German American(GABC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Unaudited Financial Statements The unaudited consolidated financial statements for the period ended September 30, 2019, detail the company's financial position and performance Consolidated Balance Sheets Consolidated Balance Sheets – September 30, 2019 and December 31, 2018 | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Assets | | | | | | Total Assets | $4,355,882 | $3,929,090 | $426,792 | 10.86% | | Loans, Net | $3,041,038 | $2,712,236 | $328,802 | 12.12% | | Goodwill | $120,835 | $103,681 | $17,154 | 16.54% | | Liabilities | | | | | | Total Deposits | $3,431,286 | $3,072,632 | $358,654 | 11.67% | | Total Liabilities | $3,792,955 | $3,470,450 | $322,505 | 9.30% | | Shareholders' Equity | | | | | | Total Shareholders' Equity | $562,927 | $458,640 | $104,287 | 22.74% | Consolidated Statements of Income (Three Months) Consolidated Statements of Income – Three Months Ended September 30, 2019 and 2018 | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $46,911 | $33,475 | $13,436 | 40.14% | | Total Interest Expense | $8,333 | $4,927 | $3,406 | 69.13% | | Net Interest Income | $38,578 | $28,548 | $10,030 | 35.13% | | Provision for Loan Losses | $2,800 | $500 | $2,300 | 460.00% | | Total Non-Interest Income | $12,056 | $8,963 | $3,093 | 34.51% | | Total Non-Interest Expense | $31,961 | $21,576 | $10,385 | 48.13% | | Net Income | $13,064 | $12,639 | $425 | 3.36% | | Basic Earnings per Share | $0.49 | $0.55 | $(0.06) | -10.91% | | Diluted Earnings per Share | $0.49 | $0.55 | $(0.06) | -10.91% | Consolidated Statements of Income (Nine Months) Consolidated Statements of Income – Nine Months Ended September 30, 2019 and 2018 | Metric | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Interest Income | $129,136 | $94,153 | $34,983 | 37.16% | | Total Interest Expense | $23,326 | $12,526 | $10,800 | 86.22% | | Net Interest Income | $105,810 | $81,627 | $24,183 | 29.63% | | Provision for Loan Losses | $3,725 | $2,070 | $1,655 | 79.95% | | Total Non-Interest Income | $34,223 | $27,337 | $6,886 | 25.19% | | Total Non-Interest Expense | $84,338 | $63,739 | $20,599 | 32.32% | | Net Income | $43,402 | $35,549 | $7,853 | 22.09% | | Basic Earnings per Share | $1.70 | $1.55 | $0.15 | 9.68% | | Diluted Earnings per Share | $1.70 | $1.55 | $0.15 | 9.68% | Consolidated Statements of Comprehensive Income Comprehensive Income – Three Months Ended September 30 | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Income | $13,064 | $12,639 | $425 | 3.36% | | Total Other Comprehensive Income (Loss) | $4,649 | $(3,921) | $8,570 | -218.57% | | Comprehensive Income | $17,713 | $8,718 | $8,995 | 103.19% | Comprehensive Income – Nine Months Ended September 30 | Metric | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Income | $43,402 | $35,549 | $7,853 | 22.09% | | Total Other Comprehensive Income (Loss) | $22,954 | $(14,640) | $37,594 | -256.79% | | Comprehensive Income | $66,356 | $20,909 | $45,447 | 217.36% | Consolidated Statements of Changes in Shareholders' Equity Changes in Shareholders' Equity | Metric | Dec 31, 2018 (in thousands) | Sep 30, 2019 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Total Shareholders' Equity | $458,640 | $562,927 | $104,287 | | Common Stock (shares) | 24,967,458 | 26,662,078 | 1,694,620 | | Retained Earnings | $211,424 | $241,801 | $30,377 | | Accumulated Other Comprehensive Income (Loss) | $(7,098) | $15,856 | $22,954 | - The increase in shareholders' equity was primarily driven by the issuance of 1,663,954 common shares for the acquisition of Citizens First Corporation, contributing $50,024 thousand, along with net income and other comprehensive income[23] Consolidated Statements of Cash Flows Cash Flow Activity – Nine Months Ended September 30 | Cash Flow Activity | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | $45,788 | $42,458 | $3,330 | | Net Cash from Investing Activities | $62,575 | $(70,005) | $132,580 | | Net Cash from Financing Activities | $(115,779) | $22,772 | $(138,551) | | Net Change in Cash and Cash Equivalents | $(7,416) | $(4,775) | $(2,641) | | Cash and Cash Equivalents at End of Period | $89,134 | $65,584 | $23,550 | - Investing activities shifted from a net outflow of $70.0 million in 9M 2018 to a net inflow of $62.6 million in 9M 2019, largely due to proceeds from maturities and sales of securities, and the acquisition of Citizens First Corporation[28] - Financing activities saw a significant shift from a net inflow of $22.8 million in 9M 2018 to a net outflow of $115.8 million in 9M 2019, primarily due to changes in deposits and short-term borrowings, and increased dividends paid[28] Notes to Consolidated Financial Statements NOTE 1 – Basis of Presentation - The Company operates primarily in the banking industry, with financial statements conforming to U.S. GAAP[34] - Certain prior period items were reclassified without affecting net income or total shareholders' equity[34] NOTE 2 - Revenue Recognition - The Company adopted ASU 2014-09 (Topic 606) on January 1, 2018, which did not materially impact revenue recognition for financial instruments[35] - Reclassification of certain debit card related costs from contra-revenue to expenses had an immaterial impact[35] - Revenue streams accounted for under Topic 606 include service charges on deposit accounts, interchange fee income, trust and investment product fees, and insurance revenues[36][37][38][39] Non-interest Income by Topic 606 Scope | Non-interest Income (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | In-Scope of Topic 606 | $9,291 | $7,549 | $27,186 | $22,755 | | Out-of-Scope of Topic 606 | $2,765 | $1,414 | $7,037 | $4,582 | | Total Non-interest Income | $12,056 | $8,963 | $34,223 | $27,337 | NOTE 3 – Per Share Data Earnings Per Share | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Basic Earnings per Share | $0.49 | $0.55 | $1.70 | $1.55 | | Diluted Earnings per Share | $0.49 | $0.55 | $1.70 | $1.55 | | Weighted Average Shares Outstanding (Basic & Diluted) Q3 | 26,643,064 | 22,968,047 | N/A | N/A | | Weighted Average Shares Outstanding (Basic & Diluted) 9M | N/A | N/A | 25,541,843 | 22,958,977 | - No anti-dilutive shares were present for the three and nine months ended September 30, 2019 and 2018[44][45] NOTE 4 – Securities Securities Available-for-Sale | Securities Available-for-Sale (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Amortized Cost | $828,810 | $821,254 | | Gross Unrealized Gains | $22,821 | $5,436 | | Gross Unrealized Losses | $(2,186) | $(14,079) | | Fair Value | $849,445 | $812,611 | - The Company does not consider securities with unrealized losses to be other-than-temporarily impaired, as it does not intend to sell them and the decline is largely due to changes in market interest rates[52] - All MBS/CMO - Residential are guaranteed by government-sponsored entities and are investment grade[52] Proceeds from Sales of Securities | Proceeds from Sales of Securities (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Proceeds from Sales | $53,025 | $5,404 | $75,299 | $22,919 | | Gross Gains on Sales | $313 | $90 | $984 | $434 | NOTE 5 – Derivatives - The Company uses interest rate swaps with commercial banking customers for risk management, simultaneously hedging these with offsetting swaps with third parties to minimize net risk exposure[54] Derivative Instruments | Derivative Instruments (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Notional Amount (Interest Rate Swaps) | $97,263 | $85,587 | | Fair Value (Included in Other Assets) | $3,985 | $1,713 | | Fair Value (Included in Other Liabilities) | $4,353 | $1,734 | Effect on Income Statement | Effect on Income Statement (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Interest Rate Swaps (Other Operating Income) | $314 | $17 | $108 | $133 | NOTE 6 – Loans Loan Classification | Loan Classification (in thousands) | Sep 30, 2019 | Dec 31, 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Commercial & Industrial Loans and Leases | $579,152 | $543,761 | $35,391 | 6.51% | | Commercial Real Estate Loans | $1,477,204 | $1,208,646 | $268,558 | 22.22% | | Agricultural Loans | $386,685 | $365,208 | $21,477 | 5.88% | | Home Equity Loans | $222,606 | $207,987 | $14,619 | 7.03% | | Consumer Loans | $82,421 | $77,547 | $4,874 | 6.28% | | Residential Mortgage Loans | $312,674 | $328,592 | $(15,918) | -4.84% | | Total Loans | $3,060,742 | $2,731,741 | $329,001 | 12.04% | Allowance for Loan Losses Activity | Allowance for Loan Losses Activity (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Beginning Balance | $16,239 | $15,637 | $15,823 | $15,694 | | Provision for Loan Losses | $2,800 | $500 | $3,725 | $2,070 | | Recoveries | $114 | $182 | $404 | $396 | | Loans Charged-off | $(3,284) | $(268) | $(4,083) | $(2,109) | | Ending Balance | $15,869 | $16,051 | $15,869 | $16,051 | - The Company categorizes loans into risk categories (Special Mention, Substandard, Doubtful, Pass) based on borrower ability to service debt, financial information, payment history, and economic trends[86][89] - Loans with outstanding balances greater than $250 thousand are individually analyzed[86][89] Non-Accrual Loans | Non-Accrual Loans (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Commercial and Industrial Loans and Leases | $6,229 | $2,430 | | Commercial Real Estate Loans | $3,695 | $6,833 | | Agricultural Loans | $2,226 | $1,449 | | Home Equity Loans | $78 | $88 | | Consumer Loans | $80 | $162 | | Residential Mortgage Loans | $1,204 | $1,617 | | Total Non-Accrual Loans | $13,512 | $12,579 | - Troubled Debt Restructurings (TDRs) totaled $117 thousand at September 30, 2019, all performing, with no new TDRs or payment defaults within twelve months following modification during the reported periods[79][82][84] NOTE 7 – Repurchase Agreements Repurchase Agreements | Repurchase Agreements (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Repurchase Agreements | $34,123 | $45,274 | - Repurchase agreements are short-term borrowings, secured by mortgage-backed securities, with the Company monitoring collateral value to mitigate risk by requiring additional collateral if fair value declines[99] NOTE 8 – Segment Information - The Company operates through three primary segments: core banking, trust and investment advisory services, and insurance operations[100][101] Segment Profit (Loss) | Segment Profit (Loss) (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Core Banking | $13,538 | $12,462 | $43,105 | $34,702 | | Trust and Investment Advisory Services | $406 | $298 | $993 | $952 | | Insurance | $145 | $147 | $1,382 | $1,116 | | Other (Holding Company & Eliminations) | $(1,025) | $(268) | $(2,078) | $(1,221) | | Consolidated Totals | $13,064 | $12,639 | $43,402 | $35,549 | NOTE 9 – Stock Repurchase Plan - The Board of Directors approved a stock repurchase program on April 26, 2001, for up to 911,631 common shares[108] - As of September 30, 2019, 502,447 shares have been purchased, with no shares purchased during the three or nine months ended September 30, 2019 and 2018[108] NOTE 10 – Equity Plans and Equity Based Compensation - The Company maintains two equity incentive plans: the 2009 LTI Plan (no new grants) and the 2019 LTI Plan (effective May 16, 2019, authorizing 1,000,000 shares)[109] - As of September 30, 2019, 994,534 shares are reserved for future grants under the 2019 LTI Plan[109] - No stock options were granted or expensed during the reported periods, as all previously granted options were fully vested prior to 2007[110] Restricted Stock Grants | Restricted Stock Grants | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Shares Granted | 5,466 | 180 | 31,329 | 35,490 | | Total Unvested Restricted Stock (Sep 30) | 76,011 | N/A | 76,011 | N/A | | Total Unvested Restricted Stock (Dec 31) | N/A | 44,682 | N/A | 44,682 | Equity Based Compensation Expense | Equity Based Compensation Expense (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Restricted Stock Expense | $311 | $303 | $972 | $952 | | Cash Entitlement Expense | $167 | $155 | $509 | $495 | | Employee Stock Purchase Plan Expense | $30 | $39 | $30 | $39 | - The 2019 Employee Stock Purchase Plan (ESPP) replaced the 2009 ESPP, effective October 1, 2019, reserving 750,000 common shares for employee purchases at 95% of fair market value[116] NOTE 11 – Fair Value - Fair value measurements are categorized into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[119][120][121] - The Company held $4.0 million in Level 3 securities (non-rated Obligations of State and Political Subdivisions) at September 30, 2019[119][120][121] - Fair values for impaired collateral-dependent loans and other real estate are generally based on Level 3 inputs from appraisals[123][124][125] Recurring Fair Value Measurements | Recurring Fair Value Measurements (in thousands) | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Sep 30, 2019 | | | | | | Total Securities | $0 | $845,415 | $4,030 | $849,445 | | Loans Held-for-Sale | $0 | $19,156 | $0 | $19,156 | | Derivative Assets | $0 | $3,985 | $0 | $3,985 | | Derivative Liabilities | $0 | $4,353 | $0 | $4,353 | | Dec 31, 2018 | | | | | | Total Securities | $0 | $807,620 | $4,991 | $812,611 | | Loans Held-for-Sale | $0 | $4,263 | $0 | $4,263 | | Derivative Assets | $0 | $1,713 | $0 | $1,713 | | Derivative Liabilities | $0 | $1,734 | $0 | $1,734 | Non-Recurring Fair Value Measurements (Impaired Loans) | Non-Recurring Fair Value Measurements (Impaired Loans, in thousands) | Level 3 (Sep 30, 2019) | Level 3 (Dec 31, 2018) | | :--- | :--- | :--- | | Commercial and Industrial Loans | $2,688 | $2,210 | | Commercial Real Estate Loans | $488 | $2,528 | - Impaired loans measured using collateral fair value resulted in an increase to the provision for loan losses of $1,510 thousand for Q3 2019 and $1,237 thousand for 9M 2019[132] NOTE 12 - Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) - Q3 2019 | Accumulated Other Comprehensive Income (Loss) (in thousands) | Sep 30, 2019 | Jul 1, 2019 | Change (Q3) | | :--- | :--- | :--- | :--- | | Beginning Balance | $11,207 | N/A | N/A | | Net Current Period Other Comprehensive Income (Loss) | $4,649 | N/A | N/A | | Ending Balance | $15,856 | N/A | N/A | Accumulated Other Comprehensive Income (Loss) - 9M 2019 | Accumulated Other Comprehensive Income (Loss) (in thousands) | Sep 30, 2019 | Jan 1, 2019 | Change (9M) | | :--- | :--- | :--- | :--- | | Beginning Balance | $(7,098) | N/A | N/A | | Net Current Period Other Comprehensive Income (Loss) | $22,954 | N/A | N/A | | Ending Balance | $15,856 | N/A | N/A | - The significant increase in accumulated other comprehensive income (loss) from $(7,098) thousand at January 1, 2019, to $15,856 thousand at September 30, 2019, was primarily driven by unrealized gains on available-for-sale securities[142] NOTE 13 - Recently Adopted and Newly Issued Accounting Pronouncements - The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recognizing a right-of-use asset and corresponding lease liability of $9,034 thousand for operating leases[148][149][150] - The Company is preparing for the adoption of ASU No. 2016-13 (CECL model), effective for fiscal years beginning after December 15, 2019, and expects a one-time cumulative adjustment to the allowance for loan losses[151][154] - The Company early adopted ASU No. 2017-08 in 2017, which shortens the amortization period for certain purchased callable debt securities held at a premium, with no material impact[155] NOTE 14 – Leases - Upon adoption of ASC 842 on January 1, 2019, the Company recognized a right-of-use asset of $9,034 thousand and a lease liability of $9,034 thousand for operating leases[158] Lease Cost | Lease Cost (in thousands) | Q3 2019 | 9M 2019 | | :--- | :--- | :--- | | Finance Lease Cost (Amortization) | $83 | $187 | | Finance Lease Cost (Interest) | $188 | $379 | | Operating Lease Cost | $514 | $1,234 | | Short-term Lease Cost | $15 | $45 | | Total Lease Cost | $800 | $1,845 | Lease Metrics (Sep 30, 2019) | Lease Metrics (Sep 30, 2019) | Value | | :--- | :--- | | Weighted Average Remaining Lease Term (Finance) | 12 years | | Weighted Average Remaining Lease Term (Operating) | 8 years | | Weighted Average Discount Rate (Finance) | 11.49% | | Weighted Average Discount Rate (Operating) | 3.39% | NOTE 15 - Business Combinations - Effective July 1, 2019, the Company acquired Citizens First Corporation, which had total assets of approximately $456.0 million and equity of $49.8 million[165] - The acquisition was accounted for using the acquisition method, with the Company expensing approximately $3.1 million in direct acquisition costs and recording $17.0 million in goodwill and $4.5 million in intangible assets[165][166] Citizens First Acquisition | Citizens First Acquisition (in thousands) | Amount | | :--- | :--- | | Fair Value of Total Consideration Transferred | $65,628 | | Total Identifiable Net Assets Acquired | $48,592 | | Goodwill | $17,036 | | Shares Issued to Former Shareholders | 1,664,000 | | Cash Consideration Paid | $15,500 | - This acquisition aligns with the Company's strategy to expand its regional presence in central and western Kentucky[170] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial condition and results of operations for the three and nine months ended September 30, 2019 Management Overview - German American Bancorp, Inc. is a NASDAQ-traded financial holding company operating 75 banking offices across southern Indiana, Kentucky, and Tennessee[173] - The Company elected to be a 'financial holding company' effective September 24, 2019, allowing it to engage in broader financial activities[174] Key Performance Metrics | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | 9M 2019 (in thousands) | 9M 2018 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $13,064 | $12,639 | $43,402 | $35,549 | | Basic EPS | $0.49 | $0.55 | $1.70 | $1.55 | - Recent acquisitions include five First Financial Bancorp branches (May 2018), First Security, Inc. (October 2018), and Citizens First Corporation (July 2019), significantly expanding the Company's assets, loans, and deposits[179][181][182] Critical Accounting Policies and Estimates - The Company's financial statements rely on critical accounting policies and estimates, including the allowance for loan losses, valuation of securities, income tax expense, and valuation of goodwill[183] Allowance for Loan Losses - The allowance for loan losses (ALL) is a subjective estimate covering probable incurred credit losses, determined quarterly based on specific and general allocations and management judgment[184][185] - Specific reserves are considered for impaired commercial and agricultural loans, while general allocations are made for substandard loans using migration analysis and for homogeneous portfolios based on historical averages[186][187][188] - A minor unallocated component of the ALL accounts for inherent losses not fully reflected in other allocations[190] Securities Valuation - Available-for-sale securities are carried at fair value, with unrealized gains/losses in accumulated other comprehensive income[191] Securities Available-for-Sale (Sep 30, 2019) | Securities Available-for-Sale (in thousands) | Sep 30, 2019 | | :--- | :--- | | Gross Unrealized Gains | $22,821 | | Gross Unrealized Losses | $2,186 | Income Tax Expense - Income tax expense involves estimates for valuation allowances on deferred tax assets and loss contingencies from tax examinations[192][193] Goodwill and Other Intangible Assets - Goodwill from business combinations is tested for impairment annually and is not amortized[194] - Other intangible assets, such as core deposit and acquired customer relationships, are amortized over their estimated useful lives, ranging from 6 to 10 years[195] Results of Operations Net Income Net Income - Q3 | Metric | Q3 2019 (in thousands) | Q3 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Income | $13,064 | $12,639 | $425 | 3.36% | | Basic EPS | $0.49 | $0.55 | $(0.06) | -10.91% | Net Income - 9M | Metric | 9M 2019 (in thousands) | 9M 2018 (in thousands) | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Income | $43,402 | $35,549 | $7,853 | 22.09% | | Basic EPS | $1.70 | $1.55 | $0.15 | 9.68% | - Q3 2019 net income included $2,258 thousand ($1,696 thousand after-tax, or $0.06 per share) in acquisition-related expenses[196] - 9M 2019 net income included $3,225 thousand ($2,494 thousand after-tax, or $0.10 per share) in acquisition-related expenses[197] Net Interest Income Net Interest Income - Q3 | Metric (Tax-Equivalent, in thousands) | Q3 2019 | Q3 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $39,310 | $29,240 | $10,070 | 34.44% | | Net Interest Margin | 3.93% | 3.76% | 0.17% | 4.52% | | Yield on Earning Assets | 4.76% | 4.39% | 0.37% | 8.43% | | Cost of Funds | 0.83% | 0.63% | 0.20% | 31.75% | Net Interest Income - 9M | Metric (Tax-Equivalent, in thousands) | 9M 2019 | 9M 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $107,963 | $83,643 | $24,320 | 29.08% | | Net Interest Margin | 3.89% | 3.72% | 0.17% | 4.57% | | Yield on Earning Assets | 4.73% | 4.28% | 0.45% | 10.51% | | Cost of Funds | 0.84% | 0.56% | 0.28% | 50.00% | - Increased net interest income and margin were primarily driven by higher average earning assets due to acquisitions and organic loan growth[204][205][211][212] - Accretion of loan discounts on acquired loans contributed approximately 20 basis points to net interest margin in Q3 2019 and 16 basis points in 9M 2019[205][212] Provision for Loan Losses Provision and Net Charge-offs | Metric (in thousands) | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Provision for Loan Losses | $2,800 | $500 | $3,725 | $2,070 | | Provision for Loan Losses (annualized % of average loans) | 36 bps | 9 bps | 17 bps | 12 bps | | Net Charge-offs (in thousands) | $3,170 | $86 | $3,679 | $1,713 | | Net Charge-offs (annualized % of average loans) | 41 bps | 1 bps | 17 bps | 10 bps | - The higher provision for loan losses in 2019 was primarily due to increased net charge-offs, including a partial charge-off on a single commercial lending relationship in Q3 2019[216][217] Non-interest Income Non-interest Income - Q3 | Non-interest Income (in thousands) | Q3 2019 | Q3 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Trust and Investment Product Fees | $1,885 | $1,585 | $300 | 19% | | Service Charges on Deposit Accounts | $2,395 | $1,858 | $537 | 29% | | Insurance Revenues | $1,883 | $1,827 | $56 | 3% | | Company Owned Life Insurance | $364 | $251 | $113 | 45% | | Interchange Fee Income | $2,538 | $1,847 | $691 | 37% | | Other Operating Income | $1,029 | $639 | $390 | 61% | | Net Gains on Sales of Loans | $1,649 | $866 | $783 | 90% | | Net Gains on Securities | $313 | $90 | $223 | 248% | | Total Non-interest Income | $12,056 | $8,963 | $3,093 | 35% | Non-interest Income - 9M | Non-interest Income (in thousands) | 9M 2019 | 9M 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Trust and Investment Product Fees | $5,365 | $5,035 | $330 | 7% | | Service Charges on Deposit Accounts | $6,319 | $4,972 | $1,347 | 27% | | Insurance Revenues | $7,017 | $6,453 | $564 | 9% | | Company Owned Life Insurance | $1,552 | $823 | $729 | 89% | | Interchange Fee Income | $6,965 | $5,043 | $1,922 | 38% | | Other Operating Income | $2,361 | $2,156 | $205 | 10% | | Net Gains on Sales of Loans | $3,660 | $2,421 | $1,239 | 51% | | Net Gains on Securities | $984 | $434 | $550 | 127% | | Total Non-interest Income | $34,223 | $27,337 | $6,886 | 25% | - Increases in service charges on deposit accounts and interchange fees were largely driven by acquisitions and increased card utilization[221][222][227][230] - Net gains on sales of loans increased significantly due to higher loan sales volume ($60.1 million in Q3 2019 vs $37.6 million in Q3 2018)[224][231] - Company owned life insurance revenue increased due to $554 thousand in death benefits received in Q1 2019 and contributions from acquisitions[229] Non-interest Expense Non-interest Expense - Q3 | Non-interest Expense (in thousands) | Q3 2019 | Q3 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Salaries and Employee Benefits | $17,579 | $12,134 | $5,445 | 45% | | Occupancy, Furniture and Equipment Expense | $3,751 | $2,738 | $1,013 | 37% | | FDIC Premiums | $0 | $324 | $(324) | -100% | | Data Processing Fees | $2,860 | $1,309 | $1,551 | 118% | | Professional Fees | $1,324 | $793 | $531 | 67% | | Advertising and Promotion | $1,054 | $851 | $203 | 24% | | Intangible Amortization | $1,064 | $430 | $634 | 147% | | Other Operating Expenses | $4,329 | $2,997 | $1,332 | 44% | | Total Non-interest Expense | $31,961 | $21,576 | $10,385 | 48% | Non-interest Expense - 9M | Non-interest Expense (in thousands) | 9M 2019 | 9M 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Salaries and Employee Benefits | $46,740 | $36,279 | $10,461 | 29% | | Occupancy, Furniture and Equipment Expense | $10,182 | $7,674 | $2,508 | 33% | | FDIC Premiums | $533 | $799 | $(266) | -33% | | Data Processing Fees | $6,246 | $3,834 | $2,412 | 63% | | Professional Fees | $3,825 | $3,025 | $800 | 26% | | Advertising and Promotion | $2,860 | $2,409 | $451 | 19% | | Intangible Amortization | $2,709 | $942 | $1,767 | 188% | | Other Operating Expenses | $11,243 | $8,777 | $2,466 | 28% | | Total Non-interest Expense | $84,338 | $63,739 | $20,599 | 32% | - The significant increase in non-interest expenses was primarily driven by the inclusion of operating expenses and acquisition-related costs from bank and branch acquisitions[233][241] - FDIC premiums declined due to credits received as the deposit insurance fund's reserve ratio exceeded targeted levels[236][244] - Intangible amortization increased substantially due to the acquisitions completed in 2018 and 2019[239][247] Income Taxes Effective Income Tax Rate | Effective Income Tax Rate | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :--- | :--- | :--- | :--- | :--- | | Effective Tax Rate | 17.7% | 18.1% | 16.5% | 17.6% | - The effective tax rate was lower than the blended statutory rate due to tax-exempt investment income, income tax credits, and income from subsidiaries in states without state or local income tax[249] Financial Condition Total Assets and Loans Assets and Loans Growth | Metric (in thousands) | Sep 30, 2019 | Dec 31, 2018 | Change (in thousands) | Annualized % Change | | :--- | :--- | :--- | :--- | :--- | | Total Assets | $4,356,000 | $3,929,000 | $427,000 | 14% | | Total Loans | $3,060,742 | $2,731,741 | $329,001 | 16% | - The increase in total assets and loans was largely driven by the acquisition of Citizens First, which contributed approximately $337.5 million in outstanding loans[250][251] Allowance for Loan Losses Allowance for Loan Loss Metrics | Metric (in thousands) | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Allowance for Loan Loss | $15,869 | $15,823 | | ALL to Period-End Loans | 0.52% | 0.58% | | Net Discount on Acquired Loans | $22,900 | $19,500 | - The allowance for loan losses ratio to period-end loans decreased due to loan growth from the Citizens First acquisition, where acquired loans are recorded at fair value[252] Non-performing Assets Non-performing Assets | Non-performing Assets (in thousands) | Sep 30, 2019 | Dec 31, 2018 | Change (in thousands) | | :--- | :--- | :--- | :--- | | Non-accrual Loans | $13,512 | $12,579 | $933 | | Past Due Loans (90 days or more) | $0 | $633 | $(633) | | Total Non-performing Loans | $13,512 | $13,212 | $300 | | Other Real Estate | $625 | $286 | $339 | | Total Non-performing Assets | $14,137 | $13,498 | $639 | | Non-performing Loans to Total Loans | 0.44% | 0.48% | -0.04% | | Allowance for Loan Loss to Non-performing Loans | 117.44% | 119.76% | -2.32% | - Non-performing assets and loans increased slightly in absolute terms but decreased as a percentage of total assets and loans, respectively, indicating improved asset quality relative to growth[253] Deposits Deposit Balances | Deposit Balances (in thousands) | Sep 30, 2019 | Dec 31, 2018 | Change (in thousands) | Annualized % Change | | :--- | :--- | :--- | :--- | :--- | | Total Deposits | $3,431,286 | $3,072,632 | $358,654 | 16% | | Non-interest-bearing Demand Deposits | $827,259 | $715,972 | $111,287 | 15.54% | | Interest-bearing Demand, Savings, & Money Market Accounts | $1,910,395 | $1,768,177 | $142,218 | 8.04% | | Time Deposits < $100,000 | $323,746 | $249,309 | $74,437 | 29.86% | | Time Deposits of $100,000 or more | $369,886 | $339,174 | $30,712 | 9.05% | - Total deposits increased significantly, primarily driven by the acquisition of Citizens First, which contributed approximately $358.6 million in deposits[255] Capital Resources Capital Metrics | Metric (in thousands) | Sep 30, 2019 | Dec 31, 2018 | Change (in thousands) | % Change | | :--- | :--- | :--- | :--- | :--- | | Shareholders' Equity | $562,900 | $458,600 | $104,300 | 22.74% | | Shareholders' Equity to Total Assets | 12.9% | 11.7% | 1.2% | 10.26% | | Goodwill and Other Intangible Assets | $133,800 | $113,600 | $20,200 | 17.78% | - The increase in shareholders' equity was largely due to the issuance of 1.7 million common shares for the Citizens First acquisition, an increase in retained earnings, and an increase in accumulated other comprehensive income[257] Regulatory Capital Ratios | Regulatory Capital Ratios | Sep 30, 2019 | Dec 31, 2018 | Minimum for Capital Adequacy | Well-Capitalized Guidelines | | :--- | :--- | :--- | :--- | :--- | | Consolidated Total Capital | 14.10% | 12.36% | 8.00% | N/A | | Consolidated Tier 1 Capital | 12.48% | 11.85% | 6.00% | N/A | | Consolidated Common Tier 1 Capital | 12.03% | 11.48% | 4.50% | N/A | | Consolidated Tier 1 Capital (to Average Assets) | 10.24% | 9.75% | 4.00% | N/A | | Bank Total Capital | 13.06% | 12.37% | 8.00% | 10.00% | | Bank Tier 1 Capital | 12.60% | 11.86% | 6.00% | 8.00% | | Bank Common Tier 1 Capital | 12.60% | 11.86% | 4.50% | 6.50% | | Bank Tier 1 Capital (to Average Assets) | 10.35% | 9.78% | 4.00% | 5.00% | - The Company and its subsidiary bank maintained capital levels well in excess of minimum requirements and met 'well-capitalized' thresholds under the Basel III framework[259] - The Company elected to opt-out of including additional components of Accumulated Other Comprehensive Income (AOCI) in regulatory capital[261] Liquidity Cash Flow Activity (9M 2019) | Cash Flow Activity (9M 2019, in thousands) | Amount | | :--- | :--- | | Net Cash from Operating Activities | $45,800 | | Net Cash from Investing Activities | $62,600 | | Net Cash from Financing Activities | $(115,800) | | Net Change in Cash and Cash Equivalents | $(7,400) | | Cash and Cash Equivalents at End of Period | $89,100 | - The parent company's liquidity is primarily derived from dividends from its bank subsidiary and borrowings, with $27.9 million in cash and cash equivalents available at September 30, 2019[263] - On June 25, 2019, the Company issued $40.0 million in 4.50% Fixed-to-Floating Rate Subordinated Notes due 2029, intended to qualify as Tier 2 capital[264][265][267] Forward-Looking Statements and Associated Risks - The Company's forward-looking statements are based on assumptions and subject to risks and uncertainties that could cause actual results to differ materially[269][271] - Key risks include interest rate changes, competitive conditions, M&A success, economic deterioration, technological changes, and regulatory actions[271] - Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their creation date[270][273] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company discloses its exposure to market risks, primarily liquidity and interest rate risk, and its management strategies - The Company's market risk exposure, including liquidity and interest rate risk, is regularly reviewed by the Asset/Liability Committee and Boards of Directors[274] - Interest rate risk is monitored using computer simulation modeling to estimate impacts on net interest income (NII) and net portfolio value (NPV)[276][277][281] Net Interest Income Sensitivity | Changes in Rates | Net Interest Income (in thousands) | % Change | | :--- | :--- | :--- | | +2% | $149,938 | (0.84)% | | +1% | $151,043 | (0.11)% | | Base | $151,211 | — | | -1% | $149,630 | (1.05)% | | -2% | $143,543 | (5.07)% | Net Portfolio Value Sensitivity | Changes in Rates | Net Portfolio Value (in thousands) | % Change | NPV Ratio | Change (b.p.) | | :--- | :--- | :--- | :--- | :--- | | +2% | $502,963 | (3.27)% | 12.43% | 13 | | +1% | $517,654 | (0.44)% | 12.50% | 20 | | Base | $519,941 | — | 12.30% | — | | -1% | $497,140 | (4.39)% | 11.56% | (74) | | -2% | $440,173 | (15.34)% | 10.09% | (221) | Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and procedures as of the end of the reporting period - As of September 30, 2019, the Company's disclosure controls and procedures were evaluated and deemed effective by its principal executive and financial officers[287] - No material changes to the Company's internal control over financial reporting occurred during the third fiscal quarter of 2019[288] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material legal proceedings outside the ordinary course of business - No material legal proceedings are pending against the Company, beyond litigation incidental to ordinary business[290] Item 1A. Risk Factors No material changes to previously disclosed risk factors are reported for the period - No material changes to risk factors have occurred since the Annual Report on Form 10-K for December 31, 2018[291] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company details its equity security repurchases for the three months ended September 30, 2019 - No shares were purchased under the Company's stock repurchase program during the three months ended September 30, 2019[293] - As of September 30, 2019, 409,184 shares remained available for repurchase under the program, which has no expiration date[293] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - No defaults upon senior securities were reported[294] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - This disclosure item is not applicable to the Company[295] Item 5. Other Information No other material information is reported for the period - No other information was reported[296] Item 6. Exhibits A comprehensive list of exhibits filed with the Form 10-Q is provided - The report includes various exhibits such as purchase and reorganization agreements, articles of incorporation, bylaws, loan agreements, subordinated note agreements, and Sarbanes-Oxley Act certifications[299][301][302][303] - Long-term debt instruments exceeding 10% of consolidated total assets are not registered, and copies will be furnished upon request to the SEC[300]