Stock Yards Bancorp, Inc. 10-Q

sybt20210630_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 June 30, 2021   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 July 30, 2021, was 26,586,530 .   1 Table of Contents         TABLE OF CONTENTS   PART I – FINANCIAL INFORMATION               Item 1. Financial Statements. 4         Condensed Consolidated Balance Sheets 4         Condensed Consolidated Statements of Income 5         Condensed Consolidated Statements of Comprehensive Income 6         Condensed Consolidated Statements of Changes in Stockholders’ Equity 7         Condensed Consolidated Statements of Cash Flows 9         Notes to Condensed Consolidated Financial Statements 11       Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 64       Item 3. Quantitative and Qualitative Disclosures about Market Risk. 100       Item 4. Controls and Procedures. 100             PART II – OTHER INFORMATION 101             Item 1. Legal Proceedings. 101       Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 102       Item 6. Exhibits. 102       Signatures 103   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   EPS   Earnings Per Share   NIM   Net Interest Margin (FTE) AFS   Available for Sale   ETR   Effective Tax Rate   NPV   Net Present Value APIC   Additional paid-in capital   EVP    Executive Vice President   Net Interest Spread   Net Interest Spread (FTE) ACL   Allowance for Credit Losses   FASB   Financial Accounting Standards Board   NM   Not Meaningful AOCI   Accumulated Other Comprehensive Income   FDIC   Federal Deposit Insurance Corporation   OAEM   Other Assets Especially Mentioned ASC   Accounting Standards Codification   FFP   Federal Funds Purchased   OCI   Other Comprehensive Income ASU   Accounting Standards Update   FFS   Federal Funds Sold   OREO   Other Real Estate Owned ATM   Automated Teller Machine   FFTR   Federal Funds Target Rate   PPP   Paycheck Protection Program AUM   Assets Under Management   FHA   Federal Housing Authority   PV   Present Value Bancorp / the Company   Stock Yards Bancorp, Inc.    FHC   Financial Holding Company   PCD   Purchased with Credit Deteriorated Bank / SYB   Stock Yards Bank & Trust Company    FHLB   Federal Home Loan Bank of Cincinnati   PCI   Purchased Credit Impaired BOLI   Bank Owned Life Insurance   FHLMC   Federal Home Loan Mortgage Corporation    Prime   The  Wall Street Journal  Prime Interest Rate BP   Basis Point - 1/100th of one percent   FICA   Federal Insurance Contributions Act   Provision   Provision for Credit Losses C&D   Construction and Development   FNMA   Federal National Mortgage Association   PSU   Performance Stock Unit Captive   SYB Insurance Company, Inc.   FRB   Federal Reserve Bank   ROA   Return on Average Assets CARES Act   Coronavirus Aid, Relief and Economic Security Act   FTE   Fully Tax Equivalent   ROE   Return on Average Equity C&I   Commercial and Industrial   GAAP   United States Generally Accepted Accounting Principles   RSA   Restricted Stock Award CD   Certificate of Deposit   GLB Act   Gramm-Leach-Bliley Act   RSU   Restricted Stock Unit CDI   Core Deposit Intangible   GNMA   Government National Mortgage Association   SAB   Staff Accounting Bulletin CECL   Current Expected Credit Loss (ASC-326)   HB   House Bill   SAR   Stock Appreciation Right CEO   Chief Executive Officer   HELOC   Home Equity Line of Credit   SBA   Small Business Administration CFO   Chief Financial Officer   ITM   Interactive Teller Machine   SEC   Securities and Exchange Commission Commonwealth   Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust   KB   Kentucky Bancshares, Inc. and Kentucky Bank   SSUAR   Securities Sold Under Agreements to Repurchase COVID-19   Coronavirus Disease - 2019   KSB   King Bancorp, Inc. and King Southern Bank   SVP   Senior Vice President CRA   Community Reinvestment Act   LIBOR   London Interbank Offered Rate   TBOC   The Bank Oldham County CRE   Commercial Real Estate   Loans   Loans and Leases   TCE   Tangible Common Equity Dodd-Frank Act   The Dodd-Frank Wall Street Reform and Consumer Protection Act   MBS   Mortgage Backed Securities   TDR   Troubled Debt Restructuring DTA   Deferred Tax Asset   MSA   Metropolitan Statistical Area   TPS   Trust Preferred Securities DTL   Deferred Tax Liability   MSRs   Mortgage Servicing Rights   VA   U.S. Department of Veterans Affairs DCF   Discounted Cash Flow   NASDAQ   The NASDAQ Stock Market, LLC   WM&T   Wealth Management and Trust   3 Table of Contents     PART I – FINANCIAL INFORMATION   Item 1. Financial Statements   CONDENSED CONSOLIDATED BALANCE SHEETS   June 30, 2021 (unaudited) and December 31, 2020 (in thousands, except share data)       June 30,     December 31,       2021     2020   Assets                 Cash and due from banks   $ 58,477     $ 43,179   Federal funds sold and interest bearing due from banks     481,716       274,766   Total cash and cash equivalents     540,193       317,945                     Mortgage loans held for sale     5,420       22,547   Available for sale debt securities (amortized cost of $ 1,003,871 ) in 2021 and $ 574,722 in 2020, respectively)     1,006,908       586,978   Federal Home Loan Bank stock, at cost     14,475       11,284   Loans     4,206,392       3,531,596   Allowance for credit losses on loans     59,424       51,920   Net loans     4,146,968       3,479,676                     Premises and equipment, net     77,639       58,015   Bank owned life insurance     52,526       33,250   Accrued interest receivable     15,262       13,094   Goodwill     136,529       12,513   Core deposit intangible     5,162       1,962   Other assets     86,990       71,365   Total assets   $ 6,088,072     $ 4,608,629                     Liabilities                 Deposits:                 Non-interest bearing   $ 1,743,953     $ 1,187,057   Interest bearing     3,516,153       2,801,577   Total deposits     5,260,106       3,988,634                     Securities sold under agreements to repurchase     63,942       47,979   Federal funds purchased     10,947       11,464   Federal Home Loan Bank advances     10,000       31,639   Accrued interest payable     630       391   Other liabilities     91,358       87,821   Total liabilities     5,436,983       4,167,928                         Commitments and contingent liabilities (Footnote 11)     —       —                     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 26,588,000 and 22,692,000 shares in 2021 and 2020, respectively     49,471       36,500   Additional paid-in capital     240,200       41,886   Retained earnings     359,628       353,574   Accumulated other comprehensive income     1,790       8,741   Total stockholders ’ equity     651,089       440,701   Total liabilities and stockholders ’ equity   $ 6,088,072     $ 4,608,629     See accompanying notes to unaudited condensed consolidated financial statements.   4 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the three and six months ended June 30, 2021 and 2020 (in thousands, except per share data)       Three months ended     Six months ended       June 30,     June 30,       2021     2020     2021     2020   Interest income                                 Loans, including fees   $ 40,095     $ 34,099     $ 77,095     $ 67,848   Federal funds sold and interest bearing due from banks     84       88       150       619   Mortgage loans held for sale     58       125       122       186   Federal Home Loan Bank stock     64       70       121       141   Securities available for sale:                                 Taxable     2,744       2,066       5,039       4,461   Tax-exempt     57       58       93       133   Total interest income     43,102       36,506       82,620       73,388   Interest expense                                 Deposits     1,435       2,607       2,945       6,569   Securities sold under agreements to repurchase     5       8       10       24   Federal funds purchased and other short-term borrowings     4       2       6       31   Federal Home Loan Bank advances     74       361       250       790   Total interest expense     1,518       2,978       3,211       7,414   Net interest income     41,584       33,528       79,409       65,974   Provision for credit losses     4,147       7,025       2,672       12,950   Net interest income after credit loss expense     37,437       26,503       76,737       53,024   Non-interest income                                 Wealth management and trust services     6,858       5,726       13,106       11,944   Deposit service charges     1,233       800       2,177       2,083   Debit and credit card income     3,284       2,063       5,557       4,043   Treasury management fees     1,730       1,249       3,270       2,533   Mortgage banking income     1,303       1,622       2,747       2,468   Net investment product sales commissions and fees     545       391       1,009       857   Bank owned life insurance     206       176       367       355   Other     629       595       1,399       875   Total non-interest income     15,788       12,622       29,632       25,158   Non-interest expenses                                 Compensation     15,680       11,763       28,507       23,996   Employee benefits     3,367       2,871       6,628       6,038   Net occupancy and equipment     2,244       2,037       4,289       3,868   Technology and communication     2,670       1,999       5,016       4,062   Debit and credit card processing     976       603       1,681       1,259   Marketing and business development     822       465       1,346       1,025   Postage, printing and supplies     460       442       869       883   Legal and professional     666       628       1,128       1,251   FDIC insurance     349       330       754       459   Amortization of investments in tax credit partnerships     231       53       262       89   Capital and deposit based taxes     527       1,225       985       2,255   Merger expenses     18,100       -       18,500       -   Federal Home Loan Bank early termination penalty     474       -       474       -   Other     1,611       993       2,711       1,799   Total non-interest expenses     48,177       23,409       73,150       46,984   Income before income tax expense     5,048       15,716       33,219       31,198   Income tax expense     864       2,348       6,325       4,598   Net income   $ 4,184     $ 13,368     $ 26,894     $ 26,600   Net income per share, basic   $ 0.17     $ 0.59     $ 1.14     $ 1.18   Net income per share, diluted   $ 0.17     $ 0.59     $ 1.13     $ 1.17   Weighted average outstanding shares                                 Basic     24,140       22,560       23,489       22,538   Diluted     24,379       22,739       23,731       22,737     See accompanying notes to unaudited condensed consolidated financial statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) For the three and six months ended June 30, 2021 and 2020 (in thousands)       Three months ended     Six months ended       June 30,     June 30,       2021     2020     2021     2020   Net income   $ 4,184     $ 13,368     $ 26,894     $ 26,600   Other comprehensive income:                                 Change in unrealized gain (loss) on AFS debt securities     6,349       3,086       ( 9,218 )     11,027   Change in fair value of derivatives used in cash flow hedge     40       28       83       ( 318 ) Total other comprehensive income (loss), before income tax expense     6,389       3,114       ( 9,135 )     10,709   Tax effect     1,549       750       ( 2,184 )     2,570   Total other comprehensive income (loss), net of tax     4,840       2,364       ( 6,951 )     8,139   Comprehensive income   $ 9,024     $ 15,732     $ 19,943     $ 34,739     See accompanying notes to unaudited condensed consolidated financial statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (unaudited) For the three and six months ended June 30, 2021 and 2020 (in thousands, except per share data)                                         Accumulated               Common stock     Additional             other     Total       Shares             paid-in     Retained     comprehensive     stockholders'       outstanding     Amount     capital     earnings     income (loss)     Total                                                     Balance, January 1, 2021     22,692     $ 36,500     $ 41,886     $ 353,574     $ 8,741     $ 440,701                                                     Activity for three months ended March 31, 2021:                                                 Net income     —       —       —       22,710       —       22,710   Other comprehensive loss     —       —       —       —       ( 11,791 )     ( 11,791 ) Stock compensation expense     —       —       849       —       —       849   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     89       296       4,144       ( 7,533 )     —       ( 3,093 ) Cash dividends declared, $ 0.27 per share     —       —       —       ( 6,144 )     —       ( 6,144 )                                                   Balance, March 31, 2021     22,781     $ 36,796     $ 46,879     $ 362,607     $ ( 3,050 )   $ 443,232                                                                                                       Activity for three months ended June 30, 2021:                                                 Net income     —       —       —       4,184       —       4,184   Other comprehensive income     —       —       —       —       4,840       4,840   Stock compensation expense     —       —       1,414       —       —       1,414   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     —       ( 2 )     ( 26 )     ( 45 )     —       ( 73 ) Stock issued for KB acquisition     3,808       12,682       191,988       —       —       204,670   Cash dividends declared, $ 0.27 per share     —       —       —       ( 7,178 )     —       ( 7,178 ) Shares cancelled     ( 1 )     ( 5 )     ( 55 )     60       —       —   Balance, June 30, 2021     26,588     $ 49,471     $ 240,200     $ 359,628     $ 1,790     $ 651,089     7 Table of Contents                                       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 (loss)     —       —       —       —       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 ) Shares cancelled     —       ( 1 )     ( 14 )     15       —       —                                                     Balance, June 30, 2020     22,667     $ 36,415     $ 39,425     $ 335,575     $ 8,816     $ 420,231     See accompanying notes to unaudited condensed consolidated financial statements.   8 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) For the six months ended June 30, 2021 and 2020 (in thousands)       2021     2020   Cash flows from operating activities:                 Net income   $ 26,894     $ 26,600   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     2,672       12,950   Depreciation, amortization and accretion, net     4,888       2,815   Deferred income tax expense (benefit)     2,307       ( 1,947 ) Gain on sale of mortgage loans held for sale     ( 2,118 )     ( 2,593 ) Origination of mortgage loans held for sale     ( 119,431 )     ( 103,509 ) Proceeds from sale of mortgage loans held for sale     141,747       97,486   Bank owned life insurance income     ( 367 )     ( 355 ) (Gain)/loss on the disposal of premises and equipment     41       ( 209 ) Gain on the sale of other real estate owned     ( 47 )     —   Stock compensation expense     2,263       1,793   Excess tax (benefit) expense from share-based compensation arrangements     ( 1,150 )     3   Net change in accrued interest receivable and other assets     ( 4,420 )     ( 14,245 ) Net change in accrued interest payable and other liabilities     ( 6,105 )     9,891   Net cash provided by operating activities     47,174       28,680   Cash flows from investing activities:                 Purchases of available for sale debt securities     ( 204,228 )     ( 192,713 ) Proceeds from sales of acquired available for sale debt securities     91,094       —   Proceeds from maturities and paydowns of available for sale debt securities     80,122       189,047   Proceeds from redemption of Federal Home Loan Bank stock     3,881       —   Net change in non-PPP loans     ( 158,253 )     12,616   Net change in PPP loans     235,864       ( 630,082 ) Purchases of premises and equipment     ( 1,752 )     ( 2,526 ) Proceeds from sale or disposal of premises and equipment     —       1,222   Other investment activities     ( 3,965 )     ( 646 ) Proceeds from sales of other real estate owned     261       —   Cash from acquisition, net of cash paid     24,981       —   Net cash provided by (used in) investing activities     68,005       ( 623,082 ) Cash flows from financing activities:                 Net change in deposits     232,255       593,179   Net change in securities sold under agreements to repurchase and federal funds purchased     4,086       8,341   Proceeds from Federal Home Loan Bank advances     20,000       60,000   Repayments of Federal Home Loan Bank advances     ( 132,745 )     ( 78,629 ) Share repurchases related to compensation plans     ( 3,166 )     ( 1,544 ) Cash dividends paid     ( 13,361 )     ( 12,275 ) Net cash provided by financing activities     107,069       569,072   Net change in cash and cash equivalents     222,248       ( 25,330 ) Beginning cash and cash equivalents     317,945       249,724   Ending cash and cash equivalents   $ 540,193     $ 224,394     9 Table of Contents   Supplemental cash flow information:                 Interest paid   $ 2,971     $ 7,583   Income taxes paid, net of refunds     13,359       418   Cash paid for operating lease liabilities     1,190       1,104   Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 5,766     $ 5,503   Due to broker     1,985       -   Dividends payable     175       172   Loans transferred to OREO     30       -                     Liabilities assumed in conjunction with acquisition:                 Fair value of assets acquired   $ 1,389,327         Consideration paid in acquisition     28,276         Common stock issued in acquisition     204,670         Total consideration paid     232,946         Liabilities assumed   $ 1,156,381           See accompanying notes to unaudited condensed consolidated financial statements.   10 Table of Contents   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     ( 1 ) 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 condensed consolidated financial statements include the accounts of its wholly owned subsidiaries, SYB (“the Bank”) and SYB Insurance Company, Inc. (“the Captive”). Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements of Bancorp and its subsidiaries have been prepared in conformity with GAAP and adhere to predominant practices within the banking industry.   Established in 1904, SYB is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets through 63 full service banking center locations.   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 investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   The Captive, a wholly owned subsidiary of the Company, is a Nevada-based captive insurance company that provides insurance against certain risks unique to operations of the Company and its subsidiaries for which insurance may not be currently available or economically feasible in today’s insurance marketplace. The Captive pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. The Captive is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831 (b) of the Internal Revenue Code. Pursuant to Section 831 (b), if gross premiums do not exceed $2,300,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.   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, 2020. Operating results for the three and six months ended June  30, 2021 are not necessarily indicative of the results that may be expected for the year ending December  31, 2021.   Critical Accounting Policies and Estimates – To prepare financial statements in conformity with GAAP, management must make estimates and assumptions that require 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 June 30, 2021 and December 31, 2020, the accounting policy considered the most critical in preparing Bancorp’s consolidated financial statements is the determination of the ACL on loans.   Effective 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. Accounting policies relating to credit losses for investment securities, loans and off-balance sheet credit exposures reflect the current accounting policies required by this ASC.   11 Table of Contents   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 specific 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.   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.   Accounting for Business Acquisitions – Bancorp accounts for acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, “ Business Combinations .” The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.   Identifiable assets acquired, liabilities assumed, and any non-controlling interest in acquirees are generally recognized at their acquisition-date (“day-one”) fair values based on the requirements of ASC Topic 820, “ Fair Value Measurements and Disclosures. ” The measurement period for day- one fair values begins on the acquisition date and ends at the earlier of: (a) the day management believes it has all the information necessary to determine day- one fair values; or (b)  one year following the acquisition date. In many cases, the determination of day- one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day- one fair values. More specifically, these recast adjustments may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day- one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.   Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.   Cash Equivalents – Cash and cash equivalents include cash and due from banks, FFS and interest bearing due from banks as segregated in the accompanying consolidated balance sheets.   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 June 30, 2021 and December 31, 2020.   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 six month periods ended June 30, 2021 and 2020.   12 Table of Contents   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 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 on AFS debt securities 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 on AFS debt securities 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 June 30, 2021 and December 31, 2020.   Changes in the ACL on AFS debt securities are recorded as expense. Losses are charged against the ACL on AFS debt securities 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.   Mortgage Loans Held for Sale – Mortgage originated and intended for sale in the secondary market are recorded at the lower of cost or market value on an individual loan basis, as determined by outstanding commitments from investors.   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.   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 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.   13 Table of Contents   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 expected 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.   Acquired loans are determined by Bancorp to have more-than-insignificant deterioration in credit quality since origination if any of the following designations apply, listed in order of priority as follows: Loans individually analyzed by Bancorp and determined to have a collateral or cash flow deficiency resulting in a full or partial allocation for loss, loans placed on non-accrual status by the acquired institution, loans identified as TDRs by the acquired institution, loans that have received a partial charge off by the acquired institution, loans risk-rated below a “pass” grade by the acquired institution and any loans past due 59 days or more at the time of acquisition.   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 over the lives of the related loans. For non-PCD loans, an initial ACL on loans is estimated and recorded as credit loss expense at the acquisition date.   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.   Bancorp adopted ASC 326, “ Financial Instruments – Credit Losses ,” effective 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.   14 Table of Contents   The following table summarizes the impact of the adoption of ASC 326 effective January 1, 2020:       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     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.   ACL – Loans – Under the 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.   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 partial 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 the ACL on loans.   Expected credit losses are reflected in the ACL on loans 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 on loans 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 of collection have been exhausted and the collateral, if any, has been liquidated. Subsequent recoveries, if any, are credited to the ACL on loans when received.   Bancorp’s methodologies for estimating the ACL on loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions and reasonable and supportable forecasts. The 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:   15 Table of Contents   Commercial Real Estate – 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 offices, 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 structured for full or partial amortization of principal.   Commercial Real Estate – 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. 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 or improvement 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 is 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 loans 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, whether 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, loans secured by accounts receivable, inventory and other business assets such as equipment, non-real estate related construction loans in addition to non-real estate loans guaranteed by the SBA. 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.   Residential Real Estate – Includes non-revolving (closed-end) first and junior lien loans secured by residential real estate primarily in Bancorp’s market areas. This portfolio is 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-purpose loans.   Leases – Represents a variety of leasing options to businesses to acquire equipment.   Credit Cards – Represents revolving loans to businesses and consumers.   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   Static pool   16 Table of Contents   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 on 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 FRB’s 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 effective 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. However, in response to uncertainty surrounding the magnitude and duration of the economic crisis created by the pandemic, management subsequently determined that a one quarter forecast period with a reversion back to a historical loss rate in the following quarter was appropriate for the calculation performed at March 31, 2020. For the calculation performed at June 30, 2020, management elected to return to the four quarter forecast period with reversion back to a historical loss rate in the following quarter, which has been the methodology used for all subsequent calculations through June 30, 2021.   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 loss 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.   Collateral 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 estimated 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.   17 Table of Contents   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 were originally eligible as long as they were executed between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) the 60th day after the end of the COVID- 19 national emergency as declared by the President of the United States. The Consolidated Appropriations Act, which was signed into law on December 27, 2020, extended this provision to the earlier of ( 1 ) 60 days after the national emergency termination date or ( 2 ) January 1, 2022. 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 .”   Premises and Equipment – Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using straight-line methods over the estimated useful lives of the assets ranging from 3 to 40 years. Leasehold improvements are amortized on the straight-line method over terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.   FHLB Stock – Bancorp is a member institution of the FHLB. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts of stock. FHLB stock is carried at cost, classified as a restricted security and annually evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income.   Goodwill – Goodwill resulting from business acquisitions represents the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested annually for impairment or more frequently if events and circumstances exist that indicate a goodwill impairment test should be performed.   Bancorp has selected September  30th as the date to perform its annual goodwill impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.   All goodwill is attributable to the Commercial Banking segment. Goodwill related to the KSB acquisition is deductible for tax purposes, as it was structured as an asset sale/338 election. Goodwill related to the KB acquisition is not deductible for tax purposes, as it was structured as stock sale. Based on its assessment, Bancorp believes its goodwill balance at June 30, 2021 and December 31, 2020 was not impaired and is properly recorded in the consolidated financial statements.   Other intangible assets consist of CDI assets arising from business acquisitions. CDI assets are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives.   Other Assets – BOLI and other life insurance policies are carried at net realizable value, which considers applicable surrender charges. Also, Bancorp maintains life insurance policies in conjunction with its non-qualified defined benefit and non-qualified compensation plans.   OREO is carried at the lower of cost or estimated fair value minus estimated selling costs. In certain situations, improvements to prepare assets for sale are capitalized if those costs increase the estimated fair value of the asset. Expenses incurred in maintaining assets, write downs to reflect subsequent declines in value, and realized gains or losses are reflected in the results of operations and are included in non-interest income and/or expense.   MSRs are amortized in proportion to, and over the period of, estimated net servicing income, considering appropriate prepayment assumptions and are evaluated quarterly for impairment by comparing the carrying value to fair value.   Off-Balance Sheet Credit Exposures – Financial instruments include off-balance sheet credit instruments, such as commitments to originate loans, commitments to fund existing 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.   18 Table of Contents   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 provision for credit losses on 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.   Derivatives – Bancorp uses derivative financial instruments, including interest rate swaps, as part of its interest rate risk management. GAAP establishes accounting and reporting standards for derivative instruments and hedging activities. As required by GAAP, Bancorp’s interest rate swaps are recognized as other assets and liabilities in the consolidated balance sheet at fair value. Accounting for changes in fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. To qualify for hedge accounting, Bancorp must comply with detailed rules and documentation requirements at inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship. Hedge ineffectiveness, if any, is measured periodically throughout the life of the hedging relationship.   For derivatives designated as cash flow hedges, the effective portion of changes in fair value of the derivative is initially reported in OCI and subsequently reclassified to interest income or expense when the hedged transaction affects earnings, while the ineffective portion of changes in fair value of derivative, if any, is recognized immediately in other noninterest income. Bancorp assesses the effectiveness of each hedging relationship by comparing cumulative changes in cash flows of the derivative hedging instrument with cumulative changes in cash flows of the designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness.   Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires 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. 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. Because these derivative instruments have not been designated as hedging instruments, the derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other noninterest income.   Bancorp had no fair value hedging relationships at June 30, 2021 and December 31, 2020. Bancorp does not use derivatives for trading or speculative purposes. See the Footnote titled “ Derivative Financial Instruments ” for additional discussion.   Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from Bancorp, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.   Stock-Based Compensation – For all awards, stock-based compensation expense is recognized over the period in which it is earned based on the grant-date fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.   Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in DTAs and DTLs. DTAs and DTLs are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted statutory tax rates. A valuation allowance, if needed, reduces DTAs to the amount expected to be realized.   A tax position is recognized as a benefit only if it is “more-likely-than- not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the “more-likely-than- not” test, no tax benefit is recorded.   Bancorp recognizes interest and/or penalties related to income tax matters in income tax expense, if any.   19 Table of Contents   Bancorp periodically invests in certain partnerships with customers that yield historic tax credits, accounted for using the flow through method, which approximates the equity method, and/or low-income housing tax credits as well as tax deductible losses, which are accounted for using the effective yield method for older transactions or proportional amortization method for more recent transactions. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income.   Net Income Per Share – Basic net income per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is determined by dividing net income by the weighted average number of shares of common stock outstanding plus the weighted average number of shares that would be issued upon exercise of dilutive options and SARs, assuming proceeds are used to repurchase shares under the treasury stock method.   Comprehensive Income – Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. For Bancorp, this includes net income, changes in unrealized gains and losses on AFS debt securities and cash flow hedging instruments, net of reclassification adjustments and taxes, and minimum pension liability adjustments, net of taxes.   Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are any outstanding matters that would have a material effect on the financial statements.   Restrictions on Cash and Cash Equivalents – Bancorp has historically been required by the FRB to maintain average reserve balances. Effective March 26, 2020, the FRB reduced the reserve requirement ratio to 0% in response to the COVID- 19 pandemic, eliminating reserve requirements for all depository institutions. The reserve requirement ratio remained at 0% as of June 30, 2021.   Dividend Restrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Holding Company or by the Holding Company to shareholders.   Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as disclosed in the Footnote titled “ Assets and Liabilities Measured and Reported at Fair Value ” in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates.   Revenue from Contracts with Customers – On January 1, 2018, Bancorp adopted ASU 2014 - 09, “ Revenue from Contracts with Customers, ” and all subsequent amendments to the ASU (collectively, “ASC 606” ). While this update modified guidance for recognizing revenue, it did not have a material impact on the timing or presentation of Bancorp’s revenue. The majority of Bancorp’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not subject to ASC 606. Bancorp’s services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as Bancorp satisfies its obligation to its customer.   Segment Information – Bancorp provides a broad range of financial services to individuals, corporations and others through its full service banking locations. These services include loan and deposit services, cash management services, securities brokerage activities, mortgage origination and WM&T activities. Bancorp’s operations are considered by management to be aggregated in two reportable operating segments: Commercial Banking and WM&T.   Reclassifications – Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods’ net income or shareholders’ equity.   Adoption of New Accounting Standards – The FASB issued ASU No. 2020 - 04, Reference Rate Reform (Topic 848 ): “ Facilitation of the Effects of Reference Rate Reform on Financial Reporting ,” in March 2020. 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.   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.   20 Table of Contents     ( 2 ) Acquisition   Bancorp completed its acquisition of Kentucky Bancshares, Inc. during the second quarter in a combined stock and cash transaction for total consideration of $ 233 million. Bancorp acquired 19 branches in 11 communities throughout central and eastern Kentucky, including the Lexington, Kentucky metropolitan statistical area and contiguous counties, and also acquired a captive insurance subsidiary.   The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subjected to further adjustment.   Acquisition of Kentucky Bancshares, Inc.   Summary of Assets Aquired and Liabilities Assumed         As Recorded     Fair Value       As Recorded   (in thousands)   By KB     Adjustments (1)       by Bancorp   Assets aquired:                           Cash and due from banks   $ 53,257     $ —       $ 53,257   Mortgage loans held for sale     3,071       —         3,071   Available for sale debt securities     396,157       ( 295 ) a     395,862   Federal Home Loan Bank stock, at cost     7,072       —         7,072   Loans     755,932       ( 757 ) b     755,175   Allowance for credits losses on loans     ( 9,491 )     2,734   c     ( 6,757 ) Net loans     746,441       1,977         748,418   Premises and equipment, net     27,401       ( 6,361 ) d     21,040   Bank owned life insurance     18,909       —         18,909   Accrued interest receivable     4,939       —         4,939   Goodwill     14,001       ( 14,001 ) e     —   Core deposit intangible     —       3,404   f     3,404   Other real estate owned     674       ( 123 ) g     551   Mortgage servicing rights     1,628       34   h     1,662   Deferred income taxes, net     1,856       715   i     2,571   Other assets     6,421       ( 1,866 ) j     4,555   Total assets acquired   $ 1,281,827     $ ( 16,516 )     $ 1,265,311                               Liabilities assumed:                           Deposits:                           Non-interest bearing   $ 359,544     $ —       $ 359,544   Interest bearing     678,528       1,146   k     679,674   Total deposits     1,038,072       1,146         1,039,218                               Securities sold under agreements to repurchase     11,360       —         11,360   Federal Home Loan Bank advances     88,581       2,490   l     91,071   Accrued interest payable     505       —         505   Other liabilities     16,231       ( 2,004 ) m     14,227   Total liabilities assumed     1,154,749       1,632         1,156,381   Net assets acquired   $ 127,078     $ ( 18,148 )     $ 108,930                               Consideration for common stock                     $ 204,670   Cash consideration paid                       28,276   Total consideration                     $ 232,946                               Goodwill                     $ 124,016     ( 1 ) See the following page for explanations or individual fair value adjustments.   21 Table of Contents   Explanation of fair value adjustments   a. Adjustment based on Bancorp’s evaluation of the acquired investment portfolio. Approximately $ 91 million in AFS debt securities were sold by Bancorp shortly after acquisition.   b. Adjustments to loans to reflect estimated fair value adjustments, including the following:   (in thousands)                   Fair value adjustment - acquired non PCD loans   $ 228   Fair value adjustment - acquired PCD loans     ( 735 ) Eliminate unrecognized loan fees on acquired loans and fair value hedge     ( 250 ) Net loan fair value adjustments   $ ( 757 )   c. The net adjustment to allowance for credit losses includes the following:   (in thousands)                   Reversal of historical KB allowance for credit losses on loans   $ 9,491   Estimate of lifetime credit losses for PCD loans     ( 6,757 ) Net change in allowance for credit losses   $ 2,734     d. Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.   e. Elimination of the historical KB goodwill of $ 14.0 million at the closing date.   f. Calculation of core deposit intangible related to the acquisition.   g. Adjustment to reflect the estimated fair value of other real estate owned.   h. Adjustment to reflect the estimated fair value of mortgage servicing rights.   i. Adjustment to net deferred tax assets associated with the effects of the purchase accounting adjustments.   j. Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.   k. Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.   l. Adjustment to reflect the estimated fair value of Federal Home Loan Bank advances for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates. All KB FHLB advances were paid off immediately upon acquisition.   m. Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL and various accrual adjustments.   Goodwill of approximately $ 124 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, is expected to be recorded in the KB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment and is not expected to be deductible for tax purposes. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the KB acquisition will change.   Net income, excluding all purchase accounting adjustments, attributed to KB totaled $ 2.1 million for the three and six months ended June 30, 2021.   22 Table of Contents   The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the KB acquisition taken place at the beginning of the period:   (in thousands)   Three months ended June 30, 2021     Three months ended June 30, 2020                     Net interest income   $ 47,465     $ 42,664   Provision for loan losses (1)     ( 3,167 )     7,525   Non-interest income     18,078       16,621   Non-interest expense (2)     37,257       32,903   Income before taxes     31,453       18,857   Income tax expense     6,026       2,518   Net income   $ 25,427     $ 16,339                     Earnings per share                 Basic   $ 0.95     $ 0.62   Diluted     0.94       0.62                     Basic weighted average shares outstanding     26,687       26,363   Diluted weighted average shares outstanding     26,926       26,542     (in thousands)   Six months ended June 30, 2021     Six months ended June 30, 2020                     Net interest income   $ 94,043     $ 84,156   Provision for loan losses (1)     ( 4,542 )     15,075   Non-interest income     36,090       32,719   Non-interest expense (2)     71,803       65,864   Income before taxes     62,872       35,936   Income tax expense     11,979       4,716   Net income   $ 50,893     $ 31,220                     Earnings per share                 Basic   $ 1.91     $ 1.19   Diluted     1.89       1.18                     Basic weighted average shares outstanding     26,670       26,341   Diluted weighted average shares outstanding     26,911       26,540     ( 1 ) - Excludes $ 7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively.   ( 2 ) - Excludes $ 18.1 million and $ 18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively.     23 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)   Amortized     Unrealized           June 30, 2021   cost     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 9,078     $ -     $ ( 1 )   $ 9,077   Government sponsored enterprise obligations     150,833       4,271       ( 124 )     154,980   Mortgage backed securities - government agencies     788,048       4,781       ( 6,118 )     786,711   Obligations of states and political subdivisions     54,906       355       ( 128 )     55,133   Other     1,006       1       -       1,007                                     Total available for sale debt securities   $ 1,003,871     $ 9,408     $ ( 6,371 )   $ 1,006,908     December 31, 2020                                                                   Government sponsored enterprise obligations   $ 133,436     $ 5,003     $ ( 361 )   $ 138,078   Mortgage backed securities - government agencies     430,198       7,555       ( 168 )     437,585   Obligations of states and political subdivisions     11,088       227       —       11,315                                     Total available for sale debt securities   $ 574,722     $ 12,785     $ ( 529 )   $ 586,978     At June 30, 2021 and December 31, 2020, 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.   Accrued interest on AFS debt securities totaled $ 2.5 million and $ 1.6 million at June 30, 2021 and December 31, 2020, respectively, and was included in the consolidated balance sheets.   AFS debt securities totaling $ 396 million were acquired as a result of the KB acquisition. Shortly after acquisition, 86 securities with a total fair value of $ 91 million in the acquired AFS debt securities portfolio were sold, resulting in a loss on the sale $ 295,000 , which was recorded a as fair value adjustment through goodwill.   A summary of AFS debt securities by contractual maturity as of June 30, 2021 follows:   (in thousands)   Amortized cost     Fair value                     Due within one year   $ 35,028     $ 35,160   Due after one year but within five years     21,347       21,535   Due after five years but within 10 years     29,630       29,745   Due after 10 years     129,818       133,757   Mortgage backed securities - government agencies     788,048       786,711   Total available for sale debt securities   $ 1,003,871     $ 1,006,908     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 $ 676 million and $ 505 million were pledged at June 30, 2021 and December 31, 2020, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The large increase over the first six months of 2021 was driven by collateralized accounts added through the KB acquisition.   24 Table of Contents   Securities with unrealized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:       Less than 12 months     12 months or more     Total                                                     (in thousands)   Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   June 30, 2021   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ 9,077     $ ( 1 )   $ -     $ -     $ 9,077     $ ( 1 )                                                   Government sponsored enterprise obligations     26,808       ( 111 )     459       ( 13 )     27,267       ( 124 )                                                   Mortgage-backed securities - government agencies     504,709       ( 6,085 )     1,946       ( 33 )     506,655       ( 6,118 )                                                   Obligations of states and political subdivisions     19,345       ( 128 )     —       —       19,345       ( 128 )                                                   Total   $ 559,939     $ ( 6,325 )   $ 2,405     $ ( 46 )   $ 562,344     $ ( 6,371 )                                                   December 31, 2020                                                 Government sponsored enterprise obligations   $ 10,404     $ ( 112 )   $ 24,398     $ ( 249 )   $ 34,802     $ ( 361 )                                                   Mortgage-backed securities - government agencies     68,033       ( 167 )     921       ( 1 )     68,954       ( 168 )                                                   Total   $ 78,437     $ ( 279 )   $ 25,319     $ ( 250 )   $ 103,756     $ ( 529 )     Applicable dates for determining when securities are in an unrealized loss position are June 30, 2021 and December 31, 2020. 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 144 and 14 separate investment positions as of June 30, 2021 and December 31, 2020, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at June 30, 2021 and December 31, 2020.   25 Table of Contents     ( 4 ) Loans and Allowance for Credit Losses on Loans   Composition of loans by class follows:   (in thousands)   June 30, 2021     December 31, 2020                     Commercial real estate - non-owner occupied   $ 1,170,461     $ 833,470   Commercial real estate - owner occupied     604,120       508,672   Total commercial real estate     1,774,581       1,342,142                     Commercial and industrial - term     544,316       525,776   Commercial and industrial - term - PPP     377,021       550,186   Commercial and industrial - lines of credit     327,990       276,646   Total commercial and industrial     1,249,327       1,352,608                     Residential real estate - owner occupied     377,783       239,191   Residential real estate - non-owner occupied     273,782       140,930   Total residential real estate     651,565       380,121                     Construction and land development     281,149       291,764   Home equity lines of credit     142,468       95,366   Consumer     78,171       44,606   Leases     14,171       14,786   Credits cards     14,960       10,203   Total loans (1)   $ 4,206,392     $ 3,531,596     ( 1 ) Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.   Loans totaling $ 755 million were acquired as a result of the KB acquisition.   Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $ 13 million and $ 12 million at June 30, 2021 and December  31, 2020, respectively, and was included in the consolidated balance sheets.   Loans with carrying amounts of $ 2.5 billion and $ 2.0 billion were pledged to secure FHLB borrowing capacity at June 30, 2021 and December 31, 2020, respectively.   Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $ 50 million and $ 43 million as of June 30, 2021 and December 31, 2020, respectively.   PCD Loans   In connection with the acquisition of KB, Bancorp acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 362, Financial Instruments – Credit Losses.   The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect Bancorp’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. Bancorp records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.   26 Table of Contents   Bancorp purchased loans through the acquisition of KB for which there was, at the time of acquisition, more-than-insignificant deterioration of credit quality since origination. The carrying amount of loans acquired and classified as PCD was as follows at June 30, 2021:   (in thousands)   June 1, 2021             Purchase price of PCD loans at acquisition   $ 32,765   Allowance for credit losses at acquisition     ( 6,757 ) Non-credit discount (premium) at acquisition     ( 735 ) Fair value of PCD loans at acquisition   $ 25,273     Allowance for Credit Losses on Loans   The table below reflects activity in the ACL related to loans:     (in thousands) Three Months Ended June 30, 2021   Beginning Balance     Initial Allowance on PCD Loans     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                                     Commercial real estate - non-owner occupied   $ 20,062     $ 1,491     $ 1,255     $ ( 3,065 )   $ 4     $ 19,747   Commercial real estate - owner occupied     7,065       2,112       ( 184 )     -       555       9,548   Total commercial real estate     27,127       3,603       1,071       ( 3,065 )     559       29,295                                                     Commercial and industrial - term (1)     8,469       1,022       355       ( 114 )     16       9,748   Commercial and industrial - lines of credit     2,983       1,755       502       -       -       5,240   Total commercial and industrial     11,452       2,777       857       ( 114 )     16       14,988                                                     Residential real estate - owner occupied     3,292       142       953       ( 40 )     3       4,350   Residential real estate - non-owner occupied     1,709       88       1,624       -       1       3,422   Total residential real estate     5,001       230       2,577       ( 40 )     4       7,772                                                     Construction and land development     5,527       -       ( 337 )     -       3       5,193   Home equity lines of credit     843       147       239       -       1       1,230   Consumer     395       -       285       ( 223 )     115       572   Leases     235       -       ( 3 )     -       -       232   Credit cards     134       -       8       -       -       142   Total   $ 50,714     $ 6,757     $ 4,697     $ ( 3,442 )   $ 698     $ 59,424     (in thousands) Six Months Ended June 30, 2021   Beginning Balance     Initial Allowance on PCD Loans     Provision for Credit Losses     Charge-offs     Recoveries     Ending Balance                                                     Commercial real estate - non-owner occupied   $ 19,396     $ 1,491     $ 1,890     $ ( 3,065 )   $ 35     $ 19,747   Commercial real estate - owner occupied     6,983       2,112       ( 102 )     -       555       9,548   Total commercial real estate     26,379       3,603       1,788       ( 3,065 )     590       29,295                                                     Commercial and industrial - term (1)     8,970       1,022       ( 97 )     ( 169 )     22       9,748   Commercial and industrial - lines of credit     3,614       1,755       ( 129 )     -       -       5,240   Total commercial and industrial     12,584       2,777       ( 226 )     ( 169 )     22       14,988                                                     Residential real estate - owner occupied     3,389       142       859       ( 43 )     3       4,350   Residential real estate - non-owner occupied     1,818       88       1,514       -       2       3,422   Total residential real estate     5,207       230       2,373       ( 43 )     5       7,772                                                     Construction and land development     6,119       -       ( 929 )     -       3       5,193   Home equity lines of credit     895       147       187       -       1       1,230   Consumer     340       -       326       ( 287 )     193       572   Leases     261       -       ( 29 )     -       -       232   Credit cards     135       -       7       -       -       142   Total   $ 51,920     $ 6,757     $ 3,497     $ ( 3,564 )   $ 814     $ 59,424       ( 1 ) The allowance allocated for the commercial & industrial – term segment includes $ 813,000 related to PCD PPP loans.   27 Table of Contents   (in thousands) Three Months Ended June 30, 2020   Beginning Balance     Impact of Adopting ASC 326     Initial ACL on Loans Purchased with Credit Deterioration     Provision for Credit Losses on Loans     Charge-offs     Recoveries     Ending Balance                                                             Commercial real estate - non-owner occupied   $ 13,435     $ -     $ -     $ 5,403     $ -     $ 1     $ 18,839   Commercial real estate - owner occupied     6,509       -       -       197       -       -       6,706   Total commercial real estate     19,944       -       -       5,600       -       1       25,545                                                             Commercial and industrial - term     7,990       -       -       ( 651 )     -       -       7,339   Commercial and industrial - lines of credit     3,866       -       -       ( 624 )     -       -       3,242   Total commercial and industrial     11,856       -       -       ( 1,275 )     -       -       10,581                                                             Residential real estate - owner occupied     2,702       -       -       162       ( 18 )     2       2,848   Residential real estate - non-owner occupied     1,419       -       -       175       -       -       1,594   Total residential real estate     4,121       -       -       337       ( 18 )     2       4,442                                                             Construction and land development     5,185       -       -       423       -       -       5,608   Home equity lines of credit     623       -       -       209       -       -       832   Consumer     198       -       -       134       ( 80 )     110       362   Leases     159       -       -       64       -       -       223   Credit cards     57       -       -       58       -       -       115   Total   $ 42,143     $ -     $ -     $ 5,550     $ ( 98 )   $ 113     $ 47,708     (in thousands) Six Months Ended June 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     $ 10,503     $ -     $ 3     $ 18,839   Commercial real estate - owner occupied     3,327       1,542       1,350       487       -       -       6,706   Total commercial real estate     8,562       4,488       1,502       10,990       -       3       25,545                                                             Commercial and industrial - term     6,782       365       -       185       -       7       7,339   Commercial and industrial - lines of credit     5,657       ( 1,528 )     -       ( 887 )     -       -       3,242   Total commercial and industrial     12,439       ( 1,163 )     -       ( 702 )     -       7       10,581                                                             Residential real estate - owner occupied     1,527       1,087       99       151       ( 18 )     2       2,848   Residential real estate - non-owner occupied     947       429       -       218       -       -       1,594   Total residential real estate     2,474       1,516       99       369       ( 18 )     2       4,442                                                             Construction and land development     2,105       3,056       -       447       -       -       5,608   Home equity lines of credit     728       114       -       ( 10 )     -       -       832   Consumer     100       264       34       ( 3 )     ( 254 )     221       362   Leases     237       ( 4 )     -       ( 10 )     -       -       223   Credit cards     146       ( 50 )     -       19       -       -       115   Total   $ 26,791     $ 8,221     $ 1,635     $ 11,100     $ ( 272 )   $ 233     $ 47,708     28 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:       Non-accrual Loans                     Past Due 90-Days-   (in thousands)   With No     Total     Troubled Debt     or-More and Still   June 30, 2021   Recorded ACL     Non-accrual     Restructurings     Accruing Interest                                     Commercial real estate - non-owner occupied   $ 6,634     $ 9,100     $ —     $ 77   Commercial real estate - owner occupied     155       696       —       888   Total commercial real estate     6,789       9,796       —       965                                     Commercial and industrial - term     94       900       14       —   Commercial and industrial - lines of credit     —       —       —       20   Total commercial and industrial     94       900       14       20                                     Residential real estate - owner occupied     —       1,591       —       19   Residential real estate - non-owner occupied     —       154       —       —   Total residential real estate     —       1,745       —       19                                     Construction and land development     —       —       —       —   Home equity lines of credit     —       366       —       46   Consumer     —       7       —       —   Leases     —       —       —       —   Credit cards     —       —       —       —   Total   $ 6,883     $ 12,814     $ 14     $ 1,050           Non-accrual Loans                     Past Due 90-Days-   (in thousands)   With No     Total     Troubled Debt     or-More and Still   December 31, 2020   Recorded ACL     Non-accrual     Restructurings     Accruing Interest                                     Commercial real estate - non-owner occupied   $ 186     $ 10,278     $ —     $ —   Commercial real estate - owner occupied     1,048       1,403       —       156   Total commercial real estate     1,234       11,681       —       156                                     Commercial and industrial - term     6       6       16       —   Commercial and industrial - lines of credit     88       88       —       —   Total commercial and industrial     94       94       16       —                                     Residential real estate - owner occupied     413       413       —       178   Residential real estate - non-owner occupied     101       101       —       301   Total residential real estate     514       514       —       479                                     Construction and land development     —       —       —       —   Home equity lines of credit     221       221       —       14   Consumer     4       4       —       —   Leases     —       —       —       —   Credit cards     —       —       —       —   Total   $ 2,067     $ 12,514     $ 16     $ 649     For the three and six month periods ended June 30, 2021 and 2020, 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 six month periods ended June 30, 2021 and 2020, no interest income was recognized on loans on non-accrual status.   29 Table of Contents   The following table presents the amortized cost basis and ACL allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:   (in thousands) June 30, 2021   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 9,600     $ -     $ -     $ 9,600     $ 1,449   Commercial real estate - owner occupied     6,115       -       -       6,115       2,100   Total commercial real estate     15,715       -       -       15,715       3,549                                             Commercial and industrial - term     14       1,010       58       1,082       399   Commercial and industrial - lines of credit     -       -       -       -       -   Total commercial and industrial     14       1,010       58       1,082       399                                             Residential real estate - owner occupied     1,804       -       -       1,804       116   Residential real estate - non-owner occupied     154       -       -       154       -   Total residential real estate     1,958       -       -       1,958       116                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     366       -       -       366       100   Consumer     7       -       -       7       -   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 18,060     $ 1,010     $ 58     $ 19,128     $ 4,164     (in thousands) December 31, 2020   Real Estate     Accounts Receivable / Equipment     Other     Total     ACL Allocation                                             Commercial real estate - non-owner occupied   $ 10,278     $ -     $ -     $ 10,278     $ 3,037   Commercial real estate - owner occupied     1,403       -       -       1,403       13   Total commercial real estate     11,681       -       -       11,681       3,050                                             Commercial and industrial - term     16       7       -       23       16   Commercial and industrial - lines of credit     -       88       -       88       -   Total commercial and industrial     16       95       -       111       16                                             Residential real estate - owner occupied     413       -       -       413       -   Residential real estate - non-owner occupied     101       -       -       101       -   Total residential real estate     514       -       -       514       -                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     221       -       -       221       -   Consumer     -       -       4       4       -   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 12,432     $ 95     $ 3     $ 12,531     $ 3,066     There have been no significant changes to the types of collateral securing Bancorp’s collateral dependent loans.   30 Table of Contents   The following tables present the aging of contractually past due loans by portfolio class:   (in thousands)           30-59 days     60-89 days     90 or more     Total     Total   June 30, 2021*   Current     Past Due     Past Due     Days Past Due     Past Due     Loans                                                     Commercial real estate - non-owner occupied   $ 1,159,299     $ 3,555     $ 6,835     $ 772     $ 11,162     $ 1,170,461   Commercial real estate - owner occupied     601,961       607       —       1,552       2,159       604,120   Total commercial real estate     1,761,260       4,162       6,835       2,324       13,321       1,774,581                                                     Commercial and industrial - term     543,413       35       14       854       903       544,316   Commercial and industrial - term - PPP     377,021       —       —       —       —       377,021   Commercial and industrial - lines of credit     327,747       223       —       20       243       327,990   Total commercial and industrial     1,248,181       258       14       874       1,146       1,249,327                                                     Residential real estate - owner occupied     375,468       1,762       19       534       2,315       377,783   Residential real estate - non-owner occupied     273,397       108       177       100       385       273,782   Total residential real estate     648,865       1,870       196       634       2,700       651,565                                                     Construction and land development     281,149       —       —       —       —       281,149   Home equity lines of credit     141,854       342       172       100       614       142,468   Consumer     78,106       58       —       7       65       78,171   Leases     14,171       —       —       —       —       14,171   Credit cards     14,951       9       —       —       9       14,960   Total   $ 4,188,537     $ 6,699     $ 7,217     $ 3,939     $ 17,855     $ 4,206,392     (in thousands)           30-59 days     60-89 days     90 or more     Total     Total   December 31, 2020*   Current     Past Due     Past Due     Days Past Due     Past Due     Loans                                                     Commercial real estate - non-owner occupied   $ 822,199     $ -     $ 10,600     $ 671     $ 11,271     $ 833,470   Commercial real estate - owner occupied     507,265       278       —       1,129       1,407       508,672   Total commercial real estate     1,329,464       278       10,600       1,800       12,678       1,342,142                                                     Commercial and industrial - term     523,936       1,404       430       6       1,840       525,776   Commercial and industrial - term - PPP     550,186       —       —       —       —       550,186   Commercial and industrial - lines of credit     276,472       86       —       88       174       276,646   Total commercial and industrial     1,350,594       1,490       430       94       2,014       1,352,608                                                     Residential real estate - owner occupied     237,902       585       247       457       1,289       239,191   Residential real estate - non-owner occupied     140,234       294       —       402       696       140,930   Total residential real estate     378,136       879       247       859       1,985       380,121                                                     Construction and land development     291,764       —       —       —       —       291,764   Home equity lines of credit     95,206       7       139       14       160       95,366   Consumer     44,510       90       4       2       96       44,606   Leases     14,786       —       —       —       —       14,786   Credit cards     10,197       5       —       1       6       10,203   Total   $ 3,514,657     $ 2,749     $ 11,420     $ 2,770     $ 16,939     $ 3,531,596     * - Pursuant to the CARES Act, loan deferrals granted to borrowers experiencing business interruptions related to the pandemic were not classified as TDRs and not included in past due and/or non-performing loan statistics. As of June 30, 2021 and December 31, 2020, outstanding CARES Act loan deferrals of $ 8 million and $ 37 million are reflected as current, respectively.     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. Beginning in 2021, Bancorp has elected not to disclose revolving loans that have converted to term loans, as activity relating to this disclosure, which is included in the tables presented below as of December 31, 2020, is currently immaterial to Bancorp’s loan portfolio and is expected to be in the future. As of June 30, 2021, the risk rating of loans based on year of origination was as follows:                                                         Revolving                                                                 loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year       amortized            June 30, 2021   2021     2020     2019     2018     2017     Prior       cost basis      Total                                                                     Commercial real estate -non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 173,784     $ 309,370     $ 144,543     $ 114,151     $ 98,517     $ 255,973     $ 18,399     $ 1,114,737   OAEM     44       -       1,003       -       -       32,934       867       34,848   Substandard     6,643       -       1,750       -       -       2,927       456       11,776   Substandard non-performing     -       6,644       25       -       605       1,799       27       9,100   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 180,471     $ 316,014     $ 147,321     $ 114,151     $ 99,122     $ 293,633     $ 19,749     $ 1,170,461                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 92,187     $ 197,160     $ 99,854     $ 81,249     $ 46,080     $ 55,358     $ 5,705     $ 577,593   OAEM     1,299       70       6,461       727       1,547       59       -       10,163   Substandard     2,483       5,451       4,656       1,306       667       108       997       15,668   Substandard non-performing     -       -       -       -       -       696       -       696   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 95,969     $ 202,681     $ 110,971     $ 83,282     $ 48,294     $ 56,221     $ 6,702     $ 604,120                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 110,845     $ 185,618     $ 75,276     $ 80,400     $ 33,531     $ 45,040     $ -     $ 530,710   OAEM     71       1,187       2,315       5,453       -       263       -       9,289   Substandard     229       218       2,771       5       118       76       -       3,417   Substandard non-performing     -       -       -       -       35       865       -       900   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 111,145     $ 187,023     $ 80,362     $ 85,858     $ 33,684     $ 46,244     $ -     $ 544,316                                                                     Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ 254,535     $ 121,673     $ -     $ -     $ -     $ -     $ -     $ 376,208   OAEM     -       -       -       -       -       -       -       -   Substandard     -       813       -       -       -       -       -       813   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ 254,535     $ 122,486     $ -     $ -     $ -     $ -     $ -     $ 377,021     (continued)   33 Table of Contents   (continued)                                                           Revolving                                                                 loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year        amortized           June 30, 2021   2021     2020     2019     2018     2017     Prior        cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 14,410     $ 17,983     $ 11,677     $ 1,879     $ 1,970     $ 257     $ 271,816     $ 319,992   OAEM     -       -       -       -       -       -       1,214       1,214   Substandard     -       -       2,088       -       -       -       4,696       6,784   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 14,410     $ 17,983     $ 13,765     $ 1,879     $ 1,970     $ 257     $ 277,726     $ 327,990                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 103,210     $ 113,596     $ 42,309     $ 21,773     $ 19,925     $ 72,481     $ -     $ 373,294   OAEM     103       -       171       -       84       567       -       925   Substandard     169       -       129       141       112       1,422       -       1,973   Substandard non-performing     -       -       -       -       837       754       -       1,591   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 103,482     $ 113,596     $ 42,609     $ 21,914     $ 20,958     $ 75,224     $ -     $ 377,783                                                                     Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 42,043     $ 92,346     $ 52,842     $ 38,226     $ 20,296     $ 24,181     $ -     $ 269,934   OAEM     445       221       2,139       357       52       327       -       3,541   Substandard     -       -       -       -       -       153       -       153   Substandard non-performing     -       -       -       28       -       126       -       154   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 42,488     $ 92,567     $ 54,981     $ 38,611     $ 20,348     $ 24,787     $ -     $ 273,782                                                                                                                                       Construction and land development                                                                 Risk rating                                                                 Pass   $ 68,305     $ 110,136     $ 53,643     $ 19,562     $ 14,859     $ 1,339     $ 13,056     $ 280,900   OAEM     -       -       -       -       -       -       249       249   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 68,305     $ 110,136     $ 53,643     $ 19,562     $ 14,859     $ 1,339     $ 13,305     $ 281,149                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 140,790     $ 140,790   OAEM     -       -       -       -       -       -       223       223   Substandard     -       -       -       -       -       -       1,089       1,089   Substandard non-performing     -       -       -       -       -       -       366       366   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 142,468     $ 142,468     (continued)   34 Table of Contents   (continued)                                                       Revolving                                                               loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year     amortized           June 30, 2021   2021     2020     2019     2018     2017     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass*   $ 20,050     $ 13,869     $ 6,594     $ 1,905     $ 879     $ 897     $ 33,722     $ 77,916   OAEM     -       -       178       -       -       -       -       178   Substandard     -       4       50       10       4       1       1       70   Substandard non-performing     -       7       -       -       -       -       -       7   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 20,050     $ 13,880     $ 6,822     $ 1,915     $ 883     $ 898     $ 33,723     $ 78,171                                                                     Leases                                                                 Risk rating                                                                 Pass   $ 1,927     $ 4,203     $ 1,628     $ 1,727     $ 844     $ 3,811     $ -     $ 14,140   OAEM     -       -       -       -       -       31       -       31   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 1,927     $ 4,203     $ 1,628     $ 1,727     $ 844     $ 3,842     $ -     $ 14,171                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 14,960     $ 14,960   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 14,960     $ 14,960                                                                     Total loans                                                                 Risk rating                                                                 Pass   $ 881,295     $ 1,165,955     $ 488,366     $ 360,872     $ 236,901     $ 459,337     $ 498,448     $ 4,091,174   OAEM     1,962       1,478       12,267       6,537       1,683       34,181       2,553       60,661   Substandard     9,524       6,486       11,444       1,462       901       4,687       7,239       41,743   Substandard non-performing     -       6,651       25       28       1,477       4,240       393       12,814   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 892,781     $ 1,180,570     $ 512,102     $ 368,899     $ 240,962     $ 502,445     $ 508,633     $ 4,206,392     *Revolving loans include $ 450,000 in overdrawn demand deposit balances.   35 Table of Contents   As of December 31, 2020, the risk rating of loans based on year of origination was as follows:                                                       Revolving     Revolving                                                               loans     loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year     amortized     converted           December 31, 2020   2020     2019     2018     2017     2016     Prior     cost basis     to term     Total                                                                             Commercial real estate - non-owner occupied:                                                                         Risk rating                                                                         Pass   $ 303,246     $ 114,731     $ 102,147     $ 105,981     $ 77,925     $ 57,221     $ 12,439     $ 11,717     $ 785,407   OAEM     3,867       16,587       -       -       7,707       615       -       -       28,776   Substandard     4,174       1,901       -       -       1,513       991       430       -       9,009   Substandard non-performing     9,644       -       -       609       -       -       -       25       10,278   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 320,931     $ 133,219     $ 102,147     $ 106,590     $ 87,145     $ 58,827     $ 12,869     $ 11,742     $ 833,470                                                                             Commercial real estate - owner occupied:                                                                         Risk rating                                                                         Pass   $ 183,666     $ 94,462     $ 83,592     $ 47,506     $ 39,638     $ 30,533     $ 7,693     $ 2,418     $ 489,508   OAEM     74       6,534       1,575       796       115       -       200       -       9,294   Substandard     1,408       5,360       1,335       247       117       -       -       -       8,467   Substandard non-performing     91       -       15       500       -       471       -       326       1,403   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 185,239     $ 106,356     $ 86,517     $ 49,049     $ 39,870     $ 31,004     $ 7,893     $ 2,744     $ 508,672                                                                             Commercial and industrial - term:                                                                         Risk rating                                                                         Pass   $ 215,629     $ 94,563     $ 104,871     $ 42,929     $ 36,016     $ 8,412     $ -     $ 7,690     $ 510,110   OAEM     60       2,969       7,878       -       283       8       -       -       11,198   Substandard     1,229       2,521       -       91       163       74       -       384       4,462   Substandard non-performing     -       -       -       -       -       6       -       -       6   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 216,918     $ 100,053     $ 112,749     $ 43,020     $ 36,462     $ 8,500     $ -     $ 8,074     $ 525,776                                                                             Commercial and industrial - PPP                                                                         Risk rating                                                                         Pass   $ 550,186     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 550,186   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ 550,186     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ 550,186     (continued)   36 Table of Contents   (continued)                                                       Revolving     Revolving                                                               loans     loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year     amortized     converted           December 31, 2020   2020     2019     2018     2017     2016     Prior     cost basis     to term     Total                                                                             Commercial and industrial - lines of credit                                                                         Risk rating                                                                         Pass   $ 26,351     $ 14,405     $ 2,229     $ 1,990     $ 290     $ 85     $ 223,172     $ -     $ 268,522   OAEM     -       2,222       -       -       -       -       1,596       -       3,818   Substandard     -       -       -       -       -       -       4,218       -       4,218   Substandard non-performing     -       -       -       -       -       -       88       -       88   Doubtful     -       -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 26,351     $ 16,627     $ 2,229     $ 1,990     $ 290     $ 85     $ 229,074     $ -     $ 276,646                                                                             Residential real estate - owner occupied                                                                         Risk rating                                                                         Pass   $ 94,023     $ 34,631     $ 23,748     $ 19,567     $ 27,791     $ 37,362     $ -     $ 1,528     $ 238,650   OAEM     -       -       -       -       -       -       -       -       -   Substandard     13       -       -       115       -       -       -       -       128   Substandard non-performing     49       58       -       100       38       73       -       95       413   Doubtful     -       -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 94,085     $ 34,689     $ 23,748     $ 19,782     $ 27,829     $ 37,435     $ -     $ 1,623     $ 239,191                                                                             Residential real estate - non-owner occupied                                                                         Risk rating                                                                         Pass   $ 63,537     $ 22,422     $ 25,466     $ 10,587     $ 9,609     $ 6,451     $ -     $ 788     $ 138,860   OAEM     137       1,600       140       -       -       92       -       -       1,969   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       29       -       -       72       -       -       101   Doubtful     -       -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 63,674     $ 24,022     $ 25,635     $ 10,587     $ 9,609     $ 6,615     $ -     $ 788     $ 140,930                                                                             Construction and land development                                                                         Risk rating                                                                         Pass   $ 139,611     $ 94,066     $ 32,539     $ 15,384     $ 1,175     $ 553     $ 6,304     $ 1,883     $ 291,515   OAEM     -       -       -       -       -       -       249       -       249   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Construction and land development   $ 139,611     $ 94,066     $ 32,539     $ 15,384     $ 1,175     $ 553     $ 6,553     $ 1,883     $ 291,764                                                                             Home equity lines of credit                                                                         Risk rating                                                                         Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 95,145     $ -     $ 95,145   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       221       -       221   Doubtful     -       -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 95,366     $ -     $ 95,366     (continued)   37 Table of Contents   (continued)                                                       Revolving     Revolving                                                               loans     loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year     amortized     converted           December 31, 2020   2020     2019     2018     2017     2016     Prior     cost basis     to term     Total                                                                             Consumer                                                                         Risk rating                                                                         Pass*   $ 10,334     $ 2,897     $ 1,687     $ 243     $ 420     $ 466     $ 28,363     $ 192     $ 44,602   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       2       -       2       -       4   Doubtful     -       -       -       -       -       -       -       -       -   Total Consumer   $ 10,334     $ 2,897     $ 1,687     $ 243     $ 422     $ 466     $ 28,365     $ 192     $ 44,606                                                                             Leases                                                                         Risk rating                                                                         Pass   $ 4,674     $ 1,875     $ 2,144     $ 1,300     $ 2,550     $ 2,168     $ -     $ -     $ 14,711   OAEM     -       -       -       -       69       -       -       -       69   Substandard     -       -       6       -       -       -       -       -       6   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Leases   $ 4,674     $ 1,875     $ 2,150     $ 1,300     $ 2,619     $ 2,168     $ -     $ -     $ 14,786                                                                             Credit cards                                                                         Risk rating                                                                         Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 10,203     $ -     $ 10,203   OAEM     -       -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 10,203     $ -     $ 10,203                                                                             Total loans                                                                         Risk rating                                                                         Pass   $ 1,591,257     $ 474,052     $ 378,423     $ 245,487     $ 195,414     $ 143,251     $ 383,319     $ 26,216     $ 3,437,419   OAEM     4,138       29,912       9,593       796       8,174       715       2,045       -       55,373   Substandard     6,824       9,782       1,341       453       1,793       1,065       4,648       384       26,290   Substandard non-performing     9,784       58       44       1,209       40       622       311       446       12,514   Doubtful     -       -       -       -       -       -       -       -       -   Total Loans   $ 1,612,003     $ 513,804     $ 389,401     $ 247,945     $ 205,421     $ 145,653     $ 390,323     $ 27,046     $ 3,531,596     * - Revolving loans include $ 536,000 in overdrawn demand deposit balances.   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:       June 30,     December 31,   (in thousands)   2021     2020                     Credit cards                 Performing   $ 14,960     $ 10,203   Non-performing     —       —   Total credit cards   $ 14,960     $ 10,203     38 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, typically 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. As of June 30, 2021, outstanding loan deferrals totaled $ 8 million, representing 0.21 % of the total loan portfolio (excluding PPP loans) compared to $ 37 million, or 1.24 % of the total loan portfolio (excluding PPP loans) at December 31, 2020.   Troubled Debt Restructurings   Detail of outstanding TDRs included in total non-performing loans follows:       June 30, 2021     December 31, 2020               Specific     Additional             Specific     Additional               reserve     commitment             reserve     commitment   (in thousands)   Balance     allocation     to lend     Balance     allocation     to lend                                                     Commercial and industrial - term   $ 14     $ 14     $ —     $ 16     $ 16     $ —   Residential real estate     —       —       —       —       —       —   Total TDRs   $ 14     $ 14     $ —     $ 16     $ 16     $ —     During the three and six month periods ended June 30, 2021 and 2020, 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 both June 30, 2021 and December 31, 2020, Bancorp had $ 147,000 , respectively, in residential real estate loans for which formal foreclosure proceedings were in process.   39 Table of Contents     ( 5 ) Goodwill and Core Deposit Intangibles   As of June 30, 2021, goodwill represents $ 124 million related to the KB acquisition, $ 11.8 million related to the 2019 KSB acquisition and $ 682,000 related to the 1996 purchase of a bank in southern Indiana. The acquisition of TBOC in 2013 generated a bargain purchase gain. As permitted under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities related to the KB acquisition. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.   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 December 31, 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     Six months ended       June 30,     June 30,   (in thousands)   2021     2020     2021     2020   Balance at beginning of period   $ 12,513     $ 12,513     $ 12,513     $ 12,513   Goodwill acquired     124,016       —       124,016       —   Recast adjustments     —       —       —       —   Impairment     —       —       —       —   Balance at end of period   $ 136,529     $ 12,513     $ 136,529     $ 12,513     Bancorp recorded CDI assets of $ 3.4 million, $ 1.5 million and $ 2.5 million in association with the acquisition of KB in 2021, KSB in 2019 and TBOC in 2013, respectively.   Changes in the net carrying amount of CDIs follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2021     2020     2021     2020   Balance at beginning of period   $ 1,885     $ 2,203     $ 1,962     $ 2,285   Core deposit intangible acquired     3,404       —       3,404       —   Amortization     ( 127 )     ( 81 )     ( 204 )     ( 163 ) Balance at end of period   $ 5,162     $ 2,122     $ 5,162     $ 2,122     40 Table of Contents     ( 6 ) Other Assets   A summary of the major components of other assets follows:       June 30,     December 31,   (in thousands)   2021     2020                     Cash surrender value of life insurance other than BOLI   $ 19,770     $ 18,426   Net deferred tax asset     25,275       22,320   Investments in tax credit related ventures     11,515       9,552   Swap assets     5,668       8,374   Prepaid assets     3,515       2,935   Trust fees receivable     2,556       2,192   Mortgage servicing rights     4,657       2,710   Other real estate owned     648       281   Other     13,386       4,575   Total other assets   $ 86,990     $ 71,365     Bancorp maintains life insurance policies other than BOLI in conjunction with its non-qualified defined benefit retirement and non-qualified compensation plans.   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. For additional information, see the footnote titled “ Derivative Financial Instruments. ”   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 June 30, 2021 and December 31, 2020 were $ 4.7 million and $ 3.1 million, respectively. MSRs with an estimated fair value of $ 1.7 million were acquired in the KB acquisition. There was no valuation allowance recorded for MSRs as of June 30, 2021 and December 31, 2020, as fair value exceeded carrying value.   Changes in the net carrying amount of MSRs follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2021     2020     2021     2020   Balance at beginning of period   $ 2,865     $ 1,446     $ 2,710     $ 1,372   MSRs acquired     1,662       —       1,662       —   Additions for mortgage loans sold     304       511       711       641   Amortization     ( 174 )     ( 69 )     ( 426 )     ( 125 ) Impairment     —       —       —       —                                     Balance at end of period   $ 4,657     $ 1,888     $ 4,657     $ 1,888     Total outstanding principal balances of loans serviced for others were $ 674 million and $ 428 million at June 30, 2021 and December 31, 2020, respectively. Loans serviced for others acquired as part of the KB acquisition totaled $ 233 million as of June 30, 2021.   41 Table of Contents     ( 7 ) Income Taxes   Components of income tax expense (benefit) from operations follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2021     2020     2021     2020   Current income tax expense:                                 Federal   $ ( 21 )   $ 4,363     $ 3,472     $ 6,205   State     24       209       546       340   Total current income tax expense     3       4,572       4,018       6,545                                     Deferred income tax expense (benefit):                                 Federal     679       ( 1,798 )     1,516       ( 1,146 ) State     182       ( 427 )     791       ( 803 ) Total deferred income tax expense (benefit)     861       ( 2,225 )     2,307       ( 1,949 ) Change in valuation allowance     -       1       -       2   Total income tax expense   $ 864     $ 2,348     $ 6,325     $ 4,598     An analysis of the difference between the statutory and ETRs from operations follows:       Three months ended     Six months ended       June 30,     June 30,       2021     2020     2021     2020   U.S. federal statutory income tax rate     21.0 %     21.0 %     21.0 %     21.0 % State income taxes, net of federal benefit     3.2       ( 1.1 )     3.1       ( 1.1 ) Excess tax benefit from stock-based compensation arrangements     ( 2.9 )     ( 0.4 )     ( 3.2 )     -   Change in cash surrender value of life insurance     ( 4.4 )     ( 2.0 )     ( 1.1 )     ( 0.4 ) Tax credits     ( 1.2 )     ( 5.9 )     ( 0.6 )     ( 5.9 ) Tax exempt interest income     ( 1.3 )     ( 0.2 )     ( 0.3 )     ( 0.3 ) Non-deductible merger expenses     4.2       -       0.9       -   Insurance captive     ( 0.4 )     -       ( 0.1 )     -   Other, net     ( 1.1 )     3.5       ( 0.7 )     1.4   Effective tax rate     17.1 %     14.9 %     19.0 %     14.7 %   Current state income tax expense represents tax owed to the states of Kentucky and Indiana. Ohio state bank taxes are currently based on capital levels and are recorded as other non-interest expense.   The state of Kentucky passed legislation in 2019 that required financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021 and allows entities filing a combined Kentucky income tax return to share certain tax attributes, including net operating loss carryforwards.    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, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of June 30, 2021 and December 31, 2020, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal and state income tax returns are subject to examination for the years after 2016.   42 Table of Contents     ( 8 ) Deposits   The composition of deposits follows:   (in thousands)   June 30, 2021     December 31, 2020                     Non-interest bearing demand deposits   $ 1,743,953     $ 1,187,057   Interest bearing deposits:                 Interest bearing demand     1,667,562       1,355,985   Savings     397,874       208,774   Money market     970,590       844,414                     Time deposits of $250 thousand or more     91,203       73,065   Other time deposits(1)     388,924       319,339   Total time deposits     480,127       392,404   Total interest bearing deposits     3,516,153       2,801,577   Total deposits   $ 5,260,106     $ 3,988,634     ( 1 ) Includes $ 49 million and $ 25 million in brokered deposits as of June 30, 2021 and December 31, 2020, respectively.   Deposits totaling $ 1.0 billion were acquired in relation to the KB acquisition.     ( 9 ) 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 June 30, 2021 and December 31, 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)   June 30, 2021     December 31, 2020   Outstanding balance at end of period   $ 63,942     $ 47,979   Weighted average interest rate at end of period     0.06 %     0.05 %       Three months ended     Six months ended       June 30,     June 30,   (dollars in thousands)   2021     2020     2021     2020                                     Average outstanding balance during the period   $ 55,673     $ 41,517     $ 51,330     $ 37,465   Average interest rate during the period     0.04 %     0.08 %     0.04 %     0.13 % Maximum outstanding at any month end during the period   $ 63,942     $ 42,722     $ 63,942     $ 42,722     SSUAR totaling $ 11 million were acquired in relation to the KB acquisition.   43 Table of Contents     ( 10 ) FHLB Advances   Bancorp had one advance totaling $ 10 million outstanding as of June 30, 2021, as compared with 37 separate advances totaling $ 32 million as of December 31, 2020. Interest payments are due monthly with principal due at maturity for the lone advance outstanding at June 30, 2021.   Bancorp chose to pay off all outstanding advances during the second quarter with the exception of the $ 10 million advance noted above, which is associated with a cash flow-related interest rate swap that matures in December 2021. The advances paid off during the second quarter had an average weighted cost of 2.03 % prior to their maturity and an early-termination fee of $ 474,000 was incurred as a result of the payoffs. Bancorp made this decision due to its excess liquidity driven by the substantial deposit growth it achieved during 2020 and the first half of 2021 combined with the near-term outlook for low interest rates. Bancorp believes it will substantially “earn back” the early termination penalty through lower interest expense over the next two years.   FHLB advances totaling $ 91 million were acquired in relation to the KB acquisition, all of which were paid off immediately upon acquisition.   The following is a summary of the contractual maturities and average effective rates of outstanding advances:   (dollars in thousands)   As of June 30, 2021     As of December 31, 2020   Maturity           Weighted average             Weighted average   Year   Advance     Fixed Rate     Advance     Fixed Rate   2021   $ 10,000       0.21     $ 12,148       0.68   2022     —       —       —       —   2023     —       —       268       1.00   2024     —       —       1,389       2.36   2025     —       —       2,827       2.43   2026     —       —       5,401       1.96   2027     —       —       5,323       1.73   2028     —       —       4,283       2.27                                     Total   $ 10,000       0.21 %   $ 31,639       1.52 %   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 June 30, 2021 and December 31, 2020, the amount of available credit from the FHLB totaled $ 875 million and $ 804 million, respectively.   Bancorp also had $ 80 million in FFP lines available from correspondent banks at both June 30, 2021 and December 31, 2020, respectively.   44 Table of Contents     ( 11 ) Commitments and Contingent Liabilities   As of June 30, 2021 and December 31, 2020, 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)   June 30, 2021     December 31, 2020   Commercial and industrial   $ 634,241     $ 555,077   Construction and development     285,376       266,550   Home equity     231,289       175,132   Credit cards     39,200       32,321   Overdrafts     32,817       33,564   Letters of credit     29,032       24,425   Other     99,784       54,385   Future loan commitments     277,009       249,318   Total off balance sheet commitments to extend credit   $ 1,628,748     $ 1,390,772     Commitments to extend credit are agreements to lend to customers either as unsecured or, in the case of secured, as long as collateral is available as agreed upon and there is no violation of any condition established in the contracts. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not 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 June 30, 2021 and December 31, 2020, Bancorp had accrued $ 4.8 million and $ 5.4 million, respectively, in other liabilities for its estimate of credit losses on off balance sheet credit exposures. A net benefit of $ 825,000 was recorded for the provision for off balance sheet credit exposures for the six months ended June 30, 2021, as compared to net expense of $ 1.9 million for the same period of 2020. The reduction in the ACL for off balance sheet credit exposures between December 31, 2020 and June 30, 2021 is attributed to nearly all loan segments experiencing a decrease in their reserve loss percentages consistent with generally improving model factors, particularly unemployment forecasts.   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 June 30, 2021, Bancorp would have been required to make payments of approximately $ 2.7 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.   On April 9, 2021, a lawsuit was filed by a purported shareholder of Kentucky Bancshares, Inc. (“KBI”) in the Circuit Court of Bourbon County, Kentucky challenging our proposed merger with KBI.  The complaint, captioned Paul Parshall v. Kentucky Bancshares, Inc. et al. (Case No. 21 -CI- 00109 ), named as defendants KBI, the KBI board of directors, Stock Yards Bancorp, Inc. and H. Meyer Merger Subsidiary, Inc., a wholly-owned subsidiary of Stock Yards Bancorp (“Merger Sub”).  The complaint alleged, among other things, that the individual defendants breached their fiduciary duties as directors of KBI in connection with their consideration and approval of the proposed merger transaction and caused materially misleading and incomplete information regarding the proposed transaction to be disseminated to the KBI shareholders in violation of their fiduciary duty of disclosure.  The complaint further asserted that KBI, Stock Yards Bancorp and Merger Sub aided and abetted the alleged breaches of fiduciary duty by the directors of KBI in connection with the proposed transaction. The complaint sought, among other relief, preliminary and permanent injunctions to prevent the defendants from proceeding with, consummating or closing the proposed transaction unless and until KBI provided all material information to KBI shareholders to allow them to make a fully informed voting or appraisal decision with respect to the proposed transaction and adopted and implemented a procedure or process to obtain a merger agreement providing the best available terms for the KBI shareholders. Stock Yards Bancorp, KBI and the KBI board of directors believed the claims asserted in the lawsuit were without merit. On April 28, 2021, Stock Yards Bancorp and Merger Sub, with the consent of the other defendants, filed a Notice of Removal with the U.S. District Court for the Eastern District of Kentucky, Central Division, to remove the case from Bourbon Circuit Court to the U.S. District Court (Case No. 5:21 -CV- 00108 -REW) for all further proceedings.  On May 25, 2021, the plaintiff filed a Notice of Voluntary Dismissal with the U.S. District Court notifying the Court and the defendants that he was voluntarily dismissing the claims in this action without prejudice. The Court subsequently entered an order giving effect to the plaintiff’s voluntary dismissal and directing that the matter be struck from the Court’s docket, as dismissed.   45 Table of Contents   On April 30, 2021, a lawsuit was filed by a purported shareholder of KBI in the U.S. District Court for the Southern District of New York challenging our proposed merger with KBI.  The complaint, captioned Alex Ciccotelli v. Kentucky Bancshares, Inc. et al. (Case No. 1:21 -CV- 03865 -LAP), named as defendants KBI, the KBI board of directors, Stock Yards Bancorp and Merger Sub.  The complaint alleged, among other things, that the individual defendants violated Section 14 (a) of the Securities Exchange Act of 1934 (the “1934 Act”) and Rule 14a - 9 promulgated thereunder by disseminating a proxy statement/prospectus to the shareholders of KBI in connection with the proposed transaction that contained material misstatements and omissions and that KBI was liable as the issuer of those statements.  The complaint further asserted that the individual defendants and Stock Yards Bancorp were liable for the alleged misstatements and omissions in the proxy statement/prospectus by virtue of their actions as controlling persons of KBI within the meaning of Section 20 (a) of the 1934 Act.  The complaint sought, among other relief, preliminary and permanent injunctions to prevent the defendants from proceeding with, consummating or closing the proposed transaction, an order directing the individual defendants to disseminate a proxy statement/prospectus that does not contain any material misstatements or omissions and, in the event defendants consummate the proposed transaction, an award of rescissionary damages.  Stock Yards Bancorp, KBI and the KBI board of directors believed the claims asserted in the lawsuit were without merit. On August 2, 2021, the plaintiff voluntarily dismissed the lawsuit.   As of June 30, 2021, in the normal course of business, there were other 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.   46 Table of Contents     ( 12 ) 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 Annual Report on Form 10 -K for the year ended December 31, 2020.   Carrying values of assets measured at fair value on a recurring basis follows:       Fair Value Measurements Using:     Total   June 30, 2021 (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   $ 9,077     $ —     $ —     $ 9,077   Government sponsored enterprise obligations     —       154,980       —       154,980   Mortgage backed securities - government agencies     —       786,711       —       786,711   Obligations of states and political subdivisions     —       55,133       —       55,133   Other     —       1,007       —       1,007                                     Total available for sale debt securities     9,077       997,831       —       1,006,908                                     Interest rate swaps     —       5,668       —       5,668                                     Total assets   $ 9,077     $ 1,003,499     $ —     $ 1,012,576                                     Liabilities:                                 Interest rate swaps   $ —     $ 5,760     $ —     $ 5,760         Fair Value Measurements Using:     Total   December 31, 2020 (in thousands)   Level 1     Level 2     Level 3     Fair Value   Assets:                                 Available for sale debt securities:                                 Government sponsored enterprise obligations   $ —     $ 138,078     $ —     $ 138,078   Mortgage backed securities - government agencies     —       437,585       —       437,585   Obligations of states and political subdivisions     —       11,315       —       11,315                                     Total available for sale debt securities     —       586,978       —       586,978                                     Interest rate swaps     —       8,374       —       8,374                                     Total assets   $ —     $ 595,352     $ —     $ 595,352                                     Liabilities:                                 Interest rate swaps   $ —     $ 8,391     $ —     $ 8,391     There were no transfers into or out of Level 3 of the fair value hierarchy during 2021 or 2020.     47 Table of Contents   Discussion of assets measured at fair value on a non-recurring basis follows:   MSRs – On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At June 30, 2021 and December 31, 2020, there was no valuation allowance for MSRs, as the fair value exceeded the cost. Accordingly, the MSRs are not included in the following tabular disclosure for June 30, 2021 and December 31, 2020.   Collateral dependent loans – 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 estimated 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. 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 or knowledge of the client and client’s business.   OREO – 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 appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the 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.   Carrying values of assets measured at fair value on a non-recurring basis follows:                                       Losses recorded                                       Three months     Six months       Fair Value Measurements Using:     Total     ended     ended   June 30, 2021 (in thousands)   Level 1     Level 2     Level 3     Fair Value     June 30, 2021     June 30, 2021                                                     Collateral dependent loans   $ —     $ —     $ 12,416     $ 12,416     $ —     $ —   Other real estate owned     —       —       648       648       —       —                                         Losses recorded                                       Three months     Six months       Fair Value Measurements Using:     Total     ended     ended   December 31, 2020 (in thousands)   Level 1     Level 2     Level 3     Fair Value     June 30, 2020     June 30, 2020                                                     Impaired loans   $ —     $ —     $ 7,546     $ 7,546     $ —     $ —   Other real estate owned     —       —       281       281       —       —     There were no liabilities measured at fair value on a non-recurring basis at June 30, 2021 and December  31, 2020.   48 Table of Contents   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.       June 30, 2021   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 12,416   Appraisal   Appraisal discounts     27.1 % Other real estate owned     648   Appraisal   Appraisal discounts     40.8         December 31, 2020   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Impaired loans - collateral dependent   $ 7,546   Appraisal   Appraisal discounts     10.7 % Other real estate owned     281   Appraisal   Appraisal discounts     36.0     49 Table of Contents     ( 13 ) Disclosure of Financial Instruments Not Reported at Fair Value   GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. 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:   June 30, 2021   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 540,193     $ 540,193     $ 540,193     $ —     $ —   Mortgage loans held for sale     5,420       5,562       —       5,562       —   Federal Home Loan Bank stock     14,475       14,475       —       14,475       —   Loans, net     4,146,968       4,177,080       —       —       4,177,080   Accrued interest receivable     15,262       15,262       15,262       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,743,953     $ 1,743,953     $ 1,743,953     $ —     $ —   Transaction deposits     3,036,026       3,036,026       —       3,036,026       —   Time deposits     480,127       482,304       —       482,304       —   Securities sold under agreement to repurchase     63,942       63,942       —       63,942       —   Federal funds purchased     10,947       10,947       —       10,947       —   Federal Home Loan Bank advances     10,000       10,087       —       10,087       —   Accrued interest payable     630       630       630       —       —     (in thousands)   Carrying             Fair Value Measurements Using:   December 31, 2020   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 317,945     $ 317,945     $ 317,945     $ —     $ —   Mortgage loans held for sale     22,547       23,389       —       23,389       —   Federal Home Loan Bank stock     11,284       11,284       —       11,284       —   Loans, net     3,479,676       3,513,916       —       —       3,513,916   Accrued interest receivable     13,094       13,094       13,094       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,187,057     $ 1,187,057     $ 1,187,057     $ —     $ —   Transaction deposits     2,409,173       2,409,173       —       2,409,173       —   Time deposits     392,404       395,734       —       395,734       —   Securities sold under agreement to repurchase     47,979       47,979       —       47,979       —   Federal funds purchased     11,464       11,464       —       11,464       —   Federal Home Loan Bank advances     31,639       33,180       —       33,180       —   Accrued interest payable     391       391       391       —       —     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.   50 Table of Contents     ( 14 ) 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 June 30, 2021                                 Balance, March 31, 2021   $ ( 2,513 )   $ ( 90 )   $ ( 447 )   $ ( 3,050 ) Net current period other comprehensive income     4,808       32       —       4,840   Balance, June 30, 2021   $ 2,295     $ ( 58 )   $ ( 447 )   $ 1,790                                     Three months ended June 30, 2020                                 Balance, March 31, 2020   $ 7,123     $ ( 302 )   $ ( 369 )   $ 6,452   Net current period other comprehensive income     2,343       21       —       2,364   Balance, June 30, 2020   $ 9,466     $ ( 281 )   $ ( 369 )   $ 8,816         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   Six months ended June 30, 2021                                 Balance, January 1, 2021   $ 9,310     $ ( 122 )   $ ( 447 )   $ 8,741   Net current period other comprehensive income (loss)     ( 7,015 )     64       —       ( 6,951 ) Balance, June 30, 2021   $ 2,295     $ ( 58 )   $ ( 447 )   $ 1,790                                     Six months ended June 30, 2020                                 Balance, January 1, 2020   $ 1,085     $ ( 39 )   $ ( 369 )   $ 677   Net current period other comprehensive income (loss)     8,381       ( 242 )     —       8,139   Balance, June 30, 2020   $ 9,466     $ ( 281 )   $ ( 369 )   $ 8,816     51 Table of Contents     ( 15 ) 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.     ( 16 ) 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     Six months ended       June 30,     June 30,   (in thousands, except per share data)   2021     2020     2021     2020   Net income   $ 4,184     $ 13,368     $ 26,894     $ 26,600                                     Weighted average shares outstanding - basic     24,140       22,560       23,489       22,538   Dilutive securities     239       179       242       199   Weighted average shares outstanding- diluted     24,379       22,739       23,731       22,737                                     Net income per share - basic   $ 0.17     $ 0.59     $ 1.14     $ 1.18   Net income per share - diluted     0.17       0.59       1.13       1.17     Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:       Three months ended     Six months ended   (shares in thousands)   June 30,     June 30,       2021     2020     2021     2020   Antidilutive SARs     29       248       29       248     52 Table of Contents     ( 17 ) 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 June 30, 2021, there were 356,000 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   2021     2020   Dividend yield     2.52 %     2.51 % Expected volatility     25.21 %     20.87 % Risk free interest rate     1.23 %     1.25 % Expected life (in years)     7.1       7.1     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 6.1 % and 4.4 % for 2021 and 2020.   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 2021 and 2020, Bancorp awarded 7,758 and 6,570 RSUs to non-employee directors of Bancorp with a grant date fair value of $ 315,000 and $ 270,000 , respectively.   Bancorp utilized cash of $ 208,000 and $ 224,000 during the first six months of 2021 and 2020, respectively, for the purchase of shares upon the vesting of RSUs.   53 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 June 30, 2021   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 86     $ 337     $ 78     $ 913     $ 1,414   Deferred tax benefit     ( 18 )     ( 71 )     ( 16 )     ( 192 )     ( 297 ) Total net expense   $ 68     $ 266     $ 62     $ 721     $ 1,117         Three months ended June 30, 2020   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 87     $ 317     $ 67     $ 505     $ 976   Deferred tax benefit     ( 18 )     ( 67 )     ( 14 )     ( 106 )     ( 205 ) Total net expense   $ 69     $ 250     $ 53     $ 399     $ 771           Six months ended June 30, 2021   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 175     $ 666     $ 154     $ 1,268     $ 2,263   Deferred tax benefit     ( 37 )     ( 140 )     ( 32 )     ( 267 )     ( 476 ) Total net expense   $ 138     $ 526     $ 122     $ 1,001     $ 1,787         Six months ended June 30, 2020   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 177     $ 643     $ 135     $ 838     $ 1,793   Deferred tax benefit     ( 37 )     ( 135 )     ( 28 )     ( 177 )     ( 377 ) Total net expense   $ 140     $ 508     $ 107     $ 661     $ 1,416     Detail of unrecognized stock-based compensation expense follows:       Stock                                   (in thousands)   Appreciation     Restricted     Restricted     Performance           Year ended   Rights     Stock Awards     Stock Units     Stock Units     Total                                             Remainder of 2021   $ 175     $ 651     $ 158     $ 1,292     $ 2,276   2022     305       1,106       3       1,453       2,867   2023     230       894       —       711       1,835   2024     124       645       —       —       769   2025     65       385       —       —       450   2026     9       35       —       —       44   Total estimated expense   $ 908     $ 3,716     $ 161     $ 3,456     $ 8,241     54 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, 2020     641     $ 14.02 - $ 40     $ 25.06     $ 10,250     $ 4.10       5.3   Granted     48     37.30 - 37.30       37.30       154       5.80           Exercised     ( 96 )   14.02 - 25.76       16.33       2,401       2.88           Forfeited     —       —         —       —       —           Outstanding, December 31, 2020     593     $ 15.24 - $ 40     $ 27.47     $ 7,706     $ 4.44       5.1                                                       Outstanding, January 1, 2021     593     $ 15.24 - $ 40     $ 27.47     $ 7,706     $ 4.44       5.1   Granted     28     50.71 - 50.71       50.71       5       9.75           Exercised     ( 76 )   15.24 - 15.84       15.31       2,815       2.58           Forfeited     —       —         —       —       —           Outstanding, June 30, 2021     545     $ 15.24 - $ 50.71     $ 30.40     $ 11,165     $ 4.98       5.4                                                       Vested and exercisable     388     $ 15.24 - $ 40     $ 26.48     $ 9,475     $ 4.30       4.4   Unvested     157     33.08 - 50.71       40.11       1,690       6.68       8.0   Outstanding, June 30, 2021     545     $ 15.24 - $ 50.71     $ 30.40     $ 11,165     $ 4.98       5.4                                                       Vested in the current year     53     $ 25.76 - $ 40     $ 33.98     $ 899     $ 5.43             ( 1 ) – Aggregate intrinsic 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:               Grant date               weighted   (in thousands, except per share data)   RSAs     average cost                     Unvested at January 1, 2020     108     $ 34.31   Shares awarded     36       39.30   Restrictions lapsed and shares released     ( 41 )     32.38   Shares forfeited     ( 4 )     36.63   Unvested at December 31, 2020     99     $ 36.85                     Unvested at January 1, 2021     99     $ 36.85   Shares awarded     39       46.90   Restrictions lapsed and shares released     ( 33 )     35.45   Shares forfeited     ( 2 )     40.98   Unvested at June 30, 2021     103     $ 41.02     55 Table of Contents   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   2019     3     $ 32.03       62,291   2020     3       32.27       65,111   2021     3       44.44       47,280       ( 18 ) 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       June 30,     December 31,     June 30,     December 31,   (dollars in thousands)   2021     2020     2021     2020                                     Notional amount   $ 139,753     $ 119,940     $ 139,753     $ 119,940   Weighted average maturity (years)     7.4       7.8       7.4       7.8   Fair value   $ 5,668     $ 8,374     $ 5,683     $ 8,391     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 AOCI, 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 Bancorp’s derivative position designated as a cash flow hedge, and the related fair value:   (dollars in thousands)                                               Fair value   Notional   Maturity   Receive (variable)   Pay fixed     assets (liabilities)   amount   date   index   swap rate     June 30, 2021     December 31, 2020   $ 10,000   December 6, 2021   Three Month LIBOR     1.89 %   $ ( 77 )   $ ( 160 )   56 Table of Contents     ( 19 ) 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, the Holding Company 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. To meet the definition of well-capitalized, a bank must have a minimum 6.5 % Common Equity Tier 1 Risk-Based Capital ratio, 8.0 % Tier 1 Risk-Based Capital ratio, 10.0 % Total Risk-Based Capital ratio and 5.0 % Tier 1 Leverage ratio.   Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5 % capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At June 30, 2020, the adequately-capitalized minimums, including the capital conservation buffer, were a 6.0 % Common Equity Tier 1 Risk-Based Capital ratio, 8.5 % Tier 1 Risk-Based Capital ratio and 10.5 % Total Risk-Based Capital ratio. The capital conservation buffer was phased in starting in 2016 at 0.625 % and was fully implemented at 2.5 % effective January 1, 2019.   Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.   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   June 30, 2021   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 568,393       12.80 %   $ 355,196       8.00 %   NA     NA   Bank     551,391       12.46       354,061       8.00     $ 442,576       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     523,433       11.79       199,798       4.50     NA     NA   Bank     506,431       11.44       199,159       4.50       287,674       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     523,433       11.79       266,397       6.00     NA     NA   Bank     506,431       11.44       265,545       6.00       354,061       8.00                                                     Leverage (2)                                                 Consolidated     523,433       10.26       204,011       4.00     NA     NA   Bank     506,431       9.95       203,510       4.00       254,388       5.00     57 Table of Contents   (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   December 31, 2020   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 470,648       13.36 %   $ 281,887       8.00 %   NA     NA   Bank     456,302       12.99       281,106       8.00     $ 351,383       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     430,886       12.23       158,556       4.50     NA     NA   Bank     416,540       11.85       158,122       4.50       228,399       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     430,886       12.23       211,407       6.00     NA     NA   Bank     416,540       11.85       210,830       6.00       281,106       8.00                                                     Leverage (2)                                                 Consolidated     430,886       9.57       180,123       4.00     NA     NA   Bank     416,540       9.26       179,845       4.00       224,807       5.00     ( 1 )     Ratio is computed in relation to risk-weighted assets. ( 2 )     Ratio is computed in relation to average assets. NA – Not Applicable   58 Table of Contents     ( 20 ) 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 investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   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 $ 136.5 million, of which $ 682,000 relates to a bank acquisition in 1996, $ 11.8 million relates to the 2019 KSB acquisition and $ 124.0 million relates to the KB 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 June 30, 2021     Three months ended June 30, 2020                                                         Commercial                 Commercial               (in thousands)   Banking     WM&T     Total     Banking     WM&T     Total                                                     Net interest income   $ 41,516     $ 68     $ 41,584     $ 33,443     $ 85     $ 33,528   Provision for credit losses     4,147       —       4,147       7,025       —       7,025   Wealth management and trust services     —       6,858       6,858       —       5,726       5,726   All other non-interest income     8,930       —       8,930       6,896       —       6,896   Non-interest expenses     44,481       3,696       48,177       20,288       3,121       23,409   Income before income tax expense     1,818       3,230       5,048       13,026       2,690       15,716   Income tax expense     190       674       864       1,764       584       2,348   Net income   $ 1,628     $ 2,556     $ 4,184     $ 11,262     $ 2,106     $ 13,368                                                     Segment assets   $ 6,084,185     $ 3,887     $ 6,088,072     $ 4,330,893     $ 3,640     $ 4,334,533         Six months ended June 30, 2021     Six months ended June 30, 2020                                                         Commercial                 Commercial               (in thousands)   Banking     WM&T     Total     Banking     WM&T     Total                                                     Net interest income   $ 79,258     $ 151     $ 79,409     $ 65,804     $ 170     $ 65,974   Provision for credit losses     2,672       —       2,672       12,950       —       12,950   Wealth management and trust services     —       13,106       13,106       —       11,944       11,944   All other non-interest income     16,526       —       16,526       13,214       —       13,214   Non-interest expenses     66,177       6,973       73,150       40,551       6,433       46,984   Income before income tax expense     26,935       6,284       33,219       25,517       5,681       31,198   Income tax expense     4,988       1,337       6,325       3,365       1,233       4,598   Net income   $ 21,947     $ 4,947     $ 26,894     $ 22,152     $ 4,448     $ 26,600                                                     Segment assets   $ 6,084,185     $ 3,887     $ 6,088,072     $ 4,330,893     $ 3,640     $ 4,334,533     59 Table of Contents     ( 21 ) 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 June 30, 2021     Three months ended June 30, 2020                                                         Commercial                                 (in thousands)   Banking     WM&T     Total     Commercial     WM&T     Total   Wealth management and trust services   $ —     $ 6,858     $ 6,858     $ —     $ 5,726     $ 5,726   Deposit service charges     1,233       —       1,233       800       —       800   Debit and credit card income     3,284       —       3,284       2,063       —       2,063   Treasury management fees     1,730       —       1,730       1,249       —       1,249   Mortgage banking income(1)     1,303       —       1,303       1,622       —       1,622   Net investment product sales commissions and fees     545       —       545       391       —       391   Bank owned life insurance(1)     206       —       206       176       —       176   Other(2)     629       —       629       595       —       595   Total non-interest income   $ 8,930     $ 6,858     $ 15,788     $ 6,896     $ 5,726     $ 12,622         Six months ended June 30, 2021     Six months ended June 30, 2020                                                         Commercial                                 (Dollars in thousands)   Banking     WM&T     Total     Commercial     WM&T     Total   Wealth management and trust services   $ —     $ 13,106     $ 13,106     $ —     $ 11,944     $ 11,944   Deposit service charges     2,177       —       2,177       2,083       —       2,083   Debit and credit card income     5,557       —       5,557       4,043       —       4,043   Treasury management fees     3,270       —       3,270       2,533       —       2,533   Mortgage banking income(1)     2,747       —       2,747       2,468       —       2,468   Net investment product sales commissions and fees     1,009       —       1,009       857       —       857   Bank owned life insurance(1)     367       —       367       355       —       355   Other(2)     1,399       —       1,399       875       —       875   Total non-interest income   $ 16,526     $ 13,106     $ 29,632     $ 13,214     $ 11,944     $ 25,158     ( 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 and stop payments 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 customers do not permit performance-based fees and accordingly, none of the fee income earned by WM&T is performance-based. Trust fees receivable were $ 2.6 million and $ 2.2 million at June 30, 2021 and December 31, 2020, respectively.   60 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 $ 289,000 and $ 283,000 for the six month periods ended June 30, 2021 and 2020.   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 first three months of 2021.   61 Table of Contents     ( 22 ) Leases   Bancorp has operating leases for various branch locations with terms ranging from two months to 19 years, some of which include options to extend the leases in five -year increments. A total of seven operating leases were added as a result of the KB acquisition. 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:   (dollars in thousands)   June 30, 2021     December 31, 2020                     Balance Sheet                 Operating lease right-of-use asset   $ 15,937     $ 12,100   Operating lease liability     17,462       13,476                     Weighted average remaining lease term (years)     9.7       8.6   Weighted average discount rate     3.02 %     3.37 %                   Maturities of lease liabilities:                 One year or less   $ 1,307     $ 2,087   Year two     2,634       2,107   Year three     2,673       2,141   Year four     2,408       1,899   Year five     1,924       1,469   Greater than five years     9,308       5,882   Total lease payments   $ 20,254     $ 15,585   Less imputed interest     2,792       2,109   Total   $ 17,462     $ 13,476         Three months ended     Three months ended   (in thousands)   June 30, 2021     June 30, 2020   Income Statement                 Components of lease expense:                 Operating lease cost   $ 520     $ 473   Variable lease cost     62       45   Less sublease income     13       25   Total lease cost   $ 569     $ 493         Six months ended     Six months ended   (in thousands)   June 30, 2021     June 30, 2020   Income Statement                 Components of lease expense:                 Operating lease cost   $ 1,007     $ 943   Variable lease cost     113       87   Less sublease income     27       38   Total lease cost   $ 1,093     $ 992         Six months ended     Six months ended   (in thousands)   June 30, 2021     June 30, 2020   Cash flow Statement                 Supplemental cash flow information:                 Operating cash flows from operating leases   $ 1,190     $ 1,104     As of June 30, 2021, Bancorp had not entered into any lease agreements that had yet to commence.   62 Table of Contents     ( 23 ) Subsequent Event   Effective August 3, 2021, Bancorp executed a definitive Agreement and Plan of Merger (“agreement”), pursuant to which Bancorp will acquire all of the outstanding common stock of privately-owned Commonwealth Bancshares, Inc. Commonwealth Bancshares, Inc., headquartered in Louisville, Kentucky, is the holding company for Commonwealth Bank & Trust Company (collectively referred to as “Commonwealth”), which operates 16 retail branches, including 10 in Jefferson County, four in Shelby counties and two in Northern Kentucky.   Under the terms of the Agreement, the Company will acquire all outstanding common stock in a combined stock and cash transaction, resulting in total consideration to Commonwealth’s shareholders of approximately $ 153 million. Bancorp will fund the cash payment portion of the acquisition through existing resources on-hand.   The acquisition is expected to close during the fourth quarter of 2021, subject to customary regulatory approval and completion of customary closing conditions.  As of June 30, 2021, Commonwealth reported approximately $ 1.3 billion in assets, $ 733 million in loans, $ 1.1 billion in deposits and $ 86 million in tangible common equity. Commonwealth also maintains a Wealth Management and Trust Department with total assets under management of $ 2.6 billion at June 30, 2021. The combined franchise will serve customers through 78  branches with total assets of approximately $ 7.4 billion, $ 4.9 billion in gross loans, $ 6.4 billion in deposits and over $ 7.0 billion in trust assets under management.    63 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 subsidiaries, SYB and the Captive, collectively referred to as “Bancorp” or the “Company.” All significant inter-company transactions and accounts have been eliminated in consolidation. Bancorp is a FHC headquartered in Louisville, Kentucky. Established in 1904, SYB is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets through 63 full-service banking center locations. The captive is a Nevada-based, wholly-owned insurance subsidiary of the Company, which was retained in conjunction with the KB acquisition and will provide insurance coverage not currently provided by Bancorp’s commercial policies to Bancorp and SYB as well as a group of third-party insurance captives upon renewal of related policies during the third quarter of 2021.   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, 2020. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp’s future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.   Cautionary Statement Regarding Forward-Looking Statements   This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 2 “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. ”   Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “aim,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable 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, MSRs, other intangible assets or DTAs;   ● ability to effectively navigate an economic slowdown or other economic or market disruptions;   ● changes in laws and regulations or the interpretation thereof;   ● changes in fiscal, monetary, and/or regulatory policies;   ● changes in tax polices including but not limited to changes in federal and state statutory rates;   ● behavior of securities and capital markets, including changes in market volatility and liquidity;   ● ability to effectively manage capital and liquidity;   64 Table of Contents     ● long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;   ● the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;   ● competitive product and pricing pressures;   ● projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;   ● descriptions of plans or objectives for future operations, products, or services;   ● integration of acquired financial institutions;   ● 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 I Item 1A “ Risk Factors ”   of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2020.   Bancorp executed a definitive Agreement and Plan of Merger (“agreement”), dated as of August 3, 2021, to acquire Commonwealth Bancshares, Inc. and its subsidiary Commonwealth Bank & Trust Company (collectively referred to as “Commonwealth”). This document also contains statements regarding the proposed acquisition transaction that are not statements of historical fact and are considered forward-looking statements within the criteria described above. These statements are likewise subject to various risks and uncertainties that may cause actual results and outcomes of the proposed transaction to differ, possibly materially, from the anticipated results or outcomes expressed or implied in these forward-looking statements. In addition to factors disclosed in reports filed by Bancorp with the SEC, risks and uncertainties for Bancorp, Commonwealth and the combined company include, but are not limited to: the possibility that some or all of the anticipated benefits of the proposed merger will not be realized or will not be realized within the expected time period; the risk that integration of Commonwealth’s operations with those of Bancorp will be materially delayed or will be more costly or difficult than expected; the parties’ inability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger; the inability to complete the merger due to the failure of Commonwealth’s shareholders to adopt the merger agreement; the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory and other approvals; the failure of the proposed transaction to close for any other reason; diversion of management's attention from ongoing business operations and opportunities due to the merger; the challenges of integrating and retaining key employees; the effect of the announcement of the merger on Bancorp’s, Commonwealth’s or the combined company’s respective customer and employee relationships and operating results; the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; dilution caused by Bancorp’s issuance of additional shares of common stock in connection with the merger; the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and the business, results of operations and financial condition of Bancorp, Commonwealth and the combined company; and general competitive, economic, political and market conditions and fluctuations.   65 Table of Contents   Acquisition of Kentucky Banchares, Inc.   On May 31, 2021, Bancorp completed its acquisition of Kentucky Bancshares, Inc. and its wholly owned subsidiary, Kentucky Bank, collectively defined as “KB,” a commercial bank and trust company operating 19 branches throughout central and eastern Kentucky with approximately $1.3 billion in assets, $755 million in loans, $396 million in AFS debt securities and $1.0 billion in deposits at the time of acquisition. Kentucky Bancshares, Inc. was also the holding company for an insurance captive, which Bancorp acquired and retained. Bancorp acquired all outstanding common stock of Kentucky Bancshares, Inc. in a combined stock and cash transaction that resulted in total consideration paid to Kentucky Bancshares, Inc. shareholders of $233 million.   As a result of the completion of the acquisition, Bancorp recorded goodwill of $124 million and incurred pre-tax merger related expenses totaling $18.1 million and $18.5 million for the three and six months ended June 30, 2021, respectively. Net income from the Kentucky Bancshares, Inc. acquisition is expected to be accretive to Bancorp’s overall operating results beginning in 2022.   The acquisition of KB had a significant impact on the ACL and loan loss provisioning for the quarter ending June 30, 2021. The ACL on loans was also increased $6.8 million as a result of the PCD loan portfolio added as a result of the acquisition, with the corresponding offset recorded to goodwill (as opposed to provision expense). In addition, credit loss expense on loans associated with the acquired non-PCD loan portfolio totaled $7.4 million for both the three and six month periods ended June 30, 2021. In total, acquisition-related activity served to increase the ACL $14.2 million during the second quarter.   Pending Acquisition of Commonwealth Banchsares, Inc. and its Subsidiary Commonwealth Bank & Trust Company   Effective August 3, 2021, Bancorp executed a definitive Agreement and Plan of Merger (“agreement”),  pursuant to which Bancorp will acquire all of the outstanding common stock of privately-owned Commonwealth Bancshares, Inc. (“Commonwealth”). Commonwealth Bancshares Inc., headquartered in Louisville, Kentucky, is the holding company for Commonwealth Bank & Trust Company (collectively referred to as “Commonwealth”), which operates 16 retail branches, including 10 in Jefferson County, four in Shelby County and two in northern Kentucky.   Under the terms of the Agreement, the Company will acquire all outstanding common stock in a combined stock and cash transaction, resulting in total consideration to Commonwealth’s shareholders of approximately $151 million. Bancorp will fund the cash payment portion of the acquisition through existing resources on-hand.   The acquisition is expected to close during the fourth quarter of 2021, subject to customary regulatory approval and completion of customary closing conditions.  As of June 30, 2021, Commonwealth reported approximately $1.3 billion in assets, $733 million in loans, $1.1 billion in deposits and $86 million in tangible common equity. Commonwealth also maintains a Wealth Management and Trust Department with total assets under management of $2.6 billion at June 30, 2021. The combined franchise will serve customers through 78 branches with total assets of approximately $7.4 billion, $4.9 billion in gross loans, $6.4 billion in deposits and over $7.0 billion in trust assets under management.    Issued but Not Yet Effective Accounting Standards Updates   For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the footnote titled “ Summary of Significant Accounting Policies ” of Part I Item 1 “ Financial Statements .”   66 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 investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Overview – 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 both the virus and the related economic fallout have had a complex and significant impact on the economy, the banking industry and Bancorp. While the distribution of vaccinations, continued easing of restrictions on public commerce and business activities, and stabilizing unemployment levels have been positive developments in recent months, the impact of the pandemic upon Bancorp, the Bank and its customers remains uncertain.   Bancorp’s financial condition and results of operations for the three and six months ended June 30, 2021 have been significantly impacted by the following pandemic-related factors, among others:     ● The sustained low interest rate environment and related NIM compression   ● Significant participation in the SBA’s PPP   ● Federal stimulus action for individuals, including stimulus checks and enhanced unemployment benefits, among many other factors   ● Overall excess balance sheet liquidity   ● The FRB’s Seasonally Adjusted National Civilian Unemployment Rate forecast and the resulting impact to the ACL on loans and off balance sheet credit exposures   The FRB’s decision to lower the FFTR 150 bps in March of 2020 in response to the pandemic lowered the FFTR to a range of 0%-0.25% and Prime to 3.25%, where both remained as of June 30, 2021. Consistent with the rate drops, key benchmark rates, such as the five-year treasury rate and one-month LIBOR, declined dramatically and generally remained low through the first and second quarters of 2021. While the interest rate environment has improved through the first half of 2021, key rates remain well below pre-pandemic levels.   Bancorp’s participation in the PPP has resulted in approximately 5,500 PPP loan originations totaling $887 million (net of unearned deferred fees and costs) since the program’s inception as part of the CARES Act, which was signed into law in March 2020. While the first round of PPP expired in August 2020, legislative action created a second round of funding for the program and subsequently extended the program to May 31, 2021.   As part of the first round of the PPP, Bancorp originated approximately 3,400 PPP loans totaling $637 million (net of unearned deferred fees and costs). As of June 30, 2021, 82% of the dollars originated in the first round have been forgiven and another 10% are in the process of being forgiven by the SBA. Further, approximately 95% of the $19.6 million in net fees received for this round have been recognized life to date. These borrowers are required to begin making payments in July, which will likely further accelerate forgiveness submissions for the remaining loans in coming months.   As part of the second round of the PPP, Bancorp originated over 2,100 PPP loans totaling $250 million (net of unearned deferred fees and costs). As of June 30, 2021, 3% of the dollars originated in the second round have been forgiven and 11% of the $11.4 million in net fees received for this round have been recognized life to date. As these borrowers are not required to make payments for 16 months, Bancorp expects a significant portion of these borrowers will seek forgiveness in early to mid-2022 in connection with their tax return preparation.   As of June 30, 2021, PPP loans originated by Kentucky Bank and acquired by Bancorp totaled $16 million.   67 Table of Contents   Interest and fee income earned on the PPP portfolio totaled $6.9 million and $13.9 million for the three and six month periods ending June 30, 2021, respectively, representing increases of $3.5 million and $10.5 million over the same periods of the prior year. Forgiveness activity that accelerated the recognition of related fee income drove a $6.6 million, or 18%, and $9.2 million, or 13%, increase in total interest income for the three and six month periods ended June 30, 2021 compared to the same periods of 2020. As of June 30, 2021, Bancorp had $11.6 million of net unearned deferred fees that have yet to be recognized and as a result, PPP loan forgiveness will have a major impact on operating results for the remainder of 2021 and the first part of 2022.   As a result of the PPP originations, forgiveness activity, record deposit levels and historically low interest rates, excess liquidity has created NIM compression, as well as challenges associated with deploying idle cash. Bancorp has made substantial investment in the AFS debt securities portfolio over the past several months in an effort to deploy excess liquidity, however, prepayment activity within the MBS portfolio has made it challenging to grow the portfolio.   The ACL for loans (excluding acquisition related activity) was reduced $3.9 million between December 31, 2020 and June 30, 2021, a stark contrast from the $11.1 million reserve build recorded between December 31, 2019 and June 30, 2020, which were separate and subsequent to the increases recorded effective January 1, 2020 in relation to the initial adoption of CECL. The pandemic had a material impact on ACL calculations in 2020, as provisioning surged amidst changes in forecasted economic conditions, especially the FRB’s Seasonally Adjusted National Civilian Unemployment Rate. After peaking towards the middle of last year, unemployment forecasts have improved, as have other underlying CECL model factors, resulting in the provision reduction recorded during the first and second quarters of 2021.   While separate from the ACL on loans and recorded in other liabilities on the consolidated balance sheets, the ACL on off balance sheet credit exposures also experienced a decrease between December 31, 2020 and June 30, 2021. A net benefit of was recorded as provision for credit losses on off balance sheet exposures during the first half of 2021, as loss factors associated with the calculation similarly improved in recent months despite line of credit utilization, while improving some, remained at low levels. The ACL for off balance sheet credit exposures stood at $4.8 million as of June 30, 2021 compared to $5.4 million as of December 31, 2020.   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 issues 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.   68 Table of Contents   Overview – Operating Results (FTE)   The following table presents an overview of Bancorp’s financial performance for the three months ended June 30, 2021 and 2020:   (dollars in thousands, except per share data)                   Variance   Three months ended June 30 ,   2021     2020     $/bp     %                                     Net income   $ 4,184     $ 13,368     $ (9,184 )     -69 % Diluted earnings per share   $ 0.17     $ 0.59     $ (0.42 )     -71 % ROA     0.32 %     1.25 %   (93) bps       -74 % ROE     3.25 %     12.90 %   (965) bps       -75 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the three months ended June 30, 2021 compared to June 30, 2020:     ● Bancorp completed its acquisition of Kentucky Bancshares, Inc. during the second quarter. At the time of acquisition, KB had approximately $1.3 billion in assets, $755 million in loans, $396 million in AFS debt securities and $1.0 billion in deposits.      ● Net income totaled $4.2 million, resulting in diluted EPS of $0.17 for the three months ended June 30, 2021, a 71% decrease over $0.59 for the same period of 2020. Significant factors affecting the results for the three months ended June 30, 2021 and 2020 include:   o The acquisition of Kentucky Bancshares included $18.1 million in merger expenses and $7.4 million in purchase accounting adjustments (mainly provision expense) for the three months ended June 30, 2021.   o Total provision for credit losses was elevated for both the three months ended June 30, 2021 and 2020, respectively, albeit for different reasons. The adoption of CECL (ASC 326) effective January 1, 2020 and subsequent pandemic-related developments, such as elevated unemployment and historic declines in line of credit utilization amidst the evolving pandemic resulted in a total provision for credit losses of $7.0 million for the three months ended June 30, 2020. While a cumulative net benefit of $3.3 million was recorded for credit losses on loans and off balance sheet credit exposures during the three months ended June 30, 2021 as a result generally improving CECL model factors, including a substantially improved unemployment forecast, a provision of $7.4 million was recorded in relation to the acquisition of Kentucky Bancshares.   o Net interest income increased $8.1 million, or 24%, for the three months ended June 30, 2021 compared to the same period of 2020 as PPP forgiveness activity accelerated fee recognition and strong growth in the non-PPP loan portfolio, both organic and through acquisition, drove a $6.6 million, or 18%, increase in total interest income. Further, a $1.5 million, or 49%, decrease in interest expense was driven by the lowering of deposit rates in tandem with FRB interest rate actions to levels at or below those offered during the Great Recession , where the remained as of June 30 ,2021.   ● NIM increased 9 bps to 3.36% for the three months ended June 30, 2021 compared to 3.27% for the same period in 2020 as a result of elevated PPP income associated with forgiveness activity and lowering deposit rates to levels at or below those offered during the Great Recession, where they remain as of June 30, 2021. Both periods reflected the full effects of the FRB lowering the FFTR to a range of 0%-0.25% and Prime to 3.25% last year, where both respectively remained as of June 30, 2021. The five-year treasury rate and one-month LIBOR tumbled in tandem with these cuts as well, and while the five-year treasury has staged a recovery over the first half of 2021, it remains well below pre-pandemic levels.   ● Total loans (excluding PPP loans) increased $995 million, or 35%, compared to June 30, 2020, $726 million of which was attributed to the acquisition. Average loans (excluding PPP loans) increased $466 million, or 16%, for the three months ended June 30, 2021 compared to the same period in 2020, $232 million of which was attributed to the acquisition. While increases were experienced in most loan segments between June 30, 2020 and June 30, 2021, growth over the period was highlighted by the CRE and Residential Real Estate portfolios.   ● Deposit balances have remained elevated for several quarters and finished at record levels as of June 30, 2021. PPP funding, multiple federal stimulus packages and general economic uncertainty surrounding the pandemic have led to customers holding higher levels of liquidity.   ● Total non-interest income increased $3.2 million, or 25%, for the three month period ended June 30, 2021 compared to the same period of 2020. While the quarter benefitted from one month of activity related to the acquisition, which totaled approximately $1.3 million, record levels were experienced across most non-interest revenue streams, highlighted by growth in WM&T income and increases in card income and Treasury management fees.   69 Table of Contents     ● Non-interest expenses increased $24.8 million, or 106%, for the quarter ended June 30, 2021 compared to the same period of 2020, driven by merger expenses of $18.1 million and one month of activity related to the acquisition, totaling approximately $2.4 million. Further, growth in FTEs, increased technology-related expenses associated with expanded data storage and the hosted core system, as well as an early termination penalty relating to paying off FHLB advances during the quarter also contributed the increase over the three months ended June 30, 2020.   The following table presents an overview of Bancorp’s financial performance for the six months ended June 30, 2021 and 2020:   (dollars in thousands, except per share data)                   Variance   Six months ended June 30 ,   2021     2020     $/bp     %                                     Net income   $ 26,894     $ 26,600     $ 294       1 % Diluted earnings per share   $ 1.13     $ 1.17     $ (0.04 )     -3 % ROA     1.09 %     1.33 %   (24) bps       -18 % ROE     11.28 %     13.04 %   (176) bps       -13 % General highlights for the six months ended June 30, 2021 compared to June 30, 2020:     ● As noted in the section above, Bancorp’s acquisition of Kentucky Bancshares, Inc. was completed during the second quarter.     ● Net income totaled $26.9 million, resulting in diluted EPS of $1.13 for the six months ended June 30, 2021, a 3% decrease over $1.17 for the same period of 2020. Significant factors affecting the results for the six months ended June 30, 2021 and 2020 include:   o The acquisition of Kentucky Bancshares included $18.5 million in merger expenses and $8.0 million purchase accounting adjustments (mainly provision expense) for the six months ended June 30, 2021.   o Total provision for credit losses was $2.7 million for the six months ended June 30, 2021, representing a $10.3 million, or 79%, decrease compared to the same period of 2020. The adoption of CECL (ASC 326) effective January 1, 2020 and subsequent pandemic-related developments, such as elevated unemployment and historic declines in line of credit utilization amidst the evolving pandemic drove elevated provisioning for the six months ended June 30, 2020. While a cumulative net benefit of $4.7 million was recorded for credit losses on loans and off balance sheet credit exposures during the six months ended June 30, 2021 as a result generally improving CECL model factors, including a substantially improved unemployment forecast, a provision of $7.4 million was recorded in relation to the acquisition of Kentucky Bancshares.   o Net interest income increased $13.4 million, or 20%, for the six months ended June 30, 2021 compared to the same period of 2020, as PPP forgiveness activity accelerated fee recognition and strong growth in the non-PPP loan portfolio, both organic and through acquisition, drove a $9.2 million, or 13%, increase in total interest income. Further, a $4.2 million, or 57%, decrease in interest expense was driven by the lowering of deposit rates in tandem with FRB interest rate actions to levels at or below those offered during the Great Recession, where the remained as of June 30 ,2021.   ● NIM decreased 9 bps to 3.38% for the six months ended June 30, 2021 compared to 3.47% for the same period in 2020. Despite a $13.4 million, or 20%, increase in net interest income for the six months ended June 30, 2021 compared to the same period of 2020, which was driven largely by accelerated fee recognition associated PPP forgiveness activity, yields on earning assets have eroded consistent with the FRB lowering the FFTR a total of 150 bps in March 2020 in response to the pandemic. These rate drops drove the FFTR to a range of 0%-0.25% and Prime to 3.25%, where both respectively remained as of June 30, 2021. The five-year treasury rate and one-month LIBOR tumbled in tandem with these cuts as well, and while the five-year treasury has staged a recovery over the first six months of 2021, it remains well below pre-pandemic levels. Given the timing of the cuts, the full effects of the dramatically lower interest rate environment were not felt in the first quarter of last year, benefitting NIM for the six months ended June 30, 2020 compared to the same period of this year.   ● Total loans (excluding PPP loans) increased $995 million, or 35%, compared to June 30, 2020, $726 million of which was attributed to the acquisition. Average loans (excluding PPP loans) increased $277 million, or 10%, for the six months ended June 30, 2021 compared to the same period in 2020, $117 million of which was attributed to the acquisition. While increases were experienced in most loan segments between June 30, 2020 and June 30, 2021, growth over the period was highlighted by the CRE and Residential Real Estate portfolios.   70 Table of Contents     ● Deposit balances have been elevated for several months and finished at record levels as of June 30, 2021. PPP funding, multiple federal stimulus packages and general economic uncertainty surrounding the pandemic have led to customers holding higher levels of liquidity.   ● Total non-interest income increased $4.5 million, or 18%, for the six month period ended June 30, 2021 compared to the same period of 2020. Every non-interest income revenue stream experienced an increase over the prior year period, led most notably by WM&T income, card income and Treasury management fees. Non-interest income attributed to the acquisition totaled $1.3 million for the six months ended June 30, 2021, which represents one month of acquisition-related activity.   ● Non-interest expenses increased $26.2 million, or 56%, for the six months ended June 30, 2021 compared to the same period of 2020. Merger expenses of $18.5 million drove the large increase along with additional acquisition-related non-interest expenses of $2.4 million, the latter of which represents one month of acquisition-related activity. Further, growth in FTEs, increased technology-related expenses associated with expanded data storage and the hosted core system, as well as an early termination penalty relating to paying off FHLB advances during six months ended June 30, 2021 also contributed the increase over the three months ended June 30, 2020.   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:   (dollars in thousands)                   Variance   As of and for the three months ended June 30,   2021     2020     $/bp     %                                     Net interest income   $ 41,584     $ 33,528     $ 8,056       24 % Net interest income (FTE)     41,661       33,573       8,088       24 % Net interest spread     3.29 %     3.10 %   19 bps       6 % Net interest margin     3.36 %     3.27 %   9 bps       3 % Total average interest earning assets   $ 4,972,914     $ 4,124,046     $ 848,868       21 %   (dollars in thousands)                   Variance   As of and for the six months ended June 30,   2021     2020     $/bp     %                                     Net interest income   $ 79,409     $ 65,974     $ 13,435       20 % Net interest income (FTE)     79,535       66,066       13,469       20 % Net interest spread     3.30 %     3.27 %   3 bps       1 % Net interest margin     3.38 %     3.47 %   (9) bps       -3 % Total average interest earning assets   $ 4,751,469     $ 3,823,598     $ 927,871       24 %   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 net 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.   71 Table of Contents   At June 30, 2021, Bancorp’s loan portfolio was composed of approximately 72% fixed and 28% variable rate loans, with the fixed rate portion 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 56%) or one-month LIBOR (approximately 44%). Excluding PPP loans, Bancorp’s loan portfolio at June 30, 2021 was composed of approximately 69% fixed and 31% variable rate loans, respectively.   Benchmark rates such as the five-year treasury and one-month LIBOR currently remain well below pre-pandemic levels and as a result, the average interest rate environment experienced for the three and six month periods ended June 30, 2021 was substantially lower than that experienced for the same periods of 2020. The following table details the volatility experienced within the interest rate environment over the past twelve months by comparing period end and quarterly average rates:       June 30,     March 31,     December 31,     June 30,     March 31,       2021     2021     2020     2020     2020                                             Five-year Treasury note - period end     0.87 %     0.92 %     0.36 %     0.29 %     0.37 % Five-year Treasury note - quarterly average     0.84 %     0.62 %     0.37 %     0.36 %     1.14 % Prime rate - period end     3.25 %     3.25 %     3.25 %     3.25 %     3.25 % Prime rate - quarterly average     3.25 %     3.25 %     3.25 %     3.25 %     4.40 % One-month LIBOR - period end     0.10 %     0.12 %     0.14 %     0.16 %     0.99 % One-month LIBOR - quarterly average     0.10 %     0.12 %     0.15 %     0.35 %     1.40 %   With 56% 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 June 30, 2021. Beyond potential ongoing pricing pressure/competition and the absolute low level of rates, the current economic outlook and prospects of a sustained low-rate environment continues to pose challenges regarding potential ongoing NIM compression.   Net Interest Income (FTE) – Three months ended June 30, 2021 compared to June 30, 2020   Net interest spread and NIM were 3.29% and 3.36%, for the three months ended June 30, 2021 compared to 3.10% and 3.27% for the same period in 2020, respectively. NIM during the three months ended June 30, 2021 was significantly impacted by the following:     ● A sustained low interest rate environment, driven by the lowering of the FFTR in mid-March 2020 to a range of 0% - 0.25%, which resulted in Prime dropping to 3.25%, where it remained as of June 30, 2021.   ● PPP originations, which began in the second quarter of 2020 and continued through expiration of the program on May 31, 2021, as well as the related forgiveness activity, which accelerates the recognition of fee income on these loans and continues to have a significant effect on NIM. The PPP portfolio contributed a 20 bps benefit to NIM during the second quarter of 2021, as a result of the forgiveness-driven fee recognition. By comparison, the PPP portfolio had a negative impact of 11 bps on NIM for the second quarter of 2020 due to the large amount of originations that occurred over the three month period ended June 30, 2020 and the affect that these low-yielding, 1% stated rate notes had on NIM for that period.   ● Overall excess balance sheet liquidity, which contributed approximately 18 bps of NIM compression for the three months ended June 30, 2021. By comparison, excess balance sheet liquidity contributed approximately 19 bps of NIM compression for the same period of 2020. Excess liquidity within the banking system in general has also led to a competitive loan rate environment.   ● Substantial balance sheet growth, both organic and acquisition-related, which has resulted total average earning asset growth of $849 million, or 21%, and average interest-bearing liability growth of $527 million, or 20%, for the three months ended June 30, 2021 compared to the same period of 2020.   ● The lowering of deposit rates in tandem with FRB interest rate actions and beyond to levels at or below rates offered during the Great Recession, where they remained as of June 30, 2021.   Net interest income increased $8.1 million, or 24%, for the three months ended June 30, 2021 compared to the same period of 2020, due to interest and fee income associated with the PPP portfolio, substantial growth in the non-PPP loan portfolio and AFS debt securities portfolio, and the aforementioned lowering of deposit rates.   72 Table of Contents   Total average interest earning assets increased $849 million, or 21%, to $5.0 billion for the three months ended June 30, 2021, as compared to the same period of 2020, with the average rate earned on total interest earning assets contracting 8 bps to 3.48%.     ● Average loan balances increased $448 million, or 13%, for the three months ended June 30, 2021 compared to the same period of 2020, $232 million of which was attributed to the acquisition, the remainder being driven by strong organic growth. Average non-PPP loan growth of $466 million, or 16%, was partially offset by $18 million, or 3%, of contraction in the PPP portfolio for the three months ended June 30, 2021 compared to the same period of 2020, as forgiveness activity increased.     ● Average AFS debt securities grew $381 million, or 92%, for the three months ended June 30, 2021 compared to the same period of 2020, $84 million of which was attributed to the acquisition, as cash was deployed into AFS debt securities in an effort to invest excess liquidity.   Total interest income increased $6.6 million, or 18%, to $43.2 million for the three months ended June 30, 2021, as compared to the same period of 2020.     ● Interest and fee income on loans increased $6.0 million, or 18%, to $40.2 million and the yield on the total loan portfolio increased 15 bps to 4.19% for the three months ended June 30, 2021 compared to the same period of 2020, attributed largely to fee income associated with the PPP portfolio. While average balances on the non-PPP loan portfolio grew substantially and interest income on the non-PPP loan portfolio increased $2.5 million, or 8%, for the three months ended June 30, 2021 compared to the same period of 2020, the yield on the non-PPP loan portfolio decreased 31 bps to 4.00% as a result of the substantially lower interest rate environment.     ● Despite significant growth in average AFS debt securities and a $676 million increase interest income on the portfolio for the three months ended June 30, 2021 compared to the same period of 2020, the lower interest rate environment experienced over the past twelve months weighed heavily on fixed income security yields, which decreased 67 bps, or 32%.   Total average interest bearing liabilities increased $527 million, or 20%, to $3.1 billion for the three month period ended June 30, 2021 compared with the same period in 2020, with the total average cost declining 27 bps to 0.19%.     ● Average interest bearing deposits increased $555 million, or 22%, for the three months ended June 30, 2021 compared to the same period in 2020, with interest-bearing demand deposits accounting for $347 million of the increase. Interest bearing deposits added as a result of the KB acquisition drove $232 million of the increase along with continued federal stimulus action, such as PPP funding, which has propelled deposit balances to record levels over the past 12 months. Further, general economic uncertainty surrounding the pandemic has resulted in the customer base ma