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 September 30, 2009 and December 31, 2008 and the consolidated results of operations for the three and nine months ended September 30, 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 third quarter of 2009, the Company generated earnings of $3,191,000 or $0.29 per share. On a net income basis and per share basis, third quarter earnings were approximately 4% less than the $3,319,000 and $0.30 per share reported in the third quarter of 2008. Earnings in the third quarter 2009 compared with the third quarter 2008 were affected by an improved net interest margin, offset by lower non-interest revenues and higher non-interest operating costs. Each of these areas will be discussed in more detail below.

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 three-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 September 30, 2009, gross unrealized losses on the securities available-for-sale portfolio totaled approximately $385,000. As of September 30, 2009, held-to-maturity securities had a gross unrecognized gain of approximately $54,000.

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 $128,000 or 4% to $3,191,000 or $0.29 per share for the quarter ended September 30, 2009, compared to $3,319,000 or $0.30 per share for the third quarter of 2008. Net income declined $553,000 or 6% to $8,897,000 or $0.81 per share for the nine months ended September 30, 2009 compared with $9,450,000 or $0.85 per share during the same period of 2008.

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.

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

                                                           Average Balance Sheet
                                               (Tax-equivalent basis / dollars in thousands)
                                     Three Months Ended                             Three Months Ended
                                     September 30, 2009                             September 30, 2008
                            Principal      Income /       Yield /          Principal      Income /       Yield /
                             Balance        Expense        Rate             Balance        Expense        Rate
Assets
Federal Funds Sold
and Other Short-term
Investments                $    36,627     $      25          0.27 %      $    20,180     $      97          1.91 %
Securities:
Taxable                        191,750         2,156          4.50 %          160,177         2,045          5.10 %
Non-taxable                     24,263           414          6.81 %           16,577           262          6.35 %
Total Loans and Leases
(2)                            903,917        13,773          6.05 %          889,167        14,475          6.48 %
Total Interest Earning
Assets                       1,156,557        16,368          5.63 %        1,086,101        16,879          6.19 %
Other Assets                    92,448                                         98,419
Less: Allowance for Loan
Losses                         (10,619 )                                       (9,567 )
Total Assets               $ 1,238,386                                    $ 1,174,953

Liabilities and
Shareholders' Equity
Interest-bearing Demand,
Savings and Money Market
Deposits                   $   481,052     $     822          0.68 %      $   439,049     $   1,636          1.48 %
Time Deposits                  336,251         2,307          2.72 %          337,196         3,257          3.84 %
FHLB Advances and Other
Borrowings                     149,602         1,549          4.11 %          144,395         1,390          3.83 %
Total Interest-bearing
Liabilities                    966,905         4,678          1.92 %          920,640         6,283          2.72 %
Demand Deposit Accounts        147,437                                        141,089
Other Liabilities               13,893                                         14,301
Total Liabilities            1,128,235                                      1,076,030
Shareholders' Equity           110,151                                         98,923
Total Liabilities and
Shareholders' Equity       $ 1,238,386                                    $ 1,174,953

Cost of Funds                                                 1.61 %                                         2.30 %
Net Interest Income                        $  11,690                                      $  10,596
Net Interest Margin                                           4.02 %                                         3.89 %

(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.

Net interest income increased $1,035,000 or 10% (an increase of $1,094,000 or 10% on a tax-equivalent basis) for the quarter ended September 30, 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 third quarter 2009 was 4.02% compared to 3.89% for the third quarter of 2008. The yield on earning assets totaled 5.63% during the quarter ended September 30, 2009 compared to 6.19% in the same period of 2008 while the cost of funds (expressed as a percentage of average earning assets) totaled 1.61% during the quarter ended September 30, 2009 compared to 2.30% in the same period of 2008.

                                                           Average Balance Sheet
                                               (Tax-equivalent basis / dollars in thousands)
                                      Nine Months Ended                              Nine Months Ended
                                     September 30, 2009                             September 30, 2008
                            Principal      Income /       Yield /          Principal      Income /       Yield /
                             Balance        Expense        Rate             Balance        Expense        Rate
Assets
Federal Funds Sold
and Other Short-term
Investments                $    29,840     $      64          0.29 %      $    34,585     $     566          2.19 %
Securities:
Taxable                        187,037         6,497          4.63 %          148,742         5,929          5.31 %
Non-taxable                     24,096         1,220          6.75 %           17,504           815          6.21 %
Total Loans and Leases
(2)                            891,519        40,752          6.11 %          876,666        44,431          6.77 %
Total Interest Earning
Assets                       1,132,492        48,533          5.73 %        1,077,497        51,741          6.41 %
Other Assets                    91,979                                         97,166
Less: Allowance for Loan
Losses                         (10,254 )                                       (9,038 )
Total Assets               $ 1,214,217                                    $ 1,165,625

Liabilities and
Shareholders' Equity
Interest-bearing Demand,
Savings and Money Market
Deposits                   $   461,787     $   2,505          0.73 %      $   414,895     $   5,367          1.73 %
Time Deposits                  342,304         7,964          3.11 %          361,559        11,037          4.08 %
FHLB Advances and Other
Borrowings                     140,544         4,231          4.02 %          137,864         4,298          4.21 %
Total Interest-bearing
Liabilities                    944,635        14,700          2.08 %          914,318        20,702          3.03 %
Demand Deposit Accounts        147,324                                        138,218
Other Liabilities               13,635                                         14,138
Total Liabilities            1,105,594                                      1,066,674
Shareholders' Equity           108,623                                         98,951
Total Liabilities and
Shareholders' Equity       $ 1,214,217                                    $ 1,165,625

Cost of Funds                                                 1.74 %                                         2.57 %
Net Interest Income                        $  33,833                                      $  31,039
Net Interest Margin                                           3.99 %                                         3.84 %

(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.

Net interest income increased $2,609,000 or 9% (an increase of $2,794,000 or 9% on a tax-equivalent basis) for the nine months ended September 30, 2009 compared with the same period of 2008. The tax equivalent net interest margin for the first nine months of 2009 was 3.99% compared to 3.84% for the first nine months of 2008. The yield on earning assets totaled 5.73% during the nine months ended September 30, 2009 compared to 6.41% in the same period of 2008 while the cost of funds totaled 1.74% during the nine months ended September 30, 2009 compared to 2.57% in the same period of 2008.

Average earning assets increased by approximately $70.5 million or 6% and $55.0 million or 5% during the three and nine months ended September 30, 2009, respectively, compared with the same periods of 2008. Average loans outstanding increased by $14.8 million or 2% and $14.9 million or 2% during the three and nine months ended September 30, 2009, respectively, compared with the same periods of the prior year. A majority of the remainder of the increase in average earning assets was related to an increased securities portfolio in the both the three and nine months ended September 30, 2009. 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 third quarter of 2009, average core deposits increased $49.7 million or 6%, compared to the third quarter of 2008. Average core deposits increased $44.7 million or 5% during the nine months ended September 30, 2009 compared to the same period of 2008.

The expansion of the Company's net interest income and net interest margin in both the three and nine months ended September 30, 2009 compared with the same periods of 2008 have been aided by utilization of interest rate floors on adjustable rate commercial and agricultural loans. As of September 30, 2009 the Company's commercial and agricultural loan portfolio totaled $682.6 million of which approximately 67% were adjustable rate loans. Of these adjustable rate loans, just over 80% contain interest rate floors which range predominantly from 4% to 7%. At September 30, 2009, approximately $211 million of these loans were at their contractual floor.

Also contributing to the expansion of the Company's net interest income and net interest margin in both the three and nine months ended September 30, 2009 compared with the same periods of 2008 has been the relative liability sensitive nature of the Company's balance sheet. The Company has been able to effectively lower interest rates on both its interest-bearing non-maturity deposits while continuing to expand its core deposit base. In addition, a significant level of time deposits matured during the nine months ended September 30, 2009 allowing the Company to lower its cost of funds of these deposits in a time of historically low interest rates.

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 $1,250,000 during the quarter ended September 30, 2009, representing an increase of $412,000 or 49% from the third quarter 2008 provision of $838,000. The provision for loan loss totaled $3,000,000 during the nine months ended September 30, 2009, representing a decline of $116,000 or 4% from the nine months ended September 30, 2008 provision of $3,116,000.

During the third quarter of 2009, the annualized provision for loan loss represented 0.55% of average loans outstanding compared with 0.38% on an annualized basis of average loans outstanding during the third quarter of 2008. Net charge-offs totaled $757,000 or 0.33% on an annualized basis of average loans outstanding during the three months ended September 30, 2009 compared with $1,333,000 or 0.60% on an annualized basis of average loans outstanding during the same period of 2008.

During the nine months ended September 30, 2009, the annualized provision for loan loss represented 0.45% of average loans outstanding compared with 0.47% on an annualized basis of average loans outstanding during the nine months ended September 30, 2008. Net charge-offs totaled $1,734,000 or 0.26% on an annualized basis of average loans outstanding during the nine months ended September 30, 2009 compared with $1,802,000 or 0.27% on an annualized basis of average loans outstanding during the same period of 2008.

The provisions for loan losses made during the quarter ended and nine months ended September 30, 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 third quarter of 2009, non-interest income declined approximately 6%
over the third quarter of 2008.
                                                                        Change from
Non-interest Income                         Three Months               Prior Period
($ in thousands)                        Ended September 30,        Amount       Percent
                                         2009           2008       Change       Change
Trust and Investment Product Fees     $      465       $   618     $  (153 )         -25 %
Service Charges on Deposit Accounts        1,131         1,293        (162 )         -13 %
Insurance Revenues                         1,254         1,402        (148 )         -11 %
Company Owned Life Insurance                 200           200           -             - %
Other Operating Income                       595           587           8             1 %
Subtotal                                   3,645         4,100        (455 )         -11 %
Net Gains on Sales of Loans and
Related Assets                               411           330          81            25 %
Net Gain (Loss) on Securities                  -          (106 )       106           n/m
Total Non-interest Income             $    4,056       $ 4,324     $  (268 )          -6 %

n/m = not meaningful

During the nine months ended September 30, 2009, non-interest income declined approximately 12% over the first nine months of 2008.

                                                                        Change from
Non-interest Income                         Nine Months                 Prior Period
($ in thousands)                        Ended September 30,         Amount       Percent
                                         2009           2008        Change       Change
Trust and Investment Product Fees     $     1,312     $  1,841     $   (529 )         -29 %
Service Charges on Deposit Accounts         3,271        3,721         (450 )         -12 %
Insurance Revenues                          4,031        4,612         (581 )         -13 %
Company Owned Life Insurance                  638          600           38             6 %
Other Operating Income                      1,467        1,838         (371 )         -20 %
Subtotal                                   10,719       12,612       (1,893 )         -15 %
Net Gains on Sales of Loans and
Related Assets                              1,437        1,058          379            36 %
Net Gain (Loss) on Securities                 (34 )        179         (213 )        -119 %
Total Non-interest Income             $    12,122     $ 13,849     $ (1,727 )         -12 %

Trust and investment product fees decreased 25% and 29% during the third quarter and nine months ended September 30, 2009, compared with the same periods of 2008. This decline was primarily attributable to continued difficult economic conditions and changes in customers' investment preferences. Deposit service charges and fees declined by 13% and 12% during the third quarter and nine months ended September 30, 2009, compared with the same periods of 2008, due in large part to less customer utilization of the Company's overdraft protection program.

Insurance revenues declined 11% and 13% during the third quarter of 2009 compared with the same period of 2008. Insurance revenues declined during the nine months ended September 30, 2009 due primarily to a reduced level of contingency revenue at the Company's property and casualty insurance subsidiary, German American Insurance.

Other operating income declined 20% due in large part to losses and write-downs on other real estate owned properties that totaled approximately $326,000 during the first nine months of 2009.

The Company recognized a $34,000 other-than-temporary impairment charge on its portfolio of non-controlling equity investment in other banking organizations during the second quarter of 2009. During the third quarter of 2008, the Company sold approximately $18 million of agency mortgage related securities at a gain of $244,000 and recognized an other-than-temporary impairment expense of $350,000 on its portfolio of non-controlling investments in other banking organizations. During the nine months ended September 30, 2008, the Company sold . . .