
PART I – FINANCIAL INFORMATION Item 1. Financial Statements This chapter contains the company's unaudited condensed consolidated financial statements and detailed notes Condensed Consolidated Balance Sheets | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 316,998 | 167,367 | | Net loans | 5,167,431 | 5,132,387 | | Available-for-sale debt securities | 1,131,852 | 1,144,617 | | Held-to-maturity debt securities | 468,751 | 473,217 | | Total assets | 7,667,648 | 7,496,261 | | Liabilities | | | | Total deposits | 6,357,195 | 6,391,252 | | Federal Home Loan Bank advances | 275,000 | 50,000 | | Total liabilities | 6,873,280 | 6,735,829 | | Stockholders' Equity | | | | Total stockholders' equity | 794,368 | 760,432 | | Total liabilities and equity | 7,667,648 | 7,496,261 | Condensed Consolidated Statements of Income | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total interest income | 79,467 | 49,984 | | Total interest expense | 16,395 | 1,224 | | Net interest income | 63,072 | 48,760 | | Provision for credit losses | 2,625 | 2,279 | | Total non-interest income | 22,047 | 19,203 | | Total non-interest expense | 45,314 | 56,297 | | Income tax expense | 8,132 | 1,445 | | Net income | 29,048 | 7,942 | | Basic net income per share | 1.00 | 0.29 | | Diluted net income per share | 0.99 | 0.29 | Condensed Consolidated Statements of Comprehensive Income (Loss) | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Net income | 29,048 | 7,942 | | Total other comprehensive income (loss), before tax | 19,353 | (65,379) | | Total other comprehensive income (loss), net of tax | 14,593 | (49,659) | | Comprehensive income (loss) | 43,641 | (41,717) | Condensed Consolidated Statements of Changes in Stockholders' Equity | Metric | Balance as of January 1, 2023 (in thousands of USD) | Balance as of March 31, 2023 (in thousands of USD) | | :--- | :--- | :--- | | Total stockholders' equity | 760,432 | 794,368 | | Net income | 29,048 | - | | Other comprehensive income | 14,593 | - | | Cash dividends ($0.29 per share) | (8,489) | - | Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Net cash from operating activities | 9,762 | 3,520 | | Net cash from investing activities | (17,337) | (35,337) | | Net cash from financing activities | 157,206 | (177,684) | | Net change in cash and cash equivalents | 149,631 | (209,501) | | Cash and cash equivalents at end of period | 316,998 | 751,691 | Notes to Condensed Consolidated Financial Statements (1) Summary of Significant Accounting Policies This section outlines key accounting principles for the condensed consolidated financial statements - The condensed consolidated financial statements are unaudited and prepared in accordance with GAAP and SEC Form 10-Q rules2123 - The adoption of ASU 2022-02, which eliminates TDR accounting guidance for entities that have adopted CECL, had no material impact on the financial statements25 - ASU 2023-02, regarding accounting for investments in tax credit structures using the proportional amortization method, is not expected to have a material impact26 (2) Bank Acquisition This section details the $168 million acquisition of Commonwealth Bancshares, Inc (CB) in March 2022 - The company completed the acquisition of Commonwealth Bancshares, Inc (CB) on March 7, 2022, for $168 million in a stock and cash transaction28 | Metric | Assets Acquired (in thousands of USD) | Liabilities Assumed (in thousands of USD) | | :--- | :--- | :--- | | Cash and due from banks | 380,450 | - | | Net loans | 622,454 | - | | Total deposits | - | 1,120,803 | | Total assets acquired | 1,336,815 | - | | Total liabilities assumed | - | 1,235,596 | | Net assets acquired | 101,219 | - | | Goodwill | 66,694 | - | - The acquisition resulted in approximately $67 million of goodwill, primarily attributed to expected operational synergies34 - CB contributed approximately $10.7 million in total revenue in Q1 2023, a significant increase from $3.2 million in the prior-year period which only included partial-month activity36 (3) Investment Securities This section details the company's available-for-sale (AFS) and held-to-maturity (HTM) debt securities | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Available-for-sale debt securities | | | | Amortized cost | 1,266,356 | 1,297,977 | | Unrealized losses | (134,579) | (153,709) | | Fair value | 1,131,852 | 1,144,617 | | Held-to-maturity debt securities | | | | Carrying value | 468,751 | 473,217 | | Unrecognized losses | (34,851) | (41,384) | | Fair value | 433,900 | 431,833 | - As of March 31, 2023, the company has not recorded an allowance for credit losses on investment securities, as declines in fair value are attributed to interest rate changes, not credit-related factors4954 (4) Loans and Allowance for Credit Losses on Loans This section details the composition of the loan portfolio and changes in the allowance for credit losses (ACL) | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total Commercial real estate | 2,272,426 | 2,231,975 | | Total Commercial and industrial | 1,214,779 | 1,249,569 | | Total Residential real estate | 943,936 | 904,763 | | Construction and land development | 439,673 | 445,690 | | Consumer loans | 136,412 | 139,461 | | Credit cards | 21,738 | 20,413 | | Total loans | 5,243,104 | 5,205,918 | | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Beginning balance | 73,531 | 53,898 | | Provision for credit losses | 2,250 | 2,679 | | Net charge-offs (recoveries) | (108) | 540 | | Ending balance | 75,673 | 67,067 | | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total non-performing loans | 18,283 | 15,134 | | Loans 90 days or more past due and still accruing | 894 | 892 | | Total non-performing assets | 18,960 | 15,811 | | Total delinquent loans (30 days or more) | 11,666 | 16,863 | - As of March 31, 2023, the carrying amount of acquired PCD (purchased credit-deteriorated) loans was $59 million60 (5) Goodwill This section reports the company's total goodwill and its allocation across business segments | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total Goodwill | 194,074 | 194,074 | | Commercial Banking segment goodwill | 172,000 | - | | WM&T segment goodwill | 22,000 | - | - The CB acquisition initially recorded $67 million in goodwill, of which $8.5 million was written off due to the LFA disposition8588 - A qualitative assessment on September 30, 2022, indicated that the fair value of reporting units was not below their carrying value, resulting in no goodwill impairment87 (6) Core Deposit and Customer List Intangible Assets This section details the carrying value and amortization of core deposit and customer list intangible assets | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Core Deposit Intangibles (CDI) | 14,196 | 14,958 | | Customer List Intangibles (CLI) | 9,614 | 10,032 | | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | CDI amortization | (762) | (494) | | CLI amortization | (418) | (218) | - $2.0 million of CLI related to LFA was written off due to its disposition91 (7) Other Assets This section summarizes the main components of other assets | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total other assets | 125,318 | 134,988 | | Net deferred tax assets | 47,123 | 54,145 | | Investments in tax credit partnerships | 13,250 | 13,969 | | Swap assets | 8,636 | 10,727 | | Mortgage servicing rights | 14,623 | 15,219 | (8) Income Taxes This section presents the components of income tax expense and analyzes the difference between statutory and effective tax rates | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total income tax expense | 8,132 | 1,445 | | Effective tax rate | 21.9% | 15.4% | - Fluctuations in the effective tax rate are primarily influenced by stock-based compensation, changes in the cash surrender value of life insurance, tax credits, tax-exempt interest income, non-deductible merger expenses, and captive insurance company activities96 (9) Deposits This section details the composition of the company's deposits | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Non-interest-bearing demand deposits | 1,845,302 | 1,950,198 | | Interest-bearing demand deposits | 2,303,412 | 2,308,960 | | Savings deposits | 514,151 | 535,903 | | Money market deposits | 1,081,704 | 1,124,100 | | Total time deposits | 612,626 | 472,091 | | Total interest-bearing deposits | 4,511,893 | 4,441,054 | | Total deposits | 6,357,195 | 6,391,252 | (10) Securities Sold Under Agreements to Repurchase This section provides information on securities sold under agreements to repurchase (SSUAR) | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Outstanding balance at period end | 104,578 | 133,342 | | Weighted-average rate at period end | 1.14% | 1.64% | | Average outstanding balance during period (Q1) | 122,049 | 91,082 | | Average rate during period (Q1) | 1.52% | 0.08% | - SSUARs are primarily used for commercial customers' collateralized corporate cash management accounts, typically mature overnight, and are collateralized by GSE bonds and government agency MBS99 (11) Subordinated Debentures This section describes subordinated debentures assumed through the acquisition of Commonwealth Bancshares, Inc | Subordinated Debenture | Face Value (in thousands of USD) | Carrying Value (in thousands of USD) | Interest Rate | | :--- | :--- | :--- | :--- | | Commonwealth Statutory Trust III | 3,093 | 3,051 | LIBOR + 2.85% | | Commonwealth Statutory Trust IV | 12,372 | 12,204 | LIBOR + 1.35% | | Commonwealth Statutory Trust V | 11,341 | 11,187 | LIBOR + 1.40% | | Total | 26,806 | 26,442 | | - The subordinated debentures, acquired through the CB acquisition, are considered part of Tier 1 capital and are redeemable quarterly at the company's option101 (12) FHLB Advances and Other Borrowings This section details the company's Federal Home Loan Bank (FHLB) advances | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Outstanding balance at period end | 275,000 | 50,000 | | Weighted-average rate at period end | 4.87% | 4.37% | | Average outstanding balance during period (Q1) | 163,056 | - | | Average rate during period (Q1) | 4.31% | -% | - FHLB advances are collateralized by commercial and residential real estate mortgage loans and FHLB stock103 - Available FHLB credit lines were $1.15 billion and $1.36 billion as of March 31, 2023, and December 31, 2022, respectively103 - The company also has $80 million in unsecured federal funds purchased lines of credit104 (13) Commitments and Contingent Liabilities This section outlines various off-balance sheet commitments and contingent liabilities | Commitment Type | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Commercial and industrial | 789,390 | 784,429 | | Construction and land development | 453,430 | 449,028 | | Home equity | 367,949 | 358,610 | | Credit cards | 68,519 | 64,231 | | Letters of credit | 58,022 | 57,193 | | Commitments to fund future loans | 201,404 | 221,973 | | Total off-balance sheet credit commitments | 2,074,090 | 2,063,587 | - The company has recorded an allowance for credit losses on off-balance sheet credit exposures of $4.9 million and $4.5 million as of March 31, 2023, and December 31, 2022, respectively106 - Management believes that existing legal proceedings will not have a material adverse effect on the company's consolidated financial condition or results of operations108 (14) Assets and Liabilities Measured and Reported at Fair Value This section explains the fair value measurement hierarchy and methodologies - Fair value measurements are categorized into three levels: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)110111 | Metric | Fair Value at March 31, 2023 (in thousands of USD) | Fair Value at December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Assets Measured on a Recurring Basis | | | | Total available-for-sale debt securities | 1,131,852 | 1,144,617 | | Mortgage loans held for sale | 6,397 | 2,606 | | Interest rate swaps | 8,636 | 10,727 | | Total assets | 1,147,353 | 1,158,134 | | Liabilities Measured on a Recurring Basis | | | | Interest rate swaps | 8,152 | 10,737 | | Total liabilities | 8,223 | 10,737 | | Assets Measured on a Non-recurring Basis | | | | Collateral-dependent loans | 9,928 | 20,637 | - There were no transfers into or out of Level 3 of the fair value hierarchy during 2023 and 2022117 (15) Disclosure of Financial Instruments Not Reported at Fair Value This section discloses the carrying amounts and estimated fair values of financial instruments not reported at fair value | Metric | Carrying Value at March 31, 2023 (in thousands of USD) | Fair Value at March 31, 2023 (in thousands of USD) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 316,998 | 316,998 | | Held-to-maturity debt securities | 468,751 | 433,900 | | Net loans | 5,167,431 | 4,948,173 | | Liabilities | | | | Non-interest-bearing deposits | 1,845,302 | 1,845,302 | | Time deposits | 612,626 | 602,758 | | FHLB advances | 275,000 | 275,188 | (16) Mortgage Banking Activities This section details the company's residential mortgage origination and servicing activities | Metric | March 31, 2023 (in thousands of USD) | March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Ending balance of mortgage loans held for sale | 6,397 | 9,323 | | Total mortgage banking income | 1,038 | 1,003 | | Ending balance of mortgage servicing rights | 14,623 | 16,877 | | Total unpaid principal balance of loans serviced | 2,040,000 | 2,080,000 | - Mortgage banking derivatives, primarily mandatory forward sales contracts and interest rate lock commitments, are used to manage interest rate risk129131 (17) Accumulated Other Comprehensive Income (Loss) This section presents the activity within the components of accumulated other comprehensive income (AOCI) | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Beginning balance | (115,536) | (7,940) | | Net other comprehensive income for the period | 14,593 | (49,659) | | Ending balance | (100,943) | (57,599) | (18) Preferred Stock This section states the company is authorized to issue preferred stock but has not done so - The company is authorized to issue 1,000,000 shares of no-par value preferred stock, but none have been issued to date134 (19) Net Income Per Share This section provides the information required to calculate basic and diluted net income per share | Metric | Three Months Ended March 31, 2023 (in thousands of USD, except per share data) | Three Months Ended March 31, 2022 (in thousands of USD, except per share data) | | :--- | :--- | :--- | | Net income available to shareholders | 29,048 | 7,906 | | Basic net income per share | 1.00 | 0.29 | | Diluted net income per share | 0.99 | 0.29 | | Diluted weighted-average shares outstanding | 29,365 | 27,485 | (20) Stock-Based Compensation This section describes the accounting for stock-based compensation and lists recognized expenses | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Total compensation expense | 1,152 | 991 | | Deferred tax benefit | (243) | (209) | | Total net expense | 909 | 782 | | Metric | March 31, 2023 (in thousands of shares) | December 31, 2022 (in thousands of shares) | | :--- | :--- | :--- | | Outstanding SARs at period end | 464 | 435 | | Unvested RSAs at period end | 102 | 96 | - As of March 31, 2023, total unrecognized stock-based compensation expense was $94.1 million144 (21) Derivative Financial Instruments This section explains the company's use of interest rate swaps to hedge against rising interest rates | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Notional amount of undesignated interest rate swaps | 108,252 | 132,831 | | Fair value of undesignated swaps (asset) | 8,142 | 10,727 | | Fair value of undesignated swaps (liability) | 8,152 | 10,737 | | Notional amount of cash flow hedge swaps | 100,000 | - | | Fair value of cash flow hedge swaps | 494 | - | - The company uses interest rate swaps to hedge against rising interest rates, with gains and losses on the effective portion of cash flow hedges recorded in AOCI150153 (22) Regulatory Matters This section discusses the company's compliance with Basel III capital requirements - The company and its bank subsidiary are both classified as "well-capitalized" by regulators, with all capital ratios exceeding minimum requirements156159 | Capital Ratio | Actual Ratio at March 31, 2023 | Actual Ratio at December 31, 2022 | | :--- | :--- | :--- | | Consolidated Total risk-based capital ratio | 12.91% | 12.54% | | Consolidated Common equity Tier 1 risk-based capital ratio | 11.30% | 11.04% | | Consolidated Tier 1 risk-based capital ratio | 11.73% | 11.47% | | Consolidated Leverage ratio | 9.56% | 9.33% | - The company has elected to delay the estimated impact of adopting ASC 326 (CECL) on its regulatory capital155350 (23) Segments This section describes the company's two reportable business segments: Commercial Banking and Wealth Management & Trust (WM&T) - The company is primarily organized into two business segments: Commercial Banking and Wealth Management & Trust (WM&T)164 | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Commercial Banking | | | | Net interest income | 62,944 | 48,653 | | Net income | 25,962 | 5,011 | | Segment assets | 7,631,031 | 7,744,189 | | Wealth Management & Trust (WM&T) | | | | Net interest income | 128 | 107 | | Net income | 3,086 | 2,931 | | Segment assets | 36,617 | 32,963 | - Of the total $194 million in goodwill, $172 million is allocated to the Commercial Banking segment and $22 million to the WM&T segment166 (24) Revenue from Contracts with Customers This section explains how the company recognizes revenue from customer contracts, primarily within non-interest income | Revenue Source | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Wealth management and trust services | 9,527 | 8,243 | | Deposit service charges | 2,149 | 1,863 | | Debit and credit card income | 4,482 | 4,119 | | Treasury management fees | 2,318 | 1,904 | | Mortgage banking income | 1,038 | 1,003 | | Total non-interest income | 22,047 | 19,203 | - Wealth management and trust services revenue is primarily based on a percentage of assets under management (AUM) and assessed monthly171 - Debit and credit card income is primarily derived from interchange fees within payment card systems and recognized when card transactions are authorized173 (25) Leases This section details the company's operating leases | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Operating lease right-of-use assets | 19,387 | 19,694 | | Operating lease liabilities | 20,723 | 21,008 | | Weighted-average remaining lease term (years) | 8.8 | 9.0 | | Weighted-average discount rate | 2.56% | 2.57% | | Total lease cost (Q1) | 886 | 689 | | Operating cash flows for operating leases (Q1) | 1,071 | 853 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This chapter provides management's detailed analysis of the company's financial condition and results of operations Cautionary Statement Regarding Forward-Looking Statements This section warns that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are based on management's current expectations, estimates, and projections and involve known and unknown risks, uncertainties, and other factors186 - Factors that could cause actual results to differ include economic conditions, laws and regulations, interest rates, market volatility, liquidity, acquisition integration, and cyber-attacks188 Recent Developments within the Banking Industry This section discusses the impact of recent bank failures on the industry and affirms the company's stability - In March and May 2023, Silicon Valley Bank, Signature Bank, and First Republic Bank failed190191192 - The FDIC announced it will recover losses to the Deposit Insurance Fund through a special assessment on banks, which may increase the company's FDIC insurance expense193194 - The company was not negatively impacted by the recent bank failures and remains well-capitalized with strong liquidity196 - The Federal Reserve established the Bank Term Funding Program to address potential liquidity issues; the company has not requested advances under this program as of March 31, 2023195 Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company This section reviews the acquisition of Commonwealth Bancshares, Inc (CB) completed on March 7, 2022 - The company completed the acquisition of CB on March 7, 2022, for $168 million in a stock and cash transaction197199 - At acquisition, CB had approximately $1.34 billion in total assets, $632 million in loans, $247 million in investment securities, $1.12 billion in deposits, and approximately $2.65 billion in WM&T assets under management197 - The acquisition generated approximately $67 million of goodwill, of which $8.5 million was written off due to the LFA disposition200 - The CB acquisition increased the allowance for credit losses (ACL) on loans by $14 million, including $10 million for PCD loans (charged against goodwill) and a $4.4 million provision for non-PCD loans201 Issued but Not Yet Effective Accounting Standards Updates This section refers readers to the notes for information on new accounting standards - For disclosures regarding the impact of issued but not yet effective accounting standards updates, refer to the "Summary of Significant Accounting Policies" section in the notes to the financial statements202 Business Segment Overview This section outlines the company's two primary reporting segments: Commercial Banking and Wealth Management & Trust (WM&T) - The company is organized into two reporting segments: Commercial Banking and Wealth Management & Trust (WM&T)203 - Commercial Banking offers a full range of products and services, including retail lending, mortgage banking, deposit services, online banking, commercial lending, and treasury management203 - WM&T provides investment management, financial and retirement planning, and trust and estate services, with a revenue scale that distinguishes the company among its peers204 Overview – Operating Results (FTE) This section provides an overview of operating results for Q1 2023 compared to Q1 2022 | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (Amount) | Change (Percent) | | :--- | :--- | :--- | :--- | :--- | | Net income available to shareholders | $29,048 thousand | $7,906 thousand | $21,142 thousand | 267% | | Diluted earnings per share | $0.99 | $0.29 | $0.70 | 241% | | Return on average assets (ROA) | 1.55% | 0.47% | 108 bps | 230% | | Return on average equity (ROE) | 15.15% | 4.55% | 1,060 bps | 233% | - Strong Q1 2023 results were driven by organic and acquisition-related growth, a significantly higher interest rate environment, and continued growth in diversified non-interest income streams207 - Q1 2022 results were significantly impacted by the CB acquisition, including $19.5 million in merger-related expenses and a $4.4 million provision for credit losses207 - Total loans (excluding PPP) grew 10% year-over-year, while average loans (excluding PPP) grew 22%207 - Deposit balances decreased 6% year-over-year, primarily due to rising interest rates and inflationary pressures causing a shift to higher-yielding alternatives209 - Net interest income (FTE) increased 29% to $63.2 million, and the net interest margin (NIM) rose 48 basis points to 3.59%209 - Non-interest income grew 15% year-over-year, while non-interest expense decreased 20% (primarily due to 2022 merger expenses)209 - The company remained "well-capitalized" as of March 31, 2023, with growth in all capital ratios209 Net Interest Income - Overview This section provides an overview of net interest income, the bank's primary revenue source | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (Amount) | Change (Percent) | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $63,072 thousand | $48,760 thousand | $14,312 thousand | 29% | | Net interest income (FTE) | $63,245 thousand | $48,944 thousand | $14,301 thousand | 29% | | Net interest spread (FTE) | 3.13% | 3.06% | 7 bps | 2% | | Net interest margin (FTE) | 3.59% | 3.11% | 48 bps | 15% | | Average interest-earning assets | $7,154,286 thousand | $6,389,882 thousand | $764,404 thousand | 12% | | Average interest-bearing liabilities | $4,807,907 thousand | $4,257,843 thousand | $550,064 thousand | 13% | | Prime rate at period end | 8.00% | 3.50% | 450 bps | 129% | - Approximately 71% of the company's loan portfolio consists of fixed-rate loans, with 29% being floating-rate213 - The Federal Reserve continued to raise rates by 50 basis points in Q1 2023, bringing the federal funds target rate to a range of 4.75%-5.00% and the prime rate to 8.00%215 - Continued pricing pressures on loans and deposits, changes in banking system liquidity, and a severely inverted yield curve are expected to continue pressuring the net interest margin in 2023216 Net Interest Income (FTE) – Three months ended March 31, 2023 compared to March 31, 2022 This section analyzes the significant growth in net interest income (FTE) and net interest margin (FTE) for Q1 2023 - Net interest income (FTE) for Q1 2023 grew by $14.3 million (29%), driven by the acquisition, organic loan growth, investment securities, and rising interest rates217 - Average interest-earning assets grew by $764 million (12%), with the average yield increasing by 133 basis points to 4.51%218 - Average total loans grew by $859 million (20%), with non-PPP loans growing by $949 million (22%)219 - Interest and fee income on loans (FTE) increased by $24.0 million (54%), with the loan portfolio yield rising 117 basis points to 5.33%223 - Total interest expense increased by $15.2 million, with the cost of interest-bearing liabilities rising 126 basis points to 1.38%222 - Interest-bearing deposit expense increased by $12.3 million, leading to a 111 basis point increase in the cost of interest-bearing deposits223 Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison This section provides a detailed comparison of the company's average balance sheets and interest rates (FTE) | Metric | 2023 Average Balance (in thousands of USD) | 2023 Average Rate | 2022 Average Balance (in thousands of USD) | 2022 Average Rate | | :--- | :--- | :--- | :--- | :--- | | Interest-Earning Assets | | | | | | Federal funds sold and interest-bearing bank deposits | 140,831 | 4.55% | 671,263 | 0.17% | | Total investment securities | 1,754,620 | 2.07% | 1,321,551 | 1.51% | | Total loans | 5,236,879 | 5.33% | 4,377,930 | 4.16% | | Total interest-earning assets | 7,154,286 | 4.51% | 6,389,882 | 3.18% | | Interest-Bearing Liabilities | | | | | | Total interest-bearing deposits | 4,480,151 | 1.22% | 4,148,716 | 0.11% | | Federal Home Loan Bank advances | 163,056 | 4.31% | - | 0.00% | | Total interest-bearing liabilities | 4,807,907 | 1.38% | 4,257,843 | 0.12% | | Net interest income | 63,245 | | 48,944 | | | Net interest spread | | 3.13% | | 3.06% | | Net interest margin | | 3.59% | | 3.11% | Supplemental Information - Average Balance Sheets and Interest Rates (FTE) This section provides supplemental information on the calculation of average balance sheets and rates - FTE interest income includes additional interest on certain tax-exempt assets, calculated using a 21% federal income tax rate227 - Net interest margin (NIM) is the percentage of FTE net interest income to total average interest-earning assets227 - Net interest spread (FTE) is the difference between the tax-equivalent yield on total interest-earning assets and the cost of interest-bearing liabilities227 Asset/Liability Management and Interest Rate Risk This section outlines the company's objectives for asset/liability and interest rate risk management - The primary goal of interest rate risk management is to mitigate the impact of interest rate changes on net income228 - The company uses an earnings simulation model to assess the impact of immediate interest rate changes on one-year earnings to measure interest rate risk exposure229 Interest Rate Simulation Sensitivity Analysis This section presents the results of the company's interest rate sensitivity analysis as of March 31, 2023 | Rate Change | % Change in Net Interest Income from Base (March 31, 2023) | | :--- | :--- | | -200 bps | -6.39% | | -100 bps | -2.95% | | +100 bps | -1.93% | | +200 bps | -3.87% | | +300 bps | -5.83% | - In a rising rate scenario, net interest income would be negatively impacted as floating-rate loans and short-term investments reprice slower than deposits and short-term borrowings231 - Approximately 72% of the company's loan portfolio is fixed-rate, with 28% being floating-rate232 - As of March 31, 2023, the company had approximately $312 million in loans and $108 million (notional) in interest rate derivative contracts referencing LIBOR, and $236 million in loans indexed to SOFR235 Provision for Credit Losses This section explains the methodology for determining the allowance for credit losses (ACL) under the CECL model | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Beginning balance | 73,531 | 53,898 | | Provision for credit losses on loans | 2,250 | 2,679 | | Net charge-offs (recoveries) | (108) | 540 | | Ending balance | 75,673 | 67,067 | | ACL on loans to total loans ratio | 1.44% | 1.38% | | ACL on loans to non-PPP loans ratio | 1.45% | 1.40% | - The Q1 2023 provision was primarily driven by a $1.4 million specific reserve for a large C&I relationship, annual CECL model updates, and qualitative factor adjustments240 - In Q1 2022, the provision for credit losses (excluding acquisition activity) was a negative $1.8 million, but was offset by a $4.4 million credit loss expense for the CB acquired loan portfolio241 - The allowance for credit losses on off-balance sheet credit exposures increased from $4.5 million at December 31, 2022, to $4.9 million at March 31, 2023243 Non-interest Income This section analyzes the components of the company's non-interest income | Revenue Source | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | Change (Amount) | Change (Percent) | | :--- | :--- | :--- | :--- | :--- | | Wealth management and trust services | 9,527 | 8,243 | 1,284 | 16% | | Deposit service charges | 2,149 | 1,863 | 286 | 15% | | Debit and credit card income | 4,482 | 4,119 | 363 | 9% | | Treasury management fees | 2,318 | 1,904 | 414 | 22% | | Mortgage banking income | 1,038 | 1,003 | 35 | 3% | | Bank owned life insurance | 549 | 266 | 283 | 106% | | Total non-interest income | 22,047 | 19,203 | 2,844 | 15% | - Wealth management and trust services revenue grew 16%, primarily due to acquisition-related activity, organic new business development, and positive returns in fixed income and equity markets248 - Assets under management (AUM) decreased from $7.59 billion at March 31, 2022, to $6.76 billion at March 31, 2023, mainly due to significant declines in fixed income and equity markets in 2022251 - Treasury management fees continued to grow, increasing 22% in Q1 2023, driven by higher transaction volumes, new product sales, and an expanded client base261 Non-interest Expenses This section reviews changes in the company's non-interest expenses | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | Change (Amount) | Change (Percent) | | :--- | :--- | :--- | :--- | :--- | | Salaries and wages | 21,896 | 17,969 | 3,927 | 22% | | Employee benefits | 5,053 | 4,539 | 514 | 11% | | Net occupancy and equipment | 3,899 | 3,025 | 874 | 29% | | Technology and communications | 4,251 | 3,419 | 832 | 24% | | FDIC insurance | 1,135 | 645 | 490 | 76% | | Merger-related expenses | - | 19,500 | (19,500) | (100)% | | Amortization of intangible assets | 1,180 | 713 | 467 | 65% | | Total non-interest expenses | 45,314 | 56,297 | (10,983) | (20)% | - Total non-interest expenses decreased 20% in Q1 2023, primarily because the prior-year period included $19.5 million in merger-related expenses from the CB acquisition268280 - Salaries and wages grew 22%, mainly due to an increase in full-time equivalent employees and annual merit-based pay raises269 - FDIC insurance expense grew 76%, primarily due to balance sheet growth and higher assessment rates277 - The efficiency ratio (FTE) for Q1 2023 was 53.13%, with an adjusted efficiency ratio of 52.75% (compared to 53.87% in the prior-year period)283 Income Tax Expense This section compares the company's income tax expense and effective tax rates for Q1 2023 and 2022 | Metric | Three Months Ended March 31, 2023 (in thousands of USD) | Three Months Ended March 31, 2022 (in thousands of USD) | Change (Amount) | Change (Percent) | | :--- | :--- | :--- | :--- | :--- | | Income before income taxes | 37,180 | 9,387 | 27,793 | 296% | | Income tax expense | 8,132 | 1,445 | 6,687 | 463% | | Effective tax rate | 21.9% | 15.4% | 650 bps | 42% | - Fluctuations in the effective tax rate are primarily attributable to stock-based compensation, changes in the cash surrender value of life insurance, tax credits, tax-exempt interest income, non-deductible merger expenses, and captive insurance company activities285 Financial Condition – March 31, 2023 Compared to December 31, 2022 This section outlines changes in the company's financial condition as of March 31, 2023 - Total assets increased by $171 million (2%) to $7.67 billion286 - Total liabilities increased by $137 million (2%) to $6.87 billion287 - Stockholders' equity increased by $34 million (4%) to $794 million288 Cash and Cash Equivalents This section discusses the significant increase in the company's cash and cash equivalents - Cash and cash equivalents increased by $150 million (89%) to $317 million289 - The growth was primarily driven by FHLB borrowing activities, including a $100 million term advance289 - This was partially offset by $37 million in loan growth and a $34 million decrease in deposits289 Investment Securities This section reports a slight decrease in the company's investment securities - Investment securities decreased by $17 million (1%) to $1.6 billion290 - No new securities were purchased in Q1 2023 to maintain higher levels of liquidity291 Loans This section details the modest growth in the company's total loans - Total loans increased by $37 million (1%) to $5.243 billion292 - Non-PPP loans grew by $46 million (1%)292 - Loan growth was primarily concentrated in the commercial real estate and residential real estate segments292 - Total line of credit utilization improved to 41.1% (March 31, 2023)293 - As of March 31, 2023, the PPP loan balance was $10 million294 - The loan portfolio consists of 72% fixed-rate loans and 28% floating-rate loans297 Non-performing Loans and Assets This section reports an increase in the company's non-performing loans and assets | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Non-accrual loans | 17,389 | 14,242 | | Total non-performing loans | 18,283 | 15,134 | | Other real estate owned | 677 | 677 | | Total non-performing assets | 18,960 | 15,811 | | Non-performing loans to total loans ratio | 0.35% | 0.29% | | Non-performing assets to total assets ratio | 0.25% | 0.21% | - The increase in non-accrual loans was primarily due to one large C&I relationship being placed on non-accrual status299 Delinquent Loans This section notes a decrease in the company's delinquent loans (30 days or more past due) - Delinquent loans (30 days or more past due) decreased from $17 million at December 31, 2022, to $12 million at March 31, 2023300 - The ratio of delinquent loans to total loans decreased from 0.32% at December 31, 2022, to 0.22% at March 31, 2023300 Allowance for Credit Losses on Loans This section discusses the increase in the company's allowance for credit losses (ACL) on loans | Metric | March 31, 2023 (in thousands of USD) | December 31, 2022 (in thousands of USD) | | :--- | :--- | :--- | | Allowance for credit losses on loans (ACL) | 75,673 | 73,531 | | ACL to total loans ratio | 1.45% | 1.42% | - The provision for credit losses on loans was $2.3 million in Q1 2023, primarily including a $1.4 million specific reserve for a large C&I relationship302 - The allowance for credit losses on off-balance sheet credit exposures increased from $4.5 million at December 31, 2022, to $4.9 million at March 31, 2023305 Premises and Equipment This section reports that the carrying value of the company's premises and equipment remained stable - Premises and equipment remained relatively flat between December 31, 2022, and March 31, 2023306 - The company currently operates a network of 73 branch locations306 - As of March 31, 2023, total premises held for sale amounted to $3.0 million307 Goodwill This section reaffirms the carrying balance of the company's goodwill - As of March 31, 2023, the carrying value of goodwill was $194 million308 - Goodwill of $67 million was initially recorded from the CB acquisition on March 7, 2022, of which $8.5 million was written off due to the LFA disposition308 - A qualitative assessment on September 30, 2022, indicated that the fair value of reporting units was not below their carrying value, resulting in no goodwill impairment309 Core Deposit and Customer List Intangibles This section details the carrying value and amortization of the company's core deposit and customer list intangibles - As of March 31, 2023, CDI assets were $14.2 million and CLI assets were $9.6 million310311 - CLI assets are entirely attributable to the Wealth Management & Trust (WM&T) business line acquired through the CB acquisition311 - $2.0 million of CLI related to LFA was written off due to its disposition311 Other Assets and Other Liabilities This section explains the decrease in other assets and other liabilities - Other assets decreased by $10 million (7%) to $125 million312 - Other liabilities decreased by $31 million (25%) to $94 million312 - The decrease in other assets was primarily due to interest rate-related valuation changes in deferred tax assets and swap assets313 - The decrease in other liabilities was mainly attributable to a reduction in various accrued liabilities, such as employee incentive compensation and benefits314 Deposits This section discusses the decrease in the company's total deposits - Total deposits decreased by $34 million (1%), primarily due to a $105 million decline in non-interest-bearing deposits, partially offset by a $71 million increase in interest-bearing deposits (particularly time deposits)315 - The cost of interest-bearing deposits increased from 0.11% in Q1 2022 to 1.22% in Q1 2023316 - Core deposits (excluding public funds and brokered deposits) were $5.59 billion, representing 88% of total deposits328 - Public fund deposits decreased from $692 million at December 31, 2022, to $622 million at March 31, 2023, primarily due to seasonal outflows330 Securities Sold Under Agreements to Repurchase This section reports a decrease in the company's securities sold under agreements to repurchase (SSUAR) - SSUAR decreased by $29 million (22%) from December 31, 2022, to March 31, 2023318 - All SSUARs mature overnight and are collateralized by GSE bonds and government agency MBS319 Federal Funds Purchased This section notes an increase in the company's federal funds purchased (FFP) and other short-term borrowings - Federal funds purchased and other short-term borrowings increased by $6 million (68%)321 Subordinated Debentures This section reaffirms the subordinated debentures assumed through the CB acquisition - As of March 31, 2023, subordinated debentures added through the CB acquisition totaled $26 million322 - The subordinated debentures are considered part of Tier 1 capital322 FHLB Advances This section details the outstanding balance of the company's Federal Home Loan Bank (FHLB) advances - As of March 31, 2023, total FHLB advances were $275 million323 - This includes $175 million in overnight cash management advances and a $100 million three-month rolling advance related to a five-year interest rate swap323 Liquidity This section describes the company's strategy for managing liquidity - Liquidity is provided by short-term assets, available-for-sale debt securities, various lines of credit, and the ability to attract external funds, primarily deposits324 - The company's most liquid assets include cash and due from banks, federal funds sold, and available-for-sale debt securities326 - As of March 31, 2023, unpledged debt securities were approximately $838 million327 - Total core deposits were $5.59 billion, representing 88% of the company's total deposits328 - As of March 31, 2023, total available FHLB credit lines were $1.15 billion331 - The bank can pay $93 million in dividends to the company without regulatory approval333 Commitments This section outlines the company's off-balance sheet commitments undertaken in the normal course of business - Unused loan commitments increased by $11 million (1%) as of March 31, 2023337 - Total line of credit utilization decreased from 42.3% at December 31, 2022, to 41.1% at March 31, 2023337 - The allowance for credit losses on off-balance sheet credit exposures was $4.9 million (March 31, 2023)339 Capital This section discusses the improvement in the company's stockholders' equity and capital ratios - As of March 31, 2023, total stockholders' equity was $794 million, an increase of $34 million (5%) from December 31, 2022342 - The growth was primarily driven by $29.1 million in net income and a $15 million positive change in AOCI342 - The tangible common equity (TCE) ratio improved to 7.74% at March 31, 2023, from 7.44% at December 31, 2022343 - Tangible book value per share improved to $19.66 at March 31, 2023, from $18.50 at December 31, 2022343 - No shares were repurchased in Q1 2022 or 2023; approximately 741,000 shares remain eligible for repurchase under the existing plan344 - The bank is rated "well-capitalized" by regulators, with all capital ratios exceeding requirements345347 - The company has elected to delay the impact of CECL adoption on its regulatory capital350 Non-GAAP Financial Measures This section provides reconciliations for non-GAAP financial measures Reconciliation of Tangible Common Equity (in thousands of USD, except per share data): | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total stockholders' equity - GAAP | 794,368 | 760,432 | | Less: Goodwill | (194,074) | (194,074) | | Less: Core deposit and other intangible assets | (23,810) | (24,990) | | Tangible common equity - Non-GAAP | 576,484 | 541,368 | | Total assets - GAAP | 7,667,648 | 7,496,261 | | Less: Goodwill | (194,074) | (194,074) | | Less: Core deposit and other intangible assets | (23,810) | (24,990) | | Tangible assets - Non-GAAP | 7,449,764 | 7,277,197 | | Tangible common equity to tangible assets ratio - Non-GAAP | 7.74% | 7.44% | | Tangible common equity per share - Non-GAAP | 19.66 | 18.50 | Reconciliation of Allowance for Credit Losses on Non-PPP Loans (in thousands of USD): | Metric | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total loans - GAAP | 5,243,104 | 5,205,918 | | Less: PPP loans | (9,557) | (18,593) | | Total non-PPP loans - Non-GAAP | 5,233,547 | 5,187,325 | | Allowance for credit losses on loans (ACL) | 75,673 | 73,531 | | ACL to total non-PPP loans ratio - Non-GAAP | 1.45% | 1.42% | Reconciliation of Efficiency Ratio (in thousands of USD): | Metric | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Total non-interest expense | 45,314 | 56,297 | | Less: Non-recurring merger-related expenses | - | (19,500) | | Less: Amortization of tax credit partnerships | (323) | (88) | | Total non-interest expense - Non-GAAP | 44,991 | 36,709 | | Total revenue - Non-GAAP | 85,292 | 68,147 | | Total adjusted revenue - Non-GAAP | 85,294 | 68,147 | | Efficiency ratio - Non-GAAP | 53.13% | 82.61% | | Adjusted efficiency ratio - Non-GAAP | 52.75% | 53.87% | Item 3. Quantitative and Qualitative Disclosures about Market Risk. This chapter refers readers to the MD&A section for information on market risk - The information required by this item is included in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations"356 Item 4. Controls and Procedures. This chapter affirms the effectiveness of the company's disclosure controls and procedures - As of March 31, 2023, the company's disclosure controls and procedures were deemed effective356 - There were no material changes in the company's internal control over financial reporting during the reporting period356 PART II – OTHER INFORMATION Item 1. Legal Proceedings. This chapter reports on various legal proceedings arising in the ordinary course of business - The company is involved in various legal proceedings in the ordinary course of business, but management believes that any adverse judgments will not have a material adverse effect on the company's business or consolidated financial condition357 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. This chapter provides information on the company's stock repurchases during the first quarter of 2023 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 1 - January 31 | 818 | $49.81 | | February 1 - February 28 | 10,592 | $61.22 | | March 1 - March 31 | 28,635 | $53.32 | | Total | 40,045 | $55.34 | - The repurchased shares were primarily to cover tax obligations related to equity grants, not as part of a publicly announced repurchase plan360 - 741,196 shares remain eligible for repurchase under the existing plan, which expires in May 2023360361 - There were no unregistered sales of equity securities during the quarter362 Item 6. Exhibits. This chapter lists the exhibits filed or furnished as part of this report - Exhibits include CEO and CFO certifications under Sections 302 and 1350, and the condensed consolidated financial statements in inline XBRL format364 Signatures This chapter contains the report's signatures as required by the Securities Exchange Act of 1934 - The report was signed on May 5, 2023, by James A. Hillebrand, Chairman and CEO, and T. Clay Stinnett, Executive Vice President, Treasurer, and CFO365