JASPER – German American Bancorp, Inc. (Nasdaq: GABC) reported another quarter of strong operating performance, resulting in quarterly earnings of $23.8 million, or $0.90 per share, during the second quarter of 2021.
This level of quarterly earnings represented an increase of $4.3 million, or approximately 22% on a per-share basis, from 2021 first-quarter earnings of $19.6 million, or $0.74 per share. On a year-over-year basis, the current quarterly earnings, as compared to second quarter 2020 earnings of $14.3 million, or $0.54 per share, increased by $9.6 million, or approximately 67 percent on a per-share basis.
The second quarter 2021 earnings growth 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 a solid increase in core non-interest income and disciplined control over non-interest expenses.
As of June 30, 2021, the Company’s total assets were $5.349 billion, representing an increase of $128.7 million, or 10 percent on an annualized basis, compared to March 31, 2021, and an increase of $497.5 million, or 10 percent, compared to June 30, 2020. This increase in total assets, on a linked-quarter basis, was partially attributable to total loans, exclusive of PPP loans, increasing by 5 percent, on an annualized basis, from March 31, 2021, to June 30, 2021. This organic growth of the core loan portfolio represents the first quarter of loan growth, exclusive of the impact of PPP loans, since the onset of the COVID-19 pandemic.
Additionally, the Company’s historically strong loan portfolio demonstrated further quality improvement, allowing for a $5.0 million reversal of the provision for credit losses in the second quarter of 2021.
Net interest income during the second quarter of 2021 increased $948,000 from the first quarter of 2021 and $1.4 million compared to the same period of 2020. The increase in net interest income in the second quarter of 2021 compared to the first quarter of 2021 was primarily attributable to the increase in average earning assets. The increase in net interest income in the second quarter of 2021 compared to the second quarter of 2020 was largely attributable to an increase in average earning assets and a higher level of fees recognized related to PPP loans.
While certain seasonality factors impacted the level of non-interest income in the second quarter compared to the first quarter of 2021, an additional factor contributing to the second quarter of 2021 net income improvement was a year-over-year increase in non-interest income. Year-over-year combined net revenue improvements of approximately $1.5 million, or 12 percent were primarily driven by a $753,000, or 40 percent, increase in trust and investment product fees, and a $1.0 million, or 41 percent, increase in interchange fee income. 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 being largely attributable to increased assets under management within the Company’s wealth management group, and the increase in interchange fees being related to increased card utilization by customers.
The Company’s non-interest expenses declined by $2.2 million in the second quarter of 2021, as compared to the first quarter of 2021. The vast majority of this positive differential was attributable to a higher level of expense in the first quarter related to the Company’s previously disclosed operating optimization plan.
Mark A. Schroeder, German American’s Chairman & CEO, stated, “We were very pleased with our ability to build upon the momentum of our solid first-quarter earnings with an exceptionally strong performance in the second quarter. We were particularly encouraged by the level of core, organic loan growth, exclusive of the impact of PPP loan activity, and the improvement we’ve seen in general economic conditions throughout our footprint during the current quarter. While new developments related to the pandemic continue to cause uncertainty for both our business and retail customers, we are hopeful that improvements in commercial and social activities will remain steady and look forward with optimism to continued economic growth in the coming months.”
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 August 20, 2021, to shareholders of record as of August 10, 2021. COVID-19 Pandemic Loan Information.
The Company continued its participation 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”), lending funds primarily to its existing loan and/or deposit customers. The PPP loans carry an interest rate of 1.00 percent and included a processing fee that varied depending on the balance of the loan at origination and is recognized over the life of the loan. The vast majority of the Company’s PPP loans made during 2020 had two-year maturities, while PPP loans made during 2021 have five-year maturities.
Under the first round of the PPP, which concluded in 2020, the Company originated loans totaling approximately $351.3 million in principal amount, with approximately $12.0 million of related net processing fees on 3,070 PPP loan relationships. As of June 30, 2021, $330.8 million of those first-round PPP loans had been forgiven by the Company pursuant to the terms of the program, with $11.7 million in net processing fees having been recognized by the Company.
The Company also participated in the second round of the program, which began in January 2021, and gave applicants until May 31, 2021, to apply for a PPP loan and the SBA until June 30, 2021, to process applications. The Company originated loans totaling approximately $157.0 million in principal amount, with approximately $9.0 million of related net processing fees, on 2,601 PPP loan relationships, under the second round of this program. As of June 30, 2021, $20.8 million of second-round PPP loans had been forgiven by the Company, with $2.0 million in net processing fees having been recognized by the Company.
As a result of the forgiveness of the first and second round PPP loans, $156.7 million of total PPP loans remain outstanding as of June 30, 2021, with approximately $7.3 million of net fees remaining deferred on that date.
In response to requests from borrowers who have experienced pandemic-related business or personal cash flow interruptions, and in accordance with regulatory guidance, the Company has made short-term loan modifications involving both partial and full payment deferrals. The table below shows the payment modifications that were still in effect as of June 30, 2021, with all of these credit relationships making full interest payments.
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 on their businesses as a result of governmental stay-at-home orders and travel restrictions.
During the second quarter of 2021, the Company re-assessed its exposure to the student housing industry segment, which was formerly included as a COVID-19 pandemic-related stressed sector. With the return of universities in its market areas to in-person classes for the 2021/2022 school year and occupancy levels for the upcoming school year that is similar to historical levels, the Company removed the student housing segment from the COVID-19 pandemic-related stressed sectors.
Balance Sheet Highlights
Total assets for the Company totaled $5.349 billion on June 30, 2021, representing an increase of $128.7 million, or 10 percent on an annualized basis, compared with March 31, 2021, and an increase of $497.5 million, or 10 percent compared with June 30, 2020. The increase in total assets during the second quarter of 2021 compared with March 31, 2021, and June 30, 2020, has been largely driven by significant growth of deposits.
Securities available for sale increased $199.5 million as of June 30, 2021, compared with March 31, 2021, and increased $623.1 million compared with June 30, 2020. The increase in the securities portfolio in both the second quarter of 2021 and over the past year was the result of increased levels of deposits and cash flows from the forgiveness of PPP loans.
June 30, 2021, total loans declined $46.5 million, or 6 percent on an annualized basis, compared with March 31, 2021, and declined $196.4 million, or 6 percent, compared with June 30, 2020. The decline in total loans on June 30, 2021, compared with March 31, 2021, and June 30, 2020, was due to a decrease in PPP loans. PPP loans, net of deferred fees, totaled $149.4 million on June 30, 2021, compared with $234.2 million on March 31, 2021, and $338.7 million on June 30, 2020.
Excluding PPP loans, total loans increased $38.4 million, or 5 percent on an annualized basis, on June 30, 2021, compared with March 31, 2021. Commercial real estate loans increased approximately $24.6 million, or 7% on an annualized basis, during the second quarter of 2021 compared with March 31, 2021, and commercial and industrial loans increased $4.8 million (excluding PPP loans), or 4 percent on an annualized basis, while agricultural loans declined $2.8 million, or 3 percent on an annualized basis. During the second quarter of 2021 compared with March 31, 2021, retail loans increased $11.9 million, or 9 percent on an annualized basis.
The Company’s allowance for credit losses totaled $40.0 million on June 30, 2021, compared to $45.1 million on March 31, 2021, and $42.4 million on June 30, 2020. The allowance for credit losses represented 1.30 percent of period-end loans (1.37 percent excluding PPP loans) on June 30, 2021, compared with 1.45 percent of period-end loans (1.56 percent excluding PPP loans) on March 31, 2021, and 1.30 percent of period-end loans (1.45 percent excluding PPP loans) at June 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 June 30, 2021, the Company held net discounts on acquired loans of $6.0 million.
The allowance for credit losses declined during the quarter ended June 30, 2021, as a result of the Company recording a negative $5.0 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 in 2020 related to the COVID-19 pandemic and the resulting impact on the economic assumptions used in the CECL model.
Non-performing assets totaled $18.3 million on June 30, 2021, compared to $21.3 million on March 31, 2021, and $19.6 million on June 30, 2020. Non-performing assets represented 0.34% of total assets on June 30, 2021 compared to 0.41% at March 31, 2021 and 0.40% at June 30, 2020. Non-performing loans totaled $17.4 million on June 30, 2021, compared to $21.0 million on March 31, 2021, and $19.1 million on June 30, 2020.
Non-performing loans represented 0.57 percent of total loans on June 30, 2021, compared to 0.67 percent on March 31, 2021, and 0.59 percent on June 30, 2020.
June 30, 2021 total deposits increased $71.1 million, or 7 percent on an annualized basis, compared to March 31, 2021, and increased $470.3 million, or 12 percent, compared with June 30, 2020. The increase in total deposits on June 30, 2021, compared with March 31, 2021, was largely attributable to seasonal increases in public fund deposits. The increase in total deposits on June 30, 2021, compared with June 30, 2020, was impacted by participation in the PPP, stimulus payments provided by the federal government, an increase in public funds, and general inflows of customer deposits.
Results of Operations Highlights – Quarter ended June 30, 2021
Net income for the quarter ended June 30, 2021, totaled $23,822,000, or $0.90 per share, an increase of 22 percent on a per-share basis compared with the first quarter 2021 net income of $19,557,000, or $0.74 per share, and an increase of 67 percent on a per-share basis compared with the second quarter 2020 net income of $14,255,000, or $0.54 per share.
During the second quarter of 2021, net interest income, on a non-tax-equivalent basis, totaled $39,880,000,
an increase of $948,000, or 2 percent, compared to the first quarter of 2021 net interest income of $38,932,000 and an increase of $1,421,000, or 4 percent, compared to the second quarter of 2020 net interest income of $38,459,000.
The increase in net interest income during the second quarter of 2021 compared with the first quarter of 2021 was primarily attributable to an increase in average earning assets. The increase in net interest income in the second quarter of 2021 compared with the second quarter of 2020 was largely 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 June 30, 2021, was 3.30 percent compared with 3.41 percent in the first quarter of 2021 and 3.59 percent in the second 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 during the second quarter of 2021 totaled $2,776,000, $3,017,000 during the first quarter of 2021, and $1,121,000 during the second quarter of 2020.
The fees recognized related to the PPP contributed approximately 22 basis points to the net interest margin on an annualized basis in the second quarter of 2021, 25 basis points in the first quarter of 2021, and 10 basis points in the second quarter of 2020. Accretion of loan discounts on acquired loans contributed approximately 5 basis points to the net interest margin in the second quarter of 2021, 7 basis points in the first quarter of 2021, and 19 basis points in the second quarter of 2020. Accretion of discounts on acquired loans totaled $671,000 during the second quarter of 2021, $867,000 during the first quarter of 2021, and $2,127,000 during the second 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 half of 2021, forgiveness of PPP loans, and continued somewhat muted loan growth.
During the quarter ended June 30, 2021, the Company recorded a negative provision for credit losses of$5,000,000 compared with a negative provision for credit losses of $1,500,000 in the first quarter of 2021 and a provision for credit losses of $5,900,000 during the second quarter of 2020. The negative provision for credit losses in the first quarter of 2021 was largely due to a decline in certain adversely criticized assets 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 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 $104,000, or 1 basis point on an annualized basis, of average loans outstanding during the second quarter of 2021 compared with $260,000, or 3 basis point on an annualized basis, of average loans during the first quarter of 2021 and compared with $110,000, or 1 basis point, of average loans during the second quarter of 2020.
During the quarter ended June 30, 2021, non-interest income totaled $13,902,000, a decline of $1,135,000, or 8 percent, compared with the first quarter of 2021 and an increase of $1,479,000, or 12 percent, compared with the second quarter of 2020.
Trust and investment product fees increased $262,000, or 11 percent, during the second quarter of 2021 compared with the first quarter of 2021 and increased $753,000, or 40 percent, compared with the second quarter of 2020. The increase during the second 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 $57,000, or 3 percent, during the second quarter of 2021 compared with the first quarter of 2021 and increased $370,000, or 27 percent, compared with the second quarter of 2020. The increase during the second quarter of 2021 compared with the second quarter of 2020 was largely related to the economic impacts of the COVID-19 pandemic and the resulting change in deposit customer activity during 2020.
Insurance revenues declined $1,272,000, or 39 percent, during the quarter ended June 30, 2021, compared with the
first quarter of 2021 and increased $190,000, or 10 percent, compared with the second quarter of 2020. The decline during the second quarter of 2021 compared with the first quarter of 2021 was primarily due to contingency revenue.
Contingency revenue during the first quarter of 2021 totaled $1,445,000 compared 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.
Interchange fee income increased $652,000, or 23 percent, during the quarter ended June 30, 2021, compared with the first quarter of 2021 and increased $1,006,000, or 41 percent compared with the second quarter of 2020. The increased level of fees during the second quarter of 2021 compared with both the first quarter of 2021 and the second quarter of 2020 was due to increased card utilization by customers. Card utilization in prior periods was impacted by the economic impacts of the COVID-19 pandemic.
Net gains on sales of loans declined $184,000, or 8 percent, during the second quarter of 2021 compared with the first quarter of 2021 and declined $636,000, or 24 percent, compared with the second quarter of 2020. The decline in the second quarter of 2021 compared with the first quarter of 2021 was largely related to a lower volume of loans sold. The decline in the second quarter of 2021 compared with the second 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 $61.5 million during the second quarter of 2021 compared with $68.5 million during the first quarter of 2021 and $79.7 million during the second quarter of 2020.
The Company realized $300,000 in gains on sales of securities during the second quarter of 2021 compared
with $975,000 during the first quarter of 2021 and $993,000 during the second 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 June 30, 2021, non-interest expense totaled $29,037,000, a decline of $2,222,000,
or 7 percent compared with the first quarter of 2021, and an increase of $949,000, or 3 percent, compared with the second quarter of 2020. The non-interest expense included non-recurring expenses that totaled $554,000 during the second quarter of 2021 and $2,012,000 during the first quarter of 2021 related to an operating optimization plan previously announced by the Company.
Salaries and benefits declined $1,430,000, or 8 percent, during the quarter ended June 30, 2021, compared with the first quarter of 2021 and increased $493,000, or 3 percent, compared with the second quarter of 2020. The decline in salaries and benefits during the second quarter of 2021 compared with the first quarter of 2021 was impacted by the employee severance and related costs associated with the Company’s previously disclosed operating optimization plan that totaled approximately $19,000 during the second quarter of 2021 and $594,000 during the first quarter of 2021. In addition, various benefit costs were reduced during the second quarter of 2021 compared with the first quarter of 2021 including health insurance costs and retirement plan costs.
Occupancy, furniture, and equipment expense declined $518,000, or 12 percent, during the second quarter of 2021 compared with the first quarter of 2021 and increased $349,000, or 10%, compared to the second quarter of 2020.
The decline during the second quarter of 2021 compared first quarter of 2021 and the increase compared with the second quarter of 2020 were both primarily related to lease termination costs associated with the Company’s operating optimization plan. Lease termination costs totaled approximately $536,000 during the second quarter of 2021 and totaled approximately $875,000 during the first quarter of 2021. The Company did not incur any lease termination costs during the second quarter of 2020.
Professional fees increased $353,000, or 30 percent, in the second quarter of 2021 compared with the first quarter of 2021 and increased $431,000, or 40 percent, compared with the second quarter of 2020. The increase during the second quarter of 2021 compared with both the first quarter of 2021 and the second quarter of 2020 was largely attributable to an increase in legal fees.
Other operating expenses declined $532,000, or 12%, during the second quarter of 2021 compared with the first quarter of 2021 and declined $171,000, or 4%, compared with the second quarter of 2020. The decline during the second quarter of 2021 compared with the first quarter of 2021 was primarily attributable to the write-down of leasehold improvements and furniture and equipment of approximately $543,000 related to the Company’s previously announced operating optimization plan in the first quarter of 2021.
