STOCK YARDS BANCORP, INC. – 10-Q – 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 MSAs 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 loaned in exchange 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. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 "Financial Statements" and other information appearing in Bancorp's Annual Report on Form 10-K for the year endedDecember 31, 2021 . To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp's future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management's expectations.
Cautionary Statement Regarding Forward-Looking Statements
This document contains statements relating to future results of Bancorp that are
considered "forward-looking" as defined by Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The forward-looking statements are principally, but not exclusively,
contained in Part I Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Forward-looking statements involve known and unknown risks, uncertainties, and
other factors that may cause actual results, performance, or achievements to be
materially different from future results, performance, or achievements expressed
or implied by the statement. These statements are often, but not always, made
through the use of words or phrases such as "anticipate," "believe," "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.
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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;
? 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;
? Residual impact, if any, of the COVID-19 pandemic on Bancorp's business,
including the impact of the actions taken by governmental authorities to try
and contain the pandemic or address the impact of the pandemic on the
economy (including, without limitation, various relief efforts), and the
resulting effect of all such items on our operations, liquidity and capital
position, and on the financial condition of Bancorp's borrowers and other
customers; and
? other risks and uncertainties reported from time-to-time in Bancorp's filings
with the
Report on Form 10-K for the year endedDecember 31, 2021 . 73
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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. 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
related expenses totaling
result of the CB acquisition.
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.
Issued but Not Yet Effective Accounting Standards Updates
For disclosure regarding the impact to Bancorp's financial statements of
issued-but-not-yet-effective ASUs, see the footnote titled "Summary of
Significant Accounting Policies" of Part I Item 1 "Financial Statements."
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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, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.
Overview - Operating Results (FTE)
The following table presents an overview of Bancorp's financial performance for
the three months ended
(dollars in thousands, except per share data)
Variance
Three months ended September 30, 2022 2021
$/bp %
Net income attributed to stockholders$ 28,455 $ 23,162 $ 5,293 23 % Diluted earnings per share$ 0.97 $ 0.87 $ 0.10 11 % ROA 1.47 % 1.50 % (3) bps -2 % ROE 14.85 % 13.92 % 93 bps 7 %
Additional discussion follows under the section titled "Results of Operations."
General highlights for the three months ended
? Bancorp completed its acquisition of CB on
acquisition and net of purchase accounting adjustments, CB had approximately
investment securities and
with the CB acquisition. There were no merger related expenses recorded for
the three months endedSeptember 30, 2022 . ? Bancorp completed its acquisition of KB onMay 31, 2021 . At the time of
acquisition and net of purchase accounting adjustments, KB had approximately
securities and
substantial balance sheet growth experienced over the past twelve months.
Given the timing of the acquisition, the three months ended
represented the first full quarter of activity associated with the KB
acquisition. The merger related expenses recorded for the three months ended
completed during the first quarter of 2022.
? Net income totaled
three months ended
period of 2021. Significant factors affecting the results for the three months
ended
o The three months ended
of activity related to the CB acquisition. No merger related expenses were
recorded during the period.
o The three months ended
of activity related to the KB acquisition, but also included
merger related expenses associated entirely with the CB acquisition, which was
completed during the first quarter of 2022.
o Net interest income increased
ended
acquisition-related growth and organic growth in loans and investment
securities, as well as the significant benefit provided by substantial upward
movement in the interest rate environment during the period.
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o Provision for credit loss expense of
months ended
and to a lesser extent, the increase in the projected unemployment rate
forecast used in the CECL model. Negative provision of
recorded for the third quarter of the prior year, which was driven by
generally improving CECL model factors at the time, including an improved
unemployment forecast.
? NIM increased 32 bps to 3.46% for the three months ended
compared to 3.14% for the same period in 2021. Recent interest rate actions
from the FRB have had a positive impact on net interest income and NIM, but
the full effects of rising rates were not realized during the three months
ended
increases. Bancorp expects to realize further benefits to net interest income
and NIM from both the recent hikes and anticipated future hikes in the
quarters ahead.
? Total loans (excluding PPP loans) increased
CB acquisition and strong organic growth. Average loans (excluding PPP loans)
increased
compared to the same period in 2021.
? The PPP loan portfolio decreased
30, 2021, as the result of anticipated forgiveness activity, driving a
million, or 84%, decline in PPP-related interest and fee income for the three
months ended
? Bancorp's ACL on loans to total loans was 1.38% at
to 1.29% at
acquisition-related activity within the ACL on loans, strong organic loan
growth and to a lesser extent, the aforementioned increase in the projected
unemployment rate forecast.
? Deposit balances increased
2021, as a result of assuming approximately
the first quarter in relation to the CB acquisition. The growth stemming from
the first quarter CB acquisition was partially offset during the second and
third quarters, as a result of anticipated seasonal deposit runoff related
mainly to public fund deposits and time deposit attrition.
? Total non-interest income increased
period ended
quarter of 2022 benefitted from both significant contributions stemming from
acquisition-related activity and organic growth over the past twelve months.
All non-interest income revenue streams experienced significant increases over
the same quarter of the prior year, with the exception of mortgage banking,
which decreased compared to the prior year period due to the rising rate
environment's impact on overall mortgage volume. In addition, a non-recurring
properties was recorded during the three months ended
? Non-interest expenses increased
ended
mainly to acquisition-related activity. Non-interest expenses have generally
remained controlled and in line with expectations.
? Bancorp's efficiency ratio (FTE) for the three months ended
was 51.30% compared to 54.63% for the same period of 2021. Bancorp also
considers an adjusted efficiency ratio, which eliminates net gains (losses) on
sales, calls, and impairment of investment securities, as well as net gains
(losses) on sales of 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 three months ended
compared to 53.72% for the same period of 2021. See the section titled
"Non-GAAP Financial Measures" for a reconcilement of non-GAAP to GAAP
measures.
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The following table presents an overview of Bancorp's financial performance for
the nine months ended
(dollars in thousands, except per share data)
Variance
Nine months ended September 30, 2022 2021
$/bp %
Net income attributed to stockholders$ 63,155 $ 50,056 $ 13,099 26 % Diluted earnings per share$ 2.20 $ 2.03 $ 0.17 8 % ROA 1.14 % 1.25 % (9) bps -9 % ROE 11.44 % 12.37 % (93) bps -8 %
Additional discussion follows under the section titled "Results of Operations."
General highlights for the nine months ended
? Bancorp completed its acquisition of CB on
acquisition and net of purchase accounting adjustments, CB had approximately
securities and
the nine months ended
activity associated with the CB acquisition. Further,
related expenses were recorded in the first nine months of 2022 in addition to
$4.4 million of credit loss expense associated with the acquired loan portfolio. ? Bancorp completed its acquisition of KB onMay 31, 2021 . At the time of
acquisition and net of purchase accounting adjustments, KB had approximately
securities and
the nine months endedSeptember 30, 2021 only represented four months of activity associated with the KB acquisition and included$19.0 million of
merger related expenses in addition to
associated with the acquired loan portfolio.
? Net income totaled
nine months ended
period of 2021. Significant factors affecting the results for the nine months
ended
o The nine months ended
months of activity related to the CB acquisition, including
merger related expenses and
acquired loan portfolio.
o The nine months ended
activity related to the KB acquisition and included
related expenses (
million in credit loss expense related to the acquired loan portfolio.
o Net interest income increased
September 30, 2022 compared to the same period of 2021, driven by acquisition-related growth and organic portfolio growth in loans and investment securities, as well as the significant benefit provided by substantial upward movement in the interest rate environment during the period.
o Total provision for credit loss expense was
ended
year. The expense recorded for both periods was driven largely by the
respective acquisitions. However, contrasting projected unemployment rate
forecasts used in the CECL model for these respective periods had opposing
effects on provision for credit loss expense. While the projected unemployment
rate forecast has increased in the current year on the heels of inflation and
recession-based concerns, increasing expense, the prior year benefitted from a
then-improving forecast, partially offsetting our growth-related expense.
? NIM decreased 4 bps to 3.25% for the nine months ended
compared to 3.29% for the same period in 2021. While the aggressive interest
rate actions taken by the FRB in 2022 have had a positive impact on net
interest income and NIM, the significantly higher interest rate environment
experienced for the nine months ended
offset the 20 bps benefit provided by the PPP portfolio for the same period of
the prior year.
? Total loans (excluding PPP loans) increased
CB acquisition and strong organic portfolio growth. Average loans (excluding
PPP loans) increased$1.26 billion , or 37%, for the nine months endedSeptember 30, 2022 compared to the same period in 2021.
? The PPP loan portfolio decreased
30, 2021, as the result of forgiveness activity, driving a
75%, decline in PPP-related interest and fee income for the nine months ended
September 30, 2022 compared to the same period of 2021. 77
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? Bancorp's ACL on loans to total loans was 1.38% at
to 1.29% at
acquisition-related activity within the ACL on loans, strong organic loan
growth and to a lesser extent, the aforementioned increase in the projected
unemployment rate forecast.
? Deposit balances increased
2021, as a result of assuming approximately
the first quarter in relation to the CB acquisition. The growth stemming from
the first quarter CB acquisition was partially offset during the second and
third quarters, as a result of anticipated seasonal deposit runoff related
mainly to public fund deposits and time deposit attrition.
? Total non-interest income increased
ended
months of 2022 benefitted from both significant contributions stemming from
acquisition-related activity and organic growth over the past twelve months.
All non-interest income revenue streams experienced significant increases over
the same quarter of the prior year, with the exception of mortgage banking,
which experienced a significant decline in volume driven by rising rates
compared to the historic low rates benefitted much of 2021. In addition, a
non-recurring
acquired properties was recorded during third quarter.
? Non-interest expenses increased
ended
periods experienced elevated non-interest expense as a result of merger
related expenses, all non-interest expense categories, with the exception of
the FHLB early pre-payment penalty, experienced significant increases over the
prior year as a result of anticipated acquisition-related growth. The prior
year FHLB early pre-payment penalty, which totaled
paying off
liquidity held on the balance sheet and the near-term outlook for interest
rates at the time of payoff.
? Bancorp's efficiency ratio (FTE) for the nine months ended
was 62.11% compared to 62.47% for the same period of 2021, the elevated ratios
being the result of one-time merger-related expenses incurred as a result of
the respective acquisitions in both periods. Bancorp also considers an
adjusted efficiency ratio, which eliminates net gains (losses) on sales,
calls, and impairment of investment securities, as well as net gains (losses)
on sales of 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 nine months ended
compared to 51.25% for the same period of 2021. See the section titled
"Non-GAAP Financial Measures" for a reconcilement of non-GAAP to GAAP
measures.
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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 economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace. The discussion that follows is based on FTE interest data.
Comparative information regarding net interest income follows:
(dollars in thousands)
Variance
As of and for the three months ended September 30, 2022 2021 $/bp % Net interest income$ 62,376 $ 45,483 $ 16,893 37 % Net interest income (FTE)* 62,608 45,643 16,965 37 % Net interest spread 3.31 % 3.08 % 23 bps 7 % Net interest margin 3.46 % 3.14 % 32 bps 10 % Average interest earning assets$ 7,181,781 $ 5,760,760 $ 1,421,021 25 %
Average interest bearing liabilities 4,619,927 3,617,833
1,002,094 28 % (dollars in thousands) Variance As of and for the nine months ended September 30, 2022 2021 $/bp % Net interest income$ 168,120 $ 124,892 $ 43,228 35 % Net interest income (FTE)* 168,797 125,178 43,619 35 % Net interest spread 3.16 % 3.22 % (6) bps -2 % Net interest margin 3.25 % 3.29 % (4) bps -1 % Average interest earning assets$ 6,936,718 $ 5,091,596 $ 1,845,122 36 %
Average interest bearing liabilities 4,524,390 3,222,861
1,301,529 40 %
*See table titled, "Average Balance Sheets and Interest Rates (FTE)," for detail of net
interest income (FTE).
NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled$5 million at bothSeptember 30, 2022 andDecember 31, 2021 . These sold loans are on Bancorp's balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, as Bancorp believes it provides a more accurate depiction of loan portfolio performance. The FRB has taken aggressive interest rate action over the past several months, implementing multiple rate hikes in an effort to tame inflation that has reached its highest levels in decades. The FFTR was increased to a range of 1.50% - 1.75% with consecutive and escalating rate increases of 25 bps, 50 bps and 75 bps in March, May and June, respectively, taking Prime to 4.75% by the end of the second quarter. The FRB remained committed to its goal of taming inflation through interest rate increases during the third quarter, hiking rates 75 bps each in both late-July and late-September, bringing the FFTR to a range of 3.00% - 3.25%, and Prime to 6.25%, as ofSeptember 30, 2022 . While the third quarter hikes provided meaningful benefit to NIM, the average interest rate environment experienced for the three months endedSeptember 30, 2022 did not capture the full benefit of the FRB's third quarter interest rate actions given the timing of the increases. Further, Bancorp elected to raise its deposit rates in July in anticipation of these rate increases, representing the Company's first deposit rate increases in nearly two years, which partially negated some of the NIM benefit associated with the aforementioned FRB rate hikes. The current economic outlook suggests continued interest rate action from the FRB through at least the end of 2022 and prospects of a continuing rising rate environment. While Bancorp expects rising rates to have a positive effect on NIM, pricing pressure/competition for both loans and deposits, changing levels of liquidity within the banking system and the possibility of a flattening yield curve could continue to place pressure on NIM. 79
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Net Interest Income (FTE) - Three months ended
Net interest spread (FTE) and NIM were 3.31% and 3.46%, for the three months endedSeptember 30, 2022 compared to 3.08% and 3.14% for the same period in 2021, respectively. NIM during the three months endedSeptember 30, 2022 was significantly 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 the FRB's hike in
stood at a range of 3.00% - 3.25%, and Prime at 6.25%, as of
2022 as a result of aggressive interest rate action from the FRB over the past
two quarters. ? Substantial balance sheet growth stemming from both acquisition-related
activity and organic growth, which resulted in total average earning asset
growth of
of$1.00 billion , or 28%, for the three months endedSeptember 30, 2022 compared to the same period of 2021.
? Overall excess balance sheet liquidity, which contributed to NIM compression
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 average excess liquidity, and its
corresponding impact on NIM, have continued to decline through
2022.
? PPP forgiveness activity, which accelerates the recognition of fee income on
these loans, 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
for the three months ended
2021. Net interest income (FTE) increased$17.0 million , or 37%, for the three months endedSeptember 30, 2022 compared to the same period of 2021, largely as a result of acquisition-related activity, but also driven in part by strong loan growth, substantial investment in the investment securities portfolio and the benefits of a rising interest rate environment. Total average interest earning assets increased$1.42 billion , or 25%, to$7.18 billion for the three months endedSeptember 30, 2022 , as compared to the same period of 2021, with the average rate earned on total interest earning assets climbing 50 bps to 3.74%.
? Average total loan balances increased
months ended
non-PPP loan growth of
acquisition-related expansion and strong organic growth, which was partially
offset by a
forgiveness activity increased.
? Average investment securities grew
ended
combination of strategically deploying excess liquidity through further
investment and acquisition-related activity.
? Average FFS and interest bearing due from bank balances decreased
or 17%, for the three months ended
investment in the securities portfolio and seasonal deposit run-off led to
lower levels of liquidity as compared to the same period of the prior year.
Total interest income (FTE) increased$20.5 million , or 44%, to$67.6 million for the three months endedSeptember 30, 2022 , as compared to the same period of 2021.
? Interest and fee income (FTE) on loans increased
same 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
overall loan portfolio increased 43 bps to 4.56% for the three months ended
while the yield on the non-PPP loan portfolio increased 54 bps compared to the
prior year period, driven by the rising rate environment and strong loan
growth.
? Significant growth in average investment securities led to a
increase in interest income (FTE) on the portfolio for the three months ended
41%, increase in the corresponding yield on the portfolio. Substantial
deployment of excess liquidity over the past twelve months benefitted the
investment portfolio, as the yields earned on current year purchases have
improved dramatically in tandem with rising rates.
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? Interest income on FFS and interest bearing due from bank balances increased
short-term interest rates more than offset a
average balances. The yield on these assets increased 204 bps to 2.19% for the
three months ended
stemming from the dramatic increase in the FFTR over the past several months.
Total average interest bearing liabilities increased$1.00 billion , or 28%, to$4.62 billion for the three-month period endedSeptember 30, 2022 compared with the same period in 2021, with the total average cost increasing 27 bps to 0.43%.
? Average interest bearing deposits increased
three months ended
with interest-bearing demand deposits accounting for
the increase. The significant growth was attributed mainly to
acquisition-related activity, as
the first quarter of 2022 in relation to the CBT acquisition. Excluding
acquisition-related activity, period-end interest-bearing deposit balances
have declined in 2022, driven largely by seasonal fluctuation in public funds
and time deposit attrition.
? Consistent with the average interest bearing deposit growth noted above,
average SSUAR balances increased
September 30, 2022 compared to the same period of 2021. ? Average FHLB advances decreased$10 million for the three months ended
outstanding FHLB advances either matured or were paid off by the end of 2021.
? Subordinated debentures totaling
acquisition during the first quarter of 2022. Total interest expense increased$3.6 million for the three months endedSeptember 30, 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 percentage cost of interest bearing liabilities increased 27 bps to 0.43% for the three months endedSeptember 30, 2022 compared to the same period of 2021.
? Total interest bearing deposit expense increased
acquisition-related growth and the aforementioned deposit rate increases,
resulting in a 24 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.
? SSUAR interest expense increased
30, 2022 compared to the same period of the prior year, consistent with the
average balance growth and deposit rate increases noted above for interest
bearing deposits.
? Interest expense totaling
the CB acquisition, approximately$100,000 of which stems from purchase accounting-related mark-to-market amortization.
? No interest expense on FHLB advances was recorded for the three months ended
2021, resulting in a decline of
prior year.
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Net Interest Income (FTE) - Nine months ended
Net interest spread (FTE) and NIM were 3.16% and 3.25%, for the nine months
ended
2021, respectively. NIM during the nine months ended
significantly 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 the FRB's hike in
stood at a range of 3.00% - 3.25%, and Prime at 6.25%, as of
2022 as a result of aggressive interest rate action from the FRB over the past
two quarters. ? Substantial balance sheet growth stemming from both acquisition-related
activity and organic growth, which resulted in total average earning asset
growth of
of$1.30 billion , or 40%, for the nine months endedSeptember 30, 2022 compared to the same period of 2021.
? Overall excess balance sheet liquidity, which contributed to NIM compression
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 continued to decline 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
for the nine months ended
2021.
Net interest income (FTE) increased
ended
result of acquisition-related activity, but also driven in part by strong
organic loan growth, substantial investment in the investment securities
portfolio and the benefits of a rising interest rate environment.
Total average interest earning assets increased$1.85 billion , or 36%, to$6.94 billion for the nine months endedSeptember 30, 2022 , as compared to the same period of 2021, with the average rate earned on total interest earning assets unchanged at 3.41%.
? Average total loan balances increased
months ended
non-PPP loan growth of
acquisition-related expansion and strong organic growth, which was partially
offset by a
forgiveness activity increased.
? Average investment securities grew
September 30, 2022 compared to the same period of 2021, attributed to a combination of strategically deploying excess liquidity through further investment and acquisition-related activity. ? Average FFS and interest bearing due from bank balances increased$196
million, or 54%, for the nine months ended
excess balance sheet liquidity. Total interest income (FTE) increased$47.3 million , or 36%, to$177.2 million for the nine months endedSeptember 30, 2022 , as compared to the same period of 2021.
? Interest and fee income (FTE) on loans increased
same 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
overall loan portfolio climbed to 4.31% for the nine months ended September
30, 2022, compared 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 nine months ended
22%, 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.
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? Interest income on FFS and interest bearing due from bank balances increased
average balance growth stemming from excess balance sheet liquidity and rising
short term interest rates. The yield on these assets increased 79 bps to 0.92%
for the nine months ended
2021, stemming from the dramatic increase in the FFTR over the past several
months. Total average interest bearing liabilities increased$1.30 billion , or 40%, to$4.52 billion for the nine month period endedSeptember 30, 2022 compared with the same period in 2021, with the total average cost increasing 6 bps to 0.25%.
? Average interest bearing deposits increased
nine months ended
interest-bearing demand deposits accounting for
increase. The significant growth was attributed to both acquisition-related
activity and organic growth stemming from the general trend of customers
maintaining higher levels of liquidity over the past several quarters.
However, excluding acquisition-related activity, period-end deposit balances
have declined in 2022, driven largely by seasonal fluctuation in public funds
and time deposit attrition.
? Consistent with the average interest bearing deposit growth noted above,
average SSUAR balances increased$66 million , for the nine months endedSeptember 30, 2022 compared to the same period of 2021. ? Average FHLB advances decreased$19 million for the nine months ended
outstanding FHLB advances either matured or were paid off by the end of 2021.
? Subordinated debentures totaling
acquisition during the first quarter of 2022. The corresponding average
balance for the nine months ended
Total interest expense increased$3.7 million , or 79%, for the nine months endedSeptember 30, 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 percentage cost of interest bearing liabilities increased 6 bps to 0.25% for the nine months endedSeptember 30, 2022 compared to the same period of 2021.
? Total interest bearing deposit expense increased
result of acquisition-related activity and the aforementioned deposit rate
increases, resulting in a 4 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.
? Interest expense totaling
the CB acquisition, approximately$232,000 of which stems from purchase accounting-related mark-to-market amortization.
? No interest expense on FHLB advances was recorded for the nine months ended
of 2021, resulting in a decline of
prior year.
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Average Balance Sheets and Interest Rates (FTE) - Three-Month Comparison
Three months ended September 30,
2022 2021
Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate
Interest earning assets:
Federal funds sold and interest
bearing due from banks $ 442,880 $ 2,450 2.19 % $ 532,549 $ 208 0.15 %
Mortgage loans held for sale 8,694 103 4.70 8,875 53 2.37
Investment securities:
Taxable 1,677,745 7,503 1.77 1,009,674 3,206 1.26
Tax-exempt 91,852 534 2.31 25,038 122 1.93
Total securities 1,769,597 8,037 1.80 1,034,712 3,328 1.28
Federal Home Loan Bank stock 11,712 172 5.83 11,364 83 2.90
SBA Paycheck Protection Program
(PPP) loans 22,939 703 12.16 281,420 4,423 6.24
Non-PPP loans 4,925,959 56,177 4.52 3,891,840 39,013 3.98
Total loans 4,948,898 56,880 4.56 4,173,260 43,436 4.13
Total interest earning assets 7,181,781 67,642 3.74 5,760,760 47,108 3.24
Less allowance for credit losses
on loans 67,473 61,324
Non-interest earning assets:
Cash and due from banks 88,434 65,682
Premises and equipment, net 117,296 77,855
Bank owned life insurance 81,841 52,631
Goodwill 198,634 136,369
Accrued interest receivable and
other 61,207 107,203
Total assets $ 7,661,720 $ 6,139,176
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 2,213,657 $ 2,536 0.45 % $ 1,700,631 $ 470 0.11 %
Savings 566,045 171 0.12 400,288 37 0.04
Money market 1,168,111 1,524 0.52 965,518 168 0.07
Time 497,170 218 0.17 459,348 728 0.63
Total interest bearing deposits 4,444,983 4,449 0.40
3,525,785 1,403 0.16
Securities sold under agreements to repurchase 139,749 176 0.50 71,065 6 0.03 Federal funds purchased 8,985 50 2.21 10,983 5 0.18 Federal Home Loan Bank advances - - 0.00 10,000 51 2.02 Subordinated debentures 26,210 359 5.43 - - 0.00 Total interest bearing liabilities 4,619,927 5,034 0.43 3,617,833 1,465 0.16 Non-interest bearing liabilities: Non-interest bearing demand deposits 2,169,280 1,771,432 Accrued interest payable and other 112,191 89,812 Total liabilities 6,901,398 5,479,077 Stockholders' equity 760,322 660,099 Total liabilities and stockholders' equity$ 7,661,720 $ 6,139,176 Net interest income$ 62,608 $ 45,643 Net interest spread 3.31 % 3.08 % Net interest margin 3.46 % 3.14 % 84
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Average Balance Sheets and Interest Rates (FTE) - Nine-Month Comparison
Nine months ended September 30,
2022 2021
Average Average Average Average
(dollars in thousands) Balance Interest Rate Balance Interest Rate
Interest earning assets:
Federal funds sold and interest
bearing due from banks $ 557,578 $ 3,845 0.92 % $ 361,713 $ 358 0.13 %
Mortgage loans held for sale 9,542 177 2.48 10,703 175 2.19
Investment securities:
Taxable 1,557,119 18,988 1.63 813,199 8,245 1.36
Tax-exempt 74,093 1,320 2.38 18,030 228 1.69
Total securities 1,631,212 20,308 1.66 831,229 8,473 1.36
Federal Home Loan Bank stock 12,015 328 3.65 11,312 204 2.41
SBA Paycheck Protection Program
(PPP) loans 62,933 4,680 9.94 473,185 18,359 5.19
Non-PPP loans 4,663,438 147,841 4.24 3,403,454 102,285 4.02
Total loans 4,726,371 152,521 4.31 3,876,639 120,644 4.16
Total interest earning assets 6,936,718 177,179 3.41 5,091,596 129,854 3.41
Less allowance for credit losses
on loans 63,857 57,620
Non-interest earning assets:
Cash and due from banks 92,890 55,707
Premises and equipment, net 105,994 66,818
Bank owned life insurance 62,924 41,962
Goodwill 184,404 67,674
Accrued interest receivable and
other 79,238 97,984
Total assets $ 7,398,311 $ 5,364,121
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 2,199,702 $ 4,169 0.25 % $ 1,515,903 $ 1,242 0.11 %
Savings 536,680 277 0.07 303,150 59 0.03
Money market 1,138,848 2,174 0.26 902,040 423 0.06
Time 495,609 770 0.21 413,885 2,624 0.85
Total interest bearing deposits 4,370,839 7,390 0.23
3,134,978 4,348 0.19
Securities sold under agreements to repurchase 123,845 250 0.27 57,980 16 0.04 Federal funds purchased 9,515 72 1.01 10,505 11 0.14 Federal Home Loan Bank advances - - 0.00 19,398 301 2.07 Subordinated debentures 20,191 670 4.44 - - 0.00 Total interest bearing liabilities 4,524,390 8,382 0.25 3,222,861 4,676 0.19 Non-interest bearing liabilities: Non-interest bearing demand deposits 2,038,168 1,517,423 Accrued interest payable and other 97,362 82,599 Total liabilities 6,659,920 4,822,883 Stockholders' equity 738,391 541,238 Total liabilities and stockholders' equity$ 7,398,311 $ 5,364,121 Net interest income$ 168,797 $ 125,178 Net interest spread 3.16 % 3.22 % Net interest margin 3.25 % 3.29 % 85
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Supplemental Information - Average Balance Sheets and Interest Rates (FTE)
? Average loan balances include the principal balance of non-accrual loans, as
well as unearned income such as loan premiums, discounts, fees/costs and
exclude participation loans accounted for as secured borrowings. Participation
loans averaged
2022 and 2021, respectively. Participation loans averaged
million for the nine-month periods endedSeptember 30, 2022 and 2021, respectively.
? Interest income on a FTE basis includes additional amounts of interest income
that would have been earned if investments in certain tax-exempt interest
earning assets had been made in assets subject to federal taxes yielding the
same after-tax income. Interest income on municipal securities and tax-exempt
loans has been calculated on a FTE basis using a federal income tax rate of
21%. Approximate tax equivalent adjustments to interest income were
and
respectively, and
September 30, 2022 and 2021, respectively.
? Interest income includes loan fees of
the PPP) and
three-month periods ended
million (
million associated with the PPP) for the nine-month periods ended September
30, 2022 and 2021. Interest income on loans may be materially impacted by the
level of prepayment fees collected and accretion related to purchased loans.
? Net interest income, the most significant component of Bancorp's earnings,
represents total interest income less total interest expense. The level of net
interest income is determined by mix and volume of interest earning assets,
interest bearing deposits and borrowed funds, and changes in interest rates.
? NIM represents net interest income on a FTE basis as a percentage of total
average interest earning assets.
? Net interest spread (FTE) is the difference between taxable equivalent rates
earned on total interest earning assets less the cost of interest bearing
liabilities.
? The fair market value adjustment on investment securities resulting from ASC
320, "Investments - Debt and Equity Securities" is included as a component of
other assets.
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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 funding requirements.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results. The results of the interest rate sensitivity analysis performed as ofSeptember 30, 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 65%. However, given the level of liquidity currently held by Bancorp and in the banking system generally, the Company anticipates actual deposit betas will remain well below long-term averages through the end of 2022. The anticipated lower deposit beta would result in the Company's interest rate sensitivity position turning slightly asset sensitive. Further, Bancorp expects to realize further benefits to net interest income and NIM from both the recent hikes and anticipated future hikes in the quarters ahead. 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 also have a negative effect on net interest income. These results depict a relatively neutral 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. Asset balances subject to immediate repricing cause an estimated decline in net interest income in the down 100 and 200 bps scenarios, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below. Change in Rates -200 -100 +100 +200 +300 Basis Points Basis Points Basis Points Basis Points Basis Points % Change from base net interest income at September 30, 2022 -8.28 % -0.42 % -0.42 % -0.56 % -1.11 % Bancorp's loan portfolio is currently composed of approximately 69% fixed and 31% 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. 87
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As ofSeptember 30, 2022 , the Company had approximately$455 million in loans and$140 million (notional amount) in interest rate derivative contracts that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. The Company had$76 million in loans that were indexed to SOFR atSeptember 30, 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 has historically used derivative financial instruments as part of its interest rate risk management, including interest rate swaps designated as cash flow hedges. For these derivatives, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction impacts earnings. As ofSeptember 30, 2022 , Bancorp had no outstanding interest rate swaps designated as cash flow hedges. 88
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Table of Contents Provision for Credit Losses Provision for credit losses on loans atSeptember 30, 2022 represents the amount of expense that, based on Management's judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the Footnote titled "Basis of Presentation and Summary of Significant Accounting Policies" for detailed discussion regarding Bancorp's ACL methodology by loan segment in this document and Bancorp's Annual Report on Form 10-K for the year endedDecember 31, 2021 . An analysis of the changes in the ACL for loans, including provision, and selected ratios follow: Three months ended Nine months ended September 30, September 30, (dollars in thousands) 2022 2021 2022 2021 Beginning balance$ 66,362 $ 59,424 $ 53,898 $ 51,920 Acquisition - PCD loans (goodwill adjustment) - - 9,950 6,757 Adjusted beginning balance 66,362 59,424
63,848 58,677
Provision for credit losses - loans 4,103 (1,000 ) 1,653 (4,900 ) Provision for credit losses - acquired loans - - 4,429 7,397 Total provision for credit losses on loans 4,103 (1,000 ) 6,082 2,497 Total charge-offs (926 ) (2,215 ) (1,705 ) (5,779 ) Total recoveries 544 324 1,858 1,138 Net loan (charge-offs) recoveries (382 ) (1,891 ) 153 (4,641 ) Ending balance$ 70,083 $ 56,533 $ 70,083 $ 56,533 Average total loans$ 4,948,898 $ 4,173,260 $ 4,726,371 $ 3,876,639 Provision for credit losses on loans to average total loans (1) 0.08 % -0.02 % 0.13 % 0.06 % Net loan (charge-offs) recoveries to average total loans (1) -0.01 % -0.05 % 0.00 % -0.12 % ACL for loans to total loans 1.38 % 1.35 % 1.38 % 1.35 % ACL for loans to total loans (excluding PPP) (2) 1.39 % 1.43 % 1.39 % 1.43 % ACL for loans to average total loans 1.42 % 1.35 % 1.48 % 1.46 % (1) Ratios are not annualized (2) See the section titled "Non-GAAP Financial Measures" for reconcilement of Non-GAAP to GAAP measures The ACL for loans totaled$70 million as ofSeptember 30, 2022 compared to$54 million atDecember 31, 2021 , representing an ACL to total loans ratio of 1.38% and 1.29% for those periods, respectively. The ACL to loans (excluding PPP loans) was 1.39% atSeptember 30, 2022 compared to 1.34% atDecember 31, 2021 . Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled$19 million atSeptember 30, 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 of$4.1 million was recorded to provision for credit losses on loans expense for the three month period endedSeptember 30, 2022 , driven by strong third quarter loan growth and to a lesser extent, a negative economic forecast. For the second consecutive quarter, the projected unemployment rate forecast, which is the primary loss driver with Bancorp's CECL model, increased due to inflation and recession-based concerns. Further, net charge off activity for the three months endedSeptember 30, 2022 totaled$382,000 , serving to reduce the ACL for loans slightly. Provision expense (excluding acquisition-related activity) of$1.7 million was recorded for the nine month period endedSeptember 30, 2022 . Strong loan growth, the aforementioned increase in the projected unemployment rate forecast, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, have been the main drivers of expense within the CECL model for 2022. Further, net charge off/recovery activity for the nine months endedSeptember 30, 2022 has been minimal. However, the release of approximately$3.0 million in specific reserves within the ACL for individual loans related to recently acquired individual loans that ultimately paid off during the second quarter with no loss or charge-off realized by Bancorp partially offset the expense drivers noted above for nine month periods endingSeptember 30, 2022 . 89
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Credit loss expense recorded for the acquired CB loan portfolio totaled$4.4 million and was recorded in the first quarter of 2022 upon closing of the CB acquisition, bringing total provision for credit losses on loans to$6.1 million for the nine months endedSeptember 30, 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). Negative provision of$1 million was recorded for the three months endedSeptember 30, 2021 , driven mainly by the benefits of improvement in the unemployment forecast for the period. Provision for credit loss expense of$2.5 million was recorded for the nine months endedSeptember 30, 2021 , as the benefits of an improving unemployment forecast in that period were more than offset by expense associated with the non-PCD loan portfolio added through the KB acquisition. 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 andSeptember 30, 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 credit exposures of$800,000 was also recorded for the nine month period endedSeptember 30, 2022 , driven largely by the addition of new lines of credit, and thus increased availability, largely within the C&D portfolio. The ACL for off balance sheet credit exposures ended at$4.8 million as ofSeptember 30, 2022 compared to$3.5 million as ofDecember 31, 2021 . 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 atSeptember 30, 2022 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date. 90
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Non-interest Income
Three months ended September 30, Nine months ended September 30,
(dollars in
thousands) 2022 2021 $ Variance % Variance 2022 2021 $ Variance % Variance
Wealth management
and trust services $ 9,152 $ 7,128 $ 2,024 28 % $ 26,890 $ 20,234 $ 6,656 33 %
Deposit service
charges 2,179 1,768 411 23 6,103 3,945 2,158 55
Debit and credit
card income 4,710 3,887 823 21 13,577 9,444 4,133 44
management fees 2,221 1,771 450 25 6,312 5,041 1,271 25 Mortgage banking income 703 915 (212 ) (23 ) 3,001 3,662 (661 ) (18 ) Net investment product sales commissions and fees 892 780 112 14 2,230 1,789 441 25 Bank owned life insurance 516 275 241 88 1,052 642 410 64 Gain on sale of premises 3,074 - 3,074 100 3,074 - 3,074 100 Other 1,417 1,090 327 30 3,768 2,489 1,279 51 Total non-interest income$ 24,864 $ 17,614 $ 7,250 41 %$ 66,007 $ 47,246 $ 18,761 40 % Total non-interest income increased$7.3 million , or 41%, and$18.8 million , or 40%, for the three and nine month periods endedSeptember 30, 2022 compared to the same periods of 2021, respectively. Non-interest income comprised 28.5% and 28.2% of total revenues, defined as net interest income and non-interest income, for the three and nine month periodsSeptember 30, 2022 compared to 27.9% and 27.4% for the same periods of 2021. WM&T services comprised 36.8% and 40.7% of total non-interest income for the three and nine month periods endedSeptember 30, 2022 compared to 40.5% and 42.8% for the same periods of 2021. Acquisition-related activity has driven a significant portion of the non-interest income increase for the three and nine month periods endedSeptember 30, 2022 compared to the same periods of the prior year. WM&T Services: The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased$2.0 million , or 28%, and$6.7 million , or 33%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021. Significant growth in AUM drove the increases for both periods, consistent with both acquisition-related activity and organic new business development. However, significant declines in both fixed income and equity markets have weighed heavily on WM&T revenue in 2022, particularly for the three months endedSeptember 30, 2022 . Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased$2.0 million , or 31%, and$6.7 million , or 35%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021. The increase was driven by both acquisition-related activity 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 corresponds with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees decreased$138,000 and$203,000 for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021, which was driven mainly by lower estate fee income earned. AUM, stated at market value, totaled$6.30 billion atSeptember 30, 2022 compared with$4.51 billion atSeptember 30, 2021 and$4.80 billion atDecember 31, 2021 . The large increase in AUM betweenSeptember 30, 2021 andSeptember 30, 2022 is attributed mainly to AUM of$2.65 billion added through the CB acquisition, as well as organic net new business growth over the past twelve months. 91
-------------------------------------------------------------------------------- Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp's financial results and provide strategic diversity to revenue streams.
Detail of WM&T Service Income by Account Type:
Three months ended September 30, Nine months ended September 30,
(in thousands) 2022 2021 2022 2021
Investment advisory $ 3,585 $ 3,148 $ 10,157 $ 8,823
Personal trust 3,025 1,855 9,898 5,481
Personal investment retirement 1,677 1,330 4,551 3,823
Company retirement 425 503 1,192 1,302
Foundation and endowment 284 208 774 581
Custody and safekeeping 107 40 207 112
Insurance services 15 25 55 69
Other 34 19 56 43
Total WM&T services income $ 9,152 $ 7,128 $ 26,890 $ 20,234
The preceding table demonstrates that WM&T fee revenue is concentrated within
investment advisory and personal trust accounts. WM&T fees are predominantly
based on AUM and tailored for individual/company accounts and/or relationships
with fee structures customized based on account type and other factors with
larger relationships paying a lower percentage of AUM in fees. For example,
recurring AUM fee structures are in place for investment management, irrevocable
trusts, revocable trusts, personal investment retirement accounts and accounts
holding only fixed income securities. Company retirement plan services can
consist of a one-time conversion fee with recurring AUM fees to follow. While
there are also fee structures for estate settlements, income received is often
non-recurring in nature. Fee structures are agreed upon at the time of account
opening and any subsequent revisions are communicated in writing to the
customer. Fees earned are not performance-based nor are they based on investment
strategy or transactions. Bancorp also earns management fees on in-house
investment funds acquired from CB.
Assets Under Management by Account Type:
AUM (not included on balance sheet) increased from
2021
September 30, 2022 December 31, 2021
(in thousands) Managed Non-managed (1) Total Managed Non-managed (1) Total
Investment advisory $ 2,097,746 $ 59,536 $ 2,157,282 $ 1,919,593 $ 34,879 $ 1,954,472
Personal trust 1,675,389 461,899 2,137,288 939,703 150,221 1,089,924
Personal investment
retirement 715,799 25,581 741,380 620,312 3,478 623,790
Company retirement 48,844 549,658 598,502 35,234 599,129 634,363
Foundation and endowment 406,637 7,476 414,113 368,572 1,532 370,104
Subtotal $ 4,944,415 $ 1,104,150 $ 6,048,565 $ 3,883,414 $ 789,239 $ 4,672,653
Custody and safekeeping - 244,923 244,923 - 128,178 128,178
Total $ 4,944,415 $ 1,349,073 $ 6,293,488 $ 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 of
respectively, of AUM were actively managed. Company retirement plan accounts
consist primarily of participant-directed assets. The amount of custody and
safekeeping accounts are insignificant.
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Managed Trust Assets under Management by Class of Investment:
September 30, December 31,
(in thousands) 2022 2021
Interest bearing deposits $ 166,039 $ 173,603
Treasury and government agency obligations 112,838
39,736
State, county and municipal obligations 192,378 110,795 Money market mutual funds 100,558 7,299 Equity mutual funds 1,068,664 944,500 Other mutual funds - fixed, balanced and municipal 617,302
612,913
Common trust funds and collective investment funds 119,939 - Other notes and bonds 204,046 171,087 Common and preferred stocks 2,012,449 1,681,006 Real estate mortgages 778 - Real estate 62,411 58,344 Other miscellaneous assets (1) 287,013 84,131 Total managed assets$ 4,944,415 $ 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 62% in equities and 38% in fixed income securities as ofSeptember 30, 2022 compared to 68% and 32% as ofDecember 31, 2021 . This composition has remained relatively consistent from period to period.
Additional Sources of Non-interest income:
Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, increased$411,000 , or 23%, and$2.2 million , or 55%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021, mainly as a result of the contribution associated with acquisition-related activity over the past twelve 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$823,000 , or 21%, and$4.1 million , or 44%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods 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$503,000 , or 18%, and$2.9 million , or 43%, and total credit card income increased$320,000 , or 28%, and$1.3 million , or 45%, for the three and nine month periods endedSeptember 30, 2022 , compared the same periods of the prior year. Bancorp expects this revenue stream will continue to grow with the expansion of the customer base.Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased$450,000 , or 25%, and$1.3 million , or 25%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021, driven by increased transaction volume, new product sales and customer base expansion. Both organic and acquisition-related sales efforts have led to the expansion of online services, reporting, ACH origination, remote deposit and fraud mitigation services over the past twelve months. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp's treasury management platform. 93
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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$212,000 , or 23%, and$661,000 , or 18%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021. Overall volume has 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 three and nine month period declines noted above, mortgage banking income has benefitted from the addition of the mortgage loan servicing portfolio added through the CB acquisition, which serviced approximately$1.48 billion in mortgage loans at the time it was acquired. Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees earned on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of account assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced by Bancorp'sWM&T Department . Net investment product sales commissions and fees increased$112,000 , or 14%, and$441,000 , or 25%, for the three and nine month periods endedSeptember 30, 2022 , as compared with the same periods of 2021, driven by acquisition-related growth, which included the addition of three financial advisors, and increased trading activity associated with general market volatility. BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. During the third quarter of 2022, Bancorp purchased an additional$30 million of BOLI assets in an effort to diversify investment of excess liquidity, bringing total BOLI assets to$84 million as ofSeptember 30, 2022 . BOLI income increased$241,000 , or 88%, and$410,000 , or 64%, for the three and nine month periods endingSeptember 30, 2022 compared to the same periods 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. During the third quarter of 2022, Bancorp completed the sale of certain acquired properties that overlapped with existing locations, recording a gain of$3.1 million as a result. No such activity was recorded in 2021. Other non-interest income increased$327,000 , or 30%, and$1.3 million , or 51%, for the three and nine month periods endedSeptember 30, 2022 compared with the same periods of 2021. The increases were driven largely by the contribution from LFA, a financial advising firm added through the CB acquisition, the insurance captive acquired through the KB acquisition in May of 2021 and an increase in other miscellaneous fee income. 94
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Non-interest Expenses
Three months ended September 30, Nine months ended September 30,
(dollars in
thousands) 2022 2021 $ Variance % Variance 2022 2021 $ Variance % Variance
Compensation $ 23,069 $ 17,381 $ 5,688 33 % $ 63,242 $ 45,888 $ 17,354 38 %
Employee benefits 4,179 3,662 517 14 13,147 10,290 2,857 28
Net occupancy and
equipment 3,767 2,732 1,035 38 10,455 7,021 3,434 49
Technology and
communication 3,747 3,173 574 18 11,150 8,189 2,961 36
Debit and credit
card processing 1,437 1,479 (42 ) (3 ) 4,439 3,160 1,279 40
Marketing and
business
development 1,244 1,011 233 23 3,461 2,357 1,104 47
Postage, printing
and supplies 903 630 273 43 2,461 1,499 962 64
Legal and
professional 774 700 74 11 2,451 1,828 623 34
FDIC insurance 847 387 460 119 2,028 1,141 887 78
Amortization of
investments in tax
credit
partnerships 88 53 35 66 265 315 (50 ) (16 )
Capital and
deposit based
taxes 722 556 166 30 1,822 1,541 281 18
Merger expenses - 525 (525 ) (100 ) 19,500 19,025 475 2
FHLB early
termination
penalty - - - 0 - 474 (474 ) (100 )
Intangible
amortization 1,610 290 1,320 455 3,934 494 3,440 696
Other 2,486 1,979 507 26 7,490 4,486 3,004 67
Total non-interest
expenses $ 44,873 $ 34,558 $ 10,315 30 % $ 145,845 $ 107,708 $ 38,137 35 %
Total non-interest expenses increased $10.3 million , or 30%, and $38.1 million ,
or 35%, for the three and nine month periods ended September 30, 2022 compared
to the same periods of 2021, the variances stemming largely from the CB and KB
acquisitions. Compensation and employee benefits comprised 60.7% and 52.4% of
Bancorp's total non-interest expenses for the three and nine month periods ended
September 30, 2022 , compared to 60.9% and 52.2% for the same periods of 2021.
Excluding merger expenses, compensation and employee benefits comprised 60.7%
and 60.5% for the three and nine month periods ended September 30, 2022 ,
compared to 61.8% and 63.3% for the same periods of 2021.
Compensation, which includes salaries, incentives, bonuses and stock based
compensation, increased $5.7 million , or 33%, and $17.4 million , or 38%, for the
three and nine month periods ended September 30, 2022 , as compared with the same
periods of 2021. The increases were attributed largely to growth in full time
equivalent employees, as well as annual merit-based salary increases. Net full
time equivalent employees totaled 1,028 at September 30, 2022 compared to 820 at
December 31, 2021 and 793 at September 30, 2021 . The acquisitions of KB in May
of 2021 and CB in the first quarter of 2022 resulted in the addition of 372 full
time equivalent employees and the correlating increase in compensation expense.
Employee benefits consists of all personnel-related expense not included in
compensation, with the most significant items being health insurance, payroll
taxes and employee retirement plan contributions. Employee benefits increased
$517,000 , or 14%, and $2.9 million , or 28%, for the three and nine month periods
ended September 30, 2022 , as compared with the same periods of 2021, driven
primarily by the overall increase in full time equivalent employees noted above.
Net occupancy and equipment expenses primarily include depreciation, rent,
property taxes, utilities and maintenance. Costs of capital asset additions flow
through the statement of income over the lives of the assets in the form of
depreciation expense. Net occupancy expense increased $1.0 million , or 38%, and
$3.4 million , or 49%, for the three and nine month periods ended September 30,
2022 , as compared with the same periods of 2021, driven by the two acquisitions
completed over the past twelve months. In connection with the CB acquisition, 15
branches were acquired, four of which were closed shortly after acquisition in
addition to one existing SYB location, as a result of branch overlap. The KB
acquisition in May of 2021 resulted in the addition of 19 branch locations in
addition to operational buildings. At September 30, 2022 , Bancorp's branch
network consists of 73 locations throughout Louisville , central, eastern and
Northern Kentucky , as well as the MSAs of Indianapolis, Indiana and Cincinnati,
Ohio .
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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$574,000 , or 18%, and$3.0 million , or 36%, for the three and nine month periods endedSeptember 30, 2022 compared to the same periods of 2021, 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 typically fluctuate consistent with transaction volumes. Debit and credit card processing expense decreased$42,000 , or 3%, and increased$1.3 million , or 40%, for the three and nine month periods endingSeptember 30, 2022 compared to the same periods of last year. The decrease for the three month period stems from expenses incurred in the prior year period associated with the timing of the KB core conversion. The increase for the nine month period correlates in part with the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related growth that served to increase corresponding debit and credit card non-interest income. Marketing and business development expenses include all costs associated with promoting Bancorp including community support, retaining customers and acquiring new business. Marketing and business development expenses increased$233,000 , or 23%, and$1.1 million , or 47%, for the three and nine month periods endingSeptember 30, 2022 , as compared to the same periods of 2021. The increases correspond with strategic decisions to advertise and promote in Bancorp's new markets, as well as the general expansion of Bancorp's existing and prospective customer base and a post-pandemic return to in-person client meeting/entertainment. Postage, printing and supplies expense increased$273,000 , or 43%, and$962,000 , or 64%, for the three and nine month periods endedSeptember 30, 2022 compared to the same periods of 2021, consistent with increased customer communication and Bancorp's expansion tied to acquisition-related activity over the past twelve months. Legal and professional fees increased$74,000 , or 11%, and$623,000 , or 34%, for the three and nine month periods endedSeptember 30, 2022 compared to the same periods of last year, attributed to various consulting engagements, collection-related expenses and litigation costs arising through the normal course of business. Legal and professional fees associated with merger-related activity are captured in merger expenses.FDIC insurance increased$460,000 , or 119%, and$887,000 , or 78%, for the three and nine month periods endedSeptember 30, 2022 , as compared to the same periods of 2021, consistent with organic and acquisition-related balance sheet growth for which the insurance is assessed on, and to a lesser extent, an increased assessment rate. Tax credit partnerships generate federal income tax credits, and for each of Bancorp's investments in tax credit partnerships, the tax benefit, net of related expenses, results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon the timing and magnitude of the underlying investments. Amortization expense associated with these investments increased$35,000 and decreased$50,000 for the three and nine month periods endingSeptember 30, 2022 compared to the same periods of last year. Capital and deposit based taxes, which consist primarily of capital-based local income taxes and franchise taxes, increased$166,000 , or 30%, and$281,000 , or 18%, for the three and nine month periods endedSeptember 30, 2022 compared to the same periods of 2021, attributed to both organic and acquisition-related growth. Merger expenses represent non-recurring expenses associated with completion of the CB acquisition and consist primarily of investment banker fees, various compensation-related expenses, legal fees, early termination fees relating to various contracts and system conversion expenses. Merger expenses totaled$0 and$19.5 million for the three and nine month periods endedSeptember 30, 2022 , compared to$0 and$19.0 million for the same periods of 2021. During the nine months endedSeptember 30, 2021 , an early termination fee of$474,000 was recorded in relation to the pre-payment of FHLB advances totaling$14 million prior to their respective 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. Bancorp currently has no FHLB advances outstanding. 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 three and nine month periods endedSeptember 30, 2022 was$1.6 million and$3.9 million , respectively, compared to$290,000 and$494,000 for the same periods of the prior year, the significant increase stemming from the CB acquisition. 96
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Other non-interest expenses increased$507,000 and$3.0 million for the three and nine month periods endedSeptember 30, 2022 , as compared to the same periods of 2021. The most notable drivers of the increases 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 past twelve months. Bancorp's efficiency ratio (FTE) for the three month period endedSeptember 30, 2022 was 51.30%, while the ratio for the corresponding nine month period was 62.11%, the latter reflecting one-time merger-related expenses attributed to the CB acquisition, which were all recorded in the first quarter of 2022. Bancorp's efficiency ratio for the three and nine month periods endedSeptember 30, 2021 was 54.63% and 62.47%. Bancorp also considers an adjusted efficiency ratio, which eliminates net gains (losses) on sales, calls, and impairment of investment securities, as well as net gains (losses) on sales of 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 was 53.06% and 54.41% for the three and nine month periods endedSeptember 30, 2022 compared to 53.72% and 51.25% for three and nine months endedSeptember 30, 2021 . See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. Income Tax Expense
A comparison of income tax expense and ETR follows:
Three months ended September 30, Nine months ended September 30,
(dollars in
thousands) 2022 2021 $ Variance % Variance 2022 2021 $ Variance % Variance
Income before
income tax
expense $ 37,564 $ 30,064 $ 7,500 25 % $ 81,400 $ 63,283 $ 18,117 29 %
Income tax
expense 9,024 6,902 2,122 31 18,016 13,227 4,789 36
Effective tax
rate 24.0 % 23.0 % 100 bps 4 22.1 % 20.9 % 120 bps 6
Fluctuations in the ETR are primarily attributed to the following:
? The stock based compensation component of the ETR fluctuates consistent with
the level of SAR exercise activity. The ETR was reduced 1.3% for the nine
month period ended
same period of 2021, as a result of increased levels of 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 0.6%
for the nine months ended
the same period of the prior year.
? Bancorp invests in certain partnerships that yield federal income tax credits.
Taken as a whole, the tax benefit of these investments exceeds amortization
expense, resulting in a positive impact on net income. The timing and
magnitude of these transactions may vary widely from period to period. The ETR
for the three months ended
1.1%, respectively. The ETR for the nine months ended
2021 was reduced by 0.6% and 0.8%, respectively.
? Tax-exempt interest income earned on loans and investment securities reduced
the ETR 0.7% for the nine month period ended
reduction of 0.3% 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 acquisitions over the past twelve months.
? Non-deductible merger expenses recorded during the nine month period ended
0.5% for the same period of 2021. ? As a result of the KB acquisition in May of 2021, Bancorp acquired an
insurance captive. The Captive provides insurance against certain risks for
which insurance may not currently be available or economically feasible to
Bancorp and SYB, as well as a group of third-party insurance captives. The tax
advantages of the Captive, including the tax-deductible nature of premiums
paid to the Captive as well as the tax-exemption for premiums received by the
Captive, serve to reduce income tax expense. Related activity reduced the ETR
0.3% for the nine month period ended
of 0.2% for the same period of 2021.
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Financial Condition -
Overview Total assets increased$908 million , or 14%, to$7.55 billion atSeptember 30, 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 (net of purchase accounting adjustments) and total investment securities of$247 million . In addition, goodwill of$67 million was recorded in relation to the transaction. Total loans (excluding loans added through the CB acquisition and the PPP portfolio) grew$395 million , or 10%, betweenDecember 31, 2021 andSeptember 30, 2022 . Total liabilities increased$853 million , or 14%, to$6.82 billion atSeptember 30, 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 as a result of the CB acquisition. Stockholders' equity increased$52 million , or 8%, to$728 million atSeptember 30, 2022 from$676 million atDecember 31, 2021 . Stock issued in relation to the CB acquisition, which totaled$134 million , and net income of$63.2 million were offset by a$120 million negative fluctuation in AOCI and dividends declared during the first nine months of 2022. The large decline in AOCI fromDecember 31, 2021 toSeptember 30, 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$631 million , or 66%, ending at$330 million atSeptember 30, 2022 compared to$961 million atDecember 31, 2021 . The decline stemmed mainly from loan growth, investment in the securities portfolio and seasonal deposit run-off. The average balance of cash and cash equivalents increased$233 million over the past twelve months, as Bancorp has maintained elevated levels of liquidity stemming from the PPP and deposit growth associated with both acquisition-related activity and the customer base maintaining higher deposit balances in general for several quarters. However, excluding acquisition-related activity, period-end deposit balances have declined in 2022, driven largely by seasonal fluctuation in public funds and time deposit attrition.Investment Securities Investment securities increased$447 million , or 38%, to$1.63 billion atSeptember 30, 2022 compared to$1.18 billion atDecember 31, 2021 . In addition to$247 million of securities being 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$640 million of debt securities during the nine months endedSeptember 30, 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$158 million stemming from an upward move in the interest rate environment experienced during the first three quarters of 2022. A portion of the securities added during the first quarter of 2022, through both acquisition and normal investment activity, were classified as HTM. As ofSeptember 30, 2022 , Bancorp's investment security portfolio consisted of AFS and HTM securities as detailed below: AFS HTM Total (in thousands) Carrying Investment September 30, 2022 Fair Value Value SecuritiesU.S. Treasury and otherU.S. Government obligations$ 114,426 $ 217,684 $ 332,110 Government sponsored enterprise obligations 151,299 27,666 178,965 Mortgage backed securities - government agencies 750,589 232,775 983,364 Obligations of states and political subdivisions 127,215 - 127,215 Other 5,644 - 5,644 Total investment securities$ 1,149,173 $ 478,125 $ 1,627,298 98
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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$22 million , or 28%, betweenDecember 31, 2021 andSeptember 30, 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 MSAs.
Premises held for sale totaling
consolidated balance sheets as of
properties, three of which were added through recent acquisitions and two legacy
operational buildings. Bancorp expects the sale of these properties to be
completed during the fourth quarter of 2022 or the first part of 2023.
Goodwill AtSeptember 30 2022 , Bancorp had$203 million in goodwill recorded on its balance sheet, including$67 million recorded with theMarch 7, 2022 acquisition of CB. As permitted under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities related to the CB acquisition. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price falling below tangible book value), negative trends in overall financial performance and regulatory action. 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 ofSeptember 30, 2022 andDecember 31, 2021 , Bancorp's CDI assets were$16 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 ofSeptember 30, 2022 , Bancorp's CLI assets totaled$13 million .
Other Assets and Other Liabilities
Other assets increased
2022
The increase in other assets stems largely from a$31 million increase in DTAs driven by the significant market depreciation experienced within the AFS debt securities portfolio for the nine months endedSeptember 30, 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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Loans
Composition of loans, net of deferred fees and costs, by primary loan portfolio
class follows:
September 30,
(dollars in thousands) 2022 December 31, 2021
$ Variance % Variance
Commercial real estate - non-owner occupied$ 1,415,180 $ 1,128,244$ 286,936 25 % Commercial real estate - owner occupied 819,727 678,405 141,322 21 % Total commercial real estate 2,234,907 1,806,649 428,258 24 % Commercial and industrial - term 751,193 596,710 154,483 26 % Commercial and industrial - term - PPP 19,469 140,734 (121,265 ) -86 % Commercial and industrial - lines of credit 419,048 370,312 48,736 13 % Total commercial and industrial 1,189,710 1,107,756 81,954 7 % Residential real estate - owner occupied 557,638 400,695 156,943 39 % Residential real estate - non-owner occupied 302,936 281,018 21,918 8 % Total residential real estate 860,574 681,713 178,861 26 % Construction and land development 414,632 299,206 115,426 39 % Home equity lines of credit 199,485 138,976 60,509 44 % Consumer 138,843 104,294 34,549 33 % Leases 13,959 13,622 337 2 % Credits cards 20,767 17,087 3,680 22 % Total loans (1)$ 5,072,877 $ 4,169,303$ 903,574 22 %
(1) Total loans are presented inclusive of premiums, discounts, and net loan
origination fees and costs.
Total loans increased$904 million , or 22%, fromDecember 31, 2021 toSeptember 30, 2022 , driven by the addition of$630 million in loans related to acquisition-related expansion and strong organic loan growth, which more than offset a$121 million decline in the PPP loan portfolio. Excluding the loans acquired through the CB acquisition and the PPP portfolio, loan growth of$395 million , or 10%, was experienced betweenDecember 31, 2021 andSeptember 30, 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 39.6% atSeptember 30, 2022 , led by C&I utilization, which strengthened from 23.9% to 29.5% over the same period, respectively. However, line of credit usage has remained below pre-pandemic levels, with customers continuing to maintain elevated levels of liquidity amidst current economic uncertainty. Further, the addition of new lines, particularly within the C&D and C&I portfolio segments, has increased availability through the first nine months of 2022, but utilization of the new lines has been relatively slow. PPP loans of$19 million were outstanding atSeptember 30, 2022 . Bancorp has$380,000 in net unrecognized fees related to the PPP as ofSeptember 30, 2022 , which will be recognized immediately once the loans are paid off or forgiven by the SBA. The timing of forgiveness activity and the related fee recognition has become less significant, as the balance of the overall portfolio has shrunk. Bancorp's credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer's ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp's current market areas, which encompassLouisville, Kentucky , central, eastern and northernKentucky , as well as theIndianapolis, Indiana andCincinnati, Ohio MSAs. Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I and CRE loan portfolio segments with a corresponding liability recorded in other liabilities. At bothSeptember 30, 2022 andDecember 31, 2021 , the total participated portion of loans of this nature totaled$5 million . 100
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The following table presents the maturity distribution and rate sensitivity of
the total loan portfolio as of
Maturity
September
30, 2022 After one After five
(in Within one but within but within Ater fifteen
thousands) year five years fifteen years years Total % of Total
Fixed rate $ 153,563 $ 1,452,152 $ 1,135,996 $ 767,099 $ 3,508,810 69 %
Variable
rate 540,558 552,963 421,562 48,984 1,564,067 31 %
Total
loans $ 694,121 $ 2,005,115 $ 1,557,558 $ 816,083 $ 5,072,877 100 %
In the event where Bancorp structures a loan with a maturity exceeding five
years (typically CRE loans), an automatic rate adjustment will typically be set
in place at five years from origination date to limit interest rate sensitivity.
Non-performing Loans and Assets
Information summarizing non-performing loans and assets follows:
(dollars in thousands) September 30, 2022 December 31, 2021 Non-accrual loans $ 10,580 $ 6,712 Troubled debt restructurings - 12 Loans past due 90 days or more and still accruing 32 684 Total non-performing loans 10,612 7,408 Other real estate owned 996 7,212 Total non-performing assets $ 11,608 $ 14,620 Non-performing loans to total loans 0.21 % 0.18 % Non-performing assets to total assets 0.15 % 0.22 % ACL for loans to total non-performing loans 660 % 728 % Non-performing assets as ofSeptember 30, 2022 consisted of 158 loans, ranging in individual amounts up to$1.5 million , and OREO. AtSeptember 30, 2022 , OREO included two CRE properties, one C&D property and one residential real estate property. 101
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The following table presents the recorded investment in non-accrual loans by portfolio: (in thousands) September 30, 2022 December 31, 2021 Commercial real estate - non-owner occupied $ 620 $ 720 Commercial real estate - owner occupied 3,227 1,748 Total commercial real estate 3,847 2,468 Commercial and industrial - term 1,474 670 Commercial and industrial - PPP 42 - Commercial and industrial - lines of credit 1,620 228 Total commercial and industrial 3,136 898 Residential real estate - owner occupied 2,468 1,997 Residential real estate - non-owner occupied 227 293 Total residential real estate 2,695 2,290 Construction and land development - - Home equity lines of credit 524 646 Consumer 366 410 Leases - - Credit cards 12 - Total non-accrual loans $ 10,580 $ 6,712 As ofSeptember 30, 2022 , non-accrual loans totaled$11 million . The increase in total non-accrual loans betweenDecember 31, 2021 andSeptember 30, 2022 stemmed mainly from non-accrual loans added through the CB acquisition. Delinquent Loans Delinquent loans (consisting of all loans 30 days or more past due) totaled$13 million and$11 million atSeptember 30, 2022 andDecember 31, 2021 . The increase betweenDecember 31, 2021 andSeptember 30, 2022 was driven mainly by two large C&I relationships that became delinquent. Delinquent loans to total loans were 0.26% at bothSeptember 30, 2022 andDecember 31, 2021 , respectively. 102
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Allowance for Credit Losses on Loans
The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled "Summary of Significant Accounting Policies" for discussion of Bancorp's ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp's judgment, should be charged-off.
The following table reflects activity in the ACL on loans for the three and nine
months ended
Initial
(in thousands) Allowance Provision for
Three Months Ended Beginning on PCD Credit Losses Ending
September 30, 2022 Balance Loans on Loans Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 20,723 $ - $ 502 $ (37 ) $ -$ 21,188 Commercial real estate - owner occupied 9,842 - (227 ) - 153 9,768 Total commercial real estate 30,565 - 275 (37 ) 153 30,956 Commercial and industrial - term 12,342 - 2,055 (466 ) 232 14,163 Commercial and industrial - lines of credit 5,000 - 203 (99 ) - 5,104 Total commercial and industrial 17,342 - 2,258 (565 ) 232 19,267 Residential real estate - owner occupied 5,988 - 423 (17 ) 2 6,396 Residential real estate - non-owner occupied 3,190 - 146 - 9 3,345 Total residential real estate 9,178 - 569 (17 ) 11 9,741 Construction and land development 6,214 - 731 - - 6,945 Home equity lines of credit 1,521 - 105 - - 1,626 Consumer 1,113 - 162 (307 ) 148 1,116 Leases 221 - (10 ) - - 211 Credit cards 208 - 13 - - 221 Total$ 66,362 $ - $ 4,103$ (926 ) $ 544 $ 70,083 Initial (in thousands) Allowance Provision for Nine Months Ended Beginning on PCD Credit Losses Ending September 30, 2022 Balance Loans on Loans
Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 15,960 $ 3,508 $ 1,744 $ (37 ) $ 13$ 21,188 Commercial real estate - owner occupied 9,595 2,121 (2,103 ) (41 ) 196 9,768 Total commercial real estate 25,555 5,629 (359 ) (78 ) 209 30,956 Commercial and industrial - term (1) 8,577 1,358 3,796 (594 ) 1,026 14,163 Commercial and industrial - lines of credit 4,802 1,874 (1,437 ) (135 ) - 5,104 Total commercial and industrial 13,379 3,232 2,359 (729 ) 1,026 19,267 Residential real estate - owner occupied 4,316 590 1,458 (30 ) 62 6,396 Residential real estate - non-owner occupied 3,677 - (349 ) - 17 3,345 Total residential real estate 7,993 590 1,109 (30 ) 79 9,741 Construction and land development 4,789 419 1,809 (72 ) - 6,945 Home equity lines of credit 1,044 2 580 - - 1,626 Consumer 772 78 565 (796 ) 497 1,116 Leases 204 - 7 - - 211 Credit cards 162 - 12 - 47 221 Total$ 53,898 $ 9,950 $ 6,082$ (1,705 ) $ 1,858 $ 70,083 103
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Bancorp's ACL for loans was$70 million as ofSeptember 30, 2022 compared to$54 million as ofDecember 31, 2021 . The change in the ACL for loans was driven by a number of competing factors, which resulted in the$16 million , or 30%, increase experienced for the first nine months of 2022. Acquisition-related activity 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. Provision for credit loss expense on loans (excluding acquisition-related activity) of$2 million was recorded for the first nine months of 2022, further increasing the ACL for loans. Increased expense within the CECL model was driven primarily by significant organic loan growth and increase of the projected unemployment rate forecast, which is the primary loss driver with Bancorp's CECL model, which has been driven by inflation and recession-based concerns. Partially offsetting the increased expense noted above was the release of approximately$3.0 million in specific reserves within the ACL for individual loans related to recently acquired individual loans that ultimately paid off during the second quarter with no loss or charge-off realized by Bancorp. In addition, net recovery activity of$153,000 was recorded for the nine months endedSeptember 30, 2022 , as charge off and recovery activity for the year has been largely offsetting, serving to increase the ACL for loans. The ACL for loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions change, Bancorp could experience further adjustments in its required ACL for loans credit loss expense.
The following table sets forth the ACL by category of loan:
September 30, 2022 December 31, 2021
% of Total % of Total
(dollars in Allocated ACL on ACL to Total Allocated ACL on ACL to Total
thousands) Allowance loans Loans (1) Allowance loans Loans (1)
Commercial real estate - non-owner occupied$ 21,188 30 % 1.50 %$ 15,960 30 % 1.41 % Commercial real estate - owner occupied 9,768 14 % 1.19 % 9,595 18 % 1.41 % Total commercial real estate 30,956 44 % 1.39 % 25,555 48 % 1.41 % Commercial and industrial - term (1) 14,163 20 % 1.89 % 8,577 16 % 1.44 % Commercial and industrial - lines of credit 5,104 8 % 1.22 % 4,802 9 % 1.30 % Total commercial and industrial 19,267 28 % 1.65 % 13,379 25 % 1.38 % Residential real estate - owner occupied 6,396 9 % 1.15 % 4,316 8 % 1.08 % Residential real estate - non-owner occupied 3,345 5 % 1.10 % 3,677 7 % 1.31 % Total residential real estate 9,741 14 % 1.13 % 7,993 15 % 1.17 % Construction and land development 6,945 10 % 1.67 % 4,789 9 % 1.60 % Home equity lines of credit 1,626 2 % 0.82 % 1,044 2 % 0.75 % Consumer 1,116 2 % 0.80 % 772 1 % 0.74 % Leases 211 0 % 1.51 % 204 0 % 1.50 % Credit cards 221 0 % 1.06 % 162 0 % 0.95 % Total$ 70,083 100 % 1.39 %$ 53,898 100 % 1.34 %
(1) Excludes the PPP loan portfolio, which was not reserved for based on the underlying 100% SBA guarantee.
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The table below details net charge-offs to average loans outstanding by category of loan for the three and nine month periods endedSeptember 30, 2022 and 2021, respectively. 2022 2021 Net (charge Net (charge offs)/ offs)/ Three months ended Net (charge recoveries Net (charge recoveries September 30, offs)/ Average to average offs)/ Average to average (dollars in thousands) recoveries Loans loans recoveries Loans loans Commercial real estate - non-owner occupied $ (37 )$ 1,398,849 0.00 % $ 6$ 1,149,807 0.00 % Commercial real estate - owner occupied 153 799,410 0.02 % (1,361 ) 624,709 -0.22 % Total commercial real estate 116 2,198,259 0.01 % (1,355 ) 1,774,516 -0.08 % Commercial and industrial - term (234 ) 710,563 -0.03 % (235 ) 580,757 -0.04 % Commercial and industrial - term - PPP - 22,939 0.00 % - 281,420 0.00 % Commercial and industrial - lines of credit (99 ) 418,839 -0.02 % - 326,637 0.00 % Total commercial and industrial (333 ) 1,152,341 -0.03 % (235 ) 1,188,814 -0.02 % Residential real estate - owner occupied (15 ) 542,734 0.00 % (313 ) 385,662 -0.08 % Residential real estate - non-owner occupied 9 296,822 0.00 % 2 273,806 0.00 % Total residential real estate (6 ) 839,556 0.00 % (311 ) 659,468 -0.05 % Construction and land development - 391,342 0.00 % - 290,689 0.00 % Home equity lines of credit - 194,762 0.00 % - 140,423 0.00 % Consumer (159 ) 137,333 -0.12 % 10 90,867 0.01 % Leases - 14,210 0.00 % - 13,182 0.00 % Credit cards - 21,095 0.00 % - 15,301 0.00 % Total$ (382 ) $ 4,948,898 -0.01 %$ (1,891 ) $ 4,173,260 -0.05 % 2022 2021 Nine months ended Net (charge Net (charge September offs)/ offs)/ 30, Net (charge recoveries Net (charge recoveries (dollars in offs)/ Average to average offs)/ Average to average thousands) recoveries Loans loans recoveries Loans loans Commercial real estate - non-owner occupied $ (24 )$ 1,330,254 0.00 %$ (3,024 ) $ 1,002,176 -0.30 % Commercial real estate - owner occupied 155 769,706 0.02 % (806 ) 571,133 -0.14 % Total commercial real estate 131 2,099,960 0.01 % (3,830 ) 1,573,309 -0.24 % Commercial and industrial - term 432 672,869 0.06 % (382 ) 506,519 -0.08 % Commercial and industrial - term - PPP - 62,933 0.00 % - 473,185 0.00 % Commercial and industrial - lines of credit (135 ) 405,468 -0.03 % - 270,251 0.00 % Total commercial and industrial 297 1,141,270 0.03 % (382 ) 1,249,955 -0.03 % Residential real estate - owner occupied 32 494,395 0.01 % (353 ) 318,246 -0.11 % Residential real estate - non-owner occupied 17 292,778 0.01 % 4 206,293 0.00 % Total residential real estate 49 787,173 0.01 % (349 ) 524,539 -0.07 % Construction and land development (72 ) 356,937 -0.02 % 3 288,556 0.00 % Home equity lines of credit - 178,564 0.00 % 1 116,854 0.00 % Consumer (299 ) 128,484 -0.23 % (84 ) 96,537 -0.09 % Leases - 13,990 0.00 % - 13,805 0.00 % Credit cards 47 19,993 0.24 % - 13,084 0.00 % Total $ 153$ 4,726,371 0.00 %$ (4,641 ) $ 3,876,639 -0.12 % 105
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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 andSeptember 30, 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$800,000 was also recorded for the nine month period endedSeptember 30, 2022 , driven largely by the addition of new construction loans. ACL for off balance sheet credit exposures stood at$4.8 million as ofSeptember 30, 2022 compared to$3.5 million as ofDecember 31, 2021 . Deposits September December 31, (dollars in thousands) 30, 2022 2021
$ Variance % Variance
Non-interest bearing demand deposits
25 % Interest bearing deposits: Interest bearing demand 2,106,267 2,131,928 (25,661 ) -1 % Savings 555,928 415,258 140,670 34 % Money market 1,163,563 1,050,352 113,211 11 % Time deposits of$250 thousand or more 92,529 89,745 2,784 3 % Other time deposits 382,445 344,477 37,968 11 % Total time deposits 474,974 434,222 40,752 9 % Total interest bearing deposits 4,300,732 4,031,760 268,972 7 % Total deposits (1)$ 6,500,773 $ 5,787,514 $ 713,259 12 %
(1) Includes
2022
Total deposits increased$713 million , or 12%, fromDecember 31, 2021 toSeptember 30, 2022 . At acquisition date, deposits totaling$1.12 billion were assumed as a result of the CB acquisition. Excluding the deposits acquired through the CB acquisition, deposits decreased$407 million , or 7%, during the first nine months of 2022, attributed mainly to seasonal deposit run-off and time deposit attrition.
Securities Sold Under Agreements to Repurchase
SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. AtSeptember 30, 2022 andDecember 31, 2021 , 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 regarding SSUAR follows:
(dollars in thousands) September 30, 2022 December 31, 2021
Outstanding balance at end of period $ 124,567 $ 75,466
Weighted average interest rate at end of period 0.64 % 0.04 %
Three months ended Nine months ended
September 30, September 30,
(dollars in thousands) 2022 2021 2022 2021
Average outstanding balance during
the period $ 139,749 $ 71,065 $ 123,845 $ 57,980
Average interest rate during the
period 0.50 % 0.03 % 0.27 % 0.04 %
Maximum outstanding at any month
end during the period $ 139,825 $ 81,964 $ 149,179 $ 81,964
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SSUARs are collateralized by securities and are treated as financings;
accordingly, the securities involved with the agreements are recorded as assets
and are held by a safekeeping agent and the obligations to repurchase the
securities are reflected as liabilities. All securities underlying the
agreements are under the Bank's control.
SSUARs increased$49 million , or 65%, betweenDecember 31, 2021 andSeptember 30, 2022 , as SSUAR 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). 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 ofSeptember 30, 2022 , subordinated notes added through the CB acquisition totaled$26 million . 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$236 million and$899 million atSeptember 30, 2022 andDecember 31, 2021 , respectively. The decrease experienced for the first nine months of 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$1.15 billion and$1.18 billion atSeptember 30, 2022 andDecember 31, 2021 respectively. The lack of growth in AFS debt security portfolio for the first nine months of 2022 is attributed to both classifying securities purchased and acquired during the first quarter as HTM for general capital purposes, as well as significant market depreciation experienced on the AFS portfolio sinceDecember 31, 2021 due to rising rates. The investment portfolio (HTM and AFS) includes scheduled maturities of$44 million and cash flows on amortizing debt securities of approximately$223 million (based on assumed prepayment speeds as ofSeptember 30, 2022 ) expected over the next twelve months. Combined with FFS and interest bearing deposits from banks, AFS debt securities offer substantial resources to meet either loan growth or reductions in Bancorp's deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public funds, cash balances of certain WM&T accounts and SSUAR. AtSeptember 30, 2022 , total investment securities pledged for these purposes comprised 60% of the debt securities portfolio, leaving approximately$656 million of unpledged debt securities. Bancorp's deposit base consists mainly of core deposits, defined as time deposits less than or equal to$250,000 , demand, savings, and money market deposit accounts, and excludes public funds and brokered deposits. AtSeptember 30, 2022 , such deposits totaled$5.88 billion and represented 90% 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. However, many of Bancorp's individual depositors are currently maintaining generally high balances. These excess balances may be more sensitive to market rates, with potential decreases possibly straining Bancorp's liquidity position. 107
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As ofSeptember 30, 2022 andDecember 31, 2021 , Bancorp held brokered deposits totaling$1 million and$5 million , respectively, all of which is attributed to deposits added through acquisition-related activity over the past twelve months. Included in total deposit balances atSeptember 30, 2022 are$530 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 decrease experienced during the first nine months of 2022 is attributed to anticipated seasonal deposit run-off. 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. AtSeptember 30, 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$90 million and$80 million atSeptember 30, 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 ofSeptember 30, 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. AtSeptember 30, 2022 , the Bank could pay an amount equal to$63 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank. Sources and Uses of Cash Cash flow is provided primarily through financing activities of Bancorp, which include raising deposits and borrowing funds from institutional sources such as advances from FHLB and FFP, as well as scheduled loan repayments and cash flows from debt securities. These funds are primarily used to facilitate investment activities of Bancorp, which include making loans and purchasing securities for the investment portfolio. Another important source of cash is net income of the Bank from operating activities. For further detail regarding the sources and uses of cash, see the "Consolidated Statements of Cash Flows" in Bancorp's consolidated financial statements. 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$457 million , or 27%, as ofSeptember 30, 2022 compared toDecember 31, 2021 , the increase being driven by both the CB acquisition and the addition of new lines of credit. Total average line of credit utilization declined to 39.6% as ofSeptember 30, 2022 compared to 41.2% atDecember 31, 2021 , however, both represent significant improvement from the pandemic-era low of 36.5% experienced atMarch 31, 2021 . C&I line of credit utilization was 29.5% atSeptember 30, 2022 compared to 31.8% atDecember 31, 2021 and 28.8% atSeptember 30, 2021 . Commitments to extend credit are agreements to lend to customers as long as collateral is available as agreed upon and there is no violation of any condition established in the contracts. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments. 108
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The ACL for off balance sheet credit exposures, which is separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, stood at$4.8 million and$3.5 million as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The CB acquisition resulted in a$500,000 increase to the ACL for off balance sheet credit exposures, with the corresponding offset recorded to goodwill (as opposed to provision expense). In addition,$800,000 of provision expense was recorded for the nine month period endedSeptember 30, 2022 , driven largely by the addition of new lines, and thus increased availability, mainly within the C&D portfolio.
Standby letters of credit are conditional commitments issued by Bancorp to
guarantee the performance of a customer to a third party beneficiary. Those
guarantees are primarily issued to support commercial transactions. Standby
letters of credit generally have maturities of one to two years.
In addition to owned banking facilities, Bancorp has entered into long-term leasing arrangements for certain branch facilities. Bancorp also has required future payments for a non-qualified defined benefit retirement plan, TPS and the maturity of time deposits.
See the footnote titled "Commitments and Contingent Liabilities" for additional
detail.
Capital AtSeptember 30, 2022 , stockholders' equity totaled$728 million , representing an increase of$52 million , or 8%, compared toDecember 31, 2021 . The increase for the first nine months of 2022 was attributed mainly to stock issued in relation to the CB acquisition, which totaled$134 million . Further, net income of$63.2 million was offset by a$120 million negative change in AOCI and dividends declared during the first nine months of 2022. 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 toSeptember 30, 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 andSeptember 30, 2022 . TCE was 6.78% atSeptember 30, 2022 compared to 8.22% atDecember 31, 2021 , while tangible book value per share was$16.94 atSeptember 30, 2022 compared to$20.09 atDecember 31, 2021 . See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. 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 the time. 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 and the increased importance of capital preservation, no shares were repurchased in 2021, nor the first nine months of 2022. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan. 109
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Bank holding companies and their subsidiary banks are required by regulators to
meet risk-based capital standards. These standards, or ratios, measure the
relationship of capital to a combination of balance sheet and off-balance sheet
risks. The value of both balance sheet and off-balance sheet items are adjusted
to reflect credit risks. See the Footnote titled "Regulatory Matters" for
additional detail regarding regulatory capital requirements, as well as capital
ratios of Bancorp and the Bank. The Bank exceeds regulatory capital ratios
required to be well-capitalized. Regulatory framework does not define well
capitalized for holding companies. Management considers the effects of growth on
capital ratios as it contemplates plans for expansion.
The following table sets forth consolidated Bancorp's and the Bank's risk based
capital ratios:
September 30, 2022 December 31, 2021
Total risk-based capital(1)
Consolidated 12.16 % 12.79 %
Bank 11.67 12.42
Common equity tier 1 risk-based capital(1)
Consolidated 10.69 11.94
Bank 10.64 11.56
Tier 1 risk-based capital(1)
Consolidated 11.13 11.94
Bank 10.64 11.56
Leverage(2)
Consolidated 8.85 8.86
Bank 8.45 8.57
(1) Under regulatory risk-based capital guidelines, assets and
credit-equivalent amounts of derivatives and off-balance sheet credit exposures
are assigned to broad risk categories. The aggregate dollar amount in each risk
category is multiplied by the associated risk weight of the category. Weighted
values are added together, resulting in Bancorp's total risk-weighted assets.
These ratios are computed in relation to average assets.
(2) Ratio is computed in relation to average assets.
Capital ratios as of September 30, 2022 decreased compared December 31, 2021 as
a result of substantial average asset and risk-weighted asset growth, driven by
both organic and acquisition-related activity. While pressure was placed on
risk-based capital and leverage ratios due to this growth, Bancorp continues to
exceed the regulatory requirements for all calculations. Bancorp and the Bank
intend to maintain a capital position that meets or exceeds the
"well-capitalized" requirements as defined by the FRB and the FDIC , in addition
to the capital conservation buffer.
Banking regulators have categorized the Bank as well-capitalized. To meet the
definition of well-capitalized for prompt corrective action requirements, a bank
must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0%
Tier 1 Risk-Based Capital ratio, 10.0% Total Risk-Based Capital ratio and 5.0%
Tier 1 Leverage ratio.
Additionally, in order to avoid limitations on capital distributions, including
dividend payments and certain discretionary bonus payments to executive
officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer
composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based
capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier
1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be
considered adequately-capitalized. At September 30, 2022 , the
adequately-capitalized minimums, including the capital conservation buffer, were
a 7.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based
Capital ratio and 10.5% Total Risk-Based Capital ratio.
As a result of the CB acquisition, Bancorp became the 100% successor owner of
the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust
III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The
sole assets of the trust subsidiaries represent the proceeds of offerings loaned
in exchange for subordinated debentures with similar terms to the TPS. The TPS
are treated as part of Tier 1 Capital. The subordinated note and related
interest expense are included in Bancorp's consolidated financial statements.
The subordinated notes are currently redeemable at Bancorp's option on a
quarterly basis. As of September 30, 2022 , subordinated notes added through the
CB acquisition totaled $26 million . Further, Bancorp had borrowing capacity of
$20 million available through an unsecured borrowing line of the holding company
as of September 30, 2022 , which was added during the first quarter to allow
capital flexibility at the Bank level.
As permitted by the interim final rule issued on March 27, 2020 by the federal
banking regulatory agencies, Bancorp elected the option to delay the estimated
impact on regulatory capital related to the adoption of ASC 326 "Financial
Instruments - Credit Losses," or CECL, which was effective January 1, 2020 . The
initial impact of adoption of ASC 326, as well as 25% of the quarterly increases
in the ACL subsequent to adoption of ASC 326 (collectively the "transition
adjustments") were declared to be delayed for two years. After two years, the
cumulative amount of the transition adjustments will become fixed and will be
phased out of the regulatory capital calculations evenly over a three-year
period, with 75% recognized in year three, 50% recognized in year four and 25%
recognized in year five. After five years, the temporary regulatory capital
benefits will be fully reversed. Had Bancorp not elected to defer the regulatory
capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and
the Bank would have exceeded the well-capitalized level.
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Non-GAAP Financial Measures
The following table provides a reconciliation of total stockholders' equity in
accordance with GAAP to tangible stockholders' equity (TCE), a non-GAAP
disclosure. Bancorp provides the TCE per share, a non-GAAP measure, in addition
to those defined by banking regulators, based on its widespread use by investors
as a means to evaluate capital adequacy:
September 30 ,
(dollars in thousands, except per share data) 2022
Total stockholders' equity - GAAP (a)$ 727,754 $
675,869
Less: Goodwill (202,524 ) (135,830 ) Less: Core deposit and other intangibles (28,747 ) (5,596 ) Tangible common equity - Non-GAAP (c)$ 496,483 $ 534,443 Total assets - GAAP (b)$ 7,554,210 $ 6,646,025 Less: Goodwill (202,524 ) (135,830 ) Less: Core deposit and other intangibles (28,747 ) (5,596 ) Tangible assets - Non-GAAP (d)$ 7,322,939 $
6,504,599
Total stockholders' equity to total assets - GAAP (a/b) 9.63 % 10.17 % Tangible common equity to tangible assets - Non-GAAP (c/d) 6.78 % 8.22 % Total shares outstanding (e) 29,242 26,596 Book value per share - GAAP (a/e)$ 24.89 $ 25.41 Tangible common equity per share - Non-GAAP (c/e) 16.98 20.09 The general decline betweenDecember 31, 2021 andSeptember 30, 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 during the nine months of 2022, which drove a$120 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. 111
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The ACL for loans to total non-PPP loans represents the ACL for 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.
September 30,
(dollars in thousands) 2022 December 31, 2021
Total loans - GAAP (a) $ 5,072,877 $ 4,169,303
Less: PPP loans (19,469 ) (140,734 )
Total non-PPP loans - Non-GAAP (b) $ 5,053,408 $ 4,028,569
ACL for loans (c) $ 70,083 $ 53,898
Non-performing loans (d) 10,612 7,408
Delinquent loans (e) 13,083 11,036
ACL for loans to total loans - GAAP (c/a) 1.38 % 1.29 %
ACL for loans to total loans - Non-GAAP (c/b) 1.39 % 1.34 %
Non-performing loans to total loans - GAAP (d/a) 0.21 % 0.18 %
Non-performing loans to total loans - Non-GAAP (d/b) 0.21 % 0.18 %
Delinquent loans to total loans - GAAP (e/a) 0.26 % 0.26 %
Delinquent loans to total loans - Non-GAAP (e/b) 0.26 % 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, calls, and
impairment 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.
Nine months ended September
Three months ended September 30, 30,
(dollars in thousands) 2022 2021 2022 2021
Total non-interest expenses (a) $ 44,873 $ 34,558 $ 145,845 $ 107,708
Less: Non-recurring merger expenses - (525 ) (19,500 ) (19,025 )
Less: Amortization of investments in tax
credit partnerships (88 ) (53 ) (265 ) (315 )
Total non-interest expenses - Non-GAAP
(c) $ 44,785 $
33,980
Total net interest income, FTE$ 62,608 $ 45,643 $ 168,797 $ 125,178 Total non-interest income 24,864 17,614 66,007 47,246 Total revenue - Non-GAAP (b) 87,472 63,257 234,804 172,424 Less: Gain/loss on sale of premises and equipment (3,074 ) - (3,074 ) - Less: Gain/loss on sale of securities - - - -
Total adjusted revenue - Non-GAAP (d)
Efficiency ratio - Non-GAAP (a/b) 51.30 % 54.63 % 62.11 % 62.47 %
Adjusted efficiency ratio - Non-GAAP
(c/d) 53.06 % 53.72 % 54.41 % 51.25 %
112
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