Stock Yards Bancorp, Inc. 10-Q

sybt20200930_10q.htm     Table of Contents UNITED STATES   SECURITIES AND EXCHANGE COMMISSION   Washington, D.C. 20549     FORM  10-Q    ☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    For the quarterly period ended September 30 , 2020    or      ☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    Commission File Number: 1 - 13661       STOCK YARDS BANCORP, INC.   (Exact name of registrant as specified in its charter)    Kentucky   61-1137529 (State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)     1040 East Main Street , Louisville , Kentucky   40206 (Address of principal executive offices)   (Zip Code)    Registrant’s telephone number, including area code: ( 502 ) 582-2571    Securities registered pursuant to Section 12(b) of the Act:  Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock, no par value SYBT The NASDAQ Stock Market, LLC   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes    ☐ No    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒  Yes   ☐ No    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.   Large accelerated filer  ☒    Accelerated filer ☐   Non-accelerated filer ☐   Smaller reporting company  ☐   Emerging growth company  ☐                If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐    Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes  ☒ No   The number of shares outstanding of the registrant’s Common Stock, no par value, as of October 31, 2020, was 22,692,044 .   1 Table of Contents       TABLE OF CONTENTS   Part I – Financial Information               Item 1. Financial Statements. 4         Consolidated Balance Sheets 4         Consolidated Statements of Income 5         Consolidated Statements of Comprehensive Income 6         Consolidated Statements of Changes in Stockholders’ Equity 7         Consolidated Statements of Cash Flows 9         Footnotes to Consolidated Financial Statements 11       Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 59     Item 3. Quantitative and Qualitative Disclosures about Market Risk. 98     Item 4. Controls and Procedures. 98             Part II – Other Information 98     Item 1. Legal Proceedings. 98     Item1A. Risk Factors. 98     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 100     Item 6. Exhibits. 100     Signatures 101   2 Table of Contents     GLOSSARY OF ABBREVIATIONS AND ACRONYMS   The acronyms and abbreviations identified in alphabetical order below are used throughout this Report on Form 10-Q:   Acronym or Term     Definition     Acronym or Term     Definition     Acronym or Term     Definition ACH   Automatic Clearing House   ETR   Effective Tax Rate   NIM   Net Interest Margin (FTE) AFS   Available for Sale   EVP    Executive Vice President   NPV   Net Present Value APIC   Additional paid-in capital   FASB   Financial Accounting Standards Board   Net Interest Spread   Net Interest Spread (FTE) ACL   Allowance for Credit Losses   FDIC   Federal Deposit Insurance Corporation   NM   Not Meaningful AOCI   Accumulated Other Comprehensive Income   FFP   Federal Funds Purchased   OAEM   Other Assets Especially Mentioned ASC   Accounting Standards Codification   FFS   Federal Funds Sold   OCI   Other Comprehensive Income ASU   Accounting Standards Update   FFTR   Federal Funds Target Rate   OREO   Other Real Estate Owned ATM   Automated Teller Machine   FHA   Federal Housing Authority   PPP   Paycheck Protection Program AUM   Assets Under Management   FHC   Financial Holding Company   PV   Present Value Bancorp / the Company   Stock Yards Bancorp, Inc.    FHLB   Federal Home Loan Bank of Cincinnati   PCD   Purchased with Credit Deteriorated Bank / SYB   Stock Yards Bank & Trust Company    FHLMC   Federal Home Loan Mortgage Corporation    PCI   Purchased Credit Impaired BOLI   Bank Owned Life Insurance   FICA   Federal Insurance Contributions Act   Prime   The  Wall Street Journal Prime Interest Rate BP   Basis Point - 1/100th of one percent   FNMA   Federal National Mortgage Association   Provision   Provision for Credit Losses C&D   Construction and Development   FRB   Federal Reserve Bank   PSU   Performance Stock Unit CARES Act   Coronavirus Aid, Relief and Economic Security Act   FTE   Fully Tax Equivalent   ROA   Return on Average Assets C&I   Commercial and Industrial   GAAP   United States Generally Accepted Accounting Principles   ROE   Return on Average Equity CD   Certificate of Deposit   GLB Act   Gramm-Leach-Bliley Act   RSA   Restricted Stock Award CDI   Core Deposit Intangible   GNMA   Government National Mortgage Association   RSU   Restricted Stock Unit CECL   Current Expected Credit Loss (ASC-326)   HB   House Bill   SAB   Staff Accounting Bulletin CEO   Chief Executive Officer   HELOC   Home Equity Line of Credit   SAR   Stock Appreciation Right CFO   Chief Financial Officer   ITM   Interactive Teller Machine   SEC   Securities and Exchange Commission COVID-19   Coronavirus Disease - 2019   KBST   King Bancorp Statutory Trust I   SSUAR   Securities Sold Under Agreements to Repurchase CRA   Community Reinvestment Act   KSB   King Bancorp, Inc. and King Southern Bank   SBA   Small Business Administration CRE   Commercial Real Estate   LIBOR   London Interbank Offered Rate   TCE   Tangible Common Equity Dodd-Frank Act   The Dodd-Frank Wall Street Reform and Consumer Protection Act   Loans   Loans and Leases   TDR   Troubled Debt Restructuring DTA   Deferred Tax Asset   MBS   Mortgage Backed Securities   TPS   Trust Preferred Securities DTL   Deferred Tax Liability   MSA   Metropolitan Statistical Area   VA   U.S. Department of Veterans Affairs DCF   Discounted Cash Flow   MSRs   Mortgage Servicing Rights   WM&T   Wealth Management and Trust EPS   Earnings Per Share   NASDAQ   The NASDAQ Stock Market, LLC           3 Table of Contents     PART I – FINANCIAL INFORMATION   Item 1. Financial Statements   CONSOLIDATED BALANCE SHEETS   September 30, 2020 (unaudited) and December 31, 2019 (in thousands, except per share data)       September 30,     December 31,       2020     2019   Assets                 Cash and due from banks   $ 49,517     $ 46,863   Federal funds sold and interest bearing due from banks     241,486       202,861   Total cash and cash equivalents     291,003       249,724                     Mortgage loans held for sale     23,611       8,748   Available for sale debt securities (amortized cost of $ 416,767 ) in 2020 and $ 469,313 in 2019, respectively     429,184       470,738   Federal Home Loan Bank stock, at cost     11,284       11,284   Loans     3,472,481       2,845,016   Allowance for credit losses     50,501       26,791   Net loans     3,421,980       2,818,225                     Premises and equipment, net     56,911       58,618   Bank owned life insurance     33,084       32,557   Accrued interest receivable     13,782       8,534   Goodwill     12,513       12,513   Core deposit intangible     2,042       2,285   Other assets     69,735       50,971   Total assets   $ 4,365,129     $ 3,724,197                     Liabilities                 Deposits:                 Non-interest bearing   $ 1,180,001     $ 810,475   Interest bearing     2,574,517       2,323,463   Total deposits     3,754,518       3,133,938                     Securities sold under agreements to repurchase     40,430       31,895   Federal funds purchased     9,179       10,887   Federal Home Loan Bank advances     56,536       79,953   Accrued interest payable     325       640   Other liabilities     75,543       60,587   Total liabilities     3,936,531       3,317,900                     Commitments and contingent liabilities (Footnote 10)     —       —                     Stockholders’ equity                 Preferred stock, no par value. Authorized 1,000,000 shares; no shares issued or outstanding     —       —   Common stock, no par value. Authorized 40,000,000 shares; issued and outstanding 22,692,000 and 22,604,000 shares in 2020 and 2019, respectively     36,500       36,207   Additional paid-in capital     41,256       35,714   Retained earnings     341,970       333,699   Accumulated other comprehensive income     8,872       677   Total stockholders’ equity     428,598       406,297   Total liabilities and stockholders’ equity   $ 4,365,129     $ 3,724,197     See accompanying notes to unaudited consolidated financial statements.   4 Table of Contents     CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the three and nine months ended September 30 , 2020 and 2019 (in thousands, except per share data)       Three months ended     Nine months ended       September 30,     September 30,       2020     2019     2020     2019   Interest income:                                 Loans, including fees   $ 33,844     $ 35,058     $ 101,692     $ 100,075   Federal funds sold and interest bearing due from banks     54       566       673       2,129   Mortgage loans held for sale     173       41       359       121   Securities available for sale:                                 Taxable     2,029       2,239       6,631       7,353   Tax-exempt     44       105       177       382   Total interest income     36,144       38,009       109,532       110,060   Interest expense:                                 Deposits     2,107       5,316       8,676       16,034   Securities sold under agreements to repurchase     7       26       31       79   Federal funds purchased and other short-term borrowing     2       52       33       176   Federal Home Loan Bank advances     333       509       1,123       1,154   Subordinated debentures     —       —       —       26   Total interest expense     2,449       5,903       9,863       17,469   Net interest income     33,695       32,106       99,669       92,591   Provision for credit losses     4,418       400       15,518       1,000   Net interest income after provision     29,277       31,706       84,151       91,591   Non-interest income:                                 Wealth management and trust services     5,657       5,738       17,601       16,839   Deposit service charges     998       1,356       3,081       3,793   Debit and credit card income     2,218       2,102       6,261       6,014   Treasury management fees     1,368       1,264       3,901       3,623   Mortgage banking income     1,979       794       4,447       2,004   Net investment product sales commissions and fees     431       400       1,288       1,120   Bank owned life insurance     172       487       527       849   Other     220       1,068       1,095       2,199   Total non-interest income     13,043       13,209       38,201       36,441   Non-interest expenses:                                 Compensation     13,300       12,330       37,296       36,846   Employee benefits     2,853       2,819       8,891       8,182   Net occupancy and equipment     2,235       2,189       6,205       6,005   Technology and communication     2,265       1,841       6,225       5,462   Debit and credit card processing     649       662       1,908       1,880   Marketing and business development     523       732       1,548       2,260   Postage, printing and supplies     472       402       1,355       1,218   Legal and professional     544       524       1,795       2,581   FDIC insurance     435       —       894       486   Amortization of investments in tax credit partnerships     52       137       141       241   Capital and deposit based taxes     1,076       993       3,331       2,864   Credit loss expense for off-balance sheet exposures     550       -       2,400       -   Other     1,242       1,269       3,041       3,937   Total non-interest expenses     26,196       23,898       75,030       71,962   Income before income tax expense     16,124       21,017       47,322       56,070   Income tax expense     1,591       3,783       6,189       6,652   Net income   $ 14,533     $ 17,234     $ 41,133     $ 49,418   Net income per share, basic   $ 0.64     $ 0.76     $ 1.82     $ 2.18   Net income per share, diluted   $ 0.64     $ 0.76     $ 1.81     $ 2.16   Weighted average outstanding shares:                                 Basic     22,582       22,550       22,553       22,633   Diluted     22,802       22,810       22,759       22,901     See accompanying notes to unaudited consolidated financial statements.    5 Table of Contents     CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) For the three and nine months ended September 30 , 2020 and 2019 (in thousands)       Three months ended     Nine months ended       September 30,     September 30,       2020     2019     2020     2019   Net income   $ 14,533     $ 17,234     $ 41,133     $ 49,418   Other comprehensive income:                                 Change in unrealized gain on AFS debt securities     ( 35 )     946       10,992       9,392   Change in fair value of derivatives used in cash flow hedge     111       ( 59 )     ( 207 )     ( 589 ) Total other comprehensive income, before income tax expense     76       887       10,785       8,803   Tax effect     20       225       2,591       1,933   Total other comprehensive income, net of tax     56       662       8,194       6,870   Comprehensive income   $ 14,589     $ 17,896     $ 49,327     $ 56,288     See accompanying notes to unaudited consolidated financial statements.   6 Table of Contents     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited) For the three and nine mo nths ended September 30 , 2020 a nd 2019 (in thousands, except per share data)                                       Accumulated               Common stock     Additional             other     Total       Shares             paid-in     Retained     comprehensive     stockholders'       outstanding     Amount     capital     earnings     income (loss)     equity                                                     Balance, January 1, 2019     22,749     $ 36,689     $ 36,797     $ 298,156     $ ( 5,142 )   $ 366,500                                                     Activity for three months ended March 31, 2019:                                                 Net income     —       —       —       15,641       —       15,641   Other comprehensive income     —       —       —       —       2,629       2,629   Stock compensation expense     —       —       863       —       —       863   Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations     74       245       2,254       ( 4,452 )     —       ( 1,953 ) Cash dividends declared, $ 0.25 per share     —       —       —       ( 5,686 )     —       ( 5,686 )                                                   Balance, March 31, 2019     22,823     $ 36,934     $ 39,914     $ 303,659     $ ( 2,513 )   $ 377,994                                                                                                       Activity for three months ended June 30, 2019:                                                                                                   Net income     —       —       —       16,543       —       16,543   Other comprehensive income     —       —       —       —       3,579       3,579   Stock compensation expense     —       —       993       —       —       993   Common stock repurchased     ( 107 )     ( 357 )     ( 3,308 )     —       —       ( 3,665 ) Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations     5       19       182       ( 363 )     —       ( 162 ) Cash dividends declared, $ 0.26 per share     —       —       —       ( 5,917 )     —       ( 5,917 ) Shares cancelled     —       —       ( 5 )     5       —       —                                                     Balance, June 30, 2019     22,721     $ 36,596     $ 37,776     $ 313,927     $ 1,066     $ 389,365                                                                                                       Activity for three months ended September 30, 2019:                                                                                                   Net income     —       —       —       17,234       —       17,234   Other comprehensive income     —       —       —       —       662       662   Stock compensation expense     —       —       876       —       —       876   Common stock repurchased     ( 152 )     ( 504 )     ( 4,995 )     —       —       ( 5,499 ) Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations     29       97       994       ( 1,744 )     —       ( 653 ) Cash dividends declared, $ 0.26 per share     —       —       —       ( 5,874 )     —       ( 5,874 ) Shares cancelled     ( 1 )     ( 5 )     ( 44 )     49       —       —                                                     Balance, September 30, 2019     22,597     $ 36,184     $ 34,607     $ 323,592     $ 1,728     $ 396,111     See accompanying notes to unaudited consolidated financial statements.     7 Table of Contents   CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited) For the three and nine mo nths ended S e ptember 30 , 2020 a nd 2019 (in thousands, except per share data)                                       Accumulated               Common stock     Additional             other     Total       Shares             paid-in     Retained     comprehensive     stockholders'       outstanding     Amount     capital     earnings     income     Total                                                     Balance, January 1, 2020     22,604     $ 36,207     $ 35,714     $ 333,699     $ 677     $ 406,297                                                     Activity for three months ended March 31, 2020:                                                 Impact of adoption of ASC 326     —       —       —       ( 8,823 )     —       ( 8,823 ) Net income     —       —       —       13,232       —       13,232   Other comprehensive income     —       —       —       —       5,775       5,775   Stock compensation expense     —       —       817       —       —       817   Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations     62       203       1,858       ( 3,546 )     —       ( 1,485 ) Cash dividends declared, $ 0.27 per share     —       —       —       ( 6,111 )     —       ( 6,111 ) Shares cancelled     ( 1 )     ( 2 )     ( 22 )     24       —       —                                                     Balance, March 31, 2020     22,665     $ 36,408     $ 38,367     $ 328,475     $ 6,452     $ 409,702                                                                                                       Activity for three months ended June 30, 2020:                                                 Net income     —       —       —       13,368       —       13,368   Other comprehensive income     —       —       —       —       2,364       2,364   Stock compensation expense     —       —       976       —       —       976   Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations     2       8       96       ( 163 )     —       ( 59 ) Cash dividends declared, $ 0.27 per share     —       —       —       ( 6,120 )     —       ( 6,120 ) Shares cancelled     —       ( 1 )     ( 14 )     15       —       —   Balance, June 30, 2020     22,667     $ 36,415     $ 39,425     $ 335,575     $ 8,816     $ 420,231                                                                                                       Activity for three months ended September 30, 2020:                                                 Net income     —       —       —       14,533       —       14,533   Other comprehensive income     —       —       —       —       56       56   Stock compensation expense     —       —       843       —       —       843   Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations     27       91       1,049       ( 2,083 )     —       ( 943 ) Cash dividends declared, $ 0.27 per share     —       —       —       ( 6,122 )     —       ( 6,122 ) Shares cancelled     ( 2 )     ( 6 )     ( 61 )     67       —       —   Balance, September 30, 2020     22,692     $ 36,500     $ 41,256     $ 341,970     $ 8,872     $ 428,598     See accompanying notes to unaudited consolidated financial statements.   8 Table of Contents     CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)   For the nine months ended September 30 , 2020 and 2019 (in thousands)       2020     2019   Operating activities:                 Net income   $ 41,133     $ 49,418   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     15,518       1,000   Depreciation, amortization and accretion, net     4,687       2,969   Deferred income tax benefit     ( 3,932 )     ( 4,924 ) Gain on sales of mortgage loans held for sale     ( 4,817 )     ( 1,251 ) Origination of mortgage loans held for sale     ( 201,099 )     ( 69,983 ) Proceeds from sale of mortgage loans held for sale     191,053       66,580   Bank owned life insurance income     ( 527 )     ( 849 ) (Gain)/loss on the disposal of premises and equipment     ( 176 )     6   Income on other investments     —       ( 142 ) Gain on the sale of other real estate owned     —       ( 63 ) Stock compensation expense     2,636       2,732   Excess tax (benefit) expense from share-based compensation arrangements     ( 444 )     ( 712 ) Net change in accrued interest receivable and other assets     ( 20,224 )     ( 7,296 ) Net change in accrued interest payable and other liabilities     13,973       2,169   Net cash provided by operating activities     37,781       39,654   Investing activities:                 Purchases of available for sale debt securities     ( 237,646 )     ( 442,220 ) Proceeds from sales of acquired available for sale debt securities     —       12,427   Proceeds from maturities and paydowns of available for sale debt securities     289,587       513,906   Proceeds from redemption of Federal Home Loan Bank stock     —       591   Proceeds from redemption of Federal Reserve Bank stock     —       490   Proceeds from redemption of interest bearing due from banks     —       1,761   Proceeds from the sale of held for investment loans     2,794       —   Net change in traditional loans     11,590       ( 142,108 ) Net change in PPP loans     ( 642,056 )     —   Purchases of premises and equipment     ( 4,068 )     ( 4,179 ) Proceeds from sale or disposal of premises and equipment     1,240       2,561   Proceeds from surrender of acquired bank owned life insurance     —       3,431   Proceeds from bank owned life insurance mortality benefit     —       909   Other investment activities     ( 860 )     ( 2,766 ) Proceeds from sales of other real estate owned     —       868   Cash for acquisition, net of cash acquired     —       ( 24,684 ) Net cash used in investing activities     ( 579,419 )     ( 79,013 ) Financing activities:                 Net change in deposits     620,521       26,342   Net change in securities sold under agreements to repurchase and federal funds purchased     6,827       ( 4,778 ) Proceeds from Federal Home Loan Bank advances     90,000       90,000   Repayments of Federal Home Loan Bank advances     ( 113,564 )     ( 99,620 ) Repayment of acquired bank holding company line of credit     —       ( 2,300 ) Redemption of acquired bank subordinated debentures     —       ( 3,609 ) Repurchase of common stock     —       ( 9,164 ) Share repurchases related to compensation plans     ( 2,487 )     ( 2,768 ) Cash dividends paid     ( 18,380 )     ( 17,469 ) Net cash provided by (used in) financing activities     582,917       ( 23,366 ) Net change in cash and cash equivalents     41,279       ( 62,725 ) Cash and cash equivalents at beginning of period     249,724       198,939   Cash and cash equivalents at end of period   $ 291,003     $ 136,214     (continued)   9 Table of Contents   CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)   For the nine months ended September 30 , 2020 and 2019 (in thousands)       2020     2019   Supplemental cash flow information:                 Interest paid   $ 10,178     $ 17,519   Income taxes paid, net of refunds     9,608       9,281   Cash paid for operating lease liabilities     1,186       1,051   Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 9,667     $ 3,424   Initial recognition of right-of-use lease assets     —       16,747   Initial recognition operating lease liabilities     —       18,067   Loans transferred to OREO     119       —                     Liabilities assumed in conjunction with acquisition                 Fair value of assets acquired   $ —     $ 204,613   Cash paid in acquisition     —       28,000   Liabilities assumed   $ —     $ 176,613     See accompanying notes to unaudited consolidated financial statements.   10 Table of Contents   N OTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)     ( 1 ) Basis of Presentation and Summary of Significant Accounting Policies   Nature of Operations – Stock Yards Bancorp, Inc. (“Bancorp” or “the Company”) is a FHC headquartered in Louisville, Kentucky. The accompanying consolidated financial statements include the accounts of its wholly owned subsidiary, SYB (“the Bank). Established in 1904, SYB is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio MSAs through 44 full service banking center locations.   As a result of its acquisition on May 1, 2019, Bancorp became the 100 % successor owner of KBST, an unconsolidated finance subsidiary. As permitted under the terms of the governing documents, Bancorp redeemed the TPS at the par amount of approximately $ 4 million in June 2019.   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, 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 custom-tailored financial planning, investment management, company retirement plan management, retirement planning, trust and estate services in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Principles of Consolidation and Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10 -Q and Rule 10 - 01 of Regulation S- X. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements.   In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Intercompany transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with Bancorp’s Annual Report on Form 10 -K for the year ended December 31, 2019. Operating results for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December  31, 2020.   Critical Accounting Policies and Estimates – Certain accounting estimates are important to the portrayal of Bancorp’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including pandemic-related changes, and changes in the financial condition of borrowers.   Bancorp’s accounting policies are fundamental to understanding management’s discussion and analysis of our results of operations and financial condition. At December 31, 2019, the significant accounting policy considered the most critical in preparing Bancorp’s consolidated financial statements is the determination of the ACL on loans. See the section titled “ Critical Accounting Policies and Estimates ” in Bancorp’s 2019 Annual Report on Form  10 -K for additional detail.   On January 1, 2020, Bancorp adopted ASC 326 “ Financial Instruments – Credit Losses , ” which created material changes to Bancorp’s existing critical accounting policy that existed at December 31, 2019. Effective January 1, 2020 through September 30, 2020, the significant accounting policy considered the most critical in preparing Bancorp’s consolidated financial statements is the determination of the ACL on loans.   The ACL on loans is established through credit loss expense charged to current earnings. The amount maintained in the ACL reflects management’s estimate of the net amount not expected to be collected on the loan portfolio at the balance sheet date over the life of the loan. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans.   11 Table of Contents   For purposes of establishing the general reserve, Bancorp stratifies the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculates the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. Bancorp’s methodologies for estimating the ACL on loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.   Significant Accounting Policies – In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of related revenues and expenses during the reporting period. Actual results could differ from those estimates. A description of significant accounting policies is presented in Bancorp’s Annual Report on Form 10 -K for the year ended December 31, 2019.   Debt Securities – Bancorp determines the classification of debt securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Debt securities not classified as held to maturity are classified as AFS and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in AOCI, net of tax. All debt securities were classified as AFS at September 30, 2020 and December 31, 2019.   Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity using the interest method, except for premiums on callable debt securities, which are amortized to their earliest call date.   Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in the consolidated balance sheets. A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on non-accrual is reversed against interest income. There was no accrued interest related to AFS debt securities reversed against interest income for the three and nine month periods ended September 30, 2020 and 2019.   ACL – AFS Debt Securities – For AFS debt securities in an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL on AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.   In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. There were no credit related factors underlying unrealized losses on AFS debt securities at September 30, 2020 and December 31, 2019.   Changes in the ACL on AFS debt securities are recorded as expense. Losses are charged against the ACL when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.   Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost basis, which is the unpaid principal balance outstanding, net of unearned income, deferred loan fees and costs, premiums and discounts associated with acquisition date fair value adjustments on acquired loans and any direct partial charge-offs. Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in the consolidated balance sheets.   12 Table of Contents   Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the remaining life of the loan without anticipating prepayments.   Loans are considered past due or delinquent when the contractual principal and/or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. The accrual of interest income on loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or if full collection of interest or principal becomes doubtful. Consumer loans are typically charged off no later than 120 days past due. All interest accrued but not received for a loan placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.   Acquired loans are recorded at fair value at the date of acquisition based on a DCF methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting Bancorp’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective, as they require material estimates, all of which may be susceptible to significant change.   Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that Bancorp would be unable to collect all contractually required payments receivable were considered PCI. PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial ACL based on a DCF methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting Bancorp’s assessment of risk inherent in the cash flow estimates. The difference between the DCFs expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the DCFs expected at acquisition, or the “non-accretable difference,” were not recognized on the balance sheet and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. ACLs on PCI loans reflected only losses incurred post-acquisition (meaning the PV of all cash flows expected at acquisition that ultimately were not to be received).   Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. Approximately $ 1.6 million in PCI loans were converted to PCD on January 1, 2020 and the majority of these marks were subsequently charged off in the third quarter of 2020.   For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial ACL on loans is estimated and recorded as credit loss expense.   The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.   ACL – Loans – Under the current CECL model, the ACL on loans represents a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loan portfolio.   13 Table of Contents   Bancorp estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of payment, and charge-offs. In the event that collection of principal becomes uncertain, Bancorp has policies in place to reverse accrued interest in a timely manner. Therefore, Bancorp has made a policy election to exclude accrued interest from the measurement of ACL.   Expected credit losses are reflected in the ACL through a charge to provision. When Bancorp deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written-off and the ACL is reduced by the same amount. Bancorp applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted and the collateral, if any, has been liquidated. Subsequent recoveries, if any, are credited to the ACL when received.   Bancorp’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Bancorp’s methodologies may revert to historical loss information on a straight-line basis over a number of quarters when it can no longer develop reasonable and supportable forecasts.   Loans are predominantly segmented by FDIC Call Report Codes into loan pools that have similar risk characteristics, similar collateral type and are assumed to pose consistent risk of loss to Bancorp. Bancorp has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:   Commercial real e stat e – owner occupied – Includes non-farm non-residential real estate loans for a variety of commercial property types and purposes, and is typically secured by commercial office or industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party (or affiliate) who owns the property. Repayment terms vary considerably; interest rates are fixed or variable and are structured for full, partial, or no amortization of principal.   Commercial real e stat e – non-owner occupied – Includes investment real estate loans secured by similar collateral as above. The primary source of income for this loan type is typically rental income associated with the property. These loans generally involve a greater degree of credit risk, as these borrowers are more sensitive to adverse economic conditions. This category also includes apartment or multifamily residential buildings (secured by five or more dwelling units).   Construction and land development — Consists of loans to finance the ground up construction, improvement and/or construction of owner occupied and non-owner occupied residential and commercial properties and loans secured by raw or improved land. The repayment of C&D loans is generally dependent upon the successful completion of the improvements by the builder for the end user, the leasing of the property, or sale of the property to a third party. Repayment of land secured loans are dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. Bancorp’s construction loans may convert to real estate-secured once construction is completed or principal amortization payments begin, assuming the borrower retains financing with the Bank.   Commercial and Industrial — Represents loans for C&I purposes to sole proprietorships, partnerships, corporations and other business enterprises, where secured (other than those that meet the definition of a “loan secured by real estate”) or unsecured, single payment or installment. This category includes loans originated for financing capital expenditures, non-real estate loans guaranteed by the SBA and non-real estate related construction loans in addition to loans secured by accounts receivable, inventory and other business assets such as equipment. Bancorp originates these loans for a variety of purposes across various industries. This category also includes loans to commercial banks in the U.S. This portfolio has been segregated between term loans and revolving lines of credits based on the varied characteristics of these individual loan structures.   14 Table of Contents   Residential real estate — Includes non-revolving (closed-end) first and junior liens secured by residential real estate primarily in Bancorp’s market areas. This portfolio has been segregated between owner occupied and non-owner occupied status, as the investment nature of the latter poses additional credit risks to Bancorp.   Home equity lines of credit – Similar to the above, however these are revolving (open-ended) lines of credit.   Consumer — Represents loans to individuals for personal expenditures that may be secured or unsecured. This includes pre-arranged overdraft plans, secured automobile loans and other consumer-purposed loans.   Leases — Represents a variety of leasing options to businesses to acquire equipment.   Commercial Credit Cards — Represents revolving loans to businesses to manage operating cash flows.   Bancorp measures expected credit losses for its loan portfolio segments as follows:   Loan Portfolio Segment   ACL Methodology       Commercial real estate - non-owner occupied   Discounted cash flow Commercial real estate - owner occupied   Discounted cash flow Commercial and industrial - term   Static pool Commercial and industrial - line of credit   Static pool Residential real estate - owner occupied   Discounted cash flow Residential real estate - non-owner occupied   Discounted cash flow Construction and land development   Static pool Home equity lines of credit   Static pool Consumer   Static pool Leases   Static pool Credit cards - commercial   Static pool   Discounted Cash flow Method – The DCF methodology is used to develop cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, time to recovery, probability of default and loss given default. The modeling of expected prepayment speeds, curtailment rates and time to recovery are based on historical internal data.   Bancorp uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes the forecasted Seasonally Adjusted National Civilian Unemployment Rate as its primary loss driver, as this was determined to best correlate to historical losses.   With regard to the DCF model and the adoption of CECL on January 1, 2020, management determined that four quarters represented a reasonable and supportable forecast period with reversion back to a historical loss rate over eight quarters on a straight-line basis.   The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level NPV of expected cash flows. An ACL is established for the difference between the instrument’s NPV and amortized cost basis.   Static Pool Method – The static pool methodology is utilized for the loan portfolio segments that typically have shorter durations. For each of these loan segments, Bancorp applies an expected loss ratio based on historical losses adjusted as appropriate for qualitative factors. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans and reasonable and supportable forecasts of economic conditions.   15 Table of Contents   Coll ateral Dependent Loans – Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where Bancorp has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and Bancorp expects repayment of the financial asset to be provided substantially through the operation of the business or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of loan. Bancorp’s estimate of the ACL reflects losses expected over the remaining contractual life of the loan and the contractual term does not consider extensions, renewals or modifications.   A loan that has been modified or renewed is considered a TDR when two conditions are met: 1 ) the borrower is experiencing financial difficulty and 2 ) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period may be included in Bancorp’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.   Off-Balance Sheet Credit Exposures – Financial instruments include off-balance sheet credit instruments, such as commitments to originate loans and commercial letters of credit issued to meet customer-financing needs. Off-balance sheet refers to assets or liabilities that do not appear on a company's balance sheet. Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.   Bancorp records an ACL on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other non-interest expense in Bancorp’s consolidated statements of income. The ACL on off-balance sheet credit exposures is estimated by loan portfolio segment at each balance sheet date under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on Bancorp’s consolidated balance sheets.   16 Table of Contents   Recently Adopted Accounting Standards – Bancorp adopted ASC 326, “ Financial Instruments – Credit Losses ,” on January 1, 2020 using the modified retrospective approach. Results for the periods subsequent to January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Bancorp recorded a net reduction of retained earnings of $ 8.8 million upon adoption. The transition adjustment included an increase in the ACL on loans of $ 8.2 million and an increase in the ACL on off-balance sheet credit exposures of $ 3.5 million, net of the total corresponding DTA increase of $ 2.9 million.   Bancorp adopted ASC 326 using the prospective transition approach for loans purchased with PCD that were previously classified as PCI and accounted for under ASC 310 - 30. In accordance with the standard, management did not reassess whether PCI loans met the criteria of PCD loans as of the adoption date. On January 1, 2020, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassified between the amortized cost basis of loans and corresponding ACL. The majority of these marks were subsequently charged off in the third quarter of 2020.   The following table summarizes the impact of the adoption of ASC 326:       January 1, 2020   (in thousands)     As reported under ASC 326     Pre-ASC 326 Adoption     Impact of Adoption (1)                             Allowance for credit losses on loans:                                                   Commercial real estate - non-owner occupied   $ 8,333     $ 5,235     $ 3,098   Commercial real estate - owner occupied     6,219       3,327       2,892   Total commercial real estate     14,552       8,562       5,990                             Commercial and industrial - term     7,147       6,782       365   Commercial and industrial - line of credit     4,129       5,657       ( 1,528 ) Total commercial and industrial     11,276       12,439       ( 1,163 )                           Residential real estate - owner occupied     2,713       1,527       1,186   Residential real estate - non-owner occupied     1,376       947       429   Total residential real estate     4,089       2,474       1,615                             Construction and land development     5,161       2,105       3,056   Home equity lines of credit     842       728       114   Consumer     398       100       298   Leases     233       237       ( 4 ) Credit cards - commercial     96       146       ( 50 ) Total allowance for credit losses on loans   $ 36,647     $ 26,791     $ 9,856                             Total allowance for credit losses on off-balance sheet exposures   $ 3,850     $ 350     $ 3,500     ( 1 ) – The impact of the ASC 326 adoption on the ACL on loans reflects $8.2 million related to the transition from the incurred loss ACL model to the CECL ACL model and $1.6 million related to the transition from PCI to PCD methodology as defined in the standard.   In August 2018, the FASB issued ASU No. 2018 - 13, Fair Value Measurement (Topic 820 ): “ Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement .” The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted for the removed disclosures and delayed adoption until the fiscal year 2020 permitted for the new disclosures. The removed and modified disclosures will be adopted on a retrospective basis, and the new disclosures will be adopted on a prospective basis. The adoption did not have a material effect on Bancorp’s consolidated financial statements.   In January 2017, the FASB issued ASU 2017 - 04,  “ Intangibles - Goodwill and Other (Topic 350 ) - Simplifying the Test for Goodwill Impairment .” This ASU simplifies the accounting for goodwill impairment by requiring impairment charges to be based on the first step in the previous two -step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. ASU 2017 - 04 was effective for Bancorp on January 1, 2020 and it did not have a material impact on Bancorp’s financial statements.   17 Table of Contents   In August 2018, the FASB issued ASU 2018 - 15,  “ Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350 - 40 ) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. ASU 2018 - 15 was effective for Bancorp on January 1, 2020 and did not have a material impact on Bancorp’s financial statements.   In March 2020, the CARES Act was signed into law. Section 4013 of the CARES Act, “Temporary Relief From Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID- 19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All modifications are eligible as long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) the 60 th day after the end of the COVID- 19 national emergency declared by the President of the United States. Multiple modifications of the same credits are allowed and there is no cap on the duration of the modification. The impact of such activity is discussed in the section of this document titled, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations.”   In March 2020, interagency guidance was issued regarding loan modifications and reporting for financial institutions working with customers affected by COVID- 19. The interagency statement was effective immediately and affected accounting for loan modifications. Under ASC 310 - 40, “ Receivables – Troubled Debt Restructurin gs by Creditors ,” a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID- 19 to borrowers who were current prior to such relief, are not to be considered TDRs. This includes short-term modifications such as full payment and principal only deferrals. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program was implemented. This interagency guidance, in addition to deferral guidance included in the CARES Act, could have a material impact on Bancorp’s financial statements; however, the impact cannot be quantified at this time.   In March 2020, the FASB issued ASU No. 2020 - 04, Reference Rate Reform (Topic 848 ): “ Facilitation of the Effects of Reference Rate Reform on Financial Reporting .” The amendments in this update provide optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Bancorp is currently evaluating the impact of this ASU on Bancorp’s consolidated financial statements.   Accounting Standards Updates – Generally, if an issued but not yet effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.   In April 2019, the FASB issued ASU No. 2019 - 04, “ Codification Improvements to Financial Instruments - Credit Losses (ASC 326 ), Derivatives and Hedging (ASC 815 ), and Financial Instruments (ASC 825 ) .” The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amended guidance in this ASU related to the credit losses will be effective for Bancorp’s for fiscal years and interim periods beginning after December 15, 2022. Bancorp is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.   18 Table of Contents     ( 2 ) Acquisition   On May 1, 2019, Bancorp completed its acquisition of KSB, for $ 28 million in cash. The acquisition expanded Bancorp’s market area into nearby Nelson County, Kentucky, while growing its customer base in Louisville, Kentucky.   Effective March 31, 2020, management finalized the fair values of the acquired assets and assumed liabilities in advance of 12 months post acquisition date, as allowed by GAAP.   The following table provides a summary of the assets acquired and liabilities assumed as recorded by the acquire, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final recast adjustments to those previously reported preliminary fair values, and the final fair values of those assets and liabilities as recorded by Bancorp.       May 1, 2019       As Recorded     Fair Value       Recast       As Recorded   (in thousands)   by KSB     Adjustments (1)       Adjustments       by Bancorp   Assets acquired:                                                                           Cash and due from banks   $ 3,316     $ —       $ —       $ 3,316   Interest bearing due from banks     1,761       —         —         1,761   Available for sale debt securities     12,404       23   a     —         12,427   Federal Home Loan Bank stock, at cost     1,517       —         —         1,517   Federal Reserve Bank stock, at cost     490       —         —         490   Loans     165,744       ( 1,597 ) b     ( 118 ) b     164,029   Allowance for credit losses     ( 1,812 )     1,812   b     —         —   Net loans     163,932       215         ( 118 )       164,029   Premises and equipment, net     4,358       ( 1,328 ) c     431   c     3,461   Bank owned life insurance     3,431       —         —         3,431   Core deposit intangible     —       1,519   d     —         1,519   Other real estate owned     325       ( 325 ) e     —         —   Other assets and accrued interest receivable     867       ( 36 ) f     —         831   Total assets acquired   $ 192,401     $ 68       $ 313       $ 192,782                                         Liabilities assumed:                                                                           Deposits:                                     Non-interest bearing   $ 24,939     $ —       $ —       $ 24,939   Interest bearing     100,839       ( 252 ) g     —         100,587   Total deposits     125,778       ( 252 )       —         125,526                                         Federal funds purchased     1,566       —         —         1,566   Federal Home Loan Bank advances     43,718       ( 419 ) h     —         43,299   Subordinated note     3,609       —         —         3,609   Holding Company line of credit     2,300       —         —         2,300   Other liabilities and accrued interest payable     313       —         —         313                                         Total liabilities assumed     177,284       ( 671 )       —         176,613                                         Net assets acquired   $ 15,117     $ 739       $ 313       $ 16,169                                         Cash consideration paid                                 ( 28,000 )                                       Goodwill                               $ 11,831       ( 1 ) See the following page for explanations of individual fair value adjustments.   19 Table of Contents   Explanation of the pr e ceding pre-ASC 326 fair value adjustments :     a. Reflects the fair value adjustment based on Bancorp’s evaluation of the acquired investment portfolio.     b. Reflects the fair value adjustment based on Bancorp’s evaluation of the acquired loan portfolio and to eliminate the acquiree’s recorded ACL .     c. Reflects the fair value adjustment based on Bancorp’s evaluation of the premises and equipment acquired.     d. Reflects the fair value adjustment for the CDI asset recorded as a result of the acquisition.     e. Reflects the fair value adjustment based upon Bancorp’s evaluation of the foreclosed real estate acquired.     f. Reflects the write-off of a miscellaneous other asset.     g. Reflects the fair value adjustment based on Bancorp ’s evaluation of the assumed time deposits.     h. Reflects the fair value adjustment based upon Bancorp’s evaluation of the assumed FHLB advances.       Goodwill of approximately $ 12 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded and is the result of expected operational synergies and other factors. This goodwill was entirely attributable to Bancorp’s Commercial Banking segment and deductible for tax purposes.   Based upon the proximity to existing branch locations, Bancorp closed and ultimately sold three acquired full service branch locations in 2019, while retaining the associated customer relationships. Goodwill was recast in 2019 based on these sales.   Pro forma financial information as of the acquisition was not considered material.   20 Table of Contents     ( 3 ) Available for Sale Debt Securities   All of Bancorp’s debt securities are classified as AFS. Amortized cost, unrealized gains and losses and fair value of securities follow:   (in thousands)         Unrealized     Allowance           September 30, 2020   Amortized cost     Gains     Losses     for Credit Losses     Fair value                                             U.S. Treasury and other U.S. Government obligations   $ —     $ —     $ —     $ —     $ —   Government sponsored enterprise obligations     136,965       5,294       ( 378 )     —       141,881   Mortgage backed securities - government agencies     272,145       7,396       ( 89 )     —       279,452   Obligations of states and political subdivisions     7,657       194       —       —       7,851                                             Total available for sale debt securities   $ 416,767     $ 12,884     $ ( 467 )   $ —     $ 429,184                                             December 31, 2019                                                                                   U.S. Treasury and other U.S. Government obligations   $ 49,887     $ 10     $ —     $ —     $ 49,897   Government sponsored enterprise obligations     208,933       1,189       ( 178 )     —       209,944   Mortgage backed securities - government agencies     193,574       1,243       ( 956 )     —       193,861   Obligations of states and political subdivisions     16,919       117       —       —       17,036                                             Total available for sale debt securities   $ 469,313     $ 2,559     $ ( 1,134 )   $ —     $ 470,738     At September 30, 2020 and December 31, 2019, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.   There were no gains or losses on sales or calls of securities for the three -month and nine -month periods ending September 30, 2020 and 2019. Securities acquired in the May 1, 2019 acquisition totaling $ 12 million, were sold immediately following the acquisition with no gain or loss realized in the income statement.   Accrued interest on AFS debt securities totaled $ 1.4 million and $ 1.6 million at September 30, 2020 and December 31, 2019, respectively, and was included in the consolidated balance sheets.   A summary of AFS debt securities by contractual maturity as of September 30, 2020 follows:   (in thousands)   Amortized cost     Fair value                     Due within 1 year   $ 2,449     $ 2,456   Due after 1 year but within 5 years     33,197       33,860   Due after 5 years but within 10 years     1,456       1,531   Due after 10 years     107,520       111,885   Mortgage backed securities - government agencies     272,145       279,452   Total securities available for sale   $ 416,767     $ 429,184       Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS’s, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.   Securities with a carrying value of $ 369 million and $ 403 million were pledged at September 30, 2020 and December 31, 2019, respectively, to secure accounts of commercial depositors in cash management accounts, public funds and uninsured cash balances for WM&T accounts.   21 Table of Contents   AFS debt securities with unrealized loss position for which an ACL has not been recorded, aggregated by investment category and length of time that individual securities have been in a continuous loss position follow:       Less than 12 months     12 months or more     Total   (in thousands)     Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   September 30, 2020   value     losses     value     losses     value     losses                                                     Government sponsored enterprise obligations   $ 29,892     $ ( 314 )   $ 5,289     $ ( 64 )   $ 35,181     $ ( 378 ) Mortgage-backed securities - government agencies     34,099       ( 87 )     994       ( 2 )     35,093       ( 89 )                                                   Total   $ 63,991     $ ( 401 )   $ 6,283     $ ( 66 )   $ 70,274     $ ( 467 )                                                   December 31, 2019                                                 Government sponsored enterprise obligations   $ 16,503     $ ( 107 )   $ 11,492     $ ( 71 )   $ 27,995     $ ( 178 ) Mortgage-backed securities - government agencies     81,664       ( 496 )     32,453       ( 460 )     114,117       ( 956 )                                                   Total   $ 98,167     $ ( 603 )   $ 43,945     $ ( 531 )   $ 142,112     $ ( 1,134 )     Applicable dates for determining when securities are in an unrealized loss position are September 30, 2020 and December 31, 2019. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “Less than 12 months” category above.   For AFS debt securities in an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL on AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.   In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of 14 and 54 separate investment positions as of September 30, 2020 and December 31, 2019, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at September 30, 2020 and December 31, 2019.   FHLB stock represents an investment held by Bancorp that is not readily marketable and is carried at cost adjusted for identified impairment, if any. Impairment is evaluated on an annual basis in the fourth quarter and more often if market conditions warrant. Bancorp has never recorded FHLB stock impairment. Holdings of FHLB stock are required for access to FHLB advances.   22 Table of Contents     ( 4 ) Loans and Allowance for Credit Losses on Loans   Composition of loans by class as reported under ASC 326 follows:   (in thousands)   September 30, 2020     December 31, 2019                     Commercial real estate - non-owner occupied   $ 828,328     $ 746,283   Commercial real estate - owner occupied     492,825       474,329   Total commercial real estate     1,321,153       1,220,612                     Commercial and industrial - term     494,394       457,298   Commercial and industrial - term - PPP     642,056       —   Commercial and industrial - lines of credit     237,456       381,502   Total commercial and industrial     1,373,906       838,800                     Residential real estate - owner occupied     211,984       217,606   Residential real estate - non-owner occupied     143,149       134,995   Total residential real estate     355,133       352,601                     Construction and land development     257,875       255,816   Home equity lines of credit     97,150       103,854   Consumer     44,161       47,467   Leases     13,981       16,003   Credits cards - commercial     9,122       9,863   Total loans (1)   $ 3,472,481     $ 2,845,016     ( 1 ) Total loans are presented inclusive of premiums, discounts, and net of loan origination fees and costs.   For historical comparative purposes, the composition of loans by class pre-ASC 326 adoption follows:   (in thousands)   December 31, 2019             Commercial and industrial   $ 870,511   Construction and development, excluding undeveloped land     213,822   Undeveloped land     46,360             Real estate mortgage:         Commercial investment     736,618   Owner occupied commercial     473,783   1-4 family residential     334,358   Home equity - first lien     48,620   Home equity - junior lien     73,477   Subtotal: Real estate mortgage     1,666,856   Consumer     47,467   Total loans (1)   $ 2,845,016     ( 1 ) Total loans are presented inclusive of premiums, discounts, and net of loan origination fees and costs.   Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $ 12 million and $ 7 million at September 30, 2020 and December  31, 2019, respectively, and was included in the consolidated balance sheets.   Loans with carrying amounts of $ 1.9 billion and $ 1.6 billion at September 30, 2020 and December 31, 2019, respectively, were pledged to secure FHLB borrowing capacity, the increase stemming from pledging a portion of the PPP portfolio this year.   Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $ 44 million and $ 43 million as of September 30, 2020 and December 31, 2019, respectively.   23 Table of Contents   The following table summarizes loans acquired in Bancorp’s May 1, 2019 acquisition, as recasted:       May 1, 2019       Contractual     Non-accretable     Accretable     Acquisition-day   (in thousands)   Receivable     Yield     Yield     Fair Value                                     Commercial and industrial   $ 8,249     $ —     $ ( 23 )   $ 8,226   Construction and land development     18,738       —       86       18,824   Real estate mortgage:                                 Commercial real estate     84,219       —       ( 456 )     83,763   Residential real estate     50,556       —       322       50,878   Home equity lines of credit     875       —       8       883   Subtotal: Real estate mortgage     135,650       —       ( 126 )     135,524                                     Consumer     1,528       —       ( 73 )     1,455                                     Total loans acquired under ASC 310-20     164,165       —       ( 136 )     164,029                                     Commercial and industrial     —       —       —       —   Construction and land development     —       —       —       —   Real estate mortgage:                                 Commercial real estate     1,351       ( 1,351 )     —       —   Residential real estate     228       ( 228 )     —       —   Home equity lines of credit     —       —       —       —   Subtotal: Real estate mortgage     1,579       ( 1,579 )     —       —                                     Consumer     —       —       —       —                                     Total purchased credit impaired loans acquired under ASC 310-30     1,579       (1,579 )     —       —                                     Total loans   $ 165,744     $ ( 1,579 )   $ ( 136 )   $ 164,029       The Bank acquired PCI loans related to its 2019 and 2013 acquisitions. At acquisition date, these loans were accounted for under ASC 310 - 30. On January 1, 2020, Bancorp adopted ASC 326 using the prospective transition approach for loans purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310 - 30. In accordance with the standard, management did not reassess whether PCI loans met the criteria of PCD loans as of the adoption date. On January 1, 2020, non-accretable yield marks of $ 1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL. The majority of these marks were subsequently charged off in the third quarter of 2020.   24 Table of Contents   Bancorp’s estimate of the ACL on loans reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications. The activity in the ACL related to loans follows ( 2020 is presented in accordance with ASC 326 and 2019 in accordance with ASC 310 ):   (in thousands) Three Months Ended September 30, 2020   Beginning Balance     Impact of Adopting ASC 326     Initial ACL on Loans Purchased with Credit Deterioration     Provision for Credit Losses     Charge-offs     Recoveries     Ending Balance                                                             Commercial real estate - non-owner occupied   $ 18,839     $ -     $ -     $ ( 558 )   $ ( 143 )   $ 2     $ 18,140   Commercial real estate - owner occupied     6,706       -       -       1,674       ( 1,351 )     -       7,029   Total commercial real estate     25,545       -       -       1,116       ( 1,494 )     2       25,169                                                             Commercial and industrial - term     7,339       -       -       1,605       ( 1 )     1       8,944   Commercial and industrial - lines of credit     3,242       -       -       179       -       -       3,421   Total commercial and industrial     10,581       -       -       1,784       ( 1 )     1       12,365                                                             Residential real estate - owner occupied     2,848       -       -       464       ( 61 )     13       3,264   Residential real estate - non-owner occupied     1,594       -       -       418       ( 2 )     -       2,010   Total residential real estate     4,442       -       -       882       ( 63 )     13       5,274                                                             Construction and land development     5,608       -       -       420       -       -       6,028   Home equity lines of credit     832       -       -       106       -       -       938   Consumer     362       -       -       57       ( 140 )     57       336   Leases     223       -       -       34       -       -       257   Credit cards - commercial     115       -       -       19       -       -       134   Total net loan (charge-offs) recoveries   $ 47,708     $ -     $ -     $ 4,418     $ ( 1,698 )   $ 73     $ 50,501     (in thousands) Nine Months Ended September 30, 2020   Beginning Balance     Impact of Adopting ASC 326     Initial ACL on Loans Purchased with Credit Deterioration     Provision for Credit Losses     Charge-offs     Recoveries     Ending Balance                                                             Commercial real estate - non-owner occupied   $ 5,235     $ 2,946     $ 152     $ 9,945     $ ( 143 )   $ 5     $ 18,140   Commercial real estate - owner occupied     3,327       1,542       1,350       2,161       ( 1,351 )     -       7,029   Total commercial real estate     8,562       4,488       1,502       12,106       ( 1,494 )     5       25,169                                                             Commercial and industrial - term     6,782       365       -       1,790       ( 1 )     8       8,944   Commercial and industrial - lines of credit     5,657       ( 1,528 )     -       ( 708 )     -       -       3,421   Total commercial and industrial     12,439       ( 1,163 )     -       1,082       ( 1 )     8       12,365                                                             Residential real estate - owner occupied     1,527       1,087       99       615       ( 79 )     15       3,264   Residential real estate - non-owner occupied     947       429       -       636       ( 2 )     -       2,010   Total residential real estate     2,474       1,516       99       1,251       ( 81 )     15       5,274                                                             Construction and land development     2,105       3,056       -       867       -       -       6,028   Home equity lines of credit     728       114       -       96       -       -       938   Consumer     100       264       34       54       ( 394 )     278       336   Leases     237       ( 4 )     -       24       -       -       257   Credit cards - commercial     146       ( 50 )     -       38       -       -       134   Total net loan (charge-offs) recoveries   $ 26,791     $ 8,221     $ 1,635     $ 15,518     $ ( 1,970 )   $ 306     $ 50,501     25 Table of Contents   (in thousands) Three Months Ended September 30, 2019   Beginning Balance     Provision for Credit Losses     Charge-offs     Recoveries     Ending Balance                                             Real estate mortgage   $ 12,030     $ 269     $ -     $ 46     $ 12,345   Commercial and industrial     11,858       32       ( 91 )     154       11,953   Construction and development     1,810       ( 108 )     -       -       1,702   Undeveloped land     601       195       -       -       796   Consumer     117       12       ( 139 )     91       81       $ 26,416     $ 400     $ ( 230 )   $ 291     $ 26,877       (in thousands) Nine Months Ended September 30, 2019   Beginning Balance     Provision for Credit Losses     Charge-offs     Recoveries     Ending Balance                                             Real estate mortgage   $ 10,681     $ 1,579     $ ( 13 )   $ 98     $ 12,345   Commercial and industrial     11,965       ( 178 )     ( 94 )     260       11,953   Construction and development     1,760       ( 261 )     -       203       1,702   Undeveloped land     752       44       -       -       796   Consumer     376       ( 184 )     ( 383 )     272       81       $ 25,534     $ 1,000     $ ( 490 )   $ 833     $ 26,877       Upon adoption of ASC 326 on January 1, 2020, Bancorp recorded an increase of $ 8.2 million to the ACL on loans and a corresponding decrease to retained earnings, net of the DTA impact. In addition, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL. The majority of these marks were subsequently charged off in the third quarter of 2020. The adjustment upon adoption of ASC 326 raised the ACL on loans balance to $ 37 million on January 1, 2020. In addition to CECL adoption, Bancorp’s national unemployment forecast adjustments within the CECL model have had a significant impact on the ACL in 2020, along with changes in the loan mix and the addition of a large specific reserve during the second quarter of 2020.   Subsequent to January 1, 2020, based on the economic crisis caused by COVID- 19 and measures taken to protect public health such as stay-at-home orders and mandatory closures of businesses, economic activity halted significantly and job losses surged. As such, national unemployment has fluctuated widely as follows:       Sep 20     Aug 20     Jul 20     Jun 20     May 20     Apr 20     Mar 20     Feb 20     Jan 20     Dec 19   National Unemployment Rate     7.90 %     8.40 %     10.20 %     11.10 %     13.30 %     14.70 %     4.40 %     3.50 %     3.60 %     3.50 %   As of March 31, 2020, based on the evolving pandemic, Bancorp elected to forecast for only one quarter of national unemployment (versus the four quarters used as of January 1, 2020) and modified its forecast to reflect a significant increase in unemployment (utilizing the highest unemployment rate in Bancorp’s observed history) reverting back to Bancorp’s long-term average in the third quarter of 2020, with the loss driver remaining significantly worse compared to recent trends. The impact of the increased national unemployment forecast was muted by an adjustment in qualitative factors attributed to the massive federal stimulus programs enacted at the end of the first quarter in response to the pandemic. The forecasted increase in national unemployment coupled with the qualitative factor adjustments resulted in approximately $ 4.2 million of the total $ 5.5 million provision expense recorded for the three months ended March 31, 2020.   During the second quarter, for the first time during 2020, the FRB released a forecasted Seasonally Adjusted National Civilian Unemployment Rate for the years ended December 31, 2020, 2021 and 2022. Based on this and the continuation of the economic crisis, as of June 30, 2020, Bancorp elected to forecast for four quarters of national unemployment utilizing actual June unemployment then stepping down to the FRB median forecast before reverting back to Bancorp’s long-term average in the fourth quarter of 2020. Similar to the first quarter of 2020, the impact of the increased unemployment forecast was muted by an adjustment in qualitative factors attributed to the massive federal stimulus programs that have been enacted. The forecasted increase in unemployment coupled with the qualitative factor adjustments resulted in approximately $ 4.6 million of the total $ 5.5 million provision expense recorded for the three months ended June 30, 2020.   26 Table of Contents   During the third quarter, the FRB released its forecasted Seasonally Adjusted National Civilian Unemployment Rate for the 12 months ended December 31, 2020, 2021, 2022 and 2023 as follows:       2020     2021     2022     2023                                     Upper end of range     8.0 %     8.0 %     7.5 %     6.0 % Median     7.6 %     5.5 %     4.6 %     4.0 % Lower end of range     6.5 %     4.0 %     3.5 %     3.5 %   As of September 30, 2020, Bancorp elected to forecast for one quarter of national unemployment utilizing the FRB’s 2020 median unemployment forecast released in September then stepping down to the FRB’s 2021 median unemployment forecast over the next three quarters before reverting back to Bancorp’s long-term average. In addition, Bancorp predominantly reversed the qualitative factor adjustment established in the first and second quarters of 2020 attributed to the massive federal stimulus. The forecasted changes in unemployment, coupled with the qualitative factor adjustments resulted in approximately $ 4.4 million, of the total third quarter provision expense for the three months ended September.   The pandemic has had a material impact on Bancorp’s ACL on loans calculation for 2020. While Bancorp has not yet experienced any credit quality issues resulting in charge-offs related to the pandemic, the ACL calculation for loans and resulting provision were significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions worsen, Bancorp could experience further increases in its required ACL and record additional provision expense. While the execution of payment deferrals under the CARES ACT has assisted the ratio of past due loans to total loans, it is possible that asset quality could worsen at future measurement periods if the effects of the pandemic are prolonged.   In connection with the adoption of ASC 326, Bancorp analyzed its unused lines of credit and recorded credit loss expense for off-balance sheet credit exposures (non-interest expense) totaling $ 375,000 and $ 1.5 million during the first and second quarters of 2020. The second quarter increase directly correlates to the increased availability due to C&I line of credit pay downs. Further declines in line of credit utilization resulted in an additional $ 550,000 of such expense in the third quarter. At September 30, 2020, approximately $ 6 million was accrued within other liabilities related to off-balance sheet credit exposures.   During the second quarter of 2020, a large CRE relationship was placed on non-accrual status and received a $ 2 million specific reserve allocation within the ACL on loans. The borrower did not receive PPP funds, the loan was current at the time of non-accrual classification and each subsequent quarter end, and no payments related to the loan have been deferred.    The following table presents the amortized cost basis and ACL allocated for collateral dependent loans in accordance with ASC 326, which are individually evaluated to determine expected credit losses:   (in thousands) September 30, 2020   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 10,218     $ -     $ -     $ 10,218     $ 1,991   Commercial real estate - owner occupied     1,493       -       -       1,493       -   Total commercial real estate     11,711       -       -       11,711       1,991                                             Commercial and industrial - term     18       9       -       27       18   Commercial and industrial - lines of credit     -       88       -       88       -   Total commercial and industrial     18       97       -       115       18                                             Residential real estate - owner occupied     443       -       -       443       -   Residential real estate - non-owner occupied     102       -       -       102       -   Total residential real estate     545       -       -       545       -                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     -       -       -       -       -   Consumer     -       -       5       5       -   Leases     -       -       -       -       -   Credit cards - commercial     -       -       -       -       -   Total collateral dependent loans   $ 12,274     $ 97     $ 5     $ 12,376     $ 2,009     There have been no significant changes to the types of collateral securing Bancorp’s collateral dependent loans.   27 Table of Contents   The following table presents loans individually and collectively evaluated for impairment and the respective ACL allocation as of December 31, 2019, as determined in accordance with ASC 310 prior to the adoption of ASC 326:       Loans     ACL   (in thousands) December 31, 2019     Loans individually evaluated for impairment     Loans collectively evaluated for impairment     Loans acquired with deteriorated credit quality     Total loans     Loans individually evaluated for impairment     Loans collectively evaluated for impairment     Loans acquired with deteriorated credit quality     Total ACL                                                                     Commercial and industrial   $ 8,223     $ 862,288     $ —     $ 870,511     $ 1,150     $ 11,672     $ —     $ 12,822   Construction and development, excluding undeveloped land     —       213,822       —       213,822       —       1,319       —       1,319   Undeveloped land     —       46,360       —       46,360       —       786       —       786   Real estate mortgage     3,307       1,663,549       —       1,666,856       13       11,751       —       11,764   Consumer     —       47,467       —       47,467       —       100       —       100                                                                     Total   $ 11,530     $ 2,833,486     $ —     $ 2,845,016     $ 1,163     $ 25,628     $ —     $ 26,791     28 Table of Contents   The following table presents information pertaining to impaired loans as of December 31, 2019 and the three and nine month periods ended September 30, 2019, as determined in accordance with ASC 310:       As of     Three months ended     Nine months ended       December 31, 2019     September 30, 2019     September 30, 2019                                                                         Unpaid             Average     Interest     Average     Interest       Recorded     principal     Related     recorded     income     recorded     income   (in thousands)   investment     balance     ACL     investment     recognized     investment     recognized                                                             Impaired loans with no related ACL                                                         Commercial and industrial   $ 174     $ 174     $ —     $ 136     $ —     $ 164     $ —   Construction and development, excluding undeveloped land     —       —       —       —       —       80       —   Undeveloped land     —       —       —       —       —       119       —                                                             Real estate mortgage                                                         Commercial investment     741       741       —       524       —       376       —   Owner occupied commercial     2,278       2,736       —       1,427       —       1,226       —   1-4 family residential     124       124       —       426       —       614       —   Home equity - junior lien     151       151       —       359       —       329       —   Subtotal: Real estate mortgage     3,294       3,752       —       2,736       —       2,545       —                                                             Subtotal   $ 3,468     $ 3,926     $ —     $ 2,872     $ —     $ 2,908     $ —                                                             Impaired loans with an ACL                                                         Commercial and industrial   $ 8,049     $ 8,049     $ 1,150     $ 28     $ —     $ 27     $ —   Real estate mortgage                                                         1-4 family residential     13       13       13       14       —       14       —   Subtotal: Real estate mortgage     13       13       13       14       —       14       —                                                             Subtotal   $ 8,062     $ 8,062     $ 1,163     $ 42     $ —     $ 41     $ -                                                             Total impaired loans:                                                         Commercial and industrial   $ 8,223     $ 8,223     $ 1,150     $ 164     $ —     $ 191     $ -   Construction and development, excluding undeveloped land     —       —       —       —       —       80       —   Undeveloped land     —       —       —       —       —       119       —                                                             Real estate mortgage                                                         Commercial investment     741       741       —       524       —       376       —   Owner occupied commercial     2,278       2,736       —       1,427       —       1,226       —   1-4 family residential     137       137       13       440       —       628       —   Home equity - junior lien     151       151       —       359       —       329       —   Subtotal: Real estate mortgage     3,307       3,765       13       2,750       —       2,559       —                                                             Total   $ 11,530     $ 11,988     $ 1,163     $ 2,914     $ —     $ 2,949     $ -         Differences between recorded investment amounts and unpaid principal balance amounts less related ACL are due to partial charge-offs which have occurred over the lives of certain loans.   29 Table of Contents   The following tables present the aging of contractually past due loans by portfolio class ( 2020 is presented in accordance with ASC 326 and 2019 in accordance with ASC 310 ):       (in thousands)           30-59 days     60-89 days     90 or more     Total     Total   September 30, 2020   Current     Past Due     Past Due     Days Past Due     Past Due     Loans                                                     Commercial real estate - non-owner occupied   $ 826,448     $ 275     $ 240     $ 1,365     $ 1,880     $ 828,328   Commercial real estate - owner occupied     491,628       —       168       1,029       1,197       492,825   Total commercial real estate     1,318,076       275       408       2,394       3,077       1,321,153                                                     Commercial and industrial - term     494,286       95       4       9       108       494,394   Commercial and industrial - term - PPP     642,056       —       —       —       —       642,056   Commercial and industrial - lines of credit     236,582       381       5       488       874       237,456   Total commercial and industrial     1,372,924       476       9       497       982       1,373,906                                                     Residential real estate - owner occupied     210,518       1,062       17       387       1,466       211,984   Residential real estate - non-owner occupied     142,672       375       30       72       477       143,149   Total residential real estate     353,190       1,437       47       459       1,943       355,133                                                     Construction and land development     257,875       —       —       —       —       257,875   Home equity lines of credit     97,150       —       —       —       —       97,150   Consumer     44,150       6       3       2       11       44,161   Leases     13,981       —       —       —       —       13,981   Credit cards - commercial     9,122       —       —       —       —       9,122   Total   $ 3,466,468     $ 2,194     $ 467     $ 3,352     $ 6,013     $ 3,472,481                                 90 or more                                               Days Past Due                   (in thousands)           30-59 days     60-89 days     (includes all     Total     Total   December 31, 2019   Current     Past Due     Past Due     non-accrual)     Past Due     Loans                                                     Commercial and industrial   $ 861,860     $ 253     $ 194     $ 8,204     $ 8,651     $ 870,511   Construction and development, excluding undeveloped land     213,766       6       50       —       56       213,822   Undeveloped land     46,360       —       —       —       —       46,360                                                     Real estate mortgage:                                                 Commercial investment     735,387       94       —       1,137       1,231       736,618   Owner occupied commercial     470,951       467       86       2,279       2,832       473,783   1-4 family residential     332,718       1,368       33       239       1,640       334,358   Home equity - first lien     48,441       179       —       —       179       48,620   Home equity - junior lien     72,995       196       100       186       482       73,477   Subtotal: Real estate mortgage     1,660,492       2,304       219       3,841       6,364       1,666,856                                                     Consumer     47,379       84       4       —       88       47,467                                                     Total   $ 2,829,857     $ 2,647     $ 467     $ 12,045     $ 15,159     $ 2,845,016     30 Table of Contents   The following table presents the amortized cost basis of non-performing loans and the amortized cost basis of loans on non-accrual status for which there was no related ACL losses of September 30, 2020:   (In thousands)   Non-accrual Loans     Total     Troubled Debt     Past Due 90-Days- or-More and Still   September 30, 2020   with no Recorded ACL     Non-accrual     Restructurings       Accruing Interest                                     Commercial real estate - non-owner occupied   $ 127     $ 10,219     $ —     $ 753   Commercial real estate - owner occupied     1,493       1,493       —       —   Total commercial real estate     1,620       11,712       —       753                                     Commercial and industrial - term     9       9       18       —   Commercial and industrial - lines of credit     88       88       —       399   Total commercial and industrial     97       97       18       399                                     Residential real estate - owner occupied     442       442       —       —   Residential real estate - non-owner occupied     102       102       —       —   Total residential real estate     544       544       —       —                                     Construction and land development     —       —       —       —   Home equity lines of credit     —       —       —       —   Consumer     5       5       —       —   Leases     —       —       —       —   Credit cards - commercial     —       —       —       —   Total   $ 2,266     $ 12,358     $ 18     $ 1,152         For the three and nine month periods ended September 30, 2020 and 2019, the amount of accrued interest income previously recorded as revenue and subsequently reversed due to the change in accrual status was immaterial.   For the three and nine month periods ended September 30, 2020 and 2019, no interest income was recognized on loans on non-accrual status.   The following table presents the recorded investment in non-performing loans by portfolio class as of December 31, 2019:   December 31, 2019 (in thousands)   Non-accrual     Past Due 90-Days-or- More and Still Accruing Interest                     Commercial and industrial   $ 8,202     $ —   Construction and development, excluding undeveloped land     —       —   Undeveloped land     —       —                     Real estate mortgage:                 Commercial investment     740       396   Owner occupied commercial     2,278       —   1-4 family residential     123       104   Home equity - first lien     —       —   Home equity - junior lien     151       35   Subtotal: Real estate mortgage     3,292       535   Consumer     —       —                     Total   $ 11,494     $ 535     31 Table of Contents   Loan Risk Ratings   Consistent with regulatory guidance, Bancorp categorizes loans into credit risk rating categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans include all risk-rated loans other than those classified as OAEM, substandard, and doubtful, which are defined below:   OAEM – Loans classified as OAEM have potential weaknesses requiring management's heightened attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.   Substandard – Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have well-defined weaknesses that jeopardize ultimate repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.   Substandard non-performing – Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as TDRs. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more.   Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.   32 Table of Contents   Management considers the guidance in ASC 310 - 20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. As of September 30, 2020, the risk rating of loans based on year of origination is as follows:       Term Loans Amortized Cost Basis by Origination Year                                                                               Revolving     Revolving                                                               loans     loans           (in thousands)                                                   amortized     converted           September 30, 2020   2020     2019     2018     2017     2016     Prior     cost basis     to term     Total                                                                             Commercial real estate - non-owner occupied:                                                                         Risk rating                                                                         Pass   $ 226,752     $ 138,493     $ 120,350     $ 116,490     $ 83,431     $ 70,706     $ 14,170     $ 11,730     $ 782,122   OAEM     649       18,344       -       -       7,835       50       -       -       26,878   Substandard     4,183       1,976       -       -       1,528       991       430       -       9,108   Substandard non-performing     9,608       -       -       612       -       -       -       -       10,220   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 241,192     $ 158,813     $ 120,350     $ 117,102     $ 92,794     $ 71,747     $ 14,600     $ 11,730     $ 828,328                                                                             Commercial real estate - owner occupied:                                                                         Risk rating                                                                         Pass   $ 149,101     $ 98,084     $ 87,903     $ 50,901     $ 41,869     $ 37,568     $ 7,610     $ 2,197     $ 475,233   OAEM     75       5,362       957       813       246       -       -       -       7,453   Substandard     1,408       5,514       1,349       260       122       -       -       -       8,653   Substandard non-performing     114       -       16       -       -       1,022       -       334       1,486   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 150,698     $ 108,960     $ 90,225     $ 51,974     $ 42,237     $ 38,590     $ 7,610     $ 2,531     $ 492,825                                                                             Commercial and industrial - term:                                                                         Risk rating                                                                         Pass   $ 798,680     $ 106,779     $ 97,116     $ 46,000     $ 39,479     $ 24,234     $ -     $ 7,204     $ 1,119,492   OAEM     3,108       2,603       8,373       144       101       13       -       -       14,342   Substandard     271       2,075       -       -       177       74       -       -       2,597   Substandard non-performing     -       -       -       -       12       7       -       -       19   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 802,059     $ 111,457     $ 105,489     $ 46,144     $ 39,769     $ 24,328     $ -     $ 7,204     $ 1,136,450                                                                             Commercial and industrial - lines of credit                                                                         Risk rating                                                                         Pass   $ 19,342     $ 19,792     $ 2,820     $ 2,870     $ 346     $ 130     $ 186,484     $ -     $ 231,784   OAEM     -       -       -       -       -       -       1,347       -       1,347   Substandard     -       -       -       -       -       -       4,237       -       4,237   Substandard non-performing     -       -       -       -       -       -       88       -       88   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 19,342     $ 19,792     $ 2,820     $ 2,870     $ 346     $ 130     $ 192,156     $ -     $ 237,456       (continued)   33 Table of Contents   (continued)     Term Loans Amortized Cost Basis by Origination Year                                                                               Revolving     Revolving                                                               loans     loans           (in thousands)                                                   amortized     converted           September 30, 2020   2020     2019     2018     2017     2016     Prior     cost basis     to term     Total                                                                             Residential real estate - owner occupied                                                                         Risk rating                                                                         Pass   $ 51,043     $ 39,569     $ 27,408     $ 20,939     $ 30,413     $ 41,483     $ -     $ 593     $ 211,448   OAEM     -       -       -       -       -       -       -       -       -   Substandard     14       -       -       116       -       -       -       -       130   Substandard non-performing     49       58       -       101       39       60       -       99       406   Doubtful     -       -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 51,106     $ 39,627     $ 27,408     $ 21,156     $ 30,452     $ 41,543     $ -     $ 692     $ 211,984                                                                             Residential real estate - non-owner occupied                                                                         Risk rating                                                                         Pass   $ 58,495     $ 24,194     $ 26,822     $ 11,995     $ 11,205     $ 8,132     $ -     $ 370     $ 141,213   OAEM     140       1,600       -       -       -       90       -       -       1,830   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       30       -       -       76       -       -       106   Doubtful     -       -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 58,635     $ 25,794     $ 26,852     $ 11,995     $ 11,205     $ 8,298     $ -     $ 370     $ 143,149                                                                             Construction and land development                                                                         Risk rating                                                                         Pass   $ 98,655     $ 91,552     $ 38,746     $ 16,678     $ 1,213     $ 2,719     $ 6,174     $ 1,883     $ 257,620   OAEM     -       -       -       -       -       -       249       -       249   Substandard     -       -       -       -       1       -       -       -       1   Substandard non-performing     -       -       -       -       -       5       -       -       5   Doubtful     -       -       -       -       -       -       -       -       -   Total Construction and land development   $ 98,655     $ 91,552     $ 38,746     $ 16,678     $ 1,214     $ 2,724     $ 6,423     $ 1,883     $ 257,875                                                                             Home equity lines of credit                                                                         Risk rating                                                                         Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 97,150     $ -     $ 97,150   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 97,150     $ -     $ 97,150                                                                             Consumer                                                                         Risk rating                                                                         Pass *   $ 7,690     $ 3,416     $ 2,111     $ 288     $ 448     $ 1,434     $ 28,629     $ 139     $ 44,155   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       2       1       3       -       6   Doubtful     -       -       -       -       -       -       -       -       -   Total Consumer   $ 7,690     $ 3,416     $ 2,111     $ 288     $ 450     $ 1,435     $ 28,632     $ 139     $ 44,161       * - Revolving loans include $ 506,000 in overdrawn demand deposit balances.     (continued)   34 Table of Contents   (continued)     Term Loans Amortized Cost Basis by Origination Year                                                                               Revolving     Revolving                                                               loans     loans           (in thousands)                                                   amortized     converted           September 30, 2020   2020     2019     2018     2017     2016     Prior     cost basis     to term     Total                                                                             Leases                                                                         Risk rating                                                                         Pass   $ 2,749     $ 2,083     $ 2,304     $ 1,550     $ 2,861     $ 2,308     $ -     $ -     $ 13,855   OAEM     -       -       31       -       87       -       -       -       118   Substandard     -       -       8       -       -       -       -       -       8   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Consumer   $ 2,749     $ 2,083     $ 2,343     $ 1,550     $ 2,948     $ 2,308     $ -     $ -     $ 13,981                                                                             Credit cards - commercial                                                                         Risk rating                                                                         Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 9,122     $ -     $ 9,122   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Consumer   $ -     $ -     $ -     $ -     $ -     $ -     $ 9,122     $ -     $ 9,122                                                                             Total loans                                                                         Risk rating                                                                         Pass   $ 1,412,507     $ 523,962     $ 405,580     $ 267,711     $ 211,265     $ 188,714     $ 349,339     $ 24,116     $ 3,383,194   OAEM     3,972       27,909       9,361       957       8,269       153       1,596       -       52,217   Substandard     5,876       9,565       1,357       376       1,828       1,065       4,667       -       24,734   Substandard non-performing     9,771       58       46       713       53       1,171       91       433       12,336   Doubtful     -       -       -       -       -       -       -       -       -   Total Loans   $ 1,432,126     $ 561,494     $ 416,344     $ 269,757     $ 221,415     $ 191,103     $ 355,693     $ 24,549     $ 3,472,481       Bancorp considers the performance of the loan portfolio and its impact on the ACL. For certain loan classes, such as credit cards, credit quality is evaluated based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in commercial credit cards based on payment activity:       September 30,   (in thousands)   2020             Credit cards - commercial         Performing   $ 9,122   Non-performing     —   Total credit cards - commercial   $ 9,122     35 Table of Contents   In accordance with Section 4013 of the CARES Act and in response to requests from borrowers who experienced business or personal cash flow interruptions related to the pandemic, Bancorp extended payment deferrals for those affected borrowers. Depending on the demonstrated need of the customer, Bancorp deferred either the full loan payment or the principal-only portion of respective loan payments for 90 or 180 days for some borrowers directly impacted by the pandemic. Pursuant to the CARES Act, these loan deferrals were not classified as TDRs and not included in past due and/or non-performing loan statistics.   Internally assigned risk ratings of loans by loan portfolio class classification category as of December 31, 2019 follows:     (in thousands)                           Substandard             Total   December 31, 2019   Pass     OAEM     Substandard     Non-performing     Doubtful     Loans                                                     Commercial and industrial   $ 840,105     $ 704     $ 21,500     $ 8,202     $ —     $ 870,511   Construction and development, excluding undeveloped land     213,822       —       —       —       —       213,822   Undeveloped land     46,360       —       —       —       —       46,360                                                     Real estate mortgage:                                                 Commercial investment     722,747       6,459       6,275       1,137       —       736,618   Owner occupied commercial     460,981       1,375       9,050       2,377       —       473,783   1-4 family residential     332,294       1,701       122       241       —       334,358   Home equity - first lien     48,620       —       —       —       —       48,620   Home equity - junior lien     73,273       —       17       187       —       73,477   Subtotal: Real estate mortgage     1,637,915       9,535       15,464       3,942       —       1,666,856                                                     Consumer     47,429       —       38       —       —       47,467                                                     Total   $ 2,785,631     $ 10,239     $ 37,002     $ 12,144     $ —     $ 2,845,016         Troubled Debt Restructurings   Detail of outstanding TDRs included in total non-performing loans follows:       September 30, 2020     December 31, 2019               Specific     Additional             Specific     Additional               reserve     commitment             reserve     commitment   (in thousands)   Balance     allocation     to lend     Balance     allocation     to lend                                                     Commercial and industrial - term   $ 18     $ 18     $ —     $ 21     $ 21     $ —   Residential real estate     —       —       —       13       13       —   Consumer     —       —       —       —       —       —                                                     Total TDRs   $ 18     $ 18     $ —     $ 34     $ 34     $ —       During the three and nine month periods ended September 30, 2020 and 2019, there were no loans modified as TDRs and there were no payment defaults of existing TDRs within 12 months following the modification. Default is determined at 90 or more days past due, charge-off, or foreclosure.   At September 30, 2020 and December 31, 2019, Bancorp had $ 40,000 and $ 239,000 , respectively, in residential real estate loans for which formal foreclosure proceedings were in process.   36 Table of Contents   Purchased Credit Impaired Loans (Prior to the Adoption o f ASC 326 )   Management utilized the following criteria in determining which loans were classified as PCI loans for its 2019 acquisition:   ● Loans classified by management as substandard, doubtful or loss   ● Loans classified as non-accrual when acquired   ● Loans past due 90 days or more when acquired   ● Loans for which management assigned a non-accretable mark   The Bank acquired $ 1.6 million in PCI loans in connection with its 2019 acquisition. Under ASC 310 - 30, the non-accretable amount attributed to these loans equaled the contractually required principal at acquisition date and as of September 30, 2020.   The following table presents a roll forward of the accretable amount of PCI loans acquired in its 2013 acquisition:       Three months ended     Nine months ended   (in thousands)   September 30, 2019     September 30, 2019                     Balance, beginning of period   $ ( 57 )   $ ( 68 ) Transfers between non-accretable and accretable     —       —   Net accretion into interest income on loans, including loan fees     57       68   Balance, end of period   $ -     $ -     37 Table of Contents     ( 5 ) Goodwill and Intangible Assets   Goodwill and intangible assets consist of the following:   (in thousands)   September 30, 2020     December 31, 2019                     Goodwill   $ 12,513     $ 12,513   Core deposit intangibles     2,042       2,285   Mortgage servicing rights     2,420       1,372       Goodwill represents $ 11.8 million related to the May 1, 2019 acquisition and $ 682,000 related to the 1996 purchase of a bank in southern Indiana. See the footnote titled “ Acquisition ” for further details. Effective March 31, 2020, management finalized the fair values of the acquired assets and assumed liabilities related to the May 2019 acquisition ahead of the 12 months as allowed by GAAP.   GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of September 30 of each year or more often as situations dictate.   At September 30, 2020, 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.   Changes in the carrying value of goodwill follows:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands)   2020     2019     2020     2019   Balance at beginning of period   $ 12,513     $ 12,826     $ 12,513     $ 682   Goodwill acquired     —       —       —       12,144   Recast adjustments     —       ( 233 )     —       ( 233 ) Impairment     —       —       —       —   Balance at end of period   $ 12,513     $ 12,593     $ 12,513     $ 12,593       Bancorp recorded CDI assets of $ 1.5 million and $ 2.5 million in association with its May 1, 2019 and 2013 acquisitions. See the footnote titled “ Acquisition ” for further details.   Changes in the net carrying amount of CDIs follows:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands)   2020     2019     2020     2019   Balance at beginning of period   $ 2,122     $ 2,461     $ 2,285     $ 1,056   Core deposit intangible acquired     —       —       —       1,519   Amortization     ( 80 )     ( 88 )     ( 243 )     ( 202 ) Balance at end of period   $ 2,042     $ 2,373     $ 2,042     $ 2,373     38 Table of Contents   MSRs, a component of other assets, are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Fair value is based on a valuation model that calculates the PV of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income.   The estimated fair value of MSRs at both September 30, 2020 and December 31, 2019 were $3 million. There was no valuation allowance for MSRs as of September 30, 2020 and December 31, 2019, as fair value exceeded carrying value.   Changes in the net carrying amount of MSRs follows:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands)   2020     2019     2020     2019   Balance at beginning of period   $ 1,888     $ 1,168     $ 1,372     $ 1,022   Additions for mortgage loans sold     631       124       1,272       338   Amortization     ( 99 )     ( 40 )     ( 224 )     ( 108 ) Impairment     —       —       —       —                                     Balance at end of period   $ 2,420     $ 1,252     $ 2,420     $ 1,252       Total outstanding principal balances of loans serviced for others were $ 398 million and $ 327 million at September 30, 2020 and December 31, 2019, respectively.   39 Table of Contents     ( 6 ) Income Taxes   Components of income tax expense (benefit) from operations follow:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands)   2020     2019     2020     2019   Current income tax expense:                                 Federal   $ 3,369     $ 4,524     $ 9,574     $ 11,022   State     198       224       538       554   Total current income tax expense     3,567       4,748       10,112       11,576                                     Deferred income tax expense (benefit):                                 Federal     ( 1,507 )     ( 768 )     ( 2,653 )     21   State     ( 476 )     ( 201 )     ( 1,279 )     ( 4,969 ) Total deferred income tax expense (benefit)     ( 1,983 )     ( 969 )     ( 3,932 )     ( 4,948 ) Change in valuation allowance     7       4       9       24   Total income tax expense   $ 1,591     $ 3,783     $ 6,189     $ 6,652       An analysis of the difference between the statutory and ETR from operations follows:       Three months ended     Nine months ended       September 30,     September 30,       2020     2019     2020     2019   U.S. federal statutory income tax rate     21.0 %     21.0 %     21.0 %     21.0 % Tax credits     ( 5.5 )     ( 0.5 )     ( 5.8 )     ( 0.6 ) Kentucky state income tax enactments     ( 1.9 )     ( 0.7 )     ( 1.9 )     ( 6.9 ) Change in cash surrender value of life insurance     ( 1.1 )     ( 0.8 )     ( 0.6 )     ( 0.9 ) State income taxes, net of federal benefit     0.6       0.7       0.7       0.7   Excess tax benefit from stock-based compensation arrangements     ( 2.6 )     ( 1.5 )     ( 0.9 )     ( 1.2 ) Tax exempt interest income     ( 0.3 )     ( 0.3 )     ( 0.3 )     ( 0.3 ) Other, net     ( 0.3 )     -       0.9       0.1   Effective tax rate     9.9 %     18.0 %     13.1 %     11.9 %     Current state income tax expense represents tax owed to the state of Indiana. Kentucky and Ohio state bank taxes are currently based on capital levels and are recorded as other non-interest expense.   The ETR at September 30, 2020 includes the anticipated full year impact of a historic tax credit project scheduled to be placed in service in the fourth quarter of 2020.   In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1 % of net capital and averaged $ 2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5 % of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, predominantly during the first quarter of 2019, Bancorp established a Kentucky state DTA related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal tax impact of $ 1.3 million, or approximately $ 0.06 per diluted share for 2019. While this is positive in the short-term, Bancorp anticipates an unfavorable impact of approximately $ 200,000 per year beginning in 2021.   In April 2019, the Kentucky Legislature passed HB458 allowing entities filing a combined Kentucky income return to share certain tax attributes, including net operating loss carryforwards. The combined filing beginning in 2021 will allow Bancorp’s net operating loss carryforwards to offset against net revenue generated by the Bank up to 50 % of the Bank’s Kentucky taxable income and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit, net of federal tax impact of $ 2.7 million, predominantly in the second quarter of 2019, or approximately $ 0.12 per diluted share for 2019.  The losses are expected to be utilized when Bancorp begins filing a combined Kentucky income tax return. A valuation allowance is maintained for the loss that will expire in 2020.   GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons, including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, the status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions. As of September 30, 2020 and December 31, 2019, the gross amount of unrecognized tax benefits was immaterial to the consolidated financial statements of Bancorp. Federal and state income tax returns are subject to examination for the years after 2015.   40 Table of Contents     ( 7 ) Deposits   The composition of the Bank’s deposits follows:   (in thousands)   September 30, 2020     December 31, 2019                     Non-interest bearing demand deposits   $ 1,180,001     $ 810,475   Interest bearing deposits:                 Interest bearing demand     1,158,552       979,595   Savings     200,602       169,622   Money market     817,686       742,029                     Time deposits of $250 thousand or more     73,758       81,412   Other time deposits(1)     323,919       350,805   Total time deposits     397,677       432,217   Total interest bearing deposits     2,574,517       2,323,463   Total deposits   $ 3,754,518     $ 3,133,938     ( 1 ) Includes $ 25 million and $ 30 million in broke red deposits as of September 30 , 2020 and December 31, 2019 , respectively .         ( 8 ) Securities Sold Under Agreements to Repurchase   SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At September 30, 2020, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.   Information concerning SSUAR follows:   (dollars in thousands)   September 30, 2020     December 31, 2019   Outstanding balance at end of period   $ 40,430     $ 31,895   Weighted average interest rate at end of period     0.07 %     0.22 %         Three months ended     Nine months ended       September 30,     September 30,   (dollars in thousands)   2020     2019     2020     2019                                     Average outstanding balance during the period   $ 40,832     $ 37,705     $ 38,595     $ 38,402   Average interest rate during the period     0.07 %     0.27 %     0.11 %     0.28 % Maximum outstanding at any month end during the period   $ 40,655     $ 38,362     $ 42,722     $ 43,160       41 Table of Contents     ( 9 ) FHLB Advances   Bancorp had 47 separate advances totaling $ 57 million outstanding as of September 30, 2020, as compared with 57 separate advances totaling $ 80 million as of December 31, 2019. As a result of the May 2019 acquisition, Bancorp assumed 46 advances totaling $ 43 million, with maturities extending to 2028. These advances were discounted to fair value as of the acquisition date. See the footnote titled “ Acquisition ” for further details. As of September 30, 2020, for 8 advances totaling $ 34 million, all of which are non-callable, interest payments are due monthly, with principal due at maturity. For the remaining advances, principal and interest payments are due monthly based on an amortization schedule.   The following is a summary of the contractual maturities and average effective rates of outstanding advances:   (dollars in thousands)   September 30, 2020     December 31, 2019   Maturity           Weighted average             Weighted average   Year   Advance     Fixed Rate     Advance     Fixed Rate   2020   $ 33,455       0.47 %   $ 50,004       1.99 % 2021     2,215       2.60       2,400       2.52   2022     —       —       —       —   2023     297       1.00       456       1.00   2024     1,434       2.36       2,023       2.36   2025     2,941       2.43       3,774       2.41   2026     5,544       1.95       8,156       1.96   2027     5,989       1.75       7,445       1.73   2028     4,661       2.32       5,695       2.32                                     Total   $ 56,536       1.14 %   $ 79,953       2.02 %     FHLB advances are collateralized by certain CRE and residential real estate mortgage loans under blanket mortgage collateral pledge agreements, as well as a portion Bancorp’s PPP loan portfolio and FHLB stock. Bancorp views these advances as an effective lower-costing alternative to brokered deposits to fund loan growth. At September 30, 2020 and December 31, 2019, the amount of available credit from the FHLB totaled $ 846 million and $ 599 million, respectively.   Bancorp also had $ 80 million and $ 105 million in FFP lines available from correspondent banks at September 30, 2020 and December 31, 2019, respectively, with the decrease resulting from the closing of an inactive correspondent relationship during the second quarter.   42 Table of Contents     ( 10 )     Commitments and Contingent Liabilities   As of September 30, 2020 and December 31, 2019, Bancorp had various commitments outstanding that arose in the normal course of business which are properly not reflected in the consolidated financial statements. Total off-balance sheet commitments to extend credit follows:   (in thousands)   September 30, 2020     December 31, 2019   Commercial and industrial   $ 546,098     $ 416,195   Construction and development     238,526       240,503   Home equity     175,649       155,920   Credit cards     32,295       26,439   Overdrafts     33,812       32,715   Letters of credit     22,238       24,193   Other     47,720       40,083   Future loan commitments     342,996       236,885   Total off balance sheet commitments to extend credit   $ 1,439,334     $ 1,172,933     Commitments to extend credit are an agreement to lend to a customer either unsecured or secured, as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.   At September 30, 2020 and December 31, 2019, Bancorp had accrued $ 6 million and $ 350,000 , respectively, in other liabilities for its estimate of inherent risks related to unfunded credit commitments. In accordance with the adoption of ASC 326 on January 1, 2020, Bancorp’s ACL on off-balance sheet credit exposures was increased from $ 350,000 at December 31, 2019 to $ 3.9 million ($ 2.6 million net of the DTA) with the offset recorded to retained earnings on a tax-effected basis, with no impact on earnings. During the first nine months of 2020, due to increases in both off-balance sheet credit exposures (primarily the increase in C&I availability) and the quantitative rates under ASC 32, which were impacted by changes in the economic forecast related to national unemployment, Bancorp’s ACL on off-balance sheet credit exposures was increased to $6 million.   Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.   Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at September 30, 2020, Bancorp would have been required to make payments of approximately $ 2.2 million, or the maximum amount payable under those contracts. No payments have ever been required because of default on these contracts. These agreements are normally secured by collateral acceptable to Bancorp, which limits credit risk associated with the agreements.   As of September 30, 2020, in the normal course of business, there were pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.   43 Table of Contents     ( 11 ) Assets and Liabilities Measured and Reported at Fair Value   Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:   Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.   Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.   Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.   The methods of determining the fair value of assets and liabilities presented in this note are consistent with the methodologies disclosed in Bancorp’s 2019 Annual Report on Form 10 -K.   Assets and liabilities measured at fair value on a recurring basis are summarized as follows:       Fair Value Measurements Using     Total   September 30, 2020 (in thousands)   Level 1     Level 2     Level 3     Fair Value   Assets:                                 Available for sale debt securities:                                 Government sponsored enterprise obligations   $ —     $ 141,881     $ —     $ 141,881   Mortgage backed securities - government agencies     —       279,452       —       279,452   Obligations of states and political subdivisions     —       7,851       —       7,851                                     Total available for sale debt securities     —       429,184       —       429,184                                     Interest rate swaps     —       9,433       —       9,433                                     Total assets   $ —     $ 438,617     $ —     $ 438,617                                     Liabilities:                                 Interest rate swaps   $ —     $ 9,708     $ —     $ 9,708         Fair Value Measurements Using     Total   December 31, 2019 (in thousands)   Level 1     Level 2     Level 3     Fair Value   Assets:                                 Available for sale debt securities:                                 U.S. Treasury and other U.S. government obligations   $ 49,897     $ —     $ —     $ 49,897   Government sponsored enterprise obligations     —       209,944       —       209,944   Mortgage backed securities - government agencies     —       193,861       —       193,861   Obligations of states and political subdivisions     —       17,036       —       17,036                                     Total available for sale debt securities     49,897       420,841       —       470,738                                     Interest rate swaps     —       2,696       —       2,696                                     Total assets   $ 49,897     $ 423,537     $ —     $ 473,434                                     Liabilities:                                 Interest rate swaps   $ —     $ 2,767     $ —     $ 2,767       There were no transfers into or out of Level 3 of the fair value hierarchy during 2020 or 2019.     44 Table of Contents   Assets measured at fair value on a non-recurring basis are summarized as follows:                                       Losses recorded                                       Three months     Nine months       Fair Value Measurements Using     Total     ended     ended   September 30, 2020 (in thousands)   Level 1     Level 2     Level 3     Fair Value     September 30, 2020     September 30, 2020                                                     Collateral dependent loans   $ —     $ —     $ 8,278     $ 8,278     $ —     $ —   Other real estate owned     —       —       612       612       —       —                                         Losses recorded                                       Three months     Nine months       Fair Value Measurements Using     Total     ended     ended   December 31, 2019 (in thousands)   Level 1     Level 2     Level 3     Fair Value     September 30, 2019     September 30, 2019                                                     Impaired loans   $ —     $ —     $ 7,253     $ 7,253     $ —     $ —   Other real estate owned     —       —       493       493       —       —     There were no liabilities measured at fair value on a non-recurring basis at September 30, 2020 and December  31, 2019.   For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below.       September 30, 2020   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 8,278   Appraisal   Appraisal discounts     7.2 % Other real estate owned     612   Appraisal   Appraisal discounts     23.4         December 31, 2019   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Impaired loans - collateral dependent   $ 7,253   Appraisal   Appraisal discounts     60.3 % Other real estate owned     493   Appraisal   Appraisal discounts     17.1       Collateral Dependent Loans with an ACL (Impaired Loans with Specific Reserves prior to the adoption of ASC 326 ) : For collateral-dependent loans where Bancorp has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party or internal appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, comparable sales, or cost) vary based on the status of the project or property. For example, land is generally based on the comparable sales method while construction and improved real estate is based on the income and/or comparable sales methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 8 % to 10 % of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise and knowledge of the client and client’s business.   45 Table of Contents   Other Real Estate Owned : OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. Bancorp obtains the valuation of OREO with material balances from third party or internal appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction and improved real estate is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 8 % to 10 % of the appraised value.   The estimated fair values of Bancorp’s financial instruments not measured at fair value on a recurring or non-recurring basis follows:     (in thousands)   Carrying             Fair Value Measurements Using   September 30, 2020   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 291,003     $ 291,003     $ 291,003     $ —     $ —   Mortgage loans held for sale     23,611       24,299       —       24,299       —   Federal Home Loan Bank stock     11,284       11,284       —       11,284       —   Loans, net     3,421,980       3,463,411       —       —       3,463,411   Accrued interest receivable     13,782       13,782       13,782       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,180,001     $ 1,180,001     $ —     $ 1,180,001     $ —   Transaction deposits     2,176,840       2,176,840       —       2,176,840       —   Time deposits     397,677       402,093       —       402,093       —   Securities sold under agreement to repurchase     40,430       40,430       —       40,430       —   Federal funds purchased     9,179       9,179       —       9,179       —   Federal Home Loan Bank advances     56,536       58,095       —       58,095       —   Accrued interest payable     325       325       325       —       —       (in thousands)   Carrying             Fair Value Measurements Using   December 31, 2019   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 249,724     $ 249,724     $ 249,724     $ —     $ —   Mortgage loans held for sale     8,748       8,923       —       8,923       —   Federal Home Loan Bank stock     11,284       11,284       —       11,284       —   Loans, net     2,818,225       2,841,767       —       —       2,841,767   Accrued interest receivable     8,534       8,534       8,534       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 810,475     $ 810,475     $ —     $ 810,475     $ —   Transaction deposits     1,891,246       1,891,246       —       1,891,246       —   Time deposits     432,217       434,927       —       434,927       —   Securities sold under agreement to repurchase     31,895       31,895       —       31,895       —   Federal funds purchased     10,887       10,887       —       10,887       —   Federal Home Loan Bank advances     79,953       80,906       —       80,906       —   Accrued interest payable     640       640       640       —       —       Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly impact estimates.   46 Table of Contents     ( 12 ) Accumulated Other Comprehensive Income (Loss)   The following table illustrates activity within the balances of AOCI by component:       Net unrealized     Net unrealized     Minimum               gains (losses)     gains (losses)     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Three months ended September 30, 2020                                 Balance, June 30, 2020   $ 9,466     $ ( 281 )   $ ( 369 )   $ 8,816   Net current period other comprehensive income (loss)     ( 29 )     85       —       56   Balance, September 30, 2020   $ 9,437     $ ( 196 )   $ ( 369 )   $ 8,872                                     Three months ended September 30, 2019                                 Balance, June 30, 2019   $ 1,291     $ ( 14 )   $ ( 211 )   $ 1,066   Net current period other comprehensive income (loss)     719       ( 55 )     ( 2 )     662   Balance, September 30, 2019   $ 2,010     $ ( 69 )   $ ( 213 )   $ 1,728               Net unrealized     Net unrealized     Minimum               gains (losses)     gains (losses)     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Nine months ended September 30, 2020                                 Balance, January 1, 2020   $ 1,085     $ ( 39 )   $ ( 369 )   $ 677   Net current period other comprehensive income (loss)     8,352       ( 157 )     —       8,195   Balance, September 30, 2020   $ 9,437     $ ( 196 )   $ ( 369 )   $ 8,872                                     Nine months ended September 30, 2019                                 Balance, January 1, 2019   $ ( 5,330 )   $ 408     $ ( 220 )   $ ( 5,142 ) Net current period other comprehensive income (loss)     7,340       ( 477 )     7       6,870   Balance, September 30, 2019   $ 2,010     $ ( 69 )   $ ( 213 )   $ 1,728     47 Table of Contents     ( 13 ) Preferred Stock   Bancorp has one class of preferred stock ( no par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of the class or any series within the class will be determined by the Board of Directors prior to any issuance. None of this stock has been issued to date.         ( 14 ) Net Income Per Share   The following table reflects net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:       Three months ended     Nine months ended       September 30,     September 30,   (in thousands, except per share data)   2020     2019     2020     2019   Net income   $ 14,533     $ 17,234     $ 41,133     $ 49,418                                     Weighted average shares outstanding - basic     22,582       22,550       22,553       22,633   Dilutive securities     220       260       206       268   Weighted average shares outstanding- diluted     22,802       22,810       22,759       22,901                                     Net income per share - basic   $ 0.64     $ 0.76     $ 1.82     $ 2.18   Net income per share - diluted     0.64       0.76       1.81       2.16       Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:       Three months ended     Nine months ended   (in thousands)   September 30,     September 30,       2020     2019     2020     2019   Antidilutive SARs     202       199       202       199     48 Table of Contents     ( 15 ) Stock-Based Compensation   The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.   At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. In 2018, shareholders approved an additional 500,000 shares for issuance under the plan. As of September 30, 2020, there were 431,000 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.   SAR Grants – SARs granted have a vesting schedule of 20 % per year and expire ten years after the grant date unless forfeited due to employment termination.   Fair values of SARs are estimated at the date of grant using the Black-Scholes option-pricing model, a leading formula for calculating such value. This model requires the input of assumptions, changes to which can materially impact the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:   Assumptions   2020     2019   Dividend yield     2.51 %     2.54 % Expected volatility     20.87 %     20.39 % Risk free interest rate     1.25 %     2.52 % Expected life (in years)     7.1       7.2       Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of underlying shares for the expected term calculated on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.   RSA Grants – RSAs granted to officers vest over five years. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015 and forward, dividends are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.   PSU Grants – PSUs vest based upon service and a three -year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a one -year post-vesting holding period and therefore the fair value of such grants incorporates a liquidity discount related to the holding period of 4.4 % and 4.1 % for 2020 and 2019.   RSU Grants – RSUs are only granted to non-employee directors, are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, therefore the fair value of the RSUs equals market value of underlying shares on the date of grant.   In the first quarters of 2020 and 2019, Bancorp awarded 6,570 and 9,834 RSUs to non-employee directors of Bancorp with a grant date fair value of $ 270,000 and $ 247,000 , respectively.   Bancorp utilized cash of $ 224,000 and $ 272,000 during the first nine months of 2020 and 2019, respectively, for the purchase of shares upon the vesting of RSUs.   49 Table of Contents   Bancorp has recognized stock-based compensation expense for SARs, RSAs and PSUs within compensation expense and RSUs for directors within other non-interest expense, as follows:       Three months ended September 30, 2020   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 88     $ 424     $ 67     $ 264     $ 843   Deferred tax benefit     ( 19 )     ( 90 )     ( 14 )     ( 56 )     ( 179 ) Total net expense   $ 69     $ 334     $ 53     $ 208     $ 664           Three months ended September 30, 2019   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 88     $ 292     $ 82     $ 414     $ 876   Deferred tax benefit     ( 18 )     ( 65 )     ( 17 )     ( 109 )     ( 209 ) Total net expense   $ 70     $ 227     $ 65     $ 305     $ 667             Nine months ended September 30, 2020   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 265     $ 1,064     $ 202     $ 1,105     $ 2,636   Deferred tax benefit     ( 56 )     ( 223 )     ( 42 )     ( 231 )     ( 552 ) Total net expense   $ 209     $ 841     $ 160     $ 874     $ 2,084           Nine months ended September 30, 2019   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 258     $ 891     $ 246     $ 1,337     $ 2,732   Deferred tax benefit     ( 54 )     ( 186 )     ( 52 )     ( 281 )     ( 573 ) Total net expense   $ 204     $ 705     $ 194     $ 1,056     $ 2,159         Detail of unrecognized stock-based compensation expense follows:   (in thousands) Year ended   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Remainder of 2020   $ 88     $ 291     $ 68     $ 190     $ 637   2021     304       1,002       1       760       2,067   2022     249       769       —       490       1,508   2023     174       550       —       —       724   2024     68       295       —       —       363   2025     9       28       —       —       37   Total estimated expense   $ 892     $ 2,935     $ 69     $ 1,440     $ 5,336     50 Table of Contents   The following table summarizes SARs activity and related information:                                                 Weighted                         Weighted             Weighted     average                         average     Aggregate     average     remaining               Exercise     exercise     intrinsic     fair     contractual   (in thousands, except per share data)   SARs     price     price     value (1)     value     life (in years)                                                       Outstanding, January 1, 2019     731     $ 14.02 - $ 40.00     $ 22.42     $ 8,422     $ 3.83       5.2   Granted     53     36.65 - 38.18       37.01       213       6.24           Exercised     ( 143 )   14.02 - 22.96       15.99       3,025       3.47           Forfeited     —       —         —       —       —           Outstanding, December 31, 2019     641     $ 14.02 - $ 40.00     $ 25.06     $ 10,250     $ 4.10       5.3                                                       Outstanding, January 1, 2020     641     $ 14.02 - $ 40.00     $ 25.06     $ 10,250     $ 4.10       5.3   Granted     48     37.30 - 37.30       37.30       —       5.80           Exercised     ( 95 )   14.02 - 25.76       16.32       2,361       2.87           Forfeited     —       —         —       —       —           Outstanding, September 30, 2020     594     $ 15.24 - $ 40.00     $ 27.45     $ 4,878     $ 4.44       5.4                                                       Vested and exercisable     402     $ 15.24 - $ 40.00     $ 23.00     $ 4,745     $ 3.78       4.1   Unvested     192     25.76 - 40.00       36.77       133       5.81       8.0   Outstanding, September 30, 2020     594     $ 15.24 - $ 40.00     $ 27.45     $ 4,878     $ 4.44       5.4                                                       Vested in the current year     58     $ 22.96 - $ 40.00     $ 30.79     $ 286     $ 5.02             ( 1 ) - In trinsic value for SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price.     The following table summarizes activity for RSAs granted to officers:               Grant date               weighted   (in thousands, except per share data)   RSAs     average cost                     Unvested at January 1, 2019     110     $ 32.09   Shares awarded     40       34.88   Restrictions lapsed and shares released     ( 40 )     28.74   Shares forfeited     ( 2 )     35.36   Unvested at December 31, 2019     108     $ 34.31                     Unvested at January 1, 2020     108     $ 34.31   Shares awarded     36       39.30   Restrictions lapsed and shares released     ( 41 )     32.39   Shares forfeited     ( 3 )     36.53   Unvested at September 30, 2020     100     $ 36.83       Shares expected to be awarded for PSUs granted to executive officers of Bancorp, the three -year performance period for which began January 1 of the award year, are as follows:       Vesting             Expected   Grant   period     Fair     shares to   year   in years     value     be awarded   2018     3     $ 31.54       50,352   2019     3       32.03       36,127   2020     3       32.27       45,577     51 Table of Contents     ( 16 ) Derivative Financial Instruments   Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.   Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of non-performance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, collateral and monitoring procedures, and does not expect any counterparties to fail their obligations.   Bancorp had outstanding undesignated interest rate swap contracts as follows:       Receiving     Paying       September 30,     December 31,     September 30,     December 31,   (dollars in thousands)   2020     2019     2020     2019                                     Notional amount   $ 106,695     $ 99,000     $ 106,695     $ 99,000   Weighted average maturity (years)     7.8       8.2       7.8       8.2   Fair value   $ 9,433     $ 2,696     $ 9,450     $ 2,767       In 2015, Bancorp entered into an interest rate swap to hedge cash flows of a $ 20 million rolling fixed-rate three -month FHLB borrowing. The swap began December 9, 2015 and matures December 6, 2020. In 2016, Bancorp entered into an interest rate swap to hedge cash flows of a $ 10 million rolling fixed-rate three -month FHLB borrowing. The swap began December 6, 2016 and matures December 6, 2021. For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods for which the hedged forecasted transaction impacts earnings.     The following table details the notional and fair value amounts of Bancorp’s derivative positions designated as cash flow hedges:   (dollars in thousands)                                               Fair value   Notional   Maturity   Receive (variable)   Pay fixed     assets (liabilities)   amount   date   index   swap rate     September 30, 2020     December 31, 2019   $ 10,000   12/6/2021   US 3 Month LIBOR     1.89 %   $ ( 200 )   $ ( 45 )   20,000   12/6/2020   US 3 Month LIBOR     1.79 %     ( 57 )     ( 6 )                                     $ 30,000           1.82 %   $ ( 257 )   $ ( 51 )   52 Table of Contents     ( 17 ) Regulatory Matters   Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Bancorp and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.   Banking regulators have categorized the Bank as well-capitalized. The regulations in accordance with Basel III define “well capitalized” as a 6.5 % Common Equity Tier 1 Risk-Based Capital ratio, an 8.0 % Tier 1 Risk-Based Capital ratio, a 10.0 % Total Risk-Based Capital ratio and a 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 Bank must hold a capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above their minimum risk-based capital requirements. The capital conservation buffer set forth by the Basel III regulatory capital framework was 2.5 % of risk-weighted assets above the minimum risk based capital ratio requirements at September 30, 2020 and December 31, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on Bancorp’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers. At September 30, 2020 and December 31, 2019, Bancorp’s and the Bank’s risk-based capital exceeded the required capital conservation buffer.   Bancorp continues to exceed the regulatory requirements to be considered “well-capitalized” for Total Risk Based Capital, Common Equity Tier I Risk Based Capital, Tier I Risk Based Capital and Tier I Leverage. 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. There are no conditions or events since September 30, 2020 that management believes have changed Bancorp’s well-capitalized status.   As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “ Financial Instruments – Credit Losses ,” or CECL , which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were declared to be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three -year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. Had Bancorp elected not 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.   Dividends paid by Bancorp are limited to, without prior regulatory approval, current year earnings and earnings less dividends paid during the preceding two years.   53 Table of Contents   The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:   (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   September 30, 2020   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 457,833       13.79 %   $ 265,548       8.00 %   NA     NA   Bank     443,406       13.40       264,799       8.00     $ 330,999       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     418,460       12.61       149,371       4.50     NA     NA   Bank     404,033       12.21       148,950       4.50       215,149       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     418,460       12.61       199,161       6.00     NA     NA   Bank     404,033       12.21       198,599       6.00       264,799       8.00                                                     Leverage (2)                                                 Consolidated     418,460       9.70       172,571       4.00     NA     NA   Bank     404,033       9.38       172,316       4.00       215,394       5.00       (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   December 31, 2019   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 418,460       12.85 %   $ 260,448       8.00 %   NA     NA   Bank     396,299       12.20       259,823       8.00     $ 324,778       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     391,319       12.02       146,502       4.50     NA     NA   Bank     369,158       11.37       146,150       4.50       211,106       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     391,319       12.02       195,336       6.00     NA     NA   Bank     369,158       11.37       194,867       6.00       259,823       8.00                                                     Leverage (2)                                                 Consolidated     391,319       10.60       147,733       4.00     NA     NA   Bank     369,158       10.67       138,392       4.00       172,990       5.00     ( 1 )     Ratio is computed in relation to risk-weighted assets. ( 2 )     Ratio is computed in relation to average assets.      NA – Not Applicable   54 Table of Contents     ( 18 ) Segments   Bancorp’s principal activities include commercial banking and WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage banking and investment products sales activity. WM&T provides custom-tailored financial planning, investment management, company retirement plan management, retirement planning, trust and estate services in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax-exempt activity. All tax-exempt activity and provision have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.   Principally, all of the net assets of Bancorp are involved in the commercial banking segment. Goodwill of $ 12.5 million, of which $ 682,000 relates to a bank acquisition in 1996 and $ 11.8 million relates to the May 2019 acquisition, has been assigned to the commercial banking segment. Assets assigned to WM&T primarily consist of net premises and equipment and a receivable related to fees earned that have not been collected.   Selected financial information by business segment follows:       Three months ended September 30, 2020     Three months ended September 30, 2019                                                     (dollars in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 33,619     $ 76     $ 33,695     $ 32,031     $ 75     $ 32,106   Provision for credit losses     4,418       —       4,418       400       —       400   Wealth management and trust services     —       5,657       5,657       —       5,738       5,738   All other non-interest income     7,386       —       7,386       7,471       —       7,471   Non-interest expenses     23,062       3,134       26,196       20,763       3,135       23,898   Income before income tax expense     13,525       2,599       16,124       18,339       2,678       21,017   Income tax expense     1,027       564       1,591       3,202       581       3,783   Net income   $ 12,498     $ 2,035     $ 14,533     $ 15,137     $ 2,097     $ 17,234                                                     Segment assets     4,361,576     $ 3,553     $ 4,365,129       3,530,198     $ 3,728     $ 3,533,926         Nine months ended September 30, 2020     Nine months ended September 30, 2019                                                     (dollars in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 99,423     $ 246     $ 99,669     $ 92,356     $ 235     $ 92,591   Provision for credit losses     15,518       —       15,518       1,000       —       1,000   Wealth management and trust services     —       17,601       17,601       —       16,839       16,839   All other non-interest income     20,600       —       20,600       19,602       —       19,602   Non-interest expenses     65,463       9,567       75,030       62,627       9,335       71,962   Income before income tax expense     39,042       8,280       47,322       48,331       7,739       56,070   Income tax expense     4,392       1,797       6,189       4,973       1,679       6,652   Net income   $ 34,650     $ 6,483     $ 41,133     $ 43,358     $ 6,060     $ 49,418                                                     Segment assets     4,361,576     $ 3,553     $ 4,365,129       3,530,198     $ 3,728     $ 3,533,926     55 Table of Contents     ( 19 ) Revenue from Contracts with Customers   All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:       Three months ended September 30, 2020     Three months ended September 30, 2019                                                     (dollars in thousands)   Commercial Banking     WM&T     Total     Commercial     WM&T     Total   Wealth management and trust services   $ —     $ 5,657     $ 5,657     $ —     $ 5,738     $ 5,738   Deposit service charges     998       —       998       1,356       —       1,356   Debit and credit card income     2,218       —       2,218       2,102       —       2,102   Treasury management fees     1,368       —       1,368       1,264       —       1,264   Mortgage banking income(1)     1,979       —       1,979       794       —       794   Net investment product sales commissions and fees     431       —       431       400       —       400   Bank owned life insurance(1)     172       —       172       487       —       487   Other(2)     220       —       220       1,068       —       1,068   Total non-interest income   $ 7,386     $ 5,657     $ 13,043     $ 7,471     $ 5,738     $ 13,209           Nine months ended September 30, 2020     Nine months ended September 30, 2019                                                     (Dollars in thousands)   Commercial Banking     WM&T     Total     Commercial     WM&T     Total   Wealth management and trust services   $ —     $ 17,601     $ 17,601     $ —     $ 16,839     $ 16,839   Deposit service charges     3,081       —       3,081       3,793       —       3,793   Debit and credit card income     6,261       —       6,261       6,014       —       6,014   Treasury management fees     3,901       —       3,901       3,623       —       3,623   Mortgage banking income(1)     4,447       —       4,447       2,004       —       2,004   Net investment product sales commissions and fees     1,288       —       1,288       1,120       —       1,120   Bank owned life insurance(1)     527       —       527       849       —       849   Other(2)     1,095       —       1,095       2,199       —       2,199   Total non-interest income   $ 20,600     $ 17,601     $ 38,201     $ 19,602     $ 16,839     $ 36,441     ( 1 ) Outside of the scope of ASC 606. ( 2 ) Outside of the scope of ASC 606, with the exception of safe deposit fees which were nominal for all periods.   Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing and extent of cash flows are affected by economic factors. Revenue sources within the scope of ASC 606 are discussed below:   Bancorp earns fees from its deposit customers for transaction-based, account management and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payments fees and ACH fees, are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided.   Treasury management transaction fees are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account analysis fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customers’ account balances.   WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and clients do not permit performance-based fees and accordingly, none of the fee income earned by WM&T is performance-based. Trust fees receivable were $ 2.1 million at both September 30, 2020 and December 31, 2019, respectively.   56 Table of Contents   Investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market values and are assessed, collected and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including nominal incentive compensation, and trading activity charges of $ 417,000 and $ 391,000 for the nine month periods ended September 30, 2020 and 2019.   Debit and credit card revenue primarily consists of debit and credit card interchange income. Interchange income represents fees assessed within the payment card system for acceptance of card-based transactions. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized. Revenue is collected and recognized daily through the payment network settlement process.   Bancorp did not establish any contract assets or liabilities as a result of adopting ASC 606, nor were any recognized during the six -month period ending September 30, 2020.   57 Table of Contents     ( 20 ) Leases   Bancorp has operating leases for various branch locations with terms ranging from one month to 13 years, some of which include options to extend the leases in five -year increments. Options reasonably expected to be exercised are included in determination of the right-of-use asset. Bancorp elected the practical expedient to expense short-term lease obligations associated with leases with original terms of 12 months or less. Bancorp elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities on the consolidated balance sheet.   Balance sheet, income statement and cash flow detail regarding operating leases follows:   (in thousands)                 Balance Sheet   September 30, 2020     December 31, 2019                     Operating lease right-of-use assets   $ 11,208     $ 12,737   Operating lease liabilities     12,616       14,369                     Weighted average remaining lease term     8.8       9.4   Weighted average discount rate     3.46 %     2.46 %                   Maturities of lease liabilities:                 One year or less   $ 1,914     $ 1,964   Year 2     1,919       1,915   Year 3     1,968       1,930   Year 4     1,858       1,972   Year 5     1,496       1,781   Greater than 5 years     5,540       6,619   Total lease payments   $ 14,695     $ 16,181   Less imputed interest     2,079       1,812   Total lease liabilities   $ 12,616     $ 14,369         (in thousands)   Three months ended     Three months ended   Income Statement   September 30, 2020     September 30, 2019   Components of lease expense:                 Operating lease cost   $ 468     $ 501   Variable lease cost     44       38   Less sublease income     —       14   Total lease cost   $ 512     $ 525     (in thousands)   Nine months ended     Nine months ended   Income Statement   September 30, 2020     September 30, 2019   Components of lease expense:                 Operating lease cost   $ 1,411     $ 1,498   Variable lease cost     131       101   Less sublease income     38       41   Total lease cost   $ 1,504     $ 1,558     (in thousands)   Nine months ended     Nine months ended   Cash flow Statement   September 30, 2020     September 30, 2019   Supplemental cash flow information:                 Operating cash flows from operating leases   $ 1,186     $ 1,051       As of September 30, 2020, Bancorp had not entered into any lease agreements that had yet to commence.   58 Table of Contents   Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The consolidated financial statements include the accounts of Stock Yards Bancorp, Inc. and its wholly owned subsidiary, SYB, collectively referred to as “Bancorp” or the “Company.” All significant inter-company transactions and accounts have been eliminated in consolidation.   Stock Yards Bancorp, Inc. is a FHC headquartered in Louisville, Kentucky. Established in 1904, SYB is a state-chartered non-member financial institution that provides services in the Louisville, Kentucky, Indianapolis, Indiana and Cincinnati, Ohio MSAs through 44 full service banking center locations.   This section presents management’s perspective on our financial condition and results of operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying footnotes presented in Part 1 Item 1 “ Financial Statements ” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2019. 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 ” and Part II Item 1A “ Risk Factors.”    Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “aim,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control, particularly with regard to developments related to the COVID-19 pandemic. 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, except as required by applicable law.   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:     ● impact of COVID-19 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 U.S. economy (including, without limitation, the CARES Act and other relief efforts), and the resulting effect of all of 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;   ● accuracy of assumptions and estimates used in establishing the ACL on loans, ACL for off-balance sheet credit exposures and other estimates;   ● impairment of investment securities, goodwill, 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 market volatility and liquidity;   ● ability to effectively manage capital and liquidity;   ● long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;   ● the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;   ● competitive product and pricing pressures;   59 Table of Contents     ● projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;   ● descriptions of plans or objectives for future operations, products, or services;   ● 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 consumer/business spending or savings behavior;   ● ability to appropriately address social, environmental and sustainability concerns that may arise from business activities;   ● integration of acquired businesses or future acquisitions;   ● 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 or its customers or to disrupt systems; and   ● other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part II Item 1A “ Risk Factors.”      Acquisition of King Bancorp, Inc. and its wholly owned subsidiary King Southern Bank   On May 1, 2019, Bancorp completed its acquisition of KSB for $28 million in cash. The acquisition expanded Bancorp’s market area into nearby Nelson County, Kentucky, while expanding the customer base in Louisville, Kentucky. At May 1, 2019, the acquiree reported approximately $192 million in total assets, approximately $164 million in loans and approximately $126 million in deposits. As a result of the acquisition, goodwill totaling $11.8 million was recorded during the second quarter of 2019, with nominal recast adjustments posted during the third and fourth quarters of 2019.   As a result of the completion of the acquisition, Bancorp incurred pre-tax transaction charges totaling $1.3 million predominantly during the second quarter of 2019. Net income from the acquisition was accretive to Bancorp’s overall operating results beginning with the third quarter of 2019. Effective March 31, 2020, management finalized the fair values of the acquired assets and assumed liabilities in advance of the 12-month post acquisition date, as allowed by GAAP.   In connection with the acquisition, Bancorp became the 100% successor owner of KBST, an unconsolidated finance subsidiary. As permitted under the terms of KBST’s governing documents, Bancorp redeemed the TPS at the par amount of approximately $4 million in June, 2019.      Issued but Not Yet Effective Accoun ting Standards Updates   For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the footnote titled “ Basis of Presentation and Summary of Significant Accounting Policies ” of Part I Item 1 “ Financial Statements .”   60 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, 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 custom-tailored financial planning, investment management, company retirement plan management, retirement planning, trust and estate services in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.      Overview – Impact of the COVID-19 Pandemic on Financial Condition and Results of Operations   The COVID-19 pandemic in the U.S. and efforts to contain it have had a complex and significant adverse impact on the economy, the banking industry and Bancorp. The impact on future fiscal periods is subject to a high degree of uncertainty.   On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic, indicating that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The spread of the virus has caused significant disruptions in the U.S. economy and has impacted banking and other financial activity in the markets in which Bancorp operates. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption resulted in the initial shuttering of non-essential businesses across most of the country, significant job loss, and aggressive measures by the federal government. While phased-in re-opening of commerce that began towards the end of the second quarter has led to the easing of many initial restrictions, unemployment levels remain elevated and uncertainty regarding the effects of the pandemic on general economic behavior remains.   In response to the above, Congress, the President and regulatory agencies took action designed to lessen the economic fallout. Most notably, the CARES Act was signed into law at the end of March. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to impacted industry sectors.   The CARES Act established the SBA PPP to provide loans for eligible businesses/not-for-profits with the focus on job retention and certain operating expenses. Portions of these loans qualify for forgiveness when used for payroll costs, mortgage interest, rent and utilities during the 24-week period beginning with the date of the loan. Loans funded through the PPP are fully guaranteed by the U.S. government.   The PPP expired on August 8, 2020 and as of October 31, 2020, the Bank has submitted 71 forgiveness applications to the SBA totaling $52 million and has received payment from the SBA for five borrowers. The SBA has 90 days to review and decision applications for forgiveness. On October 8, 2020, the SBA announced it would streamline loan forgiveness for loans of $50,000 or less with one or more employee other than the owner (representing approximately 48% of the PPP loans Bancorp originated). The Bank has nearly $15 million in net unrecognized fees related to the PPP that would be recognized in income immediately once the loans are paid off or forgiven by the SBA. The timing of such forgiveness could have a major impact on fourth quarter 2020 and early 2021 operating results.   The CARES Act permits financial institutions to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 and is intended to provide interpretive guidance as to conditions that would constitute a short-term modification that would not meet the definition of a TDR. This includes the following: (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration, and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. Bancorp is applying this guidance to qualifying loan modifications and has implemented modifications meeting these conditions. Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they would not be criticized by examiners for doing so.   61 Table of Contents   The PPP directly impact ed Bancorp’s financial condition and results of operations for the three and nine months ended September 30, 2020 as follows:     ● Bancorp originated 3,364 PPP loans totaling $657 million, with the PPP portfolio (net of unearned deferred fees and costs) representing 18% of total loans outstanding at September 30, 2020.   ● While the PPP was primarily offered to Bancorp’s customer base to limit fraud risk, Bancorp added approximately 300 new relationship prospects that have begun the process of migrating over their full commercial banking relationship.   ● Bancorp received in excess of $20 million in origination fees from the SBA that will be recognized over the term of the loans (predominantly 24 months), with the fees ranging between 1% and 5% based on the size of the loan.   ● Approximately $4.2 million and $7.6 million in interest and net fee income on PPP loans was recognized during the three and nine month periods ended September 30, 2020, respectively. While this had a positive impact on interest income and net interest income, the 1% stated yield on the PPP portfolio negatively impacted the overall loan portfolio yield and NIM.   ● Based on the 100% SBA guarantee of PPP loans, Bancorp did not reserve for potential losses within the ACL on these loans.   ● Bancorp experienced a significant increase in deposit balances (both average and ending) directly related to customers who originated PPP loans. The funding of the PPP loans was deposited into accounts held at the Bank and many Commercial customers have utilized the funds to strengthen their balance sheets.   ● A portion of Bancorp’s customer base paid down existing operating C&I lines of credit in part with excess liquidity resulting from PPP loans.   ● Bancorp relied on deposit growth in addition to excess cash on hand to fund PPP loans with no reliance placed on external funding sources. Maintaining excess liquidity related to the PPP loan portfolio contributed to overall NIM compression.   ● With regard to Bancorp’s compensation expense, the origination of PPP loans led to elevated levels of deferred salary costs with the offset to deferred loan fees, the latter of which amortizes over the outstanding term of the related loans.   ● Consistent with the decline in credit utilization and adoption of ASC-326, Bancorp incurred a significant increase in reserves for off-balance sheet credit exposures, which are recorded as a component of non-interest expenses.   ● Bancorp’s leverage ratio, which consists of tier-1 capital divided by adjusted quarterly average assets, was negatively impacted by the outsized balance sheet growth attributed to PPP participation and led to increased FDIC insurance expense for the third quarter of 2020. This should normalize over time. Bancorp and the Bank maintained the “well capitalized” designation for every capital ratio, as defined by regulators, at September 30, 2020.   Other pandemic-related impacts to Bancorp’s financial condition and results of operations for the three and nine months ended September 30, 2020 were as follows:     ● As previously disclosed, on March 16, 2020, the FRB responded to the pandemic by lowering the FFTR to a range of 0% - 0.25% resulting in Prime dropping to 3.25%.   ● Loan loss provisioning in 2020 has been significantly impacted by the economic crisis and corresponding impact on national unemployment forecast adjustments within the CECL model, changes in the loan mix and the addition of a large specific reserve during the second quarter.   ● Bancorp has deferred either the full loan payment or the principal only portion of respective loan payments for 90 or 180 days for some borrowers directly impacted by the pandemic.  Through September 30, 2020, Bancorp executed 1,100 full payment deferrals (predominantly 3 months). As of September 30, 2020 outstanding loan deferrals totaled $120 million - representing 4% of the loan portfolio (excluding PPP loans). Approximately 85% of the total deferrals processed (in terms of dollars) occurred in the month of April, with the subsequent pace slowing significantly. Pursuant to the CARES Act, these loan deferrals were not classified as TDRs and have not been included in non-performing loan statistics. While the modifications themselves did not trigger a loan risk rating downgrade, if the impact of COVID-19 continues, borrower operations do not improve or if other negative events occur, such modified loans could transition to potential problem loans or into problem loans. During the third quarter, a significant portion of the deferred loan portfolio returned to full paying status. As of October 31, 2020, outstanding loan deferrals totaled $65 million, representing 2% of outstanding loans (excluding PPP loans).   ● Deposit balances for both commercial customers who received PPP funding and those that did not were elevated at September 30, 2020, as higher levels of liquidity are being held in response to economic uncertainty.   ● Consistent with the industry, deposit service charges and debit/credit card income have been impacted by pandemic driven changes in customer behavior. This has led to, among other things, lower transaction volumes and spending behaviors during the initial phase of mandated shutdowns, with activity improving noticeably through the end of the third quarter.   ● Bancorp did not incur material non-interest expenses related to the execution of its pandemic plan or continued efforts associated with employee and customer health and safety.   62 Table of Contents   In tandem with the declaration of the global pandemic, Bancorp invoked its Board of Director-approved pandemic plan, which included timely communication to employees, implementing remote work arrangements to the full extent possible, separating individual departments, operating select branch lobbies by appointment only, fully staffing all branch drive-thru lanes, communicating with and encouraging customers to use Bancorp’s free self-service tools such as ITMs/ATMs, online banking, mobile banking and bill pay and actively promoting social distancing in all aspects of business.   Bancorp has maintained social distancing precautions for all employees in the office and customers visiting branches, preventative cleaning at offices/branches and restrictions on non-essential business related travel to the fullest extent possible and pursuant to guidance from the Centers for Disease Control and local authorities. Bancorp has implemented business continuity measures as necessary throughout the pandemic, including monitoring potential business interruptions.   Bancorp has taken measures both to support customers affected by the pandemic and to maintain strong asset quality, including:     ● Assisting business customers through PPP and other government sponsored loan products   ● Monitoring portfolio risk and related mitigation strategies by industry segments   ● Limiting originations to higher risk industries and customers including, but not limited to, transportation, travel, hospitality, entertainment, and retail   ● Proactively contacting customers in order to assess credit situations and needs and develop long-term contingency financial plans   ● Offering flexible repayment options to current customers and a streamlined loan modification process, when appropriate   Management continues to meet regularly to anticipate and respond to pandemic related developments. Bancorp has not incurred any significant challenges to its ability to maintain its systems and controls in light of the measures taken to prevent the spread of COVID-19 and has not incurred significant resource constraints through the implementation of its business continuity plans and does not anticipate incurring such in the future. Bancorp has not made, and at this time does not expect to make, any material staffing or compensation changes as a result of the pandemic.   63 Table of Contents    Overview – Operating Results (FTE)     The following table presents an overview of Bancorp’s financial performance for the three months ended September 30, 2020 and 2019:   Three months ended September 30 , (dollars in thousands, except per share data)   2020     2019     $/bp Change     % Change                                     Net income   $ 14,533     $ 17,234     $ (2,701 )     -16 % Diluted earnings per share   $ 0.64     $ 0.76     $ (0.12 )     -16 % Annualized return on average assets     1.34 %     1.95 %     (61 ) bps   -31 % Annualized return on average equity     13.57 %     17.41 %     (384 ) bps   -22 %   Additional discussion follows under the section titled “ Results of Operations.”   Ge neral highlights for the three months ended September 30 , 2020 compared to September 30, 2019:   ● Net income totaled $14.5 million, resulting in diluted EPS of $0.64, for the three months ended September 30, 2020, a 16% decline over $0.76 for the same period of 2019. Operating results were lower compared to the record results posted in the third quarter of 2019, primarily due to increased loan loss provisioning and reserves for off-balance sheet credit exposures. ● NIM decreased 61 bps to 3.26% for the three months ended September 30, 2020 compared to 3.87% for the same period in 2019 attributed to the decline in the interest rate environment, the lower yielding PPP loan portfolio and excess balance sheet liquidity; offset partially by the strategic lowering of stated deposit interest rates and CD offering rates in tandem with the FRB interest rate actions and further subsequent interest rate cuts through the end of the third quarter. Despite the decrease in NIM, Bancorp’s deposit rate cuts and fee income associated with PPP loans resulted in a $1.6 million, or 5%, increase in net interest income compared to the prior year period. ● While total loans (excluding PPP loans) decreased $26 million, or 1%, compared to September 30, 2019, average loans (excluding PPP loans) saw a marginal increase of $12 million, or less than 1%, for the three months ended September 30, 2020 compared to the same period in 2019. Strong loan growth in the first quarter of 2020 was offset by loan contraction related to the pandemic in the second quarter. Loan growth for the third quarter was essentially flat, as growth in the CRE portfolio was countered by further contraction in the C&I portfolio. ● Deposit balances ended at record levels at September 30, 2020, primarily attributed to PPP funding and higher levels of liquidity held by customers attributable to current economic uncertainty. ● Despite overall strong credit metrics, significant provisioning occurred based on the on-going economic crisis, its corresponding impact on national unemployment forecast adjustments within the CECL model and changes in the loan mix. Additional non-interest expense related to credit exposure for unfunded off-balance sheet commitments was also recorded in the third quarter consistent with further declines in line utilization (mainly C&I). ● During the third quarter of 2020, the Company recorded charge-offs totaling $1.6 million related to loans that were acquired in the prior year acquisition and fully allocated for through purchase accounting adjustments at the time of acquisition. While these are reflected as charge-offs, there was no impact to the provision for credit losses, nor to the income statement for the third quarter of 2020. ● Bancorp’s ACL to total loans was 1.45% at September 30, 2020, compared to 0.94% at December 31, 2019. Bancorp’s ACL to total loans (excluding PPP loans) rose to 1.78% at September 30, 2020. ● Total non-interest income decreased $166,000, or 1%, for the three month period ended September 30, 2020 compared to the same period of 2019, as record mortgage banking income largely offset substantially lower deposit service charge income and over $800,000 dollars of non-recurring income recorded in the prior year period. ● Non-interest expenses increased $2.3 million, or 10%, for the quarter ended September 30, 2020 compared to the same period of 2019, as a result of the following:   o Higher compensation expense related to a slight increase in full time employees and annual merit-based salary increases, as well as higher incentive-based compensation.   o Increased technology and communication expense relating to continued investment in customer-facing software and system functionality, higher licensing and maintenance expenses, additional expense associated with migrating to a hosted core environment, higher mortgage loan processing expenses and treasury management customer expansion.   o Resuming normalized FDIC insurance expense after the depletion of Bancorp’s small institution credits issued in 2019. No FDIC insurance expense was recorded in the third quarter of 2019 as the national FDIC Reserve Ratio reached 1.38%, triggering the FDIC to release credits to small institutions (less than $10 billion in total consolidated assets), the last portion of which were used in the first quarter of 2020. Further, the outsized balance sheet attributed to the PPP led to a higher leverage ratio, ultimately resulting in increased FDIC insurance expense for the third quarter of 2020.   o The aforementioned increased expense associated with off-balance sheet credit exposures relating changes in line of credit utilization. ● Bancorp’s efficiency ratio (FTE) for the three months ended September 30, 2020, was 55.96% compared with 52.67% for the same period in 2019, the increase resulting from the increase in non-interest expenses noted above (see the section titled “Non-GAAP Financial Measures” in this section of the document) . ● The ETR decreased to 9.9% for the three months ended September 30, 2020 from 18.0% for the same period in 2019, attributed largely to the current year including the full impact of a large tax credit investment and higher levels of SAR exercise activity.   64 Table of Contents   The following table presents an overview of Bancorp’s financial performance for the nine months ended September 30, 2020 and 2019:   Nine months ended September 30, (dollars in thousands, except per share data)   2020     2019     $/bp Change     % Change                                     Net income   $ 41,133     $ 49,418     $ (8,285 )     -17 % Diluted earnings per share   $ 1.81     $ 2.16     $ (0.35 )     -16 % Annualized return on average assets     1.33 %     1.94 %     (61 ) bps   -31 % Annualized return on average equity     13.22 %     17.31 %     (409 ) bps   -24 %   Additional discussion follows under the section titled “ Results of Operations.”   General highlights for the nine months ended September 30, 2020 compared to September 30, 2019:   ● Net income totaled $41.1 million for the nine months ended September 30, 2020, resulting in diluted EPS of $1.81, a 16% decline from the same period in 2019, the latter of which included $3.9 million in non-recurring tax adjustments related to two Kentucky tax law changes that equated to $0.17 per diluted share in addition to significant acquisition deal costs, which equated to $0.05 per diluted share. Operating results were lower compared to the record results posted in the third quarter of 2019, primarily due to increased loan loss provisioning and reserves for off-balance sheet credit exposures. Further, the uncertain economic conditions associated with the pandemic, a substantially lower interest rate environment and government stimulus actions have had a significant impact on Bancorp’s operating results in 2020. ● NIM decreased 46 bps to 3.40% for the nine months ended September 30, 2020 compared to 3.86% for the same period in 2019 consistent with the decline in the interest rate environment, the addition of the low-yielding PPP portfolio and excess balance sheet liquidity; offset by strong average year over prior year loan growth (excluding PPP loans) and the strategic lowering of stated deposit interest rates and CD offering rates in tandem with FRB interest rate actions. Despite the decrease in NIM, Bancorp’s deposit rate cuts and fee income associated with PPP loans resulted in a $7 million, or 8%, increase in net interest income compared to the prior year period. ● Effective January 1, 2020, Bancorp began accounting for credit losses under ASC 326, or CECL. The adoption of this standard increased the opening balance of the ACL and the reserve for off-balance sheet credit exposures as of January 1. The adoption entries reduced Bancorp’s retained earnings with no impact on the income statement. ● Total loans (excluding PPP loans) contracted $15 million during the first nine months of 2020, as record first quarter loan production was reversed by significant second quarter contraction and stagnant activity in the third quarter. Since December 31, 2019, a $101 million increase in the CRE portfolio was more than offset by a $107 million decline in the C&I portfolio (primarily operating lines of credit). ● Line of credit utilization has declined significantly in 2020, falling to 37% at September 30, 2020 compared to 47% at December 31, 2019 and 48% at September 30, 2019. The decline was led by C&I line usage, which dropped from 43% at December 31, 2019 to 26% at September 30, 2020. ● Deposit balances ended at record levels at both June 30, 2020 and September 30, 2020, primarily as a result of PPP funding and higher levels of liquidity held by customers attributable to current economic uncertainty. ● Despite overall strong credit metrics, significant provisioning occurred based on the on-going economic crisis, its corresponding impact on national unemployment forecast adjustments within the CECL model and changes in the loan mix. Significant non-interest expense related to credit exposure for unfunded off-balance sheet commitments was also recorded in the first nine months of 2020 consistent with declines in line utilization (mainly C&I). ● During the third quarter of 2020, the Company recorded charge-offs totaling $1.6 million related to loans that were acquired in the prior year acquisition and fully allocated for through purchase accounting adjustments at the time of acquisition. While these are reflected as charge-offs, there was no impact to the provision for credit losses, nor to the income statement for the third quarter of 2020. ● Bancorp’s ACL to total loans was 1.45% at September 30, 2020, compared to 0.94% at December 31, 2019. Bancorp’s ACL to total loans (excluding PPP loans) rose to 1.78% at September 30, 2020. ● Non-interest income increased 5% for the nine months ended September 30, 2020 compared to the same period of 2019 on the heels of record mortgage banking income despite substantially lower deposit service charge income and the prior year period benefitting from $1.2 million of non-recurring income. Strong WM&T results, which included a large estate fee in the first quarter of 2020, and continued growth in treasury management fees and card income also contributed to the increase. ● Non-interest expenses increased 4% for the nine months ended September 30, 2020 compared to the same period of 2019 driven largely by provisioning expense related to off-balance sheet commitments. Increases in compensation, employee benefits, technology and occupancy expense were offset by declines in other categories stemming from one-time acquisition-related charges and non-recurring activity in the prior year, as well as a pandemic-driven decrease in marketing and business development activity. ● Bancorp’s efficiency ratio (FTE) for the nine months ended September 30, 2020 was 54.36% compared with 55.70% for the same period in 2019, the latter of which included $1.3 million in one-time deal costs associated with the prior year acquisition (see the section titled “Non-GAAP Financial Measures” in this section of the document). ● The ETR increased to 13.1% for the nine months ended September 30, 2020 from 11.9% for the same period in 2019, the latter of which reflected $3.9 million in non-recurring tax adjustments related to two Kentucky tax law changes.   65 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.   Comparative information regarding net interest income follows:   As of and for the three months ended September 30,                   Change   (dollars in thousands)   2020     2019     2020 / 2019                             Net interest income   $ 33,695     $ 32,106       5 % Net interest spread     3.13 %     3.53 %     (40 ) bps Net interest margin (FTE)     3.26 %     3.87 %     (61 ) bps Average interest earning assets   $ 4,120,400     $ 3,301,848       25 %     As of and for the nine months ended September 30,                   Change   (dollars in thousands)   2020     2019     2020 / 2019                             Net interest income   $ 99,669     $ 92,591       8 % Net interest spread     3.22 %     3.53 %     (31 ) bps Net interest margin (FTE)     3.40 %     3.86 %     (46 ) bps Average interest earning assets   $ 3,923,255     $ 3,216,468       22 %     The discussion that follows is based on FTE data.   NIM and net interest spread calculations above exclude the sold portion of certain participation loans. These sold loans are recorded 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 analysis, as Bancorp believes it provides a more accurate depiction of the performance of its loan portfolio.   Bancorp’s loan portfolio is currently composed of approximately 71% fixed and 29% variable rate loans, with the fixed rate potion pricing (excluding PPP loans) 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 60%) or one month LIBOR (approximately 40%). Excluding PPP loans, Bancorp’s loan portfolio at September 30, 2020 was composed of approximately 64% fixed and 36% variable rate loans with the fluctuation in the C&I portfolio driving down variable rate concentration for the last two quarters.   66 Table of Contents   The FRB has lowered the FFTR five times since June 30, 2019, resulting in a combined 225 bps decrease in the FFTR as of September 30, 2020. The most recent of these cuts came in mid-March 2020 when the FRB lowered the FFTR to a range of 0% - 0.25% in response to the COVID-19 pandemic, the lowest level seen since late 2015. The following table details the volatility experienced within the interest rate environment over the past several months by comparing period end and quarterly average rates:       September 30,     June 30,     March 31,     December 31,     September 30,       2020     2020     2020     2019     2019                                             Five-year Treasury note - period end     0.28 %     0.29 %     0.37 %     1.69 %     1.55 % Five-year Treasury note - quarterly average     0.27 %     0.36 %     1.14 %     1.61 %     1.63 % Prime rate - period end     3.25 %     3.25 %     3.25 %     4.75 %     5.00 % Prime rate - quarterly average     3.25 %     3.25 %     4.40 %     4.83 %     5.31 % One-month LIBOR - period end     0.15 %     0.16 %     0.99 %     1.76 %     2.02 % One-month LIBOR - quarterly average     0.16 %     0.35 %     1.40 %     2.22 %     2.18 %   Bancorp lowered the stated rate of interest-bearing deposit account types and CD offering rates in tandem with the previously mentioned FRB interest rate actions and managed to fully offset the decline in loan yields associated with the first two FFTR rate reductions, which occurred in August and September of 2019. The subsequent rate cuts in October 2019, and to a greater extent in March of 2020, resulted in significant NIM compression, as further deposit rate reductions were not able to fully off-set the decline in loan yields. As of September 30, 2020, Bancorp’s current deposit rates are at or below interest rates offered during the Great Recession.   The short end of the treasury yield through the first nine months of 2020 mirrored what was experienced during the Great Recession with the long end, particularly the five-year treasury, dramatically lower. While the curve normalized during the first quarter of 2020, the steep decline/inversion of the treasury curve that began in the second quarter of 2019 has led to intense pricing pressure and stiff competition over this period. With 60% of the variable rate loan portfolio tied to Prime and the majority with floor rates of 4.00%, short-term rates would have to increase over 75 bps for these loans to move above their floor rates given Prime is at 3.25% as of September 30, 2020. Beyond potential ongoing pricing pressure/competition and the absolute low level of rates, the current economic outlook and prospects of a sustained zero-rate environment continues to pose challenges regarding potential ongoing NIM compression.     Net Interest Income – Three months ended September 30, 2020 compared to September 30, 2019   Net interest spread and NIM were 3.13% and 3.26%, for the three months ended September 30, 2020 compared to 3.53% and 3.87% for the same period in 2019. NIM during the three months ended September 30, 2020 was significantly impacted by the following:     ● The lowering of the FFTR between August 2019 and mid-March 2020, ending at a range of 0% - 0.25% and resulting in Prime dropping to 3.25%.   ● PPP loan originations during 2020   ● The strategic lowering of stated deposit rates and CD offering rates over the past several months in tandem with FRB interest rate actions and beyond.   ● Excess balance sheet liquidity.   Since the beginning of April, Bancorp originated 3,364 PPP loans equating to $657 million ($642 million net of unearned origination fees and costs) representing 18% of the total loan portfolio as of September 30, 2020. Bancorp received in excess of $20 million in origination fees from the SBA for these loans during the second and third quarters. Fees received ranged between 1% and 5% based on the size of the loan, with the average fee equating to 3.18%. Net loan origination fee income of $2.5 million was recognized in the third quarter of 2020 relating to PPP loans. While this had a positive impact to interest and fee income and net interest income, the 1% stated yield on the PPP portfolio negatively impacted the overall loan portfolio yield and NIM by 30 bps and 12 bps, respectively. The average balance of the PPP portfolio ended at $641 million for the quarter ended September 30, 2020 with a yield of 2.59%, which is significantly below the 4.22% yield on the traditional loan portfolio (excluding PPP loans) for the same period.   67 Table of Contents   With regard to the PPP, borrowers are eligible for forgiveness from the SBA for the portion of funding received utilized for job retention and certain other expenses, such as payroll costs, mortgage interest, rent and utilities during the 24-week period beginning with the date of the loan. With a significant portion of these loans potentially eligible for full forgiveness, there is high likelihood of early pay off prior to maturity (predominantly 24 months). Early payoffs would accelerate recognition of the fee (and to a lesser extent the deferred salary cost) and could have a material positive impact on operating results in the fourth quarter of 2020 and early 2021.   Average FFS and interest bearing due from bank balances increased significantly for the three months ended September 30, 2020 compared with the same period in 2019. This excess liquidity contributed to approximately 13 bps of NIM compression for the three months ended September 30, 2020.   Net interest income increased $1.6 million, or 5%, for the three months ended September 30, 2020 compared to the same period of 2019, as Bancorp’s significant deposit rate cuts made in tandem with the FRB’s interest rate actions more than offset the sharp decline in interest income attributed to the substantially lower interest rate environment. Total average interest earning assets increased $819 million, or 25%, to $4.12 billion for the three months ended September 30, 2020, with the average rate earned on total interest earning assets contracting 107 bps to 3.50%.     ● Average loans increased $653 million, or 23%, for the three months ended September 30, 2020 compared to the same period in 2019 with the majority of this growth, or $641 million, attributed to the PPP portfolio.     ● Average FFS/interest bearing due from bank balances increased $96 million for the three months ended September 30, 2020, as compared with the same period in 2019, consistent with the elevated level of deposits.     ● Average securities increased $45 million, or 11%, for the three months ended September 30, 2020 as compared to the same period of 2019, as a portion of excess liquidity was deployed into fixed income investments.   Total interest income decreased $1.9 million, or 5%, to $36.2 million for the three months ended September 30, 2020, as compared to the same period of 2019.     ● Interest and fee income on loans decreased $1.2 million, or 3%, to $33.9 million. Despite recognizing $4.2 million of interest and fee income associated with the PPP portfolio in the third quarter of 2020, the significant interest rate contraction experienced over the past 12 months drove a $5.4 million decrease in interest income on the traditional loan portfolio (excluding PPP).     ● With the exception of mortgage loans held for sale, interest income on the remaining interest earning asset portfolio was significantly impacted by the lower interest rate environment and significant average balance growth.   Total average interest bearing liabilities increased $372 million, or 16%, to $2.63 billion for the three-month period ended September 30, 2020 compared with the same period in 2019, with the total average cost declining 67 bps to 0.37%.     ● Average interest bearing deposits increased $394 million, or 19%, for the three months ended September 30, 2020 compared to the same period in 2019, with interest-bearing demand deposits representing $308 million of the increase. Customers who received PPP loans, the proceeds for which were deposited into accounts held at the Bank, have in general used the funds to strengthen their balance sheets. Further, the economic slow-down and uncertainty surrounding the pandemic has resulted in the customer base maintaining higher levels of liquidity in general, similar to customer behavior seen during the Great Recession.     ● Average FHLB advances decreased $24 million, or 29%, for the three months ended September 30, 2020 compared to the same period of 2019, as a portion of the advances assumed in the prior year acquisition have either matured or been paid off without penalty over the past year.   Total interest expense decreased $3.5 million, or 59%, for the three months ended September 30, 2020, compared to the same period of 2019, a direct result of strategic deposit rate reductions implemented in response to the changing interest rate environment.     ● Total interest bearing deposit expense decreased $3.2 million, or 60%, driving a 66 bps decrease in the cost of average total interest bearing deposits.   68 Table of Contents   Net Interest Inco me – Nine months ended S e ptember 30, 2020 compared to September 30, 2019   Net interest spread and NIM were 3.22% and 3.40%, for the nine months ended September 30, 2020 compared to 3.53% and 3.86% for the same period in 2019. NIM during the nine months ended September 30, 2020 was significantly impacted by the following:     ● The FFTR was lowered 225 bps between August 2019 and mid-March 2020, resulting in Prime dropping to 3.25%. Average Prime has declined significantly to 3.62% for the nine months ended September 30, 2020 compared to 5.43% for the same period in 2019.   ● PPP loan originations during the second quarter of 2020, with significant concentration during the month of April.   ● The strategic lowering of stated deposit interest rates and CD offering rates over the past several months in tandem with FRB interest rate actions and beyond.   ● Strong average loan growth (excluding PPP loans) related to both a prior year acquisition and organic growth.   ● Excess balance sheet liquidity.   During the first nine months of 2020, Bancorp received in excess of $20 million in origination fees from the SBA and recognized $4.6 million in net origination fee income associated with the PPP portfolio. While this had a positive impact to interest and fee income and net interest income, the 1% stated yield on the PPP portfolio has negatively impacted the overall loan portfolio yield and NIM by 22 bps and 9 bps, respectively. With a heavy concentration of these loans originating in April, the average balance of the portfolio ended at $390 million for the nine months ended September 30, 2020 with a yield of 2.59%, which was significantly below the 4.41% yield on the traditional loan portfolio (excluding PPP loans) for the nine months ended September 30, 2020.   Average FFS and interest bearing due from bank balances increased significantly for the nine months ended September 30, 2020 compared with the same period in 2019. This excess liquidity contributed to approximately 15 bps of NIM compression for the nine months ended September 30, 2020.   Net interest income increased $7.1 million, or 8%, for the first nine months of 2020 compared to the same period of 2019, attributed to the deposit rate cuts implemented by Bancorp in response to the changing interest rate environment and the additional fee income associated with the PPP portfolio.   Total average interest earning assets increased $707 million, or 22%, to $3.9 billion for the nine months ended September 30, 2020, with the average rate earned on total interest earning assets contracting 85 bps to 3.73%.     ● Average loans increased $585 million, or 22%, for the nine months ended September 30, 2020 compared to the same period in 2019 with $390 million of the growth attributed to the PPP portfolio. In addition to the May 2019 acquisition, Bancorp has experienced strong organic growth across all three markets leading to a $195 million increase in the loan portfolio (excluding PPP loans). While significant average loan growth (excluding PPP loans) was seen in the first quarter of 2020, it was reversed in the second quarter by the largest quarterly net loan contraction in Bancorp’s history and a further, marginal average balance decline in the quarter ending September 30, 2020.     ● Average FFS and interest bearing due from bank balances increased $97 million for the nine months ended September 30, 2020 as compared with the same period in 2019, consistent with the elevated level of deposits.   Total interest income decreased $535,000, or less than 1%, to $109.7 million for the nine months ended September 30, 2020, as compared with the same period of 2019.     ● Interest and fee income on loans increased approximately $1.6 million, or 2%, to $101.8 million, attributed mainly to fee income associated with the PPP portfolio, as significant interest rate contraction led to a $6.0 million decrease in interest income on the traditional loan portfolio (excluding PPP loans).     ● With the exception of mortgage loans held for sale, interest income on the remaining interest earning asset portfolio was negatively impacted by the changes in the interest rate environment and significant average balance growth.   Total average interest bearing liabilities increased $345 million, or 16%, to $2.6 billion for the nine month period ended September 30, 2020, as compared with the same period in 2019, with the average cost decreasing 54 bps to 0.51%.     ● Average interest bearing deposits increased $350 million, or 17%, for the nine months ended September 30, 2020 compared to the same period in 2019, with interest-bearing demand deposits representing $239 million of the increase. Customers who received PPP loans, the proceeds for which were deposited into accounts held at the Bank, have in general utilized the funds to strengthen their balance sheets. Further, the economic slow-down and uncertainty surrounding the pandemic has resulted in the customer base maintaining higher levels of liquidity in general, similar to customer behavior seen during the Great Recession.   Total interest expense decreased $7.6 million, or 44%, for the nine months ended September 30, 2020, compared to the same period of 2019, a direct result of strategic deposit rate reductions implemented in response to the changing interest rate environment.     ● Total interest bearing deposit expense decreased $7.4 million, or 46%, driving a 55 bps decrease in the cost of average total interest bearing liabilities. The cost of interest bearing deposits for the nine months ended September 30, 2020 was 47 bps compared to 102 bps for the same period of 2019.   69 Table of Contents   Total Company Average Balance Sheets and Interest Rates - Three-Month Comparison       Three months ended September 30,       2020     2019       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   $ 194,100     $ 54       0.11 %   $ 98,569     $ 566       2.28 % Mortgage loans held for sale     28,520       173       2.41       3,887       41       4.18   Securities available for sale:                                                 Taxable     433,923       1,973       1.81       376,186       2,113       2.23   Tax-exempt     8,166       55       2.68       20,500       125       2.42   Total securities     442,089       2,028       1.82       396,686       2,238       2.24                                                     Federal Home Loan Bank stock     11,284       56       1.97       11,317       126       4.42                                                     SBA Paycheck Protection Program (PPP) loans     640,998       4,181       2.59       —       —       —   Non-PPP loans     2,803,409       29,725       4.22       2,791,389       35,099       4.99   Total loans     3,444,407       33,906       3.92       2,791,389       35,099       4.99                                                     Total interest earning assets     4,120,400       36,217       3.50       3,301,848       38,070       4.57                                                     Less allowance for credit losses     48,331                       27,168                                                                     Non-interest earning assets:                                                 Cash and due from banks     47,535                       45,343                   Premises and equipment, net     57,121                       64,573                   Bank Owned Life Insurance     32,988                       32,697                   Accrued interest receivable and other     115,787                       84,974                   Total assets   $ 4,325,500                     $ 3,502,267                                                                                                                       Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand deposits   $ 1,145,791     $ 298       0.10 %   $ 837,796     $ 1,207       0.57 % Savings deposits     198,533       6       0.01       170,300       65       0.15   Money market deposits     772,600       159       0.08       687,794       1,763       1.02   Time deposits     404,914       1,644       1.62       431,879       2,281       2.10   Total interest bearing deposits     2,521,838       2,107       0.33       2,127,769       5,316       0.99                                                     Securities sold under agreements to repurchase     40,832       7       0.07       37,705       26       0.27   Federal funds purchased     8,877       2       0.09       10,671       52       1.93   Federal Home Loan Bank advances     59,487       333       2.23       83,386       509       2.42                                                                                                       Total interest bearing liabilities     2,631,034       2,449       0.37       2,259,531       5,903       1.04                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,186,007                       784,862                   Accrued interest payable and other     82,410                       65,034                   Total liabilities     3,899,451                       3,109,427                                                                     Stockholders’ equity     426,049                       392,840                   Total liabilities and stockholder's equity   $ 4,325,500                     $ 3,502,267                                                                     Net interest income           $ 33,768                     $ 32,167                                                             Net interest spread                     3.13 %                     3.53 %                                                   Net interest margin                     3.26 %                     3.87 %   70 Table of Contents   Total Company Average Balance Sheets and Interest Rates - Nine- Month Comparison       Nine months ended September 30,       2020     2019       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   $ 216,014     $ 673       0.42 %   $ 119,210     $ 2,129       2.39 % Mortgage loans held for sale     17,202       359       2.79       3,144       121       5.15   Securities available for sale:                                                 Taxable     422,687       6,434       2.03       398,617       6,919       2.32   Tax-exempt     11,057       217       2.62       24,465       462       2.52   Total securities     433,744       6,651       2.05       423,082       7,381       2.33                                                     Federal Home Loan Bank stock     11,284       197       2.33       10,704       434       5.42                                                     SBA Paycheck Protection Program (PPP) loans     390,120       7,573       2.59       —       —       —   Non-PPP loans     2,854,891       94,244       4.41       2,660,328       100,167       5.03   Total loans     3,245,011       101,817       4.19       2,660,328       100,167       5.03                                                     Total interest earning assets     3,923,255       109,697       3.73       3,216,468       110,232       4.58                                                     Less allowance for credit losses     42,894                       26,832                                                                     Non-interest earning assets:                                                 Cash and due from banks     45,032                       43,664                   Premises and equipment, net     57,455                       63,586                   Bank Owned Life Insurance     32,813                       32,690                   Accrued interest receivable and other     102,780                       74,504                   Total assets   $ 4,118,441                     $ 3,404,080                                                                                                                       Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand deposits   $ 1,086,866     $ 1,460       0.18 %   $ 847,443     $ 4,019       0.63 % Savings deposits     185,892       29       0.02       165,794       270       0.22   Money market deposits     755,747       1,362       0.24       685,124       5,816       1.13   Time deposits     418,080       5,825       1.86       398,384       5,929       1.99   Total interest bearing deposits     2,446,585       8,676       0.47       2,096,745       16,034       1.02                                                     Securities sold under agreements to repurchase     38,595       31       0.11       38,402       79       0.28   Federal funds purchased     9,208       33       0.48       11,288       176       2.08   Federal Home Loan Bank advances     65,751       1,123       2.28       68,075       1,154       2.27   Subordinated note     —       —       —       643       26       5.41                                                                                                       Total interest bearing liabilities     2,560,139       9,863       0.51       2,215,153       17,469       1.05                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,067,969                       745,105                   Accrued interest payable and other     74,738                       62,079                   Total liabilities     3,702,846                       3,022,337                                                                     Stockholders’ equity     415,595                       381,743                   Total liabilities and stockholder's equity   $ 4,118,441                     $ 3,404,080                                                                     Net interest income           $ 99,834                     $ 92,763                                                             Net interest spread                     3.22 %                     3.53 %                                                   Net interest margin                     3.40 %                     3.86 %   71 Table of Contents   Supplemental Information - Total Company Average Balance Sheets and Interest Rates     ● Average loan balances include the principal balance of non-ac crual loans, as well as unearned income such as l oan premiums, discounts, fees/costs and exclude participation loans accou nted for as secured borrowings. P a rticipation loans averaged $8 million and $9 million for the three-month per iods ended September 30 , 2020 and 2019, and $8 million and $10 million for the nine -month periods ended September 30, 2020 and 2019, respectively.     ● Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax- exempt interest earning assets had been made in assets subject to federal taxes yield ing the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calc ulated on a FTE basis using a federal income tax rate of 21% for 2020 and 2019 . Approximate tax equivalent adjust me nts to interest income were $73 ,000 and $ 61 ,000 for the three month periods ended September 30, 2020 and 2019, and $165 ,000 and $172 ,000 for the nine month periods ended September 30, 2020 and 2019, respectively.     ● Interest income includes loan fees of $2.8 million ( $2.5 million associated with the PPP) and $481 ,000 for the three months ended September 30 , 2020 and 2019 , and $5.6 million ($4.6 million associated with the PPP) and $1.3 million for the nine months ended S e ptember 30, 2020 and 2019, respectively . Interest income on loans may be impacted by the level of prepayment fees collected and accretion related to loan s purchased.     ● Net interest income, the mos t significant component of Bancorp 's earnings , represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.     ● NIM represents net interest income on a FTE basis as a percentage of average interest earn ing assets.     ● Net interest spread is the difference between taxable equivalent rates ea rn ed on interest earning assets less the cost of interest bearing liabilities.     ● The fair market value adjustment on investment securities resulting from ASC 320, Investments – Debt and Equity Securities is included as a component of other assets.   72 Table of Contents   Asset/Liability Management and Interest Rate Risk   Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.   Interest Rate Simulation Sensitivity Analysis   Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.   The September 30, 2020 simulation reflects the FRB’s mid-March 2020 action to lower the FFTR to near zero. Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100 bps would have a slightly negative effect on interest income, while an increase in rates of 200 bps would have a positive effect on net i