Stock Yards Bancorp, Inc. 10-Q

sybt20230930_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 September 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 October 31, 2023, was 29,321,895 .   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   September 30, 2023 (unaudited) and December 31, 2022 (in thousands, except share data)       September 30,     December 31,       2023     2022   Assets                 Cash and due from banks   $ 79,538     $ 82,515   Federal funds sold and interest bearing due from banks     113,499       84,852   Total cash and cash equivalents     193,037       167,367                     Mortgage loans held for sale, at fair value     6,535       2,606   Available for sale debt securities (amortized cost of $ 1,195,721  in 2023 and $ 1,297,977 in 2022, respectively)     1,020,248       1,144,617   Held to maturity debt securities (fair value of $ 397,418  in 2023 and $ 431,833 in 2022, respectively)     445,205       473,217   Federal Home Loan Bank stock, at cost     26,241       10,928   Loans     5,617,084       5,205,918   Allowance for credit losses on loans     ( 78,075 )     ( 73,531 ) Net loans     5,539,009       5,132,387                     Premises and equipment, net     98,425       101,612   Premises held for sale     2,388       2,644   Bank owned life insurance     86,351       84,674   Accrued interest receivable     23,777       22,157   Goodwill     194,074       194,074   Core deposit intangibles     12,693       14,958   Customer list intangibles     8,778       10,032   Other assets     246,669       134,988   Total assets   $ 7,903,430     $ 7,496,261                     Liabilities                 Deposits:                 Non-interest bearing   $ 1,714,918     $ 1,950,198   Interest bearing     4,687,889       4,441,054   Total deposits     6,402,807       6,391,252                     Securities sold under agreements to repurchase     113,894       133,342   Federal funds purchased     11,518       8,789   Subordinated debentures     26,641       26,343   Federal Home Loan Bank advances     350,000       50,000   Accrued interest payable     1,836       660   Other liabilities     189,816       125,443   Total liabilities     7,096,512       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 29,323,000 and 29,259,000 shares in 2023 and 2022, respectively     58,579       58,367   Additional paid-in capital     384,399       377,703   Retained earnings     491,845       439,898   Accumulated other comprehensive loss     ( 127,905 )     ( 115,536 ) Total stockholders ’ equity     806,918       760,432   Total liabilities and equity   $ 7,903,430     $ 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 nine months ended September 30, 2023 and 2022 (in thousands, except per share data)       Three months ended     Nine months ended       September 30,     September 30,       2023     2022     2023     2022   Interest income:                                 Loans, including fees   $ 78,234     $ 56,750     $ 219,329     $ 152,105   Federal funds sold and interest bearing due from banks     1,640       2,450       4,885       3,845   Mortgage loans held for sale     55       103       173       177   Federal Home Loan Bank stock     499       172       939       328   Investment securities:                                 Taxable     8,064       7,503       24,809       18,988   Tax-exempt     433       432       1,320       1,059   Total interest income     88,925       67,410       251,455       176,502   Interest expense:                                 Deposits     21,360       4,449       51,940       7,390   Securities sold under agreements to repurchase     597       176       1,429       250   Federal funds purchased and other short-term borrowings     157       50       504       72   Federal Home Loan Bank advances     4,917       —       10,613       —   Subordinated debentures     579       359       1,653       670   Total interest expense     27,610       5,034       66,139       8,382   Net interest income     61,315       62,376       185,316       168,120   Provision for credit losses     2,775       4,803       7,750       6,882   Net interest income after provision expense     58,540       57,573       177,566       161,238   Non-interest income:                                 Wealth management and trust services     10,030       9,152       29,703       26,890   Deposit service charges     2,272       2,179       6,622       6,103   Debit and credit card income     4,870       4,710       14,064       13,577   Treasury management fees     2,635       2,221       7,502       6,312   Mortgage banking income     814       703       2,882       3,001   Net investment product sales commissions and fees     791       892       2,345       2,230   Bank owned life insurance     569       516       1,677       1,052   Gain on sale of premises and equipment     302       3,074       75       3,046   Other     613       1,417       2,933       3,796   Total non-interest income     22,896       24,864       67,803       66,007   Non-interest expenses:                                 Compensation     23,379       23,069       67,382       63,242   Employee benefits     4,508       4,179       14,622       13,147   Net occupancy and equipment     3,821       3,767       11,234       10,455   Technology and communication     4,236       3,747       12,706       11,150   Debit and credit card processing     1,637       1,437       4,762       4,439   Marketing and business development     1,357       1,244       4,236       3,461   Postage, printing and supplies     938       903       2,701       2,461   Legal and professional     1,049       774       2,665       2,451   FDIC insurance     937       847       2,851       2,028   Amortization of investments in tax credit partnerships     323       88       970       265   Capital and deposit based taxes     629       722       1,875       1,822   Merger expenses     —       —       —       19,500   Intangible amortization     1,167       1,610       3,519       3,934   Other     2,721       2,486       8,293       7,490   Total non-interest expenses     46,702       44,873       137,816       145,845   Income before income tax expense     34,734       37,564       107,553       81,400   Income tax expense     7,642       9,024       23,749       18,016   Net income     27,092       28,540       83,804       63,384   Less income attributed to non-controlling interest     —       85       —       229   Net income available to stockholders   $ 27,092     $ 28,455     $ 83,804     $ 63,155   Net income per common share - basic   $ 0.93     $ 0.98     $ 2.87     $ 2.22   Net income per common share - diluted   $ 0.92     $ 0.97     $ 2.86     $ 2.20   Weighted average outstanding shares                                 Basic     29,223       29,144       29,208       28,509   Diluted     29,336       29,404       29,347       28,752     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 nine months ended September 30, 2023 and 2022 (in thousands)       Three months ended     Nine months ended       September 30,     September 30,       2023     2022     2023     2022   Net income   $ 27,092     $ 28,540     $ 83,804     $ 63,384   Other comprehensive income (loss):                                 Change in unrealized loss on AFS debt securities     ( 29,915 )     ( 53,415 )     ( 22,113 )     ( 157,909 ) Change in fair value of derivatives used in cash flow hedge     2,759       —       5,670       —   Total other comprehensive loss before income tax effect     ( 27,156 )     ( 53,415 )     ( 16,443 )     ( 157,909 ) Tax effect     ( 6,667 )     ( 12,835 )     ( 4,074 )     ( 37,932 ) Total other comprehensive loss net of tax     ( 20,489 )     ( 40,580 )     ( 12,369 )     ( 119,977 ) Comprehensive income (loss)     6,603       ( 12,040 )     71,435       ( 56,593 ) Less comprehensive income attributed to non-controlling interest     —       85       —       229   Comprehensive income (loss) available to stockholders   $ 6,603     $ ( 12,125 )   $ 71,435     $ ( 56,822 )   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 nine months ended September 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                                                     Activity for three months ended September 30, 2023:                                                 Net income     —       —       —       27,092       —       27,092   Other comprehensive loss     —       —       —       —       ( 20,489 )     ( 20,489 ) Stock compensation expense     —       —       1,032       —       —       1,032   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     —       —       ( 2 )     —       —       ( 2 ) Cash dividends declared, $ 0.30 per share     —       —       —       ( 8,797 )     —       ( 8,797 ) Shares cancelled     ( 1 )     ( 1 )     ( 18 )     19       —       —   Balance, September 30, 2023     29,323     $ 58,579     $ 384,399     $ 491,845     $ ( 127,905 )   $ 806,918     (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                                                                     Activity for three months ended September 30, 2022:                                                                 Net income     —       —       —       28,455       —       28,455       85       28,540   Other comprehensive loss     —       —       —       —       ( 40,580 )     ( 40,580 )     —       ( 40,580 ) Stock compensation expense     —       —       1,237       —       —       1,237       —       1,237   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     1       5       94       ( 114 )     —       ( 15 )     —       ( 15 ) Cash dividends declared, $ 0.29 per share     —       —       —       ( 8,474 )     —       ( 8,474 )     —       ( 8,474 ) Shares cancelled     ( 2 )     ( 9 )     ( 118 )     127       —       —       —       —   Distributions to non-controlling interest     —       —       —       —       —       —       ( 120 )     ( 120 ) Balance, September 30, 2022     29,242     $ 58,311     $ 376,091     $ 421,269     $ ( 127,917 )   $ 727,754     $ 2,995     $ 730,749     See accompanying notes to unaudited condensed consolidated financial statements.   8 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)   For the nine months ended September 30, 2023 and 2022 (in thousands)       2023     2022   Cash flows from operating activities:                 Net income   $ 83,804     $ 63,384   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     7,750       6,882   Depreciation, amortization and accretion, net     15,356       15,729   Deferred income tax expense (benefit)     ( 883 )     3,303   Gain on sale of mortgage loans held for sale     ( 1,251 )     ( 670 ) Origination of mortgage loans held for sale     ( 86,100 )     ( 111,026 ) Proceeds from sale of mortgage loans held for sale     83,422       118,639   Bank owned life insurance income     ( 1,677 )     ( 1,052 ) Gain on the disposal of premises and equipment     ( 75 )     ( 3,046 ) Loss on other real estate owned     250       5   Stock compensation expense     3,219       3,285   Excess tax benefit from share-based compensation arrangements     ( 579 )     ( 1,142 ) Net change in accrued interest receivable and other assets     ( 106,238 )     ( 8,635 ) Net change in accrued interest payable and other liabilities     79,409       ( 14,539 ) Net cash provided by operating activities     76,407       71,117   Cash flows from investing activities:                 Purchases of available for sale debt securities     ( 6,025 )     ( 180,902 ) Proceeds from sales of acquired available for sale debt securities     —       2,111   Proceeds from maturities and paydowns of available for sale debt securities     106,806       112,078   Purchases of held to maturity debt securities     —       ( 459,183 ) Proceeds from maturities and paydowns of held to maturity debt securities     28,196       164,512   Purchase of bank owned life insurance     —       ( 30,000 ) Purchases of FHLB stock     ( 28,800 )     —   Proceeds from redemption of FHLB stock     13,487       2,883   Net change in non-PPP loans     ( 428,674 )     ( 332,133 ) Net change in PPP loans     13,766       121,265   Purchases of premises and equipment     ( 5,536 )     ( 15,294 ) Proceeds from sale or disposal of premises and equipment     1,732       13,517   Other investment activities     ( 12,339 )     —   Proceeds from sales of other real estate owned     —       6,656   Cash from acquisition, net of cash paid     —       349,456   Net cash (used in) provided by investing activities     ( 317,387 )     ( 245,034 ) Cash flows from financing activities:                 Net change in deposits     11,555       ( 406,883 ) Net change in securities sold under agreements to repurchase and federal funds purchased     ( 16,719 )     ( 18,524 ) Proceeds from FHLB advances     700,000       —   Repayments of FHLB advances     ( 400,000 )     —   Repayment of acquired line of credit     —       ( 3,200 ) Share repurchases related to compensation plans     ( 2,382 )     ( 3,574 ) Cash disbursements to non-controlling interest     —       ( 328 ) Cash dividends paid     ( 25,804 )     ( 24,845 ) Net cash (used in) provided by financing activities     266,650       ( 457,354 ) Net change in cash and cash equivalents     25,670       ( 631,271 ) Beginning cash and cash equivalents     167,367       961,192   Ending cash and cash equivalents   $ 193,037     $ 329,921     (continued)   9 Table of Contents   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)   For the nine months ended September 30,       2023     2022   Supplemental cash flow information:                 Interest paid   $ 64,963     $ 8,281   Income taxes paid, net of refunds     28,460       9,614   Cash paid for operating lease liabilities     3,111       2,746                     Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 100,046     $ 6,886   Dividends payable to stockholders     212       204   Premises and equipment transferred to premises held for sale     715       10,355                     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 nine month period ended September 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     Fair   September 30, 2023   cost     Gains     Losses     value                                     U.S. Treasury and other U.S. Government obligations   $ 123,500     $ -     $ ( 5,491 )   $ 118,009   Government sponsored enterprise obligations     115,862       184       ( 6,813 )     109,233   Mortgage backed securities - government agencies     814,224       -       ( 141,558 )     672,666   Obligations of states and political subdivisions     138,279       -       ( 21,388 )     116,891   Other     3,856       -       ( 407 )     3,449                                     Total available for sale debt securities   $ 1,195,721     $ 184     $ ( 175,657 )   $ 1,020,248                                     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     Fair   September 30, 2023   value     Gains     Losses     value                                     U.S. Treasury and other U.S. Government obligations   $ 204,139     $ -     $ ( 7,645 )   $ 196,494   Government sponsored enterprise obligations     26,972       -       ( 3,536 )     23,436   Mortgage backed securities - government agencies     214,094       -       ( 36,606 )     177,488                                     Total held to maturity debt securities   $ 445,205     $ -     $ ( 47,787 )   $ 397,418                                     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 September 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 September 30, 2023. Further, as of September 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 September 30, 2023 follows:       AFS Debt Securities     HTM Debt Securities                             (in thousands)   Amortized cost     Fair value     Carrying value     Fair value                                     Due within one year   $ 117,105     $ 112,410     $ 51,077     $ 50,188   Due after one year but within five years     54,505       50,972       153,800       147,004   Due after five years but within 10 years     79,708       66,296       25,660       22,176   Due after 10 years     130,179       117,904       574       562   Mortgage backed securities - government agencies     814,224       672,666       214,094       177,488   Total   $ 1,195,721     $ 1,020,248     $ 445,205     $ 397,418     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 September 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 $ 1 million at September 30, 2023, respectively. Accrued interest on the AFS and HTM securities portfolios totaled $ 4 million and $ 2 million at December 31, 2022, respectively. Accrued interest on the AFS and HTM securities portfolios are included in the condensed consolidated balance sheets.   AFS debt securities totaling $ 247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, three securities with a total fair value of $ 2 million were sold, resulting in a loss on the sale of $ 92,000 , which was recorded as a fair value adjustment through goodwill during the first quarter of 2022.   Securities with a carrying value of $ 688 million and $ 1.1 billion were pledged at September 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. The decrease between December 31, 2022 and September 30, 2023 is largely the result of seasonal public funds deposit runoff.   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 September 30, 2023.   13 Table of Contents   Unrealized and Unrecognized Loss Analysis on Debt Securities   Debt securities with unrealized and unrecognized losses at September 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   September 30, 2023   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ -     $ -     $ 118,009     $ ( 5,491 )   $ 118,009     $ ( 5,491 ) Government sponsored enterprise obligations     10,262       ( 42 )     83,081       ( 6,771 )     93,343       ( 6,813 ) Mortgage-backed securities - government agencies     29,149       ( 1,633 )     643,517       ( 139,925 )     672,666       ( 141,558 ) Obligations of states and political subdivisions     13,482       ( 929 )     103,094       ( 20,459 )     116,576       ( 21,388 ) Other     -       -       3,449       ( 407 )     3,449       ( 407 )                                                   Total AFS debt securities   $ 52,893     $ ( 2,604 )   $ 951,150     $ ( 173,053 )   $ 1,004,043     $ ( 175,657 )                                                   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   September 30, 2023   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ -     $ -     $ 196,494     $ ( 7,645 )   $ 196,494     $ ( 7,645 ) Government sponsored enterprise obligations     1,415       ( 4 )     22,009       ( 3,532 )     23,424       ( 3,536 ) Mortgage-backed securities - government agencies     -       -       177,451       ( 36,606 )     177,451       ( 36,606 )                                                   Total HTM debt securities   $ 1,415     $ ( 4 )   $ 395,954     $ ( 47,783 )   $ 397,369     $ ( 47,787 )                                                   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 September 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 543 and 547 separate investment positions as of September 30, 2023 and December 31, 2022, respectively. By dollar value, approximately 99 % and 98 % of the debt securities portfolio was in a loss position as of September 30, 2023 and December 31, 2022, respectively. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at September 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)   September 30, 2023     December 31, 2022                     Commercial real estate - non-owner occupied   $ 1,508,615     $ 1,397,346   Commercial real estate - owner occupied     945,122       834,629   Total commercial real estate     2,453,737       2,231,975                     Commercial and industrial - term     826,201       765,163   Commercial and industrial - term - PPP     4,827       18,593   Commercial and industrial - lines of credit     419,999       465,813   Total commercial and industrial     1,251,027       1,249,569                     Residential real estate - owner occupied     696,162       591,515   Residential real estate - non-owner occupied     350,386       313,248   Total residential real estate     1,046,548       904,763                     Construction and land development     480,120       445,690   Home equity lines of credit     203,184       200,725   Consumer     143,703       139,461   Leases     14,710       13,322   Credits cards     24,055       20,413   Total loans (1)   $ 5,617,084     $ 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 $ 19 million and $ 17 million at September 30, 2023 and December  31, 2022, respectively, and was included in the condensed consolidated balance sheets.   Loans with carrying amounts of $ 3.11 billion and $ 2.77 billion were pledged to secure FHLB borrowing capacity at September 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 $ 77 million and $ 79 million as of September 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 September 30, 2023, the book balance of PCD loans acquired as a result of the CB acquisition totaled $ 55 million. Interest income recognized on loans classified as PCD totaled $ 1.1 million and $ 3.3 million for the three and nine month periods ended September 30, 2023, respectively. For the three and nine month periods ended September 30, 2022, interest income recognized on loans classified as PCD totaled $ 1.1 million and $ 4.0 million, respectively.   16 Table of Contents   ACL for Loans   The table below reflects activity in the ACL related to loans:   (in thousands) Three Months Ended September 30, 2023   Beginning Balance     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                             Commercial real estate - non-owner occupied   $ 21,773     $ ( 420 )   $ -     $ 17     $ 21,370   Commercial real estate - owner occupied     11,557       1,088       -       6       12,651   Total commercial real estate     33,330       668       -       23       34,021                                             Commercial and industrial - term     14,792       1,026       ( 1,878 )     16       13,956   Commercial and industrial - lines of credit     6,503       ( 158 )     -       1       6,346   Total commercial and industrial     21,295       868       ( 1,878 )     17       20,302                                             Residential real estate - owner occupied     8,835       278       -       6       9,119   Residential real estate - non-owner occupied     4,169       55       -       -       4,224   Total residential real estate     13,004       333       -       6       13,343                                             Construction and land development     6,752       227       -       -       6,979   Home equity lines of credit     1,609       ( 7 )     -       -       1,602   Consumer     1,285       184       ( 232 )     131       1,368   Leases     205       7       -       -       212   Credit cards     230       20       ( 5 )     3       248   Total   $ 77,710     $ 2,300     $ ( 2,115 )   $ 180     $ 78,075     (in thousands) Nine Months Ended September 30, 2023   Beginning Balance     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                             Commercial real estate - non-owner occupied   $ 22,641     $ ( 1,324 )   $ -     $ 53     $ 21,370   Commercial real estate - owner occupied     10,827       1,818       -       6       12,651   Total commercial real estate     33,468       494       -       59       34,021                                             Commercial and industrial - term     12,991       2,955       ( 2,006 )     16       13,956   Commercial and industrial - lines of credit     6,389       ( 193 )     -       150       6,346   Total commercial and industrial     19,380       2,762       ( 2,006 )     166       20,302                                             Residential real estate - owner occupied     6,717       2,418       ( 43 )     27       9,119   Residential real estate - non-owner occupied     3,597       625       -       2       4,224   Total residential real estate     10,314       3,043       ( 43 )     29       13,343                                             Construction and land development     7,186       ( 207 )     -       -       6,979   Home equity lines of credit     1,613       1       ( 12 )     -       1,602   Consumer     1,158       473       ( 639 )     376       1,368   Leases     201       11       -       -       212   Credit cards     211       123       ( 105 )     19       248   Total   $ 73,531     $ 6,700     $ ( 2,805 )   $ 649     $ 78,075     17 Table of Contents   (in thousands) Three Months Ended September 30, 2022   Beginning Balance     Initial ACL on PCD Loans     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                                     Commercial real estate - non-owner occupied   $ 20,723     $ -     $ 502     $ ( 37 )   $ -     $ 21,188   Commercial real estate - owner occupied     9,842       -       ( 227 )     -       153       9,768   Total commercial real estate     30,565       -       275       ( 37 )     153       30,956                                                     Commercial and industrial - term     12,342       -       2,055       ( 466 )     232       14,163   Commercial and industrial - lines of credit     5,000       -       203       ( 99 )     -       5,104   Total commercial and industrial     17,342       -       2,258       ( 565 )     232       19,267                                                     Residential real estate - owner occupied     5,988       -       423       ( 17 )     2       6,396   Residential real estate - non-owner occupied     3,190       -       146       -       9       3,345   Total residential real estate     9,178       -       569       ( 17 )     11       9,741                                                     Construction and land development     6,214       -       731       -       -       6,945   Home equity lines of credit     1,521       -       105       -       -       1,626   Consumer     1,113       -       162       ( 307 )     148       1,116   Leases     221       -       ( 10 )     -       -       211   Credit cards     208       -       13       -       -       221   Total   $ 66,362     $ -     $ 4,103     $ ( 926 )   $ 544     $ 70,083     (in thousands) Nine Months Ended September 30, 2022   Beginning Balance     Initial ACL on Loans Purchased with Credit Deterioration     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                                     Commercial real estate - non-owner occupied   $ 15,960     $ 3,508     $ 1,744     $ ( 37 )   $ 13     $ 21,188   Commercial real estate - owner occupied     9,595       2,121       ( 2,103 )     ( 41 )     196       9,768   Total commercial real estate     25,555       5,629       ( 359 )     ( 78 )     209       30,956                                                     Commercial and industrial - term     8,577       1,358       3,796       ( 594 )     1,026       14,163   Commercial and industrial - lines of credit     4,802       1,874       ( 1,437 )     ( 135 )     -       5,104   Total commercial and industrial     13,379       3,232       2,359       ( 729 )     1,026       19,267                                                     Residential real estate - owner occupied     4,316       590       1,458       ( 30 )     62       6,396   Residential real estate - non-owner occupied     3,677       -       ( 349 )     -       17       3,345   Total residential real estate     7,993       590       1,109       ( 30 )     79       9,741                                                     Construction and land development     4,789       419       1,809       ( 72 )     -       6,945   Home equity lines of credit     1,044       2       580       -       -       1,626   Consumer     772       78       565       ( 796 )     497       1,116   Leases     204       -       7       -       -       211   Credit cards     162       -       12       -       47       221   Total   $ 53,898     $ 9,950     $ 6,082     $ ( 1,705 )   $ 1,858     $ 70,083     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   September 30, 2023   Recorded ACL     Non-accrual     Accruing Interest                             Commercial real estate - non-owner occupied   $ —     $ 7,162     $ —   Commercial real estate - owner occupied     —       1,109       —                             Total commercial real estate     —       8,271       —                             Commercial and industrial - term     3,737       5,229       —   Commercial and industrial - PPP     —       —       —   Commercial and industrial - lines of credit     —       58       —                             Total commercial and industrial     3,737       5,287       —                             Residential real estate - owner occupied     237       2,709       —   Residential real estate - non-owner occupied     —       378       —                             Total residential real estate     237       3,087       —                             Construction and land development     —       —       —   Home equity lines of credit     —       304       —   Consumer     —       266       —   Leases     —       —       —   Credit cards     —       12       1   Total   $ 3,974     $ 17,227     $ 1           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 nine month periods ended September 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 nine month periods ended September 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) September 30, 2023   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 14,004     $ -     $ -     $ 14,004     $ 1,892   Commercial real estate - owner occupied     2,906       -       -       2,906       840   Total commercial real estate     16,910       -       -       16,910       2,732                                             Commercial and industrial - term     432       4,847       -       5,279       412   Commercial and industrial - lines of credit     2,690       159       -       2,849       739   Total commercial and industrial     3,122       5,006       -       8,128       1,151                                             Residential real estate - owner occupied     3,251       -       -       3,251       206   Residential real estate - non-owner occupied     567       -       -       567       116   Total residential real estate     3,818       -       -       3,818       322                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     304       -       -       304       -   Consumer     -       -       275       275       20   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 24,154     $ 5,006     $ 275     $ 29,435     $ 4,225       (in thousands) December 31, 2022   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 14,764     $ -     $ -     $ 14,764     $ 2,652   Commercial real estate - owner occupied     4,415       -       -       4,415       846   Total commercial real estate     19,179       -       -       19,179       3,498                                             Commercial and industrial - term     39       2,207       -       2,246       1,205   Commercial and industrial - lines of credit     422       2,821       -       3,243       761   Total commercial and industrial     461       5,028       -       5,489       1,966                                             Residential real estate - owner occupied     2,199       -       -       2,199       222   Residential real estate - non-owner occupied     415       -       -       415       116   Total residential real estate     2,614       -       -       2,614       338                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     205       -       -       205       -   Consumer     -       -       219       219       20   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 22,459     $ 5,028     $ 219     $ 27,706     $ 5,822     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   September 30, 2023   Current     Past Due     Past Due     days Past Due     Due Loans     Loans                                                     Commercial real estate - non-owner occupied   $ 1,504,918     $ 114     $ 3,235     $ 348     $ 3,697     $ 1,508,615   Commercial real estate - owner occupied     943,521       1,370       —       231       1,601       945,122   Total commercial real estate     2,448,439       1,484       3,235       579       5,298       2,453,737                                                     Commercial and industrial - term     824,236       456       803       706       1,965       826,201   Commercial and industrial - term - PPP     4,827       —       —       —       —       4,827   Commercial and industrial - lines of credit     419,734       207       —       58       265       419,999   Total commercial and industrial     1,248,797       663       803       764       2,230       1,251,027                                                     Residential real estate - owner occupied     689,433       4,618       709       1,402       6,729       696,162   Residential real estate - non-owner occupied     349,772       377       —       237       614       350,386   Total residential real estate     1,039,205       4,995       709       1,639       7,343       1,046,548                                                     Construction and land development     480,059       61       —       —       61       480,120   Home equity lines of credit     202,697       183       11       293       487       203,184   Consumer     143,019       348       136       200       684       143,703   Leases     14,710       —       —       —       —       14,710   Credit cards     24,049       3       2       1       6       24,055   Total   $ 5,600,975     $ 7,737     $ 4,896     $ 3,476     $ 16,109     $ 5,617,084       (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 September 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           September 30, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 255,865     $ 354,634     $ 338,426     $ 222,111     $ 122,851     $ 153,093     $ 22,016     $ 1,468,996   OAEM     3,287       -       2,917       -       3,373       4,098       -       13,675   Substandard     -       1,383       1,003       3,628       12,424       247       97       18,782   Substandard non-performing     6,080       299       -       -       76       707       -       7,162   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 265,232     $ 356,316     $ 342,346     $ 225,739     $ 138,724     $ 158,145     $ 22,113     $ 1,508,615   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 127,016     $ 181,373     $ 203,605     $ 189,483     $ 96,127     $ 113,057     $ 15,814     $ 926,475   OAEM     3,571       2,002       602       5,192       79       771       -       12,217   Substandard     266       4,286       -       -       392       377       -       5,321   Substandard non-performing     -       230       808       71       -       -       -       1,109   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 130,853     $ 187,891     $ 205,015     $ 194,746     $ 96,598     $ 114,205     $ 15,814     $ 945,122   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 192,704     $ 322,039     $ 180,682     $ 62,307     $ 27,539     $ 30,438     $ -     $ 815,709   OAEM     -       855       2,625       -       167       164       -       3,811   Substandard     922       85       45       100       -       300       -       1,452   Substandard non-performing     3,848       774       44       341       222       -       -       5,229   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 197,474     $ 323,753     $ 183,396     $ 62,748     $ 27,928     $ 30,902     $ -     $ 826,201   Current period gross charge offs   $ ( 1,274 )   $ ( 621 )   $ ( 26 )   $ ( 57 )   $ -     $ ( 28 )   $ -     $ ( 2,006 )                                                                   Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ -     $ -     $ 2,753     $ 2,074     $ -     $ -     $ -     $ 4,827   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ -     $ -     $ 2,753     $ 2,074     $ -     $ -     $ -     $ 4,827   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     (continued)   23 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           September 30, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 34,187     $ 29,544     $ 3,413     $ 360     $ 9,143     $ 2,053     $ 323,574     $ 402,274   OAEM     -       -       -       829       -       -       7,588       8,417   Substandard     -       -       -       -       25       -       9,225       9,250   Substandard non-performing     -       -       -       -       -       -       58       58   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 34,187     $ 29,544     $ 3,413     $ 1,189     $ 9,168     $ 2,053     $ 340,445     $ 419,999   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 148,984     $ 181,101     $ 179,320     $ 88,093     $ 23,378     $ 72,112     $ -     $ 692,988   OAEM     -       -       91       -       -       -       -       91   Substandard     -       16       -       -       -       358       -       374   Substandard non-performing     178       675       162       254       52       1,388       -       2,709   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 149,162     $ 181,792     $ 179,573     $ 88,347     $ 23,430     $ 73,858     $ -     $ 696,162   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ ( 43 )   $ -     $ ( 43 )                                                                   Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 65,058     $ 87,911     $ 80,228     $ 51,062     $ 31,771     $ 33,108     $ -     $ 349,138   OAEM     -       10       -       -       262       280       -       552   Substandard     -       -       -       -       -       318       -       318   Substandard non-performing     -       237       20       -       46       75       -       378   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 65,058     $ 88,158     $ 80,248     $ 51,062     $ 32,079     $ 33,781     $ -     $ 350,386   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 83,239     $ 246,335     $ 73,479     $ 49,275     $ 489     $ 3,837     $ 15,996     $ 472,650   OAEM     -       -       -       -       -       -       999       999   Substandard     4,175       2,296       -       -       -       -       -       6,471   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 87,414     $ 248,631     $ 73,479     $ 49,275     $ 489     $ 3,837     $ 16,995     $ 480,120   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 202,842     $ 202,842   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       38       38   Substandard non-performing     -       -       -       -       -       -       304       304   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 203,184     $ 203,184   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           September 30, 2023   2023     2022     2021     2020     2019     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 25,219     $ 19,908     $ 11,791     $ 3,355     $ 2,477     $ 2,073     $ 78,614     $ 143,437   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       110       80       25       13       26       12       266   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 25,219     $ 20,018     $ 11,871     $ 3,380     $ 2,490     $ 2,099     $ 78,626     $ 143,703   Current period gross charge offs   $ ( 477 )   $ ( 18 )   $ ( 23 )   $ ( 40 )   $ ( 40 )   $ ( 27 )   $ ( 14 )   $ ( 639 )                                                                   Leases                                                                 Risk rating                                                                 Pass   $ 3,688     $ 3,360     $ 1,937     $ 307     $ 315     $ 5,103     $ -     $ 14,710   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 3,688     $ 3,360     $ 1,937     $ 307     $ 315     $ 5,103     $ -     $ 14,710   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 24,043     $ 24,043   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       12       12   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 24,055     $ 24,055   Current period gross charge offs   $ -     $ -     $ -     $ -     $ -     $ -     $ ( 105 )   $ ( 105 )                                                                   Total loans                                                                 Risk rating                                                                 Pass   $ 935,960     $ 1,426,205     $ 1,075,634     $ 668,427     $ 314,090     $ 414,874     $ 682,899     $ 5,518,089   OAEM     6,858       2,867       6,235       6,021       3,881       5,313       8,587       39,762   Substandard     5,363       8,066       1,048       3,728       12,841       1,600       9,360       42,006   Substandard non-performing     10,106       2,325       1,114       691       409       2,196       386       17,227   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 958,287     $ 1,439,463     $ 1,084,031     $ 678,867     $ 331,221     $ 423,983     $ 701,232     $ 5,617,084   Current period gross charge offs   $ ( 1,751 )   $ ( 639 )   $ ( 49 )   $ ( 97 )   $ ( 40 )   $ ( 98 )   $ ( 131 )   $ ( 2,805 )   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:       September 30,     December 31,   (in thousands)   2023     2022                     Credit cards                 Performing   $ 24,043     $ 20,413   Non-performing     12       —   Total credit cards   $ 24,055     $ 20,413     28 Table of Contents   Bancorp had $ 483,000 and $ 317,000 , respectively, in residential real estate loans for which formal foreclosure proceedings were in process at September 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 nine months ended September 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-accrual loans follows:       September 30, 2022               Specific     Additional               reserve     commitment   (in thousands)   Balance     allocation     to lend                             Commercial real estate - owner occupied   $ 902     $ 202     $ —   Commercial & industrial - term     —       —       —   Total TDRs   $ 902     $ 202     $ —     During the three and nine month periods ended September 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 September 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:       September 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, 2023, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than- not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than- not that the carrying value of the reporting units exceeded their fair value.   Changes in the carrying value of goodwill follows:       Three months ended     Nine months ended       September 30,     September 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     Nine months ended       September 30,     September 30,   (in thousands)   2023     2022     2023     2022   Balance at beginning of period   $ 13,442     $ 16,870     $ 14,958     $ 5,596   Core deposit intangible acquired     —       —       —       12,724   Amortization     ( 749 )     ( 956 )     ( 2,265 )     ( 2,406 ) Balance at end of period   $ 12,693     $ 15,914     $ 12,693     $ 15,914     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     Nine months ended       September 30,     September 30,   (in thousands)   2023     2022     2023     2022   Balance at beginning of period   $ 9,196     $ 13,487     $ 10,032     $ -   Customer list intangibles acquired     —       —       —       14,360   Disposition of LFA     —       —       —       —   Amortization     ( 418 )     ( 654 )     ( 1,254 )     ( 1,527 ) Balance at end of period   $ 8,778     $ 12,833     $ 8,778     $ 12,833     Future CDI and CLI amortization expense is estimated as follows:   (in thousands)   CDI     CLI   Remainder of 2023   $ 750     $ 418   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   $ 12,693     $ 8,778     31 Table of Contents     ( 6 ) Other Assets   A summary of the major components of other assets follows:       September 30,     December 31,   (in thousands)   2023     2022                     Cash surrender value of life insurance other than BOLI   $ 16,575     $ 15,496   Net deferred tax asset     59,110       54,145   Investments in tax credit partnerships     117,204       13,969   Swap assets     17,590       10,727   Prepaid assets     4,224       5,721   Trust fees receivable     3,781       3,354   Mortgage servicing rights     13,558       15,219   Other real estate owned     427       677   Other     14,200       15,680   Total other assets   $ 246,669     $ 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 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. The investments in such partnerships are recorded in Other assets on the consolidated balance sheets, while the corresponding contribution requirements are recorded in Other liabilities. Contributions are typically spread over the life of the respective investments, which can be up to 10 years depending on the type of investment. Bancorp has invested in several larger tax credit partnerships during 2023, which have served as an economical means of fulfilling CRA requirements.   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     Nine months ended       September 30,     September 30,   (in thousands)   2023     2022     2023     2022   Current income tax expense:                                 Federal   $ 7,129     $ 9,231     $ 20,409     $ 12,838   State     1,859       1,261       4,223       1,875   Total current income tax expense     8,988       10,492       24,632       14,713                                     Deferred income tax expense:                                 Federal     ( 1,087 )     ( 1,922 )     ( 1,311 )     1,542   State     ( 259 )     454       428       1,761   Total deferred income tax expense     ( 1,346 )     ( 1,468 )     ( 883 )     3,303   Change in valuation allowance     -       -       -       -   Total income tax expense   $ 7,642     $ 9,024     $ 23,749     $ 18,016     An analysis of the difference between the statutory and ETRs from operations follows:       Three months ended     Nine months ended       September 30,     September 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     3.3       3.6       3.4       3.5   Excess tax benefit from stock-based compensation arrangements     0.1       -       ( 0.3 )     ( 1.3 ) Change in cash surrender value of life insurance     ( 0.1 )     -       ( 0.5 )     0.6   Tax credits     ( 0.7 )     ( 0.5 )     ( 0.5 )     ( 0.6 ) Tax exempt interest income     ( 0.5 )     ( 0.5 )     ( 0.5 )     ( 0.7 ) Non-deductible merger expenses     -       -       -       0.2   Insurance captive     ( 0.2 )     ( 0.3 )     ( 0.3 )     ( 0.3 ) Other, net     ( 0.9 )     0.7       ( 0.2 )     ( 0.3 ) Effective tax rate     22.0 %     24.0 %     22.1 %     22.1 %   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.   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. While the proposed regulation has not been finalized, it is expected to be finalized during the fourth quarter of 2023. As a result, Bancorp elected not to renew the insurance captive effective August 2023 and expects it to be dissolved by the end of the year. The tax benefits associated with the Captive are not expected to be experienced going forward.   GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of September 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)   September 30, 2023     December 31, 2022                     Non-interest bearing demand deposits   $ 1,714,918     $ 1,950,198   Interest bearing deposits:                 Interest bearing demand     2,283,373       2,308,960   Savings     455,515       535,903   Money market     1,085,844       1,124,100                     Time deposits of $250 thousand or more     229,943       97,638   Other time deposits     633,214       374,453   Total time deposits (1)     863,157       472,091                     Total interest bearing deposits     4,687,889       4,441,054   Total deposits   $ 6,402,807     $ 6,391,252     ( 1 ) Includes $ 591 and $ 599 in brokered deposits as of September 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 September 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)   September 30, 2023     December 31, 2022   Outstanding balance at end of period   $ 113,894     $ 133,342   Weighted average interest rate at end of period     1.76 %     1.64 %         Three months ended     Nine months ended       September 30,     September 30,   (dollars in thousands)   2023     2022     2023     2022                                     Average outstanding balance during the period   $ 127,063     $ 139,749     $ 120,740     $ 123,845   Average interest rate during the period     1.86 %     0.50 %     1.58 %     0.27 % Maximum outstanding at any month end during the period   $ 127,931     $ 139,825     $ 138,347     $ 149,179     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 October 1, 2023 and carried the notes at the costs noted below at September 30, 2023:   (dollars in thousands)   Face Value     Carrying Value   Origination Date   Maturity Date   Interest Rate                             Commonwealth Statutory Trust III   $ 3,093     $ 3,074   12/19/2003   1/7/2034   SOFR + 2.85% Commonwealth Statutory Trust IV     12,372       12,296   12/15/2005   12/30/2035   SOFR + 1.35% Commonwealth Statutory Trust V     11,341       11,271   6/28/2007   9/15/2037   SOFR + 1.40% Total   $ 26,806     $ 26,641               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 September 30, 2023 consist of a $ 150 million cash management advance with an overnight maturity and a $ 200 million three -month advance that matures in November 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 nine months ended September 30, 2023, gross proceeds and repayments related to FHLB advances totaled $ 2.2 billion and $ 1.9 billion, respectively. Net proceeds and repayments related to FHLB advances (excluding those with maturities of 90 days or less) totaled $ 700 million and $ 400 million for the nine months ended September 30, 2023, respectively. There was no FHLB advance activity for the nine months ended September 30, 2022.   (dollars in thousands)   September 30, 2023     December 31, 2022   Outstanding balance at end of period   $ 350,000     $ 50,000   Weighted average interest rate at end of period     5.51 %     4.37 %       Three months ended     Nine months ended       September 30,     September 30,   (dollars in thousands)   2023     2022     2023     2022                                     Average outstanding balance during the period   $ 401,630     $ -     $ 305,220     $ -   Average interest rate during the period     4.86 %     - %     4.65 %     - % Maximum outstanding at any month end during the period   $ 425,000     $ -     $ 425,000     $ -     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 funding option compared to other alternatives, such as brokered deposits, to fund loan growth. At September 30, 2023 and December 31, 2022, the amount of available credit from the FHLB totaled $ 1.06 billion and $ 1.36 billion, respectively.   Bancorp also had unsecured available FFP lines with correspondent banks totaling $ 80 million at both September 30, 2023 and December 31, 2022, respectively.   35 Table of Contents     ( 12 ) Commitments and Contingent Liabilities   As of September 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)   September 30, 2023     December 31, 2022   Commercial and industrial   $ 906,111     $ 784,429   Construction and land development     531,839       449,028   Home equity     375,424       358,610   Credit cards     81,774       64,231   Overdrafts     55,252       57,193   Letters of credit     32,883       34,704   Other     94,516       93,419   Future loan commitments     239,236       221,973   Total off balance sheet commitments to extend credit   $ 2,317,035     $ 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 September 30, 2023 and December 31, 2022, Bancorp had accrued $ 5.6 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 $ 475,000 and $ 1.1 million was recorded for the three and nine months ended September 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 $ 700,000 and $ 800,000 was recorded for the three and nine months ended September 30, 2022, driven largely by the addition of new lines of credit within the C&D portfolio. The ACL for off balance sheet credit exposures was also increased $ 500,000 during the first quarter of 2022 as a result of the CB acquisition, with the offset recorded to goodwill (as opposed to provision expense).   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 September 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.   Bancorp periodically invests in certain partnerships that generate federal income tax credits, which result in contribution commitments. Such commitments are recorded in Other liabilities on the consolidated balance sheets and are typically spread over the life of the corresponding investments, which can be up to 10 years depending on the type of investment. Bancorp has invested in several larger tax credit partnerships during 2023, which have served as an economical means of fulfilling CRA requirements. As of September 30, 2023, tax credit contribution commitments of $ 100 million were recorded in Other liabilities on the consolidated balance sheets.   As of September 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   September 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   $ 118,009     $ —     $ —     $ 118,009   Government sponsored enterprise obligations     —       109,233       —       109,233   Mortgage backed securities - government agencies     —       672,666       —       672,666   Obligations of states and political subdivisions     —       116,891       —       116,891   Other     —       3,449       —       3,449                                     Total available for sale debt securities     118,009       902,239       —       1,020,248                                     Mortgage loans held for sale     —       6,535       —       6,535   Rate lock loan commitments     —       202       —       202   Mandatory forward contracts     —       110       —       110   Interest rate swap assets     —       17,590       —       17,590   Total assets   $ 118,009     $ 926,676     $ —     $ 1,044,685                                     Liabilities:                                 Interest rate swap liabilities   $ —     $ 11,929     $ —     $ 11,929     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     Nine months       Fair Value Measurements Using:     Total     ended     ended   September 30, 2023 (in thousands)   Level 1     Level 2     Level 3     Fair Value     September 30, 2023     September 30, 2023                                                     Collateral dependent loans   $ —     $ —     $ 12,141     $ 12,141     $ 1,377     $ 1,377   Other real estate owned     —       —       427       427       250       250                                         Losses recorded                                       Three months     Nine months       Fair Value Measurements Using:     Total     ended     ended   December 31, 2022 (in thousands)   Level 1     Level 2     Level 3     Fair Value     September 30, 2022     September 30, 2022                                                     Collateral dependent loans   $ —     $ —     $ 20,637     $ 20,637     $ 377     $ 377   Other real estate owned     —       —       677       677       —       —     There were no liabilities measured at fair value on a non-recurring basis at September 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.       September 30, 2023   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 12,141   Appraisal   Appraisal discounts     21.2 % Other real estate owned     427   Appraisal   Appraisal discounts     78.3         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:   September 30, 2023 (in thousands)   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 193,037     $ 193,037     $ 193,037     $ —     $ —   HTM debt securities     445,205       397,418       —       397,418       —   Federal Home Loan Bank stock     26,241       26,241       —       26,241       —   Loans, net     5,539,009       5,263,127       —       —       5,263,127   Accrued interest receivable     23,777       23,777       23,777       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,714,918     $ 1,714,918     $ 1,714,918     $ —     $ —   Transaction deposits     3,824,732       3,824,732       —       3,824,732       —   Time deposits     863,157       852,693       —       852,693       —   Securities sold under agreement to repurchase     113,894       113,894       —       113,894       —   Federal funds purchased     11,518       11,518       —       11,518       —   Subordinated debentures     26,641       25,988       —       25,988       —   FHLB advances     350,000       345,101       —       345,101       —   Accrued interest payable     1,836       1,836       1,836       —       —         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     Nine months ended       September 30,     September 30,   (in thousands)   2023     2022     2023     2022   Balance, beginning of period:   $ 7,069     $ 10,045     $ 2,606     $ 8,614   Origination of mortgage loans held for sale     30,775       31,446       86,100       111,026   Loans held for sale acquired     —       —       —       3,559   Proceeds from the sale of mortgage loans held for sale     ( 31,814 )     ( 36,427 )     ( 83,422 )     ( 118,639 ) Net gain realized on sale of mortgage loans held for sale     505       166       1,251       670   Balance, end of period   $ 6,535     $ 5,230     $ 6,535     $ 5,230     The following table represents the components of Mortgage banking income:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands)   2023     2022     2023     2022                                     Net gain realized on sale of mortgage loans held for sale   $ 505     $ 166     $ 1,251     $ 670   Net change in fair value recognized on loans held for sale     ( 81 )     ( 113 )     ( 65 )     ( 70 ) Net change in fair value recognized on rate lock loan commitments     ( 186 )     134       40       1,324   Net change in fair value recognized on forward contracts     214       101       340       ( 534 ) Net gain recognized     452       288       1,566       1,390                                     Net loan servicing income     1,031       1,172       3,338       3,089   Amortization of mortgage servicing rights     ( 822 )     ( 869 )     ( 2,345 )     ( 2,206 ) Change in mortgage servicing rights valuation allowance     -       -       -       -   Net servicing income recognized     209       303       993       883                                     Other mortgage banking income     153       112       323       728   Total mortgage banking income   $ 814     $ 703     $ 2,882     $ 3,001     Activity for capitalized mortgage servicing rights was as follows:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands)   2023     2022     2023     2022   Balance at beginning of period   $ 14,116     $ 16,504     $ 15,219     $ 4,528   MSRs acquired     —       —       —       12,676   Additions for mortgage loans sold     264       269       684       906   Amortization     ( 822 )     ( 869 )     ( 2,345 )     ( 2,206 ) Impairment     —       —       —       —                                     Balance at end of period   $ 13,558     $ 15,904     $ 13,558     $ 15,904     41 Table of Contents   The estimated fair value of MSRs at both September 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 September 30, 2023 and December 31, 2022, as fair value exceeded carrying value.   Total outstanding principal balances of loans serviced for others were $ 1.96 billion and $ 2.08 billion at September 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:       September 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   $ 6,542     $ 6,535     $ 2,548     $ 2,606                                     Included in other assets:                                 Rate lock loan commitments   $ 7,632     $ 202     $ 5,599     $ 137   Mandatory forward contracts     8,038       110       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 September 30, 2023                                 Balance, beginning of period   $ ( 109,741 )   $ 2,213     $ 112     $ ( 107,416 ) Net current period other comprehensive income (loss)     ( 22,586 )     2,097       -       ( 20,489 ) Balance, end of period   $ ( 132,327 )   $ 4,310     $ 112     $ ( 127,905 )                                   Three months ended September 30, 2022                                 Balance, beginning of period   $ ( 87,054 )   $ -     $ ( 283 )   $ ( 87,337 ) Net current period other comprehensive loss     ( 40,580 )     -       -       ( 40,580 ) Balance, end of period   $ ( 127,634 )   $ -     $ ( 283 )   $ ( 127,917 )         Net unrealized     Net unrealized     Minimum               gains (losses)     gains     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Nine months ended September 30, 2023                                 Balance, beginning of period   $ ( 115,648 )   $ -     $ 112     $ ( 115,536 ) Net current period other comprehensive income (loss)     ( 16,679 )     4,310       -       ( 12,369 ) Balance, end of period   $ ( 132,327 )   $ 4,310     $ 112     $ ( 127,905 )                                   Nine months ended September 30, 2022                                 Balance, beginning of period   $ ( 7,657 )   $ -     $ ( 283 )   $ ( 7,940 ) Net current period other comprehensive loss     ( 119,977 )     -       -       ( 119,977 ) Balance, end of period   $ ( 127,634 )   $ -     $ ( 283 )   $ ( 127,917 )     ( 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     Nine months ended       September 30,     September 30,   (in thousands, except per share data)   2023     2022     2023     2022   Net income available to stockholders   $ 27,092     $ 28,455     $ 83,804     $ 63,155                                     Weighted average shares outstanding - basic     29,223       29,144       29,208       28,509   Dilutive securities     113       260       139       243   Weighted average shares outstanding- diluted     29,336       29,404       29,347       28,752                                     Net income per share - basic   $ 0.93     $ 0.98     $ 2.87     $ 2.22   Net income per share - diluted     0.92       0.97       2.86       2.20     Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:       Three months ended     Nine months ended   (shares in thousands)   September 30,     September 30,       2023     2022     2023     2022   Antidilutive SARs     94       -       79       -     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 September 30, 2023, there were 142,000 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 nine 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 September 30, 2023   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 105     $ 399     $ 126     $ 402     $ 1,032   Deferred tax benefit     ( 22 )     ( 84 )     ( 26 )     ( 84 )     ( 216 ) Total net expense   $ 83     $ 315     $ 100     $ 318     $ 816           Three months ended September 30, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 94     $ 346     $ 80     $ 717     $ 1,237   Deferred tax benefit     ( 20 )     ( 72 )     ( 17 )     ( 150 )     ( 259 ) Total net expense   $ 74     $ 274     $ 63     $ 567     $ 978           Nine months ended September 30, 2023   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 310     $ 1,204     $ 392     $ 1,313     $ 3,219   Deferred tax benefit     ( 65 )     ( 253 )     ( 82 )     ( 276 )     ( 676 ) Total net expense   $ 245     $ 951     $ 310     $ 1,037     $ 2,543           Nine months ended September 30, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 282     $ 1,028     $ 252     $ 1,723     $ 3,285   Deferred tax benefit     ( 59 )     ( 216 )     ( 53 )     ( 362 )     ( 690 ) Total net expense   $ 223     $ 812     $ 199     $ 1,361     $ 2,595     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   $ 91     $ 398     $ 125     $ 402     $ 1,016   2024     307       1,385       3       908       2,603   2025     248       1,163       —       485       1,896   2026     190       859       —       —       1,049   2027     111       504       —       —       615   2028     12       42       —       —       54   Total estimated future expense   $ 959     $ 4,351     $ 128     $ 1,795     $ 7,233     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, September 30, 2023     464     $19.37 - $74.92     $ 37.17     $ 2,529     $ 6.69       4.7                                                       Vested and exercisable     349     $19.37 - $54.91     $ 32.99     $ 3,743     $ 5.36       3.8   Unvested     115     35.90 - 74.92       49.83       ( 1,214 )     10.72       3.5   Outstanding, September 30, 2023     464     $19.37 - $74.92     $ 37.17     $ 2,529     $ 6.69       4.7                                                       Vested in the current year     42     $35.90 - $54.91     $ 41.69     $ ( 100 )   $ 7.62             ( 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 )     43.87   Shares forfeited     ( 3 )     53.33   Unvested at September 30, 2023     99     $ 54.17     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       September 30,     December 31,     September 30,     December 31,   (dollars in thousands)   2023     2022     2023     2022                                     Notional amount   $ 169,054     $ 132,831     $ 169,054     $ 132,831   Weighted average maturity (years)     6.0       7.1       6.0       7.1   Fair value   $ 11,920     $ 10,727     $ 11,929     $ 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. The swap began February 6, 2023 and matures February 6, 2028. During the third quarter of 2023, Bancorp entered into two additional interest rate swaps to hedge cash flows of two $ 50 million rolling fixed-rate three -month FHLB borrowings. These swaps began August 7, 2023, with one maturing August 6, 2026 and the other maturing August 6, 2028.   While Bancorp expects to utilize fixed-rate three -month FHLB advances with respect to these interest rate swaps, brokered CDs or other fixed rate advances may be utilized for the same three -month terms instead should those sources be more favorable. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities.   Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods for which the hedged forecasted transaction impacts earnings.   The following table details Bancorp’s derivative positions designated as a cash flow hedges, and the related fair values:                         Fair value   (dollars in thousands)           Pay fixed     September 30,   Notional Amount   Maturity Date   Receive (variable) index   swap rate     2023   $ 100,000,000   2/6/2028   USD SOFR     3.27 %   $ 4,520   $ 50,000,000   8/6/2026   USD SOFR     4.38 %   $ 344   $ 50,000,000   8/6/2028   USD SOFR     3.97 %   $ 806     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 September 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 September 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   September 30, 2023   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 831,296       12.71 %   $ 523,065       8.00 %   NA     NA   Bank     805,791       12.37       521,313       8.00     $ 651,641       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     730,410       11.17       294,224       4.50     NA     NA   Bank     730,905       11.22       293,239       4.50       423,567       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     756,410       11.57       392,298       6.00     NA     NA   Bank     730,905       11.22       390,985       6.00       521,313       8.00                                                     Leverage                                                 Consolidated     756,410       9.80       308,622       4.00     NA     NA   Bank     730,905       9.49       308,176       4.00       385,221       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 September 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 September 30, 2023     Three months ended September 30, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 61,155     $ 160     $ 61,315     $ 62,270     $ 106     $ 62,376   Provision for credit losses     2,775       —       2,775       4,803       —       4,803   Wealth management and trust services     —       10,030       10,030       —       9,152       9,152   All other non-interest income     12,866       —       12,866       15,712       —       15,712   Non-interest expenses     41,788       4,914       46,702       39,370       5,503       44,873   Income before income tax expense     29,458       5,276       34,734       33,809       3,755       37,564   Income tax expense     6,497       1,145       7,642       8,209       815       9,024   Net income     22,961       4,131       27,092       25,600       2,940       28,540   Less net income attributed to NCI     —       —       —       85       —       85   Net income available to stockholders   $ 22,961     $ 4,131     $ 27,092     $ 25,515     $ 2,940     $ 28,455                                                     Segment assets   $ 7,867,626     $ 35,804     $ 7,903,430     $ 7,522,113     $ 32,097     $ 7,554,210         Nine months ended September 30, 2023     Nine months ended September 30, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 184,895     $ 421     $ 185,316     $ 167,811     $ 309     $ 168,120   Provision for credit losses     7,750       —       7,750       6,882       —       6,882   Wealth management and trust services     —       29,703       29,703       —       26,890       26,890   All other non-interest income     38,100       —       38,100       39,117       —       39,117   Non-interest expenses     121,265       16,551       137,816       129,936       15,909       145,845   Income before income tax expense     93,980       13,573       107,553       70,110       11,290       81,400   Income tax expense     20,804       2,945       23,749       15,566       2,450       18,016   Net income     73,176       10,628       83,804       54,544       8,840       63,384   Less net income attributed to NCI     —       —       —       229       —       229   Net income available to stockholders   $ 73,176     $ 10,628     $ 83,804     $ 54,315     $ 8,840     $ 63,155                                                     Segment assets   $ 7,867,626     $ 35,804     $ 7,903,430     $ 7,522,113     $ 32,097     $ 7,554,210     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 September 30, 2023     Three months ended September 30, 2022   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 10,030     $ 10,030     $ —     $ 9,152     $ 9,152   Deposit service charges     2,272       —       2,272       2,179       —       2,179   Debit and credit card income     4,870       —       4,870       4,710       —       4,710   Treasury management fees     2,635       —       2,635       2,221       —       2,221   Mortgage banking income (1)     814       —       814       703       —       703   Net investment product sales commissions and fees     791       —       791       892       —       892   Bank owned life insurance (1)     569       —       569       516       —       516   Gain (loss) on sale of premises and equipment (1)     302       —       302       3,074       —       3,074   Other (2)     613       —       613       1,417       —       1,417   Total non-interest income   $ 12,866     $ 10,030     $ 22,896     $ 15,712     $ 9,152     $ 24,864         Nine months ended September 30, 2023     Nine months ended September 30, 2022   (Dollars in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 29,703     $ 29,703     $ —     $ 26,890     $ 26,890   Deposit service charges     6,622       —       6,622       6,103       —       6,103   Debit and credit card income     14,064       —       14,064       13,577       —       13,577   Treasury management fees     7,502       —       7,502       6,312       —       6,312   Mortgage banking income (1)     2,882       —       2,882       3,001       —       3,001   Net investment product sales commissions and fees     2,345       —       2,345       2,230       —       2,230   Bank owned life insurance (1)     1,677       —       1,677       1,052       —       1,052   Gain (loss) on sale of premises and equipment (1)     75       —       75       3,046       —       3,046   Other(2)     2,933       —       2,933       3,796       —       3,796   Total non-interest income   $ 38,100     $ 29,703     $ 67,803     $ 39,117     $ 26,890     $ 66,007     ( 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 $ 3.8 million and $ 3.4 million at September 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 $ 663,000 and $ 620,000 for the nine month periods ended September 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 and nine months ended September 30, 2023.   54 Table of Contents     ( 24 ) Leases   Bancorp has operating leases for various locations with terms ranging from approximately six months to 17 years, several 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)   September 30, 2023     December 31, 2022                     Balance Sheet                 Operating lease right-of-use asset   $ 17,720     $ 19,694   Operating lease liability     18,947       21,008                     Weighted average remaining lease term (years)     9.3       9.0   Weighted average discount rate     2.70 %     2.57 %                   Maturities of lease liabilities:                 One year or less   $ 872     $ 3,453   Year two     3,345       3,293   Year three     2,676       2,739   Year four     2,168       2,339   Year five     2,018       2,245   Greater than five years     10,496       9,559   Total lease payments   $ 21,575     $ 23,628   Less imputed interest     2,628       2,620   Total   $ 18,947     $ 21,008         Three months ended     Three months ended   (in thousands)   September 30, 2023     September 30, 2022   Income Statement                 Components of lease expense:                 Operating lease cost   $ 815     $ 793   Variable lease cost     96       57   Less sublease income     25       24   Total lease cost   $ 886     $ 826         Nine months ended     Nine months ended   (in thousands)   September 30, 2023     September 30, 2022   Income Statement                 Components of lease expense:                 Operating lease cost   $ 2,492     $ 2,241   Variable lease cost     235       172   Less sublease income     75       72   Total lease cost   $ 2,652     $ 2,341         Nine months ended     Nine months ended   (in thousands)   September 30, 2023     September 30, 2022   Cash flow Statement                 Supplemental cash flow information:                 Operating cash flows from operating leases   $ 3,111     $ 2,746     As of September 30, 2023, Bancorp had entered into one lease agreement 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. While the proposed regulation has not been finalized, it is expected to be finalized during the fourth quarter of 2023. As a result, Bancorp elected not to renew the insurance captive effective August 2023 and expects it to be dissolved by the end of the year.   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; and   ● other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “ Risk Factors ”   of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 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 fourth 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 September 30, 2023, Bancorp has made no request for an advance under this program and currently does not plan to.   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 September 30, 2023 and 2022:   (dollars in thousands, except per share data)                   Variance   Three months ended September 30 ,   2023     2022     $/bp     %                                     Net income available to stockholders   $ 27,092     $ 28,455     $ (1,363 )     -5 % Diluted earnings per share   $ 0.92     $ 0.97     $ (0.05 )     -5 % ROA     1.38 %     1.47 %   (9) bps       -6 % ROE     13.26 %     14.85 %   (159) bps       -11 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the three months ended September 30, 2023 compared to September 30, 2022:     ● Net income totaled $27.1 million for the three months ended September 30, 2023, resulting in diluted EPS of $0.92, compared to net income of $28.5 million for the three months ended September 30, 2022, which resulted in diluted EPS of $0.97.   o Results for the three months ended September 30, 2023 compared to the three months ended September 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 pricing pressure, which has driven deposit contraction and increased borrowing activity, hindered results for the third quarter of 2023 compared to the same period of the prior year.   ● Total loans (excluding PPP) increased $559 million, or 11%, compared to September 30, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $554 million, or 11%, for the three months ended September 30, 2023 compared to the same period of the prior year.   ● Bancorp’s ACL on loans increased $8 million, or 11%, compared to September 30, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $2.3 million for the three months ended September 30, 2023, compared to provision of $4.1 million for the three months ended September 30, 2022.   ● Deposit balances declined $98 million, or 2%, compared to September 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 nine months of 2023 was driven by anticipated public funds runoff. While we have not seen widespread 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 through the end 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 $61.4 million for the three months ended September 30, 2023, representing a decrease of $1.2 million, or 2%, compared to the three months ended September 30, 2022.   o NIM decreased 12 bps, or 3%, to 3.34% for the three months ended September 30, 2023 compared to the same period of the prior year, driven by rising deposit costs and increased borrowing activity, which has outpaced the benefits of average earning asset expansion and the impact of rising rates on those assets over the past 12 months.   ● Non-interest income decreased $2.0 million, or 8%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022, which was attributed largely to non-recurring activity recorded during the third quarter of 2022, including a $3.1 million gain associated with the sale of acquired property.   ● Non-interest expenses increased $1.8 million, or 4%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. Non-interest expenses in general remain well-controlled and consistent with expansion, strong performance and continued investment in technology.   ● As of September 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 September 30, 2022. Total stockholders’ equity to total assets was 10.21% as of September 30, 2023, compared to 10.14% and 9.63% at December 31, 2022 and September 30, 2022, respectively. Tangible common equity to tangible assets was 7.69% at September 30, 2023, compared to 7.44% and 6.78% at December 31, 2022 and September 30, 2022, respectively.   The following table presents an overview of Bancorp’s financial performance for the nine months ended September 30, 2023 and 2022:   (dollars in thousands, except per share data)                   Variance   Nine months ended September 30 ,   2023     2022     $/bp     %                                     Net income available to stockholders   $ 83,804     $ 63,155     $ 20,649       33 % Diluted earnings per share   $ 2.86     $ 2.20     $ 0.66       30 % ROA     1.46 %     1.14 %   32 bps       28 % ROE     14.07 %     11.44 %   263 bps       23 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the nine months ended September 30, 2023 compared to September 30, 2022:     ● Net income totaled $83.8 million for the nine months ended September 30, 2023, resulting in diluted EPS of $2.86, compared to net income of $63.2 million for the nine months ended September 30, 2022, which resulted in diluted EPS of $2.20. The nine months ended September 30, 2022 was significantly impacted by the CB acquisition.   o Strong results for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 were driven by significant organic and acquisition-related growth, higher net interest margin 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 nine months ended September 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 nine months ended September 30, 2022 represented approximately seven months of activity associated with the CB acquisition, including $19.5 million in merger expenses and $4.4 million in credit loss expense attributed to the acquired loan portfolio, which weighed heavily on prior period results.   ● Total loans (excluding PPP) increased $559 million, or 11%, compared to September 30, 2022, driven by significant organic growth over the past 12 months. Average loans (excluding PPP) increased $664 million, or 14%, for the nine months ended September 30, 2023 compared to the same period of the prior year as a result of the previously mentioned organic growth coupled with the prior year acquisition.   60 Table of Contents     ● Bancorp’s ACL on loans increased $8 million, or 11%, compared to September 30, 2022, attributed mainly to the significant organic loan growth experienced over the last 12 months. Provision for credit losses on loans totaled $6.7 million for the nine months ended September 30, 2023, compared to $6.1 million for the nine months ended September 30, 2022. While organic loan growth drove expense for the current year period, activity for the prior year period was attributed largely to $4.4 million of expense related to the acquired loan portfolio, and to a lesser extent, a deteriorating economic forecast.   ● Deposit balances declined $98 million, or 2%, compared to September 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 nine months of 2023 was driven by anticipated public funds runoff. While we have not seen widespread 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 through the end of 2023 and into early 2024.   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 $185.8 million for the nine months ended September 30, 2023, representing an increase of $17.0 million, or 10%, compared to the nine months ended September 30, 2022.   o NIM increased 19 bps, or 6%, to 3.44% for the nine months ended September 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 nine months of 2023.   ● Non-interest income increased $1.8 million, or 3%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, led by record WM&T and treasury fee income, significant growth in BOLI income associated with the prior year purchase of additional BOLI assets and solid growth in other non-interest income categories, which helped offset non-recurring activity recorded in the prior year period, including a $3.1 million gain on the sale of acquired property. The prior year period did not include a full nine months of activity associated with the acquisition of CB, as the acquisition was completed on March 7, 2022.   ● Non-interest expenses declined $8.0 million, or 6%, for the nine months ended September 30, 2023, compared to the nine months ended September 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 previously noted, the prior year period did not include a full nine months of activity stemming from the acquisition of CB.   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 September 30,   2023     2022     $/bp     %                                     Net interest income   $ 61,315     $ 62,376     $ (1,061 )     -2 % Net interest income (FTE)*     61,437       62,608       (1,171 )     -2 % Net interest spread (FTE)*     2.67 %     3.31 %   (64) bps       -19 % Net interest margin (FTE)*     3.34 %     3.46 %   (12) bps       -3 % Average interest earning assets   $ 7,305,205     $ 7,181,781     $ 123,424       2 % Average interest bearing liabilities     5,076,486       4,619,927       456,559       10 % Five year Treasury note rate at period end     4.60 %     4.06 %   54 bps       13 % Average five year Treasury note rate     4.31 %     3.23 %   108 bps       33 % Prime rate at period end     8.50 %     6.25 %   225 bps       36 % Average Prime rate     8.43 %     5.37 %   306 bps       57 % One month term SOFR at period end     5.32 %     3.04 %   228 bps       75 % Average one month term SOFR     5.29 %     2.44 %   285 bps       117 %   (dollars in thousands)                   Variance   As of and for the nine months ended September 30,   2023     2022     $/bp     %                                     Net interest income   $ 185,316     $ 168,120     $ 17,196       10 % Net interest income (FTE)*     185,757       168,797       16,960       10 % Net interest spread (FTE)*     2.87 %     3.16 %   (29) bps       -9 % Net interest margin (FTE)*     3.44 %     3.25 %   19 bps       6 % Average interest earning assets   $ 7,210,748     $ 6,936,718     $ 274,030       4 % Average interest bearing liabilities     4,934,485       4,524,390       410,095       9 % Five year Treasury note rate at period end     4.60 %     4.06 %   54 bps       13 % Average five year Treasury note rate     3.94 %     2.68 %   126 bps       47 % Prime rate at period end     8.50 %     6.25 %   225 bps       36 % Average Prime rate     8.10 %     4.22 %   388 bps       92 % One month term SOFR at period end     5.32 %     3.04 %   228 bps       75 % Average one month term SOFR     4.98 %     1.19 %   379 bps       318 %   *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 September 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 September 30, 2023, Bancorp’s loan portfolio consisted of approximately 73% fixed and 27% 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 nine months of 2023, the FRB continued raising rates, albeit at a slower pace, increasing the FFTR a total of 100 bps to a range of 5.25% - 5.50% as of September 30, 2023 via four separate 25 bps rate hikes. As a result, Prime ended at 8.50% as of September 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. Recent projections indicate that the FFTR will remain at the current level during the fourth quarter of 2023 and stay there through the first quarter of 2024. 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 through the end of 2023 and early 2024.   Net Interest Income (FTE) – Three months ended September 30, 2023 compared to September 30, 2022   Net interest spread (FTE) and NIM (FTE) were 2.67% and 3.34%, for the three months ended September 30, 2023, compared to 3.31% and 3.46% for the same period in 2022, respectively. NIM during the three months ended September 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 5.25% - 5.50%, and Prime at 8.50%, as of September 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, driving NIM compression.   Net interest income (FTE) decreased $1.2 million, or 2%, for the three months ended September 30, 2023 compared to the same period of 2022, as significant organic loan growth and the benefit higher rates had on interest earning assets were outpaced by rising funding costs stemming from intense pricing pressure/competition for deposits and increased borrowing activity.   Total average interest earning assets increased $123 million, or 2%, for the three months ended September 30, 2023, as compared to the same period of 2022, as substantial average loan growth was offset by a decline in average FFS/interest bearing due from bank balances and a decline in average investment securities associated with normal amortization and contractual maturities. However, as a result of a significantly higher interest rate environment, the average rate earned on total interest earning assets climbed 110 bps to 4.84%.     ● Average total loan balances increased $537 million, or 11%, for the three months ended September 30, 2023, compared to the same period of 2022. Average non-PPP loan growth of $554 million, or 11%, was driven by strong organic growth, which was partially offset by a $17 million, or 74%, decline in average PPP loan balances resulting from continued pay down and forgiveness activity.     ● Average investment securities declined $110 million, or 6%, for the three months ended September 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 $318 million, or 72%, for the three months ended September 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 $21.4 million, or 32%, to $89.0 million for the three months ended September 30, 2023, as compared to the same period of 2022.     ● Interest and fee income (FTE) on loans increased $21.4 million, or 38%, to $78.3 million for the three months ended September 30, 2023, compared to the same period of 2022, driven by the rising rate environment and significant organic growth. The yield on the overall loan portfolio increased 110 bps to 5.66% for the three months ended September 30, 2023, compared to 4.56% for the same period of the prior year.     ● Despite the decline in average investment securities, there was a $503,000, or 6%, increase in interest income (FTE) on the portfolio for the three months ended September 30, 2023 compared to the same period of 2022, driving a 24 bps increase in the corresponding yield on the portfolio. The increased yield on the investment securities portfolio was driven by the benefit of investments purchased in the prior year once rates began to rise and the continued amortization and maturity of lower-yielding securities.     ● Interest income on FFS and interest bearing due from bank balances decreased $810,000 for the three months ended September 30, 2023, as a $318 million decline in corresponding average balances more than offset the dramatic rise in the FFTR experienced over the past twelve months. The yield on these assets increased 303 bps to 5.22% for the three months ended September 30, 2023 compared to the same period of 2022.   Total average interest bearing liabilities increased $457 million, or 10%, to $5.1 billion for the three-month period ended September 30, 2023 compared with the same period in 2022.     ● Average interest bearing deposits increased $64 million, or 1%, for the three months ended September 30, 2023 compared to the same period in 2022, as a $296 million increase in average time deposits attributed to Bancorp’s promotional offerings more than offset declines in other interest bearing deposit types.     ● Average FHLB advances totaled $402 million for the three months ended September 30, 2023. Bancorp utilized overnight borrowings with the FHLB during the three months ended September 30, 2023 based on evolving liquidity needs. Bancorp also utilized a rolling $200 million term advance in conjunction with three separate interest rate swaps during the quarter 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 September 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.   Total interest expense increased $22.6 million for the three months ended September 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 173 bps to 2.16% for the three months ended September 30, 2023 compared to the same period of 2022.     ● Total interest bearing deposit expense increased $16.9 million as a result of the aforementioned deposit rate increases, resulting in a 148 bp increase in the cost of interest bearing deposits for the three months ended September 30, 2023 compared to the same period of the prior year. Bancorp expects pricing pressure/competition stemming from the rising rate environment to continue in the coming months.     ● Interest expense of $4.9 million was recorded in relation to FHLB borrowings for the three months ended September 30, 2023, driven by the increased borrowing activity previously noted. No FHLB borrowings were utilized for the three months ended September 30, 2022.     ● Interest expense totaling $579,000 was recorded for the three months ended September 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) – Nine months ended September 30, 2023 compared to September 30, 2022   Net interest spread (FTE) and NIM (FTE) were 2.87% and 3.44%, for the nine months ended September 30, 2023, compared to 3.16% and 3.25% for the same period in 2022, respectively. NIM during the nine months ended September 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 first hike in mid-March 2022. The FFTR stood at a range of 5.25% - 5.50%, and Prime at 8.50%, as of September 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 for the nine months ended September 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, deposit mix shift and overall deposit contraction, as depositors seek higher yielding deposit alternatives and Bancorp’s borrowing activity has increased.   Net interest income (FTE) increased $17.0 million, or 10%, for the nine months ended September 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, which more than offset rising funding costs.   Total average interest earning assets increased $274 million, or 4%, to $7.21 billion for the nine months ended September 30, 2023, as compared to the same period of 2022, with the average rate earned on total interest earning assets climbing 126 bps to 4.67%.     ● Average total loan balances increased $611 million, or 13%, for the nine months ended September 30, 2023, compared to the same period of 2022. Average non-PPP loan growth of $664 million, or 14%, was driven by strong organic growth and acquisition-related expansion, which was only partially offset by a $53 million, or 84%, decline in average PPP loan balances resulting from continued forgiveness activity.     ● Average investment securities grew $80 million, or 5%, for the nine months ended September 30, 2023 compared to the same period of 2022, attributed to a combination of strategically deploying excess liquidity through further investment and acquisition-related activity in 2022 offset by normal amortization and maturity activity through the first nine months of 2023. Investment security purchases during the nine months ended September 30, 2023 were minimal.     ● Average FFS and interest bearing due from bank balances decreased $425 million, or 76%, for the nine months ended September 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 $74.7 million, or 42%, to $251.9 million for the nine months ended September 30, 2023, as compared to the same period of 2022.     ● Interest and fee income (FTE) on loans increased $67.1 million, or 44%, to $219.6 million for the nine months ended September 30, 2023, compared to the same period of 2022, driven by the rising rate environment and both organic and acquisition-related growth, which more than offset a $4.5 million, or 95%, decline in PPP-related income. The yield on the overall loan portfolio increased 119 bps to 5.50% for the nine months ended September 30, 2023, compared to 4.31% for the same period of the prior year.     ● Growth in average investment securities led to a $6.0 million, or 30%, increase in interest income (FTE) on the portfolio for the nine months ended September 30, 2023 compared to the same period of 2022, driving a 40 bps, or 24%, increase in the corresponding yield on the portfolio. The increased yield on the investment securities portfolio was driven by the benefit of investments purchased in the prior year once rates began to rise and the continued amortization and maturity of lower-yielding securities.     ● Interest income on FFS and interest bearing due from bank balances increased $1.0 million for the nine months ended September 30, 2023, as rising short-term interest rates more than offset a $425 million decline in related average balances. The yield on these assets increased 401 bps to 4.93% for the nine months ended September 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 $410 million, or 9%, to $4.93 billion for the nine month period ended September 30, 2023 compared with the same period in 2022, with the total average cost increasing 154 bps to 1.79%.     ● Average interest bearing deposits increased $97 million, or 2%, for the nine months ended September 30, 2023 compared to the same period in 2022. This increase stems from the addition of $1.12 billion in deposits during the first quarter of 2022 in relation to the CBT acquisition and an increase in time deposits during the first nine months of 2023 attributed to Bancorp’s promotional offerings, which has been partially offset by contraction in other interest bearing deposit categories.     ● Average FHLB advances totaled $305 million for the nine months ended September 30, 2023. Bancorp utilized overnight borrowings with the FHLB during the nine months ended September 30, 2023 based on evolving liquidity needs. Bancorp also utilized rolling term advances in conjunction with three separate interest rate swaps during the nine months ended September 30, 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 nine months ended September 30, 2023. These subordinated debentures were added as a result of the CB acquisition during the first quarter of 2022.   Total interest expense increased $57.8 million for the nine months ended September 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 154 bps to 1.79% for the nine months ended September 30, 2023 compared to the same period of 2022.     ● Total interest bearing deposit expense increased $44.6 million mainly as a result aforementioned deposit rate increases, resulting in a 132 bp increase in the cost of interest bearing deposits for the nine months ended September 30, 2023 compared to the same period of the prior year. Bancorp expects pricing pressure/competition stemming from the rising rate environment to continue the coming months.     ● Interest expense of $10.6 million was recorded in relation to FHLB borrowings for the nine months ended September 30, 2023, driven by the increased borrowing activity previously noted. No FHLB borrowings were utilized for the nine months ended September 30, 2023.     ● Interest expense totaling $1.7 million was recorded for the nine months ended September 30, 2023, as a result of the subordinated debentures added through the prior year acquisition, approximately $300,000 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 September 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   $ 124,653     $ 1,640       5.22 %   $ 442,880     $ 2,450       2.19 % Mortgage loans held for sale     7,112       55       3.07       8,694       103       4.70   Investment securities:                                                 Taxable     1,575,971       8,064       2.03       1,677,745       7,503       1.77   Tax-exempt     83,917       476       2.25       91,852       534       2.31   Total securities     1,659,888       8,540       2.04       1,769,597       8,037       1.80                                                     Federal Home Loan Bank stock     27,290       499       7.25       11,712       172       5.83                                                     SBA Paycheck Protection Program (PPP) loans     5,958       27       1.80       22,939       703       12.16   Non-PPP loans     5,480,304       78,286       5.67       4,925,959       56,177       4.52   Total loans     5,486,262       78,313       5.66       4,948,898       56,880       4.56                                                     Total interest earning assets     7,305,205       89,047       4.84       7,181,781       67,642       3.74                                                     Less allowance for credit losses on loans     79,770                       67,473                                                                     Non-interest earning assets:                                                 Cash and due from banks     80,454                       88,434                   Premises and equipment, net     101,707                       117,296                   Bank owned life insurance     86,015                       81,841                   Goodwill     194,074                       198,634                   Accrued interest receivable and other     117,469                       61,207                                                                     Total assets   $ 7,805,154                     $ 7,661,720                                                                                                                       Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand   $ 2,206,238     $ 8,698       1.56 %   $ 2,213,657     $ 2,536       0.45 % Savings     468,751       334       0.28       566,045       171       0.12   Money market     1,041,471       5,824       2.22       1,168,111       1,524       0.52   Time     792,951       6,504       3.25       497,170       218       0.17   Total interest bearing deposits     4,509,411       21,360       1.88       4,444,983       4,449       0.40                                                     Securities sold under agreements to repurchase     127,063       597       1.86       139,749       176       0.50   Federal funds purchased     11,776       157       5.29       8,985       50       2.21   Federal Home Loan Bank advances     401,630       4,917       4.86       —       —       —   Subordinated debentures     26,606       579       8.63       26,210       359       5.43                                                                                                       Total interest bearing liabilities     5,076,486       27,610       2.16       4,619,927       5,034       0.43                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,731,724                       2,169,280                   Accrued interest payable and other     186,234                       112,191                                                                     Total liabilities     6,994,444                       6,901,398                                                                     Stockholders ’ equity     810,710                       760,322                   Total liabilities and stockholders' equity   $ 7,805,154                     $ 7,661,720                                                                     Net interest income           $ 61,437                     $ 62,608                                                             Net interest spread                     2.67 %                     3.31 %                                                   Net interest margin                     3.34 %                     3.46 %   67 Table of Contents   Average Balance Sheets and Interest Rates (FTE) – Nine-Month Comparison       Nine months ended September 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   $ 132,421     $ 4,885       4.93 %   $ 557,578     $ 3,845       0.92 % Mortgage loans held for sale     7,333       173       3.15       9,542       177       2.48   Investment securities:                                                 Taxable     1,624,452       24,809       2.04       1,557,119       18,988       1.63   Tax-exempt     86,386       1,492       2.31       74,093       1,320       2.38   Total securities     1,710,838       26,301       2.06       1,631,212       20,308       1.66                                                     Federal Home Loan Bank stock     22,663       939       5.54       12,015       328       3.65                                                     SBA Paycheck Protection Program (PPP) loans     10,016       217       2.90       62,933       4,680       9.94   Non-PPP loans     5,327,477       219,381       5.51       4,663,438       147,841       4.24   Total loans     5,337,493       219,598       5.50       4,726,371       152,521       4.31                                                     Total interest earning assets     7,210,748       251,896       4.67       6,936,718       177,179       3.41                                                     Less allowance for credit losses on loans     77,720                       63,857                                                                     Non-interest earning assets:                                                 Cash and due from banks     79,470                       92,890                   Premises and equipment, net     103,231                       105,994                   Bank owned life insurance     85,461                       62,924                   Goodwill     194,074                       184,404                   Accrued interest receivable and other     65,394                       79,238                                                                     Total assets   $ 7,660,658                     $ 7,398,311                                                                                                                       Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand   $ 2,241,032     $ 23,232       1.39 %   $ 2,199,702     $ 4,169       0.25 % Savings     496,230       997       0.27       536,680       277       0.07   Money market     1,061,972       14,580       1.84       1,138,848       2,174       0.26   Time     668,926       13,131       2.62       495,609       770       0.21   Total interest bearing deposits     4,468,160       51,940       1.55       4,370,839       7,390       0.23                                                     Securities sold under agreements to repurchase     120,740       1,429       1.58       123,845       250       0.27   Federal funds purchased     13,857       504       4.86       9,515       72       1.01   Federal Home Loan Bank advances     305,220       10,613       4.65       —       —       —   Subordinated debentures     26,508       1,653       8.34       20,191       670       4.44                                                                                                       Total interest bearing liabilities     4,934,485       66,139       1.79       4,524,390       8,382       0.25                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,796,586                       2,038,168                   Accrued interest payable and other     133,415                       97,362                                                                     Total liabilities     6,864,486                       6,659,920                                                                     Stockholders ’ equity     796,172                       738,391                   Total liabilities and stockholders' equity   $ 7,660,658                     $ 7,398,311                                                                     Net interest income           $ 185,757                     $ 168,797                                                             Net interest spread                     2.87 %                     3.16 %                                                   Net interest margin                     3.44 %                     3.25 %   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 accounted for as secured borrowings averaged $4 million and $5 million for the three and nine-month periods ended September 30, 2023, respectively. Participation loans accounted for as secured borrowings averaged $5 million for both the three and nine-month periods ended September 30, 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 $122,000 and $232,000 for the three-month periods ended September 30, 2023 and 2022, respectively, and $441,000 and $677,000 for the nine-month periods ended September 30, 2023 and 2022, respectively.     ● Interest income includes loan fees of $1.1 million ($27,000 associated with the PPP) and $2.2 million ($590,000 associated with the PPP) for the three-month periods ended September 30, 2023 and 2022, respectively, and $4.1 million ($217,000 associated with the PPP) and $8.9 million ($4.1 million associated with the PPP) for the nine-month periods ended September 30, 2023 and 2022, respectively. Interest income on loans may be materially impacted by the level of prepayment fees collected and accretion related to acquired loans. Accretion income related to acquired loans totaled $507,000 and $609,000 for the three-month periods ended September 30, 2023 and 2022, respectively, and $2.0 million for nine-month periods ended both September 30, 2023 and 2022, respectively.     ● Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.     ● NIM represents net interest income on a FTE basis as a percentage of total average interest earning assets.     ● Net interest spread (FTE) is the difference between taxable equivalent rates earned on total interest earning assets less the cost of interest bearing liabilities.     ● The fair market value adjustment on investment securities resulting from ASC 320, “ Investments –  Debt and Equity Securities ”  is included as a component of other assets.   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 September 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 32% 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 32% 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 September 30, 2023     -6.16 %     -3.95 %     -1.75 %     -2.23 %     -4.48 %   Bancorp’s loan portfolio is currently composed of approximately 73% fixed and 27% 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 62%) or SOFR (approximately 38%).   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 matured after the cessation of LIBOR (June 2023) that do not contain clearly defined or practicable fallback provisions. The legislation also established a safe harbor for lenders, providing protection from litigation associated with choosing a replacement rate recommended by the FRB, such as SOFR, and also allows for the continued use of any appropriate benchmark rate for new contracts.   70 Table of Contents   As a result of LIBOR’s cessation in June 2023, the Company did not have any loans or interest rate derivative contracts that referenced LIBOR as of September 30, 2023. The Company now utilizes SOFR as the replacement for LIBOR. The Company had $722 million in loans and interest rate derivative contracts (notional amount) that were indexed to SOFR at September 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 September 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     Nine months ended       September 30,     September 30,   (dollars in thousands)   2023     2022     2023     2022                                     Beginning balance   $ 77,710     $ 66,362     $ 73,531     $ 53,898   Acquisition - PCD loans (goodwill adjustment)     -       -       -       9,950   Adjusted beginning balance     77,710       66,362       73,531       63,848                                     Provision for credit losses on loans     2,300       4,103