German American Bancorp, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are to December 31, 2021. Unaudited results. The company is a regional bank holding company operating in southern Indiana and Kentucky, with wealth management and insurance businesses.
Business context and material change
On January 1, 2022, the company completed its acquisition of Citizens Union Bancorp of Shelbyville (CUB), adding 15 Kentucky banking offices. Consideration included approximately $50.8 million in cash and 2.87 million company shares. CUB contributed substantial acquired loans, deposits and operating costs to the quarter; acquisition-related valuations remain preliminary.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net interest income | $46.9 million | $38.9 million |
| Tax-equivalent net interest margin | 3.13% | 3.41% |
| Non-interest income | $16.2 million | $15.0 million |
| Non-interest expense | $48.2 million | $31.3 million |
| Provision for credit losses | $5.2 million | Benefit of $1.5 million |
| Net income | $9.1 million | $19.6 million |
| Diluted earnings per share | $0.31 | $0.74 |
| Operating cash flow | $46.3 million | $26.7 million |
Net interest income rose 20%, primarily from higher earning assets following the acquisition and continued deposit growth. Margin declined, in part because PPP fee recognition was lower: $0.6 million in Q1 2022 versus $3.0 million a year earlier. Non-interest income increased 8%, with acquisition-related growth in deposit fees, insurance and interchange income; loan-sale gains fell 35%.
Reported net income fell 54%. Results included $11.7 million of non-recurring CUB acquisition expenses ($8.9 million after tax, or $0.30 per share) and a $6.3 million Day 1 CECL provision for acquired non-PCD loans ($4.7 million after tax, or $0.16 per share). The filing’s unaudited pro forma presentation, which excludes these items, reports Q1 2022 net income of $22.7 million and diluted EPS of $0.77; it is not necessarily indicative of actual results.
Financial condition, credit and liquidity
- Total assets were $6.70 billion, up $1.09 billion from year-end, principally reflecting CUB.
- Total loans were $3.66 billion, up $648.1 million; total deposits were $5.83 billion, up $1.09 billion. Excluding CUB, deposits increased $191.4 million, while loans excluding acquired and PPP loans were nearly flat.
- Cash and cash equivalents were $670.6 million, up $273.7 million during the quarter. Total FHLB advances and other borrowings were $156.1 million. Parent-company cash available for its needs was approximately $32.3 million.
- Allowance for credit losses was $45.1 million, or 1.23% of period-end loans. Net charge-offs were $256,000, or 3 basis points annualized. Non-performing loans were $15.3 million, 0.42% of loans, compared with $14.8 million and 0.49% at year-end.
- Shareholders’ equity was $649.0 million versus $668.5 million. A $133.9 million after-tax decline in accumulated other comprehensive income, largely from falling available-for-sale securities values as interest rates rose, was partly offset by shares issued for CUB. Securities had $156.0 million of gross unrealized losses and no allowance for credit losses was recorded for them.
- Regulatory capital ratios remained above minimum requirements; the bank subsidiary met the filing’s well-capitalized guidelines. The company reported a 14.64% total capital ratio and 12.46% CET1 ratio on a consolidated basis.
Outlook, risks and unusual items
The filing provides no specific earnings or margin guidance. Management cited improvement in employment and GDP indicators and declining pandemic-stressed-sector reserves, while noting continued uncertainty about COVID-19 and borrower conditions. Key risks include interest-rate changes, credit deterioration, economic conditions, deposit and borrowing behavior, cybersecurity, regulatory changes, and whether CUB’s expected benefits are realized amid integration, acquired-asset credit and customer-retention risks.
The rapid rise in rates materially reduced securities fair values and equity through other comprehensive income. In the company’s static-balance-sheet sensitivity model, a sudden sustained 2% rate increase was estimated to reduce next-12-month net interest income by 0.09%; a 2% decrease was estimated to reduce it by 5.82%. Management cautions that model assumptions and actual results may differ.
A putative class action concerning certain debit-card overdraft fees reached a $3.05 million settlement in principle; plaintiff’s motion for preliminary approval was pending at the filing date. The company reported no other material changes to previously disclosed risk factors. A new authorization permits repurchase of up to 1 million shares; none had been repurchased through March 31, 2022.
Important facts for investors to verify
- How much reported earnings improve after CUB integration and the non-recurring acquisition and Day 1 credit costs.
- Final CUB purchase-accounting valuations, acquired-loan performance, and realization of expected integration benefits.
- Whether securities unrealized losses remain non-credit-related, and the potential effects of further rate changes on equity, margins and liquidity.
- Loan quality trends, allowance adequacy and any deterioration in acquired or pandemic-exposed borrower portfolios.
- Progress and final approval of the overdraft-fee settlement, and any resulting cash or earnings effects.