Stock Yards Bancorp, Inc. 10-K

sybt20211231_10k.htm     Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549     FORM   10-K   ☒ ANNUAL REPORT PURSUANT TO SECTION   13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934   For the fiscal year ended December 31, 2021   ☐ 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   Securities registered pursuant to Section 12(g) of the Act:   None (Title of class)   Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ☒ Yes   ☐ No   Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  ☐ Yes  ☒ No   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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262 (b)) by the registered public accounting firm that prepared or issued its audit report. ☒   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐ Yes  ☒ No   The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of June 30, 2021 (the last business day of the registrant’s most recently completed second fiscal quarter) was $ 1,287,864,172 .   The number of shares of the registrant’s Common Stock, no par value, outstanding as of January 31, 2022, was 26,601,723 .   DOCUMENTS INCORPORATED BY REFERENCE   Portions of Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 2022 are incorporated by reference into Part III of this Form 10-K.     Table of Contents     TABLE OF CONTENTS   PART I:           Item 1. Business. 4       Item 1A. Risk Factors. 11       Item 1B. Unresolved Staff Comments. 19       Item 2. Properties. 19       Item 3. Legal Proceedings. 19       Item 4. Mine Safety Disclosures. 19       PART II:           Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 20       Item 6. [Reserved] 22       Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 22       Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 76       Item 8. Financial Statements and Supplementary Data. 76       Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 154       Item 9A. Controls and Procedures. 154       Item 9B. Other Information. 158       Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 158       PART III:           Item 10. Directors, Executive Officers and Corporate Governance. 158       Item 11. Executive Compensation. 160       Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 160       Item 13. Certain Relationships and Related Transactions, and Director Independence. 160       Item 14. Principal Accountant Fees and Services. 160       PART IV:           Item 15. Exhibits and Financial Statement Schedules. 160       Item 16. Form 10-K Summary. 162       Signatures   163       2 Table of Contents     GLOSSARY OF ABBREVIATIONS AND ACRONYMS   The acronyms and abbreviations identified in alphabetical order below are used throughout this Annual Report on Form 10-K:   Acronym or Term   Definition   Acronym or Term   Definition   Acronym or Term   Definition ACH   Automatic Clearing House   EPS   Earnings Per Share   NPV   Net Present Value AFS   Available for Sale   ETR   Effective Tax Rate   Net Interest Spread   Net Interest Spread (FTE) APIC   Additional paid-in capital   EVP   Executive Vice President   NM   Not Meaningful ACL   Allowance for Credit Losses   FASB   Financial Accounting Standards Board   OAEM   Other Assets Especially Mentioned AOCI   Accumulated Other Comprehensive Income   FDIC   Federal Deposit Insurance Corporation   OCI   Other Comprehensive Income ASC   Accounting Standards Codification   FFP   Federal Funds Purchased   OREO   Other Real Estate Owned ASU   Accounting Standards Update   FFS   Federal Funds Sold   PPP   SBA Paycheck Protection Program ATM   Automated Teller Machine   FFTR   Federal Funds Target Rate   PV   Present Value AUM   Assets Under Management   FHA   Federal Housing Authority   PCD   Purchased Credit Deteriorated Bancorp / the Company   Stock Yards Bancorp, Inc.   FHC   Financial Holding Company   PCI   Purchased Credit Impaired Bank / SYB   Stock Yards Bank & Trust Company   FHLB   Federal Home Loan Bank of Cincinnati   Prime   The Wall Street Journal Prime Interest Rate BOLI   Bank Owned Life Insurance   FHLMC   Federal Home Loan Mortgage Corporation   Provision   Provision for Credit Losses BP   Basis Point - 1/100th of one percent   FICA   Federal Insurance Contributions Act   PSU   Performance Stock Unit C&D   Construction and Development   FNMA   Federal National Mortgage Association   ROA   Return on Average Assets Captive   SYB Insurance Company, Inc.   FRB   Federal Reserve Bank   ROE   Return on Average Equity CARES Act   Coronavirus Aid, Relief and Economic Security Act   FTE   Fully Tax Equivalent   RSA   Restricted Stock Award C&I   Commercial and Industrial   GAAP   United States Generally Accepted Accounting Principles   RSU   Restricted Stock Unit CD   Certificate of Deposit   GLB Act   Gramm-Leach-Bliley Act   SAB   Staff Accounting Bulletin CDI   Core Deposit Intangible   GNMA   Government National Mortgage Association   SAR   Stock Appreciation Right CECL   Current Expected Credit Loss (ASC-326)   HELOC   Home Equity Line of Credit   SBA   Small Business Administration CEO   Chief Executive Officer   ITM   Interactive Teller Machine   SEC   Securities and Exchange Commission CFO   Chief Financial Officer   KB   Kentucky Bancshares, Inc. and Kentucky Bank   SOFR   Secured Overnight Financing Right Commonwealth   Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust Company   KSB   King Bancorp, Inc. and King Southern Bank   SSUAR   Securities Sold Under Agreements to Repurchase COVID-19   Coronavirus Disease - 2019   LIBOR   London Interbank Offered Rate   SVP   Senior Vice President CRA   Community Reinvestment Act   Loans   Loans and Leases   TBOC   The Bank Oldham County CRE   Commercial Real Estate   MBS   Mortgage Backed Securities   TCE   Tangible Common Equity Dodd-Frank Act   The Dodd-Frank Wall Street Reform and Consumer Protection Act   MSA   Metropolitan Statistical Area   TDR   Troubled Debt Restructuring DTA   Deferred Tax Asset   MSRs   Mortgage Servicing Rights   TPS   Trust Preferred Securities DTL   Deferred Tax Liability   NASDAQ   The NASDAQ Stock Market, LLC   VA   U.S. Department of Veterans Affairs DCF   Discounted Cash Flow   NIM   Net Interest Margin (FTE)   WM&T   Wealth Management and Trust   3 Table of Contents   PART I   Item 1.           Business.             Stock Yards Bancorp, Inc. (“Bancorp” or “the Company”), is a FHC headquartered in Louisville, Kentucky and is engaged in the business of banking through its wholly owned subsidiaries, Stock Yards Bank & Trust Company (“SYB” or “the Bank”) and SYB Insurance Company, Inc. (“the Captive”). Bancorp, which was incorporated in 1988 in Kentucky, is registered with, and subject to supervision, regulation and examination by, the Board of Governors of the Federal Reserve System. As Bancorp has no significant operations of its own, its business is essentially that of SYB and the Captive. The operations of SYB and the Captive are fully reflected in the consolidated financial statements of Bancorp. Accordingly, references to “Bancorp” in this document may encompass both the holding company and its subsidiaries, but it should be noted that the business of the Captive is immaterial to the overall results of operations and financial condition of Bancorp.   SYB, chartered in 1904, 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 MSAs through 63 full service banking center locations. The Bank is registered with, and subject to supervision, regulation and examination by the FDIC and the Kentucky Department of Financial Institutions.   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 $2,400,000, 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.   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 $1.27 billion in assets, $755 million in loans (including PPP), $396 million in AFS debt securities and $1.04 billion in deposits at the time of acquisition. Kentucky Bancshares, Inc. was also the holding company for the insurance captive described above, 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.   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 15 retail branches, including nine 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 $171 million based on estimates as of February 17, 2022. Bancorp will fund the cash payment portion of the acquisition through existing resources on-hand.   Bancorp has received all required regulatory approvals to complete the acquisition and the acquisition is expected to close on or around March 7, 2022, subject to satisfaction or waiver of remaining closing conditions.  As of December 31, 2021, Commonwealth reported approximately $1.31 billion in assets, $680 million in loans, $1.16 billion in deposits and $88 million in tangible common equity. Commonwealth also maintains a Wealth Management and Trust Department with total assets under management of $2.73 billion at December 31, 2021. The combined franchise will have 78 branches at acquisition date and anticipates serving customers through a branch network of 73 locations, as Bancorp has notified regulators of its intent to close five locations as part of the merger. The combined franchise will have total assets of approximately $8.0 billion, $4.85 billion in gross loans, $6.95 billion in deposits and $7.53 billion in trust assets under management. The acquisition would make SYB the largest bank chartered in the state of Kentucky and would also create the largest bank-owned Trust company in the state.   4 Table of Contents   General Business Overview   As is the case with most banks, our 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, as well as Bancorp’s strong sales focus. Net interest income accounted for 72% of our total revenues, defined as net interest income plus non-interest income, for the years ended December 31, 2021, 2020 and 2019, respectively.   Fee income, or non-interest income, is a significant component of our business. Non-interest income represented 28% of total revenues for the years ended December 31, 2021, 2020 and 2019, demonstrating the value of the diversified revenue streams created by our broad product offerings in addition to income provided by the principal banking activities described above. Our non-interest income is driven by WM&T activities, deposit service charges, debit and credit card services, treasury management services, mortgage banking services, brokerage services and other ancillary activities of the Bank. WM&T revenue, which is our largest source of non-interest income, constituted 42%, 45% and 46% of total non-interest income for the years ended December 31, 2021, 2020 and 2019, respectively. Despite continued growth in WM&T income, the decline in the percentage of non-interest income attributed to WM&T is due to the significant growth of other non-interest revenue streams through both organic business development and acquisition, as Bancorp continues to prioritize the pursuit and growth of diversified revenue streams.   Bancorp is divided into two reportable segments: Commercial Banking and WM&T:   Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, leasing, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment.    WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   For further discussion regarding our business, see “ Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. ”   5 Table of Contents   Our Business Strategy   Our strategy focuses on building strong relationships with our customers, employees and communities, while maintaining disciplined underwriting standards and a commitment to operational efficiency. By leveraging our comprehensive suite of products and services, we strive to continue expanding our footprint in our home market of Louisville, Kentucky while also cultivating attractive growth opportunities in our other markets of central, eastern and northern Kentucky, Indianapolis, Indiana and Cincinnati, Ohio, and opportunistically pursuing acquisitions.   Key components of our strategy include the following:   Continue to focus on customer relationships and our community banking model – We believe that our reputation, expertise and relationship-based approach to banking enables us to establish long-lasting, full-service customer relationships. We look to leverage our relationships with existing customers by offering a wide range of products and services that are tailored to their needs and financial goals. Attracting and retaining high-quality relationship managers and providing them with the tools necessary for success is crucial to maintaining and strengthening the relationships we have with both existing and prospective customers.   Our commitment to our customers and the communities we serve has been exhibited throughout the COVID-19 pandemic. Our participation in the SBA’s PPP, our payment deferral and loan modification efforts, and other proactive assistance we have provided during the pandemic has not only deepened existing relationships, but created new relationships that have provided meaningful opportunities for growth. This relationship-based, community-focused approach has been the cornerstone of our success and remains the central tenant of our overall strategy.   Continue to grow and pursue diversified revenue streams – WM&T revenue distinguishes us from other community banks of similar asset size and continues to provide us with a strong competitive advantage. We have also seen significant growth in other non-interest revenue sources in recent years, particularly treasury management services and debit/credit card services. We believe these services, along with our other non-interest revenue sources, such as mortgage banking, brokerage services and other ancillary activities, provide the diversity necessary to weather the ups and downs of business cycles and the financial solutions our customers and communities desire.   Maintain focus on organic growth while capitalizing on strategic acquisitions – Our strategy has been to pursue attractive, organic growth opportunities within our existing markets and enter new markets that align with our business model and strategic plans. We believe we can increase our presence in our existing markets and broaden our footprint in attractive markets adjacent and complementary to our current markets by expansion of our branch network and opportunistically pursuing acquisitions.   The completion of our acquisition of Kentucky Bancshares during the second quarter of 2021 expanded our footprint into central and eastern Kentucky, providing broader product offerings, increased lending capabilities and a larger branch delivery system to our new customers in these markets. Further, the larger organization provides solid growth opportunities and a platform for future expansion.   Our pending acquisition of Commonwealth Bancshares will build upon our market share in our home market of Louisville, Kentucky, while also expanding our presence in neighboring Shelby County, Kentucky as well as northern Kentucky, providing a natural geographic connection between Louisville and the newly entered central and eastern Kentucky markets noted above. Additionally, the acquisition significantly bolsters our wealth management capabilities and will create the largest bank-owned trust company in the state of Kentucky.   Continue to manage costs and improve efficiency – We believe that conservative cost management and a focus on operational efficiency is critical to our success. We continuously manage our cost structure and refine our internal processes and technology to create further efficiencies with the goal of enhancing our earnings. Our efficiency ratio (FTE) for the years ended December 31, 2021, 2020 and 2019 was 59.94%, 54.06% and 56.07%, respectively, the spike for the most recent year being attributed to merger-related expenses. Excluding one-time merger-related expenses and the amortization of investments in tax credit partnerships, our non-GAAP efficiency ratio (FTE) for the years ended December 31, 2021, 2020 and 2019 was 51.77%, 52.42% and 54.70%. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   Human Capital Resources   Attracting and retaining talented employees is key to our ability to execute our strategy and compete effectively. Bancorp values the unique combination of talents and experiences each employee contributes towards our success and strives to provide an environment that promotes the personal well-being and career development of our employees. We are proud to be an Equal Opportunity Employer and enforce those values throughout the organization. We prohibit discrimination in hiring or advancement against any individual on the basis of race, color, religion, gender, sex, national origin, age, marital status, pregnancy, mental disability, genetics, veteran status, sexual orientation, or any other characteristic protected by applicable law.   At December 31, 2021, the Bank had 820 full-time equivalent employees. Approximately 66% of Bancorp’s employees are located in the Louisville, Kentucky market, while 22%, 6% and 6% are located the Central Kentucky, Cincinnati, Ohio and Indianapolis, Indiana markets, respectively. None of Bancorp’s employees are subject to a collective bargaining agreement and Bancorp has never experienced a work stoppage. Management of Bancorp strives to be an employer of choice and considers the relationship with employees to be good. Employees of the Bank are entitled to participate in a variety of employee benefit programs, including a defined contribution and stock ownership plan.   6 Table of Contents   The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic has presented a unique challenge with regard to maintaining employee safety while continuing successful operations. In tandem with the declaration of the global pandemic, Bancorp invoked its Board of Director-approved pandemic plan, which included timely communication to employees, implementing remote work arrangements as necessary, separating individual departments, operating select branch lobbies by appointment only, fully staffing all branch drive-thru lanes and actively promoting social distancing in all aspects of business. 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.   Executive Officers   Name and Age   Position and Offices with of Executive Officer   Bancorp and/or the Bank James A. Hillebrand   Chairman and CEO of Bancorp and SYB Age 53           Philip S. Poindexter   President of Bancorp and SYB Age 55           Kathy C. Thompson   Senior EVP and Director of WM&T Division of SYB; Director of Bancorp and SYB Age 60           T. Clay Stinnett   EVP, Treasurer and CFO of Bancorp and SYB Age 48           William M. Dishman III   EVP and Chief Risk Officer of SYB Age 58           Michael J. Croce   EVP and Director of Retail Banking of SYB Age 52           Michael V. Rehm   EVP and Chief Lending Officer of SYB Age 57       See Part   III,   Item 10. “ Directors, Executive Officers and Corporate Governance ” for information regarding Bancorp ’ s executive officers.   Competition   The Bank encounters intense competition in its markets in originating loans, attracting deposits, and selling other banking related financial services. The deregulation of the banking industry, the ability to create financial services holding companies to engage in a wide range of financial services other than banking and the widespread enactment of state laws that permit multi-bank holding companies, as well as the availability of nationwide interstate banking, has created a highly competitive environment for financial institutions. In one or more aspects of the Bank’s business, the Bank competes with local and regional retail and commercial banks, other savings banks, credit unions, finance companies and mortgage companies operating in Kentucky, Indiana and Ohio. Some of the Bank’s competitors are not subject to the same degree of regulatory review and restrictions that apply to Bancorp and the Bank. Many of the Bank’s primary competitors, some of which are affiliated with large bank holding companies or other larger financial based institutions, have substantially greater resources, larger established client bases, higher lending limits, more extensive banking center networks, numerous ATMs or ITMs, and greater advertising and marketing budgets. They may also offer services that the Bank does not currently provide. Legislative developments related to interstate branching and banking in general, by providing large banking institutions easier access to a broader marketplace, can act to create more pressure on smaller financial institutions to consolidate. It is anticipated that competition from both bank and non-bank entities will continue to remain strong in the foreseeable future.   The Bank believes that an emphasis on highly personalized service tailored to individual client needs, together with the local character of the Bank’s business and its “community bank” management philosophy will continue to enhance the Bank’s ability to compete successfully in its markets.   7 Table of Contents   Supervision and Regulation   Bank holding companies and commercial banks are extensively regulated under both federal and state laws. Changes in applicable laws or regulations may have a material effect on the business and prospects of Bancorp.   Bancorp, as a registered bank holding company, is subject to the supervision of and regulation by the Federal Reserve Board under the Bank Holding Company Act of 1956. In addition, Bancorp is subject to the provisions of Kentucky’s banking laws regulating bank acquisitions and certain activities of controlling bank shareholders.   Kentucky and federal banking statutes delineate permissible activities for Kentucky state-chartered banks. Kentucky’s statutes, however, contain a super parity provision for Kentucky chartered banks having one of the top two ratings in its most recent regulatory examination. This provision allows these state banks to engage in any banking activity in which a national bank, a state bank operating in any other state, or a federally chartered thrift could engage. The bank must first obtain a legal opinion specifying the statutory or regulatory provisions that permit the activity.   The Bank is subject to the supervision of the Kentucky Department of Financial Institutions and the FDIC. The FDIC insures the deposits of the Bank to the current maximum of $250,000 per depositor.   The GLB Act allows for affiliations among banks, securities firms and insurance companies by means of FHC. The GLB Act requires that, at the time of establishment of an FHC, all depository institutions within that corporate group must be “well-managed” and “well-capitalized” and must have received a rating of “satisfactory” or better under its most recent CRA examination. Further, non-banking financial firms (for example an insurance company or securities firm) may establish a FHC and acquire a depository institution. While the distinction between banks and non-banking financial firms is blurred, the GLB Act makes it less cumbersome for banks to offer services “financial in nature” but beyond traditional commercial banking activities. Likewise, non-banking financial firms may find it easier to offer services that had, heretofore, been provided primarily by depository institutions. In 2012, management of Bancorp elected to become and became a FHC.   The Dodd-Frank Act was signed into law in 2010 and generally was effective the day after it was signed into law, but different effective dates apply to specific sections of the law. The extensive and complex legislation contained many provisions affecting the banking industry, including but not limited to:     ● Creation of a Bureau of Consumer Financial Protection overseeing banks with assets totaling $10 billion or greater while writing and maintaining several regulations that apply to all banks,   ● Determination of debit card interchange rates by the Federal Reserve Board,   ● New regulation over derivative instruments,   ● Phase outs of certain forms of trust preferred debt and hybrid instruments previously included as bank capital, and   ● Increases to FDIC deposit coverage, revised calculations for assessing bank premiums, and numerous other provisions affecting financial institution regulation, oversight of certain non-banking organizations, and improved depositor protection.   The CRA requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. Depository institutions are periodically examined for compliance with the CRA, and banking regulators take into account CRA ratings when considering approval of certain applications. An unsatisfactory CRA rating could, among other things, result in the denial or delay of corporate applications filed by Bancorp or the Bank for proposed activities such as branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company.   8 Table of Contents   The federal banking regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to an unaffiliated third party. These regulations affect how consumer information is conveyed to outside vendors. The Bank is also subject to regulatory guidelines establishing standards for safeguarding customer information. These guidelines describe the federal banking agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities.   The Bank is subject to the Bank Secrecy Act and the USA Patriot Act. These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and accounts and other relationships intended to guard against money laundering and terrorism financing. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.   Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. The FRB and FDIC have substantially similar risk-based and leverage ratio guidelines for banking organizations, which are intended to ensure that banking organizations have adequate capital related to the risk levels of assets and off-balance sheet instruments. Under the risk-based guidelines, specific categories of assets are assigned different risk weights based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a risk-weighted asset base. In addition to the risk-based capital guidelines, the FRB uses a leverage ratio as a tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 Capital divided by its average total consolidated assets (less goodwill and certain other intangible assets).   The federal banking agencies’ risk-based and leverage ratios represent minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory capital rating. Banking organizations not meeting these criteria are required to operate with capital positions above the minimum ratios. FRB guidelines also provide that banking organizations experiencing internal growth or making acquisitions may be expected to maintain strong capital positions above the minimum supervisory levels, without significant reliance on intangible assets. The FDIC may establish higher minimum capital adequacy requirements if, for example, a bank proposes to make an acquisition requiring regulatory approval, has previously warranted special regulatory attention, rapid growth presents supervisory concerns, or, among other factors, has a high susceptibility to interest rate and other types of risk. The Bank is not subject to any such individual minimum regulatory capital requirements.   Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized for prompt corrective action requirements, a bank must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0% Tier 1 Risk-Based Capital ratio, 10.0% Total Risk-Based Capital ratio and 5.0% Tier 1 Leverage ratio.   Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. December 31, 2021, the adequately-capitalized minimums, including the capital conservation buffer, were a 6.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio.   As of December 31, 2021, Bancorp exceeded the requirements to be considered well-capitalized and those required to avoid limitations associated with the capital conservation buffer.   9 Table of Contents   Under regulatory guidance applicable to all banking organizations, incentive compensation policies must be consistent with safety and soundness principles. Under this guidance, financial institutions must review their compensation programs to ensure that they: (i) provide employees with incentives that appropriately balance risk and reward and that do not encourage imprudent risk, (ii) are compatible with effective controls and risk management, and (iii) are supported by strong corporate governance, including active and effective oversight by the banking organization’s board of directors. Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.   During 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion of total assets. These proposed rules have not been finalized.   The federal banking agencies and state regulators have been increasingly active in implementing privacy and cybersecurity standards and regulations. In February 2018, the SEC published interpretive guidance to assist public companies in preparing disclosures about cybersecurity risks and incidents. These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking laws and regulations.   In November 2021, the federal banking agencies adopted a rule regarding notification requirements for banking organizations related to significant computer security incidents. Under the final rule, a bank holding company and state member bank are required to notify the Federal Reserve within 36 hours of incidents that have materially disrupted or degraded, or are reasonably likely to materially disrupt or degrade, the banking organization’s ability to deliver services to a material portion of its customer base, jeopardize the viability of key operations of the banking organization, or impact the stability of the financial sector. The rule is effective April 1, 2022, with compliance required by May 1, 2022.   We expect federal banking agencies and state regulators to continue focusing on information technology and cybersecurity are we are continually monitoring regulatory developments and the impact they may have on Bancorp.   Website Access to Reports   Bancorp files reports with the SEC including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K, and proxy statements, as well as any amendments to those reports. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov . Bancorp’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are also accessible at no cost on Bancorp’s web site at http://www.syb.com after they are electronically filed with, or furnished to, the SEC.   10 Table of Contents   Item 1A.           Risk Factors.             FACTORS THAT MAY AFFECT FUTURE RESULTS   An investment in Bancorp’s common stock is subject to risks inherent in its business. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this filing. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to Bancorp or that Bancorp currently deems to be immaterial also may materially and adversely affect its business, financial condition and results of operations in the future. The value or market price of Bancorp’s common stock could decline due to any of these identified or other risks, and an investor could lose all or part of their investment.   There are factors, many beyond Bancorp’s control, which may significantly change the results or expectations of Bancorp. Some of these factors are described below, however, many are described in the other sections of this Annual Report on Form 10-K.   Economic, Market and Credit Risks   The ongoing COVID-19 pandemic and measures intended to prevent its spread have adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.   The COVID-19 pandemic has created and continues to create extensive disruptions to the global economy and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including self-quarantines, travel bans, shelter-in-place orders, closures of businesses and schools, fiscal stimulus, and legislation designed to deliver monetary aid and other relief. While the scope, duration, and full effects of COVID-19 continue to evolve and are not fully known, the pandemic and related efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted interest rates, increased economic and market uncertainty, and disrupted trade and supply chains. If these effects continue for a prolonged period, or result in sustained economic stress or recession, many of the risk factors identified in this Annual Report on Form-10-K could be exacerbated and such effects could have a material adverse impact on us in a number of ways related to credit, collateral, asset valuations, customer demand, funding, operations, interest rate risk, and human capital.   There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impact on our business, operations or the economy as a whole. However, the effects could have a material extended impact on our business and heighten many of its known risks described below.   Fluctuations in interest rates could reduce profitability.   Our primary source of income is from net interest spread, the difference between interest earned on loans and investments and interest paid on deposits and borrowings. We expect to periodically experience gaps in interest rate sensitivities of assets and liabilities, meaning that either interest-bearing liabilities may be more sensitive to changes in market interest rates than interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this gap will work against us and earnings will be negatively affected.   Many factors affect fluctuation of market interest rates, including, but not limited to the following:     ● the FRB’s actions to control interest rates   ● inflation or deflation   ● recession   ● changes in unemployment   ● changes in the money supply   ● local, regional, national or international disorder and instability in financial markets   11 Table of Contents   Market expectations are for the FRB to raise rates multiple times in 2022, as the economy attempts to exit a pandemic-era interest rate environment that saw the FFTR fall to a range of 0% - 0.25% and Prime fall to 3.25%, where each have respectively remained since March of 2020. Given the current low level of rates and market expectations for FRB increases, the potential of a flattening yield curve presents asset-liability management challenges. Deposit rates tend to be tied to the short end of the rate curve, while fixed-rate loans are largely priced based upon longer term rates, typically five-year offerings. A flattening yield curve may increase our funding costs while limiting rates that can be earned on loans and investments, thereby decreasing our net interest income and earnings. Migration of deposits out of Bancorp, as customers pursue higher rates, could impact liquidity and earnings, as we compete for deposits. Changes in the mix of deposits could result in increased average rates paid on deposits, and lower earnings. Our asset-liability management strategy, which is designed to mitigate risk from changes in market interest rates, may not be able to prevent changes in interest rates from having a material adverse effect on our results of operations and financial condition.   The CECL accounting standard resulted in a significant change in how we recognize credit losses.   In June 2016, the FASB issued ASC, “ Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, ” which replaced the “incurred loss” model for recognizing credit losses with an “expected loss” model and was adopted by Bancorp effective January 1, 2020. Whereas the incurred loss model delayed recognition of loss on financial instruments until it was probable a loss had occurred, the expected loss model recognizes a loss at the time the loan is first added to the balance sheet. Adoption of the CECL model has materially affected the determination of the ACL on loans and has resulted in a significant increase to the ACL. Assumptions made by management and material changes in economic factors could significantly influence the ACL. Any material increase to the required level of loan loss allowance could adversely affect our business, financial condition, and results of operations.   If actual loan losses are greater than our assumption for loan losses, earnings could decrease.   Our loan customers may not repay their loans according to the terms of these loans, collateral securing payment of these loans may be insufficient to ensure repayment and the wealth of guarantors providing guarantees to support these loans may be inadequate to aid in the repayment of these loans. Accordingly, we might experience significant credit losses which could have a material adverse effect on operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including creditworthiness of borrowers and value of collateral for repayment. In determining the adequacy of the ACL on loans, we consider, among other factors, an evaluation of economic conditions, future national unemployment projections and our historical loan loss experience. If our assumptions prove to be incorrect or economic problems are worse than projected, the current allowance may be insufficient to cover loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio. Such additions to the allowance, if necessary, could have a material adverse impact on our financial results.   Federal and state regulators annually review our allowance and may require an adjustment in the ACL on loans. If regulatory agencies require any increase in the allowance for which we had not allocated, it would have a negative effect on our financial results.   Our credit metrics are currently at historically strong levels and this trend could normalize over time.   Over the past several years, our asset quality metrics have trended within a narrow range, exceeding benchmarks and reaching historically strong levels. We realize that present asset quality metrics are positive and, recognizing the cyclical nature of the lending business, we anticipate this trend will likely normalize over time.   Financial condition and profitability depend significantly on local and national economic conditions.   Our success depends on general economic conditions both locally, regionally and nationally. A portion of our customers’ ability to repay their obligations is directly tied to local, regional, national or global business dealings. Deterioration in the quality of the credit portfolio could have a material adverse effect on our financial condition, results of operations, and ultimately capital.   Financial condition and profitability depend on real estate values in our market areas.   We offer a variety of secured loans, including C&I lines of credit, C&I term loans, real estate, C&D, HELOCs, consumer and other loans. Many of our loans are often secured by real estate primarily in our market areas. In instances where borrowers are unable to repay their loans and there has been deterioration in the value of loan collateral, we could experience higher loan losses which could have a material adverse effect on financial condition, and results of operations.   12 Table of Contents   Significant stock market volatility could negatively affect our financial results.   Income from WM&T constitutes approximately 42% of non-interest income. Trust AUM are expressed in terms of market value, and a significant portion of fee income is based upon those values, which generally fluctuate consistent with overall capital markets.   Capital and credit markets experience volatility and disruption from time to time. These conditions may place downward pressure on credit availability, credit worthiness and customers’ inclinations to borrow. Prolonged volatility or a significant disruption could negatively impact customers’ ability to seek new loans or to repay existing loans. Personal wealth of many borrowers and guarantors has historically added a source of financial strength to certain loans and would be negatively impacted by severe market declines. Sustained reliance on personal assets to make loan payments would result in deterioration of their liquidity, and could result in loan defaults.   The value of our investment securities may be negatively affected by factors outside of our control and impairment of these securities could have an adverse impact on our financial condition and results of operations.   Factors beyond our control can significantly influence the fair value of our investment securities. These factors include, but are not limited to, rating agency actions, defaults by issuers or with respect to underlying securities, changes in market interest rates, volatility and liquidity within capital markets and changes in local, regional, national or international economic conditions. Impairment to the fair value of these securities can result in realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have an adverse effect on our business, financial condition and results of operations.   Impairment of goodwill, other intangible assets or deferred tax assets could have an adverse impact on our financial condition and results of operations.   In accordance with GAAP, goodwill is not amortized but, instead, is subject to impairment on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount. In the event that we conclude that all or a portion of our goodwill may be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital. At December 31, 2021, Bancorp had goodwill of $136 million.   Bancorp’s intangible assets primarily relate to core deposits and customer relationships. Intangible assets with definite lives are amortized on an accelerated basis over their estimated life. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicated the carrying amount of the assets may not be recoverable from future undiscounted cash flows. In the event that we conclude that all or a portion of our intangible assets may be impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital. At December 31, 2021, Bancorp had intangible assets of $6 million.   In assessing the potential for realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Assessing the need for, or the sufficiency of, a valuation allowance requires management to evaluate all available evidence, both negative and positive, including whether future taxable income in sufficient amounts and character within the carryback and carryforward periods is available under tax law, including the use of tax planning strategies. We have concluded that, based on the level of positive evidence, it is more likely than not that at December 31, 2021 all deferred tax assets will be realized. At December 31, 2021, Bancorp had deferred tax assets totaling $24 million.   The impact of each of these impairment matters could have a material adverse effect on our business, results of operations and financial condition.   13 Table of Contents   The soundness of other financial institutions could adversely affect us.   Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to different industries and counterparties and through transactions with counterparties in the bank and non-bank financial services industries, including broker-dealers, commercial banks, investment banks and other institutional customers. As a result, defaults by, or even rumors or questions about, one or more bank or non-bank financial services companies, or bank or non-bank financial services industries in general, could lead to market-wide liquidity problems and could result in losses or defaults by us or other institutions. These losses or defaults could have an adverse effect on our business, financial condition and results of operations.   The planned phasing out of LIBOR as a financial benchmark presents risks to the financial instruments we originate or hold.   LIBOR is the reference rate used for many of our transactions, including our lending and borrowing, as well as the derivatives that we use to manage risk related to such transactions. LIBOR will cease to exist as a published rate after 2021. The discontinuation of LIBOR could have a significant impact on the financial markets and market participants. As of December 31, 2021, we had approximately $425 million in variable rate loans with interest rates tied to LIBOR. Our derivative activities based upon LIBOR include interest rate swap transactions with notional amounts totaling approximately $123 million.   The FRB, through the Alternative Reference Rate Committee, has recommended a replacement benchmark rate, the Secured Overnight Financing Rate. All loan and swap contracts will need to be managed effectively to ensure appropriate benchmark rate replacements are provided for and adopted.   Failure to identify a replacement benchmark rate and/or update data processing systems could result in future interest rate changes not being correctly captured, which could result in interest rate risk not being mitigated as intended, or interest earned being miscalculated, which could adversely impact our business, financial condition, and results of operations. Uncertainty regarding LIBOR and discretionary actions or negotiations of fallback provisions could result in pricing volatility, adverse tax or accounting impacts, or additional compliance, legal and operational costs.   Our mortgage banking line of business is highly dependent upon programs administered by the FNMA and FHLMC. Changes in existing U.S. government-sponsored mortgage programs or servicing eligibility standards could materially and adversely affect our business, financial position, results of operations and cash flows.   Our ability to generate revenue through mortgage loan sales to institutional investors depends to a significant degree on programs administered by the FNMA and FHLMC. These entities play powerful roles in the residential mortgage industry and as a result, we have significant business relationships with them. Our status as an approved seller and servicer with both entities is subject to compliance with their selling and servicing guidelines.   Any discontinuation of, or significant reduction or material change in, the operation of the FNMA and FHLMC, or any significant adverse change in the level of activity in the secondary mortgage market or the underwriting criteria of the FNMA or FHLMC would likely prevent us from originating and selling most, if not all, of our mortgage loan originations.   Changing industry trends related to consumer deposit relationships could have an adverse impact on our financial condition and results of operations.   Competitive factors surrounding the developing trend of financial institutions reducing or eliminating certain deposit account fees, particularly overdraft-related fees, presents a significant challenge to maintaining deposit-related non-interest income in the future and potentially threatens a revenue stream that has been in an industry-wide, regulation-driven decline for several years. Strategic decisions surrounding this trend may impact not only deposit-related income, but also deposit relationships in general, particularly for retail customers.   Any elimination of, or reduction or material change to, the fees we charge for certain deposit-related services could result in a significant decline of non-interest income. Failure to closely monitor, and appropriately adapt to, changes in industry practices and consumer behavior could have an adverse impact on our performance.   14 Table of Contents   Strategic Risks   Acquisitions could adversely affect our business, financial condition and results of operations.   An institution that we acquire may have asset quality issues or contingent liabilities that we did not discover or fully recognize in the due diligence process, thereby resulting in unanticipated losses. Acquisitions of other institutions also typically require integration of different corporate cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, compliance, internal audit and financial reporting systems, operating systems and internal controls, marketing programs and personnel of the acquired institution. The integration process is complicated and time consuming and could divert our attention from other business concerns and may be disruptive to our customers and customers of the acquired institution. Our failure to successfully integrate an acquired institution could result in loss of key customers and employees, and prevent us from achieving expected synergies and cost savings. We may finance acquisitions with borrowed funds, thereby increasing our leverage and reducing liquidity, or with potentially dilutive issuances of equity securities.   Competition with other financial institutions could adversely affect profitability.   We operate in a highly competitive industry that could become even more so as a result of earnings pressure from peer organizations, legislative, regulatory and technological changes and continued consolidation. We face vigorous competition in price and structure of financial products from banks and other financial institutions. In recent years, credit unions have expanded their lending mix and now compete heavily with banks in the CRE lending market. Non-traditional providers’ high risk tolerance for fixed rate, long-term loans has adversely affected our net loan growth and results of operations. We also compete with other non-traditional providers of financial services, such as brokerage firms and insurance companies. As internet-based financial services continue to grow in acceptance, we must remain relevant as an institution where consumers and businesses value personal service while other institutions offer these services without human interaction. The variety of sources of competition may reduce or limit our margins on banking services, increase operational costs through expanded product offerings, reduce market share and adversely affect our financial condition and results of operations.   We may not be able to attract and retain skilled people.   Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in the industry and markets in which we engage can be intense, and we may not be able to retain or hire the people wanted or needed. To attract and retain qualified employees, we must compensate them at or above market levels. If we are unable to continue to attract and retain qualified employees, or do so at rates necessary to maintain the Company’s competitive position, our performance, including the Company’s competitive position, could suffer, and, in turn, adversely affect our business, financial condition or results of operations.   We are subject to liquidity risks.   Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, sales of investment securities, FHLB advances, sales of loans and other sources could have a significant negative effect on our liquidity.   We are dependent on large commercial deposit relationships as a primary funding source. Approximately 51% of our total deposits are centralized in accounts with balances $500,000 or greater. We categorize these deposits as core funds, as they represent long-standing, full-service relationships and are a testament to our commitment to partner with business customers by providing exemplary service and competitive products. A sudden shift in customer behavior within these deposits resulting in balances being reduced or exiting Bancorp altogether could impact our ability to capitalize on growth opportunities and meet current obligations. We have secondary funding sources to draw upon as needed, but the cost of those funds would be higher than typical deposit accounts, which would negatively impact our financial condition and results of operations.   15 Table of Contents   We have experienced record levels of liquidity over the past year, which is expected to continue in 2022 and possibly beyond. Should loan demand not meet desired levels, excess liquidity must be invested in an effort to maximize return. The risks associated with such investment include the inability to find alternative options suitable to our risk profile, investing in alternatives that adversely impact our financial condition and results of operations, and liquidity risk associated with any specific investment. Further, holding elevated levels of liquidity can have a significant impact on our NIM and result in additional margin compression.   Operational Risks   Our accounting policies and methods are critical to how we report our financial condition and results of operations. They require management to make estimates about matters that are uncertain.   Accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Management must exercise judgment in selecting and applying these accounting policies and methods so they comply with GAAP.   We have identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, or reducing a liability. We have established detailed policies and control procedures intended to ensure these critical accounting estimates and judgments are well-controlled and applied consistently.   Policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding judgments and estimates pertaining to these matters, there can be no assurances that actual our results will not differ from those estimates. See the section titled “ Critical Accounting Policies and Estimates ” in “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” for more information.   An extended disruption of vital infrastructure could negatively impact our business, results of operations, and financial condition.   Our operations depend upon, among other things, infrastructure, including equipment and facilities. Extended disruption of vital infrastructure by fire, power loss, natural disaster, telecommunications failure, information systems breaches, corporate account take-over, terrorist activity or the domestic and foreign response to such activity, or other events outside of our control could have a material adverse impact on the financial services industry, the economy as a whole or on our financial condition and results of operations. Our business continuity plan may not work as intended or may not prevent significant interruption of operations. Occurrence of any failures or interruptions of information systems could damage our reputation, result in loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have an adverse effect on our financial condition and results of operations.   Security breaches or incidences of fraud could negatively impact our business, results of operations, and financial condition.   Our assets, which are at risk for cyber-attacks, include financial assets and non-public information belonging to customers. Cyber security risks include cyber espionage, blackmail, ransom, theft, and corporate account takeovers. We employ many preventive and detective controls to protect our assets, and provide mandatory recurring information security training for all employees. We have invested in multiple preventative tools in an attempt to protect customers from cyber threats and corporate account takeover and regularly provide educational information regarding cyber threats to customers. We utilize multiple third-party vendors who have access to ours assets via electronic media. While we require third parties, many of whom are small companies, to have similar or superior controls in place, there is no guarantee that a breach of information could not occur. Activities of the Bank that subject Bancorp to risk of fraud by customers, employees, vendors, or members of the general public include ACH transactions, wire transactions, ATM/ITM transactions, checking transactions, credit card transactions and loan originations. Repeated incidences of fraud or a single large occurrence could adversely impact our reputation, financial condition and results of operations.   16 Table of Contents   We are dependent upon outside third parties for processing and handling of the Company ’ s records and data.   We rely on software developed by third-party vendors to process various transactions. In some cases, we have contracted with third parties to run their proprietary software on our behalf. While we perform a review of controls instituted by applicable vendors over these programs in accordance with industry standards and performs testing of user controls, we rely on continued maintenance of controls by these third-party vendors, including safeguards over security of client data. We may incur a temporary disruption in our ability to conduct business or process transactions, or incur reputational damage, if a third-party vendor fails to adequately maintain internal controls or institute necessary changes to systems. Such a disruption or breach of security could have a material adverse effect on our business. Further, if these third-party service providers experience difficulties, or should terminate their services, and we are unable to replace them on a timely basis, our business operations could be interrupted. If an interruption were to continue for a significant period of time, or if we incurred excessive costs involved with replacing third-party service provider, our business, financial condition and results of operations could be adversely affected.   Our ability to stay current on technological changes in order to compete and meet customer demands is constantly being challenged.   The financial services industry is constantly undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. Future success of Bancorp will depend, in part, upon our ability to address the needs of our customers by utilizing technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional operational efficiencies and greater privacy and security protection for customers and their personal information. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services as quickly as competitors or be successful in marketing these products and services to our customers. We rely on third party providers for many of our technology-driven banking products and services. Some of these companies may be slow to respond with upgrades or enhancements to their products to keep pace with improvements in technology or the introduction of competing products. Failure to successfully keep pace with technological change affecting the financial services industry could impair our ability to effectively compete to retain or acquire new business and could have an adverse impact on our business, financial position and results of operations.   Changes in customer use of banks could adversely affect our financial condition and results of operations.   The rapid evolution of non-bank alternatives for initiation and completion of financial transactions puts us at risk of losing sources of revenue and funding. The ability of customers to pay bills, deposit and transfer funds, and purchase assets without utilizing the banking system could result in loss of fee income, deposits, and loans. If we are unable to continue timely development of competitive new products and services, our financial condition and results of operations could be adversely affected.   Regulatory and Legal Risks   We operate in a highly regulated environment and may be adversely affected by changes to or lack of compliance with federal, state and local laws and regulations.   We are subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change to, or addition of, applicable regulations or federal or state legislation could have a substantial impact on our financial condition and results of operations. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on the ability to pay dividends and the requirement to obtain regulatory approvals to proceed with certain aspects of our business plan, including branching and acquisitions.   17 Table of Contents   Changes in tax laws and regulations may have an adverse impact on our financial condition and results of operations.   The Tax Cuts and Jobs Act, which was enacted in December 2017, reduced the federal tax rate for corporations from 35% to 21%. While this legislation resulted in a one-time charge to earnings associated with the revaluation of Bancorp’s DTAs at the date of enactment, it has since had a positive impact on earnings as federal income tax expense has been reduced. With the Biden Administration taking office in 2021, it is increasingly likely that the federal tax rate for corporations could be increased in the future. The potential enactment of such legislation, or changes in the interpretation of existing tax law, including provisions impacting tax rates, apportionment, consolidation or combination, income, expense, credits and exemptions may have a material adverse effect on our business, financial condition and results of operations.   Changes to state tax laws and regulations that go into effect in the future may have a negative impact on our financial condition and results of operations. In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. The Kentucky corporate income tax is now assessed at 5% of Kentucky taxable income and is included as a component of current and deferred state income tax expense.   Transactions between Bancorp and its insurance subsidiary, the Captive, may be subject to certain IRS responsibilities and penalties.   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 Treasury Department of the United States and the IRS by way of Notice 2016-66 have stated that transactions believed to be similar in nature to transactions between Bancorp and the Captive may be deemed “transactions of interest” because such transactions may have potential for tax avoidance or evasion. If the IRS ultimately concludes such transactions do create tax avoidance or evasion issues, the Company could be subject to the payment of penalties and interest.   We are subject to litigation risk and reputational risk pertaining to fiduciary responsibility.   From time to time, customers may make claims and take legal action pertaining to our fiduciary responsibilities. Whether customer claims and legal action related to our fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to us they may result in significant financial liability and/or adversely affect the market perception of us and our products and services, as well as impact customer demand for those products and services. Any financial liability or reputational damage could have a material adverse effect on our financial condition and results of operations.   Increasing scrutiny and evolving expectations from regulators, investors and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.   Companies are facing increasing scrutiny from regulators, investors and other stakeholders related to their environmental, social and governance (ESG) practices and disclosure. Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance costs could result in increases to our overall operational costs. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence and disclosure. Additionally, concerns over the long-term impacts of climate change have led and will continue to lead to governmental efforts to mitigate those impacts. Failure to adapt or comply with related legislation, regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, financial condition and results of operations.   18 Table of Contents   Item 1B.           Unresolved Staff Comments.             None.   Item 2.           Properties.             The principal offices of Bancorp are located at 1040 East Main Street, Louisville, Kentucky, a complex that also serves as the Bank’s main branch. Bancorp’s operations center is at a separate location in Louisville. At December 31, 2021, in addition to the main office complex and the operations center, Bancorp owned 44 branches, seven of which are located on leased land. At that date, Bancorp also leased 18 branches, including its WM&T facility. Of the 63 banking locations, 33 are located in our home market of Louisville, while 19, six and five are located in our Central Kentucky, Cincinnati and Indianapolis markets, respectively.   Item 3.           Legal Proceedings.             In the ordinary course of operations, Bancorp and the Bank are defendants in various legal proceedings. There is no proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Bancorp or the Bank.   Item 4.           Mine Safety Disclosures.             NA   19 Table of Contents   PART II   Item 5.           Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   Bancorp’s common stock is traded on the NASDAQ under the ticker symbol SYBT. On December 31, 2021, Bancorp had approximately 2,000 shareholders of record, and approximately 11,900 beneficial owners holding shares in nominee or “street” name.   The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended December 31, 2021.       Total number of shares purchased (1)     Average price paid per share     Total number of shares purchased as part of publicly announced plans or programs     Average price paid per share     Maximum number of shares that may yet be purchased under the plans or programs                                             October 1 - October 31     460     $ 62.47       460     $ 62.47           November 1 - November 30     9,508       64.24       9,508       64.24           December 1 - December 31     620       62.27       620       62.27           Total     10,588     $ 64.04       10,588     $ 64.04       741,196       (1) Shares repurchased during the three-month period ended December 31, 2021 represent shares withheld to pay taxes due.   Effective May 22, 2019, Bancorp’s Board of Directors approved a share repurchase program authorizing the repurchase of 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. Stock repurchases are expected to be made from time to time on the open market or in privately negotiated transactions, subject to applicable securities laws. The plan, which was extended in May 2021 and will expire in May 2023 unless otherwise extended or completed at an earlier date, does not obligate the Company to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. No shares were repurchased in 2020, nor in 2021. Management does not intend to resume repurchasing in the near-term. Approximately 741,000 shares remain eligible for repurchase.   There were no equity securities of the registrant sold without registration during the quarter covered by this report.   On February 15, 2022, the Board of Directors declared a quarterly cash dividend of $0.28 per common share.   The following performance graphs and data shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed soliciting material or subject to Regulation 14A of the Exchange Act or incorporated by reference in any filing under the Exchange Act or the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.   The first graph compares performance of Bancorp’s Common Stock to the Russell 2000 Index, the SNL Midwest Bank Index, and the SNL Bank NASDAQ Index for the last five fiscal years. The graph assumes the value of the investment in Bancorp’s Common Stock and in each index was $100 at December 31, 2016 and that all dividends were reinvested.   In addition to the five-year period presented, the ten-year period is presented because it provides additional perspective, and Bancorp management believes that longer-term performance is of interest. The ten-year graph assumes the value of the investment in Bancorp’s Common Stock and in each index was $100 at December 31, 2011 and that all dividends were reinvested.   20 Table of Contents                 Period Ending           Index   12/31/16     12/31/17     12/31/18     12/31/19     12/31/20     12/31/21   Stock Yards Bancorp, Inc.   $ 100.00     $ 82.04     $ 73.37     $ 94.44     $ 96.01     $ 154.54   Russell 2000 Index     100.00       114.65       102.02       128.06       153.62       176.39   S&P U.S. BMI Banks - Midwest Region Index     100.00       107.46       91.76       119.38       102.64       135.60   KBW NASDAQ Bank Index     100.00       118.59       97.58       132.84       119.14       164.80           Period Ending   Index   12/31/11     12/31/12     12/31/13     12/31/14     12/31/15     12/31/16     12/31/17     12/31/18     12/31/19     12/31/20     12/31/21   Stock Yards Bancorp, Inc.   $ 100.00     $ 113.00     $ 166.01     $ 178.52     $ 207.87     $ 396.34     $ 325.15     $ 290.79     $ 374.31     $ 380.54     $ 612.51   Russell 2000 Index     100.00       116.35       161.52       169.43       161.95       196.45       225.23       200.42       251.58       301.80       346.52   S&P U.S. BMI Banks - Midwest Region Index     100.00       120.36       164.78       179.14       181.86       242.99       261.11       222.97       290.09       249.40       329.50   KBW NASDAQ Bank Index     100.00       132.91       183.08       200.24       201.22       258.59       306.67       252.34       343.51       308.08       426.17     21 Table of Contents   Item 6.           [RESERVED]   Item 7.           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 provides insurance coverage not currently provided by Bancorp’s commercial policies to Bancorp and SYB, as well as a group of third-party insurance captives.   Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part II Item 8 “ Financial Statements and Supplementary Data .”   Cautionary Statement Regarding Forward-Looking Statements   This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part II Item 7 “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” and Part I Item 1A “ Risk Factors. ”   Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “aim,” “anticipate,” “believe,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “likely,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “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 the COVID-19 pandemic on Bancorp’s business, including the impact of the actions taken by governmental authorities to try and contain the pandemic or address the impact of the pandemic on the U.S. economy (including, without limitation, various relief efforts), and the resulting effect of all such items on our operations, liquidity and capital position, and on the financial condition of Bancorp’s borrowers and other customers;     ● changes in, or forecasts of, future political and economic conditions, inflation and efforts to control it;     ● accuracy of assumptions and estimates used in establishing the ACL 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 interest rates, market volatility and liquidity;     ● ability to effectively manage capital and liquidity;     ● long-term and short-term interest rate fluctuations, as well as the shape of the U.S. Treasury yield curve;   22 Table of Contents     ● the magnitude and frequency of changes to the FFTR implemented by the Federal Open Market Committee of the FRB;     ● competitive product and pricing pressures;     ● projections of revenue, expenses, capital expenditures, losses, EPS, dividends, capital structure, etc.;     ● descriptions of plans or objectives for future operations, products, or services;     ● integration of acquired financial institutions, businesses or future acquisitions;     ● changes in the credit quality of Bancorp’s customers and counterparties, deteriorating asset quality and charge-off levels;     ● changes in technology instituted by Bancorp, its counterparties or competitors;     ● changes to or the effectiveness of Bancorp’s overall internal control environment;     ● adequacy of Bancorp’s risk management framework, disclosure controls and procedures and internal control over financial reporting;     ● changes in applicable accounting standards, including the introduction of new accounting standards;     ● changes in investor sentiment or behavior;     ● changes in consumer/business spending or savings behavior;     ● ability to appropriately address social, environmental and sustainability concerns that may arise from business activities;     ● occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics or outbreaks of hostilities, and Bancorp’s ability to deal effectively with disruptions caused by the foregoing;     ● ability to maintain the security of its financial, accounting, technology, data processing and other operational systems and facilities;     ● ability to withstand disruptions that may be caused by any failure of its operational systems or those of third parties;     ● ability to effectively defend itself against cyberattacks or other attempts by unauthorized parties to access information of Bancorp, its vendors or its customers or to disrupt systems; and     ● other risks and uncertainties reported from time-to-time in Bancorp’s filings with the SEC, including Part I Item 1A “ Risk Factors. ”.   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 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 failure to satisfy the conditions to completion of the merger; the failure of the proposed transaction to close for any other reason, including, without limitation, the occurrence of any event, change or other circumstance that could give rise to the right of either party or both parties to the definitive agreement to terminate the agreement; 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.   23 Table of Contents   Pending Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company   Effective August 3, 2021, Bancorp executed a definitive agreement, pursuant to which Bancorp will acquire all of the outstanding common stock of privately-owned Commonwealth Bancshares, Inc., which operates 15 retail branches, including nine 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 $171 million based on estimates as of February 17, 2022. Bancorp will fund the cash payment portion of the acquisition through existing resources on-hand.   Bancorp has received all required regulatory approvals to complete the acquisition and the acquisition is expected to close on or around March 7, 2022, subject to satisfaction or waiver of remaining closing conditions. As of December 31, 2021, Commonwealth reported approximately $1.31 billion in assets, $680 million in loans, $1.16 billion in deposits and $88 million in tangible common equity. Commonwealth also maintains a Wealth Management and Trust Department with total assets under management of $2.73 billion at December 31, 2021. The combined franchise will have 78 branches at acquisition date and anticipates serving customers through a branch network of 73 locations, as Bancorp has notified regulators of its intent to close five locations as part of the merger. The combined franchise will have total assets of approximately $8.0 billion, $4.85 billion in gross loans, $6.95 billion in deposits and $7.53 billion in trust assets under management.   Completed Acquisition of Kentucky Bancshares, 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 $1.27 billion in assets, $755 million in loans (including PPP), $396 million in AFS debt securities and $1.04 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.   Bancorp recorded goodwill of $123 million and incurred pre-tax merger related expenses totaling $18.1 million for the year ended December 31, 2021 as a result of the KB acquisition.   The acquisition of KB had a significant impact on the ACL and credit loss provisioning for the year ended December 31, 2021. In total, acquisition-related activity served to increase the ACL by $14.2 million for the year ended December 31, 2021. This increase consisted of $6.8 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $7.4 million attributed to the acquired non-PCD portfolio, which represented the acquisition-related provision expense for the year ended December 31, 2021.   Issued but Not Yet Effective Accounting Standards Updates   For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the Footnote titled “ Summary of Significant Accounting Policies ” of Part II Item 8 “ Financial Statements and Supplementary Data .”   24 Table of Contents   Critical Accounting Policies and Estimates   Bancorp’s consolidated financial statements and accompanying footnotes have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.   Management continually evaluates its accounting policies and estimates that it uses to prepare the consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, accounting and regulatory guidance, and information obtained from independent third-party professionals. Actual results may differ from those estimates made by management.   Critical accounting policies are those that management believes are the most important to the portrayal of Bancorp’s financial condition and operating results and require management to make estimates that are difficult, subjective and complex. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the financial statements. These factors include, among other things, whether the estimates have a significant impact on the financial statements, the nature of the estimates, the ability to readily validate the estimates with other information including independent third parties or available pricing, sensitivity of the estimates to changes in economic conditions and whether alternative methods of accounting may be utilized under GAAP. Management has discussed each critical accounting policy and the methodology for the identification and determination of critical accounting policies with Bancorp’s Audit Committee. Effective January 1, 2021 through December 31, 2021, the significant accounting policies considered the most critical in preparing Bancorp’s consolidated financial statements are the determination of the ACL on loans and Goodwill.   Allowance for Credit Losses on Loans and Provision for Credit Losses   On January 1, 2020, Bancorp adopted ASC 326 “ Financial Instruments – Credit Losses, ” which created material changes to Bancorp’s critical accounting policy that existed at December 31, 2019.   For purposes of establishing the general reserve, Bancorp stratifies the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculates the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. Bancorp’s methodologies for estimating the ACL on loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.   The ACL on loans is established through credit loss expense charged to current earnings. The amount maintained in the ACL reflects management’s estimate of the net amount not expected to be collected on the loan portfolio at the balance sheet date over the life of the loan. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate, an expected loss ratio based on historical losses adjusted as appropriate for qualitative factors, or the fair value of the collateral for certain collateral-dependent loans.   With the adoption of CECL, provision expense may be more volatile due to changes in the CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition. The pandemic has had a material impact on Bancorp’s quarterly ACL calculations. While Bancorp has not yet experienced credit quality issues resulting in charge-offs related to the pandemic, ACL calculations and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions, which were generally volatile for the years ended December 31, 2020 and 2021, respectively. Should the forecast for economic conditions worsen, Bancorp could experience further increases in its required ACL and record additional credit loss expense.   25 Table of Contents   Goodwill   Goodwill resulting from business combinations represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquire, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price falling below tangible book value), negative trends in overall financial performance and regulatory action.   Bancorp has selected September 30 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on Bancorp’s consolidated balance sheets. No impairment to Goodwill was indicated based on Bancorp’s annual testing for 2021.   At December 31, 2021, Bancorp had $136 million in goodwill recorded on its balance sheet, consisting primarily of $123 million recorded in association with the acquisition of KB. 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. Further, additional goodwill is expected to be recorded in association with the pending Commonwealth acquisition in 2022, which will increase the amount of goodwill on Bancorp’s balance sheet significantly.   26 Table of Contents   Business Segment Overview   Bancorp is divided into two reportable segments: Commercial Banking and WM&T:   Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, leasing, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment.    WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Overview – 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, easing of restrictions on public commerce and business activities, and stabilizing unemployment levels have been positive developments over the past several months, the pandemic’s effects on local, national and global economic activity may continue to weigh on Bancorp’s financial condition and results of operations in 2022.   Bancorp’s financial condition and results of operations for the year ended December 31, 2021 were significantly impacted by the following pandemic-related factors, among others:     ● Overall excess balance sheet liquidity     ● The sustained low interest rate environment and related NIM compression     ● Significant participation in the SBA’s PPP, which concluded on May 31, 2021     ● 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 then-developing pandemic decreased the FFTR to a range of 0%-0.25% and Prime to 3.25%, where both remained as of December 31, 2020 and 2021. Consistent with the rate drops, key benchmark rates, such as the five-year treasury rate and one-month LIBOR, declined dramatically. While the interest rate environment has improved in recent quarters, key rates remain well below pre-pandemic levels.   Bancorp’s participation in the PPP resulted in approximately 5,500 PPP loan originations totaling $918 million ($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 over 3,400 PPP loans totaling $657 million ($637 million net of unearned deferred fees and costs). As of December, 2021, 98% of the dollars originated in the first round have been forgiven. Further, approximately 99% of the $19.6 million in net fees received for this round have been recognized life to date. As these borrowers were required to begin making payments in July, accelerated forgiveness activity was experienced during the third and fourth quarters of 2021. Remaining round one originations are expected to be forgiven in the coming months.   As part of the second round of the PPP, Bancorp originated over 2,100 PPP loans totaling $261 million ($250 million net of unearned deferred fees and costs). As of December 31, 2021, 49% of the dollars originated in the second round have been forgiven and 61% of the $11.4 million in net fees received for this round were recognized in 2021. 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 December 31, 2021, outstanding PPP loans originated by KB and acquired by Bancorp totaled $6 million.   27 Table of Contents   Interest and fee income earned on the PPP portfolio totaled $22.0 million and $13.6 million for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, Bancorp had $4.6 million of net unearned deferred fees related to the PPP that have yet to be recognized and as a result, PPP loan forgiveness will continue to have an impact on operating results for 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 made substantial investments in the AFS debt securities portfolio during the year in an effort to deploy excess liquidity, purchasing $505 million in AFS debt securities (excluding those added through the KB acquisition) in 2021.   The ACL on loans (excluding acquisition related activity) decreased $5 million between December 31, 2020 and December 31, 2021, a stark contrast from the large reserve build recorded between December 31, 2019 and December 31, 2020, which included a $15 million increase that was 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 and 2021, 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 2020, unemployment forecasts have steadily improved, as have other underlying CECL model factors, resulting in a reduction of the provision for credit losses recorded in each quarter of 2021.   While separate from the ACL on loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced a decrease between December 31, 2020 and December 31, 2021. A net benefit of $2.2 million was recorded to provision for credit losses for off balance sheet exposures in 2021, as loss factors associated within the calculation improved and line of credit utilization continued to increase, while remaining below pre-pandemic levels. Partially offsetting this decrease was a $250,000 increase to the ACL for off balance sheet credit exposures recorded during the second quarter, in relation to the KB acquisition, which had no impact on earnings. The ACL for off balance sheet credit exposures stood at $3.5 million as of December 31, 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.   28 Table of Contents   Overview – Operating Results (FTE)   The following table presents an overview Bancorp’s financial performance for the years ended December 31, 2021, 2020 and 2019:   Years Ended December 31,                           Variance   (dollars in thousands, except per share data)   2021     2020     2019     2021 / 2020     2020 / 2019                                             Net income   $ 74,645     $ 58,869     $ 66,067       27 %     (11 )% Diluted earnings per share   $ 2.97     $ 2.59     $ 2.89       15 %     (10 )% ROA     1.33 %     1.40 %     1.90 %   (7 )bps   (50 )bps ROE     13.02 %     14.01 %     17.09 %   (99 )bps   (308 )bps   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the year ended December 31, 2021 compared to December 31, 2020:   ● Bancorp completed its acquisition of KB during the second quarter of 2021. At the time of acquisition, KB had $1.27 billion in assets, $755 million in loans (including PPP), $396 million in AFS debt securities and $1.04 billion in deposits.   o The year ended December 31, 2021 included seven months of activity associated with the KB acquisition, which contributed approximately $20.0 million in net interest income, $7.0 million in non-interest income and $15.3 million in non-interest expense (excluding one-time merger related expenses). In addition, one-time merger related expenses totaling $18.1 million and credit loss expense on the acquired loan portfolio of $7.4 million were recorded for the year ended December 31, 2021. ● In 2021, Bancorp set the following financial records :   o Total revenue, comprising net interest income FTE and non-interest income, of $237.4 million, shattering the previous record of $188.0 million in 2020   o Record loan production (excluding PPP), which drove $291 million of legacy portfolio growth and, combined with expansion into the Central Kentucky market, led to record total loans of $4.12 billion at December 31, 2021   o Total deposit growth of $1.80 billion, surpassing the previous record of $855 million in 2020, $1.08 billion of which was added through expansion into the Central Kentucky market (entered into as a result of the KB acquisition)   o WM&T AUM totaled $4.80 billion at December 31, 2021, with $949 million of growth during the year, approximately $250 million of which was added through the KB acquisition   o WM&T services income of $27.6 million boosted by record net new business generation and strong market performance at December 31, 2021   o Debit and credit card income of $13.5 million, supported by organic and acquisition-related growth in transaction volume and customer base   o Higher transaction volume, new product sales and customer base expansion boosted Treasury Management fees to a record $6.9 million ● Net income totaled $74.6 million for the year ended December 31, 2021, resulting in diluted EPS of $2.97, compared to net income of $58.9 million and diluted EPS of $2.59 for the year ended December 31, 2020.   o Operating results from the year ended December 31, 2021 were significantly impacted by the acquisition of KB, PPP forgiveness activity, reduction in both the ACL on loans and ACL for off-balance sheet exposures, substantial organic loan and deposit growth (excluding acquisition and PPP) and historic levels of excess liquidity.   o Operating results for the year ended December 31, 2020 were lower compared to 2021, primarily due to increased credit loss provisioning and reserves for off-balance sheet credit exposures associated with the developing pandemic and unprecedented government stimulus actions had a significant impact on Bancorp’s operating results in 2020. ● NIM decreased 17 bps to 3.22% for the year ended December 31, 2021 compared to 3.39% for the prior year consistent with the sustained low interest rate environment and record levels of excess liquidity, which created significant NIM compression. Despite the decrease in NIM, organic loan growth, the KB acquisition, fee income associated with PPP loans and deposit rate cuts resulted in a $35.2 million, or 26%, increase in net interest income compared to the prior year.   29 Table of Contents   ● Total loans (excluding PPP loans) increased $1.05 billion, or 35%, for the year ended December 31, 2021 as compared to December 31, 2020. While approximately $756 million of this growth was attributed to the central Kentucky market (entered into as a result of the KB acquisition), the remaining $291 million was attributed to strong organic growth highlighted by each of the Louisville, Indianapolis and Cincinnati markets ending the year at historic highs. ● Total provision for credit losses was a net benefit of $753,000 for the year ended December 31, 2021 compared to $18.4 million of provision expense recorded for the year ended December 31, 2020.   o While provision of $7.4 million was recorded in relation to the loan portfolio added through the KB acquisition, a cumulative net benefit of $8.2 million was recorded for credit losses on loans and credit losses on off balance sheet exposures in 2021, as a result of stabilized unemployment forecasts, generally improving CECL model factors and stronger line of credit utilization.   o The adoption of CECL 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 in 2020. ● C&I line of credit utilization improved to 31.8% at December 31, 2021, up from 26.1% at December 31, 2020. The onset of the pandemic in 2020 resulted in gradually declining levels of utilization that bottomed out in March of 2021, improving thereafter in each of the final three quarters of 2021. While this was a positive development for loan growth during the year, utilization still remains well below pre-pandemic levels. ● Bancorp’s ACL on loans to total loans was 1.29% at December 31, 2021, compared to 1.47% at December 31, 2020. ● Total deposits increased $1.80 billion, or 45%, at December 31, 2021 compared to December 31, 2020. Approximately $1.08 billion of this growth was attributed to the central Kentucky market (entered into as a result of the KB acquisition) while significant organic growth was also experienced during the year, as customers generally maintained elevated levels of liquidity stemming from economic uncertainty, PPP funding and continued federal stimulus. Deposits have remained elevated for several quarters and finished at record levels (including and excluding acquisition-related activity) as of December 31, 2021. ● Non-interest income increased $14.0 million, or 27%, for the year ended December 31, 2021 compared to the prior year. While the acquisition of KB resulted in a substantial contribution to non-interest income, significant organic growth was also experienced across all non-interest revenue streams, with the exception of mortgage banking, led by WM&T, card income and Treasury management fees. ● Non-interest expenses increased $40.6 million, or 40%, for the year ended December 31, 2021 compared to the same period of 2020, $19.0 million of which related to one-time merger related expenses (including expenses relating to the pending Commonwealth acquisition). While recurring expenses attributed to the KB acquisition comprise the majority of the remaining increase, non-interest expenses in general remained well-controlled and consistent with expansion, strong performance and continued investment in technology. ● Bancorp’s efficiency ratio (FTE) for the year ended December 31, 2021 increased to 59.94% from 54.06% for the prior year, consistent with recording one-time merger related costs of $19.0 million for the year ended December 31, 2021. Excluding one-time merger related costs and expenses related to the amortization of tax credit partnerships, Bancorp’s non-GAAP efficiency ratio at December 31, 2021 improved to 51.77% from 52.42% for the year prior. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures. ● The ETR increased to 21.75% for the year ended December 31, 2021 from 13.10% for the same period in 2020. The increase was significantly impacted by the prior year benefit of a large historic tax credit project coupled with Bancorp’s transition from a capital-based franchise tax to the Kentucky corporate income tax, which began January 1, 2021.   Total stockholder’s equity to total assets was 10.17% as of December 31, 2021 compared to 9.56% at December 31, 2020. Total equity increased $235 million in 2021, as $205 million of stock issued for the acquisition of KB and net income of $74.6 million were offset by $28.2 million of dividends declared, changes in AOCI and stock based compensation activity.   TCE is a measure of a company's capital, which is useful in evaluating the quality and adequacy of capital. Bancorp’s ratio of TCE to total tangible assets was 8.22% as of December 31, 2021, compared with 9.28% at December 31, 2020, the decline driven by goodwill of $123 million recorded in relation to the KB acquisition. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   30 Table of Contents   General highlights for the year ended December 31, 2020 compared to December 31, 2019:   ● Net income totaled $58.9 million for the year ended December 31, 2020, resulting in diluted EPS of $2.59, a 10% decline from the prior year. The year ended December 31, 2019 included $3.9 million in non-recurring tax adjustments related to two Kentucky tax law changes that equated to $0.18 per diluted share in addition to one-time merger related expenses, which equated to $0.05 per diluted share for 2019. Operating results for the year ended December 31, 2020 were lower compared to the prior year, primarily due to increased credit loss provisioning and reserves for off-balance sheet credit exposures associated with the uncertain pandemic-related economic conditions, a substantially lower interest rate environment and unprecedented government stimulus actions. ● NIM decreased 43 bps to 3.39% for the year ended December 31, 2020 compared to 3.82% for the prior year, consistent with the decline in the interest rate environment, the addition of the low-yielding PPP portfolio and excess balance sheet liquidity; offset by strong average year over prior year loan growth (excluding PPP loans) and the strategic lowering of stated deposit interest rates and CD offering rates in tandem with FRB interest rate actions. Despite the decrease in NIM, Bancorp’s deposit rate cuts and fee income associated with PPP loans resulted in a $10.6 million, or 8%, increase in net interest income compared to the prior year. ● Effective January 1, 2020, Bancorp began accounting for credit losses under ASC 326, or CECL. The adoption of this standard increased the opening balance of the ACL on loans and the reserve for off-balance sheet credit exposures as of January 1. Initial adoption reduced Bancorp’s retained earnings with no corresponding income statement impact. ● Total loans (excluding PPP loans) increased $136 million, or 5%, for the year ended December 31, 2020, as record first and fourth quarter loan production book-ended the largest quarterly loan balance contraction in the Company’s history during the second quarter and flat net loan activity in the third quarter. ● Line of credit utilization declined significantly in 2020, falling to 38.0% at December 31, 2020 compared to 47.1% at December 31, 2019. The decline was led by C&I line usage, which dropped from 40.9% at December 31, 2019 to 26.1% at December 31, 2020, with a low point of 23.3% reached at September 30, 2020. ● Deposit balances ended at record levels at December 31, 2020, primarily as a result of PPP funding and higher levels of liquidity held by customers attributable to current economic uncertainty. ● Despite overall strong credit metrics, significant credit loss provisioning occurred based on the on-going economic crisis, its corresponding impact on unemployment forecast adjustments within the CECL model, the addition of a large specific reserve, qualitative factor adjustments and loan growth. Significant provisioning related to off-balance sheet credit exposures was also recorded for the year ended December 31, 2020 consistent with declines in line utilization (mainly C&I). ● Bancorp’s ACL on loans to total loans was 1.47% at December 31, 2020, compared to 0.94% at December 31, 2019. Bancorp’s ACL on loans to total loans (excluding PPP loans) rose to 1.74% at December 31, 2020. ● Non-interest income increased 5% for the year ended December 31, 2020 compared to the prior year on the heels of record mortgage banking income despite substantially lower deposit service charge income and the prior year period benefitting from $1.4 million of non-recurring income. Strong WM&T results, which included a large estate fee in the first quarter of 2020 and continued growth in treasury management fees and card income also contributed to the increase. ● Non-interest expenses increased 4% for the year ended December 31, 2020 compared to the same period of 2019. Elevated tax credit amortization stemming from a large tax credit investment and continued investment in technology drove the increase despite declines associated with one-time acquisition-related charges and non-recurring activity in the prior year and pandemic-driven decreases in marketing and business development activity. ● Bancorp’s efficiency ratio (FTE) for the year ended December 31, 2020 improved to 54.06% from 56.07% for the prior year, the latter of which included $1.3 million in one-time merger-related expenses associated with the 2019 KSB acquisition. ● The ETR increased to 13.1% for the year ended December 31, 2020 from 12.7% for the same period in 2019, the latter of which benefitted from $3.9 million in non-recurring tax adjustments related to two Kentucky tax law changes.   Total stockholder’s equity to total assets was 9.56% as of December 31, 2020 compared to 10.91% at December 31, 2019, the decline driven by the outsized balance sheet growth attributed to PPP participation. Total equity increased $34.4 million in 2020, as net income of $58.9 million and changes in AOCI were offset by dividends declared of $24.5 million and various stock based compensation.   Bancorp’s ratio of TCE to total tangible assets was 9.28% as of December 31, 2020, compared with 10.55% at December 31, 2019, the decline driven by the significant balance sheet growth associated with PPP participation as noted above. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   31 Table of Contents   Challenges for 2022:   Bancorp has identified the following challenges for fiscal year 2022:   ● Bancorp expects to complete the merger of Commonwealth Bancshares, Inc. in the first quarter of 2022. Bancorp has received all required regulatory approvals to complete the acquisition and the acquisition is expected to close on or around March 7, 2022. Acquisitions require integration of different corporate cultures, loan and deposit products, pricing strategies, data processing systems and other technologies, accounting, internal audit and financial reporting systems, operating systems and internal controls, and marketing programs and personnel. Bancorp will need to manage the transition effectively to maximize retention of Commonwealth’s customers and employees, integrate personnel and systems efficiently, and maximize anticipated economic benefits. ● The prospects of a rising interest rate environment for 2022 and beyond present interest rate risk management challenges. Bancorp has benefitted significantly from the low cost of funds provided by its deposit base over the past year, as stated deposit rates have remained at very low levels since early 2020. Bancorp has also made significant investment in its AFS debt securities portfolio at low fixed rates, the market values of which will be impacted by rising rates. Given the record levels of liquidity held by Bancorp and in the banking system generally, the interest rate risk profile of Bancorp is expected to be slightly asset sensitive with interest rates expected to rise. ● NIM compression remains a challenge for 2022. While the FRB is projecting multiple rate hikes in 2022 based on its December 2021 policy meeting, on-going record levels of liquidity, existing and anticipated pricing pressure/competition and other economic factors, such as inflation, provide reasons for caution. Further, the timing of forgiveness associated with the remaining outstanding PPP portfolio will continue to affect loan yields and NIM, particularly in the first part of 2022. ● Net loan growth, excluding the PPP portfolio, is a major focus for Bancorp in 2022. This will be impacted by developments surrounding the on-going pandemic, competition, prevailing interest rates, economic conditions, line of credit utilization and loan prepayments. Bancorp believes there is continued opportunity for loan growth in all of its markets, including the recently entered Central Kentucky market. The pending acquisition of Commonwealth Bancshares, Inc. only serves to bolster these prospects. Bancorp’s ability to deliver attractive loan growth over the long-term is linked to Bancorp’s overall success. ● The continued integration and development of the central Kentucky market remains a top priority for 2022 as well. The acquisition of KB in 2021 expanded Bancorp’s presence in central and eastern Kentucky and will allow Bancorp to provide broader product offerings, increased lending capabilities and an expanded branch delivery system to existing and prospective customers alike, creating solid growth opportunities and a larger platform for future expansion. Prioritizing the development of the central Kentucky market, including growth of the WM&T business in this market, will play a major role in delivering strong operating results in the coming year. ● Bancorp derives significant non-interest income from WM&T services. Most of these fees are based upon the market value of AUM at respective period ends. To continue growth of this income source, Bancorp must attract new customers and retain existing customers. Bancorp believes there is opportunity for growth in all of its markets, particularly through the newly entered Central Kentucky market and the pending acquisition of Commonwealth Bancshares, Inc., the latter of which will serve to grow our WM&T customer base significantly. Growth in market values of AUM and fees is dependent upon positive returns in the overall capital markets, which ended 2021 near record highs. Bancorp has no control over market volatility. ● Competitive factors surrounding the developing trend of financial institutions reducing or eliminating certain deposit account fees, particularly overdraft-related fees, presents a significant challenge to growing deposit-related non-interest income in the future and potentially threatens a revenue stream that has been in an industry-wide, regulation-driven decline for several years. Strategic decisions surrounding this trend may impact not only deposit-related income, but also deposit relationships in general, particularly for retail customers, as consumer use of these bank deposit services continues to evolve. Continuous monitoring of these trends and evaluation of any potential changes to our deposit service fee structure will play a key role in the growth of Bancorp’s non-interest income. ● Technological advances are consistently providing opportunities for Bancorp to consider potential new products and delivery channels. Bancorp’s customers’ demand for innovative and relevant products and services is expected to trend along with changing technology. Bancorp will need to continue to make prudent investments in technology while managing associated risks so as to remain competitive with other financial service providers, especially as Bancorp’s continued expansion raises the level of expectation from customers. ● Over the past several years, Bancorp’s asset quality metrics have trended within a narrow range, exceeding benchmarks and reaching historically strong levels. Bancorp realizes that present asset quality metrics are positive and, recognizing the cyclical nature of the lending business, Bancorp anticipates this trend will likely normalize over time. ● Operating results for 2020 and 2021 were significantly impacted by the pandemic and efforts to contain both the virus and its economic impact will continue to weigh on the economy, the banking industry and Bancorp. As such, any future regulatory and legislative actions taken in response to related developments could have a significant impact on future operating results.   32 Table of Contents   Results of Operations   Net Interest Income - Overview   As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by numerous economic factors including market interest rates, business spending, liquidity, consumer confidence and various competitive conditions within the marketplace. The discussion that follows is based on fully tax-equivalent interest data.   Comparative information regarding net interest income follows:   As of and for the Years Ended December 31,                 Variance (dollars in thousands)   2021   2020   2019   2021 / 2020   2020 / 2019                           Net interest income   $       171,074   $       135,921   $       125,348    26 %    8 % Net interest income (FTE)*    171,508    136,133    125,571    26 %    8 % Net interest spread   3.16%   3.22%   3.50%    (6) bps    (28) bps Net interest margin   3.22%   3.39%   3.82%    (17) bps    (43) bps Average earning assets   $    5,318,968   $    4,019,336   $    3,290,345    32 %    22 % Five year Treasury note rate at year end   1.26%   0.36%   1.69%    90 bps    (133) bps Average five year Treasury note rate   0.86%   0.53%   1.95%    33 bps    (142) bps Prime rate at year end   3.25%   3.25%   4.75%    - bps    (150) bps Average Prime   3.25%   3.53%   5.29%    (28) bps    (176) bps One month LIBOR at year end   0.10%   0.14%   1.76%    (4) bps    (162) bps Average one month LIBOR   0.10%   0.52%   2.22%    (42) bps    (170) bps   *See table titled, "Average Balance Sheets and Interest Rates (FTE)" for detail of Net interest income (FTE).   NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled $5 million, $10 million and $8 million for the years ended December 31, 2021, 2020 and 2019, respectively. These sold loans are on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, because Bancorp believes it provides a more accurate depiction of loan portfolio performance.   Prime rate, the five year Treasury note rate and the one month LIBOR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past three years. Approximately $1.2 billion, or 30%, of Bancorp’s loans are variable rate and are indexed to either Prime or LIBOR, generally repricing as those rates change. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year Treasury rate.   The interest rate environment has experienced a significant decline over the three year period referenced above. The FFTR began 2019 at a range of 2.25-2.50%, and in turn, Prime began that same year at 5.50%, representing the highest interest rates experienced post-Great Recession. Subsequent to hitting those peak marks, the FRB lowered the FFTR five times for a total of 225 bps, the most recent of which came in March of 2020 and took the FFTR to a range of 0-0.25% and Prime to 3.25%, where both remained as of December 31, 2020 and December 31, 2021.   33 Table of Contents   Discussion of 2021 vs 2020:   Net interest spread and NIM were 3.16% and 3.22% for the year ended December 31, 2021 compared to 3.22% and 3.39% for the year ended December 31, 2020. NIM was significantly impacted in 2021 by the following:     ● A sustained low interest rate environment, driven by the lowering of the FFTR in March 2020 to a range of 0% - 0.25%, which resulted in Prime dropping to 3.25%, where it has remained since the first quarter of 2020.     ● 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 an 18 bps benefit to NIM for the year ended December 31, 2021 as a result of forgiveness activity, which drove the recognition of $18.1 million in PPP-related fee income. In comparison, the PPP portfolio had a negative impact of 3 bps on NIM for the year end December 31, 2020 due to the large amount of originations that occurred in 2020 and the affect that the low-yielding, 1% stated rate of these notes had on NIM for the period.     ● Overall, excess balance sheet liquidity contributed approximately 25 bps of NIM compression for the year ended December 31, 2021. By comparison, excess balance sheet liquidity contributed approximately 13 bps of NIM compression for the same period of 2020. In general, excess liquidity within the banking system has led to a highly competitive loan rate environment over the past two years.     ● Substantial balance sheet growth, both organic and acquisition-related, which resulted in total average earning asset growth of $1.3 billion, or 32%, and average interest-bearing liability growth of $773 million, or 30%, for the year ended December 31, 2021 compared to the same period of 2020.     ● The lowering of deposit rates in tandem with FRB interest rate actions and the benefit of paying off all FHLB advances during 2021.   Net interest income (FTE) increased $35.4 million, or 26%, for the year ended December 31, 2021 compared to the same period of 2020, due to interest and fee income associated with the PPP portfolio, substantial growth in the non-PPP loan portfolio and AFS debt securities portfolio, and the aforementioned lowering of deposit rates.   Total average interest earning assets increased $1.30 billion, or 32%, to $5.32 billion for the year ended December 31, 2021, as compared to the same period of 2020, with the average rate earned on total interest earning assets contracting 34 bps to 3.34%.     ● Average total loans increased $646 million, or 20%, for the year ended December 31, 2021 compared to the same period of 2020. Average non-PPP loan balances grew $692 million, or 24%, for the year ended December 31, 2021 compared to the same period of 2020, attributed to both the acquisition and strong organic growth. Average PPP loan balances decreased $45 million, or 10%, for the year ended December 31, 2021 compared to the same period of 2020, consistent with forgiveness activity throughout 2021.     ● Average AFS debt securities grew $446 million, or 98%, for the year ended December 31, 2021 compared to the same period of 2020, which was attributed to a combination of strategically deploying excess liquidity through further investment and the KB acquisition.     ● Average FFS and interest bearing due from balances increased $217 million, or 94%, for the year ended December 31, 2021, consistent with the elevated level of deposits.   34 Table of Contents   Total interest income (FTE) increased $29.4 million, or 20%, to $177.5 million for the year ended December 31, 2021 as compared to the same period of 2020.     ● Interest and fee income on loans (FTE) increased $26.6 million, or 19%, to $164.4 million for the year ended December 31, 2021 compared to the same period of 2020, driven by accelerated recognition of PPP fee income consistent with forgiveness activity, organic loan growth and the contribution attributed to the KB acquisition.     ● Significant growth in average AFS debt securities drove an increase of $3.2 million, or 37%, for interest income (FTE) on the portfolio for the year ended December 31, 2021 compared to the same period of 2020. However, the lower interest rate environment experienced over the past twelve months weighed heavily on fixed income security yields, which decreased 59 bps, or 31%.     ● Despite the substantial increase experienced for average FFS and interest bearing due from balances, corresponding interest income decreased $93,000, or 13%, for the year ended December 31, 2021 compared to the same period of 2020 as a result of the FRB lowering the FFTR 150 bps in March 2020 to a range of 0-0.25%, where it remained for the final three quarters of 2020 and the entirety of 2021.   Total average interest bearing liabilities increased $773 million, or 30%, to $3.39 billion for the year ended December 31, 2021 compared with the same period in 2020, with the total average cost declining 28 bps to 0.18%.     ● Average interest bearing deposits increased $795 million, or 32%, for the year ended December 31, 2021 compared to the same period in 2020, with interest-bearing demand deposits accounting for $500 million of the increase. Interest bearing deposits added as a result of the KB acquisition along with significant federal stimulus action, such as PPP funding, propelled deposit balances to record levels at December 31, 2021. Further, general economic uncertainty surrounding the on-going pandemic has resulted in the customer base maintaining higher levels of liquidity, similar to customer behavior seen during the Great Recession.     ● Consistent with the higher interest bearing deposit balances noted above, as well as the KB acquisition, average SSUAR balances increased $22 million, or 55%, for the year ended December 31, 2021 compared to the same period of 2020.     ● Average FHLB advances decreased $45 million, or 73%, for the year ended December 31, 2021 compared to the same period of 2020, as advances continued to mature without renewal or replacement over the past year, including $30 million of three month advances relating to cash flow hedge interest rate swaps. In addition, Bancorp elected to pay down certain advances prior to their maturity during the first and second quarters of 2021, the latter of which resulted in an early-termination fee of $474,000, recorded as a component non-interest expense during the second quarter of 2021. Bancorp made this decision due to its excess liquidity driven by the substantial deposit growth it achieved over the past year, combined with the near-term outlook for low interest rates at the time of pay off. As of December 31, 2021, Bancorp had no outstanding FHLB advances.   Total interest expense decreased $5.9 million, or 50%, for the year ended December 31, 2021 compared to the same period of 2020, a direct result of deposit rate reductions implemented in response to the falling interest rate environment and to a lesser extent, the reduction in interest expense on FHLB advances.     ● Total interest bearing deposit expense decreased $4.9 million, or 46%, driving a 25 bps decline in the cost of average total interest bearing deposits.     ● Interest expense on FHLB advances declined $1.1 million, or 76%, as a result of the substantial reduction in average FHLB advances outstanding. As noted above, Bancorp had no outstanding FHLB advances as of December 31, 2021.   Discussion of 2020 vs 2019:   Net interest spread and NIM were 3.22% and 3.39% for the year ended December 31, 2020 compared to 3.50% and 3.82% for the year ended December 31, 2019. NIM was significantly impacted in 2020 by the following:     ● The FFTR was lowered 225 bps between July 2019 and mid-March 2020, resulting in Prime dropping to 3.25%. Average Prime declined significantly to 3.53% for 2020 compared to 5.29% for 2019.     ● Treasury yields were near historic lows for several months in 2020, eroding NIM and loan yields.     ● PPP loan originations, which boosted net interest income, had a negative impact on NIM and loan yields.     ● The strategic lowering of stated deposit interest rates and CD offering rates over the past twelve months in tandem with FRB interest rate actions.     ● Strong average non-PPP loan growth.     ● Excess balance sheet liquidity and elevated deposit balances.   Bancorp originated approximately 3,400 PPP loans, equating to $637 million (net of origination fees and costs) during 2020. Bancorp recognized $9.1 million in net origination fee income associated with the PPP portfolio in 2020. While this had a positive impact on interest and fee income, as well as net interest income, the 1% stated yield on the PPP portfolio negatively impacted the overall loan portfolio yield by 17 bps and NIM by 3 bps for the year ended December 31, 2020.   35 Table of Contents   Average FFS and interest bearing due from bank balances increased significantly for the year ended December 31, 2020 compared with the same period in 2019. Excess liquidity contributed to approximately 15 bps of NIM compression for the year ended December 31, 2020 compared to 9 bps for the year ended December 31, 2019.   Net interest income (FTE) increased $10.6 million, or 8%, for the year ended December 31, 2020 compared to the same period of 2019, primarily attributed to the lowering of stated deposit rates in response to the changing interest rate environment and the additional fee income associated with the PPP portfolio in 2020.   Total average interest earning assets increased $729 million, or 22%, to $4.02 billion for the year ended December 31, 2020, with the average rate earned on total interest earning assets contracting 82 bps to 3.68%.     ● Average loans increased $602 million, or 22%, for the year ended December 31, 2020 compared to the same period of 2019 with $443 million of the average growth attributed to the PPP portfolio. In addition to the 2019 KSB acquisition, Bancorp experienced strong organic growth across all three markets in 2020, which led to a $160 million increase in average non-PPP loan portfolio balances.     ● Average FFS and interest bearing due from bank balances increased $93 million for the year ended December 31, 2020 as compared with the same period of 2019, consistent with the elevated level of deposits.   Total interest income (FTE) was flat, down $32,000 to $148.1 million for the year ended December 31, 2020, as compared with the same period of 2019 despite the drastic decline in the interest rate environment.     ● Interest and fee income on loans (FTE) increased approximately $3.3 million, or 2%, to $137.9 million, attributed to the PPP portfolio. Significant interest rate contraction in 2020 led to a $10.4 million decline in interest income on the non-PPP loan portfolio.     ● With the exception of mortgage loans held for sale, interest income on the remaining interest earning asset portfolio was negatively impacted by the changes in the interest rate environment in addition to substantial average balance growth.   Total average interest bearing liabilities increased $353 million, or 16%, to $2.62 billion for the year ended December 31, 2020, as compared with the same period of 2019, with the average cost decreasing 54 bps to 0.46%.     ● Average interest bearing deposits increased $364 million, or 17%, for the year ended December 31, 2020 compared to the same period of 2019, with interest-bearing demand deposits representing $257 million of the increase.     ● Average FHLB advances declined $9 million, or 13%, for the year ended December 31, 2020 compared to the same period of 2019, as matured advances were not replaced or renewed in 2020.   Total interest expense decreased $10.6 million, or 47%, for the year ended December 31, 2020, compared to the same period of 2019, a direct result of stated deposit rate reductions implemented in response to the changing interest rate environment.     ● Total interest bearing deposit expense decreased $10.1 million, or 49%, driving a 54 bps decrease in the cost of average total interest bearing liabilities to 0.42% as deposit rates were cut in tandem with FRB interest rate actions.     ● FHLB advance expense decreased $240,000 or 15%, as matured advances were not replaced or renewed in 2020, resulting in lower interest expense.   36 Table of Contents   Average Balance Sheets and Interest Rates (FTE)       2021     2020     2019   Years ended December 31, (dollars in thousands)   Average Balance     Interest     Average Rate     Average Balance     Interest     Average Rate     Average Balance     Interest     Average Rate   Interest earning assets:                                                                         Federal funds sold and interest bearing due from banks   $ 446,783     $ 645       0.14 %   $ 229,905     $ 738       0.32 %   $ 136,514     $ 2,933       2.15 % Mortgage loans held for sale     11,170       249       2.23       20,156       533       2.64       3,836       182       4.74   Available for sale debt securities:                                                                         Taxable     879,298       11,575       1.32       443,035       8,432       1.90       413,801       9,291       2.25   Tax-exempt     19,636       340       1.73       10,047       265       2.64       22,710       570       2.51   Total securities     898,934       11,915       1.33       453,082       8,697       1.92       436,511       9,861       2.26                                                                             Federal Home Loan Bank stock     10,824       262       2.42       11,284       253       2.24       10,858       548       5.05                                                                             SBA Paycheck Protection Program (PPP) loans     397,282       22,044       5.55       442,510       13,636       3.08       —       —       —   Non-PPP loans     3,553,975       142,395       4.01       2,862,399       124,226       4.34       2,702,626       134,591       4.98   Total loans     3,951,257       164,439       4.16       3,304,909       137,862       4.17       2,702,626       134,591       4.98   Total interest earning assets     5,318,968       177,510       3.34       4,019,336       148,083       3.68       3,290,345       148,115       4.50   Less allowance for credit losses on loans     57,696                       45,008                       27,057                   Non-interest earning assets:                                                                         Cash and due from banks     63,477                       46,277                       44,884                   Premises and equipment, net     69,483                       57,474                       63,197                   Bank owned life insurance     44,720                       32,899                       32,631                   Accrued interest receivable and other     187,934                       106,615                       76,998                   Total assets   $ 5,626,886                     $ 4,217,593                     $ 3,480,998                                                                                             Interest bearing liabilities:                                                                         Deposits:                                                                         Interest bearing demand   $ 1,633,606     $ 1,771       0.11 %   $ 1,133,308     $ 1,776       0.16 %   $ 875,897     $ 4,951       0.57 % Savings     328,570       93       0.03       190,368       36       0.02       166,509       291       0.17   Money market     919,778       589       0.06       771,363       1,482       0.19       695,411       7,105       1.02   Time     420,308       3,174       0.76       412,506       7,184       1.74       406,176       8,213       2.02   Total interest bearing deposits     3,302,262       5,627       0.17       2,507,545       10,478       0.42       2,143,993       20,560       0.96                                                                             Securities sold under agreements to repurchase     62,534       24       0.04       40,363       37       0.09       38,555       101       0.26   Federal funds purchased     10,596       14       0.13       9,457       35       0.37       11,182       217       1.94   Federal Home Loan Bank advances     16,317       337       2.07       61,483       1,400       2.28       70,755       1,640       2.32   Subordinated debt     —       —       —       —       —       —       922       26       2.82                                                                                                                                                       Total interest bearing liabilities     3,391,709       6,002       0.18       2,618,848       11,950       0.46       2,265,407       22,544       1.00   Non-interest bearing liabilities:                                                                         Non-interest bearing demand deposits     1,578,795                       1,100,942                       765,103                   Accrued interest payable and other     83,121                       77,684                       63,925                   Total liabilities     5,053,625                       3,797,474                       3,094,435                   Stockholders ’ equity     573,261                       420,119                       386,563                   Total liabilities and stockholder's equity   $ 5,626,886                     $ 4,217,593                     $ 3,480,998                   Net interest income           $ 171,508                     $ 136,133                     $ 125,571           Net interest spread                     3.16 %                     3.22 %                     3.50 % Net interest margin                     3.22 %                     3.39 %                     3.82 %   37 Table of Contents   Supplemental Information - Total Company Average Balance Sheets and Interest Rates (FTE)     ● Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans averaged $5 million, $8 million and $9 million for the years ended December 31, 2021, 2020 and 2019, respectively.     ● Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a FTE basis using a federal income tax rate of 21%. Approximate tax equivalent adjustments to interest income were $434,000, $212,000 and $224,000 for the years ended December 31, 2021, 2020 and 2019, respectively.     ● Interest income includes loan fees of $20.5 million ($18.1 million associated with the PPP), $10.6 million ($9.1 million associated with the PPP) and $2.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Interest income on loans may be impacted by the level of prepayment fees collected and accretion related to loans purchased.     ● Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.     ● NIM represents net interest income on a FTE basis as a percentage of average interest earning assets.     ● Net interest spread (FTE) is the difference between taxable equivalent rates earned on interest earning assets less the cost of interest bearing liabilities.     ● The fair market value adjustment on investment securities resulting from ASC 320, Investments –  Debt and Equity Securities is included as a component of other assets.   38 Table of Contents   The following table illustrates the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities impacted Bancorp’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Tax-equivalent adjustments are based on a federal income tax rate of 21%. The change in interest due to both rate and volume has been allocated to the change due to rate and the change due to volume in proportion to the relationship of the absolute dollar amounts of the change in each.   Rate/Volume Analysis (FTE)       Year ended December 31, 2021     Year ended December 31, 2020       Compared to     Compared to       Year ended December 31, 2020     Year ended December 31, 2019       Total Net     Increase (Decrease) Due to     Total Net     Increase (Decrease) Due to   (in thousands)   Change     Rate     Volume     Change     Rate     Volume                                                     Interest income:                                                 Federal funds sold and interest bearing due from banks   $ (93 )   $ (547 )   $ 454     $ (2,195 )   $ (3,441 )   $ 1,246   Mortgage loans held for sale     (284 )     (74 )     (210 )     351       (113 )     464   Securities available for sale:                                                 Taxable     3,143       (3,210 )     6,353       (859 )     (1,484 )     625   Tax-exempt     75       (114 )     189       (305 )     28       (333 ) Federal Home Loan Bank stock     9       20       (11 )     (295 )     (316 )     21   SBA Paycheck Protection Program (PPP) loans     8,408       9,928       (1,520 )     13,636       —       13,636   Non-PPP Loans     18,169       (10,096 )     28,265       (10,365 )     (18,000 )     7,635                                                     Total interest income     29,427       (4,093 )     33,520       (32 )     (23,326 )     23,294                                                     Interest expense:                                                 Deposits:                                                 Interest bearing demand     (5 )     (647 )     642       (3,175 )     (4,326 )     1,151   Savings     57       23       34       (255 )     (292 )     37   Money market     (893 )     (1,136 )     243       (5,623 )     (6,324 )     701   Time     (4,010 )     (4,143 )     133       (1,029 )     (1,155 )     126   Total interest bearing deposits     (4,851 )     (5,903 )     1,052       (10,082 )     (12,097 )     2,015                                                     Securities sold under agreements to repurchase     (13 )     (28 )     15       (64 )     (69 )     5   Federal funds purchased     (21 )     (25 )     4       (182 )     (153 )     (29 ) Federal Home Loan Bank advances     (1,063 )     (119 )     (944 )     (240 )     (28 )     (212 ) Subordinated debt     —       —       —       (26 )     —       (26 )                                                   Total interest expense     (5,948 )     (6,075 )     127       (10,594 )     (12,347 )     1,753                                                     Net interest income   $ 35,375     $ 1,982     $ 33,393     $ 10,562     $ (10,979 )   $ 21,541     39 Table of Contents   Asset/Liability Management and Interest Rate Risk   Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.   Interest Rate Simulation Sensitivity Analysis   Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.   Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100 and 200 bps would have a negative effect on net interest income, respectively. These results are attributed to over half of the variable rate loan portfolio being currently at or near floor rates, as these yields will not increase until short-term rates exceed these floor rates. For example, a significant portion of the variable rate loan portfolio is tied to Prime, with floor rates of 4.00%. Given Prime is at 3.25% as of December 31, 2021, short-term rates would have to increase over 75 bps for these loans to move above their floor rates.   The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in the down 100 bps scenario, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates of the summarized below.       Change in Rates       -200     -100     +100     +200       Basis Points     Basis Points     Basis Points     Basis Points   % Change from base net interest income at December 31, 2021   NA       -2.18 %     -2.84 %     4.50 %   Bancorp’s interest rate risk profile is generally neutral. The results of the interest rate sensitivity analysis performed as of December 31, 2021 suggest a slightly liability sensitive profile as a result of the long-term, conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates. However, given the historic levels of liquidity currently held by Bancorp and in the banking system generally, the Company anticipates actual deposit betas will remain well below long-term averages through 2022 despite forecasted interest rate hikes from the FRB. In a scenario where deposit betas are well below long-term averages, Bancorp’s interest rate risk profile shifts to a slightly asset sensitive position, but remains generally neutral.   Bancorp’s loan portfolio is currently composed of approximately 70% fixed and 30% 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 66%) or one month LIBOR (approximately 34%). Bancorp’s loan portfolio (excluding PPP loans) at December 31, 2020 was composed of approximately 69% fixed and 31% variable rate loans.   In July 2017, the Financial Conduct Authority (the “FCA”), the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. Subsequent to this, Bank regulators instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later than December 2021. Effective December 31, 2021, Libor will no longer be used to issue new loans in the U.S. It is expected to be replaced primarily by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark. To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR.   40 Table of Contents   Management has focused on operational readiness, as well as instituting processes and systems to validate that contract risk is clearly identified and understood. New originations and any modifications or renewals of LIBOR-based contracts contained fallback language to assist in an orderly transition to an alternative reference rate. For Bank contracts that have a duration beyond December 31, 2021, and that reference LIBOR, all fallback provisions and variations are currently being identified and sorted into classifications based upon those provisions. Upon classification, the contracts are monitored and possibly remediated if fallback provisions are not deemed sufficiently robust. The Bank realizes that remediating certain contracts indexed to LIBOR may require consent from the counterparties, which could be difficult and costly to obtain in certain limited circumstances.   As of December 31, 2021, the Company had approximately $425 million in loans and interest rate derivative contracts of $123 million (notional amount) that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. The Company had 7 loans totaling $24 million that were indexed to SOFR at December 31, 2021.   Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value, with changes in fair value recorded in other non-interest income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above. For additional information see the Footnote titled “ Assets and Liabilities Measured and Reported at Fair Value. ”   In addition, Bancorp periodically uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled “ Derivative Financial Instruments. ” For these derivatives, the effective portion of gains or losses is reported as a component of OCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction affects earnings. As of December 31, 2021, Bancorp had no outstanding interest rate swaps designated as cash flow hedges.   41 Table of Contents   Provision for Credit Losses   Provision for credit losses for the years ended December 31, 2021 and 2020 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL on loans at an appropriate level under the CECL model. Years prior to 2020 were historically calculated under the incurred loss model. The determination of the amount of the ACL on loans is complex and involves a high degree of judgment and subjectivity. See the footnote titled “ Summary of Significant Accounting Policies ” for detailed discussion regarding Bancorp’s ACL on loans methodology by loan portfolio segment.   An analysis of the changes in the ACL on loans, including provision, and selected ratios follow:   Years ended December 31, (dollars in thousands)   2021     2020     2019                             Beginning balance   $ 51,920     $ 26,791     $ 25,534   KB acquisition - PCD loans (goodwill adjustment)     6,757       —       —   CECL - cumulative adjustment     —       9,856       —   Adjusted beginning balance     58,677       36,647       25,534                             Provision for credit losses on loans     (6,000 )     16,918       1,000   Provision for credit losses on loans - KB acquisition     7,397       —       —   Total provision for credit losses on loans     1,397       16,918       1,000                             Total charge-offs     (7,681 )     (2,101 )     (684 ) Total recoveries     1,505       456       941   Net loan (charge-offs) recoveries     (6,176 )     (1,645 )     257   Ending balance   $ 53,898     $ 51,920     $ 26,791   Average total loans   $ 3,951,257     $ 3,304,909     $ 2,702,626   Provision for credit losses on loans to average loans     0.04 %     0.51 %     0.04 % Net loan (charge-offs) recoveries to average loans     -0.16 %     -0.05 %     0.01 % ACL on loans to total loans     1.29 %     1.47 %     0.94 % ACL on loans to total loans (excluding PPP) (1)     1.34 %     1.74 %     —   ACL on loans to average loans     1.36 %     1.57 %     0.99 %   (1) See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.         Discussion of 2021 vs 2020:   The ACL on loans totaled $54 million as of December 31, 2021 compared to $52 million at December 31, 2020, representing an ACL to total loans ratio of 1.29% and 1.47% for those periods, respectively. The ACL to total loans (excluding PPP loans) was 1.34% at December 31, 2021 compared to 1.74% at December 31, 2020, the decrease stemming from loan growth that was offset by forgiveness activity within the PPP portfolio and a lower ACL. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $141 million (net of unamortized deferred fees) at December 31, 2021 and $550 million at December 31, 2020, Bancorp did not record a general reserve for potential losses for these loans within the ACL. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   Upon adoption of ASC 326 effective January 1, 2020, Bancorp recorded an increase of $8.2 million to the ACL on loans and a corresponding decrease to retained earnings, net of the DTA impact. In addition, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL on loans, which were subsequently charged-off in the third quarter of 2020 with no resulting impact to provision expense. The adjustment upon adoption of ASC 326 raised the beginning balance of the ACL on loans to $37 million on January 1, 2020. Additionally, with the adoption of CECL, provision expense may be more volatile due to changes in the CECL model assumptions of credit quality, macroeconomic factors and conditions, and loan composition.   42 Table of Contents   Due to continued improvement in the unemployment forecast, updates to Bancorp’s CECL modeling and strong historic credit metrics, a net benefit (excluding acquisition-related activity) of $6.0 million was recorded for the year ended December 31, 2021. Offsetting this benefit was credit loss expense on loans associated with the non-PCD loan portfolio added as a result of the KB acquisition, which was recorded during the second quarter of 2021 and totaled $7.4 million.   In total, provision for credit losses on loans decreased $15.5 million for the year ended December 31, 2021 compared to the same period of 2020. The significantly higher expense recorded for the year ended December 31, 2020 was the result of adopting of CECL effective January 1, 2020 and the subsequent pandemic-related developments experienced shortly thereafter, particularly elevated unemployment forecasts.   In addition to the non-PCD provision activity previously discussed for the year ended December 31, 2021, the ACL on loans was also increased $6.8 million as a result of the PCD loan portfolio added through the KB acquisition during the second quarter, with the corresponding offset recorded to goodwill. Partially offsetting this increase was net charge off activity of $6.2 million for the year ended December 31, 2021, respectively, serving to reduce the ACL on loans. Net charge off activity for 2021 was driven by the charge off of two CRE relationships totaling $4.4 million. These charged off amounts were fully reserved and had no income statement impact for the year ended December 31, 2021. In addition, there was a $555,000 recovery of a note that was fully charged off in 2020.   While separate from the ACL on loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced a decrease between December 31, 2020 and December 31, 2021. A net benefit of $2.2 million was recorded for the year ended December 31, 2021, as nearly all applicable loan segments experienced declines in their reserve loss percentages consistent with generally improving model factors and improvement in line of credit utilization, most notably within the C&I portfolio. In addition, the ACL for off balance sheet credit exposures was increased $250,000 as a result of available credit added through the KB acquisition during the second quarter, with the corresponding offset recorded to goodwill. The ACL for off balance sheet credit exposures stood at $3.5 million as of December 31, 2021 compared to $5.4 million as of December 31, 2020.   Bancorp’s loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance at December 31, 2021 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.   Discussion of 2020 vs 2019:   Upon adoption of ASC 326 effective January 1, 2020, Bancorp recorded an increase of $8.2 million to the ACL on loans and a corresponding decrease to retained earnings, net of the DTA impact. In addition, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL. The adjustment upon adoption of ASC 326 increased the ACL on loans balance to $37 million effective of January 1, 2020.   The ACL on loans totaled $52 million at December 31, 2020 compared to $27 million at December 31, 2019, representing an ACL to total loans ratio of 1.47% and 0.94% for those periods, respectively. The ACL to total loans (excluding PPP loans) was 1.74% at December 31, 2020. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $550 million (net of unamortized deferred fees) at December 31, 2020, Bancorp did not record a general reserve for potential losses for this portfolio. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   Despite overall strong credit metrics, Bancorp recorded provision for credit losses $16.9 million for the year ended December 31, 2020, as compared with $1.0 million for the same period of 2019, the latter of which was determined under the incurred loan loss model. Credit loss provisioning for 2020 was significantly impacted by the economic crisis due to the pandemic, its corresponding impact on unemployment forecast adjustments within the CECL model, loan growth, specific reserve additions and qualitative factor adjustments. The forecasted change in the unemployment rate coupled with the qualitative factor adjustments resulted in approximately $12.4 million of the total provision for credit loss expense recorded for the year ended December 31, 2020. In addition, Bancorp recorded $2.8 million in provision for credit losses in 2020 related to net loan growth which was heavily concentrated in the fourth quarter. During the second quarter of 2020, a large CRE relationship was placed on non-accrual status and allocated a $2 million specific reserve within the ACL on loans. An additional $1 million specific reserve was added to this relationship during the fourth quarter.   During the third quarter of 2020, the Company recorded charge-offs totaling $1.6 million related to loans that were acquired in the prior year acquisition and fully allocated for through purchase accounting adjustments at the time of acquisition. While these are reflected as charge-offs, there was no impact to the provision for credit losses, nor to the income statement, associated with these loans and charge-off activity for the year ended December 31, 2020 was otherwise minimal.   43 Table of Contents   Non-Interest Income                               Variance   (dollars in thousands)                           2021 / 2020     2020 / 2019   Years Ended December 31,   2021     2020     2019     $     %      $     %                                                             Wealth management and trust services   $ 27,613     $ 23,406     $ 22,643     $ 4,207       18 %   $ 763       3 % Deposit service charges     5,852       4,161       5,193       1,691       41       (1,032 )     (20 ) Debit and credit card income     13,456       8,480       8,123       4,976       59       357       4   Treasury management fees     6,912       5,407       4,992       1,505       28       415       8   Mortgage banking income     4,724       6,155       2,934       (1,431 )     (23 )     3,221       110   Net investment products sales commissions and fees     2,553       1,775       1,498       778       44       277       18   Bank owned life insurance     914       693       1,031       221       32       (338 )     (33 ) Other     3,826       1,822       3,014       2,004       110       (1,192 )     (40 ) Total non-interest income   $ 65,850     $ 51,899     $ 49,428     $ 13,951       27 %   $ 2,471       5 %   Discussion of 2021 vs 2020:   Total non-interest income increased $14.0 million, or 27%, for the year ended December 31, 2021 compared to the same period of 2020. Non-interest income comprised 27.8% of total revenue, defined as net interest income and non-interest income, for the year ended December 31, 2021 compared to 27.6% for the same period of 2020, respectively. WM&T services comprised 41.9% of total non-interest income for the year ended December 31, 2021 compared to 45.1% for the same period of 2020, respectively. The KB acquisition accounted for a meaningful increase in total non-interest income for the year ended December 31, 2021, concentrated most notably in deposit service charges, debit and credit card income, and mortgage banking income.   WM&T Services:   The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased $4.2 million, or 18%, for the year ended December 31, 2021 as compared with the same period of 2020. Stock market appreciation, coupled with record net new business development and to a lesser extent, the KB acquisition, drove the substantial revenue increase for 2021.   Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased $4.4 million, or 20%, for the year ended December 31, 2021, as compared with the same period of 2020, as a result of significant stock market appreciation experienced in addition to both organic and acquisition-related growth in net new business.   A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues typically correspond with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees decreased $211,000, or 26%, for the year ended December 31, 2021, as compared with the same period of 2020. The decrease from prior year was driven mainly by a large estate fee recorded in the first quarter of 2020.   AUM, stated at market value, totaled $4.80 billion at December 31, 2021 compared to $3.85 billion at December 31, 2020. The large increase in AUM is attributed to significant stock market appreciation experienced in addition to record net new business growth and AUM of approximately $250 million added through the KB acquisition.   44 Table of Contents   Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams.   Detail of WM&T Service Income by Account Type:   (in thousands)                         Years Ended December 31,   2021     2020     2019                             Investment advisory   $ 12,003     $ 9,747     $ 9,072   Personal trust     7,569       7,027       7,164   Personal investment retirement     5,168       4,319       3,821   Company retirement     1,798       1,457       1,503   Foundation and endowment     797       589       559   Custody and safekeeping     146       129       130   Brokerage and insurance services     78       45       52   Other     54       93       342                             Total WM&T services income   $ 27,613     $ 23,406     $ 22,643     The preceding table demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are predominantly based on AUM and tailored for individual/company accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, recurring AUM fee structures are in place for investment management, irrevocable and revocable trusts, revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. Company retirement plan services can consist of a one-time conversion fee with recurring AUM fees to follow. While there are also fee structures for estate settlements, income received is often non-recurring in nature. Fee structures are agreed upon at the time of account opening and any subsequent revisions are communicated in writing to the customer. WM&T fees earned are not performance-based nor are they based on investment strategy or transactions.   Assets Under Management by Account Type:   Total AUM (not included on balance sheet) increased from $3.85 billion at December 31, 2020 to $4.80 billion at December 31, 2021 as follows:       December 31, 2021     December 31, 2020   (in thousands)   Managed     Non-managed (1)     Total     Managed     Non-managed (1)     Total   Investment advisory   $ 1,919,593     $ 34,879     $ 1,954,472     $ 1,547,742     $ 72,696     $ 1,620,438   Personal trust     939,703       150,221       1,089,924       721,150       112,053       833,203   Personal investment retirement     620,312       3,478       623,790       506,005       3,241       509,246   Company retirement     35,234       599,129       634,363       40,006       481,222       521,228   Foundation and endowment     368,572       1,532       370,104       281,986       2,532       284,518                                                     Subtotal   $ 3,883,414     $ 789,239     $ 4,672,653     $ 3,096,889     $ 671,744     $ 3,768,633   Custody and safekeeping     —       128,178       128,178       —       83,004       83,004                                                     Total   $ 3,883,414     $ 917,417     $ 4,800,831     $ 3,096,889     $ 754,748     $ 3,851,637     (1) Non-managed assets represent those for which the WM&T department does not hold investment discretion.                     As of December 31, 2021 and 2020, approximately 81% and 80%, respectively, of total AUM were actively managed. Company retirement plan accounts primarily consist of participant-directed assets. The amount of custody and safekeeping accounts are insignificant.   45 Table of Contents   Managed Trust AUM by Class of Investment:   (in thousands)   December 31, 2021     December 31, 2020                     Interest bearing deposits   $ 173,603     $ 168,344   Treasury and government agency obligations     39,736       31,719   State, county and municipal obligations     110,795       119,344   Money market mutual funds     7,299       58,493   Equity mutual funds     944,500       752,476   Other mutual funds - fixed, balanced and municipal     612,913       441,275   Other notes and bonds     171,087       165,828   Common and preferred stocks     1,681,006       1,238,973   Real estate mortgages     —       190   Real estate     58,344       51,682   Other miscellaneous assets (1)     84,131       68,565                     Total managed assets   $ 3,883,414     $ 3,096,889     (1) Includes client directed instruments including rights, warrants, annuities, insurance policies, unit investment trusts, and oil and gas rights.               Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations and consist of approximately 68% in equities and 32% in fixed income securities as of December 31, 2021 compared to 64% and 36% as of December 31, 2020. This composition has been relatively consistent from period to period and the WM&T Department holds no proprietary mutual funds.   Additional Sources of Non-interest income:   Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, increased $1.7 million, or 41%, for the year ended December 31, 2021, as compared with the prior year, as a result of a meaningful contribution from the KB acquisition and a recovery from the subdued pandemic-induced activity experienced in the prior year. Consistent with the industry, customer behavior and transaction volume in 2020 was significantly impacted by the pandemic and continued government efforts to minimize its impact on the economy, such as stimulus payments, PPP funding and more lucrative unemployment compensation, which led to greatly reduced overdraft activity. Bancorp anticipates that future growth of this revenue stream will be significantly impacted by changing industry practices, as many larger financial institutions have opted to greatly reduce, or completely eliminate, certain deposit service charges, particularly overdraft-related fees. Bancorp will be faced with strategic decisions surrounding deposit-related charges in the future, which may negatively impact the contributions made by this revenue stream to total non-interest income.   Debit and credit card income consists of interchange revenue, ancillary fees and incentives received from card processors. Debit and credit card revenue increased $5.0 million, or 59%, for the year ended December 31, 2021, as compared with the same period of 2020, as a result of increased transaction volume and continued expansion of the customer bases, both organically and through acquisition-related activity. Total debit card income increased $3.6 million, or 61%, and total credit card income increased $1.4 million, or 54%, for the year ended December 31, 2021 compared the year ended December 31, 2020. Bancorp expects this revenue stream will continue to increase with expansion of the customer base and further development of the debit and credit card businesses.   Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased $1.5 million, or 28%, for the year ended December 31, 2021 compared to the prior year, complemented by strong new product sales and customer base expansion. Demand for Bancorp’s treasury products increased throughout the pandemic, as these products allow customers to operate more efficiently in a decentralized environment. In addition, sales efforts involving existing customers has led to increases in online services, reporting, ACH origination, remote deposit and fraud mitigation services during 2021. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.   46 Table of Contents   Mortgage banking income primarily includes gains on sales of mortgage loans and loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to FNMA and FHLMC. Interest rates on the mortgage loans sold are locked with the borrower and investor prior to loan closing, thus Bancorp bears no interest rate risk related to loans held for sale. Bancorp offers conventional, VA and FHA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue decreased $1.4 million, or 23%, for the year ended December 31, 2021, as compared with the prior year.   The sustained low long-term rate environment that began in 2020 incentivized refinancing and purchasing activity, which resulted in elevated mortgage banking income over the course of 2020 and the first part of 2021. However, as expected, volume started normalizing during 2021 as the pool of potential customers who have yet to refinance shrank, general housing inventory remained limited and interest rates began to rise above the absolute low levels experienced during 2020. Mortgage rates are generally correlated with the 10 year treasury rate, which has fluctuated widely in recent years, averaging 2.14% in 2019, plummeting to 0.89% in 2020 and sparking the increase in activity described above and subsequently rising to an average of 1.45% during 2021.   Beginning in the fourth quarter of 2020, the Bank elected to retain a select portion of qualified secondary market single family residential real estate loan production from the mortgage banking department on balance sheet in an effort to deploy a portion of excess liquidity in lieu of buying mortgage-backed securities within the AFS debt securities portfolio. Approximately $72 million and $31 million in 15/30 year fixed rate loans were retained for the years ended December 31, 2021 and 2020, respectively, as part of this strategy, forgoing gain on sale that would typically have been recognized in mortgage banking income for those years.   Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced by Bancorp’s WM&T Department. Net investment product sales commissions and fees increased $778,000, or 44%, for the year ended December 31, 2021, as compared with the prior year due to the KB acquisition and increased trading activity.   BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value of policies and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. BOLI income increased $221,000, or 32%, for the year ended December 31, 2021 compared to the prior year attributed almost entirely to the contribution of the KB acquisition.   Other non-interest income increased $2.0 million for the year ended December 31, 2021 as compared with the prior year. The increase was driven by a plethora of activity, most notably a death benefit of $523,000 on an insurance policy outside of traditional BOLI, stronger market returns on such insurance policies, the addition of the Captive and gains on OREO sold.   Discussion of 2020 vs 2019:   Total non-interest income increased $2.5 million, or 5%, for the year ended December 31, 2020 compared to the same period in 2019. Non-interest income comprised 28% of total revenue for both the year ended December 31, 2020 and 2019. WM&T services comprised 45% of Bancorp’s total non-interest income for the year ended December 31, 2020 compared to 46% for the same period in 2019.   WM&T revenue increased $763,000, or 3%, to $23.4 million for the year ended December 31, 2020, as compared with the same period of 2019. While stock market volatility associated with the COVID-19 pandemic had a significant impact on the WM&T department, particularly in the second quarter of 2020, strong market performance in the latter half of the year, record new business growth and a large non-recurring estate fee from the first quarter of 2020 led to WM&T income of $23.4 million.   47 Table of Contents   Deposit service charges decreased $1.0 million, or 20%, for the year ended December 31, 2020, as compared with the same period in 2019. The steady decline in the volume of fees earned on overdrawn checking accounts experienced over the years prior to 2019 was significantly exacerbated by the pandemic with declines in transaction volume and paper check presentments beginning in April 2020. Stimulus checks, extensions of tax payment due dates, more lucrative unemployment compensation, diminished pandemic spend and PPP funding all impacted consumer behavior in 2020.   Debit and credit card revenue increased $357,000 or 4%, for the year ended December 31, 2020, as compared with the same period in 2019 despite pandemic-related hurdles, as a result of growth in the customer bases. Total debit card income increased $85,000, or 1%, while total credit card income increased $272,000, or 11%. Similar to deposit service charges above, Bancorp saw significant improvement in transaction volume in the latter of half of 2020 as statewide activity restrictions due to the pandemic in Bancorp’s markets implemented earlier in year were eased and/or lifted.   Treasury management fees increased $415,000, or 8%, for the year ended December 31, 2020 compared to 2019, as Bancorp’s was able to overcome the significant decline in pandemic related transaction volume with new product sales and expansion of its customer base (partially attributable to the PPP). The demand for Bancorp’s treasury products increased during the pandemic, as these products allowed customers to operate more efficiently in a decentralized environment.   Mortgage banking revenue increased $3.2 million, or 110%, for the year ended December 31, 2020 as compared with the same period of 2019, as sustained low long-term rates incentivized refinancing activity and resulted in record mortgage banking income. In September 2020, the Bank elected to start retaining a portion of qualified secondary market single family residential real estate loan production from the mortgage banking department on balance sheet in an effort to deploy excess liquidity. Approximately $31 million in 15/30 year fixed rate loans were retained through December 31, 2020, forgoing approximately $845,000 in gain on sales of loans that would typically have been recognized in mortgage banking income.   Net investment product sales commissions and fees increased $277,000, or 18%, for the year December 31, 2020, as compared with the same period of 2019, as market volatility during 2020 led to increased customer trading activity.   Primarily as a result of a $296,000 death benefit received in the third quarter of 2019, BOLI income decreased $338,000, for the year ended December 31, 2020 compared to the prior year.   Other non-interest income decreased $1.2 million, or 40%, for the year ended December 31, 2020 as compared with the same period of 2019. This decrease was driven by a plethora of non-recurring activity that occurred in 2019 including swap fee income of $374,000, a $212,000 gain on the sale of VISA Class B stock originally acquired in a 2013 acquisition, proceeds of $142,000 associated with life insurance policies outside of the traditional BOLI program and a $126,000 banking center relocation incentive.   48 Table of Contents   Non-interest expenses                               Variance                               2021 / 2020     2020 / 2019   Years Ended December 31, (dollars in thousands)   2021     2020     2019       $      %       $      %                                                             Compensation   $ 63,034     $ 51,368     $ 49,882     $ 11,666       23 %   $ 1,486       3 % Employee benefits     13,479       11,064       10,691       2,415       22       373       3   Net occupancy and equipment     9,688       8,182       8,159       1,506       18       23       —   Technology and communication     11,145       8,732       7,318       2,413       28       1,414       19   Debit and credit card processing     4,494       2,606       2,493       1,888       72       113       5   Marketing and business development     4,150       2,383       3,627       1,767       74       (1,244 )     (34 ) Postage, printing and supplies     2,213       1,778       1,652       435       24       126       8   Legal and professional     2,583       2,392       2,138       191       8       254       12   FDIC insurance     1,847       1,217       245       630       52       972       397   Amortization of investments in tax credit partnerships     367       3,096       1,078       (2,729 )     (88 )     2,018       187   Capital and deposit based taxes     2,090       4,386       3,870       (2,296 )     (52 )     516       13   Merger expenses     19,025       —       1,313       19,025       100       (1,313 )     (100 ) Federal Home Loan Bank early termination penalty     474       —       —       474       100       —       —   Other     7,691       4,455       5,650       3,236       73       (1,195 )     (21 ) Total non-interest expenses   $ 142,280     $ 101,659     $ 98,116     $ 40,621       40 %   $ 3,543       4 %   Discussion of 2021 vs 2020:   Total non-interest expenses increased $40.6 million, or 40%, for the year ended December 31, 2021 compared to the prior year. Compensation and employee benefits comprised 54% of total non-interest expenses for the year ended December 31, 2021, compared to 61% for the year ended December 31, 2020. Excluding merger expenses, compensation and employee benefits comprised 62% of total non-interest expenses for the year ended December 31, 2021.   Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased $11.7 million, or 23%, for the year ended December 31, 2021 compared to the prior year. The increases were attributed to growth in full time equivalent employees, annual merit-based salary increases and higher incentive compensation expense. Net full time equivalent employees totaled 820 at December 31, 2021 compared to 641 at December 31, 2020. The large increase compared to prior periods was attributed to the addition of 184 FTEs as a result of expansion into the Central Kentucky market (through the acquisition of KB).   Employee benefits consists of all personnel-related expense not included in compensation, with the most significant items being health insurance, payroll taxes and employee retirement plan contributions. Employee benefits increased $2.4 million, or 22%, for the year ended December 31, 2021 compared to the prior year, consistent with the overall increase in full time equivalent employees noted above.   Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy increased $1.5 million, or 18%, for the year ended December 31, 2021 compared to the prior year. The KB acquisition resulted in the addition of 19 locations and was the primary driver of the increase over the prior year.   Technology and communication expenses include computer software amortization, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased $2.4 million, or 28%, for the year ended December 31, 2021 compared to the prior year, attributed mainly to the acquisition, as the core system conversion did not occur until late August.   49 Table of Contents   Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses fluctuate consistent with transaction volumes. Debit and credit card processing expense increased $1.9 million, or 72%, for the year ended December 31, 2021, correlating in part with the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related growth that served to increase debit and credit card non-interest income.   Marketing and business development expenses include all costs associated with promoting Bancorp including community support, retaining customers and acquiring new business. Marketing and business development expenses increased $1.8 million, or 74%, for the year ended December 31, 2021 compared to the prior year. Consistent with the Company’s strategic plan, a significant investment was made to advertise and promote the Bank in the Central Kentucky market post-acquisition close. The Company also increased its contribution to the Bank’s foundation established to support various community initiatives, due to strong 2021 operational results. Further, pandemic-related restrictions during 2020 significantly muted travel and entertainment spending, resulting in lower expense last year.   Postage, printing and supplies expense increased $435,000, or 24%, for the year ended December 31, 2021 compared to the prior year, the increase being attributed almost entirely to the KB acquisition and increased customer communication.   Legal and professional fees increased $191,000, or 8%, for the year ended December 31, 2021 compared to the prior year. The increase over prior year was driven largely by increased collection activity in 2021.   FDIC insurance increased $630,000, or 52%, for the year ended December 31, 2021 compared to the prior year. The increase was related to the acquisition and PPP-driven larger balance sheet in addition to the first quarter of 2020 benefitting from the last portion of small institution credits first issued by the FDIC in 2019.   Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit, net of related expenses, results in a positive effect upon net income. Amounts of credits and corresponding expenses can vary widely depending upon the timing and magnitude of the underlying investments. Amortization expense associated with these investments decreased $2.7 million for the year ended December 31, 2021 compared to the prior year due to a large tax credit deal completed in the fourth quarter of 2020.   Capital and deposit based taxes decreased $2.3 million, or 52%, for the year ended December 31, 2021, consistent with the state of Kentucky transitioning financial institutions from a capital-based franchise tax to the Kentucky corporate income tax effective January 1, 2021.   Merger expenses represent non-recurring expenses associated with completion of the KB acquisition and consist primarily of investment banker fees, legal fees, various compensation-related expenses, early termination fees relating to various contracts and system conversion expenses. Merger expenses totaling $525,000 were recorded for the year ended December 31, 2021 related to the pending Commonwealth acquisition.   An early termination fee of $474,000 was incurred during the second quarter of 2021 in relation to the pre-payment of FHLB advances totaling $14 million prior to their respective contractual maturities. Bancorp chose to payoff these term advances, with a weighted average cost of 2.03%, due to its excess liquidity driven by the substantial deposit growth it achieved over the past year, combined with the near-term outlook for low interest rates at the time of pay off. Bancorp had no FHLB advances outstanding as of December 31, 2021.   Other non-interest expenses increased $3.2 million, or 73%, for the year ended December 31, 2021. These increases were driven by a number of factors, including $1.1 million of expense attributed to the KB acquisition, including amortization of the CDI related to KB’s deposit portfolio, expenses associated with the addition of the Captive and other miscellaneous expenses, such as debit and credit card rewards and card losses. Further, large credits to expense were recorded in the prior year associated with a gain on a bank-owned property sold and the reversal of an accrual related to a potential IRS penalty that was dismissed.   Bancorp’s efficiency ratio (FTE) for 2021 of 59.94% increased from 54.06% in 2020 due to the one-time merger-related expenses. Excluding these non-recurring expenses and amortization of investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 51.77% and 52.42% for 2021 and 2020. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   50 Table of Contents   Discussion of 2020 vs 2019:   Total non-interest expenses increased $3.5 million, or 4%, in 2020 compared to 2019. Compensation and employee benefits comprised 61% and 62% of Bancorp’s total non-interest expenses for 2020 and 2019, respectively.   Compensation increased $1.5 million, or 3%, for 2020 compared to 2019. The increase was attributed to annual merit-based salary increases, higher incentive-related compensation and an increase in full time equivalent employees, which grew from 591 at the beginning of 2019 to 641 at December 31, 2020 boosted by the 2019 KSB acquisition and the addition of sales professionals.   Employee benefits increased $373,000, or 3%, in 2020 compared with 2019 attributed to growth in FTEs.   Net occupancy increased $23,000 for 2020 compared with 2019. Three new locations were added in the second quarter of 2019 as part of the KSB acquisition and an additional branch location was added in the Louisville market during the third quarter of 2019. In 2020, Bancorp opened an additional branch in the Cincinnati MSA, as well as another location in Louisville. As of December 31, 2020, Bancorp had 44 full service banking center locations.   Technology expense increased $1.4 million, or 19%, in 2020 compared to 2019 consistent with expanding customer-facing software and system functionality, as well as increased licensing/maintenance expense, higher mortgage loan processing expenses, treasury management customer expansion and the migration to a hosted core environment during the third quarter of 2020.   Debit and credit card processing expense increased $113,000, or 5%, for 2020 as compared with 2019, consistent with the correlated increase experienced for debit and credit card income.   Marketing and business development expenses decreased $1.2 million, or 34%, for the year ended December 31, 2020, as compared to the same period of 2019. The onset of the pandemic resulted in less physical customer interaction in addition to lower advertising expense. Bancorp committed to pay $116,000 to the Bank’s foundation, established to support various community initiatives, as of December 31, 2020 compared to $600,000 as of December 31, 2019.   Postage, printing and supply expenses increased $126,000, or 8%, in 2020 compared to 2019, as a result of banking center/customer expansion coupled with replacing transaction-based forms throughout the Bank in relation to the migration to a hosted core environment, which occurred in the third quarter of 2020.   Legal and professional fees increased $254,000, or 12%, for 2020 compared to 2019, as a result of various consulting engagements and litigation costs arising through the normal course of business.   FDIC insurance increased $972,000 for the year ended December 31, 2020, as compared to the same period of 2019. As a result of the national FDIC Reserve Ratio reaching 1.38% in 2019, the FDIC released credits to small institutions in the prior year. For this reason, Bancorp recorded no FDIC insurance expense for the third and fourth quarters of 2019, and incurred only a portion of the assessed expense in the first quarter of 2020, as these credits were depleted. FDIC insurance expense normalized in the second quarter of 2020 and ultimately increased in the third and fourth quarters as a result of a higher leverage ratio attributed to a PPP-driven larger balance sheet.   Amortization of investments in tax credit partnership increased $2.0 million from 2020 to 2019 as a result of a large tax credit deal completed in the fourth quarter of 2020.   Capital and deposit based taxes increased $516,000, or 13%, in 2020 compared to 2019 consistent with overall balance sheet growth.   Merger expenses recorded for the year ended December 31, 2019 represent non-recurring expenses associated with completion of the KSB acquisition and consisted primarily of consulting fees, legal fees, various compensation-related expenses and system conversion expenses. No such expense was recorded for the year ended December 31, 2020.   Other non-interest expenses decreased $1.2 million, or 21%, for 2020 compared to 2019 driven by the sale of a bank-owned property recorded as an off-set to non-interest expense in the second quarter of 2020 along with elevated 2019 expense that included the write off of assets totaling $347,000 in connection with signing the contract to migrate to the hosted core processing solution and elevated fraud and robbery-related losses.   51 Table of Contents   Bancorp’s efficiency ratio (FTE) of 54.06% for 2020 improved from 56.07% in 2019. Excluding amortization of investments in tax credit partnerships and non-recurring merger related expenses, the adjusted efficiency ratio, a non-GAAP measure, would have been 52.42% and 54.70% for 2020 and 2019. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   Income Taxes   A comparison of income tax expense and ETR follows:   Years Ended December 31, (dollars in thousands)   2021     2020     2019                             Income before income tax expense   $ 95,397     $ 67,743     $ 75,660   Income tax expense     20,752       8,874       9,593   Effective tax rate     21.75 %     13.10 %     12.68 %   Discussion of 2021 vs 2020:   Fluctuations in the ETR are primarily attributed to the following:     ● Bancorp invests in certain partnerships that yield federal income tax credits. Taken as a whole, the tax benefit of these investments exceeds amortization expense, resulting in a positive impact on net income. The timing and magnitude of these transactions may vary widely from period to period. The ETR for 2020 included the full year benefit of a large historic tax credit project that was completed in the fourth quarter of last year, serving to reduce the ETR by 5.5% for the year.     ● 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 effective January 1, 2021 and allows entities filing a combined Kentucky income tax return to share certain tax attributes, including net operating loss carryforwards. These changes served to increase the ETR 3.5% for the year ended December 31, 2021.     ● An insurance captive was acquired as a result of the KB acquisition. The Captive provides insurance against certain risks for which insurance may not currently be available or economically feasible to Bancorp and SYB, as well as a group of third-party insurance captives. The tax advantages of the Captive, including the tax-deductible nature of premiums paid to the Captive as well as the tax-exemption for premiums received by the Captive, serve to reduce income tax expense. For the year ended December 31, 2021, the addition of the Captive reduced the ETR 0.2%.     ● The stock-based compensation component of the ETR fluctuates consistent with the level of SAR exercise activity. The ETR was reduced by 1.1% and 0.7% for the years ended December 31, 2021 and 2020, respectively.   The CARES Act includes several significant provisions for corporations including increasing the amount of deductible interest under section 163(j), allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss that corporations can use to offset income. These changes did not have a significant impact on Bancorp’s income taxes for the years ended December 31, 2021 and 2020.   Discussion of 2020 vs 2019:   Fluctuations in the ETR are primarily attributed to the following:     ● The ETR for 2020 benefitted from the impact of a large historic tax credit project that was completed during the fourth quarter of 2020.     ● In March 2019, the Kentucky Legislature passed HB354 requiring financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in 2021. Historically, the franchise tax, a component of non-interest expenses, was assessed at 1.1% of net capital and has averaged $2.5 million annually over the prior two year-end periods. The Kentucky corporate income tax will be assessed at 5% of Kentucky taxable income and will be included as a component of current and deferred state income tax expense. Associated with this change, predominantly during the first quarter of 2019, Bancorp established a Kentucky state DTA related to existing temporary differences estimated to reverse after the effective date of the law change. Bancorp recorded a corresponding state tax benefit, net of federal tax impact of $1.2 million, or approximately $0.06 per diluted share for 2019.     ● In April 2019, the Kentucky Legislature passed HB458 allowing entities filing a combined Kentucky income return to share certain tax attributed, including net operating loss carryforwards. The combined filing, beginning in 2021, will allow Bancorp’s Holding Company net operating loss carryforwards to offset against net revenue generated by the Bank up to 50% of the Bank’s Kentucky taxable income and reduce Bancorp’s tax liability. Bancorp recorded a state tax benefit, net of federal tax impact of $2.7 million, predominantly in the second quarter of 2019, or approximately $0.12 per diluted share for 2019.   52 Table of Contents   Financial Condition – December 31, 2021 Compared to December 31, 2020   Overview   Total assets increased $2.04 billion, or 44%, to $6.65 billion at December 31, 2021 from $4.61 billion at December 31, 2020. Total assets of $1.27 billion were added on May 31, 2021 as a result of the KB acquisition, including loans of $755 million (including PPP) and total AFS debt securities of $396 million. In addition, goodwill of $123 million was recorded in relation to the transaction. Total loans (excluding loans added through the acquisition and the PPP portfolio) grew $291 million, or 10%, between December 31, 2020 and December 31, 2021.   Total liabilities increased $1.80 billion, or 43%, to $5.97 billion at December 31, 2021 from $4.17 billion at December 31, 2020. Total liabilities of $1.16 billion were assumed on May 31, 2021 as a result of the KB acquisition, including total deposits of $1.04 billion. Excluding deposits assumed through the acquisition, deposit balances ended at record levels as of December 31, 2021, growing $760 million, or 19%, since December 31, 2020, as federal stimulus efforts have bolstered deposits and uncertainty surrounding the pandemic has resulted in Bancorp’s customer base maintaining higher balances in general over the past year.   Cash and Cash Equivalents   Cash and cash equivalents increased $643 million to $961 million as of December 31, 2021. Bancorp maintained higher levels of liquidity in 2021 attributable to the PPP, record levels of deposits and acquisition-related growth.   AFS Debt Securities   AFS debt securities include securities that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and prepayment risk changes and are carried at fair value with unrealized gains or losses, net of tax effect, included in stockholders’ equity.   The primary purpose of the AFS debt securities portfolio is to provide another source of interest income, as well as a tool for liquidity management. In managing the composition of the balance sheet, Bancorp seeks a balance between earnings sources and credit and liquidity considerations.   All of Bancorp’s debt securities are classified as AFS. Carrying value is summarized as follows:                       Variance   December 31 , (in thousands)   2021     2020     $ Change     % Change   U.S. Treasury and other U.S. Government obligations   $ 122,501     $ —     $ 122,501       100 % Government sponsored enterprise obligations     135,021       138,078       (3,057 )     -2 % Mortgage-backed securities – government agencies     846,624       437,585       409,039       93 % Obligations of states and political subdivisions     75,075       11,315       63,760       563 % Other     1,077       —       1,077       100 % Total available for sale debt securities   $ 1,180,298     $ 586,978     $ 593,320       101 %   AFS debt securities increased $593 million to $1.18 billion at December 31, 2021 compared to $587 million at December 31, 2020. AFS debt securities totaling $396 million were added as a result of the KB acquisition, approximately $91 million of which were sold shortly after acquisition. In addition, Bancorp continued to actively invest in the securities portfolio during 2021 in an effort to deploy a portion of excess liquidity, a strategy enacted in the latter half of 2020, by purchasing $505 million of AFS debt securities for the year ended December 31, 2021. Partially offsetting growth associated with purchasing activity was scheduled amortization and elevated prepayment activity, largely within the MBS portfolio, as well as market depreciation stemming from an upward move in the interest rate environment experienced through most of 2021. As a result of the activity above, average AFS debt securities grew $446 million, or 98%, over the past twelve months.   53 Table of Contents   Maturity distribution and weighted average yields of the AFS debt securities portfolio follows:   December 31, 2021   Due within one year     Due after one but within five years     Due after five but within ten years     Due after ten years   (dollars in thousands)   Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield                                                                     U.S. Treasury and other U.S. Government obligations     4,011       0.06 %     118,490       0.50 %   $ —       — %   $ —       — % Government sponsored enterprise obligations     972       1.68       12,007       0.52       13,817       1.47       108,225       2.04   MBS - government agencies     916       -0.17       20,995       1.07       67,263       1.59       757,450       1.29   Obligations of states and political subdivisions     415       3.88       9,044       1.38       13,866       1.46       51,750       1.80   Other     120       —       —               957       2.19       —                                                                                 $ 6,434       0.52 %   $ 160,536       0.63 %   $ 95,903       1.56 %   $ 917,425       1.41 %   Actual maturities for mortgage-backed securities may differ from contractual maturities due to prepayments on underlying collateral.   Loans   Composition of loans by primary loan portfolio class follows:                       Variance   December 31, (dollars in thousands)   2021     2020     $ Change     % Change                                     Commercial real estate - non-owner occupied   $ 1,128,244     $ 833,470     $ 294,774       35 % Commercial real estate - owner occupied     678,405       508,672       169,733       33 % Total commercial real estate     1,806,649       1,342,142       464,507       35 %                                   Commercial and industrial - term     596,710       525,776       70,934       13 % Commercial and industrial - term - PPP     140,734       550,186       (409,452 )     -74 % Commercial and industrial - lines of credit     370,312       249,378       120,934       48 % Total commercial and industrial     1,107,756       1,325,340       (217,584 )     -16 %                                   Residential real estate - owner occupied     400,695       239,191       161,504       68 % Residential real estate - non-owner occupied     281,018       140,930       140,088       99 % Total residential real estate     681,713       380,121       301,592       79 %                                   Construction and land development     299,206       291,764       7,442       3 % Home equity lines of credit     138,976       95,366       43,610       46 % Consumer     104,294       71,874       32,420       45 % Leases     13,622       14,786       (1,164 )     -8 % Credit cards     17,087       10,203       6,884       67 % Total Loans (1)   $ 4,169,303     $ 3,531,596     $ 637,707       18 %   (1) Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.   54 Table of Contents   The composition of loans is presented below by primary loan portfolio class and bifurcated between Bancorp’s legacy loan portfolio and the loan portfolio attributed to the Central Kentucky market entered as a result of the KB acquisition. This composition is presented to provide detail of the Central Kentucky market’s loan portfolio and its contribution to the total loan composition of Bancorp at December 31, 2021.       As of December 31, 2021            (dollars in thousands)   Legacy     Central Kentucky     Total                             Commercial real estate - non-owner occupied   $ 910,065     $ 218,179     $ 1,128,244   Commercial real estate - owner occupied     579,599       98,806       678,405   Total commercial real estate     1,489,664       316,985       1,806,649                             Commercial and industrial - term     535,923       60,787       596,710   Commercial and industrial - term - PPP     135,004       5,730       140,734   Commercial and industrial - lines of credit     327,269       43,043       370,312   Total commercial and industrial     998,196       109,560       1,107,756                             Residential real estate - owner occupied     312,817       87,878       400,695   Residential real estate - non-owner occupied     120,981       160,037       281,018   Total residential real estate     433,798       247,915       681,713                             Construction and land development     281,054       18,152       299,206   Home equity lines of credit     91,882       47,094       138,976   Consumer     89,352       14,942       104,294   Leases     13,622       —       13,622   Credits cards     15,475       1,612       17,087   Total loans (1)   $ 3,413,043     $ 756,260     $ 4,169,303     (1) Total loans are presented inclusive of premiums, discounts, and net loan origination fees and costs.           Total loans increased $638 million, or 18%, from December 31, 2020 to December 31, 2021, driven by the addition of $756 million in loans associated with expansion into the Central Kentucky market. While organic growth was substantial, significant forgiveness-related contraction was experienced within the PPP portfolio between December 31, 2020 and December 31, 2021.   Excluding the loan portfolio attributed to the Central Kentucky market, loan contraction of $119 million, or 3%, was experienced between December 31, 2020 and December 31, 2021, as the aforementioned forgiveness activity resulted in PPP portfolio balances declining $409 million during 2021. Partially offsetting the large decline in PPP balances was organic growth of $291 million, or 10%, nearly half of which, or $146 million, was attributed to strong loan production within the CRE portfolio. Further, gradually improving line of credit utilization and the strategic retention of a portion of qualified secondary market single family residential real estate loan production from the mortgage banking department helped drive growth of $78 million and $54 million in the C&I line of credit and residential real estate portfolios, respectively.   After hitting a pandemic-era low at March 31, 2021, total line of credit utilization improved in each subsequent quarter of 2021, led by C&I line utilization improving to 31.8% at December 31, 2021 from 26.1% at December 31, 2020. However, line of credit usage remained well below pre-pandemic levels throughout the year, as the availability of the more favorable PPP lending facility generally disparaged utilization until the program expired on May 31, 2021.   Bancorp originated $637 million PPP loans ($657 million gross of unamortized fees and costs) as part of round one of the program, which expired in August of 2020. As of December 31, 2021, 98% of the dollars originated in round one had been forgiven. All but $52,000 of the $19.6 million in fee income received for round one originations has been recognized life to date.   55 Table of Contents   Bancorp originated $250 million ($261 million gross of unamortized deferred fees and costs) as part of round two of the PPP program, which expired May 31, 2021. As of December 31, 2021, 49% of the dollars originated had been forgiven and 61% of the fees received for the second round of the program had been recognized life to date. As second round borrowers are not required to make payments for 16 months, it is probable that a significant portion of the borrowing base will seek forgiveness in early to mid-2022 in connection with their tax return preparation.   PPP loans of $141 million ($146 million gross of unamortized deferred fees and costs) were outstanding at December 31, 2021, including $6 million outstanding related to the KB acquisition, compared to $550 million at December 31, 2020. Bancorp has $4.6 million in net unrecognized fees related to the PPP as of December 31, 2021, which are recognized over the life of the respective loans and accelerated when the loans are paid off or forgiven.   In accordance with Section 4013 of the CARES Act and in response to requests from borrowers who experienced business interruptions related to the pandemic, Bancorp extended payment deferrals for those affected borrowers. Depending on the demonstrated need of the customer, Bancorp deferred either the full loan payment or the principal-only portion of respective loan payments for 90 or 180 days for some borrowers directly impacted by the pandemic. As of December 31, 2021 outstanding full payment loan deferrals totaled just $169,000, down from $37 million, or 1.24% of total loans (excluding PPP loans), at December 31, 2020.   Bancorp’s credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp’s current market areas, which encompass Louisville, Kentucky, central and eastern Kentucky, Indianapolis, Indiana and Cincinnati, Ohio.   Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I and CRE loan portfolio segments with a corresponding liability recorded in other liabilities. At December 31, 2021 and December 31, 2020, the total participated portion of loans of this nature totaled $5 million and $10 million, respectively.   56 Table of Contents   The following table presents the maturity distribution and rate sensitivity of the loan portfolio at December 31, 2021:       Maturity                   December 31, 2021 (in thousands)   Within one year     After one but within five years     After five but within fifteen years     Ater fifteen years     Total     % of Total                                                     Commercial real estate - non-owner occupied                                                 Fixed rate   $ 40,076     $ 453,597     $ 232,958     $ 147,088     $ 873,719       77 % Variable rate     44,499       116,374       92,146       1,506       254,525       23 % Total   $ 84,575     $ 569,971     $ 325,104     $ 148,594     $ 1,128,244       100 % Commercial real estate - owner-occupied                                                 Fixed rate   $ 29,328     $ 281,473     $ 239,829     $ 56,115     $ 606,745       89 % Variable rate     12,017       23,278       34,715       1,650       71,660       11 % Total   $ 41,345     $ 304,751     $ 274,544     $ 57,765     $ 678,405       100 %                                                   Commercial and industrial - term                                                 Fixed rate   $ 11,414     $ 247,254     $ 133,499     $ 16,356     $ 408,523       68 % Variable rate     31,081       120,111       36,995       -       188,187       32 % Total   $ 42,495     $ 367,365     $ 170,494     $ 16,356     $ 596,710       100 % Commercial and industrial - term - PPP                                                 Fixed rate   $ 8,018     $ 132,716     $ -     $ -     $ 140,734       100 % Variable rate     -       -       -       -       -       0 % Total   $ 8,018     $ 132,716     $ -     $ -     $ 140,734       100 % Commercial and industrial - lines of credit                                                 Fixed rate   $ 6,514     $ 16,262     $ 25,377     $ -     $ 48,153       13 % Variable rate     242,891       76,931       2,337       -       322,159       87 % Total   $ 249,405     $ 93,193     $ 27,714     $ -     $ 370,312       100 %                                                   Residential real estate - owner occupied                                                 Fixed rate   $ 5,062     $ 13,255     $ 72,247     $ 303,978     $ 394,542       98 % Variable rate     1,836       2,272       1,181       864       6,153       2 % Total   $ 6,898     $ 15,527     $ 73,428     $ 304,842     $ 400,695       100 % Residential real estate - non-owner occupied                                                 Fixed rate   $ 9,684     $ 70,844     $ 70,852     $ 120,262     $ 271,642       97 % Variable rate     4,522       2,037       2,817       -       9,376       3 % Total   $ 14,206     $ 72,881     $ 73,669     $ 120,262     $ 281,018       100 %                                                   Construction and land development                                                 Fixed rate   $ 20,107     $ 31,636     $ 54,827     $ 9,392     $ 115,962       39 % Variable rate     65,523       76,028       40,890       803       183,244       61 % Total   $ 85,630     $ 107,664     $ 95,717     $ 10,195     $ 299,206       100 %                                                   Home equity lines of credit                                                 Fixed rate   $ -     $ -     $ -     $ -     $ -       0 % Variable rate     6,276       33,645       69,939       29,116       138,976       100 % Total   $ 6,276     $ 33,645     $ 69,939     $ 29,116     $ 138,976       100 %   (continued)                                                   57 Table of Contents   (continued)   Maturity                   December 31, 2021 (in thousands)   Within one year     After one but within five years     After five but within fifteen years     Ater fifteen years     Total     % of Total   Consumer                                                 Fixed rate   $ 5,437     $ 25,582     $ 8,847     $ 934     $ 40,800       39 % Variable rate     51,855       11,259       380       -       63,494       61 % Total   $ 57,292     $ 36,841     $ 9,227     $ 934     $ 104,294       100 %                                                   Leases                                                 Fixed rate   $ 605     $ 9,701     $ 3,316     $ -     $ 13,622       100 % Variable rate     -       -       -       -       -       0 % Total   $ 605     $ 9,701     $ 3,316     $ -     $ 13,622       100 %                                                   Credit Cards                                                 Fixed rate   $ -     $ -     $ -     $ -     $ -       0 % Variable rate     17,087       -       -       -       17,087       100 % Total   $ 17,087     $ -     $ -     $ -     $ 17,087       100 %                                                   Total Loans                                                 Fixed rate   $ 136,245     $ 1,282,320     $ 841,752     $ 654,125     $ 2,914,442       70 % Variable rate     477,587       461,935       281,400       33,939       1,254,861       30 % Total   $ 613,832     $ 1,744,255     $ 1,123,152     $ 688,064     $ 4,169,303       100 %   In the event where Bancorp structures a loan with a maturity exceeding five years (typically CRE loans), an automatic rate adjustment will typically be set in place at five years from origination date to limit interest rate sensitivity.   58 Table of Contents   Non-performing Loans and Assets   Information summarizing non-performing loans and assets follows:   December 31, (dollars in thousands)   2021     2020     2019     2018     2017                                             Non-accrual loans   $ 6,712     $ 12,514     $ 11,494     $ 2,611     $ 6,511   Troubled debt restructurings     12       16       34       42       869   Loans past due 90 days or more and still accruing     684       649       535       745       2   Total non-performing loans     7,408       13,179       12,063       3,398       7,382   Other real estate owned     7,212       281       493       1,018       2,640   Total non-performing assets   $ 14,620     $ 13,460     $ 12,556     $ 4,416     $ 10,022                                             Non-performing loans to total loans     0.18 %     0.37 %     0.42 %     0.13 %     0.31 % Non-peforming loans to total loans (excluding PPP) (1)     0.18 %     0.44 %     —       —       —   Non-performing assets as to total assets     0.22 %     0.29 %     0.34 %     0.13 %     0.31 % Allowance to non-performing loans     728 %     394 %     222 %     751 %     337 %   (1) See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.           Non-performing loans to total loans were 0.18% at December 31, 2021 compared to 0.37% at December 31, 2020. Non-performing loans to total loans (excluding PPP loans) were 0.18% at December 31, 2021 compared to 0.44% at December 31, 2020.   Non-performing assets increased $1 million to $15 million at December 31, 2021 compared to December 31, 2020, mainly due to foreclosure on a large CRE relationship that was in non-accrual status at December 31, 2020 and shifted to OREO at December 31, 2021.   In total, non-performing assets as of December 31, 2021 were comprised of 103 loans ranging in individual amounts up to $950,000, one nominal accruing TDR loan and foreclosed real estate held for sale. Foreclosed real estate held at December 31, 2021 included two CRE properties and two residential real estate properties.   59 Table of Contents   The following table presents the major classifications of non-accrual loans by portfolio:   December 31, (in thousands)   2021     2020                     Commercial real estate - non-owner occupied   $ 720     $ 10,278   Commercial real estate - owner occupied     1,748       1,403   Total commercial real estate     2,468       11,681                     Commercial and industrial - term     670       6   Commercial and industrial - lines of credit     228       88   Total commercial and industrial     898       94                     Residential real estate - owner occupied     1,997       413   Residential real estate - non-owner occupied     293       101   Total residential real estate     2,290       514                     Construction and land development     —       —   Home equity lines of credit     646       221   Consumer     410       4   Leases     —       —   Credit cards     —       —   Total non-accrual loans   $ 6,712     $ 12,514     Loans are placed in a non-accrual income status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more, unless such a loan is well- secured and in the process of collection or renewal. Interest income recorded on non-accrual loans as principal payments was $312,000, $350,000, and $552,000 for 2021, 2020, and 2019. Interest income that would have been recorded if non-accrual loans were on a current basis in accordance with their original terms was $359,000, $457,000, and $491,000 for 2021, 2020, and 2019.   In addition to non-performing loans discussed above, there were loans, which are accruing interest, for which payments were current or less than 90 days past due where borrowers are experiencing elevated financial difficulties. These potential problem loans totaled approximately $40 million and $26 million at December 31, 2021 and 2020. These relationships are monitored closely for possible future inclusion in non-performing loans. Management believes it has adequately reflected credit exposure in these loans in its determination of the allowance.   Loans accounted for as TDRs include modifications from original terms such as those due to bankruptcy proceedings, certain changes to amortization periods or extended suspension of principal payments due to customer financial difficulties. To the extent that Bancorp chooses to work with borrowers by providing reasonable concessions rather than initiating collection, this would result in an increase in loans accounted for as TDRs. TDRs that are in non-accrual status are reported as non-accrual loans. Loans accounted for as TDRs are individually evaluated for impairment and are reported as non-performing loans.   On 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 GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. To qualify for Section 4013 of the CARES Act, borrowers must have been current at December 31, 2019. All modifications are eligible as long as they are executed between March 1, 2020 and the earlier of (i) December 31, 2020, or (ii) the 60th day after the end of the COVID-19 national emergency declared by the President of the United States. Multiple modifications of the same credits are allowed and there is no cap on the duration of the modification. On December 21, 2020, certain provisions of the CARES Act, including the temporary suspension of certain requirements related to TDRs, were extended through December 31, 2021.   60 Table of Contents   Also in March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the pandemic. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310-40”), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.   At both December 31, 2021 and December 31, 2020, Bancorp had one loan classified as a TDR, the balance of which was $12,000 and $16,000, respectively, as of those dates.   Delinquent Loans   Delinquent loans (consisting of all loans 30 days or more past due) totaled $11 million at December 31, 2021 compared to $17 million at December 31, 2020. Delinquent loans total loans were 0.26% and 0.48% at December 31, 2021 and December 31, 2020. Delinquent loans to total loans (excluding PPP loans) were 0.27% and 0.57% at December 31, 2021 and December 31, 2020. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   Allowance for Credit Losses on Loans   The ACL is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the footnote titled “ Summary of Significant Accounting Policies ” for discussion of Bancorp’s ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL on loans is available for any loan that, in Bancorp’s judgment, should be charged-off.     The following table sets forth the ACL by category of loan:       December 31, 2021     December 31, 2020   (dollars in thousands)   Allocated Allowance     % of Total ACL on loans     ACL on loans to Total Loans (1)     Allocated Allowance     % of Total ACL on loans     ACL on loans to Total Loans                                                     Commercial real estate - non-owner occupied   $ 15,960       30 %     1.41 %   $ 19,396       37 %     2.33 % Commercial real estate - owner occupied     9,595       18 %     1.41 %     6,983       13 %     1.37 % Total commercial real estate     25,555       48 %     1.41 %     26,379       50 %     1.97 %                                                   Commercial and industrial - term (1)     8,577       16 %     1.44 %     8,970       17 %     1.71 % Commercial and industrial - lines of credit     4,802       9 %     1.30 %     3,614       7 %     1.45 % Total commercial and industrial     13,379       25 %     1.38 %     12,584       24 %     1.62 %                                                   Residential real estate - owner occupied     4,316       8 %     1.08 %     3,389       7 %     1.42 % Residential real estate - non-owner occupied     3,677       7 %     1.31 %     1,818       3 %     1.29 % Total residential real estate     7,993       15 %     1.17 %     5,207       10 %     1.37 %                                                   Construction and land development     4,789       9 %     1.60 %     6,119       12 %     2.10 % Home equity lines of credit     1,044       2 %     0.75 %     895       2 %     0.94 % Consumer     772       1 %     0.74 %     340       1 %     0.47 % Leases     204       0 %     1.50 %     261       1 %     1.77 % Credit cards     162       0 %     0.95 %     135       0 %     1.32 % Total   $ 53,898       100 %     1.34 %   $ 51,920       100 %     1.74 %   (1) Excludes the PPP loan portfolio at December 31, 2021 and December 31, 2020, which was not reserved for based on the 100% SBA guarantee.                   61 Table of Contents   The adoption of CECL and the subsequent beginning of the pandemic had a material impact on Bancorp’s quarterly ACL on loans calculations for 2020. Upon adoption of ASC 326 on January 1, 2020, Bancorp recorded an increase of $8.2 million to the ACL on loans and a corresponding decrease to retained earnings, net of the DTA impact. The adjustment upon adoption of ASC 326 raised the ACL on loans balance to $37 million effective January 1, 2020.   Bancorp’s ACL on loans was $54 million as of December 31, 2021 compared to $52 million as of December 31, 2020. The change in the ACL on loans was driven by a number of competing factors, which resulted in the $2.0 million, or 4%, increase experienced for the year ended December 31, 2021. Acquisition-related activity was responsible for a total increase to the ACL on loans of $14.2 million, comprised of a $6.8 million day one adjustment for specific reserves placed on acquired PCD loans (offset to goodwill) and $7.4 million of provision expense related to the remaining acquired non-PCD loan portfolio. Partially offsetting the acquisition-related increases was a net reduction of the ACL on loans of $6.0 million for the year ended December 31, 2021 stemming from an improved unemployment forecast, general improvement in other underlying CECL model factors compared to recent periods and updates to Bancorp’s CECL model. Further reducing the ACL on loans were net charge offs of $6.2 million for the year, which were driven by the charge off of two large CRE relationships totaling $4.4 million. Both relationships were fully reserved and the charge off had no income statement impact for the year ended December 31, 2021. Partially offsetting these charge offs was a $555,000 recovery of a note that was fully charged off in 2020.   Outstanding loan balances (excluding PPP) grew $1.05 billion, or 35%, between December 31, 2020 and December 31, 2021, as a result of the loan portfolio added through the KB acquisition and strong organic loan growth. This growth and related changes in the overall loan mix contributed $16.8 million of provision expense for the year ended December 31, 2021. However, a net benefit of $15.4 million stemming from the improvement in the unemployment forecast and underlying CECL model factors mentioned above significantly offset the growth-related expense.   The FRB’s forecast of the Seasonally Adjusted National Civilian Unemployment Rate is the primary loss driver within Bancorp’s CECL model. The actual rate steadily improved over the past year after spiking to 14.8% in April of 2020, standing at 3.9% as of December 31, 2021, which caused the forecast to improve substantially throughout the year. Changes in the unemployment forecast contributed a net benefit to provision for credit losses on loans of approximately $6 million for the year ended December 31, 2021 compared to a net reserve build of approximately $11 million for the year ended December 31, 2020.   The pandemic has had a material impact on Bancorp’s quarterly ACL on loans calculations. While Bancorp has not yet experienced credit quality issues resulting in charge-offs related to the pandemic, the ACL on loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions worsen, Bancorp could experience further increases in its required ACL on loans and record additional credit loss expense. While the execution of payment deferrals under the CARES ACT has assisted credit quality ratios, it is possible that asset quality could worsen at future measurement periods if the effects of the pandemic are prolonged.   While separate from the ACL on loans and recorded in Other Liabilities on Bancorp’s consolidated balance sheets, the ACL for off balance sheet credit exposures decreased $1.9 million, or 35%, to $3.5 million at December 31, 2021. Reductions of the ACL for off balance sheet credit exposures totaling $2.2 million were recorded for the year ended December 31, 2021, as a result of continued improvement in line of credit utilization, attributed largely to the C&I portfolio, and improved CECL model factors. C&I line of credit utilization improved to 31.8% at December 31, 2021 compared to 26.1% at December 31, 2020. While utilization improved significantly during 2021, it still remains well below pre-pandemic levels. Partially offsetting these reductions was the loan portfolio added through the KB acquisition, which resulted in a $250,000 increase in the ACL for off balance sheet credit exposures at acquisition date with no corresponding impact on earnings.   62 Table of Contents   Summary of Activity in the ACL on Loans   The table below reflects activity in the ACL related to loans for the years ended December 31, 2021 and 2020:   (in thousands) Year ended December 31, 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   $ 19,396     $ 1,491     $ (2,031 )   $ (3,065 )   $ 169     $ 15,960   Commercial real estate - owner occupied     6,983       2,112       1,826       (1,909 )     583       9,595   Total commercial real estate     26,379       3,603       (205 )     (4,974 )     752       25,555                                                     Commercial and industrial - term     8,970       1,022       (112 )     (1,337 )     34       8,577   Commercial and industrial - lines of credit     3,614       1,755       (567 )     -       -       4,802   Total commercial and industrial     12,584       2,777       (679 )     (1,337 )     34       13,379                                                     Residential real estate - owner occupied     3,389       142       1,134       (383 )     34       4,316   Residential real estate - non-owner occupied     1,818       88       1,766       -       5       3,677   Total residential real estate     5,207       230       2,900       (383 )     39       7,993                                                     Construction and land development     6,119       -       (1,333 )     -       3       4,789   Home equity lines of credit     895       147       1       -       1       1,044   Consumer     340       -       743       (987 )     676       772   Leases     261       -       (57 )     -       -       204   Credit cards     135       -       27       -       -       162   Total   $ 51,920     $ 6,757     $ 1,397     $ (7,681 )   $ 1,505     $ 53,898     Year ended December 31, 2020 (in thousands)   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     $ 11,194     $ (143 )   $ 12     $ 19,396   Commercial real estate - owner occupied     3,327       1,542       1,350       2,115       (1,351 )     -       6,983   Total commercial real estate     8,562       4,488       1,502       13,309       (1,494 )     12       26,379                                                             Commercial and industrial - term     6,782       365       -       1,832       (18 )     9       8,970   Commercial and industrial - lines of credit     5,657       (1,528 )     -       (515 )     -       -       3,614   Total commercial and industrial     12,439       (1,163 )     -       1,317       (18 )     9       12,584                                                             Residential real estate - owner occupied     1,527       1,087       99       737       (79 )     18       3,389   Residential real estate - non-owner occupied     947       429       -       442       (2 )     2       1,818   Total residential real estate     2,474       1,516       99       1,179       (81 )     20       5,207                                                             Construction and land development     2,105       3,056       -       902       -       56       6,119   Home equity lines of credit     728       114       -       53       -       -       895   Consumer     100       264       34       91       (508 )     359       340   Leases     237       (4 )     -       28       -       -       261   Credit cards - commercial     146       (50 )     -       39       -       -       135   Total net loan (charge-offs) recoveries   $ 26,791     $ 8,221     $ 1,635     $ 16,918     $ (2,101 )   $ 456     $ 51,920     63 Table of Contents   The table below reflects activity in the ACL related to loans for the year ended December 31, 2019, presented in accordance with ASC 310 prior to the adoption of ASC 326:   Year ended December 31, 2019 (in thousands)   Beginning Balance     Provision for Credit Losses     Charge-offs     Recoveries     Ending Balance                                             Real estate mortgage   $ 10,681     $ 1,021     $ (38 )   $ 100     $ 11,764   Commercial and industrial     11,965       684       (94 )     267       12,822   Construction and development     1,760       (644 )     -       203       1,319   Undeveloped land     752       34       -       -       786   Consumer     376       (95 )     (552 )     371       100   Total   $ 25,534     $ 1,000     $ (684 )   $ 941     $ 26,791     The table below details net charge-offs to average loans outstanding by category of loan for the years ended December 31, 2021 and 2020:       2021     2020   Year ended December 31, (dollars in thousands)   Net (charge offs)/ recoveries     Average Loans     Net (charge offs)/ recoveries to average loans     Net (charge offs)/ recoveries     Average Loans     Net (charge offs)/ recoveries to average loans                                                     Commercial real estate - non-owner occupied   $ (2,896 )   $ 1,027,405       -0.28 %   $ (131 )   $ 798,085       -0.02 % Commercial real estate - owner occupied     (1,326 )     592,577       -0.22 %     (1,351 )     481,057       -0.28 % Total commercial real estate     (4,222 )     1,619,982       -0.26 %     (1,482 )     1,279,142       -0.12 %                                                   Commercial and industrial - term     (1,303 )     550,101       -0.24 %     (9 )     500,571       0.00 % Commercial and industrial - term - PPP     -       397,282       0.00 %     -       442,510       0.00 % Commercial and industrial - lines of credit     -       290,231       0.00 %     -       264,777       0.00 % Total commercial and industrial     (1,303 )     1,237,614       -0.11 %     (9 )     1,207,858       0.00 %                                                   Residential real estate - owner occupied     (349 )     334,718       -0.10 %     (61 )     218,998       -0.03 % Residential real estate - non-owner occupied     5       221,214       0.00 %     -       137,470       0.00 % Total residential real estate     (344 )     555,932       -0.06 %     (61 )     356,468       -0.02 %                                                   Construction and land development     3       290,705       0.00 %     56       259,283       0.02 % Home equity lines of credit     1       121,276       0.00 %     -       100,616       0.00 % Consumer     (311 )     98,093       -0.32 %     (149 )     77,082       -0.19 % Leases     -       13,770       0.00 %     -       14,897       0.00 % Credit cards     -       13,885       0.00 %     -       9,563       0.00 % Total   $ (6,176 )   $ 3,951,257       -0.16 %   $ (1,645 )   $ 3,304,909       -0.05 %   64 Table of Contents   Selected ratios relating to the allowance follow:   Years Ended December 31,   2021     2020     2019                             Provision for credit losses to average loans     0.04 %     0.51 %     0.04 % Net (charge-offs)/recoveries to average loans     -0.16 %     -0.05 %     0.01 % Allowance for credit losses to average loans     1.36 %     1.57 %     0.99 % Allowance for credit losses to total loans     1.29 %     1.47 %     0.94 % Allowance for credit losses to total loans (excluding PPP) (1)     1.34 %     1.74 %     —     (1) See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.   Premises and Equipment   Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets as well as fair value adjustments associated with purchase accounting. Premises and equipment increased $19 million, or 33%, between December 31, 2020 and December 31, 2021 as a result of the KB acquisition, which added 19 locations. As of December 31, 2021, Bancorp has 63 full service banking center locations; 33 in the Louisville MSA, 19 in central and eastern Kentucky, 6 in the Cincinnati MSA and 5 in the Indianapolis MSA.   BOLI   Bank-owned life insurance assets increased $20 million, or 60%, to $53 million at December 31, 2021, compared to $33 million at December 31, 2020, the increase stemming directly from life insurance assets added as a result of the KB acquisition.   Goodwill   At December 31, 2021, Bancorp had $136 million in goodwill recorded on its balance sheet, including $123 million recorded in association with the acquisition of KB. 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.   Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price falling below tangible book value), negative trends in overall financial performance and regulatory action. At September 30, 2021, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the fair value of the Commercial Banking reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value.   Core Deposit Intangibles (CDI)   CDI assets arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method of their useful lives. CDI assets increased $4 million as of December 31, 2021 compared to December 31, 2020, entirely as a result of assets added through the KB acquisition.   Other Assets and Other Liabilities   Other assets increased $15 million, or 21%, as of December 31, 2021 compared to December 31, 2020 while other liabilities increased $9 million, or 10%, for the same respective periods.   The increase in Other Assets between December 31, 2020 and December 31, 2021 was attributed mainly to the addition of a large CRE OREO property, growth in MSR assets stemming from the KB acquisition, increased values of insurance policies outside of traditional BOLI, additional investment in tax credit partnerships and general increases in other assets related to the KB acquisition. Partially offsetting the overall increase was a reduction in interest rate swap assets.   65 Table of Contents   The increase for Other Liabilities between December 31, 2020 and December 31, 2021 was driven by the accrual of an AFS debt security purchase that will settle in early 2022 and higher accrued employee incentive compensation associated with record operating results. These increases were offset by the reduction of various accrued liabilities, including tax credit partnership obligations, the ACL for off balance sheet credit exposures and interest rate swap liabilities.   Market value changes on interest rate swap transactions maintained for certain loan customers played a role in the fluctuations of both Other Asset and Other Liabilities, as noted above. Bancorp enters into these interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value via both an asset and a related liability as Bancorp has an agreement with the borrower (the asset) and the counterparty (the liability). Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value have an offsetting effect on the related asset and liability. For this reason, the market value changes over the past 12 months stemming from the declining interest rate environment have resulted in increases to both the asset and liability associated with these transactions. For additional information, see the footnote titled “ Derivative Financial Instruments. ”   Deposits   Total deposits increased $1.80 billion, or 45%, from December 31, 2020 to December 31, 2021. Deposits totaling $1.04 billion were assumed as a result of the KB acquisition. Deposit balances attributed to the acquired portfolio and related market increased slightly to $1.08 billion as of December 31, 2021. Excluding the deposits attributed to the Central Kentucky market, deposits grew $718 million, or 18%. Average deposit balances have increased $1.27 billion, or 35%, over the past 12 months, as federal programs such as the PPP, stimulus checks and enhanced unemployment benefits drove both ending and average deposit balances to record levels as of December 31, 2021 in addition to deposits added as a result of the acquisition.   (dollars in thousands)                   Variance   December 31,   2021     2020     $ Change     % Change                                     Non-interest bearing demand deposits   $ 1,755,754     $ 1,187,057     $ 568,697       48 %                                   Interest bearing deposits:                                 Interest bearing demand     2,131,928       1,355,985       775,943       57 % Savings     415,258       208,774       206,484       99 % Money market     1,050,352       844,414       205,938       24 %                                   Time deposit accounts of $250,000 or more     89,745       73,065       16,680       23 % Other time deposits     344,477       319,339       25,138       8 % Total time deposits     434,222       392,404       41,818       11 %                                   Total interest bearing deposits     4,031,760       2,801,577       1,230,183       44 %                                   Total deposits (1)   $ 5,787,514     $ 3,988,634     $ 1,798,880       45 %   (1)     Includes $5 million and $25 million in brokered deposits as of December 31, 2021 and December 31, 2020, respectively.   66 Table of Contents   The composition of deposits, bifurcated between Bancorp’s legacy deposit portfolio and the deposit portfolio acquired through expansion into the Central Kentucky market through the KB acquisition, is presented below. This composition is presented to provide detail of the Central Kentucky market’s deposit portfolio and its contribution to the total deposit composition of Bancorp at December 31, 2021.       As of December 31, 2021   (dollars in thousands)   Legacy     Central Kentucky     Total                             Non-interest bearing demand deposits   $ 1,533,188     $ 222,566     $ 1,755,754                             Interest bearing deposits:                         Interest bearing demand     1,628,598       503,330       2,131,928   Savings     258,032       157,226       415,258   Money market     961,579       88,773       1,050,352                             Time deposit accounts of $250,000 or more     66,045       23,700       89,745   Other time deposits(1)     259,636       84,841       344,477   Total time deposits     325,681       108,541       434,222                             Total interest bearing deposits     3,173,890       857,870       4,031,760                             Total deposits   $ 4,707,078     $ 1,080,436     $ 5,787,514     Despite the sharp average balance increase experienced over the past twelve months, Bancorp has experienced significant benefit from lower deposit rates. The average cost of interest bearing deposits declined 25 bps to 0.17% between December 31, 2020 and December 31, 2021, while the overall cost of deposits (including non-interest bearing deposits) declined 14 bps to 0.15% over the same period.   Average deposit balances and average rates paid on such deposits for the years indicated are summarized as follows:       2021     2020     2019   Years Ended December 31, (dollars in thousands)   Average balance     Average rate     Average balance     Average rate     Average balance     Average rate                                                     Non-interest bearing demand deposits   $ 1,578,795       — %   $ 1,100,942       — %   $ 765,103       — % Interest bearing demand deposits     1,633,606       0.11       1,133,308       0.16       875,897       0.57   Savings deposits     328,570       0.03       190,368       0.02       166,509       0.17   Money market deposits     919,778       0.06       771,363       0.19       695,411       1.02   Time deposits     420,308       0.76       412,506       1.74       406,176       2.02                                                     Total Average Deposits   $ 4,881,057             $ 3,608,487             $ 2,909,096             Maturities of time deposits of $250,000 or more at December 31, 2021 are summarized as follows:   (in thousands)                   3 months or less   $ 16,561   Over 3 through 6 months     13,215   Over 6 through 12 months     35,753   Over 12 months     24,216   Total   $ 89,745     67 Table of Contents   Securities Sold Under Agreement to Repurchase   Information regarding SSUAR follows:   December 31, (dollars in thousands)   2021     2020   Outstanding balance at end of period   $ 75,466     $ 47,979   Weighted average interest rate at end of period     0.04 %     0.05 %   Years Ended December 31, (dollars in thousands)   2021     2020     2019                             Average outstanding balance during the period   $ 62,534     $ 40,363     $ 38,555   Average interest rate during the period     0.04 %     0.09 %     0.26 % Maximum outstanding at any month end during the period   $ 81,964     $ 47,979     $ 52,599     SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control. The majority of SSUARs are indexed to immediately repricing indices such as the FFTR.   SSUARs totaled $75 million and $48 million at December 31, 2021 and December 31, 2020, respectively, as SSUARs totaling $11 million were assumed as part of the KB acquisition. The remaining increase in SSUAR is consistent with the general trend of customers maintaining elevated deposit balances.   Federal Funds Purchased and Other Short-Term Borrowing   FFP and other short-term borrowing balances decreased $1 million, or 10%, between December 31, 2020 and December 31, 2021. At December 31, 2021, FFP relate entirely to excess liquidity held by downstream correspondent bank customers of Bancorp.   FHLB Advances   FHLB advances decreased $32 million between December 31, 2020 and December 31, 2021 due to maturing advances not being renewed or replaced in addition to elective pay offs, resulting in Bancorp having no outstanding FHLB advances at December 31, 2021. During the first quarter of 2021, Bancorp elected to pay down certain advances prior to maturity without incurring pre-payment penalties. During the second quarter of 2021, Bancorp paid off $14 million of term advances, with a weighted average cost of 2.03%, prior to their maturity incurring an early-termination fee of $474,000. Bancorp based this decision on its excess liquidity position driven by the substantial deposit growth it achieved over the past year, combined with consideration for the cost of the advances and a break-even analysis.   As a result of the KB acquisition, FHLB advances totaling $91 million were assumed and paid off immediately upon acquisition based on current levels of excess liquidity. Early termination penalties totaling $2.5 million were incurred as a result of the payoffs, but had no income statement impact for the year ended December 31, 2021 due to the fair value adjustment recorded through goodwill at acquisition.   Liquidity   The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of those funds. Liquidity is provided by short-term assets that can be converted to cash, AFS debt securities, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.   68 Table of Contents   Bancorp’s Asset/Liability Committee is comprised of senior management and has direct oversight responsibility for Bancorp’s liquidity position and profile. A combination of reports provided to management details internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, and exposure to contingent draws on Bancorp’s liquidity.   For the years ended December 31, 2020 and 2021, Bancorp did not experience any significant funding issues related to the PPP or the pandemic in general. A significant portion of the PPP borrowings have remained in the form of commercial deposits and have generally been slow to outflow, as customers have utilized the funds to strengthen their balance sheets. In addition, federal stimulus checks and more lucrative unemployment benefits have also contributed to higher than normal deposit balances, resulting in record levels of liquidity. If a liquidity issue arose, Bancorp would utilize overnight funds from the FHLB (the lowest costing source), in which ‐‐‐‐‐‐Bancorp has available credit of $1.00 billion as of December 31, 2021.   Bancorp’s most liquid assets are comprised of cash and due from banks, FFS and AFS debt securities. FFS and interest bearing deposits totaled $899 million and $275 million at December 31, 2021 and December 31, 2020, respectively. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are used for general daily liquidity purposes. The fair value of the AFS debt security portfolio was $1.18 billion and $587 million at December 31, 2021 and December 31, 2020, respectively. The investment portfolio includes scheduled maturities of $6 million and expected cash flows on amortizing AFS debt securities of approximately $185 million (based on scheduled payments and assumed pre-payment speeds as of December 31, 2021) over the next 12 months. Combined with FFS and interest bearing deposits from banks, AFS debt securities offer substantial resources to meet either loan growth or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public funds, cash balances of certain WM&T accounts and SSUAR. At December 31, 2021, total investment securities pledged for these purposes comprised 75% of the AFS debt securities portfolio, leaving approximately $301 million of unpledged AFS debt securities.   Bancorp’s deposit base consists mainly of core deposits, defined as time deposits less than or equal to $250,000, demand, savings, money market deposit accounts and excludes public funds and brokered deposits. At December 31, 2021, such deposits totaled $5.05 billion and represented 87% of Bancorp’s total deposits, as compared with $3.54 billion, or 89% of total deposits at December 31, 2020. Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not place undue pressure on liquidity. However, many of Bancorp’s individual depositors are currently maintaining historically high balances. These excess balances may be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.   As of December 31, 2021 and December 31, 2020, Bancorp held brokered deposits totaling $5 million and $25 million, respectively. The $5 million of brokered deposits outstanding at December 31, 2021 was entirely attributed to deposits added through the KB acquisition.   Included in total deposit balances at December 31, 2021 and 2020 were $645 million and $355 million, respectively, of public funds generally comprised of accounts from local government agencies and public school districts in the markets in which Bancorp operates. The large increase stems from deposit relationships added through expansion into the Central Kentucky market.   Bancorp is a member of the FHLB of Cincinnati. As a member of the FHLB, Bancorp has access to credit products of the FHLB. Bancorp views these borrowings as a potential low cost alternative to brokered deposits. At December 31, 2021 and December 31, 2020, available credit from the FHLB totaled $1.00 billion and $804 million, respectively. The increase in available credit during 2021 resulted from an increase in eligible loans (those pledged for collateral-based borrowing capacity) and the maturity or elective payoff of all FHLB borrowings. See the footnote titled “ FHLB Advances ” for additional detail.  Additionally, Bancorp had unsecured available FFP lines with correspondent banks totaling $80 million at both December 31, 2021 and December 31, 2020.   During the normal course of business, Bancorp enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through Bancorp’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of Bancorp’s liquidity.   69 Table of Contents   Bancorp’s principal source of cash revenue is dividends paid to it as the sole shareholder of the Bank. As discussed in the footnote titled “ Commitments and Contingent Liabilities, ” as of January 1st of any year, the Bank may pay dividends in an amount equal to the Bank’s net income of the prior two years less any dividends paid for the same two years. At December 31, 2021, the Bank may pay an amount equal to $53 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank.   Sources and Uses of Cash   Cash flow is provided primarily through financing activities of Bancorp, which include raising deposits and borrowing funds from institutional sources such as advances from the FHLB and FFP, as well as scheduled loan repayments and cash flows from AFS debt securities. These funds are primarily used to facilitate investment activities of Bancorp, which include making loans and purchasing securities for the investment portfolio. Another important source of cash is net income of the Bank from operating activities.  For further detail regarding the sources and uses of cash, see the “Consolidated Statements of Cash Flows” in Bancorp’s consolidated financial statements.   Commitments   In the normal course of business, Bancorp is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in Bancorp’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.   Bancorp provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Unused loan commitments increased $300 million as of December 31, 2021 compared to December 31, 2020 consistent with the KB acquisition.   Commitments to extend credit are an agreement to lend to a customer as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.   Additional detail regarding credit-related financial instruments, including both commitments to extend credit and letters of credit at December 31, 2021 are as follows:       Amount of commitment expiration per period       Less than     1-3     3-5     Over 5           (in thousands)   1 year     years     years     years     Total                                             Unused loan commitments   $ 929,296     $ 365,662     $ 113,717     $ 251,698     $ 1,660,373   Standby letters of credit     30,265       480       34       —       30,779     See the footnote titled “ Commitments and Contingent Liabilities ” for additional detail.   At December 31, 2021 and December 31, 2020, Bancorp had accrued $3.5 million and $5.4 million, respectively, in other liabilities for its estimate of inherent risks related to unfunded credit commitments. The decrease is consistent with improvement in both line of credit utilization and the underlying CECL model factors.   Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.   70 Table of Contents   In addition to owned banking facilities, Bancorp has entered into long-term leasing arrangements for certain branch facilities. Bancorp also has required future payments for a non-qualified defined benefit retirement plan, time deposit maturities and other obligations.   Required payments under such commitments at December 31, 2021 are as follows:       Payments due by period       Less than     1-3     3-5     Over 5           (in thousands)   1 year     years     years     years     Total                                             Time deposit maturities   $ 320,741     $ 96,422     $ 16,977     $ 82     $ 434,222   Operating leases (1)     2,634       5,081       3,532       7,699       18,946   Defined benefit retirement plan     —       137       356       2,785       3,278   Other (2)     1,616       1,865       1,588       2,673       7,742     (1) Includes assumed renewals. (2) Consists primarily of contractual requirements relating to tax credit investments and community sponsorships.   Capital   Information pertaining to Bancorp’s capital balances and ratios follows:   Years ended December 31, (dollars in thousands, except per share data)   2021     2020     2019                             Stockholders’ equity   $ 675,869     $ 440,701     $ 406,297   Dividends per share   $ 1.10     $ 1.08     $ 1.04   Dividend payout ratio, based on basic EPS     36.67 %     41.38 %     35.62 %   Bancorp increased its cash dividends declared to stockholders during 2021 to an annual dividend of $1.10, from $1.08 per share in 2020 and $1.04 in 2019. This represents a payout ratio of 36.67% based on basic EPS and an annual dividend yield of 1.72% based upon the year-end closing stock price.   At December 31, 2021, stockholders’ equity totaled $676 million, representing an increase of $235 million, or 53%, compared to December 31, 2020. The large increase during 2021 was attributed mainly to stock issued in relation to the KB acquisition, which totaled $205 million. Further, net income of $74.6 million was partially offset by a larger negative change in AOCI and dividends declared for the year ended December 31, 2021. AOCI consists of net unrealized gains or losses on AFS debt securities and a minimum pension liability, each net of income taxes. AOCI declined $17 million from December 31, 2020 to December 31, 2021, with the fluctuation stemming from the changing interest rate environment and corresponding valuation of the AFS debt securities portfolio. See the “ Consolidated Statement of Changes in Stockholders ’ Equity ” for further detail of changes in equity.   In May 2021, Bancorp’s Board of Directors extended its share repurchase program authorizing the repurchase of up to 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at inception. The plan, which will expire in May 2023 unless otherwise extended or completed at an earlier date, does not obligate Bancorp to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. Based on economic developments over the past year, the increased importance of capital preservation and the announcement of two acquisitions, no shares were repurchased in 2020 nor 2021. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan.   71 Table of Contents   Bank holding companies and their subsidiary banks are required by regulators to meet risk-based capital standards. These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The value of both balance sheet and off-balance sheet items are adjusted to reflect credit risks. See the footnote titled “Regulatory Matters” for additional detail regarding regulatory capital requirements, as well as capital ratios of Bancorp and the Bank. The Bank exceeds regulatory capital ratios required to be well-capitalized. Regulatory framework does not define well capitalized for holding companies. Management considers the effects of growth on capital ratios as it contemplates plans for expansion.   The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital ratios:   December 31,   2021     2020                     Total risk-based capital (1)                 Consolidated     12.79 %     13.36 % Bank     12.42       12.99                     Common equity tier 1 risk-based capital (1)                 Consolidated     11.94       12.23   Bank     11.56       11.85                     Tier 1 risk-based capital (1)                 Consolidated     11.94       12.23   Bank     11.56       11.85                     Leverage (2)                 Consolidated     8.86       9.57   Bank     8.57       9.26     (1)     Under banking agencies ’ risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet credit exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. Weighted values are added together, resulting in Bancorp's total risk-weighted assets. These ratios are computed in relation to average assets. (2)     Ratio is computed in relation to average assets.   Capital ratios for the year ended December 31, 2021 decreased compared to the prior year as a result of substantial average asset and risk-weighted asset growth, driven by both organic and acquisition-related activity. While pressure was placed on risk-based capital and leverage ratios due to this growth, Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.   Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized for prompt corrective action requirements, a bank must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0% Tier 1 Risk-Based Capital ratio, 10.0% Total Risk-Based Capital ratio and 5.0% Tier 1 Leverage ratio.   Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At December 31, 2021, 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.   72 Table of Contents   As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “ Financial Instruments – Credit Losses, ” or CECL , which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were declared to be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. Had Bancorp not elected to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would have exceeded the well-capitalized level.   Fair Value Measurements   Bancorp follows the provisions of authoritative guidance for fair value measurements. This guidance is definitional and disclosure oriented and addresses how companies should approach measuring fair value when required by GAAP. It prescribes various disclosures about financial statement categories and amounts which are measured at fair value, if such disclosures are not already specified elsewhere in GAAP.   Authoritative guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between participants at the measurement date. The guidance requires fair value measurements to be classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on significant unobservable, internally-derived inputs).   Bancorp’s AFS debt securities and interest rate swaps are recorded at fair value on a recurring basis. Other accounts including mortgage loans held for sale, MSRs, impaired loans and OREO may be recorded at fair value on a non-recurring basis, generally in the application of lower of cost or market adjustments or write-downs of specific assets.   The AFS debt securities portfolio is comprised of U.S. Treasury and other U.S. government obligations, debt securities of U.S. government-sponsored corporations (including mortgage-backed securities), and obligations of state and political subdivisions. U.S. Treasury securities are priced using quoted prices of identical securities in an active market. These measurements are classified as Level 1 in the hierarchy above. All other securities are priced using standard industry models or matrices with various assumptions such as yield curves, volatility, prepayment speeds, default rates, time value, credit rating and market prices for similar instruments. These assumptions are generally observable in the market place and can be derived from or supported by observable data. These measurements are classified as Level 2 in the hierarchy above.   Interest rate swaps are valued using primarily Level 2 inputs. Fair value measurements generally based on benchmark forward yield curves and other relevant observable market data. For purposes of potential valuation adjustments to derivative positions, Bancorp evaluates the credit risk of its counterparties as well as its own credit risk. To date, Bancorp has not realized any losses due to a counterparty’s inability to perform and the change in value of derivative assets and liabilities attributable to credit risk was not significant during 2019, 2020 and 2021.   MSRs, carried in other assets and recorded at fair value upon capitalization, are amortized to correspond with estimated servicing income and are periodically assessed for impairment based on fair value at the reporting date. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At December 31, 2021 and 2020, there was no valuation allowance for MSRs, as fair value exceeded carrying value.   Loans considered to be collateral dependent are measured for impairment and, if indicated, a specific allocation is established based on the value of underlying collateral. Collateral dependent loans include non-accrual loans and loans accounted for as TDRs. For collateral dependent loans, fair value amounts represent only those loans with specific valuation allowances and loans charged down to their carrying value. At December 31, 2021 and December 31, 2020, the carrying value of collateral dependent loans measured at fair value on a non-recurring basis was $7 million and $8 million. These measurements are classified as Level 3.   73 Table of Contents   OREO, which is carried in other assets at the lower of cost or fair value, is periodically assessed for impairment based on fair value at the reporting date. Fair value is commonly based on recent real estate appraisals or valuations performed by internal or external parties which use judgments and assumptions that are property-specific and sensitive to changes in the overall economic environment. Appraisals may be further discounted based on management’s historical knowledge and/or changes in market conditions from the date of the most recent appraisal. Many of these inputs are not observable and, accordingly, these measurements are classified as Level 3. OREO is equal to the carrying value of only parcels of OREO for which carrying value equals appraised value. If a parcel of OREO has a carrying value below its appraised value, it is not considered to be carried at fair value. The losses represent write-downs which occurred during the period indicated. At December 31, 2021 and 2020, the carrying value of OREO was $7 million and $281,000.   See the Footnote titled “ Assets and Liabilities Measured and Reported at Fair Value ,” for additional detail regarding fair value measurements.   Non-GAAP Financial Measures   The following table provides a reconciliation of total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity (TCE), a non-GAAP disclosure. Bancorp provides the TCE per share, a non-GAAP measure, in addition to those defined by banking regulators, based on its widespread use by investors as a means to evaluate capital adequacy:   December 31, (dollars in thousands, except per share data)   2021     2020                     Total stockholders' equity - GAAP (a)   $ 675,869     $ 440,701   Less: Goodwill     (135,830 )     (12,513 ) Less: Core deposit intangible     (5,596 )     (1,962 ) Tangible common equity - Non-GAAP (c)   $ 534,443     $ 426,226                     Total assets - GAAP (b)   $ 6,646,025     $ 4,608,629   Less: Goodwill     (135,830 )     (12,513 ) Less: Core deposit intangible     (5,596 )     (1,962 ) Tangible assets - Non-GAAP (d)   $ 6,504,599     $ 4,594,154                     Total stockholders' equity to total assets - GAAP (a/b)     10.17 %     9.56 % Tangible common equity to tangible assets - Non-GAAP (c/d)     8.22 %     9.28 %                   Total shares outstanding (e)     26,596       22,692                     Book value per share - GAAP (a/e)   $ 25.41     $ 19.42   Tangible common equity per share - Non-GAAP (c/e)     20.09       18.78     74 Table of Contents   ACL on loans to total non-PPP loans represents the ACL on loans, divided by total loans less PPP loans. Non-performing loans to total non-PPP loans represents non-performing loans, divided by total loans less PPP loans. Delinquent loans to total non-PPP loans represents delinquent loans (consisting of all loans 30 days or more past due), divided by total loans less PPP loans. Bancorp believes these non-GAAP disclosures are important because they provide comparable ratios after eliminating PPP loans, which are fully guaranteed by the SBA and have not been allocated for within the ACL and are not at risk of non-performance.   December 31, (dollars in thousands)   2021     2020                     Total loans - GAAP (a)   $ 4,169,303     $ 3,531,596   Less: PPP loans     (140,734 )     (550,186 ) Total non-PPP loans - Non-GAAP (b)   $ 4,028,569     $ 2,981,410                     Allowance for credit losses on loans (c)   $ 53,898     $ 51,920   Non-performing loans (d)     7,408       13,179   Delinquent loans (e)     11,036       16,939                     Allowance for credit losses on loans to total loans - GAAP (c/a)     1.29 %     1.47 % Allowance for credit losses on loans to total loans - Non-GAAP (c/b)     1.34 %     1.74 %                   Non-performing loans to total loans - GAAP (d/a)     0.18 %     0.37 % Non-performing loans to total loans - Non-GAAP (d/b)     0.18 %     0.44 %                   Delinquent loans to total loans - GAAP (e/a)     0.26 %     0.48 % Delinquent loans to total loans - Non-GAAP (e/b)     0.27 %     0.57 %   The efficiency ratio, a non-GAAP measure, equals total non-interest expenses divided by the sum of net interest income FTE and non-interest income. The ratio excludes net gains (losses) on sales, calls, and impairment of investment securities, if applicable. In addition to the efficiency ratio, Bancorp considers an adjusted efficiency ratio. Bancorp believes it is important because it provides a comparable ratio after eliminating the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships.   Net interest income on a FTE basis includes the additional amount of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal, state and local taxes yielding the same after-tax income.   Years ended December 31 , (dollars in thousands)   2021     2020     2019                             Total non-interest expenses - GAAP (a)   $ 142,280     $ 101,659     $ 98,116   Less: Non-recurring merger expenses     (19,025 )     —       (1,313 ) Less: Amortization of investments in tax credit partnerships     (367 )     (3,096 )     (1,078 ) Total non-interest expenses - Non-GAAP (c )   $ 122,888     $ 98,563     $ 95,725                             Total net interest income, FTE   $ 171,508     $ 136,133     $ 125,571   Total non-interest income     65,850       51,899       49,428   Less: Gain/loss on sale of securities     —       —       —   Total revenue - GAAP (b)   $ 237,358     $ 188,032     $ 174,999                             Efficiency ratio - GAAP (a/b)     59.94 %     54.06 %     56.07 % Efficiency ratio - Non-GAAP (c/b)     51.77 %     52.42 %     54.70 %   75 Table of Contents   Item 7A.           Quantitative and Qualitative Disclosures About Market Risk.             Information required by this item is included in Item 7, “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations ” of this Form 10-K.   Item 8.              Financial Statements and Supplementary Data.             The following consolidated financial statements of Bancorp, and reports of independent registered public accounting firms and management are included below:   Consolidated Balance Sheets - December 31, 2021 and 2020 Consolidated Statements of Income - years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Comprehensive Income - years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Changes in Stockholders’ Equity - years ended December 31, 2021, 2020 and 2019 Consolidated Statements of Cash Flows - years ended December 31, 2021, 2020 and 2019 Footnotes to Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm (BKD, LLP, Indianapolis, Indiana, PCAOB ID 686 ) Management’s Report on Consolidated Financial Statements   76 Table of Contents     CONSOLIDATED BALANCE SHEETS   December 31, (in thousands, except share and per share data)                 December 31,     December 31,       2021     2020   Assets                 Cash and due from banks   $ 62,304     $ 43,179   Federal funds sold and interest bearing due from banks     898,888       274,766   Total cash and cash equivalents     961,192       317,945                     Mortgage loans held for sale     8,614       22,547   Available for sale debt securities (amortized cost of $ 1,190,379 in 2021 and $ 574,722 in 2020, respectively)     1,180,298       586,978   Federal Home Loan Bank stock, at cost     9,376       11,284   Loans     4,169,303       3,531,596   Allowance for credit losses on loans     53,898       51,920   Net loans     4,115,405       3,479,676                     Premises and equipment, net     76,894       58,015   Bank owned life insurance     53,073       33,250   Accrued interest receivable     13,745       13,094   Goodwill     135,830       12,513   Core deposit intangible     5,596       1,962   Other assets     86,002       71,365   Total assets   $ 6,646,025     $ 4,608,629                     Liabilities                 Deposits:                 Non-interest bearing   $ 1,755,754     $ 1,187,057   Interest bearing     4,031,760       2,801,577   Total deposits     5,787,514       3,988,634                     Securities sold under agreements to repurchase     75,466       47,979   Federal funds purchased     10,374       11,464   Federal Home Loan Bank advances     —       31,639   Accrued interest payable     300       391   Other liabilities     96,502       87,821   Total liabilities     5,970,156       4,167,928                     Commitments and contingent liabilities (Footnote 19)                                       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 26,596,000 and 22,692,000 shares in 2021 and 2020, respectively     49,501       36,500   Additional paid-in capital     243,107       41,886   Retained earnings     391,201       353,574   Accumulated other comprehensive income (loss)     ( 7,940 )     8,741   Total stockholders ’ equity     675,869       440,701   Total liabilities and stockholders ’ equity   $ 6,646,025     $ 4,608,629     See accompanying notes to consolidated financial statements.