Stock Yards Bancorp, Inc. 10-Q

sybt20220331_10q.htm     Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM   10-Q   ☒ Quarterly report pursuant to Section   13 or 15(d)   of the Securities Exchange Act of 1934   For the quarterly period ended March 31, 2022   or   ☐ Transition report pursuant to Section   13 or 15(d)   of the Securities Exchange Act of 1934   Commission File Number: 1-13661     STOCK YARDS BANCORP, INC. (Exact name of registrant as specified in its charter)   Kentucky 61-1137529 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)   1040 East Main Street , Louisville , Kentucky 40206 (Address of principal executive offices) (Zip Code)   Registrant’s telephone number, including area code: ( 502 ) 582-2571   Securities registered pursuant to Section 12(b) of the Act:  Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock, no par value SYBT The NASDAQ Stock Market, LLC   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes    ☐ No   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒  Yes   ☐ No   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.   Large accelerated filer ☒  Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company  ☐   Emerging growth company  ☐         If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐  Yes  ☒ No   The number of shares outstanding of the registrant’s Common Stock, no par value, as of April 30, 2022, was 29,224,452 .   1 Table of Contents         TABLE OF CONTENTS   PART I – FINANCIAL INFORMATION           Item 1. Financial Statements. 4     Condensed Consolidated Balance Sheets 4     Condensed Consolidated Statements of Income 5     Condensed Consolidated Statements of Comprehensive Income (Loss) 6     Condensed Consolidated Statements of Changes in Stockholders’ Equity 7     Condensed Consolidated Statements of Cash Flows 8     Notes to Condensed Consolidated Financial Statements 10     Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 68     Item 3. Quantitative and Qualitative Disclosures about Market Risk. 101     Item 4. Controls and Procedures. 101         PART II – OTHER INFORMATION       Item 1. Legal Proceedings. 101     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 102     Item 6. Exhibits. 102         Signatures 103   2 Table of Contents   GLOSSARY OF ABBREVIATIONS AND ACRONYMS   The acronyms and abbreviations identified in alphabetical order below are used throughout this Report on Form 10-Q:   Acronym or Term   Definition   Acronym or Term   Definition   Acronym or Term   Definition ACH   Automatic Clearing House   EPS   Earnings Per Share   NCI   Noncontrolling interest AFS   Available for Sale   ETR   Effective Tax Rate   NIM   Net Interest Margin (FTE) APIC   Additional paid-in capital   EVP   Executive Vice President   NPV   Net Present Value ACL   Allowance for Credit Losses   FASB   Financial Accounting Standards Board   Net Interest Spread   Net Interest Spread (FTE) AOCI   Accumulated Other Comprehensive Income   FDIC   Federal Deposit Insurance Corporation   NM   Not Meaningful ASC   Accounting Standards Codification   FFP   Federal Funds Purchased   OAEM   Other Assets Especially Mentioned ASU   Accounting Standards Update   FFS   Federal Funds Sold   OREO   Other Real Estate Owned ATM   Automated Teller Machine   FFTR   Federal Funds Target Rate   PPP   SBA Paycheck Protection Program AUM   Assets Under Management   FHA   Federal Housing Authority   PV   Present Value Bancorp / the Company   Stock Yards Bancorp, Inc.   FHC   Financial Holding Company   PCD   Purchased Credit Deteriorated 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 CB   Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust Company   GLB Act   Gramm-Leach-Bliley Act   SAB   Staff Accounting Bulletin CD   Certificate of Deposit   GNMA   Government National Mortgage Association   SAR   Stock Appreciation Right CDI   Core Deposit Intangible   HELOC   Home Equity Line of Credit   SBA   Small Business Administration CECL   Current Expected Credit Loss (ASC-326)   HTM   Held to Maturity   SEC   Securities and Exchange Commission CEO   Chief Executive Officer   ITM   Interactive Teller Machine   SOFR   Secured Overnight Financing Right CFO   Chief Financial Officer   KB   Kentucky Bancshares, Inc. and Kentucky Bank   SSUAR   Securities Sold Under Agreements to Repurchase CLI   Customer list intangible   KSB   King Bancorp, Inc. and King Southern Bank   SVP   Senior Vice President COVID-19   Coronavirus Disease - 2019   LFA   Landmark Financial Advisors, LLC   TBOC   The Bank Oldham County CRA   Community Reinvestment Act   LIBOR   London Interbank Offered Rate   TCE   Tangible Common Equity CRE   Commercial Real Estate   Loans   Loans and Leases   TDR   Troubled Debt Restructuring Dodd-Frank Act   The Dodd-Frank Wall Street Reform and Consumer Protection Act   MBS   Mortgage Backed Securities   TPS   Trust Preferred Securities DTA   Deferred Tax Asset   MSA   Metropolitan Statistical Area   VA   U.S. Department of Veterans Affairs DTL   Deferred Tax Liability   MSRs   Mortgage Servicing Rights   WM&T   Wealth Management and Trust DCF   Discounted Cash Flow   NASDAQ   The NASDAQ Stock Market, LLC           3 Table of Contents     PART I – FINANCIAL INFORMATION   Item 1. Financial Statements   CONDENSED CONSOLIDATED BALANCE SHEETS   March 31, 2022 (unaudited) and December 31, 2021 (in thousands, except share data)       March 31,     December 31,       2022     2021   Assets                 Cash and due from banks   $ 109,799     $ 62,304   Federal funds sold and interest bearing due from banks     641,892       898,888   Total cash and cash equivalents     751,691       961,192                     Mortgage loans held for sale, at fair value     9,323       8,614   Available for sale debt securities (amortized cost of $ 1,225,815 in 2022 and $ 1,190,379 in 2021, respectively)     1,150,355       1,180,298   Held to maturity debt securities (fair value of $ 535,807 in 2022 and $ 0 in 2021, respectively)     548,191       —   Federal Home Loan Bank stock, at cost     13,811       9,376   Loans     4,847,683       4,169,303   Allowance for credit losses on loans     67,067       53,898   Net loans     4,780,616       4,115,405                     Premises and equipment, net     108,827       76,894   Bank owned life insurance     53,339       53,073   Accrued interest receivable     15,690       13,745   Goodwill     202,524       135,830   Core deposit intangibles     17,826       5,596   Customer list intangibles     14,142       —   Other assets     110,817       86,002   Total assets   $ 7,777,152     $ 6,646,025                     Liabilities                 Deposits:                 Non-interest bearing   $ 2,089,072     $ 1,755,754   Interest bearing     4,656,419       4,031,760   Total deposits     6,745,491       5,787,514                     Securities sold under agreements to repurchase     142,146       75,466   Federal funds purchased     8,920       10,374   Subordinated debentures     26,045       —   Accrued interest payable     337       300   Other liabilities     92,993       96,502   Total liabilities     7,015,932       5,970,156                     Commitments and contingent liabilities (Footnote 12)                                       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 29,220,000 and 26,596,000 shares in 2022 and 2021, respectively     58,238       49,501   Additional paid-in capital     372,555       243,107   Retained earnings     384,949       391,201   Accumulated other comprehensive loss     ( 57,599 )     ( 7,940 ) Total stockholders ’ equity     758,143       675,869   Noncontrolling interest     3,077       —   Total equity     761,220       675,869   Total liabilities and equity   $ 7,777,152     $ 6,646,025     See accompanying notes to unaudited condensed consolidated financial statements.   4 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) For the three months ended March 31, 2022 and 2021 (in thousands, except per share data)       Three months ended       March 31,       2022     2021   Interest income                 Loans, including fees   $ 44,743     $ 37,000   Federal funds sold and interest bearing due from banks     282       66   Mortgage loans held for sale     24       64   Federal Home Loan Bank stock     54       57   Securities Investment:                 Taxable     4,680       2,295   Tax-exempt     201       36   Total interest income     49,984       39,518   Interest expense                 Deposits     1,171       1,510   Securities sold under agreements to repurchase     17       5   Federal funds purchased and other short-term borrowings     3       2   Subordinated debentures     33       —   Federal Home Loan Bank advances     —       176   Total interest expense     1,224       1,693   Net interest income     48,760       37,825   Provision for credit losses     2,279       ( 1,475 ) Net interest income after credit loss expense     46,481       39,300   Non-interest income                 Wealth management and trust services     8,469       6,248   Deposit service charges     1,863       944   Debit and credit card income     4,119       2,273   Treasury management fees     1,904       1,540   Mortgage banking income     1,003       1,444   Net investment product sales commissions and fees     607       464   Bank owned life insurance     266       161   Other     972       770   Total non-interest income     19,203       13,844   Non-interest expenses                 Compensation     17,969       12,827   Employee benefits     4,539       3,261   Net occupancy and equipment     3,025       2,045   Technology and communication     3,419       2,346   Debit and credit card processing     1,337       705   Marketing and business development     772       524   Postage, printing and supplies     733       409   Legal and professional     650       462   FDIC insurance     645       405   Amortization of investments in tax credit partnerships     88       31   Capital and deposit based taxes     518       458   Merger expenses     19,500       400   Intangible amortization     713       77   Other     2,389       1,023   Total non-interest expenses     56,297       24,973   Income before income tax expense     9,387       28,171   Income tax expense     1,445       5,461   Net income     7,942       22,710   Less income attributed to noncontrolling interest     36       —   Net Income available to stockholders   $ 7,906     $ 22,710   Net income per common share, basic   $ 0.29     $ 1.00   Net income per common share, diluted   $ 0.29     $ 0.99   Weighted average outstanding shares                 Basic     27,230       22,622   Diluted     27,485       22,865     See accompanying notes to unaudited condensed consolidated financial statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) For the three months ended March 31, 2022 and 2021 (in thousands)       Three months ended       March 31,       2022     2021   Net income   $ 7,942     $ 22,710   Other comprehensive income (loss):                 Change in unrealized loss on AFS debt securities     ( 65,379 )     ( 15,567 ) Change in fair value of derivatives used in cash flow hedge     —       43   Total other comprehensive income (loss), before income tax expense     ( 65,379 )     ( 15,524 ) Tax effect     ( 15,720 )     ( 3,733 ) Total other comprehensive income (loss), net of tax     ( 49,659 )     ( 11,791 ) Comprehensive income (loss)     ( 41,717 )     10,919   Less comprehensive income attributed to noncontrolling interest     36       —   Comprehensive income (loss) available to stockholders   $ ( 41,753 )   $ 10,919     See accompanying notes to unaudited condensed consolidated financial statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (unaudited) For the three months ended March 31, 2022 and 2021 (in thousands, except per share data)                                       Accumulated                               Common stock     Additional             other     Total                       Shares             paid-in     Retained     comprehensive     stockholders'     Noncontrolling     Total       outstanding     Amount     capital     earnings     loss     equity     interest     equity                                                                     Balance, January 1, 2022     26,596     $ 49,501     $ 243,107     $ 391,201     $ ( 7,940 )   $ 675,869     $ -     $ 675,869                                                                     Activity for three months ended March 31, 2022:                                                                 Net income     —       —       —       7,906       —       7,906       36       7,942   Other comprehensive loss     —       —       —       —       ( 49,659 )     ( 49,659 )     —       ( 49,659 ) Stock compensation expense     —       —       991       —       —       991       —       991   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     65       216       3,451       ( 6,011 )     —       ( 2,344 )     —       ( 2,344 ) Stock issued for Commonwealth acquisition     2,564       8,539       125,286       —       —       133,825       —       133,825   Noncontrolling interest of acquired entity     —       —       —       —       —       —       3,094       3,094   Cash dividends declared, $ 0.28 per share     —       —       —       ( 8,172 )     —       ( 8,172 )     —       ( 8,172 ) Shares cancelled     ( 5 )     ( 18 )     ( 280 )     25             ( 273 )     —       ( 273 ) Distributions to noncontrolling interest     —       —       —       —       —       —       ( 53 )     ( 53 ) Balance, March 31, 2022     29,220     $ 58,238     $ 372,555     $ 384,949     $ ( 57,599 )   $ 758,143     $ 3,077     $ 761,220                                           Accumulated               Common stock     Additional             other     Total       Shares             paid-in     Retained     comprehensive     stockholders'       outstanding     Amount     capital     earnings     income     Total                                                     Balance, January 1, 2021     22,692     $ 36,500     $ 41,886     $ 353,574     $ 8,741     $ 440,701                                                     Activity for three months ended March 31, 2021:                                                 Net income     —       —       —       22,710       —       22,710   Other comprehensive loss     —       —       —       —       ( 11,791 )     ( 11,791 ) Stock compensation expense     —       —       849       —       —       849   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     89       296       4,144       ( 7,533 )     —       ( 3,093 ) Cash dividends declared, $ 0.27 per share     —       —       —       ( 6,144 )     —       ( 6,144 ) Balance, March 31, 2021     22,781     $ 36,796     $ 46,879     $ 362,607     $ ( 3,050 )   $ 443,232     See accompanying notes to unaudited condensed consolidated financial statements.   7 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)   For the three months ended March 31, 2022 and 2021 (in thousands)       2022     2021   Cash flows from operating activities:                 Net income   $ 7,942     $ 22,710   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     2,279       ( 1,475 ) Depreciation, amortization and accretion, net     4,038       2,261   Deferred income tax expense     1,231       1,446   Gain on sale of mortgage loans held for sale     ( 92 )     ( 1,196 ) Origination of mortgage loans held for sale     ( 35,829 )     ( 68,739 ) Proceeds from sale of mortgage loans held for sale     38,771       85,903   Bank owned life insurance income     ( 266 )     ( 161 ) (Gain)/loss on the disposal of premises and equipment     26       —   Stock compensation expense     991       849   Excess tax benefit from share-based compensation arrangements     ( 643 )     ( 1,009 ) Net change in accrued interest receivable and other assets     6,404       3,710   Net change in accrued interest payable and other liabilities     ( 21,332 )     ( 17,064 ) Net cash provided by operating activities     3,520       27,235   Cash flows from investing activities:                 Purchases of available for sale debt securities     ( 21,970 )     ( 139,649 ) Proceeds from sales of acquired available for sale debt securities     2,111       —   Proceeds from maturities and paydowns of available for sale debt securities     44,741       38,138   Purchases of held to maturity debt securities     ( 459,183 )     —   Proceeds from maturities and paydowns of held to maturity debt securities     96,302       —   Proceeds from redemption of Federal Home Loan Bank stock     —       1,056   Net change in non-PPP loans     ( 115,277 )     ( 40,855 ) Net change in PPP loans     69,373       ( 62,699 ) Purchases of premises and equipment     ( 946 )     ( 560 ) Other investment activities     —       ( 3,078 ) Proceeds from sales of other real estate owned     56       —   Cash from acquisition, net of cash paid     349,456       —   Net cash used in investing activities     ( 35,337 )     ( 207,647 ) Cash flows from financing activities:                 Net change in deposits     ( 162,533 )     211,320   Net change in securities sold under agreements to repurchase and federal funds purchased     ( 994 )     880   Proceeds from Federal Home Loan Bank advances     —       10,000   Repayments of Federal Home Loan Bank advances     —       ( 17,486 ) Repayment of acquired line of credit     ( 3,200 )     —   Share repurchases related to compensation plans     ( 2,617 )     ( 3,093 ) Cash disbursements to noncontrolling interest     ( 53 )     —   Cash dividends paid     ( 8,287 )     ( 6,173 ) Net cash (used in) provided by financing activities     ( 177,684 )     195,448   Net change in cash and cash equivalents     ( 209,501 )     15,036   Beginning cash and cash equivalents     961,192       317,945   Ending cash and cash equivalents   $ 751,691     $ 332,981     (continued)   8 Table of Contents   (continued)   For the three months ended March 31,                 Supplemental cash flow information:   2022     2021   Interest paid   $ 1,187     $ 1,835   Income taxes paid, net of refunds     —       ( 105 ) Cash paid for operating lease liabilities     853       520   Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 3,131     $ 6,109   Dividends payable     159       185                     Liabilities assumed in conjunction with acquisition:                 Fair value of assets acquired   $ 1,403,509     $ -   Consideration paid in acquisition     30,994       -   Common stock issued in acquisition     133,825       -   Noncontrolling interest of acquired entity     3,094       -   Total consideration paid     167,913       -   Liabilities assumed   $ 1,235,596     $ -     See accompanying notes to unaudited condensed consolidated financial statements.   9 Table of Contents   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     ( 1 ) Summary of Significant Accounting Policies   Nature of Operations – Stock Yards Bancorp, Inc. (“Bancorp” or “the Company”) is a FHC headquartered in Louisville, Kentucky. The accompanying condensed consolidated financial statements include the accounts of its wholly owned subsidiaries, SYB (“the Bank”) and SYB Insurance Company, Inc. (“the Captive”). Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements of Bancorp and its subsidiaries have been prepared in conformity with GAAP and adhere to predominant practices within the banking industry.   Established in 1904, SYB is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets through 73 full service banking center locations.   Bancorp is divided into two reportable segments: Commercial Banking and WM&T:   Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, 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.   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.   As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100 % successor owner of the following unconsolidated Delaware trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS.   Also as a result of its acquisition of Commonwealth Bancshares, Inc., the Company acquired a 60 % interest in Landmark Financial Advisors, LLC (“LFA”), which is based in Bowling Green, Kentucky and provides wealth management services. LFA is consolidated into the Company. The noncontrolling interest within the consolidated financial statements represents the interest in LFA not owned by the Company.   Principles of Consolidation and Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10 -Q and Rule 10 - 01 of Regulation S- X. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements.   In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Intercompany transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with Bancorp’s Annual Report on Form 10 -K for the year ended December 31, 2021. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December  31, 2022.   10 Table of Contents   Critical Accounting Policies and Estimates – To prepare financial statements in conformity with GAAP, management must make estimates and assumptions that require difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy, including pandemic-related changes, and changes in the financial condition of borrowers.   Bancorp’s accounting policies are fundamental to understanding management’s discussion and analysis of our results of operations and financial condition. At March 31, 2022 and December 31, 2021, the accounting policies considered the most critical in preparing Bancorp’s consolidated financial statements are the determination of the ACL on loans and goodwill.   Effective January 1, 2020, Bancorp adopted ASC 326 “ Financial Instruments – Credit Losses, ” which created material changes to Bancorp’s existing critical accounting policy that existed at December 31, 2019. Accounting policies relating to credit losses for HTM investment securities, loans and off-balance sheet credit exposures reflect the current accounting policies required by this ASC.   The ACL for loans is established through credit loss expense charged to current earnings. The amount maintained in the ACL reflects management’s estimate of the net amount not expected to be collected on the loan portfolio at the balance sheet date over the life of the loan. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A specific reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans.   For purposes of establishing the general reserve, Bancorp stratifies the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculates the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. Bancorp’s methodologies for estimating the ACL for loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.   Accounting for Business Acquisitions – Bancorp accounts for acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, “ Business Combinations .” The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.   Identifiable assets acquired, liabilities assumed, and any non-controlling interest in acquirees are generally recognized at their acquisition-date (“day-one”) fair values based on the requirements of ASC Topic 820, “ Fair Value Measurements and Disclosures. ” The measurement period for day- one fair values begins on the acquisition date and ends at the earlier of: (a) the day management believes it has all the information necessary to determine day- one fair values; or (b)  one year following the acquisition date. In many cases, the determination of day- one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day- one fair values. More specifically, these recast adjustments may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day- one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.   Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.   Cash Equivalents – Cash and cash equivalents include cash and due from banks, FFS and interest bearing due from banks as segregated in the accompanying consolidated balance sheets.   Debt Securities – Bancorp determines the classification of debt securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Debt securities not classified as held to maturity are classified as AFS and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in AOCI, net of tax.   11 Table of Contents   Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity using the interest method, except for premiums on callable debt securities, which are amortized to their earliest call date.   Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in the consolidated balance sheets. A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on non-accrual is reversed against interest income. There was no accrued interest related to debt securities reversed against interest income for the three month periods ended March 31, 2022 and 2021.   ACL – AFS Debt Securities – For AFS debt securities in an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an ACL for AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL for AFS debt securities and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL for AFS debt securities in this situation.   In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. There were no credit related factors underlying unrealized losses on AFS debt securities at March 31, 2022 and December 31, 2021.   Changes in the ACL for AFS debt securities are recorded as expense. Losses are charged against the ACL for AFS debt securities when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.   ACL – HTM Debt Securities – Bancorp measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $ 771,000 and $ 0 as of March 31, 2022 and December 31, 2021, respectively and is excluded from the ACL on HTM securities. The estimate of the ACL for HTM securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. As of both March 31, 2022 and December 31, 2021, no ACL for HTM securities was recorded.   Mortgage Loans Held for Sale and Mortgage Banking Activities – As of March 31, 2022, mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale as of December 31, 2021 and prior were carried at the lower of cost or market value. Net gains on mortgage loans held for sale are recorded as a component of Mortgage banking income and represent the difference between the selling price and the carrying value of the loans sold. Substantially all of the gains or losses on the sale of loans are reported in earnings when the interest rates on loans are locked.   Commitments to fund mortgage loans (“interest rate lock commitments”) to be sold into the secondary market and non-exchange traded mandatory forward sales contracts (“forward contracts”) for the future delivery of these mortgage loans or the purchase of TBA securities are accounted for as free-standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the Bank enters into the derivative. Generally, the Bank enters into forward contracts for the future delivery of mortgage loans or the purchase of TBA securities when interest rate lock commitments are entered into in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in the fair values of these mortgage derivatives are included in net gains on sales of loans, which is a component of Mortgage banking income on the income statement.   12 Table of Contents   Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded as component of Mortgage banking income. Fair value is based on the market prices for comparable mortgage servicing contracts when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and are periodically adjusted based on the weighted average remaining life of the underlying loans.   A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs generally decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs generally will increase, as prepayments on the underlying loans would be expected to decline.   Loan servicing income is reported on the income statement as a component of Mortgage banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are considered nominal.   Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost basis, which is the unpaid principal balance outstanding, net of unearned income, deferred loan fees and costs, premiums and discounts associated with acquisition date fair value adjustments on acquired loans and any direct partial charge-offs. Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in the consolidated balance sheets.   Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the life of the loan without anticipating prepayments.   Loans are considered past due or delinquent when the contractual principal and/or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. The accrual of interest income on loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or if full collection of interest or principal becomes doubtful. Consumer loans are typically charged off no later than 120 days past due. All interest accrued but not received for a loan placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.   Acquired loans are recorded at fair value at the date of acquisition based on a DCF methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting Bancorp’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective, as they require material estimates, all of which may be susceptible to significant change.   Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.   13 Table of Contents   Acquired loans are determined by Bancorp to have more-than-insignificant deterioration in credit quality since origination if any of the following designations apply, listed in order of priority as follows: Loans individually analyzed by Bancorp and determined to have a collateral or cash flow deficiency resulting in a full or partial allocation for loss, loans placed on non-accrual status by the acquired institution, loans identified as TDRs by the acquired institution, loans that have received a partial charge off by the acquired institution, loans risk-rated below a “pass” grade by the acquired institution and any loans past due 59 days or more at the time of acquisition.   For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are accreted/amortized into interest income over the lives of the related loans. For non-PCD loans, an initial ACL for loans is estimated and recorded as credit loss expense at the acquisition date.   The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.   ACL – Loans – Under the CECL model, the ACL for loans represents a valuation allowance estimated at each balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to represent the net amount expected to be collected on the loan portfolio.   Bancorp estimates the ACL for loans based on the underlying assets’ amortized cost basis, which is the amount at which the receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, and net deferred fees or costs, collection of payment, and partial charge-offs. In the event that collection of principal becomes uncertain, Bancorp has policies in place to reverse accrued interest in a timely manner. Therefore, Bancorp has made a policy election to exclude accrued interest from the measurement of the ACL for loans.   Expected credit losses are reflected in the ACL for loans through a charge to provision. When Bancorp deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written-off and the ACL for loans is reduced by the same amount. Bancorp applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts of collection have been exhausted and the collateral, if any, has been liquidated. Subsequent recoveries, if any, are credited to the ACL for loans when received.   Bancorp’s methodologies for estimating the ACL for loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. Bancorp’s methodologies may revert to historical loss information on a straight-line basis over a number of quarters when it can no longer develop reasonable and supportable forecasts.   Loans are predominantly segmented by FDIC Call Report Codes into loan pools that have similar risk characteristics, similar collateral type and are assumed to pose consistent risk of loss to Bancorp. Bancorp has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses:   Commercial Real Estate – Owner Occupied – Includes non-farm non-residential real estate loans for a variety of commercial property types and purposes, and is typically secured by commercial offices, industrial buildings, warehouses or retail buildings where the owner of the building occupies the property. The primary source of repayment is the cash flow from the ongoing operations and activities conducted by the party (or affiliate) who owns the property. Repayment terms vary considerably; interest rates are fixed or variable and structured for full or partial amortization of principal.   Commercial Real Estate – Non-Owner Occupied – Includes investment real estate loans secured by similar collateral as above. The primary source of income for this loan type is typically rental income associated with the property. This category also includes apartment or multifamily residential buildings (secured by five or more dwelling units).   14 Table of Contents   Construction and Land Development – Consists of loans to finance the ground up construction or improvement of owner occupied and non-owner occupied residential and commercial properties and loans secured by raw or improved land. The repayment of C&D loans is generally dependent upon the successful completion of the improvements by the builder for the end user, the leasing of the property, or sale of the property to a third party. Repayment of land secured loans is dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. Bancorp’s construction loans may convert to real estate-secured loans once construction is completed or principal amortization payments begin, assuming the borrower retains financing with the Bank.   Commercial and Industrial – Represents loans for C&I purposes to sole proprietorships, partnerships, corporations and other business enterprises, whether secured (other than those that meet the definition of a “loan secured by real estate”) or unsecured, single payment or installment. This category includes loans originated for financing capital expenditures, loans secured by accounts receivable, inventory and other business assets such as equipment, non-real estate related construction loans in addition to non-real estate loans guaranteed by the SBA. Bancorp originates these loans for a variety of purposes across various industries. This portfolio has been segregated between term loans and revolving lines of credits based on the varied characteristics of these individual loan structures.   Residential Real Estate – Includes non-revolving (closed-end) first and junior lien loans secured by residential real estate primarily in Bancorp’s market areas. This portfolio is segregated between owner occupied and non-owner occupied status, as the investment nature of the latter poses additional credit risks to Bancorp.   Home Equity Lines of Credit – Similar to Residential Real Estate above, however these are revolving (open-ended) lines of credit.   Consumer – Represents loans to individuals for personal expenditures that may be secured or unsecured. This includes pre-arranged overdraft plans, secured automobile loans and other consumer-purpose loans.   Leases – Represents a variety of leasing options to businesses to acquire equipment.   Credit Cards – Represents revolving loans to businesses and consumers.   Bancorp measures expected credit losses for its loan portfolio segments as follows:   Loan Portfolio Segment   ACL Methodology       Commercial real estate - non-owner occupied   Discounted cash flow Commercial real estate - owner occupied   Discounted cash flow Commercial and industrial - term   Static pool Commercial and industrial - line of credit   Static pool Residential real estate - owner occupied   Discounted cash flow Residential real estate - non-owner occupied   Discounted cash flow Construction and land development   Static pool Home equity lines of credit   Static pool Consumer   Static pool Leases   Static pool Credit cards   Static pool   Based on the 100% SBA guarantee of the PPP loan portfolio, Bancorp does not generally reserve for potential losses for these loans within the ACL.   Discounted Cash flow Method – The DCF methodology is used to develop cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, time to recovery, probability of default and loss given default. The modeling of expected prepayment speeds, curtailment rates and time to recovery are based on historical internal data.   15 Table of Contents   Bancorp uses regression analysis on historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes the FRB’s forecasted Seasonally Adjusted National Civilian Unemployment Rate as its primary loss driver, as this was determined to best correlate to historical losses.   With regard to the DCF model and the adoption of CECL effective January 1, 2020, management determined that four quarters represented a reasonable and supportable forecast period with reversion back to a historical loss rate over eight quarters on a straight-line basis. However, in response to uncertainty surrounding the magnitude and duration of the economic crisis created by the pandemic, management subsequently determined that a one -quarter forecast period with a reversion back to a historical loss rate in the following quarter was appropriate for the calculation performed at March 31, 2020. For the calculation performed at June 30, 2020, management elected to return to the four quarter forecast period with reversion back to a historical loss rate in the following quarter, which was the methodology used for all subsequent calculations through June 30, 2021. Beginning with the calculation performed as of September 30, 2021, management concluded that increasing the reversion period back to a historical loss rate over four quarters on a straight line basis was warranted, as both current and forecasted unemployment levels become more normal.   The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level NPV of expected cash flows. An ACL is established for the difference between the instrument’s NPV and amortized cost basis.   Static Pool Method – The static pool methodology is utilized for the loan portfolio segments that typically have shorter durations. For each of these loan segments, Bancorp applies an expected loss ratio based on historical losses adjusted as appropriate for qualitative loss factors. Qualitative loss factors are based on management's judgment of company, market, industry or business specific data, changes in underlying loan composition of specific portfolios, trends relating to credit quality, delinquency, non-performing and adversely rated loans and reasonable and supportable forecasts of economic conditions.   Collateral Dependent Loans – Loans that do not share risk characteristics are evaluated on an individual basis. For collateral dependent loans where Bancorp has determined that the liquidation or foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and Bancorp expects repayment of the financial asset to be provided substantially through the operation of the business or sale of the collateral, the ACL is measured based on the difference between the estimated fair value of the collateral and the amortized cost basis of the asset as of the measurement date. When repayment is expected to be from the operation of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the NPV of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized costs basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of loan. Bancorp’s estimate of the ACL reflects losses expected over the remaining contractual life of the loan and the contractual term does not consider extensions, renewals or modifications.   A loan that has been modified or renewed is considered a TDR when two conditions are met: 1 ) the borrower is experiencing financial difficulty and 2 ) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period may be included in Bancorp’s existing pools based on the underlying risk characteristics of the loan to measure the ACL.   Premises and Equipment – Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using straight-line methods over the estimated useful lives of the assets ranging from three to 40 years. Leasehold improvements are amortized on the straight-line method over terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.   16 Table of Contents   FHLB Stock – Bancorp is a member institution of the FHLB. Members are required to own a certain amount of stock based on the level of borrowings and other factors and may invest in additional amounts of stock. FHLB stock is carried at cost, classified as a restricted security and annually evaluated for impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are recorded as interest income.   Goodwill and Other Intangible Assets – Goodwill resulting from business acquisitions represents the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested annually for impairment or more frequently if events and circumstances exist that indicate a goodwill impairment test should be performed.   Bancorp has selected September  30 as the date to perform its annual goodwill impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.   Currently, goodwill recorded on Bancorp’s consolidated balance sheets is attributed mainly to the Commercial Banking segment, while a portion is also attributed to the WM&T segment. Goodwill related to the KSB acquisition is deductible for tax purposes, as it was structured as an asset sale/338 election. Goodwill related to the CB and KB acquisitions is not deductible for tax purposes, as both were structured as stock sales. Based on its assessment, Bancorp believes its goodwill balances at March 31, 2022 and December 31, 2021 were not impaired and are properly recorded in the consolidated financial statements.   Other intangible assets consist of CDI and CLI assets arising from business acquisitions. The CDI and CLI assets represent customer relationships associated with acquired deposit portfolios and WM&T businesses, respectively. CDI and CLI assets are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives.   Other Assets – BOLI and other life insurance policies are carried at net realizable value, which considers applicable surrender charges. Also, Bancorp maintains life insurance policies in conjunction with its non-qualified defined benefit and non-qualified compensation plans.   OREO is carried at the lower of cost or estimated fair value minus estimated selling costs. In certain situations, improvements to prepare assets for sale are capitalized if those costs increase the estimated fair value of the asset. Expenses incurred in maintaining assets, write downs to reflect subsequent declines in value, and realized gains or losses are reflected in the results of operations and are included in non-interest income and/or expense.   Off-Balance Sheet Credit Exposures – Financial instruments include off-balance sheet credit instruments, such as commitments to originate loans, commitments to fund existing loans and commercial letters of credit issued to meet customer-financing needs. Off-balance sheet refers to assets or liabilities that do not appear on a company's balance sheet. Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.   Bancorp records an ACL for off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision for credit losses on Bancorp’s consolidated statements of income. The ACL for off-balance sheet credit exposures is estimated by loan portfolio segment at each balance sheet date under the current CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur and is included in other liabilities on Bancorp’s consolidated balance sheets.   Derivatives – Bancorp uses derivative financial instruments, including interest rate swaps, as part of its interest rate risk management. GAAP establishes accounting and reporting standards for derivative instruments and hedging activities. As required by GAAP, Bancorp’s interest rate swaps are recognized as other assets and liabilities in the consolidated balance sheet at fair value. Accounting for changes in fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. To qualify for hedge accounting, Bancorp must comply with detailed rules and documentation requirements at inception of the hedge, and hedge effectiveness is assessed at inception and periodically throughout the life of each hedging relationship. Hedge ineffectiveness, if any, is measured periodically throughout the life of the hedging relationship.   17 Table of Contents   For derivatives designated as cash flow hedges, the effective portion of changes in fair value of the derivative is initially reported in AOCI and subsequently reclassified to interest income or expense when the hedged transaction affects earnings, while the ineffective portion of changes in fair value of derivative, if any, is recognized immediately in other noninterest income. Bancorp assesses the effectiveness of each hedging relationship by comparing cumulative changes in cash flows of the derivative hedging instrument with cumulative changes in cash flows of the designated hedged item or transaction. No component of the change in the fair value of the hedging instrument is excluded from the assessment of hedge effectiveness.   Periodically, Bancorp enters into an interest rate swap transaction with a borrower, who desires to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Because these derivative instruments have not been designated as hedging instruments, the derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in fair value, due to changes in prevailing interest rates, recorded in other noninterest income.   Bancorp had no fair value hedging relationships at March 31, 2022 and December 31, 2021. Bancorp does not use derivatives for trading or speculative purposes. See the Footnote titled “ Derivative Financial Instruments ” for additional discussion.   Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from Bancorp, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.   Stock-Based Compensation – For all awards, stock-based compensation expense is recognized over the period in which it is earned based on the grant-date fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures at the time of grant. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.   Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in DTAs and DTLs. DTAs and DTLs are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted statutory tax rates. A valuation allowance, if needed, reduces DTAs to the amount expected to be realized.   A tax position is recognized as a benefit only if it is “more-likely-than- not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the “more-likely-than- not” test, no tax benefit is recorded.   Bancorp recognizes interest and/or penalties related to income tax matters in income tax expense, if any.   Bancorp periodically invests in certain partnerships with customers that yield historic tax credits, accounted for using the flow through method, which approximates the equity method. Also, low-income housing tax credits, as well as tax-deductible losses, are accounted for using the effective yield method for older transactions or proportional amortization method for more recent transactions. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income.   Net Income Per Share – Basic net income per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is determined by dividing net income by the weighted average number of shares of common stock outstanding plus the weighted average number of shares that would be issued upon exercise of dilutive options and SARs, assuming proceeds are used to repurchase shares under the treasury stock method.   18 Table of Contents   Comprehensive Income (Loss) – Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances outside of the Company’s control. For Bancorp, this includes net income, changes in unrealized gains and losses on AFS debt securities and cash flow hedging instruments, net of reclassification adjustments and taxes, and minimum pension liability adjustments, net of taxes.   Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable, and an amount or range of loss can be reasonably estimated. Management does not believe there are any outstanding matters that would have a material effect on the financial statements.   Restrictions on Cash and Cash Equivalents – Bancorp has historically been required by the FRB to maintain average reserve balances. Effective March 26, 2020, the FRB reduced the reserve requirement ratio to 0% in response to the COVID- 19 pandemic, eliminating reserve requirements for all depository institutions. The reserve requirement ratio remained at 0% as of March 31, 2022.   The Company’s captive maintains cash reserves to cover insurable claims. Reserves totaled $ 200,000 as of March 31, 2022.   Dividend Restrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Holding Company or by the Holding Company to shareholders.   Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as disclosed in the Footnote titled “ Assets and Liabilities Measured and Reported at Fair Value ” in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates.   Revenue from Contracts with Customers – The majority of Bancorp’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not subject to ASC 606. Bancorp’s services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as Bancorp satisfies its obligation to its customer.   Segment Information – Bancorp provides a broad range of financial services to individuals, corporations and others through its full service banking locations. These services include loan and deposit services, cash management services, securities brokerage activities, mortgage origination and WM&T activities. Bancorp’s operations are considered by management to be aggregated in two reportable operating segments: Commercial Banking and WM&T.   Reclassifications – Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods’ net income or shareholders’ equity.   Adoption of New Accounting Guidance – The FASB issued ASU No. 2020 - 04, Reference Rate Reform (Topic 848 ): “ Facilitation of the Effects of Reference Rate Reform on Financial Reporting ,” in March 2020. The amendments in this update provide optional guidance for a limited period to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform. The main provisions include:     ● A change in a contract’s reference interest rate would be accounted for as a continuation of that contract rather than as the creation of a new one for contracts, including loans, debt, leases and other arrangements, that meet specific criteria.   ● When updating its hedging strategies in response to reference rate reform, an entity would be allowed to preserve its hedge accounting.   The guidance is applicable only to contracts or hedge accounting relationships that reference LIBOR or another reference rate expected to be discontinued. Because the guidance is meant to help entities through the transition period, it will be in effect for a limited time and will not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, for which an entity has elected certain optional expedients that are retained through the end of the hedging relationship. The amendments in this ASU are effective March 12, 2020 through December 31, 2022.   19 Table of Contents   In October 2020, the FASB issued ASU No. 2020 - 10, Codification Improvements . The amendments improve codification by having all disclosure-related guidance available in the disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to codification that are not expected to have a significant effect on current accounting practice. The amendments became effective for annual periods beginning after December 15, 2020.   In May 2020, the SEC issued a final rule related to acquisitions and dispositions of businesses and related pro forma information. The rule revised the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The intent of the rule is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements. The changes are intended to improve disclosure. The final rule was effective January 1, 2021.   Accounting Standards Updates – Generally, if an issued but not yet effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.   In March 2022, the FASB issued ASU 2022 - 02,   “Financial Instruments – Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022 - 02 eliminates the accounting guidance for TDRs in ASC 310 - 40, “Receivables – Troubled Debt Restructurings by Creditors” for entities that have adopted the CECL model introduced by ASU 2016 - 13,   “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” ASU 2022 - 02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326 - 20,   “Financial Intsruments – Credit Losses – Mesasured at Amortized Cost.” The new guidance will not have a material impact on the consolidated financial statements.   In April 2019, the FASB issued ASU No. 2019 - 04, “ Codification Improvements to Financial Instruments - Credit Losses (ASC 326 ), Derivatives and Hedging (ASC 815 ), and Financial Instruments (ASC 825 ) .” The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amended guidance in this ASU related to the credit losses will be effective for Bancorp’s for fiscal years and interim periods beginning after December 15, 2022. Bancorp is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.   In August 2021, the FASB issued ASU 2021 - 06, Presentation of Financial Statements (Topic 205 ), Financial Services – Depository and Lending (Topic 942 ), and Financial Services – Investment Companies (Topic 946 ): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and will not have a material impact on the consolidated financial statements.   In October 2021, the FASB issued ASU 2021 - 08, Business Combinations (Topic 805 ): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including any interim period, for public business entities for periods which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The new guidance will not have a material impact on the consolidated financial statements.   20 Table of Contents         ( 2 ) Acquisition   Commonwealth Bancshares, Inc.   On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. in a combined stock and cash transaction for total consideration of $ 168 million. Bancorp acquired 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky.   The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subjected to further adjustment through March 7, 2023.       As Recorded     Fair Value     Provisional Period     As Recorded   (in thousands)   By CB     Adjustments (1)     Adjustments (1)     by Bancorp   Assets aquired:                                 Cash and due from banks   $ 380,450     $ —     $ —     $ 380,450   Mortgage loans held for sale     3,559       —       —       3,559   Available for sale debt securities (2)     247,209       ( 416 ) a   —       246,793   Federal Home Loan Bank stock, at cost     4,436       —       —       4,436   Loans     645,551       ( 13,147 ) b   —       632,404   Allowance for credits losses on loans     ( 16,102 )     6,152   c   —       ( 9,950 ) Net loans     629,449       ( 6,995 )     —       622,454   Premises and equipment, net     28,784       4,009   d   —       32,793   Accrued interest receivable     1,973       —       —       1,973   Goodwill     5,412       ( 5,412 ) e   —       —   Core deposit intangible     —       12,724   f   —       12,724   Customer list intangibles     —       14,360   g   —       14,360   Mortgage servicing rights     9,387       3,289   h   —       12,676   Deferred income taxes, net     —       ( 3,727 ) i   —       ( 3,727 ) Other assets     9,389       ( 1,065 ) j   —       8,324   Total assets acquired   $ 1,320,048     $ 16,767     $ -     $ 1,336,815                                     Liabilities assumed:                                 Deposits:                                 Non-interest bearing   $ 302,098     $ —     $ —     $ 302,098   Interest bearing     818,334       371   k   —       818,705   Total deposits     1,120,432       371       —       1,120,803                                     Securities sold under agreements to repurchase     66,220       —       —       66,220   Subordinated debentures     26,806       ( 794 ) l   —       26,012   Line of credit     3,200       —       —       3,200   Accrued interest payable     243       —       —       243   Other liabilities     17,822       1,296   m   —       19,118   Total liabilities assumed     1,234,723       873       —       1,235,596   Net assets acquired   $ 85,325     $ 15,894     $ -     $ 101,219                                     Consideration for common stock                           $ 133,825   Cash consideration paid                             30,994   Noncontrolling interest of acquired entity                             3,094   Total consideration                           $ 167,913                                     Goodwill                           $ 66,694     ( 1 ) See the following page for explanations or individual fair value and provisional period adjustments. ( 2 ) As of acquisition date, securities with a fair value of $ 162 million were classified as HTM.   21 Table of Contents   Explanation of fair value adjustments :   a. Adjustment based on Bancorp’s evaluation of the acquired investment portfolio.   b. Adjustments to loans to reflect estimated fair value adjustments, including the following:   (in thousands)                   Fair value adjustment - acquired non PCD loans   $ ( 9,216 ) Fair value adjustment - acquired PCD loans     ( 4,094 ) Eliminate unrecognized loan fees on acquired loans and fair value hedge     163   Net loan fair value adjustments   $ ( 13,147 )   c. The net adjustment to allowance for credit losses includes the following:   (in thousands)                   Reversal of historical CB allowance for credit losses on loans   $ ( 16,102 ) Estimate of lifetime credit losses for PCD loans     9,950   Net change in allowance for credit losses   $ ( 6,152 )   d. Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.   e. Elimination of the historical CB goodwill.   f. Calculation of CDI related to the acquisition.   g. Calculation of Customer Lists Intangibles related to the acquisition.   h. Adjustment to reflect the estimated fair value of MSRs.   i. Adjustment to net DTAs associated with the effects of the purchase accounting adjustments.   j. Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.   k. Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.   l. Adjustment to reflect the estimated fair value of subordinated debentures for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.   m. Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL, operating lease liabilities and various accrual adjustments.   Goodwill of approximately $ 67 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the CB acquisition and is the result of expected operational synergies and other factors. This goodwill is attributable to the Company’s Commercial Banking and Wealth Management & Trust segments. Goodwill related to the CB acquisition is not deductible for tax purposes, as it was structured as stock sale. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the CB acquisition will change.   Receivables acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $ 539.6 million and $ 548.8 million at the date of acquisition.   Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $ 3.2  million and $ 0 for the three months ended March 31, 2022 and 2021, respectively.   22 Table of Contents   The following unaudited pro forma condensed combined financial information presents the results of operations of Bancorp, including the effects of the purchase accounting adjustments and acquisition expenses, had the CB acquisition taken place at the beginning of the period:   (in thousands)   Three months ended March 31, 2022     Three months ended March 31, 2021                     Net interest income   $ 53,793     $ 46,758   Provision for credit losses (1)     ( 2,150 )     ( 1,175 ) Non-interest income     22,143       25,866   Non-interest expense (2)     47,289       40,857   Income before taxes     30,797       32,942   Income tax expense     6,467       6,918   Net income     24,330       26,024   Less net income attributed to noncontrolling interest     51       80   Net income available to stockholders   $ 24,279     $ 25,944                     Earnings per share                 Basic   $ —     $ 1.03   Diluted     —       1.02                     Basic weighted average shares outstanding     29,056       25,186   Diluted weighted average shares outstanding     29,364       25,429     ( 1 ) - Excludes $ 4.4 million in merger related credit loss expense for the three months ended March 31, 2022, respectively. ( 2 ) - Excludes $ 24.1 million in pre-tax merger expenses for the three months ended March 31, 2022, respectively.   23 Table of Contents   Kentucky Bancshares, Inc.   On May 31, 2021, Bancorp completed its acquisition of Kentucky Bancshares, Inc. in a combined stock and cash transaction for total consideration of $ 233 million. Bancorp acquired 19 branches in 11 communities throughout central and eastern Kentucky, including the Lexington, Kentucky metropolitan statistical area and contiguous counties, and also acquired a captive insurance subsidiary.   The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subjected to further adjustment.       As Recorded     Fair Value     Provisional Period     As Recorded   (in thousands)   By KB     Adjustments (1)     Adjustments (1)     by Bancorp   Assets aquired:                                 Cash and due from banks   $ 53,257     $ —     $ —     $ 53,257   Mortgage loans held for sale     3,071       —       —       3,071   Available for sale debt securities     396,157       ( 295 ) a   —       395,862   Federal Home Loan Bank stock, at cost     7,072       —       —       7,072   Loans     755,932       ( 757 ) b   —       755,175   Allowance for credits losses on loans     ( 9,491 )     2,734   c   —       ( 6,757 ) Net loans     746,441       1,977       —       748,418   Premises and equipment, net     27,401       ( 6,361 ) d   —       21,040   Bank owned life insurance     18,909       —       —       18,909   Accrued interest receivable     4,939       —       —       4,939   Goodwill     14,001       ( 14,001 ) e   —       —   Core deposit intangible     —       3,404   f   999   f   4,403   Other real estate owned     674       ( 123 ) g   —       551   Mortgage servicing rights     1,628       34   h   —       1,662   Deferred income taxes, net     1,856       715   i   ( 230 ) i   2,341   Other assets     6,421       ( 1,866 ) j   ( 70 ) j   4,485   Total assets acquired   $ 1,281,827     $ ( 16,516 )   $ 699     $ 1,266,010                                     Liabilities assumed:                                 Deposits:                                 Non-interest bearing   $ 359,544     $ —     $ —     $ 359,544   Interest bearing     678,528       1,146   k   —       679,674   Total deposits     1,038,072       1,146       —       1,039,218                                     Securities sold under agreements to repurchase     11,360       —       —       11,360   Federal Home Loan Bank advances     88,581       2,490   l   —       91,071   Accrued interest payable     505       —       —       505   Other liabilities     16,231       ( 2,004 ) m   —       14,227   Total liabilities assumed     1,154,749       1,632       —       1,156,381   Net assets acquired   $ 127,078     $ ( 18,148 )   $ 699     $ 109,629                                     Consideration for common stock                           $ 204,670   Cash consideration paid                             28,276   Total consideration                           $ 232,946                                     Goodwill                           $ 123,317     ( 1 ) See the following page for explanations or individual fair value and provisional period adjustments.   24 Table of Contents   Explanation of fair value adjustments   a. Adjustment based on Bancorp’s evaluation of the acquired investment portfolio. Bancorp sold approximately $ 91 million in AFS debt securities shortly after acquisition.   b. Adjustments to loans to reflect estimated fair value adjustments, including the following:   (in thousands)                   Fair value adjustment - acquired non PCD loans   $ 228   Fair value adjustment - acquired PCD loans     ( 735 ) Eliminate unrecognized loan fees on acquired loans and fair value hedge     ( 250 ) Net loan fair value adjustments   $ ( 757 )   c. The net adjustment to allowance for credit losses includes the following:   (in thousands)                   Reversal of historical KB allowance for credit losses on loans   $ 9,491   Estimate of lifetime credit losses for PCD loans     ( 6,757 ) Net change in allowance for credit losses   $ 2,734     d. Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.   e. Elimination of the historical KB goodwill of $ 14.0 million at the closing date.   f. Calculation of CDI related to the acquisition. During the third quarter of 2021, a provisional period adjustment of $ 999,000 was recorded based on revised inputs used in the CDI calculation attributed to KB.   g. Adjustment to reflect the estimated fair value of other real estate owned.   h. Adjustment to reflect the estimated fair value of mortgage servicing rights.   i. Adjustment to net deferred tax assets associated with the effects of the purchase accounting adjustments.   j. Adjustment to other assets to reflect the estimated fair value of prepaid and other assets. During the third quarter of 2021, a provisional period adjustment of $ 70,000 was recorded for the write off of miscellaneous mortgage servicing fees.   k. Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.   l. Adjustment to reflect the estimated fair value of Federal Home Loan Bank advances for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates. All KB FHLB advances were paid off immediately upon acquisition.   m. Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL and various accrual adjustments.   Goodwill of approximately $ 123 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the KB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment. Goodwill related to the KB acquisition is not deductible for tax purposes, as it was structured as stock sale. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the KB acquisition will change.   Receivables acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $ 723.5 million and $ 723.3 million at the date of acquisition.   25 Table of Contents   Total revenue, defined as net interest income and non-interest income, attributed to KB totaled approximately $ 10.9 million and $ 0 for the three months ended March 31, 2022 and 2021, respectively.   The following unaudited pro forma condensed combined financial information presents the results of operations of Bancorp, including the effects of the purchase accounting adjustments and acquisition expenses, had the KB acquisition taken place at the beginning of the period:   (in thousands)   Three months ended March 31, 2022     Three months ended March 31, 2021                     Net interest income   $ 48,760     $ 46,578   Provision for credit losses     2,279       ( 1,375 ) Non-interest income     19,203       18,012   Non-interest expense (1)     56,297       34,546   Income before taxes     9,387       31,419   Income tax expense     1,445       5,953   Net income     7,942       25,466   Less net income attributed to noncontrolling interest     36       -   Net income available to stockholders   $ 7,906     $ 25,466                     Earnings per share                 Basic   $ 0.29     $ 0.96   Diluted     0.29       0.95                     Basic weighted average shares outstanding     27,230       26,425   Diluted weighted average shares outstanding     27,485       26,668     ( 1 ) - Excludes $ 400,000 in pre-tax merger expenses for the three months ended March 31, 2021, respectively.   26 Table of Contents     ( 3 ) Investment Securities   Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified HTM securities. All other investment securities are classified as either AFS securities or other securities.   AFS Debt Securities   The following table summarizes the amortized cost, unrealized gains and losses, and fair value of Bancorp’s AFS debt securities portfolio:   (in thousands)   Amortized     Unrealized           March 31, 2022   cost     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 121,819     $ -     $ ( 5,481 )   $ 116,338   Government sponsored enterprise obligations     126,467       525       ( 2,341 )     124,651   Mortgage backed securities - government agencies     820,452       137       ( 61,176 )     759,413   Obligations of states and political subdivisions     150,824       36       ( 7,025 )     143,835   Other     6,253       -       ( 135 )     6,118   Total available for sale debt securities   $ 1,225,815     $ 698     $ ( 76,158 )   $ 1,150,355                                     December 31, 2021                                                                   U.S. Treasury and other U.S. Government obligations   $ 123,753     $ -     $ ( 1,252 )   $ 122,501   Government sponsored enterprise obligations     132,760       2,497       ( 236 )     135,021   Mortgage backed securities - government agencies     857,283       2,495       ( 13,154 )     846,624   Obligations of states and political subdivisions     75,488       289       ( 702 )     75,075   Other     1,095       -       ( 18 )     1,077   Total available for sale debt securities   $ 1,190,379     $ 5,281     $ ( 15,362 )   $ 1,180,298     HTM Debt Securities   The following table summarizes the amortized cost, unrecognized gains and losses, and fair value of Bancorp’s HTM debt securities portfolio:   (in thousands)   Carrying     Unrecognized           March 31, 2022   value     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 277,491     $ -     $ ( 1,922 )   $ 275,569   Government sponsored enterprise obligations     27,996       17       ( 195 )     27,818   Mortgage backed securities - government agencies     242,704       7       ( 10,291 )     232,420   Obligations of states and political subdivisions     -       -       -       -   Other     -       -       -       -   Total held to maturity debt securities   $ 548,191     $ 24     $ ( 12,408 )   $ 535,807     Bancorp elected to classify a portion of securities purchased and acquired during the first quarter as HTM for general capital purposes. No debt securities were classified as HTM at December 31, 2021.   All investment securities classified as HTM by Bancorp as of March 31, 2022 are obligations of the U.S. Government and/or are issued by U.S. Government-sponsored agencies and have an implicit or explicit government guarantee. Therefore, no ACL has been for Bancorp’s HTM securities as of March 31, 2022.   Further, as of March 31, 2022, none of Bancorp’s HTM securities were in non-accrual or past due status.   27 Table of Contents   Debt Securities by Contractual Maturity   A summary of AFS and HTM debt securities by contractual maturity as of March 31, 2022 follows:       AFS Debt Securities     HTM Debt Securities   (in thousands)   Amortized cost     Fair value     Carrying value     Fair value                                     Due within one year   $ 8,688     $ 8,668     $ 60,025     $ 60,024   Due after one year but within five years     160,345       154,123       217,974       216,038   Due after five years but within 10 years     56,839       54,292       26,679       26,515   Due after 10 years     179,491       173,859       809       810   Mortgage backed securities - government agencies     820,452       759,413       242,704       232,420   Total available for sale debt securities   $ 1,225,815     $ 1,150,355     $ 548,191     $ 535,807     Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.   At March 31, 2022 and December 31, 2021, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.   Accrued interest on the AFS and HTM securities portfolios totaled $ 3 million and $ 1 million at March 31, 2022, respectively, and was included on the consolidated balance sheets. Accrued interest on the AFS securities portfolio totaled $ 3 million at December 31, 2021, and was included in the consolidated balance sheets. There were no securities classified as HTM at December 31, 2021.   AFS debt securities totaling $ 247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, three securities with a total fair value of $ 2 million were sold, resulting in a loss on the sale of $ 92,000 , which was recorded as a fair value adjustment through goodwill during the first quarter.   Securities with a carrying value of $ 1.1 billion and $ 879 million were pledged at March 31, 2022 and December 31, 2021, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The increase between December 31, 2021 and March 31, 2022 was the result of relationships added through the CB acquisition.   Based on an evaluation of available information including security type, counterparty credit quality, past events, current conditions, and reasonable and supportable forecasts that are relevant to collectability, Bancorp has concluded that it expects to receive all contractual cash flows from each security held in its AFS and HTM debt securities portfolio. As such, no allowance or impairment is recorded with respect to investment securities as of March 31, 2022.   28 Table of Contents   Unrealized Loss Analysis on AFS Debt Securities   AFS debt securities with unrealized losses at March 31, 2022 and December 31, 2021, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:       Less than 12 months     12 months or more     Total                                                     (in thousands)   Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   March 31, 2022   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ 116,338     $ ( 5,481 )   $ -     $ -     $ 116,338     $ ( 5,481 ) Government sponsored enterprise obligations     94,099       ( 2,334 )     243       ( 7 )     94,342       ( 2,341 ) Mortgage-backed securities - government agencies     482,129       ( 33,441 )     263,942       ( 27,735 )     746,071       ( 61,176 ) Obligations of states and political subdivisions     122,102       ( 6,923 )     903       ( 102 )     123,005       ( 7,025 ) Other securities     6,118       ( 135 )     -       -       6,118       ( 135 ) Total   $ 820,786     $ ( 48,314 )   $ 265,088     $ ( 27,844 )   $ 1,085,874     $ ( 76,158 )                                                   December 31, 2021                                                                                                   U.S. Treasury and other U.S. Government obligations   $ 122,501     $ ( 1,252 )   $ -     $ -     $ 122,501     $ ( 1,252 ) Government sponsored enterprise obligations     23,789       ( 223 )     447       ( 13 )     24,236       ( 236 ) Mortgage-backed securities - government agencies     615,130       ( 10,027 )     102,637       ( 3,127 )     717,767       ( 13,154 ) Obligations of states and political subdivisions     46,493       ( 686 )     484       ( 16 )     46,977       ( 702 ) Other securities     957       ( 18 )     -       -       957       ( 18 )                                                   Total   $ 808,870     $ ( 12,206 )   $ 103,568     $ ( 3,156 )   $ 912,438     $ ( 15,362 )   Applicable dates for determining when securities are in an unrealized loss position are March 31, 2022 and December 31, 2021. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “Less than 12 months” category above.   For AFS debt securities with an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL for AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.   In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of 448 and 227 separate investment positions as of March 31, 2022 and December 31, 2021, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at March 31, 2022 and December 31, 2021.   29 Table of Contents     ( 4 ) Loans and Allowance for Credit Losses on Loans   Composition of loans by class follows:   (in thousands)   March 31, 2022     December 31, 2021                     Commercial real estate - non-owner occupied   $ 1,397,633     $ 1,128,244   Commercial real estate - owner occupied     803,181       678,405   Total commercial real estate     2,200,814       1,806,649                     Commercial and industrial - term     669,241       596,710   Commercial and industrial - term - PPP     71,361       140,734   Commercial and industrial - lines of credit     414,739       370,312   Total commercial and industrial     1,155,341       1,107,756                     Residential real estate - owner occupied     492,123       400,695   Residential real estate - non-owner occupied     297,127       281,018   Total residential real estate     789,250       681,713                     Construction and land development     346,372       299,206   Home equity lines of credit     186,024       138,976   Consumer     135,198       104,294   Leases     13,952       13,622   Credits cards     20,732       17,087   Total loans (1)   $ 4,847,683     $ 4,169,303     ( 1 ) Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.   As a result of the CB acquisition on March 7, 2022, $ 632 million in loans (net of purchase accounting adjustments) were added to the portfolio.   Accrued interest on loans, which is excluded from the amortized cost of loans, totaled $ 12 million and $ 11 million at March 31, 2022 and December  31, 2021, respectively, and was included in the consolidated balance sheets.   Loans with carrying amounts of $ 2.7 billion and $ 2.2 billion were pledged to secure FHLB borrowing capacity at March 31, 2022 and December 31, 2021, respectively.   Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled $ 65 million and $ 54 million as of March 31, 2022 and December 31, 2021, respectively.   PCD Loans   In connection with the acquisitions of CB on March 7, 2022, and KB on May 31, 2021, Bancorp acquired loans both with and without evidence of credit quality deterioration since origination. Acquired loans are recorded at their fair value at the time of acquisition with no carryover from the acquired institution’s previously recorded allowance for loan and lease losses. Acquired loans are accounted for under ASC 326, Financial Instruments – Credit Losses.   The fair value of acquired loans recorded at the time of acquisition is based upon several factors, including the timing and payment of expected cash flows, as adjusted for estimated credit losses and prepayments, and then discounting these cash flows using comparable market rates. The resulting fair value adjustment is recorded in the form of a premium or discount to the unpaid principal balance of the respective loans. As it relates to acquired loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination (“PCD”), the net premium or net discount is adjusted to reflect Bancorp’s allowance for credit losses recorded for PCD loans at the time of acquisition, and the remaining fair value adjustment is accreted or amortized into interest income over the remaining life of the respective loans. As it relates to loans not classified as PCD (“non-PCD”) loans, the credit loss and yield components of their fair value adjustment are aggregated, and the resulting net premium or net discount is accreted or amortized into interest income over the remaining life of the respective loans. Bancorp records an ACL for non-PCD loans at the time of acquisition through provision expense, and therefore, no further adjustments are made to the net premium or net discount for non-PCD loans.   30 Table of Contents   Bancorp purchased loans through the acquisitions of CB and KB for which there was, at the time of acquisition, more-than-insignificant deterioration of credit quality since origination. The carrying amount of loans acquired and classified as PCD was as follows at the respective acquisition dates:       CB     KB   (in thousands)   March 7, 2022     May 31, 2021                     Purchase price of PCD loans at acquisition   $ 88,549     $ 32,765   Allowance for credit losses at acquisition     ( 9,950 )     ( 6,757 ) Non-credit discount at acquisition     ( 4,094 )     ( 735 ) Fair value of PCD loans at acquisition   $ 74,505     $ 25,273     Interest income recognized on loans classified as PCD totaled $ 459,000 and $ 0 for the three month periods ended March 31, 2022 and 2021, respectively.   Allowance for Credit Losses on Loans   The table below reflects activity in the ACL related to loans:   (in thousands)   Beginning     Initial Allowance on PCD     Provision for Credit Losses                     Ending   Three Months Ended March 31, 2022   Balance     Loans     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 15,960     $ 3,508     $ 1,140     $ -     $ 12     $ 20,620   Commercial real estate - owner occupied     9,595       2,121       ( 411 )     -       21       11,326   Total commercial real estate     25,555       5,629       729       -       33       31,946                                                     Commercial and industrial - term     8,577       1,358       567       ( 113 )     719       11,108   Commercial and industrial - lines of credit     4,802       1,874       ( 132 )     ( 36 )     -       6,508   Total commercial and industrial     13,379       3,232       435       ( 149 )     719       17,616                                                     Residential real estate - owner occupied     4,316       590       460       ( 6 )     3       5,363   Residential real estate - non-owner occupied     3,677       -       ( 319 )     -       3       3,361   Total residential real estate     7,993       590       141       ( 6 )     6       8,724                                                     Construction and land development     4,789       419       656       -       -       5,864   Home equity lines of credit     1,044       2       421       -       -       1,467   Consumer     772       78       262       ( 254 )     191       1,049   Leases     204       -       7       -       -       211   Credit cards     162       -       28       -       -       190   Total   $ 53,898     $ 9,950     $ 2,679     $ ( 409 )   $ 949     $ 67,067     31 Table of Contents   (in thousands)   Beginning     Provision for Credit Losses                     Ending   Three Months Ended March 31, 2021   Balance     on Loans     Charge-offs     Recoveries     Balance                                             Commercial real estate - non-owner occupied   $ 19,396     $ 635     $ -     $ 31     $ 20,062   Commercial real estate - owner occupied     6,983       82       -       -       7,065   Total commercial real estate     26,379       717       -       31       27,127                                             Commercial and industrial - term     8,970       ( 452 )     ( 55 )     6       8,469   Commercial and industrial - lines of credit     3,614       ( 631 )     -       -       2,983   Total commercial and industrial     12,584       ( 1,083 )     ( 55 )     6       11,452                                             Residential real estate - owner occupied     3,389       ( 94 )     ( 3 )     1       3,293   Residential real estate - non-owner occupied     1,818       ( 110 )     -       -       1,708   Total residential real estate     5,207       ( 204 )     ( 3 )     1       5,001                                             Construction and land development     6,119       ( 592 )     -       -       5,527   Home equity lines of credit     895       ( 52 )     -       -       843   Consumer     340       41       ( 64 )     78       395   Leases     261       ( 26 )     -       -       235   Credit cards     135       ( 1 )     -       -       134   Total   $ 51,920     $ ( 1,200 )   $ ( 122 )   $ 116     $ 50,714     The following table presents the amortized cost basis of non-performing loans and the amortized cost basis of loans on non-accrual status for which there was no related ACL losses:       Non-accrual Loans                     Past Due 90-Days-   (in thousands)   With No     Total     Troubled Debt     or-More and Still   March 31, 2022   Recorded ACL     Non-accrual Loans     Restructurings (1)     Accruing Interest                                     Commercial real estate - non-owner occupied   $ 485     $ 1,117     $ —     $ —   Commercial real estate - owner occupied     2,237       3,912       —       115   Total commercial real estate     2,722       5,029       —       115                                     Commercial and industrial - term     490       3,053       10       —   Commercial and industrial - PPP     —       —       —       4   Commercial and industrial - lines of credit     498       663       —       30   Total commercial and industrial     988       3,716       10       34                                     Residential real estate - owner occupied     794       2,636       —       —   Residential real estate - non-owner occupied     —       282       —       —   Total residential real estate     794       2,918       —       —                                     Construction and land development     —       —       —       —   Home equity lines of credit     —       481       —       —   Consumer     —       350       —       151   Leases     —       —       —       —   Credit cards     —       —       —       —   Total   $ 4,504     $ 12,494     $ 10     $ 300     ( 1 ) Does not include TDRs captured in the non-accrual column.   32 Table of Contents       Non-accrual Loans                     Past Due 90-Days-   (in thousands)   With No     Total     Troubled Debt     or-More and Still   December 31, 2021   Recorded ACL     Non-accrual Loans     Restructurings (1)     Accruing Interest                                     Commercial real estate - non-owner occupied   $ 486     $ 720     $ —     $ —   Commercial real estate - owner occupied     665       1,748       —       —   Total commercial real estate     1,151       2,468       —       —                                     Commercial and industrial - term     419       670       12       —   Commercial and industrial - PPP     —       —       —       592   Commercial and industrial - lines of credit     —       228       —       56   Total commercial and industrial     419       898       12       648                                     Residential real estate - owner occupied     805       1,997       —       36   Residential real estate - non-owner occupied     —       293       —       —   Total residential real estate     805       2,290       —       36                                     Construction and land development     —       —       —       —   Home equity lines of credit     —       646       —       —   Consumer     —       410       —       —   Leases     —       —       —       —   Credit cards     —       —       —       —   Total   $ 2,375     $ 6,712     $ 12     $ 684     ( 1 ) Does not include TDRs captured in the non-accrual column   For the three month periods ended March 31, 2022 and 2021, the amount of accrued interest income previously recorded as revenue and subsequently reversed due to the change in accrual status was immaterial.   For the three month periods ended March 31, 2022 and 2021, no interest income was recognized on loans on non-accrual status.   The following table presents the amortized cost basis and ACL allocated for collateral dependent loans, which are individually evaluated to determine expected credit losses:   (in thousands)           Accounts Receivable /                     ACL   March 31, 2022   Real Estate     Equipment     Other     Total     Allocation                                             Commercial real estate - non-owner occupied   $ 4,705     $ -     $ -     $ 4,705     $ 588   Commercial real estate - owner occupied     8,237       -       -       8,237       2,396   Total commercial real estate     12,942       -       -       12,942       2,984                                             Commercial and industrial - term     752       666       1,937       3,355       1,358   Commercial and industrial - lines of credit     -       1,553       2,956       4,509       1,402   Total commercial and industrial     752       2,219       4,893       7,864       2,760                                             Residential real estate - owner occupied     3,224       -       -       3,224       330   Residential real estate - non-owner occupied     489       -       -       489       116   Total residential real estate     3,713       -       -       3,713       446                                             Construction and land development     3,639       -       -       3,639       419   Home equity lines of credit     481       -       -       481       2   Consumer     -       -       167       167       20   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 21,527     $ 2,219     $ 5,060     $ 28,806     $ 6,631     33 Table of Contents   (in thousands)           Accounts Receivable /                     ACL   December 31, 2021   Real Estate     Equipment     Other     Total     Allocation                                             Commercial real estate - non-owner occupied   $ 720     $ -     $ -     $ 720     $ -   Commercial real estate - owner occupied     7,652       -       -       7,652       1,652   Total commercial real estate     8,372       -       -       8,372       1,652                                             Commercial and industrial - term     -       598       -       598       -   Commercial and industrial - lines of credit     -       200       -       200       -   Total commercial and industrial     -       798       -       798       -                                             Residential real estate - owner occupied     1,997       -       -       1,997       -   Residential real estate - non-owner occupied     502       -       -       502       116   Total residential real estate     2,499       -       -       2,499       116                                             Construction and land development     -       -       -       -       -   Home equity lines of credit     646       -       -       646       -   Consumer     -       -       247       247       -   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 11,517     $ 798     $ 247     $ 12,562     $ 1,768     There have been no significant changes to the types of collateral securing Bancorp’s collateral dependent loans.   34 Table of Contents   The following tables present the aging of contractually past due loans by portfolio class:   (in thousands)           30-59 days     60-89 days     90 or more     Total     Total   March 31, 2022   Current     Past Due     Past Due     Days Past Due     Past Due     Loans                                                     Commercial real estate - non-owner occupied   $ 1,396,660     $ 338     $ -     $ 635     $ 973     $ 1,397,633   Commercial real estate - owner occupied     800,656       285       1,643       597       2,525       803,181   Total commercial real estate     2,197,316       623       1,643       1,232       3,498       2,200,814                                                     Commercial and industrial - term     668,218       248       290       485       1,023       669,241   Commercial and industrial - term - PPP     71,237       118       2       4       124       71,361   Commercial and industrial - lines of credit     414,143       466       100       30       596       414,739   Total commercial and industrial     1,153,598       832       392       519       1,743       1,155,341                                                     Residential real estate - owner occupied     488,272       2,119       4       1,728       3,851       492,123   Residential real estate - non-owner occupied     296,351       316       365       95       776       297,127   Total residential real estate     784,623       2,435       369       1,823       4,627       789,250                                                     Construction and land development     346,372       —       —       —       —       346,372   Home equity lines of credit     185,461       139       170       254       563       186,024   Consumer     134,490       327       31       350       708       135,198   Leases     13,952       —       —       —       —       13,952   Credit cards     20,704       28       —       —       28       20,732   Total   $ 4,836,516     $ 4,384     $ 2,605     $ 4,178     $ 11,167     $ 4,847,683     (in thousands)           30-59 days     60-89 days     90 or more     Total     Total   December 31, 2021   Current     Past Due     Past Due     Days Past Due     Past Due     Loans                                                     Commercial real estate - non-owner occupied   $ 1,127,448     $ -     $ 81     $ 715     $ 796     $ 1,128,244   Commercial real estate - owner occupied     677,231       360       327       487       1,174       678,405   Total commercial real estate     1,804,679       360       408       1,202       1,970       1,806,649                                                     Commercial and industrial - term     595,070       1,032       44       564       1,640       596,710   Commercial and industrial - term - PPP     139,718       128       296       592       1,016       140,734   Commercial and industrial - lines of credit     369,963       271       22       56       349       370,312   Total commercial and industrial     1,104,751       1,431       362       1,212       3,005       1,107,756                                                     Residential real estate - owner occupied     397,415       1,399       137       1,744       3,280       400,695   Residential real estate - non-owner occupied     280,257       403       258       100       761       281,018   Total residential real estate     677,672       1,802       395       1,844       4,041       681,713                                                     Construction and land development     299,206       —       —       —       —       299,206   Home equity lines of credit     138,141       279       47       509       835       138,976   Consumer     103,109       724       102       359       1,185       104,294   Leases     13,622       —       —       —       —       13,622   Credit cards     17,087       —       —       —       —       17,087   Total   $ 4,158,267     $ 4,596     $ 1,314     $ 5,126     $ 11,036     $ 4,169,303     35 Table of Contents   Loan Risk Ratings   Consistent with regulatory guidance, Bancorp categorizes loans into credit risk rating categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends. Pass-rated loans include all risk-rated loans other than those classified as OAEM, substandard, and doubtful, which are defined below:   OAEM – Loans classified as OAEM have potential weaknesses requiring management's heightened attention. These potential weaknesses may result in deterioration of repayment prospects for the loan or of Bancorp's credit position at some future date.   Substandard – Loans classified as substandard are inadequately protected by the paying capacity of the obligor or of collateral pledged, if any. Loans so classified have well-defined weaknesses that jeopardize ultimate repayment of the debt. Default is a distinct possibility if the deficiencies are not corrected.   Substandard non-performing – Loans classified as substandard non-performing have all the characteristics of substandard loans and have been placed on non-accrual status or have been accounted for as TDRs. Loans are placed on non-accrual status when prospects for recovering both principal and accrued interest are considered doubtful or when a default of principal or interest has existed for 90 days or more.   Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.   36 Table of Contents   Management considers the guidance in ASC 310 - 20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. Beginning in 2021, Bancorp has elected not to disclose revolving loans that have converted to term loans, as activity relating to this disclosure, which is included in the tables is currently immaterial to Bancorp’s loan portfolio and is expected to be in the future. As of March 31, 2022, the risk rating of loans based on year of origination was as follows:   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           March 31, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 116,262     $ 410,510     $ 288,703     $ 198,413     $ 100,462     $ 198,073     $ 21,294     $ 1,333,717   OAEM     -       5,938       2,363       19,387       -       5,601       6,105       39,394   Substandard     4,174       298       3,195       8,163       -       7,475       100       23,405   Substandard non-performing     -       -       39       -       -       1,078       -       1,117   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 120,436     $ 416,746     $ 294,300     $ 225,963     $ 100,462     $ 212,227     $ 27,499     $ 1,397,633                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 44,171     $ 213,962     $ 205,034     $ 110,962     $ 79,334     $ 108,379     $ 7,833     $ 769,675   OAEM     -       1,681       1,470       3,346       442       812       2,859       10,610   Substandard     2,294       2,617       1,811       7,345       2,031       2,487       399       18,984   Substandard non-performing     -       1,194       1,992       -       -       726       -       3,912   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 46,465     $ 219,454     $ 210,307     $ 121,653     $ 81,807     $ 112,404     $ 11,091     $ 803,181                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 80,556     $ 276,156     $ 135,281     $ 55,767     $ 48,529     $ 59,735     $ -     $ 656,024   OAEM     3,153       369       -       472       2,858       6       -       6,858   Substandard     164       1       35       2,527       165       414       -       3,306   Substandard non-performing     -       1,983       540       -       48       482       -       3,053   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 83,873     $ 278,509     $ 135,856     $ 58,766     $ 51,600     $ 60,637     $ -     $ 669,241                                                                     Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ -     $ 65,602     $ 5,759     $ -     $ -     $ -     $ -     $ 71,361   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ -     $ 65,602     $ 5,759     $ -     $ -     $ -     $ -     $ 71,361     (continued)   37 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           March 31, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 5,582     $ 29,648     $ 7,279     $ 17,795     $ 1,434     $ 3,354     $ 332,427     $ 397,519   OAEM     -       -       -       -       -       439       6,871       7,310   Substandard     -       -       975       3,810       -       2,537       1,925       9,247   Substandard non-performing     -       39       -       -       -       -       624       663   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 5,582     $ 29,687     $ 8,254     $ 21,605     $ 1,434     $ 6,330     $ 341,847     $ 414,739                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 35,908     $ 204,160     $ 103,926     $ 34,925     $ 19,421     $ 89,629     $ -     $ 487,969   OAEM     -       99       -       85       -       121       -       305   Substandard     -       -       10       -       146       1,057       -       1,213   Substandard non-performing     2       204       102       375       227       1,726       -       2,636   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 35,910     $ 204,463     $ 104,038     $ 35,385     $ 19,794     $ 92,533     $ -     $ 492,123                                                                     Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 39,704     $ 91,593     $ 65,551     $ 42,994     $ 25,066     $ 30,282     $ -     $ 295,190   OAEM     194       154       123       270       130       426       -       1,297   Substandard     -       -       -       -       -       358       -       358   Substandard non-performing     -       120       -       44       -       118       -       282   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 39,898     $ 91,867     $ 65,674     $ 43,308     $ 25,196     $ 31,184     $ -     $ 297,127                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 29,002     $ 144,489     $ 105,969     $ 29,766     $ 6,203     $ 2,193     $ 25,153     $ 342,775   OAEM     -       -       -       -       -       94       -       94   Substandard     -       93       -       3,123       -       287       -       3,503   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 29,002     $ 144,582     $ 105,969     $ 32,889     $ 6,203     $ 2,574     $ 25,153     $ 346,372                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 185,413     $ 185,413   OAEM     -       -       -       -       -       -       90       90   Substandard     -       -       -       -       -       -       40       40   Substandard non-performing     -       -       -       -       -       -       481       481   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 186,024     $ 186,024     (continued)   38 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           March 31, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 5,266     $ 24,330     $ 8,864     $ 8,321     $ 4,441     $ 3,348     $ 80,204     $ 134,774   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       36       36       -       2       -       74   Substandard non-performing     -       39       156       64       16       68       7       350   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 5,266     $ 24,369     $ 9,056     $ 8,421     $ 4,457     $ 3,418     $ 80,211     $ 135,198                                                                     Leases                                                                 Risk rating                                                                 Pass   $ 1,564     $ 5,128     $ 3,276     $ 1,222     $ 1,171     $ 1,591     $ -     $ 13,952   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 1,564     $ 5,128     $ 3,276     $ 1,222     $ 1,171     $ 1,591     $ -     $ 13,952                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 20,732     $ 20,732   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 20,732     $ 20,732                                                                     Total loans                                                                 Risk rating                                                                 Pass   $ 358,015     $ 1,465,578     $ 929,642     $ 500,165     $ 286,061     $ 496,584     $ 673,056     $ 4,709,101   OAEM     3,347       8,241       3,956       23,560       3,430       7,499       15,925       65,958   Substandard     6,632       3,009       6,062       25,004       2,342       14,617       2,464       60,130   Substandard non-performing     2       3,579       2,829       483       291       4,198       1,112       12,494   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 367,996     $ 1,480,407     $ 942,489     $ 549,212     $ 292,124     $ 522,898     $ 692,557     $ 4,847,683     39 Table of Contents   As of December 31, 2021, the risk rating of loans based on year of origination was as follows:   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           December 31, 2021   2021     2020     2019     2018     2017     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 381,014     $ 298,177     $ 134,286     $ 86,638     $ 85,110     $ 81,635     $ 19,465     $ 1,086,325   OAEM     3,186       2,666       19,784       -       353       1,619       248       27,856   Substandard     4,174       1,440       -       -       -       7,629       100       13,343   Substandard non-performing     -       39       78       -       592       11       -       720   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 388,374     $ 302,322     $ 154,148     $ 86,638     $ 86,055     $ 90,894     $ 19,813     $ 1,128,244                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 203,545     $ 192,322     $ 91,078     $ 75,062     $ 33,713     $ 44,364     $ 9,236     $ 649,320   OAEM     1,681       1,480       3,568       469       1,506       124       570       9,398   Substandard     5,051       3,605       5,985       1,275       627       -       1,396       17,939   Substandard non-performing     1,259       -       -       -       32       457       -       1,748   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 211,536     $ 197,407     $ 100,631     $ 76,806     $ 35,878     $ 44,945     $ 11,202     $ 678,405                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 283,150     $ 143,211     $ 58,988     $ 52,388     $ 26,081     $ 24,421     $ -     $ 588,239   OAEM     738       86       254       3,382       8       -       -       4,468   Substandard     170       42       2,667       176       111       167       -       3,333   Substandard non-performing     -       543       72       55       -       -       -       670   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 284,058     $ 143,882     $ 61,981     $ 56,001     $ 26,200     $ 24,588     $ -     $ 596,710                                                                     Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ 128,409     $ 12,325     $ -     $ -     $ -     $ -     $ -     $ 140,734   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ 128,409     $ 12,325     $ -     $ -     $ -     $ -     $ -     $ 140,734     (continued)   40 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           December 31, 2021   2021     2020     2019     2018     2017     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 33,875     $ 8,352     $ 11,103     $ 1,039     $ 207     $ 193     $ 303,682     $ 358,451   OAEM     -       -       -       -       -       -       6,355       6,355   Substandard     -       -       1,916       -       1,549       -       1,813       5,278   Substandard non-performing     -       -       -       -       -       -       228       228   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 33,875     $ 8,352     $ 13,019     $ 1,039     $ 1,756     $ 193     $ 312,078     $ 370,312                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 176,487     $ 99,936     $ 31,327     $ 17,259     $ 16,599     $ 56,639     $ -     $ 398,247   OAEM     101       -       174       -       -       -       -       275   Substandard     -       -       -       -       108       68       -       176   Substandard non-performing     164       103       136       230       714       650       -       1,997   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 176,752     $ 100,039     $ 31,637     $ 17,489     $ 17,421     $ 57,357     $ -     $ 400,695                                                                     Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 94,482     $ 78,785     $ 46,177     $ 27,494     $ 16,171     $ 15,909     $ -     $ 279,018   OAEM     352       126       281       132       -       462       -       1,353   Substandard     -       -       -       -       -       354       -       354   Substandard non-performing     103       -       45       28       -       117       -       293   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 94,937     $ 78,911     $ 46,503     $ 27,654     $ 16,171     $ 16,842     $ -     $ 281,018                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 160,696     $ 99,699     $ 16,665     $ 6,262     $ 1,890     $ 1,156     $ 12,736     $ 299,104   OAEM     -       -       -       -       102       -       -       102   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 160,696     $ 99,699     $ 16,665     $ 6,262     $ 1,992     $ 1,156     $ 12,736     $ 299,206                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 138,239     $ 138,239   OAEM     -       -       -       -       -       -       91       91   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       646       646   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 138,976     $ 138,976     (continued)   41 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           December 31, 2021   2021     2020     2019     2018     2017     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 23,866     $ 9,316     $ 5,014     $ 1,260     $ 555     $ 646     $ 63,227     $ 103,884   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     55       304       30       11       -       4       6       410   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 23,921     $ 9,620     $ 5,044     $ 1,271     $ 555     $ 650     $ 63,233     $ 104,294                                                                     Leases                                                                 Risk rating                                                                 Pass   $ 5,375     $ 3,596     $ 1,375     $ 1,331     $ 406     $ 1,539     $ -     $ 13,622   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 5,375     $ 3,596     $ 1,375     $ 1,331     $ 406     $ 1,539     $ -     $ 13,622                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 17,087     $ 17,087   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 17,087     $ 17,087                                                                     Total loans                                                                 Risk rating                                                                 Pass   $ 1,490,899     $ 945,719     $ 396,013     $ 268,733     $ 180,732     $ 226,502     $ 563,672     $ 4,072,270   OAEM     6,058       4,358       24,061       3,983       1,969       2,205       7,264       49,898   Substandard     9,395       5,087       10,568       1,451       2,395       8,218       3,309       40,423   Substandard non-performing     1,581       989       361       324       1,338       1,239       880       6,712   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 1,507,933     $ 956,153     $ 431,003     $ 274,491     $ 186,434     $ 238,164     $ 575,125     $ 4,169,303     For certain loan classes, such as credit cards, credit quality is evaluated based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in credit cards based on payment activity:       March 31,     December 31,   (in thousands)   2022     2021                     Credit cards                 Performing   $ 20,732     $ 17,087   Non-performing     —       —   Total credit cards   $ 20,732     $ 17,087     42 Table of Contents   In accordance with Section 4013 of the CARES Act and in response to requests from borrowers who experienced business or personal cash flow interruptions related to the pandemic, Bancorp extended payment deferrals for those affected borrowers. Depending on the demonstrated need of the customer, Bancorp deferred either the full loan payment or the principal-only portion of respective loan payments, typically for 90 or 180 days, for some borrowers directly impacted by the pandemic. Pursuant to the CARES Act, these loan deferrals were not classified as TDRs and not included in past due and/or non-performing loan statistics.   Troubled Debt Restructurings   Detail of outstanding TDRs included in total non-performing loans follows:       March 31, 2022     December 31, 2021               Specific     Additional             Specific     Additional               reserve     commitment             reserve     commitment   (in thousands)   Balance     allocation     to lend     Balance     allocation     to lend                                                     Commercial real estate - owner occupied   $ 888     $ 202     $ —     $ 950     $ 202     $ —   Commercial & industrial - term     10       10       —       12       12       —   Total TDRs   $ 898     $ 212     $ —     $ 962     $ 214     $ —     During the three month periods ended March 31, 2022 and 2021, there were no loans modified as TDRs and there were no payment defaults of existing TDRs within 12 months following the modification. Default is determined at 90 or more days past due, charge-off, or foreclosure.   Bancorp had $ 1.2 million and $ 917,000 , respectively, in residential real estate loans for which formal foreclosure proceedings were in process at March 31, 2022 and December 31, 2021.   43 Table of Contents     ( 5 ) Goodwill   As of March 31, 2022, goodwill totaled $ 203 million, $ 67 million of which was added through the CB acquisition. As permitted under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities related to the CB acquisition. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.   The composition of goodwill is presented by respective acquisition below:       March 31,     December 31,   (in thousands)   2022     2021   Commonwealth Bancshares (2022)   $ 66,694     $ —   Kentucky Bancshares (2021)     123,317       123,317   King Southern Bancorp (2019)     11,831       11,831   Austin State Bank (1996)     682       682   Total   $ 202,524     $ 135,830     GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of September 30 of each year or more often as situations dictate.   At September 30, 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.   Changes in the carrying value of goodwill follows:       Three months ended       March 31,   (in thousands)   2022     2021   Balance at beginning of period   $ 135,830     $ 12,513   Goodwill acquired     66,694       —   Provisional period adjustments     —       —   Impairment     —       —   Balance at end of period   $ 202,524     $ 12,513     As of March 31, 2022, goodwill totaling $ 203 million was recorded on Bancorp’s consolidated balance sheets, of which $ 175 million is attributed to the commercial banking segment and $ 28 million is attributed to WM&T.  The portion of total goodwill attributed to WM&T relates entirely to the CB acquisition, which generated $ 67 million in total goodwill during the three months ended March 31, 2022.   44 Table of Contents     ( 6 ) Core Deposit and Customer List Intangible Assets   Bancorp recorded CDI assets of $ 12.7 million, $ 4.4 million, $ 1.5 million and $ 2.5 million in association with the acquisition of CB, KB in 2021, KSB in 2019 and TBOC in 2013, respectively.   Changes in the net carrying amount of CDIs follows:       Three months ended       March 31,   (in thousands)   2022     2021   Balance at beginning of period   $ 5,596     $ 1,962   Core deposit intangible acquired     12,724       —   Provisional period adjustments     —       —   Amortization     ( 494 )     ( 77 ) Balance at end of period   $ 17,826     $ 1,885     As a result of the CB acquisition, Bancorp also recorded intangible assets totaling $ 14.4 million associated with the customer lists of the acquired WM&T and LFA businesses. Of this total, $ 11.9 million was recorded for WM&T and $ 2.5 million was recorded for Landmark. Similar to CDI assets, these intangibles also amortize over their estimated useful lives.   The carrying amount of the CLI assets follows:       Three months ended       March 31,   (in thousands)   2022     2021   Balance at beginning of period   $ -     $ -   Customer list intangibles acquired     14,360       —   Provisional period adjustments     —       —   Amortization     ( 218 )     —   Balance at end of period   $ 14,142     $ -     Future CDI and CLI amortization expense is estimated as follows:   (in thousands)   CDI     CLI   2022   $ 2,868     $ 1,963   2023     3,015       2,002   2024     2,686       1,823   2025     2,375       1,643   2026     2,063       1,464   2027     1,752       1,284   2028     1,339       1,105   2029     888       925   2030     576       745   2031     264       566   2032     -       387   2033     -       207   2034     -       28   Total future expense   $ 17,826     $ 14,142     45 Table of Contents         ( 7 ) Other Assets   A summary of the major components of other assets follows:       March 31,     December 31,   (in thousands)   2022     2021                     Cash surrender value of life insurance other than BOLI   $ 16,933     $ 17,875   Net deferred tax asset     35,264       24,340   Investments in tax credit related ventures     10,605       11,084   Swap assets     2,536       3,148   Prepaid assets     4,699       4,469   Trust fees receivable     3,961       2,868   Mortgage servicing rights     16,877       4,528   Other real estate owned     7,156       7,212   Other     12,786       10,478   Total other assets   $ 110,817     $ 86,002     Bancorp maintains life insurance policies other than BOLI in conjunction with its non-qualified defined benefit retirement and non-qualified compensation plans.   Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. For additional information, see the footnote titled “ Interest Rate Swaps. ”   46   Table of Contents     ( 8 ) Income Taxes   Components of income tax expense (benefit) from operations follows:       Three months ended       March 31,   (in thousands)   2022     2021   Current income tax expense:                 Federal   $ 214     $ 3,493   State     -       522   Total current income tax expense     214       4,015                     Deferred income tax expense (benefit):                 Federal     842       837   State     389       609   Total deferred income tax expense (benefit)     1,231       1,446   Change in valuation allowance     -       -   Total income tax expense   $ 1,445     $ 5,461     An analysis of the difference between the statutory and ETRs from operations follows:       Three months ended       March 31,       2022     2021   U.S. federal statutory income tax rate     21.0 %     21.0 % State income taxes, net of federal benefit     3.3       3.2   Excess tax benefit from stock-based compensation arrangements     ( 5.9 )     ( 3.0 ) Change in cash surrender value of life insurance     1.8       ( 0.4 ) Tax credits     ( 1.7 )     ( 0.5 ) Tax exempt interest income     ( 1.6 )     ( 0.1 ) Non-deductible merger expenses     1.1       -   Insurance captive     ( 0.9 )     -   Other, net     ( 1.7 )     ( 0.8 ) Effective tax rate     15.4 %     19.4 %   Current state income tax expense represents tax owed to the states of Kentucky, Indiana and Illinois. Ohio state bank taxes are based on capital levels and are recorded as other non-interest expense.   GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of March 31, 2022 and December 31, 2021, the gross amount of unrecognized tax benefits was immaterial to Bancorp’s consolidated financial statements. Federal and state income tax returns are subject to examination for the years after 2017.   47 Table of Contents     ( 9 ) Deposits   The composition of deposits follows:   (in thousands)   March 31, 2022     December 31, 2021                     Non-interest bearing demand deposits   $ 2,089,072     $ 1,755,754   Interest bearing deposits:                 Interest bearing demand     2,348,718       2,131,928   Savings     603,404       415,258   Money market     1,158,119       1,050,352                     Time deposits of $250 thousand or more     115,604       89,745   Other time deposits(1)     430,574       344,477   Total time deposits     546,178       434,222   Total interest bearing deposits     4,656,419       4,031,760   Total deposits   $ 6,745,491     $ 5,787,514     ( 1 ) Includes $ 21 million and $ 5 million in brokered deposits as of March 31, 2022 and December 31, 2021, respectively.   Deposits totaling $ 1.12 billion were assumed on March 7, 2022 in relation to the CB acquisition.     ( 10 ) Securities Sold Under Agreements to Repurchase   SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At March 31, 2022 and December 31, 2021, all of these financing arrangements had overnight maturities and were secured by government sponsored enterprise obligations and government agency mortgage-backed securities that were owned and controlled by Bancorp.   Information concerning SSUAR follows:   (dollars in thousands)   March 31, 2022     December 31, 2021   Outstanding balance at end of period   $ 142,146     $ 75,466   Weighted average interest rate at end of period     0.08 %     0.04 %       Three months ended       March 31,   (dollars in thousands)   2022     2021                     Average outstanding balance during the period   $ 91,082     $ 46,937   Average interest rate during the period     0.08 %     0.04 % Maximum outstanding at any month end during the period   $ 142,146     $ 51,681     SSUAR totaling $ 66 million were assumed on March 7, 2022 in relation to the CB acquisition.   48   Table of Contents     ( 11 ) Subordinated Debentures and Other Borrowings   As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100 % successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier I Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. Bancorp chose not to redeem the subordinated notes on April 1, 2022 and carried the note at the costs noted below at March 31, 2022. (in thousands)   Commonwealth Statutory Trust III     Commonwealth Statutory Trust IV     Commonwealth Statutory Trust V     Total                                     Trust preferred securities   $ 3,005     $ 12,021     $ 11,019     $ 26,045   Subordinated debentures     3,000       12,000       11,000       26,000                                     Origination date   12/19/2003     12/15/2005     6/28/2007           Index   LIBOR + 2.85%     LIBOR + 1.35%     LIBOR + 1.40%             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 March 31, 2022 and December 31, 2021, available credit from the FHLB totaled $ 1.02 billion and $ 1.00 billion, respectively. Bancorp also had unsecured available FFP lines with correspondent banks totaling $ 100 million and $ 80 million at March 31, 2022 and December 31, 2021, respectively. In addition, Bancorp had borrowing capacity of $ 20 million available through an unsecured borrowing line of the holding company as of March 31, 2022, which was added during the first quarter to allow capital flexibility at the Bank level.   49 Table of Contents     ( 12 ) Commitments and Contingent Liabilities   As of March 31, 2022 and December 31, 2021, Bancorp had various commitments outstanding that arose in the normal course of business which are properly not reflected in the consolidated financial statements. Total off-balance sheet commitments to extend credit follows:   (in thousands)   March 31, 2022     December 31, 2021   Commercial and industrial   $ 716,042     $ 625,858   Construction and land development     416,488       292,351   Home equity     334,219       247,885   Credit cards     51,108       40,471   Overdrafts     62,442       51,104   Letters of credit     34,532       30,779   Other     103,651       76,721   Future loan commitments     327,298       325,983   Total off balance sheet commitments to extend credit   $ 2,045,780     $ 1,691,152     Commitments to extend credit are an agreement to lend to a customer either unsecured or secured, as long as collateral is available as agreed upon and there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.   At March 31, 2022 and December 31, 2021, Bancorp had accrued $ 3.6 million and $ 3.5 million, respectively, in other liabilities for its estimate of credit losses for off balance sheet credit exposures. The CB acquisition resulted in a $ 500,000 increase to the ACL for off balance sheet credit exposures, with the corresponding offset recorded to goodwill (as opposed to provision expense). This increase was partially offset by a $ 400,000 benefit to provision expense recorded for the three month period ended March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage consistent with generally improving model factors and improvement in line of credit utilization.   Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.   Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at March 31, 2022, Bancorp would have been required to make payments of approximately $ 3 million, or the maximum amount payable under those contracts. No payments have ever been required because of default on these contracts. These agreements are normally secured by collateral acceptable to Bancorp, which limits credit risk associated with the agreements.   As of March 31, 2022, in the normal course of business, there were pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.   50   Table of Contents     ( 13 ) Assets and Liabilities Measured and Reported at Fair Value   Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:   Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.   Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.   Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.   Bancorp used the following methods and significant assumptions to estimate fair value of each type of financial instrument:   AFS debt securities - Except for Bancorp’s U.S Treasury securities, the fair value of AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Bancorp’s U.S. Treasury securities are based on quoted market prices (Level 1 inputs).   Mortgage loans held for sale - The fair value of mortgage loans held for sale is determined using quoted secondary market prices (Level 2 inputs).   Mortgage banking derivatives – Mortgage banking derivatives used in the ordinary course of business consist primarily of interest rate lock loan commitments and mandatory forward sales contracts. The fair value of the Bancorp’s derivative instruments is primarily measured by obtaining pricing from broker-dealers recognized to be market participants. The pricing is derived from observable market inputs that can generally be verified and do not typically involve significant judgement by Bancorp (Level 2 inputs).   Interest rate swap agreements – Interest rate swaps are valued using valuations received from the relevant dealer counterparty. These valuations consider multiple observable market inputs, including interest rate yield curves, time value and volatility factors (Level 2 inputs).   Carrying values of assets measured at fair value on a recurring basis follows:       Fair Value Measurements Using:     Total   March 31, 2022 (in thousands)   Level 1     Level 2     Level 3     Fair Value   Assets:                                 Available for sale debt securities:                                 U.S. Treasury and other U.S. Government obligations   $ 116,338     $ —     $ —     $ 116,338   Government sponsored enterprise obligations     —       124,651       —       124,651   Mortgage backed securities - government agencies     —       759,413       —       759,413   Obligations of states and political subdivisions     —       143,835       —       143,835   Other     —       6,118       —       6,118                                     Total available for sale debt securities     116,338       1,034,017       —       1,150,355                                     Mortgage loans held for sale     —       9,323       —       9,323   Rate lock loan commitments     —       702       —       702   Mandatory forward contracts     —       94       —       94   Interest rate swaps     —       2,536       —       2,536                                     Total assets   $ 116,338     $ 1,046,672     $ —     $ 1,163,010                                     Liabilities:                                 Interest rate swaps   $ —     $ 2,548     $ —     $ 2,548     51 Table of Contents       Fair Value Measurements Using:     Total   December 31, 2021 (in thousands)   Level 1     Level 2     Level 3     Fair Value   Assets:                                 Available for sale debt securities:                                 U.S. Treasury and other U.S. government obligations   $ 122,501     $ —     $ —     $ 122,501   Government sponsored enterprise obligations     —       135,021       —       135,021   Mortgage backed securities - government agencies     —       846,624       —       846,624   Obligations of states and political subdivisions     —       75,075       —       75,075   Other     —       1,077       —       1,077                                     Total available for sale debt securities     122,501       1,057,797       —       1,180,298                                     Interest rate swaps     —       3,148       —       3,148                                     Total assets   $ 122,501     $ 1,060,945     $ —     $ 1,183,446                                     Liabilities:                                 Interest rate swaps   $ —     $ 3,162     $ —     $ 3,162     There were no transfers into or out of Level 3 of the fair value hierarchy during 2022 or 2021.     Discussion of assets measured at fair value on a non-recurring basis follows:   MSRs – On at least a quarterly basis, MSRs are evaluated for impairment based upon the fair value of the MSRs as compared to carrying amount. Fair value is based on a valuation model that calculates the present value of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income. These measurements are classified as Level 3. At March 31, 2022 and December 31, 2021, there was no valuation allowance for MSRs, as the fair value exceeded the cost. Accordingly, the MSRs are not included in the following tabular disclosure for March 31, 2022 and December 31, 2021.   Collateral dependent loans – For collateral-dependent loans where Bancorp has determined that the liquidation or foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the estimated fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party or internal appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, comparable sales, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 8 % to 10 % of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation and management’s expertise or knowledge of the client and client’s business.   OREO – OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ACL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. Bancorp obtains the valuation of OREO with material balances from third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. Bancorp reviews the appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 8 % to 10 % of the appraised value.   52 Table of Contents   Carrying values of assets measured at fair value on a non-recurring basis follows:                                       Losses recorded                                       Three months       Fair Value Measurements Using:     Total     ended   March 31, 2022 (in thousands)   Level 1     Level 2     Level 3     Fair Value     March 31, 2022                                             Collateral dependent loans   $ —     $ —     $ 14,785     $ 14,785     $ —   Other real estate owned     —       —       7,156       7,156       —                                         Losses recorded                                       Three months       Fair Value Measurements Using:     Total     ended   December 31, 2021 (in thousands)   Level 1     Level 2     Level 3     Fair Value     March 31, 2021                                             Collateral dependent loans   $ —     $ —     $ 4,487     $ 4,487     $ —   Other real estate owned     —       —       7,212       7,212       —     There were no liabilities measured at fair value on a non-recurring basis at March 31, 2022 and December  31, 2021.   For Level 3 assets measured at fair value on a non-recurring basis, the significant unobservable inputs used in the fair value measurements are presented below.       March 31, 2022   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 14,785   Appraisal   Appraisal discounts     32.0 % Other real estate owned     7,156   Appraisal   Appraisal discounts     31.1         December 31, 2021   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependend loans   $ 4,487   Appraisal   Appraisal discounts     41.1 % Other real estate owned     7,212   Appraisal   Appraisal discounts     31.6     53   Table of Contents     ( 14 ) Disclosure of Financial Instruments Not Reported at Fair Value   GAAP requires disclosure of the fair value of financial assets and liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or nonrecurring basis. The estimated fair values of Bancorp’s financial instruments not measured at fair value on a recurring or non-recurring basis follows:   (in thousands)   Carrying             Fair Value Measurements Using:   March 31, 2022   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 751,691     $ 751,691     $ 751,691     $ —     $ —   HTM debt securities     548,191       535,807       —       535,807       —   Federal Home Loan Bank stock     13,811       13,811       —       13,811       —   Loans, net     4,780,616       4,719,799       —       —       4,719,799   Accrued interest receivable     15,690       15,690       15,690       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 2,089,072     $ 2,089,072     $ 2,089,072     $ —     $ —   Transaction deposits     4,110,241       4,110,241       —       4,110,241       —   Time deposits     546,178       540,374       —       540,374       —   Securities sold under agreement to repurchase     142,146       142,146       —       142,146       —   Federal funds purchased     8,920       8,920       —       8,920       —   Subordinated debentures     26,045       26,226       —       26,226       —   Accrued interest payable     337       337       337       —       —     (in thousands)   Carrying             Fair Value Measurements Using:   December 31, 2021   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 961,192     $ 961,192     $ 961,192     $ —     $ —   Mortgage loans held for sale     8,614       8,818       —       8,818       —   Federal Home Loan Bank stock     9,376       9,376       —       9,376       —   Loans, net     4,115,405       4,129,091       —       —       4,129,091   Accrued interest receivable     13,745       13,745       13,745       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 1,755,754     $ 1,755,754     $ 1,755,754     $ —     $ —   Transaction deposits     3,597,538       3,597,538       —       3,597,538       —   Time deposits     434,222       433,813       —       433,813       —   Securities sold under agreement to repurchase     75,466       75,466       —       75,466       —   Federal funds purchased     10,374       10,374       —       10,374       —   Accrued interest payable     300       300       300       —       —     Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a significant portion of Bancorp’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly impact estimates.   54 Table of Contents     ( 15 ) Mortgage Banking Activities   Mortgage banking activities primarily include residential mortgage originations and servicing.   As of March 31, 2022, mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale as of December 31, 2021 and prior were carried at the lower of cost or market value.   Activity for mortgage loans held for sale, at fair value, was as follows:   Note 15 - Mortgage Banking Activities - Activity in Mortgage Loans Held for Sale     Three months ended       March 31,   (in thousands)   2022   Balance, beginning of period:   $ 8,614   Origination of mortgage loans held for sale     35,829   Loans held for sale acquired     3,559   Proceeds from the sale of mortgage loans held for sale     ( 38,771 ) Net gain on sale of mortgage loans held for sale     92   Balance, end of period     9,323     The following table represents the components of Mortgage banking income:   Note 15 - Mortgage Banking Activities - Mortgage Banking Income     Three months ended       March 31,   (in thousands)   2022     2021                     Net gain realized on sale of mortgage loans held for sale   $ 92     $ 1,196   Net change in fair value recognized on loans held for sale     ( 27 )     -   Net change in fair value recognized on rate lock loan commitments     392       -   Net change in fair value recognized on forward contracts     179       -   Net gain recognized     636       1,196                     Loan servicing income     702       255   Amortization of mortgage servicing rights     ( 481 )     ( 252 ) Change in mortgage servicing rights valuation allowance     -       -   Net servicing income recognized     221       3                     Other mortgage banking income     146       245   Total Mortgage banking income   $ 1,003     $ 1,444     Activity for capitalized mortgage servicing rights was as follows:   Note 15 - Mortgage Banking Activities - Changes in the Net Carrying Amount of MSRs     Three months ended       March 31,   (in thousands)   2022     2021   Balance at beginning of period   $ 4,528     $ 2,710   MSRs acquired     12,676       —   Additions for mortgage loans sold     154       407   Amortization     ( 481 )     ( 252 ) Impairment     —       —   Balance at end of period   $ 16,877     $ 2,865     55 Table of Contents   MSRs, a component of other assets, are initially recognized at fair value when mortgage loans are sold with servicing retained. The MSRs are amortized in proportion to and over the period of estimated net servicing income, considering appropriate prepayment assumptions. MSRs are evaluated quarterly for impairment by comparing carrying value to fair value. Fair value is based on a valuation model that calculates the PV of estimated net servicing income. The model incorporates assumptions that market participants would use in estimating future net servicing income.   The estimated fair value of MSRs at March 31, 2022 and December 31, 2021 were $ 26 million and $ 6 million, respectively. MSRs with an estimated fair value of $ 13 million were acquired in the CB acquisition. There was no valuation allowance recorded for MSRs as of March 31, 2022 and December 31, 2021, as fair value exceeded carrying value.   Total outstanding principal balances of loans serviced for others were $ 2.2 billion and $ 698 million at March 31, 2022 and December 31, 2021, respectively. Loans serviced for others acquired as part of the CB acquisition totaled $ 1.5 billion at the date of acquisition.   As of March 31, 2022 and December 31, 2021, no valuation allowance was recorded on capitalized mortgage servicing rights.   Mortgage banking derivatives used in the ordinary course of business consist primarily of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future loan commitments to deliver loans at a specified price and date are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amount required to be received or paid.   Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.   The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.   The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives:   Note 15 - Mortgage Banking Activities - Notional Amounts and Fair Values     March 31, 2022   (in thousands)   Notional Amount     Fair Value   Included in Mortgage loans held for sale:                 Mortgage loans held for sale, at fair value   $ 9,202     $ 9,323                     Included in other assets:                 Rate lock loan commitments   $ 63,421     $ 702   Mandatory forward contracts     12,564       94     56   Table of Contents     ( 16 ) Accumulated Other Comprehensive Income (Loss)   The following table illustrates activity within the balances of AOCI by component:       Net unrealized     Net unrealized     Minimum               gains (losses)     gains (losses)     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Three months ended March 31, 2022                                 Balance, January 1, 2022   $ ( 7,657 )   $ -     $ ( 283 )   $ ( 7,940 ) Net current period other comprehensive income (loss)     ( 49,659 )     -       -       ( 49,659 ) Balance, March 31, 2022   $ ( 57,316 )   $ -     $ ( 283 )   $ ( 57,599 )                                   Three months ended March 31, 2021                                 Balance, January 1, 2021   $ 9,310     $ ( 122 )   $ ( 447 )   $ 8,741   Net current period other comprehensive income (loss)     ( 11,823 )     32       -       ( 11,791 ) Balance, March 31, 2021   $ ( 2,513 )   $ ( 90 )   $ ( 447 )   $ ( 3,050 )     ( 17 ) Preferred Stock   Bancorp has one class of preferred stock ( no par value; 1,000,000 shares authorized), the relative rights, preferences and other terms of the class or any series within the class will be determined by the Board of Directors prior to any issuance. None of this stock has been issued to date.   57   Table of Contents     ( 18 ) Net Income Per Share   The following table reflects net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:       Three months ended       March 31,   (in thousands, except per share data)   2022     2021   Net income available to stockholders   $ 7,906     $ 22,710                     Weighted average shares outstanding - basic     27,230       22,622   Dilutive securities     255       243   Weighted average shares outstanding- diluted     27,485       22,865                     Net income per share - basic   $ 0.29     $ 1.00   Net income per share - diluted     0.29       0.99     Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:       Three months ended   (shares in thousands)   March 31,       2022     2021   Antidilutive SARs     45       29     58   Table of Contents     ( 19 ) Stock-Based Compensation   The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.   At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. In 2018, shareholders approved an additional 500,000 shares for issuance under the plan. As of March 31, 2022, there were 355,000 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.   SAR Grants – SARs granted have a vesting schedule of 20 % per year and expire ten years after the grant date unless forfeited due to employment termination.   Fair values of SARs are estimated at the date of grant using the Black-Scholes option-pricing model, a leading formula for calculating such value. This model requires the input of assumptions, changes to which can materially impact the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:   Assumptions   2022     2021   Dividend yield     2.38 %     2.52 % Expected volatility     25.42 %     25.19 % Risk free interest rate     1.98 %     1.22 % Expected life (in years)   7.1     7.1     Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of underlying shares for the expected term calculated on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.   RSA Grants – RSAs granted to officers vest over five years. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015 and forward, dividends are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.   PSU Grants – PSUs vest based upon service and a three -year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a one -year post-vesting holding period and therefore the fair value of such grants incorporates a liquidity discount related to the holding period of 5.8 % and 6.1 % for 2022 and 2021.   RSU Grants – RSUs are only granted to non-employee directors, are time-based and vest 12 months after grant date. Because grantees are entitled to deferred dividend payments at the end of the vesting period, therefore the fair value of the RSUs equals market value of underlying shares on the date of grant.   In the first quarters of 2022 and 2021, Bancorp awarded 5,410 and 7,758 RSUs to non-employee directors of Bancorp with a grant date fair value of $ 350,000 and $ 315,000 , respectively.   Bancorp utilized cash of $ 233,000 and $ 164,000 during the first three months of 2022 and 2021, respectively, for the purchase of shares upon the vesting of RSUs.   59 Table of Contents   Bancorp has recognized stock-based compensation expense for SARs, RSAs and PSUs within compensation expense and RSUs for directors within other non-interest expense, as follows:     Three months ended March 31, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 94     $ 330     $ 86     $ 481     $ 991   Deferred tax benefit     ( 20 )     ( 70 )     ( 18 )     ( 101 )     ( 209 ) Total net expense   $ 74     $ 260     $ 68     $ 380     $ 782         Three months ended March 31, 2021   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 89     $ 329     $ 76     $ 355     $ 849   Deferred tax benefit     ( 19 )     ( 69 )     ( 16 )     ( 75 )     ( 179 ) Total net expense   $ 70     $ 260     $ 60     $ 280     $ 670     Detail of unrecognized stock-based compensation expense follows:       Stock                                   (in thousands)   Appreciation     Restricted     Restricted     Performance           Year ended   Rights     Stock Awards     Stock Units     Stock Units     Total                                             Remainder of 2022   $ 281     $ 1,048     $ 263     $ 1,581     $ 3,173   2023     309       1,197       2       1,303       2,811   2024     202       960       —       603       1,765   2025     143       714       —       —       857   2026     86       380       —       —       466   2027     9       32       —       —       41   Total estimated expense   $ 1,030     $ 4,331     $ 265     $ 3,487     $ 9,113     60 Table of Contents   The following table summarizes SARs activity and related information:                                                 Weighted                         Weighted             Weighted     average                         average     Aggregate     average     remaining               Exercise     exercise     intrinsic     fair     contractual   (in thousands, except per share data)   SARs     price     price     value(1)     value     life (in years)                                                       Outstanding, January 1, 2021     593     $15.24 - $40.00     $ 27.47     $ 7,706     $ 4.44       5.1   Granted     30     47.17 - 50.71       50.48       —       9.69           Exercised     ( 108 )   15.24 - 19.37       16.40       4,239       2.85           Forfeited     —     —       —       —       —           Outstanding, December 31, 2021     515     $15.24 - $50.71     $ 31.16     $ 16,854     $ 5.08       5.1                                                       Outstanding, January 1, 2022     515     $15.24 - $50.71     $ 31.16     $ 16,854     $ 5.08       5.1   Granted     32     54.91 - 54.91       54.91       —       11.79           Exercised     ( 10 )   15.24 - 15.24       15.24       497       2.62           Forfeited     —     —       —       —       —           Outstanding, March 31, 2022     537     $15.24 - $54.91     $ 32.88     $ 10,813     $ 5.53       5.2                                                       Vested and exercisable     398     $15.24 - $50.71     $ 29.03     $ 9,493     $ 4.69       4.3   Unvested     139     35.90 - 54.91       43.89       1,320       7.93       3.5   Outstanding, March 31, 2022     537     $15.24 - $54.91     $ 32.88     $ 10,813     $ 5.53       5.2                                                       Vested in the current year     40     $35.90 - $50.71     $ 39.36     $ 547     $ 6.82             ( 1 ) – Aggregate intrinsic value for SARs is defined as the amount by which the current market price of the underlying stock exceeds the exercise or grant price.   The following table summarizes activity for RSAs granted:               Grant date               weighted   (in thousands, except per share data)   RSAs     average cost                     Unvested at January 1, 2021     99     $ 36.85   Shares awarded     39       46.90   Restrictions lapsed and shares released     ( 34 )     35.48   Shares forfeited     ( 5 )     40.81   Unvested at December 31, 2021     99     $ 41.07                     Unvested at January 1, 2022     99     $ 41.07   Shares awarded     30       59.00   Restrictions lapsed and shares released     ( 31 )     47.29   Shares forfeited     ( 1 )     40.38   Unvested at March 31, 2022     97     $ 46.69     61 Table of Contents   Shares expected to be awarded for PSUs granted to executive officers of Bancorp, the three -year performance period for which began January 1 of the award year, are as follows:       Vesting             Expected   Grant   period     Fair     shares to   year   in years     value     be awarded   2020     3     $ 32.27       65,111   2021     3       44.44       47,280   2022     3       48.48       36,350       ( 20 ) Interest Rate Swaps   Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. Because of matching terms of offsetting contracts and collateral provisions mitigating any non-performance risk, changes in fair value subsequent to initial recognition have an insignificant effect on earnings. Exchanges of cash flows related to undesignated interest rate swap agreements were offsetting and therefore had no effect on Bancorp’s earnings or cash flows.   Interest rate swap agreements derive their value from underlying interest rates. These transactions involve both credit and market risk. Notional amounts are amounts on which calculations, payments and the value of the derivative are based. Notional amounts do not represent direct credit exposures. Direct credit exposure is limited to the net difference between the calculated amounts to be received and paid, if any. Bancorp is exposed to credit-related losses in the event of non-performance by counterparties to these agreements. Bancorp mitigates the credit risk of its financial contracts through credit approvals, collateral and monitoring procedures, and does not expect any counterparties to fail their obligations.   Bancorp had outstanding undesignated interest rate swap contracts as follows:       Receiving     Paying       March 31,     December 31,     March 31,     December 31,   (dollars in thousands)   2022     2021     2022     2021                                     Notional amount   $ 150,083     $ 123,983     $ 150,083     $ 123,983   Weighted average maturity (years)     7.3       7.2       7.3       7.2   Fair value   $ 2,536     $ 3,148     $ 2,548     $ 3,162     62   Table of Contents     ( 21 ) Regulatory Matters   Bancorp and the Bank are subject to capital regulations in accordance with Basel III, as administered by banking regulators. Regulatory agencies measure capital adequacy within a framework that makes capital requirements, in part, dependent on the individual risk profiles of financial institutions. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of Bancorp’s assets, liabilities and certain off-balance sheet items, as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators regarding components, risk weightings and other factors.   Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized, a bank must have a minimum 6.5 % Common Equity Tier 1 Risk-Based Capital ratio, 8.0 % Tier 1 Risk-Based Capital ratio, 10.0 % Total Risk-Based Capital ratio and 5.0 % Tier 1 Leverage ratio.   Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5 % capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At March 31, 2022, the adequately-capitalized minimums, including the capital conservation buffer, were a 6.0 % Common Equity Tier 1 Risk-Based Capital ratio, 8.5 % Tier 1 Risk-Based Capital ratio and 10.5 % Total Risk-Based Capital ratio. The capital conservation buffer was phased in starting in 2016 at 0.625 % and was fully implemented at 2.5 % effective January 1, 2019.   As a result of the CB acquisition, Bancorp became the 100 % successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2022, subordinated notes added through the CB acquisition totaled $ 26 million. Bancorp chose not to redeem the subordinated notes on April 1, 2022.   Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.   The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:   (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   March 31, 2022   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 681,421       12.14 %   $ 448,875       8.00 %   NA     NA   Bank     634,467       11.34       447,501       8.00     $ 559,337       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     597,949       10.66       252,492       4.50     NA     NA   Bank     576,995       10.31       251,719       4.50       363,595       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     623,949       11.12       336,656       6.00     NA     NA   Bank     576,995       10.31       335,626       6.00       447,501       8.00                                                     Leverage (2)                                                 Consolidated     623,949       9.34       267,229       4.00     NA     NA   Bank     576,995       8.65       266,683       4.00       333,354       5.00     63 Table of Contents   (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   December 31, 2021   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 596,411       12.79 %   $ 372,929       8.00 %   NA     NA   Bank     577,078       12.42       371,809       8.00     $ 464,761       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     556,590       11.94       209,772       4.50     NA     NA   Bank     537,257       11.56       209,142       4.50       302,095       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     556,590       11.94       279,696       6.00     NA     NA   Bank     537,257       11.56       278,857       6.00       371,809       8.00                                                     Leverage (2)                                                 Consolidated     556,590       8.86       251,348       4.00     NA     NA   Bank     537,257       8.57       250,871       4.00       313,588       5.00     ( 1 )     Ratio is computed in relation to risk-weighted assets. ( 2 )     Ratio is computed in relation to average assets. NA – Regulatory framework does not define “ well-capitalized ” for holding companies   64 Table of Contents     ( 22 ) Segments   Bancorp’s principal activities include commercial banking and WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage banking and investment products sales activity. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax-exempt activity. All tax-exempt activity and provision have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.   The majority of the net assets of Bancorp are involved in the commercial banking segment. As of March 31, 2022, goodwill totaling $ 203 million was recorded on Bancorp’s consolidated balance sheets, of which $ 175 million is attributed to the commercial banking segment and $ 28 million is attributed to WM&T. The portion of total goodwill attributed to WM&T relates entirely to the CB acquisition, which generated $ 67 million in total goodwill. With the exception of goodwill attributed to WM&T through the CB acquisition, assets assigned to WM&T consist primarily of net premises and equipment and a receivable related to fees earned that have not been collected.   Selected financial information by business segment follows:       Three months ended March 31, 2022     Three months ended March 31, 2021                                                     (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 48,653     $ 107     $ 48,760     $ 37,742     $ 83     $ 37,825   Provision for credit losses     2,279       —       2,279       ( 1,475 )     —       ( 1,475 ) Wealth management and trust services     —       8,469       8,469       —       6,248       6,248   All other non-interest income     10,734       —       10,734       7,596       —       7,596   Non-interest expenses     51,690       4,607       56,297       21,696       3,277       24,973   Income before income tax expense     5,418       3,969       9,387       25,117       3,054       28,171   Income tax expense     633       812       1,445       4,798       663       5,461   Net income     4,785       3,157       7,942       20,319       2,391       22,710   Less net income attributable to NCI     -       36       36       -       -       -   Net income attributable to stockholders   $ 4,785     $ 3,121     $ 7,906     $ 20,319     $ 2,391     $ 22,710                                                     Segment assets   $ 7,744,189     $ 32,963     $ 7,777,152     $ 4,790,344     $ 3,731     $ 4,794,075     65   Table of Contents     ( 23 ) Revenue from Contracts with Customers   All of Bancorp’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The table below presents Bancorp’s sources of non-interest income with items outside the scope of ASC 606 noted as such:       Three months ended March 31, 2022     Three months ended March 31, 2021                                                     (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 8,469     $ 8,469     $ —     $ 6,248     $ 6,248   Deposit service charges     1,863       —       1,863       944       —       944   Debit and credit card income     4,119       —       4,119       2,273       —       2,273   Treasury management fees     1,904       —       1,904       1,540       —       1,540   Mortgage banking income(1)     1,003       —       1,003       1,444       —       1,444   Net investment product sales commissions and fees     607       —       607       464       —       464   Bank owned life insurance(1)     266       —       266       161       —       161   Other(2)     972       —       972       770       —       770   Total non-interest income   $ 10,734     $ 8,469     $ 19,203     $ 7,596     $ 6,248     $ 13,844     ( 1 ) Outside of the scope of ASC 606.                                           ( 2 ) Outside of the scope of ASC 606, with the exception of safe deposit fees which were nominal for all periods.                     Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing and extent of cash flows are affected by economic factors. Revenue sources within the scope of ASC 606 are discussed below:   Bancorp earns fees from its deposit customers for transaction-based, account management and overdraft services. Transaction-based fees, which include services such as ATM use fees and stop payments fees, are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided.   Treasury management transaction fees are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account analysis fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customers’ account balances.   WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and customers do not permit performance-based fees and accordingly, none of the fee income earned by WM&T is performance-based. Trust fees receivable were $ 4.0 million and $ 2.9 million at March 31, 2022 and December 31, 2021, respectively.   Investment products sales commissions and fees represent the Bank’s share of transaction fees and wrap fees resulting from investment services and programs provided through an agent relationship with a third party broker-dealer. Transaction fees are assessed at the time of the transaction. Those fees are collected and recognized on a monthly basis. Trailing fees are based upon market values and are assessed, collected and recognized on a quarterly basis. Because the Bank acts as an agent in arranging the relationship between the customer and third party provider, and does not control the services rendered, investment product sales commissions and fees are reported net of related costs, including nominal incentive compensation, and trading activity charges of $ 188,000 and $ 151,000 for the three month periods ended March 31, 2022 and 2021.   Debit and credit card revenue primarily consists of debit and credit card interchange income. Interchange income represents fees assessed within the payment card system for acceptance of card-based transactions. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized. Revenue is collected and recognized daily through the payment network settlement process.   Bancorp did not establish any contract assets or liabilities as a result of adopting ASC 606, nor were any recognized during the three months ended March 31, 2022.   66 Table of Contents     ( 24 ) Leases   Bancorp has operating leases for various branch locations with terms ranging from two years to 19 years, some of which include options to extend the leases in five -year increments. A total of four operating leases were added as a result of the CB acquisition. Options reasonably expected to be exercised are included in determination of the right-of-use asset. Bancorp elected to use a practical expedient to expense short-term lease obligations associated with leases with original terms of 12 months or less. Bancorp elected not to separate non-lease components from lease components for its operating leases. The right-of-use lease asset and operating lease liability are recorded in premises and equipment and other liabilities on the consolidated balance sheet.   Balance sheet, income statement and cash flow detail regarding operating leases follows:   (dollars in thousands)   March 31, 2022     December 31, 2021                     Balance Sheet                 Operating lease right-of-use asset   $ 16,264     $ 14,958   Operating lease liability     17,703       16,408                     Weighted average remaining lease term (years)     8.8       9.4   Weighted average discount rate     2.92 %     3.02 %                   Maturities of lease liabilities:                 One year or less   $ 2,381     $ 2,634   Year two     3,191       2,673   Year three     2,887       2,408   Year four     2,147       1,924   Year five     1,669       1,608   Greater than five years     7,932       7,699   Total lease payments   $ 20,207     $ 18,946   Less imputed interest     2,504       2,538   Total   $ 17,703     $ 16,408         Three months ended     Three months ended   (in thousands)   March 31, 2022     March 31, 2021   Income Statement                 Components of lease expense:                 Operating lease cost   $ 656     $ 487   Variable lease cost     57       51   Less sublease income     24       14   Total lease cost   $ 689     $ 524         Three months ended     Three months ended   (in thousands)   March 31, 2022     March 31, 2021   Cash flow Statement                 Supplemental cash flow information:                 Operating cash flows from operating leases   $ 853     $ 520     As of March 31, 2022, Bancorp had entered into one lease agreement that had yet to commence.   67   Table of Contents   Item 2.   Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   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. All significant inter-company transactions and accounts have been eliminated in consolidation.   SYB, established in 1904, is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio MSAs through 73 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.   As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following unconsolidated Delaware trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS.   Also, as a result of its acquisition of Commonwealth Bancshares, Inc., the Company acquired a 60% interest in Landmark Financial Advisors, LLC (LFA), which is based in Bowling Green, Kentucky and provides wealth management services. LFA is consolidated into the Company. The noncontrolling interest within the consolidated financial statements represents the interest in LFA not owned by the Company.   Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 “ Financial Statements ” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of Bancorp’s future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations.   Cautionary Statement Regarding Forward-Looking Statements     This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 2 “ Management ’ s Discussion and Analysis of Financial Condition and Results of Operations. ”   Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “aim,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.   Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable regulation.   68 Table of Contents   There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things:     ● Residual impact, if any, of the COVID-19 pandemic 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;   ● 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 ”   of Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021.   69 Table of Contents   Acquisition of Commonwealth Bancshares, Inc. and its Subsidiary Commonwealth Bank & Trust Company   On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company, collectively defined as “CB,” a Louisville, Kentucky-based commercial bank and trust company, which operated 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky. At the time of acquisition and net of purchase accounting adjustments, Commonwealth had $1.34 billion in assets, $632 million in loans (net of purchase accounting adjustments), $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a Wealth Management and Trust Department with total assets under management of approximately $2.93 billion. Bancorp acquired all outstanding common stock of Commonwealth Bancshares, Inc. in a combined stock and cash transaction that resulted in total consideration paid to Commonwealth Bancshares, Inc. shareholders of $168 million.   Bancorp recorded goodwill of $67 million and incurred pre-tax merger related expenses totaling $19.5 million for the three months ended March 31, 2022 as a result of the CB acquisition.   Further, the CB acquisition served to increase the ACL on loans by $14 million at acquisition date. This increase consisted of $10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $4 million of provision for credit loss expense recorded in relation to the acquired loan portfolio for the three months ended March 31, 2022.   Acquisition of Kentucky Bancshares, Inc. and its Subsidiary Kentucky Bank   On May 31, 2021, Bancorp completed its acquisition of Kentucky Bancshares, Inc. and its wholly owned subsidiary, Kentucky Bank, collectively defined as “KB,” a Paris, Kentucky-based commercial bank and trust company, which operated 19 retail branches throughout central and eastern Kentucky with $1.27 billion in assets, $755 million in loans (including PPP), $396 million in investment 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 million for the year ended December 31, 2021. This increase consisted of $7 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $7 million attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.   Issued but Not Yet Effective Accounting Standards Updates   For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the footnote titled “ Summary of Significant Accounting Policies ” of Part I Item 1 “ Financial Statements .”   70 Table of Contents   Business Segment Overview   Bancorp is divided into two reportable segments: Commercial Banking and WM&T:   Commercial Banking provides a full range of loan and deposit products to individual consumers and businesses in all its markets through retail lending, mortgage banking, deposit services, online banking, mobile banking, private banking, commercial lending, commercial real estate lending, treasury management services, merchant services, international banking, correspondent banking and other banking services. The Bank also offers securities brokerage services via its banking center network through an arrangement with a third party broker-dealer in the Commercial Banking segment.    WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.   Overview –  Operating Results (FTE)   The following table presents an overview of Bancorp’s financial performance for the three months ended March 31, 2022 and 2021:   (dollars in thousands, except per share data)                   Variance   Three months ended March 31 ,   2022     2021     $/bp     %                                     Net income attributed to stockholders   $ 7,906     $ 22,710     $ (14,804 )     -65 % Diluted earnings per share   $ 0.29     $ 0.99     $ (0.70 )     -71 % ROA     0.47 %     1.96 %   (149) bps       -76 % ROE     4.55 %     20.71 %   (1616) bps       -78 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the three months ended March 31, 2022 compared to March 31, 2021:     ● Bancorp completed its acquisition of Commonwealth Bancorp, Inc. during the first quarter of 2022. At the time of acquisition, CB had approximately $1.34 billion in assets, $632 million in loans (net of purchase accounting adjustments), $247 million in investment securities and $1.12 billion in deposits.   ● Bancorp also completed its acquisition Kentucky Bancshares, Inc. during the second quarter of 2021, which resulted in the addition of approximately $1.27 billion in assets, $755 million in loans (net of purchase accounting adjustments), $396 million in investment securities and $1.04 billion in deposits at the time of acquisition last year, further contributing to the substantial balance sheet growth experienced over the past twelve months.   ● Net income totaled $7.9 million, resulting in diluted EPS of $0.29 for the three months ended March 31, 2022, a 71% decrease over $0.99 for the same period of 2021. Significant factors affecting the results for the three months ended March 31, 2022 and 2021 include:   o The acquisition of Commonwealth included $19.5 million in merger expenses and $4.4 million in credit loss expense attributed to the acquired loan portfolio.   o Net interest income increased $10.9 million, or 29%, for the three months ended March 31, 2022 compared to the same period of 2021, as both acquisition-related growth (primarily from the May 31, 2021 KB acquisition) and organic growth in loans and investment securities overcame a substantial decline in PPP-related fee recognition.   o Total provision for credit loss expense was $2.3 million for the three months ended March 31, 2022 compared to a net benefit of $1.5 million for the same period of last year, the increase resulting entirely from expense recorded in association with the CB acquisition.   71 Table of Contents     ● NIM decreased 28 bps to 3.11% for the three months ended March 31, 2022 compared to 3.39% for the same period in 2021. Substantial growth in federal funds sold, interest bearing due from banks and the investment securities portfolio resulting from excess liquidity and efforts to deploy it, coupled with a sustained low rate environment that has continued to put pressure on loan yields, drove NIM compression for the three months ended March 31, 2022 compared to the same period of 2021. While the interest rate environment began showing improvement during the first quarter on the heels of the FRB’s 25 bps FFTR increase, Bancorp did not experience the full benefit of rising rates during the three months ended March 31, 2022.   ● Total loans (excluding PPP loans) increased $1.75 billion, or 58%, compared to March 31, 2021, driven by the addition of $632 million in loans (net of purchase accounting adjustments) during the first quarter in relation to the CB acquisition, $755 million in loans related to expansion into the Central Kentucky market during the second quarter of 2021 and $371 million of organic growth. Average loans (excluding PPP loans) also increased $1.30 billion, or 43%, for the three months ended March 31, 2022 compared to the same period in 2021.   ● The PPP loan portfolio decreased $542 million, or 88%, compared to March 31, 2021 as the result of anticipated forgiveness activity, driving a $4.2 million, or 60%, decline in PPP-related interest and fee income for the three months ended March 31, 2022 compared to the same period of 2021.   ● Total provision for credit loss expense of $2.3 million was recorded for the three months ended March 31, 2022, compared to a net benefit of $1.5 million for the same period of the prior year. Expense of $4.4 million was recorded in relation to the loan portfolio acquired from CB, which was partially offset by a net benefit of $1.8 million recorded as a result of continued improvement in the unemployment forecast, updates to Bancorp’s CECL modeling, net recoveries and strong historic credit metrics.   ● Bancorp’s ACL on loans to total loans was 1.38% at March 31, 2022 compared to 1.29% at December 31, 2021, the increase stemming from acquisition-related activity within the ACL on loans.   ● Deposit balances increased $2.55 billion compared to March 31, 2021, as a result of assuming approximately $1.12 billion in deposits during the first quarter in relation to the CB acquisition, the addition of $1.04 billion in deposits related to expansion into the Central Kentucky market during the second quarter of 2021 and the general trend of customers maintaining elevated levels of liquidity recently.   ● Total non-interest income increased $5.4 million, or 39%, for the three-month period ended March 31, 2022 compared to the same period of 2021. The first quarter of 2022 benefitted from both significant contributions stemming from acquisition-related activity and organic growth over the past twelve months. All non-interest income revenue streams experienced significant increases over the same quarter of the prior year, with the exception of mortgage banking, which experienced a significant decrease as a result of slowing volumes compared to the re-finance rush that benefitted 2020 and 2021.   ● Non-interest expenses increased $31.3 million for the three months ended March 31, 2022 compared to the same period of 2021. Merger expenses of $19.5 million drove the large increase along with acquisition-related growth in full-time equivalent employees, technology expenses and premises and equipment.   ● Bancorp’s efficiency ratio (FTE) for the three months ended March 31, 2022 was 82.61% compared to 48.29% for the same period of 2021, the large fluctuation being the result of one-time merger-related expenses incurred as a result of the CB acquisition. Excluding one-time merger costs and expenses related to the amortization of tax credit partnerships, Bancorp’s non-GAAP efficiency ratio for the three months ended March 31, 2022 was 53.87% compared to 47.45% for the same period of 2021. See the section titled “ Non-GAAP Financial Measures ”   for a reconcilement of non-GAAP to GAAP measures.   Results of Operations   Net Interest Income - Overview   As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace. The discussion that follows is based on FTE interest data.   72 Table of Contents   Comparative information regarding net interest income follows:   (dollars in thousands)                   Variance   As of and for the three months ended March 31,   2022     2021     $/bp     %                                     Net interest income   $ 48,760     $ 37,825     $ 10,935       29 % Net interest income (FTE)*     48,944       37,874       11,070       29 % Net interest spread     3.06 %     3.30 %   (24) bps       -7 % Net interest margin     3.11 %     3.39 %   (28) bps       -8 % Average interest earning assets   $ 6,389,882     $ 4,527,563     $ 1,862,319       41 %   *See table titled, "Average Balance Sheets and Interest Rates (FTE)," for detail of net interest income (FTE).     NIM and net interest spread calculations above exclude the sold portion of certain participation loans, which totaled $5 million at both March 31, 2022 and December 31, 2021. These sold loans are on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, because Bancorp believes it provides a more accurate depiction of loan portfolio performance.   The following table details the volatility experienced within the interest rate environment over the past twelve months by comparing period end and quarterly average rates:       March 31,     December 31,     September 30,     June 30,     March 31,       2022     2021     2021     2021     2021                                             Five year Treasury note - quarter end     2.42 %     1.26 %     0.98 %     0.87 %     0.92 % Five year Treasury note - quarterly average     1.83 %     1.18 %     0.80 %     0.84 %     0.62 % Prime rate - quarter end     3.50 %     3.25 %     3.25 %     3.25 %     3.25 % Prime rate - quarterly average     3.29 %     3.25 %     3.25 %     3.25 %     3.25 % One-month LIBOR - quarter end     0.45 %     0.08 %     0.08 %     0.10 %     0.12 % One-month LIBOR - quarterly average     0.23 %     0.09 %     0.09 %     0.10 %     0.12 % Overnight SOFR - quarter end     0.29 %     0.05 %     0.05 %     0.03 %     0.02 % Overnight SOFR - quarterly average     0.09 %     0.05 %     0.05 %     0.01 %     0.05 %   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 several quarters. Approximately $1.4 billion, or 29%, of Bancorp’s loans are variable rate and are indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year Treasury rate.   On March 16, 2022, the FRB increased the FFTR to a range of 0.25%-0.50%, an increase of 25 bps, which resulted in Prime increasing to 3.50%. The hike represented the FRB’s first interest rate action since it cut the FFTR 150 bps in March of 2020 in response to the pandemic, which took Prime from 4.75% to 3.25%. While the hike drove increases in key benchmark rates, the interest rate environment remains below pre-pandemic levels in general, with the exception of the five-year treasury. Given the timing of the FRB’s increase, the average interest rate environment experienced for the three month period ended March 31, 2022 did not capture the full benefit of rising rates.   At March 31, 2022, Bancorp’s loan portfolio consisted of approximately 71% fixed and 29% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 68%) or one-month LIBOR (approximately 32%).   With 68% of the variable rate loan portfolio tied to Prime and the majority with floor rates of 4.00%, short-term rates would have to increase over 50 bps for these loans to move above their floor rates given Prime is at 3.50% as of March 31, 2022. While the current economic outlook suggests continued interest rate action from the FRB and prospects of a rising rate environment, concerns remain regarding potential ongoing pricing pressure/competition, the possibility of a flattening yield curve and the impact these factors will have on NIM.   73 Table of Contents   Net Interest Income (FTE) – Three months ended March 31, 2022 compared to March 31, 2021   Net interest spread (FTE) and NIM were 3.06% and 3.11%, for the three months ended March 31, 2022 compared to 3.30% and 3.39% for the same period in 2021, respectively. NIM during the three months ended March 31, 2022 was significantly impacted by the following:     ● An interest rate environment that is just beginning to evolve from sustained, pandemic-driven lows experienced over the last two years. The FFTR was lowered to a range of 0% - 0.25% in March of 2020, which resulted in Prime dropping to 3.25%, where it remained until the FRB’s most recent hike in mid-March. The FFTR stood at a range of 0.25%-0.50%, and Prime at 3.50%, as of March 31, 2022.   ● Substantial balance sheet growth stemming from both acquisition-related activity and organic growth, which resulted in total average earning asset growth of $1.86 billion, or 41%, and average interest-bearing liability growth of $1.36 billion, or 47%, for the three months ended March 31, 2022 compared to the same period of 2021.   ● Overall excess balance sheet liquidity, which contributed approximately 30 bps of NIM compression for the three months ended March 31, 2022 compared to approximately 13 bps of NIM compression for the same period of 2021. Excess liquidity within the banking system in general has also led to a highly competitive loan rate environment.   ● PPP originations, which began in the second quarter of 2020 and continued through expiration of the program on 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 average balance of the PPP loan portfolio decreased $523 million, and related income decreased $4.2 million, for the three months ended March 31, 2022 compared to the same period of 2021. The PPP portfolio contributed a 13 bps benefit to NIM for the three months ended March 31, 2022 compared to a 18 bps benefit for the three months ended March 31, 2021.   ● 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 $11.1 million, or 29%, for the three months ended March 31, 2022 compared to the same period of 2021, largely as a result of acquisition-related activity, but also driven in part by strong organic loan growth and substantial investment in the investment securities portfolio.   Total average interest earning assets increased $1.86 billion, or 41%, to $6.40 billion for the three months ended March 31, 2022, as compared to the same period of 2021, with the average rate earned on total interest earning assets contracting 36 bps to 3.18%.     ● Average total loan balances increased $772 million, or 21%, for the three months ended March 31, 2022 compared to the same period of 2021. Average non-PPP loan growth of $1.30 billion, or 43%, was driven by acquisition-related expansion and strong organic growth, which was partially offset by a $523 million, or 83%, decline in average PPP loan balances, as forgiveness activity accelerated has increased.     ● Average investment securities grew $660 million for the three months ended March 31, 2022 compared to the same period of 2021, which was attributed to a combination of strategically deploying excess liquidity through further investment and acquisition-related activity.   Total interest income (FTE) increased $10.6 million, or 27%, to $50.2 million for the three months ended March 31, 2022, as compared to the same period of 2021.     ● Interest and fee income (FTE) on loans increased $7.8 million, or 21%, to $44.9 million for the three months ended March 31, 2022 compared to the same period of 2021, driven by both organic and acquisition-related growth in the non-PPP portfolio, which more than offset a $4.2 million, or 60%, decline in PPP-related income. The yield on the overall loan portfolio declined 1 bp to 4.16% for the three months ended March 31, 2022 compared to 4.17% for the same period of the prior year.     ● Significant growth in average investment securities led to a $2.6 million increase interest income (FTE) on the portfolio for the three months ended March 31, 2022 compared to the same period of 2021, driving an 7 bps, or 5%, increase in the corresponding yield on the portfolio. Substantial deployment of excess liquidity during the first quarter benefitted the investment portfolio as the yields earned on recent purchases have improved dramatically in tandem with rising rates.   74 Table of Contents   Total average interest bearing liabilities increased $1.36 billion, or 47%, to $4.26 billion for the three-month period ended March 31, 2022 compared with the same period in 2021, with the total average cost declining 12 bps to 0.12%.     ● Average interest bearing deposits increased $1.33 billion, or 47%, for the three months ended March 31, 2022 compared to the same period in 2021, with interest-bearing demand deposits accounting for $767 million of the increase. The significant growth was attributed to both acquisition-related activity and organic growth stemming from the general trend of customers maintaining higher levels of liquidity over the past several quarters.     ● Consistent with the higher interest bearing deposit balances noted above, average SSUAR balances increased $44 million, or 94%, for the three months ended March 31, 2022 compared to the same period of 2021.     ● Average FHLB advances decreased $29 million for the three months ended March 31, 2022 compared to the same period of the prior year, as all outstanding FHLB advances either matured or were paid off in 2021.     ● Subordinated debentures totaling $26 million were added as a result of the CB acquisition, the average balances of which totaled $8 million of the three months ended March 31, 2022.   Total interest expense decreased $469,000, or 28%, for the three months ended March 31, 2022 compared to the same period of 2021, a direct result of lowering deposit rates in response to FRB rate reductions in March of 2020 to levels at or near those offered during the Great Recession, where they remained as of March 31, 2022. These reductions have had a significant impact on time deposit rates in particular, as the benefit of lower rates has been experienced as the time deposit portfolio has matured or renewed. Further, the three months ended March 31, 2022 benefitted from all FHLB advances either maturing or paying off in 2021.     ● Total interest bearing deposit expense decreased $339,000, or 22%, driving a 11 bps decrease in the cost of average total interest bearing deposits.     ● No interest expense on FHLB advances was recorded for the three months ended March 31, 2022, as all FHLB advances either matured or paid off in 2021, resulting in a decline of $176,000 compared to the same period of the prior year.     ● Interest expense totaling $33,000 was recorded for the three months ended March 31, 2022 as a result of the subordinated debentures added through the CB acquisition.   75 Table of Contents   Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison       Three months ended March 31,       2022     2021       Average             Average     Average             Average   (dollars in thousands)   Balance     Interest     Rate     Balance     Interest     Rate   Interest earning assets:                                                 Federal funds sold and interest bearing due from banks   $ 671,263     $ 282       0.17 %   $ 235,370     $ 66       0.11 % Mortgage loans held for sale     8,629       24       1.13       14,618       64       1.78   Investment securities:                                                 Taxable     1,278,160       4,680       1.48       654,733       2,295       1.42   Tax-exempt     43,391       252       2.36       6,442       45       2.83   Total securities     1,321,551       4,932       1.51       661,175       2,340       1.44                                                     Federal Home Loan Bank stock     10,509       54       2.08       10,640       57       2.17                                                     SBA Paycheck Protection Program (PPP) loans     103,850       2,821       11.02       627,173       7,025       4.54   Non-PPP loans     4,274,080       42,055       3.99       2,978,587       30,015       4.09   Total loans     4,377,930       44,876       4.16       3,605,760       37,040       4.17                                                     Total interest earning assets     6,389,882       50,168       3.18       4,527,563       39,567       3.54                                                     Less allowance for credit losses on loans     56,035                       53,856                                                                     Non-interest earning assets:                                                 Cash and due from banks     91,235                       47,720                   Premises and equipment, net     86,056                       57,652                   Bank owned life insurance     53,177                       33,320                   Goodwill     153,803                       12,513                   Accrued interest receivable and other     154,155                       85,924                   Total assets   $ 6,872,273                     $ 4,710,836                                                                     Interest bearing liabilities:                                                 Deposits:                                                 Interest bearing demand   $ 2,136,188     $ 649       0.12 %   $ 1,368,855     $ 357       0.11 % Savings     467,299       55       0.05       218,119       5       0.01   Money market     1,083,961       190       0.07       848,726       115       0.05   Time     461,268       277       0.24       380,286       1,033       1.10   Total interest bearing deposits     4,148,716       1,171       0.11       2,815,986       1,510       0.22                                                     Securities sold under agreements to repurchase     91,082       17       0.08       46,937       5       0.04   Federal funds purchased     9,993       3       0.12       9,599       2       0.08   Federal Home Loan Bank advances     -       -       0.00       29,270       176       2.44   Subordinated debentures     8,052       33       1.66       -       -       0.00                                                                                                       Total interest bearing liabilities     4,257,843       1,224       0.12       2,901,792       1,693       0.24                                                     Non-interest bearing liabilities:                                                 Non-interest bearing demand deposits     1,817,462                       1,278,193                   Accrued interest payable and other     93,039                       86,030                   Total liabilities     6,168,344                       4,266,015                                                                     Stockholders ’ equity     703,929                       444,821                   Total liabilities and stockholder's equity   $ 6,872,273                     $ 4,710,836                                                                     Net interest income           $ 48,944                     $ 37,874                                                             Net interest spread                     3.06 %                     3.30 %                                                   Net interest margin                     3.11 %                     3.39 %   76 Table of Contents   Supplemental Information - Average Balance Sheets and Interest Rates (FTE)     ● Average loan balances include the principal balance of non-accrual loans, as well as unearned income such as loan premiums, discounts, fees/costs and exclude participation loans accounted for as secured borrowings. Participation loans averaged $5 million for both the three-month periods ended March 31, 2022 and 2021, respectively.     ● Interest income on a FTE basis includes additional amounts of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal taxes yielding the same after-tax income. Interest income on municipal securities and tax-exempt loans has been calculated on a FTE basis using a federal income tax rate of 21%. Approximate tax equivalent adjustments to interest income were $184,000 and $49,000 for the three-month periods ended March 31, 2022 and 2021, respectively.     ● Interest income includes loan fees of $3.8 million ($2.6 million associated with the PPP) and $6.0 million ($5.5 million associated with the PPP) for the three-month periods ended March 31, 2022 and 2021, respectively. Interest income on loans may be impacted by the level of prepayment fees collected and accretion related to purchased loans.     ● Net interest income, the most significant component of Bancorp's earnings, represents total interest income less total interest expense. The level of net interest income is determined by mix and volume of interest earning assets, interest bearing deposits and borrowed funds, and changes in interest rates.     ● NIM represents net interest income on a FTE basis as a percentage of total average interest earning assets.     ● Net interest spread (FTE) is the difference between taxable equivalent rates earned on total interest earning assets less the cost of interest bearing liabilities.     ● The fair market value adjustment on investment securities resulting from ASC 320, “ Investments –  Debt and Equity Securities ”  is included as a component of other assets.   77 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 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 3.50% as of March 31, 2022, short-term rates would have to increase over 50 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 are summarized below.       Change in Rates         -200       -100     +100     +200       Basis Points     Basis Points     Basis Points     Basis Points   % Change from base net interest income at March 31, 2022     N/A       -3.15 %     -2.44 %     -2.96 %   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 71% fixed and 29% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five-year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 68%) or one month LIBOR/SOFR (approximately 32%).   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.   78 Table of Contents   On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was signed into law as part of the Consolidated Appropriations Act of 2022. This legislation established a uniform benchmark replacement process for financial contracts that mature after the cessation of LIBOR (scheduled for June 2023) that do not contain clearly defined or practicable fallback provisions. The legislation also established a safe harbor for lenders, providing protection from litigation associated with choosing a replacement rate recommended by the FRB, such as SOFR, and also allows for the continued use of any appropriate benchmark rate for new contracts.   As of March 31 2022, the Company had approximately $456 million in loans and $150 million (notional amount) in interest rate derivative contracts that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. The Company had $46 million in loans that were indexed to SOFR at March 31, 2022.   Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value, with changes in fair value recorded in other non-interest income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above. For additional information, see the Footnote titled “ Assets and Liabilities Measured and Reported at Fair Value. ”   In addition, Bancorp uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the Footnote titled “ Derivative Financial Instruments. ” For these derivatives, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction impacts earnings. As of March 31, 2022, Bancorp had no outstanding interest rate swaps designated as cash flow hedges.   79 Table of Contents   Provision for Credit Losses   Provision for credit losses on loans at March 31, 2022 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the Footnote titled “ Basis of Presentation and Summary of Significant Accounting Policies ” for detailed discussion regarding Bancorp’s ACL methodology by loan segment in this document and Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2021.   An analysis of the changes in the ACL for loans, including provision, and selected ratios follow:       Three months ended       March 31,   (dollars in thousands)   2022     2021                     Beginning balance   $ 53,898     $ 51,920   Acquisition - PCD loans (goodwill adjustment)     9,950       —   Adjusted beginning balance     63,848       51,920                     Provision for credit losses - loans     (1,750 )     (1,200 ) Provision for credit losses - acquired loans     4,429       —   Total provision for credit losses on loans     2,679       (1,200 )                   Total charge-offs     (409 )     (122 ) Total recoveries     949       116   Net loan (charge-offs) recoveries     540       (6 ) Ending balance   $ 67,067     $ 50,714                     Average total loans   $ 4,377,930     $ 3,605,760                     Provision for credit losses on loans to average total loans (1)     0.06 %     -0.03 % Net loan (charge-offs) recoveries to average total loans (1)     0.01 %     0.00 % ACL on loans to total loans     1.38 %     1.40 % ACL on loans to total loans (excluding PPP) (2)     1.40 %     1.68 % ACL on loans to average total loans     1.53 %     1.41 %   (1) Ratios are not annualized                 (2) See the section titled “ Non-GAAP Financial Measures ” for reconcilement of Non-GAAP to GAAP measures     The ACL for loans totaled $67 million as of March 31, 2022 compared to $54 million at December 31, 2021, representing an ACL to total loans ratio of 1.38% and 1.29% for those periods, respectively. The ACL to total loans (excluding PPP loans) was 1.40% at March 31, 2022 compared to 1.34% at December 31, 2021. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $71 million (net of unamortized deferred fees) at March 31, 2022 and $141 million at December 31, 2021, Bancorp did not generally 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.   Due to continued improvement in the unemployment forecast, updates to Bancorp’s CECL modeling, net recoveries and strong historic credit metrics, benefits (excluding acquisition-related activity) of $1.8 million and $1.2 million were recorded to provision for credit losses on loans expense for the three month periods ended March 31, 2022 and 2021, respectively. Offsetting the reduction for the three month period ended March 31, 2022 was credit loss expense recorded for the loan portfolio acquired from CB, which totaled $4.4 million.   In addition to the provision activity noted above for the first three months of 2022, the ACL for loans was also increased $10 million as a result of the PCD loan portfolio added through the CB acquisition during the three months ended March 31, 2022, with the corresponding offset recorded to goodwill (as opposed to provision expense). Further, net recovery activity of $540,000 million for the three month period ended March 31, 2022 also served to increase the ACL for loans, driven by a $711,000 recovery of a C&I relationship that was fully charged off in the fourth quarter of 2021.   80 Table of Contents   While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced an increase between December 31, 2021 and March 31, 2022. The CB acquisition resulted in a $500,000 increase to the ACL for off balance sheet credit exposures, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). This increase was partially offset by a $400,000 benefit to provision for credit loss expense recorded for the three period ended March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage consistent with generally improving mod