To those who wonder if a traditional community bank can stay relevant, German American Bancorp offers a case study on how it can be done.
The only thing about the company that comes close to being splashy is its performance, and that's just how Chief Executive Mark Schroeder intends to keep it.
Unlike a lot of its small-town peers looking to expand, the Jasper, Ind., company hasn't moved into big cities, started national lines of business or negotiated any blockbuster deals.
German American is a frequent acquirer, but its deals have been small, with enough time in between to ensure thorough integration. Even as the company has grown, its commitment to the Midwestern values of its founders never wavered, and along the way it has managed to outperform its peers year in and year out.
The $3 billion-asset company hardly missed a beat during the financial crisis and since then has strung together six consecutive years of record earnings and is well on its way to making it seven. Through Sept. 30 it had earned $25.1 million, up 12% from the same period in 2015.
This formula — strategic acquisitions combined with quietly effective relationship banking — has made German American one of the most consistently profitable banks in the country, and it is why American Banker has selected Schroeder as one of its three Community Bankers of the Year for 2016.
"German American is considered as part of the gold standard in Indiana as far as community banking," an approving S. Joe DeHaven, the longtime Indiana Bankers Association CEO, said in an interview. "Mark is extremely highly regarded, throughout the industry and in Indiana."
A Conservative Tradition
O. Leo Beckman would be every bit as proud.
Beckman, whose father, Fred, helped found German American in 1910, was a legend inside the company. Beckman spent his entire 52-year career there, starting as a teenager in 1930 and working his way up to CEO. He acted as a mentor to Schroeder, who joined the bank as a vault teller in 1972.
Beckman, who passed away in 1995, also was responsible in large part for German American's enduring conservatism.
"Mr. Beckman was very much a traditionalist, very disciplined regarding time-tested banking principles," Schroeder said. "He [drilled into] me that banking is not supposed to be exciting. It's supposed to be boring, and if it's getting exciting, you're probably doing it wrong."
Schroeder said the bank's conservative approach to lending is just as much about protecting its customers as about protecting the bank. "If we have a credit that becomes a problem credit, it's a problem credit for us, but it's a serious dilemma for that client."
That's not to say Beckman wouldn't ever take a risk — as Schroeder first learned 44 years ago when he told his father, Clarence, he had landed an entry-level job at the bank.
"My father told me my grandfather wouldn't bank anywhere else, because Fred Beckman backed him during the Depression," Schroeder recalled. "If the bank hadn't hung in with him, he'd have lost the [family] farm."
In the 1940s, after the Depression had ended, his grandfather ended up selling the property for a hefty profit.
Schroeder has been CEO since Jan. 1, 1999. He had a chance to become CEO in 1982 — the year Leo Beckman finally stepped down — but declined an invitation to interview for the job. "I was young," Schroeder said. "I was 27. I was the newest vice president."
When the head of the search committee called, "I remember laughing and saying that I very much appreciated the call, but I thought I needed a little more experience before I could tackle something like that. But I asked him to do me a favor and please call again when you're looking for the next CEO."
German American's board reached outside the company for Beckman's successor, tapping George Astrike, president of neighboring Tell City National Bank. Like Beckman, Astrike was a mentor to Schroeder, moving him up the ranks. "He was one of the brightest stars I had to work with," Astrike said. "He was always very capable and very industrious. I learned to appreciate that from the start."
A few months after his arrival, Astrike appointed Schroeder head of credit administration. "I remember being a little embarrassed to tell people that a $100 million bank had a 27-year-old head of credit administration, but I never had cause to regret my decision."
Though just as conservative as Beckman fundamentally, Astrike was visionary in other respects, Schroeder said. It was Astrike who inaugurated German American's growth-by-acquisition strategy, engineering the purchase of Ireland, Ind.-based Bank of Ireland in 1986.
"What I took from George was the recognition that slow and steady wins the race, but there are times when you have to seize opportunities," Schroeder said. "When those opportunities present themselves, you have to analyze them. You can't jump into something uninformed, but sometimes time is of the essence. From an M&A perspective, the bank that is choosing to join with you really sets the time when they're ready to make a move. As an acquirer, you can't call and say, 'Well, that's great but two years from now would be better for us.' "
Schroeder has continued down the acquisition path, doing a total of six deals in his 16-plus years as CEO. His most recent transaction, an $87 million cash-and-stock deal for the $514 million-asset River Valley Bancorp in Madison, Ind., closed March 1. It marked German American's entry into the greater Louisville market.
In all, German American has closed 15 whole-bank acquisitions over the past 30 years. That's probably enough to qualify the bank as a serial acquirer. Under Schroeder, though, it goes about the bank-buying business with a characteristic conservative twist.
Schroeder said he likes wait two or three years between deals to ensure enough time for integration. He is also content with relatively small transactions, where the seller is no bigger than one-quarter of German American's asset size.
"If you do run into issues [buying a smaller bank], you can throw resources at them," Schroeder explained. "If it is a huge transaction relative to your starting size, it can overwhelm you."
The strategy might be less splashy than that of other acquirers but is no less effective.
"Banks that grow exponentially via acquisition and move into new market, that's an exciting story to read about," said Joe Fenech, who covers German American for Hovde Group. "This is a bank that instead has chosen to grow at a more measured pace."
An Overlooked Gem
Fenech said German American was "flying under the radar" when Hovde initiated coverage on the company in September 2015, headlining its initial report "Basic Bread and Butter Banking at its Finest."
Fenech concluded that German American's stock, then trading at 1.75 times tangible book value, was significantly undervalued, as companies with a similar earnings track record were trading at two times tangible book or higher. Despite consistently posting a double-digit return on equity — now up to 11 years and counting — it was still being overlooked by investors.
"Our contention was if you really compared this company to the appropriate peer group — and by that I mean a group of the absolute highest-performing banks, not just in the past few years but over the past decade — those banks trade at significantly higher multiples than German American did," Fenech said.
German American is on pace to have its best year ever. For the first time in the company's 116-year history, its quarterly profit topped $10 million, up 32% from the third quarter of 2015. At 1.38% and 12.07%, returns on average assets and average equity were both comfortably above industry averages. Nonperforming loans were just 0.25% of total loans.
These days, Schroeder refers to German American as a "regional supercommunity bank." The description has an impressive ring to it, but in its day-to-day operation, German American still pursues a plain-vanilla relationship banking strategy. The closest it comes to niche banking are the two large turkey producers it counts as clients.
Like most CEOs, Schroeder spends much of his time plotting strategy. With the integration of River Valley well underway, he is considering the next step, and frequently glances south, across the state line, at Kentucky.
German American joined the Kentucky Bankers Association earlier this year, and Schroeder is doing nothing to dampen speculation the company is eyeing some point of entry into the Bluegrass State's banking market.
"There are a couple of other candidates for us in southern Indiana, but past that we're either going to have to move north around Indianapolis or move south," Schroeder said. "As we look at the landscape, there are more … markets that fit our profile in Kentucky."
As for his own future, Schroeder said he'd like to reach his 50th anniversary with the company in 2022, but he doesn't plan to stay much beyond that. Succession planning is on his radar.
"One of the hallmarks of good organizations long term is that they do CEO succession seamlessly," he said. "I consider it the ultimate test of any CEO."