STOCK YARDS BANCORP, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Stock Yards Bancorp, Inc. ("Bancorp" or "the Company"), is a FHC headquartered inLouisville, Kentucky and is engaged in the business of banking through its wholly owned subsidiaries,Stock Yards Bank & Trust Company ("SYB" or "the Bank") andSYB Insurance Company, Inc. ("the Captive"). Bancorp, which was incorporated in 1988 inKentucky , is registered with, and subject to supervision, regulation and examination by, theBoard of Governors of theFederal Reserve System . As Bancorp has no significant operations of its own, its business is essentially that of SYB and the Captive. The operations of SYB and the Captive are fully reflected in the consolidated financial statements of Bancorp. Accordingly, references to "Bancorp" in this document may encompass both the holding company and its subsidiaries, however, it should be noted that the business of the Captive is immaterial to the overall results of operations and financial condition of Bancorp. All significant inter-company transactions and accounts have been eliminated in consolidation. SYB, established in 1904, is a state-chartered non-member financial institution that provides services inLouisville , central, eastern and northernKentucky , as well as theIndianapolis, Indiana andCincinnati, Ohio markets through 73 full service banking center locations. The Bank is registered with, and subject to supervision, regulation and examination by theFDIC and theKentucky Department of Financial Institutions . The Captive, a wholly owned subsidiary of the Bancorp, is aNevada -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 theState of Nevada and undergoes periodic examinations by theNevada 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$2,450,000 , 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 ofCommonwealth Bancshares, Inc. onMarch 7, 2022 , Bancorp became the 100% successor owner of three unconsolidatedDelaware trust subsidiaries: Commonwealth Statutory Trust III,Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings exchanged for subordinated debentures with similar terms to the TPS. Also as a result of its acquisition ofCommonwealth Bancshares, Inc. , Bancorp acquired a 60% interest inLandmark Financial Advisors, LLC (LFA), which is based inBowling Green, Kentucky and provides wealth management services. LFA is consolidated into the Company. The 40% non-controlling interest is presented within the consolidated financial statements and represents the interest in LFA not owned by Bancorp. EffectiveDecember 31, 2022 , Bancorp's partial interest in LFA was sold, resulting in a pre-tax loss of$870,000 recorded in other non-interest expense on the consolidated income statements for the year endedDecember 31, 2022 . This acquired line of business was not within the Company's geographic footprint and ultimately did not align with the Company's long-term strategic model. Net income related to LFA and attributable to Bancorp's 60% interest, excluding the pre-tax loss on disposition noted above, totaled$483,000 for the year endedDecember 31, 2022 .
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the consolidated financial
statements and accompanying Footnotes presented in Part II Item 8 "Financial
Statements and Supplementary Data."
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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 II Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Part I Item 1A "Risk Factors."
Forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause actual results, performance, or achievements to be
materially different from future results, performance, or achievements expressed
or implied by the statement. These statements are often, but not always, made
through the use of words or phrases such as "anticipate," "believe," "can,"
"conclude," "continue," "could," "estimate," "expect," "foresee," "goal,"
"intend," "may," "might," "outlook," "possible," "plan," "predict," "project,"
"potential," "seek," "should," "target," "will," "will likely," "would," or
other similar expressions. These forward-looking statements are not historical
facts and are based on current expectations, estimates and projections about our
industry, management's beliefs and certain assumptions made by management, many
of which, by their nature, are inherently uncertain and beyond our control.
Forward-looking statements detail management's expectations regarding the future
and are based on information known to management only as of the date the
statements are made and management undertakes no obligation to update
forward-looking statements to reflect events or circumstances that occur after
the date forward-looking statements are made, except as required by applicable
regulation.
There is no assurance that any list of risks and uncertainties or risk factors
is complete. Factors that could cause actual results to differ materially from
those expressed or implied in forward-looking statements include, among other
things:
? Changes in, or forecasts of, future political and economic conditions,
inflation or recession and efforts to control related developments;
? changes in laws and regulations or the interpretation thereof;
? accuracy of assumptions and estimates used in establishing the ACL for loans,
ACL for off-balance sheet credit exposures and other estimates; ? impairment of investment securities; ? impairment of goodwill, MSRs, other intangible assets and/or DTAs;
? ability to effectively navigate an economic slowdown or other economic or
market disruptions; ? changes in fiscal, monetary, and/or regulatory policies;
? changes in tax polices including but not limited to changes in federal and
state statutory rates;
? behavior of securities and capital markets, including changes in interest
rates, market volatility and liquidity; ? ability to effectively manage capital and liquidity;
? long-term and short-term interest rate fluctuations, as well as the shape of
the
? the magnitude and frequency of changes to the FFTR implemented by the Federal
Open Market Committee of the FRB ; ? competitive product and pricing pressures; ? projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.; ? integration of acquired financial institutions, businesses or future acquisitions;
? changes in the credit quality of Bancorp's customers and counterparties,
deteriorating asset quality and charge-off levels;
? changes in technology instituted by Bancorp, its counterparties or
competitors;
? changes to or the effectiveness of Bancorp's overall internal control
environment;
? adequacy of Bancorp's risk management framework, disclosure controls and
procedures and internal control over financial reporting;
? changes in applicable accounting standards, including the introduction of new
accounting standards; ? changes in investor sentiment or behavior; ? changes in consumer/business spending or savings behavior;
? ability to appropriately address social, environmental and sustainability
concerns that may arise from business activities;
? occurrence of natural or man-made disasters or calamities, including health
emergencies, the spread of infectious diseases, pandemics or outbreaks of
hostilities, and Bancorp's ability to deal effectively with disruptions caused
by the foregoing;
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? ability to maintain the security of its financial, accounting, technology,
data processing and other operational systems and facilities;
? ability to withstand disruptions that may be caused by any failure of its
operational systems or those of third parties;
? ability to effectively defend itself against cyberattacks or other attempts by
unauthorized parties to access information of Bancorp, its vendors or its
customers or to disrupt systems;
? other risks and uncertainties reported from time-to-time in Bancorp's filings
with theSEC , including Part I Item 1A "Risk Factors."
Acquisition of
Bank & Trust Company
OnMarch 7, 2022 , Bancorp completed its acquisition ofCommonwealth Bancshares, Inc. and its wholly owned subsidiary,Commonwealth Bank & Trust Company , collectively defined as "CB," aLouisville, Kentucky -based commercial bank and trust company, which operated 15 retail branches, including nine inJefferson County , four inShelby County , and two inNorthern Kentucky . At the time of acquisition and net of purchase accounting adjustments, CB had$1.34 billion in assets,$632 million in loans,$247 million in investment securities and$1.12 billion in deposits in addition to maintaining aWM&T Department with total assets under management of approximately$2.65 billion . CB was also the holding company for three unconsolidatedDelaware trust subsidiaries and held a 60% interest in LFA. Bancorp became the 100% successor owner of all three trust subsidiaries and also retained the 60% interest in LFA upon acquisition, the latter of which was disposed of effectiveDecember 31, 2022 . Bancorp acquired all outstanding common stock ofCB, Inc. in a combined stock and cash transaction that resulted in total consideration paid to CB shareholders of$168 million . Bancorp recorded goodwill of approximately$67 million and incurred merger related expenses totaling$19.5 million during the first quarter of 2022 as a result of the CB acquisition. As a result of Bancorp's disposition of its partial interest in LFA, which resulted in a pre-tax loss of$870,000 recorded in other non-interest expense on the consolidated income statements for the year endedDecember 31, 2022 , goodwill totaling$8.5 million was written off, bringing total goodwill related to the CB acquisition to$58 million as ofDecember 31, 2022 . The acquisition of CB has had a significant impact on the ACL and credit loss provisioning in 2022. In total, the CB acquisition served to increase the ACL on loans by$14 million at acquisition date. This increase consisted of$10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and$4.4 million of provision for credit loss expense attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.
OnMay 31, 2021 , Bancorp completed its acquisition ofKentucky Bancshares, Inc. and its wholly owned subsidiary,Kentucky Bank , collectively defined as "KB," aParis, Kentucky -based commercial bank and trust company, which operated 19 retail branches throughout central and easternKentucky . At the time of acquisition and net of purchase accounting adjustments, KB had$1.27 billion in assets,$755 million in loans,$396 million in investment securities and$1.04 billion in deposits. KB was also the holding company for an insurance captive, which Bancorp retained and renamedSYB Insurance Company, Inc. Bancorp acquired all outstanding common stock of KB in a combined stock and cash transaction that resulted in total consideration paid to KB shareholders of$233 million .
Bancorp recorded goodwill of approximately
related expenses totaling
a result of the KB acquisition.
The acquisition of KB had a significant impact on the ACL and credit loss provisioning for the year endedDecember 31, 2021 . In total, the KB acquisition served to increase the ACL by$14 million at acquisition date. 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$7.4 million of provision for credit loss expense attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition. 25
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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 II Item 8 "Financial Statements and
Supplementary Data."
Critical Accounting Policies and Estimates
Bancorp's consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. Management continually evaluates its accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management's estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management. Critical accounting policies are those that management believes are the most important to the portrayal of Bancorp's financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with Bancorp's Audit Committee. As ofDecember 31, 2022 , the significant accounting policies considered the most critical in preparing Bancorp's consolidated financial statements are the determination of the ACL on loans andGoodwill .
Allowance for Credit Losses on Loans and Provision for Credit Losses
On
Losses," which created material changes to Bancorp's critical accounting policy
that existed at
For purposes of establishing the general reserve, Bancorp stratifies the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculates the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. Bancorp's methodologies for estimating the ACL on loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The ACL on loans is established through credit loss expense charged to current earnings. The amount maintained in the ACL reflects management's estimate of the net amount not expected to be collected on the loan portfolio at the balance sheet date over the life of the loan. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan's initial effective interest rate, an expected loss ratio based on historical losses adjusted as appropriate for qualitative factors, or the fair value of the collateral for certain collateral-dependent loans. Provision for credit losses can be subject to volatility as ACL calculations and the resulting expense are significantly impacted by changes in CECL model assumptions such as macroeconomic factors and conditions, credit quality and loan composition. Forecasted economic conditions have been generally volatile since Bancorp's adoption of CECL, as the pandemic, related government stimulus efforts, theFederal Reserve's efforts to combat inflation, and recession-based fears have driven constantly changing estimates of the economy over the past several years. 26
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Table of ContentsGoodwill Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired.Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquire, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. 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. Bancorp has selectedSeptember 30 as the date to perform the annual impairment test.Goodwill is the only intangible asset with an indefinite life on Bancorp's consolidated balance sheets. No impairment toGoodwill was indicated based on Bancorp's annual testing for 2022. AtDecember 31, 2022 , Bancorp had$194 million in goodwill recorded on its balance sheet.Goodwill totaling$67 million was recorded in association with the acquisition of CB in 2022,$8.5 million of which was subsequently written off as a result of the disposition of Bancorp's partial interest in LFA.Goodwill totaling$123 million was recorded in association with the acquisition of KB in 2021. EffectiveDecember 31, 2022 , management finalized the fair values of the acquired assets and assumed liabilities associated with the CB acquisition in advance of the 12 month post-acquisition date, as allowed by GAAP. 27
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Table of Contents Business Segment Overview
Bancorp is divided into two reportable segments: Commercial Banking and WM&T:
Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, leasing, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.
Overview - Operating Results (FTE)
The following table presents an overview Bancorp's financial performance for the
years ended
Years Ended December 31, Variance (dollars in thousands, except per share data) 2022 2021 2020
2022 / 2021 2021 / 2020
Net income available to stockholders$ 92,972 $ 74,645 $ 58,869 25 % 27 %
Diluted earnings per share
8 % 15 % ROA 1.25 % 1.33 % 1.40 % (8 )bps (7 )bps ROE 12.58 % 13.02 % 14.01 % (44 )bps (99 )bps
Additional discussion follows under the section titled "Results of Operations."
General highlights for the year ended
2021
? Bancorp completed its acquisition of CB on
acquisition and net of purchase accounting adjustments, CB had approximately
securities and
o The year ended
associated with the CB acquisition, which contributed meaningfully to results
for the year. In addition, one-time merger-related expenses totaling
million and credit loss expense on the acquired loan portfolio of
were recorded for the year ended
? Bancorp completed its acquisition of KB on
acquisition and net of purchase accounting adjustments, KB had approximately
securities and$1.04 billion in deposits. o The year endedDecember 31, 2021 included approximately seven months of
activity associated with the KB acquisition, which had a meaningful impact on
results for 2021 and 2022. In addition, one-time merger-related expenses
totaling
of
? In 2022, Bancorp set the following financial records:
o Total revenue, comprising net interest income FTE and non-interest income, of
o Net income of
the previous records of
o Record loan production, which drove
(excluding PPP) and, combined with the acquisition of CB, led to record total
loans of
o WM&T AUM totaled
billion compared to prior year. While approximately
added through the CB acquisition, significant market declines during the year
ended December 31, 2022 partially offset organic and acquisition-related
growth.
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o WM&T services income of
acquisition-related growth despite significant market downturns during the
year. o Debit and credit card income of$18.6 million , supported by organic and acquisition-related growth in transaction volume and customer base.
o Treasury Management fee income of
volume, new product sales and both organic and acquisition-related expansion
of the customer base.
? NIM increased 13 bps to 3.35% for the year ended
3.22% for the prior year consistent the average balance sheet expansion and
upward movement in interest rates experienced over the year. Net interest income FTE totaled$234.3 million for the year endedDecember 31, 2022 , representing an increase of$62.8 million , or 37%, over the prior year.
o This increase was driven by both organic and acquisition-related growth and
the aforementioned rise in interest rates, which more than offset the increase
in interest-bearing deposit costs and the substantial decline in PPP-related
interest income.
? Total loans increased
2022 as compared to
in loans from the CB acquisition and strong organic loan portfolio growth.
? Total provision for credit losses totaled
ended
o Provision for credit loss expense of
the loan portfolio added through the CB acquisition for the year ended
inflation and recession-based concerns, coupled with strong organic loan
growth, served to increase expense for 2022.
o While provision of
added through the KB acquisition for the year ended
offset by a cumulative net benefit of
on loans and credit losses on off balance sheet exposures, which was driven by
stabilizing unemployment forecasts, generally improving CECL model loss
factors and line of credit utilization.
? Bancorp's ACL on loans to total loans was 1.41% at
to 1.29% at
acquisition-related activity within the ACL on loans, strong organic growth and
to a lesser extent, the aforementioned increase in projected unemployment
forecasts.
? Total deposits increased
result of the CB acquisition. Excluding acquisition-related activity,
period-end deposit balances declined in 2022, as the elevated customer balances
experienced toward the end of 2021 have moderated, primarily due to contraction
in non-interest bearing demand deposits. While Bancorp has not experienced
fallout within the customer base, we anticipate deposit pricing will be a
challenge to future NIM expansion.
? Non-interest income increased
significant contributions stemming from acquisition-related activity and
organic growth. All non-interest income revenue streams experienced significant
increases over the prior year, with the exception of mortgage banking, which
experienced a significant decline in volume driven by rising rates compared to
the historic low rates that benefitted much of 2021. In addition, non-recurring
gains totaling
selling overlapping acquired properties.
? Non-interest expenses increased
experienced elevated non-interest expense as a result of merger-related
expenses, most non-interest expense categories experienced significant
increases over the prior year as a result of anticipated acquisition-related
expansion. In addition, Bancorp's partial interest in LFA, which was acquired
as part of the CB acquisition was sold effective
in a pre-tax loss of
well-controlled and consistent with expansion, strong performance and continued
investment in technology.
? Bancorp's efficiency ratio (FTE) for the year ended
59.30% compared to 59.94% for the year ended
ratios being the result of one-time merger-related expenses recorded in
relation to the respective acquisitions in both years. Bancorp also considers
an adjusted efficiency ratio, which eliminates net gains (losses) on sales and
calls of investment securities, as well as net gains (losses) on sales of
acquired premises and equipment and disposition of any acquired assets, if
applicable, and the fluctuation in non-interest expenses related to
amortization of investments in tax credit partnerships and non-recurring merger
expenses. Bancorp's adjusted efficiency ratio for the year ended
2022 was 53.62% compared to 51.77% for the year ended
the section titled "Non-GAAP Financial Measures" for a reconcilement of
non-GAAP to GAAP measures.
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Total stockholder's equity to total assets was 10.14% as ofDecember 31, 2022 compared to 10.17% atDecember 31, 2021 . Total equity increased to$760 million in 2022, driven by the issuance of$134 million in stock for the acquisition of CB and net income of$93.0 million , which were partially offset by a$108 million negative change in AOCI and$33 million of dividends declared. The large decline in AOCI fromDecember 31, 2021 toDecember 31, 2022 was the result of the rising interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. TCE is a measure of a company's capital, which is useful in evaluating the quality and adequacy of capital. Bancorp's ratio of TCE to total tangible assets was 7.44% as ofDecember 31, 2022 , compared with 8.22% atDecember 31, 2021 , the decline driven by both the large interest-rate driven changes in AOCI noted above and acquisition-related growth. See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures.
General highlights for the year ended
2020
? Bancorp completed its acquisition of KB on
acquisition and net of purchase accounting adjustments, KB had approximately
securities and$1.04 billion in deposits. o The year endedDecember 31, 2021 included approximately seven months of
activity associated with the KB acquisition, which had a meaningful impact on
results for 2021. In addition, one-time merger-related expenses totaling
million and credit loss expense on the acquired loan portfolio of
were recorded for the year ended
? Net income totaled
resulting in diluted EPS of
Operating results of the year ended
impacted by the acquisition of KB, PPP forgiveness activity, negative provision
expense and strong organic growth. Operating results for the year ended
increased credit loss provisioning and reserves for off-balance sheet credit
exposures associated with the then uncertain pandemic-related economic
conditions and a substantially lower interest rate environment.
? NIM decreased 17 bps to 3.22% for the year ended
3.39% for the prior year, consistent with the sustained low interest rate
environment and elevated levels of excess liquidity, which created significant
NIM compression. Despite the decrease in NIM, organic loan growth, the KB
acquisition, fee income associated with PPP loans and deposit rate cuts
resulted in a
to the prior year.
? Total loans (excluding PPP loans) increased
ended
? Total provision for credit losses was a net benefit of
ended
in relation to the acquired KB loan portfolio, it was more than offset by an
improving CECL model factors and stronger line of credit utilization. By
comparison,
the year ended
effective
as elevated unemployment and historic declines in line of credit utilization.
? C&I line of credit utilization improved to 32% at
26% at
excess liquidity stemming from the PPP resulted in gradually declining levels
of utilization that bottomed out in March of 2021, improving thereafter in each
of the final three quarters of 2021. Despite this improvement, utilization
remained well below pre-pandemic levels throughout 2021.
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? Total deposits increased
to
to the KB acquisition, while significant organic growth was also experienced
during the year, stemming mainly from PPP funding and significant federal
stimulus.
? Non-interest income increased
substantial contribution to non-interest income, significant organic growth was
also experienced across all non-interest revenue streams, with the exception of
mortgage banking.
? Non-interest expenses increased
related to one-time merger related expenses (including expenses related to the
CB acquisition). While recurring expenses attributed to the KB acquisition
comprised the majority of the remaining increase, non-interest expenses in
general remained well-controlled and consistent with expansion, strong
performance and a continued investment in technology.
? Bancorp's efficiency ratio (FTE) for the year ended
to 59.94% from 54.06% for the prior year due to one-time merger-related
expenses incurred as a result of the KB acquisition. Bancorp also considers an
adjusted efficiency ratio, which eliminates net gains (losses) on sales and
calls of investment securities, as well as net gains (losses) on sales of
acquired premises and equipment, if applicable, and the fluctuation in
non-interest expenses related to amortization of investments in tax credit
partnerships and non-recurring merger expenses. Bancorp's adjusted efficiency
ratio for the year ended
the same period of 2020. See the section titled "Non-GAAP Financial
Measures" for a reconcilement of non-GAAP to GAAP measures.
? The ETR increased to 21.75% for the year ended
for the prior year. The increase was driven by the combination of Bancorp's
transition from a capital-based franchise tax to the
tax effective
provided significant benefit in the prior year. Total stockholder's equity to total assets was 10.17% as ofDecember 31, 2021 compared to 9.56% atDecember 31, 2020 . Total equity increased$235 million in 2021, driven by the issuance of$205 million in stock for the acquisition of KB and net income of$74.6 million , which were partially offset by$28 million of dividends declared, changes in AOCI and stock-based compensation activity. Bancorp's ratio of TCE to total tangible assets was 8.22% as ofDecember 31, 2021 , compared with 9.28% atDecember 31, 2020 , the decline driven by acquisition-related growth. See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. 31
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Table of Contents Challenges for 2023:
Bancorp has identified the following challenges for fiscal year 2023:
? The FRB's efforts to control inflation, which has reached its highest levels in
decades, and its corresponding impact on local, national and global economic
conditions will present numerous challenges in 2023. The possibility of
recession, given an already-inverted yield curve and a forecast for continued
rate increases, could threaten loan demand, subdue business and consumer
spending, and create significant volatility for the markets in general.
Further, the severity of a potential recession and its effect on the
unemployment forecast, the primary loss driver within Bancorp's ACL model,
could result in substantially higher ACL provisioning.
? The prospects of further interest rate increases in 2023 also present interest
rate risk management challenges. Pricing pressure/competition for both loans
and deposits, changing levels of liquidity within the banking system and an
inverted yield curve could place pressure on NIM. Further rate increases could
also serve to hamper loan demand and/or drive up the low cost of funds that
Bancorp derives from its deposit base.
? Migration of deposits out of Bancorp, as customers pursue higher deposit rates
or alternative investments, could impact liquidity and earnings as Bancorp
competes for deposits. Changes in the mix of deposits could also result in
increased average rates paid on deposits, and lower earnings to Bancorp, should
non-interest deposits shift into interest-bearing products.
? Net loan growth is a major focus for Bancorp in 2023. This will be impacted by
competition, prevailing interest rates, economic conditions, line of credit
utilization and loan prepayments. Bancorp believes there is continued
opportunity for loan growth in all of its markets. Bancorp's ability to deliver
attractive loan growth over the long-term is linked to Bancorp's overall
success.
? The continued development of the relationships and opportunities presented by
the CB and KB acquisitions remains a priority for 2023. The Company's growing
footprint has allowed Bancorp to provide broader product offerings, increased
lending capabilities and an expanded branch delivery system to existing and
prospective customers alike, creating solid growth opportunities and a larger
platform for future expansion. Prioritizing the development of the
opportunities afforded by the CB and KB acquisitions will play a major role in
delivering strong operating results in the coming year.
? Bancorp derives significant non-interest income from WM&T services. Most of
these fees are based upon the market value of AUM at respective period ends.
Absent fixed income and equity market movements, to grow this revenue stream,
Bancorp must attract new customers and retain existing customers. Bancorp
believes there is opportunity for growth of the WM&T business in all of its
markets. Growth in market values of AUM and fees is dependent upon positive
returns in the overall capital markets, which could be threatened should
economic conditions worsen. Bancorp has no control over market volatility.
? Competitive factors surrounding the developing trend of financial institutions
reducing or eliminating certain deposit account fees, particularly
overdraft-related fees, presents a significant challenge to growing
deposit-related non-interest income in the future and potentially threatens a
revenue stream that has been in an industry-wide, regulation-driven decline for
several years. Strategic decisions surrounding this trend may impact not only
deposit-related income, but also deposit relationships in general, particularly
for retail customers, as consumer use of these bank deposit services continues
to evolve. Continuous monitoring of these trends and evaluation of any
potential changes to our deposit service fee structure will play a key role in
the growth of Bancorp's deposit service charge income.
? Technological advances are consistently providing opportunities for Bancorp to
consider potential new products and delivery channels. Bancorp's
customers' demand for innovative and relevant products and services is expected
to trend along with changing technology. Bancorp will need to continue to make
prudent investments in technology while managing associated risks so as to
remain competitive with other financial service providers, especially as
Bancorp's continued expansion raises the level of expectation from customers.
? Over the past several years, Bancorp's asset quality metrics have trended
within a low range, exceeding benchmarks and reaching historically strong
levels. Bancorp realizes that present asset quality metrics are positive and,
recognizing the cyclical nature of the lending business and current economic
conditions, Bancorp anticipates this trend will likely normalize over time.
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Table of Contents Results of Operations
Net Interest Income - Overview
As is the case with most banks, Bancorp's primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by numerous economic factors including market interest rates, business spending, liquidity, consumer confidence and various competitive conditions within the marketplace. The discussion that follows is based on FTE net interest income data.
Comparative information regarding net interest income follows:
As of and for the Years Ended December 31, Variance (dollars in thousands) 2022 2021 2020
2022 / 2021 2021 / 2020
Net interest income$ 233,383 $ 171,074 $ 135,921 36 % 26 % Net interest income (FTE)* 234,267 171,508 136,133 37 % 26 % Net interest spread (FTE)* 3.21 % 3.16 % 3.22 % 5 bps (6) bps Net interest margin (FTE)* 3.35 % 3.22 % 3.39 % 13 bps (17) bps
Average interest earning assets
31 % 32 % Average interest bearing liabilities$ 4,538,911 $ 3,391,709 $ 2,618,848 34 % 30 % Five yearTreasury note rate at year end 3.99 % 1.26 % 0.36 % 273 bps 90 bps Average five yearTreasury note rate 3.00 % 0.86 % 0.53 % 214 bps 33 bps Prime rate at year end 7.50 % 3.25 % 3.25 % 425 bps - bps Average Prime rate 4.85 % 3.25 % 3.53 % 160 bps (28) bps One month term SOFR at year end 4.36 % 0.06 % 0.07 % 430 bps (1) bps Average one month term SOFR 1.99 % 0.04 % 0.35 % 195 bps (31) bps One month term LIBOR at year end 4.39 % 0.10 % 0.14 % 429 bps (4) bps Average one month term LIBOR 1.92 % 0.10 % 0.52 % 182 bps (42) bps
*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 ,$5 million and$8 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. These sold loans are on Bancorp's balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, because Bancorp believes it provides a more accurate depiction of loan portfolio performance. AtDecember 31, 2022 , Bancorp's loan portfolio consisted of approximately 71% fixed and 29% variable rate loans. At inception, most of Bancorp's fixed rate loans are priced in relation to the five year treasury. Bancorp's variable rate loans are indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change. Prime rate, the five yearTreasury note rate, one month term LIBOR and one month term SOFR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past three years, a period that experienced significant interest rate volatility, denoted by the FRB's dramatic pandemic-driven rate cuts ofMarch 2020 that were sustained until the inflation-driven rate increases of 2022. The FRB has taken aggressive interest rate action over the past year, implementing multiple rate hikes in an effort to tame inflation that has reached its highest levels in decades. The FFTR was increased a total of 425 bps in 2022, beginning the year at a range of 0.00% - 0.25% and ending the year at a range of 4.25% - 4.50%. As a result, Prime increased from 3.25% at the beginning of 2022 to 7.50% as ofDecember 31, 2022 , ending the year at its highest level since 2007. Bancorp has experienced significant benefit from the rate increases enacted in 2022, particularly since the mid-June rate hike that lifted Prime to 4.75% and in effect, took the majority of Bancorp's variable rate loans off of their 4.00% floors. Subsequent rate increases have continued to provide meaningful benefit, offset partially by Bancorp's election to raise deposit rates. 33
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The current economic outlook suggests continued interest rate increases from the FRB through the first half of 2023, albeit at a reduced pace compared to 2022. Pricing pressure/competition for both loans and deposits, changing levels of liquidity within the banking system and an inverted yield curve could continue to place pressure on NIM.
Discussion of 2022 vs 2021:
Net interest spread (FTE) and NIM (FTE) were 3.21% and 3.35%, for the year ended
respectively. NIM during the year ended
impacted by the following:
? A rapidly rising interest rate environment evolving from the 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
4.25% - 4.50%, and Prime at 7.50%, as of
? Bancorp's first deposit rate increases in nearly two years, stemming from the
aforementioned rising rate environment, which drove a
in interest expense on deposits for the year ended
to the same period of 2021.
? Substantial balance sheet expansion stemming from both acquisition-related
activity and organic growth, which resulted in total average earning asset
growth of
of
same period of 2021.
? Overall excess balance sheet liquidity, which placed pressure on NIM in both
periods. Excess liquidity within the banking system in general has also led to
a highly competitive loan rate environment. After reaching a peak towards the
end of 2021, levels of excess liquidity, and its corresponding impact on NIM,
have moderated through
? PPP forgiveness activity, which accelerates the recognition of fee income on
these loans and has declined significantly in 2022, as the vast majority of
the original portfolio has been forgiven. The average balance of the PPP loan
portfolio decreased
million, or 78%, for the year ended
period of 2021.
? The addition of
acquisition, which contributed interest expense of
ended
accounting-related mark-to-market amortization. No such activity was recorded
for the year endedDecember 31, 2021 . Net interest income (FTE) increased$62.8 million , or 37%, for the year endedDecember 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, substantial deployment of excess liquidity into the investment securities portfolio and the continued benefit of a rising interest rate environment. Partially offsetting this increase was the rising cost of interest bearing deposits and the addition of subordinated debt through the CB acquisition. Total average interest earning assets increased$1.67 billion , or 31%, to$6.99 billion for the year endedDecember 31, 2022 , as compared to the same period of 2021, with the average rate earned on total interest earning assets increasing from 3.34% to 3.61%.
? Average total loan balances increased
growth of
and strong organic growth, which was partially offset by a
87%, decline in average PPP loan balances, as a result of forgiveness
activity.
? Average investment securities grew
December 31, 2022 compared to the same period of 2021, attributed to a combination of strategically deploying excess liquidity through further investment and acquisition-related activity. 34
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? Average FFS and interest bearing due from bank balances increased
or 7%, for the year ended
sheet liquidity. While average balances reflect excess balance sheet
liquidity, actual excess balance sheet liquidity has continued to decline
throughDecember 31, 2022 , reaching more normalized levels by year-end.
Total interest income (FTE) increased
for the year ended
? Interest and fee income (FTE) on loans increased
period of 2021, driven by both organic and acquisition-related growth in the
non-PPP portfolio and the rising rate environment, which more than offset a
loan portfolio climbed to 4.50% for the year ended
to 4.16% for the same period of 2021.
? Significant growth in average investment securities led to a
increase interest income (FTE) on the portfolio for the year ended December
31, 2022 compared to the same period of 2021, driving a 42 bps, or 32%,
increase in the corresponding yield on the portfolio. Substantial deployment
of excess liquidity benefitted the investment portfolio as the yields earned
on recent purchases have improved dramatically in tandem with rising rates.
? Interest income on FFS and interest bearing due from bank balances increased
balance growth stemming from excess balance sheet liquidity and rising
interest rates. The yield on these assets increased 112 bps to 1.26% for the
year ended
from the dramatic increase in the FFTR over the past year. Total average interest bearing liabilities increased$1.15 billion , or 34%, to$4.54 billion for the year endedDecember 31, 2022 compared with the same period in 2021, with the total average cost increasing 22 bps to 0.40%.
? Average interest bearing deposits increased
year ended
interest-bearing demand deposits accounting for
The significant growth was attributed to both acquisition-related activity and
organic growth stemming from the industry-wide trend of customers maintaining
higher levels of liquidity, which was experienced for several quarters.
However, excluding acquisition-related activity, period-end deposit balances
have declined in 2022, as the elevated customer balances noted above have
moderated.
? Consistent with the average interest bearing deposit growth noted above,
average SSUAR balances increased
2022 compared to the same period of 2021.
? Average FHLB advances decreased
2022 compared to the same period of the prior year, as all outstanding term
FHLB advances either matured or were paid off by the end of 2021. The minimal
average balance of FHLB advances for the year ended
from a one-week cash management advance that was utilized by Bancorp at
year-end for short-term liquidity purposes, which represented the only FHLB
advance used during 2022, and matured in earlyJanuary 2023 .
? Subordinated debentures totaling
acquisition during the first quarter of 2022. The corresponding average
balance for the year ended December 31, 2022 totaled $22 million .
Total interest expense increased $12.3 million for the year ended December 31,
2022 compared to the same period of 2021, driven by acquisition-related average
balance growth, Bancorp's first deposit rate increases in almost two years and
debt assumed through the CB acquisition. As a result, the cost of interest
bearing liabilities increased 22 bps to 0.40% for the year ended December 31,
2022 compared to the same period of 2021.
? Total interest bearing deposit expense increased
acquisition-related activity and the aforementioned deposit rate increases,
resulting in a 20 bps increase in the cost of interest bearing deposits.
Bancorp expects pricing pressure/competition stemming from the rising rate
environment to drive further deposit rate/cost increases in the coming months.
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Table of Contents ? Interest expense totaling$1.1 million was recorded for the year ended
the CB acquisition, approximately$331,000 of which stems from purchase accounting-related mark-to-market amortization.
? Interest expense on FHLB advances was recorded for the year ended
2022 was a minimal
the end of 2021, resulting in a decline of
period of the prior year.
Discussion of 2021 vs 2020:
Net interest spread and NIM were 3.16% and 3.22% for the year endedDecember 31, 2021 compared to 3.22% and 3.39% for the year endedDecember 31, 2020 . NIM was significantly impacted in 2021 by the following:
? A sustained low interest rate environment, driven by the lowering of the FFTR
in
3.25%, where it remained through 2021.
? Substantial balance sheet growth, both organic and acquisition-related, which
resulted in total average earning asset growth of
average interest-bearing liability growth of
year ended
? PPP originations, which began in the second quarter of 2020 and continued
through expiration of the program on
forgiveness activity, which accelerated the recognition of fee income on these
loans and had significant effect on NIM. The PPP portfolio contributed an 18
bps benefit to NIM for the year ended
forgiveness activity, which drove the recognition of
PPP-related fee income. In comparison, the PPP portfolio had a negative impact
of 3 bps on NIM for the year end
originations that occurred in 2020 and the effect that the low-yielding, 1%
stated rate of these notes had on NIM for the period.
? Overall, excess balance sheet liquidity contributed approximately 25 bps of
NIM compression for the year ended
of NIM compression for the same period of 2020. In general, excess liquidity
within the banking system led to a highly competitive loan rate environment
over the past two years.
? 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$35.4 million , or 26%, for the year endedDecember 31, 2021 compared to the same period of 2020, due to interest and fee income associated with the PPP portfolio, substantial growth in the non-PPP loan portfolio and investment securities portfolio, and the aforementioned lowering of deposit rates. Total average interest earning assets increased$1.30 billion , or 32%, to$5.32 billion for the year endedDecember 31, 2021 , as compared to the same period of 2020, with the average rate earned on total interest earning assets contracting 34 bps to 3.34%.
? Average total loans increased
balances grew
compared to the same period of 2020, attributed to both the acquisition and
strong organic growth. Average PPP loan balances decreased
10%, for the year ended
consistent with forgiveness activity throughout 2021.
? Average investment securities grew
a combination of strategically deploying excess liquidity through further
investment and the KB acquisition.
? Average FFS and interest bearing due from balances increased
94%, for the year ended
of deposits.
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Total interest income (FTE) increased
for the year ended
? Interest and fee income on loans (FTE) increased
period of 2020, driven by accelerated recognition of PPP fee income consistent
with forgiveness activity, organic loan growth and the contribution attributed
to the KB acquisition.
? Significant growth in average investment securities drove an increase of
million, or 37%, for interest income (FTE) on the portfolio for the year ended
interest rate environment experienced over the previous 12 months weighed
heavily on fixed income security yields, which contracted 59 bps, or 31%.
? Despite the substantial increase experienced for average FFS and interest
bearing due from balances, corresponding interest income decreased
13%, for the year ended
as a result of the FRB lowering the FFTR 150 bps in
0-0.25%, where it remained for the final three quarters of 2020 and the
entirety of 2021.
Total average interest bearing liabilities increased $773 million , or 30%, to
$3.39 billion for the year ended December 31, 2021 compared with the same period
in 2020, with the total average cost declining 28 bps to 0.18%.
? Average interest bearing deposits increased
ended
interest-bearing demand deposits accounting for
Interest bearing deposits added as a result of the KB acquisition along with
significant federal stimulus action, such as PPP funding, propelled deposit
balances to record levels at
uncertainty surrounding the on-going pandemic resulted in the customer base
maintaining higher levels of liquidity, similar to customer behavior seen
during the Great Recession.
? Consistent with the higher interest bearing deposit balances noted above, as
well as the KB acquisition, average SSUAR balances increased
55%, for the year ended
? Average FHLB advances decreased$45 million , or 73%, for the year ended
were not replaced. In addition, Bancorp elected to pay down certain advances
prior to their maturity during the first and second quarters of 2021, the
latter of which resulted in an early-termination fee of
a component non-interest expense during the second quarter of 2021. Total interest expense decreased$5.9 million , or 50%, for the year endedDecember 31, 2021 compared to the same period of 2020, a direct result of deposit rate reductions implemented in response to the falling interest rate environment and to a lesser extent, the reduction in interest expense on FHLB advances.
? Total interest bearing deposit expense decreased
a 25 bps decline in the cost of average total interest bearing deposits.
? Interest expense on FHLB advances declined
of the substantial reduction in average FHLB advances outstanding. As noted
above, Bancorp had no outstanding FHLB advances as of
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Average Balance Sheets and Interest Rates (FTE)
2022 2021 2020
Years ended December 31, Average Average
Average Average Average Average (dollars in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate Interest earning assets: Federal funds sold and interest bearing due from banks$ 477,341 $ 6,018 1.26 % $
446,783
0.32 % Mortgage loans held for sale 8,835 190 2.15 11,170 249 2.23 20,156 533 2.64 Investment securities: Taxable 1,594,942 27,302 1.71 879,298 11,575 1.32 443,035 8,432 1.90 Tax-exempt 75,382 1,851 2.46 19,636 340 1.73 10,047 265 2.64 Total securities 1,670,324 29,153 1.75 898,934 11,915 1.33 453,082 8,697 1.92 Federal Home Loan Bank stock 11,741 505 4.30 10,824 262 2.42 11,284 253 2.24 SBA Paycheck Protection Program (PPP) loans 52,704 4,798 9.10 397,282 22,044 5.55 442,510 13,636 3.08 Non-PPP loans 4,766,420 211,872 4.45 3,553,975 142,395 4.01 2,862,399 124,226 4.34 Total loans 4,819,124 216,670 4.50 3,951,257 164,439 4.16 3,304,909 137,862 4.17 Total interest earning assets 6,987,365 252,536 3.61 5,318,968 177,510 3.34 4,019,336 148,083 3.68 Less allowance for credit losses on loans 65,672 57,696 45,008 Non-interest earning assets: Cash and due from banks 90,481 63,477 46,277 Premises and equipment, net 106,631 69,483 57,474 Bank owned life insurance 68,325 44,720 32,899 Goodwill 188,949 84,853 12,513 Accrued interest receivable and other 62,801 103,081 94,102 Total assets$ 7,438,880 $ 5,626,886 $ 4,217,593 Interest bearing liabilities: Deposits: Interest bearing demand$ 2,218,416 $ 9,186 0.41 %$ 1,633,606 $ 1,771 0.11 %$ 1,133,308 $ 1,776 0.16 % Savings 538,971 638 0.12 328,570 93 0.03 190,368 36 0.02 Money market 1,140,025 5,284 0.46 919,778 589 0.06 771,363 1,482 0.19 Time 487,981 1,304 0.27 420,308 3,174 0.76 412,506 7,184 1.74 Total interest bearing deposits 4,385,393 16,412 0.37 3,302,262 5,627 0.17 2,507,545 10,478 0.42 Securities sold under agreements to repurchase 122,154 567 0.46 62,534 24 0.04 40,363 37 0.09 Federal funds purchased 9,357 154 1.65 10,596 14 0.13 9,457 35 0.37Federal Home Loan Bank advances 274 12 4.38 16,317 337 2.07 61,483 1,400 2.28 Subordinated debentures 21,733 1,124 5.17 - - - - - - Total interest bearing liabilities 4,538,911 18,269 0.40 3,391,709 6,002 0.18 2,618,848 11,950 0.46 Non-interest bearing liabilities: Non-interest bearing demand deposits 2,053,213 1,578,795 1,100,942 Accrued interest payable and other 107,958 83,121 77,684 Total liabilities 6,700,082 5,053,625 3,797,474 Stockholders' equity 738,798 573,261 420,119 Total liabilities and stockholder's equity$ 7,438,880 $ 5,626,886 $ 4,217,593 Net interest income$ 234,267 $ 171,508 $ 136,133 Net interest spread 3.21 % 3.16 % 3.22 % Net interest margin 3.35 % 3.22 % 3.39 % 38
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Supplemental Information - Total Company 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
December 31, 2022 , 2021 and 2020, 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
respectively.
? Interest income includes loan fees of
with the PPP),
million (
31, 2022, 2021 and 2020, respectively. Interest income on loans may be
impacted by the level of prepayment fees collected and accretion related to
loans purchased.
? 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 average
interest earning assets.
? Net interest spread (FTE) is the difference between taxable equivalent rates
earned on interest earning assets less the cost of interest bearing
liabilities.
? The fair market value adjustment on investment securities resulting from ASC
320, Investments - Debt and Equity Securities is included as a component of
other assets.
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The following table illustrates the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities impacted Bancorp's interest income and interest expense during the
periods indicated. Information is provided in each category with respect to
(i) changes attributable to changes in volume (changes in volume multiplied by
prior rate), (ii) changes attributable to changes in rate (changes in rate
multiplied by prior volume) and (iii) net change. The changes attributable to
the combined impact of volume and rate have been allocated proportionately to
the changes due to volume and the changes due to rate. Tax-equivalent
adjustments are based on a federal income tax rate of 21%. The change in
interest due to both rate and volume has been allocated to the change due to
rate and the change due to volume in proportion to the relationship of the
absolute dollar amounts of the change in each.
Rate/Volume Analysis (FTE)
Year ended December 31, 2022 Year ended December 31, 2021
Compared to Compared to
Year ended December 31, 2021 Year ended December 31, 2020
Total Net Increase (Decrease) Due to Total Net Increase (Decrease) Due to
(in thousands) Change Rate Volume Change Rate Volume
Interest income:
Federal funds sold
and interest bearing
due from banks $ 5,373 $ 5,326 $ 47 $ (93 ) $ (547 ) $ 454
Mortgage loans held
for sale (59 ) (9 ) (50 ) (284 ) (74 ) (210 )
Investment
securities:
Taxable 15,727 4,239 11,488 3,143 (3,210 ) 6,353
Tax-exempt 1,511 194 1,317 75 (114 ) 189
Federal Home Loan
Bank stock 243 219 24 9 20 (11 )
SBA Paycheck
Protection Program
(PPP) loans (17,246 ) 8,919 (26,165 ) 8,408 9,928 (1,520 )
Non-PPP Loans 69,477 16,874 52,603 18,169 (10,096 ) 28,265
Total interest income 75,026 35,762 39,264 29,427 (4,093 ) 33,520
Interest expense:
Deposits:
Interest bearing
demand 7,415 6,580 835 (5 ) (647 ) 642
Savings 545 454 91 57 23 34
Money market 4,695 4,521 174 (893 ) (1,136 ) 243
Time (1,870 ) (2,315 ) 445 (4,010 ) (4,143 ) 133
Total interest
bearing deposits 10,785 9,240 1,545 (4,851 ) (5,903 ) 1,052
Securities sold under
agreements to
repurchase 543 500 43 (13 ) (28 ) 15
Federal funds
purchased 140 142 (2 ) (21 ) (25 ) 4
Federal Home Loan
Bank advances (325 ) (158 ) (167 ) (1,063 ) (119 ) (944 )
Subordinated debt 1,124 - 1,124 - - -
Total interest
expense 12,267 9,724 2,543 (5,948 ) (6,075 ) 127
Net interest income $ 62,759 $ 26,038 $ 36,721 $ 35,375 $ 1,982 $ 33,393
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Asset/Liability Management and Interest Rate Risk
Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results. The results of the interest rate sensitivity analysis performed as ofDecember 31, 2022 were derived from 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 and are based on historical data. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 60%, which approximates Bancorp's long-term average. While the beta's experienced in 2022 were significantly below this level, the Company anticipates the future betas will be closer to, or even exceed, historic averages. Bancorp's interest rate simulation sensitivity analysis details that increases in interest rates of 100, 200 and 300 bps would have a negative effect on net interest income, respectively, while decreases of 100 and 200 bps in interest rates would have a positive effect on net interest income. These results depict a slightly liability sensitive interest rate risk profile. 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. Change in Rates -200 -100 +100 +200 +300 Basis Points Basis Points Basis Points Basis Points Basis Points % Change from base net interest income at December 31, 2022 0.58 % 0.34 % -1.71 % -3.44 % -5.17 % 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 65%) or one month LIBOR/SOFR (approximately 35%). InJuly 2017 , theFinancial 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, inNovember 2020 , theFCA announced that many tenors of LIBOR would continue to be published throughJune 2023 . Subsequent to this, Bank regulators instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later thanDecember 2021 . EffectiveDecember 31, 2021 , LIBOR is no longer used to issue new loans in theU.S. It is expected to be replaced primarily by the SOFR, which many experts consider a more accurate and more secure pricing benchmark. To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR. OnMarch 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 forJune 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. 41
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As ofDecember 31, 2022 , the Company had approximately$477 million in loans and interest rate derivative contracts of$120 million (notional amount) that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. The Company had$206 million in loans that were indexed to SOFR atDecember 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 periodically uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled "Interest Rate Swaps." For these derivatives, the effective portion of gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings. As ofDecember 31, 2022 , Bancorp had no outstanding interest rate swaps designated as cash flow hedges. 42
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Table of Contents Provision for Credit Losses Provision for credit losses on loans atDecember 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 "Summary of Significant Accounting Policies" for detailed discussion regarding Bancorp's ACL methodology by loan segment.
An analysis of the changes in the ACL on loans, including provision, and
selected ratios follow:
As of and for the years endedDecember 31 , (dollars in thousands) 2022 2021 2020 Beginning balance$ 53,898 $ 51,920 $ 26,791 Acquired PCD loans (goodwill adjustment) 9,950 6,757 - CECL - cumulative adjustment - -
9,856
Adjusted beginning balance 63,848 58,677
36,647
Provision for credit losses on loans 5,253 (6,000 ) 16,918 Provision for credit losses on loans - acquired loans 4,429 7,397 - Total provision for credit losses on loans 9,682 1,397 16,918 Total charge-offs (2,307 ) (7,681 ) (2,101 ) Total recoveries 2,308 1,505 456 Net loan (charge-offs) recoveries 1 (6,176 ) (1,645 ) Ending balance$ 73,531 $ 53,898 $ 51,920 Average total loans$ 4,819,124 $ 3,951,257 $ 3,304,909 Provision for credit losses on loans to average total loans 0.20 % 0.04 % 0.51 % Net loan (charge-offs) recoveries to average total loans 0.00 % -0.16 % -0.05 % ACL for loans to total loans 1.41 % 1.29 % 1.47 % ACL for loans to total loans (excluding PPP) (1) 1.42 % 1.34 % 1.74 % ACL for loans to average total loans 1.53 % 1.36 % 1.57 %
(1) See the section titled "Non-GAAP Financial Measures" for reconcilement of
non-GAAP to GAAP measures.
Discussion of 2022 vs 2021: The ACL for loans totaled$74 million as ofDecember 31, 2022 compared to$54 million atDecember 31, 2021 , representing an ACL to total loans ratio of 1.41% and 1.29% for those periods, respectively. The ACL to loans (excluding PPP loans) was 1.42% atDecember 31, 2022 compared to 1.34% atDecember 31, 2021 . Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled$19 million atDecember 31, 2022 and$141 million atDecember 31, 2021 , Bancorp did not reserve for potential losses for these loans within the ACL. See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. Provision expense for credit losses on loans (excluding acquisition-related activity) of$5.3 million was recorded for the year endedDecember 31, 2022 . Significant organic loan growth, inflation and recession-based increases in the projected unemployment rate forecast, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, were the main drivers of expense within the CECL model for 2022. Further, net charge off/recovery activity for the year endedDecember 31, 2022 was minimal. Credit loss expense recorded for the acquired CB loan portfolio totaled$4.4 million and was recorded in the first quarter of 2022, bringing total provision for credit losses on loans to$9.7 million for the year endedDecember 31, 2022 . Further, the ACL for loans was also increased$10 million as a result of the PCD loan portfolio added through the CB acquisition during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). 43
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Total provision expense for credit losses on loans of$1.4 million was recorded for the year endedDecember 31, 2021 , as acquisition-related expense competed with a number of improving factors within the CECL model. Expense totaling$7.4 million was recorded in association with the non-PCD loan portfolio added through the KB acquisition during the second quarter of 2021, which was partially offset by a net benefit of$6.0 million recorded for the year endedDecember 31, 2021 , and was driven by a then-improving unemployment forecast, updates to Bancorp's CECL modeling and strong historic credit metrics. Further, the ACL for loans was also increased$6.8 million as a result of the PCD loan portfolio added through the KB acquisition during the second quarter of 2021, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). The ACL for off balance sheet credit exposures, while separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, also experienced an increase betweenDecember 31, 2021 andDecember 31, 2022 . The CB acquisition resulted in a$500,000 increase to the ACL for off balance sheet credit exposures during the first quarter of 2022, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). Provision for credit loss expense for off balance sheet credit exposures of$575,000 was also recorded for the year endedDecember 31, 2022 , driven mainly by the addition of new lines of credit, and thus increased availability, largely within the C&D portfolio. ACL for off balance sheet credit exposures stood at$4.5 million as ofDecember 31, 2022 compared to$3.5 million as ofDecember 31, 2021 . While the year endedDecember 31, 2021 experienced a similar$250,000 increase to the ACL for off balance sheet credit exposures as a result of the KB acquisition, negative provision for credit loss expense for off balance sheet credit exposures totaling$2.2 million was recorded for the year endedDecember 31, 2021 . This large benefit was the result of general declines in reserve loss percentages consistent with then-improving CECL model factors and improvement in line of credit utilization. Bancorp's loan portfolio is well-diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers inLouisville , central, eastern and northernKentucky , as well as theIndianapolis, Indiana andCincinnati, Ohio metropolitan markets. The adequacy of the ACL is monitored on an ongoing basis and it is the opinion of management that the balance of the ACL atDecember 31, 2022 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.
Discussion of 2021 vs 2020:
The ACL on loans totaled$54 million as ofDecember 31, 2021 compared to$52 million atDecember 31, 2020 , representing an ACL to total loans ratio of 1.29% and 1.47% for those periods, respectively. The ACL to total loans (excluding PPP loans) was 1.34% atDecember 31, 2021 compared to 1.74% atDecember 31, 2020 , the decrease stemming from loan growth and a lower ACL. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled$141 million (net of unamortized deferred fees) atDecember 31, 2021 and$550 million atDecember 31, 2020 , Bancorp did not record a general 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. Upon adoption of ASC 326 effectiveJanuary 1, 2020 , Bancorp recorded an increase of$8.2 million to the ACL on loans and a corresponding decrease to retained earnings, net of the DTA impact. In addition, non-accretable yield marks of$1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL on loans, which were subsequently charged-off in the third quarter of 2020 with no resulting impact to provision for credit loss expense. The adjustment upon adoption of ASC 326 raised the beginning balance of the ACL on loans to$37 million onJanuary 1, 2020 . In total, provision for credit losses on loans decreased$15.5 million , or 92%, for the year endedDecember 31, 2021 compared to the same period of 2020. The significantly higher expense recorded for the year endedDecember 31, 2020 was the result of CECL adoption and the subsequent pandemic-related developments experienced shortly thereafter, particularly elevated future unemployment forecasts. Due to continued improvement in the unemployment forecast, updates to Bancorp's CECL modeling and strong historic credit metrics, a net benefit (excluding acquisition-related activity) of$6.0 million was recorded for the year endedDecember 31, 2021 , which was offset by credit loss expense on loans associated with the non-PCD loan portfolio added as a result of the KB acquisition, which was recorded during the second quarter of 2021 and totaled$7.4 million . 44
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Further, the ACL on loans was also increased$6.8 million as a result of the PCD loan portfolio added through the KB acquisition during the second quarter, with the corresponding offset recorded to goodwill. Partially offsetting this increase was net charge off activity of$6.2 million for the year endedDecember 31, 2021 , serving to reduce the ACL on loans. Net charge off activity for 2021 was driven by the charge off of two CRE relationships totaling$4.4 million . These charged off amounts were fully reserved and had no income statement impact for the year endedDecember 31, 2021 . In addition, there was a$555,000 recovery of a note that was fully charged off in 2020. While separate from the ACL on loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced a decrease betweenDecember 31, 2020 andDecember 31, 2021 . A net benefit of$2.2 million was recorded for the year endedDecember 31, 2021 , as nearly all applicable loan segments experienced declines in their reserve loss percentages consistent with generally improving model factors and improvement in line of credit utilization, most notably within the C&I portfolio. In addition, the ACL for off balance sheet credit exposures was increased$250,000 as a result of available credit added through the KB acquisition during the second quarter, with the corresponding offset recorded to goodwill. The ACL for off balance sheet credit exposures stood at$3.5 million as ofDecember 31, 2021 compared to$5.4 million as ofDecember 31, 2020 . Non-Interest Income Variance (dollars in thousands) 2022 / 2021 2021 / 2020 Years Ended December 31, 2022 2021 2020 $ % $ % Wealth management and trust services$ 36,111 $ 27,613 $ 23,406 $ 8,498 31 %$ 4,207 18 % Deposit service charges 8,286 5,852 4,161 2,434 42 1,691 41 Debit and credit card income 18,623 13,456 8,480 5,167 38 4,976 59 Treasury management fees 8,590 6,912 5,407 1,678 24 1,505 28 Mortgage banking income 3,210 4,724 6,155 (1,514 ) (32 ) (1,431 ) (23 ) Net investment products sales commissions and fees 3,063 2,553 1,775 510 20 778 44 Bank owned life insurance 1,597 914 693 683 75 221 32 Gain (loss) on sale of premises and equipment 4,369 (78 ) 150 4,447 NM (228 ) (152 ) Other 5,300 3,904 1,672 1,396 36 2,232 133 Total non-interest income$ 89,149 $ 65,850 $ 51,899 $ 23,299 35 %$ 13,951 27 % NM - Not Meaningful Discussion of 2022 vs 2021: Total non-interest income increased$23.3 million , or 35%, for the year endedDecember 31, 2022 compared to the same period of 2021. Non-interest income comprised 28% of total revenue, defined as net interest income and non-interest income, for the years endedDecember 31, 2022 and 2021, respectively. WM&T services comprised 41% of total non-interest income for the year endedDecember 31, 2022 compared to 42% for the same period of 2021, respectively. Acquisition-related activity drove a significant portion of the non-interest income increase for the year endedDecember 31, 2022 compared to the same period of 2021. 45
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Table of Contents WM&T Services: The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased$8.5 million , or 31%, for the year endedDecember 31, 2022 as compared with the same period of 2021. Significant growth in AUM drove the increase over prior year, consistent with acquisition-related activity and organic new business development. However, significant declines in both fixed income and equity markets weighed heavily on WM&T revenue in 2022, as inflation and recession-based fears, coupled with geopolitical tensions, have resulted in continued volatility. 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$8.7 million , or 32%, for the year endedDecember 31, 2022 , as compared with the same period of 2021, as a result of the aforementioned acquisition-related and organic 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 typically correspond with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees decreased$194,000 , or 32%, for the year endedDecember 31, 2022 , as compared with the same period of 2021, consistent with lower estate fee revenue. AUM, stated at market value, totaled$6.59 billion atDecember 31, 2022 compared to$4.80 billion atDecember 31, 2021 . The large increase is attributed mainly to AUM of$2.65 billion added through the first quarter CB acquisition, as well as organic net new business growth over the past year, which were partially offset by significant declines in both fixed income and equity markets during 2022, as previously noted. Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp's financial results and provide strategic diversity to revenue streams.
Detail of WM&T Service Income by Account Type:
(in thousands) Years Ended December 31, 2022 2021 2020 Investment advisory$ 13,697 $ 12,003 $ 9,747 Personal trust 13,213 7,569 7,027
Personal investment retirement 6,186 5,168 4,319
Company retirement
1,520 1,798 1,457 Foundation and endowment 1,051 797 589 Custody and safekeeping 310 146 129 Brokerage and insurance services 67 78 45 Other 67 54 93 Total WM&T services income$ 36,111 $ 27,613 $ 23,406 The preceding table demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are predominantly based on AUM and tailored for individual/company accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, recurring AUM fee structures are in place for investment management, irrevocable and revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. 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. WM&T fees earned are not performance-based nor are they based on investment strategy or transactions. Bancorp also earns management fees on in-house investments funds acquired from CB. 46
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Assets Under Management by Account Type:
Total AUM (not included on balance sheet) increased from
December 31, 2022 December 31, 2021
(in thousands) Managed Non-managed (1) Total
Managed Non-managed (1) Total Investment advisory$ 2,249,017 $ 63,691$ 2,312,708 $ 1,919,593 $ 34,879$ 1,954,472 Personal trust 1,744,522 474,373 2,218,895 939,703 150,221 1,089,924 Personal investment retirement 756,126 27,065 783,191 620,312 3,478 623,790 Company retirement 52,891 524,568 577,459 35,234 599,129 634,363 Foundation and endowment 428,018 8,219 436,237 368,572 1,532 370,104 Subtotal$ 5,230,574 $ 1,097,916 $ 6,328,490 $ 3,883,414 $ 789,239$ 4,672,653 Custody and safekeeping - 256,791 256,791 - 128,178 128,178 Total$ 5,230,574 $ 1,354,707 $ 6,585,281 $ 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.
As ofDecember 31, 2022 and 2021, approximately 79% and 81%, respectively, of total 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 AUM by Class of Investment:
December 31, December 31,
(in thousands) 2022 2021
Interest bearing deposits $ 185,080 $ 173,603
Treasury and government agency obligations 176,917
39,736
State, county and municipal obligations 201,038 110,795 Money market mutual funds 108,751 7,299 Equity mutual funds 1,125,540 944,500 Other mutual funds - fixed, balanced and municipal 583,713 612,913 Other notes and bonds 209,178 171,087 Common and preferred stocks 2,180,390 1,681,006 Common trust funds and collective investment funds 114,458 - Real estate mortgages 774 - Real estate 57,297 58,344 Other miscellaneous assets (1) 287,438 84,131 Total managed assets$ 5,230,574 $ 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 63% in equities and 37% in fixed income securities as ofDecember 31, 2022 compared to 68% and 32% as ofDecember 31, 2021 . This composition has been relatively consistent from period to period. Common trust funds and collective investment funds were added as a result of the CB acquisition in 2022. However, these investments are immaterial to WM&T revenue, AUM and the overall strategy of our WM&T business. 47
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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$2.4 million , or 42%, for the year endedDecember 31, 2022 , as compared with the prior year, mainly as a result of the contribution associated with acquisition-related activity over the past 12 months. Outside of acquisition-related growth, an industry-wide decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several years. This trend has been driven by lower check presentment volume, which has in turn led to fewer overdrawn accounts in general. Further, Bancorp anticipates that future growth of this revenue stream could be significantly impacted by changing industry practices. Bancorp could be faced with strategic decisions surrounding deposit-related service charges in the future, which could negatively impact the contributions made by this, or similar, revenue streams. Debit and credit card income consists of interchange revenue, ancillary fees and incentives received from card processors. Debit and credit card revenue increased$5.2 million , or 38%, for the year endedDecember 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$3.8 million , or 40%, and total credit card income increased$1.4 million , or 35%, for the year endedDecember 31, 2022 compared the year endedDecember 31, 2021 . Bancorp expects this revenue stream will continue to increase with expansion of the customer base and further expansion of the debit and credit card programs.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$1.7 million , or 24%, for the year endedDecember 31, 2022 compared to the prior year, driven by increased transaction volume, new product sales and customer base expansion. Both organic and acquisition-related sales efforts have led to the expansion of online services, ACH origination, remote deposit and fraud mitigation services over the past year. 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. Mortgage banking income primarily includes gains on sales of mortgage loans and net loan servicing income offset by MSR amortization. Bancorp's mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily toFNMA 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$1.5 million , or 32%, for the year endedDecember 31, 2022 , as compared with the same period of 2021. Overall volume declined in 2022 compared to the prior year as a result of rising interest rates and low housing inventory. While this has in turn led to the year-over-year decline noted above, mortgage banking income has benefitted from the addition of the mortgage loan servicing portfolio added through the CB acquisition, comprising approximately$1.43 billion in mortgage loans atDecember 31, 2022 . Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees earned on brokerage accounts. Wrap fees represent quarterly charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of account assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced by Bancorp'sWM&T Department . Net investment product sales commissions and fees increased$510,000 , or 20%, for the year endedDecember 31, 2022 , as compared with the same period of 2021, driven by acquisition-related growth, which included the addition of financial advisors, and increased trading activity associated with general market volatility. BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. During the third quarter of 2022, Bancorp purchased an additional$30 million of BOLI assets in an effort to diversify investment of excess liquidity, bringing total BOLI assets to$85 million as ofDecember 31, 2022 . BOLI income increased$683,000 , or 75%, for the year endedDecember 31, 2022 compared to the same period of the prior year, which was attributed mainly to the additional investment noted above and contributions from the BOLI portfolio added as a result of the KB acquisition in May of 2021. 48
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During the third and fourth quarters of 2022, Bancorp completed the sale of
certain acquired properties that overlapped with existing locations, recording a
pre-tax gain of
Other non-interest income increased$1.4 million , or 36%, for the year endedDecember 31, 2022 compared with the same period of 2021. The increase was driven largely by the contribution from LFA, a financial advising firm added through the CB acquisition, and an increase in other miscellaneous fee income. As previously noted, Bancorp's partial interest in LFA was sold effectiveDecember 31, 2022 . Other non-interest income attributed to Bancorp's partial interest in LFA totaled$1.3 million for the year endedDecember 31, 2022 . Discussion of 2021 vs 2020: Total non-interest income increased$14.0 million , or 27%, for the year endedDecember 31, 2021 compared to the same period in 2020. Non-interest income comprised 28% of total revenue for both the year endedDecember 31, 2021 and 2020, respectively. WM&T services comprised 42% of Bancorp's total non-interest income for the year endedDecember 31, 2021 compared to 45% for the same period of 2020. WM&T revenue increased$4.2 million , or 18%, for the year endedDecember 31, 2021 , as compared with the same period of 2020. Stock market appreciation, coupled with then-record net new business development and to a lesser extent, the KB acquisition, drove the substantial increase for 2021 as compared to 2020. Deposit service charges increased$1.7 million , or 41%, for the year endedDecember 31, 2021 , as compared with the same period in 2020. The increase resulted from the combination of a meaningful contribution associated with the KB acquisition and a recovery from the subdued activity experienced in 2020, as customer behavior and transaction volume was significantly impacted by pandemic-related developments. Debit and credit card revenue increased$5.0 million , or 59%, for the year endedDecember 31, 2021 , as compared with the same period in 2020, 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$3.6 million , or 61%, while total credit card income increased$1.4 million , or 54%. Similar to deposit service charges above, debit and credit card revenue volume benefitted from both acquisition-related activity and a recovery from the pandemic-related slowdowns of 2020.Treasury management fees increased$1.5 million , or 28%, for the year endedDecember 31, 2021 compared to 2020, as a result of strong new product sales and customer base expansion. The demand for Bancorp's treasury products increased during the pandemic, as these products allowed customers to operate more efficiently in a decentralized environment. Mortgage banking revenue decreased$1.4 million , or 23%, for the year endedDecember 31, 2021 as compared with the same period of 2020. The sustained low long-term interest rate environment that incentivized refinancing and purchasing activity resulted in elevated mortgage banking income in 2020. Over the course of 2021, volume began normalizing as the pool of potential customers who had yet to refinance shrank, general housing inventory remained limited and interest rates began to rise above the absolute low levels experienced in 2020, resulting in lower mortgage banking income. Net investment product sales commissions and fees increased$778,000 , or 44%, for the yearDecember 31, 2021 , as compared with the same period of 2020, due to the KB acquisition and increased trading activity.
BOLI income increased
compared to the same period of 2020, attributed in large part to BOLI assets
added through the KB acquisition.
Other non-interest income increased$2.2 million , for the year endedDecember 31, 2021 as compared with the same period of 2020. This increase was driven by a plethora of activity, most notably a death benefit of$523,000 on an insurance policy outside of traditional BOLI, stronger market returns on such insurance policies, the addition of the Captive through the KB acquisition and gains on OREO sold. 49
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Non-interest expenses
Variance
2022 / 2021 2021 / 2020
Years EndedDecember 31 , (dollars in thousands) 2022 2021 2020 $ % $ % Compensation$ 86,640 $ 63,034 $ 51,368 $ 23,606 37 %$ 11,666 23 % Employee benefits 16,568 13,479 11,064 3,089 23 2,415 22 Net occupancy and equipment 14,298 9,688 8,182 4,610 48 1,506 18 Technology and communication 14,897 11,145 8,732 3,752 34 2,413 28 Debit and credit card processing 5,909 4,494 2,606 1,415 31 1,888 72 Marketing and business development 5,005 4,150 2,383 855 21 1,767 74 Postage, printing and supplies 3,354 2,213 1,778 1,141 52 435 24 Legal and professional 2,943 2,583 2,392 360 14 191 8 FDIC insurance 2,758 1,847 1,217 911 49 630 52 Amortization of investments in tax credit partnerships 353 367 3,096 (14 ) (4 ) (2,729 ) (88 ) Capital and deposit based taxes 2,621 2,090 4,386 531 25 (2,296 ) (52 ) Merger expenses 19,500 19,025 - 475 2 19,025 100Federal Home Loan Bank early termination penalty - 474 - (474 ) (100 ) 474 100 Intangible amortization 5,544 770 323 4,774 620 447 138 Loss on sale of interest in LFA 870 - - 870 100 - - Other 10,531 6,921 4,132 3,610 52 2,789 67 Total non-interest expenses$ 191,791 $ 142,280 $ 101,659 $ 49,511 35 %$ 40,621 40 % Discussion of 2022 vs 2021: Total non-interest expenses increased$49.5 million , or 35%, for the year endedDecember 31, 2022 compared to the prior year. Compensation and employee benefits comprised 54% of total non-interest expenses for the years endedDecember 31, 2022 and 2021, respectively. Excluding merger expenses, compensation and employee benefits comprised 60% of total non-interest expenses for the year endedDecember 31, 2022 , compared to 62% for the year endedDecember 31, 2021 . Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased$23.6 million , or 37%, for the year endedDecember 31, 2022 compared to the prior year. The increase was attributed to growth in full time equivalent employees, annual merit-based salary increases and higher incentive compensation expense. Net full time equivalent employees totaled 1,040 atDecember 31, 2022 compared to 820 atDecember 31, 2021 . The acquisitions of CB in March of 2022 and KB in May of 2021 resulted in the combined addition of 372 full time equivalent employees over the past two years. 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$3.1 million , or 23%, for the year endedDecember 31, 2022 compared to the prior year, consistent with the overall increase in full time equivalent employees noted previously. 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$4.6 million , or 48%, for the year endedDecember 31, 2022 compared to the prior year. 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. The KB acquisition in May of 2021 resulted in the addition of 19 branch locations in addition to operational buildings. AtDecember 31, 2022 , Bancorp's branch network consisted of 73 locations throughoutLouisville , central, eastern andNorthern Kentucky , as well as the markets ofIndianapolis, Indiana andCincinnati, Ohio . 50
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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$3.8 million , or 34%, for the year endedDecember 31, 2022 compared to the prior year, consistent with acquisition-related activity, customer expansion and core system upgrades. 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$1.4 million , or 31%, for the year endedDecember 31, 2022 , 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 corresponding debit and credit card non-interest income. Marketing and business development expenses include all costs associated with promoting Bancorp including community support, retaining customers and acquiring new business. Marketing and business development expenses increased$855,000 , or 21%, for the year endedDecember 31, 2022 compared to the prior year. The increase corresponds with strategic decisions to advertise and promote in Bancorp's new markets, as well as general expansion of Bancorp's existing and prospective customer base and a post-pandemic return to in-person client meeting/entertainment.
Postage, printing and supplies expense increased
year ended
increased customer communication and Bancorp's expansion tied to
acquisition-related activity.
Legal and professional fees increased$360,000 , or 14%, for the year endedDecember 31, 2022 compared to the prior year. The increase over prior year was driven by various consulting engagements, collection-related expenses and litigation costs arising through the normal course of business. Legal and professional fees associated with merger-related activity are captured in merger expenses.
compared to the prior year, consistent with organic and acquisition-related
balance sheet growth for which the insurance is assessed on.
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 upon 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 decreased$14,000 for the year endedDecember 31, 2022 compared to the prior year. Capital and deposit based taxes, which consist primarily of deposit-based taxes and state ofOhio franchise taxes, increased$531,000 , or 25%, for the year endedDecember 31, 2022 compared to the prior year, as a result of both organic and acquisition-related growth. Merger expenses represent non-recurring expenses associated with completion of acquisitions and consist primarily of investment banker fees, legal fees, various compensation-related expenses, early termination fees relating to various contracts and system conversion expenses. Merger expenses totaled$19.5 million for the year endedDecember 31, 2022 and were attributed to the completion of the CB acquisition. By comparison, merger expensed for the year endedDecember 31, 2021 totaled$19.0 million , of which all but$525,000 was associated with the completion of the KB acquisition. An early termination fee of$474,000 was recorded for the year endedDecember 31, 2021 in relation to the pre-payment of$14 million in FHLB advances prior to contractual maturities. Bancorp chose to payoff these term advances during the second quarter of 2021 due to excess liquidity held on the balance sheet and the near-term outlook for low interest rates at the time of payoff. No such activity was recorded for the year endedDecember 31, 2022 . 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 LFA business lines added through the CB acquisition. The intangibles are generally amortized on an accelerated basis over a period of approximately ten years. Intangible amortization for the year endedDecember 31, 2022 totaled$5.5 million compared to$770,000 for the same period of the prior year, the significant increase stemming from the CB acquisition. As previously noted, Bancorp's partial interest in LFA was sold effectiveDecember 31, 2022 . Amortization expense associated with the CLI of the LFA business totaled$357,000 for the year endedDecember 31, 2022 . 51
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As noted previously, Bancorp's partial interest in LFA was sold effective
recorded as non-interest expense for the year ended
Other non-interest expenses increased$3.6 million , or 52%, for the year endedDecember 31, 2022 . The most notable drivers of the increase were expenses associated with the addition of the insurance captive as a result of the KB acquisition in May of 2021, increased card reward expense, higher fraud-related expenses and other ancillary expenses tied to Bancorp's significant growth over the last 12 months. Bancorp's efficiency ratio (FTE) for the year endedDecember 31, 2022 was 59.30%, as compared to 59.94% for the same period of 2021. The efficiency ratio (FTE) for both years was significantly impacted by the acquisitions of CB and KB in 2022 and 2021, respectively. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales and calls of investment securities, as well as net gains (losses) on sales of acquired premises and equipment and disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Bancorp's adjusted efficiency ratio for the year endedDecember 31, 2022 was 53.62%, compared to 51.77% for the year endedDecember 31, 2021 . See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. Discussion of 2021 vs 2020: Total non-interest expenses increased$40.6 million , or 40%, for the year endedDecember 31, 2021 compared to 2020. Compensation and employee benefits comprised 54% and 61% of Bancorp's total non-interest expenses for the years endedDecember 31, 2021 and 2020, respectively. Excluding merger expenses, compensation and employee benefits comprised 62% of total non-interest expenses for the year endedDecember 31, 2021 . Compensation increased$11.7 million , or 23%, for 2021 compared to 2020. The increase was attributed to growth in full time equivalent employees driven by the KB acquisition, annual merit-based salary increases and higher incentive compensation expense. Net full time equivalent employees totaled 820 atDecember 31, 2021 compared to 641 atDecember 31, 2020 .
Employee benefits increased
attributed to acquisition-related growth in FTEs.
Net occupancy increased$1.5 million , or 18% for 2021 compared with 2020. The KB acquisition resulted in the addition of 19 branches and was the primary driver of the increase over 2020.
Technology expense increased
consistent with acquisition-related growth and continued investment in
technology needed to maintain and improve the quality of customer delivery
channels, information security and internal resources.
Debit and credit card processing expense increased$1.9 million , or 72%, for 2021 as compared with 2020, consistent with the correlated increase experienced for card income that was driven by both organic and acquisition-related growth. Marketing and business development expenses increased$1.8 million , or 74%, for the year endedDecember 31, 2021 , as compared to the same period of 2020. The increase was the result of strategic plans to invest in the advertisement and promotion of the Bank in the newly entered central and easternKentucky markets and contributions to the Bank's foundation that supports various community initiatives. Further, marketing and business development activities, particularly travel and entertainment, were significantly muted during 2020 as a result of pandemic.
Postage, printing and supply expenses increased
compared to 2020, driven by the KB acquisition and increased customer
communication.
Legal and professional fees increased
2020. The increase over 2020 was largely attributed to increased loan
collection-related activity.
FDIC insurance increased$630,000 , or 52%, for the year endedDecember 31, 2021 compared to 2020. The increase was related to the acquisition and PPP-driven growth of the balance sheet. Further, the first quarter of 2020 benefitted from the last portion of small institution credits first issued by theFDIC in 2019. 52
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Amortization of investments in tax credit partnership decreased$2.7 million from 2021 to 2020 as a result of a large tax credit deal completed in the fourth quarter of 2020. Capital and deposit based taxes decreased$2.3 million , or 52%, in 2021 compared to 2020, consistent with the state ofKentucky transitioning financial institutions from a capital-based franchise tax to theKentucky corporate income tax effectiveJanuary 1, 2021 .
Merger expenses recorded for the year ended
represent non-recurring expenses associated with completion of the KB
acquisition. No such expense was recorded for the year ended
An early termination fee of$474,000 was incurred during the second quarter of 2021 in relation to the pre-payment of$14 million in FHLB advances prior to contractual maturities. Bancorp chose to pay off these advances due to excess liquidity and the near-term outlook for low interest rates at the time of pay off.
Intangible amortization expense for the years ended
consisted of amortization associated with the CDI of acquired deposit
portfolios. Such expense totaled
increase over 2020, which was driven by CDI added as a result of the KB
acquisition.
Other non-interest expenses increased$2.8 million , or 67%, for 2021 compared to 2020, stemming largely from the addition of the insurance captive through the KB acquisition, increased card reward expense, and higher debit and credit card losses. Further, 2020 benefitted from larger credits to expense associated with a gain on a bank-owned property sold and the reversal of an accrual related to a potentialIRS penalty that was dismissed. Bancorp's efficiency ratio (FTE) of 59.94% for 2021 increased from 54.06% in 2020 due to one-time merger-related expenses associated with the KB acquisition. Bancorp's adjusted efficiency ratio was 51.77% and 52.42% for 2021 and 2020. See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. Income Taxes
A comparison of income tax expense and ETR follows:
Years Ended
2020
Income before income tax expense$ 120,484 $ 95,397 $ 67,743 Income tax expense 27,190 20,752 8,874 Effective tax rate 22.57 % 21.75 % 13.10 % Discussion of 2022 vs 2021:
Fluctuations in the ETR were primarily attributed to the following:
? The stock based compensation component of the ETR fluctuates consistent with
the level of SAR exercise activity. The ETR was reduced 1.0% for the year
ended
2021, consistent with exercise activity.
? Changes in the cash surrender value of life insurance policies can vary widely
from period to period, driven largely by changes in the markets. The related
impact is inversely correlated with the ETR generally, with cash surrender
value declines typically serving to increase the ETR and vice versa. Changes
in the cash surrender value of life insurance policies increased the ETR 0.2%
for the year ended
period of the prior year.
? Bancorp invests in certain partnerships that yield federal income tax credits.
Taken as a whole, the tax benefit of these investments exceeds amortization
expense, resulting in a positive impact on net income. The timing and
magnitude of these transactions may vary widely from period to period. The ETR
for the years ended
respectively, by tax credit activity.
? Tax-exempt interest income earned on loans and investment securities reduced
the ETR by 0.6% for the year ended
of 0.4% for the same period of the prior year, the larger reduction in the
current year being attributed to tax-exempt loans and securities added through
acquisition-related activity.
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? Non-deductible merger expenses recorded during the year ended
2022 served to increase the ETR 0.1%, compared to an increase of 0.4% for the
same period of 2021. ? As a result of the KB acquisition in May of 2021, Bancorp acquired an
insurance captive. The insurance captive provides insurance against certain
risks for which insurance may not currently be available or economically
feasible to Bancorp and SYB, as well as a group of third-party insurance
captives. The tax advantages of the Captive, including the tax-deductible
nature of premiums paid to the Captive as well as the tax-exemption for
premiums received by the Captive, serve to reduce income tax expense. Related
activity reduced the ETR 0.3% for the year ended
to reduction of 0.2% for the same period of 2021. Discussion of 2021 vs 2020:
Fluctuations in the ETR were primarily attributed to the following:
? The ETR for 2020 included the full year benefit of a large historic tax credit
project that was completed in the fourth quarter of last year, serving to
reduce the ETR by 4.5% for the year. No comparable activity was recorded in
2021.
? The state of
institutions to transition from a capital based franchise tax to the
corporate income tax effective
combined
net operating loss carryforwards. These changes served to increase the ETR by
3.5% for the year ended
? An insurance captive was acquired as a result of the KB acquisition. For the
year ended
0.2%.
? The ETR was reduced by 1.1% and 0.7% for the years ended
2020, respectively, as a result of SAR exercise activity for each year. The CARES Act included several significant provisions for corporations including increasing the amount of deductible interest under section 163(j), allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income. These changes did not have a significant impact on Bancorp's income taxes for the years endedDecember 31, 2022 , 2021 and 2020. 54
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Financial Condition -
Overview Total assets increased$850 million , or 13%, to$7.50 billion atDecember 31, 2022 from$6.65 billion atDecember 31, 2021 . Total assets of$1.34 billion were added onMarch 7, 2022 as a result of the CB acquisition, including loans of$632 million and total investment securities of$247 million .Goodwill of$67 million was initially recorded in relation to the transaction,$8.5 million of which was subsequently written off as a result of the previously noted sale of Bancorp's partial interest in LFA. Total loans (excluding loans added through the CB acquisition and the PPP portfolio) grew$529 million , or 13%, betweenDecember 31, 2021 andDecember 31, 2022 . However, the acquisition-related and organic growth experienced in 2022 was partially offset by a$794 million reduction in cash and cash equivalents stemming largely from a decline in deposits experienced in the latter part of the year. Total liabilities increased$766 million , or 13%, to$6.74 billion atDecember 31, 2022 from$5.97 billion atDecember 31, 2021 . Total liabilities of$1.24 billion were assumed onMarch 7, 2022 as a result of the CB acquisition, including total deposits of$1.12 billion . Further, SSUAR totaling$66 million and subordinated debentures of$26 million were also assumed in the acquisition. However, the aforementioned decline in deposits experienced in the latter part of the year served to partially offset the acquisition-related growth noted above. Stockholders' equity increased$85 million , or 13%, to$760 million atDecember 31, 2022 from$676 million atDecember 31, 2021 . Stock issued in relation to the CB acquisition, which totaled$134 million , and net income of$93.0 million were offset by a$108 million negative fluctuation in AOCI and dividends declared during 2022. The large decline in AOCI fromDecember 31, 2021 toDecember 31, 2022 was the result of the rising interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. Cash and Cash Equivalents Cash and cash equivalents declined$794 million , or 83%, ending at$167 million atDecember 31, 2022 compared to$961 million atDecember 31, 2021 . The decline stemmed from loan growth and investment in the securities portfolio in addition to deposit run-off, as the elevated deposit balances generally maintained by the customer base over the past several quarters have gradually dissipated. While the average balance of cash and cash equivalents increased$58 million , or 7%, over the past 12 months on the heels of PPP activity and deposit growth stemming from both acquisition-related activity and the aforementioned higher deposit levels maintained by the customer base in general, Bancorp has seen liquidity retreat from the record levels experienced at the end of 2021.Investment Securities The primary purpose of the investment securities portfolio is to provide another source of interest income, as well as a tool for liquidity management. In managing the composition of the balance sheet, Bancorp seeks a balance between earnings sources, credit and liquidity considerations. Investment securities increased$438 million , or 37%, to$1.62 billion atDecember 31, 2022 compared to$1.18 billion atDecember 31, 2021 . In addition to$247 million of securities added as a result of the CB acquisition, Bancorp continued to actively invest in the securities portfolio in an effort to deploy excess liquidity by purchasing$653 million of debt securities during the year endedDecember 31, 2022 . Partially offsetting growth associated with purchasing and acquisition-related activity was scheduled maturity/amortization and prepayment activity, as well as market depreciation of approximately$143 million stemming from an upward move in the interest rate environment experienced during the year endedDecember 31, 2022 . 55
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A portion of the securities added during the first quarter of 2022, through both acquisition and normal investment activity, were classified as HTM. This election was made in an effort to lessen the impact that the rising interest rate environment has on the valuation of the AFS debt securities portfolio, and ultimately its impact on capital through AOCI. No debt securities were classified as HTM atDecember 31, 2021 . As ofDecember 31, 2022 and 2021, Bancorp's investment securities portfolio consisted of AFS and HTM securities as detailed below: AFS HTM Total (in thousands) Carrying Investment December 31, 2022 Fair Value Value SecuritiesU.S. Treasury and otherU.S. Government obligations$ 115,039 $ 217,794 $ 332,833 Government sponsored enterprise obligations 143,626 27,507
171,133
MBS - government agencies 752,738 227,916
980,654
Obligations of states and political subdivisions 127,599 - 127,599 Other 5,615 - 5,615 Total investment securities$ 1,144,617 $ 473,217 $ 1,617,834 December 31, 2021U.S. Treasury and otherU.S. Government obligations$ 122,501 $ -$ 122,501 Government sponsored enterprise obligations 135,021 -
135,021
MBS - government agencies 846,624 -
846,624
Obligations of states and political subdivisions 75,075 - 75,075 Other 1,077 - 1,077 Total investment securities$ 1,180,298 $ -$ 1,180,298
The maturity distribution (based on contractual maturity) and weighted average
yields of the AFS and HTM investment security portfolios follow:
AFS
Due after one but Due after five but
December 31, 2022 Due within one year within five years within ten years Due after ten years
(dollars in thousands) Amount Yield Amount Yield
Amount Yield Amount Yield U.S. Treasury and otherU.S. Government obligations 3,025 2.30 % 112,014 0.50 % $ - - % $ - - % Government sponsored enterprise obligations 30,197 2.35 6,380 1.21 8,493 1.72 98,556 3.31 MBS - government agencies 152 1.73 21,405 1.81 78,655 1.92 652,526 1.93 Obligations of states and political subdivisions 6,103 2.00 25,749 2.00 46,316 1.94 49,431 1.97 Other 1,995 1.97 980 2.29 2,640 3.23 -$ 41,472 2.27 %$ 166,528 0.94 %$ 136,104 1.94 %$ 800,513 2.10 % HTM Due after one but Due after five but December 31, 2022 Due within one year within five years within ten years Due after ten years
(dollars in thousands) Amount Yield Amount Yield
Amount Yield Amount Yield U.S. Treasury and otherU.S. Government obligations 15,013 1.30 % 202,781 2.07 % $ - - % $ - - % Government sponsored enterprise obligations - 604 2.42 26,293 2.64 610 3.57 MBS - government agencies 20 0.97 26,616 2.01 3,316 2.00 197,964 2.30$ 15,033 1.30 %$ 230,001 2.06 %$ 29,609 2.57 %$ 198,574 2.30 %
Actual maturities for mortgage-backed securities may differ from contractual
maturities due to prepayments on underlying collateral.
56
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Table of Contents Loans
Composition of loans by primary loan portfolio class follows:
Variance
December 31, (dollars in thousands) 2022 2021 $
Change % Change
Commercial real estate - non-owner occupied$ 1,397,346 $ 1,128,244 $ 269,102 24 % Commercial real estate - owner occupied 834,629 678,405 156,224 23 % Total commercial real estate 2,231,975 1,806,649 425,326 24 % Commercial and industrial - term 765,163 596,710 168,453 28 % Commercial and industrial - term - PPP 18,593 140,734 (122,141 ) -87 % Commercial and industrial - lines of credit 465,813 370,312 95,501 26 % Total commercial and industrial 1,249,569 1,107,756 141,813 13 % Residential real estate - owner occupied 591,515 400,695 190,820 48 % Residential real estate - non-owner occupied 313,248 281,018 32,230 11 % Total residential real estate 904,763 681,713 223,050 33 % Construction and land development 445,690 299,206 146,484 49 % Home equity lines of credit 200,725 138,976 61,749 44 % Consumer 139,461 104,294 35,167 34 % Leases 13,322 13,622 (300 ) -2 % Credit cards 20,413 17,087 3,326 19 % Total Loans (1)$ 5,205,918 $ 4,169,303 $ 1,036,615 25 %
(1) Total loans are presented inclusive of premiums, discounts and net loan
origination fees and costs.
Total loans increased
31, 2022
acquisition and strong organic loan growth, which more than offset a
million
Excluding the loans acquired through the CB acquisition and the PPP portfolio, loan growth of$529 million , or 13%, was experienced betweenDecember 31, 2021 andDecember 31, 2022 , driven by solid organic growth across virtually every loan portfolio segment. After hitting a pandemic-era low of 36.5% atMarch 31, 2021 , total line of credit utilization has improved significantly, reaching 42.3% atDecember 31, 2022 , led by C&I utilization, which increased from 23.9% to 33.1% over the same period, respectively. However, line of credit usage has remained below pre-pandemic levels, with customers continuing to utilize excess cash for financing needs as opposed to drawing on available lines. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, increased availability for the year endedDecember 31, 2022 , but utilization of the new lines has remained relatively slow. PPP loans of$19 million were outstanding atDecember 31, 2022 , including approximately$312,000 in related net unrecognized fees, which will be recognized immediately once the loans are paid off or forgiven by the SBA. The timing of forgiveness activity and the related fee recognition on the remaining outstanding PPP portfolio has become less significant, as over 98% of the original portfolio has been forgiven. 57
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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 encompassLouisville, Kentucky , central and easternKentucky ,Indianapolis, Indiana andCincinnati, 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 bothDecember 31, 2022 andDecember 31, 2021 , the total participated portion of loans of this nature totaled approximately$5 million , respectively. 58
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The following table presents the maturity distribution and rate sensitivity of
the loan portfolio at
Maturity
December 31, After one After five After
2022 (in Within one but within but within fifteen
thousands) year five years fifteen years
years Total % of Total Commercial real estate - non-owner occupied Fixed rate$ 73,967 $ 581,769 $ 346,920 $ 141,768 $ 1,144,424 82 % Variable rate 60,075 87,546 104,108 1,193 252,922 18 % Total$ 134,042 $ 669,315 $ 451,028 $ 142,961 $ 1,397,346 100 %
Commercial
real estate - owner-occupied Fixed rate$ 34,861 $ 346,059 $ 303,376 $ 62,920 $ 747,216 90 % Variable rate 9,372 15,391 49,347 13,303 87,413 10 % Total$ 44,233 $ 361,450 $ 352,723 $ 76,223 $ 834,629 100 % Commercial and industrial - term Fixed rate$ 15,288 $ 286,652 $ 179,956 $ 3,530 $ 485,426 63 % Variable rate 50,328 141,770 87,639 - 279,737 37 % Total$ 65,616 $ 428,422 $ 267,595 $ 3,530 $ 765,163 100 % Commercial and industrial - term - PPP Fixed rate$ 313 $ 18,280 $ - $ -$ 18,593 100 % Variable rate - - - - - 0 % Total$ 313 $ 18,280 $ - $ -$ 18,593 100 % Commercial and industrial - lines of credit Fixed rate$ 6,122 $ 47,160 $ 48,534 $ -$ 101,816 22 % Variable rate 288,422 71,717 1,942 1,916 363,997 78 % Total$ 294,544 $ 118,877 $ 50,476 $ 1,916 $ 465,813 100 % Residential real estate - owner occupied Fixed rate$ 5,264 $ 22,649 $ 82,430 $ 471,815 $ 582,158 98 % Variable rate 372 1,221 1,269 6,495 9,357 2 % Total$ 5,636 $ 23,870 $ 83,699 $ 478,310 $ 591,515 100 % Residential real estate - non-owner occupied Fixed rate$ 8,332 $ 101,032 $ 88,021 $ 107,426 $ 304,811 97 % Variable rate 3,687 1,926 2,724 100 8,437 3 % Total$ 12,019 $ 102,958 $ 90,745 $ 107,526 $ 313,248 100 % Construction and land development Fixed rate$ 9,558 $ 49,338 $ 136,025 $ 12,435 $ 207,356 47 % Variable rate 60,232 150,264 26,445 1,393 238,334 53 % Total$ 69,790 $ 199,602 $ 162,470 $ 13,828 $ 445,690 100 % Home equity lines of credit Fixed rate $ - $ - $ - $ - $ - 0 % Variable rate 14,308 45,764 118,969
21,684 200,725 100 % Total$ 14,308 $ 45,764 $ 118,969 $ 21,684 $ 200,725 100 % (continued) 59
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(continued) Maturity
After one After five After
December 31, 2022 (in Within one but within but within fifteen
thousands) year five years fifteen years years Total % of Total
Consumer
Fixed rate $ 3,464 $ 35,997 $ 20,059 $ 837 $ 60,357 43 %
Variable rate 58,965 19,713 426 - 79,104 57 %
Total $ 62,429 $ 55,710 $ 20,485 $ 837 $ 139,461 100 %
Leases
Fixed rate $ 1,053 $ 10,483 $ 1,786 $ - $ 13,322 100 %
Variable rate - - - - - 0 %
Total $ 1,053 $ 10,483 $ 1,786 $ - $ 13,322 100 %
Credit Cards
Fixed rate $ - $ - $ - $ - $ - 0 %
Variable rate 20,413 - - - 20,413 100 %
Total $ 20,413 $ - $ - $ - $ 20,413 100 %
Total Loans
Fixed rate $ 158,222 $ 1,499,419 $ 1,207,107 $ 800,731 $ 3,665,479 71 %
Variable rate 566,174 535,312 392,869 46,084 1,540,439 29 %
Total $ 724,396 $ 2,034,731 $ 1,599,976 $ 846,815 $ 5,205,918 100 %
In the event 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 overall interest rate
sensitivity.
Non-performing Loans and Assets
Information summarizing non-performing loans and assets follows:
December 31 , (dollars in thousands) 2022 2021 2020 2019 2018 Non-accrual loans$ 14,242 $ 6,712 $ 12,514 $ 11,494 $ 2,611 Troubled debt restructurings - 12 16 34 42 Loans past due 90 days or more and still accruing 892 684 649 535 745 Total non-performing loans 15,134 7,408 13,179 12,063 3,398 Other real estate owned 677 7,212 281 493 1,018 Total non-performing assets$ 15,811 $ 14,620 $ 13,460 $ 12,556 $ 4,416 Non-performing loans to total loans 0.29 % 0.18 % 0.37 % 0.42 % 0.13 % Non-peforming loans to total loans (excluding PPP) (1) 0.29 % 0.18 % 0.44 % N/A N/A Non-performing assets as to total assets 0.21 % 0.22 % 0.29 % 0.34 % 0.13 % ACL for loans to non-performing loans 486 % 728 % 394 % 222 % 751 %
(1) See the section titled "Non-GAAP Financial Measures" for reconcilement of
non-GAAP to GAAP measures.
Non-performing loans to total loans were 0.29% atDecember 31, 2022 compared to 0.18% atDecember 31, 2021 , the increase being attributed largely to one CRE relationship that was put on non-accrual status.
Non-performing assets totaled
million
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In total, non-performing assets as ofDecember 31, 2022 were comprised of 111 loans ranging in individual amounts up to$7 million and OREO. AtDecember 31, 2022 , OREO included two CRE properties and one residential real estate property.
The following table presents the major classifications of non-accrual loans by
primary portfolio:
December 31, (in thousands) 2022 2021
Commercial real estate - non-owner occupied
Commercial real estate - owner occupied
2,525 1,748 Total commercial real estate 10,232 2,468 Commercial and industrial - term 1,182 670 Commercial and industrial - PPP 21 -
Commercial and industrial - lines of credit 348 228
Total commercial and industrial
1,551 898
Residential real estate - owner occupied 1,801 1,997
Residential real estate - non-owner occupied 219 293
Total residential real estate
2,020 2,290 Construction and land development - - Home equity lines of credit 205 646 Consumer 234 410 Leases - - Credit cards - - Total non-accrual loans$ 14,242 $ 6,712 Loans are placed in a non-accrual income status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more, unless such a loan is well- secured and in the process of collection or renewal. Interest income recorded on non-accrual loans as principal payments was$160,000 ,$312,000 , and$350,000 for 2022, 2021, and 2020. Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original terms was$1.1 million ,$359,000 , and$457,000 for 2022, 2021, and 2020. In addition to non-performing loans discussed above, there were loans, which are accruing interest, for which payments were current or less than 90 days past due where borrowers are experiencing elevated financial difficulties. These substandard loans totaled approximately$40 million at bothDecember 31, 2022 and 2021. These relationships are monitored closely for possible future inclusion in non-performing loans. Management believes it has adequately reflected credit exposure in these loans in its determination of the allowance. Loans accounted for as TDRs include modifications from original terms such as those due to bankruptcy proceedings, certain changes to amortization periods or extended suspension of principal payments due to customer financial difficulties. To the extent that Bancorp chooses to work with borrowers by providing reasonable concessions rather than initiating collection, this would result in an increase in loans accounted for as TDRs. TDRs that are in non-accrual status are reported as non-accrual loans. Loans accounted for as TDRs are individually evaluated for impairment and are reported as non-performing loans. During the year endedDecember 31, 2022 , there were no loans modified as TDRs and there were no payment defaults of existing TDRs within 12 months following modification. AtDecember 31, 2022 , Bancorp had one loan classified as a TDR, the balance of which was$850,000 . Bancorp had two loans classified as TDR atDecember 31, 2021 , the balances of which were$950,000 and$12,000 , respectively, the latter of which was paid off during the year endedDecember 31, 2022 . 61
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Table of Contents Delinquent Loans Delinquent loans (consisting of all loans 30 days or more past due) totaled$17 million atDecember 31, 2022 compared to$11 million atDecember 31, 2021 . Delinquent loans total loans were 0.32% and 0.26% atDecember 31, 2022 andDecember 31, 2021 . The increase in delinquent loans betweenDecember 31, 2022 and 2021 stems mainly from loans added through acquisitions over the past two years.
Allowance for Credit Losses on Loans
The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled "Summary of Significant Accounting Policies" for discussion of Bancorp's ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp's judgment, should be charged-off.
The following table reflects activity in the ACL for loans for the years ended
(in thousands) Initial ACL Provision for Year ended December Beginning on PCD Credit Losses Ending 31, 2022 Balance Loans on Loans Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 15,960 $ 3,508 $ 3,173 $ (37 ) $ 37$ 22,641 Commercial real estate - owner occupied 9,595 2,121 (1,061 ) (41 ) 213 10,827 Total commercial real estate 25,555 5,629 2,112 (78 ) 250 33,468 Commercial and industrial - term 8,577 1,358 2,497 (724 ) 1,283 12,991 Commercial and industrial - lines of credit 4,802 1,874 (87 ) (200 ) - 6,389 Total commercial and industrial 13,379 3,232 2,410 (924 ) 1,283 19,380 Residential real estate - owner occupied 4,316 590 1,777 (30 ) 64 6,717 Residential real estate - non-owner occupied 3,677 - (75 ) (27 ) 22 3,597 Total residential real estate 7,993 590 1,702 (57 ) 86 10,314 Construction and land development 4,789 419 2,050 (72 ) - 7,186 Home equity lines of credit 1,044 2 567 - - 1,613 Consumer 772 78 750 (1,080 ) 638 1,158 Leases 204 - (3 ) - - 201 Credit cards 162 - 94 (96 ) 51 211 Total$ 53,898 $ 9,950 $ 9,682$ (2,307 ) $ 2,308 $ 73,531 62
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Table of Contents (in thousands) Initial ACL Provision for Year ended December Beginning on PCD Credit Losses Ending 31, 2021 Balance Loans on Loans Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 19,396 $ 1,491 $ (2,031 ) $ (3,065 ) $ 169 $ 15,960 Commercial real estate - owner occupied 6,983 2,112 1,826 (1,909 ) 583 9,595 Total commercial real estate 26,379 3,603 (205 ) (4,974 ) 752 25,555 Commercial and industrial - term 8,970 1,022 (112 ) (1,337 ) 34 8,577 Commercial and industrial - lines of credit 3,614 1,755 (567 ) - - 4,802 Total commercial and industrial 12,584 2,777 (679 ) (1,337 ) 34 13,379 Residential real estate - owner occupied 3,389 142 1,134 (383 ) 34 4,316 Residential real estate - non-owner occupied 1,818 88 1,766 - 5 3,677 Total residential real estate 5,207 230 2,900 (383 ) 39 7,993 Construction and land development 6,119 - (1,333 ) - 3 4,789 Home equity lines of credit 895 147 1 - 1 1,044 Consumer 340 - 743 (987 ) 676 772 Leases 261 - (57 ) - - 204 Credit cards 135 - 27 - - 162 Total$ 51,920 $ 6,757 $ 1,397$ (7,681 ) $ 1,505 $ 53,898 (in thousands) Impact of Provision for Year ended December 31, Beginning Adopting Initial ACL on Credit Losses Ending 2020 Balance ASC 326 PCD Loans
on Loans Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 5,235 $ 2,946 $
152
Commercial real estate -
owner occupied
3,327 1,542 1,350 2,115 (1,351 ) - 6,983 Total commercial real estate 8,562 4,488 1,502 13,309 (1,494 ) 12 26,379 Commercial and industrial - term 6,782 365 - 1,832 (18 ) 9 8,970 Commercial and industrial - lines of credit 5,657 (1,528 ) - (515 ) - - 3,614 Total commercial and industrial 12,439 (1,163 ) - 1,317 (18 ) 9 12,584 Residential real estate - owner occupied 1,527 1,087 99 737 (79 ) 18 3,389 Residential real estate - non-owner occupied 947 429 - 442 (2 ) 2 1,818 Total residential real estate 2,474 1,516 99 1,179 (81 ) 20 5,207 Construction and land development 2,105 3,056 - 902 - 56 6,119 Home equity lines of credit 728 114 - 53 - - 895 Consumer 100 264 34 91 (508 ) 359 340 Leases 237 (4 ) - 28 - - 261 Credit cards - commercial 146 (50 ) - 39 - - 135
Total net loan
(charge-offs) recoveries
Bancorp's ACL for loans was$74 million as ofDecember 31, 2022 compared to$54 million as ofDecember 31, 2021 . The change in the ACL for loans was driven by a number of factors, which resulted in the$20 million , or 36%, increase for the year endedDecember 31, 2022 . Activity associated with the CB acquisition was responsible for a total increase to the ACL for loans of$14 million in 2022, comprised of a$10 million day one adjustment for specific reserves placed on acquired PCD loans (offset to goodwill) and$4.4 million of provision for credit loss expense on loans related to the remaining acquired non-PCD loan portfolio. 63
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Provision expense for credit losses on loans (excluding acquisition-related activity) of$5.3 million was recorded for the year endedDecember 31, 2022 . Significant organic loan growth, inflation and recession-based fears that drove increases in the projected unemployment rate forecast, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio were the main drivers of expense within the CECL model for 2022. Further, net charge off/recovery activity for the year endedDecember 31, 2022 was minimal.
The table below details net charge-offs to average loans outstanding by category
of loan for the years ended
2022 2021 2020
Net (charge Net (charge Net (charge
offs)/ offs)/ offs)/
Net (charge recoveries Net (charge recoveries Net (charge recoveries
(in thousands) offs)/ to average offs)/ to average offs)/ to average
Year ended December 31, recoveries Average loans loans recoveries Average loans loans
recoveries Average loans loans
Commercial real estate - non-owner occupied $ -$ 1,342,829 0.00 %$ (2,896 ) $ 1,027,405 -0.28 % $ (131 )$ 818,132 -0.02 % Commercial real estate - owner occupied 172 782,185 0.02 % (1,326 ) 592,577 -0.22 % (1,351 ) 493,141 -0.27 % Total commercial real estate 172 2,125,014 0.01 % (4,222 ) 1,619,982 -0.26 % (1,482 ) 1,311,273 -0.11 % Commercial and industrial - term 559 692,214 0.08 % (1,303 ) 550,101 -0.24 % (9 ) 441,244 0.00 % Commercial and industrial - term - PPP - 52,704 0.00 % - 397,282 0.00 % - 442,510 0.00 % Commercial and industrial - lines of credit (200 ) 417,254 -0.05 % - 290,231 0.00 % - 271,428 0.00 % Total commercial and industrial 359 1,162,172 0.03 % (1,303 ) 1,237,614 -0.11 % (9 ) 1,155,182 0.00 % Residential real estate - owner occupied 34 513,458 0.01 % (349 ) 334,718 -0.10 % (61 ) 224,501 -0.03 % Residential real estate - non-owner occupied (5 ) 296,682 0.00 % 5 221,214 0.00 % - 140,923 0.00 % Total residential real estate 29 810,140 0.00 % (344 ) 555,932 -0.06 % (61 ) 365,424 -0.02 % Construction and land development (72 ) 374,415 -0.02 % 3 290,705 0.00 % 56 265,796 0.02 % Home equity lines of credit - 182,874 0.00 % 1 121,276 0.00 % - 103,143 0.00 % Consumer (442 ) 130,595 -0.34 % (311 ) 98,093 -0.32 % (149 ) 79,018 -0.19 % Leases - 13,849 0.00 % - 13,770 0.00 % - 15,271 0.00 % Credit cards (45 ) 20,065 -0.22 % - 13,885 0.00 % - 9,802 0.00 % Total $ 1$ 4,819,124 0.00 %$ (6,176 ) $ 3,951,257 -0.16 %$ (1,645 ) $ 3,304,909 -0.05 % 64
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The following table sets forth the ACL by category of loan:
December 31, 2022 December 31, 2021
ACL for
% of Total ACL for % of Total loans to
(dollars in Allocated ACL for loans to Total Allocated ACL for Total Loans
thousands) Allowance loans Loans (1) Allowance loans (1)
Commercial real
estate - non-owner
occupied $ 22,641 31 % 1.62 % $ 15,960 30 % 1.41 %
Commercial real
estate - owner
occupied 10,827 15 % 1.30 % 9,595 18 % 1.41 %
Total commercial real
estate 33,468 46 % 1.50 % 25,555 48 % 1.41 %
Commercial and
industrial - term (1) 12,991 17 % 1.70 % 8,577 16 % 1.44 %
Commercial and
industrial - lines of
credit 6,389 9 % 1.37 % 4,802 9 % 1.30 %
Total commercial and
industrial 19,380 26 % 1.57 % 13,379 25 % 1.38 %
Residential real
estate - owner
occupied 6,717 9 % 1.14 % 4,316 8 % 1.08 %
Residential real
estate - non-owner
occupied 3,597 5 % 1.15 % 3,677 7 % 1.31 %
Total residential
real estate 10,314 14 % 1.14 % 7,993 15 % 1.17 %
Construction and land
development 7,186 10 % 1.61 % 4,789 9 % 1.60 %
Home equity lines of
credit 1,613 2 % 0.80 % 1,044 2 % 0.75 %
Consumer 1,158 2 % 0.83 % 772 1 % 0.74 %
Leases 201 0 % 1.51 % 204 0 % 1.50 %
Credit cards 211 0 % 1.03 % 162 0 % 0.95 %
Total $ 73,531 100 % 1.42 % $ 53,898 100 % 1.34 %
(1) Excludes the PPP loan portfolio, which was not reserved for based on the
underlying 100% SBA guarantee.
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.
Selected ratios relating to the allowance follow:
Years Ended December 31, 2022 2021 2020 Provision for credit losses on loans to average total loans 0.20 % 0.04 % 0.51 % Net (charge-offs)/recoveries to average total loans 0.00 % -0.16 % -0.05 % ACL for loans to average loans 1.53 % 1.36 % 1.57 % ACL for loans to total loans 1.41 % 1.29 % 1.47 % ACL for loans to total loans (excluding PPP) (1) 1.42 % 1.34 % 1.74 %
(1) See the section titled "Non-GAAP Financial Measures" for reconcilement of
non-GAAP to GAAP measures.
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 betweenDecember 31, 2021 andDecember 31, 2022 . The CB acquisition resulted in a$500,000 increase to the ACL for off balance sheet credit exposures during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). Provision for credit loss expense of$575,000 was also recorded for the year endedDecember 31, 2022 , driven largely by the addition of new construction loans, partially offset by increased C&I utilization. ACL for off balance sheet credit exposures stood at$4.5 million as ofDecember 31, 2022 compared to$3.5 million as ofDecember 31, 2021 . 65
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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$25 million , or 32%, betweenDecember 31, 2021 andDecember 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. Bancorp's branch network currently consists of 73 locations throughoutLouisville , central, eastern and northern,Kentucky , as well as theIndianapolis, Indiana andCincinnati, Ohio markets.
Premises held for sale totaling
consolidated balance sheets as of
vacant parcels of land, one branch acquired from CB and one legacy SYB branch.
BOLI Bank-owned life insurance assets increased$32 million , or 60%, to$85 million atDecember 31, 2022 , compared to$53 million atDecember 31, 2021 . During the third quarter of 2022, Bancorp purchased an additional$30 million of BOLI assets in an effort to deploy excess liquidity.Goodwill AtDecember 31, 2022 , Bancorp had$194 million in goodwill recorded on its balance sheet.Goodwill of$67 million was initially recorded in relation to theMarch 7, 2022 acquisition of CB,$8.5 million of which was subsequently written off as a result of Bancorp selling its partial interest in LFA. EffectiveDecember 31, 2022 , management finalized the fair values of the acquired assets and assumed liabilities associated with the CB acquisition in advance of the 12 month post-acquisition date, as allowed by GAAP. 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. AtSeptember 30, 2022 , Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the reporting units exceeded their carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting units exceeded their fair value.
Core Deposit and Customer List Intangibles
CDIs and CLIs arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As a result of the 2022 CB acquisition, a CDI asset of$13 million was recorded. As a result of the 2021 KB acquisition, a CDI asset of$4 million was recorded. As ofDecember 31, 2022 andDecember 31, 2021 , Bancorp's CDI assets were$15 million and$6 million , respectively. CLI assets totaling$14 million were also recorded in association with the CB acquisition. Of this total,$12 million was attributed to CB's WM&T segment and$2 million attributed to LFA. No similar assets were recorded in relation to the KB acquisition. As ofDecember 31, 2022 , Bancorp's CLI assets totaled$10 million . As previously noted, Bancorp's interest in LFA was sold effectiveDecember 31, 2022 . As a result, the CLI associated with LFA noted above was written off and is included in the loss recorded in relation to the sale for the year endedDecember 31, 2022 .
Other Assets and Other Liabilities
Other assets increased$49 million , or 57%, as ofDecember 31, 2022 compared toDecember 31, 2021 , while other liabilities increased$29 million , or 30%, for the same respective periods. The increase in other assets stems largely from a$30 million increase in DTAs driven by the significant market depreciation experienced within the AFS debt securities portfolio for the year endedDecember 31, 2022 associated with rising interest rates. The rising interest rate environment also drove an$8 million increase in Bancorp's interest rate swap assets. Further,$13 million in MSR assets were added during the first quarter in relation to the CB acquisition.
As of
its intangible assets or other long-lived assets.
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The increase for Other liabilities betweenDecember 31, 2021 andDecember 31, 2022 was driven largely by acquisition-related activity resulting in higher accrued employee incentive compensation, employee benefits and various other liabilities. Further, the rising interest rate environment also drove an$8 million increase in Bancorp's interest rate swap liabilities, corresponding with the increase noted above for Other assets. Market value changes on interest rate swap transactions maintained for certain loan customers played a role in the fluctuations of both Other Asset and Other Liabilities, as noted above. Bancorp enters into these 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 via both an asset and a related liability as Bancorp has an agreement with the borrower (the asset) and the counterparty (the liability). Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value have an offsetting effect on the related asset and liability. For this reason, the market value changes over the past 12 months stemming from the rising interest rate environment have resulted in increases to both the asset and liability associated with these transactions. For additional information, see the footnote titled "Interest Rate Swaps." Deposits Total deposits increased$604 million , or 10%, fromDecember 31, 2021 toDecember 31, 2022 . Deposits totaling$1.12 billion were assumed as a result of the CB acquisition onMarch 7, 2022 . Excluding the deposits added through the CB acquisition, deposits declined$517 million , or 9%, as the elevated deposit levels that had generally been maintained by the customer base for several quarters following the PPP moderated during 2022. While Bancorp has not experienced fallout within the customer base, we anticipate deposit pricing will be a challenge to future NIM expansion. (dollars in thousands) Variance December 31, 2022 2021 $ Change % Change Non-interest bearing demand deposits$ 1,950,198 $ 1,755,754 $ 194,444 11 % Interest bearing deposits: Interest bearing demand 2,308,960 2,131,928 177,032 8 % Savings 535,903 415,258 120,645 29 % Money market 1,124,100 1,050,352 73,748 7 %
Time deposit accounts of
7,893 9 % Other time deposits 374,453 344,477 29,976 9 % Total time deposits (1) 472,091 434,222 37,869 9 % Total interest bearing deposits 4,441,054 4,031,760 409,294 10 % Total deposits$ 6,391,252 $ 5,787,514 $ 603,738 10 %
(1) Includes
andDecember 31, 2021 , respectively. Bancorp experienced both significant average deposit growth and sharp increases in the rates paid on deposits for the year endedDecember 31, 2022 as compared to 2021. While average deposit growth was attributed entirely to the CB acquisition, the FRB's aggressive interest rate moves drove up deposit rates. Bancorp increased rates on transaction and time deposit accounts alike during 2022, due to both proactive strategic measures and competitive pricing pressure. The average cost of interest bearing deposits increased 20 bps to 0.37% betweenDecember 31, 2021 andDecember 31, 2022 , while the overall cost of deposits (including non-interest bearing deposits) increased 10 bps to 0.25% over the same period. Bancorp anticipates increasing deposit costs could continue to place pressure on NIM in 2023. 67
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Average deposit balances and average rates paid on such deposits for the years
indicated are summarized as follows:
2022 2021 2020
Years Ended December 31, Average Average Average
(dollars in thousands) Average balance rate Average balance rate Average balance rate
Non-interest bearing demand
deposits $ 2,053,213 - % $ 1,578,795 - % $ 1,100,942 - %
Interest bearing demand
deposits 2,218,416 0.41 1,633,606 0.11 1,133,308 0.16
Savings deposits 538,971 0.12 328,570 0.03 190,368 0.02
Money market deposits 1,140,025 0.46 919,778 0.06 771,363 0.19
Time deposits 487,981 0.27 420,308 0.76 412,506 1.74
Total average deposits $ 6,438,606 $ 4,881,057 $ 3,608,487
Maturities of time deposits of
follows:
(in thousands) Three months or less$ 16,876 Over three through six months 10,024 Over six through 12 months 36,180 Over 12 months 34,558 Total$ 97,638
Securities Sold Under Agreement to Repurchase
SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. AtDecember 31, 2022 , 2021 and 2020, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.
Information concerning SSUAR follows:
December 31, (dollars in thousands) 2022 2021 Outstanding balance at end of period$ 133,342 $ 75,466
Weighted average interest rate at end of period 1.64 % 0.04 %
Years EndedDecember 31 , (dollars in thousands) 2022 2021
2020
Average outstanding balance during the period$ 122,154 $ 62,534 $ 40,363 Average interest rate during the period 0.46 % 0.04 % 0.09 % Maximum outstanding at any month end during the period$ 161,512 $ 81,964 $ 47,979 SSUARs totaled$133 million and$75 million atDecember 31, 2022 andDecember 31, 2021 , respectively, as SSUARs totaling$66 million were assumed as part of the CB acquisition. The remaining fluctuation in SSUAR is consistent with the decrease in deposit balances previously noted (excluding acquisition-related activity). 68
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Federal Funds Purchased and Other Short-Term Borrowing
FFP and other short-term borrowing balances decreased
between
related entirely to excess liquidity held by downstream correspondent bank
customers of Bancorp.
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 ofDecember 31, 2022 , subordinated notes added through the CB acquisition totaled$26 million . FHLB advances FHLB advances outstanding atDecember 31, 2022 totaled$50 million , consisting entirely of a one-week cash management advance utilized at year-end for short-term liquidity purposes. This advance represents the only FHLB advance utilized by Bancorp in 2022 and matures in earlyJanuary 2023 . There were no FHLB advances outstanding atDecember 31, 2021 , as all outstanding FHLB advances either matured or were paid off by the end of the 2021. 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$85 million and$899 million atDecember 31, 2022 andDecember 31, 2021 , respectively. The decrease experienced for the year endedDecember 31, 2022 is attributed to significant investment in the securities portfolio, strong organic loan growth and a general decline in deposits. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are used for general daily liquidity purposes. The fair value of the AFS debt security portfolio was$1.14 billion and$1.18 billion atDecember 31, 2022 andDecember 31, 2021 respectively. The lack of growth in AFS debt security portfolio for the year endedDecember 31, 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 sinceDecember 31, 2021 due to rising rates. The investment portfolio (HTM and AFS) includes scheduled maturities of$54 million and cash flows on amortizing debt securities of approximately$238 million (based on assumed prepayment speeds as ofDecember 31, 2022 ) expected over the next 12 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. AtDecember 31, 2022 , total investment securities pledged for these purposes comprised 68% of the debt securities portfolio, leaving approximately$525 million of unpledged debt securities. 69
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Bancorp's deposit base consists mainly of core deposits, defined as time deposits less than or equal to$250,000 , demand, savings, and money market deposit accounts, and excludes public funds and brokered deposits. AtDecember 31, 2022 , such deposits totaled$5.60 billion and represented 88% of Bancorp's total deposits, as compared with$5.05 billion , or 87% of total deposits atDecember 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. Non-core deposit balances may be more sensitive to market rates, with potential decreases possibly straining Bancorp's liquidity position. As ofDecember 31, 2022 andDecember 31, 2021 , Bancorp held brokered deposits totaling$599,000 and$5 million , respectively, all of which is attributed to deposits added through acquisition-related activity over the past 12 months. Included in total deposit balances atDecember 31, 2022 are$692 million in public funds generally comprised of accounts with local government agencies and public school districts in the markets in which Bancorp operates. AtDecember 31, 2021 , public funds deposits totaled$645 million , the increase over prior year being attributed to relationships added through the CB acquisition. Bancorp is a member of the FHLB ofCincinnati . 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. AtDecember 31, 2022 andDecember 31, 2021 , available credit from the FHLB totaled$1.36 billion and$1.00 billion , respectively. Bancorp also had unsecured FFP lines with correspondent banks totaling$80 million at bothDecember 31, 2022 andDecember 31, 2021 , respectively. In addition, Bancorp had borrowing capacity of$20 million available through an unsecured borrowing line at the holding company as ofDecember 31, 2022 . 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 ofJanuary 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. AtDecember 31, 2022 , the Bank could pay an amount equal to$86 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 the FHLB and FFP, as well as scheduled loan repayments and cash flows from AFS 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. 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$372 million as ofDecember 31, 2022 compared toDecember 31, 2021 consistent with the CB acquisition and strong organic growth. 70
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Commitments to extend credit are an agreement to lend to a customer as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments. Additional detail regarding credit-related financial instruments, including both commitments to extend credit and letters of credit atDecember 31, 2022 are as follows: Amount of commitment expiration per period Less than One-three Three-five Over five (in thousands) one year years years years Total
Unused loan commitments
$ 170,337 $ 2,028,883 Standby letters of credit 30,389 4,255 60 - 34,704 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 betweenDecember 31, 2021 andDecember 31, 2022 . The CB acquisition resulted in a$500,000 increase to the ACL for off balance sheet credit exposures during the first quarter, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). Provision for credit loss expense for off balance sheet exposures of$575,000 was also recorded for the year endedDecember 31, 2022 , driven largely by the addition of new construction loans. ACL for off balance sheet credit exposures stood at$4.5 million as ofDecember 31, 2022 compared to$3.5 million as ofDecember 31, 2021 .
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party beneficiary. Those
guarantees are primarily issued to support commercial transactions. Standby
letters of credit generally have maturities of one to two years.
In addition to owned banking facilities, Bancorp has entered into long-term
leasing arrangements for certain branch facilities. Bancorp also has required
future payments for a non-qualified defined benefit retirement plan, time
deposit maturities and other obligations.
Required payments under such commitments atDecember 31, 2022 are as follows: Payments due by period Less than One-three Three-five Over five (in thousands) one year years years years Total Time deposit maturities$ 335,095 $ 117,759 $ 19,045 $ 192 $ 472,091 FHLB advances 50,000 - - - 50,000 Subordinated debentures - - - 26,000 26,000 Operating leases (1) 2,963 5,259 4,031 8,755 21,008 Defined benefit retirement plan - 274 438 2,566 3,278 Other (2) 4,500 3,306 1,500 2,472 11,778
(1) Includes assumed renewals.
(2) Consists primarily of contractual requirements relating to tax credit
investments and community sponsorships.
See the footnote titled "Commitments and Contingent Liabilities" for additional
detail.
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Information pertaining to Bancorp's capital balances and ratios follows:
Years endedDecember 31 , (dollars in thousands, except per share data) 2022 2021 2020 Stockholders' equity$ 760,432 $ 675,869 $ 440,701 Dividends per share$ 1.14 $ 1.10 $ 1.08 Dividend payout ratio, based on basic EPS 35.19 % 36.67 % 41.38 % AtDecember 31, 2022 , stockholders' equity totaled$760 million , representing an increase of$85 million , or 13%, compared toDecember 31, 2021 . The increase for the year endedDecember 31, 2022 was attributed mainly to stock issued in relation to the CB acquisition, which totaled$134 million . Further, net income of$93.0 million was offset by a$108 million negative change in AOCI and$33 million in dividends declared during the year. AOCI consists of net unrealized gains or losses on AFS debt securities and a minimum pension liability, each net of income taxes. The large decline in AOCI fromDecember 31, 2021 toDecember 31, 2022 was the result of the rising interest rate environment and its corresponding impact on the valuation of the AFS debt securities portfolio. These securities are either explicitly or implicitly guaranteed by theU.S. government, are highly rated by major rating agencies, and have a long history of no credit losses. See the "Consolidated Statement of Changes in Stockholders' Equity" for further detail of changes in equity. As a result of the large interest-rate driven changes in AOCI noted above, as well as acquisition-related growth, Bancorp's TCE ratio and tangible book value per share, both non-GAAP disclosures, experienced declines betweenDecember 31, 2021 andDecember 31, 2022 . TCE was 7.44% atDecember 31, 2022 compared to 8.22% atDecember 31, 2021 , while tangible book value per share was$18.50 atDecember 31, 2022 compared to$20.09 atDecember 31, 2021 . See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. Bancorp increased its cash dividends declared to stockholders during 2022 to an annual dividend of$1.14 , from$1.10 per share in 2021 and$1.08 in 2020. This represents a payout ratio of 35.19% based on basic EPS and an annual dividend yield of 1.75% based upon the year-end closing stock price. InMay 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 inception. The plan, which will expire inMay 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, the increased importance of capital preservation and the announcement of two acquisitions, no shares were repurchased in 2022 nor 2021. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan. Bank holding companies and their subsidiary banks are required by regulators to meet risk-based capital standards. These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The value of both balance sheet and off-balance sheet items are adjusted to reflect credit risks. See the footnote titled "Regulatory Matters" for additional detail regarding regulatory capital requirements, as well as capital ratios of Bancorp and the Bank. The Bank exceeds regulatory capital ratios required to be well-capitalized. Regulatory framework does not define well capitalized for holding companies. Management considers the effects of growth on capital ratios as it contemplates plans for expansion. 72
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The following table sets forth consolidated Bancorp's and the Bank's risk based capital ratios: December 31, 2022 2021 Total risk-based capital (1) Consolidated 12.54 % 12.79 % Bank 12.08 12.42 Common equity tier 1 risk-based capital (1) Consolidated 11.47 11.94 Bank 11.01 11.56 Tier 1 risk-based capital (1) Consolidated 11.04 11.94 Bank 11.01 11.56 Leverage Consolidated 9.33 8.86 Bank 8.95 8.57 (1) Under banking agencies' 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. Capital ratios as ofDecember 31, 2022 decreased comparedDecember 31, 2021 as a result of substantial average asset and risk-weighted asset growth, driven mainly by 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 theFDIC , 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 1Risk-Based Capital ratio, 8.0% Tier 1Risk-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 1Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1Risk-Based Capital ratio, Tier 1Risk-Based Capital ratio andTotal Risk-Based Capital ratio necessary to be considered adequately-capitalized. AtDecember 31, 2022 , the adequately-capitalized minimums, including the capital conservation buffer, were a 7.0% Common Equity Tier 1Risk-Based Capital ratio, 8.5% Tier 1Risk-Based Capital ratio and 10.5%Total Risk-Based Capital ratio. Bancorp met these levels as ofDecember 31, 2022 and 2021. 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 ofDecember 31, 2022 , subordinated notes added through the CB acquisition totaled$26 million . Further, Bancorp had borrowing capacity of$20 million available through an unsecured borrowing line of the holding company as ofDecember 31, 2022 , which was added during the first quarter to allow capital flexibility at the Bank level. 73
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As permitted by the interim final rule issued onMarch 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 effectiveJanuary 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. Fair Value Measurements Bancorp follows the provisions of authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by GAAP. It prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP. Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. The guidance requires fair value measurements to be classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on significant unobservable, internally-derived inputs). Bancorp's AFS debt securities and interest rate swaps are recorded at fair value on a recurring basis. Other accounts including mortgage loans held for sale, MSRs, impaired loans and OREO may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets. The AFS debt securities portfolio is comprised ofU.S. Treasury and otherU.S. government obligations, debt securities ofU.S. government-sponsored corporations (including mortgage-backed securities), and obligations of state and political subdivisions.U.S. Treasury securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All other securities are priced using standard industry models or matrices with various assumptions such as yield curves, volatility, prepayment speeds, default rates, time value, credit rating and market prices for similar instruments. These assumptions are generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above. Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generally based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty's inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2022, 2021 and 2020. MSRs, carried in other assets and recorded at fair value upon capitalization, are amortized to correspond with estimated servicing income and are periodically assessed for impairment based on fair value at the reporting date. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. AtDecember 31, 2022 and 2021, there was no valuation allowance for MSRs, as fair value exceeded carrying value. Loans considered to be collateral dependent are measured for impairment and, if indicated, a specific allocation is established based on the value of underlying collateral. Collateral dependent loans include non-accrual loans, individually analyzed PCD loans and loans accounted for as TDRs. For collateral dependent loans, fair value amounts represent only those loans with specific valuation allowances and loans charged down to their carrying value. AtDecember 31, 2022 andDecember 31, 2021 , the carrying value of collateral dependent loans measured at fair value on a non-recurring basis was$21 million and$5 million , respectively. The increase over the prior year stemmed from a large CRE relationship that was placed on non-accrual status during the year in addition to relationships added through the CB acquisition. These measurements are classified as Level 3. 74
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OREO, which is carried in other assets at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is commonly based on recent real estate appraisals or valuations performed by internal or external parties which use judgments and assumptions that are property-specific and sensitive to changes in the overall economic environment. Appraisals may be further discounted based on management's historical knowledge and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. OREO is equal to the carrying value of only parcels of OREO for which carrying value equals appraised value. If a parcel of OREO has a carrying value below its appraised value, it is not considered to be carried at fair value. The losses represent write-downs which occurred during the period indicated. AtDecember 31, 2022 and 2021, the carrying value of OREO was$677,000 and$7 million , respectively, the decline being attributed to a large CRE OREO property being sold during the third quarter of 2022.
See the Footnote titled "Assets and Liabilities Measured and Reported at Fair
Value," for additional detail regarding fair value measurements.
Non-GAAP Financial Measures
The following table provides a reconciliation of total stockholders' equity in accordance with GAAP to tangible stockholders' equity (TCE), a non-GAAP disclosure. Bancorp provides the TCE per share, a non-GAAP measure, in addition to those defined by banking regulators, based on its widespread use by investors as a means to evaluate capital adequacy:December 31 , (dollars and shares in thousands, 2022
2021
except per share data)
Total stockholders' equity - GAAP (a)$ 760,432 $
675,869
Less: Goodwill (194,074 ) (135,830 ) Less: Core deposit and other intangibles (24,990 ) (5,596 ) Tangible common equity - Non-GAAP (c)$ 541,368 $ 534,443 Total assets - GAAP (b)$ 7,496,261 $ 6,646,025 Less: Goodwill (194,074 ) (135,830 ) Less: Core deposit and other intangibles (24,990 ) (5,596 ) Tangible assets - Non-GAAP (d)$ 7,277,197 $
6,504,599
Total stockholders' equity to total assets - GAAP (a/b) 10.14 % 10.17 % Tangible common equity to tangible assets - Non-GAAP (c/d) 7.44 % 8.22 % Total shares outstanding (e) 29,259 26,596 Book value per share - GAAP (a/e)$ 25.99 $
25.41
Tangible common equity per share - Non-GAAP (c/e) 18.50 20.09 The general decline betweenDecember 31, 2021 andDecember 31, 2022 for the ratios displayed in the table above is attributed mainly to unrealized losses within the AFS debt securities portfolio stemming from the significant increase in interest rates for the year endedDecember 31, 2022 , which drove a$108 million decline in AOCI and as a result, a decline in stockholders equity. Further, acquisition-related growth served to increase goodwill and total assets, which also contributed to lower ratios. 75
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ACL on loans to total non-PPP loans represents the ACL on loans, divided by total loans less PPP loans. Non-performing loans to total non-PPP loans represents non-performing loans, divided by total loans less PPP loans. Delinquent loans to total non-PPP loans represents delinquent loans (consisting of all loans 30 days or more past due), divided by total loans less PPP loans. Bancorp believes these non-GAAP disclosures are important because they provide comparable ratios after eliminating PPP loans, which are fully guaranteed by the SBA and have not been allocated for within the ACL and are not at risk of non-performance. December 31, (dollars in thousands) 2022 2021 Total loans - GAAP (a)$ 5,205,918 $ 4,169,303 Less: PPP loans (18,593 ) (140,734 ) Total non-PPP loans - Non-GAAP (b)$ 5,187,325 $ 4,028,569 ACL for loans (c)$ 73,531 $ 53,898 Non-performing loans (d) 15,134 7,408 Delinquent loans (e) 16,863 11,036 ACL for loans to total loans - GAAP (c/a) 1.41 % 1.29 % ACL for loans to total loans - Non-GAAP (c/b) 1.42 %
1.34 %
Non-performing loans to total loans - GAAP (d/a) 0.29 % 0.18 % Non-performing loans to total loans - Non-GAAP (d/b) 0.29 %
0.18 %
Delinquent loans to total loans - GAAP (e/a) 0.32 % 0.26 % Delinquent loans to total loans - Non-GAAP (e/b) 0.33 % 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. In addition to the efficiency ratio presented, Bancorp considers an adjusted efficiency ratio. Bancorp believes it is important because it provides a comparable ratio after eliminating net gains (losses) on sales and calls of investment securities, as well as net gains (losses) on sales of acquired premises and equipment and disposition of any acquired assets, if applicable, and the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Years endedDecember 31 , (dollars in thousands) 2022 2021
2020
Total non-interest expenses (a)$ 191,791 $ 142,280 $ 101,659 Less: Merger expenses (19,500 ) (19,025 ) - Less: Loss on disposition of LFA (870 ) - - Less: Amortization of investments in tax credit partnerships (353 ) (367 ) (3,096 ) Total non-interest expenses - Non-GAAP (c) $ 171,068 $ 122,888
Total net interest income, FTE$ 234,267 $ 171,508 $ 136,133 Total non-interest income 89,149 65,850
51,899
Total revenue - Non-GAAP (b) 323,416 237,358
188,032
Less: (Gain)/loss on sale of premises and equipment (4,369 ) - - Less: (Gain)/loss on sale of securities - - -
Total adjusted revenue - Non-GAAP (d)
Efficiency ratio - Non-GAAP (a/b) 59.30 % 59.94 % 54.06 %
Adjusted efficiency ratio - Non-GAAP (c/d) 53.62 % 51.77 % 52.42 %
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