German American Bancorp, Inc. is a financial services holding company based in Jasper, Indiana. The Company's Common Stock is traded on NASDAQ's Global Select Market, under the symbol GABC. The principal subsidiary of German American Bancorp, Inc. is its banking subsidiary, German American Bancorp, which operates through 28 retail banking offices in the ten contiguous Southern Indiana counties of Daviess, Dubois, Gibson, Knox, Lawrence, Martin, Monroe, Perry, Pike, and Spencer. German American Bancorp owns a trust, brokerage, and financial planning subsidiary, which operates from its banking offices, and a full line property and casualty insurance agency with seven insurance agency offices throughout its market area.

Throughout this Management's Discussion and Analysis, as elsewhere in this report, when we use the term "Company", we will usually be referring to the business and affairs (financial and otherwise) of the Company and its subsidiaries and affiliates as a whole. Occasionally, we will refer to the term "parent company" or "holding company" when we mean to refer to only German American Bancorp, Inc.

This section presents an analysis of the consolidated financial condition of the Company as of March 31, 2009 and December 31, 2008 and the consolidated results of operations for the three months ended March 31, 2009 and 2008. This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management's Discussion and Analysis of Financial Condition and Results of Operations, included in the Company's December 31, 2008 Annual Report on Form 10-K.

MANAGEMENT OVERVIEW

This updated discussion should be read in conjunction with the Management Overview that was included in our Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's December 31, 2008 Annual Report on Form 10-K.

During the first quarter of 2009, the Company generated earnings of $2,942,000 or $0.27 per share. On a per share basis, first quarter 2009 earnings were equal to the $0.27 per share recorded in the first quarter of 2008. On a net income basis, first quarter earnings were $78,000 or approximately 3% less than the $3,020,000 reported in the first quarter of 2008. Earnings in the first quarter 2009 compared with the first quarter 2008 were affected by an improved net interest margin and lower levels of provision for loan losses, offset by lower non-interest revenues and higher non-interest operating costs. Each of these areas will be discussed in more detail below.

On April 30, 2009, as previously reported by the Company's Current Report on Form 8-K filed May 4, 2009, the Company issued $19,250,000 of 8% redeemable subordinated debentures that will mature in 2019 for a purchase price to the Company (before offering expenses) of $19,250,000. The principal amount of these debentures upon issue was immediately includable in the Company's Tier 2 regulatory capital under banking agency regulatory standards. While the Company had no immediate need for this additional capital, as the Company was already well-capitalized under all applicable banking agency regulatory standards, management believes that raising this additional regulatory capital will further strengthen the Company's capital base and serve as additional protection from any impact of the current economic downturn. Management believes its markets will present additional loan opportunities in the future, and this additional regulatory capital will provide the Company the ability to make these additional loans while remaining a well-capitalized institution for bank regulatory purposes.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The financial condition and results of operations for German American Bancorp, Inc. 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 securities available for sale, and income tax expense.

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 and agricultural 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 may include 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.

Securities Valuation

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. Equity securities that do not have readily determinable fair values are carried at cost. Additionally, all securities 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 March 31, 2009, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $402,000. As of March 31, 2009, held-to-maturity securities had a gross unrecognized gain of approximately $51,000.

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. Tax related 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 views 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.

RESULTS OF OPERATIONS

Net Income:

Net income declined $78,000 or 3% to $2,942,000 or $0.27 per share for the quarter ended March 31, 2009, compared to $3,020,000 or $0.27 per share for the first quarter of 2008. The relatively stable earnings in the first quarter 2009 compared with the first quarter 2008 were attributable to an improved net interest margin, lower levels of provision for loan losses offset by lower non-interest revenues and higher non-interest operating costs.

Net Interest Income:

Net interest income is the Company's single largest source of earnings, and
represents the difference between interest and fees realized on earning assets,
less interest paid on deposits and borrowed funds. The following table
summarizes the Company's net interest income (on a tax-equivalent basis, at an
effective tax rate of 34%) for each of the periods presented herein (dollars in
thousands):

                                Three Months               Change from
                               Ended March 31,            Prior Period
                              2009         2008        Amount      Percent
Interest Income (T/E)       $ 16,045     $ 17,950     $ (1,905 )      (10.6 )%
Interest Expense               5,216        7,706       (2,490 )      (32.3 )%
Net Interest Income (T/E)   $ 10,829     $ 10,244     $    585          5.7 %

Net interest income increased $522,000 or 5% (an increase of $585,000 or 6% on a tax-equivalent basis) for the quarter ended March 31, 2009 compared with the same quarter of 2008. The net interest margin represents tax-equivalent net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin for the first quarter 2009 was 3.92% compared to 3.89% for the first quarter of 2008. The yield on earning assets totaled 5.82% during the quarter ended March 31, 2009 compared to 6.83% in the same period of 2008 while the cost of funds (expressed as a percentage of average earning assets) totaled 1.90% during 2009 compared to 2.94% in 2008.

Average earning assets totaled approximately $1.114 billion for the quarter ended March 31, 2009 compared with $1.056 billion for the quarter ended March 31, 2008. During the first quarter of 2009, average loans outstanding totaled $887.9 million, an increase of $19.5 million or 2%, compared to the $868.4 million in average loans outstanding during the first quarter of 2008. The remainder of the increase in average earning assets was related to an increased securities portfolio. The key driver of the increased securities portfolio and overall increased average earnings assets was a higher level of average core deposits (core deposits defined as demand deposits - both interest and non-interest bearing, savings, money market and time deposits in denominations of less than $100,000. During the first quarter of 2009, average core deposits totaled $845.0 million, an increase of $55.1 million or 7%, compared to the $789.9 million in average core deposits during the first quarter of 2008.

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 of the allowance. The provision for loan loss totaled $750,000 during the quarter ended March 31, 2009, representing a decrease of $594,000 from the first quarter 2008 provision of $1,344,000. The higher level of provision for loan losses during the first quarter of 2008 compared with the first quarter of 2009 was primarily attributable to provision during the first quarter of 2008 on a single non-performing loan secured by an apartment complex.

During the first quarter of 2009, the annualized provision for loan loss represented 0.34% of average loans outstanding compared with 0.62% on an annualized basis of average loans outstanding during the first quarter of 2008. Net charge-offs totaled $228,000 or 0.10% on an annualized basis of average loans outstanding during the three months ended March 31, 2009 compared with $190,000 or 0.09% on an annualized basis of average loans outstanding during the same period of 2008.

The provisions for loan losses made during the quarter ended March 31, 2009 were made at a level deemed necessary by management to absorb estimated, probable incurred losses in the loan portfolio. A detailed evaluation of the adequacy of the allowance for loan losses is completed quarterly by management, the results of which are used to determine provisions for loan losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Non-interest Income:

During the first quarter of 2009, non-interest income declined approximately 16%
over the first quarter of 2008.

                                                                               Change from
                                                Three Months                  Prior Period
                                               Ended March 31,            Amount         Percent
                                              2009          2008          Change         Change

Trust and Investment Product Fees          $      390     $     587     $     (197 )          (34 )%
Service Charges on Deposit Accounts             1,060         1,183           (123 )          (10 )%
Insurance Revenues                              1,487         1,903           (416 )          (22 )%
Other Operating Income                            742           750             (8 )           (1 )%
Subtotal                                        3,679         4,423           (744 )          (17 )%
Net Gains on Sales of Loans and Related
Assets                                            565           324            241             74 %
Net Gain (Loss) on Securities                       -           285           (285 )         (100 )%
Total Non-interest Income                  $    4,244     $   5,032     $     (788 )          (16 )%

Trust and investment product fees decreased 34% during the first quarter of 2009 compared with the same period of 2008. Management believes this decline was primarily attributable to difficult and volatile economic and market conditions. Deposit service charges and fees declined by 10% due in large part to less customer utilization of the Company's overdraft protection program. Insurance revenues declined 22% due to a reduced level of contingency revenue at the Company's property and casualty insurance subsidiary, German American Insurance.

During the quarter ended March 31, 2009, the net gain on sale of residential loans increased 74% over the gain recognized in the quarter ended March 31, 2008. The increase was attributable to higher levels of residential loan sales and a larger pipeline of residential mortgage loans in the first quarter of 2009, compared to the same period of 2008.

The Company had no gain from security sale activity during the first quarter of 2009. During the first quarter of 2008, the Company recognized a net gain on securities of $285,000 resulting from the sale of approximately $16 million of agency mortgage related securities and a gain on the mandatory redemption on a portion of the Company's VISA stock holdings acquired as part of the initial public offering of VISA, Inc.

Non-interest Expense:

During the quarter ended March 31, 2009, non-interest expense increased
approximately 8% compared with the same period of 2008.

                                                                                Change from
                                                  Three Months                 Prior Period
                                                 Ended March 31,           Amount         Percent
                                               2009          2008          Change         Change

Salaries and Employee Benefits               $   5,614     $   5,327     $      287              5 %
Occupancy, Furniture and Equipment Expense       1,529         1,472             57              4 %
FDIC Premiums                                      335            26            309          1,188 %
Data Processing Fees                               357           406            (49 )          (12 )%
Professional Fees                                  607           564             43              8 %
Advertising and Promotion                          288           233             55             24 %
Intangible Amortization                            221           222             (1 )            0 %
Other Operating Expenses                         1,130         1,098             32              3 %
Total Non-interest Expense                   $  10,081     $   9,348     $      733              8 %

Salaries and benefits expense increased approximately 5% during the first quarter of 2009 compared with the first quarter of 2008. The increase was nearly exclusively related to an increase in costs associated with the Company's self-insured health insurance plan.

The Company's FDIC insurance assessments increased in excess of $300,000 during the first quarter of 2009 compared with the first quarter of 2008. The Company's subsidiary bank is required to pay deposit insurance premiums to the FDIC. Because the FDIC's deposit insurance fund fell below prescribed levels in 2008, the FDIC has announced increased premiums for all insured depository institutions, including the Company's subsidiary bank, in order to begin recapitalizing the fund. Insurance assessments ranged from 0.12% to 0.50% of total deposits for the first quarter of 2009. Effective April 1, 2009 insurance assessments will range from .07% to 0.78%, depending on an institution's risk classification and other factors. The Company was in the lower end of the assessment range during the first quarter of 2009.

In addition, under an interim rule adopted during the first quarter of 2009 subject to public comment, the FDIC proposed to impose a one-time 20 basis point emergency assessment on all insured depository institutions to be paid on September 30, 2009, based on deposits at June 30, 2009. The FDIC has subsequently indicated the amount of this special assessment could decrease if certain events transpire. The interim rule also authorizes the FDIC to impose an additional emergency assessment of up to 10 basis points in respect of deposits for quarters ended after June 30, 2009 if necessary to maintain public confidence in federal deposit insurance. Each basis point of any future special assessment during 2009, based on the Company's most recent FDIC deposit insurance assessment, would cost the Company, on a pre-tax basis, approximately $95,000 in additional FDIC deposit insurance premium expense. While the interim rules are subject to change and the exact amount of the special assessment is reportedly under legislative and regulatory study, the Company expects that a material special assessment will be assessed by the FDIC in respect of the insured deposits of all banks as of June 30, 2009. Given the enacted and proposed increases in assessments for insured financial institutions in 2009, the Company anticipates that FDIC assessments on deposits will have a significantly greater impact upon operating expenses in 2009 compared to 2008.

Income Taxes:

The Company's effective income tax rate approximated 27.4% during the three months ended March 31, 2009 compared with 32.3% during the same period of 2008. The effective tax rate in both 2009 and 2008 was lower than the blended statutory rate of 39.6% resulting primarily from the Company's tax-exempt investment income on securities and loans, income tax credits generated from investments in affordable housing projects, and income generated by subsidiaries domiciled in a state with no state or local income tax.

FINANCIAL CONDITION

Total assets at March 31, 2009 increased $13.5 million to $1.204 billion compared with $1.191 billion in total assets at December 31, 2008. Cash and cash equivalents increased $2.4 million to $47.4 million at March 31, 2009 compared with $45.0 million at year-end 2008. Securities available-for-sale increased $22.7 million to $198.5 million at March 31, 2009 compared with $175.8 million at year-end 2008. The increase in securities available-for-sale was attributable to deposit growth and declines in the Company's loan portfolio.

End-of-period loans outstanding declined by 9% on an annualized basis during the first quarter of 2009. The decrease was largely attributable to a seasonal decline in the Company's agriculture related loan portfolio. In addition, the Company's residential loan portfolio declined as market interest rates have continued to trend lower. The Company continues to actively originate residential mortgage loans, with the vast majority of production being sold into the secondary market. Partially offsetting the declines in other segments of the portfolio was an increase in the Company's commercial and industrial loan portfolio (including both real estate and non-real estate loans).

End of Period Loan Balances:

                                                                   Current       Annualized
                                March 31,       December 31,       Period         Percent
                                   2009             2008            Change         Change

Commercial & Industrial Loans   $  510,324     $      505,191     $   5,133                4 %
Agricultural Loans                 144,524            159,923       (15,399 )            (39 )%
Consumer Loans                     123,354            127,343        (3,989 )            (13 )%
Residential Mortgage Loans          94,164            100,054        (5,890 )            (24 )%
                                $  872,366     $      892,511     $ (20,145 )             (9 )%

The Company's allowance for loan losses totaled $10.0 million at March 31, 2009, an increase of $522,000 or 5%, compared with $9.5 million at year-end 2008. The allowance for loan losses represented 1.15% of period end loans at March 31, 2009 compared with 1.07% of period end total loans at December 31, 2008.

End-of-period deposits increased approximately 5% at March 31, 2009 compared with year-end 2008. The increase was attributable to growth across all segments of the Company's core deposit base which is defined as its demand deposits (interest-bearing and non-interest-bearing), savings, money market, and time deposits in denominations of less than $100,000.

End of Period Deposit Balances:

                                                                              Current       Annualized
                                           March 31,       December 31,       Period         Percent
                                              2009             2008           Change         % Change

Non-interest-bearing Demand Deposits       $  149,197     $      147,977     $   1,220                3 %
Interest-bearing Demand, Savings, &
Money Market Accounts                         448,550            439,305         9,245                8 %
Time Deposits < $100,000                      253,504            250,339         3,165                5 %
Time Deposits of $100,000 or more &

Non-performing Assets:

The following is an analysis of the Company's non-performing assets at March 31,
2009 and December 31, 2008 (dollars in thousands):

                                                   March 31,       December 31,
                                                      2009             2008
Non-accrual Loans                                 $     7,984     $        8,316
Past Due Loans (90 days or more)                          253                 34
Restructured Loans                                          -                  -
Total Non-performing Loans                              8,237              8,350
Other Real Estate                                       2,367              1,818
Total Non-performing Assets                       $    10,604     $       10,168

Non-performing Loans to Total Loans                      0.95 %             0.94 %
Allowance for Loan Loss to Non-performing Loans        121.94 %           114.04 %

The Company's level of non performing loans declined modestly, by $113,000 or . . .