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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 20222023

 

or

 

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number: 1-13661

 

sybt20230630_10qimg001.jpg

 

STOCK YARDS BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

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)

 

Registrant’s telephone number, including area code: (502) 582-2571

 

Securities registered pursuant to Section 12(b) of the Act: 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes   ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☒ 

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☐ 

Emerging growth company ☐

   

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes  ☒ No

The number of shares outstanding of the registrant’s Common Stock, no par value, as of July 31, 2022,2023, was 29,243,504.29,322,661.

 

1

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION4
  
  

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.

11592
  

Item 4. Controls and Procedures.

11592
  
  

PART II OTHER INFORMATION

92
  

Item 1. Legal Proceedings.

11592
  

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

11693
  

Item 6. Exhibits.

11693
  
  

Signatures

11794

 

2

 

GLOSSARY OF ABBREVIATIONS AND ACRONYMS

 

The acronyms and abbreviations identified in alphabetical order below are used throughout this Report on Form 10-Q:

 

Acronym or

Term

 

Definition

 

Acronym or

Term

 

Definition

 

Acronym or

Term

 

Definition

ACH

 

Automatic Clearing House

 

EPSEVP

 

Earnings Per Share

NCI

Non-controlling interest

AFS

Available for Sale

ETR

Effective Tax RateExecutive Vice President

 

NIM

 

Net Interest Margin (FTE)

APICAFS

 

Additional paid-in capitalAvailable for Sale

 

EVP FASB

 

Executive Vice PresidentFinancial Accounting Standards Board

 

NPV

 

Net Present Value

ACLAPIC

 

Allowance for Credit LossesAdditional paid-in capital

 

FASBFDIC

 

Financial Accounting Standards BoardFederal Deposit Insurance Corporation

 

Net Interest Spread

 

Net Interest Spread (FTE)

AOCIACL

 

Accumulated Other Comprehensive IncomeAllowance for Credit Losses

 

FDICFFP

 

Federal Deposit Insurance CorporationFunds Purchased

 

NM

 

Not Meaningful

ASCAOCI

 

Accounting Standards CodificationAccumulated Other Comprehensive Income

 

FFPFFS

 

Federal Funds PurchasedSold

 

OAEM

 

Other Assets Especially Mentioned

ASUASC

 

Accounting Standards Update

FFS

Federal Funds Sold

OREO

Other Real Estate Owned

ATM

Automated Teller MachineCodification

 

FFTR

 

Federal Funds Target Rate

 

PPPOREO

 

SBA Paycheck Protection ProgramOther Real Estate Owned

AUMASU

 

Assets Under ManagementAccounting 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.

 

FHCFHLMC

 

Financial Holding CompanyFederal Home Loan Mortgage Corporation

 

PCDPD

 

Purchased Credit DeterioratedProbability of Default

Bank / SYB

 

Stock Yards Bank & Trust Company

 

FHLBFICA

 

Federal Home Loan Bank of CincinnatiInsurance Contributions Act

 

Prime

 

The Wall Street Journal Prime Interest Rate

BOLI

 

Bank Owned Life Insurance

 

FHLMCFNMA

 

Federal Home LoanNational Mortgage Corporation Association

 

Provision

 

Provision for Credit Losses

BP

 

Basis Point - 1/100th of one percent

 

FICAFRB

 

Federal Insurance Contributions ActReserve Bank

 

PSU

 

Performance Stock Unit

C&D

 

Construction and Development

 

FNMAFTE

 

Federal National Mortgage AssociationFully 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

 

RSUROE

Return on Average Equity

C&I

Commercial and Industrial

GLBA

Gramm-Leach-Bliley Act

RSA

 

Restricted Stock UnitAward

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

 

SARRSU

 

Restricted Stock Appreciation RightUnit

CDICD

 

CoreCertificate of Deposit Intangible

 

HELOC

 

Home Equity Line of Credit

 

SBASAB

 

Small Business AdministrationStaff 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

 

SOFRSBA

 

Secured Overnight Financing RightSmall Business Administration

CFOCEO

 

Chief FinancialExecutive Officer

 

KB

 

Kentucky Bancshares, Inc. and Kentucky Bank

 

SSUARSEC

 

Securities Sold Under Agreements to Repurchaseand Exchange Commission

CLICFO

 

Customer list intangibleChief Financial Officer

 

KSB

 

King Bancorp, Inc. and King Southern Bank

 

SVPSOFR

 

Senior Vice PresidentSecured Overnight Financing Right

COVID-19CLI

 

Coronavirus Disease - 2019Customer List Intangible

LGD

Loss Given Default

SSUAR

Securities Sold Under Agreements to Repurchase

CRA

Community Reinvestment Act

 

LFA

 

Landmark Financial Advisors, LLC

 

TBASVP

 

To Be AnnoucedSenior Vice President

CRACRE

 

Community Reinvestment ActCommercial Real Estate

 

LIBOR

 

London Interbank Offered Rate

 

TBOCTBA

 

The Bank Oldham CountyTo Be Annouced

CREDCF

 

Commercial Real EstateDiscounted 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

 

MBSMSRs

 

Mortgage Backed Securities

TDR

Troubled Debt Restructuring

DTA

Deferred Tax Asset

MSA

Metropolitan Statistical AreaServicing Rights

 

TPS

 

Trust Preferred Securities

DTLEPS

 

Deferred Tax LiabilityEarnings Per Share

 

MSRsNASDAQ

 

Mortgage Servicing RightsThe NASDAQ Stock Market, LLC

 

VA

 

U.S. Department of Veterans Affairs

DCFETR

 

Discounted Cash FlowEffective Tax Rate

 

NASDAQNCI

 

The NASDAQ Stock Market, LLCNon-controlling Interest

 

WM&T

 

Wealth Management and Trust

 

3

 

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

June 30, 20222023 (unaudited) and December 31, 20212022 (in thousands, except share data)

 

 

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 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

For the three and six months ended June 30, 20222023 and 20212022 (in thousands, except per share data)

 

 

Three months ended

 

Six months ended

  

Three months ended

 

Six months ended

 
 

June 30,

  

June 30,

  

June 30,

  

June 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Interest income

        

Interest income:

        

Loans, including fees

 $50,612  $40,095  $95,355  $77,095  $72,308  $50,612  $141,095  $95,355 

Federal funds sold and interest bearing due from banks

 1,113  84  1,395  150  1,664  1,113  3,245  1,395 

Mortgage loans held for sale

 50  58  74  122  77  50  118  74 

Federal Home Loan Bank stock

 102  64  156  121  275  102  440  156 

Investment securities:

  

Taxable

 6,805  2,744  11,485  5,039  8,299  6,805  16,745  11,485 

Tax-exempt

  426   57   627   93   440   426   887   627 

Total interest income

  59,108   43,102   109,092   82,620   83,063   59,108   162,530   109,092 

Interest expense

        

Interest expense:

        

Deposits

 1,770  1,435  2,941  2,945  17,081  1,770  30,580  2,941 

Securities sold under agreements to repurchase

 57  5  74  10  376  57  832  74 

Federal funds purchased and other short-term borrowings

 19  4  22  6  170  19  347  22 

Federal Home Loan Bank advances

 3,962    5,696   

Subordinated debentures

 278  0  311  0   545   278   1,074   311 

Federal Home Loan Bank advances

  0   74   0   250 

Total interest expense

  2,124   1,518   3,348   3,211   22,134   2,124   38,529   3,348 

Net interest income

 56,984  41,584  105,744  79,409  60,929  56,984  124,001  105,744 

Provision for credit losses

  (200)  4,147   2,079   2,672   2,350   (200)  4,975   2,079 

Net interest income after credit loss expense

  57,184   37,437   103,665   76,737 

Non-interest income

        

Net interest income after provision expense

  58,579   57,184   119,026   103,665 

Non-interest income:

        

Wealth management and trust services

 9,495  6,858  17,738  13,106  10,146  9,495  19,673  17,738 

Deposit service charges

 2,061  1,233  3,924  2,177  2,201  2,061  4,350  3,924 

Debit and credit card income

 4,748  3,284  8,867  5,557  4,712  4,748  9,194  8,867 

Treasury management fees

 2,187  1,730  4,091  3,270  2,549  2,187  4,867  4,091 

Mortgage banking income

 1,295  1,303  2,298  2,747  1,030  1,295  2,068  2,298 

Net investment product sales commissions and fees

 731  545  1,338  1,009  800  731  1,554  1,338 

Bank owned life insurance

 270  206  536  367  559  270  1,108  536 

Loss on sale of premises and equipment

 (225) (2) (227) (28)

Other

  1,153   629   2,351   1,399   1,088   1,155   2,320   2,379 

Total non-interest income

  21,940   15,788   41,143   29,632   22,860   21,940   44,907   41,143 

Non-interest expenses

        

Non-interest expenses:

        

Compensation

 22,204  15,680  40,173  28,507  22,107  22,204  44,003  40,173 

Employee benefits

 4,429  3,367  8,968  6,628  5,061  4,429  10,114  8,968 

Net occupancy and equipment

 3,663  2,244  6,688  4,289  3,514  3,663  7,413  6,688 

Technology and communication

 3,984  2,670  7,403  5,016  4,219  3,984  8,470  7,403 

Debit and credit card processing

 1,665  976  3,002  1,681  1,706  1,665  3,125  3,002 

Marketing and business development

 1,445  822  2,217  1,346  1,784  1,445  2,879  2,217 

Postage, printing and supplies

 825  460  1,558  869  889  825  1,763  1,558 

Legal and professional

 1,027  666  1,677  1,128  819  1,027  1,616  1,677 

FDIC insurance

 536  349  1,181  754  779  536  1,914  1,181 

Amortization of investments in tax credit partnerships

 89  231  177  262  324  89  647  177 

Capital and deposit based taxes

 582  527  1,100  985  607  582  1,246  1,100 

Merger expenses

 0  18,100  19,500  18,500        19,500 

Federal Home Loan Bank early termination penalty

 0  474  0  474 

Intangible amortization

 1,611  127  2,324  204  1,172  1,611  2,352  2,324 

Other

  2,615   1,484   5,004   2,507   2,819   2,615   5,572   5,004 

Total non-interest expenses

  44,675   48,177   100,972   73,150   45,800   44,675   91,114   100,972 

Income before income tax expense

 34,449  5,048  43,836  33,219  35,639  34,449  72,819  43,836 

Income tax expense

  7,547   864   8,992   6,325   7,975   7,547   16,107   8,992 

Net income

 26,902  4,184  34,844  26,894  27,664  26,902  56,712  34,844 

Less income attributed to non-controlling interest

  108   0   144   0      108      144 

Net Income available to stockholders

 $26,794  $4,184  $34,700  $26,894 

Net income per common share, basic

 $0.92  $0.17  $1.23  $1.14 

Net income per common share, diluted

 $0.91  $0.17  $1.22  $1.13 

Net income available to stockholders

 $27,664  $26,794  $56,712  $34,700 

Net income per common share - basic

 $0.95  $0.92  $1.94  $1.23 

Net income per common share - diluted

 $0.94  $0.91  $1.93  $1.22 

Weighted average outstanding shares

         

Basic

 29,131  24,140  28,186  23,489  29,223  29,131  29,200  28,186 

Diluted

 29,346  24,379  28,421  23,731  29,340  29,346  29,353  28,421 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

For the three and six months ended June 30, 20222023 and 20212022 (in thousands)

 

 

Three months ended

 

Six months ended

  

Three months ended

 

Six months ended

 
 

June 30,

  

June 30,

  

June 30,

  

June 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Net income

 $26,902  $4,184  $34,844  $26,894  $27,664  $26,902  $56,712  $34,844 

Other comprehensive income (loss):

  

Change in unrealized gain (loss) on AFS debt securities

 (39,151) 6,349  (104,530) (9,218) (11,023) (39,151) 7,837  (104,530)

Change in fair value of derivatives used in cash flow hedge

  0   40   0   83   2,417      2,911    

Total other comprehensive income (loss), before income tax effect

 (39,151) 6,389  (104,530) (9,135) (8,606) (39,151) 10,748  (104,530)

Tax effect

  (9,413)  1,549   (25,133)  (2,184)  (2,133)  (9,413)  2,628   (25,133)

Total other comprehensive income (loss), net of tax

  (29,738)  4,840   (79,397)  (6,951)  (6,473)  (29,738)  8,120   (79,397)

Comprehensive income (loss)

 (2,836) 9,024  (44,553) 19,943  21,191  (2,836) 64,832  (44,553)

Less comprehensive income attributed to non-controlling interest

  108   0   144   0      108      144 

Comprehensive income (loss) available to stockholders

 $(2,944) $9,024  $(44,697) $19,943  $21,191  $(2,944) $64,832  $(44,697)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

6

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (unaudited)

For the three and six months ended June 30, 20222023 and 20212022 (in thousands, except per share data)

 

                  

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 
                  

Accumulated

     
  

Common stock

  

Additional

      

other

  

Total

 
  

Shares

      

paid-in

  

Retained

  

comprehensive

  

stockholders'

 
  

outstanding

  

Amount

  

capital

  

earnings

  

income (loss)

  

equity

 
                         

Balance, January 1, 2023

  29,259  $58,367  $377,703  $439,898  $(115,536) $760,432 
                         

Activity for three months ended March 31, 2023:

                        

Net income

           29,048      29,048 

Other comprehensive income

              14,593   14,593 

Stock compensation expense

        1,152         1,152 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations

  66   217   3,557   (6,143)     (2,369)

Cash dividends declared, $0.29 per share

           (8,489)     (8,489)

Shares cancelled

  (1)  (2)  (21)  24      1 

Balance, March 31, 2023

  29,324  $58,582  $382,391  $454,338  $(100,943) $794,368 
                         

Activity for three months ended June 30, 2023:

                        

Net income

           27,664      27,664 

Other comprehensive loss

              (6,473)  (6,473)

Stock compensation expense

        1,035         1,035 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations

     2   26   (39)     (11)

Cash dividends declared, $0.29 per share

           (8,501)     (8,501)

Shares cancelled

     (4)  (65)  69       

Balance, June 30, 2023

  29,324  $58,580  $383,387  $473,531  $(107,416) $808,082 

 

(continued)

 

7

 

                  

Accumulated

     
  

Common stock

  

Additional

      

other

  

Total

 
  

Shares

      

paid-in

  

Retained

  

comprehensive

  

stockholders'

 
  

outstanding

  

Amount

  

capital

  

earnings

  

income

  

Total

 
                         

Balance, January 1, 2021

  22,692  $36,500  $41,886  $353,574  $8,741  $440,701 
                         

Activity for three months ended March 31, 2021:

                        

Net income

     0   0   22,710   0   22,710 

Other comprehensive loss

     0   0   0   (11,791)  (11,791)

Stock compensation expense

     0   849   0   0   849 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations

  89   296   4,144   (7,533)  0   (3,093)

Cash dividends declared, $0.27 per share

     0   0   (6,144)  0   (6,144)

Balance, March 31, 2021

  22,781  $36,796  $46,879  $362,607  $(3,050) $443,232 
                         
                         

Activity for three months ended June 30, 2021:

                        

Net income

     0   0   4,184   0   4,184 

Other comprehensive income

     0   0   0   4,840   4,840 

Stock compensation expense

     0   1,414   0   0   1,414 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations

     (2)  (26)  (45)  0   (73)

Stock issued for KB acquisition

  3,808   12,682   191,988   0   0   204,670 

Cash dividends declared, $0.27 per share

     0   0   (7,178)  0   (7,178)

Shares cancelled

  (1)  (5)  (55)  60   0   0 

Balance, June 30, 2021

  26,588  $49,471  $240,200  $359,628  $1,790  $651,089 
                  

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  $-  $675,869 
                                 

Activity for three months ended March 31, 2022:

                                

Net income

           7,906      7,906   36   7,942 

Other comprehensive loss

              (49,659)  (49,659)     (49,659)

Stock compensation expense

        991         991      991 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations

  65   216   3,451   (6,011)     (2,344)     (2,344)

Stock issued for Commonwealth acquisition

  2,564   8,539   125,286         133,825      133,825 

Non-controlling interest of acquired entity

                    3,094   3,094 

Cash dividends declared, $0.28 per share

           (8,172)     (8,172)     (8,172)

Shares cancelled

  (5)  (18)  (280)  25      (273)     (273)

Distributions to non-controlling interest

                    (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

           26,794      26,794   108   26,902 

Other comprehensive loss

              (29,738)  (29,738)     (29,738)

Stock compensation expense

        1,057         1,057      1,057 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations

  26   85   1,365   (2,394)     (944)     (944)

Cash dividends declared, $0.28 per share

           (8,183)     (8,183)     (8,183)

Shares cancelled

  (3)  (8)  (99)  109      2      2 

Distributions to non-controlling interest

                    (155)  (155)

Balance, June 30, 2022

  29,243  $58,315  $374,878  $401,275  $(87,337) $747,131  $3,030  $750,161 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

8

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

For the six months ended June 30, 20222023 and 20212022 (in thousands)

 

 2022  2021  

2023

  

2022

 

Cash flows from operating activities:

        

Net income

 $34,844  $26,894  $56,712  $34,844 

Adjustments to reconcile net income to net cash provided by operating activities:

  

Provision for credit losses

 2,079  2,672  4,975  2,079 

Depreciation, amortization and accretion, net

 10,031  4,888  10,718  10,031 

Deferred income tax expense

 4,771  2,307  463  4,771 

Gain on sale of mortgage loans held for sale

 (504) (2,118) (745) (504)

Origination of mortgage loans held for sale

 (79,643) (119,431) (55,391) (79,643)

Proceeds from sale of mortgage loans held for sale

 82,275  141,747  51,673  82,275 

Bank owned life insurance income

 (536) (367) (1,108) (536)

Loss on the disposal of premises and equipment

 28  41  227  28 

Gain on the sale of other real estate owned

 0  (47)

Stock compensation expense

 2,048  2,263  2,187  2,048 

Excess tax benefit from share-based compensation arrangements

 (1,112) (1,150) (530) (1,112)

Net change in accrued interest receivable and other assets

 (4,747) (4,420) (40,833) (4,747)

Net change in accrued interest payable and other liabilities

  (27,776)  (6,105)  15,535   (27,776)

Net cash provided by operating activities

  21,758   47,174   43,883   21,758 

Cash flows from investing activities:

        

Purchases of available for sale debt securities

 (85,659) (204,228) (170) (85,659)

Proceeds from sales of acquired available for sale debt securities

 2,111  91,094    2,111 

Proceeds from maturities and paydowns of available for sale debt securities

 78,409  80,122  58,501  78,409 

Purchases of held to maturity debt securities

 (459,183) 0    (459,183)

Proceeds from maturities and paydowns of held to maturity debt securities

 159,119  0  23,303  159,119 

Proceeds from redemption of Federal Home Loan Bank stock

 0  3,881 

Purchases of Federal Home Loan Bank stock

 (16,438)  

Net change in non-PPP loans

 (180,130) (158,253) (225,628) (180,130)

Net change in PPP loans

 103,967  235,864  11,505  103,967 

Purchases of premises and equipment

 (13,563) (1,752) (3,472) (13,563)

Proceeds from sale or disposal of premises and equipment

 411   

Other investment activities

 0  (3,965) (506)  

Proceeds from sales of other real estate owned

 56  261    56 

Cash from acquisition, net of cash paid

  349,456   24,981      349,456 

Net cash provided by (used in) investing activities

  (45,417)  68,005 

Net cash used in investing activities

  (152,494)  (45,417)

Cash flows from financing activities:

        

Net change in deposits

 (358,526) 232,255  (182,872) (358,526)

Net change in securities sold under agreements to repurchase and federal funds purchased

 18,223  4,086  7,862  18,223 

Proceeds from Federal Home Loan Bank advances

 0  20,000  1,400,000   

Repayments of Federal Home Loan Bank advances

 0  (132,745) (1,050,000)  

Repayment of acquired line of credit

 (3,200) 0    (3,200)

Share repurchases related to compensation plans

 (3,559) (3,166) (2,380) (3,559)

Cash disbursements to non-controlling interest

 (208) 0    (208)

Cash dividends paid

  (16,394)  (13,361)  (17,036)  (16,394)

Net cash (used in) provided by financing activities

  (363,664)  107,069   155,574   (363,664)

Net change in cash and cash equivalents

 (387,323) 222,248  46,963  (387,323)

Beginning cash and cash equivalents

  961,192   317,945   167,367   961,192 

Ending cash and cash equivalents

 $573,869  $540,193  $214,330  $573,869 

 

(continued)

 

9

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)

For the six months ended June 30,

 

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 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

10

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

(1)

Summary of Significant Accounting Policies

 

Nature of Operations – Stock Yards Bancorp, Inc. (“Bancorp” or “the Company”) is a FHC headquartered in Louisville, Kentucky. The accompanying condensed consolidated financial statements include the accounts of its wholly owned subsidiaries, SYB (“the Bank”) and SYB Insurance Company,Stock Yards Bancorp, Inc. (“the Captive”). Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements of Bancorp and its subsidiaries have been prepared in conformity with GAAP and adhere to predominant practices within the banking industry.

Established in 1904, SYB 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 metropolitan markets through 73 full service banking center locations.

Bancorp is divided into 2 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, leasing, treasury management services, merchant services, international banking, correspondent banking and other banking services.wholly-owned subsidiaries. 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.

The Captive, a wholly owned subsidiary of the Company, 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, 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.

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following 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 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 non-controlling interest within the consolidated financial statements represents the interest in LFA not owned by Bancorp.

Principles of Consolidation and Basis of PresentationThe accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements dothis report have not include allbeen audited by the information and footnotes required by GAAP for complete financial statements.

InCompany’s independent registered public accounting firm, but in the opinion of management, all adjustments (consistingnecessary to present fairly the financial position and the result of operations for the interim periods have been made. All such adjustments are of a normal, recurring accruals) considered necessary for fair presentation have been included. Intercompanynature and all intercompany accounts and transactions have been eliminated. These

To prepare the condensed consolidated financial statements, should be read in conjunction with Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31,2022.

11

Critical Accounting Policies and Estimates – To prepare financial statements in conformity with GAAP, management must make estimates and assumptions that may require difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. FactsActual results could differ significantly from those estimates, and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including pandemic-related changes, and changes in the financial condition of borrowers.

Bancorp’s accounting policies are fundamental to understanding management’s discussion and analysis of our results of operations and financial condition. At June 30, 2022 and December 31, 2021, the accounting policies considered the most critical in preparing Bancorp’s consolidated financial statements are the determination of the ACL on loans and goodwill.

Effective January 1, 2020, Bancorp adopted ASC 326Financial Instruments Credit Losses,” which created material changes to Bancorp’s existing critical accounting policy that existed at December 31, 2019. Accounting policies relating to credit losses for HTM investment securities, loans and off-balance sheet credit exposures reflect the current accounting policies required by this ASC.

The ACL for loans is established through credit loss expense charged to current earnings. The amount maintained in the ACL reflects management’s estimate of the net amount not expected to be collected on the loan portfolio at the balance sheet date over the life of the loan. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A specific reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans.

For purposes of establishing the general reserve, Bancorp stratifies the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculates the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. Bancorp’s methodologies for estimating the ACL for loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.

Accounting for Business AcquisitionsBancorp accounts for acquisitions in accordance with the acquisition method as outlined in ASC Topic 805,Business Combinations.” The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.

Identifiable assets acquired, liabilities assumed, and any non-controlling interest in acquirees are generally recognized at their acquisition-date (“day-one”) fair values based on the requirements of ASC Topic 820,Fair Value Measurements and Disclosures.” The measurement period for day-one fair values begins on the acquisition date and ends at the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these provisional period adjustments may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.

Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.

Cash EquivalentsCash and cash equivalents include cash and due from banks, FFS and interest bearing due from banks as segregated in the accompanying consolidated balance sheets.

Debt SecuritiesBancorp determines the classification of debt securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Debt securities not classified as held to maturity are classified as AFS and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in AOCI, net of tax.

12

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity using the interest method, except for premiums on callable debt securities, which are amortized to their earliest call date.

Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in the consolidated balance sheets. A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on non-accrual is reversed against interest income. There was no accrued interest related to debt securities reversed against interest income for the three and six month periodsperiod ended June 30, 20222023 and 2021.

ACL AFS Debt SecuritiesFor AFS debt securities in an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that isdo not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an ACL for AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL for AFS debt securities and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL for AFS debt securities in this situation.

In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, andnecessarily indicate the results of reviews ofthat Bancorp will achieve for the issuers’ financial condition, among other factors. There were no credit related factors underlying unrealized losses on AFS debt securities at June 30, 2022 andyear ended December 31, 2021.2023,

Changes in the ACL for AFS debt securities are recorded as expense. Losses are charged against the ACL for AFS debt securities when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

ACL HTM Debt Securities– Bancorp measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $2 million and $0 as of June 30, 2022 and December 31, 2021, respectively and is excluded from the ACL on HTM securities. The estimate of the ACL for HTM securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. As of both June 30, 2022 and December 31, 2021, 0 ACL for HTM securities was recorded.

Mortgage Loans Held for Sale and Mortgage Banking Activities – Effective March 31, 2022, Bancorp elected to begin carrying mortgages originated and intended for sale in the secondary at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale prior to March 31, 2022 were carried at the lower of cost or market value. Net gains on mortgage loans held for sale are recorded as a component of Mortgage banking income and represent the difference between the selling price and the carrying value of the loans sold. Substantially all of the gains or losses on the sale of loans are reported in earnings when the interest rates on loans are locked.

Commitments to fund mortgage loans (“interest rate lock commitments”) to be sold into the secondary market and non-exchange traded mandatory forward sales contracts (“forward contracts”) for the future delivery of these mortgage loans or the purchase of TBA securities are accounted for as free-standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the Bank enters into the derivative. Generally, the Bank enters into forward contracts for the future delivery of mortgage loans or the purchase of TBA securities when interest rate lock commitments are entered into in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these mortgage derivatives are included in net gains on sales of loans, which is a component of Mortgage banking income on the income statement.

13

Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded as component of Mortgage banking income. Fair value is based on the market prices for comparable mortgage servicing contracts when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and are periodically adjusted based on the weighted average remaining life of the underlying loans.

A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs generally decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs generally will increase, as prepayments on the underlying loans would be expected to decline.

Loan servicing income is reported on the income statement as a component of Mortgage banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are considered nominal.

LoansLoans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost basis, which is the unpaid principal balance outstanding, net of unearned income, deferred loan fees and costs, premiums and discounts associated with acquisition date fair value adjustments on acquired loans and any direct partial charge-offs. Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in the consolidated balance sheets.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the life of the loan without anticipating prepayments.

Loans are considered past due or delinquent when the contractual principal and/or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. The accrual of interest income on loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or if full collection of interest or principal becomes doubtful. Consumer loans are typically charged off no later than 120 days past due. All interest accrued but not received for a loan placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Acquired loans are recorded at fair value at the date of acquisition based on a DCF methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting Bancorp’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective, as they require material estimates, all of which may be susceptible to significant change.

Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.

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Acquired loans are determined by Bancorp to have more-than-insignificant deterioration in credit quality since origination if any of the following designations apply, listed in order of priority as follows: Loans individually analyzed by Bancorp and determined to have a collateral or cash flow deficiency resulting in a full or partial allocation for loss, loans placed on non-accrual status by the acquired institution, loans identified as TDRs by the acquired institution, loans that have received a partial charge off by the acquired institution, loans risk-rated below a “pass” grade by the acquired institution and any loans past due 59 days or more at the time of acquisition.

For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are accreted/amortized into interest income over the lives of the related loans. For non-PCD loans, an initial ACL for loans is estimated and recorded as credit loss expense at the acquisition date.other interim period.

 

The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.

ACL Loans – Under the CECL model, the ACL for loans represents a valuation allowance estimated at each balance sheet datecondensed consolidated financial statements have been prepared in accordance with GAAP that is deducted fromfor interim financial information and with the loans’ amortized cost basis to represent the net amount expected to be collected on the loan portfolio.

Bancorp estimates the ACLrules and regulations for loans based on the underlying assets’ amortized cost basis, which is the amount at which the receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of payment, and partial charge-offs. In the event that collection of principal becomes uncertain, Bancorp has policies in place to reverse accrued interest in a timely manner. Therefore, Bancorp has made a policy election to exclude accrued interest from the measurement of the ACL for loans.

Expected credit losses are reflected in the ACL for loans through a charge to provision. When Bancorp deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written-off and the ACL for loans is reducedForm 10-Q as adopted by the same amount. Bancorp applies judgment to determine when aSEC. Accordingly, the condensed consolidated financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts of collection have been exhausted and the collateral, if any, has been liquidated. Subsequent recoveries, if any, are credited to the ACL for loans when received.

Bancorp’s methodologies for estimating the ACL for loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Bancorp’s methodologies may revert to historical loss information on a straight-line basis over a number of quarters when it can no longer develop reasonable and supportable forecasts.

Loans are predominantly segmented by FDIC Call Report Codes into loan pools that have similar risk characteristics, similar collateral type and are assumed to pose consistent risk of loss to Bancorp. Bancorp has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:

Commercial Real Estate Owner Occupied Includes non-farm non-residential real estate loans for a variety of commercial property types and purposes, and is typically secured by commercial offices, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party (or affiliate) who owns the property. Repayment terms vary considerably; interest rates are fixed or variable and structured for full or partial amortization of principal.

Commercial Real Estate Non-Owner Occupied Includes investment real estate loans secured by similar collateral as above. The primary source of income for this loan type is typically rental income associated with the property. This category also includes apartment or multifamily residential buildings (secured by five or more dwelling units).

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Construction and Land Development Consists of loans to finance the ground up construction or improvement of owner occupied and non-owner occupied residential and commercial properties and loans secured by raw or improved land. The repayment of C&D loans is generally dependent upon the successful completion of the improvements by the builder for the end user, the leasing of the property, or sale of the property to a third party. Repayment of land secured loans is dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. Bancorp’s construction loans may convert to real estate-secured loans once construction is completed or principal amortization payments begin, assuming the borrower retains financing with the Bank.

Commercial and Industrial Represents loans for C&I purposes to sole proprietorships, partnerships, corporations and other business enterprises, whether secured (other than those that meet the definition of a “loan secured by real estate”) or unsecured, single payment or installment. This category includes loans originated for financing capital expenditures, loans secured by accounts receivable, inventory and other business assets such as equipment in addition to non-real estate loans guaranteed by the SBA. Bancorp originates these loans for a variety of purposes across various industries. This portfolio has been segregated between term loans and revolving lines of credits based on the varied characteristics of these individual loan structures.

Residential Real Estate Includes non-revolving (closed-end) first and junior lien loans secured by residential real estate primarily in Bancorp’s market areas. This portfolio is segregated between owner occupied and non-owner occupied status, as the investment nature of the latter poses additional credit risks to Bancorp.

Home Equity Lines of Credit – Similar to Residential Real Estate above, however these are revolving (open-ended) lines of credit.

Consumer Represents loans to individuals for personal expenditures that may be secured or unsecured. This includes pre-arranged overdraft plans, secured automobile loans and other consumer-purpose loans.

Leases Represents a variety of leasing options to businesses to acquire equipment.

Credit Cards Represents revolving loans to businesses and consumers.

Bancorp measures expected credit losses for its loan portfolio segments as follows:

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

Based on the 100% SBA guarantee of the PPP loan portfolio, Bancorp does not generally reserve for potential losses for these loans within the ACL.

Discounted Cash flow Method – The DCF methodology is used to develop cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, time to recovery, probability of default and loss given default. The modeling of expected prepayment speeds, curtailment rates and time to recovery are based on historical internal data.

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Bancorp uses regression analysis on historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes the FRB’s forecasted Seasonally Adjusted National Civilian Unemployment Rate as its primary loss driver, as this was determined to best correlate to historical losses.

With regard to the DCF model and the adoption of CECL effective January 1, 2020, management determined that four quarters represented a reasonable and supportable forecast period with reversion back to a historical loss rate over eight quarters on a straight-line basis. However, in response to uncertainty surrounding the magnitude and duration of the economic crisis created by the pandemic, management subsequently determined that a one-quarter forecast period with a reversion back to a historical loss rate in the following quarter was appropriate for the calculation performed at March 31, 2020. For the calculation performed at June 30, 2020, management elected to return to the four quarter forecast period with reversion back to a historical loss rate in the following quarter, which was the methodology used for all subsequent calculations through June 30, 2021. Beginning with the calculation performed as of September 30, 2021, management concluded that increasing the reversion period back to a historical loss rate over four quarters on a straight line basis was warranted, as both current and forecasted unemployment levels had become more normal.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level NPV of expected cash flows. An ACL is established for the difference between the instrument’s NPV and amortized cost basis.

Static Pool Method – The static pool methodology is utilized for the loan portfolio segments that typically have shorter durations. For each of these loan segments, Bancorp applies an expected loss ratio based on historical losses adjusted as appropriate for qualitative loss factors. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans and reasonable and supportable forecasts of economic conditions.

Collateral Dependent Loans – Loans thatstatements do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where Bancorp has determined that the liquidation or foreclosureinclude all of the collateral is probable, or where the borrower is experiencinginformation and notes required by GAAP for complete financial difficultystatements and Bancorp expects repayment of the financial asset to be provided substantially through the operation of the business 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 asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of loan. Bancorp’s estimate of the ACL reflects losses expected over the remaining contractual life of the loan and the contractual term does not consider extensions, renewals or modifications.

A loan that has been modified or renewed is considered a TDR when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period may be included in Bancorp’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.

Premises and EquipmentPremises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using straight-line methods over the estimated useful lives of the assets ranging from three to 40 years. Leasehold improvements are amortized on the straight-line method over terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

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FHLB StockBancorp is a member institution of the FHLB. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts of stock. FHLB stock is carried at cost, classified as a restricted security and annually evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income.

Goodwill and Other Intangible Assets– Goodwill resulting from business acquisitions represents the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested annually for impairment or more frequently if events and circumstances exist that indicate a goodwill impairment test should be performed.

Bancorp has selected September 30 as the date to perform its annual goodwill impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.

Currently, goodwill recorded on Bancorp’s consolidated balance sheets is attributed mainly to the Commercial Banking segment, while a portion is also attributed to the WM&T segment. Goodwill related to the KSB acquisition is deductible for tax purposes, as it was structured as an asset sale/338 election. Goodwill related to the CB and KB acquisitions is not deductible for tax purposes, as both were structured as stock sales. Based on its assessment, Bancorp believes its goodwill balances at June 30, 2022 and December 31, 2021 were not impaired and are properly recorded in the consolidated financial statements.

Other intangible assets consist of CDI and CLI assets arising from business acquisitions. The CDI and CLI assets represent customer relationships associated with acquired deposit portfolios and WM&T businesses, respectively. CDI and CLI assets are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives.

Other Assets– BOLI and other life insurance policies are carried at net realizable value, which considers applicable surrender charges. Bancorp also maintains life insurance policiesread in conjunction with its non-qualified defined benefitBancorp’s most recent Annual Report on Form 10-K, which contain the latest audited consolidated financial statements and non-qualified compensation plans.

OREO is carried at the lower of cost or estimated fair value minus estimated selling costs. In certain situations, improvements to prepare assets for sale are capitalized if those costs increase the estimated fair value of the asset. Expenses incurred in maintaining assets, write downs to reflect subsequent declines in value, and realized gains or losses are reflected in the results of operations and are included in non-interest income and/or expense.

Off-Balance Sheet Credit Exposures – Financial instruments include off-balance sheet credit instruments, such as commitments to originate loans, commitments to fund existing loans and commercial letters of credit issued to meet customer-financing needs. Off-balance sheet refers to assets or liabilities that do not appear on a company's balance sheet. Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

Bancorp records an ACL for off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision for credit losses on Bancorp’s consolidated statements of income. The ACL for off-balance sheet credit exposures is estimated by loan portfolio segment at each balance sheet date under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on Bancorp’s consolidated balance sheets.

Derivatives– Bancorp uses derivative financial instruments, including interest rate swaps, as part of its interest rate risk management. GAAP establishes accounting and reporting standards for derivative instruments and hedging activities. As required by GAAP, Bancorp’s interest rate swaps are recognized as other assets and liabilities in the consolidated balance sheet at fair value. Accounting for changes in fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. To qualify for hedge accounting, Bancorp must comply with detailed rules and documentation requirements at inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship. Hedge ineffectiveness, if any, is measured periodically throughout the life of the hedging relationship.

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For derivatives designated as cash flow hedges, the effective portion of changes in fair value of the derivative is initially reported in AOCI and subsequently reclassified to interest income or expense when the hedged transaction affects earnings, while the ineffective portion of changes in fair value of derivative, if any, is recognized immediately in other noninterest income. Bancorp assesses the effectiveness of each hedging relationship by comparing cumulative changes in cash flows of the derivative hedging instrument with cumulative changes in cash flows of the designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness.

Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires 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. 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. Because these derivative instruments have not been designated as hedging instruments, the derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other noninterest income.

Bancorp had no fair value hedging relationships at June 30, 2022 and December 31, 2021. Bancorp does not use derivatives for trading or speculative purposes. See the Footnote titled “Derivative Financial Instruments” for additional discussion.

Transfers of Financial AssetsTransfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from Bancorp, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Stock-Based Compensation– For all awards, stock-based compensation expense is recognized over the period in which it is earned based on the grant-date fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures at the time of grant. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes– Income tax expense is the total of the current year income tax due or refundable and the change in DTAs and DTLs. DTAs and DTLs are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted statutory tax rates. A valuation allowance, if needed, reduces DTAs to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.

Bancorp recognizes interest and/or penalties related to income tax matters in income tax expense, if any.

Bancorp periodically invests in certain partnerships with customers that yield historic tax credits, accounted for using the flow through method, which approximates the equity method. Low-income housing tax credits, as well as tax-deductible losses, are accounted for using the effective yield method for older transactions or proportional amortization method for more recent transactions. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income.

Net Income Per ShareBasic net income per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is determined by dividing net income by the weighted average number of shares of common stock outstanding plus the weighted average number of shares that would be issued upon exercise of dilutive options and SARs, assuming proceeds are used to repurchase shares under the treasury stock method.

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Comprehensive Income (Loss)Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances outside of the Company’s control. For Bancorp, this includes net income, changes in unrealized gains and losses on AFS debt securities and cash flow hedging instruments, net of reclassification adjustments and taxes, and minimum pension liability adjustments, net of taxes.

Loss Contingencies– Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are any outstanding matters that would have a material effect on the financial statements.

Restrictions on Cash and Cash Equivalents– Bancorp has historically been required by the FRB to maintain average reserve balances. Effective March 26, 2020, the FRB reduced the reserve requirement ratio to 0% in response to the COVID-19 pandemic, eliminating reserve requirements for all depository institutions. The reserve requirement ratio remained at 0% as of June 30, 2022.

The Company’s captive maintains cash reserves to cover insurable claims. Reserves totaled $200,000 as of June 30, 2022.

Dividend Restrictions– Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Holding Company or by the Holding Company to shareholders.

Fair Value of Financial InstrumentsFair values of financial instruments are estimated using relevant market information and other assumptions, as disclosed in the Footnote titled “Assets and Liabilities Measured and Reported at Fair Value” in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates.

Revenue from Contracts with Customers–The majority of Bancorp’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not subject to ASC 606. Bancorp’s services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as Bancorp satisfies its obligation to its customer.

Segment InformationBancorp provides a broad range of financial services to individuals, corporations and others through its full service banking locations. These services include loan and deposit services, cash management services, securities brokerage activities, mortgage origination and WM&T activities. Bancorp’s operations are considered by management to be aggregated in two reportable operating segments: Commercial Banking and WM&T.

notes thereto.

 

Reclassifications Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods’ net income or shareholders’ equity.

Adoption of New Accounting Guidance The FASB issued ASU No.2020-04, Reference Rate Reform (Topic 848): “FacilitationBancorp continually monitors potential accounting pronouncements and evaluates the impact that adoption of the Effects of Reference Rate Reform on Financial Reporting,” in March 2020. The amendments in this update provide optionalnew guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The main provisions include:

A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases and other arrangements, that meet specific criteria.

When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.

The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022.

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In October 2020, the FASB issued ASU No.2020-10,Codification Improvements. The amendments improve codification by having all disclosure-related guidance available in the disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present informationhave on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to codification that are not expected to have a significant effect on current accounting practice. The amendments became effective for annual periods beginning after December 15, 2020.

In May 2020, the SEC issued a final rule related to acquisitions and dispositions of businesses and related pro forma information. The rule revised the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The intent of the rule is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements. The changes are intended to improve disclosure. The final rule was effective January 1, 2021.

Accounting Standards UpdatesGenerally, if an issued but not yet effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.

In June 2022, the FASB issued ASU 2022-03,Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to contractual sale restrictions: 1) the fair value of the equity security subject to contractual sale restrictions reflected in the balance sheet; 2) the natures and remaining duration of the restriction(s); and 3) the circumstances that could cause a lapse in the restriction(s). ASU 2022-03 is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied prospectively. ASU 2022-03 is not expected to have a material impact on ourCompany’s condensed consolidated financial statements.

 

In March 2022, the FASB issued ASU 2022-02,Financial Instruments Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40,Receivables Troubled Debt Restructurings by Creditors” for entities that have adopted the CECL model introduced by ASU 2016-13,Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20,Financial Instruments Credit Losses Measured at Amortized Cost. The newThis guidance is effective for fiscal years beginning after December 15, 2022 and Bancorp’s adoption of this guidance did not have a material impact on the condensed consolidated financial statements.

Accounting Standards UpdatesGenerally, if an issued but not yet effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.

In March 2023, the FASB issued ASU 2023-02,Investments Equity Method and Join Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the of the tax credit program from which the related income tax credits are receiving. This guidance is effective for reporting entities for fiscal years beginning after December 15, 2023. Early adoption is permitted. ASU 2023-02 is not expected to have a material impact on the consolidated financial statements.

 

In April 2019, the FASB issued ASU No.2019-04,Codification Improvements to Financial Instruments - Credit Losses (ASC 326), Derivatives and Hedging (ASC 815), and Financial Instruments (ASC 825).” The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amended guidance in this ASU related to the credit losses will be effective for Bancorp’s for fiscal years and interim periods beginning after December 15, 2022. Bancorp is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.

In August 2021, the FASB issued ASU 2021-06,Presentation of Financial Statements (Topic 205), Financial Services Depository and Lending (Topic 942), and Financial Services Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.33-10786,Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835,Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and will not have a material impact on the consolidated financial statements.

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In October 2021, the FASB issued ASU 2021-08,Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including any interim period, for public business entities for periods which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The new guidance will not have a material impact on the consolidated financial statements.

22

 

(2)

Bank Acquisitions

Commonwealth Bancshares, Inc.

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. in a combined stock and cash transaction for total consideration of $168 million. Bancorp acquired 15 retail branches, including 9 in Jefferson County, 4 in Shelby County, and 2 in Northern Kentucky.

The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date. As provided for 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. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subjected to further adjustment through March 7, 2023.

  

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 

(1)

See the following page for explanations for individual fair value and provisional period adjustments (if applicable).

(2)

   As of acquisition date, securities with a fair value of $162 million were classified by Bancorp as HTM.

23

Explanation of fair value adjustments:

a.

Adjustment to investment securities based on Bancorp’s evaluation of the acquired portfolio.

b.

Adjustments to loans to reflect estimated fair value adjustments, including the following:

(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)

c.

The net adjustment to allowance for credit losses includes the following:

(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)

d.

Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets. Bancorp expects to make provisional period adjustments to premises and equipment during the third quarter of 2022 based on the sale of acquired buildings.

e.

Elimination of the historical CB goodwill.

f.

Calculation of CDI related to the acquisition.

g.

Calculation of CLI related to the acquisition.

h.

Adjustment to reflect the estimated fair value of MSRs.

i.

Adjustment to net DTAs associated with the effects of the purchase accounting adjustments.

j.

Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.

k.

Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based on an analysis of market interest rates and maturity dates at the time of acquisition.

l.

Adjustment to reflect the estimated fair value of subordinated debentures for differences in interest rates, which was based primarily on an analysis of market interest rates and maturity dates at the time of acquisition.

m.

Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL, operating lease liabilities and various accrual adjustments.

Goodwill of approximately $67 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the CB acquisition and is the result of expected operational synergies and other factors. This goodwill is attributable to the Company’s Commercial Banking and Wealth Management & Trust segments. Goodwill related to the CB acquisition is not deductible for tax purposes, as the transaction was structured as stock sale. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the CB acquisition will change.

Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $540 million and $549 million at the date of acquisition.

Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $11.7 million and $14.9 million for the three and six months ended June 30, 2022, respectively.

24

The following unaudited pro forma condensed combined financial information presents the results of operations of Bancorp, including the effects of the purchase accounting adjustments and acquisition expenses, had the CB acquisition taken place at the beginning of the period. Further, the pro forma condensed combined financial information presented below for the three and six month periods ended June 30, 2021 also assumes that the KB acquisition took place at the beginning of the period.

(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 

(1) - Excludes $4.4 million in merger related credit loss expense for the six months ended June 30, 2022.Excludes $7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively.

(2) - Excludes $24.1 million in pre-tax merger expenses for the six months ended June 30, 2022. Excludes $18.1 million and $18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively.

25

Kentucky Bancshares, Inc.

On May 31, 2021, Bancorp completed its acquisition of Kentucky Bancshares, Inc. in a combined stock and cash transaction for total consideration of $233 million. Bancorp acquired 19 branches in 11 communities throughout central and eastern Kentucky, including the Lexington, Kentucky metropolitan statistical area and contiguous counties, and also acquired a captive insurance subsidiary.

Effective March 31, 2022, management finalized the fair values of the acquired assets and assumed liabilities in advance of the 12 month post-acquisition date, as allowed by GAAP.

The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final provisional period adjustments to those previously reported preliminary values, and the final fair values of those assets and liabilities as recorded by Bancorp.

  

As Recorded

  

Fair Value

   

Provisional Period

   

As Recorded

 

(in thousands)

 

By KB

  

Adjustments (1)

   

Adjustments (1)

   

by Bancorp

 

Assets aquired:

                  

Cash and due from banks

 $53,257  $0   $   $53,257 

Mortgage loans held for sale

  3,071   0        3,071 

Available for sale debt securities

  396,157   (295)

a

      395,862 

Federal Home Loan Bank stock, at cost

  7,072   0        7,072 

Loans

  755,932   (757)

b

      755,175 

Allowance for credits losses on loans

  (9,491)  2,734 

c

      (6,757)

Net loans

  746,441   1,977        748,418 

Premises and equipment, net

  27,401   (6,361)

d

      21,040 

Bank owned life insurance

  18,909   0        18,909 

Accrued interest receivable

  4,939   0        4,939 

Goodwill

  14,001   (14,001)

e

       

Core deposit intangible

  0   3,404 

f

  999 

f

  4,403 

Other real estate owned

  674   (123)

g

      551 

Mortgage servicing rights

  1,628   34 

h

      1,662 

Deferred income taxes, net

  1,856   715 

i

  (230)

i

  2,341 

Other assets

  6,421   (1,866)

j

  (70)

j

  4,485 

Total assets acquired

 $1,281,827  $(16,516)  $699   $1,266,010 
                   

Liabilities assumed:

                  

Deposits:

                  

Non-interest bearing

 $359,544  $0   $   $359,544 

Interest bearing

  678,528   1,146 

k

      679,674 

Total deposits

  1,038,072   1,146        1,039,218 

Securities sold under agreements to repurchase

  11,360   0        11,360 

Federal Home Loan Bank advances

  88,581   2,490 

l

      91,071 

Accrued interest payable

  505   0        505 

Other liabilities

  16,231   (2,004)

m

      14,227 

Total liabilities assumed

  1,154,749   1,632        1,156,381 

Net assets acquired

 $127,078  $(18,148)  $699   $109,629 
                   

Consideration for common stock

               $204,670 

Cash consideration paid

                28,276 

Total consideration

               $232,946 
                   

Goodwill

               $123,317 

(1)

See the following page for explanations for individual fair value and provisional period adjustments.

26

Explanation of fair value adjustments:

a.

Adjustment based on Bancorp’s evaluation of the acquired investment portfolio. Bancorp sold approximately $91 million in AFS debt securities shortly after acquisition.

b.

Adjustments to loans to reflect estimated fair value adjustments, including the following:

(in thousands)

    
     

Fair value adjustment - acquired non PCD loans

 $228 

Fair value adjustment - acquired PCD loans

  (735)

Eliminate unrecognized loan fees on acquired loans and fair value hedge

  (250)

Net loan fair value adjustments

 $(757)

c.

The net adjustment to allowance for credit losses includes the following:

(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 

d.

Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.

e.

Elimination of the historical KB goodwill.

f.

Calculation of CDI related to the acquisition. During the third quarter of 2021, a provisional period adjustment of $999,000 was recorded based on revised inputs used in the CDI calculation.

g.

Adjustment to reflect the estimated fair value of other real estate owned.

h.

Adjustment to reflect the estimated fair value of mortgage servicing rights.

i.

Adjustment to net DTAs associated with the effects of the purchase accounting adjustments.

j.

Adjustment to other assets to reflect the estimated fair value of prepaid and other assets. During the third quarter of 2021, a provisional period adjustment of $70,000 was recorded for the write off of miscellaneous mortgage servicing fees.

k.

Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based on an analysis of market interest rates and maturity dates at the time of acquisition.

l.

Adjustment to reflect the estimated fair value of Federal Home Loan Bank advances for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates. All KB FHLB advances were paid off immediately after acquisition.

m.

Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL, operating lease liabilities and various accrual adjustments.

Goodwill of approximately $123 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the KB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment. Goodwill related to the KB acquisition is not deductible for tax purposes, as the transaction was structured as stock sale.

Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $724 million and $723 million at the date of acquisition.

27

Total revenue, defined as net interest income and non-interest income, attributed to KB totaled approximately $4.5 million and for both the three and six months ended June 30, 2021, respectively.

The following unaudited pro forma condensed combined financial information presents the results of operations of Bancorp, including the effects of the purchase accounting adjustments and acquisition expenses, had the KB acquisition taken place at the beginning of the period:

(in thousands)

 

Three months ended

June 30, 2021

 
     

Net interest income

 $47,465 

Provision for credit losses (1)

  (3,167)

Non-interest income

  18,078 

Non-interest expense (2)

  37,257 

Income before taxes

  31,453 

Income tax expense

  6,026 

Net income

  25,427 

Less net income attributed to noncontrolling interest

  0 

Net income available to stockholders

 $25,427 
     

Earnings per share

    

Basic

 $0.95 

Diluted

  0.94 
     

Basic weighted average shares outstanding

  26,687 

Diluted weighted average shares outstanding

  26,926 

(in thousands)

 

Six months ended

June 30, 2021

 
     

Net interest income

 $94,043 

Provision for credit losses (1)

  (4,542)

Non-interest income

  36,090 

Non-interest expense (2)

  71,803 

Income before taxes

  62,872 

Income tax expense

  11,979 

Net income

  50,893 

Less net income attributed to noncontrolling interest

  0 

Net income available to stockholders

 $50,893 
     

Earnings per share

    

Basic

 $1.91 

Diluted

  1.89 
     

Basic weighted average shares outstanding

  26,670 

Diluted weighted average shares outstanding

  26,911 

(1) - Excludes $7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively.

(2) - Excludes $18.1 million and $18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively.

28

(3)

Investment Securities

 

Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified as HTM securities. All other investment securities are classified as AFS securities.

 

AFS Debt Securities

 

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of Bancorp’s AFS debt securities portfolio:

 

(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)

 

Amortized

  

Unrealized

     

June 30, 2023

 cost  

Gains

  

Losses

  Fair value 
                 

U.S. Treasury and other U.S. Government obligations

 $122,927  $-  $(6,710) $116,217 

Government sponsored enterprise obligations

  139,479   199   (6,103)  133,575 

Mortgage backed securities - government agencies

  829,867   22   (117,177)  712,712 

Obligations of states and political subdivisions

  142,086   1   (15,307)  126,780 

Other

  3,890   -   (450)  3,440 
                 

Total available for sale debt securities

 $1,238,249  $222  $(145,747) $1,092,724 
                 

December 31, 2022

                
                 

U.S. Treasury and other U.S. Government obligations

 $122,966  $-  $(7,927) $115,039 

Government sponsored enterprise obligations

  149,773   290   (6,437)  143,626 

Mortgage backed securities - government agencies

  874,265   58   (121,585)  752,738 

Obligations of states and political subdivisions

  145,016   1   (17,418)  127,599 

Other

  5,957   -   (342)  5,615 
                 

Total available for sale debt securities

 $1,297,977  $349  $(153,709) $1,144,617 

 

HTM Debt Securities

 

The following table summarizes the amortized cost, unrecognized gains and losses, and fair value of Bancorp’s HTM debt securities portfolio:

 

(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 

Bancorp elected to classify a portion of securities purchased and acquired during the first quarter of 2022 as HTM. This election was made in an effort to lessen the impact that the rising interest rate environment has on the valuation of the AFS debt securities portfolio, and ultimately its impact on capital through AOCI. NaN debt securities were classified as HTM at December 31, 2021.

(in thousands)

 

Carrying

  

Unrecognized

     

June 30, 2023

 value  

Gains

  

Losses

  Fair value 
                 

U.S. Treasury and other U.S. Government obligations

 $204,017  $-  $(8,678) $195,339 

Government sponsored enterprise obligations

  27,127   -   (2,955)  24,172 

Mortgage backed securities - government agencies

  218,885   -   (28,147)  190,738 
                 

Total held to maturity debt securities

 $450,029  $-  $(39,780) $410,249 
                 

December 31, 2022

                
                 

U.S. Treasury and other U.S. Government obligations

 $217,794  $-  $(9,166) $208,628 

Government sponsored enterprise obligations

  27,507   -   (2,559)  24,948 

Mortgage backed securities - government agencies

  227,916   -   (29,659)  198,257 
                 

Total held to maturity debt securities

 $473,217  $-  $(41,384) $431,833 

 

All investment securities classified as HTM by Bancorp as of June 30, 20222023 are obligations of the U.S. Government and/or are issued by U.S. Government-sponsored agencies and have an implicit or explicit government guarantee. Therefore, 0no ACL has been recorded for Bancorp’s HTM securities as of June 30, 2022.2023. Further, as of June 30, 2022,2023, NaNnone of Bancorp’s HTM securities were in non-accrual or past due status.

 

2912

 

Debt Securities by Contractual Maturity

 

A summary of AFS and HTM debt securities by contractual maturity as of June 30, 20222023 follows:

 

  

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

  

HTM Debt Securities

 

(in thousands)

 

 

Amortized cost

  

Fair value

  

Carrying value

  

Fair value

 
                 

Due within one year

 $37,631  $37,337  $51,134  $49,821 

Due after one year but within five years

  155,874   147,197   153,477   146,073 

Due after five years but within 10 years

  69,673   61,354   25,955   23,049 

Due after 10 years

  145,204   134,124   578   568 

Mortgage backed securities - government agencies

  829,867   712,712   218,885   190,738 

Total

 $1,238,249  $1,092,724  $450,029  $410,249 

 

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

 

At June 30, 20222023 and December 31, 2021,2022, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

Accrued interest on the AFS and HTM securities portfolios totaled $3$4 million and $2 million at June 30, 2023 and December 31, 2022, respectively, and was included on the consolidated balance sheets.respectively. Accrued interest on the AFS and HTM securities portfolioportfolios totaled $3$4 million and $2 million at December 31, 2021,2022, respectively. Accrued interest on the AFS and wasHTM securities portfolios are included in the condensed consolidated balance sheets. There were no securities classified as HTM at December 31, 2021.

 

AFS debt securities totaling $247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, 3three securities with a total fair value of $2 million were sold, resulting in a loss on the sale of $92,000, which was recorded as a fair value adjustment through goodwill during the first quarter.quarter of 2022.

 

Securities with a carrying value of $1.04$825 million and $1.1 billion and $879 million were pledged at June 30, 20222023 and December 31, 2021,2022, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The increase between December 31, 2021 and June 30, 2022 was the result of relationships added through the CB acquisition.

 

Based on an evaluation of available information including security type, counterparty credit quality, past events, current conditions, and reasonable and supportable forecasts that are relevant to collectability, Bancorp has concluded that it expects to receive all contractual cash flows from each security held in its AFS and HTM debt securities portfolio. As such, 0no allowance or impairment was recorded with respect to investment securities as of June 30, 2022.2023.

 

3013

 

Unrealized and Unrecognized Loss Analysis on Debt Securities

 

Debt securities with unrealized and unrecognized losses at June 30, 20222023 and December 31, 2021,2022, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:

 

 

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)

 

  

HTM Debt Securities

 
  

Less than 12 months

  

12 months or more

  

Total

 

(in thousands)

 

Fair

  

Unrecognized

  

Fair

  

Unrecognized

  

Fair

  

Unrecognized

 

June 30, 2023

 

value

  

losses

  

value

  

losses

  

value

  

losses

 
                         

U.S. Treasury and other U.S.

                        

Government obligations

 $-  $-  $195,339  $(8,678) $195,339  $(8,678)

Government sponsored enterprise obligations

  1,502   (4)  22,670   (2,951)  24,172   (2,955)

Mortgage-backed securities - government agencies

  57   (3)  190,681   (28,144)  190,738   (28,147)
                         

Total HTM debt securities

 $1,559  $(7) $408,690  $(39,773) $410,249  $(39,780)
                         

December 31, 2022

                        
                         

U.S. Treasury and other U.S.

                        

Government obligations

 $208,628  $(9,166) $-  $-  $208,628  $(9,166)

Government sponsored enterprise obligations

  24,948   (2,559)  -   -   24,948   (2,559)

Mortgage-backed securities - government agencies

  198,257   (29,659)  -   -   198,257   (29,659)
                         

Total HTM debt securities

 $431,833  $(41,384) $-  $-  $431,833  $(41,384)

 

  

HTM Debt Securities

 
  

Less than 12 months

  

12 months or more

  

Total

 

(in thousands)

 

Fair

  

Unrecognized

  

Fair

  

Unrecognized

  

Fair

  

Unrecognized

 

June 30, 2022

 

value

  

losses

  

value

  

losses

  

value

  

losses

 
                         

U.S. Treasury and other U.S. Government obligations

 $215,015  $(4,559) $0  $0  $215,015  $(4,559)

Government sponsored enterprise obligations

  25,213   (665)  0   0   25,213   (665)

Mortgage-backed securities - government agencies

  218,534   (19,402)  0   0   218,534   (19,402)

Total HTM debt securities

 $458,762  $(24,626) $0  $0  $458,762  $(24,626)

14

Applicable dates for determining when securities are in unrealized and unrecognized loss positions are June 30, 20222023 and December 31, 2021.2022. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “LessLess than 12 months”months category above.

 

31

For debt securities with unrealized and unrecognized loss positions, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL for debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

 

In evaluating debt securities in unrealized and unrecognized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized and unrecognized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of 540535 and 227547 separate investment positions as of June 30, 20222023 and December 31, 2021,2022, respectively. By dollar value, approximately 98% of the debt securities portfolio was in a loss position as of both June 30, 2023 and December 31, 2022. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at June 30, 20222023 and December 31, 2021.2022.

 

3215

 

(43)

Loans and Allowance for Credit Losses on Loans

 

Composition of loans by class follows:

 

(in thousands)

 

June 30, 2022

  

December 31, 2021

  

June 30, 2023

  

December 31, 2022

 
      

Commercial real estate - non-owner occupied

 $1,397,330  $1,128,244  $1,477,733  $1,397,346 

Commercial real estate - owner occupied

  787,559   678,405   873,980   834,629 

Total commercial real estate

 2,184,889  1,806,649  2,351,713  2,231,975 
      

Commercial and industrial - term

 667,338  596,710  788,070  765,163 

Commercial and industrial - term - PPP

 36,767  140,734  7,088  18,593 

Commercial and industrial - lines of credit

  423,066   370,312   438,484   465,813 

Total commercial and industrial

 1,127,171  1,107,756  1,233,642  1,249,569 
      

Residential real estate - owner occupied

 533,577  400,695  664,870  591,515 

Residential real estate - non-owner occupied

  293,852   281,018   338,727   313,248 

Total residential real estate

 827,429  681,713  1,003,597  904,763 
      

Construction and land development

 372,197  299,206  451,324  445,690 

Home equity lines of credit

 192,102  138,976  202,574  200,725 

Consumer

 137,278  104,294  139,602  139,461 

Leases

 14,611  13,622  13,967  13,322 

Credits cards

  21,647   17,087   22,190   20,413 

Total loans (1)

 $4,877,324  $4,169,303  $5,418,609  $5,205,918 

 

(1)

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

As a result of the CB acquisition on March 7, 2022, $632 million in loans (net of purchase accounting adjustments) were added to the portfolio.

 

Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $12 million and $11$17 million at both June 30, 20222023 and December 31, 2021,2022, respectively, and was included in the condensed consolidated balance sheets.

 

Loans with carrying amounts of $2.66$2.96 billion and $2.20$2.77 billion were pledged to secure FHLB borrowing capacity at June 30, 20222023 and December 31, 2021,2022, respectively.

 

Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $59$74 million and $54$79 million as of June 30, 20222023 and December 31, 2021,2022, respectively.

 

PCD Loans

 

In connection with the acquisitionsacquisition of CB on March 7, 2022,and KB on May 31, 2021, Bancorp acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments Credit Losses.

 

The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect Bancorp’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. Bancorp records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.

33

Bancorp purchased loans through the acquisitions of CB and KBprior year acquisition for which there was, at the time of acquisition, more-than-insignificant deterioration of credit quality since origination. The carrying amount of loans acquired and classified as PCD was as follows at the respective acquisition dates:

 

  

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 

  

CB

 

(in thousands)

 

March 7, 2022

 
     

Purchase price of PCD loans at acquisition

 $88,549 

Allowance for credit losses at acquisition

  (9,950)

Non-credit discount at acquisition

  (4,094)

Fair value of PCD loans at acquisition

 $74,505 

 

At June 30, 2022,2023, the book balance of PCD loans acquired as a result of the CB and KB acquisitionsacquisition totaled $69$56 million. Interest income recognized on loans classified as PCD totaled $1.1 million and $12$2.2 million for the three and six month periods ended June 30, 2023, respectively. InterestFor the three and six month periods ended June 30, 2022, interest income recognized on loans classified as PCD totaled $2.0 million and $151,000 for the three month periods ended June 30, 2022 and 2021, respectively. For the six month periods ended June 30, 2022 and 2021, interest income recognized on loans classified as PCD totaled $2.9 million, and $151,000, respectively.

 

3416

 

AllowanceACL for Credit Losses on Loans

 

The table below reflects activity in the ACL related to loans:

 

(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

Allowance

on PCD

 

Provision for

Credit Losses

         Ending  Beginning  

Provision for

Credit Losses

          Ending 

Six Months Ended June 30, 2022

 

Balance

  

Loans

  

on Loans

  

Charge-offs

  

Recoveries

  

Balance

 

Six Months Ended June 30, 2023

 

Balance

  

on Loans

  

Charge-offs

  

Recoveries

  

Balance

 
  

Commercial real estate - non-owner occupied

 $15,960  $3,508  $1,242  $0  $13  $20,723  $22,641  $(904) $-  $36  $21,773 

Commercial real estate - owner occupied

  9,595   2,121   (1,876)  (41)  43   9,842   10,827   730   -   -   11,557 

Total commercial real estate

 25,555  5,629  (634) (41) 56  30,565  33,468  (174) -  36  33,330 
  

Commercial and industrial - term (1)

 8,577  1,358  1,741  (128) 794  12,342  12,991  1,929  (128) -  14,792 

Commercial and industrial - lines of credit

  4,802   1,874   (1,640)  (36)  0   5,000   6,389   (35)  -   149   6,503 

Total commercial and industrial

 13,379  3,232  101  (164) 794  17,342  19,380  1,894  (128) 149  21,295 
  

Residential real estate - owner occupied

 4,316  590  1,035  (13) 60  5,988  6,717  2,140  (43) 21  8,835 

Residential real estate - non-owner occupied

  3,677   0   (495)  0   8   3,190   3,597   570   -   2   4,169 

Total residential real estate

 7,993  590  540  (13) 68  9,178  10,314  2,710  (43) 23  13,004 
  

Construction and land development

 4,789  419  1,078  (72) 0  6,214  7,186  (434) -  -  6,752 

Home equity lines of credit

 1,044  2  475  0  0  1,521  1,613  8  (12) -  1,609 

Consumer

 772  78  403  (489) 349  1,113  1,158  289  (407) 245  1,285 

Leases

 204  0  17  0  0  221  201  4  -  -  205 

Credit cards

  162   0   (1)  0   47   208   211   103   (100)  16   230 

Total

 $53,898  $9,950  $1,979  $(779) $1,314  $66,362  $73,531  $4,400  $(690) $469  $77,710 

 

3517

 
(in thousands) Beginning 

Initial

Allowance

on PCD

 

Provision for

Credit Losses

         Ending  Beginning Initial ACL on  

Provision for

Credit Losses

          Ending 

Three Months Ended June 30, 2021

 

Balance

  

Loans

  

on Loans

  

Charge-offs

  

Recoveries

  

Balance

 

Three Months Ended June 30, 2022

 

Balance

  

PCD Loans

  

on Loans

  

Charge-offs

  

Recoveries

  

Balance

 
              

Commercial real estate - non-owner occupied

 $20,062  $1,491  $1,255  $(3,065) $4  $19,747  $20,620  $-  $101  $-  $2  $20,723 

Commercial real estate - owner occupied

  7,065   2,112   (184)  0   555   9,548   11,326   -   (1,464)  (41)  21   9,842 

Total commercial real estate

 27,127  3,603  1,071  (3,065) 559  29,295  31,946  -  (1,363) (41) 23  30,565 
              

Commercial and industrial - term

 8,469  1,022  355  (114) 16  9,748  11,108  -  1,174  (15) 75  12,342 

Commercial and industrial - lines of credit

  2,983   1,755   502   0   0   5,240   6,508   -   (1,508)  -   -   5,000 

Total commercial and industrial

 11,452  2,777  857  (114) 16  14,988  17,616  -  (334) (15) 75  17,342 
              

Residential real estate - owner occupied

 3,292  142  953  (40) 3  4,350  5,363  -  575  (7) 57  5,988 

Residential real estate - non-owner occupied

  1,709   88   1,624   0   1   3,422   3,361   -   (176)  -   5   3,190 

Total residential real estate

 5,001  230  2,577  (40) 4  7,772  8,724  -  399  (7) 62  9,178 
              

Construction and land development

 5,527  0  (337) 0  3  5,193  5,864  -  422  (72) -  6,214 

Home equity lines of credit

 843  147  239  0  1  1,230  1,467  -  54  -  -  1,521 

Consumer

 395  0  285  (223) 115  572  1,049  -  141  (235) 158  1,113 

Leases

 235  0  (3) 0  0  232  211  -  10  -  -  221 

Credit cards

  134   0   8   0   0   142   190   -   (29)  -   47   208 

Total

 $50,714  $6,757  $4,697  $(3,442) $698  $59,424  $67,067  $-  $(700) $(370) $365  $66,362 

 

(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 

 

3618

 

The following table presentstables present the amortized cost basis of non-performing loans and the amortized cost basis of loans on non-accrual status for which there was no related ACL losses:

 

 

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 

 

(1) Does not include TDRs captured in the non-accrual column. 

  

Non-accrual Loans

          

Past Due 90-Days-

 

(in thousands)

 

With No

  

Total

  

Troubled Debt

  

or-More and Still

 

December 31, 2022

 

Recorded ACL

  

Non-accrual

  

Restructurings (1)

  

Accruing Interest

 
                 

Commercial real estate - non-owner occupied

 $  $7,707  $  $78 

Commercial real estate - owner occupied

  1,370   2,525       

Total commercial real estate

  1,370   10,232      78 
                 

Commercial and industrial - term

  403   1,182      259 

Commercial and industrial - PPP

     21      28 

Commercial and industrial - lines of credit

  273   348      300 

Total commercial and industrial

  676   1,551      587 
                 

Residential real estate - owner occupied

  249   1,801       

Residential real estate - non-owner occupied

     219      220 

Total residential real estate

  249   2,020      220 
                 

Construction and land development

            

Home equity lines of credit

     205       

Consumer

     234       

Leases

            

Credit cards

           7 

Total

 $2,295  $14,242  $  $892 

 

  

Non-accrual Loans

          

Past Due 90-Days-

 

(in thousands)

 

With No

  

Total

  

Troubled Debt

  

or-More and Still

 

December 31, 2021

 

Recorded ACL

  

Non-accrual Loans

  

Restructurings (1)

  

Accruing Interest

 
                 

Commercial real estate - non-owner occupied

 $486  $720  $0  $0 

Commercial real estate - owner occupied

  665   1,748   0    

Total commercial real estate

  1,151   2,468   0   0 
                 

Commercial and industrial - term

  419   670   12   0 

Commercial and industrial - PPP

  0   0   0   592 

Commercial and industrial - lines of credit

  0   228   0   56 

Total commercial and industrial

  419   898   12   648 
                 

Residential real estate - owner occupied

  805   1,997   0   36 

Residential real estate - non-owner occupied

  0   293   0   0 

Total residential real estate

  805   2,290   0   36 
                 

Construction and land development

  0   0   0   0 

Home equity lines of credit

  0   646   0   0 

Consumer

  0   410   0   0 

Leases

  0   0   0   0 

Credit cards

  0   0   0   0 

Total

 $2,375  $6,712  $12  $684 

(1) Does not include TDRs captured in the non-accrual column

(1) Does not include TDRs reflected in the non-accrual column.

 

3719

 

For the three and six month periods ended June 30, 20222023 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, 20222023 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:

 

(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)     

Accounts

Receivable /

         ACL      

Accounts

Receivable /

          ACL 

December 31, 2021

 

Real Estate

  

Equipment

  

Other

  

Total

  

Allocation

 

December 31, 2022

 

Real Estate

  

Equipment

  

Other

  

Total

  

Allocation

 
  

Commercial real estate - non-owner occupied

 $720  $0  $0  $720  $0  $14,764  $-  $-  $14,764  $2,652 

Commercial real estate - owner occupied

  7,652   0   0   7,652   1,652   4,415   -   -   4,415   846 

Total commercial real estate

 8,372  0  0  8,372  1,652  19,179  -  -  19,179  3,498 
  

Commercial and industrial - term

 0  598  0  598  0  39  2,207  -  2,246  1,205 

Commercial and industrial - lines of credit

  0   200   0   200   0   422   2,821   -   3,243   761 

Total commercial and industrial

 0  798  0  798  0  461  5,028  -  5,489  1,966 
  

Residential real estate - owner occupied

 1,997  0  0  1,997  0  2,199  -  -  2,199  222 

Residential real estate - non-owner occupied

  502   0   0   502   116   415   -   -   415   116 

Total residential real estate

 2,499  0  0  2,499  116  2,614  -  -  2,614  338 
  

Construction and land development

 0  0  0  0  0  -  -  -  -  - 

Home equity lines of credit

 646  0  0  646  0  205  -  -  205  - 

Consumer

 0  0  247  247  0  -  -  219  219  20 

Leases

 0  0  0  0  0  -  -  -  -  - 

Credit cards

  0   0   0   0   0   -   -   -   -   - 

Total collateral dependent loans

 $11,517  $798  $247  $12,562  $1,768  $22,459  $5,028  $219  $27,706  $5,822 

 

3820

 

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

 

(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)

     

30-59 days

 

60-89 days

 

90 or more

 

Total

 

Total

      

30-59 days

 

60-89 days

 

90 or more

 

Total Past

 

Total

 

December 31, 2021

 

Current

  

Past Due

  

Past Due

  

Days Past Due

  

Past Due

  

Loans

 

December 31, 2022

 

Current

  

Past Due

  

Past Due

  

days Past Due

  

Due Loans

  

Loans

 
  

Commercial real estate - non-owner occupied

 $1,127,448  $0  $81  $715  $796  $1,128,244  $1,393,016  $3,404  $460  $466  $4,330  $1,397,346 

Commercial real estate - owner occupied

  677,231   360   327   487   1,174   678,405   831,731   225   2,592   81   2,898   834,629 

Total commercial real estate

 1,804,679  360  408  1,202  1,970  1,806,649  2,224,747  3,629  3,052  547  7,228  2,231,975 
  

Commercial and industrial - term

 595,070  1,032  44  564  1,640  596,710  763,793  157  292  921  1,370  765,163 

Commercial and industrial - term - PPP

 139,718  128  296  592  1,016  140,734  17,719  748  77  49  874  18,593 

Commercial and industrial - lines of credit

  369,963   271   22   56   349   370,312   464,494   389   300   630   1,319   465,813 

Total commercial and industrial

 1,104,751  1,431  362  1,212  3,005  1,107,756  1,246,006  1,294  669  1,600  3,563  1,249,569 
  

Residential real estate - owner occupied

 397,415  1,399  137  1,744  3,280  400,695  587,830  1,613  974  1,098  3,685  591,515 

Residential real estate - non-owner occupied

  280,257   403   258   100   761   281,018   312,249   373   331   295   999   313,248 

Total residential real estate

 677,672  1,802  395  1,844  4,041  681,713  900,079  1,986  1,305  1,393  4,684  904,763 
  

Construction and land development

 299,206  0  0  0  0  299,206  445,618    72    72  445,690 

Home equity lines of credit

 138,141  279  47  509  835  138,976  200,036  566  40  83  689  200,725 

Consumer

 103,109  724  102  359  1,185  104,294  138,846  342  85  188  615  139,461 

Leases

 13,622  0  0  0  0  13,622  13,322          13,322 

Credit cards

  17,087   0   0   0   0   17,087   20,401   3   2   7   12   20,413 

Total

 $4,158,267  $4,596  $1,314  $5,126  $11,036  $4,169,303  $5,189,055  $7,820  $5,225  $3,818  $16,863  $5,205,918 

 

3921

 

Loan Risk Ratings

 

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 asincluding 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.

 

40

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.

22

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

(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

 $-  $-  $-  $-  $-  $-  $-  $- 

(continued)

23

(continued)

(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 and industrial - lines of credit

                                

Risk rating

                                

Pass

 $18,407  $34,839  $4,082  $694  $10,010  $2,223  $347,355  $417,610 

OAEM

  -   -   -   -   -   -   15,498   15,498 

Substandard

  -   669   -   855   -   -   3,795   5,319 

Substandard non-performing

  -   -   -   -   -   -   57   57 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial and industrial - lines of credit

 $18,407  $35,508  $4,082  $1,549  $10,010  $2,223  $366,705  $438,484 

Current period gross charge offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Residential real estate - owner occupied

                                

Risk rating

                                

Pass

 $102,646  $183,469  $183,119  $91,258  $24,733  $76,606  $-  $661,831 

OAEM

  -   -   93   -   61   -   -   154 

Substandard

  -   16   -   9   -   409   -   434 

Substandard non-performing

  178   356   169   207   56   1,485   -   2,451 

Doubtful

  -   -   -   -   -   -   -   - 

Total Residential real estate - owner occupied

 $102,824  $183,841  $183,381  $91,474  $24,850  $78,500  $-  $664,870 

Current period gross charge offs

 $-  $-  $-  $-  $-  $(43) $-  $(43)
                                 

Residential real estate - non-owner occupied

                                

Risk rating

                                

Pass

 $45,316  $91,012  $81,151  $52,159  $32,246  $35,566  $-  $337,450 

OAEM

  -   13   -   -   262   283   -   558 

Substandard

  -   -   -   -   -   321   -   321 

Substandard non-performing

  -   256   20   -   47   75   -   398 

Doubtful

  -   -   -   -   -   -   -   - 

Total Residential real estate - non-owner occupied

 $45,316  $91,281  $81,171  $52,159  $32,555  $36,245  $-  $338,727 

Current period gross charge offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Construction and land development

                                

Risk rating

                                

Pass

 $48,898  $253,949  $68,273  $51,232  $501  $3,902  $19,396  $446,151 

OAEM

  -   -   -   -   -   -   999   999 

Substandard

  4,174   -   -   -   -   -   -   4,174 

Substandard non-performing

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Construction and land development

 $53,072  $253,949  $68,273  $51,232  $501  $3,902  $20,395  $451,324 

Current period gross charge offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Home equity lines of credit

                                

Risk rating

                                

Pass

 $-  $-  $-  $-  $-  $-  $202,332  $202,332 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   38   38 

Substandard non-performing

  -   -   -   -   -   -   204   204 

Doubtful

  -   -   -   -   -   -   -   - 

Total Home equity lines of credit

 $-  $-  $-  $-  $-  $-  $202,574  $202,574 

Current period gross charge offs

 $-  $-  $-  $-  $-  $-  $(12) $(12)

(continued)

24

(continued)

(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

 
                                 

Consumer

                                

Risk rating

                                

Pass

 $18,590  $22,799  $13,229  $4,055  $3,084  $2,601  $74,848  $139,206 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  -   65   99   27   37   35   133   396 

Doubtful

  -   -   -   -   -   -   -   - 

Total Consumer

 $18,590  $22,864  $13,328  $4,082  $3,121  $2,636  $74,981  $139,602 

Current period gross charge offs

 $(315) $(11) $(7) $(34) $(17) $(21) $(2) $(407)
                                 

Leases

                                

Risk rating

                                

Pass

 $3,929  $3,815  $2,149  $379  $393  $3,302  $-  $13,967 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Leases

 $3,929  $3,815  $2,149  $379  $393  $3,302  $-  $13,967 

Current period gross charge offs

 $-  $-  $-  $-  $-  $-  $-  $- 
                                 

Credit cards

                                

Risk rating

                                

Pass

 $-  $-  $-  $-  $-  $-  $22,181  $22,181 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   -   -   9   9 

Doubtful

  -   -   -   -   -   -   -   - 

Total Credit cards

 $-  $-  $-  $-  $-  $-  $22,190  $22,190 

Current period gross charge offs

 $-  $-  $-  $-  $-  $-  $(100) $(100)
                                 

Total loans

                                

Risk rating

                                

Pass

 $667,925  $1,372,834  $1,126,356  $694,889  $320,930  $438,377  $700,514  $5,321,825 

OAEM

  78   3,698   6,310   5,246   4,840   2,754   16,497   39,423 

Substandard

  4,262   3,417   2,138   4,527   18,878   2,845   3,930   39,997 

Substandard non-performing

  10,739   1,551   1,141   823   291   2,416   403   17,364 

Doubtful

  -   -   -   -   -   -   -   - 

Total Loans

 $683,004  $1,381,500  $1,135,945  $705,485  $344,939  $446,392  $721,344  $5,418,609 

Current period gross charge offs

 $(352) $(11) $(13) $(91) $(17) $(92) $(114) $(690)

25

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

 

                          

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 

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  

Revolving

loans

amortized

     

December 31, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  cost basis  

Total

 
                                 

Commercial real estate - non-owner occupied:

                                

Risk rating

                                

Pass

 $338,460  $380,612  $264,833  $128,407  $76,359  $139,095  $24,875  $1,352,641 

OAEM

  -   2,006   -   3,534   -   5,414   -   10,954 

Substandard

  1,381   1,012   3,744   19,574   -   233   100   26,044 

Substandard non-performing

  -   -   -   -   -   7,707   -   7,707 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial real estate non-owner occupied

 $339,841  $383,630  $268,577  $151,515  $76,359  $152,449  $24,975  $1,397,346 
                                 

Commercial real estate - owner occupied:

                                

Risk rating

                                

Pass

 $165,711  $202,599  $194,052  $104,148  $60,899  $74,356  $13,062  $814,827 

OAEM

  2,895   1,777   4,540   1,891   676   216   510   12,505 

Substandard

  -   1,152   -   1,623   1,928   69   -   4,772 

Substandard non-performing

  1,533   911   -   -   -   81   -   2,525 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial real estate owner occupied

 $170,139  $206,439  $198,592  $107,662  $63,503  $74,722  $13,572  $834,629 
                                 

Commercial and industrial - term:

                                

Risk rating

                                

Pass

 $357,470  $210,906  $90,063  $39,068  $29,901  $27,354  $-  $754,762 

OAEM

  3,835   2,935   -   303   1,426   -   -   8,499 

Substandard

  178   -   -   201   -   341   -   720 

Substandard non-performing

  539   39   486   101   17   -   -   1,182 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial and industrial - term

 $362,022  $213,880  $90,549  $39,673  $31,344  $27,695  $-  $765,163 
                                 

Commercial and industrial - PPP

                                

Risk rating

                                

Pass

 $-  $14,212  $4,047  $-  $-  $-  $-  $18,259 

OAEM

  -   -   313   -   -   -   -   313 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   21   -   -   -   -   21 

Doubtful

  -   -   -   -   -   -   -   - 

Total Commercial and industrial - PPP

 $-  $14,212  $4,381  $-  $-  $-  $-  $18,593 

 

(continued)

 

4126

 

(continued)

 

                         Revolving    
                         loans    

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  amortized     

Term Loans Amortized Cost Basis by Origination Year

 

Revolving

loans

amortized

    

June 30, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  cost basis  

Total

 

December 31, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  cost basis  

Total

 
  

Commercial and industrial - lines of credit

                                

Risk rating

  

Pass

 $24,723  $20,389  $6,400  $11,627  $1,348  $1,425  $348,812  $414,724  $54,948  $13,999  $991  $9,179  $1,188  $1,033  $367,688  $449,026 

OAEM

 0  0  0  0  0  415  4,319  4,734  -  -  -  -  -  366  12,491  12,857 

Substandard

 0  0  952  1,950  0  0  542  3,444  -  -  905  1,915  -  -  762  3,582 

Substandard non-performing

 0  38  0  0  0  0  126  164  -  -  -  273  -  -  75  348 

Doubtful

  0   0   0   0   0   0   0   0   -   -   -   -   -   -   -   - 

Total Commercial and industrial - lines of credit

 $24,723  $20,427  $7,352  $13,577  $1,348  $1,840  $353,799  $423,066  $54,948  $13,999  $1,896  $11,367  $1,188  $1,399  $381,016  $465,813 
  

Residential real estate - owner occupied

                                

Risk rating

  

Pass

 $100,970  $196,501  $101,346  $32,169  $17,044  $81,166  $0  $529,196  $188,765  $189,007  $96,818  $28,316  $15,281  $70,556  $-  $588,743 

OAEM

 0  98  0  80  0  0  0  178  360  96  -  70  -  -  -  526 

Substandard

 0  0  10  0  144  701  0  855  18  -  10  -  140  277  -  445 

Substandard non-performing

 48  202  73  500  299  2,226  0  3,348  65  191  70  292  122  1,061  -  1,801 

Doubtful

  0   0   0   0   0   0   0   0   -   -   -   -   -   -   -   - 

Total Residential real estate - owner occupied

 $101,018  $196,801  $101,429  $32,749  $17,487  $84,093  $0  $533,577  $189,208  $189,294  $96,898  $28,678  $15,543  $71,894  $-  $591,515 
  

Residential real estate - non-owner occupied

                                

Risk rating

  

Pass

 $55,304  $88,711  $61,711  $37,971  $20,982  $27,693  $0  $292,372  $97,313  $83,458  $55,787  $34,304  $19,300  $21,720  $-  $311,882 

OAEM

 0  0  121  271  128  375  0  895  15  -  115  271  124  290  -  815 

Substandard

 0  0  0  0  0  352  0  352  -  -  -  -  -  332  -  332 

Substandard non-performing

 94  23  0  0  0  116  0  233  86  21  -  -  -  112  -  219 

Doubtful

  0   0   0   0   0   0   0   0   -   -   -   -   -   -   -   - 

Total Residential real estate - non-owner occupied

 $55,398  $88,734  $61,832  $38,242  $21,110  $28,536  $0  $293,852  $97,414  $83,479  $55,902  $34,575  $19,424  $22,454  $-  $313,248 
  

Construction and land development

                                

Risk rating

  

Pass

 $107,261  $120,471  $93,015  $15,495  $6,116  $1,740  $24,295  $368,393  $257,559  $99,204  $45,427  $580  $5,959  $1,123  $30,378  $440,230 

OAEM

 0  0  0  0  0  87  0  87  -  -  -  -  -  -  999  999 

Substandard

 0  340  0  3,090  0  287  0  3,717  4,461  -  -  -  -  -  -  4,461 

Substandard non-performing

 0  0  0  0  0  0  0  0  -  -  -  -  -  -  -  - 

Doubtful

  0   0   0   0   0   0   0   0   -   -   -   -   -   -   -   - 

Total Construction and land development

 $107,261  $120,811  $93,015  $18,585  $6,116  $2,114  $24,295  $372,197  $262,020  $99,204  $45,427  $580  $5,959  $1,123  $31,377  $445,690 
  

Home equity lines of credit

                                

Risk rating

  

Pass

 $0  $0  $0  $0  $0  $0  $191,685  $191,685  $-  $-  $-  $-  $-  $-  $200,481  $200,481 

OAEM

 0  0  0  0  0  0  0  0  -  -  -  -  -  -  -  - 

Substandard

 0  0  0  0  0  0  39  39  -  -  -  -  -  -  39  39 

Substandard non-performing

 0  0  0  0  0  0  378  378  -  -  -  -  -  -  205  205 

Doubtful

  0   0   0   0   0   0   0   0   -   -   -   -   -   -   -   - 

Total Home equity lines of credit

 $0  $0  $0  $0  $0  $0  $192,102  $192,102  $-  $-  $-  $-  $-  $-  $200,725  $200,725 

 

(continued)

 

4227

 

(continued)

 

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  

Revolving

loans

amortized

     

June 30, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  cost basis  

Total

 
                                 

Consumer

                                

Risk rating

                                

Pass

 $12,199  $21,563  $7,733  $7,333  $3,662  $2,829  $81,518  $136,837 

OAEM

  0   0   0   0   0   0   0   0 

Substandard

  0   0   0   0   0   0   0   0 

Substandard non-performing

  0   49   159   107   21   85   20   441 

Doubtful

  0   0   0   0   0   0   0   0 

Total Consumer

 $12,199  $21,612  $7,892  $7,440  $3,683  $2,914  $81,538  $137,278 
                                 

Leases

                                

Risk rating

                                

Pass

 $3,503  $4,837  $3,041  $1,095  $962  $1,173  $0  $14,611 

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 Leases

 $3,503  $4,837  $3,041  $1,095  $962  $1,173  $0  $14,611 
                                 

Credit cards

                                

Risk rating

                                

Pass

 $0  $0  $0  $0  $0  $0  $21,647  $21,647 

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 Credit cards

 $0  $0  $0  $0  $0  $0  $21,647  $21,647 
                                 

Total loans

                                

Risk rating

                                

Pass

 $737,751  $1,359,715  $881,837  $406,091  $249,440  $431,005  $698,074  $4,763,913 

OAEM

  4,211   7,809   3,862   21,880   2,728   6,563   12,044   59,097 

Substandard

  6,654   1,808   4,003   21,871   2,288   9,181   682   46,487 

Substandard non-performing

  589   1,545   807   606   358   3,397   525   7,827 

Doubtful

  0   0   0   0   0   0   0   0 

Total Loans

 $749,205  $1,370,877  $890,509  $450,448  $254,814  $450,146  $711,325  $4,877,324 

43

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

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  

Revolving

loans

amortized

     

December 31, 2021

 

2021

  

2020

  

2019

  

2018

  

2017

  

Prior

  cost basis  

Total

 
                                 

Commercial real estate - non-owner occupied:

                                

Risk rating

                                

Pass

 $381,014  $298,177  $134,286  $86,638  $85,110  $81,635  $19,465  $1,086,325 

OAEM

  3,186   2,666   19,784   0   353   1,619   248   27,856 

Substandard

  4,174   1,440   0   0   0   7,629   100   13,343 

Substandard non-performing

  0   39   78   0   592   11   0   720 

Doubtful

  0   0   0   0   0   -   0   0 

Total Commercial real estate non-owner occupied

 $388,374  $302,322  $154,148  $86,638  $86,055  $90,894  $19,813  $1,128,244 
                                 

Commercial real estate - owner occupied:

                                

Risk rating

                                

Pass

 $203,545  $192,322  $91,078  $75,062  $33,713  $44,364  $9,236  $649,320 

OAEM

  1,681   1,480   3,568   469   1,506   124   570   9,398 

Substandard

  5,051   3,605   5,985   1,275   627   0   1,396   17,939 

Substandard non-performing

  1,259   0   0   0   32   457   0   1,748 

Doubtful

  0   0   0   0   0   0   0   0 

Total Commercial real estate owner occupied

 $211,536  $197,407  $100,631  $76,806  $35,878  $44,945  $11,202  $678,405 
                                 

Commercial and industrial - term:

                                

Risk rating

                                

Pass

 $283,150  $143,211  $58,988  $52,388  $26,081  $24,421  $0  $588,239 

OAEM

  738   86   254   3,382   8   0   0   4,468 

Substandard

  170   42   2,667   176   111   167   0   3,333 

Substandard non-performing

  0   543   72   55   0   0   0   670 

Doubtful

  0   0   0   0   0   0   0   0 

Total Commercial and industrial - term

 $284,058  $143,882  $61,981  $56,001  $26,200  $24,588  $0  $596,710 
                                 

Commercial and industrial - PPP

                                

Risk rating

                                

Pass

 $128,409  $12,325  $0  $0  $0  $0  $0  $140,734 

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

 $128,409  $12,325  $0  $0  $0  $0  $0  $140,734 

(continued)

44

(continued)

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  

Revolving

loans

amortized

     

December 31, 2021

 

2021

  

2020

  

2019

  

2018

  

2017

  

Prior

  cost basis  

Total

 
                                 

Commercial and industrial - lines of credit

                                

Risk rating

                                

Pass

 $33,875  $8,352  $11,103  $1,039  $207  $193  $303,682  $358,451 

OAEM

  0   0   0   0   0   0   6,355   6,355 

Substandard

  0   0   1,916   0   1,549   0   1,813   5,278 

Substandard non-performing

  0   0   0   0   0   0   228   228 

Doubtful

  0   0   0   0   0   0   0   0 

Total Commercial and industrial - lines of credit

 $33,875  $8,352  $13,019  $1,039  $1,756  $193  $312,078  $370,312 
                                 

Residential real estate - owner occupied

                                

Risk rating

                                

Pass

 $176,487  $99,936  $31,327  $17,259  $16,599  $56,639  $0  $398,247 

OAEM

  101   0   174   0   0   0   0   275 

Substandard

  0   0   0   0   108   68   0   176 

Substandard non-performing

  164   103   136   230   714   650   0   1,997 

Doubtful

  0   0   0   0   0   0   0   0 

Total Residential real estate - owner occupied

 $176,752  $100,039  $31,637  $17,489  $17,421  $57,357  $0  $400,695 
                                 

Residential real estate - non-owner occupied

                                

Risk rating

                                

Pass

 $94,482  $78,785  $46,177  $27,494  $16,171  $15,909  $0  $279,018 

OAEM

  352   126   281   132   0   462   0   1,353 

Substandard

  0   0   0   0   0   354   0   354 

Substandard non-performing

  103   0   45   28   0   117   0   293 

Doubtful

  0   0   0   0   0   0   0   0 

Total Residential real estate - non-owner occupied

 $94,937  $78,911  $46,503  $27,654  $16,171  $16,842  $0  $281,018 
                                 

Construction and land development

                                

Risk rating

                                

Pass

 $160,696  $99,699  $16,665  $6,262  $1,890  $1,156  $12,736  $299,104 

OAEM

  0   0   0   0   102   0   0   102 

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 Construction and land development

 $160,696  $99,699  $16,665  $6,262  $1,992  $1,156  $12,736  $299,206 
                                 

Home equity lines of credit

                                

Risk rating

                                

Pass

 $0  $0  $0  $0  $0  $0  $138,239  $138,239 

OAEM

  0   0   0   0   0   0   91   91 

Substandard

  0   0   0   0   0   0   0   0 

Substandard non-performing

  0   0   0   0   0   0   646   646 

Doubtful

  0   0   0   0   0   0   0   0 

Total Home equity lines of credit

 $0  $0  $0  $0  $0  $0  $138,976  $138,976 

(continued)

45

(continued)

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  

Revolving

loans

amortized

     

December 31, 2021

 

2021

  

2020

  

2019

  

2018

  

2017

  

Prior

  cost basis  

Total

 
                                 

Consumer

                                

Risk rating

                                

Pass

 $23,866  $9,316  $5,014  $1,260  $555  $646  $63,227  $103,884 

OAEM

  0   0   0   0   0   0   0   0 

Substandard

  0   0   0   0   0   0   0   0 

Substandard non-performing

  55   304   30   11   0   4   6   410 

Doubtful

  0   0   0   0   0   0   0   0 

Total Consumer

 $23,921  $9,620  $5,044  $1,271  $555  $650  $63,233  $104,294 
                                 

Leases

                                

Risk rating

                                

Pass

 $5,375  $3,596  $1,375  $1,331  $406  $1,539  $0  $13,622 

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 Leases

 $5,375  $3,596  $1,375  $1,331  $406  $1,539  $0  $13,622 
                                 

Credit cards

                                

Risk rating

                                

Pass

 $0  $0  $0  $0  $0  $0  $17,087  $17,087 

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 Credit cards

 $0  $0  $0  $0  $0  $0  $17,087  $17,087 
                                 

Total loans

                                

Risk rating

                                

Pass

 $1,490,899  $945,719  $396,013  $268,733  $180,732  $226,502  $563,672  $4,072,270 

OAEM

  6,058   4,358   24,061   3,983   1,969   2,205   7,264   49,898 

Substandard

  9,395   5,087   10,568   1,451   2,395   8,218   3,309   40,423 

Substandard non-performing

  1,581   989   361   324   1,338   1,239   880   6,712 

Doubtful

  0   0   0   0   0   0   0   0 

Total Loans

 $1,507,933  $956,153  $431,003  $274,491  $186,434  $238,164  $575,125  $4,169,303 

(in thousands)

 

Term Loans Amortized Cost Basis by Origination Year

  

Revolving

loans

amortized

     

December 31, 2022

 

2022

  

2021

  

2020

  

2019

  

2018

  

Prior

  cost basis  

Total

 
                                 

Consumer

                                

Risk rating

                                

Pass

 $27,308  $18,396  $5,536  $5,450  $2,270  $1,621  $78,646  $139,227 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  21   56   40   62   9   31   15   234 

Doubtful

  -   -   -   -   -   -   -   - 

Total Consumer

 $27,329  $18,452  $5,576  $5,512  $2,279  $1,652  $78,661  $139,461 
                                 

Leases

                                

Risk rating

                                

Pass

 $4,643  $4,344  $2,589  $535  $576  $635  $-  $13,322 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Leases

 $4,643  $4,344  $2,589  $535  $576  $635  $-  $13,322 
                                 

Credit cards

                                

Risk rating

                                

Pass

 $-  $-  $-  $-  $-  $-  $20,413  $20,413 

OAEM

  -   -   -   -   -   -   -   - 

Substandard

  -   -   -   -   -   -   -   - 

Substandard non-performing

  -   -   -   -   -   -   -   - 

Doubtful

  -   -   -   -   -   -   -   - 

Total Credit cards

 $-  $-  $-  $-  $-  $-  $20,413  $20,413 
                                 

Total loans

                                

Risk rating

                                

Pass

 $1,492,177  $1,216,737  $760,143  $349,987  $211,733  $337,493  $735,543  $5,103,813 

OAEM

  7,105   6,814   4,968   6,069   2,226   6,286   14,000   47,468 

Substandard

  6,038   2,164   4,659   23,313   2,068   1,252   901   40,395 

Substandard non-performing

  2,244   1,218   617   728   148   8,992   295   14,242 

Doubtful

  -   -   -   -   -   -   -   - 

Total Loans

 $1,507,564  $1,226,933  $770,387  $380,097  $216,175  $354,023  $750,739  $5,205,918 

 

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:

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 

(in thousands)

 

2022

  

2021

  

2023

  

2022

 
  

Credit cards

  

Performing

 $21,647  $17,087  $22,174  $20,413 

Non-performing

  0   0   16    

Total credit cards

 $21,647  $17,087  $22,190  $20,413 

 

4628

 

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.

Modifications to Borrowers Experiencing Financial Difficulty

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 asincluded in total non-performing loans follows:

 

  

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 

  

June 30, 2022

 
      

Specific

  

Additional

 
      

reserve

  

commitment

 

(in thousands)

 

Balance

  

allocation

  

to lend

 
             

Commercial real estate - owner occupied

 $917  $202  $ 

Commercial & industrial - term

         

Total TDRs

 $917  $202  $ 

 

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.

4729

 

(54)

Goodwill

 

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 toacquisition, $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.

 

The composition of goodwill is presented by respective acquisition below:

 

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 

(in thousands)

 

2022

  

2021

  

2023

  

2022

 

Commonwealth Bancshares (2022)

 $66,694  $0  $58,244  $58,244 

Kentucky Bancshares (2021)

 123,317  123,317  123,317  123,317 

King Southern Bancorp (2019)

 11,831  11,831  11,831  11,831 

Austin State Bank (1996)

  682   682   682   682 

Total

 $202,524  $135,830  $194,074  $194,074 

 

*Note: The acquisition of The Bank Oldham County in 2013 generatedresulted in a bargain purchase gain.

 

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 unitunits exceeded itstheir carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unitunits exceeded itstheir fair value.

 

Changes in the carrying value of goodwill follows:

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Balance at beginning of period

 $202,524  $12,513  $135,830  $12,513 

Goodwill recorded due to acquisition

  0   124,016   66,694   124,016 

Provisional period adjustments

  0   0   0   0 

Impairment

  0   0   0   0 

Balance at end of period

 $202,524  $136,529  $202,524  $136,529 

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.

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Balance at beginning of period

 $194,074  $202,524  $194,074  $135,830 

Goodwill recorded from acquisitions

           66,694 

Provisional period adjustments

            

Disposition of LFA

            

Impairment

            

Balance at end of period

 $194,074  $202,524  $194,074  $202,524 

 

4830

 

(65)

Core Deposit and Customer List Intangible Assets

 

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.

 

Changes in the net carrying amount of CDIs follows:

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Balance at beginning of period

 $17,826  $1,885  $5,596  $1,962 

Core deposit intangible acquired

  0   3,404   12,724   3,404 

Provisional period adjustments

  0   0   0   0 

Amortization

  (956)  (127)  (1,450)  (204)

Balance at end of period

 $16,870  $5,162  $16,870  $5,162 

 

Three months ended

 

Six months ended

 
 

June 30,

 

June 30,

 

(in thousands)

2023

 

2022

 

2023

 

2022

 

Balance at beginning of period

$14,196 $17,826 $14,958 $5,596 

Core deposit intangible acquired

       12,724 

Provisional period adjustments

        

Amortization

 (754) (956) (1,516) (1,450)

Balance at end of period

$13,442 $16,870 $13,442 $16,870 

 

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.

 

TheAs 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.

Changes in the net carrying amount of the CLI assetsCLIs follows:

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Balance at beginning of period

 $14,142  $0  $0  $0 

Customer list intangibles acquired

  0   0   14,360   0 

Provisional period adjustments

  0   0   0   0 

Amortization

  (655)  0   (873)  0 

Balance at end of period

 $13,487  $0  $13,487  $0 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Balance at beginning of period

 $9,614  $14,142  $10,032  $- 

Customer list intangibles acquired

           14,360 

Provisional period adjustments

            

Disposition of LFA

            

Amortization

  (418)  (655)  (836)  (873)

Balance at end of period

 $9,196  $13,487  $9,196  $13,487 

 

Future CDI and CLI amortization expense is estimated as follows:

 

(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 

 

4931

 

(76)

Other Assets

 

A summary of the major components of other assets follows:

 

  

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 

  

June 30,

  

December 31,

 

(in thousands)

 

2023

  

2022

 
         

Cash surrender value of life insurance other than BOLI

 $16,940  $15,496 

Net deferred tax asset

  51,054   54,145 

Investments in tax credit partnerships

  55,530   13,969 

Swap assets

  12,628   10,727 

Prepaid assets

  4,073   5,721 

Trust fees receivable

  3,548   3,354 

Mortgage servicing rights

  14,116   15,219 

Other real estate owned

  677   677 

Other

  14,518   15,680 

Total other assets

 $173,084  $134,988 

 

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.

 

5032

 

(87)

Income Taxes

 

Components of income tax expense (benefit) from operations follows:

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Current income tax expense (benefit):

      ��         

Federal

 $3,393  $(21) $3,607  $3,472 

State

  614   24   614   546 

Total current income tax expense

  4,007   3   4,221   4,018 
                 

Deferred income tax expense:

                

Federal

  2,622   679   3,464   1,516 

State

  918   182   1,307   791 

Total deferred income tax expense

  3,540   861   4,771   2,307 

Change in valuation allowance

  0   0   0   0 

Total income tax expense

 $7,547  $864  $8,992  $6,325 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Current income tax expense:

                

Federal

 $8,086  $3,393  $13,280  $3,607 

State

  1,687   614   2,364   614 

Total current income tax expense

  9,773   4,007   15,644   4,221 
                 

Deferred income tax expense:

                

Federal

  (1,641)  2,622   (224)  3,464 

State

  (157)  918   687   1,307 

Total deferred income tax expense

  (1,798)  3,540   463   4,771 

Change in valuation allowance

  -   -   -   - 

Total income tax expense

 $7,975  $7,547  $16,107  $8,992 

 

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

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 
  

2022

  

2021

  

2022

  

2021

 

U.S. federal statutory income tax rate

  21.0

%

  21.0

%

  21.0

%

  21.0

%

State income taxes, net of federal benefit

  3.5   3.2   3.5   3.1 

Excess tax benefit from stock-based compensation arrangements

  (1.6)  (2.9)  (2.4)  (3.2)

Change in cash surrender value of life insurance

  0.9   (4.4)  1.1   (1.1)

Tax credits

  (0.5)  (1.2)  (0.7)  (0.6)

Tax exempt interest income

  (0.6)  (1.3)  (0.8)  (0.3)

Non-deductible merger expenses

  0.1   4.2   0.3   0.9 

Insurance captive

  (0.2)  (0.4)  (0.4)  (0.1)

Other, net

  (0.7)  (1.1)  (1.1)  (0.7)

Effective tax rate

  21.9

%

  17.1

%

  20.5

%

  19.0

%

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 
  

2023

  

2022

  

2023

  

2022

 

U.S. federal statutory income tax rate

  21.0

%

  21.0

%

  21.0

%

  21.0

%

State income taxes, net of federal benefit

  3.6   3.5   3.5   3.5 

Excess tax benefit from stock-based compensation arrangements

  0.2   (1.6)  (0.5)  (2.4)

Change in cash surrender value of life insurance

  (0.6)  0.9   (0.7)  1.1 

Tax credits

  (1.2)  (0.5)  (0.4)  (0.7)

Tax exempt interest income

  (0.5)  (0.6)  (0.5)  (0.8)

Non-deductible merger expenses

  -   0.1   -   0.3 

Insurance captive

  (0.3)  (0.2)  (0.3)  (0.4)

Other, net

  0.2   (0.7)  -   (1.1)

Effective tax rate

  22.4

%

  21.9

%

  22.1

%

  20.5

%

 

Current state income tax expense for 2023 and 2022represents tax owed to the statesstate 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, 20222023 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.

 

5133

 

(98)

Deposits

 

The composition of deposits follows:

 

(in thousands)

 

June 30, 2022

  

December 31, 2021

  

June 30, 2023

  

December 31, 2022

 
      

Non-interest bearing demand deposits

 $2,121,304  $1,755,754  $1,766,132  $1,950,198 

Interest bearing deposits:

      

Interest bearing demand

 2,184,579  2,131,928  2,224,665  2,308,960 

Savings

 571,856  415,258  482,701  535,903 

Money market

 1,167,538  1,050,352  1,003,138  1,124,100 
      

Time deposits of $250 thousand or more

 95,958  89,745  174,585  97,638 

Other time deposits(1)

  407,895   344,477   557,159   374,453 

Total time deposits(1)

  503,853   434,222   731,744   472,091 
              

Total interest bearing deposits

  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 

 

(1)

Includes $10$2.3 million and $5 million$599,000 in brokered deposits as of June 30, 20222023 and December 31, 2021,2022, respectively.

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

 

 

(109)

Securities Sold Under Agreements to Repurchase

 

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, 20222023 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 concerning 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 

(dollars in thousands)

 

June 30, 2023

  

December 31, 2022

 

Outstanding balance at end of period

 $138,347  $133,342 

Weighted average interest rate at end of period

  1.72

%

  1.64

%

 

 

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

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(dollars in thousands)

 

2023

  

2022

  

2023

  

2022

 
                 

Average outstanding balance during the period

 $113,051  $140,169  $117,525  $115,761 

Average interest rate during the period

  1.33

%

  0.16

%

  1.43

%

  0.13

%

Maximum outstanding at any month end during the period

 $138,347  $161,512  $138,347  $161,512 

 

5234

 

(1110)

Subordinated Debentures and Other Borrowings

 

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 notenotes 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, 20222023 and carried the notenotes at the costs noted below at June 30, 2023:

(dollars in thousands)

 

Face Value

  

Carrying

Value

 

Origination

Date

 

Maturity

Date

 

Interest Rate

              

Commonwealth Statutory Trust III

 $3,093  $3,062 

12/19/2003

 

1/7/2034

 

LIBOR + 2.85%

Commonwealth Statutory Trust IV

  12,372   12,250 

12/15/2005

 

12/30/2035

 

LIBOR + 1.35%

Commonwealth Statutory Trust V

  11,341   11,229 

6/28/2007

 

9/15/2037

 

LIBOR + 1.40%

Total

 $26,806  $26,541      

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.

(11)

FHLB Advances and Other Borrowings

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.

 

  

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%

     

(dollars in thousands)

 

June 30, 2023

  

December 31, 2022

 
         

Outstanding balance at end of period

 $400,000  $50,000 

Weighted average interest rate at end of period

  5.15

%

  4.37

%

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(dollars in thousands)

 

2023

  

2022

  

2023

  

2022

 
                 

Average outstanding balance during the period

 $348,352  $-  $256,215  $- 

Average interest rate during the period

  4.56

%

  -

%

  4.48

%

  -

%

Maximum outstanding at any month end during the period

 $400,000  $-  $400,000  $- 

 

Bancorp is a member of the FHLB of Cincinnati. As a member of theadvances 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 borrowingsadvances as a potential low costan effective lower-costing alternative to brokered deposits.deposits to fund loan growth. At June 30, 20222023 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, 20222023 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.

 

5335

 

(12)    Commitments and Contingent Liabilities

Commitments and Contingent Liabilities

 

As of June 30, 20222023 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:

 

(in thousands)

 

June 30, 2022

  

December 31, 2021

  

June 30, 2023

  

December 31, 2022

 

Commercial and industrial

 $773,639  $625,858  $867,447  $784,429 

Construction and land development

 456,863  292,351  510,785  449,028 

Home equity

 356,309  247,885  371,567  358,610 

Credit cards

 58,391  40,471  69,850  64,231 

Overdrafts

 61,377  51,104  55,343  57,193 

Letters of credit

 34,877  30,779  33,675  34,704 

Other

 93,596  76,721  94,054  93,419 

Future loan commitments

  328,977   325,983   292,585   221,973 

Total off balance sheet commitments to extend credit

 $2,164,029  $1,691,152  $2,295,306  $2,063,587 

 

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, 20222023 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 ACLProvision for credit loss expense for off balance sheet credit exposures withof $200,000 and $575,000 was recorded for the corresponding offset recorded to goodwill (as opposed to provision expense). Further, provisionthree 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 periodsmonths ended June 30, 2022. The expense recorded for the three month periodmonths ended June 30, 2022 was driven largely by the addition of new lines of credit and thus increased availability, within the C&D portfolio, offsettingoff setting the $400,000 of negative provision that was recorded during the First quarter of first2022. quarter. Negative provision expenseThe 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.

 

5436

 

(13)

Assets and Liabilities Measured and Reported at Fair Value

 

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).

 

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

 

 

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 

 

5537

 
 

Fair Value Measurements Using:

 

Total

  

Fair Value Measurements Using:

 

Total

 

December 31, 2021 (in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Fair Value

 

December 31, 2022 (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

 $122,501  $0  $0  $122,501 

U.S. Treasury and other U.S. Government obligations

 $115,039  $  $  $115,039 

Government sponsored enterprise obligations

 0  135,021  0  135,021    143,626    143,626 

Mortgage backed securities - government agencies

 0  846,624  0  846,624    752,738    752,738 

Obligations of states and political subdivisions

 0  75,075  0  75,075    127,599    127,599 

Other

  0   1,077   0   1,077      5,615      5,615 
             

Total available for sale debt securities

  122,501   1,057,797   0   1,180,298   115,039   1,029,578      1,144,617 
  

Mortgage loans held for sale

   2,606    2,606 

Rate lock loan commitments

   137    137 

Mandatory forward contracts

   47    47 

Interest rate swaps

  0   3,148   0   3,148      10,727      10,727 
 

Total assets

 $122,501  $1,060,945  $0  $1,183,446  $115,039  $1,043,095  $  $1,158,134 
  

Liabilities:

                

Interest rate swaps

 $0  $3,162  $0  $3,162  $  $10,737  $  $10,737 

 

There were no transfers into or out of Level 3 of the fair value hierarchy during 20222023 or 2021.2022. 

 

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

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.

 

5638

 

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

 

                 

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             

 

                  

Losses recorded

 
                  

Three months

  

Six months

 
  

Fair Value Measurements Using:

  

Total

  

ended

  

ended

 

December 31, 2021 (in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Fair Value

  

June 30, 2021

  

June 30, 2021

 
                         

Collateral dependent loans

 $0  $0  $4,487  $4,487  $0  $0 

Other real estate owned

  0   0   7,212   7,212   0   0 

                  

Losses recorded

 
                  

Three months

  

Six months

 
  

Fair Value Measurements Using:

  

Total

  

ended

  

ended

 

December 31, 2022 (in thousands)

 

Level 1

  

Level 2

  

Level 3

  

Fair Value

  

June 30, 2022

  

June 30, 2022

 
                         

Collateral dependent loans

 $  $  $20,637  $20,637  $  $ 

Other real estate owned

        677   677       

 

There were 0no liabilities measured at fair value on a non-recurring basis at June 30, 20222023 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.

 

 

June 30, 2022

  

June 30, 2023

 

(dollars in thousands)

 

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

  

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

 
                  

Collateral dependent loans

 $12,554 

Appraisal

 

Appraisal discounts

 23.2

%

 $10,380 

Appraisal

 

Appraisal discounts

 23.2

%

Other real estate owned

 7,601 

Appraisal

 

Appraisal discounts

 30.7   

Appraisal

 

Appraisal discounts

  

 

 

December 31, 2021

  

December 31, 2022

 

(dollars in thousands)

 

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

  

Fair Value

 

Valuation Technique

 

Unobservable Inputs

 

Weighted Average

 
                  

Collateral dependend loans

 $4,487 

Appraisal

 

Appraisal discounts

 41.1

%

 $20,637 

Appraisal

 

Appraisal discounts

 23.3

%

Other real estate owned

 7,212 

Appraisal

 

Appraisal discounts

 31.6  677 

Appraisal

 

Appraisal discounts

 65.6 

 

5739

 

(14)

Disclosure of Financial Instruments Not Reported at Fair Value

 

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:

 

(in thousands)

 

Carrying

     

Fair Value Measurements Using:

 

June 30, 2022

 

amount

  

Fair value

  

Level 1

  

Level 2

  

Level 3

 
 

Carrying

     

Fair Value Measurements Using:

 

June 30, 2023 (in thousands)

 

amount

  

Fair value

  

Level 1

  

Level 2

  

Level 3

 
  

Assets

                    

Cash and cash equivalents

 $573,869  $573,869  $573,869  $0  $0  $214,330  $214,330  $214,330  $  $ 

HTM debt securities

 485,449  460,846  0  460,846  0  450,029  410,249    410,249   

Federal Home Loan Bank stock

 13,811  13,811  0  13,811  0  27,366  27,366    27,366   

Loans, net

 4,810,962  4,699,580  0  0  4,699,580  5,340,899  5,077,515      5,077,515 

Accrued interest receivable

 17,056  17,056  17,056  0  0  22,547  22,547  22,547     
  

Liabilities

                    

Non-interest bearing deposits

 $2,121,304  $2,121,304  $2,121,304  $0  $0  $1,766,132  $1,766,132  $1,766,132  $  $ 

Transaction deposits

 3,923,973  3,923,973  0  3,923,973  0  3,710,504  3,710,504    3,710,504   

Time deposits

 503,853  494,585  0  494,585  0  731,744  720,720    720,720   

Securities sold under agreement to repurchase

 161,512  161,512  0  161,512  0  138,347  138,347    138,347   

Federal funds purchased

 8,771  8,771  0  8,771  0  11,646  11,646    11,646   

Subordinated debentures

 26,144  26,262  0  26,262  0  26,541  26,235    26,235   

FHLB advances

 400,000  398,846    398,846   

Accrued interest payable

 277  277  277  0  0  1,064  1,064  1,064     

 

(in thousands)

 

Carrying

      

Fair Value Measurements Using:

 

December 31, 2021

 

amount

  

Fair value

  

Level 1

  

Level 2

  

Level 3

 
                     

Assets

                    

Cash and cash equivalents

 $961,192  $961,192  $961,192  $0  $0 

Mortgage loans held for sale

  8,614   8,818   0   8,818   0 

Federal Home Loan Bank stock

  9,376   9,376   0   9,376   0 

Loans, net

  4,115,405   4,129,091   0   0   4,129,091 

Accrued interest receivable

  13,745   13,745   13,745   0   0 
                     

Liabilities

                    

Non-interest bearing deposits

 $1,755,754  $1,755,754  $1,755,754  $0  $0 

Transaction deposits

  3,597,538   3,597,538   0   3,597,538   0 

Time deposits

  434,222   433,813   0   433,813   0 

Securities sold under agreement to repurchase

  75,466   75,466   0   75,466   0 

Federal funds purchased

  10,374   10,374   0   10,374   0 

Accrued interest payable

  300   300   300   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       

 

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.

 

5840

 

(15)

Mortgage Banking Activities

 

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.

 

Activity for mortgage loans held for sale, at fair value, was as follows:

 

  

Three months ended June 30,

  

Six months ended June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 

Balance, beginning of period:

 $9,323  $6,579  $8,614  $22,547 

Origination of mortgage loans held for sale

  43,814   50,692   79,643   119,431 

Loans held for sale acquired

  0   3,071   3,559   3,071 

Proceeds from the sale of mortgage loans held for sale

  (43,504)  (55,844)  (82,275)  (141,747)

Net gain on sale of mortgage loans held for sale

  412   922   504   2,118 

Balance, end of period

 $10,045  $5,420  $10,045  $5,420 

  

Three months ended

  

Six month ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 

Balance, beginning of period:

 $6,397  $9,323  $2,606  $8,614 

Origination of mortgage loans held for sale

  30,709   43,814   55,391   79,643 

Loans held for sale acquired

           3,559 

Proceeds from the sale of mortgage loans held for sale

  (30,567)  (43,504)  (51,673)  (82,275)

Net gain realized on sale of mortgage loans held for sale

  530   412   745   504 

Balance, end of period

 $7,069  $10,045  $7,069  $10,045 

 

The following table represents the components of Mortgage banking income:

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

 
                 

Net gain realized on sale of mortgage loans held for sale

 $412  $922  $504  $2,118 

Net change in fair value recognized on loans held for sale

  70   0   43   0 

Net change in fair value recognized on rate lock loan commitments

  797   0   1,189   0 

Net change in fair value recognized on forward contracts

  (814)  0   (635)  0 

Net gain recognized

  465   922   1,101   2,118 
                 

Net loan servicing income

  1,215   333   1,917   588 

Amortization of mortgage servicing rights

  (856)  (174)  (1,337)  (426)

Change in mortgage servicing rights valuation allowance

  0   0   0   0 

Net servicing income recognized

  359   159   580   162 
                 

Other mortgage banking income

  471   222   617   467 

Total mortgage banking income

 $1,295  $1,303  $2,298  $2,747 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands)

 

2023

  

2022

  

2023

  

2022

 
                 

Net gain realized on sale of mortgage loans held for sale

 $530  $412  $745  $504 

Net change in fair value recognized on loans held for sale

  (34)  70   17   43 

Net change in fair value recognized on rate lock loan commitments

  (104)  797   226   1,189 

Net change in fair value recognized on forward contracts

  173   (814)  127   (635)

Net gain recognized

  565   465   1,115   1,101 
                 

Net loan servicing income

  1,120   1,215   2,307   1,917 

Amortization of mortgage servicing rights

  (762)  (856)  (1,523)  (1,337)

Change in mortgage servicing rights valuation allowance

  -   -   -   - 

Net servicing income recognized

  358   359   784   580 
                 

Other mortgage banking income

  107   471   169   617 

Total mortgage banking income

 $1,030  $1,295  $2,068  $2,298 

 

Activity for capitalized mortgage servicing rights was as follows:

 

 

Three months ended

 

Six months ended

  

Three months ended

 

Six months ended

 
 

June 30,

  

June 30,

  

June 30,

  

June 30,

 

(in thousands)

 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Balance at beginning of period

 $16,877  $2,865  $4,528  $2,710  $14,623  $16,877  $15,219  $4,528 

MSRs acquired

 0  1,662  12,676  1,662        12,676 

Additions for mortgage loans sold

 483  304  637  711  255  483  420  637 

Amortization

 (856) (174) (1,337) (426) (762) (856) (1,523) (1,337)

Impairment

                        
                                

Balance at end of period

 $16,504  $4,657  $16,504  $4,657  $14,116  $16,504  $14,116  $16,504 

 

5941

 

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, 20222023 and December 31, 20212022 werewas $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, 20222023 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, 20222023 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 BankBancorp 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:

 

 

June 30, 2022

  

June 30, 2023

  

December 31, 2022

 

(in thousands)

 

Notional

Amount

  

Fair Value

  

Notional

Amount

  

Fair Value

  

Notional

Amount

  

Fair Value

 

Included in Mortgage loans held for sale:

  

Mortgage loans held for sale, at fair value

 $9,989  $10,045  $6,995  $7,069  $2,548  $2,606 
  

Included in other assets:

  

Rate lock loan commitments

 $17,951  $472  $13,768  $364  $5,599  $137 

Mandatory forward contracts

 18,459  44  15,500  81  6,581  47 

 

6042

 

(16)

Accumulated Other Comprehensive Income (Loss)

 

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

 

 

Net unrealized

 

Net unrealized

 

Minimum

     

Net unrealized

 

Net unrealized

 

Minimum

    
 

gains (losses)

 

gains (losses)

 

pension

     

gains (losses)

 

gains

 

pension

    
 

on available for

 

on cash

 

liability

     

on available for

 

on cash

 

liability

    

(in thousands)

 

sale debt securities

  

flow hedges

  

adjustment

  

Total

  

sale debt securities

  

flow hedges

  

adjustment

  

Total

 

Three months ended June 30, 2023

        

Balance, beginning of period

 $(101,431) $376  $112  $(100,943)

Net current period other comprehensive income (loss)

  (8,310)  1,837   -   (6,473)

Balance, end of period

 $(109,741) $2,213  $112  $(107,416)
 

Three months ended June 30, 2022

                

Balance, beginning of period

 $(57,316) $0  $(283) $(57,599) $(57,316) $-  $(283) $(57,599)

Net current period other comprehensive loss

  (29,738)  0   0   (29,738)  (29,738)  -   -   (29,738)

Balance, end of period

 $(87,054) $0  $(283) $(87,337) $(87,054) $-  $(283) $(87,337)
 

Three months ended June 30, 2021

        

Balance, beginning of period

 $(2,513) $(90) $(447) $(3,050)

Net current period other comprehensive income

  4,808   32   0   4,840 

Balance, end of period

 $2,295  $(58) $(447) $1,790 

 

  

Net unrealized

  

Net unrealized

  

Minimum

     
  

gains (losses)

  

gains (losses)

  

pension

     
  

on available for

  

on cash

  

liability

     

(in thousands)

 

sale debt securities

  

flow hedges

  

adjustment

  

Total

 

Six months ended June 30, 2022

                

Balance, beginning of period

 $(7,657) $0  $(283) $(7,940)

Net current period other comprehensive loss

  (79,397)  0   0   (79,397)

Balance, end of period

 $(87,054) $0  $(283) $(87,337)
                 

Six months ended June 30, 2021

                

Balance, beginning of period

 $9,310  $(122) $(447) $8,741 

Net current period other comprehensive income (loss)

  (7,015)  64   0   (6,951)

Balance, end of period

 $2,295  $(58) $(447) $1,790 

  

Net unrealized

  

Net unrealized

  

Minimum

     
  

gains (losses)

  

gains

  

pension

     
  

on available for

  

on cash

  

liability

     

(in thousands)

 

sale debt securities

  

flow hedges

  

adjustment

  

Total

 

Six months ended June 30, 2023

                

Balance, beginning of period

 $(115,648) $-  $112  $(115,536)

Net current period other comprehensive income

  5,907   2,213   -   8,120 

Balance, end of period

 $(109,741) $2,213  $112  $(107,416)
                 

Six months ended June 30, 2022

                

Balance, beginning of period

 $(7,657) $-  $(283) $(7,940)

Net current period other comprehensive loss

  (79,397)  -   -   (79,397)

Balance, end of period

 $(87,054) $-  $(283) $(87,337)

 

 

(17)

Preferred Stock

 

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.

 

6143

 

(18)

Net Income Per Share

 

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

 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands, except per share data)

 

2022

  

2021

  

2022

  

2021

 

Net income available to stockholders

 $26,794  $4,184  $34,700  $26,894 
                 

Weighted average shares outstanding - basic

  29,131   24,140   28,186   23,489 

Dilutive securities

  215   239   235   242 

Weighted average shares outstanding- diluted

  29,346   24,379   28,421   23,731 
                 

Net income per share - basic

 $0.92  $0.17  $1.23  $1.14 

Net income per share - diluted

  0.91   0.17   1.22   1.13 

  

Three months ended

  

Six months ended

 
  

June 30,

  

June 30,

 

(in thousands, except per share data)

 

2023

  

2022

  

2023

  

2022

 

Net income available to stockholders

 $27,664  $26,794  $56,712  $34,700 
                 

Weighted average shares outstanding - basic

  29,223   29,131   29,200   28,186 

Dilutive securities

  117   215   153   235 

Weighted average shares outstanding- diluted

  29,340   29,346   29,353   28,421 
                 

Net income per share - basic

 $0.95  $0.92  $1.94  $1.23 

Net income per share - diluted

  0.94   0.91   1.93   1.22 

 

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

 

 

Three months ended

 

Six months ended

  

Three months ended

 

Six months ended

 

(shares in thousands)

 

June 30,

  

June 30,

  

June 30,

  

June 30,

 
 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 

Antidilutive SARs

 61  29  61  29  94  61  94  61 

 

6244

 

(19)

Stock-Based Compensation

 

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 379,000140,000 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:

 

Assumptions

 

2022

  

2021

 

Dividend yield

  2.38%  2.52%

Expected volatility

  25.42%  25.21%

Risk free interest rate

  1.98%  1.23%

Expected life (in years)

  7.1   7.1 

Assumptions

 

2023

  

2022

 

Dividend yield

  2.24%  2.38%

Expected volatility

  27.20%  25.43%

Risk free interest rate

  3.84%  1.98%

Expected life (in years)

  7.1   7.1 

 

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 allDividends 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 20222023 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 20222023 and 2021,2022, Bancorp awarded 5,4108,668 and 7,7585,410 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 20222023 and 2021,2022, respectively, for the purchase of shares upon the vesting of RSUs.

 

6345

 

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:

 

  

Three months ended June 30, 2023

 

(in thousands)

 

Stock

Appreciation

Rights

  

Restricted

Stock Awards

  

Restricted

Stock Units

  

Performance

Stock Units

  

Total

 
                     

Expense

 $105  $394  $133  $403  $1,035 

Deferred tax benefit

  (22)  (82)  (28)  (85)  (217)

Total net expense

 $83  $312  $105  $318  $818 

  

Three months ended June 30, 2022

 

(in thousands)

 

Stock

Appreciation

Rights

  

Restricted

Stock Awards

  

Restricted

Stock Units

  

Performance

Stock Units

  

Total

 
                     

Expense

 $94  $350  $87  $526  $1,057 

Deferred tax benefit

  (19)  (74)  (18)  (111)  (222)

Total net expense

 $75  $276  $69  $415  $835 

 

  

Three months ended June 30, 2021

 

(in thousands)

 

Stock

Appreciation

Rights

  

Restricted

Stock Awards

  

Restricted

Stock Units

  

Performance

Stock Units

  

Total

 
                     

Expense

 $86  $337  $78  $913  $1,414 

Deferred tax benefit

  (18)  (71)  (16)  (192)  (297)

Total net expense

 $68  $266  $62  $721  $1,117 

  

Six months ended June 30, 2023

 

(in thousands)

 

Stock

Appreciation

Rights

  

Restricted

Stock Awards

  

Restricted

Stock Units

  

Performance

Stock Units

  

Total

 
                     

Expense

 $205  $806  $265  $911  $2,187 

Deferred tax benefit

  (43)  (169)  (56)  (192)  (460)

Total net expense

 $162  $637  $209  $719  $1,727 

 

  

Six months ended June 30, 2022

 

(in thousands)

 

Stock

Appreciation

Rights

  

Restricted

Stock Awards

  

Restricted

Stock Units

  

Performance

Stock Units

  

Total

 
                     

Expense

 $187  $682  $172  $1,007  $2,048 

Deferred tax benefit

  (39)  (144)  (36)  (212)  (431)

Total net expense

 $148  $538  $136  $795  $1,617 

  

Six months ended June 30, 2021

 

(in thousands)

 

Stock

Appreciation

Rights

  

Restricted

Stock Awards

  

Restricted

Stock Units

  

Performance

Stock Units

  

Total

 
                     

Expense

 $175  $666  $154  $1,268  $2,263 

Deferred tax benefit

  (37)  (140)  (32)  (267)  (476)

Total net expense

 $138  $526  $122  $1,001  $1,787 

 

Detail of unrecognized stock-based compensation expense follows:

 

 

Stock

                 

Stock

                

(in thousands)

 

Appreciation

 

Restricted

 

Restricted

 

Performance

     

Appreciation

 

Restricted

 

Restricted

 

Performance

    

Year ended

 

Rights

  

Stock Awards

  

Stock Units

  

Stock Units

  

Total

  

Rights

  

Stock Awards

  

Stock Units

  

Stock Units

  

Total

 
  

Remainder of 2022

 $189  $715  $159  $1,054  $2,117 

2023

 311  1,232  2  1,303  2,848 

Remainder of 2023

 $197  $798  $250  $803  $2,048 

2024

 205  1,002  0  603  1,810  307  1,389  3  908  2,607 

2025

 146  763  0  0  909  248  1,167    485  1,900 

2026

 88  436  0  0  524  190  863      1,053 

2027

  10   50   0   0   60  111  507      618 

2028

  12   42         54 

Total estimated expense

 $949  $4,198  $161  $2,960  $8,268  $1,065  $4,766  $253  $2,196  $8,280 

 

6446

 

The following table summarizes SARs activity and related information:

 

                      

Weighted

                       

Weighted

 
          

Weighted

     

Weighted

 

average

           

Weighted

     

Weighted

 

average

 
          

average

 

Aggregate

 

average

 

remaining

           

average

 

Aggregate

 

average

 

remaining

 
     

Exercise

 

exercise

 

intrinsic

 

fair

 

contractual

      

Exercise

 

exercise

 

intrinsic

 

fair

 

contractual

 

(in thousands, except per share data)

 

SARs

  

price

  

price

  

value(1)

  

value

  

life (in years)

 
               

Outstanding, January 1, 2021

 593  $15.24-$40.00  $27.47  $7,706  $4.44  5.1 

Granted

 30   47.17-50.71  50.48  0  9.69    

Exercised

 (108)  15.24-19.37  16.40  4,239  2.85    

Forfeited

                

Outstanding, December 31, 2021

  515  $15.24-$50.71  $31.16  $16,854  $5.08  5.1 

(in thousands, except per share and life data)

 

SARs

  

price

  

price

  

value(1)

  

value

  

life (in years)

 
                              

Outstanding, January 1, 2022

 515  $15.24-$50.71  $31.16  $16,854  $5.08  5.1  515  $15.24-

$50.71

  $31.16  $16,854  $5.08  5.1 

Granted

 33   53.29-54.91  54.86  0  11.82     34  47.17- 74.92  55.45    12.07    

Exercised

 (61)  15.24-36.65  16.69  2,544  2.78     (114) 15.24- 40.00  21.55  5,258  3.63    

Forfeited

  0                              

Outstanding, June 30, 2022

  487  $15.24-$54.91  $34.58  $12,294  $5.83  5.4 

Outstanding, December 31, 2022

  435  $19.37-

$74.92

  $35.60  $12,784  $6.02  5.1 
               

Outstanding, January 1, 2023

 435  $19.37-

$74.92

  $35.60  $12,784  $6.02  5.1 

Granted

 29  60.76- 60.76  60.76    16.81    

Exercised

               

Forfeited

                

Outstanding, June 30, 2023

  464  $19.37-

$74.92

  $37.17  $8,516  $6.69  5.0 
                              

Vested and exercisable

 349  $15.24-$50.71  $30.84  $10,121  $4.97  4.4  348  $19.37-

$54.91

  $32.97  $9,029  $5.36  4.0 

Unvested

  138   35.90-54.91  44.06  2,173  8.08  3.3   116  35.90- 74.92  49.80  (513) 10.70  3.6 

Outstanding, June 30, 2022

  487  $15.24-$54.91  $34.58  $12,294  $5.83  5.4 

Outstanding, June 30, 2023

  464  $19.37-

$74.92

  $37.17  $8,516  $6.69  5.0 
                              

Vested in the current year

 43  $35.90-$50.71  $39.29  $881  $6.71     41  $35.90-

$54.91

  $41.65  $153  $7.61    

 

(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.

 

The following table summarizes activity for RSAs granted:

 

     

Grant date

      

Grant date

 
     

weighted

      

weighted

 

(in thousands, except per share data)

 

RSAs

  

average cost

  

RSAs

  

average cost

 
 

Unvested at January 1, 2021

 99  $36.85 

Shares awarded

 39  46.90 

Restrictions lapsed and shares released

 (34) 35.48 

Shares forfeited

  (5) 40.81 

Unvested at December 31, 2021

  99  $41.07 
  

Unvested at January 1, 2022

 99  $41.07  99  $41.07 

Shares awarded

 36  58.47  35  58.47 

Restrictions lapsed and shares released

 (31) 40.38  (32) 40.39 

Shares forfeited

  (3) 45.15   (6) 47.49 

Unvested at June 30, 2022

  101  $47.25 

Unvested at December 31, 2022

  96  $47.26 
 

Unvested at January 1, 2023

 96  $47.26 

Shares awarded

 38  63.04 

Restrictions lapsed and shares released

 (32) 43.88 

Shares forfeited

  (2) 51.79 

Unvested at June 30, 2023

  100  $54.18 

 

6547

 

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:

 

 

Vesting

     

Expected

  

Vesting

     

Shares

 

Grant

 

period

 

Fair

 

shares to

  

period

 

Fair

 

expected to

 

year

 

in years

  

value

  

be awarded

  

in years

  

value

  

be awarded

 

2020

 3  $32.27  65,111 

2021

 3  44.44  47,280  3  44.44  47,280 

2022

 3  48.48  36,350  3  48.48  36,349 

2023

 3  54.33  26,804 

 

48

 

(20)

Interest Rate SwapsDerivative Financial Instruments

 

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.

 

Bancorp had outstanding undesignated interest rate swap contracts as follows:

 

 

Receiving

  

Paying

  

Receiving

  

Paying

 
 

June 30,

 

December 31,

 

June 30,

 

December 31,

  

June 30,

 

December 31,

 

June 30,

 

December 31,

 

(dollars in thousands)

 

2022

  

2021

  

2022

  

2021

  

2023

  

2022

  

2023

  

2022

 
  

Notional amount

 $141,432  $123,983  $141,432  $123,983  $113,619  $132,831  $113,619  $132,831 

Weighted average maturity (years)

 7.6  7.2  7.6  7.2  6.5  7.1  6.5  7.1 

Fair value

 $6,475  $3,148  $6,487  $3,162  $9,717  $10,727  $9,726  $10,737 

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:

           

Fair value

 

(dollars in thousands)

     

Pay fixed

  

June 30,

 

Notional Amount

 

Maturity Date

 

Receive (variable) index

 

swap rate

  

2023

 
$100,000,000 

2/6/2028

 

USD SOFR

  3.27

%

 $2,911 

 

6649

 

(21)

Regulatory Matters

 

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. TheAs all of Bancorp’s capital conservationratios were above the adequately-capitalized minimums, including the buffer, the Company was phased in starting in 2016not 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:

 

(dollars in thousands)

 

Actual

  

Minimum for adequately

capitalized

  

Minimum for well

capitalized

  

Actual

  

Minimum for adequately

capitalized

  

Minimum for well

capitalized

 

June 30, 2022

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

June 30, 2023

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

Total risk-based capital (1)

  

Consolidated

 $701,168  12.27

%

 $457,306  8.00

%

 

NA

 

NA

  $810,283  12.78

%

 $507,231  8.00

%

 

NA

 

NA

 

Bank

 662,354  11.63  455,798  8.00  $569,747  10.00

%

 785,543  12.43  505,231  8.00  $631,914  10.00

%

  

Common equity tier 1 risk-based capital (1)

  

Consolidated

 617,901  10.81  257,235  4.50  

NA

 

NA

  710,237  11.20  285,318  4.50  

NA

 

NA

 

Bank

 605,087  10.62  256,386  4.50  370,336  6.50  711,497  11.26  284,361  4.50  410,744  6.50 
  

Tier 1 risk-based capital (1)

  

Consolidated

 643,901  11.26  342,980  6.00  

NA

 

NA

  736,237  11.61  380,424  6.00  

NA

 

NA

 

Bank

 605,087  10.62  341,848  6.00  455,798  8.00  711,497  11.26  379,148  6.00  505,531  8.00 
  

Leverage (2)

  

Consolidated

 643,901  8.58  300,343  4.00  

NA

 

NA

  736,237  9.83  299,726  4.00  

NA

 

NA

 

Bank

 605,087  8.06  300,127  4.00  375,159  5.00  711,497  9.51  299,269  4.00  374,087  5.00 

 

6750

 

(dollars in thousands)

 

Actual

  

Minimum for adequately

capitalized

  

Minimum for well

capitalized

  

Actual

  

Minimum for adequately

capitalized

  

Minimum for well

capitalized

 

December 31, 2021

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

December 31, 2022

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 
  

Total risk-based capital (1)

  

Consolidated

 $596,411  12.79

%

 $372,929  8.00

%

 

NA

 

NA

  $762,956  12.54

%

 $486,841  8.00

%

 

NA

 

NA

 

Bank

 577,078  12.42  371,809  8.00  $464,761  10.00

%

 732,688  12.08  485,314  8.00  $606,643  10.00

%

  

Common equity tier 1 risk-based capital (1)

  

Consolidated

 556,590  11.94  209,772  4.50  

NA

 

NA

  672,045  11.04  273,848  4.50  

NA

 

NA

 

Bank

 537,257  11.56  209,142  4.50  302,095  6.50  667,777  11.01  272,989  4.50  394,318  6.50 
  

Tier 1 risk-based capital (1)

  

Consolidated

 556,590  11.94  279,696  6.00  

NA

 

NA

  698,045  11.47  365,131  6.00  

NA

 

NA

 

Bank

 537,257  11.56  278,857  6.00  371,809  8.00  667,777  11.01  363,986  6.00  485,314  8.00 
  

Leverage (2)

  

Consolidated

 556,590  8.86  251,348  4.00  

NA

 

NA

  698,045  9.33  299,329  4.00  

NA

 

NA

 

Bank

 537,257  8.57  250,871  4.00  313,588  5.00  667,777  8.95  298,600  4.00  373,250  5.00 

 

(1)    Ratio is computed in relation to risk-weighted assets.

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

NA Regulatory framework does not define well-capitalized for holding companiescompanies.

 

6851

 

(22)

Segments

 

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.

 

Selected financial information by business segment follows:

 

 

Three months ended June 30, 2022

  

Three months ended June 30, 2021

  

Three months ended June 30, 2023

  

Three months ended June 30, 2022

 

(in thousands)

 

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

 
  

Net interest income

 $56,888  $96  $56,984  $41,516  $68  $41,584  $60,796  $133  $60,929  $56,888  $96  $56,984 

Provision for credit losses

 (200) 0   (200) 4,147  0   4,147  2,350     2,350  (200)    (200)

Wealth management and trust services

 0  9,495   9,495  0  6,858   6,858    10,146   10,146    9,495   9,495 

All other non-interest income

 12,445  0   12,445  8,930  0   8,930  12,714     12,714  12,445     12,445 

Non-interest expenses

  38,876   5,799   44,675   44,481   3,696   48,177   39,877   5,923   45,800   38,876   5,799   44,675 

Income before income tax expense

 30,657  3,792   34,449  1,818  3,230   5,048  31,283  4,356   35,639  30,657  3,792   34,449 

Income tax expense

  6,724   823   7,547   190   674   864   7,030   945   7,975   6,724   823   7,547 

Net income

  23,933   2,969   26,902   1,628   2,556   4,184   24,253   3,411   27,664   23,933   2,969   26,902 

Less net income attributable to NCI

  108   0   108   0   0   0 

Net income attributable to stockholders

 $23,825  $2,969  $26,794  $1,628  $2,556  $4,184 

Less net income attributed to NCI

           108      108 

Net income available to stockholders

 $24,253  $3,411  $27,664  $23,825  $2,969  $26,794 
  

Segment assets

 $7,550,846  $32,259  $7,583,105  $6,084,185  $3,887  $6,088,072  $7,696,386  $36,166  $7,732,552  $7,550,846  $32,259  $7,583,105 

 

 

Six months ended June 30, 2022

  

Six months ended June 30, 2021

  

Six months ended June 30, 2023

  

Six months ended June 30, 2022

 

(in thousands)

 

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

 
  

Net interest income

 $105,541  $203  $105,744  $79,258  $151  $79,409  $123,740  $261  $124,001  $105,541  $203  $105,744 

Provision for credit losses

 2,079  0   2,079  2,672  0   2,672  4,975     4,975  2,079     2,079 

Wealth management and trust services

 0  17,738   17,738  0  13,106   13,106    19,673   19,673    17,738   17,738 

All other non-interest income

 23,405  0   23,405  16,526  0   16,526  25,234     25,234  23,405     23,405 

Non-interest expenses

  90,566   10,406   100,972   66,177   6,973   73,150   79,477   11,637   91,114   90,566   10,406   100,972 

Income before income tax expense

 36,301  7,535   43,836  26,935  6,284   33,219  64,522  8,297   72,819  36,301  7,535   43,836 

Income tax expense

  7,357   1,635   8,992   4,988   1,337   6,325   14,307   1,800   16,107   7,357   1,635   8,992 

Net income

  28,944   5,900   34,844   21,947   4,947   26,894   50,215   6,497   56,712   28,944   5,900   34,844 

Less net income attributable to NCI

  144   0   144   0   0   0 

Net income attributable to stockholders

 $28,800  $5,900  $34,700  $21,947  $4,947  $26,894 

Less net income attributed to NCI

           144      144 

Net income available to stockholders

 $50,215  $6,497  $56,712  $28,800  $5,900  $34,700 
  

Segment assets

 $7,550,846  $32,259  $7,583,105  $6,084,185  $3,887  $6,088,072  $7,696,386  $36,166  $7,732,552  $7,550,846  $32,259  $7,583,105 

 

6952

 

(23)    Revenue from Contracts with Customers

Revenue from Contracts with Customers

 

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:

 

 

Three months ended June 30, 2022

  

Three months ended June 30, 2021

  

Three months ended June 30, 2023

  

Three months ended June 30, 2022

 

(in thousands)

 

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

 

Wealth management and trust services

 $0  $9,495  $9,495  $0  $6,858  $6,858  $  $10,146  $10,146  $  $9,495  $9,495 

Deposit service charges

 2,061  0   2,061  1,233  0   1,233  2,201     2,201  2,061     2,061 

Debit and credit card income

 4,748  0   4,748  3,284  0   3,284  4,712     4,712  4,748     4,748 

Treasury management fees

 2,187  0   2,187  1,730  0   1,730  2,549     2,549  2,187     2,187 

Mortgage banking income(1)

 1,295  0   1,295  1,303  0   1,303 

Mortgage banking income (1)

 1,030     1,030  1,295     1,295 

Net investment product sales commissions and fees

 731  0   731  545  0   545  800     800  731     731 

Bank owned life insurance(1)

 270  0   270  206  0   206 

Other(2)

  1,153   0   1,153   629   0   629 

Bank owned life insurance (1)

 559     559  270     270 

Gain (loss) on sale of premises and equipment (1)

 (225)    (225) (2)    (2)

Other (2)

  1,088      1,088   1,155      1,155 

Total non-interest income

 $12,445  $9,495  $21,940  $8,930  $6,858  $15,788  $12,714  $10,146  $22,860  $12,445  $9,495  $21,940 

 

 

Six months ended June 30, 2022

  

Six months ended June 30, 2021

  

Six months ended June 30, 2023

  

Six months ended June 30, 2022

 

(Dollars in thousands)

 

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

  

Commercial

Banking

  

WM&T

  

Total

 

Wealth management and trust services

 $0  $17,738  $17,738  $0  $13,106  $13,106 

Wealth management and

 

trust services

 $  $19,673  $19,673  $  $17,738  $17,738 

Deposit service charges

 3,924  0   3,924  2,177  0   2,177  4,350     4,350  3,924     3,924 

Debit and credit card income

 8,867  0   8,867  5,557  0   5,557  9,194     9,194  8,867     8,867 

Treasury management fees

 4,091  0   4,091  3,270  0   3,270  4,867     4,867  4,091     4,091 

Mortgage banking income(1)

 2,298  0   2,298  2,747  0   2,747 

Gain on sale of securities

 0  0   0  0  0   0 

Mortgage banking income (1)

 2,068     2,068  2,298     2,298 

Net investment product sales commissions and fees

 1,338  0   1,338  1,009  0   1,009  1,554     1,554  1,338     1,338 

Bank owned life insurance(1)

 536  0   536  367  0   367 

Bank owned life insurance (1)

 1,108     1,108  536     536 

Gain (loss) on sale of premises and equipment (1)

 (227)    (227) (28)    (28)

Other(2)

  2,351   0   2,351   1,399   0   1,399   2,320      2,320   2,379      2,379 

Total non-interest income

 $23,405  $17,738  $41,143  $16,526  $13,106  $29,632  $25,234  $19,673  $44,907  $23,405  $17,738  $41,143 

 

(1) Outside of the scope of ASC 606.

(2) Outside of the scope of ASC 606, with the exception of safe deposit fees which were nominal for all periods.

 

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.

 

7053

 

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, 20222023 and December 31, 2021,2022, respectively.

 

InvestmentNet 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, 20222023 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 sixmonths ended June 30, 2022.2023.

 

7154

 

(24)

Leases

 

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:

 

(dollars in thousands)

 

June 30, 2022

  

December 31, 2021

  

June 30, 2023

  

December 31, 2022

 
  

Balance Sheet

        

Operating lease right-of-use asset

 $16,711  $14,958  $18,120  $19,694 

Operating lease liability

 18,113  16,408  19,399  21,008 
  

Weighted average remaining lease term (years)

 8.5  9.4  8.7  9.0 

Weighted average discount rate

 2.90% 3.02% 2.61% 2.57%
  

Maturities of lease liabilities:

  

One year or less

 $1,675  $2,634  $1,744  $3,453 

Year two

 3,358  2,673  3,385  3,293 

Year three

 3,057  2,408  2,805  2,739 

Year four

 2,318  1,924  2,297  2,339 

Year five

 1,842  1,608  2,148  2,245 

Greater than five years

  8,330   7,699   9,382   9,559 

Total lease payments

 $20,580  $18,946  $21,761  $23,628 

Less imputed interest

  2,467   2,538   2,362   2,620 

Total

 $18,113  $16,408  $19,399  $21,008 

 

 

Three months ended

 

Three months ended

  

Three months ended

 

Three months ended

 

(in thousands)

 

June 30, 2022

  

June 30, 2021

  

June 30, 2023

  

June 30, 2022

 

Income Statement

        

Components of lease expense:

  

Operating lease cost

 $792  $520  $837  $792 

Variable lease cost

 58  62  68  58 

Less sublease income

  24   13   25   24 

Total lease cost

 $826  $569  $880  $826 

 

 

Six months ended

 

Six months ended

  

Six months ended

 

Six months ended

 

(in thousands)

 

June 30, 2022

  

June 30, 2021

  

June 30, 2023

  

June 30, 2022

 

Income Statement

        

Components of lease expense:

  

Operating lease cost

 $1,448  $1,007  $1,677  $1,448 

Variable lease cost

 115  113  139  115 

Less sublease income

  48   27   50   48 

Total lease cost

 $1,515  $1,093  $1,766  $1,515 

 

 

Six months ended

 

Six months ended

  

Six months ended

 

Six months ended

 

(in thousands)

 

June 30, 2022

  

June 30, 2021

  

June 30, 2023

  

June 30, 2022

 

Cash flow Statement

        

Supplemental cash flow information:

  

Operating cash flows from operating leases

 $1,800  $1,190  $2,126  $1,800 

 

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

 

7255

Item 2.

Item 2.Managements 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 MSAsmarkets 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 exchangeexchanged 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 theEffective 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.

 

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 “Managements 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.

 

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 authoritiesfuture 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;

 

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.

 

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 BankRecent Developments within the Banking Industry

 

On May 31, 2021, Bancorp completed its acquisition11, 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 commercialSignature bank and trust company, which operated 19 retail branches throughout central and eastern Kentucky.earlier this year. At the time of acquisition and netthe 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 accountingDecember 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 $1.27to 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 millionwould 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 companystability 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 millionhas 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 forcontinue 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, 2021developments surrounding the recent bank failures noted above, as a result ofwell 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 servedfinancial markets generally, to increase the ACL by $14 million at acquisition date. This increase consisted of $7 million attributedensure 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.”

 

 

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, 20222023 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, 20222023 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.

o

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.

o

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.

o

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.

o

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.

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.

o

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.

o

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.

o

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.

o

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 threeThe six months ended June 30, 2022 represented the first full quarterapproximately four months of activity associated with the CB acquisition. There were no one-timeacquisition, including $19.5 million in merger related expenses recordedand $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, $755Total loans (excluding PPP) increased $571 million, in loans, $396 million in investment securities and $1.04 billion in deposits, further contributingor 12%, compared to the substantial balance sheetJune 30, 2022, driven by significant organic growth experienced over the past twelve12 months. GivenAverage loans (excluding PPP) increased $717 million, or 16%, for the timing of the acquisition, the threesix 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:

o

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.

o

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.

o

Net interest income increased $15.4 million, or 37%, for the three months ended June 30, 20222023 compared to the same period of 2021,the prior year as both acquisition-related growth anda 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.

 

 

 

o

Negative provision for credit losses of $200,000 was recorded for the three months ended June 30, 2022 compared to expense of $4.1Bancorp’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 relationattributed mainly to the CB acquisition and strongsignificant organic growth. Averageloan 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 threesix months ended June 30, 20222023, 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 threesix months ended June 30, 2022 compared to the same period of 2021.

Negative provision for credit losses of $200,000 was recorded2022. While organic loan growth drove expense for the three months ended June 30, 2022 compared to total expense of $4.1 million for the samecurrent 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 attributeddriven by $4.4 million of expense related to the acquired loan portfolio, which was partially offset by the release of specific reserves on acquired throughloans 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 duringinflationary 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 quarterhalf of 2023 was also driven by seasonal public funds runoff. While we have not seen fallout in relationour 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 asrest of 2023.

o

As a result of anticipated seasonal deposit runoff related mainlypricing 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 fundhigher-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-interestNet interest income increased $6.2(FTE) totaled $124.3 million or 39%, for the three month periodsix months ended June 30, 20222023, representing an increase of $18.1 million, or 17%, compared to the six months ended June 30, 2022.

o

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 boththe prior year, consistent with average balance sheet expansion and significant contributions stemming from acquisition-related activity and organic growthupward movement in the interest rate environment experienced over the past twelve12 months. AllHowever, 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 ofincluding higher BOLI income driven by the prior year with the exceptionpurchase of mortgage banking, which was flat compared to thean 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 $3.5declined $9.9 million, or 7%10%, for the threesix months ended June 30, 20222023, compared to the samesix months ended June 30, 2022. The prior year period included $19.5 million of 2021, remaining controlledmerger expenses associated with the CB acquisition. Non-interest expenses in general remain well-controlled and generallyconsistent 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 endedfinancial 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 attributed7.87% at June 30, 2023, compared to the KB acquisition. Excluding these non-recurring expenses7.44% 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.

 

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:

o

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.

o

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.

o

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.

o

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.

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 Measuresfor a reconcilement of non-GAAP to GAAP measures.

 

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 netNet 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, 20222023 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 detailsAt 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 interestfive 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%

 

 

Prime rate, the five year Treasury note rate and the one month LIBORterm 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, the12 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 firsttook aggressive interest rate action since it cutin 2022, increasing the FFTR 150 bps in Marcha 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 50425 bps to a range of 0.75%-1.00%, taking4.25% - 4.50%. These increases ultimately took Prime to 4.00%. This increase was followed by7.50% 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% and5.00% - 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% effectivewas 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 fromremains volatile, regularly changing as new economic data becomes available and the FRBFRB’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. Whilerecession looms, Bancorp expects rising rates to have a positive effect on NIM,ongoing pricing pressure/competition for both loans and deposits, elevatedchanging levels of liquidity within the banking system in general and the possibility of a flatteningseverely inverted yield curve couldwill continue to place pressure on NIM.NIM in the second half of 2023.

 

Net Interest Income (FTE) Three months ended June 30, 20222023 compared to June 30, 20212022

 

Net interest spread (FTE) and NIM (FTE) were 3.14%2.84% and 3.20%3.42%, for the three months ended June 30, 20222023, 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, 20222023 was significantly impacted by the following:

 

 

AnThe rising interest rate environment that is evolvinghas 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, 20222023, as a result of aggressive interest rate action from the FRB duringover 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 generaldeposits has also led todriven a highly competitive loan rate environment.

PPP originations, which begansignificant increase in the second quartercost of 2020funds and continued through expiration of the program on May 31, 2021,overall deposit contraction, as well as the related forgivenessdepositors 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, 20222023 compared to the same period of 2021, largely as a result of acquisition-related activity, but also2022, driven in part by strongsignificant organic loan growth substantial investment in the investment securities portfolio and the benefitsbenefit 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.

 

Total average interest earning assets increased $2.20 billion, or 44%, to $7.17 billionwere virtually flat for the three months ended June 30, 2022,2023, as compared to the same period of 2021, with2022, 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 16climbed 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, 20222023, 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 $948declined $23 million, or 1%, for the three months ended June 30, 20222023 compared to the same period of 2021, which was attributed to2022, 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 $247decreased $429 million, or 79%76%, for the three months ended June 30, 2022 due2023, 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.

 

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, 20222023, compared to the same period of 2021,2022, driven by bothsignificant 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 theThe yield on the overall loan portfolio increased a marginal 1 bp129 bps to 4.20%5.49% for the three months ended June 30, 20222023, 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 inWhile average investment securities led todeclined slightly, there was a $4.5$1.7 million increase in interest income (FTE) on the portfolio for the three months ended June 30, 20222023 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 benefittedThe increased yield on the investment securities portfolio aswas driven by the yields earned on recent purchases have improved dramaticallybenefit 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 therates 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, 20222023 compared to the same period of 2021, having a larger portion of2022, stemming from the balance sheet concentrateddramatic increase in lower-yielding assets created a larger drag on overall NIM for the second quarter of 2022 compared toFFTR 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, 20222023 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, 20222023 compared to the same period in 2021, with interest-bearing demand2022, 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 growthdecline noted above, average SSUAR balances increased $85decreased $27 million, or 19%, for the three months ended June 30, 20222023 compared to the same period of 2021.2022.

 

 

Average FHLB advances decreased $19totaled $348 million for the three months ended June 30, 2022 compared2023. 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.

 

 

SubordinatedAverage subordinated debentures totaling $26totaled $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.

 

Total interest expense increased $606,000, or 40%,$20.0 million for the three months ended June 30, 20222023 compared to the same period of 2021,2022, driven by a directsignificant 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 byincreased 162 bps to 1.81% for the maturity/renewalthree 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 totalTotal interest bearing deposit expense increased $335,000, or 23%,$15.3 million as a result of acquisition-related activity, Bancorp experiencedthe aforementioned deposit rate increases, resulting in a 3139 bps decreaseincrease in the cost of interest bearing deposits. Bancorp has experienced significant benefitWhile 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 duringcontinue in the second halfcoming 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.

 

Net Interest Income (FTE) Six months ended June 30, 20222023 compared to June 30, 20212022

 

Net interest spread (FTE) and NIM (FTE) were 3.09%2.98% and 3.14%3.50%, for the six months ended June 30, 20222023, 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, 20222023 was significantly impacted by the following:

 

 

AnThe rapidly rising interest rate environment that is evolvinghas 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, 20222023, as a result of aggressive interest rate action from the FRB duringover the second quarter of 2022.past 12 months.

 

Substantial balance sheet growthexpansion 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 growthexpansion of $1.45 billion,$386 million, or 48%9%, for the six months ended June 30, 20222023 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 generalIntense pricing pressure/competition for deposits has also led todriven a highly competitive loan rate environment.

PPP originations, which begansignificant increase in the second quartercost of 2020funds and continued through expiration of the program on May 31, 2021,overall deposit contraction, as well as the related forgivenessdepositors 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, 20222023 compared to the same period of 2021, largely2022, as a result of acquisition-related activity, but also driven in part by strongsignificant organic loan growth, substantial investment in the investment securities portfolio, acquisition-related activity and the benefits of a rising interest rate environment.

 

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 27climbing 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, 20222023, 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 growthGrowth 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, 20222023 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 recentthose 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 thebalances. The yield on these assets increased 35434 bps to 0.46%4.80% for the six months ended June 30, 20222023 compared to the same period of 2021, having a larger portion of2022, stemming from the balance sheet concentrateddramatic increase in lower-yielding assets created a larger drag on overall NIM for the six months ended June 30, 2022 compared toFFTR over the prior period.past 12 months.

 

Total average interest bearing liabilities increased $1.45 billion,$386 million, or 48%9%, to $4.48$4.86 billion for the six monthsix-month period ended June 30, 20222023 compared with the same period in 2021,2022, with the total average cost declining 6increasing 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, 20222023 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 trendfirst 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 comparedin relation to the same periodCBT acquisition and the deposit contraction Bancorp has experienced through the first half of 2021.2023.

 

 

Average FHLB advances decreased $24totaled $256 million for the six months ended June 30, 2022 compared2023. 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.

 

 

SubordinatedAverage subordinated debentures totalingtotaled $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.

 

Total interest expense increased $137,000, or 4%,$35.2 million for the six months ended June 30, 20222023 compared to the same period of 2021,2022, driven largely by deposit rate increases and increased borrowing activity, and to a directlesser 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 byincreased 145 bps to 1.60% for the maturity/renewalsix 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 averageTotal interest bearing deposit growth, interest expense on deposits was flat forincreased $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 periodcost 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 benefitWhile 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 duringcontinue the second halfcoming 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, 20222023, as a result of the subordinated debentures assumedadded 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.

 

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

%

 

 

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

%

 

 

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-monththree and six month periods ended June 30, 20222023 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, 20222023 and 2021,2022, respectively, and $445,000$318,000 and $126,000$445,000 for the six-month periods ended June 30, 20222023 and 2021,2022, respectively.

 

 

Interest income includes loan fees of $2.9$1.1 million ($1.2 million51,000 associated with the PPP) and $6.2$2.9 million ($5.61.2 million associated with the PPP) for the three-month periods ended June 30, 20222023 and 2021,2022, respectively, and $6.7$3.0 million ($4.0 million190,000 associated with the PPP) and $12.2$6.7 million ($11.14.0 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.

 

 

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 by2023 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 Bancorprising 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 depositthe future rising rate scenario betas will remain well below long-term averages through 2022.to return to the historic averages. The anticipated lower deposit30% beta would resultused in the Company’s interestfalling 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 decreaseas would decreases in interest rates would also have negative effect on net interest income.of 100 and 200 bps. These results depict a relatively neutralslightly liability sensitive interest rate risk profile. However, the simulation performed as of June 30, 2022 suggests improvementprofile 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 hikesan 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 declineThe decrease in net interest income in the downfalling 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 depositsand 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-yearfive 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, LiborLIBOR is no longer used to issue new loans in the U.S. It is expected to behas been replaced primarily by the Secured Overnight Financing Rate (SOFR),SOFR, which many experts consideris 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 risksBancorp did not experience any operational issues associated with the expected discontinuance or unavailability of LIBOR.reference rate reform.

 

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.

 

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 utilizednow 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 impactsaffects earnings. As of June 30, 2022, Bancorp had no outstanding interest rate swaps designated as cash flow hedges.

 

 

Provision for Credit Losses

 

Provision for credit losses on loans at June 30, 20222023 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 Policiesfor 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, 20222023 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.

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 periodsWhile credit quality remains strong, provision expense for the first half of 2023 was driven by recording $7.4strong 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 recordedof $2.1 million for the six month ended June 30, 2022.

In addition to the provision activity noted above for the prior year period, the ACL for loans was also increased $10 million during the secondfirst quarter of 2022, as a result of the KBPCD loan portfolio added through the CB acquisition, which more thanwith 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, 20212022 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 periodmonths 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 $4.1was 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, 20222023 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

 

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, 20222023 compared to the same periodsperiod 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, 20222023 compared to 27.5%27.8% and 27.2%28.0% for the same periodsperiod 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, 20222023 compared to 43.4%43.3% and 44.2%43.1% for the same periods of 2021. Acquisition-related2022. While strong organic growth has been experienced across most non-interest income revenue streams over the past 12 months, acquisition-related activity droveaccounts for a significantlarge portion of the non-interest income increase for the three and six month periodsmonths ended June 30, 20222023 compared to the same periodsperiod of 2022, as the prior year.

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 periodsperiod 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 offsetstrong equity market declines experienced duringperformance 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 $43,000increased $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 lowerhigher estate fee incomefees 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, 20212022 and June 30, 20222023 is attributed mainly to AUM of $2.65 billion added through the CB acquisition, as well asequity market appreciation and net new business growth and stock market appreciation overexperienced through the past twelve months.first half of 2023.

 

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. CompanyWM&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 oftentypically 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. FeesWM&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.

 

Assets Under Management by Account Type:

 

AUM (not included on balance sheet) increased from $4.80$6.59 billion at December 31, 20212022 to $6.56$6.98 billion at June 30, 20222023 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, 20222023 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.

 

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 beenremained relatively consistent from period to period and the WM&T Department holds no proprietary mutual funds.period.

 

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 of2022. 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 volume2022. 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 continuedacquisition-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 thecontinued expansion of the customer base, interchange rate compression and further development of the debitany 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 endingended 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.

 

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 declined2022, driven by an overall decline in 2022 compared to the prior year as a result of risingvolumes stemming from higher interest rates and generally low housing inventory. While this has in turn ledinventory 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, 20222023 compared to the same periods of the prior year, which was attributed mainly to the contributionadditional 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 addedthree 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 Maynormal course of 2021.business.

 

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, 20222023 compared with the same periods of 2021.2022. The increases weredecrease 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.

 

 

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 $3.5increased $1.1 million, or 7%3%, and increased $27.8decreased $9.9 million, or 38%10%, for the three and six month periods ended June 30, 20222023 compared to the same periods of 2021,2022. The increase for the variances stemming largely fromthree month period is consistent with the timingorganic 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 periodsperiod ended June 30, 2022. The six months ended June 30, 2022 compared to 63.3% and 64.3% foronly 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 weredecrease 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.

 

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 overacquisition 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 consistsconsisted of 7372 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.

 

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, 20222023 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, 20222023 compared to the same periods of last year, correlating in part withdriven 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 withincrease 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 asand 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, 20222023 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 twelve12 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, 20222023 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 with2022, 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 $142,000increased $235,000 and $85,000$470,000 for the three and six month periods ending June 30, 20222023 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, 20222023 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 forDuring the three and six month periodsmonths ended June 30, 2022, compared to $18.1$19.5 million and $18.5 million for the same periods of 2021.

During the three months ended June 30, 2021, an early termination fee of $474,000 wasmerger 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 intangiblesan intangible related to customer listslist of the WM&T and LFA business linesline 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 million2023, 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.

 

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, 20212022 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 monthsmonth 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 increaseddecreased 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 componenttiming 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 periodmonths 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 exercisewas 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 periodmonths ended June 30, 20222023 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.

 

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

Bancorp’s insurance captive. The Captivecaptive 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 periodmonths 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.

 

 

Financial Condition June 30, 20222023 Compared to December 31, 20212022

 

Overview

 

Total assets increased $937$236 million, or 14%3%, to $7.58$7.73 billion at June 30, 20222023 from $6.65$7.50 billion at December 31, 2021.2022. Total assets of $1.34 billion were added on March 7, 2022loans increased $213 million, or 4%, as athe result of near-record quarterly loan growth during the CB acquisition, including loans of $632second 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 tostemming 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, 20222023 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 depositslatter 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, 20222023 from $676$760 million at December 31, 2021. Stock issued in relation to the CB acquisition, which totaled $1342022. Net income of $56.7 million and net income of $34.7an $8.1 million were offset by a $79 million negative changeincrease in AOCI and dividends declared duringassociated 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 itsthe 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 $387increased $47 million, or 40%28%, ending at $574$214 million at June 30, 20222023 compared to $961$167 million at December 31, 2021. The decline stemmed2022, which was driven largely from anticipated seasonalby increased FHLB borrowing activity offsetting loan funding and deposit run-off associatedcontraction. In addition to utilizing overnight advances with public fundthe 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. Thewas experienced in comparison to December 31, 2022, average balance of cash and cash equivalents increased $380declined $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 twelve12 months, as Bancorp has maintained elevated levels of liquidity stemming fromdriven by the PPPstrong organic loan growth and deposit growth associated with both acquisition-related activity and the customer base maintaining higher deposit balances in general forcontraction experienced over the past severalfew quarters.

 

Investment Securities

 

Investment securities increased $445decreased $75 million, or 38%5%, to $1.63$1.54 billion at June 30, 20222023 compared to $1.18$1.62 billion at December 31, 2021. In addition to securities totaling $247 million being added2022, as a result ofscheduled maturity and pay down activity within the CB acquisition, Bancorp continued to actively investtotal 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 offsetting2023, as Bancorp elected to maintain higher levels of liquidity amidst loan growth associatedand 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-relatedour 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 moveconcentrated in the interest rate environmentCRE and residential real estate segments, which offset a small decline in the C&I segment, with $176 million of the growth experienced throughfor the six months ended June 30, 2023 occurring during the first half of 2022.second quarter.

 

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.

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 thatthe 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.

 

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 theThe timing of forgiveness activity will continue to impact results,and the related fee recognition has become less significantinsignificant, 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 securedbetween 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, 20222023 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%

 

 

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, 20212022 and June 30, 20222023 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, 20222023 and December 31, 2021.2022. The increasedecrease between December 31, 20212022 and June 30, 20222023 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 throughthat 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, 20222023 and December 31, 2021,2022, respectively. Despite the increase during the first six months of 2022, delinquent loan levels remain low by historical comparison.

 

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 

 

Bancorp’s ACL for loans was $66$78 million as of June 30, 20222023 compared to $54$74 million as of December 31, 2021. The change in the ACL2022. 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 recoverystrong loan growth, the establishment of a $1.4 million specific reserve for a large C&I relationship, duringand qualitative factor adjustments associated with the first quarter thatrising rate environment. Net charge-off activity was fully charged off inminimal 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.

 

 

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, 20222023 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%

 

 

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, 20212022 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, 20222023 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.

 

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 $762decreased $183 million, or 13%3%, from December 31, 20212022 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 monthsquarter 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, 20222023 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 

 

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’sBancorp’s control. The majority of SSUARs are indexed to immediately repricing indices such as the FFTR.

 

SSUARsFederal Funds Purchased

FFP and other short-term borrowing balances increased $86$3 million, or 32%, between December 31, 20212022 and June 30, 2022, as SSUAR totaling $66 million were assumed as part2023. 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 debenturesDebentures

 

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.

 

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, 20222023 and December 31, 2021,2022, respectively. The decreaseincrease experienced for the first six months of 20222023 is attributed mainly to significant investmentthe 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, 20222023 and December 31, 20212022, respectively. The lack of growthdecrease in AFS debt security portfolio for the first six months of 20222023 is attributed to both classifying securities purchasedscheduled maturities and acquirednormal 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 andtotal 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 aregiven the intense, industry-wide deposit pricing pressure that is currently maintaining historically high balances. These excess balancesbeing experienced, deposits may generally be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.

 

As of June 30, 20222023 and December 31, 2021,2022, Bancorp held brokered deposits totaling $10$2.3 million and $5 million,$599,000, respectively, allthe majority of which is attributed to deposits added through the acquisition-related activity over the past twelve months.in 2022 and 2021.

 

Included in total deposit balances at June 30, 20222023 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 increasedecrease experienced during the first six months of 2022 being2023 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, 20222023 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, 20222023 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.

 

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, 20222023 compared to December 31, 2021, the increase being driven by both the CB acquisition2022, 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, 20222023 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.

 

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 $4.1was $5.1 million and $3.5$4.5 million as of June 30, 20222023 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.

 

 

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 2022ended 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 $79and an $8 million negativepositive change in AOCI, andoffset 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 declinechanges in AOCI from December 31, 20212022 to June 30, 2022 was2023 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 declinesimprovement between December 31, 20212022 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, 20222023 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, 20222023 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 20232025 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.

 

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 decreased2023 increased compared December 31, 20212022, largely as a result of substantial average asset andmodest 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.

 

 

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 becomebecame 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.

 

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 

 

 

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%

 

 

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, “Managements 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.

 

 

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, 20222023 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 20212023 and will expire in May 20232025 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 sixthree 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, 20222023 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, 20222023 formatted in inline XBRL and contained in Exhibit 101.

 

 

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, 20224, 2023

By:

/s/ James A. Hillebrand

James A. Hillebrand

Chairman and CEO (Principal Executive Officer)

   
   
   

Date: August 5, 20224, 2023

 

/s/ T. Clay Stinnett

T. Clay Stinnett

EVP, Treasurer and CFO (Principal Financial

Officer)

 

11794