German American Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Unless noted, amounts are in U.S. dollars; financial statement amounts are in thousands.
Business context
German American Bancorp is an Indiana-based financial holding company operating German American Bank, wealth management and insurance businesses. Its bank operated 76 offices across southern Indiana and Kentucky. Comparisons with the first half of 2022 are affected by the January 1, 2022 acquisition of Citizens Union Bancorp (CUB), including acquisition expenses and a Day 1 credit-loss provision in that prior period.
Financial performance and position
| Metric | Q2 2023 / June 30, 2023 | Comparison |
|---|---|---|
| Net income | $22.1 million; diluted EPS $0.75 | Q2 2022: $23.7 million; $0.81 per diluted share |
| Net interest income | $48.3 million | Down 3% from $49.6 million in Q2 2022 |
| Tax-equivalent net interest margin | 3.63% | 3.35% in Q2 2022 |
| Provision for credit losses | $0.55 million | $0.30 million in Q2 2022 |
| Non-interest income | $14.9 million | Down 2% year over year |
| Non-interest expense | $35.7 million | Essentially unchanged year over year |
| Total assets | $6.05 billion | Down $102.7 million from December 31, 2022 |
| Loans | $3.83 billion | Up $41.8 million from year-end 2022 |
| Deposits | $5.18 billion | Down $170.3 million from year-end 2022 |
| FHLB advances and other borrowings | $227.5 million | Up $23.7 million from year-end 2022 |
| Shareholders’ equity | $602.6 million | Up $44.2 million from year-end 2022 |
For the six months ended June 30, net income was $42.9 million, or $1.45 per diluted share, versus $32.8 million, or $1.11 per share, in 2022. Net interest income was $97.3 million, up 1%; tax-equivalent net interest margin was 3.66%, compared with 3.24%. The six-month comparison also reflects $12.1 million of CUB-related non-recurring expenses and a $6.3 million Day 1 CECL provision in the 2022 period.
Six-month operating cash flow was $53.2 million; investing cash flow was $129.8 million and financing cash flow was negative $161.4 million. Cash and cash equivalents increased $21.6 million to $140.7 million. Parent-company cash and cash equivalents were approximately $55 million.
The allowance for credit losses was $44.3 million, or 1.16% of period-end loans, versus $44.2 million and 1.17% at year-end 2022. Non-performing loans were $12.4 million, 0.32% of loans, down from $14.3 million and 0.38%. The bank’s June 30 regulatory capital ratios exceeded well-capitalized thresholds; its total capital, CET1 and leverage ratios were 14.50%, 13.76% and 10.87%, respectively.
Material changes and management commentary
- Q2 net income and EPS declined year over year, mainly because average earning assets fell as average deposits declined. Higher asset yields lifted margin but did not fully offset the lower average asset base and higher funding costs.
- Deposits fell $195.2 million in Q1, then increased $24.8 million in Q2. Customers shifted funds into time deposits amid higher rates. Non-interest-bearing deposits were 30% of deposits at June 30, versus 32% at year-end; management reported approximately 21% of deposits were uninsured and uncollateralized.
- Loans grew modestly, led by commercial real estate (CRE) growth of $54.2 million; agricultural loans fell $21.9 million and commercial and industrial loans fell $7.4 million. CRE was 53% of the loan portfolio, while office exposure was approximately 4% of total loans.
- Six-month non-interest expense declined 13%, primarily because the 2022 comparison included CUB acquisition costs. Six-month non-interest income declined 5%, mainly due to lower loan-sale gains; loan sales were $48.2 million versus $101.7 million in the prior-year period.
- Available-for-sale securities had $315.2 million of gross unrealized losses at June 30, primarily attributed to market interest-rate changes. The filing reported no allowance for credit losses on these securities. Accumulated other comprehensive loss was $248.9 million.
- Management said the company had not been negatively affected by recent bank failures and remained well-capitalized, while continuing to monitor liquidity. It had not borrowed under the Federal Reserve Bank Term Funding Program.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management projected approximately $150 million of principal and interest cash flows from the securities portfolio over the next 12 months, assuming unchanged rates. Interest-rate sensitivity modeling estimated net interest income over the next 12 months would change by +0.41% for an immediate 1% rate increase and −1.28% for a 1% decrease; the filing cautions that these scenarios rely on assumptions and are not forecasts of actual results.
Key risks include deposit competition and liquidity, rising funding costs, interest-rate movements, inflation and economic weakness, credit deterioration, potential higher FDIC premiums or new regulation, and the significant CRE concentration. Management noted that the allowance estimate depends on judgment and economic forecasts. No material litigation beyond routine business litigation was reported. The company had not repurchased shares under its authorization.
Important facts for investors to verify
- Whether deposit trends, mix and funding costs continue to stabilize, and how uninsured deposit exposure evolves.
- CRE credit quality and concentration, including office exposure, criticized loans, charge-offs and allowance adequacy.
- How much of the securities portfolio’s unrealized losses may affect capital or liquidity if securities must be sold.
- Whether loan growth and asset yields can offset deposit-related balance-sheet pressure and rising funding costs.
- The sustainability of earnings excluding the prior-year CUB acquisition costs and Day 1 credit provision.
- Future FDIC assessment costs and any regulatory changes affecting the bank.