German American Bancorp, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; fourth-quarter figures are identified where reported. The Indiana-based financial holding company provides banking, trust and investment, brokerage, and insurance services across southern Indiana and parts of Kentucky and Tennessee.
Financial performance and position
| Metric | FY 2019 / year-end | Prior comparable period |
|---|---|---|
| Net interest income | $145.2 million | $114.6 million in 2018 |
| Net income | $59.2 million; diluted EPS $2.29 | $46.5 million; $1.99 in 2018 |
| Net interest margin | 3.92% tax-equivalent | 3.75% in 2018 |
| Non-interest income / expense | $45.5 million / $114.2 million | $37.1 million / $93.6 million in 2018 |
| Provision for loan losses | $5.3 million | $2.1 million in 2018 |
| Operating cash flow | $65.2 million | $62.3 million in 2018 |
| Assets / loans / deposits | $4.40 billion / $3.08 billion / $3.43 billion | $3.93 billion / $2.73 billion / $3.07 billion at year-end 2018 |
| Shareholders’ equity | $573.8 million; 13.05% of assets | $458.6 million; 11.67% in 2018 |
| Borrowings | $349.7 million total; $182.0 million long-term | $376.4 million total; $126.6 million long-term in 2018 |
| Cash and cash equivalents | $103.9 million | $96.6 million at year-end 2018 |
Net cash from investing activities was $30.7 million and financing activities used $88.6 million; cash increased $7.3 million for the year. Return on assets was 1.43%, return on equity 11.41%, and dividends were $0.68 per share. Fourth-quarter 2019 net income was $15.8 million, or $0.59 per share, versus $11.0 million, or $0.44 per share, in fourth-quarter 2018.
Material changes and drivers
- Net income rose about 27% and EPS about 15% year over year. Growth reflected higher average earning assets, improved net interest margin, acquisition contributions, and gains in fee income and loan sales.
- Net interest income increased 27%; the tax-equivalent yield on earning assets rose to 4.75%, while funding cost rose to 0.83%. Acquired-loan discount accretion and recoveries added about 30 basis points to 2019 margin, compared with 8 basis points in 2018.
- Citizens First was acquired July 1, 2019 for approximately $65.6 million of total consideration, including approximately 1.7 million shares and $15.5 million cash. The acquired bank had approximately $456 million in assets at closing. Its acquisition contributed materially to balance-sheet growth.
- Net charge-offs increased to $4.9 million, or 0.17% of average loans, from $1.9 million, or 0.08%, in 2018. Management attributed the 2019 increase primarily to partial charge-offs on two adversely classified commercial relationships.
- Non-interest expense increased 22%, partly due to acquired operations and $3.36 million of non-recurring acquisition costs. The allowance was $16.3 million, or 0.53% of loans, versus 0.58% a year earlier; management notes acquired loans are recorded at fair value and do not carry over the seller’s allowance.
- Available-for-sale securities had $21.8 million of gross unrealized gains and $1.8 million of gross unrealized losses at year-end, compared with $5.4 million and $14.1 million, respectively, in 2018.
Outlook, risks and unusual items
- The filing gives no specific earnings, revenue, or margin guidance. Management says it will continue to evaluate organic expansion and acquisition opportunities; future results remain subject to forward-looking statement risks.
- CECL was scheduled for adoption in the first quarter of 2020. The company estimated a one-time increase to the allowance for credit losses of approximately $12–$20 million, primarily related to acquired loans. The estimate was preliminary and could change; the company anticipated using the permitted three-year regulatory capital transition relief.
- The company remained well-capitalized. At December 31, 2019, the Bank’s total risk-based capital ratio was 12.82%, CET1 ratio 12.35%, and leverage ratio 10.27%. The company had not decided whether to opt into the new community bank leverage ratio framework.
- Credit exposure merits attention: commercial real estate represented 49% of loans, and non-owner-occupied commercial real estate, including multifamily, represented about 32%. Non-performing assets were $14.4 million, or 0.33% of assets; non-performing loans were 0.45% of loans.
- Other principal risks include local economic and credit deterioration, interest-rate and funding-cost changes, deposit competition, acquisition integration and credit risk, cybersecurity and third-party service-provider disruption, regulatory change, and the transition away from LIBOR.
- The company issued $40 million principal amount of 4.50% fixed-to-floating subordinated notes due 2029, intended to qualify as Tier 2 capital. It also elected financial holding company status in September 2019 and began operating a pooled captive insurance subsidiary.
- The board approved a new authorization in January 2020 to repurchase up to one million shares; the company was not obligated to repurchase shares and had made no purchases under that plan as of the filing.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The auditor identified the loan-loss allowance and Citizens First acquisition accounting as critical audit matters. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether post-acquisition growth and the higher net interest margin persist after acquired-loan accretion, and how funding costs and deposit mix evolve.
- Final CECL transition adjustment versus the estimated $12–$20 million range, and its effects on allowance coverage, earnings, and regulatory capital.
- Subsequent performance, charge-offs, and risk grades for the two commercial relationships cited as driving 2019 losses, along with acquired-loan credit quality.
- Integration costs and realized benefits from Citizens First and prior acquisitions, including the final acquisition fair-value measurements expected by June 2020.
- Capital deployment decisions, including any share repurchases, dividends, and the choice of regulatory capital framework.