GERMAN AMERICAN BANCORP, INC. quarterly report, Q3 FY2022

German American Bancorp, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results. The company is an Indiana-based bank holding company operating banking, wealth management and insurance businesses. Comparisons are with 2021 unless otherwise noted.

Financial performance and position

MetricQ3 2022Q3 2021Nine months 2022Nine months 2021
Net interest income$51.7 million$41.3 million$148.2 million$120.1 million
Net interest margin, tax-equivalent3.59%3.33%3.35%3.34%
Net income$24.6 million$21.5 million$57.4 million$64.9 million
Diluted earnings per share$0.83$0.81$1.95$2.44
Non-interest income$14.1 million$15.6 million$45.5 million$44.5 million
Non-interest expense$34.7 million$32.4 million$118.6 million$92.7 million
Provision (benefit) for credit losses$0.35 million$(2.0) million$5.85 million$(8.5) million
  • Q3 net income increased about 14% year over year; diluted EPS increased 2%. Nine-month net income declined about 11%, while diluted EPS fell about 20%.
  • At September 30, total assets were $6.26 billion, net loans $3.64 billion, deposits $5.57 billion, and borrowings $146.0 million. Loans and deposits rose $678.4 million and $830.0 million, respectively, from year-end 2021, largely reflecting the CUB acquisition.
  • Cash and cash equivalents were $373.0 million, down $23.8 million since year-end. Nine-month operating cash flow was $82.5 million; investing cash inflow was $84.1 million and financing cash outflow was $190.4 million.
  • The allowance for credit losses was $44.7 million, or 1.21% of period-end loans. Non-performing loans were $13.8 million, 0.37% of loans, versus $14.8 million and 0.49% at year-end 2021. Nine-month net charge-offs were $1.3 million.
  • Shareholders’ equity was $494.7 million, down from $668.5 million at year-end. Accumulated other comprehensive loss was $309.1 million, principally reflecting the decline in available-for-sale securities values as interest rates rose. Securities had $391.0 million of gross unrealized losses; the company reported no credit-loss allowance on that portfolio.
  • At September 30, consolidated regulatory capital ratios included 15.21% total capital, 13.76% Tier 1 capital, 13.04% CET1 and a 10.10% Tier 1 leverage ratio. The company said the Bank remained well-capitalized.

Material changes and notable items

  • On January 1, 2022, the company acquired Citizens Union Bancorp of Shelbyville (CUB), adding 15 Kentucky banking offices. It issued approximately 2.9 million shares and paid about $50.8 million cash; the acquisition added approximately $930.5 million of deposits and $683.8 million of loans at closing.
  • Nine-month 2022 results included $12.3 million of acquisition-related expenses and a $6.3 million Day 1 CECL provision for acquired non-PCD loans. Management attributed much of the year-over-year decline in nine-month EPS to these costs and the shares issued for the acquisition.
  • Higher interest rates and a larger earning-asset base supported Q3 net interest income and margin. Deposit interest expense increased, while recognition of PPP loan fees fell substantially; no PPP loans remained outstanding at September 30.
  • Q3 non-interest income declined 9%, primarily because the prior-year quarter included a $1.4 million gain from branch sales and loan-sale gains were lower. Nine-month non-interest expense rose 28%, reflecting acquisition costs and CUB operating expenses, including higher data-processing costs.
  • The company paid dividends of $0.23 per share in each of the first three quarters. Its authorization to repurchase up to 1.0 million shares remained unused at September 30.

Outlook, commentary and risks

  • The filing provides no specific earnings or revenue guidance. Management cited inflation, rising interest rates and financial-market volatility in its credit-loss assessment and used economic forecasts, including unemployment and GDP, in estimating reserves.
  • Interest-rate modeling estimated next-12-month net interest income would rise 4.18% under an instantaneous sustained 2% rate increase and fall 8.51% under a 2% decrease. These are modeled scenarios, not forecasts; management cautioned that assumptions and actual outcomes may differ.
  • Key risks include interest-rate and deposit-cost changes, local or national economic deterioration and resulting credit losses, securities valuation, litigation, cyber and technology risks, regulatory changes, and execution or integration risks from CUB, including acquired-asset quality and customer retention.
  • A lawsuit challenging overdraft-fee assessments was settled and dismissed with court approval in August 2022; a $3.05 million reserve had been recorded in Q3 2021. The filing reports no other material pending legal proceedings beyond routine litigation.
  • The company reported effective disclosure controls as of September 30, 2022, and no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  • Whether CUB integration delivers expected cost savings and strategic benefits, and how acquisition-related expenses and acquired-loan discount accretion evolve.
  • Whether net interest margin gains persist as deposit costs reprice and interest rates change.
  • Whether credit quality and the $44.7 million allowance remain adequate as inflation and higher rates affect borrowers.
  • How unrealized securities losses and their effects on accumulated other comprehensive loss and reported equity change with market rates.
  • Liquidity and capital trends, including the Bank’s regulatory ratios and the parent company’s dependence on permitted Bank dividends; parent-company cash was approximately $41.6 million.
  • Whether management uses the authorized share-repurchase plan and maintains the current dividend in light of earnings, capital and liquidity needs.