For the three and six month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, the amount of accrued interest income previously recorded as revenue and subsequently reversed due to the change in accrual status was immaterial.

For the three and six month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, 0no interest income was recognized on loans on non-accrual status.

The following table presents the amortized cost basis and ACL allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:

The following tables present the aging of contractually past due loans by portfolio class:

Consistent with regulatory guidance, Bancorp categorizes loans into credit risk rating categories based on relevant information about the ability of borrowers to service their debt, ~~such as~~including current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans include all risk-rated loans other than those classified as OAEM, substandard, and doubtful, which are defined below:

OAEM – Loans classified as OAEM have potential weaknesses requiring management's heightened attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have well-defined weaknesses that jeopardize ultimate repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.

Substandard non-performing – Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual ~~status or have been accounted for as TDRs.~~status. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. Bancorp has elected not to disclose revolving loans that have converted to term loans, as activity relating to this disclosure, which is included in the tables is currently immaterial to Bancorp’s loan portfolio and is expected to be in the future.

As of June 30, 2023, the risk rating of loans based on year of origination was as follows:

As of December 31, 2022, the risk rating of loans based on year of origination was as follows:

~~As of~~ ~~December 31, 2021,~~ ~~the risk rating of loans based on year of origination was as follows:~~

For certain loan classes, such as credit cards, credit quality is evaluated based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in credit cards based on payment activity:

Bancorp had $252,000 and $317,000, respectively, in residential real estate loans for which formal foreclosure proceedings were in process at June 30, 2023 and December 31, 2022.

Bancorp adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures,”effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

During the three and six months ended June 30, 2023, there were no modifications made to loans for borrowers experiencing financial difficulty and there were no payment defaults of existing modified loans within 12 months following modification. Default is determined at 90 days or more past due, charge off, or foreclosure.

Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022-02

Detail of outstanding TDRs ~~classified as~~included in total non-performing loans follows:

During the three and six month periods ended June 30, 2022, ~~and~~ ~~2021,~~there were 0no loans modified as TDRs and there were 0no payment defaults of existing TDRs within 12 months following the modification. Default is determined at 90 or more days past due, charge-off, or foreclosure.

~~Bancorp had $1.2 million and $917,000, respectively, in residential real estate loans for which formal foreclosure proceedings were in process at~~ ~~June 30, 2022~~ ~~and~~ ~~December 31, 2021.~~

As of June 30, 2023 and December 31, 2022, goodwill totaled ~~$203 million, $67~~$194 million, of which $172 million was attributed to the commercial banking segment and $22 million is attributed to WM&T. Goodwill of $67 million was added through the CB ~~acquisition. As permitted under GAAP, management has up to~~acquisition, $8.5 million of which was subsequently written off as a result of Bancorp selling its interest in LFA effective 12December 31, 2022. ~~months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities related to the CB acquisition. During this measurement period, Bancorp~~ ~~may~~ ~~record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.~~

GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of September 30 of each year or more often as situations dictate.

At September 30, ~~2021,~~2022, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the ~~Commercial Banking~~ reporting ~~unit~~units exceeded ~~its~~their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting ~~unit~~units exceeded ~~its~~their fair value.

~~As of~~ ~~June 30, 2022,~~ goodwill totaling $203 million was recorded on Bancorp’s consolidated balance sheets, of which $175 million is attributed to the commercial banking segment and $28 million is attributed to WM&T. The portion of total goodwill attributed to WM&T relates entirely to the CB acquisition, which generated $67 million in total goodwill during the ~~six~~ ~~months ended~~ ~~June 30, 2022.~~

Bancorp recorded CDI assets of $13 million, $4 million, $2 million and $3 million in association with the acquisitions of CB in 2022, KB in 2021, KSB in 2019 and TBOC in 2013, respectively.

As a result of the CB acquisition, Bancorp also recorded intangible assets totaling $14 million associated with the customer lists of the acquired WM&T and LFA businesses. Of this total, $12 million was recorded for WM&T and $2 million was recorded for ~~Landmark.~~LFA. Similar to CDI assets, these intangibles also amortize over their estimated useful lives.

~~The~~As previously noted, Bancorp’s interest in LFA was sold effective December 31, 2022. As a result, the remaining CLI associated with LFA was written off at the date of sale and ultimately reflected as a component of the $870,000 pre-tax loss on the disposition of LFA that was recorded on Bancorp’s consolidated income statements for the fourth quarter and year ended December 31, 2022.

Bancorp maintains life insurance policies other than BOLI in conjunction with its non-qualified defined benefit retirement and non-qualified compensation plans.

Bancorp periodically invests in certain partnerships with customers that generate federal income tax credits. The tax benefit of these investments exceeds to amortization expense associated with them, resulting in a positive impact on net income.

Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. For additional information, see the footnote titled “~~Interest Rate Swaps.~~Derivative Financial Instruments.”

For additional information related to MSRs, see the footnote titled “Mortgage Banking Activities.”

An analysis of the difference between the statutory and ETRs from operations follows:

Current state income tax expense for 2023 and 2022represents tax owed to the ~~states~~state of Kentucky, Indiana and Illinois. Ohio state bank taxes are based on capital levels and are recorded as other non-interest expense.

GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal and state income tax returns are subject to examination for the years after ~~2017.~~2018.

~~Deposits totaling $1.12 billion were assumed on~~ ~~March 7, 2022~~ ~~in relation to the CB acquisition.~~

SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.

~~SSUAR totaling $66 million were assumed on~~ ~~March 7, 2022~~ ~~in relation to the CB acquisition.~~

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier I Capital. The subordinated ~~note~~notes and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. Bancorp chose not to redeem the subordinated notes on July 1, ~~2022~~2023 and carried the ~~note~~notes at the costs noted below at June 30, 2023:

As part of the purchase accounting adjustments associated with the CB acquisition, the carrying values of the subordinated notes were adjusted to fair value at acquisition date. The related discounts on the subordinated notes are amortized and recognized as a component of interest expense in Bancorp’s consolidated financial statements.

FHLB advances outstanding at June 30, 2023 consist of a $300 million cash management advance with an overnight maturity and a $100 million three-month advance that matures in August 2023. FHLB advances outstanding at December 31, 2022 consisted entirely of a $50 million cash management advance that matured in early January 2023.

For the six months ended June 30, 2023, gross proceeds and repayments related to FHLB advances totaled $1.4 billion and $1.1 billion, respectively. Net proceeds and repayments related to FHLB advances (excluding those with maturities of 90 days or less) totaled $500 million and $150 million for the six months ended June 30, 2023, repectively. There was no FHLB advance activity for the six months ended June 30,2022.

~~Bancorp is a member of the~~ FHLB ~~of Cincinnati. As a member of the~~advances are collateralized by certain CRE and residential real estate mortgage loans under blanket mortgage collateral pledge agreements, as well as FHLB ~~Bancorp has access to credit products of the FHLB.~~stock. Bancorp views these ~~borrowings~~advances as ~~a potential low cost~~an effective lower-costing alternative to brokered ~~deposits.~~deposits to fund loan growth. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the amount of available credit from the FHLB totaled ~~$1.22~~$1.08 billion and ~~$1.00~~$1.36 billion, respectively.

Bancorp also had unsecured available FFP lines with correspondent banks totaling ~~$100 million and~~ $80 million at both June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~In addition, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line at the holding company as of~~ ~~June 30, 2022,~~ ~~which was added during the~~ ~~first~~ ~~quarter to allow capital flexibility at the Bank level.~~

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Bancorp had various commitments outstanding that arose in the normal course of business which are properly not reflected in the condensed consolidated financial statements. Total off-balance sheet commitments to extend credit follows:

Commitments to extend credit are an agreement to lend to a customer either unsecured or secured, as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Bancorp had accrued ~~$4.1~~$5.1 million and ~~$3.5~~$4.5 million, respectively, in other liabilities for its estimate of credit losses for off balance sheet credit exposures. ~~The CB acquisition resulted in a $500,000 increase to the ACL~~Provision for credit loss expense for off balance sheet credit exposures ~~with~~of $200,000 and $575,000 was recorded for the ~~corresponding offset recorded to goodwill (as opposed to provision expense). Further, provision~~three and six months ended June 30, 2023, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit.

Provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $500,000 and $100,000 was recorded for ~~off balance sheet credit exposures for~~ the three and six ~~month periods~~months ended June 30, 2022. The expense recorded for the three ~~month period~~months ended June 30, 2022 was driven largely by the addition of new lines of credit ~~and thus increased availability,~~ within the C&D portfolio, ~~offsetting~~off setting the $400,000 of negative provision ~~that was~~ recorded during the First quarter of ~~first~~2022. ~~quarter. Negative provision expense~~The ACL for off balance sheet credit exposures ~~of $550,000 and $825,000~~ was ~~recorded for the~~ ~~three~~ ~~and~~ ~~six~~ ~~month periods ended~~ ~~June 30, 2021,~~ respectively, as nearly all applicable loan segments experienced declines in their reserve loss percentage consistent with generally improving model factors and improvement in line of credit utilizationalso increased $500,000 during the ~~prior year.~~First quarter of 2022 as a result of the CB acquisition with the offset recorded to goodwill (as opposed to provision expense).

Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.

Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at June 30, ~~2022,~~2023, Bancorp would have been required to make payments of approximately $3 million, or the maximum amount payable under those contracts. No payments have ever been required because of default on these contracts. These agreements are normally secured by collateral acceptable to Bancorp, which limits credit risk associated with the agreements.

As of June 30, ~~2022,~~2023, in the normal course of business, there were pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Bancorp used the following methods and significant assumptions to estimate fair value of each type of financial instrument:

AFS debt securities - Except for Bancorp’s U.S Treasury securities, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Bancorp’s U.S. Treasury securities are based on quoted market prices (Level 1 inputs).

Mortgage loans held for sale - The fair value of mortgage loans held for sale is determined using quoted secondary market prices (Level 2 inputs).

Mortgage banking derivatives – Mortgage banking derivatives used in the ordinary course of business consist primarily of interest rate lock loan commitments and mandatory forward sales contracts. The fair value of the Bancorp’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from observable market inputs that can generally be verified and do not typically involve significant judgement by Bancorp (Level 2 inputs).

Interest rate swap agreements – Interest rate swaps are valued using valuations received from the relevant dealer counterparty. These valuations consider multiple observable market inputs, including interest rate yield curves, time value and volatility factors (Level 2 inputs).

There were no transfers into or out of Level 3 of the fair value hierarchy during ~~2022~~2023 or ~~2021.~~2022.

~~MSRs~~ – On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At ~~June 30, 2022~~ ~~and~~ ~~December 31, 2021,~~ ~~there was 0 valuation allowance for MSRs, as the fair value exceeded the cost. Accordingly, the MSRs are~~ ~~not~~ ~~included in the following tabular disclosure for~~ ~~June 30, 2022~~ ~~and~~ ~~December 31, 2021.~~

Collateral dependent loans – For collateral-dependent loans where Bancorp has determined that the liquidation or foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the estimated fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party or internal appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, comparable sales, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the third party appraisal for appropriateness and adjusts the value ~~downward~~ to consider selling and closing costs, which typically range from 8% to 10% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise or knowledge of the client and client’s business.

OREO – OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. Bancorp obtains the valuation of OREO with material balances from third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the appraisal for appropriateness and adjusts the value ~~downward~~ to consider selling and closing costs, which typically range from 8% to 10% of the appraised value.

Carrying values of assets measured at fair value on a non-recurring basis follows:

There were 0no liabilities measured at fair value on a non-recurring basis at June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below.

GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The estimated fair values of Bancorp’s financial instruments not measured at fair value on a recurring or non-recurring basis follows:

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly impact estimates.

Mortgage banking activities primarily include residential mortgage originations and servicing.

~~Effective~~ ~~March 31, 2022,~~ ~~mortgages~~ Mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. ~~Mortgage loans held for sale as of~~ ~~December 31, 2021~~ ~~and prior were carried at the lower of cost or market value.~~

MSRs, a component of other assets, are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Fair value is based on a valuation model that calculates the PV of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income.

The estimated fair value of MSRs at both June 30, ~~2022~~2023 and December 31, ~~2021~~2022 ~~were~~was $26 ~~million and $6 million, respectively.~~million. MSRs with an estimated fair value of $13 million at the date of acquisition were acquired inas part of the CB acquisition. There was 0no valuation allowance recorded for MSRs as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, as fair value exceeded carrying value.

Total outstanding principal balances of loans serviced for others were ~~$2.16~~$2.00 billion and ~~$698 million~~$2.08 billion at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Loans serviced for others acquired as part of the CB acquisition totaled ~~$1.5~~$1.48 billion at the date of acquisition.

Mortgage banking derivatives used in the ordinary course of business consist primarily of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future loan commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amount required to be received or paid.

Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.

~~The Bank~~Bancorp is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.

The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives:

The following table illustrates activity within the balances of AOCI by component:

Bancorp has one class of preferred stock (0(no par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of the class or any series within the class will be determined by the Board of Directors prior to any issuance. None of this stock has been issued to date.

The following table reflects net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:

Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:

The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. In 2018, shareholders approved an additional 500,000 shares for issuance under the plan. As of ~~June 30, 2022,~~March 31, 2023, there were ~~379,000~~140,000 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.

SAR Grants – SARs granted have a vesting schedule of 20% per year and expire ten years after the grant date unless forfeited due to employment termination.

Fair values of SARs are estimated at the date of grant using the Black-Scholes option-pricing model, a leading formula for calculating such value. This model requires the input of assumptions, changes to which can materially impact the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of underlying shares for the expected term calculated on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

RSA Grants – RSAs granted to officers vest over five years. ~~For all~~Dividends associated with RSA grants ~~prior to~~ ~~2015,~~ ~~grantees are entitled to dividend payments during the vesting period. For grants in~~ ~~2015~~ ~~and forward, dividends~~ are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.

PSU Grants – PSUs vest based upon service and a three-year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a one-year post-vesting holding period and therefore the fair value of such grants incorporates a liquidity discount related to the holding period of ~~5.8%~~5.2% and ~~6.1%~~5.8% for ~~2022~~2023 and ~~2021.~~2022.

RSU Grants – RSUs are only granted to non-employee directors, are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, therefore the fair value of the RSUs equals market value of underlying shares on the date of grant.

In the first quarters of ~~2022~~2023 and ~~2021,~~2022, Bancorp awarded ~~5,410~~8,668 and ~~7,758~~5,410 RSUs to non-employee directors of Bancorp with a grant date fair value of ~~$350,000~~$550,000 and ~~$315,000,~~$350,000, respectively.

Bancorp utilized cash of ~~$233,000~~$175,000 and ~~$164,000~~$233,000 during the first six months of ~~2022~~2023 and ~~2021,~~2022, respectively, for the purchase of shares upon the vesting of RSUs.

Bancorp has recognized stock-based compensation expense for SARs, RSAs and PSUs within compensation expense and RSUs for directors within other non-interest expense, as follows:

(1) – Aggregate intrinsic value for SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price.

Shares expected to be awarded for PSUs granted to executive officers of Bancorp, the three-year performance period for which began January 1 of the award year, are as follows:

Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of non-performance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, collateral and monitoring procedures, and does not expect any counterparties to fail their obligations.

During the first quarter of 2023, Bancorp entered into an interest rate swap to hedge cash flows of a $100 million rolling fixed-rate three-month FHLB borrowing. While Bancorp expects to utilize fixed-rate three-month FHLB advances with respect to this interest rate swap, brokered CDs or other fixed rate advances may be utilized for the same three-month terms instead should those sources be more favorable. The swap began February 6, 2023 and matures February 6, 2028. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities.

Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods for which the hedged forecasted transaction impacts earnings.

The following table details Bancorp’s derivative position designated as a cash flow hedge, and the related fair value:

Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.

Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized, a bank must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0% Tier 1 Risk-Based Capital ratio, 10.0% Total Risk-Based Capital ratio and 5.0% Tier 1 Leverage ratio.

Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At June 30, ~~2022,~~2023, the adequately-capitalized minimums, including the capital conservation buffer, were a ~~6.0%~~7.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio. ~~The~~As all of Bancorp’s capital ~~conservation~~ratios were above the adequately-capitalized minimums, including the buffer, the Company was ~~phased in starting in~~ ~~2016~~not ~~at 0.625% and was fully implemented at 2.5% effective~~ ~~January 1, 2019.~~subject to any such restrictions.

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of June 30, ~~2022,~~2023, subordinated notes added through the CB acquisition totaled $26 million.

Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:

NA – Regulatory framework does not define “well-capitalized” for holding ~~companies~~companies.

Bancorp’s principal activities include commercial banking and WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage banking and investment products sales activity. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.

Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax-exempt activity. All tax-exempt activity and provision have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.

The majority of the net assets of Bancorp are involved in the commercial banking segment. As of June 30, ~~2022,~~2023, goodwill totaling ~~$203~~$194 million was recorded on Bancorp’s consolidated balance sheets, of which ~~$175~~$172 million is attributed to the commercial banking segment and ~~$28~~$22 million is attributed to WM&T. The portion of total goodwill attributed to WM&T relates entirely to the CB acquisition, which generated $67 million in total ~~goodwill.~~ goodwill, $8.5 million of which was subsequently written off as a result of Bancorp selling its interest in LFA effective December 31, 2022. With the exception of goodwill attributed to WM&T through the CB acquisition, assets assigned to WM&T consist primarily of a CLI asset associated with the WM&T business added through the CB acquisition, net premises and equipment and a receivable related to fees earned that have not been collected.

All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:

Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing and extent of cash flows are affected by economic factors. Revenue sources within the scope of ASC 606 are discussed below:

Bancorp earns fees from its deposit customers for transaction-based, account management and overdraft services. Transaction-based fees, which include services such as ATM use fees and stop payments fees, are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided.

Treasury management transaction fees are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account analysis fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customers’ account balances.

WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and customers do not permit performance-based fees and accordingly, none of the fee income earned by WM&T is performance-based. Trust fees receivable were ~~$3.3~~$3.6 million and ~~$2.9~~$3.4 million at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

~~Investment~~Net investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market values and are assessed, collected and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including nominal incentive compensation, and trading activity charges of ~~$395,000~~$438,000 and ~~$289,000~~$395,000 for the six month periods ended June 30, ~~2022~~2023 and ~~2021.~~2022.

Debit and credit card revenue primarily consists of debit and credit card interchange income. Interchange income represents fees assessed within the payment card system for acceptance of card-based transactions. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized. Revenue is collected and recognized daily through the payment network settlement process.

Bancorp did not establish any contract assets or liabilities as a result of adopting ASC 606, nor were any recognized during the three ~~and~~ ~~six~~months ended June 30, ~~2022.~~2023.

Bancorp has operating leases for various ~~branch~~ locations with terms ranging from approximately one year to 18approximately 17 years, some of which include options to extend the leases in five-year increments. A total of 4four operating leases were added as a result of the CB ~~acquisition.~~acquisition in 2022. Options reasonably expected to be exercised are included in determination of the right-of-use asset. Bancorp elected to use a practical expedient to expense short-term lease obligations associated with leases with original terms of 12 months or less. Bancorp elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities on the consolidated balance sheet.

Balance sheet, income statement and cash flow detail regarding operating leases follows:

As of June 30, ~~2022,~~2023, Bancorp had not entered into any lease agreements that had yet to commence.

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Item 2.

~~Item 2.~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Stock Yards Bancorp, Inc. (“Bancorp” or “the Company”), is a FHC headquartered in Louisville, Kentucky and is engaged in the business of banking through its wholly owned subsidiaries, Stock Yards Bank & Trust Company (“SYB” or “the Bank”) and SYB Insurance Company, Inc. (“the Captive”). Bancorp, which was incorporated in 1988 in Kentucky, is registered with, and subject to supervision, regulation and examination by, the Board of Governors of the Federal Reserve System. As Bancorp has no significant operations of its own, its business is essentially that of SYB and the Captive. The operations of SYB and the Captive are fully reflected in the consolidated financial statements of Bancorp. Accordingly, references to “Bancorp” in this document may encompass both the holding company and its subsidiaries, however, it should be noted that the business of the Captive is immaterial to the overall results of operations and financial condition of Bancorp. All significant inter-company transactions and accounts have been eliminated in consolidation.

SYB, established in 1904, is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio ~~MSAs~~markets through 7372 full service banking center locations. The Bank is registered with, and subject to supervision, regulation and examination by the FDIC and the Kentucky Department of Financial Institutions.

The Captive, a wholly owned subsidiary of the Bancorp, is a Nevada-based captive insurance company that provides insurance against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed ~~$2,450,000,~~$2,650,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.

On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, “listed transaction,” and disallow the related tax benefits, both prospectively and retroactively, for a period of three years. At this time, due to the proposed nature of the regulation, it is uncertain as to the impact this development will have on future operations of the Captive.

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of three unconsolidated Delaware trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings ~~loaned in exchange~~exchanged for subordinated debentures with similar terms to the TPS.

Also as a result of its acquisition of Commonwealth Bancshares, Inc., Bancorp acquired a 60% interest in Landmark Financial Advisors, LLC (LFA), which is based in Bowling Green, Kentucky and provides wealth management services. ~~LFA is consolidated into the Company. The 40% non-controlling interest is presented within the consolidated financial statements and represents the~~Effective December 31, 2022, Bancorp’s partial interest in LFA was sold, resulting in a pre-tax loss of $870,000 recorded in other non-interest expense on the consolidated income statements for the quarter and year ended December 31, 2022. This acquired line of business was not ~~owned by Bancorp.~~within the Company’s geographic footprint and ultimately did not align with the Company’s long-term strategic model. Net income related to LFA and attributable to Bancorp’s 60% interest, excluding the pre-tax loss on disposition noted above, totaled $483,000 for the year ended December 31, 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 “Financial Statements” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp’s future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.

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Cautionary Statement Regarding Forward-Looking Statements

This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.

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Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable regulation.

There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things:

●

~~Residual impact, if any,~~Changes in, or forecasts of, ~~the COVID-19 pandemic on Bancorp’s business, including the impact of the actions taken by governmental authorities~~future political and economic conditions, inflation or recession and efforts to try and contain the pandemic or address the impact of the pandemic on the U.S. economy (including, without limitation, various relief efforts), and the resulting effect of all such items on our operations, liquidity and capital position, and on the financial condition of Bancorp’s borrowers and other customers;control related developments;

●

changes in laws and regulations or ~~forecasts of, future political and economic conditions, inflation and efforts to control it;~~the interpretation thereof;

●

accuracy of assumptions and estimates used in establishing the ACL for loans, ACL for off-balance sheet credit exposures and other estimates;

●

impairment of investment ~~securities,~~securities;

●

impairment of goodwill, MSRs, other intangible assets and/or DTAs;

●

ability to effectively navigate an economic slowdown or other economic or market disruptions;

●

~~changes in laws and regulations or the interpretation thereof;~~

●

changes in fiscal, monetary, and/or regulatory policies;

●

changes in tax polices including but not limited to changes in federal and state statutory rates;

●

behavior of securities and capital markets, including changes in interest rates, market volatility and liquidity;

●

ability to effectively manage capital and liquidity;

●

long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;

●

the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;

●

competitive product and pricing pressures;

●

projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;

●

~~descriptions of plans or objectives for future operations, products, or services;~~

●

integration of acquired financial institutions, businesses or future acquisitions;

●

changes in the credit quality of Bancorp’s customers and counterparties, deteriorating asset quality and charge-off levels;

●

changes in technology instituted by Bancorp, its counterparties or competitors;

●

changes to or the effectiveness of Bancorp’s overall internal control environment;

●

adequacy of Bancorp’s risk management framework, disclosure controls and procedures and internal control over financial reporting;

●

changes in applicable accounting standards, including the introduction of new accounting standards;

●

changes in investor sentiment or behavior;

●

changes in consumer/business spending or savings behavior;

●

ability to appropriately address social, environmental and sustainability concerns that may arise from business activities;

●

occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics or outbreaks of hostilities, and Bancorp’s ability to deal effectively with disruptions caused by the foregoing;

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●

ability to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;

●

ability to withstand disruptions that may be caused by any failure of its operational systems or those of third parties;

●

ability to effectively defend itself against cyberattacks or other attempts by unauthorized parties to access information of Bancorp, its vendors or its customers or to disrupt systems; ~~and~~

●

other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “Risk Factors” of Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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~~Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company~~

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company, collectively defined as “CB,” a Louisville, Kentucky-based commercial bank and trust company, which operated 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky. At the time of acquisition and net of purchase accounting adjustments, CB had $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a WM&T Department with total assets under management of approximately $2.65 billion. CB was also the holding company for three unconsolidated Delaware trust subsidiaries and a 60% interest in Landmark Financial Advisors, LLC (LFA). Bancorp became the 100% successor owner of all three trust subsidiaries and also retained the 60% interest in LFA upon acquisition. Bancorp acquired all outstanding common stock of CB, Inc. in a combined stock and cash transaction that resulted in total consideration paid to CB shareholders of $168 million.

~~Bancorp recorded goodwill of $67 million and incurred pre-tax merger related expenses totaling $19.5 million during the first quarter of 2022 as a result of the CB acquisition.~~

The acquisition of CB has had a significant impact on the ACL and credit loss provisioning in 2022. In total, the CB acquisition served to increase the ACL on loans by $14 million at acquisition date. This increase consisted of $10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $4.4 million of provision for credit loss expense recorded in relation to the acquired loan portfolio.

~~Acquisition of Kentucky Bancshares, Inc. and its Subsidiary Kentucky Bank~~Recent Developments within the Banking Industry

On May ~~31, 2021, Bancorp completed its acquisition~~11, 2023, the FDIC approved a notice of ~~Kentucky Bancshares, Inc.~~proposed rulemaking regarding a special assessment aimed at recovering the cost associated with protecting uninsured depositors following the failures of Silicon Valley Bank and ~~its wholly owned subsidiary, Kentucky Bank, collectively defined as “KB,” a Paris, Kentucky-based commercial~~Signature bank ~~and trust company, which operated 19 retail branches throughout central and eastern Kentucky.~~earlier this year. At the time of ~~acquisition and net~~the proposal, the FDIC estimated that these costs totaled approximately $16 billion.

Under the proposal, the base for the special assessment would be equal to an insured depository institution’s estimated uninsured deposits reported as of ~~purchase accounting~~December 31, 2022, adjusted to exclude the institution’s first $5 billion of uninsured deposits. The special assessment would be collected at an annual rate of approximately 12.5 bps over eight quarterly assessment periods beginning with the first quarterly assessment period of 2024. However, the proposed rate is subject to change prior to any final rule depending on any adjustments ~~KB had $1.27~~to the estimate of losses, mergers or failures, or amendments to reported estimates of uninsured deposits. The proposed rule provides opportunity for public comment for 60 days following publication in the Federal Register. As such, a final ruling on the proposal is expected to be announced during the third quarter of 2023.

As proposed, Bancorp would not be subjected to the special assessment. It is estimated that a total of 113 banking organizations would be subject to the special assessment, with 95% of the special assessment expected to be paid by banking organizations with $50 billion or more in total assets. No banking organization with under $5 billion in total assets ~~$755 million~~would be subject to the special assessment.

In response to the potential liquidity issues created by the bank failures noted above, and to restore confidence in ~~loans, $396 million in investment securities and $1.04 billion in deposits. KB was also~~ the ~~holding company~~stability of the banking system, the FRB created the Bank Term Funding Program. This program serves as a funding source to any U.S. federally insured depository institution, offering collateral-based fixed-rate advances to eligible borrowers for a term of up to one year. Eligible institutions can request such advances under the program until at least March 11, 2024. As of June 30, 2023, Bancorp has made no request for an insurance captive, which Bancorp retained and renamed SYB Insurance Company, Inc. Bancorp acquired all outstanding common stock of KB in a combined stock and cash transaction that resulted in total consideration paid to KB shareholders of $233 million.advance under this program.

Bancorp ~~recorded goodwill of $123 million~~has not been directly impacted by the early 2023 bank failures. We remain well-capitalized and ~~incurred pre-tax merger related expenses totaling $18.1 million for~~continue to monitor and manage our liquidity position to satisfy both daily operations and longer-term strategic needs. Bancorp regularly reviews contingency funding strategies and we believe we are well-equipped to handle future liquidity requirements. We will continue to monitor the ~~year ended December 31, 2021~~developments surrounding the recent bank failures noted above, as ~~a result of~~well as trends within the ~~KB acquisition.~~

~~The acquisition of KB had a significant impact on the ACL and credit loss provisioning for the year ended December 31, 2021. In total, the KB acquisition served~~financial markets generally, to ~~increase the ACL by $14 million at acquisition date. This increase consisted of $7 million attributed~~ensure we remain prepared to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $7.4 million attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.address potential liquidity issues that may arise.

Issued but Not Yet Effective Accounting Standards Updates

For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the footnote titled “Summary of Significant Accounting Policies” of Part I Item 1 “Financial Statements.”

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Business Segment Overview

Bancorp is divided into two reportable segments: Commercial Banking and WM&T:

Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment.

WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.

Overview – Operating Results (FTE)

The following table presents an overview of Bancorp’s financial performance for the three months ended June 30, ~~2022~~2023 and ~~2021:~~2022:

(dollars in thousands, except per share data)							Variance											Variance
Three months ended June 30,	2022			2021			$/bp		%			2023			2022			$/bp		%

Net income attributed to stockholders	$	26,794		$	4,184		$	22,610		540	%
Net income available to stockholders												$	27,664		$	26,794		$	870		3	%
Diluted earnings per share	$	0.91		$	0.17		$	0.74		435	%	$	0.94		$	0.91		$	0.03		3	%
ROA		1.40	%		0.32	%	108 bps			338	%		1.46	%		1.40	%	6 bps			4	%
ROE		14.34	%		3.25	%	1,109 bps			341	%		13.87	%		14.34	%	(47) bps			-3	%

Additional discussion follows under the section titled “Results of Operations.”

General highlights for the three months ended June 30, ~~2022~~2023 compared to June 30, ~~2021:~~2022:

●

Net Income totaled $27.7 million for the three months ended June 30, 2023, resulting in diluted EPS of $0.94, compared to net income of $26.8 million for the three months ended June 30, 2022, which resulted in diluted EPS of $0.91. The three months ended June 30, 2022 represented the first full quarter of activity associated with the CB acquisition.

Solid results for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 were driven by strong loan growth, a significantly higher interest rate environment compared to the same period of the prior year and the continued growth of Bancorp’s diversified non-interest revenue streams.

An increase in the cost of funds stemming from deposit contraction and pricing pressure, as well as increased borrowing activity, hindered results for the second quarter of 2023 compared to the same period of the prior year.

●

Total loans (excluding PPP) increased $571 million, or 12%, compared to June 30, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $481 million, or 10%, for the three months ended June 30, 2023 compared to the same period of the prior year.

Bancorp’s ACL on loans increased $11 million, or 17%, compared to June 30, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $2.2 million for the three months ended June 30, 2023, compared to a negative provision of $700,000 for the three months ended June 30, 2022.

●

Deposit balances declined $341 million, or 5%, compared to June 30, 2022, as a result of inflationary pressures and rising rates, the latter of which has enticed depositors to seek higher-yielding alternatives. In addition, a portion the deposit decline experienced for the first half of 2023 was also driven by anticipated seasonal public funds runoff. While we have not seen fallout in our overall customer base, deposit competition and a higher interest rate environment has created NIM compression and we expect it will continue to do so throughout the rest of 2023.

As a result of deposit pricing pressure/competition, Bancorp has experienced a significant shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits. This shift has significantly increased Bancorp’s cost of deposits and overall cost of funds.

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●

Net interest income (FTE) totaled $61.1 million for the three months ended June 30, 2023, representing an increase of $3.8 million, or 7%, compared to the three months ended June 30, 2022.

NIM increased 22 bps, or 7%, to 3.42% for the three months ended June 30, 2023 compared to the same period of the prior year, consistent with average balance sheet expansion and significant upward movement in the interest rate environment experienced over the past 12 months. However, rising funding costs, including an increase in the cost of deposits and increased borrowing activity, continues to place pressure on NIM.

●

Non-interest income increased $920,000, or 4%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, highlighted by quarterly records for WM&T fees and treasury management fees, in addition to higher BOLI income driven by the prior year purchase of an additional $30 million of BOLI assets.

●

Non-interest expenses increased $1.1 million, or 3%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Non-interest expenses in general remain well-controlled and consistent with expansion, strong performance and continued investment in technology.

●

As of June 30, 2023, Bancorp continued to be “well-capitalized,” the highest regulatory capital rating for financial institutions, with all capital ratios experiencing growth compared to both December 31, 2022 and June 30, 2022. Total stockholders’ equity to total assets was 10.45% as of June 30, 2023, compared to 10.14% and 9.85% at December 31, 2022 and June 30, 2022, respectively. Tangible common equity to tangible assets was 7.87% at June 30, 2023, compared to 7.44% and 7.00% at December 31, 2022 and June 30, 2022, respectively.

The following table presents an overview of Bancorp’s financial performance for the six months ended June 30, 2023 and 2022:

(dollars in thousands, except per share data)							Variance
Six months ended June 30,	2023			2022			$/bp		%

Net income available to stockholders	$	56,712		$	34,700		$	22,012		63	%
Diluted earnings per share	$	1.93		$	1.22		$	0.71		58	%
ROA		1.51	%		0.96	%	55 bps			57	%
ROE		14.50	%		9.62	%	488 bps			51	%

Additional discussion follows under the section titled “Results of Operations.”

General highlights for the six months ended June 30, 2023 compared to June 30, 2022:

●

Net income totaled $56.7 million for the six months ended June 30, 2023, resulting in diluted EPS of $1.93, compared to net income of $34.7 million for the six months ended June 30, 2022, which resulted in diluted EPS of $1.22. The six months ended June 30, 2022 was significantly impacted by the CB acquisition.

Strong results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 were driven by significant organic and acquisition-related growth, a significantly higher interest rate environment compared to the same period of the prior year and the continued growth of Bancorp’s diversified non-interest revenue streams.

An increase in the cost of funds stemming from deposit contraction and pricing pressure, as well as increased borrowing activity, had a substantial impact on results for the six months ended June 30, 2023 compared to the same period of the prior year.

Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in total assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits. ~~Given the timing of the acquisition, the three~~The six months ended June 30, 2022 represented ~~the first full quarter~~approximately four months of activity associated with the CB ~~acquisition. There were no one-time~~acquisition, including $19.5 million in merger ~~related~~ expenses ~~recorded~~and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on results for the ~~three months ended June 30, 2022.~~period.

●

~~Bancorp also completed its acquisition of KB on May 31, 2021. At the time of acquisition and net of purchase accounting adjustments, KB had approximately $1.27 billion in assets, $755~~Total loans (excluding PPP) increased $571 million, ~~in loans, $396 million in investment securities and $1.04 billion in deposits, further contributing~~or 12%, compared to ~~the substantial balance sheet~~June 30, 2022, driven by significant organic growth ~~experienced~~ over the past ~~twelve~~12 months. ~~Given~~Average loans (excluding PPP) increased $717 million, or 16%, for the ~~timing of the acquisition, the three~~six months ended June 30, 2021 included only one month of activity associated with the KB acquisition and included $18.1 million of one-time merger related expenses in addition to $7.4 million in credit loss expense associated with the acquired loan portfolio.

●

Net income totaled $26.8 million, resulting in diluted EPS of $0.91 for the three months ended June 30, 2022, a significant increase over $0.17 for the same period of 2021, which included the acquisition related charges mentioned above. Significant factors affecting the results for the three months ended June 30, 2022 and 2021 include:

~~The three months ended June 30, 2022 represented the first full quarter of activity related to the CB acquisition. No one-time merger related expenses were recorded during the period.~~

The three months ended June 30, 2021 represented only one month of activity related to the KB acquisition and included $18.1 million of one-time merger related expenses and $7.4 million in credit loss expense related to the acquired loan portfolio.

~~Net interest income increased $15.4 million, or 37%, for the three months ended June 30, 2022~~2023 compared to the same period of ~~2021,~~the prior year as ~~both acquisition-related growth and~~a result of the previously mentioned organic growth in ~~loans and investment securities overcame a substantial decline in PPP-related fee recognition.~~addition to the prior year acquisition.

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~~Negative provision for credit losses of $200,000 was recorded for the three months ended June 30, 2022 compared to expense of $4.1~~Bancorp’s ACL on loans increased $11 million, for the same period of last year. The negative provision recorded for the three months ended June 30, 2022 was driven mainly by the release of $3.0 million in specific reserves associated with recently acquired loans. The expense recorded for the prior year was driven by the KB acquisition, which was completed in the second quarter of 2021.

●

NIM decreased 16 bps to 3.20% for the three months ended June 30, 2022 compared to 3.36% for the same period in 2021. Recent interest rate actions from the FRB have had a positive impact on net interest income and NIM, but the full effects of rising rates were not realized during the three months ended June 30, 2022 due to the timing of the rate increases. Bancorp expects to realize further benefits to net interest income and NIM from both the recent hikes and anticipated future hikes in the quarters ahead.

●

~~Total loans (excluding PPP loans) increased $1.01 billion,~~ or ~~26%~~17%, compared to June 30, ~~2021, driven by the addition of $630 million in loans during the first quarter of~~ 2022, ~~in relation~~attributed mainly to the ~~CB acquisition and strong~~significant organic ~~growth. Average~~loan growth experienced over the last 12 months. Provision for credit losses on loans ~~(excluding PPP loans) increased $1.46 billion, or 44%,~~totaled $4.4 million for the ~~three~~six months ended June 30, ~~2022~~2023, compared to ~~the same period in 2021. Average balance growth was driven by the CB acquisition noted above and strong organic growth in addition to $755~~$2.0 million ~~in loans added through the KB acquisition on May 31, 2021, the effect of which was only partially captured in the prior year average balances due to the timing of the acquisition.~~

●

The PPP loan portfolio decreased $340 million, or 90%, compared to June 30, 2021 as the result of anticipated forgiveness activity, driving a $5.8 million, or 83%, decline in PPP-related interest and fee income for the ~~three~~six months ended June 30, ~~2022 compared to the same period of 2021.~~

●

~~Negative provision for credit losses of $200,000 was recorded~~2022. While organic loan growth drove expense for the ~~three months ended June 30, 2022 compared to total expense of $4.1 million for the same~~current year period, of last year. The release of approximately $3.0 million of specific reserves related to recently acquired loans was the main driver of the negative provision recorded for the three months ended June 30, 2022, which more than offset expense associated with a deteriorating unemployment forecast and qualitative factor adjustments within the CECL model. Expense recordedactivity for the prior year period was ~~attributed~~driven by $4.4 million of expense related to the acquired loan portfolio, which was partially offset by the release of specific reserves on acquired ~~through~~loans that paid off during the ~~KB acquisition.~~

●

~~Bancorp’s ACL on loans to total loans was 1.36% at June 30, 2022 compared to 1.29% at December 31, 2021, the increase stemming from acquisition-related activity within the ACL on loans.~~period.

●

Deposit balances ~~increased $1.29 billion,~~declined $341 million, or ~~25%~~5%, compared to June 30, ~~2021,~~2022, as a result of ~~assuming approximately $1.12 billion in deposits during~~inflationary pressures and rising rates, the latter of which has enticed depositors to seek higher-yielding alternatives. In addition, a portion the deposit decline experienced for the first ~~quarter~~half of 2023 was also driven by seasonal public funds runoff. While we have not seen fallout in ~~relation~~our overall customer base, deposit competition and a higher interest rate environment has created NIM compression and we anticipate it will continue to do so throughout the ~~CB acquisition. The growth stemming from the first quarter CB acquisition was partially offset during the second quarter as~~rest of 2023.

As a result of ~~anticipated seasonal~~ deposit ~~runoff related mainly~~pricing pressure/competition, Bancorp has experienced a significant shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to ~~public fund~~higher-yielding options, particularly time deposits. This shift has significantly increased Bancorp’s cost of deposits ~~customer tax payment activity~~ and ~~time deposit maturities.~~overall cost of funds.

●

~~Total non-interest~~Net interest income ~~increased $6.2~~(FTE) totaled $124.3 million ~~or 39%,~~ for the ~~three month period~~six months ended June 30, ~~2022~~2023, representing an increase of $18.1 million, or 17%, compared to the six months ended June 30, 2022.

NIM increased 36 bps, or 11%, to 3.50% for the six months ended June 30, 2023 compared to the same period of ~~2021. The second quarter of 2022 benefitted from both~~the prior year, consistent with average balance sheet expansion and significant ~~contributions stemming from acquisition-related activity and organic growth~~upward movement in the interest rate environment experienced over the past ~~twelve~~12 months. ~~All~~However, rising funding costs, including a substantial increase in the cost of deposits and increased borrowing activity, has placed considerable pressure on NIM through the first six months of 2023.

●

Non-interest income increased $3.8 million, or 9%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, highlighted by record WM&T fees and treasury management fees, in addition to significant growth in most of Bancorp’s other non-interest income revenue streams, ~~experienced significant increases over the same quarter of~~including higher BOLI income driven by the prior year ~~with the exception~~purchase of ~~mortgage banking, which was flat compared to the~~an additional $30 million of BOLI assets. The prior year ~~period.~~period did not include a full six months of activity stemming from the acquisition of CB, as the acquisition was completed on March 7, 2022.

●

Non-interest expenses ~~decreased $3.5~~declined $9.9 million, or 7%10%, for the ~~three~~six months ended June 30, ~~2022~~2023, compared to the ~~same~~six months ended June 30, 2022. The prior year period included $19.5 million of ~~2021, remaining controlled~~merger expenses associated with the CB acquisition. Non-interest expenses in general remain well-controlled and ~~generally~~consistent with expansion, strong performance and continued investment in ~~line with expectations.~~technology.

●

~~Bancorp’s efficiency ratio (FTE)~~As of June 30, 2023, Bancorp continued to be “well-capitalized,” the highest regulatory capital rating for ~~the three month period ended~~financial institutions, with all capital ratios experiencing growth compared to both December 31, 2022 and June 30, 2022. Total stockholders’ equity to total assets was 10.45% as of June 30, 2023, compared to 10.14% and 9.85% at December 31, 2022 and June 30, 2022, respectively. Tangible common equity to tangible assets was ~~56.42%, while the ratio for the same period of the prior year was 83.86%, the latter reflecting one-time merger-related expenses attributed~~7.87% at June 30, 2023, compared to ~~the KB acquisition. Excluding these non-recurring expenses~~7.44% and ~~amortization of investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 56.31%~~7.00% at December 31, 2022 and ~~51.95% for the three months ended~~ June 30, 2022, ~~and 2021,~~ respectively. ~~See the section titled “~~~~Non-GAAP Financial Measures~~~~” for reconcilement of non-GAAP to GAAP measures.~~

~~Table of Contents~~

~~The following table presents an overview of Bancorp’s financial performance for the six months ended June 30, 2022 and 2021:~~

(dollars in thousands, except per share data)

Variance

Six months ended June 30,

2022

2021

$/bp

%

Net income attributed to stockholders
$ 34,700 $ 26,894 $ 7,806 29 %
Diluted earnings per share
$ 1.22 $ 1.13 $ 0.09 8 %
ROA
0.96 % 1.09 %
(13) bps
-12 %
ROE
9.62 % 11.28 %
(166) bps
-15 %

~~Additional discussion follows under the section titled “~~~~Results of Operations.~~”

~~General highlights for the six months ended June 30, 2022 compared to June 30, 2021:~~

●

Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits. Given the timing of the acquisition, the six months ended June 30, 2022 did not include a full six months of activity associated with the CB acquisition. Further, $19.5 million in one-time merger related expenses were recorded in the first quarter of 2022 in addition to $4.4 million of credit loss expense associated with the acquired loan portfolio.

●

Bancorp also completed its acquisition of KB on May 31, 2021. At the time of acquisition and net of purchase accounting adjustments, KB had approximately $1.27 billion in assets, $755 million in loans, $396 million in investment securities and $1.04 billion in deposits at the time of acquisition last year. Given the timing of the acquisition, the six months ended June 30, 2021 only represented one month of activity associated with the KB acquisition and included $18.5 million of one-time merger related expenses in addition to $7.4 million in credit loss expense associated with the acquired loan portfolio.

●

Net income totaled $34.7 million, resulting in diluted EPS of $1.22 for the six months ended June 30, 2022, an 8% increase over $1.13 for the same period of 2021. Significant factors affecting the results for the six months ended June 30, 2022 and 2021 include:

The six months ended June 30, 2022 represented approximately four months of activity related to the CB acquisition, including $19.5 million in one-time merger related expenses and $4.4 million of credit loss expense related to the acquired loan portfolio.

The six months ended June 30, 2021 represented only one month of activity related to the KB acquisition and included $18.5 million of one-time merger related expenses and $7.4 million in credit loss expense related to the acquired loan portfolio.

Net interest income increased $26.3 million, or 33%, for the six months ended June 30, 2022 compared to the same period of 2021, as both acquisition-related growth and organic growth in loans and investment securities overcame a substantial decline in PPP-related fee recognition.

Total provision for credit loss expense was $2.1 million for the six months ended June 30, 2022 compared to $2.7 million for the same period of last year. The expense recorded for both periods was driven by the respective acquisitions.

●

NIM decreased 24 bps to 3.14% for the six months ended June 30, 2022 compared to 3.38% for the same period in 2021. Recent interest rate actions from the FRB have had a positive impact on net interest income and NIM, but the full effects of rising rates were not realized during the six months ended June 30, 2022 due to the timing of the rate increases. Bancorp expects to realize further benefits to net interest income and NIM from both the recent hikes and anticipated future hikes.

●

Total loans (excluding PPP loans) increased $1.01 billion, or 26%, compared to June 30, 2021, driven by the addition of $630 million in loans during the first quarter of 2022 in relation to the CB acquisition and strong organic growth. Average loans (excluding PPP loans) increased $1.38 billion, or 44%, for the six months ended June 30, 2022 compared to the same period in 2021. Average balance growth was driven by the CB acquisition noted above and strong organic growth in addition to $755 million in loans added through the KB acquisition on May 31, 2021, the effect of which was only partially captured in the prior year average balances due to the timing of the acquisition.

●

The PPP loan portfolio decreased $340 million, or 90%, compared to June 30, 2021 as the result of forgiveness activity, driving a $10.0 million, or 71%, decline in PPP-related interest and fee income for the six months ended June 30, 2022 compared to the same period of 2021.

~~Table of Contents~~

●

Total provision for credit loss expense was $2.1 million for the six months ended June 30, 2022 compared to expense of $2.7 million for the same period of last year. Provision expense for the six months ended June 30, 2022 was driven largely by $4.4 million of expense related to the loan portfolio acquired through the CB acquisition. In addition, the FRB’s forecast of the Seasonally Adjusted National Civilian Unemployment Rate, which is the primary loss driver with Bancorp’s CECL model, deteriorated during the second quarter, presumptively the result of inflation and recession-based fears, resulting in increased credit loss expense along with qualitative factor adjustments within the CECL model. Partially offsetting this activity was the reduction of approximately $3.0 million of specific reserves on individual loans related to recently acquired individual loans that paid off during the second quarter. Provision expense recorded for the six months ended June 30, 2021 was driven by $7.4 million of expense related to the loan portfolio acquired through the KB acquisition, which was offset by the benefits associated with an improving unemployment forecast, the primary loss driver within the CECL model.

●

~~Bancorp’s ACL on loans to total loans was 1.36% at June 30, 2022 compared to 1.29% at December 31, 2021, the increase stemming mainly from acquisition-related activity within the ACL on loans.~~

●

Deposit balances increased $1.29 billion, or 25%, compared to June 30, 2021, as a result of assuming approximately $1.12 billion in deposits during the first quarter in relation to the CB acquisition. The growth stemming from the first quarter CB acquisition was partially offset during the second quarter as a result of anticipated seasonal deposit runoff related mainly to public fund deposits, customer tax payment activity and time deposit maturities.

●

Total non-interest income increased $11.5 million, or 39%, for the six month period ended June 30, 2022 compared to the same period of 2021. The first half of 2022 benefitted from both significant contributions stemming from acquisition-related activity and organic growth over the past twelve months. All non-interest income revenue streams experienced significant increases over the same quarter of the prior year, with the exception of mortgage banking, which experienced a significant decline as a result of slowing volumes compared to the re-finance rush that benefitted 2021.

●

Non-interest expenses increased $27.8 million, or 38%, for the six months ended June 30, 2022 compared to the same period of 2021. While both periods experienced elevated non-interest expense as a result of one-time merger related expenses, all non-interest expense categories, with the exception of the FHLB early pre-payment penalty, experienced significant increases over the prior year as a result of anticipated acquisition-related growth. The prior year FHLB early pre-payment penalty, which totaled $474,000, was the result of paying off $14 million of FHLB advances prior to maturity due to excess liquidity held on the balance sheet and the near-term outlook for interest rates at the time of payoff.

●

Bancorp’s efficiency ratio (FTE) for the six months ended June 30, 2022 was 68.53% compared to 67.01% for the same period of 2021, the large fluctuation being the result of one-time merger-related expenses incurred as a result of the respective acquisitions in both periods. Excluding one-time merger costs and expenses related to the amortization of tax credit partnerships, Bancorp’s non-GAAP efficiency ratio for the six months ended June 30, 2022 was 55.18% compared to 49.82% for the same period of 2021. See the section titled “~~Non-GAAP Financial Measures~~”~~for a reconcilement of non-GAAP to GAAP measures.~~

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Results of Operations

Net Interest Income - Overview

As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by numerous economic factors including market interest rates, business spending, liquidity, consumer confidence and competitive conditions within the marketplace. The discussion that follows is based on FTE net interest income data.

Comparative information regarding net interest income follows:

(dollars in thousands)							Variance											Variance
As of and for the three months ended June 30,	2022			2021			$/bp		%			2023			2022			$/bp			%

Net interest income	$	56,984		$	41,584		$	15,400		37	%	$	60,929		$	56,984		$	3,945			7	%
Net interest income (FTE)*		57,244			41,661			15,583		37	%		61,074			57,244			3,830			7	%
Net interest spread		3.14	%		3.29	%	(15) bps			-5	%
Net interest margin		3.20	%		3.36	%	(16) bps			-5	%
Net interest spread (FTE)*													2.84	%		3.14	%	(30) bps				-10	%
Net interest margin (FTE)*													3.42	%		3.20	%	22 bps				7	%
Average interest earning assets	$	7,174,072		$	4,972,914		$	2,201,158		44	%	$	7,171,094		$	7,174,072		$	(2,978	)		0	%
Average interest bearing liabilities													4,916,112			4,691,421			224,691			5	%
Five year Treasury note rate at period end													4.13	%		3.01	%	112 bps				37	%
Average five year Treasury note rate													3.69	%		2.95	%	74 bps				25	%
Prime rate at period end													8.25	%		4.75	%	350 bps				74	%
Average Prime rate													8.16	%		3.93	%	423 bps				108	%
One month term SOFR at period end													5.14	%		1.69	%	345 bps				204	%
Average one month term SOFR													5.04	%		0.94	%	410 bps				436	%

(dollars in thousands)							Variance											Variance
As of and for the six months ended June 30,	2022			2021			$/bp		%			2023			2022			$/bp		%

Net interest income	$	105,744		$	79,409		$	26,335		33	%	$	124,001		$	105,744		$	18,257		17	%
Net interest income (FTE)*		106,189			79,535			26,654		34	%		124,319			106,189			18,130		17	%
Net interest spread		3.09	%		3.30	%	(21) bps			-6	%
Net interest margin		3.14	%		3.38	%	(24) bps			-7	%
Net interest spread (FTE)*													2.98	%		3.09	%	(11) bps			-4	%
Net interest margin (FTE)*													3.50	%		3.14	%	36 bps			11	%
Average interest earning assets	$	6,812,158		$	4,751,469		$	2,060,689		43	%	$	7,162,736		$	6,812,158		$	350,578		5	%
Average interest bearing liabilities													4,862,307			4,475,830			386,477		9	%
Five year Treasury note rate at period end													4.13	%		3.01	%	112 bps			37	%
Average five year Treasury note rate													3.75	%		2.39	%	136 bps			57	%
Prime rate at period end													8.25	%		4.75	%	350 bps			74	%
Average Prime rate													7.93	%		3.61	%	432 bps			120	%
One month term SOFR at period end													5.14	%		1.69	%	345 bps			204	%
Average one month term SOFR													4.82	%		0.55	%	427 bps			776	%

*See table titled, "Average Balance Sheets and Interest Rates (FTE)," for detail of ~~net~~Net interest income (FTE).

NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled $4 million and $5 million at ~~both~~ June 30, ~~2022~~2023 and December 31, ~~2021.~~2022, respectively. These sold loans are on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, as Bancorp believes it provides a more accurate depiction of loan portfolio performance.

~~The following table details~~At June 30, 2023, Bancorp’s loan portfolio consisted of approximately 72% fixed and 28% variable rate loans. At inception, most of Bancorp’s fixed rate loans are priced in relation to the ~~volatility experienced within the interest~~five year treasury. Bancorp’s variable rate ~~environment over the past twelve months by comparing period end and quarterly average rates:~~loans are typically indexed to either Prime or SOFR, generally repricing as those rates change.

June 30,

March 31,

December 31,

September 30,

June 30,

2022

2022

2021

2021

2021

Five year Treasury note - quarter end
3.01 % 2.42 % 1.26 % 0.98 % 0.87 %
Five year Treasury note - quarterly average
2.95 % 1.83 % 1.18 % 0.80 % 0.84 %
Prime rate - quarter end
4.75 % 3.50 % 3.25 % 3.25 % 3.25 %
Prime rate - quarterly average
3.93 % 3.29 % 3.25 % 3.25 % 3.25 %
One-month LIBOR - quarter end
1.67 % 0.46 % 0.10 % 0.08 % 0.10 %
One-month LIBOR - quarterly average
1.02 % 0.23 % 0.09 % 0.09 % 0.10 %
Overnight SOFR - quarter end
1.50 % 0.29 % 0.05 % 0.05 % 0.03 %
Overnight SOFR - quarterly average
0.71 % 0.09 % 0.05 % 0.05 % 0.01 %

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Prime rate, the five year Treasury note rate and ~~the~~ one month ~~LIBOR~~term SOFR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past several quarters. Approximately $1.47 billion, or 30%, of Bancorp’s loans are variable rate and are indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year Treasury rate.

At June 30, 2022, Bancorp’s loan portfolio consisted of approximately 70% fixed and 30% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 70%) or LIBOR/SOFR (approximately 30%).

~~On March 16, 2022, the~~12 months. The FRB ~~increased the FFTR to a range of 0.25%-0.50%, an increase of 25 bps, which resulted in Prime increasing to 3.50%. The hike represented the FRB’s first~~took aggressive interest rate action ~~since it cut~~in 2022, increasing the FFTR ~~150 bps in March~~a total of 2020 in response to the pandemic, which took Prime from 4.75% to 3.25%. Given the timing of the FRB’s increase, the average interest rate environment experienced for the first quarter of 2022 did not capture the full benefit of the FRB’s March rate increase.

~~Effective May 4, 2022, the FFTR was increased 50~~425 bps to a range of ~~0.75%-1.00%, taking~~4.25% - 4.50%. These increases ultimately took Prime to ~~4.00%. This increase was followed by~~7.50% as of December 31, 2022, marking its highest level since 2007.

During the first half of 2023, the FRB continued raising rates, albeit at a slower pace, increasing the FFTR a total 75 bps ~~increase, taking the FFTR~~ to a range of ~~1.50%-1.75% and~~5.00% - 5.25% as of June 30, 2023 via three separate 25 bps rate hikes. The FRB elected to pause rate hikes at their June 14, 2023 meeting in an effort to further evaluate the impact of recent policy decisions. As a result, Prime ~~to 4.75% effective~~was 8.25% as of June 16, 2022, marking Prime’s return to pre-pandemic levels. With 70% of the variable rate loan portfolio tied to Prime and the majority of these loans having floor rates of 4.00%, the FRB’s most recent hike was of particular significance, as it moved these loans off their floors and provided an immediate boost to the yields earned on the variable rate loan portfolio. Given the timing of the most recent FRB hike, the average interest rate environment experienced for the second quarter of 2022 did not capture the full benefit of the FRB’s most recent rate action.30, 2023.

The current economic outlook ~~suggests continued interest rate action from~~remains volatile, regularly changing as new economic data becomes available and the ~~FRB~~FRB’s efforts to control inflation continue. Current projections indicate a likelihood for an additional 25 bps increase in the FFTR during the third quarter of 2023, with the FFTR remaining at least at its current level through the end of the year. As a potential economic slowdown and ~~prospects of a rising rate environment. While~~recession looms, Bancorp expects ~~rising rates to have a positive effect on NIM,~~ongoing pricing pressure/competition for both loans and deposits, ~~elevated~~changing levels of liquidity within the banking system ~~in general~~ and ~~the possibility of~~ a ~~flattening~~severely inverted yield curve ~~could~~will continue to place pressure on ~~NIM.~~NIM in the second half of 2023.

Net Interest Income (FTE) – Three months ended June 30, ~~2022~~2023 compared to June 30, ~~2021~~2022

Net interest spread (FTE) and NIM (FTE) were ~~3.14%~~2.84% and ~~3.20%~~3.42%, for the three months ended June 30, ~~2022~~2023, compared to ~~3.29%~~3.14% and ~~3.36%~~3.20% for the same period in ~~2021,~~2022, respectively. Despite the period over period increase, NIM during the three months ended June 30, ~~2022~~2023 was significantly impacted by the following:

●

AnThe rising interest rate environment that ~~is evolving~~has evolved from the sustained, pandemic-driven lows experienced ~~over the last two years.~~beginning in 2020. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB’s hike in mid-March 2022. The FFTR stood at a range of ~~1.50%-1.75%~~5.00% - 5.25%, and Prime at ~~4.75%~~8.25%, as of June 30, ~~2022~~2023, as a result of aggressive interest rate action from the FRB ~~during~~over the ~~second quarter of 2022.~~past 12 months.

●

Substantial balance sheet growth stemming from both acquisition-related activity and organic growth, which resulted in total average earning asset growth of $2.20 billion, or 44%, and average interest-bearing liability growth of $1.55 billion, or 49%,Intense pricing pressure/competition for ~~the three months ended June 30, 2022 compared to the same period of 2021.~~

●

~~Overall excess balance sheet liquidity, which contributed to NIM compression in both periods. Excess liquidity within the banking system in general~~deposits has ~~also led to~~driven a ~~highly competitive loan rate environment.~~

●

~~PPP originations, which began~~significant increase in the ~~second quarter~~cost of ~~2020~~funds and ~~continued through expiration of the program on May 31, 2021,~~overall deposit contraction, as ~~well as the related forgiveness~~depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity which accelerates the recognition of fee income on these loans and continues to impact NIM. The average balance of the PPP loan portfolio decreased $463 million, and related income decreased $5.8 million, for the three months ended June 30, 2022 compared to the same period of 2021. The PPP portfolio contributed a 4 bps benefit to NIM for the three months ended June 30, 2022 compared to a 20 bps benefit for the three months ended June 30, 2021.has increased.

Net interest income (FTE) increased ~~$15.6~~$3.8 million, or ~~37%~~7%, for the three months ended June 30, ~~2022~~2023 compared to the same period of ~~2021, largely as a result of acquisition-related activity, but also~~2022, driven ~~in part~~ by ~~strong~~significant organic loan growth ~~substantial investment in the investment securities portfolio~~ and the ~~benefits~~benefit of ahigher rates, which were able to outpace rising ~~interest rate environment.~~funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.

~~Table of Contents~~

Total average interest earning assets ~~increased $2.20 billion, or 44%, to $7.17 billion~~were virtually flat for the three months ended June 30, ~~2022,~~2023, as compared to the same period of ~~2021, with~~2022, as substantial average loan growth was offset by a significant decline in average FFS/interest bearing due from bank balances and a marginal decline in average investment securities. However, as a result of a significantly higher interest rate environment, the average rate earned on total interest earning assets ~~contracting 16~~climbed 133 bps to ~~3.32%~~4.65%.

●

Average total loan balances increased ~~$1.00 billion,~~$441 million, or ~~26%~~9%, for the three months ended June 30, ~~2022~~2023, compared to the same period of ~~2021.~~2022. Average non-PPP loan growth of ~~$1.46 billion,~~$481 million, or ~~44%~~10%, was driven by ~~acquisition-related expansion and~~ strong organic growth, which was partially offset by a ~~$463~~$40 million, or ~~91%~~83%, decline in average PPP loan balances asresulting from continued pay down and forgiveness ~~activity increased.~~activity.

●

Average investment securities ~~grew $948~~declined $23 million, or 1%, for the three months ended June 30, ~~2022~~2023 compared to the same period of ~~2021, which was attributed to~~2022, the result of normal pay down and maturity activity. Investment in the securities portfolio has slowed considerably over the past 12 months, consistent with funding loan growth and a ~~combination of strategically deploying excess liquidity through further investment and acquisition-related activity.~~general industry-wide decline in liquidity.

●

Average FFS and interest bearing due from bank balances ~~increased $247~~decreased $429 million, or ~~79%~~76%, for the three months ended June 30, ~~2022 due~~2023, as loan growth and deposit contraction led to ~~excess balance sheet liquidity.~~lower levels of liquidity compared to the same period of the prior year.

Table of Contents

Total interest income (FTE) increased ~~$16.2~~$24.0 million, or ~~37%~~41%, to ~~$59.4~~$83.1 million for the three months ended June 30, ~~2022,~~2023, as compared to the same period of ~~2021.~~2022.

●

Interest and fee income (FTE) on loans increased ~~$10.6~~$21.6 million, or ~~26%~~43%, to ~~$50.8~~$72.4 million for the three months ended June 30, ~~2022~~2023, compared to the same period of ~~2021,~~2022, driven by ~~both~~significant organic ~~and acquisition-related~~ growth in the non-PPP portfolio and the rising rate environment, which more than offset a ~~$5.8~~$1.1 million, or ~~83%~~96%, decline in PPP-related income. ~~While the~~The yield on the overall loan portfolio increased ~~a marginal 1 bp~~129 bps to ~~4.20%~~5.49% for the three months ended June 30, ~~2022~~2023, compared to ~~4.19%~~4.20% for the same period of the prior year, while the yield on the non-PPP loan portfolio increased 15135 bps compared to the prior year period, driven by the rising rate environment.

●

~~Significant growth in~~While average investment securities ~~led to~~declined slightly, there was a ~~$4.5~~$1.7 million increase in interest income (FTE) on the portfolio for the three months ended June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driving a 2736 bps ~~or 19%,~~ increase in the corresponding yield on the portfolio. ~~Substantial deployment of excess liquidity benefitted~~The increased yield on the investment securities portfolio aswas driven by the ~~yields earned on recent purchases have improved dramatically~~benefit of purchase activity made in ~~tandem with rising rates.~~the prior year once rates began to rise.

●

Interest income on FFS and interest bearing due from bank balances increased ~~$1.0 million~~$551,000 for the three months ended June 30, ~~2022,~~2023, as ~~a result of average balance growth stemming from excess balance sheet liquidity and~~ rising short-term interest ~~rates. While the~~rates more than offset a $429 million decline in corresponding average balances. The yield on these assets increased 69426 bps to ~~0.80%~~5.06% for the three months ended June 30, ~~2022~~2023 compared to the same period of ~~2021, having a larger portion of~~2022, stemming from the ~~balance sheet concentrated~~dramatic increase in ~~lower-yielding assets created a larger drag on overall NIM for~~ the ~~second quarter of 2022 compared to~~FFTR over the ~~prior period.~~past 12 months.

Total average interest bearing liabilities increased ~~$1.55 billion,~~$225 million, or ~~49%~~5%, to ~~$4.69~~$4.92 billion for the three-month period ended June 30, ~~2022~~2023 compared with the same period in ~~2021, with the total average cost declining 1 bp to 0.18%.~~2022.

●

Average interest bearing deposits ~~increased $1.46 billion,~~decreased $101 million, or ~~48%~~2%, for the three months ended June 30, ~~2022~~2023 compared to the same period in ~~2021, with interest-bearing demand~~2022, as a result of inflationary pressures and rising rates, the latter of which has driven customers to seek higher-yielding alternatives for excess cash. Partially offsetting the average interest bearing deposit decline was a $145 million increase in average time deposits ~~accounting for $774 million, or 53%, of the increase. The significant growth was~~ attributed to ~~both acquisition-related activity and organic growth stemming from the general trend of customers maintaining higher levels of liquidity over the past several quarters.~~Bancorp’s promotional time deposit offerings.

●

Consistent with the average interest bearing deposit ~~growth~~decline noted above, average SSUAR balances ~~increased $85~~decreased $27 million, or 19%, for the three months ended June 30, ~~2022~~2023 compared to the same period of ~~2021.~~2022.

●

Average FHLB advances ~~decreased $19~~totaled $348 million for the three months ended June 30, ~~2022 compared~~2023. Bancorp utilized overnight borrowings with the FHLB during the three months ended June 30, 2023 based on evolving liquidity needs. Bancorp also initiated a $100 million term advance in conjunction with five-year interest rate swap during the first quarter of 2023 in an effort to secure longer-term funding at a more favorable rate. No FHLB borrowings were utilized during the same period of the prior ~~year, as all outstanding FHLB advances either matured or were paid off in 2021.~~year.

●

~~Subordinated~~Average subordinated debentures ~~totaling $26~~totaled $27 million for the three months ended June 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.

~~Table of Contents~~

Total interest expense increased ~~$606,000, or 40%,~~$20.0 million for the three months ended June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driven by a ~~direct~~significant rise in rates paid on deposits and increased borrowing activity. As a result, ~~of acquisition-related average deposit balance growth and assumed debt. Despite this growth,~~ the ~~percentage~~ cost of interest bearing liabilities ~~has remained relatively low, driven by~~increased 162 bps to 1.81% for the ~~maturity/renewal~~three months ended June 30, 2023 compared to the same period of ~~higher-costing time deposits at lower rates and the benefit of all FHLB advances either maturing or paying off in 2021.~~2022.

●

~~While total~~Total interest bearing deposit expense increased ~~$335,000, or 23%,~~$15.3 million as a result of ~~acquisition-related activity, Bancorp experienced~~the aforementioned deposit rate increases, resulting in a 3139 bps ~~decrease~~increase in the cost of interest bearing deposits. ~~Bancorp has experienced significant benefit~~While the overall deposit mix continues to change, the Company also continues to see loyalty from ~~longstanding low levels of deposit rates. While low-level deposit rates have benefited interest bearing deposit costs for several quarters,~~our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to ~~drive deposit rate/cost increases during~~continue in the ~~second half~~coming months.

●

SSUAR interest expense increased $319,000 for the three months ended June 30, 2023 compared to the same period of ~~2022.~~the prior year, consistent with the aforementioned rate increases.

●

Interest expense of $4.0 million was recorded in relation to FHLB borrowings for the three months ended June 30, 2023, driven by the increased borrowings activity previously noted. No FHLB borrowings were utilized for the three months ended June 30, 2023.

●

Interest expense totaling ~~$278,000~~$545,000 was recorded for the three months ended June 30, ~~2022,~~2023, as a result of the subordinated debentures added through the CBprior year acquisition, approximately $100,000 of which stems from purchase accounting-related mark-to-market amortization.

●

No interest expense on FHLB advances was recorded for the three months ended June 30, 2022, as all FHLB advances either matured or paid off in 2021, resulting in a decline of $74,000 compared to the same period of the prior year.

Table of Contents

Net Interest Income (FTE) – Six months ended June 30, ~~2022~~2023 compared to June 30, ~~2021~~2022

Net interest spread (FTE) and NIM (FTE) were ~~3.09%~~2.98% and ~~3.14%~~3.50%, for the six months ended June 30, ~~2022~~2023, compared to ~~3.30%~~3.09% and ~~3.38%~~3.14% for the same period in ~~2021,~~2022, respectively. Despite the period over period increase, NIM during the six months ended June 30, ~~2022~~2023 was significantly impacted by the following:

●

AnThe rapidly rising interest rate environment that ~~is evolving~~has evolved from the sustained, pandemic-driven lows experienced ~~over the last two years.~~beginning in 2020. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB’s hike in mid-March 2022. The FFTR stood at a range of ~~1.50%-1.75%~~5.00% - 5.25%, and Prime at ~~4.75%~~8.25%, as of June 30, ~~2022~~2023, as a result of aggressive interest rate action from the FRB ~~during~~over the ~~second quarter of 2022.~~past 12 months.

●

Substantial balance sheet ~~growth~~expansion stemming from both organic growth and acquisition-related activity, ~~and organic growth,~~ which resulted in total average earning asset growth of ~~$2.06 billion,~~$351 million, or ~~43%~~5%, and average interest-bearing liability ~~growth~~expansion of ~~$1.45 billion,~~$386 million, or ~~48%~~9%, for the six months ended June 30, ~~2022~~2023 compared to the same period of ~~2021.~~2022.

●

~~Overall excess balance sheet liquidity, which contributed to NIM compression in both periods. Excess liquidity within the banking system in general~~Intense pricing pressure/competition for deposits has ~~also led to~~driven a ~~highly competitive loan rate environment.~~

●

~~PPP originations, which began~~significant increase in the ~~second quarter~~cost of ~~2020~~funds and ~~continued through expiration of the program on May 31, 2021,~~overall deposit contraction, as ~~well as the related forgiveness~~depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity which accelerates the recognition of fee income on these loans and continues to impact NIM. The average balance of the PPP loan portfolio decreased $489 million, and related income decreased $10.0 million, for the six months ended June 30, 2022 compared to the same period of 2021. The PPP portfolio contributed a 8 bps benefit to NIM for the three months ended June 30, 2022 compared to a 22 bps benefit for the six months ended June 30, 2021.has increased.

Net interest income (FTE) increased ~~$26.7~~$18.1 million, or ~~34%~~17%, for the six months ended June 30, ~~2022~~2023 compared to the same period of ~~2021, largely~~2022, as a result of ~~acquisition-related activity, but also driven in part by strong~~significant organic loan growth, ~~substantial~~ investment in the ~~investment~~ securities portfolio, acquisition-related activity and the benefits of a rising interest rate environment.

~~Table of Contents~~

Total average interest earning assets increased ~~$2.06 billion,~~$351 million, or ~~43%~~5%, to ~~$6.81~~$7.16 billion for the six months ended June 30, ~~2022,~~2023, as compared to the same period of ~~2021,~~2022, with the average rate earned on total interest earning assets ~~contracting 27~~climbing 134 bps to ~~3.24%~~4.58%.

●

Average total loan balances increased ~~$ 887~~$649 million, or ~~24%~~14%, for the six months ended June 30, ~~2022~~2023, compared to the same period of ~~2021.~~2022. Average non-PPP loan growth of ~~$1.38 billion,~~$717 million, or ~~44%~~16%, was driven by ~~acquisition-related expansion and~~ strong organic growth and acquisition-related expansion, which was only partially offset by a ~~$489~~$68 million, or ~~86%~~85%, decline in average PPP loan balances asresulting from continued forgiveness ~~activity increased. While the yield on the overall loan portfolio was unchanged at 4.18%~~activity.

●

Average investment securities grew $176 million, or 11%, for the six months ended June 30, 2023 compared to the same period of 2022, attributed to a combination of strategically deploying excess liquidity through further investment in 2022 and ~~2021, respectively,~~acquisition-related activity. Investment security purchases made during the six months ended June 30, 2023 were minimal.

●

Average FFS and interest bearing due from bank balances decreased $480 million, or 78%, for the six months ended June 30, 2023, as loan growth and deposit contraction have led to lower levels of liquidity compared to the same period of the prior year.

Total interest income (FTE) increased $53.3 million, or 49%, to $162.8 million for the six months ended June 30, 2023, as compared to the same period of 2022.

●

Interest and fee income (FTE) on loans increased $45.6 million, or 48%, to $141.3 million for the six months ended June 30, 2023, compared to the same period of 2022, driven by both organic and acquisition-related growth in the non-PPP portfolio and the rising rate environment, which more than offset a $3.8 million, or 95%, decline in PPP-related income. The yield on the overall loan portfolio increased 123 bps to 5.41% for the six months ended June 30, 2023, compared to 4.18% for the same period of the prior year, while the yield on the non-PPP loan portfolio increased 4134 bps compared to the prior year period, driven by the rising rate environment.

●

Average investment securities grew $833 million for the six months ended June 30, 2022 compared to the same period of 2021, attributed to a combination of strategically deploying excess liquidity through further investment and acquisition-related activity.

●

~~Average FFS and interest bearing due from bank balances increased $341 million for the six months ended June 30, 2022 due to on-going excess balance sheet liquidity.~~

~~Total interest income (FTE) increased $26.8 million, or 32%, to $109.5 million for the six months ended June 30, 2022, as compared to the same period of 2021.~~

●

Interest and fee income (FTE) on loans increased $18.4 million, or 24%, to $95.6 million for the six months ended June 30, 2022 compared to the same period of 2021, driven by both organic and acquisition-related growth in the non-PPP portfolio, which more than offset a $10.0 million, or 71%, decline in PPP-related income. The yield on the overall loan portfolio was flat at 4.18% for the six months ended both June 30, 2022 and 2021.

●

~~Significant growth~~Growth in average investment securities led to a ~~$7.1~~$5.5 million increase in interest income (FTE) on the portfolio for the six months ended June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driving a 1647 bps, or ~~11%~~30%, increase in the corresponding yield on the portfolio. Substantial deployment of excess liquidity in 2022 benefitted the investment portfolio, as the yields earned on ~~recent~~those purchases ~~have~~ improved dramatically ~~in tandem with rising rates.~~as rates began to rise last year.

●

Interest income on FFS and interest bearing due from bank balances increased ~~$1.2~~$1.9 million for the six months ended June 30, ~~2022,~~2023, as rising short-term interest rates more than offset a ~~result of~~$480 million decline in related average ~~balance growth stemming from excess balance sheet liquidity and rising short term interest rates. While the~~balances. The yield on these assets increased 35434 bps to ~~0.46%~~4.80% for the six months ended June 30, ~~2022~~2023 compared to the same period of ~~2021, having a larger portion of~~2022, stemming from the ~~balance sheet concentrated~~dramatic increase in ~~lower-yielding assets created a larger drag on overall NIM for~~ the ~~six months ended June 30, 2022 compared to~~FFTR over the ~~prior period.~~past 12 months.

Table of Contents

Total average interest bearing liabilities increased ~~$1.45 billion,~~$386 million, or ~~48%~~9%, to ~~$4.48~~$4.86 billion for the ~~six month~~six-month period ended June 30, ~~2022~~2023 compared with the same period in ~~2021,~~2022, with the total average cost ~~declining 6~~increasing 145 bps to ~~0.15%~~1.60%.

●

Average interest bearing deposits increased ~~$1.40 billion,~~$114 million, or ~~48%~~3%, for the six months ended June 30, ~~2022~~2023 compared to the same period in ~~2021, with interest-bearing demand deposits accounting for $771 million, or 54%,~~2022. This increase stems from an offsetting combination of the ~~increase. The significant growth was attributed to both acquisition-related activity and organic growth stemming from~~$1.12 billion in deposits added during the ~~general trend~~first quarter of ~~customers maintaining higher levels of liquidity over the past several quarters.~~

●

~~Consistent with the average interest bearing deposit growth noted above, average SSUAR balances increased $64 million, for the six months ended June 30,~~ 2022 ~~compared~~in relation to the ~~same period~~CBT acquisition and the deposit contraction Bancorp has experienced through the first half of ~~2021.~~2023.

●

Average FHLB advances ~~decreased $24~~totaled $256 million for the six months ended June 30, ~~2022 compared~~2023. Bancorp utilized overnight borrowings with the FHLB during the six months ended June 30, 2023 based on evolving liquidity needs. Bancorp also initiated a $100 million term advance in conjunction with an interest rate swap during the first quarter of 2023 in an effort to secure longer-term funding at a more favorable rate. No FHLB borrowings were utilized during the same period of the prior ~~year, as all outstanding FHLB advances either matured or were paid off in 2021.~~year.

●

~~Subordinated~~Average subordinated debentures ~~totaling~~totaled $26 million for the six months ended June 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of ~~2022, the corresponding average balance for the six months ended June 30, 2022 totaling $17 million.~~2022.

~~Table of Contents~~

Total interest expense increased ~~$137,000, or 4%,~~$35.2 million for the six months ended June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driven largely by deposit rate increases and increased borrowing activity, and to a ~~direct~~lesser extent, acquisition-related expansion. As a result, ~~of acquisition-related average deposit balance growth and assumed debt. Despite this growth,~~ the ~~percentage~~ cost of interest bearing liabilities ~~has remained relatively low, driven by~~increased 145 bps to 1.60% for the ~~maturity/renewal~~six months ended June 30, 2023 compared to the same period of ~~higher-costing time deposits at lower rates and the benefit of all FHLB advances either maturing or paying off in 2021.~~2022.

●

~~Despite significant average~~Total interest bearing deposit ~~growth, interest~~ expense ~~on deposits was flat for~~increased $27.6 million mainly as a result aforementioned deposit rate increases, resulting in a 125 bps increase in the ~~six months ended June 30, 2022 compared to the same period~~cost of ~~2021. The reduction of time deposit expense stemming from the maturity/renewal of higher-costing time deposits at lower rates offset the expense associated with adding $1.40 billion of average~~ interest bearing deposits. ~~Bancorp has experienced significant benefit~~While the overall deposit mix continues to change, the Company also continues to see loyalty from ~~longstanding low levels of deposit rates. While low-level deposit rates have benefited interest bearing deposit costs for several quarters,~~our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to ~~drive deposit rate/cost increases during~~continue the ~~second half~~coming months.

●

SSUAR interest expense increased $758,000 for the six months ended June 30, 2023 compared to the same period of ~~2022.~~the prior year, consistent with interest rate increases.

●

Interest expense of $5.7 million was recorded in relation to FHLB borrowings for the six months ended June 30, 2023, driven by the increased borrowing activity previously noted. No FHLB borrowings were utilized for the six months ended June 30, 2023.

●

Interest expense totaling ~~$311,000~~$1.1 million was recorded for the six months ended June 30, ~~2022~~2023, as a result of the subordinated debentures ~~assumed~~added through the CBprior year acquisition, approximately ~~$132,000~~$200,000 of which stems from purchase accounting-related mark-to-market amortization.

●

No interest expense on FHLB advances was recorded for the six months ended June 30, 2022, as all FHLB advances either matured or paid off in 2021, resulting in a decline of $250,000 compared to the same period of the prior year.

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Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison

	Three months ended June 30,														Three months ended June 30,
	2022							2021							2023							2022
	Average				Average			Average				Average			Average				Average			Average				Average
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate

Interest earning assets:
Federal funds sold and interest bearing due from banks	$	561,101	$	1,113		0.80	%	$	313,954	$	84		0.11	%	$	131,958	$	1,664		5.06	%	$	561,101	$	1,113		0.80	%
Mortgage loans held for sale		11,303		50		1.77			8,678		58		2.68			8,420		77		3.67			11,303		50		1.77
Investment securities:
Taxable		1,648,014		6,805		1.66			771,289		2,744		1.43			1,632,337		8,299		2.04			1,648,014		6,805		1.66
Tax-exempt		93,830		533		2.28			22,407		70		1.25			86,708		496		2.29			93,830		533		2.28
Total securities		1,741,844		7,338		1.69			793,696		2,814		1.42			1,719,045		8,795		2.05			1,741,844		7,338		1.69

Federal Home Loan Bank stock		13,811		102		2.96			11,924		64		2.15			25,074		275		4.40			13,811		102		2.96

SBA Paycheck Protection Program (PPP) loans		48,364		1,156		9.59			510,963		6,911		5.43			8,323		51		2.46			48,364		1,156		9.59
Non-PPP loans		4,797,649		49,609		4.15			3,333,699		33,248		4.00			5,278,274		72,346		5.50			4,797,649		49,609		4.15
Total loans		4,846,013		50,765		4.20			3,844,662		40,159		4.19			5,286,597		72,397		5.49			4,846,013		50,765		4.20

Total interest earning assets		7,174,072		59,368		3.32			4,972,914		43,179		3.48			7,171,094		83,208		4.65			7,174,072		59,368		3.32

Less allowance for credit losses on loans		67,939							57,599							77,884							67,939

Non-interest earning assets:
Cash and due from banks		99,033							53,522							78,977							99,033
Premises and equipment, net		114,287							64,726							103,645							114,287
Bank owned life insurance		53,438							39,723							85,449							53,438
Goodwill		202,524							52,780							194,074							202,524
Accrued interest receivable and other		75,917							100,588							39,546							75,917

Total assets	$	7,651,332						$	5,226,654						$	7,594,901						$	7,651,332


Interest bearing liabilities:
Deposits:
Interest bearing demand	$	2,248,410	$	984		0.18	%	$	1,474,576	$	415		0.11	%	$	2,218,096	$	7,784		1.41	%	$	2,248,410	$	984		0.18	%
Savings		575,610		51		0.04			289,042		16		0.02			495,644		323		0.26			575,610		51		0.04
Money market		1,163,546		460		0.16			890,593		140		0.06			1,028,302		4,594		1.79			1,163,546		460		0.16
Time		527,997		275		0.21			401,149		864		0.86			672,557		4,380		2.61			527,997		275		0.21
Total interest bearing deposits		4,515,563		1,770		0.16			3,055,360		1,435		0.19			4,414,599		17,081		1.55			4,515,563		1,770		0.16

Securities sold under agreements to repurchase		140,169		57		0.16			55,673		5		0.04			113,051		376		1.33			140,169		57		0.16
Federal funds purchased		9,578		19		0.80			10,918		4		0.15			13,602		170		5.01			9,578		19		0.80
Federal Home Loan Bank advances		-		-		0.00			19,135		74		1.55			348,352		3,962		4.56			—		—		0.00
Subordinated debentures		26,111		278		4.27			-		-		0.00			26,508		545		8.25			26,111		278		4.27


Total interest bearing liabilities		4,691,421		2,124		0.18			3,141,086		1,518		0.19			4,916,112		22,134		1.81			4,691,421		2,124		0.18

Non-interest bearing liabilities:
Non-interest bearing demand deposits		2,123,895							1,497,223							1,781,338							2,123,895
Accrued interest payable and other		86,571							71,918							97,565							86,571

Total liabilities		6,901,887							4,710,227							6,795,015							6,901,887

Stockholders’ equity		749,445							516,427							799,886							749,445
Total liabilities and stockholder's equity	$	7,651,332						$	5,226,654
Total liabilities and stockholders' equity															$	7,594,901						$	7,651,332

Net interest income			$	57,244						$	41,661						$	61,074						$	57,244

Net interest spread						3.14	%						3.29	%						2.84	%						3.14	%

Net interest margin						3.20	%						3.36	%						3.42	%						3.20	%

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Average Balance Sheets and Interest Rates (FTE) – Six-Month Comparison

	Six months ended June 30,														Six months ended June 30,
	2022							2021							2023							2022
	Average				Average			Average				Average			Average				Average			Average				Average
(dollars in thousands)	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate

Interest earning assets:
Federal funds sold and interest bearing due from banks	$	615,878	$	1,395		0.46	%	$	274,880	$	150		0.11	%	$	136,369	$	3,245		4.80	%	$	615,878	$	1,395		0.46	%
Mortgage loans held for sale		9,974		74		1.50			11,632		122		2.12			7,446		118		3.20			9,974		74		1.50
Investment securities:
Taxable		1,492,123		11,485		1.55			713,332		5,039		1.42			1,649,093		16,745		2.05			1,492,123		11,485		1.55
Tax-exempt		68,750		786		2.31			14,469		115		1.60			87,641		1,016		2.34			68,750		786		2.31
Total securities		1,560,873		12,271		1.59			727,801		5,154		1.43			1,736,734		17,761		2.06			1,560,873		12,271		1.59

Federal Home Loan Bank stock		12,169		156		2.59			11,285		121		2.16			20,311		440		4.37			12,169		156		2.59

SBA Paycheck Protection Program (PPP) loans		80,070		3,978		10.02			569,068		13,936		4.94			11,746		190		3.26			80,070		3,978		10.02
Non-PPP loans		4,533,194		91,663		4.08			3,156,803		63,263		4.04			5,250,130		141,094		5.42			4,533,194		91,663		4.08
Total loans		4,613,264		95,641		4.18			3,725,871		77,199		4.18			5,261,876		141,284		5.41			4,613,264		95,641		4.18

Total interest earning assets		6,812,158		109,537		3.24			4,751,469		82,746		3.51			7,162,736		162,848		4.58			6,812,158		109,537		3.24

Less allowance for credit losses on loans		62,020							55,738							76,678							62,020

Non-interest earning assets:
Cash and due from banks		95,155							50,637							78,969							95,155
Premises and equipment, net		100,250							61,208							104,005							100,250
Bank owned life insurance		53,308							36,539							85,179							53,308
Goodwill		178,573							32,758							194,074							178,573
Accrued interest receivable and other		86,999							93,299							38,926							86,999

Total assets	$	7,264,423						$	4,970,172						$	7,587,211						$	7,264,423

Interest bearing liabilities:
Deposits:
Interest bearing demand	$	2,192,609	$	1,633		0.15	%	$	1,422,008	$	772		0.11	%	$	2,258,717	$	14,534		1.30	%	$	2,192,609	$	1,633		0.15	%
Savings		521,754		106		0.04			253,776		21		0.02			510,197		663		0.26			521,754		106		0.04
Money market		1,123,973		650		0.12			869,775		255		0.06			1,072,393		8,756		1.65			1,123,973		650		0.12
Time		494,817		552		0.22			390,775		1,897		0.98			605,887		6,627		2.21			494,817		552		0.22
Total interest bearing deposits		4,333,153		2,941		0.14			2,936,334		2,945		0.20			4,447,194		30,580		1.39			4,333,153		2,941		0.14

Securities sold under agreements to repurchase		115,761		74		0.13			51,330		10		0.04			117,525		832		1.43			115,761		74		0.13
Federal funds purchased		9,784		22		0.45			10,262		6		0.12			14,915		347		4.69			9,784		22		0.45
Federal Home Loan Bank advances		-		-		0.00			24,174		250		2.09			256,215		5,696		4.48			—		—		—
Subordinated debentures		17,132		311		3.66			-		-		0.00			26,458		1,074		8.19			17,132		311		3.66


Total interest bearing liabilities		4,475,830		3,348		0.15			3,022,100		3,211		0.21			4,862,307		38,529		1.60			4,475,830		3,348		0.15

Non-interest bearing liabilities:
Non-interest bearing demand deposits		1,971,525							1,388,313							1,829,554							1,971,525
Accrued interest payable and other		89,824							78,937							106,568							89,824

Total liabilities		6,537,179							4,489,350							6,798,429							6,537,179

Stockholders’ equity		727,244							480,822							788,782							727,244
Total liabilities and stockholder's equity	$	7,264,423						$	4,970,172
Total liabilities and stockholders' equity															$	7,587,211						$	7,264,423

Net interest income			$	106,189						$	79,535						$	124,319						$	106,189

Net interest spread						3.09	%						3.30	%						2.98	%						3.09	%

Net interest margin						3.14	%						3.38	%						3.50	%						3.14	%

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Supplemental Information - Average Balance Sheets and Interest Rates (FTE)

●

Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans averaged $5 million for both the ~~three-month~~three and six month periods ended June 30, ~~2022~~2023 and ~~2021 and the six-month periods ended June 30,~~ 2022, ~~and 2021,~~ respectively.

●

Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a FTE basis using a federal income tax rate of 21%. Approximate tax equivalent adjustments to interest income were ~~$260,000~~$145,000 and ~~$77,000~~$260,000 for the three-month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$445,000~~$318,000 and ~~$126,000~~$445,000 for the six-month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

●

Interest income includes loan fees of ~~$2.9~~$1.1 million ($~~1.2 million~~51,000 associated with the PPP) and ~~$6.2~~$2.9 million ($~~5.6~~1.2 million associated with the PPP) for the three-month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$6.7~~$3.0 million ($~~4.0 million~~190,000 associated with the PPP) and ~~$12.2~~$6.7 million ($~~11.1~~4.0 million associated with the PPP) for the six-month periods ended June 30, 2023 and 2022, ~~and 2021.~~respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and accretion related to purchased loans.

●

Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.

●

NIM represents net interest income on a FTE basis as a percentage of total average interest earning assets.

●

Net interest spread (FTE) is the difference between taxable equivalent rates earned on total interest earning assets less the cost of interest bearing liabilities.

●

The fair market value adjustment on investment securities resulting from ASC 320, “Investments – Debt and Equity Securities” is included as a component of other assets.

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Asset/Liability Management and Interest Rate Risk

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer funding requirements.

Interest Rate Simulation Sensitivity Analysis

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.

The results of the interest rate sensitivity analysis performed as of June 30, ~~2022 are driven by~~2023 were derived from the ~~long-term,~~ conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates and are based on historical data. Management uses different betas in the rising and falling rate scenarios in an effort to best simulate expected earnings trends. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 60%~~. However, given~~ for the ~~historic levels of liquidity currently held by Bancorp~~rising rate scenarios and 30% for falling rate scenarios, respectively. While the beta’s experienced since rates began to rise in the ~~banking system generally,~~first quarter of 2022 were significantly below the 60% beta used in the model, the Company anticipates ~~actual deposit~~the future rising rate scenario betas ~~will remain well below long-term averages through 2022.~~to return to the historic averages. The ~~anticipated lower deposit~~30% beta ~~would result~~used in the ~~Company’s interest~~falling rate ~~sensitivity position turning slightly asset sensitive.~~scenario is the result of management’s expectations of deposit rate decreases given the rate changes experienced since the first quarter of 2022.

Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100, 200 and 300 bps would have a negative effect on net interest income, ~~respectively, while a 100 bps decrease~~as would decreases in interest rates ~~would also have negative effect on net interest income.~~of 100 and 200 bps. These results depict a ~~relatively neutral~~slightly liability sensitive interest rate risk ~~profile. However, the simulation performed as of June 30, 2022 suggests improvement~~profile in rising rate scenarios as compared to the prior quarter simulation performed as of March 31, 2022, which stems from the recent interest rate actions taken by the FRB. These rate hikes resulted in Prime rising to 4.75% as of June 30, 2022, which in turn elevated a significant portion of the variable rate loan portfolio off their floor rates of 4.00%. Bancorp expects to realize further benefits to net interest income and ~~NIM from both the recent hikes and anticipated future hikes~~an asset sensitive position in the ~~quarters ahead.~~

falling rate scenarios. The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. ~~Asset balances subject to immediate repricing cause an estimated decline~~The decrease in net interest income in the ~~down~~falling rate scenarios is the result of the lower beta experienced since rates began to rise in the first quarter of 2022, which was the result of a significant percentage of the Company’s deposit cost being less than 100 bps, ~~scenario, as rates on non-maturity deposits~~and therefore cannot ~~be lowered sufficiently to offset declining interest income. These estimates are summarized below.~~decrease the full 100 or 200 bps simulated in the model.

Change in Rates

-200 -100
+100

+200

+300

Basis Points

Basis Points

Basis Points

Basis Points

Basis Points

% Change from base net interest income at June 30, 2022
N/A -5.13 % -0.48 % -0.96 % -1.42 %

	Change in Rates
	-300			-200			-100			+100			+200
	Basis Points			Basis Points			Basis Points			Basis Points			Basis Points
% Change from base net interest income at June 30, 2023		-6.28	%		-4.04	%		-1.78	%		-2.46	%		-4.95	%

Bancorp’s loan portfolio is currently composed of approximately ~~70%~~72% fixed and ~~30%~~28% variable rate loans, with the fixed rate portion pricing generally based on a spread to the ~~five-year~~five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately ~~70%~~63%) or one month LIBOR/SOFR (approximately ~~30%~~37%).

In July 2017, the Financial Conduct Authority (the “FCA”), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. Subsequent to this, Bank regulators instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later than December 2021. Effective December 31, 2021, ~~Libor~~LIBOR is no longer used to issue new loans in the U.S. It ~~is expected to be~~has been replaced primarily by ~~the Secured Overnight Financing Rate (SOFR),~~SOFR, which ~~many experts consider~~is considered to be a more accurate and ~~more~~ secure pricing benchmark. ~~To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks~~Bancorp did not experience any operational issues associated with ~~the expected discontinuance or unavailability of LIBOR.~~reference rate reform.

~~Table of Contents~~

On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law as part of the Consolidated Appropriations Act of 2022. This legislation established a uniform benchmark replacement process for financial contracts that mature after the cessation of LIBOR (scheduled for June 2023) that do not contain clearly defined or practicable fallback provisions. The legislation also established a safe harbor for lenders, providing protection from litigation associated with choosing a replacement rate recommended by the FRB, such as SOFR, and also allows for the continued use of any appropriate benchmark rate for new contracts.

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As of June 30, ~~2022,~~2023, the Company had approximately ~~$443~~$116 million in loans and ~~$141 million (notional amount) in~~ interest rate derivative contracts of $114 million (notional amount) that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company ~~and other industry participants, continue to review alternative reference rates that could be utilized~~now utilizes SOFR as athe replacement for LIBOR. The Company had ~~$49~~$452 million in loans that were indexed to SOFR at June 30, ~~2022.~~2023.

Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value, with changes in fair value recorded in other non-interest income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above. For additional information see the Footnote titled “Assets and Liabilities Measured and Reported at Fair Value.”

In addition, Bancorp periodically uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled “Derivative Financial Instruments.” For these derivatives, the effective portion of gains or losses is reported as a component of ~~AOCI,~~OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction ~~impacts~~affects earnings. ~~As of June 30, 2022, Bancorp had no outstanding interest rate swaps designated as cash flow hedges.~~

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Provision for Credit Losses

Provision for credit losses on loans at June 30, ~~2022~~2023 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the Footnote titled “Basis of Presentation and Summary of Significant Accounting Policies” ~~for detailed discussion regarding Bancorp’s ACL methodology by loan segment~~ in ~~this document and~~ Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022 for detailed discussion regarding Bancorp’s ACL methodology by loan segment.

An analysis of the changes in the ACL for loans, including provision, and selected ratios follow:

	Three months ended						Six months ended						Three months ended						Six months ended
	June 30,						June 30,						June 30,						June 30,
(dollars in thousands)	2022			2021			2022			2021			2023			2022			2023			2022

Beginning balance	$	67,067		$	50,714		$	53,898		$	51,920		$	75,673		$	67,067		$	73,531		$	53,898
Acquisition - PCD loans (goodwill adjustment)		-			6,757			9,950			6,757			-			-			-			9,950
Adjusted beginning balance		67,067			57,471			63,848			58,677			75,673			67,067			73,531			63,848

Provision for credit losses - loans		(700	)		(2,700	)		(2,450	)		(3,900	)
Provision for credit losses - acquired loans		-			7,397			4,429			7,397
Provision for credit losses on loans														2,150			(700	)		4,400			(2,450	)
Provision for credit losses on loans - acquired loans														-			-			-			4,429
Total provision for credit losses on loans		(700	)		4,697			1,979			3,497			2,150			(700	)		4,400			1,979

Total charge-offs		(370	)		(3,442	)		(779	)		(3,564	)		(320	)		(370	)		(690	)		(779	)
Total recoveries		365			698			1,314			814			207			365			469			1,314
Net loan (charge-offs) recoveries		(5	)		(2,744	)		535			(2,750	)		(113	)		(5	)		(221	)		535
Ending balance	$	66,362		$	59,424		$	66,362		$	59,424		$	77,710		$	66,362		$	77,710		$	66,362

Average total loans	$	4,846,013		$	3,844,662		$	4,613,264		$	3,725,871		$	5,286,597		$	4,846,013		$	5,261,879		$	4,613,264

Provision for credit losses on loans to average total loans (1)		-0.01	%		0.12	%		0.04	%		0.09	%		0.04	%		-0.01	%		0.08	%		0.04	%
Net loan (charge-offs) recoveries to average total loans (1)		0.00	%		-0.07	%		0.01	%		-0.07	%		0.00	%		0.00	%		0.00	%		0.01	%
ACL for loans to total loans		1.36	%		1.41	%		1.36	%		1.41	%		1.43	%		1.36	%		1.43	%		1.36	%
ACL for loans to total loans (excluding PPP) (2)		1.37	%		1.55	%		1.37	%		1.55	%		1.44	%		1.37	%		1.44	%		1.37	%
ACL for loans to average total loans		1.37	%		1.55	%		1.44	%		1.59	%		1.47	%		1.37	%		1.48	%		1.44	%

(1) Ratios are not annualized

(2) See the section titled “Non-GAAP Financial Measures” for reconcilement of Non-GAAP to GAAP measures

The ACL for loans totaled ~~$66~~$78 million as of June 30, ~~2022~~2023 compared to ~~$54~~$66 million at ~~December 31, 2021,~~June 30, 2022, representing an ACL to total loans ratio of 1.43% and 1.36% ~~and 1.29%~~ for ~~those periods, respectively.~~the respective periods. The ACL to loans (excluding PPP loans) was 1.44% at June 30, 2023 compared to 1.37% at June 30, ~~2022 compared to 1.34% at December 31, 2021.~~2022. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $7 million at June 30, 2023 and $37 million at June 30, 2022, ~~and $141 million at December 31, 2021,~~ Bancorp did not reserve for potential losses for these loans within the ACL. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

~~Negative provision (excluding acquisition-related activity)~~Provision of $700,000 and $2.5 million was recorded to provision for credit losses on loans expense for the three and six month periods ended June 30, 2022, respectively. While improvement in the unemployment forecast has helped drive reductions of the ACL for loans in recent quarters, the FRB’s forecast of the Seasonally Adjusted National Civilian Unemployment Rate, which is the primary loss driver with Bancorp’s CECL model, deteriorated during the second quarter, presumptively the result of inflation and recession-based fears. This development, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, resulted in increased expense within the CECL model. However, the negative impact of the economic forecast update was more than offset by the release of approximately $3.0 million in specific reserves within the ACL for individual loans related to recently acquired individual loans that ultimately paid off during the second quarter with no loss or charge-off realized by Bancorp, driving the negative provision recorded for the three and six month periods ending June 30, 2022.

~~Table of Contents~~

While net charge off activity minimal for the three month period ended June 30, 2022, net recovery activity of $535,000 was recorded for the six months ended June 30, 2022, driven by a $711,000 recovery of a C&I relationship during the first quarter that was fully charged off in the prior year, serving to increase the ACL on loans.

~~More than offsetting the negative provision for the for the six month period ended June 30, 2022 was credit loss expense recorded for the loan portfolio acquired from CB, which totaled $4.4~~$2.2 million and was recorded entirely in the first quarter of 2022 upon closing of the CB acquisition. Further, the ACL for loans was also increased $10 million as a result of the PCD loan portfolio added through the CB acquisition during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense).

~~Expense of $4.7 million and $3.5~~$4.4 million was recorded to provision for credit losses on loans for the three and six month periods ended June 30, ~~2021,~~2023, respectively. ~~Expense in both periods~~While credit quality remains strong, provision expense for the first half of 2023 was driven by ~~recording $7.4~~strong loan growth, the establishment of a $1.4 million specific reserve for a large C&I relationship, and qualitative factor adjustments associated with the rising rate environment. Further, net charge off activity for the three and six months ended June 30, 2023 totaled $113,000 and $221,000, respectively, serving to slightly reduce the ACL for loans.

Negative provision (excluding acquisition-related activity) of $700,000 and $2.5 million was recorded for the three and six months ended June 30, 2022, respectively, as the release of approximately $3.0 million in specific reserves relating to acquired individual loans, more than offset the increased expense associated with negative economic forecast updates, including deterioration of the unemployment forecast. These loans paid off during the second quarter of 2022 with no loss or charge-off realized by Bancorp. However, credit loss expense recorded in the first quarter for the loan portfolio acquired from CB, which totaled $4.4 million, counteracted the negative provision activity noted above, resulting in total provision for credit losses on loans ~~recorded~~of $2.1 million for the six month ended June 30, 2022.

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In addition to the provision activity noted above for the prior year period, the ACL for loans was also increased $10 million during the ~~second~~first quarter of 2022, as a result of the KBPCD loan portfolio added through the CB acquisition, ~~which more than~~with the corresponding offset ~~the benefits associated with improving unemployment forecasts during the three and six month periods ended June 30, 2021.~~recorded to goodwill (as opposed to provision expense).

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, ~~2021~~2022 and June 30, ~~2022.~~2023. Provision for credit loss expense for off balance sheet credit exposures of $200,000 and $575,000 was recorded for the three and six months ended June 30, 2023, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ~~CB acquisition resulted in a $500,000 increase to the~~ ACL for off balance sheet credit exposures ~~during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense).~~ was $5 million as of June 30, 2023.

Provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $500,000 and $100,000 was ~~also~~ recorded for the three and six ~~month period~~months ended June 30, 2022. The expense recorded for the three months ended June 30, 2022 was driven largely by the addition of new lines of credit ~~and thus increased availability,~~ within the C&D ~~portfolio.~~portfolio, off setting the $400,000 of negative provision recorded during the First quarter of 2022. The ACL for off balance sheet credit exposures ~~ended at $4.1~~was also increased $500,000 during the First quarter of 2022 as a result of the CB acquisition with the offset recorded to goodwill (as opposed to provision expense). The ACL for off balance sheet credit exposures was $4 million as of June 30, ~~2022 compared to $3.5 million as of December 31, 2021.~~2022.

Bancorp’s loan portfolio is well-diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The adequacy of the ACL is monitored on an ongoing basis and it is the opinion of management that the balance of the ACL at June 30, ~~2022~~2023 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

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Non-interest Income

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

2022

2021

$ Variance

% Variance

2022

2021

$ Variance

% Variance

Wealth management and trust services
$ 9,495 $ 6,858 $ 2,637 38
%
$ 17,738 $ 13,106 $ 4,632 35
%
Deposit service charges
2,061 1,233 828 67 3,924 2,177 1,747 80
Debit and credit card income
4,748 3,284 1,464 45 8,867 5,557 3,310 60
Treasury management fees
2,187 1,730 457 26 4,091 3,270 821 25
Mortgage banking income
1,295 1,303 (8 ) (1 ) 2,298 2,747 (449 ) (16 )
Net investment product sales commissions and fees
731 545 186 34 1,338 1,009 329 33
Bank owned life insurance
270 206 64 31 536 367 169 46
Other
1,153 629 524 83 2,351 1,399 952 68

Total non-interest income
$ 21,940 $ 15,788 $ 6,152 39
%
$ 41,143 $ 29,632 $ 11,511 39
%

	Three months ended June 30,												Six months ended June 30,
(dollars in thousands)	2023			2022			$ Variance			% Variance			2023			2022			$ Variance			% Variance

Wealth management and trust services	$	10,146		$	9,495		$	651			7	%	$	19,673		$	17,738		$	1,935			11	%
Deposit service charges		2,201			2,061			140			7			4,350			3,924			426			11
Debit and credit card income		4,712			4,748			(36	)		(1	)		9,194			8,867			327			4
Treasury management fees		2,549			2,187			362			17			4,867			4,091			776			19
Mortgage banking income		1,030			1,295			(265	)		(20	)		2,068			2,298			(230	)		(10	)
Net investment product sales commissions and fees		800			731			69			9			1,554			1,338			216			16
Bank owned life insurance		559			270			289			107			1,108			536			572			107
Gain (loss) on sale of premises and equipment		(225	)		(2	)		(223	)		11,150			(227	)		(28	)		(199	)		711
Other		1,088			1,155			(67	)		(6	)		2,320			2,379			(59	)		(2	)
Total non-interest income	$	22,860		$	21,940		$	920			4	%	$	44,907		$	41,143		$	3,764			9	%

Total non-interest income increased ~~$6.2~~$920,000, or 4%, and $3.8 million, or ~~39%, and $11.5 million, or 39%~~9%, for the three and six month periods ended June 30, ~~2022~~2023 compared to the same ~~periods~~period of ~~2021,~~2022, respectively. Non-interest income comprised ~~27.8%~~27.3% and ~~28.0%~~26.6% of total revenues, defined as net interest income and non-interest income, for the three and six month periods ended June 30, ~~2022~~2023 compared to ~~27.5%~~27.8% and ~~27.2%~~28.0% for the same ~~periods~~period of ~~2021.~~2022. WM&T services comprised ~~43.3%~~44.4% and ~~43.1%~~43.8% of total non-interest income for the three and six month periods ended June 30, ~~2022~~2023 compared to ~~43.4%~~43.3% and ~~44.2%~~43.1% for the same periods of ~~2021. Acquisition-related~~2022. While strong organic growth has been experienced across most non-interest income revenue streams over the past 12 months, acquisition-related activity ~~drove~~accounts for a ~~significant~~large portion of the ~~non-interest income~~ increase for the ~~three and~~ six ~~month periods~~months ended June 30, ~~2022~~2023 compared to the same ~~periods~~period of 2022, as the prior ~~year.~~

~~Table~~year period only included approximately four months of ~~Contents~~

activity related to the CB acquisition.

WM&T Services:

The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased ~~$2.6~~$651,000, or 7%, and $1.9 million, or ~~38%, and $4.6 million, or 35%~~11%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same ~~periods~~period of ~~2021. Significant growth in asset-based income drove the increases for both periods,~~2022, consistent with ~~both acquisition-related activity and organic~~ new business development, ~~which served to offset~~strong equity market ~~declines experienced during~~performance through the first half of ~~2022.~~2023 and to a lesser extent, acquisition-related activity.

Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased ~~$2.7~~$548,000, or 6%, and $1.8 million, or ~~40%, and $4.7 million, or 37%~~10%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021.~~2022. The increase was driven largely by ~~both acquisition-related activity and organic~~ new business ~~development.~~development and the previously mentioned positive returns from the equity markets for the three and six months ended June 30, 2023. Further, the six months ended June 30, 2022 included only four months of activity stemming from the CB acquisition, which added AUM $2.65 billion as of the acquisition date.

A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees ~~decreased $43,000~~increased $104,000 and ~~$66,000~~$158,000 for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022, which was driven mainly by ~~lower~~higher estate ~~fee income~~fees earned.

AUM, stated at market value, totaled $6.98 billion at June 30, 2023 compared with $6.56 billion at June 30, 2022 ~~compared with $4.44 billion at June 30, 2021~~ and ~~$4.80~~$6.59 billion at December 31, ~~2021.~~2022. The ~~large~~ increase in AUM between June 30, ~~2021~~2022 and June 30, ~~2022~~2023 is attributed ~~mainly~~ to ~~AUM of $2.65 billion added through the CB acquisition, as well as~~equity market appreciation and net new business growth ~~and stock market appreciation over~~experienced through the ~~past twelve months.~~first half of 2023.

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Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams.

Detail of WM&T Service Income by Account Type:

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

Investment advisory
$ 3,157 $ 2,936 $ 6,572 $ 5,675
Personal trust
3,919 1,948 6,297 3,626
Personal investment retirement
1,235 1,277 2,874 2,493
Company retirement
325 427 767 799
Foundation and endowment
229 197 490 373
Custody and safekeeping
36 37 100 72
Brokerage and insurance services
- 24 40 44
Other
594 12 598 24

Total WM&T services income
$ 9,495 $ 6,858 $ 17,738 $ 13,106

	Three months ended June 30,				Six months ended June 30,
(in thousands)	2023		2022		2023		2022

Investment advisory	$	3,973	$	3,157	$	7,655	$	6,572
Personal trust		3,653		3,919		7,015		6,297
Personal investment retirement		1,706		1,235		3,386		2,874
Company retirement		378		325		740		767
Foundation and endowment		286		229		569		490
Custody and safekeeping		85		36		171		100
Insurance services		3		8		8		48
Other		62		586		129		590

Total WM&T services income	$	10,146	$	9,495	$	19,673	$	17,738

The preceding table demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are predominantly based on AUM and tailored for individual/company accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, recurring AUM fee structures are in place for investment management, irrevocable ~~trusts,~~and revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. ~~Company~~WM&T also provides company retirement plan services, which can consist of a one-time conversion fee with recurring AUM fees to follow. While there are also fee structures for estate settlements, income received is ~~often~~typically non-recurring in nature. Fee structures are agreed upon at the time of account opening and any subsequent revisions are communicated in writing to the customer. ~~Fees~~WM&T fees earned are not performance-based nor are they based on investment strategy or transactions. Bancorp also earns management fees on in-house investments funds acquired from CB.

~~Table of Contents~~

Assets Under Management by Account Type:

AUM (not included on balance sheet) increased from ~~$4.80~~$6.59 billion at December 31, ~~2021~~2022 to ~~$6.56~~$6.98 billion at June 30, ~~2022~~2023 as follows:

	June 30, 2022						December 31, 2021						June 30, 2023						December 31, 2022
(in thousands)	Managed		Non-managed (1)		Total		Managed		Non-managed (1)		Total		Managed		Non-managed (1)		Total		Managed		Non-managed (1)		Total
Investment advisory	$	1,731,809	$	495,337	$	2,227,146	$	1,919,593	$	34,879	$	1,954,472	$	2,395,338	$	62,548	$	2,457,886	$	2,249,017	$	63,691	$	2,312,708
Personal trust		2,144,943		59,444		2,204,387		939,703		150,221		1,089,924		1,828,645		523,350		2,351,995		1,744,522		474,373		2,218,895
Personal investment retirement		752,067		27,122		779,189		620,312		3,478		623,790		816,995		31,897		848,892		756,126		27,065		783,191
Company retirement		51,363		597,196		648,559		35,234		599,129		634,363		55,903		551,216		607,119		52,891		524,568		577,459
Foundation and endowment		429,233		7,551		436,784		368,572		1,532		370,104		474,137		7,450		481,587		428,018		8,219		436,237

Subtotal	$	5,109,415	$	1,186,650	$	6,296,065	$	3,883,414	$	789,239	$	4,672,653	$	5,571,018	$	1,176,461	$	6,747,479	$	5,230,574	$	1,097,916	$	6,328,490
Custody and safekeeping		—		259,026		259,026		—		128,178		128,178		—		228,822		228,822		—		256,791		256,791

Total	$	5,109,415	$	1,445,676	$	6,555,091	$	3,883,414	$	917,417	$	4,800,831	$	5,571,018	$	1,405,283	$	6,976,301	$	5,230,574	$	1,354,707	$	6,585,281

(1) Non-managed assets represent those for which the WM&T department does not hold investment discretion.

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, approximately ~~78%~~80% and ~~81%~~79%, respectively, of AUM were actively managed. Company retirement plan accounts consist primarily ~~consist~~ of participant-directed assets. The amount of custody and safekeeping accounts are insignificant.

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Managed Trust Assets under Management by Class of Investment:

(in thousands)	June 30, 2022		December 31, 2021		June 30, 2023		December 31, 2022

Interest bearing deposits	$	171,602	$	173,603	$	258,628	$	185,080
Treasury and government agency obligations		62,395		39,736		231,154		176,917
State, county and municipal obligations		195,720		110,795		232,488		201,038
Money market mutual funds		95,224		7,299		96,791		108,751
Equity mutual funds		1,166,903		944,500		1,176,177		1,125,540
Other mutual funds - fixed, balanced and municipal		679,180		612,913		571,407		583,713
Common trust funds and collective investment funds		117,597		-
Other notes and bonds		199,572		171,087		194,164		209,178
Common and preferred stocks		2,052,255		1,681,006		2,341,466		2,180,390
Common trust funds and collective investment funds						116,758		114,458
Real estate mortgages		786		-		571		774
Real estate		62,792		58,344		40,683		57,297
Other miscellaneous assets (1)		305,389		84,131		310,731		287,438

Total managed assets	$	5,109,415	$	3,883,414	$	5,571,018	$	5,230,574

(1)

Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts,and oil and gas rights.

Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations and consist of approximately 63% in equities and 37% in fixed income securities as of both June 30, ~~2022 compared to 68%~~2023 and ~~32% as of~~ December 31, ~~2021.~~2022. This composition has ~~been~~remained relatively consistent from period to ~~period and the WM&T Department holds no proprietary mutual funds.~~period.

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Additional Sources of Non-interest income:

Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, increased ~~$828,000,~~$140,000, or ~~67%~~7%, and ~~$1.7 million,~~$426,000, or ~~80%~~11%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021, mainly as a result of~~2022. While both organic and acquisition-related expansion drove the ~~contribution associated with acquisition-related activity over the past twelve months. Outside of acquisition-related growth,~~increases noted above, an industry-wide decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several years. This trend has been driven by lower check presentment volume, ~~and more recently, elevated deposit levels maintained by customers,~~ which has in turn led to fewer overdrawn accounts in general. Further, Bancorp anticipates that future growth of this revenue stream could be significantly impacted by changing industry ~~practices, as many larger financial institutions have opted to greatly reduce, or completely eliminate, certain deposit service charges, particularly overdraft-related fees.~~practices. Bancorp could be faced with strategic decisions surrounding deposit-related service charges in the future, which could negatively impact the contributions made by this, or similar, revenue streams.

Debit and credit card income consists of interchange revenue, ancillary fees and incentives received from card processors. Debit and credit card revenue ~~increased $1.5 million,~~decreased $36,000, or ~~45%~~1%, and ~~$3.3 million,~~increased $327,000, or ~~60%~~4%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021, as a result of increased transaction volume~~2022. The decrease for the three month period stems largely from interchange rate compression while the increase for the six month period stems from both organic and ~~continued~~acquisition-related expansion, ofwhich served to offset the ~~customer bases, both organically and through acquisition-related activity.~~previously mentioned interchange rate compression. Total debit card income ~~increased $968,000,~~decreased $8,000, or ~~41%~~less than 1%, and ~~$2.4 million,~~increased $189,000, or ~~60%~~3%, and total credit card income ~~increased $496,000,~~decreased $28,000, or ~~54%~~2%, and ~~$955,000,~~increased $138,000, or ~~58%~~5%, for the three and six month periods ended June 30, ~~2022,~~2023, compared the same periods of the prior year. While Bancorp generally expects this revenue stream ~~will continue~~ to grow with ~~the~~continued expansion of the customer base, interchange rate compression and ~~further development of the debit~~any potential fluctuation in business and ~~credit card businesses.~~consumer spend levels could serve as challenges to future growth.

Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased ~~$457,000,~~$362,000, or ~~26%~~17%, and ~~$821,000,~~$776,000, or ~~25%~~19%, for the three and six month periods ~~ending~~ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022, driven by organic and acquisition-related expansion, increased transaction volume and new product sales and customer base expansion. Both organic and acquisition-related sales efforts have led to increases in online services, reporting, ACH origination, remote deposit and fraud mitigation services over the past twelve months.sales. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.

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Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA, FHA and GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue decreased ~~$8,000,~~$265,000, or 1%20%, and ~~$449,000,~~$230,000, or ~~16%~~10%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021. Overall volume has declined~~2022, driven by an overall decline in ~~2022 compared to the prior year as a result of rising~~volumes stemming from higher interest rates and generally low housing ~~inventory. While this has in turn led~~inventory compared to the three and six month period declines noted above, mortgage banking income has benefitted from the addition of a mortgage loan servicing portfolio that services approximately $1.48 billion in mortgage loans as a result of the CB acquisition.prior periods.

Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as ~~quarterly~~ wrap fees earned on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of account assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced by Bancorp’s WM&T Department. Net investment product sales commissions and fees increased ~~$186,000,~~$69,000, or ~~34%~~9%, and ~~$329,000,~~$216,000, or ~~33%~~16%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022, driven by organic and acquisition-related growth, the latter of which included the addition of three financial advisors, and increased trading ~~activity.~~activity associated with general market volatility.

BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. During the third quarter of 2022, Bancorp purchased an additional $30 million of BOLI assets in an effort to diversify investment of excess liquidity, bringing total BOLI assets to $86 million as of June 30, 2023. BOLI income increased ~~$64,000, or 31%,~~$289,000 and ~~$169,000, or 46%,~~$572,000 for the three and six month periods ending June 30, ~~2022~~2023 compared to the same periods of the prior year, which was attributed mainly to the ~~contribution~~additional prior year investment noted above in addition to general market appreciation within the policy plans during the first half of 2023.

The $225,000 loss on sale of premises and equipment recorded for the ~~BOLI portfolio added~~three months ended June 30, 2023 relates to the disposal of assets associated with the sale of Bancorp’s former operations center. During the first quarter of 2023, Bancorp completed the sale of certain acquired properties that overlapped with existing locations, recording a net loss of $2,000 as a result. Prior year activity was the result of fixed asset disposals occurring through the ~~KB acquisition in May~~normal course of ~~2021.~~business.

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Other non-interest income ~~increased $524,000,~~decreased $67,000, or ~~83%~~6%, and ~~$952,000,~~$59,000, or ~~68%~~2%, for the three and six month periods ended June 30, ~~2022~~2023 compared with the same periods of ~~2021.~~2022. The ~~increases were~~decrease was driven largely by the disposition of Bancorp’s partial interest in LFA effective December 31, 2022, which contributed $541,000 and $731,000 of other non-interest income for the three and six month periods ended June 30, 2022. However, largely offsetting the loss of the LFA contribution for the three and six month periods ended June 30, 2023 were positive returns from ~~LFA, a financial advising firm added through the CB acquisition,~~insurance policies outside of Bancorp’s BOLI portfolio and increased income from the insurance ~~captive acquired through the KB acquisition in May of 2021 and an increase in other miscellaneous fee income.~~captive.

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Non-interest Expenses

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

2022

2021

$ Variance

% Variance

2022

2021

$ Variance

% Variance

Compensation
$ 22,204 $ 15,680 $ 6,524 42
%
$ 40,173 $ 28,507 $ 11,666 41
%
Employee benefits
4,429 3,367 1,062 32 8,968 6,628 2,340 35
Net occupancy and equipment
3,663 2,244 1,419 63 6,688 4,289 2,399 56
Technology and communication
3,984 2,670 1,314 49 7,403 5,016 2,387 48
Debit and credit card processing
1,665 976 689 71 3,002 1,681 1,321 79
Marketing and business development
1,445 822 623 76 2,217 1,346 871 65
Postage, printing and supplies
825 460 365 79 1,558 869 689 79
Legal and professional
1,027 666 361 54 1,677 1,128 549 49
FDIC insurance
536 349 187 54 1,181 754 427 57
Amortization of investments in tax credit partnerships
89 231 (142 ) (61 ) 177 262 (85 ) (32 )
Capital and deposit based taxes
582 527 55 10 1,100 985 115 12
Merger expenses
- 18,100 (18,100 ) (100 ) 19,500 18,500 1,000 5
FHLB early termination penalty
- 474 (474 ) (100 ) - 474 (474 ) (100 )
Intangible amortization
1,611 127 1,484 1,169 2,324 204 2,120 1,039
Other
2,615 1,484 1,131 76 5,004 2,507 2,497 100

Total non-interest expenses
$ 44,675 $ 48,177 $ (3,502 ) (7
)%
$ 100,972 $ 73,150 $ 27,822 38
%

	Three months ended June 30,										Six months ended June 30,
(dollars in thousands)	2023		2022		$ Variance			% Variance			2023		2022		$ Variance			% Variance

Compensation	$	22,107	$	22,204	$	(97	)		(0	)%	$	44,003	$	40,173	$	3,830			10	%
Employee benefits		5,061		4,429		632			14			10,114		8,968		1,146			13
Net occupancy and equipment		3,514		3,663		(149	)		(4	)		7,413		6,688		725			11
Technology and communication		4,219		3,984		235			6			8,470		7,403		1,067			14
Debit and credit card processing		1,706		1,665		41			2			3,125		3,002		123			4
Marketing and business development		1,784		1,445		339			23			2,879		2,217		662			30
Postage, printing and supplies		889		825		64			8			1,763		1,558		205			13
Legal and professional		819		1,027		(208	)		(20	)		1,616		1,677		(61	)		(4	)
FDIC insurance		779		536		243			45			1,914		1,181		733			62
Amortization of investments in tax credit partnerships		324		89		235			264			647		177		470			266
Capital and deposit based taxes		607		582		25			4			1,246		1,100		146			13
Merger expenses		-		-		-			0			-		19,500		(19,500	)		(100	)
Intangible amortization		1,172		1,611		(439	)		(27	)		2,352		2,324		28			1
Other		2,819		2,615		204			8			5,572		5,004		568			11
Total non-interest expenses	$	45,800	$	44,675	$	1,125			3	%	$	91,114	$	100,972	$	(9,858	)		(10	)%

Total non-interest expenses ~~decreased $3.5~~increased $1.1 million, or 7%3%, and ~~increased $27.8~~decreased $9.9 million, or ~~38%~~10%, for the three and six month periods ended June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022. The increase for the ~~variances stemming largely from~~three month period is consistent with the ~~timing~~organic and acquisition-related growth experienced over the past year, while the decrease for the six month period was driven by one-time merger expenses associated with completion of the CB ~~and KB acquisitions.~~acquisition during the first quarter of 2022. Compensation and employee benefits comprised ~~59.6%~~59.3% and ~~48.7%~~59.4% of Bancorp’s total non-interest expenses for the three and six month periods ended June 30, ~~2022,~~2023, compared to ~~39.5%~~59.6% and ~~48.0%~~48.7% for the same periods of ~~2021.~~2022. Excluding merger expenses, compensation and employee benefits comprised ~~59.6% and~~ 60.3% for the ~~three and~~ six month ~~periods~~period ended June 30, 2022. The six months ended June 30, 2022 ~~compared to 63.3% and 64.3% for~~only included approximately four months of activity associated with the ~~same periods of 2021.~~CB acquisition.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, decreased $97,000, or less than 1%, and increased ~~$6.5~~$3.8 million, or ~~42%, and $11.7 million, or 41%~~10%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021.~~2022. The ~~increases were~~decrease for the three month period was driven by lower incentive compensation compared to the prior year period, which was nearly offset by increased salary expense associated with FTE growth. The increase for the six month period was attributed ~~largely~~ to growth in full time equivalent employees, ~~as well as~~ annual merit-based salary ~~increases.~~increases and the impact of the first half of 2022 experiencing only four months of acquisition-related activity. Net full time equivalent employees totaled 1,064 at June 30, 2023 compared to 1,040 at December 31, 2022 and 1,018 at June 30, 2022 compared to 820 at December 31, 2021 and 823 at June 30, 2021. The acquisitions of KB in May of 2021 and CB in the first quarter of 2022 resulted in the addition of 372 full time equivalent employees and the correlating increase in compensation expense.2022.

Employee benefits consists of all personnel-related expense not included in compensation, with the most significant items being health insurance, payroll taxes and employee retirement plan contributions. Employee benefits increased $632,000, or 14%, and $1.1 million, or ~~32% and $2.3 million, or 35%~~13%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022, driven ~~primarily~~ by an increase in health insurance claims activity and the overall increase in full time equivalent employees noted above.

~~Table of Contents~~

Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy expense ~~increased $1.4 million,~~decreased $149,000, or ~~63%~~4%, and ~~$2.4 million,~~increased $725,000, or ~~56%~~11%, ~~for~~ the three and six month periods ended June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022. While the decrease for the three month period was attributed mainly to closing certain locations subsequent to last year’s acquisition, the increase for the six month period was driven by the ~~two acquisitions completed over~~acquisition of CB as well as the ~~past twelve months.~~opening of a new operations center in the latter half of 2022. In connection with the CB acquisition, 15 branches were acquired, four of which were closed shortly after acquisition in addition to one existing SYB location, as a result of branch overlap. Further, two operational buildings were also acquired and are currently listed for sale. The KB acquisition in May of 2021 resulted in the addition of 19 branch locations in addition to operational buildings. At June 30, ~~2022,~~2023, Bancorp’s branch network ~~consists~~consisted of 7372 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.

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Technology and communication expenses include computer software ~~amortization,~~usage and licensing fees, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased ~~$1.3~~$235,000, or 6%, and $1.1 million, or ~~49%, and $2.4 million, or 48%~~14%, for the three and six month periods ended June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022, consistent with acquisition-related activity, customer expansion and ~~core system upgrades.~~continued investment in technology.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses typically fluctuate consistent with transaction volumes. Debit and credit card processing expense increased ~~$689,000,~~$41,000, or ~~71%~~2%, and ~~$1.3 million,~~$123,000, or ~~79%~~4%, for the three and six month periods ending June 30, ~~2022~~2023 compared to the same periods of last year, ~~correlating in part with~~driven by the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related ~~growth that served to increase debit and credit card non-interest income.~~growth.

Marketing and business development expenses include all costs associated with promoting Bancorp, including community support, retaining customers and acquiring new business. Marketing and business development expenses increased ~~$623,000,~~$339,000, or ~~76%~~23%, and ~~$871,000,~~$662,000, or ~~65%~~30%, for the three and six month periods ending June 30, ~~2022,~~2023, as compared to the same periods of ~~2021.~~2022. The ~~increases correspond with~~increase was driven largely by the post-pandemic return to in-person client meeting/entertainment in addition to strategic decisions to advertise ~~and promote~~ in Bancorp’s new markets ~~as well as~~and the general expansion of Bancorp’s existing and prospective customer ~~base and a post-pandemic return to in-person client meeting/entertainment.~~base.

Postage, printing and supplies expense increased ~~$365,000,~~$64,000, or ~~79%~~8%, and ~~$689,000,~~$205,000, or ~~79%~~13%, for the three and six month periods ended June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022, consistent with ~~increased customer communication and~~ Bancorp’s expansion ~~tied to acquisition-related activity~~ over the past ~~twelve~~12 months.

Legal and professional fees ~~increased $361,000,~~decreased $208,000, or ~~54%~~20%, and ~~$549,000,~~$61,000, or ~~49%~~4%, for the three and six month periods ended June 30, ~~2022~~2023 compared to the same periods of last year, ~~the increase being~~ attributed mainly to ~~various consulting engagements,~~a decline in collection-related expenses and litigation costs arising through the normal course of business. Legal and professional fees associated with the prior year merger-related activity are captured in merger expenses.

FDIC insurance increased ~~$187,000,~~$243,000, or ~~54%~~45%, and ~~$427,000,~~$733,000, or ~~57%~~62%, for the three and six month periods ended June 30, ~~2022,~~2023, as compared to the same periods of ~~2021, consistent with~~2022, driven primarily by the increased assessment rate instituted by the FDIC, and to a lesser extent, Bancorp’s organic and acquisition-related balance sheet ~~growth for which the insurance is assessed on.~~growth.

Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit, net of related expenses, results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon the timing and magnitude of the underlying investments. Amortization expense associated with these investments ~~decreased $142,000~~increased $235,000 and ~~$85,000~~$470,000 for the three and six month periods ending June 30, ~~2022~~2023 compared to the same periods of last ~~year.~~year, driven by the addition of several tax credit projects closed in the first quarter of 2023.

Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, increased ~~$55,000,~~$25,000, or ~~10%~~4%, and ~~$115,000,~~$146,000, or ~~12%~~13%, for the three and six month periods ended June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022, attributed to ~~both organic and acquisition-related growth.~~Bancorp’s expansion over the past 12 months.

Merger expenses represent non-recurring expenses associated with completion of the CB acquisition and consist primarily of investment banker fees, various compensation-related expenses, legal fees, early termination fees relating to various contracts and system conversion expenses. ~~Merger expenses totaled $0 and $19.5 million for~~During the ~~three and~~ six ~~month periods~~months ended June 30, 2022, ~~compared to $18.1~~$19.5 million ~~and $18.5 million for the same periods~~ of ~~2021.~~

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~~During the three months ended June 30, 2021, an early termination fee of $474,000 was~~merger expenses were recorded in relation to the pre-payment of FHLB advances totaling $14 million prior to their respective contractual maturities. Bancorp chose to payoff these term advances, with a weighted average cost of 2.03%, due to excess liquidity held on the balance sheet and the near-term outlook for low interest rates at the time of payoff. No such activity was recorded during the first half of 2022. Bancorp currently has no FHLB advances outstanding.CB acquisition.

Intangible amortization expense consists of amortization associated with the CDI of acquired deposit portfolios, as well as ~~other intangibles~~an intangible related to customer ~~lists~~list of the WM&T ~~and LFA~~ business ~~lines~~line added through the CB acquisition. The intangibles ~~amortized through this category of non-interest expense~~ are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization expense decreased $439,000, or 27%, and increased $28,000, or 1%, for the three and six months ended June 30, 2023. The decrease for the three month period is attributed to both the accelerated depreciation method for which intangible assets are amortized, as well as the previously mentioned disposal of Bancorp’s partial interest in LFA at the end of 2022, which included writing off the related CLI effective December 31, 2022. The increase for the six month period is attributed to the prior year period only including four months of activity associated with the CB acquisition and the related CDI and CLI assets.

Other non-interest expenses increased $204,000, or 8%, and $568,000, or 11%, for the three and six month periods ended June 30, ~~2022 totaled $1.6 million and $2.3 million~~2023, as compared to ~~$127,000 and $204,000 for~~ the same periods of 2022. The most notable drivers of the ~~prior year,~~increases were increased card reward expense, higher fraud and theft-related expenses and other ancillary expenses tied to Bancorp’s growth over the ~~significant increase stemming from the CB acquisition.~~past 12 months.

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~~Other non-interest expenses increased $1.1 million and $2.5 million~~

Bancorp’s efficiency ratio (FTE) for the three and six month periods ended June 30, 2022, as compared to the same periods of 2021. The most notable drivers of the increases were expenses associated with the addition of the insurance captive as a result of the KB acquisition in May of 2021, increased card reward expense correlating with growth in the debit2023 was 54.57% and ~~credit card business lines, higher fraud-related expenses and other ancillary expenses tied to Bancorp’s general growth over the past twelve months.~~

~~Bancorp’s efficiency ratio (FTE) for the three month period ended June 30, 2022 was 56.42%~~53.84%, while the ratio for the corresponding six month period was 68.53%, the latter reflecting one-time merger-related expenses attributed to the CB acquisition, which were all recorded in the first quarter of 2022. Excluding these non-recurring expenses and amortization of investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 56.31% and 55.18% for the three and six month periods ended June 30, 2022. By comparison,respectively. Bancorp’s efficiency ratio for the three and six month periods ended June 30, ~~2021~~2022 was ~~83.86%~~56.42% and ~~67.01%.~~68.52%, the latter period reflecting one-time merger-related expenses attributed to the CB acquisition, all of which were recorded in the first quarter of 2022. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of premises and equipment and the disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and merger-related expenses. Bancorp’s adjusted efficiency ratio was 54.04% and 53.39% for the three and six ~~months~~month periods ended June 30, ~~2021 was 51.95%~~2023 compared to 56.31% and ~~49.82%.~~55.17% for three and six month periods ended June 30, 2022. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Income Tax Expense

A comparison of income tax expense and ETR follows:

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

2022

2021

$ Variance

% Variance

2022

2021

$ Variance

% Variance

Income before income tax expense
$ 34,449 $ 5,048 $ 29,401 582
%
$ 43,836 $ 33,219 $ 10,617 32
%
Income tax expense
7,547 864 6,683 773 8,992 6,325 2,667 42
Effective tax rate
21.9 % 17.1 %
480 bps
28 20.5 % 19.0 %
150 bps
8

	Three months ended June 30,											Six months ended June 30,
(dollars in thousands)	2023			2022			$ Variance		% Variance			2023			2022			$ Variance		% Variance

Income before income tax expense	$	35,639		$	34,449		$	1,190		3	%	$	72,819		$	43,836		$	28,983		66	%
Income tax expense		7,975			7,547			428		6			16,107			8,992			7,115		79
Effective tax rate		22.4	%		21.9	%	50 bps			2			22.1	%		20.5	%	160 bps			8

Fluctuations in the ETR are primarily attributed to the following:

●

The stock based compensation component of the ETR fluctuates consistent with the level of SAR exercise activity. The ETR was reduced 0.5% for the six months ended June 30, 2023 compared to a reduction of 2.4% for the same period of 2022, consistent with exercise activity, and was the largest driver of the overall ETR decrease for the period noted.

●

Changes in the cash surrender value of life insurance policies can vary widely from period to period, driven largely by changes in the markets. The related impact is inversely correlated with the ETR generally, with cash surrender value declines typically serving to increase the ETR and vice versa. Changes in the cash surrender value of life insurance policies ~~increased~~decreased the ETR ~~1.1%~~0.7% for the six months ended June 30, ~~2022,~~2023, compared to aan increase of 1.1% ~~decrease for~~ the same period of the prior year.

●

Bancorp invests in certain partnerships that yield federal income tax credits. Taken as a whole, the tax benefit of these investments exceeds amortization expense, resulting in a positive impact on net income. The ~~stock based compensation component~~timing and magnitude of ~~the ETR fluctuates consistent with the level of SAR exercise activity.~~these transactions may vary widely from period to period. The ETR ~~was reduced 2.4%~~ for the six ~~month period~~months ended June 30, 2023 and 2022 ~~compared to a reduction of 3.2% for the same period of 2021, as a result of increased levels of exercise~~was reduced by 0.4% and by 0.7%, respectively, by tax credit activity.

●

Tax-exempt interest income earned on loans and investment securities reduced the ETR ~~0.8%~~by 0.5% for the six ~~month period~~months ended June 30, ~~2022~~2023 compared to a reduction of ~~0.3%~~0.8% for the same period of the prior ~~year, the larger reduction in the current year being attributed to tax-exempt loans and securities added through acquisitions over the past twelve months.~~year.

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●

~~As a result of~~Non-deductible merger expenses recorded during the ~~KB acquisition in May of 2021, Bancorp acquired an~~six months ended June 30, 2022 served to increase the ETR 0.3%.

●

Bancorp’s insurance ~~captive. The Captive~~captive provides insurance against certain risks for which insurance may not currently be available or economically feasible to Bancorp and SYB, as well as a group of third-party insurance captives. The tax advantages of the Captive, including the tax-deductible nature of premiums paid to the Captive as well as the tax-exemption for premiums received by the Captive, serve to reduce income tax expense. Related activity reduced the ETR ~~0.4%~~by 0.3% for the six ~~month period~~months ended June 30, ~~2022,~~2023, compared to reduction of ~~0.1%~~0.4% for the same period of ~~2021.~~

●

~~Non-deductible merger expenses recorded during the six month period ended June 30, 2022 served to increase the ETR 0.3%, compared to an increase of 0.9% for the same period of 2021.~~2022.

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Financial Condition – June 30, ~~2022~~2023 Compared to December 31, ~~2021~~2022

Overview

Total assets increased ~~$937~~$236 million, or ~~14%~~3%, to ~~$7.58~~$7.73 billion at June 30, ~~2022~~2023 from ~~$6.65~~$7.50 billion at December 31, ~~2021.~~2022. Total ~~assets of $1.34 billion were added on March 7, 2022~~loans increased $213 million, or 4%, as athe result of near-record quarterly loan growth during the ~~CB acquisition, including loans of $632~~second quarter, while cash and cash equivalents increased $47 million, ~~(net of purchase accounting adjustments)~~or 28%, due to increased FHLB borrowing activity and other assets increased $38 million, or 28%, driven by investment in tax credit partnerships. Partially offsetting this growth was a $75 million, or 5%, decline in total investment securities ~~of $247 million. In addition, goodwill of $67 million was recorded in relation to~~stemming from a scheduled maturity and pay down activity within the ~~transaction. Total loans (excluding loans added through the CB acquisition and the PPP portfolio) grew $182 million, or 5%, between December 31, 2021 and June 30, 2022.~~total portfolio.

Total liabilities increased ~~$863~~$189 million, or ~~15%~~3%, to ~~$6.83~~$6.92 billion at June 30, ~~2022~~2023 from ~~$5.97~~$6.74 billion at December 31, ~~2021. Total liabilities of $1.24 billion were assumed on March 7,~~2022. While total FHLB borrowings increased $350 million compared to December 31, 2022, a $183 million, or 3%, decline in total deposits partially offset this growth, as athe result of inflationary pressures and rising rates, the ~~CB acquisition, including total deposits~~latter of ~~$1.12 billion. Further, SSUAR totaling $66 million and subordinated debentures of $26 million were also assumed as a result of the CB acquisition.~~which has encouraged depositors to seek higher-yielding alternatives.

Stockholders’ equity increased ~~$71~~$48 million, or ~~11%~~6%, to ~~$747~~$808 million at June 30, ~~2022~~2023 from ~~$676~~$760 million at December 31, ~~2021. Stock issued in relation to the CB acquisition, which totaled $134~~2022. Net income of $56.7 million and ~~net income of $34.7~~an $8.1 million ~~were offset by a $79 million negative change~~increase in AOCI ~~and dividends declared during~~associated with changes in the ~~first six months of 2022. The large decline in AOCI from December 31, 2021 to June 30, 2022 was the result of the rising~~ interest rate environment and ~~its~~the corresponding impact on the valuation of the AFS debt securities ~~portfolio.~~portfolio served to grow stockholder’s equity for the period, offset only partially by $17.0 million of dividends declared during the first six months of 2023.

Cash and Cash Equivalents

Cash and cash equivalents ~~declined $387~~increased $47 million, or ~~40%~~28%, ending at ~~$574~~$214 million at June 30, ~~2022~~2023 compared to ~~$961~~$167 million at December 31, ~~2021. The decline stemmed~~2022, which was driven largely ~~from anticipated seasonal~~by increased FHLB borrowing activity offsetting loan funding and deposit ~~run-off associated~~contraction. In addition to utilizing overnight advances with ~~public fund~~the FHLB based on changing levels of liquidity during the period, Bancorp also entered into a $100 million term advance in conjunction with a five-year interest rate swap during the first quarter of 2023 as a way of securing longer-term funding at a more attractive rate. For more information on this interest rate swap, see the footnote titled “Derivative Financial Instruments.”

Cash and cash equivalent growth was partially offset by loan growth of $213 million and $183 million of deposit contraction during the six months ended June 30, 2023. While growth in period end balances ~~and customer tax payment activity. The~~was experienced in comparison to December 31, 2022, average ~~balance of~~ cash and cash equivalents ~~increased $380~~declined $496 million, or 70%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The record levels of liquidity held near the beginning of 2022 have retreated over the past ~~twelve~~12 months, ~~as Bancorp has maintained elevated levels of liquidity stemming from~~driven by the ~~PPP~~strong organic loan growth and deposit ~~growth associated with both acquisition-related activity and the customer base maintaining higher deposit balances in general for~~contraction experienced over the past ~~several~~few quarters.

Investment Securities

Investment securities ~~increased $445~~decreased $75 million, or ~~38%~~5%, to ~~$1.63~~$1.54 billion at June 30, ~~2022~~2023 compared to ~~$1.18~~$1.62 billion at December 31, ~~2021. In addition to securities totaling $247 million being added~~2022, as ~~a result of~~scheduled maturity and pay down activity within the ~~CB acquisition, Bancorp continued to actively invest~~total portfolio was only partially offset by market appreciation within the AFS portfolio stemming from changes in the interest rate environment.

Investment in the securities portfolio was minimal during the ~~first half of 2022 in an effort to deploy excess liquidity by purchasing $545 million of debt securities during~~ six months ended June 30, ~~2022. Partially offsetting~~2023, as Bancorp elected to maintain higher levels of liquidity amidst loan growth ~~associated~~and deposit contraction during the period.

FHLB Stock

FHLB stock holdings increased $16 million, or 150%, to $27 million at June 30, 2023 compared to $11 million at December 31, 2023. The increase was driven by FHLB borrowing activity during the six months ended June 30, 2023, as FHLB members are required to hold certain levels of FHLB stock in relation to the amount of their borrowings. Bancorp’s FHLB stock holdings will fluctuate consistent with ~~purchasing and acquisition-related~~our borrowing activity from period to period.

Loans

Total loans increased $213 million, or 4%, from December 31, 2022 to June 30, 2023. Excluding the PPP portfolio, loans grew $224 million, or 4%, over the same period. Loan growth for the six months ended June 30, 2023 was ~~scheduled maturity/amortization and prepayment activity, as well as market depreciation of approximately $105 million stemming from an upward move~~concentrated in the ~~interest rate environment~~CRE and residential real estate segments, which offset a small decline in the C&I segment, with $176 million of the growth experienced ~~through~~for the six months ended June 30, 2023 occurring during the ~~first half of 2022.~~second quarter.

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A portion of the securities added during the first quarter of 2022, through both acquisition and normal investment activity, were classified as HTM. As of June 30, 2022, Bancorp’s investment security portfolio consisted of AFS and HTM securities as detailed below:

AFS

HTM

Total

(in thousands)

Carrying

Investment

June 30, 2022
Fair Value
Value
Securities

U.S. Treasury and other U.S. Government obligations
$ 115,532 $ 219,574 $ 335,106
Government sponsored enterprise obligations
117,703 27,847 145,550
Mortgage backed securities - government agencies
765,522 238,028 1,003,550
Obligations of states and political subdivisions
135,268 - 135,268
Other
6,014 - 6,014

Total investment securities
$ 1,140,039 $ 485,449 $ 1,625,488

~~Premises and Equipment~~

Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets as well as fair value adjustments associated with purchase accounting. Premises and equipment increased $43 million, or 55%, between December 31, 2021 and June 30, 2022, driven by the CB acquisition. As a result of the acquisition, 15 branches were acquired, four of which were closed shortly acquisition as a result of overlapping with existing locations of the Bank. In addition, two operational buildings were also acquired through CB and are currently listed for sale. Bancorp’s branch network now consists of 73 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio MSAs.

~~Goodwill~~

At June 30 2022, Bancorp had $203 million in goodwill recorded on its balance sheet, including $67 million recorded in association with the March 7, 2022 acquisition of CB. As permitted under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities related to the CB acquisition. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price falling below tangible book value), negative trends in overall financial performance and regulatory action. At September 30, 2021, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the Commercial Banking reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value.

~~Core Deposit and Customer List Intangibles~~

CDIs and CLIs arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As a result of the 2022 CB acquisition, a CDI asset of $13 million was recorded. As a result of the 2021 KB acquisition, a CDI asset of $4 million was recorded. As of June 30, 2022 and December 31, 2021, Bancorp’s CDI assets were $17 million and $6 million, respectively.

CLI assets totaling $14 million were also recorded in association with the CB acquisition. Of this total, $12 million was attributed to CB’s WM&T segment and $2 million related to LFA. No similar assets were recorded in relation to the KB acquisition. As of June 30, 2022, Bancorp’s CLI assets totaled $14 million.

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~~Other Assets and Other Liabilities~~

~~Other assets increased $40 million, or 46%, to $126 million at June 30, 2022. Other liabilities decreased $9 million, or 10%, to $87 million at June 30, 2022.~~

The increase in other assets stems mainly from the addition of $13 million in MSR assets related to the CB acquisition and a $17 million increase in DTAs driven by the significant market depreciation experienced within the AFS debt securities portfolio for the six months ended June 30, 2022 associated with rising interest rates. An increase in the market value of interest rate swap-related assets and further investment in tax credit assets also contributed to the increase, albeit to a lesser extent.

~~The decrease in other liabilities was attributed mainly to the reduction of various accrued liabilities, such as employee incentive compensation and benefits.~~

~~As of June 30, 2022, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.~~

~~Loans~~

~~Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:~~

(dollars in thousands)

June 30, 2022

December 31, 2021

$ Variance

% Variance

Commercial real estate - non-owner occupied
$ 1,397,330 $ 1,128,244 $ 269,086 24 %
Commercial real estate - owner occupied
787,559 678,405 109,154 16 %
Total commercial real estate
2,184,889 1,806,649 378,240 21 %

Commercial and industrial - term
667,338 596,710 70,628 12 %
Commercial and industrial - term - PPP
36,767 140,734 (103,967 ) -74 %
Commercial and industrial - lines of credit
423,066 370,312 52,754 14 %
Total commercial and industrial
1,127,171 1,107,756 19,415 2 %

Residential real estate - owner occupied
533,577 400,695 132,882 33 %
Residential real estate - non-owner occupied
293,852 281,018 12,834 5 %
Total residential real estate
827,429 681,713 145,716 21 %

Construction and land development
372,197 299,206 72,991 24 %
Home equity lines of credit
192,102 138,976 53,126 38 %
Consumer
137,278 104,294 32,984 32 %
Leases
14,611 13,622 989 7 %
Credits cards
21,647 17,087 4,560 27 %
Total loans (1)
$ 4,877,324 $ 4,169,303 $ 708,021 17 %

~~(1) Total loans are presented inclusive of premiums, discounts, and net loan origination fees and costs.~~

Total loans increased $708 million, or 17%, from December 31, 2021 to June 30, 2022, driven by the addition of $630 million in loans related to acquisition-related expansion and strong organic loan growth, which more than offset a $104 million decline in the PPP loan portfolio.

Excluding the loans acquired through the CB acquisition and the PPP portfolio, loan growth of $182 million, or 5%, was experienced between December 31, 2021 and June 30, 2022, driven largely by growth across virtually every loan portfolio segment.

After hitting a pandemic-era low of 36.5% at March 31, 2021, total line of credit utilization has improved significantly, reaching ~~40.5%~~40.1% at June 30, ~~2022,~~2023, led by C&I utilization, which strengthened from 23.9% to ~~31.0%~~29.6% over ~~that~~the same period, respectively. However, line of credit usage has remained below pre-pandemic levels, as customers continue to utilize strong liquidity positions. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability over the past several quarters, but utilization of ~~PPP lending facilities limited utilization for much of 2021 and into 2022, with customers continuing to maintain elevated levels of liquidity amidst current economic uncertainty.~~the new lines has been relatively slow.

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PPP loans of ~~$37~~$7 million ~~($38 million gross of unamortized deferred fees and costs)~~ were outstanding at June 30, ~~2022.~~2023. Bancorp has ~~$1 million~~$123,000 in net unrecognized fees related to the PPP as of June 30, ~~2022,~~2023, which will be recognized immediately once the loans are paid off or forgiven by the SBA. ~~While the~~The timing of forgiveness activity ~~will continue to impact results,~~and the related fee recognition has become ~~less significant~~insignificant, as the balance of the overall PPP portfolio has shrunk. ~~At June 30, 2022, approximately 96% of the dollars originated through the PPP have been forgiven and approximately 97% of the fee income received in relation to the PPP has been recognized.~~

Bancorp’s credit exposure is diversified ~~with secured~~between businesses and ~~unsecured loans to individuals and businesses.~~individuals. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp’s current market areas, which encompass the Louisville, Kentucky MSA, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio MSAs.

Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I and CRE loan portfolio segments with a corresponding liability recorded in other liabilities. At ~~both~~ June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the total participated portion of loans of this nature totaled $4 million and $5 ~~million.~~million, respectively.

The following table presents the maturity distribution and rate sensitivity of the total loan portfolio as of June 30, ~~2022:~~2023:

Maturity

June 30, 2022 (in thousands)
Within one
year

After one
but within
five years

After five
but within
fifteen years

Ater fifteen
years

Total

% of Total

Total Loans

Fixed rate
$ 170,025 $ 1,417,951 $ 1,094,591 $ 754,684 $ 3,437,251 70 %
Variable rate
521,561 510,005 357,886 50,621 1,440,073 30 %
Total
$ 691,586 $ 1,927,956 $ 1,452,477 $ 805,305 $ 4,877,324 100 %

	Maturity
	Within one year		After one but within five years		After five but within fifteen years		Ater fifteen years		Total		% of Total
June 30, 2023 (in thousands)
Fixed rate	$	207,016	$	1,645,484	$	1,191,470	$	854,773	$	3,898,743		72	%
Variable rate		503,686		612,255		364,106		39,819		1,519,866		28	%
Total loans	$	710,702	$	2,257,739	$	1,555,576	$	894,592	$	5,418,609		100	%

In the event where Bancorp structures a loan with a maturity exceeding five years (typically CRE loans), an automatic rate adjustment will typically be set in place at five years from origination date to limit interest rate sensitivity.

Non-performing Loans and Assets

Information summarizing non-performing loans and assets follows:

(dollars in thousands)

June 30, 2022

December 31, 2021

Non-accrual loans
$ 7,827 $ 6,712
Troubled debt restructurings
- 12
Loans past due 90 days or more and still accruing
1,176 684
Total non-performing loans
9,003 7,408

Other real estate owned
7,601 7,212
Total non-performing assets
$ 16,604 $ 14,620

Non-performing loans to total loans
0.18 % 0.18 %
Non-performing loans to total loans (excluding PPP) (1)
0.19 % 0.18 %
Non-performing assets to total assets
0.22 % 0.22 %
ACL for loans to total non-performing loans
737 % 728 %

~~(1) See the section titled~~ “~~Non-GAAP Financial Measures~~” ~~for reconcilement of non-GAAP to GAAP measures.~~

(dollars in thousands)	June 30, 2023			December 31, 2022

Non-accrual loans	$	17,364		$	14,242
Troubled debt restructurings		-			-
Loans past due 90 days or more and still accruing		437			892
Total non-performing loans		17,801			15,134

Other real estate owned		677			677
Total non-performing assets	$	18,478		$	15,811

Non-performing loans to total loans		0.33	%		0.29	%
Non-performing assets to total assets		0.24	%		0.21	%
ACL for loans to total non-performing loans		437	%		486	%

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Non-performing assets as of June 30, 2022 consisted of 164 loans, ranging in individual amounts up to $917,000, and OREO. OREO at June 30, 2022 included four CRE properties and one residential real estate property.

~~The following table presents the recorded investment in non-accrual loans by portfolio:~~

(in thousands)

June 30, 2022

December 31, 2021

Commercial real estate - non-owner occupied
$ 647 $ 720
Commercial real estate - owner occupied
1,593 1,748
Total commercial real estate
2,240 2,468

Commercial and industrial - term
1,023 670
Commercial and industrial - PPP
— —
Commercial and industrial - lines of credit
164 228
Total commercial and industrial
1,187 898

Residential real estate - owner occupied
3,348 1,997
Residential real estate - non-owner occupied
233 293
Total residential real estate
3,581 2,290

Construction and land development
— —
Home equity lines of credit
378 646
Consumer
441 410
Leases
— —
Credit cards
— —
Total non-accrual loans
$ 7,827 $ 6,712

As of June 30, ~~2022,~~2023, non-accrual loans totaled ~~$8 million.~~$17 million compared to $14 million at December 31, 2022. The increase in total non-accrual loans between December 31, ~~2021~~2022 and June 30, ~~2022~~2023 stemmed mainly fromone large C&I relationship being placed on non-accrual status during the first quarter.

Non-performing assets as of June 30, 2023 consisted of 122 loans, ~~added through the CB acquisition.~~ranging in individual amounts up to $6.4 million, and OREO. At June 30, 2023, OREO included two CRE properties and one residential real estate property.

Delinquent Loans

Delinquent loans (consisting of all loans 30 days or more past due) totaled ~~$18~~$9 million and ~~$11~~$17 million at June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. The ~~increase~~decrease between December 31, ~~2021~~2022 and June 30, ~~2022~~2023 was driven mainly by atwo larger CRE relationships that have since become current and another large CRE relationship ~~going past due as well as loans added through~~that paid off during the ~~CB acquisition.~~first quarter. Delinquent loans to total loans were ~~0.37%~~0.16% and ~~0.26%~~0.32% at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~Despite the increase during the first six months of 2022, delinquent loan levels remain low by historical comparison.~~

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Allowance for Credit Losses on Loans

The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled “Summary of Significant Accounting Policies” for discussion of Bancorp’s ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp’s judgment, should be charged-off.

~~The following table reflects activity in the ACL on loans for the three and six months ended June 30, 2022:~~

(in thousands) Beginning
Initial
Allowance
on PCD

Provision for
Credit Losses
Ending
Three Months Ended June 30, 2022

Balance

Loans

on Loans

Charge-offs

Recoveries

Balance

Commercial real estate - non-owner occupied
$ 20,620 $ - $ 101 $ - $ 2 $ 20,723
Commercial real estate - owner occupied
11,326 - (1,464 ) (41 ) 21 9,842
Total commercial real estate
31,946 - (1,363 ) (41 ) 23 30,565

Commercial and industrial - term
11,108 - 1,174 (15 ) 75 12,342
Commercial and industrial - lines of credit
6,508 - (1,508 ) - - 5,000
Total commercial and industrial
17,616 - (334 ) (15 ) 75 17,342

Residential real estate - owner occupied
5,363 - 575 (7 ) 57 5,988
Residential real estate - non-owner occupied
3,361 - (176 ) - 5 3,190
Total residential real estate
8,724 - 399 (7 ) 62 9,178

Construction and land development
5,864 - 422 (72 ) - 6,214
Home equity lines of credit
1,467 - 54 - - 1,521
Consumer
1,049 - 141 (235 ) 158 1,113
Leases
211 - 10 - - 221
Credit cards
190 - (29 ) - 47 208
Total
$ 67,067 $ - $ (700 ) $ (370 ) $ 365 $ 66,362

(in thousands) Beginning
Initial
Allowance
on PCD

Provision for
Credit Losses
Ending
Six Months Ended June 30, 2022

Balance

Loans

on Loans

Charge-offs

Recoveries

Balance

Commercial real estate - non-owner occupied
$ 15,960 $ 3,508 $ 1,242 $ - $ 13 $ 20,723
Commercial real estate - owner occupied
9,595 2,121 (1,876 ) (41 ) 43 9,842
Total commercial real estate
25,555 5,629 (634 ) (41 ) 56 30,565

Commercial and industrial - term (1)
8,577 1,358 1,741 (128 ) 794 12,342
Commercial and industrial - lines of credit
4,802 1,874 (1,640 ) (36 ) - 5,000
Total commercial and industrial
13,379 3,232 101 (164 ) 794 17,342

Residential real estate - owner occupied
4,316 590 1,035 (13 ) 60 5,988
Residential real estate - non-owner occupied
3,677 - (495 ) - 8 3,190
Total residential real estate
7,993 590 540 (13 ) 68 9,178

Construction and land development
4,789 419 1,078 (72 ) - 6,214
Home equity lines of credit
1,044 2 475 - - 1,521
Consumer
772 78 403 (489 ) 349 1,113
Leases
204 - 17 - - 221
Credit cards
162 - (1 ) - 47 208
Total
$ 53,898 $ 9,950 $ 1,979 $ (779 ) $ 1,314 $ 66,362

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~~Table of Contents~~

Bancorp’s ACL for loans was ~~$66~~$78 million as of June 30, ~~2022~~2023 compared to ~~$54~~$74 million as of December 31, ~~2021. The change in the ACL~~2022. Provision expense for loans was driven by a number of competing factors, which resulted in the $12 million, or 23%, increase experienced for the first six months of 2022. Acquisition-related activity was responsible for a total increase to the ACL forcredit losses on loans of ~~$14 million at acquisition date, comprised of a $10 million day one adjustment for specific reserves placed on acquired PCD loans (offset to goodwill) and~~ $4.4 million ~~of provision for credit loss expense on loans related to the remaining acquired non-PCD loan portfolio.~~

Partially offsetting the acquisition-related increases was a net reduction of the ACL for loans of $2 million for the first six months of 2022. While improvement in the unemployment forecast has helped drive reductions of the ACL for loans in recent quarters, the FRB’s forecast of the Seasonally Adjusted National Civilian Unemployment Rate, which is the primary loss driver with Bancorp’s CECL model, deteriorated during the second quarter, presumptively the result of inflation and recession-based fears. This development, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, resulted in increased expense within the CECL model. However, the negative impact of the economic forecast update was more than offset by the release of approximately $3.0 million in specific reserves within the ACL for individual loans related to recently acquired individual loans that ultimately paid off during the second quarter with no loss or charge-off realized by Bancorp, driving the negative provision recorded for the six month period ending June 30, 2022.

~~In addition, net recovery activity of $535,000~~ was recorded for the six months ended June 30, ~~2022,~~2023, driven ~~mainly~~ by ~~a $711,000 recovery~~strong loan growth, the establishment of a $1.4 million specific reserve for a large C&I relationship, ~~during~~and qualitative factor adjustments associated with the ~~first quarter that~~rising rate environment. Net charge-off activity was ~~fully charged off in~~minimal for the ~~prior year, serving to increase the ACL for loans.~~six months ended June 30, 2023.

The ACL for loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions change, Bancorp could experience further adjustments in its required ACL for loans credit loss expense.

The following table sets forth the ACL by category of ~~loan (excluding):~~loan:

	June 30, 2022								December 31, 2021								June 30, 2023								December 31, 2022
(dollars in thousands)	Allocated Allowance		% of Total ACL on loans			ACL to Total Loans (1)			Allocated Allowance		% of Total ACL on loans			ACL to Total Loans (1)			Allocated Allowance		% of Total ACL on loans			ACL for loans to Total Loans (1)			Allocated Allowance		% of Total ACL on loans			ACL for loans to Total Loans (1)

Commercial real estate - non-owner occupied	$	20,723		31	%		1.48	%	$	15,960		30	%		1.41	%	$	21,773		28	%		1.47	%	$	22,641		31	%		1.62	%
Commercial real estate - owner occupied		9,842		15	%		1.25	%		9,595		18	%		1.41	%		11,557		15	%		1.32	%		10,827		15	%		1.30	%
Total commercial real estate		30,565		46	%		1.40	%		25,555		48	%		1.41	%		33,330		43	%		1.42	%		33,468		46	%		1.50	%

Commercial and industrial - term (1)		12,342		19	%		1.85	%		8,577		16	%		1.44	%		14,792		19	%		1.89	%		12,991		17	%		1.70	%
Commercial and industrial - lines of credit		5,000		7	%		1.18	%		4,802		9	%		1.30	%		6,503		9	%		1.47	%		6,389		9	%		1.37	%
Total commercial and industrial		17,342		26	%		1.59	%		13,379		25	%		1.38	%		21,295		28	%		1.74	%		19,380		26	%		1.57	%

Residential real estate - owner occupied		5,988		9	%		1.12	%		4,316		8	%		1.08	%		8,835		11	%		1.33	%		6,717		9	%		1.14	%
Residential real estate - non-owner occupied		3,190		5	%		1.09	%		3,677		7	%		1.31	%		4,169		5	%		1.23	%		3,597		5	%		1.15	%
Total residential real estate		9,178		14	%		1.11	%		7,993		15	%		1.17	%		13,004		16	%		1.30	%		10,314		14	%		1.14	%

Construction and land development		6,214		10	%		1.67	%		4,789		9	%		1.60	%		6,752		9	%		1.50	%		7,186		10	%		1.61	%
Home equity lines of credit		1,521		2	%		0.79	%		1,044		2	%		0.75	%		1,609		2	%		0.79	%		1,613		2	%		0.80	%
Consumer		1,113		2	%		0.81	%		772		1	%		0.74	%		1,285		2	%		0.92	%		1,158		2	%		0.83	%
Leases		221		0	%		1.51	%		204		0	%		1.50	%		205		0	%		1.47	%		201		0	%		1.51	%
Credit cards		208		0	%		0.96	%		162		0	%		0.95	%		230		0	%		1.04	%		211		0	%		1.03	%
Total	$	66,362		100	%		1.37	%	$	53,898		100	%		1.34	%	$	77,710		100	%		1.44	%	$	73,531		100	%		1.42	%

(1) Excludes the PPP loan portfolio, which was not reserved for based on the underlying 100% SBA guarantee.

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The table below details net charge-offs to average loans outstanding by category of loan for the three and six month periods ended June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

	2022								2021								2023								2022
Three months ended June 30,	Net (charge offs)/			Average		Net (charge offs)/ recoveries to average			Net (charge offs)/			Average		Net (charge offs)/ recoveries to average
(dollars in thousands)	recoveries			Loans		loans			recoveries			Loans		loans
Three months ended June 30, (dollars in thousands)																	Net (charge offs)/ recoveries			Average Loans		Net (charge offs)/ recoveries to average loans			Net (charge offs)/ recoveries			Average Loans		Net (charge offs)/ recoveries to average loans

Commercial real estate - non-owner occupied	$	2		$	1,392,742		0.00	%	$	(3,061	)	$	1,003,623		-0.30	%	$	17		$	1,437,661		0.00	%	$	2		$	1,392,742		0.00	%
Commercial real estate - owner occupied		(20	)		792,673		0.00	%		555			554,736		0.10	%		-			855,213		0.00	%		(20	)		792,673		0.00	%
Total commercial real estate		(18	)		2,185,415		0.00	%		(2,506	)		1,558,359		-0.16	%		17			2,292,874		0.00	%		(18	)		2,185,415		0.00	%

Commercial and industrial - term		60			671,539		0.01	%		(98	)		491,094		-0.02	%		(57	)		772,239		-0.01	%		60			671,539		0.01	%
Commercial and industrial - term - PPP		-			48,364		0.00	%		-			510,963		0.00	%		-			8,323		0.00	%		-			48,364		0.00	%
Commercial and industrial - lines of credit		-			417,482		0.00	%		-			275,019		0.00	%		62			433,484		0.01	%		-			417,482		0.00	%
Total commercial and industrial		60			1,137,385		0.01	%		(98	)		1,277,076		-0.01	%		5			1,214,046		0.00	%		60			1,137,385		0.01	%

Residential real estate - owner occupied		50			511,111		0.01	%		(37	)		313,935		-0.01	%		(32	)		637,308		-0.01	%		50			511,111		0.01	%
Residential real estate - non-owner occupied		5			294,487		0.00	%		1			201,100		0.00	%		1			328,374		0.00	%		5			294,487		0.00	%
Total residential real estate		55			805,598		0.01	%		(36	)		515,035		-0.01	%		(31	)		965,682		0.00	%		55			805,598		0.01	%

Construction and land development		(72	)		358,066		-0.02	%		3			276,018		0.00	%		-			441,800		0.00	%		(72	)		358,066		-0.02	%
Home equity lines of credit		-			188,422		0.00	%		1			114,582		0.00	%		-			200,078		0.00	%		-			188,422		0.00	%
Consumer		(77	)		135,776		-0.06	%		(108	)		76,730		-0.14	%		(102	)		136,861		-0.07	%		(77	)		135,776		-0.06	%
Leases		-			14,233		0.00	%		-			13,868		0.00	%		-			13,474		0.00	%		-			14,233		0.00	%
Credit cards		47			21,118		0.22	%		-			12,994		0.00	%		(2	)		21,782		-0.01	%		47			21,118		0.22	%
Total	$	(5	)	$	4,846,013		0.00	%	$	(2,744	)	$	3,844,662		-0.07	%	$	(113	)	$	5,286,597		0.00	%	$	(5	)	$	4,846,013		0.00	%

Six months ended June 30,	Net (charge offs)/			Average		Net (charge offs)/ recoveries to average			Net (charge offs)/			Average		Net (charge offs)/ recoveries to average
(dollars in thousands)	recoveries			Loans		loans			recoveries			Loans		loans
																	2023								2022
Six months ended June 30, (dollars in thousands)																	Net (charge offs)/ recoveries			Average Loans		Net (charge offs)/ recoveries to average loans			Net (charge offs)/ recoveries			Average Loans		Net (charge offs)/ recoveries to average loans

Commercial real estate - non-owner occupied	$	14		$	1,302,604		0.00	%	$	(3,030	)	$	943,644		-0.32	%	$	36		$	1,424,844		0.00	%	$	14		$	1,302,604		0.00	%
Commercial real estate - owner occupied		1			753,414		0.00	%		555			537,304		0.10	%		-			848,716		0.00	%		1			753,414		0.00	%
Total commercial real estate		15			2,056,018		0.00	%		(2,475	)		1,480,948		-0.17	%		36			2,273,560		0.00	%		15			2,056,018		0.00	%

Commercial and industrial - term		666			644,461		0.10	%		(147	)		452,971		-0.03	%		(128	)		770,175		-0.02	%		666			644,461		0.10	%
Commercial and industrial - term - PPP		-			80,070		0.00	%		-			569,068		0.00	%		-			11,746		0.00	%		-			80,070		0.00	%
Commercial and industrial - lines of credit		(36	)		401,126		-0.01	%		-			247,592		0.00	%		149			444,372		0.03	%		(36	)		401,126		-0.01	%
Total commercial and industrial		630			1,125,657		0.06	%		(147	)		1,269,631		-0.01	%		21			1,226,293		0.00	%		630			1,125,657		0.06	%

Residential real estate - owner occupied		47			473,599		0.01	%		(40	)		288,123		-0.01	%		(22	)		622,368		0.00	%		47			473,599		0.01	%
Residential real estate - non-owner occupied		8			289,525		0.00	%		2			180,539		0.00	%		2			323,484		0.00	%		8			289,525		0.00	%
Total residential real estate		55			763,124		0.01	%		(38	)		468,662		-0.01	%		(20	)		945,852		0.00	%		55			763,124		0.01	%

Construction and land development		(72	)		337,927		-0.02	%		3			280,011		0.00	%		-			443,260		0.00	%		(72	)		337,927		-0.02	%
Home equity lines of credit		-			171,691		0.00	%		1			107,803		0.00	%		(12	)		200,370		-0.01	%		-			171,691		0.00	%
Consumer		(140	)		125,097		-0.11	%		(94	)		92,681		-0.10	%		(162	)		137,776		-0.12	%		(140	)		125,097		-0.11	%
Leases		-			14,006		0.00	%		-			14,110		0.00	%		-			13,429		0.00	%		-			14,006		0.00	%
Credit cards		47			19,744		0.24	%		-			12,025		0.00	%		(84	)		21,336		-0.39	%		47			19,744		0.24	%
Total	$	535		$	4,613,264		0.01	%	$	(2,750	)	$	3,725,871		-0.07	%	$	(221	)	$	5,261,876		0.00	%	$	535		$	4,613,264		0.01	%

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While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, ~~2021~~2022 and June 30, ~~2022.~~2023. Provision for credit loss expense for off balance sheet credit exposures of $575,000 was recorded for the six months ended June 30, 2023, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ~~CB acquisition resulted in a $500,000 increase to the~~ ACL for off balance sheet credit exposures ~~during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). Provision for credit loss expense of $100,000~~ was also recorded for the six month period ended June 30, 2022, driven largely by the addition of new lines, and thus increased availability, within the C&D portfolio. ACL for off balance sheet credit exposures stood at $4.1$5.1 million as of June 30, ~~2022~~2023 compared to ~~$3.5~~$4.5 million as of December 31, ~~2021.~~2022.

Premises and Equipment

Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets, as well as fair value adjustments associated with purchase accounting. Premises and equipment experienced minimal fluctuation between December 31, 2022 and June 30, 2023. Bancorp’s branch network currently consists of 72 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets.

Premises held for sale totaling $3 million was recorded on Bancorp’s consolidated balance sheets as of June 30, 2023, which consists of three vacant parcels of land, one branch acquired from CB, one legacy SYB branch and an administrative building acquired from KB.

Goodwill

At June 30, 2023, Bancorp had $194 million in goodwill recorded on its balance sheet. Goodwill of $67 million was initially recorded in relation to the March 7, 2022 acquisition of CB, $8.5 million of which was subsequently written off as a result of Bancorp selling its partial interest in LFA effective December 31, 2022.

Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price declining below tangible book value), negative trends in overall financial performance and regulatory actions. At September 30, 2022, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting units exceeded their fair value.

Core Deposit and Customer List Intangibles

CDIs and CLIs arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As of June 30, 2023 and December 31, 2022, Bancorp’s CDI assets totaled $13.4 million and $15.0 million, respectively. A CDI asset of $13 million was recorded during the first quarter of 2022 as a result of the CB acquisition.

As of June 30, 2023 and December 31, 2022, Bancorp’s CLI assets were $9.2 million and $10.0 million, respectively, and are attributed entirely to the WM&T segment acquired from CB. CLI assets totaling $14 million were recorded in association with the CB acquisition during the first quarter of 2022. However, as a result of Bancorp’s disposition of its partial interest in LFA effective December 31, 2022, the $2 million CLI associated with that business was written off and was included in the loss recorded in relation to the disposition in 2022.

Other Assets and Other Liabilities

Other assets increased $38 million, or 28%, to $173 million between December 31, 2022 and June 30, 2023. Other liabilities increased $13 million, or 10%, to $138 million over the same period.

The increase in other assets stemmed mainly from Bancorp’s investment in credit partnerships. As of June 30, 2023, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.

The increase in other liabilities was attributed largely to the accrual of future tax credit investment obligations, which outpaced a reduction in various accrued liabilities, such as employee incentive compensation and benefits.

Table of Contents

Deposits

(dollars in thousands)

June 30, 2022

December 31, 2021

$ Variance

% Variance

Non-interest bearing demand deposits
$ 2,121,304 $ 1,755,754 $ 365,550 21 %

Interest bearing deposits:

Interest bearing demand
2,184,579 2,131,928 52,651 2 %
Savings
571,856 415,258 156,598 38 %
Money market
1,167,538 1,050,352 117,186 11 %

Time deposits of $250 thousand or more
95,958 89,745 6,213 7 %
Other time deposits
407,895 344,477 63,418 18 %
Total time deposits
503,853 434,222 69,631 16 %

Total interest bearing deposits
4,427,826 4,031,760 396,066 10 %

Total deposits (1)
$ 6,549,130 $ 5,787,514 $ 761,616 13 %

~~(1)~~

~~Includes $10 million and $5 million in brokered deposits as of June 30, 2022 and December 31, 2021, respectively.~~

Total deposits ~~increased $762~~decreased $183 million, or ~~13%~~3%, from December 31, ~~2021~~2022 to June 30, ~~2022. At acquisition date,~~2023, driven almost entirely by a $184 million decline in non-interest bearing deposits, as customers have shifted into higher-yielding alternatives amidst rising rates and economic uncertainty. While Bancorp has not been immune to the resulting industry-wide deposit run-off experienced over the past several quarters, fallout within the customer base has not been experienced, as deposit rate increases and time deposit promotions have provided attractive alternatives for customers in addition to Bancorp’s ability to offer alternative investment options through the WM&T and retail brokerage business lines. Further, a portion of the decrease in deposits experienced during the first half of 2023 was attributed in large part to typical seasonal public funds runoff. However, deposit pricing pressure/competition has been intense as a result of rising rates and Bancorp expects it will continue to place pressure on NIM through the second half of 2023.

As a result of this activity, the rates paid by Bancorp on deposits has increased and the deposit base itself has shifted to a more interest-bearing mix over the past several quarters. The cost of interest-bearing deposits rose to 1.39% for the six months ended June 30, 2023 compared to 0.14% for the same period of the prior year, with the cost of total deposits (including non-interest deposits) rising to 0.98% from 0.09% for the same periods. Total average deposit balances experienced an $114 million increase for the six months ended June 30, 2023 compared to the same period of 2022, as deposits totaling $1.12 billion were assumed as a result of the CB ~~acquisition. Excluding the deposits acquired through the CB~~ acquisition ~~deposits decreased $358 million, or 6%,~~ during the first ~~six months~~quarter of ~~2022, attributed mainly to anticipated seasonal deposit run-off and time deposit maturities.~~the prior year.

Securities Sold Under Agreements to Repurchase

SSUARs increased $5 million, or 4%, between December 31, 2022 and June 30, 2023, consistent with interest-bearing deposit growth. SSUAR totaling $66 million were assumed in relation to the CB acquisition during the first quarter of 2022.

SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.

~~Information regarding SSUAR follows:~~

(dollars in thousands)

June 30, 2022

December 31, 2021

Outstanding balance at end of period
$ 161,512 $ 75,466
Weighted average interest rate at end of period
0.44
%
0.04
%

Three months ended

Six months ended

June 30,

June 30,

(dollars in thousands)

2022

2021

2022

2021

Average outstanding balance during the period
$ 140,169 $ 55,673 $ 115,761 $ 51,330
Average interest rate during the period
0.16
%
0.04
%
0.13
%
0.04
%
Maximum outstanding at any month end during the period
$ 161,512 $ 63,942 $ 161,512 $ 63,942

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SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the ~~Bank’s~~Bancorp’s control. ~~The majority of SSUARs are indexed to immediately repricing indices such as the FFTR.~~

~~SSUARs~~Federal Funds Purchased

FFP and other short-term borrowing balances increased ~~$86~~$3 million, or 32%, between December 31, ~~2021~~2022 and June 30, ~~2022, as SSUAR totaling $66 million were assumed as part~~2023. At June 30, 2023, FFP related mainly to excess liquidity held by downstream correspondent bank customers of ~~the CB acquisition. The remaining fluctuation in SSUAR is consistent with the general trend of customers maintaining elevated deposit balances over the past several quarters.~~

Bancorp.

Subordinated ~~debentures~~Debentures

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of June 30, ~~2022,~~2023, subordinated notes added through the CB acquisition totaled ~~$26~~$27 million.

FHLB Advances

FHLB advances outstanding at June 30, 2023 totaled $400 million. These borrowings consisted of a $300 million cash management advance with an overnight maturity utilized for short-term liquidity purposes and a $100 million three-month rolling advance related to a five-year interest rate swap (cash flow hedge) that was entered into during the quarter in an effort to secure longer-term funding at a more attractive rate. For more information related to the interest rate swap noted above, see the footnote titled, “Derivative Financial Instruments.”

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Liquidity

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of those funds. Liquidity is provided by short-term assets that can be converted to cash, AFS debt securities, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.

Bancorp’s Asset/Liability Committee is comprised of senior management and has direct oversight responsibility for Bancorp’s liquidity position and profile. A combination of reports provided to management details internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, and exposure to contingent draws on Bancorp’s liquidity.

Bancorp’s most liquid assets are comprised of cash and due from banks, FFS and AFS debt securities. FFS and interest bearing deposits totaled ~~$485~~$103 million and ~~$899~~$85 million at June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The ~~decrease~~increase experienced for the first six months of ~~2022~~2023 is attributed mainly to ~~significant investment~~the increased in ~~the securities portfolio, strong organic loan growth and seasonal deposit runoff.~~FHLB borrowing activity. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are used for general daily liquidity purposes.

The fair value of the AFS debt security portfolio was ~~$1.14~~$1.10 billion and ~~$1.18~~$1.14 billion at June 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively. The ~~lack of growth~~decrease in AFS debt security portfolio for the first six months of ~~2022~~2023 is attributed to ~~both classifying securities purchased~~scheduled maturities and ~~acquired~~normal pay down activity within the portfolio, which was partially offset by market value appreciation during the ~~first quarter as HTM for general capital purposes, as well as significant market depreciation experienced on the AFS portfolio since December 31, 2021 due to rising rates.~~period. The investment portfolio (HTM and AFS) includes ~~scheduled maturities of $26 million and~~total cash flows on amortizing debt securities of approximately ~~$206~~$266 million (based on assumed prepayment speeds as of June 30, ~~2022)~~2023) expected over the next ~~twelve months.~~12 months, including $85 million of contractual maturities. Combined with FFS and interest bearing deposits from banks, AFS debt securities offer substantial resources to meet either loan growth or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public funds, cash balances of certain WM&T accounts and SSUAR. At June 30, ~~2022,~~2023, total investment securities pledged for these purposes comprised ~~64%~~47% of the debt securities portfolio, leaving approximately ~~$586~~$825 million of unpledged debt securities.

Bancorp’s deposit base consists mainly of core deposits, defined as time deposits less than or equal to $250,000, demand, savings, and money market deposit accounts, and excludes public funds and brokered deposits. At June 30, ~~2022,~~2023, such deposits totaled ~~$5.76~~$5.50 billion and represented ~~88%~~89% of Bancorp’s total deposits, as compared with ~~$5.05~~$5.60 billion, or ~~87%~~88% of total deposits at December 31, ~~2021.~~2022. Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not place undue pressure on liquidity. However, ~~many of Bancorp’s individual depositors are~~given the intense, industry-wide deposit pricing pressure that is currently ~~maintaining historically high balances. These excess balances~~being experienced, deposits may generally be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.

As of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Bancorp held brokered deposits totaling ~~$10~~$2.3 million and ~~$5 million,~~$599,000, respectively, ~~all~~the majority of which is attributed to deposits added through ~~the~~ acquisition-related activity ~~over the past twelve months.~~in 2022 and 2021.

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Included in total deposit balances at June 30, ~~2022~~2023 are ~~$628~~$538 million in public funds generally comprised of accounts with local government agencies and public school districts in the markets in which Bancorp operates. At December 31, ~~2021,~~2022, public funds deposits totaled ~~$645~~$692 million, the ~~increase~~decrease experienced during the first six months of ~~2022 being~~2023 was attributed ~~mainly~~ to ~~relationships added through the CB acquisition.~~typical seasonal deposit run-off.

Bancorp is a member of the FHLB of Cincinnati. As a member of the FHLB, Bancorp has access to credit products of the FHLB. Bancorp views these borrowings as a potential low cost alternative to brokered deposits. At June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, available credit from the FHLB totaled ~~$1.22~~$1.08 billion and ~~$1.00~~$1.36 billion, ~~respectively. Additionally,~~respectively, the decline during this period being attributed to increased utilization of FHLB borrowings. Bancorp also had unsecured ~~available~~ FFP lines with correspondent banks totaling ~~$100 million and~~ $80 million at both June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~In addition, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line at the holding company.~~

During the normal course of business, Bancorp enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through Bancorp’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of Bancorp’s liquidity.

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Bancorp’s principal source of cash is dividends paid to it as the sole shareholder of the Bank. As discussed in the Footnote titled “Commitments and Contingent Liabilities,” as of January 1st of any year, the Bank may pay dividends in an amount equal to the Bank’s net income of the prior two years less any dividends paid for the same two years. At June 30, ~~2022,~~2023, the Bank could pay an amount equal to ~~$43~~$112 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank.

Sources and Uses of Cash

Cash flow is provided primarily through financing activities of Bancorp, which include raising deposits and borrowing funds from institutional sources such as advances from FHLB and FFP, as well as scheduled loan repayments and cash flows from debt securities. These funds are primarily used to facilitate investment activities of Bancorp, which include making loans and purchasing securities for the investment portfolio. Another important source of cash is net income of the Bank from operating activities. For further detail regarding the sources and uses of cash, see the “Consolidated Statements of Cash Flows” in Bancorp’s consolidated financial statements.

Commitments

In the normal course of business, Bancorp is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in Bancorp’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.

Bancorp provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Unused loan commitments increased ~~$467~~$232 million, or 11%, as of June 30, ~~2022~~2023 compared to December 31, ~~2021, the increase being driven by both the CB acquisition~~2022, due to a combination of new line production and ~~new lines of credit.~~lower utilization. Total average line of credit utilization declined to ~~40.5%~~40.1% as of June 30, ~~2022~~2023 compared to ~~41.2%~~42.3% at December 31, ~~2021,~~2022, however, both represent significant improvement from the pandemic-era low of 36.5% experienced at March 31, 2021. C&I line of credit utilization was 29.6% at June 30, 2023 compared to 33.1% at December 31, 2022 and 31.0% at June 30, ~~2022 compared to 31.8% at December 31, 2021 and 27.4% at June 30, 2021.~~2022.

Commitments to extend credit are agreements to lend to customers as long as collateral is available as agreed upon and there is no violation of any condition established in the contracts. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

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The ACL for off balance sheet credit exposures, which is separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, ~~stood at $4.1~~was $5.1 million and ~~$3.5~~$4.5 million as of June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The CB acquisition resulted in a $500,000 increase to the ACL for off balance sheet credit exposures, with the corresponding offset recorded to goodwill (as opposed to provision expense). In addition, $100,000Provision expense of ~~provision expense~~$575,000 was recorded for the six month period ended June 30, ~~2022,~~2023, driven ~~largely~~ by a decline in C&I utilization and increased availability stemming from the addition of new lines ~~and thus increased availability, within the C&D portfolio.~~of credit.

Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.

In addition to owned banking facilities, Bancorp has entered into long-term leasing arrangements for certain ~~branch~~ facilities. Bancorp also has required future payments for a non-qualified defined benefit retirement plan, TPS and the maturity of time deposits.

See the footnote titled “Commitments and Contingent Liabilities” for additional detail.

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Capital

At June 30, ~~2022,~~2023, stockholders’ equity totaled ~~$747~~$808 million, representing an increase of ~~$71~~$48 million, or ~~11%~~6%, compared to December 31, ~~2021.~~2022. The increase for the ~~first~~ six months ~~of 2022~~ended June 30, 2023 was attributed mainly to ~~stock issued in relation to the CB acquisition, which totaled $134 million. Further,~~ net income of ~~$34.7~~$56.7 million ~~was offset by a $79~~and an $8 million ~~negative~~positive change in AOCI, ~~and~~offset only partially by $17 million of dividends ~~declared during the first six months of 2022.~~declared. AOCI consists of net unrealized gains or losses on AFS debt securities and a minimum pension liability, each net of income taxes. The ~~large decline~~changes in AOCI from December 31, ~~2021~~2022 to June 30, ~~2022 was~~2023 were the result of changes in the ~~rising~~ interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. ~~These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses.~~ See the “Consolidated Statement of Changes in Stockholders’ Equity” for further detail of changes in equity.

~~As a result of the large interest-rate driven changes in AOCI noted above, as well as acquisition-related growth,~~ Bancorp’s TCE ratio and tangible book value per share, both non-GAAP disclosures, experienced ~~declines~~improvement between December 31, ~~2021~~2022 and June 30, ~~2022.~~2023, which stemmed largely from recording net income of $56.7 million and an $8 million positive change in AOCI for the six months ended June 30, 2023. TCE was ~~7.00%~~7.87% at June 30, ~~2022~~2023 compared to ~~8.22%~~7.44% at December 31, ~~2021,~~2022, while tangible book value per share was ~~$17.59~~$20.17 at June 30, ~~2022~~2023 compared to ~~$20.09~~$18.50 at December 31, ~~2021.~~2022. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

In May ~~2021,~~2023, Bancorp’s Board of Directors extended its share repurchase program authorizing the repurchase of up to 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. The plan, which will expire in May ~~2023~~2025 unless otherwise extended or completed at an earlier date, does not obligate Bancorp to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. Based on economic developments over the past year and the increased importance of capital preservation, no shares were repurchased in ~~2021,~~2022, nor the first six months of ~~2022.~~2023. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan.

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Bank holding companies and their subsidiary banks are required by regulators to meet risk-based capital standards. These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The value of both balance sheet and off-balance sheet items are adjusted to reflect credit risks. See the Footnote titled “Regulatory Matters” for additional detail regarding regulatory capital requirements, as well as capital ratios of Bancorp and the Bank. The Bank exceeds regulatory capital ratios required to be well-capitalized. Regulatory framework does not define well capitalized for holding companies. Management considers the effects of growth on capital ratios as it contemplates plans for expansion.

~~The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital ratios:~~

June 30, 2022

December 31, 2021

Total risk-based capital(1)

Consolidated
12.27
%
12.79
%
Bank
11.63 12.42

Common equity tier 1 risk-based capital(1)

Consolidated
10.81 11.94
Bank
10.62 11.56

Tier 1 risk-based capital(1)

Consolidated
11.26 11.94
Bank
10.62 11.56

Leverage(2)

Consolidated
8.58 8.86
Bank
8.06 8.57

~~(1)~~ Under regulatory risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet credit exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. Weighted values are added together, resulting in Bancorp's total risk-weighted assets. These ratios are computed in relation to average assets.

~~(2)~~ ~~Ratio is computed in relation to average assets.~~

Capital ratios as of June 30, ~~2022 decreased~~2023 increased compared December 31, ~~2021~~2022, largely as a result of ~~substantial average asset and~~modest risk-weighted asset growth ~~driven by both organic~~ and ~~acquisition-related activity. While pressure was placed on risk-based capital and leverage ratios due to this growth,~~strong first quarter operating results. Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized for prompt corrective action requirements, a bank must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0% Tier 1 Risk-Based Capital ratio, 10.0% Total Risk-Based Capital ratio and 5.0% Tier 1 Leverage ratio.

Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At June 30, ~~2022,~~2023, the adequately-capitalized minimums, including the capital conservation buffer, were a ~~6.0%~~7.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio.

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of June 30, ~~2022,~~2023, subordinated notes added through the CB acquisition totaled $26 million. Further, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line of the holding company as of June 30, 2022, which was added during the first quarter to allow capital flexibility at the Bank level.

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As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “Financial Instruments – Credit Losses,” or CECL, which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were ~~declared to be~~ delayed for two years. After two years, the cumulative amount of the transition adjustments ~~will become~~became fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. 2023 represents year four of the transition period for Bancorp. Had Bancorp not elected to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would still have exceeded the well-capitalized level.

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Non-GAAP Financial Measures

The following table provides a reconciliation of total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity (TCE), a non-GAAP disclosure. Bancorp provides the TCE per share, a non-GAAP measure, in addition to those defined by banking regulators, based on its widespread use by investors as a means to evaluate capital adequacy:

(dollars in thousands, except per share data)

June 30, 2022

December 31, 2021

Total stockholders' equity - GAAP (a)
$ 747,131 $ 675,869
Less: Goodwill
(202,524 ) (135,830 )
Less: Core deposit and other intangibles
(30,357 ) (5,596 )
Tangible common equity - Non-GAAP (c)
$ 514,250 $ 534,443

Total assets - GAAP (b)
$ 7,583,105 $ 6,646,025
Less: Goodwill
(202,524 ) (135,830 )
Less: Core deposit and other intangibles
(30,357 ) (5,596 )
Tangible assets - Non-GAAP (d)
$ 7,350,224 $ 6,504,599

Total stockholders' equity to total assets - GAAP (a/b)
9.85 % 10.17 %
Tangible common equity to tangible assets - Non-GAAP (c/d)
7.00 % 8.22 %

Total shares outstanding (e)
29,243 26,596

Book value per share - GAAP (a/e)
$ 25.55 $ 25.41
Tangible common equity per share - Non-GAAP (c/e)
17.59 20.09

The general decline between December 31, 2021 and June 30, 2022 for the ratios displayed in the table above is attributed mainly to unrealized losses within the AFS debt securities portfolio stemming from the significant increase in interest rates during the six months of 2022, which drove a $79 million decline in AOCI and as a result, a decline in stockholders equity. Further, acquisition-related growth served to increase goodwill and total assets, which also contributed to lower ratios.

(dollars in thousands, except per share data)	June 30, 2023			December 31, 2022

Total stockholders' equity - GAAP (a)	$	808,082		$	760,432
Less: Goodwill		(194,074	)		(194,074	)
Less: Core deposit and other intangibles		(22,638	)		(24,990	)
Tangible common equity - Non-GAAP (c)	$	591,370		$	541,368

Total assets - GAAP (b)	$	7,732,552		$	7,496,261
Less: Goodwill		(194,074	)		(194,074	)
Less: Core deposit and other intangibles		(22,638	)		(24,990	)
Tangible assets - Non-GAAP (d)	$	7,515,840		$	7,277,197

Total stockholders' equity to total assets - GAAP (a/b)		10.45	%		10.14	%
Tangible common equity to tangible assets - Non-GAAP (c/d)		7.87	%		7.44	%

Total shares outstanding (e)		29,323			29,259

Book value per share - GAAP (a/e)	$	27.56		$	25.99
Tangible common equity per share - Non-GAAP (c/e)		20.17			18.50

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The ACL for loans to total non-PPP loans represents the ACL for loans, divided by total loans less PPP loans. Non-performing loans to total non-PPP loans represents non-performing loans, divided by total loans less PPP loans. Delinquent loans to total non-PPP loans represents delinquent loans (consisting of all loans 30 days or more past due), divided by total loans less PPP loans. Bancorp believes these non-GAAP disclosures are important because they provide comparable ratios after eliminating PPP loans, which are fully guaranteed by the SBA and have not been allocated for within the ACL and are not at risk of non-performance.

(dollars in thousands)	June 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022

Total loans - GAAP (a)	$	4,877,324		$	4,169,303		$	5,418,609		$	5,205,918
Less: PPP loans		(36,767	)		(140,734	)		(7,088	)		(18,593	)
Total non-PPP loans - Non-GAAP (b)	$	4,840,557		$	4,028,569		$	5,411,521		$	5,187,325

ACL for loans (c)	$	66,362		$	53,898		$	77,710		$	73,531
Non-performing loans (d)		9,003			7,408			17,801			15,134
Delinquent loans (e)		17,973			11,036			8,790			16,863

ACL for loans to total loans - GAAP (c/a)		1.36	%		1.29	%		1.43	%		1.41	%
ACL for loans to total loans - Non-GAAP (c/b)		1.37	%		1.34	%		1.44	%		1.42	%

Non-performing loans to total loans - GAAP (d/a)		0.18	%		0.18	%		0.33	%		0.29	%
Non-performing loans to total loans - Non-GAAP (d/b)		0.19	%		0.18	%		0.33	%		0.29	%

Delinquent loans to total loans - GAAP (e/a)		0.37	%		0.26	%		0.16	%		0.32	%
Delinquent loans to total loans - Non-GAAP (e/b)		0.37	%		0.27	%		0.16	%		0.33	%

The efficiency ratio, a non-GAAP measure, equals total non-interest expenses divided by the sum of net interest income FTE and non-interest income. ~~The ratio excludes net gains (losses) on sales, calls, and impairment of investment securities, if applicable.~~ In addition to the efficiency ratio presented, Bancorp considers an adjusted efficiency ratio. Bancorp believes it is important because it provides a comparable ratio after eliminating net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of premises and equipment and disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses.

	Three months ended June 30,						Six months ended June 30,						Three months ended June 30,						Six months ended June 30,
(dollars in thousands)	2022			2021			2022			2021			2023			2022			2023			2022

Total non-interest expenses - GAAP (a)	$	44,675		$	48,177		$	100,972		$	73,150
Total non-interest expenses (a)													$	45,800		$	44,675		$	91,114		$	100,972
Less: Non-recurring merger expenses		—			(18,100	)		(19,500	)		(18,500	)		—			—			—			(19,500	)
Less: Amortization of investments in tax credit partnerships		(89	)		(231	)		(177	)		(262	)		(324	)		(89	)		(647	)		(177	)
Total non-interest expenses - Non-GAAP (c)	$	44,586		$	29,846		$	81,295		$	54,388		$	45,476		$	44,586		$	90,467		$	81,295

Total net interest income, FTE	$	57,244		$	41,661		$	106,189		$	79,535		$	61,074		$	57,244		$	124,319		$	106,189
Total non-interest income		21,940			15,788			41,143			29,632			22,860			21,940			44,907			41,143
Total revenue - Non-GAAP (b)														83,934			79,184			169,226			147,332
Less: Gain/loss on sale of premises and equipment														225			2			227			28
Less: Gain/loss on sale of securities		—			—			—			—			—			—			—			—
Total revenue - GAAP (b)	$	79,184		$	57,449		$	147,332		$	109,167
Total adjusted revenue - Non-GAAP (d)													$	84,159		$	79,186		$	169,453		$	147,360

Efficiency ratio - GAAP (a/b)		56.42	%		83.86	%		68.53	%		67.01	%
Efficiency ratio - Non-GAAP (c/b)		56.31	%		51.95	%		55.18	%		49.82	%
Efficiency ratio - Non-GAAP (a/b)														54.57	%		56.42	%		53.84	%		68.52	%
Adjusted efficiency ratio - Non-GAAP (c/d)														54.04	%		56.31	%		53.39	%		55.17	%

~~114~~91

Table of Contents

Item 3. ~~Quantitative and Qualitative Disclosures about Market Risk.~~

Quantitative and Qualitative Disclosures about Market Risk.

Information required by this item is included in Part I Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 4.~~Controls and Procedures.~~

Controls and Procedures.

As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, Inc.’s management, with the participation of its CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s CEO and CFO concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.~~Legal Proceedings.~~

Legal Proceedings.

Bancorp and the Bank are defendants in various legal proceedings that arise in the ordinary course of business. There is no such proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Bancorp or the Bank.

~~115~~92

Table of Contents

Item 2.~~Unregistered Sales of Equity Securities and Use of Proceeds.~~

Unregistered Sales of Equity Securities and Use of Proceeds.

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended June 30, ~~2022.~~2023.

	Total number of shares purchased(1)		Average price paid per share			Total number of shares purchased as part of publicly announced plans or programs		Average price paid per share		Maximum number of shares that may yet be purchased under the plans or programs		Total number of shares purchased(1)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Average price paid per share		Maximum number of shares that may yet be purchased under the plans or programs

April 1 - April 30		2,061	$	42.81			—	$	—				529	$	56.08		—	$	—
May 1 - May 31		9,440		54.73			—		—				950		53.64		—		—
June 1 - June 30		7,406		60.32			—		—				—		—		—		—
					��
Total		18,907	$	55.62			—	$	—		741,196		1,479	$	54.51		—	$	—		741,196

(1)

Shares repurchased during the three-month period ended June 30, ~~2022~~2023 represent shares withheld to pay taxes due on the exercise of equity grants.

Effective May 22, 2019, Bancorp’s Board of Directors approved a share repurchase program authorizing the repurchase of 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. Stock repurchases are expected to be made from time to time on the open market or in privately negotiated transactions, subject to applicable securities laws. The plan, which was extended in May ~~2021~~2023 and will expire in May ~~2023~~2025 unless otherwise extended or completed at an earlier date, does not obligate the Company to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. No shares were repurchased in ~~2021,~~2022, nor through the first ~~six~~three months of ~~2022. Management does not intend to resume repurchasing in the near-term.~~2023. Approximately 741,000 shares remain eligible for repurchase.

There were no equity securities of the registrant sold without registration during the quarter covered by this report.

Item 6.~~Exhibits.~~

Exhibits.

The following exhibits are filed or furnished as a part of this report:

Exhibit
Number	Description of exhibit
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act

32	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 902 of the Sarbanes-Oxley Act

101	The following materials from Stock Yards Bancorp Inc.’s Form 10-Q Report for the quarterly period ended June 30, ~~2022~~2023 formatted in inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

104	The cover page from Stock Yards Bancorp Inc.’s Form 10-Q Report for the quarterly period ended June 30, ~~2022~~2023 formatted in inline XBRL and contained in Exhibit 101.

~~116~~93

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STOCK YARDS BANCORP, INC. (Registrant)




Date: August ~~5, 2022~~4, 2023	By:	/s/ James A. Hillebrand James A. Hillebrand Chairman and CEO (Principal Executive Officer)




Date: August ~~5, 2022~~4, 2023		/s/ T. Clay Stinnett T. Clay Stinnett EVP, Treasurer and CFO (Principal Financial Officer)

~~117~~94

Kentucky		61-1137529
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1040 East Main Street, Louisville, Kentucky		40206
(Address of principal executive offices)		(Zip Code)

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value	SYBT	The NASDAQ Stock Market, LLC

Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

Acronym or Term	Definition	Acronym or Term	Definition	Acronym or Term	Definition
ACH	Automatic Clearing House	~~EPS~~EVP	~~Earnings Per Share~~	~~NCI~~	~~Non-controlling interest~~
~~AFS~~	~~Available for Sale~~	~~ETR~~	~~Effective Tax Rate~~Executive Vice President	NIM	Net Interest Margin (FTE)
~~APIC~~AFS	~~Additional paid-in capital~~Available for Sale	~~EVP~~ FASB	~~Executive Vice President~~Financial Accounting Standards Board	NPV	Net Present Value
~~ACL~~APIC	~~Allowance for Credit Losses~~Additional paid-in capital	~~FASB~~FDIC	~~Financial Accounting Standards Board~~Federal Deposit Insurance Corporation	Net Interest Spread	Net Interest Spread (FTE)
~~AOCI~~ACL	~~Accumulated Other Comprehensive Income~~Allowance for Credit Losses	~~FDIC~~FFP	Federal ~~Deposit Insurance Corporation~~Funds Purchased	NM	Not Meaningful
~~ASC~~AOCI	~~Accounting Standards Codification~~Accumulated Other Comprehensive Income	~~FFP~~FFS	Federal Funds ~~Purchased~~Sold	OAEM	Other Assets Especially Mentioned
~~ASU~~ASC	Accounting Standards ~~Update~~	~~FFS~~	~~Federal Funds Sold~~	~~OREO~~	~~Other Real Estate Owned~~
~~ATM~~	~~Automated Teller Machine~~Codification	FFTR	Federal Funds Target Rate	~~PPP~~OREO	~~SBA Paycheck Protection Program~~Other Real Estate Owned
~~AUM~~ASU	~~Assets Under Management~~Accounting Standards Update	FHA	Federal Housing Authority	PPP	SBA Paycheck Protection Program
ATM	Automated Teller Machine	FHC	Financial Holding Company	PV	Present Value
AUM	Assets Under Management	FHLB	Federal Home Loan Bank of Cincinnati	PCD	Purchased Credit Deteriorated
Bancorp / the Company	Stock Yards Bancorp, Inc.	~~FHC~~FHLMC	~~Financial Holding Company~~Federal Home Loan Mortgage Corporation	~~PCD~~PD	~~Purchased Credit Deteriorated~~Probability of Default
Bank / SYB	Stock Yards Bank & Trust Company	~~FHLB~~FICA	Federal ~~Home Loan Bank of Cincinnati~~Insurance Contributions Act	Prime	The Wall Street Journal Prime Interest Rate
BOLI	Bank Owned Life Insurance	~~FHLMC~~FNMA	Federal ~~Home Loan~~National Mortgage ~~Corporation~~ Association	Provision	Provision for Credit Losses
BP	Basis Point - 1/100th of one percent	~~FICA~~FRB	Federal ~~Insurance Contributions Act~~Reserve Bank	PSU	Performance Stock Unit
C&D	Construction and Development	~~FNMA~~FTE	~~Federal National Mortgage Association~~Fully Tax Equivalent	ROA	Return on Average Assets
Captive	SYB Insurance Company, Inc.	~~FRB~~	~~Federal Reserve Bank~~	~~ROE~~	~~Return on Average Equity~~
~~CARES Act~~	~~Coronavirus Aid, Relief and Economic Security Act~~	~~FTE~~	~~Fully Tax Equivalent~~	~~RSA~~	~~Restricted Stock Award~~
~~C&I~~	~~Commercial and Industrial~~	GAAP	United States Generally Accepted Accounting Principles	~~RSU~~ROE	Return on Average Equity
C&I	Commercial and Industrial	GLBA	Gramm-Leach-Bliley Act	RSA	Restricted Stock ~~Unit~~Award
CB	Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust Company	~~GLBA~~	~~Gramm-Leach-Bliley Act~~	~~SAB~~	~~Staff Accounting Bulletin~~
CD	~~Certificate of Deposit~~	GNMA	Government National Mortgage Association	~~SAR~~RSU	Restricted Stock ~~Appreciation Right~~Unit
~~CDI~~CD	~~Core~~Certificate of Deposit ~~Intangible~~	HELOC	Home Equity Line of Credit	~~SBA~~SAB	~~Small Business Administration~~Staff Accounting Bulletin
CDI	Core Deposit Intangible	HTM	Held to Maturity	SAR	Stock Appreciation Right
CECL	Current Expected Credit Loss (ASC-326)	~~HTM~~	~~Held to Maturity~~	~~SEC~~	~~Securities and Exchange Commission~~
~~CEO~~	~~Chief Executive Officer~~	ITM	Interactive Teller Machine	~~SOFR~~SBA	~~Secured Overnight Financing Right~~Small Business Administration
~~CFO~~CEO	Chief ~~Financial~~Executive Officer	KB	Kentucky Bancshares, Inc. and Kentucky Bank	~~SSUAR~~SEC	Securities ~~Sold Under Agreements to Repurchase~~and Exchange Commission
~~CLI~~CFO	~~Customer list intangible~~Chief Financial Officer	KSB	King Bancorp, Inc. and King Southern Bank	~~SVP~~SOFR	~~Senior Vice President~~Secured Overnight Financing Right
~~COVID-19~~CLI	~~Coronavirus Disease - 2019~~Customer List Intangible	LGD	Loss Given Default	SSUAR	Securities Sold Under Agreements to Repurchase
CRA	Community Reinvestment Act	LFA	Landmark Financial Advisors, LLC	~~TBA~~SVP	~~To Be Annouced~~Senior Vice President
~~CRA~~CRE	~~Community Reinvestment Act~~Commercial Real Estate	LIBOR	London Interbank Offered Rate	~~TBOC~~TBA	~~The Bank Oldham County~~To Be Annouced
~~CRE~~DCF	~~Commercial Real Estate~~Discounted Cash Flow	Loans	Loans and Leases	TBOC	The Bank Oldham County
DTA	Deferred Tax Asset	MBS	Mortgage Backed Securities	TCE	Tangible Common Equity
DTL	Deferred Tax Liability	MSA	Metropolitan Statistical Area	TDR	Troubled Debt Restructuring
Dodd-Frank Act	The Dodd-Frank Wall Street Reform and Consumer Protection Act	~~MBS~~MSRs	Mortgage ~~Backed Securities~~	~~TDR~~	~~Troubled Debt Restructuring~~
~~DTA~~	~~Deferred Tax Asset~~	~~MSA~~	~~Metropolitan Statistical Area~~Servicing Rights	TPS	Trust Preferred Securities
~~DTL~~EPS	~~Deferred Tax Liability~~Earnings Per Share	~~MSRs~~NASDAQ	~~Mortgage Servicing Rights~~The NASDAQ Stock Market, LLC	VA	U.S. Department of Veterans Affairs
~~DCF~~ETR	~~Discounted Cash Flow~~Effective Tax Rate	~~NASDAQ~~NCI	~~The NASDAQ Stock Market, LLC~~Non-controlling Interest	WM&T	Wealth Management and Trust

PART I – FINANCIAL INFORMATION	4


Item 1. Financial Statements.	4

Condensed Consolidated Balance Sheets	4

Condensed Consolidated Statements of Income	5

Condensed Consolidated Statements of Comprehensive Income (Loss)	6

Condensed Consolidated Statements of Changes in Stockholders’ Equity	7

Condensed Consolidated Statements of Cash Flows	9

Notes to Condensed Consolidated Financial Statements	11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	7356

Item 3. Quantitative and Qualitative Disclosures about Market Risk.	~~115~~92

Item 4. Controls and Procedures.	~~115~~92



PART II – OTHER INFORMATION	92

Item 1. Legal Proceedings.	~~115~~92

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	~~116~~93

Item 6. Exhibits.	~~116~~93



Signatures	~~117~~94

	June 30,			December 31,			June 30,			December 31,
	2022			2021			2023			2022
Assets
Cash and due from banks	$	88,422		$	62,304		$	111,126		$	82,515
Federal funds sold and interest bearing due from banks		485,447			898,888			103,204			84,852
Total cash and cash equivalents		573,869			961,192			214,330			167,367

Mortgage loans held for sale, at fair value		10,045			8,614			7,069			2,606
Available for sale debt securities (amortized cost of $1,254,650 in 2022 and $1,190,379 in 2021, respectively)		1,140,039			1,180,298
Held to maturity debt securities (fair value of $460,846 in 2022 and $0 in 2021, respectively)		485,449			0
Available for sale debt securities (amortized cost of $1,238,249 in 2023 and $1,297,977 in 2022, respectively)								1,092,724			1,144,617
Held to maturity debt securities (fair value of $410,249 in 2023 and $431,833 in 2022, respectively)								450,029			473,217
Federal Home Loan Bank stock, at cost		13,811			9,376			27,366			10,928
Loans		4,877,324			4,169,303			5,418,609			5,205,918
Allowance for credit losses on loans		66,362			53,898			(77,710	)		(73,531	)
Net loans		4,810,962			4,115,405			5,340,899			5,132,387

Premises and equipment, net		119,462			76,894			98,777			101,612
Premises held for sale								3,233			2,644
Bank owned life insurance		53,609			53,073			85,782			84,674
Accrued interest receivable		17,056			13,745			22,547			22,157
Goodwill		202,524			135,830			194,074			194,074
Core deposit intangibles		16,870			5,596			13,442			14,958
Customer list intangibles		13,487			0			9,196			10,032
Other assets		125,922			86,002			173,084			134,988
Total assets	$	7,583,105		$	6,646,025		$	7,732,552		$	7,496,261

Liabilities
Deposits:
Non-interest bearing	$	2,121,304		$	1,755,754		$	1,766,132		$	1,950,198
Interest bearing		4,427,826			4,031,760			4,442,248			4,441,054
Total deposits		6,549,130			5,787,514			6,208,380			6,391,252

Securities sold under agreements to repurchase		161,512			75,466			138,347			133,342
Federal funds purchased		8,771			10,374			11,646			8,789
Subordinated debentures		26,144			0			26,541			26,343
Federal Home Loan Bank advances								400,000			50,000
Accrued interest payable		277			300			1,064			660
Other liabilities		87,110			96,502			138,492			125,443
Total liabilities		6,832,944			5,970,156			6,924,470			6,735,829

Commitments and contingent liabilities (Footnote 12)

Stockholders’ equity

Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding		0			0			—			—
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 29,243,000 and 26,596,000 shares in 2022 and 2021, respectively		58,315			49,501
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 29,324,000 and 29,259,000 shares in 2023 and 2022, respectively								58,580			58,367
Additional paid-in capital		374,878			243,107			383,387			377,703
Retained earnings		401,275			391,201			473,531			439,898
Accumulated other comprehensive loss		(87,337	)		(7,940	)		(107,416	)		(115,536	)
Total stockholders’ equity		747,131			675,869			808,082			760,432
Non-controlling interest		3,030			0
Total equity		750,161			675,869
Total liabilities and equity	$	7,583,105		$	6,646,025		$	7,732,552		$	7,496,261

													Accumulated
	Common stock						Additional						other			Total
	*Shares*						*paid-in*			*Retained*			*comprehensive*			*stockholders'*			*Non-controlling*			*Total*
	*outstanding*			*Amount*			*capital*			*earnings*			*loss*			*equity*			*interest*			*equity*

Balance, January 1, 2022		26,596		$	49,501		$	243,107		$	391,201		$	(7,940	)	$	675,869		$	0		$	675,869

Activity for three months ended March 31, 2022:
Net income		—			0			0			7,906			0			7,906			36			7,942
Other comprehensive loss		—			0			0			0			(49,659	)		(49,659	)		0			(49,659	)
Stock compensation expense		—			0			991			0			0			991			0			991
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		65			216			3,451			(6,011	)		0			(2,344	)		0			(2,344	)
Stock issued for Commonwealth acquisition		2,564			8,539			125,286			0			0			133,825			0			133,825
Non-controlling interest of acquired entity		—			0			0			0			0			0			3,094			3,094
Cash dividends declared, $0.28 per share		—			0			0			(8,172	)		0			(8,172	)		0			(8,172	)
Shares cancelled		(5	)		(18	)		(280	)		25			0			(273	)		0			(273	)
Distributions to non-controlling interest		—			0			0			0			0			0			(53	)		(53	)
Balance, March 31, 2022		29,220		$	58,238		$	372,555		$	384,949		$	(57,599	)	$	758,143		$	3,077		$	761,220


Activity for three months ended June 30, 2022:
Net income		—			0			0			26,794			0			26,794			108			26,902
Other comprehensive loss		—			0			0			0			(29,738	)		(29,738	)		0			(29,738	)
Stock compensation expense		—			0			1,057			0			0			1,057			0			1,057
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		26			85			1,365			(2,394	)		0			(944	)		0			(944	)
Cash dividends declared, $0.28 per share		—			0			0			(8,183	)		0			(8,183	)		0			(8,183	)
Shares cancelled		(3	)		(8	)		(99	)		109			0			2			0			2
Distributions to non-controlling interest		—			0			0			0			0			0			(155	)		(155	)
Balance, June 30, 2022		29,243		$	58,315		$	374,878		$	401,275		$	(87,337	)	$	747,131		$	3,030		$	750,161

For the six months ended June 30,
Supplemental cash flow information:	2022		2021		2023		2022
Interest paid	$	2,147	$	2,971	$	38,125	$	2,147
Income taxes paid, net of refunds		7,989		13,359		17,010		7,989
Cash paid for operating lease liabilities		1,800		1,190		2,126		1,800

Supplemental non-cash activity:
Unfunded commitments in tax credit investments	$	6,907	$	5,766	$	49,012	$	6,907
Due to broker		0		1,985
Dividends payable to stockholders		182		175		183		182
Loans transferred to OREO		445		30		—		445
Premises and equipment transferred to premises held for sale						715		—

Liabilities assumed in conjunction with acquisition:
Liabilities assumed in conjunction with acquisitions:
Fair value of assets acquired	$	1,403,509	$	1,389,327	$	-	$	1,403,509
Consideration paid in acquisition		30,994		28,276
Cash paid in acquisition						—		30,994
Common stock issued in acquisition		133,825		204,670		—		133,825
Non-controlling interest of acquired entity		3,094		0		—		3,094
Total consideration paid		167,913		232,946		—		167,913
Liabilities assumed	$	1,235,596	$	1,156,381	$	-	$	1,235,596

~~Loan Portfolio Segment~~		~~ACL Methodology~~

~~Commercial real estate - non-owner occupied~~		~~Discounted cash flow~~
~~Commercial real estate - owner occupied~~		~~Discounted cash flow~~
~~Commercial and industrial - term~~		~~Static pool~~
~~Commercial and industrial - line of credit~~		~~Static pool~~
~~Residential real estate - owner occupied~~		~~Discounted cash flow~~
~~Residential real estate - non-owner occupied~~		~~Discounted cash flow~~
~~Construction and land development~~		~~Static pool~~
~~Home equity lines of credit~~		~~Static pool~~
~~Consumer~~		~~Static pool~~
~~Leases~~		~~Static pool~~
~~Credit cards~~		~~Static pool~~

	As Recorded			Fair Value				Provisional Period		As Recorded
(in thousands)	By CB			Adjustments (1)				Adjustments (1)		by Bancorp
Assets aquired:
Cash and due from banks	$	380,450		$	0			$	—	$	380,450
Mortgage loans held for sale		3,559			0				—		3,559
Available for sale debt securities (2)		247,209			(416	)	a		—		246,793
Federal Home Loan Bank stock, at cost		4,436			0				—		4,436
Loans		645,551			(13,147	)	b		—		632,404
Allowance for credits losses on loans		(16,102	)		6,152		c		—		(9,950	)
Net loans		629,449			(6,995	)			—		622,454
Premises and equipment, net		28,784			4,009		d		—		32,793
Accrued interest receivable		1,973			0				—		1,973
Goodwill		5,412			(5,412	)	e		—		—
Core deposit intangible		0			12,724		f		—		12,724
Customer list intangibles		0			14,360		g		—		14,360
Mortgage servicing rights		9,387			3,289		h		—		12,676
Deferred income taxes, net		0			(3,727	)	i		—		(3,727	)
Other assets		9,389			(1,065	)	j		—		8,324
Total assets acquired	$	1,320,048		$	16,767			$	-	$	1,336,815

Liabilities assumed:
Deposits:
Non-interest bearing	$	302,098		$	0			$	—	$	302,098
Interest bearing		818,334			371		k		—		818,705
Total deposits		1,120,432			371				—		1,120,803
Securities sold under agreements to repurchase		66,220			0				—		66,220
Subordinated debentures		26,806			(794	)	l		—		26,012
Line of credit		3,200			0				—		3,200
Accrued interest payable		243			0				—		243
Other liabilities		17,822			1,296		m		—		19,118
Total liabilities assumed		1,234,723			873				—		1,235,596
Net assets acquired	$	85,325		$	15,894			$	-	$	101,219

Consideration for common stock										$	133,825
Cash consideration paid											30,994
Noncontrolling interest of acquired entity											3,094
Total consideration										$	167,913

Goodwill										$	66,694

(in thousands)

Fair value adjustment - acquired non PCD loans	$	(9,216	)
Fair value adjustment - acquired PCD loans		(4,094	)
Eliminate unrecognized loan fees on acquired loans and fair value hedge		163
Net loan fair value adjustments	$	(13,147	)

(in thousands)

Reversal of historical CB allowance for credit losses on loans	$	(16,102	)
Estimate of lifetime credit losses for PCD loans		9,950
Net change in allowance for credit losses	$	(6,152	)

(in thousands)	Three months ended June 30, 2022			Three months ended June 30, 2021

Net interest income	$	56,984		$	55,595
Provision for credit losses		(200	)		(3,167	)
Non-interest income		21,940			29,396
Non-interest expense		44,675			52,563
Income before taxes		34,449			35,595
Income tax expense		7,547			6,735
Net income		26,902			28,860
Less net income attributed to noncontrolling interest		108			94
Net income available to stockholders	$	26,794		$	28,766

Earnings per share
Basic	$	0.92		$	0.99
Diluted		0.91			0.98

Basic weighted average shares outstanding		29,131			29,049
Diluted weighted average shares outstanding		29,346			29,288

(in thousands)	Six months ended June 30, 2022			Six months ended June 30, 2021

Net interest income	$	110,777		$	111,106
Provision for credit losses (1)		(2,350	)		(4,242	)
Non-interest income		44,083			59,430
Non-interest expense (2)		91,964			102,993
Income before taxes		65,246			71,785
Income tax expense		14,014			13,676
Net income		51,232			58,109
Less net income attributed to noncontrolling interest		159			174
Net income available to stockholders	$	51,073		$	57,935

Earnings per share
Basic	$	1.76		$	2.00
Diluted		1.74			1.98

Basic weighted average shares outstanding		29,094			29,022
Diluted weighted average shares outstanding		29,355			29,263

(in thousands)

Reversal of historical KB allowance for credit losses on loans	$	9,491
Estimate of lifetime credit losses for PCD loans		(6,757	)
Net change in allowance for credit losses	$	2,734

(in thousands)	Amortized		Unrealized
June 30, 2022	cost		Gains		Losses			Fair value

U.S. Treasury and other U.S. Government obligations	$	121,846	$	0	$	(6,314	)	$	115,532
Government sponsored enterprise obligations		120,954		625		(3,876	)		117,703
Mortgage backed securities - government agencies		857,086		245		(91,809	)		765,522
Obligations of states and political subdivisions		148,543		6		(13,281	)		135,268
Other		6,221		0		(207	)		6,014
Total available for sale debt securities	$	1,254,650	$	876	$	(115,487	)	$	1,140,039

December 31, 2021

U.S. Treasury and other U.S. Government obligations	$	123,753	$	0	$	(1,252	)	$	122,501
Government sponsored enterprise obligations		132,760		2,497		(236	)		135,021
Mortgage backed securities - government agencies		857,283		2,495		(13,154	)		846,624
Obligations of states and political subdivisions		75,488		289		(702	)		75,075
Other		1,095		0		(18	)		1,077
Total available for sale debt securities	$	1,190,379	$	5,281	$	(15,362	)	$	1,180,298

(in thousands)	Carrying		Unrecognized
June 30, 2022	value		Gains		Losses			Fair value

U.S. Treasury and other U.S. Government obligations	$	219,574	$	0	$	(4,559	)	$	215,015
Government sponsored enterprise obligations		27,847		22		(665	)		27,204
Mortgage backed securities - government agencies		238,028		1		(19,402	)		218,627
Total held to maturity debt securities	$	485,449	$	23	$	(24,626	)	$	460,846

	AFS Debt Securities				HTM Debt Securities
(in thousands)	Amortized cost		Fair value		Carrying value		Fair value

Due within one year	$	9,518	$	9,481	$	16,029	$	15,815
Due after one year but within five years		158,324		151,417		204,196		199,369
Due after five years but within 10 years		58,836		53,826		26,451		26,290
Due after 10 years		170,886		159,793		745		745
Mortgage backed securities - government agencies		857,086		765,522		238,028		218,627
Total available for sale debt securities	$	1,254,650	$	1,140,039	$	485,449	$	460,846

	AFS Debt Securities															AFS Debt Securities
	Less than 12 months					12 months or more					Total					Less than 12 months					12 months or more					Total
(in thousands)	*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*
June 30, 2022	*value*		*losses*			*value*		*losses*			*value*		*losses*
June 30, 2023																*value*		*losses*			*value*		*losses*			*value*		*losses*

U.S. Treasury and other U.S.Government obligations	$	115,533	$	(6,314	)	$	0	$	0		$	115,533	$	(6,314	)
Government sponsored enterprise obligations		80,629		(3,574	)		8,102		(302	)		88,731		(3,876	)
Mortgage-backed securities - government agencies		472,323		(49,162	)		273,568		(42,647	)		745,891		(91,809	)
Obligations of states andpolitical subdivisions		126,114		(13,098	)		823		(183	)		126,937		(13,281	)
Other		6,014		(207	)		0		0			6,014		(207	)
Total AFS debt securities	$	800,613	$	(72,355	)	$	282,493	$	(43,132	)	$	1,083,106	$	(115,487	)

December 31, 2021

U.S. Treasury and other U.S.Government obligations	$	122,501	$	(1,252	)	$	0	$	0		$	122,501	$	(1,252	)
U.S. Treasury and other U.S. Government obligations																$	-	$	-		$	116,217	$	(6,710	)	$	116,217	$	(6,710	)
Government sponsored enterprise obligations		23,789		(223	)		447		(13	)		24,236		(236	)		43,334		(107	)		74,092		(5,996	)		117,426		(6,103	)
Mortgage-backed securities - government agencies		615,130		(10,027	)		102,637		(3,127	)		717,767		(13,154	)		114,246		(5,479	)		595,295		(111,698	)		709,541		(117,177	)
Obligations of states and political subdivisions		46,493		(686	)		484		(16	)		46,977		(702	)		16,530		(242	)		106,563		(15,065	)		123,093		(15,307	)
Other		957		(18	)		0		0			957		(18	)		-		-			3,440		(450	)		3,440		(450	)

Total AFS debt securities	$	808,870	$	(12,206	)	$	103,568	$	(3,156	)	$	912,438	$	(15,362	)	$	174,110	$	(5,828	)	$	895,607	$	(139,919	)	$	1,069,717	$	(145,747	)

December 31, 2022

U.S. Treasury and other U.S.
Government obligations																$	3,025	$	(57	)	$	111,966	$	(7,870	)	$	114,991	$	(7,927	)
Government sponsored enterprise obligations																	99,785		(3,553	)		22,484		(2,884	)		122,269		(6,437	)
Mortgage-backed securities - government agencies																	180,263		(11,114	)		567,988		(110,471	)		748,251		(121,585	)
Obligations of states and political subdivisions																	64,165		(3,763	)		56,864		(13,655	)		121,029		(17,418	)
Other																	4,865		(213	)		749		(129	)		5,614		(342	)

Total AFS debt securities																$	352,103	$	(18,700	)	$	760,051	$	(135,009	)	$	1,112,154	$	(153,709	)

	CB			KB
(in thousands)	March 7, 2022			May 31, 2021

Purchase price of PCD loans at acquisition	$	88,549		$	32,765
Allowance for credit losses at acquisition		(9,950	)		(6,757	)
Non-credit discount at acquisition		(4,094	)		(735	)
Fair value of PCD loans at acquisition	$	74,505		$	25,273

(in thousands)	Beginning		Initial Allowance on PCD		Provision for Credit Losses								Ending		Beginning		Provision for Credit Losses								Ending
Three Months Ended June 30, 2022	Balance		Loans		on Loans			Charge-offs			Recoveries		Balance
Three Months Ended June 30, 2023															Balance		on Loans			Charge-offs			Recoveries		Balance

Commercial real estate - non-owner occupied	$	20,620	$	0	$	101		$	0		$	2	$	20,723	$	21,669	$	87		$	-		$	17	$	21,773
Commercial real estate - owner occupied		11,326		0		(1,464	)		(41	)		21		9,842		11,429		128			-			-		11,557
Total commercial real estate		31,946		0		(1,363	)		(41	)		23		30,565		33,098		215			-			17		33,330

Commercial and industrial - term		11,108		0		1,174			(15	)		75		12,342		13,998		851			(57	)		-		14,792
Commercial and industrial - lines of credit		6,508		0		(1,508	)		0			0		5,000		6,025		416			-			62		6,503
Total commercial and industrial		17,616		0		(334	)		(15	)		75		17,342		20,023		1,267			(57	)		62		21,295

Residential real estate - owner occupied		5,363		0		575			(7	)		57		5,988		8,205		662			(43	)		11		8,835
Residential real estate - non-owner occupied		3,361		0		(176	)		0			5		3,190		4,144		24			-			1		4,169
Total residential real estate		8,724		0		399			(7	)		62		9,178		12,349		686			(43	)		12		13,004

Construction and land development		5,864		0		422			(72	)		0		6,214		6,735		17			-			-		6,752
Home equity lines of credit		1,467		0		54			0			0		1,521		1,618		(9	)		-			-		1,609
Consumer		1,049		0		141			(235	)		158		1,113		1,186		201			(208	)		106		1,285
Leases		211		0		10			0			0		221		199		6			-			-		205
Credit cards		190		0		(29	)		0			47		208		465		(233	)		(12	)		10		230
Total	$	67,067	$	0	$	(700	)	$	(370	)	$	365	$	66,362	$	75,673	$	2,150		$	(320	)	$	207	$	77,710

(in thousands)	Beginning		Initial ACL on Loans Purchased with Credit		Provision for Credit Losses								Ending		Beginning		Initial ACL on Loans Purchased with Credit		Provision for Credit Losses								Ending
Six Months Ended June 30, 2021	Balance		Deterioration		on Loans			Charge-offs			Recoveries		Balance
Six Months Ended June 30, 2022															Balance		Deterioration		on Loans			Charge-offs			Recoveries		Balance

Commercial real estate - non-owner occupied	$	19,396	$	1,491	$	1,890		$	(3,065	)	$	35	$	19,747	$	15,960	$	3,508	$	1,242		$	-		$	13	$	20,723
Commercial real estate - owner occupied		6,983		2,112		(102	)		0			555		9,548		9,595		2,121		(1,876	)		(41	)		43		9,842
Total commercial real estate		26,379		3,603		1,788			(3,065	)		590		29,295		25,555		5,629		(634	)		(41	)		56		30,565

Commercial and industrial - term		8,970		1,022		(97	)		(169	)		22		9,748		8,577		1,358		1,741			(128	)		794		12,342
Commercial and industrial - lines of credit		3,614		1,755		(129	)		0			0		5,240		4,802		1,874		(1,640	)		(36	)		-		5,000
Total commercial and industrial		12,584		2,777		(226	)		(169	)		22		14,988		13,379		3,232		101			(164	)		794		17,342

Residential real estate - owner occupied		3,389		142		859			(43	)		3		4,350		4,316		590		1,035			(13	)		60		5,988
Residential real estate - non-owner occupied		1,818		88		1,514			0			2		3,422		3,677		-		(495	)		-			8		3,190
Total residential real estate		5,207		230		2,373			(43	)		5		7,772		7,993		590		540			(13	)		68		9,178

Construction and land development		6,119		0		(929	)		0			3		5,193		4,789		419		1,078			(72	)		-		6,214
Home equity lines of credit		895		147		187			0			1		1,230		1,044		2		475			-			-		1,521
Consumer		340		0		326			(287	)		193		572		772		78		403			(489	)		349		1,113
Leases		261		0		(29	)		0			0		232		204		-		17			-			-		221
Credit cards		135		0		7			0			0		142		162		-		(1	)		-			47		208
Total	$	51,920	$	6,757	$	3,497		$	(3,564	)	$	814	$	59,424	$	53,898	$	9,950	$	1,979		$	(779	)	$	1,314	$	66,362

	Non-accrual Loans						Past Due 90-Days-		Non-accrual Loans				Past Due 90-Days-
(in thousands)	*With No*		*Total*		*Troubled Debt*		*or-More and Still*		*With No*		*Total*		*or-More and Still*
June 30, 2022	*Recorded ACL*		*Non-accrual Loans*		*Restructurings (1)*		*Accruing Interest*
June 30, 2023									*Recorded ACL*		*Non-accrual*		*Accruing Interest*

Commercial real estate - non-owner occupied	$	0	$	647	$	0	$	27	$	—	$	7,179	$	160
Commercial real estate - owner occupied		298		1,593		0		528		—		1,347		—
Total commercial real estate		298		2,240		0		555		—		8,526		160

Commercial and industrial - term		419		1,023		0		224		302		5,323		156
Commercial and industrial - PPP		0		0		0		33		—		—		—
Commercial and industrial - lines of credit		0		164		0		49		—		57		114
Total commercial and industrial		419		1,187		0		306		302		5,380		270

Residential real estate - owner occupied		1,081		3,348		0		0		245		2,451		—
Residential real estate - non-owner occupied		0		233		0		180		—		398		—
Total residential real estate		1,081		3,581		0		180		245		2,849		—

Construction and land development		0		0		0		0		—		—		—
Home equity lines of credit		0		378		0		40		—		204		—
Consumer		0		441		0		75		—		396		—
Leases		0		0		0		0		—		—		—
Credit cards		0		0		0		20		—		9		7
Total	$	1,798	$	7,827	$	0	$	1,176	$	547	$	17,364	$	437

(in thousands)			Accounts Receivable /						ACL				Accounts Receivable /						ACL
June 30, 2022	Real Estate		Equipment		Other		Total		Allocation
June 30, 2023											Real Estate		Equipment		Other		Total		Allocation

Commercial real estate - non-owner occupied	$	4,216	$	0	$	0	$	4,216	$	588	$	14,094	$	-	$	-	$	14,094	$	2,081
Commercial real estate - owner occupied		3,601		0		0		3,601		851		3,174		-		-		3,174		842
Total commercial real estate		7,817		0		0		7,817		1,439		17,268		-		-		17,268		2,923

Commercial and industrial - term		537		485		284		1,306		354		4,405		306		459		5,170		1,571
Commercial and industrial - lines of credit		2,008		1,032		0		3,040		770		2,734		159		-		2,893		750
Total commercial and industrial		2,545		1,517		284		4,346		1,124		7,139		465		459		8,063		2,321

Residential real estate - owner occupied		4,029		0		0		4,029		370		2,996		-		-		2,996		214
Residential real estate - non-owner occupied		438		0		0		438		116		588		-		-		588		116
Total residential real estate		4,467		0		0		4,467		486		3,584		-		-		3,584		330

Construction and land development		3,852		0		0		3,852		419		-		-		-		-		-
Home equity lines of credit		378		0		0		378		0		205		-		-		205		-
Consumer		0		0		229		229		19		-		-		407		407		20
Leases		0		0		0		0		0		-		-		-		-		-
Credit cards		0		0		0		0		0		-		-		-		-		-
Total collateral dependent loans	$	19,059	$	1,517	$	513	$	21,089	$	3,487	$	28,196	$	465	$	866	$	29,527	$	5,594

(in thousands)			30-59 days		60-89 days		90 or more		Total		Total				30-59 days		60-89 days		90 or more		Total Past		Total
June 30, 2022	Current		Past Due		Past Due		Days Past Due		Past Due		Loans
June 30, 2023													Current		Past Due		Past Due		days Past Due		Due Loans		Loans

Commercial real estate - non-owner occupied	$	1,393,506	$	3,303	$	308	$	213	$	3,824	$	1,397,330	$	1,476,525	$	565	$	-	$	643	$	1,208	$	1,477,733
Commercial real estate - owner occupied		785,831		446		624		658		1,728		787,559		873,504		156		—		320		476		873,980
Total commercial real estate		2,179,337		3,749		932		871		5,552		2,184,889		2,350,029		721		—		963		1,684		2,351,713

Commercial and industrial - term		665,752		600		280		706		1,586		667,338		786,472		594		30		974		1,598		788,070
Commercial and industrial - term - PPP		34,421		2,236		77		33		2,346		36,767		7,088		—		—		—		—		7,088
Commercial and industrial - lines of credit		421,888		917		176		85		1,178		423,066		437,885		418		10		171		599		438,484
Total commercial and industrial		1,122,061		3,753		533		824		5,110		1,127,171		1,231,445		1,012		40		1,145		2,197		1,233,642

Residential real estate - owner occupied		529,094		1,945		410		2,128		4,483		533,577		661,389		1,917		629		935		3,481		664,870
Residential real estate - non-owner occupied		292,839		692		46		275		1,013		293,852		338,383		92		—		252		344		338,727
Total residential real estate		821,933		2,637		456		2,403		5,496		827,429		999,772		2,009		629		1,187		3,825		1,003,597

Construction and land development		371,869		328		0		0		328		372,197		451,261		63		—		—		63		451,324
Home equity lines of credit		191,475		258		184		185		627		192,102		202,206		129		85		154		368		202,574
Consumer		136,447		395		84		352		831		137,278		138,962		292		37		311		640		139,602
Leases		14,611		0		0		0		0		14,611		13,967		—		—		—		—		13,967
Credit cards		21,618		4		5		20		29		21,647		22,177		4		2		7		13		22,190
Total	$	4,859,351	$	11,124	$	2,194	$	4,655	$	17,973	$	4,877,324	$	5,409,819	$	4,230	$	793	$	3,767	$	8,790	$	5,418,609

(in thousands)	Term Loans Amortized Cost Basis by Origination Year																Revolving loans amortized
June 30, 2023	2023			2022		2021			2020			2019		Prior			cost basis		Total

Commercial real estate - non-owner occupied:
Risk rating
Pass	$	148,105		$	347,477	$	377,626		$	245,143		$	121,333	$	178,360		$	20,193	$	1,438,237
OAEM		78			-		2,918			-			3,395		1,501			-		7,892
Substandard		-			1,381		1,008			3,663			18,052		224			97		24,425
Substandard non-performing		6,355			-		-			-			77		747			-		7,179
Doubtful		-			-		-			-			-		-			-		-
Total Commercial real estate non-owner occupied	$	154,538		$	348,858	$	381,552		$	248,806		$	142,857	$	180,832		$	20,290	$	1,477,733
Current period gross charge offs	$	-		$	-	$	-		$	-		$	-	$	-		$	-	$	-

Commercial real estate - owner occupied:
Risk rating
Pass	$	82,250		$	173,810	$	203,710		$	180,082		$	96,535	$	106,908		$	14,209	$	857,504
OAEM		-			2,884		608			5,246			928		786			-		10,452
Substandard		-			1,313		1,130			-			669		1,565			-		4,677
Substandard non-performing		-			380		817			76			-		74			-		1,347
Doubtful		-			-		-			-			-		-			-		-
Total Commercial real estate owner occupied	$	82,250		$	178,387	$	206,265		$	185,404		$	98,132	$	109,333		$	14,209	$	873,980
Current period gross charge offs	$	-		$	-	$	-		$	-		$	-	$	-		$	-	$	-

Commercial and industrial - term:
Risk rating
Pass	$	199,784		$	261,664	$	188,314		$	67,502		$	32,095	$	28,909		$	-	$	778,268
OAEM		-			801		2,691			-			194		184			-		3,870
Substandard		88			38		-			-			157		326			-		609
Substandard non-performing		4,206			494		36			513			74		-			-		5,323
Doubtful		-			-		-			-			-		-			-		-
Total Commercial and industrial - term	$	204,078		$	262,997	$	191,041		$	68,015		$	32,520	$	29,419		$	-	$	788,070
Current period gross charge offs	$	(37	)	$	-	$	(6	)	$	(57	)	$	-	$	(28	)	$	-	$	(128	)

Commercial and industrial - PPP
Risk rating
Pass	$	-		$	-	$	4,703		$	2,385		$	-	$	-		$	-	$	7,088
OAEM		-			-		-			-			-		-			-		-
Substandard		-			-		-			-			-		-			-		-
Substandard non-performing		-			-		-			-			-		-			-		-
Doubtful		-			-		-			-			-		-			-		-
Total Commercial and industrial - PPP	$	-		$	-	$	4,703		$	2,385		$	-	$	-		$	-	$	7,088
Current period gross charge offs	$	-		$	-	$	-		$	-		$	-	$	-		$	-	$	-

													Revolving
													loans
(in thousands)	Term Loans Amortized Cost Basis by Origination Year												amortized
June 30, 2022	2022		2021		2020		2019		2018		Prior		cost basis		Total

Commercial real estate - non-owner occupied:
Risk rating
Pass	$	232,985	$	390,203	$	283,758	$	143,894	$	82,816	$	179,300	$	21,526	$	1,334,482
OAEM		168		5,740		2,340		19,201		0		5,542		6,095		39,086
Substandard		4,174		298		3,041		8,124		0		7,378		100		23,115
Substandard non-performing		0		0		39		0		0		608		0		647
Doubtful		0		0		0		0		0		0		0		0
Total Commercial real estate non-owner occupied	$	237,327	$	396,241	$	289,178	$	171,219	$	82,816	$	192,828	$	27,721	$	1,397,330

Commercial real estate - owner occupied:
Risk rating
Pass	$	81,564	$	206,021	$	198,696	$	105,386	$	73,275	$	92,744	$	8,592	$	766,278
OAEM		0		1,681		1,401		1,942		413		140		1,630		7,207
Substandard		2,279		1,170		0		6,965		1,993		74		0		12,481
Substandard non-performing		0		1,234		0		0		0		359		0		1,593
Doubtful		0		0		0		0		0		0		0		0
Total Commercial real estate owner occupied	$	83,843	$	210,106	$	200,097	$	114,293	$	75,681	$	93,317	$	10,222	$	787,559

Commercial and industrial - term:
Risk rating
Pass	$	119,240	$	279,221	$	121,168	$	51,121	$	43,235	$	42,936	$	0	$	656,921
OAEM		4,043		290		0		387		2,187		4		0		6,911
Substandard		201		1		0		1,742		151		388		0		2,483
Substandard non-performing		448		0		537		0		38		0		0		1,023
Doubtful		0		0		0		0		0		0		0		0
Total Commercial and industrial - term	$	123,932	$	279,512	$	121,705	$	53,250	$	45,611	$	43,328	$	0	$	667,338

Commercial and industrial - PPP
Risk rating
Pass	$	0	$	31,798	$	4,969	$	0	$	0	$	0	$	0	$	36,767
OAEM		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0
Substandard non-performing		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Total Commercial and industrial - PPP	$	0	$	31,798	$	4,969	$	0	$	0	$	0	$	0	$	36,767

	June 30, 2022						December 31, 2021
			Specific		Additional				Specific		Additional
			reserve		commitment				reserve		commitment
(in thousands)	Balance		allocation		to lend		Balance		allocation		to lend

Commercial real estate - owner occupied	$	917	$	202	$	0	$	950	$	202	$	0
Commercial & industrial - term		0		0		0		12		12		0
Total TDRs	$	917	$	202	$	0	$	962	$	214	$	0

(in thousands)	CDI		CLI		CDI		CLI
2022	$	1,912	$	1,308
2023		3,015		2,002
Remainder of 2023					$	1,499	$	836
2024		2,686		1,823		2,686		1,520
2025		2,375		1,643		2,375		1,368
2026		2,063		1,464		2,063		1,216
2027		1,752		1,284		1,752		1,064
2028		1,339		1,105		1,339		912
2029		888		925		888		760
2030		576		745		576		608
2031		264		566		264		456
2032		0		387		-		304
2033		0		207		-		152
2034		0		28
Total future expense	$	16,870	$	13,487	$	13,442	$	9,196

	June 30,		December 31,
*(in thousands)*	2022		2021

Cash surrender value of life insurance other than BOLI	$	15,297	$	17,875
Net deferred tax asset		41,138		24,340
Investments in tax credit related ventures		14,626		11,084
Swap assets		6,475		3,148
Prepaid assets		4,016		4,469
Trust fees receivable		3,298		2,868
Mortgage servicing rights		16,504		4,528
Other real estate owned		7,601		7,212
Other		16,967		10,478
Total other assets	$	125,922	$	86,002

	Commonwealth Statutory Trust		Commonwealth Statutory Trust		Commonwealth Statutory Trust		Total
(in thousands)	III		IV		V

Trust preferred securities	$	3,093	$	12,372	$	11,341	$	26,806
Subordinated debentures		3,000		12,000		11,000		26,000

Origination date	12/19/2003		12/15/2005		6/28/2007
Index	LIBOR + 2.85%		LIBOR + 1.35%		LIBOR + 1.40%

	Fair Value Measurements Using:						Total		Fair Value Measurements Using:						Total
June 30, 2022 (in thousands)	Level 1		Level 2		Level 3		Fair Value
June 30, 2023 (in thousands)									Level 1		Level 2		Level 3		Fair Value
Assets:
Available for sale debt securities:
U.S. Treasury and other U.S. Government obligations	$	115,532	$	0	$	0	$	115,532	$	116,217	$	—	$	—	$	116,217
Government sponsored enterprise obligations		0		117,703		0		117,703		—		133,575		—		133,575
Mortgage backed securities - government agencies		0		765,522		0		765,522		—		712,712		—		712,712
Obligations of states and political subdivisions		0		135,268		0		135,268		—		126,780		—		126,780
Other		0		6,014		0		6,014		—		3,440		—		3,440

Total available for sale debt securities		115,532		1,024,507		0		1,140,039		116,217		976,507		—		1,092,724

Mortgage loans held for sale		0		10,045		0		10,045		—		7,069		—		7,069
Rate lock loan commitments		0		472		0		472		—		364		—		364
Mandatory forward contracts		0		44		0		44		—		81		—		81
Interest rate swaps		0		6,475		0		6,475
Interest rate swap assets										—		12,628		—		9,717
Total assets	$	115,532	$	1,041,543	$	0	$	1,157,075	$	116,217	$	996,649	$	—	$	1,109,955

Liabilities:
Interest rate swaps	$	0	$	6,487	$	0	$	6,487
Interest rate swap liabilities									$	—	$	9,726	$	—	$	9,726

									Losses recorded												Losses recorded
									Three months		Six months										Three months		Six months
	Fair Value Measurements Using:						Total		ended		ended		Fair Value Measurements Using:						Total		ended		ended
June 30, 2022 (in thousands)	Level 1		Level 2		Level 3		Fair Value		June 30, 2022		June 30, 2022
June 30, 2023 (in thousands)													Level 1		Level 2		Level 3		Fair Value		June 30, 2023		June 30, 2023

Collateral dependent loans	$	0	$	0	$	12,554	$	12,554	$	0	$	0	$	—	$	—	$	10,380	$	10,380	$	—	$	—
Other real estate owned		0		0		7,601		7,601		0		0		—		—		—		—		—		—

	Carrying				Fair Value Measurements Using:
December 31, 2022 (in thousands)	amount		Fair value		Level 1		Level 2		Level 3

Assets
Cash and cash equivalents	$	167,367	$	167,367	$	167,367	$	—	$	—
HTM debt securities		473,217		431,833		—		431,833		—
Federal Home Loan Bank stock		10,928		10,928		—		10,928		—
Loans, net		5,132,387		4,914,770		—		—		4,914,770
Accrued interest receivable		22,157		22,157		22,157		—		—

Liabilities
Non-interest bearing deposits	$	1,950,198	$	1,950,198	$	1,950,198	$	—	$	—
Transaction deposits		3,968,963		3,968,963		—		3,968,963		—
Time deposits		472,091		459,467		—		459,467		—
Securities sold under agreement to repurchase		133,342		133,342		—		133,342		—
Federal funds purchased		8,789		8,789		—		8,789		—
Subordinated debentures		26,343		26,460		—		26,460		—
FHLB advances		50,000		50,000		—		50,000		—
Accrued interest payable		660		660		660		—		—