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.

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, 2017, 2016, and 2015, were classified as follows:



	2017		2016		2015

Beginning of Year	$	54,058	$	20,536	$	20,536
Acquired Goodwill	—		33,522		—
Impairment	—		—		—
End of Year	$	54,058	$	54,058	$	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, 2017 and 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.

Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. At December 31, 2017, 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:	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	)



Acquired intangible assets were as follows as of year end:	2016
	Gross Amount		Accumulated Amortization
Core Banking
Core Deposit Intangible	$	11,617	$	(8,782	)
Branch Acquisition Intangible	257		(257		)
Insurance
Customer List	5,199		(5,199		)
Total	$	17,073	$	(14,238	)

Amortization Expense was $942, $1,062 and $790, for 2017, 2016 and 2015.

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



2018	$	753
2019	564
2020	383
2021	229
2022	114