# Stock Yards Bancorp, Inc.: Form 10-Q for the period ended Sep 30, 2024

- Company: [Stock Yards Bancorp, Inc.](/companies/sybt.md) (CIK 835324)
- Form: 10-Q
- Filed: 2024-11-05
- Accepted by EDGAR: Nov 5, 2024, 12:43 ET
- Period: 2024-09-30
- Accession: 0001437749-24-033271
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/835324/000143774924033271/sybt20240930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/835324/000143774924033271/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $7.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $22.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $29.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $82.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $1.00 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $2.82 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $1.00 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $2.83 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 29,445,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 29,396,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $123.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $6.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $26.7m | us-gaap:PaymentsOfDividends |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $3.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2024-09-30 | $8.44bn | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $7.50bn | us-gaap:Liabilities |
| Long-term debt | at 2024-09-30 | $26.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2024-09-30 | $934.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 127,664 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 72 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 KB 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 2025. 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 September 30, 2024 and 2023:

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

| Three months ended September 30, | 2024 | 2023 | Variance $/bp% |  |
| --- | ---: | ---: | ---: | ---: |
| Net income | $29,360 | $27,092 | $2,268 | 8% |
| Diluted earnings per share | $1.00 | $0.92 | $0.08 | 9% |
| ROA | 1.39% | 1.38% | 1 bp | 1% |
| ROE | 12.83% | 13.26% | (43) bps | -3% |

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

### General highlights for the three months ended September 30, 2024 compared to September 30, 2023:

- Net income totaled $29.4 million for the three months ended September 30, 2024, resulting in diluted EPS of $1.00, compared to net income of $27.1 million for the three months ended September 30, 2023, which resulted in diluted EPS of $0.92.
- Total loans increased $661 million, or 12%, compared to September 30, 2023, driven by growth in all categories over the past 12 months. Average loans increased $688 million, or 13%, for the three months ended September 30, 2024 compared to the same period of the prior year.
- Bancorp’s ACL on loans increased $7 million, or 9%, compared to September 30, 2023, attributed mainly to the significant loan growth experienced over the last 12 months, and to a lesser extent, deterioration in the FRB unemployment forecast. Provision for credit losses on loans totaled $4.3 million for the three months ended September 30, 2024, compared to $2.3 million for the three months ended September 30, 2023.
- Deposit balances climbed $323 million, or 5%, compared to September 30, 2023, driven in large part by 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 $65.1 million for the three months ended September 30, 2024, representing an increase of $3.6 million, or 6%, compared to the three months ended September 30, 2023.
- Interest income experienced a $16.8 million, or 19%, increase over this period associated with the benefits of higher rates and average earning asset growth, which outpaced the $13.1 million, or 48%, increase in interest expense driven by the rising cost of funds and growth in interest-bearing liabilities.
- 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.
- NIM decreased 1 bp to 3.33% for the three months ended September 30, 2024, compared to the same period of the prior year.
- Non-interest income increased $1.9 million, or 8%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, attributed largely to strong WM&T and treasury management fees in addition to general increases across virtually all of Bancorp’s diversified non-interest revenue streams.
- Non-interest expenses increased $1.8 million, or 4%, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, driven mainly by higher compensation expenses associated with annual merit-based salary increases and higher bonus levels in addition to increased technology and communication expense attributed to various security and compliance-related software upgrades. Further, modifications to the corporate credit card reward program (reducing program expense) and a significant decline in fraudulent check and card losses served to partially offset general increases in other non-interest expense categories.
- Bancorp’s efficiency ratio (FTE) for the three months ended September 30, 2024 was 53.92% compared to 54.57% for the three months ended September 30, 2023. This improvement was the result of strong growth in net interest income and non-interest income, which outpaced growth in non-interest expenses.
- As of September 30, 2024, Bancorp continued to be “well-capitalized,” the highest regulatory capital rating for financial institutions, with capital ratios experiencing growth compared to both December 31, 2023 and September 30, 2023. Total stockholders’ equity to total assets was 11.07% as of September 30, 2024, compared to 10.50% and 10.21% at December 31, 2023 and September 30, 2023, respectively. Tangible common equity to tangible assets was 8.79% at September 30, 2024, compared to 8.09% and 7.69% at December 31, 2023 and September 30, 2023, respectively.

The following table presents an overview of Bancorp’s financial performance for the nine months ended September 30, 2024 and 2023:

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

| Nine months ended September 30, | 2024 | 2023 | Variance $/bp% |  |
| --- | ---: | ---: | ---: | ---: |
| Net income | $82,845 | $83,804 | $(959) | -1% |
| Diluted earnings per share | $2.82 | $2.86 | $(0.04) | -1% |
| ROA | 1.34% | 1.46% | (12) bps | -8% |
| ROE | 12.53% | 14.07% | (154) bps | -11% |

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

### General highlights for the nine months ended September 30, 2024 compared to September 30, 2023:

- Net income totaled $82.8 million for the nine months ended September 30, 2024, resulting in diluted EPS of $2.82, compared to net income of $83.8 million for the nine months ended September 30, 2023, which resulted in diluted EPS of $2.86.
- Total loans increased $661 million, or 12%, compared to September 30, 2023, driven by growth in all categories over the past 12 months. Average loans increased $649 million, or 12%, for the nine months ended September 30, 2024 compared to the same period of the prior year.
- Bancorp’s ACL on loans increased $7 million, or 9%, compared to September 30, 2023, attributed mainly to the significant loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $6.6 million for the nine months ended September 30, 2024, compared to provision of $6.7 million for the nine months ended September 30, 2023.
- Deposit balances climbed $323 million, or 5%, compared to September 30, 2023, driven in large part by 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. Average deposits increased $270 million, or 4%, for the nine months ended September 30, 2024 compared to the same period of the prior year.
- Net interest income (FTE) totaled $187.3 million for the nine months ended September 30, 2024, representing an increase of $1.6 million, or 1%, compared to the nine months ended September 30, 2023.
- Interest income experienced a $50.9 million, or 20%, increase over this period associated with the benefits of higher rates and average earning asset growth, narrowly outpacing the $49.4 million, or 75%, increase in interest expense driven by the rising cost of funds and growth in interest-bearing liabilities.
- 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 nine months of 2024 compared to the same period of the prior year, contributing to the overall increase in interest expense.
- NIM decreased 18 bps, or 5%, to 3.26% for the nine months ended September 30, 2024, compared to the same period of the prior year.
- Non-interest income increased $3.9 million, or 6%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, attributed largely to strong WM&T fees, treasury management fees and card income.
- Non-interest expenses increased $8.7 million, or 6%, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, driven mainly by higher compensation and employee benefit expenses associated with annual merit-based salary increases and higher bonus levels, FTE growth and higher health insurance claims activity, in addition to increased technology and communication expense, attributed to various security and compliance-related software upgrades.
- Bancorp’s efficiency ratio (FTE) for the nine months ended September 30, 2024 was 56.56% compared to 54.35% for the nine months ended September 30, 2023. The increase in this ratio is the result of non-interest expense growth outpacing net interest income and non-interest income expansion, as net interest income was hampered by rising funding costs.

### 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 September 30, | 2024 | 2023 | Variance $/bp% |  |
| --- | ---: | ---: | --- | ---: |
| Net interest income | $64,979 | $61,315 | $3,664 | 6% |
| Net interest income (FTE)\* | 65,064 | 61,437 | 3,627 | 6% |
| Net interest spread (FTE)\* | 2.57% | 2.67% | (10) bps | -4% |
| Net interest margin (FTE)\* | 3.33% | 3.34% | (1) bp | 0% |
| Average interest earning assets | $7,783,997 | $7,305,205 | $478,792 | 7% |
| Average interest bearing liabilities | 5,701,063 | 5,076,486 | 624,577 | 12% |
| Five year Treasury note rate at period end | 3.58% | 4.60% | (102) bps | -22% |
| Average five year Treasury note rate | 3.80% | 4.31% | (51) bps | -12% |
| Prime rate at period end | 8.00% | 8.50% | (50) bps | -6% |
| Average Prime rate | 8.44% | 8.43% | 1 bp | 0% |
| One month term SOFR at period end | 4.85% | 5.32% | (47) bps | -9% |
| Average one month term SOFR | 5.22% | 5.29% | (7) bps | -1% |

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

*(dollars in thousands)*

| As of and for the nine months ended September 30, | 2024 | 2023 | Variance $/bp% |  |
| --- | ---: | ---: | --- | ---: |
| Net interest income | $187,071 | $185,316 | $1,755 | 1% |
| Net interest income (FTE)\* | 187,344 | 185,757 | 1,587 | 1% |
| Net interest spread (FTE)\* | 2.52% | 2.87% | (35) bps | -12% |
| Net interest margin (FTE)\* | 3.26% | 3.44% | (18) bps | -5% |
| Average interest earning assets | $7,670,807 | $7,210,748 | $460,059 | 6% |
| Average interest bearing liabilities | 5,611,573 | 4,934,485 | 677,088 | 14% |
| Five year Treasury note rate at period end | 3.58% | 4.60% | 102 bps | -22% |
| Average five year Treasury note rate | 4.13% | 3.94% | 19 bps | 5% |
| Prime rate at period end | 8.00% | 8.50% | (50) bps | -6% |
| Average Prime rate | 8.48% | 8.10% | 38 bps | 5% |
| One month term SOFR at period end | 4.85% | 5.32% | (47) bps | -9% |
| Average one month term SOFR | 5.29% | 4.98% | 31 bps | 6% |

*\*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 September 30, 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 September 30, 2024, Bancorp’s loan portfolio consisted of approximately 69% fixed and 31% variable rate loans. At inception, most of Bancorp’s fixed rate loans are generally priced in relation to the five year treasury. Bancorp’s variable rate loans are typically indexed to either Prime or SOFR, repricing as those rates change. At September 30, 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 tables 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 remained until September 18, 2024. On September 18, 2024, the FRB reduced the FFTR 50 bps, representing the first rate reduction in over four years. This action lowered the FFTR to a range of 4.75% - 5.00% and Prime to 8.00% as of September 30, 2024.

The current economic outlook remains volatile, regularly changing as new economic data becomes available and the FRB’s efforts to control or moderate inflation continue. Recent projections indicate the potential for multiple rate reductions to occur over the course of the next several months. While Bancorp has experienced NIM compression as a result of pricing pressure/competition for both loans and deposits, changing levels of liquidity and a flattening yield curve, NIM expansion has been experienced for two consecutive quarters as the result of lower funding costs and an improved yield curve.

**Net Interest Income (FTE) – Three months ended September 30, 2024 compared to September 30, 2023**

Net interest spread (FTE) and NIM (FTE) were 2.57% and 3.33%, for the three months ended September 30, 2024, compared to 2.68% and 3.34% for the same period in 2023, respectively. NIM during the three months ended September 30, 2024 was significantly impacted by the following:

- The higher interest rate environment that has served to benefit interest-earning assets has simultaneously driven NIM compression, as the cost of deposits and other funding sources has risen. While the FFTR was reduced to a range of 4.75% - 5.00% effective September 18, 2024, it had previously remained at a range of 5.25% - 5.50% since mid-2023, resulting in an inverted interest rate yield curve for an extended period of time. Although it has flattened/improved some during the first nine months of 2024, continued action by the FRB may create a challenging interest rate environment over the next several quarters.
- 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. While the cost of funding is expected to moderate in tandem with anticipated rate decreases, lower liquidity levels within the banking industry generally may continue to drive pricing pressure/competition for deposits.
- Significant loan growth over the past 12 months has positively impacted interest income and average interest-earning asset growth, which Bancorp elected to fund with deposit and non-deposit sources, namely a combination of scheduled investment security maturities and FHLB borrowings.

Net interest income (FTE) increased $3.6 million, or 6%, for the three months ended September 30, 2024 compared to the same period of 2023, as significant average loan growth and the benefit of higher rates upon average interest earning assets managed to outpace rising funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.

Total average interest earning assets increased $479 million, or 7%, for the three months ended September 30, 2024, as compared to the same period of 2023, attributed to substantial average loan growth that was partially offset by a decline in average investment securities driven by scheduled maturities and normal amortization. However, as a result of a higher interest rate environment, the average rate earned on total average interest earning assets climbed 57 bps to 5.41%.

- Average total loan balances increased $688 million, or 13%, for the three months ended September 30, 2024, compared to the same period of 2023, with significant growth driven by contributions from every loan category.
- Average investment securities declined $235 million, or 14%, for the three months ended September 30, 2024 compared to the same period of 2023, mainly the result of significant scheduled maturities within the treasury portfolio, and to a lesser extent, normal amortization activity. The funding provided by this activity has benefitted interest-earning asset yields and overall NIM, as the low-yielding treasury securities shifted into higher-yielding interest-bearing cash and helped fund Bancorp’s substantial loan growth.
- Average FFS and interest bearing due from bank balances increased $24 million, or 19%, for the three months ended September 30, 2024, which was largely the result of the previously mentioned liquidity provided by the investment securities portfolio.

Total interest income (FTE) increased $16.8 million, or 19%, to $106 million for the three months ended September 30, 2024, as compared to the same period of 2023.

- Interest and fee income (FTE) on loans increased $17.4 million, or 22%, to $95.7 million for the three months ended September 30, 2024, compared to the same period of 2023, driven by the higher rate environment and significant average loan growth. The yield on the overall loan portfolio increased 51 bps to 6.17% for the three months ended September 30, 2024 compared to 5.66% for the same period of the prior year.
- Consistent with the decline in average investment securities, there was a $1.1 million, or 13%, decrease in interest income (FTE) on the portfolio for the three months ended September 30, 2024 compared to the same period of 2023. The corresponding yield on the portfolio was 2.07% for the three months ended September 30, 2024, compared to 2.04% for the prior year period, the increase being attributed to the maturity of low-yielding treasury securities during the latter part of the three months ended September 30, 2024.
- Interest income on FFS and interest bearing due from bank balances increased $306,000 for the three months ended September 30, 2024, stemming mainly average balance growth. The yield on these assets decreased 2 bps to 5.20% for the three months ended September 30, 2024 compared to the same period of 2023.

Total average interest bearing liabilities increased $625 million, or 12%, to $5.70 billion for the three month period ended September 30, 2024 compared with the same period in 2023.

- Average interest bearing deposits increased $538 million, or 12%, for the three months ended September 30, 2024 compared to the same period in 2023. Bancorp experienced a $324 million, or 41%, increase in average time deposits and a $192 million, or 18%, increase in average money market deposits as a result of depositors seeking higher-yielding deposit products in the current environment.
- Average FHLB advances increased $60 million, or 15%, for the three months ended September 30, 2024 compared to the same period of the prior year. Bancorp currently utilizes a $300 million term advance in conjunction with four separate interest rate swaps of varying maturities in an effort to secure longer-term funding at a more favorable rate. Bancorp has also utilized overnight borrowings more heavily in the current year to fund loan growth and manage deposit fluctuations.
- Average SSUAR increased $30 million, or 23%, for the three months ended September 30, 2024 compared to the same period of the prior year, as customers were attracted to the collateralized protection provided by this product.

Total interest expense increased $13.1 million, or 48%, for the three months ended September 30, 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 68 bps to 2.84% for the three months ended September 30, 2024 compared to the same period of 2023.

- Total interest bearing deposit expense increased $12.6 million, or 59%, $9.6 million of which was attributed to time deposit and money market deposits, as customers continued to shift to higher-yielding deposit products. This activity resulted in a 80 bps increase in the cost of interest bearing deposits for the three months ended September 30, 2024 compared to the same period of the prior year. While Bancorp expects pricing pressure/competition to continue in the coming quarters, the pace of deposit cost expansion is expected to moderate.
- Interest expense on FHLB borrowings increased $292,000, or 6%, for the three months ended September 30, 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 SSUAR increased $340,000, or 57%, for the three months ended September 30, 2024, as compared to the same period of the prior year, consistent with average balance growth and higher rates.

**Net Interest Income (FTE) – Nine months ended September 30, 2024 compared to September 30, 2023**

Net interest spread (FTE) and NIM (FTE) were 2.52% and 3.26%, for the nine months ended September 30, 2024, compared to 2.88% and 3.44% for the same period in 2023, respectively. NIM during the nine months ended September 30, 2024 was significantly impacted by the following:

- The higher interest rate environment that has served to benefit interest-earning assets has simultaneously driven NIM compression, as the cost of deposits and other funding sources has risen. While the FFTR was reduced to a range of 4.75% - 5.00% effective September 18, 2024, it had previously remained at a range of 5.25% - 5.50% since mid-2023, resulting in an inverted interest rate yield curve for an extended period of time. Although it has flattened/improved some during the first nine months of 2024, it remains to be seen how FRB rate action will impact the interest rate yield curve over the next several quarters.
- Pricing pressure/competition for deposits has driven a significant increase in the cost of funds and shift in Bancorp’s deposit mix, as depositors seek higher yielding deposit alternatives. While the cost of funding is expected to moderate in tandem with anticipated rate decreases, lower liquidity levels within the banking industry generally may continue to drive pricing pressure/competition for deposits.
- Significant loan growth over the past 12 months has positively impacted interest income and average interest-earning asset growth, which Bancorp elected to fund with deposit and non-deposit sources, namely scheduled investment security maturities and FHLB borrowings.

Net interest income (FTE) increased $1.6 million, or 1%, for the nine months ended September 30, 2024 compared to the same period of 2023, as significant average loan growth and the benefit of higher rates upon average interest earning assets managed to slightly outpace rising funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.

Total average interest earning assets increased $460 million, or 6%, for the nine months ended September 30, 2024, as compared to the same period of 2023, attributed to substantial average loan growth that was partially offset by a decline in average investment securities associated with scheduled maturities and normal amortization. As a result of a higher interest rate environment, the average rate earned on total interest earning assets climbed 60 bps to 5.27%.

- Average total loan balances increased $649 million, or 12%, for the nine months ended September 30, 2024, compared to the same period of 2023, with significant growth driven by contributions from every loan category.
- Average investment securities declined $213 million, or 12%, for the nine months ended September 30, 2024 compared to the same period of 2023, mainly the result of significant scheduled maturities within the treasury portfolio, and to a lesser extent, normal amortization activity. The funding provided by this activity has benefitted interest-earning asset yields and overall NIM, as the low-yielding treasury securities shifted into higher-yielding interest-bearing cash and helped fund Bancorp’s substantial loan growth.
- Average FFS and interest bearing due from bank balances increased $21 million, or 16%, for the nine months ended September 30, 2024, as a result of the previously mentioned liquidity provided by the investment securities portfolio and increased FHLB borrowing activity.

Total interest income (FTE) increased $50.9 million, or 20%, to $302.8 million for the nine months ended September 30, 2024, as compared to the same period of 2023.

- Interest and fee income (FTE) on loans increased $52.1 million, or 24%, to $271.7 million for the nine months ended September 30, 2024, compared to the same period of 2023, driven by the higher rate environment and significant average loan growth. The yield on the overall loan portfolio increased 56 bps to 6.06% for the nine months ended September 30, 2024 compared to 5.50% for the same period of the prior year.
- Consistent with the decline in average investment securities, there was a $3.1 million, or 12%, decrease in interest income (FTE) on the portfolio for the nine months ended September 30, 2024 compared to the same period of 2023. The corresponding yield on the portfolio was 2.06% for both the nine months ended September 30, 2024 and 2023.
- Interest income on FFS and interest bearing due from bank balances increased $1.3 million, or 27%, for the nine months ended September 30, 2024, stemming mainly from a higher FFTR. The yield on these assets increased 46 bps to 5.39% for the nine months ended September 30, 2024 compared to the same period of 2023.

Total average interest bearing liabilities increased $677 million, or 14%, to $5.61 billion for the nine month period ended September 30, 2024 compared with the same period in 2023.

- Average interest bearing deposits increased $558 million, or 12%, for the nine months ended September 30, 2024 compared to the same period in 2023. Bancorp experienced a $384 million, or 57%, increase in average time deposits and a $163 million, or 15%, increase in average money market deposits compared to the prior year period as a result of depositors seeking higher-yielding deposit products in the current environment.
- Average FHLB advances increased $87 million, or 29%, for the nine months ended September 30, 2024 compared to the same period of the prior year. Bancorp currently utilizes a $300 million term advance in conjunction with four separate interest rate swaps of varying maturities in an effort to secure longer-term funding at a more favorable rate. Bancorp has also utilized overnight borrowings more heavily in the current year to fund loan growth and manage deposit fluctuations.
- Average SSUAR increased $36 million, or 30%, for the nine months ended September 30, 2024 compared to the same period of the prior year, as customers were attracted to the collateralized protection provided by this product.

Total interest expense increased $49.4 million, or 75%, for the nine months ended September 30, 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 96 bps to 2.75% for the nine months ended September 30, 2024 compared to the same period of 2023.

- Total interest bearing deposit expense increased $45.5 million, or 88%, as a result of deposit rate increases, $33.5 million of which was attributed to time deposit and money market deposits, as customers continued to shift to higher-yielding deposit products. This activity resulted in a 104 bps increase in the cost of interest bearing deposits for the nine months ended September 30, 2024 compared to the same period of the prior year. While Bancorp expects pricing pressure/competition to continue in the coming quarters, the pace of deposit cost expansion is expected to moderate.
- Interest expense on FHLB borrowings increased $2.9 million, or 27%, for the nine months ended September 30, 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 SSUAR increased $1.2 million, or 85%, for the nine months ended September 30, 2024, as compared to the same period of the prior year, consistent with average balance growth and rising rates.

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

*(dollars in thousands)*

| Interest earning assets: | Three months ended September 30, 2024 Average Balance | Interest | Average Rate | 2023 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold and interest bearing due from banks | $148,818 | $1,946 | 5.20% | $124,653 | $1,640 | 5.22% |
| Mortgage loans held for sale | 4,862 | 47 | 3.85 | 7,112 | 55 | 3.07 |
| Investment securities: |  |  |  |  |  |  |
| Taxable | 1,347,533 | 6,918 | 2.04 | 1,575,971 | 8,064 | 2.03 |
| Tax-exempt | 77,282 | 485 | 2.50 | 83,917 | 476 | 2.25 |
| Total securities | 1,424,815 | 7,403 | 2.07 | 1,659,888 | 8,540 | 2.04 |
| Federal Home Loan Bank stock | 31,193 | 663 | 8.46 | 27,290 | 499 | 7.25 |
| Loans | 6,174,309 | 95,748 | 6.17 | 5,486,262 | 78,313 | 5.66 |
| **Total interest earning assets** | 7,783,997 | 105,807 | 5.41 | 7,305,205 | 89,047 | 4.84 |
| Less allowance for credit losses on loans | 84,260 |  |  | 79,770 |  |  |
| **Non-interest earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | 72,692 |  |  | 80,454 |  |  |
| Premises and equipment, net | 113,150 |  |  | 101,707 |  |  |
| Bank owned life insurance | 88,356 |  |  | 86,015 |  |  |
| Goodwill | 194,074 |  |  | 194,074 |  |  |
| Accrued interest receivable and other | 216,596 |  |  | 117,469 |  |  |
| **Total assets** | $8,384,605 |  |  | $7,805,154 |  |  |
| **Interest bearing liabilities:** |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest bearing demand | $2,273,444 | $11,783 | 2.06% | $2,206,238 | $8,698 | 1.56% |
| Savings | 423,754 | 298 | 0.28 | 468,751 | 334 | 0.28 |
| Money market | 1,233,297 | 9,930 | 3.20 | 1,041,471 | 5,824 | 2.22 |
| Time | 1,117,276 | 11,986 | 4.27 | 792,951 | 6,504 | 3.25 |
| Total interest bearing deposits | 5,047,771 | 33,997 | 2.68 | 4,509,411 | 21,360 | 1.88 |
| Securities sold under agreements to repurchase | 156,865 | 937 | 2.38 | 127,063 | 597 | 1.86 |
| Federal funds purchased | 8,480 | 120 | 5.63 | 11,776 | 157 | 5.29 |
| Federal Home Loan Bank advances | 461,141 | 5,209 | 4.49 | 401,630 | 4,917 | 4.86 |
| Subordinated debentures | 26,806 | 480 | 7.12 | 26,606 | 579 | 8.63 |
| **Total interest bearing liabilities** | 5,701,063 | 40,743 | 2.84 | 5,076,486 | 27,610 | 2.16 |
| **Non-interest bearing liabilities:** |  |  |  |  |  |  |
| Non-interest bearing demand deposits | 1,510,515 |  |  | 1,731,724 |  |  |
| Accrued interest payable and other | 262,753 |  |  | 186,234 |  |  |
| **Total liabilities** | 7,474,331 |  |  | 6,994,444 |  |  |
| Stockholders’ equity | 910,274 |  |  | 810,710 |  |  |
| **Total liabilities and stockholders' equity** | $8,384,605 |  |  | $7,805,154 |  |  |
| **Net interest income** |  | $65,064 |  |  | $61,437 |  |
| **Net interest spread** |  |  | 2.57% |  |  | 2.68% |
| **Net interest margin** |  |  | 3.33% |  |  | 3.34% |

66

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

*(dollars in thousands)*

| Interest earning assets: | Nine months ended September 30, 2024 Average Balance | Interest | Average Rate | 2023 Average Balance | Interest | Average Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Federal funds sold and interest bearing due from banks | $153,755 | $6,199 | 5.39% | $132,421 | $4,885 | 4.93% |
| Mortgage loans held for sale | 5,230 | 152 | 3.88 | 7,333 | 173 | 3.15 |
| Investment securities: |  |  |  |  |  |  |
| Taxable | 1,418,794 | 21,700 | 2.04 | 1,624,452 | 24,809 | 2.04 |
| Tax-exempt | 79,298 | 1,456 | 2.45 | 86,386 | 1,492 | 2.31 |
| Total securities | 1,498,092 | 23,156 | 2.06 | 1,710,838 | 26,301 | 2.06 |
| Federal Home Loan Bank stock | 27,364 | 1,601 | 7.82 | 22,663 | 939 | 5.54 |
| Loans | 5,986,366 | 271,736 | 6.06 | 5,337,493 | 219,598 | 5.50 |
| **Total interest earning assets** | 7,670,807 | 302,844 | 5.27 | 7,210,748 | 251,896 | 4.67 |
| Less allowance for credit losses on loans | 83,344 |  |  | 77,720 |  |  |
| **Non-interest earning assets:** |  |  |  |  |  |  |
| Cash and due from banks | 72,444 |  |  | 79,470 |  |  |
| Premises and equipment, net | 111,113 |  |  | 103,231 |  |  |
| Bank owned life insurance | 87,760 |  |  | 85,461 |  |  |
| Goodwill | 194,074 |  |  | 194,074 |  |  |
| Accrued interest receivable and other | 209,163 |  |  | 65,394 |  |  |
| **Total assets** | $8,262,017 |  |  | $7,660,658 |  |  |
| **Interest bearing liabilities:** |  |  |  |  |  |  |
| Deposits: |  |  |  |  |  |  |
| Interest bearing demand | $2,318,696 | $35,365 | 2.04% | $2,241,032 | $23,232 | 1.39% |
| Savings | 429,546 | 895 | 0.28 | 496,230 | 997 | 0.27 |
| Money market | 1,224,878 | 28,521 | 3.11 | 1,061,972 | 14,580 | 1.84 |
| Time | 1,053,065 | 32,705 | 4.15 | 668,926 | 13,131 | 2.62 |
| Total interest bearing deposits | 5,026,185 | 97,486 | 2.59 | 4,468,160 | 51,940 | 1.55 |
| Securities sold under agreements to repurchase | 156,392 | 2,639 | 2.25 | 120,740 | 1,429 | 1.58 |
| Federal funds purchased | 9,585 | 395 | 5.50 | 13,857 | 504 | 4.86 |
| Federal Home Loan Bank advances | 392,609 | 13,469 | 4.58 | 305,220 | 10,613 | 4.65 |
| Subordinated debentures | 26,802 | 1,511 | 7.53 | 26,508 | 1,653 | 8.34 |
| **Total interest bearing liabilities** | 5,611,573 | 115,500 | 2.75 | 4,934,485 | 66,139 | 1.79 |
| **Non-interest bearing liabilities:** |  |  |  |  |  |  |
| Non-interest bearing demand deposits | 1,508,947 |  |  | 1,796,586 |  |  |
| Accrued interest payable and other | 258,230 |  |  | 133,415 |  |  |
| **Total liabilities** | 7,378,750 |  |  | 6,864,486 |  |  |
| Stockholders’ equity | 883,267 |  |  | 796,172 |  |  |
| **Total liabilities and stockholders' equity** | $8,262,017 |  |  | $7,660,658 |  |  |
| **Net interest income** |  | $187,344 |  |  | $185,757 |  |
| **Net interest spread** |  |  | 2.52% |  |  | 2.88% |
| **Net interest margin** |  |  | 3.26% |  |  | 3.44% |

67

### 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 $2 million and $4 million for the three month periods ended September 30, 2024 and 2023, respectively. Participation loans accounted for as secured borrowings averaged $3 million and $5 million for the nine month periods ended September 30, 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 $85,000 and $122,000 for the three month periods ended September 30, 2024 and 2023, respectively, and $273,000 and $441,000 for the nine month periods ended September 30, 2024 and 2023, respectively.*
- *Interest income includes loan fees of $1.7 million and $1.1 million for the three month periods ended September 30, 2024 and 2023, respectively, and $4.6 million and $4.1 million for the nine month periods ended September 30, 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 $467,000 and $507,000 for the three-month periods ended September 30, 2024 and 2023, respectively, and $1.8 million and $2.0 million for the nine month periods ended September 30, 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 September 30, 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.

Bancorp’s interest rate sensitivity analysis details that increases in interest rates of 100 and 200 bps would have a slightly positive effect on net interest income, while decreases in interest rates of 100 and 200 bps would have a slightly negative impact. These results depict a relatively neutral 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 September 30, 2024 | -2.66% | -1.47% | 1.58% | 3.06% |

Bancorp’s loan portfolio is currently composed of approximately 69% fixed and 31% 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 September 30, 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 September 30, 2024 | 2023 | Nine months ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Beginning balance | $82,155 | $77,710 | $79,374 | $73,531 |
| Provision for credit losses on loans | 4,325 | 2,300 | 6,575 | 6,700 |
| Total charge-offs | (1,345) | (2,115) | (1,954) | (2,805) |
| Total recoveries | 208 | 180 | 1,348 | 649 |
| Net loan (charge-offs) recoveries | (1,137) | (1,935) | (606) | (2,156) |
| Ending balance | $85,343 | $78,075 | $85,343 | $78,075 |
| Average total loans | $6,174,309 | $5,486,262 | $5,986,366 | $5,337,493 |
| Provision for credit losses on loans to average total loans (1) | 0.07% | 0.04% | 0.11% | 0.13% |
| Net loan (charge-offs) recoveries to average total loans (1) | -0.02% | -0.04% | -0.01% | -0.04% |
| ACL for loans to total loans | 1.36% | 1.39% | 1.36% | 1.39% |
| ACL for loans to average total loans | 1.38% | 1.42% | 1.43% | 1.46% |

#### (1) Ratios are not annualized

The ACL for loans totaled $85 million as of September 30, 2024 compared to $78 million at September 30, 2023, representing an ACL to total loans ratio of 1.36% and 1.39% for the respective periods.

Provision expense on loans of $4.3 million and $6.6 million was recorded for the three and nine month periods ended September 30, 2024, attributed mainly to strong loan growth and deterioration in the FRB unemployment forecast. Net charge offs of $1.1 million and $606,000 were recorded for the three and nine month periods ended September 30, 2024, serving to decrease the ACL for loans.

Provision expense on loans of $2.3 million and $6.7 million was recorded to provision for credit losses on loans for the three and nine month periods ended September 30, 2023, respectively, driven mainly by strong loan growth. Partially offsetting the increase in the ACL associated with provision expense was net charge off activity of $1.9 million and $2.2 million for the three and nine month periods ended September 30, 2024, respectively.

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 September 30, 2024. While no provision for off balance sheet credit exposures was recorded for the three month period ended September 30, 2024 due to increased utilization (and thus a decrease in availability), provision of $475,000 was recorded for the nine month period ended September 30, 2024, driven largely by increased availability within the C&D portfolio. The ACL for off balance sheet credit exposures totaled $6.3 million as of September 30, 2024.

Provision for credit loss expense for off balance sheet credit exposures of $475,000 and $1.1 million was recorded for the three and nine month periods ended September 30, 2023. The ACL for off balance sheet credit exposures was $5.6 million as of September 30, 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 September 30, 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 September 30, 2024 | 2023 | $ Variance | % Variance | Nine months ended September 30, 2024 | 2023 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Wealth management and trust services | $10,931 | $10,030 | $901 | 9% | $32,497 | $29,703 | $2,794 | 9% |
| Deposit service charges | 2,314 | 2,272 | 42 | 2 | 6,630 | 6,622 | 8 | 0 |
| Debit and credit card income | 5,083 | 4,870 | 213 | 4 | 14,688 | 14,064 | 624 | 4 |
| Treasury management fees | 2,939 | 2,635 | 304 | 12 | 8,389 | 7,502 | 887 | 12 |
| Mortgage banking income | 1,112 | 814 | 298 | 37 | 3,077 | 2,882 | 195 | 7 |
| Net investment product sales commissions and fees | 915 | 791 | 124 | 16 | 2,580 | 2,345 | 235 | 10 |
| Bank owned life insurance | 634 | 569 | 65 | 11 | 1,817 | 1,677 | 140 | 8 |
| Gain (loss) on sale of premises and equipment | (59) | 302 | (361) | NM | (39) | 75 | (114) | NM |
| Other | 928 | 613 | 315 | 51 | 2,084 | 2,933 | (849) | (29) |
| Total non-interest income | $24,797 | $22,896 | $1,901 | 8% | $71,723 | $67,803 | $3,920 | 6% |

Total non-interest income increased $1.9 million, or 8%, and $3.9 million, or 6%, for the three and nine month periods ended September 30, 2024 compared to the same periods of 2023, respectively. Non-interest income comprised 27.6% and 27.7% of total revenues, defined as net interest income and non-interest income, for the three and nine month periods ended September 30, 2024 compared to 27.2% and 26.8%% for the same periods of 2023. WM&T services comprised 44.1% and 45.3% of total non-interest income for the three and nine month periods ended September 30, 2024 compared to 43.8% for both the three and nine month periods ended September 30, 2023.

### WM&T Services:

The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased $901,000, or 9%, and $2.8 million, or 9%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023, consistent with strong equity market appreciation and higher estate fee income that more than offset a decline in net new business expansion.

Net new business refers to revenue generated from newly acquired customers or reactivated accounts, excluding revenue from upselling or cross-selling to existing active customers. It plays a crucial role in expanding Bancorp’s financial base and ensuring long-term sustainability and success. During the third quarter of 2024, the WM&T department experienced negative net new business for the first time in a few years, which was driven in large part to attrition associated with employee retirements and market competition. Despite negative net new business for the quarter, total WM&T income is currently projected to increase over the next twelve months, as projected moderate market growth would more than offset the potential negative impact from the previously mentioned attrition and an expected decline in non-recurring estate fees.

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 $613,000, or 6%, and $2.3 million, or 8% for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023. The increases were driven largely by equity market appreciation over the past year.

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 $288,000 and $534,000 for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023, driven by increased estate fee income.

AUM, stated at market value, totaled $7.32 billion at September 30, 2024 compared with $7.16 billion at December 31, 2023 and $6.67 billion at September 30, 2023. The increase in AUM between September 30, 2023 and September 30, 2024 is attributed mainly to strong equity market appreciation experienced over the past year.

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 September 30, 2024 | 2023 | Nine months ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Investment advisory | $4,240 | $3,856 | $12,726 | $11,511 |
| Personal trust | 3,815 | 3,557 | 11,465 | 10,572 |
| Personal investment retirement | 1,955 | 1,778 | 5,661 | 5,164 |
| Company retirement | 416 | 392 | 1,240 | 1,132 |
| Foundation and endowment | 339 | 303 | 1,003 | 872 |
| Custody and safekeeping | 56 | 77 | 172 | 248 |
| Brokerage and insurance services | 5 | 1 | 9 | 9 |
| Other | 105 | 66 | 221 | 195 |
| Total WM&T services income | $10,931 | $10,030 | $32,497 | $29,703 |

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 $7.32 billion at September 30, 2024 as follows:

*(in thousands)*

|  | September 30, 2024 Managed | Non-managed (1) | Total | December 31, 2023 Managed | Non-managed (1) | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Investment advisory | $2,736,814 | $66,332 | $2,803,146 | $2,591,561 | $72,028 | $2,663,589 |
| Personal trust | 1,614,335 | 435,589 | 2,049,924 | 1,922,294 | 459,103 | 2,381,397 |
| Personal investment retirement | 946,944 | 21,282 | 968,226 | 848,800 | 17,854 | 866,654 |
| Company retirement | 54,368 | 633,990 | 688,358 | 57,486 | 510,294 | 567,780 |
| Foundation and endowment | 523,563 | 7,278 | 530,841 | 471,609 | 23,413 | 495,022 |
| Subtotal | $5,876,024 | $1,164,471 | $7,040,495 | $5,891,750 | $1,082,692 | $6,974,442 |
| Custody and safekeeping | — | 276,336 | 276,336 | — | 185,638 | 185,638 |
| Total AUM | $5,876,024 | $1,440,807 | $7,316,831 | $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 September 30, 2024 and December 31, 2023, approximately 80% and 82% of AUM were actively managed, respectively. Company retirement plan accounts consist primarily of participant-directed assets. The amount of custody and safekeeping accounts are insignificant to overall WM&T operations.

#### Managed AUM by Class of Investment:

*(in thousands)*

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Interest bearing deposits | $414,981 | $442,820 |
| Treasury and government agency obligations | 210,703 | 240,848 |
| State, county and municipal obligations | 341,798 | 297,314 |
| Money market mutual funds | 35,949 | 68,617 |
| Equity mutual funds | 1,358,978 | 1,225,210 |
| Other mutual funds - fixed, balanced and municipal | 547,813 | 551,141 |
| Other notes and bonds | 28,502 | 199,146 |
| Common and preferred stocks | 2,549,702 | 2,474,186 |
| Common trust funds and collective investment funds | 179,448 | 84,996 |
| Real estate mortgages | 167 | 373 |
| Real estate | 43,028 | 40,224 |
| Other miscellaneous assets (1) | 164,955 | 266,875 |
| Total managed assets | $5,876,024 | $5,891,750 |

(1) *Includes client directed instruments such as 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 67% in equities and 33% in fixed income securities as of September 30, 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, increased $42,000, or 2%, and $8,000, or less than 1%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023. Consistent with the banking industry generally, Bancorp has experienced a steady decline in the volume of fees earned on overdrawn checking accounts 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 $213,000, or 4%, and $624,000, or 4%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023. The increases were driven by interchange income expansion and higher transaction volume. Total debit card income increased $110,000, or 3%, and $161,000, or 2%, and total credit card income increased $103,000, or 13%, and $463,000, or 11% for the three and nine month periods ended September 30, 2024, compared the same periods 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 $304,000, or 12%, and $887,000, or 12%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023, driven by 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 increased $298,000, or 37%, and $195,000, or 7%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023, driven by an increase in origination volume during the third quarter of this year in addition to slowing MSR amortization.

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 via an arrangement with a third party broker-dealer. 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, while larger managed accounts are generally serviced by Bancorp’s WM&T group. Net investment product sales commissions and fees increased $124,000, or 16%, and $235,000, or 10%, for the three and nine month periods ended September 30, 2024 compared to the same periods of 2023 due to organic growth and general market appreciation over the respective period.

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 $65,000, or 11%, and $140,000, or 8%, for the three and nine month periods ending September 30, 2024 compared to the same periods of the prior year, which was attributed to general market appreciation and a reallocation of investments within the policy plans over the past year.

Losses on the sale of premises and equipment of $59,000 and $39,000 were recorded for the three and nine month periods ended September 30, 2024. Activity for the three and nine month periods ended September 30, 2023 was the result of the sale of certain acquired properties that overlapped with existing locations in addition to other merger-related disposal activity.

Other non-interest income increased $315,000, or 51%, for the three months ended September 30, 2024 and decreased $849,000, or 29%, for the three and nine month periods ended September 30, 2024 compared with the same periods of 2023. The increase for the three month period was attributed largely higher swap fee income recorded during the current year. In addition, the prior year period included a $250,000 OREO write-down (no such activity in the current year period). The decrease for the nine month period was driven largely by Bancorp’s decision not to renew the insurance captive in late 2023, which contributed approximately $1.4 million of other non-interest income for nine month periods ended September 30, 2023.

### Non-interest Expenses

*(dollars in thousands)*

|  | Three months ended September 30, 2024 | 2023 | $ Variance | % Variance | Nine months ended September 30, 2024 | 2023 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Compensation | $25,534 | $23,379 | $2,155 | 9% | $74,389 | $67,382 | $7,007 | 10% |
| Employee benefits | 4,629 | 4,508 | 121 | 3 | 15,591 | 14,622 | 969 | 7 |
| Net occupancy and equipment | 3,775 | 3,821 | (46) | (1) | 11,264 | 11,234 | 30 | 0 |
| Technology and communication | 4,500 | 4,236 | 264 | 6 | 14,463 | 12,706 | 1,757 | 14 |
| Debit and credit card processing | 1,845 | 1,637 | 208 | 13 | 5,402 | 4,762 | 640 | 13 |
| Marketing and business development | 1,438 | 1,357 | 81 | 6 | 4,109 | 4,236 | (127) | (3) |
| Postage, printing and supplies | 901 | 938 | (37) | (4) | 2,740 | 2,701 | 39 | 1 |
| Legal and professional | 968 | 1,049 | (81) | (8) | 3,268 | 2,665 | 603 | 23 |
| FDIC insurance | 1,095 | 937 | 158 | 17 | 3,368 | 2,851 | 517 | 18 |
| Capital and deposit based taxes | 825 | 629 | 196 | 31 | 2,128 | 1,875 | 253 | 13 |
| Intangible amortization | 1,052 | 1,167 | (115) | (10) | 3,155 | 3,519 | (364) | (10) |
| Amortization of investments in tax credit partnerships | - | 323 | (323) | NM | - | 970 | (970) | NM |
| Other | 1,890 | 2,721 | (831) | (31) | 6,645 | 8,293 | (1,648) | (20) |
| Total non-interest expenses | $48,452 | $46,702 | $1,750 | 4% | $146,522 | $137,816 | $8,706 | 6% |

Total non-interest expenses increased $1.8 million, or 4%, and $8.7 million, or 6%, for the three and nine month periods ended September 30, 2024 compared to the same periods of 2023. Compensation and employee benefits comprised 62.3% and 61.4% of Bancorp’s total non-interest expenses for the three and nine month periods ended September 30, 2024, compared to 59.7% and 59.5% for the same periods of 2023.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased $2.2 million, or 9%, and $7.0 million, or 10%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023. The increases were attributed to annual merit-based salary increases, higher bonus accruals and to a lesser extent, increased incentive compensation. Net full time equivalent employees totaled 1,068 at September 30, 2024 compared to 1,075 at December 31, 2023 and 1,056 at September 30, 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 $121,000, or 3%, and $969,000, or 7%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023, driven mainly by an increase in health insurance claims activity.

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 $46,000, or 1%, and increased $30,000, or less than 1%, for the three and nine month periods ended September 30, 2024, as compared with the same periods of 2023. At September 30, 2024, Bancorp’s branch network consisted of 72 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 $264,000, or 6%, and $1.8 million, or 14%, for the three and nine month periods ended September 30, 2024 compared to the same periods of 2023, consistent with Bancorp’s growth and continued investment in technology, including various security and compliance-related software upgrades.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses typically fluctuate consistent with transaction volumes. Debit and credit card processing expense increased $208,000, or 13%, and $640,000, or 13%, for the three and nine month periods ending September 30, 2024 compared to the same periods 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 increased $81,000, or 6%, and decreased $127,000, or 3%, for the three and nine month periods ending September 30, 2024, as compared to the same periods of 2023. The increase for the three month period related to higher advertising expense tied to time deposit product promotions, while the decrease for the nine month period stemmed largely from lower customer entertainment expenses compared to the prior year.

Postage, printing and supplies expense decreased $37,000, or 4%, and increased $39,000, or 1%, for the three and nine month periods ended September 30, 2024 compared to the same periods of 2023.

Legal and professional fees decreased $81,000, or 8%, and increased $603,000, or 23%, for the three and nine month periods ended September 30, 2024 compared to the same periods of the prior year. The decrease for the three month period is attributed mainly to lower collections-related expenses while the increase for the nine month period was driven primarily by compliance-related consulting projects associated with Bancorp approaching $10 billion in total assets.

FDIC insurance expense increased $158,000, or 17%, and $517,000, or 18%, for the three and nine month periods ended September 30, 2024, as compared to the same periods of 2023, consistent with Bancorp’s growth.

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 and nine month periods ended September 30, 2024. Expense of $323,000 and $970,000 was recorded in relation to amortization of tax credit investments for the three and nine month periods ended September 30, 2023, respectively.

Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, increased $196,000, or 31%, and $253,000, or 13%, for the three and nine month periods ended September 30, 2024 compared to the same periods of 2023. Bancorp’s capital and deposit based tax 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 amortized on an accelerated basis over a period of approximately ten years. Intangible amortization expense decreased $115,000, or 10%, and $364,000, or 10%, for the three and nine month periods ended September 30, 2024 compared to the same periods of the prior year, which is attributed to the accelerated depreciation method for which intangible assets are amortized.

Other non-interest expenses decreased $831,000, or 31%, and $1.6 million, or 20%, for the three and nine month periods ended September 30, 2024, as compared to the same periods of 2023, driven largely by Bancorp’s decision not to renew the insurance captive in late 2023, in addition to the benefit of modifications made to the corporate credit card reward program and a decline in fraudulent check and card losses.

### Income Tax Expense

A comparison of income tax expense and ETR follows:

*(dollars in thousands)*

|  | Three months ended September 30, 2024 | 2023 | $/bp Variance | % Variance | Nine months ended September 30, 2024 | 2023 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Income before income tax expense | $36,999 | $34,734 | $2,265 | 7% | $105,222 | $107,553 | $(2,331) | (2%) |
| Income tax expense | 7,639 | 7,642 | (3) | (0) | 22,377 | 23,749 | (1,372) | (6) |
| Effective tax rate | 20.65% | 22.00% | (135) bps | (6) | 21.27% | 22.08% | (81) bps | (4) |

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, RSA and RSU vesting. The ETR was reduced by 0.36% for the nine months ended September 30, 2024 compared to a reduction of 0.29% 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 0.73% and 0.49% for the nine months ended September 30, 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 nine months ended September 30, 2024 served to reduce the ETR 0.90%. The ETR was reduced by 0.48% by tax credit activity for the nine months ended September 30, 2023.
- Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.45% and 0.49% for the nine months ended September 30, 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 0.27% for the nine months ended September 30, 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 – September 30, 2024 Compared to December 31, 2023**

### Overview

Total assets increased $267 million, or 3%, to $8.44 billion at September 30, 2024 from $8.17 billion at December 31, 2023. The increase for the first nine months of 2024 was attributed to substantial loan growth of $507 million, or 9%, which was partially offset by declines of $234 million, or 16%, in the investment securities portfolio and $13 million, or 5%, in cash and cash equivalents.

Total liabilities increased $191 million, or 3%, to $7.50 billion at September 30, 2024 from $7.31 billion at December 31, 2023, driven by increases of $125 million, or 63%, and $55 million, or 1%, in FHLB advances and total deposits, respectively.

Stockholders’ equity increased $76 million, or 9%, to $934 million at September 30, 2024 from $858 million at December 31, 2023, as net income of $82.8 million and a $17.5 million improvement in AOCI was offset by $26.7 million of cash dividends declared during the first nine months of 2024. The improvement in AOCI was 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. Further, a $2.5 million increase in retained earnings was recorded in relation to the adoption of ASU 2023-02 effective January 1, 2024.

### Cash and Cash Equivalents

Cash and cash equivalents decreased $13 million, or 5%, ending at $253 million at September 30, 2024 compared to $266 million at December 31, 2023, which was the result of normal fluctuations experienced during the first nine months of 2024.

### 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 $234 million, or 16%, to $1.24 billion at September 30, 2024 compared to $1.47 billion at December 31, 2023. This decline was driven by scheduled maturities within the treasury portfolio, normal pay down activity, and to a smaller extent, a increase in the market value of the AFS investment portfolio specifically. There were no investment security purchases during the first nine months of 2024, as Bancorp has prioritized liquidity amidst continued loan growth and deposit portfolio fluctuations.

### FHLB Stock

FHLB stock holdings increased $13 million to $29 million at September 30, 2024 compared to $16 million at December 31, 2023. The increase was driven by FHLB borrowing activity during the first nine months of 2024, as FHLB members are required to hold certain levels of FHLB stock in relation to the amount of their borrowings. Overnight borrowing activity increased during the first nine months of 2024, as a result of strong loan growth and deposit fluctuations. Bancorp’s FHLB stock holdings will fluctuate consistent with borrowing activity from period to period.

### Loans

Total loans increased $507 million, or 9%, from December 31, 2023 to September 30, 2024. While the substantial loan growth experienced during the first nine months of 2024 was well-spread across loan categories, C&D and C&I lines of credit experienced growth of 27% and 17%, respectively.

Total line of credit utilization has experienced steady improvement through the first nine months of 2024, ending at 43.2% as of September 30, 2024, compared to 39.2% at December 31, 2023 and 38.8% at September 30, 2023. Increased utilization has been experienced within the C&D and C&I portfolios, the latter of which has improved to 31.8% at September 30, 2024 from 28.6% at December 31, 2023 and 26.8% at September 30, 2023. While line utilization has trended upward, it still remains below pre-pandemic levels, as customers continue to utilize cash in lieu of higher costing lines of credit.

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 $2.64 billion, or 42%, of total loans as of September 30, 2024. While a combination of sustained 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 $546 million, or 9%, of total loans as of September 30, 2024. Approximately $218 million, or 40%, of Bancorp’s office building exposure is medical-related, which in management’s opinion presents reduced risk compared to other CRE uses. In addition, approximately $282 million, or 52%, of the office building exposure is owner-occupied and is generally accompanied by a full commercial banking relationship. 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 September 30, 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 September 30, 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 September 30, 2024:

| September 30, 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 | $390,031 | $2,071,509 | $963,557 | $919,635 | $4,344,732 | 69% |
| Variable rate | 738,481 | 694,318 | 470,932 | 29,670 | 1,933,401 | 31% |
| Total loans | $1,128,512 | $2,765,827 | $1,434,489 | $949,305 | $6,278,133 | 100% |

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

### Non-performing Loans and Assets

Information summarizing non-performing loans and assets follows:

*(dollars in thousands)*

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Non-accrual loans | $16,288 | $19,058 |
| Modifications to borrowers experiencing financial difficulty | - | - |
| Loans past due 90 days or more and still accruing | 870 | 110 |
| Total non-performing loans | 17,158 | 19,168 |
| Other real estate owned | 10 | 10 |
| Total non-performing assets | $17,168 | $19,178 |
| Non-performing loans to total loans | 0.27% | 0.33% |
| Non-performing assets to total assets | 0.20% | 0.23% |
| ACL for loans to total non-performing loans | 497% | 414% |

As of September 30, 2024, non-accrual loans totaled $16 million compared to $19 million at December 31, 2023. The decrease in total non-accrual loans between December 31, 2023 and September 30, 2024 stemmed mainly from the payoffs of two larger and unrelated CRE relationships that were on non-accrual status as of December 31, 2023.

Non-performing assets as of September 30, 2024 consisted of 128 loans, ranging in individual amounts up to $3 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 $28 million and $17 million at September 30, 2024 and December 31, 2023. Delinquent loans to total loans were 0.44% and 0.30% at September 30, 2024 and December 31, 2023, respectively. The increase in delinquent loans over this period was driven by 44 owner-occupied residential real estate loans totaling $6 million that were 30 days past due and two unrelated CRE relationships totaling $4 million that went past due during the third quarter. $9 million of loans in delinquent status as of September 30, 2024 became current in October 2024, including $2 million of loans that fully paid off.

### Classified Loans

Classified loans, which consist of loans defined as OAEM, substandard, substandard non-performing (including non-accrual loans discussed above) and doubtful, totaled $167 million and $96 million at September 30, 2024 and December 31, 2023. The increase over this period was driven mainly by loans classified as OAEM and substandard, which increased $66 million in total over this period.

Loans classified as OAEM have potential weaknesses requiring management’s heightened attention that may result in deterioration of repayment prospects on the loan or of Bancorp’s credit position at some future date. OAEM loans totaled $100 million and $34 million as of September 30, 2024 and December 31, 2023, respectively. The increase in OAEM loans experienced between December 31, 2023 and September 30, 2024 was driven by a small number of relationships that were downgraded to OAEM, with one C&I relationship representing $16 million of the increase. Further, approximately $15 million of notes classified as OAEM as of September 30, 2024 represent loans that have been upgraded from the substandard classification during 2024. As of September 30, 2024, $83 million, or 83%, of loans classified as OAEM were current with their contractual payments.

### 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 $85 million as of September 30, 2024 compared to $79 million as of December 31, 2023. Provision expense for credit losses on loans of $6.6 million was recorded for the nine months ended September 30, 2024, consistent with strong loan growth and deterioration in the FRB unemployment forecast. Net charge offs of $606,000 were recorded for the nine months ended September 30, 2024, serving to reduce the ACL for loans.

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)*

|  | September 30, 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 | $13,328 | 16% | 0.79% | $22,133 | 28% | 1.42% |
| Commercial real estate - owner occupied | 9,367 | 11% | 0.98% | 11,667 | 15% | 1.29% |
| Total commercial real estate | 22,695 | 27% | 0.86% | 33,800 | 43% | 1.37% |
| Commercial and industrial - term | 21,239 | 25% | 2.46% | 14,359 | 18% | 1.66% |
| Commercial and industrial - lines of credit | 6,502 | 8% | 1.27% | 6,495 | 8% | 1.48% |
| Total commercial and industrial | 27,741 | 33% | 2.02% | 20,854 | 26% | 1.60% |
| Residential real estate - owner occupied | 13,945 | 16% | 1.78% | 9,316 | 12% | 1.31% |
| Residential real estate - non-owner occupied | 4,940 | 6% | 1.30% | 4,282 | 5% | 1.19% |
| Total residential real estate | 18,885 | 22% | 1.62% | 13,598 | 17% | 1.27% |
| Construction and land development | 11,651 | 14% | 1.73% | 7,593 | 10% | 1.43% |
| Home equity lines of credit | 1,234 | 1% | 0.52% | 1,660 | 2% | 0.79% |
| Consumer | 2,460 | 3% | 1.71% | 1,407 | 2% | 0.97% |
| Leases | 402 | 0% | 2.40% | 220 | 0% | 1.42% |
| Credit cards | 275 | 0% | 1.05% | 242 | 0% | 1.02% |
| Total | $85,343 | 100% | 1.36% | $79,374 | 100% | 1.38% |

The allocation of the ACL for loans amongst respective segments of the loan portfolio experienced a shift between December 31, 2023 and September 30, 2024, most notably within the CRE and C&I categories. This shift was driven by a thorough evaluation of the qualitative factors within the CECL methodology performed during the second quarter as part of Bancorp’s analysis, which resulted in a larger allocation of the ACL to the C&I segment and a reduced allocation of the ACL to the CRE segment.

The larger qualitative allocation that had previously been assigned to the CRE portfolio stemmed from pandemic-era concerns surrounding certain concentrations within this segment and subsequent concerns related to the impact of rising interest rates. As the CRE portfolio has continued to perform well despite higher interest rates and the prospect of interest rate decreases are on the horizon, these original concerns have been alleviated. Further, there has been minimal charge-off activity within the CRE portfolio for several quarters and delinquent loans within the segment have trended downward. Considering all of these factors, management believes a lower qualitative allocation to the CRE portfolio was warranted.

Offsetting the reduced qualitative allocation for the CRE portfolio as of September 30, 2024 was an increased qualitative allocation for the C&I portfolio. C&I concerns were driven by both recent and long-term charge off activity being concentrated in this portfolio, increased specific reserves, and higher levels of OAEM and substandard loans within the C&I segment. Further, C&I customers have generally been more strained by current economic conditions and the dramatic increase in interest rates due to exposure to the variable rate structure of many C&I loans. As such, management believed a higher qualitative allocation to the C&I portfolio was warranted.

The table below details net charge-offs to average loans outstanding by category of loan for the three and nine month periods ended September 30, 2024 and 2023, respectively.

| Three months ended September 30, (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 | $18 | $1,669,466 | 0.00% | $17 | $1,485,582 | 0.00% |
| Commercial real estate - owner occupied | - | 946,239 | 0.00% | 6 | 899,796 | 0.00% |
| Total commercial real estate | 18 | 2,615,705 | 0.00% | 23 | 2,385,378 | 0.00% |
| Commercial and industrial - term | (591) | 866,705 | -0.07% | (1,862) | 810,604 | -0.23% |
| Commercial and industrial - lines of credit | - | 501,374 | 0.00% | 1 | 436,179 | 0.00% |
| Total commercial and industrial | (591) | 1,368,079 | -0.04% | (1,861) | 1,246,783 | -0.15% |
| Residential real estate - owner occupied | (391) | 766,574 | -0.05% | 6 | 667,786 | 0.00% |
| Residential real estate - non-owner occupied | 7 | 373,434 | 0.00% | - | 341,276 | 0.00% |
| Total residential real estate | (384) | 1,140,008 | -0.03% | 6 | 1,009,062 | 0.00% |
| Construction and land development | - | 630,845 | 0.00% | - | 462,092 | 0.00% |
| Home equity lines of credit | - | 230,053 | 0.00% | - | 204,466 | 0.00% |
| Consumer | (86) | 147,447 | -0.06% | (101) | 141,453 | -0.07% |
| Leases | - | 17,008 | 0.00% | - | 14,116 | 0.00% |
| Credit cards | (94) | 25,164 | -0.37% | (2) | 22,912 | -0.01% |
| Total | $(1,137) | $6,174,309 | -0.02% | $(1,935) | $5,486,262 | -0.04% |

| Nine months ended September 30, (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 | $51 | $1,625,903 | 0.00% | $53 | $1,442,236 | 0.00% |
| Commercial real estate - owner occupied | 49 | 932,038 | 0.01% | 6 | 870,630 | 0.00% |
| Total commercial real estate | 100 | 2,557,941 | 0.00% | 59 | 2,312,866 | 0.00% |
| Commercial and industrial - term | (126) | 865,401 | -0.01% | (1,990) | 792,245 | -0.25% |
| Commercial and industrial - lines of credit | 204 | 467,513 | 0.04% | 150 | 437,250 | 0.03% |
| Total commercial and industrial | 78 | 1,332,914 | 0.01% | (1,840) | 1,229,495 | -0.15% |
| Residential real estate - owner occupied | (392) | 740,579 | -0.05% | (16) | 639,207 | 0.00% |
| Residential real estate - non-owner occupied | 7 | 366,270 | 0.00% | 2 | 329,391 | 0.00% |
| Total residential real estate | (385) | 1,106,849 | -0.03% | (14) | 968,598 | 0.00% |
| Construction and land development | - | 580,720 | 0.00% | - | 451,353 | 0.00% |
| Home equity lines of credit | 2 | 220,764 | 0.00% | (12) | 200,588 | -0.01% |
| Consumer | (241) | 146,168 | -0.16% | (263) | 138,918 | -0.19% |
| Leases | - | 16,518 | 0.00% | - | 13,715 | 0.00% |
| Credit cards | (160) | 24,492 | -0.65% | (86) | 21,960 | -0.39% |
| Total | $(606) | $5,986,366 | -0.01% | $(2,156) | $5,337,493 | -0.04% |

82

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 September 30, 2024. Provision for credit loss expense for off balance sheet credit exposures of $475,000 was recorded for the nine months ended September 30, 2024, driven largely by increased availability within the C&D portfolio. The ACL for off balance sheet credit exposures totaled $6.3 million as of September 30, 2024.

### 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 $10 million, or 10%, between December 31, 2023 and September 30, 2024, which was primarily the result of right-of-use lease asset additions. Bancorp’s branch network currently consists of 72 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets.

Premises held for sale totaling $2.3 million and $2.5 million was recorded on Bancorp’s consolidated balance sheets as of September 30, 2024 and December 31, 2023, which consists of three vacant parcels of land, a former administrative building and one former branch location.

### Goodwill

At September 30, 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, 2024, 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 September 30, 2024 and December 31, 2023, Bancorp’s CDI assets totaled $10 million and $12 million, respectively. As of September 30, 2024 and December 31, 2023, Bancorp’s CLI assets were $7 million and $8 million, respectively, and attributed entirely to the WM&T segment.

### Other Assets and Other Liabilities

Other assets decreased $7 million, or 2%, to $280 million between December 31, 2023 and September 30, 2024. Other liabilities increased $20 million, or 8%, to $267 million over the same period. The decrease in other assets stems mainly from market value changes in interest rate swap assets and amortization of MSR assets. The increase in other liabilities was driven largely by right-of-use lease liability additions (the balance sheet offset of the previously mentioned right-of-use asset additions) and increases in accrued tax liabilities and other miscellaneous accruals.

### Deposits

Total deposits increased $55 million, or 1%, from December 31, 2023 to September 30, 2024. Interest bearing deposits increased $95 million, or 2%, outpacing the $40 million, or 3% decrease in non-interest bearing deposits, as depositors continued shifting into higher-yielding alternatives in the current environment.

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 2.59% for the nine months ended September 30, 2024, compared to 1.55% for the same period of the prior year, with the cost of total deposits (including non-interest deposits) rising to 1.99% from 1.11%. While deposit costs have placed pressure on NIM in 2024, they are expected to moderate in tandem with anticipated interest rate reductions from the FRB.

### Securities Sold Under Agreements to Repurchase

SSUAR declined $3 million, or 2%, between December 31, 2023 and September 30, 2024, ending at $150 million as of September 30, 2024.

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 September 30, 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.

SSUAR 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 Bancorp’s control.

### Federal Funds Purchased

FFP and other short-term borrowing balances decreased $6 million between December 31, 2023 and September 30, 2024. At September 30, 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 September 30, 2024 and December 31, 2023, subordinated notes totaled $27 million, respectively.

### FHLB Advances

FHLB advances outstanding at September 30, 2024 and December 31, 2023 totaled $325 million and $200 million, respectively. Total advances at September 30, 2024 included a $300 million three-month rolling advance related to four separate interest rate swaps (cash flow hedges) entered into in an effort to secure longer-term funding at more attractive rates in addition to a $25 million overnight advance. At December 31, 2023, total advances consisted of a $200 million three-month rolling advance related to three separate interest rate swaps (cash flow hedges). For more information related to the interest rate swaps noted above, see the footnote titled, “*Derivative Financial Instruments.”*

Overnight advances have been utilized more frequently during the nine months ended September 30, 2024 as a result of substantial loan growth and deposit 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 $144 million and $171 million at September 30, 2024 and December 31, 2023, respectively. The decrease experienced for the first nine months of 2024 is attributed mainly to loan funding activity and deposit balance fluctuations. 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 $862 million and $1.03 billion at September 30, 2024 and December 31, 2023, respectively. The decrease in AFS debt security portfolio for the first nine months of 2024 was attributed to scheduled maturities, mainly within the treasury portfolio, and normal pay down activity, offset partially by market value appreciation during the period. The investment portfolio (HTM and AFS) includes total cash flows on amortizing debt securities of approximately $362 million (based on assumed prepayment speeds as of September 30, 2024) expected over the next 12 months, including $174 million of contractual maturities. Combined with FFS and interest bearing deposits from banks, AFS debt securities offer substantial resources to meet either loan growth or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public funds, cash balances of certain WM&T accounts and SSUAR. At September 30, 2024, the total carrying value of investment securities pledged for these purposes comprised 67% of the debt securities portfolio, leaving approximately $403 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 September 30, 2024, such deposits totaled $5.92 billion and represented 88% 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 September 30, 2024 and December 31, 2023, Bancorp held brokered deposits totaling $203,000 and $597,000, respectively.

Included in total deposit balances at September 30, 2024 are $478 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 nine 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 September 30, 2024 and December 31, 2023, available credit from the FHLB totaled $1.21 billion and $1.33 billion, respectively. Bancorp also had unsecured FFP lines with correspondent banks totaling $80 million at both September 30, 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 September 30, 2024, the Bank could pay an amount equal to $190 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank.

S**ources 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 decreased $43 million, or 2%, as of September 30, 2024 compared to December 31, 2023, as a result of increased line of credit utilization.

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 $6.3 million and $5.9 million as of September 30, 2024 and December 31, 2023, respectively. Provision expense for off balance sheet credit exposures of $475,000 was recorded for the nine month period ended September 30, 2024, driven largely by increased availability within the C&D portfolio.

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 information regarding commitments.

### Capital

At September 30, 2024, stockholders’ equity totaled $934 million, representing an increase of $76 million, or 9%, compared to December 31, 2023, as net income of $82.8 million and a $17.5 million improvement in AOCI was offset by $26.7 million of dividends declared during the first nine months of 2024. The improvement in AOCI was 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. Further, a $2.5 million increase in retained earnings was recorded in relation to the adoption of ASU 2023-02 effective January 1, 2024. 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 September 30, 2024, which stemmed largely from recording net income of $82.8 million. TCE was 8.79% at September 30, 2024 compared to 8.09% at December 31, 2023, while tangible book value per share was $24.58 at September 30, 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 nine months of 2024, as Bancorp continues to prioritize capital preservation and liquidity management. As of September 30, 2024, 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 September 30, 2024 increased compared December 31, 2023, as a result of strong operating results, which helped offset substantial risk-weighted asset growth from the loan portfolio. Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

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

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

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Total stockholders' equity - GAAP (a) | $934,094 | $858,103 |
| Less: Goodwill | (194,074) | (194,074) |
| Less: Core deposit and other intangibles | (17,149) | (20,304) |
| Tangible common equity - Non-GAAP (c) | $722,871 | $643,725 |
| Total assets - GAAP (b) | $8,437,280 | $8,170,102 |
| Less: Goodwill | (194,074) | (194,074) |
| Less: Core deposit and other intangibles | (17,149) | (20,304) |
| Tangible assets - Non-GAAP (d) | $8,226,057 | $7,955,724 |
| Total stockholders' equity to total assets - GAAP (a/b) | 11.07% | 10.50% |
| Tangible common equity to tangible assets - Non-GAAP (c/d) | 8.79% | 8.09% |
| Total shares outstanding (e) | 29,414 | 29,329 |
| Book value per share - GAAP (a/e) | $31.76 | $29.26 |
| Tangible common equity per share - Non-GAAP (c/e) | 24.58 | 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, if applicable.

*(dollars in thousands)*

|  | Three months ended September 30, 2024 | 2023 | Nine months ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Total non-interest expenses (a) | $48,452 | $46,702 | $146,522 | $137,816 |
| Less: Amortization of investments in tax credit partnerships | — | (323) | — | (970) |
| Total non-interest expenses - Non-GAAP (c) | $48,452 | $46,379 | $146,522 | $136,846 |
| Total net interest income, FTE | $65,064 | $61,437 | $187,344 | $185,757 |
| Total non-interest income | 24,797 | 22,896 | 71,723 | 67,803 |
| Total revenue - Non-GAAP (b) | 89,861 | 84,333 | 259,067 | 253,560 |
| Less: Gain/loss on sale of premises and equipment | 59 | (302) | 39 | (75) |
| Less: Gain/loss on sale of securities | — | — | — | — |
| Total adjusted revenue - Non-GAAP (d) | $89,920 | $84,031 | $259,106 | $253,485 |
| Efficiency ratio - Non-GAAP (a/b) | 53.92% | 55.38% | 56.56% | 54.35% |
| Adjusted efficiency ratio - Non-GAAP (c/d) | 53.88% | 55.19% | 56.55% | 53.99% |

88

## 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 Nov 5, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-033271. Last ingested by Listed: Oct 28, 2026, 07:31 ET. No prices; not investment advice.