(JASPER) – German American Bancorp, Inc. (NASDAQ: GABC) reported quarterly earnings of $12.5 million, or $0.47 per share, for the quarter ending on March 31, 2020. The quarterly earnings performance was inclusive of a $5.2 million provision for loan losses as the Company increased its allowance for loan losses in anticipation of the expected economic downturn related to the COVID-19 pandemic.
The first quarter 2020 performance compared to fourth quarter 2019 net income of $15.8 million, or $0.59 per share, and to first quarter 2019 net income of $15.1 million, or $0.60 per share. The operating results comparisons reflect the inclusion of the acquisition of Citizens First Corporation of Bowling Green, Kentucky on July 1, 2019.
End-of-period loans, as of March 31, 2020, were approximately $3.0 billion, which represented an increase of $306 million, or approximately 11% from end-of-period loans as of March 31, 2019. Total deposits at March 31, 2020, of approximately $3.5 billion increased by $413 million, or approximately 13%, relative to first quarter end-of-period total deposits in the prior year. The increase in end-of-period loans and deposits as of March 31, 2020, as compared to March 31, 2019, was largely related to the acquisition of Citizens First.
Commenting on the Company’s first-quarter performance, Mark A. Schroeder, German American’s Chairman & CEO, stated, “We’re extremely pleased to report solid profitability for the first quarter of 2020. As we enter a period of economic uncertainty, we do so from a position of strength. In the face of increasing our allowance for credit losses to $36.6 million (in addition to net discounts on acquired loans of $12.0 million), which
represents a strong 1.22% of total loans, we produced $12.5 million in earnings for the quarter, increased quarter-end tangible book value to $17.00 per share, reflecting a 16% increase over the past year since March
31, 2019, and continued our historic disciplined approach to lending, which resulted in strong credit metrics, including an end-of-period non-performing asset ratio of 0.44%. From a liquidity perspective, we had a
significant level of on-balance sheet liquidity on March 31, 2020, as indicated by a loan to deposit ratio of 87% and a loan to earning assets ratio of 76%. In terms of capital strength, the Company’s capital ratios as of March 31, 2020, significantly exceeded well-capitalized standards with a total risk-based capital ratio of 14.71%, a common equity tier 1 capital ratio of 12.52% and a tangible common equity ratio of 10.75%.
Schroeder continued, “With the exponential spread of COVID-19 late in the quarter, our focus turned to ensuring the health and well-being of our customers and employees, meeting the liquidity needs of our clients, and supporting the communities we serve. We have enhanced and implemented our pandemic contingency plan, which includes promoting social distancing in all aspects of our business by operating all our banking offices utilizing drive-thru services with limited lobby access by appointment only, educating our customers on a multitude of electronic delivery options, such as mobile banking, online banking, bill pay, treasury management, and automated/interactive teller machines, instituting remote work arrangements for a significant number of our employees, and separating individual departments to create redundancy capabilities for all critical functions. Additionally, we have been proactive in making contributions to local COVID-19 relief funds, offering payment deferral options to business and consumer clients, as well as providing access to other government-sponsored programs, such as the paycheck protection program for small businesses.”
In closing, Schroeder added, “I’m extremely proud of our German American team, who have risen to every challenge we’ve faced in connection with the pandemic and consistently delivered on our promise of customer service excellence without regard to the difficulty of doing so in the current environment. We have received numerous comments from our customers complimenting team members for their exceptional service and thanking us for providing their business, family, employees, and the communities we serve with a critical lifeline in these difficult times. I would be remiss if I didn’t likewise express my sincere appreciation to each and every German American team member. It is their time and talent that makes our Company one of the finest community banking organizations in our region.”
The Company previously announced on April 28, 2020, that its Board of Directors had declared a regular quarterly cash dividend of $0.19 per share, which will be payable on May 20, 2020, to shareholders of record as of May 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. The PPP was designed such that a loan originated under this program will be forgiven if the small business retains its employees and level of payroll through the first two months of the loan. 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 maturity. As of April 30, 2020, the Company has committed approximately $352.6 million, on 2,669 PPP loan relationships, under this program, with processing fees estimated to total approximately $12.5 million.
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.
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 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.
The increase in total assets as of March 31, 2020, compared to a year ago was driven largely by the acquisition of Citizens First Corporation (“Citizens First”). On July 1, 2019, the Company completed its acquisition of Citizens First and its subsidiary bank, Citizen First Bank, Inc. Citizens First,
headquartered in Bowling Green, Kentucky, operated eight retail banking offices through Citizens First Bank, Inc. in Barren, Hart, Simpson, and Warren Counties in Kentucky.
March 31, 2020, total loans declined $63.6 million, or 8% on an annualized basis, compared with December 31, 2019, and increased $306.0 million, or 11%, compared with March 31, 2019. The decline in loans during the first quarter of 2020 compared with year-end 2019 was impacted by elevated pay-offs and reduced line utilization within the commercial loan portfolio, a seasonal decline in the agricultural 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 March 31, 2020, compared to a year ago was largely attributable to the acquisition of Citizens First. The Company’s allowance for credit losses totaled $36.6 million at March 31, 2020, compared to $16.3 million at December 31, 2019, and $16.2 million at March 31, 2019. The allowance for credit losses represented 1.22% of period-end loans at March 31, 2020, compared with 0.53% of period-end loans at December 31, 2019, and 0.60% of period-end loans at March 31, 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 March 31, 2020, the Company held net discounts on acquired loans of $12.0 million.
In addition, the allowance for credit losses increased during the quarter ended March 31, 2020, as a result of the Company recording a $5.2 million provision for credit losses while recording net charge-offs of approximately $440,000. The provision for credit losses was elevated in the first quarter of 2020 primarily due to the recent developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.
Non-performing assets totaled $19.1 million at March 31, 2020, compared to $14.4 million at December 31, 2019, and $13.1 million at March 31, 2019. Non-performing assets represented 0.44% of total assets at March 31, 2020, 0.33% at December 31, 2019, and 0.34% at March 31, 2019. Non-performing loans totaled $18.5 million at March 31, 2020, compared to $14.0 million at December 31, 2019, and $12.4 million at March 31, Non-performing loans represented 0.61% of total loans at March 31, 2020, compared to 0.45% at December 31, 2019 and 0.46% at March 31, 2019. The increase in the level of non-performing assets and non- performing loans at March 31, 2020, compared with year-end 2019 was attributable to the $6.9 million gross-
up of purchased credit deteriorated loans upon the adoption of the CECL standard.
March 31, 2019 total deposits increased $48.5 million, or 6% on an annualized basis, compared to December 31, 2019, and increased $413.3 million, or 14%, compared with March 31, 2019. The increase in total deposits at March 31, 2020, compared with March 31, 2019, was largely related to the acquisition of Citizens First.
Net income for the quarter ended March 31, 2020, totaled $12,472,000, or $0.47 per share, a decline of 20% on a per-share basis compared with the fourth quarter 2019 net income of $15,820,000, or $0.59 per share, and a decline of 22% on a per-share basis compared with the first quarter 2019 net income of $15,067,000, or $0.60 per share. The decline in net income and earnings per share during the first quarter of 2020 was largely attributable to an increased level of provision for credit losses related to economic uncertainties and stress related to the COVID-19 pandemic.
During the first quarter of 2020, net interest income totaled $36,256,000, a decline of $3,159,000, or 8%, compared to the fourth quarter of 2019 net interest income of $39,415,000 and an increase of $2,665,000, or 8%, compared to the first quarter of 2019 net interest income of $33,951,000. The decreased level of net interest income during the first quarter of 2020 compared with the fourth quarter of 2019 was primarily attributable to a decreased tax-equivalent net interest margin. The increased level of net interest income during the first quarter of 2020 compared with the first quarter of 2019 was primarily the result of the acquisition Citizens First partially mitigated by a lower net interest margin.
The tax-equivalent net interest margin for the quarter ended March 31, 2020 was 3.74% compared with 4.02% in the fourth quarter of 2019 and 3.88% in the first quarter of 2019. The lower net interest margin during the first quarter of 2020 compared with both the fourth quarter of 2019 and the first quarter of 2019 was attributable to lower market interest rates and lower levels of accretion of loan discounts on acquired loans. Accretion of loan discounts on acquired loans contributed approximately 14 basis points to the net interest margin on an annualized basis in the first quarter of 2020, 36 basis points in the fourth quarter of 2019 and 16 basis points
in the first quarter of 2019.
During the quarter ended March 31, 2020, the Company recorded a provision for credit loss of $5,150,000 compared with a provision for loan loss of $1,600,000 in the fourth quarter of 2019 and compared with a
provision for loan loss of $675,000 during the first quarter of 2019. The increase in the provision for credit losses compared to both the first and fourth quarter of 2019 was primarily due to the recent developments related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.
Net charge-offs totaled $440,000 or 6 basis points on an annualized basis of average loans outstanding during the first quarter of 2020, compared with $1,191,000 or 15 basis point on an annualized basis of average loans
during the fourth quarter of 2019 and compared with $255,000 or 4 basis points of average loans during the first quarter of 2019.
During the quarter ended March 31, 2020, non-interest income totaled $14,081,000, an increase of $2,803,000, or 25%, compared with the fourth quarter of 2019 and an increase of $2,423,000, or 21%, compared with the first quarter of 2019.
Trust and investment product fees increased $118,000, or 6%, during the first quarter of 2020 compared with the fourth quarter of 2019 and increased $464,000, or 30%, compared with the first quarter of 2019. The increase in both comparative periods was primarily attributable to fees generated from increased assets under management in the Company’s wealth management group.
Service charges on deposit accounts declined $162,000, or 7%, during the first quarter of 2020 compared with the fourth quarter of 2019 and increased $337,000, or 18%, compared with the first quarter of 2019. The decline during the first quarter of 2020 compared with the fourth quarter of 2019 was largely related to seasonal declines in deposit fees, while the increase during the first quarter of 2020 compared with the first quarter of 2019 was largely attributable to the acquisition completed during 2019.
Insurance revenues increased $1,306,000, or 68%, during the quarter ended March 31, 2020, compared with the fourth quarter of 2019 and increased $24,000, or 1%, compared with the first quarter of 2019. The increase during the first quarter of 2020 compared with the fourth quarter of 2019 was primarily due to increased contingency revenue. Contingency revenue during the first quarter of 2020 totaled $1,319,000 compared with no contingency revenue during the fourth quarter of 2019 and $1,375,000 during the first quarter of 2019.
Contingency revenue is reflective of claims and loss experience with insurance carriers that the Company represents through its property and casualty insurance agency. Typically, the majority of contingency revenue
is recognized during the first quarter of the year.
Company-owned life insurance revenue increased $769,000, or 170%, during the quarter ended March 31, 2020, compared with the fourth quarter of 2019 and increased $338,000, or 38%, compared with the first quarter of 2019. The increased revenue in the first quarter of 2020 was largely related to death benefits of $838,000 received from life insurance policies during the first quarter of 2020. Death benefits received from life insurance policies totaled $72,000 in the fourth quarter of 2019 and $554,000 received from life insurance policies during the first quarter of 2019.
Interchange fees remained relatively flat during the first quarter of 2020 compared with the fourth quarter of 2019 and increased $387,000, or 18%, compared with the first quarter of 2019. The increase during the first quarter of 2020 compared with the first quarter of 2019 was largely attributable to increased card utilization by customers and the acquisition completed during 2019.
Net gains on sales of loans increased $890,000, or 91%, during the first quarter of 2020 compared with the fourth quarter of 2019 and increased $882,000, or 90%, compared with the first quarter of 2019. The increase during the first quarter of 2020 in the net gain on sale compared with the fourth quarter of 2019 was generally attributable to higher pricing levels on loans sold and an increased level of commitments to originate loans which resulted in a higher fair value adjustment on those commitments. The increase during the first quarter of 2020 compared with the first quarter of 2019 was generally attributable to higher sales volumes and an increased level of commitments to originate loans which resulted in a higher fair value adjustment on those commitments. Loan sales totaled $56.2 million during the first quarter of 2020, compared with $56.6 million during the fourth quarter of 2019 and $28.9 million during the first quarter of 2019.
Other operating income declined $441,000, or 51%, during the quarter ended March 31, 2020, compared with the fourth quarter of 2019 and declined $444,000, or 51%, compared with the first quarter of 2019. The decline during the first quarter of 2020 compared with both comparative periods was largely attributable to the fair value adjustments associated with interest rate swap transactions with loan customers.
During the quarter ended March 31, 2020, non-interest expense totaled $30,328,000, an increase of $504,000, or 2%, compared with the fourth quarter of 2019, and an increase of $3,569,000, or 13%, compared with the first quarter of 2019. The increased level of non-interest expense during the first quarter of 2020 compared with the first quarter of 2019 was largely attributable to the acquisition of Citizens First on July 1, 2019.
Salaries and benefits increased $255,000, or 1%, during the quarter ended March 31, 2020, compared with the fourth quarter of 2019 and increased $2,356,000, or 16%, compared with the first quarter of 2019. The increase
in salaries and benefits during the first quarter of 2020 compared with the first quarter of 2019 was primarily attributable to an increased number of full-time equivalent employees due in part to the acquisition of Citizens
First.
Occupancy, furniture and equipment expense remained relatively stable during the first quarter of 2020 compared with the fourth quarter of 2019 and increased $362,000, or 11%, compared to the first quarter of the increase during the first quarter of 2020 compared with the first quarter of 2019 was primarily due to the operating costs of the Citizens First branch network.
Professional fees increased $235,000, or 28%, during the first quarter of 2020 compared with the fourth quarter of 2019 and declined $243,000, or 18%, compared with the first quarter of 2019. The increase during the first quarter of 2020 compared to the fourth quarter of 2019 was due in large part to professional fees related to CECL implementation and the Company’s annual meeting. The decline during the first quarter of 2020
compared to the first quarter of 2019 was due in primarily to acquisition-related professional fees expensed in the first quarter of 2019.
Advertising and promotion expense declined $299,000, or 22%, in the first quarter of 2020 compared with the fourth quarter of 2019 and increased $201,000, or 23%, compared with the first quarter of 2019. The decline in the first quarter of 2020 compared with the fourth quarter of 2019 was largely related to an elevated level of contributions during the fourth quarter of 2019. The increase in advertising and promotion expense during
the first quarter of 2020 compared with the first quarter of 2019 was largely related to general advertising costs related to the Company’s expanded footprint from the merger and acquisition activity during 2018 and 2019.
Intangible amortization declined $52,000, or 5%, during the quarter ended March 31, 2020, compared with the fourth quarter of 2019 and increased $117,000, or 14%, compared with the first quarter of 2019. The increase
in intangible amortization in the first quarter of 2020 compared with the first quarter of 2019 was attributable to the Citizens First acquisition completed during 2019.
Other operating expenses increased $373,000, or 9%, during the first quarter of 2020 compared with the fourth quarter of 2019 and increased $961,000, or 27%, compared with the first quarter of 2019. The increase in the first quarter of 2020 compared with the first quarter of 2019 was impacted by the Citizens First acquisition.
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 75
banking offices in 20 contiguous southern Indiana counties, eight counties in Kentucky and one county in Tennessee. The Company also owns an investment brokerage subsidiary (German American Investment Services, Inc.) and a full line property and the casualty insurance agency (German American Insurance, Inc.).
