# Stock Yards Bancorp, Inc. (SYBT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Stock Yards Bancorp, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/835324/000143774924005669/sybt20231231_10k.htm
Accession: 0001437749-24-005669
Filing date: 2024-02-27
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SYBT/
All MD&A years: /company/SYBT/mda/
Previous year: /company/SYBT/mda/fy2022/ (FY 2022)
Next year: /company/SYBT/mda/fy2024/ (FY 2024)

Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.         ’

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

SYB, established in 1904, is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets through 71 full service banking center locations. The Bank is registered with, and subject to supervision, regulation and examination by the FDIC and the Kentucky Department of Financial Institutions.

As a result of its acquisition of Kentucky Bancshares, Inc. on May 31, 2021, Bancorp became the 100% successor owner of a Nevada-based insurance captive taxed under Section 831(b) of the Internal Revenue Code. On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, “listed transaction,” and possibly disallow the related tax benefits, both prospectively and retroactively, for a period to be determined. While the regulation has not been finalized, it is expected to be finalized in 2024. Bancorp elected not to renew the Captive in August of 2023 and ultimately dissolved the Captive in December of 2023. The Captive’s activity is included in the Company’s consolidated financial statements and will be included in its 2023 federal income tax return. The Captive’s activity served to reduce Bancorp’s ETR by 0.2%, 0.3% and 0.2% for the years ended December 31, 2023, 2022 and 2021, respectively.

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part II Item 8 “Financial Statements and Supplementary Data.”

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Cautionary Statement Regarding Forward-Looking Statements

This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part II Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I Item 1A “Risk Factors.”

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:

[[GREPCENT_TABLE]]
[["","\u25cf","Changes in, or forecasts of, future political and economic conditions, inflation or recession and efforts to control related developments;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in laws and regulations or the interpretation thereof;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","accuracy of assumptions and estimates used in establishing the ACL for loans, ACL for off-balance sheet credit exposures and other estimates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","impairment of investment securities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","impairment of goodwill, MSRs, other intangible assets and/or DTAs;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","ability to effectively navigate an economic slowdown or other economic or market disruptions;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in fiscal, monetary, and/or regulatory policies;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in tax polices including but not limited to changes in federal and state statutory rates;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","behavior of securities and capital markets, including changes in interest rates, market volatility and liquidity;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","ability to effectively manage capital and liquidity;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","competitive product and pricing pressures;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","integration of acquired financial institutions, businesses or future acquisitions;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in the credit quality of Bancorp\u2019s customers and counterparties, deteriorating asset quality and charge-off levels;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in technology instituted by Bancorp, its counterparties or competitors;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes to or the effectiveness of Bancorp\u2019s overall internal control environment;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","adequacy of Bancorp\u2019s risk management framework, disclosure controls and procedures and internal control over financial reporting;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in applicable accounting standards, including the introduction of new accounting standards;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in investor sentiment or behavior;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","changes in consumer/business spending or savings behavior;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","ability to appropriately address social, environmental and sustainability concerns that may arise from business activities;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics or outbreaks of hostilities, and Bancorp\u2019s ability to deal effectively with disruptions caused by the foregoing;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","ability to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","ability to withstand disruptions that may be caused by any failure of its operational systems or those of third parties;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","other risks and uncertainties reported from time-to-time in Bancorp\u2019s filings with the SEC, including Part I Item 1A \u201cRisk Factors.\u201d"]]
[[/GREPCENT_TABLE]]

Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company, collectively defined as “CB,” a Louisville, Kentucky-based commercial bank and trust company, which operated 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky. At the time of acquisition and net of purchase accounting adjustments, CB had $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a WM&T Department with total AUM of approximately $2.65 billion. CB was also the holding company for three unconsolidated Delaware trust subsidiaries and held a 60% interest in LFA. Bancorp became the 100% successor owner of all three trust subsidiaries and also retained the 60% interest in LFA upon acquisition, the latter of which was disposed of effective December 31, 2022. Bancorp acquired all outstanding common stock of CB, Inc. in a combined stock and cash transaction that resulted in total consideration paid to CB shareholders of $168 million.

Bancorp recorded initial goodwill of approximately $67 million and incurred merger related expenses totaling $19.5 million during the first quarter of 2022 as a result of the CB acquisition. As a result of Bancorp’s disposition of its partial interest in LFA, which resulted in a pre-tax loss of $870,000 recorded in other non-interest expense on the consolidated income statements for the fourth quarter of 2022, goodwill totaling $8.5 million was written off, bringing total goodwill related to the CB acquisition to $58 million as of December 31, 2022.

The acquisition of CB had a significant impact on the ACL and credit loss provisioning in 2022. In total, the CB acquisition served to increase the ACL on loans by $14 million at acquisition date. This increase consisted of $10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $4.4 million of provision for credit loss expense attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense.

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 II Item 8 “Financial Statements and Supplementary Data.”

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Critical Accounting Policies and Estimates

Bancorp’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.

Management continually evaluates its accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.

Critical accounting policies are those that management believes are the most important to the portrayal of Bancorp’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with Bancorp’s Audit Committee. As of December 31, 2023, the significant accounting policy considered the most critical in preparing Bancorp’s consolidated financial statements is the determination of the ACL on loans.

Allowance for Credit Losses on Loans and Provision for Credit Losses

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

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

Provision for credit losses can be subject to volatility as ACL calculations and the resulting expense are significantly impacted by changes in CECL model assumptions such as macroeconomic factors and conditions, credit quality and loan composition. Forecasted economic conditions have been generally volatile since Bancorp’s adoption of CECL, as the pandemic, related government stimulus efforts, the Federal Reserve’s efforts to combat inflation, and recession-based fears have driven constantly changing estimates of the economy over the past several years.

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Business Segment Overview

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

Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, leasing, 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 Bancorp’s financial performance for the years ended December 31, 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["Years Ended December 31,","","","","","","","","","","","","","","Variance"],["(dollars in thousands, except per share data)","","2023","","","2022","","","2021","","","2023 / 2022","","","2022 / 2021"],["Net income available to stockholders","","$","107,748","","","$","92,972","","","$","74,645","","","","16","%","","","25","%"],["Diluted earnings per share","","$","3.67","","","$","3.21","","","$","2.97","","","","14","%","","","8","%"],["ROA","","","1.39","%","","","1.25","%","","","1.33","%","","","14","%","","","(8",")bps"],["ROE","","","13.44","%","","","12.58","%","","","13.02","%","","","86","%","","","(44",")bps"]]
[[/GREPCENT_TABLE]]

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

General highlights for the year ended December 31, 2023 compared to December 31, 2022:

[[GREPCENT_TABLE]]
[["\u25cf","In 2023, Bancorp set the following financial records:"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Net income of $107.7 million, and as a result, diluted EPS of $3.67, besting the previous records of $93.0 million and diluted EPS of $3.21 from 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Total revenue, comprising net interest income FTE and non-interest income, of $340.1 million, surpassing the previous record of $323.4 million in 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Record loan production, which drove $579 million of loan growth (excluding PPP), leading to record total loans of $5.77 billion at December 31, 2023."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","WM&T services income of $39.8 million, which was driven by solid net new business growth and strong fourth quarter performance within the equity and fixed income markets."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Debit and credit card income of $19.4 million, consistent with organic and acquisition-related growth in transaction volume and customer base in addition to larger processor incentives."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Treasury management fee income of $10.0 million, led by strong transaction volume, organic and acquisition-related expansion of the customer base, new product sales and expanded international revenue."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Net investment product sales commissions and fee income of $3.2 million stemming from organic growth and the full year impact of acquisition-related activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Net income totaled $107.7 million for year ended December 31, 2023, resulting in diluted EPS of $3.67, compared to net income of $93.0 million for the year ended December 31, 2022, which resulted in diluted EPS of $3.21. The year ended December 31, 2022 was significantly impacted by the CB acquisition."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Record results for the year ended December 31, 2023 compared to the prior year were driven by significant organic growth, the full year impact of acquisition-related activity, the benefit to interest income of rising interest rates compared to the prior year and the continued growth of Bancorp\u2019s diversified non-interest revenue streams."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","o","While interest income benefitted from rising interest rates in 2023, an increase in the cost of funds stemming from deposit contraction and pricing pressure, as well as increased borrowing activity, had a substantial impact on results for the year ended December 31, 2023 compared to the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in total assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits. The year ended December 31, 2022 represented approximately 10 months of activity associated with the CB acquisition, including $19.5 million in merger expenses and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on prior year results."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","NIM increased 4 bps to 3.39% for the year ended December 31, 2023 compared to 3.35% for the prior year consistent with average balance sheet expansion and upward movement in interest rates experienced during the year. Net interest income FTE totaled $247.9 million for the year ended December 31, 2023, representing an increase of $13.6 million, or 6%, over the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Despite increased net interest income and NIM, net interest spread declined 43 bps to 2.78% for the year ended December 31, 2023 compared to the prior year. Rising deposit costs and increased borrowing activity drove a substantial increase in the cost of funds, which increased 157 bps to 1.97% for the year ended December 31, 2023, compared to 0.40% for the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Total loans increased $565 million, or 11%, for the year ended December 31, 2023 compared to the prior year, with notable growth in CRE and Residential real estate being driven by a year of record loan production."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Bancorp\u2019s ACL on loans increased $6 million, or 8%, compared to December 31, 2022. Provision for credit losses on loans totaled $12.5 million for the year ended December 31, 2023, compared to $9.7 million for the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","In addition to substantial loan growth, a flat unemployment forecast and other factors within the CECL model, Bancorp also recorded net charge offs of $6.6 million for the year ended December 31, 2023, driven by the charge off of two isolated and unrelated C&I relationships."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Provision for credit losses on loans for the prior year period included $4.4 million of expense related to the acquired loan portfolio, and to a lesser extent, a deteriorating economic forecast."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Total deposits increased $279 million, or 4%, at December 31, 2023 compared to December 31, 2022. While total deposit growth was experienced compared to the prior year, there was significant shift in the deposit base mix, as customers migrated from non-interest bearing products into higher-yielding alternatives and pricing pressure related to deposits intensified during the year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Interest-bearing deposits increased $681 million, or 15%, for the year ended December 31, 2023 compared to the prior year, led by a $511 million increase in time deposits associated with Bancorp\u2019s successful promotional product offerings, offsetting a $402 million, or 21%, decline in non-interest bearing deposits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Non-interest income increased $3.1 million, or 3%, for the year ended December 31, 2023 compared to the prior year. While virtually all traditional non-interest income revenue streams experienced significant increases over the year ended December 31, 2022, the prior year benefitted from non-recurring gains totaling $4.4 million associated with the sale of acquired properties."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Non-interest expenses decreased $4.0 million, or 2%, for the year ended December 31, 2023 compared to the prior year. Non-interest expenses in general remained well-controlled and consistent with expansion, strong performance and continued investment in technology. The prior year included $19.5 million of merger expenses associated with the CB acquisition."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Bancorp\u2019s efficiency ratio (FTE) for the year ended December 31, 2023 was 55.23% compared to 59.30% for the year ended December 31, 2022. The elevated ratio for the prior year was the result of one-time merger-related expenses recorded in relation to the CB acquisition. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales and calls of investment securities, as well as net gains (losses) on sales of acquired premises and equipment and disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Bancorp\u2019s adjusted efficiency ratio for the year ended December 31, 2023 was 54.84% compared to 53.61% for the year ended December 31, 2022. See the section titled \u201cNon-GAAP Financial Measures\u201d for a reconcilement of non-GAAP to GAAP measures."]]
[[/GREPCENT_TABLE]]

Total stockholder’s equity to total assets was 10.50% as of December 31, 2023 compared to 10.14% at December 31, 2022. Total equity increased to $858 million in 2023, driven by net income of $107.7 million and a $23 million positive change in AOCI, offset partially by $35 million of dividends declared. The increase in AOCI from December 31, 2022 to December 31, 2023 was the result of the changing interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio.

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TCE is a measure of a company’s capital, which is useful in evaluating the quality and adequacy of capital. Bancorp’s ratio of TCE to total tangible assets was 8.09% as of December 31, 2023, compared to 7.44% at December 31, 2022, the improvement driven by growth in stockholder’s equity associated with the year’s strong operating results and the positive change in AOCI related to the valuation of the AFS debt securities portfolio. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

General highlights for the year ended December 31, 2022 compared to December 31, 2021:

[[GREPCENT_TABLE]]
[["\u25cf","Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Bancorp completed its acquisition of KB on May 31, 2021. At the time of acquisition and net of purchase accounting adjustments, KB had approximately $1.27 billion in assets, $755 million in loans, $396 million in investments securities and $1.04 billion in deposits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","In 2022, Bancorp set the following financial records:"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Net income of $93.0 million, and as a result, diluted EPS of $3.21, besting the previous records of $74.6 million and diluted EPS of $2.97 from 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Total revenue, comprising net interest income FTE and non-interest income, of $323.4 million, surpassing the previous record of $237.4 million in 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Record loan production, which drove $529 million of organic loan growth (excluding PPP) and, combined with the acquisition of CB, led to record total loans of $5.21 billion at December 31, 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","WM&T services income of $36.1 million, which was driven by both organic and acquisition-related growth despite significant market downturns during the year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Debit and credit card income of $18.6 million, supported by organic and acquisition-related growth in transaction volume and customer base."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Treasury management fee income of $8.6 million, led by increased transaction volume, new product sales and both organic and acquisition-related expansion of the customer base."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","NIM increased 13 bps to 3.35% for the year ended December 31, 2022 compared to 3.22% for the prior year consistent with average balance sheet expansion and upward movement in interest rates experienced over the year. Net interest income FTE totaled $234.3 million for the year ended December 31, 2022, representing an increase of $62.8 million, or 37%, over 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","The NIM increase was driven by both organic and acquisition-related growth and the aforementioned rise in interest rates, which more than offset the increase in interest-bearing deposit costs and the substantial decline in PPP-related interest income."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Total loans increased $1.04 billion, or 25%, for the year ended December 31, 2022 as compared to December 31, 2021, driven by the addition of $632 million in loans from the CB acquisition and strong organic loan portfolio growth."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Total provision for credit losses totaled $10.3 million for the year ended December 31, 2022, compared to negative provision of $753,000 for the year ended December 31, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Provision for credit loss expense of $4.4 million was recorded in relation to the loan portfolio added through the CB acquisition for the year ended December 31, 2022. In addition, increasing unemployment forecasts and strong organic loan growth served to increase expense for 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","While provision of $7.4 million was recorded in relation to the loan portfolio added through the KB acquisition for the year ended December 31, 2021, it was offset by a cumulative net benefit of $8.2 million recorded for credit losses on loans and credit losses on off balance sheet exposures, which was driven by stabilizing unemployment forecasts, generally improving CECL model loss factors and line of credit utilization."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Total deposits increased $604 million, or 10%, at December 31, 2022 compared to December 31, 2021. Approximately $1.12 billion of deposits were added as a result of the CB acquisition. Excluding acquisition-related activity, period-end deposit balances declined in 2022, as the elevated customer balances experienced toward the end of 2021 moderated, primarily due to contraction in non-interest bearing demand deposits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Non-interest income increased $23.3 million, or 35%, for the year ended December 31, 2022 compared to the prior year, as 2022 benefitted from both significant contributions stemming from acquisition-related activity and organic growth. All non-interest income revenue streams experienced significant increases over the prior year, with the exception of mortgage banking, which experienced a significant decline in volume driven by rising rates compared to the historic low rates that benefitted much of 2021. In addition, non-recurring gains totaling $4.4 million were recorded during the year due to the sale of acquired properties."]]
[[/GREPCENT_TABLE]]

33

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[[GREPCENT_TABLE]]
[["\u25cf","Non-interest expenses increased $49.5 million, or 35%, for the year ended December 31, 2022 compared to the same period of 2021. While both years experienced elevated non-interest expense as a result of merger-related expenses, most non-interest expense categories experienced significant increases over the prior year as a result of anticipated acquisition-related expansion. Non-interest expenses in general remained well-controlled and consistent with expansion, strong performance and continued investment in technology."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Bancorp\u2019s efficiency ratio (FTE) for the year ended December 31, 2022 was 59.30% compared to 59.92% for the year ended December 31, 2021, the elevated ratios being the result of one-time merger-related expenses recorded in relation to the respective acquisitions in both years. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales and calls of investment securities, as well as net gains (losses) on sales of acquired premises and equipment and disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Bancorp\u2019s adjusted efficiency ratio for the year ended December 31, 2022 was 53.61% compared to 51.76% for the year ended December 31, 2021. See the section titled \u201cNon-GAAP Financial Measures\u201d for a reconcilement of non-GAAP to GAAP measures."]]
[[/GREPCENT_TABLE]]

Total stockholder’s equity to total assets was 10.14% as of December 31, 2022 compared to 10.17% at December 31, 2021. Total equity increased to $760 million in 2022, driven by the issuance of $134 million in stock for the acquisition of CB and net income of $93.0 million, which were partially offset by a $108 million negative change in AOCI and $33 million of dividends declared. The large decline in AOCI from December 31, 2021 to December 31, 2022 was the result of the rising interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. TCE is a measure of a company’s capital, which is useful in evaluating the quality and adequacy of capital. Bancorp’s ratio of TCE to total tangible assets was 7.44% as of December 31, 2022, compared to 8.22% at December 31, 2021, the decline driven by both the large interest-rate driven changes in AOCI noted above and acquisition-related growth. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

34

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Challenges for 2024:

Bancorp has identified the following challenges for fiscal year 2024:

[[GREPCENT_TABLE]]
[["\u25cf","Pricing pressure and competition for both loans and deposits will continue to present significant challenges in 2024, driven by uncertainty within the current interest rate environment, inversion of the yield curve and changing levels of liquidity within the banking system generally."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","While the rising rate environment experienced in 2023 led to higher yields within the loan portfolio, continued inversion of the yield curve creates a general pricing mismatch between the rates earned on longer-term loans and the rates paid on shorter-term deposits. To the extent growth in the cost of interest bearing liabilities outpaces growth in the yield produced by interest-earning assets, NIM compression could continue."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Significant pressure was placed on NIM in 2023 as a result of a substantial and rapid increase in the cost of funds, as depositors migrated from non-interest bearing deposits to higher-yielding alternatives and borrowing activity increased. Bancorp expects related NIM compression to continue into the first part of 2024, with the percentage of non-interest bearing deposits to total deposits continuing to decline."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Successfully funding loan growth will require Bancorp to manage liquidity in a cost-effective manner and could depend largely on Bancorp\u2019s ability to raise and maintain deposits, which will present challenges in the current environment. While other sources of funding are available, they are typically more expensive than in-market deposit relationships and the extent to which they are utilized could increase our overall cost of funding."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Continued monetary policy changes (or lack thereof) by the FRB and the corresponding impact on local, national and global economic conditions could present numerous challenges in 2024. The possibility of recession, given an already-inverted yield curve and uncertainty related to future interest rate moves could threaten loan demand, subdue business and consumer spending, and create significant volatility for the markets in general. Further, the severity of a potential recession and its effect on the unemployment forecast, the primary loss driver within Bancorp\u2019s ACL model, could result in substantially higher ACL provisioning."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Net loan growth will be a major focus for Bancorp in 2024. This will be impacted by competition, prevailing interest rates, economic conditions, line of credit utilization and loan prepayments. Bancorp believes there is continued opportunity for loan growth in all of its markets. Bancorp\u2019s ability to deliver attractive loan growth over the long-term is linked to Bancorp\u2019s overall success."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","The continued development of the relationships and opportunities in Bancorp\u2019s newer markets remains a priority for 2024. The Company\u2019s growing footprint has allowed Bancorp to provide broader product offerings, increased lending capabilities and an expanded branch delivery system to existing and prospective customers alike, creating solid growth opportunities and a larger platform for future expansion. Prioritizing the development of the opportunities afforded by recent acquisitions will play a major role in delivering strong operating results in the coming year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Bancorp derives significant non-interest income from WM&T services. Most of these fees are based upon the market value of AUM at respective period ends. Absent fixed income and equity market movements, to grow this revenue stream, Bancorp must attract new customers and retain existing customers. Bancorp believes there is opportunity for growth of the WM&T business in all of its markets. Growth in market values of AUM and fees is dependent upon positive returns in the overall capital markets, which could be threatened should economic conditions worsen. Bancorp has no control over market volatility."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["\u25cf","Over the past several years, Bancorp\u2019s asset quality metrics have trended within a low range, periodically exceeding benchmarks and reaching historically strong levels. Bancorp realizes that present asset quality metrics are positive and, recognizing the cyclical nature of the lending business and current economic conditions, Bancorp anticipates this trend will likely normalize over time."]]
[[/GREPCENT_TABLE]]

35

Table of Contents

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 various competitive conditions within the marketplace. The discussion that follows is based on FTE net interest income data.

Comparative information regarding net interest income follows:

[[GREPCENT_TABLE]]
[["As of and for the Years Ended December 31,","","","","","","","","","","","Variance"],["(dollars in thousands)","","2023","","","2022","","","2021","","","2023 / 2022","","","2022 / 2021"],["Net interest income","","$","247,332","","","$","233,383","","","$","171,074","","","","6","%","","","36","%"],["Net interest income (FTE)*","","","247,869","","","","234,267","","","","171,508","","","","6","%","","","37","%"],["Net interest spread (FTE)*","","","2.78","%","","","3.21","%","","","3.16","%","","","(43",")bps","","","5","bps"],["Net interest margin (FTE)*","","","3.39","%","","","3.35","%","","","3.22","%","","","4","bps","","","13","bps"],["Average interest earning assets","","$","7,303,763","","","$","6,987,365","","","$","5,318,968","","","","5","%","","","31","%"],["Average interest bearing liabilities","","$","5,052,106","","","$","4,538,911","","","$","3,391,709","","","","11","%","","","34","%"],["Five year Treasury note rate at year end","","","3.84","%","","","3.99","%","","","1.26","%","","","(15",")bps","","","273","bps"],["Average five year Treasury note rate","","","4.06","%","","","3.00","%","","","0.86","%","","","106","bps","","","214","bps"],["Prime rate at year end","","","8.50","%","","","7.50","%","","","3.25","%","","","100","bps","","","425","bps"],["Average Prime rate","","","8.20","%","","","4.85","%","","","3.25","%","","","335","bps","","","160","bps"],["One month term SOFR at year end","","","5.35","%","","","4.36","%","","","0.06","%","","","99","bps","","","430","bps"],["Average one month term SOFR","","","5.07","%","","","1.99","%","","","0.04","%","","","308","bps","","","195","bps"]]
[[/GREPCENT_TABLE]]

*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 $4 million, $5 million and $5 million for the years ended December 31, 2023, 2022 and 2021, 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, because Bancorp believes it provides a more accurate depiction of loan portfolio performance.

At December 31, 2023, Bancorp’s loan portfolio consisted of approximately 72% fixed and 28% variable rate loans. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year treasury. Bancorp’s variable rate loans are typically indexed to either Prime or SOFR, generally repricing as those rates change. At December 31, 2023, approximately 61% and 39% of Bancorp’s variable rate loan portfolio was indexed to Prime and SOFR, respectively.

Prime rate, the five year Treasury note rate, one month term SOFR are included in the table above to provide a general indication of the interest rate environment Bancorp has operated in during the past three years, a period marked by a dramatic rise in interest rates.

The FRB has taken aggressive interest rate action over this period, holding the FFTR at the pandemic-driven range of 0.00% - 0.25% for the entirety of 2021 until beginning a rate hike strategy in 2022 aimed at taming inflation that had reached its highest levels in decades. The FFTR was increased a total of 425 bps in 2022, and another 100 bps in 2023, ending at a range of 5.25% - 5.50% as of December 31, 2023. As a result, Prime increased from 3.25% at the beginning of 2021 to 8.50% as of December 31, 2023.

Bancorp experienced significant benefit from the rate increases enacted in 2022, as the majority of Bancorp’s variable rate loans rose above their 4.00% floors and deposit rates remained low. However, as interest rates continued to rise in 2023, the positive impact rising rates had on the loan portfolio began to be offset by higher deposit rates stemming from intense pricing pressure and competition, which began to drive NIM compression.

36

Table of Contents

The current economic outlook remains volatile, regularly changing as new economic data becomes available and the FRB’s efforts to control inflation continue. It is generally anticipated that short-term interest rates will decline at some point in 2024, but there is wide speculation regarding when the FRB will cut the FFTR. Given current economic uncertainty, Bancorp expects ongoing pricing pressure/competition for both loans and deposits, changing levels of liquidity within the banking system generally and an inverted yield curve will continue to place pressure on NIM in the first part of 2024.

Discussion of 2023 vs 2022:

Net interest spread (FTE) and NIM (FTE) were 2.78% and 3.39%, for the year ended December 31, 2023 compared to 3.21% and 3.35% for the year ended December 31, 2022, respectively. NIM during the year ended December 31, 2023 was significantly impacted by the following:

[[GREPCENT_TABLE]]
[["","\u25cf","The rapidly rising interest rate environment that has evolved from the sustained, pandemic-driven lows experienced beginning in 2020. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB\u2019s first hike in mid-March 2022. The FFTR stood at a range of 5.25% - 5.50%, and Prime at 8.50%, as of December 31, 2023, as a result of aggressive interest rate action from the FRB during 2022 and 2023."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The positive impact of rising interest rates on interest-earning assets, which drove a substantial increase in interest income across all interest-earning asset categories."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","A significant increase in the cost of funds, as depositors migrated to higher yielding deposit alternatives, competition for deposits intensified and Bancorp\u2019s borrowing activity increased, which partially offset the growth of yields on interest-earning assets noted above."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Balance sheet expansion stemming from both organic growth and the full year impact of acquisition-related activity for the year ended December 31, 2023 compared to the prior year."]]
[[/GREPCENT_TABLE]]

Net interest income (FTE) increased $13.6 million, or 6%, for the year ended December 31, 2023 compared to the same period of 2022, attributed largely to significant organic loan growth, the full year impact of acquisition-related activity and the benefits of a rising interest rate environment, which more than offset rising funding costs.

Total average interest earning assets increased $316.4 million, or 5%, to $7.30 billion for the year ended December 31, 2023, as compared to year ended December 31, 2022, with the average rate earned on total interest earning assets increasing 114 bps to 4.75%.

[[GREPCENT_TABLE]]
[["","\u25cf","Average total loan balances increased $604 million, or 13%, for the year ended December 31, 2023, compared to the prior year. Average non-PPP loan growth of $648 million, or 14%, was driven by strong organic growth and the full year impact of acquisition-related activity, which was partially offset by a $44 million, or 83%, decline in average PPP loan balances resulting from continued forgiveness activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average investment securities grew $17 million, or 1%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, attributed to a combination of strategically deploying excess liquidity through further investment and the full year impact of acquisition-related activity, which was partially offset by normal amortization and maturity activity during 2023. Investment security purchases during 2023 were minimal."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average FFS and interest bearing due from bank balances decreased $313 million, or 66%, for the year ended December 31, 2023, as loan growth and average total deposit contraction have led to lower levels of liquidity compared to the prior year."]]
[[/GREPCENT_TABLE]]

Total interest income (FTE) increased $94.7 million, or 37%, to $347.2 million for the year ended December 31, 2023, as compared to the year ended December 31, 2022.

[[GREPCENT_TABLE]]
[["","\u25cf","Interest and fee income (FTE) on loans increased $85.7 million, or 40%, to $302.4 million for the year ended December 31, 2023, compared to the prior year, driven by the rising rate environment and both organic and acquisition-related growth, which more than offset a $4.6 million, or 95%, decline in PPP-related income. The yield on the overall loan portfolio increased 108 bps to 5.58% for the year ended December 31, 2023, compared to 4.50% for the year ended December 31, 2022."]]
[[/GREPCENT_TABLE]]

37

Table of Contents

[[GREPCENT_TABLE]]
[["","\u25cf","Growth in average investment securities led to a $5.5 million, or 19%, increase in interest income (FTE) on the portfolio for the year ended December 31, 2023 compared to the prior year, driving a 30 bps, or 17%, increase in the corresponding yield on the portfolio. The increased yield on the investment securities portfolio was driven by the benefit of investments purchased in the prior year once rates began to rise and the continued amortization and maturity of lower-yielding securities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest income on FFS and interest bearing due from bank balances increased $2.4 million, or 40%, for the year ended December 31, 2023, as rising short-term interest rates more than offset a $313 million decline in related average balances. The yield on these assets increased 386 bps to 5.12% for the year ended December 31, 2023 compared to the same period of 2022, stemming from the dramatic increase in the FFTR over the past 12 months."]]
[[/GREPCENT_TABLE]]

Total average interest bearing liabilities increased $513.2 million, or 11%, to $5.05 billion for the year ended December 31, 2023 compared with the year ended December 31, 2022, with the total average cost increasing 157 bps to 1.97%.

[[GREPCENT_TABLE]]
[["","\u25cf","Average interest bearing deposits increased $223 million, or 5%, for the year ended December 31, 2023 compared to the prior year. This increase stems mainly from an increase in time deposits during 2023 attributed to general customer migration to higher-yielding deposit alternatives and Bancorp\u2019s promotional offerings, which has been partially offset by contraction in other interest bearing deposit categories."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average FHLB advances totaled $280 million for the year ended December 31, 2023. Bancorp utilized overnight borrowings with the FHLB during 2023 based on evolving liquidity needs. Bancorp also utilized rolling term advances in conjunction with three separate interest rate swaps during the year ended December 31, 2023 in an effort to secure longer-term funding at a more favorable rate. The minimal FHLB advance activity that occurred in the prior year was the result of utilizing a one-week cash management advance at year-end for short-term liquidity purposes, which represented the only FHLB advance used during 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average subordinated debentures totaled $26.6 million for the year ended December 31, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022."]]
[[/GREPCENT_TABLE]]

Total interest expense increased $81.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, driven by substantial deposit rate increases and increased borrowing activity, and to a lesser extent, acquisition-related expansion. As a result, the cost of interest bearing liabilities increased 157 bps to 1.97% for the year ended December 31, 2023 compared to the prior year.

[[GREPCENT_TABLE]]
[["","\u25cf","Total interest bearing deposit expense increased $65.2 million, mainly as a result aforementioned deposit rate increases, resulting in a 140 bps increase in the cost of interest bearing deposits for the year ended December 31, 2023 compared to the prior year. Bancorp expects pricing pressure/competition stemming from the rising rate environment to continue in the coming months."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest expense of $12.8 million was recorded in relation to FHLB borrowings for the year ended December 31, 2023, driven by the increased borrowing activity previously noted. Interest expense of $12,000 was recorded for the year ended December 31, 2022, which stemmed entirely from a one-week cash management advance utilized at year-end."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest expense totaling $2.2 million was recorded for the year ended December 31, 2023, as a result of the subordinated debentures added through the prior year acquisition, approximately $397,000 of which stems from purchase accounting-related mark-to-market amortization. Interest expense totaling $1.1 million was recorded for the year ended December 31, 2022, $331,000 of which stemmed from the purchase accounting-related mark-to-market amortization."]]
[[/GREPCENT_TABLE]]

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Table of Contents

Discussion of 2022 vs 2021:

Net interest spread (FTE) and NIM (FTE) were 3.21% and 3.35%, for the year ended December 31, 2022 compared to 3.16% and 3.22% for the same period in 2021, respectively. NIM during the year ended December 31, 2022 was significantly impacted by the following:

[[GREPCENT_TABLE]]
[["","\u25cf","A rapidly rising interest rate environment evolving from the sustained, pandemic-driven lows experienced over the prior two years. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until mid-March 2022. The FFTR stood at a range of 4.25% - 4.50%, and Prime at 7.50%, as of December 31, 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Bancorp\u2019s first deposit rate increases in nearly two years, stemming from the aforementioned rising rate environment, which drove a $10.8 million increase in interest expense on deposits for the year ended December 31, 2022 compared to the same period of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Substantial balance sheet expansion stemming from both acquisition-related activity and organic growth, which resulted in total average earning asset growth of $1.67 billion, or 31%, and average interest-bearing liability growth of $1.15 billion, or 34%, for the year ended December 31, 2022 compared to the same period of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Overall excess balance sheet liquidity, which placed pressure on NIM in both periods. Excess liquidity within the banking system in general peaked towards the end of 2021 and moderated through the year ended December 31, 2022."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","PPP forgiveness activity, and the related recognition of fee income on such loans declined significantly in 2022, as the vast majority of the original portfolio became forgiven. The average balance of the PPP loan portfolio decreased $345 million, or 87%, and related income decreased $17.3 million, or 78%, for the year ended December 31, 2022 compared to the same period of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The addition of $26 million of subordinated debt in association with the CB acquisition contributed $1.1 million of interest expense for the year ended December 31, 2022, $331,000 of which was attributed to purchase accounting-related mark-to-market amortization. No such activity was recorded for the year ended December 31, 2021."]]
[[/GREPCENT_TABLE]]

Net interest income (FTE) increased $62.8 million, or 37%, for the year ended December 31, 2022 compared to the same period of 2021, largely as a result of acquisition-related activity, but also driven in part by strong organic loan growth, substantial deployment of excess liquidity into the investment securities portfolio and the benefit of a rising interest rate environment. Partially offsetting this increase was the rising cost of interest bearing deposits and the addition of subordinated debt through the CB acquisition.

Total average interest earning assets increased $1.67 billion, or 31%, to $6.99 billion for the year ended December 31, 2022, as compared to the same period of 2021, with the average rate earned on total interest earning assets increasing from 3.34% to 3.61%.

[[GREPCENT_TABLE]]
[["","\u25cf","Average total loan balances increased $868 million, or 22%, for the year ended December 31, 2022 compared to the same period of 2021. Average non-PPP loan growth of $1.21 billion, or 34%, was driven by acquisition-related expansion and strong organic growth, which was partially offset by a $345 million, or 87%, decline in average PPP loan balances, as a result of forgiveness activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average investment securities grew $771 million, or 86%, for the year ended December 31, 2022 compared to the same period of 2021, attributed to a combination of strategically deploying excess liquidity through further investment and acquisition-related activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average FFS and interest bearing due from bank balances increased $31 million, or 7%, for the year ended December 31, 2022 due to on-going excess balance sheet liquidity. While average balances reflected excess balance sheet liquidity, actual excess balance sheet liquidity gradually declined through December 31, 2022, and reached more moderate levels by year-end."]]
[[/GREPCENT_TABLE]]

39

Table of Contents

Total interest income (FTE) increased $75.0 million, or 42%, to $252.5 million for the year ended December 31, 2022, as compared to the same period of 2021.

[[GREPCENT_TABLE]]
[["","\u25cf","Interest and fee income (FTE) on loans increased $52.2 million, or 32%, to $216.7 million for the year ended December 31, 2022 compared to the same period of 2021, driven by both organic and acquisition-related growth in the non-PPP portfolio and the rising rate environment, which more than offset a $17.3 million, or 78%, decline in PPP-related income. The yield on the overall loan portfolio climbed to 4.50% for the year ended December 31, 2022, compared to 4.16% for the same period of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Significant growth in average investment securities led to a $17.2 million increase interest income (FTE) on the portfolio for the year ended December 31, 2022 compared to the same period of 2021, driving a 42 bps, or 32%, increase in the corresponding yield on the portfolio. Substantial deployment of excess liquidity benefitted the investment portfolio as the yields earned on recent purchases have improved dramatically in tandem with rising rates."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest income on FFS and interest bearing due from bank balances increased $5.4 million for the year ended December 31, 2022, as a result of average balance growth stemming from excess balance sheet liquidity and rising interest rates. The yield on these assets increased 112 bps to 1.26% for the year ended December 31, 2022 compared to the same period of 2021, stemming from the dramatic increase in the FFTR over the period."]]
[[/GREPCENT_TABLE]]

Total average interest bearing liabilities increased $1.15 billion, or 34%, to $4.54 billion for the year ended December 31, 2022 compared with the same period in 2021, with the total average cost increasing 22 bps to 0.40%.

[[GREPCENT_TABLE]]
[["","\u25cf","Average interest bearing deposits increased $1.08 billion, or 33%, for the year ended December 31, 2022 compared to the same period in 2021, with interest-bearing demand deposits accounting for $585 million of the increase. The significant growth was attributed to both acquisition-related activity and organic growth stemming from the industry-wide trend of customers maintaining higher levels of liquidity, which was experienced for several quarters. However, excluding acquisition-related activity, period-end deposit balances declined in 2022, as the elevated customer balances noted above moderated."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Consistent with the average interest bearing deposit growth noted above, average SSUAR balances increased $60 million for the year ended December 31, 2022 compared to the same period of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Average FHLB advances decreased $16 million for the year ended December 31, 2022 compared to the same period of the prior year, as all outstanding term FHLB advances either matured or were paid off by the end of 2021. The minimal average balance of FHLB advances for the year ended December 31, 2022 stemmed from a one-week cash management advance that was utilized by Bancorp at year-end for short-term liquidity purposes, which represented the only FHLB advance used during 2022, and matured in early January 2023."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Subordinated debentures totaling $26 million were added as a result of the CB acquisition during the first quarter of 2022. The corresponding average balance for the year ended December 31, 2022 totaled $22 million."]]
[[/GREPCENT_TABLE]]

Total interest expense increased $12.3 million for the year ended December 31, 2022 compared to the same period of 2021, driven by acquisition-related average balance growth, Bancorp’s first deposit rate increases in almost two years and debt assumed through the CB acquisition. As a result, the cost of interest bearing liabilities increased 22 bps to 0.40% for the year ended December 31, 2022 compared to the same period of 2021.

[[GREPCENT_TABLE]]
[["","\u25cf","Total interest bearing deposit expense increased $10.8 million as a result of acquisition-related activity and the aforementioned deposit rate increases, resulting in a 20 bps increase in the cost of interest bearing deposits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest expense totaling $1.1 million was recorded for the year ended December 31, 2022 as a result of the subordinated debentures assumed through the CB acquisition, approximately $331,000 of which stems from purchase accounting-related mark-to-market amortization. No such activity was recorded for year ended December 31, 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest expense on FHLB advances was recorded for the year ended December 31, 2022 was a minimal $12,000, as all FHLB advances either matured or paid off by the end of 2021, resulting in a decline of $325,000 compared to the same period of the prior year."]]
[[/GREPCENT_TABLE]]

40

Table of Contents

Average Balance Sheets and Interest Rates (FTE)

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["","","Average","","","","","","","Average","","","Average","","","","","","","Average","","","Average","","","","","","","Average"],["Years ended December 31, (dollars in thousands)","","Balance","","","Interest","","","Rate","","","Balance","","","Interest","","","Rate","","","Balance","","","Interest","","","Rate"],["Interest earning assets:"],["Federal funds sold and interest bearing due from banks","","$","164,314","","","$","8,411","","","","5.12","%","","$","477,341","","","$","6,018","","","","1.26","%","","$","446,783","","","$","645","","","","0.14","%"],["Mortgage loans held for sale","","","6,822","","","","211","","","","3.09","","","","8,835","","","","190","","","","2.15","","","","11,170","","","","249","","","","2.23"],["Investment securities:"],["Taxable","","","1,602,335","","","","32,706","","","","2.04","","","","1,594,942","","","","27,302","","","","1.71","","","","879,298","","","","11,575","","","","1.32"],["Tax-exempt","","","85,304","","","","1,957","","","","2.29","","","","75,382","","","","1,851","","","","2.46","","","","19,636","","","","340","","","","1.73"],["Total securities","","","1,687,639","","","","34,663","","","","2.05","","","","1,670,324","","","","29,153","","","","1.75","","","","898,934","","","","11,915","","","","1.33"],["Federal Home Loan Bank stock","","","22,123","","","","1,560","","","","7.05","","","","11,741","","","","505","","","","4.30","","","","10,824","","","","262","","","","2.42"],["SBA Paycheck Protection Program (PPP) loans","","","8,877","","","","242","","","","2.73","","","","52,704","","","","4,798","","","","9.10","","","","397,282","","","","22,044","","","","5.55"],["Non-PPP loans","","","5,413,988","","","","302,146","","","","5.58","","","","4,766,420","","","","211,872","","","","4.45","","","","3,553,975","","","","142,395","","","","4.01"],["Total loans","","","5,422,865","","","","302,388","","","","5.58","","","","4,819,124","","","","216,670","","","","4.50","","","","3,951,257","","","","164,439","","","","4.16"],["Total interest earning assets","","","7,303,763","","","","347,233","","","","4.75","","","","6,987,365","","","","252,536","","","","3.61","","","","5,318,968","","","","177,510","","","","3.34"],["Less allowance for credit losses on loans","","","78,352","","","","","","","","","","","","65,672","","","","","","","","","","","","57,696"],["Non-interest earning assets:"],["Cash and due from banks","","","80,061","","","","","","","","","","","","90,481","","","","","","","","","","","","63,477"],["Premises and equipment, net","","","102,895","","","","","","","","","","","","106,631","","","","","","","","","","","","69,483"],["Bank owned life insurance","","","85,746","","","","","","","","","","","","68,325","","","","","","","","","","","","44,720"],["Goodwill","","","194,074","","","","","","","","","","","","188,949","","","","","","","","","","","","84,853"],["Accrued interest receivable and other","","","87,387","","","","","","","","","","","","62,801","","","","","","","","","","","","103,081"],["Total assets","","$","7,775,574","","","","","","","","","","","$","7,438,880","","","","","","","","","","","$","5,626,886"],["Interest bearing liabilities:"],["Deposits:"],["Interest bearing demand","","$","2,277,001","","","$","34,262","","","","1.50","%","","$","2,218,416","","","$","9,186","","","","0.41","%","","$","1,633,606","","","$","1,771","","","","0.11","%"],["Savings","","","483,245","","","","1,308","","","","0.27","","","","538,971","","","","638","","","","0.12","","","","328,570","","","","93","","","","0.03"],["Money market","","","1,115,331","","","","24,077","","","","2.16","","","","1,140,025","","","","5,284","","","","0.46","","","","919,778","","","","589","","","","0.06"],["Time","","","732,998","","","","21,938","","","","2.99","","","","487,981","","","","1,304","","","","0.27","","","","420,308","","","","3,174","","","","0.76"],["Total interest bearing deposits","","","4,608,575","","","","81,585","","","","1.77","","","","4,385,393","","","","16,412","","","","0.37","","","","3,302,262","","","","5,627","","","","0.17"],["Securities sold under agreements to repurchase","","","123,111","","","","2,087","","","","1.70","","","","122,154","","","","567","","","","0.46","","","","62,534","","","","24","","","","0.04"],["Federal funds purchased","","","13,794","","","","689","","","","4.99","","","","9,357","","","","154","","","","1.65","","","","10,596","","","","14","","","","0.13"],["Federal Home Loan Bank advances","","","280,068","","","","12,768","","","","4.56","","","","274","","","","12","","","","4.38","","","","16,317","","","","337","","","","2.07"],["Subordinated debentures","","","26,558","","","","2,235","","","","8.42","","","","21,733","","","","1,124","","","","5.17","","","","\u2014","","","","\u2014","","","","\u2014"],["Total interest bearing liabilities","","","5,052,106","","","","99,364","","","","1.97","","","","4,538,911","","","","18,269","","","","0.40","","","","3,391,709","","","","6,002","","","","0.18"],["Non-interest bearing liabilities:"],["Non-interest bearing demand deposits","","","1,763,157","","","","","","","","","","","","2,053,213","","","","","","","","","","","","1,578,795"],["Accrued interest payable and other","","","158,718","","","","","","","","","","","","107,958","","","","","","","","","","","","83,121"],["Total liabilities","","","6,973,981","","","","","","","","","","","","6,700,082","","","","","","","","","","","","5,053,625"],["Stockholders\u2019 equity","","","801,593","","","","","","","","","","","","738,798","","","","","","","","","","","","573,261"],["Total liabilities and stockholder's equity","","$","7,775,574","","","","","","","","","","","$","7,438,880","","","","","","","","","","","$","5,626,886"],["Net interest income","","","","","","$","247,869","","","","","","","","","","","$","234,267","","","","","","","","","","","$","171,508"],["Net interest spread","","","","","","","","","","","2.78","%","","","","","","","","","","","3.21","%","","","","","","","","","","","3.16","%"],["Net interest margin","","","","","","","","","","","3.39","%","","","","","","","","","","","3.35","%","","","","","","","","","","","3.22","%"]]
[[/GREPCENT_TABLE]]

41

Table of Contents

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

[[GREPCENT_TABLE]]
[["","\u25cf","Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans averaged $4 million, $5 million and $5 million for the years ended December 31, 2023, 2022 and 2021, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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 $537,000, $884,000 and $434,000 for the years ended December 31, 2023, 2022 and 2021, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Interest income includes loan fees of $5.2 million ($242,000 associated with the PPP), $10.3 million ($4.2 million associated with the PPP) and $20.5 million ($18.1 million associated with the PPP) for the years ended December 31, 2023, 2022 and 2021, respectively. Interest income on loans may be impacted by the level of prepayment fees collected and accretion related to loans purchased. Accretion income/ (amortization expense) related to acquired loans totaled $2.4 million, $2.6 million and ($112,000) for the years ended December 31, 2023, 2022 and 2021, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","NIM represents net interest income on a FTE basis as a percentage of average interest earning assets."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Net interest spread (FTE) is the difference between taxable equivalent rates earned on interest earning assets less the cost of interest bearing liabilities."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The fair market value adjustment on investment securities resulting from ASC 320, Investments \u2013 Debt and Equity Securities is included as a component of other assets."]]
[[/GREPCENT_TABLE]]

42

Table of Contents

The following table illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Bancorp’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Tax-equivalent adjustments are based on a federal income tax rate of 21%. The change in interest due to both rate and volume has been allocated to the change due to rate and the change due to volume in proportion to the relationship of the absolute dollar amounts of the change in each.

Rate/Volume Analysis (FTE)

[[GREPCENT_TABLE]]
[["","","Year ended December 31, 2023","","","Year ended December 31, 2022"],["","","Compared to","","","Compared to"],["","","Year ended December 31, 2022","","","Year ended December 31, 2021"],["","","Total Net","","","Increase (Decrease) Due to","","","Total Net","","","Increase (Decrease) Due to"],["(in thousands)","","Change","","","Rate","","","Volume","","","Change","","","Rate","","","Volume"],["Interest income:"],["Federal funds sold and interest bearing due from banks","","$","2,393","","","$","8,471","","","$","(6,078",")","","$","5,373","","","$","5,326","","","$","47"],["Mortgage loans held for sale","","","21","","","","71","","","","(50",")","","","(59",")","","","(9",")","","","(50",")"],["Investment securities:"],["Taxable","","","5,404","","","","5,277","","","","127","","","","15,727","","","","4,239","","","","11,488"],["Tax-exempt","","","106","","","","(127",")","","","233","","","","1,511","","","","194","","","","1,317"],["Federal Home Loan Bank stock","","","1,055","","","","443","","","","612","","","","243","","","","219","","","","24"],["SBA Paycheck Protection Program (PPP) loans","","","(4,556",")","","","(2,083",")","","","(2,473",")","","","(17,246",")","","","8,919","","","","(26,165",")"],["Non-PPP Loans","","","90,274","","","","58,935","","","","31,339","","","","69,477","","","","16,874","","","","52,603"],["Total interest income","","","94,697","","","","70,987","","","","23,710","","","","75,026","","","","35,762","","","","39,264"],["Interest expense:"],["Deposits:"],["Interest bearing demand","","","25,076","","","","24,827","","","","249","","","","7,415","","","","6,580","","","","835"],["Savings","","","670","","","","742","","","","(72",")","","","545","","","","454","","","","91"],["Money market","","","18,793","","","","18,910","","","","(117",")","","","4,695","","","","4,521","","","","174"],["Time","","","20,634","","","","19,666","","","","968","","","","(1,870",")","","","(2,315",")","","","445"],["Total interest bearing deposits","","","65,173","","","","64,145","","","","1,028","","","","10,785","","","","9,240","","","","1,545"],["Securities sold under agreements to repurchase","","","1,520","","","","1,516","","","","4","","","","543","","","","500","","","","43"],["Federal funds purchased","","","535","","","","434","","","","101","","","","140","","","","142","","","","(2",")"],["Federal Home Loan Bank advances","","","12,756","","","","1","","","","12,755","","","","(325",")","","","(158",")","","","(167",")"],["Subordinated debt","","","1,111","","","","821","","","","290","","","","1,124","","","","\u2014","","","","1,124"],["Total interest expense","","","81,095","","","","66,917","","","","14,178","","","","12,267","","","","9,724","","","","2,543"],["Net interest income","","$","13,602","","","$","4,070","","","$","9,532","","","$","62,759","","","$","26,038","","","$","36,721"]]
[[/GREPCENT_TABLE]]

43

Table of Contents

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 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 December 31, 2023 were derived from conservative assumptions Bancorp uses in its model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates based on historical data. Management uses different betas in the rising and falling rate scenarios in an effort to best simulate expected earnings trends. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 68% for rising rate scenarios and 37% for falling rate scenarios, respectively. While the betas experienced since rates began to rise in the first quarter of 2022 were significantly below the 68% beta used in the model, the Company anticipates future rising rate scenario betas to return to the historic averages. The 37% beta used in the falling rate scenario is the result of management’s expectations of deposit rate decreases given the current characteristics of the deposit portfolio.

Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100 and 200 bps would have a negative effect on net interest income, as would decreases in interest rates of 100, 200 and 300 bps. These results depict a slightly liability sensitive interest rate risk profile in rising rate scenarios and an asset sensitive position in the falling rate scenarios. The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. The decrease in net interest income in the falling rate scenarios is the result of the lower beta experienced since rates began to rise in the first quarter of 2022, which was the result of a significant percentage of the Company’s deposit cost being less than 100 bps, and therefore cannot decrease the full 100, 200 or 300 bps simulated in the model.

[[GREPCENT_TABLE]]
[["","","-200","","","-100","","","100","","","200"],["","","Basis Points","","","Basis Points","","","Basis Points","","","Basis Points"],["% Change from base net interest income at December 31, 2023","","","-3.68","%","","","-1.59","%","","","-2.11","%","","","-4.24","%"]]
[[/GREPCENT_TABLE]]

Bancorp’s loan portfolio is currently composed of approximately 72% fixed and 28% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 61%) or one month LIBOR/SOFR (approximately 39%).

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

44

Table of Contents

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

The Company did not have any loans or interest rate derivative contracts that referenced LIBOR as of December 31, 2023. The Company has elected to utilize SOFR as the replacement for LIBOR. The Company had $813 million in loans and interest rate derivative contracts (notional amount) that were indexed to SOFR at December 31, 2023.

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

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

45

Table of Contents

Provision for Credit Losses

Provision for credit losses on loans at December 31, 2023 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the footnote titled “Summary of Significant Accounting Policies” for detailed discussion regarding Bancorp’s ACL methodology by loan segment.

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

[[GREPCENT_TABLE]]
[["As of and for the years ended December 31, (dollars in thousands)","","2023","","","2022","","","2021"],["Beginning balance - ACL on loans","","$","73,531","","","$","53,898","","","$","51,920"],["Acquired PCD loans (goodwill adjustment)","","","\u2014","","","","9,950","","","","6,757"],["Adjusted beginning balance - ACL on loans","","","73,531","","","","63,848","","","","58,677"],["Provision for credit losses on loans","","","12,471","","","","5,253","","","","(6,000",")"],["Provision for credit losses on loans - acquired loans","","","\u2014","","","","4,429","","","","7,397"],["Total provision for credit losses on loans","","","12,471","","","","9,682","","","","1,397"],["Total charge-offs","","","(7,512",")","","","(2,307",")","","","(7,681",")"],["Total recoveries","","","884","","","","2,308","","","","1,505"],["Net loan (charge-offs) recoveries","","","(6,628",")","","","1","","","","(6,176",")"],["Ending balance - ACL on loans","","$","79,374","","","$","73,531","","","$","53,898"],["Average total loans","","$","5,422,865","","","$","4,819,124","","","$","3,951,257"],["Provision for credit losses on loans to average total loans","","","0.23","%","","","0.20","%","","","0.04","%"],["Net loan (charge-offs) recoveries to average total loans","","","-0.12","%","","","0.00","%","","","-0.16","%"],["ACL on loans to total loans","","","1.38","%","","","1.41","%","","","1.29","%"],["ACL on loans to total loans (excluding PPP) (1)","","","1.38","%","","","1.42","%","","","1.34","%"],["ACL on loans to average total loans","","","1.46","%","","","1.53","%","","","1.36","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","See the section titled \u201cNon-GAAP Financial Measures\u201d for reconcilement of non-GAAP to GAAP measures."]]
[[/GREPCENT_TABLE]]

Discussion of 2023 vs 2022:

The ACL for loans totaled $79 million as of December 31, 2023 compared to $74 million at December 31, 2022, representing an ACL to total loans ratio of 1.38% and 1.41% for those periods, respectively. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $4 million at December 31, 2023 and $19 million at December 31, 2022, Bancorp did not reserve for potential losses for these loans within the ACL. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Provision expense for credit losses on loans of $12.5 million was recorded for the year ended December 31, 2023. In addition to strong loan growth, a flat unemployment forecast and other factors within the CECL allowance model, provision expense for the year ended December 31, 2023 was driven by net charge offs $6.6 million. Net charge off activity for the year ended December 31, 2023 was attributed mainly to the charge off of two isolated and unrelated C&I relationships, one of which was fully reserved for in a prior period.

Provision expense (excluding acquisition-related activity) of $5.3 million was recorded for the year ended December 31, 2022. Significant loan growth, inflation and recession-based increases in the projected unemployment rate forecast, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, were the main drivers of expense within the CECL model for 2022. Further, net charge off/recovery activity for the year ended December 31, 2022 was minimal.

46

Table of Contents

Credit loss expense recorded for the acquired CB loan portfolio totaled $4.4 million and was recorded in the first quarter of 2022, bringing total provision for credit losses on loans to $9.7 million for the year ended December 31, 2022. Further, the ACL for loans was also increased $10 million as a result of the PCD loan portfolio added through the CB acquisition during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense).

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2022 and December 31, 2023. Provision for credit loss expense for off balance sheet credit exposures of $1.3 million was recorded for the year ended December 31, 2023, driven largely by the addition of new C&D and C&I lines of credit. The ACL for off balance sheet credit exposures totaled $5.9 million as of December 31, 2023.

Provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $575,000 was recorded for the year ended December 31, 2022. The expense recorded for the year ended December 31, 2022 was driven largely by the addition of new lines of credit, and thus increased availability, within the C&D portfolio. The ACL for off balance sheet credit exposures was also increased $500,000 during the first quarter of 2022 as a result of the CB acquisition, with the offset recorded to goodwill (as opposed to provision expense). The ACL for off balance sheet credit exposures totaled $4.5 million as of December 31, 2022.

Bancorp’s loan portfolio is well-diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The adequacy of the ACL is monitored on an ongoing basis and it is the opinion of management that the balance of the ACL at December 31, 2023 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

Discussion of 2022 vs 2021:

The ACL for loans totaled $74 million as of December 31, 2022 compared to $54 million at December 31, 2021, representing an ACL to total loans ratio of 1.41% and 1.29% for those periods, respectively. The ACL to loans (excluding PPP loans) was 1.42% at December 31, 2022 compared to 1.34% at December 31, 2021. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $19 million at December 31, 2022 and $141 million at December 31, 2021, Bancorp did not reserve for potential losses for these loans within the ACL. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Provision expense for credit losses on loans totaled of $9.7 million was recorded for the year ended December 31, 2022, which included $4.4 million of credit loss expense associated with the acquired CB loan portfolio. The ACL for loans was also increased $10 million as a result of the PCD loan portfolio added through the CB acquisition during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). Net charge off/recovery activity for the year ended December 31, 2022 was minimal.

Total provision expense for credit losses on loans of $1.4 million was recorded for the year ended December 31, 2021, as acquisition-related expense competed with a number of improving factors within the CECL model. Expense totaling $7.4 million was recorded in association with the non-PCD loan portfolio added through the KB acquisition during the second quarter of 2021, which was partially offset by a net benefit of $6.0 million recorded for the year ended December 31, 2021, and was driven by a then-improving unemployment forecast, updates to Bancorp’s CECL modeling and strong historic credit metrics. Further, the ACL for loans was also increased $6.8 million as a result of the PCD loan portfolio added through the KB acquisition during the second quarter of 2021, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense).

The ACL for off balance sheet credit exposures also experienced an increase between December 31, 2021 and December 31, 2022. The CB acquisition resulted in a $500,000 increase to the ACL for off balance sheet credit exposures during the first quarter of 2022, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). Provision for credit loss expense for off balance sheet credit exposures of $575,000 was also recorded for the year ended December 31, 2022, driven mainly by the addition of new lines of credit, and thus increased availability, largely within the C&D portfolio. ACL for off balance sheet credit exposures stood at $4.5 million as of December 31, 2022 compared to $3.5 million as of December 31, 2021.

47

Table of Contents

While the year ended December 31, 2021 experienced a similar $250,000 increase to the ACL for off balance sheet credit exposures as a result of the KB acquisition, negative provision for credit loss expense for off balance sheet credit exposures totaling $2.2 million was recorded for the year ended December 31, 2021. This large benefit was the result of general declines in reserve loss percentages consistent with then-improving CECL model factors and improvement in line of credit utilization.

Non-Interest Income

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Variance"],["(dollars in thousands)","","","","","","","","","","","","","","2023 / 2022","","","2022 / 2021"],["Years Ended December 31,","","2023","","","2022","","","2021","","","$","","","%","","","$","","","%"],["Wealth management and trust services","","$","39,802","","","$","36,111","","","$","27,613","","","$","3,691","","","","10","%","","$","8,498","","","","31","%"],["Deposit service charges","","","8,866","","","","8,286","","","","5,852","","","","580","","","","7","","","","2,434","","","","42"],["Debit and credit card income","","","19,438","","","","18,623","","","","13,456","","","","815","","","","4","","","","5,167","","","","38"],["Treasury management fees","","","10,033","","","","8,590","","","","6,912","","","","1,443","","","","17","","","","1,678","","","","24"],["Mortgage banking income","","","3,705","","","","3,210","","","","4,724","","","","495","","","","15","","","","(1,514",")","","","(32",")"],["Loss on sale of securities AFS","","","(44",")","","","\u2014","","","","\u2014","","","","(44",")","","","NM","","","","\u2014","","","","\u2014"],["Net investment products sales commissions and fees","","","3,205","","","","3,063","","","","2,553","","","","142","","","","5","","","","510","","","","20"],["Bank owned life insurance","","","2,253","","","","1,597","","","","914","","","","656","","","","41","","","","683","","","","75"],["Gain (loss) on sale of premises and equipment","","","(30",")","","","4,341","","","","(78",")","","","(4,371",")","","","NM","","","","4,419","","","","NM"],["Other","","","4,992","","","","5,328","","","","3,904","","","","(336",")","","","(6",")","","","1,424","","","","36"],["Total non-interest income","","$","92,220","","","$","89,149","","","$","65,850","","","$","3,071","","","","3","%","","$","23,299","","","","35","%"]]
[[/GREPCENT_TABLE]]

Discussion of 2023 vs 2022:

Total non-interest income increased $3.1 million, or 3%, for the year ended December 31, 2023 compared to the same period of 2022. Non-interest income comprised 27% and 28% of total revenue, defined as net interest income and non-interest income, for the years ended December 31, 2023 and 2022, respectively. WM&T services comprised 43% of total non-interest income for the year ended December 31, 2023 compared to 41% for the same period of 2022, respectively. While strong organic growth has been experienced across most non-interest income revenue streams over the past 12 months, the prior year period only included approximately 10 months of activity related to the CB acquisition. In addition, a large gain recorded in the prior year associated with the sale of acquired properties benefitted the year ended December 31, 2022.

WM&T Services:

The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased $3.7 million, or 10%, for the year ended December 31, 2023 as compared with the same period of 2022, consistent with new business development, increased estate fees and strong returns from the fixed income and equity markets.

Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased $3.0 million, or 8%, for the year ended December 31, 2023, as compared with the same period of 2022. The increase was driven largely by new business development and positive returns from the fixed income and equity markets. Further, the year ended December 31, 2022 included only 10 months of activity stemming from the CB acquisition, which added AUM of $2.65 billion as of the acquisition date.

A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues typically correspond with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees increased $705,000 for the year ended December 31, 2023, as compared with the same period of 2022, driven mainly by higher estate fee revenue.

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AUM, stated at market value, totaled $7.16 billion at December 31, 2023 compared to $6.59 billion at December 31, 2022. The increase in AUM over this period was attributed to net new business growth and fixed income/equity market appreciation experienced during the year ended December 31, 2023.

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

Detail of WM&T Services Income by Account Type:

[[GREPCENT_TABLE]]
[["(in thousands)"],["Years Ended December 31,","","2023","","","2022","","","2021"],["Investment advisory","","$","15,639","","","$","13,697","","","$","12,003"],["Personal trust","","","14,048","","","","13,213","","","","7,569"],["Personal investment retirement","","","6,858","","","","6,186","","","","5,168"],["Company retirement","","","1,524","","","","1,520","","","","1,798"],["Foundation and endowment","","","1,174","","","","1,051","","","","797"],["Custody and safekeeping","","","292","","","","310","","","","146"],["Brokerage and insurance services","","","11","","","","67","","","","78"],["Other","","","256","","","","67","","","","54"],["Total WM&T services income","","$","39,802","","","$","36,111","","","$","27,613"]]
[[/GREPCENT_TABLE]]

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. WM&T fees earned are not performance-based nor are they based on investment strategy or transactions. Bancorp also earns management fees on in-house investments funds acquired from CB.

Assets Under Management by Account Type:

Total AUM (not included on balance sheet) increased from $6.59 billion at December 31, 2022 to $7.16 billion at December 31, 2023 as follows:

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","","December 31, 2022"],["(in thousands)","","Managed","","","Non-managed (1)","","","Total","","","Managed","","","Non-managed (1)","","","Total"],["Investment advisory","","$","2,591,561","","","$","72,028","","","$","2,663,589","","","$","2,249,017","","","$","63,691","","","$","2,312,708"],["Personal trust","","","1,922,294","","","","459,103","","","","2,381,397","","","","1,744,522","","","","474,373","","","","2,218,895"],["Personal investment retirement","","","848,800","","","","17,854","","","","866,654","","","","756,126","","","","27,065","","","","783,191"],["Company retirement","","","57,486","","","","510,294","","","","567,780","","","","52,891","","","","524,568","","","","577,459"],["Foundation and endowment","","","471,609","","","","23,413","","","","495,022","","","","428,018","","","","8,219","","","","436,237"],["Subtotal","","$","5,891,750","","","$","1,082,692","","","$","6,974,442","","","$","5,230,574","","","$","1,097,916","","","$","6,328,490"],["Custody and safekeeping","","","\u2014","","","","185,638","","","","185,638","","","","\u2014","","","","256,791","","","","256,791"],["Total AUM","","$","5,891,750","","","$","1,268,330","","","$","7,160,080","","","$","5,230,574","","","$","1,354,707","","","$","6,585,281"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Non-managed assets represent those for which the WM&T department does not hold investment discretion."]]
[[/GREPCENT_TABLE]]

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As of December 31, 2023 and 2022, approximately 82% and 79%, respectively, of total AUM were actively managed. Company retirement plan accounts primarily consist of participant-directed assets. The amount of custody and safekeeping accounts are insignificant.

Managed Trust AUM by Class of Investment:

[[GREPCENT_TABLE]]
[["(in thousands)","","December 31, 2023","","","December 31, 2022"],["Interest bearing deposits","","$","442,820","","","$","185,080"],["Treasury and government agency obligations","","","240,848","","","","176,917"],["State, county and municipal obligations","","","297,314","","","","201,038"],["Money market mutual funds","","","68,617","","","","108,751"],["Equity mutual funds","","","1,225,210","","","","1,125,540"],["Other mutual funds - fixed, balanced and municipal","","","551,141","","","","583,713"],["Other notes and bonds","","","199,146","","","","209,178"],["Common and preferred stocks","","","2,474,186","","","","2,180,390"],["Common trust funds and collective investment funds","","","84,996","","","","114,458"],["Real estate mortgages","","","373","","","","774"],["Real estate","","","40,224","","","","57,297"],["Other miscellaneous assets (1)","","","266,875","","","","287,438"],["Total managed assets","","$","5,891,750","","","$","5,230,574"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","(1)","Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts, and oil and gas rights."]]
[[/GREPCENT_TABLE]]

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 64% in equities and 36% in fixed income securities as of December 31, 2023, compared to 63% and 37% as of December 31, 2022. This composition has been 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 $580,000, or 7%, for the year ended December 31, 2023, as compared with the prior year. While both organic growth and the full year impact of acquisition-related activity drove the increase noted above, an industry-wide decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several years. Prior to the acquisition-related growth experienced in recent years, this trend had been driven by lower check presentment volume, which has in turn led to fewer overdrawn accounts in general. Further, Bancorp anticipates that future organic 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 $815,000, or 4%, for the year ended December 31, 2023, as compared with the prior year. The increase stemmed mainly from organic growth and the full year impact of acquisition-related activity, which more than offset interchange rate compression. Total debit card income increased $384,000, or 3%, and total credit card income increased $431,000, or 8%, for the year ended December 31, 2023 compared the year ended December 31, 2022. While Bancorp generally expects this revenue stream to grow in conjunction with expansion of the customer base, interchange rate compression and any potential fluctuation in business and consumer spend levels could serve as challenges to future growth.

Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased $1.4 million, or 17%, for the year ended December 31, 2023 compared to the prior year, driven by organic growth and the full year impact of acquisition-related activity, 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.

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Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA, FHA and GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue increased $495,000, or 15%, for the year ended December 31, 2023, as compared with the same period of 2022, driven largely by higher servicing fee income tied to the mortgage servicing portfolio added through the prior year acquisition.

As a result of the dissolution of the Captive during the fourth quarter of 2023, a loss totaling $44,000 on the sale of AFS treasury securities held by the Captive was recorded for the year ended December 31, 2023. No such activity was recorded in 2022.

Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees earned on brokerage accounts. Wrap fees represent quarterly charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of account assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are generally serviced by Bancorp’s WM&T Department. Net investment product sales commissions and fees increased $142,000, or 5%, for the year ended December 31, 2023, as compared with the prior year, attributed to organic growth and the full year impact of acquisition-related activity.

BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. During the third quarter of 2022, Bancorp purchased $30 million of additional BOLI assets in an effort to diversify investment of excess liquidity. BOLI assets totaled $87 million as of December 31, 2023. BOLI income increased $656,000, or 41%, for the year ended December 31, 2023 compared to the prior year, which was attributed mainly to the additional prior year investment noted above in addition to general market appreciation within the policy plans during the year.

Gains and losses on the sale of premises and equipment for the year ended December 31, 2023 were driven mainly by the sale of an acquired property from CB during the third quarter and other nominal disposal activity. The large gain recorded for the year ended December 31, 2022 stemmed from the sale of certain acquired properties from CB that overlapped with existing locations.

Other non-interest income decreased $336,000, or 6%, for the year ended December 31, 2023 compared with the same period of 2022. The decrease was driven in large part by the disposition of Bancorp’s partial interest in LFA effective December 31, 2022, which contributed $1.3 million of other non-interest income for the year ended December 31, 2022. Further, Bancorp elected not to renew the Captive in August and fully dissolved it during the fourth quarter of 2023, resulting in a $132,000 decrease in Captive income compared to the prior year. Partially offsetting these declines were higher interest rate swap fee income, a $487,000 gain on the sale of VISA Class B stock originally acquired through the CB acquisition and stronger returns from insurance policies held outside of Bancorp’s BOLI portfolio compared to the prior year.

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Discussion of 2022 vs 2021:

Total non-interest income increased $23.3 million, or 35%, for the year ended December 31, 2022 compared to the same period in 2021. Non-interest income comprised 28% of total revenue for both the year ended December 31, 2022 and 2021, respectively. WM&T services comprised 41% of Bancorp’s total non-interest income for the year ended December 31, 2022 compared to 42% for the same period of 2020.

WM&T revenue increased $8.5 million, or 31%, for the year ended December 31, 2022, as compared with the same period of 2021. Significant growth in AUM drove the increase over prior year, consistent with acquisition-related activity and organic new business development, more than offsetting significant declines in both fixed income and equity markets experienced during 2022.

Deposit service charges increased $2.4 million, or 42%, for the year ended December 31, 2022, as compared with the same period in 2021, mainly as a result of the contribution associated with acquisition-related activity.

Debit and credit card revenue increased $5.2 million, or 38%, for the year ended December 31, 2022, as compared with the same period in 2021, as a result of increased transaction volume and continued expansion of the customer bases, both organically and through acquisition-related activity. Total debit card income increased $3.8 million, or 40%, while total credit card income increased $1.4 million, or 35%.

Treasury management fees increased $1.7 million, or 24%, for the year ended December 31, 2022 compared to 2021, as a result of increased transaction volume, new product sales and customer base expansion. Both organic and acquisition-related sales efforts led to the expansion of online services, ACH origination, remote deposit and fraud mitigation services during 2022.

Mortgage banking revenue decreased $1.5 million, or 32%, for the year ended December 31, 2022 as compared with the same period of 2021, as rising rates and low housing inventory drove lower mortgage volume. Partially offsetting the volume-driven decrease was the benefit the mortgage servicing portfolio added through the CB acquisition.

Net investment product sales commissions and fees increased $510,000, or 20%, for the year December 31, 2022, as compared with the same period of 2021, driven by acquisition-related growth and increased customer trading activity associated with general market volatility during 2022.

BOLI income increased $683,000, or 75% for the year ended December 31, 2022 compared to the same period of 2021, attributed mainly to the additional BOLI investment made during the third quarter of 2022 and contributions from the BOLI portfolio added as a result of the KB acquisition.

During the third and fourth quarters of 2022, Bancorp completed the sale of certain acquired properties that overlapped with existing locations, recording a pre-tax gain of $4.4 million as a result.

Other non-interest income increased $1.4 million, or 36%, for the year ended December 31, 2022 as compared with the same period of 2021. The increase was driven largely by the contribution from LFA, a financial advising firm added through the CB acquisition. Bancorp’s partial interest in LFA contributed was sold effective December 31, 2022.

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Non-interest Expenses

[[GREPCENT_TABLE]]
[["","","","","","","","","","","","","","","Variance"],["","","","","","","","","","","","","","","2023 / 2022","","","2022 / 2021"],["Years Ended December 31, (dollars in thousands)","","2023","","","2022","","","2021","","","$","","","%","","","$","","","%"],["Compensation","","$","91,876","","","$","86,640","","","$","63,034","","","$","5,236","","","","6","%","","$","23,606","","","","37","%"],["Employee benefits","","","18,451","","","","16,568","","","","13,479","","","","1,883","","","","11","","","","3,089","","","","23"],["Net occupancy and equipment","","","16,384","","","","14,298","","","","9,688","","","","2,086","","","","15","","","","4,610","","","","48"],["Technology and communication","","","17,318","","","","14,897","","","","11,145","","","","2,421","","","","16","","","","3,752","","","","34"],["Debit and credit card processing","","","6,481","","","","5,909","","","","4,494","","","","572","","","","10","","","","1,415","","","","31"],["Marketing and business development","","","5,990","","","","5,005","","","","4,150","","","","985","","","","20","","","","855","","","","21"],["Postage, printing and supplies","","","3,604","","","","3,354","","","","2,213","","","","250","","","","7","","","","1,141","","","","52"],["Legal and professional","","","3,958","","","","2,943","","","","2,583","","","","1,015","","","","34","","","","360","","","","14"],["FDIC insurance","","","3,911","","","","2,758","","","","1,847","","","","1,153","","","","42","","","","911","","","","49"],["Amortization of investments in tax credit partnerships","","","1,294","","","","353","","","","367","","","","941","","","","NM","","","","(14",")","","","(4",")"],["Capital and deposit based taxes","","","2,476","","","","2,621","","","","2,090","","","","(145",")","","","(6",")","","","531","","","","25"],["Merger expenses","","","\u2014","","","","19,500","","","","19,025","","","","(19,500",")","","","NM","","","","475","","","","2"],["Federal Home Loan Bank early termination penalty","","","\u2014","","","","\u2014","","","","474","","","","\u2014","","","","\u2014","","","","(474",")","","","NM"],["Intangible amortization","","","4,686","","","","5,544","","","","770","","","","(858",")","","","(15",")","","","4,774","","","","NM"],["Loss on disposition of LFA","","","\u2014","","","","870","","","","\u2014","","","","(870",")","","","NM","","","","870","","","","NM"],["Other","","","11,400","","","","10,531","","","","6,921","","","","869","","","","8","","","","3,610","","","","52"],["Total non-interest expenses","","$","187,829","","","$","191,791","","","$","142,280","","","$","(3,962",")","","","(2",")%","","$","49,511","","","","35","%"]]
[[/GREPCENT_TABLE]]

Discussion of 2023 vs 2022:

Total non-interest expenses decreased $4.0 million, or 2%, for the year ended December 31, 2023, compared to the same period of 2022. While the year ended December 31, 2022 included one-time merger expenses associated with the completion of the CB acquisition, it only included approximately 10 months of normal, recurring expenses associated with the acquisition. Compensation and employee benefits comprised 59% and 54% of total non-interest expenses for the years ended December 31, 2023 and 2022, respectively. Excluding merger expenses, compensation and employee benefits comprised 60% of total non-interest expenses for the year ended December 31, 2022.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased $5.2 million, or 6%, for the year ended December 31, 2023 compared to the prior year. The increase was attributed to growth in full time equivalent employees and annual merit-based salary increases. In addition, compensation expense totaling $630,000 related to an executive retirement agreement was also recorded during the year ended December 31, 2023. Net full time equivalent employees totaled 1,075 at December 31, 2023 compared to 1,033 at December 31, 2022.

Employee benefits consists of all personnel-related expense not included in compensation, with the most significant items being health insurance, payroll taxes and employee retirement plan contributions. Employee benefits increased $1.9 million, or 11%, for the year ended December 31, 2023 compared to the prior year, consistent with the overall increase in full time equivalent employees noted previously.

Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions (recorded on the balance sheet) flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy increased $2.1 million, or 15%, for the year ended December 31, 2023 compared to the prior year. The increase was attributed to relocation of all WM&T employees into a consolidated location as part of finalizing the CB integration plan, the prior year period experiencing only 10 months of acquisition-related activity and the opening of Bancorp’s new operations center in the latter part of 2022. In connection with the CB acquisition, 15 branches were acquired, four of which were closed shortly after acquisition in addition to one existing SYB location, as a result of branch overlap. At December 31, 2023, Bancorp’s branch network consisted of 71 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.

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Technology and communication expenses include computer software usage and licensing, 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 $2.4 million, or 16%, for the year ended December 31, 2023 compared to the prior year, consistent with the full year impact of acquisition-related activity, customer expansion and continued investment in technology.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses generally fluctuate consistent with transaction volumes. Debit and credit card processing expense increased $572,000, or 10%, for the year ended December 31, 2023 compared to the prior year, consistent with the increase in transaction volume and customer base expansion resulting from both organic growth and the full year impact of acquisition-related activity.

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 $985,000, or 20%, for the year ended December 31, 2023 compared to the prior year. The increase corresponds with strategic decisions to advertise in Bancorp’s new markets, increased advertising expense associated with Bancorp’s deposit promotions and the general expansion of Bancorp’s existing and prospective customer base.

Postage, printing and supplies expense increased $250,000, or 7%, for the year ended December 31, 2023 compared to the prior year, consistent with Bancorp’s expansion and promotional mailings.

Legal and professional fees increased $1.0 million, or 34%, for the year ended December 31, 2023 compared to the prior year. The increase over prior year was driven mainly by various compliance-related consulting engagements associated with preparation for expanded regulatory oversight in conjunction with future growth in total assets. Legal and professional fees associated with merger-related activity are captured in merger expenses.

FDIC insurance increased $1.2 million, or 42%, for the year ended December 31, 2023 compared to the prior year, attributed to Bancorp’s asset growth and the FDIC-mandated increase of the uniform base assessment rate.

Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit, net of related expenses, results in a positive effect upon net income. Amounts of credits and corresponding expenses can vary widely depending upon the timing and magnitude of the underlying investments. Amortization expense associated with these investments increased $941,000 for the year ended December 31, 2023 compared to the prior year stemming from Bancorp’s investment in several larger tax credit projects during 2023.

Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, decreased $145,000, or 6%, for the year ended December 31, 2023 compared to the prior year, driven by fluctuation in revenue growth generated within the state of Ohio, which is the only state Bancorp conducts business in that has a capital-based deposit tax.

Merger expenses for the year ended December 31, 2022 represent non-recurring expenses associated with completion of the CB acquisition and consist primarily of investment banker fees, various compensation-related expenses, legal fees, early termination fees relating to various contracts and system conversion expenses. Merger expenses totaling $19.5 million were recorded in relation to the CB acquisition for the year ended December 31, 2022.

Intangible amortization expense consists of amortization associated with the CDI of acquired deposit portfolios, as well as an intangible related to customer list of the WM&T business line added through the CB acquisition. The intangibles are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization expense decreased $858,000, or 15%, for the year ended December 31, 2023. The decrease was attributed to both the accelerated depreciation method for which intangible assets are amortized, coupled with the previously mentioned disposal of Bancorp’s partial interest in LFA at the end of 2022, which included writing off the related CLI effective December 31, 2022.

As noted previously, Bancorp’s partial interest in LFA was sold effective December 31, 2022. The sale resulted in a pre-tax loss of $870,000, which was recorded as non-interest expense for the year ended December 31, 2022.

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Other non-interest expenses increased $869,000, or 8%, for the year ended December 31, 2023 compared to the prior year, the most notable drivers being increased card reward expense, higher fraud and theft-related expenses and other ancillary expenses tied to Bancorp’s growth over the past year.

Bancorp’s efficiency ratio (FTE) for the years ended December 31, 2023 and 2022 was 55.23% and 59.30%, respectively, the latter period reflecting one-time merger-related expenses attributed to the CB acquisition, all of which were recorded in the first quarter of 2022. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of premises and equipment and the disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and merger-related expenses. Bancorp’s adjusted efficiency ratio was 54.84% and 53.61% for the years ended December 31, 2023 and 2022, respectively. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Discussion of 2022 vs 2021:

Total non-interest expenses increased $49.5 million, or 35%, for the year ended December 31, 2022 compared to the prior year. Compensation and employee benefits comprised 54% of total non-interest expenses for the years ended December 31, 2022 and 2021, respectively. Excluding merger expenses, compensation and employee benefits comprised 60% of total non-interest expenses for the year ended December 31, 2022, compared to 62% for the year ended December 31, 2021.

Compensation increased $23.6 million, or 37%, for the year ended December 31, 2022 compared to the prior year due to growth in full time equivalent employees, annual merit-based salary increases and higher incentive compensation expense. Net full time equivalent employees totaled 1,033 at December 31, 2022 compared to 820 at December 31, 2021.

Employee benefits increased $3.1 million, or 23%, for the year ended December 31, 2022 compared to the prior year, consistent with the overall increase in full time equivalent employees previously noted.

Net occupancy increased $4.6 million, or 48%, for the year ended December 31, 2022 compared to the prior year. In connection with the CB acquisition, 15 branches were acquired, four of which were closed shortly after acquisition in addition to one existing SYB location, as a result of branch overlap. The KB acquisition in May of 2021 resulted in the addition of 19 branch locations in addition to operational buildings.

Technology expense increased $3.8 million, or 34%, for the year ended December 31, 2022 compared to the prior year, consistent with acquisition-related activity, customer expansion and core system upgrades.

Debit and credit card processing expense increased $1.4 million, or 31%, for the year ended December 31, 2022 compared to the prior year, consistent with the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related growth.

Marketing and business development expenses increased $855,000, or 21%, for the year ended December 31, 2022 compared to the prior year, corresponding with strategic decisions to advertise and promote in Bancorp’s new markets and a post-pandemic return to in-person client meeting/entertainment.

Postage, printing and supplies expense increased $1.1 million, or 52%, for the year ended December 31, 2022 compared to the prior year, consistent with Bancorp’s overall expansion.

Legal and professional fees increased $360,000, or 14%, for the year ended December 31, 2022 compared to the prior year. The increase over prior year was driven by various consulting engagements, collection-related expenses and litigation costs arising through the normal course of business.

FDIC insurance increased $911,000, or 49%, for the year ended December 31, 2022 compared to the prior year, consistent with organic and acquisition-related balance sheet growth for which the insurance is assessed on.

Amortization expense associated with tax credit investments decreased $14,000 for the year ended December 31, 2022 compared to the prior year.

Capital and deposit based taxes increased $531,000, or 25%, for the year ended December 31, 2022 compared to the prior year, as a result of both organic and acquisition-related growth.

55

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Merger expenses of $19.5 million were recorded for the year ended December 31, 2022 and were attributed to the completion of the CB acquisition. By comparison, merger expensed for the year ended December 31, 2021 totaled $19.0 million, of which all but $525,000 was associated with the completion of the KB acquisition.

An early termination fee of $474,000 was recorded for the year ended December 31, 2021 in relation to the pre-payment of $14 million in FHLB advances prior to contractual maturities.

Intangible amortization for the year ended December 31, 2022 totaled $5.5 million compared to $770,000 for the same period of the prior year, the significant increase stemming from the CB acquisition. Bancorp’s partial interest in LFA was sold effective December 31, 2022. Amortization expense associated with the CLI of the LFA business totaled $357,000 for the year ended December 31, 2022.

As noted previously, Bancorp’s partial interest in LFA was sold effective December 31, 2022. The sale resulted in a pre-tax loss of $870,000, which was recorded as non-interest expense for the year ended December 31, 2022.

Other non-interest expenses increased $3.6 million, or 52%, for the year ended December 31, 2022. The most notable drivers of the increase were expenses associated with the addition of the insurance captive as a result of the KB acquisition in May of 2021, increased card reward expense, higher fraud-related expenses and other ancillary expenses tied to Bancorp’s significant growth over the last 12 months.

Bancorp’s efficiency ratio (FTE) for the year ended December 31, 2022 was 59.30%, as compared to 59.94% for the same period of 2021. The efficiency ratio (FTE) for both years was significantly impacted by the acquisitions of CB and KB in 2022 and 2021, respectively. Bancorp’s adjusted efficiency ratio for the year ended December 31, 2022 was 53.61%, compared to 51.76% for the year ended December 31, 2021. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Income Taxes

A comparison of income tax expense and ETR follows:

[[GREPCENT_TABLE]]
[["Years Ended December 31, (dollars in thousands)","","2023","","","2022","","","2021"],["Income before income tax expense","","$","137,927","","","$","120,484","","","$","95,397"],["Income tax expense","","","30,179","","","","27,190","","","","20,752"],["Effective tax rate","","","21.88","%","","","22.57","%","","","21.75","%"]]
[[/GREPCENT_TABLE]]

Discussion of 2023 vs 2022:

Fluctuations in the ETR are primarily attributed to the following:

[[GREPCENT_TABLE]]
[["","\u25cf","The stock based compensation component of the ETR fluctuates consistent with the level of SAR exercise activity in addition to the level of PSU and RSA vesting. The ETR was reduced by 0.3% for the year ended December 31, 2023 compared to a reduction of 1.0% for the prior year, consistent with exercise and vesting activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","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 0.7% for the year ended December 31, 2023, compared to an increase of 0.2% the same period of the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Bancorp invests in certain partnerships that yield federal income tax credits. Taken as a whole, the tax benefit of these investments exceeds amortization expense, resulting in a positive impact on net income. The timing and magnitude of these transactions may vary widely from period to period. The ETR for the year ended December 31, 2023 and 2022 was reduced by 0.3% and by 0.1%, respectively, based on tax credit activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.5% for the year ended December 31, 2023 compared to a reduction of 0.6% for the same period of the prior year."]]
[[/GREPCENT_TABLE]]

56

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[[GREPCENT_TABLE]]
[["","\u25cf","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 0.2% and 0.3% for the years ended December 31, 2023 and 2022, respectively. Bancorp elected not to renew the Captive during the third quarter of 2023 and subsequently dissolved it as of December 31, 2023. As a result, no tax benefit associated with the Captive will be experienced going forward."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Non-deductible merger expenses recorded during the year ended December 31, 2022 served to increase the ETR 0.1%."]]
[[/GREPCENT_TABLE]]

Discussion of 2022 vs 2021:

Fluctuations in the ETR were primarily attributed to the following:

[[GREPCENT_TABLE]]
[["","\u25cf","Stock compensation activity reduced the ETR 1.0% for the year ended December 31, 2022 compared to a reduction of 1.1% for the same period of 2021, consistent with exercise activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Changes in the cash surrender value of life insurance policies increased the ETR 0.2% for the year ended December 31, 2022, compared to a 0.8% decrease for the same period of the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The ETR for the years ended December 31, 2022 and 2021 was reduced by 0.1% and 0.2%, respectively, based on tax credit investment activity."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.6% for the year ended December 31, 2022 compared to a reduction of 0.4% for the same period of the prior year."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Non-deductible merger expenses recorded during the year ended December 31, 2022 served to increase the ETR 0.1%, compared to an increase of 0.4% for the same period of 2021."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Activity associated with the insurance captive reduced the ETR 0.3% for the year ended December 31, 2022, compared to reduction of 0.2% for the same period of 2021."]]
[[/GREPCENT_TABLE]]

57

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

Overview

Total assets increased $674 million, or 9%, to $8.17 billion at December 31, 2023 from $7.50 billion at December 31, 2022. Total loans increased $565 million, or 11%, as the result of record loan production that drove growth in nearly every loan category. Additionally, cash and cash equivalents increased $99 million, or 59%, due to deposit inflows and increased FHLB borrowing activity, while Other assets increased $152 million driven by investment in tax credit partnerships associated with meeting CRA requirements. Partially offsetting this growth was a $147 million, or 9%, decline in total investment securities stemming from scheduled maturity and pay down activity within the total portfolio, which more than offset a $30 million improvement in the market value of the AFS investment portfolio specifically.

Total liabilities increased $576 million, or 9%, to $7.31 billion at December 31, 2023 from $6.74 billion at December 31, 2022. The increase was attributed to a $279 million, or 4%, increase in total deposits, a $150 million increase in FHLB borrowings associated with funding loan growth and a $121 million increase in Other liabilities, which related to the accrual of contributions for tax credit partnerships (the offset to the increase in Other assets for tax credit investment noted above).

Stockholders’ equity increased $98 million, or 13%, to $858 million at December 31, 2023 from $760 million at December 31, 2022. Net income of $107.7 million and a $23 million increase in AOCI associated with changes in the interest rate environment and the corresponding impact on the valuation of the AFS debt securities portfolio were only partially offset by $35 million of dividends declared during 2023, serving to grow stockholder’s equity for the period.

Cash and Cash Equivalents

Cash and cash equivalents increased $99 million, or 59%, ending at $266 million at December 31, 2023 compared to $167 million at December 31, 2022, attributed largely to deposit growth and increased FHLB borrowing activity, which was partially offset by loan funding activity. Bancorp entered into $200 million of term FHLB advances in conjunction with three separate interest rate swaps during 2023 as a way of securing longer-term funding at more attractive rates. For more information on these interest rate swaps, see the footnote titled “Derivative Financial Instruments.”

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 $147 million, or 9%, to $1.47 billion at December 31, 2023 compared to $1.62 billion at December 31, 2022, driven by scheduled maturity and pay down activity within the total portfolio, more than offsetting a $30 million improvement in the market value of the AFS investment portfolio specifically. Investment in the securities portfolio was minimal during the 2023, as Bancorp elected to maintain higher levels of liquidity amidst substantial loan growth and deposit fluctuations during the year.

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The maturity distribution (based on contractual maturity) and weighted average yields of the AFS and HTM investment security portfolios follow:

[[GREPCENT_TABLE]]
[["","","AFS"],["","","","","","","","","","","Due after one but","","","Due after five but"],["December 31, 2023","","Due within one year","","","within five years","","","within ten years","","","Due after ten years"],["(dollars in thousands)","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["U.S. Treasury and other U.S. Government obligations","","","116,269","","","","0.50","%","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%"],["Government sponsored enterprise obligations","","","\u2014","","","","\u2014","","","","8,637","","","","1.32","","","","9,489","","","","2.25","","","","81,721","","","","4.70"],["MBS - government agencies","","","4,426","","","","0.73","","","","20,591","","","","2.01","","","","69,524","","","","2.06","","","","593,498","","","","1.96"],["Obligations of states and political subdivisions","","","5,104","","","","1.86","","","","26,036","","","","2.00","","","","60,378","","","","2.13","","","","31,972","","","","2.07"],["Other","","","986","","","","2.29","","","","\u2014","","","","\u2014","","","","2,548","","","","3.26","","","","\u2014","","","","\u2014"],["","","$","126,785","","","","0.58","%","","$","55,264","","","","1.90","%","","$","141,939","","","","2.12","%","","$","707,191","","","","2.28","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","HTM"],["","","","","","","","","","","Due after one but","","","Due after five but"],["December 31, 2023","","Due within one year","","","within five years","","","within ten years","","","Due after ten years"],["(dollars in thousands)","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield","","","Amount","","","Yield"],["U.S. Treasury and other U.S. Government obligations","","","50,031","","","","1.86","%","","","153,228","","","","2.14","%","","$","\u2014","","","","\u2014","%","","$","\u2014","","","","\u2014","%"],["Government sponsored enterprise obligations","","","\u2014","","","","\u2014","","","","703","","","","2.79","","","","25,671","","","","2.69","","","","544","","","","5.44"],["MBS - government agencies","","","5","","","","1.32","","","","27,366","","","","2.00","","","","1,030","","","","2.20","","","","181,259","","","","2.30"],["","","$","50,036","","","","1.86","%","","$","181,297","","","","2.12","%","","$","26,701","","","","2.67","%","","$","181,803","","","","2.31","%"]]
[[/GREPCENT_TABLE]]

Actual maturities for mortgage-backed securities may differ from contractual maturities due to prepayments on underlying collateral.

Loans

Total loans increased $565 million, or 11%, from December 31, 2022 to December 31, 2023. Excluding the PPP portfolio, loans grew $579 million, or 11%, over the same period. Loan growth (excluding PPP) for the year ended December 31, 2023 was experienced for nearly all loan categories, with CRE and Residential real estate posting the largest increases over the prior year.

While total line of credit utilization has improved since hitting pandemic-era lows experienced in early 2021, line of credit usage has remained below pre-pandemic levels, as customers continue to utilize cash in lieu of higher costing lines of credit. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability over the past several quarters, but utilization of the new lines has been relatively slow compared to historical usage rates. Total line of credit utilization was 39.2% as of December 31, 2023, compared to 42.3% at December 31, 2022, with C&I utilization of 28.6% and 33.1% as of the same periods, respectively.

Bancorp’s credit exposure is well-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 contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are 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.

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CRE represents the largest segment of Bancorp’s loan portfolio, totaling $2.5 billion, or 43%, of total loans as of December 31, 2023. While a combination of higher interest rates and rising central business district vacancies across the country have created credit and collateral concerns within the CRE sector generally, Bancorp believes the quality of its CRE portfolio, and the overall loan portfolio, remains solid. Office building exposure, which is a sub-segment of CRE and perceived to be of particular risk in the current environment, is a smaller component of Bancorp’s loan portfolio, totaling $594 million, or 10%, of total loans as of December 31, 2023. Of this sub-segment total, 55% is owner-occupied and is generally accompanied by a full commercial relationship. Further, approximately $206 million of Bancorp’s office building exposure is medical-related, which presents reduced risk compared other CRE uses. Lastly, this sub-segment is concentrated in Bancorp’s primary markets, with no exposure to large office towers and minimal exposure to central business districts, and continues to perform well with minimal substandard/non-accrual and past due loans as of December 31, 2023.

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 December 31, 2023 and December 31, 2022, the total participated portion of loans of this nature totaled $4 million and $5 million, respectively.

60

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The following table presents the maturity distribution and rate sensitivity of the loan portfolio at December 31, 2023:

[[GREPCENT_TABLE]]
[["","","Maturity"],["December 31, 2023 (in thousands)","","Within one year","","","After one but within five years","","","After five but within fifteen years","","","After fifteen years","","","Total","","","% of Total"],["Commercial real estate - non-owner occupied"],["Fixed rate","","$","127,455","","","$","747,464","","","$","359,931","","","$","120,406","","","$","1,355,256","","","","87","%"],["Variable rate","","","46,884","","","","78,390","","","","80,717","","","","442","","","","206,433","","","","13","%"],["Total","","$","174,339","","","$","825,854","","","$","440,648","","","$","120,848","","","$","1,561,689","","","","100","%"],["Commercial real estate - owner-occupied"],["Fixed rate","","$","40,800","","","$","411,747","","","$","305,010","","","$","52,774","","","$","810,331","","","","89","%"],["Variable rate","","","12,937","","","","14,826","","","","56,598","","","","12,732","","","","97,093","","","","11","%"],["Total","","$","53,737","","","$","426,573","","","$","361,608","","","$","65,506","","","$","907,424","","","","100","%"],["Commercial and industrial - term"],["Fixed rate","","$","28,805","","","$","337,037","","","$","203,251","","","$","2,674","","","$","571,767","","","","66","%"],["Variable rate","","","61,896","","","","170,143","","","","58,981","","","","274","","","","291,294","","","","34","%"],["Total","","$","90,701","","","$","507,180","","","$","262,232","","","$","2,948","","","$","863,061","","","","100","%"],["Commercial and industrial - term - PPP"],["Fixed rate","","$","-","","","$","4,319","","","$","-","","","$","-","","","$","4,319","","","","100","%"],["Variable rate","","","-","","","","-","","","","-","","","","-","","","","-","","","","0","%"],["Total","","$","-","","","$","4,319","","","$","-","","","$","-","","","$","4,319","","","","100","%"],["Commercial and industrial - lines of credit"],["Fixed rate","","$","22,981","","","$","36,443","","","$","10,008","","","$","-","","","$","69,432","","","","16","%"],["Variable rate","","","286,228","","","","77,685","","","","4,560","","","","1,843","","","","370,316","","","","84","%"],["Total","","$","309,209","","","$","114,128","","","$","14,568","","","$","1,843","","","$","439,748","","","","100","%"],["Residential real estate - owner occupied"],["Fixed rate","","$","5,307","","","$","32,536","","","$","70,636","","","$","591,055","","","$","699,534","","","","99","%"],["Variable rate","","","473","","","","1,247","","","","1,241","","","","6,398","","","","9,359","","","","1","%"],["Total","","$","5,780","","","$","33,783","","","$","71,877","","","$","597,453","","","$","708,893","","","","100","%"],["Residential real estate - non-owner occupied"],["Fixed rate","","$","14,997","","","$","156,659","","","$","84,221","","","$","96,277","","","$","352,154","","","","98","%"],["Variable rate","","","2,046","","","","2,253","","","","2,165","","","","97","","","","6,561","","","","2","%"],["Total","","$","17,043","","","$","158,912","","","$","86,386","","","$","96,374","","","$","358,715","","","","100","%"],["Construction and land development"],["Fixed rate","","$","18,192","","","$","65,433","","","$","91,678","","","$","5,698","","","$","181,001","","","","34","%"],["Variable rate","","","137,732","","","","173,182","","","","38,488","","","","921","","","","350,323","","","","66","%"],["Total","","$","155,924","","","$","238,615","","","$","130,166","","","$","6,619","","","$","531,324","","","","100","%"],["Home equity lines of credit"],["Fixed rate","","$","-","","","$","-","","","$","-","","","$","-","","","$","-","","","","0","%"],["Variable rate","","","19,927","","","","43,989","","","","131,982","","","","15,492","","","","211,390","","","","100","%"],["Total","","$","19,927","","","$","43,989","","","$","131,982","","","$","15,492","","","$","211,390","","","","100","%"]]
[[/GREPCENT_TABLE]]

(continued)

61

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[[GREPCENT_TABLE]]
[["(continued)","","Maturity"],["December 31, 2023 (in thousands)","","Within one year","","","After one but within five years","","","After five but within fifteen years","","","After fifteen years","","","Total","","","% of Total"],["Consumer"],["Fixed rate","","$","4,665","","","$","40,210","","","$","23,739","","","$","574","","","$","69,188","","","","48","%"],["Variable rate","","","55,040","","","","20,775","","","","337","","","","-","","","","76,152","","","","52","%"],["Total","","$","59,705","","","$","60,985","","","$","24,076","","","$","574","","","$","145,340","","","","100","%"],["Leases"],["Fixed rate","","$","396","","","$","12,707","","","$","2,400","","","$","-","","","$","15,503","","","","100","%"],["Variable rate","","","-","","","","-","","","","-","","","","-","","","","-","","","","0","%"],["Total","","$","396","","","$","12,707","","","$","2,400","","","$","-","","","$","15,503","","","","100","%"],["Credit Cards"],["Fixed rate","","$","-","","","$","-","","","$","-","","","$","-","","","$","-","","","","0","%"],["Variable rate","","","23,632","","","","-","","","","-","","","","-","","","","23,632","","","","100","%"],["Total","","$","23,632","","","$","-","","","$","-","","","$","-","","","$","23,632","","","","100","%"],["Total Loans"],["Fixed rate","","$","263,598","","","$","1,844,555","","","$","1,150,874","","","$","869,458","","","$","4,128,485","","","","72","%"],["Variable rate","","","646,795","","","","582,490","","","","375,069","","","","38,199","","","","1,642,553","","","","28","%"],["Total","","$","910,393","","","$","2,427,045","","","$","1,525,943","","","$","907,657","","","$","5,771,038","","","","100","%"]]
[[/GREPCENT_TABLE]]

In the event 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 overall interest rate sensitivity.

Non-performing Loans and Assets

Information summarizing non-performing loans and assets follows:

[[GREPCENT_TABLE]]
[["December 31, (dollars in thousands)","","2023","","","2022","","","2021","","","2020","","","2019"],["Non-accrual loans","","$","19,058","","","$","14,242","","","$","6,712","","","$","12,514","","","$","11,494"],["Troubled debt restructurings (1)","","","-","","","","-","","","","12","","","","16","","","","34"],["Loans past due 90 days or more and still accruing","","","110","","","","892","","","","684","","","","649","","","","535"],["Total non-performing loans","","","19,168","","","","15,134","","","","7,408","","","","13,179","","","","12,063"],["Other real estate owned","","","10","","","","677","","","","7,212","","","","281","","","","493"],["Total non-performing assets","","$","19,178","","","$","15,811","","","$","14,620","","","$","13,460","","","$","12,556"],["Non-performing loans to total loans","","","0.33","%","","","0.29","%","","","0.18","%","","","0.37","%","","","0.42","%"],["Non-peforming loans to total loans (excluding PPP) (2)","","","0.33","%","","","0.29","%","","","0.18","%","","","0.44","%","","","N/A"],["Non-performing assets to total assets","","","0.23","%","","","0.21","%","","","0.22","%","","","0.29","%","","","0.34","%"],["ACL for loans to non-performing loans","","","414","%","","","486","%","","","728","%","","","394","%","","","222","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","TDR accounting no longer applicable due to adoption of ASU 2002-02. Now considered modifications to borrowers experiencing financial difficulty."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","See the section titled \u201cNon-GAAP Financial Measures\u201d for reconcilement of non-GAAP to GAAP measures."]]
[[/GREPCENT_TABLE]]

Non-performing loans to total loans were 0.33% at December 31, 2023 compared to 0.29% at December 31, 2022, the increase being attributed largely to one C&I relationship that was placed on non-accrual status during the first quarter of 2023 and a CRE relationship that was put on non-accrual status during the fourth quarter of 2023.

Non-performing assets totaled $19 million at December 31, 2023 compared to $16 million at December 31, 2022.

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Table of Contents

In total, non-performing assets as of December 31, 2023 were comprised of 106 loans ranging in individual amounts up to $6 million and one residential real estate property held as OREO.

The following table presents the major classifications of non-accrual loans by primary portfolio:

[[GREPCENT_TABLE]]
[["December 31, (in thousands)","","2023","","","2022"],["Commercial real estate - non-owner occupied","","$","8,649","","","$","7,707"],["Commercial real estate - owner occupied","","","885","","","","2,525"],["Total commercial real estate","","","9,534","","","","10,232"],["Commercial and industrial - term","","","4,456","","","","1,182"],["Commercial and industrial - PPP","","","\u2014","","","","21"],["Commercial and industrial - lines of credit","","","215","","","","348"],["Total commercial and industrial","","","4,671","","","","1,551"],["Residential real estate - owner occupied","","","3,667","","","","1,801"],["Residential real estate - non-owner occupied","","","372","","","","219"],["Total residential real estate","","","4,039","","","","2,020"],["Construction and land development","","","\u2014","","","","\u2014"],["Home equity lines of credit","","","467","","","","205"],["Consumer","","","337","","","","234"],["Leases","","","\u2014","","","","\u2014"],["Credit cards","","","10","","","","\u2014"],["Total non-accrual loans","","$","19,058","","","$","14,242"]]
[[/GREPCENT_TABLE]]

Loans are placed in a non-accrual income status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more, unless such a loan is well- secured and in the process of collection or renewal. Interest income recorded on non-accrual loans as principal payments was $342,000, $160,000, and $312,000 for 2023, 2022, and 2021. Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original terms was $1.5 million, $1.1 million, and $359,000 for 2023, 2022, and 2021.

In addition to non-performing loans discussed above, there were loans, which are accruing interest, for which payments were current or less than 90 days past due where borrowers are experiencing elevated financial difficulties. These substandard loans totaled approximately $43 million and $40 million at December 31, 2023 and 2022, respectively. These relationships are monitored closely for possible future inclusion in non-performing loans. Management believes it has adequately reflected credit exposure in these loans in its determination of the allowance.

Bancorp adopted ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures,” effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.

During the year ended December 31, 2023, there were no modifications made to loans for borrowers experiencing financial difficulty and there were no payment defaults of existing modified loans within 12 months following modification. Default is determined at 90 days or more past due, charge off, or foreclosure.

During the year ended December 31, 2022, there were no loans modified as TDRs and there were no payment defaults of existing TDRs within 12 months following modification. At December 31, 2022, Bancorp had one loan classified as a TDR, the balance of which was $850,000. Bancorp had two loans classified as TDR at December 31, 2021, the balances of which were $950,000 and $12,000, respectively, the latter of which was paid off during the year ended December 31, 2022.

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Delinquent Loans

Delinquent loans (consisting of all loans 30 days or more past due) totaled $17 million at both December 31, 2023 and December 31, 2022. Delinquent loans total loans were 0.30% and 0.32% at December 31, 2023 and December 31, 2022.

Allowance for Credit Losses on Loans

The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled “Summary of Significant Accounting Policies” for discussion of Bancorp’s ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp’s judgment, should be charged-off.  

Bancorp’s ACL for loans was $79 million as of December 31, 2023 compared to $74 million as of December 31, 2022. Provision expense for credit losses on loans of $12.5 million was recorded for the year ended December 31, 2023, driven by strong loan growth and net charge off activity. Net charge-off activity of $6.6 million was recorded for the year ended December 31, 2023, which was attributed mainly to the charge off of two larger, isolated C&I relationships, one of which was fully reserved for in a prior period.

The table below details net charge-offs to average loans outstanding by category of loan for the years ended December 31, 2023, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["(in thousands) Years ended December 31,","","Net (charge offs)/ recoveries","","","Average loans","","","Net (charge offs)/ recoveries to average loans","","","Net (charge offs)/ recoveries","","","Average loans","","","Net (charge offs)/ recoveries to average loans","","","Net (charge offs)/ recoveries","","","Average loans","","","Net (charge offs)/ recoveries to average loans"],["Commercial real estate - non-owner occupied","","$","91","","","$","1,465,305","","","","0.01","%","","$","-","","","$","1,342,829","","","","0.00","%","","$","(2,896",")","","$","1,027,405","","","","-0.28","%"],["Commercial real estate - owner occupied","","","9","","","","884,555","","","","0.00","%","","","172","","","","782,185","","","","0.02","%","","","(1,326",")","","","592,577","","","","-0.22","%"],["Total commercial real estate","","","100","","","","2,349,860","","","","0.00","%","","","172","","","","2,125,014","","","","0.01","%","","","(4,222",")","","","1,619,982","","","","-0.26","%"],["Commercial and industrial - term","","","(2,239",")","","","796,039","","","","-0.28","%","","","559","","","","692,214","","","","0.08","%","","","(1,303",")","","","550,101","","","","-0.24","%"],["Commercial and industrial - term - PPP","","","-","","","","8,877","","","","0.00","%","","","-","","","","52,704","","","","0.00","%","","","-","","","","397,282","","","","0.00","%"],["Commercial and industrial - lines of credit","","","(3,476",")","","","444,244","","","","-0.78","%","","","(200",")","","","417,254","","","","-0.05","%","","","-","","","","290,231","","","","0.00","%"],["Total commercial and industrial","","","(5,715",")","","","1,249,160","","","","-0.46","%","","","359","","","","1,162,172","","","","0.03","%","","","(1,303",")","","","1,237,614","","","","-0.11","%"],["Residential real estate - owner occupied","","","2","","","","649,431","","","","0.00","%","","","34","","","","513,458","","","","0.01","%","","","(349",")","","","334,718","","","","-0.10","%"],["Residential real estate - non-owner occupied","","","2","","","","334,660","","","","0.00","%","","","(5",")","","","296,682","","","","0.00","%","","","5","","","","221,214","","","","0.00","%"],["Total residential real estate","","","4","","","","984,091","","","","0.00","%","","","29","","","","810,140","","","","0.00","%","","","(344",")","","","555,932","","","","-0.06","%"],["Construction and land development","","","-","","","","458,572","","","","0.00","%","","","(72",")","","","374,415","","","","-0.02","%","","","3","","","","290,705","","","","0.00","%"],["Home equity lines of credit","","","(12",")","","","203,796","","","","-0.01","%","","","-","","","","182,874","","","","0.00","%","","","1","","","","121,276","","","","0.00","%"],["Consumer","","","(379",")","","","141,140","","","","-0.27","%","","","(442",")","","","130,595","","","","-0.34","%","","","(311",")","","","98,093","","","","-0.32","%"],["Leases","","","-","","","","13,934","","","","0.00","%","","","-","","","","13,849","","","","0.00","%","","","-","","","","13,770","","","","0.00","%"],["Credit cards","","","(626",")","","","22,312","","","","-2.81","%","","","(45",")","","","20,065","","","","-0.22","%","","","-","","","","13,885","","","","0.00","%"],["Total","","$","(6,628",")","","$","5,422,865","","","","-0.12","%","","$","1","","","$","4,819,124","","","","0.00","%","","$","(6,176",")","","$","3,951,257","","","","-0.16","%"]]
[[/GREPCENT_TABLE]]

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The following table sets forth the ACL by category of loan:

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","","December 31, 2022"],["(dollars in thousands)","","Allocated Allowance","","","% of Total ACL for loans","","","ACL for loans to Total Loans (1)","","","Allocated Allowance","","","% of Total ACL for loans","","","ACL for loans to Total Loans (1)"],["Commercial real estate - non-owner occupied","","$","22,133","","","","28","%","","","1.42","%","","$","22,641","","","","31","%","","","1.62","%"],["Commercial real estate - owner occupied","","","11,667","","","","15","%","","","1.29","%","","","10,827","","","","15","%","","","1.30","%"],["Total commercial real estate","","","33,800","","","","43","%","","","1.37","%","","","33,468","","","","46","%","","","1.50","%"],["Commercial and industrial - term (1)","","","14,359","","","","18","%","","","1.66","%","","","12,991","","","","17","%","","","1.70","%"],["Commercial and industrial - lines of credit","","","6,495","","","","8","%","","","1.48","%","","","6,389","","","","9","%","","","1.37","%"],["Total commercial and industrial","","","20,854","","","","26","%","","","1.60","%","","","19,380","","","","26","%","","","1.57","%"],["Residential real estate - owner occupied","","","9,316","","","","12","%","","","1.31","%","","","6,717","","","","9","%","","","1.14","%"],["Residential real estate - non-owner occupied","","","4,282","","","","5","%","","","1.19","%","","","3,597","","","","5","%","","","1.15","%"],["Total residential real estate","","","13,598","","","","17","%","","","1.27","%","","","10,314","","","","14","%","","","1.14","%"],["Construction and land development","","","7,593","","","","10","%","","","1.43","%","","","7,186","","","","10","%","","","1.61","%"],["Home equity lines of credit","","","1,660","","","","2","%","","","0.79","%","","","1,613","","","","2","%","","","0.80","%"],["Consumer","","","1,407","","","","2","%","","","0.97","%","","","1,158","","","","2","%","","","0.83","%"],["Leases","","","220","","","","0","%","","","1.42","%","","","201","","","","0","%","","","1.51","%"],["Credit cards","","","242","","","","0","%","","","1.02","%","","","211","","","","0","%","","","1.03","%"],["Total","","$","79,374","","","","100","%","","","1.38","%","","$","73,531","","","","100","%","","","1.42","%"]]
[[/GREPCENT_TABLE]]

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

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.

Selected ratios relating to the ACL on loans follow:

[[GREPCENT_TABLE]]
[["Years Ended December 31,","","2023","","","2022","","","2021"],["Provision for credit losses on loans to average total loans","","","0.23","%","","","0.20","%","","","0.04","%"],["Net (charge offs)/recoveries to average total loans","","","-0.12","%","","","0.00","%","","","-0.16","%"],["ACL for loans to average loans","","","1.46","%","","","1.53","%","","","1.36","%"],["ACL for loans to total loans","","","1.38","%","","","1.41","%","","","1.29","%"],["ACL for loans to total loans (excluding PPP) (1)","","","1.38","%","","","1.42","%","","","1.34","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","See the section titled \u201cNon-GAAP Financial Measures\u201d for reconcilement of non-GAAP to GAAP measures."]]
[[/GREPCENT_TABLE]]

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2022 and December 31, 2023. Provision for credit loss expense for off balance sheet credit exposures of $1.3 million was recorded for the year ended December 31, 2023, driven largely by the addition of new C&D and C&I lines of credit. The ACL for off balance sheet credit exposures totaled $5.9 million as of December 31, 2023, compared to $4.5 million as of December 31, 2022.

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Premises and Equipment

Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets, as well as fair value adjustments associated with purchase accounting. Premises and equipment experienced minimal fluctuation between December 31, 2022 and December 31, 2023. Bancorp’s branch network consists of 71 locations throughout Louisville, central, eastern and northern, Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets as of December 31, 2023.

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

BOLI

Bank-owned life insurance assets increased $2 million, or 3%, to $87 million at December 31, 2023, compared to $85 million at December 31, 2022, the increase being attributed to appreciation within the plan experienced during the year.

Goodwill          

At December 31, 2023, Bancorp had $194 million in goodwill recorded on its balance sheet. Goodwill totaling $67 million was initially recorded in association with the acquisition of CB in 2022, $8.5 million of which was subsequently written off as a result of the disposition of Bancorp’s partial interest in LFA. Goodwill totaling $123 million was recorded in association with the acquisition of KB in 2021. Additionally, Goodwill totaling $12 million and $682,000 was recorded in relation to the acquisitions of KSB and Austin State Bank in 2019 and 1996, respectively. The acquisition of TBOC in 2013 resulted in a bargain purchase gain.

Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price declining below tangible book value), negative trends in overall financial performance and regulatory actions. At September 30, 2023, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting units exceeded their fair value.

Core Deposit and Customer List Intangibles

CDIs and CLIs arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As of December 31, 2023 and December 31, 2022, Bancorp’s CDI assets totaled $12 million and $15 million, respectively. A CDI asset of $13 million was recorded during the first quarter of 2022 as a result of the CB acquisition.

As of December 31, 2023 and December 31, 2022, Bancorp’s CLI assets were $8 million and $10 million, respectively, and are attributed entirely to the WM&T segment acquired from CB. CLI assets totaling $14 million were initially recorded in association with the CB acquisition during the first quarter of 2022. However, as a result of Bancorp’s disposition of its partial interest in LFA effective December 31, 2022, the $2 million CLI associated with that business was written off and included in the loss recorded in relation to the disposition in 2022.

As of December 31, 2023, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.

Other Assets and Other Liabilities

Other assets increased $152 million to $287 million between December 31, 2022 and December 31, 2023. Other liabilities increased $121 million, or 97%, to $247 million over the same period.

The increase in Other assets stemmed mainly from Bancorp’s investment in tax credit partnerships during 2023, which have served as an economical means of fulfilling CRA requirements. As of December 31, 2023, Bancorp did not incur any impairment with respect to its intangible assets or other long-lived assets.

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The increase in Other liabilities was attributed largely to the accrual of future tax credit investment obligations, which outpaced a reduction in various accrued liabilities, such as employee incentive compensation/benefits and tax liabilities.

Deposits

Total deposits increased $279 million, or 4%, from December 31, 2022 to December 31, 2023, as time deposit growth associated with successful promotional product offerings and other interest-bearing deposit inflows more than offset a decline in non-interest bearing deposits. Average total deposit balances, which offer a more accurate representation of activity for the year, experienced a $67 million, or 1%, decline compared to the prior year, as a $290 million, or 14% decrease in average non-interest bearing deposits was only partially offset by a $223 million, or 5%, increase in average interest-bearing deposit balances.

As a result of intense pricing pressure/competition for deposits, the rates paid by Bancorp on deposits has increased and the deposit base itself has shifted to a heavier interest-bearing mix over the past several quarters. The cost of interest-bearing deposits rose to 1.77% for the year ended December 31, 2023 compared to 0.37% for the same period of the prior year, with the cost of total deposits (including non-interest deposits) rising to 1.28% from 0.25% for the same periods, respectively.

Average deposit balances and average rates paid on such deposits for the years indicated are summarized as follows:

[[GREPCENT_TABLE]]
[["","","2023","","","2022","","","2021"],["Years Ended December 31, (dollars in thousands)","","Average balance","","","Average rate","","","Average balance","","","Average rate","","","Average balance","","","Average rate"],["Non-interest bearing demand deposits","","$","1,763,157","","","","\u2014","%","","$","2,053,213","","","","\u2014","%","","$","1,578,795","","","","\u2014","%"],["Interest bearing demand deposits","","","2,277,001","","","","1.50","","","","2,218,416","","","","0.41","","","","1,633,606","","","","0.11"],["Savings deposits","","","483,245","","","","0.27","","","","538,971","","","","0.12","","","","328,570","","","","0.03"],["Money market deposits","","","1,115,331","","","","2.16","","","","1,140,025","","","","0.46","","","","919,778","","","","0.06"],["Time deposits","","","732,998","","","","2.99","","","","487,981","","","","0.27","","","","420,308","","","","0.76"],["Total average deposits","","$","6,371,732","","","","","","","$","6,438,606","","","","","","","$","4,881,057"]]
[[/GREPCENT_TABLE]]

Maturities of time deposits of $250,000 or more at December 31, 2023 are as follows:

[[GREPCENT_TABLE]]
[["(in thousands)"],["Three months or less","","$","54,203"],["Over three through six months","","","91,973"],["Over six through 12 months","","","91,837"],["Over 12 months","","","41,461"],["Total","","$","279,474"]]
[[/GREPCENT_TABLE]]

Securities Sold Under Agreement to Repurchase

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 December 31, 2023 and 2022, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.

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

SSUARs increased $20 million, or 15%, between December 31, 2022 and December 31, 2023, largely as a result of some customers experiencing normal cyclical fluctuation in their SSUAR balances.

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Federal Funds Purchased and Other Short-Term Borrowing

FFP and other short-term borrowing balances increased $4 million, or 46%, between December 31, 2022 and December 31, 2023. At December 31, 2023, FFP related mainly to excess liquidity held by downstream correspondent bank customers of Bancorp.

Subordinated debentures

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of December 31, 2023, subordinated notes added through the CB acquisition totaled $27 million.

FHLB advances

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

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 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 $171 million and $85 million at December 31, 2023 and December 31, 2022, respectively. The increase experienced during 2023 is attributed mainly to deposit growth and the increase in FHLB borrowing activity. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are used for general daily liquidity purposes.

The fair value of the AFS debt security portfolio was $1.03 billion and $1.14 billion at December 31, 2023 and December 31, 2022, respectively. The decrease in AFS debt security portfolio for during 2023 is attributed to scheduled maturities and normal pay down activity within the portfolio, which more than offset a market value appreciation during the period. The investment portfolio (HTM and AFS) includes total cash flows on amortizing debt securities of approximately $373 million (based on assumed prepayment speeds as of December 31, 2023) expected over the next 12 months, including $181 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 December 31, 2023, the total carrying value of investment securities pledged for these purposes comprised 67% of the debt securities portfolio, leaving approximately $480 million of unpledged debt securities.

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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 December 31, 2023, such deposits totaled $5.78 billion and represented 87% of Bancorp’s total deposits, as compared with $5.60 billion, or 88% of total deposits at December 31, 2022. Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they normally 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 December 31, 2023 and December 31, 2022, Bancorp held brokered deposits totaling $597,000 and $599,000, respectively, the majority of which was added through acquisition-related activity in 2022 and 2021.

Included in total deposit balances at December 31, 2023 are $613 million in public funds generally comprised of accounts with local government agencies and public school districts in the markets in which Bancorp operates. At December 31, 2022, public funds deposits totaled $692 million, the decrease experienced during 2023 was attributed to a small number of public fund relationships obtained through acquisition leaving the Bank due to competitor bids at rates exceeding the FFTR.

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 December 31, 2023 and December 31, 2022, available credit from the FHLB totaled $1.33 billion and $1.36 billion, respectively, the decline during this period being attributed to increased utilization of FHLB borrowings. Bancorp also had unsecured FFP lines with correspondent banks totaling $80 million at both December 31, 2023 and December 31, 2022, respectively.

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

Bancorp’s principal source of cash is dividends paid to it as the sole shareholder of the Bank. As discussed in the Footnote titled “Commitments and Contingent Liabilities,” as of January 1st of any year, the Bank may pay dividends in an amount equal to the Bank’s net income of the prior two years less any dividends paid for the same two years. At December 31, 2023, the Bank could pay an amount equal to $145 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank.

Sources and Uses of Cash

Cash flow is provided primarily through financing activities of Bancorp, which include raising deposits and borrowing funds from institutional sources such as advances from the FHLB and FFP, as well as scheduled loan repayments and cash flows from AFS debt securities. These funds are primarily used to facilitate investment activities of Bancorp, which include making loans and purchasing securities for the investment portfolio. Another important source of cash is net income of the Bank from operating activities.  For further detail regarding the sources and uses of cash, see the “Consolidated Statements of Cash Flows” in Bancorp’s consolidated financial statements.

Commitments

In the normal course of business, Bancorp is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in Bancorp’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.

Bancorp provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Unused loan commitments increased $393 million, or 19%, as of December 31, 2023 compared to December 31, 2022 consistent with substantial organic growth experienced during the year. However, as previously noted, line of credit utilization has been below historical usage rates despite this growth.

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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.

Additional detail regarding credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2023 are as follows:

[[GREPCENT_TABLE]]
[["","","Amount of commitment expiration per period"],["","","Less than","","","One-three","","","Three-five","","","Over five"],["(in thousands)","","one year","","","years","","","years","","","years","","","Total"],["Unused loan commitments","","$","1,126,843","","","$","446,189","","","$","339,443","","","$","510,411","","","$","2,422,886"],["Standby letters of credit","","","31,526","","","","2,248","","","","4","","","","\u2014","","","","33,778"]]
[[/GREPCENT_TABLE]]

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 $5.9 million and $4.5 million as of December 31, 2023 and December 31, 2022, respectively. Provision expense for off balance sheet credit exposures of $1.3 million was recorded for the year ended December 31, 2023, driven largely by the addition of new C&D and C&I lines of credit. Provision expense for off balance sheet credit exposures of $575,000 was recorded for the year ended December 31, 2022.

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

In addition to owned banking facilities, Bancorp has entered into long-term leasing arrangements for certain branch facilities. Bancorp also has required future payments for a non-qualified defined benefit retirement plan, time deposit maturities and other obligations.

Required payments under such commitments at December 31, 2023 are as follows:

[[GREPCENT_TABLE]]
[["","","Payments due by period"],["","","Less than","","","One-three","","","Three-five","","","Over five"],["(in thousands)","","one year","","","years","","","years","","","years","","","Total"],["Time deposit maturities","","$","862,913","","","$","108,023","","","$","12,341","","","$","-","","","$","983,277"],["FHLB advances","","","200,000","","","","\u2014","","","","\u2014","","","","\u2014","","","","200,000"],["Tax credit partnership contributions","","","48,481","","","","96,141","","","","8,096","","","","5,000","","","","157,718"],["Subordinated debentures","","","\u2014","","","","\u2014","","","","\u2014","","","","26,000","","","","26,000"],["Operating leases (1)","","","2,773","","","","4,421","","","","4,331","","","","10,962","","","","22,487"],["Defined benefit retirement plan","","","219","","","","438","","","","438","","","","2,183","","","","3,278"],["Other (2)","","","1,123","","","","1,293","","","","1,332","","","","1,024","","","","4,772"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes assumed lease renewals."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Consists primarily of contractual requirements relating to community sponsorships."]]
[[/GREPCENT_TABLE]]

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

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Capital

Information pertaining to Bancorp’s capital balances and select ratios follow:

[[GREPCENT_TABLE]]
[["Years ended December 31, (dollars in thousands, except per share data)","","2023","","","2022","","","2021"],["Stockholders\u2019 equity","","$","858,103","","","$","760,432","","","$","675,869"],["Dividends per share","","$","1.18","","","$","1.14","","","$","1.10"],["Dividend payout ratio, based on basic EPS","","","31.98","%","","","35.19","%","","","36.67","%"]]
[[/GREPCENT_TABLE]]

At December 31, 2023, stockholders’ equity totaled $858 million, representing an increase of $98 million, or 13%, compared to December 31, 2022. The increase for year ended December 31, 2023 was attributed to recording net income of $107.7 million and a $23 million increase in AOCI, which was only partially offset by $35 million of dividends declared, serving to grow stockholder’s equity for the period. AOCI consists of net unrealized gains or losses on AFS debt securities and cash flow hedging instruments in addition to a minimum pension liability, each net of income taxes. The changes in AOCI from December 31, 2022 to December 31, 2023 were the result of changes in the interest rate environment and its corresponding impact on the valuation of these components, mainly the AFS debt securities portfolio. See the “Consolidated Statement of Changes in Stockholders’ Equity” for further detail of changes in equity. 

Bancorp’s TCE ratio and tangible book value per share, both non-GAAP disclosures, experienced improvement between December 31, 2022 and December 31, 2023, which stemmed largely from recording net income of $107.7 million and the $23 million positive change in AOCI for the year ended December 31, 2023. TCE was 8.09% at December 31, 2023 compared to 7.44% at December 31, 2022, while tangible book value per share was $21.95 at December 31, 2023 compared to $18.50 at December 31, 2022. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Bancorp increased its cash dividends declared to stockholders during 2023 to an annual dividend of $1.18, from $1.14 per share in 2022 and $1.10 in 2021. This represents a payout ratio of 31.98% based on basic EPS and an annual dividend yield of 2.29% based upon the year-end closing stock price.

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. Based on economic developments over the past year and the increased importance of capital preservation, no shares were repurchased in 2022, nor 2023. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan.

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

Capital ratios as of December 31, 2023 decreased compared December 31, 2022, as a result of substantial risk-weighted asset growth within the loan portfolio and tax credit investment activity, which was buoyed by strong operating results. Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

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

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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 December 31, 2023, the adequately-capitalized minimums, including the capital conservation buffer, were a 7.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio. Bancorp met these levels as of December 31, 2023 and 2022.

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of December 31, 2023, subordinated notes totaled $27 million.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “Financial Instruments – Credit Losses,” or CECL, which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were delayed for two years. After two years, the cumulative amount of the transition adjustments became fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. 2024 will represent year five 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.

Fair Value Measurements

Bancorp follows the provisions of authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by GAAP. It prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP.

Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. The guidance requires fair value measurements to be classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on significant unobservable, internally-derived inputs).

Bancorp’s AFS debt securities and interest rate swaps are recorded at fair value on a recurring basis. Other accounts including mortgage loans held for sale, MSRs, impaired loans and OREO may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.

The AFS debt securities portfolio is comprised of U.S. Treasury and other U.S. government obligations, debt securities of U.S. government-sponsored corporations (including mortgage-backed securities), and obligations of state and political subdivisions. U.S. Treasury securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All other securities are priced using standard industry models or matrices with various assumptions such as yield curves, volatility, prepayment speeds, default rates, time value, credit rating and market prices for similar instruments. These assumptions are generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above.

Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generally based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2023, 2022 and 2021.

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MSRs, carried in other assets and recorded at fair value upon capitalization, are amortized to correspond with estimated servicing income and are periodically assessed for impairment based on fair value at the reporting date. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At December 31, 2023 and 2022, there was no valuation allowance for MSRs, as fair value exceeded carrying value.

Loans considered to be collateral dependent are measured for impairment and, if indicated, a specific allocation is established based on the value of underlying collateral. Collateral dependent loans include non-accrual loans, individually analyzed PCD loans and loans modified for borrowers experiencing financial difficulty. For collateral dependent loans, fair value amounts represent only those loans with specific valuation allowances established or adjusted and loans charged down to their carrying value during the period. At December 31, 2023 and December 31, 2022, the carrying value of collateral dependent loans measured at fair value on a non-recurring basis was $14 million and $21 million, respectively. These measurements are classified as Level 3.

OREO, which is carried in other assets at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is commonly based on recent real estate appraisals or valuations performed by internal or external parties which use judgments and assumptions that are property-specific and sensitive to changes in the overall economic environment. Appraisals may be further discounted based on management’s judgement and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. OREO is equal to the carrying value of only parcels of OREO for which carrying value equals appraised value. If a parcel of OREO has a carrying value below its appraised value, it is not considered to be carried at fair value. The losses represent write-downs which occurred during the period indicated. At December 31, 2023 and 2022, the carrying value of OREO was $10,000 and $677,000, respectively, with the decline being attributed to the sale of two properties during 2023.

See the Footnote titled “Assets and Liabilities Measured and Reported at Fair Value,” for additional detail regarding fair value measurements.

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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:

[[GREPCENT_TABLE]]
[["December 31, (dollars and shares in thousands, except per share data)","","2023","","","2022"],["Total stockholders' equity - GAAP (a)","","$","858,103","","","$","760,432"],["Less: Goodwill","","","(194,074",")","","","(194,074",")"],["Less: Core deposit and other intangibles","","","(20,304",")","","","(24,990",")"],["Tangible common equity - Non-GAAP (c)","","$","643,725","","","$","541,368"],["Total assets - GAAP (b)","","$","8,170,102","","","$","7,496,261"],["Less: Goodwill","","","(194,074",")","","","(194,074",")"],["Less: Core deposit and other intangibles","","","(20,304",")","","","(24,990",")"],["Tangible assets - Non-GAAP (d)","","$","7,955,724","","","$","7,277,197"],["Total stockholders' equity to total assets - GAAP (a/b)","","","10.50","%","","","10.14","%"],["Tangible common equity to tangible assets - Non-GAAP (c/d)","","","8.09","%","","","7.44","%"],["Total shares outstanding (e)","","","29,329","","","","29,259"],["Book value per share - GAAP (a/e)","","$","29.26","","","$","25.99"],["Tangible common equity per share - Non-GAAP (c/e)","","","21.95","","","","18.50"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["December 31, (dollars in thousands)","","2023","","","2022"],["Total loans - GAAP (a)","","$","5,771,038","","","$","5,205,918"],["Less: PPP loans","","","(4,319",")","","","(18,593",")"],["Total non-PPP loans - Non-GAAP (b)","","$","5,766,719","","","$","5,187,325"],["ACL for loans (c)","","$","79,374","","","$","73,531"],["Non-performing loans (d)","","","19,168","","","","15,134"],["Delinquent loans (e)","","","17,322","","","","16,863"],["ACL for loans to total loans - GAAP (c/a)","","","1.38","%","","","1.41","%"],["ACL for loans to total loans - Non-GAAP (c/b)","","","1.38","%","","","1.42","%"],["Non-performing loans to total loans - GAAP (d/a)","","","0.33","%","","","0.29","%"],["Non-performing loans to total loans - Non-GAAP (d/b)","","","0.33","%","","","0.29","%"],["Delinquent loans to total loans - GAAP (e/a)","","","0.30","%","","","0.32","%"],["Delinquent loans to total loans - Non-GAAP (e/b)","","","0.30","%","","","0.33","%"]]
[[/GREPCENT_TABLE]]

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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 merger-related expenses.

[[GREPCENT_TABLE]]
[["Years ended December 31, (dollars in thousands)","","2023","","","2022","","","2021"],["Total non-interest expenses (a)","","$","187,829","","","$","191,791","","","$","142,280"],["Less: Merger expenses","","","\u2014","","","","(19,500",")","","","(19,025",")"],["Less: Loss on disposition of LFA","","","\u2014","","","","(870",")","","","\u2014"],["Less: Amortization of investments in tax credit partnerships","","","(1,294",")","","","(353",")","","","(367",")"],["Total non-interest expenses - Non-GAAP (c)","","$","186,535","","","$","171,068","","","$","122,888"],["Total net interest income, FTE","","$","247,869","","","$","234,267","","","$","171,508"],["Total non-interest income","","","92,220","","","","89,149","","","","65,850"],["Total revenue - Non-GAAP (b)","","","340,089","","","","323,416","","","","237,358"],["Less: (Gain)/loss on sale of premises and equipment","","","30","","","","(4,341",")","","","78"],["Less: Loss on sale of securities","","","44","","","","\u2014","","","","\u2014"],["Total adjusted revenue - Non-GAAP (d)","","$","340,163","","","$","319,075","","","$","237,436"],["Efficiency ratio - Non-GAAP (a/b)","","","55.23","%","","","59.30","%","","","59.92","%"],["Adjusted efficiency ratio - Non-GAAP (c/d)","","","54.84","%","","","53.61","%","","","51.76","%"]]
[[/GREPCENT_TABLE]]