Edgar Filing: GERMAN AMERICAN BANCORP, INC.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2012

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

YES x NO ¨

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

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

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

YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 1, 2012
Common Shares, no par value	12,628,673

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, 2011, in Item 1, “Business – Forward-Looking Statements and Associated Risks” and our discussion of risk factors in Item 1A, “Risk Factors” of that annual report on Form 10-K, as updated from time to time in our subsequent SEC filings, including by Item 2 of Part I of this Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations”) at the conclusion of that Item 2 under the heading “Forward-Looking Statements and Associated Risks.”

*****

INDEX

PART I.	FINANCIAL INFORMATION	3

Item 1.	Financial Statements	3

	Consolidated Balance Sheets – June 30, 2012 and December 31, 2011	3

	Consolidated Statements of Income and Comprehensive Income - Three Months Ended June 30, 2012 and 2011	4

	Consolidated Statements of Income and Comprehensive Income - Six Months Ended June 30, 2012 and 2011	5

	Consolidated Statements of Cash Flows – Six Months Ended June 30, 2012 and 2011	6

	Notes to Consolidated Financial Statements – June 30, 2012	7-27

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28-39

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39-40

Item 4.	Controls and Procedures	40

PART II.	OTHER INFORMATION	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	41

SIGNATURES		41

INDEX OF EXHIBITS		42

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

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

	June 30,			December 31,
	2012			2011

ASSETS
Cash and Due from Banks	$	31,537		$	28,366
Federal Funds Sold and Other Short-term Investments		11,613			32,737
Cash and Cash Equivalents		43,150			61,103

Interest-bearing Time Deposits with Banks		3,718			5,986
Securities Available-for-Sale, at Fair Value		644,894			516,844
Securities Held-to-Maturity, at Cost (Fair value of $351 and $697 on June 30, 2012 and December 31, 2011, respectively)		346			690

Loans Held-for-Sale, at Fair Value		8,627			21,485

Loans		1,147,041			1,123,549
Less: Unearned Income		(3,103	)		(2,556	)
Allowance for Loan Losses		(15,692	)		(15,312	)
Loans, Net		1,128,246			1,105,681

Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost		8,340			8,340
Premises, Furniture and Equipment, Net		35,413			37,706
Other Real Estate		4,250			2,343
Goodwill		18,865			18,865
Intangible Assets		3,482			4,346
Company Owned Life Insurance		29,766			29,263
Accrued Interest Receivable and Other Assets		14,715			61,115
TOTAL ASSETS	$	1,943,812		$	1,873,767

LIABILITIES
Non-interest-bearing Demand Deposits	$	303,040		$	282,335
Interest-bearing Demand, Savings, and Money Market Accounts		944,730			899,584
Time Deposits		355,470			374,279
Total Deposits		1,603,240			1,556,198

FHLB Advances and Other Borrowings		143,132			130,993
Accrued Interest Payable and Other Liabilities		20,290			18,966
TOTAL LIABILITIES		1,766,662			1,706,157

SHAREHOLDERS’ EQUITY
Preferred Stock, no par value; 500,000 shares authorized, no shares issued		—			—
Common Stock, no par value, $1 stated value; 30,000,000 shares authorized		12,626			12,594
Additional Paid-in Capital		95,330			95,039
Retained Earnings		57,472			49,434
Accumulated Other Comprehensive Income		11,722			10,543

TOTAL SHAREHOLDERS’ EQUITY		177,150			167,610

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	1,943,812		$	1,873,767

End of period shares issued and outstanding		12,626,205			12,594,258

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

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

	Three Months Ended
	June 30,
	2012		2011
INTEREST INCOME
Interest and Fees on Loans	$	15,513	$	16,446
Interest on Federal Funds Sold and Other Short-term Investments		40		66
Interest and Dividends on Securities:
Taxable		3,421		3,586
Non-taxable		589		423
TOTAL INTEREST INCOME		19,563		20,521

INTEREST EXPENSE
Interest on Deposits		1,855		3,248
Interest on FHLB Advances and Other Borrowings		1,059		1,009
TOTAL INTEREST EXPENSE		2,914		4,257

NET INTEREST INCOME		16,649		16,264
Provision for Loan Losses		391		1,300
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		16,258		14,964

NON-INTEREST INCOME
Trust and Investment Product Fees		664		495
Service Charges on Deposit Accounts		1,017		1,074
Insurance Revenues		1,358		1,290
Company Owned Life Insurance		266		250
Interchange Fee Income		460		378
Other Operating Income		316		496
Net Gains on Sales of Loans		676		379
Net Gains on Securities		76		—
TOTAL NON-INTEREST INCOME		4,833		4,362

NON-INTEREST EXPENSE
Salaries and Employee Benefits		6,828		6,722
Occupancy Expense		1,061		1,024
Furniture and Equipment Expense		724		817
FDIC Premiums		283		382
Data Processing Fees		321		395
Professional Fees		587		499
Advertising and Promotion		396		314
Intangible Amortization		422		498
Other Operating Expenses		1,801		1,620
TOTAL NON-INTEREST EXPENSE		12,423		12,271

Income before Income Taxes		8,668		7,055
Income Tax Expense		2,701		2,191
NET INCOME	$	5,967	$	4,864

Other Comprehensive Income:
Changes in Unrealized Gain on Securities Available-for-Sale, Net		704		5,482
Total Other Comprehensive Income	$	704	$	5,482

COMPREHENSIVE INCOME	$	6,671	$	10,346

Basic Earnings Per Share and Diluted Earnings Per Share	$	0.47	$	0.39
Dividends Per Share	$	0.14	$	0.14

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

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

	Six Months Ended
	June 30,
	2012		2011
INTEREST INCOME
Interest and Fees on Loans	$	31,298	$	32,687
Interest on Federal Funds Sold and Other Short-term Investments		73		131
Interest and Dividends on Securities:
Taxable		6,747		6,430
Non-taxable		1,172		792
TOTAL INTEREST INCOME		39,290		40,040

INTEREST EXPENSE
Interest on Deposits		3,901		6,641
Interest on FHLB Advances and Other Borrowings		2,128		2,028
TOTAL INTEREST EXPENSE		6,029		8,669

NET INTEREST INCOME		33,261		31,371
Provision for Loan Losses		1,081		2,600
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		32,180		28,771

NON-INTEREST INCOME
Trust and Investment Product Fees		1,360		959
Service Charges on Deposit Accounts		1,952		2,015
Insurance Revenues		2,749		3,339
Company Owned Life Insurance		510		603
Interchange Fee Income		891		731
Other Operating Income		689		896
Net Gains on Sales of Loans		1,389		788
Net Gains on Securities		94		1,045
TOTAL NON-INTEREST INCOME		9,634		10,376

NON-INTEREST EXPENSE
Salaries and Employee Benefits		14,148		14,123
Occupancy Expense		2,153		2,074
Furniture and Equipment Expense		1,404		1,622
FDIC Premiums		580		896
Data Processing Fees		435		1,500
Professional Fees		1,192		1,104
Advertising and Promotion		769		617
Intangible Amortization		864		1,015
Other Operating Expenses		3,471		3,190
TOTAL NON-INTEREST EXPENSE		25,016		26,141

Income before Income Taxes		16,798		13,006
Income Tax Expense		5,229		3,497
NET INCOME	$	11,569	$	9,509

Other Comprehensive Income:
Changes in Unrealized Gain on Securities Available-for-Sale, Net		1,179		5,670
Total Other Comprehensive Income	$	1,179	$	5,670

COMPREHENSIVE INCOME	$	12,748	$	15,179

Basic Earnings Per Share and Diluted Earnings Per Share	$	0.92	$	0.76
Dividends Per Share	$	0.28	$	0.28

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, dollars in thousands)

	Six Months Ended
	June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	11,569		$	9,509
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Amortization on Securities		2,258			888
Depreciation and Amortization		2,499			2,685
Loans Originated for Sale		(77,713	)		(42,261	)
Proceeds from Sales of Loans Held-for-Sale		91,927			48,802
Loss in Investment in Limited Partnership		—			8
Provision for Loan Losses		1,081			2,600
Gain on Sale of Loans, net		(1,389	)		(788	)
Gain on Securities, net		(94	)		(1,045	)
Loss (Gain) on Sales of Other Real Estate and Repossessed Assets		70			(103	)
Loss (Gain) on Disposition and Impairment of Premises and Equipment		(2	)		13
Increase in Cash Surrender Value of Company Owned Life Insurance		(503	)		(604	)
Equity Based Compensation		308			307
Change in Assets and Liabilities:
Interest Receivable and Other Assets		5,068			6,017
Interest Payable and Other Liabilities		673			(2,211	)
Net Cash from Operating Activities		35,752			23,817

CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturity of Other Short-term Investments		2,240			3,882
Proceeds from Maturities, Calls, Redemptions of Securities Available-for-Sale		61,373			38,241
Redemption of Federal Reserve Bank Stock		—			694
Proceeds from Sales of Securities Available-for-Sale		51,395			—
Purchase of Securities Available-for-Sale		(197,985	)		(141,180	)
Proceeds from Maturities of Securities Held-to-Maturity		344			161
Proceeds from Redemption of Federal Home Loan Bank Stock		—			1,523
Proceeds from Sales of Loans		—			893
Loans Made to Customers, net of Payments Received		(25,871	)		25,773
Proceeds from Sales of Other Real Estate		246			2,641
Property and Equipment Expenditures		(1,108	)		(2,359	)
Proceeds from Sales of Property and Equipment		1			12
Acquisition of American Community Bancorp, Inc.		—			55,780
Net Cash from Investing Activities		(109,365	)		(13,939	)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits		47,070			131,374
Change in Short-term Borrowings		22,156			(44,202	)
Repayments of Long-term Debt		(10,050	)		(5,039	)
Issuance of Common Stock		15			12
Dividends Paid		(3,531	)		(3,521	)
Net Cash from Financing Activities		55,660			78,624

Net Change in Cash and Cash Equivalents		(17,953	)		88,502
Cash and Cash Equivalents at Beginning of Year		61,103			19,271
Cash and Cash Equivalents at End of Period	$	43,150		$	107,773

Cash Paid During the Period for
Interest	$	6,308		$	8,918
Income Taxes		1,934			3,981

Supplemental Non Cash Disclosures
Loans Transferred to Other Real Estate	$	2,223		$	1,608
Accounts Receivable Transferred to Securities		(43,167	)		—

See accompanying notes to consolidated financial statements.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 1 – Basis of Presentation

German American Bancorp, Inc. operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp, Inc. and its subsidiaries conform to U.S. generally accepted accounting principles. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform with current year classifications. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp, Inc. December 31, 2011 Annual Report on Form 10-K.

Note 2 – Per Share Data

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

	Three Months Ended
	June 30,
	2012		2011
Basic Earnings per Share:
Net Income	$	5,967	$	4,864
Weighted Average Shares Outstanding		12,627,715		12,592,324
Basic Earnings per Share	$	0.47	$	0.39

Diluted Earnings per Share:
Net Income	$	5,967	$	4,864

Weighted Average Shares Outstanding		12,627,715		12,592,324
Potentially Dilutive Shares, Net		10,811		5,555
Diluted Weighted Average Shares Outstanding		12,638,526		12,597,879
Diluted Earnings per Share	$	0.47	$	0.39

Stock options for 89,275 shares of common stock were not considered in computing diluted earnings per share for the quarter ended June 30, 2011 because they were anti-dilutive. There were no anti-dilutive shares as of June 30, 2012.

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

	Six Months Ended
	June 30,
	2012		2011
Basic Earnings per Share:
Net Income	$	11,569	$	9,509
Weighted Average Shares Outstanding		12,614,075		12,546,310
Basic Earnings per Share	$	0.92	$	0.76

Diluted Earnings per Share:
Net Income	$	11,569	$	9,509

Weighted Average Shares Outstanding		12,614,075		12,546,310
Potentially Dilutive Shares, Net		14,003		6,221
Diluted Weighted Average Shares Outstanding		12,628,078		12,552,531
Diluted Earnings per Share	$	0.92	$	0.76

Stock options for 89,275 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2011 because they were anti-dilutive. There were no anti-dilutive shares as of June 30, 2012.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 3 – Securities

The amortized cost, unrealized gross gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale at June 30, 2012 and December 31, 2011, were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Securities Available-for-Sale:
June 30, 2012
U.S. Treasury and Agency Securities	$	4,829	$	59	$	—		$	4,888
Obligations of State and Political Subdivisions		69,628		4,840		(10	)		74,458
Mortgage-backed Securities - Residential		551,207		13,809		(141	)		564,875
Equity Securities		684		—		(11	)		673
Total	$	626,348	$	18,708	$	(162	)	$	644,894

December 31, 2011
U.S. Treasury and Agency Securities	$	6,340	$	82	$	—		$	6,422
Corporate Securities		1,003		2		—			1,005
Obligations of State and Political Subdivisions		60,606		4,195		(2	)		64,799
Mortgage-backed Securities - Residential		431,495		12,529		(90	)		443,934
Equity Securities		684		—		—			684
Total	$	500,128	$	16,808	$	(92	)	$	516,844

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

The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity at June 30, 2012 and December 31, 2011, were as follows:

			Gross		Gross
	Carrying		Unrecognized		Unrecognized		Fair
	Amount		Gains		Losses		Value
Securities Held-to-Maturity:
June 30, 2012
Obligations of State and Political Subdivisions	$	346	$	5	$	—	$	351

December 31, 2011
Obligations of State and Political Subdivisions	$	690	$	7	$	—	$	697

The amortized cost and fair value of Securities at June 30, 2012 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately.

	Amortized		Fair
	Cost		Value
Securities Available-for-Sale:
Due in one year or less	$	827	$	831
Due after one year through five years		16,780		17,257
Due after five years through ten years		25,394		27,207
Due after ten years		31,456		34,051
Mortgage-backed Securities - Residential		551,207		564,875
Equity Securities		684		673
Totals	$	626,348	$	644,894

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 3 – Securities (continued)

	Carrying		Fair
	Amount		Value
Securities Held-to-Maturity:
Due in one year or less	$	—	$	—
Due after one year through five years		346		351
Due after five years through ten years		—		—
Due after ten years		—		—
Totals	$	346	$	351

Below is a summary of securities with unrealized losses as of June 30, 2012 and December 31, 2011, presented by length of time the securities have been in a continuous unrealized loss position:

	Less than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
At June 30, 2012:
U.S. Treasury and Agency Securities	$	—	$	—		$	—	$	—	$	—	$	—
Corporate Securities		—		—			—		—		—		—
Obligations of State and Political Subdivisions		984		(10	)		—		—		984		(10	)
Mortgage-backed Securities - Residential		29,322		(141	)		—		—		29,322		(141	)
Equity Securities		673		(11	)		—		—		673		(11	)
Total	$	30,979	$	(162	)	$	—	$	—	$	30,979	$	(162	)

	Less than 12 Months					12 Months or More				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
	Value		Loss			Value		Loss		Value		Loss
At December 31, 2011:
U.S. Treasury and Agency Securities	$	—	$	—		$	—	$	—	$	—	$	—
Corporate Securities		—		—			—		—		—		—
Obligations of State and Political Subdivisions		203		(2	)		—		—		203		(2	)
Mortgage-backed Securities - Residential		39,947		(90	)		—		—		39,947		(90	)
Equity Securities		—		—			—		—		—		—
Total	$	40,150	$	(92	)	$	—	$	—	$	40,150	$	(92	)

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

The Company held a minority interest in American Community Bancorp, Inc., prior to the acquisition on January 1, 2011. For the six months ended June 30, 2011, the Company recognized a gain of $1.045 million on the stock held of American Community Bancorp, Inc. as a result of the acquisition.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 4 – Loans

Loans were comprised of the following classifications at June 30, 2012 and December 31, 2011:

	June 30,			December 31,
	2012			2011

Commercial:
Commercial and Industrial Loans and Leases	$	323,618		$	293,172
Commercial Real Estate Loans		460,052			452,071
Agricultural Loans		158,463			167,693
Retail:
Home Equity Loans		73,687			77,070
Consumer Loans		42,362			47,409
Residential Mortgage Loans		88,859			86,134
Subtotal		1,147,041			1,123,549
Less: Unearned Income		(3,103	)		(2,556	)
Allowance for Loan Losses		(15,692	)		(15,312	)
Loans, Net	$	1,128,246		$	1,105,681

The following table presents the activity in the allowance for loan losses by portfolio class for the three months ending June 30, 2012 and 2011:

	Commercial
	and
	Industrial			Commercial					Home						Residential
	Loans and			Real Estate			Agricultural		Equity			Consumer			Mortgage
	Leases			Loans			Loans		Loans			Loans			Loans			Unallocated		Total
June 30, 2012
Beginning Balance	$	4,460		$	9,234		$	751	$	204		$	196		$	441		$	480	$	15,766
Provision for Loan Losses		312			(202	)		139		(17	)		83			(8	)		84		391
Recoveries		4			7			—		—			33			7			—		51
Loans Charged-off		(69	)		(307	)		—		(6	)		(85	)		(49	)		—		(516	)
Ending Balance	$	4,707		$	8,732		$	890	$	181		$	227		$	391		$	564	$	15,692

	Commercial
	and
	Industrial			Commercial					Home						Residential
	Loans and			Real Estate			Agricultural		Equity			Consumer			Mortgage
	Leases			Loans			Loans		Loans			Loans			Loans			Unallocated		Total
June 30, 2011
Beginning Balance	$	3,820		$	7,708		$	654	$	271		$	432		$	748		$	540	$	14,173
Provision for Loan Losses		650			315			79		(18	)		—			115			159		1,300
Recoveries		3			11			—		1			27			15			—		57
Loans Charged-off		(181	)		(337	)		—		(41	)		(59	)		(132	)		—		(750	)
Ending Balance	$	4,292		$	7,697		$	733	$	213		$	400		$	746		$	699	$	14,780

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

The following table presents the activity in the allowance for loan losses by portfolio class for the six months ending June 30, 2012 and 2011:

	Commercial
	and
	Industrial			Commercial						Home						Residential
	Loans and			Real Estate			Agricultural			Equity			Consumer			Mortgage
	Leases			Loans			Loans			Loans			Loans			Loans			Unallocated			Total
June 30, 2012
Beginning Balance	$	3,493		$	9,297		$	926		$	258		$	190		$	402		$	746		$	15,312
Provision for Loan Losses		1,273			(144	)		(36	)		(30	)		129			71			(182	)		1,081
Recoveries		49			26			—			1			64			9			—			149
Loans Charged-off		(108	)		(447	)		—			(48	)		(156	)		(91	)		—			(850	)
Ending Balance	$	4,707		$	8,732		$	890		$	181		$	227		$	391		$	564		$	15,692

	Commercial
	and
	Industrial			Commercial						Home						Residential
	Loans and			Real Estate			Agricultural			Equity			Consumer			Mortgage
	Leases			Loans			Loans			Loans			Loans			Loans			Unallocated		Total
June 30, 2011
Beginning Balance	$	3,713		$	7,497		$	750		$	220		$	362		$	543		$	232	$	13,317
Provision for Loan Losses		755			887			(17	)		86			84			338			467		2,600
Recoveries		6			103			—			3			59			15			—		186
Loans Charged-off		(182	)		(790	)		—			(96	)		(105	)		(150	)		—		(1,323	)
Ending Balance	$	4,292		$	7,697		$	733		$	213		$	400		$	746		$	699	$	14,780

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class and based on impairment method as of June 30, 2012 and December 31, 2011:

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
June 30, 2012
Allowance for Loan Losses:
Ending Allowance Balance
Attributable to Loans:
Individually Evaluated for Impairment	$	5,100	$	1,282	$	3,818	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		10,515		3,425		4,837		890		181		227		391		564
Acquired with Deteriorated
Credit Quality		77		—		77		—		—		—		—		—
Total Ending Allowance Balance	$	15,692	$	4,707	$	8,732	$	890	$	181	$	227	$	391	$	564

Loans:
Loans Individually
Evaluated for Impairment	$	12,689	$	2,789	$	9,900	$	—	$	—	$	—	$	—	$	—
Loans Collectively
Evaluated for Impairment		1,126,966		319,867		441,358		160,437		73,929		42,354		89,021		—
Loans Acquired with Deteriorated
Credit Quality		12,285		1,972		10,006		—		—		156		151		—
Total Ending Loans Balance ⁽¹⁾	$	1,151,940	$	324,628	$	461,264	$	160,437	$	73,929	$	42,510	$	89,172	$	—

⁽¹⁾ Total recorded investment in loans includes $4,899 in accrued interest.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

			Commercial
			and
			Industrial		Commercial				Home				Residential
			Loans and		Real Estate		Agricultural		Equity		Consumer		Mortgage
	Total		Leases		Loans		Loans		Loans		Loans		Loans		Unallocated
December 31, 2011
Allowance for Loan Losses:
Ending Allowance Balance
Attributable to Loans:
Individually Evaluated for Impairment	$	4,834	$	466	$	4,368	$	—	$	—	$	—	$	—	$	—
Collectively Evaluated for Impairment		10,401		3,027		4,852		926		258		190		402		746
Acquired with Deteriorated
Credit Quality		77		—		77		—		—		—		—		—
Total Ending Allowance Balance	$	15,312	$	3,493	$	9,297	$	926	$	258	$	190	$	402	$	746

Loans:
Loans Individually
Evaluated for Impairment	$	16,613	$	3,567	$	13,046	$	—	$	—	$	—	$	—	$	—
Loans Collectively
Evaluated for Impairment		1,096,571		287,924		427,063		170,513		77,323		47,431		86,317		—
Loans Acquired with Deteriorated
Credit Quality		16,121		2,596		13,209		—		—		164		152		—
Total Ending Loans Balance ⁽¹⁾	$	1,129,305	$	294,087	$	453,318	$	170,513	$	77,323	$	47,595	$	86,469	$	—

⁽¹⁾ Total recorded investment in loans includes $5,756 in accrued interest.

The following table presents loans individually evaluated for impairment by class of loans including purchase credit impaired loans that subsequently result in additional allowance for loan losses as of June 30, 2012 and December 31, 2011:

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated

June 30, 2012
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	98	$	78	$	—
Commercial Real Estate Loans		4,803		4,237		—
Agricultural Loans		—		—		—

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,737		2,737		1,282
Commercial Real Estate Loans		6,326		6,209		3,895
Agricultural Loans		—		—		—
Total	$	13,964	$	13,261	$	5,177

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

	Unpaid				Allowance for
	Principal		Recorded		Loan Losses
	Balance		Investment		Allocated
December 31, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	1,084	$	1,066	$	—
Commercial Real Estate Loans		5,959		5,894		—
Agricultural Loans		—		—		—

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,502		2,501		466
Commercial Real Estate Loans		7,400		7,230		4,445
Agricultural Loans		—		—		—
Total	$	16,945	$	16,691	$	4,911

	Average		Interest		Cash
	Recorded		Income		Basis
	Investment		Recognized		Recognized
June 30, 2012
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	100	$	1	$	1
Commercial Real Estate Loans		6,166		1		1
Agricultural Loans		145		2		2

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,795		2		2
Commercial Real Estate Loans		6,546		5		5
Agricultural Loans		—		—		—
Total	$	15,752	$	11	$	11

	Average		Interest		Cash
	Recorded		Income		Basis
	Investment		Recognized		Recognized
June 30, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	730	$	2	$	2
Commercial Real Estate Loans		4,059		29		29
Agricultural Loans		20		6		6

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		3,961		4		4
Commercial Real Estate Loans		10,451		6		4
Agricultural Loans		—		—		—
Total	$	19,221	$	47	$	45

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

	Average		Interest		Cash
	Recorded		Income		Basis
	Investment		Recognized		Recognized
June 30, 2012
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	377	$	2	$	2
Commercial Real Estate Loans		5,858		5		5
Agricultural Loans		73		2		2

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		2,818		3		3
Commercial Real Estate Loans		6,914		11		9
Agricultural Loans		—		—		—
Total	$	16,040	$	23	$	21

	Average		Interest		Cash
	Recorded		Income		Basis
	Investment		Recognized		Recognized
June 30, 2011
With No Related Allowance Recorded:
Commercial and Industrial Loans and Leases	$	281	$	3	$	3
Commercial Real Estate Loans		2,388		32		32
Agricultural Loans		38		6		6

With An Allowance Recorded:
Commercial and Industrial Loans and Leases		4,280		6		6
Commercial Real Estate Loans		11,181		36		34
Agricultural Loans		—		—		—
Total	$	18,168	$	83	$	81

The following tables present the recorded investment in non-accrual loans and loans past due 90 days or more still on accrual by class of loans as of June 30, 2012 and December 31, 2011:

					Loans Past Due
					90 Days or More
	Non-Accrual				& Still Accruing
	2012		2011		2012		2011

Commercial and Industrial Loans and Leases	$	2,702	$	3,471	$	—	$	—
Commercial Real Estate Loans		10,137		13,289		—		—
Agricultural Loans		—		—		108		—
Home Equity Loans		55		90		—		—
Consumer Loans		176		259		—		—
Residential Mortgage Loans		328		748		—		—
Total	$	13,398	$	17,857	$	108	$	—

Non-accrual loans and loans past due 90 days or more still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2012 and December 31, 2011:

							90 Days
			30-59 Days		60-89 Days		or More		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
June 30, 2012
Commercial and Industrial Loans and Leases	$	324,628	$	456	$	51	$	480	$	987	$	323,641
Commercial Real Estate Loans		461,264		169		90		3,559		3,818		457,446
Agricultural Loans		160,437		15		242		108		365		160,072
Home Equity Loans		73,929		159		59		55		273		73,656
Consumer Loans		42,510		162		102		13		277		42,233
Residential Mortgage Loans		89,172		3,032		405		328		3,765		85,407
Total ⁽¹⁾	$	1,151,940	$	3,993	$	949	$	4,543	$	9,485	$	1,142,455

⁽¹⁾ Total recorded investment in loans includes $4,899 in accrued interest.

							90 Days
			30-59 Days		60-89 Days		or More		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
December 31, 2011
Commercial and Industrial Loans and Leases	$	294,087	$	220	$	—	$	1,141	$	1,361	$	292,726
Commercial Real Estate Loans		453,318		381		148		5,920		6,449		446,869
Agricultural Loans		170,513		10		—		—		10		170,503
Home Equity Loans		77,323		176		6		90		272		77,051
Consumer Loans		47,595		287		117		221		625		46,970
Residential Mortgage Loans		86,469		2,752		893		748		4,393		82,076
Total ⁽¹⁾	$	1,129,305	$	3,826	$	1,164	$	8,120	$	13,110	$	1,116,195

⁽¹⁾ Total recorded investment in loans includes $5,756 in accrued interest.

Troubled Debt Restructurings:

The Company has allocated $196 of specific reserves on $386 in principal to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2012. The Company had allocated $198 of specific reserves on $409 in principal to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2011. The Company has not committed to lending any additional amounts as of June 30, 2012 and December 31, 2011 to customers with outstanding loans that are classified as troubled debt restructurings.

For the three and six months ended June 30, 2012, no troubled debt restructurings occurred. The troubled debt restructurings resulted in no charge-offs for the three and six months ended June 30, 2012.

For the three and six months ended June 30, 2012, there were no payment defaults within the twelve months following modification for troubled debt restructurings.

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

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company classifies loans as to credit risk by individually analyzing loans. This analysis includes commercial and industrial loans, commercial real estate loans, and agricultural loans with an outstanding balance greater than $100. 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. Loans listed as not rated are either less than $100 or are included in groups of homogeneous loans. Based on the most recent analysis performed, the risk category of loans by class of loans is a follows:

			Special
	Pass		Mention		Substandard		Doubtful		Total
June 30, 2012
Commercial and Industrial Loans and Leases	$	297,071	$	16,062	$	11,495	$	—	$	324,628
Commercial Real Estate Loans		413,821		25,049		22,394		—		461,264
Agricultural Loans		155,796		2,181		2,460		—		160,437
Total	$	866,688	$	43,292	$	36,349	$	—	$	946,329

			Special
	Pass		Mention		Substandard		Doubtful		Total
December 31, 2011
Commercial and Industrial Loans and Leases	$	264,037	$	16,188	$	13,862	$	—	$	294,087
Commercial Real Estate Loans		396,057		28,272		28,989		—		453,318
Agricultural Loans		165,153		2,744		2,616		—		170,513
Total	$	825,247	$	47,204	$	45,467	$	—	$	917,918

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For home equity, consumer and residential mortgage 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 home equity, consumer and residential mortgage loans based on payment activity as of June 30, 2012 and December 31, 2011:

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
June 30, 2012
Performing	$	73,874	$	42,334	$	88,844
Nonperforming		55		176		328
Total	$	73,929	$	42,510	$	89,172

	Home Equity		Consumer		Residential
	Loans		Loans		Mortgage Loans
December 31, 2011
Performing	$	77,233	$	47,336	$	85,721
Nonperforming		90		259		748
Total	$	77,323	$	47,595	$	86,469

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The recorded investment of those loans is as follows:

	June 30, 2012

Commercial and Industrial Loans	$	1,972
Commercial Real Estate Loans		10,006
Home Equity Loans		—
Consumer Loans		156
Residential Mortgage Loans		151
Total	$	12,285

Carrying amount, Net of Allowance	$	12,208

	December 31, 2011

Commercial and Industrial Loans	$	2,596
Commercial Real Estate Loans		13,209
Home Equity Loans		—
Consumer Loans		164
Residential Mortgage Loans		152
Total	$	16,121

Carrying amount, Net of Allowance	$	16,044

Accretable yield, or income expected to be collected, is as follows:

	June 30, 2012			June 30, 2011

Balance at April 1	$	630		$	1,792
New Loans Purchased		—			—
Accretion of Income		(241	)		(314	)
Reclassifications from Non-accretable Difference		—			—
Charge-off of Accretable Yield		—			—
Balance at June 30	$	389		$	1,478

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 4 – Loans (continued)

	June 30, 2012			June 30, 2011

Balance at January 1	$	967		$	—
New Loans Purchased		—			2,042
Accretion of Income		(784	)		(564	)
Reclassifications from Non-accretable Difference		206			—
Charge-off of Accretable Yield		—			—
Balance at June 30	$	389		$	1,478

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three and six months ended June 30, 2012. For those purchased loans disclosed above, the Company increases the allowance for loan losses by $75 during the three and six months ended June 30, 2011. No allowances for loan losses were reversed during the same periods.

Note 5 – Segment Information

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

The core banking segment is comprised by the Company’s banking subsidiary, German American Bancorp, which operated through 34 retail banking offices at June 30, 2012. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue for the core-banking segment. The trust and investment advisory services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company. These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment 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 German American Bancorp, Inc., which are used by management to monitor and manage the financial performance of the Company. The accounting policies of the three segments are the same as those of the Company. The evaluation process for segments does not include holding company income and expense. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the column labeled “Other” below, along with amounts to eliminate transactions between segments.

			Trust and
			Investment
	Core		Advisory								Consolidated
	Banking		Services			Insurance		Other			Totals
Three Months Ended
June 30, 2012
Net Interest Income	$	17,163	$	7		$	10	$	(531	)	$	16,649
Net Gains on Sales of Loans		676		—			—		—			676
Net Gains on Securities		76		—			—		—			76
Trust and Investment Product Fees		2		663			—		(1	)		664
Insurance Revenues		6		9			1,343		—			1,358
Noncash Items:
Provision for Loan Losses		391		—			—		—			391
Depreciation and Amortization		1,095		5			105		38			1,243
Income Tax Expense (Benefit)		2,980		(10	)		66		(335	)		2,701
Segment Profit (Loss)		6,227		(20	)		89		(329	)		5,967
Segment Assets at June 30, 2012		1,947,075		11,785			8,254		(23,302	)		1,943,812

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

NOTE 5 – Segment Information (continued)

			Trust and
			Investment
	Core		Advisory									Consolidated
	Banking		Services			Insurance			Other			Totals
Three Months Ended
June 30, 2011
Net Interest Income	$	16,790	$	5		$	6		$	(537	)	$	16,264
Net Gains on Sales of Loans		379		—			—			—			379
Net Gains on Securities		—		—			—			—			—
Trust and Investment Product Fees		1		495			—			(1	)		495
Insurance Revenues		19		2			1,282			(13	)		1,290
Noncash Items:
Provision for Loan Losses		1,300		—			—			—			1,300
Depreciation and Amortization		1,175		9			137			38			1,359
Income Tax Expense (Benefit)		2,626		(121	)		15			(329	)		2,191
Segment Profit (Loss)		5,403		(185	)		(11	)		(343	)		4,864
Segment Assets at December 31, 2011		1,875,417		11,801			7,948			(21,399	)		1,873,767

			Trust and
			Investment
	Core		Advisory								Consolidated
	Banking		Services			Insurance		Other			Totals
Six Months Ended
June 30, 2012
Net Interest Income	$	34,304	$	10		$	17	$	(1,070	)	$	33,261
Net Gains on Sales of Loans		1,389		—			—		—			1,389
Net Gains on Securities		94		—			—		—			94
Trust and Investment Product Fees		3		1,359			—		(2	)		1,360
Insurance Revenues		16		27			2,706		—			2,749
Noncash Items:
Provision for Loan Losses		1,081		—			—		—			1,081
Depreciation and Amortization		2,204		10			210		75			2,499
Income Tax Expense (Benefit)		5,855		(58	)		106		(674	)		5,229
Segment Profit (Loss)		12,159		(97	)		145		(638	)		11,569
Segment Assets at June 30, 2012		1,947,075		11,785			8,254		(23,302	)		1,943,812

			Trust and
			Investment
	Core		Advisory								Consolidated
	Banking		Services			Insurance		Other			Totals
Six Months Ended
June 30, 2011
Net Interest Income	$	32,429	$	7		$	13	$	(1,078	)	$	31,371
Net Gains on Sales of Loans		788		—			—		—			788
Net Gains on Securities		—		—			—		1,045			1,045
Trust and Investment Product Fees		2		959			—		(2	)		959
Insurance Revenues		40		2			3,313		(16	)		3,339
Noncash Items:
Provision for Loan Losses		2,600		—			—		—			2,600
Depreciation and Amortization		2,320		17			273		75			2,685
Income Tax Expense (Benefit)		3,995		(147	)		330		(681	)		3,497
Segment Profit (Loss)		8,964		(223	)		439		329			9,509
Segment Assets at December 31, 2011		1,875,417		11,801			7,948		(21,399	)		1,873,767

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 6 – Stock Repurchase Plan

On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 607,754 (as adjusted for subsequent stock dividends) of the outstanding Common Shares of the Company. Shares may be purchased from time to time in the open market and in large block privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time before the maximum number of shares specified by the program is purchased. As of June 30, 2012, the Company had purchased 334,965 (as adjusted for subsequent stock dividends) shares under the program. No shares were purchased under the program during the six months ended June 30, 2012 and 2011.

Note 7 – Equity Plans and Equity Based Compensation

The Company maintains three equity incentive plans under which stock options, restricted stock, and other equity incentive awards can be granted. At June 30, 2012, the Company has reserved 611,548 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options, restricted stock, and other equity awards to officers, directors and other employees of the Company.

For the six months ended June 30, 2012 and 2011, the Company granted no options, and accordingly, recorded no stock option expense related to option grants during the three and six months ended June 30, 2012 and 2011. The Company recorded no other stock compensation expense applicable to options during the quarter and six months ended June 30, 2012 and 2011 because all outstanding options were fully vested prior to 2007. In addition, there was no unrecognized option expense as all outstanding options were fully vested prior to June 30, 2012 and 2011.

During the periods presented, awards of long-term incentives were granted in the form of restricted stock, granted in tandem with cash credit entitlements. The incentive awards will typically be in the form of 50% restricted stock grants and 50% cash credit entitlements. The restricted stock grants and tandem cash credit entitlements are subject to forfeiture in the event that the recipient of the grant does not continue employment with the Company through December 5 of the year of grant, at which time they generally vest 100 percent. For measuring compensation costs, restricted stock awards are valued based upon the market value of the common shares on the date of grant. During the quarter ended June 30, 2012, the Company granted no shares of restricted stock. During the six months ended June 30, 2012, the Company granted awards of 30,019 shares of restricted stock. During the three and six months ended June 30, 2011, the Company granted awards of 1,266 and 37,467 shares of restricted stock, respectively.

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

	Three Months Ended
	June 30,
	2012			2011
Restricted Stock Expense	$	141		$	154
Cash Entitlement Expense		133			137
Tax Effect		(111	)		(118	)
Net of Tax	$	163		$	173

	Six Months Ended
	June 30,
	2012			2011
Restricted Stock Expense	$	308		$	308
Cash Entitlement Expense		293			275
Tax Effect		(243	)		(236	)
Net of Tax	$	358		$	347

Unrecognized expense associated with the restricted stock grants and cash entitlements totaled $601 and $587 as of June 30, 2012 and 2011, respectively.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 7 – Equity Plans and Equity Based Compensation (continued)

The Company maintains an Employee Stock Purchase Plan whereby eligible employees have the option to purchase the Company’s common stock at a discount. The purchase price of the shares under this Plan has been set at 95% of the fair market value of the Company’s common stock as of the last day of the plan year. The plan provides for the purchase of up to 500,000 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. Funding for the purchase of common stock is from employee and Company contributions.

The Employee Stock Purchase Plan is not considered compensatory. There was no expense recorded for the employee stock purchase plan during the three and six months ended June 30, 2012 and 2011, nor was there any unrecognized compensation expense as of June 30, 2012 and 2011 for the Employee Stock Purchase Plan.

Note 8 – Fair Value

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

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

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

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

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 pricing is obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. At June 30, 2012, the Company held $12.1 million in Level 3 securities which consist of $11.8 million of non-rated Obligations of State and Political Subdivisions and $353 thousand of equity securities that are not actively traded. Absent the credit rating, significant assumptions must be made such that the credit risk input becomes an unobservable input and thus these securities are reported by the Company in a Level 3 classification.

Impaired Loans: Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value in the cost to replace the current property. Value of market comparison approach evaluates the sales price of similar properties in the same market area. The income approach considers net operating income generated by the property and an investors required return. Adjustments are routinely made in the appraisal process 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.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 8 – Fair Value (continued)

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

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

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

Assets and Liabilities Measured on a Recurring Basis

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

	Fair Value Measurements at June 30, 2012 Using
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
U.S. Treasury and Agency Securities	$	—	$	4,888	$	—	$	4,888
Corporate Securities		—		—		—		—
Obligations of State and Political Subdivisions		—		62,667		11,791		74,458
Mortgage-backed Securities-Residential		—		564,875		—		564,875
Equity Securities		320		—		353		673
Total Securities	$	320	$	632,430	$	12,144	$	644,894

Loans Held-for-Sale	$	—	$	8,627	$	—	$	8,627

	Fair Value Measurements at December 31, 2011 Using
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
U.S. Treasury and Agency Securities	$	—	$	6,422	$	—	$	6,422
Corporate Securities		—		—		1,005		1,005
Obligations of State and Political Subdivisions		—		60,027		4,772		64,799
Mortgage-backed Securities-Residential		—		443,934		—		443,934
Equity Securities		331		—		353		684
Total Securities	$	331	$	510,383	$	6,130	$	516,844

Loans Held-for-Sale	$	—	$	21,485	$	—	$	21,485

There were no transfers between Level 1 and Level 2 for the periods ended June 30, 2012 and December 31, 2011.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 8 – Fair Value (continued)

At June 30, 2012, the aggregate fair value of the Loans Held-for-Sale was $8,627 and the aggregate contractual principal balance was $8,529 with a difference of $98. At December 31, 2011, the aggregate fair value of the Loans Held-for-Sale was $21,485 and the aggregate contractual principle balance was $21,225 with a difference of $260.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2012 and 2011:

	Obligations of State
	and Political
	Subdivisions				Equity Securities				Corporate Securities
	2012		2011		2012		2011		2012		2011

Balance of Recurring Level 3 Assets at March 31	$	4,075	$	4,772	$	353	$	353	$	—	$	1,005
Total Gains or Losses (realized/unrealized) Included in earnings		51		—		—		—		—		—
Purchases		7,665		—		—		—		—		—
Balance of Recurring Level 3 Assets at June 30	$	11,791	$	4,772	$	353	$	353	$	—	$	1,005

	Obligations of State
	and Political
	Subdivisions					Equity Securities				Corporate Securities
	2012			2011		2012		2011		2012			2011

Balance of Recurring Level 3 Assets at January 1	$	4,772		$	—	$	353	$	353	$	1,005		$	—
Total Gains or Losses (realized/unrealized) Included in earnings		51			—		—		—		—			—
Maturities / Calls		(697	)		—		—		—		(1,005	)		—
Purchases		7,665			4,772		—		—		—			1,005
Balance of Recurring Level 3 Assets at June 30	$	11,791		$	4,772	$	353	$	353	$	—		$	1,005

The fair value for nineteen obligations of state and political subdivisions with a fair value of $7.665 million as of June 30, 2012 were placed into Level 3 at the time of purchase because quoted prices or market prices of similar securities were not available. These fair values were calculated using discounted cash flows or other market indicators. Level 3 pricing was obtained from a third-party based upon similar trades that are not traded frequently without adjustment by the Company. This fair value method is consistent with the fair value methodology used on the existing obligations of state and political subdivisions in Level 3 at January 1, 2012.

Assets and Liabilities Measured on a Non-Recurring Basis

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

	Fair Value Measurements at June 30, 2012 Using
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Impaired Loans with Specific Allocations
Commercial and Industrial Loans	$	—	$	—	$	1,455	$	1,455
Commercial Real Estate Loans		—		—		2,308		2,308

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 8 – Fair Value (continued)

	Fair Value Measurements at December 31, 2011 Using
	Quoted Prices in
	Active Markets for		Significant Other		Significant
	Identical Assets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Impaired Loans with Specific Allocations
Commercial and Industrial Loans	$	—	$	—	$	2,035	$	2,035
Commercial Real Estate Loans		—		—		2,783		2,783
Other Real Estate
Commercial Real Estate		—		—		250		250

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $8,940 with a valuation allowance of $5,177, resulting in a decreased provision for loan losses of $200 for the three months ended June 30, 2012 and an additional provision for loan losses of $633 for the six months ended June 30, 2012. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $9,729 with a valuation allowance of $4,911, resulting in an additional provision for loan losses of $4,226 for the year ended December 31, 2011.

Other Real Estate is measured at the lower of carrying or fair value less costs to sell. No charge to earnings was included in the three or six months ended June 30, 2012 and 2011. Other Real Estate, which is measured at the lower of carrying or fair value less costs to sell, had a carrying amount of $250 at December 31, 2011.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2012:

Range

Valuation

(Weighted

Fair Value

Technique(s)

Unobservable Input(s)

Average)

Impaired Loans - Commercial

2,308

Sales comparison

Adjustment for physical

20%-75%

Real Estate Loans

approach

condition of comparable

(63%)

Income approach

properties sold

Cost approach

Adjustment for net operating

income generated by the

property

Adjustment for investor rates

of return

Impaired Loans - Commercial

1,455

Sales comparison

Adjustment for differences

10%-60%

and Industrial Loans

approach

between the comparable sales

(30%)

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 8 – Fair Value (continued)

The carrying amounts and estimated fair values of the Company’s financial instruments not previously presented are provided in the table below for the periods ending June 30, 2012 and December 31, 2011. Not all of the Company’s assets and liabilities are considered financial instruments, and therefore are not included in the table. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.

				Fair Value Measurements at
				June 30, 2012 Using
	Carrying Value			Level 1			Level 2			Level 3			Total
Financial Assets:
Cash and Short-term Investments	$	46,868		$	31,537		$	15,331		$	—		$	46,868
Securities Held-to-Maturity		346			—			351			—			351
FHLB Stock and Other Restricted Stock		8,340			N/A			N/A			N/A			N/A
Loans, Net		1,124,483			—			—			1,132,078			1,132,078
Accrued Interest Receivable		7,080			—			2,090			4,990			7,080
Financial Liabilities:
Demand, Savings, and Money Market Deposits		(1,247,770	)		(1,247,770	)		—			—			(1,247,770	)
Time Deposits		(355,470	)		—			(360,808	)		—			(360,808	)
Short-term Borrowings		(62,175	)		—			(62,175	)		—			(62,175	)
Long-term Debt		(80,957	)		—			(58,494	)		(26,598	)		(85,092	)
Accrued Interest Payable		(1,605	)		—			(1,158	)		(447	)		(1,605	)
Unrecognized Financial Instruments:
Commitments to Extend Credit		—			—			—			—			—
Standby Letters of Credit		—			—			—			—			—
Commitments to Sell Loans		—			—			—			—			—

	December 31, 2011
	Carrying			Fair
	Value			Value
Financial Assets:
Cash and Short-term Investments	$	67,089		$	67,089
Securities Held-to-Maturity		690			697
FHLB Stock and Other Restricted Stock		8,340			N/A
Loans, Net		1,100,863			1,111,532
Accrued Interest Receivable		7,793			7,793
Financial Liabilities:
Demand, Savings, and Money Market Deposits		(1,181,919	)		(1,181,919	)
Time Deposits		(374,279	)		(380,584	)
Short-term Borrowings		(40,019	)		(40,019	)
Long-term Debt		(90,974	)		(96,047	)
Accrued Interest Payable		(1,884	)		(1,884	)
Unrecognized Financial Instruments:
Commitments to Extend Credit		—			—
Standby Letters of Credit		—			—
Commitments to Sell Loans		—			—

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 8 – Fair Value (continued)

Cash and Short-Term Investments:

The carrying amount of cash and short-term investments approximate fair values and are classified as Level 1 or Level 2.

Securities Held-to-Maturity:

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

FHLB Stock and Other Restricted Stock:

It is not practical to determine the fair values of FHLB stock and other restricted stock due to restrictions placed on their transferability.

Loans:

Fair values of loans, excluding loans held for sale and collateral dependent impaired loans having a specific allowance allocation, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued as described previously. The methods utilized to estimate fair value of loans do not necessarily represent an exit price.

Accrued Interest Receivable:

The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the asset they are associated with.

Deposits:

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate time deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings:

The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Long-Term Debt:

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Payable:

The carrying amount of accrued interest approximates fair value resulting in a Level 2 or Level 3 classification consistent with the liability they are associated with.

Off-balance Sheet Instruments:

Commitments to extend credit and standby letters of credit are generally short-term or variable rate with minimal fees charged. These instruments have no carrying value, and the fair value is not material. The fair value of commitments to sell loans is the cost or benefit of settling the commitments with the counter-party at the reporting date. At June 30, 2012 and December 31, 2011, none of the Company’s commitments to sell loans were mandatory, and there is no cost or benefit to settle these commitments.

GERMAN AMERICAN BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2012

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

Note 9 – Newly Issued but Not Yet Effective Accounting Pronouncements

In December 2011, the FASB issued new guidance ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This new guidance requires expanded information about financial instruments or derivatives that are either presented on a net basis in the balance sheet or subject to an enforceable master netting arrangement or similar arrangement. The new guidance does not change existing offsetting criteria in U.S. GAAP or the permitted balance sheet presentation for items meeting the criteria. The new disclosure requirements in the ASU are intended to enhance comparability between financial statements prepared using U.S. GAAP and those prepared using IFRS. The Company does not expect this guidance to have a material impact on its consolidated financial statements.

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 financial services holding company based in Jasper, Indiana. The Company’s Common Stock is traded on NASDAQ’s Global Select Market, under the symbol GABC. The principal subsidiary of German American Bancorp, Inc. is its banking subsidiary, German American Bancorp, which operates through 34 retail banking offices in twelve contiguous Southern Indiana counties. German American Bancorp owns a trust, brokerage, and financial planning subsidiary, which operates from its banking offices, and a full line property and casualty insurance agency with seven insurance agency offices throughout its market area.

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 the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term “parent company” or “holding company” when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of June 30, 2012 and December 31, 2011 and the consolidated results of operations for the three and six months ended June 30, 2012 and 2011. 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 December 31, 2011 Annual Report on Form 10-K.

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 December 31, 2011 Annual Report on Form 10-K and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.

During the second quarter and first half of 2012, the Company achieved record levels of earnings. The Company’s second quarter net income totaled $5,967,000, or $0.47 per share, representing an increase of approximately 21% on a per share basis, from the $4,864,000, or $0.39 per share, recorded during the same quarter last year. On a year-to-date basis, 2012 earnings improved to $11,569,000 or $0.92 per share, as compared to $9,509,000, or $0.76 per share for the first six months of 2011 representing an increase of approximately 21% on a per share basis.

The Company’s second quarter and first half of 2012 earnings were positively impacted by a $385,000 or 2% and $1,890,000, or 6%, increase in the level of net interest income as compared to the same periods of 2011. The current year net interest income improvement was largely the result of a higher level of earning assets. Also contributing to the improved level of earnings in the second quarter of 2012 and the first half of 2012 was a lower level of loan loss provision compared with the same periods of 2011.

The Company’s second quarter of 2012 earnings as compared with the second quarter of 2011 were also positively impacted by an increased level of non-interest income driven primarily by a higher level of trust and investment product fees and an increased net gain on the sale of residential mortgage loans. Operating expenses for the second quarter of 2012 remained relatively stable as compared with the second quarter of 2011 increasing by approximately 1%.

The Company’s first half of 2012 earnings as compared with the first half of 2011 were also positively impacted by a lower level of operating expenses. This reduction was largely related to an elevated level of expenses in the first half of 2011 related to the acquisition of American Community Bancorp, Inc. effective January 1, 2011. Somewhat offsetting the positive impact of improved net interest income, a lower level provision for loan losses, and a lower level non-interest expense was a lower level of non-interest revenue. The largest component of the decline was the recognition of a security gain in the first quarter of 2011 related to the acquisition accounting treatment of the existing equity ownership position the Company held in American Community Bancorp, Inc. at the time of acquisition. Also, contributing to the decline in non-interest revenues was a decline in the level of the Company’s contingency revenue generated by its insurance agency subsidiary.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for German American Bancorp, Inc. 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 loan losses, the valuation of securities available for sale, and the valuation allowance on deferred tax assets.

Allowance for Loan Losses

The Company maintains an allowance for loan losses to cover probable incurred credit losses at the balance sheet date. 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 loan 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 loan 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 impaired 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, 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 loan losses deemed adequate to cover losses inherent in 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 graded substandard or 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 collectibility of the loan is in question, or the loan characteristics require special monitoring. Specific allowances are established in cases where management has identified significant conditions or circumstances related to an individual credit that we believe indicates the loan is impaired. Specific allocations on impaired 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 considered individually impaired but for which the rate of loss is expected to be greater than historical averages, including those graded substandard and non-performing consumer or residential real estate loans. Such allocations are based on past loss experience and information about specific borrower situations and estimated collateral values.

General allocations are made for 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 a one-year historical average for loan losses for these portfolios, judgmentally adjusted for economic factors and portfolio trends.

Due to the imprecise nature of estimating the allowance for loan losses, the Company’s allowance for loan losses includes a minor unallocated component. The unallocated component of the allowance for loan losses incorporates the Company’s judgmental determination of inherent losses that may not be fully reflected in other allocations, including factors such as economic uncertainties, lending staff quality, industry trends impacting specific portfolio segments, and broad portfolio quality trends. Therefore, the ratio of allocated to unallocated components within the total allowance may fluctuate from period to period.

Securities Valuation

Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, when securities are deemed to be other than temporarily impaired, a charge will be recorded through earnings; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Company intends to sell or believes it will be required to sell the securities prior to recovery. As of June 30, 2012, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $162,000 and gross unrealized gains totaled approximately $18,708,000. As of June 30, 2012, held-to-maturity securities had a gross unrecognized gain of approximately $5,000.

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.

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 carryback and carryforward 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.

RESULTS OF OPERATIONS

Net Income:

Net income for the quarter ended June 30, 2012 totaled $5,967,000, or $0.47 per share, an increase of $1,103,000 or 23% from the quarter ended June 30, 2011 net income of $4,864,000, or $0.39 per share. The improvement in the second quarter of 2012 earnings from the second quarter of 2011 represented an increase of approximately 21% on a per share basis.

Net income for the six months ended June 30, 2012 totaled $11,569,000, or $0.92 per share, an increase of $2,060,000 or 22% from the six months ended June 30, 2011 net income of $9,509,000, or $0.76 per share. The improvement in the first half of 2012 earnings from the first half of 2011 earnings represented an increase of approximately 21% on a per share basis.

Net Interest Income:

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

The following table summarizes net interest income (on a tax-equivalent basis). For tax-equivalent adjustments, an effective tax rate of 35% was used for all periods presented ⁽¹⁾.

	Average Balance Sheet
	(Tax-equivalent basis / dollars in thousands)
	Three Months Ended June 30, 2012								Three Months Ended June 30, 2011
	Principal			Income /		Yield /			Principal			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Federal Funds Sold and Other Short-term Investments	$	65,760		$	40		0.24	%	$	86,689		$	66		0.30	%
Securities:
Taxable		558,788			3,421		2.45	%		442,883			3,586		3.24	%
Non-taxable		67,796			905		5.34	%		44,155			650		5.89	%
Total Loans and Leases ⁽²⁾		1,121,425			15,579		5.58	%		1,107,014			16,506		5.98	%
Total Interest Earning Assets		1,813,769			19,945		4.42	%		1,680,741			20,808		4.96	%
Other Assets		137,860								137,280
Less: Allowance for Loan Losses		(16,367	)							(14,687	)
Total Assets	$	1,935,262							$	1,803,334

Liabilities and Shareholders’ Equity
Interest-bearing Demand, Savings and Money Market Deposits	$	963,060		$	457		0.19	%	$	881,955		$	1,239		0.56	%
Time Deposits		364,446			1,398		1.54	%		391,181			2,009		2.06	%
FHLB Advances and Other Borrowings		114,932			1,059		3.71	%		114,290			1,009		3.54	%
Total Interest-bearing Liabilities		1,442,438			2,914		0.81	%		1,387,426			4,257		1.23	%
Demand Deposit Accounts		298,580								248,055
Other Liabilities		19,516								13,685
Total Liabilities		1,760,534								1,649,166
Shareholders’ Equity		174,728								154,168
Total Liabilities and Shareholders’ Equity	$	1,935,262							$	1,803,334

Cost of Funds							0.65	%							1.01	%
Net Interest Income				$	17,031							$	16,551
Net Interest Margin							3.77	%							3.95	%

⁽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.

Net interest income increased $385,000 or 2% (an increase of $480,000 or 3% on a tax-equivalent basis) for the quarter ended June 30, 2012 compared with the same quarter of 2011. The increased net interest income during the first quarter of 2012 compared with the first quarter of 2011 was driven by a higher level of earning assets including both modest average loan growth and growth in the securities portfolio which resulted from growth of the Company’s deposit base.

Average earning assets increased by approximately $133.0 million for the three months ended June 30, 2012 compared with the same period of 2011. Average loans outstanding increased $14.4 million during the three months ended June 30, 2012 compared with the second quarter of 2011. Average federal funds sold and other short-term investments decreased by $20.9 million during the second quarter of 2012 compared with the same quarter of 2011. The average securities portfolio increased approximately $139.5 million, or 29%, in the three months ended June 30, 2012 compared with the second quarter of 2011. The key driver of the increased securities portfolio was the decline in the federal funds sold position and an increased level of average core deposits (core deposits defined as demand deposits - both interest and non-interest bearing, savings, money market and time deposits in denominations of less than $100,000). The increase in average core deposits totaled $104.1 million, or approximately 7%, during the second quarter of 2012 compared with the second quarter of 2011.

The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin was 3.77% for the second quarter of 2012 compared to 3.95% during the second quarter of 2011. The yield on earning assets totaled 4.42% during the quarter ended June 30, 2012 compared to 4.96% in the same period of 2011 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.65% during the quarter ended June 30, 2012 compared to 1.01% in the same period of 2011.

The decline in the net interest margin in the second quarter of 2012 compared with the second quarter of 2011 was largely attributable to the continued downward pressure on earning asset yields being driven by a historically low market interest rate environment and a very competitive marketplace for lending opportunities. Accretion of loan discounts on certain acquired loans contributed approximately 18 basis points on an annualized basis to the net interest margin in the quarter ended June 30, 2012 compared to approximately 25 basis points during the second quarter of 2011. The decline in the Company’s cost of funds by approximately 36 basis points during the second quarter of 2012 compared to the second quarter 2011 was driven by a continued decline in deposit rates.

The following table summarizes net interest income (on a tax-equivalent basis). For tax-equivalent adjustments, an effective tax rate of 35% was used for all periods presented ⁽¹⁾.

	Average Balance Sheet
	(Tax-equivalent basis / dollars in thousands)
	Six Months Ended								Six Months Ended
	June 30, 2012								June 30, 2011
	Principal			Income /		Yield /			Principal			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
Assets
Federal Funds Sold and Other Short-term Investments	$	62,950		$	73		0.23	%	$	98,393		$	131		0.27	%
Securities:
Taxable		538,651			6,747		2.50	%		399,509			6,430		3.22	%
Non-taxable		67,328			1,802		5.36	%		41,940			1,218		5.81	%
Total Loans and Leases ⁽²⁾		1,117,706			31,427		5.65	%		1,110,642			32,809		5.95	%
Total Interest Earning Assets		1,786,635			40,049		4.50	%		1,650,484			40,588		4.95	%
Other Assets		138,208								140,575
Less: Allowance for Loan Losses		(16,133	)							(14,230	)
Total Assets	$	1,908,710							$	1,776,829

Liabilities and Shareholders’ Equity
Interest-bearing Demand, Savings and Money Market Deposits	$	940,241		$	983		0.21	%	$	843,662		$	2,505		0.60	%
Time Deposits		364,472			2,918		1.61	%		395,806			4,136		2.11	%
FHLB Advances and Other Borrowings		116,956			2,128		3.66	%		122,588			2,028		3.34	%
Total Interest-bearing Liabilities		1,421,669			6,029		0.85	%		1,362,056			8,669		1.28	%
Demand Deposit Accounts		295,222								245,851
Other Liabilities		19,469								13,814
Total Liabilities		1,736,360								1,621,721
Shareholders’ Equity		172,350								155,108
Total Liabilities and Shareholders’ Equity	$	1,908,710							$	1,776,829

Cost of Funds							0.68	%							1.06	%
Net Interest Income				$	34,020							$	31,919
Net Interest Margin							3.82	%							3.89	%

⁽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.

Net interest income increased $1,890,000 or 6% (an increase of $2,101,000 or 7% on a tax-equivalent basis) for the six months ended June 30, 2012 compared with the same period of 2011. The increased net interest income during the first half of 2012 compared with the first half of 2011 was driven by a higher level of earning assets including both modest average loan growth and growth in the securities portfolio which resulted from growth of the Company’s deposit base.

Average earning assets increased by approximately $136.2 million for the six months ended June 30, 2012 compared with the same period of 2011. Average loans outstanding increased $7.1 million during the six months ended June 30, 2012 compared with the second period of 2011. Average federal funds sold and other short-term investments decreased by $35.4 million during the six months ended June 30, 2012 compared with the same period of 2011. The average securities portfolio increased approximately $164.5 million, or 37%, in the six months ended June 30, 2012 compared with the first half of 2011. The key driver of the increased securities portfolio was the decline in the federal funds sold position and an increased level of average core deposits (core deposits defined as demand deposits - both interest and non-interest bearing, savings, money market and time deposits in denominations of less than $100,000). The increase in average core deposits totaled $120.1 million, or approximately 9%, during the first six months of 2012 compared with the same period of 2011.

The tax equivalent net interest margin was 3.82% for the six months ended June 30, 2012 compared to 3.89% during the same period of 2011. The yield on earning assets totaled 4.50% during the six months ended June 30, 2012 compared to 4.95% in the same period of 2011 while the cost of funds (expressed as a percentage of average earning assets) totaled 0.68% during the six months ended June 30, 2012 compared to 1.06% in the same period of 2011.

As was the case in the quarterly comparison, the decline in the net interest margin in the first half of 2012 compared with the first half of 2011 was largely attributable to the continued downward pressure on earning asset yields being driven by a historically low market interest rate environment and a very competitive marketplace for lending opportunities. Accretion of loan discounts on certain acquired loans contributed approximately 18 basis points on an annualized basis to the net interest margin in the six months ended June 30, 2012 compared to approximately 21 basis points during the same period of 2011. The decline in the Company’s cost of funds by approximately 38 basis points during the first half of 2012 compared to the first half of 2011 was driven by a continued decline in deposit rates.

Provision for Loan Losses:

The Company provides for loan losses through regular provisions to the allowance for loan losses. The provision is affected by net charge-offs on loans and changes in specific and general allocations of the allowance. The provision for loan losses totaled $391,000 during the quarter ended June 30, 2012, a decrease of $909,000 or 70% compared to the provision of $1,300,000 during the quarter ended June 30, 2011. The provision for loan losses totaled $1,081,000 for the six months ended June 30, 2012, a decrease of $1,519,000 or 58% compared to the provision of $2,600,000 during the six months ended June 30, 2011. The decline in the provision for loan losses in the three and six month periods ended June 30, 2012 compared with the same periods of 2011 was attributable to a reduced level of net charge-offs, lower levels of non-performing loans, and a lower level of adversely classified loans.

During the second quarter of 2012, the annualized provision for loan losses represented 0.14% of average loans outstanding compared with 0.47% on an annualized basis of average loans outstanding during the second quarter of 2011. Net charge-offs totaled $464,000 or 0.17% on an annualized basis of average loans outstanding during the three months ended June 30, 2012, compared with $693,000 or 0.25% on an annualized basis of average loans outstanding during the same period of 2011.

During the six months ended June 30, 2012, the annualized provision for loan losses represented 0.19% of average loans outstanding compared with 0.47% on an annualized basis of average loans outstanding during the first half of 2011. Net charge-offs totaled $700,000 or 0.13% on an annualized basis of average loans outstanding during the six months ended June 30, 2012, compared with $1,137,000 or 0.20% on an annualized basis of average loans outstanding during the same period of 2011.

The provision for loan losses made during the three and six months ended June 30, 2012 was made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provision for loan 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 other factors.

Non-interest Income:

During the quarter ended June 30, 2012, non-interest income totaled $4,833,000, an increase of $471,000 or 11% compared with the second quarter of 2011.

					Change from
Non-interest Income	Three Months				Prior Period
(dollars in thousands)	Ended June 30,				Amount			Percent
	2012		2011		Change			Change
Trust and Investment Product Fees	$	664	$	495	$	169			34	%
Service Charges on Deposit Accounts		1,017		1,074		(57	)		(5	)
Insurance Revenues		1,358		1,290		68			5
Company Owned Life Insurance		266		250		16			6
Interchange Fee Income		460		378		82			22
Other Operating Income		316		496		(180	)		(36	)
Subtotal		4,081		3,983		98			2
Net Gains on Sales of Loans		676		379		297			78
Net Gains on Securities		76		—		76			n/m
Total Non-interest Income	$	4,833	$	4,362	$	471			11

n/m = not meaningful

Trust and investment product fees increased $169,000, or 34%, during the three months ended June 30, 2012 compared with the same period of 2011. The increase was primarily attributable to an increased level of trust revenues generated by a significant expansion of trust assets under management during the past several quarters. Other operating income decreased $180,000 or 36% during the quarter ended June 30, 2012 compared with the second quarter of 2011. The decline was primarily related to a net loss on the sale of other real estate during the quarter ended June 30, 2012 compared with a net gain on sale of other real estate during second quarter of 2011.

Net gains on sales of loans increased $297,000, or 78%, during the second quarter of 2012 compared with the second quarter of 2011. Loan sales totaled $36.3 million during the second quarter of 2012 compared with $16.9 million during the second quarter of 2011.

During the six months ended June 30, 2012, non-interest income totaled $9,634,000, a decrease of $742,000 or 7% compared with the first six months of 2011.

					Change from
Non-interest Income	Six Months				Prior Period
(dollars in thousands)	Ended June 30,				Amount			Percent
	2012		2011		Change			Change
Trust and Investment Product Fees	$	1,360	$	959	$	401			42	%
Service Charges on Deposit Accounts		1,952		2,015		(63	)		(3	)
Insurance Revenues		2,749		3,339		(590	)		(18	)
Company Owned Life Insurance		510		603		(93	)		(15	)
Interchange Fee Income		891		731		160			22
Other Operating Income		689		896		(207	)		(23	)
Subtotal		8,151		8,543		(392	)		(5	)
Net Gains on Sales of Loans		1,389		788		601			76
Net Gains on Securities		94		1,045		(951	)		(91	)
Total Non-interest Income	$	9,634	$	10,376	$	(742	)		(7	)

Trust and investment product fees increased 42% during the six months ended June 30, 2012 compared with the same period of 2011. The increase was primarily attributable to increased trust revenues supplemented by increased retail brokerage revenues. Insurance revenues decreased approximately 18% during the six months ended June 30, 2012 as compared to the first half of 2011 as a result of lower contingency revenue. Contingency revenue totaled $88,000 during the six months ended June 30, 2012 compared with contingency revenue of $872,000 in the first half of 2011. The fluctuation in contingency revenue during 2012 and 2011 is a normal course of business type of variance and is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency.

Net interchange revenues related to debit cards increased approximately 22% during the first half of 2012 compared with the six months ended June 30, 2011 primarily due to increased customer utilization. Other operating income decreased 23% during the six months ended June 30, 2012 compared with the same period of 2011. The decline was primarily related to net a net loss on the sale of other real estate during the six months ended June 30, 2012 compared with a net gain on sale of other real estate during first half of 2011.

Net gains on sales of loans increased $601,000, or 76%, during the six months ended June 30, 2012 compared with the same period of 2011. Loan sales totaled $90.4 million during the six months ended June 30, 2012 compared with $53.3 million during the same period of 2011. The net gain on securities declined $951,000, or 91%, during the first half of 2012 compared with the first six months of 2011. The Company realized a net gain on securities of $1,045,000 during the first half of 2011 related to the acquisition accounting treatment of the existing equity ownership position the Company held in American Community at the time of acquisition.

Non-interest Expense:

During the quarter ended June 30, 2012, non-interest expense totaled $12,423,000, an increase of $152,000 or 1% compared with the second quarter of 2011.

					Change from
Non-interest Expense	Three Months				Prior Period
(dollars in thousands)	Ended June 30,				Amount			Percent
	2012		2011		Change			Change
Salaries and Employee Benefits	$	6,828	$	6,722	$	106			2	%
Occupancy, Furniture and Equipment Expense		1,785		1,841		(56	)		(3	)
FDIC Premiums		283		382		(99	)		(26	)
Data Processing Fees		321		395		(74	)		(19	)
Professional Fees		587		499		88			18
Advertising and Promotion		396		314		82			26
Intangible Amortization		423		498		(75	)		(15	)
Other Operating Expenses		1,800		1,620		180			11
Total Non-interest Expense	$	12,423	$	12,271	$	152			1

Salaries and employee benefits increased 2% during the quarter ended June 30, 2012 compared with the second quarter of 2011. The increase was largely related to a modestly increased level of full-time equivalent employees. The Company’s FDIC deposit insurance assessments decreased 26% during the second quarter of 2012 compared with second quarter of 2011 largely due to FDIC premium expense adjustments related to the Bank of Evansville acquisition recorded during the second quarter of 2011.

Data processing fees declined 19% during the quarter ended June 30, 2012 compared the second quarter of 2011. The decline was largely related to running the Company’s existing core processing system and the Bank of Evansville’s core processing system during the second quarter of 2011. The customers of the Bank of Evansville were moved to the Company’s core processing system during April 2011. Other operating expenses increased approximately 11% during the quarter ended June 30, 2012 compared with the second quarter of 2011 largely due to an increased level of loan expenses associated with a higher level of residential mortgage loan originations.

During the six months ended June 30, 2012, non-interest expense totaled $25,016,000, a decrease of $1,125,000 or 4% compared with the first six months of 2011.

					Change from
Non-interest Expense	Six Months				Prior Period
(dollars in thousands)	Ended June 30,				Amount			Percent
	2012		2011		Change			Change
Salaries and Employee Benefits	$	14,148	$	14,123	$	25			n/m
Occupancy, Furniture and Equipment Expense		3,557		3,696		(139	)		(4	)%
FDIC Premiums		580		896		(316	)		(35	)
Data Processing Fees		435		1,500		(1,065	)		(71	)
Professional Fees		1,192		1,104		88			8
Advertising and Promotion		769		617		152			25
Intangible Amortization		865		1,015		(150	)		(15	)
Other Operating Expenses		3,470		3,190		280			9
Total Non-interest Expense	$	25,016	$	26,141	$	(1,125	)		(4	)

n/m = not meaningful

The Company’s FDIC deposit insurance assessments decreased 35% during the six months ended June 30, 2012 compared with same period of 2011. This decline was attributable to changes in the deposit insurance assessment calculation which became effective in the second quarter of 2011 related to the Dodd Frank Act.

Data processing fees declined $1,065,000, or 71%, during the six months ended June 30, 2012 compared the first six months of 2011. The decline was largely related to running the Company’s existing core processing system and the Bank of Evansville’s core processing system during the first four months of 2011 and the resolution of a contractual dispute during the first quarter of 2012 related to the acquisition of American Community Bancorp and its banking subsidiary the Bank of Evansville. An expense for the cancellation of a data processing contract was recorded in the first quarter of 2011, and upon resolution of the contractual dispute, a portion of that accrued expense was reversed in the first quarter of 2012. The customers of the Bank of Evansville were moved to the Company’s core processing system during April 2011. Other operating expenses increased approximately 9% during the six months ended June 30, 2012 compared with the same period of 2011 largely due to an increased level of loan expenses associated with a higher level of residential mortgage loan originations.

Income Taxes:

The Company’s effective income tax rate was 31.2% and 31.1% during the three months ended June 30, 2012 and 2011. The Company’s effective income tax rate approximated 31.1% and 26.9% during the six months ended June 30, 2012 and 2011. The effective tax rate in all periods presented was lower than the blended statutory rate of 40.5% resulting primarily from the Company’s tax-exempt investment income on securities, loans and company owned life insurance, income tax credits generated from investments in a new markets tax credit project, and income generated by subsidiaries domiciled in a state with no state or local income tax. Further lowering the effective tax rate during the first half of 2011 was the non-taxability of the $1.045 million gain on securities related to the acquisition accounting treatment of the existing equity ownership position the Company held in American Community at the time of acquisition.

FINANCIAL CONDITION

Total assets at June 30, 2012 increased $70.0 million to $1.944 billion compared with $1.874 billion in total assets at December 31, 2011. Securities available-for-sale increased $128.1 million to $644.9 million at June 30, 2012 compared with $516.8 million at year-end 2011. This increase was primarily the result of the re-investment of funds early during the first quarter of 2012 following a security sale transaction late in the fourth quarter of 2011 and deposit growth during the first half of 2012.

Total loans outstanding increased $23.5 million, or approximately 4% on an annualized basis, at June 30, 2012 compared with year-end 2011. The increase in loans was the result of increases in commercial and industrial loans and commercial real estate loans driven in large part to the Company’s entrance into a new lending market during the second quarter of 2012.

End of Period Loan Balances:					Current
(dollars in thousands)	June 30,		December 31,		Period
	2012		2011		Change

Commercial & Industrial Loans	$	323,618	$	293,172	$	30,446
Commercial Real Estate Loans		460,052		452,071		7,981
Agricultural Loans		158,463		167,693		(9,230	)
Home Equity & Consumer Loans		116,049		124,479		(8,430	)
Residential Mortgage Loans		88,859		86,134		2,725
Total Loans	$	1,147,041	$	1,123,549	$	23,492

The Company’s allowance for loan losses totaled $15.7 million at June 30, 2012 representing an increase of $380,000 or 5% on an annualized basis from year end 2011. The allowance for loan losses represented 1.37% of period end loans at both June 30, 2012 and year-end 2011. Under acquisition accounting treatment, loans acquired are recorded at fair value which includes a credit risk component, and therefore the allowance on loans acquired is not carried over from the seller. As of June 30, 2012, the Company held a discount on acquired loans of $4.7 million.

Total deposits increased $47.0 million or approximately 6% on an annualized basis, as of June 30, 2012 compared with year-end 2011 total deposits.

End of Period Deposit Balances:					Current
(dollars in thousands)	June 30,		December 31,		Period
	2012		2011		Change

Non-interest-bearing Demand Deposits	$	303,040	$	282,335	$	20,705
Interest-bearing Demand, Savings,
& Money Market Accounts		944,730		899,584		45,146
Time Deposits < $100,000		259,350		273,663		(14,313	)
Time Deposits of $100,000 or more
& Brokered Deposits		96,120		100,616		(4,496	)
Total Deposits	$	1,603,240	$	1,556,198	$	47,042

The following is an analysis of the Company’s non-performing assets at June 30, 2012 and December 31, 2011:

Non-performing Assets:
(dollars in thousands)
	June 30,			December 31,
	2012			2011
Non-accrual Loans	$	13,398		$	17,857
Past Due Loans (90 days or more and still accruing)		99			—
Restructured Loans		386			409
Total Non-performing Loans		13,883			18,266
Other Real Estate		4,250			2,343
Total Non-performing Assets	$	18,133		$	20,609

Non-performing Loans to Total Loans		1.21	%		1.63	%
Allowance for Loan Loss to Non-performing Loans		113.03	%		83.83	%

Non-performing assets totaled $18.1 million at June 30, 2012 compared to $20.6 million of non-performing assets at December 31, 2011. Non-performing assets represented 0.93% of total assets at June 30, 2012 compared to 1.10% of total assets at year end 2011. Non-performing loans totaled $13.9 million at June 30, 2012 compared to $18.3 million at year end 2011. Non-performing loans represented 1.21% of total loans at June 30, 2012 compared with 1.63% of total outstanding loans at year end 2011. The reduction in non-performing loans during the first half of 2012 was spread across multiple credit relationships.

Capital Resources:

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 such as loan commitments and standby letters of credit.

Tier 1, or core capital, consists of shareholders’ equity plus certain amounts of instruments commonly referred to as trust preferred securities, less goodwill, core deposit intangibles, other identifiable intangibles and certain deferred tax assets defined by bank regulations. Tier 2 capital currently consists of the amount of the allowance for loan losses which does not exceed a defined maximum allowance limit of 1.25 percent of gross risk adjusted assets and certain amounts of subordinated debenture obligations. Total capital is the sum of Tier 1 and Tier 2 capital.

The minimum requirements under these standards are generally at least a 4.0 percent leverage ratio, which is Tier 1 capital divided by defined “total assets”; 4.0 percent Tier 1 capital to risk-adjusted assets; and, an 8.0 percent total capital to risk-adjusted assets ratios. Under these guidelines, the Company, on a consolidated basis, and its subsidiary bank, have capital ratios that exceed the regulatory minimums.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires federal regulatory agencies to define capital tiers. These are: well-capitalized, adequately-capitalized, under-capitalized, significantly under-capitalized, and critically under-capitalized. Under these regulations, a “well-capitalized” entity must achieve a Tier 1 risk-based capital ratio of at least 6.0 percent; a total capital ratio of at least 10.0 percent; and, a leverage ratio of at least 5.0 percent, and not be under a capital directive. The Company’s subsidiary bank was categorized as well-capitalized as of June 30, 2012.

At June 30, 2012, management was not under such a capital directive, nor was it aware of any current recommendations by banking regulatory authorities which, if they were to be implemented, would have or are reasonably likely to have, a material effect on the Company’s liquidity, capital resources or operations.

The table below presents the Company’s consolidated capital ratios under regulatory guidelines:

	Minimum for
	Capital			At			At
	Adequacy			June 30,			December 31,
	Purposes			2012			2011

Leverage Ratio		4.00	%		7.82	%		7.46	%
Tier 1 Capital to Risk-adjusted Assets		4.00	%		11.27	%		10.58	%
Total Capital to Risk-adjusted Assets		8.00	%		14.08	%		13.52	%

As of June 30, 2012, shareholders’ equity increased by $9.6 million to $177.2 million compared with $167.6 million at year-end 2011. The increase in shareholders’ equity was primarily attributable to an increase of $8.0 million in retained earnings and an increase of $1.2 million in accumulated other comprehensive income related to an increase in net unrealized gains in the Company’s securities available-for-sale portfolio. Shareholders’ equity represented 9.1% of total assets at June 30, 2012 and 8.9% of total assets at December 31, 2011. Shareholders’ equity included $22.3 million of goodwill and other intangible assets at June 30, 2012 compared to $23.2 million of goodwill and other intangible assets at December 31, 2011.

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 decreased $18.0 million during the six months ended June 30, 2012 ending at $43.2 million. During the six months ended June 30, 2012, operating activities resulted in net cash inflows of $35.8 million. Investing activities resulted in net cash outflows of $109.4 million during the six months ended June 30, 2012 primarily related to the purchase of available for sale securities. Financing activities resulted in net cash inflows for the six months ended June 30, 2012 of $55.7 million primarily the result of increased deposits.

The parent company is a corporation separate and distinct from its bank and other subsidiaries. The Company uses funds at the parent company level to pay dividends to its shareholders, to acquire or make other investments in other businesses or their securities or assets, to repurchase its stock from time to time, and for other general corporate purposes including debt service. The parent company does not have access at the parent-company level to the deposits and certain other sources of funds that are available to its bank subsidiary to support its operations. Instead, the parent company has historically derived most of its revenues from dividends paid to the parent company by its bank subsidiary. The Company’s banking subsidiary is subject to statutory restrictions on its ability to pay dividends to the parent company. The parent company has in recent years supplemented the dividends received from its subsidiaries with borrowings. As of June 30, 2012, the parent company had approximately $21.5 million of cash and cash equivalents available to meet its cash flow needs.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

The Company from time to time in its oral and written communications makes statements relating to its expectations regarding the future. These types of statements are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Company may include forward-looking statements in filings with the Securities and Exchange Commission (“SEC”), such as this Form 10-Q, in other written materials, and in oral statements made by senior management to analysts, investors, representatives of the media, and others. Such forward looking statements can include statements about the Company’s net interest income or net interest margin; its adequacy of allowance for loan losses, levels of provisions for loan losses, and the quality of the Company’s loans 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 “expect,” “may,” “will,” “would,” “could,” “should,” “intend,” “project,” “estimate,” “believe” or “anticipate,” or similar expressions.

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

Readers are cautioned that, by their nature, all forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially and adversely from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussions in this Item 2 list some of the factors that could cause the Company's actual results to vary materially from those expressed or implied by any forward-looking statements. Other risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates; changes in competitive conditions; the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies; changes in customer borrowing, repayment, investment and deposit practices; changes in fiscal, monetary and tax policies; changes in financial and capital markets; deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration; 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 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; 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; 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 and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms; 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, 2011, and other SEC filings from time to time, when considering any forward-looking statement.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

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

NPV represents the market value of portfolio equity and is equal to the estimated market value of assets minus the estimated market value of liabilities. Computations 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 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 table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment.

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

		Interest Rate Sensitivity as of June 30, 2012

							Net Portfolio Value
		Net Portfolio					as a % of Present Value
		Value					of Assets
Changes
in rates		Amount		% Change			NPV Ratio			Change
	+2%	$	158,658		(16.60	)%		8.50	%		(125)b.p.
	Base		190,228		—			9.75	%		—
	-2%		150,491		(20.89	)%		7.65	%		(210)b.p.

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

Item 4. Controls and Procedures

As of June 30, 2012, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based on this evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were as of that date effective in timely alerting them to material information required to be included in the Company's periodic reports filed with the Securities and Exchange Commission. There are inherent limitations to the effectiveness of systems of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of disclosure controls and procedures can provide only reasonable assurances of achieving their control objectives.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s second fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

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

(e) The following table sets forth information regarding the Company's purchases of its common shares during each of the three months ended June 30, 2012.

	Total						Maximum Number
	Number				Total Number of Shares		(or Approximate Dollar
	Of Shares		Average Price		(or Units) Purchased as Part		Value) of Shares (or Units)
	(or Units)		Paid Per Share		of Publicly Announced Plans		that May Yet Be Purchased
Period	Purchased		(or Unit)		or Programs		under the Plans or Programs⁽¹⁾
4/1/12 – 4/30/12		—		—		—		272,789
5/1/12 – 5/31/12		—		—		—		272,789
6/1/12 – 6/30/12		—		—		—		272,789
		—		—		—

⁽¹⁾ On April 26, 2001, the Company announced that its Board of Directors had approved a stock repurchase program for up to 607,754 of its outstanding common shares, of which the Company had purchased 334,965 common shares through June 30, 2012 (both such numbers adjusted for subsequent stock dividends). The Board of Directors established no expiration date for this program. The Company purchased no shares under this program during the three months ended June 30, 2012.

Item 6. Exhibits

The exhibits described by the Exhibit Index immediately following the Signature Page of this Report are incorporated herein by reference.

SIGNATURES

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


		GERMAN AMERICAN BANCORP, INC.

Date:	August 3, 2012	By/s/Mark A. Schroeder
		Mark A. Schroeder
		Chairman of the Board and Chief Executive Officer

Date:	August 3, 2012	By/s/Bradley M. Rust
		Bradley M. Rust
		Executive Vice President and Chief Financial Officer

INDEX OF EXHIBITS

Exhibit No.	Description
10.1	The Registrant’s 1992 Stock Option Plan, as amended prior to 2012, is incorporated by reference from Exhibit 10.1 to the Registrant’s Registration Statement on Form S-4 filed October 14, 1998.
10.2	Amendment to 1992 Stock Option Plan effective April 1, 2012.
10.3	Description of Director Compensation Arrangements for the 12 month period ending at 2013 Annual Reorganization Meeting of the Board of Directors is incorporated by reference from the description included in Exhibit 5.02 of the Registrant’s Current Report on Form 8-K filed June 29, 2012.
10.4	Description of special bonus paid to Kenneth Sendelweck in June 2012, is incorporated by reference from the description included in Exhibit 5.02 of the Registrant’s Current Report on Form 8-K filed June 4, 2012.
31.1	Sarbanes-Oxley Act of 2002, Section 302 Certification for Chairman of the Board and Chief Executive Officer.
31.2	Sarbanes-Oxley Act of 2002, Section 302 Certification for Executive Vice President and Chief Financial Officer.
32.1	Sarbanes-Oxley Act of 2002, Section 906 Certification for Chairman of the Board and Chief Executive Officer.
32.2	Sarbanes-Oxley Act of 2002, Section 906 Certification for Executive Vice President and Chief Financial Officer.
101*+	The following materials from German American Bancorp, Inc.’s Form 10-Q Report for the quarterly period ended June 30, 2012, formatted in XBRL: (i) the Consolidated Balance Sheet, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statement of Cash Flows, and (iv) the Notes to Consolidated Financial Statements.

*Exhibits that are furnished, not filed.

+ Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are furnished and not deemed filed or part of a registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933, as amended, and are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.