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:
? 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;
? changes in, or forecasts of, future political and economic conditions,
inflation and efforts to control it;
? accuracy of assumptions and estimates used in establishing the ACL for loans,
ACL for off-balance sheet credit exposures and other estimates;
? impairment of investment securities, goodwill, MSRs, other intangible assets
or DTAs;
? ability to effectively navigate an economic slowdown or other economic or
market disruptions; ? changes in laws and regulations or the interpretation thereof; ? changes in fiscal, monetary, and/or regulatory policies;
? changes in tax polices including but not limited to changes in federal and
state statutory rates;
? behavior of securities and capital markets, including changes in interest
rates, market volatility and liquidity; ? ability to effectively manage capital and liquidity;
? long-term and short-term interest rate fluctuations, as well as the shape of
the
? the magnitude and frequency of changes to the FFTR implemented by the Federal
Open Market Committee of the FRB ; ? competitive product and pricing pressures; ? projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.; ? descriptions of plans or objectives for future operations, products, or services; ? integration of acquired financial institutions, businesses or future acquisitions;
? changes in the credit quality of Bancorp's customers and counterparties,
deteriorating asset quality and charge-off levels;
? changes in technology instituted by Bancorp, its counterparties or
competitors;
? changes to or the effectiveness of Bancorp's overall internal control
environment;
? adequacy of Bancorp's risk management framework, disclosure controls and
procedures and internal control over financial reporting;
? changes in applicable accounting standards, including the introduction of new
accounting standards; ? changes in investor sentiment or behavior; ? changes in consumer/business spending or savings behavior;
? ability to appropriately address social, environmental and sustainability
concerns that may arise from business activities;
? occurrence of natural or man-made disasters or calamities, including health
emergencies, the spread of infectious diseases, pandemics or outbreaks of
hostilities, and Bancorp's ability to deal effectively with disruptions caused
by the foregoing;
? ability to maintain the security of its financial, accounting, technology,
data processing and other operational systems and facilities;
? ability to withstand disruptions that may be caused by any failure of its
operational systems or those of third parties;
? ability to effectively defend itself against cyberattacks or other attempts by
unauthorized parties to access information of Bancorp, its vendors or its
customers or to disrupt systems; and
? other risks and uncertainties reported from time-to-time in Bancorp's filings
with the
Report on Form 10-K for the year endedDecember 31, 2021 . 74
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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 a 60% interest inLandmark Financial Advisors, LLC (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$67 million and incurred pre-tax merger related expenses totaling$19.5 million during the first quarter of 2022 as a 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 recorded in relation to the acquired loan portfolio.
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$123 million and incurred pre-tax merger related expenses totaling$18.1 million for the year endedDecember 31, 2021 as a result of the KB acquisition. The acquisition of KB had a significant impact on the ACL and credit loss provisioning for the year 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 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 June 30, 2022 2021 $/bp % Net income attributed to stockholders$ 26,794 $ 4,184 $ 22,610 540 % Diluted earnings per share$ 0.91 $ 0.17 $ 0.74 435 % ROA 1.40 % 0.32 % 108 bps 338 % ROE 14.34 % 3.25 % 1,109 bps 341 %
Additional discussion follows under the section titled "Results of Operations."
General highlights for the three months ended
2021
? Bancorp completed its acquisition of CB on
acquisition and net of purchase accounting adjustments, CB had approximately
investment securities and
acquisition, the three months ended
quarter of activity associated with the CB acquisition. There were no one-time
merger related expenses recorded for the three months ended
? Bancorp also completed its acquisition of KB on
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
included only one month of activity associated with the KB acquisition and
included
million in credit loss expense associated with the acquired loan portfolio.
? Net income totaled
three months ended
same period of 2021, which included the acquisition related charges mentioned
above. Significant factors affecting the results for the three months ended
o The three months ended
activity related to the CB acquisition. No one-time merger related expenses
were recorded during the period.
o The three months ended
related to the KB acquisition and included
related expenses and$7.4 million in credit loss expense related to the acquired loan portfolio.
o Net interest income increased
ended
acquisition-related growth and organic growth in loans and investment
securities overcame a substantial decline in PPP-related fee recognition.
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o Negative provision for credit losses of
months ended
period of last year. The negative provision recorded for the three months
endedJune 30, 2022 was driven mainly by the release of$3.0 million in specific reserves associated with recently acquired loans. The expense recorded for the prior year was driven by the KB acquisition, which was completed in the second quarter of 2021. ? NIM decreased 16 bps to 3.20% for the three months endedJune 30, 2022
compared to 3.36% 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
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
first quarter of 2022 in relation to the CB acquisition and strong organic
growth. Average loans (excluding PPP loans) increased
for the three months ended
Average balance growth was driven by the CB acquisition noted above and strong
organic growth in addition to
acquisition on
in the prior year average balances due to the timing of the acquisition.
? The PPP loan portfolio decreased
2021 as the result of anticipated forgiveness activity, driving a
million, or 83%, decline in PPP-related interest and fee income for the three
months ended
? Negative provision for credit losses of
months ended
same period of last year. The release of approximately
specific reserves related to recently acquired loans was the main driver of
the negative provision recorded for the three months ended
which more than offset expense associated with a deteriorating unemployment
forecast and qualitative factor adjustments within the CECL model. Expense
recorded for the prior year period was attributed to the loan portfolio
acquired through the KB acquisition.
? Bancorp's ACL on loans to total loans was 1.36% at
1.29% at
activity within the ACL on loans.
? Deposit balances increased
as a result of assuming approximately
first quarter in relation to the CB acquisition. The growth stemming from the
first quarter CB acquisition was partially offset during the second quarter as
a result of anticipated seasonal deposit runoff related mainly to public fund
deposits, customer tax payment activity and time deposit maturities.
? 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 was flat compared to the prior year period.
? Non-interest expenses decreased
ended
and generally in line with expectations.
? Bancorp's efficiency ratio (FTE) for the three month period ended
2022 was 56.42%, while the ratio for the same period of the prior year was
83.86%, the latter reflecting one-time merger-related expenses attributed to
the KB acquisition. Excluding these non-recurring expenses and amortization of
investments in tax credit partnerships, the adjusted efficiency ratio, a
non-GAAP measure, would have been 56.31% and 51.95% for the three months ended
June 30, 2022 and 2021, respectively. See the section titled "Non-GAAP Financial Measures" for reconcilement of non-GAAP to GAAP measures. 77
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The following table presents an overview of Bancorp's financial performance for
the six months ended
(dollars in thousands, except per share data) Variance Six months ended June 30, 2022 2021 $/bp % Net income attributed to stockholders$ 34,700 $ 26,894 $ 7,806 29 % Diluted earnings per share$ 1.22 $ 1.13 $ 0.09 8 % ROA 0.96 % 1.09 % (13) bps -12 % ROE 9.62 % 11.28 % (166) bps -15 %
Additional discussion follows under the section titled "Results of Operations."
General highlights for the six months ended
2021
? Bancorp completed its acquisition of CB on
acquisition and net of purchase accounting adjustments, CB had approximately
securities and
the six months ended
activity associated with the CB acquisition. Further,
one-time merger related expenses were recorded in the first quarter of 2022 in
addition to
loan portfolio.
? Bancorp also completed its acquisition of KB on
acquisition and net of purchase accounting adjustments, KB had approximately
securities and
Given the timing of the acquisition, the six months ended
represented one month of activity associated with the KB acquisition and
included
million in credit loss expense associated with the acquired loan portfolio.
? Net income totaled
six months ended
of 2021. Significant factors affecting the results for the six months ended
o The six months ended
activity related to the CB acquisition, including
merger related expenses and
acquired loan portfolio.
o The six months ended
related to the KB acquisition and included
related expenses and$7.4 million in credit loss expense related to the acquired loan portfolio.
o Net interest income increased
growth and organic growth in loans and investment securities overcame a
substantial decline in PPP-related fee recognition.
o Total provision for credit loss expense was
ended
The expense recorded for both periods was driven by the respective
acquisitions.
? NIM decreased 24 bps to 3.14% for the six months ended
to 3.38% 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 six months ended
2022 due to the timing of the rate increases. Bancorp expects to realize
further benefits to net interest income and NIM from both the recent hikes and
anticipated future hikes.
? Total loans (excluding PPP loans) increased
first quarter of 2022 in relation to the CB acquisition and strong organic
growth. Average loans (excluding PPP loans) increased
for the six months ended
Average balance growth was driven by the CB acquisition noted above and strong
organic growth in addition to
acquisition on
in the prior year average balances due to the timing of the acquisition.
? The PPP loan portfolio decreased
2021 as the result of forgiveness activity, driving a
decline in PPP-related interest and fee income for the six months ended June
30, 2022 compared to the same period of 2021.
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? Total provision for credit loss expense was
ended
last year. Provision expense for the six months ended
largely by
through the CB acquisition. In addition, the FRB's forecast of the Seasonally
Adjusted National Civilian Unemployment Rate, which is the primary loss driver
with Bancorp's CECL model, deteriorated during the second quarter,
presumptively the result of inflation and recession-based fears, resulting in
increased credit loss expense along with qualitative factor adjustments within
the CECL model. Partially offsetting this activity was the reduction of
approximately
recently acquired individual loans that paid off during the second quarter.
Provision expense recorded for the six months ended
by
KB acquisition, which was offset by the benefits associated with an improving
unemployment forecast, the primary loss driver within the CECL model.
? Bancorp's ACL on loans to total loans was 1.36% at
1.29% atDecember 31, 2021 , the increase stemming mainly from acquisition-related activity within the ACL on loans.
? Deposit balances increased
as a result of assuming approximately
first quarter in relation to the CB acquisition. The growth stemming from the
first quarter CB acquisition was partially offset during the second quarter as
a result of anticipated seasonal deposit runoff related mainly to public fund
deposits, customer tax payment activity and time deposit maturities.
? Total non-interest income increased
period ended
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 as a result of slowing volumes
compared to the re-finance rush that benefitted 2021.
? Non-interest expenses increased
ended
experienced elevated non-interest expense as a result of one-time 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 six months ended
68.53% compared to 67.01% for the same period of 2021, the large fluctuation
being the result of one-time merger-related expenses incurred as a result of
the respective acquisitions in both periods. Excluding one-time merger costs
and expenses related to the amortization of tax credit partnerships, Bancorp's
non-GAAP efficiency ratio for the six months ended
compared to 49.82% 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 June 30, 2022 2021 $/bp % Net interest income$ 56,984 $ 41,584 $ 15,400 37 % Net interest income (FTE)* 57,244 41,661 15,583 37 % Net interest spread 3.14 % 3.29 % (15) bps -5 % Net interest margin 3.20 % 3.36 % (16) bps -5 % Average interest earning assets$ 7,174,072 $ 4,972,914 $ 2,201,158 44 % (dollars in thousands) Variance As of and for the six months ended June 30, 2022 2021 $/bp % Net interest income$ 105,744 $ 79,409 $ 26,335 33 % Net interest income (FTE)* 106,189 79,535 26,654 34 % Net interest spread 3.09 % 3.30 % (21) bps -6 % Net interest margin 3.14 % 3.38 % (24) bps -7 % Average interest earning assets$ 6,812,158 $ 4,751,469 $ 2,060,689 43 %
*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 bothJune 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 following table details the volatility experienced within the interest rate environment over the past twelve months by comparing period end and quarterly average rates: June 30, March 31, December 31, September 30, June 30, 2022 2022 2021 2021 2021 Five yearTreasury note - quarter end 3.01 % 2.42 % 1.26 % 0.98 % 0.87 % Five yearTreasury note - quarterly average 2.95 % 1.83 % 1.18 % 0.80 % 0.84 % Prime rate - quarter end 4.75 % 3.50 % 3.25 % 3.25 % 3.25 % Prime rate - quarterly average 3.93 % 3.29 % 3.25 % 3.25 % 3.25 % One-month LIBOR - quarter end 1.67 % 0.46 % 0.10 % 0.08 % 0.10 % One-month LIBOR - quarterly average 1.02 % 0.23 % 0.09 % 0.09 % 0.10 % Overnight SOFR - quarter end 1.50 % 0.29 % 0.05 % 0.05 % 0.03 % Overnight SOFR - quarterly average 0.71 % 0.09 % 0.05 % 0.05 % 0.01 % 80
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Prime rate, the five yearTreasury note rate and the one month LIBOR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past several quarters. Approximately$1.47 billion , or 30%, of Bancorp's loans are variable rate and are indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change. At inception, most of Bancorp's fixed rate loans are priced in relation to the five yearTreasury rate. AtJune 30, 2022 , Bancorp's loan portfolio consisted of approximately 70% fixed and 30% 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 70%) or LIBOR/SOFR (approximately 30%). OnMarch 16, 2022 , the FRB increased the FFTR to a range of 0.25%-0.50%, an increase of 25 bps, which resulted in Prime increasing to 3.50%. The hike represented the FRB's first interest rate action since it cut the FFTR 150 bps in March of 2020 in response to the pandemic, which took Prime from 4.75% to 3.25%. Given the timing of the FRB's increase, the average interest rate environment experienced for the first quarter of 2022 did not capture the full benefit of the FRB's March rate increase. EffectiveMay 4, 2022 , the FFTR was increased 50 bps to a range of 0.75%-1.00%, taking Prime to 4.00%. This increase was followed by a 75 bps increase, taking the FFTR to a range of 1.50%-1.75% and Prime to 4.75% effectiveJune 16, 2022 , marking Prime's return to pre-pandemic levels. With 70% of the variable rate loan portfolio tied to Prime and the majority of these loans having floor rates of 4.00%, the FRB's most recent hike was of particular significance, as it moved these loans off their floors and provided an immediate boost to the yields earned on the variable rate loan portfolio. Given the timing of the most recent FRB hike, the average interest rate environment experienced for the second quarter of 2022 did not capture the full benefit of the FRB's most recent rate action. The current economic outlook suggests continued interest rate action from the FRB and prospects of a rising rate environment. While Bancorp expects rising rates to have a positive effect on NIM, pricing pressure/competition for both loans and deposits, elevated levels of liquidity within the banking system in general and the possibility of a flattening yield curve could continue to place pressure on NIM.
Net Interest Income (FTE) - Three months ended
30, 2021
Net interest spread (FTE) and NIM were 3.14% and 3.20%, for the three months endedJune 30, 2022 compared to 3.29% and 3.36% for the same period in 2021, respectively. NIM during the three months endedJune 30, 2022 was significantly impacted by the following:
? An interest rate environment that is 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 1.50%-1.75%, and Prime at 4.75%, as of
result of aggressive interest rate action from the FRB during the second
quarter of 2022. ? Substantial balance sheet growth stemming from both acquisition-related
activity and organic growth, which resulted in total average earning asset
growth of
of
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.
? PPP originations, which began in the second quarter of 2020 and continued
through expiration of the program on
forgiveness activity, which accelerates the recognition of fee income on these
loans and continues to impact NIM. The average balance of the PPP loan
portfolio decreased
for the three months ended
The PPP portfolio contributed a 4 bps benefit to NIM for the three months
ended
June 30, 2021 . Net interest income (FTE) increased$15.6 million , or 37%, for the three months endedJune 30, 2022 compared to the same period of 2021, largely as a result of acquisition-related activity, but also driven in part by strong organic loan growth, substantial investment in the investment securities portfolio and the benefits of a rising interest rate environment. 81
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Total average interest earning assets increased$2.20 billion , or 44%, to$7.17 billion for the three months endedJune 30, 2022 , as compared to the same period of 2021, with the average rate earned on total interest earning assets contracting 16 bps to 3.32%.
? 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
combination of strategically deploying excess liquidity through further
investment and acquisition-related activity.
? Average FFS and interest bearing due from bank balances increased $247
million , or 79%, for the three months ended June 30, 2022 due to excess
balance sheet liquidity.
Total interest income (FTE) increased
for the three months ended
2021.
? Interest and fee income (FTE) on loans increased
period of 2021, driven by both organic and acquisition-related growth in the
non-PPP portfolio, which more than offset a
PPP-related income. While the yield on the overall loan portfolio increased a
marginal 1 bp to 4.20% for the three months ended
4.19% for the same period of the prior year, the yield on the non-PPP
portfolio increased 15 bps compared to the prior year period, driven by the
rising rate environment.
? Significant growth in average investment securities led to a
increase in interest income (FTE) on the portfolio for the three months ended
increase in the corresponding yield on the portfolio. Substantial deployment
of excess liquidity benefitted the investment portfolio, as the yields earned
on recent purchases have improved dramatically in tandem with rising rates.
? Interest income on FFS and interest bearing due from bank balances increased
balance growth stemming from excess balance sheet liquidity and rising
short-term interest rates. While the yield on these assets increased 69 bps to
0.80% for the three months ended
2021, having a larger portion of the balance sheet concentrated in
lower-yielding assets created a larger drag on overall NIM for the second
quarter of 2022 compared to the prior period. Total average interest bearing liabilities increased$1.55 billion , or 49%, to$4.69 billion for the three-month period endedJune 30, 2022 compared with the same period in 2021, with the total average cost declining 1 bp to 0.18%.
? Average interest bearing deposits increased
three 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.
? Consistent with the average interest bearing deposit growth noted above,
average SSUAR balances increased
30, 2022 compared to the same period of 2021.
? Average FHLB advances decreased
30, 2022 compared to the same period of the prior year, as all outstanding
FHLB advances either matured or were paid off in 2021.
? Subordinated debentures totaling
acquisition during the first quarter of 2022.
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Total interest expense increased$606,000 , or 40%, for the three months endedJune 30, 2022 compared to the same period of 2021, a direct result of acquisition-related average deposit balance growth and assumed debt. Despite this growth, the percentage cost of interest bearing liabilities has remained relatively low, driven by the maturity/renewal of higher-costing time deposits at lower rates and the benefit of all FHLB advances either maturing or paying off in 2021.
? While total interest bearing deposit expense increased
result of acquisition-related activity, Bancorp experienced a 3 bps decrease
in the cost of interest bearing deposits. Bancorp has experienced significant
benefit from longstanding low levels of deposit rates. While low-level deposit
rates have benefited interest bearing deposit costs for several quarters,
Bancorp expects pricing pressure/competition stemming from the rising rate
environment to drive deposit rate/cost increases during the second half of
2022.
? Interest expense totaling
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
resulting in a decline of
year.
Net Interest Income (FTE) - Six months ended
2021
Net interest spread (FTE) and NIM were 3.09% and 3.14%, for the six months endedJune 30, 2022 compared to 3.30% and 3.38% for the same period in 2021, respectively. NIM during the six months endedJune 30, 2022 was significantly impacted by the following:
? An interest rate environment that is 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 1.50%-1.75%, and Prime at 4.75%, as of
result of aggressive interest rate action from the FRB during the second
quarter of 2022. ? Substantial balance sheet growth stemming from both acquisition-related
activity and organic growth, which resulted in total average earning asset
growth of
of
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.
? PPP originations, which began in the second quarter of 2020 and continued
through expiration of the program on
forgiveness activity, which accelerates the recognition of fee income on these
loans and continues to impact NIM. The average balance of the PPP loan
portfolio decreased
for the six months ended
The PPP portfolio contributed a 8 bps benefit to NIM for the three months
ended
30, 2021. Net interest income (FTE) increased$26.7 million , or 34%, for the six months endedJune 30, 2022 compared to the same period of 2021, largely as a result of acquisition-related activity, but also driven in part by strong organic loan growth, substantial investment in the investment securities portfolio and the benefits of a rising interest rate environment. 83
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Total average interest earning assets increased$2.06 billion , or 43%, to$6.81 billion for the six months endedJune 30, 2022 , as compared to the same period of 2021, with the average rate earned on total interest earning assets contracting 27 bps to 3.24%.
? 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. While the yield on the overall loan portfolio
was unchanged at 4.18% for the six months ended
respectively, the yield on the non-PPP portfolio increased 4 bps compared to
the prior year period, driven by the rising rate environment.
? Average investment securities grew
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
for the six months ended
liquidity.
Total interest income (FTE) increased
for the six months ended
? Interest and fee income (FTE) on loans increased
period of 2021, driven by both organic and acquisition-related growth in the
non-PPP portfolio, which more than offset a
PPP-related income. The yield on the overall loan portfolio was flat at 4.18%
for the six months ended bothJune 30, 2022 and 2021.
? Significant growth in average investment securities led to a
increase interest income (FTE) on the portfolio for the six months ended June
30, 2022 compared to the same period of 2021, driving a 16 bps, or 11%,
increase in the corresponding yield on the portfolio. Substantial deployment
of excess liquidity benefitted the investment portfolio as the yields earned
on recent purchases have improved dramatically in tandem with rising rates.
? Interest income on FFS and interest bearing due from bank balances increased
balance growth stemming from excess balance sheet liquidity and rising short
term interest rates. While the yield on these assets increased 35 bps to 0.46%
for the six months ended
having a larger portion of the balance sheet concentrated in lower-yielding
assets created a larger drag on overall NIM for the six months ended
2022 compared to the prior period. Total average interest bearing liabilities increased$1.45 billion , or 48%, to$4.48 billion for the six month period endedJune 30, 2022 compared with the same period in 2021, with the total average cost declining 6 bps to 0.15%.
? Average interest bearing deposits increased
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.
? Consistent with the average interest bearing deposit growth noted above,
average SSUAR balances increased
30, 2022 compared to the same period of 2021.
? Average FHLB advances decreased
2022 compared to the same period of the prior year, as all outstanding FHLB
advances either matured or were paid off in 2021.
? Subordinated debentures totaling
acquisition during the first quarter of 2022, the corresponding average
balance for the six months ended June 30, 2022 totaling $17 million .
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Total interest expense increased$137,000 , or 4%, for the six months endedJune 30, 2022 compared to the same period of 2021, a direct result of acquisition-related average deposit balance growth and assumed debt. Despite this growth, the percentage cost of interest bearing liabilities has remained relatively low, driven by the maturity/renewal of higher-costing time deposits at lower rates and the benefit of all FHLB advances either maturing or paying off in 2021.
? Despite significant average interest bearing deposit growth, interest expense
on deposits was flat for the six months ended
same period of 2021. The reduction of time deposit expense stemming from the
maturity/renewal of higher-costing time deposits at lower rates offset the
expense associated with adding
deposits. Bancorp has experienced significant benefit from longstanding low
levels of deposit rates. While low-level deposit rates have benefited interest
bearing deposit costs for several quarters, Bancorp expects pricing
pressure/competition stemming from the rising rate environment to drive
deposit rate/cost increases during the second half of 2022.
? Interest expense totaling
30, 2022 as a result of the subordinated debentures assumed through the CB
acquisition, approximately$132,000 of which stems from purchase accounting-related mark-to-market amortization.
? No interest expense on FHLB advances was recorded for the six months ended
resulting in a decline of
year.
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Average Balance Sheets and Interest Rates (FTE) - Three-Month Comparison
Three months ended June 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 $ 561,101 $ 1,113 0.80 % $ 313,954 $ 84 0.11 %
Mortgage loans held for sale 11,303 50 1.77 8,678 58 2.68
Investment securities:
Taxable 1,648,014 6,805 1.66 771,289 2,744 1.43
Tax-exempt 93,830 533 2.28 22,407 70 1.25
Total securities 1,741,844 7,338 1.69 793,696 2,814 1.42
Federal Home Loan Bank stock 13,811 102 2.96 11,924 64 2.15
SBA Paycheck Protection Program
(PPP) loans 48,364 1,156 9.59 510,963 6,911 5.43
Non-PPP loans 4,797,649 49,609 4.15 3,333,699 33,248 4.00
Total loans 4,846,013 50,765 4.20 3,844,662 40,159 4.19
Total interest earning assets 7,174,072 59,368 3.32 4,972,914 43,179 3.48
Less allowance for credit losses
on loans 67,939 57,599
Non-interest earning assets:
Cash and due from banks 99,033 53,522
Premises and equipment, net 114,287 64,726
Bank owned life insurance 53,438 39,723
Goodwill 202,524 52,780
Accrued interest receivable and
other 75,917 100,588
Total assets $ 7,651,332 $ 5,226,654
Interest bearing liabilities:
Deposits:
Interest bearing demand $ 2,248,410 $ 984 0.18 % $ 1,474,576 $ 415 0.11 %
Savings 575,610 51 0.04 289,042 16 0.02
Money market 1,163,546 460 0.16 890,593 140 0.06
Time 527,997 275 0.21 401,149 864 0.86
Total interest bearing deposits 4,515,563 1,770 0.16
3,055,360 1,435 0.19
Securities sold under agreements to repurchase 140,169 57 0.16 55,673 5 0.04 Federal funds purchased 9,578 19 0.80 10,918 4 0.15 Federal Home Loan Bank advances - - 0.00 19,135 74 1.55 Subordinated debentures 26,111 278 4.27 - - 0.00 Total interest bearing liabilities 4,691,421 2,124 0.18 3,141,086 1,518 0.19 Non-interest bearing liabilities: Non-interest bearing demand deposits 2,123,895 1,497,223 Accrued interest payable and other 86,571 71,918 Total liabilities 6,901,887 4,710,227 Stockholders' equity 749,445 516,427 Total liabilities and stockholder's equity$ 7,651,332 $ 5,226,654 Net interest income$ 57,244 $ 41,661 Net interest spread 3.14 % 3.29 % Net interest margin 3.20 % 3.36 % 86
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Average Balance Sheets and Interest Rates (FTE) - Six-Month Comparison
Six months ended June 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$ 615,878 $ 1,395 0.46 %$ 274,880 $ 150 0.11 % Mortgage loans held for sale 9,974 74 1.50 11,632 122 2.12 Investment securities: Taxable 1,492,123 11,485 1.55 713,332 5,039 1.42 Tax-exempt 68,750 786 2.31 14,469 115 1.60 Total securities 1,560,873 12,271 1.59 727,801 5,154 1.43 Federal Home Loan Bank stock 12,169 156 2.59 11,285 121 2.16 SBA Paycheck Protection Program (PPP) loans 80,070 3,978 10.02 569,068 13,936 4.94 Non-PPP loans 4,533,194 91,663 4.08 3,156,803 63,263 4.04 Total loans 4,613,264 95,641 4.18 3,725,871 77,199 4.18 Total interest earning assets 6,812,158 109,537 3.24 4,751,469 82,746 3.51 Less allowance for credit losses on loans 62,020 55,738 Non-interest earning assets: Cash and due from banks 95,155
50,637
Premises and equipment, net 100,250 61,208 Bank owned life insurance 53,308 36,539 Goodwill 178,573 32,758 Accrued interest receivable and other 86,999 93,299 Total assets$ 7,264,423 $ 4,970,172 Interest bearing liabilities: Deposits: Interest bearing demand$ 2,192,609 $ 1,633 0.15 %$ 1,422,008 $ 772 0.11 % Savings 521,754 106 0.04 253,776 21 0.02 Money market 1,123,973 650 0.12 869,775 255 0.06 Time 494,817 552 0.22 390,775 1,897 0.98 Total interest bearing deposits 4,333,153 2,941 0.14 2,936,334 2,945 0.20 Securities sold under agreements to repurchase 115,761 74 0.13 51,330 10 0.04 Federal funds purchased 9,784 22 0.45 10,262 6 0.12Federal Home Loan Bank advances - - 0.00 24,174 250 2.09 Subordinated debentures 17,132 311 3.66 - - 0.00 Total interest bearing liabilities 4,475,830 3,348 0.15 3,022,100 3,211 0.21 Non-interest bearing liabilities: Non-interest bearing demand deposits 1,971,525
1,388,313
Accrued interest payable and other 89,824 78,937 Total liabilities 6,537,179 4,489,350 Stockholders' equity 727,244 480,822 Total liabilities and stockholder's equity$ 7,264,423 $ 4,970,172 Net interest income$ 106,189 $ 79,535 Net interest spread 3.09 % 3.30 % Net interest margin 3.14 % 3.38 % 87
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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
and 2021 and the six-month periods ended
? 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
30, 2022 and 2021, respectively.
? Interest income includes loan fees of
with the PPP) and
three-month periods ended
million (
million associated with the PPP) for the six-month periods ended
and 2021. Interest income on loans may be impacted by the level of prepayment
fees collected and accretion related to purchased loans.
? Net interest income, the most significant component of Bancorp's earnings,
represents total interest income less total interest expense. The level of net
interest income is determined by mix and volume of interest earning assets,
interest bearing deposits and borrowed funds, and changes in interest rates.
? NIM represents net interest income on a FTE basis as a percentage of total
average interest earning assets.
? Net interest spread (FTE) is the difference between taxable equivalent rates
earned on total interest earning assets less the cost of interest bearing
liabilities.
? The fair market value adjustment on investment securities resulting from ASC
320, "Investments - Debt and Equity Securities" is included as a component of
other assets.
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Asset/Liability Management and Interest Rate Risk
Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.
Interest Rate Simulation Sensitivity Analysis
Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results. The results of the interest rate sensitivity analysis performed as ofJune 30, 2022 are driven by the long-term, conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management's deposit repricing may be to changes in market rates and are based on historical data. The results presented below reflect an interest rate sensitivity analysis that incorporates a deposit beta of approximately 60%. However, given the historic levels of liquidity currently held by Bancorp and in the banking system generally, the Company anticipates actual deposit betas will remain well below long-term averages through 2022. The anticipated lower deposit beta would result in the Company's interest rate sensitivity position turning slightly asset sensitive. 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 a 100 bps decrease in interest rates would also have negative effect on net interest income. These results depict a relatively neutral interest rate risk profile. However, the simulation performed as ofJune 30, 2022 suggests improvement in rising rate scenarios as compared to the prior quarter simulation performed as ofMarch 31, 2022 , which stems from the recent interest rate actions taken by the FRB. These rate hikes resulted in Prime rising to 4.75% as ofJune 30, 2022 , which in turn elevated a significant portion of the variable rate loan portfolio off their floor rates of 4.00%. 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. The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in the down 100 bps scenario, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below. Change in Rates -200 -100 +100 +200 +300 Basis Points Basis Points Basis Points Basis Points Basis Points % Change from base net interest income at June 30, 2022 N/A -5.13 % -0.48 % -0.96 % -1.42 % Bancorp's loan portfolio is currently composed of approximately 70% fixed and 30% 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 70%) or one month LIBOR/SOFR (approximately 30%). 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 Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark. To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR. 89
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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. As ofJune 30, 2022 , the Company had approximately$443 million in loans and$141 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$49 million in loans that were indexed to SOFR atJune 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 uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled "Derivative Financial Instruments." For these derivatives, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction impacts earnings. As ofJune 30, 2022 , Bancorp had no outstanding interest rate swaps designated as cash flow hedges. 90
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Table of Contents Provision for Credit Losses Provision for credit losses on loans atJune 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 Six months ended June 30, June 30, (dollars in thousands) 2022 2021 2022 2021 Beginning balance$ 67,067 $ 50,714 $ 53,898 $ 51,920 Acquisition - PCD loans (goodwill adjustment) - 6,757 9,950 6,757 Adjusted beginning balance 67,067 57,471
63,848 58,677
Provision for credit losses - loans (700 ) (2,700 ) (2,450 ) (3,900 ) Provision for credit losses - acquired loans - 7,397 4,429 7,397 Total provision for credit losses on loans (700 ) 4,697 1,979 3,497 Total charge-offs (370 ) (3,442 ) (779 ) (3,564 ) Total recoveries 365 698 1,314 814 Net loan (charge-offs) recoveries (5 ) (2,744 ) 535 (2,750 ) Ending balance$ 66,362 $ 59,424 $ 66,362 $ 59,424 Average total loans$ 4,846,013 $ 3,844,662 $ 4,613,264 $ 3,725,871 Provision for credit losses on loans to average total loans (1) -0.01 % 0.12 % 0.04 % 0.09 % Net loan (charge-offs) recoveries to average total loans (1) 0.00 % -0.07 % 0.01 % -0.07 % ACL for loans to total loans 1.36 % 1.41 % 1.36 % 1.41 % ACL for loans to total loans (excluding PPP) (2) 1.37 % 1.55 % 1.37 % 1.55 % ACL for loans to average total loans 1.37 % 1.55 % 1.44 % 1.59 %
(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$66 million as ofJune 30, 2022 compared to$54 million atDecember 31, 2021 , representing an ACL to total loans ratio of 1.36% and 1.29% for those periods, respectively. The ACL to loans (excluding PPP loans) was 1.37% atJune 30, 2022 compared to 1.34% atDecember 31, 2021 . Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled$37 million atJune 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. Negative provision (excluding acquisition-related activity) of$700,000 and$2.5 million was recorded to provision for credit losses on loans expense for the three and six month periods endedJune 30, 2022 , respectively. While improvement in the unemployment forecast has helped drive reductions of the ACL for loans in recent quarters, the FRB's forecast of the Seasonally Adjusted National Civilian Unemployment Rate, which is the primary loss driver with Bancorp's CECL model, deteriorated during the second quarter, presumptively the result of inflation and recession-based fears. This development, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, resulted in increased expense within the CECL model. However, the negative impact of the economic forecast update was more than offset by 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, driving the negative provision recorded for the three and six month periods endingJune 30, 2022 . 91
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While net charge off activity minimal for the three month period endedJune 30, 2022 , net recovery activity of$535,000 was recorded for the six months endedJune 30, 2022 , driven by a$711,000 recovery of a C&I relationship during the first quarter that was fully charged off in the prior year, serving to increase the ACL on loans. More than offsetting the negative provision for the for the six month period endedJune 30, 2022 was credit loss expense recorded for the loan portfolio acquired from CB, which totaled$4.4 million and was recorded entirely in the first quarter of 2022 upon closing of the CB acquisition. 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). Expense of$4.7 million and$3.5 million was recorded to provision for credit losses on loans for the three and six month periods endedJune 30, 2021 , respectively. Expense in both periods was driven by recording$7.4 million of credit loss expense on loans recorded during the second quarter as a result of the KB acquisition, which more than offset the benefits associated with improving unemployment forecasts during the three and six month periods endedJune 30, 2021 . 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 andJune 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$100,000 was also recorded for the six month period endedJune 30, 2022 , driven largely by the addition of new lines of credit, and thus increased availability, within the C&D portfolio. The ACL for off balance sheet credit exposures ended at$4.1 million as ofJune 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 atJune 30, 2022 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date. Non-interest Income Three months ended June 30, Six months ended June 30, (dollars in thousands) 2022 2021 $ Variance % Variance 2022 2021 $ Variance % Variance Wealth management and trust services$ 9,495 $ 6,858 $ 2,637 38 %$ 17,738 $ 13,106 $ 4,632 35 % Deposit service charges 2,061 1,233 828 67 3,924 2,177 1,747 80 Debit and credit card income 4,748 3,284 1,464 45 8,867 5,557 3,310 60 Treasury management fees 2,187 1,730 457 26 4,091 3,270 821 25 Mortgage banking income 1,295 1,303 (8 ) (1 ) 2,298 2,747 (449 ) (16 ) Net investment product sales commissions and fees 731 545 186 34 1,338 1,009 329 33 Bank owned life insurance 270 206 64 31 536 367 169 46 Other 1,153 629 524 83 2,351 1,399 952 68 Total non-interest income$ 21,940 $ 15,788 $ 6,152 39 %$ 41,143 $ 29,632 $ 11,511 39 % Total non-interest income increased$6.2 million , or 39%, and$11.5 million , or 39%, for the three and six month periods endedJune 30, 2022 compared to the same periods of 2021, respectively. Non-interest income comprised 27.8% and 28.0% of total revenues, defined as net interest income and non-interest income, for the three and six month periodsJune 30, 2022 compared to 27.5% and 27.2% for the same periods of 2021. WM&T services comprised 43.3% and 43.1% of total non-interest income for the three and six month periods endedJune 30, 2022 compared to 43.4% and 44.2% for the same periods of 2021. Acquisition-related activity drove a significant portion of the non-interest income increase for the three and six month periods endedJune 30, 2022 compared to the same periods of the prior year. 92
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Table of Contents WM&T Services: The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased$2.6 million , or 38%, and$4.6 million , or 35%, for the three and six month periods endedJune 30, 2022 , as compared with the same periods of 2021. Significant growth in asset-based income drove the increases for both periods, consistent with both acquisition-related activity and organic new business development, which served to offset market declines experienced during the first half of 2022. Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased$2.7 million , or 40%, and$4.7 million , or 37%, for the three and six month periods endedJune 30, 2022 , as compared with the same periods of 2021. The increase was driven by both acquisition-related activity and organic new business development. A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees decreased$43,000 and$66,000 for the three and six month periods endedJune 30, 2022 , as compared with the same periods of 2021, which was driven by lower estate fee income earned. AUM, stated at market value, totaled$6.56 billion atJune 30, 2022 compared with$4.44 billion atJune 30, 2021 and$4.80 billion atDecember 31, 2021 . The large increase in AUM betweenJune 30, 2021 andJune 30, 2022 is attributed mainly to AUM of$2.65 billion added through the CB acquisition, as well as net new business growth and stock market appreciation over the past twelve months. Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp's financial results and provide strategic diversity to revenue streams.
Detail of WM&T Service Income by Account Type:
Three months ended June 30, Six months ended June 30,
(in thousands) 2022 2021 2022 2021
Investment advisory $ 3,157 $ 2,936 $ 6,572 $ 5,675
Personal trust 3,919 1,948 6,297 3,626
Personal investment retirement 1,235 1,277 2,874 2,493
Company retirement 325 427 767 799
Foundation and endowment 229 197 490 373
Custody and safekeeping 36 37 100 72
Brokerage and insurance services - 24 40 44
Other 594 12 598 24
Total WM&T services income $ 9,495 $ 6,858 $ 17,738 $ 13,106
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.
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Assets Under Management by Account Type:
AUM (not included on balance sheet) increased from
2021
June 30, 2022 December 31, 2021
(in thousands) Managed Non-managed (1) Total Managed Non-managed (1) Total
Investment advisory $ 1,731,809 $ 495,337 $ 2,227,146 $ 1,919,593 $ 34,879 $ 1,954,472
Personal trust 2,144,943 59,444 2,204,387 939,703 150,221 1,089,924
Personal investment retirement 752,067 27,122 779,189 620,312 3,478 623,790
Company retirement 51,363 597,196 648,559 35,234 599,129 634,363
Foundation and endowment 429,233 7,551 436,784 368,572 1,532 370,104
Subtotal $ 5,109,415 $ 1,186,650 $ 6,296,065 $ 3,883,414 $ 789,239 $ 4,672,653
Custody and safekeeping - 259,026 259,026 - 128,178 128,178
Total $ 5,109,415 $ 1,445,676 $ 6,555,091 $ 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
primarily consist of participant-directed assets. The amount of custody and
safekeeping accounts are insignificant.
Managed Trust Assets under Management by Class of Investment:
December 31,
(in thousands) June 30, 2022 2021
Interest bearing deposits $ 171,602 $ 173,603
Treasury and government agency obligations 62,395
39,736
State, county and municipal obligations 195,720 110,795 Money market mutual funds 95,224 7,299 Equity mutual funds 1,166,903 944,500 Other mutual funds - fixed, balanced and municipal 679,180
612,913
Common trust funds and collective investment funds 117,597 - Other notes and bonds 199,572 171,087 Common and preferred stocks 2,052,255 1,681,006 Real estate mortgages 786 - Real estate 62,792 58,344 Other miscellaneous assets (1) 305,389 84,131 Total managed assets$ 5,109,415 $ 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 63% in equities and 37% in fixed income securities as ofJune 30, 2022 compared to 68% and 32% as ofDecember 31, 2021 . This composition has been relatively consistent from period to period and theWM&T Department holds no proprietary mutual funds. 94
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Additional Sources of Non-interest income:
Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, increased$828,000 , or 67%, and$1.7 million , or 80%, for the three and six month periods endedJune 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 and more recently, elevated deposit levels maintained by customers, 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, as many larger financial institutions have opted to greatly reduce, or completely eliminate, certain deposit service charges, particularly overdraft-related fees. Bancorp could be faced with strategic decisions surrounding deposit-related service charges in the future, which could negatively impact the contributions made by this, 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$1.5 million , or 45%, and$3.3 million , or 60%, for the three and six month periods endedJune 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$968,000 , or 41%, and$2.4 million , or 60%, and total credit card income increased$496,000 , or 54%, and$955,000 , or 58%, for the three and six month periods endedJune 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 and further development of the debit and credit card businesses.Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased$457,000 , or 26%, and$821,000 , or 25%, for the three and six month periods endingJune 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 increases in online services, reporting, ACH origination, remote deposit and fraud mitigation services over the past twelve months. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp's treasury management platform. 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$8,000 , or 1%, and$449,000 , or 16%, for the three and six month periods endedJune 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 six month period declines noted above, mortgage banking income has benefitted from the addition of a mortgage loan servicing portfolio that services approximately$1.48 billion in mortgage loans as a result of the CB acquisition. Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as quarterly wrap fees on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of 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$186,000 , or 34%, and$329,000 , or 33%, for the three and six month periods endedJune 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. BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. BOLI income increased$64,000 , or 31%, and$169,000 , or 46%, for the three and six month periods endingJune 30, 2022 compared to the same periods of the prior year, which was attributed mainly to the contribution of the BOLI portfolio added as a result of the KB acquisition in May of 2021. 95
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Other non-interest income increased$524,000 , or 83%, and$952,000 , or 68%, for the three and six month periods endedJune 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. Non-interest Expenses Three months endedJune 30 , Six months endedJune 30 ,
(dollars in thousands) 2022 2021 $ Variance % Variance 2022 2021 $ Variance % Variance
Compensation$ 22,204 $ 15,680 $ 6,524 42 %$ 40,173 $ 28,507 $ 11,666 41 % Employee benefits 4,429 3,367 1,062 32 8,968 6,628 2,340 35 Net occupancy and equipment 3,663 2,244 1,419 63 6,688 4,289 2,399 56 Technology and communication 3,984 2,670 1,314 49 7,403 5,016 2,387 48 Debit and credit card processing 1,665 976 689 71 3,002 1,681 1,321 79 Marketing and business development 1,445 822 623 76 2,217 1,346 871 65 Postage, printing and supplies 825 460 365 79 1,558 869 689 79 Legal and professional 1,027 666 361 54 1,677 1,128 549 49 FDIC insurance 536 349 187 54 1,181 754 427 57 Amortization of investments in tax credit partnerships 89 231 (142 ) (61 ) 177 262 (85 ) (32 ) Capital and deposit based taxes 582 527 55 10 1,100 985 115 12 Merger expenses - 18,100 (18,100 ) (100 ) 19,500 18,500 1,000 5 FHLB early termination penalty - 474 (474 ) (100 ) - 474 (474 ) (100 ) Intangible amortization 1,611 127 1,484 1,169 2,324 204 2,120 1,039 Other 2,615 1,484 1,131 76 5,004 2,507 2,497 100 Total non-interest expenses$ 44,675 $ 48,177 $ (3,502 ) (7 )%$ 100,972 $ 73,150 $ 27,822 38 % Total non-interest expenses decreased$3.5 million , or 7%, and increased$27.8 million , or 38%, for the three and six month periods endedJune 30, 2022 compared to the same periods of 2021, the variances stemming largely from the timing of the CB and KB acquisitions. Compensation and employee benefits comprised 59.6% and 48.7% of Bancorp's total non-interest expenses for the three and six month periods endedJune 30, 2022 , compared to 39.5% and 48.0% for the same periods of 2021. Excluding merger expenses, compensation and employee benefits comprised 59.6% and 60.3% for the three and six month periods endedJune 30, 2022 , compared to 63.3% and 64.3% for the same periods of 2021. Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased$6.5 million , or 42%, and$11.7 million , or 41%, for the three and six month periods endedJune 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 1,018 atJune 30, 2022 compared to 820 atDecember 31, 2021 and 823 atJune 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$1.1 million , or 32% and$2.3 million , or 35%, for the three and six month periods endedJune 30, 2022 , as compared with the same periods of 2021, driven primarily by the overall increase in full time equivalent employees noted above. 96
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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$1.4 million , or 63%, and$2.4 million , or 56%, for the three and six month periods endedJune 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. Further, two operational buildings were also acquired and are currently listed for sale. The KB acquisition in May of 2021 resulted in the addition of 19 branch locations in addition to operational buildings. AtJune 30, 2022 , Bancorp's branch network consists of 73 locations throughoutLouisville , central, eastern andNorthern Kentucky , as well as the MSAs ofIndianapolis, Indiana andCincinnati, Ohio . Technology and communication expenses include computer software amortization, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased$1.3 million , or 49%, and$2.4 million , or 48%, for the three and six month periods endedJune 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 fluctuate consistent with transaction volumes. Debit and credit card processing expense increased$689,000 , or 71%, and$1.3 million , or 79%, for the three and six month periods endingJune 30, 2022 compared to the same periods of last year, correlating in part with the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related growth that served to increase debit and credit card non-interest income. Marketing and business development expenses include all costs associated with promoting Bancorp including community support, retaining customers and acquiring new business. Marketing and business development expenses increased$623,000 , or 76%, and$871,000 , or 65%, for the three and six month periods endingJune 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$365,000 , or 79%, and$689,000 , or 79%, for the three and six month periods endedJune 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$361,000 , or 54%, and$549,000 , or 49%, for the three and six month periods endedJune 30, 2022 compared to the same periods of last year, the increase being 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$187,000 , or 54%, and$427,000 , or 57%, for the three and six month periods endedJune 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. 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 decreased$142,000 and$85,000 for the three and six month periods endingJune 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$55,000 , or 10%, and$115,000 , or 12%, for the three and six month periods endedJune 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 six month periods endedJune 30, 2022 , compared to$18.1 million and$18.5 million for the same periods of 2021. 97
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During the three months endedJune 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, with a weighted average cost of 2.03%, due to excess liquidity held on the balance sheet and the near-term outlook for low interest rates at the time of payoff. No such activity was recorded during the first half of 2022. 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 amortized through this category of non-interest expense are generally amortized over a period of approximately ten years. Intangible amortization for the three and six month periods endedJune 30, 2022 totaled$1.6 million and$2.3 million compared to$127,000 and$204,000 for the same periods of the prior year, the significant increase stemming from the CB acquisition. Other non-interest expenses increased$1.1 million and$2.5 million for the three and six month periods endedJune 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 correlating with growth in the debit and credit card business lines, higher fraud-related expenses and other ancillary expenses tied to Bancorp's general growth over the past twelve months. Bancorp's efficiency ratio (FTE) for the three month period endedJune 30, 2022 was 56.42%, while the ratio for the corresponding six month period was 68.53%, the latter reflecting one-time merger-related expenses attributed to the CB acquisition, which were all recorded in the first quarter of 2022. Excluding these non-recurring expenses and amortization of investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 56.31% and 55.18% for the three and six month periods endedJune 30, 2022 . By comparison, Bancorp's efficiency ratio for the three and six month periods endedJune 30, 2021 was 83.86% and 67.01%. Bancorp's adjusted efficiency ratio for the three and six months endedJune 30, 2021 was 51.95% and 49.82%. 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 June 30, Six months ended June 30,
(dollars in
thousands) 2022 2021 $ Variance %
Variance 2022 2021 $ Variance % Variance
Income before income tax expense$ 34,449 $ 5,048 $ 29,401 582 %$ 43,836 $ 33,219 $ 10,617 32 % Income tax expense 7,547 864 6,683 773 8,992 6,325 2,667 42 Effective tax rate 21.9 % 17.1 % 480 bps 28 20.5 % 19.0 % 150 bps 8
Fluctuations in the ETR are primarily attributed to the following:
? 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 1.1%
for the six months ended
same period of the prior year.
? The stock based compensation component of the ETR fluctuates consistent with
the level of SAR exercise activity. The ETR was reduced 2.4% for the six month
period ended
of 2021, as a result of increased levels of exercise activity.
? Tax-exempt interest income earned on loans and investment securities reduced
the ETR 0.8% for the six 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.
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Table of Contents ? 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
0.4% for the six month period ended
0.1% for the same period of 2021.
? Non-deductible merger expenses recorded during the six month period ended June
30, 2022 served to increase the ETR 0.3%, compared to an increase of 0.9% for
the same period of 2021.
Financial Condition -
Overview Total assets increased$937 million , or 14%, to$7.58 billion atJune 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$182 million , or 5%, betweenDecember 31, 2021 andJune 30, 2022 . Total liabilities increased$863 million , or 15%, to$6.83 billion atJune 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$71 million , or 11%, to$747 million atJune 30, 2022 from$676 million atDecember 31, 2021 . Stock issued in relation to the CB acquisition, which totaled$134 million , and net income of$34.7 million were offset by a$79 million negative change in AOCI and dividends declared during the first six months of 2022. The large decline in AOCI fromDecember 31, 2021 toJune 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$387 million , or 40%, ending at$574 million atJune 30, 2022 compared to$961 million atDecember 31, 2021 . The decline stemmed largely from anticipated seasonal deposit run-off associated with public fund balances and customer tax payment activity. The average balance of cash and cash equivalents increased$380 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 the past several quarters.Investment Securities Investment securities increased$445 million , or 38%, to$1.63 billion atJune 30, 2022 compared to$1.18 billion atDecember 31, 2021 . In addition to securities totaling$247 million being added as a result of the CB acquisition, Bancorp continued to actively invest in the securities portfolio during the first half of 2022 in an effort to deploy excess liquidity by purchasing$545 million of debt securities during six months endedJune 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$105 million stemming from an upward move in the interest rate environment experienced through the during the first half of 2022. 99
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A portion of the securities added during the first quarter of 2022, through both acquisition and normal investment activity, were classified as HTM. As ofJune 30, 2022 , Bancorp's investment security portfolio consisted of AFS and HTM securities as detailed below: AFS HTM Total (in thousands) Carrying Investment June 30, 2022 Fair Value Value SecuritiesU.S. Treasury and otherU.S. Government obligations$ 115,532 $ 219,574 $ 335,106 Government sponsored enterprise obligations 117,703 27,847
145,550
Mortgage backed securities - government agencies 765,522 238,028
1,003,550
Obligations of states and political subdivisions 135,268 - 135,268 Other 6,014 - 6,014 Total investment securities$ 1,140,039 $ 485,449 $ 1,625,488 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$43 million , or 55%, betweenDecember 31, 2021 andJune 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. In addition, two operational buildings were also acquired through CB and are currently listed for sale. Bancorp's branch network now consists of 73 locations throughoutLouisville , central, eastern and northern,Kentucky , as well as theIndianapolis, Indiana andCincinnati, Ohio MSAs.Goodwill At June 30 2022, Bancorp had$203 million in goodwill recorded on its balance sheet, including$67 million recorded in association 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, 2021 , Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the Commercial Banking reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value.
Core Deposit and Customer List Intangibles
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 ofJune 30, 2022 andDecember 31, 2021 , Bancorp's CDI assets were$17 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 related to LFA. No similar assets were recorded in relation to the KB acquisition. As ofJune 30, 2022 , Bancorp's CLI assets totaled$14 million . 100
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Other Assets and Other Liabilities
Other assets increased
Other liabilities decreased
The increase in other assets stems mainly from the addition of$13 million in MSR assets related to the CB acquisition and a$17 million increase in DTAs driven by the significant market depreciation experienced within the AFS debt securities portfolio for the six months endedJune 30, 2022 associated with rising interest rates. An increase in the market value of interest rate swap-related assets and further investment in tax credit assets also contributed to the increase, albeit to a lesser extent.
The decrease in other liabilities was attributed mainly to the reduction of
various accrued liabilities, such as employee incentive compensation and
benefits.
As of
intangible assets or other long-lived assets.
Loans
Composition of loans, net of deferred fees and costs, by primary loan portfolio
class follows:
December 31,
(dollars in thousands) June 30, 2022 2021 $
Variance % Variance
Commercial real estate - non-owner occupied$ 1,397,330 $ 1,128,244 $ 269,086 24 % Commercial real estate - owner occupied 787,559 678,405 109,154 16 % Total commercial real estate 2,184,889 1,806,649 378,240 21 % Commercial and industrial - term 667,338 596,710 70,628 12 % Commercial and industrial - term - PPP 36,767 140,734 (103,967 ) -74 % Commercial and industrial - lines of credit 423,066 370,312 52,754 14 %
Total commercial and industrial 1,127,171 1,107,756
19,415 2 % Residential real estate - owner occupied 533,577 400,695 132,882 33 % Residential real estate - non-owner occupied 293,852 281,018 12,834 5 % Total residential real estate 827,429 681,713 145,716 21 % Construction and land development 372,197 299,206 72,991 24 % Home equity lines of credit 192,102 138,976 53,126 38 % Consumer 137,278 104,294 32,984 32 % Leases 14,611 13,622 989 7 % Credits cards 21,647 17,087 4,560 27 % Total loans (1)$ 4,877,324 $ 4,169,303 $ 708,021 17 %
(1) Total loans are presented inclusive of premiums,
discounts, and net loan origination fees and costs.
Total loans increased$708 million , or 17%, fromDecember 31, 2021 toJune 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$104 million decline in the PPP loan portfolio. Excluding the loans acquired through the CB acquisition and the PPP portfolio, loan growth of$182 million , or 5%, was experienced betweenDecember 31, 2021 andJune 30, 2022 , driven largely by 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 40.5% atJune 30, 2022 , led by C&I utilization, which strengthened from 23.9% to 31.0% over that same period, respectively. However, line of credit usage has remained below pre-pandemic levels, as the availability of PPP lending facilities limited utilization for much of 2021 and into 2022, with customers continuing to maintain elevated levels of liquidity amidst current economic uncertainty. 101
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PPP loans of$37 million ($38 million gross of unamortized deferred fees and costs) were outstanding atJune 30, 2022 . Bancorp has$1 million in net unrecognized fees related to the PPP as ofJune 30, 2022 , which will be recognized immediately once the loans are paid off or forgiven by the SBA. While the timing of forgiveness activity will continue to impact results, the related fee recognition has become less significant as the balance of the overall portfolio has shrunk. AtJune 30, 2022 , approximately 96% of the dollars originated through the PPP have been forgiven and approximately 97% of the fee income received in relation to the PPP has been recognized. Bancorp's credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer's ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp's current market areas, which 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 bothJune 30, 2022 andDecember 31, 2021 , the total participated portion of loans of this nature totaled$5 million .
The following table presents the maturity distribution and rate sensitivity of
the total loan portfolio as of
Maturity
Within one After one After five Ater fifteen
June 30, 2022 (in year but within but within years Total % of Total
thousands) five years fifteen years
Total Loans
Fixed rate $ 170,025 $ 1,417,951 $ 1,094,591 $ 754,684 $ 3,437,251 70 %
Variable rate 521,561 510,005 357,886 50,621 1,440,073 30 %
Total $ 691,586 $ 1,927,956 $ 1,452,477 $ 805,305 $ 4,877,324 100 %
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) June 30, 2022 December 31, 2021 Non-accrual loans $ 7,827 $ 6,712 Troubled debt restructurings - 12 Loans past due 90 days or more and still accruing 1,176 684 Total non-performing loans 9,003 7,408 Other real estate owned 7,601 7,212 Total non-performing assets$ 16,604 $ 14,620 Non-performing loans to total loans 0.18 % 0.18 % Non-performing loans to total loans (excluding PPP) (1) 0.19 % 0.18 % Non-performing assets to total assets 0.22 % 0.22 % ACL for loans to total non-performing loans 737 % 728 %
(1) See the section titled "Non-GAAP Financial Measures" for reconcilement of
non-GAAP to GAAP measures.
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Non-performing assets as ofJune 30, 2022 consisted of 164 loans, ranging in individual amounts up to$917,000 , and OREO. OREO atJune 30, 2022 included four CRE properties and one residential real estate property. The following table presents the recorded investment in non-accrual loans by portfolio: (in thousands) June 30, 2022 December 31, 2021 Commercial real estate - non-owner occupied $ 647 $ 720 Commercial real estate - owner occupied 1,593
1,748
Total commercial real estate 2,240
2,468
Commercial and industrial - term 1,023 670 Commercial and industrial - PPP - - Commercial and industrial - lines of credit 164 228 Total commercial and industrial 1,187 898 Residential real estate - owner occupied 3,348
1,997
Residential real estate - non-owner occupied 233 293 Total residential real estate 3,581
2,290
Construction and land development - - Home equity lines of credit 378 646 Consumer 441 410 Leases - - Credit cards - - Total non-accrual loans $ 7,827 $ 6,712 As ofJune 30, 2022 , non-accrual loans totaled$8 million . The increase in total non-accrual loans betweenDecember 31, 2021 andJune 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$18 million and$11 million atJune 30, 2022 andDecember 31, 2021 . The increase betweenDecember 31, 2021 andJune 30, 2022 was driven by a large CRE relationship going past due as well as loans added through the CB acquisition. Delinquent loans to total loans were 0.37% and 0.26% atJune 30, 2022 andDecember 31, 2021 , respectively. Despite the increase during the first six months of 2022, delinquent loan levels remain low by historical comparison. 103
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Allowance for Credit Losses on Loans
The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the Footnote titled "Summary of Significant Accounting Policies" for discussion of Bancorp's ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp's judgment, should be charged-off. The following table reflects activity in the ACL on loans for the three and six months endedJune 30, 2022 : Initial Allowance Provision for (in thousands) Beginning on PCD Credit Losses Ending Three Months Ended June 30, 2022 Balance Loans on Loans
Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 20,620 $ - $ 101 $ - $ 2$ 20,723 Commercial real estate - owner occupied 11,326 - (1,464 ) (41 ) 21 9,842 Total commercial real estate 31,946 - (1,363 ) (41 ) 23 30,565 Commercial and industrial - term 11,108 - 1,174 (15 ) 75 12,342 Commercial and industrial - lines of credit 6,508 - (1,508 ) - - 5,000 Total commercial and industrial 17,616 - (334 ) (15 ) 75 17,342 Residential real estate - owner occupied 5,363 - 575 (7 ) 57 5,988 Residential real estate - non-owner occupied 3,361 - (176 ) - 5 3,190 Total residential real estate 8,724 - 399 (7 ) 62 9,178 Construction and land development 5,864 - 422 (72 ) - 6,214 Home equity lines of credit 1,467 - 54 - - 1,521 Consumer 1,049 - 141 (235 ) 158 1,113 Leases 211 - 10 - - 221 Credit cards 190 - (29 ) - 47 208 Total$ 67,067 $ - $ (700 )$ (370 ) $ 365 $ 66,362 Initial Allowance Provision for (in thousands) Beginning on PCD Credit Losses Ending Six Months Ended June 30, 2022 Balance Loans on Loans
Charge-offs Recoveries Balance
Commercial real estate - non-owner occupied$ 15,960 $ 3,508 $ 1,242 $ - $ 13$ 20,723 Commercial real estate - owner occupied 9,595 2,121 (1,876 ) (41 ) 43 9,842 Total commercial real estate 25,555 5,629 (634 ) (41 ) 56 30,565 Commercial and industrial - term (1) 8,577 1,358 1,741 (128 ) 794 12,342 Commercial and industrial - lines of credit 4,802 1,874 (1,640 ) (36 ) - 5,000 Total commercial and industrial 13,379 3,232 101 (164 ) 794 17,342 Residential real estate - owner occupied 4,316 590 1,035 (13 ) 60 5,988 Residential real estate - non-owner occupied 3,677 - (495 ) - 8 3,190 Total residential real estate 7,993 590 540 (13 ) 68 9,178 Construction and land development 4,789 419 1,078 (72 ) - 6,214 Home equity lines of credit 1,044 2 475 - - 1,521 Consumer 772 78 403 (489 ) 349 1,113 Leases 204 - 17 - - 221 Credit cards 162 - (1 ) - 47 208 Total$ 53,898 $ 9,950 $ 1,979$ (779 ) $ 1,314 $ 66,362 104
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Bancorp's ACL for loans was$66 million as ofJune 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$12 million , or 23%, increase experienced for the first six months of 2022. Acquisition-related activity was responsible for a total increase to the ACL for loans of$14 million at acquisition date, comprised of a$10 million day one adjustment for specific reserves placed on acquired PCD loans (offset to goodwill) and$4.4 million of provision for credit loss expense on loans related to the remaining acquired non-PCD loan portfolio. Partially offsetting the acquisition-related increases was a net reduction of the ACL for loans of$2 million for the first six months of 2022. While improvement in the unemployment forecast has helped drive reductions of the ACL for loans in recent quarters, the FRB's forecast of the Seasonally Adjusted National Civilian Unemployment Rate, which is the primary loss driver with Bancorp's CECL model, deteriorated during the second quarter, presumptively the result of inflation and recession-based fears. This development, along with qualitative factor updates related to the potential impact of rising rates on the C&I portfolio, resulted in increased expense within the CECL model. However, the negative impact of the economic forecast update was more than offset by 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, driving the negative provision recorded for the six month period endingJune 30, 2022 . In addition, net recovery activity of$535,000 was recorded for the six months endedJune 30, 2022 , driven mainly by a$711,000 recovery of a C&I relationship during the first quarter that was fully charged off in the prior year, serving to increase the ACL for loans. The ACL for loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions change, Bancorp could experience further adjustments in its required ACL for loans credit loss expense.
The following table sets forth the ACL by category of loan (excluding):
June 30, 2022 December 31, 2021
% of Total % of Total
(dollars in Allocated ACL on ACL to Total Allocated ACL on ACL to Total
thousands) Allowance loans Loans (1) Allowance loans Loans (1)
Commercial real estate - non-owner occupied$ 20,723 31 % 1.48 %$ 15,960 30 % 1.41 % Commercial real estate - owner occupied 9,842 15 % 1.25 % 9,595 18 % 1.41 % Total commercial real estate 30,565 46 % 1.40 % 25,555 48 % 1.41 % Commercial and industrial - term (1) 12,342 19 % 1.85 % 8,577 16 % 1.44 % Commercial and industrial - lines of credit 5,000 7 % 1.18 % 4,802 9 % 1.30 % Total commercial and industrial 17,342 26 % 1.59 % 13,379 25 % 1.38 % Residential real estate - owner occupied 5,988 9 % 1.12 % 4,316 8 % 1.08 % Residential real estate - non-owner occupied 3,190 5 % 1.09 % 3,677 7 % 1.31 % Total residential real estate 9,178 14 % 1.11 % 7,993 15 % 1.17 % Construction and land development 6,214 10 % 1.67 % 4,789 9 % 1.60 % Home equity lines of credit 1,521 2 % 0.79 % 1,044 2 % 0.75 % Consumer 1,113 2 % 0.81 % 772 1 % 0.74 % Leases 221 0 % 1.51 % 204 0 % 1.50 % Credit cards 208 0 % 0.96 % 162 0 % 0.95 % Total$ 66,362 100 % 1.37 %$ 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 six month periods endedJune 30, 2022 and 2021, respectively. 2022 2021 Net (charge Net (charge offs)/ offs)/ Three months ended June Net (charge recoveries Net (charge recoveries 30, offs)/ Average to average offs)/ Average to average (dollars in thousands) recoveries Loans loans recoveries Loans loans Commercial real estate - non-owner occupied $ 2$ 1,392,742 0.00 %$ (3,061 ) $ 1,003,623 -0.30 % Commercial real estate - owner occupied (20 ) 792,673 0.00 % 555 554,736 0.10 % Total commercial real estate (18 ) 2,185,415 0.00 % (2,506 ) 1,558,359 -0.16 % Commercial and industrial - term 60 671,539 0.01 % (98 ) 491,094 -0.02 % Commercial and industrial - term - PPP - 48,364 0.00 % - 510,963 0.00 % Commercial and industrial - lines of credit - 417,482 0.00 % - 275,019 0.00 % Total commercial and industrial 60 1,137,385 0.01 % (98 ) 1,277,076 -0.01 % Residential real estate - owner occupied 50 511,111 0.01 % (37 ) 313,935 -0.01 % Residential real estate - non-owner occupied 5 294,487 0.00 % 1 201,100 0.00 % Total residential real estate 55 805,598 0.01 % (36 ) 515,035 -0.01 % Construction and land development (72 ) 358,066 -0.02 % 3 276,018 0.00 % Home equity lines of credit - 188,422 0.00 % 1 114,582 0.00 % Consumer (77 ) 135,776 -0.06 % (108 ) 76,730 -0.14 % Leases - 14,233 0.00 % - 13,868 0.00 % Credit cards 47 21,118 0.22 % - 12,994 0.00 % Total $ (5 )$ 4,846,013 0.00 %$ (2,744 ) $ 3,844,662 -0.07 % Net (charge Net (charge offs)/ offs)/ Six months ended June Net (charge recoveries to Net (charge recoveries 30, offs)/ Average average offs)/ Average to average (dollars in thousands) recoveries Loans loans recoveries Loans loans Commercial real estate - non-owner occupied $ 14$ 1,302,604 0.00 %$ (3,030 ) $ 943,644 -0.32 % Commercial real estate - owner occupied 1 753,414 0.00 % 555 537,304 0.10 % Total commercial real estate 15 2,056,018 0.00 % (2,475 ) 1,480,948 -0.17 % Commercial and industrial - term 666 644,461 0.10 % (147 ) 452,971 -0.03 % Commercial and industrial - term - PPP - 80,070 0.00 % - 569,068 0.00 % Commercial and industrial - lines of credit (36 ) 401,126 -0.01 % - 247,592 0.00 % Total commercial and industrial 630 1,125,657 0.06 % (147 ) 1,269,631 -0.01 % Residential real estate - owner occupied 47 473,599 0.01 % (40 ) 288,123 -0.01 % Residential real estate - non-owner occupied 8 289,525 0.00 % 2 180,539 0.00 % Total residential real estate 55 763,124 0.01 % (38 ) 468,662 -0.01 % Construction and land development (72 ) 337,927 -0.02 % 3 280,011 0.00 % Home equity lines of credit - 171,691 0.00 % 1 107,803 0.00 % Consumer (140 ) 125,097 -0.11 % (94 ) 92,681 -0.10 % Leases - 14,006 0.00 % - 14,110 0.00 % Credit cards 47 19,744 0.24 % - 12,025 0.00 % Total $ 535$ 4,613,264 0.01 %$ (2,750 ) $ 3,725,871 -0.07 % 106
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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 andJune 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$100,000 was also recorded for the six month period endedJune 30, 2022 , driven largely by the addition of new lines, and thus increased availability, within the C&D portfolio. ACL for off balance sheet credit exposures stood at$4.1 million as ofJune 30, 2022 compared to$3.5 million as ofDecember 31, 2021 . Deposits December 31, (dollars in thousands) June 30, 2022 2021 $
Variance % Variance
Non-interest bearing demand deposits$ 2,121,304 $ 1,755,754 $ 365,550 21 % Interest bearing deposits: Interest bearing demand 2,184,579 2,131,928 52,651 2 % Savings 571,856 415,258 156,598 38 % Money market 1,167,538 1,050,352 117,186 11 % Time deposits of$250 thousand or more 95,958 89,745 6,213 7 % Other time deposits 407,895 344,477 63,418 18 % Total time deposits 503,853 434,222 69,631 16 %
Total interest bearing deposits 4,427,826 4,031,760
396,066 10 % Total deposits (1)$ 6,549,130 $ 5,787,514 $ 761,616 13 %
(1) Includes
andDecember 31, 2021 , respectively. Total deposits increased$762 million , or 13%, fromDecember 31, 2021 toJune 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$358 million , or 6%, during the first six months of 2022, attributed mainly to anticipated seasonal deposit run-off and time deposit maturities.
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. AtJune 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) June 30, 2022 December 31, 2021 Outstanding balance at end of period $ 161,512 $
75,466
Weighted average interest rate at end of period 0.44 % 0.04 %
Three months ended Six months ended
June 30, June 30,
(dollars in thousands) 2022 2021 2022 2021
Average outstanding balance during
the period $ 140,169 $ 55,673 $ 115,761 $ 51,330
Average interest rate during the
period 0.16 % 0.04 % 0.13 % 0.04 %
Maximum outstanding at any month
end during the period $ 161,512 $ 63,942 $ 161,512 $ 63,942
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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. The majority of SSUARs are indexed to immediately repricing indices such as the FFTR. SSUARs increased$86 million , betweenDecember 31, 2021 andJune 30, 2022 , as SSUAR totaling$66 million were assumed as part of the CB acquisition. The remaining fluctuation in SSUAR is consistent with the general trend of customers maintaining elevated deposit balances over the past several quarters. 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 ofJune 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$485 million and$899 million atJune 30, 2022 andDecember 31, 2021 , respectively. The decrease experienced for the first six months of 2022 is attributed to significant investment in the securities portfolio, strong organic loan growth and seasonal deposit runoff. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are used for general daily liquidity purposes. The fair value of the AFS debt security portfolio was$1.14 billion and$1.18 billion atJune 30, 2022 andDecember 31, 2021 respectively. The lack of growth in AFS debt security portfolio for the first six 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$26 million and cash flows on amortizing debt securities of approximately$206 million (based on assumed prepayment speeds as ofJune 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. AtJune 30, 2022 , total investment securities pledged for these purposes comprised 64% of the debt securities portfolio, leaving approximately$586 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. AtJune 30, 2022 , such deposits totaled$5.76 billion and represented 88% of Bancorp's total deposits, as compared with$5.05 billion , or 87% of total deposits atDecember 31, 2021 . Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not place undue pressure on liquidity. However, many of Bancorp's individual depositors are currently maintaining historically high balances. These excess balances may be more sensitive to market rates, with potential decreases possibly straining Bancorp's liquidity position. As ofJune 30, 2022 andDecember 31, 2021 , Bancorp held brokered deposits totaling$10 million and$5 million , respectively, all of which is attributed to deposits added through the acquisition-related activity over the past twelve months. 108
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Included in total deposit balances atJune 30, 2022 are$628 million in public funds generally comprised of accounts with local government agencies and public school districts in the markets in which Bancorp operates. AtDecember 31, 2021 , public funds deposits totaled$645 million , the increase experienced during the first six months of 2022 being attributed mainly to relationships added through the CB acquisition. Bancorp is a member of the FHLB ofCincinnati . As a member of the FHLB, Bancorp has access to credit products of the FHLB. Bancorp views these borrowings as a potential low cost alternative to brokered deposits. AtJune 30, 2022 andDecember 31, 2021 , available credit from the FHLB totaled$1.22 billion and$1.00 billion , respectively. Additionally, Bancorp had unsecured available FFP lines with correspondent banks totaling$100 million and$80 million atJune 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. 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. AtJune 30, 2022 , the Bank could pay an amount equal to$43 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$467 million as ofJune 30, 2022 compared toDecember 31, 2021 , the increase being driven by both the CB acquisition and new lines of credit. Total average line of credit utilization declined to 40.5% as ofJune 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 31.0% atJune 30, 2022 compared to 31.8% atDecember 31, 2021 and 27.4% atJune 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. 109
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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$4.1 million and$3.5 million as ofJune 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,$100,000 of provision expense was recorded for the six month period endedJune 30, 2022 , driven largely by the addition of new lines, and thus increased availability, 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 AtJune 30, 2022 , stockholders' equity totaled$747 million , representing an increase of$71 million , or 11%, compared toDecember 31, 2021 . The increase for the first six months of 2022 was attributed mainly to stock issued in relation to the CB acquisition, which totaled$134 million . Further, net income of$34.7 million was offset by a$79 million negative change in AOCI and dividends declared during the first six 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 toJune 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 andJune 30, 2022 . TCE was 7.00% atJune 30, 2022 compared to 8.22% atDecember 31, 2021 , while tangible book value per share was$17.59 atJune 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 six months of 2022. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan. 110
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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:
June 30, 2022 December 31, 2021
Total risk-based capital(1)
Consolidated 12.27 % 12.79 %
Bank 11.63 12.42
Common equity tier 1 risk-based capital(1)
Consolidated 10.81 11.94
Bank 10.62 11.56
Tier 1 risk-based capital(1)
Consolidated 11.26 11.94
Bank 10.62 11.56
Leverage(2)
Consolidated 8.58 8.86
Bank 8.06 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 June 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 June 30, 2022 , the adequately-capitalized
minimums, including the capital conservation buffer, were a 6.0% Common Equity
Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5%
Total Risk-Based Capital ratio.
As a result of the CB acquisition, Bancorp became the 100% successor owner of
the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust
III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The
sole assets of the trust subsidiaries represent the proceeds of offerings loaned
in exchange for subordinated debentures with similar terms to the TPS. The TPS
are treated as part of Tier 1 Capital. The subordinated note and related
interest expense are included in Bancorp's consolidated financial statements.
The subordinated notes are currently redeemable at Bancorp's option on a
quarterly basis. As of June 30, 2022 , subordinated notes added through the CB
acquisition totaled $26 million . Further, Bancorp had borrowing capacity of $20
million available through an unsecured borrowing line of the holding company as
of June 30, 2022 , which was added during the first quarter to allow capital
flexibility at the Bank level.
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As permitted by the interim final rule issued onMarch 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 "Financial Instruments - Credit Losses," or CECL, which was effectiveJanuary 1, 2020 . The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the "transition adjustments") were declared to be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed.Had Bancorp not elected to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would have exceeded the well-capitalized level. 112
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Non-GAAP Financial Measures
The following table provides a reconciliation of total stockholders' equity in accordance with GAAP to tangible stockholders' equity (TCE), a non-GAAP disclosure. Bancorp provides the TCE per share, a non-GAAP measure, in addition to those defined by banking regulators, based on its widespread use by investors as a means to evaluate capital adequacy: (dollars in thousands, except per share data)June 30, 2022
Total stockholders' equity - GAAP (a)$ 747,131 $ 675,869 Less: Goodwill (202,524 ) (135,830 ) Less: Core deposit and other intangibles (30,357 ) (5,596 ) Tangible common equity - Non-GAAP (c)$ 514,250 $ 534,443 Total assets - GAAP (b)$ 7,583,105 $ 6,646,025 Less: Goodwill (202,524 ) (135,830 ) Less: Core deposit and other intangibles (30,357 ) (5,596 ) Tangible assets - Non-GAAP (d)$ 7,350,224
$ 6,504,599
Total stockholders' equity to total assets - GAAP (a/b) 9.85 % 10.17 % Tangible common equity to tangible assets - Non-GAAP (c/d) 7.00 % 8.22 % Total shares outstanding (e) 29,243 26,596 Book value per share - GAAP (a/e) $ 25.55 $ 25.41 Tangible common equity per share - Non-GAAP (c/e) 17.59 20.09 The general decline betweenDecember 31, 2021 andJune 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 six months of 2022, which drove a$79 million decline in AOCI and as a result, a decline in stockholders equity. Further, acquisition-related growth served to increase goodwill and total assets, which also contributed to lower ratios. 113
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The ACL for loans to total non-PPP loans represents the ACL for loans, divided by total loans less PPP loans. Non-performing loans to total non-PPP loans represents non-performing loans, divided by total loans less PPP loans. Delinquent loans to total non-PPP loans represents delinquent loans (consisting of all loans 30 days or more past due), divided by total loans less PPP loans. Bancorp believes these non-GAAP disclosures are important because they provide comparable ratios after eliminating PPP loans, which are fully guaranteed by the SBA and have not been allocated for within the ACL and are not at risk of non-performance. (dollars in thousands) June 30, 2022 December 31, 2021 Total loans - GAAP (a)$ 4,877,324 $ 4,169,303 Less: PPP loans (36,767 ) (140,734 ) Total non-PPP loans - Non-GAAP (b)$ 4,840,557 $ 4,028,569 ACL for loans (c)$ 66,362 $ 53,898 Non-performing loans (d) 9,003 7,408 Delinquent loans (e) 17,973 11,036 ACL for loans to total loans - GAAP (c/a) 1.36 % 1.29 % ACL for loans to total loans - Non-GAAP (c/b) 1.37 % 1.34 % Non-performing loans to total loans - GAAP (d/a) 0.18 % 0.18 % Non-performing loans to total loans - Non-GAAP (d/b) 0.19 % 0.18 % Delinquent loans to total loans - GAAP (e/a) 0.37 % 0.26 % Delinquent loans to total loans - Non-GAAP (e/b) 0.37 % 0.27 % The efficiency ratio, a non-GAAP measure, equals total non-interest expenses divided by the sum of net interest income FTE and non-interest income. The ratio excludes net gains (losses) on sales, calls, and impairment of investment securities, if applicable. In addition to the efficiency ratio, Bancorp considers an adjusted efficiency ratio. Bancorp believes it is important because it provides a comparable ratio after eliminating the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses. Three months ended June 30, Six months ended June 30, (dollars in thousands) 2022 2021 2022 2021
Total non-interest expenses - GAAP (a)
Less: Non-recurring merger expenses
- (18,100 ) (19,500 ) (18,500 ) Less: Amortization of investments in tax credit partnerships (89 ) (231 ) (177 ) (262 ) Total non-interest expenses - Non-GAAP (c)$ 44,586 $
29,846
Total net interest income, FTE$ 57,244 $ 41,661 $ 106,189 $ 79,535 Total non-interest income 21,940 15,788 41,143 29,632 Less: Gain/loss on sale of securities - - - - Total revenue - GAAP (b)$ 79,184 $ 57,449 $ 147,332 $ 109,167 Efficiency ratio - GAAP (a/b) 56.42 % 83.86 % 68.53 % 67.01 % Efficiency ratio - Non-GAAP (c/b) 56.31 % 51.95 % 55.18 % 49.82 % 114
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