Business Combinations, Goodwill and Intangible Assets

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.

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2015 after giving effect to certain adjustments. The unaudited pro forma information for the years ended December 31, 2016 and 2015 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.



	Pro Forma Year Ended 12/31/2016		Pro Forma Year Ended 12/31/2015

Net Interest Income	$	97,796	$	96,269
Non-interest Income	32,655		32,042
Total Revenue	130,451		128,311
Provision for Loan Losses Expense	1,200		—
Non-interest Expense	74,231		76,415
Income Before Income Taxes	55,020		51,896
Income Tax Expense	16,089		14,029
Net Income	38,931		37,867
Earnings Per Share and Diluted Earnings Per Share	$	2.55	$	2.49

The above pro forma financial information includes approximately $5,344 of net income and $18,527 of total revenue related to the operations of River Valley during the year ended 2016. The above pro forma financial information related to 2016 excludes non-recurring merger costs that totaled $4,318 on a pre-tax basis for the year ended December 31, 2016. The above pro forma financial information excludes the River Valley provision for loan loss recognized during the year ended 2016. Under acquisition accounting treatment, loans are recorded at fair value which includes a credit risk component, and therefore the provision for loan loss recognized during the year ended December 31, 2015 was presumed to not be necessary.

Goodwill

The changes in the carrying amount of goodwill for the periods ended December 31, 2016, 2015, and 2014, were classified as follows:



	2016		2015		2014

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

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 period ended December 31, 2016. Of the $20,536 carrying amount of goodwill, $19,204 is allocated to the core banking segment, and $1,332 is allocated to the insurance segment for the periods ended December 31, 2015 and 2014.

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2016, 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:	2016
	Gross Amount		Accumulated Amortization
Core Banking
Core Deposit Intangible	$	11,617	$	8,782
Unidentified Branch Acquisition Intangible	257		257
Insurance
Customer List	5,199		5,199
Total	$	17,073	$	14,238



Acquired intangible assets were as follows as of year end:	2015
	Gross Amount		Accumulated Amortization
Core Banking
Core Deposit Intangible	$	9,004	$	7,748
Unidentified Branch Acquisition Intangible	257		257
Insurance
Customer List	5,199		5,171
Total	$	14,460	$	13,176

Amortization Expense was $1,062, $790 and $1,254, for 2016, 2015 and 2014.

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



2017	$	912
2018	723
2019	534
2020	353
2021	199