Stock Yards Bancorp, Inc. 10-Q

sybt20220630_10q.htm     Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM   10-Q   ☒ Quarterly report pursuant to Section   13 or 15(d)   of the Securities Exchange Act of 1934   For the quarterly period ended June 30, 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 July 31, 2022, was 29,243,504 .   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 9     Notes to Condensed Consolidated Financial Statements 11     Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 73     Item 3. Quantitative and Qualitative Disclosures about Market Risk. 115     Item 4. Controls and Procedures. 115             PART II – OTHER INFORMATION       Item 1. Legal Proceedings. 115     Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 116     Item 6. Exhibits. 116             Signatures 117   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   Non-controlling 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   GLBA   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   TBA   To Be Annouced CRA   Community Reinvestment Act   LIBOR   London Interbank Offered Rate   TBOC   The Bank Oldham County CRE   Commercial Real Estate   Loans   Loans and Leases   TCE   Tangible Common Equity Dodd-Frank Act   The Dodd-Frank Wall Street Reform and Consumer Protection Act   MBS   Mortgage Backed Securities   TDR   Troubled Debt Restructuring DTA   Deferred Tax Asset   MSA   Metropolitan Statistical Area   TPS   Trust Preferred Securities DTL   Deferred Tax Liability   MSRs   Mortgage Servicing Rights   VA   U.S. Department of Veterans Affairs DCF   Discounted Cash Flow   NASDAQ   The NASDAQ Stock Market, LLC   WM&T   Wealth Management and Trust   3 Table of Contents     PART I – FINANCIAL INFORMATION   Item 1. Financial Statements   CONDENSED CONSOLIDATED BALANCE SHEETS   June 30, 2022 (unaudited) and December 31, 2021 (in thousands, except share data)       June 30,     December 31,       2022     2021   Assets                 Cash and due from banks   $ 88,422     $ 62,304   Federal funds sold and interest bearing due from banks     485,447       898,888   Total cash and cash equivalents     573,869       961,192                     Mortgage loans held for sale, at fair value     10,045       8,614   Available for sale debt securities (amortized cost of $ 1,254,650 in 2022 and $ 1,190,379 in 2021, respectively)     1,140,039       1,180,298   Held to maturity debt securities (fair value of $ 460,846 in 2022 and $ 0 in 2021, respectively)     485,449       —   Federal Home Loan Bank stock, at cost     13,811       9,376   Loans     4,877,324       4,169,303   Allowance for credit losses on loans     66,362       53,898   Net loans     4,810,962       4,115,405                     Premises and equipment, net     119,462       76,894   Bank owned life insurance     53,609       53,073   Accrued interest receivable     17,056       13,745   Goodwill     202,524       135,830   Core deposit intangibles     16,870       5,596   Customer list intangibles     13,487       —   Other assets     125,922       86,002   Total assets   $ 7,583,105     $ 6,646,025                     Liabilities                 Deposits:                 Non-interest bearing   $ 2,121,304     $ 1,755,754   Interest bearing     4,427,826       4,031,760   Total deposits     6,549,130       5,787,514                     Securities sold under agreements to repurchase     161,512       75,466   Federal funds purchased     8,771       10,374   Subordinated debentures     26,144       —   Accrued interest payable     277       300   Other liabilities     87,110       96,502   Total liabilities     6,832,944       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 29,243,000 and 26,596,000 shares in 2022 and 2021, respectively     58,315       49,501   Additional paid-in capital     374,878       243,107   Retained earnings     401,275       391,201   Accumulated other comprehensive loss     ( 87,337 )     ( 7,940 ) Total stockholders ’ equity     747,131       675,869   Non-controlling interest     3,030       —   Total equity     750,161       675,869   Total liabilities and equity   $ 7,583,105     $ 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 and six months ended June 30, 2022 and 2021 (in thousands, except per share data)       Three months ended     Six months ended       June 30,     June 30,       2022     2021     2022     2021   Interest income                                 Loans, including fees   $ 50,612     $ 40,095     $ 95,355     $ 77,095   Federal funds sold and interest bearing due from banks     1,113       84       1,395       150   Mortgage loans held for sale     50       58       74       122   Federal Home Loan Bank stock     102       64       156       121   Investment securities:                                 Taxable     6,805       2,744       11,485       5,039   Tax-exempt     426       57       627       93   Total interest income     59,108       43,102       109,092       82,620   Interest expense                                 Deposits     1,770       1,435       2,941       2,945   Securities sold under agreements to repurchase     57       5       74       10   Federal funds purchased and other short-term borrowings     19       4       22       6   Subordinated debentures     278       —       311       —   Federal Home Loan Bank advances     —       74       —       250   Total interest expense     2,124       1,518       3,348       3,211   Net interest income     56,984       41,584       105,744       79,409   Provision for credit losses     ( 200 )     4,147       2,079       2,672   Net interest income after credit loss expense     57,184       37,437       103,665       76,737   Non-interest income                                 Wealth management and trust services     9,495       6,858       17,738       13,106   Deposit service charges     2,061       1,233       3,924       2,177   Debit and credit card income     4,748       3,284       8,867       5,557   Treasury management fees     2,187       1,730       4,091       3,270   Mortgage banking income     1,295       1,303       2,298       2,747   Net investment product sales commissions and fees     731       545       1,338       1,009   Bank owned life insurance     270       206       536       367   Other     1,153       629       2,351       1,399   Total non-interest income     21,940       15,788       41,143       29,632   Non-interest expenses                                 Compensation     22,204       15,680       40,173       28,507   Employee benefits     4,429       3,367       8,968       6,628   Net occupancy and equipment     3,663       2,244       6,688       4,289   Technology and communication     3,984       2,670       7,403       5,016   Debit and credit card processing     1,665       976       3,002       1,681   Marketing and business development     1,445       822       2,217       1,346   Postage, printing and supplies     825       460       1,558       869   Legal and professional     1,027       666       1,677       1,128   FDIC insurance     536       349       1,181       754   Amortization of investments in tax credit partnerships     89       231       177       262   Capital and deposit based taxes     582       527       1,100       985   Merger expenses     —       18,100       19,500       18,500   Federal Home Loan Bank early termination penalty     —       474       —       474   Intangible amortization     1,611       127       2,324       204   Other     2,615       1,484       5,004       2,507   Total non-interest expenses     44,675       48,177       100,972       73,150   Income before income tax expense     34,449       5,048       43,836       33,219   Income tax expense     7,547       864       8,992       6,325   Net income     26,902       4,184       34,844       26,894   Less income attributed to non-controlling interest     108       —       144       —   Net Income available to stockholders   $ 26,794     $ 4,184     $ 34,700     $ 26,894   Net income per common share, basic   $ 0.92     $ 0.17     $ 1.23     $ 1.14   Net income per common share, diluted   $ 0.91     $ 0.17     $ 1.22     $ 1.13   Weighted average outstanding shares                                 Basic     29,131       24,140       28,186       23,489   Diluted     29,346       24,379       28,421       23,731     See accompanying notes to unaudited condensed consolidated financial statements.   5 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) For the three and six months ended June 30, 2022 and 2021 (in thousands)       Three months ended     Six months ended       June 30,     June 30,       2022     2021     2022     2021   Net income   $ 26,902     $ 4,184     $ 34,844     $ 26,894   Other comprehensive income (loss):                                 Change in unrealized gain (loss) on AFS debt securities     ( 39,151 )     6,349       ( 104,530 )     ( 9,218 ) Change in fair value of derivatives used in cash flow hedge     —       40       —       83   Total other comprehensive income (loss), before income tax effect     ( 39,151 )     6,389       ( 104,530 )     ( 9,135 ) Tax effect     ( 9,413 )     1,549       ( 25,133 )     ( 2,184 ) Total other comprehensive income (loss), net of tax     ( 29,738 )     4,840       ( 79,397 )     ( 6,951 ) Comprehensive income (loss)     ( 2,836 )     9,024       ( 44,553 )     19,943   Less comprehensive income attributed to non-controlling interest     108       —       144       —   Comprehensive income (loss) available to stockholders   $ ( 2,944 )   $ 9,024     $ ( 44,697 )   $ 19,943     See accompanying notes to unaudited condensed consolidated financial statements.   6 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS ’ EQUITY (unaudited) For the three and six months ended June 30, 2022 and 2021 (in thousands, except per share data)                                       Accumulated                               Common stock     Additional             other     Total                       Shares             paid-in     Retained     comprehensive     stockholders'     Non-controlling     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   Non-controlling 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 non-controlling interest     —       —       —       —       —       —       ( 53 )     ( 53 ) Balance, March 31, 2022     29,220     $ 58,238     $ 372,555     $ 384,949     $ ( 57,599 )   $ 758,143     $ 3,077     $ 761,220                                                                                                                                       Activity for three months ended June 30, 2022:                                                                 Net income     —       —       —       26,794       —       26,794       108       26,902   Other comprehensive loss     —       —       —       —       ( 29,738 )     ( 29,738 )     —       ( 29,738 ) Stock compensation expense     —       —       1,057       —       —       1,057       —       1,057   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     26       85       1,365       ( 2,394 )     —       ( 944 )     —       ( 944 ) Cash dividends declared, $ 0.28 per share     —       —       —       ( 8,183 )     —       ( 8,183 )     —       ( 8,183 ) Shares cancelled     ( 3 )     ( 8 )     ( 99 )     109       —       2       —       2   Distributions to non-controlling interest     —       —       —       —       —       —       ( 155 )     ( 155 ) Balance, June 30, 2022     29,243     $ 58,315     $ 374,878     $ 401,275     $ ( 87,337 )   $ 747,131     $ 3,030     $ 750,161     (continued)   7 Table of Contents                                       Accumulated               Common stock     Additional             other     Total       Shares             paid-in     Retained     comprehensive     stockholders'       outstanding     Amount     capital     earnings     income     Total                                                     Balance, January 1, 2021     22,692     $ 36,500     $ 41,886     $ 353,574     $ 8,741     $ 440,701                                                     Activity for three months ended March 31, 2021:                                                 Net income     —       —       —       22,710       —       22,710   Other comprehensive loss     —       —       —       —       ( 11,791 )     ( 11,791 ) Stock compensation expense     —       —       849       —       —       849   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     89       296       4,144       ( 7,533 )     —       ( 3,093 ) Cash dividends declared, $ 0.27 per share     —       —       —       ( 6,144 )     —       ( 6,144 ) Balance, March 31, 2021     22,781     $ 36,796     $ 46,879     $ 362,607     $ ( 3,050 )   $ 443,232                                                                                                       Activity for three months ended June 30, 2021:                                                 Net income     —       —       —       4,184       —       4,184   Other comprehensive income     —       —       —       —       4,840       4,840   Stock compensation expense     —       —       1,414       —       —       1,414   Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations     —       ( 2 )     ( 26 )     ( 45 )     —       ( 73 ) Stock issued for KB acquisition     3,808       12,682       191,988       —       —       204,670   Cash dividends declared, $ 0.27 per share     —       —       —       ( 7,178 )     —       ( 7,178 ) Shares cancelled     ( 1 )     ( 5 )     ( 55 )     60       —       —   Balance, June 30, 2021     26,588     $ 49,471     $ 240,200     $ 359,628     $ 1,790     $ 651,089     See accompanying notes to unaudited condensed consolidated financial statements.   8 Table of Contents     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)   For the six months ended June 30, 2022 and 2021 (in thousands)       2022     2021   Cash flows from operating activities:                 Net income   $ 34,844     $ 26,894   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     2,079       2,672   Depreciation, amortization and accretion, net     10,031       4,888   Deferred income tax expense     4,771       2,307   Gain on sale of mortgage loans held for sale     ( 504 )     ( 2,118 ) Origination of mortgage loans held for sale     ( 79,643 )     ( 119,431 ) Proceeds from sale of mortgage loans held for sale     82,275       141,747   Bank owned life insurance income     ( 536 )     ( 367 ) Loss on the disposal of premises and equipment     28       41   Gain on the sale of other real estate owned     —       ( 47 ) Stock compensation expense     2,048       2,263   Excess tax benefit from share-based compensation arrangements     ( 1,112 )     ( 1,150 ) Net change in accrued interest receivable and other assets     ( 4,747 )     ( 4,420 ) Net change in accrued interest payable and other liabilities     ( 27,776 )     ( 6,105 ) Net cash provided by operating activities     21,758       47,174   Cash flows from investing activities:                 Purchases of available for sale debt securities     ( 85,659 )     ( 204,228 ) Proceeds from sales of acquired available for sale debt securities     2,111       91,094   Proceeds from maturities and paydowns of available for sale debt securities     78,409       80,122   Purchases of held to maturity debt securities     ( 459,183 )     —   Proceeds from maturities and paydowns of held to maturity debt securities     159,119       —   Proceeds from redemption of Federal Home Loan Bank stock     —       3,881   Net change in non-PPP loans     ( 180,130 )     ( 158,253 ) Net change in PPP loans     103,967       235,864   Purchases of premises and equipment     ( 13,563 )     ( 1,752 ) Other investment activities     —       ( 3,965 ) Proceeds from sales of other real estate owned     56       261   Cash from acquisition, net of cash paid     349,456       24,981   Net cash provided by (used in) investing activities     ( 45,417 )     68,005   Cash flows from financing activities:                 Net change in deposits     ( 358,526 )     232,255   Net change in securities sold under agreements to repurchase and federal funds purchased     18,223       4,086   Proceeds from Federal Home Loan Bank advances     —       20,000   Repayments of Federal Home Loan Bank advances     —       ( 132,745 ) Repayment of acquired line of credit     ( 3,200 )     —   Share repurchases related to compensation plans     ( 3,559 )     ( 3,166 ) Cash disbursements to non-controlling interest     ( 208 )     —   Cash dividends paid     ( 16,394 )     ( 13,361 ) Net cash (used in) provided by financing activities     ( 363,664 )     107,069   Net change in cash and cash equivalents     ( 387,323 )     222,248   Beginning cash and cash equivalents     961,192       317,945   Ending cash and cash equivalents   $ 573,869     $ 540,193     (continued)   9 Table of Contents   (continued)    For the six months ended June 30,                 Supplemental cash flow information:   2022     2021   Interest paid   $ 2,147     $ 2,971   Income taxes paid, net of refunds     7,989       13,359   Cash paid for operating lease liabilities     1,800       1,190   Supplemental non-cash activity:                 Unfunded commitments in tax credit investments   $ 6,907     $ 5,766   Due to broker     —       1,985   Dividends payable to stockholders     182       175   Loans transferred to OREO     445       30                     Liabilities assumed in conjunction with acquisition:                 Fair value of assets acquired   $ 1,403,509     $ 1,389,327   Consideration paid in acquisition     30,994       28,276   Common stock issued in acquisition     133,825       204,670   Non-controlling interest of acquired entity     3,094       —   Total consideration paid     167,913       232,946   Liabilities assumed   $ 1,235,596     $ 1,156,381     See accompanying notes to unaudited condensed consolidated financial statements.   10 Table of Contents   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)     ( 1 ) Summary of Significant Accounting Policies   Nature of Operations – Stock Yards Bancorp, Inc. (“Bancorp” or “the Company”) is a FHC headquartered in Louisville, Kentucky. The accompanying condensed consolidated financial statements include the accounts of its wholly owned subsidiaries, SYB (“the Bank”) and SYB Insurance Company, Inc. (“the Captive”). Intercompany transactions and balances are eliminated in consolidation. The consolidated financial statements of Bancorp and its subsidiaries have been prepared in conformity with GAAP and adhere to predominant practices within the banking industry.   Established in 1904, SYB is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets through 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 $2,450,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.   As a result of its acquisition 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., Bancorp 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 non-controlling interest within the consolidated financial statements represents the interest in LFA not owned by Bancorp.   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 and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December  31, 2022.   11 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 June 30, 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 provisional period 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.   12 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 and six month periods ended June 30, 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 June 30, 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 $ 2 million and $ 0 as of June 30, 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 June 30, 2022 and December 31, 2021, no ACL for HTM securities was recorded.   Mortgage Loans Held for Sale and Mortgage Banking Activities – Effective March 31, 2022, Bancorp elected to begin carrying mortgages originated and intended for sale in the secondary at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale prior to March 31, 2022 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.   13 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 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. 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.   14 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).   15 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 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.   16 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 had 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.   17 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 June 30, 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. Bancorp also 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.   18 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 June 30, 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. 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.   19 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 June 30, 2022.   The Company’s captive maintains cash reserves to cover insurable claims. Reserves totaled $ 200,000 as of June 30, 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.   20 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 June 2022, the FASB issued ASU 2022 - 03, “ Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. ” ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security should not be considered in measuring fair value. It also requires the following disclosures for equity securities subject to contractual sale restrictions: 1 ) the fair value of the equity security subject to contractual sale restrictions reflected in the balance sheet; 2 ) the natures and remaining duration of the restriction(s); and 3 ) the circumstances that could cause a lapse in the restriction(s). ASU 2022 - 03 is effective for the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The guidance should be applied prospectively. ASU 2022 - 03 is not expected to have a material impact on our consolidated financial statements.   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 Instruments – Credit Losses – Measured 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.   21 Table of Contents   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.   22   Table of Contents     ( 2 ) Bank Acquisitions   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 for individual fair value and provisional period adjustments (if applicable).     ( 2 )    As of acquisition date, securities with a fair value of $ 162 million were classified by Bancorp as HTM.   23 Table of Contents   Explanation of fair value adjustments :   a. Adjustment to investment securities based on Bancorp’s evaluation of the acquired 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. Bancorp expects to make provisional period adjustments to premises and equipment during the third quarter of 2022 based on the sale of acquired buildings.   e. Elimination of the historical CB goodwill.   f. Calculation of CDI related to the acquisition.   g. Calculation of CLI 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 on an analysis of market interest rates and maturity dates at the time of acquisition.   l. Adjustment to reflect the estimated fair value of subordinated debentures for differences in interest rates, which was based primarily on an analysis of market interest rates and maturity dates at the time of acquisition.   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 the transaction 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.   Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $ 540 million and $ 549 million at the date of acquisition.   Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $ 11.7 million and $ 14.9 million for the three and six months ended June 30, 2022, respectively.   24 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. Further, the pro forma condensed combined financial information presented below for the three and six month periods ended June 30, 2021 also assumes that the KB acquisition took place at the beginning of the period.   (in thousands)   Three months ended June 30, 2022     Three months ended June 30, 2021                     Net interest income   $ 56,984     $ 55,595   Provision for credit losses     ( 200 )     ( 3,167 ) Non-interest income     21,940       29,396   Non-interest expense     44,675       52,563   Income before taxes     34,449       35,595   Income tax expense     7,547       6,735   Net income     26,902       28,860   Less net income attributed to noncontrolling interest     108       94   Net income available to stockholders   $ 26,794     $ 28,766                     Earnings per share                 Basic   $ 0.92     $ 0.99   Diluted     0.91       0.98                     Basic weighted average shares outstanding     29,131       29,049   Diluted weighted average shares outstanding     29,346       29,288       (in thousands)   Six months ended June 30, 2022     Six months ended June 30, 2021                     Net interest income   $ 110,777     $ 111,106   Provision for credit losses (1)     ( 2,350 )     ( 4,242 ) Non-interest income     44,083       59,430   Non-interest expense (2)     91,964       102,993   Income before taxes     65,246       71,785   Income tax expense     14,014       13,676   Net income     51,232       58,109   Less net income attributed to noncontrolling interest     159       174   Net income available to stockholders   $ 51,073     $ 57,935                     Earnings per share                 Basic   $ 1.76     $ 2.00   Diluted     1.74       1.98                     Basic weighted average shares outstanding     29,094       29,022   Diluted weighted average shares outstanding     29,355       29,263     ( 1 ) - Excludes $ 4.4 million in merger related credit loss expense for the six months ended June 30, 2022.Excludes $ 7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively. ( 2 ) - Excludes $ 24.1 million in pre-tax merger expenses for the six months ended June 30, 2022. Excludes $ 18.1 million and $ 18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively.   25 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.   Effective March 31, 2022, management finalized the fair values of the acquired assets and assumed liabilities in advance of the 12 month post-acquisition date, as allowed by GAAP.   The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final provisional period adjustments to those previously reported preliminary values, and the final fair values of those assets and liabilities as recorded by Bancorp.       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 for individual fair value and provisional period adjustments.   26 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.   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.   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 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. 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 on an analysis of market interest rates and maturity dates at the time of acquisition.   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 after acquisition.   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 $ 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 the transaction was structured as stock sale.   Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $ 724 million and $ 723 million at the date of acquisition.   27 Table of Contents   Total revenue, defined as net interest income and non-interest income, attributed to KB totaled approximately $ 4.5 million and for both the three and six months ended June 30, 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 June 30, 2021             Net interest income   $ 47,465   Provision for credit losses (1)     ( 3,167 ) Non-interest income     18,078   Non-interest expense (2)     37,257   Income before taxes     31,453   Income tax expense     6,026   Net income     25,427   Less net income attributed to noncontrolling interest     -   Net income available to stockholders   $ 25,427             Earnings per share         Basic   $ 0.95   Diluted     0.94             Basic weighted average shares outstanding     26,687   Diluted weighted average shares outstanding     26,926     (in thousands)   Six months ended June 30, 2021             Net interest income   $ 94,043   Provision for credit losses (1)     ( 4,542 ) Non-interest income     36,090   Non-interest expense (2)     71,803   Income before taxes     62,872   Income tax expense     11,979   Net income     50,893   Less net income attributed to noncontrolling interest     -   Net income available to stockholders   $ 50,893             Earnings per share         Basic   $ 1.91   Diluted     1.89             Basic weighted average shares outstanding     26,670   Diluted weighted average shares outstanding     26,911     ( 1 ) - Excludes $ 7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively. ( 2 ) - Excludes $ 18.1 million and $ 18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively.   28   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 AFS 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           June 30, 2022   cost     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 121,846     $ -     $ ( 6,314 )   $ 115,532   Government sponsored enterprise obligations     120,954       625       ( 3,876 )     117,703   Mortgage backed securities - government agencies     857,086       245       ( 91,809 )     765,522   Obligations of states and political subdivisions     148,543       6       ( 13,281 )     135,268   Other     6,221       -       ( 207 )     6,014   Total available for sale debt securities   $ 1,254,650     $ 876     $ ( 115,487 )   $ 1,140,039                                     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           June 30, 2022   value     Gains     Losses     Fair value                                     U.S. Treasury and other U.S. Government obligations   $ 219,574     $ -     $ ( 4,559 )   $ 215,015   Government sponsored enterprise obligations     27,847       22       ( 665 )     27,204   Mortgage backed securities - government agencies     238,028       1       ( 19,402 )     218,627   Total held to maturity debt securities   $ 485,449     $ 23     $ ( 24,626 )   $ 460,846       Bancorp elected to classify a portion of securities purchased and acquired during the first quarter of 2022 as HTM. This election was made in an effort to lessen the impact that the rising interest rate environment has on the valuation of the AFS debt securities portfolio, and ultimately its impact on capital through AOCI. No debt securities were classified as HTM at December 31, 2021.   All investment securities classified as HTM by Bancorp as of June 30, 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 recorded for Bancorp’s HTM securities as of June 30, 2022. Further, as of June 30, 2022, none of Bancorp’s HTM securities were in non-accrual or past due status.   29 Table of Contents   Debt Securities by Contractual Maturity   A summary of AFS and HTM debt securities by contractual maturity as of June 30, 2022 follows:       AFS Debt Securities     HTM Debt Securities   (in thousands)   Amortized cost     Fair value     Carrying value     Fair value                                     Due within one year   $ 9,518     $ 9,481     $ 16,029     $ 15,815   Due after one year but within five years     158,324       151,417       204,196       199,369   Due after five years but within 10 years     58,836       53,826       26,451       26,290   Due after 10 years     170,886       159,793       745       745   Mortgage backed securities - government agencies     857,086       765,522       238,028       218,627   Total available for sale debt securities   $ 1,254,650     $ 1,140,039     $ 485,449     $ 460,846       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 June 30, 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 $ 2 million at June 30, 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 $ 1.04 billion and $ 879 million were pledged at June 30, 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 June 30, 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 was recorded with respect to investment securities as of June 30, 2022.   30 Table of Contents   Unrealized and Unrecognized Loss Analysis on Debt Securities   Debt securities with unrealized and unrecognized losses at June 30, 2022 and December 31, 2021, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:       AFS Debt Securities       Less than 12 months     12 months or more     Total   (in thousands)   Fair     Unrealized     Fair     Unrealized     Fair     Unrealized   June 30, 2022   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S.Government obligations   $ 115,533     $ ( 6,314 )   $ -     $ -     $ 115,533     $ ( 6,314 ) Government sponsored enterprise obligations     80,629       ( 3,574 )     8,102       ( 302 )     88,731       ( 3,876 ) Mortgage-backed securities - government agencies     472,323       ( 49,162 )     273,568       ( 42,647 )     745,891       ( 91,809 ) Obligations of states andpolitical subdivisions     126,114       ( 13,098 )     823       ( 183 )     126,937       ( 13,281 ) Other     6,014       ( 207 )     -       -       6,014       ( 207 ) Total AFS debt securities   $ 800,613     $ ( 72,355 )   $ 282,493     $ ( 43,132 )   $ 1,083,106     $ ( 115,487 )                                                   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     957       ( 18 )     -       -       957       ( 18 ) Total AFS debt securities   $ 808,870     $ ( 12,206 )   $ 103,568     $ ( 3,156 )   $ 912,438     $ ( 15,362 )         HTM Debt Securities       Less than 12 months     12 months or more     Total   (in thousands)   Fair     Unrecognized     Fair     Unrecognized     Fair     Unrecognized   June 30, 2022   value     losses     value     losses     value     losses                                                     U.S. Treasury and other U.S. Government obligations   $ 215,015     $ ( 4,559 )   $ -     $ -     $ 215,015     $ ( 4,559 ) Government sponsored enterprise obligations     25,213       ( 665 )     -       -       25,213       ( 665 ) Mortgage-backed securities - government agencies     218,534       ( 19,402 )     -       -       218,534       ( 19,402 ) Total HTM debt securities   $ 458,762     $ ( 24,626 )   $ -     $ -     $ 458,762     $ ( 24,626 )     Applicable dates for determining when securities are in unrealized and unrecognized loss positions are June 30, 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.   31 Table of Contents   For debt securities with unrealized and unrecognized loss positions, 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 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 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 debt securities in unrealized and unrecognized 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 and unrecognized 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 540 and 227 separate investment positions as of June 30, 2022 and December 31, 2021, respectively. There were no credit related factors underlying unrealized and unrecognized losses on debt securities at June 30, 2022 and December 31, 2021.   32 Table of Contents     ( 4 ) Loans and Allowance for Credit Losses on Loans   Composition of loans by class follows:   (in thousands)   June 30, 2022     December 31, 2021                     Commercial real estate - non-owner occupied   $ 1,397,330     $ 1,128,244   Commercial real estate - owner occupied     787,559       678,405   Total commercial real estate     2,184,889       1,806,649                     Commercial and industrial - term     667,338       596,710   Commercial and industrial - term - PPP     36,767       140,734   Commercial and industrial - lines of credit     423,066       370,312   Total commercial and industrial     1,127,171       1,107,756                     Residential real estate - owner occupied     533,577       400,695   Residential real estate - non-owner occupied     293,852       281,018   Total residential real estate     827,429       681,713                     Construction and land development     372,197       299,206   Home equity lines of credit     192,102       138,976   Consumer     137,278       104,294   Leases     14,611       13,622   Credits cards     21,647       17,087   Total loans (1)   $ 4,877,324     $ 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 June 30, 2022 and December  31, 2021, respectively, and was included in the consolidated balance sheets.   Loans with carrying amounts of $ 2.66 billion and $ 2.20 billion were pledged to secure FHLB borrowing capacity at June 30, 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 $ 59 million and $ 54 million as of June 30, 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.   33 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       At June 30, 2022, the book balance of PCD loans acquired as a result of the CB and KB acquisitions totaled $ 69 million and $ 12 million, respectively. Interest income recognized on loans classified as PCD totaled $ 2.0 million and $ 151,000 for the three month periods ended June 30, 2022 and 2021, respectively. For the six month periods ended June 30, 2022 and 2021, interest income recognized on loans classified as PCD totaled $ 2.9 million and $ 151,000 , respectively.   34 Table of Contents   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 June 30, 2022   Balance     Loans     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 20,620     $ -     $ 101     $ -     $ 2     $ 20,723   Commercial real estate - owner occupied     11,326       -       ( 1,464 )     ( 41 )     21       9,842   Total commercial real estate     31,946       -       ( 1,363 )     ( 41 )     23       30,565                                                     Commercial and industrial - term     11,108       -       1,174       ( 15 )     75       12,342   Commercial and industrial - lines of credit     6,508       -       ( 1,508 )     -       -       5,000   Total commercial and industrial     17,616       -       ( 334 )     ( 15 )     75       17,342                                                     Residential real estate - owner occupied     5,363       -       575       ( 7 )     57       5,988   Residential real estate - non-owner occupied     3,361       -       ( 176 )     -       5       3,190   Total residential real estate     8,724       -       399       ( 7 )     62       9,178                                                     Construction and land development     5,864       -       422       ( 72 )     -       6,214   Home equity lines of credit     1,467       -       54       -       -       1,521   Consumer     1,049       -       141       ( 235 )     158       1,113   Leases     211       -       10       -       -       221   Credit cards     190       -       ( 29 )     -       47       208   Total   $ 67,067     $ -     $ ( 700 )   $ ( 370 )   $ 365     $ 66,362     (in thousands)   Beginning     Initial Allowance on PCD     Provision for Credit Losses                     Ending   Six Months Ended June 30, 2022   Balance     Loans     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 15,960     $ 3,508     $ 1,242     $ -     $ 13     $ 20,723   Commercial real estate - owner occupied     9,595       2,121       ( 1,876 )     ( 41 )     43       9,842   Total commercial real estate     25,555       5,629       ( 634 )     ( 41 )     56       30,565                                                     Commercial and industrial - term (1)     8,577       1,358       1,741       ( 128 )     794       12,342   Commercial and industrial - lines of credit     4,802       1,874       ( 1,640 )     ( 36 )     -       5,000   Total commercial and industrial     13,379       3,232       101       ( 164 )     794       17,342                                                     Residential real estate - owner occupied     4,316       590       1,035       ( 13 )     60       5,988   Residential real estate - non-owner occupied     3,677       -       ( 495 )     -       8       3,190   Total residential real estate     7,993       590       540       ( 13 )     68       9,178                                                     Construction and land development     4,789       419       1,078       ( 72 )     -       6,214   Home equity lines of credit     1,044       2       475       -       -       1,521   Consumer     772       78       403       ( 489 )     349       1,113   Leases     204       -       17       -       -       221   Credit cards     162       -       ( 1 )     -       47       208   Total   $ 53,898     $ 9,950     $ 1,979     $ ( 779 )   $ 1,314     $ 66,362     35 Table of Contents   (in thousands)   Beginning     Initial Allowance on PCD     Provision for Credit Losses                     Ending   Three Months Ended June 30, 2021   Balance     Loans     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 20,062     $ 1,491     $ 1,255     $ ( 3,065 )   $ 4     $ 19,747   Commercial real estate - owner occupied     7,065       2,112       ( 184 )     -       555       9,548   Total commercial real estate     27,127       3,603       1,071       ( 3,065 )     559       29,295                                                     Commercial and industrial - term     8,469       1,022       355       ( 114 )     16       9,748   Commercial and industrial - lines of credit     2,983       1,755       502       -       -       5,240   Total commercial and industrial     11,452       2,777       857       ( 114 )     16       14,988                                                     Residential real estate - owner occupied     3,292       142       953       ( 40 )     3       4,350   Residential real estate - non-owner occupied     1,709       88       1,624       -       1       3,422   Total residential real estate     5,001       230       2,577       ( 40 )     4       7,772                                                     Construction and land development     5,527       -       ( 337 )     -       3       5,193   Home equity lines of credit     843       147       239       -       1       1,230   Consumer     395       -       285       ( 223 )     115       572   Leases     235       -       ( 3 )     -       -       232   Credit cards     134       -       8       -       -       142   Total   $ 50,714     $ 6,757     $ 4,697     $ ( 3,442 )   $ 698     $ 59,424     (in thousands)   Beginning     Initial ACL on Loans Purchased with Credit     Provision for Credit Losses                     Ending   Six Months Ended June 30, 2021   Balance     Deterioration     on Loans     Charge-offs     Recoveries     Balance                                                     Commercial real estate - non-owner occupied   $ 19,396     $ 1,491     $ 1,890     $ ( 3,065 )   $ 35     $ 19,747   Commercial real estate - owner occupied     6,983       2,112       ( 102 )     -       555       9,548   Total commercial real estate     26,379       3,603       1,788       ( 3,065 )     590       29,295                                                     Commercial and industrial - term     8,970       1,022       ( 97 )     ( 169 )     22       9,748   Commercial and industrial - lines of credit     3,614       1,755       ( 129 )     -       -       5,240   Total commercial and industrial     12,584       2,777       ( 226 )     ( 169 )     22       14,988                                                     Residential real estate - owner occupied     3,389       142       859       ( 43 )     3       4,350   Residential real estate - non-owner occupied     1,818       88       1,514       -       2       3,422   Total residential real estate     5,207       230       2,373       ( 43 )     5       7,772                                                     Construction and land development     6,119       -       ( 929 )     -       3       5,193   Home equity lines of credit     895       147       187       -       1       1,230   Consumer     340       -       326       ( 287 )     193       572   Leases     261       -       ( 29 )     -       -       232   Credit cards     135       -       7       -       -       142   Total   $ 51,920     $ 6,757     $ 3,497     $ ( 3,564 )   $ 814     $ 59,424     36 Table of Contents   The following table presents the amortized cost basis of non-performing loans and the amortized cost basis of loans on non-accrual status for which there was no related ACL losses:       Non-accrual Loans                     Past Due 90-Days-   (in thousands)   With No     Total     Troubled Debt     or-More and Still   June 30, 2022   Recorded ACL     Non-accrual Loans     Restructurings (1)     Accruing Interest                                     Commercial real estate - non-owner occupied   $ —     $ 647     $ —     $ 27   Commercial real estate - owner occupied     298       1,593       —       528   Total commercial real estate     298       2,240       —       555                                     Commercial and industrial - term     419       1,023       —       224   Commercial and industrial - PPP     —       —       —       33   Commercial and industrial - lines of credit     —       164       —       49   Total commercial and industrial     419       1,187       —       306                                     Residential real estate - owner occupied     1,081       3,348       —       —   Residential real estate - non-owner occupied     —       233       —       180   Total residential real estate     1,081       3,581       —       180                                     Construction and land development     —       —       —       —   Home equity lines of credit     —       378       —       40   Consumer     —       441       —       75   Leases     —       —       —       —   Credit cards     —       —       —       20   Total   $ 1,798     $ 7,827     $ —     $ 1,176     ( 1 ) Does not include TDRs captured in the non-accrual column.          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   37 Table of Contents   For the three and six month periods ended June 30, 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 and six month periods ended June 30, 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   June 30, 2022   Real Estate     Equipment     Other     Total     Allocation                                             Commercial real estate - non-owner occupied   $ 4,216     $ -     $ -     $ 4,216     $ 588   Commercial real estate - owner occupied     3,601       -       -       3,601       851   Total commercial real estate     7,817       -       -       7,817       1,439                                             Commercial and industrial - term     537       485       284       1,306       354   Commercial and industrial - lines of credit     2,008       1,032       -       3,040       770   Total commercial and industrial     2,545       1,517       284       4,346       1,124                                             Residential real estate - owner occupied     4,029       -       -       4,029       370   Residential real estate - non-owner occupied     438       -       -       438       116   Total residential real estate     4,467       -       -       4,467       486                                             Construction and land development     3,852       -       -       3,852       419   Home equity lines of credit     378       -       -       378       -   Consumer     -       -       229       229       19   Leases     -       -       -       -       -   Credit cards     -       -       -       -       -   Total collateral dependent loans   $ 19,059     $ 1,517     $ 513     $ 21,089     $ 3,487       (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     38 Table of Contents   The following tables present the aging of contractually past due loans by portfolio class:   (in thousands)           30-59 days     60-89 days     90 or more     Total     Total   June 30, 2022   Current     Past Due     Past Due     Days Past Due     Past Due     Loans                                                     Commercial real estate - non-owner occupied   $ 1,393,506     $ 3,303     $ 308     $ 213     $ 3,824     $ 1,397,330   Commercial real estate - owner occupied     785,831       446       624       658       1,728       787,559   Total commercial real estate     2,179,337       3,749       932       871       5,552       2,184,889                                                     Commercial and industrial - term     665,752       600       280       706       1,586       667,338   Commercial and industrial - term - PPP     34,421       2,236       77       33       2,346       36,767   Commercial and industrial - lines of credit     421,888       917       176       85       1,178       423,066   Total commercial and industrial     1,122,061       3,753       533       824       5,110       1,127,171                                                     Residential real estate - owner occupied     529,094       1,945       410       2,128       4,483       533,577   Residential real estate - non-owner occupied     292,839       692       46       275       1,013       293,852   Total residential real estate     821,933       2,637       456       2,403       5,496       827,429                                                     Construction and land development     371,869       328       —       —       328       372,197   Home equity lines of credit     191,475       258       184       185       627       192,102   Consumer     136,447       395       84       352       831       137,278   Leases     14,611       —       —       —       —       14,611   Credit cards     21,618       4       5       20       29       21,647   Total   $ 4,859,351     $ 11,124     $ 2,194     $ 4,655     $ 17,973     $ 4,877,324       (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     39 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.   40 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. 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 June 30, 2022, the risk rating of loans based on year of origination was as follows:                                                       Revolving                                                               loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year     amortized           June 30, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Commercial real estate - non-owner occupied:                                                                 Risk rating                                                                 Pass   $ 232,985     $ 390,203     $ 283,758     $ 143,894     $ 82,816     $ 179,300     $ 21,526     $ 1,334,482   OAEM     168       5,740       2,340       19,201       -       5,542       6,095       39,086   Substandard     4,174       298       3,041       8,124       -       7,378       100       23,115   Substandard non-performing     -       -       39       -       -       608       -       647   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate non-owner occupied   $ 237,327     $ 396,241     $ 289,178     $ 171,219     $ 82,816     $ 192,828     $ 27,721     $ 1,397,330                                                                     Commercial real estate - owner occupied:                                                                 Risk rating                                                                 Pass   $ 81,564     $ 206,021     $ 198,696     $ 105,386     $ 73,275     $ 92,744     $ 8,592     $ 766,278   OAEM     -       1,681       1,401       1,942       413       140       1,630       7,207   Substandard     2,279       1,170       -       6,965       1,993       74       -       12,481   Substandard non-performing     -       1,234       -       -       -       359       -       1,593   Doubtful     -       -       -       -       -       -       -       -   Total Commercial real estate owner occupied   $ 83,843     $ 210,106     $ 200,097     $ 114,293     $ 75,681     $ 93,317     $ 10,222     $ 787,559                                                                     Commercial and industrial - term:                                                                 Risk rating                                                                 Pass   $ 119,240     $ 279,221     $ 121,168     $ 51,121     $ 43,235     $ 42,936     $ -     $ 656,921   OAEM     4,043       290       -       387       2,187       4       -       6,911   Substandard     201       1       -       1,742       151       388       -       2,483   Substandard non-performing     448       -       537       -       38       -       -       1,023   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - term   $ 123,932     $ 279,512     $ 121,705     $ 53,250     $ 45,611     $ 43,328     $ -     $ 667,338                                                                     Commercial and industrial - PPP                                                                 Risk rating                                                                 Pass   $ -     $ 31,798     $ 4,969     $ -     $ -     $ -     $ -     $ 36,767   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - PPP   $ -     $ 31,798     $ 4,969     $ -     $ -     $ -     $ -     $ 36,767       (continued)   41 Table of Contents   (continued)                                                       Revolving                                                               loans           (in thousands)   Term Loans Amortized Cost Basis by Origination Year     amortized           June 30, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Commercial and industrial - lines of credit                                                                 Risk rating                                                                 Pass   $ 24,723     $ 20,389     $ 6,400     $ 11,627     $ 1,348     $ 1,425     $ 348,812     $ 414,724   OAEM     -       -       -       -       -       415       4,319       4,734   Substandard     -       -       952       1,950       -       -       542       3,444   Substandard non-performing     -       38       -       -       -       -       126       164   Doubtful     -       -       -       -       -       -       -       -   Total Commercial and industrial - lines of credit   $ 24,723     $ 20,427     $ 7,352     $ 13,577     $ 1,348     $ 1,840     $ 353,799     $ 423,066                                                                     Residential real estate - owner occupied                                                                 Risk rating                                                                 Pass   $ 100,970     $ 196,501     $ 101,346     $ 32,169     $ 17,044     $ 81,166     $ -     $ 529,196   OAEM     -       98       -       80       -       -       -       178   Substandard     -       -       10       -       144       701       -       855   Substandard non-performing     48       202       73       500       299       2,226       -       3,348   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - owner occupied   $ 101,018     $ 196,801     $ 101,429     $ 32,749     $ 17,487     $ 84,093     $ -     $ 533,577                                                                     Residential real estate - non-owner occupied                                                                 Risk rating                                                                 Pass   $ 55,304     $ 88,711     $ 61,711     $ 37,971     $ 20,982     $ 27,693     $ -     $ 292,372   OAEM     -       -       121       271       128       375       -       895   Substandard     -       -       -       -       -       352       -       352   Substandard non-performing     94       23       -       -       -       116       -       233   Doubtful     -       -       -       -       -       -       -       -   Total Residential real estate - non-owner occupied   $ 55,398     $ 88,734     $ 61,832     $ 38,242     $ 21,110     $ 28,536     $ -     $ 293,852                                                                     Construction and land development                                                                 Risk rating                                                                 Pass   $ 107,261     $ 120,471     $ 93,015     $ 15,495     $ 6,116     $ 1,740     $ 24,295     $ 368,393   OAEM     -       -       -       -       -       87       -       87   Substandard     -       340       -       3,090       -       287       -       3,717   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Construction and land development   $ 107,261     $ 120,811     $ 93,015     $ 18,585     $ 6,116     $ 2,114     $ 24,295     $ 372,197                                                                     Home equity lines of credit                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 191,685     $ 191,685   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       39       39   Substandard non-performing     -       -       -       -       -       -       378       378   Doubtful     -       -       -       -       -       -       -       -   Total Home equity lines of credit   $ -     $ -     $ -     $ -     $ -     $ -     $ 192,102     $ 192,102     (continued)   42 Table of Contents   (continued)   (in thousands)   Term Loans Amortized Cost Basis by Origination Year     Revolving loans amortized           June 30, 2022   2022     2021     2020     2019     2018     Prior     cost basis     Total                                                                     Consumer                                                                 Risk rating                                                                 Pass   $ 12,199     $ 21,563     $ 7,733     $ 7,333     $ 3,662     $ 2,829     $ 81,518     $ 136,837   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       49       159       107       21       85       20       441   Doubtful     -       -       -       -       -       -       -       -   Total Consumer   $ 12,199     $ 21,612     $ 7,892     $ 7,440     $ 3,683     $ 2,914     $ 81,538     $ 137,278                                                                     Leases                                                                 Risk rating                                                                 Pass   $ 3,503     $ 4,837     $ 3,041     $ 1,095     $ 962     $ 1,173     $ -     $ 14,611   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Leases   $ 3,503     $ 4,837     $ 3,041     $ 1,095     $ 962     $ 1,173     $ -     $ 14,611                                                                     Credit cards                                                                 Risk rating                                                                 Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 21,647     $ 21,647   OAEM     -       -       -       -       -       -       -       -   Substandard     -       -       -       -       -       -       -       -   Substandard non-performing     -       -       -       -       -       -       -       -   Doubtful     -       -       -       -       -       -       -       -   Total Credit cards   $ -     $ -     $ -     $ -     $ -     $ -     $ 21,647     $ 21,647                                                                     Total loans                                                                 Risk rating                                                                 Pass   $ 737,751     $ 1,359,715     $ 881,837     $ 406,091     $ 249,440     $ 431,005     $ 698,074     $ 4,763,913   OAEM     4,211       7,809       3,862       21,880       2,728       6,563       12,044       59,097   Substandard     6,654       1,808       4,003       21,871       2,288       9,181       682       46,487   Substandard non-performing     589       1,545       807       606       358       3,397       525       7,827   Doubtful     -       -       -       -       -       -       -       -   Total Loans   $ 749,205     $ 1,370,877     $ 890,509     $ 450,448     $ 254,814     $ 450,146     $ 711,325     $ 4,877,324     43 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)   44 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)   45 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:       June 30,     December 31,   (in thousands)   2022     2021                     Credit cards                 Performing   $ 21,647     $ 17,087   Non-performing     —       —   Total credit cards   $ 21,647     $ 17,087     46 Table of Contents   Troubled Debt Restructurings   Detail of outstanding TDRs classified as non-performing loans follows:       June 30, 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   $ 917     $ 202     $ —     $ 950     $ 202     $ —   Commercial & industrial - term     —       —       —       12       12       —   Total TDRs   $ 917     $ 202     $ —     $ 962     $ 214     $ —       During the three and six month periods ended June 30, 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 June 30, 2022 and December 31, 2021.   47 Table of Contents     ( 5 ) Goodwill   As of June 30, 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:       June 30,     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     *The acquisition of The Bank Oldham County in 2013 generated a bargain purchase gain.     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     Six months ended       June 30,     June 30,   (in thousands)   2022     2021     2022     2021   Balance at beginning of period   $ 202,524     $ 12,513     $ 135,830     $ 12,513   Goodwill recorded due to acquisition     —       124,016       66,694       124,016   Provisional period adjustments     —       —       —       —   Impairment     —       —       —       —   Balance at end of period   $ 202,524     $ 136,529     $ 202,524     $ 136,529       As of June 30, 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 six months ended June 30, 2022.   48 Table of Contents     ( 6 ) Core Deposit and Customer List Intangible Assets   Bancorp recorded CDI assets of $ 13 million, $ 4 million, $ 2 million and $ 3 million in association with the acquisitions of CB in 2022, KB in 2021, KSB in 2019 and TBOC in 2013, respectively.   Changes in the net carrying amount of CDIs follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2022     2021     2022     2021   Balance at beginning of period   $ 17,826     $ 1,885     $ 5,596     $ 1,962   Core deposit intangible acquired     —       3,404       12,724       3,404   Provisional period adjustments     —       —       —       —   Amortization     ( 956 )     ( 127 )     ( 1,450 )     ( 204 ) Balance at end of period   $ 16,870     $ 5,162     $ 16,870     $ 5,162       As a result of the CB acquisition, Bancorp also recorded intangible assets totaling $ 14 million associated with the customer lists of the acquired WM&T and LFA businesses. Of this total, $ 12 million was recorded for WM&T and $ 2 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     Six months ended       June 30,     June 30,   (in thousands)   2022     2021     2022     2021   Balance at beginning of period   $ 14,142     $ -     $ -     $ -   Customer list intangibles acquired     —       —       14,360       —   Provisional period adjustments     —       —       —       —   Amortization     ( 655 )     —       ( 873 )     -   Balance at end of period   $ 13,487     $ -     $ 13,487     $ -       Future CDI and CLI amortization expense is estimated as follows:   (in thousands)   CDI     CLI   2022   $ 1,912     $ 1,308   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   $ 16,870     $ 13,487     49   Table of Contents     ( 7 ) Other Assets   A summary of the major components of other assets follows:       June 30,     December 31,   (in thousands)   2022     2021                     Cash surrender value of life insurance other than BOLI   $ 15,297     $ 17,875   Net deferred tax asset     41,138       24,340   Investments in tax credit related ventures     14,626       11,084   Swap assets     6,475       3,148   Prepaid assets     4,016       4,469   Trust fees receivable     3,298       2,868   Mortgage servicing rights     16,504       4,528   Other real estate owned     7,601       7,212   Other     16,967       10,478   Total other assets   $ 125,922     $ 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. ”   For additional information related to MSRs, see the footnote titled “ Mortgage Banking Activities. ”   50   Table of Contents     ( 8 ) Income Taxes   Components of income tax expense (benefit) from operations follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2022     2021     2022     2021   Current income tax expense (benefit):                                 Federal   $ 3,393     $ ( 21 )   $ 3,607     $ 3,472   State     614       24       614       546   Total current income tax expense     4,007       3       4,221       4,018                                     Deferred income tax expense:                                 Federal     2,622       679       3,464       1,516   State     918       182       1,307       791   Total deferred income tax expense     3,540       861       4,771       2,307   Change in valuation allowance     -       -       -       -   Total income tax expense   $ 7,547     $ 864     $ 8,992     $ 6,325       An analysis of the difference between the statutory and ETRs from operations follows:       Three months ended     Six months ended       June 30,     June 30,       2022     2021     2022     2021   U.S. federal statutory income tax rate     21.0 %     21.0 %     21.0 %     21.0 % State income taxes, net of federal benefit     3.5       3.2       3.5       3.1   Excess tax benefit from stock-based compensation arrangements     ( 1.6 )     ( 2.9 )     ( 2.4 )     ( 3.2 ) Change in cash surrender value of life insurance     0.9       ( 4.4 )     1.1       ( 1.1 ) Tax credits     ( 0.5 )     ( 1.2 )     ( 0.7 )     ( 0.6 ) Tax exempt interest income     ( 0.6 )     ( 1.3 )     ( 0.8 )     ( 0.3 ) Non-deductible merger expenses     0.1       4.2       0.3       0.9   Insurance captive     ( 0.2 )     ( 0.4 )     ( 0.4 )     ( 0.1 ) Other, net     ( 0.7 )     ( 1.1 )     ( 1.1 )     ( 0.7 ) Effective tax rate     21.9 %     17.1 %     20.5 %     19.0 %     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 June 30, 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.   51   Table of Contents     ( 9 ) Deposits   The composition of deposits follows:   (in thousands)   June 30, 2022     December 31, 2021                     Non-interest bearing demand deposits   $ 2,121,304     $ 1,755,754   Interest bearing deposits:                 Interest bearing demand     2,184,579       2,131,928   Savings     571,856       415,258   Money market     1,167,538       1,050,352                     Time deposits of $250 thousand or more     95,958       89,745   Other time deposits(1)     407,895       344,477   Total time deposits     503,853       434,222                     Total interest bearing deposits     4,427,826       4,031,760   Total deposits   $ 6,549,130     $ 5,787,514     ( 1 ) Includes $ 10 million and $ 5 million in brokered deposits as of June 30, 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 June 30, 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)   June 30, 2022     December 31, 2021   Outstanding balance at end of period   $ 161,512     $ 75,466   Weighted average interest rate at end of period     0.44 %     0.04 %       Three months ended     Six months ended       June 30,     June 30,   (dollars in thousands)   2022     2021     2022     2021                                     Average outstanding balance during the period   $ 140,169     $ 55,673     $ 115,761     $ 51,330   Average interest rate during the period     0.16 %     0.04 %     0.13 %     0.04 % Maximum outstanding at any month end during the period   $ 161,512     $ 63,942     $ 161,512     $ 63,942       SSUAR totaling $ 66 million were assumed on March 7, 2022 in relation to the CB acquisition.   52   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 July 1, 2022 and carried the note at the costs noted below at June 30, 2022.       Commonwealth Statutory Trust     Commonwealth Statutory Trust     Commonwealth Statutory Trust     Total   (in thousands)   III     IV     V                                             Trust preferred securities   $ 3,093     $ 12,372     $ 11,341     $ 26,806   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 June 30, 2022 and December 31, 2021, available credit from the FHLB totaled $ 1.22 billion and $ 1.00 billion, respectively. Bancorp also had unsecured available FFP lines with correspondent banks totaling $ 100 million and $ 80 million at June 30, 2022 and December 31, 2021, respectively. In addition, Bancorp had borrowing capacity of $ 20 million available through an unsecured borrowing line at the holding company as of June 30, 2022, which was added during the first quarter to allow capital flexibility at the Bank level.   53 Table of Contents     ( 12 )     Commitments and Contingent Liabilities   As of June 30, 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)   June 30, 2022     December 31, 2021   Commercial and industrial   $ 773,639     $ 625,858   Construction and land development     456,863       292,351   Home equity     356,309       247,885   Credit cards     58,391       40,471   Overdrafts     61,377       51,104   Letters of credit     34,877       30,779   Other     93,596       76,721   Future loan commitments     328,977       325,983   Total off balance sheet commitments to extend credit   $ 2,164,029     $ 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 June 30, 2022 and December 31, 2021, Bancorp had accrued $ 4.1 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). Further, provision expense of $ 500,000 and $ 100,000 was recorded for off balance sheet credit exposures for the three and six month periods ended June 30, 2022. The expense recorded for the three month period ended June 30, 2022 was driven largely by the addition of new lines of credit, and thus increased availability, within the C&D portfolio, offsetting the $ 400,000 negative provision that was recorded during the first quarter. Negative provision expense for off balance sheet credit exposures of $ 550,000 and $ 825,000 was recorded for the three and six month periods ended June 30, 2021, respectively, 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 during the prior year.   Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.   Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at June 30, 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 June 30, 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.   54   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   June 30, 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   $ 115,532     $ —     $ —     $ 115,532   Government sponsored enterprise obligations     —       117,703       —       117,703   Mortgage backed securities - government agencies     —       765,522       —       765,522   Obligations of states and political subdivisions     —       135,268       —       135,268   Other     —       6,014       —       6,014                                     Total available for sale debt securities     115,532       1,024,507       —       1,140,039                                     Mortgage loans held for sale     —       10,045       —       10,045   Rate lock loan commitments     —       472       —       472   Mandatory forward contracts     —       44       —       44   Interest rate swaps     —       6,475       —       6,475   Total assets   $ 115,532     $ 1,041,543     $ —     $ 1,157,075                                     Liabilities:                                 Interest rate swaps   $ —     $ 6,487     $ —     $ 6,487     55 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 June 30, 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 June 30, 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.   56 Table of Contents   Carrying values of assets measured at fair value on a non-recurring basis follows:                                       Losses recorded                                       Three months     Six months       Fair Value Measurements Using:     Total     ended     ended   June 30, 2022 (in thousands)   Level 1     Level 2     Level 3     Fair Value     June 30, 2022     June 30, 2022                                                     Collateral dependent loans   $ —     $ —     $ 12,554     $ 12,554     $ —     $ —   Other real estate owned     —       —       7,601       7,601       —       —                                         Losses recorded                                       Three months     Six months       Fair Value Measurements Using:     Total     ended     ended   December 31, 2021 (in thousands)   Level 1     Level 2     Level 3     Fair Value     June 30, 2021     June 30, 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 June 30, 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.       June 30, 2022   (dollars in thousands)   Fair Value   Valuation Technique   Unobservable Inputs   Weighted Average                           Collateral dependent loans   $ 12,554   Appraisal   Appraisal discounts     23.2 % Other real estate owned     7,601   Appraisal   Appraisal discounts     30.7         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     57   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:   June 30, 2022   amount     Fair value     Level 1     Level 2     Level 3                                             Assets                                         Cash and cash equivalents   $ 573,869     $ 573,869     $ 573,869     $ —     $ —   HTM debt securities     485,449       460,846       —       460,846       —   Federal Home Loan Bank stock     13,811       13,811       —       13,811       —   Loans, net     4,810,962       4,699,580       —       —       4,699,580   Accrued interest receivable     17,056       17,056       17,056       —       —                                             Liabilities                                         Non-interest bearing deposits   $ 2,121,304     $ 2,121,304     $ 2,121,304     $ —     $ —   Transaction deposits     3,923,973       3,923,973       —       3,923,973       —   Time deposits     503,853       494,585       —       494,585       —   Securities sold under agreement to repurchase     161,512       161,512       —       161,512       —   Federal funds purchased     8,771       8,771       —       8,771       —   Subordinated debentures     26,144       26,262       —       26,262       —   Accrued interest payable     277       277       277       —       —         (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.   58 Table of Contents       ( 15 ) Mortgage Banking Activities   Mortgage banking activities primarily include residential mortgage originations and servicing.   Effective 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:       Three months ended June 30,     Six months ended June 30,   (in thousands)   2022     2021     2022     2021   Balance, beginning of period:   $ 9,323     $ 6,579     $ 8,614     $ 22,547   Origination of mortgage loans held for sale     43,814       50,692       79,643       119,431   Loans held for sale acquired     -       3,071       3,559       3,071   Proceeds from the sale of mortgage loans held for sale     ( 43,504 )     ( 55,844 )     ( 82,275 )     ( 141,747 ) Net gain on sale of mortgage loans held for sale     412       922       504       2,118   Balance, end of period   $ 10,045     $ 5,420     $ 10,045     $ 5,420       The following table represents the components of Mortgage banking income:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2022     2021     2022     2021                                     Net gain realized on sale of mortgage loans held for sale   $ 412     $ 922     $ 504     $ 2,118   Net change in fair value recognized on loans held for sale     70       -       43       -   Net change in fair value recognized on rate lock loan commitments     797       -       1,189       -   Net change in fair value recognized on forward contracts     ( 814 )     -       ( 635 )     -   Net gain recognized     465       922       1,101       2,118                                     Net loan servicing income     1,215       333       1,917       588   Amortization of mortgage servicing rights     ( 856 )     ( 174 )     ( 1,337 )     ( 426 ) Change in mortgage servicing rights valuation allowance     -       -       -       -   Net servicing income recognized     359       159       580       162                                     Other mortgage banking income     471       222       617       467   Total mortgage banking income   $ 1,295     $ 1,303     $ 2,298     $ 2,747       Activity for capitalized mortgage servicing rights was as follows:       Three months ended     Six months ended       June 30,     June 30,   (in thousands)   2022     2021     2022     2021   Balance at beginning of period   $ 16,877     $ 2,865     $ 4,528     $ 2,710   MSRs acquired     —       1,662       12,676       1,662   Additions for mortgage loans sold     483       304       637       711   Amortization     ( 856 )     ( 174 )     ( 1,337 )     ( 426 ) Impairment     —       —       —       —                                     Balance at end of period   $ 16,504     $ 4,657     $ 16,504     $ 4,657     59 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 June 30, 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 June 30, 2022 and December 31, 2021, as fair value exceeded carrying value.   Total outstanding principal balances of loans serviced for others were $ 2.16 billion and $ 698 million at June 30, 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.   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:       June 30, 2022   (in thousands)   Notional Amount     Fair Value   Included in Mortgage loans held for sale:                 Mortgage loans held for sale, at fair value   $ 9,989     $ 10,045                     Included in other assets:                 Rate lock loan commitments   $ 17,951     $ 472   Mandatory forward contracts     18,459       44     60   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 June 30, 2022                                 Balance, beginning of period   $ ( 57,316 )   $ -     $ ( 283 )   $ ( 57,599 ) Net current period other comprehensive loss     ( 29,738 )     -       -       ( 29,738 ) Balance, end of period   $ ( 87,054 )   $ -     $ ( 283 )   $ ( 87,337 )                                   Three months ended June 30, 2021                                 Balance, beginning of period   $ ( 2,513 )   $ ( 90 )   $ ( 447 )   $ ( 3,050 ) Net current period other comprehensive income     4,808       32       -       4,840   Balance, end of period   $ 2,295     $ ( 58 )   $ ( 447 )   $ 1,790           Net unrealized     Net unrealized     Minimum               gains (losses)     gains (losses)     pension               on available for     on cash     liability           (in thousands)   sale debt securities     flow hedges     adjustment     Total   Six months ended June 30, 2022                                 Balance, beginning of period   $ ( 7,657 )   $ -     $ ( 283 )   $ ( 7,940 ) Net current period other comprehensive loss     ( 79,397 )     -       -       ( 79,397 ) Balance, end of period   $ ( 87,054 )   $ -     $ ( 283 )   $ ( 87,337 )                                   Six months ended June 30, 2021                                 Balance, beginning of period   $ 9,310     $ ( 122 )   $ ( 447 )   $ 8,741   Net current period other comprehensive income (loss)     ( 7,015 )     64       -       ( 6,951 ) Balance, end of period   $ 2,295     $ ( 58 )   $ ( 447 )   $ 1,790         ( 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.   61   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     Six months ended       June 30,     June 30,   (in thousands, except per share data)   2022     2021     2022     2021   Net income available to stockholders   $ 26,794     $ 4,184     $ 34,700     $ 26,894                                     Weighted average shares outstanding - basic     29,131       24,140       28,186       23,489   Dilutive securities     215       239       235       242   Weighted average shares outstanding- diluted     29,346       24,379       28,421       23,731                                     Net income per share - basic   $ 0.92     $ 0.17     $ 1.23     $ 1.14   Net income per share - diluted     0.91       0.17       1.22       1.13       Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:       Three months ended     Six months ended   (shares in thousands)   June 30,     June 30,       2022     2021     2022     2021   Antidilutive SARs     61       29       61       29     62 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 June 30, 2022, there were 379,000 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 %     25.21 % Risk free interest rate     1.98 %     1.23 % 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 six months of 2022 and 2021, respectively, for the purchase of shares upon the vesting of RSUs.   63 Table of Contents   Bancorp has recognized stock-based compensation expense for SARs, RSAs and PSUs within compensation expense and RSUs for directors within other non-interest expense, as follows:       Three months ended June 30, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 94     $ 350     $ 87     $ 526     $ 1,057   Deferred tax benefit     ( 19 )     ( 74 )     ( 18 )     ( 111 )     ( 222 ) Total net expense   $ 75     $ 276     $ 69     $ 415     $ 835           Three months ended June 30, 2021   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 86     $ 337     $ 78     $ 913     $ 1,414   Deferred tax benefit     ( 18 )     ( 71 )     ( 16 )     ( 192 )     ( 297 ) Total net expense   $ 68     $ 266     $ 62     $ 721     $ 1,117           Six months ended June 30, 2022   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 187     $ 682     $ 172     $ 1,007     $ 2,048   Deferred tax benefit     ( 39 )     ( 144 )     ( 36 )     ( 212 )     ( 431 ) Total net expense   $ 148     $ 538     $ 136     $ 795     $ 1,617           Six months ended June 30, 2021   (in thousands)   Stock Appreciation Rights     Restricted Stock Awards     Restricted Stock Units     Performance Stock Units     Total                                             Expense   $ 175     $ 666     $ 154     $ 1,268     $ 2,263   Deferred tax benefit     ( 37 )     ( 140 )     ( 32 )     ( 267 )     ( 476 ) Total net expense   $ 138     $ 526     $ 122     $ 1,001     $ 1,787         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   $ 189     $ 715     $ 159     $ 1,054     $ 2,117   2023     311       1,232       2       1,303       2,848   2024     205       1,002       —       603       1,810   2025     146       763       —       —       909   2026     88       436       —       —       524   2027     10       50       —       —       60   Total estimated expense   $ 949     $ 4,198     $ 161     $ 2,960     $ 8,268     64 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     33      53.29 - 54.91       54.86       —       11.82           Exercised     ( 61 )    15.24 - 36.65       16.69       2,544       2.78           Forfeited     —       —         —       —       —           Outstanding, June 30, 2022     487     $15.24 - $54.91     $ 34.58     $ 12,294     $ 5.83       5.4                                                       Vested and exercisable     349     $15.24 - $50.71     $ 30.84     $ 10,121     $ 4.97       4.4   Unvested     138      35.90 - 54.91       44.06       2,173       8.08       3.3   Outstanding, June 30, 2022     487     $15.24 - $54.91     $ 34.58     $ 12,294     $ 5.83       5.4                                                       Vested in the current year     43     $35.90 - $50.71     $ 39.29     $ 881     $ 6.71             ( 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     36       58.47   Restrictions lapsed and shares released     ( 31 )     40.38   Shares forfeited     ( 3 )     45.15   Unvested at June 30, 2022     101     $ 47.25     65 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       June 30,     December 31,     June 30,     December 31,   (dollars in thousands)   2022     2021     2022     2021                                     Notional amount   $ 141,432     $ 123,983     $ 141,432     $ 123,983   Weighted average maturity (years)     7.6       7.2       7.6       7.2   Fair value   $ 6,475     $ 3,148     $ 6,487     $ 3,162     66 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 June 30, 2022, the adequately-capitalized minimums, including the capital conservation buffer, were a 6.0 % Common Equity Tier 1 Risk-Based Capital ratio, 8.5 % Tier 1 Risk-Based Capital ratio and 10.5 % Total Risk-Based Capital ratio. 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 June 30, 2022, subordinated notes added through the CB acquisition totaled $ 26 million.   Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.   The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:   (dollars in thousands)   Actual     Minimum for adequately capitalized     Minimum for well capitalized   June 30, 2022   Amount     Ratio     Amount     Ratio     Amount     Ratio                                                     Total risk-based capital (1)                                                 Consolidated   $ 701,168       12.27 %   $ 457,306       8.00 %   NA     NA   Bank     662,354       11.63       455,798       8.00     $ 569,747       10.00 %                                                   Common equity tier 1 risk-based capital (1)                                                 Consolidated     617,901       10.81       257,235       4.50     NA     NA   Bank     605,087       10.62       256,386       4.50       370,336       6.50                                                     Tier 1 risk-based capital (1)                                                 Consolidated     643,901       11.26       342,980       6.00     NA     NA   Bank     605,087       10.62       341,848       6.00       455,798       8.00                                                     Leverage (2)                                                 Consolidated     643,901       8.58       300,343       4.00     NA     NA   Bank     605,087       8.06       300,127       4.00       375,159       5.00     67 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   68 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 June 30, 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 June 30, 2022     Three months ended June 30, 2021   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 56,888     $ 96     $ 56,984     $ 41,516     $ 68     $ 41,584   Provision for credit losses     ( 200 )     —       ( 200 )     4,147       —       4,147   Wealth management and trust services     —       9,495       9,495       —       6,858       6,858   All other non-interest income     12,445       —       12,445       8,930       —       8,930   Non-interest expenses     38,876       5,799       44,675       44,481       3,696       48,177   Income before income tax expense     30,657       3,792       34,449       1,818       3,230       5,048   Income tax expense     6,724       823       7,547       190       674       864   Net income     23,933       2,969       26,902       1,628       2,556       4,184   Less net income attributable to NCI     108       —       108       —       —       —   Net income attributable to stockholders   $ 23,825     $ 2,969     $ 26,794     $ 1,628     $ 2,556     $ 4,184                                                     Segment assets   $ 7,550,846     $ 32,259     $ 7,583,105     $ 6,084,185     $ 3,887     $ 6,088,072           Six months ended June 30, 2022     Six months ended June 30, 2021   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total                                                     Net interest income   $ 105,541     $ 203     $ 105,744     $ 79,258     $ 151     $ 79,409   Provision for credit losses     2,079       —       2,079       2,672       —       2,672   Wealth management and trust services     —       17,738       17,738       —       13,106       13,106   All other non-interest income     23,405       —       23,405       16,526       —       16,526   Non-interest expenses     90,566       10,406       100,972       66,177       6,973       73,150   Income before income tax expense     36,301       7,535       43,836       26,935       6,284       33,219   Income tax expense     7,357       1,635       8,992       4,988       1,337       6,325   Net income     28,944       5,900       34,844       21,947       4,947       26,894   Less net income attributable to NCI     144       —       144       —       —       —   Net income attributable to stockholders   $ 28,800     $ 5,900     $ 34,700     $ 21,947     $ 4,947     $ 26,894                                                     Segment assets   $ 7,550,846     $ 32,259     $ 7,583,105     $ 6,084,185     $ 3,887     $ 6,088,072     69 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 June 30, 2022     Three months ended June 30, 2021   (in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 9,495     $ 9,495     $ —     $ 6,858     $ 6,858   Deposit service charges     2,061       —       2,061       1,233       —       1,233   Debit and credit card income     4,748       —       4,748       3,284       —       3,284   Treasury management fees     2,187       —       2,187       1,730       —       1,730   Mortgage banking income(1)     1,295       —       1,295       1,303       —       1,303   Net investment product sales commissions and fees     731       —       731       545       —       545   Bank owned life insurance(1)     270       —       270       206       —       206   Other(2)     1,153       —       1,153       629       —       629   Total non-interest income   $ 12,445     $ 9,495     $ 21,940     $ 8,930     $ 6,858     $ 15,788         Six months ended June 30, 2022     Six months ended June 30, 2021   (Dollars in thousands)   Commercial Banking     WM&T     Total     Commercial Banking     WM&T     Total   Wealth management and trust services   $ —     $ 17,738     $ 17,738     $ —     $ 13,106     $ 13,106   Deposit service charges     3,924       —       3,924       2,177       —       2,177   Debit and credit card income     8,867       —       8,867       5,557       —       5,557   Treasury management fees     4,091       —       4,091       3,270       —       3,270   Mortgage banking income(1)     2,298       —       2,298       2,747       —       2,747   Gain on sale of securities     —       —       —       —       —       —   Net investment product sales commissions and fees     1,338       —       1,338       1,009       —       1,009   Bank owned life insurance(1)     536       —       536       367       —       367   Other(2)     2,351       —       2,351       1,399       —       1,399   Total non-interest income   $ 23,405     $ 17,738     $ 41,143     $ 16,526     $ 13,106     $ 29,632     ( 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.   70 Table of Contents   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 $ 3.3 million and $ 2.9 million at June 30, 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 $ 395,000 and $ 289,000 for the six month periods ended June 30, 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 and six months ended June 30, 2022.   71   Table of Contents     ( 24 ) Leases   Bancorp has operating leases for various branch locations with terms ranging from one year to 18 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)   June 30, 2022     December 31, 2021                     Balance Sheet                 Operating lease right-of-use asset   $ 16,711     $ 14,958   Operating lease liability     18,113       16,408                     Weighted average remaining lease term (years)     8.5       9.4   Weighted average discount rate     2.90 %     3.02 %                   Maturities of lease liabilities:                 One year or less   $ 1,675     $ 2,634   Year two     3,358       2,673   Year three     3,057       2,408   Year four     2,318       1,924   Year five     1,842       1,608   Greater than five years     8,330       7,699   Total lease payments   $ 20,580     $ 18,946   Less imputed interest     2,467       2,538   Total   $ 18,113     $ 16,408         Three months ended     Three months ended   (in thousands)   June 30, 2022     June 30, 2021   Income Statement                 Components of lease expense:                 Operating lease cost   $ 792     $ 520   Variable lease cost     58       62   Less sublease income     24       13   Total lease cost   $ 826     $ 569         Six months ended     Six months ended   (in thousands)   June 30, 2022     June 30, 2021   Income Statement                 Components of lease expense:                 Operating lease cost   $ 1,448     $ 1,007   Variable lease cost     115       113   Less sublease income     48       27   Total lease cost   $ 1,515     $ 1,093         Six months ended     Six months ended   (in thousands)   June 30, 2022     June 30, 2021   Cash flow Statement                 Supplemental cash flow information:                 Operating cash flows from operating leases   $ 1,800     $ 1,190     As of June 30, 2022, Bancorp had not entered into any lease agreements that had yet to commence.   72   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, however, it should be noted that the business of the Captive is immaterial to the overall results of operations and financial condition of Bancorp. All significant inter-company transactions and accounts have been eliminated in consolidation.   SYB, established in 1904, is a state-chartered non-member financial institution that provides services 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 Bancorp, 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 $2,450,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.   As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of three 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., Bancorp 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 40% non-controlling interest is presented within the consolidated financial statements and represents the interest in LFA not owned by Bancorp.   Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying Footnotes presented in Part 1 Item 1 “ Financial Statements ” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year 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,” “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.   73 Table of Contents   Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable regulation.   There is no assurance that any list of risks and uncertainties or risk factors is complete. Factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements include, among other things:     ● Residual impact, if any, of the COVID-19 pandemic on Bancorp’s business, including the impact of the actions taken by governmental authorities to try and contain the pandemic or address the impact of the pandemic on the 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 for loans, ACL for off-balance sheet credit exposures and other estimates;   ● impairment of investment securities, goodwill, MSRs, other intangible assets or DTAs;   ● ability to effectively navigate an economic slowdown or other economic or market disruptions;   ● changes in laws and regulations or the interpretation thereof;   ● changes in fiscal, monetary, and/or regulatory policies;   ● changes in tax polices including but not limited to changes in federal and state statutory rates;   ● behavior of securities and capital markets, including changes in interest rates, market volatility and liquidity;   ● ability to effectively manage capital and liquidity;   ● long-term and short-term interest rate fluctuations, as well as the shape of the 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.   74 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, CB had $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a WM&T Department with total assets under management of approximately $2.65 billion. CB was also the holding company for three unconsolidated Delaware trust subsidiaries and a 60% interest in Landmark Financial Advisors, LLC (LFA). Bancorp became the 100% successor owner of all three trust subsidiaries and also retained the 60% interest in LFA upon acquisition. Bancorp acquired all outstanding common stock of CB, Inc. in a combined stock and cash transaction that resulted in total consideration paid to CB shareholders of $168 million.   Bancorp recorded goodwill of $67 million and incurred pre-tax merger related expenses totaling $19.5 million during the first quarter of 2022 as a result of the CB acquisition.   The acquisition of CB has had a significant impact on the ACL and credit loss provisioning in 2022. In total, the CB acquisition served to increase the ACL on loans by $14 million at acquisition date. This increase consisted of $10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $4.4 million of provision for credit loss expense recorded in relation to the acquired loan portfolio.   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. At the time of acquisition and net of purchase accounting adjustments, KB had $1.27 billion in assets, $755 million in loans, $396 million in investment securities and $1.04 billion in deposits. KB was also the holding company for an insurance captive, which Bancorp retained and renamed SYB Insurance Company, Inc. Bancorp acquired all outstanding common stock of KB in a combined stock and cash transaction that resulted in total consideration paid to KB shareholders of $233 million.   Bancorp recorded goodwill of $123 million and incurred pre-tax merger related expenses totaling $18.1 million for the year 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, the KB acquisition served to increase the ACL by $14 million at acquisition date. This increase consisted of $7 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $7.4 million attributed to the acquired non-PCD portfolio, which represented the acquisition-related credit loss expense at the time of acquisition.   Issued but Not Yet Effective Accounting Standards Updates   For disclosure regarding the impact to Bancorp’s financial statements of issued-but-not-yet-effective ASUs, see the footnote titled “ Summary of Significant Accounting Policies ” of Part I Item 1 “ Financial Statements .”   75 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 June 30, 2022 and 2021:   (dollars in thousands, except per share data)                   Variance   Three months ended June 30 ,   2022     2021     $/bp     %                                     Net income attributed to stockholders   $ 26,794     $ 4,184     $ 22,610       540 % Diluted earnings per share   $ 0.91     $ 0.17     $ 0.74       435 % ROA     1.40 %     0.32 %   108 bps       338 % ROE     14.34 %     3.25 %   1,109 bps       341 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the three months ended June 30, 2022 compared to June 30, 2021:     ● Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in total assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits. Given the timing of the acquisition, the three months ended June 30, 2022 represented the first full quarter of activity associated with the CB acquisition. There were no one-time merger related expenses recorded for the three months ended June 30, 2022.   ● Bancorp also completed its acquisition of KB on May 31, 2021. At the time of acquisition and net of purchase accounting adjustments, KB had approximately $1.27 billion in assets, $755 million in loans, $396 million in investment securities and $1.04 billion in deposits, further contributing to the substantial balance sheet growth experienced over the past twelve months. Given the timing of the acquisition, the three months ended June 30, 2021 included only one month of activity associated with the KB acquisition and included $18.1 million of one-time merger related expenses in addition to $7.4 million in credit loss expense associated with the acquired loan portfolio.   ● Net income totaled $26.8 million, resulting in diluted EPS of $0.91 for the three months ended June 30, 2022, a significant increase over $0.17 for the same period of 2021, which included the acquisition related charges mentioned above. Significant factors affecting the results for the three months ended June 30, 2022 and 2021 include:   o The three months ended June 30, 2022 represented the first full quarter of activity related to the CB acquisition. No one-time merger related expenses were recorded during the period.   o The three months ended June 30, 2021 represented only one month of activity related to the KB acquisition and included $18.1 million of one-time merger related expenses and $7.4 million in credit loss expense related to the acquired loan portfolio.   o Net interest income increased $15.4 million, or 37%, for the three months ended June 30, 2022 compared to the same period of 2021, as both acquisition-related growth and organic growth in loans and investment securities overcame a substantial decline in PPP-related fee recognition.   76 Table of Contents     o Negative provision for credit losses of $200,000 was recorded for the three months ended June 30, 2022 compared to expense of $4.1 million for the same period of last year. The negative provision recorded for the three months ended June 30, 2022 was driven mainly by the release of $3.0 million in specific reserves associated with recently acquired loans. The expense recorded for the prior year was driven by the KB acquisition, which was completed in the second quarter of 2021.   ● NIM decreased 16 bps to 3.20% for the three months ended June 30, 2022 compared to 3.36% for the same period in 2021. Recent interest rate actions from the FRB have had a positive impact on net interest income and NIM, but the full effects of rising rates were not realized during the three months ended June 30, 2022 due to the timing of the rate increases. Bancorp expects to realize further benefits to net interest income and NIM from both the recent hikes and anticipated future hikes in the quarters ahead.   ● Total loans (excluding PPP loans) increased $1.01 billion, or 26%, compared to June 30, 2021, driven by the addition of $630 million in loans during the first quarter of 2022 in relation to the CB acquisition and strong organic growth. Average loans (excluding PPP loans) increased $1.46 billion, or 44%, for the three months ended June 30, 2022 compared to the same period in 2021. Average balance growth was driven by the CB acquisition noted above and strong organic growth in addition to $755 million in loans added through the KB acquisition on May 31, 2021, the effect of which was only partially captured in the prior year average balances due to the timing of the acquisition.   ● The PPP loan portfolio decreased $340 million, or 90%, compared to June 30, 2021 as the result of anticipated forgiveness activity, driving a $5.8 million, or 83%, decline in PPP-related interest and fee income for the three months ended June 30, 2022 compared to the same period of 2021.   ● Negative provision for credit losses of $200,000 was recorded for the three months ended June 30, 2022 compared to total expense of $4.1 million for the same period of last year. The release of approximately $3.0 million of specific reserves related to recently acquired loans was the main driver of the negative provision recorded for the three months ended June 30, 2022, which more than offset expense associated with a deteriorating unemployment forecast and qualitative factor adjustments within the CECL model. Expense recorded for the prior year period was attributed to the loan portfolio acquired through the KB acquisition.   ● Bancorp’s ACL on loans to total loans was 1.36% at June 30, 2022 compared to 1.29% at December 31, 2021, the increase stemming from acquisition-related activity within the ACL on loans.   ● Deposit balances increased $1.29 billion, or 25%, compared to June 30, 2021, as a result of assuming approximately $1.12 billion in deposits during the first quarter in relation to the CB acquisition. The growth stemming from the first quarter CB acquisition was partially offset during the second quarter as a result of anticipated seasonal deposit runoff related mainly to public fund deposits, customer tax payment activity and time deposit maturities.   ● Total non-interest income increased $6.2 million, or 39%, for the three month period ended June 30, 2022 compared to the same period of 2021. The second quarter of 2022 benefitted from both significant contributions stemming from acquisition-related activity and organic growth over the past twelve months. All non-interest income revenue streams experienced significant increases over the same quarter of the prior year, with the exception of mortgage banking, which was flat compared to the prior year period.   ● Non-interest expenses decreased $3.5 million, or 7%, for the three months ended June 30, 2022 compared to the same period of 2021, remaining controlled and generally in line with expectations.   ● Bancorp’s efficiency ratio (FTE) for the three month period ended June 30, 2022 was 56.42%, while the ratio for the same period of the prior year was 83.86%, the latter reflecting one-time merger-related expenses attributed to the KB acquisition. Excluding these non-recurring expenses and amortization of investments in tax credit partnerships, the adjusted efficiency ratio, a non-GAAP measure, would have been 56.31% and 51.95% for the three months ended June 30, 2022 and 2021, respectively. See the section titled “ Non-GAAP Financial Measures ” for reconcilement of non-GAAP to GAAP measures.   77 Table of Contents   The following table presents an overview of Bancorp’s financial performance for the six months ended June 30, 2022 and 2021:   (dollars in thousands, except per share data)                   Variance   Six months ended June 30 ,   2022     2021     $/bp     %                                     Net income attributed to stockholders   $ 34,700     $ 26,894     $ 7,806       29 % Diluted earnings per share   $ 1.22     $ 1.13     $ 0.09       8 % ROA     0.96 %     1.09 %   (13) bps       -12 % ROE     9.62 %     11.28 %   (166) bps       -15 %   Additional discussion follows under the section titled “ Results of Operations. ”   General highlights for the six months ended June 30, 2022 compared to June 30, 2021:     ● Bancorp completed its acquisition of CB on March 7, 2022. At the time of acquisition and net of purchase accounting adjustments, CB had approximately $1.34 billion in assets, $632 million in loans, $247 million in investment securities and $1.12 billion in deposits. Given the timing of the acquisition, the six months ended June 30, 2022 did not include a full six months of activity associated with the CB acquisition. Further, $19.5 million in one-time merger related expenses were recorded in the first quarter of 2022 in addition to $4.4 million of credit loss expense associated with the acquired loan portfolio.   ● Bancorp also completed its acquisition of KB on May 31, 2021. At the time of acquisition and net of purchase accounting adjustments, KB had approximately $1.27 billion in assets, $755 million in loans, $396 million in investment securities and $1.04 billion in deposits at the time of acquisition last year. Given the timing of the acquisition, the six months ended June 30, 2021 only represented one month of activity associated with the KB acquisition and included $18.5 million of one-time merger related expenses in addition to $7.4 million in credit loss expense associated with the acquired loan portfolio.   ● Net income totaled $34.7 million, resulting in diluted EPS of $1.22 for the six months ended June 30, 2022, an 8% increase over $1.13 for the same period of 2021. Significant factors affecting the results for the six months ended June 30, 2022 and 2021 include:   o The six months ended June 30, 2022 represented approximately four months of activity related to the CB acquisition, including $19.5 million in one-time merger related expenses and $4.4 million of credit loss expense related to the acquired loan portfolio.   o The six months ended June 30, 2021 represented only one month of activity related to the KB acquisition and included $18.5 million of one-time merger related expenses and $7.4 million in credit loss expense related to the acquired loan portfolio.   o Net interest income increased $26.3 million, or 33%, for the six months ended June 30, 2022 compared to the same period of 2021, as both acquisition-related growth and organic growth in loans and investment securities overcame a substantial decline in PPP-related fee recognition.   o Total provision for credit loss expense was $2.1 million for the six months ended June 30, 2022 compared to $2.7 million for the same period of last year. The expense recorded for both periods was driven by the respective acquisitions.   ●