JASPER -German American Bancorp, Inc. (Nasdaq: GABC) reported today continued strong operating performance with earnings of $21.5 million, or $0.81 per share, for the third quarter of 2021.
This level of solid quarterly earnings represented an increase of $6.9 million, or $0.26 per share, approximately 47% on a per-share basis, from 2020 third-quarter earnings of $14.6 million, or $0.55 per share. On a year-to-date basis, the current earnings of $64.9 million, or $2.44 per share, increased by $23.5 million, or approximately 56% on a per-share basis, as compared to third quarter 2020 year-to-date earnings of $41.3 million, or $1.56 per share.
The third quarter 2021 earnings growth, as compared to third quarter 2020, was driven by a number of factors including strong balance sheet growth, within both the core loan portfolio and deposit base, improved net interest income, and a reduced provision for credit losses, coupled with solid core non-interest income revenue increases and controlled non-interest expenses.
As of September 30, 2021, the Company’s total assets were $5.476 billion, representing an increase of $127.2 million, or 10% on an annualized basis, compared to June 30, 2021, and an increase of $622.9 million, or 13%, compared to September 30, 2020. Exclusive of PPP loans and certain sold loans, the increase in total assets reflects an increase in total loans of approximately 5%, on an annualized basis, when comparing September 30, 2021, to June 30, 2021, and an increase of approximately 2% when compared to September 30, 2020. Additionally, the Company’s historically strong loan portfolio demonstrated continued quality improvement, allowing for a $2.0 million reversal of the provision for credit losses in the third quarter of 2021.
Net interest income during the third quarter of 2021 increased by $2.9 million, or 8%, from the third quarter of 2020, and $7.0 million, or 6%, in 2021 relative to 2020 on a year-to-date basis. The increase in net interest income in the third quarter of 2021 compared to the third quarter of 2020 was primarily attributable to the increase in average earning assets. The increase in net interest income for year-to-date 2021 was primarily attributable to an increase in average earning assets, a higher level of fees recognized related to PPP loans, and a lower cost of funds.
Year-over-year non-interest income improvements totaled approximately $2.3 million, or 17%, on a quarterly basis, and $4.7 million, or 12%, on a year-to-date basis. A comparison of third quarter 2021 non-interest income to the third quarter of 2020 was driven by a $1.7 million increase in other operating income primarily related to the gain from the sale of two branch office locations during the current quarter.
Additionally, the Company generated a $733,000, or 37%, increase in trust and investment product fees and a $544,000, or 19%, increase in interchange fee income during the third quarter of 2021 as compared to the same quarter in 2020. Both of these areas of fee income were positively impacted by the ongoing improvement in economic conditions, with the increase in trust and investment fees largely attributable to increased assets under management within the Company’s wealth management group and the increase in interchange fees related to increased card utilization by customers. These non-interest income improvements were partially offset by reduced levels of net gains on sales of residential loans into the secondary market and of net gains on sales of securities. The Company’s level of non-interest expenses reflected modest increases in 2021 on both a quarterly and year-to-date basis relative to 2020. The primary drivers of the increase were related to several areas of non-recurring professional and legal related expenses in connection with the previously noted branch office sale, the recently announced pending acquisition of Citizens Union Bancorp of Shelbyville, Inc., and certain other legal matters.
Mark A. Schroeder, German American’s Chairman & CEO, stated, “We were again very pleased with our ability to build upon the momentum of our strong first half of 2021 earnings with a very solid performance in the third quarter. We are also excited about the future growth potential in connection with the recent announcement of our pending acquisition of Citizens Union Bancorp of Shelbyville, Kentucky. Citizens Union primarily operates within the Louisville, Kentucky Metropolitan Statistical Area (“MSA”), which will provide us with a strong platform from which we can build upon our existing strong presence on the Indiana side of the Louisville MSA and on our successful Louisville-based Commercial Loan Production and Wealth Management Office. I believe this acquisition represents one of the most important strategic opportunities we’ve had during my tenure as CEO to take our Company to the next level in terms of both future balance sheet and earnings growth.”
The Company also announced its Board of Directors has declared a regular quarterly cash dividend of $0.21 per share, which will be payable on November 20, 2021, to shareholders of record as of November 10, 2021.
Balance Sheet Highlights
On September 24, 2021, the Company completed the sale of its two branches located in Lexington,
Kentucky, to the Home Savings and Loan Company of Kenton, Ohio (“HSLC”). As part of the sale, HSLC
assumed approximately $17.6 million in total deposits and purchased approximately $18.0 million in total
loans.
Total assets for the Company totaled $5.476 billion on September 30, 2021, representing an increase of $127.2 million, or 10% on an annualized basis, compared with June 30, 2021, and an increase of $622.9 million, or 13%, compared with September 30, 2020. The increase in total assets during the third quarter of 2021 compared with June 30, 2021, and September 30, 2020, has been largely driven by significant growth of deposits. Securities available for sale increased $110.9 million as of September 30, 2021, compared with June 30, 2021, and increased $659.3 million compared with September 30, 2020. The increase in the securities portfolio in both the third quarter of 2021 and over the past year was the result of increased levels of deposits and cash flows from the forgiveness of loans made under the Paycheck Protection Program (“PPP”).
September 30, 2021, total loans declined $61.5 million, or 8% on an annualized basis, compared with June 30, 2021, and declined $212.2 million, or 7%, compared with September 30, 2020. The decline in total loans at September 30, 2021, compared with June 30, 2021, and September 30, 2020, was primarily due to a decrease in PPP loans and, to a lesser degree, the sale of commercial and agricultural loans as a part of the branch sale completed during the third quarter of 2021. PPP loans, net of deferred fees, totaled $68.0 million ($71.2 million principal balance and $3.2 million of remaining net deferred fees) on September 30, 2021, compared with $149.4 million on June 30, 2021, and $341.8 million on September 30, 2020. As of June 30, 2021, the balances of loans sold as a part of the branch sale totaled $15.8 million.
Excluding PPP loans and the loans sold as a part of the branch sale, total loans increased $35.6 million, or5% on an annualized basis, on September 30, 2021, compared with June 30, 2021. Commercial real estate loans increased approximately $24.9 million, or 7% on an annualized basis, during the third quarter of 2021 compared with June 30, 2021, commercial and industrial loans increased $2.2 million, or 2% on an annualized basis and agricultural loans increased $5.0 million, or 6% on an annualized basis (excluding PPP loans and the branch loans that were sold). During the third quarter of 2021 compared with June 30, 2021, retail loans increased $3.4 million, or 2% on an annualized basis.
In response to requests from borrowers who had experienced pandemic-related business or personal cash flow interruptions, and in accordance with regulatory guidance, the Company began making short-term loan modifications involving both partial and full payment deferrals in April 2020. As of September 30, 2021, the Company has just one commercial real estate loan, in the principal amount of $3.5 million, with a payment the modification that is still in effect, with such credit relationship making full interest payments.
The Company’s allowance for credit losses totaled $37.8 million on September 30, 2021, compared to $40.0 million on June 30, 2021, and $46.8 million on September 30, 2020. The allowance for credit losses represented 1.26% of period-end loans (1.29% excluding PPP loans) on September 30, 2021, compared with 1.30% of period-end loans (1.37% excluding PPP loans) at June 30, 2021, and 1.45% of period-end loans (1.62% excluding PPP loans) on September 30, 2020.
The Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“CECL”) on January 1, 2020. 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, 2021, the Company held net discounts on
acquired loans of $5.5 million.
The allowance for credit losses declined during the quarter ended September 30, 2021, as a result of the Company recording a negative $2.0 million provision for credit losses while recording modest net charge-offs. During 2020, the allowance for credit losses increased through elevated provision for credit losses 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.
The Company tracks lending exposure by industry classification to determine the 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 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. On September 30, 2021, the Company had the following exposure to these potentially sensitive COVID-19 identified loan segments: Non-performing assets totaled $18.5 million on September 30, 2021, compared to $18.3 million on June 30, 2021, and $23.3 million on September 30, 2020. Non-performing assets represented 0.34% of total assets a September 30, 2021 compared to 0.34% at June 30, 2021 and 0.48% at September 30, 2020. Non- performing loans totaled $18.4 million on September 30, 2021, compared to $17.4 million on June 30, 2021.
September 30, 2021 total deposits increased $143.2 million, or 13% on an annualized basis, compared to June 30, 2021, and increased $613.3 million, or 15%, compared with September 30, 2020. Total deposits increased $175.4 million, or 16% on an annualized basis, on September 30, 2021, compared with June 30, 2021, excluding deposit balances associated with the branches sold during the third quarter of 2021, which totaled $32.2 million at June 30, 2021. and $22.9 million on September 30, 2020. Non-performing loans represented 0.61% of total loans on September 30, 2021 compared to 0.57% at June 30, 2021 and 0.71% at September 30, 2020.
The increase in total deposits on September 30, 2021 compared with both June 30, 2021 and September 30, 2020 was largely impacted by participation in the PPP, stimulus payments provided by the federal government, an increase in public funds, and general inflows of customer deposits during all periods presented.
Results of Operations Highlights – Quarter ended September 30, 2021
Net income for the quarter ended September 30, 2021, totaled $21,486,000, or $0.81 per share, a decline of 10% on a per-share basis compared with the second quarter 2021 net income of $23,822,000, or $0.90 per share, and an increase of 47% on a per-share basis compared with the third quarter 2020 net income of $14,593,000, or $0.55 per share.
During the third quarter of 2021, net interest income, on a non-tax-equivalent basis, totaled $41,287,000, an increase of $1,407,000, or 4%, compared to the second quarter of 2021 net interest income of $39,880,000 and an increase of $2,899,000, or 8%, compared to the third quarter of 2020 net interest income of $38,388,000.
The increase in net interest income during the third quarter of 2021 compared with both the second quarter of 2021 and the third quarter of 2020 was primarily attributable to an increase in average earning assets and a higher level of fees recognized related to PPP loans. The tax-equivalent net interest margin for the quarter ended September 30, 2021, was 3.33% compared with 3.30% in the second quarter of 2021 and 3.50% in the third quarter of 2020. The Company’s net interest margin in all periods presented has been impacted significantly by fees recognized as a part of the PPP and accretion of loan discounts on acquired loans.
Fees recognized on PPP loans through net interest income totaled $4,109,000 during the third quarter of 2021, $2,776,000 during the second quarter of 2021, and $1,457,000 during the third quarter of 2020. The fees recognized related to the PPP contributed approximately 32 basis points to the net interest margin on an annualized basis in the third quarter of 2021, 22 basis points in the second quarter of 2021, and 13 basis points in the third quarter of 2020. Accretion of loan discounts on acquired loans contributed approximately 4 basis points to the net interest margin in the third quarter of 2021, 5 basis points in the second quarter of 2021, and 11 basis points in the third quarter of 2020. Accretion of discounts on acquired loans totaled $516,000 during the third quarter of 2021, $671,000 during the second quarter of 2021, and $1,189,000 during the third quarter of 2020.
Historically low market interest rates continue to impact the Company’s net interest margin. Lower market interest rates continue to negatively impact earning asset yields, with these declines being partially mitigated by a lower cost of funds. The Company has also continued to carry excess liquidity on the balance sheet that resulted from significant deposit growth during 2020, which has continued in the first nine months of 2021, the forgiveness of PPP loans, and continued somewhat muted loan growth.
During the quarter ended September 30, 2021, the Company recorded a negative provision for credit losses of $2,000,000 compared with a negative provision for credit losses of $5,000,000 in the second quarter of 2021 and a provision for credit losses of $4,500,000 during the third quarter of 2020. The negative provision for credit losses in the third quarter of 2021 was largely due to a decline in certain adversely criticized assets, improvement in the agricultural loan sector, and improvement in certain pandemic-related stressed sectors for which the Company had provided significant levels of allowance for credit losses during 2020.
The level of provision for credit losses during the third 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 $197,000, or 3 basis points on an annualized basis, of average loans outstanding during the third quarter of 2021 compared with $104,000, or 1 basis point on an annualized basis, of average loans during the second quarter of 2021 and compared with $163,000, or 2 basis point, of average loans during the third quarter of 2020.
During the quarter ended September 30, 2021, non-interest income totaled $15,556,000, an increase of $1,654,000, or 12%, compared with the second quarter of 2021 and an increase of $2,277,000, or 17%, compared with the third quarter of 2020.
Trust and investment product fees increased $70,000, or 3%, during the third quarter of 2021 compared with the second quarter of 2021 and increased $733,000, or 37%, compared with the third quarter of 2020. The increase during the third quarter of 2021 compared with both periods was largely attributable to increased assets under management within the Company’s wealth management group.
Service charges on deposit accounts increased $282,000, or 16%, during the third quarter of 2021 compared with the second quarter of 2021 and increased $244,000, or 14%, compared with the third quarter of 2020. The increase during the third quarter of 2021 compared with both periods was largely the result of increased deposit customer activity.
Interchange fee income declined $143,000, or 4%, during the quarter ended September 30, 2021, compared with the second quarter of 2021 and increased $544,000, or 19%, compared with the third quarter of 2020. The decline in the level of fees during the third quarter of 2021 compared with the second quarter of 2021 was largely related to a seasonal decline in card utilization by customers while the increase in the level of fees in the third quarter of 2021 compared with the same period of 2020 was due to increased card utilization by customers. Card utilization in 2020 was impacted by the economic impacts of the COVID-19 pandemic.
Other operating income increased $1,253,000, or 93%, during the third quarter of 2021 compared with the second quarter of 2021 and increased $1,653,000 or 175% compared with the third quarter of 2020. The increase during the third quarter of 2021 was primarily attributable to the net gain of approximately $1.4 million related to the sale of the two branch office locations.
Net gains on sales of loans increased $179,000, or 9%, during the third quarter of 2021 compared with the second quarter of 2021 and declined $664,000, or 23%, compared with the third quarter of 2020. The increase in the third quarter of 2021 compared with the second quarter of 2021 was largely related to a higher volume of loans sold. The decline in the third quarter of 2021 compared with the third quarter of 2020 was generally attributable to a lower volume of loans sold and fair value adjustments on commitments to sell loans partially offset by higher pricing levels on loans sold. Loan sales totaled $69.7 million during the third quarter of 2021 compared with $61.5 million during the second quarter of 2021 and $83.5 million during the third quarter of 2020.
The Company realized $218,000 in gains on sales of securities during the third quarter of 2021 compared with $300,000 during the second quarter of 2021 and $607,000 during the third quarter of 2020. The sales of securities in all periods were done as part of modest shifts in the allocations within the securities portfolio.
During the quarter ended September 30, 2021, non-interest expenses totaled $32,444,000, an increase of $3,407,000, or 12%, compared with the second quarter of 2021, and an increase of $3,024,000, or 10%, compared with the third quarter of 2020. In the third quarter of 2021, non-interest expenses included approximately $457,000 of non-recurring acquisition-related expenses for the acquisition of Citizens Union Bancorp of Shelbyville, Inc. (“Citizens Union”) was announced during the third quarter of 2021 while the second quarter of 2021 included approximately $94,000 in acquisition related expenses.
Salaries and benefits increased $899,000, or 5%, during the quarter ended September 30, 2021, compared with the second quarter of 2021 and declined $135,000, or 1%, compared with the third quarter of 2020. The increase in salaries and benefits during the third quarter of 2021 compared with the second quarter of 2021 was largely attributable to higher health insurance costs and hourly wage increases related to a very competitive labor market in the Company’s market areas.
Occupancy, furniture, and equipment expense declined $377,000, or 10%, during the third quarter of 2021 compared with the second quarter of 2021 and increased $91,000, or 3%, compared with the third quarter of 2020. The decline during the third quarter of 2021 compared to the second quarter of 2021 was primarily related to lease termination costs of $536,000 recognized in the second quarter of 2021 associated with the Company’s operating optimization plan.
Data processing fees increased $227,000, or 13%, during the third quarter of 2021 compared with the second quarter of 2021 and increased $313,000, or 18%, compared with the third quarter of 2020. The increase during the third quarter of 2021 compared with both periods was largely attributable to data processing fees related to the branch office sale and the recently announced Citizens Union acquisition.
Professional fees declined $156,000, or 10%, in the third quarter of 2021 compared with the second quarter of 2021 and increased $482,000, or 55%, compared with the third quarter of 2020. The decline during the third quarter of 2021, compared with the second quarter of 2021, was due in large part to a lower level of non-acquisition-related legal and other professional fees, which were partially offset by an increase in the professional fees associated with the pending acquisition of Citizens Union. The increase during the third quarter of 2021 compared with the third quarter of 2020 was primarily attributable to professional fees associated with the pending acquisition of Citizens Union.
Advertising and promotion expenses increased $192,000, or 27%, in the third quarter of 2021 compared with the second quarter of 2021 and increased $189,000, or 27%, compared with the third quarter of 2020. The increase during the third quarter of 2021 compared with both periods was primarily related to corporate sponsorships of events and increased community activities. The opportunities for sponsorships and community activities have increased as the in-person activities of our customers and communities continue to resume as certain COVID-19 restrictions have been eased.
Other operating expenses increased $2,618,000, or 69%, during the third quarter of 2021 compared with the second quarter of 2021 and increased $2,226,000, or 53%, compared with the third quarter of 2020. The increase during the third quarter of 2021 compared with both the second quarter of 2021 and the third quarter of 2020 was primarily attributable to the establishment of a settlement reserve for a lawsuit challenging the Company’s checking account practices associated with its assessment of overdraft fees for certain debit card transactions. Like many other financial institutions, the Company has been the subject of an overdraft fee-related putative class action lawsuit since the third quarter of 2020. This type of litigation is often time-consuming and expensive to defend. In order to avoid further costs associated with this type of litigation, the Company determined it was in its best interest to pursue a settlement of this lawsuit during the third quarter of 2021 and therefore accrued a $3,050,000 settlement reserve. On October 21, 2021, the Company executed a settlement agreement for payment of that amount in connection with this lawsuit which remains subject to court approval.
