German American Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The company is an Indiana-based bank holding company operating 68 banking offices in southern Indiana and Kentucky, with wealth management and insurance businesses. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $23.8; diluted EPS $0.90 | Q2 2020: $14.3; $0.54 per share |
| Net interest income | $39.9 | Q2 2020: $38.5 |
| Tax-equivalent net interest margin | 3.30% | Q2 2020: 3.59% |
| Non-interest income | $13.9 | Q2 2020: $12.4 |
| Non-interest expense | $29.0 | Q2 2020: $28.1 |
| Total assets | $5,348.6 | December 31, 2020: $4,977.6 |
| Total loans / net loans | $3,074.5 / $3,030.7 | December 31, 2020: $3,092.0 / $3,041.2 |
| Total deposits | $4,449.7 | December 31, 2020: $4,106.5 |
| Cash and cash equivalents | $370.1 | December 31, 2020: $345.7 |
| Borrowings | $205.5 | December 31, 2020: $194.5 |
| Shareholders’ equity | $649.0 | December 31, 2020: $624.7 |
- For the six months ended June 30, net income was $43.4 million, or $1.64 per share, versus $26.7 million, or $1.01 per share, in 2020. Net interest income was $78.8 million versus $74.7 million; tax-equivalent margin was 3.35% versus 3.66%.
- Q2 net income per share increased 67% year over year; first-half EPS increased 62%. Management attributed earnings growth to improved net interest income, lower credit-loss provision and higher non-interest revenue, partly offset by higher expenses.
- Q2 provision for credit losses was a benefit of $5.0 million, compared with a $5.9 million provision in Q2 2020. First-half provision was a benefit of $6.5 million, compared with a $11.1 million provision in first-half 2020. Management cited improving criticized assets and pandemic-affected sectors. First-half net charge-offs were $0.4 million.
- Non-performing loans were $17.4 million, or 0.57% of loans, versus $21.5 million, or 0.70%, at year-end 2020. The allowance was $40.0 million, 1.30% of period-end loans, versus $46.9 million, or 1.52%.
- Six-month cash flows: operating inflow $45.4 million, investing outflow $364.1 million and financing inflow $343.0 million. Investing outflows primarily reflected purchases of available-for-sale securities; financing inflows primarily reflected deposit growth.
- Regulatory capital remained above minimum requirements. At June 30, consolidated total capital, Tier 1, CET1 and leverage ratios were 16.13%, 14.40%, 13.96% and 9.96%, respectively. The bank subsidiary met the “well-capitalized” requirements.
Material changes and business developments
- Assets grew $371.0 million from year-end, primarily from deposits; deposits rose $343.2 million. The company invested excess liquidity in securities, which increased $367.5 million.
- Total loans declined $17.5 million, mainly as PPP loans were forgiven. Excluding PPP, loans increased $15.1 million; commercial real estate and residential mortgage balances grew, while commercial and agricultural line utilization remained subdued.
- Net interest margin fell year over year amid historically low rates and excess liquidity. Lower funding costs partly offset lower asset yields. PPP fees supported margin, while acquired-loan discount accretion was lower than in 2020.
- Non-interest income rose 12% in Q2, led by trust fees and interchange income; loan-sale and securities-sale gains declined. Non-interest expense rose 3%.
- The company recorded $2.566 million in first-half pre-tax costs for an operating optimization plan, including branch valuation adjustments, lease termination and severance costs. Seven branches are planned for consolidation, with actions expected primarily to be completed by year-end 2021.
Outlook, risks and contingencies
- No specific earnings or financial guidance is provided. Management described an improving business climate, supported by fiscal stimulus, accommodative Federal Reserve policy and vaccination progress, but noted continuing uncertainty, very low rates, muted loan growth and excess liquidity.
- As of June 30, eight pandemic-related loan payment modifications remained in effect, totaling $12.6 million; the filing says those borrowers were making full interest payments. PPP loans outstanding were $156.7 million, with $7.3 million of deferred net fees.
- The bank agreed to sell two Lexington, Kentucky branches to Home Savings and Loan Company, representing approximately $32.2 million of deposits and $8.9 million of loans at June 30. Closing was expected in the second half of 2021, subject to regulatory approvals; no material gain or charge was anticipated.
- Interest-rate simulations estimated next-12-month net interest income declines of 1.29% under an instantaneous +1% rate shock and 2.57% under a -1% shock; a -2% shock indicated a 3.71% decline. These are model estimates based on assumptions, not forecasts.
- A putative Indiana class action alleges improper overdraft fees on certain debit-card transactions. The company disputes the claims; a motion to dismiss was pending and mediation was scheduled for August 25, 2021. Management said the likelihood and amount of any material loss could not be estimated.
- Principal stated risks include changing interest rates, credit deterioration, COVID-19 effects, deposit and borrowing trends, competition, cyber and information-security events, regulation, litigation and the availability of earnings and capital for dividends.
Key facts for investors to verify
- Whether loan demand recovers and excess liquidity can be deployed without further pressure on net interest margin.
- Credit performance and the adequacy of the allowance as pandemic-related support and borrower conditions evolve.
- PPP forgiveness pace and recognition of remaining deferred processing fees.
- Execution, costs and expected savings from branch consolidations and staff reductions; regulatory approval and completion of the Lexington branch sale.
- Developments in the overdraft-fee lawsuit and any resulting financial exposure.
- Capital and liquidity measures, including parent-company cash availability and regulatory limits on bank-subsidiary dividends.