German American Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Financial statements are unaudited. Amounts below are in U.S. dollars; figures are rounded.
Business context
German American Bancorp is an Indiana-based financial holding company with community banking, wealth management, and property and casualty insurance operations. Its bank operates primarily in southern Indiana and Kentucky. The comparison with Q1 2022 is affected by the January 1, 2022 acquisition of Citizens Union Bancorp (CUB), including substantial acquisition-related costs and a Day 1 credit-loss provision in the prior-year quarter.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior year-end |
|---|---|---|
| Net income; diluted EPS | $20.8 million; $0.71 | Q1 2022: $9.1 million; $0.31 |
| Net interest income | $49.0 million | Q1 2022: $46.9 million |
| Tax-equivalent net interest margin | 3.69% | Q1 2022: 3.13% |
| Provision for credit losses | $1.1 million | Q1 2022: $5.2 million |
| Non-interest income | $15.0 million | Q1 2022: $16.2 million |
| Non-interest expense | $37.6 million | Q1 2022: $48.2 million |
| Total assets | $6.00 billion | December 31, 2022: $6.16 billion |
| Total loans | $3.77 billion | December 31, 2022: $3.79 billion |
| Total deposits | $5.15 billion | December 31, 2022: $5.35 billion |
| FHLB advances and other borrowings | $191.1 million | December 31, 2022: $203.8 million |
| Shareholders’ equity | $605.3 million | December 31, 2022: $558.4 million |
- Earnings and margins: Net income rose 129% per share year over year. Net interest income increased 4%, as higher earning-asset yields more than offset increased funding costs. Interest expense rose to $11.5 million from $2.4 million; management attributed higher deposit costs to rising rates, competitive deposit pricing, and deposit mix changes.
- Revenue and costs: Non-interest income declined 8%, principally due to lower loan-sale gains, insurance revenue, and securities-sale gains; interchange income increased 16%. Non-interest expense declined 22%, but Q1 2022 included about $11.7 million of nonrecurring CUB acquisition costs.
- Credit: The allowance for credit losses was $44.3 million, or 1.18% of period-end loans, versus $44.2 million, or 1.17%, at year-end. Net charge-offs were $953,000, or 10 basis points annualized, versus $256,000, or 3 basis points, in Q1 2022. Nonperforming loans were $14.6 million, 0.39% of loans, compared with $14.3 million, 0.38%, at year-end.
- Liquidity and cash flow: Cash and cash equivalents decreased $38.8 million to $80.3 million. Operating cash flow was positive $31.5 million, investing cash flow positive $145.0 million, and financing cash flow negative $215.3 million. Deposits fell $195.2 million, or 4%, during the quarter. Management reported approximately 21% of deposits were uninsured and uncollateralized. The company had not borrowed through the Federal Reserve’s Bank Term Funding Program; parent-company cash and cash equivalents were approximately $53.5 million.
- Capital and securities: Shareholders’ equity was 10.1% of assets, compared with 9.1% at year-end. Consolidated regulatory ratios included CET1 of 13.60% and total capital of 15.89%; the bank’s capital met the well-capitalized thresholds. Available-for-sale securities had $292.6 million of gross unrealized losses and no credit-loss allowance; management attributed the improvement in unrealized losses during the quarter primarily to market-rate changes. Accumulated other comprehensive loss was $230.5 million at quarter-end.
Material changes and management commentary
- Loan balances decreased $15.8 million: seasonal agricultural and lower commercial and industrial balances more than offset $33.4 million of commercial real estate growth.
- Deposit declines were concentrated in January and slowed in February and March. Customers also shifted funds from transactional accounts into time deposits. The company used securities-portfolio cash flows to help meet liquidity needs; available-for-sale securities declined $91.4 million during the quarter.
- Management said the company had not been negatively impacted by the failures of Silicon Valley Bank and Signature Bank and subsequent First Republic Bank failure. It cited a diverse core deposit base and access to other funding sources, while stating it would continue to monitor liquidity and industry developments.
- The company paid $7.4 million in dividends, or $0.25 per share, and had not repurchased shares under its authorization to repurchase up to 1.0 million shares.
Outlook, risks, and unusual items
- The filing provides no specific numerical earnings, revenue, or margin guidance. Management described continued monitoring of liquidity and market developments, rather than providing formal forecasts.
- Key risks include deposit competition and outflows, uninsured-deposit confidence, rising funding costs, potential new regulation and higher FDIC premiums, interest-rate changes, credit deterioration amid inflation and economic uncertainty, and market-value volatility in securities. Management noted qualitative allowance estimates are sensitive to economic assumptions.
- Q1 2022 earnings comparisons are materially affected by CUB acquisition costs and the $6.3 million Day 1 CECL provision. CUB-related acquisition expenses were approximately $11.7 million in Q1 2022.
- Interest-rate sensitivity modeling estimated that a sudden, sustained 2% rate increase would raise next-12-month net interest income 1.14% versus the base case, while a 2% decrease would reduce it 3.55%. The filing cautions that these models rely on assumptions and may differ from actual results.
- The company reported no material changes to previously disclosed risk factors other than risks tied to banking-industry liquidity concerns and potential regulatory responses. It reported no material change in internal control over financial reporting and no material pending legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether deposit outflows continue, and how the uninsured and uncollateralized deposit share and deposit mix evolve.
- Whether deposit pricing and funding costs further pressure net interest margin and earnings.
- The scale and duration of unrealized securities losses, liquidity available without securities sales, and any subsequent use of borrowing facilities.
- Trends in commercial real estate, agricultural, and other loan quality, charge-offs, and allowance assumptions.
- Regulatory capital levels, possible regulatory changes, and potential increases in FDIC premiums.
- How much of the year-over-year earnings improvement reflects underlying performance versus the unusual CUB-related costs and provision in Q1 2022.