GERMAN AMERICAN BANCORP - 10-K Annual Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

(Mark one)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended: December 31, 2004

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)

711 Main Street, Box 810, Jasper, Indiana
(Address of Principal Executive Offices)

35-1547518
(I.R.S. Employer Identification No.)

47546
(Zip Code)

Registrant's telephone number, including area code: (812) 482-1314
Securities registered pursuant to Section 12 (b) of the Act: None

Securities registered pursuant to Section 12 (g) of the Act:

Common Shares, No Par Value
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)

Indicate by check mark 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 NO

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO

The aggregate market value of the registrant's common shares held by non-affiliates of the registrant, computed by reference to the price at which the common shares were last sold, as of June 30, 2004 (the last business day of the registrant's most recently completed second fiscal quarter) was approximately $157,030,000.

As of March 1, 2005, there were outstanding 10,900,948 common shares, no par value, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement of German American Bancorp for the Annual Meeting of its Shareholders to be held April 28, 2005, to the extent stated herein, are incorporated by reference into Part III.

GERMAN AMERICAN BANCORP
ANNUAL REPORT ON FORM 10-K
For Fiscal Year Ended December 31, 2004

Table of Contents


PART I.
Item 1.	Business	3
Item 2.	Properties	5
Item 3.	Legal Proceedings	5
Item 4.	Submission of Matters to a Vote of Security Holders	5

PART II.
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	6
Item 6.	Selected Financial Data	7
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	8-26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	26-27
Item 8.	Financial Statements and Supplementary Data	28-58
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	59
Item 9A.	Controls and Procedures	59
Item 9B.	Other Information	59

PART III.
Item 10.	Directors and Executive Officers of the Registrant	59-60
Item 11.	Executive Compensation	60
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	60-61
Item 13.	Certain Relationships and Related Transactions	61
Item 14.	Principal Accountant Fees and Services	61

PART IV.
Item 15.	Exhibits and Financial Statement Schedules	62

SIGNATURES		63
INDEX OF EXHIBITS		64-65

Information included in or incorporated by reference in this Annual Report on Form 10-K, our other filing with the Securities and Exchange Commission (the “SEC”) and our press releases or other public statements, contain or may contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Please refer to a discussion of our forward- looking statements and associated risks in “Item 1 – Forward-Looking Statements and Associated Risks” in this Annual Report on Form 10-K.

PART I

Item 1. Business.

General

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. 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. Financial and other information by segment is included in Note 16 – Segment Information of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and is incorporated into this Item 1 by reference. Substantially all of the Company’s revenues are derived from customers located in, and substantially all of its assets are located in, the United States.

The Company’s principal operating subsidiaries are described in the following table:

Name	Type of Business	Principal Office Location
The German American Bank	Commercial Bank	Jasper, IN
First American Bank	Commercial Bank	Vincennes, IN
First Title Insurance Company	Title Insurance Agency	Vincennes, IN
First State Bank, Southwest Indiana	Commercial Bank	Tell City, IN
Peoples Bank	Commercial Bank	Washington, IN
Citizens State Bank	Commercial Bank	Petersburg, IN
German American Insurance, Inc.	Multi-Line Insurance Agency	Petersburg, IN
German American Financial Advisors & Trust Company	Trust, Brokerage, Financial Planning	Jasper, IN

Competition

The industries in which the Company operates are highly competitive. The Company’s subsidiary banks compete for commercial and retail banking business within its core banking segment not only with financial institutions that have offices in the same counties but also with financial institutions that compete from other locations in Southwest Indiana and elsewhere. The Company’s subsidiaries compete with commercial banks, savings and loan associations, savings banks, credit unions, production credit associations, federal land banks, finance companies, credit card companies, personal loan companies, investment brokerage firms, insurance agencies, insurance companies, lease finance companies, money market funds, mortgage companies, and other non-depository financial intermediaries. Many of these banks and other organizations have substantially greater resources than the Corporation.

Employees

At March 1, 2005 the Company and its subsidiaries employed approximately 372 full-time equivalent employees. There are no collective bargaining agreements, and employee relations are considered to be good.

Regulation and Supervision

The Company is subject to the Bank Holding Company Act of 1956, as amended (“BHC Act”), and is required to file with the Board of Governors of the Federal Reserve System (“FRB”) annual reports and such additional information as the FRB may require. The FRB may also make examinations or inspections of the Company. Under FRB policy, the Company is expected to act as a source of financial strength to its bank subsidiaries and to commit resources to support them even in circumstances where the Company might not do so absent such an FRB policy.

The Company’s five subsidiary banks are under the supervision of and subject to examination by the Indiana Department of Financial Institutions (“DFI”), and the Federal Deposit Insurance Corporation (“FDIC”). Regulation and examination by banking regulatory agencies are primarily for the benefit of depositors rather than shareholders.

With certain exceptions, the BHC Act prohibits a bank holding company from engaging in (or acquiring direct or indirect control of more than 5 percent of the voting shares of any company engaged in) nonbanking activities. One of the principal exceptions to this prohibition is for activities deemed by the FRB to be “closely related to banking.” Under current regulations, bank holding companies and their subsidiaries are permitted to engage in such banking-related business ventures as consumer finance; equipment leasing; credit life insurance; computer service bureau and software operations; mortgage banking; and securities brokerage.

Under the BHC Act, certain well-managed and well-capitalized bank holding companies may elect to be treated as a “financial holding company” and, as a result, be permitted to engage in a broader range of activities that are “financial in nature” and in activities that are determined to be incidental or complementary to activities that are financial in nature. These activities include underwriting, dealing in and making a market in securities; insurance underwriting and agency activities; and merchant banking. Banks may also engage through financial subsidiaries in certain of the activities permitted for financial holding companies, subject to certain conditions. The Company has not elected to become a financial holding company and none of its subsidiary banks have elected to form financial subsidiaries.

The Company’s banks and their subsidiaries may generally engage in activities that are permissible activities for state chartered banks under Indiana banking law, without regard to the limitations that might apply to such activities under the BHC Act if the Company were to engage directly in such activities.

Indiana law and the BHC Act restrict certain types of expansion by the Company and its bank subsidiaries. The Company and its subsidiaries may be required to apply for prior approval from (or give prior notice and an opportunity for review to) the FRB, the DFI, and/or other bank regulatory or other regulatory agencies, as a condition to the acquisition or establishment of new offices, or the acquisition (by merger or consolidation, purchase or otherwise) of the stock, business or properties of other banks or other companies.

The earnings of commercial banks and their holding companies are affected not only by general economic conditions but also by the policies of various governmental regulatory authorities. In particular, the FRB regulates money and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, varying the discount rate on bank borrowings, and setting reserve requirements against bank deposits. These policies have a significant influence on overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans and earned on investments or paid for time and savings deposits. FRB monetary policies have had a significant effect on the operating results of commercial banks in the past and this is expected to continue in the future. The general effect, if any, of such policies upon the future business and earnings of the Company cannot accurately be predicted.

The Company and its bank subsidiaries are required by law to maintain minimum levels of capital. These required capital levels are expressed in terms of capital ratios, known as the leverage ratio and the capital to risk-based assets ratios. The Company significantly exceeds the minimum required capital levels for each measure of capital adequacy. See Note 9 to the Company’s consolidated financial statements that are presented in Item 8 of this report, which Note 9 is incorporated herein by reference.

Also, federal regulations define five categories of financial institutions for purposes of implementing prompt corrective action and supervisory enforcement requirements of the Federal Deposit Insurance Corporation Improvements Act of 1991. The category to which the most highly capitalized institutions are assigned is termed “well-capitalized.” Institutions falling into this category must have a total risk-based capital ratio (the ratio of total capital to risk-weighted assets) of at least 10%, a Tier 1 risk-based capital ratio (the ratio of Tier 1, or “core”, capital to risk-weighted assets) of at least 6%, a leverage ratio (the ratio of Tier 1 capital to total assets) of at least 5%, and must not be subject to any written agreement, order or directive from its regulator relative to meeting and maintaining a specific capital level. On December 31, 2004, the Company had a total risk-based capital ratio of 11.83%, a Tier 1 risk-based capital ratio of 10.63% (based on Tier 1 capital of $78,945,000 and total risk-weighted assets of $742,323,000), and a leverage ratio of 8.50%. The Company and all its affiliate banks meet all of the requirements of the “well-capitalized” category and, accordingly, the Company does not expect these regulations to significantly impact operations.

The Company is a corporation separate and distinct from its bank and other subsidiaries. Most of the Company’s revenues will be received by it in the form of dividends, fees, and interest paid by its bank subsidiaries. These subsidiaries are subject to statutory restrictions on their ability to pay dividends. The FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries that enable it to prevent or remedy actions that in its view may represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability in appropriate cases to proscribe the payment of dividends by banks and bank holding companies. The FDIC and DFI possess similar enforcement powers over the respective bank subsidiaries of the Company for which they have supervision. The “prompt corrective action” provisions of federal banking law impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies.

Internet Address; Internet Availability of SEC Reports.

The Company’s Internet address is www.germanamericanbancorp.com.

The Company makes available, free of charge through the Investors section of its Internet website, its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission (SEC).

Forward-Looking Statements and Associated Risks

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, investment securities 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 SEC, such as this Form 10-K, 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 in Item 7 of this Form 10-K, “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; 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 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; changes in accounting principles and interpretations; the inherent uncertainties involved in litigation and regulatory proceedings which could result in the Company’s incurring loss or damage regardless of the merits of the Company’s claims or defenses; 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 other SEC filings from time to time when considering any forward-looking statement.

Item 2. Properties.

The Company conducts its operations from the main office building of The German American Bank at 711 Main Street, Jasper, Indiana. The main office building contains approximately 23,600 square feet of office space. The Company’s subsidiaries conduct their operations from 30 other locations in Southwest Indiana.

Item 3. Legal Proceedings.

There are no material pending legal proceedings, other than routine litigation incidental to the business of the Company’s subsidiaries, to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

Item 4. Submission of Matters to a Vote of Security Holders.

There were no matters submitted during the fourth quarter of 2004 to a vote of security holders, by solicitation of proxies or otherwise.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market and Dividend Information

German American Bancorp’s stock is traded on NASDAQ’s National Market System under the symbol GABC. The quarterly high and low closing prices for the Company’s common stock as reported by NASDAQ and quarterly cash dividends declared and paid are set forth in the table below. All per share data are retroactively restated for all stock dividends.

	2004			2003
	High	Low	Cash Dividend	High	Low	Cash Dividend
Fourth Quarter	$17.24	$15.95	$0.140	$18.79	$14.81	$0.133
Third Quarter	$17.75	$15.75	$0.140	$18.19	$16.21	$0.133
Second Quarter	$17.23	$15.80	$0.140	$18.09	$16.48	$0.133
First Quarter	$18.02	$16.81	$0.140	$18.55	$16.91	$0.133

			$0.560			$0.532

The Common Stock was held of record by approximately 3,803 shareholders at March 1, 2005.

Cash dividends paid to the Company’s shareholders are primarily funded from dividends received by the Company from its subsidiaries. The declaration and payment of future dividends will depend upon the earnings and financial condition of the Company and its subsidiaries, general economic conditions, compliance with regulatory requirements, and other factors.

Transfer Agent:

UMB Bank, N.A.
Securities Transfer Division
P.O. Box 410064
Kansas City, MO 64141-0064
Contact: Shareholder Relations
(800) 884-4225

Shareholder
Information and
Corporate Office:

Terri A. Eckerle
German American Bancorp
P. O. Box 810
Jasper, Indiana 47547-0810
(812) 482-1314
(800) 482-1314

Stock Repurchase Program Information

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

Period	Total Number Of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)	Total Number of Shares (or Units) Purchases 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)

October 2004	---	---	---	355,789
November 2004	---	---	---	355,789
December 2004	---	---	---	355,789

(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 251,965 common shares through December 31, 2004. The Board of Directors established no expiration date for this program.

Item 6. Selected Financial Data.

The following selected data should be read in conjunction with the consolidated financial statements and related notes that are included in Item 8 of this report, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this report (Dollars in thousands except per share data).

	2004			2003			2002			2001			2000
Summary of Operations:
Interest Income	$	47,710		$	50,619		$	60,494		$	71,069		$	79,319
Interest Expense		16,471			21,084			28,492			38,917			45,646

Net Interest Income		31,239			29,535			32,002			32,152			33,673
Provision for Loan Losses		2,015			811			1,115			660			2,231

Net Interest Income after Provision
For Loan Losses		29,224			28,724			30,887			31,492			31,442
Non-interest Income		9,620	⁽¹⁾		12,934			9,509			9,772			2,543	⁽⁴⁾
Non-interest Expense		30,609			32,219	⁽²⁾		28,967			29,308			28,238

Income before Income Taxes		8,235			9,439			11,429			11,956			5,747
Income Tax Expense		996			1,271			1,987			2,763			459

Net Income	$	7,239		$	8,168		$	9,442		$	9,193		$	5,288


Year-end Balances:
Total Assets	$	942,094		$	925,946		$	957,005		$	1,015,111		$	1,079,808
Total Loans, Net of Unearned Income		629,793			611,866			610,741			657,166			709,744	⁽⁴⁾
Total Deposits		750,383			717,133			707,194			726,874			735,570
Total Long-term Debt		69,941			76,880	⁽²⁾		121,687			156,726			182,370
Total Shareholders' Equity		83,669			83,126	⁽³⁾		104,519			102,209			97,260

Average Balances:
Total Assets	$	927,528		$	938,992		$	1,000,167		$	1,014,917		$	1,070,093
Total Loans, Net of Unearned Income		622,240			618,340			644,990			704,562			766,533	⁽⁴⁾
Total Deposits		731,467			711,310			718,763			718,160			749,235
Total Shareholders' Equity		82,558			87,703	⁽³⁾		103,301			100,232			95,788

Per Share Data⁽⁵⁾:
Net Income	$	0.66		$	0.73	⁽³⁾	$	0.79		$	0.76		$	0.44
Cash Dividends		0.56			0.53			0.51			0.48			0.45
Book Value at Year-end		7.68			7.60	⁽³⁾		8.72			8.44			8.05

Other Data at Year-end:
Number of Shareholders		3,219			3,198			3,299			3,314			3,208
Number of Employees		372			383			390			422			405
Weighted Average Number of Shares⁽⁵⁾		10,914,622			11,176,766	⁽³⁾		12,007,009			12,093,160			12,074,628

Selected Performance Ratios:
Return on Assets		0.78	%		0.87	%		0.94	%		0.91	%		0.49	%
Return on Equity		8.77	%		9.31	%⁽³⁾		9.14	%		9.17	%		5.52	%
Equity to Assets		8.88	%		8.98	%⁽³⁾		10.92	%		10.07	%		9.01	%
Dividend Payout		84.46	%		73.26	%		64.99	%		63.98	%		98.54	%
Net Charge-offs to Average Loans		0.24	%		0.14	%		0.19	%		0.22	%		0.27	%
Allowance for Loan Losses to Loans		1.40	%		1.35	%		1.36	%		1.27	%		1.31	%
Net Interest Margin		3.86	%		3.61	%		3.67	%		3.61	%		3.57	%

⁽¹⁾	In 2004, the Company recognized a $3.7 million non-cash pre-tax charge (which reduced Non-interest Income) for the other-than-temporary decline in value of its FHLMC and FNMA preferred stock portfolio.

⁽²⁾	In 2003, the Company prepaid $40.0 million of FHLB borrowings within its mortgage banking segment. The prepayment fees associated with the extinguishment of these borrowings totaled $1.9 million.

⁽³⁾

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

⁽⁴⁾	In 2000, the Company reclassified $69.8 million of sub-prime, out-of-market residential mortgage loans as held-for-sale. The difference between book value and market value resulted in a $5.2 million allowance for market loss on loans held-for-sale.

⁽⁵⁾	Share and Per Share Data has been retroactively adjusted to give effect for stock dividends and excludes the dilutive effect of stock options.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

The information in this Management’s Discussion and Analysis is presented as an analysis of the major components of the Company’s operations for the years 2002 through 2004 and its financial condition as of December 31, 2004 and 2003. This information should be read in conjunction with the accompanying consolidated financial statements and footnotes contained elsewhere in this report, and with the description of business included in Item 1 of this Report (including the cautionary disclosure regarding “Forward Looking Statements and Associated Risks”). Financial and other information by segment is included in Note 16 – Segment Information of the Notes to the Consolidated Financial Statements included in Item 8 of this Report and is incorporated into this Item 7 by reference.

MANAGEMENT OVERVIEW

The Company’s performance in 2004 was overshadowed somewhat by the recording in the fourth quarter of 2004 a non-cash, other-than-temporary impairment charge of approximately $2.4 million after-tax, or $0.23 per share, related to certain investments in Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association (“FNMA”) preferred stock. Public disclosures regarding accounting practices at FNMA and a multi-billion dollar FNMA preferred stock issuance with a substantially different structure and higher yield than previous offerings had a detrimental effect on the fair value of both the FHLMC and FNMA preferred stock holdings. As a result of these factors and the magnitude and length of time the market value had been below cost, management could not forecast full recovery of the fair values in a reasonable time period and concluded that the preferred stock was other than temporarily impaired. Accordingly, the other-than-temporary impairment was recognized in the income statement as an investment securities loss. The Company’s net income, inclusive of the impairment charge, for the year ended December 31, 2004, was $7,239,000, or $0.66 per share, compared with 2003 net income of $8,168,000, or $0.73 per share. Exclusive of the impairment charge, 2004 earnings would have been $9,669,000, or $0.89 per share.

As is the case for many banking organizations, the Company’s largest source of revenue has historically been, and continues to be, derived from the spread earned between its interest income and interest expense. As discussed in greater detail elsewhere in this discussion, improvements in the Company’s interest spread contributed to increased net interest income during 2004 compared to 2003. This improvement reversed a five-year trend of declines in net interest income.

In recent years, management has taken steps to enhance and grow its sources of non-interest-related revenue (such as insurance, trust administration, securities brokerage and financial planning) in an effort to reduce the Company’s dependency on its net interest income and net interest spread. The positive trends in growth in trust and investment product fees and in insurance revenues, (principally attributable to insurance acquisitions during 2003), continued in 2004. Management expects that these non-interest-related revenue sources will continue to significantly enhance its financial performance in the coming years.

The Company also has devoted increased emphasis in recent years to expanding its offering of loans and other products and services to business customers. Measured on an average basis, commercial/agricultural loans grew by approximately 10% in 2004, the seventh consecutive year of growth within this component of the Company’s balance sheet. The heightened management efforts to grow this component of the Company’ customer base is directly attributable to management’s belief that business customers, particularly small business customers, will value the Company’s approach of providing a combination of highly qualified professional financial advisors, local decision-making, and customer-focused products and services.

Management has continued to endeavor to improve the Company’s operating efficiency through enhanced employee productivity and the control of operating expenses, as evidenced by the three-year trend in the reduction in the number of full-time equivalent employees. The Company’s total operating expenses (exclusive of the 2003 net loss on extinguishment of borrowings) in 2004 increased modestly over those of 2003, mostly due to costs associated with compliance with requirements of Section 404 of the Sarbanes-Oxley Act.

In summary, management in 2005 expects to continue to reduce the Company’s reliance upon net interest income by increasing its emphasis on products and services that generate fees and commissions. Management also seeks to enhance the Company’s financial performance by increasing its offering of loans and other products and services to business customers, and operating more efficiently.

The statements of management’s expectations and goals concerning the Company’s future operations and performance that are set forth in this Management Overview and in other sections of this Item 7 are forward-looking statements, and readers are cautioned that these 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 following discussion, as well as the discussion in Item 1 of this Form 10-K (“Business”) entitled “Forward-Looking Statements and Associated Risks” (which discussion is incorporated in this Item 7 by reference) lists some of the factors that could cause the Company’s actual results to vary materially from those expressed or implied by any such forward-looking statements.

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, the valuation of mortgage servicing rights, the valuation of securities available for sale, and the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.

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.

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 its 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 December 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 December 31, 2004 the Company’s MSRs had a fair value of $2,695,000 using a weighted average prepayment rate of 19%. Assuming a 1.0% increase in market interest rates the estimated fair value of MSRs would be $3,507,000 with a weighted average prepayment rate of 11%. Assuming a 1.0% decline in market interest rates the estimated fair value of MSRs would be $1,383,000 with a weighted average prepayment rate of 52%.

Securities Available-for-Sale

Securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity. Securities available-for-sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. The Company obtains market values from a third party on a monthly basis in order to adjust the securities to fair value. Additionally, securities available-for-sale are required to be written down to fair value when a decline in fair value is other than temporary; therefore, future changes in the fair value of securities could have a significant impact on the Company’s operating results. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline and the duration of the decline. As of December 31, 2004, unrealized gains on the securities available-for-sale portfolio totaled approximately $543,000. This total is a net of unrealized gains on certain segments of the securities available-for-sale portfolio and unrealized losses on other segments of the portfolio.

In the fourth quarter of 2004, the Company recognized a $3.68 million non-cash pre-tax charge for the other-than-temporary decline in value on its FHLMC and FNMA floating rate preferred stock portfolio. The Company accounts for these securities in accordance with SFAS No. 115, which requires that if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss must be recognized as expense in the income statement. During the quarter ended December 31, 2004, public disclosures regarding accounting practices at FNMA and a multi-billion dollar FNMA preferred stock issuance with a substantially different structure and higher yield than previous offerings had a detrimental effect on the fair value of both the FHLMC and FNMA preferred stock holdings. In connection with the preparation of the Company’s financial statements included elsewhere in this Annual Report, management in January 2005 concluded, as a result of the factors identified in the preceding sentence and the magnitude and length of time the market value had been below cost, that management could not forecast full recovery of the fair values of these securities in a reasonable time period. Accordingly, management determined to recognize the other-than-temporary impairment in the income statement for the fourth quarter of 2004 as an investment securities loss.

Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” contains guidance regarding other-than-temporary impairment on securities that was to take effect for the quarter ended September 30, 2004. However, the effective date of portions of this guidance has been delayed, and more interpretive guidance is expected to be issued in the future. The effect of this new and pending guidance on the Company’s financial statements is not known, but it is possible this guidance could change management’s assessment of other-than-temporary impairment in future periods.

Income Tax Expense

Income tax expense involves estimates related to the valuation allowance on deferred tax assets and loss contingencies related to exposure from tax examinations.

A valuation allowance reduces deferred tax assets to the amount management believes is more likely than not to be realized. In evaluating the realization of deferred tax assets, management considers the likelihood that sufficient taxable income of appropriate character will be generated within carryback and carryforward periods, including consideration of available tax planning strategies. As of December 31, 2004, the Company has a deferred tax asset of $3.3 million representing various tax credit carryforwards. Based on the long carryforward periods available, management has assessed it more likely than not that these credits will be realized and no valuation allowance has been established on this asset. At December 31, 2004, the Company also has a deferred tax asset representing unrealized capital losses on equity securities. Should these capital losses be realized, management believes the Company has the ability to generate sufficient capital gains to realize the tax benefit of the capital losses during the available carryforward period, including the use of tax planning strategies related to mortgage servicing rights, appreciated securities and appreciated FHLB stock. As a result, no valuation allowance has been established on this asset.

Loss contingencies, including assessments arising from tax examinations and tax strategies, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. In considering the likelihood of loss, management considers the nature of the contingency, the progress of any examination or related protest or appeal, the opinions of legal counsel and other advisors, experience of the Company or other enterprises in similar matters, if any, and management’s intended response to any assessment. As discussed more fully in “Provision for Income Taxes”, as well as Note 11 to the consolidated financial statements, an audit of the Company by the Indiana Department of Revenue is pending and an assessment may result. Based on the preliminary stage of this possible assessment, management’s evaluation, after consultation with counsel, of the merits of the possible assessment, and management’s intent to protest any assessment and defend its position, management has concluded that a loss is not probable at this time and no liability has been recorded at December 31, 2004.

RESULTS OF OPERATIONS

NET INCOME

Net income declined $929,000 or 11% to $7,239,000 or $0.66 per share in 2004 compared to $8,168,000 or $0.73 per share during 2003. The earnings decline was directly attributable to a $2,430,000 after tax, or $0.23 per share, other-than-temporary impairment charge on the Company’s portfolio of FHLMC and FNMA preferred stocks. Excluding the effect of this other-than-temporary impairment charge, net income for 2004 would have been $9,669,000 or $0.89 per share. In comparing reported earnings for 2004 to 2003, the impairment charge was mitigated to some degree by increased net interest income, increased trust and investment product fees and insurance fees, and no net loss on the extinguishment of borrowings during 2004. Also contributing to the lower level of earnings in 2004 compared with 2003 was a decline in mortgage loan originations and subsequent sales of mortgage loans and an increased provision for loan losses.

In 2003, the Company earned net income of $8,168,000 or $0.73 per share. Earnings for 2003 declined by approximately 13% from the $9,442,000 and approximately 8% from the $0.79 per share reported for 2002. A lower number of shares outstanding resulting from a tender offer completed in March 2003 produced the lower percentage decline in earnings per share than that experienced in net income. The lower level of earnings during 2003 compared to 2002 was attributable principally to a decline in net interest income of $2,467,000 and a net loss of $1,898,000 incurred with the prepayment of $40.0 million of FHLB borrowings. These significant factors were partially offset by double-digit percentage increases in each category of non-interest income which totaled $3,425,000.

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. Several factors contribute to the determination of net interest income and net interest margin, including the volume and mix of earning assets, interest rates, and income taxes. Many factors affecting net interest income are subject to control by management policies and actions. Factors beyond the control of management include the general level of credit and deposit demand, Federal Reserve Board monetary policy, and changes in tax laws.

Net interest income increased during 2004 by $1,704,000 or 6% ($1,336,000 or 4% on a tax equivalent basis) compared to 2003. Net interest margin is tax equivalent net interest income expressed as a percentage of average earning assets. For 2004, the net interest margin increased to 3.86% compared with 3.61% in 2003.

The Company’s increase in net interest income in 2004 compared with 2003 was largely attributable to the increased net interest margin that has been largely driven by a decline in the Company’s cost of funds. The Company’s cost of funds has been reduced due to a number of factors including the historically low level of interest rates during 2003 and 2004 and the change in the mix of the deposit base to a higher dependence on non-maturity deposits and less dependence on time deposits. Also contributing to the lower cost of funds during 2004 was the repayment of higher costing FHLB advances during 2003 in the Company’s mortgage banking segment.

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 impacted the net interest margin and net interest income during the year ended December 31, 2004 compared with the year ended December 31, 2003.

As illustrated in Note 16 to the Company’s consolidated financial statements included in item 8 of this Report, the Company’s core banking segment net interest income increased $995,000 in 2004 compared with 2003. The increase in the core banking segment was largely attributable to an increased level of earning assets driven by commercial loan growth and a stable net interest margin. The core banking segment’s net interest margin was able to remain stable due primarily to the decline in its cost of funds. Net interest income increased $873,000 during 2004 compared with 2003 in the Company’s mortgage banking segment primarily due to the repayment of the aforementioned FHLB borrowings.

Total average earning assets declined by $21.6 million during 2004 compared with 2003 primarily due to the repayment of FHLB advances within the mortgage banking segment during 2003. Average total loans remained relatively stable, increasing $3.9 million in 2004 compared with 2003. While total loans have remained relatively stable, the loan portfolio composition has changed. Average commercial loans increased $35.2 million or 10% in 2004 compared with 2003. Mitigating to a large degree the growth in the commercial loan portfolio has been the continued decline in the average residential mortgage loan portfolio. Average residential mortgage loans declined $34.9 million or 25% during the year ended 2004 compared with 2003.

Net interest income declined during 2003 by $2,467,000 or 8% ($2,777,000 or 8% on a tax equivalent basis) compared with 2002. Net interest margin is tax equivalent net interest income expressed as a percentage of average earning assets. For 2003, the net interest margin declined to 3.61% compared with 3.67% for 2002.

The Company’s net interest income was adversely impacted by the historically low levels of interest rates during 2003. The historically low interest rate environment resulted in a decline in overall earning asset yields including both the loan and securities portfolios. The decline in interest rates through most of the first three quarters of 2003 resulted in increased prepayment speeds in the Company’s mortgage-related securities portfolio, causing increased purchase premium amortization within that portfolio and thereby driving yields lower. In addition, due to the low level of interest rates, the Company was unable to reinvest the proceeds of the mortgage-related securities repayments and cash flows from securities issued by state and local subdivisions at comparable yields. The low level of interest rates also caused downward pressure on the yield in the Company’s loan portfolio. The Company’s cost of funds was lowered significantly but not sufficiently to mitigate the decline in earning asset yield.

Earning assets also declined during 2003 compared with 2002 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 self tender offer discussed in Note 9 to the Company’s consolidated financial statements included in item 8 of this Report and the purchase of Company Owned Life Insurance (COLI) during mid-2003.

The reduction in loans during 2003 compared with 2002 was attributable to the refinance activity in the residential loan industry that resulted from historically low interest rates and the Company’s continued sale of a majority of residential loan production in the secondary markets. Overall, the average loan portfolio declined by $26.7 million or approximately 4% during 2003 compared with 2002. Average residential mortgage loans declined $63.5 million or 31% during 2003. Partially mitigating the decline in average residential mortgage loans was growth in the commercial loan portfolio. Average commercial loans increased by $40.4 million or 13% during 2003 compared with 2002.

The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years. For tax-equivalent adjustments, an effective tax rate of 34% was used for all years presented ⁽¹⁾.

Average Balance Sheet
(Tax-equivalent basis / dollars in thousands)

	Twelve Months Ended December 31, 2004								Twelve Months Ended December 31, 2003								Twelve Months Ended December 31, 2002

	Principal Balance			Income/ Expense		Yield/ Rate			Principal Balance			Income/ Expense		Yield/ Rate			Principal Balance			Income/ Expense		Yield/ Rate
ASSETS
Federal Funds Sold and Other
Short-term Investments	$	10,635		$	129		1	.21%	$	25,007		$	270		1	.08%	$	45,531		$	754		1	.66%

Securities:
Taxable		157,021			5,455		3	.34%		154,946			5,023		3	.24%		155,784			7,144		4	.59%
Non-taxable		62,309			4,347		7	.31%		75,507			5,371		7	.11%		87,380			6,248		7	.15%
Total Loans and Leases⁽²⁾		622,240			39,407		6	.33%		618,340			41,951		6	.78%		644,990			48,654		7	.54%


TOTAL INTEREST EARNING ASSETS		852,205			49,338		5	.79%		873,800			52,615		6	.02%		933,685			62,800		6	.73%

Other Assets		83,960								73,670								74,786
Less: Allowance for Loan Losses		(8,637	)							(8,478	)							(8,304	)


TOTAL ASSETS	$	927,528							$	938,992							$	1,000,167


LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-Bearing Demand Deposits	$	121,173		$	557		0	.46%	$	110,544		$	612		0	.55%	$	99,781		$	775		0	.78%
Savings Deposits		163,272			1,188		0	.73%		142,198			1,149		0	.81%		143,318			1,941		1	.35%
Time Deposits		330,898			10,002		3	.02%		354,703			12,236		3	.45%		380,249			15,960		4	.20%
FHLB Advances and
Other Borrowings		101,067			4,724		4	.67%		130,165			7,087		5	.44%		165,247			9,816		5	.94%

TOTAL INTEREST-BEARING LIABILITIES		716,410			16,471		2	.30%		737,610			21,084		2	.86%		788,595			28,492		3	.61%

Demand Deposit Accounts		116,124								103,865								95,415
Other Liabilities		12,436								9,814								12,856


TOTAL LIABILITIES		844,970								851,289								896,866


Shareholders' Equity		82,558								87,703								103,301


TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	927,528							$	938,992							$	1,000,167


NET INTEREST INCOME				$	32,867							$	31,531							$	34,308


NET INTEREST MARGIN							3	.86%							3	.61%							3	.67%

⁽¹⁾	Effective tax rates were determined as though interest earned on the Company's investments in municipal bonds and loans was fully taxable.

⁽²⁾	Loans held-for-sale and non-accruing loans have been included in average loans. Interest income on loans includes loan fees of $1,442, $1,340, and $1,184 for 2004, 2003, and 2002, respectively.

The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates:

Net Interest Income - Rate/Volume Analysis:
(Tax-Equivalent basis, dollars in thousands)

	2004 compared to 2003 Increase/(Decrease) Due to⁽¹⁾									2003 compared to 2002 Increase/(Decrease) Due to ⁽¹⁾
	Volume			Rate			Net			Volume			Rate			Net

Interest Income:
Federal Funds Sold and Other
Short-term Investments	$	(171	)	$	30		$	(141	)	$	(273	)	$	(211	)	$	(484	)
Taxable Securities		68			364			432			(38	)		(2,083	)		(2,121	)
Nontaxable Securities		(923	)		(101	)		(1,024	)		(845	)		(32	)		(877	)
Loans and Leases		263			(2,807	)		(2,544	)		(1,951	)		(4,752	)		(6,703	)

Total Interest Income		(763	)		(2,514	)		(3,277	)		(3,107	)		(7,078	)		(10,185	)


Interest Expense:
Savings and Interest-bearing Demand		207			(223	)		(16	)		104			(1,059	)		(955	)
Time Deposits		(785	)		(1,449	)		(2,234	)		(1,020	)		(2,704	)		(3,724	)
FHLB Advances and Other Borrowings		(1,447	)		(916	)		(2,363	)		(1,959	)		(770	)		(2,729	)

Total Interest Expense		(2,025	)		(2,588	)		(4,613	)		(2,875	)		(4,533	)		(7,408	)


Net Interest Income	$	1,262		$	74		$	1,336		$	(232	)	$	(2,545	)	$	(2,777	)

⁽¹⁾ The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

See the Company’s Average Balance Sheet and the discussions headed USES OF FUNDS, SOURCES OF FUNDS, AND LIQUIDITY AND INTEREST RATE RISK MANAGEMENT for further information on the Company’s net interest income, net interest margin, and interest rate sensitivity position.

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 $2,015,000, $811,000, and $1,115,000 in 2004, 2003 and 2002, respectively. The provision increased by $1,204,000 during 2004 compared with 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 2004, the core banking segment’s provisions for loan loss totaled $2,250,000 while the mortgage banking segment totaled a negative $235,000 provision for loan loss. These totals compare to a provision of $1,352,000 for the core banking segment in 2003 and a negative provision of $541,000 for the mortgage banking segment in 2003. During 2002, the core banking segment’s provision for loan loss totaled $1,365,000 while the mortgage banking segment totaled a negative $250,000 provision for loan loss.

The increase in provision for loan losses within the core banking segment during 2004 was largely attributable to the continued change in the composition of the Company’s loan portfolio toward a greater concentration in commercial and agricultural loans and less concentration in residential mortgage loans. Also contributing to the increased provision for loan losses has been an increase in specific allocations on internally classified loans and an overall higher level of net charge-offs during 2004.

The negative provision for loan losses in 2004, 2003, and 2002 within the mortgage banking segment has been driven by a declining level of portfolio residential real estate loans held by the mortgage banking segment. This decline has been due in large part to significant refinancing activity within the residential loan portfolio during 2002 and 2003 due to a historically low interest rate environment during those periods. Also contributing to the decline in the mortgage banking segment’s residential loan portfolio has been the Company’s operating strategy to sell fixed rate residential real estate loans into the secondary market rather than to rebuild the mortgage banking segment’s residential real estate portfolio.

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. Refer also to the section entitled CRITICAL ACCOUNTING POLICIES AND ESTIMATES and LENDING AND LOAN ADMINISTRATION for further discussion of the provision and allowance for loan losses.

NON-INTEREST INCOME

Non-interest income for 2004 was $9,620,000, a decline of $3,314,000 or 26%, as compared to $12,934,000 in 2003. The decline was predominantly attributable to an other-than-temporary impairment charge on the Company’s FHLMC and FNMA preferred stock portfolio recognized in the fourth quarter of 2004. Excluding the effect of this other-than-temporary charge of $3,682,000, non-interest income for 2004 would have been $13,302,000, an increase of $368,000 or 3% over that recorded in 2003. Non-interest income increased $3,425,000 or 36% when comparing 2003 to 2002. All categories of non-interest income increased by double-digit percentages in 2003.

Non-interest Income (dollars in thousands)								% Change From Prior Year
	2004			2003		2002		2004			2003
Trust and Investment Product Fees	$	2,046		$	1,627	$	1,419		26	%		15	%
Service Charges on Deposit Accounts		3,537			3,391		2,574		4			32
Insurance Revenues		4,666			3,692		2,818		26			31
Other Operating Income		2,074			1,556		1,056		33			47

Subtotal		12,323			10,266		7,867		20			30
Net Gains on Sales of Loans and Related Assets		975			2,588		1,625		(62	)		59
Net Gain / (Loss) on Securities		(3,678	)		80		17		n/m	⁽¹⁾		371

TOTAL NON-INTEREST INCOME	$	9,620		$	12,934	$	9,509		(26	)		36

⁽¹⁾ n/m = not meaningful

In 2004, Trust and Investment Product Fees increased $419,000 or 26% following an increase of $208,000 or 15% in 2003. The increase in fees over the past two years was primarily attributable to increased production from German American Financial Advisors (GAFA). GAFA was formed mid-year 2002 to provide expanded financial planning, full service brokerage, trust administration and other financial services.

Service Charges on Deposit Accounts increased 4% and 32% in 2004 and 2003, respectively. These increases were primarily attributable to the introduction of an overdraft protection service program during the second quarter of 2003.

Insurance Revenues increased 26% and 31% in 2004 and 2003, respectively. The increased Insurance Revenues were primarily the result of insurance agency acquisitions completed in late 2002 and in September 2003. To a lesser degree, internal growth within the Company’s existing property and casualty insurance operations also contributed to the increase. The most significant insurance agency acquisitions were completed September 2, 2003. On that date, the Company acquired substantially all of the assets, net of certain assumed liabilities, of two property and casualty insurance agencies, Hoosierland Agency based in Jasper, Indiana and Stafford-Williams Agency based in Washington, Indiana. These acquisitions significantly impacted the Company’s insurance revenues during 2004 and 2003. For more information on the business combination, see Note 18 to the Company’s consolidated financial statements included in Item 8 of this report.

For the year ended 2004, Other Operating Income increased 33%. The increase was partially attributable to an increase in the cash surrender value of Company Owned Life Insurance. The Company purchased $10.0 million of COLI during the third quarter of 2003. Also contributing to the increase in Other Operating Income was a reduced amount of mortgage servicing right impairment charges. During 2004, mortgage servicing right impairment charges were $37,000 as compared to $240,000 during 2003. The increase in Other Operating Income for 2003 as compared to 2002 was also primarily due to reduced impairment charges in the mortgage banking segment. Impairment charges totaled $721,000 in 2002.

Net Gains on Sales of Loans and Related Assets decreased 62% in 2004 following a 59% increase in 2003. The lower level of gains in 2004 resulted from lower residential mortgage loan production and subsequent loan sales. For the period ended December 31, 2003, the increase was attributable to historically low interest rates which produced an increased level of loan production and sales. Loan sales for 2004, 2003, and 2002 were $61.4 million, $181.2 million and $134.2 million, respectively.

The Company recorded a non-cash, other-than-temporary impairment charge of $3,682,000 ($2,430,000 after-tax) related to certain investments in FHLMC and FNMA preferred stock in the fourth quarter of 2004. For further discussion of the other-than-temporary charge, see the MANAGEMENT OVERVIEW and USE OF FUNDS sections of this Report as well as Note 2 to the Company’s consolidated financial statements included in Item 8 of this Report.

NON-INTEREST EXPENSE

For the year ended 2004, non-interest expense decreased 5% or $1,610,000 from 2003. The decline is primarily attributable to no Net Loss on Extinguishment of Borrowings, decreased Salaries and Employee Benefits and Occupancy Expense offset by an increase in Professional Fees and Other Operating Expenses. Non-interest expense increased 11% in 2003.

Non-interest Expense (dollars in thousands)							% Change From Prior Year
	2004		2003		2002		2004			2003
Salaries and Employee Benefits	$	17,814	$	18,062	$	17,443		(1	)%		4	%
Occupancy, Furniture and Equipment Expense		4,292		4,574		4,050		(6	)		13
FDIC Premiums		106		114		128		(7	)		(11	)
Data Processing Fees		1,186		1,126		1,098		5			3
Professional Fees		1,690		1,227		1,170		38			5
Advertising and Promotion		888		853		738		4			16
Supplies		527		633		660		(17	)		(4	)
Net Loss on Extinguishment of Borrowings		---		1,898		66		n/m	⁽¹⁾		2,776
Other Operating Expenses		4,106		3,732		3,614		10			3

TOTAL NON-INTEREST EXPENSE	$	30,609	$	32,219	$	28,967		(5	)		11

⁽¹⁾ n/m = not meaningful

Salaries and Employee Benefits Expense, the largest component of non-interest expense, was approximately 58%, 56% and 60% of total non-interest expense in 2004, 2003, and 2002, respectively. For the year ended 2004, Salaries and Employee Benefit remained relatively stable with a modest 1% decline. In 2003, the 4% increase in Salaries and Employee Benefits resulted from increased expenses associated with retirement benefits and sales-related incentive compensation partially offset by a decrease in incentive compensation based on overall financial performance.

In 2004, the decrease in Occupancy, Furniture and Equipment Expense of 6% was primarily attributable to a decline in real estate and personal property taxes. In the state of Indiana counties reassessed real property in 2002 which carried over into 2003 and resulted in a delay of some tax billings until 2004. Due to the billing delay, the Company adjusted property tax accruals and expense during 2004 which resulted in a reduced level of real estate and personal property expense. Occupancy, Furniture and Equipment Expense increased 13% in 2003. This increase was primarily attributable to increased building, furniture and equipment expense as well software licenses and maintenance agreements expense.

During 2004 and 2003, Professional Fees increased 38% and 5%, respectively. For 2004, the increase was primarily the result of costs associated with ensuring the Company’s compliance with the requirements of Section 404 of the Sarbanes Oxley Act. The increase in 2003 was attributable to an increase in general audit and accounting fees.

The Company did not prepay any FHLB Advances during 2004. During 2003 the Company’s mortgage banking segment prepaid $40 million of FHLB Advances which resulted in a $1,898,000 net loss on extinguishment of borrowings. For further discussion of the prepayments of FHLB Advances please see the NET INTEREST INCOME section of this Report.

Other Operating Expenses increased 10% and 3% during 2004 and 2003, respectively. The Company’s property and casualty acquisition activity during late 2002 and in the third quarter 2003 resulted in an increased level of customer list intangible amortization during 2004 and 2003. The amortization expense associated with these acquisitions was $405,000 in 2004 and $136,000 in 2003. Also contributing to the increase in Other Operating Expenses for 2003 were increased claims incurred and an increased level of insurance reserves at the Company’s credit reinsurance subsidiary. For further discussion of intangible amortization, see Note 18 to the Company’s consolidated financial statements included in Item 8 of this Report.

PROVISION FOR INCOME TAXES

The Company records a provision for current income taxes payable, along with a provision for deferred taxes payable in the future. Deferred taxes arise from temporary differences, which are items recorded for financial statement purposes in a different period than for income tax returns. The Company’s effective tax rate was 12.1%, 13.5%, and 17.4%, respectively, in 2004, 2003, and 2002. The effective tax rate in all periods is lower than the blended statutory rate of 39.6%. The lower effective rate in all periods primarily resulted from the Company’s tax-exempt investment income on securities and loans, income tax credits generated by investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax. See Note 11 to the Company’s consolidated financial statements included in Item 8 of this Report for additional details relative to the Company’s income tax provision.

Since December 31, 2001, the Company’s effective tax rate has been favorably impacted by Indiana financial institution tax savings resulting from the Company’s formation of investment subsidiaries in the state of Nevada by four of the Company’s banking subsidiaries. The state of Nevada has no state or local income tax. An auditor employed by the Indiana Department of Revenue (“Department”) has, in the course of the Department’s pending audit of the Company’s financial institutions tax return for the year 2002, advised the Company that the Department is considering issuing a notice of proposed assessment for unpaid financial institutions tax for the year 2002 of approximately $590,000 ($389,000 net of federal tax) plus interest, based on the auditor’s inclusion of the income of the Nevada subsidiaries in the Indiana return for that year. If the Department issues such a notice of proposed assessment, the Company intends to file a protest with the Department contesting the proposed assessment and would defend its position that the income of the Nevada subsidiaries is not subject to the Indiana financial institutions tax. Although there can be no such assurance, at this time management does not believe this potential assessment will result in additional tax liability. Therefore, no tax provision has been recognized for the potential assessment of additional financial institutions tax for 2002 or for financial institutions tax with respect to any of the Nevada subsidiaries in any period subsequent to 2002.

CAPITAL RESOURCES

The Company and affiliate banks are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. The prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. The Company and all affiliate banks at year-end 2004 were categorized as well-capitalized as that term is defined by the prompt corrective action regulations. The Company has agreed with its parent-company correspondent bank lender, JPMorgan Chase Bank, N.A., as a term of its line of credit with that lender (see “SOURCES OF FUNDS – Parent Company Funding sources”, below) that it will maintain the capital ratios of the Company and its affiliate banks at levels that would qualify it as well-capitalized as that term is defined by the prompt corrective action regulations. See Note 9 to the Company’s consolidated financial statements included in Item 8 of this Report for actual and required capital ratios and for additional information regarding capital adequacy.

The Company continues to maintain a strong capital position. Shareholders’ equity totaled $83.7 million and $83.1 million at December 31, 2004 and 2003, respectively. Total equity represented 8.9% and 9.0%, respectively, of year-end total assets. The Company paid cash dividends of $6.1 million or $0.56 per share in 2004 compared with $6.0 million or $0.53 per share in 2003. During 2004, the Company purchased 44,000 shares of its common stock at a total cost of $708,000 under an on-going repurchase program.

USES OF FUNDS

LOANS

Total loans at year-end 2004 increased $17.8 million or 3% compared with year-end 2003. The composition of the loan portfolio continued to shift toward a commercial and agricultural base with less concentration in residential mortgage loans during 2004. The Company’s commercial and industrial loans increased $14.7 million or 5% and agricultural based loans increased $10.5 million or 11% during 2004. In a reversal of a declining trend over the past several years, consumer loans increased $8.1 million or 7% during 2004. The increases in these categories were partially mitigated by the decline in the residential mortgage loan portfolio. Residential mortgage loans declined $15.5 million or 14% during 2004 due primarily to the Company’s continued sale of a majority of residential loan production into the secondary market. While refinance activity slowed significantly during 2004 compared with the prior two years, loan rates were still considered historically low leading to the Company’s decision to continue to sell the majority of production into the secondary market.

Total loans at year-end 2003 increased by $1.1 million compared with year-end 2002. Residential mortgage loans declined $45.9 million or 29% during 2003 as the Company continued to sell a majority of new residential loan production in the secondary market. The Company’s commercial and industrial loan portfolio increased $41.3 million or 16% in 2003 while agricultural and poultry loans increased $7.8 million or 9%. Consumer loans declined $2.2 million or 2% during 2003.

The Company’s loan portfolio is diversified, with the heaviest concentration in commercial and industrial loans. The Company’s commercial lending is extended to various industries, including hotel, agribusiness and manufacturing, as well as health care, wholesale, and retail services. The Company’s concentration in residential mortgage loans has declined over the past several years as was discussed above.

Loan Portfolio dollars in thousands	December 31,
	2004			2003			2002			2001			2000

Residential Mortgage Loans	$	94,800		$	110,325		$	156,180		$	227,502		$	312,199
Agricultural and Poultry		104,592			94,099			86,264			78,675			74,111
Commercial and Industrial Loans		308,763			294,015			252,744			227,872			188,213
Consumer Loans		122,888			114,816			116,987			123,840			135,596

Total Loans		631,043			613,255			612,175			657,889			710,119
Less: Unearned Income		(1,250	)		(1,389	)		(1,434	)		(723	)		(375	)

Subtotal		629,793			611,866			610,741			657,166			709,744
Less: Allowance for Loan Losses		(8,801	)		(8,265	)		(8,301	)		(8,388	)		(9,274	)

Loans, net	$	620,992		$	603,601		$	602,440		$	648,778		$	700,470


Ratio of Loans to Total Loans:
Residential Mortgage Loans		15	%		18	%		26	%		34	%		44	%
Agricultural and Poultry		17	%		15	%		14	%		12	%		10	%
Commercial and Industrial Loans		49	%		48	%		41	%		35	%		27	%
Consumer Loans		19	%		19	%		19	%		19	%		19	%

Totals		100	%		100	%		100	%		100	%		100	%

The Company’s policy is generally to extend credit to consumer and commercial borrowers in its primary geographic market area in Southwestern Indiana. Commercial extensions of credit outside this market area are generally concentrated in real estate loans within a 120 mile radius of the Company’s primary market and are granted on a selective basis.

The following table indicates the amounts of loans (excluding residential mortgages on 1-4 family residences and consumer loans) outstanding as of December 31, 2004 which, based on remaining scheduled repayments of principal, are due in the periods indicated (dollars in thousands).

	Within One Year		One to Five Years		After Five Years		Total

Commercial, Agricultural and Poultry	$	138,305	$	122,468	$	152,582	$	413,355

	Interest Sensitivity
	Fixed Rate		Variable Rate

Loans maturing after one year	$	45,711	$	229,340

INVESTMENTS

The investment portfolio is a principal source for funding the Company’s loan growth and other liquidity needs of its subsidiaries. The Company’s securities portfolio consists of money market securities, uncollateralized U.S. Treasury and federal agency securities, municipal obligations of state and political subdivisions, asset- / mortgage-backed securities issued by U.S. government agencies and other intermediaries, and corporate investments. Money market securities include federal funds sold, interest-bearing balances with banks, and other short-term investments. The composition of the year-end balances in the investment portfolio is presented in Note 2 to the Company’s consolidated financial statements included in Item 8 of this Report and in the table below:

Investment Portfolio, at Amortized Cost dollars in thousands	December 31,
	2004		%			2003		%			2002		%
Federal Funds Sold and Short-term Investments	$	24,354		11	%	$	3,804		2	%	$	8,118		3	%
U.S. Treasury and Agency Securities		4,060		2			4,112		2			9,500		4
Obligations of State and Political Subdivisions .		43,125		20			54,838		25			67,216		27
Asset- / Mortgage-backed Securities		131,614		60			136,674		63			143,247		57
Corporate Securities		503		n/m	⁽¹⁾		506		n/m	⁽¹⁾		4,990		2
Equity Securities		15,149		7			16,808		8			16,809		7

Total Securities Portfolio	$	218,805		100	%	$	216,742		100	%	$	249,880		100	%

⁽¹⁾ n/m = not meaningful

The amortized cost of investment securities, including federal funds sold and short-term investments, increased $2.1 million at year-end 2004 compared with year-end 2003. At year-end 2004, the level of federal funds sold and short-term investments was elevated from year-end 2003 and from the levels throughout 2004. This increased level resulted from the cash flow nature of the Company’s portfolio with its concentration in mortgage related securities and the timing of reinvestment of this cash flow back into other types of securities at year-end. The Company has continued its strategy during 2004 of investing in mortgage related securities. The mortgage related securities provide structured cash flows in what has continued to be a relatively low interest rate environment.

The Company’s level of obligations of state and political subdivisions declined $11.7 million or 21% during 2004 and $12.4 million or 18% in 2003. The decline in obligations of state and political subdivisions has been primarily the result of the Company’s strategy to not invest in these traditionally longer-term securities during periods of relatively low interest rates. The Company continues to believe that at the proper time, investment in tax-advantaged obligations of state and political subdivisions is prudent. However, in the relatively low interest rate environment, investments in these types of securities have not been undertaken.

The Company’s equity portfolio in all periods disclosed in the table above was primarily comprised of floating rate preferred stock issued by FHLMC and FNMA. In the year ended December 31, 2004, the Company recognized a $3.68 million non-cash pre-tax charge for the other-than-temporary decline in value on this floating rate preferred stock portfolio. The Company accounts for these securities in accordance with SFAS No. 115, which requires that if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss must be recognized as expense in the income statement. Refer also to the sections entitled CRITICAL ACCOUNTING POLICIES AND ESTIMATES and NON-INTEREST INCOME in this Report and Note 2 to the Company’s consolidated financial statements included in Item 8 of this Report for further discussion of the equity securities portfolio and the other-than-temporary impairment charge recognized during 2004.

The amortized cost of investment securities, including federal funds sold and short-term investments, decreased $33.1 million or 13% at year-end 2003 compared with year-end 2002. The decline occurred in a majority of categories of securities during 2003. The overall decline in the securities was largely attributable to the repayment of FHLB borrowings, primarily in the mortgage banking segment, and the purchase of COLI by three of the Company’s affiliate banks.

Investment Securities, at Carrying Value dollars in thousands	December 31,
	2004		2003		2002

Securities Held-to-Maturity:
Obligations of State and Political Subdivisions	$	13,318	$	17,417	$	20,833

Securities Available-for-Sale:
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies	$	4,034	$	4,090	$	9,535
Obligations of State and Political Subdivisions		30,621		38,579		47,610
Asset- / Mortgage-backed Securities		131,201		136,585		145,485
Corporate Securities		503		515		4,990
Equity Securities		15,317		16,024		16,228

Subtotal of Securities Available-for-Sale		181,676		195,793		223,848

Total Securities	$	194,994	$	213,210	$	244,681

The Company’s $181.7 million available-for-sale portion of the investment portfolio provides an additional funding source for the liquidity needs of the Company’s subsidiaries and for asset/liability management requirements. Although management has the ability to sell these securities if the need arises, their designation as available-for-sale should not be interpreted as an indication that management anticipates such sales.

The amortized cost of debt securities at December 31, 2004 are shown in the following table by expected maturity. Asset/ mortgage-backed securities are based on estimated average lives. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations. Equity securities do not have contractual maturities, and are excluded from the table below.

Maturities and Average Yields of Securities at December 31, 2004:

	Within One Year					After One But Within Five Years					After Five But Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
U.S. Treasuries and
Agencies	$	510		1	.59%	$	3,550		2	.95%	$	---			N/A	$	---			N/A
State and Political
Subdivisions		2,366		7	.87%		9,125		7	.68%		17,486		7	.82%		14,148		7	.48%
Asset- / Mortgage-backed
Securities		22,684		2	.69%		108,744		3	.63%		119		7	.91%		67		6	.00%
Corporate Securities		---			N/A		503		3	.42%		---			N/A		---			N/A


Totals	$	25,560		3	.15%	$	121,922		3	.91%	$	17,605		7	.82%	$	14,215		7	.47%

A tax-equivalent adjustment using a tax rate of 34 percent was used in the above table.

In addition to the other uses of funds discussed previously, the Company had certain long-term contractual obligations as of December 31, 2004. These contractual obligations primarily consisted of long-term borrowings with the FHLB and Bank One, N.A. (now JPMorgan Chase Bank, N.A.), time deposits, and lease commitments for certain office facilities. Scheduled principal payments on long-term borrowings, time deposits, and future minimum lease payments are outlined in the table below.

Contractual Obligations dollars in thousands	Payments Due By Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-Term Borrowings	$	69,941	$	32,335	$	4,802	$	11,194	$	21,610
Time Deposits		321,915		197,162		90,465		34,264		24
Lease Commitments		291		88		124		55		24

Total	$	392,147	$	229,585	$	95,391	$	45,513	$	21,658

SOURCES OF FUNDS

The Company’s primary source of funding is its base of core customer deposits. Core deposits consist of demand deposits, savings, interest-bearing checking, money market accounts, and certificates of deposit of less than $100,000. Other sources of funds are certificates of deposit of $100,000 or more, brokered deposits, overnight borrowings from other financial institutions and securities sold under agreement to repurchase. The membership of the Company’s affiliate banks in the Federal Home Loan Bank System (FHLB) provides a significant additional source for both long and short-term collateralized borrowings. The following pages contain a discussion of changes in these areas.

The table below illustrates changes between years in the average balances of all funding sources:

Funding Sources - Average Balances dollars in thousands							% Change From Prior Year
	2004		2003		2002		2004			2003
Demand Deposits
Non-interest Bearing	$	116,124	$	103,865	$	95,415		12	%		9	%
Interest Bearing		121,173		110,544		99,781		10			11
Savings Deposits		65,757		61,295		55,056		7			11
Money Market Accounts		97,515		80,903		88,262		21			(8	)
Other Time Deposits		268,842		298,430		321,911		(10	)		(7	)

Total Core Deposits		669,411		655,037		660,425		2			(1	)
Certificates of Deposits of $100,000 or
more and Brokered Deposits		62,056		56,273		58,338		10			(4	)
FHLB Advances and
Other Borrowings		101,067		130,165		165,247		(22	)		(21	)

Total Funding Sources	$	832,534	$	841,475	$	884,010		(1	)		(5	)

Maturities of certificates of deposit of $100,000 or more are summarized as follows:

			3 Months Or Less			3 thru 6 Months			6 thru 12 Months			Over 12 Months			Total

December 31, 2004			$	25,495		$	10,386		$	17,875		$	15,827		$	69,583

CORE DEPOSITS

The Company’s overall level of average core deposits has remained relatively stable during 2004 and 2003, with an increase of 2% in 2004 and a decline of 1% in 2003. The Company’s ability to attract core deposits continues to be influenced by competition and the interest rate environment, as well as the increased availability of alternative investment products. Management does believe that core deposits continue to represent a stable and viable funding source for the Company’s operations, but expects, in large part due to the prolonged low interest rate environment that has been experienced, that a portion of non-maturity deposits may be less stable for the Company in a time of prolonged economic recovery and increased interest rates.

Demand, savings and money market deposits have provided a growing source of funding for the company in each of the periods reported. Average demand, savings and money market deposits totaled $400.6 million or 60% of core deposits in 2004 compared with $356.6 million or 54% in 2003 and $338.5 million or 51% in 2002. This increase during 2004 and 2003 has contributed significantly to the decline in the Company’s cost of funds as was discussed in the NET INTEREST INCOME section of this Report.

Other time deposits consist of certificates of deposits in denominations of less than $100,000. These deposits declined by 10% and 7% in both 2004 and 2003. Other time deposits comprised 40% of core deposits in 2004 compared with 46% in 2003 and 49% in 2002. Management believes a portion of the decline in other time deposits has migrated to non-maturity deposit accounts assisting in the growth of that portion of the Company’s funding source. It is believed the interest rate environment has driven this migration.

OTHER FUNDING SOURCES

Federal Home Loan Bank advances and other borrowings represent the Company’s most significant source of other funding for its bank subsidiaries. Average borrowed funds decreased $29.1 million or 22% during 2004. This decline followed a decline of $35.1 million or 21% in 2003. Borrowings comprised 12%, 15%, and 19% of total funding sources in 2004, 2003, and 2002, respectively. The decline in average borrowed funds during 2004 and 2003 was primarily the result of repayment of FHLB advances, primarily by the Company’s mortgage banking segment, during the fourth quarter of 2002 and throughout 2003. During those periods the Company’s mortgage banking segment repaid approximately $70.0 million of FHLB advances. In some instances those advances were paid prior to maturity. See NET INTEREST INCOME and NON-INTEREST EXPENSE for a discussion of the impact of these prepayments on the Company’s results of operations.

Certificates of deposits in denominations of $100,000 or more and brokered deposits are an additional source of other funding for the Company’s bank subsidiaries. Large denomination certificates and brokered deposits increased $5.8 million or 10% during 2004 following a decline of $2.1 million or 4% in 2003. Large certificates and brokered deposits comprised approximately 7% of total funding sources in 2004, 2003, and 2002.

The bank subsidiaries of the Company also utilize short-term funding sources from time to time. These sources consist of overnight federal funds purchased from other financial institutions, secured repurchase agreements that generally mature within one day of the transaction date, and secured overnight variable rate borrowings from the FHLB. These borrowings represent an important source of short-term liquidity for the bank subsidiaries of the Company. Long-term debt is in the form of FHLB advances, which are secured by the pledge of certain investment securities and residential mortgage loans. See Note 8 to the Company’s consolidated financial statements included in item 8 of this Report for further information regarding borrowed funds.

PARENT COMPANY FUNDING SOURCES

The Company is a corporation separate and distinct from its bank and other subsidiaries. For information regarding the financial condition, result of operations, and cash flows of the Company, presented on a parent-company-only basis, see Note 17 to the Company’s consolidated financial statements included in Item 8 of this Report.

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, fees, and 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. The FRB possesses enforcement powers over bank holding companies and their non-bank subsidiaries that enable it to prevent or remedy actions that in its view may represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability in appropriate cases to proscribe the payment of dividends by banks and bank holding companies. The FDIC and DFI possess similar enforcement powers over the bank subsidiaries of the Company. The “prompt corrective action” provisions of federal banking law impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels and, in some cases, their parent bank holding companies.

In conjunction with the self tender offer the Company completed on March 20, 2003, the parent company entered into a borrowing agreement with a correspondent bank lender, Bank One, N.A., Chicago, Illinois (now JPMorgan Chase Bank, N.A.) for the purpose of funding stock repurchases and parent company working capital needs. The borrowing agreement included a revolving line of credit for up to $15.0 million with interest payable quarterly at a rate of 90 day LIBOR plus 1.25% with an additional commitment fee for the unused portion of the line of credit. The line of credit was scheduled to terminate, and the amount borrowed was scheduled to become payable, in March 2005. The Company initially borrowed $8.0 million under the terms of the loan at the time the tender offer was completed. The balance of the parent company borrowing totaled $10.5 million at December 31, 2004 and $12.0 million at March 1, 2005.

JPMorgan Chase Bank, N.A., has agreed to modify and extend the line of credit and the amounts borrowed under similar terms to the initial loan, and the Company anticipates that the new credit documents will be executed and delivered between the Company and JPMorgan Chase Bank, N.A., prior to maturity of the initial loan. The most notable modification to the terms will be an increase in the line of credit to $20.0 million, of which $12.0 million will be advanced at inception to renew the indebtedness for advances that had been made under the prior loan. The new line of credit will terminate not later than August 31, 2006, and upon termination of the line of credit the amounts of all advances then outstanding will be due and payable. The line of credit will include usual and customary covenants and conditions, including a covenant that requires that the Company maintain the capital ratios of the Company and of its affiliate banks at levels that would be considered “well-capitalized” under the prompt corrective action regulations of the federal banking agencies. The Company intends to utilize dividends that are available from its banking subsidiaries as the primary source of repayment for its borrowings under this line of credit. As described above, statutory and regulatory requirements may restrict the payment of dividends by the bank subsidiaries, depending upon their earnings and capital positions, during the period ending August 31, 2006, in amounts sufficient to retire the indebtedness of JPMorgan Chase Bank, N.A., in full by such time, in which event the Company may seek to extend the line of credit or refinance the amount outstanding with that lender or seek other sources of equity or debt capital.

RISK MANAGEMENT

The Company is exposed to various types of business risk on an on-going basis. These risks include credit risk, liquidity risk and interest rate risk. Various procedures are employed at the Company’s affiliate banks to monitor and mitigate risk in their loan and investment portfolios, as well as risks associated with changes in interest rates. Following is a discussion of the Company’s philosophies and procedures to address these risks.

LENDING AND LOAN ADMINISTRATION

Primary responsibility and accountability for day-to-day lending activities rests with the Company’s affiliate banks. Loan personnel at each bank have the authority to extend credit under guidelines approved by the bank’s board of directors. Executive and board loan committees active at each bank serve as vehicles for communication and for the pooling of knowledge, judgment and experience of its members. These committees provide valuable input to lending personnel, act as an approval body, and monitor the overall quality of the banks’ loan portfolios. The Corporate Risk Management Committee, comprised of members of the Company’s executive officers and board of directors, strive to ensure a consistent application of the Company’s lending policies. The Company also maintains a comprehensive risk-weighting and loan review program for its affiliate banks, which includes quarterly reviews of problem loans, delinquencies and charge-offs. The purpose of this program is to evaluate loan administration, credit quality, loan documentation and the adequacy of the allowance for loan losses.

The Company maintains an allowance for loan losses to cover probable, incurred credit losses identified during its loan review process. Management estimates the required level of allowance for loan losses 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. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgement, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.

The allowance for loan losses is comprised of: (a) specific reserves on individual credits; (b) general reserves for certain loan categories and industries, and overall historical loss experience; and (c) unallocated reserves based on performance trends in the loan portfolios, current economic conditions, and other factors that influence the level of estimated probable losses. The need for specific reserves are considered for credits 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.

Allowance for Loan Losses dollars in thousands	Years Ended December 31,
	2004			2003			2002			2001			2000
Balance of allowance for possible
losses at beginning of period	$	8,265		$	8,301		$	8,388		$	9,274		$	9,101
Loans charged-off:
Residential Mortgage Loans		367			474			481			637			1,188
Agricultural and Poultry Loans		---			---			89			66			134
Commercial and Industrial Loans		904			562			183			659			347
Consumer Loans		579			595			832			990			748

Total Loans charged-off		1,850			1,631			1,585			2,352			2,417

Recoveries of previously charged-off Loans:
Residential Mortgage Loans		31			281			77			54			14
Agricultural and Poultry Loans		11			11			2			191			29
Commercial and Industrial Loans		118			316			59			374			120
Consumer Loans		211			176			245			187			196

Total Recoveries		371			784			383			806			359


Net Loans recovered / (charged-off)		(1,479	)		(847	)		(1,202	)		(1,546	)		(2,058	)
Additions to allowance charged to expense		2,015			811			1,115			660			2,231

Balance at end of period	$	8,801		$	8,265		$	8,301		$	8,388		$	9,274


Net Charge-offs to Average Loans Outstanding		0.24	%		0.14	%		0.19	%		0.22	%		0.27	%
Provision for Loan Losses to Average Loans Outstanding		0.32	%		0.13	%		0.17	%		0.09	%		0.29	%
Allowance for Loan Losses to Total Loans at Year-end		1.39	%		1.35	%		1.36	%		1.27	%		1.31	%

The following table indicates the breakdown of the allowance for loan losses for the periods indicated (dollars in thousands):

Residential Mortgage Loans	$	790		$	839		$	1,126		$	1,958		$	2,235
Agricultural and Poultry		982			704			781			812			1,097
Commercial and Industrial Loans		5,906			5,358			4,687			3,487			3,582
Consumer Loans		1,043			1,158			1,140			921			935
Unallocated		80			206			567			1,210			1,425


Total Loans	$	8,801		$	8,265		$	8,301		$	8,388		$	9,274

The increase in specific allocations resulted primarily from commercial and agricultural loan growth, which includes larger credits and the reclassification of individual loans identified in the Company’s comprehensive risk weighting and loan review program. The trend in the decline in residential mortgage loan allocations has resulted from the trend of declining net charge-offs and the lower concentration of this type of loans. 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 has fluctuated from period to period.

Net charge-offs increased to $1,479,000 or 0.24% of average outstanding loans during 2004. This level compares to net charge-offs of $847,000 or 0.14% of average outstanding loans in 2003 and $1,202,000 or 0.19% of average outstanding loans in 2002. The increase in 2004 was attributable to a modestly higher level of loan charge-offs of $219,000 coupled with a $413,000 reduction in the level of recoveries of previously charged-off loans. The increase in the level of loan charge-offs in 2004 was attributable primarily to commercial and industrial loans, but was not necessarily attributable to a particular segment within the commercial and industrial portfolio. The increase in net charge-offs during 2004 followed declines in both 2003 and 2002. Please see PROVISION FOR LOAN LOSSES in the discussion regarding the RESULTS OF OPERATIONS and ALLOWANCE FOR LOAN LOSSES in the discussion regarding CRITICAL ACCOUNTING POLICIES AND ESTIMATES for additional information regarding the allowance.

NON-PERFORMING ASSETS

Non-performing assets consist of: (a) non-accrual loans; (b) loans which have been renegotiated to provide for a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower; (c) loans past due 90 days or more as to principal or interest; and, (d) other real estate owned. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more or when the borrower’s ability to repay becomes doubtful. Uncollected interest accrued in the current year is reversed against income at the time a loan is placed on non-accrual. Loans are charged-off at 120 days past due, or earlier if deemed uncollectible. Exceptions to the non-accrual and charge-off policies are made when the loan is well secured and in the process of collection. The following table presents an analysis of the Company’s non-performing assets.

Non-performing Assets dollars in thousands	December 31,
	2004			2003			2002			2001			2000

Non-accrual Loans	$	5,750		$	1,817		$	1,773		$	3,452		$	8,014
Past Due Loans (90 days or more)		831			962			1,095			916			1,513
Restructured Loans		---			---			365			367			---

Total Non-performing Loans		6,581			2,779			3,233			4,735			9,527
Other Real Estate		213			749			1,812			1,612			1,579

Total Non-performing Assets	$	6,794		$	3,528		$	5,045		$	6,347		$	11,106


Non-performing Loans to Total Loans		1.04	%		0.45	%		0.53	%		0.72	%		1.34	%
Allowance for Loan Losses to Non-performing Loans		133.73	%		297.41	%		256.76	%		177.15	%		97.34	%

Non-performing loans increased to 1.04% of total loans at year-end 2004 after declines in both 2003 and 2002. The increase in 2004 was largely attributable to commercial and industrial loans. A significant portion of the increase in non-performing loans at year-end 2004 related to a single commercial real estate credit. Management does not believe the non-accrual status of this credit is indicative of its potential loss exposure and anticipates achieving a resolution of the problems that have resulted in this credit being placed on non-accrual status by as early as June 30, 2005, on terms that would not result in a material loss to the Company in excess of the amount that has been specifically reserved for this credit in the allowance for loan losses as of December 31, 2004. Management considers the level of non-performing loans to be manageable within the Company’s normal course of business, and continues to actively work with the borrowers that comprise the non-performing loan portfolio. The Company is also continuing to monitor specific individual credits within the real estate development, manufacturing and lodging industry segments, that have not yet benefited from the improving economic climate.

Interest income recognized on non-performing loans for 2004 was $301,000. The gross interest income that would have been recognized in 2004 on non-performing loans if the loans had been current in accordance with their original terms was $596,000. Loans are placed on non-accrual status when scheduled principal or interest payments are past due for 90 days or more, unless the loan is well secured and in the process of collection.

Loan impairment is reported when full repayment under the terms of the loan is not expected. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from the collateral. Commercial, agricultural and poultry loans are evaluated individually for impairment. Smaller balance homogeneous loans are evaluated for impairment in total. Such loans include real estate loans secured by one-to-four family residences and loans to individuals for household, family and other personal expenditures. Individually evaluated loans on non-accrual are generally considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible. The total dollar amount of impaired loans at December 31, 2004 was $5,523,000. For additional detail on impaired loans, see Note 3 to the Company’s consolidated financial statements included in Item 8 of this report.

LIQUIDITY AND INTEREST RATE RISK MANAGEMENT

Liquidity is a measure of the ability of the Company’s subsidiary banks to fund new loan demand, existing loan commitments and deposit withdrawals. The purpose of liquidity management is to match sources of funds with anticipated customer borrowings and withdrawals and other obligations to ensure a dependable funding base, without unduly penalizing earnings. Failure to properly manage liquidity requirements can result in the need to satisfy customer withdrawals and other obligations on less than desirable terms. The liquidity of the parent company is dependent upon the receipt of dividends from its bank subsidiaries, which are subject to certain regulatory limitations explained in Note 9 to the consolidated financial statements included in Item 8 of this Report, as enhanced by its ability to draw upon a line of credit established by the parent company in March 2003 with a correspondent bank lender, as described under SOURCES OF FUNDS – PARENT COMPANY FUNDING SOURCES, above. 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.

Interest rate risk is the exposure of the Company’s financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company’s earnings, the Company monitors interest rate risk through computer-assisted simulation modeling of its net interest income. The Company’s simulation modeling monitors the potential impact to net interest income under various interest rate scenarios. The Company’s objective is to actively manage its asset/liability position within a one-year interval and to limit the risk in any of the interest rate scenarios to a reasonable level of tax-equivalent net interest income within that interval. Funds Management Committees at the holding company and each affiliate bank monitor compliance within established guidelines of the Funds Management Policy. See the Quantitative and Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements other than stand-by letters of credit as disclosed in Note 14 to the Company’s consolidated financial statements.

Item 7A. 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, as discussed above.

As discussed previously, 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. 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.

The following table provides an assessment of the risk to NPV in the event of sudden and sustained 1% and 2% increases and decreases in prevailing interest rates. The table indicates that as of December 31, 2004 the Company’s estimated NPV might be expected to increase in the event of an increase in prevailing interest rates, and might be expected to decrease in the event of a decrease in prevailing interest rates (dollars in thousands).

Interest Rate Sensitivity as of December 31, 2004

	Net Portfolio Value			Net Portfolio Value as a % of Present Value of Assets
Changes in Rates	$ Amount		% Change	NPV Ratio	Change
+2%		$ 121,858	6.03%	13.27%	39 b.p.
+1%		119,736	4.19	12.88	65 b.p.
Base		114,923	---	12.23	---
-1%		107,168	(6.75)	11.31	(92) b.p.
-2%		98,403	(14.37)	10.31	(100) b.p.

The above discussion, and the portions of MANAGEMENT’S DISCUSSION AND ANALYSIS that are referenced in the above discussion contains statements relating to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, simulation of the impact on net interest income from changes in interest rates. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed above, those that are described in MANAGEMENT’S DISCUSSION AND ANALYSIS in Item 7 of this report, and those that are described in Item 1 of this report, “Business,” under the caption “Forward-Looking Statements and Associated Risks,” which discussions are incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data.

Report of Independent Registered Public Accounting Firm on Financial Statements

Board of Directors and Shareholders
German American Bancorp
Jasper, Indiana

We have audited the accompanying consolidated balance sheets of German American Bancorp as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of German American Bancorp as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

Indianapolis, Indiana
February 28, 2005

/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC

Consolidated Balance Sheets
Dollars in thousands, except per share data

	December 31,
	2004			2003
ASSETS
Cash and Due from Banks	$	23,312		$	28,729
Federal Funds Sold and Other Short-term Investments		24,354			3,804

Cash and Cash Equivalents		47,666			32,533

Securities Available-for-Sale, at Fair Value		181,676			195,793
Securities Held-to-Maturity, at Cost (Fair value of $13,636 and $17,964 on
December 31, 2004 and 2003, respectively)		13,318			17,417

Loans Held-for-Sale		3,122			1,416

Loans		631,043			613,255
Less: Unearned Income		(1,250	)		(1,389	)
Allowance for Loan Losses		(8,801	)		(8,265	)

Loans, Net		620,992			603,601

Stock in FHLB of Indianapolis and Other Restricted Stock, at Cost		13,542			12,944
Premises, Furniture and Equipment, Net		20,231			21,605
Other Real Estate		213			749
Goodwill		1,794			1,794
Intangible Assets		2,378			2,804
Company Owned Life Insurance		18,540			17,831
Accrued Interest Receivable and Other Assets		18,622			17,459


TOTAL ASSETS	$	942,094		$	925,946


LIABILITIES
Non-interest-bearing Demand Deposits	$	123,127		$	112,689
Interest-bearing Demand, Savings, and Money Market Accounts		305,341			266,652
Time Deposits under $100,000		252,332			283,959
Time Deposits $100,000 or more and Brokered Deposits		69,583			53,833

Total Deposits		750,383			717,133

FHLB Advances and Other Borrowings		95,614			112,559
Accrued Interest Payable and Other Liabilities		12,428			13,128


TOTAL LIABILITIES		858,425			842,820

SHAREHOLDERS' EQUITY
Preferred Stock, $10 par value; 500,000 shares authorized, no shares issued		---			---
Common Stock, no par value, $1 stated value; 20,000,000 shares authorized		10,898			10,933
Additional Paid-in Capital		66,817			67,532
Retained Earnings		5,778			4,653
Accumulated Other Comprehensive Income		176			8


TOTAL SHAREHOLDERS' EQUITY		83,669			83,126


TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	942,094		$	925,946


End of period shares issued and outstanding		10,898,241			10,932,882

See accompanying notes to consolidated financial statements.

Consolidated Statements of Income
Dollars in thousands, except per share data

	Years ended December 31,

	2004			2003		2002

INTEREST INCOME
Interest and Fees on Loans	$	39,257		$	41,781	$	48,471
Interest on Federal Funds Sold and Other Short-term Investments		129			270		754
Interest and Dividends on Securities:
Taxable		5,455			5,023		7,144
Non-taxable		2,869			3,545		4,125

TOTAL INTEREST INCOME		47,710			50,619		60,494

INTEREST EXPENSE
Interest on Deposits		11,747			13,997		18,676
Interest on FHLB Advances and Other Borrowings		4,724			7,087		9,816

TOTAL INTEREST EXPENSE		16,471			21,084		28,492

NET INTEREST INCOME		31,239			29,535		32,002
Provision for Loan Losses		2,015			811		1,115

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		29,224			28,724		30,887

NON-INTEREST INCOME
Trust and Investment Product Fees		2,046			1,627		1,419
Service Charges on Deposit Accounts		3,537			3,391		2,574
Insurance Revenues		4,666			3,692		2,818
Other Operating Income		2,074			1,556		1,056
Net Gains on Sales of Loans and Related Assets		975			2,588		1,625
Net Gain / (Loss) on Securities		(3,678	)		80		17

TOTAL NON-INTEREST INCOME		9,620			12,934		9,509


NON-INTEREST EXPENSE
Salaries and Employee Benefits		17,814			18,062		17,443
Occupancy Expense		2,121			2,354		2,184
Furniture and Equipment Expense		2,171			2,220		1,866
Data Processing Fees		1,186			1,126		1,098
Professional Fees		1,690			1,227		1,170
Advertising and Promotion		888			853		738
Supplies		527			633		660
Net Loss on Extinguishment of Borrowings		---			1,898		66
Other Operating Expenses		4,212			3,846		3,742

TOTAL NON-INTEREST EXPENSE		30,609			32,219		28,967


Income before Income Taxes		8,235			9,439		11,429
Income Tax Expense		996			1,271		1,987

NET INCOME	$	7,239		$	8,168	$	9,442


Earnings per Share	$	0.66		$	0.73	$	0.79

Diluted Earnings per Share	$	0.66		$	0.73	$	0.78

See accompanying notes to consolidated financial statements.

Consolidated Statements of Changes in Shareholders' Equity
Dollars in thousands, except per share data

						Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders' Equity


Balances, January 1, 2002	11,038,675		$	11,039		$	72,238		$	18,133		$	799		$	102,209

Comprehensive Income:
Net Income										9,442						9,442
Changes in Unrealized Gain/(Loss)
on Securities Available for Sale, net													1,125			1,125

Total Comprehensive Income																10,567
Cash Dividends ($.51 per share)										(6,136	)					(6,136	)
Issuance of Common Stock for:
Exercise of Stock Options	5,966			6			281			(263	)					24
Director Stock Awards	18,762			19			290									309
Employee Benefit Plans	3,104			3			49									52
Dividend Reinvestment Plan	15,459			15			260									275
5% Stock Dividend	544,051			544			8,302			(8,846	)					---
Employee Stock Purchase Plan							(66	)								(66	)
Purchase and Retirement of Common Stock	(165,286	)		(165	)		(2,518	)								(2,683	)
Purchase of Interest in Fractional Shares										(32	)					(32	)


Balances, December 31, 2002	11,460,731			11,461			78,836			12,298			1,924			104,519

Comprehensive Income:
Net Income										8,168						8,168
Changes in Unrealized Gain/(Loss)
on Securities Available for Sale, net													(1,747	)		(1,747	)
Change in Minimum Pension Liability													(169	)		(169	)

Total Comprehensive Income																6,252
Cash Dividends ($.53 per share)										(5,984	)					(5,984	)
Issuance of Common Stock for:
Exercise of Stock Options	14,807			15			555			(542	)					28
Director Stock Awards	15,939			16			288									304
5% Stock Dividend	520,233			520			8,740			(9,260	)					---
Employee Stock Purchase Plan							(120	)								(120	)
Purchase and Retirement of Common Stock	(1,078,828	)		(1,079	)		(20,767	)								(21,846	)
Purchase of Interest in Fractional Shares										(27	)					(27	)


Balances, December 31, 2003	10,932,882			10,933			67,532			4,653			8			83,126

Comprehensive Income:
Net Income										7,239						7,239
Changes in Unrealized Gain/(Loss) on
Securities Available for Sale, net													178			178
Changes in Minimum Pension Liability													(10	)		(10	)

Total Comprehensive Income																7,407
Cash Dividends ($.56 per share)										(6,114	)					(6,114	)
Issuance of Common Stock for:
Exercise of Stock Options	9,359			9			25									34
Employee Stock Purchase Plan							(76	)								(76	)
Purchase and Retirement of Common Stock	(44,000	)		(44	)		(664	)								(708	)


Balances, December 31, 2004	10,898,241		$	10,898		$	66,817		$	5,778		$	176		$	83,669

See accompanying notes to consolidated financial statements.

Consolidated Statements of Cash Flows
Dollars in thousands

	Years Ended December 31,

	2004			2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	7,239		$	8,168		$	9,442
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Net Amortization on Securities		1,042			2,134			1,635
Depreciation and Amortization		2,734			2,585			2,125
Amortization and Impairment of Mortgage Servicing Rights		504			660			992
Net Change in Loans Held-for-Sale		(2,349	)		10,032			(8,587	)
Loss in Investment in Limited Partnership		162			223			170
Provision for Loan Losses		2,015			811			1,115
Loss / (Gain) on Securities, net		3,678			(80	)		(17	)
Loss / (Gain) on Sales of Other Real Estate and Repossessed Assets		(17	)		222			(42	)
Loss / (Gain) on Disposition and Impairment of Premises and Equipment		30			20			(48	)
Loss on Extinguishment of Borrowings		---			1,898			66
Director Stock Awards		---			304			309
FHLB Stock Dividends		(598	)		(482	)		---
Increase in Cash Surrender Value of Company Owned Life Insurance (COLI)		(709	)		(432	)		(362	)
Change in Assets and Liabilities:
Interest Receivable and Other Assets		(1,272	)		(531	)		11,192
Interest Payable and Other Liabilities		(717	)		(125	)		1,330

Net Cash from Operating Activities		11,742			25,407			19,320

CASH FLOWS FROM INVESTING ACTIVITIES
Change in Interest-bearing Balances with Banks		---			---			299
Proceeds from Maturities of Securities Available-for-Sale		36,745			140,227			68,351
Proceeds from Sales of Securities Available-for-Sale		1,986			18,239			19,975
Purchase of Securities Available-for-Sale		(29,059	)		(135,116	)		(143,944	)
Proceeds from Maturities of Securities Held-to-Maturity		4,095			3,420			2,223
Purchase of Loans		(12,837	)		(5,570	)		(4,701	)
Proceeds from Sales of Loans		2,894			2,644			1,025
Loans Made to Customers, net of Payments Received		(10,216	)		219			47,047
Proceeds from Sales of Other Real Estate		1,306			1,576			1,353
Property and Equipment Expenditures		(1,328	)		(2,083	)		(4,175	)
Proceeds from Sales of Property and Equipment		364			6			547
Purchase of Company Owned Life Insurance		---			(10,000	)		---
Acquire Insurance Agencies		---			(2,513	)		(325	)

Net Cash from Investing Activities		(6,050	)		11,049			(12,325	)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in Deposits		33,250			9,939			(19,680	)
Change in Short-term Borrowings		(10,006	)		25,047			(7,027	)
Advances in Long-term Debt		4,500			8,000			1,145
Repayments of Long-term Debt		(11,439	)		(54,705	)		(36,250	)
Issuance of Common Stock		34			28			351
Purchase / Retire Common Stock		(708	)		(21,846	)		(2,683	)
Employee Stock Purchase Plan		(76	)		(120	)		(66	)
Dividends Paid		(6,114	)		(5,984	)		(6,136	)
Purchase of Interests in Fractional Shares		---			(27	)		(32	)

Net Cash from Financing Activities		9,441			(39,668	)		(70,378	)


Net Change in Cash and Cash Equivalents		15,133			(3,212	)		(63,383	)
Cash and Cash Equivalents at Beginning of Year		32,533			35,745			99,128

Cash and Cash Equivalents at End of Year	$	47,666		$	32,533		$	35,745

Cash Paid During the Year for:
Interest	$	16,813		$	21,627		$	29,189
Income Taxes		786			1,026			1,214

See accompanying notes to consolidated financial statements.

Notes to the Consolidated Financial Statements
Dollars in thousands, except per share data

NOTE 1 – Summary of Significant Accounting Policies

Description of Business and Basis of Presentation
German American Bancorp operations are primarily comprised of four business segments: core banking, mortgage banking, financial services and insurance operations. The accounting and reporting policies of German American Bancorp and its subsidiaries conform to U.S. generally accepted accounting principles. The more significant policies are described below. The consolidated financial statements include the accounts of the Company and its subsidiaries after elimination of all material intercompany accounts and transactions. Certain prior year amounts have been reclassified to conform with current classifications. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures. Actual results could differ from those estimates. Estimates susceptible to change in the near term include the allowance for loan losses, other-than-temporary impairment of securities, the fair value of mortgage servicing rights and financial instruments, the valuation allowance on deferred tax assets and loss contingencies.

Securities
Securities classified as available-for-sale are securities that the Company intends to hold for an indefinite period of time, but not necessarily until maturity. These include securities that management may use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, or similar reasons. Equity Securities with readily determinable fair values are classified as available-for-sale. Securities held as available-for-sale are reported at market value with unrealized gains or losses included as a separate component of equity, net of tax. Securities classified as held-to-maturity are securities that the Company has both the ability and positive intent to hold to maturity. Securities held-to-maturity are carried at amortized cost. Restricted stock, such as stock in the Federal Home Loan Bank (FHLB), is carried at cost.

Premium amortization is deducted from, and discount accretion is added to, interest income using the level yield method. The cost of securities sold is computed on the identified securities method. Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers: (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or fair value, in aggregate.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term without anticipating prepayments. Interest income is discontinued on impaired loans and loans past due 90 days or more, unless the loan is well secured and in process of collection. All interest accrued but not received for loans placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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. 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. 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.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or special mention. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 1 – Summary of Significant Accounting Policies (continued)

Premises, Furniture and Equipment
Land is carried at cost. Premises, furniture and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 10 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.

Other Real Estate
Other Real Estate is carried at the lower of cost or fair value, less estimated selling costs. Expenses incurred in carrying Other Real Estate are charged to operations as incurred.

Goodwill and Other Intangible Assets
Goodwill results from prior business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is not amortized, but is assessed at least annually for impairment with any such impairment recognized in the period identified.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets. They are initially measured at fair value and then are amortized on a straight-line method over their estimated useful lives, which range from 7 to 10 years.

Company Owned Life Insurance
The Company has purchased life insurance policies on certain directors and executives. This life insurance is recorded at its cash surrender value or the amount that can be realized.

Servicing Rights
Servicing rights are recognized and included with other assets for purchased rights and 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, with any impairment of a grouping reported as a valuation allowance. Fair value is determined based upon discounted cash flows using market based assumptions.

Loss contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

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.

	2004	2003	2002

Net Income as Reported	$ 7,239	$ 8,168	$ 9,442
Compensation Expense Under Fair Value Method, Net of Tax	246	268	229

Pro forma Net Income	$ 6,993	$ 7,900	$ 9,213
Pro forma Earnings per Share	$ 0.64	$ 0.71	$ 0.77
Proforma Diluted Earnings per Shares	$ 0.64	$ 0.70	$ 0.77
Earnings per Share as Reported	$ 0.66	$ 0.73	$ 0.79
Diluted Earnings per Share as Reported	$ 0.66	$ 0.73	$ 0.78

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 1 – Summary of Significant Accounting Policies (continued)

For options granted during 2004, 2003 and 2002, the weighted-average fair values at grant date are $2.89, $3.04 and $2.88, respectively. The fair value of options granted during 2004, 2003 and 2002 was estimated using the following weighted-average information: risk-free interest rate of 2.79%, 2.56% and 3.89%, expected life of 4.3, 4.4 and 4.1 years, expected volatility of stock price of .24, .25 and .27, and expected dividends of 3.20%, 3.11% and 2.88% per year.

Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in minimum pension liability, which are also recognized as a separate component of equity.

Income Taxes
Deferred tax liabilities and assets are determined at each balance sheet date and are the result of differences in the financial statement and tax bases of assets and liabilities. Income tax expense is the amount due on the current year tax returns plus or minus the change in deferred taxes. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Earnings Per Share
Earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the potential dilutive effect of additional common shares issuable under stock options. Earnings per share is retroactively restated for stock dividends.

Cash Flow Reporting
The Company reports net cash flows for customer loan transactions, deposit transactions and deposits made with other financial institutions. Cash and cash equivalents are defined to include cash on hand, demand deposits in other institutions and Federal Funds Sold.

Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments do not include the value of anticipated future business, or the values of assets and liabilities not considered financial instruments.

New Accounting Pronouncements
FAS 123R requires all public companies to record compensation cost for stock options provided to employees in return for employee service. The cost is measured at the fair value of the options when granted, and this cost is expensed over the employee service period, which is normally the vesting period of the options. This will apply to awards granted or modified on or after July 1, 2005. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The effect on results of operations will depend on the level of future option grants and the calculation of the fair value of the options granted at such future date, as well as the vesting periods provided, and cannot currently be predicted. Existing options that will vest after adoption date are expected to result in additional compensation expense of approximately $48 during the balance of 2005, $58 in 2006, $27 in 2007, $9 in 2008, and $1 in 2009. There will be no significant effect on financial position as total equity will not change.

SOP 03-3 requires that a valuation allowance for loans acquired in a transfer, including in a business combination, reflect only losses incurred after acquisition and should not be recorded at acquisition. It applies to any loan acquired in a transfer that showed evidence of credit quality deterioration since it was made. The effect of this new standard on the Company’s financial position and results of operations will depend upon the amount of such loans acquired in the future.

Emerging Issues Task Force (“EITF”) Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”, contains guidance regarding other-than-temporary impairment on securities that was to take effect for the quarter ended September 30, 2004. However, the effective date of portions of this guidance has been delayed, and more interpretive guidance is expected to be issued in the future. The effect of this new and pending guidance on the Company’s financial statements is not known, but it is possible this guidance could change management’s assessment of other-than-temporary impairment in future periods.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 2 – Securities

The amortized cost, gains and losses recognized in accumulated other comprehensive income (loss), and fair value of Securities Available-for-Sale were as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities Available-for-Sale:
2004
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies	$	4,060	$	---	$	(26	)	$	4,034
Obligations of State and Political Subdivisions		29,807		829		(15	)		30,621
Asset- / Mortgage-backed Securities		131,614		455		(868	)		131,201
Corporate Securities		503		---		---			503
Equity Securities		15,149		168		---			15,317

Total	$	181,133	$	1,452	$	(909	)	$	181,676


2003
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies	$	4,112	$	1	$	(23	)	$	4,090
Obligations of State and Political Subdivisions		37,421		1,178		(20	)		38,579
Asset- / Mortgage-backed Securities		136,674		590		(679	)		136,585
Corporate Securities		506		9		---			515
Equity Securities		16,808		286		(1,070	)		16,024

Total	$	195,521	$	2,064	$	(1,792	)	$	195,793

The carrying amount, unrecognized gains and losses and fair value of Securities Held-to-Maturity were as follows:

	Carrying Amount		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value

Securities Held-to-Maturity:
2004
Obligations of State and Political Subdivisions	$	13,318	$	319	$	(1	)	$	13,636

2003
Obligations of State and Political Subdivisions	$	17,417	$	552	$	(5	)	$	17,964

The amortized cost and fair value of Securities at December 31, 2004 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because some issuers have the right to call or prepay certain obligations with or without call or prepayment penalties. Asset-backed, Mortgage-backed and Equity Securities are not due at a single maturity date and are shown separately.

	Amortized Cost		Fair Value

Securities Available-for-Sale:
Due in one year or less	$	1,330	$	1,333
Due after one year through five years		8,494		8,604
Due after five years through ten years		14,690		15,162
Due after ten years		9,856		10,059
Asset- / Mortgage-backed Securities		131,614		131,201
Equity Securities		15,149		15,317

Totals	$	181,133	$	181,676

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 2 – Securities (continued)

	Carrying Amount		Fair Value

Securities Held-to-Maturity:
Due in one year or less	$	1,547	$	1,552
Due after one year through five years		4,683		4,820
Due after five years through ten years		2,796		2,877
Due after ten years		4,292		4,387

Totals	$	13,318	$	13,636

Proceeds from the Sales of Securities are summarized below:

	2004 Available- for-Sale		2003 Available- for-Sale			2002 Available- for-Sale

Proceeds from Sales and Calls	$	1,986	$	18,239		$	19,975
Gross Gains on Sales and Calls		5		126			17
Gross Losses on Sales and Calls		---		(46	)		---

Income Taxes on Gross Gains		2		43			6
Income Taxes on Gross Losses		---		(16	)		---

The carrying value of securities pledged to secure repurchase agreements, public and trust deposits, and for other purposes as required by law was $94,995 and $89,398 as of December 31, 2004 and 2003, respectively.

Below is a summary of securities with unrealized losses as of year-end 2004 and 2003, presented by length of time the securities have been in an unrealized loss position:

At December 31, 2004:	Less than 12 Months					12 Months or More					Total
		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury Securities and Obligations of
Government Corporations and Agencies	$	2,534	$	(26	)	$	---	$	---		$	2,534	$	(26	)
Obligations of State and Political Subdivisions		2,085		(16	)		---		---			2,085		(16	)
Asset- / Mortgage-backed Securities		74,038		(570	)		19,458		(298	)		93,496		(868	)
Corporate Securities		---		---			---		---			---		---
Equity Securities		---		---			---		---			---		---

Total	$	78,657	$	(612	)	$	19,458	$	(298	)	$	98,115	$	(910	)

The Company’s equity portfolio is primarily comprised of floating rate preferred stock issued by the Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA). In the year ended December 31, 2004, the Company recognized a $3.68 million non-cash, pre-tax charge for the other-than-temporary decline in value on this floating rate preferred stock portfolio. The Company accounts for these securities in accordance with SFAS No. 115, which requires that if the decline in fair market value below cost is determined to be other-than-temporary, the unrealized loss must be recognized as expense in the income statement. During the quarter ended December 31, 2004, public disclosures regarding accounting practices at FNMA and a multi-billion dollar FNMA preferred stock issuance with a substantially different structure and higher yield than previous offerings had a detrimental effect on the fair value of both the FHLMC and FNMA preferred stock holdings. As a result of these factors and the magnitude and length of time the market value had been below cost, management could not forecast full recovery of the fair values in a reasonable time period and concluded that the preferred stock is other than temporarily impaired. Accordingly, the other-than-temporary impairment was recognized in the income statement as an investment securities loss.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 2 – Securities (continued)

The Company’s Asset/Mortgage backed securities portfolio has been issued primarily by governmental agencies (i.e. GNMA, FNMA, and FHLMC). Gross unrealized losses on these securities that have been in a continuous unrealized loss position for twelve months or longer were $298 at December 31, 2004. The Company has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value was largely due to changes in market interest rates, therefore, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004.

Gross unrealized losses on all securities that have been in an unrealized loss position for less than twelve months were $612 at December 31, 2004. The Company has the intent and ability to hold these securities for the foreseeable future, and the decline in fair value was largely due to changes in market interest rates, therefore, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2004.

At December 31, 2003:	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Treasury Securities and Obligations of
Government Corporations and Agencies	$	2,051	$	(23	)	$	---		---		$	2,051	$	(23	)
Obligations of State and Political Subdivisions		1,491		(7	)		1,608		(18	)		3,099		(25	)
Asset- / Mortgage-backed Securities		68,906		(679	)		---		---			68,906		(679	)
Corporate Securities		---		---			---		---			---		---
Equity Securities		---		---			4,663		(1,070	)		4,663		(1,070	)

Total	$	72,448	$	(709	)	$	6,271	$	(1,088	)	$	78,719	$	(1,797	)

At December 31, 2003, unrealized losses on the Company’s securities portfolio were not recognized into income because the securities were of high credit quality (rated AA or higher), management had the intent and ability to hold for the foreseeable future, and the decline in fair value was largely due to changes in market interest rates. The Company’s Asset/Mortgage backed securities portfolio and Equity portfolio was issued primarily by governmental agencies (i.e. GNMA, FNMA, and FHLMC) and the equity securities were preferred shares that carried a variable interest rate. The fair value was expected to recover as the securities approached their maturity/repricing date and/or market rates changed.

NOTE 3 – Loans

Loans were comprised of the following classifications at December 31:

	2004		2003
Residential Mortgage Loans	$	94,800	$	110,325
Agricultural and Poultry Loans		104,592		94,099
Commercial and Industrial Loans		308,763		294,015
Consumer Loans		122,888		114,816

Totals	$	631,043	$	613,255


Nonperforming loans were as follows at December 31:

Loans past due over 90 days and accruing and Restructured Loans	$	831	$	962
Non-accrual loans		5,750		1,817

Totals	$	6,581	$	2,779

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 3 – Loans (continued)

Information regarding impaired loans:	2004		2003


Year-end impaired loans with no allowance for loan losses allocated	$	905	$	834
Year-end impaired loans with allowance for loan losses allocated		4,618		1,355

Amount of allowance allocated to impaired loans		992		246	2002

Average balance of impaired loans during the year		4,400		1,313	$ 2,025

Interest income recognized during impairment		263		103	110
Interest income recognized on cash basis		243		102	101

Certain directors, executive officers, and principal shareholders of the Company, including their immediate families and companies in which they are principal owners, were loan customers of the Company during 2004. A summary of the activity of these loans follows:

Balance January 1, 2004			Additions			Changes in Persons Included			Deductions Collected Charged-off						Balance December 31, 2004
	$16,945			$19,327			$515			$(12,918	)	$---				$23,869

NOTE 4 – Allowance for Loan Losses

A summary of the activity in the Allowance for Loan Losses follows:

	2004			2003			2002
Balance as of January 1	$	8,265		$	8,301		$	8,388
Provision for Loan Losses		2,015			811			1,115
Recoveries of Prior Loan Losses		371			784			383
Loan Losses Charged to the Allowance		(1,850	)		(1,631	)		(1,585	)

Balance as of December 31	$	8,801		$	8,265		$	8,301

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 5 – Mortgage Banking

The amount of loans serviced by the Company for the benefit of others was $316,948 and $305,927 at December 31, 2004 and 2003. These loans are owned by outside parties and are not included in the assets of the Company.

Activity for capitalized mortgage servicing rights and the related valuation allowance was as follows. The net balance of mortgage servicing rights is included in Other Assets.

	2004			2003			2002
Servicing Rights:
Beginning of Year	$	3,368		$	2,694		$	1,979
Additions		643			1,687			986
Amortized to Expense		(467	)		(420	)		(271	)
Direct Write-downs		(145	)		(593	)		---

End of Year	$	3,399		$	3,368		$	2,694

Valuation Allowance:
Beginning of Year	$	885		$	1,238		$	517
Additions Expensed		363			706			784
Reductions Credited to Expense		(326	)		(466	)		(63	)
Direct Write-downs		(145	)		(593	)		---

End of Year	$	777		$	885		$	1,238

The fair value of servicing rights was $2,695 and $2,647 at December 31, 2004 and 2003. For purposes of determining fair value, a discount rate of 9% was assumed at December 31, 2004 and 2003. Weighted average prepayment speeds applied were 19% and 20% at December 31, 2004 and 2003. Fair values were determined using a discounted cash-flow model.

NOTE 6 – Premises, Furniture, and Equipment

Premises, furniture, and equipment was comprised of the following classifications at December 31:

	2004			2003
Land	$	3,947		$	4,086
Buildings and Improvements		23,256			23,001
Furniture and Equipment		15,158			14,721

Total Premises, Furniture and Equipment		42,361			41,808
Less: Accumulated Depreciation		(22,130	)		(20,203	)

Total	$	20,231		$	21,605

Depreciation expense was $2,308, $2,418 and $2,067 for 2004, 2003 and 2002, respectively.

NOTE 7 – Deposits

At year-end 2004, interest-bearing deposits include $305,341 of demand and savings deposits and $321,915 of time deposits. Stated maturities of time deposits were as follows:

2004	$	197,162
2005		42,257
2006		48,208
2007		30,821
2008		3,443
Thereafter		24

Total	$	321,915

Time deposits of $100 or more at December 31, 2004 and 2003 were $69,583 and $53,833.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 8 – FHLB Advances and Other Borrowed Money

The Company’s funding sources include Federal Home Loan Bank advances and repurchase agreements. Information regarding each of these types of borrowings is as follows:

	December 31,
	2004		2003
Long-term advances from the Federal Home Loan Bank collateralized by
qualifying mortgages, investment securities, and mortgage-backed securities	$	59,366	$	68,730
Promissory notes payable		10,575		8,150

Long-term borrowings		69,941		76,880


Overnight variable rate advances from Federal Home Loan Bank collateralized by qualifying mortgages, investment securities, and mortgage-backed securities	$	---	$	8,500
Federal Funds Purchased		---		4,000
Repurchase Agreements		25,673		23,179

Short-term borrowings		25,673		35,679


Total borrowings	$	95,614	$	112,559

Repurchase agreements, which are classified as secured borrowings, generally mature within one day of the transaction date. Repurchase agreements are reflected at the amount of cash received in connection with the transaction. The corporation may be required to provide additional collateral based on the value of the underlying securities.

At December 31, 2004 interest rates on the fixed rate long-term FHLB advances ranged from 2.50% to 7.22% with a weighted average rate of 5.93%. Of the $59.4 million, $50.0 million or 84% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. The options on these advances are subject to a variety of terms including LIBOR based strike rates.

At December 31, 2003 interest rates on the fixed rate long-term FHLB advances ranged from 4.98% to 7.27% with a weighted average rate of 6.10%. Of the $68.7 million, $52.6 million or 77% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the company may prepay the advance without penalty. The options on these advances are subject to a variety of terms including LIBOR based strike rates.

During 2003, the Company’s mortgage banking segment prepaid $40 million of FHLB advances. The prepayment fees associated with the extinguishment of this debt totaled $1.9 million.

At December 31, 2004, the notes payable shown above includes $10.5 million outstanding on a $15.0 million line of credit at the Parent Company. Interest on the line of credit is based upon 90-day LIBOR plus 1.25% with a .15% commitment fee on the unused portion of the line of credit. The line of credit matures in March 2005. Under the terms of this note, the Company and all of its bank subsidiaries must maintain a “well-capitalized” status.

Scheduled principal payments on long-term borrowings at December 31, 2004 are as follows:

2005	$	32,335
2006		2,485
2007		2,317
2008		1,168
2009		10,026
Thereafter		21,610

Total	$	69,941

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 9 – Stockholders’ Equity (share and per share amounts adjusted for stock dividends)

The prompt corrective action regulations provide five classifications, including well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required.

At December 31, 2004, consolidated and affiliate bank actual capital and minimum required levels are presented below:

	Actual					Minimum Required For Capital Adequacy Purposes:					Minimum Required To Be Well- Capitalized Under Prompt Corrective Action Regulations:

	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total Capital
(to Risk Weighted Assets)
Consolidated	$	87,821		11	.83%	$	59,386		8	.00%	$	74,232		10	.00%
German American Bank		37,180		10	.85		27,402		8	.00		34,252		10	.00
First American Bank		13,396		14	.85		7,218		8	.00		9,023		10	.00
Peoples Bank		16,692		12	.32		10,835		8	.00		13,543		10	.00
Citizens State Bank		12,528		12	.06		8,309		8	.00		10,386		10	.00
First State Bank		6,636		10	.72		4,954		8	.00		6,192		10	.00

Tier 1 Capital
(to Risk Weighted Assets)
Consolidated	$	78,945		10	.63%	$	29,693		4	.00%	$	44,539		6	.00%
German American Bank		33,510		9	.78		13,701		4	.00		20,551		6	.00
First American Bank		12,260		13	.59		3,609		4	.00		5,414		6	.00
Peoples Bank		15,203		11	.23		5,417		4	.00		8,126		6	.00
Citizens State Bank		11,345		10	.92		4,154		4	.00		6,232		6	.00
First State Bank		5,949		9	.61		2,477		4	.00		3,715		6	.00

Tier 1 Capital
(to Average Assets)
Consolidated	$	78,945		8	.50%	$	37,143		4	.00%	$	46,428		5	.00%
German American Bank		33,510		7	.99		16,774		4	.00		20,968		5	.00
First American Bank		12,260		9	.50		5,159		4	.00		6,449		5	.00
Peoples Bank		15,203		7	.80		7,792		4	.00		9,740		5	.00
Citizens State Bank		11,345		9	.19		4,938		4	.00		6,172		5	.00
First State Bank		5,949		7	.76		3,065		4	.00		3,831		5	.00

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 9 – Stockholders’ Equity (continued)

At December 31, 2003, consolidated and affiliate bank actual capital and minimum required levels are presented below:

	Actual					Minimum Required For Capital Adequacy Purposes:					Minimum Required To Be Well- Capitalized Under Prompt Corrective Action Regulations:

	Amount		Ratio			Amount		Ratio			Amount		Ratio

Total Capital
(to Risk Weighted Assets)
Consolidated	$	85,999		12	.30%	$	55,956		8	.00%	$	69,945		10	.00%
German American Bank		36,507		10	.72		27,232		8	.00		34,040		10	.00
First American Bank		13,314		14	.39		7,403		8	.00		9,254		10	.00
Peoples Bank		15,957		11	.55		11,054		8	.00		13,817		10	.00
Citizens State Bank		12,343		12	.04		8,199		8	.00		10,248		10	.00
First State Bank		5,860		10	.65		4,401		8	.00		5,501		10	.00

Tier 1 Capital
(to Risk Weighted Assets)
Consolidated	$	77,734		11	.11%	$	27,978		4	.00%	$	41,967		6	.00%
German American Bank		33,102		9	.72		13,616		4	.00		20,424		6	.00
First American Bank		12,153		13	.13		3,701		4	.00		5,552		6	.00
Peoples Bank		14,710		10	.65		5,527		4	.00		8,290		6	.00
Citizens State Bank		11,060		10	.79		4,099		4	.00		6,149		6	.00
First State Bank		5,178		9	.41		2,200		4	.00		3,300		6	.00

Tier 1 Capital
(to Average Assets)
Consolidated	$	77,734		8	.40%	$	37,034		4	.00%	$	46,293		5	.00%
German American Bank		33,102		7	.99		16,566		4	.00		20,708		5	.00
First American Bank		12,153		8	.12		5,990		4	.00		7,487		5	.00
Peoples Bank		14,710		7	.92		7,431		4	.00		9,289		5	.00
Citizens State Bank		11,060		8	.96		4,935		4	.00		6,169		5	.00
First State Bank		5,178		7	.38		2,808		4	.00		3,510		5	.00

The Company and all affiliate Banks at year-end 2004 and 2003 were categorized as well-capitalized. There have been no conditions or events that management believes have changed classification of the Company or affiliate Banks under the prompt corrective action regulations since the last notification from regulators. Regulations require the maintenance of certain capital levels at each affiliate bank, and may limit the dividends payable by the affiliates to the holding company, or by the holding company to its shareholders. At December 31, 2004 the affiliates had $10.3 million in retained earnings available for dividends to the parent company without prior regulatory approval.

Stock Options

The Company maintains Stock Option Plans and at December 31, 2004, has reserved 620,144 shares of Common Stock (as adjusted for subsequent stock dividends and subject to further customary anti-dilution adjustments) for the purpose of issuance pursuant to outstanding and future grants of options to officers, directors and other employees of the Company. Options may be designated as “incentive stock options” under the Internal Revenue Code of 1986, or as nonqualified options. While the date after which options are first exercisable is determined by the Stock Option Committee of the Company or, in the case of options granted to directors, by the Board of Directors, no stock option may be exercised after ten years from the date of grant (twenty years in the case of nonqualified stock options). The exercise price of stock options granted pursuant to the Plans must be no less than the fair market value of the Common Stock on the date of the grant.

The Plans authorize an optionee to pay the exercise price of options in cash or in common shares of the Company or in some combination of cash and common shares. An optionee may tender already-owned common shares to the Company in exercise of an option. In this instance, the Company is obligated to issue to such optionee a replacement option for the number of shares tendered, as follows: (a) of the same type as the option exercised (either an incentive stock option or a non-qualified option); (b) with the same expiration date; and (c) priced at the fair market value of the stock on that date. Replacement options may generally not be exercised until one year from the date of grant and (subject to certain exceptions) are cancelled if the optionee sells any Company stock prior to that date.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 9 – Stockholders’ Equity (continued)

Changes in options outstanding were as follows, as adjusted to reflect stock dividends:

	Number of Options		Weighted-average Exercise Price

Outstanding, beginning of 2002	285,725		$	14.19
Granted	104,060			14.73
Exercised	(39,476	)		12.67
Forfeited	(5,373	)		12.15
Expired	---			---

Outstanding, end of 2002	344,936			14.56
Granted	101,587			17.99
Exercised	(66,660	)		13.81
Forfeited	(2,303	)		15.16
Expired	(430	)		21.34

Outstanding, end of 2003	377,130			15.61
Granted	87,685			17.36
Exercised	(32,608	)		13.00
Forfeited	(2,040	)		16.12
Expired	---			---

Outstanding, end of 2004	430,167			16.16

Options outstanding at year-end 2004 are as follows:

	Outstanding		Exercisable
Range of Exercise Prices	Number	Weighted Average Remaining Contractual Life (in years)	Number	Weighted Average Exercise Price

$ 11.93 - $ 13.07	88,807	2.27	57,499	$ 12.45
$ 14.20 - $ 16.52	87,447	4.08	52,049	14.93
$ 17.51 - $ 18.28	253,913	6.40	128,664	18.18

	430,167	5.08	238,212	16.08

Options exercisable and the weighted average exercise price at December 31, 2003 and 2002 were 185,759 at $15.73 and 172,652 at $15.58, respectively.

Employee Stock Purchase Plan

The Company maintains an Employee Stock Purchase Plan whereby eligible employees can purchase the Company’s common stock at a discount. The purchase price of the shares under this plan is 85% of the fair market value of such stock at the beginning or end of the period, whichever is less. The plan provides for the purchase of up to 542,420 shares of common stock, which the Company may obtain by purchases on the open market or from private sources, or by issuing authorized but unissued common shares. The Company purchased common shares on the open market in 2004, 2003, and 2002. Funding for the purchase of common stock was from employee contributions and Company contributions. Company contributions totaled $76, $120, and $66 for 2004, 2003, and 2002.

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 December 31, 2004, the Company had purchased 251,965 shares under the program.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 9 – Stockholders’ Equity (continued)

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 10 – Employee Benefit Plans

The Company provides a contributory trusteed 401(k) deferred compensation and profit sharing plan, which covers substantially all full-time employees. The Company agrees to match certain employee contributions under the 401(k) portion of the plan, while profit sharing contributions are discretionary and are subject to determination by the Board of Directors. Company contributions were $495, $1,137, and $1,184 for 2004, 2003, and 2002, respectively.

Prior to the second quarter of 2004, the Company self-insured employee health benefits for the majority of its subsidiaries. Since then, the Company has self-isured all employee health benefits. Stop loss insurance covers annual losses exceeding $70 per covered individual and approximately $1,755 in the aggregate. Management’s policy is to establish a reserve for claims not submitted by a charge to earnings based on prior experience. Charges to earnings were $1,145, $868, and $873 for 2004, 2003, and 2002, respectively.

The Company maintains deferred compensation plans for the benefit of certain directors and officers. Under the plans the company agrees, in return for the directors and officers deferring the receipt of a portion of their current compensation, to pay a retirement benefit computed as the amount of the compensation deferred plus accrued interest at a variable rate. Accrued benefits payable totaled $3,577 and $3,653 at December 31, 2004 and 2003. Deferred compensation expense was $315, $895, and $327 for 2004, 2003, and 2002. In conjunction with the plans, the Company has purchased life insurance on certain directors and officers.

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. During 2004, the Company incurred $52 on partial settlements of the plan. During 2003, there were no losses incurred on partial settlements of the plan, and during 2002, $39 was incurred on partial settlements. The Company uses a September 30 measurement date for its plan.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 10 – Employee Benefit Plans (continued)

Accumulated plan benefit information for the Company’s plan as of December 31, 2004 and 2003 was as follows:

	2004			2003
Changes in Benefit Obligation:
Obligation at beginning of year	$	936		$	959
Service cost		---			---
Interest cost		54			61
Benefits paid		(200	)		(91	)
Actuarial gain		42			7
Adjustment in cost of settlement		27			---

Obligation at end of year		859			936

Changes in Plan Assets:
Fair value at beginning of year		744			782
Actual return on plan assets		8			53
Employer contributions		---			---
Benefits paid		(200	)		(91	)

Fair value at end of year		552			744

Funded Status:
Funded status at end of year		(307	)		(191	)
Unrecognized prior service cost		(5	)		(8	)
Unrecognized net loss		306			294
Unrecognized transition asset		(5	)		(7	)

Pension (liability) or prepaid benefit cost	$	(11	)	$	88


Amounts recognized in the balance sheet consist of:

		2004			2003
(Accrued) Prepaid benefit cost	$	(11	)	$	88
Minimum pension liability		(296	)		(279	)
Accumulated other comprehensive income		179			169

Because the plan has been suspended, the projected benefit obligation and accumulated benefit obligation are the same. The accumulated benefit obligation for the defined benefit pension plan exceeds the fair value of the assets included in the plan.

Net periodic pension expense for the years ended December 31, 2004, 2003, and 2002 was as follows:

	2004			2003			2002
Interest cost	$	54		$	61		$	66
Expected return on assets		(31	)		(38	)		(50	)
Amortization of transition amount		(2	)		(1	)		(2	)
Amortization of prior service cost		(3	)		(3	)		(3	)
Recognition of net loss		29			34			15

Net periodic pension expense	$	47		$	53		$	26


Additional Information		2004			2003

Increase in minimum liability included in other
comprehensive income	$	10		$	169

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 10 – Employee Benefit Plans (continued)

Assumptions

Weighted-average assumptions used to determine benefit obligations at year-end:

	2004	2003
Discount rate	6.00%	6.25%
Rate of compensation increase	N/A	N/A⁽¹⁾

Weighted-average assumptions used to determine net cost:
	2004	2003	2002
Discount rate	6.25%	6.50%	7.50%
Expected return on plan assets	5.00%	5.00%	5.50%
Rate of compensation increase	N/A	N/A	N/A⁽¹⁾

⁽¹⁾	Benefits under the plan were suspended in 1998; therefore, the weighted-average rate of increase in future compensation levels was not applicable for all years presented.

The expected return on plan assets was determined based upon rates that are expected to be available for future reinvestment of earnings and maturing investments along with consideration given to the current mix of plan assets.

Plan Assets

The Company’s defined benefit pension plan asset allocation at year-end 2004 and 2003 and target allocation for 2005 by asset category are as follows:

	Target Allocation			Percentage of Plan Assets at Year-end
	2005			2004			2003
Asset Category

Cash		21	%		1	%		7	%
Certificate of Deposits		56	%		76	%		75	%
Equity Securities		23	%		23	%		18	%

Total		100	%		100	%		100	%

Plan benefits are suspended. Therefore, the Company has invested predominantly in relatively short-term investments over the past two years. No significant changes to investing strategies are anticipated.

The above mentioned Equity Securities consist of the Company’s stock for all periods presented.

Contributions

The Company expects to contribute $21 to the pension plan during the fiscal year ending December 31, 2005.

Estimated Future Benefits

The following benefit payments, which reflect expected future service, are expected to be paid:


Year	Benefits
2005	$ 41
2006	51
2007	50
2008	49
2009	47
2010-2014	266

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 11 – Income Taxes

	2004			2003			2002
The provision for income taxes consists of the following:
Currently Payable	$	1,811		$	883		$	817
Deferred		(619	)		192			1,170
Change in Valuation Allowance		(196	)		196			---

Total	$	996		$	1,271		$	1,987


Income tax expense is reconciled to the 34% statutory rate applied to pre-tax income as follows:

		2004			2003			2002

Statutory Rate Times Pre-tax Income	$	2,800		$	3,209		$	3,886
Add/(Subtract) the Tax Effect of:
Income from Tax-exempt Loans and Investments		(845	)		(1,035	)		(1,292	)
State Income Tax, Net of Federal Tax Effect		25			(2	)		95
Low Income Housing Credit		(525	)		(520	)		(525	)
Dividends Received Deduction		(165	)		(183	)		(207	)
Company Owned Life Insurance		(241	)		(147	)		(123	)
Other Differences		(53	)		(51	)		153

Total Income Taxes	$	996		$	1,271		$	1,987


The net deferred tax asset at December 31 consists of the following:

		2004			2003
Deferred Tax Assets:
Allowance for Loan Losses	$	2,543		$	2,331
Deferred Compensation and Employee Benefits		1,596			1,533
Intangibles		40			30
Unused Tax Credits		3,337			3,057
Unrealized Capital Loss on Equity Securities		1,252			---
Minimum Pension Liability		117			110
Net Operating Loss Carryforward		---			193
Other		244			203

Total Deferred Tax Assets		9,129			7,457

Deferred Tax Liabilities:
Depreciation		(861	)		(866	)
Leasing Activities, Net		(3,227	)		(2,495	)
Mortgage Servicing Rights		(1,032	)		(978	)
Investment in Low Income Housing Partnerships		(372	)		(319	)
Unrealized Appreciation on Securities		(188	)		(95	)
FHLB Stock Dividends		(540	)		(304	)
Other		(263	)		(287	)

Total Deferred Tax Liabilities		(6,483	)		(5,344	)
Valuation Allowance		(45	)		(241	)

Net Deferred Tax Asset	$	2,601		$	1,872

The Company has $1,818 of general business credit carryforward, which will expire in years 2021 thru 2024. The Company also has $1,519 of alternative minimum tax credit carryforward, which under current tax law has no expiration period. The valuation allowance on deferred tax assets declined during 2004 due to the realization of Indiana net operating loss carryforwards.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 11 – Income Taxes (continued)

Under the Internal Revenue Code, through 1996 First Federal Bank (now First American Bank) was allowed a special bad debt deduction related to additions to tax bad debt reserves established for the purpose of absorbing losses. Subject to certain limitations, First Federal Bank was permitted to deduct from taxable income an allowance for bad debts based on a percentage of taxable income before such deductions or actual loss experience. First Federal Bank generally computed its annual addition to its bad debt reserves using the percentage of taxable income method; however, due to certain limitations in 1996, First Federal Bank was only allowed a deduction based on actual loss experience. Retained earnings at December 31, 2004, include approximately $2,300 for which no provision for federal income taxes has been made. This amount represents allocations of income for allowable bad debt deductions. Reduction of amounts so allocated for purposes other than tax bad debt losses will create taxable income, which will be subject to the then current corporate income tax rate. It is not contemplated that amounts allocated to bad debt deductions will be used in any manner to create taxable income. The unrecorded deferred income tax liability on the above amount at December 31, 2004 was approximately $782.

Since December 31, 2001, the Company’s effective tax rate has been favorably impacted by Indiana financial institution tax savings resulting from the Company’s formation of investment subsidiaries in the state of Nevada by four of the Company’s banking subsidiaries. The state of Nevada has no state or local income tax. An auditor employed by the Indiana Department of Revenue (“Department”) has, in the course of the Department’s pending audit of the Company’s financial institutions tax return for the year 2002, advised the Company that the Department is considering issuing a notice of proposed assessment for unpaid financial institutions tax for the year 2002 of approximately $590 ($389 net of federal tax) plus interest, based on the auditor’s inclusion of the income of the Nevada subsidiaries in the Indiana return for that year. If the Department issues such a notice of proposed assessment, the Company intends to file a protest with the Department contesting the proposed assessment and would defend its position that the income of the Nevada subsidiaries is not subject to the Indiana financial institutions tax. Although there can be no such assurance, at this time management does not believe this potential assessment will result in additional tax liability. Therefore, no tax provision has been recognized for the potential assessment of additional financial institutions tax for 2002 or for financial institutions tax with respect to any of the Nevada subsidiaries in any period subsequent to 2002, including the year-ended December 31, 2004.

NOTE 12 – Per Share Data

Earnings and Diluted Earnings per Share amounts 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 provided below:

	2004		2003		2002
Earnings per Share:
Net Income	$	7,239	$	8,168	$	9,442

Weighted Average Shares Outstanding		10,914,622		11,176,766		12,007,009

Earnings per Share	$	0.66	$	0.73	$	0.79

Diluted Earnings per Share:
Net Income	$	7,239	$	8,168	$	9,442

Weighted Average Shares Outstanding		10,914,622		11,176,766		12,007,009
Stock Options, Net		33,509		45,577		32,601

Diluted Weighted Average Shares Outstanding		10,948,131		11,222,343		12,039,610

Diluted Earnings per Share	$	0.66	$	0.73	$	0.78

Stock options for 253,913, 177,974, and 78,136 shares of common stock were not considered in computing diluted earnings per common share for 2004, 2003, and 2002, respectively because they were anti-dilutive.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 13 – Lease Commitments

The total rental expense for all leases for the years ended December 31, 2004, 2003, and 2002 was $213, $165, and $161 respectively, including amounts paid under short-term cancelable leases.

At December 31, 2004, the German American Bank subleased space for two branch-banking facilities from a company controlled by a director and shareholder of the Company. The subleases expire in 2005 and 2008 with various renewal options provided. Aggregate annual rental payments to this Director’s company totaled $51 for 2004. Exercise of the Bank’s sublease renewal options is contingent upon the Director’s company renewing its primary leases.

At December 31, 2004, the German American Bancorp leased space for office facilities from a company controlled by another director and shareholder of the Company. The lease expires in 2005 with various renewal options provided. Aggregate annual rental payments to this Director’s company totaled $29 for 2004.

The following is a schedule of future minimum lease payments:

Years Ending December 31:	Premises

2005	$	88
2006		62
2007		62
2008		31
2009		24
Thereafter		24

Total	$	291

NOTE 14 – Commitments and Off-balance Sheet Items

In the normal course of business, there are various commitments and contingent liabilities, such as commitments to extend credit and commitments to sell loans, which are not reflected in the accompanying consolidated financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to make loans and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policy to make commitments as it uses for on-balance sheet items.

The Company’s exposure to credit risk for commitments to sell loans is dependent upon the ability of the counter-party to purchase the loans. This is generally assured by the use of government sponsored entity counterparts. These commitments are subject to market risk resulting from fluctuations in interest rates. Commitments to sell loans are not mandatory (i.e., do not require net settlement with the counter-party to cancel the commitment).

Commitments and contingent liabilities are summarized as follows, at December 31:

	2004		2003
Commitments to Fund Loans:
Home Equity	$	40,158	$	34,578
Credit Card Lines		12,737		11,469
Commercial Operating Lines		51,826		47,928
Residential Mortgages		6,584		9,843

Total Commitments to Fund Loans	$	111,305	$	103,818

Commitments to Sell Loans	$	8,934	$	5,113
Standby Letters of Credit	$	6,245	$	5,933

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 14 – Commitments and Off-balance Sheet Items (continued)

The majority of commercial operating lines and home equity lines are variable rate, while the majority of other commitments to fund loans are fixed rate. Since many commitments to make loans expire without being used, these amounts do not necessarily represent future cash commitments. Collateral obtained upon exercise of the commitment is determined using management’s credit evaluation of the borrower, and may include accounts receivable, inventory, property, land and other items. The approximate duration of these commitments is generally one year or less.

At December 31, 2004 and 2003, respectively, the affiliate banks were required to have $4,982 and $11,192 on deposit with the Federal Reserve, or as cash on hand. These reserves do not earn interest.

NOTE 15 – Non-cash Investing Activities

			2004			2003			2002
Loans Transferred to Other Real Estate			$	800		$	834		$	1,975

NOTE 16 – Segment Information

The Company’s operations include four primary segments: core banking, mortgage banking, trust and investment advisory, 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 trust and investment advisory 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 26 retail banking offices. 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 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 trust and investment advisory 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 German American Insurance, 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 amounts to eliminate transactions between segments.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 16 – Segment Information (continued)

Year Ended December 31, 2004	Core Banking			Mortgage Banking			Trust and Investment Advisory		Insurance		Other			Consolidated Totals

Net Interest Income	$	31,279		$	251		$	32	$	4	$	(327	)	$	31,239
Gain on Sales of Loans and
Related Assets		583			392			---		---		---			975
Net Gain/(Loss) on Securities		(3,678	)		---			---		---		---			(3,678	)
Servicing Income		---			925			---		---		(154	)		771
Trust and Investment Product Fees		4			---			2,129		---		(87	)		2,046
Insurance Revenues		76			60			53		4,598		(121	)		4,666
Loss on Extinguishment of Borrowings		---			---			---		---		---			---
Noncash Items:
Provision for Loan Losses		2,250			(235	)		---		---		---			2,015
MSR Amortization & Valuation		---			504			---		---		---			504
Provision for Income Taxes		3,512			(26	)		106		305		(2,901	)		996
Segment Profit (Loss)		9,491			(39	)		159		646		(3,018	)		7,239
Segment Assets		904,633			24,928			2,200		7,959		2,374			942,094

Year Ended December 31, 2003	Core Banking			Mortgage Banking			Trust and Investment Advisory		Insurance		Other			Consolidated Totals

Net Interest Income	$	30,284		$	(622	)	$	22	$	10	$	(159	)	$	29,535
Gain on Sales of Loans and
Related Assets		1,284			1,304			---		---		---			2,588
Net Gain/(Loss) on Securities		56			---			---		---		24			80
Servicing Income		---			893			---		---		(189	)		704
Trust and Investment Product Fees		4			---			1,716		---		(93	)		1,627
Insurance Revenues		124			166			17		3,543		(158	)		3,692
Loss on Extinguishment of Borrowings		---			1,898			---		---		---			1,898
Noncash Items:
Provision for Loan Losses		1,352			(541	)		---		---		---			811
MSR Amortization&Valuation		---			660			---		---		---			660
Provision for Income Taxes		4,515			(783	)		15		261		(2,737	)		1,271
Segment Profit (Loss)		11,579			(1,122	)		20		589		(2,898	)		8,168
Segment Assets		883,639			27,536			2,141		9,448		3,182			925,946

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 16 – Segment Information (continued)

Year Ended December 31, 2002	Core Banking		Mortgage Banking			Trust and Investment Advisory			Insurance		Other			Consolidated Totals

Net Interest Income	$	32,336	$	(547	)	$	6		$	19	$	188		$	32,002
Gain on Sales of Loans and
Related Assets		1,051		574			---			---		---			1,625
Net Gain/(Loss) on Securities		---		17			---			---		---			17
Servicing Income		---		838			---			---		(252	)		586
Trust and Investment Product Fees		88		---			1,380			---		(49	)		1,419
Insurance Revenues		141		165			5			2,639		(132	)		2,818
Loss on Extinguishment of Borrowings		---		66			---			---		---			66
Noncash Items:
Provision for Loan Losses		1,365		(250	)		---			---		---			1,115
MSR Amortization&Valuation		---		992			---			---		---			992
Provision for Income Taxes		4,687		(632	)		(7	)		353		(2,414	)		1,987
Segment Profit (Loss)		12,157		(963	)		(11	)		487		(2,228	)		9,442
Segment Assets		866,078		79,919			2,025			5,140		3,843			957,005

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 17 – Parent Company Financial Statements

The condensed financial statements of German American Bancorp are presented below:

CONDENSED BALANCE SHEETS

	December 31,
	2004		2003
ASSETS
Cash	$	1,012	$	596
Securities Available-for-Sale, at Fair Value		2,623		551
Investment in Subsidiary Banks and Bank Holding Company		86,285		84,920
Investment in GAB Mortgage Corp.		41		291
Investment in German American Reinsurance Company, Ltd.		604		478
Furniture and Equipment		2,083		2,572
Other Assets		3,361		4,092

Total Assets	$	96,009	$	93,500


LIABILITIES
Promissory Notes Payable	$	10,500	$	8,000
Other Liabilities		1,840		2,374

Total Liabilities		12,340		10,374

SHAREHOLDERS' EQUITY
Common Stock		10,898		10,933
Additional Paid-in Capital		66,817		67,532
Retained Earnings		5,778		4,653
Accumulated Other Comprehensive Income		176		8

Total Shareholders' Equity		83,669		83,126

Total Liabilities and Shareholders' Equity	$	96,009	$	93,500

CONDENSED STATEMENTS OF INCOME

	Years ended December 31,
	2004			2003			2002
INCOME
Dividends from Subsidiaries
Bank	$	7,675		$	14,200		$	18,775
Nonbank		1,750			300			1,000
Dividend and Interest Income		18			79			188
Fee Income from Subsidiaries		677			688			564
Securities Gains, net		---			23			---
Other Income		1			54			108

Total Income		10,121			15,344			20,635

EXPENSES
Salaries and Benefits		3,602			5,463			5,015
Professional Fees		1,068			621			682
Occupancy and Equipment Expense		766			784			587
Interest Expense		287			165			---
Other Expenses		552			532			622

Total Expenses		6,275			7,565			6,906
INCOME BEFORE INCOME TAXES AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARIES		3,846			7,779			13,729
Income Tax Benefit		2,301			2,656			2,440

INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES		6,147			10,435			16,169
Equity in Undistributed Income of Subsidiaries		1,092			(2,267	)		(6,727	)

NET INCOME		7,239			8,168			9,442

Other Comprehensive Income:
Unrealized Gain/(Loss) on Securities, net		178			(1,747	)		1,125
Changes in Minimum Pension Liability		(10	)		(169	)		---

TOTAL COMPREHENSIVE INCOME	$	7,407		$	6,252		$	10,567

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 17 – Parent Company Financial Statements (continued)

CONDENSED STATEMENTS OF CASH FLOWS


	Years ended December 31

	2004			2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	7,239		$	8,168		$	9,442
Adjustments to Reconcile Net Income to Net Cash from Operations
Amortization on Securities		---			1			7
Depreciation		426			479			339
Gain on Sale of Securities, net		---			(23	)		---
Loss on Sale of Property and Equipment		---			---			1
Director Stock Awards		---			72			88
Change in Other Assets		719			(997	)		(798	)
Change in Other Liabilities		(551	)		916			292
Equity in Undistributed Income of Subsidiaries		(1,092	)		2,267			6,727

Net Cash from Operating Activities		6,741			10,883			16,098

CASH FLOWS FROM INVESTING ACTIVITIES
Capital Contribution to Subsidiaries		---			(2,600	)		(4,500	)
Purchase of Securities Available-for-Sale		(2,024	)		---			(4,990	)
Proceeds from Maturities of Securities Available-for-Sale		---			6,280			---
Property and Equipment Expenditures		(143	)		(694	)		(744	)
Proceeds from Sale of Property and Equipment		206			---			16

Net Cash from Investing Activities		(1,961	)		2,986			(10,218	)

CASH FLOWS FROM FINANCING ACTIVITIES
Advances on Long-term Debt		2,500			8,000			---
Issuance of Common Stock		34			260			572
Purchase / Retire Common Stock		(708	)		(21,846	)		(2,683	)
Employee Stock Purchase Plan		(76	)		(120	)		(66	)
Dividends Paid		(6,114	)		(5,984	)		(6,136	)
Purchase of Interest in Fractional Shares		---			(27	)		(32	)

Net Cash from Financing Activities		(4,364	)		(19,717	)		(8,345	)

Net Change in Cash and Cash Equivalents		416			(5,848	)		(2,465	)
Cash and Cash Equivalents at Beginning of Year		596			6,444			8,909

Cash and Cash Equivalents at End of Year	$	1,012		$	596		$	6,444

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 18 – Business Combinations, Goodwill and Intangible Assets

Information relating to mergers and acquisitions for the three year period ended December 31, 2004, includes:

Business Combination	Date Acquired	Accounting Method
Tevebaugh & Associates Insurance, Inc., Vincennes, Indiana	12/10/02	Purchase⁽¹⁾
Hoosierland Insurance Agency, Inc., Jasper, Indiana	09/02/03	Purchase⁽²⁾
Stafford-Williams Insurance Agency, Inc., Washington, Indiana	09/02/03	Purchase⁽³⁾

Certain of the above entities changed their name and/or have been merged into other subsidiaries of the Corporation.

⁽¹⁾

This merger was accounted for as a purchase, with net assets acquired of $325. The Company issued no stock in this transaction. The Company recorded customer list intangible of $325 as a result of this transaction. The acquired company is included in operating results beginning with the date of acquisition.

⁽²⁾

This merger was accounted for as a purchase, with net assets acquired of $1,553. The Company issued no stock in this transaction. The Company recorded customer list intangible of $1,534 as a result of this transaction. The acquired company is included in operating results beginning with the date of acquisition.

⁽³⁾

This merger was accounted for as a purchase, with net assets acquired of $998. The Company issued no stock in this transaction. The Company recorded customer list intangible of $979 as a result of this transaction. The acquired company is included in operating results beginning with the date of acquisition.

The carrying amount of goodwill has not changed for the periods ended December 31, 2004 and 2003:

Of the $1,794 carrying amount of goodwill, $730 is allocated to the core banking segment and $1,064 is allocated to the insurance segment in both 2004 and 2003. The mortgage banking and trust and investment advisory segments do not have goodwill.

Acquired intangible assets were as follows as of year end:

	2004
	Gross Amount		Accumulated Amortization
Core Banking
Core Deposit Intangible	$	670	$	670
Unidentified Branch Acquisition Intangible		257		175
Insurance
Customer List		2,838		542

Total	$	3,765	$	1,387


	2003
	Gross Amount		Accumulated Amortization

Core Banking
Core Deposit Intangible	$	670	$	668
Unidentified Branch Acquisition Intangible		257		157
Insurance
Customer List		2,838		136

Total	$	3,765	$	961

The trust and investment advisory and mortgage banking segments do not have intangible assets. Amortization Expense was $426, $167, and $58 for 2004, 2003, and 2002.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 18 – Business Combinations, Goodwill and Intangible Assets (continued)

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


2005	$	422
2006		422
2007		422
2008		422
2009		420

NOTE 19 – Fair Values of Financial Instruments

The estimated fair values of the Company’s financial instruments are provided in the table below. Since not all of the Company’s assets and liabilities are considered financial instruments, some assets and liabilities are not included in the table. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates were based on subjective judgments, and therefore cannot be determined with precision.

	December 31, 2004						December 31, 2003
	Carrying Value			Fair Value			Carrying Value			Fair Value

Financial Assets:
Cash and Short-term Investments	$	47,666		$	47,666		$	32,533		$	32,533
Securities Available-for-Sale		181,676			181,676			195,793			195,793
Securities Held-to-Maturity		13,318			13,636			17,417			17,964
FHLB Stock and Other Restricted Stock		13,542			13,542			12,944			12,944
Loans, including Loans Held-for-Sale, net		624,114			621,135			605,017			611,781
Accrued Interest Receivable		5,431			5,431			5,548			5,548
Financial Liabilities:
Demand, Savings, and Money Market Deposits		(428,468	)		(428,468	)		(379,341	)		(379,341	)
Other Time Deposits		(321,915	)		(320,128	)		(337,792	)		(343,523	)
Short-term Borrowings		(25,673	)		(25,673	)		(35,679	)		(35,679	)
Long-term Debt		(69,941	)		(73,239	)		(76,880	)		(82,906	)
Accrued Interest Payable		(1,406	)		(1,406	)		(1,748	)		(1,748	)
Unrecognized Financial Instruments:
Commitments to Extend Credit		---			---			---			---
Standby Letters of Credit		---			---			---			---
Commitments to Sell Loans		---			---			---			---

The carrying amounts of cash, short-term investments, FHLB and other restricted stock, and accrued interest receivable are a reasonable estimate of their fair values. The fair values of securities are based on quoted market prices or dealer quotes, if available, or by using quoted market prices for similar instruments. The fair value of loans held-for-sale is estimated using commitment prices or market quotes on similar loans. The fair value of loans are estimated by discounting future cash flows using the current rates at which similar loans would be made for the average remaining maturities. The fair value of demand deposits, savings accounts, money market deposits, short-term borrowings and accrued interest payable is the amount payable on demand at the reporting date. The fair value of fixed-maturity time deposits and long-term borrowings are estimated using the rates currently offered on these instruments for similar remaining maturities. Commitments to extend credit and standby letters of credit are generally short-term or variable rate with minimal fees charged. These instruments have no carrying value, and the fair value is not significant. The fair value of commitments to sell loans is the cost or benefit of settling the commitments with the counter-party at the reporting date. At December 31, 2004 and 2003, none of the Company’s commitments to sell loans were mandatory, and there is no cost or benefit to settle these commitments.

Notes to the Consolidated Financial Statements (continued)
Dollars in thousands, except per share data

NOTE 20 – Other Comprehensive Income

Other comprehensive income components and related taxes were as follows:

	2004			2003			2002
Unrealized holding gains and (losses) on
securities available-for-sale	$	(3,407	)	$	(2,567	)	$	1,636
Reclassification adjustments for (gains) and losses
later recognized in income		3,678			(80	)		(17	)


Net unrealized gains and (losses)		271			(2,647	)		1,619

Recognition of minimum pension liability		(17	)		(279	)		---

Tax Effect		(86	)		1,010			(494	)


Other comprehensive income (loss)	$	168		$	(1,916	)	$	1,125

NOTE 21 – Quarterly Financial Data (Unaudited)

The following table represents selected quarterly financial data for the Company:

	Interest Income		Net Interest Income		Net Income		Earnings per Share Basic Diluted

2004
First Quarter	$	11,776	$	7,478	$	1,952	$ 0	.18	$	0	.18
Second Quarter		11,888		7,735		2,332	0	.21		0	.21
Third Quarter		11,957		7,900		2,376	0	.22		0	.22
Fourth Quarter		12,089		8,126		579	0	.05		0	.05

2003
First Quarter	$	13,449	$	7,785	$	2,438	$ 0	.20	$	0	.20
Second Quarter		12,857		7,335		2,043	0	.19		0	.19
Third Quarter		12,204		7,025		2,153	0	.20		0	.20
Fourth Quarter		12,109		7,390		1,534	0	.14		0	.14

During the fourth quarter 2004, the Company’s operating results were impacted by a $3.68 million other-than-temporary impairment charge on the Company’s portfolio of FHLMC and FNMA preferred stocks. See Note 2 to the Consolidated Financial Statements for further discussion of this charge.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Not Applicable.

Item 9A. Controls and Procedures.

This Item 9A includes information regarding the Company’s systems of disclosure controls and procedures and its internal control over financial reporting, as those terms are defined by certain SEC rules. There are inherent limitations to the effectiveness of any system of controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective systems of controls and procedures can provide only reasonable assurances of achieving their control objectives.

Disclosure Controls and Procedures

As of December 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.

Management’s Report on Internal Control Over Financial Reporting

In reliance upon the Order of the Securities and Exchange Commission issued under Section 36 of the Securities Exchange Act of 1934 (Release No. 50754, November 30, 2004), the Company has not included in this Report either (a) the annual report of its management on internal control over financial reporting, as required by Item 308(a) of Regulation S-K, or (b) the related attestation report of a registered public accounting firm, as required by Item 308(b) of Regulation S-K. The Company will file this information by amending this Report on or before May 2, 2005. As of the date of this Report, the Company had not identified any material weakness in its internal control over financial reporting, and the Company’s registered public accounting firm had not identified any such material weakness and communicated this finding to the Company.

Changes in Internal Control over Financial Reporting in Most Recent Fiscal Quarter

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

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Information relating to directors and executive officers of the Corporation will be included under the caption “Election of Directors” in the Company’s Proxy Statement for the Annual Meeting of Shareholders to be held in April 2005, which will be filed within 120 days of the end of the fiscal year covered by this Report (the “2005 Proxy Statement”), which section is incorporated herein in partial response to this Item’s informational requirements.

Section 16(a) Compliance. Information relating to Section 16(a) compliance will be included in the 2005 Proxy Statement under the caption of “Section 16(a): Beneficial Ownership Reporting Compliance” and is incorporated herein by reference.

Code of Business Conduct. At its regular meeting in April 2004, the Corporation’s Board of Directors adopted a Code of Business Conduct, which constitutes a “code of ethics” as that term is defined by SEC rules adopted under the Sarbanes-Oxley Act of 2002 (“SOA”). The Corporation has posted a copy of the Code of Business Conduct on its Internet website (www.germanamericanbancorp.com). The Corporation intends to satisfy its disclosure requirements under Item 10 of Form 8-K regarding certain amendments to, or waivers of, the Code of Business Conduct, by posting such information on its Internet website.

Audit Committee Identification. The Board of Directors of the Corporation has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The description of the Audit Committee of the Board of Directors, and the identification of its members, will be set forth in the 2005 Proxy Statement under the caption “ELECTION OF DIRECTORS – Committees and Attendance”, which section is incorporated herein by reference.

Audit Committee Financial Expert. The Board of Directors has determined that none of its members who serve on the Audit Committee of the Board of Directors is an “audit committee financial expert” as that term is defined by SEC rules adopted under SOA. The Board of Directors has determined, however, that the absence from its Audit Committee of a person who would qualify as an audit committee financial expert does not impair the ability of its Audit Committee to provide effective oversight of the Corporation’s external financial reporting and internal control over financial reporting. Accordingly, the Board of Directors does not intend to add a person to its membership solely for the purpose of adding an audit committee financial expert to its Audit Committee. In reaching its determination that the members of the Audit Committee, as it is presently constituted, have sufficient knowledge and experience to exercise effective oversight without the addition of an audit committee financial expert, the Board of Directors considered the knowledge gained by the current members of the Audit Committee in connection with their prior years of service on the Corporation’s Audit Committee. The Board of Directors also considered the experience in financial and accounting matters that Mr. Steurer, Chairman of the Board of JOFCO, Inc., a privately-held manufacturing company, has gained in connection with his active supervision of the accounting and finance personnel of that company. Mr. Steurer is a member of the Corporation’s Audit Committee.

Item 11. Executive Compensation.

Information relating to compensation of the Corporation’s Executive Officers and Directors will be included under the captions “Executive Compensation” and “Election of Directors — Compensation of Directors” in the 2005 Proxy Statement of the Corporation, which sections are incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information relating to security ownership of certain beneficial owners and the directors and executive officers of the Corporation will be included under the captions “Election of Directors” and “Principal Owners of Common Shares” of the 2005 Proxy Statement of the Corporation, which sections are incorporated herein by reference.

Equity Compensation Plan Information

The Company maintains three plans under which it has authorized the issuance of its Common Shares to employees and non-employee directors as compensation: its 1992 Stock Option Plan (under which no new grants may be made), its 1999 Long-Term Equity Incentive Plan, and its 1999 Employee Stock Purchase Plan. Each of these three plans was approved by the requisite vote of the Company’s common shareholders in the year of adoption by the Board of Directors. The Company is not a party to any individual compensation arrangement involving the authorization for issuance of its equity securities to any single person, other than option agreements granted under the terms of one of the three plans identified above. The following table sets forth information regarding these plans as of December 31, 2004:

Plan Category			Weighted Average Exercise Price of Outstanding Options, Warrants and Rights

Equity compensation plans approved by
security holders	430,167	(a)	$	16.16	700,110	(b)
Equity compensation plans not approved by
security holders	---			---	---


Total	430,167		$	16.16	700,110

(a) Does not include any shares that employees may have the right to purchase under the Employee Stock Purchase Plan in August 2005 in respect of employee payroll deductions of participating employees that had accumulated as of December 31, 2004 during the plan year that commenced in August 2004. Although these employees have the right under this Plan to have their accumulated payroll deductions applied to the purchase of Common Shares at a discounted price in August 2005, the price at which such shares may be purchased and the number of shares that may be purchased under that Plan at that time is not presently determinable.

(b) Represents 415,070 shares that the Company may in the future issue to employees under the Employee Stock Purchase Plan (although the Company typically purchases the shares needed for sale to participating employees on the open market rather than issuing new issue shares to such employees) and 285,040 shares that were available for grant or issuance at December 31, 2004 under the 1999 Long-Term Equity Incentive Plan. Under the Long-Term Equity Incentive Plan, the aggregate number of Common Shares available for the grant of awards in any given fiscal year is equal to the sum of (i) one percent of the number of Common Shares outstanding as of the last day of the Corporation’s prior fiscal year, plus (ii) the number of Common Shares that were available for the grant of awards, but were not granted, under the Plan in any previous fiscal year. Under no circumstances, however, may the number of Common Shares available for the grant of awards in any fiscal year under the Long-Term Equity Incentive Plan exceed one and one-half percent of the Common Shares outstanding as of the last day of the prior fiscal year. The 285,050 shares available at December 31, 2004 and included in the above table represent only the carryover of shares that may be the subject of grants of awards under the Long-Term Equity Incentive Plan in 2005 and future years; the Corporation during 2005 and future years (in addition to this carryover amount) may grant an additional 108,982 shares, representing one percent of the number of Common Shares that were outstanding at December 31, 2004, under the Long-Term Equity Incentive Plan.

For additional information regarding the Company’s stock option plans and employee stock purchase plan, see Note 9 — Stockholders’ Equity in the Notes to Consolidated Financial Statements in Item 8 of this Report.

Item 13. Certain Relationships and Related Transactions.

Information responsive to this Item 13 will be included under the captions “Executive Compensation — Certain Business Relationships and Transactions” and “Executive Compensation — Compensation Committee Interlocks and Insider Participation” of the 2005 Proxy Statement of the Corporation, which sections are incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

Information responsive to this item 14 will be included in the 2005 Proxy Statement under the caption “Principal Accountant Fees and Services,” which section is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) Financial Statements

The following items are included in Item 8 of this report:

	Page #

German American Bancorp and Subsidiaries:

Report of Independent Registered Public Accounting Firm on Financial Statements	28

Consolidated Balance Sheets at December 31, 2004 and December 31, 2003	29

Consolidated Statements of Income, years ended December 31, 2004, 2003, and 2002	30

Consolidated Statements of Changes in Shareholders' Equity, years ended December 31, 2004, 2003, and 2002	31

Consolidated Statements of Cash Flows, years ended December 31, 2004, 2003, and 2002	32

Notes to the Consolidated Financial Statements	33-58

b) Exhibits

The Exhibits described in the Exhibit List immediately following the “Signatures” pages of this report (which Exhibit List is incorporated herein by reference) are hereby filed as part of this report.

c) Financial Statement Schedules

None.

Pursuant to the requirements of Section 13 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: March 15, 2005

GERMAN AMERICAN BANCORP
(Registrant)

By/s/Mark A. Schroeder

Mark A. Schroeder, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Date: March 15, 2005

By/s/Mark A. Schroeder

Mark A. Schroeder, President and Chief Executive
Officer (principal executive officer), Director

Date: March 15, 2005

By/s/Douglas A. Bawel

Douglas A. Bawel, Director

Date: March 15, 2005

By/s/David G. Buehler

David G. Buehler, Director

Date: March 9, 2005

By/s/Christina M. Ernst

Christina M. Ernst, Director

Date: March 15, 2005

By/s/William R. Hoffman

William R. Hoffman, Director

Date: March 15, 2005

By/s/U. Butch Klem

U. Butch Klem, Director

Date: March 9, 2005

By/s/J. David Lett

J. David Lett, Director

Date: March 15, 2005

By/s/Gene C. Mehne

Gene C. Mehne, Director

Date: March 15, 2005

By/s/Robert L. Ruckriegel

Robert L. Ruckriegel, Director

Date: March 15, 2005

By/s/Larry J. Seger

Larry J. Seger, Director

Date: March 15, 2005

By/s/Joseph F. Steurer

Joseph F. Steurer, Director

Date: March 15, 2005

By/s/C.L. Thompson

C.L. Thompson, Director

Date: March 15, 2005

By/s/Michael J. Voyles

Michael J. Voyles, Director

Date: March 15, 2005

By/s/Bradley M. Rust

Bradley M. Rust, Senior Vice President -
Accounting and Finance (principal financial
officer and principal accounting officer)

INDEX OF EXHIBITS

Executive Compensation Plans and Arrangements*	Exhibit No.	Description

3.1

Restatement of Articles of Incorporation of the Registrant is incorporated by reference from 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 22, 2004, is incorporated by reference from Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

4.1

Rights Agreement dated April 27, 2000, is incorporated by reference from Exhibit 4.01 to the 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 or is registered. 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 request.

4.3

Terms of Common Shares and Preferred Shares of the Registrant found in Restatement of Articles of Incorporation of the Registrant are incorporated by reference from Exhibit 3.01 to the Registrant's Current Report on Form 8-K filed May 5, 2000.

10.1

The Registrant's 1992 Stock Option Plan, as amended, is incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-4 filed October 14, 1998.

10.2

Form of Director Deferred Compensation Agreement between The German American Bank and certain of its Directors is incorporated herein by reference from Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993 (the Agreement entered into by former director George W. Astrike, a copy of which was filed as Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 filed January 21, 1993, is substantially identical to the Agreements entered into by the other Directors, some of whom remain directors of the Registrant.). The schedule following Exhibit 10.4 lists the Agreements with the other Directors and sets forth the material detail in which such Agreements differ from the Agreement filed as Exhibit 10.4.

10.3

The Registrant's 1999 Long-Term Equity Incentive Plan.

10.4

Basic Plan Document for the Registrant's Nonqualified Savings Plan.

10.5

Adoption Agreement for the Registrant's Nonqualified Savings Plan dated August 17, 2004.

10.6

First Amendment to the Registrant's Nonqualified Savings Plan dated August 17, 2004

10.7

Form of Employee Stock Option Agreement (new grant, five-year expiration, five year 20% vesting) typically issued to executive officers and other key employees as incentives.

10.8

Form of Employee Stock Option Agreement (Replacement Grant) typically issued to persons who exercise other stock options using common shares as payment for the exercise price (one year vesting).

Executive Compensation Plans and Arrangements*	Exhibit No.	Description

10.9

Form of Non-Employee Director Stock Option Agreement (new grant, ten year expiration, no vesting) typically issued to non-employee members of the Board of Directors as part of annual director fee retainer (not Incentive Stock Option for tax purposes).

10.10

Form of Employee Director Stock Option Agreement (new grant, ten year expiration, no vesting) typically issued to employee members of the Board of Directors as part of annual director fee retainer (intended to be Incentive Stock Option for tax purposes).

10.11

Description of Director Compensation Arrangements for 12 month period ending at 2005 Annual Meeting of Shareholders.

10.12

Description of Executive Management Incentive Plan for 2004 (awards payable in 2005).

10.13

Executive Supplemental Retirement Income Agreement dated October 1, 1996, between First Federal Bank, F.S.B. and Bradley M. Rust is incorporated herein by reference from Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for its fiscal year ended December 31, 2002.

Subsidiaries of the Registrant.

Consent of Crowe Chizek and Company LLC.

Power of Attorney.

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).

*Exhibits that describe or evidence all management contracts or compensatory plans or arrangements required to be filed as exhibits to this Report are indicated by an "X" in this column.

GERMAN AMERICAN BANCORP WILL FURNISH TO ANY SHAREHOLDER AS OF MARCH 1, 2005, A COPY OF ANY OF THE ABOVE-LISTED EXHIBITS UPON THE PAYMENT OF A CHARGE OF $.50 PER PAGE IN ORDER TO DEFRAY ITS EXPENSES IN PROVIDING SUCH EXHIBIT. SUCH REQUEST SHOULD BE ADDRESSED TO GERMAN AMERICAN BANCORP, ATTN: TERRI A. ECKERLE, SHAREHOLDER RELATIONS, P.O. BOX 810, JASPER, INDIANA, 47546.