German American Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019. German American is an Indiana-based regional bank with trust, investment advisory and insurance businesses. The quarter was shaped by the COVID-19 pandemic and the January 2020 adoption of CECL.
Key financial results
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net interest income | $36.3 million | $33.6 million; up 8% |
| Net interest margin, tax-equivalent | 3.74% | 3.88% |
| Provision for credit losses | $5.2 million | $0.7 million |
| Noninterest income | $14.1 million | $11.7 million; up 21% |
| Noninterest expense | $30.3 million | $26.8 million; up 13% |
| Net income / diluted EPS | $12.5 million / $0.47 | $15.1 million / $0.60 |
| Total assets | $4.324 billion | Down $73.8 million from year-end |
| Loans / deposits | $3.018 billion / $3.479 billion | Loans down $63.6 million; deposits up $48.5 million from year-end |
| Allowance for credit losses | $36.6 million; 1.22% of loans | $16.3 million; 0.53% at year-end |
| Cash and cash equivalents | $90.1 million | Down $13.7 million during the quarter |
| FHLB advances and other borrowings | $208.0 million | $349.7 million at year-end |
Operating cash flow was $23.9 million; investing activities provided $65.0 million and financing activities used $102.7 million. Shareholders’ equity was $583.5 million. Regulatory capital ratios remained above minimum requirements; the Bank’s total capital ratio was 12.79% and leverage ratio was 10.08%.
Material changes and notable items
- Net income declined 17% and diluted EPS declined 22% year over year. Management attributed the earnings decline primarily to the higher credit-loss provision associated with COVID-19 uncertainty.
- Q1 net interest income increased with higher average earning assets, including the July 2019 Citizens First acquisition, but margin fell as asset yields declined. Lower funding costs partly offset the yield pressure.
- CECL adoption on January 1 increased the allowance by $15.7 million and reduced retained earnings by $6.7 million after tax. The quarter also included a $5.2 million provision, which management linked to COVID-19-related economic forecasts. The allowance rose to $36.6 million.
- Nonperforming assets increased to $19.1 million from $14.4 million at year-end; nonperforming loans were 0.61% of loans versus 0.45%. The filing says the increase was attributable to the CECL gross-up of purchased credit-deteriorated loans.
- The company repurchased 173,089 shares for $4.5 million at an average $25.97 per share and paid $5.1 million in dividends. The board authorized repurchases of up to one million shares.
- Available-for-sale securities had a fair value of $875.8 million. The filing reported $13.3 million of after-tax other comprehensive income for the quarter, primarily from securities valuation gains.
Outlook, risks and contingencies
- Management said the pandemic’s overall effects could not yet be determined. It warned that a prolonged crisis could materially adversely affect business, results, financial condition and cash flows. Lower rates may pressure net interest income and noninterest income; the filing gives no earnings guidance.
- As of April 30, 2020, the Bank had committed approximately $352.6 million in PPP loans across 2,669 relationships, with estimated processing fees of approximately $12.5 million. Management anticipated most loans would be forgiven by the SBA and was still assessing whether to use the Federal Reserve’s PPPL Facility.
- As of April 30, the company had made payment modifications covering 647 loans totaling $233.9 million, or 7.9% of total loans. Identified potentially sensitive exposures included lodging/hotels ($126.4 million), retail shopping/strip centers ($94.0 million), student housing ($93.7 million) and restaurants ($45.8 million).
- Risks include further credit deterioration and reserve increases, impairment of goodwill or other assets, PPP processing litigation or SBA guarantee disputes, and dependence of parent-company liquidity on subsidiary dividends. The company reported no goodwill impairment from its March 31 interim test.
- Interest-rate modeling estimated next-12-month net interest income would decline 0.89% under an immediate 1% rate increase and 1.31% under a 2% increase. A 1% decrease was estimated to increase income 0.76%. These are model estimates based on stated assumptions, not forecasts.
- The filing reported no material pending legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- How subsequent economic conditions and borrower performance affect CECL assumptions, charge-offs, criticized loans and the allowance.
- Whether COVID-19 payment modifications remain temporary, and how sensitive-industry exposures perform as deferrals end.
- PPP loan funding, forgiveness, fee recognition and SBA guarantee compliance; confirm later filings for actual outcomes.
- Whether margin and earnings withstand the rate environment and pandemic-related changes in loan demand, deposit costs and fee income.
- Capital and liquidity trends, including parent-company cash availability and the effects of repurchases and dividends.