German American Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited; amounts below are in millions unless stated otherwise. The company operates community banking, trust and investment advisory, and insurance businesses across southern Indiana and northern Kentucky.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $24.9 | $24.6 | $74.5 | $70.0 |
| Provision for loan losses | $0.3 | — | $1.1 | $1.2 |
| Non-interest income | $8.3 | $8.4 | $24.3 | $23.7 |
| Non-interest expense | $19.8 | $18.7 | $57.8 | $57.2 |
| Net income | $9.7 | $10.2 | $29.1 | $25.1 |
| Diluted EPS | $0.42 | $0.45 | $1.27 | $1.13 |
| Tax-equivalent net interest margin | 3.70% | 3.75% | 3.78% | 3.75% |
- Q3 net income declined 5% and diluted EPS declined 7% year over year. Net interest income rose modestly, but higher expenses and a $0.25 million loan-loss provision weighed on earnings.
- Nine-month net income increased 16% and diluted EPS increased 12%. The comparison benefits from approximately $4.3 million of River Valley merger costs in the first nine months of 2016, including $2.7 million after tax, and from 2016 including only seven months of River Valley operations.
- Q3 tax-equivalent net interest margin edged down as funding costs rose and acquired-loan discount accretion declined. For the nine-month period, margin improved slightly, supported by securities yields.
- Q3 non-interest income was nearly flat. Higher trust fees, interchange income and securities gains were offset by lower other operating income, including reduced swap-related fees. Nine-month non-interest income rose 3%; lower securities gains partly offset increases in trust fees, interchange and company-owned life insurance income.
- Q3 non-interest expense increased 6%, driven by salaries and a $0.77 million expense for donating a closed branch facility. Nine-month expense rose 1% despite the prior-year merger costs; 2017 also included the branch donation expense.
Financial position, credit and liquidity
- Total assets were $3.073 billion at September 30, up $116.9 million from year-end 2016. Loans were $2.090 billion, up $96.3 million; deposits were $2.425 billion, up $75.0 million.
- Cash and cash equivalents were $54.6 million, down $10.3 million over the nine months. Operating cash flow was $43.8 million, investing cash outflow $124.2 million, and financing cash inflow $70.1 million.
- FHLB advances and other borrowings totaled $261.9 million, versus $258.1 million at year-end. Shareholders’ equity was $360.6 million, or 11.7% of assets. The bank’s total capital ratio was 12.21%; its common equity tier 1 ratio was 11.58%.
- Nonperforming assets rose to $10.2 million from $4.0 million at year-end; nonperforming loans were 0.46% of loans versus 0.19%. Management attributed most of the increase to one commercial relationship placed on non-accrual during Q3. The allowance was $15.3 million, or 0.73% of period-end loans, compared with 0.74% at year-end.
- The parent company reported approximately $19.2 million of cash and cash equivalents available for its needs. Its access to bank subsidiary dividends is subject to regulatory restrictions.
Outlook, risks and notable items
- The filing provides no specific earnings or revenue guidance. Management identifies interest rates, funding costs, credit quality, economic conditions, competition, integration of acquisitions, cybersecurity, regulation and capital availability as risks to results.
- Interest-rate simulations show estimated next-12-month net interest income falling 5.23% under an instantaneous 1% rate decrease and 9.24% under a 2% decrease; modeled increases also reduce NII. These are scenario estimates based on assumptions, not forecasts.
- Management anticipated that adoption of the expected-credit-loss standard could increase the loan-loss allowance but could not estimate the amount. It estimated lease accounting adoption would increase the balance sheet by approximately $6 million.
- The company completed a 3-for-2 stock split in April 2017; reported prior-period per-share data reflects the split. It repurchased no shares during Q3. Management reported effective disclosure controls and no material change in internal control over financial reporting; no material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the single commercial relationship driving higher nonperforming assets results in further deterioration, charge-offs or increased provisions.
- Whether loan and deposit growth can continue while maintaining funding costs and net interest margin.
- How much Q3 earnings were affected by the branch donation, swap-related income changes and other unusual items.
- How the prior-year River Valley merger costs and partial-year consolidation affect comparisons of year-over-year performance.
- Future capital, liquidity and parent-company cash needs, and the realized impact of forthcoming accounting standards.