German American(GABC) - 2022 Q3 - Quarterly Report

Glossary of Terms and Acronyms This section defines key terminology and acronyms used throughout the financial report - The glossary defines key terms and acronyms used throughout the report, including 'Company' (German American Bancorp, Inc and its consolidated subsidiaries), 'parent company' (German American Bancorp, Inc only), and 'Bank' (German American Bank)[11][12] - Key acronyms include ASC, ASU, Basel III Rules, CARES Act, CECL, CET1, CMO, COVID-19, CUB (Citizens Union Bancorp of Shelbyville, Inc acquired Jan 1, 2022), Dodd-Frank Act, FASB, FDIC, FHLB, FRB, GAAP, LIBOR, MBS, NPV, OCC, PCD, PPP, SBA, SEC, SOFR, and TDR[13][14] PART I. FINANCIAL INFORMATION This part presents the unaudited consolidated financial statements and management's analysis of financial condition and results of operations Item 1. Unaudited Financial Statements This section presents the unaudited consolidated financial statements of German American Bancorp, Inc for the period ended September 30, 2022 Consolidated Balance Sheets Consolidated Balance Sheet Highlights (September 30, 2022 vs. December 31, 2021) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :-------------------- | -----------: | -----------: | -----: | -------: | | Assets | | | | | | Total Assets | $6,259,905 | $5,608,539 | $651,366 | 11.61% | | Cash and Cash Equivalents | $373,046 | $396,890 | $(23,844) | -6.01% | | Securities Available-for-Sale | $1,701,628 | $1,889,617 | $(187,989) | -9.95% | | Loans, Net | $3,637,817 | $2,967,247 | $670,570 | 22.59% | | Goodwill | $180,476 | $121,761 | $58,715 | 48.22% | | Liabilities | | | | | | Total Deposits | $5,574,341 | $4,744,316 | $830,025 | 17.49% | | Total Liabilities | $5,765,204 | $4,940,080 | $825,124 | 16.70% | | Shareholders' Equity | | | | | | Total Shareholders' Equity | $494,701 | $668,459 | $(173,758) | -25.99% | | Accumulated Other Comprehensive Income (Loss) | $(309,058) | $15,484 | $(324,542) | -2095.98% | | End of period shares outstanding | 29,485,121 | 26,553,508 | 2,931,613 | 11.04% | Consolidated Statements of Income – Three Months Ended September 30, 2022 and 2021 Consolidated Statements of Income Highlights (Three Months Ended September 30) | Metric (in thousands, except per share) | Sep 30, 2022 | Sep 30, 2021 | Change | % Change | | :------------------------------------ | -----------: | -----------: | -----: | -------: | | Total Interest Income | $56,524 | $43,575 | $12,949 | 29.72% | | Total Interest Expense | $4,826 | $2,288 | $2,538 | 110.92% | | Net Interest Income | $51,698 | $41,287 | $10,411 | 25.22% | | Provision (Benefit) for Credit Losses | $350 | $(2,000) | $2,350 | -117.50% | | Total Non-Interest Income | $14,097 | $15,556 | $(1,459) | -9.38% | | Total Non-Interest Expense | $34,716 | $32,444 | $2,272 | 7.00% | | Income before Income Taxes | $30,729 | $26,399 | $4,330 | 16.40% | | Income Tax Expense | $6,133 | $4,913 | $1,220 | 24.83% | | NET INCOME | $24,596 | $21,486 | $3,110 | 14.47% | | Basic Earnings per Share | $0.83 | $0.81 | $0.02 | 2.47% | | Diluted Earnings per Share | $0.83 | $0.81 | $0.02 | 2.47% | Consolidated Statements of Income – Nine Months Ended September 30, 2022 and 2021 Consolidated Statements of Income Highlights (Nine Months Ended September 30) | Metric (in thousands, except per share) | Sep 30, 2022 | Sep 30, 2021 | Change | % Change | | :------------------------------------ | -----------: | -----------: | -----: | -------: | | Total Interest Income | $158,065 | $127,394 | $30,671 | 24.08% | | Total Interest Expense | $9,862 | $7,295 | $2,567 | 35.19% | | Net Interest Income | $148,203 | $120,099 | $28,104 | 23.40% | | Provision (Benefit) for Credit Losses | $5,850 | $(8,500) | $14,350 | -168.82% | | Total Non-Interest Income | $45,465 | $44,495 | $970 | 2.18% | | Total Non-Interest Expense | $118,577 | $92,740 | $25,837 | 27.86% | | Income before Income Taxes | $69,241 | $80,354 | $(11,113) | -13.83% | | Income Tax Expense | $11,831 | $15,489 | $(3,658) | -23.62% | | NET INCOME | $57,410 | $64,865 | $(7,455) | -11.49% | | Basic Earnings per Share | $1.95 | $2.44 | $(0.49) | -20.08% | | Diluted Earnings per Share | $1.95 | $2.44 | $(0.49) | -20.08% | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) Highlights (Three and Nine Months Ended September 30) | Metric (in thousands) | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | NET INCOME | $24,596 | $21,486 | $57,410 | $64,865 | | Unrealized Holding Gain (Loss) Arising During the Period (Net of Tax) | $(97,963) | $(15,161) | $(324,542) | $(24,111) | | COMPREHENSIVE INCOME (LOSS) | $(73,367) | $6,325 | $(267,132) | $40,754 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' Equity Changes (January 1, 2022 to September 30, 2022) | Metric (in thousands) | January 1, 2022 | September 30, 2022 | Change | | :-------------------- | ---------------: | -----------------: | -----: | | Total Shareholders' Equity | $668,459 | $494,701 | $(173,758) | | Net Income | $9,067 (Q1) + $23,747 (Q2) + $24,596 (Q3) = $57,410 | - | $57,410 | | Other Comprehensive Income (Loss) | - | $(309,058) | $(324,542) | | Cash Dividends | - | $(20,264) | $(20,264) | | Issuance of Common Stock for Acquisition | - | $111,723 | $111,723 | | Issuance of Common Stock for Restricted Share Grants | - | $822 | $822 | - The significant decline in total shareholders' equity from January 1, 2022, to September 30, 2022, was primarily driven by a substantial increase in accumulated other comprehensive loss, largely due to unrealized losses on available-for-sale securities[27] - The acquisition of Citizens Union Bancorp of Shelbyville, Inc (CUB) on January 1, 2022, resulted in the issuance of 2,870,975 common shares, increasing common stock and additional paid-in capital[27] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30) | Cash Flow Activity (in thousands) | 2022 | 2021 | Change | | :-------------------------------- | -----------: | -----------: | ---------: | | Net Cash from Operating Activities | $82,492 | $73,933 | $8,559 | | Net Cash from Investing Activities | $84,088 | $(449,994) | $534,082 | | Net Cash from Financing Activities | $(190,424) | $479,056 | $(669,480) | | Net Change in Cash and Cash Equivalents | $(23,844) | $102,995 | $(126,839) | | Cash and Cash Equivalents at End of Period | $373,046 | $448,743 | $(75,697) | - Investing activities saw a significant shift from net outflow in 2021 to net inflow in 2022, largely due to the acquisition of Citizens Union Bancorp of Shelbyville, Inc (CUB), which provided $207,598 thousand in cash[32] - Financing activities experienced a substantial net outflow in 2022, primarily driven by a decrease in deposits and repayments of long-term debt, contrasting with a net inflow in 2021[32] Notes to Consolidated Financial Statements NOTE 1 – Basis of Presentation and Market Conditions - The Company's financial statements conform to U.S. GAAP, with certain information condensed or omitted for interim reporting[35] - All necessary adjustments for fair presentation are included and are of a normal recurring nature[35] NOTE 2 - Recent Accounting Pronouncements - The FASB issued ASU No 2020-04 and ASU 2021-01 on Reference Rate Reform (Topic 848) to ease accounting burdens related to the LIBOR transition, effective through December 31, 2022[36] - The Company has ceased originating LIBOR-based loans and plans to transition existing ones to SOFR or other indices[36] - ASU 2022-02, 'Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,' eliminates TDR recognition guidance and enhances disclosures, effective for fiscal years beginning after December 15, 2022[37] NOTE 3 – Per Share Data Earnings Per Share (Three and Nine Months Ended September 30) | Metric | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | Basic Earnings per Share | $0.83 | $0.81 | $1.95 | $2.44 | | Diluted Earnings per Share | $0.83 | $0.81 | $1.95 | $2.44 | | Weighted Average Shares Outstanding (Basic) | 29,484,394 | 26,545,868 | 29,457,396 | 26,534,044 | - There were no anti-dilutive shares for the three and nine months ended September 30, 2022 and 2021[40][41] NOTE 4 – Securities Securities Available-for-Sale (September 30, 2022 vs. December 31, 2021) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | | :-------------------- | -----------: | -----------: | -----: | | Amortized Cost | $2,092,522 | $1,869,198 | $223,324 | | Gross Unrealized Gains | $117 | $36,068 | $(35,951) | | Gross Unrealized Losses | $(391,011) | $(15,649) | $(375,362) | | Fair Value | $1,701,628 | $1,889,617 | $(187,989) | - The significant increase in unrealized losses on available-for-sale securities was primarily due to fluctuations in interest rates and temporary market investments[49] - No allowance for credit losses was recorded for available-for-sale debt securities at September 30, 2022, or December 31, 2021[49] Proceeds and Gains from Sales of Securities (Three and Nine Months Ended September 30) | Metric (in thousands) | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | Proceeds from Sales | $2,073 | $36,075 | $99,572 | $102,823 | | Gross Gains on Sales | $23 | $218 | $473 | $1,493 | NOTE 5 – Derivatives - The Company uses interest rate swaps with commercial banking customers and simultaneously hedges these with offsetting swaps with third parties to minimize net risk exposure[53] Fair Value of Interest Rate Swaps (September 30, 2022 vs. December 31, 2021) | Metric (in thousands) | Sep 30, 2022 | Dec 31, 2021 | | :-------------------- | -----------: | -----------: | | Notional Amount | $135,880 | $143,593 | | Fair Value (Assets) | $10,554 | $4,519 | | Fair Value (Liabilities) | $10,352 | $4,762 | Effect of Derivative Instruments on Income (Three and Nine Months Ended September 30) | Metric (in thousands) | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | Included in Other Operating Income | $111 | $179 | $455 | $854 | NOTE 6 – Loans Loan Classifications (September 30, 2022 vs. December 31, 2021) | Loan Type (in thousands) | Sep 30, 2022 | Dec 31, 2021 | Change | % Change | | :----------------------- | -----------: | -----------: | -----: | -------: | | Commercial & Industrial | $585,449 | $493,005 | $92,444 | 18.75% | | Commercial Real Estate | $1,923,794 | $1,530,677 | $393,117 | 25.68% | | Agricultural | $401,608 | $358,150 | $43,458 | 12.13% | | Leases | $58,835 | $55,345 | $3,490 | 6.31% | | Home Equity | $273,786 | $222,525 | $51,261 | 23.04% | | Consumer | $80,617 | $70,302 | $10,315 | 14.67% | | Credit Cards | $15,932 | $14,357 | $1,575 | 10.97% | | Residential Mortgage | $346,347 | $263,565 | $82,782 | 31.41% | | Total Loans | $3,686,368 | $3,007,926 | $678,442 | 22.56% | - The increase in total loans is significantly influenced by the acquisition of Citizens Union Bancorp of Shelbyville, Inc (CUB) on January 1, 2022, which added $678,167 thousand in fair value of loans[59][60][167] - As of September 30, 2022, all Paycheck Protection Program (PPP) loans have been forgiven by the SBA and repaid to the Company[66][67] Allowance for Credit Losses Activity (Three Months Ended September 30) | Metric (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :-------------------- | -----------: | -----------: | | Beginning balance | $45,031 | $39,995 | | Provision (Benefit) for credit loss expense | $350 | $(2,000) | | Loans charged-off | $(820) | $(279) | | Recoveries collected | $138 | $82 | | Total ending allowance balance | $44,699 | $37,798 | Allowance for Credit Losses Activity (Nine Months Ended September 30) | Metric (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :-------------------- | -----------: | -----------: | | Beginning balance | $37,017 | $46,859 | | Acquisition of CUB | $3,117 | — | | Provision (Benefit) for credit loss expense | $5,850 | $(8,500) | | Loans charged-off | $(1,636) | $(892) | | Recoveries collected | $351 | $331 | | Total ending allowance balance | $44,699 | $37,798 | - The allowance for credit losses increased for the nine months ended September 30, 2022, primarily due to the CUB acquisition[76] Non-Accrual Loans and Loans Past Due Over 89 Days (September 30, 2022 vs. December 31, 2021) | Loan Type (in thousands) | Non-Accrual (Sep 30, 2022) | Non-Accrual (Dec 31, 2021) | Past Due >89 Days Still Accruing (Sep 30, 2022) | Past Due >89 Days Still Accruing (Dec 31, 2021) | | :----------------------- | -------------------------: | -------------------------: | -----------------------------------------------: | -----------------------------------------------: | | Commercial & Industrial | $8,695 | $10,530 | $28 | $0 | | Commercial Real Estate | $2,059 | $2,243 | $0 | $156 | | Agricultural | $899 | $1,136 | $698 | $0 | | Home Equity | $262 | $24 | $0 | $0 | | Consumer | $14 | $18 | $0 | $0 | | Credit Cards | $75 | $64 | $0 | $0 | | Residential Mortgage | $1,050 | $587 | $0 | $0 | | Total | $13,054 | $14,602 | $726 | $156 | - The Company had no troubled debt restructurings as of September 30, 2022, a decrease from $104 thousand at December 31, 2021[85] NOTE 7 – Repurchase Agreements Accounted for as Secured Borrowings - Repurchase agreements, secured by mortgage-backed securities, totaled $43,455 thousand at September 30, 2022, a decrease from $68,328 thousand at December 31, 2021[103] - The Company manages risk by continuously monitoring the value of pledged collateral and requiring additional collateral if its fair value declines[103] NOTE 8 – Segment Information - The Company operates in three primary segments: core banking, wealth management services, and insurance operations[104] - The core banking segment's primary revenue is net interest income from loans and investments, operating through 78 banking offices at September 30, 2022[105] - Wealth management segment revenues are primarily fees from trust, investment advisory, brokerage, and retirement planning services[105] - The insurance segment's primary revenue is commissions from selling personal and corporate property and casualty insurance products[107] Segment Profit (Loss) (Three Months Ended September 30) | Segment (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :--------------------- | -----------: | -----------: | | Core Banking | $26,213 | $21,267 | | Wealth Management Services | $461 | $722 | | Insurance | $189 | $250 | | Other | $(2,267) | $(753) | | Consolidated Totals | $24,596 | $21,486 | Segment Profit (Loss) (Nine Months Ended September 30) | Segment (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :--------------------- | -----------: | -----------: | | Core Banking | $58,162 | $63,204 | | Wealth Management Services | $1,717 | $1,811 | | Insurance | $2,038 | $1,812 | | Other | $(4,507) | $(1,962) | | Consolidated Totals | $57,410 | $64,865 | NOTE 9 – Stock Repurchase Plan - On January 31, 2022, the Board approved a plan to repurchase up to 1,000,000 shares (approximately 3% of outstanding shares at approval)[113] - The Company is not obligated to purchase shares and has not repurchased any shares under this plan or the prior 2021 plan[113] NOTE 10 – Equity Plans and Equity Based Compensation - The Company maintains the 2019 Long-Term Equity Incentive Plan (2019 LTI Plan) for stock options, restricted stock, and other equity awards, authorizing up to 1,000,000 shares[114] - No stock options were granted or outstanding, and no stock compensation expense was recorded for options during the reported periods[115][120] Restricted Stock and Cash Entitlement Expense (Three and Nine Months Ended September 30) | Metric (in thousands) | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | Restricted Stock Expense | $398 | $355 | $1,915 | $1,322 | | Cash Entitlement Expense | $163 | $180 | $497 | $547 | | Tax Effect | $(146) | $(139) | $(626) | $(485) | | Net of Tax | $415 | $396 | $1,786 | $1,384 | - Unrecognized expense for restricted stock and cash entitlements totaled $3,061 thousand at September 30, 2022, and $2,753 thousand at September 30, 2021[118] - The 2019 Employee Stock Purchase Plan (2019 ESPP) allows employees to purchase common stock at 95% of fair value[119][120] NOTE 11 – Fair Value - Fair value measurements are categorized into three levels: Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[121][122][124] - Investment securities are valued using quoted market prices (Level 1), market prices of similar securities (Level 2), or discounted cash flows/other market indicators (Level 3)[125][133] - Derivatives are valued using valuation models with observable market data (Level 2)[126][133] - Individually analyzed loans and other real estate are generally valued based on appraisals, often involving significant unobservable inputs, resulting in Level 3 classification[127][128][129][136][138][140] - Loans held-for-sale are valued using quoted prices for similar assets, adjusted for specific attributes (Level 2)[130][133] NOTE 12 - Other Comprehensive Income (Loss) Changes in Accumulated Other Comprehensive Income (Loss) (Three Months Ended September 30) | Metric (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :-------------------- | -----------: | -----------: | | Beginning Balance | $(211,095) | $26,425 | | Net Current Period Other Comprehensive Income (Loss) | $(97,963) | $(15,161) | | Ending Balance | $(309,058) | $11,264 | Changes in Accumulated Other Comprehensive Income (Loss) (Nine Months Ended September 30) | Metric (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :-------------------- | -----------: | -----------: | | Beginning Balance | $15,484 | $35,375 | | Net Current Period Other Comprehensive Income (Loss) | $(324,542) | $(24,111) | | Ending Balance | $(309,058) | $11,264 | - The significant decline in accumulated other comprehensive income (loss) in 2022 is primarily due to unrealized losses on available-for-sale securities[144] NOTE 13 - Revenue Recognition Non-interest Income Segregated by Topic 606 Scope (Three Months Ended September 30) | Non-interest Income (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :--------------------------------- | -----------: | -----------: | | In-Scope of Topic 606 | $12,296 | $10,813 | | Out-of-Scope of Topic 606 | $1,801 | $4,743 | | Total Non-interest Income | $14,097 | $15,556 | Non-interest Income Segregated by Topic 606 Scope (Nine Months Ended September 30) | Non-interest Income (in thousands) | Sep 30, 2022 | Sep 30, 2021 | | :--------------------------------- | -----------: | -----------: | | In-Scope of Topic 606 | $38,477 | $32,217 | | Out-of-Scope of Topic 606 | $6,988 | $12,278 | | Total Non-interest Income | $45,465 | $44,495 | - Revenue streams in-scope of Topic 606 include Wealth Management Fees, Service Charges on Deposit Accounts, Insurance Revenues, Interchange Fee Income, and Other Operating Income[150][152][153][154][155] NOTE 14 – Leases - The Company has finance leases for branch offices and operating leases for branch offices, ATM locations, and certain office equipment[157] Total Lease Cost (Three and Nine Months Ended September 30) | Lease Cost (in thousands) | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :------------------------ | --------------------: | --------------------: | --------------------: | --------------------: | | Total Lease Cost | $493 | $506 | $1,535 | $1,553 | Weighted Average Lease Term and Discount Rates (September 30) | Metric | Sep 30, 2022 | Sep 30, 2021 | | :---------------------- | -----------: | -----------: | | Finance Leases (Term) | 10 years | 10 years | | Operating Leases (Term) | 8 years | 7 years | | Finance Leases (Rate) | 11.42% | 11.46% | | Operating Leases (Rate) | 2.87% | 3.04% | NOTE 15 - Business Combinations - On January 1, 2022, the Company acquired Citizens Union Bancorp of Shelbyville, Inc (CUB), expanding its presence in Kentucky with 15 retail banking offices[163] - CUB had approximately $1,108,546 thousand in total assets, $683,807 thousand in total loans, and $930,533 thousand in total deposits at closing[164] - The acquisition involved issuing 2,870,975 shares of common stock and paying $50.8 million in cash, resulting in $58,716 thousand of goodwill and $7,572 thousand of intangible assets[165][167] Unaudited Pro Forma Net Income (Three and Nine Months Ended September 30) | Metric (in thousands, except per share) | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :------------------------------------ | --------------------: | --------------------: | --------------------: | --------------------: | | Net Income | $24,740 | $26,582 | $71,633 | $78,487 | | Earnings Per Share | $0.84 | $0.90 | $2.43 | $2.67 | - Pro forma financial information for 2022 excludes $12,276 thousand in non-recurring merger costs and a $6,300 thousand Day 1 CECL provision for credit losses[172] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial condition and results of operations, highlighting key trends and the CUB acquisition impact MANAGEMENT OVERVIEW - The Company completed the acquisition of Citizens Union Bancorp of Shelbyville, Inc (CUB) on January 1, 2022, adding 15 retail banking offices in Kentucky and approximately $1.109 billion in total assets[179] Net Income and EPS Overview (Three and Nine Months Ended September 30) | Metric | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | Net Income (in thousands) | $24,596 | $21,486 | $57,410 | $64,865 | | EPS | $0.83 | $0.81 | $1.95 | $2.44 | - The decline in net income and EPS for the nine months ended September 30, 2022, was largely due to $12,276 thousand in acquisition-related expenses and a $6,300 thousand Day 1 provision for credit losses related to the CUB acquisition[181] - The issuance of approximately 2.9 million common shares as part of the CUB merger consideration also impacted the per-share net income for the nine-month period[181] CRITICAL ACCOUNTING POLICIES AND ESTIMATES - Critical accounting policies and estimates include the allowance for credit losses, valuation of securities, income tax expense, and valuation of goodwill[183] - The allowance for credit losses is inherently subjective, requiring significant estimates for future cash flows, losses on classified loans, and economic conditions[185] - Available-for-sale debt securities in unrealized loss positions are evaluated quarterly for impairment; no allowance for credit losses was needed at September 30, 2022[190][191] - Goodwill and intangible assets are tested for impairment annually; no goodwill impairment was indicated in 2022[195][196] RESULTS OF OPERATIONS Net Income and EPS (Three and Nine Months Ended September 30) | Metric | 3 Months Sep 30, 2022 | 3 Months Sep 30, 2021 | 9 Months Sep 30, 2022 | 9 Months Sep 30, 2021 | | :-------------------------- | --------------------: | --------------------: | --------------------: | --------------------: | | Net Income (in thousands) | $24,596 | $21,486 | $57,410 | $64,865 | | EPS | $0.83 | $0.81 | $1.95 | $2.44 | - Net interest income increased by 25% for Q3 2022 and 23% for the nine months ended September 30, 2022, primarily due to higher earning assets from the CUB acquisition and improved net interest margin[200][204] - The tax equivalent net interest margin improved to 3.59% in Q3 2022, driven by increased market interest rates and improved yields on earning assets[201][205] - PPP loan fees recognized through net interest income significantly decreased to $46 thousand in Q3 2022 from $4,111 thousand in Q3 2021[203][207] - Provision for credit losses was $5,850 thousand for the nine months ended September 30, 2022, including a $6,300 thousand Day 1 CECL addition for the CUB acquisition[208][209] - Non-interest income decreased by 9% in Q3 2022, mainly due to lower loan sales volume and the absence of branch sale gains from 2021[212][216][217][218][222][223] - Non-interest expense increased by 28% for the nine months ended September 30, 2022, primarily driven by operating costs and non-recurring acquisition-related expenses for CUB[226][231][233][235][236][237][238] - The effective income tax rate was 17.1% for the nine months ended September 30, 2022, lower than the statutory rate due to tax-exempt income and credits[239] FINANCIAL CONDITION - Total assets increased by $651.4 million to $6.260 billion at September 30, 2022, largely due to the CUB acquisition[240] - Securities available for sale declined by $188.0 million, primarily due to fair value adjustments caused by rising market interest rates[241] - Total loans increased by $678.4 million to $3.686 billion, driven by the CUB acquisition[242] - The allowance for credit losses increased to $44.7 million (1.21% of period-end loans), including a $9.4 million addition from the CUB acquisition under CECL[243][244] - Non-performing assets decreased to $13.8 million (0.22% of total assets) from $14.8 million (0.26% of total assets) at year-end 2021[247] - Total deposits increased by $830.0 million to $5.574 billion, largely attributable to the CUB acquisition[248] - Shareholders' equity declined by $173.8 million to $494.7 million, primarily due to a $324.5 million decrease in accumulated other comprehensive income from unrealized losses on securities[250] - The Company and its subsidiary bank maintained capital levels well in excess of minimum regulatory requirements, meeting 'well-capitalized' status[254] Regulatory Capital Ratios (September 30, 2022 vs. December 31, 2021) | Capital Ratio | Sep 30, 2022 | Dec 31, 2021 | Minimum for Capital Adequacy | Well-Capitalized Guidelines | | :---------------------------- | -----------: | -----------: | ---------------------------: | --------------------------: | | Consolidated Total Capital | 15.21% | 16.20% | 8.00% | N/A | | Bank Total Capital | 13.88% | 13.36% | 8.00% | 10.00% | | Consolidated Tier 1 Capital | 13.76% | 14.61% | 6.00% | N/A | | Bank Tier 1 Capital | 13.26% | 12.83% | 6.00% | 8.00% | | Consolidated Common Tier 1 (CET1) | 13.04% | 14.18% | 4.50% | N/A | | Bank Common Tier 1 (CET1) | 13.26% | 12.83% | 4.50% | 6.50% | | Consolidated Tier 1 (to Average Assets) | 10.10% | 10.10% | 4.00% | N/A | | Bank Tier 1 (to Average Assets) | 9.75% | 8.88% | 4.00% | 5.00% | - The Company elected the five-year transition option for CECL's impact on regulatory capital, beginning the phase-in on January 1, 2022[255] - PPP loans are assigned a zero percent risk weight for regulatory capital purposes[257] - Cash and cash equivalents decreased by $23.8 million to $373.0 million, with net cash outflows from financing activities ($190.4 million) offsetting inflows from operating and investing activities[258] FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS - The report contains forward-looking statements regarding future expectations, including net interest income, credit loss allowance, and economic conditions[260] - Readers are cautioned that actual results may differ materially due to various risks and uncertainties, including interest rate fluctuations and economic deterioration[262][265] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Company's exposure to market risks, primarily liquidity and interest rate risk, and the methods used for monitoring them - The Company's market risk exposure, including liquidity and interest rate risk, is regularly reviewed by the Asset/Liability Committee and Boards of Directors[266] - Interest rate risk is monitored using computer simulation modeling to estimate impacts on net interest income and net portfolio value (NPV)[268] Net Interest Income Sensitivity (September 30, 2022) | Changes in Rates | Amount (in thousands) | % Change | | :--------------- | --------------------: | --------: | | +2% | $232,690 | 4.18% | | +1% | $228,257 | 2.20% | | Base | $223,354 | — | | -1% | $215,692 | (3.43)% | | -2% | $204,337 | (8.51)% | Net Portfolio Value Sensitivity (September 30, 2022) | Changes in Rates | Amount (in thousands) | % Change | NPV Ratio | Change (b.p.) | | :--------------- | --------------------: | --------: | --------: | ------------: | | +2% | $825,144 | (6.25)% | 14.76% | (1) | | +1% | $852,841 | (3.11)% | 14.78% | 1 | | Base | $880,195 | — | 14.77% | — | | -1% | $898,703 | 2.10% | 14.60% | (17) | | -2% | $898,664 | 2.10% | 14.14% | (63) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal controls - As of September 30, 2022, the Company's disclosure controls and procedures were deemed effective by its principal executive and financial officers[278] - There were no material changes in the Company's internal control over financial reporting during the third fiscal quarter of 2022[279] PART II. OTHER INFORMATION This part covers legal proceedings, risk factors, equity sales, and other required disclosures Item 1. Legal Proceedings The Company reported no pending legal proceedings other than routine litigation incidental to its business - There are no pending legal proceedings, other than routine litigation incidental to the business of the Company's subsidiaries[281] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report - No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2021[282] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company did not repurchase any of its common shares during the three months ended September 30, 2022 - The Company did not repurchase any shares of common stock during July, August, or September 2022[284] - A plan approved on January 31, 2022, authorizes the repurchase of up to 1,000,000 shares, but no shares have been purchased under this plan[284] Item 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities - No defaults upon senior securities were reported[285] Item 4. Mine Safety Disclosures This item is not applicable to the Company - This item is not applicable[285] Item 5. Other Information The Company reported no other information - No other information was reported[285] Item 6. Exhibits This section lists all exhibits included with the report, such as articles of incorporation, bylaws, and various certifications - Exhibits include Amended and Restated Articles of Incorporation, Amended and Restated Bylaws, Terms of Common Shares, Specimen stock certificate, Indenture, Form of 4.50% Fixed-to-Floating Subordinated Note due 2029, Sarbanes-Oxley Act Section 302 and 906 Certifications, and Inline XBRL documents[288]