(JASPER) – German American Bancorp, Inc. (Nasdaq: GABC) reported third quarter earnings of $14.6 million, or $0.55 per share, for the quarter ending on September 30, 2020. The third quarter 2020 performance was an increase of approximately 12%, on a per share basis, compared to third quarter 2019 net income of $13.1 million, or $0.49 per share. The current quarterly earnings also represented an increase of approximately 2%, on a per share basis, as compared to second quarter 2020 net income of $14.3 million, or $0.54 per share.
Relative to the year-over-year comparison, third quarter 2020 earnings were positively impacted by a $1.2 million increase in non-interest income and a $2.5 million decrease in non-interest expenses. Partially offsetting this $3.7 million positive operating earnings impact was a $1.7 million increase in the current quarter’s provision for credit losses, which primarily enhanced the level of the Company’s allowance for credit losses in response to developments related to the COVID-19 pandemic and its potential future economic impact.
End-of-period loans, as of September 30, 2020, were approximately $3.2 billion, which represented an increase of $164 million, or approximately 5%, from end of period loans as of September 30, 2019. This comparison is inclusive of PPP loans of $342 million, net of fees, as of September 30, 2020. Total deposits at September 30, 2020 of approximately $4.0 billion increased by $548 million, or approximately 16%, relative to third quarter 2019 end of-period total deposits. Approximately 65% of the deposit growth during the year-over-year current quarter comparison occurred within the extremely valuable non-interest bearing demand deposit category.
Commenting on the Company’s third quarter performance, Mark A. Schroeder, German American’s Chairman & CEO, stated, “In the face of an extremely difficult environment, we’re pleased to be able to report another period of very solid profitability during the third quarter of 2020, producing $14.6 million, or $0.55 per share, in earnings for the quarter, which was inclusive of a $4.5 million provision for credit losses. This level of profitability represented a 12% increase over third quarter 2019 earnings and is reflected in third quarter 2020 end of period tangible book value per share of $17.82, which increased by 11% from 2019 third quarter end of period tangible book value of $16.09 per share.”
Schroeder continued, “The current environment of extremely low general market interest rates makes it very difficult to drive growth of net interest income. Additionally, it’s prudent to continue to enhance the level of our allowance for credit losses until the future economic impact of the pandemic is more readily determinable. In spite of these headwinds, we were, nevertheless, able to generate very strong 12% year-over-year quarterly earnings improvement by focusing on the growth of multiple sources of non-interest income and solid control of nearly every category of operating expenses. As always, we’re extremely grateful to our clients for their continued business and loyalty, as well as to our entire team of financial professionals for their unwavering dedication to our clients, communities, and shareholders.”
The Company also announced its Board of Directors declared a regular quarterly cash dividend of $0.19 per share, which will be payable on November 20, 2020 to shareholders of record as of November 10, 2020.
COVID-19 Pandemic Loan Information
The Company is participating in the Paycheck Protection Program (“PPP”) for loans provided through the Small Business Administration (“SBA”), as established under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Under this program, the Company has lent funds primarily to its existing loan and/or deposit customers, based on a pre determined SBA-developed formula, intended to incentivize small business owners to retain their employees. These loans carry a customer interest rate of 1.00% plus a processing fee that varies depending on the balance of the loan at origination and have a two-year or five- year maturity, depending on when the loan was made. The vast majority of the Company’s PPP loans have two-year maturities. As of September 30, 2020, the Company had approximately $351.3 million outstanding, on 3,070 PPP loan relationships, under this program. The net processing fees related to the PPP, which are estimated to total approximately $12.0 million, are being recognized over the life of the loans. As of September 30, 2020, $9.5 million of such fees remain deferred.
In response to requests from borrowers who have experienced pandemic-related business or personal cash flow interruptions, and in accordance with recently issued regulatory guidance, the Company has made
short-term loan modifications involving both interest only and full payment deferrals. As of September 30, 2020 the following active payment modifications are still in effect. These payment modifications are significantly reduced from the level of active modifications as of June 30, 2020.
The Company tracks lending exposure by industry classification to determine potential risk associated with industry concentrations, if any, that could lead to additional credit loss exposure. As a result of the COVID-19 pandemic, the Company has initially identified loan segments that could represent a potentially higher level of credit risk, as many of these customers may have incurred a significant negative impact to their businesses as a result of governmental stay-at-home orders and travel restrictions. At September 30, 2020, the Company had the following exposure to these potentially sensitive COVID-19 identified loan segments:
Balance Sheet Highlights
Total assets for the Company totaled $4.853 billion at September 30, 2020, representing an increase of $1.8 million, or less than 1% on an annualized basis, compared with June 30, 2020 and an increase of $496.9 million, or 11%, compared with September 30, 2019. The increase in total assets during the third quarter of 2020 compared with September 30, 2019 has been impacted by the Company’s participation in the PPP and by significant growth of deposits during the period (primarily in the second quarter of 2020).
September 30, 2020 total loans decreased $45.7 million, or 6% on an annualized basis, compared with June 30, 2020 and increased $164.5 million, or 5%, compared with September 30, 2019. The decline in total loans was impacted by continued elevated pay-offs within the commercial real estate loan portfolio, reduced line utilization within the commercial loan portfolio, and continued pay-downs in the Company’s residential loan portfolio related to the current interest rate environment. The increase in outstanding loans as of September 30, 2020 compared to a year ago was attributable to PPP loans , which were partially mitigated by declines across each segment of the Company’s portfolio. PPP loans totaled $351.3 million ($341.8 million net of deferred fees) at September 30, 2020 compared with $349.5 million in PPP loans ($338.7 million net of deferred fees) at June 30, 2020.
The Company’s allowance for credit losses totaled $46.8 million at September 30, 2020 compared to $42.4 million at June 30, 2020 and $15.9 million at September 30, 2019. The allowance for credit losses represented 1.45% of period-end loans at September 30, 2020 compared with 1.30% of period-end loans at June 30, 2020 and 0.52% of period-end loans at September 30, 2019.
The Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“CECL”) on January 1, 2020. As a result, the Company recognized a one-time cumulative adjustment to the allowance for credit losses of $15.7 million. The increase was primarily related to the Company’s acquired loan portfolio which totaled approximately $851.1 million at the time of adoption. The increase included $6.9 million in non-accretable credit marks allocated to purchased credit deteriorated loans which were grossed up between loans and the allowance for credit losses. Under the CECL model, certain acquired loans continue to carry a fair value discount as well as an allowance for credit losses. As of September 30, 2020, the Company held net discounts on acquired loans of $8.6 million.
The allowance for credit losses increased during the quarter ended September 30, 2020, as a result of the Company recording a $4.5 million provision for credit losses while recording net charge-offs of approximately $163,000. This followed an increase in the allowance for credit losses during the quarter ended June 30, 2020, that resulted from the Company recording a $5.9 million provision for credit losses while recording net charge-offs of approximately $110,000. The provision for credit losses was elevated in the second and third quarters of 2020 primarily due to the developments during 2020 related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.
Non-performing assets totaled $23.3 million at September 30, 2020 compared to $19.6 million at June 30, 2020 and $14.1 million at September 30, 2019. Non-performing assets represented 0.48% of total assets at September 30, 2020, 0.40% at June 30, 2020, and 0.32% at September 30, 2019. Non-performing loans totaled $22.9 million at September 30, 2020 compared to $19.1 million at June 30, 2020 and $13.5 million at September 30, 2019. Non-performing loans represented 0.71% of total loans at September 30, 2020 compared to 0.59% at June 30, 2020 and 0.44% at September 30, 2019. The increase in the level of non- performing assets and non-performing loans at September 30, 2020 compared with June 30, 2020 was primarily attributable to a single commercial real estate credit in the lodging industry. The increase in the level of non-performing assets and non-performing loans at September 30, 2020 compared with September 30, 2019 was largely attributable to the previously discussed commercial real estate relationship and the gross-up of purchased credit deteriorated loans upon the adoption of the CECL standard during 2020.
September 30, 2020 total deposits remained stable, increasing $241,000, compared to June 30, 2020 and increased $548.4 million, or 16%, compared with September 30, 2019. While the overall level of deposits did not change significantly as of September 30, 2020 compared with June 30, 2020, the mix of the deposit portfolio did adjust during the third quarter of 2020. Non-interest bearing deposit accounts increased $45.9 million, or 16% on annualized basis and interest bearing demand, savings and money market accounts increased $11.7 million, or 2% on an annualized basis, while time deposits declined $57.4 million, or 40% on an annualized basis. The increase in total deposits at September 30, 2020 compared with September 30, 2019 was impacted by participation in the PPP and inflows of customer deposits during the second quarter of 2020.
Results of Operations Highlights – Quarter ended September 30, 2020
Net income for the quarter ended September 30, 2020 totaled $14,593,000, or $0.55 per share, an increase of 2% on a per share basis compared with the second quarter 2020 net income of $14,255,000, or $0.54 per share, and an increase of 12% on a per share basis compared with the third quarter 2019 net income of $13,064,000, or $0.49 per share.
During the third quarter of 2020, net interest income totaled $38,388,000, a decline of $71,000, or less than 1%, compared to the second quarter of 2020 net interest income of $38,459,000 and a decline of $190,000, or less than 1%, compared to the third quarter of 2019 net interest income of $38,578,000.
The relative stability in net interest income during the third quarter of 2020 compared with the second quarter of 2020 and the third quarter of 2019 was largely attributable to an increased level of average earning assets driven by participation in the PPP and a larger investment portfolio driven by significant deposit growth during the second quarter of 2020. The average balance of PPP loans during the third quarter of 2020 was $351 million while net fees recognized through interest income on these loans totaled $1.5 million, compared with the second quarter of 2020 average balance on PPP loans of approximately $276 million while the net fees recognized through interest income on those loans totaled approximately $1.1 million. Also contributing to the relatively stable net interest income was a significantly reduced cost of funds and a corresponding decline in the interest cost of interest bearing liabilities.
The tax equivalent net interest margin for the quarter ended September 30, 2020 was 3.50% compared with 3.59% in the second quarter of 2020 and 3.93% in the third quarter of 2019. The lower net interest margin during the third quarter of 2020 compared with the second quarter of 2020 was primarily attributable to a lower level of accretion on acquired loans. Lower market interest rates continue to negatively impact earning asset yields, but these declines have been largely mitigated by a lower cost of funds. The Company has continued to carry excess liquidity on the balance sheet that resulted from significant deposit growth during the second quarter of 2020 and continued muted loan growth. The decline in the tax equivalent net interest margin during the third quarter of 2020 compared with the third quarter of 2019 was attributable to lower market interest rates, excess liquidity on the balance sheet, the 1% interest rate applicable to the PPP loans and a lower level of accretion on acquired loans. Accretion of loan discounts on acquired loans contributed approximately 11 basis points to the net interest margin on an annualized basis in the third quarter of 2020, 19 basis points in the second quarter of 2020 and 20 basis points in the third quarter of 2019.
During the quarter ended September 30, 2020, the Company recorded a provision for credit losses of $4,500,000 compared with a provision for credit losses of $5,900,000 in the second quarter of 2020 and compared with a provision for loan losses of $2,800,000 during the third quarter of 2019. The level of provision for credit losses in both the third quarter of 2020 and the second quarter of 2020 was primarily due to the developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.
Net charge-offs totaled $163,000 or 2 basis points on an annualized basis of average loans outstanding during the third quarter of 2020, compared with $110,000 or 1 basis point on an annualized basis of average loans during the second quarter of 2020 and compared with $3,170,000 or 41 basis points of average loans during the third quarter of 2019.
During the quarter ended September 30, 2020, non-interest income totaled $13,279,000, an increase of $856,000, or 7%, compared with the second quarter of 2020 and an increase of $1,223,000, or 10%, compared with the third quarter of 2019.
Service charges on deposit accounts increased $408,000, or 30%, during the third quarter of 2020 compared with the second quarter of 2020 and declined $622,000, or 26%, compared with the third quarter of 2019. The increase during the third quarter of 2020 compared with the second quarter of 2020 was largely related to improved economic activity in the third quarter of 2020 compared with the second quarter of 2020 and a corresponding change in deposit customer activity as a result of COVID-19 restrictions being loosened in various states. The decline during the third quarter of 2020 compared with the third quarter of 2019 was largely related to the economic impacts of the COVID-19 pandemic and resulting change in deposit customer activity.
Interchange fee income increased $319,000, or 13%, during the quarter ended September 30, 2020 compared with the second quarter of 2020 and increased $257,000, or 10%, compared with the third quarter of 2019. The increased level of fees during the third quarter of 2020 compared with both the second quarterof 2020 and the third quarter of 2019 was due to increased card utilization by customers.
Net gains on sales of loans increased $207,000, or 8%, during the third quarter of 2020 compared with the second quarter of 2020 and increased $1,212,000, or 74%, compared with the third quarter of 2019. The increase during the third quarter of 2020 compared with both the second quarter of 2020 and the third quarter of 2019 was generally attributable to a higher sales volume and higher pricing levels on loans sold. Loan sales totaled $83.5 million during the third quarter of 2020, compared with $79.7 million during the second quarter of 2020 and $60.4 million during the third quarter of 2019.
The Company realized $607,000 in gains on sales of securities during the third quarter of 2020 compared with $993,000 during the second quarter of 2020 and $313,000 during the third quarter of 2019. The sales of securities in all periods was done as part of modest shifts in the allocations within the securities portfolio.
During the quarter ended September 30, 2020, non-interest expense totaled $29,420,000, an increase of $1,332,000, or 5%, compared with the second quarter of 2020, and a decline of $2,541,000, or 8%, compared with the third quarter of 2019. The third quarter of 2019 non-interest expense included $2,258,000 in acquisition related expenses related to the acquisition of Citizens First Corporation on July 1, 2019.
Salaries and benefits increased $1,527,000, or 10%, during the quarter ended September 30, 2020 compared with the second quarter of 2020 and declined $170,000, or 1%, compared with the third quarter of 2019.
The increase in salaries and benefits during the third quarter of 2020 compared with the second quarter of 2020 was primarily attributable to higher incentive plan costs and higher costs related to health insurance
benefits during the third quarter of 2020, and the deferral of a portion of salary costs related to the origination of PPP loans during the second quarter of 2020. The decline in salaries and benefits during the third quarter of 2020 compared with the third quarter of 2019 was primarily attributable to acquisition related expenses of $695,000 during the third quarter of 2019.
Occupancy, furniture and equipment expense declined $119,000, or 3%, during the third quarter of 2020 compared with the second quarter of 2020 and declined $389,000, or 10%, compared to the third quarter of The decline during the third quarter of 2020 compared with the third quarter of 2019 was primarily due to the consolidation of three branch office facilities during 2020 and the timing of expenses for normal repairs and maintenance across the Company’s branch office network.
FDIC premiums increased $203,000, or 165%, during the third quarter of 2020 compared with the second quarter of 2020 and increased $326,000, or 100%, compared with the third quarter of 2019. The change during the third quarter of 2020 to both comparative periods was related to credits received from the FDICduring the second quarter of 2020 and third quarter of 2019. There were no credits received during the third quarter of 2020. The credits received were due to the reserve ratio of the deposit insurance fund exceeding the FDIC targeted levels.
Data processing fees declined $70,000, or 4%, in the third quarter of 2020 compared with the second quarter of 2020 and declined $1,167,000, or 41%, compared with the third quarter of 2019. The decline in the third quarter of 2020 compared with the third quarter of 2019 was primarily attributable to acquisition related expenses of $999,000 during the third quarter of 2019.
Professional fees declined $207,000, or 19%, in the third quarter of 2020 compared with the second quarter of 2020 and declined $449,000, or 34%, compared with the third quarter of 2019. The decline in the third quarter of 2020 compared with the second quarter of 2020 was largely attributable to the timing of certain professional services that occurred during the second quarter of 2020 that did not recur in the third quarter of 2020. The decline in the third quarter of 2020 compared with the third quarter of 2019 was primarily attributable to acquisition related expenses of $401,000 during the third quarter of 2019.
Advertising and promotion expense declined $174,000, or 20%, in the third quarter of 2020 compared with the second quarter of 2020 and declined $346,000, or 33%, compared with the third quarter of 2019. The decline in the third quarter of 2020 compared with the second quarter of 2020 was largely related to the donation of a former branch facility in the second quarter of 2020. The decline in the third quarter of 2020 compared with the third quarter of 2019 was largely attributable to a decline in advertising expense due in part to the COVID-19 pandemic.
Other operating expenses increased $221,000, or 6%, during the third quarter of 2020 compared with the second quarter of 2020 and declined $142,000, or 3%, compared with the third quarter of 2019. The increase during the third quarter of 2020 compared with the second quarter of 2020 was primarily attributable to the write-down of a former office facility of the Company which totaled $311,000 during the third quarter of 2020.
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 73 banking offices in 20 contiguous southern Indiana counties and eight 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.).
