~~0000835324sybt:ResidentialRealEstatePortfolioSegmentMembersybt:NonownerOccupiedMemberus-gaap:SpecialMentionMember2021-12-31~~0000835324us-gaap:PerformingFinancingReceivableMemberus-gaap:CommercialPortfolioSegmentMemberus-gaap:CreditCardReceivablesMember2023-06-30

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 ~~September~~June 30, ~~2022~~2023

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

Commission File Number: 1-13661

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 ~~October~~July 31, ~~2022,~~2023, was ~~29,258,080.~~29,322,661.

Table of Contents

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION	4


Item 1. Financial Statements.	4

Condensed Consolidated Balance Sheets	4

Condensed Consolidated Statements of Income	5

Condensed Consolidated Statements of Comprehensive Income (Loss)	6

Condensed Consolidated Statements of Changes in Stockholders’ Equity	7

Condensed Consolidated Statements of Cash Flows	9

Notes to Condensed Consolidated Financial Statements	11

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	7256

Item 3. Quantitative and Qualitative Disclosures about Market Risk.	~~113~~92

Item 4. Controls and Procedures.	~~113~~92


PART II – OTHER INFORMATION	~~113~~92

Item 1. Legal Proceedings.	~~113~~92

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	~~114~~93

Item 6. Exhibits.	~~114~~93


Signatures	~~115~~94

Table of Contents

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

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

~~September~~June 30, ~~2022~~2023 (unaudited) and December 31, ~~2021~~2022 (in thousands, except share data)

	September 30,			December 31,			June 30,			December 31,
	2022			2021			2023			2022
Assets
Cash and due from banks	$	93,948		$	62,304		$	111,126		$	82,515
Federal funds sold and interest bearing due from banks		235,973			898,888			103,204			84,852
Total cash and cash equivalents		329,921			961,192			214,330			167,367

Mortgage loans held for sale, at fair value		5,230			8,614			7,069			2,606
Available for sale debt securities (amortized cost of $1,317,163 in 2022 and $1,190,379 in 2021, respectively)		1,149,173			1,180,298
Held to maturity debt securities (fair value of $433,371 in 2022 and $0 in 2021, respectively)		478,125			—
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		10,928			9,376			27,366			10,928
Loans		5,072,877			4,169,303			5,418,609			5,205,918
Allowance for credit losses on loans		70,083			53,898			(77,710	)		(73,531	)
Net loans		5,002,794			4,115,405			5,340,899			5,132,387

Premises and equipment, net		98,744			76,894			98,777			101,612
Premises held for sale		10,355			—			3,233			2,644
Bank owned life insurance		84,129			53,073			85,782			84,674
Accrued interest receivable		17,568			13,745			22,547			22,157
Goodwill		202,524			135,830			194,074			194,074
Core deposit intangibles		15,914			5,596			13,442			14,958
Customer list intangibles		12,833			—			9,196			10,032
Other assets		135,972			86,002			173,084			134,988
Total assets	$	7,554,210		$	6,646,025		$	7,732,552		$	7,496,261

Liabilities
Deposits:
Non-interest bearing	$	2,200,041		$	1,755,754		$	1,766,132		$	1,950,198
Interest bearing		4,300,732			4,031,760			4,442,248			4,441,054
Total deposits		6,500,773			5,787,514			6,208,380			6,391,252

Securities sold under agreements to repurchase		124,567			75,466			138,347			133,342
Federal funds purchased		8,970			10,374			11,646			8,789
Subordinated debentures		26,244			—			26,541			26,343
Federal Home Loan Bank advances								400,000			50,000
Accrued interest payable		401			300			1,064			660
Other liabilities		162,506			96,502			138,492			125,443
Total liabilities		6,823,461			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		—			—			—			—
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 29,242,000 and 26,596,000 shares in 2022 and 2021, respectively		58,311			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		376,091			243,107			383,387			377,703
Retained earnings		421,269			391,201			473,531			439,898
Accumulated other comprehensive loss		(127,917	)		(7,940	)		(107,416	)		(115,536	)
Total stockholders’ equity		727,754			675,869			808,082			760,432
Non-controlling interest		2,995			—
Total equity		730,749			675,869
Total liabilities and equity	$	7,554,210		$	6,646,025		$	7,732,552		$	7,496,261

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (in thousands, except per share data)

	Three months ended					Nine months ended				Three months ended						Six months ended
	September 30,					September 30,				June 30,						June 30,
	2022		2021			2022		2021		2023			2022			2023			2022
Interest income
Interest income:
Loans, including fees	$	56,750	$	43,307		$	152,105	$	120,402	$	72,308		$	50,612		$	141,095		$	95,355
Federal funds sold and interest bearing due from banks		2,450		208			3,845		358		1,664			1,113			3,245			1,395
Mortgage loans held for sale		103		53			177		175		77			50			118			74
Federal Home Loan Bank stock		172		83			328		204		275			102			440			156
Investment securities:
Taxable		7,503		3,206			18,988		8,245		8,299			6,805			16,745			11,485
Tax-exempt		432		91			1,059		184		440			426			887			627
Total interest income		67,410		46,948			176,502		129,568		83,063			59,108			162,530			109,092
Interest expense
Interest expense:
Deposits		4,449		1,403			7,390		4,348		17,081			1,770			30,580			2,941
Securities sold under agreements to repurchase		176		6			250		16		376			57			832			74
Federal funds purchased and other short-term borrowings		50		5			72		11		170			19			347			22
Federal Home Loan Bank advances											3,962			—			5,696			—
Subordinated debentures		359		—			670		—		545			278			1,074			311
Federal Home Loan Bank advances		—		51			—		301
Total interest expense		5,034		1,465			8,382		4,676		22,134			2,124			38,529			3,348
Net interest income		62,376		45,483			168,120		124,892		60,929			56,984			124,001			105,744
Provision for credit losses		4,803		(1,525	)		6,882		1,147		2,350			(200	)		4,975			2,079
Net interest income after credit loss expense		57,573		47,008			161,238		123,745
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		9,152		7,128			26,890		20,234		10,146			9,495			19,673			17,738
Deposit service charges		2,179		1,768			6,103		3,945		2,201			2,061			4,350			3,924
Debit and credit card income		4,710		3,887			13,577		9,444		4,712			4,748			9,194			8,867
Treasury management fees		2,221		1,771			6,312		5,041		2,549			2,187			4,867			4,091
Mortgage banking income		703		915			3,001		3,662		1,030			1,295			2,068			2,298
Net investment product sales commissions and fees		892		780			2,230		1,789		800			731			1,554			1,338
Bank owned life insurance		516		275			1,052		642		559			270			1,108			536
Gain (loss) on sale of premises and equipment		3,074		—			3,074		(41)
Loss on sale of premises and equipment											(225	)		(2	)		(227	)		(28	)
Other		1,417		1,090			3,768		2,530		1,088			1,155			2,320			2,379
Total non-interest income		24,864		17,614			66,007		47,246		22,860			21,940			44,907			41,143
Non-interest expenses
Non-interest expenses:
Compensation		23,069		17,381			63,242		45,888		22,107			22,204			44,003			40,173
Employee benefits		4,179		3,662			13,147		10,290		5,061			4,429			10,114			8,968
Net occupancy and equipment		3,767		2,732			10,455		7,021		3,514			3,663			7,413			6,688
Technology and communication		3,747		3,173			11,150		8,189		4,219			3,984			8,470			7,403
Debit and credit card processing		1,437		1,479			4,439		3,160		1,706			1,665			3,125			3,002
Marketing and business development		1,244		1,011			3,461		2,357		1,784			1,445			2,879			2,217
Postage, printing and supplies		903		630			2,461		1,499		889			825			1,763			1,558
Legal and professional		774		700			2,451		1,828		819			1,027			1,616			1,677
FDIC insurance		847		387			2,028		1,141		779			536			1,914			1,181
Amortization of investments in tax credit partnerships		88		53			265		315		324			89			647			177
Capital and deposit based taxes		722		556			1,822		1,541		607			582			1,246			1,100
Merger expenses		—		525			19,500		19,025		—			—			—			19,500
Federal Home Loan Bank early termination penalty		—		—			—		474
Intangible amortization		1,610		290			3,934		494		1,172			1,611			2,352			2,324
Other		2,486		1,979			7,490		4,486		2,819			2,615			5,572			5,004
Total non-interest expenses		44,873		34,558			145,845		107,708		45,800			44,675			91,114			100,972
Income before income tax expense		37,564		30,064			81,400		63,283		35,639			34,449			72,819			43,836
Income tax expense		9,024		6,902			18,016		13,227		7,975			7,547			16,107			8,992
Net income		28,540		23,162			63,384		50,056		27,664			26,902			56,712			34,844
Less income attributed to non-controlling interest		85		—			229		—		—			108			—			144
Net Income available to stockholders	$	28,455	$	23,162		$	63,155	$	50,056
Net income per common share, basic	$	0.98	$	0.87		$	2.22	$	2.05
Net income per common share, diluted	$	0.97	$	0.87		$	2.20	$	2.03
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		29,144		26,485			28,509		24,360		29,223			29,131			29,200			28,186
Diluted		29,404		26,726			28,752		24,602		29,340			29,346			29,353			28,421

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

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

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (in thousands)

	Three months ended						Nine months ended						Three months ended						Six months ended
	September 30,						September 30,						June 30,						June 30,
	2022			2021			2022			2021			2023			2022			2023		2022
Net income	$	28,540		$	23,162		$	63,384		$	50,056		$	27,664		$	26,902		$	56,712	$	34,844
Other comprehensive income (loss):
Change in unrealized loss on AFS debt securities		(53,415	)		(5,881	)		(157,909	)		(15,100	)
Change in unrealized gain (loss) on AFS debt securities														(11,023	)		(39,151	)		7,837		(104,530	)
Change in fair value of derivatives used in cash flow hedge		—			44			—			127			2,417			—			2,911		—
Total other comprehensive loss, before income tax effect		(53,415	)		(5,837	)		(157,909	)		(14,973	)
Total other comprehensive income (loss), before income tax effect														(8,606	)		(39,151	)		10,748		(104,530	)
Tax effect		(12,835	)		(1,416	)		(37,932	)		(3,601	)		(2,133	)		(9,413	)		2,628		(25,133	)
Total other comprehensive loss, net of tax		(40,580	)		(4,421	)		(119,977	)		(11,372	)
Total other comprehensive income (loss), net of tax														(6,473	)		(29,738	)		8,120		(79,397	)
Comprehensive income (loss)		(12,040	)		18,741			(56,593	)		38,684			21,191			(2,836	)		64,832		(44,553	)
Less comprehensive income attributed to non-controlling interest		85			—			229			—			—			108			—		144
Comprehensive income (loss) available to stockholders	$	(12,125	)	$	18,741		$	(56,822	)	$	38,684		$	21,191		$	(2,944	)	$	64,832	$	(44,697	)

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (in thousands, except per share data)

Common stock

Accumulated

Shares
outstanding

Amount

Additional
paid-in
capital

Retained
earnings

other
comprehensive
loss

Total
stockholders'
equity

Non-controlling
interest

Total
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 tosatisfy 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 tosatisfy 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

Activity for three months ended September 30, 2022:

Net income
— — — 28,455 — 28,455 85 28,540
Other comprehensive loss
— — — — (40,580 ) (40,580 ) — (40,580 )
Stock compensation expense
— — 1,237 — — 1,237 — 1,237
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations
1 5 94 (114 ) — (15 ) — (15 )
Cash dividends declared, $0.29 per share
— — — (8,474 ) — (8,474 ) — (8,474 )
Shares cancelled
(2 ) (9 ) (118 ) 127 — — — —
Distributions to non-controlling interest
— — — — — — (120 ) (120 )
Balance, September 30, 2022
29,242 $ 58,311 $ 376,091 $ 421,269 $ (127,917 ) $ 727,754 $ 2,995 $ 730,749

													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)

Table of Contents

~~(continued)~~

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

Balance, January 1, 2021		22,692		$	36,500		$	41,886		$	353,574		$	8,741		$	440,701
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, 2021:
Activity for three months ended March 31, 2022:
Net income		—			—			—			22,710			—			22,710			—			—			—			7,906			—			7,906			36			7,942
Other comprehensive loss		—			—			—			—			(11,791	)		(11,791	)		—			—			—			—			(49,659	)		(49,659	)		—			(49,659	)
Stock compensation expense		—			—			849			—			—			849			—			—			991			—			—			991			—			991
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		89			296			4,144			(7,533	)		—			(3,093	)		65			216			3,451			(6,011	)		—			(2,344	)		—			(2,344	)
Cash dividends declared, $0.27 per share		—			—			—			(6,144	)		—			(6,144	)
Balance, March 31, 2021		22,781		$	36,796		$	46,879		$	362,607		$	(3,050	)	$	443,232
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, 2021:
Net income		—			—			—			4,184			—			4,184
Other comprehensive income		—			—			—			—			4,840			4,840
Stock compensation expense		—			—			1,414			—			—			1,414
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		—			(2	)		(26	)		(45	)		—			(73	)
Stock issued for KB acquisition		3,808			12,682			191,988			—			—			204,670
Cash dividends declared, $0.27 per share		��			—			—			(7,178	)		—			(7,178	)
Shares cancelled		(1	)		(5	)		(55	)		60			—			—
Balance, June 30, 2021		26,588		$	49,471		$	240,200		$	359,628		$	1,790		$	651,089


Activity for three months ended September 30, 2021:
Activity for three months ended June 30, 2022:
Net income		—			—			—			23,162			—			23,162			—			—			—			26,794			—			26,794			108			26,902
Other comprehensive loss		—			—			—			—			(4,421	)		(4,421	)		—			—			—			—			(29,738	)		(29,738	)		—			(29,738	)
Stock compensation expense		—			—			1,165			—			—			1,165			—			—			1,057			—			—			1,057			—			1,057
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations		—			(1	)		(10	)		—			—			(11	)
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		—			—			—			(7,437	)		—			(7,437	)		—			—			—			(8,183	)		—			(8,183	)		—			(8,183	)
Shares cancelled		(3	)		(8	)		(101	)		109			—			—			(3	)		(8	)		(99	)		109			—			2			—			2
Balance, September 30, 2021		26,585		$	49,462		$	241,254		$	375,462		$	(2,631	)	$	663,547
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.

Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 (in thousands)

	2022			2021			2023			2022
Cash flows from operating activities:
Net income	$	63,384		$	50,056		$	56,712		$	34,844
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		6,882			1,147			4,975			2,079
Depreciation, amortization and accretion, net		15,729			7,925			10,718			10,031
Deferred income tax expense		3,303			3,837			463			4,771
Gain on sale of mortgage loans held for sale		(670	)		(2,708	)		(745	)		(504	)
Origination of mortgage loans held for sale		(111,026	)		(169,542	)		(55,391	)		(79,643	)
Proceeds from sale of mortgage loans held for sale		118,639			187,667			51,673			82,275
Bank owned life insurance income		(1,052	)		(642	)		(1,108	)		(536	)
(Gain) loss on the disposal of premises and equipment		(3,074	)		41
(Gain) loss on the sale of other real estate owned		5			(180	)
Loss on the disposal of premises and equipment								227			28
Stock compensation expense		3,285			3,428			2,187			2,048
Excess tax benefit from share-based compensation arrangements		(1,142	)		(1,152	)		(530	)		(1,112	)
Net change in accrued interest receivable and other assets		(8,607	)		1,656			(40,833	)		(4,747	)
Net change in accrued interest payable and other liabilities		(14,539	)		(18,401	)		15,535			(27,776	)
Net cash provided by operating activities		71,117			63,132			43,883			21,758
Cash flows from investing activities:
Purchases of available for sale debt securities		(180,902	)		(325,073	)		(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		112,078			131,936			58,501			78,409
Purchases of held to maturity debt securities		(459,183	)		—			—			(459,183	)
Proceeds from maturities and paydowns of held to maturity debt securities		164,512			—			23,303			159,119
Purchase of bank owned life insurance		(30,000	)		—
Proceeds from redemption of Federal Home Loan Bank stock		2,883			8,980
Purchases of Federal Home Loan Bank stock								(16,438	)		—
Net change in non-PPP loans		(332,133	)		(232,636	)		(225,628	)		(180,130	)
Net change in PPP loans		121,265			318,851			11,505			103,967
Purchases of premises and equipment		(15,294	)		(3,243	)		(3,472	)		(13,563	)
Proceeds from sale or disposal of premises and equipment		13,517			—			411			—
Other investment activities		—			(3,975	)		(506	)		—
Proceeds from sales of other real estate owned		6,656			919			—			56
Cash from acquisition, net of cash paid		349,456			24,981			—			349,456
Net cash (used in) provided by investing activities		(245,034	)		11,834
Net cash used in investing activities								(152,494	)		(45,417	)
Cash flows from financing activities:
Net change in deposits		(406,883	)		314,218			(182,872	)		(358,526	)
Net change in securities sold under agreements to repurchase and federal funds purchased		(18,524	)		14,511			7,862			18,223
Proceeds from Federal Home Loan Bank advances		—			30,000			1,400,000			—
Repayments of Federal Home Loan Bank advances		—			(142,745	)		(1,050,000	)		—
Repayment of acquired line of credit		(3,200	)		—			—			(3,200	)
Share repurchases related to compensation plans		(3,574	)		(3,177	)		(2,380	)		(3,559	)
Cash disbursements to non-controlling interest		(328	)		—			—			(208	)
Cash dividends paid		(24,845	)		(20,777	)		(17,036	)		(16,394	)
Net cash (used in) provided by financing activities		(457,354	)		192,030			155,574			(363,664	)
Net change in cash and cash equivalents		(631,271	)		266,996			46,963			(387,323	)
Beginning cash and cash equivalents		961,192			317,945			167,367			961,192
Ending cash and cash equivalents	$	329,921		$	584,941		$	214,330		$	573,869

(continued)

Table of Contents

~~(continued)~~

~~For the nine months ended September~~
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
For the six months ended June 30,

	2022		2021
Supplemental cash flow information:					2023		2022
Interest paid	$	8,281	$	4,669	$	38,125	$	2,147
Income taxes paid, net of refunds		9,614		13,359		17,010		7,989
Cash paid for operating lease liabilities		2,746		1,898		2,126		1,800

Supplemental non-cash activity:
Unfunded commitments in tax credit investments	$	6,886	$	6,307	$	49,012	$	6,907
Due to broker		62,241		3,590
Dividends payable to stockholders		204		194		183		182
Loans transferred to OREO		—		7,106		—		445
Premises and equipment transferred to premises held for sale		10,355		—		715		—

Liabilities assumed in conjunction with acquisitions:
Fair value of assets acquired	$	1,403,509	$	1,389,327	$	-	$	1,403,509
Consideration paid		30,994		28,276
Common stock issued		133,825		204,670
Cash paid in acquisition						—		30,994
Common stock issued in acquisition						—		133,825
Non-controlling interest of acquired entity		3,094		—		—		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.

Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(1) ~~Summary of Significant Accounting Policies~~

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 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, 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 CB 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 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 Presentation~~–~~The 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 do~~this report have not ~~include all~~been 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 ~~(consisting~~necessary 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. Intercompany~~nature 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~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022~~ ~~are~~ ~~not~~ ~~necessarily indicative of the results that~~ ~~may~~ ~~be expected for the year ending~~ ~~December~~ ~~31,~~~~2022.~~

~~Table of Contents~~

~~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. ~~Facts~~Actual 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~~ ~~September 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~~ ~~326~~ “~~Financial Instruments~~ – ~~Credit Losses,~~” which created material changes to Bancorp’s existing critical accounting policy that existed prior to adoption. 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 Acquisitions~~ –~~Bancorp 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 Equivalents~~–~~Cash 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 Securities~~–Bancorp 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.~~

~~Table of Contents~~

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 ~~nine~~six month ~~periods~~period ended ~~September~~June 30, ~~2022~~2023 ~~and~~ ~~2021.~~

~~ACL – AFS Debt Securities~~ – For 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 of~~that 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~~ ~~September 30, 2022~~ ~~and~~year 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 $731,000 and $0 as of~~ ~~September 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 ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021,~~ ~~no 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.

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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.

~~Loans~~–Loans 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.~~

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 date~~condensed consolidated financial statements have been prepared in accordance with GAAP ~~that is deducted from~~for 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 ACL~~rules 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 a~~SEC. 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, 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 that~~statements do not ~~share risk characteristics are evaluated on an individual basis. For collateral dependent loans where Bancorp has determined that the liquidation or foreclosure~~include all of the ~~collateral is probable, or where the borrower is experiencing~~information and notes required by GAAP for complete financial ~~difficulty~~statements 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 Equipment~~–Premises 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 Stock~~–~~Bancorp 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~~ ~~September 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 policies~~read in conjunction with ~~its non-qualified defined benefit~~Bancorp’s most recent Annual Report on Form 10-K, which contain the latest audited consolidated financial statements and ~~non-qualified compensation plans.~~notes thereto.

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. These derivative instruments are recognized on the consolidated balance sheet at fair value.

~~Bancorp had~~ no ~~fair value hedging relationships at~~ ~~September 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 Assets~~–Transfers 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 Share~~ –Basic 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.

~~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.

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~~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~~ ~~September 30, 2022.~~

~~The Company’s captive maintains cash reserves to cover insurable claims. Reserves totaled $200,000 as of~~ ~~September 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 Instruments~~–~~Fair 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 Information~~–Bancorp 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.~~

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~~~~): “~~~~Facilitation~~Bancorp 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 optional~~new 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.~~

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.~~

~~Table of Contents~~

~~Accounting Standards Updates~~–~~Generally, 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~~have 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 our~~Company’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 new~~This guidance ~~will~~ ~~not~~ ~~have a material impact on the consolidated financial statements.~~

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~~is effective for fiscal years beginning after December 15, 2022 and ~~interim periods within those~~Bancorp’s adoption of this guidance did not have a material impact on the condensed consolidated financial statements.

Accounting Standards Updates–Generally, 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. Entities should apply the amendments prospectively to business combinations that occur~~years beginning after ~~the effective date.~~ December 15, 2023. Early adoption is ~~permitted, including any interim period, for public business entities for periods which financial statements have~~permitted. ASU 2023-02 is 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~~expected to have a material impact on the consolidated financial statements.

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(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 nine in Jefferson County, four in Shelby County, and two 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 $ — $ — $ 380,450
Mortgage loans held for sale
3,559 — — 3,559
Available for sale debt securities (2)
247,209 (416 )
a
— 246,793
Federal Home Loan Bank stock, at cost
4,436 — — 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 — — 1,973
Goodwill
5,412 (5,412 )
e
— —
Core deposit intangible
— 12,724
f
— 12,724
Customer list intangibles
— 14,360
g
— 14,360
Mortgage servicing rights
9,387 3,289
h
— 12,676
Deferred income taxes, net
— (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 $ — $ — $ 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 — — 66,220
Subordinated debentures
26,806 (794 )
l
— 26,012
Line of credit
3,200 — — 3,200
Accrued interest payable
243 — — 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 of individual fair value/provisional period adjustments.~~

(2)

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

~~Table of Contents~~

~~Explanation of fair value/provisional period adjustments~~:

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

~~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 )

~~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 )

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

~~Elimination of the historical CB goodwill.~~

~~Calculation of CDI related to the acquisition.~~

~~Calculation of CLI related to the acquisition.~~

~~Adjustment to reflect the estimated fair value of MSRs.~~

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

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

~~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.~~

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.

~~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 $11.9 million and $26.8 million for the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022,~~ ~~respectively.~~

~~Table of Contents~~

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~~ ~~nine~~ ~~month periods ended~~ ~~September 30, 2021~~ ~~also assumes that the KB acquisition took place at the beginning of the period.~~

(in thousands)

Three months ended
September 30, 2022

Three months ended
September 30, 2021

Net interest income
$ 62,376 $ 53,473
Provision for credit losses (1)
4,803 (1,525 )
Non-interest income
24,864 38,094
Non-interest expense (2)
44,873 50,414
Income before taxes
37,564 42,678
Income tax expense
9,024 9,803
Net income
28,540 32,875
Less net income attributed to noncontrolling interest
85 90
Net income available to stockholders
$ 28,455 $ 32,785

Earnings per share

Basic
$ 0.98 $ 1.13
Diluted
0.97 1.13

Basic weighted average shares outstanding
29,144 29,049
Diluted weighted average shares outstanding
29,404 29,031

(in thousands)

Nine months ended
September 30, 2022

Nine months ended
September 30, 2021

Net interest income
$ 173,153 $ 164,579
Provision for credit losses (1)
2,453 (5,767 )
Non-interest income
68,947 97,524
Non-interest expense (2)
136,837 153,407
Income before taxes
102,810 114,463
Income tax expense
23,038 23,380
Net income
79,772 91,083
Less net income attributed to noncontrolling interest
244 264
Net income available to stockholders
$ 79,528 $ 90,819

Earnings per share

Basic
$ 2.73 $ 3.10
Diluted
2.71 3.10

Basic weighted average shares outstanding
29,110 29,291
Diluted weighted average shares outstanding
29,371 29,272

(1~~) - Excludes $4.4 million in merger related credit loss expense for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022.~~ ~~Excludes $7.4 million in merger related credit loss expense for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~respectively.~~

(2~~) - Excludes $24.1 million in merger expenses for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2022.~~ ~~Excludes $525,000 and $18.5 million in merger expenses for the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~respectively.~~

~~Table of Contents~~

~~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 $ — $ — $ 53,257
Mortgage loans held for sale
3,071 — — 3,071
Available for sale debt securities
396,157 (295 )
a
— 395,862
Federal Home Loan Bank stock, at cost
7,072 — — 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 — — 18,909
Accrued interest receivable
4,939 — — 4,939
Goodwill
14,001 (14,001 )
e
— —
Core deposit intangible
— 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 $ — $ — $ 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 — — 11,360
Federal Home Loan Bank advances
88,581 2,490
l
— 91,071
Accrued interest payable
505 — — 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 of individual fair value/provisional period adjustments.~~

~~Table of Contents~~

~~Explanation of fair value/provisional period adjustments~~:

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

~~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 )

~~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

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

~~Elimination of the historical KB goodwill.~~

~~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.~~

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

~~Adjustment to reflect the estimated fair value of MSRs.~~

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

~~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.~~

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.

~~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.~~

~~Table of Contents~~

~~Total revenue, defined as net interest income and non-interest income, attributed to KB totaled approximately $11.3 million and $15.7 million and for the~~ ~~three~~ ~~and~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~respectively.~~

(in thousands)

Three months ended
September 30, 2021

Net interest income
$ 45,483
Provision for credit losses
(1,525 )
Non-interest income
17,614
Non-interest expense
34,558
Income before taxes
30,064
Income tax expense
6,902
Net income
23,162
Less net income attributed to noncontrolling interest
-
Net income available to stockholders
$ 23,162

Earnings per share

Basic
$ 0.87
Diluted
0.87

Basic weighted average shares outstanding
26,485
Diluted weighted average shares outstanding
26,726

(in thousands)

Nine months ended
September 30, 2021

Net interest income
$ 139,526
Provision for credit losses (1)
(6,067 )
Non-interest income
53,704
Non-interest expense (2)
106,361
Income before taxes
92,936
Income tax expense
18,881
Net income
74,055
Less net income attributed to noncontrolling interest
-
Net income available to stockholders
$ 74,055

Earnings per share

Basic
$ 2.79
Diluted
2.77

Basic weighted average shares outstanding
26,532
Diluted weighted average shares outstanding
26,773

(1~~) - Excludes $7.4 million in merger related credit loss expense for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021.~~

(2~~) - Excludes $18.5 million in pre-tax merger expenses for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021.~~

~~Table of Contents~~

(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

September 30, 2022
cost
Gains

Losses
Fair value

U.S. Treasury and other U.S. Government obligations
$ 122,805 $ - $ (8,379 ) $ 114,426
Government sponsored enterprise obligations
157,598 370 (6,669 ) 151,299
Mortgage backed securities - government agencies
883,386 2 (132,799 ) 750,589
Obligations of states and political subdivisions
147,385 1 (20,171 ) 127,215
Other
5,989 - (345 ) 5,644
Total available for sale debt securities
$ 1,317,163 $ 373 $ (168,363 ) $ 1,149,173

December 31, 2021

U.S. Treasury and other U.S. Government obligations
$ 123,753 $ - $ (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 - (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

September 30, 2022
value
Gains

Losses
Fair value

U.S. Treasury and other U.S. Government obligations
$ 217,684 $ - $ (9,673 ) $ 208,011
Government sponsored enterprise obligations
27,666 2 (2,498 ) 25,170
Mortgage backed securities - government agencies
232,775 - (32,585 ) 200,190
Total available for sale debt securities
$ 478,125 $ 2 $ (44,756 ) $ 433,371

~~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. No 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 ~~September~~June 30, ~~2022~~2023 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, no ACL has been recorded for Bancorp’s HTM securities as of ~~September~~June 30, ~~2022.~~2023. Further, as of ~~September~~June 30, ~~2022,~~2023, none of Bancorp’s HTM securities were in non-accrual or past due status.

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Table of Contents

Debt Securities by Contractual Maturity

A summary of AFS and HTM debt securities by contractual maturity as of ~~September~~June 30, ~~2022~~2023 follows:

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

Due within one year	$	34,464	$	34,211	$	14,078	$	13,804	$	37,631	$	37,337	$	51,134	$	49,821
Due after one year but within five years		157,245		147,011		203,124		193,712		155,874		147,197		153,477		146,073
Due after five years but within 10 years		69,127		59,766		26,333		23,887		69,673		61,354		25,955		23,049
Due after 10 years		172,941		157,596		1,815		1,778		145,204		134,124		578		568
Mortgage backed securities - government agencies		883,386		750,589		232,775		200,190		829,867		712,712		218,885		190,738
Total available for sale debt securities	$	1,317,163	$	1,149,173	$	478,125	$	433,371
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 ~~September~~June 30, ~~2022~~2023 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 ~~$731,000~~$2 million at ~~September~~June 30, 2023 and December 31, 2022, ~~respectively, and was included in the consolidated balance sheets.~~respectively. Accrued interest on the AFS and HTM securities ~~portfolio~~portfolios totaled $3$4 million and $2 million at December 31, ~~2021,~~2022, respectively. Accrued interest on the AFS and ~~was~~HTM 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, three 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.~~goodwill during the first quarter of 2022.

Securities with a carrying value of ~~$972~~$825 million and ~~$879 million~~$1.1 billion were pledged at ~~September~~June 30, ~~2022~~2023 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~~ ~~September 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, no allowance or impairment was recorded with respect to investment securities as of ~~September~~June 30, ~~2022.~~2023.

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Unrealized and Unrecognized Loss Analysis on Debt Securities

Debt securities with unrealized and unrecognized losses at ~~September~~June 30, ~~2022~~2023 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*
September 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	$	21,554	$	(1,391	)	$	92,872	$	(6,988	)	$	114,426	$	(8,379	)	$	-	$	-		$	116,217	$	(6,710	)	$	116,217	$	(6,710	)
Government sponsored enterprise obligations		96,995		(4,999	)		16,589		(1,670	)		113,584		(6,669	)		43,334		(107	)		74,092		(5,996	)		117,426		(6,103	)
Mortgage-backed securities - government agencies		288,778		(33,664	)		461,306		(99,135	)		750,084		(132,799	)		114,246		(5,479	)		595,295		(111,698	)		709,541		(117,177	)
Obligations of states and political subdivisions		98,599		(14,002	)		25,924		(6,169	)		124,523		(20,171	)		16,530		(242	)		106,563		(15,065	)		123,093		(15,307	)
Other		4,880		(205	)		764		(140	)		5,644		(345	)		-		-			3,440		(450	)		3,440		(450	)

Total AFS debt securities	$	510,806	$	(54,261	)	$	597,455	$	(114,102	)	$	1,108,261	$	(168,363	)	$	174,110	$	(5,828	)	$	895,607	$	(139,919	)	$	1,069,717	$	(145,747	)

December 31, 2021
December 31, 2022

U.S. Treasury and other U.S. Government obligations	$	122,501	$	(1,252	)	$	-	$	-		$	122,501	$	(1,252	)
U.S. Treasury and other U.S.
Government obligations																$	3,025	$	(57	)	$	111,966	$	(7,870	)	$	114,991	$	(7,927	)
Government sponsored enterprise obligations		23,789		(223	)		447		(13	)		24,236		(236	)		99,785		(3,553	)		22,484		(2,884	)		122,269		(6,437	)
Mortgage-backed securities - government agencies		615,130		(10,027	)		102,637		(3,127	)		717,767		(13,154	)		180,263		(11,114	)		567,988		(110,471	)		748,251		(121,585	)
Obligations of states and political subdivisions		46,493		(686	)		484		(16	)		46,977		(702	)		64,165		(3,763	)		56,864		(13,655	)		121,029		(17,418	)
Other		957		(18	)		-		-			957		(18	)		4,865		(213	)		749		(129	)		5,614		(342	)

Total AFS debt securities	$	808,870	$	(12,206	)	$	103,568	$	(3,156	)	$	912,438	$	(15,362	)	$	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

September 30, 2022

value

losses

value

losses

value

losses

U.S. Treasury and other U.S. Government obligations
$ 208,011 $ (9,673 ) $ - $ - $ 208,011 $ (9,673 )
Government sponsored enterprise obligations
23,374 (2,498 ) - - 23,374 (2,498 )
Mortgage-backed securities - government agencies
200,190 (32,585 ) - - 200,190 (32,585 )
Total HTM debt securities
$ 431,575 $ (44,756 ) $ - $ - $ 431,575 $ (44,756 )

Table of Contents

Applicable dates for determining when securities are in unrealized and unrecognized loss positions are ~~September~~June 30, ~~2022~~2023 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 ~~“Less~~“Less than 12 ~~months”~~months” category above.

~~Table of Contents~~

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 ~~553~~535 and ~~227~~547 separate investment positions as of ~~September~~June 30, ~~2022~~2023 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022.

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(43)

Loans and Allowance for Credit Losses on Loans

Composition of loans by class follows:

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

Commercial real estate - non-owner occupied	$	1,415,180	$	1,128,244	$	1,477,733	$	1,397,346
Commercial real estate - owner occupied		819,727		678,405		873,980		834,629
Total commercial real estate		2,234,907		1,806,649		2,351,713		2,231,975

Commercial and industrial - term		751,193		596,710		788,070		765,163
Commercial and industrial - term - PPP		19,469		140,734		7,088		18,593
Commercial and industrial - lines of credit		419,048		370,312		438,484		465,813
Total commercial and industrial		1,189,710		1,107,756		1,233,642		1,249,569

Residential real estate - owner occupied		557,638		400,695		664,870		591,515
Residential real estate - non-owner occupied		302,936		281,018		338,727		313,248
Total residential real estate		860,574		681,713		1,003,597		904,763

Construction and land development		414,632		299,206		451,324		445,690
Home equity lines of credit		199,485		138,976		202,574		200,725
Consumer		138,843		104,294		139,602		139,461
Leases		13,959		13,622		13,967		13,322
Credits cards		20,767		17,087		22,190		20,413
Total loans (1)	$	5,072,877	$	4,169,303	$	5,418,609	$	5,205,918

(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 ~~$13 million and $11~~$17 million at both ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, ~~respectively,~~ and was included in the condensed consolidated balance sheets.

Loans with carrying amounts of ~~$2.72~~$2.96 billion and ~~$2.20~~$2.77 billion were pledged to secure FHLB borrowing capacity at ~~September~~June 30, ~~2022~~2023 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 ~~$73~~$74 million and ~~$54~~$79 million as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

PCD Loans

In connection with the ~~acquisitions~~acquisition 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.~~

~~Table of Contents~~

Bancorp purchased loans through the ~~acquisitions of CB and KB~~prior 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			CB
(in thousands)	March 7, 2022			May 31, 2021			March 7, 2022

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

At ~~September~~June 30, ~~2022,~~2023, the book balance of PCD loans acquired as a result of the CB ~~and KB acquisitions~~acquisition totaled ~~$66 million and $13 million, respectively.~~$56 million. Interest income recognized on loans classified as PCD totaled $1.1 million and ~~$341,000~~$2.2 million for the three ~~month periods ended~~ ~~September 30, 2022~~ and ~~2021,~~ ~~respectively. For the~~ ~~nine~~six month periods ended ~~September~~June 30, 2023, respectively. For the three and six month periods ended June 30, 2022, ~~and~~ ~~2021,~~interest income recognized on loans classified as PCD totaled ~~$4.0~~$2.0 million and ~~$450,000,~~$2.9 million, respectively.

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~~Allowance~~ACL 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 September 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	$	20,723	$	-	$	502		$	(37	)	$	-	$	21,188	$	21,669	$	87		$	-		$	17	$	21,773
Commercial real estate - owner occupied		9,842		-		(227	)		-			153		9,768		11,429		128			-			-		11,557
Total commercial real estate		30,565		-		275			(37	)		153		30,956		33,098		215			-			17		33,330

Commercial and industrial - term		12,342		-		2,055			(466	)		232		14,163		13,998		851			(57	)		-		14,792
Commercial and industrial - lines of credit		5,000		-		203			(99	)		-		5,104		6,025		416			-			62		6,503
Total commercial and industrial		17,342		-		2,258			(565	)		232		19,267		20,023		1,267			(57	)		62		21,295

Residential real estate - owner occupied		5,988		-		423			(17	)		2		6,396		8,205		662			(43	)		11		8,835
Residential real estate - non-owner occupied		3,190		-		146			-			9		3,345		4,144		24			-			1		4,169
Total residential real estate		9,178		-		569			(17	)		11		9,741		12,349		686			(43	)		12		13,004

Construction and land development		6,214		-		731			-			-		6,945		6,735		17			-			-		6,752
Home equity lines of credit		1,521		-		105			-			-		1,626		1,618		(9	)		-			-		1,609
Consumer		1,113		-		162			(307	)		148		1,116		1,186		201			(208	)		106		1,285
Leases		221		-		(10	)		-			-		211		199		6			-			-		205
Credit cards		208		-		13			-			-		221		465		(233	)		(12	)		10		230
Total	$	66,362	$	-	$	4,103		$	(926	)	$	544	$	70,083	$	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
Nine Months Ended September 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	$	1,744		$	(37	)	$	13	$	21,188	$	22,641	$	(904	)	$	-		$	36	$	21,773
Commercial real estate - owner occupied		9,595		2,121		(2,103	)		(41	)		196		9,768		10,827		730			-			-		11,557
Total commercial real estate		25,555		5,629		(359	)		(78	)		209		30,956		33,468		(174	)		-			36		33,330

Commercial and industrial - term		8,577		1,358		3,796			(594	)		1,026		14,163		12,991		1,929			(128	)		-		14,792
Commercial and industrial - lines of credit		4,802		1,874		(1,437	)		(135	)		-		5,104		6,389		(35	)		-			149		6,503
Total commercial and industrial		13,379		3,232		2,359			(729	)		1,026		19,267		19,380		1,894			(128	)		149		21,295

Residential real estate - owner occupied		4,316		590		1,458			(30	)		62		6,396		6,717		2,140			(43	)		21		8,835
Residential real estate - non-owner occupied		3,677		-		(349	)		-			17		3,345		3,597		570			-			2		4,169
Total residential real estate		7,993		590		1,109			(30	)		79		9,741		10,314		2,710			(43	)		23		13,004

Construction and land development		4,789		419		1,809			(72	)		-		6,945		7,186		(434	)		-			-		6,752
Home equity lines of credit		1,044		2		580			-			-		1,626		1,613		8			(12	)		-		1,609
Consumer		772		78		565			(796	)		497		1,116		1,158		289			(407	)		245		1,285
Leases		204		-		7			-			-		211		201		4			-			-		205
Credit cards		162		-		12			-			47		221		211		103			(100	)		16		230
Total	$	53,898	$	9,950	$	6,082		$	(1,705	)	$	1,858	$	70,083	$	73,531	$	4,400		$	(690	)	$	469	$	77,710

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(in thousands)	Beginning		Initial Allowance		Provision for Credit Losses								Ending		Beginning		Initial ACL on		Provision for Credit Losses								Ending
Three Months Ended September 30, 2021	Balance		on PCD 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	$	19,747	$	-	$	(3,582	)	$	-		$	6	$	16,171	$	20,620	$	-	$	101		$	-		$	2	$	20,723
Commercial real estate - owner occupied		9,548		-		2,131			(1,361	)		-		10,318		11,326		-		(1,464	)		(41	)		21		9,842
Total commercial real estate		29,295		-		(1,451	)		(1,361	)		6		26,489		31,946		-		(1,363	)		(41	)		23		30,565

Commercial and industrial - term		9,748		-		253			(240	)		5		9,766		11,108		-		1,174			(15	)		75		12,342
Commercial and industrial - lines of credit		5,240		-		(328	)		-			-		4,912		6,508		-		(1,508	)		-			-		5,000
Total commercial and industrial		14,988		-		(75	)		(240	)		5		14,678		17,616		-		(334	)		(15	)		75		17,342

Residential real estate - owner occupied		4,350		-		420			(340	)		27		4,457		5,363		-		575			(7	)		57		5,988
Residential real estate - non-owner occupied		3,422		-		106			-			2		3,530		3,361		-		(176	)		-			5		3,190
Total residential real estate		7,772		-		526			(340	)		29		7,987		8,724		-		399			(7	)		62		9,178

Construction and land development		5,193		-		45			-			-		5,238		5,864		-		422			(72	)		-		6,214
Home equity lines of credit		1,230		-		(173	)		-			-		1,057		1,467		-		54			-			-		1,521
Consumer		572		-		145			(274	)		284		727		1,049		-		141			(235	)		158		1,113
Leases		232		-		(38	)		-			-		194		211		-		10			-			-		221
Credit cards		142		-		21			-			-		163		190		-		(29	)		-			47		208
Total	$	59,424	$	-	$	(1,000	)	$	(2,215	)	$	324	$	56,533	$	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
Nine Months Ended September 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	$	(1,692	)	$	(3,065	)	$	41	$	16,171	$	15,960	$	3,508	$	1,242		$	-		$	13	$	20,723
Commercial real estate - owner occupied		6,983		2,112		2,029			(1,361	)		555		10,318		9,595		2,121		(1,876	)		(41	)		43		9,842
Total commercial real estate		26,379		3,603		337			(4,426	)		596		26,489		25,555		5,629		(634	)		(41	)		56		30,565

Commercial and industrial - term		8,970		1,022		156			(409	)		27		9,766		8,577		1,358		1,741			(128	)		794		12,342
Commercial and industrial - lines of credit		3,614		1,755		(457	)		-			-		4,912		4,802		1,874		(1,640	)		(36	)		-		5,000
Total commercial and industrial		12,584		2,777		(301	)		(409	)		27		14,678		13,379		3,232		101			(164	)		794		17,342

Residential real estate - owner occupied		3,389		142		1,279			(383	)		30		4,457		4,316		590		1,035			(13	)		60		5,988
Residential real estate - non-owner occupied		1,818		88		1,620			-			4		3,530		3,677		-		(495	)		-			8		3,190
Total residential real estate		5,207		230		2,899			(383	)		34		7,987		7,993		590		540			(13	)		68		9,178

Construction and land development		6,119		-		(884	)		-			3		5,238		4,789		419		1,078			(72	)		-		6,214
Home equity lines of credit		895		147		14			-			1		1,057		1,044		2		475			-			-		1,521
Consumer		340		-		471			(561	)		477		727		772		78		403			(489	)		349		1,113
Leases		261		-		(67	)		-			-		194		204		-		17			-			-		221
Credit cards		135		-		28			-			-		163		162		-		(1	)		-			47		208
Total	$	51,920	$	6,757	$	2,497		$	(5,779	)	$	1,138	$	56,533	$	53,898	$	9,950	$	1,979		$	(779	)	$	1,314	$	66,362

3518

Table of Contents

The following ~~table presents~~tables 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*
September 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	$	—	$	620	$	—	$	—	$	—	$	7,179	$	160
Commercial real estate - owner occupied		2,021		3,227		—		—		—		1,347		—
Total commercial real estate		2,021		3,847		—		—		—		8,526		160

Commercial and industrial - term		403		1,474		—		—		302		5,323		156
Commercial and industrial - PPP		42		42		—		—		—		—		—
Commercial and industrial - lines of credit		1,479		1,620		—		—		—		57		114
Total commercial and industrial		1,924		3,136		—		—		302		5,380		270

Residential real estate - owner occupied		511		2,468		—		—		245		2,451		—
Residential real estate - non-owner occupied		—		227		—		—		—		398		—
Total residential real estate		511		2,695		—		—		245		2,849		—

Construction and land development		—		—		—		—		—		—		—
Home equity lines of credit		—		524		—		—		—		204		—
Consumer		—		366		—		—		—		396		—
Leases		—		—		—		—		—		—		—
Credit cards		—		12		—		32		—		9		7
Total	$	4,456	$	10,580	$	—	$	32	$	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 $ — $ —
Commercial real estate - owner occupied
665 1,748 — —
Total commercial real estate
1,151 2,468 — —

Commercial and industrial - term
419 670 12 —
Commercial and industrial - PPP
— — — 592
Commercial and industrial - lines of credit
— 228 — 56
Total commercial and industrial
419 898 12 648

Residential real estate - owner occupied
805 1,997 — 36
Residential real estate - non-owner occupied
— 293 — —
Total residential real estate
805 2,290 — 36

Construction and land development
— — — —
Home equity lines of credit
— 646 — —
Consumer
— 410 — —
Leases
— — — —
Credit cards
— — — —
Total
$ 2,375 $ 6,712 $ 12 $ 684

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

3619

Table of Contents

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

For the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, no 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:

Accounts
(in thousands) Receivable / ACL
Accounts
Receivable /
ACL
September 30, 2022

Real Estate

Equipment

Other

Total

Allocation

June 30, 2023

Real Estate

Equipment

Other

Total

Allocation

Commercial real estate - non-owner occupied
$ 6,734 $ - $ - $ 6,734 $ 998 $ 14,094 $ - $ - $ 14,094 $ 2,081
Commercial real estate - owner occupied
5,148 - - 5,148 849 3,174 - - 3,174 842
Total commercial real estate
11,882 - - 11,882 1,847 17,268 - - 17,268 2,923

Commercial and industrial - term
342 819 536 1,697 390 4,405 306 459 5,170 1,571
Commercial and industrial - lines of credit
1,933 1,673 929 4,535 888 2,734 159 - 2,893 750
Total commercial and industrial
2,275 2,492 1,465 6,232 1,278 7,139 465 459 8,063 2,321

Residential real estate - owner occupied
3,029 - - 3,029 363 2,996 - - 2,996 214
Residential real estate - non-owner occupied
424 - - 424 116 588 - - 588 116
Total residential real estate
3,453 - - 3,453 479 3,584 - - 3,584 330

Construction and land development
613 - - 613 9 - - - - -
Home equity lines of credit
524 - - 524 - 205 - - 205 -
Consumer
- - 266 266 19 - - 407 407 20
Leases
- - - - - - - - - -
Credit cards
- - - - - - - - - -
Total collateral dependent loans
$ 18,747 $ 2,492 $ 1,731 $ 22,970 $ 3,632 $ 28,196 $ 465 $ 866 $ 29,527 $ 5,594

Accounts
(in thousands) 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 $ - $ - $ 720 $ - $ 14,764 $ - $ - $ 14,764 $ 2,652
Commercial real estate - owner occupied
7,652 - - 7,652 1,652 4,415 - - 4,415 846
Total commercial real estate
8,372 - - 8,372 1,652 19,179 - - 19,179 3,498

Commercial and industrial - term
- 598 - 598 - 39 2,207 - 2,246 1,205
Commercial and industrial - lines of credit
- 200 - 200 - 422 2,821 - 3,243 761
Total commercial and industrial
- 798 - 798 - 461 5,028 - 5,489 1,966

Residential real estate - owner occupied
1,997 - - 1,997 - 2,199 - - 2,199 222
Residential real estate - non-owner occupied
502 - - 502 116 415 - - 415 116
Total residential real estate
2,499 - - 2,499 116 2,614 - - 2,614 338

Construction and land development
- - - - - - - - - -
Home equity lines of credit
646 - - 646 - 205 - - 205 -
Consumer
- - 247 247 - - - 219 219 20
Leases
- - - - - - - - - -
Credit cards
- - - - - - - - - -
Total collateral dependent loans
$ 11,517 $ 798 $ 247 $ 12,562 $ 1,768 $ 22,459 $ 5,028 $ 219 $ 27,706 $ 5,822

3720
Table of Contents

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

September 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
$ 1,413,186 $ 133 $ 1,653 $ 208 $ 1,994 $ 1,415,180 $ 1,476,525 $ 565 $ - $ 643 $ 1,208 $ 1,477,733
Commercial real estate - owner occupied
819,078 415 117 117 649 819,727 873,504 156 — 320 476 873,980
Total commercial real estate
2,232,264 548 1,770 325 2,643 2,234,907 2,350,029 721 — 963 1,684 2,351,713

Commercial and industrial - term
749,897 204 409 683 1,296 751,193 786,472 594 30 974 1,598 788,070
Commercial and industrial - term - PPP
17,042 2,343 42 42 2,427 19,469 7,088 — — — — 7,088
Commercial and industrial - lines of credit
417,285 1,639 2 122 1,763 419,048 437,885 418 10 171 599 438,484
Total commercial and industrial
1,184,224 4,186 453 847 5,486 1,189,710 1,231,445 1,012 40 1,145 2,197 1,233,642

Residential real estate - owner occupied
554,406 1,264 436 1,532 3,232 557,638 661,389 1,917 629 935 3,481 664,870
Residential real estate - non-owner occupied
302,408 430 - 98 528 302,936 338,383 92 — 252 344 338,727
Total residential real estate
856,814 1,694 436 1,630 3,760 860,574 999,772 2,009 629 1,187 3,825 1,003,597

Construction and land development
414,589 43 — — 43 414,632 451,261 63 — — 63 451,324
Home equity lines of credit
198,993 271 67 154 492 199,485 202,206 129 85 154 368 202,574
Consumer
138,220 302 75 246 623 138,843 138,962 292 37 311 640 139,602
Leases
13,959 — — — — 13,959 13,967 — — — — 13,967
Credit cards
20,731 2 2 32 36 20,767 22,177 4 2 7 13 22,190
Total
$ 5,059,794 $ 7,046 $ 2,803 $ 3,234 $ 13,083 $ 5,072,877 $ 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 $ - $ 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 — — — — 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 — — — — 13,622 13,322 — — — — 13,322
Credit cards
17,087 — — — — 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

3821
Table of Contents

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 as~~including current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans include all risk-rated loans other than those classified as OAEM, substandard, and doubtful, which are defined below:

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

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

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

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

39

~~Table of Contents~~
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
Table of Contents
As of ~~September~~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
Table of Contents
(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
Table of Contents
(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
Table of Contents
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
Term Loans Amortized Cost Basis by Origination Year

Revolving
loans
amortized

September 30, 2022

2022

2021

2020

2019

2018

Prior
cost basis
Total

December 31, 2022

2022

2021

2020

2019

2018

Prior
cost basis
Total

Commercial real estate - non-owner occupied:

Risk rating

Pass
$ 293,231 $ 384,606 $ 285,261 $ 114,927 $ 77,978 $ 166,586 $ 21,887 $ 1,344,476 $ 338,460 $ 380,612 $ 264,833 $ 128,407 $ 76,359 $ 139,095 $ 24,875 $ 1,352,641
OAEM
- 5,290 2,317 18,793 - 5,464 5,850 37,714 - 2,006 - 3,534 - 5,414 - 10,954
Substandard
- 298 4,926 19,789 - 7,257 100 32,370 1,381 1,012 3,744 19,574 - 233 100 26,044
Substandard non-performing
- - - - - 620 - 620 - - - - - 7,707 - 7,707
Doubtful
- - - - - - - - - - - - - - - -
Total Commercial real estate non-owner occupied
$ 293,231 $ 390,194 $ 292,504 $ 153,509 $ 77,978 $ 179,927 $ 27,837 $ 1,415,180 $ 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
$ 118,302 $ 209,793 $ 199,078 $ 103,352 $ 70,931 $ 82,084 $ 11,496 $ 795,036 $ 165,711 $ 202,599 $ 194,052 $ 104,148 $ 60,899 $ 74,356 $ 13,062 $ 814,827
OAEM
2,896 1,797 4,571 735 717 101 510 11,327 2,895 1,777 4,540 1,891 676 216 510 12,505
Substandard
- 1,160 - 6,948 1,958 71 - 10,137 - 1,152 - 1,623 1,928 69 - 4,772
Substandard non-performing
1,538 1,213 - 359 - 117 - 3,227 1,533 911 - - - 81 - 2,525
Doubtful
- - - - - - - - - - - - - - - -
Total Commercial real estate owner occupied
$ 122,736 $ 213,963 $ 203,649 $ 111,394 $ 73,606 $ 82,373 $ 12,006 $ 819,727 $ 170,139 $ 206,439 $ 198,592 $ 107,662 $ 63,503 $ 74,722 $ 13,572 $ 834,629

Commercial and industrial - term:

Risk rating

Pass
$ 272,982 $ 252,324 $ 101,275 $ 41,359 $ 38,690 $ 31,500 $ - $ 738,130 $ 357,470 $ 210,906 $ 90,063 $ 39,068 $ 29,901 $ 27,354 $ - $ 754,762
OAEM
3,968 3,166 - 345 1,809 - - 9,288 3,835 2,935 - 303 1,426 - - 8,499
Substandard
185 - - 1,615 136 365 - 2,301 178 - - 201 - 341 - 720
Substandard non-performing
464 167 581 101 30 131 - 1,474 539 39 486 101 17 - - 1,182
Doubtful
- - - - - - - - - - - - - - - -
Total Commercial and industrial - term
$ 277,599 $ 255,657 $ 101,856 $ 43,420 $ 40,665 $ 31,996 $ - $ 751,193 $ 362,022 $ 213,880 $ 90,549 $ 39,673 $ 31,344 $ 27,695 $ - $ 765,163

Commercial and industrial - PPP

Risk rating

Pass
$ - $ 14,836 $ 4,591 $ - $ - $ - $ - $ 19,427 $ - $ 14,212 $ 4,047 $ - $ - $ - $ - $ 18,259
OAEM
- - - - - - - - - - 313 - - - - 313
Substandard
- - - - - - - - - - - - - - - -
Substandard non-performing
- 14 28 - - - - 42 - - 21 - - - - 21
Doubtful
- - - - - - - - - - - - - - - -
Total Commercial and industrial - PPP
$ - $ 14,850 $ 4,619 $ - $ - $ - $ - $ 19,469 $ - $ 14,212 $ 4,381 $ - $ - $ - $ - $ 18,593

(continued)

4026
Table of Contents

(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

September 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
$ 43,413 $ 13,746 $ 1,118 $ 9,941 $ 1,268 $ 1,159 $ 336,534 $ 407,179 $ 54,948 $ 13,999 $ 991 $ 9,179 $ 1,188 $ 1,033 $ 367,688 $ 449,026
OAEM
- - - - - 391 6,601 6,992 - - - - - 366 12,491 12,857
Substandard
- - 929 1,933 - - 395 3,257 - - 905 1,915 - - 762 3,582
Substandard non-performing
- - - 964 - - 656 1,620 - - - 273 - - 75 348
Doubtful
- - - - - - - - - - - - - - - -
Total Commercial and industrial - lines of credit
$ 43,413 $ 13,746 $ 2,047 $ 12,838 $ 1,268 $ 1,550 $ 344,186 $ 419,048 $ 54,948 $ 13,999 $ 1,896 $ 11,367 $ 1,188 $ 1,399 $ 381,016 $ 465,813

Residential real estate - owner occupied

Risk rating

Pass
$ 144,412 $ 191,838 $ 99,108 $ 29,820 $ 15,527 $ 73,156 $ - $ 553,861 $ 188,765 $ 189,007 $ 96,818 $ 28,316 $ 15,281 $ 70,556 $ - $ 588,743
OAEM
365 96 - 76 - - - 537 360 96 - 70 - - - 526
Substandard
19 - 10 - 142 601 - 772 18 - 10 - 140 277 - 445
Substandard non-performing
63 220 73 692 123 1,297 - 2,468 65 191 70 292 122 1,061 - 1,801
Doubtful
- - - - - - - - - - - - - - - -
Total Residential real estate - owner occupied
$ 144,859 $ 192,154 $ 99,191 $ 30,588 $ 15,792 $ 75,054 $ - $ 557,638 $ 189,208 $ 189,294 $ 96,898 $ 28,678 $ 15,543 $ 71,894 $ - $ 591,515

Residential real estate - non-owner occupied

Risk rating

Pass
$ 78,318 $ 85,299 $ 59,138 $ 34,834 $ 20,226 $ 23,728 $ - $ 301,543 $ 97,313 $ 83,458 $ 55,787 $ 34,304 $ 19,300 $ 21,720 $ - $ 311,882
OAEM
- - 118 271 126 309 - 824 15 - 115 271 124 290 - 815
Substandard
- - - - - 342 - 342 - - - - - 332 - 332
Substandard non-performing
90 23 - - - 114 - 227 86 21 - - - 112 - 219
Doubtful
- - - - - - - - - - - - - - - -
Total Residential real estate - non-owner occupied
$ 78,408 $ 85,322 $ 59,256 $ 35,105 $ 20,352 $ 24,493 $ - $ 302,936 $ 97,414 $ 83,479 $ 55,902 $ 34,575 $ 19,424 $ 22,454 $ - $ 313,248

Construction and land development

Risk rating

Pass
$ 187,688 $ 107,932 $ 68,481 $ 15,387 $ 6,028 $ 1,705 $ 21,342 $ 408,563 $ 257,559 $ 99,204 $ 45,427 $ 580 $ 5,959 $ 1,123 $ 30,378 $ 440,230
OAEM
- - - - - - 999 999 - - - - - - 999 999
Substandard
4,457 613 - - - - - 5,070 4,461 - - - - - - 4,461
Substandard non-performing
- - - - - - - - - - - - - - - -
Doubtful
- - - - - - - - - - - - - - - -
Total Construction and land development
$ 192,145 $ 108,545 $ 68,481 $ 15,387 $ 6,028 $ 1,705 $ 22,341 $ 414,632 $ 262,020 $ 99,204 $ 45,427 $ 580 $ 5,959 $ 1,123 $ 31,377 $ 445,690

Home equity lines of credit

Risk rating

Pass
$ - $ - $ - $ - $ - $ - $ 198,922 $ 198,922 $ - $ - $ - $ - $ - $ - $ 200,481 $ 200,481
OAEM
- - - - - - - - - - - - - - - -
Substandard
- - - - - - 39 39 - - - - - - 39 39
Substandard non-performing
- - - - - - 524 524 - - - - - - 205 205
Doubtful
- - - - - - - - - - - - - - - -
Total Home equity lines of credit
$ - $ - $ - $ - $ - $ - $ 199,485 $ 199,485 $ - $ - $ - $ - $ - $ - $ 200,725 $ 200,725

(continued)

4127
Table of Contents

(continued)

Revolving
loans
(in thousands)

Term Loans Amortized Cost Basis by Origination Year
amortized
September 30, 2022

2022

2021

2020

2019

2018

Prior
cost basis
Total

Consumer

Risk rating

Pass
$ 23,526 $ 19,826 $ 6,547 $ 6,195 $ 2,909 $ 2,355 $ 77,080 $ 138,438
OAEM
39 - - - - - - 39
Substandard
- - - - - - - -
Substandard non-performing
- 36 76 78 25 53 98 366
Doubtful
- - - - - - - -
Total Consumer
$ 23,565 $ 19,862 $ 6,623 $ 6,273 $ 2,934 $ 2,408 $ 77,178 $ 138,843

Leases

Risk rating

Pass
$ 3,901 $ 4,592 $ 2,816 $ 966 $ 812 $ 872 $ - $ 13,959
OAEM
- - - - - - - -
Substandard
- - - - - - - -
Substandard non-performing
- - - - - - - -
Doubtful
- - - - - - - -
Total Leases
$ 3,901 $ 4,592 $ 2,816 $ 966 $ 812 $ 872 $ - $ 13,959

Credit cards

Risk rating

Pass
$ - $ - $ - $ - $ - $ - $ 20,755 $ 20,755
OAEM
- - - - - - - -
Substandard
- - - - - - - -
Substandard non-performing
- - - - - - 12 12
Doubtful
- - - - - - - -
Total Credit cards
$ - $ - $ - $ - $ - $ - $ 20,767 $ 20,767

Total loans

Risk rating

Pass
$ 1,165,772 $ 1,284,792 $ 827,414 $ 356,781 $ 234,370 $ 383,146 $ 688,015 $ 4,940,290
OAEM
7,269 10,347 7,005 20,220 2,651 6,265 13,960 67,717
Substandard
4,661 2,071 5,866 30,285 2,236 8,637 534 54,290
Substandard non-performing
2,155 1,673 758 2,194 178 2,332 1,290 10,580
Doubtful
- - - - - - - -
Total Loans
$ 1,179,857 $ 1,298,883 $ 841,043 $ 409,480 $ 239,435 $ 400,380 $ 703,799 $ 5,072,877
42

~~Table of Contents~~
~~As of~~ ~~December 31, 2021,~~ ~~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
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 - 353 1,619 248 27,856
Substandard
4,174 1,440 - - - 7,629 100 13,343
Substandard non-performing
- 39 78 - 592 11 - 720
Doubtful
- - - - - - - -
Total Commercial real estatenon-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 - 1,396 17,939
Substandard non-performing
1,259 - - - 32 457 - 1,748
Doubtful
- - - - - - - -
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 $ - $ 588,239
OAEM
738 86 254 3,382 8 - - 4,468
Substandard
170 42 2,667 176 111 167 - 3,333
Substandard non-performing
- 543 72 55 - - - 670
Doubtful
- - - - - - - -
Total Commercial and industrial - term
$ 284,058 $ 143,882 $ 61,981 $ 56,001 $ 26,200 $ 24,588 $ - $ 596,710

Commercial and industrial - PPP

Risk rating

Pass
$ 128,409 $ 12,325 $ - $ - $ - $ - $ - $ 140,734
OAEM
- - - - - - - -
Substandard
- - - - - - - -
Substandard non-performing
- - - - - - - -
Doubtful
- - - - - - - -
Total Commercial and industrial - PPP
$ 128,409 $ 12,325 $ - $ - $ - $ - $ - $ 140,734
~~(continued)~~
43

~~Table of Contents~~
~~(continued)~~
Revolving
loans
(in thousands)

Term Loans Amortized Cost Basis by Origination Year
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
- - - - - - 6,355 6,355
Substandard
- - 1,916 - 1,549 - 1,813 5,278
Substandard non-performing
- - - - - - 228 228
Doubtful
- - - - - - - -
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 $ - $ 398,247
OAEM
101 - 174 - - - - 275
Substandard
- - - - 108 68 - 176
Substandard non-performing
164 103 136 230 714 650 - 1,997
Doubtful
- - - - - - - -
Total Residential real estate - owner occupied
$ 176,752 $ 100,039 $ 31,637 $ 17,489 $ 17,421 $ 57,357 $ - $ 400,695

Residential real estate - non-owner occupied

Risk rating

Pass
$ 94,482 $ 78,785 $ 46,177 $ 27,494 $ 16,171 $ 15,909 $ - $ 279,018
OAEM
352 126 281 132 - 462 - 1,353
Substandard
- - - - - 354 - 354
Substandard non-performing
103 - 45 28 - 117 - 293
Doubtful
- - - - - - - -
Total Residential real estate - non-owner occupied
$ 94,937 $ 78,911 $ 46,503 $ 27,654 $ 16,171 $ 16,842 $ - $ 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
- - - - 102 - - 102
Substandard
- - - - - - - -
Substandard non-performing
- - - - - - - -
Doubtful
- - - - - - - -
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
$ - $ - $ - $ - $ - $ - $ 138,239 $ 138,239
OAEM
- - - - - - 91 91
Substandard
- - - - - - - -
Substandard non-performing
- - - - - - 646 646
Doubtful
- - - - - - - -
Total Home equity lines of credit
$ - $ - $ - $ - $ - $ - $ 138,976 $ 138,976
~~(continued)~~
44

~~Table of Contents~~
~~(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

December 31, 2021

2021

2020

2019

2018

2017

Prior
cost basis
Total

December 31, 2022

2022

2021

2020

2019

2018

Prior
cost basis
Total

Consumer

Risk rating

Pass
$ 23,866 $ 9,316 $ 5,014 $ 1,260 $ 555 $ 646 $ 63,227 $ 103,884 $ 27,308 $ 18,396 $ 5,536 $ 5,450 $ 2,270 $ 1,621 $ 78,646 $ 139,227
OAEM
- - - - - - - - - - - - - - - -
Substandard
- - - - - - - - - - - - - - - -
Substandard non-performing
55 304 30 11 - 4 6 410 21 56 40 62 9 31 15 234
Doubtful
- - - - - - - - - - - - - - - -
Total Consumer
$ 23,921 $ 9,620 $ 5,044 $ 1,271 $ 555 $ 650 $ 63,233 $ 104,294 $ 27,329 $ 18,452 $ 5,576 $ 5,512 $ 2,279 $ 1,652 $ 78,661 $ 139,461

Leases

Risk rating

Pass
$ 5,375 $ 3,596 $ 1,375 $ 1,331 $ 406 $ 1,539 $ - $ 13,622 $ 4,643 $ 4,344 $ 2,589 $ 535 $ 576 $ 635 $ - $ 13,322
OAEM
- - - - - - - - - - - - - - - -
Substandard
- - - - - - - - - - - - - - - -
Substandard non-performing
- - - - - - - - - - - - - - - -
Doubtful
- - - - - - - - - - - - - - - -
Total Leases
$ 5,375 $ 3,596 $ 1,375 $ 1,331 $ 406 $ 1,539 $ - $ 13,622 $ 4,643 $ 4,344 $ 2,589 $ 535 $ 576 $ 635 $ - $ 13,322

Credit cards

Risk rating

Pass
$ - $ - $ - $ - $ - $ - $ 17,087 $ 17,087 $ - $ - $ - $ - $ - $ - $ 20,413 $ 20,413
OAEM
- - - - - - - - - - - - - - - -
Substandard
- - - - - - - - - - - - - - - -
Substandard non-performing
- - - - - - - - - - - - - - - -
Doubtful
- - - - - - - - - - - - - - - -
Total Credit cards
$ - $ - $ - $ - $ - $ - $ 17,087 $ 17,087 $ - $ - $ - $ - $ - $ - $ 20,413 $ 20,413

Total loans

Risk rating

Pass
$ 1,490,899 $ 945,719 $ 396,013 $ 268,733 $ 180,732 $ 226,502 $ 563,672 $ 4,072,270 $ 1,492,177 $ 1,216,737 $ 760,143 $ 349,987 $ 211,733 $ 337,493 $ 735,543 $ 5,103,813
OAEM
6,058 4,358 24,061 3,983 1,969 2,205 7,264 49,898 7,105 6,814 4,968 6,069 2,226 6,286 14,000 47,468
Substandard
9,395 5,087 10,568 1,451 2,395 8,218 3,309 40,423 6,038 2,164 4,659 23,313 2,068 1,252 901 40,395
Substandard non-performing
1,581 989 361 324 1,338 1,239 880 6,712 2,244 1,218 617 728 148 8,992 295 14,242
Doubtful
- - - - - - - - - - - - - - - -
Total Loans
$ 1,507,933 $ 956,153 $ 431,003 $ 274,491 $ 186,434 $ 238,164 $ 575,125 $ 4,169,303 $ 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:

September 30,

December 31,

June 30,

December 31,

(in thousands)

2022

2021

2023

2022

Credit cards

Performing
$ 20,723 $ 17,087 $ 22,174 $ 20,413
Non-performing
44 — 16 —
Total credit cards
$ 20,767 $ 17,087 $ 22,190 $ 20,413

4528
Table of Contents

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
~~Detail~~ and Vintage Disclosures,”effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of ~~outstanding TDRs classified as non-performing loans follows:~~troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

September 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
$ 902 $ 202 $ — $ 950 $ 202 $ —
Commercial & industrial - term
— — — 12 12 —
Total TDRs
$ 902 $ 202 $ — $ 962 $ 214 $ —

During the three and ~~nine~~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 included in total non-performing loans follows:

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 ~~September~~June 30, 2022, ~~and~~ ~~2021,~~there were no loans modified as TDRs and there were no 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 $786,000 and $917,000, respectively, in residential real estate loans for which formal foreclosure proceedings were in process at~~ ~~September 30, 2022~~ ~~and~~ ~~December 31, 2021.~~
4629
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(54)
Goodwill

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

The composition of goodwill is presented by respective acquisition below:

September 30,

December 31,

June 30,

December 31,

(in thousands)

2022

2021

2023

2022

Commonwealth Bancshares (2022)
$ 66,694 $ — $ 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 resulted 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, 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.

Changes in the carrying value of goodwill follows:

  Three months ended
Nine months ended

  September 30,
September 30,

(in thousands)

2022

2021

2022

2021

Balance at beginning of period
$ 202,524 $ 136,529 $ 135,830 $ 12,513
Goodwill recorded from acquisitions
— — 66,694 124,016
Provisional period adjustments
— (699 ) — (699 )
Impairment
— — — —
Balance at end of period
$ 202,524 $ 135,830 $ 202,524 $ 135,830
~~As of~~ ~~September 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 ~~nine~~ ~~months ended~~ ~~September 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

4730
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(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

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Balance at beginning of period
$ 16,870 $ 5,162 $ 5,596 $ 1,962 $ 14,196 $ 17,826 $ 14,958 $ 5,596
Core deposit intangible acquired
— — 12,724 3,404 — — — 12,724
Provisional period adjustments
— 999 — 999 — — — —
Amortization
(956 ) (290 ) (2,406 ) (494 ) (754 ) (956 ) (1,516 ) (1,450 )
Balance at end of period
$ 15,914 $ 5,871 $ 15,914 $ 5,871 $ 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.

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

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Balance at beginning of period
$ 13,487 $ - $ - $ - $ 9,614 $ 14,142 $ 10,032 $ -
Customer list intangibles acquired
— — 14,360 — — — — 14,360
Provisional period adjustments
— — — — — — — —
Disposition of LFA
— — — —
Amortization
(654 ) — (1,527 ) - (418 ) (655 ) (836 ) (873 )
Balance at end of period
$ 12,833 $ - $ 12,833 $ - $ 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
$ 956 $ 654
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
- 387 - 304
2033
- 207 - 152
2034
- 28
Total future expense
$ 15,914 $ 12,833 $ 13,442 $ 9,196

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Other Assets

A summary of the major components of other assets follows:

September 30,

December 31,

June 30,

December 31,

(in thousands)

2022

2021

2023

2022

Cash surrender value of life insurance other than BOLI
$ 14,804 $ 17,875 $ 16,940 $ 15,496
Net deferred tax asset
55,440 24,340 51,054 54,145
Investments in tax credit related ventures
14,147 11,084
Investments in tax credit partnerships
55,530 13,969
Swap assets
11,589 3,148 12,628 10,727
Prepaid assets
5,157 4,469 4,073 5,721
Trust fees receivable
3,172 2,868 3,548 3,354
Mortgage servicing rights
15,904 4,528 14,116 15,219
Other real estate owned
996 7,212 677 677
Other
14,763 10,478 14,518 15,680
Total other assets
$ 135,972 $ 86,002 $ 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.”

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Income Taxes

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

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Current income tax expense:

Federal
$ 9,231 $ 4,730 $ 12,838 $ 8,202 $ 8,086 $ 3,393 $ 13,280 $ 3,607
State
1,261 642 1,875 1,188 1,687 614 2,364 614
Total current income tax expense
10,492 5,372 14,713 9,390 9,773 4,007 15,644 4,221

Deferred income tax expense (benefit):

Deferred income tax expense:

Federal
(1,922 ) 858 1,542 2,375 (1,641 ) 2,622 (224 ) 3,464
State
454 672 1,761 1,462 (157 ) 918 687 1,307
Total deferred income tax expense (benefit)
(1,468 ) 1,530 3,303 3,837
Total deferred income tax expense
(1,798 ) 3,540 463 4,771
Change in valuation allowance
- - - - - - - -
Total income tax expense
$ 9,024 $ 6,902 $ 18,016 $ 13,227 $ 7,975 $ 7,547 $ 16,107 $ 8,992

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

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

2022

2021

2022

2021

2023

2022

2023

2022

U.S. federal statutory income tax rate
21.0
%
21.0
%
21.0
%
21.0
%
21.0
%
21.0
%
21.0
%
21.0
%
State income taxes, net of federal benefit
3.6 3.5 3.5 3.4 3.6 3.5 3.5 3.5
Excess tax benefit from stock-based compensation arrangements
- (0.1 ) (1.3 ) (1.7 ) 0.2 (1.6 ) (0.5 ) (2.4 )
Change in cash surrender value of life insurance
- (0.2 ) 0.6 (0.7 ) (0.6 ) 0.9 (0.7 ) 1.1
Tax credits
(0.5 ) (1.1 ) (0.6 ) (0.8 ) (1.2 ) (0.5 ) (0.4 ) (0.7 )
Tax exempt interest income
(0.5 ) (0.4 ) (0.7 ) (0.3 ) (0.5 ) (0.6 ) (0.5 ) (0.8 )
Non-deductible merger expenses
- 0.1 0.2 0.5 - 0.1 - 0.3
Insurance captive
(0.3 ) (0.3 ) (0.3 ) (0.2 ) (0.3 ) (0.2 ) (0.3 ) (0.4 )
Other, net
0.7 0.5 (0.3 ) (0.3 ) 0.2 (0.7 ) - (1.1 )
Effective tax rate
24.0
%
23.0
%
22.1
%
20.9
%
22.4
%
21.9
%
22.1
%
20.5
%

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

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

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Deposits

The composition of deposits follows:

(in thousands)

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Non-interest bearing demand deposits
$ 2,200,041 $ 1,755,754 $ 1,766,132 $ 1,950,198
Interest bearing deposits:

Interest bearing demand
2,106,267 2,131,928 2,224,665 2,308,960
Savings
555,928 415,258 482,701 535,903
Money market
1,163,563 1,050,352 1,003,138 1,124,100

Time deposits of $250 thousand or more
92,529 89,745 174,585 97,638
Other time deposits~~(1)~~
382,445 344,477 557,159 374,453
Total time deposits(1)
474,974 434,222 731,744 472,091

Total interest bearing deposits
4,300,732 4,031,760 4,442,248 4,441,054
Total deposits
$ 6,500,773 $ 5,787,514 $ 6,208,380 $ 6,391,252

(1)
Includes $1$2.3 million and ~~$5 million~~$599,000 in brokered deposits as of ~~September~~June 30, ~~2022~~2023 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.

Information concerning SSUAR follows:

(dollars in thousands)

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Outstanding balance at end of period
$ 124,567 $ 75,466 $ 138,347 $ 133,342
Weighted average interest rate at end of period
0.64
%
0.04
%
1.72
%
1.64
%

Three months ended

Nine months ended

September 30,

September 30,

(dollars in thousands)

2022

2021

2022

2021

Average outstanding balance during the period
$ 139,749 $ 71,065 $ 123,845 $ 57,980
Average interest rate during the period
0.50
%
0.03
%
0.27
%
0.04
%
Maximum outstanding at any month end during the period
$ 139,825 $ 81,964 $ 149,179 $ 81,964
~~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

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(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 ~~note~~notes and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. Bancorp chose not to redeem the subordinated notes on ~~October~~July 1, ~~2022~~2023 and carried the ~~note~~notes at the costs noted below at ~~September~~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.

(dollars in thousands)
Commonwealth
Statutory Trust
III

Commonwealth
Statutory Trust
IV

Commonwealth
Statutory Trust
V

Total

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 the~~advances are collateralized by certain CRE and residential real estate mortgage loans under blanket mortgage collateral pledge agreements, as well as FHLB ~~Bancorp has access to credit products of the FHLB.~~stock. Bancorp views these ~~borrowings~~advances as ~~a potential low cost~~an effective lower-costing alternative to brokered ~~deposits.~~deposits to fund loan growth. At ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the amount of available credit from the FHLB totaled $1.08 billion and $1.36 billion, ~~and $1.00 billion,~~ respectively.
Bancorp also had unsecured available FFP lines with correspondent banks totaling ~~$90 million and~~ $80 million at both ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~In addition, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line at the holding company as of~~ ~~September 30, 2022,~~ ~~which was added during the~~ ~~first~~ ~~quarter of~~ ~~2022~~ ~~to allow capital flexibility at the Bank level, if ever needed.~~

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Commitments and Contingent Liabilities

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

(in thousands)

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Commercial and industrial
$ 813,750 $ 625,858 $ 867,447 $ 784,429
Construction and land development
481,956 292,351 510,785 449,028
Home equity
348,216 247,885 371,567 358,610
Credit cards
61,599 40,471 69,850 64,231
Overdrafts
57,963 51,104 55,343 57,193
Letters of credit
35,001 30,779 33,675 34,704
Other
93,502 76,721 94,054 93,419
Future loan commitments
256,549 325,983 292,585 221,973
Total off balance sheet commitments to extend credit
$ 2,148,536 $ 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Bancorp had accrued ~~$4.8~~$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. 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.
Provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $500,000 and $100,000 was recorded for the three and six months ended June 30, 2022. The ~~CB acquisition resulted in a $500,000 increase to~~expense recorded for thethree months ended June 30, 2022 was driven largely by the addition of new lines of credit within the C&D portfolio, off setting the $400,000 of negative provision recorded during the First quarter of 2022. The ACL for off balance sheet credit exposures was also increased $500,000 during the First quarter of 2022 as a result of the CB acquisition with the ~~corresponding~~ offset recorded to goodwill (as opposed to provision expense). ~~Provision for credit loss expense of $800,000 was also recorded for the~~ ~~nine~~ ~~month period ended~~ ~~September 30, 2022,~~ ~~driven mainly by the addition of new lines of credit, and thus increased availability, and largely concentrated within the C&D portfolio.~~

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 ~~September~~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 ~~September~~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.

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(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

September 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
$ 114,426 $ — $ — $ 114,426 $ 116,217 $ — $ — $ 116,217
Government sponsored enterprise obligations
— 151,299 — 151,299 — 133,575 — 133,575
Mortgage backed securities - government agencies
— 750,589 — 750,589 — 712,712 — 712,712
Obligations of states and political subdivisions
— 127,215 — 127,215 — 126,780 — 126,780
Other
— 5,644 — 5,644 — 3,440 — 3,440

Total available for sale debt securities
114,426 1,034,747 — 1,149,173 116,217 976,507 — 1,092,724

Mortgage loans held for sale
— 5,230 — 5,230 — 7,069 — 7,069
Rate lock loan commitments
— 118 — 118 — 364 — 364
Mandatory forward contracts
— 431 — 431 — 81 — 81
Interest rate swaps
— 11,589 — 11,589
Interest rate swap assets
— 12,628 — 9,717
Total assets
$ 114,426 $ 1,052,115 $ — $ 1,166,541 $ 116,217 $ 996,649 $ — $ 1,109,955

Liabilities:

Interest rate swaps
$ — $ 11,600 $ — $ 11,600
Interest rate swap liabilities
$ — $ 9,726 $ — $ 9,726

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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 $ — $ — $ 122,501
U.S. Treasury and other U.S. Government obligations
$ 115,039 $ — $ — $ 115,039
Government sponsored enterprise obligations
— 135,021 — 135,021 — 143,626 — 143,626
Mortgage backed securities - government agencies
— 846,624 — 846,624 — 752,738 — 752,738
Obligations of states and political subdivisions
— 75,075 — 75,075 — 127,599 — 127,599
Other
— 1,077 — 1,077 — 5,615 — 5,615

Total available for sale debt securities
122,501 1,057,797 — 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
— 3,148 — 3,148 — 10,727 — 10,727

Total assets
$ 122,501 $ 1,060,945 $ — $ 1,183,446 $ 115,039 $ 1,043,095 $ — $ 1,158,134

Liabilities:

Interest rate swaps
$ — $ 3,162 $ — $ 3,162 $ — $ 10,737 $ — $ 10,737

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

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

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.

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

Losses recorded

Losses recorded

Three months

Nine months

Three months

Six months

Fair Value Measurements Using:

Total

ended

ended

Fair Value Measurements Using:

Total

ended

ended

September 30, 2022 (in thousands)

Level 1

Level 2

Level 3

Fair Value

September 30, 2022

September 30, 2022

June 30, 2023 (in thousands)

Level 1

Level 2

Level 3

Fair Value

June 30, 2023

June 30, 2023

Collateral dependent loans
$ — $ — $ 13,039 $ 13,039 $ 377 $ 377 $ — $ — $ 10,380 $ 10,380 $ — $ —
Other real estate owned
— — 996 996 — — — — — — — —

Losses recorded

Three months

Nine months

Fair Value Measurements Using:

Total

ended

ended

December 31, 2021 (in thousands)

Level 1

Level 2

Level 3

Fair Value

September 30, 2021

September 30, 2021

Collateral dependent loans
$ — $ — $ 4,487 $ 4,487 $ — $ —
Other real estate owned
— — 7,212 7,212 — —

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

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

September 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
$ 13,039
Appraisal

Appraisal discounts
24.1
%
$ 10,380
Appraisal

Appraisal discounts
23.2
%
Other real estate owned
996
Appraisal

Appraisal discounts
57.0 —
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

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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:

September 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
$ 329,921 $ 329,921 $ 329,921 $ — $ — $ 214,330 $ 214,330 $ 214,330 $ — $ —
HTM debt securities
478,125 433,371 — 433,371 — 450,029 410,249 — 410,249 —
Federal Home Loan Bank stock
10,928 10,928 — 10,928 — 27,366 27,366 — 27,366 —
Loans, net
5,002,794 4,753,475 — — 4,753,475 5,340,899 5,077,515 — — 5,077,515
Accrued interest receivable
17,568 17,568 17,568 — — 22,547 22,547 22,547 — —

Liabilities

Non-interest bearing deposits
$ 2,200,041 $ 2,200,041 $ 2,200,041 $ — $ — $ 1,766,132 $ 1,766,132 $ 1,766,132 $ — $ —
Transaction deposits
3,825,758 3,825,758 — 3,825,758 — 3,710,504 3,710,504 — 3,710,504 —
Time deposits
474,974 462,307 — 462,307 — 731,744 720,720 — 720,720 —
Securities sold under agreement to repurchase
124,567 124,567 — 124,567 — 138,347 138,347 — 138,347 —
Federal funds purchased
8,970 8,970 — 8,970 — 11,646 11,646 — 11,646 —
Subordinated debentures
26,244 26,361 — 26,361 — 26,541 26,235 — 26,235 —
FHLB advances
400,000 398,846 — 398,846 —
Accrued interest payable
401 401 401 — — 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

Carrying

Fair Value Measurements Using:

December 31, 2022 (in thousands)

amount

Fair value

Level 1

Level 2

Level 3

Assets

Cash and cash equivalents
$ 961,192 $ 961,192 $ 961,192 $ — $ — $ 167,367 $ 167,367 $ 167,367 $ — $ —
Mortgage loans held for sale
8,614 8,818 — 8,818 —
HTM debt securities
473,217 431,833 — 431,833 —
Federal Home Loan Bank stock
9,376 9,376 — 9,376 — 10,928 10,928 — 10,928 —
Loans, net
4,115,405 4,129,091 — — 4,129,091 5,132,387 4,914,770 — — 4,914,770
Accrued interest receivable
13,745 13,745 13,745 — — 22,157 22,157 22,157 — —

Liabilities

Non-interest bearing deposits
$ 1,755,754 $ 1,755,754 $ 1,755,754 $ — $ — $ 1,950,198 $ 1,950,198 $ 1,950,198 $ — $ —
Transaction deposits
3,597,538 3,597,538 — 3,597,538 — 3,968,963 3,968,963 — 3,968,963 —
Time deposits
434,222 433,813 — 433,813 — 472,091 459,467 — 459,467 —
Securities sold under agreement

to repurchase
75,466 75,466 — 75,466 —
Securities sold under agreement to repurchase
133,342 133,342 — 133,342 —
Federal funds purchased
10,374 10,374 — 10,374 — 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
300 300 300 — — 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.

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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

Six month ended

Three months ended
September 30,

Nine months ended
September 30,

June 30,

June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Balance, beginning of period:
$ 10,045 $ 5,420 $ 8,614 $ 22,547 $ 6,397 $ 9,323 $ 2,606 $ 8,614
Origination of mortgage loans held for sale
31,446 50,111 111,026 169,542 30,709 43,814 55,391 79,643
Loans held for sale acquired
- - 3,559 3,071 — — — 3,559
Proceeds from the sale of mortgage loans held for sale
(36,427 ) (45,920 ) (118,639 ) (187,667 ) (30,567 ) (43,504 ) (51,673 ) (82,275 )
Net gain on sale of mortgage loans held for sale
166 590 670 2,708
Net gain realized on sale of mortgage loans held for sale
530 412 745 504
Balance, end of period
$ 5,230 $ 10,201 $ 5,230 $ 10,201 $ 7,069 $ 10,045 $ 7,069 $ 10,045

The following table represents the components of Mortgage banking income:

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Net gain realized on sale of mortgage loans held for sale
$ 166 $ 590 $ 670 $ 2,708 $ 530 $ 412 $ 745 $ 504
Net change in fair value recognized on loans held for sale
(113 ) - (70 ) - (34 ) 70 17 43
Net change in fair value recognized on rate lock loan commitments
134 - 1,324 - (104 ) 797 226 1,189
Net change in fair value recognized on forward contracts
101 - (534 ) - 173 (814 ) 127 (635 )
Net gain recognized
288 590 1,390 2,708 565 465 1,115 1,101

Net loan servicing income
1,172 434 3,089 1,021 1,120 1,215 2,307 1,917
Amortization of mortgage servicing rights
(869 ) (252 ) (2,206 ) (677 ) (762 ) (856 ) (1,523 ) (1,337 )
Change in mortgage servicing rights valuation allowance
- - - - - - - -
Net servicing income recognized
303 182 883 344 358 359 784 580

Other mortgage banking income
112 143 728 610 107 471 169 617
Total mortgage banking income
$ 703 $ 915 $ 3,001 $ 3,662 $ 1,030 $ 1,295 $ 2,068 $ 2,298

Activity for capitalized mortgage servicing rights was as follows:

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Balance at beginning of period
$ 16,504 $ 4,657 $ 4,528 $ 2,710 $ 14,623 $ 16,877 $ 15,219 $ 4,528
MSRs acquired
— — 12,676 1,662 — — — 12,676
Additions for mortgage loans sold
269 195 906 905 255 483 420 637
Amortization
(869 ) (252 ) (2,206 ) (677 ) (762 ) (856 ) (1,523 ) (1,337 )
Impairment
— — — — — — — —

Balance at end of period
$ 15,904 $ 4,600 $ 15,904 $ 4,600 $ 14,116 $ 16,504 $ 14,116 $ 16,504

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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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022 ~~were $27 million and $6 million, respectively.~~was $26 million. MSRs with an estimated fair value of $13 million at the date of acquisition were acquired as part of the CB acquisition. There was no valuation allowance recorded for MSRs as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, as fair value exceeded carrying value.

Total outstanding principal balances of loans serviced for others were ~~$2.11~~$2.00 billion and ~~$698 million~~$2.08 billion at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. Loans serviced for others acquired as part of the CB acquisition totaled $1.48 billion at the date of acquisition.

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

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

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

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

September 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
$ 5,217 $ 5,230 $ 6,995 $ 7,069 $ 2,548 $ 2,606

Included in other assets:

Rate lock loan commitments
$ 14,768 $ 118 $ 13,768 $ 364 $ 5,599 $ 137
Mandatory forward contracts
13,250 431 15,500 81 6,581 47

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(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 September 30, 2022

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
$ (87,054 ) $ - $ (283 ) $ (87,337 ) $ (57,316 ) $ - $ (283 ) $ (57,599 )
Net current period other comprehensive loss
(40,580 ) - - (40,580 ) (29,738 ) - - (29,738 )
Balance, end of period
$ (127,634 ) $ - $ (283 ) $ (127,917 ) $ (87,054 ) $ - $ (283 ) $ (87,337 )

Three months ended September 30, 2021

Balance, beginning of period
$ 2,295 $ (58 ) $ (447 ) $ 1,790
Net current period other comprehensive income (loss)
(4,453 ) 32 - (4,421 )
Balance, end of period
$ (2,158 ) $ (26 ) $ (447 ) $ (2,631 )

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

Nine months ended September 30, 2022

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 ) $ (7,657 ) $ - $ (283 ) $ (7,940 )
Net current period other comprehensive loss
(119,977 ) - - (119,977 ) (79,397 ) - - (79,397 )
Balance, end of period
$ (127,634 ) $ - $ (283 ) $ (127,917 ) $ (87,054 ) $ - $ (283 ) $ (87,337 )

Nine months ended September 30, 2021

Balance, beginning of period
$ 9,310 $ (122 ) $ (447 ) $ 8,741
Net current period other comprehensive income (loss)
(11,468 ) 96 - (11,372 )
Balance, end of period
$ (2,158 ) $ (26 ) $ (447 ) $ (2,631 )

(17)
Preferred Stock

Bancorp has one class of preferred stock (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.

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(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

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(in thousands, except per share data)

2022

2021

2022

2021

2023

2022

2023

2022

Net income available to stockholders
$ 28,455 $ 23,162 $ 63,155 $ 50,056 $ 27,664 $ 26,794 $ 56,712 $ 34,700

Weighted average shares outstanding - basic
29,144 26,485 28,509 24,360 29,223 29,131 29,200 28,186
Dilutive securities
260 241 243 242 117 215 153 235
Weighted average shares outstanding- diluted
29,404 26,726 28,752 24,602 29,340 29,346 29,353 28,421

Net income per share - basic
$ 0.98 $ 0.87 $ 2.22 $ 2.05 $ 0.95 $ 0.92 $ 1.94 $ 1.23
Net income per share - diluted
0.97 0.87 2.20 2.03 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

Nine months ended

Three months ended

Six months ended

(shares in thousands)

September 30,

September 30,

June 30,

June 30,

2022

2021

2022

2021

2023

2022

2023

2022

Antidilutive SARs
- 31 - 31 94 61 94 61

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(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 ~~September 30, 2022,~~March 31, 2023, there were ~~383,000~~140,000 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.

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

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

Assumptions

2022

2021

2023

2022

Dividend yield
2.38 % 2.52 % 2.24 % 2.38 %
Expected volatility
25.42 % 25.19 % 27.20 % 25.43 %
Risk free interest rate
1.98 % 1.22 % 3.84 % 1.98 %
Expected life (in years)
7.1 7.1 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 all~~Dividends associated with RSA grants ~~prior to~~ ~~2015,~~ ~~grantees are entitled to dividend payments during the vesting period. For grants in~~ ~~2015~~ ~~and forward, dividends~~ are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.

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

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

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

Bancorp utilized cash of ~~$233,000~~$175,000 and ~~$208,000~~$233,000 during the first ~~nine~~six months of ~~2022~~2023 and ~~2021,~~2022, respectively, for the purchase of shares upon the vesting of RSUs.

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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 September 30, 2022

Three months ended June 30, 2023

(in thousands)

Stock
Appreciation
Rights

Restricted
Stock Awards

Restricted
Stock Units

Performance
Stock Units

Total

Stock
Appreciation
Rights

Restricted
Stock Awards

Restricted
Stock Units

Performance
Stock Units

Total

Expense
$ 94 $ 346 $ 80 $ 717 $ 1,237 $ 105 $ 394 $ 133 $ 403 $ 1,035
Deferred tax benefit
(20 ) (72 ) (17 ) (150 ) (259 ) (22 ) (82 ) (28 ) (85 ) (217 )
Total net expense
$ 74 $ 274 $ 63 $ 567 $ 978 $ 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 September 30, 2021

Six months ended June 30, 2023

(in thousands)

Stock
Appreciation
Rights

Restricted
Stock Awards

Restricted
Stock Units

Performance
Stock Units

Total

Stock
Appreciation
Rights

Restricted
Stock Awards

Restricted
Stock Units

Performance
Stock Units

Total

Expense
$ 88 $ 312 $ 79 $ 686 $ 1,165 $ 205 $ 806 $ 265 $ 911 $ 2,187
Deferred tax benefit
(18 ) (66 ) (17 ) (144 ) (245 ) (43 ) (169 ) (56 ) (192 ) (460 )
Total net expense
$ 70 $ 246 $ 62 $ 542 $ 920 $ 162 $ 637 $ 209 $ 719 $ 1,727

Nine months ended September 30, 2022

(in thousands)

Stock
Appreciation
Rights

Restricted
Stock Awards

Restricted
Stock Units

Performance
Stock Units

Total

Expense
$ 282 $ 1,028 $ 252 $ 1,723 $ 3,285
Deferred tax benefit
(59 ) (216 ) (53 ) (362 ) (690 )
Total net expense
$ 223 $ 812 $ 199 $ 1,361 $ 2,595

Nine months ended September 30, 2021

(in thousands)

Stock
Appreciation
Rights

Restricted
Stock Awards

Restricted
Stock Units

Performance
Stock Units

Total

Expense
$ 264 $ 978 $ 233 $ 1,953 $ 3,428
Deferred tax benefit
(55 ) (206 ) (49 ) (411 ) (721 )
Total net expense
$ 209 $ 772 $ 184 $ 1,542 $ 2,707

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

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
$ 95 $ 346 $ 79 $ 590 $ 1,110
2023
311 1,192 2 1,555 3,060
Remainder of 2023
$ 197 $ 798 $ 250 $ 803 $ 2,048
2024
205 969 — 855 2,029 307 1,389 3 908 2,607
2025
146 737 — — 883 248 1,167 — 485 1,900
2026
88 421 — — 509 190 863 — — 1,053
2027
10 47 — — 57 111 507 — — 618
2028
12 42 — — 54
Total estimated expense
$ 855 $ 3,712 $ 81 $ 3,000 $ 7,648 $ 1,065 $ 4,766 $ 253 $ 2,196 $ 8,280

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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 and life data)

SARs

price

price

value(1)

value

life (in years)

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 — 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

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 — 11.82 34 47.17 - 74.92 55.45 — 12.07
Exercised
(63 ) 15.24 - 36.65 16.93 2,658 2.79 (114 ) 15.24 - 40.00 21.55 5,258 3.63
Forfeited
— — — — — — — — — —
Outstanding, September 30, 2022
485
$15.24
- $54.91 $ 34.65 $ 16,171 $ 5.85 5.2
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
348
$15.24
- $50.71 $ 30.92 $ 12,882 $ 4.99 4.2 348 $19.37 -
$54.91
$ 32.97 $ 9,029 $ 5.36 4.0
Unvested
137 35.90 - 54.91 44.06 3,228 8.02 3.2 116 35.90 - 74.92 49.80 (513 ) 10.70 3.6
Outstanding, September 30, 2022
485
$15.24
- $54.91 $ 34.65 $ 16,171 $ 5.85 5.2
Outstanding, June 30, 2023
464 $19.37 -
$74.92
$ 37.17 $ 8,516 $ 6.69 5.0

Vested in the current year
44
$35.90
- $50.71 $ 39.36 $ 1,246 $ 6.73 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
35 58.47 35 58.47
Restrictions lapsed and shares released
(31 ) 40.42 (32 ) 40.39
Shares forfeited
(6 ) 46.91 (6 ) 47.49
Unvested at September 30, 2022
97 $ 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

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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

Shares

Vesting

Shares

Grant

period

Fair

expected 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 51,929 3 48.48 36,349
2023
3 54.33 26,804

48
Table of Contents

(20)
~~Interest Rate Swaps~~Derivative 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

September 30,

December 31,

September 30,

December 31,

June 30,

December 31,

June 30,

December 31,

(dollars in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Notional amount
$ 140,360 $ 123,983 $ 140,360 $ 123,983 $ 113,619 $ 132,831 $ 113,619 $ 132,831
Weighted average maturity (years)
7.1 7.2 7.1 7.2 6.5 7.1 6.5 7.1
Fair value
$ 11,589 $ 3,148 $ 11,600 $ 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

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Table of Contents

(21)    ~~Regulatory Matters~~
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 ~~September~~June 30, ~~2022,~~2023, the adequately-capitalized minimums, including the capital conservation buffer, were a 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 all of Bancorp’s capital ratios were above the adequately-capitalized minimums, including the buffer, the Company was not 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 ~~September~~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

September 30, 2022

Amount

Ratio

Amount

Ratio

Amount

Ratio

June 30, 2023

Amount

Ratio

Amount

Ratio

Amount

Ratio

Total risk-based capital (1)

Consolidated
$ 728,051 12.16
%
$ 479,113 8.00
%

NA

NA
$ 810,283 12.78
%
$ 507,231 8.00
%

NA

NA

Bank
697,115 11.67 477,688 8.00 $ 597,110 10.00
%
785,543 12.43 505,231 8.00 $ 631,914 10.00
%

Common equity tier 1 risk-based capital (1)

Consolidated
640,363 10.69 269,501 4.50
NA

NA
710,237 11.20 285,318 4.50
NA

NA

Bank
635,427 10.64 268,700 4.50 388,122 6.50 711,497 11.26 284,361 4.50 410,744 6.50

Tier 1 risk-based capital (1)

Consolidated
666,363 11.13 359,335 6.00
NA

NA
736,237 11.61 380,424 6.00
NA

NA

Bank
635,427 10.64 358,266 6.00 477,688 8.00 711,497 11.26 379,148 6.00 505,531 8.00

Leverage ~~(2)~~

Consolidated
666,363 8.85 301,181 4.00
NA

NA
736,237 9.83 299,726 4.00
NA

NA

Bank
635,427 8.45 300,927 4.00 376,159 5.00 711,497 9.51 299,269 4.00 374,087 5.00

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Table of Contents

(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 companies.

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Table of Contents

(22)    ~~Segments~~
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 ~~September~~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 September 30, 2022

Three months ended September 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
$ 62,270 $ 106 $ 62,376 $ 45,414 $ 69 $ 45,483 $ 60,796 $ 133 $ 60,929 $ 56,888 $ 96 $ 56,984
Provision for credit losses
4,803 — 4,803 (1,525 ) — (1,525 ) 2,350 — 2,350 (200 ) — (200 )
Wealth management and trust services
— 9,152 9,152 — 7,128 7,128 — 10,146 10,146 — 9,495 9,495
All other non-interest income
15,712 — 15,712 10,486 — 10,486 12,714 — 12,714 12,445 — 12,445
Non-interest expenses
39,370 5,503 44,873 31,072 3,486 34,558 39,877 5,923 45,800 38,876 5,799 44,675
Income before income tax expense
33,809 3,755 37,564 26,353 3,711 30,064 31,283 4,356 35,639 30,657 3,792 34,449
Income tax expense
8,209 815 9,024 6,070 832 6,902 7,030 945 7,975 6,724 823 7,547
Net income
25,600 2,940 28,540 20,283 2,879 23,162 24,253 3,411 27,664 23,933 2,969 26,902
Less net income attributable to NCI
85 — 85 — — —
Net income attributable to stockholders
$ 25,515 $ 2,940 $ 28,455 $ 20,283 $ 2,879 $ 23,162
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
$ 7,522,113 $ 32,097 $ 7,554,210 $ 6,177,355 $ 3,833 $ 6,181,188 $ 7,696,386 $ 36,166 $ 7,732,552 $ 7,550,846 $ 32,259 $ 7,583,105

Nine months ended September 30, 2022

Nine months ended September 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
$ 167,811 $ 309 $ 168,120 $ 124,672 $ 220 $ 124,892 $ 123,740 $ 261 $ 124,001 $ 105,541 $ 203 $ 105,744
Provision for credit losses
6,882 — 6,882 1,147 — 1,147 4,975 — 4,975 2,079 — 2,079
Wealth management and trust services
— 26,890 26,890 — 20,234 20,234 — 19,673 19,673 — 17,738 17,738
All other non-interest income
39,117 — 39,117 27,012 — 27,012 25,234 — 25,234 23,405 — 23,405
Non-interest expenses
129,936 15,909 145,845 97,249 10,459 107,708 79,477 11,637 91,114 90,566 10,406 100,972
Income before income tax expense
70,110 11,290 81,400 53,288 9,995 63,283 64,522 8,297 72,819 36,301 7,535 43,836
Income tax expense
15,566 2,450 18,016 11,058 2,169 13,227 14,307 1,800 16,107 7,357 1,635 8,992
Net income
54,544 8,840 63,384 42,230 7,826 50,056 50,215 6,497 56,712 28,944 5,900 34,844
Less net income attributable to NCI
229 — 229 — — —
Net income attributable to stockholders
$ 54,315 $ 8,840 $ 63,155 $ 42,230 $ 7,826 $ 50,056
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
$ 7,522,113 $ 32,097 $ 7,554,210 $ 6,177,355 $ 3,833 $ 6,181,188 $ 7,696,386 $ 36,166 $ 7,732,552 $ 7,550,846 $ 32,259 $ 7,583,105

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(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 September 30, 2022

Three months ended September 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
$ — $ 9,152 $ 9,152 $ — $ 7,128 $ 7,128 $ — $ 10,146 $ 10,146 $ — $ 9,495 $ 9,495
Deposit service charges
2,179 — 2,179 1,768 — 1,768 2,201 — 2,201 2,061 — 2,061
Debit and credit card income
4,710 — 4,710 3,887 — 3,887 4,712 — 4,712 4,748 — 4,748
Treasury management fees
2,221 — 2,221 1,771 — 1,771 2,549 — 2,549 2,187 — 2,187
Mortgage banking income(1)
703 — 703 915 — 915
Mortgage banking income (1)
1,030 — 1,030 1,295 — 1,295
Net investment product sales commissions and fees
892 — 892 780 — 780 800 — 800 731 — 731
Bank owned life insurance(1)
516 — 516 275 — 275
Bank owned life insurance (1)
559 — 559 270 — 270
Gain (loss) on sale of premises and equipment (1)
3,074 — 3,074 — — — (225 ) — (225 ) (2 ) — (2 )
Other(2)
1,417 — 1,417 1,090 — 1,090
Other (2)
1,088 — 1,088 1,155 — 1,155
Total non-interest income
$ 15,712 $ 9,152 $ 24,864 $ 10,486 $ 7,128 $ 17,614 $ 12,714 $ 10,146 $ 22,860 $ 12,445 $ 9,495 $ 21,940

Nine months ended September 30, 2022

Nine months ended September 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
$ — $ 26,890 $ 26,890 $ — $ 20,234 $ 20,234
Wealth management and

trust services
$ — $ 19,673 $ 19,673 $ — $ 17,738 $ 17,738
Deposit service charges
6,103 — 6,103 3,945 — 3,945 4,350 — 4,350 3,924 — 3,924
Debit and credit card income
13,577 — 13,577 9,444 — 9,444 9,194 — 9,194 8,867 — 8,867
Treasury management fees
6,312 — 6,312 5,041 — 5,041 4,867 — 4,867 4,091 — 4,091
Mortgage banking income(1)
3,001 — 3,001 3,662 — 3,662
Mortgage banking income (1)
2,068 — 2,068 2,298 — 2,298
Net investment product sales commissions and fees
2,230 — 2,230 1,789 — 1,789 1,554 — 1,554 1,338 — 1,338
Bank owned life insurance(1)
1,052 — 1,052 642 — 642
Bank owned life insurance (1)
1,108 — 1,108 536 — 536
Gain (loss) on sale of premises and equipment (1)
3,074 — 3,074 (41) — (41) (227 ) — (227 ) (28 ) — (28 )
Other(2)
3,768 — 3,768 2,530 — 2,530 2,320 — 2,320 2,379 — 2,379
Total non-interest income
$ 39,117 $ 26,890 $ 66,007 $ 27,012 $ 20,234 $ 47,246 $ 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.

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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 ~~$3.2~~$3.6 million and ~~$2.9~~$3.4 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

~~Investment~~Net investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market values and are assessed, collected and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including nominal incentive compensation, and trading activity charges of ~~$620,000~~$438,000 and ~~$437,000~~$395,000 for the ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021.~~2022.

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

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

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(24)    ~~Leases~~
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 four 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)

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Balance Sheet

Operating lease right-of-use asset
$ 16,046 $ 14,958 $ 18,120 $ 19,694
Operating lease liability
17,408 16,408 19,399 21,008

Weighted average remaining lease term (years)
8.4 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
$ 843 $ 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
2,319 1,924 2,297 2,339
Year five
1,842 1,608 2,148 2,245
Greater than five years
8,329 7,699 9,382 9,559
Total lease payments
$ 19,748 $ 18,946 $ 21,761 $ 23,628
Less imputed interest
2,340 2,538 2,362 2,620
Total
$ 17,408 $ 16,408 $ 19,399 $ 21,008

Three months ended

Three months ended

Three months ended

Three months ended

(in thousands)

September 30, 2022

September 30, 2021

June 30, 2023

June 30, 2022

Income Statement

Components of lease expense:

Operating lease cost
$ 793 $ 616 $ 837 $ 792
Variable lease cost
57 57 68 58
Less sublease income
24 9 25 24
Total lease cost
$ 826 $ 664 $ 880 $ 826

Nine months ended

Nine months ended

Six months ended

Six months ended

(in thousands)

September 30, 2022

September 30, 2021

June 30, 2023

June 30, 2022

Income Statement

Components of lease expense:

Operating lease cost
$ 2,241 $ 1,623 $ 1,677 $ 1,448
Variable lease cost
172 170 139 115
Less sublease income
72 36 50 48
Total lease cost
$ 2,341 $ 1,757 $ 1,766 $ 1,515

Nine months ended

Nine months ended

Six months ended

Six months ended

(in thousands)

September 30, 2022

September 30, 2021

June 30, 2023

June 30, 2022

Cash flow Statement

Supplemental cash flow information:

Operating cash flows from operating leases
$ 2,746 $ 1,898 $ 2,126 $ 1,800

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

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

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

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

The Captive, a wholly owned subsidiary of the Bancorp, is a Nevada-based captive insurance company that provides insurance against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed ~~$2,450,000,~~$2,650,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.
On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, “listed transaction,” and disallow the related tax benefits, both prospectively and retroactively, for a period of three years. At this time, due to the proposed nature of the regulation, it is uncertain as to the impact this development will have on future operations of the Captive.

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

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

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

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

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.
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Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable regulation.

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

●
Changes in, or forecasts of, future political and economic conditions, inflation or recession and efforts to control related developments;

●
changes in laws and regulations or 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;

●
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 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.;

●
integration of acquired financial institutions, businesses or future acquisitions;

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

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

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

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

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

●
changes in investor sentiment or behavior;

●
changes in consumer/business spending or savings behavior;

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

●
occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics or outbreaks of hostilities, and Bancorp’s ability to deal effectively with disruptions caused by the foregoing;
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●
ability to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;

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

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

●
Residual impact, if any, of the COVID-19 pandemic on Bancorp’s business, including the impact of the actions taken by governmental authorities 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; and
●
other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “Risk Factors” of Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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~~Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company~~
On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company, collectively defined as “CB,” a Louisville, Kentucky-based commercial bank and trust company, which operated 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky. At the time of acquisition and net of purchase accounting adjustments, CB had $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a WM&T Department with total assets under management of approximately $2.65 billion. CB was also the holding company for three unconsolidated Delaware trust subsidiaries and held a 60% interest in 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 approximately $67 million and incurred 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 attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.
~~Acquisition of Kentucky Bancshares, Inc. and its Subsidiary Kentucky Bank~~Recent Developments within the Banking Industry

On May ~~31, 2021, Bancorp completed its acquisition~~11, 2023, the FDIC approved a notice of ~~Kentucky Bancshares, Inc.~~proposed rulemaking regarding a special assessment aimed at recovering the cost associated with protecting uninsured depositors following the failures of Silicon Valley Bank and ~~its wholly owned subsidiary, Kentucky Bank, collectively defined as “KB,” a Paris, Kentucky-based commercial~~Signature bank ~~and trust company, which operated 19 retail branches throughout central and eastern Kentucky.~~earlier this year. At the time of ~~acquisition and net~~the proposal, the FDIC estimated that these costs totaled approximately $16 billion.
Under the proposal, the base for the special assessment would be equal to an insured depository institution’s estimated uninsured deposits reported as of ~~purchase accounting~~December 31, 2022, adjusted to exclude the institution’s first $5 billion of uninsured deposits. The special assessment would be collected at an annual rate of approximately 12.5 bps over eight quarterly assessment periods beginning with the first quarterly assessment period of 2024. However, the proposed rate is subject to change prior to any final rule depending on any adjustments ~~KB had $1.27~~to the estimate of losses, mergers or failures, or amendments to reported estimates of uninsured deposits. The proposed rule provides opportunity for public comment for 60 days following publication in the Federal Register. As such, a final ruling on the proposal is expected to be announced during the third quarter of 2023.
As proposed, Bancorp would not be subjected to the special assessment. It is estimated that a total of 113 banking organizations would be subject to the special assessment, with 95% of the special assessment expected to be paid by banking organizations with $50 billion or more in total assets. No banking organization with under $5 billion in total assets ~~$755 million~~would be subject to the special assessment.
In response to the potential liquidity issues created by the bank failures noted above, and to restore confidence in ~~loans, $396 million in investment securities and $1.04 billion in deposits. KB was also~~ the ~~holding company~~stability of the banking system, the FRB created the Bank Term Funding Program. This program serves as a funding source to any U.S. federally insured depository institution, offering collateral-based fixed-rate advances to eligible borrowers for a term of up to one year. Eligible institutions can request such advances under the program until at least March 11, 2024. As of June 30, 2023, Bancorp has made no request for an insurance captive, which Bancorp retained and renamed SYB Insurance Company, Inc. Bancorp acquired all outstanding common stock of KB in a combined stock and cash transaction that resulted in total consideration paid to KB shareholders of $233 million.advance under this program.

Bancorp ~~recorded goodwill of approximately $123 million~~has not been directly impacted by the early 2023 bank failures. We remain well-capitalized and ~~incurred merger related expenses totaling $18.1 million for~~continue to monitor and manage our liquidity position to satisfy both daily operations and longer-term strategic needs. Bancorp regularly reviews contingency funding strategies and we believe we are well-equipped to handle future liquidity requirements. We will continue to monitor the ~~year ended December 31, 2021~~developments surrounding the recent bank failures noted above, as ~~a result of~~well as trends within the ~~KB acquisition.~~
~~The acquisition of KB had a significant impact on the ACL and credit loss provisioning for the year ended December 31, 2021. In total, the KB acquisition served~~financial markets generally, to ~~increase the ACL by $14 million at acquisition date. This increase consisted of $7 million attributed~~ensure we remain prepared to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $7.4 million of provision for credit loss expense attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.address potential liquidity issues that may arise.

Issued but Not Yet Effective Accounting Standards Updates

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

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Business Segment Overview

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

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

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

Overview – Operating Results (FTE)

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

(dollars in thousands, except per share data)

Variance

Variance

Three months ended September 30,

2022

2021

$/bp

%

Three months ended June 30,

2023

2022

$/bp

%

Net income attributed to stockholders
$ 28,455 $ 23,162 $ 5,293 23 %
Net income available to stockholders
$ 27,664 $ 26,794 $ 870 3 %
Diluted earnings per share
$ 0.97 $ 0.87 $ 0.10 11 % $ 0.94 $ 0.91 $ 0.03 3 %
ROA
1.47 % 1.50 %
(3) bps
-2 % 1.46 % 1.40 %
6 bps
4 %
ROE
14.85 % 13.92 %
93 bps
7 % 13.87 % 14.34 %
(47) bps
-3 %

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

General highlights for the three months ended ~~September~~June 30, ~~2022~~2023 compared to ~~September~~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.
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●
Net interest income (FTE) totaled $61.1 million for the three months ended June 30, 2023, representing an increase of $3.8 million, or 7%, compared to the three months ended June 30, 2022.
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. The ~~three~~six months ended ~~September~~June 30, 2022 represented ~~the second full quarter~~approximately four months of activity associated with the CB ~~acquisition. There were no~~acquisition, including $19.5 million in merger ~~related~~ expenses ~~recorded~~and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on results for the ~~three months ended September 30, 2022.~~period.

●
~~Bancorp completed its acquisition of KB on May 31, 2021. At the time of acquisition and net of purchase accounting adjustments, KB had approximately $1.27 billion in assets, $755~~Total loans (excluding PPP) increased $571 million, ~~in loans, $396 million in investment securities and $1.04 billion in deposits, further contributing~~or 12%, compared to ~~the substantial balance sheet~~June 30, 2022, driven by significant organic growth ~~experienced~~ over the past ~~twelve~~12 months. Given the timing of the acquisition, the three months ended September 30, 2021 represented the first full quarter of activity associated with the KB acquisition. The merger related expenses recorded for the three months ended September 30, 2021 were associated entirely with the CB acquisition, which was completed during the first quarter of 2022.
●
Net income totaled $28.5 million, resulting in diluted EPS of $0.97 for the three months ended September 30, 2022, an 11% increase over $0.87 for the same period of 2021. Significant factors affecting the results for the three months ended September 30, 2022 and 2021 include:
o
~~The three months ended September 30, 2022 represented the second full quarter of activity related to the CB acquisition. No merger related expenses were recorded during the period.~~
o
The three months ended September 30, 2021 represented the first full quarter of activity related to the KB acquisition, but also included $525,000 of merger related expenses associated entirely with the CB acquisition, which was completed during the first quarter of 2022.
o
~~Net interest income~~Average loans (excluding PPP) increased ~~$16.9~~$717 million, or ~~37%~~16%, for the ~~three~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021, driven by acquisition-related growth and~~the prior year as a result of the previously mentioned organic growth in ~~loans and investment securities, as well as~~addition to the ~~significant benefit provided by substantial upward movement in the interest rate environment during the period.~~prior year acquisition.

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o
Provision for credit loss expense of $4.8 million was recorded for the three months ended September 30, 2022, which was the result of strong loan growth and to a lesser extent, the increase in the projected unemployment rate forecast used in the CECL model. Negative provision of $1.5 million was recorded for the third quarter of the prior year, which was driven by generally improving CECL model factors at the time, including an improved unemployment forecast.
●
NIM increased 32 bps to 3.46% for the three months ended September 30, 2022 compared to 3.14% 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 September 30, 2022 due to the timing of the third quarter 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 $1.10 billion, or 28%, compared to September 30, 2021, driven by the addition of $630 million in loans from the CB acquisition and strong organic growth. Average loans (excluding PPP loans) increased $1.03 billion, or 27%, for the three months ended September 30, 2022 compared to the same period in 2021.
●
The PPP loan portfolio decreased $212 million, or 92%, compared to September 30, 2021, as the result of anticipated forgiveness activity, driving a $3.7 million, or 84%, decline in PPP-related interest and fee income for the three months ended September 30, 2022 compared to the same period of 2021.
●
Bancorp’s ACL on loans increased $11 million, or 17%, compared to ~~total loans was 1.38% at September~~June 30, 2022, ~~compared~~attributed mainly to ~~1.29% at December 31, 2021,~~ the ~~increase stemming mainly from acquisition-related activity within the ACL on loans, strong~~significant organic loan growth ~~and~~experienced over the last 12 months. Provision for credit losses on loans totaled $4.4 million for the six months ended June 30, 2023, compared to ~~a lesser extent,~~$2.0 million for the ~~aforementioned increase in~~six months ended June 30, 2022. While organic loan growth drove expense for the ~~projected unemployment rate forecast.~~current year period, activity for the prior year period was driven by $4.4 million of expense related to the acquired loan portfolio, which was partially offset by the release of specific reserves on acquired loans that paid off during the period.

●
Deposit balances ~~increased $1.16 billion,~~declined $341 million, or ~~22%~~5%, compared to ~~September~~June 30, ~~2021,~~2022, as a result of ~~assuming approximately $1.12 billion in deposits during~~inflationary pressures and rising rates, the latter of which has enticed depositors to seek higher-yielding alternatives. In addition, a portion the deposit decline experienced for the first ~~quarter~~half of 2023 was also driven by seasonal public funds runoff. While we have not seen fallout in ~~relation~~our overall customer base, deposit competition and a higher interest rate environment has created NIM compression and we anticipate it will continue to do so throughout the ~~CB acquisition. The growth stemming from the first quarter CB acquisition was partially offset during the second and third quarters, as~~rest of 2023.
o
As a result of ~~anticipated seasonal~~ deposit ~~runoff related mainly to public fund~~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 ~~deposit attrition.~~deposits. This shift has significantly increased Bancorp’s cost of deposits and overall cost of funds.

●
~~Total non-interest~~Net interest income ~~increased $7.3~~(FTE) totaled $124.3 million for the six months ended June 30, 2023, representing an increase of $18.1 million, or ~~41%~~17%, compared to the six months ended June 30, 2022.
o
NIM increased 36 bps, or 11%, to 3.50% for the ~~three month period~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021. The third quarter of 2022 benefitted from both~~the prior year, consistent with average balance sheet expansion and significant ~~contributions stemming from acquisition-related activity and organic growth~~upward movement in the interest rate environment experienced over the past ~~twelve~~12 months. ~~All~~However, rising funding costs, including a substantial increase in the cost of deposits and increased borrowing activity, has placed considerable pressure on NIM through the first six months of 2023.
●
Non-interest income increased $3.8 million, or 9%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, highlighted by record WM&T fees and treasury management fees, in addition to significant growth in most of Bancorp’s other non-interest income revenue streams, ~~experienced significant increases over the same quarter of~~including higher BOLI income driven by the prior year ~~with the exception~~purchase of ~~mortgage banking, which decreased compared to the~~an additional $30 million of BOLI assets. The prior year period ~~due to the rising rate environment’s impact on overall mortgage volume. In addition,~~did not include a ~~non-recurring $3.1 million gain resulting~~full six months of activity stemming from the ~~sale~~acquisition of ~~certain overlapping acquired properties~~CB, as the acquisition was ~~recorded during the three months ended September 30,~~completed on March 7, 2022.

●
Non-interest expenses ~~increased $10.3~~declined $9.9 million, or ~~30%~~10%, for the ~~three~~six months ended ~~September~~June 30, ~~2022~~2023, compared to the ~~same~~six months ended June 30, 2022. The prior year period included $19.5 million of ~~2021, attributed mainly to acquisition-related activity.~~merger expenses associated with the CB acquisition. Non-interest expenses ~~have generally remained controlled~~in general remain well-controlled and consistent with expansion, strong performance and continued investment in ~~line with expectations.~~technology.

●
~~Bancorp’s efficiency ratio (FTE)~~As of June 30, 2023, Bancorp continued to be “well-capitalized,” the highest regulatory capital rating for ~~the three months ended September~~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 ~~51.30%~~7.87% at June 30, 2023, compared to ~~54.63% for the same period of 2021. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales, calls,~~7.44% and ~~impairment of investment securities, as well as net gains (losses) on sales of acquired premises~~7.00% at December 31, 2022 and equipment, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Bancorp’s adjusted efficiency ratio for the three months ended SeptemberJune 30, 2022, ~~was 53.06% compared to 53.72% for the same period of 2021. See the section titled “~~~~Non-GAAP Financial Measures~~”~~for a reconcilement of non-GAAP to GAAP measures.~~respectively.

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~~The following table presents an overview of Bancorp’s financial performance for the nine months ended September 30, 2022 and 2021:~~
(dollars in thousands, except per share data)

Variance

Nine months ended September 30,

2022

2021

$/bp

%

Net income attributed to stockholders
$ 63,155 $ 50,056 $ 13,099 26 %
Diluted earnings per share
$ 2.20 $ 2.03 $ 0.17 8 %
ROA
1.14 % 1.25 %
(9) bps
-9 %
ROE
11.44 % 12.37 %
(93) bps
-8 %
~~Additional discussion follows under the section titled “~~~~Results of Operations.~~”
~~General highlights for the nine months ended September 30, 2022 compared to September 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 nine months ended September 30, 2022 did not include a full nine months of activity associated with the CB acquisition. Further, $19.5 million in merger related expenses were recorded in the first nine months of 2022 in addition to $4.4 million of credit loss expense associated with the acquired loan portfolio.
●
Bancorp 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. Given the timing of the acquisition, the nine months ended September 30, 2021 only represented four months of activity associated with the KB acquisition and included $19.0 million of merger related expenses in addition to $7.4 million in credit loss expense associated with the acquired loan portfolio.
●
Net income totaled $63.2 million, resulting in diluted EPS of $2.20 for the nine months ended September 30, 2022, an 8% increase over $2.03 for the same period of 2021. Significant factors affecting the results for the nine months ended September 30, 2022 and 2021 include:
o
The nine months ended September 30, 2022 represented approximately seven months of activity related to the CB acquisition, including $19.5 million in merger related expenses and $4.4 million of credit loss expense related to the acquired loan portfolio.
o
The nine months ended September 30, 2021 represented only four months of activity related to the KB acquisition and included $19.0 million of merger related expenses ($525,000 of which related to the CB acquisition) and $7.4 million in credit loss expense related to the acquired loan portfolio.
o
Net interest income increased $43.2 million, or 35%, for the nine months ended September 30, 2022 compared to the same period of 2021, driven by acquisition-related growth and organic portfolio growth in loans and investment securities, as well as the significant benefit provided by substantial upward movement in the interest rate environment during the period.
o
Total provision for credit loss expense was $6.9 million for the nine months ended September 30, 2022 compared to $1.1 million for the same period of last year. The expense recorded for both periods was driven largely by the respective acquisitions. However, contrasting projected unemployment rate forecasts used in the CECL model for these respective periods had opposing effects on provision for credit loss expense. While the projected unemployment rate forecast has increased in the current year on the heels of inflation and recession-based concerns, increasing expense, the prior year benefitted from a then-improving forecast, partially offsetting our growth-related expense.
●
NIM decreased 4 bps to 3.25% for the nine months ended September 30, 2022 compared to 3.29% for the same period in 2021. While the aggressive interest rate actions taken by the FRB in 2022 have had a positive impact on net interest income and NIM, the significantly higher interest rate environment experienced for the nine months ended September 30, 2022 was not enough to offset the 20 bps benefit provided by the PPP portfolio for the same period of the prior year.
●
Total loans (excluding PPP loans) increased $1.10 billion, or 28%, compared to September 30, 2021, driven by the addition of $630 million in loans from the CB acquisition and strong organic portfolio growth. Average loans (excluding PPP loans) increased $1.26 billion, or 37%, for the nine months ended September 30, 2022 compared to the same period in 2021.
●
The PPP loan portfolio decreased $212 million, or 92%, compared to September 30, 2021, as the result of forgiveness activity, driving a $13.7 million, or 75%, decline in PPP-related interest and fee income for the nine months ended September 30, 2022 compared to the same period of 2021.
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●
Bancorp’s ACL on loans to total loans was 1.38% at September 30, 2022 compared to 1.29% at December 31, 2021, the increase stemming mainly from acquisition-related activity within the ACL on loans, strong organic loan growth and to a lesser extent, the aforementioned increase in the projected unemployment rate forecast.
●
Deposit balances increased $1.16 billion, or 22%, compared to September 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 and third quarters, as a result of anticipated seasonal deposit runoff related mainly to public fund deposits and time deposit attrition.
●
Total non-interest income increased $18.8 million, or 40%, for the nine months ended September 30, 2022 compared to the same period of 2021. The first nine months 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 in volume driven by rising rates compared to the historic low rates benefitted much of 2021. In addition, a non-recurring $3.1 million gain resulting from the sale of certain overlapping acquired properties was recorded during third quarter.
●
Non-interest expenses increased $38.1 million, or 35%, for the nine months ended September 30, 2022 compared to the same period of 2021. While both periods experienced elevated non-interest expense as a result of 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 nine months ended September 30, 2022 was 62.11% compared to 62.47% for the same period of 2021, the elevated ratios being the result of one-time merger-related expenses incurred as a result of the respective acquisitions in both periods. 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 acquired premises and equipment, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Bancorp’s adjusted efficiency ratio for the nine months ended September 30, 2022 was 54.41% compared to 51.25% for the same period of 2021. See the section titled “~~Non-GAAP Financial Measures~~”~~for a reconcilement of non-GAAP to GAAP measures.~~
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Results of Operations

Net Interest Income - Overview

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

Comparative information regarding net interest income follows:

(dollars in thousands)

Variance

Variance

As of and for the three months ended September 30,

2022

2021

$/bp

%

As of and for the three months ended June 30,

2023

2022

$/bp

%

Net interest income
$ 62,376 $ 45,483 $ 16,893 37 % $ 60,929 $ 56,984 $ 3,945 7 %
Net interest income (FTE)*
62,608 45,643 16,965 37 % 61,074 57,244 3,830 7 %
Net interest spread
3.31 % 3.08 %
23 bps
7 %
Net interest margin
3.46 % 3.14 %
32 bps
10 %
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
$ 7,181,781 $ 5,760,760 $ 1,421,021 25 % $ 7,171,094 $ 7,174,072 $ (2,978 ) 0 %
Average interest bearing liabilities
4,619,927 3,617,833 1,002,094 28 % 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 nine months ended September 30,

2022

2021

$/bp

%

As of and for the six months ended June 30,

2023

2022

$/bp

%

Net interest income
$ 168,120 $ 124,892 $ 43,228 35 % $ 124,001 $ 105,744 $ 18,257 17 %
Net interest income (FTE)*
168,797 125,178 43,619 35 % 124,319 106,189 18,130 17 %
Net interest spread
3.16 % 3.22 %
(6) bps
-2 %
Net interest margin
3.25 % 3.29 %
(4) bps
-1 %
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
$ 6,936,718 $ 5,091,596 $ 1,845,122 36 % $ 7,162,736 $ 6,812,158 $ 350,578 5 %
Average interest bearing liabilities
4,524,390 3,222,861 1,301,529 40 % 4,862,307 4,475,830 386,477 9 %
Five year Treasury note rate at period end
4.13 % 3.01 %
112 bps
37 %
Average five year Treasury note rate
3.75 % 2.39 %
136 bps
57 %
Prime rate at period end
8.25 % 4.75 %
350 bps
74 %
Average Prime rate
7.93 % 3.61 %
432 bps
120 %
One month term SOFR at period end
5.14 % 1.69 %
345 bps
204 %
Average one month term SOFR
4.82 % 0.55 %
427 bps
776 %

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

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

At June 30, 2023, Bancorp’s loan portfolio consisted of approximately 72% fixed and 28% variable rate loans. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year treasury. Bancorp’s variable rate loans are typically indexed to either Prime or SOFR, generally repricing as those rates change.
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Table of Contents
Prime rate, the five year Treasury note rate and one month term SOFR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past 12 months. The FRB ~~has taken~~took aggressive interest rate action ~~over~~in 2022, increasing the ~~past several months, implementing multiple~~FFTR a total of 425 bps to a range of 4.25% - 4.50%. These increases ultimately took Prime to 7.50% as of December 31, 2022, marking its highest level since 2007.
During the first half of 2023, the FRB continued raising rates, albeit at a slower pace, increasing the FFTR a total 75 bps to a range of 5.00% - 5.25% as of June 30, 2023 via three separate 25 bps rate hikes. The FRB elected to pause rate hikes at their June 14, 2023 meeting in an effort to ~~tame inflation that has reached its highest levels in decades. The FFTR~~further evaluate the impact of recent policy decisions. As a result, Prime was increased to a range of 1.50% - 1.75% with consecutive and escalating rate increases of 25 bps, 50 bps and 75 bps in March, May and June, respectively, taking Prime to 4.75% by the end of the second quarter. The FRB remained committed to its goal of taming inflation through interest rate increases during the third quarter, hiking rates 75 bps each in both late-July and late-September, bringing the FFTR to a range of 3.00% - 3.25%, and Prime to 6.25%,8.25% as of ~~September~~June 30, 2022. While the third quarter hikes provided meaningful benefit to NIM, the average interest rate environment experienced for the three months ended September 30, 2022 did not capture the full benefit of the FRB’s third quarter interest rate actions given the timing of the increases. Further, Bancorp elected to raise its deposit rates in July in anticipation of these rate increases, representing the Company’s first deposit rate increases in nearly two years, which partially negated some of the NIM benefit associated with the aforementioned FRB rate hikes.2023.

The current economic outlook ~~suggests continued interest rate action from~~remains volatile, regularly changing as new economic data becomes available and the ~~FRB through~~FRB’s efforts to control inflation continue. Current projections indicate a likelihood for an additional 25 bps increase in the FFTR during the third quarter of 2023, with the FFTR remaining at least at its current level through the end of ~~2022~~the year. As a potential economic slowdown and ~~prospects of a continuing rising rate environment. While~~recession looms, Bancorp expects ~~rising rates to have a positive effect on NIM,~~ongoing pricing pressure/competition for both loans and deposits, changing levels of liquidity within the banking system and ~~the possibility of~~ a ~~flattening~~severely inverted yield curve ~~could~~will continue to place pressure on ~~NIM.~~
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~~Table~~NIM in the second half of ~~Contents~~
2023.

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

Net interest spread (FTE) and NIM (FTE) were ~~3.31%~~2.84% and ~~3.46%~~3.42%, for the three months ended ~~September~~June 30, ~~2022~~2023, compared to ~~3.08%~~3.14% and ~~3.14%~~3.20% for the same period in ~~2021,~~2022, respectively. Despite the period over period increase, NIM during the three months ended ~~September~~June 30, ~~2022~~2023 was significantly impacted by the following:

●
~~A rapidly~~The rising interest rate environment ~~evolving~~that has evolved from the sustained, pandemic-driven lows experienced ~~over the last two years.~~beginning in 2020. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB’s hike in mid-March 2022. The FFTR stood at a range of ~~3.00%~~5.00% - ~~3.25%~~5.25%, and Prime at ~~6.25%~~8.25%, as of ~~September~~June 30, ~~2022~~2023, as a result of aggressive interest rate action from the FRB over the past ~~two quarters.~~12 months.

●
~~Substantial balance sheet growth stemming from both acquisition-related~~Intense pricing pressure/competition for deposits has driven a significant increase in the cost of funds and overall deposit contraction, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity and organic growth, which resulted in total average earning asset growth of $1.42 billion, or 25%, and average interest-bearing liability growth of $1.00 billion, or 28%, for the three months ended September 30, 2022 compared to the same period of 2021.
●
~~Overall excess balance sheet liquidity, which contributed to NIM compression in both periods. Excess liquidity within the banking system in general~~ has also led to a highly competitive loan rate environment. After reaching a peak towards the end of 2021, levels of average excess liquidity, and its corresponding impact on NIM, have continued to decline through September 30, 2022.
●
PPP forgiveness activity, which accelerates the recognition of fee income on these loans, has declined significantly in 2022, as the vast majority of the original portfolio has been forgiven. The average balance of the PPP loan portfolio decreased $258 million, and related income decreased $3.7 million, for the three months ended September 30, 2022 compared to the same period of 2021.increased.

Net interest income (FTE) increased ~~$17.0~~$3.8 million, or ~~37%~~7%, for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021, largely as a result of acquisition-related activity, but also~~2022, driven ~~in part~~ by ~~strong~~significant organic loan growth ~~substantial investment in the investment securities portfolio~~ and the ~~benefits~~benefit of ahigher rates, which were able to outpace rising ~~interest rate environment.~~funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.

Total average interest earning assets ~~increased $1.42 billion, or 25%, to $7.18 billion~~were virtually flat for the three months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period of ~~2021, with~~2022, as substantial average loan growth was offset by a significant decline in average FFS/interest bearing due from bank balances and a marginal decline in average investment securities. However, as a result of a significantly higher interest rate environment, the average rate earned on total interest earning assets ~~climbing 50~~climbed 133 bps to ~~3.74%~~4.65%.

●
Average total loan balances increased ~~$776~~$441 million, or ~~19%~~9%, for the three months ended ~~September~~June 30, ~~2022~~2023, compared to the same period of ~~2021.~~2022. Average non-PPP loan growth of ~~$1.03 billion,~~$481 million, or ~~27%~~10%, was driven by ~~acquisition-related expansion and~~ strong organic growth, which was partially offset by a ~~$258~~$40 million, or ~~92%~~83%, decline in average PPP loan balances asresulting from continued pay down and forgiveness ~~activity increased.~~activity.

●
Average investment securities ~~grew $735~~declined $23 million, or ~~71%~~1%, for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021, attributed to~~2022, the result of normal pay down and maturity activity. Investment in the securities portfolio has slowed considerably over the past 12 months, consistent with funding loan growth and a ~~combination of strategically deploying excess liquidity through further investment and acquisition-related activity.~~general industry-wide decline in liquidity.

●
Average FFS and interest bearing due from bank balances decreased ~~$90~~$429 million, or ~~17%~~76%, for the three months ended ~~September~~June 30, ~~2022,~~2023, as loan growth ~~investment in the securities portfolio~~ and ~~seasonal~~ deposit ~~run-off~~contraction led to lower levels of liquidity as compared to the same period of the prior year.

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Table of Contents
Total interest income (FTE) increased ~~$20.5~~$24.0 million, or ~~44%~~41%, to ~~$67.6~~$83.1 million for the three months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period of ~~2021.~~2022.

●
Interest and fee income (FTE) on loans increased ~~$13.4~~$21.6 million, or ~~31%~~43%, to ~~$56.9~~$72.4 million for the three months ended ~~September~~June 30, ~~2022~~2023, compared to the same period of ~~2021,~~2022, driven by ~~both~~significant organic ~~and acquisition-related~~ growth in the non-PPP portfolio and the rising rate environment, which more than offset a ~~$3.7~~$1.1 million, or ~~84%~~96%, decline in PPP-related income. The yield on the overall loan portfolio increased 43129 bps to ~~4.56%~~5.49% for the three months ended ~~September~~June 30, ~~2022~~2023, compared to ~~4.13%~~4.20% for the same period of the prior year, while the yield on the non-PPP loan portfolio increased 54135 bps compared to the prior year period, driven by the rising rate ~~environment and strong loan growth.~~environment.

●
~~Significant growth in~~While average investment securities ~~led to~~declined slightly, there was a ~~$4.7~~$1.7 million increase in interest income (FTE) on the portfolio for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driving a 5236 bps ~~or 41%,~~ increase in the corresponding yield on the portfolio. ~~Substantial deployment of excess liquidity over the past twelve months benefitted~~The increased yield on the investment securities portfolio aswas driven by the ~~yields earned on current~~benefit of purchase activity made in the prior year ~~purchases have improved dramatically in tandem with rising rates.~~once rates began to rise.
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●
Interest income on FFS and interest bearing due from bank balances increased ~~$2.2 million~~$551,000 for the three months ended ~~September~~June 30, ~~2022,~~2023, as rising short-term interest rates more than offset a ~~$90~~$429 million decline in ~~related~~corresponding average balances. The yield on these assets increased ~~204~~426 bps to ~~2.19%~~5.06% for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, stemming from the dramatic increase in the FFTR over the past ~~several~~12 months.

Total average interest bearing liabilities increased ~~$1.00 billion,~~$225 million, or ~~28%~~5%, to ~~$4.62~~$4.92 billion for the three-month period ended ~~September~~June 30, ~~2022~~2023 compared with the same period in ~~2021, with the total average cost increasing 27 bps to 0.43%.~~2022.

●
Average interest bearing deposits ~~increased $919~~decreased $101 million, or ~~26%~~2%, for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period in ~~2021, with interest-bearing demand~~2022, as a result of inflationary pressures and rising rates, the latter of which has driven customers to seek higher-yielding alternatives for excess cash. Partially offsetting the average interest bearing deposit decline was a $145 million increase in average time deposits ~~accounting for $513 million, or 56%, of the increase. The significant growth was~~ attributed ~~mainly~~ to acquisition-related activity, as $1.12 billion in deposits were added during the first quarter of 2022 in relation to the CBT acquisition. Excluding acquisition-related activity, period-end interest-bearing deposit balances have declined in 2022, driven largely by seasonal fluctuation in public funds andBancorp’s promotional time deposit ~~attrition.~~offerings.

●
Consistent with the average interest bearing deposit ~~growth~~decline noted above, average SSUAR balances ~~increased $69~~decreased $27 million, or 19%, for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021.~~2022.

●
Average FHLB advances ~~decreased $10~~totaled $348 million for the three months ended ~~September~~June 30, ~~2022 compared~~2023. Bancorp utilized overnight borrowings with the FHLB during the three months ended June 30, 2023 based on evolving liquidity needs. Bancorp also initiated a $100 million term advance in conjunction with five-year interest rate swap during the first quarter of 2023 in an effort to secure longer-term funding at a more favorable rate. No FHLB borrowings were utilized during the same period of the prior ~~year, as all outstanding FHLB advances either matured or were paid off by the end of 2021.~~year.

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

Total interest expense increased ~~$3.6~~$20.0 million for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driven by ~~acquisition-related average balance growth, Bancorp’s first deposit rate increases~~a significant rise in ~~almost two years~~rates paid on deposits and ~~debt assumed through the CB acquisition.~~increased borrowing activity. As a result, the ~~percentage~~ cost of interest bearing liabilities increased 27162 bps to ~~0.43%~~1.81% for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021.~~2022.

●
Total interest bearing deposit expense increased ~~$3.0~~$15.3 million as a result of ~~acquisition-related growth and~~ the aforementioned deposit rate increases, resulting in a 24139 bps increase in the cost of interest bearing deposits. While the overall deposit mix continues to change, the Company also continues to see loyalty from our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to ~~drive further deposit rate/cost increases~~continue in the coming months.

●
SSUAR interest expense increased ~~$170,000~~$319,000 for the three months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of the prior year, consistent with the ~~average balance growth and deposit~~aforementioned rate ~~increases noted above~~increases.
●
Interest expense of $4.0 million was recorded in relation to FHLB borrowings for ~~interest bearing deposits.~~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 ~~$359,000~~$545,000 was recorded for the three months ended ~~September~~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 September 30, 2022, as all FHLB advances either matured or paid off by the end 2021, resulting in a decline of $51,000 compared to the same period of the prior year.
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Net Interest Income (FTE) – ~~Nine~~Six months ended ~~September~~June 30, ~~2022~~2023 compared to ~~September~~June 30, ~~2021~~2022

Net interest spread (FTE) and NIM (FTE) were ~~3.16%~~2.98% and ~~3.25%~~3.50%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, compared to ~~3.22%~~3.09% and ~~3.29%~~3.14% for the same period in ~~2021,~~2022, respectively. Despite the period over period increase, NIM during the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 was significantly impacted by the following:

●
AThe rapidly rising interest rate environment ~~evolving~~that has evolved from the sustained, pandemic-driven lows experienced ~~over the last two years.~~beginning in 2020. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB’s hike in mid-March 2022. The FFTR stood at a range of ~~3.00%~~5.00% - ~~3.25%~~5.25%, and Prime at ~~6.25%~~8.25%, as of ~~September~~June 30, ~~2022~~2023, as a result of aggressive interest rate action from the FRB over the past ~~two quarters.~~12 months.

●
Substantial balance sheet ~~growth~~expansion stemming from both organic growth and acquisition-related activity, ~~and organic growth,~~ which resulted in total average earning asset growth of ~~$1.85 billion,~~$351 million, or ~~36%~~5%, and average interest-bearing liability ~~growth~~expansion of ~~$1.30 billion,~~$386 million, or ~~40%~~9%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021.~~
●
Overall excess balance sheet liquidity, which contributed to NIM compression in both periods. Excess liquidity within the banking system in general has also led to a highly competitive loan rate environment. After reaching a peak towards the end of 2021, levels of excess liquidity, and its corresponding impact on NIM, have continued to decline through September 30, 2022.

●
~~PPP forgiveness~~Intense pricing pressure/competition for deposits has driven a significant increase in the cost of funds and overall deposit contraction, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity ~~which accelerates the recognition of fee income on these loans and~~ has declined significantly in 2022, as the vast majority of the original portfolio has been forgiven. The average balance of the PPP loan portfolio decreased $410 million, and related income decreased $13.7 million, for the nine months ended September 30, 2022 compared to the same period of 2021.increased.

Net interest income (FTE) increased ~~$43.6~~$18.1 million, or ~~35%~~17%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021, largely~~2022, as a result of ~~acquisition-related activity, but also driven in part by strong~~significant organic loan growth, ~~substantial~~ investment in the ~~investment~~ securities portfolio, acquisition-related activity and the benefits of a rising interest rate environment.

Total average interest earning assets increased ~~$1.85 billion,~~$351 million, or ~~36%~~5%, to ~~$6.94~~$7.16 billion for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period of ~~2021,~~2022, with the average rate earned on total interest earning assets ~~unchanged at 3.41%~~climbing 134 bps to 4.58%.

●
Average total loan balances increased ~~$850~~$649 million, or ~~22%~~14%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, compared to the same period of ~~2021.~~2022. Average non-PPP loan growth of ~~$1.26 billion,~~$717 million, or ~~37%~~16%, was driven by ~~acquisition-related expansion and~~ strong organic growth and acquisition-related expansion, which was only partially offset by a ~~$410~~$68 million, or ~~87%~~85%, decline in average PPP loan balances asresulting from continued forgiveness ~~activity increased.~~activity.

●
Average investment securities grew ~~$800~~$176 million, or 11%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, attributed to a combination of strategically deploying excess liquidity through further investment in 2022 and 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 ~~increased $196~~decreased $480 million, or ~~54%~~78%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022 due~~2023, as loan growth and deposit contraction have led to ~~on-going excess balance sheet liquidity.~~lower levels of liquidity compared to the same period of the prior year.

Total interest income (FTE) increased ~~$47.3~~$53.3 million, or ~~36%~~49%, to ~~$177.2~~$162.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, as compared to the same period of ~~2021.~~2022.

●
Interest and fee income (FTE) on loans increased ~~$31.9~~$45.6 million, or ~~26%~~48%, to ~~$152.5~~$141.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, compared to the same period of ~~2021,~~2022, driven by both organic and acquisition-related growth in the non-PPP portfolio and the rising rate environment, which more than offset a ~~$13.7~~$3.8 million, or ~~75%~~95%, decline in PPP-related income. The yield on the overall loan portfolio ~~climbed~~increased 123 bps to ~~4.31%~~5.41% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~4.16%~~4.18% for the same period of ~~2021.~~the prior year, while the yield on the non-PPP loan portfolio increased 134 bps compared to the prior year period, driven by the rising rate environment.

●
~~Significant growth~~Growth in average investment securities led to a ~~$11.8~~$5.5 million increase in interest income (FTE) on the portfolio for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driving a 3047 bps, or ~~22%~~30%, increase in the corresponding yield on the portfolio. Substantial deployment of excess liquidity in 2022 benefitted the investment portfolio, as the yields earned on ~~recent~~those purchases ~~have~~ improved dramatically ~~in tandem with rising rates.~~as rates began to rise last year.
82

~~Table of Contents~~

●
Interest income on FFS and interest bearing due from bank balances increased ~~$3.5~~$1.9 million for the ~~nine~~six months ended ~~September~~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.~~balances. The yield on these assets increased 79434 bps to ~~0.92%~~4.80% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, stemming from the dramatic increase in the FFTR over the past ~~several~~12 months.
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Table of Contents

Total average interest bearing liabilities increased ~~$1.30 billion,~~$386 million, or ~~40%~~9%, to ~~$4.52~~$4.86 billion for the ~~nine month~~six-month period ended ~~September~~June 30, ~~2022~~2023 compared with the same period in ~~2021,~~2022, with the total average cost increasing 6145 bps to ~~0.25%~~1.60%.

●
Average interest bearing deposits increased ~~$1.24 billion,~~$114 million, or ~~39%~~3%, for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period in ~~2021, with interest-bearing demand deposits accounting for $684 million, or 55%,~~2022. This increase stems from an offsetting combination of the ~~increase. The significant growth was attributed to both acquisition-related activity and organic growth stemming from~~$1.12 billion in deposits added during the ~~general trend~~first quarter of ~~customers maintaining higher levels of liquidity over the past several quarters. However, excluding acquisition-related activity, period-end deposit balances have declined~~2022 in ~~2022, driven largely by seasonal fluctuation in public funds and time deposit attrition.~~
●
~~Consistent with the average interest bearing deposit growth noted above, average SSUAR balances increased $66 million, for the nine months ended September 30, 2022 compared~~relation to the ~~same period~~CBT acquisition and the deposit contraction Bancorp has experienced through the first half of ~~2021.~~2023.

●
Average FHLB advances ~~decreased $19~~totaled $256 million for the ~~nine~~six months ended ~~September~~June 30, ~~2022 compared~~2023. Bancorp utilized overnight borrowings with the FHLB during the six months ended June 30, 2023 based on evolving liquidity needs. Bancorp also initiated a $100 million term advance in conjunction with an interest rate swap during the first quarter of 2023 in an effort to secure longer-term funding at a more favorable rate. No FHLB borrowings were utilized during the same period of the prior ~~year, as all outstanding FHLB advances either matured or were paid off by the end of 2021.~~year.

●
~~Subordinated~~Average subordinated debentures ~~totaling~~totaled $26 million for the six months ended June 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022. ~~The corresponding average balance for the nine months ended September 30, 2022 totaled $20 million.~~

Total interest expense increased ~~$3.7~~$35.2 million ~~or 79%,~~ for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021,~~2022, driven largely by ~~acquisition-related average balance growth, Bancorp’s first~~ deposit rate increases ~~in almost two years~~ and ~~debt assumed through the CB acquisition.~~increased borrowing activity, and to a lesser extent, acquisition-related expansion. As a result, the ~~percentage~~ cost of interest bearing liabilities increased 6145 bps to ~~0.25%~~1.60% for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same period of ~~2021.~~2022.

●
Total interest bearing deposit expense increased ~~$3.0~~$27.6 million ~~or 70%,~~mainly as a result ~~of acquisition-related activity and the~~ aforementioned deposit rate increases, resulting in a 4125 bps increase in the cost of interest bearing deposits. While the overall deposit mix continues to change, the Company also continues to see loyalty from our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to ~~drive further deposit rate/cost increases in~~continue the coming months.

●
SSUAR interest expense increased $758,000 for the six months ended June 30, 2023 compared to the same period of 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 ~~$670,000~~$1.1 million was recorded for the ~~nine~~six months ended ~~September~~June 30, ~~2022~~2023, as a result of the subordinated debentures ~~assumed~~added through the CBprior year acquisition, approximately ~~$232,000~~$200,000 of which stems from purchase accounting-related mark-to-market amortization.

●
No interest expense on FHLB advances was recorded for the nine months ended September 30, 2022, as all FHLB advances either matured or paid off by the end of 2021, resulting in a decline of $301,000 compared to the same period of the prior year.
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Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison

Three months ended September 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
$ 442,880 $ 2,450 2.19
%
$ 532,549 $ 208 0.15
%
$ 131,958 $ 1,664 5.06
%
$ 561,101 $ 1,113 0.80
%
Mortgage loans held for sale
8,694 103 4.70 8,875 53 2.37 8,420 77 3.67 11,303 50 1.77
Investment securities:

Taxable
1,677,745 7,503 1.77 1,009,674 3,206 1.26 1,632,337 8,299 2.04 1,648,014 6,805 1.66
Tax-exempt
91,852 534 2.31 25,038 122 1.93 86,708 496 2.29 93,830 533 2.28
Total securities
1,769,597 8,037 1.80 1,034,712 3,328 1.28 1,719,045 8,795 2.05 1,741,844 7,338 1.69

Federal Home Loan Bank stock
11,712 172 5.83 11,364 83 2.90 25,074 275 4.40 13,811 102 2.96

SBA Paycheck Protection Program (PPP) loans
22,939 703 12.16 281,420 4,423 6.24 8,323 51 2.46 48,364 1,156 9.59
Non-PPP loans
4,925,959 56,177 4.52 3,891,840 39,013 3.98 5,278,274 72,346 5.50 4,797,649 49,609 4.15
Total loans
4,948,898 56,880 4.56 4,173,260 43,436 4.13 5,286,597 72,397 5.49 4,846,013 50,765 4.20

Total interest earning assets
7,181,781 67,642 3.74 5,760,760 47,108 3.24 7,171,094 83,208 4.65 7,174,072 59,368 3.32

Less allowance for credit losses on loans
67,473 61,324 77,884 67,939

Non-interest earning assets:

Cash and due from banks
88,434 65,682 78,977 99,033
Premises and equipment, net
117,296 77,855 103,645 114,287
Bank owned life insurance
81,841 52,631 85,449 53,438
Goodwill
198,634 136,369 194,074 202,524
Accrued interest receivable and other
61,207 107,203 39,546 75,917

Total assets
$ 7,661,720 $ 6,139,176 $ 7,594,901 $ 7,651,332

Interest bearing liabilities:

Deposits:

Interest bearing demand
$ 2,213,657 $ 2,536 0.45
%
$ 1,700,631 $ 470 0.11
%
$ 2,218,096 $ 7,784 1.41
%
$ 2,248,410 $ 984 0.18
%
Savings
566,045 171 0.12 400,288 37 0.04 495,644 323 0.26 575,610 51 0.04
Money market
1,168,111 1,524 0.52 965,518 168 0.07 1,028,302 4,594 1.79 1,163,546 460 0.16
Time
497,170 218 0.17 459,348 728 0.63 672,557 4,380 2.61 527,997 275 0.21
Total interest bearing deposits
4,444,983 4,449 0.40 3,525,785 1,403 0.16 4,414,599 17,081 1.55 4,515,563 1,770 0.16

Securities sold under agreements to repurchase
139,749 176 0.50 71,065 6 0.03 113,051 376 1.33 140,169 57 0.16
Federal funds purchased
8,985 50 2.21 10,983 5 0.18 13,602 170 5.01 9,578 19 0.80
Federal Home Loan Bank advances
- - 0.00 10,000 51 2.02 348,352 3,962 4.56 — — 0.00
Subordinated debentures
26,210 359 5.43 - - 0.00 26,508 545 8.25 26,111 278 4.27

Total interest bearing liabilities
4,619,927 5,034 0.43 3,617,833 1,465 0.16 4,916,112 22,134 1.81 4,691,421 2,124 0.18

Non-interest bearing liabilities:

Non-interest bearing demand deposits
2,169,280 1,771,432 1,781,338 2,123,895
Accrued interest payable and other
112,191 89,812 97,565 86,571

Total liabilities
6,901,398 5,479,077 6,795,015 6,901,887

Stockholders’ equity
760,322 660,099 799,886 749,445
Total liabilities and stockholders' equity
$ 7,661,720 $ 6,139,176 $ 7,594,901 $ 7,651,332

Net interest income
$ 62,608 $ 45,643 $ 61,074 $ 57,244

Net interest spread
3.31
%
3.08
%
2.84
%
3.14
%

Net interest margin
3.46
%
3.14
%
3.42
%
3.20
%

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

Nine months ended September 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
$ 557,578 $ 3,845 0.92
%
$ 361,713 $ 358 0.13
%
$ 136,369 $ 3,245 4.80
%
$ 615,878 $ 1,395 0.46
%
Mortgage loans held for sale
9,542 177 2.48 10,703 175 2.19 7,446 118 3.20 9,974 74 1.50
Investment securities:

Taxable
1,557,119 18,988 1.63 813,199 8,245 1.36 1,649,093 16,745 2.05 1,492,123 11,485 1.55
Tax-exempt
74,093 1,320 2.38 18,030 228 1.69 87,641 1,016 2.34 68,750 786 2.31
Total securities
1,631,212 20,308 1.66 831,229 8,473 1.36 1,736,734 17,761 2.06 1,560,873 12,271 1.59

Federal Home Loan Bank stock
12,015 328 3.65 11,312 204 2.41 20,311 440 4.37 12,169 156 2.59

SBA Paycheck Protection Program (PPP) loans
62,933 4,680 9.94 473,185 18,359 5.19 11,746 190 3.26 80,070 3,978 10.02
Non-PPP loans
4,663,438 147,841 4.24 3,403,454 102,285 4.02 5,250,130 141,094 5.42 4,533,194 91,663 4.08
Total loans
4,726,371 152,521 4.31 3,876,639 120,644 4.16 5,261,876 141,284 5.41 4,613,264 95,641 4.18

Total interest earning assets
6,936,718 177,179 3.41 5,091,596 129,854 3.41 7,162,736 162,848 4.58 6,812,158 109,537 3.24

Less allowance for credit losses on loans
63,857 57,620 76,678 62,020

Non-interest earning assets:

Cash and due from banks
92,890 55,707 78,969 95,155
Premises and equipment, net
105,994 66,818 104,005 100,250
Bank owned life insurance
62,924 41,962 85,179 53,308
Goodwill
184,404 67,674 194,074 178,573
Accrued interest receivable and other
79,238 97,984 38,926 86,999

Total assets
$ 7,398,311 $ 5,364,121 $ 7,587,211 $ 7,264,423

Interest bearing liabilities:

Deposits:

Interest bearing demand
$ 2,199,702 $ 4,169 0.25
%
$ 1,515,903 $ 1,242 0.11
%
$ 2,258,717 $ 14,534 1.30
%
$ 2,192,609 $ 1,633 0.15
%
Savings
536,680 277 0.07 303,150 59 0.03 510,197 663 0.26 521,754 106 0.04
Money market
1,138,848 2,174 0.26 902,040 423 0.06 1,072,393 8,756 1.65 1,123,973 650 0.12
Time
495,609 770 0.21 413,885 2,624 0.85 605,887 6,627 2.21 494,817 552 0.22
Total interest bearing deposits
4,370,839 7,390 0.23 3,134,978 4,348 0.19 4,447,194 30,580 1.39 4,333,153 2,941 0.14

Securities sold under agreements to repurchase
123,845 250 0.27 57,980 16 0.04 117,525 832 1.43 115,761 74 0.13
Federal funds purchased
9,515 72 1.01 10,505 11 0.14 14,915 347 4.69 9,784 22 0.45
Federal Home Loan Bank advances
- - 0.00 19,398 301 2.07 256,215 5,696 4.48 — — —
Subordinated debentures
20,191 670 4.44 - - 0.00 26,458 1,074 8.19 17,132 311 3.66

Total interest bearing liabilities
4,524,390 8,382 0.25 3,222,861 4,676 0.19 4,862,307 38,529 1.60 4,475,830 3,348 0.15

Non-interest bearing liabilities:

Non-interest bearing demand deposits
2,038,168 1,517,423 1,829,554 1,971,525
Accrued interest payable and other
97,362 82,599 106,568 89,824

Total liabilities
6,659,920 4,822,883 6,798,429 6,537,179

Stockholders’ equity
738,391 541,238 788,782 727,244
Total liabilities and stockholders' equity
$ 7,398,311 $ 5,364,121 $ 7,587,211 $ 7,264,423

Net interest income
$ 168,797 $ 125,178 $ 124,319 $ 106,189

Net interest spread
3.16
%
3.22
%
2.98
%
3.09
%

Net interest margin
3.25
%
3.29
%
3.50
%
3.14
%

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

●
Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans averaged $5 million for both the ~~three-month~~three and six month periods ended ~~both September~~June 30, ~~2022~~2023 and ~~2021, respectively. Participation loans averaged $5 million and $7 million for the nine-month periods ended September 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 ~~$232,000~~$145,000 and ~~$160,000~~$260,000 for the three-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$677,000~~$318,000 and ~~$286,000~~$445,000 for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively.

●
Interest income includes loan fees of ~~$2.2~~$1.1 million ($~~590,000~~51,000 associated with the PPP) and ~~$4.2~~$2.9 million ($~~3.7~~1.2 million associated with the PPP) for the three-month periods ended ~~September~~June 30, ~~2022~~2023 and ~~2021,~~2022, respectively, and ~~$8.9~~$3.0 million ($~~4.1 million~~190,000 associated with the PPP) and ~~$16.3~~$6.7 million ($~~14.9~~4.0 million associated with the PPP) for the ~~nine-month~~six-month periods ended ~~September~~June 30, 2023 and 2022, ~~and 2021.~~respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and accretion related to purchased loans.

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

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

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

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

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Asset/Liability Management and Interest Rate Risk

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

Interest Rate Simulation Sensitivity Analysis

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

The results of the interest rate sensitivity analysis performed as of ~~September~~June 30, ~~2022~~2023 were derived from the ~~long-term,~~ conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates and are based on historical data. Management uses different betas in the rising and falling rate scenarios in an effort to best simulate expected earnings trends. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately ~~65%. However, given~~60% for the ~~level of liquidity currently held by Bancorp~~rising rate scenarios and 30% for falling rate scenarios, respectively. While the beta’s experienced since rates began to rise in the ~~banking system generally,~~first quarter of 2022 were significantly below the 60% beta used in the model, the Company anticipates ~~actual deposit~~the future rising rate scenario betas ~~will remain well below long-term averages through~~to return to the ~~end of 2022.~~historic averages. The ~~anticipated lower deposit~~30% beta ~~would result~~used in the ~~Company’s interest~~falling rate ~~sensitivity position turning slightly asset sensitive. Further, Bancorp expects to realize further benefits to net interest income and NIM from both~~scenario is the ~~recent hikes and anticipated future hikes in~~result of management’s expectations of deposit rate decreases given the ~~quarters ahead.~~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~~as would decreases in interest rates of 100 and 200 ~~bps in interest rates would also have a negative effect on net interest income.~~bps. These results depict a ~~relatively neutral~~slightly liability sensitive interest rate risk ~~profile.~~profile in rising rate scenarios and an asset sensitive position in the falling rate scenarios. The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. ~~Asset balances subject to immediate repricing cause an estimated decline~~The decrease in net interest income in the ~~down~~falling rate scenarios is the result of the lower beta experienced since rates began to rise in the first quarter of 2022, which was the result of a significant percentage of the Company’s deposit cost being less than 100 bps, and therefore cannot decrease the full 100 or 200 bps ~~scenarios, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below.~~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 September 30, 2022
-8.28 % -0.42 % -0.42 % -0.56 % -1.11 %

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 ~~69%~~72% fixed and ~~31%~~28% variable rate loans, with the fixed rate portion pricing generally based on a spread to the ~~five-year~~five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately ~~65%~~63%) or one month LIBOR/SOFR (approximately ~~35%~~37%).

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

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

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As of ~~September~~June 30, ~~2022,~~2023, the Company had approximately ~~$455~~$116 million in loans and ~~$140 million (notional amount) in~~ interest rate derivative contracts of $114 million (notional amount) that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company ~~and other industry participants, continue to review alternative reference rates that could be utilized~~now utilizes SOFR as athe replacement for LIBOR. The Company had ~~$76~~$452 million in loans that were indexed to SOFR at ~~September~~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 ~~has historically used~~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.~~hedges as described in the Footnote titled “Derivative Financial Instruments.” For these derivatives, the effective portion of gains or losses is reported as a component of ~~AOCI,~~OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction ~~impacts~~affects earnings. ~~As of September 30, 2022, Bancorp had no outstanding interest rate swaps designated as cash flow hedges.~~

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Provision for Credit Losses

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

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

Three months ended

Nine months ended

Three months ended

Six months ended

September 30,

September 30,

June 30,

June 30,

(dollars in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Beginning balance
$ 66,362 $ 59,424 $ 53,898 $ 51,920 $ 75,673 $ 67,067 $ 73,531 $ 53,898
Acquisition - PCD loans (goodwill adjustment)
- - 9,950 6,757 - - - 9,950
Adjusted beginning balance
66,362 59,424 63,848 58,677 75,673 67,067 73,531 63,848

Provision for credit losses - loans
4,103 (1,000 ) 1,653 (4,900 )
Provision for credit losses - acquired loans
- - 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
4,103 (1,000 ) 6,082 2,497 2,150 (700 ) 4,400 1,979

Total charge-offs
(926 ) (2,215 ) (1,705 ) (5,779 ) (320 ) (370 ) (690 ) (779 )
Total recoveries
544 324 1,858 1,138 207 365 469 1,314
Net loan (charge-offs) recoveries
(382 ) (1,891 ) 153 (4,641 ) (113 ) (5 ) (221 ) 535
Ending balance
$ 70,083 $ 56,533 $ 70,083 $ 56,533 $ 77,710 $ 66,362 $ 77,710 $ 66,362

Average total loans
$ 4,948,898 $ 4,173,260 $ 4,726,371 $ 3,876,639 $ 5,286,597 $ 4,846,013 $ 5,261,879 $ 4,613,264

Provision for credit losses on loans to average total loans (1)
0.08 % -0.02 % 0.13 % 0.06 % 0.04 % -0.01 % 0.08 % 0.04 %
Net loan (charge-offs) recoveries to average total loans (1)
-0.01 % -0.05 % 0.00 % -0.12 % 0.00 % 0.00 % 0.00 % 0.01 %
ACL for loans to total loans
1.38 % 1.35 % 1.38 % 1.35 % 1.43 % 1.36 % 1.43 % 1.36 %
ACL for loans to total loans (excluding PPP) (2)
1.39 % 1.43 % 1.39 % 1.43 % 1.44 % 1.37 % 1.44 % 1.37 %
ACL for loans to average total loans
1.42 % 1.35 % 1.48 % 1.46 % 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 ~~$70~~$78 million as of ~~September~~June 30, ~~2022~~2023 compared to ~~$54~~$66 million at ~~December 31, 2021,~~June 30, 2022, representing an ACL to total loans ratio of ~~1.38%~~1.43% and ~~1.29%~~1.36% for ~~those periods, respectively.~~the respective periods. The ACL to loans (excluding PPP loans) was ~~1.39%~~1.44% at ~~September~~June 30, ~~2022~~2023 compared to ~~1.34%~~1.37% at ~~December 31, 2021.~~June 30, 2022. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled ~~$19~~$7 million at ~~September~~June 30, ~~2022~~2023 and ~~$141~~$37 million at ~~December 31, 2021,~~June 30, 2022, 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.

Provision of ~~$4.1~~$2.2 million and $4.4 million was recorded to provision for credit losses on loans for the three and six month periods ended June 30, 2023, respectively. While credit quality remains strong, provision expense for the ~~three month period ended September 30, 2022,~~first half of 2023 was driven by strong ~~third quarter~~ loan growth, the establishment of a $1.4 million specific reserve for a large C&I relationship, and ~~to a lesser extent, a negative economic forecast. For~~qualitative factor adjustments associated with the ~~second consecutive quarter, the projected unemployment~~rising rate ~~forecast, which is the primary loss driver with Bancorp’s CECL model, increased due to inflation and recession-based concerns.~~environment. Further, net charge off activity for the three and six months ended ~~September~~June 30, ~~2022~~2023 totaled ~~$382,000,~~$113,000 and $221,000, respectively, serving to slightly reduce the ACL for ~~loans slightly.~~loans.

~~Provision expense~~Negative provision (excluding acquisition-related activity) of ~~$1.7~~$700,000 and $2.5 million was recorded for the nine month period ended September 30, 2022. Strong loan growth, the aforementioned increase in the projected unemployment rate forecast, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, have been the main drivers of expense within the CECL model for 2022. Further, net charge off/recovery activity for the ninethree and six months ended ~~September~~June 30, 2022, ~~has been minimal. However,~~respectively, as the release of approximately $3.0 million in specific reserves ~~within the ACL for individual loans related~~relating to ~~recently~~ acquired individual loans, ~~that ultimately~~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 partially offset~~Bancorp. However, credit loss expense recorded in the ~~expense drivers~~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 ~~nine~~credit losses on loans of $2.1 million for the six month ~~periods ending September~~ended June 30, 2022.

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~~Credit loss expense recorded~~In addition to the provision activity noted above for the acquired CB loan portfolio totaled $4.4 million and was recorded in the first quarter of 2022 upon closing of the CB acquisition, bringing total provision for credit losses on loans to $6.1 million for the nine months ended September 30, 2022. Further,prior year period, the ACL for loans was also increased $10 million during the first quarter of 2022, 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).
Negative provision of $1 million was recorded for the three months ended September 30, 2021, driven mainly by the benefits of improvement in the unemployment forecast for the period. Provision for credit loss expense of $2.5 million was recorded for the nine months ended September 30, 2021, as the benefits of an improving unemployment forecast in that period were more than offset by expense associated with the non-PCD loan portfolio added through the KB acquisition.

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, ~~2021~~2022 and ~~September~~June 30, 2022. 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).2023. Provision for credit loss expense for off balance sheet credit exposures of ~~$800,000~~$200,000 and $575,000 was ~~also~~ recorded for the ~~nine month period~~three and six months ended ~~September~~June 30, 2023, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ACL for off balance sheet credit exposures 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 recorded for the three and six months ended June 30, 2022. The expense recorded for the three months ended June 30, 2022 was driven largely by the addition of new lines of credit ~~and thus increased availability, largely~~ 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 $4.8~~was also increased $500,000 during the First quarter of 2022 as a result of the CB acquisition with the offset recorded to goodwill (as opposed to provision expense). The ACL for off balance sheet credit exposures was $4 million as of ~~September~~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 ~~September~~June 30, ~~2022~~2023 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

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Non-interest Income

Three months ended September 30,

Nine months ended September 30,

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

2022

2021

$ Variance

% Variance

2022

2021

$ Variance

% Variance

2023

2022

$ Variance

% Variance

2023

2022

$ Variance

% Variance

Wealth management and trust services
$ 9,152 $ 7,128 $ 2,024 28
%
$ 26,890 $ 20,234 $ 6,656 33
%
$ 10,146 $ 9,495 $ 651 7
%
$ 19,673 $ 17,738 $ 1,935 11
%
Deposit service charges
2,179 1,768 411 23 6,103 3,945 2,158 55 2,201 2,061 140 7 4,350 3,924 426 11
Debit and credit card income
4,710 3,887 823 21 13,577 9,444 4,133 44 4,712 4,748 (36 ) (1 ) 9,194 8,867 327 4
Treasury management fees
2,221 1,771 450 25 6,312 5,041 1,271 25 2,549 2,187 362 17 4,867 4,091 776 19
Mortgage banking income
703 915 (212 ) (23 ) 3,001 3,662 (661 ) (18 ) 1,030 1,295 (265 ) (20 ) 2,068 2,298 (230 ) (10 )
Net investment product sales commissions and fees
892 780 112 14 2,230 1,789 441 25 800 731 69 9 1,554 1,338 216 16
Bank owned life insurance
516 275 241 88 1,052 642 410 64 559 270 289 107 1,108 536 572 107
Gain on sale of premises
3,074 - 3,074 100 3,074 - 3,074 100
Gain (loss) on sale of premises and equipment
(225 ) (2 ) (223 ) 11,150 (227 ) (28 ) (199 ) 711
Other
1,417 1,090 327 30 3,768 2,489 1,279 51 1,088 1,155 (67 ) (6 ) 2,320 2,379 (59 ) (2 )
Total non-interest income
$ 24,864 $ 17,614 $ 7,250 41
%
$ 66,007 $ 47,246 $ 18,761 40
%
$ 22,860 $ 21,940 $ 920 4
%
$ 44,907 $ 41,143 $ 3,764 9
%

Total non-interest income increased ~~$7.3~~$920,000, or 4%, and $3.8 million, or ~~41%, and $18.8 million, or 40%~~9%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to the same ~~periods~~period of ~~2021,~~2022, respectively. Non-interest income comprised ~~28.5%~~27.3% and ~~28.2%~~26.6% of total revenues, defined as net interest income and non-interest income, for the three and ~~nine~~six month periods ~~September~~ended June 30, ~~2022~~2023 compared to ~~27.9%~~27.8% and ~~27.4%~~28.0% for the same ~~periods~~period of ~~2021.~~2022. WM&T services comprised ~~36.8%~~44.4% and ~~40.7%~~43.8% of total non-interest income for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to ~~40.5%~~43.3% and ~~42.8%~~43.1% for the same periods of ~~2021. Acquisition-related~~2022. While strong organic growth has been experienced across most non-interest income revenue streams over the past 12 months, acquisition-related activity ~~has driven~~accounts for a ~~significant~~large portion of the ~~non-interest income~~ increase for the ~~three and nine month periods~~six months ended ~~September~~June 30, ~~2022~~2023 compared to the same ~~periods~~period of 2022, as the prior ~~year.~~year period only included approximately four months of 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 ~~$2.0~~$651,000, or 7%, and $1.9 million, or ~~28%, and $6.7 million, or 33%~~11%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same ~~periods~~period of ~~2021. Significant growth in AUM drove the increases for both periods,~~2022, consistent with ~~both acquisition-related activity and organic~~ new business ~~development. However, significant declines in both fixed income~~development, strong equity market performance through the first half of 2023 and ~~equity markets have weighed heavily on WM&T revenue in 2022, particularly for the three months ended September 30, 2022.~~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 ~~$2.0~~$548,000, or 6%, and $1.8 million, or ~~31%, and $6.7 million, or 35%~~10%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021.~~2022. The increase was driven largely by ~~both acquisition-related~~new business 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 ~~and organic business development.~~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 $138,000~~increased $104,000 and ~~$203,000~~$158,000 for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022, which was driven mainly by ~~lower~~higher estate ~~fee income~~fees earned.

AUM, stated at market value, totaled ~~$6.30~~$6.98 billion at ~~September~~June 30, 2023 compared with $6.56 billion at June 30, 2022 ~~compared with $4.51 billion at September 30, 2021~~ and ~~$4.80~~$6.59 billion at December 31, ~~2021.~~2022. The ~~large~~ increase in AUM between ~~September 30, 2021 and September~~June 30, 2022 and June 30, 2023 is attributed ~~mainly~~ to ~~AUM of $2.65 billion added through the CB acquisition, as well as organic~~equity market appreciation and net new business growth ~~over~~experienced through the ~~past twelve months.~~first half of 2023.

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

Detail of WM&T Service Income by Account Type:

Three months ended September 30,

Nine months ended September 30,

Three months ended June 30,

Six months ended June 30,

(in thousands)

2022

2021

2022

2021

2023

2022

2023

2022

Investment advisory
$ 3,585 $ 3,148 $ 10,157 $ 8,823 $ 3,973 $ 3,157 $ 7,655 $ 6,572
Personal trust
3,025 1,855 9,898 5,481 3,653 3,919 7,015 6,297
Personal investment retirement
1,677 1,330 4,551 3,823 1,706 1,235 3,386 2,874
Company retirement
425 503 1,192 1,302 378 325 740 767
Foundation and endowment
284 208 774 581 286 229 569 490
Custody and safekeeping
107 40 207 112 85 36 171 100
Insurance services
15 25 55 69 3 8 8 48
Other
34 19 56 43 62 586 129 590

Total WM&T services income
$ 9,152 $ 7,128 $ 26,890 $ 20,234 $ 10,146 $ 9,495 $ 19,673 $ 17,738

The preceding table demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are predominantly based on AUM and tailored for individual/company accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, recurring AUM fee structures are in place for investment management, irrevocable ~~trusts,~~and revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. ~~Company~~WM&T also provides company retirement plan services, which can consist of a one-time conversion fee with recurring AUM fees to follow. While there are also fee structures for estate settlements, income received is ~~often~~typically non-recurring in nature. Fee structures are agreed upon at the time of account opening and any subsequent revisions are communicated in writing to the customer. ~~Fees~~WM&T fees earned are not performance-based nor are they based on investment strategy or transactions. Bancorp also earns management fees on in-house ~~investment~~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, ~~2021~~2022 to ~~$6.30~~$6.98 billion at ~~September~~June 30, ~~2022~~2023 as follows:

September 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
$ 2,097,746 $ 59,536 $ 2,157,282 $ 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
1,675,389 461,899 2,137,288 939,703 150,221 1,089,924 1,828,645 523,350 2,351,995 1,744,522 474,373 2,218,895
Personal investment retirement
715,799 25,581 741,380 620,312 3,478 623,790 816,995 31,897 848,892 756,126 27,065 783,191
Company retirement
48,844 549,658 598,502 35,234 599,129 634,363 55,903 551,216 607,119 52,891 524,568 577,459
Foundation and endowment
406,637 7,476 414,113 368,572 1,532 370,104 474,137 7,450 481,587 428,018 8,219 436,237

Subtotal
$ 4,944,415 $ 1,104,150 $ 6,048,565 $ 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
— 244,923 244,923 — 128,178 128,178 — 228,822 228,822 — 256,791 256,791

Total
$ 4,944,415 $ 1,349,073 $ 6,293,488 $ 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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, approximately ~~79%~~80% and ~~81%~~79%, respectively, of AUM were actively managed. Company retirement plan accounts consist primarily of participant-directed assets. The amount of custody and safekeeping accounts are insignificant.

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Managed Trust Assets under Management by Class of Investment:

(in thousands)

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Interest bearing deposits
$ 166,039 $ 173,603 $ 258,628 $ 185,080
Treasury and government agency obligations
112,838 39,736 231,154 176,917
State, county and municipal obligations
192,378 110,795 232,488 201,038
Money market mutual funds
100,558 7,299 96,791 108,751
Equity mutual funds
1,068,664 944,500 1,176,177 1,125,540
Other mutual funds - fixed, balanced and municipal
617,302 612,913 571,407 583,713
Common trust funds and collective investment funds
119,939 -
Other notes and bonds
204,046 171,087 194,164 209,178
Common and preferred stocks
2,012,449 1,681,006 2,341,466 2,180,390
Common trust funds and collective investment funds
116,758 114,458
Real estate mortgages
778 - 571 774
Real estate
62,411 58,344 40,683 57,297
Other miscellaneous assets (1)
287,013 84,131 310,731 287,438

Total managed assets
$ 4,944,415 $ 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 ~~62%~~63% in equities and ~~38%~~37% in fixed income securities as of ~~September~~both June 30, ~~2022 compared to 68%~~2023 and ~~32% as of~~ December 31, ~~2021.~~2022. This composition has remained relatively consistent from period to 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 ~~$411,000,~~$140,000, or ~~23%~~7%, and ~~$2.2 million,~~$426,000, or ~~55%~~11%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021, mainly as a result of~~2022. While both organic and acquisition-related expansion drove the ~~contribution associated with acquisition-related activity over the past twelve months. Outside of acquisition-related growth,~~increases noted above, an industry-wide decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several years. This trend has been driven by lower check presentment volume, 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. 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 $823,000,~~decreased $36,000, or ~~21%~~1%, and ~~$4.1 million,~~increased $327,000, or ~~44%~~4%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021, as a result of increased transaction volume~~2022. The decrease for the three month period stems largely from interchange rate compression while the increase for the six month period stems from both organic and ~~continued~~acquisition-related expansion, ofwhich served to offset the ~~customer bases, both organically and through acquisition-related activity.~~previously mentioned interchange rate compression. Total debit card income ~~increased $503,000,~~decreased $8,000, or ~~18%~~less than 1%, and ~~$2.9 million,~~increased $189,000, or ~~43%~~3%, and total credit card income ~~increased $320,000,~~decreased $28,000, or ~~28%~~2%, and ~~$1.3 million,~~increased $138,000, or ~~45%~~5%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, compared the same periods of the prior year. While Bancorp generally expects this revenue stream ~~will continue~~ to grow with ~~the~~continued expansion of the customer ~~base.~~base, interchange rate compression and any potential fluctuation in business and 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 ~~$450,000,~~$362,000, or ~~25%~~17%, and ~~$1.3 million,~~$776,000, or ~~25%~~19%, for the three and ~~nine~~six month periods ended ~~September~~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 the expansion of online services, reporting, ACH origination, remote deposit and fraud mitigation services over the past twelve months.sales. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.

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Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA, FHA and GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue decreased ~~$212,000,~~$265,000, or ~~23%~~20%, and ~~$661,000,~~$230,000, or ~~18%~~10%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021. Overall volume has declined~~2022, driven by an overall decline in ~~2022 compared to the prior year as a result of rising~~volumes stemming from higher interest rates and generally low housing ~~inventory. While this has in turn led~~inventory compared to the three and nine month period declines noted above, mortgage banking income has benefitted from the addition of the mortgage loan servicing portfolio added through the CB acquisition, which serviced approximately $1.48 billion in mortgage loans at the time it was acquired.prior periods.

Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as 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 ~~$112,000,~~$69,000, or ~~14%~~9%, and ~~$441,000,~~$216,000, or ~~25%~~16%, for the three and ~~nine~~six month periods ended ~~September~~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 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 ~~$84~~$86 million as of ~~September~~June 30, ~~2022.~~2023. BOLI income increased ~~$241,000, or 88%,~~$289,000 and ~~$410,000, or 64%,~~$572,000 for the three and ~~nine~~six month periods ending ~~September~~June 30, ~~2022~~2023 compared to the same periods of the prior year, which was attributed mainly to the additional prior year investment noted above ~~and contributions from~~in addition to general market appreciation within the ~~BOLI portfolio added as a result~~policy plans during the first half of ~~the KB acquisition in May of 2021.~~2023.

The $225,000 loss on sale of premises and equipment recorded for the three months ended June 30, 2023 relates to the disposal of assets associated with the sale of Bancorp’s former operations center. During the ~~third~~first quarter of ~~2022,~~2023, Bancorp completed the sale of certain acquired properties that overlapped with existing locations, recording a ~~gain~~net loss of ~~$3.1 million~~$2,000 as a result. ~~No such~~Prior year activity was ~~recorded in 2021.~~the result of fixed asset disposals occurring through the normal course of business.

Other non-interest income ~~increased $327,000,~~decreased $67,000, or ~~30%~~6%, and ~~$1.3 million,~~$59,000, or ~~51%~~2%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared with the same periods of ~~2021.~~2022. The ~~increases were~~decrease was driven largely by the disposition of Bancorp’s partial interest in LFA effective December 31, 2022, which contributed $541,000 and $731,000 of other non-interest income for the three and six month periods ended June 30, 2022. However, largely offsetting the loss of the LFA contribution for the three and six month periods ended June 30, 2023 were positive returns from ~~LFA, a financial advising firm added through the CB acquisition,~~insurance policies outside of Bancorp’s BOLI portfolio and increased income from the insurance ~~captive acquired through the KB acquisition in May of 2021 and an increase in other miscellaneous fee income.~~captive.

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Non-interest Expenses

Three months ended September 30,

Nine months ended September 30,

(dollars in thousands)

2022

2021

$ Variance

% Variance

2022

2021

$ Variance

% Variance

Compensation
$ 23,069 $ 17,381 $ 5,688 33
%
$ 63,242 $ 45,888 $ 17,354 38
%
Employee benefits
4,179 3,662 517 14 13,147 10,290 2,857 28
Net occupancy and equipment
3,767 2,732 1,035 38 10,455 7,021 3,434 49
Technology and communication
3,747 3,173 574 18 11,150 8,189 2,961 36
Debit and credit card processing
1,437 1,479 (42 ) (3 ) 4,439 3,160 1,279 40
Marketing and business development
1,244 1,011 233 23 3,461 2,357 1,104 47
Postage, printing and supplies
903 630 273 43 2,461 1,499 962 64
Legal and professional
774 700 74 11 2,451 1,828 623 34
FDIC insurance
847 387 460 119 2,028 1,141 887 78
Amortization of investments in tax credit partnerships
88 53 35 66 265 315 (50 ) (16 )
Capital and deposit based taxes
722 556 166 30 1,822 1,541 281 18
Merger expenses
- 525 (525 ) (100 ) 19,500 19,025 475 2
FHLB early termination penalty
- - - 0 - 474 (474 ) (100 )
Intangible amortization
1,610 290 1,320 455 3,934 494 3,440 696
Other
2,486 1,979 507 26 7,490 4,486 3,004 67
Total non-interest expenses
$ 44,873 $ 34,558 $ 10,315 30
%
$ 145,845 $ 107,708 $ 38,137 35
%

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 increased ~~$10.3~~$1.1 million, or ~~30%~~3%, and ~~$38.1~~decreased $9.9 million, or ~~35%~~10%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022. The increase for the ~~variances stemming largely from~~three month period is consistent with the organic and acquisition-related growth experienced over the past year, while the decrease for the six month period was driven by one-time merger expenses associated with completion of the CB ~~and KB acquisitions.~~acquisition during the first quarter of 2022. Compensation and employee benefits comprised ~~60.7%~~59.3% and ~~52.4%~~59.4% of Bancorp’s total non-interest expenses for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, compared to ~~60.9%~~59.6% and ~~52.2%~~48.7% for the same periods of ~~2021.~~2022. Excluding merger expenses, compensation and employee benefits comprised ~~60.7% and 60.5%~~60.3% for the ~~three and nine~~six month ~~periods~~period ended ~~September~~June 30, 2022. The six months ended June 30, 2022 ~~compared to 61.8% and 63.3% for~~only included approximately four months of activity associated with the ~~same periods of 2021.~~CB acquisition.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, decreased $97,000, or less than 1%, and increased ~~$5.7~~$3.8 million, or ~~33%, and $17.4 million, or 38%~~10%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021.~~2022. The ~~increases were~~decrease for the three month period was driven by lower incentive compensation compared to the prior year period, which was nearly offset by increased salary expense associated with FTE growth. The increase for the six month period was attributed ~~largely~~ to growth in full time equivalent employees, ~~as well as~~ annual merit-based salary ~~increases.~~increases and the impact of the first half of 2022 experiencing only four months of acquisition-related activity. Net full time equivalent employees totaled ~~1,028~~1,064 at ~~September~~June 30, ~~2022~~2023 compared to ~~820~~1,040 at December 31, ~~2021~~2022 and ~~793~~1,018 at ~~September~~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 ~~$517,000,~~$632,000, or 14%, and ~~$2.9~~$1.1 million, or ~~28%~~13%, for the three and ~~nine~~six month periods ended ~~September~~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 $1.0 million,~~decreased $149,000, or ~~38%~~4%, and ~~$3.4 million,~~increased $725,000, or ~~49%~~11%, ~~for~~ the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared with the same periods of ~~2021,~~2022. While the decrease for the three month period was attributed mainly to closing certain locations subsequent to last year’s acquisition, the increase for the six month period was driven by the ~~two acquisitions completed over~~acquisition of CB as well as the ~~past twelve months.~~opening of a new operations center in the latter half of 2022. In connection with the CB acquisition, 15 branches were acquired, four of which were closed shortly after acquisition in addition to one existing SYB location, as a result of branch overlap. ~~The KB acquisition in May of 2021 resulted in the addition of 19 branch locations in addition to operational buildings.~~ At ~~September~~June 30, ~~2022,~~2023, Bancorp’s branch network ~~consists~~consisted of 7372 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.

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Technology and communication expenses include computer software ~~amortization,~~usage and licensing fees, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased ~~$574,000,~~$235,000, or ~~18%~~6%, and ~~$3.0~~$1.1 million, or ~~36%~~14%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022, consistent with acquisition-related activity, customer expansion and ~~core system upgrades.~~continued investment in technology.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses typically fluctuate consistent with transaction volumes. Debit and credit card processing expense ~~decreased $42,000,~~increased $41,000, or 3%2%, and ~~increased $1.3 million,~~$123,000, or ~~40%~~4%, for the three and ~~nine~~six month periods ending ~~September~~June 30, ~~2022~~2023 compared to the same periods of last ~~year. The decrease for the three month period stems from expenses incurred in the prior~~ year, ~~period associated with the timing of the KB core conversion. The increase for the nine month period correlates in part with~~driven by the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related ~~growth that served to increase corresponding 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 ~~$233,000,~~$339,000, or 23%, and ~~$1.1 million,~~$662,000, or ~~47%~~30%, for the three and ~~nine~~six month periods ending ~~September~~June 30, ~~2022,~~2023, as compared to the same periods of ~~2021.~~2022. The ~~increases correspond with~~increase was driven largely by the post-pandemic return to in-person client meeting/entertainment in addition to strategic decisions to advertise ~~and promote~~ in Bancorp’s new markets ~~as well as~~and the general expansion of Bancorp’s existing and prospective customer ~~base and a post-pandemic return to in-person client meeting/entertainment.~~base.

Postage, printing and supplies expense increased ~~$273,000,~~$64,000, or ~~43%~~8%, and ~~$962,000,~~$205,000, or ~~64%~~13%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022, consistent with ~~increased customer communication and~~ Bancorp’s expansion ~~tied to acquisition-related activity~~ over the past ~~twelve~~12 months.

Legal and professional fees ~~increased $74,000,~~decreased $208,000, or ~~11%~~20%, and ~~$623,000,~~$61,000, or ~~34%~~4%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to the same periods of last year, 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 ~~$460,000,~~$243,000, or ~~119%~~45%, and ~~$887,000,~~$733,000, or ~~78%~~62%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022,~~2023, as compared to the same periods of ~~2021, consistent with~~2022, driven primarily by the increased assessment rate instituted by the FDIC, and to a lesser extent, Bancorp’s organic and acquisition-related balance sheet ~~growth for which the insurance is assessed on, and to a lesser extent, an increased assessment rate.~~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 increased ~~$35,000~~$235,000 and ~~decreased $50,000~~$470,000 for the three and ~~nine~~six month periods ending ~~September~~June 30, ~~2022~~2023 compared to the same periods of last ~~year.~~year, driven by the addition of several tax credit projects closed in the first quarter of 2023.

Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, increased ~~$166,000,~~$25,000, or ~~30%~~4%, and ~~$281,000,~~$146,000, or ~~18%~~13%, for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to the same periods of ~~2021,~~2022, attributed to ~~both organic and acquisition-related growth.~~Bancorp’s expansion over the past 12 months.

Merger expenses represent non-recurring expenses associated with completion of the CB acquisition and consist primarily of investment banker fees, various compensation-related expenses, legal fees, early termination fees relating to various contracts and system conversion expenses. ~~Merger expenses totaled $0 and~~During the six months ended June 30, 2022, $19.5 million ~~for the three and nine month periods ended September 30, 2022, compared to $0 and $19.0 million for the same periods~~ of ~~2021.~~
~~During the nine months ended September 30, 2021, an early termination fee of $474,000 was~~merger expenses were recorded in relation to the pre-payment of FHLB advances totaling $14 million prior to their respective contractual maturities. Bancorp chose to payoff these term advances during the second quarter of 2021 due to excess liquidity held on the balance sheet and the near-term outlook for low interest rates at the time of payoff. Bancorp currently has no FHLB advances outstanding.CB acquisition.

Intangible amortization expense consists of amortization associated with the CDI of acquired deposit portfolios, as well as ~~other intangibles~~an intangible related to customer ~~lists~~list of the WM&T ~~and LFA~~ business ~~lines~~line added through the CB acquisition. The intangibles 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 ~~nine~~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 ~~September~~June 30, ~~2022 was $1.6 million and $3.9 million, respectively,~~2023, as compared to ~~$290,000 and $494,000 for~~ the same periods of 2022. The most notable drivers of the ~~prior year,~~increases were increased card reward expense, higher fraud and theft-related expenses and other ancillary expenses tied to Bancorp’s growth over the ~~significant increase stemming from the CB acquisition.~~past 12 months.

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Other non-interest expenses increased $507,000 and $3.0 million for the three and nine month periods ended September 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, higher fraud-related expenses and other ancillary expenses tied to Bancorp’s significant growth over the past twelve months.
Bancorp’s efficiency ratio (FTE) for the three and six month ~~period~~periods ended ~~September~~June 30, 2023 was 54.57% and 53.84%, respectively. Bancorp’s efficiency ratio for the three and six month periods ended June 30, 2022 was ~~51.30%, while the ratio for the corresponding nine month period was 62.11%~~56.42% and 68.52%, the latter period reflecting one-time merger-related expenses attributed to the CB acquisition, all of which were ~~all~~ recorded in the first quarter of 2022. ~~Bancorp’s efficiency ratio for the three and nine month periods ended September 30, 2021 was 54.63% and 62.47%.~~ 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 ~~acquired~~ 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 ~~non-recurring merger~~merger-related expenses. Bancorp’s adjusted efficiency ratio was ~~53.06%~~54.04% and ~~54.41%~~53.39% for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2022~~2023 compared to ~~53.72%~~56.31% and ~~51.25%~~55.17% for three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2021.~~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 September 30,

Nine months ended September 30,

Three months ended June 30,

Six months ended June 30,

(dollars in thousands)

2022

2021

$ Variance

% Variance

2022

2021

$ Variance

% Variance

2023

2022

$ Variance

% Variance

2023

2022

$ Variance

% Variance

Income before income tax expense
$ 37,564 $ 30,064 $ 7,500 25
%
$ 81,400 $ 63,283 $ 18,117 29
%
$ 35,639 $ 34,449 $ 1,190 3
%
$ 72,819 $ 43,836 $ 28,983 66
%
Income tax expense
9,024 6,902 2,122 31 18,016 13,227 4,789 36 7,975 7,547 428 6 16,107 8,992 7,115 79
Effective tax rate
24.0 % 23.0 %
100 bps
4 22.1 % 20.9 %
120 bps
6 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 ~~1.3%~~0.5% for the ~~nine month period~~six months ended ~~September~~June 30, ~~2022~~2023 compared to a reduction of ~~1.7%~~2.4% for the same period of ~~2021, as a result~~2022, consistent with exercise activity, and was the largest driver of ~~increased levels of exercise activity.~~the overall ETR decrease for the period noted.

●
Changes in the cash surrender value of life insurance policies can vary widely from period to period, driven largely by changes in the markets. The related impact is inversely correlated with the ETR generally, with cash surrender value declines typically serving to increase the ETR and vice versa. Changes in the cash surrender value of life insurance policies ~~increased~~decreased the ETR ~~0.6%~~0.7% for the ~~nine~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to ~~a 0.7% decrease for~~an increase of 1.1% 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 timing and magnitude of these transactions may vary widely from period to period. The ETR for the ~~three~~six months ended ~~September~~June 30, ~~2022~~2023 and ~~2021~~2022 was reduced by ~~0.5%~~0.4% and ~~1.1%~~by 0.7%, ~~respectively. The ETR for the nine months ended September 30, 2022 and 2021 was reduced~~respectively, by ~~0.6% and 0.8%, respectively.~~tax credit activity.

●
Tax-exempt interest income earned on loans and investment securities reduced the ETR ~~0.7%~~by 0.5% for the ~~nine month period~~six months ended ~~September~~June 30, ~~2022~~2023 compared to a reduction of ~~0.3%~~0.8% for the same period of the prior ~~year, the larger reduction in the current year being attributed to tax-exempt loans and securities added through acquisitions over the past twelve months.~~year.

●
Non-deductible merger expenses recorded during the ~~nine month period~~six months ended ~~September~~June 30, 2022 served to increase the ETR ~~0.2%, compared to an increase of 0.5% for the same period of 2021.~~0.3%.

●
~~As a result of the KB acquisition in May of 2021, Bancorp acquired an~~Bancorp’s insurance ~~captive. The Captive~~captive provides insurance against certain risks for which insurance may not currently be available or economically feasible to Bancorp and SYB, as well as a group of third-party insurance captives.  The tax advantages of the Captive, including the tax-deductible nature of premiums paid to the Captive as well as the tax-exemption for premiums received by the Captive, serve to reduce income tax expense. Related activity reduced the ETR by 0.3% for the ~~nine month period~~six months ended ~~September~~June 30, ~~2022,~~2023, compared to reduction of ~~0.2%~~0.4% for the same period of ~~2021.~~2022.

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

Overview

Total assets increased ~~$908~~$236 million, or ~~14%~~3%, to ~~$7.55~~$7.73 billion at ~~September~~June 30, ~~2022~~2023 from ~~$6.65~~$7.50 billion at December 31, ~~2021.~~2022. Total ~~assets of $1.34 billion were added on March 7, 2022~~loans increased $213 million, or 4%, as athe result of near-record quarterly loan growth during the ~~CB acquisition, including loans of $632~~second quarter, while cash and cash equivalents increased $47 million, ~~(net of purchase accounting adjustments)~~or 28%, due to increased FHLB borrowing activity and other assets increased $38 million, or 28%, driven by investment in tax credit partnerships. Partially offsetting this growth was a $75 million, or 5%, decline in total investment securities ~~of $247 million. In addition, goodwill of $67 million was recorded in relation to~~stemming from a scheduled maturity and pay down activity within the ~~transaction. Total loans (excluding loans added through the CB acquisition and the PPP portfolio) grew $395 million, or 10%, between December 31, 2021 and September 30, 2022.~~total portfolio.

Total liabilities increased ~~$853~~$189 million, or ~~14%~~3%, to ~~$6.82~~$6.92 billion at ~~September~~June 30, ~~2022~~2023 from ~~$5.97~~$6.74 billion at December 31, ~~2021. Total liabilities of $1.24 billion were assumed on March 7,~~2022. While total FHLB borrowings increased $350 million compared to December 31, 2022, a $183 million, or 3%, decline in total deposits partially offset this growth, as athe result of inflationary pressures and rising rates, the ~~CB acquisition, including total deposits~~latter of ~~$1.12 billion. Further, SSUAR totaling $66 million and subordinated debentures of $26 million were also assumed as a result of the CB acquisition.~~which has encouraged depositors to seek higher-yielding alternatives.

Stockholders’ equity increased ~~$52~~$48 million, or 8%6%, to ~~$728~~$808 million at ~~September~~June 30, ~~2022~~2023 from ~~$676~~$760 million at December 31, ~~2021. Stock issued in relation to the CB acquisition, which totaled $134~~2022. Net income of $56.7 million and ~~net income of $63.2~~an $8.1 million ~~were offset by a $120 million negative fluctuation~~increase in AOCI ~~and dividends declared during~~associated with changes in the ~~first nine months of 2022. The large decline in AOCI from December 31, 2021 to September 30, 2022 was the result of the rising~~ interest rate environment and ~~its~~the corresponding impact on the valuation of the AFS debt securities ~~portfolio.~~portfolio served to grow stockholder’s equity for the period, offset only partially by $17.0 million of dividends declared during the first six months of 2023.

Cash and Cash Equivalents

Cash and cash equivalents ~~declined $631~~increased $47 million, or ~~66%~~28%, ending at ~~$330~~$214 million at ~~September~~June 30, ~~2022~~2023 compared to ~~$961~~$167 million at December 31, ~~2021. The decline stemmed mainly from~~2022, which was driven largely by increased FHLB borrowing activity offsetting loan funding and deposit contraction. In addition to utilizing overnight advances with the FHLB based on changing levels of liquidity during the period, Bancorp also entered into a $100 million term advance in conjunction with a five-year interest rate swap during the first quarter of 2023 as a way of securing longer-term funding at a more attractive rate. For more information on this interest rate swap, see the footnote titled “Derivative Financial Instruments.”
Cash and cash equivalent growth was partially offset by loan growth ~~investment~~of $213 million and $183 million of deposit contraction during the six months ended June 30, 2023. While growth in ~~the securities portfolio and seasonal deposit run-off. The~~period end balances was experienced in comparison to December 31, 2022, average ~~balance of~~ cash and cash equivalents ~~increased $233~~declined $496 million, or 70%, for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The record levels of liquidity held near the beginning of 2022 have retreated over the past ~~twelve~~12 months, ~~as Bancorp has maintained elevated levels of liquidity stemming from~~driven by the ~~PPP~~strong organic loan growth and deposit ~~growth associated with both acquisition-related activity and~~contraction experienced over the ~~customer base maintaining higher deposit balances in general for several~~past few quarters. ~~However, excluding acquisition-related activity, period-end deposit balances have declined in 2022, driven largely by seasonal fluctuation in public funds and time deposit attrition.~~

Investment Securities

Investment securities ~~increased $447~~decreased $75 million, or ~~38%~~5%, to ~~$1.63~~$1.54 billion at ~~September~~June 30, ~~2022~~2023 compared to ~~$1.18~~$1.62 billion at December 31, ~~2021. In addition to $247 million of securities being added~~2022, as ~~a result of~~scheduled maturity and pay down activity within the ~~CB acquisition, Bancorp continued to actively invest~~total portfolio was only partially offset by market appreciation within the AFS portfolio stemming from changes in the interest rate environment.
Investment in the securities portfolio was minimal during the six months ended June 30, 2023, as Bancorp elected to maintain higher levels of liquidity amidst loan growth and deposit contraction during the period.
FHLB Stock
FHLB stock holdings increased $16 million, or 150%, to $27 million at June 30, 2023 compared to $11 million at December 31, 2023. The increase was driven by FHLB borrowing activity during the six months ended June 30, 2023, as FHLB members are required to hold certain levels of FHLB stock in ~~an effort~~relation to ~~deploy excess liquidity by purchasing $640~~the amount of their borrowings. Bancorp’s FHLB stock holdings will fluctuate consistent with our borrowing activity from period to period.
Loans
Total loans increased $213 million, or 4%, from December 31, 2022 to June 30, 2023. Excluding the PPP portfolio, loans grew $224 million, or 4%, over the same period. Loan growth for the six months ended June 30, 2023 was concentrated in the CRE and residential real estate segments, which offset a small decline in the C&I segment, with $176 million of ~~debt securities~~the growth experienced for the six months ended June 30, 2023 occurring during the nine months ended September 30, 2022. Partially offsetting growth associated with purchasing and acquisition-related activity was scheduled maturity/amortization and prepayment activity, as well as market depreciation of approximately $158 million stemming from an upward move in the interest rate environment experienced during the first three quarters 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 September 30, 2022, Bancorp’s investment security portfolio consisted of AFS and HTM securities as detailed below:

AFS

HTM

Total

(in thousands)
September 30, 2022

Fair Value

Carrying
Value

Investment
Securities

U.S. Treasury and other U.S. Government obligations
$ 114,426 $ 217,684 $ 332,110
Government sponsored enterprise obligations
151,299 27,666 178,965
Mortgage backed securities - government agencies
750,589 232,775 983,364
Obligations of states and political subdivisions
127,215 - 127,215
Other
5,644 - 5,644
Total investment securities
$ 1,149,173 $ 478,125 $ 1,627,298

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Table of Contents
~~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 $22 million, or 28%, between December 31, 2021 and September 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. Bancorp’s branch network currently consists of 73 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio MSAs.
Premises held for sale totaling $10 million are also recorded on Bancorp’s consolidated balance sheets as of September 30, 2022, which consist of five properties, three of which were added through recent acquisitions and two legacy operational buildings. Bancorp expects the sale of these properties to be completed during the fourth quarter of 2022 or the first part of 2023.
~~Goodwill~~
At September 30 2022, Bancorp had $203 million in goodwill recorded on its balance sheet, including $67 million recorded 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, 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 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 September 30, 2022 and December 31, 2021, Bancorp’s CDI assets were $16 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 attributed to LFA. No similar assets were recorded in relation to the KB acquisition. As of September 30, 2022, Bancorp’s CLI assets totaled $13 million.
~~Other Assets and Other Liabilities~~
~~Other assets increased $50 million, or 58%, to $136 million at September 30, 2022. Other liabilities increased $66 million, or 68%, to $163 million at September 30, 2022.~~
The increase in other assets stems largely from a $31 million increase in DTAs driven by the significant market depreciation experienced within the AFS debt securities portfolio for the nine months ended September 30, 2022 associated with rising interest rates. The rising interest rate environment also drove an $8 million increase in Bancorp’s interest rate swap assets. Further, $13 million in MSR assets were added during the first quarter in relation to the CB acquisition.
~~As of September 30, 2022, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.~~
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~~Loans~~
~~Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:~~
(dollars in thousands)

September 30, 2022

December 31, 2021

$ Variance

% Variance

Commercial real estate - non-owner occupied
$ 1,415,180 $ 1,128,244 $ 286,936 25 %
Commercial real estate - owner occupied
819,727 678,405 141,322 21 %
Total commercial real estate
2,234,907 1,806,649 428,258 24 %

Commercial and industrial - term
751,193 596,710 154,483 26 %
Commercial and industrial - term - PPP
19,469 140,734 (121,265 ) -86 %
Commercial and industrial - lines of credit
419,048 370,312 48,736 13 %
Total commercial and industrial
1,189,710 1,107,756 81,954 7 %

Residential real estate - owner occupied
557,638 400,695 156,943 39 %
Residential real estate - non-owner occupied
302,936 281,018 21,918 8 %
Total residential real estate
860,574 681,713 178,861 26 %

Construction and land development
414,632 299,206 115,426 39 %
Home equity lines of credit
199,485 138,976 60,509 44 %
Consumer
138,843 104,294 34,549 33 %
Leases
13,959 13,622 337 2 %
Credits cards
20,767 17,087 3,680 22 %
Total loans (1)
$ 5,072,877 $ 4,169,303 $ 903,574 22 %
~~(1) Total loans are presented inclusive of premiums, discounts, and net loan origination fees and costs.~~
Total loans increased $904 million, or 22%, from December 31, 2021 to September 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 $121 million decline in the PPP loan portfolio.
Excluding the loans acquired through the CB acquisition and the PPP portfolio, loan growth of $395 million, or 10%, was experienced between December 31, 2021 and September 30, 2022, driven by solid organic 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 ~~39.6%~~40.1% at ~~September~~June 30, ~~2022,~~2023, led by C&I utilization, which strengthened from 23.9% to ~~29.5%~~29.6% over the same period, respectively. However, line of credit usage has remained below pre-pandemic levels, ~~with~~as customers ~~continuing~~continue to ~~maintain elevated levels of~~utilize strong liquidity ~~amidst current economic uncertainty.~~positions. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability ~~through~~over the ~~first nine months of 2022,~~past several quarters, but utilization of the new lines has been relatively slow.

PPP loans of ~~$19~~$7 million were outstanding at ~~September~~June 30, ~~2022.~~2023. Bancorp has ~~$380,000~~$123,000 in net unrecognized fees related to the PPP as of ~~September~~June 30, ~~2022,~~2023, which will be recognized immediately once the loans are paid off or forgiven by the SBA. The timing of forgiveness activity and the related fee recognition has become ~~less significant,~~insignificant, as the balance of the overall PPP portfolio has shrunk.

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

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

Maturity

Maturity

September 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

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
$ 153,563 $ 1,452,152 $ 1,135,996 $ 767,099 $ 3,508,810 69 % $ 207,016 $ 1,645,484 $ 1,191,470 $ 854,773 $ 3,898,743 72 %
Variable rate
540,558 552,963 421,562 48,984 1,564,067 31 % 503,686 612,255 364,106 39,819 1,519,866 28 %
Total loans
$ 694,121 $ 2,005,115 $ 1,557,558 $ 816,083 $ 5,072,877 100 % $ 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)

September 30, 2022

December 31, 2021

Non-accrual loans
$ 10,580 $ 6,712
Troubled debt restructurings
- 12
Loans past due 90 days or more and still accruing
32 684
Total non-performing loans
10,612 7,408

Other real estate owned
996 7,212
Total non-performing assets
$ 11,608 $ 14,620

Non-performing loans to total loans
0.21 % 0.18 %
Non-performing assets to total assets
0.15 % 0.22 %
ACL for loans to total non-performing loans
660 % 728 %
Non-performing assets as of September 30, 2022 consisted of 158 loans, ranging in individual amounts up to $1.5 million, and OREO. At September 30, 2022, OREO included two CRE properties, one C&D property and one residential real estate property.
(dollars in thousands)

June 30, 2023

December 31, 2022

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

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

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

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Table of Contents

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

September 30, 2022

December 31, 2021

Commercial real estate - non-owner occupied
$ 620 $ 720
Commercial real estate - owner occupied
3,227 1,748
Total commercial real estate
3,847 2,468

Commercial and industrial - term
1,474 670
Commercial and industrial - PPP
42 —
Commercial and industrial - lines of credit
1,620 228
Total commercial and industrial
3,136 898

Residential real estate - owner occupied
2,468 1,997
Residential real estate - non-owner occupied
227 293
Total residential real estate
2,695 2,290

Construction and land development
— —
Home equity lines of credit
524 646
Consumer
366 410
Leases
— —
Credit cards
12 —
Total non-accrual loans
$ 10,580 $ 6,712
As of ~~September~~June 30, ~~2022,~~2023, non-accrual loans totaled ~~$11 million.~~$17 million compared to $14 million at December 31, 2022. The increase in total non-accrual loans between December 31, ~~2021~~2022 and ~~September~~June 30, ~~2022~~2023 stemmed mainly fromone large C&I relationship being placed on non-accrual status during the first quarter.
Non-performing assets as of June 30, 2023 consisted of 122 loans, ~~added through the CB acquisition.~~ranging in individual amounts up to $6.4 million, and OREO. At June 30, 2023, OREO included two CRE properties and one residential real estate property.

Delinquent Loans

Delinquent loans (consisting of all loans 30 days or more past due) totaled ~~$13~~$9 million and ~~$11~~$17 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021.~~2022. The ~~increase~~decrease between December 31, ~~2021~~2022 and ~~September~~June 30, ~~2022~~2023 was driven mainly by two ~~large C&I~~larger CRE relationships that ~~became delinquent.~~have since become current and another large CRE relationship that paid off during the first quarter. Delinquent loans to total loans were ~~0.26%~~0.16% and 0.32% at ~~both September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

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Allowance for Credit Losses on Loans

The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled “Summary of Significant Accounting Policies” for discussion of Bancorp’s ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp’s judgment, should be charged-off.
~~The following table reflects activity in the ACL on loans for the three and nine months ended September 30, 2022:~~
(in thousands)
Three Months Ended September 30, 2022

Beginning
Balance

Initial
Allowance
on PCD
Loans

Provision for
Credit Losses
on Loans

Charge-offs

Recoveries

Ending
Balance

Commercial real estate - non-owner occupied
$ 20,723 $ - $ 502 $ (37 ) $ - $ 21,188
Commercial real estate - owner occupied
9,842 - (227 ) - 153 9,768
Total commercial real estate
30,565 - 275 (37 ) 153 30,956

Commercial and industrial - term
12,342 - 2,055 (466 ) 232 14,163
Commercial and industrial - lines of credit
5,000 - 203 (99 ) - 5,104
Total commercial and industrial
17,342 - 2,258 (565 ) 232 19,267

Residential real estate - owner occupied
5,988 - 423 (17 ) 2 6,396
Residential real estate - non-owner occupied
3,190 - 146 - 9 3,345
Total residential real estate
9,178 - 569 (17 ) 11 9,741

Construction and land development
6,214 - 731 - - 6,945
Home equity lines of credit
1,521 - 105 - - 1,626
Consumer
1,113 - 162 (307 ) 148 1,116
Leases
221 - (10 ) - - 211
Credit cards
208 - 13 - - 221
Total
$ 66,362 $ - $ 4,103 $ (926 ) $ 544 $ 70,083
(in thousands)
Nine Months Ended September 30, 2022

Beginning
Balance

Initial
Allowance
on PCD
Loans

Provision for
Credit Losses
on Loans

Charge-offs

Recoveries

Ending
Balance

Commercial real estate - non-owner occupied
$ 15,960 $ 3,508 $ 1,744 $ (37 ) $ 13 $ 21,188
Commercial real estate - owner occupied
9,595 2,121 (2,103 ) (41 ) 196 9,768
Total commercial real estate
25,555 5,629 (359 ) (78 ) 209 30,956

Commercial and industrial - term (1)
8,577 1,358 3,796 (594 ) 1,026 14,163
Commercial and industrial - lines of credit
4,802 1,874 (1,437 ) (135 ) - 5,104
Total commercial and industrial
13,379 3,232 2,359 (729 ) 1,026 19,267

Residential real estate - owner occupied
4,316 590 1,458 (30 ) 62 6,396
Residential real estate - non-owner occupied
3,677 - (349 ) - 17 3,345
Total residential real estate
7,993 590 1,109 (30 ) 79 9,741

Construction and land development
4,789 419 1,809 (72 ) - 6,945
Home equity lines of credit
1,044 2 580 - - 1,626
Consumer
772 78 565 (796 ) 497 1,116
Leases
204 - 7 - - 211
Credit cards
162 - 12 - 47 221
Total
$ 53,898 $ 9,950 $ 6,082 $ (1,705 ) $ 1,858 $ 70,083
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~~Table of Contents~~

Bancorp’s ACL for loans was ~~$70~~$78 million as of ~~September~~June 30, ~~2022~~2023 compared to ~~$54~~$74 million as of December 31, ~~2021. The change in the ACL~~2022. Provision expense for loans was driven by a number of competing factors, which resulted in the $16 million, or 30%, increase experienced for the first nine months of 2022. Acquisition-related activity was responsible for a total increase to the ACL forcredit losses on loans of ~~$14 million in 2022, 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.~~
~~Provision for credit loss expense on loans (excluding acquisition-related activity) of $2~~ million was recorded for the ~~first nine~~six months ~~of 2022, further increasing the ACL for loans. Increased expense within the CECL model was~~ended June 30, 2023, driven ~~primarily~~ by ~~significant organic~~strong loan growth, the establishment of a $1.4 million specific reserve for a large C&I relationship, and ~~increase of~~qualitative factor adjustments associated with the ~~projected unemployment~~rising rate ~~forecast, which is the primary loss driver with Bancorp’s CECL model, which has been driven by inflation and recession-based concerns. Partially offsetting the increased expense noted above~~environment. Net charge-off activity was 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.
~~In addition, net recovery activity of $153,000 was recorded~~minimal for the ~~nine~~six months ended ~~September~~June 30, ~~2022, as charge off and recovery activity for the year has been largely offsetting, serving to increase the ACL for loans.~~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:

September 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
$ 21,188 30 % 1.50 % $ 15,960 30 % 1.41 % $ 21,773 28 % 1.47 % $ 22,641 31 % 1.62 %
Commercial real estate - owner occupied
9,768 14 % 1.19 % 9,595 18 % 1.41 % 11,557 15 % 1.32 % 10,827 15 % 1.30 %
Total commercial real estate
30,956 44 % 1.39 % 25,555 48 % 1.41 % 33,330 43 % 1.42 % 33,468 46 % 1.50 %

Commercial and industrial - term (1)
14,163 20 % 1.89 % 8,577 16 % 1.44 % 14,792 19 % 1.89 % 12,991 17 % 1.70 %
Commercial and industrial - lines of credit
5,104 8 % 1.22 % 4,802 9 % 1.30 % 6,503 9 % 1.47 % 6,389 9 % 1.37 %
Total commercial and industrial
19,267 28 % 1.65 % 13,379 25 % 1.38 % 21,295 28 % 1.74 % 19,380 26 % 1.57 %

Residential real estate - owner occupied
6,396 9 % 1.15 % 4,316 8 % 1.08 % 8,835 11 % 1.33 % 6,717 9 % 1.14 %
Residential real estate - non-owner occupied
3,345 5 % 1.10 % 3,677 7 % 1.31 % 4,169 5 % 1.23 % 3,597 5 % 1.15 %
Total residential real estate
9,741 14 % 1.13 % 7,993 15 % 1.17 % 13,004 16 % 1.30 % 10,314 14 % 1.14 %

Construction and land development
6,945 10 % 1.67 % 4,789 9 % 1.60 % 6,752 9 % 1.50 % 7,186 10 % 1.61 %
Home equity lines of credit
1,626 2 % 0.82 % 1,044 2 % 0.75 % 1,609 2 % 0.79 % 1,613 2 % 0.80 %
Consumer
1,116 2 % 0.80 % 772 1 % 0.74 % 1,285 2 % 0.92 % 1,158 2 % 0.83 %
Leases
211 0 % 1.51 % 204 0 % 1.50 % 205 0 % 1.47 % 201 0 % 1.51 %
Credit cards
221 0 % 1.06 % 162 0 % 0.95 % 230 0 % 1.04 % 211 0 % 1.03 %
Total
$ 70,083 100 % 1.39 % $ 53,898 100 % 1.34 % $ 77,710 100 % 1.44 % $ 73,531 100 % 1.42 %

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

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Table of Contents

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

2022

2021

2023

2022

Three months ended September 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

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
$ (37 ) $ 1,398,849 0.00 % $ 6 $ 1,149,807 0.00 % $ 17 $ 1,437,661 0.00 % $ 2 $ 1,392,742 0.00 %
Commercial real estate - owner occupied
153 799,410 0.02 % (1,361 ) 624,709 -0.22 % - 855,213 0.00 % (20 ) 792,673 0.00 %
Total commercial real estate
116 2,198,259 0.01 % (1,355 ) 1,774,516 -0.08 % 17 2,292,874 0.00 % (18 ) 2,185,415 0.00 %

Commercial and industrial - term
(234 ) 710,563 -0.03 % (235 ) 580,757 -0.04 % (57 ) 772,239 -0.01 % 60 671,539 0.01 %
Commercial and industrial - term - PPP
- 22,939 0.00 % - 281,420 0.00 % - 8,323 0.00 % - 48,364 0.00 %
Commercial and industrial - lines of credit
(99 ) 418,839 -0.02 % - 326,637 0.00 % 62 433,484 0.01 % - 417,482 0.00 %
Total commercial and industrial
(333 ) 1,152,341 -0.03 % (235 ) 1,188,814 -0.02 % 5 1,214,046 0.00 % 60 1,137,385 0.01 %

Residential real estate - owner occupied
(15 ) 542,734 0.00 % (313 ) 385,662 -0.08 % (32 ) 637,308 -0.01 % 50 511,111 0.01 %
Residential real estate - non-owner occupied
9 296,822 0.00 % 2 273,806 0.00 % 1 328,374 0.00 % 5 294,487 0.00 %
Total residential real estate
(6 ) 839,556 0.00 % (311 ) 659,468 -0.05 % (31 ) 965,682 0.00 % 55 805,598 0.01 %

Construction and land development
- 391,342 0.00 % - 290,689 0.00 % - 441,800 0.00 % (72 ) 358,066 -0.02 %
Home equity lines of credit
- 194,762 0.00 % - 140,423 0.00 % - 200,078 0.00 % - 188,422 0.00 %
Consumer
(159 ) 137,333 -0.12 % 10 90,867 0.01 % (102 ) 136,861 -0.07 % (77 ) 135,776 -0.06 %
Leases
- 14,210 0.00 % - 13,182 0.00 % - 13,474 0.00 % - 14,233 0.00 %
Credit cards
- 21,095 0.00 % - 15,301 0.00 % (2 ) 21,782 -0.01 % 47 21,118 0.22 %
Total
$ (382 ) $ 4,948,898 -0.01 % $ (1,891 ) $ 4,173,260 -0.05 % $ (113 ) $ 5,286,597 0.00 % $ (5 ) $ 4,846,013 0.00 %

2022

2021

2023

2022

Nine months ended September 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

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
$ (24 ) $ 1,330,254 0.00 % $ (3,024 ) $ 1,002,176 -0.30 % $ 36 $ 1,424,844 0.00 % $ 14 $ 1,302,604 0.00 %
Commercial real estate - owner occupied
155 769,706 0.02 % (806 ) 571,133 -0.14 % - 848,716 0.00 % 1 753,414 0.00 %
Total commercial real estate
131 2,099,960 0.01 % (3,830 ) 1,573,309 -0.24 % 36 2,273,560 0.00 % 15 2,056,018 0.00 %

Commercial and industrial - term
432 672,869 0.06 % (382 ) 506,519 -0.08 % (128 ) 770,175 -0.02 % 666 644,461 0.10 %
Commercial and industrial - term - PPP
- 62,933 0.00 % - 473,185 0.00 % - 11,746 0.00 % - 80,070 0.00 %
Commercial and industrial - lines of credit
(135 ) 405,468 -0.03 % - 270,251 0.00 % 149 444,372 0.03 % (36 ) 401,126 -0.01 %
Total commercial and industrial
297 1,141,270 0.03 % (382 ) 1,249,955 -0.03 % 21 1,226,293 0.00 % 630 1,125,657 0.06 %

Residential real estate - owner occupied
32 494,395 0.01 % (353 ) 318,246 -0.11 % (22 ) 622,368 0.00 % 47 473,599 0.01 %
Residential real estate - non-owner occupied
17 292,778 0.01 % 4 206,293 0.00 % 2 323,484 0.00 % 8 289,525 0.00 %
Total residential real estate
49 787,173 0.01 % (349 ) 524,539 -0.07 % (20 ) 945,852 0.00 % 55 763,124 0.01 %

Construction and land development
(72 ) 356,937 -0.02 % 3 288,556 0.00 % - 443,260 0.00 % (72 ) 337,927 -0.02 %
Home equity lines of credit
- 178,564 0.00 % 1 116,854 0.00 % (12 ) 200,370 -0.01 % - 171,691 0.00 %
Consumer
(299 ) 128,484 -0.23 % (84 ) 96,537 -0.09 % (162 ) 137,776 -0.12 % (140 ) 125,097 -0.11 %
Leases
- 13,990 0.00 % - 13,805 0.00 % - 13,429 0.00 % - 14,006 0.00 %
Credit cards
47 19,993 0.24 % - 13,084 0.00 % (84 ) 21,336 -0.39 % 47 19,744 0.24 %
Total
$ 153 $ 4,726,371 0.00 % $ (4,641 ) $ 3,876,639 -0.12 % $ (221 ) $ 5,261,876 0.00 % $ 535 $ 4,613,264 0.01 %

~~105~~84
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While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, ~~2021~~2022 and ~~September~~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 $800,000~~ was ~~also recorded for the nine month period ended September 30, 2022, driven largely by the addition of new construction loans. ACL for off balance sheet credit exposures stood at $4.8~~$5.1 million as of ~~September~~June 30, ~~2022~~2023 compared to ~~$3.5~~$4.5 million as of December 31, ~~2021.~~2022.
Premises and Equipment
Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets, as well as fair value adjustments associated with purchase accounting. Premises and equipment experienced minimal fluctuation between December 31, 2022 and June 30, 2023. Bancorp’s branch network currently consists of 72 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets.
Premises held for sale totaling $3 million was recorded on Bancorp’s consolidated balance sheets as of June 30, 2023, which consists of three vacant parcels of land, one branch acquired from CB, one legacy SYB branch and an administrative building acquired from KB.
Goodwill
At June 30, 2023, Bancorp had $194 million in goodwill recorded on its balance sheet. Goodwill of $67 million was initially recorded in relation to the March 7, 2022 acquisition of CB, $8.5 million of which was subsequently written off as a result of Bancorp selling its partial interest in LFA effective December 31, 2022.
Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price declining below tangible book value), negative trends in overall financial performance and regulatory actions. At September 30, 2022, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting units exceeded their fair value.
Core Deposit and Customer List Intangibles
CDIs and CLIs arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As of June 30, 2023 and December 31, 2022, Bancorp’s CDI assets totaled $13.4 million and $15.0 million, respectively. A CDI asset of $13 million was recorded during the first quarter of 2022 as a result of the CB acquisition.
As of June 30, 2023 and December 31, 2022, Bancorp’s CLI assets were $9.2 million and $10.0 million, respectively, and are attributed entirely to the WM&T segment acquired from CB. CLI assets totaling $14 million were recorded in association with the CB acquisition during the first quarter of 2022. However, as a result of Bancorp’s disposition of its partial interest in LFA effective December 31, 2022, the $2 million CLI associated with that business was written off and was included in the loss recorded in relation to the disposition in 2022.
Other Assets and Other Liabilities
Other assets increased $38 million, or 28%, to $173 million between December 31, 2022 and June 30, 2023. Other liabilities increased $13 million, or 10%, to $138 million over the same period.
The increase in other assets stemmed mainly from Bancorp’s investment in credit partnerships. As of June 30, 2023, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.
The increase in other liabilities was attributed largely to the accrual of future tax credit investment obligations, which outpaced a reduction in various accrued liabilities, such as employee incentive compensation and benefits.
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Table of Contents

Deposits

(dollars in thousands)

September 30, 2022

December 31, 2021

$ Variance

% Variance

Non-interest bearing demand deposits
$ 2,200,041 $ 1,755,754 $ 444,287 25 %

Interest bearing deposits:

Interest bearing demand
2,106,267 2,131,928 (25,661 ) -1 %
Savings
555,928 415,258 140,670 34 %
Money market
1,163,563 1,050,352 113,211 11 %

Time deposits of $250 thousand or more
92,529 89,745 2,784 3 %
Other time deposits
382,445 344,477 37,968 11 %
Total time deposits
474,974 434,222 40,752 9 %

Total interest bearing deposits
4,300,732 4,031,760 268,972 7 %

Total deposits (1)
$ 6,500,773 $ 5,787,514 $ 713,259 12 %
~~(1)~~    ~~Includes $1 million and $5 million in brokered deposits as of September 30, 2022 and December 31, 2021, respectively.~~
Total deposits ~~increased $713~~decreased $183 million, or ~~12%~~3%, from December 31, ~~2021~~2022 to ~~September~~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 $407 million, or 7%,~~ during the first ~~nine months~~quarter of ~~2022, attributed mainly to seasonal deposit run-off and time deposit attrition.~~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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.
~~Information regarding SSUAR follows:~~
(dollars in thousands)

September 30, 2022

December 31, 2021

Outstanding balance at end of period
$ 124,567 $ 75,466
Weighted average interest rate at end of period
0.64
%
0.04
%

Three months ended

Nine months ended

September 30,

September 30,

(dollars in thousands)

2022

2021

2022

2021

Average outstanding balance during the period
$ 139,749 $ 71,065 $ 123,845 $ 57,980
Average interest rate during the period
0.50
%
0.03
%
0.27
%
0.04
%
Maximum outstanding at any month end during the period
$ 139,825 $ 81,964 $ 149,179 $ 81,964
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~~Table of Contents~~

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

~~SSUARs~~Federal Funds Purchased
FFP and other short-term borrowing balances increased ~~$49~~$3 million, or ~~65%~~32%, between December 31, ~~2021~~2022 and ~~September~~June 30, ~~2022, as SSUAR totaling $66 million were assumed as part~~2023. At June 30, 2023, FFP related mainly to excess liquidity held by downstream correspondent bank customers of ~~the CB acquisition. The remaining fluctuation in SSUAR is consistent with the decrease in deposit balances previously noted (excluding acquisition-related activity).~~Bancorp.

Subordinated ~~debentures~~Debentures

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of ~~September~~June 30, ~~2022,~~2023, subordinated notes added through the CB acquisition totaled ~~$26~~$27 million.
FHLB Advances
FHLB advances outstanding at June 30, 2023 totaled $400 million. These borrowings consisted of a $300 million cash management advance with an overnight maturity utilized for short-term liquidity purposes and a $100 million three-month rolling advance related to a five-year interest rate swap (cash flow hedge) that was entered into during the quarter in an effort to secure longer-term funding at a more attractive rate. For more information related to the interest rate swap noted above, see the footnote titled, “Derivative Financial Instruments.”
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Table of Contents

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 ~~$236~~$103 million and ~~$899~~$85 million at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The ~~decrease~~increase experienced for the first ~~nine~~six months of ~~2022~~2023 is attributed mainly to ~~significant investment~~the increased in ~~the securities portfolio, strong organic loan growth and a general decline in deposits.~~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 ~~$1.15~~$1.10 billion and ~~$1.18~~$1.14 billion at ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021~~2022, respectively. The ~~lack of growth~~decrease in AFS debt security portfolio for the first ~~nine~~six months of ~~2022~~2023 is attributed to ~~both classifying securities purchased~~scheduled maturities and ~~acquired~~normal pay down activity within the portfolio, which was partially offset by market value appreciation during the ~~first quarter as HTM for general capital purposes, as well as significant market depreciation experienced on the AFS portfolio since December 31, 2021 due to rising rates.~~period. The investment portfolio (HTM and AFS) includes ~~scheduled maturities of $44 million and~~total cash flows on amortizing debt securities of approximately ~~$223~~$266 million (based on assumed prepayment speeds as of ~~September~~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 ~~September~~June 30, ~~2022,~~2023, total investment securities pledged for these purposes comprised ~~60%~~47% of the debt securities portfolio, leaving approximately ~~$656~~$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 ~~September~~June 30, ~~2022,~~2023, such deposits totaled ~~$5.88~~$5.50 billion and represented ~~90%~~89% of Bancorp’s total deposits, as compared with ~~$5.05~~$5.60 billion, or ~~87%~~88% of total deposits at December 31, ~~2021.~~2022. Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not place undue pressure on liquidity. However, ~~many of Bancorp’s individual depositors are~~given the intense, industry-wide deposit pricing pressure that is currently ~~maintaining~~being experienced, deposits may generally ~~high balances. These excess balances may~~ be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.

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~~Table of Contents~~
As of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, Bancorp held brokered deposits totaling $1$2.3 million and ~~$5 million,~~$599,000, respectively, ~~all~~the majority of which is attributed to deposits added through acquisition-related activity ~~over the past twelve months.~~in 2022 and 2021.

Included in total deposit balances at ~~September~~June 30, ~~2022~~2023 are ~~$530~~$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 decrease experienced during the first ~~nine~~six months of ~~2022 is~~2023 was attributed to ~~anticipated~~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 ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, available credit from the FHLB totaled $1.08 billion and $1.36 billion, ~~and $1.00 billion, respectively.~~respectively, the decline during this period being attributed to increased utilization of FHLB borrowings. Bancorp also had unsecured FFP lines with correspondent banks totaling ~~$90 million and~~ $80 million at ~~September~~both June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. ~~In addition, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line at the holding company as of September 30, 2022.~~

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.
87
Table of Contents

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 ~~September~~June 30, ~~2022,~~2023, the Bank could pay an amount equal to ~~$63~~$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 ~~$457~~$232 million, or ~~27%~~11%, as of ~~September~~June 30, ~~2022~~2023 compared to December 31, ~~2021, the increase being driven by both the CB acquisition and the addition~~2022, due to a combination of new ~~lines of credit.~~line production and lower utilization. Total average line of credit utilization declined to ~~39.6%~~40.1% as of ~~September~~June 30, ~~2022~~2023 compared to ~~41.2%~~42.3% at December 31, ~~2021,~~2022, however, both represent significant improvement from the pandemic-era low of 36.5% experienced at March 31, 2021. C&I line of credit utilization was ~~29.5%~~29.6% at ~~September~~June 30, ~~2022~~2023 compared to ~~31.8%~~33.1% at December 31, ~~2021~~2022 and ~~28.8%~~31.0% at ~~September~~June 30, ~~2021.~~2022.

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

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~~Table of Contents~~
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 $4.8~~was $5.1 million and ~~$3.5~~$4.5 million as of ~~September~~June 30, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. The CB acquisition resulted in a $500,000 increase to the ACL for off balance sheet credit exposures, with the corresponding offset recorded to goodwill (as opposed to provision expense). In addition, $800,000Provision expense of ~~provision expense~~$575,000 was recorded for the ~~nine~~six month period ended ~~September~~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, mainly within the C&D portfolio.~~of credit.

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

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

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

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Table of Contents

Capital

At ~~September~~June 30, ~~2022,~~2023, stockholders’ equity totaled ~~$728~~$808 million, representing an increase of ~~$52~~$48 million, or 8%6%, compared to December 31, ~~2021.~~2022. The increase for the ~~first nine~~six months ~~of 2022~~ended June 30, 2023 was attributed mainly to ~~stock issued in relation to the CB acquisition, which totaled $134 million. Further,~~ net income of ~~$63.2~~$56.7 million ~~was offset by a $120~~and an $8 million ~~negative~~positive change in AOCI, ~~and~~offset only partially by $17 million of dividends ~~declared during the first nine months of 2022.~~declared. AOCI consists of net unrealized gains or losses on AFS debt securities and a minimum pension liability, each net of income taxes. The ~~large decline~~changes in AOCI from December 31, ~~2021~~2022 to ~~September~~June 30, ~~2022 was~~2023 were the result of changes in the ~~rising~~ interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. ~~These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major rating agencies, and have a long history of no credit losses.~~ See the “Consolidated Statement of Changes in Stockholders’ Equity” for further detail of changes in equity.

~~As a result of the large interest-rate driven changes in AOCI noted above, as well as acquisition-related growth,~~ Bancorp’s TCE ratio and tangible book value per share, both non-GAAP disclosures, experienced ~~declines~~improvement between December 31, ~~2021~~2022 and ~~September~~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 ~~6.78%~~7.87% at ~~September~~June 30, ~~2022~~2023 compared to ~~8.22%~~7.44% at December 31, ~~2021,~~2022, while tangible book value per share was ~~$16.94~~$20.17 at ~~September~~June 30, ~~2022~~2023 compared to ~~$20.09~~$18.50 at December 31, ~~2021.~~2022. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

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

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:~~

September 30, 2022

December 31, 2021

Total risk-based capital(1)

Consolidated
12.16
%
12.79
%
Bank
11.67 12.42

Common equity tier 1 risk-based capital(1)

Consolidated
10.69 11.94
Bank
10.64 11.56

Tier 1 risk-based capital(1)

Consolidated
11.13 11.94
Bank
10.64 11.56

Leverage(2)

Consolidated
8.85 8.86
Bank
8.45 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 ~~September~~June 30, ~~2022 decreased~~2023 increased compared December 31, ~~2021~~2022, largely as a result of ~~substantial average asset and~~modest risk-weighted asset growth ~~driven by both organic~~ and ~~acquisition-related activity. While pressure was placed on risk-based capital and leverage ratios due to this growth,~~strong first quarter operating results. Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

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

Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At ~~September~~June 30, ~~2022,~~2023, the adequately-capitalized minimums, including the capital conservation buffer, were a 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 ~~September~~June 30, ~~2022,~~2023, subordinated notes added through the CB acquisition totaled $26 million. ~~Further, Bancorp had borrowing capacity~~
89
Table of ~~$20 million available through an unsecured borrowing line of the holding company as of September 30, 2022, which was added during the first quarter to allow capital flexibility at the Bank level.~~
Contents

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “Financial Instruments – Credit Losses,” or CECL, which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were ~~declared to be~~ delayed for two years. After two years, the cumulative amount of the transition adjustments ~~will become~~became fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. 2023 represents year four of the transition period for Bancorp. Had Bancorp not elected to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would still have exceeded the well-capitalized level.
~~110~~

~~Table of Contents~~

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)

September 30, 2022

December 31, 2021

Total stockholders' equity - GAAP (a)
$ 727,754 $ 675,869
Less: Goodwill
(202,524 ) (135,830 )
Less: Core deposit and other intangibles
(28,747 ) (5,596 )
Tangible common equity - Non-GAAP (c)
$ 496,483 $ 534,443

Total assets - GAAP (b)
$ 7,554,210 $ 6,646,025
Less: Goodwill
(202,524 ) (135,830 )
Less: Core deposit and other intangibles
(28,747 ) (5,596 )
Tangible assets - Non-GAAP (d)
$ 7,322,939 $ 6,504,599

Total stockholders' equity to total assets - GAAP (a/b)
9.63 % 10.17 %
Tangible common equity to tangible assets - Non-GAAP (c/d)
6.78 % 8.22 %

Total shares outstanding (e)
29,242 26,596

Book value per share - GAAP (a/e)
$ 24.89 $ 25.41
Tangible common equity per share - Non-GAAP (c/e)
16.98 20.09
The general decline between December 31, 2021 and September 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 nine months of 2022, which drove a $120 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

~~111~~90
Table of Contents

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)

September 30, 2022

December 31, 2021

June 30, 2023

December 31, 2022

Total loans - GAAP (a)
$ 5,072,877 $ 4,169,303 $ 5,418,609 $ 5,205,918
Less: PPP loans
(19,469 ) (140,734 ) (7,088 ) (18,593 )
Total non-PPP loans - Non-GAAP (b)
$ 5,053,408 $ 4,028,569 $ 5,411,521 $ 5,187,325

ACL for loans (c)
$ 70,083 $ 53,898 $ 77,710 $ 73,531
Non-performing loans (d)
10,612 7,408 17,801 15,134
Delinquent loans (e)
13,083 11,036 8,790 16,863

ACL for loans to total loans - GAAP (c/a)
1.38 % 1.29 % 1.43 % 1.41 %
ACL for loans to total loans - Non-GAAP (c/b)
1.39 % 1.34 % 1.44 % 1.42 %

Non-performing loans to total loans - GAAP (d/a)
0.21 % 0.18 % 0.33 % 0.29 %
Non-performing loans to total loans - Non-GAAP (d/b)
0.21 % 0.18 % 0.33 % 0.29 %

Delinquent loans to total loans - GAAP (e/a)
0.26 % 0.26 % 0.16 % 0.32 %
Delinquent loans to total loans - Non-GAAP (e/b)
0.26 % 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. 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 ~~acquired~~ 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 September 30,

Nine months ended September 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 (a)
$ 44,873 $ 34,558 $ 145,845 $ 107,708 $ 45,800 $ 44,675 $ 91,114 $ 100,972
Less: Non-recurring merger expenses
— (525 ) (19,500 ) (19,025 ) — — — (19,500 )
Less: Amortization of investments in tax credit partnerships
(88 ) (53 ) (265 ) (315 ) (324 ) (89 ) (647 ) (177 )
Total non-interest expenses - Non-GAAP (c)
$ 44,785 $ 33,980 $ 126,080 $ 88,368 $ 45,476 $ 44,586 $ 90,467 $ 81,295

Total net interest income, FTE
$ 62,608 $ 45,643 $ 168,797 $ 125,178 $ 61,074 $ 57,244 $ 124,319 $ 106,189
Total non-interest income
24,864 17,614 66,007 47,246 22,860 21,940 44,907 41,143
Total revenue - Non-GAAP (b)
87,472 63,257 234,804 172,424 83,934 79,184 169,226 147,332
Less: Gain/loss on sale of premises and equipment
(3,074 ) — (3,074 ) — 225 2 227 28
Less: Gain/loss on sale of securities
— — — — — — — —
Total adjusted revenue - Non-GAAP (d)
$ 84,398 $ 63,257 $ 231,730 $ 172,424 $ 84,159 $ 79,186 $ 169,453 $ 147,360

Efficiency ratio - Non-GAAP (a/b)
51.30 % 54.63 % 62.11 % 62.47 % 54.57 % 56.42 % 53.84 % 68.52 %
Adjusted efficiency ratio - Non-GAAP (c/d)
53.06 % 53.72 % 54.41 % 51.25 % 54.04 % 56.31 % 53.39 % 55.17 %

~~112~~91
Table of Contents

Item 3.
Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4.
Controls and Procedures.

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.

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.

~~113~~92
Table of Contents

Item 2.
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 ~~September~~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

July 1 - July 31
1,041 $ 52.65 — $ —
August 1 - August 31
515 52.84 — —
September 1 - September 30
1,336 46.79 — —

Total
2,892 $ 49.98 — $ — 741,196

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
529 $ 56.08 — $ —
May 1 - May 31
950 53.64 — —
June 1 - June 30
— — — —

Total
1,479 $ 54.51 — $ — 741,196

(1)
Shares repurchased during the three-month period ended ~~September~~June 30, ~~2022~~2023 represent shares withheld to pay taxes due on the exercise of equity grants.

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

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

Item 6.
Exhibits.

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

Exhibit
~~Number~~

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 ~~September~~June 30, ~~2022~~2023 formatted in inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.

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

~~114~~
93
Table of Contents

SIGNATURES

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

STOCK YARDS BANCORP, INC.
(Registrant)

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

Date: ~~November~~August 4, ~~2022~~2023

/s/ T. Clay Stinnett
T. Clay Stinnett
EVP, Treasurer and CFO (Principal Financial
Officer)

~~115~~94

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


Activity for three months ended September 30, 2022:
Net income		—			—			—			28,455			—			28,455			85			28,540
Other comprehensive loss		—			—			—			—			(40,580	)		(40,580	)		—			(40,580	)
Stock compensation expense		—			—			1,237			—			—			1,237			—			1,237
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		1			5			94			(114	)		—			(15	)		—			(15	)
Cash dividends declared, $0.29 per share		—			—			—			(8,474	)		—			(8,474	)		—			(8,474	)
Shares cancelled		(2	)		(9	)		(118	)		127			—			—			—			—
Distributions to non-controlling interest		—			—			—			—			—			—			(120	)		(120	)
Balance, September 30, 2022		29,242		$	58,311		$	376,091		$	421,269		$	(127,917	)	$	727,754		$	2,995		$	730,749

	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		$	—			$	—	$	380,450
Mortgage loans held for sale		3,559			—				—		3,559
Available for sale debt securities (2)		247,209			(416	)	a		—		246,793
Federal Home Loan Bank stock, at cost		4,436			—				—		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			—				—		1,973
Goodwill		5,412			(5,412	)	e		—		—
Core deposit intangible		—			12,724		f		—		12,724
Customer list intangibles		—			14,360		g		—		14,360
Mortgage servicing rights		9,387			3,289		h		—		12,676
Deferred income taxes, net		—			(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		$	—			$	—	$	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			—				—		66,220
Subordinated debentures		26,806			(794	)	l		—		26,012
Line of credit		3,200			—				—		3,200
Accrued interest payable		243			—				—		243
Other liabilities		17,822			1,296		m		—		19,118
Total liabilities assumed		1,234,723			873				—		1,235,596
Net assets acquired	$	85,325		$	15,894			$	-	$	101,219

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

Goodwill										$	66,694

(in thousands)

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

(in thousands)

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

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

Net interest income	$	62,376	$	53,473
Provision for credit losses (1)		4,803		(1,525	)
Non-interest income		24,864		38,094
Non-interest expense (2)		44,873		50,414
Income before taxes		37,564		42,678
Income tax expense		9,024		9,803
Net income		28,540		32,875
Less net income attributed to noncontrolling interest		85		90
Net income available to stockholders	$	28,455	$	32,785

Earnings per share
Basic	$	0.98	$	1.13
Diluted		0.97		1.13

Basic weighted average shares outstanding		29,144		29,049
Diluted weighted average shares outstanding		29,404		29,031

(in thousands)	Nine months ended September 30, 2022		Nine months ended September 30, 2021

Net interest income	$	173,153	$	164,579
Provision for credit losses (1)		2,453		(5,767	)
Non-interest income		68,947		97,524
Non-interest expense (2)		136,837		153,407
Income before taxes		102,810		114,463
Income tax expense		23,038		23,380
Net income		79,772		91,083
Less net income attributed to noncontrolling interest		244		264
Net income available to stockholders	$	79,528	$	90,819

Earnings per share
Basic	$	2.73	$	3.10
Diluted		2.71		3.10

Basic weighted average shares outstanding		29,110		29,291
Diluted weighted average shares outstanding		29,371		29,272

(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

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

Commercial real estate - non-owner occupied	$	6,734	$	-	$	-	$	6,734	$	998	$	14,094	$	-	$	-	$	14,094	$	2,081
Commercial real estate - owner occupied		5,148		-		-		5,148		849		3,174		-		-		3,174		842
Total commercial real estate		11,882		-		-		11,882		1,847		17,268		-		-		17,268		2,923

Commercial and industrial - term		342		819		536		1,697		390		4,405		306		459		5,170		1,571
Commercial and industrial - lines of credit		1,933		1,673		929		4,535		888		2,734		159		-		2,893		750
Total commercial and industrial		2,275		2,492		1,465		6,232		1,278		7,139		465		459		8,063		2,321

Residential real estate - owner occupied		3,029		-		-		3,029		363		2,996		-		-		2,996		214
Residential real estate - non-owner occupied		424		-		-		424		116		588		-		-		588		116
Total residential real estate		3,453		-		-		3,453		479		3,584		-		-		3,584		330

Construction and land development		613		-		-		613		9		-		-		-		-		-
Home equity lines of credit		524		-		-		524		-		205		-		-		205		-
Consumer		-		-		266		266		19		-		-		407		407		20
Leases		-		-		-		-		-		-		-		-		-		-
Credit cards		-		-		-		-		-		-		-		-		-		-
Total collateral dependent loans	$	18,747	$	2,492	$	1,731	$	22,970	$	3,632	$	28,196	$	465	$	866	$	29,527	$	5,594

(in thousands)			30-59 days		60-89 days		90 or more		Total		Total				30-59 days		60-89 days		90 or more		Total Past		Total
September 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	$	1,413,186	$	133	$	1,653	$	208	$	1,994	$	1,415,180	$	1,476,525	$	565	$	-	$	643	$	1,208	$	1,477,733
Commercial real estate - owner occupied		819,078		415		117		117		649		819,727		873,504		156		—		320		476		873,980
Total commercial real estate		2,232,264		548		1,770		325		2,643		2,234,907		2,350,029		721		—		963		1,684		2,351,713

Commercial and industrial - term		749,897		204		409		683		1,296		751,193		786,472		594		30		974		1,598		788,070
Commercial and industrial - term - PPP		17,042		2,343		42		42		2,427		19,469		7,088		—		—		—		—		7,088
Commercial and industrial - lines of credit		417,285		1,639		2		122		1,763		419,048		437,885		418		10		171		599		438,484
Total commercial and industrial		1,184,224		4,186		453		847		5,486		1,189,710		1,231,445		1,012		40		1,145		2,197		1,233,642

Residential real estate - owner occupied		554,406		1,264		436		1,532		3,232		557,638		661,389		1,917		629		935		3,481		664,870
Residential real estate - non-owner occupied		302,408		430		-		98		528		302,936		338,383		92		—		252		344		338,727
Total residential real estate		856,814		1,694		436		1,630		3,760		860,574		999,772		2,009		629		1,187		3,825		1,003,597

Construction and land development		414,589		43		—		—		43		414,632		451,261		63		—		—		63		451,324
Home equity lines of credit		198,993		271		67		154		492		199,485		202,206		129		85		154		368		202,574
Consumer		138,220		302		75		246		623		138,843		138,962		292		37		311		640		139,602
Leases		13,959		—		—		—		—		13,959		13,967		—		—		—		—		13,967
Credit cards		20,731		2		2		32		36		20,767		22,177		4		2		7		13		22,190
Total	$	5,059,794	$	7,046	$	2,803	$	3,234	$	13,083	$	5,072,877	$	5,409,819	$	4,230	$	793	$	3,767	$	8,790	$	5,418,609

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

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

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

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

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

														Revolving
														loans
(in thousands)	Term Loans Amortized Cost Basis by Origination Year													amortized			Term Loans Amortized Cost Basis by Origination Year												Revolving loans amortized
September 30, 2022	2022		2021		2020		2019		2018		Prior			cost basis	Total
December 31, 2022																	2022		2021		2020		2019		2018		Prior		cost basis		Total

Commercial real estate - non-owner occupied:
Risk rating
Pass	$	293,231	$	384,606	$	285,261	$	114,927	$	77,978	$	166,586	$	21,887	$	1,344,476	$	338,460	$	380,612	$	264,833	$	128,407	$	76,359	$	139,095	$	24,875	$	1,352,641
OAEM		-		5,290		2,317		18,793		-		5,464		5,850		37,714		-		2,006		-		3,534		-		5,414		-		10,954
Substandard		-		298		4,926		19,789		-		7,257		100		32,370		1,381		1,012		3,744		19,574		-		233		100		26,044
Substandard non-performing		-		-		-		-		-		620		-		620		-		-		-		-		-		7,707		-		7,707
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial real estate non-owner occupied	$	293,231	$	390,194	$	292,504	$	153,509	$	77,978	$	179,927	$	27,837	$	1,415,180	$	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	$	118,302	$	209,793	$	199,078	$	103,352	$	70,931	$	82,084	$	11,496	$	795,036	$	165,711	$	202,599	$	194,052	$	104,148	$	60,899	$	74,356	$	13,062	$	814,827
OAEM		2,896		1,797		4,571		735		717		101		510		11,327		2,895		1,777		4,540		1,891		676		216		510		12,505
Substandard		-		1,160		-		6,948		1,958		71		-		10,137		-		1,152		-		1,623		1,928		69		-		4,772
Substandard non-performing		1,538		1,213		-		359		-		117		-		3,227		1,533		911		-		-		-		81		-		2,525
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial real estate owner occupied	$	122,736	$	213,963	$	203,649	$	111,394	$	73,606	$	82,373	$	12,006	$	819,727	$	170,139	$	206,439	$	198,592	$	107,662	$	63,503	$	74,722	$	13,572	$	834,629

Commercial and industrial - term:
Risk rating
Pass	$	272,982	$	252,324	$	101,275	$	41,359	$	38,690	$	31,500	$	-	$	738,130	$	357,470	$	210,906	$	90,063	$	39,068	$	29,901	$	27,354	$	-	$	754,762
OAEM		3,968		3,166		-		345		1,809		-		-		9,288		3,835		2,935		-		303		1,426		-		-		8,499
Substandard		185		-		-		1,615		136		365		-		2,301		178		-		-		201		-		341		-		720
Substandard non-performing		464		167		581		101		30		131		-		1,474		539		39		486		101		17		-		-		1,182
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial and industrial - term	$	277,599	$	255,657	$	101,856	$	43,420	$	40,665	$	31,996	$	-	$	751,193	$	362,022	$	213,880	$	90,549	$	39,673	$	31,344	$	27,695	$	-	$	765,163

Commercial and industrial - PPP
Risk rating
Pass	$	-	$	14,836	$	4,591	$	-	$	-	$	-	$	-	$	19,427	$	-	$	14,212	$	4,047	$	-	$	-	$	-	$	-	$	18,259
OAEM		-		-		-		-		-		-		-		-		-		-		313		-		-		-		-		313
Substandard		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Substandard non-performing		-		14		28		-		-		-		-		42		-		-		21		-		-		-		-		21
Doubtful		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-
Total Commercial and industrial - PPP	$	-	$	14,850	$	4,619	$	-	$	-	$	-	$	-	$	19,469	$	-	$	14,212	$	4,381	$	-	$	-	$	-	$	-	$	18,593

	September 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	$	902	$	202	$	—	$	950	$	202	$	—
Commercial & industrial - term		—		—		—		12		12		—
Total TDRs	$	902	$	202	$	—	$	962	$	214	$	—

	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	$	—

(in thousands)	CDI		CLI		CDI		CLI
2022	$	956	$	654
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		-		387		-		304
2033		-		207		-		152
2034		-		28
Total future expense	$	15,914	$	12,833	$	13,442	$	9,196

(dollars in thousands)	September 30, 2022			December 31, 2021			June 30, 2023			December 31, 2022
Outstanding balance at end of period	$	124,567		$	75,466		$	138,347		$	133,342
Weighted average interest rate at end of period		0.64	%		0.04	%		1.72	%		1.64	%

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

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

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

	Fair Value Measurements Using:						Total		Fair Value Measurements Using:						Total
September 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	$	114,426	$	—	$	—	$	114,426	$	116,217	$	—	$	—	$	116,217
Government sponsored enterprise obligations		—		151,299		—		151,299		—		133,575		—		133,575
Mortgage backed securities - government agencies		—		750,589		—		750,589		—		712,712		—		712,712
Obligations of states and political subdivisions		—		127,215		—		127,215		—		126,780		—		126,780
Other		—		5,644		—		5,644		—		3,440		—		3,440

Total available for sale debt securities		114,426		1,034,747		—		1,149,173		116,217		976,507		—		1,092,724

Mortgage loans held for sale		—		5,230		—		5,230		—		7,069		—		7,069
Rate lock loan commitments		—		118		—		118		—		364		—		364
Mandatory forward contracts		—		431		—		431		—		81		—		81
Interest rate swaps		—		11,589		—		11,589
Interest rate swap assets										—		12,628		—		9,717
Total assets	$	114,426	$	1,052,115	$	—	$	1,166,541	$	116,217	$	996,649	$	—	$	1,109,955

Liabilities:
Interest rate swaps	$	—	$	11,600	$	—	$	11,600
Interest rate swap liabilities									$	—	$	9,726	$	—	$	9,726

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

Collateral dependent loans	$	—	$	—	$	13,039	$	13,039	$	377	$	377	$	—	$	—	$	10,380	$	10,380	$	—	$	—
Other real estate owned		—		—		996		996		—		—		—		—		—		—		—		—

													Three months ended						Six month ended
	Three months ended September 30,						Nine months ended September 30,						June 30,						June 30,
(in thousands)	2022			2021			2022			2021			2023			2022			2023			2022
Balance, beginning of period:	$	10,045		$	5,420		$	8,614		$	22,547		$	6,397		$	9,323		$	2,606		$	8,614
Origination of mortgage loans held for sale		31,446			50,111			111,026			169,542			30,709			43,814			55,391			79,643
Loans held for sale acquired		-			-			3,559			3,071			—			—			—			3,559
Proceeds from the sale of mortgage loans held for sale		(36,427	)		(45,920	)		(118,639	)		(187,667	)		(30,567	)		(43,504	)		(51,673	)		(82,275	)
Net gain on sale of mortgage loans held for sale		166			590			670			2,708
Net gain realized on sale of mortgage loans held for sale														530			412			745			504
Balance, end of period	$	5,230		$	10,201		$	5,230		$	10,201		$	7,069		$	10,045		$	7,069		$	10,045

	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 September 30, 2022
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	$	(87,054	)	$	-		$	(283	)	$	(87,337	)	$	(57,316	)	$	-	$	(283	)	$	(57,599	)
Net current period other comprehensive loss		(40,580	)		-			-			(40,580	)		(29,738	)		-		-			(29,738	)
Balance, end of period	$	(127,634	)	$	-		$	(283	)	$	(127,917	)	$	(87,054	)	$	-	$	(283	)	$	(87,337	)

Three months ended September 30, 2021
Balance, beginning of period	$	2,295		$	(58	)	$	(447	)	$	1,790
Net current period other comprehensive income (loss)		(4,453	)		32			-			(4,421	)
Balance, end of period	$	(2,158	)	$	(26	)	$	(447	)	$	(2,631	)

Assumptions	2022			2021			2023			2022
Dividend yield		2.38	%		2.52	%		2.24	%		2.38	%
Expected volatility		25.42	%		25.19	%		27.20	%		25.43	%
Risk free interest rate		1.98	%		1.22	%		3.84	%		1.98	%
Expected life (in years)		7.1			7.1			7.1			7.1

	Three months ended September 30, 2022															Three months ended June 30, 2023
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total			Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	94		$	346		$	80		$	717		$	1,237		$	105		$	394		$	133		$	403		$	1,035
Deferred tax benefit		(20	)		(72	)		(17	)		(150	)		(259	)		(22	)		(82	)		(28	)		(85	)		(217	)
Total net expense	$	74		$	274		$	63		$	567		$	978		$	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 September 30, 2021															Six months ended June 30, 2023
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total			Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	88		$	312		$	79		$	686		$	1,165		$	205		$	806		$	265		$	911		$	2,187
Deferred tax benefit		(18	)		(66	)		(17	)		(144	)		(245	)		(43	)		(169	)		(56	)		(192	)		(460	)
Total net expense	$	70		$	246		$	62		$	542		$	920		$	162		$	637		$	209		$	719		$	1,727

	Nine months ended September 30, 2022
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	282		$	1,028		$	252		$	1,723		$	3,285
Deferred tax benefit		(59	)		(216	)		(53	)		(362	)		(690	)
Total net expense	$	223		$	812		$	199		$	1,361		$	2,595

	Nine months ended September 30, 2021
(in thousands)	Stock Appreciation Rights			Restricted Stock Awards			Restricted Stock Units			Performance Stock Units			Total

Expense	$	264		$	978		$	233		$	1,953		$	3,428
Deferred tax benefit		(55	)		(206	)		(49	)		(411	)		(721	)
Total net expense	$	209		$	772		$	184		$	1,542		$	2,707

	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

	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	$	95	$	346	$	79	$	590	$	1,110
2023		311		1,192		2		1,555		3,060
Remainder of 2023											$	197	$	798	$	250	$	803	$	2,048
2024		205		969		—		855		2,029		307		1,389		3		908		2,607
2025		146		737		—		—		883		248		1,167		—		485		1,900
2026		88		421		—		—		509		190		863		—		—		1,053
2027		10		47		—		—		57		111		507		—		—		618
2028												12		42		—		—		54
Total estimated expense	$	855	$	3,712	$	81	$	3,000	$	7,648	$	1,065	$	4,766	$	253	$	2,196	$	8,280

													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 and life data)	*SARs*			*price*			*price*		*value(1)*		*value*		*life (in years)*		*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		—		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

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		—		11.82				34		47.17	-	74.92		55.45		—			12.07
Exercised		(63	)	15.24	-	36.65		16.93		2,658		2.79				(114	)	15.24	-	40.00		21.55		5,258			3.63
Forfeited		—			—			—		—		—				—			—			—		—			—
Outstanding, September 30, 2022		485		$15.24	-	$54.91	$	34.65	$	16,171	$	5.85		5.2
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		348		$15.24	-	$50.71	$	30.92	$	12,882	$	4.99		4.2		348		$19.37	-	$54.91	$	32.97	$	9,029		$	5.36		4.0
Unvested		137		35.90	-	54.91		44.06		3,228		8.02		3.2		116		35.90	-	74.92		49.80		(513	)		10.70		3.6
Outstanding, September 30, 2022		485		$15.24	-	$54.91	$	34.65	$	16,171	$	5.85		5.2
Outstanding, June 30, 2023																464		$19.37	-	$74.92	$	37.17	$	8,516		$	6.69		5.0

Vested in the current year		44		$35.90	-	$50.71	$	39.36	$	1,246	$	6.73				41		$35.90	-	$54.91	$	41.65	$	153		$	7.61

				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		35			58.47		35			58.47
Restrictions lapsed and shares released		(31	)		40.42		(32	)		40.39
Shares forfeited		(6	)		46.91		(6	)		47.49
Unvested at September 30, 2022		97		$	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