# Stock Yards Bancorp, Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Stock Yards Bancorp, Inc.](/companies/sybt.md) (CIK 835324)
- Form: 10-Q
- Filed: 2023-05-05
- Accepted by EDGAR: May 5, 2023, 12:05 ET
- Period: 2023-03-31
- Accession: 0001437749-23-012736
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/835324/000143774923012736/sybt20230331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/835324/000143774923012736/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $16.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $8.1m | us-gaap:IncomeTaxExpenseBenefit |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.99 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $1.00 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 29,365,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $9.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $1.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $8.6m | us-gaap:PaymentsOfDividends |
| Total assets | at 2023-03-31 | $7.67bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $6.87bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $26.4m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2023-03-31 | $794.4m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 124,885 characters.

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 markets through 73 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 $2,650,000, 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 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. 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 year ended December 31, 2022. This acquired line of business was not 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, 2022. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp’s future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.

### Cautionary Statement Regarding Forward-Looking Statements

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

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;
- 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;
- 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, 2022.

### Recent Developments within the Banking Industry

On March 10, 2023, Silicon Valley Bank, an FDIC-insured institution based in Santa Clara, California, was closed by the California Department of Financial Protection & Innovation and the FDIC was named Receiver. As of December 31, 2022, Silicon Valley Bank had approximately $209 billion in total assets and $175 billion in total deposits, making this closure one of the largest bank failures in U.S. history and the first FDIC-insured institution failure since 2020.

On March 12, 2023, Signature Bank, an FDIC-insured institution based in New York, New York, was closed by the New York State Department of Financial Services and the FDIC was named Receiver. As of December 31, 2022, Signature Bank had total assets of approximately $110 billion in total assets and $83 billion in total deposits, marking another large bank failure and the second FDIC-insured institution failure of 2023.

On May 1, 2023, First Republic Bank, an FDIC-insured institution based on San Francisco, California, was closed by the California Department of Financial Protection & Innovation and the FDIC was named Receiver. To protect depositors, the FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank, National Association, Columbus, Ohio, to assume all of the deposits and substantially all of the assets of First Republic Bank, which was the result of a highly competitive bidding process.

In each instance of failure noted above, the FDIC was named Receiver upon closure of the respective institutions. The FDIC announced that all depositors affected by the Silicon Valley Bank and Signature Bank failures would be made whole and that no losses associated with the resolution of either institution would be borne by taxpayers. As the First Republic Bank failure resulted in a purchase and assumption agreement with another FDIC-insured institution, depositors of First Republic Bank remain covered by FDIC insurance. However, while losses associated with the resolution of First Republic Bank will not be borne by taxpayers, they will be applied against the Deposit Insurance Fund similar to any losses associated with the resolutions of Silicon Valley Bank and Signature Bank.

As required by law, any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks. While the impact to Bancorp of a special assessment is yet to be determined, such action by the FDIC could result in increased FDIC insurance expense for the Company, which is a component of non-interest expenses on the condensed consolidated financial statements. Bank failures, such as those noted above, can lead to market-wide liquidity problems and potentially affect our business, financial condition and results of operations. For more information regarding such risks, and others inherent in Bancorp’s business, see Part I Item 1A “*Risk Factors”* of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.

In response to the potential liquidity issues created by the bank failures noted above, and to restore confidence in the 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 March 31, 2023, Bancorp has made no request for an advance under this program.

Bancorp has not been negatively impacted by the recent bank failures. We remain well-capitalized and 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 developments surrounding the recent bank failures noted above, as well as trends within the financial markets generally, to ensure we remain prepared to address potential liquidity issues that may arise.

### 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, the latter of which was disposed of effective December 31, 2022. 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. As a result of Bancorp’s disposition of its partial interest in LFA, which resulted in a pre-tax loss of $870,000 recorded in other non-interest expense on the consolidated income statements for the fourth quarter and year ended December 31, 2022, goodwill totaling $8.5 million was written off, bringing total goodwill related to the CB acquisition to $58 million as of December 31, 2022.

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.

### Issued but Not Yet Effective Accounting Standards Updates

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

### Business Segment Overview

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

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

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

**Overview – Operating Results (FTE)**

The following table presents an overview of Bancorp’s financial performance for the three months ended March 31, 2023 and 2022:

*(dollars in thousands, except per share data)*

| Three months ended March 31, | 2023 | 2022 | Variance $/bp% |  |
| --- | ---: | ---: | ---: | ---: |
| Net income available to stockholders | $29,048 | $7,906 | $21,142 | 267% |
| Diluted earnings per share | $0.99 | $0.29 | $0.70 | 241% |
| ROA | 1.55% | 0.47% | 108 bps | 230% |
| ROE | 15.15% | 4.55% | 1,060 bps | 233% |

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

### General highlights for the three months ended March 31, 2023 compared to March 31, 2022:

- Net Income totaled $29.0 million for the three months ended March 31, 2023, resulting in diluted EPS of $0.99, compared to net income of $7.9 million for the three months ended March 31, 2022, which resulted in diluted EPS of $0.29. The first quarter of 2022 was significantly impacted by the completion of the CB acquisition.
- Strong results for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 were driven by significant organic and acquisition-related growth over the past 12 months, 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.
- 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 months ended March 31, 2022 represented the only a partial month of activity associated with the CB acquisition, but included $19.5 million in merger expenses and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on results for the period.
- Total loans (excluding PPP) increased $456 million, or 10%, compared to March 31, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $949 million, or 22%, for the three months ended March 31, 2023 compared to the same period of the prior year as a result of the prior year acquisition in addition to the previously mentioned organic growth.
- Bancorp’s ACL on loans increased $9 million, or 13%, compared to March 31, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $2.3 million for the three months ended March 31, 2023, compared to $2.7 million for the three months ended March 31, 2022. Expense for the three months ended March 31, 2023 was driven largely by a $1.4 million specific reserve recorded for a large C&I relationship in addition to annual CECL model updates and qualitative factor adjustments. Expense for the prior year period was driven by $4.4 million of expense recorded in relation to the acquired loan portfolio of CB, which was partially offset by a net credit to expense of $1.8 million stemming from generally improving CECL model factors.
- Deposit balances declined $388 million, or 6%, compared to March 31, 2022, as rising rates and inflationary pressures have enticed depositors to seek higher-yielding alternatives. In addition, the deposit decline experienced for the first quarter of 2023 in particular was also driven in large part by typical seasonal public funds runoff. While we continue to see consistent loyalty and confidence from our customer base, deposit competition and a higher interest rate environment has created NIM compression and we anticipate it will continue to do so throughout most of 2023.
- As a result of deposit pricing pressure/competition, Bancorp has experienced a shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits. This shift has significantly increased Bancorp’s cost of deposits and overall cost of funds.
- Net interest income (FTE) totaled $63.2 million for the three months ended March 31, 2023, representing an increase of $14.3 million, or 29%, compared to the three months ended March 31, 2022.
- NIM increased 48 bps, or 15%, to 3.59% for the three months ended March 31, 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.
- Non-interest income increased $2.8 million, or 15%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, highlighted by quarterly records for WM&T fees and treasury management fees, in addition to strong debit and credit card income. The prior year period included only a partial month of activity stemming from the acquisition of CB, as the acquisition was completed on March 7, 2022.
- Non-interest expenses declined $11 million, or 20%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The prior year period included $19.5 million of merger expenses associated with the CB acquisition. Non-interest expenses in general remain well-controlled and consistent with expansion, strong performance and continued investment in technology.
- As of March 31, 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 March 31, 2022. Total stockholders’ equity to total assets was 10.36% as of March 31, 2023, compared to 10.14% and 9.75% at December 31, 2022 and March 31, 2022, respectively. Tangible common equity to tangible assets was 7.74% at March 31, 2023, compared to 7.44% and 6.94% at December 31, 2022 and March 31, 2022, respectively.

### 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)*

| As of and for the three months ended March 31, | 2023 | 2022 | Variance $/bp% |  |
| --- | ---: | ---: | --- | ---: |
| Net interest income | $63,072 | $48,760 | $14,312 | 29% |
| Net interest income (FTE)\* | 63,245 | 48,944 | 14,301 | 29% |
| Net interest spread (FTE)\* | 3.13% | 3.06% | 7 bps | 2% |
| Net interest margin (FTE)\* | 3.59% | 3.11% | 48 bps | 15% |
| Average interest earning assets | $7,154,286 | $6,389,882 | $764,404 | 12% |
| Average interest bearing liabilities | 4,807,907 | 4,257,843 | 550,064 | 13% |
| Five year Treasury note rate at period end | 3.60% | 2.42% | 118 bps | 49% |
| Average five year Treasury note rate | 3.80% | 1.83% | 197 bps | 108% |
| Prime rate at period end | 8.00% | 3.50% | 450 bps | 129% |
| Average Prime rate | 7.69% | 3.29% | 440 bps | 134% |
| One month term SOFR at period end | 4.80% | 0.30% | 450 bps | 1500% |
| Average one month term SOFR | 4.61% | 0.16% | 445 bps | 2781% |
| One month term LIBOR at period end | 4.86% | 0.45% | 441 bps | 980% |
| Average one month term LIBOR | 4.62% | 0.23% | 439 bps | 1909% |

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

NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled $5 million at both March 31, 2023 and December 31, 2022. 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 March 31, 2023, Bancorp’s loan portfolio consisted of approximately 71% fixed and 29% 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 indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change.

Prime rate, the five year Treasury note rate, one month term LIBOR 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 took aggressive interest rate action in 2022, increasing the 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 quarter of 2023, the FRB continued raising rates, albeit at a slower pace, increasing the FFTR 50 bps to a range of 4.75% - 5.00% via two separate 25 bps rate hikes. As a result, Prime was 8.00% as of March 31, 2023.

The current economic outlook remains volatile, regularly changing as new economic data becomes available and the FRB’s fight against inflation continues. While indications in recent quarters had suggested continued interest rate increases from the FRB through 2023 with rates maintaining their higher levels through the end of the year, current projections now anticipate multiple rate decreases from the FRB beginning in the second half of 2023. As a potential economic slowdown and recession looms, Bancorp expects ongoing pricing pressure/competition for both loans and deposits, changing levels of liquidity within the banking system and a severely inverted yield curve will continue to place pressure on NIM in 2023.

**Net Interest Income (FTE) – Three months ended March 31, 2023 compared to March 31, 2022**

Net interest spread (FTE) and NIM (FTE) were 3.13% and 3.59%, for the three months ended March 31, 2023, compared to 3.06% and 3.11% for the same period in 2022, respectively. NIM during the three months ended March 31, 2023 was significantly impacted by the following:

- The rapidly rising interest rate environment that has evolved from the sustained, pandemic-driven lows experienced 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 4.75% - 5.00%, and Prime at 8.00%, as of March 31, 2023, as a result of aggressive interest rate action from the FRB over the past 12 months.
- Substantial balance sheet expansion stemming from both acquisition-related activity and organic growth, which resulted in total average earning asset growth of $764 million, or 12%, and average interest-bearing liability growth of $550 million, or 13%, for the three months ended March 31, 2023 compared to the same period of 2022.
- Intense pricing pressure/competition for deposits has driven a significant increase in the cost of funds, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity has increased.

Net interest income (FTE) increased $14.3 million, or 29%, for the three months ended March 31, 2023 compared to the same period of 2022, largely as a result of acquisition-related activity, but also driven in part by significant organic loan growth, substantial investment in the investment securities portfolio and the benefits of a rising interest rate environment.

Total average interest earning assets increased $764 million, or 12%, to $7.15 billion for the three months ended March 31, 2023, as compared to the same period of 2022, with the average rate earned on total interest earning assets climbing 133 bps to 4.51%.

- Average total loan balances increased $859 million, or 20%, for the three months ended March 31, 2023, compared to the same period of 2022. Average non-PPP loan growth of $949 million, or 22%, was driven by acquisition-related expansion and strong organic growth, which was partially offset by a $90 million, or 86%, decline in average PPP loan balances resulting from continued forgiveness activity.
- Average investment securities grew $433 million, or 33%, for the three months ended March 31, 2023 compared to the same period of 2022, attributed to a combination of strategically deploying excess liquidity through further investment in 2022 and acquisition-related activity. There were no investment security purchases made during the three month ended March 31, 2023.
- Average FFS and interest bearing due from bank balances decreased $530 million, or 79%, for the three months ended March 31, 2023, as loan growth, investment in the securities portfolio and deposit run-off led to lower levels of liquidity as compared to the same period of the prior year.

Total interest income (FTE) increased $29.5 million, or 59%, to $79.6 million for the three months ended March 31, 2023, as compared to the same period of 2022.

- Interest and fee income (FTE) on loans increased $24.0 million, or 54%, to $68.9 million for the three months ended March 31, 2023, compared to the same period of 2022, driven by both organic and acquisition-related growth in the non-PPP portfolio and the rising rate environment, which more than offset a $2.7 million, or 95%, decline in PPP-related income. The yield on the overall loan portfolio increased 117 bps to 5.33% for the three months ended March 31, 2023, compared to 4.16% for the same period of the prior year, while the yield on the non-PPP loan portfolio increased 135 bps compared to the prior year period, driven by the rising rate environment.
- Significant growth in average investment securities led to a $4.0 million increase in interest income (FTE) on the portfolio for the three months ended March 31, 2023 compared to the same period of 2022, driving a 56 bps, or 37%, increase in the corresponding yield on the portfolio. Substantial deployment of excess liquidity in 2022 benefitted the investment portfolio, as the yields earned on those purchases improved dramatically as rates began to rise last year.
- Interest income on FFS and interest bearing due from bank balances increased $1.3 million for the three months ended March 31, 2023, as rising short-term interest rates more than offset a $530 million decline in related average balances. The yield on these assets increased 438 bps to 4.55% for the three months ended March 31, 2023 compared to the same period of 2022, stemming from the dramatic increase in the FFTR over the past 12 months.

Total average interest bearing liabilities increased $550 million, or 13%, to $4.81 billion for the three-month period ended March 31, 2023 compared with the same period in 2022, with the total average cost increasing 126 bps to 1.38%.

- Average interest bearing deposits increased $331 million, or 8%, for the three months ended March 31, 2023 compared to the same period in 2022, with interest-bearing demand deposits accounting for $163 million, or 49%, 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. While rising rates and inflationary pressures have driven declines in period-end balances for the past several quarters, the decrease experienced for the first quarter of 2023 was attributed in large part to typical seasonal public funds runoff.
- Consistent with the acquisition-related average interest bearing deposit growth noted above, average SSUAR balances increased $31 million, or 34%, for the three months ended March 31, 2023 compared to the same period of 2022.
- Average FHLB advances totaled $163 million for the three months ended March 31, 2023. Bancorp 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. Bancorp also utilized overnight borrowings with the FHLB during the three months ended March 31, 2023 based on liquidity needs. No FHLB borrowings were utilized during the same period of the prior year.
- Average subordinated debentures totaled $26 million for the three months ended March 31, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.

Total interest expense increased $15.2 million for the three months ended March 31, 2023 compared to the same period of 2022, driven by acquisition-related average balance growth, deposit rate increases, increased borrowing activity and debt assumed through last year’s CB acquisition. As a result, the cost of interest bearing liabilities increased 126 bps to 1.38% for the three months ended March 31, 2023 compared to the same period of 2022.

- Total interest bearing deposit expense increased $12.3 million as a result of acquisition-related growth and the aforementioned deposit rate increases, resulting in a 111 bps increase in the cost of interest bearing deposits. While the overall deposit mix continues to change, the Company also continues to see consistent loyalty and confidence from our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to drive further deposit rate/cost increases in the coming months.
- SSUAR interest expense increased $439,000 for the three months ended March 31, 2023 compared to the same period of the prior year, consistent with average balance growth and rate increases.
- Interest expense of $1.7 million was recorded in relation to FHLB borrowings for the three months ended March 31, 2023, driven by the increased borrowings activity previously noted. No FHLB borrowings were utilized for the three months ended March 31, 2023.
- Interest expense totaling $529,000 was recorded for the three months ended March 31, 2023, as a result of the subordinated debentures added through the prior year acquisition, approximately $100,000 of which stems from purchase accounting-related mark-to-market amortization.

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

*(dollars in thousands)*

| Interest earning assets: | Three months ended March 31, 2023 Average Balance | Interest | Average Rate | 2022 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold and interest bearing due from banks | $140,831 | $1,581 | 4.55% | $671,263 | $282 | 0.17% |
| Mortgage loans held for sale | 6,460 | 41 | 2.57 | 8,629 | 24 | 1.13 |
| Investment securities: |  |  |  |  |  |  |
| Taxable | 1,666,035 | 8,446 | 2.06 | 1,278,160 | 4,680 | 1.48 |
| Tax-exempt | 88,585 | 520 | 2.38 | 43,391 | 252 | 2.36 |
| Total securities | 1,754,620 | 8,966 | 2.07 | 1,321,551 | 4,932 | 1.51 |
| Federal Home Loan Bank stock | 15,496 | 165 | 4.32 | 10,509 | 54 | 2.08 |
| SBA Paycheck Protection Program (PPP) loans | 14,075 | 139 | 4.01 | 103,850 | 2,821 | 11.02 |
| Non-PPP loans | 5,222,804 | 68,748 | 5.34 | 4,274,080 | 42,055 | 3.99 |
| Total loans | 5,236,879 | 68,887 | 5.33 | 4,377,930 | 44,876 | 4.16 |
| **Total interest earning assets** | 7,154,286 | 79,640 | 4.51 | 6,389,882 | 50,168 | 3.18 |
| Less allowance for credit losses on loans | 75,459 |  |  | 56,035 |  |  |
| **Non-interest earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | 78,961 |  |  | 91,235 |  |  |
| Premises and equipment, net | 104,369 |  |  | 86,056 |  |  |
| Bank owned life insurance | 84,906 |  |  | 53,177 |  |  |
| Goodwill | 194,074 |  |  | 153,803 |  |  |
| Accrued interest receivable and other | 38,302 |  |  | 154,155 |  |  |
| **Total assets** | $7,579,439 |  |  | $6,872,273 |  |  |
| **Interest bearing liabilities:** |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest bearing demand | $2,299,789 | $6,750 | 1.19% | $2,136,188 | $649 | 0.12% |
| Savings | 524,911 | 340 | 0.26 | 467,299 | 55 | 0.05 |
| Money market | 1,116,975 | 4,162 | 1.51 | 1,083,961 | 190 | 0.07 |
| Time | 538,476 | 2,247 | 1.69 | 461,268 | 277 | 0.24 |
| Total interest bearing deposits | 4,480,151 | 13,499 | 1.22 | 4,148,716 | 1,171 | 0.11 |
| Securities sold under agreements to repurchase | 122,049 | 456 | 1.52 | 91,082 | 17 | 0.08 |
| Federal funds purchased | 16,243 | 177 | 4.42 | 9,993 | 3 | 0.12 |
| Federal Home Loan Bank advances | 163,056 | 1,734 | 4.31 | — | — | 0.00 |
| Subordinated debentures | 26,408 | 529 | 8.12 | 8,052 | 33 | 1.66 |
| **Total interest bearing liabilities** | 4,807,907 | 16,395 | 1.38 | 4,257,843 | 1,224 | 0.12 |
| **Non-interest bearing liabilities:** |  |  |  |  |  |  |
| Non-interest bearing demand deposits | 1,878,307 |  |  | 1,817,462 |  |  |
| Accrued interest payable and other | 115,670 |  |  | 93,039 |  |  |
| **Total liabilities** | 6,801,884 |  |  | 6,168,344 |  |  |
| Stockholders’ equity | 777,555 |  |  | 703,929 |  |  |
| **Total liabilities and stockholders' equity** | $7,579,439 |  |  | $6,872,273 |  |  |
| **Net interest income** |  | $63,245 |  |  | $48,944 |  |
| **Net interest spread** |  |  | 3.13% |  |  | 3.06% |
| **Net interest margin** |  |  | 3.59% |  |  | 3.11% |

65

### 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 period ended March 31, 2023 and 2022, 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 $173,000 and $184,000 for the three-month periods ended March 31, 2023 and 2022, respectively.*
- *Interest income includes loan fees of $1.9 million ($139,000 associated with the PPP) and $3.8 million ($2.8 million associated with the PPP) for the three-month periods ended March 31, 2023 and 2022, respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and accretion related to purchased loans.*
- *Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.*
- *NIM represents net interest income on a FTE basis as a percentage of total average interest earning assets.*
- *Net interest spread (FTE) is the difference between taxable equivalent rates earned on total interest earning assets less the cost of interest bearing liabilities.*
- *The fair market value adjustment on investment securities resulting from ASC 320, “Investments – Debt and Equity Securities” is included as a component of other assets.*

### Asset/Liability Management and Interest Rate Risk

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

### Interest Rate Simulation Sensitivity Analysis

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

The results of the interest rate sensitivity analysis performed as of March 31, 2023 were derived from the conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates and are based on historical data. Management uses different betas in the rising and falling rate scenarios in an effort to best simulate expected earnings trends. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 60% for the rising rate scenarios and 30% for falling rate scenarios, respectively. While the beta’s experienced since rates began to rise in the first quarter of 2022 were significantly below the 60% beta used in the model, the Company anticipates the future rising rate scenario betas to return to the historic averages. The 30% beta used in the falling rate scenario is the result of management’s expectations of deposit rate decreases given the rate changes experienced since the first quarter of 2022.

Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100, 200 and 300 bps would have a negative effect on net interest income, as would decreases in interest rates of 100 and 200 bps. These results depict a slightly liability sensitive interest rate risk 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. The decrease in net interest income in the 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 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 March 31, 2023 | -6.39% | -2.95% | -1.93% | -3.87% | -5.83% |

Bancorp’s loan portfolio is currently composed of approximately 72% fixed and 28% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 65%) or one month LIBOR/SOFR (approximately 35%).

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 is no longer used to issue new loans in the U.S. It is expected to be replaced primarily by the SOFR, which many experts consider 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 associated with the expected discontinuance or unavailability of LIBOR. To date, Bancorp has not experienced any operational issues associated with reference rate reform, nor do we anticipate any in the future.

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

As of March 31, 2023, the Company had approximately $312 million in loans and interest rate derivative contracts of $108 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 as a replacement for LIBOR. The Company had $236 million in loans that were indexed to SOFR at March 31, 2023.

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

In addition, Bancorp periodically uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled “*Derivative Financial Instruments.”* For these derivatives, the effective portion of gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.

### Provision for Credit Losses

Provision for credit losses on loans at March 31, 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”* in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 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:

*(dollars in thousands)*

|  | Three months ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Beginning balance | $73,531 | $53,898 |
| Acquisition - PCD loans (goodwill adjustment) | - | 9,950 |
| Adjusted beginning balance | 73,531 | 63,848 |
| Provision for credit losses on loans | 2,250 | (1,750) |
| Provision for credit losses on loans - acquired loans | - | 4,429 |
| Total provision for credit losses on loans | 2,250 | 2,679 |
| Total charge-offs | (370) | (409) |
| Total recoveries | 262 | 949 |
| Net loan (charge-offs) recoveries | (108) | 540 |
| Ending balance | $75,673 | $67,067 |
| Average total loans | $5,236,879 | $4,377,930 |
| Provision for credit losses on loans to average total loans (1) | 0.04% | 0.06% |
| Net loan (charge-offs) recoveries to average total loans (1) | 0.00% | 0.01% |
| ACL for loans to total loans | 1.44% | 1.38% |
| ACL for loans to total loans (excluding PPP) (2) | 1.45% | 1.40% |
| ACL for loans to average total loans | 1.45% | 1.53% |

#### (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 $76 million as of March 31, 2023 compared to $67 million at March 31, 2022, representing an ACL to total loans ratio of 1.44% and 1.38% for those periods, respectively. The ACL to loans (excluding PPP loans) was 1.45% at March 31, 2023 compared to 1.40% at March 31, 2022. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $10 million at March 31, 2023 and $71 million at March 31, 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 $2.3 million was recorded to provision for credit losses on loans for the three month period ended March 31, 2023. While credit quality remains strong, provision expense for the first quarter of 2023 was driven by the establishment of a $1.4 million specific reserve for a large C&I relationship, annual CECL model updates and qualitative factor adjustments. Further, net charge off activity for the three months ended March 31, 2023 totaled $108,000, serving to reduce the ACL for loans.

Negative provision (excluding acquisition-related activity) of $1.8 million was recorded for the three month ended March 31, 2022 due to improvement in the unemployment forecast, updates to Bancorp’s CECL modeling, net recoveries and strong historic credit metrics. Offsetting the negative provision for the three months ended March 31, 2022 was credit loss expense recorded for the loan portfolio acquired from CB, which totaled $4.4 million.

In addition to the provision activity noted above for the 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, with the corresponding offset recorded to goodwill (as opposed to provision expense).

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2022 and March 31, 2023. Provision for credit loss expense for off balance sheet credit exposures of $375,000 was recorded for the three months ended March 31, 2023, driven mainly by a decline in C&I utilization. The ACL for off balance sheet credit exposures was $4.9 million as of March 31, 2023.

Negative provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $400,000 was recorded for the three months ended March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage, consistent with generally improving model factors and improvement in line of credit utilization. Offsetting this negative provision was a $500,000 increase in the ACL for off balance sheet credit exposures associated with the CB acquisition, with the offset recorded to goodwill (as opposed to provision expense). The ACL for off balance sheet credit exposures stood at $3.6 million as of March 31, 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 March 31, 2023 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

### Non-interest Income

*(dollars in thousands)*

|  | Three months ended March 31, 2023 | 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Wealth management and trust services | $9,527 | $8,243 | $1,284 | 16% |
| Deposit service charges | 2,149 | 1,863 | 286 | 15 |
| Debit and credit card income | 4,482 | 4,119 | 363 | 9 |
| Treasury management fees | 2,318 | 1,904 | 414 | 22 |
| Mortgage banking income | 1,038 | 1,003 | 35 | 3 |
| Net investment product sales commissions and fees | 754 | 607 | 147 | 24 |
| Bank owned life insurance | 549 | 266 | 283 | 106 |
| Gain (loss) on sale of premises and equipment | (2) | - | (2) | 100 |
| Other | 1,232 | 1,198 | 34 | 3 |
| Total non-interest income | $22,047 | $19,203 | $2,844 | 15% |

Total non-interest income increased $2.8 million, or 15%, for the three period ended March 31, 2023 compared to the same period of 2022, respectively. Non-interest income comprised 25.9% of total revenues, defined as net interest income and non-interest income, for the three month period ended March 31, 2023 compared to 28.3% for the same period of 2022. WM&T services comprised 43.2% of total non-interest income for the three month period ended March 31, 2023 compared to 42.9% and for the same period of 2022. While strong organic growth has been experienced across most non-interest income revenue streams over the past 12 months, acquisition-related activity accounts for a large portion of the increase for the three months ended March 31, 2023 compared to the same period of 2022, as the first quarter of the prior year included just a partial month 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 $1.3 million, or 16%, for the three month period ended March 31, 2023, as compared with the same period of 2022, consistent with acquisition-related activity, organic new business development and positive returns for the quarter from both the fixed income and equity markets.

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 $1.2 million, or 15%, for the three month period ended March 31, 2023, as compared with the same period of 2022. The increase was driven by both acquisition-related activity and organic business development in addition to the previously mentioned positive returns from fixed income and equity markets for the three months ended March 31, 2023. Further, the prior year period included just a partial month of activity stemming from the CB acquisition.

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 increased $54,000 for the three month period ended March 31, 2023, as compared with the same period of 2022, which was driven mainly by higher estate fees earned.

AUM, stated at market value, totaled $6.76 billion at March 31, 2023 compared with $7.59 billion at March 31, 2022 and $6.59 billion at December 31, 2022. The decrease in AUM between March 31, 2022 and March 31, 2023 is attributed to the significant declines in both fixed income and equity markets experienced during 2022, which negatively impacted the market value of AUM last year and was only partially countered by equity market appreciation during the first quarter of 2023.

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

#### Detail of WM&T Service Income by Account Type:

*(in thousands)*

|  | Three months ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Investment advisory | $3,681 | $3,415 |
| Personal trust | 3,362 | 2,378 |
| Personal investment retirement | 1,680 | 1,639 |
| Company retirement | 363 | 442 |
| Foundation and endowment | 283 | 261 |
| Custody and safekeeping | 86 | 64 |
| Insurance services | 5 | 40 |
| Other | 67 | 4 |
| Total WM&T services income | $9,527 | $8,243 |

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 and revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. 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 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. WM&T fees earned are not performance-based nor are they based on investment strategy or transactions. Bancorp also earns management fees on in-house investments funds acquired from CB.

#### Assets Under Management by Account Type:

AUM (not included on balance sheet) increased from $6.59 billion at December 31, 2022 to $6.76 billion at March 31, 2023 as follows:

*(in thousands)*

|  | March 31, 2023 Managed | Non-managed (1) | Total | December 31, 2022 Managed | Non-managed (1) | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment advisory | $2,344,991 | $59,924 | $2,404,915 | $2,249,017 | $63,691 | $2,312,708 |
| Personal trust | 1,770,079 | 502,150 | 2,272,229 | 1,744,522 | 474,373 | 2,218,895 |
| Personal investment retirement | 785,503 | 27,431 | 812,934 | 756,126 | 27,065 | 783,191 |
| Company retirement | 54,548 | 538,692 | 593,240 | 52,891 | 524,568 | 577,459 |
| Foundation and endowment | 444,309 | 8,492 | 452,801 | 428,018 | 8,219 | 436,237 |
| Subtotal | $5,399,430 | $1,136,689 | $6,536,119 | $5,230,574 | $1,097,916 | $6,328,490 |
| Custody and safekeeping | — | 227,755 | 227,755 | — | 256,791 | 256,791 |
| Total | $5,399,430 | $1,364,444 | $6,763,874 | $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 March 31, 2023 and December 31, 2022, approximately 80% and 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.

#### Managed Trust Assets under Management by Class of Investment:

*(in thousands)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Interest bearing deposits | $221,554 | $185,080 |
| Treasury and government agency obligations | 229,410 | 176,917 |
| State, county and municipal obligations | 212,497 | 201,038 |
| Money market mutual funds | 88,514 | 108,751 |
| Equity mutual funds | 1,156,985 | 1,125,540 |
| Other mutual funds - fixed, balanced and municipal | 575,360 | 583,713 |
| Other notes and bonds | 205,867 | 209,178 |
| Common and preferred stocks | 2,238,183 | 2,180,390 |
| Common trust funds and collective investment funds | 114,888 | 114,458 |
| Real estate mortgages | 770 | 774 |
| Real estate | 40,741 | 57,297 |
| Other miscellaneous assets (1) | 314,661 | 287,438 |
| Total managed assets | $5,399,430 | $5,230,574 |

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

Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations and consist of approximately 63% in equities and 37% in fixed income securities as of both March 31, 2023 and December 31, 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 $286,000, or 15%, for the three month period ended March 31, 2023, as compared with the same period of 2022, mainly as a result of the contribution associated with acquisition-related activity over the past 12 months. Outside of acquisition-related growth, 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 $363,000 or 9%, for the three month period ended March 31, 2023, as compared with the same period of 2022, as a result of increased transaction volume and continued expansion of the customer bases, both organically and through acquisition-related activity. Total debit card income increased $197,000, or 7%, and total credit card income increased $166,000, or 14%, for the three period ended March 31, 2023, compared the same period of the prior year. Bancorp expects this revenue stream will continue to grow with the expansion of the customer base.

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 $414,000, or 22%, for the three period ended March 31, 2023, as compared with the same period of 2022, driven by increased transaction volume, 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 12 months. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.

Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA, FHA and GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue increased $35,000, or 3%, for the three month period ended March 31, 2023, as compared with the same period of 2022. This increase was driven by market value appreciation of loans held for sale and lower long-term rates, which have helped improve volume compared to recent quarters. Further, mortgage banking income has benefitted from the addition of the mortgage loan servicing portfolio added through the CB acquisition.

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 $147,000, or 24%, for the three month period ended March 31, 2023, as compared with the same period of 2022, driven by acquisition-related growth, 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 $85 million as of March 31, 2023. BOLI income increased $283,000 for the three month period ending March 31, 2023 compared to the same period of the prior year, which was attributed mainly to the additional investment made in 2022, as previously noted.

During the first quarter of 2023, Bancorp completed the sale of certain acquired properties that overlapped with existing locations, recording a net loss of $2,000 as a result. No such activity was recorded for the three months ended March 31, 2022.

Other non-interest income increased $34,000, or 3%, for the three month period ended March 31, 2023 compared with the same period of 2022. The increase was driven largely by positive returns within the COLI portfolio and the contribution of the insurance captive, which served to offset a large decline in miscellaneous fee income and the benefit provided by Bancorp’s partial interest in LFA for the three months ended March 31, 2022, the latter of which was disposed of effective December 31, 2022.

### Non-interest Expenses

*(dollars in thousands)*

|  | Three months ended March 31, 2023 | 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Compensation | $21,896 | $17,969 | $3,927 | 22% |
| Employee benefits | 5,053 | 4,539 | 514 | 11 |
| Net occupancy and equipment | 3,899 | 3,025 | 874 | 29 |
| Technology and communication | 4,251 | 3,419 | 832 | 24 |
| Debit and credit card processing | 1,419 | 1,337 | 82 | 6 |
| Marketing and business development | 1,095 | 772 | 323 | 42 |
| Postage, printing and supplies | 874 | 733 | 141 | 19 |
| Legal and professional | 797 | 650 | 147 | 23 |
| FDIC insurance | 1,135 | 645 | 490 | 76 |
| Amortization of investments in tax credit partnerships | 323 | 88 | 235 | 267 |
| Capital and deposit based taxes | 639 | 518 | 121 | 23 |
| Merger expenses | - | 19,500 | (19,500) | (100) |
| Intangible amortization | 1,180 | 713 | 467 | 65 |
| Other | 2,753 | 2,389 | 364 | 15 |
| Total non-interest expenses | $45,314 | $56,297 | $(10,983) | (20)% |

Total non-interest expenses decreased $11.0 million, or 20%, for the three month period ended March 31, 2023 compared to the same period of 2022, the variance stemming largely from merger expenses associated with completion of the CB acquisition during the first quarter of 2022. Compensation and employee benefits comprised 59.5% of Bancorp’s total non-interest expenses for the three month period ended March 31, 2023, compared to 40.0% for the same period of 2022. Excluding merger expenses, compensation and employee benefits comprised 61.2% for the three month period ended March 31, 2022. As previously noted, the three months ended March 31, 2022 included only a partial month of activity associated with the CB acquisition.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased $3.9 million, or 22%, for the three month period ended March 31, 2023, as compared with the same period of 2022. The increases were attributed to growth in full time equivalent employees, annual merit-based salary increases and the impact of the first quarter of 2022 experiencing only a partial month of acquisition-related activity. Net full time equivalent employees totaled 1,044 at March 31, 2023 compared to 1,040 at December 31, 2022 and 997 at March 31, 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 $514,000, or 11%, for the three month period ended March 31, 2023, as compared with the same period of 2022, driven primarily by 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 $874,000, or 29%, the three month period ended March 31, 2023, as compared with the same period of 2022, driven by the acquisition of CB. 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. At March 31, 2023, Bancorp’s branch network consisted of 73 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.

Technology and communication expenses include computer software 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 $832,000, or 24%, for the three month period ended March 31, 2023 compared to the same period of 2022, consistent with acquisition-related activity, customer expansion and core system upgrades.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses typically fluctuate consistent with transaction volumes. Debit and credit card processing expense increased $82,000, or 6%, for the three month period ending March 31, 2023 compared to the same period of last year. The increase correlates in part with 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.

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 $323,000, or 42%, for the three month period ending March 31, 2023, as compared to the same period of 2022. The increase corresponds with strategic decisions to advertise and promote in Bancorp’s new markets, as well as the general expansion of Bancorp’s existing and prospective customer base and a post-pandemic return to in-person client meeting/entertainment.

Postage, printing and supplies expense increased $141,000, or 19%, for the three month period ended March 31, 2023 compared to the same period of 2022, consistent with Bancorp’s expansion over the past 12 months.

Legal and professional fees increased $147,000, or 23%, for the three month period ended March 31, 2023 compared to the same period of last year, attributed to various consulting engagements, 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 $490,000, or 76%, for the three month period ended March 31, 2023, as compared to the same period of 2022, consistent with organic and acquisition-related balance sheet growth for which the insurance is assessed on and an increased assessment rate. While not reflected in the increased expense experienced for the three months ended March 31, 2023, Bancorp anticipates future increases in FDIC insurance expense associated with potential assessments related to recent bank failures.

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 $235,000, for the three month period ending March 31, 2023 compared to the same period of last year, driven by the addition of several recently closed tax credit projects.

Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, increased $121,000, or 23%, for the three month period ended March 31, 2023 compared to the same period of 2022, attributed to 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. While no merger expenses were recorded for the three months ended March 31, 2023, $19.5 million of merger expenses were recorded in the first quarter of 2022 in relation to the CB acquisition.

Intangible amortization expense consists of amortization associated with the CDI of acquired deposit portfolios, as well as an intangible related to customer list of the WM&T business line added through the CB acquisition. The intangibles are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization for the three period ended March 31, 2023 was $1.2 million compared to $713,000 for the same period of the prior year, the significant increase stemming from the CB acquisition.

Other non-interest expenses increased $364,000, or 15%, for the three month period ended March 31, 2023, as compared to the same period of 2022. The most notable drivers of the increases were increased card reward expense, higher fraud and theft-related expenses and other ancillary expenses tied to Bancorp’s significant growth over the past 12 months.

Bancorp’s efficiency ratio (FTE) for the three month period ended March 31, 2023 was 53.13% compared to 82.61% for the three months ended March 31, 2022, the latter period reflecting one-time merger-related expenses attributed to the CB acquisition, which were all recorded in the first quarter of 2022. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of premises and equipment and the disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and merger-related expenses. Bancorp’s adjusted efficiency ratio was 52.75% for the three month period ended March 31, 2023 compared to 53.87% for three month period ended March 31, 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:

*(dollars in thousands)*

|  | Three months ended March 31, 2023 | 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Income before income tax expense | $37,180 | $9,387 | $27,793 | 296% |
| Income tax expense | 8,132 | 1,445 | 6,687 | 463 |
| Effective tax rate | 21.9% | 15.4% | 650 bps | 42% |

Fluctuations in the 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 1.1% for the three months ended March 31, 2023 compared to a reduction of 5.9% for the same period of 2022, consistent with exercise activity.
- 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 decreased the ETR 0.7% for the three months ended March 31, 2023, compared to an increase of 1.8% 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 months ended March 31, 2023 and 2022 was increased by 0.4% and reduced by 1.7%, respectively, by tax credit activity.
- Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.5% for the three months ended March 31, 2023 compared to a reduction of 1.6% 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 acquisition-related activity.
- Non-deductible merger expenses recorded during the three months ended March 31, 2022 served to increase the ETR 1.1%. No such activity was recorded for the three months ended March 31, 2023.
- Bancorp’s insurance captive provides insurance against certain risks for which insurance may not currently be available or economically feasible to Bancorp and SYB, as well as a group of third-party insurance captives. The tax advantages of the Captive, including the tax-deductible nature of premiums paid to the Captive as well as the tax-exemption for premiums received by the Captive, serve to reduce income tax expense. Related activity reduced the ETR 0.3% for the three months ended March 31, 2023, compared to reduction of 0.9% for the same period of 2022.

77

**Financial Condition – March 31, 2023 Compared to December 31, 2022**

### Overview

Total assets increased $171 million, or 2%, to $7.67 billion at March 31, 2023 from $7.50 billion at December 31, 2022. Total cash and cash equivalents increased $150 million, or 89%, as the result of increased FHLB borrowing activity and total loans increased $37 million, or 1%, as loan growth slowed compared to the record organic loan growth experienced in 2022. Partially offsetting this growth was a $17 million, or 1%, decline in total investment securities stemming from a combination of scheduled maturity and pay down activity within the total portfolio in addition to market value appreciation on the AFS portfolio. Further, other assets declined $10 million, or 7%, driven largely by interest rate-related changes to the valuations of deferred tax assets and swap assets.

Total liabilities increased $137 million, or 2%, to $6.87 billion at March 31, 2023 from $6.74 billion at December 31, 2022. While total FHLB borrowings increased $225 million compared to December 31, 2022, a $34 million, or 1%, decline in total deposits and a $29 million, or 22%, decline in SSUAR partially offset this growth, as rising interest rates and inflationary pressures encouraged depositors to seek higher-yielding alternatives. Further, a $31 million, or 25%, decrease in other liabilities was driven by a reduction in various year-end accruals.

Stockholders’ equity increased $34 million, or 4%, to $794 million at March 31, 2023 from $760 million at December 31, 2022. Net income of $29.1 million and a $14.6 million increase in AOCI associated with changes in the interest rate environment and their corresponding impact on the valuation of the AFS debt securities portfolio served to grow stockholder’s equity for the period, offset only partially by $8.5 million of dividends declared during the first quarter.

### Cash and Cash Equivalents

Cash and cash equivalents increased $150 million, or 89%, ending at $317 million at March 31, 2023 compared to $167 million at December 31, 2022, which was driven largely by FHLB borrowing activity. In addition to intermittently 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 as a way of securing term funding at a more attractive rate. For more information on this interest rate swap, see the footnote titled “*Derivative Financial Instruments.”*

Cash and cash equivalent growth was partially offset by loan growth of $37 million and reductions of $34 million and $29 million in total deposits and SSUAR, respectively, during the three months ended March 31, 2023. While growth in period end balances was experienced in comparison to December 31, 2022, average cash and cash equivalents declined $543 million, or 71%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The record levels of liquidity held near the beginning of 2022 have retreated over the past 12 months, driven by the record organic loan growth recorded in 2022 and the deposit run-off experienced over the past few quarters.

### Investment Securities

Investment securities decreased $17 million, or 1%, to $1.60 billion at March 31, 2023 compared to $1.62 billion at December 31, 2022, as scheduled maturity and pay down activity within the total portfolio was partially offset by market appreciation within the AFS portfolio stemming from changes in the interest rate environment.

No additional investment in the securities portfolio was made during the three months ended March 31, 2023, as Bancorp elected to maintain higher levels of liquidity amidst loan growth and deposit contraction during the period.

### Loans

Total loans increased $37 million, or 1%, from December 31, 2022 to March 31, 2023. Excluding the PPP portfolio, loans grew $46 million, or 1%, over the same period. Loan growth for the three months ended March 31, 2023 was concentrated in the CRE and residential real estate segments, which outpaced a decline in the C&I segment, and to a lesser extent, the C&D and consumer segments. While loan production and loan pipelines remain steady, elevated payoff activity stemming largely from business sales and lower LOC utilization combined to mute otherwise solid loan growth for the first quarter of 2023.

After hitting a pandemic-era low of 36.5% at March 31, 2021, total line of credit utilization has improved significantly, reaching 41.1% at March 31, 2023, led by C&I utilization, which strengthened from 23.9% to 30.5% over the same period, respectively. However, line of credit usage has remained below pre-pandemic levels, as customers continue to utilize strong liquidity positions. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability over the past several quarters, but utilization of the new lines has been relatively slow.

PPP loans of $10 million were outstanding at March 31, 2023. Bancorp has $210,000 in net unrecognized fees related to the PPP as of March 31, 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 insignificant, as the balance of the overall portfolio has shrunk.

Bancorp’s credit exposure is diversified with secured and unsecured loans to individuals and businesses. 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 March 31, 2023 and December 31, 2022, the total participated portion of loans of this nature totaled $5 million.

The following table presents the maturity distribution and rate sensitivity of the total loan portfolio as of March 31, 2023:

| March 31, 2023 (in thousands) | Maturity Within one year | After one but within five years | After five but within fifteen years | Ater fifteen years | Total | % of Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Fixed rate | $190,472 | $1,522,410 | $1,210,107 | $826,300 | $3,749,289 | 72% |
| Variable rate | 543,650 | 535,916 | 370,690 | 43,559 | 1,493,815 | 28% |
| Total loans | $734,122 | $2,058,326 | $1,580,797 | $869,859 | $5,243,104 | 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)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Non-accrual loans | $17,389 | $14,242 |
| Troubled debt restructurings | - | - |
| Loans past due 90 days or more and still accruing | 894 | 892 |
| Total non-performing loans | 18,283 | 15,134 |
| Other real estate owned | 677 | 677 |
| Total non-performing assets | $18,960 | $15,811 |
| Non-performing loans to total loans | 0.35% | 0.29% |
| Non-performing assets to total assets | 0.25% | 0.21% |
| ACL for loans to total non-performing loans | 414% | 486% |

79

As of March 31, 2023, non-accrual loans totaled $17 million compared to $14 million at December 31, 2022. The increase in total non-accrual loans between December 31, 2022 and March 31, 2023 stemmed mainly from one large C&I relationship being placed on non-accrual status.

Non-performing assets as of March 31, 2023 consisted of 124 loans, ranging in individual amounts up to $6.6 million, and OREO. At March 31, 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 $12 million and $17 million at March 31, 2023 and December 31, 2022. The decrease between December 31, 2022 and March 31, 2023 was driven mainly by a large CRE relationship that became current and another large CRE relationship that paid off during the quarter. Delinquent loans to total loans were 0.22% and 0.32% at March 31, 2023 and December 31, 2022, respectively.

### 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.

Bancorp’s ACL for loans was $76 million as of March 31, 2023 compared to $74 million as of December 31, 2022. Provision expense for credit losses on loans of $2.3 million was recorded for the three months ended March 31, 2023, driven mainly by a $1.4 million specific reserve recorded for a large C&I relationship, annual CECL model updates and qualitative factor adjustments. The projected unemployment rate forecast, which is the primary loss driver within the model, improved between December 31, 2022 and March 31, 2023, serving to benefit expense slightly. Net charge-off activity was minimal for the three months ended March 31, 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:

*(dollars in thousands)*

|  | March 31, 2023 Allocated Allowance | % of Total ACL on loans | ACL for loans to Total Loans (1) | December 31, 2022 Allocated Allowance | % of Total ACL on loans | ACL for loans to Total Loans (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate - non-owner occupied | $21,669 | 29% | 1.52% | $22,641 | 31% | 1.62% |
| Commercial real estate - owner occupied | 11,429 | 15% | 1.34% | 10,827 | 15% | 1.30% |
| Total commercial real estate | 33,098 | 44% | 1.46% | 33,468 | 46% | 1.50% |
| Commercial and industrial - term (1) | 13,982 | 18% | 1.82% | 12,991 | 17% | 1.70% |
| Commercial and industrial - lines of credit | 6,041 | 8% | 1.39% | 6,389 | 9% | 1.37% |
| Total commercial and industrial | 20,023 | 26% | 1.66% | 19,380 | 26% | 1.57% |
| Residential real estate - owner occupied | 8,205 | 11% | 1.32% | 6,717 | 9% | 1.14% |
| Residential real estate - non-owner occupied | 4,144 | 5% | 1.28% | 3,597 | 5% | 1.15% |
| Total residential real estate | 12,349 | 16% | 1.31% | 10,314 | 14% | 1.14% |
| Construction and land development | 6,735 | 9% | 1.53% | 7,186 | 10% | 1.61% |
| Home equity lines of credit | 1,618 | 2% | 0.81% | 1,613 | 2% | 0.80% |
| Consumer | 1,186 | 2% | 0.87% | 1,158 | 2% | 0.83% |
| Leases | 199 | 0% | 1.51% | 201 | 0% | 1.51% |
| Credit cards | 465 | 1% | 2.14% | 211 | 0% | 1.03% |
| Total | $75,673 | 100% | 1.45% | $73,531 | 100% | 1.42% |

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

The table below details net charge-offs to average loans outstanding by category of loan for the three month periods ended March 31, 2023 and 2022, respectively.

| Three months ended March 31, (dollars in thousands) | 2023 Net (charge offs)/ recoveries | Average Loans | Net (charge offs)/ recoveries to average loans | 2022 Net (charge offs)/ recoveries | Average Loans | Net (charge offs)/ recoveries to average loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate - non-owner occupied | $19 | $1,412,841 | 0.00% | $12 | $1,225,492 | 0.00% |
| Commercial real estate - owner occupied | - | 844,692 | 0.00% | 21 | 719,340 | 0.00% |
| Total commercial real estate | 19 | 2,257,533 | 0.00% | 33 | 1,944,832 | 0.00% |
| Commercial and industrial - term | - | 769,171 | 0.00% | 606 | 614,645 | 0.10% |
| Commercial and industrial - term - PPP | - | 14,075 | 0.00% | - | 103,850 | 0.00% |
| Commercial and industrial - lines of credit | 16 | 451,845 | 0.00% | (36) | 381,158 | -0.01% |
| Total commercial and industrial | 16 | 1,235,091 | 0.00% | 570 | 1,099,653 | 0.05% |
| Residential real estate - owner occupied | 10 | 607,401 | 0.00% | (3) | 433,481 | 0.00% |
| Residential real estate - non-owner occupied | 1 | 319,137 | 0.00% | 3 | 280,701 | 0.00% |
| Total residential real estate | 11 | 926,538 | 0.00% | - | 714,182 | 0.00% |
| Construction and land development | - | 443,729 | 0.00% | - | 313,441 | 0.00% |
| Home equity lines of credit | (12) | 201,304 | -0.01% | - | 157,794 | 0.00% |
| Consumer | (60) | 138,263 | -0.04% | (63) | 116,278 | -0.05% |
| Leases | - | 13,296 | 0.00% | - | 13,388 | 0.00% |
| Credit cards | (82) | 21,125 | -0.39% | - | 18,362 | 0.00% |
| Total | $(108) | $5,236,879 | 0.00% | $540 | $4,377,930 | 0.01% |

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2022 and March 31, 2023. Provision for credit loss expense for off balance sheet credit exposures of $375,000 was recorded for the three months ended March 31, 2023, driven mainly by changes in the mix of line of credit utilization. ACL for off balance sheet credit exposures stood at $4.9 million as of March 31, 2023 compared to $4.5 million as of December 31, 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 March 31, 2023. 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 markets.

Premises held for sale totaling $3 million was recorded on Bancorp’s consolidated balance sheets as of March 31, 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 March 31, 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, management finalized the fair values of the acquired assets and assumed liabilities associated with the CB acquisition in advance of the 12-month post-acquisition date, as allowed by GAAP.

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 March 31, 2023 and December 31, 2022, Bancorp’s CDI assets totaled $14.2 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 March 31, 2023 and December 31, 2022, Bancorp’s CLI assets were $9.6 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 decreased $10 million, or 7%, to $125 million between December 31, 2022 March 31, 2023. Other liabilities decreased $31 million, or 25%, to $94 million over the same period.

The decrease in other assets stems mainly from changes in the interest rate environment and the corresponding impact on Bancorp’s DTAs and swap assets, which declined $7 million and $2 million, respectively, between December 31, 2022 and March 31, 2023. As of March 31, 2023, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.

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

### Deposits

Total deposits decreased $34 million, or 1%, from December 31, 2022 to March 31, 2023, as a $105 million decline in non-interest bearing deposits was partially offset by a $71 million increase in interest-bearing deposits, most notably time 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, the decrease in deposits experienced during the first quarter 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 throughout 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 1.22% for the three months ended March 31, 2023 compared to 0.11% for the same period of the prior year, with the cost of total deposits (including non-interest deposits) rising to 0.86% from 0.08% for the same periods. Total average deposit balances experienced an $881 million increase for the three months ended March 31, 2023 compared to the same period of 2022, as deposits totaling $1.12 billion were assumed as a result of the CB acquisition during the first quarter of the prior year.

### Securities Sold Under Agreements to Repurchase

SSUARs decreased $29 million, or 22%, between December 31, 2022 and March 31, 2023, driven largely in tandem with the seasonal decrease in deposit balances previously noted. 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 March 31, 2023 and December 31, 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.

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 Bancorp’s control.

### Federal Funds Purchased

FFP and other short-term borrowing balances increased $6 million, or 68%, between December 31, 2022 and March 31, 2023. At March 31, 2023, FFP related mainly to excess liquidity held by downstream correspondent bank customers of Bancorp.

### Subordinated 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 March 31, 2023, subordinated notes added through the CB acquisition totaled $26 million.

### FHLB Advances

FHLB advances outstanding at March 31, 2023 totaled $275 million. These borrowings consisted of a $175 million cash management advance with an overnight maturity utilized for short-term liquidity purposes and a $100 million three-month rolling advance related to a five-year interest rate swap (cash flow hedge) that was entered into during the quarter in an effort to secure longer-term funding at a more attractive rate. For more information related to the interest rate swap noted above, see the footnote titled, “*Derivative Financial Instruments.”*

### Liquidity

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

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

Bancorp’s most liquid assets are comprised of cash and due from banks, FFS and AFS debt securities. FFS and interest bearing deposits totaled $229 million and $85 million at March 31, 2023 and December 31, 2022, respectively. The increase experienced for the first three months of 2023 is attributed to mainly to the increased in FHLB borrowings. 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 $1.13 billion and $1.14 billion at March 31, 2023 and December 31, 2022, respectively. The decrease in AFS debt security portfolio for the first three months of 2023 is attributed to scheduled maturities and normal pay down activity within the portfolio, which was partially offset by market value appreciation during the period. The investment portfolio (HTM and AFS) includes total cash flows on amortizing debt securities of approximately $294 million (based on assumed prepayment speeds as of March 31, 2023) expected over the next 12 months, including $100 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 March 31, 2023, total investment securities pledged for these purposes comprised 48% of the debt securities portfolio, leaving approximately $838 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 March 31, 2023, such deposits totaled $5.59 billion and represented 88% of Bancorp’s total deposits, as compared with $5.60 billion, or 88% of total deposits at December 31, 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, given the intense, industry-wide deposit pricing pressure that is currently being experienced, deposits may generally be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.

As of March 31, 2023 and December 31, 2022, Bancorp held brokered deposits totaling $2.3 million and $599,000, respectively, the majority of which is attributed to deposits added through acquisition-related activity in 2022 and 2021.

Included in total deposit balances at March 31, 2023 are $622 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, 2022, public funds deposits totaled $692 million, the decrease experienced during the first three months of 2023 is attributed to 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 March 31, 2023 and December 31, 2022, available credit from the FHLB totaled $1.15 billion and $1.36 billion, respectively. Bancorp also had unsecured FFP lines with correspondent banks totaling $80 million at both March 31, 2023 and December 31, 2022, respectively.

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

Bancorp’s principal source of cash is dividends paid to it as the sole shareholder of the Bank. As discussed in the Footnote titled “*Commitments and Contingent Liabilities,”* as of January 1st of any year, the Bank may pay dividends in an amount equal to the Bank’s net income of the prior two years less any dividends paid for the same two years. At March 31, 2023, the Bank could pay an amount equal to $93 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 $11 million, or 1%, as of March 31, 2023 compared to December 31, 2022. Total average line of credit utilization declined to 41.1% as of March 31, 2023 compared to 42.3% at December 31, 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 30.5% at March 31, 2023 compared to 33.1% at December 31, 2022 and 31.6% at March 31, 2022.

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

The ACL for off balance sheet credit exposures, which is separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, was $4.9 million and $4.5 million as of March 31, 2023 and December 31, 2022, respectively. Provision expense of $375,000 was recorded for the three month period ended March 31, 2023, driven mainly by changes in the mix of line of credit utilization.

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 facilities. Bancorp also has required future payments for a non-qualified defined benefit retirement plan, TPS and the maturity of time deposits.

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

### Capital

At March 31, 2023, stockholders’ equity totaled $794 million, representing an increase of $34 million, or 5%, compared to December 31, 2022. The increase for the three months ended March 31, 2023 was attributed mainly to net income of $29.1 million and a $15 million positive change in AOCI, offset only partially by $9 million of dividends declared and net stock compensation-related activity of $1 million during the first three months of 2023. AOCI consists of net unrealized gains or losses on AFS debt securities and a minimum pension liability, each net of income taxes. The changes in AOCI from December 31, 2022 to March 31, 2023 were the result of changes in the interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. See the “*Consolidated Statement of Changes in Stockholders’ Equity”* for further detail of changes in equity.

Bancorp’s TCE ratio and tangible book value per share, both non-GAAP disclosures, experienced improvement between December 31, 2022 and March 31, 2023, which stemmed largely from recording net income of $29.1 million and a $15 million positive change in AOCI for the three months ended March 31, 2023. TCE was 7.74% at March 31, 2023 compared to 7.44% at December 31, 2021, while tangible book value per share was $19.66 at March 31, 2023 compared to $18.50 at December 31, 2022. See the section titled “*Non-GAAP Financial Measures”* for reconcilement of non-GAAP to GAAP measures.

In May 2021, 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 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 2022, nor the first three months of 2023. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan.

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

Capital ratios as of March 31, 2023 increased compared December 31, 2022, largely as a result of modest risk-weighted asset growth and 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 March 31, 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 March 31, 2023, subordinated notes added through the CB acquisition totaled $26 million.

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 delayed for two years. After two years, the cumulative amount of the transition adjustments 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.

### 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)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Total stockholders' equity - GAAP (a) | $794,368 | $760,432 |
| Less: Goodwill | (194,074) | (194,074) |
| Less: Core deposit and other intangibles | (23,810) | (24,990) |
| Tangible common equity - Non-GAAP (c) | $576,484 | $541,368 |
| Total assets - GAAP (b) | $7,667,648 | $7,496,261 |
| Less: Goodwill | (194,074) | (194,074) |
| Less: Core deposit and other intangibles | (23,810) | (24,990) |
| Tangible assets - Non-GAAP (d) | $7,449,764 | $7,277,197 |
| Total stockholders' equity to total assets - GAAP (a/b) | 10.36% | 10.14% |
| Tangible common equity to tangible assets - Non-GAAP (c/d) | 7.74% | 7.44% |
| Total shares outstanding (e) | 29,324 | 29,259 |
| Book value per share - GAAP (a/e) | $27.09 | $25.99 |
| Tangible common equity per share - Non-GAAP (c/e) | 19.66 | 18.50 |

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

*(dollars in thousands)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Total loans - GAAP (a) | $5,243,104 | $5,205,918 |
| Less: PPP loans | (9,557) | (18,593) |
| Total non-PPP loans - Non-GAAP (b) | $5,233,547 | $5,187,325 |
| ACL for loans (c) | $75,673 | $73,531 |
| Non-performing loans (d) | 18,283 | 15,134 |
| Delinquent loans (e) | 11,666 | 16,863 |
| ACL for loans to total loans - GAAP (c/a) | 1.44% | 1.41% |
| ACL for loans to total loans - Non-GAAP (c/b) | 1.45% | 1.42% |
| Non-performing loans to total loans - GAAP (d/a) | 0.35% | 0.29% |
| Non-performing loans to total loans - Non-GAAP (d/b) | 0.35% | 0.29% |
| Delinquent loans to total loans - GAAP (e/a) | 0.22% | 0.32% |
| Delinquent loans to total loans - Non-GAAP (e/b) | 0.22% | 0.33% |

88

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 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.

*(dollars in thousands)*

|  | Three months ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Total non-interest expenses (a) | $45,314 | $56,297 |
| Less: Non-recurring merger expenses | — | (19,500) |
| Less: Amortization of investments in tax credit partnerships | (323) | (88) |
| Total non-interest expenses - Non-GAAP (c) | $44,991 | $36,709 |
| Total net interest income, FTE | $63,245 | $48,944 |
| Total non-interest income | 22,047 | 19,203 |
| Total revenue - Non-GAAP (b) | 85,292 | 68,147 |
| Less: Gain/loss on sale of premises and equipment | 2 | — |
| Less: Gain/loss on sale of securities | — | — |
| Total adjusted revenue - Non-GAAP (d) | $85,294 | $68,147 |
| Efficiency ratio - Non-GAAP (a/b) | 53.13% | 82.61% |
| Adjusted efficiency ratio - Non-GAAP (c/d) | 52.75% | 53.87% |

89

## Market risk

As filed, 154 characters.

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

## Controls and procedures

As filed, 837 characters.

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.

Filed May 5, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-012736. Last ingested by Listed: Oct 28, 2026, 07:31 ET. No prices; not investment advice.