Equibles

10-Q

Stock Yards Bancorp, Inc. (SYBT)

10-Q 2024-05-07 For: 2024-03-31
View Original
Added on April 04, 2026

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2024

or

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

Commission File Number: 1-13661

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STOCK YARDS BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky 61-1137529
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1040 East Main Street, Louisville, Kentucky 40206
--- ---
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (502) 582-2571

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, no par value SYBT The NASDAQ Stock Market, LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes   ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes  ☒ No

The number of shares outstanding of the registrant’s Common Stock, no par value, as of April 30, 2024, was 29,392,401.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION 4
Item 1. Financial Statements. 4
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements Income 5
Condensed Consolidated Statements of Comprehensive Income (Loss) 6
Condensed Consolidated Statements of Changes in Stockholders’ Equity 7
Condensed Consolidated Statements of Cash Flows 8
Notes to Condensed Consolidated Financial Statements 10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 53
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 80
Item 4. Controls and Procedures. 80
PART II – OTHER INFORMATION 80
Item 1. Legal Proceedings. 80
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 80
Item 5. Other Information 80
Item 6. Exhibits. 81
Signatures 82

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GLOSSARY OF ABBREVIATIONS AND ACRONYMS

The acronyms and abbreviations identified in alphabetical order below are used throughout this Report on Form 10-Q:

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2024 (unaudited) and December 31, 2023 (in thousands, except share data)

December 31,
2023
Assets **** **** **** **** ****
Cash and due from banks 71,676 $ 94,466
Federal funds sold and interest bearing due from banks 88,547 171,493
Total cash and cash equivalents 160,223 265,959
Mortgage loans held for sale, at fair value 6,462 6,056
Available for sale debt securities (amortized cost of 1,123,119 in 2024 and 1,154,153 in 2023, respectively) 993,808 1,031,179
Held to maturity debt securities (fair value of 351,869 in 2024 and 408,519 in 2023, respectively) 385,404 439,837
Federal Home Loan Bank stock, at cost 24,675 16,236
Loans 5,849,715 5,771,038
Allowance for credit losses on loans (80,897 ) (79,374 )
Net loans 5,768,818 5,691,664
Premises and equipment, net 106,730 101,174
Premises held for sale 2,482 2,502
Bank owned life insurance 87,514 86,927
Accrued interest receivable 26,074 26,830
Goodwill 194,074 194,074
Core deposit intangible 11,272 11,944
Customer list intangible 7,980 8,360
Other assets 347,612 287,360
Total assets 8,123,128 $ 8,170,102
Liabilities **** **** **** **** ****
Deposits:
Non-interest bearing 1,481,217 $ 1,548,624
Interest bearing 5,127,863 5,122,124
Total deposits 6,609,080 6,670,748
Securities sold under agreements to repurchase 162,528 152,991
Federal funds purchased 9,961 12,852
Subordinated debentures 26,806 26,740
Federal Home Loan Bank advances 200,000 200,000
Accrued interest payable 2,194 2,094
Other liabilities 237,848 246,574
Total liabilities 7,248,417 7,311,999
Commitments and contingent liabilities (Footnote 12)
Stockholders’ equity **** **** **** **** ****
Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding — —
Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 29,393,000 and 29,329,000 shares in 2024 and 2023, respectively 58,812 58,602
Additional paid-in capital 389,685 385,955
Retained earnings 521,268 506,344
Accumulated other comprehensive loss (95,054 ) (92,798 )
Total stockholders’ equity 874,711 858,103
Total liabilities and equity 8,123,128 $ 8,170,102

All values are in US Dollars.

See accompanying notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

For the three months ended March 31, 2024 and 2023 (in thousands, except per share data)

Three months ended
March 31,
2024 2023
Interest income: **** **** **** **** ****
Loans, including fees $ 85,840 $ 68,787
Federal funds sold and interest bearing due from banks 2,096 1,581
Mortgage loans held for sale 31 41
Federal Home Loan Bank stock 468 165
Investment securities:
Taxable 7,657 8,446
Tax-exempt 453 447
Total interest income 96,545 79,467
Interest expense: **** **** **** **** ****
Deposits 31,866 13,499
Securities sold under agreements to repurchase 931 456
Federal funds purchased and other short-term borrowings 136 177
Federal Home Loan Bank advances 2,997 1,734
Subordinated debentures 545 529
Total interest expense 36,475 16,395
Net interest income 60,070 63,072
Provision for credit losses 1,425 2,625
Net interest income after provision expense 58,645 60,447
Non-interest income: **** **** **** **** ****
Wealth management and trust services 10,771 9,527
Deposit service charges 2,136 2,149
Debit and credit card income 4,682 4,482
Treasury management fees 2,625 2,318
Mortgage banking income 948 1,038
Net investment product sales commissions and fees 865 754
Bank owned life insurance 588 549
Loss on sale of premises and equipment - (2 )
Other 656 1,232
Total non-interest income 23,271 22,047
Non-interest expenses: **** **** **** **** ****
Compensation 24,221 21,896
Employee benefits 5,876 5,053
Net occupancy and equipment 3,670 3,899
Technology and communication 5,069 4,251
Debit and credit card processing 1,746 1,419
Marketing and business development 1,075 1,095
Postage, printing and supplies 926 874
Legal and professional 1,115 797
FDIC insurance 1,112 1,135
Amortization of investments in tax credit partnerships - 323
Capital and deposit based taxes 630 639
Intangible amortization 1,052 1,180
Other 2,469 2,753
Total non-interest expenses 48,961 45,314
Income before income tax expense 32,955 37,180
Income tax expense 7,068 8,132
Net income $ 25,887 $ 29,048
Net income per share - basic $ 0.89 $ 1.00
Net income per share - diluted $ 0.88 $ 0.99
Weighted average outstanding shares
Basic 29,250 29,178
Diluted 29,361 29,365

See accompanying notes to unaudited condensed consolidated financial statements.

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

For the three months ended March 31, 2024 and 2023 (in thousands)

Three months ended
March 31,
2024 2023
Net income $ 25,887 $ 29,048
Other comprehensive income (loss):
Change in unrealized gain (loss) on AFS debt securities (6,337 ) 18,859
Change in fair value of derivatives used in cash flow hedge 3,325 494
Total other comprehensive income (loss) before income tax effect (3,012 ) 19,353
Tax effect (756 ) 4,760
Total other comprehensive income (loss) net of tax (2,256 ) 14,593
Comprehensive income $ 23,631 $ 43,641

See accompanying notes to unaudited condensed consolidated financial statements.

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

For the three months ended March 31, 2024 and 2023 (in thousands, except per share data)

**** **** **** **** **** **** **** **** **** **** **** Accumulated **** **** ****
Additional **** **** **** other Total
**** **** **** paid-in Retained comprehensive stockholders'
Amount capital earnings income (loss) equity
Balance, January 1, 2024 29,329 $ 58,602 $ 385,955 $ 506,344 $ (92,798 ) $ 858,103
Activity for three months ended March 31, 2024: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Net income — — — 25,887 — 25,887
Other comprehensive loss — — — — (2,256 ) (2,256 )
Stock compensation expense — — 942 — — 942
Reclassification adjustment - ASU 2023-02 — — — 2,482 — 2,482
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations 65 212 2,825 (4,675 ) — (1,638 )
Cash dividends declared, 0.30 per share — — — (8,809 ) — (8,809 )
Shares cancelled (1 ) (2 ) (37 ) 39 — —
Balance, March 31, 2024 29,393 $ 58,812 $ 389,685 $ 521,268 $ (95,054 ) $ 874,711

All values are in US Dollars.

**** **** **** **** **** **** **** **** **** **** **** Accumulated **** **** ****
Additional **** **** **** other Total
**** **** **** paid-in Retained comprehensive stockholders'
Amount capital earnings income (loss) equity
Balance, January 1, 2023 29,259 $ 58,367 $ 377,703 $ 439,898 $ (115,536 ) $ 760,432
Activity for three months ended March 31, 2023: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Net income — — — 29,048 — 29,048
Other comprehensive income — — — — 14,593 14,593
Stock compensation expense — — 1,152 — — 1,152
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations 66 217 3,557 (6,143 ) — (2,369 )
Cash dividends declared, 0.29 per share — — — (8,489 ) — (8,489 )
Shares cancelled (1 ) (2 ) (21 ) 24 — 1
Balance, March 31, 2023 29,324 $ 58,582 $ 382,391 $ 454,338 $ (100,943 ) $ 794,368

All values are in US Dollars.

See accompanying notes to unaudited condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

For the three months ended March 31, 2024 and 2023 (in thousands)

2024 2023
Cash flows from operating activities: **** **** **** **** **** ****
Net income $ 25,887 $ 29,048
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses 1,425 2,625
Depreciation, amortization and accretion, net 3,438 5,879
Deferred income tax expense 754 2,261
Gain on sale of mortgage loans held for sale (341 ) (215 )
Origination of mortgage loans held for sale+ (22,617 ) (24,683 )
Proceeds from sale of mortgage loans held for sale 22,552 21,107
Bank owned life insurance income (588 ) (549 )
Loss on the disposal of premises and equipment — 2
Stock compensation expense 942 1,152
Excess tax expense (benefit) from share-based compensation arrangements (4 ) 493
Net change in accrued interest receivable and other assets (8,907 ) 3,659
Net change in accrued interest payable and other liabilities (5,125 ) (31,017 )
Net cash provided by operating activities 17,416 9,762
Cash flows from investing activities: **** **** **** **** **** ****
Proceeds from maturities and paydowns of available for sale debt securities 30,325 30,681
Proceeds from maturities and paydowns of held to maturity debt securities 4,506 4,504
Purchases of FHLB stock (9,782 ) (12,298 )
Proceeds from redemption of FHLB stock 1,343 —
Net change in non-PPP loans (78,086 ) (47,277 )
Net change in PPP loans 397 9,036
Purchases of premises and equipment (1,830 ) (1,831 )
Proceeds from sale or disposal of premises and equipment — 103
Other investment activities (4,498 ) (255 )
Net cash used in investing activities (57,625 ) (17,337 )
Cash flows from financing activities: **** **** **** **** **** ****
Net change in deposits (61,668 ) (34,057 )
Net change in securities sold under agreements to repurchase and federal funds purchased 6,646 (22,808 )
Proceeds from FHLB advances 725,000 700,000
Repayments of FHLB advances (725,000 ) (475,000 )
Repurchase of common stock (1,638 ) (2,368 )
Cash dividends paid (8,867 ) (8,561 )
Net cash (used in) provided by financing activities (65,527 ) 157,206
Net change in cash and cash equivalents (105,736 ) 149,631
Beginning cash and cash equivalents 265,959 167,367
Ending cash and cash equivalents $ 160,223 $ 316,998

(continued)

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)

For the three months ended March 31,

2024 2023
Supplemental cash flow information:
Interest paid $ 36,375 $ 16,026
Income taxes paid, net of refunds 5,115 —
Cash paid for operating lease liabilities 1,328 1,071
Supplemental non-cash activity: **** **** **** ****
Unfunded commitments in tax credit investments $ — $ 6,262
Receivable for proceeds from matured HTM investment security 50,000 —
Dividends payable to stockholders 181 158
Premises and equipment transferred to premises held for sale — 715

See accompanying notes to unaudited condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

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

The accompanying condensed consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. and its wholly-owned subsidiary, Stock Yards Bank & Trust Company. The condensed consolidated financial statements in this report have not been audited by the Company’s independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the result of operations for the interim periods have been made. All such adjustments are of a normal, recurring nature and all intercompany accounts and transactions have been eliminated.

To prepare the condensed consolidated financial statements, management must make estimates and assumptions that may require difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Actual results could differ significantly from those estimates, and the results of operations for the three month period ended March 31, 2024 do not necessarily indicate the results that Bancorp will achieve for the year ended December 31, 2024, or any other interim period.

The condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the rules and regulations for Form 10-Q as adopted by the SEC. Accordingly, the condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with Bancorp’s most recent Annual Report on Form 10-K, which contain the latest audited consolidated financial statements and notes thereto.

Reclassifications – Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods' net income or shareholder's equity.

Adoption of New Accounting Guidance **** – **** Bancorp continually monitors potential accounting pronouncements and evaluates the impact that adoption of new guidance will have on the Company’s condensed consolidated financial statements.

In March 2023, the FASB issued ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” The amendments in this update permit reporting entities to elect to account for their tax equity investments using the proportional amortization method if certain conditions are met, regardless of the tax credit program from which the related income tax credits are received. The amendments also allow for making the election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis, as opposed to applying this method at the reporting entity level or to individual investments. Further, the amendments of this ASU remove certain guidance for Qualified Affordable Housing Project investments and require the application of the delayed equity contribution guidance to all tax equity investments. The amendments of this ASU are effective for fiscal years beginning after December 15, 2023 and must be applied on either a modified retrospective or a retrospective basis.

Bancorp adopted this ASU effective January 1, 2024 using the modified retrospective basis. The impact of adoption was measured as of January 1, 2024 and resulted in a one-time cumulative-effect adjustment to retained earnings. This adjustment ultimately increased total stockholders equity by $2.5 million and included the write-off of DTAs for qualified tax credit investments. Also as a result of adoption, Bancorp began booking related tax credit amortization expense as a component of income tax expense effective January 1, 2024, which had previously been recorded as a component of non-interest expenses. No prior periods presented were impacted as a result of adopting ASU 2023-02.

Accounting Standards Updates **** – **** Generally, if an issued but not yet effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.

In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The amendments in this update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this update do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments of this ASU are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. Adoption of this ASU is not expected to have a material impact on Bancorp’s consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures, primarily related to effective tax rate reconciliation and information related to income taxes paid, among certain other amendments to improve the effectiveness of such disclosures. The amendments of this ASU are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. Adoption of this ASU is not expected to have a material impact on Bancorp’s consolidated financial statements.

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(2) Investment Securities

Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified as HTM securities. All other investment securities are classified as AFS securities.

AFS Debt Securities

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of Bancorp’s AFS debt securities portfolio:

(in thousands) Amortized Unrealized
March 31, 2024 cost Gains Losses Fair value
U.S. Treasury and other U.S. Government obligations $ 119,955 $ - $ (2,477 ) $ 117,478
Government sponsored enterprise obligations 96,057 149 (5,310 ) 90,896
Mortgage backed securities - government agencies 768,003 16 (107,399 ) 660,620
Obligations of states and political subdivisions 135,318 3 (14,064 ) 121,257
Other 3,786 - (229 ) 3,557
Total available for sale debt securities $ 1,123,119 $ 168 $ (129,479 ) $ 993,808
December 31, 2023 **** **** **** **** **** **** **** **** ****
U.S. Treasury and other U.S. Government obligations $ 119,931 $ - $ (3,662 ) $ 116,269
Government sponsored enterprise obligations 104,677 157 (4,987 ) 99,847
Mortgage backed securities - government agencies 789,145 83 (101,189 ) 688,039
Obligations of states and political subdivisions 136,579 5 (13,094 ) 123,490
Other 3,821 - (287 ) 3,534
Total available for sale debt securities $ 1,154,153 $ 245 $ (123,219 ) $ 1,031,179

HTM Debt Securities

The following table summarizes the amortized cost, unrecognized gains and losses, and fair value of Bancorp’s HTM debt securities portfolio:

(in thousands) Carrying Unrecognized
March 31, 2024 value Gains Losses Fair value
U.S. Treasury and other U.S. Government obligations $ 153,383 $ - $ (4,190 ) $ 149,193
Government sponsored enterprise obligations 26,756 - (2,639 ) 24,117
Mortgage backed securities - government agencies 205,265 - (26,706 ) 178,559
Total held to maturity debt securities $ 385,404 $ - $ (33,535 ) $ 351,869
December 31, 2023 **** **** **** **** **** **** **** **** ****
U.S. Treasury and other U.S. Government obligations $ 203,259 $ - $ (4,932 ) $ 198,327
Government sponsored enterprise obligations 26,918 - (2,457 ) 24,461
Mortgage backed securities - government agencies 209,660 1 (23,930 ) 185,731
Total held to maturity debt securities $ 439,837 $ 1 $ (31,319 ) $ 408,519

All investment securities classified as HTM by Bancorp as of March 31, 2024 are obligations of the U.S. Government and/or are issued by U.S. Government-sponsored agencies and have an implicit or explicit government guarantee. Therefore, no ACL has been recorded for Bancorp’s HTM securities as of March 31, 2024. Further, as of March 31, 2024, none of Bancorp’s HTM securities were in non-accrual or past due status.

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Debt Securities by Contractual Maturity

A summary of AFS and HTM debt securities by contractual maturity as of March 31, 2024 follows:

AFS Debt Securities HTM Debt Securities
(in thousands) Amortized cost Fair value Carrying value Fair value
Due within one year $ 127,223 $ 124,656 $ 151,432 $ 147,357
Due after one year but within five years 37,397 35,288 2,656 2,511
Due after five years but within 10 years 79,825 69,940 25,539 22,941
Due after 10 years 110,671 103,304 512 501
Mortgage backed securities - government agencies 768,003 660,620 205,265 178,559
Total $ 1,123,119 $ 993,808 $ 385,404 $ 351,869

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

At March 31, 2024 and December 31, 2023, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Accrued interest on the investment securities portfolio (AFS and HTM) totaled $4 million and $6 million at March 31, 2024 and December 31, 2023, respectively. Accrued interest on the investment securities portfolios is included in the condensed consolidated balance sheets.

Securities with a carrying value of $949 million and $991 million were pledged at March 31, 2024 and December 31, 2023, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts.

Based on an evaluation of available information including security type, counterparty credit quality, past events, current conditions, and reasonable and supportable forecasts that are relevant to collectability, Bancorp has concluded that it expects to receive all contractual cash flows from each security held in its AFS and HTM debt securities portfolio. As such, no allowance or impairment was recorded with respect to investment securities as of March 31, 2024.

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Unrealized and Unrecognized Loss Analysis on Debt Securities

Debt securities with unrealized and unrecognized losses at March 31, 2024 and December 31, 2023, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:

AFS Debt Securities
Less than 12 months 12 months or more Total
(in thousands) Fair Unrealized Fair Unrealized Fair Unrealized
March 31, 2024 value losses value losses value losses
U.S. Treasury and other U.S. Government obligations $ - $ - $ 117,478 $ (2,477 ) $ 117,478 $ (2,477 )
Government sponsored enterprise obligations 4,759 (12 ) 80,067 (5,298 ) 84,826 (5,310 )
Mortgage-backed securities - government agencies 10,421 (113 ) 647,067 (107,286 ) 657,488 (107,399 )
Obligations of states and political subdivisions 10,844 (101 ) 104,919 (13,963 ) 115,763 (14,064 )
Other - - 3,557 (229 ) 3,557 (229 )
Total AFS debt securities $ 26,024 $ (226 ) $ 953,088 $ (129,253 ) $ 979,112 $ (129,479 )
December 31, 2023 **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
U.S. Treasury and other U.S. Government obligations $ - $ - $ 116,269 $ (3,662 ) $ 116,269 $ (3,662 )
Government sponsored enterprise obligations - - 83,675 (4,987 ) 83,675 (4,987 )
Mortgage-backed securities - government agencies 16,346 (95 ) 661,195 (101,094 ) 677,541 (101,189 )
Obligations of states and political subdivisions 6,326 (64 ) 105,179 (13,030 ) 111,505 (13,094 )
Other - - 3,534 (287 ) 3,534 (287 )
Total AFS debt securities $ 22,672 $ (159 ) $ 969,852 $ (123,060 ) $ 992,524 $ (123,219 )
HTM Debt Securities
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Less than 12 months 12 months or more Total
(in thousands) Fair Unrecognized Fair Unrecognized Fair Unrecognized
March 31, 2024 value losses value losses value losses
U.S. Treasury and other U.S. Government obligations $ - $ - $ 149,193 $ (4,190 ) $ 149,193 $ (4,190 )
Government sponsored enterprise obligations 424 (1 ) 23,681 (2,638 ) 24,105 (2,639 )
Mortgage-backed securities - government agencies 204 (1 ) 178,355 (26,705 ) 178,559 (26,706 )
Total HTM debt securities $ 628 $ (2 ) $ 351,229 $ (33,533 ) $ 351,857 $ (33,535 )
December 31, 2023 **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
U.S. Treasury and other U.S. Government obligations $ - $ - $ 198,327 $ (4,932 ) $ 198,327 $ (4,932 )
Government sponsored enterprise obligations 455 (1 ) 23,967 (2,456 ) 24,422 (2,457 )
Mortgage-backed securities - government agencies - - 185,504 (23,930 ) 185,504 (23,930 )
Total HTM debt securities $ 455 $ (1 ) $ 407,798 $ (31,318 ) $ 408,253 $ (31,319 )

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Applicable dates for determining when securities are in unrealized and unrecognized loss positions are March 31, 2024 and December 31, 2023. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “Less than 12 months” category of the preceding table.

For debt securities with unrealized and unrecognized loss positions, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL for debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating debt securities in unrealized and unrecognized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized and unrecognized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of 516 and 498 separate investment positions as of March 31, 2024 and December 31, 2023, respectively. By dollar value, approximately 99% and 98% of the debt securities portfolio was in a loss position as of March 31, 2024 and December 31, 2023, respectively. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at March 31, 2024 and December 31, 2023.

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(3) Loans and Allowance for Credit Losses on Loans

Composition of loans by class follows:

(in thousands) March 31, 2024 December 31, 2023
Commercial real estate - non-owner occupied $ 1,609,483 $ 1,561,689
Commercial real estate - owner occupied 931,973 907,424
Total commercial real estate 2,541,456 2,469,113
Commercial and industrial - term 864,272 867,380
Commercial and industrial - lines of credit 429,424 439,748
Total commercial and industrial 1,293,696 1,307,128
Residential real estate - owner occupied 723,234 708,893
Residential real estate - non-owner occupied 360,958 358,715
Total residential real estate 1,084,192 1,067,608
Construction and land development 532,183 531,324
Home equity lines of credit 212,443 211,390
Consumer 145,022 145,340
Leases 16,619 15,503
Credits cards 24,104 23,632
Total loans (1) $ 5,849,715 $ 5,771,038

(1) Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.

Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $22 million and $21 million at March 31, 2024 and December 31, 2023, respectively, and was included in the condensed consolidated balance sheets.

Loans with carrying amounts of $3.21 billion and $3.15 billion were pledged to secure FHLB borrowing capacity at March 31, 2024 and December 31, 2023, respectively.

Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $62 million as of both March 31, 2024 and December 31, 2023, respectively.

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ACL for Loans

The table below reflects activity in the ACL related to loans:

(in thousands)<br> <br>Three Months Ended March 31, 2024 Beginning<br> <br>Balance Provision for<br> <br>Credit Losses<br> <br>on Loans Charge-offs Recoveries Ending<br> <br>Balance
Commercial real estate - non-owner occupied $ 22,133 $ (326 ) $ - $ 16 $ 21,823
Commercial real estate - owner occupied 11,667 (441 ) - 4 11,230
Total commercial real estate 33,800 (767 ) - 20 33,053
Commercial and industrial - term 14,359 (673 ) (23 ) 253 13,916
Commercial and industrial - lines of credit 6,495 (441 ) - 204 6,258
Total commercial and industrial 20,854 (1,114 ) (23 ) 457 20,174
Residential real estate - owner occupied 9,316 2,509 (14 ) 15 11,826
Residential real estate - non-owner occupied 4,282 449 - - 4,731
Total residential real estate 13,598 2,958 (14 ) 15 16,557
Construction and land development 7,593 (134 ) - - 7,459
Home equity lines of credit 1,660 4 - 2 1,666
Consumer 1,407 192 (210 ) 111 1,500
Leases 220 12 - - 232
Credit cards 242 24 (15 ) 5 256
Total $ 79,374 $ 1,175 $ (262 ) $ 610 $ 80,897
(in thousands)<br> <br>Three Months Ended March 31, 2023 Beginning<br> <br>Balance Provision for<br> <br>Credit Losses<br> <br>on Loans Charge-offs Recoveries Ending<br> <br>Balance
--- --- --- --- --- --- --- --- --- --- --- --- ---
Commercial real estate - non-owner occupied $ 22,641 $ (991 ) $ - $ 19 $ 21,669
Commercial real estate - owner occupied 10,827 602 - - 11,429
Total commercial real estate 33,468 (389 ) - 19 33,098
Commercial and industrial - term 12,991 991 (71 ) 87 13,998
Commercial and industrial - lines of credit 6,389 (364 ) - - 6,025
Total commercial and industrial 19,380 627 (71 ) 87 20,023
Residential real estate - owner occupied 6,717 1,478 - 10 8,205
Residential real estate - non-owner occupied 3,597 546 - 1 4,144
Total residential real estate 10,314 2,024 - 11 12,349
Construction and land development 7,186 (451 ) - - 6,735
Home equity lines of credit 1,613 17 (12 ) - 1,618
Consumer 1,158 88 (199 ) 139 1,186
Leases 201 (2 ) - - 199
Credit cards 211 336 (88 ) 6 465
Total $ 73,531 $ 2,250 $ (370 ) $ 262 $ 75,673

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The following tables present the amortized cost basis of non-performing loans and the amortized cost basis of loans on non-accrual status for which there was no related ACL losses:

Non-accrual Loans **** **** Past Due 90-Days-
(in thousands) With No Total or-More and Still
March 31, 2024 Recorded ACL Non-accrual Accruing Interest
Commercial real estate - non-owner occupied $ 3,025 $ 4,103 $ —
Commercial real estate - owner occupied — 849 —
Total commercial real estate 3,025 4,952 —
Commercial and industrial - term 3,083 3,974 22
Commercial and industrial - lines of credit — — —
Total commercial and industrial 3,083 3,974 22
Residential real estate - owner occupied 265 3,783 —
Residential real estate - non-owner occupied — 393 —
Total residential real estate 265 4,176 —
Construction and land development — — —
Home equity lines of credit 321 515 —
Consumer — 353 —
Leases — — —
Credit cards — 14 84
Total $ 6,694 $ 13,984 $ 106
Non-accrual Loans **** **** Past Due 90-Days-
--- --- --- --- --- --- ---
(in thousands) With No Total or-More and Still
December 31, 2023 Recorded ACL Non-accrual Accruing Interest
Commercial real estate - non-owner occupied $ 1,714 $ 8,649 $ —
Commercial real estate - owner occupied — 885 —
Total commercial real estate 1,714 9,534 —
Commercial and industrial - term 688 4,456 —
Commercial and industrial - lines of credit — 215 —
Total commercial and industrial 688 4,671 —
Residential real estate - owner occupied 230 3,667 —
Residential real estate - non-owner occupied — 372 —
Total residential real estate 230 4,039 —
Construction and land development — — —
Home equity lines of credit 343 467 —
Consumer — 337 —
Leases — — —
Credit cards — 10 110
Total $ 2,975 $ 19,058 $ 110

For the three month periods ended March 31, 2024 and 2023, the amount of accrued interest income previously recorded as revenue and subsequently reversed due to the change in accrual status was immaterial.

For the three month periods ended March 31, 2024 and 2023, no interest income was recognized on loans on non-accrual status.

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The following table presents the amortized cost basis and ACL allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:

(in thousands)<br> <br>March 31, 2024 Real Estate Accounts<br> <br>Receivable /<br> <br>Equipment Other Total ACL<br> <br>Allocation
Commercial real estate - non-owner occupied $ 10,518 $ - $ - $ 10,518 $ 902
Commercial real estate - owner occupied 1,742 - - 1,742 609
Total commercial real estate 12,260 - - 12,260 1,511
Commercial and industrial - term 360 3,085 248 3,693 -
Commercial and industrial - lines of credit 2,212 101 - 2,313 620
Total commercial and industrial 2,572 3,186 248 6,006 620
Residential real estate - owner occupied 3,536 - - 3,536 198
Residential real estate - non-owner occupied 579 - - 579 116
Total residential real estate 4,115 - - 4,115 314
Construction and land development - - - - -
Home equity lines of credit 515 - - 515 -
Consumer - - 347 347 11
Leases - - - - -
Credit cards - - - - -
Total collateral dependent loans $ 19,462 $ 3,186 $ 595 $ 23,243 $ 2,456
(in thousands)<br> <br>December 31, 2023 Real Estate Accounts<br> <br>Receivable /<br> <br>Equipment Other Total ACL<br> <br>Allocation
--- --- --- --- --- --- --- --- --- --- ---
Commercial real estate - non-owner occupied $ 15,419 $ - $ - $ 15,419 $ 1,604
Commercial real estate - owner occupied 2,586 - - 2,586 812
Total commercial real estate 18,005 - - 18,005 2,416
Commercial and industrial - term 302 4,088 - 4,390 377
Commercial and industrial - lines of credit 2,781 101 - 2,882 708
Total commercial and industrial 3,083 4,189 - 7,272 1,085
Residential real estate - owner occupied 4,205 - - 4,205 198
Residential real estate - non-owner occupied 558 - - 558 116
Total residential real estate 4,763 - - 4,763 314
Construction and land development - - - - -
Home equity lines of credit 467 - - 467 -
Consumer - - 335 335 18
Leases - - - - -
Credit cards - - - - -
Total collateral dependent loans $ 26,318 $ 4,189 $ 335 $ 30,842 $ 3,833

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The following tables present the aging of contractually past due loans by portfolio class:

(in thousands) **** **** 30-59 days 60-89 days 90 or more Total Past Total
March 31, 2024 Current Past Due Past Due days Past Due Due Loans Loans
Commercial real estate - non-owner occupied $ 1,608,139 $ 1 $ 232 $ 1,111 $ 1,344 $ 1,609,483
Commercial real estate - owner occupied 929,996 1,717 189 71 1,977 931,973
Total commercial real estate 2,538,135 1,718 421 1,182 3,321 2,541,456
Commercial and industrial - term 862,153 489 982 648 2,119 864,272
Commercial and industrial - lines of credit 429,117 300 7 — 307 429,424
Total commercial and industrial 1,291,270 789 989 648 2,426 1,293,696
Residential real estate - owner occupied 713,275 5,908 1,897 2,154 9,959 723,234
Residential real estate - non-owner occupied 360,153 407 135 263 805 360,958
Total residential real estate 1,073,428 6,315 2,032 2,417 10,764 1,084,192
Construction and land development 532,183 — — — — 532,183
Home equity lines of credit 211,825 406 18 194 618 212,443
Consumer 144,374 257 148 243 648 145,022
Leases 16,619 — — — — 16,619
Credit cards 23,768 243 9 84 336 24,104
Total $ 5,831,602 $ 9,728 $ 3,617 $ 4,768 $ 18,113 $ 5,849,715
(in thousands) **** **** 30-59 days 60-89 days 90 or more Total Past Total
--- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2023 Current Past Due Past Due days Past Due Due Loans Loans
Commercial real estate - non-owner occupied $ 1,558,756 $ 768 $ 318 $ 1,847 $ 2,933 $ 1,561,689
Commercial real estate - owner occupied 906,385 758 260 21 1,039 907,424
Total commercial real estate 2,465,141 1,526 578 1,868 3,972 2,469,113
Commercial and industrial - term 866,089 244 2 1,045 1,291 867,380
Commercial and industrial - lines of credit 439,671 77 — — 77 439,748
Total commercial and industrial 1,305,760 321 2 1,045 1,368 1,307,128
Residential real estate - owner occupied 699,475 5,290 1,612 2,516 9,418 708,893
Residential real estate - non-owner occupied 357,763 621 94 237 952 358,715
Total residential real estate 1,057,238 5,911 1,706 2,753 10,370 1,067,608
Construction and land development 531,324 — — — — 531,324
Home equity lines of credit 210,823 67 33 467 567 211,390
Consumer 144,640 258 145 297 700 145,340
Leases 15,503 — — — — 15,503
Credit cards 23,287 191 44 110 345 23,632
Total $ 5,753,716 $ 8,274 $ 2,508 $ 6,540 $ 17,322 $ 5,771,038

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Loan Risk Ratings

Consistent with regulatory guidance, Bancorp categorizes loans into credit risk rating categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans include all risk-rated loans other than those classified as OAEM, substandard, and doubtful, which are defined below:

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

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

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

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

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. Bancorp has elected not to disclose revolving loans that have converted to term loans, as activity relating to this disclosure, which is included in the tables is currently immaterial to Bancorp’s loan portfolio and is expected to be in the future.

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As of March 31, 2024, the risk rating of loans based on year of origination was as follows:

**** **** **** **** **** **** **** **** **** **** **** **** **** Revolving **** **** ****
**** **** **** **** **** **** **** **** **** **** **** **** **** loans **** **** ****
(in thousands) Term Loans Amortized Cost Basis by Origination Year amortized **** **** ****
March 31, 2024 2024 2023 2022 2021 2020 Prior cost basis Total
Commercial real estate - non-owner occupied: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 113,686 $ 292,164 $ 377,178 $ 310,974 $ 215,516 $ 244,789 $ 20,113 $ 1,574,420
OAEM 2,316 1,772 - 2,886 - 5,601 - 12,575
Substandard - 290 1,093 991 3,546 12,367 98 18,385
Substandard non-performing 2,708 76 284 - - 1,035 - 4,103
Doubtful - - - - - - - -
Total Commercial real estate non-owner occupied $ 118,710 $ 294,302 $ 378,555 $ 314,851 $ 219,062 $ 263,792 $ 20,211 $ 1,609,483
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - owner occupied: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 38,226 $ 148,512 $ 176,211 $ 185,807 $ 169,607 $ 176,632 $ 14,950 $ 909,945
OAEM 2,316 2,325 220 1,683 742 1,397 - 8,683
Substandard 2,862 622 4,218 - 4,334 460 - 12,496
Substandard non-performing - - - 778 71 - - 849
Doubtful - - - - - - - -
Total Commercial real estate owner occupied $ 43,404 $ 151,459 $ 180,649 $ 188,268 $ 174,754 $ 178,489 $ 14,950 $ 931,973
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Commercial and industrial - term: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 62,850 $ 250,419 $ 279,708 $ 151,918 $ 49,446 $ 46,339 $ - $ 840,680
OAEM 4,072 3,807 781 2,218 75 122 - 11,075
Substandard - 5,121 2,281 18 875 248 - 8,543
Substandard non-performing - 3,054 305 226 302 87 - 3,974
Doubtful - - - - - - - -
Total Commercial and industrial - term $ 66,922 $ 262,401 $ 283,075 $ 154,380 $ 50,698 $ 46,796 $ - $ 864,272
Current period gross charge offs $ - $ (23 ) $ - $ - $ - $ - $ - $ (23 )
Commercial and industrial - lines of credit **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 13,843 $ 18,796 $ 11,216 $ 3,066 $ 337 $ 7,895 $ 343,653 $ 398,806
OAEM 5,382 - - - - 14 22,403 27,799
Substandard - - - - - - 2,819 2,819
Substandard non-performing - - - - - - - -
Doubtful - - - - - - - -
Total Commercial and industrial - lines of credit $ 19,225 $ 18,796 $ 11,216 $ 3,066 $ 337 $ 7,909 $ 368,875 $ 429,424
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -

(continued)

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(continued)

**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** Revolving **** **** ****
**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** loans **** **** ****
(in thousands) Term Loans Amortized Cost Basis by Origination Year amortized **** **** ****
March 31, 2024 2024 2023 2022 2021 2020 Prior cost basis Total
Residential real estate - owner occupied **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 27,388 $ 167,859 $ 174,431 $ 172,838 $ 84,750 $ 91,731 $ - $ 718,997
OAEM - - - 88 - - - 88
Substandard - - 14 - - 352 - 366
Substandard non-performing - 1,727 1,088 189 182 597 - 3,783
Doubtful - - - - - - - -
Total Residential real estate - owner occupied $ 27,388 $ 169,586 $ 175,533 $ 173,115 $ 84,932 $ 92,680 $ - $ 723,234
Current period gross charge offs $ - $ (14 ) $ - $ - $ - $ - $ - $ (14 )
Residential real estate - non-owner occupied **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 17,699 $ 75,801 $ 82,460 $ 76,341 $ 47,211 $ 60,216 $ - $ 359,728
OAEM - - 4 - - 524 - 528
Substandard - - - - - 309 - 309
Substandard non-performing - - 226 19 - 148 - 393
Doubtful - - - - - - - -
Total Residential real estate - non-owner occupied $ 17,699 $ 75,801 $ 82,690 $ 76,360 $ 47,211 $ 61,197 $ - $ 360,958
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Construction and land development **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 52,693 $ 167,237 $ 213,365 $ 60,291 $ 10,522 $ 4,013 $ 13,909 $ 522,030
OAEM 3,683 - - - - - 999 4,682
Substandard 2,298 3,173 - - - - - 5,471
Substandard non-performing - - - - - - - -
Doubtful - - - - - - - -
Total Construction and land development $ 58,674 $ 170,410 $ 213,365 $ 60,291 $ 10,522 $ 4,013 $ 14,908 $ 532,183
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Home equity lines of credit **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ - $ - $ - $ - $ - $ - $ 211,891 $ 211,891
OAEM - - - - - - - -
Substandard - - - - - - 37 37
Substandard non-performing - - - - - - 515 515
Doubtful - - - - - - - -
Total Home equity lines of credit $ - $ - $ - $ - $ - $ - $ 212,443 $ 212,443
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Consumer **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 7,341 $ 25,424 $ 17,140 $ 8,213 $ 2,332 $ 2,953 $ 81,266 $ 144,669
OAEM - - - - - - - -
Substandard - - - - - - - -
Substandard non-performing - 152 62 86 26 27 - 353
Doubtful - - - - - - - -
Total Consumer $ 7,341 $ 25,576 $ 17,202 $ 8,299 $ 2,358 $ 2,980 $ 81,266 $ 145,022
Current period gross charge offs $ (153 ) $ (6 ) $ - $ (13 ) $ (2 ) $ (33 ) $ (3 ) $ (210 )

(continued)

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(continued)

**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** Revolving **** **** ****
**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** loans **** **** ****
(in thousands) Term Loans Amortized Cost Basis by Origination Year amortized **** **** ****
March 31, 2024 2024 2023 2022 2021 2020 Prior cost basis Total
Leases **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 2,634 $ 6,486 $ 3,182 $ 2,667 $ 1,336 $ 314 $ - $ 16,619
OAEM - - - - - - - -
Substandard - - - - - - - -
Substandard non-performing - - - - - - - -
Doubtful - - - - - - - -
Total Leases $ 2,634 $ 6,486 $ 3,182 $ 2,667 $ 1,336 $ 314 $ - $ 16,619
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Credit cards **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ - $ - $ - $ - $ - $ - $ 24,090 $ 24,090
OAEM - - - - - - - -
Substandard - - - - - - - -
Substandard non-performing - - - - - - 14 14
Doubtful - - - - - - - -
Total Credit cards $ - $ - $ - $ - $ - $ - $ 24,104 $ 24,104
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ (15 ) $ (15 )
Total loans **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 336,360 $ 1,152,698 $ 1,334,891 $ 972,115 $ 581,057 $ 634,882 $ 709,872 $ 5,721,875
OAEM **** 17,769 **** 7,904 **** 1,005 **** 6,875 **** 817 **** 7,658 **** 23,402 **** 65,430
Substandard **** 5,160 **** 9,206 **** 7,606 **** 1,009 **** 8,755 **** 13,736 **** 2,954 **** 48,426
Substandard non-performing **** 2,708 **** 5,009 **** 1,965 **** 1,298 **** 581 **** 1,894 **** 529 **** 13,984
Doubtful **** - **** - **** - **** - **** - **** - **** - **** -
Total Loans $ 361,997 $ 1,174,817 $ 1,345,467 $ 981,297 $ 591,210 $ 658,170 $ 736,757 $ 5,849,715
Current period gross charge offs $ (153 ) $ (43 ) $ - $ (13 ) $ (2 ) $ (33 ) $ (18 ) $ (262 )

Table of Contents

As of December 31, 2023, the risk rating of loans based on year of origination was as follows:

**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** Revolving **** **** ****
**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** loans **** **** ****
(in thousands) Term Loans Amortized Cost Basis by Origination Year amortized **** **** ****
December 31, 2023 2023 2022 2021 2020 2019 Prior cost basis Total
Commercial real estate - non-owner occupied: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 302,787 $ 370,728 $ 346,600 $ 220,144 $ 122,732 $ 136,624 $ 26,187 $ 1,525,802
OAEM 76 - 2,902 - 1,947 3,727 - 8,652
Substandard 290 1,093 997 3,587 12,278 243 98 18,586
Substandard non-performing 5,806 286 - - 1,472 1,085 - 8,649
Doubtful - - - - - - - -
Total Commercial real estate non-owner occupied $ 308,959 $ 372,107 $ 350,499 $ 223,731 $ 138,429 $ 141,679 $ 26,285 $ 1,561,689
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate - owner occupied: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 148,498 $ 164,087 $ 191,350 $ 179,450 $ 90,575 $ 100,988 $ 13,941 $ 888,889
OAEM 4,175 221 592 757 395 691 - 6,831
Substandard 1,675 4,258 - 4,370 458 58 - 10,819
Substandard non-performing - 21 793 71 - - - 885
Doubtful - - - - - - - -
Total Commercial real estate owner occupied $ 154,348 $ 168,587 $ 192,735 $ 184,648 $ 91,428 $ 101,737 $ 13,941 $ 907,424
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Commercial and industrial - term: **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 279,002 $ 298,204 $ 172,288 $ 56,949 $ 24,939 $ 26,790 $ - $ 858,172
OAEM 585 819 2,520 87 139 - - 4,150
Substandard 218 80 31 - - 273 - 602
Substandard non-performing 3,395 592 29 338 101 1 - 4,456
Doubtful - - - - - - - -
Total Commercial and industrial - term $ 283,200 $ 299,695 $ 174,868 $ 57,374 $ 25,179 $ 27,064 $ - $ 867,380
Current period gross charge offs $ (1,315 ) $ (734 ) $ (37 ) $ (93 ) $ (37 ) $ (82 ) $ - $ (2,298 )
Commercial and industrial - lines of credit **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 30,553 $ 22,409 $ 3,232 $ 348 $ 8,931 $ 1,783 $ 356,237 $ 423,493
OAEM - - - 723 20 - 8,585 9,328
Substandard - - - - - - 6,712 6,712
Substandard non-performing 157 - - - - - 58 215
Doubtful - - - - - - - -
Total Commercial and industrial - lines of credit $ 30,710 $ 22,409 $ 3,232 $ 1,071 $ 8,951 $ 1,783 $ 371,592 $ 439,748
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ (3,633 ) $ (3,633 )

(continued)

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(continued)

**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** Revolving **** **** ****
**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** loans **** **** ****
(in thousands) Term Loans Amortized Cost Basis by Origination Year amortized **** **** ****
December 31, 2023 2023 2022 2021 2020 2019 Prior cost basis Total
Residential real estate - owner occupied **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 170,446 $ 178,088 $ 175,561 $ 86,105 $ 24,354 $ 70,213 $ - $ 704,767
OAEM - - 89 - - - - 89
Substandard - 15 - - - 355 - 370
Substandard non-performing 1,138 1,122 297 192 162 756 - 3,667
Doubtful - - - - - - - -
Total Residential real estate - owner occupied $ 171,584 $ 179,225 $ 175,947 $ 86,297 $ 24,516 $ 71,324 $ - $ 708,893
Current period gross charge offs $ - $ - $ - $ - $ - $ (43 ) $ - $ (43 )
Residential real estate - non-owner occupied **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 83,913 $ 84,278 $ 77,868 $ 49,555 $ 31,325 $ 30,546 $ - $ 357,485
OAEM - 7 - - 262 277 - 546
Substandard - - - - - 312 - 312
Substandard non-performing - 233 19 - 45 75 - 372
Doubtful - - - - - - - -
Total Residential real estate - non-owner occupied $ 83,913 $ 84,518 $ 77,887 $ 49,555 $ 31,632 $ 31,210 $ - $ 358,715
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Construction and land development **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 157,832 $ 239,807 $ 69,131 $ 34,591 $ 478 $ 3,711 $ 15,623 $ 521,173
OAEM - - 3,682 - - - 999 4,681
Substandard 5,470 - - - - - - 5,470
Substandard non-performing - - - - - - - -
Doubtful - - - - - - - -
Total Construction and land development $ 163,302 $ 239,807 $ 72,813 $ 34,591 $ 478 $ 3,711 $ 16,622 $ 531,324
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Home equity lines of credit **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ - $ - $ - $ - $ - $ - $ 210,886 $ 210,886
OAEM - - - - - - - -
Substandard - - - - - - 37 37
Substandard non-performing - - - - - - 467 467
Doubtful - - - - - - - -
Total Home equity lines of credit $ - $ - $ - $ - $ - $ - $ 211,390 $ 211,390
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ (12 ) $ (12 )
Consumer **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 30,823 $ 18,399 $ 10,148 $ 2,832 $ 1,931 $ 1,765 $ 79,105 $ 145,003
OAEM - - - - - - - -
Substandard - - - - - - - -
Substandard non-performing 41 145 91 27 3 14 16 337
Doubtful - - - - - - - -
Total Consumer $ 30,864 $ 18,544 $ 10,239 $ 2,859 $ 1,934 $ 1,779 $ 79,121 $ 145,340
Current period gross charge offs $ (683 ) $ (22 ) $ (29 ) $ (43 ) $ (41 ) $ (27 ) $ (20 ) $ (865 )

(continued)

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(continued)

**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** Revolving **** **** ****
**** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** loans **** **** ****
(in thousands) Term Loans Amortized Cost Basis by Origination Year amortized **** **** ****
December 31, 2023 2023 2022 2021 2020 2019 Prior cost basis Total
Leases **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ 6,801 $ 3,442 $ 3,117 $ 1,723 $ 155 $ 265 $ - $ 15,503
OAEM - - - - - - - -
Substandard - - - - - - - -
Substandard non-performing - - - - - - - -
Doubtful - - - - - - - -
Total Leases $ 6,801 $ 3,442 $ 3,117 $ 1,723 $ 155 $ 265 $ - $ 15,503
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ - $ -
Credit cards **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating
Pass $ - $ - $ - $ - $ - $ - $ 23,622 $ 23,622
OAEM - - - - - - - -
Substandard - - - - - - - -
Substandard non-performing - - - - - - 10 10
Doubtful - - - - - - - -
Total Credit cards $ - $ - $ - $ - $ - $ - $ 23,632 $ 23,632
Current period gross charge offs $ - $ - $ - $ - $ - $ - $ (661 ) $ (661 )
Total loans **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Risk rating **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 1,207,296 $ 1,379,117 $ 1,047,901 $ 630,129 $ 305,493 $ 379,258 $ 725,601 $ 5,674,795
OAEM **** 4,836 **** 1,047 **** 9,785 **** 1,567 **** 2,763 **** 4,695 **** 9,584 **** 34,277
Substandard **** 7,653 **** 5,446 **** 1,028 **** 7,957 **** 12,736 **** 1,241 **** 6,847 **** 42,908
Substandard non-performing **** 10,537 **** 2,399 **** 1,229 **** 628 **** 1,783 **** 1,931 **** 551 **** 19,058
Doubtful **** - **** - **** - **** - **** - **** - **** - **** -
Total Loans $ 1,230,322 $ 1,388,009 $ 1,059,943 $ 640,281 $ 322,775 $ 387,125 $ 742,583 $ 5,771,038
Current period gross charge offs $ (1,998 ) $ (756 ) $ (66 ) $ (136 ) $ (78 ) $ (152 ) $ (4,326 ) $ (7,512 )

For certain loan classes, such as credit cards, credit quality is evaluated based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in credit cards based on payment activity:

March 31, December 31,
(in thousands) 2024 2023
Credit cards
Performing $ 24,006 $ 23,512
Non-performing 98 120
Total credit cards $ 24,104 $ 23,632

Bancorp had $112,000 and $668,000, respectively, in residential real estate loans for which formal foreclosure proceedings were in process at March 31, 2024 and December 31, 2023.

Modifications to Borrowers Experiencing Financial Difficulty

During the three months ended March 31, 2024 and 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.

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(4) Goodwill

As of March 31, 2024 and December 31, 2023, goodwill totaled $194 million, of which $172 million was attributed to the commercial banking segment and $22 million is attributed to WM&T.

The composition of goodwill is presented by respective acquisition below:

March 31, December 31,
(in thousands) 2024 2023
Commonwealth Bancshares (2022) $ 58,244 $ 58,244
Kentucky Bancshares (2021) 123,317 123,317
King Southern Bancorp (2019) 11,831 11,831
Austin State Bank (1996) 682 682
Total $ 194,074 $ 194,074

Note: The acquisition of The Bank Oldham County in 2013 resulted in a bargain purchase gain.

GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of September 30 of each year or more often as situations dictate.

At September 30, 2023, Bancorp performed its annual qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting units exceeded their fair value.

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(5) Core Deposit and Customer List Intangible Assets

Bancorp recorded CDI assets of $13 million, $4 million, $2 million and $3 million in association with the acquisitions of CB in 2022, KB in 2021, KSB in 2019 and TBOC in 2013, respectively.

Changes in the net carrying amount of CDIs follows:

Three months ended
March 31,
(in thousands) 2024 2023
Balance at beginning of period $ 11,944 $ 14,958
Amortization (672 ) (762 )
Balance at end of period $ 11,272 $ 14,196

As a result of the CB acquisition, Bancorp also recorded intangible assets totaling $14 million associated with the customer lists of the acquired WM&T business. Similar to CDI assets, this intangible asset also amortizes over its estimated useful life.

Changes in the net carrying amount of the CLI follows:

Three months ended
March 31,
(in thousands) 2024 2023
Balance at beginning of period $ 8,360 $ 10,032
Amortization (380 ) (418 )
Balance at end of period $ 7,980 $ 9,614

Future CDI and CLI amortization expense is estimated as follows:

(in thousands) CDI CLI
Remainder of 2024 $ 2,015 $ 1,140
2025 2,375 1,368
2026 2,063 1,216
2027 1,752 1,064
2028 1,339 912
2029 888 760
2030 576 608
2031 264 456
2032 - 304
2033 - 152
Total future expense $ 11,272 $ 7,980

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(6) Other Assets

A summary of the major components of other assets follows:

March 31, December 31,
(in thousands) 2024 2023
Cash surrender value of life insurance other than BOLI $ 18,773 $ 17,843
Net deferred tax asset 49,181 47,236
Investments in tax credit partnerships 173,055 175,056
Swap assets 10,823 5,133
Prepaid assets 6,255 5,873
WM&T fees receivable 4,551 4,205
Mortgage servicing rights 12,544 13,082
Other real estate owned 10 10
Other 72,420 18,922
Total other assets $ 347,612 $ 287,360

Bancorp maintains life insurance policies other than BOLI in conjunction with its non-qualified defined benefit retirement and non-qualified compensation plans.

Bancorp periodically invests in certain partnerships that generate federal income tax credits. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income. The investments in such partnerships are recorded in Other assets on the consolidated balance sheets, while the corresponding contribution requirements are recorded in Other liabilities. For additional information, see the footnote titled “Income Taxes.”

Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. For additional information, see the footnote titled “Derivative Financial Instruments.”

For additional information related to MSRs, see the footnote titled “Mortgage Banking Activities.”

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(7) **** Income Taxes

Components of income tax expense from operations follows:

Three months ended
March 31,
(in thousands) 2024 2023
Current income tax expense:
Federal $ 5,116 $ 5,194
State 1,198 677
Total current income tax expense 6,314 5,871
Deferred income tax expense:
Federal 587 1,417
State 167 844
Total deferred income tax expense 754 2,261
Change in valuation allowance - -
Total income tax expense $ 7,068 $ 8,132

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

Three months ended
March 31,
2024 2023
U.S. federal statutory income tax rate 21.0 % 21.0 %
State income taxes, net of federal benefit 3.3 3.3
Excess tax benefit from stock-based compensation arrangements 0.3 (1.1 )
Change in cash surrender value of life insurance (1.0 ) (0.7 )
Adoption of ASU 2023-02 (1.3 ) -
Tax credits 0.6 0.4
Tax exempt interest income (0.5 ) (0.5 )
Insurance captive - (0.3 )
Other, net (0.9 ) (0.2 )
Effective tax rate 21.5 % 21.9 %

Current state income tax expense for 2024 and 2023 represents tax owed to the states of Kentucky, Indiana and Illinois. Ohio state bank taxes are based on capital levels and are recorded as other non-interest expense.

On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, “listed transaction,” and disallow the related tax benefits, both prospectively and retroactively, for a period to be determined. While the proposed regulation has not been finalized, it is expected to be finalized in 2024. Bancorp elected not to renew the insurance captive effective August 2023 and it was dissolved as of December 31, 2023. The tax benefits associated with the Captive will not be experienced going forward.

GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of March 31, 2024 and December 31, 2023, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal income tax returns are subject to examination for the years after 2019 and state income tax returns are subject to examination for the years after 2018.

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Bancorp periodically invests in certain partnerships that generate federal income tax credits. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income. In addition to income tax benefits, these investments also serve as an economical means of achieving CRA goals. The investments in such partnerships are recorded in Other assets on the consolidated balance sheets, while the corresponding contribution requirements are recorded in Other liabilities. While contributions are made periodically over the life of the respective investments, which can be up to 10 years depending on the type of investment, the majority of contributions associated with a respective investment are made within the first few years after entering the partnership.

Bancorp’s investments in tax credit partnerships, including the related unfunded contributions, totaled $173 million and $175 million as of March 31, 2024 and December 31, 2023, respectively, and are included in other assets on the condensed consolidated balance sheets.

As of March 31, 2024, Bancorp’s expected payments for unfunded contributions related to investments in tax credit partnerships, which are accrued and included in other liabilities on the condensed consolidated balance sheets, were as follows:

(dollars in thousands) March 31, 2024
Remainder of 2024 $ 35,791
2025 62,830
2026 33,634
2027 7,136
2028 793
Thereafter 13,117
Total unfunded contributions $ 153,301

Effective January 1, 2024, Bancorp adopted ASU 2023-02, “Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” As a result, all of Bancorp’s investments in tax credit partnerships are now accounted for under the proportional amortization method, with related amortization expense recorded within income tax expense on the condensed consolidated income statements. Prior to 2024, Bancorp used both the effective yield and the proportional amortization methods to account for these investments, with related amortization expense recorded as a component of non-interest expenses on the condensed consolidated income statements.

The following table presents tax credits and other tax benefits recognized in addition to amortization expense related to Bancorp’s investment in tax credit partnerships for the three months ended March 31, 2024 and 2023:

Three months ended
March 31,
(in thousands) 2024 2023
Proportional amortization method:
Tax credits and other tax benefits recognized $ 3,551 $ 350
Amortization expense in provision for income taxes 2,853 398
Amortization expense in other non-interest expense - 323
Effective yield method:
Tax credits and other tax benefits recognized $ - $ 399
Amortization expense in provision for income taxes - -
Amortization expense in other non-interest expense - -

There were no impairment losses related to Bancorp’s investments in tax credit partnerships during the three months ended March 31, 2024 and March 31, 2023.

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(8) Deposits

The composition of deposits follows:

(in thousands) December 31, 2023
Non-interest bearing demand deposits 1,481,217 $ 1,548,624
Interest bearing deposits:
Interest bearing demand 2,414,118 2,480,357
Savings 436,501 438,834
Money market 1,241,822 1,219,656
Time deposits of 250 thousand or more 288,861 279,474
Other time deposits 746,561 703,803
Total time deposits (1) 1,035,422 983,277
Total interest bearing deposits 5,127,863 5,122,124
Total deposits 6,609,080 $ 6,670,748

All values are in US Dollars.

(1) Includes $364 and $597 in brokered deposits as of March 31, 2024 and December 31, 2023, respectively.
(9) Securities Sold Under Agreements to Repurchase
--- ---

SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At March 31, 2024 and December 31, 2023, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.

Information concerning SSUAR follows:

(dollars in thousands) March 31, 2024 December 31, 2023
Outstanding balance at end of period $ 162,528 $ 152,991
Weighted average interest rate at end of period 2.09 % 2.23 %
Three months ended
--- --- --- --- --- --- ---
March 31,
(dollars in thousands) 2024 2023
Average outstanding balance during the period $ 164,979 $ 122,049
Average interest rate during the period 2.27 % 1.52 %
Maximum outstanding at any month end during the period $ 179,428 $ 133,740

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(10) Subordinated Debentures

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier I Capital. The subordinated notes and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. Bancorp chose not to redeem the subordinated notes on April 1, 2024 and carried the notes at the costs noted below at March 31, 2024:

(dollars in thousands) Face Value Carrying<br> <br>Value Origination<br> <br>Date Maturity<br> <br>Date Interest<br> <br>Rate
Commonwealth Statutory Trust III $ 3,093 $ 3,093 12/19/2003 1/7/2034 SOFR + 2.85%
Commonwealth Statutory Trust IV 12,372 12,372 12/15/2005 12/30/2035 SOFR + 1.35%
Commonwealth Statutory Trust V 11,341 11,341 6/28/2007 9/15/2037 SOFR + 1.40%
Total $ 26,806 $ 26,806

As part of the purchase accounting adjustments associated with the CB acquisition, the carrying values of the subordinated notes were adjusted to fair value at acquisition date. The related discounts on the subordinated notes have been amortized and recognized as a component of interest expense in Bancorp’s consolidated financial statements. The discounts became fully amortized during the first quarter of 2024.

(11) FHLB Advances and Other Borrowings

FHLB advances outstanding at March 31, 2024 consist of a rolling $200 million three-month advance that matures in May 2024, which Bancorp utilizes in conjunction with interest rate swaps entered into during 2023 in an effort to hedge cash flows. FHLB advances outstanding at December 31, 2023 also consisted of a rolling $200 million three-month advance that matured in early January 2024, which was also utilized in conjunction with the previously mentioned interest rate swaps.

For the three month period ended March 31, 2024, gross proceeds and repayments related to FHLB advances totaled $725 million and $725 million, respectively. Net proceeds and repayments related to FHLB advances (excluding those with maturities of 90 days or less) totaled $200 million and $200 million for the three months ended March 31, 2024. For the three month period ended March 31, 2023, gross proceeds and repayments totaled $700 million and $475 million, respectively. Net proceeds and repayments (excluding those with maturities of 90 days or less) for the three month period ended March 31, 2023 totaled $275 million and $50 million.

Information regarding FHLB advances follows. The average interest rate information provided includes the benefit associated with the related interest rate swaps:

(dollars in thousands) March 31, 2024 December 31, 2023
Outstanding balance at end of period $ 200,000 $ 200,000
Weighted average interest rate at end of period 4.04 % 4.11 %

FHLB advances are collateralized by certain CRE and residential real estate mortgage loans under blanket mortgage collateral pledge agreements, as well as FHLB stock. Bancorp views these advances as an effective lower-costing funding option compared to other alternatives, such as brokered deposits, to fund loan growth. At both March 31, 2024 and December 31, 2023, the amount of available credit from the FHLB totaled $1.33 billion, respectively.

Bancorp also had unsecured available FFP lines with correspondent banks totaling $80 million at both March 31, 2024 and December 31, 2023, respectively.

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(12) **** Commitments and Contingent Liabilities

As of March 31, 2024 and December 31, 2023, Bancorp had various commitments outstanding that arose in the normal course of business which are properly not reflected in the condensed consolidated financial statements. Total off-balance sheet commitments to extend credit follows:

(in thousands) March 31, 2024 December 31, 2023
Commercial and industrial $ 927,870 $ 897,673
Construction and development 634,705 606,668
Home equity lines of credit 387,244 381,110
Credit cards 84,209 83,700
Overdrafts 55,926 55,124
Standby letters of credit 35,627 33,778
Other 87,732 100,447
Future loan commitments 324,784 298,164
Total off balance sheet commitments to extend credit $ 2,538,097 $ 2,456,664

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

The ACL for off balance sheet credit exposures, which is separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, was $6.1 million and $5.9 million as of March 31, 2024 and December 31, 2023, respectively. Provision expense for off balance sheet credit exposures of $250,000 was recorded for the three months ended March 31, 2024, driven largely by the addition of new CRE and C&I lines of credit.

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

Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at March 31, 2024, Bancorp would have been required to make payments of approximately $3 million, or the maximum amount payable under those contracts. No payments have ever been required because of default on these contracts. These agreements are normally secured by collateral acceptable to Bancorp, which limits credit risk associated with the agreements.

Bancorp periodically invests in certain partnerships that generate federal income tax credits, which result in contribution commitments. Such commitments are recorded in Other liabilities on the consolidated balance sheets. While contributions are made periodically over the life of the respective investments, which can be up to 10 years depending on the type of investment, the majority of contributions associated with a respective investment are made within the first few years after entering the partnership. Bancorp invested in several larger tax credit partnerships during 2023, which have served as an economical means of fulfilling CRA goals. As of March 31, 2024, tax credit contribution commitments of $153 million were recorded in Other liabilities on the consolidated balance sheets.

As of March 31, 2024, in the normal course of business, there were pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.

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(13) Assets and Liabilities Measured and Reported at Fair Value

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Authoritative guidance requires maximization of use of observable inputs and minimization of use of unobservable inputs in fair value measurements. Where there exists limited or no observable market data, Bancorp derives its own estimates by generally considering characteristics of the asset/liability, the current economic and competitive environment and other factors. For this reason, results cannot be determined with precision and may not be realized on an actual sale or immediate settlement of the asset or liability.

Bancorp used the following methods and significant assumptions to estimate fair value of each type of financial instrument:

AFS debt securities - Except for Bancorp’s U.S Treasury securities, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Bancorp’s U.S. Treasury securities are based on quoted market prices (Level 1 inputs).

Mortgage loans held for sale - The fair value of mortgage loans held for sale is determined using quoted secondary market prices (Level 2 inputs).

Mortgage banking derivatives – Mortgage banking derivatives used in the ordinary course of business consist primarily of interest rate lock loan commitments and mandatory forward sales contracts. The fair value of the Bancorp’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from observable market inputs that can generally be verified and do not typically involve significant judgement by Bancorp (Level 2 inputs).

Interest rate swap agreements – Interest rate swaps are valued using valuations received from the relevant dealer counterparty. These valuations consider multiple observable market inputs, including interest rate yield curves, time value and volatility factors (Level 2 inputs).

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

Fair Value Measurements Using: Total
March 31, 2024 (in thousands) Level 1 Level 2 Level 3 Fair Value
Assets: **** **** **** **** **** **** **** ****
Available for sale debt securities:
U.S. Treasury and other U.S. Government obligations $ 117,478 $ — $ — $ 117,478
Government sponsored enterprise obligations — 90,896 — 90,896
Mortgage backed securities - government agencies — 660,620 — 660,620
Obligations of states and political subdivisions — 121,257 — 121,257
Other — 3,557 — 3,557
Total available for sale debt securities 117,478 876,330 — 993,808
Mortgage loans held for sale — 6,462 — 6,462
Rate lock loan commitments — 452 — 452
Interest rate swap assets — 10,823 — 10,823
Total assets $ 117,478 $ 894,067 $ — $ 1,011,545
Liabilities: **** **** **** **** **** **** **** ****
Interest rate swap liabilities $ — $ 7,743 $ — $ 7,743
Mandatory forward contracts — 41 — 41
Total liabilities $ — $ 7,784 $ — $ 7,784
Fair Value Measurements Using: Total
--- --- --- --- --- --- --- --- ---
December 31, 2023 (in thousands) Level 1 Level 2 Level 3 Fair Value
Assets: **** **** **** **** **** **** **** ****
Available for sale debt securities:
U.S. Treasury and other U.S. Government obligations $ 116,269 $ — $ — $ 116,269
Government sponsored enterprise obligations — 99,847 — 99,847
Mortgage backed securities - government agencies — 688,039 — 688,039
Obligations of states and political subdivisions — 123,490 — 123,490
Other — 3,534 — 3,534
Total available for sale debt securities 116,269 914,910 — 1,031,179
Mortgage loans held for sale — 6,056 — 6,056
Rate lock loan commitments — 174 — 174
Interest rate swap assets — 5,133 — 5,133
Total assets $ 116,269 $ 926,273 $ — $ 1,042,542
Liabilities: **** **** **** **** **** **** **** ****
Interest rate swap liabilities $ — $ 5,378 $ — $ 5,378
Mandatory forward contracts — 43 — 43
Total liabilities $ — $ 5,421 $ — $ 5,421

There were no transfers into or out of Level 3 of the fair value hierarchy during 2024 or 2023.

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

Collateral dependent loans – For collateral-dependent loans where Bancorp has determined that the liquidation or foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the estimated fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party or internal appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, comparable sales, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the third party appraisal for appropriateness and adjusts the value to consider selling and closing costs, which typically range from 8% to 10% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise or knowledge of the client and client’s business.

OREO – **** OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. Bancorp obtains the valuation of OREO with material balances from third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the appraisal for appropriateness and adjusts the value to consider selling and closing costs, which typically range from 8% to 10% of the appraised value.

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

**** **** **** **** **** **** **** **** Losses recorded
**** **** **** **** **** **** **** **** Three months
Fair Value Measurements Using: Total ended
March 31, 2024 (in thousands) Level 1 Level 2 Level 3 Fair Value March 31, 2024
Collateral dependent loans $ — $ — $ 7,632 $ 7,632 $ 4
Other real estate owned — — 10 10 —
**** **** **** **** **** **** **** **** Losses recorded
--- --- --- --- --- --- --- --- --- --- ---
**** **** **** **** **** **** **** **** Three months
Fair Value Measurements Using: Total ended
December 31, 2023 (in thousands) Level 1 Level 2 Level 3 Fair Value March 31, 2023
Collateral dependent loans $ — $ — $ 13,561 $ 13,561 $ —
Other real estate owned — — 10 10 —

There were no liabilities measured at fair value on a non-recurring basis at March 31, 2024 and December 31, 2023.

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

March 31, 2024
(dollars in thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Average
Collateral dependent loans $ 7,632 Appraisal Appraisal discounts 8.4 %
Other real estate owned 10 Appraisal Appraisal discounts 93.0
December 31, 2023
--- --- --- --- --- --- --- ---
(dollars in thousands) Fair Value Valuation Technique Unobservable Inputs Weighted Average
Collateral dependend loans $ 13,561 Appraisal Appraisal discounts 18.0 %
Other real estate owned 10 Appraisal Appraisal discounts 93.0

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(14) Disclosure of Financial Instruments Not Reported at Fair Value

GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The estimated fair values of Bancorp’s financial instruments not measured at fair value on a recurring or non-recurring basis follows:

Carrying **** **** Fair Value Measurements Using:
March 31, 2024 (in thousands) amount Fair value Level 1 Level 2 Level 3
Assets **** **** **** **** **** **** **** **** **** ****
Cash and cash equivalents $ 160,223 $ 160,223 $ 160,223 $ — $ —
HTM debt securities 385,404 351,869 149,193 202,676 —
Federal Home Loan Bank stock 24,675 24,675 — 24,675 —
Loans, net 5,768,818 5,594,312 — — 5,594,312
Accrued interest receivable 26,074 26,074 26,074 — —
Liabilities **** **** **** **** **** **** **** **** **** ****
Non-interest bearing deposits $ 1,481,217 $ 1,481,217 $ 1,481,217 $ — $ —
Transaction deposits 4,092,441 4,092,441 — 4,092,441 —
Time deposits 1,035,422 1,029,116 — 1,029,116 —
Securities sold under agreement to repurchase 162,528 162,528 — 162,528 —
Federal funds purchased 9,961 9,961 — 9,961 —
Subordinated debentures 26,806 25,896 — 25,896 —
FHLB advances 200,000 193,213 — 193,213 —
Accrued interest payable 2,194 2,194 2,194 — —
Carrying **** **** Fair Value Measurements Using:
--- --- --- --- --- --- --- --- --- --- ---
December 31, 2023 (in thousands) amount Fair value Level 1 Level 2 Level 3
Assets **** **** **** **** **** **** **** **** **** ****
Cash and cash equivalents $ 265,959 $ 265,959 $ 265,959 $ — $ —
HTM debt securities 439,837 408,519 198,327 210,192 —
Federal Home Loan Bank stock 16,236 16,236 — 16,236 —
Loans, net 5,691,664 5,520,059 — — 5,520,059
Accrued interest receivable 26,830 26,830 26,830 — —
Liabilities **** **** **** **** **** **** **** **** **** ****
Non-interest bearing deposits $ 1,548,624 $ 1,548,624 $ 1,548,624 $ — $ —
Transaction deposits 4,138,847 4,138,847 — 4,138,847 —
Time deposits 983,277 976,841 — 976,841 —
Securities sold under agreement to repurchase 152,991 152,991 — 152,991 —
Federal funds purchased 12,852 12,852 — 12,852 —
Subordinated debentures 26,740 26,746 — 26,746 —
FHLB advances 200,000 200,047 — 200,047 —
Accrued interest payable 2,094 2,094 2,094 — —

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly impact estimates.

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(15) Mortgage Banking Activities

Mortgage banking activities primarily include residential mortgage originations and servicing. Mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.

Activity for mortgage loans held for sale, at fair value, was as follows:

Three months ended
March 31,
(in thousands) 2024 2023
Balance, beginning of period: $ 6,056 $ 2,606
Origination of mortgage loans held for sale 22,617 24,683
Proceeds from the sale of mortgage loans held for sale (22,552 ) (21,107 )
Net gain realized on sale of mortgage loans held for sale 341 215
Balance, end of period $ 6,462 $ 6,397

The following table represents the components of Mortgage banking income:

Three months ended
March 31,
(in thousands) 2024 2023
Net gain realized on sale of mortgage loans held for sale $ 341 $ 215
Net change in fair value recognized on loans held for sale 33 50
Net change in fair value recognized on rate lock loan commitments 257 330
Net change in fair value recognized on forward contracts 28 (47 )
Net gain recognized 659 548
Net loan servicing income 960 1,188
Amortization of mortgage servicing rights (738 ) (761 )
Change in mortgage servicing rights valuation allowance - -
Net servicing income recognized 222 427
Other mortgage banking income 67 63
Total mortgage banking income $ 948 $ 1,038

Activity for capitalized mortgage servicing rights was as follows:

Three months ended
March 31,
(in thousands) 2024 2023
Balance, beginning of period $ 13,082 $ 15,219
Additions for mortgage loans sold 200 165
Amortization (738 ) (761 )
Impairment — —
Balance, end of period $ 12,544 $ 14,623

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The estimated fair value of MSRs at March 31, 2024 and December 31, 2023 was $25 million and $24 million, respectively. There was no valuation allowance recorded for MSRs as of March 31, 2024 and December 31, 2023, as fair value exceeded carrying value.

Total outstanding principal balances of loans serviced for others were $1.90 billion and $1.93 billion at March 31, 2024 and December 31, 2023, respectively.

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

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

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

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

March 31, 2024 December 31, 2023
(in thousands) Notional<br> <br>Amount Fair Value Notional<br> <br>Amount Fair Value
Included in Mortgage loans held for sale:
Mortgage loans held for sale, at fair value $ 6,338 $ 6,462 $ 5,965 $ 6,056
Included in other assets:
Rate lock loan commitments $ 11,626 $ 452 $ 4,345 $ 174
Included in other liabilities
Mandatory forward contracts $ 13,250 $ (41 ) $ 6,750 $ (43 )

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(16) Accumulated Other Comprehensive Income (Loss)

The following table illustrates activity within the balances of AOCI by component:

Net unrealized Net unrealized Minimum **** **** ****
gains (losses) gains (losses) pension **** **** ****
on available for on cash liability **** **** ****
(in thousands) sale debt securities flow hedges adjustment Total
Three months ended March 31, 2024 **** **** **** **** **** **** **** **** **** **** ****
Balance, beginning of period $ (92,678 ) $ (179 ) $ 59 $ (92,798 )
Net current period other comprehensive loss (4,775 ) 2,519 - (2,256 )
Balance, end of period $ (97,453 ) $ 2,340 $ 59 $ (95,054 )
Three months ended March 31, 2023 **** **** **** **** **** **** **** **** **** **** ****
Balance, beginning of period $ (115,648 ) $ - $ 112 $ (115,536 )
Net current period other comprehensive income 14,217 376 - 14,593
Balance, end of period $ (101,431 ) $ 376 $ 112 $ (100,943 )
(17) Preferred Stock
--- ---

Bancorp has one class of preferred stock (no par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of the class or any series within the class will be determined by the Board of Directors prior to any issuance. None of this stock has been issued to date.

(18) Net Income Per Share

The following table reflects net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:

Three months ended
March 31,
(in thousands, except per share data) 2024 2023
Net income available to stockholders $ 25,887 $ 29,048
Weighted average shares outstanding - basic 29,250 29,178
Dilutive securities 111 187
Weighted average shares outstanding- diluted 29,361 29,365
Net income per share - basic $ 0.89 $ 1.00
Net income per share - diluted 0.88 0.99

Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:

Three months ended
(shares in thousands) March 31,
2024 2023
Antidilutive SARs 115 48

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(19) Stock-Based Compensation

The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. In 2018, shareholders approved an additional 500,000 shares for issuance under the plan. As of March 31, 2024, there were 63,000 shares available for future awards, however, shareholders approved an additional 1 million shares for issuance under the plan at Bancorp’s 2024 Annual Meeting of Shareholders on April 25, 2024. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.

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

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

Assumptions 2024 2023
Dividend yield 2.29 % 2.24 %
Expected volatility 28.43 % 27.20 %
Risk free interest rate 4.16 % 3.84 %
Expected life (in years) 7.1 7.1

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of underlying shares for the expected term calculated on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

RSA Grants – RSAs granted to officers vest over five years. Dividends associated with RSA grants are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.

PSU Grants – PSUs vest based upon service and a three-year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a one-year post-vesting holding period and therefore the fair value of such grants incorporates a liquidity discount related to the holding period of 5.8% and 5.2% for 2024 and 2023.

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

In the first quarters of 2024 and 2023, Bancorp awarded 9,550 and 8,668 RSUs to non-employee directors of Bancorp with a grant date fair value of $500,000 and $550,000, respectively.

Bancorp utilized cash of $203,000 and $175,000 during the first three months of 2024 and 2023, respectively, for the purchase of shares upon the vesting of RSUs.

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Bancorp has recognized stock-based compensation expense for SARs, RSAs and PSUs within compensation expense and RSUs for directors within other non-interest expense, as follows:

Three months ended March 31, 2024
(in thousands) Stock<br> <br>Appreciation<br> <br>Rights Restricted<br> <br>Stock Awards Restricted<br> <br>Stock Units Performance<br> <br>Stock Units Total
Expense $ 69 $ 420 $ 124 $ 329 $ 942
Deferred tax benefit (14 ) (88 ) (26 ) (69 ) (197 )
Total net expense $ 55 $ 332 $ 98 $ 260 $ 745
Three months ended March 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
(in thousands) Stock<br> <br>Appreciation<br> <br>Rights Restricted<br> <br>Stock Awards Restricted<br> <br>Stock Units Performance<br> <br>Stock Units Total
Expense $ 99 $ 412 $ 132 $ 509 $ 1,152
Deferred tax benefit (21 ) (87 ) (28 ) (107 ) (243 )
Total net expense $ 78 $ 325 $ 104 $ 402 $ 909

Detail of unrecognized stock-based compensation expense follows:

Stock **** **** **** **** **** **** **** ****
(in thousands) Appreciation Restricted Restricted Performance **** ****
Year ended Rights Stock Awards Stock Units Stock Units Total
Remainder of 2024 $ 284 $ 1,330 $ 375 $ 712 $ 2,701
2025 336 1,567 1 606 2,510
2026 286 1,268 — — 1,554
2027 216 918 — — 1,134
2028 126 462 — — 588
2029 11 37 — — 48
Total estimated future expense $ 1,259 $ 5,582 $ 376 $ 1,318 $ 8,535

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The following table summarizes SARs activity and related information:

**** **** **** **** **** **** **** **** **** **** **** **** Weighted
**** **** **** **** **** Weighted **** **** **** Weighted average
**** **** **** **** **** average Aggregate average remaining
**** **** **** Exercise exercise intrinsic fair contractual
(in thousands, except per share and life data) SARs price price value(1) value life (in years)
Outstanding, January 1, 2023 435 $19.37 - $74.92 $ 35.60 $ 12,784 $ 6.02 5.1
Granted 29 60.76 - 60.76 60.76 — 16.81
Exercised (24 ) 19.37 - 19.37 19.37 681 3.58
Forfeited — — — — —
Outstanding, December 31, 2023 440 $19.44 - $74.92 $ 38.11 $ 6,297 $ 6.86 4.7
Outstanding, January 1, 2024 440 $19.44 - $74.92 $ 38.11 $ 6,297 $ 6.86 4.7
Granted 42 47.95 - 54.92 49.20 — 13.75
Exercised (1 ) 45.76 - 45.76 24.56 32 3.97
Forfeited — — — — —
Outstanding, March 31, 2024 481 $19.44 - $74.92 $ 39.12 $ 5,371 $ 7.47 4.9
Vested and exercisable 378 $19.44 - $60.76 $ 35.70 $ 5,212 $ 6.00 3.9
Unvested 103 36.65 - 74.92 51.61 (279 ) 12.80 3.9
Outstanding, March 31, 2024 481 $19.44 - $74.92 $ 39.12 $ 5,371 $ 7.47 4.9
Vested in the current year 43 $36.65 - $60.76 $ 47.37 $ 66 $ 9.87

(1) **** – **** Aggregate intrinsic value for SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price.

The following table summarizes activity for RSAs granted:

**** **** **** Grant date
**** **** **** weighted
(in thousands, except per share data) RSAs average cost
Unvested at January 1, 2023 96 $ 47.26
Shares awarded 38 63.04
Restrictions lapsed and shares released (33 ) 43.77
Shares cancelled (3 ) 53.38
Unvested at December 31, 2023 98 $ 54.23
Unvested at January 1, 2024 98 $ 54.23
Shares awarded 44 48.74
Restrictions lapsed and shares released (31 ) 49.15
Shares cancelled (1 ) 55.44
Unvested at March 31, 2024 110 $ 53.49

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Shares expected to be awarded for PSUs granted to executive officers of Bancorp, the three-year performance period for which began January 1 of the award year, are as follows:

Vesting **** **** Shares
Grant period Fair expected to
year in years value be awarded
2022 3 48.48 14,538
2023 3 54.33 13,402
2024 3 41.84 34,452

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(20) **** Derivative Financial Instruments

Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.

Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of non-performance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, collateral and monitoring procedures, and does not expect any counterparties to fail their obligations.

Bancorp had outstanding undesignated interest rate swap contracts as follows:

Receiving Paying
March, 31 December 31, March, 31 December 31,
(dollars in thousands) 2024 2023 2024 2023
Notional amount $ 200,074 $ 201,555 $ 200,074 $ 201,555
Weighted average maturity (years) 5.7 6.0 5.7 6.0
Fair value $ 7,735 $ 5,133 $ 7,743 $ 5,142

During the first quarter of 2023, Bancorp entered into an interest rate swap to hedge cash flows of a $100 million rolling fixed-rate three-month FHLB borrowing. The swap began February 6, 2023 and matures February 6, 2028. During the third quarter of 2023, Bancorp entered into two additional interest rate swaps to hedge cash flows of two $50 million rolling fixed-rate three-month FHLB borrowings. These swaps began August 7, 2023, with one maturing August 6, 2026 and the other maturing August 6, 2028.

While Bancorp expects to utilize fixed-rate three-month FHLB advances with respect to these interest rate swaps, brokered CDs or other fixed rate advances may be utilized for the same three-month terms instead should those sources be more favorable. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. ****

Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods for which the hedged forecasted transaction impacts earnings.

The following table details Bancorp’s derivative positions designated as a cash flow hedges, and the related fair values:

**** **** **** **** Fair value
(dollars in thousands) March 31,
Notional Amount Maturity Date Receive (variable) index 2024
$ 100,000 2/6/2028 SOFR 3.27 % $ 2,988
50,000 8/6/2026 SOFR 4.38 % 16
50,000 8/6/2028 SOFR 3.97 % 84
$ 200,000 $ 3,088

All values are in US Dollars.

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(21) **** Regulatory Matters

Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.

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

Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At March 31, 2024, the adequately-capitalized minimums, including the capital conservation buffer, were a 7.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio. As all of Bancorp’s capital ratios were above the adequately-capitalized minimums, including the buffer, the Company was not subject to any such restrictions.

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2024, subordinated notes totaled $26 million.

Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:

(dollars in thousands) Actual Minimum for adequately<br> <br>capitalized Minimum for well<br> <br>capitalized
March 31, 2024 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital (1)
Consolidated $ 872,434 12.69 % $ 549,896 8.00 % NA NA
Bank 847,856 12.37 548,183 8.00 $ 685,228 10.00 %
Common equity tier 1 risk-based capital (1)
Consolidated 763,818 11.11 309,316 4.50 NA NA
Bank 765,240 11.17 308,353 4.50 445,398 6.50
Tier 1 risk-based capital (1)
Consolidated 789,818 11.49 412,422 6.00 NA NA
Bank 765,240 11.17 411,137 6.00 548,183 8.00
Leverage
Consolidated 789,818 9.82 321,766 4.00 NA NA
Bank 765,240 9.52 321,523 4.00 401,903 5.00

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(dollars in thousands) Actual Minimum for adequately<br> <br>capitalized Minimum for well<br> <br>capitalized
December 31, 2023 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital (1)
Consolidated $ 849,836 12.56 % $ 541,370 8.00 % NA NA
Bank 823,275 12.21 539,609 8.00 $ 674,511 10.00 %
Common equity tier 1 risk-based capital (1)
Consolidated 747,376 11.04 304,521 4.50 NA NA
Bank 746,815 11.07 303,530 4.50 438,432 6.50
Tier 1 risk-based capital (1)
Consolidated 773,376 11.43 406,027 6.00 NA NA
Bank 746,815 11.07 404,707 6.00 539,609 8.00
Leverage
Consolidated 773,376 9.62 321,713 4.00 NA NA
Bank 746,815 9.30 321,323 4.00 401,654 5.00

(1) Ratio is computed in relation to risk-weighted assets.

NA – Regulatory framework does not define “well-capitalized” for holding companies.

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(22) **** Segments

Bancorp’s principal activities include commercial banking and WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage banking and investment products sales activity. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.

Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax-exempt activity. All tax-exempt activity and provision have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.

The majority of the net assets of Bancorp are involved in the commercial banking segment. As of March 31, 2024, goodwill totaling $194 million was recorded on Bancorp’s consolidated balance sheets, of which $172 million is attributed to the commercial banking segment and $22 million is attributed to WM&T. The portion of total goodwill attributed to WM&T relates entirely to the CB acquisition. With the exception of goodwill attributed to WM&T through the CB acquisition, assets assigned to WM&T consist primarily of a CLI asset associated with the WM&T business added through the CB acquisition, net premises and equipment and a receivable related to fees earned that have not been collected.

Selected financial information by business segment follows:

Three months ended March 31, 2024 Three months ended March 31, 2023
Commercial Commercial
(in thousands) Banking WM&T Total Banking WM&T Total
Net interest income $ 59,794 $ 276 $ 60,070 $ 62,944 $ 128 $ 63,072
Provision for credit losses 1,425 — **** 1,425 2,625 — **** 2,625
Wealth management and trust services — 10,771 **** 10,771 — 9,527 **** 9,527
All other non-interest income 12,500 — **** 12,500 12,520 — **** 12,520
Non-interest expenses 42,979 5,982 **** 48,961 39,600 5,714 **** 45,314
Income before income tax expense 27,890 5,065 **** 32,955 33,239 3,941 **** 37,180
Income tax expense 5,969 1,099 **** 7,068 7,277 855 **** 8,132
Net income $ 21,921 $ 3,966 $ 25,887 $ 25,962 $ 3,086 $ 29,048
Segment assets $ 8,087,998 $ 35,130 $ 8,123,128 $ 7,631,031 $ 36,617 $ 7,667,648

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(23) **** Revenue from Contracts with Customers

All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:

Three months ended March 31, 2024 Three months ended March 31, 2023
(in thousands) Commercial<br> <br>Banking WM&T Total Commercial<br> <br>Banking WM&T Total
Wealth management and trust services $ — $ 10,771 $ 10,771 $ — $ 9,527 $ 9,527
Deposit service charges 2,136 — **** 2,136 2,149 — **** 2,149
Debit and credit card income 4,682 — **** 4,682 4,482 — **** 4,482
Treasury management fees 2,625 — **** 2,625 2,318 — **** 2,318
Mortgage banking income (1) 948 — **** 948 1,038 — **** 1,038
Net investment product sales commissions and fees 865 — **** 865 754 — **** 754
Bank owned life insurance (1) 588 — **** 588 549 — **** 549
Loss on sale of premises and equipment (1) — — — (2 ) — **** (2 )
Other (2) 656 — **** 656 1,232 — **** 1,232
Total non-interest income $ 12,500 $ 10,771 $ 23,271 $ 12,520 $ 9,527 $ 22,047

(1) Outside of the scope of ASC 606.

(2) Outside of the scope of ASC 606, with the exception of safe deposit fees which were nominal for all periods.

Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing and extent of cash flows are affected by economic factors. Revenue sources within the scope of ASC 606 are discussed below:

Bancorp earns fees from its deposit customers for transaction-based, account management and overdraft services. Transaction-based fees, which include services such as ATM use fees and stop payments fees, are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided.

Treasury management transaction fees are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account analysis fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customers’ account balances.

WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and customers do not permit performance-based fees and accordingly, none of the fee income earned by WM&T is performance-based. Trust fees receivable were $4.6 million and $4.2 million at March 31, 2024 and December 31, 2023, respectively.

Net investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market values and are assessed, collected and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including nominal incentive compensation, and trading activity charges of $248,000 and $227,000 for the three month periods ended March 31, 2024 and 2023.

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

Bancorp did not establish any contract assets or liabilities as a result of adopting ASC 606, nor were any recognized during the three and nine months ended March 31, 2024.

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(24) **** Leases

Bancorp has operating leases for various locations with terms ranging from approximately two months to 16 years, several of which include options to extend the leases in five-year increments. Options reasonably expected to be exercised are included in determination of the right-of-use asset. Bancorp elected to use a practical expedient to expense short-term lease obligations associated with leases with original terms of 12 months or less. Bancorp elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities on the consolidated balance sheet.

Balance sheet, income statement and cash flow detail regarding operating leases follows:

(dollars in thousands) March 31, 2024 December 31, 2023
Balance Sheet **** **** **** **** **** ****
Operating lease right-of-use asset $ 26,300 $ 21,007
Operating lease liability 27,776 22,487
Weighted average remaining lease term (years) 9.7 9.8
Weighted average discount rate 3.39 % 2.84 %
Maturities of lease liabilities:
One year or less $ 3,033 $ 3,365
Year two 3,596 2,864
Year three 3,290 2,543
Year four 3,298 2,536
Year five 3,324 2,547
Greater than five years 16,183 12,059
Total lease payments $ 32,724 $ 25,914
Less imputed interest 4,948 3,427
Total $ 27,776 $ 22,487
Three months ended Three months ended
--- --- --- --- ---
(in thousands) March 31, 2024 March 31, 2023
Income Statement **** **** **** ****
Components of lease expense:
Operating lease cost $ 1,046 $ 840
Variable lease cost 83 71
Less sublease income 26 25
Total lease cost $ 1,103 $ 886
Three months ended Three months ended
--- --- --- --- ---
(in thousands) March 31, 2024 March 31, 2023
Cash flow Statement **** **** **** ****
Supplemental cash flow information:
Operating cash flows from operating leases $ 1,328 $ 1,071

As of March 31, 2024, Bancorp had entered into two lease agreements that had yet to commence. Both agreements relate to retail branch locations and commence during the second quarter of 2024.

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

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

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

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 “Financial Statements” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp’s future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.

Cautionary Statement Regarding Forward-Looking Statements

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

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.

Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable regulation.

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

● Changes in, or forecasts of, future political and economic conditions, inflation or recession and efforts to control related developments;
● changes in laws and regulations or the interpretation thereof;
--- ---
● accuracy of assumptions and estimates used in establishing the ACL for loans, ACL for off-balance sheet credit exposures and other estimates;
--- ---
● impairment of investment securities;
--- ---
● impairment of goodwill, MSRs, other intangible assets and/or DTAs;
--- ---
● ability to effectively navigate an economic slowdown or other economic or market disruptions;
--- ---
● changes in fiscal, monetary, and/or regulatory policies;
--- ---
● changes in tax polices including but not limited to changes in federal and state statutory rates;
--- ---
● behavior of securities and capital markets, including changes in interest rates, market volatility and liquidity;
--- ---
● ability to effectively manage capital and liquidity;
--- ---
● long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;
--- ---
● the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;
--- ---
● competitive product and pricing pressures;
--- ---
● projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;
--- ---
● integration of acquired financial institutions, businesses or future acquisitions;
--- ---
● changes in the credit quality of Bancorp’s customers and counterparties, deteriorating asset quality and charge-off levels;
--- ---
● changes in technology instituted by Bancorp, its counterparties or competitors;
--- ---
● changes to or the effectiveness of Bancorp’s overall internal control environment;
--- ---
● adequacy of Bancorp’s risk management framework, disclosure controls and procedures and internal control over financial reporting;
--- ---
● changes in applicable accounting standards, including the introduction of new accounting standards;
--- ---
● changes in investor sentiment or behavior;
--- ---
● changes in consumer/business spending or savings behavior;
--- ---
● ability to appropriately address social, environmental and sustainability concerns that may arise from business activities;
--- ---
● occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics or outbreaks of hostilities, and Bancorp’s ability to deal effectively with disruptions caused by the foregoing;
--- ---
● ability to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;
--- ---
● ability to withstand disruptions that may be caused by any failure of its operational systems or those of third parties;
--- ---
● ability to effectively defend itself against cyberattacks or other attempts by unauthorized parties to access information of Bancorp, its vendors or its customers or to disrupt systems; and
--- ---
● other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “Risk Factors” of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023.
--- ---
Issued but Not Yet Effective Accounting Standards Updates
---

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

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Business Segment Overview

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

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

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

Overview – Operating Results (FTE)

The following table presents an overview of Bancorp’s financial performance for the three months ended March 31, 2024 and 2023:

(dollars in thousands, except per share data) **** **** **** **** **** **** Variance
Three months ended March 31, 2024 2023 /bp %
Net income $ 25,887 $ 29,048 ) -11 %
Diluted earnings per share $ 0.88 $ 0.99 ) -11 %
ROA 1.28 % 1.55 % (27) bps -17 %
ROE 12.09 % 15.15 % (306) bps -20 %

All values are in US Dollars.

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

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

● Net income totaled $25.9 million for the three months ended March 31, 2024, resulting in diluted EPS of $0.88, compared to net income of $29.0 million for the three months ended March 31, 2023, which resulted in diluted EPS of $0.99.
o Net interest income totaled $60.1 million for the three months ended March 31, 2024 compared to $63.1 million for the same period of the prior year, representing a $3 million, or 5%, decrease. While interest income experienced a $17.1 million, or 21% increase, over this period associated with the benefits of higher rates, it was outpaced by a $20.1 million increase in interest expense driven by the rising cost of funds.
--- ---
o As a result of deposit pricing pressure/competition, Bancorp has continued to experience a significant shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits, driving a substantial increase in the overall cost of deposits. Further, continued loan growth and deposit balance fluctuations necessitated more borrowing activity throughout the first quarter of 2024 compared to the same period of the prior year, contributing to the overall increase in interest expense.
--- ---
● Total loans increased $607 million, or 12%, compared to March 31, 2023, driven by significant organic growth over the past 12 months. Average loans increased $572 million, or 11%, for the three months ended March 31, 2024 compared to the same period of the prior year.
--- ---
● Bancorp’s ACL on loans increased $5 million, or 7%, compared to March 31, 2023, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $1.2 million for the three months ended March 31, 2024, compared to provision of $2.3 million for the three months ended March 31, 2023.
--- ---
● Deposit balances climbed $252 million, or 4%, compared to March 31, 2023, stemming mainly from growth in time deposits tied to the success of promotional rate offerings, which have more than offset deposit contraction within the non-interest bearing deposit portfolio.
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● Net interest income (FTE) totaled $60.2 million for the three months ended March 31, 2024, representing a decrease of $3.1 million, or 5%, compared to the three months ended March 31, 2023.
o While interest income has benefitted from higher rates and average earning asset growth, it was outpaced by increased interest expense associated with rising funding costs and growth in interest-bearing liabilities.
--- ---
o NIM decreased 39 bps, or 11%, to 3.20% for the three months ended March 31, 2024, compared to the same period of the prior year.
--- ---
● Non-interest income increased $1.2 million, or 6%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, attributed largely to record WM&T fees and strong treasury management fees and brokerage income. ****
--- ---
● Non-interest expenses increased $3.6 million, or 8%, for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, driven mainly by higher compensation and employee benefit expenses associated with annual merit-based salary increases, FTE growth and higher health insurance claims activity.
--- ---
● Bancorp’s efficiency ratio (FTE) for the three months ended March 31, 2024 was 58.68% compared to 53.13% for the three months ended March 31, 2023. The increase in this ratio is tied to both the decline in net interest income associated with rising funding costs and higher non-interest expenses.
--- ---
● As of March 31, 2024, Bancorp continued to be “well-capitalized,” the highest regulatory capital rating for financial institutions, with all capital ratios experiencing growth compared to both December 31, 2023 and March 31, 2023. Total stockholders’ equity to total assets was 10.77% as of March 31, 2024, compared to 10.50% and 10.36% at December 31, 2023 and March 31, 2023, respectively. Tangible common equity to tangible assets was 8.36% at March 31, 2024, compared to 8.09% and 7.74% at December 31, 2023 and March 31, 2023, respectively.
--- ---
Results of Operations
---

Net Interest Income - Overview

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

Comparative information regarding net interest income follows:

(dollars in thousands) **** **** **** **** **** **** Variance
As of and for the three months ended March 31, 2024 2023 /bp %
Net interest income $ 60,070 $ 63,072 ) -5 %
Net interest income (FTE)* 60,167 63,245 ) -5 %
Net interest spread (FTE)* 2.49 % 3.13 % (64) bps -20 %
Net interest margin (FTE)* 3.20 % 3.59 % (39) bps -11 %
Average interest earning assets $ 7,567,065 $ 7,154,286 6 %
Average interest bearing liabilities 5,535,128 4,807,907 15 %
Five year Treasury note rate at period end 4.21 % 3.60 % 61 bps 17 %
Average five year Treasury note rate 4.12 % 3.80 % 32 bps 8 %
Prime rate at period end 8.50 % 8.00 % 50 bps 6 %
Average Prime rate 8.50 % 7.69 % 81 bps 11 %
One month term SOFR at period end 5.33 % 4.80 % 53 bps 11 %
Average one month term SOFR 5.33 % 4.61 % 72 bps 16 %

All values are in US Dollars.

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

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

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

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

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

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

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

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

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

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

● Average total loan balances increased $572 million, or 11%, for the three months ended March 31, 2024, compared to the same period of 2023, highlighted by growth in the CRE, Residential real estate and C&I categories. ****
● Average investment securities declined $176 million, or 10%, for the three months ended March 31, 2024 compared to the same period of 2023, the result of normal pay down and maturity activity. Investment in the securities portfolio was minimal over the past 12 months, consistent with funding loan growth and liquidity management.
--- ---
● Average FFS and interest bearing due from bank balances increased $13 million, or 9%, for the three months ended March 31, 2024, as a result of increased borrowing activity in addition to utilizing the liquidity provided by the amortization and maturity of the investment securities portfolio.
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Total interest income (FTE) increased $17.0 million, or 21%, to $96.6 million for the three months ended March 31, 2024, as compared to the same period of 2023.

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

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

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

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

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

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

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

● Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans accounted for as secured borrowings averaged $4 million and $5 million for the three month periods ended March 31, 2024 and 2023, respectively.
● Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a FTE basis using a federal income tax rate of 21%. Approximate tax equivalent adjustments to interest income were $97,000 and $173,000 for the three month periods ended March 31, 2024 and 2023, respectively.
--- ---
● Interest income includes loan fees of $1.5 million and $1.9 million for the three month periods ended March 31, 2024 and 2023, respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and net accretion income related to acquired loans. Net accretion income related to acquired loans totaled $819,000 and $1.1 million for the three-month periods ended March 31, 2024 and 2023, respectively.
--- ---
● Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.
--- ---
● NIM represents net interest income on a FTE basis as a percentage of total average interest earning assets.
--- ---
● Net interest spread (FTE) is the difference between taxable equivalent rates earned on total interest earning assets less the cost of interest bearing liabilities.
--- ---
● The fair market value adjustment on investment securities resulting from ASC 320, “Investments –Debt and Equity Securities”is included as a component of other assets.
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Asset/Liability Management and Interest Rate Risk

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

Interest Rate Simulation Sensitivity Analysis

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

The results of the interest rate sensitivity analysis performed as of March 31, 2024 were derived from conservative assumptions Bancorp uses in its model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates based on historical data. Management uses different betas in the rising and falling rate scenarios in an effort to best simulate expected earnings trends. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 45% for rising rate scenarios and 39% for falling rate scenarios, respectively. The beta used in the falling rate scenario is the result of management’s expectations of deposit rate decreases given the current characteristics of the deposit portfolio. The analysis performed as of March 31, 2024 suggests a slightly asset sensitive interest rate risk profile, which represents a change from the more neutral profile rendered from the prior quarter analysis. This change is the result of update to the assumptions incorporated in the model, the most notable being deposit betas.

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

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

Bancorp’s loan portfolio is currently composed of approximately 72% fixed and 28% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 60%) or SOFR (approximately 40%).

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

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

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Provision for Credit Losses

Provision for credit losses on loans at March 31, 2024 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the Footnote titled “Basis of Presentation and Summary of Significant Accounting Policies” in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023 for detailed discussion regarding Bancorp’s ACL methodology by loan segment.

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

Three months ended
March 31,
(dollars in thousands) 2024 2023
Beginning balance $ 79,374 $ 73,531
Provision for credit losses on loans 1,175 2,250
Total charge-offs (262 ) (370 )
Total recoveries 610 262
Net loan (charge-offs) recoveries 348 (108 )
Ending balance $ 80,897 $ 75,673
Average total loans $ 5,808,924 $ 5,236,879
Provision for credit losses on loans to average total loans (1) 0.02 % 0.04 %
Net loan (charge-offs) recoveries to average total loans (1) 0.01 % 0.00 %
ACL for loans to total loans 1.38 % 1.44 %
ACL for loans to average total loans 1.39 % 1.45 %

(1) Ratios are not annualized

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

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

Provision expense on loans of $2.3 million was recorded for the three months ended March 31, 2023, driven by the establishment of a $1.4 million specific reserve for a large C&I relationship, annual CECL model updates and qualitative factor adjustments. Further, net charge off activity for the three months ended March 31, 2023 totaled $108,000, serving to reduce the ACL for loans.

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2023 and March 31, 2024. Provision for credit loss expense for off balance sheet credit exposures of $250,000 was recorded for the three months ended March 31, 2024, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ACL for off balance sheet credit exposures totaled $6.1 million as of March 31, 2024.

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

Bancorp’s loan portfolio is well-diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The adequacy of the ACL is monitored on an ongoing basis and it is the opinion of management that the balance of the ACL at March 31, 2024 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

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Non-interest Income

Three months ended March 31,
(dollars in thousands) 2024 2023 Variance % Variance
Wealth management and trust services $ 10,771 $ 9,527 13 %
Deposit service charges 2,136 2,149 ) (1 )
Debit and credit card income 4,682 4,482 4
Treasury management fees 2,625 2,318 13
Mortgage banking income 948 1,038 ) (9 )
Net investment product sales commissions and fees 865 754 15
Bank owned life insurance 588 549 7
Loss on sale of premises and equipment - (2 ) (100 )
Other 656 1,232 ) (47 )
Total non-interest income $ 23,271 $ 22,047 6 %

All values are in US Dollars.

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

WM&T Services:

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

Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased $1.1 million, or 12%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The increase was driven largely by the factors noted in the preceding paragraph.

A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees increased $125,000 for the three month period ended March 31, 2024, as compared with the same period of 2023, which was driven by increased estate fee income.

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

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

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Detail of WM&T Service Income by Account Type:

Three months ended March 31,
(in thousands) 2024 2023
Investment advisory $ 4,312 $ 3,681
Personal trust 3,774 3,362
Personal investment retirement 1,820 1,680
Company retirement 411 363
Foundation and endowment 330 283
Custody and safekeeping 59 86
Brokerage and insurance services 2 5
Other 63 67
Total WM&T services income $ 10,771 $ 9,527

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

AUM by Account Type:

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

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

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

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

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Managed AUM by Class of Investment:

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

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

Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations and consist of approximately 66% in equities and 34% in fixed income securities as of March 31, 2024, compared to 64% and 36% as of December 31, 2023. This composition has remained relatively consistent from period to period.

Additional Sources of Non-interest income:

Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, decreased $13,000, or 1%, for the three month period ended March 31, 2024, as compared with the same period of 2023. Consistent with the banking industry generally, Bancorp has experienced a decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several years. This trend has been driven by lower check presentment volume, which has in turn led to fewer overdrawn accounts in general. Further, Bancorp anticipates that future growth of this revenue stream could be significantly impacted by changing industry practices. Bancorp could be faced with strategic decisions surrounding deposit-related service charges in the future, which could negatively impact the contributions made by this, or similar, revenue streams.

Debit and credit card income consists of interchange revenue, ancillary fees and incentives received from card processors. Debit and credit card revenue increased $200,000, or 4%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The increase was driven by interchange income expansion and higher transaction volume. Total debit card income increased $18,000, or less than 1%, and total credit card income increased $182,000, or 13%, for the three month period ended March 31, 2024, compared the same period of the prior year. While Bancorp generally expects this revenue stream to grow with continued expansion of the customer base, interchange rate compression and fluctuations in business and consumer spend levels could serve as challenges to future growth.

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

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

Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees earned on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of account assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are generally serviced by Bancorp’s WM&T group. Net investment product sales commissions and fees increased $111,000, or 15%, for the three month period ended March 31, 2024, as compared with the same period of 2023 as a result of higher trading volume and equity market appreciation.

BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income and serves to offset the cost of various employee benefits. BOLI income increased $39,000, or 7%, for the three month period ending March 31, 2024 compared to the same period of the prior year, which was attributed to general market appreciation within the policy plans over the past year.

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

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

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Non-interest Expenses

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

All values are in US Dollars.

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

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

Employee benefits consists of all personnel-related expense not included in compensation, with the most significant items being health insurance, payroll taxes and employee retirement plan contributions. Employee benefits increased $823,000, or 16%, for the three month period ended March 31, 2024, as compared with the same period of 2023, driven by an increase in health insurance claims activity and the overall increase in full time equivalent employees noted above.

Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy expense decreased $229,000, or 6%, for the three month period ended March 31, 2024, as compared with the same period of 2023. The decrease was attributed to the benefit of consolidating WM&T employees from the Louisville market into one centralized location in the fourth quarter of 2023. **** At March 31, 2024, Bancorp’s branch network consisted of 71 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.

Technology and communication expenses include computer software usage and licensing fees, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased $818,000, or 19%, for the three month period ended March 31, 2024 compared to the same period of 2023, consistent with Bancorp’s growth and continued investment in technology, including various software upgrades and cyber-security enhancements.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses typically fluctuate consistent with transaction volumes. Debit and credit card processing expense increased $327,000, or 23%, for the three month period ending March 31, 2024 compared to the same period of last year, driven by increased transaction volume and customer base expansion.

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Marketing and business development expenses include all costs associated with promoting Bancorp, including community support, retaining customers and acquiring new business. Marketing and business development expenses decreased $20,000, or 2%, for the three month period ending March 31, 2024, as compared to the same period of 2023.

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

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

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

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

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

Intangible amortization expense consists of amortization associated with the CDI of acquired deposit portfolios, as well as an intangible related to customer list of the WM&T business line added through a past acquisition. The intangibles are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization expense decreased $128,000, or 11%, for the three months ended March 31, 2024. The decrease was attributed to the accelerated depreciation method for which intangible assets are amortized.

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

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Income Tax Expense

A comparison of income tax expense and ETR follows:

Three months ended March 31,
(dollars in thousands) 2024 2023 /bp Variance % Variance
Income before income tax expense $ 32,955 $ 37,180 ) (11 )%
Income tax expense 7,068 8,132 ) (13 )
Effective tax rate 21.5 % 21.9 % (40) bps (2 )

All values are in US Dollars.

Fluctuations in the ETR are primarily attributed to the following:

● The stock based compensation component of the ETR fluctuates consistent with the level of SAR exercise activity in addition to the levels of PSU and RSA vesting. The ETR was increased by 0.3% for the three months ended March 31, 2024 compared to a reduction of 1.1% for the same period of 2023, consistent with exercise and vesting activity. ****
● The cash surrender value of life insurance policies can vary widely from period to period, driven largely by market changes. The related impact is inversely correlated with the ETR generally, with cash surrender value declines typically serving to increase the ETR and vice versa. Changes in the cash surrender value of life insurance policies decreased the ETR by 1.0% and 0.7% for the three months ended March 31, 2024 and 2023, respectively.
--- ---
● Bancorp invests in certain partnerships that yield federal income tax credits. Taken as a whole, the tax benefit of these investments exceeds amortization expense, resulting in a positive impact on net income. The timing and magnitude of these transactions may vary widely from period to period. Effective January 1, 2024, Bancorp adopted ASU 2023-02 and began booking tax credit amortization expense for all tax credit projects as a component of income tax expense via the proportional amortization method. The cumulative impact of the adoption of ASU 2023-02 and tax credit amortization for the three months ended March 31, 2024 served to reduce the ETR 0.7%. The ETR was increased by 0.4% by tax credit activity for the three months ended March 31, 2023.
--- ---
● Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.5% for both the three months ended March 31, 2024 and 2023, respectively.
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● Activity related to the Captive, which previously provided tax advantages associated with the tax-deductible/exempt nature of insurance premiums paid to/received by the Captive, reduced the ETR by 0.3% for the three months ended March 31, 2023. Bancorp elected not to renew the Captive during the third quarter of 2023 and subsequently dissolved it as of December 31, 2023. No tax benefit associated with the Captive will be experienced going forward.
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Financial Condition – March 31, 2024 Compared to December 31, 2023

Overview

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

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

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

Cash and Cash Equivalents

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

Investment Securities

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

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

FHLB Stock

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

Loans

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

While total line of credit utilization has improved since hitting pandemic-era lows in early 2021, line of credit usage has remained below pre-pandemic levels, as customers continue to utilize cash in lieu of higher costing lines of credit. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability over the past several quarters, but utilization of the new lines has been relatively slow. Total line of credit utilization was 38.9% as of March 31, 2024, compared to 39.2% at December 31, 2023, with C&I utilization of 27.3% and 28.6% for the same periods, respectively.

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

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

Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I and CRE loan portfolio segments with a corresponding liability recorded in other liabilities. At March 31, 2024 and December 31, 2023, the total participated portion of loans of this nature totaled $2 million and $4 million, respectively.

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

Maturity **** **** **** **** ****
Within one After one<br> <br>but within After five<br> <br>but within Ater fifteen
March 31, 2024 (in thousands) ****** year five years fifteen years years Total % of Total ******
Fixed rate $ 264,618 $ 1,958,545 $ 1,099,376 $ 878,276 $ 4,200,815 72 %
Variable rate 689,505 551,133 379,737 28,525 1,648,900 28 %
Total loans $ 954,123 $ 2,509,678 $ 1,479,113 $ 906,801 $ 5,849,715 100 %

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

Non-performing Loans and Assets

Information summarizing non-performing loans and assets follows:

(dollars in thousands) March 31, 2024 December 31, 2023
Non-accrual loans $ 13,984 $ 19,058
Modifications to borrowers experiencing financial difficulty - -
Loans past due 90 days or more and still accruing 106 110
Total non-performing loans 14,090 19,168
Other real estate owned 10 10
Total non-performing assets $ 14,100 $ 19,178
Non-performing loans to total loans 0.24 % 0.33 %
Non-performing assets to total assets 0.17 % 0.23 %
ACL for loans to total non-performing loans 574 % 414 %

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

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

Delinquent Loans

Delinquent loans (consisting of all loans 30 days or more past due) totaled $18 million and $17 million at March 31, 2024 and December 31, 2023. Delinquent loans to total loans were 0.31% and 0.30% at March 31, 2024 and December 31, 2023, respectively.

Allowance for Credit Losses on Loans

The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp’s judgment, should be charged-off. See the Footnote titled “Summary of Significant Accounting Policies” from Bancorp’s most recent Annual Report on Form 10-K for discussion of Bancorp’s ACL methodology on loans.

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

The ACL for loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions change, Bancorp could experience further adjustments in its required ACL for loans credit loss expense.

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

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

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

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

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2023 and March 31, 2024. Provision for credit loss expense for off balance sheet credit exposures of $250,000 was recorded for the three months ended March 31, 2024, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit. The ACL for off balance sheet credit exposures was $6.1 million as of March 31, 2024 compared to $5.9 million as of December 31, 2023.

Premises and Equipment

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

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

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Goodwill

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

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

Core Deposit and Customer List Intangibles

CDIs and CLIs arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As of March 31, 2024 and December 31, 2023, Bancorp’s CDI assets totaled $11 million and $12 million, respectively. As of both March 31, 2024 and December 31, 2023, Bancorp’s CLI assets were $8 million and attributed entirely to the WM&T segment.

Other Assets and Other Liabilities

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

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

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

Deposits

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

Securities Sold Under Agreements to Repurchase

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

SSUAR represent a funding source of Bancorp and are used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At March 31, 2024 and December 31, 2023, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.

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

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Federal Funds Purchased

FFP and other short-term borrowing balances decreased $3 million, or 23%, between December 31, 2023 and March 31, 2024. At March 31, 2024, FFP related mainly to excess liquidity held by downstream correspondent bank customers of Bancorp.

Subordinated Debentures

Bancorp owns the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2024 and December 31, 2023, subordinated notes totaled $27 million, respectively.

FHLB Advances

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

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

Liquidity

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

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

Bancorp’s most liquid assets are comprised of cash and due from banks, FFS and AFS debt securities. FFS and interest bearing deposits totaled $89 million and $171 million at March 31, 2024 and December 31, 2023, respectively. The decrease experienced for the first three months of 2024 is attributed mainly to loan funding activity and deposit balance contraction. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are generally used for daily liquidity purposes.

The fair value of the AFS debt security portfolio was $994 million and $1.03 billion at March 31, 2024 and December 31, 2023, respectively. The decrease in AFS debt security portfolio for the first three months of 2024 is attributed to scheduled maturities and normal pay down activity within the portfolio, and to much lesser extent, market value depreciation during the period. The investment portfolio (HTM and AFS) includes total cash flows on amortizing debt securities of approximately $464 million (based on assumed prepayment speeds as of March 31, 2024) expected over the next 12 months, including $283 million of contractual maturities. Combined with FFS and interest bearing deposits from banks, AFS debt securities offer substantial resources to meet either loan growth or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public funds, cash balances of certain WM&T accounts and SSUAR. At March 31, 2024, the total carrying value of investment securities pledged for these purposes comprised 69% of the debt securities portfolio, leaving approximately $430 million of unpledged debt securities, compared to 67% and $480 million at December 31, 2023, respectively.

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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 March 31, 2024, such deposits totaled $5.76 billion and represented 87% of Bancorp’s total deposits, as compared with $5.78 billion, or 87% of total deposits at December 31, 2023. Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not place undue pressure on liquidity. However, given the intense, industry-wide deposit pricing pressure that is currently being experienced, deposits may generally be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.

As of March 31, 2024 and December 31, 2023, Bancorp held brokered deposits totaling $351,000 and $597,000, respectively.

Included in total deposit balances at March 31, 2024 are $561 million in public funds generally comprised of accounts with local government agencies and public school districts in the markets in which Bancorp operates. At December 31, 2023, public funds deposits totaled $613 million, the decrease experienced during the first three months of 2024 was attributed largely to normal seasonal public funds run-off.

Bancorp is a member of the FHLB of Cincinnati. As a member of the FHLB, Bancorp has access to credit products of the FHLB. Bancorp views these borrowings as a potential low cost alternative to brokered deposits. At both March 31, 2024 and December 31, 2023, available credit from the FHLB totaled $1.33 billion, respectively. Bancorp also had unsecured FFP lines with correspondent banks totaling $80 million at both March 31, 2024 and December 31, 2023, respectively. ****

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

Bancorp’s principal source of cash is dividends paid to it as the sole shareholder of the Bank. As discussed in the Footnote titled “Commitments and Contingent Liabilities,” as of January 1st of any year, the Bank may pay dividends in an amount equal to the Bank’s net income of the prior two years less any dividends paid for the same two years. At March 31, 2024, the Bank could pay an amount equal to $148 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank.

Sources and Uses of Cash

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

Commitments

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

Bancorp provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Unused loan commitments increased $81 million, or 3%, as of March 31, 2024 compared to December 31, 2023, as a result of increases in line of credit availability and future loan commitments (term loans we have committed to fund).

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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.

The ACL for off balance sheet credit exposures, which is separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, was $6.1 million and $5.9 million as of March 31, 2024 and December 31, 2023, respectively. Provision expense for off balance sheet credit exposures of $250,000 was recorded for the three month period ended March 31, 2024, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit.

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

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

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

Capital

At March 31, 2024, stockholders’ equity totaled $875 million, representing an increase of $17 million, or 2%, compared to December 31, 2023. The increase for the three months ended March 31, 2024 was attributed to recording net income of $25.9 million, which was offset by $8.8 million, serving to grow stockholder’s equity for the period. A $2.5 million increase in retained earnings was recorded in relation to the adoption of ASU 2023-02 effective January 1, 2024, but was largely offset with a $2.3 million decrease in AOCI associated with changes in the interest rate environment and the corresponding impact on the valuation of the AFS debt securities portfolio and cash flow hedging derivatives. See the “Condensed Consolidated Statement of Changes in Stockholders’ Equity” for further detail of changes in equity.

Bancorp’s TCE ratio and tangible book value per share, both non-GAAP disclosures, experienced improvement between December 31, 2023 and March 31, 202, which stemmed largely from recording net income of $25.9 million. TCE was 8.36% at March 31, 2024 compared to 8.09% at December 31, 2023, while tangible book value per share was $22.50 at March 31, 2024, compared to $21.95 at December 31, 2023. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

In May 2023, Bancorp’s Board of Directors extended its share repurchase program authorizing the repurchase of up to 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. The plan, which will expire in May 2025 unless otherwise extended or completed at an earlier date, does not obligate Bancorp to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. No shares were repurchased in 2023, nor the first three months of 2024, as Bancorp continues to prioritize capital preservation and liquidity management. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan. ****

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

Capital ratios as of March 31, 2024 increased compared December 31, 2023, as a result of operating results and moderate risk-weighted asset growth for the first three months of 2024. Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

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

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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 March 31, 2024, the adequately-capitalized minimums, including the capital conservation buffer, were a 7.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio.

As previously noted, Bancorp is the 100% owner of three unconsolidated trust subsidiaries. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2024 and December 31, 2023, subordinated notes totaled $27 million, respectively.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “Financial Instruments – Credit Losses,” or CECL*,* which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were delayed for two years. After two years, the cumulative amount of the transition adjustments became fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. 2024 represents the fifth and final year of the transition period for Bancorp. Had Bancorp not elected to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would still have exceeded the well-capitalized level.

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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:

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

The efficiency ratio, a non-GAAP measure, equals total non-interest expenses divided by the sum of net interest income FTE and non-interest income. In addition to the efficiency ratio presented, Bancorp considers an adjusted efficiency ratio. Bancorp believes it is important because it provides a comparable ratio after eliminating net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of premises and equipment and disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses.

Three months ended March 31,
(dollars in thousands) 2024 2023
Total non-interest expenses (a) $ 48,961 $ 45,314
Less: Amortization of investments in tax credit partnerships — (323 )
Total non-interest expenses - Non-GAAP (c) $ 48,961 $ 44,991
Total net interest income, FTE $ 60,167 $ 63,245
Total non-interest income 23,271 22,047
Total revenue - Non-GAAP (b) 83,438 85,292
Less: Gain/loss on sale of premises and equipment — 2
Less: Gain/loss on sale of securities — —
Total adjusted revenue - Non-GAAP (d) $ 83,438 $ 85,294
Efficiency ratio - Non-GAAP (a/b) 58.68 % 53.13 %
Adjusted efficiency ratio - Non-GAAP (c/d) 58.68 % 52.75 %

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, Inc.’s management, with the participation of its CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s CEO and CFO concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings.

Bancorp and the Bank are defendants in various legal proceedings that arise in the ordinary course of business. There is no such proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Bancorp or the Bank.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended March 31, 2024.

**** **** **** **** Total number of **** **** **** ****
**** **** **** **** shares purchased as Average Maximum number of
Total number Average part of publicly price shares that may yet be
of shares price paid announced plans or paid per purchased under the
purchased(1) per share programs share plans or programs
January 1 - January 31 — $ — — $ —
February 1 - February 29 10,448 48.09 — —
March 1 - March 31 21,291 45.09 — —
Total 31,739 $ 46.08 — $ — 741,196
(1) Shares repurchased during the three-month period ended March 31, 2024 represent shares withheld to pay taxes due.
--- ---

In May 2023, Bancorp’s Board of Directors extended its share repurchase program authorizing the repurchase of up to 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. The plan, which will expire in May 2025 unless otherwise extended or completed at an earlier date, does not obligate Bancorp to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. No shares were repurchased in 2023, nor the first three months of 2024, as Bancorp continues to prioritize capital preservation and liquidity management. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan.

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

Item 5. Other Information

(c) During the three months ended March 31, 2024, no director of officer (as defined in Rule 16a-1(f) of the Exchange Act) of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

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Item 6. Exhibits.

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

Exhibit<br> <br>Number Description of exhibit
31.1 Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2 Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32 Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 902 of the Sarbanes-Oxley Act
101 The following materials from Stock Yards Bancorp Inc.’s Form 10-Q Report for the quarterly period ended March 31, 2024 formatted in inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Condensed Consolidated Financial Statements.
104 The cover page from Stock Yards Bancorp Inc.’s Form 10-Q Report for the quarterly period ended March 31, 2024 formatted in inline XBRL and contained in Exhibit 101.

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SIGNATURES

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

STOCK YARDS BANCORP, INC.<br> <br>(Registrant)
Date: May 7, 2024 By: /s/ James A. Hillebrand
James A. Hillebrand
Chairman and CEO (Principal Executive Officer)
Date: May 7, 2024 /s/ T. Clay Stinnett
T. Clay Stinnett
EVP, Treasurer and CFO (Principal Financial Officer)

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ex_615477.htm

Exhibit 31.1

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, James A. Hillebrand, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Stock Yards Bancorp, Inc.

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  1. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2024 By: /s/ James A. Hillebrand
James A. Hillebrand<br> Chairman and CEO

ex_615478.htm

Exhibit 31.2

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, T. Clay Stinnett, certify that:

  1. I have reviewed this quarterly report on Form 10-Q of Stock Yards Bancorp, Inc.

  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

  4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

  1. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 7, 2024 By: /s/ T. Clay Stinnett
T. Clay Stinnett,<br><br> <br>EVP, Treasurer and CFO

ex_615479.htm

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this quarterly report of Stock Yards Bancorp, Inc. on Form 10-Q for the period ending March 31, 2024 (the “Report”), we, the undersigned, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of our knowledge and belief: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Stock Yards Bancorp, Inc. as of and for the periods presented in the Report.

Date: May 7, 2024 By: /s/ James A. Hillebrand
James A. Hillebrand
Chairman and CEO
Date: May 7, 2024 By: /s/ T. Clay Stinnett
T. Clay Stinnett
EVP, Treasurer and CFO

The foregoing certification is being furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed as part of the report or as a separate document.

A signed original of this written statement required by section 906 has been provided to Stock Yards Bancorp, Inc. and will be retained by Stock Yards Bancorp, Inc. and furnished to the SEC or its staff upon request.

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