STOCK YARDS BANCORP, INC. – 10-Q

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, but 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 MSAs through 73 full
service banking center locations. The Bank is registered with, and subject to
supervision, regulation and examination by the FDIC and the Kentucky Department
of Financial Institutions.



The Captive, a wholly owned subsidiary of the Company, 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 $2,400,000, 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.



As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7,
2022, Bancorp became the 100% successor owner of the following 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 loaned in exchange for
subordinated debentures with similar terms to the TPS.



Also, as a result of its acquisition of Commonwealth Bancshares, Inc., the
Company acquired a 60% interest in Landmark Financial Advisors, LLC (LFA), which
is based in Bowling Green, Kentucky and provides wealth management services. LFA
is consolidated into the Company. The noncontrolling interest within the
consolidated financial statements represents the interest in LFA not owned by
the Company.



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, 2021. To the extent that this discussion
describes prior performance, the descriptions relate only to the periods listed,
which may not be indicative of Bancorp's future financial outcomes. In addition
to historical information, this discussion contains forward-looking statements
that involve risks, uncertainties and assumptions that could cause results to
differ materially from management's expectations.



Cautionary Statement Regarding Forward-Looking Statements




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



Forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause actual results, performance, or achievements to be
materially different from future results, performance, or achievements expressed
or implied by the statement. These statements are often, but not always, made
through the use of words or phrases such as "anticipate," "believe," "aim,"
"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.



                                       68

——————————————————————————–

Table of Contents



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:


? Residual impact, if any, of the COVID-19 pandemic of the COVID-19 pandemic on

Bancorp’s business, including the impact of the actions taken by governmental

Allianz 2022-05 Body Leaderboard

authorities to try and contain the pandemic or address the impact of the

pandemic on the U.S. economy (including, without limitation, various relief

efforts), and the resulting effect of all such items on our operations,

liquidity and capital position, and on the financial condition of Bancorp’s

    borrowers and other customers;


  ? changes in, or forecasts of, future political and economic conditions,
    inflation and efforts to control it;

? accuracy of assumptions and estimates used in establishing the ACL on loans,

ACL for off-balance sheet credit exposures and other estimates;

? impairment of investment securities, goodwill, MSRs, other intangible assets

or DTAs;

? ability to effectively navigate an economic slowdown or other economic or

    market disruptions;


  ? changes in laws and regulations or the interpretation thereof;


  ? 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.;


  ? descriptions of plans or objectives for future operations, products, or
    services;


  ? integration of acquired financial institutions, businesses or future
    acquisitions;

? changes in the credit quality of Bancorp’s customers and counterparties,

    deteriorating asset quality and charge-off levels;


  ? changes in technology instituted by Bancorp, its counterparties or
    competitors;


  ? changes to or the effectiveness of Bancorp's overall internal control
    environment;

? adequacy of Bancorp’s risk management framework, disclosure controls and

procedures and internal control over financial reporting;

? changes in applicable accounting standards, including the introduction of new

    accounting standards;


  ? changes in investor sentiment or behavior;


  ? changes in consumer/business spending or savings behavior;

? ability to appropriately address social, environmental and sustainability

concerns that may arise from business activities;

? occurrence of natural or man-made disasters or calamities, including health

emergencies, the spread of infectious diseases, pandemics or outbreaks of

hostilities, and Bancorp’s ability to deal effectively with disruptions caused

by the foregoing;

? ability to maintain the security of its financial, accounting, technology,

data processing and other operational systems and facilities;

? ability to withstand disruptions that may be caused by any failure of its

operational systems or those of third parties;

? ability to effectively defend itself against cyberattacks or other attempts by

unauthorized parties to access information of Bancorp, its vendors or its

customers or to disrupt systems; and

? other risks and uncertainties reported from time-to-time in Bancorp’s filings

with the SEC, including Part I Item 1A “Risk Factors” of Bancorp’s Annual

    Report on Form 10-K for the year ended December 31, 2021.




                                       69

——————————————————————————–

Table of Contents

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




On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares,
Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company,
collectively defined as "CB," a Louisville, Kentucky-based commercial bank and
trust company, which operated 15 retail branches, including nine in Jefferson
County, four in Shelby County, and two in Northern Kentucky. At the time of
acquisition and net of purchase accounting adjustments, Commonwealth had $1.34
billion in assets, $632 million in loans (net of purchase accounting
adjustments), $247 million in investment securities and $1.12 billion in
deposits in addition to maintaining a Wealth Management and Trust Department
with total assets under management of approximately $2.93 billion. Bancorp
acquired all outstanding common stock of Commonwealth Bancshares, Inc. in a
combined stock and cash transaction that resulted in total consideration paid to
Commonwealth Bancshares, Inc. shareholders of $168 million.



Bancorp recorded goodwill of $67 million and incurred pre-tax merger related
expenses totaling $19.5 million for the three months ended March 31, 2022 as a
result of the CB acquisition.



Further, the CB acquisition served to increase the ACL on loans by $14 million
at acquisition date. This increase consisted of $10 million attributed to the
acquired PCD loan portfolio, with the corresponding offset recorded to goodwill
(as opposed to provision for credit loss expense), and $4 million of provision
for credit loss expense recorded in relation to the acquired loan portfolio for
the three months ended March 31, 2022.



Acquisition of Kentucky Bancshares, Inc. and its Subsidiary Kentucky Bank




On May 31, 2021, Bancorp completed its acquisition of Kentucky Bancshares, Inc.
and its wholly owned subsidiary, Kentucky Bank, collectively defined as "KB," a
Paris, Kentucky-based commercial bank and trust company, which operated 19
retail branches throughout central and eastern Kentucky with $1.27 billion in
assets, $755 million in loans (including PPP), $396 million in investment
securities and $1.04 billion in deposits at the time of acquisition. Kentucky
Bancshares, Inc. was also the holding company for an insurance captive, which
Bancorp acquired and retained. Bancorp acquired all outstanding common stock of
Kentucky Bancshares, Inc. in a combined stock and cash transaction that resulted
in total consideration paid to Kentucky Bancshares, Inc. shareholders of $233
million.



Bancorp recorded goodwill of $123 million and incurred pre-tax merger related
expenses totaling $18.1 million for the year ended December 31, 2021 as a result
of the KB acquisition.



The acquisition of KB had a significant impact on the ACL and credit loss
provisioning for the year ended December 31, 2021. In total, acquisition-related
activity served to increase the ACL by $14 million for the year ended December
31, 2021. This increase consisted of $7 million attributed to the acquired PCD
loan portfolio, with the corresponding offset recorded to goodwill (as opposed
to provision for credit loss expense), and $7 million attributed to the acquired
non-PCD portfolio, which represented the acquisition-related credit loss expense
at the time of acquisition.


Issued but Not Yet Effective Accounting Standards Updates

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

                                       70

——————————————————————————–

  Table of Contents



Business Segment Overview



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



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



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



Overview – Operating Results (FTE)

The following table presents an overview of Bancorp’s financial performance for
the three months ended March 31, 2022 and 2021:



(dollars in thousands, except per
share data)                                                                 

Variance

Three months ended March 31,               2022           2021            $/bp             %

Net income attributed to stockholders   $    7,906     $   22,710     $    (14,804 )          -65 %
Diluted earnings per share              $     0.29     $     0.99     $      (0.70 )          -71 %
ROA                                           0.47 %         1.96 %      (149) bps            -76 %
ROE                                           4.55 %        20.71 %     (1616) bps            -78 %



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

General highlights for the three months ended March 31, 2022 compared to March
31, 2021
:

? Bancorp completed its acquisition of Commonwealth Bancorp, Inc. during the

first quarter of 2022. At the time of acquisition, CB had approximately $1.34

billion in assets, $632 million in loans (net of purchase accounting

adjustments), $247 million in investment securities and $1.12 billion in

deposits.

? Bancorp also completed its acquisition Kentucky Bancshares, Inc. during the

second quarter of 2021, which resulted in the addition of approximately $1.27

billion in assets, $755 million in loans (net of purchase accounting

adjustments), $396 million in investment securities and $1.04 billion in

deposits at the time of acquisition last year, further contributing to the

substantial balance sheet growth experienced over the past twelve months.

? Net income totaled $7.9 million, resulting in diluted EPS of $0.29 for the

three months ended March 31, 2022, a 71% decrease over $0.99 for the same

period of 2021. Significant factors affecting the results for the three months

ended March 31, 2022 and 2021 include:

o The acquisition of Commonwealth included $19.5 million in merger expenses and

$4.4 million in credit loss expense attributed to the acquired loan portfolio.

o Net interest income increased $10.9 million, or 29%, for the three months

ended March 31, 2022 compared to the same period of 2021, as both

acquisition-related growth (primarily from the May 31, 2021 KB acquisition)

and organic growth in loans and investment securities overcame a substantial

decline in PPP-related fee recognition.

o Total provision for credit loss expense was $2.3 million for the three months

ended March 31, 2022 compared to a net benefit of $1.5 million for the same

period of last year, the increase resulting entirely from expense recorded in

    association with the CB acquisition.




                                       71

——————————————————————————–

  Table of Contents



  ? NIM decreased 28 bps to 3.11% for the three months ended March 31, 2022

compared to 3.39% for the same period in 2021. Substantial growth in federal

funds sold, interest bearing due from banks and the investment securities

portfolio resulting from excess liquidity and efforts to deploy it, coupled

with a sustained low rate environment that has continued to put pressure on

loan yields, drove NIM compression for the three months ended March 31, 2022

compared to the same period of 2021. While the interest rate environment began

showing improvement during the first quarter on the heels of the FRB’s 25 bps

FFTR increase, Bancorp did not experience the full benefit of rising rates

during the three months ended March 31, 2022.

? Total loans (excluding PPP loans) increased $1.75 billion, or 58%, compared to

March 31, 2021, driven by the addition of $632 million in loans (net of

purchase accounting adjustments) during the first quarter in relation to the

CB acquisition, $755 million in loans related to expansion into the Central

Kentucky market during the second quarter of 2021 and $371 million of organic

growth. Average loans (excluding PPP loans) also increased $1.30 billion, or

43%, for the three months ended March 31, 2022 compared to the same period in

2021.

? The PPP loan portfolio decreased $542 million, or 88%, compared to March 31,

2021 as the result of anticipated forgiveness activity, driving a $4.2

million, or 60%, decline in PPP-related interest and fee income for the three

months ended March 31, 2022 compared to the same period of 2021.

? Total provision for credit loss expense of $2.3 million was recorded for the

three months ended March 31, 2022, compared to a net benefit of $1.5 million

for the same period of the prior year. Expense of $4.4 million was recorded in

relation to the loan portfolio acquired from CB, which was partially offset by

a net benefit of $1.8 million recorded as a result of continued improvement in

the unemployment forecast, updates to Bancorp’s CECL modeling, net recoveries

and strong historic credit metrics.

? Bancorp’s ACL on loans to total loans was 1.38% at March 31, 2022 compared to

1.29% at December 31, 2021, the increase stemming from acquisition-related

activity within the ACL on loans.

? Deposit balances increased $2.55 billion compared to March 31, 2021, as a

result of assuming approximately $1.12 billion in deposits during the first

quarter in relation to the CB acquisition, the addition of $1.04 billion in

deposits related to expansion into the Central Kentucky market during the

second quarter of 2021 and the general trend of customers maintaining elevated

levels of liquidity recently.

? Total non-interest income increased $5.4 million, or 39%, for the three-month

period ended March 31, 2022 compared to the same period of 2021. The first

quarter of 2022 benefitted from both significant contributions stemming from

acquisition-related activity and organic growth over the past twelve months.

All non-interest income revenue streams experienced significant increases over

the same quarter of the prior year, with the exception of mortgage banking,

    which experienced a significant decrease as a result of slowing volumes
    compared to the re-finance rush that benefitted 2020 and 2021.

? Non-interest expenses increased $31.3 million for the three months ended March

31, 2022 compared to the same period of 2021. Merger expenses of $19.5 million

drove the large increase along with acquisition-related growth in full-time

equivalent employees, technology expenses and premises and equipment.

? Bancorp’s efficiency ratio (FTE) for the three months ended March 31, 2022 was

82.61% compared to 48.29% for the same period of 2021, the large fluctuation

being the result of one-time merger-related expenses incurred as a result of

the CB acquisition. Excluding one-time merger costs and expenses related to

the amortization of tax credit partnerships, Bancorp’s non-GAAP efficiency

ratio for the three months ended March 31, 2022 was 53.87% compared to 47.45%

    for the same period of 2021. See the section titled "Non-GAAP Financial
    Measures" for a reconcilement of non-GAAP to GAAP measures.




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 economic
factors including market interest rates, business spending, consumer confidence
and competitive conditions within the marketplace. The discussion that follows
is based on FTE interest data.



                                       72

——————————————————————————–

Table of Contents

Comparative information regarding net interest income follows:



(dollars in thousands)                                                      

Variance

As of and for the three months ended
March 31,                                     2022            2021            $/bp             %

Net interest income                        $    48,760     $    37,825     $    10,935            29 %
Net interest income (FTE)*                      48,944          37,874          11,070            29 %
Net interest spread                               3.06 %          3.30 %      (24) bps            -7 %
Net interest margin                               3.11 %          3.39 %      (28) bps            -8 %
Average interest earning assets            $ 6,389,882     $ 4,527,563     $ 1,862,319            41 %



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




NIM and net interest spread calculations above exclude the sold portion of
certain participation loans, which totaled $5 million at both March 31, 2022 and
December 31, 2021. These sold loans are on Bancorp's balance sheet as required
by GAAP because Bancorp retains some form of effective control; however, Bancorp
receives no interest income on the sold portion. These participation loans sold
are excluded from NIM and spread analysis, because Bancorp believes it provides
a more accurate depiction of loan portfolio performance.



The following table details the volatility experienced within the interest rate
environment over the past twelve months by comparing period end and quarterly
average rates:



                                   March 31,       December 31,       September 30,       June 30,       March 31,
                                     2022              2021               2021              2021           2021

Five year Treasury note -
quarter end                              2.42 %             1.26 %              0.98 %         0.87 %          0.92 %
Five year Treasury note -
quarterly average                        1.83 %             1.18 %              0.80 %         0.84 %          0.62 %
Prime rate - quarter end                 3.50 %             3.25 %              3.25 %         3.25 %          3.25 %
Prime rate - quarterly average           3.29 %             3.25 %              3.25 %         3.25 %          3.25 %
One-month LIBOR - quarter end            0.45 %             0.08 %              0.08 %         0.10 %          0.12 %
One-month LIBOR - quarterly
average                                  0.23 %             0.09 %              0.09 %         0.10 %          0.12 %
Overnight SOFR - quarter end             0.29 %             0.05 %              0.05 %         0.03 %          0.02 %
Overnight SOFR - quarterly
average                                  0.09 %             0.05 %              0.05 %         0.01 %          0.05 %




Prime rate, the five year Treasury note rate and the one month LIBOR are
included in the table above to provide a general indication of the interest rate
environment in which Bancorp has operated during the past several
quarters. Approximately $1.4 billion, or 29%, of Bancorp's loans are variable
rate and are indexed to either Prime, LIBOR or SOFR, generally repricing as
those rates change. At inception, most of Bancorp's fixed rate loans are priced
in relation to the five year Treasury rate.



On March 16, 2022, the FRB increased the FFTR to a range of 0.25%-0.50%, an
increase of 25 bps, which resulted in Prime increasing to 3.50%. The hike
represented the FRB's first interest rate action since it cut the FFTR 150 bps
in March of 2020 in response to the pandemic, which took Prime from 4.75% to
3.25%. While the hike drove increases in key benchmark rates, the interest rate
environment remains below pre-pandemic levels in general, with the exception of
the five-year treasury. Given the timing of the FRB's increase, the average
interest rate environment experienced for the three month period ended March 31,
2022 did not capture the full benefit of rising rates.



At March 31, 2022, Bancorp's loan portfolio consisted of approximately 71% fixed
and 29% 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
68%) or one-month LIBOR (approximately 32%).



With 68% of the variable rate loan portfolio tied to Prime and the majority with
floor rates of 4.00%, short-term rates would have to increase over 50 bps for
these loans to move above their floor rates given Prime is at 3.50% as of March
31, 2022. While the current economic outlook suggests continued interest rate
action from the FRB and prospects of a rising rate environment, concerns remain
regarding potential ongoing pricing pressure/competition, the possibility of a
flattening yield curve and the impact these factors will have on NIM.



                                       73

——————————————————————————–

Table of Contents

Net Interest Income (FTE) – Three months ended March 31, 2022 compared to March
31, 2021



Net interest spread (FTE) and NIM were 3.06% and 3.11%, for the three months
ended March 31, 2022 compared to 3.30% and 3.39% for the same period in 2021,
respectively. NIM during the three months ended March 31, 2022 was significantly
impacted by the following:


? An interest rate environment that is just beginning to evolve from sustained,

pandemic-driven lows experienced over the last two years. The FFTR was lowered

to a range of 0% – 0.25% in March of 2020, which resulted in Prime dropping to

3.25%, where it remained until the FRB’s most recent hike in mid-March. The

FFTR stood at a range of 0.25%-0.50%, and Prime at 3.50%, as of March 31,

    2022.


  ? Substantial balance sheet growth stemming from both acquisition-related

activity and organic growth, which resulted in total average earning asset

growth of $1.86 billion, or 41%, and average interest-bearing liability growth

of $1.36 billion, or 47%, for the three months ended March 31, 2022 compared

to the same period of 2021.

? Overall excess balance sheet liquidity, which contributed approximately 30 bps

of NIM compression for the three months ended March 31, 2022 compared to

approximately 13 bps of NIM compression for the same period of 2021. Excess

    liquidity within the banking system in general has also led to a highly
    competitive loan rate environment.

? PPP originations, which began in the second quarter of 2020 and continued

through expiration of the program on May 31, 2021, as well as the related

forgiveness activity, which accelerates the recognition of fee income on these

loans and continues to have a significant effect on NIM. The average balance

of the PPP loan portfolio decreased $523 million, and related income decreased

$4.2 million, for the three months ended March 31, 2022 compared to the same

period of 2021. The PPP portfolio contributed a 13 bps benefit to NIM for the

three months ended March 31, 2022 compared to a 18 bps benefit for the three

months ended March 31, 2021.

? The lowering of deposit rates in tandem with FRB interest rate actions and the

    benefit of paying off all FHLB advances during 2021.




Net interest income (FTE) increased $11.1 million, or 29%, for the three months
ended March 31, 2022 compared to the same period of 2021, largely as a result of
acquisition-related activity, but also driven in part by strong organic loan
growth and substantial investment in the investment securities portfolio.



Total average interest earning assets increased $1.86 billion, or 41%, to $6.40
billion for the three months ended March 31, 2022, as compared to the same
period of 2021, with the average rate earned on total interest earning assets
contracting 36 bps to 3.18%.


? Average total loan balances increased $772 million, or 21%, for the three

months ended March 31, 2022 compared to the same period of 2021. Average

non-PPP loan growth of $1.30 billion, or 43%, was driven by

acquisition-related expansion and strong organic growth, which was partially

offset by a $523 million, or 83%, decline in average PPP loan balances, as

    forgiveness activity accelerated has increased.



? Average investment securities grew $660 million for the three months ended

March 31, 2022 compared to the same period of 2021, which was attributed to a

    combination of strategically deploying excess liquidity through further
    investment and acquisition-related activity.




Total interest income (FTE) increased $10.6 million, or 27%, to $50.2 million
for the three months ended March 31, 2022, as compared to the same period of
2021.


? Interest and fee income (FTE) on loans increased $7.8 million, or 21%, to

$44.9 million for the three months ended March 31, 2022 compared to the same

period of 2021, driven by both organic and acquisition-related growth in the

non-PPP portfolio, which more than offset a $4.2 million, or 60%, decline in

PPP-related income. The yield on the overall loan portfolio declined 1 bp to

4.16% for the three months ended March 31, 2022 compared to 4.17% for the same

    period of the prior year.



? Significant growth in average investment securities led to a $2.6 million

increase interest income (FTE) on the portfolio for the three months ended

March 31, 2022 compared to the same period of 2021, driving an 7 bps, or 5%,

increase in the corresponding yield on the portfolio. Substantial deployment

of excess liquidity during the first quarter benefitted the investment

portfolio as the yields earned on recent purchases have improved dramatically

    in tandem with rising rates.




                                       74

——————————————————————————–

Table of Contents



Total average interest bearing liabilities increased $1.36 billion, or 47%, to
$4.26 billion for the three-month period ended March 31, 2022 compared with the
same period in 2021, with the total average cost declining 12 bps to 0.12%.



? Average interest bearing deposits increased $1.33 billion, or 47%, for the

three months ended March 31, 2022 compared to the same period in 2021, with

interest-bearing demand deposits accounting for $767 million of the increase.

The significant growth was attributed to both acquisition-related activity and

organic growth stemming from the general trend of customers maintaining higher

    levels of liquidity over the past several quarters.



? Consistent with the higher interest bearing deposit balances noted above,

average SSUAR balances increased $44 million, or 94%, for the three months

    ended March 31, 2022 compared to the same period of 2021.



? Average FHLB advances decreased $29 million for the three months ended March

31, 2022 compared to the same period of the prior year, as all outstanding

    FHLB advances either matured or were paid off in 2021.



? Subordinated debentures totaling $26 million were added as a result of the CB

acquisition, the average balances of which totaled $8 million of the three

    months ended March 31, 2022.




Total interest expense decreased $469,000, or 28%, for the three months ended
March 31, 2022 compared to the same period of 2021, a direct result of lowering
deposit rates in response to FRB rate reductions in March of 2020 to levels at
or near those offered during the Great Recession, where they remained as of
March 31, 2022. These reductions have had a significant impact on time deposit
rates in particular, as the benefit of lower rates has been experienced as the
time deposit portfolio has matured or renewed. Further, the three months ended
March 31, 2022 benefitted from all FHLB advances either maturing or paying off
in 2021.


? Total interest bearing deposit expense decreased $339,000, or 22%, driving a

    11 bps decrease in the cost of average total interest bearing deposits.



? No interest expense on FHLB advances was recorded for the three months ended

March 31, 2022, as all FHLB advances either matured or paid off in 2021,

resulting in a decline of $176,000 compared to the same period of the prior

    year.



? Interest expense totaling $33,000 was recorded for the three months ended

March 31, 2022 as a result of the subordinated debentures added through the CB

    acquisition.




                                       75

——————————————————————————–

Table of Contents

Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison


                                                         Three months ended March 31,
                                               2022                                        2021
                                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                         $   671,263     $     282          0.17 %   $   235,370     $      66          0.11 %
Mortgage loans held for
sale                                8,629            24          1.13          14,618            64          1.78
Investment securities:
Taxable                         1,278,160         4,680          1.48         654,733         2,295          1.42
Tax-exempt                         43,391           252          2.36           6,442            45          2.83
Total securities                1,321,551         4,932          1.51         661,175         2,340          1.44

Federal Home Loan Bank
stock                              10,509            54          2.08          10,640            57          2.17

SBA Paycheck Protection
Program (PPP) loans               103,850         2,821         11.02         627,173         7,025          4.54
Non-PPP loans                   4,274,080        42,055          3.99       2,978,587        30,015          4.09
Total loans                     4,377,930        44,876          4.16       3,605,760        37,040          4.17

Total interest earning
assets                          6,389,882        50,168          3.18       4,527,563        39,567          3.54

Less allowance for credit
losses on loans                    56,035                                      53,856

Non-interest earning
assets:
Cash and due from banks            91,235                                      47,720
Premises and equipment, net        86,056                                      57,652
Bank owned life insurance          53,177                                      33,320
Goodwill                          153,803                                      12,513
Accrued interest receivable
and other                         154,155                                      85,924
Total assets                  $ 6,872,273                                 $ 4,710,836

Interest bearing
liabilities:
Deposits:
Interest bearing demand       $ 2,136,188     $     649          0.12 %   $ 1,368,855     $     357          0.11 %
Savings                           467,299            55          0.05         218,119             5          0.01
Money market                    1,083,961           190          0.07         848,726           115          0.05
Time                              461,268           277          0.24         380,286         1,033          1.10
Total interest bearing
deposits                        4,148,716         1,171          0.11       2,815,986         1,510          0.22

Securities sold under
agreements to repurchase           91,082            17          0.08          46,937             5          0.04
Federal funds purchased             9,993             3          0.12           9,599             2          0.08
Federal Home Loan Bank
advances                                -             -          0.00          29,270           176          2.44
Subordinated debentures             8,052            33          1.66               -             -          0.00


Total interest bearing
liabilities                     4,257,843         1,224          0.12       2,901,792         1,693          0.24

Non-interest bearing
liabilities:
Non-interest bearing demand
deposits                        1,817,462                                   1,278,193
Accrued interest payable
and other                          93,039                                      86,030
Total liabilities               6,168,344                                   4,266,015

Stockholders' equity              703,929                                     444,821
Total liabilities and
stockholder's equity          $ 6,872,273                                 $ 4,710,836

Net interest income                           $  48,944                                   $  37,874

Net interest spread                                              3.06 %                                      3.30 %

Net interest margin                                              3.11 %                                      3.39 %




                                       76

——————————————————————————–

Table of Contents

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

? Average loan balances include the principal balance of non-accrual loans, as

well as unearned income such as loan premiums, discounts, fees/costs and

exclude participation loans accounted for as secured borrowings. Participation

loans averaged $5 million for both the three-month periods ended March 31,

    2022 and 2021, 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 $184,000

    and $49,000 for the three-month periods ended March 31, 2022 and 2021,
    respectively.



? Interest income includes loan fees of $3.8 million ($2.6 million associated

with the PPP) and $6.0 million ($5.5 million associated with the PPP) for the

three-month periods ended March 31, 2022 and 2021, respectively. Interest

income on loans may be impacted by the level of prepayment fees collected and

    accretion related to purchased loans.



? Net interest income, the most significant component of Bancorp’s earnings,

represents total interest income less total interest expense. The level of net

interest income is determined by mix and volume of interest earning assets,

interest bearing deposits and borrowed funds, and changes in interest rates.

? NIM represents net interest income on a FTE basis as a percentage of total

    average interest earning assets.



? Net interest spread (FTE) is the difference between taxable equivalent rates

earned on total interest earning assets less the cost of interest bearing

    liabilities.



? The fair market value adjustment on investment securities resulting from ASC

320, “Investments – Debt and Equity Securities” is included as a component of

    other assets.




                                       77

——————————————————————————–

Table of Contents

Asset/Liability Management and Interest Rate Risk



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



Interest Rate Simulation Sensitivity Analysis



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



Bancorp's interest rate simulation sensitivity analysis details that increases
in interest rates of 100 and 200 bps would have a negative effect on interest
income, respectively. These results are attributed to over half of the variable
rate loan portfolio being currently at or near floor rates, as these yields will
not increase until short-term rates exceed these floor rates. For example, a
significant portion of the variable rate loan portfolio is tied to Prime, with
floor rates of 4.00%. Given Prime is at 3.50% as of March 31, 2022, short-term
rates would have to increase over 50 bps for these loans to move above their
floor rates.



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. Asset balances subject to immediate
repricing cause an estimated decline in net interest income in the down 100 bps
scenario, as rates on non-maturity deposits cannot be lowered sufficiently to
offset declining interest income. These estimates are summarized below.



                                                                     Change in Rates
                                                -200               -100             +100              +200
                                            Basis Points      Basis Points      Basis Points      Basis Points
% Change from base net interest income
at March 31, 2022                                     N/A             -3.15 %           -2.44 %           -2.96 %




Bancorp's interest rate risk profile is generally neutral. The results of the
interest rate sensitivity analysis performed as of December 31, 2021 suggest a
slightly liability sensitive profile as a result of the long-term, 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. However, given the historic levels of liquidity
currently held by Bancorp and in the banking system generally, the Company
anticipates actual deposit betas will remain well below long-term averages
through 2022 despite forecasted interest rate hikes from the FRB. In a scenario
where deposit betas are well below long-term averages, Bancorp's interest rate
risk profile shifts to a slightly asset sensitive position, but remains
generally neutral.



Bancorp's loan portfolio is currently composed of approximately 71% fixed and
29% 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
68%) or one month LIBOR/SOFR (approximately 32%).



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 will no longer be used to issue new loans in the U.S. It is expected to be
replaced primarily by the Secured Overnight Financing Rate (SOFR), which many
experts consider a more accurate and more secure pricing benchmark. To
facilitate the transition process, management has instituted an enterprise-wide
program to identify, assess, and monitor risks associated with the expected
discontinuance or unavailability of LIBOR.



                                       78

——————————————————————————–

Table of Contents



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



As of March 31 2022, the Company had approximately $456 million in loans and
$150 million (notional amount) in interest rate derivative contracts that
reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary
in future periods as current contracts expire with potential replacement
contracts using either LIBOR or an alternative reference rate. The Company, and
other industry participants, continue to review alternative reference rates that
could be utilized as a replacement for LIBOR. The Company had $46 million in
loans that were indexed to SOFR at March 31, 2022.



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 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 AOCI, and is
subsequently reclassified into earnings as an adjustment to interest expense in
periods in which the hedged forecasted transaction impacts earnings. As of March
31, 2022, Bancorp had no outstanding interest rate swaps designated as cash flow
hedges.



                                       79

——————————————————————————–

  Table of Contents



Provision for Credit Losses



Provision for credit losses on loans at March 31, 2022 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" for detailed discussion regarding Bancorp's ACL
methodology by loan segment in this document and Bancorp's Annual Report on Form
10-K for the year ended December 31, 2021.



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



                                                            Three months ended
                                                                 March 31,
(dollars in thousands)                                    2022               2021

Beginning balance                                    $       53,898     $       51,920
Acquisition - PCD loans (goodwill adjustment)                 9,950         

Adjusted beginning balance                                   63,848         

51,920

Provision for credit losses - loans                          (1,750 )           (1,200 )
Provision for credit losses - acquired loans                  4,429         

Total provision for credit losses on loans                    2,679             (1,200 )

Total charge-offs                                              (409 )             (122 )
Total recoveries                                                949                116
Net loan (charge-offs) recoveries                               540                 (6 )
Ending balance                                       $       67,067     $       50,714

Average total loans                                  $    4,377,930     $    3,605,760

Provision for credit losses on loans to average
total loans (1)                                                0.06 %       

-0.03 %
Net loan (charge-offs) recoveries to average total
loans (1)

                                                      0.01 %             0.00 %
ACL on loans to total loans                                    1.38 %             1.40 %
ACL on loans to total loans (excluding PPP) (2)                1.40 %             1.68 %
ACL on loans to average total loans                            1.53 %             1.41 %




(1) Ratios are not annualized
(2) See the section titled "Non-GAAP Financial Measures" for reconcilement of Non-GAAP
to GAAP measures




The ACL for loans totaled $67 million as of March 31, 2022 compared to $54
million at December 31, 2021, representing an ACL to total loans ratio of 1.38%
and 1.29% for those periods, respectively. The ACL to total loans (excluding PPP
loans) was 1.40% at March 31, 2022 compared to 1.34% at December 31, 2021. Based
on the 100% SBA guarantee of the PPP loan portfolio, which totaled $71 million
(net of unamortized deferred fees) at March 31, 2022 and $141 million at
December 31, 2021, Bancorp did not generally reserve for potential losses for
these loans within the ACL. See the section titled "Non-GAAP Financial Measures"
for reconcilement of non-GAAP to GAAP measures.



Due to continued improvement in the unemployment forecast, updates to Bancorp's
CECL modeling, net recoveries and strong historic credit metrics, benefits
(excluding acquisition-related activity) of $1.8 million and $1.2 million were
recorded to provision for credit losses on loans expense for the three month
periods ended March 31, 2022 and 2021, respectively. Offsetting the reduction
for the three month period ended March 31, 2022 was credit loss expense recorded
for the loan portfolio acquired from CB, which totaled $4.4 million.



In addition to the provision activity noted above for the first three months of
2022, the ACL for loans was also increased $10 million as a result of the PCD
loan portfolio added through the CB acquisition during the three months ended
March 31, 2022, with the corresponding offset recorded to goodwill (as opposed
to provision expense). Further, net recovery activity of $540,000 million for
the three month period ended March 31, 2022 also served to increase the ACL for
loans, driven by a $711,000 recovery of a C&I relationship that was fully
charged off in the fourth quarter of 2021.



                                       80

——————————————————————————–

Table of Contents



While separate from the ACL for loans and recorded in other liabilities on the
consolidated balance sheets, the ACL for off balance sheet credit exposures also
experienced an increase between December 31, 2021 and March 31, 2022. The CB
acquisition resulted in a $500,000 increase to the ACL for off balance sheet
credit exposures, with the corresponding offset recorded to goodwill (as opposed
to provision for credit loss expense). This increase was partially offset by a
$400,000 benefit to provision for credit loss expense recorded for the three
period ended March 31, 2022, as nearly all applicable loan segments experienced
declines in their reserve loss percentage consistent with generally improving
model factors and improvement in line of credit utilization. The ACL for off
balance sheet credit exposures stood at $3.6 million as of March 31, 2022
compared to $3.5 million as of December 31, 2021.



Bancorp's loan portfolio is diversified with no significant concentrations of
credit. Geographically, most loans are extended to borrowers in Louisville,
central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and
Cincinnati, Ohio metropolitan markets. The adequacy of the allowance is
monitored on an ongoing basis and it is the opinion of management that the
balance of the allowance at March 31, 2022 is adequate to absorb probable losses
inherent in the loan portfolio as of the financial statement date.



Non-interest Income



                                                    Three months ended March 31,
(dollars in thousands)                2022            2021          $ Variance       % Variance

Wealth management and trust
services                           $     8,469     $     6,248     $      2,221                36 %
Deposit service charges                  1,863             944              919                97
Debit and credit card income             4,119           2,273            1,846                81
Treasury management fees                 1,904           1,540              364                24
Mortgage banking income                  1,003           1,444             (441 )             (31 )
Net investment product sales
commissions and fees                       607             464              143                31
Bank owned life insurance                  266             161              105                65
Other                                      972             770              202                26
Total non-interest income          $    19,203     $    13,844     $      5,359                39 %




Total non-interest income increased $5.4 million, or 39%, for the three month
period ended March 31, 2022 compared to the same period of 2021, respectively.
Non-interest income comprised 28.3% of total revenues, defined as net interest
income and non-interest income, for the three month period March 31, 2022
compared to 26.8% for the same period of 2021. WM&T services comprised 44.1% of
total non-interest income for the three month period ended March 31, 2022
compared to 45.1% for the same period of 2021. Acquisition-related activity
drove a significant portion of the non-interest income increase for the three
months ended March 31, 2022 compared to the same period of the prior year.



WM&T Services:



The magnitude of WM&T revenue distinguishes Bancorp from other community banks
of similar asset size. WM&T revenue increased $2.2 million, or 36%, for the
three month period ended March 31, 2022, as compared with the same period of
2021. Significant growth in asset-based income drove the increase, consistent
with both acquisition-related activity and organic new business development,
which served to offset stock market declines during the first quarter of 2022.



Recurring fees earned for managing accounts are based on a percentage of market
value of AUM and are typically assessed on a monthly basis. Recurring fees,
which generally comprise the vast majority of WM&T revenue, increased $2.2
million, or 37%, for the three month period ended March 31, 2022, as compared
with the same period of 2021. The increase was driven by both
acquisition-related activity and organic new business development.



A portion of WM&T revenue, most notably executor and certain employee benefit
plan-related fees, are non-recurring in nature and the timing of these revenues
corresponds with the related administrative activities. For this reason, such
fees are subject to greater period over period fluctuation. Total non-recurring
fees decreased $23,000 for the three month period ended March 31, 2022, as
compared with the same period of 2021, which was driven by lower estate fee
income earned.



                                       81

——————————————————————————–

Table of Contents



AUM, stated at market value, totaled $7.59 billion at March 31, 2022 compared
with $3.99 billion at March 31, 2021 and $4.80 billion at December 31, 2021. The
large increase in AUM between March 31, 2021 and March 31, 2022 is attributed
mainly to AUM of $2.93 billion added through the CB acquisition, as well as net
new business growth stock market appreciation over the past twelve months.



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



Detail of WM&T Service Income by Account Type:


                                     Three months ended March 31,
(in thousands)                         2022                2021

Investment advisory                $       3,641       $       2,740
Personal trust                             2,378               1,678
Personal investment retirement             1,639               1,216
Company retirement                           442                 372
Foundation and endowment                     261                 176
Custody and safekeeping                       64                  35
Brokerage and insurance services              40                  20
Other                                          4                  11

Total WM&T services income         $       8,469       $       6,248




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


Assets Under Management by Account Type:

AUM (not included on balance sheet) increased from $4.8 billion at December 31,
2021
to $7.6 billion at March 31, 2022 as follows:


                                            March 31, 2022                                       December 31, 2021
(in thousands)               Managed        Non-managed (1)         Total          Managed        Non-managed (1)         Total
Investment advisory        $ 2,578,355     $          30,641     $ 2,608,996     $ 1,919,593     $          34,879     $ 1,954,472
Personal trust               2,009,092               562,272       2,571,364         939,703               150,221       1,089,924
Personal investment
retirement                     943,345                25,668         969,013         620,312                 3,478         623,790
Company retirement              52,646               641,823         694,469          35,234               599,129         634,363
Foundation and endowment       398,826                 1,372         400,198         368,572                 1,532         370,104

Subtotal                   $ 5,982,264     $       1,261,776     $ 7,244,040     $ 3,883,414     $         789,239     $ 4,672,653
Custody and safekeeping              -               343,171         343,171               -               128,178         128,178

Total                      $ 5,982,264     $       1,604,947     $ 7,587,211     $ 3,883,414     $         917,417     $ 4,800,831



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

                                       82

——————————————————————————–

Table of Contents

As of March 31, 2022 and December 31, 2021, approximately 79% and 81%,
respectively, of AUM were actively managed. Company retirement plan accounts
primarily consist of participant-directed assets. The amount of custody and
safekeeping accounts are insignificant.

Managed Trust Assets under Management by Class of Investment:


                                                                              December 31,
(in thousands)                                            March 31, 2022          2021

Interest bearing deposits                                $        178,268     $     173,603
Treasury and government agency obligations                         49,155   

39,736

State, county and municipal obligations                           209,279           110,795
Money market mutual funds                                         119,895             7,299
Equity mutual funds                                             1,161,355           944,500
Other mutual funds - fixed, balanced and municipal              1,032,160           612,913
Other notes and bonds                                             204,272           171,087
Common and preferred stocks                                     2,749,460         1,681,006
Real estate mortgages                                                 791                 -
Real estate                                                       107,596            58,344
Other miscellaneous assets (1)                                    170,033            84,131

Total managed assets                                     $      5,982,264     $   3,883,414



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




Managed assets are invested in instruments for which market values can be
readily determined, the majority of which are sensitive to market fluctuations
and consist of approximately 65% in equities and 35% in fixed income securities
as of March 31, 2022 compared to 68% and 32% as of December 31, 2021. This
composition has been relatively consistent from period to period and the WM&T
Department holds no proprietary mutual funds.



Additional Sources of Non-interest income:



Deposit service charges, which consist of non-sufficient funds charges and to a
lesser extent, other activity based charges, increased $919,000, or 97%, for the
three period ended March 31, 2022, as compared with the same period of 2021,
mainly as a result of the contribution associated with acquisition-related
activity over the past twelve months. Excluding acquisition-related activity, an
industry-wide decline in the volume of fees earned on overdrawn checking
accounts has been experienced over the past several years, a trend that has been
exacerbated by the elevated deposit levels maintained by customers over the past
several quarters, which has in turned led to fewer overdrawn accounts. Further,
Bancorp anticipates that future growth of this revenue stream will be
significantly impacted by changing industry practices, as many larger financial
institutions have opted to greatly reduce, or completely eliminate, certain
deposit service charges, particularly overdraft-related fees. Bancorp could be
faced with strategic decisions surrounding deposit-related service charges in
the future, which could negatively impact the contributions made by this revenue
stream to total non-interest income.



Debit and credit card income consists of interchange revenue, ancillary fees and
incentives received from card processors. Debit and credit card revenue
increased $1.8 million, or 81%, for the three period ended March 31, 2022, as
compared with the same period of 2021, as a result of increased transaction
volume and continued expansion of the customer bases, both organically and
through acquisition-related activity. Total debit card income increased $1.4
million, or 90%, and total credit card income increased $459,000, or 62%, for
the three month period ended March 31, 2022, compared the same period of the
prior year. Bancorp expects this revenue stream will continue to grow with the
expansion of the customer base and further development of the debit and credit
card businesses.



Treasury management fees primarily consist of fees earned for cash management
services provided to commercial customers. This category continues to stand out
as a consistent, growing source of revenue for Bancorp and increased $364,000,
or 24%, for the three month period ending March 31, 2022, as compared with the
same period of 2021, driven by increased transaction volume, new product sales
and customer base expansion. In addition, sales efforts involving existing
customers has led to increases in online services, reporting, ACH origination,
remote deposit and fraud mitigation services over the past twelve months.
Bancorp anticipates this income category will continue to increase based on
continued customer base growth and the expanding suite of services offered
within Bancorp's treasury management platform.



                                       83

——————————————————————————–

Table of Contents



Mortgage banking income primarily includes gains on sales of mortgage loans and
loan servicing income offset by MSR amortization. Bancorp's mortgage banking
department predominantly originates residential mortgage loans to be sold in the
secondary market, primarily to FNMA and FHLMC. Bancorp offers conventional, VA,
FHA and GNMA financing for purchases and refinances, as well as programs for
first-time homebuyers. Interest rates on mortgage loans directly influence the
volume of business transacted by the mortgage-banking department. Mortgage
banking revenue decreased $441,000, or 31%, for the three month periods ended
March 31, 2022, as compared with the same period of 2021, the decline stemming
from rising mortgage rates and limited housing inventory, which have slowed
refinance and purchasing activity. Bancorp anticipates that both factors will
continue to limit mortgage banking revenue growth in 2022.



Net investment product sales commissions and fees are generated primarily on
stock, bond and mutual fund sales, as well as wrap fees on brokerage accounts.
Wrap fees represent charges for investment programs that bundle together a suite
of services, such as brokerage, advisory, research and management and are based
on a percentage of assets. Bancorp deploys its financial advisors primarily
through its branch network via an arrangement with a third party broker-dealer,
while larger managed accounts are serviced by Bancorp's WM&T Department. Net
investment product sales commissions and fees increased $143,000, or 31%, for
the three and month period ended March 31, 2022, as compared with the same
period of 2021, driven by acquisition-related growth and increased trading
activity.



BOLI assets represent the cash surrender value of life insurance policies on
certain active and non-active employees who have provided consent for Bancorp to
be the beneficiary for a portion of such policies. The related change in cash
surrender value and any death benefits received under the policies are recorded
as non-interest income. This income serves to offset the cost of various
employee benefits. BOLI income increased $105,000, or 65%, for the three month
period ending March 31, 2022 compared to the same period of the prior year,
which was attributed mainly to the contribution of the BOLI portfolio added as a
result of the KB acquisition in May of 2021.



Other non-interest income increased $202,000, or 26%, for the three month period
ended March 31, 2022 compared with the same period of 2021, driven largely by
the contribution from the insurance captive acquired through the KB acquisition
in May of 2021 and an increase in swap fee income.



Non-interest Expenses



                                                   Three months ended March 31,
(dollars in thousands)                2022            2021          $ Variance       % Variance

Compensation                       $    17,969     $    12,827     $      5,142               40 %
Employee benefits                        4,539           3,261            1,278               39
Net occupancy and equipment              3,025           2,045              980               48
Technology and communication             3,419           2,346            1,073               46
Debit and credit card processing         1,337             705              632               90
Marketing and business
development                                772             524              248               47
Postage, printing and supplies             733             409              324               79
Legal and professional                     650             462              188               41
FDIC insurance                             645             405              240               59
Amortization of investments in
tax credit partnerships                     88              31               57              184
Capital and deposit based taxes            518             458               60               13
Merger expenses                         19,500             400           19,100            4,775
Intangible amortization                    713              77              636              826
Other                                    2,389           1,023            1,366              134
Total non-interest expenses        $    56,297     $    24,973     $     31,324              125 %




                                       84

——————————————————————————–

Table of Contents



Total non-interest expenses increased $31.3 million for the three period ended
March 31, 2022 compared to the same period of 2021. Compensation and employee
benefits comprised 40.0% of Bancorp's total non-interest expenses for the three
month period ended March 31, 2022, compared to 64.4% for the same periods of
2021. Excluding merger expenses, compensation and employee benefits comprised
61.2% for the three month period ended March 31, 2022.



Compensation, which includes salaries, incentives, bonuses and stock based
compensation, increased $5.1 million, or 40%, for the three month period ended
March 31, 2022, as compared with the same period of 2021. The increase was
attributed largely to growth in full time equivalent employees, as well as
annual merit-based salary increases. Net full time equivalent employees totaled
997 at March 31, 2022 compared to 820 at December 31, 2021 and 638 at March 31,
2021. The acquisitions of KB in May of 2021 and CB in the first quarter of 2022
have resulted in the addition of 372 full time equivalent employees over the
past twelve months and a significant correlating increase in compensation
expense.



Employee benefits consists of all personnel-related expense not included in
compensation, with the most significant items being health insurance, payroll
taxes and employee retirement plan contributions. Employee benefits increased
$1.3 million, or 39%, for the three month period ended March 31, 2022, as
compared with the same period of 2021, consistent with the overall increase in
full time equivalent employees noted above.



Net occupancy and equipment expenses primarily include depreciation, rent,
property taxes, utilities and maintenance. Costs of capital asset additions flow
through the statement of income over the lives of the assets in the form of
depreciation expense. Net occupancy increased $980,000, or 48%, for the three
month period ended March 31, 2022, as compared with the same period of 2021,
driven by the two acquisitions completed over the past twelve months. In
connection with the CB acquisition, 15 branches were acquired, four of which
were closed shortly after acquisition in addition to one existing SYB location,
as a result of branch overlap. Further, two operational buildings were also
acquired and are currently listed for sale. The KB acquisition in May of 2021
resulted in the addition of 19 branch locations. At March 31, 2022, Bancorp's
branch network consists of 73 locations throughout Louisville, Central, Eastern
and Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and
Cincinnati, Ohio.



Technology and communication expenses include computer software amortization,
equipment depreciation and expenditures related to investments in technology
needed to maintain and improve the quality of customer delivery channels,
information security and internal resources. Technology expense increased $1.1
million, or 46%, for the three month period ended March 31, 2022 compared to the
same period of 2021, consistent with acquisition-related activity and core
system upgrades. The CB system conversion occurred in late-March 2022 and total
technology expenses are expected to moderate over the rest of 2022.



Bancorp outsources processing for debit and commercial credit card operations,
which generate significant revenue for the Company. These expenses fluctuate
consistent with transaction volumes. Debit and credit card processing expense
increased $632,000, or 90%, for the three month period ending March 31, 2022
compared to the same period of last year, correlating in part with the increase
in transaction volume and customer base expansion resulting from both organic
and acquisition-related growth that served to increase debit and credit card
non-interest income.



Marketing and business development expenses include all costs associated with
promoting Bancorp including community support, retaining customers and acquiring
new business. Marketing and business development expenses increased $248,000, or
47%, for the three month period ending March 31, 2022, as compared to the same
period of 2021. The increases correspond with strategic decisions to advertise
and promote in Bancorp's new markets, as well as the general expansion and
growth of the Company's existing and prospective customer base.



Postage, printing and supplies expense increased $324,000, or 79%, for the three
months ended March 31, 2022 compared to the same period of 2021, consistent with
increased customer communication and Bancorp's expansion tied to
acquisition-related activity over the past twelve months.



Legal and professional fees increased $188,000, or 41%, for the three month
period ended March 31, 2022 compared to the same period of last year, the
increase being attributed to various consulting engagements and litigation costs
arising through the normal course of business. Legal and professional fees
associated with merger-related activity are captured in merger expenses below.

FDIC insurance increased $240,000, or 59%, for the three month period ended
March 31, 2022, as compared to the same period of 2021, consistent with
acquisition-related balance sheet growth.

                                       85

——————————————————————————–

Table of Contents



Tax credit partnerships generate federal income tax credits, and for each of
Bancorp's investments in tax credit partnerships, the tax benefit, net of
related expenses, results in a positive effect on net income. Amounts of credits
and corresponding expenses can vary widely depending upon the timing and
magnitude of the underlying investments. Amortization expense associated with
these investments increased $57,000 for the three month period ending March 31,
2022 compared to the same period of last year.



Capital and deposit based taxes, which consist primarily of capital-based local
income taxes and franchise taxes, increased $60,000, or 13%, for the three month
period ended March 31, 2022 compared to the same period of 2021, attributed to
both organic and acquisition-related growth.



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



Intangible amortization expense consists of amortization associated with the CDI
of acquired deposit portfolios, as well as other intangibles related to customer
lists of the WM&T and investment advisory business lines added through the CB
acquisition. The intangibles amortized through this category of non-interest
expense are generally amortized over a period of approximately ten years.
Intangible amortization for the three months ended March 31, 2022 totaled
$713,000 compared to $77,000 for the same period of the prior year, the increase
stemming from the CB and KB acquisitions.



Other non-interest expenses increased $1.4 million for the three month period
ended March 31, 2022, as compared to the same period of 2020. These increases
were driven by a number of factors, mainly expenses associated with the addition
of the insurance captive as a result of the KB acquisition in May of 2021,
increased card reward expense correlating with growth in the debit and credit
card business lines, and other ancillary expenses tied to Bancorp's general
growth over the past twelve months.



Bancorp's efficiency ratio (FTE) for the three months ended March 31, 2022 of
82.61% reflects one-time merger-related expenses attributed to the CB
acquisition. Excluding these non-recurring expenses and amortization of
investments in tax credit partnerships, the adjusted efficiency ratio, a
non-GAAP measure, would have been 53.87% for March 31, 2022. By comparison,
Bancorp's efficiency ratio (FTE) and adjusted efficiency ratio for the three
months ended March 31, 2021 were 48.29% and 47.45%, respectively. See the
section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to
GAAP measures.



Income Tax Expense


A comparison of income tax expense and ETR follows:

                                                Three months ended March 31,
(dollars in thousands)              2022         2021        $ Variance       % Variance

Income before income tax expense $ 9,387 $ 28,171 $ (18,784 )

          (67 )%
Income tax expense                   1,445        5,461           (4,016 )            (74 )
Effective tax rate                    15.4 %       19.4 %      (400) bps              (21 )



Fluctuations in the ETR are primarily attributed to the following:

? Bancorp invests in certain partnerships that yield federal income tax credits.

Taken as a whole, the tax benefit of these investments exceeds amortization

expense, resulting in a positive impact on net income. The timing and

magnitude of these transactions may vary widely from period to period.

Activity for the three months ended March 31, 2022 resulted in a reduction to

the ETR of 1.7% compared to a reduction of 0.5% for the same period of 2021.

? The stock based compensation component of the ETR fluctuates consistent with

the level of SAR exercise activity. The ETR was reduced 5.9% for the three

month period ended March 31, 2022 compared to a reduction of 3.0% for the same

    period of 2021, as a result of increased levels of exercise activity.




                                       86

——————————————————————————–

  Table of Contents


? Tax-exempt interest income earned on loans and investment securities reduced

the ETR 1.6% for the three months ended March 31, 2022 compared to a reduction

of 0.1% for the same period of the prior year, the larger reduction being

    attributed to tax-exempt loans and securities add through the CB and KB
    acquisitions.


  ? As a result of the KB acquisition in May of 2021, Bancorp acquired an

insurance captive. The Captive provides insurance against certain risks for

which insurance may not currently be available or economically feasible to

Bancorp and SYB, as well as a group of third-party insurance captives. The tax

advantages of the Captive, including the tax-deductible nature of premiums

paid to the Captive as well as the tax-exemption for premiums received by the

Captive, serve to reduce income tax expense. Related activity reduced the ETR

0.9% for the three months ended March 31, 2022.

? Non-deductible merger expenses recorded during the first quarter served to

increase the ETR 1.1% for the three months ended March 31, 2022. No such

    expense was recorded for the three months ended March 31, 2022.



Financial Condition – March 31, 2022 Compared to December 31, 2021



Overview



Total assets increased $1.13 billion, or 17%, to $7.78 billion at March 31, 2022
from $6.65 billion at December 31, 2021. Total assets of $1.34 billion were
added on March 7, 2022 as a result of the CB acquisition, including loans of
$632 million (net of purchase accounting adjustments) and total investment
securities of $247 million. In addition, goodwill of $67 million was recorded in
relation to the transaction. Further, total loans (excluding loans added through
the CB acquisition and the PPP portfolio) grew $118 million, or 3%, between
December 31, 2021 and March 31, 2022.



Total liabilities increased $1.05 billion, or 18%, to $7.02 billion at March 31,
2022 from $5.97 billion at December 31, 2021. Total liabilities of $1.24 billion
were assumed on March 7, 2022 as a result of the CB acquisition, including total
deposits of $1.12 billion. Both period end and average deposit balances finished
at record levels as of March 31, 2022 due to the acquisition. Further, SSUAR
totaling $66 million and subordinated debentures of $26 million were also
assumed as a result of the CB acquisition.



Cash and Cash Equivalents



Cash and cash equivalents declined $209 million, or 22%, ending at $752 million
at March 31, 2022 compared to $961 million at December 31, 2021. The average
balance of cash and cash equivalents increased $436 million over the past twelve
months, as Bancorp continues to maintain higher levels of liquidity attributable
to the PPP, continued growth in deposits and the overall interest rate
environment.



Investment Securities



Investment securities increased $518 million, or 44%, to $1.70 billion at March
31, 2022 compared to $1.18 billion at December 31, 2021. Securities totaling
$247 million were added as a result of the CB acquisition. In addition, Bancorp
continued to actively invest in the securities portfolio during the first
quarter of 2022 in an effort to deploy excess liquidity by purchasing $481
million of debt securities for the three months ended March 31, 2022. Partially
offsetting growth associated with purchasing and acquisition-related activity
was scheduled amortization and prepayment activity, largely within the MBS
portfolio, as well as market depreciation of approximately $65 million stemming
from an upward move in the interest rate environment experienced through the
during the three months ended March 31, 2022.



A portion of the securities added during the first quarter of 2022, through both
acquisition and normal investment activity, were classified as HTM. As of March
31, 2022, Bancorp's investment security portfolio consisted of AFS and HTM
securities as detailed below:



                                                AFS              HTM             Total
(in thousands)                                                 Carrying        Investment
March 31, 2022                               Fair Value         Value          Securities

U.S. Treasury and other U.S. Government
obligations                                 $    116,338     $    277,491     $    393,829
Government sponsored enterprise
obligations                                      124,651           27,996   

152,647

Mortgage backed securities - government
agencies                                         759,413          242,704   

1,002,117

Obligations of states and political
subdivisions                                     143,835                -          143,835
Other                                              6,118                -            6,118
Total investment securities                 $  1,150,355     $    548,191     $  1,698,546




                                       87

——————————————————————————–

  Table of Contents



Premises and Equipment



Premises and equipment are presented on the consolidated balance sheets net of
related depreciation on the respective assets as well as fair value adjustments
associated with purchase accounting. Premises and equipment increased $32
million, or 42%, between December 31, 2021 and March 31, 2022, driven by the CB
acquisition. As a result of the acquisition, 15 branches were acquired, four of
which were closed shortly acquisition as a result of overlapping with existing
locations of the Bank. In addition, two operational buildings were also acquired
through CB and are currently listed for sale. Bancorp's branch network now
consists of 73 locations throughout Louisville, Central, Eastern and Northern,
Kentucky, including Shelby County, as well as the Indianapolis, Indiana and
Cincinnati, Ohio MSAs.



Goodwill



At March 31, 2022, Bancorp had $203 million in goodwill recorded on its balance
sheet, including $67 million recorded in association with the acquisition of CB.
As permitted under GAAP, management has up to 12 months following the date of
acquisition to finalize the fair values of the acquired assets and assumed
liabilities related to the CB acquisition. During this measurement period,
Bancorp may record subsequent adjustments to goodwill for provisional amounts
recorded at the acquisition date.



Events that may trigger goodwill impairment include deterioration in economic
conditions, a decline in market-dependent multiples or metrics (i.e. stock price
falling below tangible book value), negative trends in overall financial
performance and regulatory action. At September 30, 2021, Bancorp elected to
perform a qualitative assessment to determine if it was more-likely-than-not
that the fair value of the Commercial Banking reporting unit exceeded its
carrying value, including goodwill. The qualitative assessment indicated that it
was not more-likely-than-not that the carrying value of the reporting unit
exceeded its fair value.



Core Deposit and Customer List Intangibles



Core deposit and customer relationships intangibles arising from business
acquisitions are initially measured at fair value and are then amortized on an
accelerated method based on their useful lives. As a result of the CB
acquisition, a CDI asset of $13 million was recorded, bringing Bancorp's total
CDI assets to $18 million as of March 31, 2022.



Customer list intangible assets totaling $14 million were also recorded in
association with the CB acquisition. Of this total, $12 million related to CB’s
WM&T segment and $2 million related to LFA.

Other Assets and Other Liabilities

Other assets increased $25 million, or 29%, to $111 million at March 31, 2022.
Other liabilities decreased $4 million, or 4%, to $93 million at March 31, 2022.



The increase in other assets was attributed to the addition of $13 million in
MSR assets related to the CB acquisition and an $11 million increase in deferred
tax assets driven by the significant market depreciation experienced within the
AFS debt securities portfolio for the three months ended March 31, 2022 as a
result of rising rates.


The decrease in other liabilities was attributed mainly to the reduction of
various accrued liabilities, such as employee incentive compensation and
benefits.

As of March 31, 2022, Bancorp did not incur any impairment with respect to its
intangible assets or other long-lived assets.

                                       88

——————————————————————————–

  Table of Contents



Loans



Composition of loans, net of deferred fees and costs, by primary loan portfolio
class follows:



                                                                    December 31,
(dollars in thousands)                          March 31, 2022          2021          $ Variance       % Variance

Commercial real estate – non-owner occupied $ 1,397,633 $ 1,128,244 $ 269,389

               24 %
Commercial real estate - owner occupied                 803,181          678,405          124,776               18 %
Total commercial real estate                          2,200,814        1,806,649          394,165               22 %

Commercial and industrial - term                        669,241          596,710           72,531               12 %
Commercial and industrial - term - PPP                   71,361          140,734          (69,373 )            -49 %
Commercial and industrial - lines of credit             414,739          370,312           44,427               12 %
Total commercial and industrial                       1,155,341        1,107,756           47,585                4 %

Residential real estate - owner occupied                492,123          400,695           91,428               23 %
Residential real estate - non-owner occupied            297,127          281,018           16,109                6 %
Total residential real estate                           789,250          681,713          107,537               16 %

Construction and land development                       346,372          299,206           47,166               16 %
Home equity lines of credit                             186,024          138,976           47,048               34 %
Consumer                                                135,198          104,294           30,904               30 %
Leases                                                   13,952           13,622              330                2 %
Credits cards                                            20,732           17,087            3,645               21 %
Total loans (1)                                $      4,847,683     $  4,169,303     $    678,380               16 %



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




The composition of loans as of March 31, 2022, net of deferred fees and costs,
by primary loan portfolio class and bifurcated between Bancorp's historic loan
portfolio and the loan portfolio acquired through the CB acquisition follows:



                                                         As of March 31, 2022
(dollars in thousands)                           Bancorp          CB            Total

Commercial real estate – non-owner occupied $ 1,174,125 $ 223,508

  $ 1,397,633
Commercial real estate - owner occupied            685,696       117,485    

803,181

Total commercial real estate                     1,859,821       340,993    

2,200,814

Commercial and industrial - term                   628,367        40,874    

669,241

Commercial and industrial - term - PPP              70,603           758    

71,361

Commercial and industrial – lines of credit 384,761 29,978

414,739

Total commercial and industrial                  1,083,731        71,610    

1,155,341

Residential real estate - owner occupied           405,850        86,273    

492,123

Residential real estate – non-owner occupied 285,288 11,839

297,127

Total residential real estate                      691,138        98,112    

789,250

Construction and land development                  312,162        34,210         346,372
Home equity lines of credit                        135,526        50,498         186,024
Consumer                                           102,996        32,202         135,198
Leases                                              13,952             -          13,952
Credits cards                                       18,290         2,442          20,732
Total loans (1)                                $ 4,217,616     $ 630,067     $ 4,847,683



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




Total loans increased $678 million, or 16%, from December 31, 2021 to March 31,
2022, driven by the addition of $630 million in loans related to
acquisition-related expansion and strong organic loan growth, which more than
offset a $69 million decline in the PPP loan portfolio.



                                       89

——————————————————————————–

Table of Contents



Excluding the loans acquired through the CB acquisition and the PPP portfolio,
loan growth of $118 million, or 3%, was experienced between December 31, 2021
and March 31, 2022, driven largely by increases of $53 million and $46 million
in the CRE and C&I portfolios, respectively.



After hitting a pandemic-era low of 36.5% at March 31, 2021, total line of
credit utilization has improved significantly, reaching 41.0% at March 31, 2022,
led by C&I utilization, which strengthened from 23.9% to 31.6% over that same
period, respectively. However, line of credit usage has remained below
pre-pandemic levels, as the availability of the more favorable PPP lending
facility hurt utilization for much of 2021 and customers continue to maintain
elevated levels of liquidity.



PPP loans of $71 million ($73 million gross of unamortized deferred fees and
costs) were outstanding at March 31, 2022. Bancorp has $2 million in net
unrecognized fees related to the PPP as of March 31, 2022, which will be
recognized immediately once the loans are paid off or forgiven by the SBA. While
forgiveness activity will continue to impact results, the related fee
recognition is becoming less significant as the balance of the overall portfolio
shrinks. At March 31, 2022, approximately 92% of the dollars originated through
the PPP have been forgiven and approximately 94% of the fee income received in
relation to the PPP has been recognized.



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



Bancorp occasionally enters into loan participation agreements with other banks
to diversify credit risk. For certain participation loans sold, Bancorp has
retained effective control of the loans, typically by restricting the
participating institutions from pledging or selling their ownership share of the
loan without permission from Bancorp. GAAP requires the participated portion of
these loans to be recorded as secured borrowings. These participated loans are
included in the C&I and CRE loan portfolio segments with a corresponding
liability recorded in other liabilities. At both March 31, 2022 and December 31,
2021, the total participated portion of loans of this nature totaled $5 million.



The following table presents the maturity distribution and rate sensitivity of
the total loan portfolio as of March 31, 2022:



                                                     Maturity
                                          After one        After five

March 31, 2022 (in Within one but within but within

  Ater fifteen
thousands)                  year         five years       fifteen years          years             Total         % of Total

Total Loans
Fixed rate              $    197,147     $ 1,465,746     $     1,042,066     $      730,825     $ 3,435,784               71 %
Variable rate                494,923         538,381             328,508             50,087       1,411,899               29 %
Total                   $    692,070     $ 2,004,127     $     1,370,574     $      780,912     $ 4,847,683              100 %



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



                                       90

——————————————————————————–

Table of Contents

Non-performing Loans and Assets

Information summarizing non-performing loans and assets follows:


(dollars in thousands)                                    March 31, 2022       December 31, 2021

Non-accrual loans                                         $        12,494     $             6,712
Troubled debt restructurings                                           10                      12
Loans past due 90 days or more and still accruing                     300                     684
Total non-performing loans                                         12,804                   7,408

Other real estate owned                                             7,156                   7,212
Total non-performing assets                               $        19,960     $            14,620

Non-performing loans to total loans                                  0.26 %                  0.18 %
Non-performing loans to total loans (excluding PPP) (1)              0.27 %                  0.18 %
Non-performing assets to total assets                                0.26 %                  0.22 %
ACL for loans to total non-performing loans                           524 %                   728 %



(1) See the section titled “Non-GAAP Financial Measures” for reconcilement of
non-GAAP to GAAP measures.



In total, non-performing assets as of March 31, 2022 were comprised of 138
loans, ranging in individual amounts up to $2 million, one nominal accruing TDR
loan and foreclosed real estate held for sale. Foreclosed real estate held at
March 31, 2022 included two CRE properties and one residential real estate
property. Non-performing loans totaling $6 million were added as a result of the
CB acquisition.



The following table presents the recorded investment in non-accrual loans by
portfolio:



(in thousands)                                         March 31, 2022       December 31, 2021

Commercial real estate - non-owner occupied            $         1,117     $               720
Commercial real estate - owner occupied                          3,912                   1,748
Total commercial real estate                                     5,029                   2,468

Commercial and industrial - term                                 3,053                     670
Commercial and industrial - PPP                                      -                       -
Commercial and industrial - lines of credit                        663                     228
Total commercial and industrial                                  3,716                     898

Residential real estate - owner occupied                         2,636                   1,997
Residential real estate - non-owner occupied                       282                     293
Total residential real estate                                    2,918                   2,290

Construction and land development                                    -                       -
Home equity lines of credit                                        481                     646
Consumer                                                           350                     410
Leases                                                               -                       -
Credit cards                                                         -                       -
Total non-accrual loans                                $        12,494     $             6,712




As of March 31, 2022, non-accrual loans totaled $12 million. The increase in
total non-accrual loans between December 31, 2021 and March 31, 2022 as a result
of adding $6 million in non-accrual loans through the CB acquisition.



                                       91

——————————————————————————–

  Table of Contents



Delinquent Loans



Delinquent loans (consisting of all loans 30 days or more past due) totaled $11
million at both March 31, 2022 and December 31, 2021. Delinquent loans to total
loans were 0.23% and 0.26% at March 31, 2022 and December 31, 2021,
respectively. Delinquent loans to total loans (excluding PPP loans) were 0.23%
at March 31, 2022 compared to 0.27% at December 31, 2021.



Allowance for Credit Losses on Loans



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



The following table reflects activity in the ACL on loans for the three months
ended March 31, 2022:



                                            Initial
                                           Allowance       Provision for
(in thousands)             Beginning        on PCD         Credit Losses                                          Ending

Three Months Ended
March 31, 2022              Balance          Loans           on Loans          Charge-offs       Recoveries       Balance
Commercial real estate
- non-owner occupied      $    15,960     $     3,508     $         1,140     $           -     $         12     $  20,620
Commercial real estate
- owner occupied                9,595           2,121                (411 )               -               21        11,326
Total commercial real
estate                         25,555           5,629                 729                 -               33        31,946

Commercial and
industrial - term               8,577           1,358                 567              (113 )            719        11,108
Commercial and
industrial - lines of
credit                          4,802           1,874                (132 )             (36 )              -         6,508
Total commercial and
industrial                     13,379           3,232                 435              (149 )            719        17,616

Residential real estate
- owner occupied                4,316             590                 460                (6 )              3         5,363
Residential real estate
- non-owner occupied            3,677               -                (319 )               -                3         3,361
Total residential real
estate                          7,993             590                 141                (6 )              6         8,724

Construction and land
development                     4,789             419                 656                 -                -         5,864
Home equity lines of
credit                          1,044               2                 421                 -                -         1,467
Consumer                          772              78                 262              (254 )            191         1,049
Leases                            204               -                   7                 -                -           211
Credit cards                      162               -                  28                 -                -           190
Total                     $    53,898     $     9,950     $         2,679     $        (409 )   $        949     $  67,067




Bancorp's ACL for loans was $67 million as of March 31, 2022 compared to $54
million as of December 31, 2021. The change in the ACL for loans was driven by a
number of competing factors, which resulted in the $13 million, or 24%, increase
experienced for the first three months of 2022. Acquisition-related activity was
responsible for a total increase to the ACL for loans of $14 million at
acquisition date, comprised of a $10 million day one adjustment for specific
reserves placed on acquired PCD loans (offset to goodwill) and $4 million of
provision for credit loss expense on loans related to the remaining
acquired loan portfolio. Partially offsetting the acquisition-related increases
was a net reduction of the ACL for loans of $2 million for the first three
months of 2022 stemming from an improved unemployment forecast, general
improvement in other underlying CECL model factors and strong credit quality
metrics. Further, net recoveries totaling $540,000 were recorded for the three
months ended March 31, 2022, driven by a $711,000 recovery of a C&I relationship
that was fully charged off during the fourth quarter of 2021.



The FRB's forecast of the Seasonally Adjusted National Civilian Unemployment
Rate is the primary loss driver within Bancorp's CECL model and has continued to
improve over the past year. This rate stood at 3.6% as of March 31, 2022
compared to 3.9% at December 31, 2021 and 6.0% at March 31, 2021, supporting the
FRB's improved outlook regarding unemployment. The ACL for loans calculation and
resulting credit loss expense is significantly impacted by changes in forecasted
economic conditions. Should the forecast for economic conditions change, Bancorp
could experience further adjustments in its required ACL for loans credit loss
expense.



                                       92

——————————————————————————–

Table of Contents

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


                                        March 31, 2022                                     December 31, 2021
                                         % of Total                                          % of Total
(dollars in              Allocated         ACL on         ACL to Total       Allocated         ACL on         ACL to Total
thousands)               Allowance         loans           Loans (1)         Allowance         loans           Loans (1)
Commercial real
estate - non-owner
occupied                $    20,620               31 %             1.48 %   $    15,960               30 %             1.41 %
Commercial real
estate - owner
occupied                     11,326               17 %             1.41 %         9,595               18 %             1.41 %
Total commercial real
estate                       31,946               48 %             1.45 %        25,555               48 %             1.41 %

Commercial and
industrial - term (1)        11,108               16 %             1.66 %         8,577               16 %             1.44 %
Commercial and
industrial - lines of
credit                        6,508               10 %             1.57 %         4,802                9 %             1.30 %
Total commercial and
industrial                   17,616               26 %             1.63 %        13,379               25 %             1.38 %

Residential real
estate - owner
occupied                      5,363                8 %             1.09 %         4,316                8 %             1.08 %
Residential real
estate - non-owner
occupied                      3,361                5 %             1.13 %         3,677                7 %             1.31 %
Total residential
real estate                   8,724               13 %             1.11 %         7,993               15 %             1.17 %

Construction and land
development                   5,864                9 %             1.69 %         4,789                9 %             1.60 %
Home equity lines of
credit                        1,467                2 %             0.79 %         1,044                2 %             0.75 %
Consumer                      1,049                2 %             0.78 %           772                1 %             0.74 %
Leases                          211                0 %             1.51 %           204                0 %             1.50 %
Credit cards                    190                0 %             0.91 %           162                0 %             0.95 %
Total                   $    67,067              100 %             1.40 %   $    53,898              100 %             1.34 %



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




The table below details net charge-offs to average loans outstanding by category
of loan for the three month periods ended March 31, 2022 and 2021, respectively.



                                                   2022                                                   2021
                                                                    Net (charge                                         Net (charge
                                                                      offs)/                                              offs)/
Three months ended March                                            recoveries        Net (charge                       recoveries
31,                            Net (charge           Average        to average          offs)/           Average        to average
(dollars in thousands)      offs)/ recoveries         Loans            loans          recoveries          Loans            loans

Commercial real estate -
non-owner occupied         $                12     $ 1,225,492              0.00 %   $          31     $   860,339              0.00 %
Commercial real estate -
owner occupied                              21         719,340              0.00 %               -         521,230              0.00 %
Total commercial real
estate                                      33       1,944,832              0.00 %              31       1,381,569              0.00 %

Commercial and
industrial - term                          606         614,645              0.10 %             (50 )       520,905             -0.01 %
Commercial and
industrial - term - PPP                      -         103,850              0.00 %               -         585,168              0.00 %
Commercial and
industrial - lines of
credit                                     (36 )       381,158             -0.01 %               -         228,945              0.00 %
Total commercial and
industrial                                 570       1,099,653              0.05 %             (50 )     1,335,018              0.00 %

Residential real estate
- owner occupied                            (3 )       433,481              0.00 %              (3 )       252,420              0.00 %
Residential real estate
- non-owner occupied                         3         280,701              0.00 %               2         139,521              0.00 %
Total residential real
estate                                       -         714,182              0.00 %              (1 )       391,941              0.00 %

Construction and land
development                                  -         313,441              0.00 %               -         288,581              0.00 %
Home equity lines of
credit                                       -         157,794              0.00 %               -          93,882              0.00 %
Consumer                                   (63 )       116,278             -0.05 %              14          89,288              0.02 %
Leases                                       -          13,388              0.00 %               -          14,541              0.00 %
Credit cards                                 -          18,362              0.00 %               -          10,940              0.00 %
Total                      $               540     $ 4,377,930              0.01 %   $          (6 )   $ 3,605,760              0.00 %




                                       93

——————————————————————————–

Table of Contents



While separate from the ACL for loans and recorded in other liabilities on
Bancorp's consolidated balance sheets, the ACL for off balance sheet credit
exposures also experienced an increase between December 31, 2021 and March 31,
2022. As a result of the CB acquisition, the ACL for off balance sheet credit
exposures was increased $500,000 (offset to goodwill) at acquisition date. A net
benefit was subsequently recorded for provision for credit losses for off
balance sheet exposures for the three months ended March 31, 2022, as nearly all
applicable loan segments experienced declines in their reserve loss percentage
consistent with generally improving model factors and continued improvement in
line of credit utilization. The ACL for off balance sheet credit exposures stood
at $3.6 million as of March 31, 2022 compared to $3.5 million as of December 31,
2021.



Deposits



                                                                December 31,
(dollars in thousands)                      March 31, 2022          2021   

$ Variance % Variance

Non-interest bearing demand deposits       $      2,089,072     $  1,755,754     $    333,318               19 %

Interest bearing deposits:
Interest bearing demand                           2,348,718        2,131,928          216,790               10 %
Savings                                             603,404          415,258          188,146               45 %
Money market                                      1,158,119        1,050,352          107,767               10 %

Time deposits of $250 thousand or more              115,604           89,745           25,859               29 %
Other time deposits                                 430,574          344,477           86,097               25 %
Total time deposits                                 546,178          434,222          111,956               26 %

Total interest bearing deposits                   4,656,419        4,031,760          624,659               15 %

Total deposits (1)                         $      6,745,491     $  5,787,514     $    957,977               17 %



(1) Includes $21 million and $5 million in brokered deposits as of March 31,
2022
and December 31, 2021, respectively.



The composition of deposits as of March 31, 2022, bifurcated between Bancorp's
legacy deposit portfolio and the deposit portfolio acquired through the CB
acquisition, follows:



                                                    As of March 31, 2022
(dollars in thousands)                     Legacy            CB             Total

Non-interest bearing demand deposits     $ 1,802,072     $   287,000     $ 2,089,072

Interest bearing deposits:
Interest bearing demand                    1,974,633         374,085       2,348,718
Savings                                      428,334         175,070         603,404
Money market                               1,019,237         138,882       1,158,119

Time deposits of $250 thousand or more 95,860 19,744

 115,604
Other time deposits(1)                       346,673          83,901         430,574
Total time deposits                          442,533         103,645         546,178

Total interest bearing deposits            3,864,737         791,682       4,656,419

Total deposits                           $ 5,666,809     $ 1,078,682     $ 6,745,491




Total deposits increased $958 million, or 17%, from December 31, 2021 to March
31, 2022. At acquisition date, deposits totaling $1.12 billion were assumed as a
result of the CB acquisition. Excluding the deposits acquired through the CB
acquisition, deposits decreased $163 million, or 3%, during the first three
months of 2022, attributed mainly anticipated seasonal deposit run-off.



                                       94

——————————————————————————–

Table of Contents

Securities Sold Under Agreements to Repurchase

Information regarding SSUAR follows:



(dollars in thousands)                                  March 31, 2022       December 31, 2021
Outstanding balance at end of period                   $        142,146     $            75,466
Weighted average interest rate at end of period                    0.08 %                  0.04 %




                                                           Three months ended
                                                                March 31,
(dollars in thousands)                                      2022          2021

Average outstanding balance during the period            $   91,082     $ 

46,937

Average interest rate during the period                        0.08 %       

0.04 %
Maximum outstanding at any month end during the period $ 142,146 $ 51,681




SSUARs are collateralized by securities and are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets
and are held by a safekeeping agent and the obligations to repurchase the
securities are reflected as liabilities. All securities underlying the
agreements are under the Bank's control. The majority of SSUARs are indexed to
immediately repricing indices such as the FFTR.



SSUARs increased $67 million, or 88%, between December 31, 2021 and March 31,
2022, as SSUAR totaling $66 million were assumed as part of the CB acquisition.
The remaining fluctuation in SSUAR is consistent with the general trend of
customers maintaining elevated deposit balances.



Subordinated debentures



As a result of the CB acquisition, Bancorp became the 100% successor owner of
the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust
III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The
sole assets of the trust subsidiaries represent the proceeds of offerings loaned
in exchange for subordinated debentures with similar terms to the TPS. The TPS
are treated as part of Tier 1 Capital. The subordinated note and related
interest expense are included in Bancorp's consolidated financial statements.
The subordinated notes are currently redeemable at Bancorp's option on a
quarterly basis. As of March 31, 2022, subordinated notes added through the CB
acquisition totaled $26 million. Bancorp chose not to redeem the subordinated
notes on April 1, 2022.



Liquidity



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



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



Bancorp's most liquid assets are comprised of cash and due from banks, FFS and
AFS debt securities. FFS and interest bearing deposits totaled $642 million and
$899 million at March 31, 2022 and December 31, 2021, respectively. The decrease
experienced for the first three months of 2022 is attributed to significant
investment in the securities portfolio and strong organic loan growth, which was
partially offset by liquidity added through the CB acquisition. FFS normally
have overnight maturities while interest-bearing deposits in banks are
accessible on demand. These investments are used for general daily liquidity
purposes.



                                       95

——————————————————————————–

Table of Contents



The fair value of the AFS debt security portfolio was $1.15 billion and $1.18
billion at March 31, 2022 and December 31, 2021 respectively. The lack of growth
in AFS debt security portfolio for the first three months of 2022 is attributed
to both classifying securities purchased and acquired during the first quarter
as HTM for general capital purposes as well as significant market depreciation
experienced on the AFS portfolio since December 31, 2021 due to rising rates.
The investment portfolio (HTM and AFS) includes scheduled maturities of $69
million and cash flows on amortizing debt securities of approximately $266
million (based on assumed prepayment speeds as of March 31, 2022) expected over
the next twelve months. Combined with FFS and interest bearing deposits from
banks, AFS debt securities offer substantial resources to meet either loan
growth or reductions in Bancorp's deposit funding base. Bancorp pledges portions
of its investment securities portfolio to secure public funds, cash balances of
certain WM&T accounts and SSUAR. At March 31, 2022, total investment securities
pledged for these purposes comprised 64% of the debt securities portfolio,
leaving approximately $617 million of unpledged debt securities.



Bancorp's deposit base consists mainly of core deposits, defined as time
deposits less than or equal to $250,000, demand, savings, money market deposit
accounts and excludes public funds and brokered deposits. At March 31, 2022,
such deposits totaled $5.85 billion and represented 87% of Bancorp's total
deposits, as compared with $5.05 billion, or 87% of total deposits at December
31, 2021. Because these core deposits are less volatile and are often tied to
other products of Bancorp through long lasting relationships, they do not place
undue pressure on liquidity. However, many of Bancorp's individual depositors
are currently maintaining historically high balances. These excess balances may
be more sensitive to market rates, with potential decreases possibly straining
Bancorp's liquidity position.



As of March 31, 2022 and December 31, 2021, Bancorp held brokered deposits
totaling $21 million and $5 million, respectively, all of which is attributed to
deposits added through the acquisition-related activity over the past twelve
months.



Included in total deposit balances at March 31, 2022 are $760 million in public
funds generally comprised of accounts with local government agencies and public
school districts in the markets in which Bancorp operates. At December 31, 2021,
public funds deposits totaled $645 million, the increase experienced during the
first three months of 2022 being attributed mainly to relationships added
through the CB acquisition.



Bancorp is a member of the FHLB of Cincinnati. As a member of the FHLB, Bancorp
has access to credit products of the FHLB. Bancorp views these borrowings as a
potential low cost alternative to brokered deposits. At March 31, 2022 and
December 31, 2021, available credit from the FHLB totaled $1.02 billion and
$1.00 billion, respectively. Additionally, Bancorp had unsecured available FFP
lines with correspondent banks totaling $100 million and $80 million at March
31, 2022 and December 31, 2021, respectively. In addition, Bancorp had borrowing
capacity of $20 million available through an unsecured borrowing line of the
holding company.



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



Bancorp's principal source of cash is dividends paid to it as the sole
shareholder of the Bank. As discussed in the Footnote titled "Commitments and
Contingent Liabilities," as of January 1st of any year, the Bank may pay
dividends in an amount equal to the Bank's net income of the prior two years
less any dividends paid for the same two years. At March 31, 2022, the Bank
could pay an amount equal to $22 million in dividends to Bancorp without
regulatory approval subject to ongoing capital requirements of the Bank.



Sources and Uses of Cash



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



                                       96

——————————————————————————–

  Table of Contents



Commitments



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



Bancorp provides customers with off-balance sheet credit support through loan
commitments and standby letters of credit. Unused loan commitments increased
$355 million as of March 31, 2022 compared to December 31, 2021, the increase
being driven by both the CB acquisition and new lines of credit. Total average
line of credit utilization was essentially flat at 41.0% as of March 31, 2022 as
compared to 41.2% at December 31, 2021, both representing significant
improvement from the pandemic-era low of 36.5% experienced at March 31, 2021.
C&I line of credit utilization was 31.6% at March 31, 2022 compared to 31.8% at
December 31, 2021 and 23.9% at March 31, 2021.



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



The ACL for off balance sheet credit exposures, which is separate from the ACL
for loans and recorded in other liabilities on the consolidated balance sheets,
stood at $3.6 million and $3.5 million as of March 31, 2022 and December 31,
2021, respectively. The CB acquisition resulted in a $500,000 increase to the
ACL for off balance sheet credit exposures, with the corresponding offset
recorded to goodwill (as opposed to provision expense). This increase was
partially offset by a $400,000 benefit to provision expense recorded for the
three period ended March 31, 2022, as nearly all applicable loan segments
experienced declines in their reserve loss percentage consistent with generally
improving model factors and improvement in line of credit utilization.



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



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


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



Capital



At March 31, 2022, stockholders' equity totaled $758 million, representing an
increase of $82 million, or 12%, compared to December 31, 2021. The increase for
the first three months of 2022 was attributed mainly to stock issued in relation
to the CB acquisition, which totaled $134 million. Further, net income of $7.9
million was offset by a $50 million negative change in AOCI and dividends
declared during the first quarter of 2022. AOCI consists of net unrealized gains
or losses on AFS debt securities and a minimum pension liability, each net of
income taxes. AOCI declined $50 million from December 31, 2021 to March 31,
2022, with the fluctuation stemming from the changing interest rate environment
and corresponding valuation of the AFS debt securities portfolio. See the
"Consolidated Statement of Changes in Stockholders' Equity" for further detail
of changes in equity.



In May 2021, Bancorp's Board of Directors extended its share repurchase program
authorizing the repurchase of up to 1 million shares, or approximately 4% of
Bancorp's total common shares outstanding at the time. The plan, which will
expire in May 2023 unless otherwise extended or completed at an earlier date,
does not obligate Bancorp to repurchase any specific dollar amount or number of
shares prior to the plan's expiration. Based on economic developments over the
past year and the increased importance of capital preservation, no shares were
repurchased in 2021, nor the first three months of 2022. Approximately 741,000
shares remain eligible for repurchase under the current repurchase plan.



                                       97

——————————————————————————–

Table of Contents



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



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



                                              March 31, 2022       December 31, 2021

Total risk-based capital(1)
Consolidated                                            12.14 %                 12.79 %
Bank                                                    11.34                   12.42

Common equity tier 1 risk-based capital(1)
Consolidated                                            10.66                   11.94
Bank                                                    10.31                   11.56

Tier 1 risk-based capital(1)
Consolidated                                            11.12                   11.94
Bank                                                    10.31                   11.56

Leverage(2)
Consolidated                                             9.34                    8.86
Bank                                                     8.65                    8.57




(1)  Under regulatory risk-based capital guidelines, assets and
credit-equivalent amounts of derivatives and off-balance sheet credit exposures
are assigned to broad risk categories. The aggregate dollar amount in each risk
category is multiplied by the associated risk weight of the category. Weighted
values are added together, resulting in Bancorp's total risk-weighted assets.
These ratios are computed in relation to average assets.



(2)  Ratio is computed in relation to average assets.



Capital ratios as of March 31, 2022 decreased compared December 31, 2021 as a
result of substantial average asset and risk-weighted asset growth, driven by
both organic and acquisition-related activity. While pressure was placed on
risk-based capital and leverage ratios due to this growth, Bancorp continues to
exceed the regulatory requirements for all calculations. Bancorp and the Bank
intend to maintain a capital position that meets or exceeds the
"well-capitalized" requirements as defined by the FRB and the FDIC, in addition
to the capital conservation buffer.



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



Additionally, in order to avoid limitations on capital distributions, including
dividend payments and certain discretionary bonus payments to executive
officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer
composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based
capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier
1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be
considered adequately-capitalized. At March 31, 2022, the adequately-capitalized
minimums, including the capital conservation buffer, were a 6.0% 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 a result of the CB acquisition, Bancorp became the 100% successor owner of
the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust
III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The
sole assets of the trust subsidiaries represent the proceeds of offerings loaned
in exchange for subordinated debentures with similar terms to the TPS. The TPS
are treated as part of Tier 1 Capital. The subordinated note and related
interest expense are included in Bancorp's consolidated financial statements.
The subordinated notes are currently redeemable at Bancorp's option on a
quarterly basis. As of March 31, 2022, subordinated notes added through the CB
acquisition totaled $26 million. Bancorp chose not to redeem the subordinated
notes on April 1, 2022.



                                       98

——————————————————————————–

Table of Contents

Further, Bancorp had borrowing capacity of $20 million available through an
unsecured borrowing line of the holding company as of March 31, 2022, which was
added during the first quarter to allow capital flexibility at the Bank level.



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



Non-GAAP Financial Measures




The following table provides a reconciliation of total stockholders' equity in
accordance with GAAP to tangible stockholders' equity (TCE), a non-GAAP
disclosure. Bancorp provides the TCE per share, a non-GAAP measure, in addition
to those defined by banking regulators, based on its widespread use by investors
as a means to evaluate capital adequacy:



                                                                                  December 31,
(dollars in thousands, except per share data)                 March 31, 

2022 2021

Total stockholders' equity - GAAP (a)                        $        758,143     $     675,869
Less: Goodwill                                                       (202,524 )        (135,830 )
Less: Core deposit and other intangibles                              (31,968 )          (5,596 )
Tangible common equity - Non-GAAP (c)                        $        523,651     $     534,443

Total assets - GAAP (b)                                      $      7,777,152     $   6,646,025
Less: Goodwill                                                       (202,524 )        (135,830 )
Less: Core deposit and other intangibles                              (31,968 )          (5,596 )
Tangible assets - Non-GAAP (d)                               $      

7,542,660 $ 6,504,599

Total stockholders' equity to total assets - GAAP (a/b)                  9.75 %           10.17 %
Tangible common equity to tangible assets - Non-GAAP (c/d)               6.94 %            8.22 %

Total shares outstanding (e)                                           29,220            26,596

Book value per share - GAAP (a/e)                            $          25.95     $       25.41
Tangible common equity per share - Non-GAAP (c/e)                       17.92             20.09




The general decline between December 31, 2021 and March 31, 2022 for the ratios
displayed in the table above is attributed largely to unrealized losses within
the AFS debt securities portfolio stemming from the significant increase in
interest rates during the first quarter, which drove a $50 million decline in
AOCI and as a result, a decline in stockholders equity. Further,
acquisition-related growth served to increase goodwill and total assets, which
also contributed to lower ratios.



                                       99

——————————————————————————–

Table of Contents



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



                                                                                December 31,
(dollars in thousands)                                      March 31, 2022          2021

Total loans - GAAP (a)                                     $      4,847,683     $  4,169,303
Less: PPP loans                                                     (71,361 )       (140,734 )
Total non-PPP loans - Non-GAAP (b)                         $      4,776,322     $  4,028,569

ACL on loans (c)                                           $         67,067     $     53,898
Non-performing loans (d)                                             12,804            7,408
Delinquent loans (e)                                                 11,167           11,036

ACL on loans to total loans - GAAP (c/a)                               1.38 %           1.29 %
ACL on loans to total loans - Non-GAAP (c/b)                           1.40 %           1.34 %

Non-performing loans to total loans - GAAP (d/a)                       0.26 %           0.18 %
Non-performing loans to total loans - Non-GAAP (d/b)                   0.27 %           0.18 %

Delinquent loans to total loans - GAAP (e/a)                           0.23 %           0.26 %
Delinquent loans to total loans - Non-GAAP (e/b)                       0.23 %           0.27 %




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



                                                         Three months ended March 31,
(dollars in thousands)                                    2022                  2021

Total non-interest expenses - GAAP (a)               $        56,297       $        24,973
Less: Non-recurring merger expenses                          (19,500 )                (400 )
Less: Amortization of investments in tax credit
partnerships                                                     (88 )                 (31 )
Total non-interest expenses - Non-GAAP (c)           $        36,709       

$ 24,542

Total net interest income, FTE                       $        48,944       $        37,874
Total non-interest income                                     19,203        

13,844

Less: Gain/loss on sale of securities                              -                     -
Total revenue - GAAP (b)                             $        68,147       $        51,718

Efficiency ratio - GAAP (a/b)                                  82.61 %               48.29 %
Efficiency ratio - Non-GAAP (c/b)                              53.87 %               47.45 %




                                      100

——————————————————————————–

Table of Contents



Source link