GABC 10-Q Quarterly Report June 30, 2022

GERMAN AMERICAN BANCORP, INC.

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gabc-20220630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2022

Commission File Number 001-15877

German American Bancorp, Inc.

(Exact name of registrant as specified in its charter)


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

711 Main Street, Jasper, Indiana 47546

(Address of Principal Executive Offices and Zip Code)

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

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No ¨

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

Large accelerated filer

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes ☐ No x

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, no par value	GABC	Nasdaq Global Select Market

As of August 2, 2022, the registrant had 29,484,319 outstanding shares of Common Stock, no par value.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

Information included in or incorporated by reference in this Quarterly Report on Form 10-Q, our other filings with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements contains or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to the discussions of our forward-looking statements and associated risks in our Annual Report on Form 10-K for the year ended December 31, 2021, in Item 1, “Business - Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” of that Annual Report on Form 10-K, as updated and supplemented from time to time by our subsequent SEC filings, including by the discussion under the heading “Forward-Looking Statements and Associated Risks” at the conclusion of Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”), and by the additional risk factors set forth in Part II, Item 1A, “Risk Factors” of this Report.

*****

INDEX


Glossary of Terms and Acronyms		4

PART I. FINANCIAL INFORMATION		6

Item 1.	Unaudited Financial Statements	6

	Consolidated Balance Sheets – June 30, 2022 and December 31, 2021	6

	Consolidated Statements of Income – Three Months Ended June 30, 2022 and 2021	7

	Consolidated Statements of Income – Six Months Ended June 30, 2022 and 2021	8

	Consolidated Statements of Comprehensive Income (Loss) – Three and Six Months Ended June 30, 2022 and 2021	9

	Consolidated Statements of Changes in Shareholders’ Equity - Three and Six Months Ended June 30, 2022 and 2021	10

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2022 and 2021	12

	Notes to Consolidated Financial Statements – June 30, 2022	13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60

Item 4.	Controls and Procedures	61

PART II. OTHER INFORMATION		62

Item 1.	Legal Proceedings	62

Item 1A.	Risk Factors	62

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	62

Item 3.	Defaults Upon Senior Securities	62

Item 4.	Mine Safety Disclosures	62

Item 5.	Other Information	62

Item 6.	Exhibits	63

SIGNATURES		64

GLOSSARY OF TERMS AND ACRONYMS

As used in this Report, references to “Company,” “we,” “our,” “us,” and similar terms refer to German American Bancorp, Inc. and its consolidated subsidiaries as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc. and the term “Bank” when we mean to refer only to German American Bank, the Company’s bank subsidiary.

The terms and acronyms identified below are used throughout this Report, including the Notes to Consolidated Financial Statements. You may find it helpful to refer to this Glossary as you read this Report.

2019 ESPP: German American Bancorp, Inc. 2019 Employee Stock Purchase Plan

2019 LTI Plan: German American Bancorp, Inc. 2019 Long-Term Equity Incentive Plan

ASC: Accounting Standards Codification

ASU: Accounting Standards Update

Basel III Rules: Regulatory capital rules agreed to by the Basel Committee on Banking Supervision, as issued by the FRB and OCC and published in the Federal Register on October 11, 2013

CARES Act: Coronavirus Aid, Relief and Economic Security Act

CECL: Current expected credit losses, which are the subject of an accounting standard under GAAP

CET1: Common Equity Tier 1

CMO: Collateralized mortgage obligations

COVID-19: Novel coronavirus disease 2019 declared, in March 2020, by the World Health Organization as a global pandemic and by the President of the United States as a national emergency

CUB: Citizens Union Bancorp of Shelbyville, Inc., which was acquired by the Company on January 1, 2022

Dodd-Frank Act: Dodd-Frank Wall Street Reform and Consumer Protection Act

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

federal banking

regulators: The FRB, the OCC, and the FDIC, collectively

FHLB: Federal Home Loan Bank

FRB: Board of Governors of the Federal Reserve System

GAAP: Generally Accepted Accounting Principles in the United States of America

LIBOR: London Interbank Offered Rate

MBS: Mortgage-backed securities

NPV: Net portfolio value

OCC: Office of the Comptroller of the Currency

PCD: Purchased with credit deterioration

PCI: Purchased credit impaired

PPP: Paycheck Protection Program established under the CARES Act

SBA: Small Business Administration

SEC: Securities and Exchange Commission

SOFR: Secured Overnight Funding Rate recommended as an alternative to LIBOR by the Alternative Reference Rate Committee, a U.S.-based group convened by the FRB and the Federal Reserve Bank of New York

TDR: Troubled Debt Restructurings

PART I. FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(unaudited, dollars in thousands except share and per share data)


	June 30, 2022		December 31, 2021
ASSETS
Cash and Due from Banks	$	111,904	$	47,173
Federal Funds Sold and Other Short-term Investments	414,141		349,717
Cash and Cash Equivalents	526,045		396,890

Interest-bearing Time Deposits with Banks	995		745
Securities Available-for-Sale, at Fair Value (Amortized Cost $2,088,464 for June 30, 2022; Amortized Cost $1,869,198 for December 31, 2021; No Allowance for Credit Losses)	1,821,735		1,889,617
Other Investments	353		353

Loans Held-for-Sale, at Fair Value	9,171		10,585

Loans	3,652,743		3,007,926
Less: Unearned Income	(3,374)		(3,662)
Allowance for Credit Losses	(45,031)		(37,017)
Loans, Net	3,604,338		2,967,247

Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost	15,259		13,048
Premises, Furniture and Equipment, Net	111,341		88,863
Other Real Estate	—		—
Goodwill	180,308		121,761
Intangible Assets	11,303		5,845
Company Owned Life Insurance	83,086		70,070
Accrued Interest Receivable and Other Assets	107,769		43,515
TOTAL ASSETS	$	6,471,703	$	5,608,539

LIABILITIES
Non-interest-bearing Demand Deposits	$	1,745,067	$	1,529,223
Interest-bearing Demand, Savings, and Money Market Accounts	3,503,789		2,867,994
Time Deposits	464,752		347,099
Total Deposits	5,713,608		4,744,316

FHLB Advances and Other Borrowings	144,885		152,183
Accrued Interest Payable and Other Liabilities	38,781		43,581
TOTAL LIABILITIES	5,897,274		4,940,080

SHAREHOLDERS’ EQUITY
Common Stock, no par value, $1 stated value; 45,000,000 shares authorized	29,483		26,554
Additional Paid-in Capital	386,368		276,057
Retained Earnings	369,673		350,364
Accumulated Other Comprehensive Income (Loss)	(211,095)		15,484
TOTAL SHAREHOLDERS’ EQUITY	574,429		668,459
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	6,471,703	$	5,608,539
End of period shares issued and outstanding	29,483,045		26,553,508

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands except per share data)


	Three Months Ended June 30,
	2022		2021
INTEREST INCOME
Interest and Fees on Loans	$	39,987	$	34,504
Interest on Federal Funds Sold and Other Short-term Investments	1,232		103
Interest and Dividends on Securities:
Taxable	5,113		3,523
Non-taxable	5,934		4,164
TOTAL INTEREST INCOME	52,266		42,294

INTEREST EXPENSE
Interest on Deposits	1,549		1,269
Interest on FHLB Advances and Other Borrowings	1,120		1,145
TOTAL INTEREST EXPENSE	2,669		2,414

NET INTEREST INCOME	49,597		39,880
Provision (Benefit) for Credit Losses	300		(5,000)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	49,297		44,880

NON-INTEREST INCOME
Wealth Management Fees	2,642		2,620
Service Charges on Deposit Accounts	2,871		1,735
Insurance Revenues	2,254		2,020
Company Owned Life Insurance	894		385
Interchange Fee Income	4,167		3,482
Other Operating Income	1,225		1,342
Net Gains on Sales of Loans	1,049		2,018
Net Gains on Securities	78		300
TOTAL NON-INTEREST INCOME	15,180		13,902

NON-INTEREST EXPENSE
Salaries and Employee Benefits	20,384		16,375
Occupancy Expense	2,803		2,833
Furniture and Equipment Expense	969		997
FDIC Premiums	465		329
Data Processing Fees	2,460		1,779
Professional Fees	1,573		1,513
Advertising and Promotion	1,027		705
Intangible Amortization	957		711
Other Operating Expenses	5,063		3,795
TOTAL NON-INTEREST EXPENSE	35,701		29,037

Income before Income Taxes	28,776		29,745
Income Tax Expense	5,029		5,923
NET INCOME	$	23,747	$	23,822

Basic Earnings per Share	$	0.81	$	0.90
Diluted Earnings per Share	$	0.81	$	0.90

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands except per share data)


	Six Months Ended June 30,
	2022		2021
INTEREST INCOME
Interest and Fees on Loans	$	78,922	$	69,608
Interest on Federal Funds Sold and Other Short-term Investments	1,512		188
Interest and Dividends on Securities:
Taxable	9,633		6,130
Non-taxable	11,474		7,893
TOTAL INTEREST INCOME	101,541		83,819

INTEREST EXPENSE
Interest on Deposits	2,878		2,711
Interest on FHLB Advances and Other Borrowings	2,158		2,296
TOTAL INTEREST EXPENSE	5,036		5,007

NET INTEREST INCOME	96,505		78,812
Provision (Benefit) for Credit Losses	5,500		(6,500)
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	91,005		85,312

NON-INTEREST INCOME
Wealth Management Fees	5,280		4,978
Service Charges on Deposit Accounts	5,554		3,413
Insurance Revenues	5,975		5,312
Company Owned Life Insurance	1,352		737
Interchange Fee Income	7,794		6,312
Other Operating Income	2,493		2,692
Net Gains on Sales of Loans	2,470		4,220
Net Gains on Securities	450		1,275
TOTAL NON-INTEREST INCOME	31,368		28,939

NON-INTEREST EXPENSE
Salaries and Employee Benefits	43,472		34,180
Occupancy Expense	5,682		6,205
Furniture and Equipment Expense	1,899		1,973
FDIC Premiums	941		663
Data Processing Fees	10,184		3,522
Professional Fees	3,936		2,673
Advertising and Promotion	2,165		1,487
Intangible Amortization	1,974		1,471
Other Operating Expenses	13,608		8,122
TOTAL NON-INTEREST EXPENSE	83,861		60,296

Income before Income Taxes	38,512		53,955
Income Tax Expense	5,698		10,576
NET INCOME	$	32,814	$	43,379

Basic Earnings per Share	$	1.11	$	1.64
Diluted Earnings per Share	$	1.11	$	1.64

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, dollars in thousands)


	Three Months Ended June 30,
	2022		2021

NET INCOME	$	23,747	$	23,822

Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gain (Loss) Arising During the Period	(117,357)		16,587
Reclassification Adjustment for Gains Included in Net Income	(78)		(300)
Tax Effect	24,741		(3,409)
Net of Tax	(92,694)		12,878

Total Other Comprehensive Income (Loss)	(92,694)		12,878

COMPREHENSIVE INCOME (LOSS)	$	(68,947)	$	36,700


	Six Months Ended June 30,
	2022		2021

NET INCOME	$	32,814	$	43,379

Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gain (Loss) Arising During the Period	(286,698)		(10,098)
Reclassification Adjustment for Gains Included in Net Income	(450)		(1,275)
Tax Effect	60,569		2,423
Net of Tax	(226,579)		(8,950)

Total Other Comprehensive Income (Loss)	(226,579)		(8,950)

COMPREHENSIVE INCOME (LOSS)	$	(193,765)	$	34,429

See accompanying notes to consolidated financial statements.

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, January 1, 2022	26,553,508	$	26,554	$	276,057	$	350,364	$	15,484	$	668,459

Net Income	—	—		—		9,067		—		9,067
Other Comprehensive Income (Loss)	—	—		—		—		(133,885)		(133,885)
Cash Dividends ($0.23 per share)	—	—		—		(6,752)		—		(6,752)
Issuance of Common Stock for:
Acquisition of Citizens Union Bancorp of Shelbyville, Inc., net	2,870,975	2,871		108,852		—		—		111,723
Restricted Share Grants	61,200	61		363		—		—		424

Balances, March 31, 2022	29,485,683	$	29,486	$	385,272	$	352,679	$	(118,401)	$	649,036

Net Income	—	—		—		23,747		—		23,747
Other Comprehensive Income (Loss)	—	—		—		—		(92,694)		(92,694)
Cash Dividends ($0.23 per share)	—	—		—		(6,753)		—		(6,753)
Issuance of Common Stock for:

Restricted Share Grants	(2,638)	(3)		1,096		—		—		1,093



Balances, June 30, 2022	29,483,045	$	29,483	$	386,368	$	369,673	$	(211,095)	$	574,429

See accompanying notes to consolidated financial statements.

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, January 1, 2021	26,502,157	$	26,502	$	274,385	$	288,447	$	35,375	$	624,709

Net Income	—	—		—		19,557		—		19,557
Other Comprehensive Income (Loss)	—	—		—		—		(21,828)		(21,828)
Cash Dividends ($0.21 per share)	—	—		—		(5,554)		—		(5,554)
Issuance of Common Stock for:
Restricted Share Grants	44,123	44		285		—		—		329


Balances, March 31, 2021	26,546,280	$	26,546	$	274,670	$	302,450	$	13,547	$	617,213

Net Income	—	—		—		23,822		—		23,822
Other Comprehensive Income (Loss)	—	—		—		—		12,878		12,878
Cash Dividends ($0.21 per share)	—	—		—		(5,555)		—		(5,555)
Issuance of Common Stock for:

Restricted Share Grants	(576)	—		639		—		—		639


Balances, June 30, 2021	26,545,704	$	26,546	$	275,309	$	320,717	$	26,425	$	648,997

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)


	Six Months Ended June 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	32,814	$	43,379
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Amortization on Securities	3,341		3,177
Depreciation and Amortization	5,250		4,581
Loans Originated for Sale	(98,293)		(131,409)
Proceeds from Sales of Loans Held-for-Sale	104,858		135,402
Provision (Benefit) for Credit Losses	5,500		(6,500)
Gain on Sale of Loans, net	(2,470)		(4,220)
Gain on Securities, net	(450)		(1,275)
Gain on Sales of Other Real Estate and Repossessed Assets	(19)		(105)

(Gain) Loss on Disposition and Donation of Premises and Equipment	(28)		485

Increase in Cash Surrender Value of Company Owned Life Insurance	(908)		(601)
Equity Based Compensation	1,517		968
Change in Assets and Liabilities:
Interest Receivable and Other Assets	6,508		4,917
Interest Payable and Other Liabilities	(7,299)		(3,375)
Net Cash from Operating Activities	50,321		45,424

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturity of Other Short-term Investments	—		248
Proceeds from Maturities of Securities Available-for-Sale	73,320		112,808

Proceeds from Sales of Securities Available-for-Sale	97,500		66,748
Purchase of Securities Available-for-Sale	(290,743)		(560,327)

Proceeds from Redemption of Federal Home Loan Bank Stock	7,867		120
Purchase of Loans	(1,063)		—
Proceeds from Sale of Loans Held for Investment	609		—
Loans Made to Customers, net of Payments Received	33,504		16,093
Proceeds from Sales of Other Real Estate	89		430
Property and Equipment Expenditures	(5,211)		(1,795)

Proceeds from Sales of Land and Buildings	—		1,614
Proceeds from Life Insurance	773		—

Acquisition of Citizens Union Bancorp of Shelbyville, Inc.	207,764		—
Net Cash from Investing Activities	124,409		(364,061)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits	38,496		343,265
Change in Short-term Borrowings	(28,934)		18,859

Repayments of Long-term Debt	(41,632)		(8,043)

Dividends Paid	(13,505)		(11,109)
Net Cash from Financing Activities	(45,575)		342,972

Net Change in Cash and Cash Equivalents	129,155		24,335
Cash and Cash Equivalents at Beginning of Year	396,890		345,748
Cash and Cash Equivalents at End of Period	$	526,045	$	370,083


Cash Paid During the Period for
Interest	$	4,831	$	5,348
Income Taxes	8,312		9,484

Supplemental Non Cash Disclosures

Reclassification of Land and Buildings to Other Assets	$	—	$	1,499
Supplemental Schedule for Investing Activities
Business Combinations (See Note 15 for Business Combinations)
Assets acquired, net of purchase consideration	$	945,043	$	—
Liabilities assumed	1,003,591		—
Goodwill	$	58,548	$	—

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(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, 2021. 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.

NOTE 2 - Recent Accounting Pronouncements

Accounting Guidance Issued But Not Yet Adopted

In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. In January 2021, the FASB issued ASU 2021-01 which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company has discontinued originating LIBOR based loans and has a plan in place to transition LIBOR indexed loans primarily to term SOFR or other indices.

On March 31, 2022, the FASB issued ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures" which eliminates the troubled debt restructuring (TDR) recognition and measurement guidance and instead requires an entity to evaluate whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosures and include new disclosure requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. To improve consistency for vintage disclosures, the ASU requires that public business entities disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20. For entities that have adopted ASU 2016-13, the amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not adopted ASU 2016-13, the effective dates for the amendments are the same as the effective dates in ASU 2016-13. Early adoption is permitted if ASU 2016-13 has been adopted, including adoption in an interim period. If an entity elects to adopt the amendments in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes the interim period. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 3 – Per Share Data

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


	Three Months Ended June 30,
	2022		2021
Basic Earnings per Share:
Net Income	$	23,747	$	23,822
Weighted Average Shares Outstanding	29,483,848		26,545,869
Basic Earnings per Share	$	0.81	$	0.90

Diluted Earnings per Share:
Net Income	$	23,747	$	23,822

Weighted Average Shares Outstanding	29,483,848		26,545,869
Potentially Dilutive Shares, Net	—		—
Diluted Weighted Average Shares Outstanding	29,483,848		26,545,869
Diluted Earnings per Share	$	0.81	$	0.90

For the three months ended June 30, 2022 and 2021, there were no anti-dilutive shares.


	Six Months Ended June 30,
	2022		2021
Basic Earnings per Share:
Net Income	$	32,814	$	43,379
Weighted Average Shares Outstanding	29,443,673		26,528,034
Basic Earnings per Share	$	1.11	$	1.64

Diluted Earnings per Share:
Net Income	$	32,814	$	43,379

Weighted Average Shares Outstanding	29,443,673		26,528,034
Potentially Dilutive Shares, Net	—		—
Diluted Weighted Average Shares Outstanding	29,443,673		26,528,034
Diluted Earnings per Share	$	1.11	$	1.64

For the six months ended June 30, 2022 and 2021, there were no anti-dilutive shares.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 4 – Securities

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows:


Securities Available-for-Sale:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Fair Value

June 30, 2022
U.S. Treasury	$	1,494	$	—	$	(1)	$	—	$	1,493
Obligations of State and Political Subdivisions	975,510		1,771		(147,072)		—		830,209
MBS/CMO	876,135		67		(96,177)		—		780,025
US Gov’t Sponsored Entities & Agencies	235,325		61		(25,378)		—		210,008
Total	$	2,088,464	$	1,899	$	(268,628)	$	—	$	1,821,735

December 31, 2021
Obligations of State and Political Subdivisions	$	896,048	$	31,138	$	(1,480)	$	—	$	925,706
MBS/CMO	797,693		4,738		(10,481)		—		791,950
US Gov’t Sponsored Entities & Agencies	175,457		192		(3,688)		—		171,961
Total	$	1,869,198	$	36,068	$	(15,649)	$	—	$	1,889,617

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 US Gov’t Sponsored Entities & Agencies in the above table include securities that have underlying collateral of equipment, machinery and commercial real estate.

The amortized cost and fair value of Securities at June 30, 2022 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	$	3,849	$	3,856
Due after one year through five years	19,898		20,212
Due after five years through ten years	77,761		76,616
Due after ten years	875,496		731,018
MBS/CMO	876,135		780,025
US Gov’t Sponsored Entities & Agencies	235,325		210,008
Total	$	2,088,464	$	1,821,735

Proceeds from the Sales of Securities are summarized below:


	Three Months Ended		Three Months Ended
	June 30, 2022		June 30, 2021

Proceeds from Sales	$	5,554	$	15,378
Gross Gains on Sales	78		300
Income Taxes on Gross Gains	16		63

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 4 - Securities (continued)


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2021

Proceeds from Sales	$	97,500	$	66,748
Gross Gains on Sales	450		1,275
Income Taxes on Gross Gains	94		268

The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $284,699 and $222,896 as of June 30, 2022 and December 31, 2021, respectively.

Below is a summary of securities with unrealized losses as of June 30, 2022 and December 31, 2021, presented by length of time the securities have been in a continuous unrealized loss position:


	Less than 12 Months				12 Months or More				Total
June 30, 2022	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

U.S. Treasury and Agency Securities	$	1,493	$	(1)	$	—	$	—	$	1,493	$	(1)
Obligations of State and Political Subdivisions	695,986		(142,294)		14,716		(4,778)		710,702		(147,072)
MBS/CMO	499,905		(48,520)		269,902		(47,657)		769,807		(96,177)
US Gov’t Sponsored Entities & Agencies	198,294		(24,535)		6,653		(843)		204,947		(25,378)
Total	$	1,395,678	$	(215,350)	$	291,271	$	(53,278)	$	1,686,949	$	(268,628)


	Less than 12 Months				12 Months or More				Total
December 31, 2021	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Obligations of State and Political Subdivisions	$	165,210	$	(1,386)	$	1,500	$	(94)	$	166,710	$	(1,480)
MBS/CMO	467,888		(9,100)		36,827		(1,381)		504,715		(10,481)
US Gov’t Sponsored Entities & Agencies	126,103		(3,480)		7,288		(208)		133,391		(3,688)
Total	$	759,201	$	(13,966)	$	45,615	$	(1,683)	$	804,816	$	(15,649)

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 reduced to fair value with an allowance. For available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was needed at June 30, 2022 or December 31, 2021. Accrued interest receivable on available-for-sale debt securities totaled $10,555 at June 30, 2022 and $8,990 at December 31, 2021. Accrued interest receivable is excluded from the estimate of credit losses.

The Company’s equity securities are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at June 30, 2022 and December 31, 2021. The original investment totaled $1,350 and other-than-temporary impairment was previously recorded totaling $997. The Company’s equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. At June 30, 2022, there was no additional impairment recognized through earnings.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(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 $141,222 at June 30, 2022 and $143,593 at December 31, 2021. 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:


	June 30, 2022				December 31, 2021
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in Other Assets:
Interest Rate Swaps	$	141,222	$	5,919	$	143,593	$	4,519

Included in Other Liabilities:
Interest Rate Swaps	$	141,222	$	5,817	$	143,593	$	4,762

The following table presents the effect of derivative instruments on the Consolidated Statements of Income for the periods presented:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Interest Rate Swaps:
Included in Other Operating Income	$	130	$	190	$	344	$	675

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 – Loans

Loans were comprised of the following classifications:


	June 30, 2022		December 31, 2021
Commercial:
Commercial and Industrial Loans	$	587,460	$	493,005
Commercial Real Estate Loans	1,904,235		1,530,677
Agricultural Loans	397,524		358,150
Leases	54,036		55,345
Retail:
Home Equity Loans	261,019		222,525
Consumer Loans	89,230		70,302
Credit Cards	16,073		14,357
Residential Mortgage Loans	343,166		263,565

Subtotal	3,652,743		3,007,926
Less: Unearned Income	(3,374)		(3,662)
Allowance for Credit Losses	(45,031)		(37,017)
Loans, net	$	3,604,338	$	2,967,247

The table above includes $34,929 and $9,861 of purchase credit deteriorated loans as of June 30, 2022 and December 31, 2021, respectively.

As further described in Note 15, during 2022 the Company acquired loans at fair value as part of a business combination. The table below summarizes the loans acquired on January 1, 2022.


	Acquired Loan Balance	Fair Value Discounts	Fair Value
Bank Acquisition	$683,526	$(5,359)	$678,167

The table below summarizes the remaining carrying amount of acquired loans included in the June 30, 2022 table above.


	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total
Loan Balance	$	60,090	$	368,657	$	55,110	$	—	$	16,056	$	25,720	$	—	$	76,599	$	602,232
Fair Value Discount	(1,084)		(2,932)		196		—		(77)		(240)		—		533		(3,604)

The company has purchased loans, for which there was, at acquisition, evidence of more than insignificant deterioration of credit quality since origination. The carrying amount of these loans is as follow:


	2022
Purchase Price of Loans at Acquisition	$	32,997
Allowance for Credit Losses at Acquisition	3,117
Non-Credit Discount/(Premium) at Acquisition	1,456
Total	$	37,570

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

As previously disclosed, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law in March 2020, providing an approximately $2 trillion stimulus package that included 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”), a lending program administered by the Small Business Administration (“SBA”) that was intended to incentivize participants to retain their employees by providing them with loans that are fully guaranteed by the U.S. government and subject to forgiveness if program guidelines are met. The PPP was later extended and modified by the Paycheck Protection Program and Health Care Enhancement Act in April 2020 and the Paycheck Protection Program Flexibility Act in June 2020, with PPP funding under this initial round expiring on August 8, 2020.

In December 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act was signed into law as part of the Consolidated Appropriations Act, 2021. In addition to direct stimulus payments and other aid, this Act provided for a second round of PPP loans through March 31, 2021. Under the American Rescue Plan Act of 2021 and the PPP Extension Act of 2021, which were both enacted during March 2021, additional funds were provided for the program and the deadline for applying for PPP loans was extended through May 31, 2021 (with the SBA given until June 30, 2021 to process loan applications).

The Company actively participated in both rounds of the PPP, lending funds primarily to its existing loan and/or deposit customers. The PPP loans carry an interest rate of 1.00% and included a processing fee that varied depending on the balance of the loan at origination (which fee is recognized over the life of the loan). The vast majority of the Company’s PPP loans made during 2020 had two-year maturities, while PPP loans made during 2021 have five-year maturities.

Under the first round of the PPP (i.e., the 2020 round), the Company originated loans totaling approximately $351,260 in principal amount, with approximately $12,024 of related net processing fees on 3,070 PPP loan relationships. As of June 30, 2022, $351,260 of those first round PPP loans had been forgiven by the SBA and repaid to the Company pursuant to the terms of the program, with $12,024 in net processing fees having been recognized by the Company.

Under the second round of the PPP (i.e., the 2021 round), the Company originated loans totaling approximately $157,042 in principal amount, with approximately $9,022 of related net processing fees, on 2,601 PPP loan relationships. As of June 30, 2022, $156,398 of second round PPP loans had been forgiven by the SBA and repaid to the Company, with $8,976 in net processing fees having been recognized by the Company. As a result of the forgiveness of the first and second round PPP loans, $644 of total PPP loans remain outstanding as of June 30, 2022, with approximately $46 of net fees remaining deferred on that date.

Allowance for Credit Losses for Loans

The following tables present the activity in the allowance for credit losses by portfolio segment for the three months ended June 30, 2022 and 2021:


June 30, 2022	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	$	12,720	$	23,217	$	4,759	$	196	$	616	$	1,207	$	212	$	2,151	$	—	$	45,078
Provision (Benefit) for credit loss expense	874		(873)		(131)		(5)		293		41		73		28		—		300
Loans charged-off	(56)		—		—		—		(322)		(15)		(51)		(3)		—		(447)
Recoveries collected	7		5		—		—		81		—		5		2		—		100
Total ending allowance balance	$	13,545	$	22,349	$	4,628	$	191	$	668	$	1,233	$	239	$	2,178	$	—	$	45,031

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)


June 30, 2021	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	$	6,248	$	28,540	$	6,462	$	201	$	439	$	965	$	162	$	2,082	$	—	$	45,099
Provision (Benefit) for credit loss expense	(196)		(4,335)		(615)		3		85		(63)		108		13		—		(5,000)
Loans charged-off	—		(1)		—		—		(144)		—		(95)		(1)		—		(241)
Recoveries collected	28		16		—		—		80		6		6		1		—		137
Total ending allowance balance	$	6,080	$	24,220	$	5,847	$	204	$	460	$	908	$	181	$	2,095	$	—	$	39,995

The following tables present the activity in the allowance for credit losses by portfolio segment for the six months ended June 30, 2022 and 2021:


June 30, 2022	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	$	9,554	$	19,245	$	4,505	$	200	$	507	$	1,061	$	240	$	1,705	$	—	$	37,017
Acquisition of Citizens Union Bank of Shelbyville, KY	376		1,945		689		—		2		—		—		105		—		3,117
Provision (Benefit) for credit loss expense	3,662		1,223		(566)		(9)		518		224		79		369		—		5,500
Loans charged-off	(61)		(78)		—		—		(532)		(52)		(90)		(3)		—		(816)
Recoveries collected	14		14		—		—		173		—		10		2		—		213
Total ending allowance balance	$	13,545	$	22,349	$	4,628	$	191	$	668	$	1,233	$	239	$	2,178	$	—	$	45,031


June 30, 2021	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	$	6,445	$	29,878	$	6,756	$	200	$	490	$	996	$	150	$	1,944	$	—	$	46,859
Provision (Benefit) for credit loss expense	(218)		(5,669)		(909)		4		67		(94)		167		152		—		(6,500)
Loans charged-off	(190)		(10)		—		—		(269)		—		(142)		(2)		—		(613)
Recoveries collected	43		21		—		—		172		6		6		1		—		249
Total ending allowance balance	$	6,080	$	24,220	$	5,847	$	204	$	460	$	908	$	181	$	2,095	$	—	$	39,995

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

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

Qualitative reserves reflect management’s overall estimate of the extent to which current expected credit losses on collectively evaluated loans will differ from historical loss experience. The analysis takes into consideration industry and collateral concentrations, acquired loan portfolio characteristics and other credit-related analytics as deemed appropriate. Management attempts to quantify qualitative reserves whenever possible.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (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. 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.

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.

For the six months ended June 30, 2022, the allowance for credit losses increased primarily due to the acquisition of CUB which is slightly offset by a decline in individually analyzed loans as well as a decline in the reserve attributable to pandemic-related stressed sectors. Key indicators utilized in forecasting for the allowance calculations include unemployment rates and gross domestic product. There have been some improvement in these factors over previous periods; however, supply chain issues, inflation and the ongoing impact of the COVID-19 pandemic were considered in the qualitative factors to determine the allowance for credit losses. 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 tables present the amortized cost in non-accrual loans and loans past due over 89 days still accruing by class of loans as of June 30, 2022 and December 31, 2021:


June 30, 2022	Non-Accrual With No Allowance for Credit Loss (1)		Total Non-Accrual		Loans Past Due Over 89 Days Still Accruing

Commercial and Industrial Loans	$	716	$	9,015	$	—
Commercial Real Estate Loans	57		2,105		—
Agricultural Loans	1,018		1,018		1,161
Leases	—		—		—
Home Equity Loans	204		233		—
Consumer Loans	34		79		—
Credit Cards	59		59		—
Residential Mortgage Loans	782		1,412		—
Total	$	2,870	$	13,921	$	1,161

(1) Non-accrual loans with no allowance for credit loss and are also included in Total Non-Accrual loans of $13,921.

Interest income on non-accrual loans recognized during the three and six months ended June 30, 2022 totaled $7 and $27, respectively.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)


December 31, 2021	Non-Accrual With No Allowance for Credit Loss (1)		Total Non-Accrual		Loans Past Due Over 89 Days Still Accruing

Commercial and Industrial Loans	$	1,989	$	10,530	$	—
Commercial Real Estate Loans	145		2,243		156
Agricultural Loans	1,041		1,136		—
Leases	—		—		—
Home Equity Loans	1		24		—
Consumer Loans	16		18		—
Credit Cards	64		64		—
Residential Mortgage Loans	587		587		—
Total	$	3,843	$	14,602	$	156

(1) Includes non-accrual loans with no allowance for credit loss and are also included in Total Non-Accrual loans of $14,602.

Interest income on non-accrual loans recognized during the year ended December 31, 2021 totaled $80.

The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of June 30, 2022 and December 31, 2021:


June 30, 2022	Real Estate		Equipment		Accounts Receivable		Other		Total

Commercial and Industrial Loans	$	3,220	$	1,967	$	332	$	6,000	$	11,519
Commercial Real Estate Loans	24,089		37		—		—		24,126
Agricultural Loans	4,444		264		—		—		4,708
Leases	—		—		—		—		—
Home Equity Loans	447		—		—		—		447
Consumer Loans	7		26		—		20		53
Credit Cards	—		—		—		—		—
Residential Mortgage Loans	1,237		—		—		—		1,237
Total	$	33,444	$	2,294	$	332	$	6,020	$	42,090


December 31, 2021	Real Estate		Equipment		Accounts Receivable		Other		Total

Commercial and Industrial Loans	$	1,716	$	2,444	$	549	$	5,822	$	10,531
Commercial Real Estate Loans	4,610		—		—		—		4,610
Agricultural Loans	1,522		—		—		—		1,522
Leases	—		—		—		—		—
Home Equity Loans	441		—		—		—		441
Consumer Loans	6		—		—		2		8
Credit Cards	—		—		—		—		—
Residential Mortgage Loans	652		—		—		—		652
Total	$	8,947	$	2,444	$	549	$	5,824	$	17,764

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The following tables present the aging of the amortized cost basis in past due loans by class of loans as of June 30, 2022 and December 31, 2021:


June 30, 2022	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	$	40	$	46	$	7,862	$	7,948	$	579,512	$	587,460
Commercial Real Estate Loans	1,151		—		629		1,780		1,902,455		1,904,235
Agricultural Loans	38		71		1,162		1,271		396,253		397,524
Leases	—		—		—		—		54,036		54,036
Home Equity Loans	636		342		233		1,211		259,808		261,019
Consumer Loans	1,079		18		66		1,163		88,067		89,230
Credit Cards	224		52		59		335		15,738		16,073
Residential Mortgage Loans	4,799		982		1,064		6,845		336,321		343,166
Total	$	7,967	$	1,511	$	11,075	$	20,553	$	3,632,190	$	3,652,743


December 31, 2021	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	$	12	$	—	$	6,147	$	6,159	$	486,846	$	493,005
Commercial Real Estate Loans	—		5		891		896		1,529,781		1,530,677
Agricultural Loans	—		—		—		—		358,150		358,150
Leases	—		—		—		—		55,345		55,345
Home Equity Loans	225		229		25		479		222,046		222,525
Consumer Loans	158		58		4		220		70,082		70,302
Credit Cards	61		9		64		134		14,223		14,357
Residential Mortgage Loans	2,726		507		369		3,602		259,963		263,565
Total	$	3,182	$	808	$	7,500	$	11,490	$	2,996,436	$	3,007,926

Troubled Debt Restructurings:

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

As of June 30, 2022, the Company had no troubled debt restructurings. The Company had no specific allocation of allowance for these loans at June 30, 2022. As of December 31, 2021, the Company had troubled debt restructurings totaling $104. The Company had no specific allocation of allowance for these loans at December 31, 2021.

The Company had not committed to lending any additional amounts as of June 30, 2022 and December 31, 2021 to customers with outstanding loans that are classified as troubled debt restructurings.

For the three and six months ended June 30, 2022 and 2021, the Company had no loans modified as troubled debt restructurings. Additionally, there were no loans modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three and six months ended June 30, 2022 and 2021.

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

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

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.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

Based on the analysis performed at June 30, 2022 and December 31, 2021, the risk category of loans by class of loans is as follows:


	Term Loans Amortized Cost Basis by Origination Year
As of June 30, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and Industrial:
Risk Rating
Pass	$	94,221	$	128,056	$	48,970	$	57,023	$	25,320	$	66,158	$	140,139	$	559,887
Special Mention	—		104		630		123		584		643		2,010		4,094
Substandard	326		168		1,658		779		1,141		4,319		15,088		23,479
Doubtful	—		—		—		—		—		—		—		—
Total Commercial & Industrial Loans	$	94,547	$	128,328	$	51,258	$	57,925	$	27,045	$	71,120	$	157,237	$	587,460

Commercial Real Estate:
Risk Rating
Pass	$	152,123	$	524,183	$	289,249	$	179,881	$	147,216	$	500,418	$	38,772	$	1,831,842
Special Mention	3,128		1,512		4,926		137		15,795		34,773		—		60,271
Substandard	851		186		—		1,266		2,215		7,604		—		12,122
Doubtful	—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	156,102	$	525,881	$	294,175	$	181,284	$	165,226	$	542,795	$	38,772	$	1,904,235

Agricultural:
Risk Rating
Pass	$	36,391	$	52,074	$	51,020	$	27,243	$	23,178	$	99,354	$	65,789	$	355,049
Special Mention	400		1,797		6,730		5,457		3,074		12,979		6,287		36,724
Substandard	—		211		—		54		427		4,763		296		5,751
Doubtful	—		—		—		—		—		—		—		—
Total Agricultural Loans	$	36,791	$	54,082	$	57,750	$	32,754	$	26,679	$	117,096	$	72,372	$	397,524

Leases:
Risk Rating
Pass	$	8,242	$	16,720	$	11,127	$	11,125	$	3,865	$	2,957	$	—	$	54,036
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total Leases	$	8,242	$	16,720	$	11,127	$	11,125	$	3,865	$	2,957	$	—	$	54,036

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and Industrial:
Risk Rating
Pass	$	141,133	$	57,477	$	60,883	$	29,005	$	15,936	$	48,559	$	122,377	$	475,370
Special Mention	115		128		227		649		7		918		1,510		3,554
Substandard	100		1,221		—		1,062		1,378		2,457		7,863		14,081
Doubtful	—		—		—		—		—		—		—		—
Total Commercial & Industrial Loans	$	141,348	$	58,826	$	61,110	$	30,716	$	17,321	$	51,934	$	131,750	$	493,005

Commercial Real Estate:
Risk Rating
Pass	$	404,175	$	264,011	$	164,204	$	131,746	$	139,788	$	336,066	$	26,697	$	1,466,687
Special Mention	2,279		—		710		14,426		17,356		13,916		—		48,687
Substandard	74		—		7,687		1,528		—		6,014		—		15,303
Doubtful	—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	406,528	$	264,011	$	172,601	$	147,700	$	157,144	$	355,996	$	26,697	$	1,530,677

Agricultural:
Risk Rating
Pass	$	44,510	$	45,101	$	22,482	$	24,187	$	24,325	$	71,268	$	81,011	$	312,884
Special Mention	1,714		5,346		5,503		3,025		6,438		6,624		8,271		36,921
Substandard	—		—		63		385		1,048		6,849		—		8,345
Doubtful	—		—		—		—		—		—		—		—
Total Agricultural Loans	$	46,224	$	50,447	$	28,048	$	27,597	$	31,811	$	84,741	$	89,282	$	358,150

Leases:
Risk Rating
Pass	$	19,689	$	12,706	$	12,990	$	5,599	$	2,473	$	1,888	$	—	$	55,345
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total Leases	$	19,689	$	12,706	$	12,990	$	5,599	$	2,473	$	1,888	$	—	$	55,345

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

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


	Term Loans Amortized Cost Basis by Origination Year
As of June 30, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Consumer:
Payment performance
Performing	$	25,024	$	40,135	$	11,037	$	3,638	$	3,869	$	2,159	$	3,289	$	89,151
Nonperforming	21		13		25		2		3		11		4		79
Total Consumer Loans	$	25,045	$	40,148	$	11,062	$	3,640	$	3,872	$	2,170	$	3,293	$	89,230

Home Equity:
Payment performance
Performing	$	34	$	—	$	—	$	—	$	20	$	589	$	260,143	$	260,786
Nonperforming	—		—		—		—		—		1		232		233
Total Home Equity Loans	$	34	$	—	$	—	$	—	$	20	$	590	$	260,375	$	261,019

Residential Mortgage:
Payment performance
Performing	$	38,471	$	101,614	$	51,356	$	21,215	$	19,003	$	110,075	$	20	$	341,754
Nonperforming	—		173		170		114		18		937		—		1,412
Total Residential Mortgage Loans	$	38,471	$	101,787	$	51,526	$	21,329	$	19,021	$	111,012	$	20	$	343,166


	Term Loans Amortized Cost Basis by Origination Year
As of December 31, 2021	2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Total
Consumer:
Payment performance
Performing	$	39,923	$	15,900	$	4,325	$	4,531	$	600	$	1,655	$	3,350	$	70,284
Nonperforming	3		—		—		—		—		15		—		18
Total Consumer Loans	$	39,926	$	15,900	$	4,325	$	4,531	$	600	$	1,670	$	3,350	$	70,302

Home Equity:
Payment performance
Performing	$	—	$	—	$	—	$	21	$	—	$	835	$	221,644	$	222,500
Nonperforming	—		—		—		—		—		1		24		25
Total Home Equity Loans	$	—	$	—	$	—	$	21	$	—	$	836	$	221,668	$	222,525

Residential Mortgage:
Payment performance
Performing	$	84,809	$	38,717	$	15,244	$	17,369	$	19,688	$	87,164	$	—	$	262,991
Nonperforming	—		—		—		—		—		574		—		574
Total Residential Mortgage Loans	$	84,809	$	38,717	$	15,244	$	17,369	$	19,688	$	87,738	$	—	$	263,565

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 6 - Loans (continued)

The Company considers the performance of the loan portfolio and its impact on the allowance for credit 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 credit cards based on payment activity:


Credit Cards	June 30, 2022		December 31, 2021

Performing	$	16,014	$	14,293
Nonperforming	59		64

Total	$	16,073	$	14,357

The following tables present loans purchased and/or sold during the year by portfolio segment and excludes the business combination activity:


June 30, 2022	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total

Purchases	$	—	$	1,063	$	—	$	—	$	—	$	—	$	—	$	—	$	1,063
Sales	—		609		—		—		—		—		—		—		609


December 31, 2021	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total

Purchases	$	—	$	2,271	$	—	$	—	$	—	$	—	$	—	$	—	$	2,271
Sales	2,273		15,415		111		—		—		—		—		—		17,799

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 $42,410 and $68,328 as of June 30, 2022 and December 31, 2021, 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, brokerage and retirement planning 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 77 banking offices at June 30, 2022. 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, brokerage and retirement planning services to its customers. The insurance segment primarily consists of German American Insurance, Inc., which provides a full line of

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 8 - Segment Information (continued)

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.


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Three Months Ended
June 30, 2022
Net Interest Income	$	50,474	$	9	$	3	$	(889)	$	49,597
Net Gains on Sales of Loans	1,049		—		—		—		1,049
Net Gains on Securities	78		—		—		—		78
Wealth Management Fees	1		2,641		—		—		2,642
Insurance Revenues	2		1		2,251		—		2,254
Noncash Items:
Provision (Benefit) for Credit Losses	300		—		—		—		300
Depreciation and Amortization	2,459		11		12		114		2,596
Income Tax Expense (Benefit)	5,129		198		133		(431)		5,029
Segment Profit (Loss)	23,519		617		420		(809)		23,747
Segment Assets at June 30, 2022	6,459,481		7,672		14,524		(9,974)		6,471,703


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Three Months Ended
June 30, 2021
Net Interest Income	$	40,521	$	13	$	3	$	(657)	$	39,880
Net Gains on Sales of Loans	2,018		—		—		—		2,018
Net Gains on Securities	300		—		—		—		300
Wealth Management Fees	2		2,618		—		—		2,620
Insurance Revenues	5		1		2,014		—		2,020
Noncash Items:
Provision (Benefit) for Credit Losses	(5,000)		—		—		—		(5,000)
Depreciation and Amortization	2,148		11		14		81		2,254
Income Tax Expense (Benefit)	6,056		199		101		(433)		5,923
Segment Profit (Loss)	23,309		619		314		(420)		23,822
Segment Assets at December 31, 2021	5,595,721		6,115		12,245		(5,542)		5,608,539

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 8 - Segment Information (continued)


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Six Months Ended
June 30, 2022
Net Interest Income	$	98,139	$	14	$	6	$	(1,654)	$	96,505
Net Gains on Sales of Loans	2,470		—		—		—		2,470
Net Gains on Securities	450		—		—		—		450
Wealth Management Fees	2		5,278		—		—		5,280
Insurance Revenues	29		2		5,944		—		5,975
Noncash Items:
Provision (Benefit) for Credit Losses	5,500		—		—		—		5,500
Depreciation and Amortization	4,977		21		24		228		5,250
Income Tax Expense (Benefit)	5,745		402		583		(1,032)		5,698
Segment Profit (Loss)	31,948		1,257		1,849		(2,240)		32,814
Segment Assets at June 30, 2022	6,459,481		7,672		14,524		(9,974)		6,471,703


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Six Months Ended
June 30, 2021
Net Interest Income	$	80,103	$	21	$	5	$	(1,317)	$	78,812
Net Gains on Sales of Loans	4,220		—		—		—		4,220
Net Gains on Securities	1,275		—		—		—		1,275
Wealth Management Fees	3		4,975		—		—		4,978
Insurance Revenues	7		3		5,302		—		5,312
Noncash Items:
Provision (Benefit) for Credit Losses	(6,500)		—		—		—		(6,500)
Depreciation and Amortization	4,365		24		31		161		4,581
Income Tax Expense (Benefit)	10,480		350		496		(750)		10,576
Segment Profit (Loss)	41,937		1,089		1,562		(1,209)		43,379
Segment Assets at December 31, 2021	5,595,721		6,115		12,245		(5,542)		5,608,539

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 9 – Stock Repurchase Plan

On January 31, 2022, the Company’s Board of Directors approved a plan to repurchase up to 1,000,000 shares of the Company’s outstanding common stock. On a share basis, the amount of common stock subject to the repurchase plan represented approximately 3% of the Company’s outstanding shares at the time it was approved. 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 plan that had been adopted in January 2021. At the time of its termination, the Company had been authorized to purchase up to 1,000,000 shares of common stock under the 2021 repurchase plan. The Company did not repurchase any shares of common stock under the 2021 repurchase plan and has not repurchased any shares under the 2022 repurchase plan.

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 six months ended June 30, 2022 and 2021, the Company granted no options. The Company recorded no stock compensation expense applicable to options during the three and six months ended June 30, 2022 and 2021. 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. 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 33.33% each. In 2020, 100% of the cash portion of an award vested 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. Beginning in 2021, for named executive officers, awards are granted in the form of 100% restricted stock grants which vest in one-third installments on the first, second and third anniversaries of the award date. 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 does 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 months ended June 30, 2022, the Company granted no awards of restricted stock. During the six months ended June 30, 2022, the Company granted awards of 63,258 shares of restricted stock. During the three months ended June 30, 2021, the Company granted no awards of restricted stock. During the six months ended June 30, 2021, the Company granted 44,123 shares of restricted stock. Total unvested restricted stock awards at June 30, 2022 and December 31, 2021 were 105,530 and 67,160, respectively.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 10 - Equity Plans and Equity Based Compensation (continued)

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


	Three Months Ended June 30,
	2022		2021

Restricted Stock Expense	$	1,094	$	638
Cash Entitlement Expense	169		284
Tax Effect	(328)		(239)
Net of Tax	$	935	$	683


	Six Months Ended June 30,
	2022		2021

Restricted Stock Expense	$	1,517	$	967
Cash Entitlement Expense	334		367
Tax Effect	(480)		(346)
Net of Tax	$	1,371	$	988

Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $3,503 and $3,380 as of June 30, 2022 and 2021, respectively.

The Company’s shareholders approved the Company’s 2019 Employee Stock Purchase Plan on May 16, 2019, as well as an Amended and Restated 2019 Employee Stock Purchase Plan on May 21, 2020, which was amended and restated to reflect certain clarifying changes (the "2019 ESPP"). The 2019 ESPP replaced the Company's 2009 Employee Stock Purchase Plan, 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 value of the Company’s common stock on the last trading day of the offering period. A total of 750,000 common shares has been reserved for issuance under the 2019 ESPP. The 2019 ESPP will continue until September 30, 2029, or, if earlier, until all of the shares of common stock allocated to the 2019 ESPP have been purchased. Funding for the purchase of common stock is from employee and Company contributions.

For the three months ended June 30, 2022, the Company recorded $14 of expense related to the employee stock purchase plan resulting in $10 net of tax. For the six months ended June 30, 2022, the Company recorded $28 of expense related to the employee stock purchase plan resulting in $21 net of tax. For the three months ended June 30, 2021, the Company recorded an immaterial amount of expense related to the employee stock purchase plan resulting in an immaterial amount net of tax. For the six months ended June 30, 2021, the company recorded $10 of expense, $7 net of tax, for the employee stock purchase plan. There was no unrecognized compensation expense as of June 30, 2022 and 2021 for the employee stock purchase plan. No stock options were outstanding as of June 30, 2022 and December 31, 2021.

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.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 11 - Fair Value (continued)

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

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For investment securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At June 30, 2022, the Company held Level 3 securities with a fair value of $94. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these investment securities are reported by the Company in a Level 3 classification.

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

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

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

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

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

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 11 - Fair Value (continued)

Assets and Liabilities Measured on a Recurring Basis

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


	Fair Value Measurements at June 30, 2022 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
U.S. Treasury	$	1,493	$	—	$	—	$	1,493
Obligations of State and Political Subdivisions	—		830,115		94		830,209
MBS/CMO	—		780,025		—		780,025
US Gov’t Sponsored Entities & Agencies	—		210,008		—		210,008
Total Securities	$	1,493	$	1,820,148	$	94	$	1,821,735

Loans Held-for-Sale	$	—	$	9,171	$	—	$	9,171

Derivative Assets	$	—	$	5,919	$	—	$	5,919

Derivative Liabilities	$	—	$	5,817	$	—	$	5,817


	Fair Value Measurements at December 31, 2021 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	$	—	$	925,706	$	—	$	925,706
MBS/CMO	—		791,950		—		791,950
US Gov’t Sponsored Entities & Agencies	—		171,961		—		171,961
Total Securities	$	—	$	1,889,617	$	—	$	1,889,617

Loans Held-for-Sale	$	—	$	10,585	$	—	$	10,585

Derivative Assets	$	—	$	4,519	$	—	$	4,519

Derivative Liabilities	$	—	$	4,762	$	—	$	4,762

As of June 30, 2022 and December 31, 2021, the aggregate fair value, contractual balance (including accrued interest), and gain or loss on Loans Held-for-Sale was as follows:


	June 30, 2022		December 31, 2021

Aggregate Fair Value	$	9,171	$	10,585
Contractual Balance	9,017		10,296
Gain (Loss)	154		289

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2022 were $(94) and $(135), respectively. The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2021 for loans held for sale were $(33) and $(80), respectively.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(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 months ended June 30, 2022 and 2021:


	Obligations of State and Political Subdivisions
	2022		2021

Balance of Recurring Level 3 Assets at April 1	$	94	$	—
Total Losses Included in Other Comprehensive Income	—		—
Maturities / Calls	—		—
Acquired through Bank Acquisition	—		—
Balance of Recurring Level 3 Assets at June 30	$	94	$	—


	Obligations of State and Political Subdivisions
	2022		2021

Balance of Recurring Level 3 Assets at January 1	$	—	$	497
Total Losses Included in Other Comprehensive Income	—		(2)
Maturities / Calls	—		(495)
Acquired through Bank Acquisition	94		—
Balance of Recurring Level 3 Assets at June 30	$	94	$	—

Of the total gain/loss included in earnings for the three months ended June 30, 2022 and 2021, $0 and $0 was attributable to other changes in fair value, respectively. Of the total gain/loss included in earnings for the six months ended June 30, 2022 and 2021, $0 and $(2) was attributable to other changes in fair value, respectively.

Assets and Liabilities Measured on a Non-Recurring Basis

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


	Fair Value Measurements at June 30, 2022 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	$	—	$	—	$	3,804	$	3,804
Commercial Real Estate Loans	$	—	$	—	$	20,118	$	20,118
Agricultural Loans	$	—	$	—	$	3,148	$	3,148
Consumer Loans	$	—	$	—	$	351	$	351
Home Equity Loans	$	—	$	—	$	323	$	323
Residential Mortgage Loans	$	—	$	—	$	752	$	752

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 11 - Fair Value (continued)


	Fair Value Measurements at December 31, 2021 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	$	—	$	—	$	4,423	$	4,423
Commercial Real Estate Loans	$	—	$	—	$	1,672	$	1,672
Agricultural Loans	$	—	$	—	$	79	$	79
Consumer Loans	$	—	$	—	$	—	$	—
Home Equity Loans	$	—	$	—	$	345	$	345
Residential Mortgage Loans	$	—	$	—	$	—	$	—

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2022 and December 31, 2021:


June 30, 2022	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)

Individual Analyzed Loans - Commercial and Industrial Loans	$	3,804	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-100% (41%)
Individual Analyzed Loans - Commercial Real Estate Loans	$	20,118	Sales comparison approach	Adjustment for physical condition of comparable properties sold	25%-68% (36%)
Individual Analyzed Loans - Agricultural Loans	$	3,148	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-83% (48%)
Individual Analyzed Loans - Consumer Loans	$	351	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-100% (37%)
Individual Analyzed Loans - Home Equity Loans	$	323	Sales comparison approach	Adjustment for physical condition of comparable properties sold	31%-100% (46%)
Individual Analyzed Loans - Residential Mortgage Loans	$	752	Sales comparison approach	Adjustment for physical condition of comparable properties sold	13%-100% (23%)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 11 - Fair Value (continued)


December 31, 2021	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)

Individual Analyzed Loans - Commercial and Industrial Loans	$	4,423	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-100% (69%)
Individual Analyzed Loans - Commercial Real Estate Loans	$	1,672	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-100% (46%)
Individual Analyzed Loans - Agricultural Loans	$	79	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-96% (90%)
Individual Analyzed Loans - Consumer Loans	$	—	Sales comparison approach	Adjustment for physical condition of comparable properties sold	100% (100%)
Individual Analyzed Loans - Home Equity Loans	$	345	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-23% (22%)
Individual Analyzed Loans - Residential Mortgage Loans	$	—	Sales comparison approach	Adjustment for physical condition of comparable properties sold	—%-—% (—%)

The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending June 30, 2022 and December 31, 2021. 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.


			Fair Value Measurements at June 30, 2022 Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Short-term Investments	$	526,045	$	111,904	$	414,141	$	—	$	526,045
Interest Bearing Time Deposits with Banks	995		—		995		—		995
Loans, Net	3,572,796		—		—		3,564,134		3,564,134
Accrued Interest Receivable	21,946		—		10,675		11,271		21,946
Financial Liabilities:
Demand, Savings, and Money Market Deposits	(5,248,856)		(5,248,856)		—		—		(5,248,856)
Time Deposits	(464,752)		—		(465,042)		—		(465,042)
Short-term Borrowings	(42,410)		—		(42,410)		—		(42,410)
Long-term Debt	(102,475)		—		(27,234)		(71,169)		(98,403)
Accrued Interest Payable	(818)		—		(671)		(147)		(818)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 11 - Fair Value (continued)


			Fair Value Measurements at December 31, 2021 Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Short-term Investments	$	396,890	$	47,173	$	349,717	$	—	$	396,890
Interest Bearing Time Deposits with Banks	745		—		745		—		745
Loans, Net	2,960,728		—		—		2,980,555		2,980,555
Accrued Interest Receivable	20,229		—		9,213		11,016		20,229
Financial Liabilities:
Demand, Savings, and Money Market Deposits	(4,397,217)		(4,397,217)		—		—		(4,397,217)
Time Deposits	(347,099)		—		(347,876)		—		(347,876)
Short-term Borrowings	(68,328)		—		(68,328)		—		(68,328)
Long-term Debt	(83,855)		—		(28,320)		(58,303)		(86,623)
Accrued Interest Payable	(613)		—		(579)		(34)		(613)

NOTE 12 - Other Comprehensive Income (Loss)

The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2022 and 2021, net of tax:


June 30, 2022	Unrealized Gains and Losses on Available-for-Sale Securities		Postretirement Benefit Items		Total

Beginning Balance at April 1, 2022	$	(117,833)	$	(568)	$	(118,401)
Other Comprehensive Income (Loss) Before Reclassification	(92,632)		—		(92,632)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(62)		—		(62)
Net Current Period Other Comprehensive Income (Loss)	(92,694)		—		(92,694)
Ending Balance at June 30, 2022	$	(210,527)	$	(568)	$	(211,095)


June 30, 2022	Unrealized Gains and Losses on Available-for-Sale Securities		Postretirement Benefit Items		Total

Beginning Balance at January 1, 2022	$	16,052	$	(568)	$	15,484
Other Comprehensive Income (Loss) Before Reclassification	(226,223)		—		(226,223)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(356)		—		(356)
Net Current Period Other Comprehensive Income (Loss)	(226,579)		—		(226,579)
Ending Balance at June 30, 2022	$	(210,527)	$	(568)	$	(211,095)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 12 - Other Comprehensive Income (Loss) (continued)


June 30, 2021	Unrealized Gains and Losses on Available-for-Sale Securities		Postretirement Benefit Items		Total

Beginning Balance at April 1, 2021	$	14,115	$	(568)	$	13,547
Other Comprehensive Income (Loss) Before Reclassification	13,115		—		13,115
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(237)		—		(237)
Net Current Period Other Comprehensive Income (Loss)	12,878		—		12,878
Ending Balance at June 30, 2021	$	26,993	$	(568)	$	26,425


June 30, 2021	Unrealized Gains and Losses on Available-for-Sale Securities		Postretirement Benefit Items		Total

Beginning Balance at January 1, 2021	$	35,943	$	(568)	$	35,375
Other Comprehensive Income (Loss) Before Reclassification	(7,949)		—		(7,949)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(1,001)		—		(1,001)
Net Current Period Other Comprehensive Income (Loss)	(8,950)		—		(8,950)
Ending Balance at June 30, 2021	$	26,993	$	(568)	$	26,425

The tables below summarize the classifications out of accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2022 and 2021:


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	$	78	Net Gains on Securities
	(16)		Income Tax Expense
	62		Net of Tax

Total Reclassifications for the Three Months Ended June 30, 2022	$	62


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	$	450	Net Gains on Securities
	(94)		Income Tax Expense
	356		Net of Tax

Total Reclassifications for the Six Months Ended June 30, 2022	$	356

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 12 - Other Comprehensive Income (Loss) (continued)


Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified From Accumulated Other Comprehensive Income (Loss)		Affected Line Item in the Statement Where Net Income is Presented

Unrealized Gains and Losses on Available-for-Sale Securities	$	300	Net Gains on Securities
	(63)		Income Tax Expense
	237		Net of Tax

Total Reclassifications for the Three Months Ended June 30, 2021	$	237


Details about Accumulated Other Comprehensive Income (Loss) Components	Amount Reclassified From Accumulated Other Comprehensive Income (Loss)		Affected Line Item in the Statement Where Net Income is Presented

Unrealized Gains and Losses on Available-for-Sale Securities	$	1,275	Net Gains on Securities
	(268)		Income Tax Expense
	1,007		Net of Tax

Total Reclassifications for the Six Months Ended June 30, 2021	$	1,007

NOTE 13 - Revenue Recognition

The following table presents non-interest income, segregated by revenue streams in-scope and out-of-scope of FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), for the three and six months ended June 30, 2022 and 2021. Wealth management fees are included in the wealth management services segment while insurance revenues are included in the insurance segment. All other revenue streams are primarily included in the banking segment.


	Three Months Ended
	June 30,
Non-interest Income	2022		2021
In-Scope of Topic 606:
Wealth Management Fees	$	2,642	$	2,620
Service Charges on Deposit Accounts	2,871		1,735
Insurance Revenues	2,254		2,020
Interchange Fee Income	4,167		3,482
Other Operating Income	820		726
Non-interest Income (in-scope of Topic 606)	12,754		10,583
Non-interest Income (out-of-scope of Topic 606)	2,426		3,319
Total Non-interest Income	$	15,180	$	13,902

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 13 - Revenue Recognition (continued)


	Six Months Ended
	June 30,
Non-interest Income	2022		2021
In-Scope of Topic 606:
Wealth Management Fees	$	5,280	$	4,978
Service Charges on Deposit Accounts	5,554		3,413
Insurance Revenues	5,975		5,312
Interchange Fee Income	7,794		6,312
Other Operating Income	1,578		1,389
Non-interest Income (in-scope of Topic 606)	26,181		21,404
Non-interest Income (out-of-scope of Topic 606)	5,187		7,535
Total Non-interest Income	$	31,368	$	28,939

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.

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

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

NOTE 14 – Leases

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

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

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 14 - Leases (continued)

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

The components of lease expense were as follows:


	Three Months Ended		Three Months Ended
	June 30, 2022		June 30, 2021

Finance Lease Cost:
Amortization of Right-of -Use Assets	$	53	$	52
Interest on Lease Liabilities	82		87
Operating Lease Cost	376		342
Short-term Lease Cost	3		7
Total Lease Cost	$	514	$	488


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2021

Finance Lease Cost:
Amortization of Right-of -Use Assets	$	105	$	104
Interest on Lease Liabilities	165		175
Operating Lease Cost	745		761
Short-term Lease Cost	27		7
Total Lease Cost	$	1,042	$	1,047

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


	June 30, 2022		June 30, 2021

Weighted Average Remaining Lease Term:
Finance Leases	10 years		11 years
Operating Leases	8 years		8 years

Weighted Average Discount Rate:
Finance Leases	11.43	%	11.47	%
Operating Leases	2.85	%	3.15	%

Supplemental balance sheet information related to leases were as follows:


	June 30, 2022		June 30, 2021

Finance Leases
Premises, Furniture and Equipment, Net	$	1,963	$	2,173
Other Borrowings	2,957		3,140

Operating Leases
Operating Lease Right-of-Use Assets	$	6,510	$	6,260
Operating Lease Liabilities	6,645		6,357

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 14 - Leases (continued)

Supplemental cash flow information related to leases were as follows:


	Six Months Ended		Six Months Ended
	June 30, 2022		June 30, 2021

Cash paid for amounts in the measurement of lease liabilities:
Operating Cash Flows from Finance Leases	$	166	$	175
Operating Cash Flows from Operating Leases	701		1,805
Financing Cash Flows from Finance Leases	91		69

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


	June 30, 2022
	Finance Leases		Operating Leases

Year 1	$	519	$	1,331
Year 2	519		1,110
Year 3	519		972
Year 4	519		868
Year 5	519		756
Thereafter	2,174		2,425
Total Lease Payments	4,769		7,462
Less Imputed Interest	(1,812)		(817)
Total	$	2,957	$	6,645

NOTE 15 - Business Combinations

On January 1, 2022, the Company acquired Citizens Union Bancorp of Shelbyville, Inc. (“CUB”) through the merger of CUB with and into the Company. This was immediately followed by the merger of Citizens Union Bank of Shelbyville, Inc., a wholly-owned subsidiary of CUB, into the Company’s subsidiary bank, German American Bank. CUB, headquartered in Shelbyville, Kentucky, operated 15 retail banking offices located in Shelby, Jefferson, Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through Citizens Union Bank of Shelbyville, Inc.

As of the closing of the transaction, CUB had total assets of approximately $1,108,546 (unaudited), total loans of approximately $683,807 (unaudited), and total deposits of approximately $930,533 (unaudited). The Company accounted for the transaction under the acquisition method of accounting which means these financial assets and liabilities were recorded at fair value at the day of acquisition. The fair value of the common shares issued as part of the consideration paid for CUB was based upon the closing price of the Company's common shares on the acquisition date. The fair value estimates included in these financial statements are based on preliminary valuations; certain loan, deferred tax, and premises and equipment measurements have not been finalized and are subject to change. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed prior to December 31, 2022.

In accordance with ASC 805, the Company has expensed approximately $12,132 of direct acquisition costs and recorded $58,548 of goodwill and $7,572 of intangible assets. The goodwill of $58,548 arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. This goodwill will be evaluated annually for impairment and is non-deductible for tax purposes. The intangible assets are related to core deposits and are being amortized over 8 years. The following table summarizes the fair value of the total consideration transferred as a part of the CUB acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 15 - Business Combinations (continued)


Consideration
Cash for Stock Options and Fractional Shares	$	942
Cash Consideration	49,863
Equity Instruments	111,914
Fair Value of Total Consideration Transferred	$	162,719

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash	$	20,244
Federal Funds Sold and Other Short-term Investments	238,325
Interest-bearing Time Deposits with Banks	250
Securities	102,233
Loans	678,167
Stock in FHLB and Other Restricted Stock, at Cost	10,078
Premises, Furniture & Equipment	20,064
Other Real Estate	40
Intangible Assets	7,572
Company Owned Life Insurance	12,881
Accrued Interest Receivable and Other Assets	17,908
Deposits - Non-interest Bearing	(237,472)
Deposits - Interest Bearing	(696,750)
FHLB Advances and Other Borrowings	(60,837)
Accrued Interest Payable and Other Liabilities	(8,532)
Total Identifiable Net Assets	104,171
Goodwill	$	58,548

Under the terms of the merger agreement, each CUB common shareholder of record at the effective time of the merger became entitled to receive a cash payment of $13.44 and a 0.7739 share of common stock of the Company for each of their former shares of CUB common stock. As a result, in connection with the closing of the merger on January 1, 2022, the Company issued 2,870,975 shares of its common stock to the former shareholders of CUB and paid cash consideration in the aggregate amount of $50.8 million.

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

The fair value of purchased financial assets with credit deterioration was $29,868 on the date of acquisition. The gross contractual amounts receivable relating to the purchased financial assets with credit deterioration was $34,453. The Company estimates, on the date of acquisition, that $3,117 of the contractual cash flows specific to the purchased financial assets with credit deterioration will not be collected.

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2021 after giving effect to certain adjustments. The unaudited pro forma information for the three and six months ended June 30, 2022 and 2021 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022

(unaudited, dollars in thousands except share and per share data)

NOTE 15 - Business Combinations (continued)


	Unaudited Pro Forma		Unaudited Pro Forma
	Quarter Ended 6/30/2022		Quarter Ended 6/30/2021

Net Interest Income	$	49,597	$	48,453
Non-interest Income	15,180		15,253
Total Revenue	64,777		63,706
Provision for Loan Losses Expense	300		(5,454)
Non-interest Expense	35,274		33,677
Income Before Income Taxes	29,203		35,483
Income Tax Expense	5,029		7,300
Net Income	$	24,174	$	28,183
Earnings Per Share and Diluted Earnings Per Share	$	0.82	$	0.96


	Unaudited Pro Forma		Unaudited Pro Forma
	Six Months Ended 6/30/2022		Six Months Ended 6/30/2021

Net Interest Income	$	96,505	$	96,184
Non-interest Income	31,368		31,779
Total Revenue	127,873		127,963
Provision for Loan Losses Expense	(800)		(8,311)
Non-interest Expense	71,729		71,121
Income Before Income Taxes	56,944		65,153
Income Tax Expense	10,051		13,248
Net Income	$	46,893	$	51,905
Earnings Per Share and Diluted Earnings Per Share	$	1.59	$	1.77

For the three months ended June 30, 2022, the above pro forma financial information excludes non-recurring merger costs that totaled $427 on a pre-tax basis. For the six months ended June 30, 2022, the above pro forma financial information excludes non-recurring merger costs that totaled $12,132 on a pre-tax basis and Day 1 provision for credit losses under the CECL model of $6,300 on a pre-tax basis.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GERMAN AMERICAN BANCORP, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

German American Bancorp, Inc. is a Nasdaq-traded (symbol: GABC) financial holding company based in Jasper, Indiana. German American, through its banking subsidiary German American Bank, operates 77 banking offices in 19 contiguous southern Indiana counties and 14 Kentucky counties. The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and casualty insurance agency (German American Insurance, Inc.).

Throughout this Management’s Discussion and Analysis, as elsewhere in this Report, when we use the term “Company,” we will usually be referring to the business and affairs (financial and otherwise) of German American Bancorp, Inc. and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2022 and December 31, 2021 and the consolidated results of operations for the three and six months ended June 30, 2022 and 2021. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

MANAGEMENT OVERVIEW

This updated discussion should be read in conjunction with the Management Overview that was included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

On January 1, 2022, the Company completed its acquisition of Citizens Union Bancorp of Shelbyville, Inc. (“CUB”). CUB, headquartered in Shelbyville, Kentucky, operated 15 retail banking offices located in Shelby, Jefferson, Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through its banking subsidiary, Citizens Union Bank of Shelbyville, Inc. As of the closing of the transaction, CUB had total assets of approximately $1.109 billion, total loans of approximately $683.8 million, and total deposits of approximately $930.5 million. The Company issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB.

For further information regarding this acquisition, see Note 15 (Business Combinations) in the Notes to the Consolidated Financial Statements included in Item 1 of this Report.

Net income for the quarter ended June 30, 2022 totaled $23,747,000, or $0.81 per share, a decline of 10% on a per share basis compared with the second quarter 2021 net income of $23,822,000, or $0.90 per share. The decline on a per share basis was the result of the Company's January 1, 2022 issuance of approximately 2.9 million shares of common stock as part of the merger consideration in the CUB transaction.

Net income for the six months ended June 30, 2022 totaled $32,814,000, or $1.11 per share, a decline of 32% on a per share basis compared with the first half of 2021 net income of $43,379,000, or $1.64 per share. The change in net income during the first half of 2022, compared with the first half of 2021, was largely impacted by acquisition-related expenses for the CUB transaction that closed on January 1, 2022. The first half of 2022 results of operations included acquisition-related expenses of $12,132,000 ($9,228,000 or $0.31 per share, on an after tax basis) and also included Day 1 provision for credit losses under the CECL model of $6,300,000 ($4,725,000 or $0.16 per share, on an after tax basis). The decline in per share net income for the six months ended June 30, 2022, as compared to the same period of 2021, was also impacted by the CUB share issuance discussed above.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for the Company presented in the Consolidated Financial Statements, accompanying Notes to the Consolidated Financial Statements, and selected financial data appearing elsewhere within this Report, are, to a large degree, dependent upon the Company’s accounting policies. The selection of and application of these

policies involve estimates, judgments, and uncertainties that are subject to change. The critical accounting policies and estimates that the Company has determined to be the most susceptible to change in the near term relate to the determination of the allowance for credit losses, the valuation of securities available for sale, income tax expense, and the valuation of goodwill and other intangible assets.

Allowance for Credit Losses

The Company maintains an allowance for credit losses to cover the estimated expected credit losses over the expected contractual life of the loan portfolio. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. A provision for credit losses is charged to operations based on management’s periodic evaluation of the necessary allowance balance. Evaluations are conducted at least quarterly and more often if deemed necessary. The ultimate recovery of all loans is susceptible to future market factors beyond the Company’s control.

The Company has an established process to determine the adequacy of the allowance for credit losses. The determination of the allowance is inherently subjective, as it requires significant estimates, including the amounts and timing of expected future cash flows on individually analyzed loans, estimated losses on other classified loans and pools of homogeneous loans, and consideration of past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, reasonable and supportable forecasts and other factors, all of which may be susceptible to significant change. The allowance consists of two components of allocations, specific and general. These two components represent the total allowance for credit losses deemed adequate to cover expected credit losses over the expected life of the loan portfolio.

Commercial and agricultural loans are subject to a standardized grading process administered by an internal loan review function. The need for specific reserves is considered for credits when: (a) the customer’s cash flow or net worth appears insufficient to repay the loan; (b) the loan has been criticized in a regulatory examination; (c) the loan is on non-accrual; or (d) other reasons where the ultimate collectability of the loan is in question, or the loan characteristics require special monitoring.

Specific reserves on individually analyzed loans are determined by comparing the loan balance to the present value of expected cash flows or expected collateral proceeds. Allocations are also applied to categories of loans not individually analyzed but for which the rate of loss is expected to be greater than other similar type loans, including non-performing consumer or residential real estate loans. Such allocations are based on past loss experience, reasonable and supportable forecasts and information about specific borrower situations and estimated collateral values.

General allocations are made for commercial and agricultural loans that are graded as substandard and special mention, but are not individually analyzed for specific reserves as well as other pools of loans, including non-classified loans, homogeneous portfolios of consumer and residential real estate loans, and loans within certain industry categories believed to present unique risk of loss. General allocations of the allowance are primarily made based on historical averages for loan losses for these portfolios along with reasonable and supportable forecasts, judgmentally adjusted for economic, external and internal quantitative and qualitative factors and portfolio trends. Economic factors include evaluating changes in international, national, regional and local economic and business conditions that affect the collectability of the loan portfolio. Internal factors include evaluating changes in lending policies and procedures; changes in the nature and volume of the loan portfolio; and changes in experience, ability and depth of lending management and staff.

The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of the loan portfolio. Determining the appropriateness and adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio may result in significant changes in the allowance for credit losses in future periods.

Securities Valuation

Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was needed at June 30, 2022. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. As of June 30, 2022, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $1,899,000 and gross unrealized losses totaled approximately $268,628,000 net of applicable taxes is included in other comprehensive income.

Equity securities that do not have readily determinable fair values are carried at cost, less impairment with observable price changes being recognized in earnings.

Income Tax Expense

Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations presumed to occur.

A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carry-back and carry-forward periods, including consideration of available tax planning strategies. Tax-related loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the views of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment.

Goodwill and Other Intangible Assets

Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected December 31 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet. No impairment to Goodwill was indicated based on year-end testing and no triggering events occurred in 2022 causing reassessment.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Other intangible assets consist of core deposit and acquired customer relationship intangible assets. They are initially measured at fair value and then are amortized over their estimated useful lives, which range from 6 to 10 years.

RESULTS OF OPERATIONS

Net Income:

Net Interest Income:

Net interest income is the Company’s single largest source of earnings, and represents the difference between interest and fees realized on earning assets, less interest paid on deposits and borrowed funds. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

The following table summarizes net interest income (on a tax-equivalent basis) for the three months ended June 30, 2022 and 2021. For tax-equivalent adjustments, an effective tax rate of 21% was used for both periods(1).


	Average Balance Sheet (Tax-equivalent basis / dollars in thousands)
	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
	Principal Balance		Income / Expense		Yield / Rate		Principal Balance		Income / Expense		Yield / Rate
ASSETS
Federal Funds Sold and Other Short-term Investments	$	606,488	$	1,232	0.81	%	$	386,144	$	103	0.11	%
Securities:
Taxable	1,025,156		5,113		2.00	%	816,444		3,523		1.73	%
Non-taxable	850,046		7,512		3.53	%	664,088		5,271		3.17	%
Total Loans and Leases⁽²⁾	3,649,466		40,058		4.40	%	3,119,385		34,561		4.44	%
TOTAL INTEREST EARNING ASSETS	6,131,156		53,915		3.52	%	4,986,061		43,458		3.49	%
Other Assets	552,148						419,116
Less: Allowance for Credit Losses	(45,335)						(45,790)
TOTAL ASSETS	$	6,637,969					$	5,359,387

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing Demand, Savings and Money Market Deposits	$	3,622,748	$	1,113	0.12	%	$	2,704,765	$	672	0.10	%
Time Deposits	492,453		436		0.36	%	425,972		597		0.56	%
FHLB Advances and Other Borrowings	145,705		1,120		3.08	%	179,698		1,145		2.56	%
TOTAL INTEREST-BEARING LIABILITIES	4,260,906		2,669		0.25	%	3,310,435		2,414		0.29	%
Demand Deposit Accounts	1,740,592						1,377,754
Other Liabilities	38,031						39,595
TOTAL LIABILITIES	6,039,529						4,727,784
Shareholders’ Equity	598,440						631,603
TOTAL LIBABILITIES AND SHAREHOLDERS' EQUITY	$	6,637,969					$	5,359,387

COST OF FUNDS					0.17	%					0.19	%
NET INTEREST INCOME			$	51,246					$	41,044
NET INTEREST MARGIN					3.35	%					3.30	%

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

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

During the second quarter of 2022, net interest income, on a non tax-equivalent basis, totaled $49,597,000, an increase of $9,717,000, or 24%, compared to the second quarter of 2021 net interest income of $39,880,000. The increase in net interest income during the second quarter of 2022 compared with the second quarter of 2021 was primarily attributable to a higher level of earning assets driven by both the CUB acquisition and deposit growth which led to a higher level of securities and short-term investments. Such increase was partially mitigated by a lower level of PPP loan fee recognition.

The tax equivalent net interest margin for the quarter ended June 30, 2022 was 3.35% compared with 3.30% in the second quarter of 2021. The improvement in the net interest margin during the second quarter of 2022 was largely attributable to increased market interest rates resulting in improved yields on earning assets. The Company's net interest margin in both periods presented was impacted by fees recognized as a part of the PPP and accretion of loan discounts on acquired loans. The

impact of the PPP fees and accretion of loan discounts was significantly less in the second quarter of 2022 compared to the second quarter of 2021.

Fees recognized on PPP loans through net interest income totaled $264,000 during the second quarter of 2022 and $2,776,000 during the second quarter of 2021. The fees recognized related to the PPP contributed approximately 2 basis points to the net interest margin on an annualized basis in the second quarter of 2022 and 22 basis points in the second quarter of 2021. Accretion of loan discounts on acquired loans contributed approximately 10 basis points to the net interest margin in the second quarter of 2022 and 5 basis points in the second quarter of 2021. Accretion of discounts on acquired loans totaled $1,528,000 during the second quarter of 2022 and $671,000 during the second quarter of 2021.

The following table summarizes net interest income (on a tax-equivalent basis) for the six months ended June 30, 2022 and 2021. For tax-equivalent adjustments, an effective tax rate of 21% was used for both periods(1).


	Average Balance Sheet (Tax-equivalent basis / dollars in thousands)
	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
	Principal Balance		Income / Expense		Yield / Rate		Principal Balance		Income / Expense		Yield / Rate
ASSETS
Federal Funds Sold and Other Short-term Investments	$	600,727	$	1,512	0.51	%	$	362,196	$	188	0.10	%
Securities:
Taxable	1,046,326		9,633		1.84	%	761,812		6,130		1.61	%
Non-taxable	884,425		14,524		3.28	%	626,780		9,991		3.19	%
Total Loans and Leases⁽²⁾	3,658,225		79,080		4.36	%	3,113,675		69,725		4.51	%
TOTAL INTEREST EARNING ASSETS	6,189,703		104,749		3.40	%	4,864,463		86,034		3.56	%
Other Assets	544,998						407,765
Less: Allowance for Credit Losses	(46,013)						(46,607)
TOTAL ASSETS	$	6,688,688					$	5,225,621

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing Demand, Savings and Money Market Deposits	$	3,558,139	$	1,984	0.11	%	$	2,598,449	$	1,309	0.10	%
Time Deposits	510,353		894		0.35	%	446,527		1,402		0.63	%
FHLB Advances and Other Borrowings	164,986		2,158		2.64	%	181,527		2,296		2.55	%
TOTAL INTEREST-BEARING LIABILITIES	4,233,478		5,036		0.24	%	3,226,503		5,007		0.31	%
Demand Deposit Accounts	1,739,975						1,323,384
Other Liabilities	44,657						46,286
TOTAL LIABILITIES	6,018,110						4,596,173
Shareholders’ Equity	670,578						629,448
TOTAL LIBABILITIES AND SHAREHOLDERS' EQUITY	$	6,688,688					$	5,225,621

COST OF FUNDS					0.16	%					0.21	%
NET INTEREST INCOME			$	99,713					$	81,027
NET INTEREST MARGIN					3.24	%					3.35	%

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

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

During the first half of 2022, net interest income, on a non tax-equivalent basis, totaled $96,505,000, an increase of $17,693,000, or 22%, compared to the first half of 2021 net interest income of $78,812,000. The increase in net interest income during the first half of 2022 compared with same period of 2021 was primarily attributable to a higher level of earning assets driven by both the CUB acquisition, and deposit growth which led to a higher level of securities and short-term investments. Such increase was partially mitigated by a lower level of PPP loan fee recognition.

The tax equivalent net interest margin for the six months ended June 30, 2022 was 3.24% compared with 3.35% in the first half of 2021. The decline in the net interest margin during the first half of 2022 was largely attributable a lower level of PPP loan fee recognition partially offset by increased market interest rates resulting in improved yields on earning assets and increased accretion on acquired loans.

Fees recognized on PPP loans through net interest income totaled $826,000 during the first half of 2022 and $5,793,000 during the first half of 2021. The fees recognized related to the PPP contributed approximately 3 basis points to the net interest margin on an annualized basis in the first six months of 2022 and 24 basis points in the same period of 2021. Accretion of loan discounts on acquired loans contributed approximately 9 basis points to the net interest margin in the first half of 2022 and 6 basis points in the first half of 2021. Accretion of discounts on acquired loans totaled $2,639,000 during the first half of 2022 and $1,538,000 during the first half of 2021.

Provision for Credit Losses:

The Company provides for credit losses through regular provisions to the allowance for credit losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance. During the quarter ended June 30, 2022, the Company recorded a provision for credit losses of $300,000 compared with a negative provision for credit losses of $5,000,000 during the second quarter of 2021. The negative provision for credit losses in the second quarter of 2021 was largely due to a decline in certain adversely criticized assets and improvement in certain pandemic-related stressed sectors for which the Company had provided significant levels of allowance for credit losses during 2020.

During the six months ended June 30, 2022, the Company recorded a provision for credit losses of $5,500,000 compared with the first six months of 2021 negative provision for credit losses of $6,500,000. During the first quarter of 2022, the provision for credit losses included $6,300,000 for the Day 1 CECL addition to the allowance for credit loss related to the CUB acquisition for the non-PCD loans. The negative provision for credit losses during the first half of 2021 was largely due to a decline in certain adversely criticized assets and improvement in certain pandemic-related stressed sectors for which the Company had provided significant levels of allowance for credit losses during 2020.

Net charge-offs totaled $347,000, or 4 basis points on an annualized basis, of average loans outstanding during the second quarter of 2022 compared with $104,000, or 1 basis point, of average loans during the second quarter of 2021. Net charge-offs totaled $603,000 or 3 basis points on an annualized basis of average loans outstanding during the six months ended June 30, 2022, compared with $364,000 or 2 basis points on an annualized basis of average loans outstanding during the same period of 2021.

The provision for credit losses made during the three and six months ended June 30, 2022 was made at a level deemed necessary by management to absorb expected losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for credit losses is completed quarterly by management, the results of which are used to determine provision for credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and reasonable and supportable forecasts along with other qualitative and quantitative factors.

Non-interest Income:

During the quarter ended June 30, 2022, non-interest income totaled $15,180,000, an increase of $1,278,000, or 9%, compared with the second quarter of 2021. The increase in non-interest income during the second quarter of 2022 compared with the second quarter of 2021 was in large part attributable to the CUB acquisition.


Non-interest Income (dollars in thousands)	Three Months Ended June 30,				Change From Prior Period
					Amount		Percent
	2022		2021		Change		Change
Wealth Management Fees	$	2,642	$	2,620	$	22	1	%
Service Charges on Deposit Accounts	2,871		1,735		1,136		65
Insurance Revenues	2,254		2,020		234		12
Company Owned Life Insurance	894		385		509		132
Interchange Fee Income	4,167		3,482		685		20
Other Operating Income	1,225		1,342		(117)		(9)
Subtotal	14,053		11,584		2,469		21
Net Gains on Sales of Loans	1,049		2,018		(969)		(48)
Net Gains on Securities	78		300		(222)		(74)
Total Non-interest Income	$	15,180	$	13,902	$	1,278	9

Service charges on deposit accounts increased $1,136,000, or 65%, during the second quarter of 2022 compared with the second quarter of 2021. The increase during the second quarter of 2022 was the result of the CUB acquisition as well as increased deposit customer activity.

Company owned life insurance increased $509,000, or 132%, during the second quarter of 2022 compared with the second quarter of 2021. The increase in the second quarter of 2022 was primarily the result of death benefit claims received during the second quarter of 2022.

Interchange fee income increased $685,000, or 20%, during the quarter ended June 30, 2022 compared with the second quarter of 2021. The increase in the level of fees during the second quarter of 2022 compared with the second quarter of 2021 was related to the CUB acquisition as well as increased card utilization by customers.

Net gains on sales of loans declined $969,000, or 48%, during the second quarter of 2022 compared with the second quarter of 2021. The decline in the second quarter of 2022 compared with the second quarter of 2021 was largely related to a lower volume of loans sold and lower pricing levels. Loan sales totaled $52.5 million during the second quarter of 2022 compared with $61.5 million during the second quarter of 2021.

The Company realized $78,000 in gains on sales of securities during the second quarter of 2022 compared with $300,000 during the second quarter of 2021. The sales of securities in all periods was done as part of modest shifts in the allocations within the securities portfolio.

During the six months ended June 30, 2022, non-interest income totaled $31,368,000, an increase of $2,429,000, or 8%, compared with the first half of 2021. The increase in non-interest income during 2022 compared with 2021 was in large part attributable to the CUB acquisition.


Non-interest Income (dollars in thousands)	Six Months Ended June 30,				Change From Prior Period
					Amount		Percent
	2022		2021		Change		Change
Wealth Management Fees	$	5,280	$	4,978	$	302	6	%
Service Charges on Deposit Accounts	5,554		3,413		2,141		63
Insurance Revenues	5,975		5,312		663		12
Company Owned Life Insurance	1,352		737		615		83
Interchange Fee Income	7,794		6,312		1,482		23
Other Operating Income	2,493		2,692		(199)		(7)
Subtotal	28,448		23,444		5,004		21
Net Gains on Sales of Loans	2,470		4,220		(1,750)		(41)
Net Gains on Securities	450		1,275		(825)		(65)
Total Non-interest Income	$	31,368	$	28,939	$	2,429	8

Service charges on deposit accounts increased $2,141,000, or 63%, during the first half of 2022 compared with the first half of 2021. The increase during 2022 compared with 2021 was the result of the CUB acquisition as well as increased deposit customer activity.

Company owned life insurance revenue increased $615,000, or 83%, during the six months ended June 30, 2022 compared with the first half of 2021. The increase was largely related to death benefits received from life insurance policies during 2022 and to the CUB acquisition.

Interchange fee income increased $1,482,000, or 23%, during the first half of 2022 compared with the same period of 2021. The increase in the level of fees during the first half of 2022 compared with the first half of 2021 was related to the CUB acquisition as well as increased card utilization by customers.

Net gains on sales of loans declined $1,750,000, or 41%, during the first half of 2022 compared with the same period of 2021. The decline in 2022 compared with 2021 was generally attributable to a lower volume of loans sold and lower pricing levels. Loan sales totaled $101.7 million during 2022 compared with $130.0 million during 2021.

The Company realized $450,000 in gains on sales of securities during the first half of 2022 compared with $1,275,000 during the same period of 2021. The sales of securities in both periods was done as part of modest shifts in the allocations within the securities portfolio.

Non-interest Expense:

During the quarter ended June 30, 2022, non-interest expense totaled $35,701,000, an increase of $6,664,000, or 23%, compared with the second quarter of 2021. The second quarter of 2022 non-interest expenses included approximately $426,000 of non-recurring acquisition-related expenses for the acquisition of CUB. The increase in non-interest expense in the second quarter of 2022 compared with the second quarter of 2021 was primarily related to the operating costs for CUB.


Non-interest Expense (dollars in thousands)	Three Months Ended June 30,				Change From Prior Period
					Amount		Percent
	2022		2021		Change		Change
Salaries and Employee Benefits	$	20,384	$	16,375	$	4,009	24	%
Occupancy, Furniture and Equipment Expense	3,772		3,830		(58)		(2)
FDIC Premiums	465		329		136		41
Data Processing Fees	2,460		1,779		681		38
Professional Fees	1,573		1,513		60		4
Advertising and Promotion	1,027		705		322		46
Intangible Amortization	957		711		246		35
Other Operating Expenses	5,063		3,795		1,268		33
Total Non-interest Expense	$	35,701	$	29,037	$	6,664	23

Salaries and benefits increased $4,009,000, or 24%, during the quarter ended June 30, 2022 compared with the second quarter of 2021. The increase in salaries and benefits during the second quarter of 2022 compared with the second quarter of 2021 was largely related to the salaries and benefit costs for the CUB employee base and a higher number of full time equivalent employees.

Data processing fees increased $681,000, or 38%, during the second quarter of 2022 compared with the second quarter of 2021. The increase in data processing fees during the second quarter of 2022 compared with the same period of the prior year was in part attributable to the CUB acquisition and additionally related to continued data system enhancements.

Advertising and promotion expense increased $322,000, or 46%, in the second quarter of 2022 compared with the second quarter of 2021. The increase during the second quarter of 2022 was due in large part to expenses related to the CUB acquisition.

Other operating expenses increased $1,268,000, or 33%, during the second quarter of 2022 compared with the second quarter of 2021. The increase in the second quarter of 2022 compared with the same period of 2021 was largely due to operating costs related to the acquisition of CUB and provisions related to the allowance for credit losses for unfunded commitments.

During the six months ended June 30, 2022, non-interest expense totaled $83,861,000, an increase of $23,565,000, or 39%, compared with the first half of 2021. The first half of 2022 non-interest expenses included approximately $12,132,000 of non-recurring acquisition-related expenses for the acquisition of CUB. The primary drivers of the remaining increases in the first half of 2022 compared with the first half of 2021 were the operating costs for CUB.


Non-interest Expense (dollars in thousands)	Six Months Ended June 30,				Change From Prior Period
					Amount		Percent
	2022		2021		Change		Change
Salaries and Employee Benefits	$	43,472	$	34,180	$	9,292	27	%
Occupancy, Furniture and Equipment Expense	7,581		8,178		(597)		(7)
FDIC Premiums	941		663		278		42
Data Processing Fees	10,184		3,522		6,662		189
Professional Fees	3,936		2,673		1,263		47
Advertising and Promotion	2,165		1,487		678		46
Intangible Amortization	1,974		1,471		503		34
Other Operating Expenses	13,608		8,122		5,486		68
Total Non-interest Expense	$	83,861	$	60,296	$	23,565	39

Salaries and benefits increased $9,292,000, or 27%, during the first half of 2022 compared with the same period of 2021. The increase in salaries and benefits during the first half of 2022 compared with the first half of 2021 was largely attributable to the CUB acquisition completed on January 1, 2022. The first half of 2022 included approximately $1,480,000 of acquisition-related salary and benefit costs of a non-recurring nature with the remainder of the increase due primarily to the salaries and benefits costs for the CUB employee base.

Occupancy, furniture and equipment expense declined $597,000, or 7%, during the first half of 2022 compared with the same period of 2021. The decline during the first half of 2022 compared to the first half of 2021 was largely related to operating fewer branch offices from the Company’s existing branch network (excluding the CUB acquisition), which was the result of the Company’s 2021 operating optimization plan, and non-recurring costs associated with the optimization plan in the first half of 2021, partially mitigated by the operating costs of the CUB branch network in the first half of 2022.

Data processing fees increased $6,662,000, or 189%, during the first half of 2022 compared with the first half of 2021. The increase during 2022 compared with 2021 was largely driven by acquisition-related costs which totaled approximately $4,982,000 during the first half of 2022, along with the CUB operating costs and additionally related to continued data system enhancements.

Professional fees increased $1,263,000, or 47%, in the first half of 2022 compared with the first half of 2021. The increase during 2022 was primarily due to professional fees associated with the CUB acquisition. Merger and acquisition related professional fees totaled approximately $1,616,000 during the first half of 2022.

Advertising and promotion expense increased $678,000, or 46%, in the first half of 2022 compared with the first half of 2021. The increase during 2022 was due in large part to expenses related to the CUB acquisition.

Other operating expenses increased $5,486,000, or 68%, during the first half of 2022 compared with the first half of 2021. The increase in 2022 compared to 2021 was largely attributable to acquisition-related costs that totaled approximately $3,857,000 in the first half of 2022 and operating costs associated with CUB. The acquisition-related costs were primarily vendor contract termination costs.

Income Taxes:

The Company’s effective income tax rate was 17.5% and 19.9%, respectively, during the three months ended June 30, 2022 and 2021. The Company's effective income tax rate was 14.8% and 19.6%, respectively, during the six months ended June 30, 2022 and 2021. The lower effective tax rate during the first half of 2022 compared with the first half of 2021 was the result of non-taxable sources of income being a greater component of pre-tax income. The lower level of pre-tax income in the first half of 2022 was driven in large part by acquisition costs and the Day 1 CECL provision associated with the CUB merger. The effective tax rate in all periods presented was lower than the blended statutory rate resulting primarily from the Company’s tax-exempt investment income on securities, loans and company-owned life insurance, income tax credits generated from affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

FINANCIAL CONDITION

Total assets for the Company totaled $6.472 billion at June 30, 2022, representing an increase of $863.2 million compared with year-end 2021. The increase in total assets at June 30, 2022 compared with year-end 2021 was in large part attributable to the

acquisition of CUB.

Securities available for sale declined $67.9 million as of June 30, 2022 compared with year-end 2021. The decline in the securities portfolio in the first half of 2022 was largely the result of fair value adjustments on the available-for-sale portfolio caused by the rapid rise in market interest rates during the first half of 2022.

June 30, 2022 total loans increased $644.8 million compared with December 31, 2021. The increase in total loans at June 30, 2022, compared with year-end 2021, was largely due to the acquisition of CUB, which was partially offset by a decline in PPP loans. PPP loans, net of deferred fees, totaled $0.6 million at June 30, 2022 compared with $19.5 million at December 31, 2021. As of June 30, 2022, outstanding loans from the CUB acquisition totaled approximately $602.2 million.

Excluding PPP loans and loans acquired through the CUB acquisition, total loans increased $61.4 million, or 4% on an annualized basis, at June 30, 2022 compared with December 31, 2021. Commercial and industrial loans increased approximately $33.0 million, or 12% on an annualized basis, during the first half of 2022 compared with year-end 2021, commercial real estate loans increased $23.9 million, or 3% on an annualized basis, while agricultural loans declined $15.7 million, or 9% on an annualized basis. During the first half of 2022 compared with year-end 2021, retail loans increased $20.4 million, or 7% on an annualized basis.


End of Period Loan Balances: (dollars in thousands)	June 30, 2022		December 31, 2021		Current Period Change
Commercial and Industrial Loans and Leases	$	641,496	$	548,350	$	93,146
Commercial Real Estate Loans	1,904,235		1,530,677		373,558
Agricultural Loans	397,524		358,150		39,374
Home Equity and Consumer Loans	366,322		307,184		59,138
Residential Mortgage Loans	343,166		263,565		79,601
Total Loans	$	3,652,743	$	3,007,926	$	644,817

The following table indicates the breakdown of the allowance for credit losses for the periods indicated (dollars in thousands):


	June 30, 2022		December 31, 2021
Commercial and Industrial Loans and Leases	$	13,736	$	9,754
Commercial Real Estate Loans	22,349		19,245
Agricultural Loans	4,628		4,505
Home Equity and Consumer Loans	2,140		1,808
Residential Mortgage Loans	2,178		1,705
Unallocated	—		—

Total Allowance for Credit Losses	$	45,031	$	37,017

The Company’s allowance for credit losses totaled $45.0 million at June 30, 2022 compared to $37.0 million at year-end 2021. The allowance for credit losses represented 1.23% of period-end loans at June 30, 2022 and year-end 2021.

The Company adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("CECL") on January 1, 2020. The Company added $9.4 million to the allowance for credit losses in conjunction with the closing of the CUB acquisition on January 1, 2022 related to the CUB loan portfolio. Of the increase in the allowance for credit losses for the CUB portfolio, $6.3 million was recorded through the provision for credit losses on "Day 1" under the CECL model for non-PCD loans. The Company also acquired $29.9 million in PCD loans for which the Company recorded a credit adjustment of $3.1 million which was included in the allowance for credit losses.

Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses. As of June 30, 2022, the Company held net discounts on acquired loans of $7.7 million which included $3.5 million related to the CUB loan portfolio.

The following is an analysis of the Company’s non-performing assets at June 30, 2022 and December 31, 2021:


Non-performing Assets: (dollars in thousands)	June 30, 2022			December 31, 2021
Non-accrual Loans	$	13,921		$	14,602
Past Due Loans (90 days or more)	1,161			156
Total Non-performing Loans	15,082			14,758
Other Real Estate	—			—
Total Non-performing Assets	$	15,082		$	14,758

Restructured Loans	$	—		$	104

Non-performing Loans to Total Loans	0.41		%	0.49		%
Allowance for Credit Loss to Non-performing Loans	298.57		%	250.83		%

The following table presents non-accrual loans and loans past due 90 days or more still on accrual by class of loans:


	Non-Accrual Loans				Loans Past Due 90 Days or More & Still Accruing
	June 30, 2022		December 31, 2021		June 30, 2022		December 31, 2021
Commercial and Industrial Loans and Leases	$	9,015	$	10,530	$	—	$	—
Commercial Real Estate Loans	2,105		2,243		—		156
Agricultural Loans	1,018		1,136		1,161		—
Home Equity Loans	233		24		—		—
Consumer Loans	138		82		—		—
Residential Mortgage Loans	1,412		587		—		—
Total	$	13,921	$	14,602	$	1,161	$	156

Non-performing assets totaled $15.1 million at June 30, 2022 compared to $14.8 million at year-end 2021. Non-performing assets represented 0.23% of total assets at June 30, 2022 compared to 0.26% at December 31, 2021. Non-performing loans totaled $15.1 million at June 30, 2022 compared to $14.8 million at year-end 2021. Non-performing loans represented 0.41% of total loans at June 30, 2022 compared to 0.49% at December 31, 2021. The increase in non-performing assets was primarily attributable to the CUB acquisition which totaled approximately $1.6 million at June 30, 2022.

June 30, 2022 total deposits increased $969.3 million compared to year-end 2021. The increase in total deposits at June 30, 2022 compared with year-end 2021 was largely attributable to the CUB acquisition and general inflows of customer deposits. As of June 30, 2022, deposits from the CUB acquisition totaled $821.5 million.


End of Period Deposit Balances: (dollars in thousands)	June 30, 2022		December 31, 2021		Current Period Change
Non-interest-bearing Demand Deposits	$	1,745,067	$	1,529,223	$	215,844
Interest-bearing Demand, Savings, & Money Market Accounts	3,503,789		2,867,994		635,795
Time Deposits < $100,000	263,798		201,683		62,115
Time Deposits of $100,000 or more	200,954		145,416		55,538
Total Deposits	$	5,713,608	$	4,744,316	$	969,292

Capital Resources:

As of June 30, 2022, shareholders’ equity declined by $94.1 million to $574.4 million compared with $668.5 million at year-end 2021. The decline in shareholders’ equity was primarily attributable to a decline in accumulated other comprehensive income of $226.6 million related to the decrease in value of the Company’s available-for-sale securities portfolio driven by a rapid increase in market interest rates during the first half of 2022. Partially mitigating the decline was the issuance of the Company’s common shares in the acquisition of CUB. Approximately 2.9 million shares were issued to CUB shareholders resulting in an increase to shareholders’ equity of $111.9 million. Also mitigating the decline was increased retained earnings of $19.3 million due to net income of $32.8 million, which was partially offset by the payment of $13.5 million in shareholder dividends.

Shareholders’ equity represented 8.9% of total assets at June 30, 2022 and 11.9% of total assets at December 31, 2021. Shareholders’ equity included $191.6 million of goodwill and other intangible assets at June 30, 2022 compared to $127.6

million of goodwill and other intangible assets at December 31, 2021. The increase in goodwill and other intangible assets was attributable to the CUB acquisition.

On January 31, 2022, the Company’s Board of Directors approved a plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock. On a share basis, the amount of common stock subject to the new repurchase plan represented approximately 3% of the Company’s outstanding shares on the date it was approved. The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements. At the time it approved the new plan, the Board also terminated a similar plan that had been adopted in January 2021. The Company has not repurchased any shares of common stock under the 2022 repurchase plan.

Federal banking regulations provide guidelines for determining the capital adequacy of bank holding companies and banks. These guidelines provide for a more narrow definition of core capital and assign a measure of risk to the various categories of assets. The Company is required to maintain minimum levels of capital in proportion to total risk-weighted assets and off-balance sheet exposures.

The current risk-based capital rules, as adopted by federal banking regulators, are based upon guidelines developed by the Basel Committee on Banking Supervision and reflect various requirements of the Dodd-Frank Act (the “Basel III Rules”). The Basel III Rules require banking organizations to, among other things, maintain a minimum ratio of Total Capital to risk-weighted assets, a minimum ratio of Tier 1 Capital to risk-weighted assets, a minimum ratio of “Common Equity Tier 1 Capital” to risk-weighted assets, and a minimum leverage ratio (calculated as the ratio of Tier 1 Capital to adjusted average consolidated assets). In addition, under the Basel III Rules, in order to avoid limitations on capital distributions, including dividend payments, the Company is required to maintain a 2.5% capital conservation buffer above the adequately capitalized regulatory capital ratios. At June 30, 2022, the capital levels for the Company and its subsidiary bank remained well in excess of the minimum amounts needed for capital adequacy purposes and the Bank's capital levels met the necessary requirements to be considered well-capitalized.

The table below presents the Company’s consolidated and the subsidiary bank's capital ratios under regulatory guidelines:


	6/30/2022 Ratio		12/31/2021 Ratio		Minimum for Capital Adequacy Purposes ⁽¹⁾		Well-Capitalized Guidelines
Total Capital (to Risk Weighted Assets)
Consolidated	15.07	%	16.20	%	8.00	%	N/A
Bank	13.86	%	13.36	%	8.00	%	10.00	%
Tier 1 (Core) Capital (to Risk Weighted Assets)
Consolidated	13.58	%	14.61	%	6.00	%	N/A
Bank	13.23	%	12.83	%	6.00	%	8.00	%
Common Tier 1, (CET 1) Capital Ratio (to Risk Weighted Assets)
Consolidated	12.85	%	14.18	%	4.50	%	N/A
Bank	13.23	%	12.83	%	4.50	%	6.50	%
Tier 1 Capital (to Average Assets)
Consolidated	9.57	%	10.10	%	4.00	%	N/A
Bank	9.33	%	8.88	%	4.00	%	5.00	%

(1) Excludes capital conservation buffer.

In December 2018, the 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, which was finalized effective September 30, 2020, 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 elected to adopt the five-year transition option and, as a result, began the required three-year phase-in by reflecting

25% of the previously deferred estimated capital impact of CECL in its regulatory capital effective January 1, 2022. An additional 25% is to be phased in at the beginning of each subsequent year until fully phased in by January 1, 2025. Under the five-year transition option, the amount of adjustments to regulatory capital that could be deferred until the phase-in period began included both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

On April 9, 2020, federal banking regulators issued an interim final rule to modify the Basel III regulatory capital rules applicable to banking organizations to allow those organizations participating in the PPP to neutralize the regulatory capital effects of participating in the program. Specifically, the agencies have clarified that banking organizations, including the Company and the Bank, are permitted to assign a zero percent risk weight to PPP loans for purposes of determining risk-weighted assets and risk-based capital ratios.

Liquidity:

The Consolidated Statement of Cash Flows details the elements of changes in the Company’s consolidated cash and cash equivalents. Total cash and cash equivalents increased $129.2 million during the six months ended June 30, 2022 ending at $526.0 million. During the six months ended June 30, 2022, operating activities resulted in net cash inflows of $50.3 million. Investing activities resulted in net cash inflows of $124.4 million during the six months ended June 30, 2022. Financing activities resulted in net cash outflows for the six months ended June 30, 2022 of $45.6 million.

The parent company is a corporation separate and distinct from its bank and other subsidiaries. The Company uses funds at the parent-company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes including debt service. The parent company does not have access at the parent-company level to the deposits and certain other sources of funds that are available to its bank subsidiary to support its operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank subsidiary. The Company’s banking subsidiary is subject to statutory restrictions on its ability to pay dividends to the parent company. The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings. As of June 30, 2022, the parent company had approximately $33.5 million of cash and cash equivalents available to meet its cash flow needs.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

The Company from time to time in its oral and written communications makes statements relating to its expectations regarding the future. These types of statements are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-Q, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. Such forward looking statements can include statements about the Company’s net interest income or net interest margin; its adequacy of allowance for credit losses, levels of provisions for credit losses, and the quality of the Company’s loans, investment securities and other assets; simulations of changes in interest rates; expected results from mergers with or acquisitions of other businesses; litigation results; tax estimates and recognition; dividend policy; parent company cash resources and cash requirements, and parent company capital resources; estimated cost savings, plans and objectives for future operations; and expectations about the Company’s financial and business performance and other business matters as well as economic and market conditions and trends. They often can be identified by the use of words like “plan,” “expect,” “can,” “might,” “may,” “will,” “would,” “could,” “should,” “intend,” “project,” “estimate,” “believe” or “anticipate,” or similar expressions.

Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the forward-looking statement is made.

Readers are cautioned that, by their nature, all forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially and adversely from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussions in this Item 2 list some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statements. Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include:

•the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

•changes in competitive conditions;

•the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies;

•changes in customer borrowing, repayment, investment and deposit practices;

•changes in fiscal, monetary and tax policies;

•changes in financial and capital markets;

•potential deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration;

•the severity and duration of the COVID-19 pandemic and its impact on general economic and financial market conditions and our business, results of operations, and financial condition;

•our participation as a lender in the PPP;

•capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities;

•factors driving impairment charges on investments;

•the impact, extent and timing of technological changes;

•potential cyber-attacks, information security breaches and other criminal activities;

•litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;

•actions of the Federal Reserve Board;

•the possible effects of the replacement of the London Interbank Offering Rate (LIBOR);

•the impact of the current expected credit loss (CECL) standard;

•changes in accounting principles and interpretations;

•potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary;

•actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms;

•impacts resulting from possible amendments or revisions to the Dodd-Frank Act and the regulations promulgated thereunder, or to Consumer Financial Protection Bureau rules and regulations;

•the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends; and

•with respect to the merger with CUB, the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies, unexpected credit quality problems of the acquired loans or other assets, or unexpected attrition of the customer base of the acquired institution or branches.

Such statements reflect our views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the operations, results of operations, growth strategy and liquidity of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements.

Investors should consider these risks, uncertainties, and other factors, in addition to those mentioned by the Company in its Annual Report on Form 10-K for its fiscal year ended December 31, 2021, this Quarterly Report on Form 10-Q, and other SEC filings from time to time, when considering any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee and Boards of Directors of the parent company and its subsidiary bank. Primary market risks which impact the Company’s operations are liquidity risk and interest rate risk.

The liquidity of the parent company is dependent upon the receipt of dividends from its subsidiary bank, which is subject to certain regulatory limitations. The Bank’s source of funding is predominately core deposits, maturities of securities, repayments of loan principal and interest, federal funds purchased, securities sold under agreements to repurchase and borrowings from the Federal Home Loan Bank.

The Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios, and by estimating its static interest rate sensitivity position. Another method by which the Company’s interest rate risk position can be estimated is by computing estimated changes in its net portfolio value (“NPV”). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities. NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities.

Computations for measuring both net interest income and NPV are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing both net interest income and NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the modeling. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment.

The Company from time to time utilizes derivatives to manage interest rate risk. Management continuously evaluates the merits of such interest rate risk products but does not anticipate the use of such products to become a major part of the Company’s risk management strategy.

The table below provides an assessment of the risk to net interest income over the next 12 months in the event of a sudden and sustained 1% and 2% increase and decrease in prevailing interest rates (dollars in thousands).

Interest Rate Sensitivity as of June 30, 2022 - Net Interest Income


	Net Interest Income

Changes in Rates	Amount		% Change
+2%	$	217,961	5.98	%
+1%	212,196		3.18	%
Base	205,661		—
-1%	196,559		(4.43)	%
-2%	185,643		(9.73)	%

The above table is a measurement of the Company’s net interest income at risk, assuming a static balance sheet as of June 30, 2022 and instantaneous parallel changes in interest rates. The Company also monitors interest rate risk under other scenarios including a more gradual movement in market interest rates. This type of scenario can at times produce different modeling results in measuring interest rate risk sensitivity.

The table below provides an assessment of the risk to NPV in the event of a sudden and sustained 1% and 2% increase and decrease in prevailing interest rates (dollars in thousands).

Interest Rate Sensitivity as of June 30, 2022 - Net Portfolio Value


	Net Portfolio Value				Net Portfolio Value as a % of Present Value of Assets
Changes in Rates	Amount		% Change		NPV Ratio		Change

+2%	$	886,709	(5.46)	%	15.06	%	12 b.p.
+1%	913,499		(2.60)	%	15.03	%	9 b.p.
Base	937,884		—		14.94	%	—
-1%	1,230,787		31.23	%	18.19	%	325 b.p.
-2%	1,091,990		16.43	%	15.90	%	96 b.p.

This Item 3 includes forward-looking statements. See “Forward-looking Statements and Associated Risks” included in Part I, Item 2 of this Report for a discussion of certain factors that could cause the Company’s actual exposure to market risk to vary materially from that expressed or implied above. These factors include possible changes in economic conditions; interest rate fluctuations, competitive product and pricing pressures within the Company’s markets; and equity and fixed income market fluctuations. Actual experience may also vary materially to the extent that the Company’s assumptions described above prove to be inaccurate.

Item 4. Controls and Procedures

As of June 30, 2022, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were, as of that date, effective in timely alerting them to material information required to be included in the Company’s periodic reports filed with the Securities and Exchange Commission. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s second fiscal quarter of 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

In July 2020, the Company was named in a putative class action lawsuit filed in Marion County, Indiana Superior Court challenging the Company’s checking account practices associated with its assessment of overdraft fees for certain debit card transactions. The relief sought by the plaintiff included restitution, other monetary damages, and injunctive and declaratory relief. The plaintiff also sought to have the case certified by the Court as a class action on behalf all citizens of Indiana who are checking account holders at German American Bank and who were assessed overdraft fees on certain debit card transactions. While the Company believes the plaintiff’s claims were unfounded and vehemently defended against them, on October 21, 2021, the Company executed a Settlement Agreement and Release (the “Settlement Agreement”), pursuant to which the Company would pay the amount of $3,050,000 in full and complete settlement of plaintiff’s putative class action. On August 1, 2022, the Court entered its Amended Final Approval Order, directing the parties to effectuate the terms of the Settlement Agreement, dismissing the lawsuit, and entering final judgment in the matter. As a result, the Company has paid the amount set forth above.

There are no other pending legal proceedings, other than routine litigation incidental to the business of the Company’s subsidiaries, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

Item 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed in German American Bancorp, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table sets forth information regarding the Company’s purchases of its common shares during each of the three months ended June 30, 2022.


Period	Total Number of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)	Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased under the Plans or Programs (1)
April 2022	—	—	—	1,000,000
May 2022	—	—	—	1,000,000
June 2022	—	—	—	1,000,000
Total	—	—	—

(1) On January 31, 2022, the Company’s Board of Directors approved a plan to repurchase up to 1.0 million shares of the Company’s outstanding common stock. On a share basis, the amount of common stock subject to the repurchase plan represented approximately 3% of the Company’s outstanding shares on the date it was approved. The Company is not obligated to purchase any shares under the plan, and the plan may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase plan will be determined by the Company at its discretion and will depend upon such factors as the market price of the stock, general market and economic conditions and applicable legal requirements. The Company has not repurchased any shares under the 2022 repurchase plan.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are included with this Report or incorporated herein by reference.


Exhibit No.						Description
2.1#						Agreement and Plan of Reorganization by and among German American Bancorp, Inc., German American Bank, Citizens Union Bancorp of Shelbyville, Inc. and Citizens Union Bank of Shelbyville, Inc., dated as of September 20, 2021, is incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K filed September 21, 2021 (SEC File No. 001-15877).
3.1						Amended and Restated Articles of Incorporation of German American Bancorp, Inc., are incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed May 26, 2020 (SEC File No. 001-15877).
3.2						Amended and Restated Bylaws of German American Bancorp, Inc. are incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed July 1, 2020 (SEC File No. 001-15877).
4.1						Terms of Common Shares and Preferred Shares of the Registrant (included in Restatement of Articles of Incorporation) are incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed May 26, 2020 (SEC File No. 001-15877).
4.2						Specimen stock certificate for Common Shares of the Registrant is incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed October 21, 2010 (SEC File No. 001-15877).
4.3						Indenture, dated as of June 25, 2019, by and between German American Bancorp, Inc. and U.S. Bank National Association, as trustee, is incorporated by reference to Exhibit 4.1 of the Registrant’s Current Report on Form 8-K filed June 25, 2019 (SEC File No. 001-15877).
4.4						Form of 4.50% Fixed-to-Floating Subordinated Note due 2029 of German American Bancorp, Inc. is incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed June 25, 2019 (SEC File No. 001-15877).
10.1*+						Description of Director Compensation Arrangements, effective as of July 1, 2022.
31.1+						Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.
31.2+						Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.
32.1++						Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.
32.2++						Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.
101.INS+						Inline XBRL Instance Document (The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.)
101.SCH+						Inline XBRL Taxonomy Extension Schema Document
101.CAL+						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF+						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB+						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE+						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

Note: No long-term debt instrument issued by the Registrant exceeds 10% of consolidated total assets or is registered. In accordance with paragraph 4 (iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request.

# Schedules to the subject agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule will be furnished to the Securities and Exchange Commission upon request.

* Exhibits that describe or evidence management contracts or compensatory plans or arrangements required to be filed as exhibits to this Report are indicated by an asterisk.

+Filed with this Report (other than through incorporation by reference to other disclosures or exhibits).

++Furnished with this Report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


			GERMAN AMERICAN BANCORP, INC.

Date: August 9, 2022			By: /s/D. Neil Dauby
			D. Neil Dauby
			President and Chief Executive Officer
			(Principal Executive Officer)

Date: August 9, 2022			By: /s/Bradley M. Rust
			Bradley M. Rust
			Senior Executive Vice President, Chief Operating Officer and
			Chief Financial Officer
			(Principal Financial Officer)

Date: August 9, 2022			By: /s/Vicki L. Schuler
			Vicki L. Schuler
			Senior Vice President, Controller
			(Principal Accounting Officer)

TABLE OF CONTENTS

Part I. Financial Information Item 1. Unaudited Financial Statements Note 1 Basis Of Presentation and Market Conditions Note 2 - Recent Accounting Pronouncements Note 3 Per Share Data Note 4 Securities Note 4 - Securities (continued)Note 5 Derivatives Note 6 Loans Note 6 - Loans (continued)Note 7 Repurchase Agreements Accounted For As Secured Borrowings Note 8 Segment Information Note 8 - Segment Information (continued)Note 9 Stock Repurchase Plan Note 10 Equity Plans and Equity Based Compensation Note 10 - Equity Plans and Equity Based Compensation (continued)Note 11 Fair Value Note 11 - Fair Value (continued)Note 12 - Other Comprehensive Income (loss)Note 12 - Other Comprehensive Income (loss) (continued)Note 13 - Revenue Recognition Note 13 - Revenue Recognition (continued)Note 14 Leases Note 14 - Leases (continued)Note 15 - Business Combinations Note 15 - Business Combinations (continued)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information Item 6. Exhibits

Exhibits

2.1# Agreement and Plan of Reorganization by and among German American Bancorp, Inc., German American Bank, Citizens Union Bancorp of Shelbyville, Inc. and Citizens Union Bank of Shelbyville, Inc., dated as of September 20, 2021, is incorporated by reference to Exhibit 2.1 of the Registrants Current Report on Form 8-K filed September 21, 2021 (SEC File No. 001-15877). 3.1 Amended and Restated Articles of Incorporation of German American Bancorp, Inc., are incorporated by reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K filed May 26, 2020 (SEC File No. 001-15877). 3.2 Amended and Restated Bylaws of German American Bancorp, Inc. are incorporated by reference to Exhibit 3.1 of the Registrant's Current Report on Form 8-K filed July 1, 2020 (SEC File No. 001-15877). 4.1 Terms of Common Shares and Preferred Shares of the Registrant (included in Restatement of Articles of Incorporation) are incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed May 26, 2020 (SEC File No. 001-15877). 4.2 Specimen stock certificate for Common Shares of the Registrant is incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed October 21, 2010 (SEC File No. 001-15877). 4.3 Indenture, dated as of June 25, 2019, by and between German American Bancorp, Inc. and U.S. Bank National Association, as trustee, is incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K filed June 25, 2019 (SEC File No. 001-15877). 4.4 Form of 4.50% Fixed-to-Floating Subordinated Note due 2029 of German American Bancorp, Inc. is incorporated by reference to Exhibit 4.2 of the Registrants Current Report on Form 8-K filed June 25, 2019 (SEC File No. 001-15877). 10.1*+ Description of Director Compensation Arrangements, effective as of July 1, 2022. 31.1+ Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer. 31.2+ Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer. 32.1++ Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer. 32.2++ Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.

GABC 10-Q Quarter ended June 30, 2022

Exhibits