Back to GetFilings.com



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, 2004

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
(State or other jurisdiction of
incorporation or organization)
35-1547518
(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
Common Stock, No par value
Outstanding at May 3, 2004
10,940,803




1

GERMAN AMERICAN BANCORP

INDEX


PART I.    FINANCIAL INFORMATION

Item 1. Financial Statements

  Consolidated Balance Sheets — March 31, 2004 and December 31, 2003

  Consolidated Statements of Income and Comprehensive Income — Three months Ended March 31, 2004 and 2003

  Consolidated Statements of Cash Flows — Three months Ended March 31, 2004 and 2003

  Notes to Consolidated Financial Statements — March 31, 2004

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 2. Changes in Securities and Use of Proceeds

Item 6. Exhibits and Reports on Form 8-K


SIGNATURES

EXHIBIT INDEX




2

PART 1.    FINANCIAL INFORMATION
ITEM 1.    Financial Statements

GERMAN AMERICAN BANCORP
CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share data)


March 31,
2004
 December 31,
2003
(unaudited)
 
ASSETS            
Cash and Due from Banks   $ 23,939   $ 28,729  
Federal Funds Sold and Other Short-term Investments    11,075    3,804  
     Cash and Cash Equivalents    35,014    32,533  
 
Securities Available-for-Sale, at Fair Value    193,798    195,793  
Securities Held-to-Maturity, at Cost    15,033    17,417  
 
Loans Held-for-Sale    651    1,416  
 
Total Loans    609,889    613,255  
Less:  Unearned Income    (1,392 )  (1,389 )
       Allowance for Loan Losses    (8,436 )  (8,265 )
Loans, Net    600,061    603,601  
 
Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost    13,106    12,944  
Premises, Furniture and Equipment, Net    21,502    21,605  
Other Real Estate    754    749  
Goodwill    1,794    1,794  
Intangible Assets    2,697    2,804  
Company Owned Life Insurance    18,024    17,831  
Accrued Interest Receivable and Other Assets    15,655    17,459  
 
       TOTAL ASSETS   $ 918,089   $ 925,946  
 
LIABILITIES  
Non-interest-bearing Demand Deposits   $ 114,692   $ 112,689  
Interest-bearing Demand, Savings, and Money Market Accounts    271,982    266,652  
Time Deposits < $100,000    277,363    283,959  
Time Deposits $100,000 or more and Brokered Deposits    60,209    53,833  
     Total Deposits    724,246    717,133  
 
FHLB Advances and Other Borrowings    98,425    112,559  
Accrued Interest Payable and Other Liabilities    11,242    13,128  
       TOTAL LIABILITIES    833,913    842,820  
 
SHAREHOLDERS' EQUITY  
Common Stock, no par value, $1 stated value;  
     20,000,000 shares authorized    10,941    10,933  
Preferred Stock, $10 par value; 500,000  
     shares authorized, no shares issued    ---    ---  
Additional Paid-in Capital    67,753    67,532  
Retained Earnings    4,846    4,653  
Accumulated Other Comprehensive Income    636    8  
       TOTAL SHAREHOLDERS' EQUITY    84,176    83,126  
       TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   $ 918,089   $ 925,946  
End of period shares issued and outstanding    10,940,803    10,932,882  

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,
2004
 2003
 
INTEREST INCOME            
Interest and Fees on Loans   $ 9,705   $ 10,888  
Interest on Federal Funds Sold and Other Short-term Investments    28    56  
Interest and Dividends on Securities:  
   Taxable    1,284    1,534  
   Non-taxable    759    971  
     TOTAL INTEREST INCOME    11,776    13,449  
 
INTEREST EXPENSE  
Interest on Deposits    3,133    3,764  
Interest on FHLB Advances and Other Borrowings    1,165    1,900  
     TOTAL INTEREST EXPENSE    4,298    5,664  
 
NET INTEREST INCOME    7,478    7,785  
Provision for Loan Losses    402    (36 )
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES		    7,076    7,821  
 
NON-INTEREST INCOME  
Trust and Investment Product Fees    456    356  
Service Charges on Deposit Accounts    833    648  
Insurance Revenues    1,044    793  
Other Operating Income    435    176  
Gain on Sales of Loans and Related Assets    182    537  
Net Gain / (Loss) on Sales of Securities    5    23  
     TOTAL NON-INTEREST INCOME    2,955    2,533  
 
NON-INTEREST EXPENSE  
Salaries and Employee Benefits    4,615    4,422  
Occupancy Expense    620    617  
Furniture and Equipment Expense    563    551  
Data Processing Fees    306    277  
Professional Fees    367    285  
Advertising and Promotions    229    225  
Supplies    139    153  
Other Operating Expenses    918    793  
     TOTAL NON-INTEREST EXPENSE    7,757    7,323  
 
Income before Income Taxes    2,274    3,031  
Income Tax Expense    322    593  
NET INCOME   $ 1,952   $ 2,438  
 
COMPREHENSIVE INCOME   $ 2,580   $ 2,031  
 
Earnings Per Share   $ 0.18   $ 0.21  
Diluted Earnings Per Share   $ 0.18   $ 0.20  
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,
2004
 2003
 
CASH FLOWS FROM OPERATING ACTIVITIES            
Net Income   $ 1,952   $ 2,438  
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:  
     Net Amortization on Securities    397    575  
     Depreciation and Amortization    702    644  
Amortization and Impairment of Mortgage Servicing Rights    227    321  
     Net Change in Loans Held for Sale    670    3,320  
     Loss on Investment in Limited Partnership    (20 )  (31 )
       Provision for Loan Losses    402    (36 )
     (Gain) on Sale of Securities, net    (5 )  (23 )
     Loss / (Gain) on Sale of Other Real Estate and Repossessed Assets    (1 )  143  
     Loss / (Gain) on Disposition and Impairment of Premises and  
        Equipment    ---    (3 )
     Increase in Cash Surrender Value of Company Owned Life Insurance  
       (COLI)    (193 )  (58 )
     Change in Assets and Liabilities:  
       Interest Receivable and Other Assets    1,349    862  
       Interest Payable and Other Liabilities    (1,886 )  (479 )
          Net Cash from Operating Activities    3,594    7,673  
 
CASH FLOWS FROM INVESTING ACTIVITIES  
   Proceeds from Maturities of Securities Available-for-Sale    8,160    35,715  
   Proceeds from Sales of Securities Available-for-Sale    1,986    786  
   Purchase of Securities Available-for-Sale    (7,732 )  (15,436 )
   Proceeds from Maturities of Securities Held-to-Maturity    2,382    1,211  
   Proceeds from Sales of Loans    1,250    ---  
   Loans Made to Customers, net of Payments Received    1,620    12,071  
   Proceeds from Sales of Other Real Estate    264    345  
   Property and Equipment Expenditures    (492 )  (1,074 )
   Proceeds from the Sale of Property and Equipment    ---    3  
          Net Cash from Investing Activities    7,438    33,621  
 
CASH FLOWS FROM FINANCING ACTIVITIES  
   Change in Deposits    7,113    (3,263 )
   Change in Short-term Borrowings    (15,528 )  (1,123 )
   Advances of Long-term Debt    1,500    8,000  
   Repayments of Long-term Debt    (106 )  (857 )
   Purchase/Retire Common Stock    ---    (21,443 )
   Dividends Paid    (1,530 )  (1,604 )
          Net Cash from Financing Activities    (8,551 )  (20,290 )
 
Net Change in Cash and Cash Equivalents    2,481    21,004  
   Cash and Cash Equivalents at Beginning of Year    32,533    35,745  
   Cash and Cash Equivalents at End of Period   $ 35,014   $ 56,749  

See accompanying notes to consolidated financial statements.




5

GERMAN AMERICAN BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
(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, 2003 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,
2004
 2003
Earnings per Share:            
Net Income   $ 1,952   $ 2,438  
 
Weighted Average Shares Outstanding    10,936,799    11,869,714  
     Earnings per Share:   $ 0.18   $ 0.21  
 
Diluted Earnings per Share:  
Net Income   $ 1,952   $ 2,438  
 
Weighted Average Shares Outstanding    10,936,799    11,869,714  
Stock Options, Net    40,189    45,600  
     Diluted Weighted Average Shares Outstanding    10,976,988    11,915,314  
 
     Diluted Earnings per Share   $ 0.18   $ 0.20  

Note 3 – Securities

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

March 31,
2004
 December 31,
2003
Earnings per Share:            
U.S. Treasury Securities and Obligations of            
     U.S. Government Corporations and Agencies   $ 5,125   $ 4,090  
Obligations of State and Political Subdivisions    35,321    38,579  
Asset-/Mortgage-backed Securities    136,896    136,585  
Corporate Securities    519    515  
Equity Securities    15,937    16,024  
     Total   $ 193,798   $ 195,793  



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, 2004:            
Obligations of State and Political Subdivisions   $ 15,033   $ 15,928  
December 31, 2003:  
Obligations of State and Political Subdivisions   $ 17,417   $ 17,964  

Note 4 — Segment Information

The Company’s operations include four primary segments: core banking, mortgage banking, financial services, 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 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 financial 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 affiliate banks’ local markets.

The core banking segment is comprised of five community banks with 27 retail banking offices and one business lending center in Southwestern Indiana. 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 financial services segment’s revenues are comprised primarily of fees generated by German American Financial Advisors & Trust Company (GAFA). These fees are derived by providing trust, investment advisory, and brokerage services to its customers. The insurance segment consists of The Doty Agency, Inc., which provides a full line of personal and corporate insurance products as agent under five distinctive insurance agency names from five 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 four 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, 2004		 Core
Banking
 Mortgage
Banking
 Financial
Services
 Insurance
 Other
 Consolidated
Totals
 
Net Interest Income     $ 7,461   $ 84   $ 8   $ (5 ) $ (70 ) $ 7,478  
Gain on Sales of Loans and  
Related Assets    94    88    ---    ---    ---    182  
Servicing Income    ---    231    ---    ---    (40 )  191  
Trust and Investment Product  
Fees    1    ---    478    ---    (23 )  456  
Insurance Revenues    20    7    8    1,036    (27 )  1,044  
Noncash Items:  
Provision for Loan Losses    462    (60 )  ---    ---    ---    402  
MSR Amortization & Valuation    ---    227    ---    ---    ---    227  
Provision for Income Taxes    987    (74 )  7    73    (671 )  322  
Segment Profit    2,656    (113 )  10    107    (708 )  1,952  
Segment Assets    880,354    26,153    2,092    8,378    1,112    918,089  



7

Three Months Ended
March 31, 2003		 Core
Banking
 Mortgage
Banking
 Financial
Services
 Insurance
 Other
 Consolidated
Totals
 
Net Interest Income   $ 7,812   $ (81 ) $ 2   $ 3   $ 49   $ 7,785  
Gain on Sales of Loans and  
Related Assets    358    179    ---    ---    ---    537  
Servicing Income    ---    218    ---    ---    (53 )  165  
Trust and Investment Product  
Fees    1    ---    379    ---    (24 )  356  
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 )  (2 )  84    (585 )  593  
Segment Profit    2,881    (10 )  (3 )  127    (557 )  2,438  
Segment Assets    858,236    78,559    2,022    4,872    (5,422 )  938,267  

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 607,754 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 are purchased. As of March 31, 2004, the Company had purchased 207,965 shares under the program.

Note 6 – Self Tender Offer

On February 7, 2003 the Company commenced a self-tender offer for up to 1.05 million of its common shares, or approximately 9% of its then outstanding shares, at a purchase price of $19.05 per share. On March 20, 2003, the Company purchased 1,110,444 shares under the offer, including 60,444 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,
2004
 2003
Net Income as Reported     $ 1,952   $ 2,438  
Compensation Expense Under Fair Value Method, Net of Tax    61    62  
Pro forma Net Income   $ 1,891   $ 2,376  
Pro forma Earnings per Share   $ 0.17 $0.20
Pro forma Diluted Earnings per Share   $ 0.17  $0.20
Earnings per Share as Reported   $ 0.18  $0.21
Diluted Earnings per Share as Reported   $ 0.18  $0.20



8

Note 8 – Employee Benefit Plans

The Company acquired through previous bank mergers a noncontributory defined benefit pension plan with benefits based on years of service and compensation prior to retirement. The benefits under the plan were suspended in 1998. The following table represents the components of net periodic benefit cost for the periods presents:

Three Months Ended
March 31,
2004
 2003
Service Cost      $---    ---  
Interest Cost    14    15  
Expected Return on Assets    9    9  
Amortization of Transition Amount    ---    ---  
Amortization of Prior Service Cost    (1 )  (1 )
Recognition of Net (Gain)/Loss    7    8  
Net Periodic Benefit Cost   $ 11   $ 13  
 
Gain/loss on Settlements and Curtailments    None    None  

The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to make no contributions to its pension plan in 2004. As of March 31, 2004, no contributions have been made nor does the Company presently anticipate making any additional contributions to fund its pension plan in 2004.




9

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

GERMAN AMERICAN BANCORP
MANAGEMENT’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 27 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 five 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, 2004 and December 31, 2003 and the consolidated results of operations for the three month periods ended March 31, 2004 and 2003. 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, 2003 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, 2003 Annual Report on Form 10-K. Management believes that many of the key factors influencing the performance of the Company at the time of the filing of that annual report and discussed in that Management Overview continued through the date of filing of the quarterly report. Specifically, and as discussed in greater detail below, the Company’s continued dependence on its interest spread adversely affected the first quarter 2004 operating results while growth in non-interest income continued to mitigate those adverse affects. The Company’s net interest income decreased by $307,000 during the first quarter of 2004, a decline of 4% from that earned in the first quarter of 2003. While this continued a trend of declines in net interest income when compared to the corresponding period in the prior year, net interest income increased in the fourth quarter of 2003 from that earned in the immediately preceding quarter, and net interest income for the first quarter of 2004 increased by $88,000 or 1% from the net interest income of the Company during the fourth quarter of 2003.

Increased commissions and fees from the Company’s combined banking, insurance, and investment operations were principally responsible for the growth of $422,000 million, or 17%, in the Company’s non-interest income in the quarter ended March 31, 2004 from that recorded in the same period of 2003. The first quarter also saw continued growth in commercial/agricultural loans when compared with year end 2003 and the quarter ended March 31, 2003.

STOCK PURCHASE

On March 20, 2003, the Company purchased 1,110,444 of its common shares (approximately 9% of the number of shares that were then outstanding) at $19.05 per share pursuant to its self tender offer at a total cost, including fees and expenses incurred in connection with the offer, of approximately $21.4 million. 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, 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. 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, 2004, 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.




10

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for German American Bancorp 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 and the valuation of mortgage servicing rights.

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, agricultural and poultry 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 special mention, 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 or special mention 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 five-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.

Mortgage Servicing Rights Valuation

Mortgage servicing rights (MSRs) are recognized and included with other assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to type and age. Fair value is determined based upon discounted cash flows using market-based assumptions.




11

To determine the fair value of MSRs, the Company uses a valuation model that calculates the present value of estimated future net servicing income. In using this valuation method, the Company incorporates assumptions that market participants would use in estimating future net servicing income, which include estimates of prepayment speeds, discount rate, cost to service, escrow account earnings, contractual servicing fee income, ancillary income, late fees, and float income. The Company periodically validates it valuation model by obtaining an independent valuation of its MSRs.

The most significant assumption used to value MSRs is prepayment rate. In general, during periods of declining interest rates, the value of MSRs decline due to increasing prepayment speeds attributable to increased mortgage refinancing activity. Prepayment rates are estimated based on published industry consensus prepayment rates. Prepayments will increase or decrease in correlation with market interest rates, and actual prepayments generally differ from initial estimates. If actual prepayment rates are different than originally estimated, the Company may receive less mortgage servicing income, which could reduce the value of the MSRs. Other assumptions used in estimating the fair value of MSRs do not generally fluctuate to the same degree as prepayment rates, and therefore the fair value of MSRs is less sensitive to changes in these other assumptions.

On a quarterly basis, the Company evaluates the possible impairment of MSRs based on the difference between the carrying amount and the current fair value of MSRs. For purposes of evaluating and measuring impairment, the Company stratifies its portfolios on the basis of certain risk characteristics, including loan type and age. If temporary impairment exists, a valuation allowance is established for any excess of amortized cost over the current fair value, by risk stratification, through a charge to income. If the Company later determines that all or a portion of the temporary impairment no longer exists for a particular strata, a reduction of the valuation allowance may be recorded as an increase to income.

The Company annually reviews MSRs for other-than-temporary impairment and recognizes a direct write-down when the recoverability of a recorded valuation allowance is determined to be remote. In determining whether other-than-temporary impairment has occurred, the Company considers both historical and projected trends in interest rates, prepayment activity within the strata, and the potential for impairment recovery through interest rate increases. Unlike a valuation allowance, a direct-write down permanently reduces the carrying value of the MSRs and the valuation allowance, precluding subsequent recoveries.

As of March 31, 2004 the Company analyzed the sensitivity of its MSRs to changes in prepayment rates. In estimating the changes in prepayment rates, market interest rates were assumed to be increased and decreased by 1.0%. At March 31, 2004 the Company’s MSRs had a fair value of $2,396,000 using a weighted average prepayment rate of 23%. Assuming a 1.0% increase in market interest rates the estimated fair value of MSRs would be $3,224,000 with a weighted average prepayment rate of 13%. Assuming a 1.0% decline in market interest rates the estimated fair value of MSRs would be $1,320,000 with a weighted average prepayment rate of 56%.

RESULTS OF OPERATIONS

Net Income:

Net income declined $486,000 to $1,952,000 for the quarter ended March 31, 2004 compared to $2,438,000 for the first quarter of 2003. Earnings per share for the quarter ended March 31, 2004 totaled $0.18 compared with $0.21 for the quarter ended March 31, 2003. The percentage decline in net income per share for the three months ended March 31, 2004, as compared to the same period of 2003, was less than the percentage decline in net income for the 2004 period compared to 2003, due to the reduced average number of shares outstanding during 2004 as a result of the March 20, 2003 stock purchase. The decline in net income from the prior year’s first quarter results is attributable principally to a decline in net interest income of $307,000 and an increase of $438,000 in the level of provision for loan losses.




12

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
2004
 2003
 Amount
 Percent
Interest Income (T/E)     $ 12,199   $ 13,990   $ (1,791 )  -12.8%  
Interest Expense    4,298    5,664    (1,366 )  -24.1%  
     Net Interest Income (T/E)   $ 7,901   $ 8,326   $ (425 )  -5.1%  

Net interest income declined $307,000 or 3.9% ($425,000 or 5.1% on a tax-equivalent basis) for the quarter ended March 31, 2004 compared with the first quarter of 2003. Net interest margin is tax-equivalent net interest income expressed as a percentage of average earning assets. For the first quarter of 2004, the net interest margin was 3.78% compared to 3.77% for the same period of 2003.

The Company’s net interest income has been adversely impacted over the past several quarters including the first quarter of 2004 by the historically low level of interest rates. The net interest margin for the Company’s core banking segment was 3.85% during the first quarter 2004 compared with 4.15% in the same period of 2003. As illustrated in Note 4 to the consolidated financial statements, the Company’s core banking segment net interest income declined by $351,000 during the first quarter 2004 compared with 2003. This decline was largely attributable to the sustained low level of interest rates. This historically low interest rate environment resulted in a decline in overall earning asset yields including both the loan and securities portfolios. The Company’s cost of funds has lowered significantly but has not sufficiently mitigated the decline in earning asset yield. The decline in net interest income was partially mitigated in the core banking segment by an increased level of earning assets driven by commercial loan growth.

In the second quarter of 2003, the Company’s mortgage banking segment repaid a maturing FHLB advance in the amount of $10.0 million with a rate of 7.27%. Late in the third quarter of 2003, the mortgage banking segment prepaid $20.0 million of FHLB advances with an average rate of 5.99%. These advances had stated maturities in the third quarter of 2004. Late in the fourth quarter of 2003, the Company’s mortgage banking segment prepaid an additional $20.0 million of FHLB advances with an average rate of 6.19%. These advances had stated maturities in the first quarter of 2005. During 2003, these advances were carried at negative interest rate spreads ranging from approximately 3% to 5% compared to the short-term investments that had been internally matched to the contractual repayment of these advances. The extinguishment of these borrowings positively impact the net interest margin and net interest income during the first quarter of 2004 compared with the first quarter of 2003. The net interest margin for the mortgage banking segment was 0.77% during the first quarter 2004 compared with a negative 0.42% in 2003. The increase in net interest income for the mortgage banking segment totaled $165,000 as illustrated in Note 4 to the consolidated financial statements.

Earning assets declined by $43.3 million during the first quarter of 2004 compared with 2003 and was largely attributable to a decreased residential mortgage loan portfolio and the repayment of FHLB advances within the mortgage banking segment. The decline in interest earning assets was also attributable, to a lesser degree, to the previously discussed self tender offer and the purchase of Company Owned Life Insurance (COLI) during mid-2003.

The reduction in loans was attributable to the refinance activity in the residential loan industry throughout 2003 that was fueled by a historically low interest rate environment and the Company’s sale of a majority of residential loan production in the secondary markets. Overall, the average loan portfolio declined by $11.9 million or approximately 2% during the first quarter of 2004 compared with 2003. Average residential mortgage loans declined $51.6 million or 32% in the quarter ended March 31, 2004 compared with the same period of 2003. Partially mitigating the decline in average residential mortgage loans was growth in the commercial loan portfolio. Average commercial loans increased by $39.5 million or 12% during the three months ended March 31, 2004 compared with the same period of 2003.




13

The Company purchased $10.0 million of COLI during July 2003. COLI is an earning asset, however, for financial statement purposes is not considered an interest-earning asset. The increase in cash value on COLI is reported in the non-interest income section of the consolidated statements of income. Because this $10.0 million consisted of funds that were previously invested in interest bearing assets, this purchase had a detrimental effect on net interest income, but not necessarily on net income.

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 required on the allowance. Provisions for loan losses totaled $402,000 during the quarter ended March 31, 2004 compared with a negative provision for loan losses of $36,000 in the first quarter of 2003. Net charge-offs totaled $231,000 or 0.04% of average loans outstanding during the first quarter of 2004 compared with net recoveries of $163,000 during the same period of 2003. The composition of the loan portfolio changed during the first quarter of 2004 compared with the same period of 2003, continuing a trend toward a greater concentration in higher-risk commercial and agricultural loans and less concentration in residential mortgage loans. Non-performing assets increased to $3,046,000 or 0.50% of total loans at March 31, 2004 compared with $2,779,000 or 0.45% of total loans at year-end 2003 and $2,877,000 0.48% of total loans at March 31, 2003.

The Company’s allowance for loan losses and subsequent provisions for loan losses are typically analyzed at the individual affiliate bank level, the segment level, and finally at the consolidated level. During the first quarter of 2004, the core banking segment’s provisions for loan losses totaled $462,000 while the mortgage banking segment totaled a negative $60,000 provision for loan loss. These levels compare with a provision in the core banking segment of $280,000 and a negative provision of $316,000 in the mortgage banking segment during the quarter ended March 31, 2003.

These provisions were 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 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.

Non-interest Income:

Non-interest income increased $422,000 or 17% for the quarter ended March 31, 2004 compared with the first quarter of 2003. The increases in Trust and Investment Product Fees, Service Charges on Deposit Accounts, Insurance Revenues, and Other Operating Income were offset by a decline in Net Gains on Sales of Loans and Related Assets.

Trust and Investment Product Fees increased $100,000 or 28% during the three month period ended March 31, 2004 compared to the same period during 2003. This increase was the result of the expansion of the sales generated by Company’s financial services subsidiary. Service Charges on Deposit Accounts increased $185,000 or 29% during the quarter ended March 31, 2004 compared with the same period during 2003. This increase was primarily attributable to the introduction of an overdraft protection service program during the second quarter of 2003.

Insurance Revenues increased $251,000 or 32% during the three month period ended March 31, 2004 compared to the three month period ended March 31, 2003. The increased insurance revenues were primarily the result of property and casualty insurance agency acquisitions completed late in the third quarter of 2003.

Other Operating Income increased by $259,000 or 147% during the quarter ended March 31, 2004 compared with the same quarter during 2003. The increase in Other Operating Income is partially attributable to reduced impairment charges in the mortgage banking segment’s mortgage servicing rights portfolio. The impairment charge was $117,000 for the three month period ended March 31, 2004 compared to $237,000 for the same period of 2003. Also contributing to the increase in Other Operating Income was the purchase of $10,000,000 of Company Owned Life Insurance (COLI) by the Company during the third quarter of 2003. The cash surrender value income on COLI increased $134,000 during three- months ended March 31, 2004 compared with the same period of 2003.




14

Net Gains on Sales of Loans and Related Assets decreased $355,000 or 66% for the three month period ended March 31, 2004 compared with the same period during 2003. The decline was primarily attributable to lower levels of loan originations and sales of loans to the secondary market as compared to 2003. Loan sales totaled $10.5 million during the quarter ended March 31, 2004 compared with $47.1 in 2003.

Non-interest Expense:

Non-interest expense increased $434,000 or 6% during the three month period ended March 31, 2004 compared to the same period of 2003. The increase was primarily due to an increase in Salaries and Employee Benefits, Professional Fees and Other Operating Expenses.

Salaries and Employee Benefits Expense increased $193,000 or 4% during the quarter ended March 31, 2004 compared with the same period of 2003. The increase in Salaries and Employee Benefits Expense is partially due to an increase in employees resulting from the acquisition of property and casualty insurance agencies completed late in the third quarter of 2003. Salaries and Employee Benefits Expense also increased due to increased sales-related incentives. Increased trust and investment product fees and increased property and casualty insurance revenues have contributed to increased sales-related incentive pay. Conversely, sales-related incentive pay for mortgage originations has declined during the three months ended March 31, 2004 compared to the same period of 2003 due to diminished loan originations and sales. Salaries and Employee Benefits Expense continues to represent the most significant portion of operating expenses, totaling 59% in 2004 and 60% in 2003.

Professional Fees Expense increased $82,000 or 29% during the three months ended March 31, 2004 compared with the same period of 2003. The increase was primarily attributable to expenses associated with ensuring the Company’s compliance with the provisions of the Sarbanes-Oxley Act.

Other Operating Expense increased $125,000 or 16% during the quarter ended March 31, 2004 compared with the quarter ended March 31, 2003. The increase in Other Operating Expense is due to an increased level of intangible amortization resulting from the previously mentioned property and casualty insurance agency acquisitions.

Income Taxes:

The Company’s effective income tax rate approximated 14.2% and 19.6% of pre-tax income during the three months ended March 31, 2004 and 2003. The lower effective tax rate during 2004 compared with 2003 was the result of lower before tax net income. The effective tax rate in all periods is lower than the blended statutory rate of 39.6%. The lower effective rates in both 2004 and 2003 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, 2004 decreased $7.9 million to $918.1 million compared with $925.9 million in total assets at December 31, 2003. Loans, net of unearned income and allowance for loan losses, decreased by $3.5 million during the three months ended March 31, 2004. Cash and Cash Equivalents increased $2.5 million while Investment Securities decreased $4.4 million to $208.8 million at March 31, 2004 compared with $213.2 million at year-end.

Total Deposits at March 31, 2004 increased $7.1 million to $724.2 million compared with $717.1 in total deposits at December 31, 2003. Demand, savings, and money market accounts increased $7.3 million. FHLB Advances and Other Borrowings declined $14.1 million to $98.4 million at March 31, 2004 compared with $112.6 million at year-end. The decline in borrowings was the result of repayment of short-term variable rate FHLB advances and federal funds purchased.




15

Non-performing Assets:

The following is an analysis of the Company’s non-performing assets at March 31, 2004 and December 31, 2003 (dollars in thousands):

March 31,
2004
   December 31,
2003
Non-accrual Loans     $ 1,444   $ 1,817  
Past Due Loans (90 days or more)    1,602    962  
Restructured Loans    ---    ---  
     Total Non-performing Loans    3,046    2,779  
Other Real Estate    754    749  
     Total Non-performing Assets   $ 3,800   $ 3,528  
 
Allowance for Loan Loss to Non-performing Loans    276.95 %  297.41 %
Non-performing Loans to Total Loans    0.50 %  0.45 %

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 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, 2004, 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.




16

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,
2004
 At
December 31,
2003
 
Leverage Ratio 4.00%             5.00%             8.54%             8.40%            
Tier 1 Capital to Risk-adjusted Assets 4.00%             6.00%             11.02%             11.11%            
Total Capital to Risk-adjusted Assets 8.00%             10.00%             12.21%             12.30%            

Shareholders’ equity totaled $84.2 million at March 31, 2004 or 9.2% of total assets, an increase of $1.1 million from December 31, 2003. All of the Company’s affiliate banks are categorized as well-capitalized as of March 31, 2004.

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, 2004, operating activities provided $3.6 million of available cash, which included net income of $2.0 million. In addition, cash outflows included $1.5 million in dividends paid to shareholders. The cash inflows from the maturities and sales of securities exceeded the cash outflows from purchases of securities by approximately $4.8 million. The repayment of short-term borrowings totaled $15.5 million. Total cash inflows for the period exceeded outflows by $2.5 million, leaving cash and cash equivalents of $35.0 million at March 31, 2004.

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 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 and an additional $1.5 million during the first quarter of 2004. 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.

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 the Company’s net interest income or net interest margin; 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.




17

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 unknown future direction of interest rates and the timing and magnitude of any changes in interest rates; 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 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, 2003, 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.

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.




18

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 March 31, 2004

Net Portfolio
Value
 Net Portfolio Value
as a % of Present Value
of Assets
Changes
In rates
 $ Amount
 % Change
 NPV Ratio
 Change
 +2% $113,734  3.72% 12.55% 75 b.p. 
Base 109,655  ---   11.80   --- 
 -2% 93,490  (14.74)  9.93   (187) 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.

As of March 31, 2004, 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.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s first fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.




19

PART II.    OTHER INFORMATION

Item 2.    Changes in Securities and Use of Proceeds

The following table sets forth information regarding the Company’s purchases of its common shares during each of the three months ended March 31, 2004.

Period Total Number
Of Shares (or
Units)
Purchased		 Average Price
Paid Per Share
(or Unit)		 Total Number of Shares
(or Units) Purchased as Part
of Publicly Announced Plans
or Programs		 Maximum Number
(or Approximate Dollar
Value) of Shares (or Units)
that May Yet Be Purchased
Under the Plans or Programs (1)
January ---  ---  --- 399,789 
2004
February 22,135(2) $     17.51(2) ---  399,789 
2004
March ---  ---  --- 399,789 
2004

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 207,965 common shares through March 31, 2004. The Board of Directors established no expiration date for this program. No shares were purchased under this program during the quarter ended March 31, 2004.

2.    The shares purchased during February 2004 were acquired by the Company from certain persons who held options (“optionees”) to acquire the Company’s common shares under its 1999 Long-Term Equity Incentive Plan (“Plan”) in connection with the exercises by such optionees of their options during February 2004. Under the terms of the Plan, optionees are generally entitled to pay some or all of the exercise price of their options by delivering to the Company common shares that the optionee may already own, subject to certain conditions. The Company is generally obligated to purchase any such common shares delivered to it by such optionees for this purpose and to apply the market value of those tendered shares as of the date of exercise of the options toward the exercise prices due upon exercise of the options. Shares acquired by the Company pursuant to option exercises under the Plan are not made pursuant to the repurchase program described by Note 1 and do not reduce the number of shares available for purchase under that program.




20

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.

31.1
 Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer

31.2
 Sarbanes-Oxley Act of 2002, Section 302 Certification for Senior Vice President (Principal Financial Officer)

32.1
 Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer

32.2
 Sarbanes-Oxley Act of 2002, Section 906 Certification for Senior Vice President (Principal Financial Officer)

(b)        Reports on Form 8-K

The Registrant filed a Report on Form 8-K on February 3, 2004 to furnish under Item 12 its press release announcing its results of operations for the quarter and year ended December 31, 2003.




21

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 7, 2004		 GERMAN AMERICAN BANCORP


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


Date  May 7, 2004 By  /s/  Bradley M. Rust
Bradley M. Rust
Senior Vice President and
Principal Financial Officer




22

EXHIBIT INDEX


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.

31.1
 Sarbanes-Oxley Act of 2002, Section 302 Certification for President and Chief Executive Officer

31.2
 Sarbanes-Oxley Act of 2002, Section 302 Certification for Senior Vice President (Principal Financial Officer)

32.1
 Sarbanes-Oxley Act of 2002, Section 906 Certification for President and Chief Executive Officer

32.2
 Sarbanes-Oxley Act of 2002, Section 906 Certification for Senior Vice President (Principal Financial Officer)




23