German American Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. The company is an Indiana-based regional bank holding company with banking, trust and investment, and insurance businesses. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and position
- Earnings: Net income was $11.8 million, up 24% from $9.6 million in Q1 2017. Diluted EPS rose to $0.51 from $0.42. The federal tax-rate reduction contributed approximately $0.06 per share; the effective tax rate fell to 17.4% from 28.6%.
- Net interest: Net interest income was $25.6 million versus $24.7 million. On a tax-equivalent basis, it was $26.3 million versus $26.0 million, while net interest margin declined to 3.66% from 3.86%. Average loans increased about 8%; higher funding costs and lower acquired-loan discount accretion weighed on margin.
- Other income and expenses: Non-interest income increased 16% to $9.5 million, including higher trust fees, insurance revenue and interchange income, plus $0.3 million of securities gains. Non-interest expense rose 7% to $20.5 million, with increases in salaries, occupancy, data processing and other expenses.
- Loans and credit: Period-end loans were $2.154 billion, up $8.8 million from year-end, mainly from commercial real estate growth. The allowance was $14.5 million, or 0.67% of loans, down from $15.7 million and 0.73%. Net charge-offs rose to $1.6 million from $0.1 million, primarily due to a partial charge-off on one commercial relationship. Non-performing assets declined to $10.7 million from $11.9 million; non-performing loans were 0.49% of loans versus 0.55%.
- Deposits, borrowings and liquidity: Deposits totaled $2.467 billion, down $16.9 million from year-end. FHLB advances and other borrowings were $274.5 million, versus $275.2 million. Cash and cash equivalents fell $30.1 million during the quarter to $40.2 million. Operating cash flow was $13.7 million; investing and financing cash flows were negative $22.8 million and $21.1 million, respectively. The parent company reported approximately $27.9 million of cash and cash equivalents available for its needs.
- Capital and securities: Shareholders’ equity was $364.0 million, nearly unchanged from year-end; regulatory capital ratios remained above minimums, and the bank met well-capitalized requirements. A $9.2 million after-tax securities-related loss in other comprehensive income reduced equity, reflecting market-value declines. Available-for-sale securities had $18.7 million of gross unrealized losses; management attributed these mainly to interest rates and said it did not intend, or expect to be required, to sell them before recovery.
- Dividends: Quarterly dividends were $0.15 per share, compared with $0.13 in Q1 2017.
Material changes, outlook and risks
- Q1 earnings benefited from the Tax Act’s reduction of the federal corporate tax rate from 35% to 21%. The company also adopted revenue-recognition guidance in 2018; it reported no material overall earnings impact, though certain debit-card costs were reclassified from contra-revenue to expense.
- After quarter-end, the company agreed to acquire five MainSource Bank branches in Indiana, assume approximately $160 million of deposits and purchase approximately $134 million of loans. The expected deposit premium was approximately $8 million; closing was expected May 18, 2018, subject to customary conditions. The bank’s legal name changed to German American Bank effective April 1, 2018.
- No specific earnings or margin guidance was provided. Management described the allowance as based on its quarterly assessment of credit conditions and portfolio factors. The filing highlights risks including interest-rate changes, credit deterioration, competition, acquisition integration, cybersecurity, regulatory changes and tax-law effects; it reports no material change to previously disclosed risk factors.
- Interest-rate simulations estimated next-12-month net interest income declines of 2.37% under an immediate, sustained 2% rate increase and 11.05% under a 2% decrease. The filing cautions that these are model estimates based on assumptions and a static balance sheet, not forecasts.
Important facts for investors to verify
- Whether the elevated charge-offs tied to the single commercial relationship remain isolated, and how credit quality and allowance coverage evolve.
- Whether deposit pricing and funding costs continue to pressure net interest margin.
- Completion and integration of the five-branch acquisition, including deposit retention, loan performance and the final purchase economics.
- Effects of interest-rate movements on securities values, accumulated other comprehensive loss and earnings sensitivity.
- The future impact of the expected CECL adoption; management said it could not yet estimate the one-time allowance adjustment.