JASPER – German American Bancorp, Inc. (Nasdaq: GABC) reported solid third-quarter earnings of $21.5 million, or $0.73 per share. This level of quarterly earnings reflected a linked quarter decrease of $0.7 million, or approximately 3% on a per share basis, from 2023 second-quarter earnings of $22.1 million or $0.75 per share.
The Company remained well-positioned at the end of the third quarter of 2023 with continued solid liquidity and strong capital.
Third quarter 2023 operating performance was highlighted by marginal net interest margin compression, solid loan growth, a stable/diversified deposit base, continued strong credit metrics, reductions in non-interest expense, and stable/diversified non-interest income.
The net interest margin declined marginally from 3.63% to 3.57%, or 6 basis points, during the third quarter of 2023 on a linked quarter basis as the earning asset yield increase of 14 basis points mostly kept pace with the funding cost increase of 20 basis points. The rise in the cost of funds in the third quarter of 2023 was driven by the continued historic pace of Federal Reserve interest rate increases, extremely competitive deposit pricing in the marketplace, and a continued re-mixing of the Company’s deposit composition as customers looked for higher yield opportunities.
Third quarter 2023 deposits decreased approximately $44 million, or 3%, on an annualized basis compared to the second quarter of 2023. Non-interest-bearing accounts remained stable at a healthy 29% of total deposits. The core deposit base remains diverse with stable and manageable exposure to uninsured and uncollateralized deposits of approximately 21%.
During the third quarter of 2023, total loans increased $63.1 million or 7% on an annualized basis with most categories of loans showing growth. The Company’s loan portfolio composition remained diverse with a low commercial real estate office concentration. Credit metrics remained strong as non-performing assets were 0.21% of period-end assets and non-performing loans totaled 0.32% of period-end loans.
Non-interest income for the third quarter of 2023 remained stable when compared to the second quarter of 2023, as most revenue lines reflected minor changes over the linked second quarter. Non-interest expenses were stable as well with an overall reduction in non-interest expense of approximately 1% over the second quarter.
The Company also announced that its Board of Directors declared a regular quarterly cash dividend of $0.25 per share, which will be payable on November 20, 2023 to shareholders of record as of November 10, 2023. As previously reported, this dividend rate represents a 9% increase over the rate in effect during 2022.
D. Neil Dauby, German American’s Chairman & CEO stated, “We are extremely pleased to deliver yet another solid quarterly operating performance. German American remains extremely well-positioned with solid liquidity, strong capital, and a diverse core deposit base which continues to speak to the strength and resilience of our Company. Thanks to the dedicated efforts of our relationship-focused team of professionals, we are confident that our strong community presence, healthy financial condition, and disciplined approach to risk management and earnings growth will continue to drive future profitability. We remain excited and committed to the vitality and growth of our Indiana and Kentucky communities.”
Balance Sheet Highlights
Total assets for the Company totaled $6.006 billion at September 30, 2023, representing a decline of $47.6 million compared with June 30, 2023, and a decline of $254.2 million compared with September 30, 2022. The decline in total assets on September 30, 2023, compared with June 30, 2023, was primarily related to a decline in the market value of the securities portfolio partially offset by an increase in total loans, while the decline in total assets compared to September 30, 2022, was largely attributable to a decline in total deposits which in turn has led to a decline in short-term investments as well as the Company’s securities portfolio. Federal funds sold and other short-term investments totaled $60.4 million on September 30, 2023, compared with $62.4 million on June 30, 2023, and $302.4 million on September 30, 2022.
Securities available for sale declined $123.8 million as of September 30, 2023, compared with June 30, 2023, and declined $224.7 million compared with September 30, 2022. The decline in the available-for-sale securities portfolio during the third quarter of 2023 compared with the end of the second quarter of 2023 was largely attributable to fair value adjustments on the portfolio caused by a rise in market interest rates while the decline from the third quarter of 2022 was primarily the result of the Company’s utilization of cash flows from the securities portfolio to fund loan growth. The total cash flow generated from the portfolio totaled approximately $35.0 million during the third quarter of 2023, reflecting principal and interest payments. Current projections indicate approximately $140.0 million in principal and interest cash flows from the portfolio over the next twelve months with rates unchanged.
September 30, 2023, total loans increased $63.1 million, or 7% on an annualized basis, compared with June 30, 2023, and increased $207.2 million, or 6%, compared with September 30, 2022. The increase during the third quarter of 2023 compared with June 30, 2023, was broad-based across most segments of the portfolio. Commercial real estate loans increased $55.9 million, or 11% on an annualized basis, while agricultural loans grew $2.6 million, or 3% on an annualized basis, and retail loans grew by $7.8 million, or 4% on an annualized basis. Partially offsetting these increases was a modest decline in commercial and industrial loans of $3.2 million, or 2% on an annualized basis, as line of credit utilization remains muted.
The composition of the loan portfolio has remained relatively stable and diversified over the past several
years, including 2023. The portfolio is most heavily concentrated in commercial real estate loans at 53% of
the portfolio, followed by commercial and industrial loans at 17% of the portfolio, and agricultural loans at 10% of the portfolio. The Company’s commercial lending is extended to various industries, including multi-family housing and lodging, agribusiness, and manufacturing, as well as health care, wholesale, and
retail services. The Company’s commercial real estate portfolio has limited exposure to office real estate,
with office exposure totaling approximately 4% of the total loan portfolio.
The Company’s allowance for credit losses totaled $44.6 million on September 30, 2023, compared to $44.3 million on June 30, 2023, and $44.7 million on September 30, 2022. The allowance for credit losses
represented 1.15% of period-end loans on September 30, 2023, compared with 1.16% on June 30, 2023, and 1.21% of period-end loans on September 30, 2022.
Non-performing assets totaled $12.4 million at both September 30, 2023, and June 30, 2023, and $13.8 million at September 30, 2022. Non-performing assets represented 0.21% of total assets at both September 30, 2023 and June 30, 2023, and 0.22% at September 30, 2022. Non-performing loans totaled $12.4 million at both September 30, 2023, and June 30, 2023, and $13.8 million at September 30, 2022. Non-performing loans represented 0.32% of total loans on both September 30, 2023, and June 30, 2023, and 0.37% on September 30, 2022.
Overall deposits remained relatively stable during the third quarter of 2023 compared with the overall level of deposits on June 30, 2023. September 30, 2023, total deposits declined $43.8 million, or 1% on a linked quarter basis, compared to June 30, 2023, and declined $438.5 million, or 8%, compared with September 30, 2022.
The Company has continued to see customer movement from both interest-bearing and non-interest-bearing transactional accounts to time deposits due primarily to the rising interest rate environment. Non- interest-bearing deposits have remained relatively stable as a percent of total deposits with September 30, 2023, with non-interest deposits totaling 29% of total deposits compared with 30% on June 30, 2023, and 31% on September 30, 2022.
A competitive market driven by rising interest rates has been a significant contributing factor to the decline in total deposits over the course of the past year. Additionally, a meaningful level of the outflow of deposits experienced during the past year was captured within the Company’s wealth management group.
September 30, 2023, total borrowings increased $58.7 million compared to June 30, 2023, and increased $140.2 million compared with September 30, 2022. The increase in total borrowings over the course of the third quarter of 2023 and the past year has been to fund loan growth and mitigate deposit outflows.
On September 30, 2023, the capital levels for the Company and its subsidiary bank, German American Bank (the “Bank”), remained well in excess of the minimum amounts needed for capital adequacy purposes and the Bank’s capital levels met the necessary requirements to be considered well-capitalized.
During the third quarter of 2023, net interest income, on a non tax-equivalent basis, totaled $47,559,000, a decline of $699,000, or 1%, compared to the second quarter of 2023 net interest income of $48,258,000 and a decline of $4,139,000, or 8%, compared to the third quarter of 2022 net interest income of $51,698,000.
The decline in net interest income during the third quarter of 2023 compared with the second quarter of 2023 was primarily attributable to a decline in the Company’s net interest margin. The decline in net interest income during the third quarter of 2023 compared with the third quarter of 2022 was primarily attributable to a decline in average earning assets, driven by a reduced level of average deposits, and a modestly lower net interest margin.
The tax equivalent net interest margin for the quarter ended September 30, 2023, was 3.57% compared with 3.63% in the second quarter of 2023 and 3.59% in the third quarter of 2022. The decline in the net interest margin during the third quarter of 2023 compared with both the second quarter of 2023 and the third quarter of 2022 was largely driven by an increase in the cost of funds. The cost of funds continued to accelerate higher in the third quarter of 2023 due to the continued increase of market interest rates, very competitive deposit pricing in the marketplace, customers actively looking for yield opportunities within and outside the banking industry, and a change in the Company’s deposit composition.
The Company’s net interest margin and net interest income have been impacted by accretion of loan
discounts on acquired loans. Accretion of discounts on acquired loans totaled $1,288,000 during the third quarter of 2023, $716,000 during the second quarter of 2023, and $1,099,000 during the third quarter of 2022.
Accretion of loan discounts on acquired loans contributed approximately 9 basis points to the net interest margin in the third quarter of 2023, 5 basis points in the second quarter of 2023, and 7 basis points in the third quarter of 2022.
During the quarter ended September 30, 2023, the Company recorded a provision for credit losses of $900,000 compared with a provision for credit losses of $550,000 in the second quarter of 2023 and a provision for credit losses of $350,000 during the third quarter of 2022.
Net charge-offs totaled $520,000, or 5 basis points on an annualized basis, of average loans outstanding during the third quarter of 2023 compared with $599,000, or 6 basis points on an annualized basis, of average loans during the second quarter of 2023 and compared with $682,000, or 7 basis points, of average loans during the third quarter of 2022.
During the quarter ended September 30, 2023, non-interest income totaled $14,804,000, a decline of $92,000, or less than 1%, compared with the second quarter of 2023 and an increase of $707,000, or 5%, compared with the third quarter of 2022.
Wealth management fees increased $45,000, or 2%, during the third quarter of 2023 compared with the second quarter of 2023 and increased by $581,000, or 24%, compared with the third quarter of 2022. The
increase during the third quarter of 2023 was largely attributable to increased assets under management
within the Company’s wealth management group as compared with both the second quarter of 2023 and the third quarter of 2022.
Interchange fee income increased $58,000, or 1%, during the quarter ended September 30, 2023 compared with the second quarter of 2023 and increased $416,000, or 10%, compared with the third quarter of 2022.
The increased level of fees during the third quarter of 2023 compared with both the second quarter of 2023 and the third quarter of 2022 was due to increased card utilization by customers.
Other operating income declined $192,000, or 13%, during the third quarter of 2023 compared with the
second quarter of 2023 and declined $95,000, or 7%, compared with the third quarter of 2022. The decline during the third quarter of 2023 compared with both periods was largely attributable to a fair value adjustment to the asset held for the Company’s lender risk account with the Federal Home Loan Bank.
Net gains on sales of loans decreased $16,000, or 3%, during the third quarter of 2023 compared with the second quarter of 2023 and declined $240,000, or 28%, compared with the third quarter of 2022. The
decline in the third quarter of 2023 compared with the second quarter of 2022 was largely related to a lower volume of loans sold and lower pricing levels. Loan sales totaled $33.8 million during the third 2023 compared with $24.8 million during the second quarter of 2023 and $40.9 million during the third
quarter of 2022.
During the quarter ended September 30, 2023, non-interest expense totaled $35,421,000, a decline of
$305,000, or 1%, compared with the second quarter of 2023, and increased $705,000, or 2%, compared with the third quarter of 2022.
Salaries and benefits increased $244,000, or 1%, during the quarter ended September 30, 2023 compared
with the second quarter of 2023 and increased $596,000, or 3%, compared with the third quarter of 2022.
The increase in salaries and benefits during the third quarter of 2023 compared with the second quarter of 2023 was primarily due to higher employee benefit costs including health insurance benefit costs. The
increase in salaries and benefits during the third quarter of 2023 compared with the third quarter of 2022
was due in large part to higher salary costs primarily associated with annual adjustments for employees
throughout the past year.
Occupancy, furniture, and equipment expenses increased $248,000, or 7%, during the quarter that ended September 30, 2023, compared with the second quarter of 2023 and remained stable compared with the
second quarter of 2022. The increase in the third quarter of 2023 compared with the second quarter of 2023 was primarily attributable to increased repairs and maintenance costs, utility costs, and real and personal property tax expenses.
FDIC premiums increased $13,000, or 2%, during the quarter ended September 30, 2023 compared with the second quarter of 2023, and increased $223,000, or 47%, compared with the third quarter of 2022.
The increase in the third quarter of 2023 compared with the third quarter of 2022 was primarily related to an industry-wide 2 basis point increase in the base FDIC premium assessment effective January 1, 2023. Professional fees declined $385,000, or 24%, in the third quarter of 2023 compared with the second quarter of 2023 and increased $41,000, or 3%, compared with the third quarter of 2022. The decline during the third quarter of 2023 compared with the second quarter of 2023 was largely attributable to increased professional fees in the second quarter of 2023 related to fiduciary-related tax services for wealth management customers, fees for certain retirement plan services, and the timing of other professional fees.
Other operating expenses declined $309,000, or 6%, during the quarter ended September 30, 2023, compared with the second quarter of 2023 and declined $19,000, or less than 1%, compared with the third quarter of 2022. The decline in the third quarter of 2023 compared with the second quarter of 2023 was due in large part to a reduced liability for unfunded commitments and various fees associated with ATM/debit cards.
About German American
German American Bancorp, Inc. is a Nasdaq-traded (symbol: GABC) financial holding company based in Jasper, Indiana. German American, through its banking subsidiary German American Bank, operates 76
banking offices in 20 contiguous southern Indiana counties and 14 counties in Kentucky. The Company
also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full-line property and casualty insurance agency (German American Insurance, Inc.).
