German American Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated financial statements; amounts below are in U.S. dollars. The company operates a regional bank, trust and investment advisory business, and insurance agency.
Business context and material developments
- On July 1, 2019, the company acquired Citizens First Corporation, adding eight Kentucky banking offices. Consideration was approximately $65.6 million, including about 1.664 million shares and $15.5 million in cash. The acquired bank had approximately $456 million of assets at closing.
- The acquisition added $17.0 million of goodwill and $4.5 million of core-deposit intangibles; purchase accounting valuations remain preliminary. Management said the acquisition advances its regional expansion strategy.
- The company elected financial holding company status effective September 24, 2019, but reported that it had not begun activities newly permitted by that election.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $38.6 million | $28.5 million | $105.8 million | $81.6 million |
| Provision for loan losses | $2.8 million | $0.5 million | $3.7 million | $2.1 million |
| Non-interest income | $12.1 million | $9.0 million | $34.2 million | $27.3 million |
| Non-interest expense | $32.0 million | $21.6 million | $84.3 million | $63.7 million |
| Net income | $13.1 million | $12.6 million | $43.4 million | $35.5 million |
| Diluted EPS | $0.49 | $0.55 | $1.70 | $1.55 |
- Q3 net income increased about 3%, while diluted EPS fell 11%, reflecting a larger share count after acquisitions as well as acquisition-related costs. Nine-month net income rose about 22% and EPS rose 10% year over year.
- Tax-equivalent net interest margin was 3.93% in Q3 versus 3.76% a year earlier, and 3.89% for the nine-month period versus 3.72%. Management attributed the improvement to higher loan yields and increased accretion of acquired-loan discounts; higher funding costs partly offset the benefit.
- Q3 acquisition-related expenses were approximately $2.3 million ($1.7 million after tax); nine-month costs were $3.2 million ($2.5 million after tax). Non-interest expense also rose as acquired operations were added. FDIC premium credits reduced expense in Q3.
- Non-interest income growth reflected higher deposit and interchange fees, loan-sale gains, and wealth-management fees. Nine-month company-owned life insurance income also included $554,000 of death benefits.
Financial position, credit, liquidity, and capital
- At September 30, 2019, total assets were $4.36 billion, loans were $3.06 billion, and deposits were $3.43 billion. Since December 31, 2018, assets increased $426.8 million, loans $329.0 million, and deposits $358.7 million, driven largely by the Citizens First acquisition.
- The allowance for loan losses was $15.9 million, or 0.52% of period-end loans, versus 0.58% at year-end 2018. Non-performing loans were $13.5 million (0.44% of loans); non-performing assets were $14.1 million (0.32% of assets).
- Q3 net charge-offs were $3.17 million, or 41 basis points annualized, compared with $86,000 a year earlier. Management attributed the increase primarily to a partial charge-off on one adversely classified commercial lending relationship. The allowance covered 117% of non-performing loans.
- Cash and cash equivalents were $89.1 million, down $7.4 million from year-end. Nine-month operating cash flow was $45.8 million, investing cash flow was $62.6 million, and financing cash flow was negative $115.8 million. The parent company reported $27.9 million of cash available for its needs.
- Total shareholders’ equity was $562.9 million, or 12.9% of assets. The company’s total capital, Tier 1, CET1, and leverage ratios were 14.10%, 12.48%, 12.03%, and 10.24%, respectively. The bank was reported well-capitalized.
- The company issued $40 million of 4.50% fixed-to-floating subordinated notes due 2029. Proceeds funded part of the Citizens First cash consideration and repaid a $25 million term loan. Consolidated FHLB advances and other borrowings totaled $316.7 million at quarter-end.
Outlook, risks, and unusual items
- The filing provides no specific earnings, growth, or margin guidance. Management’s discussion describes acquisition-driven growth and margin improvement but cautions that results depend on rates, funding costs, credit quality, economic conditions, and successful acquisition integration.
- CECL was scheduled to take effect in 2020. The company planned parallel testing in Q4 2019 and expected a one-time opening allowance adjustment, but said it could not estimate the amount.
- Interest-rate modeling estimated next-12-month net interest income changes of -0.84% for a +2% rate shock and -5.07% for a -2% shock. The modeled net portfolio value fell 15.34% under a -2% shock. Management cautioned that these simulations rely on assumptions and do not predict actual results.
- Available-for-sale securities had $22.8 million of gross unrealized gains and $2.2 million of gross unrealized losses. Management attributed losses primarily to interest-rate changes and stated it did not intend, nor expect to be required, to sell the securities before recovery.
- The company reported no material pending legal proceedings beyond ordinary business matters, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2019.
Important facts for investors to verify
- Whether acquired operations deliver expected benefits and whether preliminary Citizens First purchase-accounting estimates change materially.
- The cause, recovery prospects, and potential future credit effects of the commercial relationship charge-off; monitor loan quality, charge-offs, and allowance coverage.
- Whether margin gains persist as interest rates and deposit funding costs change, including the contribution from acquired-loan discount accretion.
- The eventual CECL transition adjustment and its effects on the allowance, retained earnings, and capital.
- How acquisition-related expenses, added shares, and the $40 million subordinated notes affect ongoing EPS, funding costs, and capital.