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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



(Mark One)

       [X]     Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
                 For the Quarterly Period Ended March 31, 2003.

Or

       [   ]     Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                 for the Transition Period from ______________ to ______________.

Commission File Number:  0-11244


German American Bancorp
(Exact name of registrant as specified in its charter)

INDIANA 35-1547518
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer 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 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
      Yes [X]      No [   ]

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 May 1, 2003
Common Stock, No par value 10,417,218




– 1 –

GERMAN AMERICAN BANCORP

INDEX

PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements

  Consolidated Balance Sheets – March 31, 2003 and December 31, 2002

  Consolidated Statements of Income and Comprehensive Income — Three months Ended March 31, 2003 and 2002

  Consolidated Statements of Cash Flows — Three months EndedMarch 31, 2003 and 2002

  Notes to Consolidated Financial Statements -- March 31, 2003

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

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

Item 4.    Controls and Procedures.


PART II.    OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

SIGNATURES

PRINCIPAL EXECUTIVE OFFICER CERTIFICATION

PRINCIPAL FINANCIAL OFFICER CERTIFICATION




- - 2 -

PART 1.    FINANCIAL INFORMATION
ITEM 1.    Financial Statements

GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS

(dollars in thousands except per share data)


March 31,
2003
December 31,
2002
(unaudited)
ASSETS            
Cash and Due from Banks   $ 29,088   $ 27,627  
Federal Funds Sold and Other Short-term Investments    27,661  8,118


     Cash and Cash Equivalents    56,749    35,745  
 
Securities Available-for-Sale, at Fair Value    201,606    223,848  
Securities Held-to-Maturity, at Cost    19,629    20,833  
 
Loans Held for Sale    9,418    13,138  
 
Total Loans    600,178    612,175  
Less:   Unearned Income    (1,472 )  (1,434 )
            Allowance for Loan Losses    (8,428 )  (8,301 )


Loans, Net    590,278    602,440  
 
Stock in FHLB of Indianapolis and Other Restricted Stock, at cost    12,462    12,462  
Premises, Furniture and Equipment, Net    22,419    21,966  
Other Real Estate    1,451    1,812  
Goodwill    1,794    1,794  
Intangible Assets    435    458  
Accrued Interest Receivable and Other Assets    22,026    22,509  


 
        TOTAL ASSETS   $ 938,267   $ 957,005  


 
LIABILITIES  
Noninterest-bearing Demand Deposits   $ 100,685   $ 95,655  
Interest-bearing Demand, Savings, and Money Market Accounts    244,332    243,202  
Time Deposits < $100,000    301,545    311,489  
Time Deposits $100,000 or more and Brokered Deposits    57,369    56,848  


     Total Deposits    703,931    707,194  
 
FHLB Advances and Other Borrowings    138,339    132,319  
Accrued Interest Payable and Other Liabilities    12,494    12,973  


       TOTAL LIABILITIES    854,764    852,486  
 
SHAREHOLDERS' EQUITY  
Common Stock, no par value, $1 stated value;  
     20,000,000 shares authorized    10,416    11,461  
Preferred Stock, $10 par value; 500,000  
     shares authorized, no shares issued    ---    ---  
Additional Paid-in Capital    58,864    78,836  
Retained Earnings    12,706    12,298  
Accumulated Other Comprehensive Income (Loss)    1,517    1,924  


 
       TOTAL SHAREHOLDERS' EQUITY    83,503    104,519  


 
       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 938,267   $ 957,005  


 
End of period shares issued and outstanding    10,416,025    11,460,731  


See accompanying notes to consolidated financial statements.




- - 3 -

GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME

(unaudited, dollars in thousands except per share data)


Three months Ended
March 31,
2003 2002


INTEREST INCOME            
Interest and Fees on Loans   $ 10,888   $ 12,584  
Interest on Federal Funds Sold and Other Short-term Investments    56    303  
Interest and Dividends on Securities:  
   Taxable    1,534    1,527  
   Non-taxable    971    1,047  


     TOTAL INTEREST INCOME    13,449    15,461  
 
INTEREST EXPENSE  
Interest on Deposits    3,764    4,966  
Interest on FHLB Advances and Other Borrowings    1,900    2,461  


     TOTAL INTEREST EXPENSE    5,664    7,427  


 
NET INTEREST INCOME    7,785    8,034  
Provision for Loan Losses    (36 )  248  


NET INTEREST INCOME AFTER PROVISION  
     FOR LOAN LOSSES    7,821    7,786  
 
NON-INTEREST INCOME  
Trust and Investment Product Fees    356    330  
Service Charges on Deposit Accounts    648    580  
Insurance Revenues    793    739  
Other Operating Income    176    411  
Net Gain on Sales of Loans and Related Assets    537    381  
Net Gain / (Loss) on Sales of Securities    23    ---  


     TOTAL NON-INTEREST INCOME    2,533    2,441  
 
NON-INTEREST EXPENSE  
Salaries and Employee Benefits    4,422    4,445  
Occupancy Expense    617    506  
Furniture and Equipment Expense    551    427  
Data Processing Fees    277    262  
Professional Fees    285    294  
Advertising and Promotions    225    170  
Supplies    153    173  
Other Operating Expenses    793    821  


     TOTAL NON-INTEREST EXPENSE    7,323    7,098  
 
Income before Income Taxes    3,031    3,129  
Income Tax Expense    593    611  


NET INCOME   $ 2,438   $ 2,518  


COMPREHENSIVE INCOME   $ 2,031   $ 2,147  


 
Earnings Per Share and Diluted Earnings Per Share   $ 0.21   $ 0.22  
 
Dividends Per Share   $ 0.14   $ 0.13  

See accompanying notes to consolidated financial statements.




- - 4 -

GERMAN AMERICAN BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, dollars in thousands)


Three Months Ended
March 31,
2003 2002
 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net Income   $ 2,438   $ 2,518  
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:  
     Net (Accretion) / Amortization on Securities    575    272  
     Depreciation and Amortization    644    511  
     Amortization and Impairment of Mortgage Servicing Rights    321    61  
     Net Change in Loans Held for Sale    3,995    (475 )
     Loss on Investment in Limited Partnership    (31 )  (42 )
     Provision for Loan Losses    (36 )  248  
     Loss/(Gain) on Sale of Securities, net    (23 )  ---  
     Loss/(Gain) on Sales of Loans and Related Assets    (537 )  (381 )
     Loss/(Gain) on Disposition and Impairment of Premises and  
        Equipment    (3 )  (3 )
     Change in Assets and Liabilities:  
       Interest Receivable and Other Assets    809    11,142  
       Interest Payable and Other Liabilities    (479 )  (1,628 )


          Net Cash from Operating Activities    7,673    12,223  
 
CASH FLOWS FROM INVESTING ACTIVITIES  
   Change in Interest-bearing Balances with Banks    ---    299  
   Proceeds from Maturities of Securities Available-for-Sale    35,715    14,673  
   Proceeds from Sales of Securities Available-for-Sale    786    134  
   Purchase of Securities Available-for-Sale    (15,436 )  (40,550 )
   Proceeds from Maturities of Securities Held-to-Maturity    1,211    1,353  
   Proceeds from Sales of Loans    ---    280  
   Loans Made to Customers, net of Payments Received    12,071    18,957  
   Proceeds from Sales of Other Real Estate    345    465  
   Property and Equipment Expenditures    (1,074 )  (734 )
   Proceeds from the Sale of Property and Equipment    3    5  


          Net Cash from Investing Activities    33,621    (5,118 )
 
CASH FLOWS FROM FINANCING ACTIVITIES  
   Change in Deposits    (3,263 )  (16,285 )
   Change in Short-term Borrowings    (1,123 )  (7,505 )
   Advances of Long-term Debt    8,000    920  
   Repayments of Long-term Debt    (857 )  (2,599 )
   Issuance of Common Stock    ---    36  
   Purchase/Retire Common Stock    (21,443 )  (1,610 )
   Dividends Paid    (1,604 )  (1,545 )


          Net Cash from Financing Activities    (20,290 )  (28,588 )


 
Net Change in Cash and Cash Equivalents    21,004    (21,483 )
   Cash and Cash Equivalents at Beginning of Year    35,745    99,128  


   Cash and Cash Equivalents at End of Period   $ 56,749   $ 77,645  


See accompanying notes to consolidated financial statements.




- - 5 -

GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003

(unaudited, dollars in thousands except per share data)


Note 1 — Basis of Presentation

German American Bancorp operates primarily in the banking industry. The accounting and reporting policies of German American Bancorp and its subsidiaries conform to accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements, and all such adjustments are of a normal recurring nature. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the German American Bancorp December 31, 2002 Annual Report on Form 10-K.

Note 2 — Per Share Data

Earnings and dividends per share have been retroactively computed as though shares issued for stock dividends had been outstanding for all periods presented. The computation of Earnings per Share and Diluted Earnings per Share are as follows:

Three Months Ended
March 31,
2003 2002
Earnings per Share:            
Net Income   $ 2,438   $ 2,518  
Weighted Average Shares Outstanding    11,349,481    11,539,500  


     Earnings per Share:   $ 0.21   $ 0.22  


Diluted Earnings per Share:  
Net Income   $ 2,438   $ 2,518  
Weighted Average Shares Outstanding    11,349,481    11,539,500  
Stock Options, Net    43,429    24,669  


     Diluted Weighted Average Shares Outstanding    11,392,910    11,564,169  


     Diluted Earnings per Share   $ 0.21   $ 0.22  


Note 3 – Securities

The fair values of Securities Available-for-Sale are as follows (dollars in thousands):

March 31,
2003
December 31,
2002
U.S. Treasury Securities and Obligations of            
     U.S. Government Corporations and Agencies   $ 8,523   $ 9,535  
Obligations of State and Political Subdivisions    43,039    47,610  
Asset-/Mortgage-backed Securities    133,533    145,485  
Corporate Securities    ---    4,990  
Equity Securities    16,511    16,228  


     Total   $ 201,606   $ 223,848  





- - 6 -

The total carrying values and fair values of Securities Held-to-Maturity are as follows (dollars in thousands):

Carrying
Value
Fair
Value
 
March 31, 2003:            
Obligations of State and Political Subdivisions   $ 19,629   $ 20,366  
 
 
 
 
December 31, 2002:  
Obligations of State and Political Subdivisions   $ 20,833   $ 21,566  
 
 
 

Note 4 – Segment Information

The Company’s operations include three primary segments: core banking, mortgage banking, and insurance operations. The core banking segment involves attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the affiliate banks’ local markets. The core banking segment also involves providing trust and investment brokerage services to its customers. The mortgage banking segment involves the origination and purchase of single-family residential mortgage loans; the sale of such loans in the secondary market; the servicing of mortgage loans for investors; and the operation of a title insurance company. The insurance segment offers a full range of personal and corporate property and casualty insurance products, primarily in the affiliate banks’ local markets.

The core segment is comprised of five community banks with 26 retail banking offices and one business lending center in Southwestern Indiana. The five community banks jointly own German American Financial Advisors & Trust Company (GAFA) which provides trust administration, investment advisory, brokerage services, and financial planning to customers. Net interest income from loans and investments funded by deposits and borrowings is the primary revenue of the five affiliate community banks comprising the core-banking segment. Revenues for the mortgage-banking segment consist of net interest income from a residential real estate loan portfolio and investment securities portfolio funded primarily by wholesale sources, gains on sales of loans and gains on sales of and capitalization of mortgage servicing rights (MSR), loan servicing income, title insurance commissions and loan closing fees. The insurance segment consists of The Doty Agency, Inc., which provides a full line of personal and corporate insurance products as agent under four distinctive insurance agency names from four offices; and German American Reinsurance Company, Ltd. (GARC), which reinsures credit insurance products sold by the Company’s five affiliate banks. 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, 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 Other column below, along with minor amounts to eliminate transactions between segments.

Three months Ended March 31, 2003

Core
Banking
Mortgage
Banking
Insurance Other Consolidated
Totals
 
Net Interest Income     $ 7,812   $ (81 ) $ 3   $ 51   $ 7,785  
Gain on Sales of Loans and Related Assets    358    179    ---    ---    537  
Servicing Income    ---    218    ---    (53 )  165  
Insurance Revenues    48    41    737    (33 )  793  
Noncash Items:  
Provision for Loan Losses    280    (316 )  ---    ---    (36 )
MSR Amortization & Valuation    ---    321    ---    ---    321  
Provision for Income Taxes    1,103    (7 )  84    (587 )  593  
Segment Profit (Loss)    2,881    (10 )  127    (560 )  2,438  
Segment Assets    858,359    78,559    4,872    (3,523 )  938,267  




- - 7 -

Three months Ended March 31, 2002

Core
Banking
Mortgage
Banking
Insurance Other Consolidated
Totals
 
Net Interest Income     $ 8,025   $ (36 ) $ 5   $ 40   $ 8,034  
Gain on Sales of Loans and Related Assets    205    176    ---    ---    381  
Servicing Income    ---    202    ---    (69 )  133  
Insurance Revenues    33    41    698    (33 )  739  
Noncash Items:  
Provision for Loan Losses    248    ---    ---    ---    248  
MSR Amortization & Valuation    ---    61    ---    ---    61  
Provision for Income Taxes    1,126    (52 )  107    (570 )  611  
Segment Profit (Loss)    2,945    (79 )  98    (446 )  2,518  
Segment Assets    881,178    107,527    4,154    (5,817 )  987,042  

Note 5 – Stock Repurchase Plan

On April 26, 2001 the Company announced that its Board of Directors approved a stock repurchase program for up to 578,813 of the outstanding Common Shares of the Company, representing nearly five percent of its outstanding shares. 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 are purchased. As of March 31, 2003, the Company had purchased 178,179 shares under the program.

Note 6 – Self Tender Offer

On February 7, 2003 the Company commenced a self-tender offer for up to 1.0 million of its common shares, or approximately 9% of its outstanding shares, at a purchase price of $20 per share. On March 20, 2003, the Company purchased 1,057,566 shares under the offer, including 57,566 shares that the Company purchased in accordance with the optional purchase provision of the offer. The Company’s total cost in purchasing the shares, including fees and expenses incurred in connection with the offer, was approximately $21,442,000.

Note 7 – Stock Compensation

Compensation expense under stock options is reported, if applicable, using the intrinsic value method. No compensation expense has been recognized in net income. Financial Accounting Standard No. 123 requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. Accordingly, the following pro forma information presents net income and earnings per share had the Standard’s fair value method been used to measure compensation cost for stock option plans.

Three Months Ended
March 31,
2003 2002
 
Net Income as Reported   $    2,438   $    2,518  
Compensation Expense Under Fair Value Method, Net of Tax  63   47  


Pro forma Net Income  $    2,375   $    2,471  
Pro forma Earnings per Share and Diluted Earnings per Share  $      0.21   $      0.21  
Earnings per Share and Diluted Earnings per Share as Reported  $      0.21   $      0.22  




- - 8 -

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

GERMAN AMERICAN BANCORPMANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

German American Bancorp (“the Company”) is a financial services holding company based in Jasper, Indiana. The Company’s Common Stock is traded on NASDAQ’s National Market System under the symbol GABC. The Company operates five affiliated community banks with 26 retail banking offices in the eight contiguous Southwestern Indiana counties of Daviess, Dubois, Gibson, Knox, Martin, Perry, Pike, and Spencer and a business lending center in Evansville, Indiana. The Company also operates a trust, brokerage and financial planning subsidiary which operates from the banking offices of the bank subsidiaries, and two insurance agencies with four insurance agency offices throughout its market area. The Company’s lines of business include retail and commercial banking, mortgage banking, comprehensive financial planning, full service brokerage and trust administration, title insurance, and a full range of personal and corporate insurance products.

This section presents an analysis of the consolidated financial condition of the Company as of March 31, 2003 and December 31, 2002 and the consolidated results of operations for the three-month period ended March 31, 2003 and 2002. 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, 2002 Annual Report on Form 10-K.

STOCK PURCHASE

On March 20, 2003, the Company purchased 1,057,566 of its common shares (approximately 9% of the number of shares that were then outstanding) at $20 per share pursuant to its self tender offer at a total cost, including fees and expenses incurred in connection with the offer, of approximately $21,442,000. Primarily due to this stock purchase, shareholders’ equity at March 31, 2003, declined by $21.0 million, or 20%, from shareholders’ equity at December 31, 2002, and book value per share declined by $1.10 or 12% from $9.12 at December 31, 2002 to $8.02 at March 31, 2003.

The Company funded $8,000,000 of the costs of purchasing these shares by borrowing under a revolving line of credit that the parent company established with a correspondent bank lender (see “FINANCIAL CONDITION — Liquidity” below), and the balance by applying cash and investments held by the parent company including cash received in the form of dividend payments by the Company from subsidiary companies during the first quarter of 2003. At March 31, 2003, the parent company’s cash and marketable investments were $3,544,000, a decline of $9,541,000 or 73%, from the parent company’s cash and marketable investments at December 31, 2002. Accordingly, the purchase of stock pursuant to the tender offer materially affected the liquidity of the parent company, and reduced its equity and increased its debt. On a consolidated basis, however, the Company continued at March 31, 2003, to remain “Well Capitalized” as that term is defined by federal banking regulations and its capital levels continued to significantly exceed the minimum required capital levels for each measure of capital adequacy. See ” FINANCIAL CONDITION — Capital Resources” below.

Assuming continued profitability, the Company believes that its purchase of shares pursuant to the offer has the potential to increase the Company’s return on equity and earnings per share in future periods by reducing the amount of equity capital and the number of shares outstanding. The Company’s statements, in this paragraph and elsewhere, regarding its expectations that its purchase of shares pursuant to the offer have the potential to increase its return on equity and earnings per share are forward-looking statements. With respect to these statements, readers are cautioned that the Company’s expectations regarding enhanced earnings per share and return on equity as a result of the offer assume the Company’s earnings and financial condition in future periods are not materially different from its earnings and financial condition preceding the purchase of stock under the offer, except to the extent that earnings and financial condition were affected by the purchase of the shares pursuant to the offer. Readers are further cautioned that a variety of factors could cause the Company’s actual results to differ from those described herein, including general and local economic conditions, interest rate changes, risks associated with acquisitions, credit risks, regulatory risks and competition. For a more complete description of factors that could cause future results to differ from those described in forward-looking statements, see “FORWARD-LOOKING STATEMENTS” below.




- - 9 -

RESULTS OF OPERATIONS

Net Income:

Net income declined $80,000 to $2,438,000 or $0.21 per share for the quarter ended March 31, 2003 compared to $2,518,000 or $0.22 per share for the first quarter of 2002. The decline in net income from last year’s first quarter results is attributable principally to a decline in net interest income of $249,000, increased expense relating to the impairment of the value of the Company’s mortgage servicing rights of $236,000 caused by increased refinancings attributable to the historic low level of interest rates, and increased occupancy, furniture, equipment, and advertising expenses of $290,000. These factors were offset in part by increased gains on sale of loans related to mortgage refinance activity of $156,000 and a negative provision for loan losses of $316,000 in the Company’s mortgage banking segment that was recorded principally in recognition of an unanticipated settlement of claims during the first quarter of 2003 relating to a block of previously charged-off mortgage loans. As a result of this negative provision in the mortgage banking segment, the Company recorded a consolidated negative provision for loan losses of $36,000 during the first quarter of 2003, which was a $284,000 difference compared to the consolidated provision for loan losses during the first quarter of 2002 of $248,000.

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. The following table summarizes German American Bancorp’s net interest income (on a tax-equivalent basis, at an effective tax rate of 34%) for each of the periods presented herein (dollars in thousands):

Three Months
Ended March 31,
Change from
Prior Period
2003 2002 Amount Percent
 
Interest Income (T/E)     $ 13,990   $ 16,045   $ (2,055 )  -12.8%  
Interest Expense    5,664    7,427    (1,763 )  -23.7%  

 
 
     Net Interest Income (T/E)   $ 8,325   $ 8,618   $ (292 )  -3.4%  

 
 

Net interest income declined $249,000 or 3.1% ($292,000 or 3.4% on a tax-equivalent basis) for the quarter ended March 31, 2003 compared with the first quarter of 2002. Net interest margin is tax-equivalent net interest income expressed as a percentage of average earning assets. For the first quarter of 2003, the net interest margin improved slightly to 3.77% compared to 3.74% for the same period of 2002. While the net interest margin increased slightly, an overall decline in earning assets resulted in the decline in net interest income.

The decline in earning assets during the first quarter 2003 compared with 2002 is largely attributable to a decreased residential mortgage loan portfolio. This reduction is attributable to the refinance activity in the residential loan industry that has been fueled by the historically low interest rate environment and the Company’s continued sale of a majority of residential loan production in the secondary market. Overall, the average loan portfolio declined by $33.3 million or 5% in the quarter ended March 31, 2003 compared with the first quarter 2002. Average residential mortgage loans declined $64.8 million or 29% during the first quarter 2003 compared with the same period in 2002. Partially mitigating the decline in average residential mortgage loans was growth in the commercial loan portfolio. Average commercial loans increased by $38.5 million or 13% during the quarter ended March 31, 2003 compared with the first quarter 2002.

Provision For Loan Losses:

The Company provides for loan losses through regular provisions to the allowance for loan losses. For the quarter ended March 31, 2003 the Company recorded a negative loan loss provision of $36,000 compared with a provision of $248,000 during the quarter ended March 31, 2002. During the first quarter 2003, a $316,000 negative provision for loan losses in the Company’s mortgage banking segment was recorded. Of this negative provision, $196,000 was due to an unanticipated settlement of claims relating to a block of previously charged-off residential mortgage loans, and the balance was attributable to the continued decline in the volume of the mortgage banking segment’s residential loan portfolio. The core banking segment recorded a $280,000 provision for loan loss during the quarter ended March 31, 2003, compared to $248,000 during the first quarter of 2002.




- - 10 -

Provisions for loan losses are made at levels 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 provisions 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.

For the three months ended March 31, 2003 the Company realized net recoveries of $163,000 or 0.11% annualized of average loans compared with net charge-offs of $329,000 or 0.20% annualized of average loans for the same period of 2002.

Non-performing loans represented 0.48% of total loans at March 31, 2003 compared to 0.53% at December 31, 2002. See discussion of “Financial Condition” for more information regarding nonperforming assets.

Non-interest Income:

Non-interest income for the quarter ended March 31, 2003 increased $92,000 or 4% compared with the first quarter of 2002. The increase in the three month period ended March 31, 2003 primarily resulted from an increase in Net Gains on Sales of Loans and Related Assets largely offset by a decline in Other Operating Income.

Net Gains on Sales of Loans and Related Assets increased $156,000 or 41% for the three month period ended March 31, 2003 compared with the same period during 2002. Historically low interest rate levels have fueled significant refinance activity and subsequently increased levels of loan sales to the secondary markets. Loan sales totaled $47 million during the first three months of 2003 compared with $39 million in 2002.

Other Operating income declined by $235,000 or 57% during the three months ended March 31, 2003 compared with 2002. The decline in the three months ended March 31, 2003 compared to the prior year was primarily the result of increased impairment adjustments on the mortgage banking segment’s mortgage servicing rights portfolio. Impairment adjustments for the three months ended March 31, 2003 totaled $237,000 compared with $1,000 during the same period of 2002.

Non-interest Expense:

Non-interest expenses increased $225,000 or 3% during the first quarter of 2003 compared with 2002. This increase was primarily the result of increased Occupancy Expense, Furniture and Equipment Expense and Advertising and Promotion Expense.

Occupancy Expense increased $111,000 or 22% during the quarter ended March 31, 2003 compared with the same period in 2002. Of this increase, approximately $41,000 was attributable to building depreciation resulting from remodeling at an affiliate bank’s main office facility and the building of a branch facility by an affiliate bank. In addition, general repairs and maintenance costs increased $32,000 throughout the Company during the first quarter 2003 compared to the prior year.

Furniture and Equipment Expense increased $124,000 or 29% in the first quarter of 2003 compared with 2002. The increased furniture and equipment expense was due to an increased amount of depreciation expense from equipment purchases related to the aforementioned remodeling and various other equipment upgrades and replacements throughout the Company during 2002.

Advertising and Promotions Expense increased $55,000 or 32% compared with the prior year. This increase was attributable to the initiation of a television advertising campaign by the Company during the first quarter of 2003.




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Income Taxes:

The Company’s effective income tax rate approximated 20% of pre-tax income during the three months ended March 31, 2003 and 2002. The effective tax rate in both periods is lower than the blended statutory rate of 39.6%. The lower effective rates in both 2003 and 2002 primarily resulted from the Company’s tax-exempt investment income on securities and loans, income tax credits generated from investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

FINANCIAL CONDITION

Total assets at March 31, 2003 decreased $18.7 million to $938.3 million compared with $957.0 million in total assets at December 31, 2002. Loans, net of unearned income and allowance for loan losses, decreased by $12.2 million during the three months ended March 31, 2003. Residential real estate loans declined $14.9 million and consumer loans declined $6.1 during the quarter ended March 31, 2003 while commercial and industrial loans increased $9.6 million. The decline in residential real estate loans was attributable to the sale of a majority of new loan production to the secondary markets combined with continued prepayments of existing portfolio residential real estate loans. Cash and Cash Equivalents increased $21.0 million while Investment Securities decreased $23.4 million to $221.2 million at March 31, 2003 compared with $244.7 million at year-end.

Total Deposits at March 31, 2003 declined $3.3 million to $703.9 million compared with $707.2 in total deposits at December 31, 2002. The decline in total deposits was primarily attributable to declines in time deposits of $9.4 million partially offset by increased demand, savings, and money market accounts of $6.2 million.

FHLB Advances and Other Borrowings increased $6.0 million to $138.3 million at March 31, 2003 compared with $132.3 million at year-end. The increase in total borrowing resulted from an $8.0 million borrowing by the Company incurred in order to finance part of the cost of the repurchase of common stock pursuant the Company’s self tender offer.

Non-performing Assets:

The following is an analysis of the Company’s non-performing assets at March 31, 2003 and December 31, 2002 (dollars in thousands):

March 31,
2003
December 31,
2002
 
Non-accrual Loans     $ 2,142   $ 1,773  
Past Due Loans (90 days or more)    734    1,095  
Restructured Loans    ---    365  


 
     Total Non-performing Loans    2,876    3,233  


 
Other Real Estate    1,451    1,812  


 
     Total Non-performing Assets   $ 4,327   $ 5,045  


 
 
Allowance for Loan Loss to Non-performing Loans    293.05 %  256.76 %
Non-performing Loans to Total Loans    0.48 %  0.53 %

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.




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Tier 1, or core capital, consists of shareholders’ equity less goodwill, core deposit 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. 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 each of its affiliate banks individually, 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.

At March 31, 2003, management is not under such a capital directive, nor is 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
Adequacy
Purposes

To be Well
Capitalized
Under Prompt
Corrective
Action
Provisions
(FDICIA)

At
March 31,
2003

At
December 31,
2002

Leverage Ratio   4.00 % 5.00 % 8.32 % 9.91 %
Tier 1 Capital to Risk-adjusted Assets  4.00 % 6.00 % 11.81 % 14.64 %
Total Capital to Risk-adjusted Assets  8.00 % 10.00 % 13.06 % 15.86 %

Shareholders’ equity totaled $83.5 million at March 31, 2003 or 8.9% of total assets, a decrease of $21.0 million from December 31, 2002. The decline in total shareholders’ equity was primarily the result of shares repurchased through a tender offer. See “Stock Purchase”, above. As noted in the above table, the Company remains categorized as well-capitalized for regulatory purposes after the repurchase of shares through the tender offer.

Liquidity:

The Consolidated Statement of Cash Flows details the elements of change in the Company’s cash and cash equivalents. During the three months ended March 31, 2003, operating activities provided $7.7 million of available cash, which included net income of $2.4 million. The single most significant cash outflow experienced during the three months ended March 31, 2002 was $21.4 for the purchase and retirement of common stock through the aforementioned tender offer. Additional significant cash outflows included $1.6 million in dividends paid to shareholders and a $3.2 million decrease in deposits. The cash inflows from the maturities and sales of securities exceeded the cash outflows from purchases of securities by approximately $22.3 million. Total cash inflows for the period exceeded outflows by $21.0 million, leaving cash and cash equivalents of $56.7 million at March 31, 2003.

The Company does not have access at the parent-company level to the sources of funds that are available to its bank subsidiaries to support their operations. The Company derives most of its parent-company revenues from dividends or interest paid to the parent company by its bank subsidiaries. These subsidiaries are subject to statutory restrictions on their ability to pay dividends to the parent company. Therefore, in conjunction with the closing of the purchase by the Company of its stock under the tender offer, the parent company on March 20, 2003, established a two-year $15.0 million revolving line of credit with Bank One, N.A., Chicago, Illinois. The parent company may borrow funds under this line of credit for the purpose of funding stock repurchases and parent company working capital needs. The Company drew $8.0 million on the line of credit on the date of establishment. Interest on the unpaid balance of the line of credit is payable quarterly at a rate of 90-day LIBOR plus 125 basis points, and the unused balance of the line of credit bears a commitment fee of 15 basis points per annum. The loan agreement establishing the line of credit includes usual and customary covenants, including an agreement by the Company not to incur other debt without Bank One’s consent, an agreement that the Company will not pledge to others its investments in its subsidiaries, and an agreement to maintain its capital and the capital of its subsidiaries at “well capitalized” levels as that term is defined by bank regulatory agencies.




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FORWARD-LOOKING STATEMENTS

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. Such forward looking statements can include statements about adequacy of allowance for loan losses and the quality of the Company’s loans and other assets; simulations of changes in interest rates; litigation results; dividend policy; 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.

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. It is intended that these 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, forward-looking statements are based on assumptions and are subject to risks, uncertainties, and other factors. Actual results may differ materially from the expectations of the Company that are expressed or implied by any forward-looking statement. The discussion elsewhere in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” lists 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 effects of changes in competitive conditions; acquisitions of other businesses by the Company and costs of integrations of such acquired businesses; the introduction, withdrawal, success and timing of business initiatives and strategies; changes in customer borrowing, repayment, investment and deposit practices; changes in fiscal, monetary and tax policies; changes in interest rates and financial and capital markets; changes in general economic conditions, either nationally or regionally, resulting in, among other things, credit quality deterioration; the impact, extent and timing of technological changes; capital management activities; actions of the Federal Reserve Board and 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. 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, 2002, 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 Committees and Boards of Directors of the holding company and its affiliate banks. 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 bank subsidiaries, which are subject to certain regulatory limitations. The affiliate banks’ 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.




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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 sudden and sustained 2% increase and decrease in prevailing interest rates (dollars in thousands).

Interest Rate Sensitivity as of March 31, 2003

  Net Portfolio Value Net Portfolio Value
as a % of Present Value
of Assets
Changes
In rates
$ Amount % Change NPV Ratio Change
 +2% $130,453  11.3% 14.02% 173 b.p. 
Base 117,224  ---     12.29     --- 
 -2% 95,177  (18.8)     9.81     (248) b.p. 

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.

Within 90 days prior to the date of this report, 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 are 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. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

In addition, the Company reviewed its internal controls, and there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect those controls subsequent to the date of its last evaluation of such controls.




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PART II.    OTHER INFORMATION

Item 6.    Exhibits and Reports on Form 8-K

(a)    The following exhibits are filed herewith:

  3.1
Restatement of Articles of Incorporation of the Registrant is incorporated by reference to Exhibit 3.01 to the Registrant’s Current Report on Form 8-K filed May 5, 2000.

  3.2
Restated Bylaws of the Registrant, as amended April 26, 2001, is incorporated by reference to Exhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

  4.1
Rights Agreement dated April 27, 2000 is incorporated by reference to Exhibit 4.01 to Registrant’s Current Report on Form 8-K filed May 5, 2000.

  4.2
No long-term debt instrument issued by the Registrant exceeds 10% of consolidated total assets. In accordance with paragraph 4 (iii) of Item 601(b) of Regulation S-K, the Registrant will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon requests.

  4.3
Terms of Common Shares and Preferred Shares of German American Bancorp found in Restatement of Articles of Incorporation are incorporated by reference to Exhibit 3.01 to Registrant’s Current Report on From 8-K filed May 5, 2000.

  99.1
Certification of Chief Executive Officer

  99.2
Certification of Principal Financial Officer

(b)    Reports on Form 8-K

The Registrant filed a Report on Form 8-K on January 30, 2003 to report under Item 5 its intent to commence a tender offer for up to 1,000,000 of its common shares, its 2002 earnings and the declaration of its quarterly cash dividend.




- - 16 -

The Registrant filed a Report on Form 8-K on March 17, 2003 to report under Item 5 its intention to purchase approximately 1,075,000 of its common shares, including the associated preferred share purchase rights, pursuant to its tender offer.

The Registrant filed a Report on Form 8-K on March 21, 2003 to announce under Item 5 that it had purchased 1,057,566 of its common shares, including the associated preferred share purchase rights, pursuant to its tender offer.

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.

Date    May 14, 2003




Date    May 14, 2003
  GERMAN AMERICAN BANCORP



By  /s/ Mark A. Schroeder
Mark A. Schroeder
President and CEO



By  /s/ Bradley M. Rust
Bradley M. Rust
Senior Vice President and
Principal Financial Officer




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CERTIFICATION
(Principal Executive Officer)

I, Mark A. Schroeder, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of German American Bancorp;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 13, 2003


Date


By  /s/ Mark A. Schroeder
Mark A. Schroeder
President and CEO




- - 18 -

CERTIFICATION
(Principal Financial Officer)

I, Bradley M. Rust, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of German American Bancorp;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b)     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)     all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

May 13, 2003


Date


By  /s/ Bradley M. Rust
Bradley M. Rust
Principal Financial Officer




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