Stock Yards Bancorp, Inc. 10-Q

sybt20230331_10q.htm     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, 2023   or   ☐ Transition report pursuant to Section   13 or 15(d)   of the Securities Exchange Act of 1934   Commission File Number: 1-13661     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 28, 2023, was 29,323,011 .     1 Table of Contents     TABLE OF CONTENTS   PART I – FINANCIAL INFORMATION 4         Item 1. Financial Statements. 4     Condensed Consolidated Balance Sheets 4     Condensed Consolidated Statements of 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. 56     Item 3. Quantitative and Qualitative Disclosures about Market Risk. 90     Item 4. Controls and Procedures. 90         PART II – OTHER INFORMATION 90     Item 1. Legal Proceedings. 90     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 91     Item 6. Exhibits. 91         Signatures 92   2 Table of Contents Table of Contents     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 Term   Definition   Acronym or Term   Definition   Acronym or Term   Definition ACH   Automatic Clearing House   EVP   Executive Vice President   NIM   Net Interest Margin (FTE) AFS   Available for Sale   FASB   Financial Accounting Standards Board   NPV   Net Present Value APIC   Additional paid-in capital   FDIC   Federal Deposit Insurance Corporation   Net Interest Spread   Net Interest Spread (FTE) ACL   Allowance for Credit Losses   FFP   Federal Funds Purchased   NM   Not Meaningful AOCI   Accumulated Other Comprehensive Income   FFS   Federal Funds Sold   OAEM   Other Assets Especially Mentioned ASC   Accounting Standards Codification   FFTR   Federal Funds Target Rate   OREO   Other Real Estate Owned ASU   Accounting Standards Update   FHA   Federal Housing Authority   PPP   SBA Paycheck Protection Program ATM   Automated Teller Machine   FHC   Financial Holding Company   PV   Present Value AUM   Assets Under Management   FHLB   Federal Home Loan Bank of Cincinnati   PCD   Purchased Credit Deteriorated Bancorp / the Company   Stock Yards Bancorp, Inc.    FHLMC   Federal Home Loan Mortgage Corporation    PD   Probability of Default Bank / SYB   Stock Yards Bank & Trust Company    FICA   Federal Insurance Contributions Act   Prime   The Wall Street Journal Prime Interest Rate BOLI   Bank Owned Life Insurance   FNMA   Federal National Mortgage Association   Provision   Provision for Credit Losses BP   Basis Point - 1/100th of one percent   FRB   Federal Reserve Bank   PSU   Performance Stock Unit C&D   Construction and Development   FTE   Fully Tax Equivalent   ROA   Return on Average Assets Captive   SYB Insurance Company, Inc.   GAAP   United States Generally Accepted Accounting Principles   ROE   Return on Average Equity C&I   Commercial and Industrial   GLBA   Gramm-Leach-Bliley Act   RSA   Restricted Stock Award CB   Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust Company   GNMA   Government National Mortgage Association   RSU   Restricted Stock Unit CD   Certificate of Deposit   HELOC   Home Equity Line of Credit   SAB   Staff Accounting Bulletin CDI   Core Deposit Intangible   HTM   Held to Maturity   SAR   Stock Appreciation Right CECL   Current Expected Credit Loss (ASC-326)   ITM   Interactive Teller Machine   SBA   Small Business Administration CEO   Chief Executive Officer   KB   Kentucky Bancshares, Inc. and Kentucky Bank   SEC   Securities and Exchange Commission CFO   Chief Financial Officer   KSB   King Bancorp, Inc. and King Southern Bank   SOFR   Secured Overnight Financing Right CLI   Customer List Intangible   LGD   Loss Given Default   SSUAR   Securities Sold Under Agreements to Repurchase CRA   Community Reinvestment Act   LFA   Landmark Financial Advisors, LLC   SVP   Senior Vice President CRE   Commercial Real Estate   LIBOR   London Interbank Offered Rate   TBA   To Be Annouced DCF    Discounted Cash Flow   Loans   Loans and Leases   TBOC   The Bank Oldham County DTA   Deferred Tax Asset   MBS   Mortgage Backed Securities   TCE   Tangible Common Equity DTL   Deferred Tax Liability   MSA   Metropolitan Statistical Area   TDR   Troubled Debt Restructuring Dodd-Frank Act   The Dodd-Frank Wall Street Reform and Consumer Protection Act   MSRs   Mortgage Servicing Rights   TPS   Trust Preferred Securities EPS   Earnings Per Share   NASDAQ   The NASDAQ Stock Market, LLC   VA   U.S. Department of Veterans Affairs ETR   Effective Tax Rate   NCI   Non-controlling Interest   WM&T   Wealth Management and Trust   3 Table of Contents     PART I – FINANCIAL INFORMATION   Item 1. Financial Statements   CONDENSED CONSOLIDATED BALANCE SHEETS   March 31, 2023 (unaudited) and December 31, 2022 (in thousands, except share data)       March 31,     December 31,       2023     2022   Assets                 Cash and due from banks   $ 87,922     $ 82,515   Federal funds sold and interest bearing due from banks     229,076       84,852   Total cash and cash equivalents     316,998       167,367                     Mortgage loans held for sale, at fair value     6,397       2,606   Available for sale debt securities (amortized cost of $ 1,266,356  in 2023 and $ 1,297,977 in 2022, respectively)     1,131,852       1,144,617   Held to maturity debt securities (fair value of $ 433,900  in 2023 and $ 431,833 in 2022, respectively)     468,751       473,217   Federal Home Loan Bank stock, at cost     23,226       10,928   Loans     5,243,104       5,205,918   Allowance for credit losses on loans     75,673       73,531   Net loans     5,167,431       5,132,387                     Premises and equipment, net     100,761       101,612   Premises held for sale     3,246       2,644   Bank owned life insurance     85,223       84,674   Accrued interest receivable     20,561       22,157   Goodwill     194,074       194,074   Core deposit intangibles     14,196       14,958   Customer list intangibles     9,614       10,032   Other assets     125,318       134,988   Total assets   $ 7,667,648     $ 7,496,261                     Liabilities                 Deposits:                 Non-interest bearing   $ 1,845,302     $ 1,950,198   Interest bearing     4,511,893       4,441,054   Total deposits     6,357,195       6,391,252                     Securities sold under agreements to repurchase     104,578       133,342   Federal funds purchased     14,745       8,789   Subordinated debentures     26,442       26,343   Federal Home Loan Bank advances     275,000       50,000   Accrued interest payable     1,029       660   Other liabilities     94,291       125,443   Total liabilities     6,873,280       6,735,829                     Commitments and contingent liabilities (Footnote 13)                                       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 29,324,000 and 29,259,000 shares in 2023 and 2022, respectively     58,582       58,367   Additional paid-in capital     382,391       377,703   Retained earnings     454,338       439,898   Accumulated other comprehensive loss     ( 100,943 )     ( 115,536 ) Total stockholders ’ equity     794,368       760,432   Total liabilities and equity   $ 7,667,648     $ 7,496,261     See accompanying notes to unaudited condensed consolidated financial statements.   4 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the three months ended March 31, 2023 and 2022 (in thousands, except per share data)       Three months ended       March 31,       2023     2022   Interest income:                 Loans, including fees   $ 68,787     $ 44,743   Federal funds sold and interest bearing due from banks     1,581       282   Mortgage loans held for sale     41       24   Federal Home Loan Bank stock     165       54   Investment securities:                 Taxable     8,446       4,680   Tax-exempt     447       201   Total interest income     79,467       49,984   Interest expense:                 Deposits     13,499       1,171   Securities sold under agreements to repurchase     456       17   Federal funds purchased and other short-term borrowings     177       3   Subordinated debentures     1,734       33   Federal Home Loan Bank advances     529       —   Total interest expense     16,395       1,224   Net interest income     63,072       48,760   Provision for credit losses     2,625       2,279   Net interest income after provision expense     60,447       46,481   Non-interest income:                 Wealth management and trust services     9,527       8,243   Deposit service charges     2,149       1,863   Debit and credit card income     4,482       4,119   Treasury management fees     2,318       1,904   Mortgage banking income     1,038       1,003   Net investment product sales commissions and fees     754       607   Bank owned life insurance     549       266   Gain (loss) on sale of premises and equipment     ( 2 )     —   Other     1,232       1,198   Total non-interest income     22,047       19,203   Non-interest expenses:                 Compensation     21,896       17,969   Employee benefits     5,053       4,539   Net occupancy and equipment     3,899       3,025   Technology and communication     4,251       3,419   Debit and credit card processing     1,419       1,337   Marketing and business development     1,095       772   Postage, printing and supplies     874       733   Legal and professional     797       650   FDIC insurance     1,135       645   Amortization of investments in tax credit partnerships     323       88   Capital and deposit based taxes     639       518   Merger expenses     —       19,500   Intangible amortization     1,180       713   Other     2,753       2,389   Total non-interest expenses     45,314       56,297   Income before income tax expense     37,180       9,387   Income tax expense     8,132       1,445   Net income     29,048       7,942   Less income attributed to non-controlling interest     —       36   Net income available to stockholders   $ 29,048     $ 7,906   Net income per common share - basic   $ 1.00     $ 0.29   Net income per common share - diluted   $ 0.99     $ 0.29   Weighted average outstanding shares                 Basic     29,178       27,230   Diluted     29,365       27,485     See accompanying notes to unaudited condensed consolidated financial statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)   For the three months ended March 31, 2023 and 2022 (in thousands)       Three months ended       March 31,       2023     2022   Net income   $ 29,048     $ 7,942   Other comprehensive income (loss):                 Change in unrealized gain (loss) on AFS debt securities     18,859       ( 65,379 ) Change in fair value of derivatives used in cash flow hedge     494       —   Total other comprehensive income (loss), before income tax effect     19,353       ( 65,379 ) Tax effect     4,760       ( 15,720 ) Total other comprehensive income (loss), net of tax     14,593       ( 49,659 ) Comprehensive income (loss)     43,641       ( 41,717 ) Less comprehensive income attributed to non-controlling interest     —       36   Comprehensive income (loss) available to stockholders   $ 43,641     $ ( 41,753 )   See accompanying notes to unaudited condensed consolidated financial statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (unaudited)   For the three months ended March 31, 2023 and 2022 (in thousands, except per share data)                                       Accumulated               Common stock     Additional             other     Total       Shares             paid-in     Retained     comprehensive     stockholders'       outstanding     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                                         Accumulated                               Common stock     Additional             other     Total                       Shares             paid-in     Retained     comprehensive     stockholders'     Non-controlling     Total       outstanding     Amount     capital     earnings     loss     equity     interest     equity                                                                     Balance, January 1, 2022     26,596     $ 49,501     $ 243,107     $ 391,201     $ ( 7,940 )   $ 675,869     $ -     $ 675,869                                                                     Activity for three months ended March 31, 2022:                                                                 Net income     —       —       —       7,906       —       7,906       36       7,942   Other comprehensive loss     —       —       —       —       ( 49,659 )     ( 49,659 )     —       ( 49,659 ) Stock compensation expense     —       —       991       —       —       991       —       991   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     65       216       3,451       ( 6,011 )     —       ( 2,344 )     —       ( 2,344 ) Stock issued for Commonwealth acquisition     2,564       8,539       125,286       —       —       133,825       —       133,825   Non-controlling interest of acquired entity     —       —       —       —       —       —       3,094       3,094   Cash dividends declared, $0.28 per share     —       —       —       ( 8,172 )     —       ( 8,172 )     —       ( 8,172 ) Shares cancelled     ( 5 )     ( 18 )     ( 280 )     25       —       ( 273 )     —       ( 273 ) Distributions to non-controlling interest     —       —       —       —       —       —       ( 53 )     ( 53 ) Balance, March 31, 2022     29,220     $ 58,238     $ 372,555     $ 384,949     $ ( 57,599 )   $ 758,143     $ 3,077     $ 761,220     See accompanying notes to unaudited condensed consolidated financial statements.   7 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)   For the three months ended March 31, 2023 and 2022 (in thousands)       2023     2022   Cash flows from operating activities:                 Net income   $ 29,048     $ 7,942   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     2,625       2,279   Depreciation, amortization and accretion, net     5,879       4,038   Deferred income tax expense     2,261       1,231   Gain on sale of mortgage loans held for sale     ( 215 )     ( 92 ) Origination of mortgage loans held for sale     ( 24,683 )     ( 35,829 ) Proceeds from sale of mortgage loans held for sale     21,107       38,771   Bank owned life insurance income     ( 549 )     ( 266 ) Loss on the disposal of premises and equipment     2       —   Stock compensation expense     1,152       991   Excess tax expense (benefit) from share-based compensation arrangements     493       ( 643 ) Net change in accrued interest receivable and other assets     3,659       6,404   Net change in accrued interest payable and other liabilities     ( 31,017 )     ( 21,306 ) Net cash provided by operating activities     9,762       3,520   Cash flows from investing activities:                 Purchases of available for sale debt securities     —       ( 21,970 ) Proceeds from sales of acquired available for sale debt securities     —       2,111   Proceeds from maturities and paydowns of available for sale debt securities     30,681       44,741   Purchases of held to maturity debt securities     —       ( 459,183 ) Proceeds from maturities and paydowns of held to maturity debt securities     4,504       96,302   Purchases of Federal Home Loan Bank stock     ( 12,298 )     —   Net change in non-PPP loans     ( 47,277 )     ( 115,277 ) Net change in PPP loans     9,036       69,373   Purchases of premises and equipment     ( 1,831 )     ( 946 ) Proceeds from sale or disposal of premises and equipment     103       —   Other investment activities     ( 255 )     —   Proceeds from sales of other real estate owned     —       56   Cash from acquisition, net of cash paid     —       349,456   Net cash (used in) provided by investing activities     ( 17,337 )     ( 35,337 ) Cash flows from financing activities:                 Net change in deposits     ( 34,057 )     ( 162,533 ) Net change in securities sold under agreements to repurchase and federal funds purchased     ( 22,808 )     ( 994 ) Proceeds from Federal Home Loan Bank advances     700,000       —   Repayments of Federal Home Loan Bank advances     ( 475,000 )     —   Repayment of acquired line of credit     —       ( 3,200 ) Share repurchases related to compensation plans     ( 2,368 )     ( 2,617 ) Cash disbursements to non-controlling interest     —       ( 53 ) Cash dividends paid     ( 8,561 )     ( 8,287 ) Net cash (used in) provided by financing activities     157,206       ( 177,684 ) Net change in cash and cash equivalents     149,631       ( 209,501 ) Beginning cash and cash equivalents     167,367       961,192   Ending cash and cash equivalents   $ 316,998     $ 751,691     (continued)   8 Table of Contents   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)   For the three months ended March 31,                                       2023     2022   Supplemental cash flow information:             Interest paid   $ 16,026     $ 1,187   Income taxes paid, net of refunds     —       —   Cash paid for operating lease liabilities     1,071       853                     Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 6,262     $ 3,131   Dividends payable to stockholders     158       159   Premises and equipment transferred to premises held for sale     715       —                     Liabilities assumed in conjunction with acquisitions:                 Fair value of assets acquired   $ -     $ 1,403,509   Cash paid in acquisition     —       30,994   Common stock issued in acquisition     —       133,825   Non-controlling interest of acquired entity     —       3,094   Total consideration paid     —       167,913   Liabilities assumed   $ -     $ 1,235,596     See accompanying notes to unaudited condensed consolidated financial statements.   9 Table of Contents   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 subsidiaries. The condensed consolidated financial statements in this report have not been audited by an 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 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, 2023 do not necessarily indicate the results that Bancorp will achieve for the year ended December 31, 2023, 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 shareholders’ 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 2022, the FASB issued ASU 2022 - 02, “ Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022 - 02 eliminates the accounting guidance for TDRs in ASC 310 - 40, “ Receivables – Troubled Debt Restructurings by Creditors ” for entities that have adopted the CECL model introduced by ASU 2016 - 13, “ Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments. ” ASU 2022 - 02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20, “ Financial Instruments – Credit Losses – Measured at Amortized Cost. ” This guidance is effective for fiscal years beginning after December 15, 2022 and Bancorp’s adoption of this guidance did not have a material impact on the condensed consolidated financial statements   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 March 2023, the FASB issued ASU 2023 - 02, “ Investments Equity Method and Join Ventures (Topic 323 ): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ” These amendments allow reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the of the tax credit program from which the related income tax credits are receiving. This guidance is effective for reporting entities for fiscal years beginning after December 15, 2023. Early adoption is permitted. ASU 2023 - 02 is not expected to have a material impact on the consolidated financial statements.   10 Table of Contents     ( 2 ) Bank Acquisition   Commonwealth Bancshares, Inc.   On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. in a combined stock and cash transaction for total consideration of $ 168 million. Bancorp acquired 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky.   The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final provisional period adjustments to those previously reported preliminary values, and the final fair values of those assets and liabilities as recorded by Bancorp.       As Recorded     Fair Value       Classification     Provisional Period     As Recorded   (in thousands)   By CB     Adjustments (1)       Adjustments (2)     Adjustments (1)     by Bancorp   Assets aquired:                                           Cash and due from banks   $ 380,450     $ —       $ —     $ —     $ 380,450   Mortgage loans held for sale     3,559       —         —       —       3,559   Available for sale debt securities     247,209       ( 416 ) a     ( 161,819 )     —       84,974   Held to maturity debt securities (2)     —       —   a     161,819       —       161,819   Federal Home Loan Bank stock, at cost     4,436       —         —       —       4,436   Loans     645,551       ( 13,147 ) b     —       —       632,404   Allowance for credits losses on loans     ( 16,102 )     6,152   c     —       —       ( 9,950 ) Net loans     629,449       ( 6,995 )       —       —       622,454   Premises and equipment, net     28,784       4,009   d     —       —       32,793   Accrued interest receivable     1,973       —         —       —       1,973   Goodwill     5,412       ( 5,412 ) e     —       —       —   Core deposit intangible     —       12,724   f     —       —       12,724   Customer list intangibles     —       14,360   g     —       —       14,360   Mortgage servicing rights     9,387       3,289   h     —       —       12,676   Deferred income taxes, net     —       ( 3,727 ) i     —       —       ( 3,727 ) Other assets     9,389       ( 1,065 ) j     —       —       8,324   Total assets acquired   $ 1,320,048     $ 16,767       $ -     $ -     $ 1,336,815                                               Liabilities assumed:                                           Deposits:                                           Non-interest bearing   $ 302,098     $ —       $ —     $ —     $ 302,098   Interest bearing     818,334       371   k     —       —       818,705   Total deposits     1,120,432       371         —       —       1,120,803   SSUAR     66,220       —         —       —       66,220   Subordinated debentures     26,806       ( 794 ) l     —       —       26,012   Line of credit     3,200       —         —       —       3,200   Accrued interest payable     243       —         —       —       243   Other liabilities     17,822       1,296   m     —       —       19,118   Total liabilities assumed     1,234,723       873         —       —       1,235,596   Net assets acquired   $ 85,325     $ 15,894       $ -     $ -     $ 101,219                                               Consideration for common stock                                     $ 133,825   Cash consideration paid                                       30,994   Non-controlling interest of acquired entity                                       3,094   Total consideration                                     $ 167,913                                               Goodwill                                     $ 66,694       ( 1 ) See the following page for explanations of individual fair value/provisional period adjustments.     ( 2 )  As of acquisition date, securities with a fair value of $ 162 million were classified by Bancorp as HTM.   11 Table of Contents   Explanation of fair value/provisional period adjustments :   a. Adjustment to investment securities based on Bancorp’s evaluation of the acquired portfolio.   b. Adjustments to loans to reflect estimated fair value adjustments, including the following:   (in thousands)                   Fair value adjustment - acquired non PCD loans   $ ( 9,216 ) Fair value adjustment - acquired PCD loans     ( 4,094 ) Eliminate unrecognized loan fees on acquired loans and fair value hedge     163   Net loan fair value adjustments   $ ( 13,147 )   c. The net adjustment to ACL for loans includes the following:   (in thousands)                   Reversal of historical CB ACL for loans   $ ( 16,102 ) Estimate of lifetime credit losses for PCD loans     9,950   Net change in ACL for loans   $ ( 6,152 )   d. Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.   e. Elimination of the historical CB goodwill.   f. Calculation of CDI related to the acquisition.   g. Calculation of CLI related to the acquisition.   h. Adjustment to reflect the estimated fair value of MSRs.   i. Adjustment to net DTAs associated with the effects of the purchase accounting adjustments.   j. Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.   k. Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based on an analysis of market interest rates and maturity dates at the time of acquisition.   l. Adjustment to reflect the estimated fair value of subordinated debentures for differences in interest rates, which was based primarily on an analysis of market interest rates and maturity dates at the time of acquisition.   m. Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL, operating lease liabilities and various accrual adjustments.   Goodwill of approximately $ 67 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the CB acquisition and is the result of expected operational synergies and other factors. This goodwill is attributable to the Company’s Commercial Banking and Wealth Management & Trust segments. Goodwill related to the CB acquisition is not deductible for tax purposes, as the transaction was structured as stock sale.   Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $ 540 million and $ 549 million at the date of acquisition.   Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $ 10.7 million and $ 3.2 million for the three months ended March 31, 2023 and 2022, respectively. The significant increase between the three months ended March 31, 2023 and 2022 is the result of the prior year period including only a partial month of activity given the March 7, 2022 acquisition date.   12 Table of Contents   The following unaudited pro forma condensed combined financial information presents the results of operations of Bancorp, including the effects of the purchase accounting adjustments and acquisition expenses, had the CB acquisition taken place at the beginning of the period.   (in thousands)   Three months ended March 31, 2022             Net interest income   $ 53,793   Provision for credit losses (1)     ( 2,150 ) Non-interest income     22,143   Non-interest expense (2)     47,289   Income before income tax expense     30,797   Income tax expense     6,467   Net income     24,330   Less net income attributed to non-controlling interest     51   Net income available to stockholders   $ 24,279             Earnings per share         Basic   $ 0.84   Diluted     0.83             Basic weighted average shares outstanding     29,056   Diluted weighted average shares outstanding     29,364     ( 1 ) - Excludes $ 4.4 million in merger related credit loss expense for the three months ended March 31, 2022.     ( 2 ) - Excludes $ 24.1 million in merger expenses for the three months ended March 31, 2022.   13 Table of Contents Table of Contents     ( 3 ) Investment Securities   Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified 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, 2023   cost     Gains     Losses       Fair value                                       U.S. Treasury and other U.S. Government obligations   $ 122,752     $ -     $ ( 6,464 )   $ 116,288   Government sponsored enterprise obligations     142,900       75       ( 5,196 )     137,779   Mortgage backed securities - government agencies     851,879       -       ( 108,424 )     743,455   Obligations of states and political subdivisions     142,901       -       ( 14,176 )     128,725   Other     5,924       -       ( 319 )     5,605   Total available for sale debt securities   $ 1,266,356     $ 75     $ ( 134,579 )   $ 1,131,852                                     December 31, 2022                                                                   U.S. Treasury and other U.S. Government obligations   $ 122,966     $ -     $ ( 7,927 )   $ 115,039   Government sponsored enterprise obligations     149,773       290       ( 6,437 )     143,626   Mortgage backed securities - government agencies     874,265       58       ( 121,585 )     752,738   Obligations of states and political subdivisions     145,016       1       ( 17,418 )     127,599   Other     5,957       -       ( 342 )     5,615   Total available for sale debt securities   $ 1,297,977     $ 349     $ ( 153,709 )   $ 1,144,617     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, 2023   value     Gains     Losses       Fair value                                       U.S. Treasury and other U.S. Government obligations   $ 217,906     $ -     $ ( 7,065 )   $ 210,841   Government sponsored enterprise obligations     27,229       -       ( 1,884 )     25,345   Mortgage backed securities - government agencies     223,616       -       ( 25,902 )     197,714   Total held to maturity debt securities   $ 468,751     $ -     $ ( 34,851 )   $ 433,900                                     December 31, 2022                                 U.S. Treasury and other U.S. Government obligations   $ 217,794     $ -     $ ( 9,166 )   $ 208,628   Government sponsored enterprise obligations     27,507       -       ( 2,559 )     24,948   Mortgage backed securities - government agencies     227,916       -       ( 29,659 )     198,257   Total held to maturity debt securities   $ 473,217     $ -     $ ( 41,384 )   $ 431,833     All investment securities classified as HTM by Bancorp as of March 31, 2023 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, 2023. Further, as of March 31, 2023, none of Bancorp’s HTM securities were in non-accrual or past due status.   14 Table of Contents   Debt Securities by Contractual Maturity   A summary of AFS and HTM debt securities by contractual maturity as of March 31, 2023 follows:       AFS Debt Securities     HTM Debt Securities   (in thousands)   Amortized cost     Fair value     Carrying value     Fair value                                     Due within one year   $ 38,238     $ 37,810     $ 65,167     $ 63,709   Due after one year but within five years     154,856       146,932       153,365       147,726   Due after five years but within 10 years     67,697       60,871       26,014       24,170   Due after 10 years     153,686       142,784       589       581   Mortgage backed securities - government agencies     851,879       743,455       223,616       197,714   Total   $ 1,266,356     $ 1,131,852     $ 468,751     $ 433,900     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, 2023 and December 31, 2022, 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 AFS and HTM securities portfolios totaled $ 3 million and $ 729,000 at March 31, 2023, respectively. Accrued interest on the AFS and HTM securities portfolios totaled $ 4 million and $ 2 million at December 31, 2022, respectively. Accrued interest on the AFS and HTM securities portfolios are included in the condensed consolidated balance sheets.   AFS debt securities totaling $ 247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, three securities with a total fair value of $ 2 million were sold, resulting in a loss on the sale of $ 92,000 , which was recorded as a fair value adjustment through goodwill during the first quarter of 2022.   Securities with a carrying value of $ 783 million and $ 1.1 billion were pledged at March 31, 2023 and December 31, 2022, 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, 2023.   15 Table of Contents   Unrealized and Unrecognized Loss Analysis on Debt Securities   Debt securities with unrealized and unrecognized losses at March 31, 2023 and December 31, 2022, 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, 2023   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ -     $ -     $ 116,288     $ ( 6,464 )   $ 116,288     $ ( 6,464 ) Government sponsored enterprise obligations     43,668       ( 157 )     76,479       ( 5,039 )     120,147       ( 5,196 ) Mortgage-backed securities - government agencies     113,174       ( 3,879 )     620,688       ( 104,545 )     733,862       ( 108,424 ) Obligations of states and political subdivisions     7,312       ( 42 )     107,916       ( 14,134 )     115,228       ( 14,176 ) Other     -       -       5,604       ( 319 )     5,604       ( 319 )                                                   Total AFS debt securities   $ 164,154     $ ( 4,078 )   $ 926,975     $ ( 130,501 )   $ 1,091,129     $ ( 134,579 )                                                   December 31, 2022                                                                                                   U.S. Treasury and other U.S. Government obligations   $ 3,025     $ ( 57 )   $ 111,966     $ ( 7,870 )   $ 114,991     $ ( 7,927 ) Government sponsored enterprise obligations     99,785       ( 3,553 )     22,484       ( 2,884 )     122,269       ( 6,437 ) Mortgage-backed securities - government agencies     180,263       ( 11,114 )     567,988       ( 110,471 )     748,251       ( 121,585 ) Obligations of states and political subdivisions     64,165       ( 3,763 )     56,864       ( 13,655 )     121,029       ( 17,418 ) Other     4,865       ( 213 )     749       ( 129 )     5,614       ( 342 )                                                   Total AFS debt securities   $ 352,103     $ ( 18,700 )   $ 760,051     $ ( 135,009 )   $ 1,112,154     $ ( 153,709 )       HTM Debt Securities       Less than 12 months     12 months or more     Total   (in thousands)   Fair     Unrecognized     Fair     Unrecognized     Fair     Unrecognized   March 31, 2023   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ -     $ -     $ 210,841     $ ( 7,065 )   $ 210,841     $ ( 7,065 ) Government sponsored enterprise obligations     1,602       ( 4 )     23,743       ( 1,880 )     25,345       ( 1,884 ) Mortgage-backed securities - government agencies     409       ( 9 )     197,305       ( 25,893 )     197,714       ( 25,902 )                                                   Total HTM debt securities   $ 2,011     $ ( 13 )   $ 431,889     $ ( 34,838 )   $ 433,900     $ ( 34,851 )                                                   December 31, 2022                                                                                                   U.S. Treasury and other U.S. Government obligations   $ 208,628     $ ( 9,166 )   $ -     $ -     $ 208,628     $ ( 9,166 ) Government sponsored enterprise obligations     24,948       ( 2,559 )     -       -       24,948       ( 2,559 ) Mortgage-backed securities - government agencies     198,257       ( 29,659 )     -       -       198,257       ( 29,659 )                                                   Total HTM debt securities   $ 431,833     $ ( 41,384 )   $ -     $ -     $ 431,833     $ ( 41,384 )   16 Table of Contents   Applicable dates for determining when securities are in unrealized and unrecognized loss positions are March 31, 2023 and December 31, 2022. 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 above.   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 523 and 547 separate investment positions as of March 31, 2023 and December 31, 2022, respectively. By dollar value, approximately 98 % of the portfolio was in a loss position as of both March 31, 2023 and December 31, 2022. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at March 31, 2023 and December 31, 2022.   17 Table of Contents     ( 4 ) Loans and Allowance for Credit Losses on Loans   Composition of loans by class follows:   (in thousands)   March 31, 2023     December 31, 2022                     Commercial real estate - non-owner occupied   $ 1,421,660     $ 1,397,346   Commercial real estate - owner occupied     850,766       834,629   Total commercial real estate     2,272,426       2,231,975                     Commercial and industrial - term     769,479       765,163   Commercial and industrial - term - PPP     9,557       18,593   Commercial and industrial - lines of credit     435,743       465,813   Total commercial and industrial     1,214,779       1,249,569                     Residential real estate - owner occupied     620,417       591,515   Residential real estate - non-owner occupied     323,519       313,248   Total residential real estate     943,936       904,763                     Construction and land development     439,673       445,690   Home equity lines of credit     200,933       200,725   Consumer     136,412       139,461   Leases     13,207       13,322   Credits cards     21,738       20,413   Total loans (1)   $ 5,243,104     $ 5,205,918     ( 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 $ 16 million and $ 17 million at March 31, 2023 and December  31, 2022, respectively, and was included in the condensed consolidated balance sheets.   Loans with carrying amounts of $ 2.85 billion and $ 2.77 billion were pledged to secure FHLB borrowing capacity at March 31, 2023 and December 31, 2022, respectively.   Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $ 71 million and $ 79 million as of March 31, 2023 and December 31, 2022, respectively.   PCD Loans   In connection with the acquisitions of CB on March 7, 2022, Bancorp acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments – Credit Losses.   Bancorp purchased loans through the prior year acquisition for which there was, at the time of acquisition, more-than-insignificant deterioration of credit quality since origination. The carrying amount of loans acquired and classified as PCD was as follows at the respective acquisition dates:       CB   (in thousands)   March 7, 2022             Purchase price of PCD loans at acquisition   $ 88,549   Allowance for credit losses at acquisition     ( 9,950 ) Non-credit discount at acquisition     ( 4,094 ) Fair value of PCD loans at acquisition   $ 74,505     At March 31, 2023, the book balance of PCD loans acquired as a result of the CB acquisition totaled $ 59 million. Interest income recognized on loans classified as PCD totaled $ 1.1 million and $ 459,000 for the three month periods ended March 31, 2023 and 2022, respectively.   18 Table of Contents   ACL for Loans   The table below reflects activity in the ACL related to loans:   (in thousands) Three Months Ended March 31, 2023   Beginning Balance     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending 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       13,982   Commercial and industrial - lines of credit     6,389       ( 364 )     -       -       6,041   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       (in thousands) Three Months Ended March 31, 2022   Beginning Balance     Initial ACL on PCD Loans     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                                     Commercial real estate - non-owner occupied   $ 15,960     $ 3,508     $ 1,140     $ -     $ 12     $ 20,620   Commercial real estate - owner occupied     9,595       2,121       ( 411 )     -       21       11,326   Total commercial real estate     25,555       5,629       729       -       33       31,946                                                     Commercial and industrial - term     8,577       1,358       567       ( 113 )     719       11,108   Commercial and industrial - lines of credit     4,802       1,874       ( 132 )     ( 36 )     -       6,508   Total commercial and industrial     13,379       3,232       435       ( 149 )     719       17,616                                                     Residential real estate - owner occupied     4,316       590       460       ( 6 )     3       5,363   Residential real estate - non-owner occupied     3,677       -       ( 319 )     -       3       3,361   Total residential real estate     7,993       590       141       ( 6 )     6       8,724                                                     Construction and land development     4,789       419       656       -       -       5,864   Home equity lines of credit     1,044       2       421       -       -       1,467   Consumer     772       78       262       ( 254 )     191       1,049   Leases     204       -       7       -       -       211   Credit cards     162       -       28       -       -       190   Total   $ 53,898     $ 9,950     $ 2,679     $ ( 409 )   $ 949     $ 67,067     19 Table of Contents   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, 2023   Recorded ACL     Non-accrual Loans     Accruing Interest                             Commercial real estate - non-owner occupied   $ —     $ 7,349     $ 622   Commercial real estate - owner occupied     —       1,297       —   Total commercial real estate     —       8,646       622                             Commercial and industrial - term     402       5,214       227   Commercial and industrial - PPP     —       —       —   Commercial and industrial - lines of credit     273       348       —   Total commercial and industrial     675       5,562       227                             Residential real estate - owner occupied     247       2,183       —   Residential real estate - non-owner occupied     —       390       43   Total residential real estate     247       2,573       43                             Construction and land development     —       —       —   Home equity lines of credit     —       100       —   Consumer     —       265       —   Leases     —       —       —   Credit cards     —       243       2   Total   $ 922     $ 17,389     $ 894         Non-accrual Loans                     Past Due 90-Days-   (in thousands)   With No     Total     Troubled Debt     or-More and Still   December 31, 2022   Recorded ACL     Non-accrual Loans     Restructurings (1)     Accruing Interest                                     Commercial real estate - non-owner occupied   $ —     $ 7,707     $ —     $ 78   Commercial real estate - owner occupied     1,370       2,525       —       —   Total commercial real estate     1,370       10,232       —       78                                     Commercial and industrial - term     403       1,182       —       259   Commercial and industrial - PPP     —       21       —       28   Commercial and industrial - lines of credit     273       348       —       300   Total commercial and industrial     676       1,551       —       587                                     Residential real estate - owner occupied     249       1,801       —       —   Residential real estate - non-owner occupied     —       219       —       220   Total residential real estate     249       2,020       —       220                                     Construction and land development     —       —       —       —   Home equity lines of credit     —       205       —       —   Consumer     —       234       —       —   Leases     —       —       —       —   Credit cards     —       —       —       7   Total   $ 2,295     $ 14,242     $ —     $ 892     ( 1 ) Does not include TDRs captured in the non-accrual column.   For the three month periods ended March 31, 2023 and 2022, the amount of accrued interest income previously recorded as revenue and subsequently reversed due to the change in accrual status was immaterial.   20 Table of Contents   For the three month periods ended March 31, 2023 and 2022, no interest income was recognized on loans on non-accrual status.   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) March 31, 2023   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 14,336     $ -     $ -     $ 14,336     $ 2,357   Commercial real estate - owner occupied     3,157       -       -       3,157       845   Total commercial real estate     17,493       -       -       17,493       3,202                                             Commercial and industrial - term     4,541       330       470       5,341       1,463   Commercial and industrial - lines of credit     2,777       169       272       3,218       756   Total commercial and industrial     7,318       499       742       8,559       2,219                                             Residential real estate - owner occupied     2,578       -       -       2,578       217   Residential real estate - non-owner occupied     584       -       -       584       116   Total residential real estate     3,162       -       -       3,162       333                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     100       -       -       100       -   Consumer     -       -       270       270       20   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 28,073     $ 499     $ 1,012     $ 29,584     $ 5,774     (in thousands) December 31, 2022   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 14,764     $ -     $ -     $ 14,764     $ 2,652   Commercial real estate - owner occupied     4,415       -       -       4,415       846   Total commercial real estate     19,179       -       -       19,179       3,498                                             Commercial and industrial - term     39       2,207       -       2,246       1,205   Commercial and industrial - lines of credit     422       2,821       -       3,243       761   Total commercial and industrial     461       5,028       -       5,489       1,966                                             Residential real estate - owner occupied     2,199       -       -       2,199       222   Residential real estate - non-owner occupied     415       -       -       415       116   Total residential real estate     2,614       -       -       2,614       338                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     205       -       -       205       -   Consumer     -       -       219       219       20   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 22,459     $ 5,028     $ 219     $ 27,706     $ 5,822     21 Table of Contents   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, 2023   Current     Past Due     Past Due     days Past Due     Due Loans     Loans                                                     Commercial real estate - non-owner occupied   $ 1,420,520     $ 93     $ 77     $ 970     $ 1,140     $ 1,421,660   Commercial real estate - owner occupied     849,361       1,082       76       247       1,405       850,766   Total commercial real estate     2,269,881       1,175       153       1,217       2,545       2,272,426                                                     Commercial and industrial - term     764,893       20       2,554       2,012       4,586       769,479   Commercial and industrial - term - PPP     9,557       —       —       —       —       9,557   Commercial and industrial - lines of credit     435,296       99       —       348       447       435,743   Total commercial and industrial     1,209,746       119       2,554       2,360       5,033       1,214,779                                                     Residential real estate - owner occupied     618,228       1,170       297       722       2,189       620,417   Residential real estate - non-owner occupied     323,142       —       —       377       377       323,519   Total residential real estate     941,370       1,170       297       1,099       2,566       943,936                                                     Construction and land development     439,673       —       —       —       —       439,673   Home equity lines of credit     199,880       923       80       50       1,053       200,933   Consumer     135,993       115       64       240       419       136,412   Leases     13,207       —       —       —       —       13,207   Credit cards     21,688       45       3       2       50       21,738   Total   $ 5,231,438     $ 3,547     $ 3,151     $ 4,968     $ 11,666     $ 5,243,104     (in thousands)           30-59 days     60-89 days     90 or more     Total Past     Total   December 31, 2022   Current     Past Due     Past Due     days Past Due     Due Loans     Loans                                                     Commercial real estate - non-owner occupied   $ 1,393,016     $ 3,404     $ 460     $ 466     $ 4,330     $ 1,397,346   Commercial real estate - owner occupied     831,731       225       2,592       81       2,898       834,629   Total commercial real estate     2,224,747       3,629       3,052       547       7,228       2,231,975                                                     Commercial and industrial - term     763,793       157       292       921       1,370       765,163   Commercial and industrial - term - PPP     17,719       748       77       49       874       18,593   Commercial and industrial - lines of credit     464,494       389       300       630       1,319       465,813   Total commercial and industrial     1,246,006       1,294       669       1,600       3,563       1,249,569                                                     Residential real estate - owner occupied     587,830       1,613       974       1,098       3,685       591,515   Residential real estate - non-owner occupied     312,249       373       331       295       999       313,248   Total residential real estate     900,079       1,986       1,305       1,393       4,684       904,763                                                     Construction and land development     445,618       —       72       —       72       445,690   Home equity lines of credit     200,036       566       40       83       689       200,725   Consumer     138,846       342       85       188       615       139,461   Leases     13,322       —       —       —       —       13,322   Credit cards     20,401       3       2       7       12       20,413   Total   $ 5,189,055     $ 7,820     $ 5,225     $ 3,818     $ 16,863     $ 5,205,918     22 Table of Contents   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, including 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 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.   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.   23 Table of Contents   As of March 31, 2023, the risk rating of loans based on year of origination was as follows:   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           March 31, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 54,428     $ 354,920     $ 379,689     $ 250,448     $ 124,052     $ 194,552     $ 23,852     $ 1,381,941   OAEM     -       -       1,991       -       3,507       2,189       -       7,687   Substandard     -       1,381       1,012       3,703       18,261       229       97       24,683   Substandard non-performing     -       -       -       -       -       7,349       -       7,349   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 54,428     $ 356,301     $ 382,692     $ 254,151     $ 145,820     $ 204,319     $ 23,949     $ 1,421,660   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 51,338     $ 159,590     $ 207,031     $ 184,700     $ 99,251     $ 120,853     $ 11,742     $ 834,505   OAEM     -       2,889       617       5,299       1,104       1,126       846       11,881   Substandard     -       -       1,140       -       680       1,262       -       3,082   Substandard non-performing     -       389       832       -       -       77       -       1,298   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 51,338     $ 162,868     $ 209,620     $ 189,999     $ 101,035     $ 123,318     $ 12,588     $ 850,766   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 150,625     $ 262,762     $ 196,467     $ 70,680     $ 45,180     $ 33,750     $ -     $ 759,464   OAEM     -       831       2,795       -       261       454       -       4,341   Substandard     126       40       -       -       184       112       -       462   Substandard non-performing     -       3,772       64       540       106       730       -       5,212   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 150,751     $ 267,405     $ 199,326     $ 71,220     $ 45,731     $ 35,046     $ -     $ 769,479   Current period gross charge offs   $ -     $ -     $ ( 6 )   $ ( 37 )   $ -     $ ( 28 )   $ -     $ ( 71 )                                                                   Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ -     $ -     $ 6,858     $ 2,699     $ -     $ -     $ -     $ 9,557   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ -     $ -     $ 6,858     $ 2,699     $ -     $ -     $ -     $ 9,557   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     (continued)   24 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           March 31, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 4,329     $ 45,595     $ 4,083     $ 769     $ 10,222     $ 2,376     $ 349,426     $ 416,800   OAEM     -       -       -       -       -       -       17,092       17,092   Substandard     -       -       -       879       -       -       624       1,503   Substandard non-performing     -       -       -       -       273       -       75       348   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 4,329     $ 45,595     $ 4,083     $ 1,648     $ 10,495     $ 2,376     $ 367,217     $ 435,743   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 43,469     $ 185,699     $ 188,309     $ 93,506     $ 26,152     $ 80,500     $ -     $ 617,635   OAEM     -       -       94       -       65       -       -       159   Substandard     -       17       -       10       -       413       -       440   Substandard non-performing     24       486       180       214       60       1,219       -       2,183   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 43,493     $ 186,202     $ 188,583     $ 93,730     $ 26,277     $ 82,132     $ -     $ 620,417   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 21,218     $ 92,239     $ 82,276     $ 53,823     $ 33,894     $ 38,678     $ -     $ 322,128   OAEM     -       14       -       112       262       286       -       674   Substandard     -       -       -       -       -       327       -       327   Substandard non-performing     -       259       20       -       -       111       -       390   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 21,218     $ 92,512     $ 82,296     $ 53,935     $ 34,156     $ 39,402     $ -     $ 323,519   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 27,791     $ 243,747     $ 73,360     $ 52,361     $ 549     $ 6,973     $ 29,719     $ 434,500   OAEM     -       -       -       -       -       -       999       999   Substandard     4,174       -       -       -       -       -       -       4,174   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 31,965     $ 243,747     $ 73,360     $ 52,361     $ 549     $ 6,973     $ 30,718     $ 439,673   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 200,794     $ 200,794   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       39       39   Substandard non-performing     -       -       -       -       -       -       100       100   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 200,933     $ 200,933   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ ( 12 )   $ ( 12 )   (continued)   25 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           March 31, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 10,645     $ 24,848     $ 15,791     $ 4,729     $ 3,628     $ 3,260     $ 73,246     $ 136,147   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       111       37       44       37       36       -       265   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 10,645     $ 24,959     $ 15,828     $ 4,773     $ 3,665     $ 3,296     $ 73,246     $ 136,412   Current period gross charge offs   $ ( 154 )   $ ( 5 )   $ ( 1 )   $ ( 15 )   $ ( 8 )   $ ( 15 )   $ ( 1 )   $ ( 199 )                                                                   Leases                                                                 Risk rating                                                                 Pass   $ 4,202     $ 4,066     $ 2,359     $ 454     $ 476     $ 1,650     $ -     $ 13,207   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 4,202     $ 4,066     $ 2,359     $ 454     $ 476     $ 1,650     $ -     $ 13,207   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 21,494     $ 21,494   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       244       244   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 21,738     $ 21,738   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ ( 88 )   $ ( 88 )                                                                   Total loans                                                                 Risk rating                                                                 Pass   $ 368,045     $ 1,373,466     $ 1,156,223     $ 714,169     $ 343,404     $ 482,592     $ 710,273     $ 5,148,172   OAEM     -       3,734       5,497       5,411       5,199       4,055       18,937       42,833   Substandard     4,300       1,438       2,152       4,592       19,125       2,343       760       34,710   Substandard non-performing     24       5,017       1,133       798       476       9,522       419       17,389   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 372,369     $ 1,383,655     $ 1,165,005     $ 724,970     $ 368,204     $ 498,512     $ 730,389     $ 5,243,104   Current period gross charge offs   $ ( 154 )   $ ( 5 )   $ ( 7 )   $ ( 52 )   $ ( 8 )   $ ( 43 )   $ ( 101 )   $ ( 370 )   26 Table of Contents   As of December 31, 2022, the risk rating of loans based on year of origination was as follows:   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           December 31, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 338,460     $ 380,612     $ 264,833     $ 128,407     $ 76,359     $ 139,095     $ 24,875     $ 1,352,641   OAEM     -       2,006       -       3,534       -       5,414       -       10,954   Substandard     1,381       1,012       3,744       19,574       -       233       100       26,044   Substandard non-performing     -       -       -       -       -       7,707       -       7,707   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 339,841     $ 383,630     $ 268,577     $ 151,515     $ 76,359     $ 152,449     $ 24,975     $ 1,397,346                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 165,711     $ 202,599     $ 194,052     $ 104,148     $ 60,899     $ 74,356     $ 13,062     $ 814,827   OAEM     2,895       1,777       4,540       1,891       676       216       510       12,505   Substandard     -       1,152       -       1,623       1,928       69       -       4,772   Substandard non-performing     1,533       911       -       -       -       81       -       2,525   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 170,139     $ 206,439     $ 198,592     $ 107,662     $ 63,503     $ 74,722     $ 13,572     $ 834,629                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 357,470     $ 210,906     $ 90,063     $ 39,068     $ 29,901     $ 27,354     $ -     $ 754,762   OAEM     3,835       2,935       -       303       1,426       -       -       8,499   Substandard     178       -       -       201       -       341       -       720   Substandard non-performing     539       39       486       101       17       -       -       1,182   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 362,022     $ 213,880     $ 90,549     $ 39,673     $ 31,344     $ 27,695     $ -     $ 765,163                                                                     Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ -     $ 14,212     $ 4,047     $ -     $ -     $ -     $ -     $ 18,259   OAEM     -       -       313       -       -       -       -       313   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       21       -       -       -       -       21   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ -     $ 14,212     $ 4,381     $ -     $ -     $ -     $ -     $ 18,593     (continued)   27 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           December 31, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 54,948     $ 13,999     $ 991     $ 9,179     $ 1,188     $ 1,033     $ 367,688     $ 449,026   OAEM     -       -       -       -       -       366       12,491       12,857   Substandard     -       -       905       1,915       -       -       762       3,582   Substandard non-performing     -       -       -       273       -       -       75       348   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 54,948     $ 13,999     $ 1,896     $ 11,367     $ 1,188     $ 1,399     $ 381,016     $ 465,813                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 188,765     $ 189,007     $ 96,818     $ 28,316     $ 15,281     $ 70,556     $ -     $ 588,743   OAEM     360       96       -       70       -       -       -       526   Substandard     18       -       10       -       140       277       -       445   Substandard non-performing     65       191       70       292       122       1,061       -       1,801   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 189,208     $ 189,294     $ 96,898     $ 28,678     $ 15,543     $ 71,894     $ -     $ 591,515                                                                     Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 97,313     $ 83,458     $ 55,787     $ 34,304     $ 19,300     $ 21,720     $ -     $ 311,882   OAEM     15       -       115       271       124       290       -       815   Substandard     -       -       -       -       -       332       -       332   Substandard non-performing     86       21       -       -       -       112       -       219   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 97,414     $ 83,479     $ 55,902     $ 34,575     $ 19,424     $ 22,454     $ -     $ 313,248                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 257,559     $ 99,204     $ 45,427     $ 580     $ 5,959     $ 1,123     $ 30,378     $ 440,230   OAEM     -       -       -       -       -       -       999       999   Substandard     4,461       -       -       -       -       -       -       4,461   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 262,020     $ 99,204     $ 45,427     $ 580     $ 5,959     $ 1,123     $ 31,377     $ 445,690                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 200,481     $ 200,481   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       39       39   Substandard non-performing     -       -       -       -       -       -       205       205   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 200,725     $ 200,725     (continued)   28 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           December 31, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 27,308     $ 18,396     $ 5,536     $ 5,450     $ 2,270     $ 1,621     $ 78,646     $ 139,227   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     21       56       40       62       9       31       15       234   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 27,329     $ 18,452     $ 5,576     $ 5,512     $ 2,279     $ 1,652     $ 78,661     $ 139,461                                                                     Leases                                                                 Risk rating                                                                 Pass   $ 4,643     $ 4,344     $ 2,589     $ 535     $ 576     $ 635     $ -     $ 13,322   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 4,643     $ 4,344     $ 2,589     $ 535     $ 576     $ 635     $ -     $ 13,322                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 20,413     $ 20,413   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 20,413     $ 20,413                                                                     Total loans                                                                 Risk rating                                                                 Pass   $ 1,492,177     $ 1,216,737     $ 760,143     $ 349,987     $ 211,733     $ 337,493     $ 735,543     $ 5,103,813   OAEM     7,105       6,814       4,968       6,069       2,226       6,286       14,000       47,468   Substandard     6,038       2,164       4,659       23,313       2,068       1,252       901       40,395   Substandard non-performing     2,244       1,218       617       728       148       8,992       295       14,242   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 1,507,564     $ 1,226,933     $ 770,387     $ 380,097     $ 216,175     $ 354,023     $ 750,739     $ 5,205,918     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)   2023     2022                     Credit cards                 Performing   $ 21,494     $ 20,413   Non-performing     244       —   Total credit cards   $ 21,738     $ 20,413     29 Table of Contents   Bancorp had $ 290,000 and $ 317,000 , respectively, in residential real estate loans for which formal foreclosure proceedings were in process at March 31, 2023 and December 31, 2022.   Modifications to Borrowers Experiencing Financial Difficulty   Bancorp adopted ASU 2022 - 02, “ Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures, ” effective January 1, 2023. The amendments in ASU 2022 - 02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.   During the three months ended March 31, 2023, there were no modifications made to loans for borrowers experiencing financial difficulty and there were no payment defaults of existing modified loans within 12 months following modification. Default is determined at 90 days or more past due, charge off, or foreclosure.   Troubled Debt Restructuring Disclosures Prior to the Adoption of ASU 2022 - 02   Detail of outstanding TDRs included in total non-performing loans follows:       March 31, 2022               Specific     Additional               reserve     commitment   (in thousands)   Balance     allocation     to lend                             Commercial real estate - owner occupied   $ 888     $ 202     $ —   Commercial & industrial - term     10       10       —   Total TDRs   $ 898     $ 212     $ —     During the three month periods ended March 31, 2022, there were no loans modified as TDRs and there were no payment defaults of existing TDRs within 12 months following the modification. Default is determined at 90 or more days past due, charge-off, or foreclosure.   30 Table of Contents Table of Contents     ( 5 ) Goodwill   As of March 31, 2023 and December 31, 2022, goodwill totaled $ 194 million, of which $ 172 million was attributed to the commercial banking segment and $ 22 million is attributed to WM&T. Goodwill of $ 67 million was added through the CB acquisition, $ 8.5 million of which was subsequently written off as a result of Bancorp selling its interest in LFA effective December 31, 2022. Effective December 31, 2022, management finalized the fair values of the acquired assets and assumed liabilities associated with the CB acquisition in advance of the 12 month post-acquisition date, as allowed by GAAP.   The composition of goodwill is presented by respective acquisition below:       March 31,     December 31,   (in thousands)   2023     2022   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, 2022, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than- not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than- not that the carrying value of the reporting units exceeded their fair value.   Changes in the carrying value of goodwill follows:       Three months ended       March 31,   (in thousands)   2023     2022   Balance at beginning of period   $ 194,074     $ 135,830   Goodwill recorded from acquisitions     —       66,694   Provisional period adjustments     —       —   Disposition of LFA     —       —   Impairment     —       —   Balance at end of period   $ 194,074     $ 202,524     31 Table of Contents     ( 6 ) 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)   2023     2022   Balance at beginning of period   $ 14,958     $ 5,596   Core deposit intangible acquired     —       12,724   Provisional period adjustments     —       —   Amortization     ( 762 )     ( 494 ) Balance at end of period   $ 14,196     $ 17,826     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 and LFA businesses. Of this total, $ 12 million was recorded for WM&T and $ 2 million was recorded for LFA. Similar to CDI assets, these intangibles also amortize over their estimated useful lives.   As previously noted, Bancorp’s interest in LFA was sold effective December 31, 2022. As a result, the remaining CLI associated with LFA was written off at the date of sale and ultimately reflected as a component of the $ 870,000 pre-tax loss on the disposition of LFA that was recorded on Bancorp’s consolidated income statements for the fourth quarter and year ended December 31, 2022.   The carrying amount of the CLI assets follows:       Three months ended       March 31,   (in thousands)   2023     2022   Balance at beginning of period   $ 10,032     $ -   Customer list intangibles acquired     —       14,360   Provisional period adjustments     —       —   Disposition of LFA                 Amortization     ( 418 )     ( 218 ) Balance at end of period   $ 9,614     $ 14,142     Future CDI and CLI amortization expense is estimated as follows:   (in thousands)   CDI     CLI   Remainder of 2023   $ 2,253     $ 1,254   2024     2,686       1,520   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   $ 14,196     $ 9,614     32 Table of Contents     ( 7 ) Other Assets   A summary of the major components of other assets follows:       March 31,     December 31,   (in thousands)   2023     2022                     Cash surrender value of life insurance other than BOLI   $ 16,332     $ 15,496   Net deferred tax asset     47,123       54,145   Investments in tax credit partnerships     13,250       13,969   Swap assets     8,636       10,727   Prepaid assets     4,528       5,721   Trust fees receivable     3,548       3,354   Mortgage servicing rights     14,623       15,219   Other real estate owned     677       677   Other     16,601       15,680   Total other assets   $ 125,318     $ 134,988     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 with customers that generate federal income tax credits. The tax benefit of these investments exceeds to amortization expense associated with them, resulting in a positive impact on net income.   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. ”   33 Table of Contents     ( 8 ) Income Taxes   Components of income tax expense from operations follows:       Three months ended       March 31,   (in thousands)   2023     2022   Current income tax expense:                 Federal   $ 5,194     $ 214   State     677       -   Total current income tax expense     5,871       214                     Deferred income tax expense:                 Federal     1,417       842   State     844       389   Total deferred income tax expense     2,261       1,231   Change in valuation allowance     -       -   Total income tax expense   $ 8,132     $ 1,445     An analysis of the difference between the statutory and ETRs from operations follows:       Three months ended       March 31,       2023     2022   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     ( 1.1 )     ( 5.9 ) Change in cash surrender value of life insurance     ( 0.7 )     1.8   Tax credits     0.4       ( 1.7 ) Tax exempt interest income     ( 0.5 )     ( 1.6 ) Non-deductible merger expenses     -       1.1   Insurance captive     ( 0.3 )     ( 0.9 ) Other, net     ( 0.2 )     ( 1.7 ) Effective tax rate     21.9 %     15.4 %   Current state income tax expense for 2023 and 2022 represents tax owed to the state of Kentucky, Indiana and Illinois. Ohio state bank taxes are based on capital levels and are recorded as other non-interest expense.   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, 2023 and December 31, 2022, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal and state income tax returns are subject to examination for the years after 2018.   34 Table of Contents     ( 9 ) Deposits   The composition of deposits follows:   (in thousands)   March 31, 2023     December 31, 2022                     Non-interest bearing demand deposits   $ 1,845,302     $ 1,950,198   Interest bearing deposits:                 Interest bearing demand     2,303,412       2,308,960   Savings     514,151       535,903   Money market     1,081,704       1,124,100                     Time deposits of $250 thousand or more     147,008       97,638   Other time deposits     465,618       374,453   Total time deposits (1)     612,626       472,091   Total interest bearing deposits     4,511,893       4,441,054   Total deposits   $ 6,357,195     $ 6,391,252     ( 1 )     Includes $ 2.3 million and $ 599,000 in brokered deposits as of March 31, 2023 and December 31, 2022, respectively.       ( 10 ) 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, 2023 and December 31, 2022, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.   Information concerning SSUAR follows:   (dollars in thousands)   March 31, 2023     December 31, 2022   Outstanding balance at end of period   $ 104,578     $ 133,342   Weighted average interest rate at end of period     1.14 %     1.64 %       Three months ended       March 31,   (dollars in thousands)   2023     2022                     Average outstanding balance during the period   $ 122,049     $ 91,082   Average interest rate during the period     1.52 %     0.08 % Maximum outstanding at any month end during the period   $ 133,740     $ 142,146     35 Table of Contents     ( 11 ) 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, 2023 and carried the notes at the costs noted below at March 31, 2023:   (dollars in thousands)   Face Value     Carrying Value   Origination Date   Maturity Date   Interest Rate                             Commonwealth Statutory Trust III   $ 3,093     $ 3,051   12/19/2003   1/7/2034   LIBOR + 2.85% Commonwealth Statutory Trust IV     12,372       12,204   12/15/2005   12/30/2035   LIBOR + 1.35% Commonwealth Statutory Trust V     11,341       11,187   6/28/2007   9/15/2037   LIBOR + 1.40% Total   $ 26,806     $ 26,442               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 are amortized and recognized as a component of interest expense in Bancorp’s consolidated financial statements.     ( 12 ) FHLB Advances and Other Borrowings   FHLB advances outstanding at March 31, 2023 consist of a $ 175 million cash management advance with an overnight maturity and a $ 100 million three -month advance that matures in May 2023. FHLB advances outstanding at December 31, 2022 consisted entirely of a $ 50 million cash management advance that matured in early January 2023.   (dollars in thousands)   March 31, 2023     December 31, 2022   Outstanding balance at end of period   $ 275,000     $ 50,000   Weighted average interest rate at end of period     4.87 %     4.37 %       Three months ended       March 31,   (dollars in thousands)   2023     2022                     Average outstanding balance during the period   $ 163,056     $ -   Average interest rate during the period     4.31 %     - % Maximum outstanding at any month end                 during the period   $ 275,000     $ -     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 alternative to brokered deposits to fund loan growth. At March 31, 2023 and December 31, 2022, the amount of available credit from the FHLB totaled $ 1.15 billion and $ 1.36 billion, respectively.   Bancorp also had unsecured available FFP lines with correspondent banks totaling $ 80 million at both March 31, 2023 and December 31, 2022, respectively.   36 Table of Contents Table of Contents     ( 13 ) Commitments and Contingent Liabilities   As of March 31, 2023 and December 31, 2022, 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, 2023     December 31, 2022   Commercial and industrial   $ 789,390     $ 784,429   Construction and land development     453,430       449,028   Home equity     367,949       358,610   Credit cards     68,519       64,231   Overdrafts     58,022       57,193   Letters of credit     34,273       34,704   Other     101,103       93,419   Future loan commitments     201,404       221,973   Total off balance sheet commitments to extend credit   $ 2,074,090     $ 2,063,587     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.   At March 31, 2023 and December 31, 2022, Bancorp had accrued $ 4.9 million and $ 4.5 million, respectively, in other liabilities for its estimate of credit losses for off balance sheet credit exposures.   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, 2023, 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.   As of March 31, 2023, 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.   37 Table of Contents     ( 14 ) 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.   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).   Carrying values of assets measured at fair value on a recurring basis follows:       Fair Value Measurements Using:     Total   March 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   $ 116,288     $ —     $ —     $ 116,288   Government sponsored enterprise obligations     —       137,779       —       137,779   Mortgage backed securities - government agencies     —       743,455       —       743,455   Obligations of states and political subdivisions     —       128,725       —       128,725   Other     —       5,605       —       5,605   Total available for sale debt securities     116,288       1,015,564       —       1,131,852                                     Mortgage loans held for sale     —       6,397       —       6,397   Rate lock loan commitments     —       468       —       468   Interest rate swaps     —       8,636       —       8,636   Total assets   $ 116,288     $ 1,031,065     $ —     $ 1,147,353                                     Liabilities:                                 Interest rate swaps     —       8,152       —       8,152   Mandatory forward contracts     —       71       —       71   Total Liabilities   $ —     $ 8,223     $ —     $ 8,223     38 Table of Contents       Fair Value Measurements Using:     Total   December 31, 2022 (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   $ 115,039     $ —     $ —     $ 115,039   Government sponsored enterprise obligations     —       143,626       —       143,626   Mortgage backed securities - government agencies     —       752,738       —       752,738   Obligations of states and political subdivisions     —       127,599       —       127,599   Other     —       5,615       —       5,615   Total available for sale debt securities     115,039       1,029,578       —       1,144,617                                     Mortgage loans held for sale     —       2,606       —       2,606   Rate lock loan commitments     —       137       —       137   Mandatory forward contracts     —       47       —       47   Interest rate swaps     —       10,727       —       10,727   Total assets   $ 115,039     $ 1,043,095     $ —     $ 1,158,134                                     Liabilities:                                 Interest rate swaps   $ —     $ 10,737     $ —     $ 10,737     There were no transfers into or out of Level 3 of the fair value hierarchy during 2023 or 2022.     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.   39 Table of Contents   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, 2023 (in thousands)   Level 1     Level 2     Level 3     Fair Value     March 31, 2023                                             Collateral dependent loans   $ —     $ —     $ 9,928     $ 9,928     $ —   Other real estate owned     —       —       —       —       —                                         Losses recorded                                       Three months       Fair Value Measurements Using:     Total     ended   December 31, 2022 (in thousands)   Level 1     Level 2     Level 3     Fair Value     March 31, 2022                                             Collateral dependent loans   $ —     $ —     $ 20,637     $ 20,637     $ —   Other real estate owned     —       —       677       677       —     There were no liabilities measured at fair value on a non-recurring basis at March 31, 2023 and December  31, 2022.   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, 2023   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 9,928   Appraisal   Appraisal discounts     23.8 % Other real estate owned     —   Appraisal   Appraisal discounts     —         December 31, 2022   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependend loans   $ 20,637   Appraisal   Appraisal discounts     23.3 % Other real estate owned     677   Appraisal   Appraisal discounts     65.6     40 Table of Contents     ( 15 ) 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, 2023 (in thousands)   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 316,998     $ 316,998     $ 316,998     $ —     $ —   HTM debt securities     468,751       433,900       —       433,900       —   Federal Home Loan Bank stock     23,226       23,226       —       23,226       —   Loans, net     5,167,431       4,948,173       —       —       4,948,173   Accrued interest receivable     20,561       20,561       20,561       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,845,302     $ 1,845,302     $ 1,845,302     $ —     $ —   Transaction deposits     3,899,267       3,899,267       —       3,899,267       —   Time deposits     612,626       602,758       —       602,758       —   Securities sold under agreement                                         to repurchase     104,578       104,578       —       104,578       —   Federal funds purchased     14,745       14,745       —       14,745       —   Subordinated debentures     26,442       26,492       —       26,492       —   FHLB advances     275,000       275,188       —       275,188       —   Accrued interest payable     1,029       1,029       1,029       —       —         Carrying             Fair Value Measurements Using:   December 31, 2022 (in thousands)   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 167,367     $ 167,367     $ 167,367     $ —     $ —   HTM debt securities     473,217       431,833       —       431,833       —   Federal Home Loan Bank stock     10,928       10,928       —       10,928       —   Loans, net     5,132,387       4,914,770       —       —       4,914,770   Accrued interest receivable     22,157       22,157       22,157       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,950,198     $ 1,950,198     $ 1,950,198     $ —     $ —   Transaction deposits     3,968,963       3,968,963       —       3,968,963       —   Time deposits     472,091       459,467       —       459,467       —   Securities sold under agreement                                         to repurchase     133,342       133,342       —       133,342       —   Federal funds purchased     8,789       8,789       —       8,789       —   Subordinated debentures     26,343       26,460       —       26,460       —   FHLB advances     50,000       50,000       —       50,000       —   Accrued interest payable     660       660       660       —       —     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.   41 Table of Contents     ( 16 ) 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)   2023     2022   Balance, beginning of period:   $ 2,606     $ 8,614   Origination of mortgage loans held for sale     24,683       35,829   Loans held for sale acquired     —       3,559   Proceeds from the sale of mortgage loans held for sale     ( 21,107 )     ( 38,771 ) Net gain on sale of mortgage loans held for sale     215       92   Balance, end of period   $ 6,397     $ 9,323     The following table represents the components of Mortgage banking income:       Three months ended       March 31,   (in thousands)   2023     2022                     Net gain realized on sale of mortgage loans held for sale   $ 215     $ 92   Net change in fair value recognized on loans held for sale     50       ( 27 ) Net change in fair value recognized on rate lock loan commitments     330       392   Net change in fair value recognized on forward contracts     ( 47 )     179   Net gain recognized     548       636                     Net loan servicing income     1,188       702   Amortization of mortgage servicing rights     ( 761 )     ( 481 ) Change in mortgage servicing rights valuation allowance     -       -   Net servicing income recognized     427       221                     Other mortgage banking income     63       146   Total mortgage banking income   $ 1,038     $ 1,003     Activity for capitalized mortgage servicing rights was as follows:       Three months ended       March 31,   (in thousands)   2023     2022   Balance at beginning of period   $ 15,219     $ 4,528   MSRs acquired     —       12,676   Additions for mortgage loans sold     165       154   Amortization     ( 761 )     ( 481 ) Impairment     —       —   Balance at end of period   $ 14,623     $ 16,877     42 Table of Contents   The estimated fair value of MSRs at March 31, 2023 and December 31, 2022 were $ 25 million and $ 26 million, respectively. MSRs with an estimated fair value of $ 13 million at the date of acquisition were acquired as part of the CB acquisition. There was no valuation allowance recorded for MSRs as of March 31, 2023 and December 31, 2022, as fair value exceeded carrying value.   Total outstanding principal balances of loans serviced for others were $ 2.04 billion and $ 2.08 billion at March 31, 2023 and December 31, 2022, respectively. Loans serviced for others acquired as part of the CB acquisition totaled $ 1.48 billion at the date of acquisition.   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.   The Bank 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, 2023     December 31, 2022   (in thousands)   Notional Amount     Fair Value     Notional Amount     Fair Value   Included in Mortgage loans held for sale:                                 Mortgage loans held for sale, at fair value   $ 6,289     $ 6,397     $ 2,548     $ 2,606                                     Included in other assets:                                 Rate lock loan commitments   $ 12,861     $ 468     $ 5,599     $ 137   Mandatory forward contracts     13,841       ( 71 )     6,581       47     43 Table of Contents     ( 17 ) 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, 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 )                                   Three months ended March 31, 2022                                 Balance, beginning of period   $ ( 7,657 )   $ -     $ ( 283 )   $ ( 7,940 ) Net current period other comprehensive loss     ( 49,659 )     -       -       ( 49,659 ) Balance, end of period   $ ( 57,316 )   $ -     $ ( 283 )   $ ( 57,599 )     ( 18 ) 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.   44 Table of Contents     ( 19 ) 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)   2023     2022   Net income available to stockholders   $ 29,048     $ 7,906                     Weighted average shares outstanding - basic     29,178       27,230   Dilutive securities     187       255   Weighted average shares outstanding- diluted     29,365       27,485                     Net income per share - basic   $ 1.00     $ 0.29   Net income per share - diluted     0.99       0.29     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,       2023     2022   Antidilutive SARs     48       45     45 Table of Contents     ( 20 ) 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, 2023, there were 140,000 shares available for future awards. 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   2023     2022   Dividend yield     2.24 %     2.38 % Expected volatility     27.20 %     25.43 % Risk free interest rate     3.84 %     1.98 % 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 5.2 % and 5.8 % for 2023 and 2022.   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 2023 and 2022, Bancorp awarded 8,668 and 5,410 RSUs to non-employee directors of Bancorp with a grant date fair value of $ 550,000 and $ 350,000 , respectively.   Bancorp utilized cash of $ 175,000 and $ 233,000 during the first three months of 2023 and 2022, respectively, for the purchase of shares upon the vesting of RSUs.   46 Table of Contents Table of Contents   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, 2023   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance 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         Three months ended March 31, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 94     $ 330     $ 86     $ 481     $ 991   Deferred tax benefit     ( 20 )     ( 70 )     ( 18 )     ( 101 )     ( 209 ) Total net expense   $ 74     $ 260     $ 68     $ 380     $ 782     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 2023   $ 302     $ 1,209     $ 408     $ 1,206     $ 3,125   2024     307       1,407       3       908       2,625   2025     248       1,182       —       485       1,915   2026     190       875       —       —       1,065   2027     111       514       —       —       625   2028     12       43       —       —       55   Total estimated expense   $ 1,170     $ 5,230     $ 411     $ 2,599     $ 9,410     47 Table of Contents   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, 2022     515     $15.24 - $50.71     $ 31.16     $ 16,854     $ 5.08       5.1   Granted     34     47.17 - 74.92       55.45       —       12.07           Exercised     ( 114 )   15.24 - 40.00       21.55       5,258       3.63           Forfeited     —         —       —       —       —       —   Outstanding, December 31, 2022     435     $19.37 - $74.92     $ 35.60     $ 12,784     $ 6.02       5.1                                                       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     —         —       —       —       —       —   Forfeited     —         —       —       —       —       —   Outstanding, March 31, 2023     464     $19.37 - $74.92     $ 37.17     $ 8,516     $ 6.69       5.2                                                       Vested and exercisable     345     $19.37 - $54.91     $ 32.92     $ 7,672     $ 5.36       4.2   Unvested     119     35.90 - 74.92       49.56       662       10.59       3.7   Outstanding, March 31, 2023     464     $19.37 - $$74.92     $ 37.17     $ 8,516     $ 6.69       5.2                                                       Vested in the current year     38     $35.90 - $$54.91     $ 41.82     $ 511     $ 7.75             ( 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, 2022     99     $ 41.07   Shares awarded     35       58.47   Restrictions lapsed and shares released     ( 32 )     40.39   Shares forfeited     ( 6 )     47.49   Unvested at December 31, 2022     96     $ 47.26                     Unvested at January 1, 2023     96     $ 47.26   Shares awarded     38       63.04   Restrictions lapsed and shares released     ( 31 )     43.58   Shares forfeited     ( 1 )     43.74   Unvested at March 31, 2023     102     $ 54.20     48 Table of Contents   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   2021     3       44.44       47,280   2022     3       48.48       51,929   2023     3       54.33       67,018     49 Table of Contents     ( 21 ) 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)   2023     2022     2023     2022                                     Notional amount   $ 108,252     $ 132,831     $ 108,252     $ 132,831   Weighted average maturity (years)     7.2       7.1       7.2       7.1   Fair value   $ 8,142     $ 10,727     $ 8,152     $ 10,737     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. While Bancorp expects to utilize fixed-rate three -month FHLB advances with respect to this interest rate swap, brokered CDs or other fixed rate advances may be utilized for the same three -month terms instead should those sources be more favorable. The swap began February 6, 2023 and matures February 6, 2028. 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 position designated as a cash flow hedge, and the related fair value:                         Fair value   (dollars in thousands)           Pay fixed     March 31,   Notional Amount   Maturity Date   Receive (variable) index   swap rate     2023   $ 100,000,000   2/6/2028   USD SOFR     3.27 %   $ 494       50 Table of Contents     ( 22 ) 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, 2023, the adequately-capitalized minimums, including the capital conservation buffer, were a 7.0 % Common Equity Tier 1 Risk-Based Capital ratio, 8.5 % Tier 1 Risk-Based Capital ratio and 10.5 % Total Risk-Based Capital ratio. As 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, 2023, subordinated notes added through the CB acquisition 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 capitalized     Minimum for well capitalized   March 31, 2023   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 786,853       12.91 %   $ 487,733       8.00 %   NA     NA   Bank     763,743       12.57       486,086       8.00     $ 607,608       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     689,044       11.30       274,350       4.50     NA     NA   Bank     691,934       11.39       273,423       4.50       394,945       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     715,044       11.73       365,800       6.00     NA     NA   Bank     691,934       11.39       364,565       6.00       486,086       8.00                                                     Leverage                                                 Consolidated     715,044       9.56       299,234       4.00     NA     NA   Bank     691,934       9.23       298,876       4.00       373,595       5.00     51 Table of Contents   (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   December 31, 2022   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 762,956       12.54 %   $ 486,841       8.00 %   NA     NA   Bank     732,688       12.08       485,314       8.00     $ 606,643       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     672,045       11.04       273,848       4.50     NA     NA   Bank     667,777       11.01       272,989       4.50       394,318       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     698,045       11.47       365,131       6.00     NA     NA   Bank     667,777       11.01       363,986       6.00       485,314       8.00                                                     Leverage                                                 Consolidated     698,045       9.33       299,329       4.00     NA     NA   Bank     667,777       8.95       298,600       4.00       373,250       5.00     ( 1 )     Ratio is computed in relation to risk-weighted assets.   NA – Regulatory framework does not define “ well-capitalized ” for holding companies.   52 Table of Contents     ( 23 ) 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, 2023, 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, which generated $ 67 million in total goodwill, $ 8.5 million of which was subsequently written off as a result of Bancorp selling its interest in LFA effective December 31, 2022. 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, 2023     Three months ended March 31, 2022                                                     (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 62,944     $ 128     $ 63,072     $ 48,653     $ 107     $ 48,760   Provision for credit losses     2,625       —       2,625       2,279       —       2,279   Wealth management and trust services     —       9,527       9,527       —       8,243       8,243   All other non-interest income     12,520       —       12,520       10,960       —       10,960   Non-interest expenses     39,600       5,714       45,314       51,690       4,607       56,297   Income before income tax expense     33,239       3,941       37,180       5,644       3,743       9,387   Income tax expense     7,277       855       8,132       633       812       1,445   Net income     25,962       3,086       29,048       5,011       2,931       7,942   Less net income attributed to NCI     —       —       —       —       36       36   Net income available to stockholders   $ 25,962     $ 3,086     $ 29,048     $ 5,011     $ 2,895     $ 7,906                                                     Segment assets   $ 7,631,031     $ 36,617     $ 7,667,648     $ 7,744,189     $ 32,963     $ 7,777,152     53 Table of Contents     ( 24 ) 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, 2023     Three months ended March 31, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 9,527     $ 9,527     $ —     $ 8,243     $ 8,243   Deposit service charges     2,149       —       2,149       1,863       —       1,863   Debit and credit card income     4,482       —       4,482       4,119       —       4,119   Treasury management fees     2,318       —       2,318       1,904       —       1,904   Mortgage banking income(1)     1,038       —       1,038       1,003       —       1,003   Net investment product sales commissions and fees     754       —       754       607       —       607   Bank owned life insurance(1)     549       —       549       266       —       266   Gain (loss) on sale of premises and equipment (1)     ( 2 )     —       ( 2 )     —       —       —   Other (2)     1,232       —       1,232       1,198       —       1,198   Total non-interest income   $ 12,520     $ 9,527     $ 22,047     $ 10,960     $ 8,243     $ 19,203     ( 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 $ 3.5 million and $ 3.4 million at March 31, 2023 and December 31, 2022, 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 $ 227,000 and $ 188,000 for the three month periods ended March 31, 2023 and 2022.   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 months ended March 31, 2023.   54 Table of Contents     ( 25 ) Leases   Bancorp has operating leases for various locations with terms ranging from approximately one year to approximately 18 years, some of which include options to extend the leases in five -year increments. A total of four operating leases were added as a result of the CB acquisition in 2022. 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, 2023     December 31, 2022                     Balance Sheet                 Operating lease right-of-use asset   $ 19,387     $ 19,694   Operating lease liability     20,723       21,008                     Weighted average remaining lease term (years)     8.8       9.0   Weighted average discount rate     2.56 %     2.57 %                   Maturities of lease liabilities:                 One year or less   $ 2,641     $ 3,453   Year two     3,367       3,293   Year three     2,813       2,739   Year four     2,449       2,339   Year five     2,362       2,245   Greater than five years     9,608       9,559   Total lease payments   $ 23,240     $ 23,628   Less imputed interest     2,517       2,620   Total   $ 20,723     $ 21,008         Three months ended     Three months ended   (in thousands)   March 31, 2023     March 31, 2022   Income Statement                 Components of lease expense:                 Operating lease cost   $ 840     $ 656   Variable lease cost     71       57   Less sublease income     25       24   Total lease cost   $ 886     $ 689         Three months ended     Three months ended   (in thousands)   March 31, 2023     March 31, 2022   Cash flow Statement                 Supplemental cash flow information:                 Operating cash flows from operating leases   $ 1,071     $ 853     As of March 31, 2023, Bancorp had not entered into any lease agreements that had yet to commence.   55 Table of Contents     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 subsidiaries, Stock Yards Bank & Trust Company (“SYB” or “the Bank”) and SYB Insurance Company, Inc. (“the Captive”). Bancorp, which was incorporated in 1988 in Kentucky, is registered with, and subject to supervision, regulation and examination by, the Board of Governors of the Federal Reserve System. As Bancorp has no significant operations of its own, its business is essentially that of SYB and the Captive. The operations of SYB and the Captive are fully reflected in the consolidated financial statements of Bancorp. Accordingly, references to “Bancorp” in this document may encompass both the holding company and its subsidiaries, however, it should be noted that the business of the Captive is immaterial to the overall results of operations and financial condition of Bancorp. All significant inter-company transactions and accounts have been eliminated in consolidation.   SYB, established in 1904, is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio markets through 73 full service banking center locations. The Bank is registered with, and subject to supervision, regulation and examination by the FDIC and the Kentucky Department of Financial Institutions.   The Captive, a wholly owned subsidiary of the Bancorp, is a Nevada-based captive insurance company that provides insurance against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,650,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.   On April 10, 2023, the IRS issued a proposed regulation that would potentially classify section 831(b) captive activity as a, "listed transaction," and disallow the related tax benefits, both prospectively and retroactively, for a period of three years. At this time, due to the proposed nature of the regulation, it is uncertain as to the impact this development will have on Future operations of the Captive.    As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of three unconsolidated Delaware trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings exchanged for subordinated debentures with similar terms to the TPS.   Also as a result of its acquisition of Commonwealth Bancshares, Inc., Bancorp acquired a 60% interest in Landmark Financial Advisors, LLC (LFA), which is based in Bowling Green, Kentucky and provides wealth management services. Effective December 31, 2022, Bancorp’s partial interest in LFA was sold, resulting in a pre-tax loss of $870,000 recorded in other non-interest expense on the consolidated income statements for the year ended December 31, 2022. This acquired line of business was not within the Company’s geographic footprint and ultimately did not align with the Company’s long-term strategic model. Net income related to LFA and attributable to Bancorp’s 60% interest, excluding the pre-tax loss on disposition noted above, totaled $483,000 for the year ended December 31, 2022.   Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 “ Financial Statements ” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp’s future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.   56 Table of Contents   Cautionary Statement Regarding Forward-Looking Statements   This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 2 “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. ”   Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.   Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable regulation.   There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things:     ● Changes in, or forecasts of, future political and economic conditions, inflation or recession and efforts to control related developments;   ● changes in laws and regulations or the interpretation thereof;   ● accuracy of assumptions and estimates used in establishing the ACL for loans, ACL for off-balance sheet credit exposures and other estimates;   ● impairment of investment securities;   ● impairment of goodwill, MSRs, other intangible assets and/or DTAs;   ● ability to effectively navigate an economic slowdown or other economic or market disruptions;   ● changes in fiscal, monetary, and/or regulatory policies;   ● changes in tax polices including but not limited to changes in federal and state statutory rates;   ● behavior of securities and capital markets, including changes in interest rates, market volatility and liquidity;   ● ability to effectively manage capital and liquidity;   ● long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;   ● the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;   ● competitive product and pricing pressures;   ● projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;   ● integration of acquired financial institutions, businesses or future acquisitions;   ● changes in the credit quality of Bancorp’s customers and counterparties, deteriorating asset quality and charge-off levels;   ● changes in technology instituted by Bancorp, its counterparties or competitors;   ● changes to or the effectiveness of Bancorp’s overall internal control environment;   ● adequacy of Bancorp’s risk management framework, disclosure controls and procedures and internal control over financial reporting;   ● changes in applicable accounting standards, including the introduction of new accounting standards;   ● changes in investor sentiment or behavior;   ● changes in consumer/business spending or savings behavior;   ● ability to appropriately address social, environmental and sustainability concerns that may arise from business activities;   57 Table of Contents     ● occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics or outbreaks of hostilities, and Bancorp’s ability to deal effectively with disruptions caused by the foregoing;   ● ability to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;   ● ability to withstand disruptions that may be caused by any failure of its operational systems or those of third parties;   ● ability to effectively defend itself against cyberattacks or other attempts by unauthorized parties to access information of Bancorp, its vendors or its customers or to disrupt systems;   ● other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “ Risk Factors ”   of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.   Recent Developments within the Banking Industry   On March 10, 2023, Silicon Valley Bank, an FDIC-insured institution based in Santa Clara, California, was closed by the California Department of Financial Protection & Innovation and the FDIC was named Receiver. As of December 31, 2022, Silicon Valley Bank had approximately $209 billion in total assets and $175 billion in total deposits, making this closure one of the largest bank failures in U.S. history and the first FDIC-insured institution failure since 2020.   On March 12, 2023, Signature Bank, an FDIC-insured institution based in New York, New York, was closed by the New York State Department of Financial Services and the FDIC was named Receiver. As of December 31, 2022, Signature Bank had total assets of approximately $110 billion in total assets and $83 billion in total deposits, marking another large bank failure and the second FDIC-insured institution failure of 2023.   On May 1, 2023, First Republic Bank, an FDIC-insured institution based on San Francisco, California, was closed by the California Department of Financial Protection & Innovation and the FDIC was named Receiver. To protect depositors, the FDIC entered into a purchase and assumption agreement with JPMorgan Chase Bank, National Association, Columbus, Ohio, to assume all of the deposits and substantially all of the assets of First Republic Bank, which was the result of a highly competitive bidding process.    In each instance of failure noted above, the FDIC was named Receiver upon closure of the respective institutions. The FDIC announced that all depositors affected by the Silicon Valley Bank and Signature Bank failures would be made whole and that no losses associated with the resolution of either institution would be borne by taxpayers. As the First Republic Bank failure resulted in a purchase and assumption agreement with another FDIC-insured institution, depositors of First Republic Bank remain covered by FDIC insurance. However, while losses associated with the resolution of First Republic Bank will not be borne by taxpayers, they will be applied against the Deposit Insurance Fund similar to any losses associated with the resolutions of Silicon Valley Bank and Signature Bank.   As required by law, any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks. While the impact to Bancorp of a special assessment is yet to be determined, such action by the FDIC could result in increased FDIC insurance expense for the Company, which is a component of non-interest expenses on the condensed consolidated financial statements. Bank failures, such as those noted above, can lead to market-wide liquidity problems and potentially affect our business, financial condition and results of operations. For more information regarding such risks, and others inherent in Bancorp’s business, see Part I Item 1A “ Risk Factors ” of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022.   In response to the potential liquidity issues created by the bank failures noted above, and to restore confidence in the stability of the banking system, the FRB created the Bank Term Funding Program. This program serves as a funding source to any U.S. federally insured depository institution, offering collateral-based fixed-rate advances to eligible borrowers for a term of up to one year. Eligible institutions can request such advances under the program until at least March 11, 2024. As of March 31, 2023, Bancorp has made no request for an advance under this program.   Bancorp has not been negatively impacted by the recent bank failures. We remain well-capitalized and continue to monitor and manage our liquidity position to satisfy both daily operations and longer-term strategic needs. Bancorp regularly reviews contingency funding strategies and we believe we are well-equipped to handle future liquidity requirements. We will continue to monitor the developments surrounding the recent bank failures noted above, as well as trends within the financial markets generally, to ensure we remain prepared to address potential liquidity issues that may arise.   Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company   On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company, collectively defined as “CB,” a Louisville, Kentucky-based commercial bank and trust company, which operated 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky. At the time of acquisition and net of purchase accounting adjustments, CB had $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a WM&T Department with total assets under management of approximately $2.65 billion. CB was also the holding company for three unconsolidated Delaware trust subsidiaries and held a 60% interest in LFA. Bancorp became the 100% successor owner of all three trust subsidiaries and also retained the 60% interest in LFA upon acquisition, the latter of which was disposed of effective December 31, 2022. Bancorp acquired all outstanding common stock of CB, Inc. in a combined stock and cash transaction that resulted in total consideration paid to CB shareholders of $168 million.   58 Table of Contents   Bancorp recorded goodwill of approximately $67 million and incurred merger related expenses totaling $19.5 million during the first quarter of 2022 as a result of the CB acquisition. As a result of Bancorp’s disposition of its partial interest in LFA, which resulted in a pre-tax loss of $870,000 recorded in other non-interest expense on the consolidated income statements for the fourth quarter and year ended December 31, 2022, goodwill totaling $8.5 million was written off, bringing total goodwill related to the CB acquisition to $58 million as of December 31, 2022.   The acquisition of CB has had a significant impact on the ACL and credit loss provisioning in 2022. In total, the CB acquisition served to increase the ACL on loans by $14 million at acquisition date. This increase consisted of $10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $4.4 million of provision for credit loss expense attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.   Issued but Not Yet Effective Accounting Standards Updates   For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the footnote titled “ Summary of Significant Accounting Policies ” of Part I Item 1 “ Financial Statements .”   59 Table of Contents Table of Contents   Business Segment Overview   Bancorp is divided into two reportable segments: Commercial Banking and WM&T:   Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment.    WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Overview – Operating Results (FTE)   The following table presents an overview of Bancorp’s financial performance for the three months ended March 31, 2023 and 2022:   (dollars in thousands, except per share data)                   Variance   Three months ended March 31 ,   2023     2022     $/bp     %                                     Net income available to stockholders   $ 29,048     $ 7,906     $ 21,142       267 % Diluted earnings per share   $ 0.99     $ 0.29     $ 0.70       241 % ROA     1.55 %     0.47 %   108 bps       230 % ROE     15.15 %     4.55 %   1,060 bps       233 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the three months ended March 31, 2023 compared to March 31, 2022:     ● Net Income totaled $29.0 million for the three months ended March 31, 2023, resulting in diluted EPS of $0.99, compared to net income of $7.9 million for the three months ended March 31, 2022, which resulted in diluted EPS of $0.29. The first quarter of 2022 was significantly impacted by the completion of the CB acquisition.   o Strong results for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 were driven by significant organic and acquisition-related growth over the past 12 months, a significantly higher interest rate environment compared to the same period of the prior year and the continued growth of Bancorp’s diversified non-interest revenue streams.   o Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in total assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits. The three months ended March 31, 2022 represented the only a partial month of activity associated with the CB acquisition, but included $19.5 million in merger expenses and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on results for the period.   ● Total loans (excluding PPP) increased $456 million, or 10%, compared to March 31, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $949 million, or 22%, for the three months ended March 31, 2023 compared to the same period of the prior year as a result of the prior year acquisition in addition to the previously mentioned organic growth.   o Bancorp’s ACL on loans increased $9 million, or 13%, compared to March 31, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $2.3 million for the three months ended March 31, 2023, compared to $2.7 million for the three months ended March 31, 2022. Expense for the three months ended March 31, 2023 was driven largely by a $1.4 million specific reserve recorded for a large C&I relationship in addition to annual CECL model updates and qualitative factor adjustments. Expense for the prior year period was driven by $4.4 million of expense recorded in relation to the acquired loan portfolio of CB, which was partially offset by a net credit to expense of $1.8 million stemming from generally improving CECL model factors.   60 Table of Contents     ● Deposit balances declined $388 million, or 6%, compared to March 31, 2022, as rising rates and inflationary pressures have enticed depositors to seek higher-yielding alternatives. In addition, the deposit decline experienced for the first quarter of 2023 in particular was also driven in large part by typical seasonal public funds runoff. While we continue to see consistent loyalty and confidence from our customer base, deposit competition and a higher interest rate environment has created NIM compression and we anticipate it will continue to do so throughout most of 2023.   o As a result of deposit pricing pressure/competition, Bancorp has experienced a shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits. This shift has significantly increased Bancorp’s cost of deposits and overall cost of funds.   ● Net interest income (FTE) totaled $63.2 million for the three months ended March 31, 2023, representing an increase of $14.3 million, or 29%, compared to the three months ended March 31, 2022.   o NIM increased 48 bps, or 15%, to 3.59% for the three months ended March 31, 2023 compared to the same period of the prior year, consistent with average balance sheet expansion and significant upward movement in the interest rate environment experienced over the past 12 months.   ● Non-interest income increased $2.8 million, or 15%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, highlighted by quarterly records for WM&T fees and treasury management fees, in addition to strong debit and credit card income. The prior year period included only a partial month of activity stemming from the acquisition of CB, as the acquisition was completed on March 7, 2022.   ● Non-interest expenses declined $11 million, or 20%, for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The prior year period included $19.5 million of merger expenses associated with the CB acquisition. Non-interest expenses in general remain well-controlled and consistent with expansion, strong performance and continued investment in technology.   ● As of March 31, 2023, Bancorp continued to be “well-capitalized,” the highest regulatory capital rating for financial institutions, with all capital ratios experiencing growth compared to both December 31, 2022 and March 31, 2022. Total stockholders’ equity to total assets was 10.36% as of March 31, 2023, compared to 10.14% and 9.75% at December 31, 2022 and March 31, 2022, respectively. Tangible common equity to tangible assets was 7.74% at March 31, 2023, compared to 7.44% and 6.94% at December 31, 2022 and March 31, 2022, respectively.   61 Table of Contents   Results of Operations   Net Interest Income - Overview   As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by numerous economic factors including market interest rates, business spending, liquidity, consumer confidence and 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,   2023     2022     $/bp     %                                     Net interest income   $ 63,072     $ 48,760     $ 14,312       29 % Net interest income (FTE)*     63,245       48,944       14,301       29 % Net interest spread (FTE)*     3.13 %     3.06 %   7 bps       2 % Net interest margin (FTE)*     3.59 %     3.11 %   48 bps       15 % Average interest earning assets   $ 7,154,286     $ 6,389,882     $ 764,404       12 % Average interest bearing liabilities     4,807,907       4,257,843       550,064       13 % Five year Treasury note rate at period end     3.60 %     2.42 %   118 bps       49 % Average five year Treasury note rate     3.80 %     1.83 %   197 bps       108 % Prime rate at period end     8.00 %     3.50 %   450 bps       129 % Average Prime rate     7.69 %     3.29 %   440 bps       134 % One month term SOFR at period end     4.80 %     0.30 %   450 bps       1500 % Average one month term SOFR     4.61 %     0.16 %   445 bps       2781 % One month term LIBOR at period end     4.86 %     0.45 %   441 bps       980 % Average one month term LIBOR     4.62 %     0.23 %   439 bps       1909 %   *See table titled, "Average Balance Sheets and Interest Rates (FTE)" for detail of Net interest income (FTE).     NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled $5 million at both March 31, 2023 and December 31, 2022. These sold loans are on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, as Bancorp believes it provides a more accurate depiction of loan portfolio performance.   At March 31, 2023, Bancorp’s loan portfolio consisted of approximately 71% fixed and 29% variable rate loans. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year treasury. Bancorp’s variable rate loans are indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change.   Prime rate, the five year Treasury note rate, one month term LIBOR and one month term SOFR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past 12 months. The FRB took aggressive interest rate action in 2022, increasing the FFTR a total of 425 bps to a range of 4.25% - 4.50%. These increases ultimately took Prime to 7.50% as of December 31, 2022, marking its highest level since 2007.   During the first quarter of 2023, the FRB continued raising rates, albeit at a slower pace, increasing the FFTR 50 bps to a range of 4.75% - 5.00% via two separate 25 bps rate hikes. As a result, Prime was 8.00% as of March 31, 2023.   The current economic outlook remains volatile, regularly changing as new economic data becomes available and the FRB’s fight against inflation continues. While indications in recent quarters had suggested continued interest rate increases from the FRB through 2023 with rates maintaining their higher levels through the end of the year, current projections now anticipate multiple rate decreases from the FRB beginning in the second half of 2023. As a potential economic slowdown and recession looms, Bancorp expects ongoing pricing pressure/competition for both loans and deposits, changing levels of liquidity within the banking system and a severely inverted yield curve will continue to place pressure on NIM in 2023.   62 Table of Contents   Net Interest Income (FTE) – Three months ended March 31, 2023 compared to March 31, 2022   Net interest spread (FTE) and NIM (FTE) were 3.13% and 3.59%, for the three months ended March 31, 2023, compared to 3.06% and 3.11% for the same period in 2022, respectively. NIM during the three months ended March 31, 2023 was significantly impacted by the following:     ● The rapidly rising interest rate environment that has evolved from the sustained, pandemic-driven lows experienced beginning in 2020. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB’s hike in mid-March 2022. The FFTR stood at a range of 4.75% - 5.00%, and Prime at 8.00%, as of March 31, 2023, as a result of aggressive interest rate action from the FRB over the past 12 months.   ● Substantial balance sheet expansion stemming from both acquisition-related activity and organic growth, which resulted in total average earning asset growth of $764 million, or 12%, and average interest-bearing liability growth of $550 million, or 13%, for the three months ended March 31, 2023 compared to the same period of 2022.   ● Intense pricing pressure/competition for deposits has driven a significant increase in the cost of funds, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity has increased.   Net interest income (FTE) increased $14.3 million, or 29%, for the three months ended March 31, 2023 compared to the same period of 2022, largely as a result of acquisition-related activity, but also driven in part by significant organic loan growth, substantial investment in the investment securities portfolio and the benefits of a rising interest rate environment.   Total average interest earning assets increased $764 million, or 12%, to $7.15 billion for the three months ended March 31, 2023, as compared to the same period of 2022, with the average rate earned on total interest earning assets climbing 133 bps to 4.51%.     ● Average total loan balances increased $859 million, or 20%, for the three months ended March 31, 2023, compared to the same period of 2022. Average non-PPP loan growth of $949 million, or 22%, was driven by acquisition-related expansion and strong organic growth, which was partially offset by a $90 million, or 86%, decline in average PPP loan balances resulting from continued forgiveness activity.     ● Average investment securities grew $433 million, or 33%, for the three months ended March 31, 2023 compared to the same period of 2022, attributed to a combination of strategically deploying excess liquidity through further investment in 2022 and acquisition-related activity. There were no investment security purchases made during the three month ended March 31, 2023.     ● Average FFS and interest bearing due from bank balances decreased $530 million, or 79%, for the three months ended March 31, 2023, as loan growth, investment in the securities portfolio and deposit run-off led to lower levels of liquidity as compared to the same period of the prior year.   63 Table of Contents   Total interest income (FTE) increased $29.5 million, or 59%, to $79.6 million for the three months ended March 31, 2023, as compared to the same period of 2022.     ● Interest and fee income (FTE) on loans increased $24.0 million, or 54%, to $68.9 million for the three months ended March 31, 2023, compared to the same period of 2022, driven by both organic and acquisition-related growth in the non-PPP portfolio and the rising rate environment, which more than offset a $2.7 million, or 95%, decline in PPP-related income. The yield on the overall loan portfolio increased 117 bps to 5.33% for the three months ended March 31, 2023, compared to 4.16% for the same period of the prior year, while the yield on the non-PPP loan portfolio increased 135 bps compared to the prior year period, driven by the rising rate environment.     ● Significant growth in average investment securities led to a $4.0 million increase in interest income (FTE) on the portfolio for the three months ended March 31, 2023 compared to the same period of 2022, driving a 56 bps, or 37%, increase in the corresponding yield on the portfolio. Substantial deployment of excess liquidity in 2022 benefitted the investment portfolio, as the yields earned on those purchases improved dramatically as rates began to rise last year.     ● Interest income on FFS and interest bearing due from bank balances increased $1.3 million for the three months ended March 31, 2023, as rising short-term interest rates more than offset a $530 million decline in related average balances. The yield on these assets increased 438 bps to 4.55% for the three months ended March 31, 2023 compared to the same period of 2022, stemming from the dramatic increase in the FFTR over the past 12 months.   Total average interest bearing liabilities increased $550 million, or 13%, to $4.81 billion for the three-month period ended March 31, 2023 compared with the same period in 2022, with the total average cost increasing 126 bps to 1.38%.     ● Average interest bearing deposits increased $331 million, or 8%, for the three months ended March 31, 2023 compared to the same period in 2022, with interest-bearing demand deposits accounting for $163 million, or 49%, of the increase. The significant growth was attributed mainly to acquisition-related activity, as $1.12 billion in deposits were added during the first quarter of 2022 in relation to the CBT acquisition. While rising rates and inflationary pressures have driven declines in period-end balances for the past several quarters, the decrease experienced for the first quarter of 2023 was attributed in large part to typical seasonal public funds runoff.     ● Consistent with the acquisition-related average interest bearing deposit growth noted above, average SSUAR balances increased $31 million, or 34%, for the three months ended March 31, 2023 compared to the same period of 2022.     ● Average FHLB advances totaled $163 million for the three months ended March 31, 2023. Bancorp initiated a $100 million term advance in conjunction with an interest rate swap during the first quarter of 2023 in an effort to secure longer-term funding at a more favorable rate. Bancorp also utilized overnight borrowings with the FHLB during the three months ended March 31, 2023 based on liquidity needs. No FHLB borrowings were utilized during the same period of the prior year.     ● Average subordinated debentures totaled $26 million for the three months ended March 31, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.   Total interest expense increased $15.2 million for the three months ended March 31, 2023 compared to the same period of 2022, driven by acquisition-related average balance growth, deposit rate increases, increased borrowing activity and debt assumed through last year’s CB acquisition. As a result, the cost of interest bearing liabilities increased 126 bps to 1.38% for the three months ended March 31, 2023 compared to the same period of 2022.     ● Total interest bearing deposit expense increased $12.3 million as a result of acquisition-related growth and the aforementioned deposit rate increases, resulting in a 111 bps increase in the cost of interest bearing deposits. While the overall deposit mix continues to change, the Company also continues to see consistent loyalty and confidence from our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to drive further deposit rate/cost increases in the coming months.     ● SSUAR interest expense increased $439,000 for the three months ended March 31, 2023 compared to the same period of the prior year, consistent with average balance growth and rate increases.     ● Interest expense of $1.7 million was recorded in relation to FHLB borrowings for the three months ended March 31, 2023, driven by the increased borrowings activity previously noted. No FHLB borrowings were utilized for the three months ended March 31, 2023.     ● Interest expense totaling $529,000 was recorded for the three months ended March 31, 2023, as a result of the subordinated debentures added through the prior year acquisition, approximately $100,000 of which stems from purchase accounting-related mark-to-market amortization.   64 Table of Contents   Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison       Three months ended March 31,       2023     2022       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   $ 140,831     $ 1,581       4.55 %   $ 671,263     $ 282       0.17 % Mortgage loans held for sale     6,460       41       2.57       8,629       24       1.13   Investment securities:                                                 Taxable     1,666,035       8,446       2.06       1,278,160       4,680       1.48   Tax-exempt     88,585       520       2.38       43,391       252       2.36   Total securities     1,754,620       8,966       2.07       1,321,551       4,932       1.51                                                     Federal Home Loan Bank stock     15,496       165       4.32       10,509       54       2.08                                                     SBA Paycheck Protection Program (PPP) loans     14,075       139       4.01       103,850       2,821       11.02   Non-PPP loans     5,222,804       68,748       5.34       4,274,080       42,055       3.99   Total loans     5,236,879       68,887       5.33       4,377,930       44,876       4.16   Total interest earning assets     7,154,286       79,640       4.51       6,389,882       50,168       3.18   Less allowance for credit losses on loans     75,459                       56,035                   Non-interest earning assets:                                                 Cash and due from banks     78,961                       91,235                   Premises and equipment, net     104,369                       86,056                   Bank owned life insurance     84,906                       53,177                   Goodwill     194,074                       153,803                   Accrued interest receivable and other     38,302                       154,155                   Total assets   $ 7,579,439                     $ 6,872,273                                                                     Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand   $ 2,299,789     $ 6,750       1.19 %   $ 2,136,188     $ 649       0.12 % Savings     524,911       340       0.26       467,299       55       0.05   Money market     1,116,975       4,162       1.51       1,083,961       190       0.07   Time     538,476       2,247       1.69       461,268       277       0.24   Total interest bearing deposits     4,480,151       13,499       1.22       4,148,716       1,171       0.11                                                     Securities sold under agreements to repurchase     122,049       456       1.52       91,082       17       0.08   Federal funds purchased     16,243       177       4.42       9,993       3       0.12   Federal Home Loan Bank advances     163,056       1,734       4.31       —       —       0.00   Subordinated debentures     26,408       529       8.12       8,052       33       1.66                                                                                                       Total interest bearing liabilities     4,807,907       16,395       1.38       4,257,843       1,224       0.12   Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,878,307                       1,817,462                   Accrued interest payable and other     115,670                       93,039                   Total liabilities     6,801,884                       6,168,344                   Stockholders ’ equity     777,555                       703,929                   Total liabilities and stockholders' equity   $ 7,579,439                     $ 6,872,273                   Net interest income           $ 63,245                     $ 48,944           Net interest spread                     3.13 %                     3.06 % Net interest margin                     3.59 %                     3.11 %   65 Table of Contents   Supplemental Information - Average Balance Sheets and Interest Rates (FTE)     ● Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans averaged $5 million for both the three-month period ended March 31, 2023 and 2022, respectively.     ● Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a FTE basis using a federal income tax rate of 21%. Approximate tax equivalent adjustments to interest income were $173,000 and $184,000 for the three-month periods ended March 31, 2023 and 2022, respectively.     ● Interest income includes loan fees of $1.9 million ($139,000 associated with the PPP) and $3.8 million ($2.8 million associated with the PPP) for the three-month periods ended March 31, 2023 and 2022, respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and accretion related to purchased loans.     ● Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.     ● NIM represents net interest income on a FTE basis as a percentage of total average interest earning assets.     ● Net interest spread (FTE) is the difference between taxable equivalent rates earned on total interest earning assets less the cost of interest bearing liabilities.     ● The fair market value adjustment on investment securities resulting from ASC 320, “ Investments –  Debt and Equity Securities ”  is included as a component of other assets.   66 Table of Contents   Asset/Liability Management and Interest Rate Risk   Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer funding requirements.   Interest Rate Simulation Sensitivity Analysis   Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.   The results of the interest rate sensitivity analysis performed as of March 31, 2023 were derived from the conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates and are based on historical data. Management uses different betas in the rising and falling rate scenarios in an effort to best simulate expected earnings trends. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 60% for the rising rate scenarios and 30% for falling rate scenarios, respectively. While the beta’s experienced since rates began to rise in the first quarter of 2022 were significantly below the 60% beta used in the model, the Company anticipates the future rising rate scenario betas to return to the historic averages. The 30% beta used in the falling rate scenario is the result of management’s expectations of deposit rate decreases given the rate changes experienced since the first quarter of 2022.   Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100, 200 and 300 bps would have a negative effect on net interest income, as would decreases in interest rates of 100 and 200 bps. These results depict a slightly liability sensitive interest rate risk profile in rising rate scenarios and an asset sensitive position in the falling rate scenarios. The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. The decrease in net interest income in the falling rate scenarios is the result of the lower  beta experienced since rates began to rise in the first quarter of 2022, which was the result of a significant percentage of the Company’s deposit cost being less than 100 bps, and therefore cannot decrease the full 100 or 200 bps simulated in the model.       Change in Rates       -200     -100     +100     +200     +300       Basis Points     Basis Points     Basis Points     Basis Points     Basis Points   % Change from base net interest income at March 31, 2023     -6.39 %     -2.95 %     -1.93 %     -3.87 %     -5.83 %   Bancorp’s loan portfolio is currently composed of approximately 72% fixed and 28% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 65%) or one month LIBOR/SOFR (approximately 35%).   In July 2017, the Financial Conduct Authority (the “FCA”), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. Subsequent to this, Bank regulators instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later than December 2021. Effective December 31, 2021, LIBOR is no longer used to issue new loans in the U.S. It is expected to be replaced primarily by the SOFR, which many experts consider a more accurate and more secure pricing benchmark. To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR. To date, Bancorp has not experienced any operational issues associated with reference rate reform, nor do we anticipate any in the future.   67 Table of Contents   On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law as part of the Consolidated Appropriations Act of 2022. This legislation established a uniform benchmark replacement process for financial contracts that mature after the cessation of LIBOR (scheduled for June 2023) that do not contain clearly defined or practicable fallback provisions. The legislation also established a safe harbor for lenders, providing protection from litigation associated with choosing a replacement rate recommended by the FRB, such as SOFR, and also allows for the continued use of any appropriate benchmark rate for new contracts.   As of March 31, 2023, the Company had approximately $312 million in loans and interest rate derivative contracts of $108 million (notional amount) that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. The Company had $236 million in loans that were indexed to SOFR at March 31, 2023.   Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value, with changes in fair value recorded in other non-interest income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above. For additional information see the Footnote titled “ Assets and Liabilities Measured and Reported at Fair Value. ”   In addition, Bancorp periodically uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled “ Derivative Financial Instruments. ” For these derivatives, the effective portion of gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings.   68 Table of Contents   Provision for Credit Losses   Provision for credit losses on loans at March 31, 2023 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the Footnote titled “ Basis of Presentation and Summary of Significant Accounting Policies ” in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2022 for detailed discussion regarding Bancorp’s ACL methodology by loan segment.   An analysis of the changes in the ACL for loans, including provision, and selected ratios follow:       Three months ended       March 31,   (dollars in thousands)   2023     2022                     Beginning balance   $ 73,531     $ 53,898   Acquisition - PCD loans (goodwill adjustment)     -       9,950   Adjusted beginning balance     73,531       63,848                     Provision for credit losses on loans     2,250       (1,750 ) Provision for credit losses on loans - acquired loans     -       4,429   Total provision for credit losses on loans     2,250       2,679                     Total charge-offs     (370 )     (409 ) Total recoveries     262       949   Net loan (charge-offs) recoveries     (108 )     540   Ending balance   $ 75,673     $ 67,067   Average total loans   $ 5,236,879     $ 4,377,930   Provision for credit losses on loans to average total loans (1)     0.04 %     0.06 % Net loan (charge-offs) recoveries to average total loans (1)     0.00 %     0.01 % ACL for loans to total loans     1.44 %     1.38 % ACL for loans to total loans (excluding PPP) (2)     1.45 %     1.40 % ACL for loans to average total loans     1.45 %     1.53 %   (1) Ratios are not annualized (2) See the section titled “ Non-GAAP Financial Measures ”  for reconcilement of Non-GAAP to GAAP measures   The ACL for loans totaled $76 million as of March 31, 2023 compared to $67 million at March 31, 2022, representing an ACL to total loans ratio of 1.44% and 1.38% for those periods, respectively. The ACL to loans (excluding PPP loans) was 1.45% at March 31, 2023 compared to 1.40% at March 31, 2022. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $10 million at March 31, 2023 and $71 million at March 31, 2022, Bancorp did not reserve for potential losses for these loans within the ACL. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   Provision of $2.3 million was recorded to provision for credit losses on loans for the three month period ended March 31, 2023. While credit quality remains strong, provision expense for the first quarter of 2023 was driven by the establishment of a $1.4 million specific reserve for a large C&I relationship, annual CECL model updates and qualitative factor adjustments. Further, net charge off activity for the three months ended March 31, 2023 totaled $108,000, serving to reduce the ACL for loans.   Negative provision (excluding acquisition-related activity) of $1.8 million was recorded for the three month ended March 31, 2022 due to improvement in the unemployment forecast, updates to Bancorp’s CECL modeling, net recoveries and strong historic credit metrics. Offsetting the negative provision for the three months ended March 31, 2022 was credit loss expense recorded for the loan portfolio acquired from CB, which totaled $4.4 million.   In addition to the provision activity noted above for the prior year period, the ACL for loans was also increased $10 million during the first quarter of 2022, as a result of the PCD loan portfolio added through the CB acquisition, with the corresponding offset recorded to goodwill (as opposed to provision expense).   69 Table of Contents   While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2022 and March 31, 2023. Provision for credit loss expense for off balance sheet credit exposures of $375,000 was recorded for the three months ended March 31, 2023, driven mainly by a decline in C&I utilization. The ACL for off balance sheet credit exposures was $4.9 million as of March 31, 2023.   Negative provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $400,000 was recorded for the three months ended March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage, consistent with generally improving model factors and improvement in line of credit utilization. Offsetting this negative provision was a $500,000 increase in the ACL for off balance sheet credit exposures associated with the CB acquisition, with the offset recorded to goodwill (as opposed to provision expense). The ACL for off balance sheet credit exposures stood at $3.6 million as of March 31, 2022.   Bancorp’s loan portfolio is well-diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The adequacy of the ACL is monitored on an ongoing basis and it is the opinion of management that the balance of the ACL at March 31, 2023 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.   70 Table of Contents   Non-interest Income       Three months ended March 31,   (dollars in thousands)   2023     2022     $ Variance     % Variance                                     Wealth management and trust services   $ 9,527     $ 8,243     $ 1,284       16 % Deposit service charges     2,149       1,863       286       15   Debit and credit card income     4,482       4,119       363       9   Treasury management fees     2,318       1,904       414       22   Mortgage banking income     1,038       1,003       35       3   Net investment product sales commissions and fees     754       607       147       24   Bank owned life insurance     549       266       283       106   Gain (loss) on sale of premises and equipment     (2 )     -       (2 )     100   Other     1,232       1,198       34       3   Total non-interest income   $ 22,047     $ 19,203     $ 2,844       15 %   Total non-interest income increased $2.8 million, or 15%, for the three period ended March 31, 2023 compared to the same period of 2022, respectively. Non-interest income comprised 25.9% of total revenues, defined as net interest income and non-interest income, for the three month period ended March 31, 2023 compared to 28.3% for the same period of 2022. WM&T services comprised 43.2% of total non-interest income for the three month period ended March 31, 2023 compared to 42.9% and for the same period of 2022. While strong organic growth has been experienced across most non-interest income revenue streams over the past 12 months, acquisition-related activity accounts for a large portion of the increase for the three months ended March 31, 2023 compared to the same period of 2022, as the first quarter of the prior year included just a partial month of activity related to the CB acquisition.   WM&T Services:   The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased $1.3 million, or 16%, for the three month period ended March 31, 2023, as compared with the same period of 2022, consistent with acquisition-related activity, organic new business development and positive returns for the quarter from both the fixed income and equity markets.   Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased $1.2 million, or 15%, for the three month period ended March 31, 2023, as compared with the same period of 2022. The increase was driven by both acquisition-related activity and organic business development in addition to the previously mentioned positive returns from fixed income and equity markets for the three months ended March 31, 2023. Further, the prior year period included just a partial month of activity stemming from the CB acquisition.   A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees increased $54,000 for the three month period ended March 31, 2023, as compared with the same period of 2022, which was driven mainly by higher estate fees earned.   AUM, stated at market value, totaled $6.76 billion at March 31, 2023 compared with $7.59 billion at March 31, 2022 and $6.59 billion at December 31, 2022. The decrease in AUM between March 31, 2022 and March 31, 2023 is attributed to the significant declines in both fixed income and equity markets experienced during 2022, which negatively impacted the market value of AUM last year and was only partially countered by equity market appreciation during the first quarter of 2023.   71 Table of Contents   Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams.   Detail of WM&T Service Income by Account Type:       Three months ended March 31,   (in thousands)   2023     2022                     Investment advisory   $ 3,681     $ 3,415   Personal trust     3,362       2,378   Personal investment retirement     1,680       1,639   Company retirement     363       442   Foundation and endowment     283       261   Custody and safekeeping     86       64   Insurance services     5       40   Other     67       4                     Total WM&T services income   $ 9,527     $ 8,243     The preceding table demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are predominantly based on AUM and tailored for individual/company accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, recurring AUM fee structures are in place for investment management, irrevocable and revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. WM&T also provides company retirement plan services, which can consist of a one-time conversion fee with recurring AUM fees to follow. While there are also fee structures for estate settlements, income received is often non-recurring in nature. Fee structures are agreed upon at the time of account opening and any subsequent revisions are communicated in writing to the customer. WM&T fees earned are not performance-based nor are they based on investment strategy or transactions. Bancorp also earns management fees on in-house investments funds acquired from CB.   Assets Under Management by Account Type:   AUM (not included on balance sheet) increased from $6.59 billion at December 31, 2022 to $6.76 billion at March 31, 2023 as follows:       March 31, 2023     December 31, 2022   (in thousands)   Managed     Non-managed (1)     Total     Managed     Non-managed (1)     Total   Investment advisory   $ 2,344,991     $ 59,924     $ 2,404,915     $ 2,249,017     $ 63,691     $ 2,312,708   Personal trust     1,770,079       502,150       2,272,229       1,744,522       474,373       2,218,895   Personal investment retirement     785,503       27,431       812,934       756,126       27,065       783,191   Company retirement     54,548       538,692       593,240       52,891       524,568       577,459   Foundation and endowment     444,309       8,492       452,801       428,018       8,219       436,237                                                     Subtotal   $ 5,399,430     $ 1,136,689     $ 6,536,119     $ 5,230,574     $ 1,097,916     $ 6,328,490   Custody and safekeeping     —       227,755       227,755       —       256,791       256,791                                                     Total   $ 5,399,430     $ 1,364,444     $ 6,763,874     $ 5,230,574     $ 1,354,707     $ 6,585,281     (1) Non-managed assets represent those for which the WM&T department does not hold investment discretion.   As of March 31, 2023 and December 31, 2022, approximately 80% and 79%, respectively, of AUM were actively managed. Company retirement plan accounts consist primarily of participant-directed assets. The amount of custody and safekeeping accounts are insignificant.   72 Table of Contents   Managed Trust Assets under Management by Class of Investment:   (in thousands)   March 31, 2023     December 31, 2022                     Interest bearing deposits   $ 221,554     $ 185,080   Treasury and government agency obligations     229,410       176,917   State, county and municipal obligations     212,497       201,038   Money market mutual funds     88,514       108,751   Equity mutual funds     1,156,985       1,125,540   Other mutual funds - fixed, balanced and municipal     575,360       583,713   Other notes and bonds     205,867       209,178   Common and preferred stocks     2,238,183       2,180,390   Common trust funds and collective investment funds     114,888       114,458   Real estate mortgages     770       774   Real estate     40,741       57,297   Other miscellaneous assets (1)     314,661       287,438                     Total managed assets   $ 5,399,430     $ 5,230,574     (1) Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts,  and oil and gas rights.   Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations and consist of approximately 63% in equities and 37% in fixed income securities as of both March 31, 2023 and December 31, 2022. This composition has remained relatively consistent from period to period.   Additional Sources of Non-interest income:   Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, increased $286,000, or 15%, for the three month period ended March 31, 2023, as compared with the same period of 2022, mainly as a result of the contribution associated with acquisition-related activity over the past 12 months. Outside of acquisition-related growth, an industry-wide decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several years. This trend has been driven by lower check presentment volume, which has in turn led to fewer overdrawn accounts in general. Further, Bancorp anticipates that future growth of this revenue stream could be significantly impacted by changing industry practices. Bancorp could be faced with strategic decisions surrounding deposit-related service charges in the future, which could negatively impact the contributions made by this, or similar, revenue streams.   Debit and credit card income consists of interchange revenue, ancillary fees and incentives received from card processors. Debit and credit card revenue increased $363,000 or 9%, for the three month period ended March 31, 2023, as compared with the same period of 2022, as a result of increased transaction volume and continued expansion of the customer bases, both organically and through acquisition-related activity. Total debit card income increased $197,000, or 7%, and total credit card income increased $166,000, or 14%, for the three period ended March 31, 2023, compared the same period of the prior year. Bancorp expects this revenue stream will continue to grow with the expansion of the customer base.   Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased $414,000, or 22%, for the three period ended March 31, 2023, as compared with the same period of 2022, driven by increased transaction volume, new product sales and customer base expansion. Both organic and acquisition-related sales efforts have led to the expansion of online services, reporting, ACH origination, remote deposit and fraud mitigation services over the past 12 months. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.   73 Table of Contents   Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA, FHA and GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue increased $35,000, or 3%, for the three month period ended March 31, 2023, as compared with the same period of 2022. This increase was driven by market value appreciation of loans held for sale and lower long-term rates, which have helped improve volume compared to recent quarters. Further, mortgage banking income has benefitted from the addition of the mortgage loan servicing portfolio added through the CB acquisition.   Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees earned on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of account assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced by Bancorp’s WM&T Department. Net investment product sales commissions and fees increased $147,000, or 24%, for the three month period ended March 31, 2023, as compared with the same period of 2022, driven by acquisition-related growth, which included the addition of three financial advisors, and increased trading activity associated with general market volatility.   BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. During the third quarter of 2022, Bancorp purchased an additional $30 million of BOLI assets in an effort to diversify investment of excess liquidity, bringing total BOLI assets to $85 million as of March 31, 2023. BOLI income increased $283,000 for the three month period ending March 31, 2023 compared to the same period of the prior year, which was attributed mainly to the additional investment made in 2022, as previously noted.   During the first quarter of 2023, Bancorp completed the sale of certain acquired properties that overlapped with existing locations, recording a net loss of $2,000 as a result. No such activity was recorded for the three months ended March 31, 2022.   Other non-interest income increased $34,000, or 3%, for the three month period ended March 31, 2023 compared with the same period of 2022. The increase was driven largely by positive returns within the COLI portfolio and the contribution of the insurance captive, which served to offset a large decline in miscellaneous fee income and the benefit provided by Bancorp’s partial interest in LFA for the three months ended March 31, 2022, the latter of which was disposed of effective December 31, 2022.   74 Table of Contents   Non-interest Expenses       Three months ended March 31,   (dollars in thousands)   2023     2022     $ Variance     % Variance                                     Compensation   $ 21,896     $ 17,969     $ 3,927       22 % Employee benefits     5,053       4,539       514       11   Net occupancy and equipment     3,899       3,025       874       29   Technology and communication     4,251       3,419       832       24   Debit and credit card processing     1,419       1,337       82       6   Marketing and business development     1,095       772       323       42   Postage, printing and supplies     874       733       141       19   Legal and professional     797       650       147       23   FDIC insurance     1,135       645       490       76   Amortization of investments in tax credit partnerships     323       88       235       267   Capital and deposit based taxes     639       518       121       23   Merger expenses     -       19,500       (19,500 )     (100 ) Intangible amortization     1,180       713       467       65   Other     2,753       2,389       364       15   Total non-interest expenses   $ 45,314     $ 56,297     $ (10,983 )     (20 )%   Total non-interest expenses decreased $11.0 million, or 20%, for the three month period ended March 31, 2023 compared to the same period of 2022, the variance stemming largely from merger expenses associated with completion of the CB acquisition during the first quarter of 2022. Compensation and employee benefits comprised 59.5% of Bancorp’s total non-interest expenses for the three month period ended March 31, 2023, compared to 40.0% for the same period of 2022. Excluding merger expenses, compensation and employee benefits comprised 61.2% for the three month period ended March 31, 2022. As previously noted, the three months ended March 31, 2022 included only a partial month of activity associated with the CB acquisition.   Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased $3.9 million, or 22%, for the three month period ended March 31, 2023, as compared with the same period of 2022. The increases were attributed to growth in full time equivalent employees, annual merit-based salary increases and the impact of the first quarter of 2022 experiencing only a partial month of acquisition-related activity. Net full time equivalent employees totaled 1,044 at March 31, 2023 compared to 1,040 at December 31, 2022 and 997 at March 31, 2022.   Employee benefits consists of all personnel-related expense not included in compensation, with the most significant items being health insurance, payroll taxes and employee retirement plan contributions. Employee benefits increased $514,000, or 11%, for the three month period ended March 31, 2023, as compared with the same period of 2022, driven primarily by the overall increase in full time equivalent employees noted above.   Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy expense increased $874,000, or 29%, the three month period ended March 31, 2023, as compared with the same period of 2022, driven by the acquisition of CB. In connection with the CB acquisition, 15 branches were acquired, four of which were closed shortly after acquisition in addition to one existing SYB location, as a result of branch overlap. At March 31, 2023, Bancorp’s branch network consisted of 73 locations throughout Louisville, central, eastern and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and Cincinnati, Ohio.   Technology and communication expenses include computer software usage and licensing fees, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased $832,000, or 24%, for the three month period ended March 31, 2023 compared to the same period of 2022, consistent with acquisition-related activity, customer expansion and core system upgrades.   75 Table of Contents   Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses typically fluctuate consistent with transaction volumes. Debit and credit card processing expense increased $82,000, or 6%, for the three month period ending March 31, 2023 compared to the same period of last year. The increase correlates in part with the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related growth that served to increase corresponding debit and credit card non-interest income.   Marketing and business development expenses include all costs associated with promoting Bancorp including community support, retaining customers and acquiring new business. Marketing and business development expenses increased $323,000, or 42%, for the three month period ending March 31, 2023, as compared to the same period of 2022. The increase corresponds with strategic decisions to advertise and promote in Bancorp’s new markets, as well as the general expansion of Bancorp’s existing and prospective customer base and a post-pandemic return to in-person client meeting/entertainment.   Postage, printing and supplies expense increased $141,000, or 19%, for the three month period ended March 31, 2023 compared to the same period of 2022, consistent with Bancorp’s expansion over the past 12 months.   Legal and professional fees increased $147,000, or 23%, for the three month period ended March 31, 2023 compared to the same period of last year, attributed to various consulting engagements, collection-related expenses and litigation costs arising through the normal course of business. Legal and professional fees associated with the prior year merger-related activity are captured in merger expenses.   FDIC insurance increased $490,000, or 76%, for the three month period ended March 31, 2023, as compared to the same period of 2022, consistent with organic and acquisition-related balance sheet growth for which the insurance is assessed on and an increased assessment rate. While not reflected in the increased expense experienced for the three months ended March 31, 2023, Bancorp anticipates future increases in FDIC insurance expense associated with potential assessments related to recent bank failures.   Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit, net of related expenses, results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon the timing and magnitude of the underlying investments. Amortization expense associated with these investments increased $235,000, for the three month period ending March 31, 2023 compared to the same period of last year, driven by the addition of several recently closed tax credit projects.   Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, increased $121,000, or 23%, for the three month period ended March 31, 2023 compared to the same period of 2022, attributed to Bancorp’s expansion over the past 12 months.   Merger expenses represent non-recurring expenses associated with completion of the CB acquisition and consist primarily of investment banker fees, various compensation-related expenses, legal fees, early termination fees relating to various contracts and system conversion expenses. While no merger expenses were recorded for the three months ended March 31, 2023, $19.5 million of merger expenses were recorded in the first quarter of 2022 in relation to the CB acquisition.   Intangible amortization expense consists of amortization associated with the CDI of acquired deposit portfolios, as well as an intangible related to customer list of the WM&T business line added through the CB acquisition. The intangibles are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization for the three period ended March 31, 2023 was $1.2 million compared to $713,000 for the same period of the prior year, the significant increase stemming from the CB acquisition.   Other non-interest expenses increased $364,000, or 15%, for the three month period ended March 31, 2023, as compared to the same period of 2022. The most notable drivers of the increases were increased card reward expense, higher fraud and theft-related expenses and other ancillary expenses tied to Bancorp’s significant growth over the past 12 months.   Bancorp’s efficiency ratio (FTE) for the three month period ended March 31, 2023 was 53.13% compared to 82.61% for the three months ended March 31, 2022, the latter period reflecting one-time merger-related expenses attributed to the CB acquisition, which were all recorded in the first quarter of 2022. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of premises and equipment and the disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and merger-related expenses. Bancorp’s adjusted efficiency ratio was 52.75% for the three month period ended March 31, 2023 compared to 53.87% for three month period ended March 31, 2022. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   76 Table of Contents   Income Tax Expense   A comparison of income tax expense and ETR follows:       Three months ended March 31,   (dollars in thousands)   2023     2022     $ Variance     % Variance                                     Income before income tax expense   $ 37,180     $ 9,387     $ 27,793       296 % Income tax expense     8,132       1,445       6,687       463   Effective tax rate     21.9 %     15.4 %   650 bps       42 %   Fluctuations in the ETR are primarily attributed to the following:     ● The stock based compensation component of the ETR fluctuates consistent with the level of SAR exercise activity. The ETR was reduced 1.1% for the three months ended March 31, 2023 compared to a reduction of 5.9% for the same period of 2022, consistent with exercise activity.   ● Changes in the cash surrender value of life insurance policies can vary widely from period to period, driven largely by changes in the markets. The related impact is inversely correlated with the ETR generally, with cash surrender value declines typically serving to increase the ETR and vice versa. Changes in the cash surrender value of life insurance policies decreased the ETR 0.7% for the three months ended March 31, 2023, compared to an increase of 1.8% the same period of the prior year.   ● Bancorp invests in certain partnerships that yield federal income tax credits. Taken as a whole, the tax benefit of these investments exceeds amortization expense, resulting in a positive impact on net income. The timing and magnitude of these transactions may vary widely from period to period. The ETR for the three months ended March 31, 2023 and 2022 was increased by 0.4% and reduced by 1.7%, respectively, by tax credit activity.   ● Tax-exempt interest income earned on loans and investment securities reduced the ETR by 0.5% for the three months ended March 31, 2023 compared to a reduction of 1.6% for the same period of the prior year, the larger reduction in the current year being attributed to tax-exempt loans and securities added through acquisition-related activity.   ● Non-deductible merger expenses recorded during the three months ended March 31, 2022 served to increase the ETR 1.1%. No such activity was recorded for the three months ended March 31, 2023.   ● Bancorp’s insurance captive provides insurance against certain risks for which insurance may not currently be available or economically feasible to Bancorp and SYB, as well as a group of third-party insurance captives.  The tax advantages of the Captive, including the tax-deductible nature of premiums paid to the Captive as well as the tax-exemption for premiums received by the Captive, serve to reduce income tax expense. Related activity reduced the ETR 0.3% for the three months ended March 31, 2023, compared to reduction of 0.9% for the same period of 2022.   77 Table of Contents   Financial Condition – March 31, 2023 Compared to December 31, 2022   Overview   Total assets increased $171 million, or 2%, to $7.67 billion at March 31, 2023 from $7.50 billion at December 31, 2022. Total cash and cash equivalents increased $150 million, or 89%, as the result of increased FHLB borrowing activity and total loans increased $37 million, or 1%, as loan growth slowed compared to the record organic loan growth experienced in 2022. Partially offsetting this growth was a $17 million, or 1%, decline in total investment securities stemming from a combination of scheduled maturity and pay down activity within the total portfolio in addition to market value appreciation on the AFS portfolio. Further, other assets declined $10 million, or 7%, driven largely by interest rate-related changes to the valuations of deferred tax assets and swap assets.   Total liabilities increased $137 million, or 2%, to $6.87 billion at March 31, 2023 from $6.74 billion at December 31, 2022. While total FHLB borrowings increased $225 million compared to December 31, 2022, a $34 million, or 1%, decline in total deposits and a $29 million, or 22%, decline in SSUAR partially offset this growth, as rising interest rates and inflationary pressures encouraged depositors to seek higher-yielding alternatives. Further, a $31 million, or 25%, decrease in other liabilities was driven by a reduction in various year-end accruals.   Stockholders’ equity increased $34 million, or 4%, to $794 million at March 31, 2023 from $760 million at December 31, 2022. Net income of $29.1 million and a $14.6 million increase in AOCI associated with changes in the interest rate environment and their corresponding impact on the valuation of the AFS debt securities portfolio served to grow stockholder’s equity for the period, offset only partially by $8.5 million of dividends declared during the first quarter.   Cash and Cash Equivalents   Cash and cash equivalents increased $150 million, or 89%, ending at $317 million at March 31, 2023 compared to $167 million at December 31, 2022, which was driven largely by FHLB borrowing activity. In addition to intermittently utilizing overnight advances with the FHLB based on changing levels of liquidity during the period, Bancorp also entered into a $100 million term advance in conjunction with a five-year interest rate swap during the first quarter as a way of securing term funding at a more attractive rate. For more information on this interest rate swap, see the footnote titled “ Derivative Financial Instruments. ”   Cash and cash equivalent growth was partially offset by loan growth of $37 million and reductions of $34 million and $29 million in total deposits and SSUAR, respectively, during the three months ended March 31, 2023. While growth in period end balances was experienced in comparison to December 31, 2022, average cash and cash equivalents declined $543 million, or 71%, for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The record levels of liquidity held near the beginning of 2022 have retreated over the past 12 months, driven by the record organic loan growth recorded in 2022 and the deposit run-off experienced over the past few quarters.   Investment Securities   Investment securities decreased $17 million, or 1%, to $1.60 billion at March 31, 2023 compared to $1.62 billion at December 31, 2022, as scheduled maturity and pay down activity within the total portfolio was partially offset by market appreciation within the AFS portfolio stemming from changes in the interest rate environment.   No additional investment in the securities portfolio was made during the three months ended March 31, 2023, as Bancorp elected to maintain higher levels of liquidity amidst loan growth and deposit contraction during the period.   Loans   Total loans increased $37 million, or 1%, from December 31, 2022 to March 31, 2023. Excluding the PPP portfolio, loans grew $46 million, or 1%, over the same period. Loan growth for the three months ended March 31, 2023 was concentrated in the CRE and residential real estate segments, which outpaced a decline in the C&I segment, and to a lesser extent, the C&D and consumer segments. While loan production and loan pipelines remain steady, elevated payoff activity stemming largely from business sales and lower LOC utilization combined to mute otherwise solid loan growth for the first quarter of 2023.   After hitting a pandemic-era low of 36.5% at March 31, 2021, total line of credit utilization has improved significantly, reaching 41.1% at March 31, 2023, led by C&I utilization, which strengthened from 23.9% to 30.5% over the same period, respectively. However, line of credit usage has remained below pre-pandemic levels, as customers continue to utilize strong liquidity positions. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability over the past several quarters, but utilization of the new lines has been relatively slow.   78 Table of Contents   PPP loans of $10 million were outstanding at March 31, 2023. Bancorp has $210,000 in net unrecognized fees related to the PPP as of March 31, 2023, which will be recognized immediately once the loans are paid off or forgiven by the SBA. The timing of forgiveness activity and the related fee recognition has become insignificant, as the balance of the overall portfolio has shrunk.   Bancorp’s credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp’s current market areas, which encompass the Louisville, Kentucky MSA, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio MSAs.   Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I and CRE loan portfolio segments with a corresponding liability recorded in other liabilities. At both March 31, 2023 and December 31, 2022, the total participated portion of loans of this nature totaled $5 million.   The following table presents the maturity distribution and rate sensitivity of the total loan portfolio as of March 31, 2023:       Maturity                   March 31, 2023 (in thousands)   Within one year     After one but within five years     After five but within fifteen years     Ater fifteen years     Total     % of Total   Fixed rate   $ 190,472     $ 1,522,410     $ 1,210,107     $ 826,300     $ 3,749,289       72 % Variable rate     543,650       535,916       370,690       43,559       1,493,815       28 % Total loans   $ 734,122     $ 2,058,326     $ 1,580,797     $ 869,859     $ 5,243,104       100 %   In the event where Bancorp structures a loan with a maturity exceeding five years (typically CRE loans), an automatic rate adjustment will typically be set in place at five years from origination date to limit interest rate sensitivity.   Non-performing Loans and Assets   Information summarizing non-performing loans and assets follows:   (dollars in thousands)   March 31, 2023     December 31, 2022                     Non-accrual loans   $ 17,389     $ 14,242   Troubled debt restructurings     -       -   Loans past due 90 days or more and still accruing     894       892   Total non-performing loans     18,283       15,134                     Other real estate owned     677       677   Total non-performing assets   $ 18,960     $ 15,811                     Non-performing loans to total loans     0.35 %     0.29 % Non-performing assets to total assets     0.25 %     0.21 % ACL for loans to total non-performing loans     414 %     486 %   79 Table of Contents   As of March 31, 2023, non-accrual loans totaled $17 million compared to $14 million at December 31, 2022. The increase in total non-accrual loans between December 31, 2022 and March 31, 2023 stemmed mainly from one large C&I relationship being placed on non-accrual status.   Non-performing assets as of March 31, 2023 consisted of 124 loans, ranging in individual amounts up to $6.6 million, and OREO. At March 31, 2023, OREO included two CRE properties and one residential real estate property.   Delinquent Loans   Delinquent loans (consisting of all loans 30 days or more past due) totaled $12 million and $17 million at March 31, 2023 and December 31, 2022. The decrease between December 31, 2022 and March 31, 2023 was driven mainly by a large CRE relationship that became current and another large CRE relationship that paid off during the quarter. Delinquent loans to total loans were 0.22% and 0.32% at March 31, 2023 and December 31, 2022, respectively.   80 Table of Contents   Allowance for Credit Losses on Loans   The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled “ Summary of Significant Accounting Policies ” for discussion of Bancorp’s ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp’s judgment, should be charged-off.   Bancorp’s ACL for loans was $76 million as of March 31, 2023 compared to $74 million as of December 31, 2022. Provision expense for credit losses on loans of $2.3 million was recorded for the three months ended March 31, 2023, driven mainly by a $1.4 million specific reserve recorded for a large C&I relationship, annual CECL model updates and qualitative factor adjustments. The projected unemployment rate forecast, which is the primary loss driver within the model, improved between December 31, 2022 and March 31, 2023, serving to benefit expense slightly. Net charge-off activity was minimal for the three months ended March 31, 2023.   The ACL for loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions change, Bancorp could experience further adjustments in its required ACL for loans credit loss expense.   The following table sets forth the ACL by category of loan:       March 31, 2023     December 31, 2022   (dollars in thousands)   Allocated Allowance     % of Total ACL on loans     ACL for loans to Total Loans (1)     Allocated Allowance     % of Total ACL on loans     ACL for loans to Total Loans (1)                                                     Commercial real estate - non-owner occupied   $ 21,669       29 %     1.52 %   $ 22,641       31 %     1.62 % Commercial real estate - owner occupied     11,429       15 %     1.34 %     10,827       15 %     1.30 % Total commercial real estate     33,098       44 %     1.46 %     33,468       46 %     1.50 %                                                   Commercial and industrial - term (1)     13,982       18 %     1.82 %     12,991       17 %     1.70 % Commercial and industrial - lines of credit     6,041       8 %     1.39 %     6,389       9 %     1.37 % Total commercial and industrial     20,023       26 %     1.66 %     19,380       26 %     1.57 %                                                   Residential real estate - owner occupied     8,205       11 %     1.32 %     6,717       9 %     1.14 % Residential real estate - non-owner occupied     4,144       5 %     1.28 %     3,597       5 %     1.15 % Total residential real estate     12,349       16 %     1.31 %     10,314       14 %     1.14 %                                                   Construction and land development     6,735       9 %     1.53 %     7,186       10 %     1.61 % Home equity lines of credit     1,618       2 %     0.81 %     1,613       2 %     0.80 % Consumer     1,186       2 %     0.87 %     1,158       2 %     0.83 % Leases     199       0 %     1.51 %     201       0 %     1.51 % Credit cards     465       1 %     2.14 %     211       0 %     1.03 % Total   $ 75,673       100 %     1.45 %   $ 73,531       100 %     1.42 %   (1) Excludes the PPP loan portfolio, which was not reserved for based on the underlying 100% SBA guarantee.     81 Table of Contents   The table below details net charge-offs to average loans outstanding by category of loan for the three month periods ended March 31, 2023 and 2022, respectively.       2023     2022   Three months ended March 31, (dollars in thousands)   Net (charge offs)/ recoveries     Average Loans &#xa