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German American Bancorp, Inc. (GABC) Posts Strong Second Quarter Performance
JASPER, IND. (July 26, 2022) — German American Bancorp, Inc. (Nasdaq: GABC) reported strong operating performance in the second quarter of 2022, with earnings of $23.7 million, resulting in our Company’s second highest level of reported earnings per share at $0.81 per share. This level of quarterly earnings represented an increase of $14.7 million, or approximately 161% on a per share basis, from 2022 first quarter earnings of $9.1 million, or $0.31 per share. The first quarter of 2022 was impacted by one-time related merger and acquisition costs as a result of the January 1, 2022 merger with Citizens Union Bancorp of Shelbyville, Inc. (“CUB”). On a year-over-year basis, the current quarterly earnings, as compared to the second quarter 2021 of $23.8 million, or $0.90 per share, were comparable in dollars but decreased 10% on a per share basis as a result of the Company’s January 1, 2022 issuance of approximately 2.9 million shares of common stock as part of the merger consideration in the CUB transaction. The second quarter 2021 earnings were positively impacted by a reserve for credit loss release of $5 million and approximately $2.8 million of Paycheck Protection Program (“PPP”) fees equating to approximately $0.22 per share on an after-tax basis.
The second quarter 2022 earnings performance was driven by a number of factors including improved net interest margin and continued strong credit metrics, as well as increased interchange fee income and deposit service charges, and improved efficiencies in non-interest expenses resulting from the CUB merger.
While overall reported loans remain stable, we continue to see solid organic loan originations throughout our entire footprint. Excluding CUB acquired loans and PPP loans, total loans increased approximately 8% on an annualized basis with solid gains in all lending categories including commercial, agricultural and retail.
Net interest income during the second quarter of 2022 increased $2.7 million from the first quarter of 2022 and $9.7 million compared to the same quarter 2021. The increase in net interest income in the second quarter of 2022 was primarily attributable to an improved net interest margin. On a year-over-year basis, total assets increased $1.12 billion, compared to June 30, 2021. This increase was mostly attributable to the acquisition of CUB as well as strong organic deposit and solid loan growth from throughout our entire market footprint partially offset by a decrease in PPP loans.
Non-interest income declined in the second quarter of 2022 compared with the first quarter of 2022 by approximately $1 million, or 6%, driven by a seasonal decline in insurance contingency income of $1.6 million which was recognized in the first quarter as well as a decline in the net gain on sale of loans of approximately $372,000 or 26% as housing market refinancings continued to diminish. However, all other areas of non-interest income showed improvement. Interchange income increased approximately $540,000, or 15%, due to increased card usage, deposit fees increased $188,000, or 7%, and other income increased approximately $393,000, or 23%. In addition, despite significant declines in the capital markets, wealth management fee income remained stable, quarter-over-quarter, through continued growth of the client base.
The Company’s non-interest expenses declined by $12.5 million, or 26%, in the second quarter of 2022, as compared to the first quarter of 2022 with much of this attributable to non-recurring acquisition-related expenses in the first quarter 2022. However, absent these one-time expenses, the Company was able to begin to optimize its operating costs in the second quarter by realizing efficiencies following the CUB merger and related systems conversion.
D. Neil Dauby, German American’s President and CEO, stated, “We were very pleased with our ability to build upon our momentum from our first quarter acquisition with a strong operating performance in the second quarter. We are encouraged by our improving net interest margins as we anticipate continuing to realize the benefits from a rising rate environment as well as the strength of our lending pipelines throughout most of our existing and newly acquired geographic footprint. Although continued fears of inflation and recession may potentially slow future loan growth, we will be prepared to face the headwinds from future economic uncertainties.”
The Company also announced its Board of Directors has declared a regular quarterly cash dividend of $0.23 per share, which will be payable on August 20, 2022 to shareholders of record as of August 10, 2022.
Balance Sheet Highlights
On January 1, 2022, the Company completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc. (“CUB”). CUB, headquartered in Shelbyville, Kentucky, operated 15 retail banking offices located in Shelby, Jefferson, Spencer, Bullitt, Oldham, Owen, Gallatin and Hardin counties in Kentucky through its banking subsidiary, Citizens Union Bank of Shelbyville, Inc. As of the closing of the transaction, CUB had total assets of approximately $1.109 billion, total loans of approximately $683.8 million, and total deposits of approximately $930.5 million. The Company issued approximately 2.9 million shares of its common stock, and paid approximately $50.8 million in cash, in exchange for all of the issued and outstanding shares of common stock of CUB.
Total assets for the Company totaled $6.472 billion at June 30, 2022, representing a decrease of $225.9 million compared with March 31, 2022 and an increase of $1.123 billion compared with June 30, 2021. The decline in total assets at June 30, 2022 compared with March 31, 2022 was largely attributable to a decline in deposits and a decline in the market value of available-for-sale securities. The increase in total assets at June 30, 2022 compared with June 30, 2021 was in large part attributable to the acquisition of CUB as well as organic deposit growth.
Securities available for sale declined $101.9 million as of June 30, 2022 compared with March 31, 2022 and increased $236.4 million compared with June 30, 2021. The decline in the available for sale securities portfolio during the second quarter of 2022 compared with March 31, 2022 was due primarily to the fair value adjustments on the portfolio caused by the rise in market interest rates. The increase in the securities portfolio in the second quarter of 2022 compared with June 30, 2021 was largely the result of increased levels of deposits with the reported growth tempered by the fair value adjustments on the portfolio caused by the rapid rise in market interest rates during the first half of 2022.
June 30, 2022 total loans declined $3.3 million, or less than 1% on an annualized basis, compared with March 31, 2022 and increased $578.2 million, or 19%, compared with June 30, 2021. The increase at June 30, 2022 compared with June 30, 2021 was largely due to the acquisition of CUB and to organic loan growth from throughout the Company’s existing market areas partially offset by a decrease in PPP loans. PPP loans, net of deferred fees, totaled $0.6 million at June 30, 2022 compared with $6.6 million at March 31, 2022 and $149.4 million at June 30, 2021. As of June 30, 2022, outstanding loans from the CUB acquisition totaled $602.2 million.
Excluding PPP loans and loans acquired through the CUB acquisition, total loans increased $59.7 million, or 8% on an annualized basis, at June 30, 2022 compared with March 31, 2022 and $124.8 million, or 4%, compared with June 30, 2021. Commercial and industrial loans increased approximately $11.7 million, or 9% on an annualized basis, during the second quarter of 2022 compared with March 31, 2022, commercial real estate loans increased $10.7 million, or 3% on an annualized basis, while agricultural loans increased $16.6 million, or 20% on an annualized basis. During the second quarter of 2022 compared with March 31, 2022, retail loans increased $20.8 million, or 15% on an annualized basis.
| End of Period Loan Balances | 6/30/2022 | 3/31/2022 | 6/30/2021 | ||||||
| (dollars in thousands) | |||||||||
| Commercial & Industrial Loans | $ | 641,496 | $ | 636,519 | $ | 647,918 | |||
| Commercial Real Estate Loans | 1,904,235 | 1,938,528 | 1,517,172 | ||||||
| Agricultural Loans | 397,524 | 387,764 | 344,450 | ||||||
| Consumer Loans | 366,322 | 351,083 | 290,890 | ||||||
| Residential Mortgage Loans | 343,166 | 342,140 | 274,093 | ||||||
| $ | 3,652,743 | $ | 3,656,034 | $ | 3,074,523 | ||||
| Net PPP Loans (included in Commercial & Industrial Loans above) | $ | 598 | $ | 6,612 | $ | 149,372 | |||
The Company’s allowance for credit losses totaled $45.0 million at June 30, 2022 compared to $45.1 million at March 31, 2022 and $40.0 million at June 30, 2021. The allowance for credit losses represented 1.23% of period-end loans at June 30, 2022 and March 31, 2022 and 1.30% of period-end loans at June 30, 2021.
The Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“CECL”) on January 1, 2020. The Company added $9.4 million to the allowance for credit losses in conjunction with the closing of the CUB acquisition on January 1, 2022 related to the CUB loan portfolio. Of the increase in the allowance for credit losses for the CUB portfolio, $6.3 million was recorded through the provision for credit losses on “Day 1” under the CECL model.
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, 2022, the Company held net discounts on acquired loans of $7.7 million which included $3.5 million related to the CUB loan portfolio.
Non-performing assets totaled $15.1 million at June 30, 2022 compared to $15.3 million at March 31, 2022 and $18.3 million at June 30, 2021. Non-performing assets represented 0.23% of total assets at June 30, 2022 compared to 0.23% at March 31, 2022 and 0.34% at June 30, 2021. Non-performing loans totaled $15.1 million at June 30, 2022 compared to $15.3 million at March 31, 2022 and $17.4 million at June 30, 2021. Non-performing loans represented 0.41% of total loans at June 30, 2022 compared to 0.42% at March 31, 2022 and 0.57% at June 30, 2021.
| Non-performing Assets | ||||||||
| (dollars in thousands) | ||||||||
| 6/30/2022 | 3/31/2022 | 6/30/2021 | ||||||
| Non-Accrual Loans | $ | 13,921 | $ | 14,929 | $ | 17,386 | ||
| Past Due Loans (90 days or more) | 1,161 | 383 | — | |||||
| Total Non-Performing Loans | 15,082 | 15,312 | 17,386 | |||||
| Other Real Estate | — | 30 | 925 | |||||
| Total Non-Performing Assets | $ | 15,082 | $ | 15,342 | $ | 18,311 | ||
| Restructured Loans | $ | — | $ | 102 | $ | 108 | ||
June 30, 2022 total deposits declined $116.0 million, or 2% on an annualized basis, compared to March 31, 2022 and increased $1.264 billion, or 28%, compared with June 30, 2021. The increase in total deposits at June 30, 2022 compared with June 30, 2021 was largely attributable to the CUB acquisition and general inflows of customer deposits throughout the past year. As of June 30, 2022, deposits from the CUB acquisition totaled approximately $821.5 million.
| End of Period Deposit Balances | 6/30/2022 | 3/31/2022 | 6/30/2021 | ||||||
| (dollars in thousands) | |||||||||
| Non-interest-bearing Demand Deposits | $ | 1,745,067 | $ | 1,789,353 | $ | 1,350,399 | |||
| IB Demand, Savings, and MMDA Accounts | 3,503,789 | 3,527,373 | 2,688,611 | ||||||
| Time Deposits < $100,000 | 263,798 | 278,477 | 226,970 | ||||||
| Time Deposits > $100,000 | 200,954 | 234,407 | 183,765 | ||||||
| $ | 5,713,608 | $ | 5,829,610 | $ | 4,449,745 | ||||
Results of Operations Highlights – Quarter ended June 30, 2022
Net income for the quarter ended June 30, 2022 totaled $23,747,000, or $0.81 per share, an increase of 161% on a per share basis compared with the first quarter 2022 net income of $9,067,000, or $0.31 per share, and 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.
Net income during the first and second quarters of 2022 was impacted by acquisition-related expenses for the CUB transaction that closed on January 1, 2022. The second quarter of 2022 results of operations included acquisition-related expenses of $426,000 ($320,000 or $0.01 per share, on an after tax basis). The first quarter of 2022 results of operations included acquisition-related expenses of $11,705,000 ($8,908,000 or $0.30 per share, on an after tax basis) and also included Day 1 provision for credit losses under the CECL model of $6,300,000 ($4,725,000 or $0.16 per share, on an after tax basis).
| Summary Average Balance Sheet | |||||||||||||||||||||||||||
| (Tax-equivalent basis / dollars in thousands) | |||||||||||||||||||||||||||
| Quarter Ended | Quarter Ended | Quarter Ended | |||||||||||||||||||||||||
| June 30, 2022 | March 31, 2022 | June 30, 2021 | |||||||||||||||||||||||||
| Principal Balance | Income/ Expense | Yield/ Rate | Principal Balance | Income/ Expense | Yield/ Rate | Principal Balance | Income/ Expense | Yield/ Rate | |||||||||||||||||||
| Assets | |||||||||||||||||||||||||||
| Federal Funds Sold and Other | |||||||||||||||||||||||||||
| Short-term Investments | $ | 606,488 | $ | 1,232 | 0.81 | % | $ | 594,901 | $ | 280 | 0.19 | % | $ | 386,144 | $ | 103 | 0.11 | % | |||||||||
| Securities | 1,875,202 | 12,625 | 2.69 | % | 1,986,917 | 11,533 | 2.32 | % | 1,480,532 | 8,794 | 2.38 | % | |||||||||||||||
| Loans and Leases | 3,649,466 | 40,058 | 4.40 | % | 3,667,082 | 39,022 | 4.31 | % | 3,119,385 | 34,561 | 4.44 | % | |||||||||||||||
| Total Interest Earning Assets | $ | 6,131,156 | $ | 53,915 | 3.52 | % | $ | 6,248,900 | $ | 50,835 | 3.28 | % | $ | 4,986,061 | $ | 43,458 | 3.49 | % | |||||||||
| Liabilities | |||||||||||||||||||||||||||
| Demand Deposit Accounts | $ | 1,740,592 | $ | 1,739,351 | $ | 1,377,754 | |||||||||||||||||||||
| IB Demand, Savings, and | |||||||||||||||||||||||||||
| MMDA Accounts | $ | 3,622,748 | $ | 1,113 | 0.12 | % | $ | 3,492,813 | $ | 872 | 0.10 | % | $ | 2,704,765 | $ | 672 | 0.10 | % | |||||||||
| Time Deposits | 492,453 | 436 | 0.36 | % | 528,452 | 457 | 0.35 | % | 425,972 | 597 | 0.56 | % | |||||||||||||||
| FHLB Advances and Other Borrowings | 145,705 | 1,120 | 3.08 | % | 184,481 | 1,038 | 2.28 | % | 179,698 | 1,145 | 2.56 | % | |||||||||||||||
| Total Interest-Bearing Liabilities | $ | 4,260,906 | $ | 2,669 | 0.25 | % | $ | 4,205,746 | $ | 2,367 | 0.23 | % | $ | 3,310,435 | $ | 2,414 | 0.29 | % | |||||||||
| Cost of Funds | 0.17 | % | 0.15 | % | 0.19 | % | |||||||||||||||||||||
| Net Interest Income | $ | 51,246 | $ | 48,468 | $ | 41,044 | |||||||||||||||||||||
| Net Interest Margin | 3.35 | % | 3.13 | % | 3.30 | % | |||||||||||||||||||||
During the second quarter of 2022, net interest income, on a non tax-equivalent basis, totaled $49,597,000, an increase of $2,689,000, or 6%, compared to the first quarter of 2022 net interest income of $46,908,000 and an increase of $9,717,000, or 24%, compared to the second quarter of 2021 net interest income of $39,880,000.
The increase in net interest income during the second quarter of 2022 compared with the first quarter of 2022 was primarily attributable to an increase in the Company’s net interest margin. The increase in net interest income during the second quarter of 2022 compared with the second quarter of 2021 was primarily attributable to a higher level of earning assets driven by both the CUB acquisition and deposit growth which led to a higher level of securities and short-term investments, which was partially mitigated by a lower level of PPP loan fee recognition.
The tax equivalent net interest margin for the quarter ended June 30, 2022 was 3.35% compared with 3.13% in the first quarter of 2022 and 3.30% in the second quarter of 2021. The improvement in the net interest margin during the second quarter of 2022 has largely been attributable to increased market interest rates resulting in improved yields on earning assets. The Company’s net interest margin in all periods presented has been impacted by fees recognized as a part of the PPP and accretion of loan discounts on acquired loans. The impact of the PPP fees and accretion of loan discounts was relatively flat in the second quarter of 2022 compared to first quarter of 2022 and significantly less than the second quarter of 2021.
Fees recognized on PPP loans through net interest income totaled $264,000 during the second quarter of 2022, $562,000 during the first quarter of 2022 and $2,776,000 during the second quarter of 2021. The fees recognized related to the PPP contributed approximately 2 basis points to the net interest margin on an annualized basis in the second quarter of 2022, 4 basis points in the first quarter of 2022 and 22 basis points in the second quarter of 2021. Accretion of loan discounts on acquired loans contributed approximately 10 basis points to the net interest margin in the second quarter of 2022, 7 basis points in the first quarter of 2022 and 5 basis points in the second quarter of 2021. Accretion of discounts on acquired loans totaled $1,528,000 during the second quarter of 2022, $1,112,000 during the first quarter of 2022 and $671,000 during the second quarter of 2021.
During the quarter ended June 30, 2022, the Company recorded a provision for credit losses of $300,000 compared with a provision for credit losses of $5,200,000 in the first quarter of 2022 and a negative provision for credit losses of $5,000,000 during the second quarter of 2021. During the first quarter of 2022, the provision for credit losses included $6,300,000 for the Day 1 CECL addition to the allowance for credit loss related to the CUB acquisition. The negative provision for credit losses in the second 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.
Net charge-offs totaled $347,000, or 4 basis point on an annualized basis, of average loans outstanding during the second quarter of 2022 compared with $256,000, or 3 basis points on an annualized basis, of average loans during the first quarter of 2022 and compared with $104,000, or 1 basis point, of average loans during the second quarter of 2021.
During the quarter ended June 30, 2022, non-interest income totaled $15,180,000, a decline of $1,008,000, or 6%, compared with the first quarter of 2022 and an increase of $1,278,000, or 9%, compared with the second quarter of 2021.
| Quarter Ended | Quarter Ended | Quarter Ended | |||||||
| Non-interest Income | 6/30/2022 | 3/31/2022 | 6/30/2021 | ||||||
| (dollars in thousands) | |||||||||
| Wealth Management Fees | $ | 2,642 | $ | 2,638 | $ | 2,620 | |||
| Service Charges on Deposit Accounts | 2,871 | 2,683 | 1,735 | ||||||
| Insurance Revenues | 2,254 | 3,721 | 2,020 | ||||||
| Company Owned Life Insurance | 894 | 458 | 385 | ||||||
| Interchange Fee Income | 4,167 | 3,627 | 3,482 | ||||||
| Other Operating Income | 1,225 | 1,268 | 1,342 | ||||||
| Subtotal | 14,053 | 14,395 | 11,584 | ||||||
| Net Gains on Sales of Loans | 1,049 | 1,421 | 2,018 | ||||||
| Net Gains on Securities | 78 | 372 | 300 | ||||||
| Total Non-interest Income | $ | 15,180 | $ | 16,188 | $ | 13,902 | |||
Service charges on deposit accounts increased $188,000, or 7%, during the second quarter of 2022 compared with the first quarter of 2022 and increased $1,136,000, or 65%, compared with the second quarter of 2021. The increase during the second quarter of 2022 compared with the second quarter of 2021 was the result of the CUB acquisition as well as increased deposit customer activity.
Insurance revenues decreased $1,467,000, or 39%, during the quarter ended June 30, 2022, compared with the first quarter of 2022 and increased $234,000, or 12%, compared with the second quarter of 2021. The decline during the second quarter of 2022 compared with the first quarter of 2022 was primarily due to increased contingency revenue. Contingency revenue during the second quarter of 2022 totaled $19,000 compared with $1,620,000 during the first quarter of 2022. 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 increased $436,000, or 95%, during the second quarter of 2022 compared with the first quarter of 2022 and increased $509,000, or 132%, compared with the second quarter of 2021. The increase in the second quarter of 2022 compared to both periods was primarily the result of death benefit claims received during the second quarter of 2022.
Interchange fee income increased $540,000, or 15%, during the quarter ended June 30, 2022 compared with the first quarter of 2022 and increased $685,000, or 20%, compared with the second quarter of 2021. The increase in the level of fees during the second quarter of 2022 compared with the first quarter of 2022 was largely related to increased card utilization by customers while the increase compared with the second quarter of 2021 was related to the CUB acquisition as well as increased card utilization by customers.
Net gains on sales of loans declined $372,000, or 26%, during the second quarter of 2022 compared with the first quarter of 2022 and declined $969,000, or 48%, compared with the second quarter of 2021. The decline in the second quarter of 2022 compared with the first quarter of 2022 was largely attributable to lower pricing levels and fair value adjustments on commitments to sell loans. The decline in the second quarter of 2022 compared with the second quarter of 2021 was largely related to a lower volume of loans sold and lower pricing levels. Loan sales totaled $52.5 million during the second quarter of 2022 compared with $49.3 million during the first quarter of 2022 and $61.5 million during the second quarter of 2021.
The Company realized $78,000 in gains on sales of securities during the second quarter of 2022 compared with $372,000 during the first quarter of 2022 and $300,000 during the second quarter of 2021. 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 June 30, 2022, non-interest expense totaled $35,701,000, a decline of $12,459,000, or 26%, compared with the first quarter of 2022, and an increase of $6,664,000, or 23%, compared with the second quarter of 2021. The second quarter of 2022 non-interest expenses included approximately $426,000 of acquisition-related expenses for the acquisition of CUB while the first quarter of 2022 included approximately $11,705,000 in non-recurring acquisition-related expenses. The primary drivers of the increases in the second quarter of 2022 compared with the second quarter of 2021 were the operating costs for CUB.
| Quarter Ended | Quarter Ended | Quarter Ended | |||||||
| Non-interest Expense | 6/30/2022 | 3/31/2022 | 6/30/2021 | ||||||
| (dollars in thousands) | |||||||||
| Salaries and Employee Benefits | $ | 20,384 | $ | 23,088 | $ | 16,375 | |||
| Occupancy, Furniture and Equipment Expense | 3,772 | 3,809 | 3,830 | ||||||
| FDIC Premiums | 465 | 476 | 329 | ||||||
| Data Processing Fees | 2,460 | 7,724 | 1,779 | ||||||
| Professional Fees | 1,573 | 2,363 | 1,513 | ||||||
| Advertising and Promotion | 1,027 | 1,138 | 705 | ||||||
| Intangible Amortization | 957 | 1,017 | 711 | ||||||
| Other Operating Expenses | |||||||||