GERMAN AMERICAN BANCORP, INC. - Quarter Report: 2023 September (Form 10-Q)

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 September 30, 2023

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 November 1, 2023, the registrant had 29,575,451 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, 2022, 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 – September 30, 2023 and December 31, 2022	6

	Consolidated Statements of Income – Three Months Ended September 30, 2023 and 2022	7

	Consolidated Statements of Income – Nine Months Ended September 30, 2023 and 2022	8

	Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2023 and 2022	9

	Consolidated Statements of Changes in Shareholders’ Equity - Three and Nine Months Ended September 30, 2023 and 2022	10

	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2023 and 2022	12

	Notes to Consolidated Financial Statements – September 30, 2023	13

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	58

Item 4.	Controls and Procedures	60

PART II. OTHER INFORMATION		61

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

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

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

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

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)


	September 30, 2023		December 31, 2022
ASSETS
Cash and Due from Banks	$	72,063	$	77,174
Federal Funds Sold and Other Short-term Investments	60,356		41,905
Cash and Cash Equivalents	132,419		119,079

Interest-bearing Time Deposits with Banks	500		500
Securities Available-for-Sale, at Fair Value (Amortized Cost $1,891,435 for September 30, 2023; Amortized Cost $2,094,826 for December 31, 2022; No Allowance for Credit Losses)	1,476,956		1,761,669
Other Investments	353		353

Loans Held-for-Sale, at Fair Value	7,085		8,600

Loans	3,893,573		3,788,645
Less: Unearned Income	(6,023)		(3,711)
Allowance for Credit Losses	(44,646)		(44,168)
Loans, Net	3,842,904		3,740,766

Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost	14,763		15,037
Premises, Furniture and Equipment, Net	111,252		112,237
Other Real Estate	24		—
Goodwill	180,357		180,357
Intangible Assets	7,016		9,426
Company Owned Life Insurance	85,372		83,998
Accrued Interest Receivable and Other Assets	146,665		123,969
TOTAL ASSETS	$	6,005,666	$	6,155,991

LIABILITIES
Non-interest-bearing Demand Deposits	$	1,502,175	$	1,691,804
Interest-bearing Demand, Savings, and Money Market Accounts	2,932,180		3,229,778
Time Deposits	701,516		428,469
Total Deposits	5,135,871		5,350,051

FHLB Advances and Other Borrowings	286,193		203,806
Accrued Interest Payable and Other Liabilities	45,210		43,741
TOTAL LIABILITIES	5,467,274		5,597,598

SHAREHOLDERS’ EQUITY
Common Stock, no par value, $1 stated value; 45,000,000 shares authorized	29,575		29,493
Additional Paid-in Capital	388,955		387,171
Retained Earnings	447,475		405,167
Accumulated Other Comprehensive Income (Loss)	(327,613)		(263,438)
TOTAL SHAREHOLDERS’ EQUITY	538,392		558,393
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	6,005,666	$	6,155,991
End of period shares issued and outstanding	29,575,451		29,493,193

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 September 30,
	2023		2022
INTEREST INCOME
Interest and Fees on Loans	$	55,196	$	43,128
Interest on Federal Funds Sold and Other Short-term Investments	199		2,053
Interest and Dividends on Securities:
Taxable	4,871		5,276
Non-taxable	5,376		6,067
TOTAL INTEREST INCOME	65,642		56,524

INTEREST EXPENSE
Interest on Deposits	15,578		3,597
Interest on FHLB Advances and Other Borrowings	2,505		1,229
TOTAL INTEREST EXPENSE	18,083		4,826

NET INTEREST INCOME	47,559		51,698
Provision for Credit Losses	900		350
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	46,659		51,348

NON-INTEREST INCOME
Wealth Management Fees	2,957		2,376
Service Charges on Deposit Accounts	2,982		3,014
Insurance Revenues	2,065		1,995
Company Owned Life Insurance	446		416
Interchange Fee Income	4,470		4,054
Other Operating Income	1,270		1,365
Net Gains on Sales of Loans	614		854
Net Gains on Securities	—		23
TOTAL NON-INTEREST INCOME	14,804		14,097

NON-INTEREST EXPENSE
Salaries and Employee Benefits	20,347		19,751
Occupancy Expense	2,813		2,764
Furniture and Equipment Expense	878		921
FDIC Premiums	700		477
Data Processing Fees	2,719		2,712
Professional Fees	1,229		1,188
Advertising and Promotion	1,278		1,215
Intangible Amortization	685		897
Other Operating Expenses	4,772		4,791
TOTAL NON-INTEREST EXPENSE	35,421		34,716

Income before Income Taxes	26,042		30,729
Income Tax Expense	4,591		6,133
NET INCOME	$	21,451	$	24,596

Basic Earnings per Share	$	0.73	$	0.83
Diluted Earnings per Share	$	0.73	$	0.83

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(unaudited, dollars in thousands except per share data)


	Nine Months Ended September 30,
	2023		2022
INTEREST INCOME
Interest and Fees on Loans	$	156,459	$	122,050
Interest on Federal Funds Sold and Other Short-term Investments	1,204		3,565
Interest and Dividends on Securities:
Taxable	15,490		14,909
Non-taxable	16,492		17,541
TOTAL INTEREST INCOME	189,645		158,065

INTEREST EXPENSE
Interest on Deposits	37,906		6,475
Interest on FHLB Advances and Other Borrowings	6,913		3,387
TOTAL INTEREST EXPENSE	44,819		9,862

NET INTEREST INCOME	144,826		148,203
Provision for Credit Losses	2,550		5,850
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	142,276		142,353

NON-INTEREST INCOME
Wealth Management Fees	8,513		7,656
Service Charges on Deposit Accounts	8,653		8,568
Insurance Revenues	7,330		7,970
Company Owned Life Insurance	1,276		1,768
Interchange Fee Income	13,081		11,848
Other Operating Income	3,943		3,858
Net Gains on Sales of Loans	1,831		3,324
Net Gains on Securities	40		473
TOTAL NON-INTEREST INCOME	44,667		45,465

NON-INTEREST EXPENSE
Salaries and Employee Benefits	62,296		63,223
Occupancy Expense	8,270		8,446
Furniture and Equipment Expense	2,684		2,820
FDIC Premiums	2,128		1,418
Data Processing Fees	8,277		12,896
Professional Fees	4,405		5,124
Advertising and Promotion	3,706		3,380
Intangible Amortization	2,204		2,871
Other Operating Expenses	14,793		18,399
TOTAL NON-INTEREST EXPENSE	108,763		118,577

Income before Income Taxes	78,180		69,241
Income Tax Expense	13,799		11,831
NET INCOME	$	64,381	$	57,410

Basic Earnings per Share	$	2.18	$	1.95
Diluted Earnings per Share	$	2.18	$	1.95

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited, dollars in thousands)


	Three Months Ended September 30,
	2023		2022

NET INCOME	$	21,451	$	24,596

Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gain (Loss) Arising During the Period	(99,787)		(124,142)
Reclassification Adjustment for Gains Included in Net Income	—		(23)
Tax Effect	21,026		26,202
Net of Tax	(78,761)		(97,963)

Total Other Comprehensive Income (Loss)	(78,761)		(97,963)

COMPREHENSIVE INCOME (LOSS)	$	(57,310)	$	(73,367)


	Nine Months Ended September 30,
	2023		2022

NET INCOME	$	64,381	$	57,410

Other Comprehensive Income (Loss):
Unrealized Gains (Losses) on Securities:
Unrealized Holding Gain (Loss) Arising During the Period	(81,281)		(410,839)
Reclassification Adjustment for Gains Included in Net Income	(40)		(473)
Tax Effect	17,146		86,770
Net of Tax	(64,175)		(324,542)

Total Other Comprehensive Income (Loss)	(64,175)		(324,542)

COMPREHENSIVE INCOME (LOSS)	$	206	$	(267,132)

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, 2023	29,493,193	$	29,493	$	387,171	$	405,167	$	(263,438)	$	558,393

Net Income	—	—		—		20,807		—		20,807
Other Comprehensive Income (Loss)	—	—		—		—		32,946		32,946
Cash Dividends ($0.25 per share)	—	—		—		(7,354)		—		(7,354)
Issuance of Common Stock for:

Restricted Share Grants Net	80,246	80		459		—		—		539

Balances, March 31, 2023	29,573,439	$	29,573	$	387,630	$	418,620	$	(230,492)	$	605,331

Net Income	—	—		—		22,123		—		22,123
Other Comprehensive Income (Loss)	—	—		—		—		(18,360)		(18,360)
Cash Dividends ($0.25 per share)	—	—		—		(7,359)		—		(7,359)
Issuance of Common Stock for:

Restricted Share Grants Net	(656)	—		830		—		—		830



Balances, June 30, 2023	29,572,783	$	29,573	$	388,460	$	433,384	$	(248,852)	$	602,565

Net Income	—	—		—		21,451		—		21,451
Other Comprehensive Income (Loss)	—	—		—		—		(78,761)		(78,761)
Cash Dividends ($0.25 per share)	—	—		—		(7,360)		—		(7,360)
Issuance of Common Stock for:
Restricted Share Grants Net	2,668	2		495		—		—		497

Balances, September 30, 2023	29,575,451	$	29,575	$	388,955	$	447,475	$	(327,613)	$	538,392

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 Net	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 Net	(2,638)	(3)		1,096		—		—		1,093


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

Net Income	—	—		—		24,596		—		24,596
Other Comprehensive Income (Loss)	—	—		—		—		(97,963)		(97,963)
Cash Dividends ($0.23 per share)	—	—		—		(6,759)		—		(6,759)
Issuance of Common Stock for:
Restricted Share Grants Net	2,076	2		396		—		—		398

Balances, September 30, 2022	29,485,121	$	29,485	$	386,764	$	387,510	$	(309,058)	$	494,701

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)


	Nine Months Ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	64,381	$	57,410
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Amortization on Securities	4,166		4,954
Depreciation and Amortization	7,208		7,743
Loans Originated for Sale	(81,608)		(138,921)
Proceeds from Sales of Loans Held-for-Sale	84,926		145,194
Provision for Credit Losses	2,550		5,850
Gain on Sale of Loans, net	(1,831)		(3,324)
Gain on Securities, net	(40)		(473)
Gain on Sales of Other Real Estate and Repossessed Assets	(55)		(18)

Loss (Gain) on Disposition and Donation of Premises and Equipment	28		(37)
Gain on Disposition of Land	(83)		—
Increase in Cash Surrender Value of Company Owned Life Insurance	(1,374)		(1,323)
Equity Based Compensation	1,866		1,915
Change in Assets and Liabilities:
Interest Receivable and Other Assets	(5,214)		(87)
Interest Payable and Other Liabilities	2,737		3,609
Net Cash from Operating Activities	77,657		82,492

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturity of Other Short-term Investments	—		248
Proceeds from Maturities of Securities Available-for-Sale	187,171		107,665

Proceeds from Sales of Securities Available-for-Sale	114,259		99,572
Purchase of Securities Available-for-Sale	(102,164)		(332,809)

Proceeds from Redemption of Federal Home Loan Bank Stock	274		8,020
Purchase of Loans	(544)		(1,811)
Proceeds from Sale of Loans Held for Investment	—		596
Loans Made to Customers, net of Payments Received	(104,168)		436
Proceeds from Sales of Other Real Estate	55		88
Property and Equipment Expenditures	(5,497)		(6,288)

Proceeds from Sales of Land and Buildings	252		—
Proceeds from Life Insurance	—		773

Acquisition of Citizens Union Bancorp of Shelbyville, Inc.	—		207,598
Net Cash from Investing Activities	89,638		84,088

CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits	(213,927)		(100,610)
Change in Short-term Borrowings	57,142		(27,890)
Advances in Long-term Debt	25,000		—
Repayments of Long-term Debt	(97)		(41,660)

Dividends Paid	(22,073)		(20,264)
Net Cash from Financing Activities	(153,955)		(190,424)

Net Change in Cash and Cash Equivalents	13,340		(23,844)
Cash and Cash Equivalents at Beginning of Year	119,079		396,890
Cash and Cash Equivalents at End of Period	$	132,419	$	373,046


Cash Paid During the Period for
Interest	$	40,442	$	9,142
Income Taxes	14,865		8,612

Supplemental Non Cash Disclosures
Loans Transferred to Other Real Estate	$	—	$	30
Interest Rate Swap Fair Value Adjustment	$	419	$	5,590
Reclassification of Land and Buildings to Other Assets	$	691	$	—
Supplemental Schedule for Investing Activities (Acquisition of CUB)
Assets acquired, net of purchase consideration	$	—	$	945,160
Liabilities assumed	—		1,003,756
Goodwill	$	—	$	58,596

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2022. 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

Recently Adopted Accounting Guidance

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, 2024. 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 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 adopted the new guidance prospectively with no material impact to the consolidated financial statements.

The SEC released Staff Accounting Bulletin No. 121 (“SAB 121”) on March 31, 2022, which provides interpretive guidance regarding the accounting for obligations to safeguard crypto-assets an entity holds for its customers, either directly, through an agent or through another third party acting on its behalf. SAB 121 requires an entity to recognize a liability on its balance sheet to reflect the obligation to safeguard the crypto-assets of others, along with a corresponding safeguarding asset, both of which are measured at fair value. The Company has completed an evaluation and concluded that it does not have a safeguarding obligation under SAB 121 and therefore the disclosures do not apply.

Newly Issued But Not Yet Effective Accounting Standards

On March 29, 2023, the FASB issued ASU 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method" to expand use of the proportional amortization method of accounting to equity investments in tax credit programs beyond those in low-income-housing tax credit (LIHTC) programs. The amendments in this update permit reporting entities to account for certain tax equity

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 2 - Recent Accounting Pronouncements (continued)

investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. This guidance provides clarifications to address interpretive issues and prescribes specific information that reporting entities must disclose about tax credit investments each period.

This ASU is effective for reporting periods beginning after December 15, 2023, for public business entities. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2024. Early adoption is permitted, included early adoption in any interim period as of the beginning of the fiscal year that includes that interim period. Entities have the option of applying the forthcoming revisions using either a modified retrospective or retrospective adoption approach. The Company is currently evaluating the impact of adopting this new guidance, however, adoption of the standard is not expected to have a material impact on the Company's financial statements or disclosures.

NOTE 3 – Per Share Data

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


	Three Months Ended September 30,
	2023		2022
Basic Earnings per Share:
Net Income	$	21,451	$	24,596
Weighted Average Shares Outstanding	29,573,461		29,484,394
Basic Earnings per Share	$	0.73	$	0.83

Diluted Earnings per Share:
Net Income	$	21,451	$	24,596

Weighted Average Shares Outstanding	29,573,461		29,484,394
Potentially Dilutive Shares, Net	—		—
Diluted Weighted Average Shares Outstanding	29,573,461		29,484,394
Diluted Earnings per Share	$	0.73	$	0.83

For the three months ended September 30, 2023 and 2022, there were no anti-dilutive shares.


	Nine Months Ended September 30,
	2023		2022
Basic Earnings per Share:
Net Income	$	64,381	$	57,410
Weighted Average Shares Outstanding	29,551,558		29,457,396
Basic Earnings per Share	$	2.18	$	1.95

Diluted Earnings per Share:
Net Income	$	64,381	$	57,410

Weighted Average Shares Outstanding	29,551,558		29,457,396
Potentially Dilutive Shares, Net	—		—
Diluted Weighted Average Shares Outstanding	29,551,558		29,457,396
Diluted Earnings per Share	$	2.18	$	1.95

For the nine months ended September 30, 2023 and 2022, there were no anti-dilutive shares.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 4 – Securities

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


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

September 30, 2023
U.S. Treasury	$	—	$	—	$	—	$	—	$	—
Obligations of State and Political Subdivisions	892,171		10		(212,994)		—		679,187
MBS/CMO	775,708		—		(155,145)		—		620,563
US Gov’t Sponsored Entities & Agencies	223,556		—		(46,350)		—		177,206
Total	$	1,891,435	$	10	$	(414,489)	$	—	$	1,476,956

December 31, 2022
U.S. Treasury	$	64,097	$	22	$	—	$	—	$	64,119
Obligations of State and Political Subdivisions	939,193		673		(162,014)		—		777,852
MBS/CMO	846,519		—		(131,838)		—		714,681
US Gov’t Sponsored Entities & Agencies	245,017		—		(40,000)		—		205,017
Total	$	2,094,826	$	695	$	(333,852)	$	—	$	1,761,669

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 available-for-sale at September 30, 2023 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	$	1,807	$	1,793
Due after one year through five years	17,277		16,880
Due after five years through ten years	60,985		54,202
Due after ten years	812,102		606,312
MBS/CMO	775,708		620,563
US Gov’t Sponsored Entities & Agencies	223,556		177,206
Total	$	1,891,435	$	1,476,956

Proceeds from the Sales of Securities are summarized below:


	Three Months Ended		Three Months Ended
	September 30, 2023		September 30, 2022

Proceeds from Sales	$	—	$	2,073
Gross Gains on Sales	—		23
Income Taxes on Gross Gains	—		5

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 4 - Securities (continued)


	Nine Months Ended		Nine Months Ended
	September 30, 2023		September 30, 2022

Proceeds from Sales	$	114,259	$	99,572
Gross Gains on Sales	346		517
Income Taxes on Gross Gains	73		109

The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $376,326 and $354,123 as of September 30, 2023 and December 31, 2022, respectively.

Below is a summary of securities with unrealized losses as of September 30, 2023 and December 31, 2022, presented by length of time the securities have been in a continuous unrealized loss position:


	Less than 12 Months				12 Months or More				Total
September 30, 2023	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of State and Political Subdivisions	89,609		(5,201)		587,496		(207,793)		677,105		(212,994)
MBS/CMO	129		(9)		620,427		(155,136)		620,556		(155,145)
US Gov’t Sponsored Entities & Agencies	—		—		177,206		(46,350)		177,206		(46,350)
Total	$	89,738	$	(5,210)	$	1,385,129	$	(409,279)	$	1,474,867	$	(414,489)


	Less than 12 Months				12 Months or More				Total
December 31, 2022	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

U.S. Treasury	$	—	$	—	$	—	$	—	$	—	$	—
Obligations of State and Political Subdivisions	579,267		(117,423)		122,992		(44,591)		702,259		(162,014)
MBS/CMO	240,344		(20,920)		474,327		(110,918)		714,671		(131,838)
US Gov’t Sponsored Entities & Agencies	198,702		(38,818)		6,314		(1,182)		205,016		(40,000)
Total	$	1,018,313	$	(177,161)	$	603,633	$	(156,691)	$	1,621,946	$	(333,852)

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 through income. For available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income, net of applicable taxes. The increase in unrealized losses from December 31, 2022 to September 30, 2023 was primarily the result of fair value adjustments caused by the change in market interest rates. There was no allowance for credit losses for available-for-sale debt securities at September 30, 2023 or December 31, 2022.

Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not necessarily be interpreted as an indication that management anticipates such sales.

Accrued interest receivable on available-for-sale debt securities totaled $9,272 at September 30, 2023 and $10,637 at December 31, 2022. Accrued interest receivable is excluded from the estimate of credit losses.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 4 - Securities (continued)

The Company’s equity securities are listed as Other Investments on the Consolidated Balance Sheets and consist of one non-controlling investment in a single banking organization at September 30, 2023 and December 31, 2022. The original investment totaled $1,350 and other-than-temporary impairment was previously recorded totaling $997. The Company’s equity securities are considered not to have readily determinable fair value and are carried at cost and evaluated for impairment. At September 30, 2023, there was no additional impairment recognized through earnings.

NOTE 5 – Derivatives

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $137,340 at September 30, 2023 and $134,684 at December 31, 2022. 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. While the derivatives represent economic hedges, they do not qualify as hedges for accounting purposes.

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 of derivative instruments included in the Consolidated Balance Sheets as of:


	September 30, 2023				December 31, 2022
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in Other Assets:
Interest Rate Swaps	$	137,340	$	10,318	$	134,684	$	9,899

Included in Other Liabilities:
Interest Rate Swaps	$	137,340	$	10,195	$	134,684	$	9,749

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest Rate Swaps:
Included in Other Operating Income	$	194	$	111	$	372	$	455

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 6 – Loans

Loans were comprised of the following classifications:


	September 30, 2023		December 31, 2022
Commercial:
Commercial and Industrial Loans	$	598,893	$	620,106
Commercial Real Estate Loans	2,076,962		1,966,884
Agricultural Loans	398,109		417,413
Leases	66,999		56,396
Retail:
Home Equity Loans	286,880		279,748
Consumer Loans	88,976		79,904
Credit Cards	20,144		17,512
Residential Mortgage Loans	356,610		350,682

Subtotal	3,893,573		3,788,645
Less: Unearned Income	(6,023)		(3,711)
Allowance for Credit Losses	(44,646)		(44,168)
Loans, net	$	3,842,904	$	3,740,766

The table above includes $15,074 and $21,149 of purchase credit deteriorated loans as of September 30, 2023 and December 31, 2022, respectively.

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 September 30, 2023 and 2022:


September 30, 2023	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total
Allowance for Credit Losses:
Beginning balance	$	13,567	$	21,834	$	3,956	$	235	$	640	$	1,436	$	288	$	2,310	$	44,266
Provision (Benefit) for credit loss expense	(436)		1,117		(168)		19		258		9		93		8		900
Loans charged-off	(175)		(56)		(2)		—		(352)		—		(64)		(1)		(650)
Recoveries collected	2		5		—		—		119		2		2		—		130
Total ending allowance balance	$	12,958	$	22,900	$	3,786	$	254	$	665	$	1,447	$	319	$	2,317	$	44,646

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 6 - Loans (continued)


September 30, 2022	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total
Allowance for Credit Losses:
Beginning balance	$	13,545	$	22,349	$	4,628	$	191	$	668	$	1,233	$	239	$	2,178	$	45,031
Provision (Benefit) for credit loss expense	141		(210)		(99)		27		305		85		52		49		350
Loans charged-off	(238)		(1)		—		—		(495)		(5)		(63)		(18)		(820)
Recoveries collected	7		5		—		—		116		—		8		2		138
Total ending allowance balance	$	13,455	$	22,143	$	4,529	$	218	$	594	$	1,313	$	236	$	2,211	$	44,699

The following tables present the activity in the allowance for credit losses by portfolio segment for the nine months ended September 30, 2023 and 2022:


September 30, 2023	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total
Allowance for Credit Losses:
Beginning balance	$	13,749	$	21,598	$	4,188	$	209	$	595	$	1,344	$	257	$	2,228	$	44,168
Provision (Benefit) for credit loss expense	310		1,286		(375)		45		657		109		374		144		2,550
Loans charged-off	(1,252)		(56)		(27)		—		(980)		(39)		(325)		(58)		(2,737)
Recoveries collected	151		72		—		—		393		33		13		3		665
Total ending allowance balance	$	12,958	$	22,900	$	3,786	$	254	$	665	$	1,447	$	319	$	2,317	$	44,646


September 30, 2022	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		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	3,803		1,013		(665)		18		823		309		131		418		5,850
Loans charged-off	(299)		(79)		—		—		(1,027)		(57)		(153)		(21)		(1,636)
Recoveries collected	21		19		—		—		289		—		18		4		351
Total ending allowance balance	$	13,455	$	22,143	$	4,529	$	218	$	594	$	1,313	$	236	$	2,211	$	44,699

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 by anchoring to specific data points when possible.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 advancing stress on the economy as a result of inflationary pressures, rising interest rates and financial market volatility, the Company 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 nine months ended September 30, 2023, the allowance for credit losses increased minimally compared to December 31, 2022. The Company saw improvement in individually analyzed loans and added reserve for loan portfolio growth. Key indicators utilized in forecasting for the allowance calculations include unemployment rates and gross domestic product as well as commodity prices for the agricultural segment of the portfolio. There has been some improvement in these factors over previous periods; however, rising interest rates and the expanded inflationary impact on consumer discretionary spending were considered in the qualitative factors to determine 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 September 30, 2023 and December 31, 2022:


September 30, 2023	Non-Accrual With No Allowance for Credit Loss (1)		Total Non-Accrual		Loans Past Due Over 89 Days Still Accruing

Commercial and Industrial Loans	$	554	$	7,298	$	1,000
Commercial Real Estate Loans	137		1,006		145
Agricultural Loans	698		1,036		25
Leases	—		—		—
Home Equity Loans	567		621		—
Consumer Loans	32		32		—
Credit Cards	146		146		—
Residential Mortgage Loans	726		1,067		—
Total	$	2,860	$	11,206	$	1,170

(1) Includes non-accrual loans with no allowance for credit loss and are also included in Total Non-Accrual loans of $11,206.

Interest income on non-accrual loans recognized during the three and nine months ended September 30, 2023 totaled $62 and $99, respectively.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 6 - Loans (continued)


December 31, 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	$	1,142	$	7,936	$	1,427
Commercial Real Estate Loans	49		1,950		—
Agricultural Loans	994		1,062		—
Leases	—		—		—
Home Equity Loans	262		310		—
Consumer Loans	240		254		—
Credit Cards	146		146		—
Residential Mortgage Loans	676		1,230		—
Total	$	3,509	$	12,888	$	1,427

(1) Includes non-accrual loans with no allowance for credit loss and are also included in Total Non-Accrual loans of $12,888.

Interest income on non-accrual loans recognized during the year ended December 31, 2022 totaled $32.

The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023 and December 31, 2022:


September 30, 2023	Real Estate		Equipment		Accounts Receivable		Other		Total

Commercial and Industrial Loans	$	3,070	$	134	$	—	$	6,707	$	9,911
Commercial Real Estate Loans	8,367		—		—		—		8,367
Agricultural Loans	2,796		1,097		—		—		3,893
Leases	—		—		—		—		—
Home Equity Loans	475		—		—		—		475
Consumer Loans	9		—		—		—		9
Credit Cards	—		—		—		—		—
Residential Mortgage Loans	847		—		—		—		847
Total	$	15,564	$	1,231	$	—	$	6,707	$	23,502


December 31, 2022	Real Estate		Equipment		Accounts Receivable		Other		Total

Commercial and Industrial Loans	$	2,078	$	1,219	$	272	$	5,851	$	9,420
Commercial Real Estate Loans	12,192		36		—		—		12,228
Agricultural Loans	4,944		318		—		—		5,262
Leases	—		—		—		—		—
Home Equity Loans	467		—		—		—		467
Consumer Loans	8		2		—		12		22
Credit Cards	—		—		—		—		—
Residential Mortgage Loans	1,060		—		—		—		1,060
Total	$	20,749	$	1,575	$	272	$	5,863	$	28,459

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 September 30, 2023 and December 31, 2022:


September 30, 2023	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	$	454	$	—	$	7,822	$	8,276	$	590,617	$	598,893
Commercial Real Estate Loans	387		384		1,012		1,783		2,075,179		2,076,962
Agricultural Loans	337		—		639		976		397,133		398,109
Leases	—		—		—		—		66,999		66,999
Home Equity Loans	1,460		215		621		2,296		284,584		286,880
Consumer Loans	269		19		32		320		88,656		88,976
Credit Cards	87		58		146		291		19,853		20,144
Residential Mortgage Loans	8,233		1,345		855		10,433		346,177		356,610
Total	$	11,227	$	2,021	$	11,127	$	24,375	$	3,869,198	$	3,893,573


December 31, 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	$	268	$	681	$	8,285	$	9,234	$	610,872	$	620,106
Commercial Real Estate Loans	1,617		14		616		2,247		1,964,637		1,966,884
Agricultural Loans	343		—		123		466		416,947		417,413
Leases	—		—		—		—		56,396		56,396
Home Equity Loans	1,770		140		310		2,220		277,528		279,748
Consumer Loans	219		64		252		535		79,369		79,904
Credit Cards	86		24		146		256		17,256		17,512
Residential Mortgage Loans	6,330		2,783		1,051		10,164		340,518		350,682
Total	$	10,633	$	3,706	$	10,783	$	25,122	$	3,763,523	$	3,788,645

Loan Modifications Made to Borrowers Experiencing Financial Difficulty

Effective January 1, 2023, the Company prospectively adopted ASU 2022-02, which eliminated the accounting for troubled debt restructurings while establishing a new standard for the treatment of modifications made to borrowers experiencing financial difficulties. As such, effective with the adoption of the new standard, the Company will not include, prospectively, financial difficulty modifications in its presentation of nonperforming loans, nonperforming assets or classified assets. Prior period data, which included troubled debt restructurings, has not been adjusted.

The Company’s loan modifications for borrowers experiencing financial difficulties will typically include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. No modifications in 2023 resulted in the permanent reduction of the recorded investment in the loan.

During the three and nine months ended September 30, 2023, the Company had no modified loans made to borrowers experiencing financial difficulty. There were no modified loans that had a payment default during the three and nine months ended September 30, 2023 and were modified in the twelve months prior to that default to borrowers experiencing financial difficulty. The Company considers a loan 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

September 30, 2023

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

NOTE 6 - Loans (continued)

Troubled Debt Restructurings Disclosures Prior to Adoption of ASU 2022-02

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 December 31, 2022, the Company had no troubled debt restructurings. The Company had no specific allocation of allowance for these loans at December 31, 2022.

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

For the year ended December 31, 2022, 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 year ended December 31, 2022.

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

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

September 30, 2023

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

NOTE 6 - Loans (continued)

Based on the analysis performed at September 30, 2023 and December 31, 2022, the risk category of loans by class of loans is as follows:


	Term Loans Amortized Cost Basis by Origination Year
As of September 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and Industrial:
Risk Rating
Pass	$	88,379	$	140,656	$	86,196	$	30,700	$	36,656	$	51,279	$	136,528	$	570,394
Special Mention	48		470		498		1,609		642		1,991		5,843		11,101
Substandard	—		391		6,284		787		1,116		1,510		7,310		17,398
Doubtful	—		—		—		—		—		—		—		—
Total Commercial & Industrial Loans	$	88,427	$	141,517	$	92,978	$	33,096	$	38,414	$	54,780	$	149,681	$	598,893

Current Period Gross Charge-Offs	$	—	$	911	$	32	$	33	$	7	$	88	$	181	$	1,252

Commercial Real Estate:
Risk Rating
Pass	$	218,088	$	424,293	$	473,834	$	227,014	$	150,687	$	482,924	$	36,185	$	2,013,025
Special Mention	13,591		2,171		11,239		4,471		264		21,051		—		52,787
Substandard	—		203		5,360		1,152		748		3,372		315		11,150
Doubtful	—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	231,679	$	426,667	$	490,433	$	232,637	$	151,699	$	507,347	$	36,500	$	2,076,962

Current Period Gross Charge-Offs	$	—	$	—	$	56	$	—	$	—	$	—	$	—	$	56

Agricultural:
Risk Rating
Pass	$	33,037	$	58,537	$	41,034	$	42,723	$	22,653	$	104,949	$	65,960	$	368,893
Special Mention	2,528		240		635		5,037		2,552		10,101		2,649		23,742
Substandard	—		—		202		189		292		4,791		—		5,474
Doubtful	—		—		—		—		—		—		—		—
Total Agricultural Loans	$	35,565	$	58,777	$	41,871	$	47,949	$	25,497	$	119,841	$	68,609	$	398,109

Current Period Gross Charge-Offs	$	—	$	—	$	—	$	2	$	—	$	—	$	25	$	27

Leases:
Risk Rating
Pass	$	27,207	$	13,519	$	11,533	$	6,964	$	6,076	$	1,700	$	—	$	66,999
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total Leases	$	27,207	$	13,519	$	11,533	$	6,964	$	6,076	$	1,700	$	—	$	66,999

Current Period Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Commercial and Industrial:
Risk Rating
Pass	$	156,318	$	117,648	$	39,949	$	46,505	$	18,423	$	51,482	$	154,203	$	584,528
Special Mention	56		148		577		78		551		2,346		1,672		5,428
Substandard	1,714		5,629		849		1,304		1,028		2,237		17,389		30,150
Doubtful	—		—		—		—		—		—		—		—
Total Commercial & Industrial Loans	$	158,088	$	123,425	$	41,375	$	47,887	$	20,002	$	56,065	$	173,264	$	620,106

Commercial Real Estate:
Risk Rating
Pass	$	398,631	$	490,747	$	261,462	$	162,701	$	129,151	$	427,433	$	35,163	$	1,905,288
Special Mention	3,982		1,568		4,612		135		13,689		25,371		—		49,357
Substandard	—		4,628		489		1,415		979		4,728		—		12,239
Doubtful	—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	402,613	$	496,943	$	266,563	$	164,251	$	143,819	$	457,532	$	35,163	$	1,966,884

Agricultural:
Risk Rating
Pass	$	62,673	$	47,682	$	47,355	$	25,431	$	21,728	$	92,344	$	83,862	$	381,075
Special Mention	634		842		6,066		4,149		2,355		11,440		4,310		29,796
Substandard	—		210		628		429		85		5,190		—		6,542
Doubtful	—		—		—		—		—		—		—		—
Total Agricultural Loans	$	63,307	$	48,734	$	54,049	$	30,009	$	24,168	$	108,974	$	88,172	$	417,413

Leases:
Risk Rating
Pass	$	20,057	$	14,461	$	9,648	$	8,901	$	1,851	$	1,478	$	—	$	56,396
Special Mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total Leases	$	20,057	$	14,461	$	9,648	$	8,901	$	1,851	$	1,478	$	—	$	56,396

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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 September 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Total
Consumer:
Payment performance
Performing	$	40,108	$	28,347	$	10,852	$	3,710	$	1,139	$	2,121	$	2,667	$	88,944
Nonperforming	4		6		11		6		—		5		—		32
Total Consumer Loans	$	40,112	$	28,353	$	10,863	$	3,716	$	1,139	$	2,126	$	2,667	$	88,976

Current Period Gross Charge-Offs	$	880	$	42	$	23	$	24	$	3	$	1	$	7	$	980

Home Equity:
Payment performance
Performing	$	225	$	118	$	87	$	90	$	68	$	1,014	$	284,657	$	286,259
Nonperforming	—		—		251		—		—		92		278		621
Total Home Equity Loans	$	225	$	118	$	338	$	90	$	68	$	1,106	$	284,935	$	286,880

Current Period Gross Charge-Offs	$	—	$	—	$	—	$	—	$	—	$	24	$	15	$	39

Residential Mortgage:
Payment performance
Performing	$	40,631	$	66,546	$	87,909	$	42,517	$	18,330	$	99,610	$	—	$	355,543
Nonperforming	—		110		140		123		109		585		—		1,067
Total Residential Mortgage Loans	$	40,631	$	66,656	$	88,049	$	42,640	$	18,439	$	100,195	$	—	$	356,610

Current Period Gross Charge-Offs	$	—	$	—	$	22	$	36	$	—	$	—	$	—	$	58

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Total
Consumer:
Payment performance
Performing	$	42,685	$	22,708	$	5,610	$	2,394	$	1,543	$	1,553	$	3,157	$	79,650
Nonperforming	3		19		212		8		2		10		—		254
Total Consumer Loans	$	42,688	$	22,727	$	5,822	$	2,402	$	1,545	$	1,563	$	3,157	$	79,904

Home Equity:
Payment performance
Performing	$	63	$	—	$	—	$	—	$	—	$	591	$	278,784	$	279,438
Nonperforming	—		20		—		—		19		1		270		310
Total Home Equity Loans	$	63	$	20	$	—	$	—	$	19	$	592	$	279,054	$	279,748

Residential Mortgage:
Payment performance
Performing	$	69,982	$	97,176	$	46,851	$	20,080	$	16,664	$	98,699	$	—	$	349,452
Nonperforming	—		161		253		—		78		738		—		1,230
Total Residential Mortgage Loans	$	69,982	$	97,337	$	47,104	$	20,080	$	16,742	$	99,437	$	—	$	350,682

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	September 30, 2023		December 31, 2022

Performing	$	19,998	$	17,366
Nonperforming	146		146

Total	$	20,144	$	17,512

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


September 30, 2023	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total

Purchases	$	—	$	544	$	—	$	—	$	—	$	—	$	—	$	—	$	544
Sales	—		—		—		—		—		—		—		—		—


December 31, 2022	Commercial and Industrial Loans		Commercial Real Estate Loans		Agricultural Loans		Leases		Consumer Loans		Home Equity Loans		Credit Cards		Residential Mortgage Loans		Total

Purchases	$	522	$	411	$	—	$	—	$	—	$	—	$	—	$	—	$	933
Sales	—		3,819		97		—		—		—		—		—		3,916

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

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 $41,303 and $64,961 as of September 30, 2023 and December 31, 2022, 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 76 banking offices at September 30, 2023. 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 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
September 30, 2023
Net Interest Income	$	48,794	$	32	$	15	$	(1,282)	$	47,559
Net Gains on Sales of Loans	614		—		—		—		614
Net Gains on Securities	—		—		—		—		—
Wealth Management Fees	1		2,956		—		—		2,957
Insurance Revenues	—		1		2,064		—		2,065
Noncash Items:
Provision (Benefit) for Credit Losses	900		—		—		—		900
Depreciation and Amortization	2,236		7		12		114		2,369
Income Tax Expense (Benefit)	4,709		184		107		(409)		4,591
Segment Profit (Loss)	21,472		761		161		(943)		21,451
Segment Assets at September 30, 2023	5,998,860		8,374		15,631		(17,199)		6,005,666

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 8 - Segment Information (continued)


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Three Months Ended
September 30, 2022
Net Interest Income	$	52,659	$	14	$	8	$	(983)	$	51,698
Net Gains on Sales of Loans	854		—		—		—		854
Net Gains on Securities	23		—		—		—		23
Wealth Management Fees	1		2,375		—		—		2,376
Insurance Revenues	1		9		1,985		—		1,995
Noncash Items:
Provision (Benefit) for Credit Losses	350		—		—		—		350
Depreciation and Amortization	2,357		10		12		114		2,493
Income Tax Expense (Benefit)	6,443		149		61		(520)		6,133
Segment Profit (Loss)	26,213		461		189		(2,267)		24,596
Segment Assets at December 31, 2022	6,152,346		8,846		14,706		(19,907)		6,155,991


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Nine Months Ended
September 30, 2023
Net Interest Income	$	148,363	$	86	$	45	$	(3,668)	$	144,826
Net Gains on Sales of Loans	1,831		—		—		—		1,831
Net Gains on Securities	40		—		—		—		40
Wealth Management Fees	4		8,509		—		—		8,513
Insurance Revenues	1		22		7,307		—		7,330
Noncash Items:
Provision (Benefit) for Credit Losses	2,550		—		—		—		2,550
Depreciation and Amortization	6,803		26		37		342		7,208
Income Tax Expense (Benefit)	14,099		474		427		(1,201)		13,799
Segment Profit (Loss)	63,987		2,083		1,470		(3,159)		64,381
Segment Assets at September 30, 2023	5,998,860		8,374		15,631		(17,199)		6,005,666

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 8 - Segment Information (continued)


	Core Banking		Wealth Management Services		Insurance		Other		Consolidated Totals
Nine Months Ended
September 30, 2022
Net Interest Income	$	150,798	$	27	$	14	$	(2,636)	$	148,203
Net Gains on Sales of Loans	3,324		—		—		—		3,324
Net Gains on Securities	473		—		—		—		473
Wealth Management Fees	3		7,653		—		—		7,656
Insurance Revenues	30		11		7,929		—		7,970
Noncash Items:
Provision (Benefit) for Credit Losses	5,850		—		—		—		5,850
Depreciation and Amortization	7,334		31		36		342		7,743
Income Tax Expense (Benefit)	12,189		551		643		(1,552)		11,831
Segment Profit (Loss)	58,162		1,717		2,038		(4,507)		57,410
Segment Assets at December 31, 2022	6,152,346		8,846		14,706		(19,907)		6,155,991

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.

In August 2022, the Inflation Reduction Act of 2022 (the “IRA”) was enacted. Among other things, the IRA imposes a new 1% excise tax on the fair value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations, like the Company. With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements.

NOTE 10 – Equity Plans and Equity Based Compensation

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

For the three and nine months ended September 30, 2023 and 2022, the Company granted no options. The Company recorded no stock compensation expense applicable to options during the three and nine months ended September 30, 2023 and 2022. 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

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

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

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%. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. During the three and nine months ended September 30, 2023, the Company granted 2,668 and 83,786 shares, respectively, of restricted stock. During the three and nine months ended September 30, 2022, the Company granted 2,076 and 65,334 shares, respectively, of restricted stock. Total unvested shares of restricted stock at September 30, 2023 and December 31, 2022 were 136,622 and 74,873, respectively.

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


	Three Months Ended September 30,
	2023		2022

Restricted Stock Expense	$	497	$	398
Cash Entitlement Expense	209		163
Tax Effect	(183)		(146)
Net of Tax	$	523	$	415


	Nine Months Ended September 30,
	2023		2022

Restricted Stock Expense	$	1,866	$	1,915
Cash Entitlement Expense	570		497
Tax Effect	(632)		(626)
Net of Tax	$	1,804	$	1,786

Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $3,805 and $3,061 as of September 30, 2023 and 2022, 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 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 September 30, 2023, the Company recorded $7 of expense related to the employee stock purchase plan resulting in $5 net of tax. For the nine months ended September 30, 2023, the Company recorded $23 of expense related to the employee stock purchase plan resulting in $17 net of tax. For the three months ended September 30, 2022, the Company recorded $11 of expense related to the employee stock purchase plan resulting in $8 net of tax. For the nine months ended September 30, 2022, the Company recorded $39 of expense related to the employee stock purchase plan resulting in $30 net of

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

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

tax. There was no unrecognized compensation expense as of September 30, 2023 and 2022 for the employee stock purchase plan. No stock options were outstanding as of September 30, 2023 and December 31, 2022.

NOTE 11 – Fair Value

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

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

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

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

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For investment securities where quoted prices are not available, fair values are calculated based on market prices of similar investment securities (Level 2). For investment securities where quoted prices or market prices of similar investment securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At September 30, 2023, the Company held $82 in Level 3 securities which consist of non-rated Obligations of State and Political Subdivisions and $943 in Level 3 securities which consist of non-rated MBS/CMO. 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 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 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.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 11 - Fair Value (continued)

Other Real Estate: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate 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 Individually Analyzed 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.

Assets and Liabilities Measured on a Recurring Basis

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


	Fair Value Measurements at September 30, 2023 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	$	—	$	—	$	—	$	—
Obligations of State and Political Subdivisions	—		679,105		82		679,187
MBS/CMO	—		619,620		943		620,563
US Gov’t Sponsored Entities & Agencies	—		177,206		—		177,206
Total Securities	$	—	$	1,475,931	$	1,025	$	1,476,956

Loans Held-for-Sale	$	—	$	7,085	$	—	$	7,085

Derivative Assets	$	—	$	10,318	$	—	$	10,318

Derivative Liabilities	$	—	$	10,195	$	—	$	10,195


	Fair Value Measurements at December 31, 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	$	64,119	$	—	$	—	$	64,119
Obligations of State and Political Subdivisions	—		777,769		83		777,852
MBS/CMO	—		713,775		906		714,681
US Gov’t Sponsored Entities & Agencies	—		205,017		—		205,017
Total Securities	$	64,119	$	1,696,561	$	989	$	1,761,669

Loans Held-for-Sale	$	—	$	8,600	$	—	$	8,600

Derivative Assets	$	—	$	9,899	$	—	$	9,899

Derivative Liabilities	$	—	$	9,749	$	—	$	9,749

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 11 - Fair Value (continued)

As of September 30, 2023 and December 31, 2022, the aggregate fair value, contractual balance (including accrued interest), and gain or loss on Loans Held-for-Sale was as follows:


	September 30, 2023		December 31, 2022

Aggregate Fair Value	$	7,085	$	8,600
Contractual Balance	6,973		8,474
Gain (Loss)	112		126

The total amount of gains and losses from changes in fair value included in earnings for the three months ended September 30, 2023 and 2022 were $(44) and $(4), respectively. The total amount of gains and losses from changes in fair value included in earnings for the nine months ended September 30, 2023 and 2022 were $(14) and $(140), respectively.

The tables below present a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023 and 2022:


	Obligations of State and Political Subdivisions				MBS/CMO
	2023		2022		2023		2022

Balance of Recurring Level 3 Assets at July 1	$	84	$	94	$	919	$	—
Total Gains (Losses) Included in Other Comprehensive Income	(2)		(3)		24		—
Maturities / Calls	—		—		—		—
Acquired through Bank Acquisition	—		—		—		—
Balance of Recurring Level 3 Assets at September 30	$	82	$	91	$	943	$	—


	Obligations of State and Political Subdivisions				MBS/CMO
	2023		2022		2023		2022

Balance of Recurring Level 3 Assets at January 1	$	83	$	—	$	906	$	—
Total Gains (Losses) Included in Other Comprehensive Income	(1)		(3)		37		—
Maturities / Calls	—		—		—		—
Acquired through Bank Acquisition	—		94		—		—
Balance of Recurring Level 3 Assets at September 30	$	82	$	91	$	943	$	—

Of the total gain (loss) included in earnings for the three months ended September 30, 2023 and 2022, $22 and $(3) was attributable to other changes in fair value, respectively. Of the total gain (loss) included in earnings for the nine months ended September 30, 2023 and 2022, $36 and $(3) was attributable to other changes in fair value, respectively.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 11 - Fair Value (continued)

Assets and Liabilities Measured on a Non-Recurring Basis

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


	Fair Value Measurements at September 30, 2023 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Individually Analyzed Loans
Commercial and Industrial Loans	$	—	$	—	$	2,699	$	2,699
Commercial Real Estate Loans	$	—	$	—	$	6,877	$	6,877
Agricultural Loans	$	—	$	—	$	1,841	$	1,841
Consumer Loans	$	—	$	—	$	9	$	9
Home Equity Loans	$	—	$	—	$	363	$	363
Residential Mortgage Loans	$	—	$	—	$	537	$	537


	Fair Value Measurements at December 31, 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	$	—	$	—	$	1,858	$	1,858
Commercial Real Estate Loans	$	—	$	—	$	10,040	$	10,040
Agricultural Loans	$	—	$	—	$	2,970	$	2,970
Consumer Loans	$	—	$	—	$	8	$	8
Home Equity Loans	$	—	$	—	$	368	$	368
Residential Mortgage Loans	$	—	$	—	$	718	$	718

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 11 - Fair Value (continued)

The following tables present quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2023 and December 31, 2022:


September 30, 2023	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)

Individual Analyzed Loans - Commercial and Industrial Loans	$	2,699	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-100% (38%)
Individual Analyzed Loans - Commercial Real Estate Loans	$	6,877	Sales comparison approach	Adjustment for physical condition of comparable properties sold	25%-68% (37%)
Individual Analyzed Loans - Agricultural Loans	$	1,841	Sales comparison approach	Adjustment for physical condition of comparable properties sold	19%-100% (50%)
Individual Analyzed Loans - Consumer Loans	$	9	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-27% (20%)
Individual Analyzed Loans - Home Equity Loans	$	363	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-20% (20%)
Individual Analyzed Loans - Residential Mortgage Loans	$	537	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-20% (20%)


December 31, 2022	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)

Individual Analyzed Loans - Commercial and Industrial Loans	$	1,858	Sales comparison approach	Adjustment for physical condition of comparable properties sold	0%-100% (40%)
Individual Analyzed Loans - Commercial Real Estate Loans	$	10,040	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-100% (37%)
Individual Analyzed Loans - Agricultural Loans	$	2,970	Sales comparison approach	Adjustment for physical condition of comparable properties sold	30%-100% (48%)
Individual Analyzed Loans - Consumer Loans	$	8	Sales comparison approach	Adjustment for physical condition of comparable properties sold	27%-100% (20%)
Individual Analyzed Loans - Home Equity Loans	$	368	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-51% (20%)
Individual Analyzed Loans - Residential Mortgage Loans	$	718	Sales comparison approach	Adjustment for physical condition of comparable properties sold	20%-100% (21%)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 11 - Fair Value (continued)

The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the tables below for the periods ending September 30, 2023 and December 31, 2022. 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 September 30, 2023 Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Short-term Investments	$	132,419	$	72,063	$	60,356	$	—	$	132,419
Interest Bearing Time Deposits with Banks	500		—		500		—		500
Loans, Net	3,830,578		—		—		3,725,317		3,725,317
Accrued Interest Receivable	29,115		—		9,634		19,481		29,115
Financial Liabilities:
Demand, Savings, and Money Market Deposits	(4,434,355)		(4,434,355)		—		—		(4,434,355)
Time Deposits	(701,516)		—		(698,642)		—		(698,642)
Short-term Borrowings	(158,303)		(117,000)		(41,303)		—		(158,303)
Long-term Debt	(127,890)		—		(51,983)		(72,280)		(124,263)
Accrued Interest Payable	(5,890)		—		(5,417)		(473)		(5,890)


			Fair Value Measurements at December 31, 2022 Using
	Carrying Value		Level 1		Level 2		Level 3		Total
Financial Assets:
Cash and Short-term Investments	$	119,079	$	77,174	$	41,905	$	—	$	119,079
Interest Bearing Time Deposits with Banks	500		—		500		—		500
Loans, Net	3,724,804		—		—		3,688,903		3,688,903
Accrued Interest Receivable	27,741		38		10,863		16,840		27,741
Financial Liabilities:
Demand, Savings, and Money Market Deposits	(4,921,582)		(4,921,582)		—		—		(4,921,582)
Time Deposits	(428,469)		—		(426,184)		—		(426,184)
Short-term Borrowings	(101,161)		(36,200)		(64,961)		—		(101,161)
Long-term Debt	(102,645)		—		(26,830)		(72,272)		(99,102)
Accrued Interest Payable	(1,513)		—		(1,205)		(308)		(1,513)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 12 - Other Comprehensive Income (Loss)

The tables below summarize the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2023 and 2022, net of tax:


September 30, 2023	Unrealized Gains and Losses on Available-for-Sale Securities		Postretirement Benefit Items		Total

Beginning Balance at July 1, 2023	$	(248,338)	$	(514)	$	(248,852)
Other Comprehensive Income (Loss) Before Reclassification	(78,761)		—		(78,761)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	—		—		—
Net Current Period Other Comprehensive Income (Loss)	(78,761)		—		(78,761)
Ending Balance at September 30, 2023	$	(327,099)	$	(514)	$	(327,613)


September 30, 2023	Unrealized Gains and Losses on Available-for-Sale Securities		Postretirement Benefit Items		Total

Beginning Balance at January 1, 2023	$	(262,924)	$	(514)	$	(263,438)
Other Comprehensive Income (Loss) Before Reclassification	(64,143)		—		(64,143)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(32)		—		(32)
Net Current Period Other Comprehensive Income (Loss)	(64,175)		—		(64,175)
Ending Balance at September 30, 2023	$	(327,099)	$	(514)	$	(327,613)


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

Beginning Balance at July 1, 2022	$	(210,527)	$	(568)	$	(211,095)
Other Comprehensive Income (Loss) Before Reclassification	(97,945)		—		(97,945)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(18)		—		(18)
Net Current Period Other Comprehensive Income (Loss)	(97,963)		—		(97,963)
Ending Balance at September 30, 2022	$	(308,490)	$	(568)	$	(309,058)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

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


September 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	(324,168)		—		(324,168)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)	(374)		—		(374)
Net Current Period Other Comprehensive Income (Loss)	(324,542)		—		(324,542)
Ending Balance at September 30, 2022	$	(308,490)	$	(568)	$	(309,058)

The tables below summarize the classifications out of accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2023 and 2022:

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

—

Net Gains on Securities

—

Income Tax Expense

—

Net of Tax

Total Reclassifications for the Three
Months Ended September 30, 2023

—


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	$	40	Net Gains on Securities
	(8)		Income Tax Expense
	32		Net of Tax

Total Reclassifications for the Nine Months Ended September 30, 2023	$	32

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

(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	$	23	Net Gains on Securities
	(5)		Income Tax Expense
	18		Net of Tax

Total Reclassifications for the Three Months Ended September 30, 2022	$	18


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	$	473	Net Gains on Securities
	(99)		Income Tax Expense
	374		Net of Tax

Total Reclassifications for the Nine Months Ended September 30, 2022	$	374

NOTE 13 - Revenue Recognition

The following tables present non-interest income, segregated by revenue streams in-scope and out-of-scope of FASB ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", for the three and nine months ended September 30, 2023 and 2022. 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
	September 30,
Non-interest Income	2023		2022
In-Scope of Topic 606:
Wealth Management Fees	$	2,957	$	2,376
Service Charges on Deposit Accounts	2,982		3,014
Insurance Revenues	2,065		1,995
Interchange Fee Income	4,470		4,054
Other Operating Income	796		857
Non-interest Income (in-scope of Topic 606)	13,270		12,296
Non-interest Income (out-of-scope of Topic 606)	1,534		1,801
Total Non-interest Income	$	14,804	$	14,097

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 13 - Revenue Recognition (continued)


	Nine Months Ended
	September 30,
Non-interest Income	2023		2022
In-Scope of Topic 606:
Wealth Management Fees	$	8,513	$	7,656
Service Charges on Deposit Accounts	8,653		8,568
Insurance Revenues	7,330		7,970
Interchange Fee Income	13,081		11,848
Other Operating Income	2,373		2,435
Non-interest Income (in-scope of Topic 606)	39,950		38,477
Non-interest Income (out-of-scope of Topic 606)	4,717		6,988
Total Non-interest Income	$	44,667	$	45,465

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.

The Bank 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

September 30, 2023

(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
	September 30, 2023		September 30, 2022

Finance Lease Cost:
Amortization of Right-of -Use Assets	$	52	$	52
Interest on Lease Liabilities	75		81
Operating Lease Cost	343		360
Short-term Lease Cost	—		—
Total Lease Cost	$	470	$	493


	Nine Months Ended		Nine Months Ended
	September 30, 2023		September 30, 2022

Finance Lease Cost:
Amortization of Right-of -Use Assets	$	157	$	157
Interest on Lease Liabilities	230		246
Operating Lease Cost	1,080		1,105
Short-term Lease Cost	—		27
Total Lease Cost	$	1,467	$	1,535

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


	September 30, 2023		September 30, 2022

Weighted Average Remaining Lease Term:
Finance Leases	9 years		10 years
Operating Leases	7 years		8 years

Weighted Average Discount Rate:
Finance Leases	11.38	%	11.42	%
Operating Leases	3.05	%	2.87	%

Supplemental balance sheet information related to leases were as follows:


	September 30, 2023		September 30, 2022

Finance Leases
Premises, Furniture and Equipment, Net	$	1,700	$	1,910
Other Borrowings	2,699		2,908

Operating Leases
Operating Lease Right-of-Use Assets	$	5,449	$	6,195
Operating Lease Liabilities	5,598		6,338

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023

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

NOTE 14 - Leases (continued)

Supplemental cash flow information related to leases were as follows:


	Nine Months Ended		Nine Months Ended
	September 30, 2023		September 30, 2022

Cash paid for amounts in the Measurement of Lease Liabilities:
Operating Cash Flows from Finance Leases	$	230	$	246
Operating Cash Flows from Operating Leases	1,058		1,054
Financing Cash Flows from Finance Leases	154		138

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


	September 30, 2023
	Finance Leases		Operating Leases

Year 1	$	519	$	1,264
Year 2	519		1,124
Year 3	519		867
Year 4	519		702
Year 5	438		620
Thereafter	1,619		1,643
Total Lease Payments	4,133		6,220
Less Imputed Interest	(1,434)		(622)
Total	$	2,699	$	5,598

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. The Company, through its banking subsidiary German American Bank, operates 76 banking offices in 20 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 September 30, 2023 and December 31, 2022 and the consolidated results of operations for the three and nine months ended September 30, 2023 and 2022. 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, 2022.

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, 2022.

Net income for the quarter ended September 30, 2023 totaled $21,451,000, or $0.73 per share, a decline of 12% on a per share basis compared with the third quarter 2022 net income of $24,596,000, or $0.83 per share. The decline in net income in the third quarter of 2023 compared with the third quarter of 2022 was largely driven by a reduced level of average earning assets and net interest margin resulting in a decline in net interest income.

Net income for the nine months ended September 30, 2023 totaled $64,381,000, or $2.18 per share, an increase of 12% on a per share basis compared with the first nine months of 2022 net income of $57,410,000, or $1.95 per share. The first nine months of 2022 was significantly impacted by costs associated with the acquisition of Citizens Union Bancorp of Shelbyville, Inc. ("CUB"), which closed effective January 1, 2022.

On January 1, 2022, the Company completed the acquisition of CUB through the merger of CUB with and into the Company. Immediately following completion of the CUB holding company merger, CUB's subsidiary bank, Citizen Union Bank of Shelbyville, Inc., was merged with and 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 $1.109 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 merger and acquisition transaction, see Note 18 (Business Combinations, Goodwill and Intangible Assets) in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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.

The Company uses a number of economic variables in its scenarios to estimate the allowance for credit losses, with the most significant drivers being an unemployment rate forecast, gross domestic product and the agricultural producer price index, as well as qualitative adjustments. Historical loss rates from periods where the average unemployment rate, gross domestic product and agricultural producer pricing index matches the forecast range are considered when calculating the forecast period loss rate. The impact of loan growth, improvement in individually analyzed loans as well as rising interest rates and expanded inflationary impact on consumer discretionary spending resulted in an increase in the allowance for credit losses of approximately $478,000 between September 30, 2023 and December 31, 2022.

Based on sensitivity analysis of all portfolios, a 0.050% change (slight improvement or decline on the Company's scale) in all ten qualitative risk factors would have a $1,900,000 impact on the reserve allocation. The sensitivity and related range of impact is a hypothetical analysis and is not intended to represent management's judgements or assumptions of qualitative loss

factors that were utilized at September 30, 2023 in estimation of the allowance for credit losses on loans recognized on the Consolidated Balance Sheets.

Securities Valuation

Available-for-sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available-for-sale debt securities in an unrealized loss position, the Company assesses whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For available-for sale debt securities that do not meet the criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, the 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 (loss), net of applicable taxes. No allowance for credit losses for available-for-sale debt securities was needed at September 30, 2023. Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. As of September 30, 2023, gross unrealized gains on the securities available-for-sale portfolio totaled approximately $10,000 and gross unrealized losses totaled approximately $414,489,000. The net amount of these two items, net of applicable taxes, is included in accumulated other comprehensive income (loss).

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 2023 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 income for the nine months ended September 30, 2023 totaled $64,381,000, or $2.18 per share, an increase of 12% on a per share basis compared with the first nine months of 2022 net income of $57,410,000, or $1.95 per share. The first nine months of 2022 was significantly impacted by costs associated with the CUB acquisition, which closed effective January 1, 2022.

Net Interest Income:

The following table summarizes net interest income (on a tax-equivalent basis) for the three months ended September 30, 2023 and 2022. 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 September 30, 2023						Three Months Ended September 30, 2022
	Principal Balance		Income / Expense		Yield / Rate		Principal Balance		Income / Expense		Yield / Rate
ASSETS
Federal Funds Sold and Other Short-term Investments	$	20,243	$	199	3.91	%	$	402,006	$	2,053	2.03	%
Securities:
Taxable	861,293		4,871		2.26	%	1,009,395		5,276		2.09	%
Non-taxable	735,360		6,806		3.70	%	838,770		7,679		3.66	%
Total Loans and Leases⁽²⁾	3,855,586		55,343		5.70	%	3,676,862		43,251		4.67	%
TOTAL INTEREST EARNING ASSETS	5,472,482		67,219		4.88	%	5,927,033		58,259		3.91	%
Other Assets	575,219						558,823
Less: Allowance for Credit Losses	(44,632)						(45,276)
TOTAL ASSETS	$	6,003,069					$	6,440,580

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing Demand, Savings and Money Market Deposits	$	2,973,909	$	10,601	1.41	%	$	3,477,902	$	3,131	0.36	%
Time Deposits	640,992		4,977		3.08	%	451,390		466		0.41	%
FHLB Advances and Other Borrowings	219,371		2,505		4.53	%	143,548		1,229		3.39	%
TOTAL INTEREST-BEARING LIABILITIES	3,834,272		18,083		1.87	%	4,072,840		4,826		0.47	%
Demand Deposit Accounts	1,524,682						1,738,237
Other Liabilities	46,740						42,759
TOTAL LIABILITIES	5,405,694						5,853,836
Shareholders’ Equity	597,375						586,744
TOTAL LIBABILITIES AND SHAREHOLDERS' EQUITY	$	6,003,069					$	6,440,580

COST OF FUNDS					1.31	%					0.32	%
NET INTEREST INCOME			$	49,136					$	53,433
NET INTEREST MARGIN					3.57	%					3.59	%

(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 third quarter of 2023, net interest income, on a non tax-equivalent basis, totaled $47,559,000, a decline of $4,139,000, or 8%, compared to the third quarter of 2022 net interest income of $51,698,000.

The decline in net interest income during the third quarter of 2023 compared with the third quarter of 2022 was primarily attributable to a decline in average earning assets, driven by a reduced level of average deposits and a modestly lower net interest margin.

The tax equivalent net interest margin for the quarter ended September 30, 2023 was 3.57% compared with 3.59% in the third quarter of 2022. The decline in the net interest margin during the third quarter of 2023 compared with the third quarter of 2022 was largely driven by an increase in the cost of funds. The cost of funds continued to accelerate higher in the third quarter of 2023 due to the continued increase of market interest rates, very competitive deposit pricing in the marketplace, customers actively looking for yield opportunities within and outside the banking industry and a change in the Company's deposit composition.

The Company's net interest margin and net interest income have been impacted by accretion of loan discounts on acquired loans. Accretion of discounts on acquired loans totaled $1,288,000 during the third quarter of 2023 and $1,099,000 during the third quarter of 2022. Accretion of loan discounts on acquired loans contributed approximately 9 basis points to the net interest margin in the third quarter of 2023 and 7 basis points in the third quarter of 2022.

The following table summarizes net interest income (on a tax-equivalent basis) for the nine months ended September 30, 2023 and 2022. 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)
	Nine Months Ended September 30, 2023						Nine Months Ended September 30, 2022
	Principal Balance		Income / Expense		Yield / Rate		Principal Balance		Income / Expense		Yield / Rate
ASSETS
Federal Funds Sold and Other Short-term Investments	$	40,303	$	1,204	3.99	%	$	533,758	$	3,565	0.89	%
Securities:
Taxable	908,835		15,490		2.27	%	1,033,881		14,909		1.92	%
Non-taxable	755,251		20,876		3.69	%	869,039		22,204		3.41	%
Total Loans and Leases⁽²⁾	3,805,903		156,939		5.51	%	3,664,506		122,331		4.46	%
TOTAL INTEREST EARNING ASSETS	5,510,292		194,509		4.72	%	6,101,184		163,009		3.57	%
Other Assets	572,791						549,657
Less: Allowance for Credit Losses	(44,660)						(45,765)
TOTAL ASSETS	$	6,038,423					$	6,605,076

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing Demand, Savings and Money Market Deposits	$	3,070,169	$	28,051	1.22	%	$	3,531,100	$	5,115	0.19	%
Time Deposits	547,233		9,855		2.41	%	490,483		1,360		0.37	%
FHLB Advances and Other Borrowings	213,628		6,913		4.33	%	157,761		3,387		2.87	%
TOTAL INTEREST-BEARING LIABILITIES	3,831,030		44,819		1.56	%	4,179,344		9,862		0.32	%
Demand Deposit Accounts	1,568,348						1,739,389
Other Liabilities	45,775						44,017
TOTAL LIABILITIES	5,445,153						5,962,750
Shareholders’ Equity	593,270						642,326
TOTAL LIBABILITIES AND SHAREHOLDERS' EQUITY	$	6,038,423					$	6,605,076

COST OF FUNDS					1.09	%					0.22	%
NET INTEREST INCOME			$	149,690					$	153,147
NET INTEREST MARGIN					3.63	%					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 nine months of 2023, net interest income, on a non tax-equivalent basis, totaled $144,826,000, a decrease of $3,377,000, or 2%, compared to the same period of 2022 net interest income of $148,203,000. The decrease in net interest income during the first nine months of 2023 compared with the same period of 2022 was primarily attributable to a decline in average earning assets, driven by a reduced level of deposits which is somewhat offset by an improved net interest margin resulting from the rise in market interest rates.

The tax equivalent net interest margin for the nine months ended September 30, 2023 was 3.63% compared with 3.35% for the same period of 2022.

Accretion of loan discounts on acquired loans contributed approximately 6 basis points to the net interest margin in the first nine months of 2023 and 8 basis points in the same period of 2022. Accretion of discounts on acquired loans totaled $2,533,000 during the first nine months of 2023 and $3,739,000 during the same period of 2022.

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 September 30, 2023, the Company recorded a provision for credit losses of $900,000 compared with a provision for credit losses of $350,000 during the third quarter of 2022.

During the nine months ended September 30, 2023, the Company recorded a provision for credit losses of $2,550,000 compared with a provision for credit losses of $5,850,000 for the same period of 2022. During the first nine months 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.

Net charge-offs totaled $520,000, or 5 basis points, on an annualized basis, of average loans outstanding during the third quarter of 2023 compared with $682,000, or 7 basis points of average loans during the third quarter of 2022. Net charge-offs totaled $2,072,000, or 7 basis points, on an annualized basis, of average loans outstanding during the nine months ended September 30, 2023 compared with $1,285,000, or 5 basis points, on an annualized basis, of average loans outstanding during the same period of 2022.

The provision for credit losses made during the three and nine months ended September 30, 2023 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 September 30, 2023, non-interest income totaled $14,804,000, an increase of $707,000, or 5%, compared with the third quarter of 2022. The increase in non-interest income during the third quarter of 2023 compared to the third quarter of 2022 was in large part attributable to increased wealth management fees and interchange fee income.


Non-interest Income (dollars in thousands)	Three Months Ended September 30,				Change From Prior Period
					Amount		Percent
	2023		2022		Change		Change
Wealth Management Fees	$	2,957	$	2,376	$	581	24	%
Service Charges on Deposit Accounts	2,982		3,014		(32)		(1)
Insurance Revenues	2,065		1,995		70		4
Company Owned Life Insurance	446		416		30		7
Interchange Fee Income	4,470		4,054		416		10
Other Operating Income	1,270		1,365		(95)		(7)
Subtotal	14,190		13,220		970		7
Net Gains on Sales of Loans	614		854		(240)		(28)
Net Gains on Securities	—		23		(23)		(100)
Total Non-interest Income	$	14,804	$	14,097	$	707	5

Wealth management fees increased $581,000, or 24%, during the third quarter of 2023 compared with the third quarter of 2022. The increase during the third quarter of 2023 was largely attributable to increased assets under management within the Company's wealth management group as compared with the third quarter of 2022.

Interchange fee income increased $416,000, or 10%, during the three months ended September 30, 2023 compared with the third quarter of 2022. The increase in the level of fees during the third quarter of 2023 compared with the same period of 2022 was due to increased card utilization by customers.

Net gains on sales of loans declined $240,000, or 28%, during the third quarter of 2023 compared with the same period of 2022. The decline in the third quarter of 2023 compared with the third quarter of 2022 was largely related to a lower volume of loans sold and lower pricing levels. Loan sales totaled $33.8 million during the third quarter of 2023 compared with $40.9 million during the third quarter of 2022.

During the nine months ended September 30, 2023, non-interest income totaled $44,667,000, a decline of $798,000, or 2%, compared with the first nine months of 2022.


Non-interest Income (dollars in thousands)	Nine Months Ended September 30,				Change From Prior Period
					Amount		Percent
	2023		2022		Change		Change
Wealth Management Fees	$	8,513	$	7,656	$	857	11	%
Service Charges on Deposit Accounts	8,653		8,568		85		1
Insurance Revenues	7,330		7,970		(640)		(8)
Company Owned Life Insurance	1,276		1,768		(492)		(28)
Interchange Fee Income	13,081		11,848		1,233		10
Other Operating Income	3,943		3,858		85		2
Subtotal	42,796		41,668		1,128		3
Net Gains on Sales of Loans	1,831		3,324		(1,493)		(45)
Net Gains on Securities	40		473		(433)		(92)
Total Non-interest Income	$	44,667	$	45,465	$	(798)	(2)

Wealth management fees increased $857,000, or 11%, during the first nine months of 2023 compared with the first nine months of 2022. The increase during the nine months ended September 30, 2023 was largely attributable to increased assets under management within the Company's wealth management group as compared with the first nine months of 2022.

Insurance revenues declined $640,000, or 8%, during the first nine months of 2023 compared with the same period of 2022 and was primarily attributable to decreased contingency revenue. Contingency revenue during the first nine months of 2023 totaled

$955,000 compared with $1,641,000 during the first nine months of 2022. Contingency revenue is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency. Typically, the majority of contingency revenue is recognized during the first quarter of the year.

Company owned life insurance decreased $492,000, or 28%, during the first nine months of 2023 compared with the first nine months of 2022. The decline in the first nine months of 2023 was primarily the result of a decrease in the death benefit claims received compared with the same period of 2022.

Interchange fee income increased $1,233,000, or 10%, during the nine months ended September 30, 2023 compared with the nine months ended September 30, 2022. The increase in the level of fees during the first nine months of 2023 compared with the same period of 2022 was due to increased card utilization by customers.

Net gains on sales of loans declined $1,493,000, or 45%, during the first nine months of 2023 compared with the first nine months of 2022. The decline in the nine months ended September 30, 2023 compared with the same period of 2022 was largely related to a lower volume of loans sold and lower pricing levels. Loan sales totaled $82.0 million during the first nine months of 2023 compared with $142.6 million during the first nine months of 2022.

The Company realized $40,000 in gains on sales of securities during the nine months ended September 30, 2023 compared with $473,000 during the nine months ended September 30, 2022. The sales of securities, during the nine months ended September 30, 2022, was completed as part of modest shifts in the allocations within the securities portfolio.

Non-interest Expense:

During the quarter ended September 30, 2023, non-interest expense totaled $35,421,000 an increase of $705,000, or 2% compared with the third quarter of 2022.


Non-interest Expense (dollars in thousands)	Three Months Ended September 30,				Change From Prior Period
					Amount		Percent
	2023		2022		Change		Change
Salaries and Employee Benefits	$	20,347	$	19,751	$	596	3	%
Occupancy, Furniture and Equipment Expense	3,691		3,685		6		—
FDIC Premiums	700		477		223		47
Data Processing Fees	2,719		2,712		7		—
Professional Fees	1,229		1,188		41		3
Advertising and Promotion	1,278		1,215		63		5
Intangible Amortization	685		897		(212)		(24)
Other Operating Expenses	4,772		4,791		(19)		—
Total Non-interest Expense	$	35,421	$	34,716	$	705	2

Salaries and benefits increased $596,000, or 3%, during the third quarter of 2023 as compared with the third quarter of 2022. The increase in salaries and benefits during the third quarter of 2023 compared with the same period of 2022 was due in large part to higher salary costs primarily associated with annual adjustments for employees throughout the past year.

FDIC premiums increased $223,000, or 47%, during the quarter ended September 30, 2023 compared with the third quarter of 2022. The increase in the third quarter of 2023 compared with the third quarter of 2022 was primarily related to an industry-wide 2 basis point increase in the base FDIC premium assessment effective January 1, 2023.

Intangible amortization expense consists primarily of amortization associated with the core deposit intangible of acquired deposit portfolios. The core deposit intangibles are generally amortized on an accelerated basis over a period of six to ten years. Intangible Amortization decreased $212,000, or 24%, during the quarter ended September 30, 2023 compared with the same period of the prior year. The decrease in the third quarter of 2023 compared with the same period of the prior year was primarily attributable to the accelerated amortization method for which the intangible assets are amortized.

During the nine months ended September 30, 2023, non-interest expense totaled $108,763,000, a decrease of $9,814,000, or 8%, compared to the first nine months of 2022. The first nine months of 2022 non-interest expenses included approximately $12,276,000 of non-recurring acquisition-related expenses for the acquisition of CUB.


Non-interest Expense (dollars in thousands)	Nine Months Ended September 30,				Change From Prior Period
					Amount		Percent
	2023		2022		Change		Change
Salaries and Employee Benefits	$	62,296	$	63,223	$	(927)	(1)	%
Occupancy, Furniture and Equipment Expense	10,954		11,266		(312)		(3)
FDIC Premiums	2,128		1,418		710		50
Data Processing Fees	8,277		12,896		(4,619)		(36)
Professional Fees	4,405		5,124		(719)		(14)
Advertising and Promotion	3,706		3,380		326		10
Intangible Amortization	2,204		2,871		(667)		(23)
Other Operating Expenses	14,793		18,399		(3,606)		(20)
Total Non-interest Expense	$	108,763	$	118,577	$	(9,814)	(8)

Salaries and benefits declined $927,000, or 1%, during the first nine months of 2023 compared with the same period of 2022. The decline in salaries and benefits during the first nine months of 2023 compared with the same period of 2022 was largely related to approximately $1,480,000 of acquisition-related salary and benefit costs of a non-recurring nature in the first nine months of 2022 related to the CUB acquisition.

FDIC premiums increased $710,000, or 50%, during the nine months ended September 30, 2023 compared with the same period of 2022. The increase in the nine months ended September 30, 2023 compared with the same period of 2022 was primarily related to an industry-wide 2 basis point increase in the base FDIC premium assessment effective January 1, 2023.

Data processing fees declined $4,619,000, or 36%, during the first nine months of 2023 compared with the first nine months of 2022. The decline during the first nine months of 2023 compared with the same period of 2022 was largely driven by acquisition-related costs associated with the CUB transaction, which totaled approximately $4,982,000 during the first nine months of 2022.

Professional fees declined $719,000, or 14%, during the first nine months of 2023 compared to the first nine months of 2022. The decline in the first nine months of 2023 compared to the same period of 2022 was primarily due to merger-related professional fees associated with the CUB acquisition that totaled approximately $1,755,000 partially mitigated by increased legal and other professional fees.

Intangible amortization expense consists primarily of amortization associated with the core deposit intangible of acquired deposit portfolios. The core deposit intangibles are generally amortized on an accelerated basis over a period of six to ten years. Intangible Amortization decreased $667,000, or 23%, during the nine months ended September 30, 2023 compared with the same period of the prior year. The decrease in the first nine months of 2023 compared with the same period of the prior year was primarily attributable to the accelerated amortization method for which the intangible assets are amortized.

Other operating expenses declined $3,606,000, or 20%, during the first nine months of 2023 compared to the first nine months of 2022. The decline in the first nine months of 2023 compared with the same period of 2022 was attributable to acquisition-related costs that totaled approximately $3,862,000 in the first nine months of 2022. The acquisition-related costs were primarily vendor contract termination costs.

Income Taxes:

The Company’s effective income tax rate was 17.6% and 20.0%, respectively, during the three months ended September 30, 2023 and 2022. The Company's effective income tax rate was 17.7% and 17.1%, respectively, during the nine months ended September 30, 2023 and 2022. 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 $6.006 billion at September 30, 2023, representing a decline of $150.3 million compared with year-end 2022. The decline in total assets at September 30, 2023 compared with December 31, 2022 was largely attributable to a decline in total deposits which in turn has led to declines in the Company's securities portfolio. These declines were partially offset by an increase in total loans.

Securities available for sale declined $284.7 million as of September 30, 2023 compared with December 31, 2022. The changes in the available for sale securities portfolio during the first nine months of 2023 compared with year-end 2022 was largely attributable to the Company's utilization of cash flows from the securities portfolio to partially fund deposit declines and loan growth during the first nine months of the year and to a lesser extent the decline in the fair value of the securities portfolio. Total cash flow generated from the portfolio totaled approximately $238.0 million during the first nine months of 2023, reflecting principal and interest payments as well as a modest level of securities sales. Current projections indicate approximately $140.0 million in principal and interest cash flows from the portfolio over the next twelve months with rates unchanged.

September 30, 2023 total loans increased $104.9 million, or 4% on an annualized basis, compared with December 31, 2022. The increase in the first nine months of the year was primarily driven by an increase in commercial real estate loans of $110.1 million, or 7% on an annualized basis, as well as an increase in retail loans of $24.8 million, or 5% on an annualized basis. Retail loans include home equity and consumer loans and residential mortgage loans. These increases were somewhat offset by a decline in agricultural loans of $19.3 million and a decline in commercial and industrial loans of $10.6 million.

The composition of the loan portfolio has remained relatively stable and diversified over the past several years, including 2023. The portfolio is most heavily concentrated in commercial real estate loans at 53% of the portfolio, followed by commercial and industrial loans at 17% of the portfolio, and agricultural loans at 10% of the portfolio. The Company’s commercial lending is extended to various industries, including multi-family housing and lodging, agribusiness and manufacturing, as well as health care, wholesale, and retail services. The Company's commercial real estate portfolio has limited exposure to office real estate, with office exposure totaling approximately 4% of the total loan portfolio.


End of Period Loan Balances: (dollars in thousands)	September 30, 2023		December 31, 2022		Current Period Change
Commercial and Industrial Loans and Leases	$	665,892	$	676,502	$	(10,610)
Commercial Real Estate Loans	2,076,962		1,966,884		110,078
Agricultural Loans	398,109		417,413		(19,304)
Home Equity and Consumer Loans	396,000		377,164		18,836
Residential Mortgage Loans	356,610		350,682		5,928
Total Loans	$	3,893,573	$	3,788,645	$	104,928

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


	September 30, 2023		December 31, 2022
Commercial and Industrial Loans and Leases	$	13,212	$	13,958
Commercial Real Estate Loans	22,900		21,598
Agricultural Loans	3,786		4,188
Home Equity and Consumer Loans	2,431		2,196
Residential Mortgage Loans	2,317		2,228
Unallocated	—		—
Total Allowance for Credit Losses	$	44,646	$	44,168

The Company’s allowance for credit losses totaled $44.6 million at September 30, 2023 compared to $44.2 million at December 31, 2022. The allowance for credit losses represented 1.15% of period-end loans at September 30, 2023 compared with 1.17% at December 31, 2022.

The Company adopted ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("CECL") on January 1, 2020. Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses. As of September 30, 2023, the Company held net discounts on acquired loans of $4.2 million.

The following is an analysis of the Company’s non-performing assets at September 30, 2023 and December 31, 2022:


Non-performing Assets: (dollars in thousands)	September 30, 2023			December 31, 2022
Non-accrual Loans	$	11,206		$	12,888
Past Due Loans (90 days or more)	1,170			1,427
Total Non-performing Loans	12,376			14,315
Other Real Estate	24			—
Total Non-performing Assets	$	12,400		$	14,315

Restructured Loans	$	—		$	—

Non-performing Loans to Total Loans	0.32		%	0.38		%
Allowance for Credit Loss to Non-performing Loans	360.75		%	308.54		%

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
	September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Commercial and Industrial Loans and Leases	$	7,298	$	7,936	$	1,000	$	1,427
Commercial Real Estate Loans	1,006		1,950		145		—
Agricultural Loans	1,036		1,062		25		—
Home Equity Loans	621		310		—		—
Consumer Loans	178		400		—		—
Residential Mortgage Loans	1,067		1,230		—		—
Total	$	11,206	$	12,888	$	1,170	$	1,427

Non-performing assets totaled $12.4 million at September 30, 2023 compared to $14.3 million at December 31, 2022. Non-performing assets represented 0.21% of total assets at September 30, 2023 compared to 0.23% at year-end 2022. Non-performing loans totaled $12.4 million at September 30, 2023 compared to $14.3 million at December 31, 2022. Non-performing loans represented 0.32% of total loans at September 30, 2023 compared to 0.38% at December 31, 2022.

September 30, 2023 total deposits declined $214.2 million, or 4%, compared to December 31, 2022. The decline in deposits stabilized following the first quarter of 2023, during which $195.2 million of the overall decline occurred. The core deposit base remains diverse with stable and manageable exposure to uninsured and uncollateralized deposits of approximately 21% of total deposits.

The Company has continued to see customer movement from both interest bearing and non-interest bearing transactional accounts to time deposits due primarily to the rising interest rate environment. Non-interest bearing deposits have remained relatively stable as a percent of total deposits with September 30, 2023 non-interest bearing deposits totaling 29% of total deposits compared with 32% at December 31, 2022.

Competitive deposit pricing in the marketplace as well as customers actively looking for yield opportunities within and outside the banking industry are contributing factors to the decline in total deposits over the course of the past year. Additionally, a meaningful level of the outflow of deposits experienced during the past year was captured within the Company's wealth management group.


End of Period Deposit Balances: (dollars in thousands)	September 30, 2023		December 31, 2022		Current Period Change
Non-interest-bearing Demand Deposits	$	1,502,175	$	1,691,804	$	(189,629)
Interest-bearing Demand, Savings, & Money Market Accounts	2,932,180		3,229,778		(297,598)
Time Deposits < $100,000	269,829		235,219		34,610
Time Deposits of $100,000 or more	431,687		193,250		238,437
Total Deposits	$	5,135,871	$	5,350,051	$	(214,180)

September 30, 2023 total borrowings increased $82.4 million, or 40%, compared to December 31, 2022. The increase in total borrowings over the course of the past year has been to fund loan growth and mitigate deposit outflows.

Capital Resources:

As of September 30, 2023, shareholders’ equity declined by $20.0 million to $538.4 million compared with $558.4 million at year-end 2022. The decline in shareholders' equity was primarily attributable to a decline in accumulated other comprehensive income (loss) of $64.2 million related to the decrease in value of the Company's available-for-sale securities portfolio driven by changes in market interest rates during the first nine months of 2023. Partially mitigating the decline was increased retained earnings of $42.3 million due to net income of $64.4 million, which was partially offset by the payment of $22.1 million in shareholder dividends.

Shareholders’ equity represented 9.0% of total assets at September 30, 2023 and 9.1% of total assets at December 31, 2022. Shareholders’ equity included $187.4 million of goodwill and other intangible assets at September 30, 2023 compared to $189.8 million of goodwill and other intangible assets at December 31, 2022.

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 of common stock under the 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 September 30, 2023, 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:


	9/30/2023 Ratio		12/31/2022 Ratio		Minimum for Capital Adequacy Purposes ⁽¹⁾		Well-Capitalized Guidelines
Total Capital (to Risk Weighted Assets)
Consolidated	16.21	%	15.45	%	8.00	%	N/A
Bank	14.83	%	14.07	%	8.00	%	10.00	%
Tier 1 (Core) Capital (to Risk Weighted Assets)
Consolidated	14.66	%	13.97	%	6.00	%	N/A
Bank	14.10	%	13.42	%	6.00	%	8.00	%
Common Tier 1 (CET 1) Capital Ratio (to Risk Weighted Assets)
Consolidated	13.95	%	13.26	%	4.50	%	N/A
Bank	14.10	%	13.42	%	4.50	%	6.50	%
Tier 1 Capital (to Average Assets)
Consolidated	11.70	%	10.50	%	4.00	%	N/A
Bank	11.26	%	10.09	%	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, maintained 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% was phased in on January 1, 2023 and another 25% will be phased in on each of January 1, 2024 and January 1, 2025 (at which time the cumulative effects of adopting CECL will have been fully phased into our regulatory capital). 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.

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 $13.3 million during the nine months ended September 30, 2023 ending at $132.4 million. During the nine months ended September 30, 2023, operating activities resulted in net cash inflows of $77.7 million. Investing activities resulted in net cash inflows of $89.6 million during the nine months ended September 30, 2023. Financing activities resulted in net cash outflows for the nine months ended September 30, 2023 of $154.0 million.

The Company’s primary source of funding is its customer deposits, supplemented by brokered deposits, overnight borrowings from other financial institutions, and securities sold under agreements to repurchase. The membership of the Company’s affiliate bank in the Federal Home Loan Bank System provides a significant additional source for both long and short-term collateralized borrowings. In addition, in March 2023, the FRB created the Bank Term Funding Program, a new facility established in response to liquidity concerns resulting, in part, from the bank failures that occurred earlier that month. The program was designed to provide available additional funding to eligible depository institutions in order to help assure that banks have the ability to meet the needs of all their depositors. Under the program, eligible depository institutions can obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The program is intended to eliminate the need for depository institutions to quickly sell their securities when they are experiencing stress on their liquidity. As of the date of this Quarterly Report on Form 10-Q, the Company has not made any requests for loans under the program.

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 September 30, 2023, the parent company had approximately $47.3 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:

•changes in interest rates and the timing and magnitude of any such changes;

•unfavorable economic conditions, including a prolonged period of inflation, and the resulting adverse impact on, among other things, credit quality;

•the impacts related to or resulting from recent bank failures or adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks;

•the impacts of epidemics, pandemics or other infectious disease outbreaks;

•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;

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

•risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base or employee base of the acquired institution or branches, and difficulties in integration of the acquired operations;

•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 Offered Rate (LIBOR);

•the potential for increases to, and volatility in, the balance of our allowance for credit losses and related provision expense due to 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; and

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

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, 2022, 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 and the Federal Reserve 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 September 30, 2023 - Net Interest Income


	Net Interest Income

Changes in Rates	Amount		% Change
+2%	$	197,287	(0.32)	%
+1%	197,692		(0.12)	%
Base	197,930		—
-1%	195,745		(1.10)	%
-2%	191,533		(3.23)	%

The above table is a measurement of the Company’s net interest income at risk, assuming a static balance sheet as of September 30, 2023 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 September 30, 2023 - 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%	$	582,710	(15.19)	%	11.11	%	(117) b.p.
+1%	633,282		(7.83)	%	11.69	%	(59) b.p.
Base	687,079		—		12.28	%	—
-1%	735,299		7.02	%	12.72	%	44 b.p.
-2%	775,055		12.80	%	12.98	%	70 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 September 30, 2023, 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 third fiscal quarter of 2023 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

There are no 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

Except for the additional risk factors set forth below, 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, 2022.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on our operations.

The failures of Silicon Valley Bank and Signature Bank in March 2023, followed by the failure of First Republic Bank in May 2023, have resulted in general uncertainty for the financial services industry and have caused concerns relative to the adequacy of liquidity in the banking sector as a whole. A financial institution’s liquidity reflects its ability to meet customer demand for loans, accommodating possible outflows in deposits and accessing alternative sources of funds when needed, while at the same time taking advantage of interest rate market opportunities. The ability to manage liquidity is fundamental to a financial institution’s business and success. The recent bank failures highlight the potential results of an insured depository institution unexpectedly having to obtain needed liquidity to satisfy deposit withdrawal requests, including how quickly such requests can accelerate once uninsured depositors lose confidence in an institutions ability to satisfy its obligations to depositors. Current market uncertainties and other external factors may impact the competitive landscape for deposits in the banking industry in an unpredictable manner. In addition, the rising interest rate environment has continued to increase competition for liquidity and the premium at which liquidity is available to meet funding needs. These possible impacts may adversely affect our future operating results, including net income, and negatively impact capital.

Regulatory requirements arising from recent events in the financial services industry, or the application of current regulations, could increase our expenses and affect our operations.

We anticipate the potential of new regulations for banks of similar size to the Company’s banking subsidiary, German American Bank, designed to address the recent developments in the financial services industry, which may increase our costs of doing business and reduce our profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. We also expect that another result of the recent bank failures, as well as any future bank failures, may be an increase to our FDIC insurance premiums in future years, further increasing our cost of doing business.

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 September 30, 2023.


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)
July 2023	—	—	—	1,000,000
August 2023	—	—	—	1,000,000
September 2023	—	—	—	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

(a) Information required to be disclosed in a report on Form 8-K.

None.

(b) Changes to director nomination procedures.

None.

During the three months ended September 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits

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


Exhibit No.						Description
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, 2023, is incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, filed August 8, 2023 (SEC File No. 001-15877).
31.1+						Sarbanes-Oxley Act of 2002, Section 302 Certification of Principal Executive Officer.
31.2+						Sarbanes-Oxley Act of 2002, Section 302 Certification of Principal Financial Officer.
32.1++						Sarbanes-Oxley Act of 2002, Section 906 Certification of Principal Executive Officer.
32.2++						Sarbanes-Oxley Act of 2002, Section 906 Certification of Principal 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.

* 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: November 7, 2023			By: /s/D. Neil Dauby
			D. Neil Dauby
			Chairman and Chief Executive Officer
			(Principal Executive Officer)

Date: November 7, 2023			By: /s/Bradley M. Rust
			Bradley M. Rust
			President and Chief Financial Officer
			(Principal Financial Officer)

Date: November 7, 2023			By: /s/Vicki L. Schuler
			Vicki L. Schuler
			Senior Vice President, Controller
			(Principal Accounting Officer)