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
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $51.7 million | $41.3 million | $148.2 million | $120.1 million |
| Net interest margin, tax-equivalent | 3.59% | 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.