Main Street, Jasper, Indiana  47546
(Address of Principal Executive Offices and Zip Code)

Registrant’s telephone number, including area code: (812) 482-1314

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES   x       NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES   x       NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer o      Accelerated filer x    Non-accelerated filer o     Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act):
YES  o   NO  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at August 2, 2010
Common Stock, no par value
11,104,918

CAUTION REGARDING FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Information included in or incorporated by reference in this Quarterly Report on Form 10-Q, our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contains or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Please refer to the discussions of our forward-looking statements and associated risks in our annual report on Form 10-K for the year ended December 31, 2009, in Item 1, “Business – Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” of that annual report on Form 10-K, as updated from time to time in our subsequent SEC filings, including by Item 1A of Part II of this Report and by Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) at the conclusion of that Item 2 under the heading “Forward-Looking Statements and Associated Risks.”
 

 
*****

INDEX

PART I.
FINANCIAL INFORMATION
 
3
       
Item 1.
Financial Statements
 
3
       
 
Consolidated Balance Sheets – June 30, 2010 and December 31, 2009
 
3
       
 
Consolidated Statements of Income and Comprehensive Income - Three Months Ended June 30, 2010 and 2009
 
4
       
 
Consolidated Statements of Income and Comprehensive Income - Six Months Ended June 30, 2010 and 2009
 
5
       
 
Consolidated Statements of Cash Flows – Six Months Ended  June 30, 2010 and 2009
 
6
       
 
Notes to Consolidated Financial Statements – June 30, 2010
 
7-19
       
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
20-30
       
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
30
       
Item 4.
Controls and Procedures
 
31
       
PART II.
OTHER INFORMATION
 
32
       
Item 1A.
Risk Factors
 
32
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
32
       
Item 5.
Other Information
 
32-33
       
Item 6.
Exhibits
 
33
     
 
SIGNATURES  
34
       
INDEX OF EXHIBITS  
35
 
2

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

   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
ASSETS
           
Cash and Due from Banks
  $ 17,110     $ 16,052  
Federal Funds Sold and Other Short-term Investments
    19,399       12,002  
Cash and Cash Equivalents
    36,509       28,054  
                 
Securities Available-for-Sale, at Fair Value
    298,555       250,940  
Securities Held-to-Maturity, at Cost (Fair value of $1,899 and $2,801 on June 30, 2010 and December 31, 2009, respectively)
    1,886       2,774  
                 
Loans Held-for-Sale
    10,768       5,706  
                 
Loans
    914,667       879,475  
Less: Unearned Income
    (1,729 )     (1,653 )
         Allowance for Loan Losses
    (10,813 )     (11,016 )
Loans, Net
    902,125       866,806  
                 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost
    10,621       10,621  
Premises, Furniture and Equipment, Net
    26,182       22,153  
Other Real Estate
    1,822       2,363  
Goodwill
    9,835       9,655  
Intangible Assets
    3,056       2,618  
Company Owned Life Insurance
    24,400       24,008  
Accrued Interest Receivable and Other Assets
    15,169       17,267  
  TOTAL ASSETS
  $ 1,340,928     $ 1,242,965  
                 
LIABILITIES
               
Non-interest-bearing Demand Deposits
  $ 166,922     $ 155,268  
Interest-bearing Demand, Savings, and Money Market Accounts
    522,438       484,699  
Time Deposits
    360,496       329,676  
Total Deposits
    1,049,856       969,643  
                 
FHLB Advances and Other Borrowings
    157,861       148,121  
Accrued Interest Payable and Other Liabilities
    13,054       11,652  
  TOTAL LIABILITIES
    1,220,771       1,129,416  
                 
SHAREHOLDERS’ EQUITY
               
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued
           
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized
    11,105       11,077  
Additional Paid-in Capital
    69,020       68,816  
Retained Earnings
    32,595       29,041  
Accumulated Other Comprehensive Income, Net of Tax
    7,437       4,615  
  TOTAL SHAREHOLDERS’ EQUITY
    120,157       113,549  
  TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 1,340,928     $ 1,242,965  
End of period shares issued and outstanding
    11,104,918       11,077,382  
 
See accompanying notes to consolidated financial statements.
 
3


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

   
Three Months Ended
 
    
June 30,
 
   
2010
   
2009
 
INTEREST INCOME
           
Interest and Fees on Loans
  $ 13,194     $ 13,473  
Interest on Federal Funds Sold and Other Short-term Investments
    27       22  
Interest and Dividends on Securities:
               
Taxable
    2,462       2,151  
Non-taxable
    258       277  
TOTAL INTEREST INCOME
    15,941       15,923  
                 
INTEREST EXPENSE
               
Interest on Deposits
    2,686       3,335  
Interest on FHLB Advances and Other Borrowings
    1,340       1,471  
TOTAL INTEREST EXPENSE
    4,026       4,806  
                 
NET INTEREST INCOME
    11,915       11,117  
Provision for Loan Losses
    1,000       1,000  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    10,915       10,117  
                 
NON-INTEREST INCOME
               
Trust and Investment Product Fees
    395       457  
Service Charges on Deposit Accounts
    1,075       1,080  
Insurance Revenues
    1,083       1,290  
Company Owned Life Insurance
    186       200  
Other Operating Income
    553       368  
Net Gains on Sales of Loans
    499       461  
Net Gain (Loss) on Securities
          (34 )
TOTAL NON-INTEREST INCOME
    3,791       3,822  
                 
NON-INTEREST EXPENSE
               
Salaries and Employee Benefits
    5,288       5,515  
Occupancy Expense
    835       816  
Furniture and Equipment Expense
    600       654  
FDIC Premiums
    336       885  
Data Processing Fees
    365       344  
Professional Fees
    524       405  
Advertising and Promotion
    273       199  
Supplies
    246       142  
Intangible Amortization
    247       221  
Other Operating Expenses
    1,188       1,052  
TOTAL NON-INTEREST EXPENSE
    9,902       10,233  
                 
Income before Income Taxes
    4,804       3,706  
Income Tax Expense
    1,396       942  
NET INCOME
  $ 3,408     $ 2,764  
                 
COMPREHENSIVE INCOME
  $ 5,331     $ 2,092  
                 
Earnings Per Share and Diluted Earnings Per Share
  $ 0.31     $ 0.25  
Dividends Per Share
  $ 0.14     $ 0.14  

See accompanying notes to consolidated financial statements.
 
4

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

   
Six Months Ended
 
    
June 30,
 
   
2010
   
2009
 
INTEREST INCOME
           
Interest and Fees on Loans
  $ 26,033     $ 26,867  
Interest on Federal Funds Sold and Other Short-term Investments
    36       39  
Interest and Dividends on Securities:
               
Taxable
    4,927       4,341  
Non-taxable
    528       533  
TOTAL INTEREST INCOME
    31,524       31,780  
                 
INTEREST EXPENSE
               
Interest on Deposits
    5,298       7,340  
Interest on FHLB Advances and Other Borrowings
    2,662       2,682  
TOTAL INTEREST EXPENSE
    7,960       10,022  
                 
NET INTEREST INCOME
    23,564       21,758  
Provision for Loan Losses
    2,500       1,750  
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    21,064       20,008  
                 
NON-INTEREST INCOME
               
Trust and Investment Product Fees
    786       847  
Service Charges on Deposit Accounts
    2,021       2,140  
Insurance Revenues
    2,769       2,777  
Company Owned Life Insurance
    388       438  
Other Operating Income
    1,589       872  
Net Gains on Sales of Loans
    817       1,026  
Net Gain (Loss) on Securities
          (34 )
TOTAL NON-INTEREST INCOME
    8,370       8,066  
                 
NON-INTEREST EXPENSE
               
Salaries and Employee Benefits
    10,837       11,129  
Occupancy Expense
    1,722       1,683  
Furniture and Equipment Expense
    1,252       1,316  
FDIC Premiums
    688       1,220  
Data Processing Fees
    724       701  
Professional Fees
    1,045       1,012  
Advertising and Promotion
    542       487  
Supplies
    441       277  
Intangible Amortization
    465       442  
Other Operating Expenses
    2,452       2,047  
TOTAL NON-INTEREST EXPENSE
    20,168       20,314  
                 
Income before Income Taxes
    9,266       7,760  
Income Tax Expense
    2,607       2,054  
NET INCOME
  $ 6,659     $ 5,706  
                 
COMPREHENSIVE INCOME
  $ 9,481     $ 6,397  
                 
Earnings Per Share and Diluted Earnings Per Share
  $ 0.60     $ 0.52  
Dividends Per Share
  $ 0.28     $ 0.28  
 
See accompanying notes to consolidated financial statements.
 
5


GERMAN AMERICAN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)

   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 6,659     $ 5,706  
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
               
Net (Accretion) Amortization on Securities
    278       (170 )
Depreciation and Amortization
    1,812       1,797  
Loans Originated for Sale
    (40,891 )     (79,937 )
Proceeds from Sales of Loans Held-for-Sale
    36,646       71,754  
Loss in Investment in Limited Partnership
    33       78  
Provision for Loan Losses
    2,500       1,750  
Gain on Sale of Loans, net
    (817 )     (1,026 )
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets
    (237 )     314  
Loss (Gain) on Disposition and Impairment of Premises and Equipment
    (55 )     11  
Other-than-temporary Impairment on Securities
          34  
Increase in Cash Surrender Value of Company Owned Life Insurance
    (392 )     (444 )
Equity Based Compensation
    200       235  
Change in Assets and Liabilities:
               
Interest Receivable and Other Assets
    2,218       3,431  
Interest Payable and Other Liabilities
    (202 )     (1,844 )
Net Cash from Operating Activities
    7,752       1,689  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from Maturities of Securities Available-for-Sale
    25,873       19,191  
Proceeds from Sales of Securities Available-for-Sale
          379  
Purchase of Securities Available-for-Sale
    (69,406 )     (41,729 )
Proceeds from Maturities of Securities Held-to-Maturity
    889       309  
Purchase of Loans
    (175 )     (20,666 )
Proceeds from Sales of Loans
    3,711       12,938  
Loans Made to Customers, net of Payments Received
    472       373  
Proceeds from Sales of Other Real Estate
    1,889       322  
Property and Equipment Expenditures
    (652 )     (1,275 )
Proceeds from Sales of Property and Equipment
    491       4  
Acquire Bank Branches
    855        
Acquire Insurance Customer List
          (386 )
Net Cash from Investing Activities
    (36,053 )     (30,540 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Change in Deposits
    30,090       14,028  
Change in Short-term Borrowings
    10,535       (3,050 )
Advances in Long-term Debt
          19,250  
Repayments of Long-term Debt
    (796 )     (33 )
Issuance of Common Stock
    32       5  
Dividends Paid
    (3,105 )     (3,094 )
Net Cash from Financing Activities
    36,756       27,106  
                 
Net Change in Cash and Cash Equivalents
    8,455       (1,745 )
Cash and Cash Equivalents at Beginning of Year
    28,054       44,992  
Cash and Cash Equivalents at End of Period
  $ 36,509     $ 43,247  
                 
Cash Paid During the Period for
               
Interest
  $ 7,858     $ 10,721  
Income Taxes
    2,678       2,270  
Supplemental Non Cash Disclosures(1)
               
Loans Transferred to Other Real Estate
  $ 1,112     $ 1,266  
(1) See Note 11 for non-cash transactions included in the acquisition of bank branches.

See accompanying notes to consolidated financial statements.

 
6

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 1 – Basis of Presentation

German American Bancorp, Inc. operates primarily in the banking industry.  The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting principles.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted.  All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature.  Certain prior year amounts have been reclassified to conform with current classifications.  It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp, Inc. December 31, 2009 Annual Report on Form 10-K.

Note 2 – Per Share Data
 
The computations of Earnings per Share and Diluted Earnings per Share are as follows:
 
   
Three Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Earnings per Share:
           
Net Income
  $ 3,408     $ 2,764  
                 
Weighted Average Shares Outstanding
    11,103,095       11,073,081  
Earnings per Share
  $ 0.31     $ 0.25  
                 
Diluted Earnings per Share:
               
Net Income
  $ 3,408     $ 2,764  
                 
Weighted Average Shares Outstanding
    11,103,095       11,073,081  
Potentially Dilutive Shares, Net
    5,065       494  
Diluted Weighted Average Shares Outstanding
    11,108,160       11,073,575  
                 
Diluted Earnings per Share
  $ 0.31     $ 0.25  

Stock options for 99,275 and 138,003 shares of common stock were not considered in computing diluted earnings per share for the quarters ended June 30, 2010 and 2009, respectively, because they were anti-dilutive.

The computations of Earnings per Share and Diluted Earnings per Share are as follows:
 
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Earnings per Share:
           
Net Income
  $ 6,659     $ 5,706  
                 
Weighted Average Shares Outstanding
    11,092,447       11,055,111  
Earnings per Share
  $ 0.60     $ 0.52  
                 
Diluted Earnings per Share:
               
Net Income
  $ 6,659     $ 5,706  
                 
Weighted Average Shares Outstanding
    11,092,447       11,055,111  
Potentially Dilutive Shares, Net
    4,896        
Diluted Weighted Average Shares Outstanding
    11,097,343       11,055,111  
                 
Diluted Earnings per Share
  $ 0.60     $ 0.52  
 
Stock options for 99,275 and 169,433 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2010 and 2009, respectively, because they were anti-dilutive.
 
 
7

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 3 – Securities
 
The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at June 30, 2010 and December 31, 2009, were as follows:

         
Gross
   
Gross
       
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
Securities Available-for-Sale:
                       
                         
June 30, 2010
                       
U.S. Treasury and Agency Securities
  $     $     $     $  
Obligations of State and Political Subdivisions
    21,204       1,121       (23 )     22,302  
Mortgage-backed Securities - Residential
    263,151       10,755       (137 )     273,769  
Equity Securities
    2,818             (334 )     2,484  
Total
  $ 287,173     $ 11,876     $ (494 )   $ 298,555  
                                 
December 31, 2009
                               
U.S. Treasury and Agency Securities
  $ 5,000     $     $ (30 )   $ 4,970  
Obligations of State and Political Subdivisions
    21,511       931       (64 )     22,378  
Mortgage-backed Securities - Residential
    214,591       7,065       (404 )     221,252  
Equity Securities
    2,818       13       (491 )     2,340  
Total
  $ 243,920     $ 8,009     $ (989 )   $ 250,940  

Equity securities that do not have readily determinable fair values are included in the above totals, are carried at historical cost and are evaluated for impairment on a periodic basis.  All mortgage-backed securities in the above table are residential mortgage-backed securities and guaranteed by government sponsored entities.

The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity at June 30, 2010 and December 31, 2009, were as follows:

         
Gross
   
Gross
       
   
Carrying
   
Unrecognized
   
Unrecognized
   
Fair
 
   
Amount
   
Gains
   
Losses
   
Value
 
Securities Held-to-Maturity:
                       
June 30, 2010
                       
Obligations of State and Political Subdivisions
  $ 1,886     $ 13     $     $ 1,899  
                                 
December 31, 2009
                               
Obligations of State and Political Subdivisions
  $ 2,774     $ 27     $     $ 2,801  

 
8

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 3 – Securities (continued)

The amortized cost and fair value of Securities at June 30, 2010 by contractual maturity are shown below.  Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties.  Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately.
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Securities Available-for-Sale:
           
Due in one year or less
  $ 785     $ 790  
Due after one year through five years
    3,419       3,588  
Due after five years through ten years
    4,678       4,762  
Due after ten years
    12,322       13,162  
Mortgage-backed Securities - Residential
    263,151       273,769  
Equity Securities
    2,818       2,484  
Totals
  $ 287,173     $ 298,555  

   
Carrying
   
Fair
 
   
Amount
   
Value
 
Securities Held-to-Maturity:
           
Due in one year or less
  $ 175     $ 175  
Due after one year through five years
    454       456  
Due after five years through ten years
    937       948  
Due after ten years
    320       320  
Totals
  $ 1,886     $ 1,899  

Below is a summary of securities with unrealized losses as of June 30, 2010 and December 31, 2009, presented by length of time the securities have been in a continuous unrealized loss position:

At June 30, 2010:
 
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
                                     
U.S. Treasury and Agency Securities
  $     $     $     $     $     $  
Obligations of State and Political Subdivisions
    1,273       (10 )     987       (13 )     2,260       (23 )
Mortgage-backed Securities - Residential
    17,182       (136 )     39       (1 )     17,221       (137 )
Equity Securities
                1,689       (334 )     1,689       (334 )
Total
  $ 18,455     $ (146 )   $ 2,715     $ (348 )   $ 21,170     $ (494 )

At December 31, 2009:
 
Less than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Loss
   
Value
   
Loss
   
Value
   
Loss
 
                                     
U.S. Treasury and Agency Securities
  $ 4,970     $ (30 )   $     $     $ 4,970     $ (30 )
Obligations of State and Political Subdivisions
    3,419       (64 )                 3,419       (64 )
Mortgage-backed Securities - Residential
    47,726       (403 )     40       (1 )     47,766       (404 )
Equity Securities
    1,533       (491 )                 1,533       (491 )
Total
  $ 57,648     $ (988 )   $ 40     $ (1 )   $ 57,688     $ (989 )

 
9

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 3 – Securities (continued)

Securities are written down to fair value when a decline in fair value is not considered temporary.  In estimating other-than-temporary losses, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery.  The Company doesn’t intend to sell or expect to be required to sell these securities, and the decline in fair value is largely due to changes in market interest rates, therefore, the Company does not consider these securities to be other-than-temporarily impaired.  As a result of valuations of the Company’s equity securities portfolio during the second quarter of 2009, the Company recognized a $34 pre-tax charge for an other-than-temporary decline in fair value of this portfolio.  All mortgage-backed securities in the Company’s portfolio are guaranteed by government sponsored entities, are investment grade, and are performing as expected.

The Company’s equity securities consist of non-controlling investments in other banking organizations.  When a decline in fair value below cost is deemed to be other-than-temporary, the unrealized loss must be recognized as a charge to earnings.    At June 30, 2010 and December 31, 2009, certain equity securities in the Company’s portfolio with fair values below amortized cost were deemed to not be other-than-temporarily impaired due in large part to the overall financial condition of the issuers which included continued profitability throughout the first half of 2010 and during 2009 and that the fair value of the securities has declined due to difficult macroeconomic conditions for equity security valuations of banking organizations.  In addition, the length of time that fair value has been less than cost was assessed and it is reasonable to expect that fair value can recover to a level greater than cost in a reasonable period of time.

Proceeds from the sales of Available-for-Sale Securities are summarized below:
 
   
Three Months
   
Six Months
 
   
Ended
   
Ended
 
   
June 30, 2010
   
June 30, 2010
 
             
Proceeds from Sales and Calls
  $     $  
Gross Gains on Sales and Calls
           
                 
Income Taxes on Gross Gains
           

Proceeds from the sales of Available-for-Sale Securities are summarized below:
 
   
Three Months
   
Six Months
 
   
Ended
   
Ended
 
   
June 30, 2009
   
June 30, 2009
 
             
Proceeds from Sales and Calls
  $     $ 379  
Gross Gains on Sales and Calls
           
                 
Income Taxes on Gross Gains
           

 
10

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 4 – Loans

Total loans, as presented on the balance sheet, are comprised of the following classifications:
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
Commercial and Industrial Loans
  $ 226,876     $ 188,962  
Commercial Real Estate Loans
    340,229       334,255  
Agricultural Loans
    150,462       156,845  
Consumer Loans
    115,553       114,736  
Residential Mortgage Loans
    81,547       84,677  
Total Loans
  $ 914,667     $ 879,475  
Less:    Unearned Income
    (1,729 )     (1,653 )
 Allowance for Loan Losses
    (10,813 )     (11,016 )
Loans, Net
  $ 902,125     $ 866,806  

Information Regarding Impaired Loans:

Impaired Loans with No Allowance for Loan Losses Allocated
  $ 1,469     $ 1,213  
Impaired Loans with Allowance for Loan Losses Allocated
    5,902       6,932  
                 
Amount of Allowance Allocated to Impaired Loans
    2,004       3,024  

Note 5 – Allowance for Loan Losses

A summary of the activity in the Allowance for Loan Losses follows:
   
June 30,
   
June 30,
 
   
2010
   
2009
 
             
Balance as of January 1
  $ 11,016     $ 9,522  
Provision for Loan Losses
    2,500       1,750  
Recoveries of Prior Loan Losses
    439       600  
Loan Losses Charged to the Allowance
    (3,142 )     (1,577 )
Balance as of June 30
  $ 10,813     $ 10,295  

Note 6 – Segment Information

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

The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operates through 30 retail banking offices.  Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment.  The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company.  These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment consists of German American Insurance, Inc., which provides a full line of personal and corporate insurance products from seven offices; and German American Reinsurance Company, Ltd., which reinsures credit insurance products sold by the Company’s subsidiary bank.  Commissions derived from the sale of insurance products are the primary source of revenue for the insurance segment.

 
11

 
GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 6 – Segment Information (continued)

The following segment financial information has been derived from the internal financial statements of German American Bancorp, Inc., which are used by management to monitor and manage the financial performance of the Company.  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.

Three Months Ended
June 30, 2010
         
Trust and
                   
         
Investment
                   
   
Core
   
Advisory
               
Consolidated
 
   
Banking
   
Services
   
Insurance
   
Other
   
Totals
 
                               
Net Interest Income
  $ 12,356     $ 2     $ 9     $ (452 )   $ 11,915  
Net Gains on Sales of Loans
    499                         499  
Net Gain (Loss) on Securities
                             
Trust and Investment Product Fees
    1       395             (1 )     395  
Insurance Revenues
    17       1       1,072       (7 )     1,083  
Noncash Item:
                                       
Provision for Loan Losses
    1,000                         1,000  
Depreciation and Amortization
    615       7       227             849  
Income Tax Expense
    1,883       (53 )     (105 )     (329 )     1,396  
Segment Profit (Loss)
    3,874       (80 )     (171 )     (215 )     3,408  
Segment Assets
    1,334,688       2,284       8,188       (4,232 )     1,340,928  

Three Months Ended
June 30, 2009
         
Trust and
                   
         
Investment
                   
   
Core
   
Advisory
               
Consolidated
 
   
Banking
   
Services
   
Insurance
   
Other
   
Totals
 
                               
Net Interest Income
  $ 11,452     $ 4     $ 15     $ (354 )   $ 11,117  
Net Gains on Sales of Loans
    461                         461  
Net Gain (Loss) on Securities
                      (34 )     (34 )
Trust and Investment Product Fees
    1       457             (1 )     457  
Insurance Revenues
    34       2       1,267       (13 )     1,290  
Noncash Item:
                                       
Provision for Loan Losses
    1,000                         1,000  
Depreciation and Amortization
    666       7       226             899  
Income Tax Expense
    1,211       9       24       (302 )     942  
Segment Profit (Loss)
    2,874       14       40       (164 )     2,764  
Segment Assets
    1,218,143       2,054       8,489       (4,194 )     1,224,492  

 
12

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 6 – Segment Information (continued)

Six Months Ended
June 30, 2010
         
Trust and
                   
         
Investment
                   
   
Core
   
Advisory
               
Consolidated
 
   
Banking
   
Services
   
Insurance
   
Other
   
Totals
 
                               
Net Interest Income
  $ 24,442     $ 4     $ 17     $ (899 )   $ 23,564  
Net Gains on Sales of Loans
    817                         817  
Net Gain (Loss) on Securities
                             
Trust and Investment Product Fees
    2       786             (2 )     786  
Insurance Revenues
    30       7       2,746       (14 )     2,769  
Noncash Item:
                                       
Provision for Loan Losses
    2,500                         2,500  
Depreciation and Amortization
    1,335       13       464             1,812  
Income Tax Expense
    3,321       (104 )     8       (618 )     2,607  
Segment Profit (Loss)
    7,241       (157 )     (10 )     (415 )     6,659  
Segment Assets
    1,334,688       2,284       8,188       (4,232 )     1,340,928  

Six Months Ended
June 30, 2009
         
Trust and
                   
         
Investment
                   
   
Core
   
Advisory
               
Consolidated
 
   
Banking
   
Services
   
Insurance
   
Other
   
Totals
 
                               
Net Interest Income
  $ 22,199     $ 5     $ 28     $ (474 )   $ 21,758  
Net Gains on Sales of Loans
    1,026                         1,026  
Net Gain (Loss) on Securities
                      (34 )     (34 )
Trust and Investment Product Fees
    2       847             (2 )     847  
Insurance Revenues
    50       4       2,750       (27 )     2,777  
Noncash Item:
                                       
Provision for Loan Losses
    1,750                         1,750  
Depreciation and Amortization
    1,331       14       452             1,797  
Income Tax Expense
    2,553       (44 )     47       (502 )     2,054  
Segment Profit (Loss)
    5,824       (66 )     76       (128 )     5,706  
Segment Assets
    1,218,143       2,054       8,489       (4,194 )     1,224,492  

Note 7 – Stock Repurchase Plan

On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 607,754 (as adjusted for subsequent stock dividends) of the outstanding Common Shares of the Company.  Shares may be purchased from time to time in the open market and in large block privately negotiated transactions.  The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program is purchased.  As of June 30, 2010, the Company had purchased 334,965 (as adjusted for subsequent stock dividends) shares under the program.  No shares were purchased under the plan during the six months ended June 30, 2010.

 
13

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 8 – Equity Plans and Equity Based Compensation

The Company maintains equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted.  At June 30, 2010, the Company has reserved 657,956 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options, restricted stock, and other equity awards to officers, directors and other employees of the Company.

For the six months ended June 30, 2010 and 2009, the Company granted no options, and accordingly, recorded no stock option expense related to option grants during the three or six months ended June 30, 2010 and 2009.  In addition, there was no unrecognized option expense as all outstanding options were fully vested prior to June 30, 2010 and 2009.

During the quarter ended June 30, 2010 and 2009, the Company granted no restricted stock awards.  During the six months ended June 30, 2010 and 2009, the Company granted awards of 24,178 and 42,775 shares of restricted stock, respectively.  The expense recorded for the restricted stock grants totaled $100 (or $60, net of an income tax benefit of $40) and $200 (or $121, net of an income tax benefit of $79) during the three and six months ended June 30, 2010.  The expense recorded for the restricted stock grants totaled $117 (or $71, net of an income tax benefit of $46) and $235 (or $142, net of an income tax benefit of $93) during the three and six months ended June 30, 2009.  Unrecognized expense associated with the restricted stock grants totaled $200 and $235 as of June 30, 2010 and 2009, respectively.

The Company maintains an Employee Stock Purchase Plan (a 1999 plan that expired at the end of the most recent plan year in August 2009; a 2009 plan that is substantively the same in all material respects has succeeded the 1999 plan for the annual offering period that commenced in August 2009) whereby eligible employees have the option to purchase the Company’s common stock at a discount.  The plan year for the Employee Stock Purchase Plan runs from August 17 through August 16 of the subsequent year.

The purchase price of the shares under this Plan is 95% of the fair market value of the Company’s common stock as of the last day of the plan year.  The 1999 plan provided for the purchase of up to 542,420 shares of common stock, and the 2009 plan provides for the purchase of up to 500,000 shares of common stock.  The Company may obtain shares for sale under both the 1999 and 2009 plans by purchases on the open market or from private sources, or by issuing authorized but unissued common shares.  Funding for the purchase of common stock is from employee and Company contributions.  The Employee Stock Purchase Plan was not considered compensatory and no expense was recorded during the 2008/2009 and 2009/2010 plan years.

Note 9 – Employee Benefit Plans

The Company acquired through previous bank mergers a noncontributory defined benefit pension plan with benefits based on years of service and compensation prior to retirement.  The benefits under the plan were suspended in 1998.  The following tables represent the components of net periodic benefit cost for the periods presented:
   
Three Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Service Cost
  $     $  
Interest Cost
    8       9  
Expected Return on Assets
          (2 )
Amortization of Transition Amount
           
Amortization of Prior Service Cost
    (1 )      
Recognition of Net (Gain) Loss
    7       4  
Net Periodic Benefit Cost
  $ 14     $ 11  
                 
Loss on Settlements and Curtailments
 
None
   
None
 

 
14

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 9 – Employee Benefit Plans (continued)
   
Six Months Ended
 
   
June 30,
 
   
2010
   
2009
 
Service Cost
  $     $  
Interest Cost
    17       18  
Expected Return on Assets
    (1 )     (4 )
Amortization of Transition Amount
           
Amortization of Prior Service Cost
    (2 )     (1 )
Recognition of Net (Gain) Loss
    13       8  
Net Periodic Benefit Cost
  $ 27     $ 21  
                 
Loss on Settlements and Curtailments
 
None
   
None
 

The Company previously disclosed in its financial statements for the year ended December 31, 2009, that it expected to contribute $75 to the pension plan during the fiscal year ending December 31, 2010.  As of June 30, 2010, the Company has contributed $39 to the pension plan.

Note 10 – 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 securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).  For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Impaired Loans:  Values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances 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 investors required return.  Adjustments are routinely made in the appraisal process to adjust for differences between the comparable sale and income data available.  Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 
15

 

GERMAN AMERICAN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(unaudited, dollars in thousands except share and per share data)

Note 10 – Fair Value (continued)
 
Other Real Estate:  Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate (ORE) are measured at the lower of carrying amount or fair value, less costs to sell.  Fair values are generally based on third party appraisals of the property utilizing similar techniques as discussed above for Impaired Loans, resulting in a Level 3 classification.  In cases where the carrying amount exceeds the fair value, less costs to sell, impairment loss is recognized.

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

Assets and Liabilities Measured on a Recurring Basis
 
Assets and liabilities measured at fair value on a recurring basis are summarized below:
 
         
Fair Value Measurements at June 30, 2010 Using
 
         
Quoted Prices in
             
         
Active Markets for
   
Significant Other
   
Significant
 
         
Identical Assets
   
Observable Inputs
   
Unobservable Inputs
 
   
Carrying Value
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
U.S. Treasury and Agency Securities
  $     $     $     $  
Obligations of State and
                               
Political Subdivisions
    22,302             22,302        
Mortgage-backed Securities-Residential
    273,769             273,769        
Equity Securities
    2,484       2,131             353  
Loans Held-for-Sale
    10,768             10,768