Business Combinations, Goodwill and Intangible Assets

Business Combination

Effective October 15, 2018, the Company acquired First Security, Inc. ("First Security") and its subsidiary, First Security Bank, Inc., pursuant to an Agreement and Plan of Reorganization dated May 22, 2018. The acquisition was accomplished by the merger of First Security with and into the Company, immediately followed by the merger of First Security Bank with and into the Company's bank subsidiary, German American Bank. First Security Bank operated 11 banking offices in Owensboro, Bowling Green, Franklin and Lexington, Kentucky and in Evansville and Newburgh, Indiana. First Security's consolidated assets and equity (unaudited) as of October 14, 2018 totaled $563.0 million and $58.3 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value estimates included in these financial statements are based on preliminary valuations; certain loan and premises and equipment measurements have not been finalized and are subject to change. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed prior to September 30, 2019.

In accordance with ASC 805, the Company has expensed approximately $3.8 million of direct acquisition costs and recorded $42.8 million of goodwill and $6.1 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $42.8 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as a part of the First Security acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.



Consideration
Cash for Options and Fractional Shares	$	132
Cash Consideration	31,039
Equity Instruments	64,898

Fair Value of Total Consideration Transferred	$	96,069

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash	$	13,605
Interest-bearing Time Deposits with Banks	250
Securities	109,580
Loans	390,106
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost	2,607
Premises, Furniture & Equipment	11,149
Other Real Estate	468
Intangible Assets	6,139
Company Owned Life Insurance	13,135
Accrued Interest Receivable and Other Assets	6,126
Deposits - Non-interest Bearing	(66,112		)
Deposits - Interest Bearing	(358,285		)
FHLB Advances and Other Borrowings	(73,275		)
Accrued Interest Payable and Other Liabilities	(2,200		)

Total Identifiable Net Assets	$	53,293

Goodwill	$	42,776

Under the terms of the merger agreement, the Company issued approximately 1,988,000 shares of its common stock to the former shareholders of First Security. Each First Security common shareholder of record at the effective time of the merger (other than those holding shares in the First Security, Inc. 401k and Employee Stock Ownership Plan (the "First Security KSOP")) became entitled to receive 0.7982 shares of common stock of the Company for each of their former shares of First Security common stock.

In connection with the closing of the merger, the Company paid to First Security's shareholders of record at the close of business on October 14, 2018, cash consideration of $12.00 per First Security share, other than First Security KSOP shares (an aggregate of $29,886 to shareholders), and cash consideration of $40.00 per First Security KSOP share (an aggregate of $1,153), and the Company paid approximately $124 to persons who held options to purchase First Security common stock (all of which rights were canceled at the effective time of the merger and were not assumed by the Company).

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

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which are loans that have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value of $382.4 million and unpaid principal of $385.4 million on the date of acquisition.

Branch Acquisition

On May 18, 2018, German American Bank completed the acquisition of five branch locations of First Financial Bancorp (formerly branch locations of Mainsource Financial Group, Inc. prior to its merger with First Financial Bancorp on April 1, 2018) and certain related assets, and the assumption by German American Bank of certain related liabilities. Four of the branches are located in Columbus, Indiana, and one in Greensburg, Indiana. At the time of closing, German American Bank acquired approximately $175.7 million in deposits and approximately $116.3 million in loans associated with the five bank branches. The premium paid on deposits by German American Bank was approximately $7.4 million. The premium was subject to adjustment to reflect increases or decreases in the deposit balances during the six month period following the closing date. In January 2019, an adjustment of approximately $0.1 million in additional premium was paid by German American Bank as a result of the change in deposits during the six month measurement period. German American Bank also had the ability, under certain circumstances, to put loans back to First Financial Bancorp’s bank subsidiary during such six month period. During the fourth quarter of 2018, approximately $1.3 million of loans were put back by German American Bank. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value estimates included in these financial statements are based on preliminary valuations; deposit measurements have not been finalized and are subject to change. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed prior to March 31, 2019.

This branch acquisition was consistent with the Company's strategy to continue building its regional presence in Southern Indiana. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region.

In accordance with ASC 805, the Company has expensed approximately $691 of direct acquisition costs and recorded $6.8 million of goodwill and $3.5 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $6.8 million is tax deductible and will be amortized over 15 years. The following table summarizes the fair value of the total cash received as part of the branch acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.



Total Cash Received from First Financial	$	41,944

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash	$	756
Loans	116,305
Premises, Furniture & Equipment	5,666
Intangible Assets	3,475
Accrued Interest Receivable and Other Assets	780
Deposits - Non-interest Bearing	(39,607		)
Deposits - Interest Bearing	(136,096		)
Accrued Interest Payable and Other Liabilities	(70		)

Total Identifiable Net Assets	$	(48,791	)

Goodwill	$	6,847

Business Combination

Effective March 1, 2016, the Company acquired River Valley Bancorp ("River Valley") and its subsidiaries, including River Valley Financial Bank, pursuant to an Agreement and Plan of Reorganization dated October 26, 2015. The acquisition was accomplished by the merger of River Valley with and into the Company, immediately followed by the merger of River Valley Financial Bank with and into the Company's bank subsidiary, German American Bancorp. River Valley Financial Bank operated 14 banking offices in Southeast Indiana and 1 banking office in Northern Kentucky. River Valley's consolidated assets and equity (unaudited) as of February 29, 2016 totaled $516.3 million and $56.6 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.

In accordance with ASC 805, the Company has expensed approximately $4.3 million of direct acquisition costs and recorded $33.5 million of goodwill and $2.6 million of intangible assets. The intangible assets are related to core deposits and are being amortized over 8 years. For tax purposes, goodwill totaling $33.5 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as a part of the River Valley acquisition as well as the fair value of identifiable assets acquired and liabilities assumed as of the effective date of the transaction.



Consideration
Cash for Options and Fractional Shares	$	395
Cash Consideration	24,975
Equity Instruments	62,022

Fair Value of Total Consideration Transferred	$	87,392

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash	$	17,877
Federal Funds Sold and Other Short-term Investments	6,477
Interest-bearing Time Deposits with Banks	992
Securities	132,396
Loans	317,760
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost	3,127
Premises, Furniture & Equipment	9,650
Other Real Estate	882
Intangible Assets	2,613
Company Owned Life Insurance	12,842
Accrued Interest Receivable and Other Assets	9,139
Deposits - Non-interest Bearing	(9,584		)
Deposits - Interest Bearing	(395,862		)
FHLB Advances and Other Borrowings	(49,910		)
Accrued Interest Payable and Other Liabilities	(4,529		)

Total Identifiable Net Assets	$	53,870

Goodwill	$	33,522

Under the terms of the merger agreement, the Company issued approximately 1,942,000 shares of its common stock to the former shareholders of River Valley. Each River Valley common shareholder of record at the effective time of the merger became entitled to receive 0.770 shares of common stock of the Company for each of their former shares of River Valley common stock.

In connection with the closing of the merger, the Company paid to River Valley's shareholders of record at the close of business on February 29, 2016, cash consideration of $9.90 per River Valley share (an aggregate of $24,975 to shareholders) and the Company paid approximately $395 to persons who held options to purchase River Valley common stock (all of which rights were canceled at the effective time of the merger and were not assumed by the Company).

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

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which are loans that have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value of $309.0 million and unpaid principal of $316.4 million on the date of acquisition.

Business Combination

On January 1, 2017, the Company acquired certain assets of an existing insurance agency office located in Madison, Indiana. The assets became a part of German American Insurance, Inc., the Company's property and casualty insurance entity.

The purchase price of this transaction was $209 in cash and resulted in $209 in customer list intangible. The customer relationship intangible is being amortized over seven years utilizing the straight-line method and deducted for tax purposes over 15 years using the straight-line method.

Goodwill

The changes in the carrying amount of goodwill for the periods ended December 31, 2018, 2017, and 2016, were classified as follows:



	2018		2017		2016

Beginning of Year	$	54,058	$	54,058	$	20,536
Acquired Goodwill	49,623		—		33,522
Impairment	—		—		—
End of Year	$	103,681	$	54,058	$	54,058

Of the $103,681 carrying amount of goodwill, $102,349 is allocated to the core banking segment, and $1,332 is allocated to the insurance segment for the period ended December 31, 2018. Of the $54,058 carrying amount of goodwill, $52,726 is allocated to the core banking segment, and $1,332 is allocated to the insurance segment for the periods ended December 31, 2017 and 2016.

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2018, the Company’s reporting units had positive equity, and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting units exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.

Acquired Intangible Assets



Acquired intangible assets were as follows as of year end:	2018
	Gross Amount		Accumulated Amortization
Core Banking
Core Deposit Intangible	$	21,231	$	(11,418	)
Branch Acquisition Intangible	257		(257		)
Insurance
Customer List	5,408		(5,259		)
Total	$	26,896	$	(16,934	)



Acquired intangible assets were as follows as of year end:	2017
	Gross Amount		Accumulated Amortization
Core Banking
Core Deposit Intangible	$	11,617	$	(9,694	)
Branch Acquisition Intangible	257		(257		)
Insurance
Customer List	5,408		(5,229		)
Total	$	17,282	$	(15,180	)

Amortization Expense was $1,752, $942 and $1,062, for 2018, 2017 and 2016.

Estimated amortization expense for each of the next five years is as follows:



2019	$	3,125
2020	2,472
2021	1,846
2022	1,259
2023	774