Stock Yards Bancorp, Inc. 10-Q

sybt20230630_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 June 30, 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 July 31, 2023, was 29,322,661 .   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 9     Notes to Condensed Consolidated Financial Statements 11     Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 56     Item 3. Quantitative and Qualitative Disclosures about Market Risk. 92     Item 4. Controls and Procedures. 92         PART II – OTHER INFORMATION 92     Item 1. Legal Proceedings. 92     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 93     Item 6. Exhibits. 93         Signatures 94   2 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   June 30, 2023 (unaudited) and December 31, 2022 (in thousands, except share data)       June 30,     December 31,       2023     2022   Assets                 Cash and due from banks   $ 111,126     $ 82,515   Federal funds sold and interest bearing due from banks     103,204       84,852   Total cash and cash equivalents     214,330       167,367                     Mortgage loans held for sale, at fair value     7,069       2,606   Available for sale debt securities (amortized cost of $ 1,238,249 in 2023 and $ 1,297,977 in 2022, respectively)     1,092,724       1,144,617   Held to maturity debt securities (fair value of $ 410,249 in 2023 and $ 431,833 in 2022, respectively)     450,029       473,217   Federal Home Loan Bank stock, at cost     27,366       10,928   Loans     5,418,609       5,205,918   Allowance for credit losses on loans     ( 77,710 )     ( 73,531 ) Net loans     5,340,899       5,132,387                     Premises and equipment, net     98,777       101,612   Premises held for sale     3,233       2,644   Bank owned life insurance     85,782       84,674   Accrued interest receivable     22,547       22,157   Goodwill     194,074       194,074   Core deposit intangibles     13,442       14,958   Customer list intangibles     9,196       10,032   Other assets     173,084       134,988   Total assets   $ 7,732,552     $ 7,496,261                     Liabilities                 Deposits:                 Non-interest bearing   $ 1,766,132     $ 1,950,198   Interest bearing     4,442,248       4,441,054   Total deposits     6,208,380       6,391,252                     Securities sold under agreements to repurchase     138,347       133,342   Federal funds purchased     11,646       8,789   Subordinated debentures     26,541       26,343   Federal Home Loan Bank advances     400,000       50,000   Accrued interest payable     1,064       660   Other liabilities     138,492       125,443   Total liabilities     6,924,470       6,735,829                     Commitments and contingent liabilities (Footnote 12)                                       Stockholders ’ equity                 Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding     —       —   Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 29,324,000 and 29,259,000 shares in 2023 and 2022, respectively     58,580       58,367   Additional paid-in capital     383,387       377,703   Retained earnings     473,531       439,898   Accumulated other comprehensive loss     ( 107,416 )     ( 115,536 ) Total stockholders ’ equity     808,082       760,432   Total liabilities and equity   $ 7,732,552     $ 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 and six months ended June 30, 2023 and 2022 (in thousands, except per share data)       Three months ended     Six months ended       June 30,     June 30,       2023     2022     2023     2022   Interest income:                                 Loans, including fees   $ 72,308     $ 50,612     $ 141,095     $ 95,355   Federal funds sold and interest bearing due from banks     1,664       1,113       3,245       1,395   Mortgage loans held for sale     77       50       118       74   Federal Home Loan Bank stock     275       102       440       156   Investment securities:                                 Taxable     8,299       6,805       16,745       11,485   Tax-exempt     440       426       887       627   Total interest income     83,063       59,108       162,530       109,092   Interest expense:                                 Deposits     17,081       1,770       30,580       2,941   Securities sold under agreements to repurchase     376       57       832       74   Federal funds purchased and other short-term borrowings     170       19       347       22   Federal Home Loan Bank advances     3,962       —       5,696       —   Subordinated debentures     545       278       1,074       311   Total interest expense     22,134       2,124       38,529       3,348   Net interest income     60,929       56,984       124,001       105,744   Provision for credit losses     2,350       ( 200 )     4,975       2,079   Net interest income after provision expense     58,579       57,184       119,026       103,665   Non-interest income:                                 Wealth management and trust services     10,146       9,495       19,673       17,738   Deposit service charges     2,201       2,061       4,350       3,924   Debit and credit card income     4,712       4,748       9,194       8,867   Treasury management fees     2,549       2,187       4,867       4,091   Mortgage banking income     1,030       1,295       2,068       2,298   Net investment product sales commissions and fees     800       731       1,554       1,338   Bank owned life insurance     559       270       1,108       536   Loss on sale of premises and equipment     ( 225 )     ( 2 )     ( 227 )     ( 28 ) Other     1,088       1,155       2,320       2,379   Total non-interest income     22,860       21,940       44,907       41,143   Non-interest expenses:                                 Compensation     22,107       22,204       44,003       40,173   Employee benefits     5,061       4,429       10,114       8,968   Net occupancy and equipment     3,514       3,663       7,413       6,688   Technology and communication     4,219       3,984       8,470       7,403   Debit and credit card processing     1,706       1,665       3,125       3,002   Marketing and business development     1,784       1,445       2,879       2,217   Postage, printing and supplies     889       825       1,763       1,558   Legal and professional     819       1,027       1,616       1,677   FDIC insurance     779       536       1,914       1,181   Amortization of investments in tax credit partnerships     324       89       647       177   Capital and deposit based taxes     607       582       1,246       1,100   Merger expenses     —       —       —       19,500   Intangible amortization     1,172       1,611       2,352       2,324   Other     2,819       2,615       5,572       5,004   Total non-interest expenses     45,800       44,675       91,114       100,972   Income before income tax expense     35,639       34,449       72,819       43,836   Income tax expense     7,975       7,547       16,107       8,992   Net income     27,664       26,902       56,712       34,844   Less income attributed to non-controlling interest     —       108       —       144   Net income available to stockholders   $ 27,664     $ 26,794     $ 56,712     $ 34,700   Net income per common share - basic   $ 0.95     $ 0.92     $ 1.94     $ 1.23   Net income per common share - diluted   $ 0.94     $ 0.91     $ 1.93     $ 1.22   Weighted average outstanding shares                                 Basic     29,223       29,131       29,200       28,186   Diluted     29,340       29,346       29,353       28,421     See accompanying notes to unaudited condensed consolidated financial statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) For the three and six months ended June 30, 2023 and 2022 (in thousands)       Three months ended     Six months ended       June 30,     June 30,       2023     2022     2023     2022   Net income   $ 27,664     $ 26,902     $ 56,712     $ 34,844   Other comprehensive income (loss):                                 Change in unrealized gain (loss) on AFS debt securities     ( 11,023 )     ( 39,151 )     7,837       ( 104,530 ) Change in fair value of derivatives used in cash flow hedge     2,417       —       2,911       —   Total other comprehensive income (loss), before income tax effect     ( 8,606 )     ( 39,151 )     10,748       ( 104,530 ) Tax effect     ( 2,133 )     ( 9,413 )     2,628       ( 25,133 ) Total other comprehensive income (loss), net of tax     ( 6,473 )     ( 29,738 )     8,120       ( 79,397 ) Comprehensive income (loss)     21,191       ( 2,836 )     64,832       ( 44,553 ) Less comprehensive income attributed to non-controlling interest     —       108       —       144   Comprehensive income (loss) available to stockholders   $ 21,191     $ ( 2,944 )   $ 64,832     $ ( 44,697 )   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 and six months ended June 30, 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                                                     Activity for three months ended June 30, 2023:                                                 Net income     —       —       —       27,664       —       27,664   Other comprehensive loss     —       —       —       —       ( 6,473 )     ( 6,473 ) Stock compensation expense     —       —       1,035       —       —       1,035   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     —       2       26       ( 39 )     —       ( 11 ) Cash dividends declared, $ 0.29 per share     —       —       —       ( 8,501 )     —       ( 8,501 ) Shares cancelled     —       ( 4 )     ( 65 )     69       —       —   Balance, June 30, 2023     29,324     $ 58,580     $ 383,387     $ 473,531     $ ( 107,416 )   $ 808,082     (continued)   7 Table of Contents                                       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                                                                                                                                       Activity for three months ended June 30, 2022:                                                                 Net income     —       —       —       26,794       —       26,794       108       26,902   Other comprehensive loss     —       —       —       —       ( 29,738 )     ( 29,738 )     —       ( 29,738 ) Stock compensation expense     —       —       1,057       —       —       1,057       —       1,057   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     26       85       1,365       ( 2,394 )     —       ( 944 )     —       ( 944 ) Cash dividends declared, $ 0.28 per share     —       —       —       ( 8,183 )     —       ( 8,183 )     —       ( 8,183 ) Shares cancelled     ( 3 )     ( 8 )     ( 99 )     109       —       2       —       2   Distributions to non-controlling interest     —       —       —       —       —       —       ( 155 )     ( 155 ) Balance, June 30, 2022     29,243     $ 58,315     $ 374,878     $ 401,275     $ ( 87,337 )   $ 747,131     $ 3,030     $ 750,161     See accompanying notes to unaudited condensed consolidated financial statements.   8 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)   For the six months ended June 30, 2023 and 2022 (in thousands)       2023     2022   Cash flows from operating activities:                 Net income   $ 56,712     $ 34,844   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     4,975       2,079   Depreciation, amortization and accretion, net     10,718       10,031   Deferred income tax expense     463       4,771   Gain on sale of mortgage loans held for sale     ( 745 )     ( 504 ) Origination of mortgage loans held for sale     ( 55,391 )     ( 79,643 ) Proceeds from sale of mortgage loans held for sale     51,673       82,275   Bank owned life insurance income     ( 1,108 )     ( 536 ) Loss on the disposal of premises and equipment     227       28   Stock compensation expense     2,187       2,048   Excess tax benefit from share-based compensation arrangements     ( 530 )     ( 1,112 ) Net change in accrued interest receivable and other assets     ( 40,833 )     ( 4,747 ) Net change in accrued interest payable and other liabilities     15,535       ( 27,776 ) Net cash provided by operating activities     43,883       21,758   Cash flows from investing activities:                 Purchases of available for sale debt securities     ( 170 )     ( 85,659 ) Proceeds from sales of acquired available for sale debt securities     —       2,111   Proceeds from maturities and paydowns of available for sale debt securities     58,501       78,409   Purchases of held to maturity debt securities     —       ( 459,183 ) Proceeds from maturities and paydowns of held to maturity debt securities     23,303       159,119   Purchases of Federal Home Loan Bank stock     ( 16,438 )     —   Net change in non-PPP loans     ( 225,628 )     ( 180,130 ) Net change in PPP loans     11,505       103,967   Purchases of premises and equipment     ( 3,472 )     ( 13,563 ) Proceeds from sale or disposal of premises and equipment     411       —   Other investment activities     ( 506 )     —   Proceeds from sales of other real estate owned     —       56   Cash from acquisition, net of cash paid     —       349,456   Net cash used in investing activities     ( 152,494 )     ( 45,417 ) Cash flows from financing activities:                 Net change in deposits     ( 182,872 )     ( 358,526 ) Net change in securities sold under agreements to repurchase and federal funds purchased     7,862       18,223   Proceeds from Federal Home Loan Bank advances     1,400,000       —   Repayments of Federal Home Loan Bank advances     ( 1,050,000 )     —   Repayment of acquired line of credit     —       ( 3,200 ) Share repurchases related to compensation plans     ( 2,380 )     ( 3,559 ) Cash disbursements to non-controlling interest     —       ( 208 ) Cash dividends paid     ( 17,036 )     ( 16,394 ) Net cash (used in) provided by financing activities     155,574       ( 363,664 ) Net change in cash and cash equivalents     46,963       ( 387,323 ) Beginning cash and cash equivalents     167,367       961,192   Ending cash and cash equivalents   $ 214,330     $ 573,869     (continued)   9 Table of Contents   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued) For the six months ended June 30,   Supplemental cash flow information:   2023     2022   Interest paid   $ 38,125     $ 2,147   Income taxes paid, net of refunds     17,010       7,989   Cash paid for operating lease liabilities     2,126       1,800                     Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 49,012     $ 6,907   Dividends payable to stockholders     183       182   Loans transferred to OREO     —       445   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.   10 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 the Company’s independent registered public accounting firm, but in the opinion of management, all adjustments necessary to present fairly the financial position and the result of operations for the interim periods have been made. All such adjustments are of a normal, recurring nature and all intercompany accounts and transactions have been eliminated.   To prepare the condensed consolidated financial statements, management must make estimates and assumptions that may require difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Actual results could differ significantly from those estimates, and the results of operations for the three and six month period ended June 30, 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.   11 Table of Contents     ( 2 ) Investment Securities   Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified as HTM securities. All other investment securities are classified as AFS securities.   AFS Debt Securities   The following table summarizes the amortized cost, unrealized gains and losses, and fair value of Bancorp’s AFS debt securities portfolio:   (in thousands)   Amortized     Unrealized           June 30, 2023   cost     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 122,927     $ -     $ ( 6,710 )   $ 116,217   Government sponsored enterprise obligations     139,479       199       ( 6,103 )     133,575   Mortgage backed securities - government agencies     829,867       22       ( 117,177 )     712,712   Obligations of states and political subdivisions     142,086       1       ( 15,307 )     126,780   Other     3,890       -       ( 450 )     3,440                                     Total available for sale debt securities   $ 1,238,249     $ 222     $ ( 145,747 )   $ 1,092,724                                     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           June 30, 2023   value     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 204,017     $ -     $ ( 8,678 )   $ 195,339   Government sponsored enterprise obligations     27,127       -       ( 2,955 )     24,172   Mortgage backed securities - government agencies     218,885       -       ( 28,147 )     190,738                                     Total held to maturity debt securities   $ 450,029     $ -     $ ( 39,780 )   $ 410,249                                     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 June 30, 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 June 30, 2023. Further, as of June 30, 2023, none of Bancorp’s HTM securities were in non-accrual or past due status.   12 Table of Contents   Debt Securities by Contractual Maturity   A summary of AFS and HTM debt securities by contractual maturity as of June 30, 2023 follows:       AFS Debt Securities     HTM Debt Securities   (in thousands)     Amortized cost     Fair value     Carrying value     Fair value                                     Due within one year   $ 37,631     $ 37,337     $ 51,134     $ 49,821   Due after one year but within five years     155,874       147,197       153,477       146,073   Due after five years but within 10 years     69,673       61,354       25,955       23,049   Due after 10 years     145,204       134,124       578       568   Mortgage backed securities - government agencies     829,867       712,712       218,885       190,738   Total   $ 1,238,249     $ 1,092,724     $ 450,029     $ 410,249     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 June 30, 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 $ 4 million and $ 2 million at June 30, 2023 and December 31, 2022, 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 $ 825 million and $ 1.1 billion were pledged at June 30, 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 June 30, 2023.   13 Table of Contents   Unrealized and Unrecognized Loss Analysis on Debt Securities   Debt securities with unrealized and unrecognized losses at June 30, 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   June 30, 2023   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ -     $ -     $ 116,217     $ ( 6,710 )   $ 116,217     $ ( 6,710 ) Government sponsored enterprise obligations     43,334       ( 107 )     74,092       ( 5,996 )     117,426       ( 6,103 ) Mortgage-backed securities - government agencies     114,246       ( 5,479 )     595,295       ( 111,698 )     709,541       ( 117,177 ) Obligations of states and political subdivisions     16,530       ( 242 )     106,563       ( 15,065 )     123,093       ( 15,307 ) Other     -       -       3,440       ( 450 )     3,440       ( 450 )                                                   Total AFS debt securities   $ 174,110     $ ( 5,828 )   $ 895,607     $ ( 139,919 )   $ 1,069,717     $ ( 145,747 )                                                   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   June 30, 2023   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S.                                                 Government obligations   $ -     $ -     $ 195,339     $ ( 8,678 )   $ 195,339     $ ( 8,678 ) Government sponsored enterprise obligations     1,502       ( 4 )     22,670       ( 2,951 )     24,172       ( 2,955 ) Mortgage-backed securities - government agencies     57       ( 3 )     190,681       ( 28,144 )     190,738       ( 28,147 )                                                   Total HTM debt securities   $ 1,559     $ ( 7 )   $ 408,690     $ ( 39,773 )   $ 410,249     $ ( 39,780 )                                                   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 )   14 Table of Contents   Applicable dates for determining when securities are in unrealized and unrecognized loss positions are June 30, 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 535 and 547 separate investment positions as of June 30, 2023 and December 31, 2022, respectively. By dollar value, approximately 98 % of the debt securities portfolio was in a loss position as of both June 30, 2023 and December 31, 2022. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at June 30, 2023 and December 31, 2022.   15 Table of Contents     ( 3 ) Loans and Allowance for Credit Losses on Loans   Composition of loans by class follows:   (in thousands)   June 30, 2023     December 31, 2022                     Commercial real estate - non-owner occupied   $ 1,477,733     $ 1,397,346   Commercial real estate - owner occupied     873,980       834,629   Total commercial real estate     2,351,713       2,231,975                     Commercial and industrial - term     788,070       765,163   Commercial and industrial - term - PPP     7,088       18,593   Commercial and industrial - lines of credit     438,484       465,813   Total commercial and industrial     1,233,642       1,249,569                     Residential real estate - owner occupied     664,870       591,515   Residential real estate - non-owner occupied     338,727       313,248   Total residential real estate     1,003,597       904,763                     Construction and land development     451,324       445,690   Home equity lines of credit     202,574       200,725   Consumer     139,602       139,461   Leases     13,967       13,322   Credits cards     22,190       20,413   Total loans (1)   $ 5,418,609     $ 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 $ 17 million at both June 30, 2023 and December  31, 2022, and was included in the condensed consolidated balance sheets.   Loans with carrying amounts of $ 2.96 billion and $ 2.77 billion were pledged to secure FHLB borrowing capacity at June 30, 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 $ 74 million and $ 79 million as of June 30, 2023 and December 31, 2022, respectively.   PCD Loans   In connection with the acquisition 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 June 30, 2023, the book balance of PCD loans acquired as a result of the CB acquisition totaled $ 56 million. Interest income recognized on loans classified as PCD totaled $ 1.1 million and $ 2.2 million for the three and six month periods ended June 30, 2023, respectively. For the three and six month periods ended June 30, 2022, interest income recognized on loans classified as PCD totaled $ 2.0 million and $ 2.9 million, respectively.   16 Table of Contents   ACL for Loans   The table below reflects activity in the ACL related to loans:   (in thousands)   Beginning     Provision for Credit Losses                     Ending   Three Months Ended June 30, 2023   Balance     on Loans     Charge-offs     Recoveries     Balance                                             Commercial real estate - non-owner occupied   $ 21,669     $ 87     $ -     $ 17     $ 21,773   Commercial real estate - owner occupied     11,429       128       -       -       11,557   Total commercial real estate     33,098       215       -       17       33,330                                             Commercial and industrial - term     13,998       851       ( 57 )     -       14,792   Commercial and industrial - lines of credit     6,025       416       -       62       6,503   Total commercial and industrial     20,023       1,267       ( 57 )     62       21,295                                             Residential real estate - owner occupied     8,205       662       ( 43 )     11       8,835   Residential real estate - non-owner occupied     4,144       24       -       1       4,169   Total residential real estate     12,349       686       ( 43 )     12       13,004                                             Construction and land development     6,735       17       -       -       6,752   Home equity lines of credit     1,618       ( 9 )     -       -       1,609   Consumer     1,186       201       ( 208 )     106       1,285   Leases     199       6       -       -       205   Credit cards     465       ( 233 )     ( 12 )     10       230   Total   $ 75,673     $ 2,150     $ ( 320 )   $ 207     $ 77,710     (in thousands)   Beginning     Provision for Credit Losses                     Ending   Six Months Ended June 30, 2023   Balance     on Loans     Charge-offs     Recoveries     Balance                                             Commercial real estate - non-owner occupied   $ 22,641     $ ( 904 )   $ -     $ 36     $ 21,773   Commercial real estate - owner occupied     10,827       730       -       -       11,557   Total commercial real estate     33,468       ( 174 )     -       36       33,330                                             Commercial and industrial - term     12,991       1,929       ( 128 )     -       14,792   Commercial and industrial - lines of credit     6,389       ( 35 )     -       149       6,503   Total commercial and industrial     19,380       1,894       ( 128 )     149       21,295                                             Residential real estate - owner occupied     6,717       2,140       ( 43 )     21       8,835   Residential real estate - non-owner occupied     3,597       570       -       2       4,169   Total residential real estate     10,314       2,710       ( 43 )     23       13,004                                             Construction and land development     7,186       ( 434 )     -       -       6,752   Home equity lines of credit     1,613       8       ( 12 )     -       1,609   Consumer     1,158       289       ( 407 )     245       1,285   Leases     201       4       -       -       205   Credit cards     211       103       ( 100 )     16       230   Total   $ 73,531     $ 4,400     $ ( 690 )   $ 469     $ 77,710     17 Table of Contents   (in thousands)   Beginning     Initial ACL on     Provision for Credit Losses                     Ending   Three Months Ended June 30, 2022   Balance     PCD Loans     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 20,620     $ -     $ 101     $ -     $ 2     $ 20,723   Commercial real estate - owner occupied     11,326       -       ( 1,464 )     ( 41 )     21       9,842   Total commercial real estate     31,946       -       ( 1,363 )     ( 41 )     23       30,565                                                     Commercial and industrial - term     11,108       -       1,174       ( 15 )     75       12,342   Commercial and industrial - lines of credit     6,508       -       ( 1,508 )     -       -       5,000   Total commercial and industrial     17,616       -       ( 334 )     ( 15 )     75       17,342                                                     Residential real estate - owner occupied     5,363       -       575       ( 7 )     57       5,988   Residential real estate - non-owner occupied     3,361       -       ( 176 )     -       5       3,190   Total residential real estate     8,724       -       399       ( 7 )     62       9,178                                                     Construction and land development     5,864       -       422       ( 72 )     -       6,214   Home equity lines of credit     1,467       -       54       -       -       1,521   Consumer     1,049       -       141       ( 235 )     158       1,113   Leases     211       -       10       -       -       221   Credit cards     190       -       ( 29 )     -       47       208   Total   $ 67,067     $ -     $ ( 700 )   $ ( 370 )   $ 365     $ 66,362     (in thousands)   Beginning     Initial ACL on Loans Purchased with Credit     Provision for Credit Losses                     Ending   Six Months Ended June 30, 2022   Balance     Deterioration     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 15,960     $ 3,508     $ 1,242     $ -     $ 13     $ 20,723   Commercial real estate - owner occupied     9,595       2,121       ( 1,876 )     ( 41 )     43       9,842   Total commercial real estate     25,555       5,629       ( 634 )     ( 41 )     56       30,565                                                     Commercial and industrial - term     8,577       1,358       1,741       ( 128 )     794       12,342   Commercial and industrial - lines of credit     4,802       1,874       ( 1,640 )     ( 36 )     -       5,000   Total commercial and industrial     13,379       3,232       101       ( 164 )     794       17,342                                                     Residential real estate - owner occupied     4,316       590       1,035       ( 13 )     60       5,988   Residential real estate - non-owner occupied     3,677       -       ( 495 )     -       8       3,190   Total residential real estate     7,993       590       540       ( 13 )     68       9,178                                                     Construction and land development     4,789       419       1,078       ( 72 )     -       6,214   Home equity lines of credit     1,044       2       475       -       -       1,521   Consumer     772       78       403       ( 489 )     349       1,113   Leases     204       -       17       -       -       221   Credit cards     162       -       ( 1 )     -       47       208   Total   $ 53,898     $ 9,950     $ 1,979     $ ( 779 )   $ 1,314     $ 66,362     18 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   June 30, 2023   Recorded ACL     Non-accrual     Accruing Interest                             Commercial real estate - non-owner occupied   $ —     $ 7,179     $ 160   Commercial real estate - owner occupied     —       1,347       —   Total commercial real estate     —       8,526       160                             Commercial and industrial - term     302       5,323       156   Commercial and industrial - PPP     —       —       —   Commercial and industrial - lines of credit     —       57       114   Total commercial and industrial     302       5,380       270                             Residential real estate - owner occupied     245       2,451       —   Residential real estate - non-owner occupied     —       398       —   Total residential real estate     245       2,849       —                             Construction and land development     —       —       —   Home equity lines of credit     —       204       —   Consumer     —       396       —   Leases     —       —       —   Credit cards     —       9       7   Total   $ 547     $ 17,364     $ 437         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     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 reflected in the non-accrual column.   19 Table of Contents   For the three and six month periods ended June 30, 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.   For the three and six month periods ended June 30, 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)           Accounts Receivable /                     ACL   June 30, 2023   Real Estate     Equipment     Other     Total     Allocation                                             Commercial real estate - non-owner occupied   $ 14,094     $ -     $ -     $ 14,094     $ 2,081   Commercial real estate - owner occupied     3,174       -       -       3,174       842   Total commercial real estate     17,268       -       -       17,268       2,923                                             Commercial and industrial - term     4,405       306       459       5,170       1,571   Commercial and industrial - lines of credit     2,734       159       -       2,893       750   Total commercial and industrial     7,139       465       459       8,063       2,321                                             Residential real estate - owner occupied     2,996       -       -       2,996       214   Residential real estate - non-owner occupied     588       -       -       588       116   Total residential real estate     3,584       -       -       3,584       330                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     205       -       -       205       -   Consumer     -       -       407       407       20   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 28,196     $ 465     $ 866     $ 29,527     $ 5,594     (in thousands)           Accounts Receivable /                     ACL   December 31, 2022   Real Estate     Equipment     Other     Total     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     20 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   June 30, 2023   Current     Past Due     Past Due     days Past Due     Due Loans     Loans                                                     Commercial real estate - non-owner occupied   $ 1,476,525     $ 565     $ -     $ 643     $ 1,208     $ 1,477,733   Commercial real estate - owner occupied     873,504       156       —       320       476       873,980   Total commercial real estate     2,350,029       721       —       963       1,684       2,351,713                                                     Commercial and industrial - term     786,472       594       30       974       1,598       788,070   Commercial and industrial - term - PPP     7,088       —       —       —       —       7,088   Commercial and industrial - lines of credit     437,885       418       10       171       599       438,484   Total commercial and industrial     1,231,445       1,012       40       1,145       2,197       1,233,642                                                     Residential real estate - owner occupied     661,389       1,917       629       935       3,481       664,870   Residential real estate - non-owner occupied     338,383       92       —       252       344       338,727   Total residential real estate     999,772       2,009       629       1,187       3,825       1,003,597                                                     Construction and land development     451,261       63       —       —       63       451,324   Home equity lines of credit     202,206       129       85       154       368       202,574   Consumer     138,962       292       37       311       640       139,602   Leases     13,967       —       —       —       —       13,967   Credit cards     22,177       4       2       7       13       22,190   Total   $ 5,409,819     $ 4,230     $ 793     $ 3,767     $ 8,790     $ 5,418,609     (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     21 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.   22 Table of Contents   As of June 30, 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           June 30, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 148,105     $ 347,477     $ 377,626     $ 245,143     $ 121,333     $ 178,360     $ 20,193     $ 1,438,237   OAEM     78       -       2,918       -       3,395       1,501       -       7,892   Substandard     -       1,381       1,008       3,663       18,052       224       97       24,425   Substandard non-performing     6,355       -       -       -       77       747       -       7,179   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 154,538     $ 348,858     $ 381,552     $ 248,806     $ 142,857     $ 180,832     $ 20,290     $ 1,477,733   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 82,250     $ 173,810     $ 203,710     $ 180,082     $ 96,535     $ 106,908     $ 14,209     $ 857,504   OAEM     -       2,884       608       5,246       928       786       -       10,452   Substandard     -       1,313       1,130       -       669       1,565       -       4,677   Substandard non-performing     -       380       817       76       -       74       -       1,347   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 82,250     $ 178,387     $ 206,265     $ 185,404     $ 98,132     $ 109,333     $ 14,209     $ 873,980   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 199,784     $ 261,664     $ 188,314     $ 67,502     $ 32,095     $ 28,909     $ -     $ 778,268   OAEM     -       801       2,691       -       194       184       -       3,870   Substandard     88       38       -       -       157       326       -       609   Substandard non-performing     4,206       494       36       513       74       -       -       5,323   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 204,078     $ 262,997     $ 191,041     $ 68,015     $ 32,520     $ 29,419     $ -     $ 788,070   Current period gross charge offs   $ ( 37 )   $ -     $ ( 6 )   $ ( 57 )   $ -     $ ( 28 )   $ -     $ ( 128 )                                                                   Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ -     $ -     $ 4,703     $ 2,385     $ -     $ -     $ -     $ 7,088   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ -     $ -     $ 4,703     $ 2,385     $ -     $ -     $ -     $ 7,088   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     (continued)   23 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           June 30, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 18,407     $ 34,839     $ 4,082     $ 694     $ 10,010     $ 2,223     $ 347,355     $ 417,610   OAEM     -       -       -       -       -       -       15,498       15,498   Substandard     -       669       -       855       -       -       3,795       5,319   Substandard non-performing     -       -       -       -       -       -       57       57   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 18,407     $ 35,508     $ 4,082     $ 1,549     $ 10,010     $ 2,223     $ 366,705     $ 438,484   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 102,646     $ 183,469     $ 183,119     $ 91,258     $ 24,733     $ 76,606     $ -     $ 661,831   OAEM     -       -       93       -       61       -       -       154   Substandard     -       16       -       9       -       409       -       434   Substandard non-performing     178       356       169       207       56       1,485       -       2,451   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 102,824     $ 183,841     $ 183,381     $ 91,474     $ 24,850     $ 78,500     $ -     $ 664,870   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ ( 43 )   $ -     $ ( 43 )                                                                   Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 45,316     $ 91,012     $ 81,151     $ 52,159     $ 32,246     $ 35,566     $ -     $ 337,450   OAEM     -       13       -       -       262       283       -       558   Substandard     -       -       -       -       -       321       -       321   Substandard non-performing     -       256       20       -       47       75       -       398   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 45,316     $ 91,281     $ 81,171     $ 52,159     $ 32,555     $ 36,245     $ -     $ 338,727   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 48,898     $ 253,949     $ 68,273     $ 51,232     $ 501     $ 3,902     $ 19,396     $ 446,151   OAEM     -       -       -       -       -       -       999       999   Substandard     4,174       -       -       -       -       -       -       4,174   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 53,072     $ 253,949     $ 68,273     $ 51,232     $ 501     $ 3,902     $ 20,395     $ 451,324   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 202,332     $ 202,332   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       38       38   Substandard non-performing     -       -       -       -       -       -       204       204   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 202,574     $ 202,574   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ ( 12 )   $ ( 12 )   (continued)   24 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           June 30, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 18,590     $ 22,799     $ 13,229     $ 4,055     $ 3,084     $ 2,601     $ 74,848     $ 139,206   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       65       99       27       37       35       133       396   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 18,590     $ 22,864     $ 13,328     $ 4,082     $ 3,121     $ 2,636     $ 74,981     $ 139,602   Current period gross charge offs   $ ( 315 )   $ ( 11 )   $ ( 7 )   $ ( 34 )   $ ( 17 )   $ ( 21 )   $ ( 2 )   $ ( 407 )                                                                   Leases                                                                 Risk rating                                                                 Pass   $ 3,929     $ 3,815     $ 2,149     $ 379     $ 393     $ 3,302     $ -     $ 13,967   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 3,929     $ 3,815     $ 2,149     $ 379     $ 393     $ 3,302     $ -     $ 13,967   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 22,181     $ 22,181   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       9       9   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 22,190     $ 22,190   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ ( 100 )   $ ( 100 )                                                                   Total loans                                                                 Risk rating                                                                 Pass   $ 667,925     $ 1,372,834     $ 1,126,356     $ 694,889     $ 320,930     $ 438,377     $ 700,514     $ 5,321,825   OAEM     78       3,698       6,310       5,246       4,840       2,754       16,497       39,423   Substandard     4,262       3,417       2,138       4,527       18,878       2,845       3,930       39,997   Substandard non-performing     10,739       1,551       1,141       823       291       2,416       403       17,364   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 683,004     $ 1,381,500     $ 1,135,945     $ 705,485     $ 344,939     $ 446,392     $ 721,344     $ 5,418,609   Current period gross charge offs   $ ( 352 )   $ ( 11 )   $ ( 13 )   $ ( 91 )   $ ( 17 )   $ ( 92 )   $ ( 114 )   $ ( 690 )   25 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)   26 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)   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                                                                     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:       June 30,     December 31,   (in thousands)   2023     2022                     Credit cards                 Performing   $ 22,174     $ 20,413   Non-performing     16       —   Total credit cards   $ 22,190     $ 20,413     28 Table of Contents   Bancorp had $ 252,000 and $ 317,000 , respectively, in residential real estate loans for which formal foreclosure proceedings were in process at June 30, 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 and six months ended June 30, 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:       June 30, 2022               Specific     Additional               reserve     commitment   (in thousands)   Balance     allocation     to lend                             Commercial real estate - owner occupied   $ 917     $ 202     $ —   Commercial & industrial - term     —       —       —   Total TDRs   $ 917     $ 202     $ —     During the three and six month periods ended June 30, 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.   29 Table of Contents     ( 4 ) Goodwill   As of June 30, 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.   The composition of goodwill is presented by respective acquisition below:       June 30,     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     Six months ended       June 30,     June 30,   (in thousands)   2023     2022     2023     2022   Balance at beginning of period   $ 194,074     $ 202,524     $ 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     $ 194,074     $ 202,524     30 Table of Contents     ( 5 ) Core Deposit and Customer List Intangible Assets   Bancorp recorded CDI assets of $ 13 million, $ 4 million, $ 2 million and $ 3 million in association with the acquisitions of CB in 2022, KB in 2021, KSB in 2019 and TBOC in 2013, respectively.   Changes in the net carrying amount of CDIs follows:     Three months ended   Six months ended     June 30,   June 30,   (in thousands) 2023   2022   2023   2022   Balance at beginning of period $ 14,196   $ 17,826   $ 14,958   $ 5,596   Core deposit intangible acquired   —     —     —     12,724   Provisional period adjustments   —     —     —     —   Amortization   ( 754 )   ( 956 )   ( 1,516 )   ( 1,450 ) Balance at end of period $ 13,442   $ 16,870   $ 13,442   $ 16,870     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.   Changes in the net carrying amount of CLIs follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2023     2022     2023     2022   Balance at beginning of period   $ 9,614     $ 14,142     $ 10,032     $ -   Customer list intangibles acquired     —       —       —       14,360   Provisional period adjustments     —       —       —       —   Disposition of LFA     —       —       —       —   Amortization     ( 418 )     ( 655 )     ( 836 )     ( 873 ) Balance at end of period   $ 9,196     $ 13,487     $ 9,196     $ 13,487     Future CDI and CLI amortization expense is estimated as follows:   (in thousands)   CDI     CLI   Remainder of 2023   $ 1,499     $ 836   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   $ 13,442     $ 9,196     31 Table of Contents     ( 6 ) Other Assets   A summary of the major components of other assets follows:       June 30,     December 31,   (in thousands)   2023     2022                     Cash surrender value of life insurance other than BOLI   $ 16,940     $ 15,496   Net deferred tax asset     51,054       54,145   Investments in tax credit partnerships     55,530       13,969   Swap assets     12,628       10,727   Prepaid assets     4,073       5,721   Trust fees receivable     3,548       3,354   Mortgage servicing rights     14,116       15,219   Other real estate owned     677       677   Other     14,518       15,680   Total other assets   $ 173,084     $ 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. ”   32 Table of Contents     ( 7 ) Income Taxes   Components of income tax expense from operations follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2023     2022     2023     2022   Current income tax expense:                                 Federal   $ 8,086     $ 3,393     $ 13,280     $ 3,607   State     1,687       614       2,364       614   Total current income tax expense     9,773       4,007       15,644       4,221                                     Deferred income tax expense:                                 Federal     ( 1,641 )     2,622       ( 224 )     3,464   State     ( 157 )     918       687       1,307   Total deferred income tax expense     ( 1,798 )     3,540       463       4,771   Change in valuation allowance     -       -       -       -   Total income tax expense   $ 7,975     $ 7,547     $ 16,107     $ 8,992     An analysis of the difference between the statutory and ETRs from operations follows:       Three months ended     Six months ended       June 30,     June 30,       2023     2022     2023     2022   U.S. federal statutory income tax rate     21.0 %     21.0 %     21.0 %     21.0 % State income taxes, net of federal benefit     3.6       3.5       3.5       3.5   Excess tax benefit from stock-based compensation arrangements     0.2       ( 1.6 )     ( 0.5 )     ( 2.4 ) Change in cash surrender value of life insurance     ( 0.6 )     0.9       ( 0.7 )     1.1   Tax credits     ( 1.2 )     ( 0.5 )     ( 0.4 )     ( 0.7 ) Tax exempt interest income     ( 0.5 )     ( 0.6 )     ( 0.5 )     ( 0.8 ) Non-deductible merger expenses     -       0.1       -       0.3   Insurance captive     ( 0.3 )     ( 0.2 )     ( 0.3 )     ( 0.4 ) Other, net     0.2       ( 0.7 )     -       ( 1.1 ) Effective tax rate     22.4 %     21.9 %     22.1 %     20.5 %   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 June 30, 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.   33 Table of Contents     ( 8 ) Deposits   The composition of deposits follows:   (in thousands)   June 30, 2023     December 31, 2022                     Non-interest bearing demand deposits   $ 1,766,132     $ 1,950,198   Interest bearing deposits:                 Interest bearing demand     2,224,665       2,308,960   Savings     482,701       535,903   Money market     1,003,138       1,124,100                     Time deposits of $250 thousand or more     174,585       97,638   Other time deposits     557,159       374,453   Total time deposits (1)     731,744       472,091                     Total interest bearing deposits     4,442,248       4,441,054   Total deposits   $ 6,208,380     $ 6,391,252     ( 1 ) Includes $ 2.3 million and $ 599,000 in brokered deposits as of June 30, 2023 and December 31, 2022, respectively.     ( 9 ) Securities Sold Under Agreements to Repurchase   SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At June 30, 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)   June 30, 2023     December 31, 2022   Outstanding balance at end of period   $ 138,347     $ 133,342   Weighted average interest rate at end of period     1.72 %     1.64 %         Three months ended     Six months ended       June 30,     June 30,   (dollars in thousands)   2023     2022     2023     2022                                     Average outstanding balance during the period   $ 113,051     $ 140,169     $ 117,525     $ 115,761   Average interest rate during the period     1.33 %     0.16 %     1.43 %     0.13 % Maximum outstanding at any month end during the period   $ 138,347     $ 161,512     $ 138,347     $ 161,512     34 Table of Contents     ( 10 ) Subordinated Debentures   As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100 % successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier I Capital. The subordinated notes and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. Bancorp chose not to redeem the subordinated notes on July 1, 2023 and carried the notes at the costs noted below at June 30, 2023:   (dollars in thousands)   Face Value     Carrying Value   Origination Date   Maturity Date   Interest Rate                             Commonwealth Statutory Trust III   $ 3,093     $ 3,062   12/19/2003   1/7/2034   LIBOR + 2.85% Commonwealth Statutory Trust IV     12,372       12,250   12/15/2005   12/30/2035   LIBOR + 1.35% Commonwealth Statutory Trust V     11,341       11,229   6/28/2007   9/15/2037   LIBOR + 1.40% Total   $ 26,806     $ 26,541               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.     ( 11 ) FHLB Advances and Other Borrowings   FHLB advances outstanding at June 30, 2023 consist of a $ 300 million cash management advance with an overnight maturity and a $ 100 million three -month advance that matures in August 2023. FHLB advances outstanding at December 31, 2022 consisted entirely of a $ 50 million cash management advance that matured in early January 2023.   For the six months ended June 30, 2023, gross proceeds and repayments related to FHLB advances totaled $ 1.4 billion and $ 1.1 billion, respectively. Net proceeds and repayments related to FHLB advances (excluding those with maturities of 90 days or less) totaled $ 500 million and $ 150 million for the six months ended June 30, 2023, repectively. There was no FHLB advance activity for the six months ended June  30, 2022.   (dollars in thousands)   June 30, 2023     December 31, 2022                     Outstanding balance at end of period   $ 400,000     $ 50,000   Weighted average interest rate at end of period     5.15 %     4.37 %       Three months ended     Six months ended       June 30,     June 30,   (dollars in thousands)   2023     2022     2023     2022                                     Average outstanding balance during the period   $ 348,352     $ -     $ 256,215     $ -   Average interest rate during the period     4.56 %     - %     4.48 %     - % Maximum outstanding at any month end during the period   $ 400,000     $ -     $ 400,000     $ -     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 June 30, 2023 and December 31, 2022, the amount of available credit from the FHLB totaled $ 1.08 billion and $ 1.36 billion, respectively.   Bancorp also had unsecured available FFP lines with correspondent banks totaling $ 80 million at both June 30, 2023 and December 31, 2022, respectively.   35 Table of Contents     ( 12 ) Commitments and Contingent Liabilities   As of June 30, 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)   June 30, 2023     December 31, 2022   Commercial and industrial   $ 867,447     $ 784,429   Construction and land development     510,785       449,028   Home equity     371,567       358,610   Credit cards     69,850       64,231   Overdrafts     55,343       57,193   Letters of credit     33,675       34,704   Other     94,054       93,419   Future loan commitments     292,585       221,973   Total off balance sheet commitments to extend credit   $ 2,295,306     $ 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 June 30, 2023 and December 31, 2022, Bancorp had accrued $ 5.1 million and $ 4.5 million, respectively, in other liabilities for its estimate of credit losses for off balance sheet credit exposures. Provision for credit loss expense for off balance sheet credit exposures of $ 200,000 and $ 575,000 was recorded for the three and six months ended June 30, 2023, driven by a decline in C&I utilization and increased availability stemming from the addition of new lines of credit.   Provision for credit loss expense for off balance sheet credit exposures (excluding acquisition-related activity) of $ 500,000 and $ 100,000 was recorded for the three and six months ended June 30, 2022. The expense recorded for the three months ended June 30, 2022 was driven largely by the addition of new lines of credit within the C&D portfolio, off setting the $ 400,000 of negative provision recorded during the First quarter of 2022. The ACL for off balance sheet credit exposures was also increased $ 500,000 during the First quarter of 2022 as a result of the CB acquisition with the offset recorded to goodwill (as opposed to provision expense).   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 June 30, 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 June 30, 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.   36 Table of Contents     ( 13 ) Assets and Liabilities Measured and Reported at Fair Value   Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:   Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.   Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.   Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.   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   June 30, 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   $ 116,217     $ —     $ —     $ 116,217   Government sponsored enterprise obligations     —       133,575       —       133,575   Mortgage backed securities - government agencies     —       712,712       —       712,712   Obligations of states and political subdivisions     —       126,780       —       126,780   Other     —       3,440       —       3,440                                     Total available for sale debt securities     116,217       976,507       —       1,092,724                                     Mortgage loans held for sale     —       7,069       —       7,069   Rate lock loan commitments     —       364       —       364   Mandatory forward contracts     —       81       —       81   Interest rate swap assets     —       12,628       —       9,717   Total assets   $ 116,217     $ 996,649     $ —     $ 1,109,955                                     Liabilities:                                 Interest rate swap liabilities   $ —     $ 9,726     $ —     $ 9,726     37 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.   38 Table of Contents   Carrying values of assets measured at fair value on a non-recurring basis follows:                                       Losses recorded                                       Three months     Six months       Fair Value Measurements Using:     Total     ended     ended   June 30, 2023 (in thousands)   Level 1     Level 2     Level 3     Fair Value     June 30, 2023     June 30, 2023                                                     Collateral dependent loans   $ —     $ —     $ 10,380     $ 10,380     $ —     $ —   Other real estate owned     —       —       —       —       —       —                                         Losses recorded                                       Three months     Six months       Fair Value Measurements Using:     Total     ended     ended   December 31, 2022 (in thousands)   Level 1     Level 2     Level 3     Fair Value     June 30, 2022     June 30, 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 June 30, 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.       June 30, 2023   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 10,380   Appraisal   Appraisal discounts     23.2 % 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     39 Table of Contents     ( 14 ) Disclosure of Financial Instruments Not Reported at Fair Value   GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The estimated fair values of Bancorp’s financial instruments not measured at fair value on a recurring or non-recurring basis follows:       Carrying             Fair Value Measurements Using:   June 30, 2023 (in thousands)   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 214,330     $ 214,330     $ 214,330     $ —     $ —   HTM debt securities     450,029       410,249       —       410,249       —   Federal Home Loan Bank stock     27,366       27,366       —       27,366       —   Loans, net     5,340,899       5,077,515       —       —       5,077,515   Accrued interest receivable     22,547       22,547       22,547       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,766,132     $ 1,766,132     $ 1,766,132     $ —     $ —   Transaction deposits     3,710,504       3,710,504       —       3,710,504       —   Time deposits     731,744       720,720       —       720,720       —   Securities sold under agreement to repurchase     138,347       138,347       —       138,347       —   Federal funds purchased     11,646       11,646       —       11,646       —   Subordinated debentures     26,541       26,235       —       26,235       —   FHLB advances     400,000       398,846       —       398,846       —   Accrued interest payable     1,064       1,064       1,064       —       —         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.   40 Table of Contents     ( 15 ) Mortgage Banking Activities   Mortgage banking activities primarily include residential mortgage originations and servicing. Mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.   Activity for mortgage loans held for sale, at fair value, was as follows:       Three months ended     Six month ended       June 30,     June 30,   (in thousands)   2023     2022     2023     2022   Balance, beginning of period:   $ 6,397     $ 9,323     $ 2,606     $ 8,614   Origination of mortgage loans held for sale     30,709       43,814       55,391       79,643   Loans held for sale acquired     —       —       —       3,559   Proceeds from the sale of mortgage loans held for sale     ( 30,567 )     ( 43,504 )     ( 51,673 )     ( 82,275 ) Net gain realized on sale of mortgage loans held for sale     530       412       745       504   Balance, end of period   $ 7,069     $ 10,045     $ 7,069     $ 10,045     The following table represents the components of Mortgage banking income:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2023     2022     2023     2022                                     Net gain realized on sale of mortgage loans held for sale   $ 530     $ 412     $ 745     $ 504   Net change in fair value recognized on loans held for sale     ( 34 )     70       17       43   Net change in fair value recognized on rate lock loan commitments     ( 104 )     797       226       1,189   Net change in fair value recognized on forward contracts     173       ( 814 )     127       ( 635 ) Net gain recognized     565       465       1,115       1,101                                     Net loan servicing income     1,120       1,215       2,307       1,917   Amortization of mortgage servicing rights     ( 762 )     ( 856 )     ( 1,523 )     ( 1,337 ) Change in mortgage servicing rights valuation allowance     -       -       -       -   Net servicing income recognized     358       359       784       580                                     Other mortgage banking income     107       471       169       617   Total mortgage banking income   $ 1,030     $ 1,295     $ 2,068     $ 2,298     Activity for capitalized mortgage servicing rights was as follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2023     2022     2023     2022   Balance at beginning of period   $ 14,623     $ 16,877     $ 15,219     $ 4,528   MSRs acquired     —       —       —       12,676   Additions for mortgage loans sold     255       483       420       637   Amortization     ( 762 )     ( 856 )     ( 1,523 )     ( 1,337 ) Impairment     —       —       —       —                                     Balance at end of period   $ 14,116     $ 16,504     $ 14,116     $ 16,504     41 Table of Contents   The estimated fair value of MSRs at both June 30, 2023 and December 31, 2022 was $ 26 million. 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 June 30, 2023 and December 31, 2022, as fair value exceeded carrying value.   Total outstanding principal balances of loans serviced for others were $ 2.00 billion and $ 2.08 billion at June 30, 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.   Bancorp is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.   The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives:       June 30, 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   $ 6,995     $ 7,069     $ 2,548     $ 2,606                                     Included in other assets:                                 Rate lock loan commitments   $ 13,768     $ 364     $ 5,599     $ 137   Mandatory forward contracts     15,500       81       6,581       47     42 Table of Contents     ( 16 ) Accumulated Other Comprehensive Income (Loss)   The following table illustrates activity within the balances of AOCI by component:       Net unrealized     Net unrealized     Minimum               gains (losses)     gains     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Three months ended June 30, 2023                                 Balance, beginning of period   $ ( 101,431 )   $ 376     $ 112     $ ( 100,943 ) Net current period other comprehensive income (loss)     ( 8,310 )     1,837       -       ( 6,473 ) Balance, end of period   $ ( 109,741 )   $ 2,213     $ 112     $ ( 107,416 )                                   Three months ended June 30, 2022                                 Balance, beginning of period   $ ( 57,316 )   $ -     $ ( 283 )   $ ( 57,599 ) Net current period other comprehensive loss     ( 29,738 )     -       -       ( 29,738 ) Balance, end of period   $ ( 87,054 )   $ -     $ ( 283 )   $ ( 87,337 )       Net unrealized     Net unrealized     Minimum               gains (losses)     gains     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Six months ended June 30, 2023                                 Balance, beginning of period   $ ( 115,648 )   $ -     $ 112     $ ( 115,536 ) Net current period other comprehensive income     5,907       2,213       -       8,120   Balance, end of period   $ ( 109,741 )   $ 2,213     $ 112     $ ( 107,416 )                                   Six months ended June 30, 2022                                 Balance, beginning of period   $ ( 7,657 )   $ -     $ ( 283 )   $ ( 7,940 ) Net current period other comprehensive loss     ( 79,397 )     -       -       ( 79,397 ) Balance, end of period   $ ( 87,054 )   $ -     $ ( 283 )   $ ( 87,337 )     ( 17 ) Preferred Stock   Bancorp has one class of preferred stock ( no par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of the class or any series within the class will be determined by the Board of Directors prior to any issuance. None of this stock has been issued to date.   43 Table of Contents     ( 18 ) Net Income Per Share   The following table reflects net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:       Three months ended     Six months ended       June 30,     June 30,   (in thousands, except per share data)   2023     2022     2023     2022   Net income available to stockholders   $ 27,664     $ 26,794     $ 56,712     $ 34,700                                     Weighted average shares outstanding - basic     29,223       29,131       29,200       28,186   Dilutive securities     117       215       153       235   Weighted average shares outstanding- diluted     29,340       29,346       29,353       28,421                                     Net income per share - basic   $ 0.95     $ 0.92     $ 1.94     $ 1.23   Net income per share - diluted     0.94       0.91       1.93       1.22     Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:       Three months ended     Six months ended   (shares in thousands)   June 30,     June 30,       2023     2022     2023     2022   Antidilutive SARs     94       61       94       61     44 Table of Contents     ( 19 ) Stock-Based Compensation   The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.   At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. In 2018, shareholders approved an additional 500,000 shares for issuance under the plan. As of March 31, 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 six months of 2023 and 2022, respectively, for the purchase of shares upon the vesting of RSUs.   45 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 June 30, 2023   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 105     $ 394     $ 133     $ 403     $ 1,035   Deferred tax benefit     ( 22 )     ( 82 )     ( 28 )     ( 85 )     ( 217 ) Total net expense   $ 83     $ 312     $ 105     $ 318     $ 818         Three months ended June 30, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 94     $ 350     $ 87     $ 526     $ 1,057   Deferred tax benefit     ( 19 )     ( 74 )     ( 18 )     ( 111 )     ( 222 ) Total net expense   $ 75     $ 276     $ 69     $ 415     $ 835         Six months ended June 30, 2023   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 205     $ 806     $ 265     $ 911     $ 2,187   Deferred tax benefit     ( 43 )     ( 169 )     ( 56 )     ( 192 )     ( 460 ) Total net expense   $ 162     $ 637     $ 209     $ 719     $ 1,727         Six months ended June 30, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 187     $ 682     $ 172     $ 1,007     $ 2,048   Deferred tax benefit     ( 39 )     ( 144 )     ( 36 )     ( 212 )     ( 431 ) Total net expense   $ 148     $ 538     $ 136     $ 795     $ 1,617     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   $ 197     $ 798     $ 250     $ 803     $ 2,048   2024     307       1,389       3       908       2,607   2025     248       1,167       —       485       1,900   2026     190       863       —       —       1,053   2027     111       507       —       —       618   2028     12       42       —       —       54   Total estimated expense   $ 1,065     $ 4,766     $ 253     $ 2,196     $ 8,280     46 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, June 30, 2023     464     $19.37 - $74.92     $ 37.17     $ 8,516     $ 6.69       5.0                                                       Vested and exercisable     348     $19.37 - $54.91     $ 32.97     $ 9,029     $ 5.36       4.0   Unvested     116     35.90 -  74.92       49.80       ( 513 )     10.70       3.6   Outstanding, June 30, 2023     464     $19.37 - $74.92     $ 37.17     $ 8,516     $ 6.69       5.0                                                       Vested in the current year     41     $35.90 - $54.91     $ 41.65     $ 153     $ 7.61             ( 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     ( 32 )     43.88   Shares forfeited     ( 2 )     51.79   Unvested at June 30, 2023     100     $ 54.18     47 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       36,349   2023     3       54.33       26,804     48 Table of Contents     ( 20 ) Derivative Financial Instruments   Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.   Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of non-performance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, collateral and monitoring procedures, and does not expect any counterparties to fail their obligations.   Bancorp had outstanding undesignated interest rate swap contracts as follows:       Receiving     Paying       June 30,     December 31,     June 30,     December 31,   (dollars in thousands)   2023     2022     2023     2022                                     Notional amount   $ 113,619     $ 132,831     $ 113,619     $ 132,831   Weighted average maturity (years)     6.5       7.1       6.5       7.1   Fair value   $ 9,717     $ 10,727     $ 9,726     $ 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     June 30,   Notional Amount   Maturity Date   Receive (variable) index   swap rate     2023   $ 100,000,000   2/6/2028   USD SOFR     3.27 %   $ 2,911     49 Table of Contents     ( 21 ) Regulatory Matters   Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.   Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized, a bank must have a minimum 6.5 % Common Equity Tier 1 Risk-Based Capital ratio, 8.0 % Tier 1 Risk-Based Capital ratio, 10.0 % Total Risk-Based Capital ratio and 5.0 % Tier 1 Leverage ratio.   Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5 % capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At June 30, 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 June 30, 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   June 30, 2023   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 810,283       12.78 %   $ 507,231       8.00 %   NA     NA   Bank     785,543       12.43       505,231       8.00     $ 631,914       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     710,237       11.20       285,318       4.50     NA     NA   Bank     711,497       11.26       284,361       4.50       410,744       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     736,237       11.61       380,424       6.00     NA     NA   Bank     711,497       11.26       379,148       6.00       505,531       8.00                                                     Leverage                                                 Consolidated     736,237       9.83       299,726       4.00     NA     NA   Bank     711,497       9.51       299,269       4.00       374,087       5.00     50 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.   51 Table of Contents     ( 22 ) Segments   Bancorp’s principal activities include commercial banking and WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage banking and investment products sales activity. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax-exempt activity. All tax-exempt activity and provision have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.   The majority of the net assets of Bancorp are involved in the commercial banking segment. As of June 30, 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 June 30, 2023     Three months ended June 30, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 60,796     $ 133     $ 60,929     $ 56,888     $ 96     $ 56,984   Provision for credit losses     2,350       —       2,350       ( 200 )     —       ( 200 ) Wealth management and trust services     —       10,146       10,146       —       9,495       9,495   All other non-interest income     12,714       —       12,714       12,445       —       12,445   Non-interest expenses     39,877       5,923       45,800       38,876       5,799       44,675   Income before income tax expense     31,283       4,356       35,639       30,657       3,792       34,449   Income tax expense     7,030       945       7,975       6,724       823       7,547   Net income     24,253       3,411       27,664       23,933       2,969       26,902   Less net income attributed to NCI     —       —       —       108       —       108   Net income available to stockholders   $ 24,253     $ 3,411     $ 27,664     $ 23,825     $ 2,969     $ 26,794                                                     Segment assets   $ 7,696,386     $ 36,166     $ 7,732,552     $ 7,550,846     $ 32,259     $ 7,583,105         Six months ended June 30, 2023     Six months ended June 30, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 123,740     $ 261     $ 124,001     $ 105,541     $ 203     $ 105,744   Provision for credit losses     4,975       —       4,975       2,079       —       2,079   Wealth management and trust services     —       19,673       19,673       —       17,738       17,738   All other non-interest income     25,234       —       25,234       23,405       —       23,405   Non-interest expenses     79,477       11,637       91,114       90,566       10,406       100,972   Income before income tax expense     64,522       8,297       72,819       36,301       7,535       43,836   Income tax expense     14,307       1,800       16,107       7,357       1,635       8,992   Net income     50,215       6,497       56,712       28,944       5,900       34,844   Less net income attributed to NCI     —       —       —       144       —       144   Net income available to stockholders   $ 50,215     $ 6,497     $ 56,712     $ 28,800     $ 5,900     $ 34,700                                                     Segment assets   $ 7,696,386     $ 36,166     $ 7,732,552     $ 7,550,846     $ 32,259     $ 7,583,105     52 Table of Contents     ( 23 ) Revenue from Contracts with Customers   All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:       Three months ended June 30, 2023     Three months ended June 30, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 10,146     $ 10,146     $ —     $ 9,495     $ 9,495   Deposit service charges     2,201       —       2,201       2,061       —       2,061   Debit and credit card income     4,712       —       4,712       4,748       —       4,748   Treasury management fees     2,549       —       2,549       2,187       —       2,187   Mortgage banking income (1)     1,030       —       1,030       1,295       —       1,295   Net investment product sales commissions and fees     800       —       800       731       —       731   Bank owned life insurance (1)     559       —       559       270       —       270   Gain (loss) on sale of premises and equipment (1)     ( 225 )     —       ( 225 )     ( 2 )     —       ( 2 ) Other (2)     1,088       —       1,088       1,155       —       1,155   Total non-interest income   $ 12,714     $ 10,146     $ 22,860     $ 12,445     $ 9,495     $ 21,940         Six months ended June 30, 2023     Six months ended June 30, 2022   (Dollars in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and                                                 trust services   $ —     $ 19,673     $ 19,673     $ —     $ 17,738     $ 17,738   Deposit service charges     4,350       —       4,350       3,924       —       3,924   Debit and credit card income     9,194       —       9,194       8,867       —       8,867   Treasury management fees     4,867       —       4,867       4,091       —       4,091   Mortgage banking income (1)     2,068       —       2,068       2,298       —       2,298   Net investment product sales commissions and fees     1,554       —       1,554       1,338       —       1,338   Bank owned life insurance (1)     1,108       —       1,108       536       —       536   Gain (loss) on sale of premises and equipment (1)     ( 227 )     —       ( 227 )     ( 28 )     —       ( 28 ) Other(2)     2,320       —       2,320       2,379       —       2,379   Total non-interest income   $ 25,234     $ 19,673     $ 44,907     $ 23,405     $ 17,738     $ 41,143     ( 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.   53 Table of Contents   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 $ 3.6 million and $ 3.4 million at June 30, 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 $ 438,000 and $ 395,000 for the six month periods ended June 30, 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 June 30, 2023.   54 Table of Contents     ( 24 ) Leases   Bancorp has operating leases for various locations with terms ranging from approximately one year to approximately 17 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)   June 30, 2023     December 31, 2022                     Balance Sheet                 Operating lease right-of-use asset   $ 18,120     $ 19,694   Operating lease liability     19,399       21,008                     Weighted average remaining lease term (years)     8.7       9.0   Weighted average discount rate     2.61 %     2.57 %                   Maturities of lease liabilities:                 One year or less   $ 1,744     $ 3,453   Year two     3,385       3,293   Year three     2,805       2,739   Year four     2,297       2,339   Year five     2,148       2,245   Greater than five years     9,382       9,559   Total lease payments   $ 21,761     $ 23,628   Less imputed interest     2,362       2,620   Total   $ 19,399     $ 21,008         Three months ended     Three months ended   (in thousands)   June 30, 2023     June 30, 2022   Income Statement                 Components of lease expense:                 Operating lease cost   $ 837     $ 792   Variable lease cost     68       58   Less sublease income     25       24   Total lease cost   $ 880     $ 826         Six months ended     Six months ended   (in thousands)   June 30, 2023     June 30, 2022   Income Statement                 Components of lease expense:                 Operating lease cost   $ 1,677     $ 1,448   Variable lease cost     139       115   Less sublease income     50       48   Total lease cost   $ 1,766     $ 1,515         Six months ended     Six months ended   (in thousands)   June 30, 2023     June 30, 2022   Cash flow Statement                 Supplemental cash flow information:                 Operating cash flows from operating leases   $ 2,126     $ 1,800     As of June 30, 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 72 full service banking center locations. The Bank is registered with, and subject to supervision, regulation and examination by the FDIC and the Kentucky Department of Financial Institutions.   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 quarter and year ended December 31, 2022. This acquired line of business was not within the Company’s geographic footprint and ultimately did not align with the Company’s long-term strategic model. Net income related to LFA and attributable to Bancorp’s 60% interest, excluding the pre-tax loss on disposition noted above, totaled $483,000 for the year ended December 31, 2022.   Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 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;   ● 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;   57 Table of Contents     ● 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 May 11, 2023, the FDIC approved a notice of proposed rulemaking regarding a special assessment aimed at recovering the cost associated with protecting uninsured depositors following the failures of Silicon Valley Bank and Signature bank earlier this year. At the time of the proposal, the FDIC estimated that these costs totaled approximately $16 billion.   Under the proposal, the base for the special assessment would be equal to an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the institution’s first $5 billion of uninsured deposits. The special assessment would be collected at an annual rate of approximately 12.5 bps over eight quarterly assessment periods beginning with the first quarterly assessment period of 2024. However, the proposed rate is subject to change prior to any final rule depending on any adjustments to the estimate of losses, mergers or failures, or amendments to reported estimates of uninsured deposits. The proposed rule provides opportunity for public comment for 60 days following publication in the Federal Register. As such, a final ruling on the proposal is expected to be announced during the third quarter of 2023.   As proposed, Bancorp would not be subjected to the special assessment. It is estimated that a total of 113 banking organizations would be subject to the special assessment, with 95% of the special assessment expected to be paid by banking organizations with $50 billion or more in total assets. No banking organization with under $5 billion in total assets would be subject to the special assessment.   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 June 30, 2023, Bancorp has made no request for an advance under this program.   Bancorp has not been directly impacted by the early 2023 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.   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 .”   58 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 June 30, 2023 and 2022:   (dollars in thousands, except per share data)                   Variance   Three months ended June 30 ,   2023     2022     $/bp     %                                     Net income available to stockholders   $ 27,664     $ 26,794     $ 870       3 % Diluted earnings per share   $ 0.94     $ 0.91     $ 0.03       3 % ROA     1.46 %     1.40 %   6 bps       4 % ROE     13.87 %     14.34 %   (47) bps       -3 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the three months ended June 30, 2023 compared to June 30, 2022:     ● Net Income totaled $27.7 million for the three months ended June 30, 2023, resulting in diluted EPS of $0.94, compared to net income of $26.8 million for the three months ended June 30, 2022, which resulted in diluted EPS of $0.91. The three months ended June 30, 2022 represented the first full quarter of activity associated with the CB acquisition.   o Solid results for the three months ended June 30, 2023 compared to the three months ended June 30, 2022 were driven by strong loan growth, 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 An increase in the cost of funds stemming from deposit contraction and pricing pressure, as well as increased borrowing activity, hindered results for the second quarter of 2023 compared to the same period of the prior year.   ● Total loans (excluding PPP) increased $571 million, or 12%, compared to June 30, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $481 million, or 10%, for the three months ended June 30, 2023 compared to the same period of the prior year.   o Bancorp’s ACL on loans increased $11 million, or 17%, compared to June 30, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $2.2 million for the three months ended June 30, 2023, compared to a negative provision of $700,000 for the three months ended June 30, 2022.   ● Deposit balances declined $341 million, or 5%, compared to June 30, 2022, as a result of inflationary pressures and rising rates, the latter of which has enticed depositors to seek higher-yielding alternatives. In addition, a portion the deposit decline experienced for the first half of 2023 was also driven by anticipated seasonal public funds runoff. While we have not seen fallout in our overall customer base, deposit competition and a higher interest rate environment has created NIM compression and we expect it will continue to do so throughout the rest of 2023.   o As a result of deposit pricing pressure/competition, Bancorp has experienced a significant shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits. This shift has significantly increased Bancorp’s cost of deposits and overall cost of funds.   59 Table of Contents     ● Net interest income (FTE) totaled $61.1 million for the three months ended June 30, 2023, representing an increase of $3.8 million, or 7%, compared to the three months ended June 30, 2022.   o NIM increased 22 bps, or 7%, to 3.42% for the three months ended June 30, 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. However, rising funding costs, including an increase in the cost of deposits and increased borrowing activity, continues to place pressure on NIM.   ● Non-interest income increased $920,000, or 4%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022, highlighted by quarterly records for WM&T fees and treasury management fees, in addition to higher BOLI income driven by the prior year purchase of an additional $30 million of BOLI assets.   ● Non-interest expenses increased $1.1 million, or 3%, for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. Non-interest expenses in general remain well-controlled and consistent with expansion, strong performance and continued investment in technology.   ● As of June 30, 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 June 30, 2022. Total stockholders’ equity to total assets was 10.45% as of June 30, 2023, compared to 10.14% and 9.85% at December 31, 2022 and June 30, 2022, respectively. Tangible common equity to tangible assets was 7.87% at June 30, 2023, compared to 7.44% and 7.00% at December 31, 2022 and June 30, 2022, respectively.   The following table presents an overview of Bancorp’s financial performance for the six months ended June 30, 2023 and 2022:   (dollars in thousands, except per share data)                   Variance   Six months ended June 30 ,   2023     2022     $/bp     %                                     Net income available to stockholders   $ 56,712     $ 34,700     $ 22,012       63 % Diluted earnings per share   $ 1.93     $ 1.22     $ 0.71       58 % ROA     1.51 %     0.96 %   55 bps       57 % ROE     14.50 %     9.62 %   488 bps       51 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the six months ended June 30, 2023 compared to June 30, 2022:     ● Net income totaled $56.7 million for the six months ended June 30, 2023, resulting in diluted EPS of $1.93, compared to net income of $34.7 million for the six months ended June 30, 2022, which resulted in diluted EPS of $1.22. The six months ended June 30, 2022 was significantly impacted by the CB acquisition.   o Strong results for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 were driven by significant organic and acquisition-related growth, 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 An increase in the cost of funds stemming from deposit contraction and pricing pressure, as well as increased borrowing activity, had a substantial impact on results for the six months ended June 30, 2023 compared to the same period of the prior year.   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 six months ended June 30, 2022 represented approximately four months of activity associated with the CB acquisition, including $19.5 million in merger expenses and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on results for the period.   ● Total loans (excluding PPP) increased $571 million, or 12%, compared to June 30, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $717 million, or 16%, for the six months ended June 30, 2023 compared to the same period of the prior year as a result of the previously mentioned organic growth in addition to the prior year acquisition.   60 Table of Contents     o Bancorp’s ACL on loans increased $11 million, or 17%, compared to June 30, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $4.4 million for the six months ended June 30, 2023, compared to $2.0 million for the six months ended June 30, 2022. While organic loan growth drove expense for the current year period, activity for the prior year period was driven by $4.4 million of expense related to the acquired loan portfolio, which was partially offset by the release of specific reserves on acquired loans that paid off during the period.   ● Deposit balances declined $341 million, or 5%, compared to June 30, 2022, as a result of inflationary pressures and rising rates, the latter of which has enticed depositors to seek higher-yielding alternatives. In addition, a portion the deposit decline experienced for the first half of 2023 was also driven by seasonal public funds runoff. While we have not seen fallout in our overall customer base, deposit competition and a higher interest rate environment has created NIM compression and we anticipate it will continue to do so throughout the rest of 2023.   o As a result of deposit pricing pressure/competition, Bancorp has experienced a significant shift in the deposit mix, as non-interest bearing deposits and lower-yielding deposits have migrated to higher-yielding options, particularly time deposits. This shift has significantly increased Bancorp’s cost of deposits and overall cost of funds.   ● Net interest income (FTE) totaled $124.3 million for the six months ended June 30, 2023, representing an increase of $18.1 million, or 17%, compared to the six months ended June 30, 2022.   o NIM increased 36 bps, or 11%, to 3.50% for the six months ended June 30, 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. However, rising funding costs, including a substantial increase in the cost of deposits and increased borrowing activity, has placed considerable pressure on NIM through the first six months of 2023.   ● Non-interest income increased $3.8 million, or 9%, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, highlighted by record WM&T fees and treasury management fees, in addition to significant growth in most of Bancorp’s other non-interest income revenue streams, including higher BOLI income driven by the prior year purchase of an additional $30 million of BOLI assets. The prior year period did not include a full six months of activity stemming from the acquisition of CB, as the acquisition was completed on March 7, 2022.   ● Non-interest expenses declined $9.9 million, or 10%, for the six months ended June 30, 2023, compared to the six months ended June 30, 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 June 30, 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 June 30, 2022. Total stockholders’ equity to total assets was 10.45% as of June 30, 2023, compared to 10.14% and 9.85% at December 31, 2022 and June 30, 2022, respectively. Tangible common equity to tangible assets was 7.87% at June 30, 2023, compared to 7.44% and 7.00% at December 31, 2022 and June 30, 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 June 30,   2023     2022     $/bp     %                                     Net interest income   $ 60,929     $ 56,984     $ 3,945       7 % Net interest income (FTE)*     61,074       57,244       3,830       7 % Net interest spread (FTE)*     2.84 %     3.14 %   (30) bps       -10 % Net interest margin (FTE)*     3.42 %     3.20 %   22 bps       7 % Average interest earning assets   $ 7,171,094     $ 7,174,072     $ (2,978 )     0 % Average interest bearing liabilities     4,916,112       4,691,421       224,691       5 % Five year Treasury note rate at period end     4.13 %     3.01 %   112 bps       37 % Average five year Treasury note rate     3.69 %     2.95 %   74 bps       25 % Prime rate at period end     8.25 %     4.75 %   350 bps       74 % Average Prime rate     8.16 %     3.93 %   423 bps       108 % One month term SOFR at period end     5.14 %     1.69 %   345 bps       204 % Average one month term SOFR     5.04 %     0.94 %   410 bps       436 %   (dollars in thousands)                   Variance   As of and for the six months ended June 30,   2023     2022     $/bp     %                                     Net interest income   $ 124,001     $ 105,744     $ 18,257       17 % Net interest income (FTE)*     124,319       106,189       18,130       17 % Net interest spread (FTE)*     2.98 %     3.09 %   (11) bps       -4 % Net interest margin (FTE)*     3.50 %     3.14 %   36 bps       11 % Average interest earning assets   $ 7,162,736     $ 6,812,158     $ 350,578       5 % Average interest bearing liabilities     4,862,307       4,475,830       386,477       9 % Five year Treasury note rate at period end     4.13 %     3.01 %   112 bps       37 % Average five year Treasury note rate     3.75 %     2.39 %   136 bps       57 % Prime rate at period end     8.25 %     4.75 %   350 bps       74 % Average Prime rate     7.93 %     3.61 %   432 bps       120 % One month term SOFR at period end     5.14 %     1.69 %   345 bps       204 % Average one month term SOFR     4.82 %     0.55 %   427 bps       776 %   *See table titled, "Average Balance Sheets and Interest Rates (FTE)" for detail of Net interest income (FTE).   NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled $4 million and $5 million at June 30, 2023 and December 31, 2022, respectively. These sold loans are on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, as Bancorp believes it provides a more accurate depiction of loan portfolio performance.   At June 30, 2023, Bancorp’s loan portfolio consisted of approximately 72% fixed and 28% variable rate loans. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year treasury. Bancorp’s variable rate loans are typically indexed to either Prime or SOFR, generally repricing as those rates change.   62 Table of Contents   Prime rate, the five year Treasury note rate 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 half of 2023, the FRB continued raising rates, albeit at a slower pace, increasing the FFTR a total 75 bps to a range of 5.00% - 5.25% as of June 30, 2023 via three separate 25 bps rate hikes. The FRB elected to pause rate hikes at their June 14, 2023 meeting in an effort to further evaluate the impact of recent policy decisions. As a result, Prime was 8.25% as of June 30, 2023.   The current economic outlook remains volatile, regularly changing as new economic data becomes available and the FRB’s efforts to control inflation continue. Current projections indicate a likelihood for an additional 25 bps increase in the FFTR during the third quarter of 2023, with the FFTR remaining at least at its current level through the end of the year. 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 the second half of 2023.   Net Interest Income (FTE) – Three months ended June 30, 2023 compared to June 30, 2022   Net interest spread (FTE) and NIM (FTE) were 2.84% and 3.42%, for the three months ended June 30, 2023, compared to 3.14% and 3.20% for the same period in 2022, respectively. Despite the period over period increase, NIM during the three months ended June 30, 2023 was significantly impacted by the following:     ● The 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 5.00% - 5.25%, and Prime at 8.25%, as of June 30, 2023, as a result of aggressive interest rate action from the FRB over the past 12 months.   ● Intense pricing pressure/competition for deposits has driven a significant increase in the cost of funds and overall deposit contraction, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity has increased.   Net interest income (FTE) increased $3.8 million, or 7%, for the three months ended June 30, 2023 compared to the same period of 2022, driven by significant organic loan growth and the benefit of higher rates, which were able to outpace rising funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.   Total average interest earning assets were virtually flat for the three months ended June 30, 2023, as compared to the same period of 2022, as substantial average loan growth was offset by a significant decline in average FFS/interest bearing due from bank balances and a marginal decline in average investment securities. However, as a result of a significantly higher interest rate environment, the average rate earned on total interest earning assets climbed 133 bps to 4.65%.     ● Average total loan balances increased $441 million, or 9%, for the three months ended June 30, 2023, compared to the same period of 2022. Average non-PPP loan growth of $481 million, or 10%, was driven by strong organic growth, which was partially offset by a $40 million, or 83%, decline in average PPP loan balances resulting from continued pay down and forgiveness activity.     ● Average investment securities declined $23 million, or 1%, for the three months ended June 30, 2023 compared to the same period of 2022, the result of normal pay down and maturity activity. Investment in the securities portfolio has slowed considerably over the past 12 months, consistent with funding loan growth and a general industry-wide decline in liquidity.     ● Average FFS and interest bearing due from bank balances decreased $429 million, or 76%, for the three months ended June 30, 2023, as loan growth and deposit contraction led to lower levels of liquidity compared to the same period of the prior year.   63 Table of Contents   Total interest income (FTE) increased $24.0 million, or 41%, to $83.1 million for the three months ended June 30, 2023, as compared to the same period of 2022.     ● Interest and fee income (FTE) on loans increased $21.6 million, or 43%, to $72.4 million for the three months ended June 30, 2023, compared to the same period of 2022, driven by significant organic growth in the non-PPP portfolio and the rising rate environment, which more than offset a $1.1 million, or 96%, decline in PPP-related income. The yield on the overall loan portfolio increased 129 bps to 5.49% for the three months ended June 30, 2023, compared to 4.20% 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.     ● While average investment securities declined slightly, there was a $1.7 million increase in interest income (FTE) on the portfolio for the three months ended June 30, 2023 compared to the same period of 2022, driving a 36 bps increase in the corresponding yield on the portfolio. The increased yield on the investment securities portfolio was driven by the benefit of purchase activity made in the prior year once rates began to rise.     ● Interest income on FFS and interest bearing due from bank balances increased $551,000 for the three months ended June 30, 2023, as rising short-term interest rates more than offset a $429 million decline in corresponding average balances. The yield on these assets increased 426 bps to 5.06% for the three months ended June 30, 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 $225 million, or 5%, to $4.92 billion for the three-month period ended June 30, 2023 compared with the same period in 2022.     ● Average interest bearing deposits decreased $101 million, or 2%, for the three months ended June 30, 2023 compared to the same period in 2022, as a result of inflationary pressures and rising rates, the latter of which has driven customers to seek higher-yielding alternatives for excess cash. Partially offsetting the average interest bearing deposit decline was a $145 million increase in average time deposits attributed to Bancorp’s promotional time deposit offerings.     ● Consistent with the average interest bearing deposit decline noted above, average SSUAR balances decreased $27 million, or 19%, for the three months ended June 30, 2023 compared to the same period of 2022.     ● Average FHLB advances totaled $348 million for the three months ended June 30, 2023. Bancorp utilized overnight borrowings with the FHLB during the three months ended June 30, 2023 based on evolving liquidity needs. Bancorp also initiated a $100 million term advance in conjunction with five-year interest rate swap during the first quarter of 2023 in an effort to secure longer-term funding at a more favorable rate. No FHLB borrowings were utilized during the same period of the prior year.     ● Average subordinated debentures totaled $27 million for the three months ended June 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.   Total interest expense increased $20.0 million for the three months ended June 30, 2023 compared to the same period of 2022, driven by a significant rise in rates paid on deposits and increased borrowing activity. As a result, the cost of interest bearing liabilities increased 162 bps to 1.81% for the three months ended June 30, 2023 compared to the same period of 2022.     ● Total interest bearing deposit expense increased $15.3 million as a result of the aforementioned deposit rate increases, resulting in a 139 bps increase in the cost of interest bearing deposits. While the overall deposit mix continues to change, the Company also continues to see loyalty from our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to continue in the coming months.     ● SSUAR interest expense increased $319,000 for the three months ended June 30, 2023 compared to the same period of the prior year, consistent with the aforementioned rate increases.     ● Interest expense of $4.0 million was recorded in relation to FHLB borrowings for the three months ended June 30, 2023, driven by the increased borrowings activity previously noted. No FHLB borrowings were utilized for the three months ended June 30, 2023.     ● Interest expense totaling $545,000 was recorded for the three months ended June 30, 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   Net Interest Income (FTE) – Six months ended June 30, 2023 compared to June 30, 2022   Net interest spread (FTE) and NIM (FTE) were 2.98% and 3.50%, for the six months ended June 30, 2023, compared to 3.09% and 3.14% for the same period in 2022, respectively. Despite the period over period increase, NIM during the six months ended June 30, 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 5.00% - 5.25%, and Prime at 8.25%, as of June 30, 2023, as a result of aggressive interest rate action from the FRB over the past 12 months.   ● Substantial balance sheet expansion stemming from both organic growth and acquisition-related activity, which resulted in total average earning asset growth of $351 million, or 5%, and average interest-bearing liability expansion of $386 million, or 9%, for the six months ended June 30, 2023 compared to the same period of 2022.   ● Intense pricing pressure/competition for deposits has driven a significant increase in the cost of funds and overall deposit contraction, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity has increased.   Net interest income (FTE) increased $18.1 million, or 17%, for the six months ended June 30, 2023 compared to the same period of 2022, as a result of significant organic loan growth, investment in the securities portfolio, acquisition-related activity and the benefits of a rising interest rate environment.   Total average interest earning assets increased $351 million, or 5%, to $7.16 billion for the six months ended June 30, 2023, as compared to the same period of 2022, with the average rate earned on total interest earning assets climbing 134 bps to 4.58%.     ● Average total loan balances increased $649 million, or 14%, for the six months ended June 30, 2023, compared to the same period of 2022. Average non-PPP loan growth of $717 million, or 16%, was driven by strong organic growth and acquisition-related expansion, which was only partially offset by a $68 million, or 85%, decline in average PPP loan balances resulting from continued forgiveness activity.     ● Average investment securities grew $176 million, or 11%, for the six months ended June 30, 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. Investment security purchases made during the six months ended June 30, 2023 were minimal.     ● Average FFS and interest bearing due from bank balances decreased $480 million, or 78%, for the six months ended June 30, 2023, as loan growth and deposit contraction have led to lower levels of liquidity compared to the same period of the prior year.   Total interest income (FTE) increased $53.3 million, or 49%, to $162.8 million for the six months ended June 30, 2023, as compared to the same period of 2022.     ● Interest and fee income (FTE) on loans increased $45.6 million, or 48%, to $141.3 million for the six months ended June 30, 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 $3.8 million, or 95%, decline in PPP-related income. The yield on the overall loan portfolio increased 123 bps to 5.41% for the six months ended June 30, 2023, compared to 4.18% for the same period of the prior year, while the yield on the non-PPP loan portfolio increased 134 bps compared to the prior year period, driven by the rising rate environment.     ● Growth in average investment securities led to a $5.5 million increase in interest income (FTE) on the portfolio for the six months ended June 30, 2023 compared to the same period of 2022, driving a 47 bps, or 30%, 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 $1.9 million for the six months ended June 30, 2023, as rising short-term interest rates more than offset a $480 million decline in related average balances. The yield on these assets increased 434 bps to 4.80% for the six months ended June 30, 2023 compared to the same period of 2022, stemming from the dramatic increase in the FFTR over the past 12 months.   65 Table of Contents   Total average interest bearing liabilities increased $386 million, or 9%, to $4.86 billion for the six-month period ended June 30, 2023 compared with the same period in 2022, with the total average cost increasing 145 bps to 1.60%.     ● Average interest bearing deposits increased $114 million, or 3%, for the six months ended June 30, 2023 compared to the same period in 2022. This increase stems from an offsetting combination of the $1.12 billion in deposits added during the first quarter of 2022 in relation to the CBT acquisition and the deposit contraction Bancorp has experienced through the first half of 2023.     ● Average FHLB advances totaled $256 million for the six months ended June 30, 2023. Bancorp utilized overnight borrowings with the FHLB during the six months ended June 30, 2023 based on evolving liquidity needs. Bancorp also 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. No FHLB borrowings were utilized during the same period of the prior year.     ● Average subordinated debentures totaled $26 million for the six months ended June 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.   Total interest expense increased $35.2 million for the six months ended June 30, 2023 compared to the same period of 2022, driven largely by deposit rate increases and increased borrowing activity, and to a lesser extent, acquisition-related expansion. As a result, the cost of interest bearing liabilities increased 145 bps to 1.60% for the six months ended June 30, 2023 compared to the same period of 2022.     ● Total interest bearing deposit expense increased $27.6 million mainly as a result aforementioned deposit rate increases, resulting in a 125 bps increase in the cost of interest bearing deposits. While the overall deposit mix continues to change, the Company also continues to see loyalty from our customer base. Bancorp expects pricing pressure/competition stemming from the rising rate environment to continue the coming months.     ● SSUAR interest expense increased $758,000 for the six months ended June 30, 2023 compared to the same period of the prior year, consistent with interest rate increases.     ● Interest expense of $5.7 million was recorded in relation to FHLB borrowings for the six months ended June 30, 2023, driven by the increased borrowing activity previously noted. No FHLB borrowings were utilized for the six months ended June 30, 2023.     ● Interest expense totaling $1.1 million was recorded for the six months ended June 30, 2023, as a result of the subordinated debentures added through the prior year acquisition, approximately $200,000 of which stems from purchase accounting-related mark-to-market amortization.   66 Table of Contents   Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison       Three months ended June 30,       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   $ 131,958     $ 1,664       5.06 %   $ 561,101     $ 1,113       0.80 % Mortgage loans held for sale     8,420       77       3.67       11,303       50       1.77   Investment securities:                                                 Taxable     1,632,337       8,299       2.04       1,648,014       6,805       1.66   Tax-exempt     86,708       496       2.29       93,830       533       2.28   Total securities     1,719,045       8,795       2.05       1,741,844       7,338       1.69                                                     Federal Home Loan Bank stock     25,074       275       4.40       13,811       102       2.96                                                     SBA Paycheck Protection Program (PPP) loans     8,323       51       2.46       48,364       1,156       9.59   Non-PPP loans     5,278,274       72,346       5.50       4,797,649       49,609       4.15   Total loans     5,286,597       72,397       5.49       4,846,013       50,765       4.20                                                     Total interest earning assets     7,171,094       83,208       4.65       7,174,072       59,368       3.32                                                     Less allowance for credit losses on loans     77,884                       67,939                                                                     Non-interest earning assets:                                                 Cash and due from banks     78,977                       99,033                   Premises and equipment, net     103,645                       114,287                   Bank owned life insurance     85,449                       53,438                   Goodwill     194,074                       202,524                   Accrued interest receivable and other     39,546                       75,917                                                                     Total assets   $ 7,594,901                     $ 7,651,332                                                                     Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand   $ 2,218,096     $ 7,784       1.41 %   $ 2,248,410     $ 984       0.18 % Savings     495,644       323       0.26       575,610       51       0.04   Money market     1,028,302       4,594       1.79       1,163,546       460       0.16   Time     672,557       4,380       2.61       527,997       275       0.21   Total interest bearing deposits     4,414,599       17,081       1.55       4,515,563       1,770       0.16                                                     Securities sold under agreements to repurchase     113,051       376       1.33       140,169       57       0.16   Federal funds purchased     13,602       170       5.01       9,578       19       0.80   Federal Home Loan Bank advances     348,352       3,962       4.56       —       —       0.00   Subordinated debentures     26,508       545       8.25       26,111       278       4.27                                                     Total interest bearing liabilities     4,916,112       22,134       1.81       4,691,421       2,124       0.18                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,781,338                       2,123,895                   Accrued interest payable and other     97,565                       86,571                                                                     Total liabilities     6,795,015                       6,901,887                                                                     Stockholders ’ equity     799,886                       749,445                   Total liabilities and stockholders' equity   $ 7,594,901                     $ 7,651,332                                                                     Net interest income           $ 61,074                     $ 57,244                                                             Net interest spread                     2.84 %                     3.14 %                                                   Net interest margin                     3.42 %                     3.20 %   67 Table of Contents   Average Balance Sheets and Interest Rates (FTE) – Six-Month Comparison       Six months ended June 30,       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   $ 136,369     $ 3,245       4.80 %   $ 615,878     $ 1,395       0.46 % Mortgage loans held for sale     7,446       118       3.20       9,974       74       1.50   Investment securities:                                                 Taxable     1,649,093       16,745       2.05       1,492,123       11,485       1.55   Tax-exempt     87,641       1,016       2.34       68,750       786       2.31   Total securities     1,736,734       17,761       2.06       1,560,873       12,271       1.59                                                     Federal Home Loan Bank stock     20,311       440       4.37       12,169       156       2.59                                                     SBA Paycheck Protection Program (PPP) loans     11,746       190       3.26       80,070       3,978       10.02   Non-PPP loans     5,250,130       141,094       5.42       4,533,194       91,663       4.08   Total loans     5,261,876       141,284       5.41       4,613,264       95,641       4.18                                                     Total interest earning assets     7,162,736       162,848       4.58       6,812,158       109,537       3.24                                                     Less allowance for credit losses on loans     76,678                       62,020                                                                     Non-interest earning assets:                                                 Cash and due from banks     78,969                       95,155                   Premises and equipment, net     104,005                       100,250                   Bank owned life insurance     85,179                       53,308                   Goodwill     194,074                       178,573                   Accrued interest receivable and other     38,926                       86,999                                                                     Total assets   $ 7,587,211                     $ 7,264,423                                                                     Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand   $ 2,258,717     $ 14,534       1.30 %   $ 2,192,609     $ 1,633       0.15 % Savings     510,197       663       0.26       521,754       106       0.04   Money market     1,072,393       8,756       1.65       1,123,973       650       0.12   Time     605,887       6,627       2.21       494,817       552       0.22   Total interest bearing deposits     4,447,194       30,580       1.39       4,333,153       2,941       0.14                                                     Securities sold under agreements to repurchase     117,525       832       1.43       115,761       74       0.13   Federal funds purchased     14,915       347       4.69       9,784       22       0.45   Federal Home Loan Bank advances     256,215       5,696       4.48       —       —       —   Subordinated debentures     26,458       1,074       8.19       17,132       311       3.66                                                     Total interest bearing liabilities     4,862,307       38,529       1.60       4,475,830       3,348       0.15                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,829,554                       1,971,525                   Accrued interest payable and other     106,568                       89,824                                                                     Total liabilities     6,798,429                       6,537,179                                                                     Stockholders ’ equity     788,782                       727,244                   Total liabilities and stockholders' equity   $ 7,587,211                     $ 7,264,423                                                                     Net interest income           $ 124,319                     $ 106,189                                                             Net interest spread                     2.98 %                     3.09 %                                                   Net interest margin                     3.50 %                     3.14 %   68 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 and six month periods ended June 30, 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 $145,000 and $260,000 for the three-month periods ended June 30, 2023 and 2022, respectively, and $318,000 and $445,000 for the six-month periods ended June 30, 2023 and 2022, respectively.     ● Interest income includes loan fees of $1.1 million ($51,000 associated with the PPP) and $2.9 million ($1.2 million associated with the PPP) for the three-month periods ended June 30, 2023 and 2022, respectively, and $3.0 million ($190,000 associated with the PPP) and $6.7 million ($4.0 million associated with the PPP) for the six-month periods ended June 30, 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.   69 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 June 30, 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       -300     -200     -100     +100     +200       Basis Points     Basis Points     Basis Points     Basis Points     Basis Points   % Change from base net interest income at June 30, 2023     -6.28 %     -4.04 %     -1.78 %     -2.46 %     -4.95 %   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 63%) or one month LIBOR/SOFR (approximately 37%).   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 has been replaced primarily by SOFR, which is considered to be a more accurate and secure pricing benchmark. Bancorp did not experience any operational issues associated with reference rate reform.   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.   70 Table of Contents   As of June 30, 2023, the Company had approximately $116 million in loans and interest rate derivative contracts of $114 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 now utilizes SOFR as the replacement for LIBOR. The Company had $452 million in loans that were indexed to SOFR at June 30, 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.   71 Table of Contents   Provision for Credit Losses   Provision for credit losses on loans at June 30, 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     Six months ended       June 30,     June 30,   (dollars in thousands)   2023     2022     2023     2022                                     Beginning balance   $ 75,673     $ 67,067     $ 73,531     $ 53,898   Acquisition - PCD loans (goodwill adjustment)     -       -       -       9,950