# Stock Yards Bancorp, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Stock Yards Bancorp, Inc.](/companies/sybt.md) (CIK 835324)
- Form: 10-Q
- Filed: 2024-05-07
- Accepted by EDGAR: May 7, 2024, 11:00 ET
- Period: 2024-03-31
- Accession: 0001437749-24-014968
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/835324/000143774924014968/sybt20240331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/835324/000143774924014968/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $36.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $7.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $25.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.88 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.89 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 29,361,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $17.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $1.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2024-01-01 to 2024-03-31 | $8.9m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $1.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-03-31 | $8.12bn | us-gaap:Assets |
| Total liabilities | at 2024-03-31 | $7.25bn | us-gaap:Liabilities |
| Long-term debt | at 2024-03-31 | $26.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-03-31 | $874.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 101,354 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 subsidiary, Stock Yards Bank & Trust Company (“SYB” or “the Bank”). 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 and the business of SYB are essentially the same. The operations of SYB are fully reflected in the consolidated financial statements of Bancorp. Accordingly, references to “Bancorp” in this document may encompass both the holding company and the Bank. 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 71 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.

As a result of its acquisition of Kentucky Bancshares, Inc. on May 31, 2021, Bancorp became the 100% successor owner of a Nevada-based insurance captive taxed under Section 831(b) of the Internal Revenue Code. On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, “listed transaction,” and possibly disallow the related tax benefits, both prospectively and retroactively, for a period to be determined. While the regulation has not been finalized, it is expected to be finalized in 2024. Bancorp elected not to renew the Captive in August of 2023 and ultimately dissolved the Captive in December of 2023.

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.

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, 2023. 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; and
- other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “*Risk Factors”* of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023.

### 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, 2024 and 2023:

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

| Three months ended March 31, | 2024 | 2023 | Variance $/bp% |  |
| --- | ---: | ---: | ---: | ---: |
| Net income | $25,887 | $29,048 | $(3,161) | -11% |
| Diluted earnings per share | $0.88 | $0.99 | $(0.11) | -11% |
| ROA | 1.28% | 1.55% | (27) bps | -17% |
| ROE | 12.09% | 15.15% | (306) bps | -20% |

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

### General highlights for the three months ended March 31, 2024 compared to March 31, 2023:

- Net income totaled $25.9 million for the three months ended March 31, 2024, resulting in diluted EPS of $0.88, compared to net income of $29.0 million for the three months ended March 31, 2023, which resulted in diluted EPS of $0.99.
- Net interest income totaled $60.1 million for the three months ended March 31, 2024 compared to $63.1 million for the same period of the prior year, representing a $3 million, or 5%, decrease. While interest income experienced a $17.1 million, or 21% increase, over this period associated with the benefits of higher rates, it was outpaced by a $20.1 million increase in interest expense driven by the rising cost of funds.
- As a result of deposit pricing pressure/competition, Bancorp has continued to experience a significant shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits, driving a substantial increase in the overall cost of deposits. Further, continued loan growth and deposit balance fluctuations necessitated more borrowing activity throughout the first quarter of 2024 compared to the same period of the prior year, contributing to the overall increase in interest expense.
- Total loans increased $607 million, or 12%, compared to March 31, 2023, driven by significant organic growth over the past 12 months. Average loans increased $572 million, or 11%, for the three months ended March 31, 2024 compared to the same period of the prior year.
- Bancorp’s ACL on loans increased $5 million, or 7%, compared to March 31, 2023, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $1.2 million for the three months ended March 31, 2024, compared to provision of $2.3 million for the three months ended March 31, 2023.
- Deposit balances climbed $252 million, or 4%, compared to March 31, 2023, stemming mainly from growth in time deposits tied to the success of promotional rate offerings, which have more than offset deposit contraction within the non-interest bearing deposit portfolio.
- Net interest income (FTE) totaled $60.2 million for the three months ended March 31, 2024, representing a decrease of $3.1 million, or 5%, compared to the three months ended March 31, 2023.
- While interest income has benefitted from higher rates and average earning asset growth, it was outpaced by increased interest expense associated with rising funding costs and growth in interest-bearing liabilities.
- NIM decreased 39 bps, or 11%, to 3.20% for the three months ended March 31, 2024, compared to the same period of the prior year.
- Non-interest income increased $1.2 million, or 6%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, attributed largely to record WM&T fees and strong treasury management fees and brokerage income.
- Non-interest expenses increased $3.6 million, or 8%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, driven mainly by higher compensation and employee benefit expenses associated with annual merit-based salary increases, FTE growth and higher health insurance claims activity.
- Bancorp’s efficiency ratio (FTE) for the three months ended March 31, 2024 was 58.68% compared to 53.13% for the three months ended March 31, 2023. The increase in this ratio is tied to both the decline in net interest income associated with rising funding costs and higher non-interest expenses.
- As of March 31, 2024, 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, 2023 and March 31, 2023. Total stockholders’ equity to total assets was 10.77% as of March 31, 2024, compared to 10.50% and 10.36% at December 31, 2023 and March 31, 2023, respectively. Tangible common equity to tangible assets was 8.36% at March 31, 2024, compared to 8.09% and 7.74% at December 31, 2023 and March 31, 2023, 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, | 2024 | 2023 | Variance $/bp% |  |
| --- | ---: | ---: | --- | ---: |
| Net interest income | $60,070 | $63,072 | $(3,002) | -5% |
| Net interest income (FTE)\* | 60,167 | 63,245 | (3,078) | -5% |
| Net interest spread (FTE)\* | 2.49% | 3.13% | (64) bps | -20% |
| Net interest margin (FTE)\* | 3.20% | 3.59% | (39) bps | -11% |
| Average interest earning assets | $7,567,065 | $7,154,286 | $412,779 | 6% |
| Average interest bearing liabilities | 5,535,128 | 4,807,907 | 727,221 | 15% |
| Five year Treasury note rate at period end | 4.21% | 3.60% | 61 bps | 17% |
| Average five year Treasury note rate | 4.12% | 3.80% | 32 bps | 8% |
| Prime rate at period end | 8.50% | 8.00% | 50 bps | 6% |
| Average Prime rate | 8.50% | 7.69% | 81 bps | 11% |
| One month term SOFR at period end | 5.33% | 4.80% | 53 bps | 11% |
| Average one month term SOFR | 5.33% | 4.61% | 72 bps | 16% |

*\*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 $2 million and $4 million at March 31, 2024 and December 31, 2023, respectively. These sold loans are on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, as Bancorp believes it provides a more accurate depiction of loan portfolio performance.

At March 31, 2024, Bancorp’s loan portfolio consisted of approximately 72% fixed and 28% variable rate loans. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year treasury. Bancorp’s variable rate loans are typically indexed to either Prime or SOFR, generally repricing as those rates change. At March 31, 2024, approximately 60% and 40% of Bancorp’s variable rate loan portfolio was indexed to Prime and SOFR, respectively.

Prime rate, the five year Treasury note rate and one month term SOFR are included in the preceding table to provide a general indication of the interest rate environment in which Bancorp has operated during the past 12 months. The FRB increased the FFTR a total of 100 bps in 2023 via four separate 25 bps rate hikes, two of which occurred during the first quarter of 2023. These increases took the FFTR to a range of 5.25% - 5.50%, and Prime to 8.50%, in July of 2023, where each has remained as of March 31, 2024.

The current economic outlook remains volatile, regularly changing as new economic data becomes available and the FRB’s efforts to control inflation continue. Recent projections indicate that the FRB will hold rates at a higher level longer than initially anticipated, with only one rate reduction expected to occur in the late third/early fourth quarter of 2024. While Bancorp believes ongoing pricing pressure/competition for both loans and deposits, changing levels of liquidity and an improving-but-still-inverted yield curve could possibly place pressure on NIM through the first half of 2024, NIM expansion is anticipated during the second half of the year.

**Net Interest Income (FTE) – Three months ended March 31, 2024 compared to March 31, 2023**

Net interest spread (FTE) and NIM (FTE) were 2.49% and 3.20%, for the three months ended March 31, 2024, compared to 3.13% and 3.59% for the same period in 2023, respectively. NIM during the three months ended March 31, 2024 was significantly impacted by the following:

- The rising interest rate environment, which has served to benefit interest-earning assets, but has simultaneously driven NIM compression, as the cost of deposits and other funding sources has risen. While the FFTR has remained at a range of 5.25% - 5.50% since mid-2023, the interest rate yield curve remained inverted over the past 12 months, although it began to flatten/improve during the first quarter of 2024.
- Pricing pressure/competition for deposits, which has driven a significant increase in the cost of funds and shift in Bancorp’s deposit mix, as depositors seek higher yielding deposit alternatives.
- Significant loan growth over the past 12 months, which has positively impacted interest income and interest-earning asset growth, but has also necessitated the use of more expensive funding sources, namely FHLB borrowings.

Net interest income (FTE) decreased $3.1 million, or 5%, for the three months ended March 31, 2024 compared to the same period of 2023, as significant organic loan growth and the benefit of higher rates upon interest earning assets were outpaced by rising funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.

Total average interest earning assets increased $413 million, or 6%, for the three months ended March 31, 2024, as compared to the same period of 2023, attributed to substantial average loan growth that was only partially offset by a decline in average investment securities associated with normal amortization and contractual maturities. However, as a result of a significantly higher interest rate environment, the average rate earned on total interest earning assets climbed 63 bps to 5.14%.

- Average total loan balances increased $572 million, or 11%, for the three months ended March 31, 2024, compared to the same period of 2023, highlighted by growth in the CRE, Residential real estate and C&I categories.
- Average investment securities declined $176 million, or 10%, for the three months ended March 31, 2024 compared to the same period of 2023, the result of normal pay down and maturity activity. Investment in the securities portfolio was minimal over the past 12 months, consistent with funding loan growth and liquidity management.
- Average FFS and interest bearing due from bank balances increased $13 million, or 9%, for the three months ended March 31, 2024, as a result of increased borrowing activity in addition to utilizing the liquidity provided by the amortization and maturity of the investment securities portfolio.

Total interest income (FTE) increased $17.0 million, or 21%, to $96.6 million for the three months ended March 31, 2024, as compared to the same period of 2023.

- Interest and fee income (FTE) on loans increased $17.0 million, or 25%, to $85.9 million for the three months ended March 31, 2024, compared to the same period of 2023, driven by the higher rate environment and significant organic growth. The yield on the overall loan portfolio increased 62 bps to 5.95% for the three months ended March 31, 2024 compared to 5.33% for the same period of the prior year.
- Consistent with the decline in average investment securities, there was a $827,000, or 9%, decrease in interest income (FTE) on the portfolio for the three months ended March 31, 2024 compared to the same period of 2023. The corresponding yield on the portfolio was unchanged compared to the prior year period at 2.07%.
- Interest income on FFS and interest bearing due from bank balances increased $515,000 for the three months ended March 31, 2024, stemming largely from the rise in the FFTR experienced over the past 12 months and to a lesser extent, average balance growth. The yield on these assets increased 92 bps to 5.47% for the three months ended March 31, 2024 compared to the same period of 2023.

Total average interest bearing liabilities increased $727 million, or 15%, to $5.54 billion for the three-month period ended March 31, 2024 compared with the same period in 2023.

- Average interest bearing deposits increased $579 million, or 13%, for the three months ended March 31, 2024 compared to the same period in 2023. Bancorp experienced a $473 million increase in average time deposits and a $134 million increase in average money market deposits as a result of depositors seeking higher-yielding alternatives in the current environment.
- Average FHLB advances increased $111 million for the three months ended March 31, 2024 compared to the same period of the prior year. In 2023, Bancorp entered into a $200 million term advance in conjunction with three separate interest rate swaps in an effort to secure longer-term funding at a more favorable rate in addition to utilizing overnight borrowings on an as-needed basis to fund loan growth and manage deposit fluctuations.
- Average subordinated debentures totaled $27 million for the three months ended March 31, 2024, compared to $26 million for the same period of the prior year, the difference being attributed to the amortization of purchase accounting adjustments.

Total interest expense increased $20.1 million for the three months ended March 31, 2024 compared to the same period of 2023, driven by a significant rise in rates paid on deposits and increased borrowing activity. As a result, the cost of interest bearing liabilities increased 127 bps to 2.65% for the three months ended March 31, 2024 compared to the same period of 2023.

- Total interest bearing deposit expense increased $18.4 million as a result of deposit rate increases, resulting in a 131 bps increase in the cost of interest bearing deposits for the three months ended March 31, 2024 compared to the same period of the prior year. While Bancorp expects pricing pressure/competition stemming from the higher rate environment to continue in the coming months, the pace at which the cost of deposits has risen appears to be moderating.
- Interest expense on FHLB borrowings increased $1.3 million, or 73%, for the three months ended March 31, 2024, as compared to same period of the prior year, driven by both increased borrowing activity and higher costs associated with overnight borrowings.
- Interest expense on subordinated debentures totaling $545,000 was recorded for the three months ended March 31, 2024, approximately $66,000 of which stems from purchase accounting-related mark-to-market amortization. This purchase accounting adjustment became fully amortized during the first quarter of 2024 and as a result, no such amortization will be recorded going forward.

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

*(dollars in thousands)*

| Interest earning assets: | Three months ended March 31, 2024 Average Balance | Interest | Average Rate | 2023 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold and interest bearing due from banks | $153,990 | $2,096 | 5.47% | $140,831 | $1,581 | 4.55% |
| Mortgage loans held for sale | 4,629 | 31 | 2.69 | 6,460 | 41 | 2.57 |
| Investment securities: |  |  |  |  |  |  |
| Taxable | 1,497,641 | 7,657 | 2.06 | 1,666,035 | 8,446 | 2.06 |
| Tax-exempt | 80,760 | 482 | 2.40 | 88,585 | 520 | 2.38 |
| Total securities | 1,578,401 | 8,139 | 2.07 | 1,754,620 | 8,966 | 2.07 |
| Federal Home Loan Bank stock | 21,121 | 468 | 8.91 | 15,496 | 165 | 4.32 |
| Loans | 5,808,924 | 85,908 | 5.95 | 5,236,879 | 68,887 | 5.33 |
| **Total interest earning assets** | 7,567,065 | 96,642 | 5.14 | 7,154,286 | 79,640 | 4.51 |
| Less allowance for credit losses on loans | 82,470 |  |  | 75,459 |  |  |
| **Non-interest earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | 71,275 |  |  | 78,961 |  |  |
| Premises and equipment, net | 108,081 |  |  | 104,369 |  |  |
| Bank owned life insurance | 87,164 |  |  | 84,906 |  |  |
| Goodwill | 194,074 |  |  | 194,074 |  |  |
| Accrued interest receivable and other | 208,175 |  |  | 38,302 |  |  |
| **Total assets** | $8,153,364 |  |  | $7,579,439 |  |  |
| **Interest bearing liabilities:** |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest bearing demand | $2,361,515 | $11,921 | 2.03% | $2,299,789 | $6,750 | 1.19% |
| Savings | 434,411 | 299 | 0.28 | 524,911 | 340 | 0.26 |
| Money market | 1,251,125 | 9,490 | 3.05 | 1,116,975 | 4,162 | 1.51 |
| Time | 1,011,692 | 10,156 | 4.04 | 538,476 | 2,247 | 1.69 |
| Total interest bearing deposits | 5,058,743 | 31,866 | 2.53 | 4,480,151 | 13,499 | 1.22 |
| Securities sold under agreements to repurchase | 164,979 | 931 | 2.27 | 122,049 | 456 | 1.52 |
| Federal funds purchased | 10,161 | 136 | 5.38 | 16,243 | 177 | 4.42 |
| Federal Home Loan Bank advances | 274,451 | 2,997 | 4.39 | 163,056 | 1,734 | 4.31 |
| Subordinated debentures | 26,794 | 545 | 8.18 | 26,408 | 529 | 8.12 |
| **Total interest bearing liabilities** | 5,535,128 | 36,475 | 2.65 | 4,807,907 | 16,395 | 1.38 |
| **Non-interest bearing liabilities:** |  |  |  |  |  |  |
| Non-interest bearing demand deposits | 1,500,602 |  |  | 1,878,307 |  |  |
| Accrued interest payable and other | 256,605 |  |  | 115,670 |  |  |
| **Total liabilities** | 7,292,335 |  |  | 6,801,884 |  |  |
| Stockholders’ equity | 861,029 |  |  | 777,555 |  |  |
| **Total liabilities and stockholders' equity** | $8,153,364 |  |  | $7,579,439 |  |  |
| **Net interest income** |  | $60,167 |  |  | $63,245 |  |
| **Net interest spread** |  |  | 2.49% |  |  | 3.13% |
| **Net interest margin** |  |  | 3.20% |  |  | 3.59% |

59

### 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 accounted for as secured borrowings averaged $4 million and $5 million for the three month periods ended March 31, 2024 and 2023, 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 $97,000 and $173,000 for the three month periods ended March 31, 2024 and 2023, respectively.*
- *Interest income includes loan fees of $1.5 million and $1.9 million for the three month periods ended March 31, 2024 and 2023, respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and net accretion income related to acquired loans. Net accretion income related to acquired loans totaled $819,000 and $1.1 million for the three-month periods ended March 31, 2024 and 2023, respectively.*
- *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, 2024 were derived from conservative assumptions Bancorp uses in its model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates 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 45% for rising rate scenarios and 39% for falling rate scenarios, respectively. The beta used in the falling rate scenario is the result of management’s expectations of deposit rate decreases given the current characteristics of the deposit portfolio. The analysis performed as of March 31, 2024 suggests a slightly asset sensitive interest rate risk profile, which represents a change from the more neutral profile rendered from the prior quarter analysis. This change is the result of update to the assumptions incorporated in the model, the most notable being deposit betas.

Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100 and 200 bps would have a positive effect on net interest income, while decreases in interest rates of 100 and 200 bps would have a negative impact. These results depict an asset sensitive interest rate risk profile. The increase in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing more quickly than deposits and short-term borrowings. Net interest income decreases in the falling rate scenarios because rates on non-maturity deposits cannot be lowered sufficiently to offset the decline in interest income associated with assets that immediately reprice as rates fall.

|  |  |  |  |  |
| --- | ---: | ---: | --- | --- |
|  | **-200** | **-100** | **+100** | **+200** |
|  | **Basis Points** | **Basis Points** | **Basis Points** | **Basis Points** |
| % Change from base net interest income at March 31, 2024 | -2.30% | -1.30% | 1.80% | 3.40% |

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 60%) or SOFR (approximately 40%).

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, 2024 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, 2023 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, 2024 | 2023 |
| --- | ---: | ---: |
| Beginning balance | $79,374 | $73,531 |
| Provision for credit losses on loans | 1,175 | 2,250 |
| Total charge-offs | (262) | (370) |
| Total recoveries | 610 | 262 |
| Net loan (charge-offs) recoveries | 348 | (108) |
| Ending balance | $80,897 | $75,673 |
| Average total loans | $5,808,924 | $5,236,879 |
| Provision for credit losses on loans to average total loans (1) | 0.02% | 0.04% |
| Net loan (charge-offs) recoveries to average total loans (1) | 0.01% | 0.00% |
| ACL for loans to total loans | 1.38% | 1.44% |
| ACL for loans to average total loans | 1.39% | 1.45% |

#### (1) Ratios are not annualized

The ACL for loans totaled $81 million as of March 31, 2024 compared to $76 million at March 31, 2023, representing an ACL to total loans ratio of 1.38% and 1.44% for the respective periods.

Provision expense on loans of $1.2 million was recorded for the three month period ended March 31, 2024, consistent with modest loan growth, annual CECL model methodology updates, a slight improvement in the unemployment forecast and a reduction in specific reserves. Net recoveries of $348,000 were recorded for the three months ended March 31, 2024.

Provision expense on loans of $2.3 million was recorded for the three months ended March 31, 2023, 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.

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, 2023 and March 31, 2024. Provision for credit loss expense for off balance sheet credit exposures of $250,000 was recorded for the three months ended March 31, 2024, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ACL for off balance sheet credit exposures totaled $6.1 million as of March 31, 2024.

Provision for credit loss expense for off balance sheet credit exposures of $375,000 was recorded for the three months ended March 31, 2023. The expense recorded for the first quarter of the prior year was driven largely by a decline in C&I line utilization. The ACL for off balance sheet credit exposures was $4.9 million as of March 31, 2023.

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, 2024 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, 2024 | 2023 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Wealth management and trust services | $10,771 | $9,527 | $1,244 | 13% |
| Deposit service charges | 2,136 | 2,149 | (13) | (1) |
| Debit and credit card income | 4,682 | 4,482 | 200 | 4 |
| Treasury management fees | 2,625 | 2,318 | 307 | 13 |
| Mortgage banking income | 948 | 1,038 | (90) | (9) |
| Net investment product sales commissions and fees | 865 | 754 | 111 | 15 |
| Bank owned life insurance | 588 | 549 | 39 | 7 |
| Loss on sale of premises and equipment | - | (2) | 2 | (100) |
| Other | 656 | 1,232 | (576) | (47) |
| Total non-interest income | $23,271 | $22,047 | $1,224 | 6% |

Total non-interest income increased $1.2 million or 6%, for the three month period ended March 31, 2024 compared to the same period of 2023. Non-interest income comprised 27.9% of total revenues, defined as net interest income and non-interest income, for the three month period ended March 31, 2024 compared to 25.9% for the same period of 2023. WM&T services comprised 46.3% of total non-interest income for the three month period ended March 31, 2024 compared to 43.2% for the same period of 2023.

### WM&T Services:

The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased $1.2 million, or 13%, for the three month period ended March 31, 2024, as compared with the same period of 2023, consistent with strong first quarter equity market appreciation, net new business expansion and higher quarterly fee income.

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 $1.1 million, or 12%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The increase was driven largely by the factors noted in the preceding paragraph.

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 $125,000 for the three month period ended March 31, 2024, as compared with the same period of 2023, which was driven by increased estate fee income.

AUM, stated at market value, totaled $7.50 billion at March 31, 2024 compared with $6.76 billion at March 31, 2023 and $7.16 billion at December 31, 2023. The increase in AUM between March 31, 2023 and March 31, 2024 is attributed to strong equity market appreciation experienced over the past year in addition to net new business expansion.

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, 2024 | 2023 |
| --- | ---: | ---: |
| Investment advisory | $4,312 | $3,681 |
| Personal trust | 3,774 | 3,362 |
| Personal investment retirement | 1,820 | 1,680 |
| Company retirement | 411 | 363 |
| Foundation and endowment | 330 | 283 |
| Custody and safekeeping | 59 | 86 |
| Brokerage and insurance services | 2 | 5 |
| Other | 63 | 67 |
| Total WM&T services income | $10,771 | $9,527 |

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 typically non-recurring in nature. Fee structures are agreed upon at the time of account opening and any subsequent revisions are communicated in writing to the customer. As previously mentioned, 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.

#### AUM by Account Type:

AUM (not included on balance sheet) increased from $7.16 billion at December 31, 2023 to $7.50 billion at March 31, 2024 as follows:

*(in thousands)*

|  | March 31, 2024 Managed | Non-managed (1) | Total | December 31, 2023 Managed | Non-managed (1) | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment advisory | $2,737,196 | $66,192 | $2,803,388 | $2,591,561 | $72,028 | $2,663,589 |
| Personal trust | 1,929,494 | 508,880 | 2,438,374 | 1,922,294 | 459,103 | 2,381,397 |
| Personal investment retirement | 897,809 | 18,118 | 915,927 | 848,800 | 17,854 | 866,654 |
| Company retirement | 55,395 | 574,152 | 629,547 | 57,486 | 510,294 | 567,780 |
| Foundation and endowment | 513,861 | 7,603 | 521,464 | 471,609 | 23,413 | 495,022 |
| Subtotal | $6,133,755 | $1,174,945 | $7,308,700 | $5,891,750 | $1,082,692 | $6,974,442 |
| Custody and safekeeping | — | 187,246 | 187,246 | — | 185,638 | 185,638 |
| Total AUM | $6,133,755 | $1,362,191 | $7,495,946 | $5,891,750 | $1,268,330 | $7,160,080 |

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

As of both March 31, 2024 and December 31, 2023, approximately 82% of AUM were actively managed. Company retirement plan accounts consist primarily of participant-directed assets. The amount of custody and safekeeping accounts are insignificant to WM&T operations.

#### Managed AUM by Class of Investment:

*(in thousands)*

|  | March 31, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Interest bearing deposits | $428,000 | $442,820 |
| Treasury and government agency obligations | 220,181 | 240,848 |
| State, county and municipal obligations | 338,483 | 297,314 |
| Money market mutual funds | 61,059 | 68,617 |
| Equity mutual funds | 1,315,214 | 1,225,210 |
| Other mutual funds - fixed, balanced and municipal | 549,022 | 551,141 |
| Other notes and bonds | 200,984 | 199,146 |
| Common and preferred stocks | 2,630,718 | 2,474,186 |
| Common trust funds and collective investment funds | 85,570 | 84,996 |
| Real estate mortgages | 371 | 373 |
| Real estate | 40,501 | 40,224 |
| Other miscellaneous assets (1) | 263,652 | 266,875 |
| Total managed assets | $6,133,755 | $5,891,750 |

*(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 66% in equities and 34% in fixed income securities as of March 31, 2024, compared to 64% and 36% as of December 31, 2023. 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, decreased $13,000, or 1%, for the three month period ended March 31, 2024, as compared with the same period of 2023. Consistent with the banking industry generally, Bancorp has experienced a 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 $200,000, or 4%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The increase was driven by interchange income expansion and higher transaction volume. Total debit card income increased $18,000, or less than 1%, and total credit card income increased $182,000, or 13%, for the three month period ended March 31, 2024, compared the same period of the prior year. While Bancorp generally expects this revenue stream to grow with continued expansion of the customer base, interchange rate compression and fluctuations in business and consumer spend levels could serve as challenges to future growth.

Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased $307,000, or 13%, for the three month period ended March 31, 2024, as compared with the same period of 2023, driven by organic expansion, increased transaction volume, growing international services and new product sales. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.

Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA, FHA and GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue decreased $90,000, or 9%, for the three month period ended March 31, 2024, as compared with the same period of 2023, the variance from the prior year period being attributed to changing levels of mortgage volume.

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 generally serviced by Bancorp’s WM&T group. Net investment product sales commissions and fees increased $111,000, or 15%, for the three month period ended March 31, 2024, as compared with the same period of 2023 as a result of higher trading volume and equity market appreciation.

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 and serves to offset the cost of various employee benefits. BOLI income increased $39,000, or 7%, for the three month period ending March 31, 2024 compared to the same period of the prior year, which was attributed to general market appreciation within the policy plans over the past year.

No gain/loss activity on the sale of premises and equipment was recorded for the three months ended March 31, 2024. Activity for the three months ended March 31, 2023 was the result of the sale of certain acquired properties that overlapped with existing locations.

Other non-interest income decreased $576,000, or 47%, for the three month period ended March 31, 2024 compared with the same period of 2023. The decrease was driven largely by Bancorp’s decision not to renew the insurance captive in late 2023, which contributed approximately $538,000 of other non-interest income for the three months ended March 31, 2023.

### Non-interest Expenses

*(dollars in thousands)*

|  | Three months ended March 31, 2024 | 2023 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Compensation | $24,221 | $21,896 | $2,325 | 11% |
| Employee benefits | 5,876 | 5,053 | 823 | 16 |
| Net occupancy and equipment | 3,670 | 3,899 | (229) | (6) |
| Technology and communication | 5,069 | 4,251 | 818 | 19 |
| Debit and credit card processing | 1,746 | 1,419 | 327 | 23 |
| Marketing and business development | 1,075 | 1,095 | (20) | (2) |
| Postage, printing and supplies | 926 | 874 | 52 | 6 |
| Legal and professional | 1,115 | 797 | 318 | 40 |
| FDIC insurance | 1,112 | 1,135 | (23) | (2) |
| Amortization of investments in tax credit partnerships | - | 323 | (323) | (100) |
| Capital and deposit based taxes | 630 | 639 | (9) | (1) |
| Intangible amortization | 1,052 | 1,180 | (128) | (11) |
| Other | 2,469 | 2,753 | (284) | (10) |
| Total non-interest expenses | $48,961 | $45,314 | $3,647 | 8% |

Total non-interest expenses increased $3.6 million, or 8%, for the three month period ended March 31, 2024 compared to the same period of 2023. Compensation and employee benefits comprised 61.5% of Bancorp’s total non-interest expenses for the three month period ended March 31, 2024, compared to 59.5% for the same period of 2023.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased $2.3 million, or 11%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The increase was attributed to annual merit-based salary increases and growth in full time equivalent employees. Net full time equivalent employees totaled 1,062 at March 31, 2024 compared to 1,075 at December 31, 2023 and 1,028 at March 31, 2023.

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 $823,000, or 16%, for the three month period ended March 31, 2024, as compared with the same period of 2023, driven by an increase in health insurance claims activity and the overall increase in full time equivalent employees noted above.

Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy expense decreased $229,000, or 6%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The decrease was attributed to the benefit of consolidating WM&T employees from the Louisville market into one centralized location in the fourth quarter of 2023. At March 31, 2024, Bancorp’s branch network consisted of 71 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 $818,000, or 19%, for the three month period ended March 31, 2024 compared to the same period of 2023, consistent with Bancorp’s growth and continued investment in technology, including various software upgrades and cyber-security enhancements.

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 $327,000, or 23%, for the three month period ending March 31, 2024 compared to the same period of last year, driven by increased transaction volume and customer base expansion.

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 decreased $20,000, or 2%, for the three month period ending March 31, 2024, as compared to the same period of 2023.

Postage, printing and supplies expense increased $52,000, or 6%, for the three month period ended March 31, 2024 compared to the same period of 2023, consistent with Bancorp’s expansion over the past 12 months.

Legal and professional fees increased $318,000, or 40%, for the three month period ended March 31, 2024 compared to the same period of last year, driven by increased compliance-related consulting projects associated with Bancorp approaching $10 billion in total assets in addition to higher collections-related expense.

FDIC insurance expense decreased $23,000, or 2%, for the three month period ended March 31, 2024, as compared to the same period of 2023.

Effective January 1, 2024, Bancorp adopted ASU 2023-02 and began booking tax credit amortization expense for all historical and low income tax credit projects as a component of income tax expense via the proportional amortization method. Such expense had previously been recorded as a component of non-interest expenses. As such, no tax credit amortization expense was recorded as non-interest expense for the three months ended March 31, 2024. Expense of $323,000 was recorded in relation to amortization of tax credit investments for the three months ended March 31, 2023.

Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, decreased $9,000, or 1%, for the three month period ended March 31, 2024 compared to the same period of 2023. This expense is based on gross revenues appropriated to the state of Ohio (the only state Bancorp operates in with a capital-based deposit tax).

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 a past acquisition. The intangibles are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization expense decreased $128,000, or 11%, for the three months ended March 31, 2024. The decrease was attributed to the accelerated depreciation method for which intangible assets are amortized.

Other non-interest expenses decreased $284,000, or 10%, for the three month period ended March 31, 2024, as compared to the same period of 2023. This decrease was driven largely by Bancorp’s decision not to renew the insurance captive in late 2023. The decrease in expense attributed to the dissolution of the insurance captive was partially offset by higher card reward expense and other ancillary expenses tied to Bancorp’s growth over the past 12 months.

### Income Tax Expense

A comparison of income tax expense and ETR follows:

*(dollars in thousands)*

|  | Three months ended March 31, 2024 | 2023 | $/bp Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Income before income tax expense | $32,955 | $37,180 | $(4,225) | (11)% |
| Income tax expense | 7,068 | 8,132 | (1,064) | (13) |
| Effective tax rate | 21.5% | 21.9% | (40) bps | (2) |

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 in addition to the levels of PSU and RSA vesting. The ETR was increased by 0.3% for the three months ended March 31, 2024 compared to a reduction of 1.1% for the same period of 2023, consistent with exercise and vesting activity.
- The cash surrender value of life insurance policies can vary widely from period to period, driven largely by market changes. 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 by 1.0% and 0.7% for the three months ended March 31, 2024 and 2023, respectively.
- 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. Effective January 1, 2024, Bancorp adopted ASU 2023-02 and began booking tax credit amortization expense for all tax credit projects as a component of income tax expense via the proportional amortization method. The cumulative impact of the adoption of ASU 2023-02 and tax credit amortization for the three months ended March 31, 2024 served to reduce the ETR 0.7%. The ETR was increased by 0.4% by tax credit activity for the three months ended March 31, 2023.
- Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.5% for both the three months ended March 31, 2024 and 2023, respectively.
- Activity related to the Captive, which previously provided tax advantages associated with the tax-deductible/exempt nature of insurance premiums paid to/received by the Captive, reduced the ETR by 0.3% for the three months ended March 31, 2023. Bancorp elected not to renew the Captive during the third quarter of 2023 and subsequently dissolved it as of December 31, 2023. No tax benefit associated with the Captive will be experienced going forward.

**Financial Condition – March 31, 2024 Compared to December 31, 2023**

### Overview

Total assets decreased $47 million, or less than 1%, to $8.12 billion at March 31, 2024 from $8.17 billion at December 31, 2023. Largely offsetting factors drove the modest decline in total assets for the first three months of 2023, as cash and cash equivalents declined $106 million, or 40%, and total investment securities declined $92 million, or 6%, outpaced loan growth of $79 million, or 1%, and a $60 million, or 21%, increase in Other assets.

Total liabilities decreased $64 million, or 1%, to $7.25 billion at March 31, 2024 from $7.31 billion at December 31, 2023. The decrease was attributed mainly to a $62 million, or 1%, decline in total deposits.

Stockholders’ equity increased $17 million, or 2%, to $875 million at March 31, 2024 from $858 million at December 31, 2023. Net income of $25.9 million was offset by $8.8 million of dividends declared during the first quarter. A $2.5 million increase in retained earnings was recorded in relation to the adoption of ASU 2023-02 effective January 1, 2024, but was largely offset with a $2.3 million decrease in AOCI associated with changes in the interest rate environment and the corresponding impact on the valuation of the AFS debt securities portfolio and cash flow hedging derivatives.

### Cash and Cash Equivalents

Cash and cash equivalents decreased $106 million, or 40%, ending at $160 million at March 31, 2024 compared to $266 million at December 31, 2023, which was mainly the result of both loan funding activity and deposit contraction experienced during the first three months of 2023.

### Investment Securities

The primary purpose of the investment securities portfolio is to provide another source of interest income, as well as a tool for liquidity management. In managing the composition of the balance sheet, Bancorp seeks a balance between earnings sources, credit and liquidity considerations.

Investment securities decreased $92 million, or 6%, to $1.38 billion at March 31, 2024 compared to $1.47 billion at December 31, 2023, driven by scheduled maturity and pay down activity within the portfolio, and to a much smaller extent, a decline in the market value of the AFS investment portfolio specifically. There were no investment security purchases during the first quarter as Bancorp has prioritized liquidity amidst continued loan growth and deposit portfolio fluctuations.

### FHLB Stock

FHLB stock holdings increased $8 million to $24 million at March 31, 2024 compared to $16 million at December 31, 2023. The increase was driven by FHLB borrowing activity during the three months of 2024, as FHLB members are required to hold certain levels of FHLB stock in relation to the amount of their borrowings. While period end FHLB borrowing balances were unchanged between March 31, 2024 and December 31, 2023, average FHLB borrowing balances increased $69 million, or 34%, between the three months ended March 31, 2024 and the three months ended December 31, 2023. Bancorp’s FHLB stock holdings will fluctuate consistent with our borrowing activity from period to period.

### Loans

Total loans increased $79 million, or 1%, from December 31, 2023 to March 31, 2024. Loan growth for the three months ended March 31, 2024 was concentrated in the CRE and residential real estate segments, more than offsetting contraction within the C&I portfolio.

While total line of credit utilization has improved since hitting pandemic-era lows in early 2021, line of credit usage has remained below pre-pandemic levels, as customers continue to utilize cash in lieu of higher costing lines of credit. 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. Total line of credit utilization was 38.9% as of March 31, 2024, compared to 39.2% at December 31, 2023, with C&I utilization of 27.3% and 28.6% for the same periods, respectively.

Bancorp’s credit exposure is diversified between businesses and individuals. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer’s ability to honor loan agreements 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.

CRE represents the largest segment of Bancorp’s loan portfolio, totaling $2.54 billion, or 43%, of total loans as of March 31, 2024. While a combination of higher interest rates and rising central business district vacancies across the country have created credit and collateral concerns within the CRE sector generally, Bancorp believes the quality of its CRE portfolio, and the overall loan portfolio, remains solid. Office building exposure, which is a sub-segment of CRE and perceived to be of particular risk in the current environment, is a smaller component of Bancorp’s loan portfolio, totaling $527 million, or 9%, of total loans as of March 31, 2024. Of this sub-segment total, 53% is owner-occupied and is generally accompanied by a full commercial relationship. Further, approximately $202 million, or 38%, of Bancorp’s office building exposure is medical-related, which presents reduced risk compared other CRE uses. Lastly, this sub-segment is concentrated in Bancorp’s primary markets, with no exposure to large office towers and minimal exposure to central business districts, and continues to perform well with minimal substandard/non-accrual and past due loans as of March 31, 2024.

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 March 31, 2024 and December 31, 2023, the total participated portion of loans of this nature totaled $2 million and $4 million, respectively.

The following table presents the maturity distribution (based on contractual maturity) and rate sensitivity of the total loan portfolio as of March 31, 2024:

| March 31, 2024 (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 | $264,618 | $1,958,545 | $1,099,376 | $878,276 | $4,200,815 | 72% |
| Variable rate | 689,505 | 551,133 | 379,737 | 28,525 | 1,648,900 | 28% |
| Total loans | $954,123 | $2,509,678 | $1,479,113 | $906,801 | $5,849,715 | 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, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Non-accrual loans | $13,984 | $19,058 |
| Modifications to borrowers experiencing financial difficulty | - | - |
| Loans past due 90 days or more and still accruing | 106 | 110 |
| Total non-performing loans | 14,090 | 19,168 |
| Other real estate owned | 10 | 10 |
| Total non-performing assets | $14,100 | $19,178 |
| Non-performing loans to total loans | 0.24% | 0.33% |
| Non-performing assets to total assets | 0.17% | 0.23% |
| ACL for loans to total non-performing loans | 574% | 414% |

71

As of March 31, 2024, non-accrual loans totaled $14 million compared to $19 million at December 31, 2023. The decrease in total non-accrual loans between December 31, 2023 and March 31, 2024 stemmed mainly from both a payoff and pay down, respectively, of two larger and unrelated CRE relationships that were on non-accrual status.

Non-performing assets as of March 31, 2024 consisted of approximately 100 loans, ranging in individual amounts up to $2.8 million, and one residential real estate property held as OREO.

### Delinquent Loans

Delinquent loans (consisting of all loans 30 days or more past due) totaled $18 million and $17 million at March 31, 2024 and December 31, 2023. Delinquent loans to total loans were 0.31% and 0.30% at March 31, 2024 and December 31, 2023, 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. 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. See the Footnote titled “*Summary of Significant Accounting Policies”* from Bancorp’s most recent Annual Report on Form 10-K for discussion of Bancorp’s ACL methodology on loans.

Bancorp’s ACL for loans was $81 million as of March 31, 2024 compared to $79 million as of December 31, 2023. Provision expense for credit losses on loans of $1.2 million was recorded for the three months ended March 31, 2024, which was impacted by modest loan growth during the first quarter, annual CECL model methodology updates, a slight improvement in the unemployment forecast and a reduction in specific reserves tied in large part to the pay down of a large CRE relationship. Net recoveries of $348,000 were recorded for the three months ended March 31, 2024.

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, 2024 Allocated Allowance | % of Total ACL on loans | ACL for loans to Total Loans | December 31, 2023 Allocated Allowance | % of Total ACL on loans | ACL for loans to Total Loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate - non-owner occupied | $21,823 | 27% | 1.36% | $22,133 | 28% | 1.42% |
| Commercial real estate - owner occupied | 11,230 | 14% | 1.20% | 11,667 | 15% | 1.29% |
| Total commercial real estate | 33,053 | 41% | 1.30% | 33,800 | 43% | 1.37% |
| Commercial and industrial - term | 13,916 | 17% | 1.61% | 14,359 | 18% | 1.66% |
| Commercial and industrial - lines of credit | 6,258 | 8% | 1.46% | 6,495 | 8% | 1.48% |
| Total commercial and industrial | 20,174 | 25% | 1.56% | 20,854 | 26% | 1.60% |
| Residential real estate - owner occupied | 11,826 | 15% | 1.64% | 9,316 | 12% | 1.31% |
| Residential real estate - non-owner occupied | 4,731 | 6% | 1.31% | 4,282 | 5% | 1.19% |
| Total residential real estate | 16,557 | 21% | 1.53% | 13,598 | 17% | 1.27% |
| Construction and land development | 7,459 | 9% | 1.40% | 7,593 | 10% | 1.43% |
| Home equity lines of credit | 1,666 | 2% | 0.78% | 1,660 | 2% | 0.79% |
| Consumer | 1,500 | 2% | 1.03% | 1,407 | 2% | 0.97% |
| Leases | 232 | 0% | 1.40% | 220 | 0% | 1.42% |
| Credit cards | 256 | 0% | 1.06% | 242 | 0% | 1.02% |
| Total | $80,897 | 100% | 1.38% | $79,374 | 100% | 1.38% |

72

The table below details net charge-offs to average loans outstanding by category of loan for the three month periods ended March 31, 2024 and 2023, respectively.

| Three months ended March 31, (dollars in thousands) | 2024 Net (charge offs)/ recoveries | Average Loans | Net (charge offs)/ recoveries to average loans | 2023 Net (charge offs)/ recoveries | Average Loans | Net (charge offs)/ recoveries to average loans |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate - non-owner occupied | $16 | $1,585,189 | 0.00% | $19 | $1,412,841 | 0.00% |
| Commercial real estate - owner occupied | 4 | 919,469 | 0.00% | - | 844,692 | 0.00% |
| Total commercial real estate | 20 | 2,504,658 | 0.00% | 19 | 2,257,533 | 0.00% |
| Commercial and industrial - term | 230 | 865,611 | 0.03% | - | 783,246 | 0.00% |
| Commercial and industrial - lines of credit | 204 | 434,476 | 0.05% | 16 | 451,845 | 0.00% |
| Total commercial and industrial | 434 | 1,300,087 | 0.03% | 16 | 1,235,091 | 0.00% |
| Residential real estate - owner occupied | 1 | 715,884 | 0.00% | 10 | 607,401 | 0.00% |
| Residential real estate - non-owner occupied | - | 359,747 | 0.00% | 1 | 319,137 | 0.00% |
| Total residential real estate | 1 | 1,075,631 | 0.00% | 11 | 926,538 | 0.00% |
| Construction and land development | - | 531,620 | 0.00% | - | 443,729 | 0.00% |
| Home equity lines of credit | 2 | 211,864 | 0.00% | (12) | 201,304 | -0.01% |
| Consumer | (99) | 145,145 | -0.07% | (60) | 138,263 | -0.04% |
| Leases | - | 16,057 | 0.00% | - | 13,296 | 0.00% |
| Credit cards | (10) | 23,862 | -0.04% | (82) | 21,125 | -0.39% |
| Total | $348 | $5,808,924 | 0.01% | $(108) | $5,236,879 | 0.00% |

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, 2023 and March 31, 2024. Provision for credit loss expense for off balance sheet credit exposures of $250,000 was recorded for the three months ended March 31, 2024, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ACL for off balance sheet credit exposures was $6.1 million as of March 31, 2024 compared to $5.9 million as of December 31, 2023.

### Premises and Equipment

Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets, as well as fair value adjustments associated with purchase accounting. Premises and equipment increased $6 million, or 5%, between December 31, 2023 and March 31, 2024, which was primarily the result of the leasehold related to right-of-use lease asset adjustments. Bancorp’s branch network currently consists of 71 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets.

Premises held for sale totaling $2.5 million was recorded on Bancorp’s consolidated balance sheets as of March 31, 2024 and December 31, 2023, which consists of three vacant parcels of land, a former administrative building and two former branch locations.

### Goodwill

At March 31, 2024 and December 31, 2023, Bancorp had $194 million in goodwill recorded on its balance sheet. Goodwill of $58 million and $123 million is attributed to the acquisitions of CB and KB in 2022 and 2021, respectively. Additionally, Goodwill totaling $12 million and $682,000 is attributed to the acquisitions of KSB and Austin State Bank in 2019 and 1996, respectively. The acquisition of TBOC in 2013 resulted in a bargain purchase gain.

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, 2023, Bancorp performed its annual 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, 2024 and December 31, 2023, Bancorp’s CDI assets totaled $11 million and $12 million, respectively. As of both March 31, 2024 and December 31, 2023, Bancorp’s CLI assets were $8 million and attributed entirely to the WM&T segment.

### Other Assets and Other Liabilities

Other assets increased $60 million, or 21%, to $348 million between December 31, 2023 and March 31, 2024. Other liabilities decreased $9 million, or 4%, to $238 million over the same period.

The increase in Other assets stemmed mainly from recording a receivable for a $50 million treasury bill that matured effective March 31, 2024, but for which the funds were not received until the beginning of April 2024.

The decrease in Other liabilities was attributed largely to the reduction of various accrued liabilities, such as employee incentive compensation and other benefit-related accruals.

### Deposits

Total deposits decreased $62 million, or 1%, from December 31, 2023 to March 31, 2024, driven largely by normal seasonal runoff of public funds deposits, which typically peak during the fourth quarter of each year and gradually dissipate in the following months. Bancorp continues to experience a shift in the deposit portfolio mix, as customers continue to seek higher-yielding alternatives to low-rate or non-interest bearing deposits in the higher rate environment. As a result, the cost of interest-bearing deposits rose to 2.53% for the three months ended March 31, 2024, compared to 1.22% for the same period of the prior year, with the cost of total deposits (including non-interest deposits) rising to 1.95% from 0.86%. While Bancorp expects deposit costs will continue to place pressure on NIM through the first half of 2024, they are expected to moderate during the second half of the year.

### Securities Sold Under Agreements to Repurchase

SSUARs increased $10 million, or 6%, between December 31, 2023 and March 31, 2024, largely as a result of normal cyclical fluctuation in the SSUAR balances of a few larger customers.

SSUAR represent a funding source of Bancorp and are 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, 2024 and December 31, 2023, 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 decreased $3 million, or 23%, between December 31, 2023 and March 31, 2024. At March 31, 2024, FFP related mainly to excess liquidity held by downstream correspondent bank customers of Bancorp.

### Subordinated Debentures

Bancorp owns 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, 2024 and December 31, 2023, subordinated notes totaled $27 million, respectively.

### FHLB Advances

FHLB advances outstanding at both March 31, 2024 and December 31, 2023 totaled $200 million, respectively, which consisted of a $200 million three-month rolling advance related to three separate interest rate swaps (cash flow hedges) that were entered into during 2023 in an effort to secure longer-term funding at more attractive rates. For more information related to the interest rate swaps noted above, see the footnote titled, “*Derivative Financial Instruments.”*

While period end FHLB borrowings were flat between March 31, 2024 and December 31, 2023, average FHLB borrowing balances increased $69 million for the three months ended March 31, 2024 compared to the three month ended December 31, 2023, as overnight borrowing activity increased during the first quarter as a result of loan funding activity and deposit balance fluctuations.

### 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 $89 million and $171 million at March 31, 2024 and December 31, 2023, respectively. The decrease experienced for the first three months of 2024 is attributed mainly to loan funding activity and deposit balance contraction. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are generally used for daily liquidity purposes.

The fair value of the AFS debt security portfolio was $994 million and $1.03 billion at March 31, 2024 and December 31, 2023, respectively. The decrease in AFS debt security portfolio for the first three months of 2024 is attributed to scheduled maturities and normal pay down activity within the portfolio, and to much lesser extent, market value depreciation during the period. The investment portfolio (HTM and AFS) includes total cash flows on amortizing debt securities of approximately $464 million (based on assumed prepayment speeds as of March 31, 2024) expected over the next 12 months, including $283 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, 2024, the total carrying value of investment securities pledged for these purposes comprised 69% of the debt securities portfolio, leaving approximately $430 million of unpledged debt securities, compared to 67% and $480 million at December 31, 2023, respectively.

Bancorp’s deposit base consists mainly of core deposits, which are defined as demand, savings, and money market deposit accounts, time deposits less than or equal to $250,000, and excludes public funds and brokered deposits. At March 31, 2024, such deposits totaled $5.76 billion and represented 87% of Bancorp’s total deposits, as compared with $5.78 billion, or 87% of total deposits at December 31, 2023. 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, 2024 and December 31, 2023, Bancorp held brokered deposits totaling $351,000 and $597,000, respectively.

Included in total deposit balances at March 31, 2024 are $561 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, 2023, public funds deposits totaled $613 million, the decrease experienced during the first three months of 2024 was attributed largely to normal seasonal public funds 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 both March 31, 2024 and December 31, 2023, available credit from the FHLB totaled $1.33 billion, respectively. Bancorp also had unsecured FFP lines with correspondent banks totaling $80 million at both March 31, 2024 and December 31, 2023, 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, 2024, the Bank could pay an amount equal to $148 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 “*Condensed 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 $81 million, or 3%, as of March 31, 2024 compared to December 31, 2023, as a result of increases in line of credit availability and future loan commitments (term loans we have committed to fund).

Most commitments to extend credit are an agreement to lend to a customer as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not 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 $6.1 million and $5.9 million as of March 31, 2024 and December 31, 2023, respectively. Provision expense for off balance sheet credit exposures of $250,000 was recorded for the three month period ended March 31, 2024, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit.

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

In addition to owned banking facilities, Bancorp has entered into long-term leasing arrangements for certain 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, 2024, stockholders’ equity totaled $875 million, representing an increase of $17 million, or 2%, compared to December 31, 2023. The increase for the three months ended March 31, 2024 was attributed to recording net income of $25.9 million, which was offset by $8.8 million, serving to grow stockholder’s equity for the period. A $2.5 million increase in retained earnings was recorded in relation to the adoption of ASU 2023-02 effective January 1, 2024, but was largely offset with a $2.3 million decrease in AOCI associated with changes in the interest rate environment and the corresponding impact on the valuation of the AFS debt securities portfolio and cash flow hedging derivatives. See the “*Condensed 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, 2023 and March 31, 202, which stemmed largely from recording net income of $25.9 million. TCE was 8.36% at March 31, 2024 compared to 8.09% at December 31, 2023, while tangible book value per share was $22.50 at March 31, 2024, compared to $21.95 at December 31, 2023. See the section titled “*Non-GAAP Financial Measures”* for reconcilement of non-GAAP to GAAP measures.

In May 2023, Bancorp’s Board of Directors extended its share repurchase program authorizing the repurchase of up to 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. The plan, which will expire in May 2025 unless otherwise extended or completed at an earlier date, does not obligate Bancorp to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. No shares were repurchased in 2023, nor the first three months of 2024, as Bancorp continues to prioritize capital preservation and liquidity management. 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, 2024 increased compared December 31, 2023, as a result of operating results and moderate risk-weighted asset growth for the first three months of 2024. 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, 2024, 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 previously noted, Bancorp is the 100% owner of three unconsolidated trust subsidiaries. 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, 2024 and December 31, 2023, subordinated notes totaled $27 million, respectively.

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. 2024 represents the fifth and final year 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, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Total stockholders' equity - GAAP (a) | $874,711 | $858,103 |
| Less: Goodwill | (194,074) | (194,074) |
| Less: Core deposit and other intangibles | (19,252) | (20,304) |
| Tangible common equity - Non-GAAP (c) | $661,385 | $643,725 |
| Total assets - GAAP (b) | $8,123,128 | $8,170,102 |
| Less: Goodwill | (194,074) | (194,074) |
| Less: Core deposit and other intangibles | (19,252) | (20,304) |
| Tangible assets - Non-GAAP (d) | $7,909,802 | $7,955,724 |
| Total stockholders' equity to total assets - GAAP (a/b) | 10.77% | 10.50% |
| Tangible common equity to tangible assets - Non-GAAP (c/d) | 8.36% | 8.09% |
| Total shares outstanding (e) | 29,393 | 29,329 |
| Book value per share - GAAP (a/e) | $29.76 | $29.26 |
| Tangible common equity per share - Non-GAAP (c/e) | 22.50 | 21.95 |

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, 2024 | 2023 |
| --- | ---: | ---: |
| Total non-interest expenses (a) | $48,961 | $45,314 |
| Less: Amortization of investments in tax credit partnerships | — | (323) |
| Total non-interest expenses - Non-GAAP (c) | $48,961 | $44,991 |
| Total net interest income, FTE | $60,167 | $63,245 |
| Total non-interest income | 23,271 | 22,047 |
| Total revenue - Non-GAAP (b) | 83,438 | 85,292 |
| Less: Gain/loss on sale of premises and equipment | — | 2 |
| Less: Gain/loss on sale of securities | — | — |
| Total adjusted revenue - Non-GAAP (d) | $83,438 | $85,294 |
| Efficiency ratio - Non-GAAP (a/b) | 58.68% | 53.13% |
| Adjusted efficiency ratio - Non-GAAP (c/d) | 58.68% | 52.75% |

79

## 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 7, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-014968. Last ingested by Listed: Nov 5, 2026, 15:30 ET. No prices; not investment advice.