German American Bancorp, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results; dollar amounts below are in millions except per-share data and ratios. The company is a Southern Indiana financial services holding company with banking, trust/advisory, and insurance operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income | $17.192 | $16.393 | $50.129 | $49.654 |
| Provision for loan losses | $(0.400) | $0.640 | $(0.250) | $1.721 |
| Non-interest income | $5.444 | $6.158 | $17.464 | $15.792 |
| Non-interest expense | $13.584 | $12.728 | $40.307 | $37.744 |
| Net income | $6.483 | $6.292 | $18.824 | $17.861 |
| Diluted EPS | $0.51 | $0.50 | $1.48 | $1.41 |
| Dividends per share | $0.15 | $0.14 | $0.45 | $0.42 |
- Q3 net income rose 3%; diluted EPS rose about 2%. Nine-month net income rose 5% and diluted EPS rose about 5%.
- Tax-equivalent net interest margin was 3.70% in Q3 versus 3.66% a year earlier; for the first nine months it was 3.65% versus 3.77%. The nine-month decline reflected lower asset yields and reduced accretion on acquired-loan discounts, partly offset by lower funding costs.
- For the first nine months, operating cash flow was $33.3 million, investing cash outflow $72.6 million, and financing cash inflow $54.9 million. Cash and cash equivalents increased $15.6 million to $64.7 million.
Financial condition, credit and capital
- At September 30, total assets were $2.060 billion, up $53.8 million from year-end 2012. Loans were $1.284 billion, up $76.4 million (about 6%); deposits were $1.671 billion, up $30.1 million.
- FHLB advances and other borrowings totaled $191.6 million, compared with $161.0 million at year-end. The company redeemed $19.3 million of 8% subordinated debentures on April 1, using parent-company cash.
- Shareholders’ equity was $185.1 million, approximately unchanged from year-end. A $13.3 million decline in accumulated other comprehensive income, primarily from lower available-for-sale securities values, largely offset retained earnings growth. The securities portfolio had $11.849 million of gross unrealized losses and $7.902 million of gross unrealized gains.
- Non-performing assets declined to $7.5 million, or 0.37% of assets, from $12.0 million, or 0.60%, at year-end. Non-performing loans were $6.9 million, or 0.54% of loans, versus $10.4 million, or 0.86%. The allowance was $14.5 million, 1.13% of loans versus 1.29% at year-end; coverage of non-performing loans was 208%.
- The subsidiary bank was categorized as well-capitalized. Consolidated ratios at September 30 were 8.63% leverage, 11.92% Tier 1 risk-based capital, and 12.93% total risk-based capital; total capital was 13.70% at year-end.
Changes, outlook and risks
- Earnings benefited from lower loan-loss provisions, improved asset quality, and higher net interest income. Q3 non-interest income fell 12%, primarily due to lower other operating income and loan- and securities-sale gains; nine-month non-interest income rose 11%, including higher trust fees, insurance revenue, and securities gains.
- Non-interest expense rose 7% in both the quarter and nine-month period. Management cited staffing, occupancy and technology costs, acquisition-related professional fees, and other operating initiatives.
- Management changed its general allowance methodology in 2013 from a four-quarter to a rolling 12-quarter loss average; this increased the required allowance by approximately $0.280 million in Q1. Management reported improved asset quality and lower net charge-offs, but loan-loss estimates remain judgmental and sensitive to economic and borrower conditions.
- Effective October 1, 2013, the company acquired United Commerce Bancorp, adding two Bloomington branches. United Commerce reported September 30 assets of about $120.2 million, loans of $83.5 million, and deposits of $106.5 million. Consideration was approximately $14.1 million, including $12.7 million in company stock and $1.4 million cash. Purchase accounting valuations and goodwill/core deposit intangible amounts were incomplete at filing; goodwill was expected not to be tax deductible. Management cited expansion in Southern Indiana and potential cross-selling opportunities.
- No specific earnings or margin guidance is provided. Management identified interest-rate, liquidity, credit, competitive, regulatory, and acquisition-integration risks. A modeled immediate, sustained 2% rate increase reduced estimated net portfolio value 19.24%; a 2% decrease reduced it 9.65%. The filing cautions that these estimates depend on assumptions and do not predict actual results.
- Final Basel III rules were expected to increase capital requirements generally; management said community-bank concerns regarding trust preferred securities and AOCI had been favorably addressed and did not expect materially burdensome compliance efforts before January 1, 2015.
Important facts for investors to verify
- Post-acquisition results, integration costs, customer retention, purchase-accounting marks, goodwill, and core deposit intangible once valuations are finalized.
- Whether loan growth and improving non-performing asset trends continue, particularly given the commercial real estate concentration in non-performing loans and allowance methodology change.
- Net interest margin sensitivity to rates, loan pricing, deposit costs, and acquired-loan discount accretion; also the effect of unrealized securities losses on equity and regulatory capital.
- Parent-company liquidity and capacity to pay dividends: the parent reported approximately $9.2 million of cash, and depends substantially on subsidiary dividends subject to regulatory limits.