The acronyms and abbreviations identified in alphabetical order below are used throughout this Report on Form 10-Q:

~~September 30, 2021~~March 31, 2022 (unaudited) and December 31, ~~2020~~2021 (in thousands, except share data)

See accompanying notes to unaudited condensed consolidated financial statements.

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial ~~statements~~statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands, except per share data)

See accompanying notes to unaudited condensed consolidated financial statements.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2022 and 2021 ~~and 2020~~ (in thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

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 6373 full service banking center locations.

Bancorp is divided into ~~two~~2 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 $~~2,300,000,~~2,400,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following unconsolidated Delaware trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS.

Also as a result of its acquisition of Commonwealth Bancshares, Inc., the Company acquired a 60% interest in Landmark Financial Advisors, LLC (“LFA”), which is based in Bowling Green, Kentucky and provides wealth management services. LFA is consolidated into the Company. The noncontrolling interest within the consolidated financial statements represents the interest in LFA not owned by the Company.

Principles of Consolidation and Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Intercompany transactions have been eliminated. These condensed consolidated financial statements should be read in conjunction with Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021. Operating results for the three ~~and~~ ~~nine~~months ended ~~September~~March 31, 2022 ~~30,~~~~2021~~are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2021.~~2022.

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, the accounting ~~policy~~policies considered the most critical in preparing Bancorp’s consolidated financial statements isare the determination of the ACL ~~for loans.~~on loans and goodwill.

Effective January 1, 2020, Bancorp adopted ASC 326 “Financial Instruments – Credit Losses,” which created material changes to Bancorp’s existing critical accounting policy that existed at December 31, 2019. Accounting policies relating to credit losses for HTM investment securities, loans and off-balance sheet credit exposures reflect the current accounting policies required by this ASC.

The ACL for loans is established through credit loss expense charged to current earnings. The amount maintained in the ACL reflects management’s estimate of the net amount not expected to be collected on the loan portfolio at the balance sheet date over the life of the loan. The ACL is comprised of specific reserves assigned to certain loans that do not share general risk characteristics and general reserves on pools of loans that do share general risk characteristics. Factors contributing to the determination of specific reserves include the creditworthiness of the borrower and more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. A specific reserve is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral-dependent loans.

For purposes of establishing the general reserve, Bancorp stratifies the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and calculates the net amount expected to be collected over the life of the loans to estimate the credit losses in the loan portfolio. Bancorp’s methodologies for estimating the ACL for loans consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts.

Accounting for Business Acquisitions – Bancorp accounts for acquisitions in accordance with the acquisition method as outlined in ASC Topic 805, “Business Combinations.” The acquisition method requires: a) identification of the entity that obtains control of the acquiree; b) determination of the acquisition date; c) recognition and measurement of the identifiable assets acquired and liabilities assumed, and any non-controlling interest in the acquiree; and d) recognition and measurement of goodwill or bargain purchase gain.

Identifiable assets acquired, liabilities assumed, and any non-controlling interest in acquirees are generally recognized at their acquisition-date (“day-one”) fair values based on the requirements of ASC Topic 820, “Fair Value Measurements and Disclosures.” The measurement period for day-one fair values begins on the acquisition date and ends at the earlier of: (a) the day management believes it has all the information necessary to determine day-one fair values; or (b) one year following the acquisition date. In many cases, the determination of day-one fair values requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly complex and subjective in nature and subject to recast adjustments, which are retrospective adjustments to reflect new information existing at the acquisition date affecting day-one fair values. More specifically, these recast adjustments may be made, as market value data, such as valuations, are received by the Bank. Increases or decreases to day-one fair values are reflected with a corresponding increase or decrease to bargain purchase gain or goodwill.

Acquisition related costs are expensed as incurred unless those costs are related to issuing debt or equity securities used to finance the acquisition.

Cash Equivalents – Cash and cash equivalents include cash and due from banks, FFS and interest bearing due from banks as segregated in the accompanying consolidated balance sheets.

Debt Securities – Bancorp determines the classification of debt securities at the time of purchase. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Debt securities not classified as held to maturity are classified as AFS and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in AOCI, net of tax. ~~All debt securities were classified as AFS at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020.~~

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. Amortization of premiums and discounts are recognized in interest income over the period to maturity using the interest method, except for premiums on callable debt securities, which are amortized to their earliest call date.

Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of debt securities and reports accrued interest separately in the consolidated balance sheets. A debt security is placed on non-accrual status at the time any principal or interest payments become more than 90 days delinquent or if full collection of interest or principal becomes uncertain. Accrued interest for a security placed on non-accrual is reversed against interest income. There was no accrued interest related to ~~AFS~~ debt securities reversed against interest income for the three ~~and~~ ~~nine~~month periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~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.

Changes in the ACL for AFS debt securities are recorded as expense. Losses are charged against the ACL for AFS debt securities when management believes the uncollectability of an AFS debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

ACL – HTM Debt Securities– Bancorp measures expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities totaled $771,000 and $0 as of March 31, 2022 and December 31, 2021, respectively and is excluded from the ACL on HTM securities. The estimate of the ACL for HTM securities considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. As of both March 31, 2022 and December 31, 2021, 0 ACL for HTM securities was recorded.

Mortgage Loans Held for Sale and Mortgage Banking Activities – ~~Mortgages~~As of March 31, 2022, mortgages originated and intended for sale in the secondary market are ~~recorded~~carried at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale as of December 31, 2021 and prior were carried at the lower of cost or market value. Net gains on mortgage loans held for sale are recorded as a component of Mortgage banking income and represent the difference between the selling price and the carrying value of the loans sold. Substantially all of the gains or losses on ~~an individual loan basis, as determined by outstanding commitments from investors.~~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.

Mortgage loans held for sale are generally sold with the MSRs retained. When mortgage loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded as component of Mortgage banking income. Fair value is based on the market prices for comparable mortgage servicing contracts when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into Mortgage banking income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Amortization of MSRs are initially set at seven years and are periodically adjusted based on the weighted average remaining life of the underlying loans.

A primary factor influencing the fair value is the estimated life of the underlying serviced loans. The estimated life of the serviced loans is significantly influenced by market interest rates. During a period of declining interest rates, the fair value of the MSRs generally decline due to higher expected prepayments within the portfolio. Alternatively, during a period of rising interest rates, the fair value of MSRs generally will increase, as prepayments on the underlying loans would be expected to decline.

Loan servicing income is reported on the income statement as a component of Mortgage banking income. Loan servicing income is recorded as loan payments are collected and includes servicing fees from investors and certain charges collected from borrowers. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. Late fees and ancillary fees related to loan servicing are considered nominal.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost basis, which is the unpaid principal balance outstanding, net of unearned income, deferred loan fees and costs, premiums and discounts associated with acquisition date fair value adjustments on acquired loans and any direct partial charge-offs. Bancorp has made a policy election to exclude accrued interest from the amortized cost basis of loans and report accrued interest separately from the related loan balance in the consolidated balance sheets.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income over the life of the loan without anticipating prepayments.

Loans are considered past due or delinquent when the contractual principal and/or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. The accrual of interest income on loans is typically discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection, or if full collection of interest or principal becomes doubtful. Consumer loans are typically charged off no later than 120 days past due. All interest accrued but not received for a loan placed on non-accrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Acquired loans are recorded at fair value at the date of acquisition based on a DCF methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting Bancorp’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while certain purchased loans are grouped together according to similar risk characteristics and are treated in aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective, as they require material estimates, all of which may be susceptible to significant change.

~~Prior to~~ ~~January 1, 2020,~~ loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that Bancorp would be unable to collect all contractually required payments receivable were considered PCI. PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial ACL based on a DCF methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or ~~not~~ the loan was amortizing, and a discount rate reflecting Bancorp’s assessment of risk inherent in the cash flow estimates. The difference between the DCFs expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceed the DCFs expected at acquisition, or the “non-accretable difference,” were ~~not~~ ~~recognized on the balance sheet and did~~ ~~not~~ result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. ACLs on PCI loans reflected only losses incurred post-acquisition (meaning the PV of all cash flows expected at acquisition that ultimately were ~~not~~ ~~expected to be received).~~

Subsequent to January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered PCD loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial ACL is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial ACL is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to non-credit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.

Acquired loans are determined by Bancorp to have more-than-insignificant deterioration in credit quality since origination if any of the following designations apply, listed in order of priority as follows: Loans individually analyzed by Bancorp and determined to have a collateral or cash flow deficiency resulting in a full or partial allocation for loss, loans placed on non-accrual status by the acquired institution, loans identified as TDRs by the acquired institution, loans that have received a partial charge off by the acquired institution, loans risk-rated below a “pass” grade by the acquired institution and any loans past due 59 days or more at the time of acquisition.

For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are ~~recognized as~~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.

~~Bancorp adopted ASC~~ ~~326,~~“~~Financial Instruments~~ – ~~Credit Losses~~~~,” effective~~ ~~January 1, 2020~~ ~~using the modified retrospective approach. Results for the periods subsequent to~~ ~~January 1, 2020~~ ~~are presented under ASC~~ ~~326,~~ while prior period amounts continue to be reported in accordance with previously applicable GAAP. Bancorp recorded a net reduction of retained earnings of $8.8 million upon adoption. The transition adjustment included an increase in the ACL for loans of $8.2 million and an increase in the ACL for off-balance sheet credit exposures of $3.5 million, net of the total corresponding DTA increase of $2.9 million.

~~Bancorp adopted ASC~~ ~~326~~ ~~using the prospective transition approach for loans purchased with PCD that were previously classified as PCI and accounted for under ASC~~ ~~310~~-~~30.~~ ~~In accordance with the standard, management did~~ ~~not~~ ~~reassess whether PCI loans met the criteria of PCD loans as of the adoption date. On~~ ~~January 1, 2020,~~ non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassified between the amortized cost basis of loans and corresponding ACL. The majority of these marks were subsequently charged off in the ~~third~~ ~~quarter of~~ ~~2020.~~

~~The following table summarizes the impact of the adoption of ASC~~ ~~326~~ ~~effective~~ ~~January 1, 2020:~~

(1) – ~~The impact of the ASC~~ ~~326~~ adoption on the ACL for loans reflects $8.2 million related to the transition from the incurred loss ACL model to the CECL ACL model and $1.6 million related to the transition from PCI to PCD methodology as defined in the standard.

ACL – Loans – Under the CECL model, the ACL 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).

Construction and Land Development – Consists of loans to finance the ground up construction or improvement of owner occupied and non-owner occupied residential and commercial properties and loans secured by raw or improved land. The repayment of C&D loans is generally dependent upon the successful completion of the improvements by the builder for the end user, the leasing of the property, or sale of the property to a third party. Repayment of land secured loans is dependent upon the successful development and sale of the property, the sale of the land as is, or the outside cash flow of the owners to support the retirement of the debt. Bancorp’s construction loans may convert to real estate-secured loans once construction is completed or principal amortization payments begin, assuming the borrower retains financing with the Bank.

Commercial and Industrial – Represents loans for C&I purposes to sole proprietorships, partnerships, corporations and other business enterprises, whether secured (other than those that meet the definition of a “loan secured by real estate”) or unsecured, single payment or installment. This category includes loans originated for financing capital expenditures, loans secured by accounts receivable, inventory and other business assets such as equipment, non-real estate related construction loans in addition to non-real estate loans guaranteed by the SBA. Bancorp originates these loans for a variety of purposes across various industries. This portfolio has been segregated between term loans and revolving lines of credits based on the varied characteristics of these individual loan structures.

Residential Real Estate – Includes non-revolving (closed-end) first and junior lien loans secured by residential real estate primarily in Bancorp’s market areas. This portfolio is segregated between owner occupied and non-owner occupied status, as the investment nature of the latter poses additional credit risks to Bancorp.

Home Equity Lines of Credit – Similar to ~~the~~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.

Bancorp measures expected credit losses for its loan portfolio segments as follows:

Discounted Cash flow Method – The DCF methodology is used to develop cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, time to recovery, probability of default and loss given default. The modeling of expected prepayment speeds, curtailment rates and time to recovery are based on historical internal data.

Bancorp uses regression analysis on historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes the FRB’s forecasted Seasonally Adjusted National Civilian Unemployment Rate as its primary loss driver, as this was determined to best correlate to historical losses.

With regard to the DCF model and the adoption of CECL effective January 1, 2020, management determined that four quarters represented a reasonable and supportable forecast period with reversion back to a historical loss rate over eight quarters on a straight-line basis. However, in response to uncertainty surrounding the magnitude and duration of the economic crisis created by the pandemic, management subsequently determined that a one-quarter forecast period with a reversion back to a historical loss rate in the following quarter was appropriate for the calculation performed at March 31, 2020. For the calculation performed at June 30, 2020, management elected to return to the four quarter forecast period with reversion back to a historical loss rate in the following quarter, which 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 ~~have normalized.~~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.

In ~~March 2020,~~ ~~the CARES Act was signed into law. Section~~ ~~4013~~ ~~of the CARES Act, “~~~~Temporary Relief from Troubled Debt Restructurings,~~~~” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to TDRs for a limited period of time to account for the effects of COVID-~~~~19.~~ ~~To qualify for Section~~ ~~4013~~ ~~of the CARES Act, borrowers must have been current at~~ ~~December 31, 2019.~~ ~~All modifications were originally eligible as long as they were executed between~~ ~~March 1, 2020~~ ~~and the earlier of (i)~~ ~~December 31, 2020~~ ~~or (ii) the~~ ~~60th~~ ~~day after the end of the COVID-~~19 ~~national emergency as declared by the President of the United States. The Consolidated Appropriations Act, which was signed into law on~~ ~~December 27, 2020,~~ ~~extended this provision to the earlier of (~~1) 60 ~~days after the national emergency termination date or (~~2) ~~January 1, 2022.~~ ~~Multiple modifications of the same credits are allowed and there is~~ no ~~cap on the duration of the modification. The impact of such activity is discussed in the section of this document titled, “~~~~Management~~’~~s Discussion and Analysis of Financial Condition and Results of Operations~~.”

Premises and Equipment – Premises and equipment are carried at cost, less accumulated depreciation and amortization. Depreciation of premises and equipment is computed using straight-line methods over the estimated useful lives of the assets ranging from 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.

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.

~~All~~Currently, goodwill recorded on Bancorp’s consolidated balance sheets is ~~attributable~~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 ~~acquisition~~acquisitions is not deductible for tax purposes, as ~~it was~~both were structured as stock ~~sale.~~sales. Based on its assessment, Bancorp believes its goodwill ~~balance~~balances at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020~~2021 ~~was~~were not impaired and isare properly recorded in the consolidated financial statements.

Other intangible assets consist of CDI and CLI assets arising from business acquisitions. The CDI and CLI assets represent customer relationships associated with acquired deposit portfolios and WM&T businesses, respectively. CDI and CLI assets are initially measured at fair value and then amortized on an accelerated method over their estimated useful lives.

Other Assets – BOLI and other life insurance policies are carried at net realizable value, which considers applicable surrender charges. Also, Bancorp maintains life insurance policies in conjunction with its non-qualified defined benefit and non-qualified compensation plans.

OREO is carried at the lower of cost or estimated fair value minus estimated selling costs. In certain situations, improvements to prepare assets for sale are capitalized if those costs increase the estimated fair value of the asset. Expenses incurred in maintaining assets, write downs to reflect subsequent declines in value, and realized gains or losses are reflected in the results of operations and are included in non-interest income and/or expense.

MSRs are initially recorded at fair value and amortized in proportion to, and over the period of, estimated net servicing income, considering appropriate prepayment assumptions and are evaluated quarterly for impairment by comparing the carrying value to fair value.

Off-Balance Sheet Credit Exposures – Financial instruments include off-balance sheet credit instruments, such as commitments to originate loans, commitments to fund existing loans and commercial letters of credit issued to meet customer-financing needs. Off-balance sheet refers to assets or liabilities that do not appear on a company's balance sheet. Bancorp’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

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.

For derivatives designated as cash flow hedges, the effective portion of changes in fair value of the derivative is initially reported in ~~OCI~~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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. Bancorp does not use derivatives for trading or speculative purposes. See the Footnote titled “Derivative Financial Instruments” for additional discussion.

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from Bancorp, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and Bancorp does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Stock-Based Compensation – For all awards, stock-based compensation expense is recognized over the period in which it is earned based on the grant-date fair value of the portion of stock-based payment awards that are ultimately expected to vest, reduced for estimated forfeitures at the time of grant. GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in DTAs and DTLs. DTAs and DTLs are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted statutory tax rates. A valuation allowance, if needed, reduces DTAs to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more-likely-than-not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the “more-likely-than-not” test, no tax benefit is recorded.

Bancorp recognizes interest and/or penalties related to income tax matters in income tax expense, if any.

Bancorp periodically invests in certain partnerships with customers that yield historic tax credits, accounted for using the flow through method, which approximates the equity method. Also, low-income housing tax credits, as well as tax-deductible losses, are accounted for using the effective yield method for older transactions or proportional amortization method for more recent transactions. The tax benefit of these investments exceeds the amortization expense associated with them, resulting in a positive impact on net income.

Net Income Per Share – Basic net income per common share is determined by dividing net income by the weighted average number of shares of common stock outstanding. Diluted net income per share is determined by dividing net income by the weighted average number of shares of common stock outstanding plus the weighted average number of shares that would be issued upon exercise of dilutive options and SARs, assuming proceeds are used to repurchase shares under the treasury stock method.

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 ~~from non-owner sources.~~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 ~~September 30, 2021.~~March 31, 2022.

The Company’s captive maintains cash reserves to cover insurable claims. Reserves totaled ~~$400,000~~$200,000 as of ~~September 30, 2021.~~March 31, 2022.

Dividend Restrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Holding Company or by the Holding Company to shareholders.

Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions, as disclosed in the Footnote titled “Assets and Liabilities Measured and Reported at Fair Value” in this section of the filing. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect such estimates.

Revenue from Contracts with Customers – On ~~January 1, 2018,~~ ~~Bancorp adopted ASU~~ ~~2014~~-~~09,~~ “~~Revenue from Contracts with Customers,~~”~~and all subsequent amendments to the ASU (collectively, “ASC~~ ~~606”~~~~). While this update modified guidance for recognizing revenue, it did~~ ~~not~~ ~~have a material impact on the timing or presentation of Bancorp’s revenue.~~ The majority of Bancorp’s revenue comes from interest income and other sources, including loans, leases, securities, and derivatives, which are not subject to ASC 606. Bancorp’s services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as Bancorp satisfies its obligation to its customer.

Segment Information – Bancorp provides a broad range of financial services to individuals, corporations and others through its full service banking locations. These services include loan and deposit services, cash management services, securities brokerage activities, mortgage origination and WM&T activities. Bancorp’s operations are considered by management to be aggregated in two reportable operating segments: Commercial Banking and WM&T.

Reclassifications – Certain amounts presented in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported prior periods’ net income or shareholders’ equity.

Adoption of New Accounting ~~Standards~~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 if~~reform. The main provisions include:

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 ~~criteria~~optional expedients that are ~~met.~~retained through the end of the hedging relationship. The amendments in this ~~update~~ASU are effective ~~for all entities as of~~ March 12, 2020 through December 31, 2022.

In October 2020, the FASB issued ASU No.2020-10,Codification Improvements. The amendments improve codification by having all disclosure-related guidance available in the disclosure sections of the codification. Prior to this ASU, various disclosure requirements or options to present information on the face of the financial statements or as a note to the financial statements were not included in the appropriate disclosure sections of the codification. The codification improvements also contain various other minor amendments to codification that are not expected to have a significant effect on current accounting practice. The amendments became effective for annual periods beginning after December 15, 2020.

In May 2020, the SEC issued a final rule related to acquisitions and dispositions of businesses and related pro forma information. The rule revised the circumstances that require financial statements and related pro forma information for acquisitions and dispositions of businesses. The intent of the rule is to allow for more meaningful conclusions on when an acquired or disposed business is significant as well as to improve the related disclosure requirements. The changes are intended to improve disclosure. The final rule was effective January 1, 2021.

Accounting Standards Updates – Generally, if an issued but not yet effective ASU with an expected immaterial impact to Bancorp has been disclosed in prior SEC filings, it will not be re-disclosed.

In March 2022, the FASB issued ASU 2022-02,“Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 eliminates the accounting guidance for TDRs in ASC 310-40,“Receivables – Troubled Debt Restructurings by Creditors” for entities that have adopted the CECL model introduced by ASU 2016-13,“Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2022-02 also requires that public business entities disclose current-period gross charge offs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 326-20,“Financial Intsruments – Credit Losses – Mesasured at Amortized Cost.” The new guidance will not have a material impact on the consolidated financial statements.

In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Financial Instruments - Credit Losses (ASC 326), Derivatives and Hedging (ASC 815), and Financial Instruments (ASC 825).” The amendments in the ASU improve the Codification by eliminating inconsistencies and providing clarifications. The amended guidance in this ASU related to the credit losses will be effective for Bancorp’s for fiscal years and interim periods beginning after December 15, 2022. Bancorp is currently evaluating the impact of the ASU on the Company’s consolidated financial statements.

In August 2021, the FASB issued ASU 2021-06,Presentation of Financial Statements (Topic 205), Financial Services – Depository and Lending (Topic 942), and Financial Services – Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.33-10786,Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835,Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The amendments in this update are effective upon addition to the FASB Codification and will not have a material impact on the consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08,Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities From Contracts With Customers, to address diversity in practice and inconsistency related to the accounting for revenue contracts with customers acquired in a business combination. The amendments require that the acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The ASU also provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination and applies to contract assets and contract liabilities from other contracts to which the provisions of Topic 606 apply. The amendments in this update are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. Entities should apply the amendments prospectively to business combinations that occur after the effective date. Early adoption is permitted, including any interim period, for public business entities for periods which financial statements have not yet been issued, and for all other entities for periods for which financial statements have not yet been made available for issuance. The new guidance will not have a material impact on the consolidated financial statements.

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Acquisition

Commonwealth Bancshares, Inc.

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. in a combined stock and cash transaction for total consideration of $168 million. Bancorp acquired 15 retail branches, including 9 in Jefferson County, 4 in Shelby County, and 2 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		$	0			$	—	$	380,450
Mortgage loans held for sale		3,559			0				—		3,559
Available for sale debt securities (2)		247,209			(416	)	a		—		246,793
Federal Home Loan Bank stock, at cost		4,436			0				—		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			0				—		1,973
Goodwill		5,412			(5,412	)	e		—		—
Core deposit intangible		0			12,724		f		—		12,724
Customer list intangibles		0			14,360		g		—		14,360
Mortgage servicing rights		9,387			3,289		h		—		12,676
Deferred income taxes, net		0			(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		$	0			$	—	$	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			0				—		66,220
Subordinated debentures		26,806			(794	)	l		—		26,012
Line of credit		3,200			0				—		3,200
Accrued interest payable		243			0				—		243
Other liabilities		17,822			1,296		m		—		19,118
Total liabilities assumed		1,234,723			873				—		1,235,596
Net assets acquired	$	85,325		$	15,894			$	-	$	101,219

Consideration for common stock										$	133,825
Cash consideration paid											30,994
Noncontrolling interest of acquired entity											3,094
Total consideration										$	167,913

Goodwill										$	66,694

(1)	See the following page for explanations or individual fair value and provisional period adjustments.
(2)	As of acquisition date, securities with a fair value of $162 million were classified as HTM.

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Explanation of fair value adjustments:

a.	Adjustment based on Bancorp’s evaluation of the acquired investment portfolio.

b.	Adjustments to loans to reflect estimated fair value adjustments, including the following:

(in thousands)

Fair value adjustment - acquired non PCD loans	$	(9,216	)
Fair value adjustment - acquired PCD loans		(4,094	)
Eliminate unrecognized loan fees on acquired loans and fair value hedge		163
Net loan fair value adjustments	$	(13,147	)

c.	The net adjustment to allowance for credit losses includes the following:

(in thousands)

Reversal of historical CB allowance for credit losses on loans	$	(16,102	)
Estimate of lifetime credit losses for PCD loans		9,950
Net change in allowance for credit losses	$	(6,152	)

d.	Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.

e.	Elimination of the historical CB goodwill.

f.	Calculation of CDI related to the acquisition.

g.	Calculation of Customer Lists Intangibles related to the acquisition.

h.	Adjustment to reflect the estimated fair value of MSRs.

i.	Adjustment to net DTAs associated with the effects of the purchase accounting adjustments.

j.	Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.

k.	Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.

l.	Adjustment to reflect the estimated fair value of subordinated debentures for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.

m.	Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL, operating lease liabilities and various accrual adjustments.

Goodwill of approximately $67 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the CB acquisition and is the result of expected operational synergies and other factors. This goodwill is attributable to the Company’s Commercial Banking and Wealth Management & Trust segments. Goodwill related to the CB acquisition is not deductible for tax purposes, as it was structured as stock sale. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the CB acquisition will change.

Receivables acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $539.6 million and $548.8 million at the date of acquisition.

Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $3.2 million and $0 for the three months ended March 31, 2022 and 2021, respectively.

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The following unaudited pro forma condensed combined financial information presents the results of operations of Bancorp, including the effects of the purchase accounting adjustments and acquisition expenses, had the CB acquisition taken place at the beginning of the period:

(in thousands)	Three months ended March 31, 2022			Three months ended March 31, 2021

Net interest income	$	53,793		$	46,758
Provision for credit losses (1)		(2,150	)		(1,175	)
Non-interest income		22,143			25,866
Non-interest expense (2)		47,289			40,857
Income before taxes		30,797			32,942
Income tax expense		6,467			6,918
Net income		24,330			26,024
Less net income attributed to noncontrolling interest		51			80
Net income available to stockholders	$	24,279		$	25,944

Earnings per share
Basic	$	0		$	1.03
Diluted		0			1.02

Basic weighted average shares outstanding		29,056			25,186
Diluted weighted average shares outstanding		29,364			25,429

(1) - Excludes $4.4 million in merger related credit loss expense for the three months ended March 31, 2022, respectively.

(2) - Excludes $24.1 million in pre-tax merger expenses for the three months ended March 31, 2022, respectively.

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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.

	As Recorded			Fair Value				Recast				As Recorded			As Recorded			Fair Value				Provisional Period				As Recorded
(in thousands)	By KB			Adjustments (1)				Adjustments (1)				by Bancorp			By KB			Adjustments (1)				Adjustments (1)				by Bancorp
Assets aquired:
Cash and due from banks	$	53,257		$	0			$	—			$	53,257		$	53,257		$	0			$	—			$	53,257
Mortgage loans held for sale		3,071			0				—				3,071			3,071			0				—				3,071
Available for sale debt securities		396,157			(295	)	a		—				395,862			396,157			(295	)	a		—				395,862
Federal Home Loan Bank stock, at cost		7,072			0				—				7,072			7,072			0				—				7,072
Loans		755,932			(757	)	b		—				755,175			755,932			(757	)	b		—				755,175
Allowance for credits losses on loans		(9,491	)		2,734		c		—				(6,757	)		(9,491	)		2,734		c		—				(6,757	)
Net loans		746,441			1,977				—				748,418			746,441			1,977				—				748,418
Premises and equipment, net		27,401			(6,361	)	d		—				21,040			27,401			(6,361	)	d		—				21,040
Bank owned life insurance		18,909			0				—				18,909			18,909			0				—				18,909
Accrued interest receivable		4,939			0				—				4,939			4,939			0				—				4,939
Goodwill		14,001			(14,001	)	e		—				0			14,001			(14,001	)	e		—				—
Core deposit intangible		0			3,404		f		999		f		4,403			0			3,404		f		999		f		4,403
Other real estate owned		674			(123	)	g		—				551			674			(123	)	g		—				551
Mortgage servicing rights		1,628			34		h		—				1,662			1,628			34		h		—				1,662
Deferred income taxes, net		1,856			715		i		(230	)	i		2,341			1,856			715		i		(230	)	i		2,341
Other assets		6,421			(1,866	)	j		(70	)	j		4,485			6,421			(1,866	)	j		(70	)	j		4,485
Total assets acquired	$	1,281,827		$	(16,516	)		$	699			$	1,266,010		$	1,281,827		$	(16,516	)		$	699			$	1,266,010

Liabilities assumed:
Deposits:
Non-interest bearing	$	359,544		$	0			$	—			$	359,544		$	359,544		$	0			$	—			$	359,544
Interest bearing		678,528			1,146		k		—				679,674			678,528			1,146		k		—				679,674
Total deposits		1,038,072			1,146				—				1,039,218			1,038,072			1,146				—				1,039,218

Securities sold under agreements to repurchase		11,360			0				—				11,360			11,360			0				—				11,360
Federal Home Loan Bank advances		88,581			2,490		l		—				91,071			88,581			2,490		l		—				91,071
Accrued interest payable		505			0				—				505			505			0				—				505
Other liabilities		16,231			(2,004	)	m		—				14,227			16,231			(2,004	)	m		—				14,227
Total liabilities assumed		1,154,749			1,632				—				1,156,381			1,154,749			1,632				—				1,156,381
Net assets acquired	$	127,078		$	(18,148	)		$	699			$	109,629		$	127,078		$	(18,148	)		$	699			$	109,629

Consideration for common stock												$	204,670													$	204,670
Cash consideration paid													28,276														28,276
Total consideration												$	232,946													$	232,946

Goodwill												$	123,317													$	123,317

(1)

See the following page for explanations or individual fair value and ~~recast~~provisional period adjustments.

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Explanation of fair value adjustments

a.	Adjustment based on Bancorp’s evaluation of the acquired investment portfolio. Bancorp sold approximately $91 million in AFS debt securities shortly after acquisition.

b.	Adjustments to loans to reflect estimated fair value adjustments, including the following:

(in thousands)

Fair value adjustment - acquired non PCD loans	$	228
Fair value adjustment - acquired PCD loans		(735	)
Eliminate unrecognized loan fees on acquired loans and fair value hedge		(250	)
Net loan fair value adjustments	$	(757	)

c.	The net adjustment to allowance for credit losses includes the following:

(in thousands)

Reversal of historical KB allowance for credit losses on loans	$	9,491
Estimate of lifetime credit losses for PCD loans		(6,757	)
Net change in allowance for credit losses	$	2,734

d.	Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.

e.	Elimination of the historical KB goodwill of $14.0 million at the closing date.

Calculation of ~~core deposit intangible~~CDI related to the acquisition. During the third quarter of 2021, a ~~recast~~provisional period adjustment of $999,000 was recorded based on revised inputs used in the CDI calculation ~~of the CDI~~ attributed to ~~KB, resulting in an increased intangible value.~~KB.

g.	Adjustment to reflect the estimated fair value of other real estate owned.

h.	Adjustment to reflect the estimated fair value of mortgage servicing rights.

i.	Adjustment to net deferred tax assets associated with the effects of the purchase accounting adjustments.

Adjustment to other assets to reflect the estimated fair value of prepaid and other assets. During the third quarter of 2021, a ~~recast~~provisional period adjustment of $70,000 was recorded for the write off of miscellaneous mortgage servicing ~~fees accrued in other assets by KB at acquisition, resulting in a reduction to other assets.~~fees.

k.	Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates.

l.	Adjustment to reflect the estimated fair value of Federal Home Loan Bank advances for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates. All KB FHLB advances were paid off immediately upon acquisition.

m.	Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL and various accrual adjustments.

Goodwill of approximately $123 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the KB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment. Goodwill related to the KB acquisition is not deductible for tax purposes, as it was structured as stock sale. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the KB acquisition will change.

Receivables acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $723.5 million and $723.3 million at the date of acquisition.

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Total revenue, defined as net interest income and non-interest income, attributed to KB totaled ~~$11.3~~approximately $10.9 million and ~~$15.7 million~~$0 for the three ~~and~~ ~~nine~~months ended ~~September 30, 2021.~~March 31, 2022 and 2021, respectively.

~~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 KB acquisition taken place at the beginning of the period:

(in thousands)

Three months ended September 30, 2021

Three months ended September 30, 2020

Net interest income
$ 45,483 $ 42,458
Provision for credit losses
(1,525 ) 4,718
Non-interest income
17,614 17,188
Non-interest expense
34,558 35,238
Income before taxes
30,064 19,690
Income tax expense
6,902 1,907
Net income
$ 23,162 $ 17,783

Earnings per share

Basic
$ 0.87 $ 0.67
Diluted
0.87 0.67

Basic weighted average shares outstanding
26,485 26,385
Diluted weighted average shares outstanding
26,726 26,605

(in thousands)	Nine months ended September 30, 2021			Nine months ended September 30, 2020		Three months ended March 31, 2022		Three months ended March 31, 2021

Net interest income	$	139,526		$	126,614	$	48,760	$	46,578
Provision for credit losses ~~(1)~~		(6,067	)		19,793		2,279		(1,375	)
Non-interest income		53,704			49,907		19,203		18,012
Non-interest expense ~~(2)~~(1)		106,361			101,102		56,297		34,546
Income before taxes		92,936			55,626		9,387		31,419
Income tax expense		18,881			6,623		1,445		5,953
Net income	$	74,055		$	49,003		7,942		25,466
Less net income attributed to noncontrolling interest							36		0
Net income available to stockholders						$	7,906	$	25,466

Earnings per share
Basic	$	2.79		$	1.86	$	0.29	$	0.96
Diluted		2.77			1.84		0.29		0.95

Basic weighted average shares outstanding		26,532			26,356		27,230		26,425
Diluted weighted average shares outstanding		26,773			26,562		27,485		26,668

(1) - Excludes ~~$7.4 million in merger related credit loss expense for the~~ ~~nine~~* ~~months ended~~ ~~September 30, 2021,~~ ~~respectively.~~*
(2~~) - Excludes $19.0 million~~$400,000 in pre-tax merger expenses for the ~~nine~~three* months ended ~~September 30,~~March 31, 2021, respectively.*

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(3)

~~Available for Sale Debt~~Investment Securities

Debt securities purchased in which Bancorp has the intent and ability to hold to their maturity are classified HTM securities. All ~~of Bancorp’s debt~~other investment securities are classified as ~~AFS. Amortized~~either AFS securities or other securities.

AFS Debt Securities

The following table summarizes the amortized cost, unrealized gains and losses, and fair value of ~~securities follow:~~

(in thousands)

Amortized

Unrealized

September 30, 2021
cost
Gains

Losses
Fair value

U.S. Treasury and other U.S. Government obligations
$ 83,916 $ 0 $ (204 ) $ 83,712
Government sponsored enterprise obligations
142,802 3,553 (68 ) 146,287
Mortgage backed securities - government agencies
777,636 3,784 (9,698 ) 771,722
Obligations of states and political subdivisions
67,633 284 (493 ) 67,424
Other
1,006 0 (3 ) 1,003

Total available for sale debt securities
$ 1,072,993 $ 7,621 $ (10,466 ) $ 1,070,148

December 31, 2020

Government sponsored enterprise obligations
$ 133,436 $ 5,003 $ (361 ) $ 138,078
Mortgage backed securities - government agencies
430,198 7,555 (168 ) 437,585
Obligations of states and political subdivisions
11,088 227 0 11,315

Total available for sale debt securities
$ 574,722 $ 12,785 $ (529 ) $ 586,978

At ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020,~~ ~~there were~~ no ~~holdings of debt securities of any~~ ~~one~~ ~~issuer, other than the U.S. government and its agencies, in an amount greater than~~ ~~10%~~ ~~of stockholders’ equity.~~

~~Accrued interest on~~Bancorp’s AFS debt securities ~~totaled $2.3 million~~portfolio:

(in thousands)	Amortized		Unrealized
March 31, 2022	cost		Gains		Losses			Fair value

U.S. Treasury and other U.S. Government obligations	$	121,819	$	0	$	(5,481	)	$	116,338
Government sponsored enterprise obligations		126,467		525		(2,341	)		124,651
Mortgage backed securities - government agencies		820,452		137		(61,176	)		759,413
Obligations of states and political subdivisions		150,824		36		(7,025	)		143,835
Other		6,253		0		(135	)		6,118
Total available for sale debt securities	$	1,225,815	$	698	$	(76,158	)	$	1,150,355

December 31, 2021

U.S. Treasury and other U.S. Government obligations	$	123,753	$	0	$	(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		0		(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 ~~$1.6 million~~losses, and fair value of Bancorp’s HTM debt securities portfolio:

(in thousands)	Carrying		Unrecognized
March 31, 2022	value		Gains		Losses			Fair value

U.S. Treasury and other U.S. Government obligations	$	277,491	$	0	$	(1,922	)	$	275,569
Government sponsored enterprise obligations		27,996		17		(195	)		27,818
Mortgage backed securities - government agencies		242,704		7		(10,291	)		232,420
Obligations of states and political subdivisions		0		0		0			0
Other		0		0		0			0
Total held to maturity debt securities	$	548,191	$	24	$	(12,408	)	$	535,807

Bancorp elected to classify a portion of securities purchased and acquired during the first quarter as HTM for general capital purposes. NaN debt securities were classified as HTM at~~September 30, 2021~~ ~~and~~ December 31, ~~2020,~~ 2021.~~respectively, and was included in the consolidated balance sheets.~~

~~AFS debt~~All investment securities ~~totaling $396 million were acquired on~~classified as HTM by Bancorp as of ~~May~~March 31, ~~2021~~2022 ~~as a result~~are obligations of the ~~KB acquisition. Shortly after acquisition, 86~~U.S. Government and/or are issued by U.S. Government-sponsored agencies and have an implicit or explicit government guarantee. Therefore, 0 ACL has been for Bancorp’s HTM securities ~~with a total fair value~~as of ~~$91 million~~March 31, 2022.

Further, as of March 31, 2022, NaN of Bancorp’s HTM securities were in ~~the acquired AFS debt securities portfolio were sold, resulting in a loss on the sale $295,000, which was recorded a as fair value adjustment through goodwill during the~~ non-accrual or past due status.

~~second~~27 ~~quarter~~

Table of ~~2021.~~Contents

Debt Securities by Contractual Maturity

A summary of AFS and HTM debt securities by contractual maturity as of ~~September 30, 2021~~March 31, 2022 follows:

(in thousands)

Amortized cost

Fair value

Due within one year
$ 30,408 $ 30,442
Due after one year but within five years
100,808 100,774
Due after five years but within 10 years
28,165 28,220
Due after 10 years
135,976 138,990
Mortgage backed securities - government agencies
777,636 771,722
Total available for sale debt securities
$ 1,072,993 $ 1,070,148

	AFS Debt Securities				HTM Debt Securities
(in thousands)	Amortized cost		Fair value		Carrying value		Fair value

Due within one year	$	8,688	$	8,668	$	60,025	$	60,024
Due after one year but within five years		160,345		154,123		217,974		216,038
Due after five years but within 10 years		56,839		54,292		26,679		26,515
Due after 10 years		179,491		173,859		809		810
Mortgage backed securities - government agencies		820,452		759,413		242,704		232,420
Total available for sale debt securities	$	1,225,815	$	1,150,355	$	548,191	$	535,807

Actual maturities may differ from contractual maturities because some issuers have the right to call or prepay obligations with or without prepayment penalties. The investment portfolio includes MBS, which are guaranteed by agencies such as FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they may have uncertain principal payment dates and are priced based on estimated prepayment rates on the underlying collateral.

At March 31, 2022 and December 31, 2021, there were no holdings of debt securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders’ equity.

Accrued interest on the AFS and HTM securities portfolios totaled $3 million and $1 million at March 31, 2022, respectively, and was included on the consolidated balance sheets. Accrued interest on the AFS securities portfolio totaled $3 million at December 31, 2021, and was included in the consolidated balance sheets. There were no securities classified as HTM at December 31, 2021.

AFS debt securities totaling $247 million were acquired on March 7, 2022, as a result of the CB acquisition, a portion of which were classified as HTM at acquisition. Shortly after acquisition, 3 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 ~~$698 million~~$1.1 billion and ~~$505~~$879 million were pledged at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, to secure accounts of commercial depositors in cash management accounts, public deposits and uninsured cash balances for WM&T accounts. The ~~large~~ increase ~~for~~between December 31, 2021and March 31, 2022 was ~~driven by collateralized accounts~~the result of relationships added through the KBCB 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, 0 allowance or impairment is recorded with respect to investment securities as of March 31, 2022.

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Unrealized Loss Analysis on AFS Debt Securities

~~Securities~~AFS debt securities with unrealized losses at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, aggregated by investment category and length of time securities have been in a continuous unrealized loss position follows:

Less than 12 months

12 months or more

Total

(in thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

September 30, 2021

value

losses

value

losses

value

losses

U.S. Treasury and other U.S.Government obligations
$ 83,712 $ (204 ) $ 0 $ 0 $ 83,712 $ (204 )
Government sponsored enterprise obligations
16,587 (68 ) 0 0 16,587 (68 )
Mortgage-backed securities - government agencies
585,126 (9,698 ) 0 0 585,126 (9,698 )
Obligations of states and political subdivisions
37,348 (493 ) 0 0 37,348 (493 )
Other securities
1,003 (3 ) 0 0 1,003 (3 )
Total
$ 723,776 $ (10,466 ) $ 0 $ 0 $ 723,776 $ (10,466 )

December 31, 2020

Government sponsored enterprise obligations
$ 10,404 $ (112 ) $ 24,398 $ (249 ) $ 34,802 $ (361 )
Mortgage-backed securities - government agencies
68,033 (167 ) 921 (1 ) 68,954 (168 )
Total
$ 78,437 $ (279 ) $ 25,319 $ (250 ) $ 103,756 $ (529 )

	Less than 12 months					12 months or more					Total

(in thousands)	*Fair*		*Unrealized*			*Fair*		*Unrealized*			*Fair*		*Unrealized*
March 31, 2022	*value*		*losses*			*value*		*losses*			*value*		*losses*

U.S. Treasury and other U.S. Government obligations	$	116,338	$	(5,481	)	$	0	$	0		$	116,338	$	(5,481	)
Government sponsored enterprise obligations		94,099		(2,334	)		243		(7	)		94,342		(2,341	)
Mortgage-backed securities - government agencies		482,129		(33,441	)		263,942		(27,735	)		746,071		(61,176	)
Obligations of states and political subdivisions		122,102		(6,923	)		903		(102	)		123,005		(7,025	)
Other securities		6,118		(135	)		0		0			6,118		(135	)
Total	$	820,786	$	(48,314	)	$	265,088	$	(27,844	)	$	1,085,874	$	(76,158	)

December 31, 2021

U.S. Treasury and other U.S. Government obligations	$	122,501	$	(1,252	)	$	0	$	0		$	122,501	$	(1,252	)
Government sponsored enterprise obligations		23,789		(223	)		447		(13	)		24,236		(236	)
Mortgage-backed securities - government agencies		615,130		(10,027	)		102,637		(3,127	)		717,767		(13,154	)
Obligations of states and political subdivisions		46,493		(686	)		484		(16	)		46,977		(702	)
Other securities		957		(18	)		0		0			957		(18	)

Total	$	808,870	$	(12,206	)	$	103,568	$	(3,156	)	$	912,438	$	(15,362	)

Applicable dates for determining when securities are in an unrealized loss position are ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021. As such, it is possible that a security had a market value lower than its amortized cost on other days during the past 12 months, but is not in the “Less than 12 months” category above.

For AFS debt securities with an unrealized loss position, Bancorp evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit-related is recognized in AOCI, net of tax. Credit-related impairment is recognized as an a ACL for AFS debt securities on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Accrued interest receivable is excluded from the estimate of credit losses. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if Bancorp intends to sell an impaired AFS debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount would be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation.

In evaluating AFS debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, Bancorp considers the extent to which fair value is less than amortized cost, whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. Unrealized losses on Bancorp’s investment securities portfolio have not been recognized as an expense because the securities are of high credit quality, and the decline in fair values is attributable to changes in the prevailing interest rate environment since the purchase date. Fair value is expected to recover as securities reach maturity and/or the interest rate environment returns to conditions similar to when these securities were purchased. These investments consisted of ~~177~~448 and 14227 separate investment positions as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. There were no credit related factors underlying unrealized losses on AFS debt securities at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

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(1) Total loans are presented inclusive of premiums, discounts and net loan origination fees and costs.

~~Loans totaling $755 million were acquired on~~ ~~May 31, 2021~~ asAs a result of the KBCB acquisition ~~including $33~~on March 7, 2022, $632 million in ~~PPP loans.~~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 ~~$11~~$12 million and ~~$12~~$11 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively, and was included in the consolidated balance sheets.

Loans with carrying amounts of ~~$2.5~~$2.7 billion and ~~$2.0~~$2.2 billion were pledged to secure FHLB borrowing capacity at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

Loans to directors and their related interests, including loans to companies for which directors are principal owners and executive officers, totaled ~~$53~~$65 million and ~~$43~~$54 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

In connection with the ~~acquisition~~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.

Bancorp purchased loans through the ~~acquisition~~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 ~~acquisition:~~the respective acquisition dates:

Interest income recognized on loans classified as PCD totaled ~~$341,000~~$459,000 and ~~$450,000~~$0 for the three ~~and~~ ~~nine~~~~-month~~month periods ended ~~September 30,~~ March 31, 2022 and 2021,respectively.

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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:

For the three ~~and~~ ~~nine~~month periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020,~~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~~ ~~nine~~month periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020,~~2021, 0 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:

There have been no significant changes to the types of collateral securing Bancorp’s collateral dependent loans.

The following tables present the aging of contractually past due loans by portfolio class:

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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.

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. Current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. Beginning in 2021, Bancorp has elected not to disclose revolving loans that have converted to term loans, as activity relating to this disclosure, which is included in the tables ~~presented below as of~~ ~~December 31, 2020,~~ is currently immaterial to Bancorp’s loan portfolio and is expected to be in the future. As of ~~September 30,~~March 31, 2022, the risk rating of loans based on year of origination was as follows:

As of December 31, 2021, the risk rating of loans based on year of origination was as follows:

*Pass-rated, revolving consumer loans include $881,000 in overdrawn demand deposit balances.

~~As of~~ ~~December 31, 2020,~~ ~~the risk rating of loans based on year of origination was as follows:~~

* - Pass-rated, revolving consumer loans include $536,000 in overdrawn demand deposit balances.

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:

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In accordance with Section 4013 of the CARES Act and in response to requests from borrowers who experienced business or personal cash flow interruptions related to the pandemic, Bancorp extended payment deferrals for those affected borrowers. Depending on the demonstrated need of the customer, Bancorp deferred either the full loan payment or the principal-only portion of respective loan payments, typically for 90 or 180 days, for some borrowers directly impacted by the pandemic. Pursuant to the CARES Act, these loan deferrals were not classified as TDRs and not included in past due and/or non-performing loan statistics. ~~As of~~ ~~September 30, 2021,~~ ~~outstanding loan deferrals totaled $355,000, representing 0.01% of the total loan portfolio (excluding PPP loans) compared to $37 million, or 1.24% of the total loan portfolio (excluding PPP loans) at~~ ~~December 31, 2020.~~

During the three ~~and~~ ~~nine~~month periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020,~~2021, there were 0 loans modified as TDRs and there were 0 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 ~~$862,000~~$1.2 million and ~~$147,000,~~$917,000, respectively, in residential real estate loans for which formal foreclosure proceedings were in process at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021.

As of ~~September 30, 2021,~~March 31, 2022, goodwill ~~represents $123~~totaled $203 million, ~~related to~~$67 million of which was added through the ~~KB acquisition, $12 million related to the~~ ~~2019~~ ~~KSB acquisition and $682,000 related to the~~ ~~1996~~ ~~purchase of a bank in southern Indiana. The acquisition of TBOC in~~ ~~2013~~ ~~generated a bargain purchase gain.~~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 KBCB acquisition. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date.

GAAP requires that goodwill and intangible assets with indefinite useful lives not be amortized, but instead be tested for impairment at least annually. Impairment exists when a reporting unit’s carrying value of goodwill exceeds its fair value. Bancorp’s annual goodwill impairment test is conducted as of September 30 of each year or more often as situations dictate.

At 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.

As of March 31, 2022, goodwill totaling $203 million was recorded on Bancorp’s consolidated balance sheets, of which $175 million is attributed to the commercial banking segment and $28 million is attributed to WM&T. The portion of total goodwill attributed to WM&T relates entirely to the CB acquisition, which generated $67 million in total goodwill during the three months ended March 31, 2022.

Bancorp recorded CDI assets of $12.7 million, $4.4 million, $1.5 million and $2.5 million in association with the acquisition of CB, KB in 2021, KSB in 2019 and TBOC in 2013, respectively.

As a result of the CB acquisition, Bancorp also recorded intangible assets totaling $14.4 million associated with the customer lists of the acquired WM&T and LFA businesses. Of this total, $11.9 million was recorded for WM&T and $2.5 million was recorded for Landmark. Similar to CDI assets, these intangibles also amortize over their estimated useful lives.

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Other Assets

A summary of the major components of other assets follows:

	September 30,		December 31,		March 31,		December 31,
*(in thousands)*	2021		2020		2022		2021

Cash surrender value of life insurance other than BOLI	$	19,792	$	18,426	$	16,933	$	17,875
Net deferred tax asset		24,202		22,320		35,264		24,340
Investments in tax credit related ventures		11,576		9,552		10,605		11,084
Swap assets		4,180		8,374		2,536		3,148
Prepaid assets		4,082		2,935		4,699		4,469
Trust fees receivable		2,557		2,192		3,961		2,868
Mortgage servicing rights		4,600		2,710		16,877		4,528
Other real estate owned		7,229		281		7,156		7,212
Other		10,118		4,575		12,786		10,478
Total other assets	$	88,336	$	71,365	$	110,817	$	86,002

Bancorp maintains life insurance policies other than BOLI in conjunction with its non-qualified defined benefit retirement and non-qualified compensation plans.

Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value. For additional information, see the footnote titled “~~Derivative Financial Instruments.~~Interest Rate Swaps.”

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~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020~~ ~~were $5.3 million and $3.1 million, respectively. MSRs with an estimated fair value of $1.7 million were acquired in the KB acquisition. There was 0 valuation allowance recorded for MSRs as of~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020,~~ ~~as fair value exceeded carrying value.~~

~~Changes in the net carrying amount of MSRs follows:~~

Three months ended

Nine months ended

September 30,

September 30,

(in thousands)

2021

2020

2021

2020

Balance at beginning of period
$ 4,657 $ 1,888 $ 2,710 $ 1,372
MSRs acquired
0 0 1,662 0
Additions for mortgage loans sold
177 631 888 1,272
Amortization
(234 ) (99 ) (660 ) (224 )
Impairment
— — — —
Balance at end of period
$ 4,600 $ 2,420 $ 4,600 $ 2,420

~~Total outstanding principal balances of loans serviced for others were $697 million and $428 million at~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020,~~ ~~respectively. Loans serviced for others acquired as part of the KB acquisition totaled $233 million at the date of acquisition.~~

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An analysis of the difference between the statutory and ETRs from operations follows:

Current state income tax expense represents tax owed to the states of Kentucky, Indiana and Illinois. Ohio state bank taxes are ~~currently~~ based on capital levels and are recorded as other non-interest expense.

~~The state of Kentucky passed legislation in~~ ~~2019~~ ~~that required financial institutions to transition from a capital based franchise tax to the Kentucky corporate income tax beginning in~~ ~~2021~~ ~~and allows entities filing a combined Kentucky income tax return to share certain tax attributes, including net operating loss carryforwards.~~

GAAP provides guidance on financial statement recognition and measurement of tax positions taken, or expected to be taken, in tax returns. If recognized, tax benefits would reduce tax expense and accordingly, increase net income. The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current year tax positions, expiration of open income tax returns due to statutes of limitation, changes in management’s judgment about the level of uncertainty, status of examination, litigation and legislative activity and addition or elimination of uncertain tax positions. As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 ~~2016.~~2017.

Deposits totaling ~~$1.0~~$1.12 billion were assumed on ~~May 31, 2021~~March 7, 2022 in relation to the KBCB acquisition.

SSUAR represent a funding source of Bancorp and are primarily used by commercial customers in conjunction with collateralized corporate cash management accounts. Such repurchase agreements are considered financing agreements and mature within one business day from the transaction date. At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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.

SSUAR totaling ~~$11~~$66 million were assumed on ~~May 31, 2021~~March 7, 2022 in relation to the KBCB acquisition.

~~Bancorp had~~ ~~one~~ ~~advance totaling $10 million outstanding as of~~ ~~September 30, 2021,~~ ~~as compared with 37 separate advances totaling $32 million as of~~ ~~December 31, 2020.~~ ~~Interest payments are due monthly with principal due at maturity for the lone advance outstanding at~~ ~~September 30, 2021.~~

~~Bancorp chose to pay off all outstanding advances during the~~ ~~second~~ ~~quarter with the exception of the $10 million advance noted above, which is associated with a cash flow-related interest rate swap that matures in~~ ~~December 2021.~~ ~~The advances paid off during the~~ ~~second~~ quarter had an average weighted cost of 2.03% prior to their maturity and an early-termination fee of $474,000 was incurred as a result of the payoffs. Bancorp made this decision due to its excess liquidity driven by the substantial deposit growth it achieved during ~~2020~~ ~~and the~~ ~~first~~ ~~half of~~ ~~2021~~ ~~combined with the near-term outlook for low interest rates. Bancorp believes it will substantially “earn back” the early termination penalty through lower interest expense over~~ ~~two~~ ~~years.~~

~~FHLB advances totaling $91 million were assumed on~~ ~~May 31, 2021~~ ~~in relation to the KB acquisition, all of which were paid off immediately upon acquisition.~~

~~The following is a summary of the contractual maturities and average effective rates of outstanding advances:~~

FHLB advances are collateralized by certain CRE and residential real estate mortgage loans under blanket mortgage collateral pledge agreements and FHLB stock. Bancorp views these advances as an effective lower-costing alternative to brokered deposits to fund loan growth. At ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020,~~ ~~the amount of available credit from the FHLB totaled $892 million and $804 million, respectively.~~

~~Bancorp also had $80 million in FFP lines available from correspondent banks at both~~ ~~September 30, 2021~~ ~~and~~ ~~December 31, 2020,~~ ~~respectively.~~

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier I Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. Bancorp chose not to redeem the subordinated notes on April 1, 2022 and carried the note at the costs noted below at March 31, 2022.

Bancorp is a member of the FHLB of Cincinnati. As a member of the FHLB, Bancorp has access to credit products of the FHLB. Bancorp views these borrowings as a potential low cost alternative to brokered deposits. At March 31, 2022 and December 31, 2021, available credit from the FHLB totaled $1.02 billion and $1.00 billion, respectively. Bancorp also had unsecured available FFP lines with correspondent banks totaling $100 million and $80 million at March 31, 2022 and December 31, 2021, respectively. In addition, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line of the holding company as of March 31, 2022, which was added during the first quarter to allow capital flexibility at the Bank level.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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:

Commitments to extend credit are ~~agreements~~an agreement to lend to ~~customers~~a customer either as unsecured or ~~in the case of~~ secured, as long as collateral is available as agreed upon and there is no violation of any condition established in the ~~contracts.~~contract. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

At ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, Bancorp had accrued ~~$4.3~~$3.6 million and ~~$5.4~~$3.5 million, respectively, in other liabilities for its estimate of credit losses for off balance sheet credit exposures. ~~A net benefit of $1.4 million was recorded for the provision for off balance sheet credit exposures for the~~ ~~nine~~ ~~months ended~~ ~~September 30, 2021,~~ ~~as compared~~The CB acquisition resulted in a $500,000 increase to ~~net expense of $2.4 million for the same period of~~ ~~2020.~~ ~~The reduction in~~ the ACL for off balance sheet credit exposures, ~~between~~with the corresponding offset recorded to goodwill (as opposed to provision expense). This increase was partially offset by a $400,000 benefit to provision expense recorded for the ~~December~~three month period ended March 31, ~~2020~~2022, ~~and~~ ~~September 30, 2021~~ ~~is attributed to~~as nearly all applicable loan segments ~~experiencing a decrease~~experienced declines in their reserve loss ~~percentages~~percentage consistent with generally improving model factors ~~particularly unemployment forecasts.~~and improvement in line of credit utilization.

Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a first party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.

Certain commercial customers require confirmation of Bancorp’s letters of credit by other banks since Bancorp does not have a rating by a national rating agency. Terms of the agreements range from one month to a year with certain agreements requiring between one and six months’ notice to cancel. If an event of default on all contracts had occurred at ~~September 30, 2021,~~March 31, 2022, Bancorp would have been required to make payments of approximately ~~$2.2~~$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 ~~September 30, 2021,~~March 31, 2022, in the normal course of business, there were pending legal actions and proceedings in which claims for damages are asserted. Management, after discussion with legal counsel, believes the ultimate result of these legal actions and proceedings will not have a material adverse effect on the consolidated financial position or results of operations of Bancorp.

Fair value represents the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

~~The~~Bancorp used the following methods and significant assumptions to estimate fair value of ~~determining~~each type of financial instrument:

AFS debt securities - Except for Bancorp’s U.S Treasury securities, the fair value of ~~assets and liabilities presented~~AFS debt securities is typically determined by matrix pricing, which is a mathematical technique used widely in ~~this note are consistent with~~ the ~~methodologies disclosed in Bancorp’s Annual Report~~industry to value debt securities without relying exclusively on ~~Form~~ 10-Kquoted prices for the ~~year ended~~specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level ~~December 31, 2020.~~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).

There were no transfers into or out of Level 3 of the fair value hierarchy during ~~2021~~2022 or ~~2020.~~2021.

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, there was no0 valuation allowance for MSRs, as the fair value exceeded the cost. Accordingly, the MSRs are not included in the following tabular disclosure for ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~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.

Carrying values of assets measured at fair value on a non-recurring basis follows:

There were no0 liabilities measured at fair value on a non-recurring basis at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~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.

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:

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.

Mortgage banking activities primarily include residential mortgage originations and servicing.

As of March 31, 2022, mortgages originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors. Mortgage loans held for sale as of December 31, 2021 and prior were carried at the lower of cost or market value.

The estimated fair value of MSRs at March 31, 2022 and December 31, 2021 were $26 million and $6 million, respectively. MSRs with an estimated fair value of $13 million were acquired in the CB acquisition. There was 0 valuation allowance recorded for MSRs as of March 31, 2022 and December 31, 2021, as fair value exceeded carrying value.

Total outstanding principal balances of loans serviced for others were $2.2 billion and $698 million at March 31, 2022 and December 31, 2021, respectively. Loans serviced for others acquired as part of the CB acquisition totaled $1.5 billion at the date of acquisition.

As of March 31, 2022 and December 31, 2021, 0 valuation allowance was recorded on capitalized mortgage servicing rights.

Mortgage banking derivatives used in the ordinary course of business consist primarily of mandatory forward sales contracts and interest rate lock loan commitments. Mandatory forward contracts represent future loan commitments to deliver loans at a specified price and date are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Interest rate lock loan commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 90 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amount required to be received or paid.

Mandatory forward contracts also contain an element of risk in that the counterparties may be unable to meet the terms of such agreements. In the event the counterparties fail to deliver commitments or are unable to fulfill their obligations, the Bank could potentially incur significant additional costs by replacing the positions at then current market rates. The Bank manages its risk of exposure by limiting counterparties to those banks and institutions deemed appropriate by management. The Bank does not expect any counterparty to default on their obligations and therefore, the Bank does not expect to incur any cost related to counterparty default.

The Bank is exposed to interest rate risk on loans held for sale and rate lock loan commitments. As market interest rates fluctuate, the fair value of mortgage loans held for sale and rate lock commitments will decline or increase. To offset this interest rate risk the Bank enters into derivatives, such as mandatory forward contracts to sell loans. The fair value of these mandatory forward contracts will fluctuate as market interest rates fluctuate, and the change in the value of these instruments is expected to largely, though not entirely, offset the change in fair value of loans held for sale and rate lock commitments. The objective of this activity is to minimize the exposure to losses on rate lock loan commitments and loans held for sale due to market interest rate fluctuations. The net effect of derivatives on earnings will depend on risk management activities and a variety of other factors, including: market interest rate volatility; the amount of rate lock commitments that close; the ability to fill the forward contracts before expiration; and the time period required to close and sell loans.

The following table includes the notional amounts and fair values of mortgage loans held for sale and mortgage banking derivatives:

The following table illustrates activity within the balances of AOCI by component:

Bancorp has one class of preferred stock (0 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.

The following table reflects net income (numerator) and average shares outstanding (denominator) for basic and diluted net income per share computations:

Certain SARs that were excluded from the EPS calculation because their impact was antidilutive were as follows:

The fair value of all stock-based awards granted, net of estimated forfeitures, is recognized as compensation expense over the respective service period.

At Bancorp's 2015 Annual Meeting of Shareholders, shareholders approved the 2015 Omnibus Equity Compensation Plan and authorized the shares available from the expiring 2005 plan for future awards under the 2015 plan. In 2018, shareholders approved an additional 500,000 shares for issuance under the plan. As of ~~September 30, 2021,~~March 31, 2022, there were ~~351,000~~355,000 shares available for future awards. The 2005 Stock Incentive Plan expired in April 2015 and SARs granted under this plan expire as late as 2025. The 2015 Stock Incentive Plan has no defined expiration date.

SAR Grants – SARs granted have a vesting schedule of 20% per year and expire ten years after the grant date unless forfeited due to employment termination.

Fair values of SARs are estimated at the date of grant using the Black-Scholes option-pricing model, a leading formula for calculating such value. This model requires the input of assumptions, changes to which can materially impact the fair value estimate. The following assumptions were used in SAR valuations at the grant date in each year:

Dividend yield and expected volatility are based on historical information for Bancorp corresponding to the expected life of SARs granted. Expected volatility is the volatility of underlying shares for the expected term calculated on a monthly basis. The risk free interest rate is the implied yield currently available on U.S. Treasury issues with a remaining term equal to the expected life of the awards. The expected life of SARs is based on actual experience of past like-term SARs. Bancorp evaluates historical exercise and post-vesting termination behavior when determining the expected life.

RSA Grants – RSAs granted to officers vest over five years. For all grants prior to 2015, grantees are entitled to dividend payments during the vesting period. For grants in 2015 and forward, dividends are deferred until shares are vested. Fair value of RSAs is equal to the market value of the shares on the date of grant.

PSU Grants – PSUs vest based upon service and a three-year performance period, which begins January 1 of the first year of the performance period. Because grantees are not entitled to dividend payments during the performance period, the fair value of these PSUs is estimated based upon the market value of the underlying shares on the date of grant, adjusted for non-payment of dividends. Grants require a one-year post-vesting holding period and therefore the fair value of such grants incorporates a liquidity discount related to the holding period of ~~6.1%~~5.8% and ~~4.4%~~6.1% for ~~2021~~2022 and ~~2020.~~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 ~~2021~~2022 and ~~2020,~~2021, Bancorp awarded ~~7,758~~5,410 and ~~6,570~~7,758 RSUs to non-employee directors of Bancorp with a grant date fair value of ~~$315,000~~$350,000 and ~~$270,000,~~$315,000, respectively.

Bancorp utilized cash of ~~$208,000~~$233,000 and ~~$224,000~~$164,000 during the first ~~nine~~three months of ~~2021~~2022 and ~~2020,~~2021, respectively, for the purchase of shares upon the vesting of RSUs.

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:

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(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.

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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:

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.

In ~~2016,~~ ~~Bancorp entered into an interest rate swap to hedge cash flows of a $10 million rolling fixed-rate~~ ~~three~~~~-month FHLB borrowing. The swap began~~ ~~December 6, 2016~~ ~~and matures~~ ~~December 6, 2021.~~ For purposes of hedging, rolling fixed rate advances are considered to be floating rate liabilities. Interest rate swaps involve exchange of Bancorp’s floating rate interest payments for fixed rate swap payments on underlying principal amounts. These swaps were designated and qualified, for cash-flow hedge accounting. For derivative instruments that are designated and qualify as cash flow hedging instruments, the effective portion of gains or losses is reported as a component of AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods for which the hedged forecasted transaction impacts earnings.

~~The following table details Bancorp’s derivative position designated as a cash flow hedge, and the related fair value:~~

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 ~~September 30, 2020,~~March 31, 2022, the adequately-capitalized minimums, including the capital conservation buffer, were a 6.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio. The capital conservation buffer was phased in starting in 2016 at 0.625% and was fully implemented at 2.5% effective January 1, 2019.

As a result of the CB acquisition, Bancorp became the 100% successor owner of the following unconsolidated trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2022, subordinated notes added through the CB acquisition totaled $26 million. Bancorp chose not to redeem the subordinated notes on April 1, 2022.

Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital amounts and ratios:

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NA – Regulatory framework does ~~Not~~not ~~Applicable~~define “well-capitalized” for holding companies

Bancorp’s principal activities include commercial banking and WM&T. Commercial banking provides a full range of loan and deposit products to individual consumers and businesses. Commercial banking also includes Bancorp’s mortgage banking and investment products sales activity. WM&T provides investment management, financial & retirement planning and trust & estate services, as well as retirement plan management for businesses and corporations in all markets in which Bancorp operates. The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size.

Financial information for each business segment reflects that which is specifically identifiable or allocated based on an internal allocation method. Income taxes are allocated based on the effective federal income tax rate adjusted for any tax-exempt activity. All tax-exempt activity and provision have been allocated fully to the commercial banking segment. Measurement of performance of business segments is based on the management structure of Bancorp and is not necessarily comparable with similar information for any other financial institution. Information presented is also not necessarily indicative of the segments’ operations if they were independent entities.

~~Principally, all~~The majority of the net assets of Bancorp are involved in the commercial banking segment. ~~Goodwill~~As of ~~$136~~March 31, 2022, goodwill totaling $203 million was recorded on Bancorp’s consolidated balance sheets, of which ~~$682,000 relates to a bank acquisition in~~ ~~1996,~~ ~~$12~~$175 million ~~relates to the~~ ~~2019~~ ~~KSB acquisition and $123 million relates to the KB acquisition, has been assigned~~is attributed to the commercial banking ~~segment. Assets~~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 ~~consist~~ of net premises and equipment and a receivable related to fees earned that have not been collected.

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:

Bancorp’s revenue on the consolidated statement of income is categorized by product type, which effectively depicts how the nature, timing and extent of cash flows are affected by economic factors. Revenue sources within the scope of ASC 606 are discussed below:

Bancorp earns fees from its deposit customers for transaction-based, account management and overdraft services. Transaction-based fees, which include services such as ATM use fees and stop payments fees, are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account management fees are earned over the course of a month and charged in the month in which the services are provided.

Treasury management transaction fees are recognized at the time the transaction is executed, as that is when the company fulfills the performance obligation. Account analysis fees are earned over the course of a month and charged in the month in which the services are provided. Treasury management fees are withdrawn from customers’ account balances.

WM&T provides customers fiduciary and investment management services as agreed upon in asset management contracts. The contracts require WM&T to provide a series of distinct services for which fees are earned over time. The contracts are cancellable upon demand with fees typically based upon the asset value of investments. Revenue is accrued and recognized monthly based upon month-end asset values and collected from the customer predominately in the following month except for a small percentage of fees collected quarterly. Incentive compensation related to WM&T activities is considered a cost of obtaining the contract. Contracts between WM&T and customers do not permit performance-based fees and accordingly, none of the fee income earned by WM&T is performance-based. Trust fees receivable were ~~$2.6~~$4.0 million and ~~$2.2~~$2.9 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~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 ~~$437,000~~$188,000 and ~~$417,000~~$151,000 for the ~~nine~~three month periods ended ~~September 30, 2021~~March 31, 2022 and ~~2020.~~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 ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022.

Bancorp has operating leases for various branch locations with terms ranging from two years to 19 years, some of which include options to extend the leases in five-year increments. A total of ~~seven~~4 operating leases were added as a result of the KBCB 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:

As of ~~September 30, 2021,~~March 31, 2022, Bancorp had ~~not~~entered into ~~any~~1 lease ~~agreements~~agreement that had yet to commence.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~The consolidated financial statements include the accounts of~~ Stock Yards Bancorp, Inc. (“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 ~~collectively referred~~are fully reflected in the consolidated financial statements of Bancorp. Accordingly, references to as “Bancorp” orin this document may encompass both the ~~“Company.”~~holding company and its subsidiaries, but it should be noted that the business of the Captive is immaterial to the overall results of operations and financial condition of Bancorp. All significant inter-company transactions and accounts have been eliminated in consolidation.

~~Bancorp is a FHC headquartered~~SYB, established in ~~Louisville, Kentucky. Established in~~ 1904, ~~SYB~~ is a state-chartered non-member financial institution that provides services in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio ~~metropolitan markets~~MSAs through ~~63 full-service~~73 full service banking center locations. The ~~captive~~Bank is registered with, and subject to supervision, regulation and examination by the FDIC and the Kentucky Department of Financial Institutions.

The Captive, a ~~Nevada-based, wholly-owned insurance~~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 ~~was retained~~insurance may not be currently available or economically feasible in ~~conjunction~~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 KBState of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. It has elected to be taxed under Section 831(b) of the Internal Revenue Code. Pursuant to Section 831(b), if gross premiums do not exceed $2,400,000, then the Captive is taxable solely on its investment income. The Captive is included in the Company’s consolidated financial statements and its federal income tax return.

As a result of its acquisition of Commonwealth Bancshares, Inc. on March 7, 2022, Bancorp became the 100% successor owner of the following unconsolidated Delaware trust subsidiaries: Commonwealth Statutory Trust III, Commonwealth Statutory Trust IV and Commonwealth Statutory Trust V. The sole assets of the trust subsidiaries represent the proceeds of offerings loaned in exchange for subordinated debentures with similar terms to the TPS.

Also, as a result of its acquisition of Commonwealth Bancshares, Inc., the Company acquired a 60% interest in Landmark Financial Advisors, LLC (LFA), which is based in Bowling Green, Kentucky and provides ~~insurance coverage~~wealth management services. LFA is consolidated into the Company. The noncontrolling interest within the consolidated financial statements represents the interest in LFA not ~~currently provided~~owned by ~~Bancorp’s commercial policies to Bancorp and SYB as well as a group of third-party insurance captives.~~the Company.

~~This section presents management’s perspective on our financial condition and results of operations.~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and accompanying ~~footnotes~~Footnotes presented in Part 1 Item 1 “Financial Statements” and other information appearing in Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~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.

This document contains statements relating to future results of Bancorp that are considered “forward-looking” as defined by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally, but not exclusively, contained in Part I Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements to be materially different from future results, performance, or achievements expressed or implied by the statement. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believe,” “aim,” “can,” “conclude,” “continue,” “could,” “estimate,” “expect,” “foresee,” “goal,” “intend,” “may,” “might,” “outlook,” “possible,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “will likely,” “would,” or other similar expressions. These forward-looking statements are not historical facts and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control.

Forward-looking statements detail management’s expectations regarding the future and are based on information known to management only as of the date the statements are made and management undertakes no obligation to update forward-looking statements to reflect events or circumstances that occur after the date forward-looking statements are made, except as required by applicable ~~law.~~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:

Bancorp executed a definitive Agreement and Plan of Merger (“agreement”), dated as of August 3, 2021, to acquire Commonwealth Bancshares, Inc. and its subsidiary Commonwealth Bank & Trust Company (collectively referred to as “Commonwealth”). This document also contains statements regarding the proposed acquisition transaction that are not statements of historical fact and are considered forward-looking statements within the criteria described above. These statements are likewise subject to various risks and uncertainties that may cause actual results and outcomes of the proposed transaction to differ, possibly materially, from the anticipated results or outcomes expressed or implied in these forward-looking statements. In addition to factors disclosed in reports filed by Bancorp with the SEC, risks and uncertainties for Bancorp, Commonwealth and the combined company include, but are not limited to: the possibility that some or all of the anticipated benefits of the proposed merger will not be realized or will not be realized within the expected time period; the risk that integration of Commonwealth’s operations with those of Bancorp will be materially delayed or will be more costly or difficult than expected; the parties’ inability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger; the failure to satisfy other conditions to completion of the merger, including receipt of required regulatory and other approvals; the failure of the proposed transaction to close for any other reason; diversion of management's attention from ongoing business operations and opportunities due to the merger; the challenges of integrating and retaining key employees; the effect of the announcement of the merger on Bancorp’s, Commonwealth’s or the combined company’s respective customer and employee relationships and operating results; the possibility that the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events; dilution caused by Bancorp’s issuance of additional shares of common stock in connection with the merger; the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and the business, results of operations and financial condition of Bancorp, Commonwealth and the combined company; and general competitive, economic, political and market conditions and fluctuations.

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. and its wholly owned subsidiary, Commonwealth Bank & Trust Company, collectively defined as “CB,” a Louisville, Kentucky-based commercial bank and trust company, which operated 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky. At the time of acquisition and net of purchase accounting adjustments, Commonwealth had $1.34 billion in assets, $632 million in loans (net of purchase accounting adjustments), $247 million in investment securities and $1.12 billion in deposits in addition to maintaining a Wealth Management and Trust Department with total assets under management of approximately $2.93 billion. Bancorp acquired all outstanding common stock of Commonwealth Bancshares, Inc. in a combined stock and cash transaction that resulted in total consideration paid to Commonwealth Bancshares, Inc. shareholders of $168 million.

Bancorp recorded goodwill of $67 million and incurred pre-tax merger related expenses totaling $19.5 million for the three months ended March 31, 2022 as a result of the CB acquisition.

Further, the CB acquisition served to increase the ACL on loans by $14 million at acquisition date. This increase consisted of $10 million attributed to the acquired PCD loan portfolio, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense), and $4 million of provision for credit loss expense recorded in relation to the acquired loan portfolio for the three months ended March 31, 2022.

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, ~~operating~~which operated 19 retail branches throughout central and eastern Kentucky with ~~approximately $1.3~~$1.27 billion in assets, $755 million in loans (including PPP), $396 million in ~~AFS debt~~investment securities and ~~$1.0~~$1.04 billion in deposits at the time of acquisition. Kentucky Bancshares, Inc. was also the holding company for an insurance captive, which Bancorp acquired and retained. Bancorp acquired all outstanding common stock of Kentucky Bancshares, Inc. in a combined stock and cash transaction that resulted in total consideration paid to Kentucky Bancshares, Inc. shareholders of $233 million.

Bancorp ~~has~~ recorded goodwill of $123 million and incurred pre-tax merger related expenses totaling ~~$0 and $18.5~~$18.1 million for the ~~three and nine months~~year ended ~~September 30,~~December 31, 2021 ~~respectively,~~ as a result of the KB acquisition. ~~Net income from the Kentucky Bancshares, Inc. acquisition is expected to be accretive to Bancorp’s overall operating results beginning in 2022.~~

The acquisition of KB had a significant impact on the ACL and ~~loan~~credit loss provisioning for the ~~nine months ending September 30,~~year ended December 31, 2021. In total, acquisition-related activity served to increase the ACL ~~$14.2~~by $14 million for the ~~nine months~~year ended ~~September 30,~~December 31, 2021. This increase consisted of ~~$6.8~~$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~~$7 million attributed to the acquired non-PCD portfolio, which ~~represents~~represented the acquisition-related ~~provision~~credit loss expense ~~for~~at the ~~nine months ended September 30, 2021.~~time of acquisition.

Effective August 3, 2021, Bancorp executed a definitive Agreement and Plan of Merger (“agreement”), pursuant to which Bancorp will acquire all of the outstanding common stock of privately-owned Commonwealth Bancshares, Inc. Commonwealth Bancshares, Inc., headquartered in Louisville, Kentucky, is the holding company for Commonwealth Bank & Trust Company (collectively referred to as “Commonwealth”), which operates 15 retail branches, including nine in Jefferson County, four in Shelby county and two in Northern Kentucky.

Under the terms of the Agreement, the Company will acquire all outstanding common stock in a combined stock and cash transaction, resulting in total consideration to Commonwealth’s shareholders of approximately $188 million based on estimates as of October 29, 2021. Bancorp will fund the cash payment portion of the acquisition through existing resources on-hand.

The acquisition is expected to close during the fourth quarter of 2021, subject to customary regulatory approval and completion of customary closing conditions. As of September 30, 2021, Commonwealth reported approximately $1.2 billion in assets, $711 million in loans (excluding PPP), $1.0 billion in deposits and $89 million in tangible common equity. Commonwealth also maintains a Wealth Management and Trust Department with total assets under management of $2.6 billion at September 30, 2021. The combined franchise will serve customers through 78 branches with total assets of approximately $7.4 billion, $4.9 billion in gross loans, $6.3 billion in deposits and over $7.1 billion in trust assets under management.

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.”

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.

The COVID-19 pandemic in the U.S. and efforts to contain both the virus and the related economic fallout have had a complex and significant impact on the economy, the banking industry and Bancorp. While the distribution of vaccinations, continued easing of restrictions on public commerce and business activities, and stabilizing unemployment levels have been positive developments in recent months, the overall impact of the pandemic upon Bancorp, the Bank and its customers remains uncertain.

Bancorp’s financial condition and results of operations for the three and nine months ended September 30, 2021 have been significantly impacted by the following pandemic-related factors, among others:

The FRB’s decision to lower the FFTR 150 bps in March of 2020 in response to the pandemic lowered the FFTR to a range of 0%-0.25% and Prime to 3.25%, where both remained as of September 30, 2021. Consistent with the rate drops, key benchmark rates, such as the five-year treasury rate and one-month LIBOR, declined dramatically. While the interest rate environment has improved in recent quarters, key rates remain well below pre-pandemic levels.

Bancorp’s participation in the PPP has resulted in approximately 5,500 PPP loan originations totaling $918 million ($887 million net of unearned deferred fees and costs) since the program’s inception as part of the CARES Act, which was signed into law in March 2020. While the first round of PPP expired in August 2020, legislative action created a second round of funding for the program and subsequently extended the program to May 31, 2021.

As part of the first round of the PPP, Bancorp originated approximately 3,400 PPP loans totaling $657 million ($637 million net of unearned deferred fees and costs). As of September 30, 2021, 96% of the dollars originated in the first round have been forgiven. Further, approximately 99% of the $19.6 million in net fees received for this round have been recognized life to date. As these borrowers were required to begin making payments in July, accelerated forgiveness activity was experienced during the third quarter of 2021. Remaining round one originations are expected to be forgiven in the coming months.

As part of the second round of the PPP, Bancorp originated over 2,100 PPP loans totaling $261 million ($250 million net of unearned deferred fees and costs). As of September 30, 2021, 24% of the dollars originated in the second round have been forgiven and 34% of the $11.4 million in net fees received for this round have been recognized life to date. As these borrowers are not required to make payments for 16 months, Bancorp expects a significant portion of these borrowers will seek forgiveness in early to mid-2022 in connection with their tax return preparation.

~~As of September 30, 2021, outstanding PPP loans originated by KB and acquired by Bancorp totaled $12 million.~~

Interest and fee income earned on the PPP portfolio totaled $4.4 million and $18.4 million for the three and nine month periods ending September 30, 2021, respectively, representing increases of $242,000 and $10.8 million over the same periods of the prior year. As of September 30, 2021, Bancorp had $8 million of net unearned deferred fees related to the PPP that have yet to be recognized and as a result, PPP loan forgiveness will have a major impact on operating results for the remainder of 2021 and the first part of 2022.

As a result of the PPP originations, forgiveness activity, record deposit levels and historically low interest rates, excess liquidity has created NIM compression, as well as challenges associated with deploying idle cash. Bancorp has made substantial investments in the AFS debt securities portfolio during 2021 an effort to deploy excess liquidity, however, prepayment activity within the MBS portfolio has made it challenging to grow the portfolio.

The ACL for loans (excluding acquisition related activity) decreased $5 million between December 31, 2020 and September 30, 2021, a stark contrast from the large increase recorded between December 31, 2019 and September 30, 2020, which included a $16 million reserve build that was separate and subsequent to the increases recorded effective January 1, 2020 in relation to the initial adoption of CECL. The pandemic had a material impact on ACL calculations in 2020, as provisioning surged amidst changes in forecasted economic conditions, especially the FRB’s Seasonally Adjusted National Civilian Unemployment Rate. After peaking towards the middle of last year, unemployment forecasts have improved, as have other underlying CECL model factors, resulting in the provision reduction recorded during the first nine months of 2021.

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced a decrease between December 31, 2020 and September 30, 2021. A net benefit of $1.4 million was recorded to provision for credit losses for off balance sheet exposures during the first nine months of 2021, as loss factors associated with the calculation have improved in recent months and line of credit utilization continues to increase, although it remains below pre-pandemic levels. The ACL for off balance sheet credit exposures stood at $4.3 million as of September 30, 2021 compared to $5.4 million as of December 31, 2020.

Bancorp has not incurred any significant challenges to its ability to maintain its systems and controls in light of the measures taken to prevent the spread of COVID-19 and has not incurred significant resource constraints through the implementation of its business continuity plans and does not anticipate incurring such issues in the future. Bancorp has not made, and at this time does not expect to make, any material staffing or compensation changes as a result of the pandemic.

The following table presents an overview of Bancorp’s financial performance for the three months ended ~~September 30, 2021~~March 31, 2022 and ~~2020:~~2021:

Additional discussion follows under the section titled “Results of Operations.”

General highlights for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~September 30, 2020:~~March 31, 2021:

~~The following table presents an overview of Bancorp’s financial performance for the nine months ended September 30, 2021 and 2020:~~

~~General highlights for the nine months ended September 30, 2021 compared to September 30, 2020:~~

As is the case with most banks, Bancorp’s primary revenue sources are net interest income and fee income from various financial services provided to customers. Net interest income is the difference between interest income earned on loans, investment securities and other interest earning assets less interest expense on deposit accounts and other interest bearing liabilities. Loan volume and interest rates earned on those loans are critical to overall profitability. Similarly, deposit volume is crucial to funding loans and rates paid on deposits directly impact profitability. New business volume is influenced by economic factors including market interest rates, business spending, consumer confidence and competitive conditions within the marketplace. The discussion that follows is based on FTE interest data.

NIM and net interest spread calculations above exclude the sold portion of certain participation ~~loans.~~loans, which totaled $5 million at both March 31, 2022 and December 31, 2021. These sold loans are ~~recorded~~ on Bancorp’s balance sheet as required by GAAP because Bancorp retains some form of effective control; however, Bancorp receives no ~~net~~ interest income on the sold portion. These participation loans sold are excluded from NIM and spread analysis, asbecause Bancorp believes it provides a more accurate depiction of ~~the performance of its~~ loan ~~portfolio.~~portfolio performance.

At September 30, 2021, Bancorp’s loan portfolio was composed of approximately 71% fixed and 29% variable rate loans, with the fixed rate portion pricing (including PPP loans) generally based on a spread to the five-year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 66%) or one-month LIBOR (approximately 34%). Excluding PPP loans, Bancorp’s loan portfolio at September 30, 2021 was composed of approximately 69% fixed and 31% variable rate loans, respectively.

Benchmark rates such as the five-year treasury and one-month LIBOR currently remain well below pre-pandemic levels and as a result, the average interest rate environment experienced for the three and nine month periods ended September 30, 2021 was substantially lower than that experienced for the same periods of 2020. The following table details the volatility experienced within the interest rate environment over the past twelve months by comparing period end and quarterly average rates:

Prime rate, the five year Treasury note rate and the one month LIBOR are included in the table above to provide a general indication of the interest rate environment in which Bancorp has operated during the past several quarters. Approximately $1.4 billion, or 29%, of Bancorp’s loans are variable rate and are indexed to either Prime, LIBOR or SOFR, generally repricing as those rates change. At inception, most of Bancorp’s fixed rate loans are priced in relation to the five year Treasury rate.

On March 16, 2022, the FRB increased the FFTR to a range of 0.25%-0.50%, an increase of 25 bps, which resulted in Prime increasing to 3.50%. The hike represented the FRB’s first interest rate action since it cut the FFTR 150 bps in March of 2020 in response to the pandemic, which took Prime from 4.75% to 3.25%. While the hike drove increases in key benchmark rates, the interest rate environment remains below pre-pandemic levels in general, with the exception of the five-year treasury. Given the timing of the FRB’s increase, the average interest rate environment experienced for the three month period ended March 31, 2022 did not capture the full benefit of rising rates.

At March 31, 2022, Bancorp’s loan portfolio consisted of approximately 71% fixed and 29% variable rate loans, with the fixed rate portion pricing generally based on a spread to the five year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately 68%) or one-month LIBOR (approximately 32%).

With ~~66%~~68% of the variable rate loan portfolio tied to Prime and the majority with floor rates of 4.00%, short-term rates would have to increase over 7550 bps for these loans to move above their floor rates given Prime is at ~~3.25%~~3.50% as of ~~September 30, 2021. Beyond~~March 31, 2022. While the current economic outlook suggests continued interest rate action from the FRB and prospects of a rising rate environment, concerns remain regarding potential ongoing pricing pressure/competition, the possibility of a flattening yield curve and the ~~absolute low level~~impact these factors will have on NIM.

Net Interest Income (FTE) – Three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~September 30, 2020~~March 31, 2021

Net interest spread (FTE) and NIM were ~~3.08%~~3.06% and ~~3.14%~~3.11%, for the three months ended ~~September 30, 2021~~March 31, 2022 compared to ~~3.13%~~3.30% and ~~3.26%~~3.39% for the same period in ~~2020,~~2021, respectively. NIM during the three months ended ~~September 30, 2021~~March 31, 2022 was significantly impacted by the following:

Net interest income (FTE) increased ~~$11.9~~$11.1 million, or ~~35%~~29%, for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period of ~~2020,~~2021, largely as a result of acquisition-related activity, but also driven in part by strong organic loan growth and substantial investment in the ~~AFS debt~~investment securities portfolio.

Total average interest earning assets increased ~~$1.6~~$1.86 billion, or ~~40%~~41%, to ~~$5.8~~$6.40 billion for the three months ended ~~September 30, 2021,~~March 31, 2022, as compared to the same period of ~~2020,~~2021, with the average rate earned on total interest earning assets contracting 2636 bps to ~~3.24%~~3.18%.

Total interest income (FTE) increased ~~$10.9~~$10.6 million, or ~~30%~~27%, to ~~$47.1~~$50.2 million for the three months ended ~~September 30, 2021,~~March 31, 2022, as compared to the same period of ~~2020.~~2021.

Total average interest bearing liabilities increased ~~$987 million,~~$1.36 billion, or ~~38%~~47%, to ~~$3.6~~$4.26 billion for the three-month period ended ~~September 30, 2021~~March 31, 2022 compared with the same period in ~~2020,~~2021, with the total average cost declining 2112 bps to ~~0.16%~~0.12%.

Total interest expense decreased ~~$984,000,~~$469,000, or ~~40%~~28%, for the three months ended ~~September 30, 2021~~March 31, 2022 compared to the same period of ~~2020,~~2021, a direct result of lowering deposit ~~rate reductions implemented~~rates in response to FRB rate reductions in March of 2020 to levels at or near those offered during the ~~falling interest rate environment and to~~Great Recession, where they remained as of March 31, 2022. These reductions have had a ~~lesser extent,~~significant impact on time deposit rates in particular, as the ~~reduction~~benefit of lower rates has been experienced as the time deposit portfolio has matured or renewed. Further, the three months ended March 31, 2022 benefitted from all FHLB advances either maturing or paying off in ~~interest expense on FHLB advances.~~2021.

~~Net Interest Income (FTE)~~ – ~~Nine months ended September 30, 2021 compared to September 30, 2020~~

Net interest spread and NIM were 3.22% and 3.29%, for the six months ended September 30, 2021 compared to 3.22% and 3.40% for the same period in 2020, respectively. NIM during the nine months ended September 30, 2021 was significantly impacted by the following:

Net interest income increased $25.3 million, or 25%, for the nine months ended September 30, 2021 compared to the same period of 2020, due to interest and fee income associated with the PPP portfolio, substantial growth in the non-PPP loan portfolio and AFS debt securities portfolio, and the aforementioned lowering of deposit rates.

Total average interest earning assets increased $1.2 billion, or 30%, to $5.1 billion for the nine months ended September 30, 2021, as compared to the same period of 2020, with the average rate earned on total interest earning assets contracting 32 bps to 3.41%.

~~Total interest income increased $20.2 million, or 18%, to $129.9 million for the nine months ended September 30, 2021, as compared to the same period of 2020.~~

Total average interest bearing liabilities increased $663 million, or 26%, to $3.2 billion for the nine-month period ended September 30, 2021 compared with the same period in 2020, with the total average cost declining 32 bps to 0.19%.

Total interest expense decreased $5.2 million, or 53%, for the nine months ended September 30, 2021 compared to the same period of 2020, a direct result of deposit rate reductions implemented in response to the falling interest rate environment and to a lesser extent, the reduction in interest expense on FHLB advances.

Average Balance Sheets and Interest Rates (FTE) – Three-Month Comparison

~~Average Balance Sheets and Interest Rates (FTE)~~ – ~~Nine-Month Comparison~~

Managing interest rate risk is fundamental for the financial services industry. The primary objective of interest rate risk management is to neutralize effects of interest rate changes on net income. By considering both on and off-balance sheet financial instruments, management evaluates interest rate sensitivity with the goal of optimizing net interest income within the constraints of prudent capital adequacy, liquidity needs, market opportunities and customer requirements.

Bancorp uses an earnings simulation model to estimate and evaluate the impact of an immediate change in interest rates on earnings in a one-year forecast. The simulation model is designed to reflect dynamics of interest earning assets and interest bearing liabilities. By estimating effects of interest rate fluctuations, the model can approximate interest rate risk exposure. This simulation model is used by management to gauge approximate results given a specific change in interest rates at a given point in time. The model is therefore a tool to indicate earnings trends in given interest rate scenarios and may not indicate actual or expected results.

Bancorp’s interest rate simulation sensitivity analysis details that increases in interest rates of 100 and 200 bps would have a negative effect on interest income, respectively. These results are attributed to over half of the variable rate loan portfolio being currently at or near floor rates, as these yields will not increase until short-term rates exceed these floor rates. For example, a significant portion of the variable rate loan portfolio is tied to Prime, with floor rates of 4.00%. Given Prime is at ~~3.25%~~3.50% as of ~~September 30, 2021,~~March 31, 2022, short-term rates would have to increase over 7550 bps for these loans to move above their floor rates.

The decrease in net interest income in the rising rate scenarios is primarily due to variable rate loans and short-term investments repricing slower than deposits and short-term borrowings. Asset balances subject to immediate repricing cause an estimated decline in net interest income in the down 100 bps scenario, as rates on non-maturity deposits cannot be lowered sufficiently to offset declining interest income. These estimates are summarized below.

Bancorp’s interest rate risk profile is generally neutral. The results of the interest rate sensitivity analysis performed as of December 31, 2021 suggest a slightly liability sensitive profile as a result of the long-term, conservative assumptions Bancorp uses in the model, particularly in relation to deposit betas, which measure how responsive management’s deposit repricing may be to changes in market rates. However, given the historic levels of liquidity currently held by Bancorp and in the banking system generally, the Company anticipates actual deposit betas will remain well below long-term averages through 2022 despite forecasted interest rate hikes from the FRB. In a scenario where deposit betas are well below long-term averages, Bancorp’s interest rate risk profile shifts to a slightly asset sensitive position, but remains generally neutral.

Bancorp’s loan portfolio is currently composed of approximately 71% fixed and 29% variable rate loans, with the fixed rate portion pricing ~~(including PPP loans)~~ generally based on a spread to the five-year treasury curve at the time of origination and the variable portion pricing based on an on-going spread to Prime (approximately ~~66%~~68%) or ~~one-month~~one month LIBOR/SOFR (approximately 32%).

In July 2017, the Financial Conduct Authority (the “FCA”), the authority regulating LIBOR, ~~(approximately 34%). Bancorp’s loan portfolio (excluding PPP loans)~~along with various other regulatory bodies, announced that LIBOR would likely be discontinued at ~~September 30,~~the end of 2021. Subsequent to that announcement, in November 2020, the FCA announced that many tenors of LIBOR would continue to be published through June 2023. Subsequent to this, Bank regulators instructed banks to discontinue new originations referencing LIBOR as soon as possible, but no later than December 2021. Effective December 31, 2021, Libor will no longer be used to issue new loans in the U.S. It is expected to be replaced primarily by the Secured Overnight Financing Rate (SOFR), which many experts consider a more accurate and more secure pricing benchmark. To facilitate the transition process, management has instituted an enterprise-wide program to identify, assess, and monitor risks associated with the expected discontinuance or unavailability of LIBOR.

On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was ~~composed~~signed into law as part of the Consolidated Appropriations Act of 2022. This legislation established a uniform benchmark replacement process for financial contracts that mature after the cessation of LIBOR (scheduled for June 2023) that do not contain clearly defined or practicable fallback provisions. The legislation also established a safe harbor for lenders, providing protection from litigation associated with choosing a replacement rate recommended by the FRB, such as SOFR, and also allows for the continued use of any appropriate benchmark rate for new contracts.

As of March 31 2022, the Company had approximately ~~69% fixed~~$456 million in loans and ~~31% variable~~$150 million (notional amount) in interest rate ~~loans.~~derivative contracts that reference LIBOR. Each of the LIBOR-referenced amounts discussed above will vary in future periods as current contracts expire with potential replacement contracts using either LIBOR or an alternative reference rate. The Company, and other industry participants, continue to review alternative reference rates that could be utilized as a replacement for LIBOR. The Company had $46 million in loans that were indexed to SOFR at March 31, 2022.

Periodically, Bancorp enters into interest rate swap transactions with borrowers who desire to hedge exposure to rising interest rates, while at the same time entering into an offsetting interest rate swap, with substantially matching terms, with another approved independent counterparty. These are undesignated derivative instruments and are recognized on the balance sheet at fair value, with changes in fair value recorded in other non-interest income as interest rates fluctuate. Because of matching terms of offsetting contracts, in addition to collateral provisions which mitigate the impact of non-performance risk, changes in fair value subsequent to initial recognition have a minimal effect on earnings, and are therefore not included in the simulation analysis results above. For additional information, see the ~~footnote~~Footnote titled “Assets and Liabilities Measured and Reported at Fair Value.”

In addition, Bancorp uses derivative financial instruments as part of its interest rate risk management, including interest rate swaps. These interest rate swaps are designated as cash flow hedges as described in the ~~footnote~~Footnote titled “Derivative Financial Instruments.” For these derivatives, the effective portion of gains or losses is reported as a component of ~~OCI,~~AOCI, and is subsequently reclassified into earnings as an adjustment to interest expense in periods in which the hedged forecasted transaction impacts earnings. As of March 31, 2022, Bancorp had no outstanding interest rate swaps designated as cash flow hedges.

~~An analysis of the changes in the ACL for loans, including provision, and selected ratios follow:~~

The ACL for loans totaled $57 million as of September 30, 2021 compared to $52 million at December 31, 2020, representing an ACL to total loans ratio of 1.35% and 1.47% for those periods, respectively. The ACL to total loans (excluding PPP loans) was 1.43% at September 30, 2021 compared to 1.74% at December 31, 2020. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $231 million (net of unamortized deferred fees) at September 30, 2021 and $550 million at December 31, 2020, Bancorp did not generally reserve for potential losses for these loans within the ACL. See the section titled “~~Non-GAAP Financial Measures~~~~” for reconcilement of non-GAAP to GAAP measures.~~

Upon adoption of ASC 326 effective January 1, 2020, Bancorp recorded an increase of $8.2 million to the ACL for loans and a corresponding decrease to retained earnings, net of the DTA impact. In addition, non-accretable yield marks of $1.6 million related to formerly classified PCI loans were reclassed between the amortized cost basis of loans and corresponding ACL, which were subsequently charged-off in the third quarter of 2020 with no resulting impact to provision expense. The adjustment upon adoption of ASC 326 raised the ACL for loans balance to $37 million on January 1, 2020.

Due to continued improvement in the unemployment forecast, updates to Bancorp’s CECL modeling and strong historic credit metrics, benefits (excluding acquisition-related activity) of $1.0 million and $4.9 million were recorded for the three and nine month periods ended September 30, 2021, respectively. Offsetting the reduction for the nine-month period ended September 30, 2021, was credit loss expense on loans associated with the non-PCD loan portfolio added as a result of the KB acquisition, which was recorded during the second quarter and totaled $7.4 million.

The activity noted above drove provision expense decreases of $5.4 million and $13.0 million compared to the same periods of 2020. The significantly higher expense recorded for the three and nine months ended September 30, 2020 was the result of adopting of CECL effective January 1, 2020 and the subsequent pandemic-related developments experienced in the first three quarters of 2021, particularly elevated unemployment forecasts.

In addition to the provision activity noted above for the first nine months of 2021, the ACL for loans was also increased $6.8 million as a result of the PCD loan portfolio added through the KB acquisition during the second quarter, with the corresponding offset recorded to goodwill (as opposed to provision expense). Partially offsetting this increase was net charge off activity of $1.9 million and $4.6 million for the three and nine-month periods ended September 30, 2021, respectively, serving to reduce the ACL for loans. Net charge off activity for 2021 has been highlighted by the charge off of two CRE relationships totaling $4.4 million, as the charged off amounts were fully reserved and had no income statement impact for the three and nine months ended September 30, 2021, in addition to a $555,000 recovery of a note that was fully charged off in 2020.

Provision for credit losses on loans at ~~September 30, 2021~~March 31, 2022 represents the amount of expense that, based on Management’s judgment, is required to maintain the ACL for loans at an appropriate level under the CECL model. The determination of the amount of the ACL for loans is complex and involves a high degree of judgment and subjectivity. See the ~~footnote~~Footnote titled “Basis of Presentation and Summary of Significant Accounting Policies” for detailed discussion regarding Bancorp’s ACL methodology by loan segment in this document and Bancorp’s Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

An analysis of the changes in the ACL for loans, including provision, and selected ratios follow:

The ACL for loans totaled $67 million as of March 31, 2022 compared to $54 million at December 31, 2021, representing an ACL to total loans ratio of 1.38% and 1.29% for those periods, respectively. The ACL to total loans (excluding PPP loans) was 1.40% at March 31, 2022 compared to 1.34% at December 31, 2021. Based on the 100% SBA guarantee of the PPP loan portfolio, which totaled $71 million (net of unamortized deferred fees) at March 31, 2022 and $141 million at December 31, 2021, Bancorp did not generally reserve for potential losses for these loans within the ACL. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Due to continued improvement in the unemployment forecast, updates to Bancorp’s CECL modeling, net recoveries and strong historic credit metrics, benefits (excluding acquisition-related activity) of $1.8 million and $1.2 million were recorded to provision for credit losses on loans expense for the three month periods ended March 31, 2022 and 2021, respectively. Offsetting the reduction for the three month period ended March 31, 2022 was credit loss expense recorded for the loan portfolio acquired from CB, which totaled $4.4 million.

In addition to the provision activity noted above for the first three months of 2022, the ACL for loans was also increased $10 million as a result of the PCD loan portfolio added through the CB acquisition during the three months ended March 31, 2022, with the corresponding offset recorded to goodwill (as opposed to provision expense). Further, net recovery activity of $540,000 million for the three month period ended March 31, 2022 also served to increase the ACL for loans, driven by a $711,000 recovery of a C&I relationship that was fully charged off in the fourth quarter of 2021.

While separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced ~~a decrease~~an increase between December 31, ~~2020~~2021 and ~~September 30, 2021. Net benefits were~~March 31, 2022. The CB acquisition resulted in a $500,000 increase to the ACL for off balance sheet credit exposures, with the corresponding offset recorded to goodwill (as opposed to provision for credit loss expense). This increase was partially offset by a $400,000 benefit to provision for credit loss expense recorded for the three ~~and nine-month periods~~period ended ~~September 30, 2021, respectively,~~March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage consistent with generally improving model factors and improvement in line of credit utilization. The ACL for off balance sheet credit exposures stood at ~~$4.3~~$3.6 million as of ~~September 30, 2021~~March 31, 2022 compared to ~~$5.4~~$3.5 million as of December 31, ~~2020.~~2021.

Bancorp’s loan portfolio is diversified with no significant concentrations of credit. Geographically, most loans are extended to borrowers in Louisville, central, eastern and northern Kentucky, as well as the Indianapolis, Indiana and Cincinnati, Ohio metropolitan markets. The adequacy of the allowance is monitored on an ongoing basis and it is the opinion of management that the balance of the allowance at ~~September 30, 2021~~March 31, 2022 is adequate to absorb probable losses inherent in the loan portfolio as of the financial statement date.

Total non-interest income increased ~~$4.6~~$5.4 million, or ~~35%, and $9.0 million, or 24%~~39%, for the three ~~and nine-month periods~~month period ended ~~September 30, 2021~~March 31, 2022 compared to the same ~~periods~~period of ~~2020,~~2021, respectively. Non-interest income comprised ~~27.9% and 27.4%~~28.3% of total revenues, defined as net interest income and non-interest income, for the three ~~and nine~~ month ~~periods ended September 30, 2021~~period March 31, 2022 compared to ~~27.9% and 27.7%~~26.8% for the same ~~periods~~period of ~~2020, respectively.~~2021. WM&T services comprised ~~40.5% and 42.8%~~44.1% of total non-interest income for the three ~~and nine-month periods~~month period ended ~~September 30, 2021~~March 31, 2022 compared to ~~43.4% and 46.1%~~45.1% for the same ~~periods~~period of ~~2020, respectively. The KB acquisition added $3.0 million and $4.3 million in total~~2021. Acquisition-related activity drove a significant portion of the non-interest income increase for the three ~~and nine-month periods~~months ended ~~September 30, 2021, concentrated most notably in deposit service charges, debit and credit card income, and mortgage banking income.~~

The magnitude of WM&T revenue distinguishes Bancorp from other community banks of similar asset size. WM&T revenue increased ~~$1.5~~$2.2 million, or ~~26%, and $2.6 million, or 15%~~36%, for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively. Stock market appreciation, coupled~~2021. Significant growth in asset-based income drove the increase, consistent with ~~record net~~both acquisition-related activity and organic new business development, ~~drove~~which served to offset stock market declines during the ~~substantial revenue increases for these periods. WM&T income~~first quarter of ~~$333,000 and $455,000 was recorded in relation to the KB acquisition for the three and nine-month periods ended September 30, 2021.~~2022.

Recurring fees earned for managing accounts are based on a percentage of market value of AUM and are typically assessed on a monthly basis. Recurring fees, which generally comprise the vast majority of WM&T revenue, increased ~~$1.3~~$2.2 million, or ~~23% and $2.8 million, or 17%~~37%, for the three ~~and nine-month periods~~month period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020.~~2021. The ~~increases for the three~~increase was driven by both acquisition-related activity and ~~nine month periods stem from significant stock market appreciation experienced in addition to both~~ organic ~~and acquisition-related growth in net~~ new ~~business.~~business development.

A portion of WM&T revenue, most notably executor and certain employee benefit plan-related fees, are non-recurring in nature and the timing of these revenues corresponds with the related administrative activities. For this reason, such fees are subject to greater period over period fluctuation. Total non-recurring fees ~~increased $180,000 and~~ decreased ~~$192,000,~~$23,000 for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods of 2020. The increase for the three-month~~ period ~~is attributed to estate fees recorded during the third quarter~~ of 2021, ~~while the decrease for the nine month period~~which was driven by ~~a large~~lower estate fee ~~recorded in the first quarter~~income earned.

AUM, stated at market value, totaled ~~$4.5~~$7.59 billion at ~~September 30, 2021~~March 31, 2022 compared with ~~$3.4~~$3.99 billion at ~~September 30, 2020~~March 31, 2021 and ~~$3.9~~$4.80 billion at December 31, ~~2020.~~2021. The large increase in AUM between ~~September 30, 2020~~March 31, 2021 and ~~September 30, 2021~~March 31, 2022 is attributed mainly to ~~significant~~AUM of $2.93 billion added through the CB acquisition, as well as net new business growth stock market appreciation ~~experienced in addition to growth in net new business and AUM of $250 million added through~~over the ~~KB acquisition.~~past twelve months.

Contracts between WM&T and their customers do not permit performance-based fees and accordingly, none of the WM&T revenue is performance based. Management believes the WM&T department will continue to factor significantly in Bancorp’s financial results and provide strategic diversity to revenue streams.

The preceding table demonstrates that WM&T fee revenue is concentrated within investment advisory and personal trust accounts. WM&T fees are predominantly based on AUM and tailored for individual/company accounts and/or relationships with fee structures customized based on account type and other factors with larger relationships paying a lower percentage of AUM in fees. For example, recurring AUM fee structures are in place for investment management, irrevocable trusts, revocable trusts, personal investment retirement accounts and accounts holding only fixed income securities. Company retirement plan services can consist of a one-time conversion fee with recurring AUM fees to follow. While there are also fee structures for estate settlements, income received is often non-recurring in nature. Fee structures are agreed upon at the time of account opening and any subsequent revisions are communicated in writing to the customer. Fees earned are not performance-based nor are they based on investment strategy or transactions.

AUM (not included on balance sheet) increased from ~~$3.9~~$4.8 billion at December 31, ~~2020~~2021 to ~~$4.5~~$7.6 billion at ~~September 30, 2021~~March 31, 2022 as follows:

As of ~~both September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, approximately ~~80%~~79% and 81%, respectively, of AUM were actively managed. Company retirement plan accounts primarily consist of participant-directed assets. The amount of custody and safekeeping accounts are insignificant.

Managed assets are invested in instruments for which market values can be readily determined, the majority of which are sensitive to market fluctuations and consist of approximately ~~68%~~65% in equities and ~~32%~~35% in fixed income securities as of ~~September 30, 2021~~March 31, 2022 compared to ~~64%~~68% and ~~36%~~32% as of December 31, ~~2020.~~2021. This composition has been relatively consistent from period to period and the WM&T Department holds no proprietary mutual funds.

Deposit service charges, which consist of non-sufficient funds charges and to a lesser extent, other activity based charges, increased ~~$770,000,~~$919,000, or ~~77%, and $864,000, or 28%~~97%, for the three ~~and nine month periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively. These increases were attributed largely to~~2021, mainly as a result of the contribution associated with acquisition-related activity over the KB acquisition, however, the prior year periods were also negatively impacted by the pandemic. Consistent with the industry, customer behavior and transaction volume have been impacted by the pandemic and continued government efforts to minimize its impact on the economy, such as stimulus payments, PPP funding and more lucrative unemployment compensation. Deposit balances have remained at or near record levels for several months as a result, which has in turn led to fewer overdrawn accounts. These trends have significantly exacerbated thepast twelve months. Excluding acquisition-related activity, an industry-wide decline in the volume of fees earned on overdrawn checking accounts has been experienced over the past several ~~years. While~~years, a trend that has been exacerbated by the elevated deposit levels maintained by customers over the past several quarters, which has in turned led to fewer overdrawn accounts. Further, Bancorp ~~has experienced notable improvement since first experiencing significant pandemic-related declines in transaction volume in April 2020, Management is not able to predict when, or if,~~anticipates that future growth of this revenue stream will ~~return~~be significantly impacted by changing industry practices, as many larger financial institutions have opted to ~~pre-pandemic levels.~~greatly reduce, or completely eliminate, certain deposit service charges, particularly overdraft-related fees. Bancorp could be faced with strategic decisions surrounding deposit-related service charges in the future, which could negatively impact the contributions made by this revenue stream to total non-interest income.

Debit and credit card income consists of interchange revenue, ancillary fees and incentives received from card processors. Debit and credit card revenue increased ~~$1.7~~$1.8 million, or ~~75%, and $3.2 million, or 51%~~81%, for the three ~~and nine-month periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020,~~2021, as a result of increased transaction volume and continued expansion of the customer bases, both organically and through acquisition-related activity. ~~Debit and credit card revenue of approximately $1.1 million and $1.5 million was added for the three and nine-month periods ended September 30, 2021 as a result of the KB acquisition.~~ Total debit card income increased ~~$1.2~~$1.4 million, or ~~81%, and $2.3 million, or 53%~~90%, and total credit card income increased ~~$449,000,~~$459,000, or ~~63%, and $896,000, or 46%~~62%, for the three ~~and nine-month periods~~month period ended ~~September 30, 2021~~March 31, 2022, compared the same ~~periods~~period of the prior year. Bancorp expects this revenue stream will continue to grow with the expansion of the customer base and further development of the debit and credit card businesses.

Treasury management fees primarily consist of fees earned for cash management services provided to commercial customers. This category continues to stand out as a consistent, growing source of revenue for Bancorp and increased ~~$403,000,~~$364,000, or ~~29%, and $1.1 million, or 29%~~24%, for the three ~~and nine~~ month ~~periods~~period ending ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively. New~~2021, driven by increased transaction volume, new product sales and ~~expansion of its~~ customer base have helped Bancorp’s Treasury Management department overcome challenges presented by the pandemic. Demand for Bancorp’s treasury products has increased during the pandemic, as these products allow customers to operate more efficiently in a decentralized environment.expansion. In addition, sales efforts involving existing customers has led to increases in online services, reporting, ACH origination, remote deposit and fraud mitigation services ~~during~~over the ~~first three quarters of 2021.~~past twelve months. Bancorp anticipates this income category will continue to increase based on continued customer base growth and the expanding suite of services offered within Bancorp’s treasury management platform.

Mortgage banking income primarily includes gains on sales of mortgage loans and loan servicing income offset by MSR amortization. Bancorp’s mortgage banking department predominantly originates residential mortgage loans to be sold in the secondary market, primarily to ~~FNMA. Interest rates on the mortgage loans sold are locked with the borrower~~FNMA and ~~investor prior to loan closing, thus Bancorp bears no interest rate risk related to loans held for sale.~~FHLMC. Bancorp offers conventional, VA, FHA and ~~FHA~~GNMA financing for purchases and refinances, as well as programs for first-time homebuyers. Interest rates on mortgage loans directly influence the volume of business transacted by the mortgage-banking department. Mortgage banking revenue decreased ~~$1.1 million,~~$441,000, or ~~54%, and $785,000, or 18%~~31%, for the three ~~and nine~~ month periods ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively. Mortgage~~2021, the decline stemming from rising mortgage rates and limited housing inventory, which have slowed refinance and purchasing activity. Bancorp anticipates that both factors will continue to limit mortgage banking revenue of approximately $330,000 and $592,000 was added for the three and nine-month periods ended September 30, 2021 as a result of the KB acquisition. The following activity also influenced mortgage banking income for the periods noted above:growth in 2022.

Net investment product sales commissions and fees are generated primarily on stock, bond and mutual fund sales, as well as wrap fees on brokerage accounts. Wrap fees represent charges for investment programs that bundle together a suite of services, such as brokerage, advisory, research and management and are based on a percentage of assets. Bancorp deploys its financial advisors primarily through its branch network via an arrangement with a third party broker-dealer, while larger managed accounts are serviced by Bancorp’s WM&T Department. Net investment product sales commissions and fees increased ~~$349,000,~~$143,000, or ~~81%, and $501,000, or 39%~~31%, for the three and ~~nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively. Net investment product sales commissions~~2021, driven by acquisition-related growth and ~~fees associated with the KB acquisition totaled approximately $239,000 and $298,000 for the three and nine-month periods ended September 30, 2021.~~increased trading activity.

BOLI assets represent the cash surrender value of life insurance policies on certain active and non-active employees who have provided consent for Bancorp to be the beneficiary for a portion of such policies. The related change in cash surrender value and any death benefits received under the policies are recorded as non-interest income. This income serves to offset the cost of various employee benefits. BOLI income increased ~~$103,000,~~$105,000, or ~~60%, and $115,000, or 22%~~65%, for the three ~~and nine~~ month ~~periods~~period ending ~~September 30, 2021~~March 31, 2022 compared to the same ~~periods~~period of the prior year, which was attributed ~~almost entirely~~mainly to the contribution of the BOLI portfolio added as a result of the KB ~~acquisition.~~acquisition in May of 2021.

Other non-interest income increased ~~$870,000 and $1.4 million~~$202,000, or 26%, for the three ~~and nine-month periods~~month period ended ~~September 30, 2021 as~~March 31, 2022 compared with the same ~~periods~~period of ~~2020, respectively. These increases were~~2021, driven largely by ~~a plethora of activity, most notably~~ the ~~addition of~~contribution from the insurance captive ~~stronger market returns on insurance policies outside~~acquired through the KB acquisition in May of ~~traditional BOLI, increased~~2021 and an increase in swap fee ~~income and gains on OREO sold.~~income.

Total non-interest expenses increased $8.9 million, or 35%, and $35.1 million, or 48%, for the three and nine-month periods ended September 30, 2021 compared to the same periods of 2020, respectively. Compensation and employee benefits comprised 60.9% and 52.2% of Bancorp’s total non-interest expenses for the three and nine-month periods ended September 30, 2021, compared to 63.0% and 63.6% for the same periods of 2020, respectively. Excluding merger expenses, compensation and employee benefits comprised 61.8% and 63.3% of total non-interest expenses for the three and nine-month periods ended September 30, 2021. On-going non-interest expense totaling $6.5 million and $8.8 million were added for the three and nine-month periods ended September 30, 2021 as a result of the KB acquisition (excluding merger expenses).

Total non-interest expenses increased $31.3 million for the three period ended March 31, 2022 compared to the same period of 2021. Compensation and employee benefits comprised 40.0% of Bancorp’s total non-interest expenses for the three month period ended March 31, 2022, compared to 64.4% for the same periods of 2021. Excluding merger expenses, compensation and employee benefits comprised 61.2% for the three month period ended March 31, 2022.

Compensation, which includes salaries, incentives, bonuses and stock based compensation, increased ~~$4.1~~$5.1 million, or ~~31%, and $8.6 million, or 23%~~40%, for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively.~~2021. The ~~increases were~~increase was attributed largely to growth in full time equivalent employees, as well as annual merit-based salary ~~increases and higher incentive compensation expense.~~increases. Net full time equivalent employees totaled ~~793~~997 at ~~September 30, 2021~~March 31, 2022 compared to ~~641~~820 at December 31, ~~2020~~2021 and ~~626~~638 at ~~September 30, 2020.~~March 31, 2021. The ~~large increase compared to prior periods was attributed to~~acquisitions of KB in May of 2021 and CB in the first quarter of 2022 have resulted in the addition of ~~156 FTEs as~~372 full time equivalent employees over the past twelve months and a result of the KB acquisition. Compensation expense totaling approximately $3.0 million and $3.9 million was recorded for the three and nine-month periods ended September 30, 2021 as a result of the acquisition.significant correlating increase in compensation expense.

Employee benefits consists of all personnel-related expense not included in compensation, with the most significant items being health insurance, payroll taxes and employee retirement plan contributions. Employee benefits increased ~~$809,000 or 28%, and $1.4~~$1.3 million, or ~~16%~~39%, for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020,~~2021, consistent with the overall increase in full time equivalent employees noted above. ~~Employee benefits expense totaling approximately $444,000 and $653,000 was recorded for the three and nine months ended September 30, 2021, respectively, in relation to the KB acquisition.~~

Net occupancy and equipment expenses primarily include depreciation, rent, property taxes, utilities and maintenance. Costs of capital asset additions flow through the statement of income over the lives of the assets in the form of depreciation expense. Net occupancy increased ~~$555,000,~~$980,000, or ~~25%, and $976,000, or 16%~~48%, for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared with the same ~~periods~~period of ~~2020, respectively.~~2021, driven by the two acquisitions completed over the past twelve months. In connection with the CB acquisition, 15 branches were acquired, four of which were closed shortly after acquisition in addition to one existing SYB location, as a result of branch overlap. Further, two operational buildings were also acquired and are currently listed for sale. The KB acquisition in May of 2021 resulted in the addition of 19 branch locations. At March 31, 2022, Bancorp’s branch network consists of 73 locations throughout ~~central~~Louisville, Central, Eastern and ~~eastern~~Northern Kentucky, as well as the MSAs of Indianapolis, Indiana and was the primary driver of the increases over prior period, contributing net occupancy and equipment expenses totaling approximately $608,000 and $837,000 for the three and nine month periods ending September 30, 2021, respectively.Cincinnati, Ohio.

Technology and communication expenses include computer software amortization, equipment depreciation and expenditures related to investments in technology needed to maintain and improve the quality of customer delivery channels, information security and internal resources. Technology expense increased ~~$850,000, or 37%, and $1.8~~$1.1 million, or ~~28%~~46%, for the three ~~and nine-month periods~~month period ended ~~September 30, 2021, attributed mainly~~March 31, 2022 compared to the ~~acquisition. Expenses totaling approximately $897,000~~same period of 2021, consistent with acquisition-related activity and ~~$1.2 million were recorded as a result of the KB acquisition for the three and nine-month periods ended September 30, 2021, respectively.~~core system upgrades. The KBCB system conversion occurred in ~~August 2021and technology-related~~late-March 2022 and total technology expenses are expected to moderate ~~into~~over the ~~fourth quarter.~~rest of 2022.

Bancorp outsources processing for debit and commercial credit card operations, which generate significant revenue for the Company. These expenses fluctuate consistent with transaction volumes. Debit and credit card processing expense increased ~~$830,000 and $1.3 million~~$632,000, or 90%, for the three ~~and nine~~ month ~~periods~~period ending ~~September 30, 2021~~March 31, 2022 compared to the same period of last year, correlating in part with the increase in transaction volume and customer base expansion resulting from both organic and acquisition-related growth that served to increase debit and credit card non-interest income. ~~Related expense associated with the KB acquisition totaled $651,000 and $868,000 for the three and nine-month periods ended September 30, 2021.~~

Marketing and business development expenses include all costs associated with promoting Bancorp including community support, retaining customers and acquiring new business. Marketing and business development expenses increased ~~$488,000,~~$248,000, or ~~93%, and $809,000, or 52%~~47%, for the three ~~and nine~~ month ~~periods~~period ending ~~September 30, 2021,~~March 31, 2022, as compared to the same ~~periods~~period of ~~2020.~~2021. The increases correspond with ~~more physical~~strategic decisions to advertise and promote in Bancorp’s new markets, as well as the general expansion and growth of the Company’s existing and prospective customer ~~interaction as a result of continued easing of pandemic-related restrictions, which has led to~~base.

Postage, printing and supplies expense increased ~~travel and entertainment expense~~$324,000, or 79%, for the three months ended March 31, 2022 compared to the same ~~periods~~period of ~~2020. Marketing~~2021, consistent with increased customer communication and ~~business development expense associated with~~Bancorp’s expansion tied to acquisition-related activity over the ~~KB acquisition totaled $157,000 and $208,000 for the three and nine months ended September 30, 2021.~~past twelve months.

Legal and professional fees increased ~~$156,000,~~$188,000, or ~~29%, and $33,000, or 2%~~41%, for the three ~~and nine-month periods~~month period ended ~~September 30, 2021~~March 31, 2022 compared to the same ~~periods~~period of last year, ~~respectively.~~the increase being attributed to various consulting engagements and litigation costs arising through the normal course of business. Legal and professional fees ~~related to the merger~~associated with merger-related activity are captured in merger expenses below. ~~Legal and professional expenses unrelated to the merger, but attributable to KB totaled approximately $132,000 for the three and nine months ended September 30, 2021.~~

FDIC insurance ~~decreased $48,000,~~increased $240,000, or ~~11%, and increased $247,000, or 28%~~59%, for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared to the same period of 2020. FDIC insurance expense related to the KB acquisition totaled $75,000 and $105,000 for the three and nine-month periods ended September 30, 2021. The three-month decrease was attributed mainly to a lower assessment rate, and thus a lower premium for the third quarter. The nine month period increase was driven by the acquisition and PPP-driven larger2021, consistent with acquisition-related balance sheet in addition to the first quarter of 2020 benefitting from the last portion of small institution credits first issued by the FDIC in 2019 upon the national FDIC Reserve Ratio reaching its targeted level.growth.

Tax credit partnerships generate federal income tax credits, and for each of Bancorp’s investments in tax credit partnerships, the tax benefit, net of related expenses, results in a positive effect on net income. Amounts of credits and corresponding expenses can vary widely depending upon the timing and magnitude of the underlying investments. Amortization expense associated with these investments increased ~~$1,000 and $174,000~~$57,000 for the three ~~and nine~~ month ~~periods~~period ending ~~September 30, 2021~~March 31, 2022 compared to the same period of last year. ~~No tax credit amortization was recorded in relation to the KB acquisition of the three and nine-month periods ended September 30, 2021.~~

Capital and deposit based taxes, ~~decreased $520,000,~~which consist primarily of capital-based local income taxes and franchise taxes, increased $60,000, or ~~48%, and $1.8 million, or 54%~~13%, for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021~~March 31, 2022 compared to the same ~~periods~~period of ~~2020 consistent with the state of Kentucky transitioning financial institutions from a capital-based franchise tax~~2021, attributed to ~~the Kentucky corporate income tax effective January 1, 2021. Capital~~both organic and ~~deposit based tax expense related to the KB acquisition was $82,000 and $109,000 for the three and nine month periods ended September 30, 2021, respectively.~~acquisition-related growth.

Merger expenses represent non-recurring expenses associated with completion of the KBCB acquisition and consist primarily of investment banker fees, various compensation-related expenses, legal fees, early termination fees relating to various contracts and system conversion expenses. Merger expenses totaled ~~$525,000 and $19.0~~$19.5 million for the three ~~and nine-month periods~~months ended ~~September 30, 2021. Merger expenses for the three-month period ended September 30, 2021 were attributed to the pending Commonwealth acquisition.~~

~~An early termination fee of $474,000 was recorded during the second quarter of 2021~~March 31, 2022, primarily in relation to the ~~pre-payment~~CB acquisition.

Intangible amortization expense consists of FHLB advances totaling $14 million prior to their respective contractual maturities. Bancorp chose to payoff these term advances, with a weighted average cost of 2.03%, due to its excess liquidity driven by the substantial deposit growth it achieved over the past 12 months, combinedamortization associated with the ~~near-term outlook~~CDI of acquired deposit portfolios, as well as other intangibles related to customer lists of the WM&T and investment advisory business lines added through the CB acquisition. The intangibles amortized through this category of non-interest expense are generally amortized over a period of approximately ten years. Intangible amortization for ~~low interest rates.~~the three months ended March 31, 2022 totaled $713,000 compared to $77,000 for the same period of the prior year, the increase stemming from the CB and KB acquisitions.

Other non-interest expenses increased ~~$1.0~~$1.4 million ~~or 83%, and $1.9 million, or 64%,~~ for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2021,~~March 31, 2022, as compared to the same ~~periods~~period of 2020. These increases were driven by a number of factors, ~~including the first full quarter of other non-interest expenses attributed to the KB acquisition, including amortization of the CDI related to KB’s deposit portfolio,~~mainly expenses associated with the addition of the insurance captive as a result of the KB acquisition in May of 2021, increased card reward expense correlating with growth in the debit and credit card business lines, and other ~~miscellaneous expenses. Further, large credits~~ancillary expenses tied to ~~expense were recorded in~~Bancorp’s general growth over the prior year associated with a gain on a bank-owned property sold in the first quarter of 2020 and the reversal of an accrual in the second quarter of 2020 related to a potential IRS penalty that was ultimately dismissed.past twelve months.

Bancorp’s efficiency ratio (FTE) for the three months ended March 31, 2022 of 82.61% reflects one-time merger-related expenses attributed to the CB 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 53.87% for March 31, 2022. By comparison, Bancorp’s efficiency ratio (FTE) and adjusted efficiency ratio for the three months ended March 31, 2021 were 48.29% and 47.45%, respectively. See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

Total assets increased ~~$1.6~~$1.13 billion, or ~~34%~~17%, to ~~$6.2~~$7.78 billion at ~~September 30, 2021~~March 31, 2022 from ~~$4.6~~$6.65 billion at December 31, ~~2020.~~2021. Total assets of ~~$1.3~~$1.34 billion were added on ~~May 31, 2021~~March 7, 2022 as a result of the KBCB acquisition, including loans of ~~$755~~$632 million ~~(including PPP)~~(net of purchase accounting adjustments) and total ~~AFS debt~~investment securities of ~~$396~~$247 million. In addition, goodwill of ~~$123~~$67 million was recorded in relation to the transaction. Further, total loans (excluding loans added through the CB acquisition and the PPP portfolio) grew ~~$221~~$118 million, or 7%3%, between December 31, ~~2020~~2021 and ~~September 30, 2021.~~March 31, 2022.

Total liabilities increased ~~$1.3~~$1.05 billion, or ~~32%~~18%, to ~~$5.5~~$7.02 billion at ~~September 30, 2021~~March 31, 2022 from ~~$4.2~~$5.97 billion at December 31, ~~2020.~~2021. Total liabilities of ~~$1.2~~$1.24 billion were assumed on ~~May 31, 2021~~March 7, 2022 as a result of the KBCB acquisition, including total deposits of ~~$1.0~~$1.12 billion. ~~Excluding deposits assumed through the acquisition,~~Both period end and average deposit balances ~~remained~~finished at record levels as of ~~September 30, 2021, growing $353~~March 31, 2022 due to the acquisition. Further, SSUAR totaling $66 million ~~or 9%, since December 31, 2020,~~and subordinated debentures of $26 million were also assumed as ~~federal stimulus efforts have bolstered deposits and uncertainty surrounding~~a result of the ~~pandemic has resulted in Bancorp’s customer base maintaining higher balances in general over the past several months.~~CB acquisition.

Cash and cash equivalents ~~increased $267~~declined $209 million, or ~~84%~~22%, ending at ~~$585~~$752 million at ~~September 30, 2021~~March 31, 2022 compared to ~~$318~~$961 million at December 31, ~~2020.~~2021. The average balance of cash and cash equivalents increased ~~$156~~$436 million ~~or 60%,~~ over the past twelve ~~months.~~months, as Bancorp continues to maintain higher levels of liquidity attributable to the PPP, continued growth in deposits and the overall interest rate environment.

~~AFS debt~~Investment securities increased ~~$483~~$518 million, or ~~82%~~44%, to ~~$1.1~~$1.70 billion at ~~September 30, 2021~~March 31, 2022 compared to ~~$587 million~~$1.18 billion at December 31, ~~2020. AFS debt securities~~2021. Securities totaling ~~$396~~$247 million were added as a result of the ~~KB acquisition, approximately $91 million of which were sold shortly after~~CB acquisition. In addition, Bancorp continued to actively invest in the securities portfolio during ~~2021~~the first quarter of 2022 in an effort to deploy ~~a portion of~~ excess liquidity ~~a strategy enacted in the latter half of 2020,~~ by purchasing ~~$325~~$481 million of ~~AFS~~ debt securities for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. Partially offsetting growth associated with purchasing and acquisition-related activity was scheduled amortization and ~~elevated~~ prepayment activity, largely within the MBS portfolio, as well as market depreciation of approximately $65 million stemming from an upward move in the interest rate environment experienced through the ~~first nine~~during the three months ~~of 2021. As a result~~ended March 31, 2022.

A portion of the securities added during the first quarter of 2022, through both acquisition and normal investment activity, ~~above, average~~were classified as HTM. As of March 31, 2022, Bancorp’s investment security portfolio consisted of AFS ~~debt~~and HTM securities ~~grew $397 million, or 92%, over the past twelve months.~~as detailed below:

Premises and equipment are presented on the consolidated balance sheets net of related depreciation on the respective assets as well as fair value adjustments associated with purchase accounting. Premises and equipment increased $32 million, or 42%, between December 31, 2021 and March 31, 2022, driven by the CB acquisition. As a result of the KB acquisition, 15 branches were acquired, four of which ~~added 19 locations throughout central and eastern Kentucky, premises and equipment increased $19 million, or 33%, to $77 million at September 30, 2021 from $58 million at December 31, 2020.~~

Bank-owned life insurance assets increased $20 million, or 59%, to $53 million at September 30, 2021, compared to $33 million at December 31, 2020, the increase stemming directly from life insurance assets addedwere closed shortly acquisition as a result of overlapping with existing locations of the ~~KB acquisition.~~

At ~~September 30, 2021,~~March 31, 2022, Bancorp had ~~$136~~$203 million in goodwill recorded on its balance sheet, including ~~$124~~$67 million recorded in association with the acquisition of ~~KB.~~CB. 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 KBCB acquisition. During this measurement period, Bancorp may record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. ~~Net adjustments attributed~~

Events that may trigger goodwill impairment include deterioration in economic conditions, a decline in market-dependent multiples or metrics (i.e. stock price falling below tangible book value), negative trends in overall financial performance and regulatory action. At September 30, 2021, Bancorp elected to perform a qualitative assessment to determine if it was more-likely-than-not that the KBfair value of the Commercial Banking reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that it was not more-likely-than-not that the carrying value of the reporting unit exceeded its fair value.

Core deposit and customer relationships intangibles arising from business acquisitions are initially measured at fair value and are then amortized on an accelerated method based on their useful lives. As a result of the CB acquisition, ~~totaling $700,000 reduced goodwill attributed~~a CDI asset of $13 million was recorded, bringing Bancorp’s total CDI assets to ~~KB to $123~~$18 million as of ~~September 30, 2021.~~March 31, 2022.

Customer list intangible assets totaling $14 million were also recorded in association with the CB acquisition. Of this total, $12 million related to CB’s WM&T segment and $2 million related to LFA.

Other assets increased ~~$17~~$25 million, or ~~24%~~29%, to ~~$88~~$111 million at ~~September 30, 2021.~~March 31, 2022. Other liabilities decreased $8$4 million, or 9%4%, to ~~$80~~$93 million at ~~September 30, 2021.~~March 31, 2022.

The increase in other assets was attributed to ~~OREO added due to foreclosure~~the addition of ~~a large CRE property, additional investment~~$13 million in ~~tax credit partnerships and general increases in other~~MSR assets related to the ~~KB acquisition. Partially offsetting~~CB acquisition and an $11 million increase in deferred tax assets driven by the ~~increase was~~significant market depreciation ~~on interest rate swap assets stemming from an improving interest rate environment, which also served to decrease to correlating interest rate swap liabilities.~~ experienced within the AFS debt securities portfolio for the three months ended March 31, 2022 as a result of rising rates.

The ~~remaining~~ decrease in other liabilities was attributed mainly to the reduction of various accrued ~~liabilities.~~liabilities, such as employee incentive compensation and benefits.

As of ~~September 30, 2021,~~March 31, 2022, Bancorp did not incur any impairment with respect to its ~~other~~ intangible assets ~~(MSRs and CDIs)~~ or other long-lived assets.

Composition of loans, net of deferred fees and costs, by primary loan portfolio class follows:

~~Composition~~loans as of ~~loans,~~March 31, 2022, net of deferred fees and costs, by primary loan portfolio class and bifurcated between Bancorp’s ~~legacy~~historic loan portfolio and the loan portfolio ~~attributed to KB:~~acquired through the CB acquisition follows:

Total loans increased ~~$658~~$678 million, or ~~19%~~16%, from December 31, ~~2020~~2021 to ~~September 30, 2021,~~March 31, 2022, driven by the addition of ~~$755~~$630 million in loans ~~associated with the KB acquisition. Loan balances attributed~~related to ~~the acquired portfolio~~acquisition-related expansion and ~~related market grew to $763~~strong organic loan growth, which more than offset a $69 million ~~as of September 30, 2021, and while organic growth was also strong for the nine months ended September 30, 2021, significant forgiveness-related contractions was experienced within~~decline in the PPP ~~portfolio between December 31, 2020 and September 30, 2021.~~

~~Excluding the~~ loan portfolio acquired through the KB acquisition, loan contraction of $97 million, or 3%, was experienced between December 31, 2020 and September 30, 2021, as the aforementioned forgiveness activity resulted in PPP portfolio balances declining $319 million, or 58%, during the first nine months of 2021. Partially offsetting the large decline in PPP balances was organic growth of $221 million, or 7%, over half of which, or $118 million, was attributed to strong loan production within the CRE portfolio. Further, the strategic retention of a portion of qualified secondary market single family residential real estate loan production from the mortgage banking department and gradually improving line of credit utilization helped drive growth of $55 million and $41 million in the residential real estate and C&I line of credit portfolios, respectively, over the first nine months of 2021.

While improving for the third straight quarter, line of credit usage remained well below pre-pandemic levels through the first nine months of 2021, as the availability of the more favorable PPP lending facility continued to disparage utilization until the program expired on May 31, 2021. Overall, total line of credit usage did increase to 40.6% at September 30, 2021 compared to 38.0% at December 31, 2020 and 37.0% at September 30, 2020.

PPP loans of $231 million ($239 million gross of unamortized deferred fees and costs) were outstanding at September 30, 2021, including $12 million attributed to the KB acquisition. Bancorp has $8 million in net unrecognized fees related to the PPP as of September 30, 2021, which would be recognized immediately once the loans are paid off or forgiven by the SBA. The timing of such forgiveness is expected to have a major impact on operating results for the remainder of 2021 and into early to mid-2022.

~~Bancorp originated $637~~Excluding the loans acquired through the CB acquisition and the PPP portfolio, loan growth of $118 million, ~~PPP loans ($657~~or 3%, was experienced between December 31, 2021 and March 31, 2022, driven largely by increases of $53 million ~~gross of unamortized fees~~ and costs) as part of round one of the program, which expired in August of 2020. As of September 30, 2021, 96% of the dollars originated in round one have been forgiven. In addition, approximately 99% of the $19.6$46 million in ~~fee income received for round one originations has been recognized life to date.~~the CRE and C&I portfolios, respectively.

~~Bancorp originated $250~~After hitting a pandemic-era low of 36.5% at March 31, 2021, total line of credit utilization has improved significantly, reaching 41.0% at March 31, 2022, led by C&I utilization, which strengthened from 23.9% to 31.6% over that same period, respectively. However, line of credit usage has remained below pre-pandemic levels, as the availability of the more favorable PPP lending facility hurt utilization for much of 2021 and customers continue to maintain elevated levels of liquidity.

PPP loans of $71 million ($~~261~~73 million gross of unamortized deferred fees and costs) were outstanding at March 31, 2022. Bancorp has $2 million in net unrecognized fees related to the PPP as ~~part~~ of ~~round two~~March 31, 2022, which will be recognized immediately once the loans are paid off or forgiven by the SBA. While forgiveness activity will continue to impact results, the related fee recognition is becoming less significant as the balance of the ~~PPP program, which expired May~~overall portfolio shrinks. At March 31, ~~2021. As of September 30, 2021, 24%~~2022, approximately 92% of the dollars originated through the PPP have been forgiven and ~~34%~~approximately 94% of the ~~fees~~fee income received for the second round of the program have been recognized life to date. As second round borrowers are not required to make payments for 16 months, it is probable that a significant portion of the borrowing base will seek forgiveness in ~~early to mid-2022 in connection with tax return preparation.~~

~~In accordance with Section 4013 of the CARES Act and in response to requests from borrowers who experienced business interruptions related~~relation to the pandemic, Bancorp extended payment deferrals for those affected borrowers. Depending on the demonstrated need of the customer, Bancorp deferred either the full loan payment or the principal-only portion of respective loan payments for 90 or 180 days for some borrowers directly impacted by the pandemic. As of September 30, 2021 outstanding full payment loan deferrals totaled $355,000, representing 0.01% of the loan portfolio (excluding PPP ~~loans), down from $37 million, or 1.24% of total loans (excluding PPP loans), at December 31, 2020.~~has been recognized.

Bancorp’s credit exposure is diversified with secured and unsecured loans to individuals and businesses. No specific industry concentration exceeds 10% of loans outstanding. While Bancorp has a diversified loan portfolio, a customer’s ability to honor contracts is somewhat dependent upon the economic stability and/or industry in which that customer does business. Loans outstanding and related unfunded commitments are primarily concentrated within Bancorp’s current market areas, which encompass Louisville, Kentucky, central and eastern Kentucky, Indianapolis, Indiana and Cincinnati, Ohio.

Bancorp occasionally enters into loan participation agreements with other banks to diversify credit risk. For certain participation loans sold, Bancorp has retained effective control of the loans, typically by restricting the participating institutions from pledging or selling their ownership share of the loan without permission from Bancorp. GAAP requires the participated portion of these loans to be recorded as secured borrowings. These participated loans are included in the C&I and CRE loan portfolio segments with a corresponding liability recorded in other liabilities. At ~~September 30, 2021~~both March 31, 2022 and December 31, ~~2020,~~2021, the total participated portion of loans of this nature totaled $5 ~~million~~million.

The following table presents the maturity distribution and ~~$10 million, respectively.~~rate sensitivity of the total loan portfolio as of March 31, 2022:

In the event where Bancorp structures a loan with a maturity exceeding five years (typically CRE loans), an automatic rate adjustment will typically be set in place at five years from origination date to limit interest rate sensitivity.

(1) See the section titled “Non-GAAP Financial Measures” for reconcilement of non-GAAP to GAAP measures.

In total, non-performing assets as of ~~September 30, 2021~~March 31, 2022 were comprised of 67138 loans, ranging in individual amounts up to $1$2 million, one nominal accruing TDR loan and foreclosed real estate held for sale. Foreclosed real estate held at ~~September 30, 2021~~March 31, 2022 included two CRE properties and ~~two~~one residential real estate ~~properties.~~

The following table presents the recorded investment in non-accrual loans by portfolio:

As of ~~September 30, 2021,~~March 31, 2022, non-accrual loans totaled ~~$5.0~~$12 million. The ~~decrease~~increase in total non-accrual loans ~~decreased~~ between December 31, ~~2020~~2021 and ~~September 30, 2021~~March 31, 2022 as a result of adding $6 million in non-accrual loans through the ~~partial charge off~~CB acquisition.

Delinquent loans (consisting of all loans 30 days or more past due) totaled ~~$13~~$11 million at ~~September 30, 2021 compared to $17 million at~~both March 31, 2022 and December 31, ~~2020.~~2021. Delinquent loans to total loans were ~~0.31%~~0.23% and ~~0.48%~~0.26% at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. Delinquent loans to total loans (excluding PPP loans) were ~~0.33%~~0.23% at ~~September 30, 2021~~March 31, 2022 compared to ~~0.57%~~0.27% at December 31, ~~2020.~~2021.

The ACL for loans is a valuation allowance for loans estimated at each balance sheet date in accordance with GAAP. When Bancorp deems all or a portion of a loan to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. Subsequent recoveries, if any, are credited to the ACL when received. See the ~~footnote~~Footnote titled “Summary of Significant Accounting Policies” for discussion of Bancorp’s ACL methodology on loans. Allocations of the ACL may be made for specific loans, but the entire ACL for loans is available for any loan that, in Bancorp’s judgment, should be charged-off.

The following table ~~sets forth~~reflects activity in the ACL ~~by category of loan (excluding PPP):~~on loans for the three months ended March 31, 2022:

~~(1) Excludes the PPP loan portfolio, which was not reserved for based on the underlying 100% SBA guarantee. The allowance allocated for the commercial & industrial~~ –~~term segment includes $813,000 related to PCD PPP loans.~~

Bancorp’s ACL for loans was ~~$56.5~~$67 million as of ~~September 30, 2021~~March 31, 2022 compared to ~~$51.9~~$54 million as of December 31, ~~2020.~~2021. The change in the ACL for loans was driven by a number of competing factors, which resulted in the ~~$4.6~~$13 million, or 9%24%, increase experienced for the first ~~nine~~three months of ~~2021.~~2022. Acquisition-related activity was responsible for a total increase to the ACL for loans of ~~$14.2~~$14 million at acquisition date, comprised of a ~~$6.8~~$10 million day one adjustment for specific reserves placed on acquired PCD loans (offset to goodwill) and ~~$7.4~~$4 million of provision for credit loss expense on loans related to the remaining acquired ~~non-PCD~~ loan portfolio. Partially offsetting the acquisition-related increases was a net reduction of the ACL for loans of ~~$4.9~~$2 million for the first ~~nine~~three months of ~~2021~~2022 stemming from an improved unemployment forecast, general improvement in other underlying CECL model factors ~~compared to recent periods~~ and ~~updates to Bancorp’s CECL model.~~strong credit quality metrics. Further, ~~reducing the ACL for loans~~net recoveries totaling $540,000 were net charge offs of $4.6 million for the period, which were driven by the charge off of two CRE relationships totaling $4.4 million. Both relationships were fully reserved and had no income statement impactrecorded for the three ~~and nine~~ months ended ~~September 30, 2021. Partially offsetting these charge offs was~~March 31, 2022, driven by a ~~$555,000~~$711,000 recovery of a ~~note~~C&I relationship that was fully charged off ~~in 2020.~~during the fourth quarter of 2021.

The FRB’s forecast of the Seasonally Adjusted National Civilian Unemployment Rate is the primary loss driver within Bancorp’s CECL model and has ~~steadily improved~~continued to improve over the past ~~several months after spiking to 14.8% in April of 2020, standing~~year. This rate stood at ~~4.8%~~3.6% as of ~~September 30, 2021.~~March 31, 2022 compared to 3.9% at December 31, 2021 and 6.0% at March 31, 2021, supporting the FRB’s improved outlook regarding unemployment. The pandemic has had a material impact on Bancorp’s quarterly ACL for loans calculations. While Bancorp has not yet experienced credit quality issues resulting in charge-offs related to the pandemic, the ACL for loans calculation and resulting credit loss expense is significantly impacted by changes in forecasted economic conditions. Should the forecast for economic conditions ~~worsen,~~change, Bancorp could experience further ~~increases~~adjustments in its required ACL for loans ~~and record additional~~ credit loss expense. ~~While~~

The following table sets forth the ~~execution~~ACL by category of ~~payment deferrals under~~loan (excluding):

The table below details net charge-offs to average loans outstanding by category of loan for the ~~CARES ACT has assisted credit quality ratios, it is possible that asset quality could worsen at future measurement~~three month periods ~~if the effects~~ended March 31, 2022 and 2021, respectively.

While separate from the ACL for loans and recorded in other liabilities on ~~the~~Bancorp’s consolidated balance sheets, the ACL for off balance sheet credit exposures also experienced ~~a decrease~~an increase between December 31, ~~2020~~2021 and ~~September 30, 2021.~~March 31, 2022. As a result of the CB acquisition, the ACL for off balance sheet credit exposures was increased $500,000 (offset to goodwill) at acquisition date. A net benefit was subsequently recorded for provision for credit losses for off balance sheet exposures ~~during~~for the ~~first nine~~three months ~~of 2021,~~ended March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage consistent with generally improving model factors and continued improvement in line of credit utilization. The ACL for off balance sheet credit exposures stood at ~~$4.3~~$3.6 million as of ~~September 30, 2021~~March 31, 2022 compared to ~~$5.4~~$3.5 million as of December 31, ~~2020.~~2021.

(1) Includes $4$21 million and ~~$25~~$5 million in brokered deposits as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively.

~~Composition~~The composition of deposits as of March 31, 2022, bifurcated between Bancorp’s legacy deposit portfolio and the deposit portfolio acquired through the KBCB acquisition, follows:

Total deposits increased ~~$1.4 billion,~~$958 million, or ~~34%~~17%, from December 31, ~~2020~~2021 to ~~September 30, 2021. Deposits~~March 31, 2022. At acquisition date, deposits totaling ~~$1.0~~$1.12 billion were assumed as a result of the KBCB acquisition. ~~Deposit balances attributed to the acquired portfolio and related market decreased slightly to $995 million as of September 30, 2021.~~ Excluding the deposits acquired through the KBCB acquisition, deposits ~~grew $358~~decreased $163 million, or 9%3%, during the first ~~nine~~three months of ~~2021, with non-interest bearing balances representing virtually the entire increase. Average~~2022, attributed mainly anticipated seasonal deposit balances have increased $688 million, or 28%, over the past 12 months, as federal programs such as the PPP, stimulus checks and enhanced unemployment benefits drove both ending and average deposit balances to record levels as of September 30, 2021 in addition to deposits added as a result of the acquisition, which contributed $448 million of the average balance increase.run-off.

SSUARs are collateralized by securities and are treated as financings; accordingly, the securities involved with the agreements are recorded as assets and are held by a safekeeping agent and the obligations to repurchase the securities are reflected as liabilities. All securities underlying the agreements are under the Bank’s control. The majority of SSUARs are indexed to immediately repricing indices such as the FFTR.

SSUARs ~~totaled $74~~increased $67 million, ~~and $48 million at September 30,~~or 88%, between December 31, 2021 and ~~December~~March 31, ~~2020, respectively,~~2022, as SSUAR totaling ~~$11~~$66 million were assumed as part of the KBCB acquisition. The remaining ~~increase~~fluctuation in SSUAR is consistent with the general trend of customers maintaining elevated deposit balances.

FHLB advances decreased $22 million, or 68%, between December 31, 2020 and September 30, 2021 due to maturing advances not being renewed or replaced in addition to elective pay offs. During the first quarter of 2021, Bancorp elected to pay down certain advances prior to maturity without incurring pre-payment penalties. During the second quarter of 2021, Bancorp paid off $14 million of term advances, with a weighted average cost of 2.03%, prior to their maturity incurring an early-termination fee of $474,000. Bancorp based this decision on its excess liquidity position driven by the substantial deposit growth it achieved during 2020 and the first half of 2021, combined with the then near-term outlook for low interest rates. Bancorp believes it will substantially “earn back” the early termination penalty through lower interest expense over the next two years assuming short-term interest rates remain at current low levels.Subordinated debentures

As a result of the KBCB acquisition, FHLB advances totaling $91 million were assumed and paid off immediately upon acquisition based on lack of necessity and current levels of excess liquidity. Early termination penalties totaling $2.5 million were incurred as a resultBancorp became the 100% successor owner of the ~~payoffs, but had no income statement impact~~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 ~~the three and nine-month periods ended September 30, 2021 due~~subordinated debentures with similar terms to the ~~fair value adjustment recorded~~TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2022, subordinated notes added through ~~goodwill at acquisition.~~the CB acquisition totaled $26 million. Bancorp chose not to redeem the subordinated notes on April 1, 2022.

The role of liquidity management is to ensure funds are available to meet depositors’ withdrawal and borrowers’ credit demands while at the same time maximizing profitability. This is accomplished by balancing changes in demand for funds with changes in supply of those funds. Liquidity is provided by short-term assets that can be converted to cash, AFS debt securities, various lines of credit available to Bancorp, and the ability to attract funds from external sources, principally deposits. Management believes it has the ability to increase deposits at any time by offering rates slightly higher than market rate.

Bancorp’s Asset/Liability Committee is comprised of senior management and has direct oversight responsibility for Bancorp’s liquidity position and profile. A combination of reports provided to management details internal liquidity metrics, composition and level of the liquid asset portfolio, timing differences in short-term cash flow obligations, and exposure to contingent draws on Bancorp’s liquidity.

Bancorp’s most liquid assets are comprised of cash and due from banks, FFS and AFS debt securities. FFS and interest bearing deposits totaled ~~$500~~$642 million and ~~$275~~$899 million at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. The ~~large increase in FFS and interest bearing deposits~~decrease experienced ~~over~~for the first ~~nine~~three months of ~~2021~~2022 is attributed ~~largely~~ to ~~PPP forgiveness activity, as cash received for~~significant investment in the ~~forgiveness of these notes has outpaced efforts to invest cash~~securities portfolio and strong organic loan growth, which was partially offset by liquidity added through the ~~typical investments, such as loan production and AFS debt security purchases.~~CB acquisition. FFS normally have overnight maturities while interest-bearing deposits in banks are accessible on demand. These investments are used for general daily liquidity purposes.

The fair value of the AFS debt security portfolio was ~~$1.1~~$1.15 billion and ~~$587 million~~$1.18 billion at ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021 respectively. The ~~$483 million, or 82%, increase experienced over~~lack of growth in AFS debt security portfolio for the first ~~nine~~three months of ~~2021~~2022 is attributed to both classifying securities purchased and acquired during the ~~KB acquisition~~first quarter as HTM for general capital purposes as well as significant market depreciation experienced on the AFS portfolio since December 31, 2021 due to rising rates. The investment portfolio (HTM and ~~the strategic, aggressive growth of portfolio through security purchases in an effort to deploy excess liquidity. The portfolio~~AFS) includes scheduled maturities of ~~$30~~$69 million and cash flows on amortizing ~~AFS~~ debt securities of approximately ~~$220~~$266 million (based on assumed prepayment speeds as of ~~September 30, 2021)~~March 31, 2022) expected over the next twelve months. Combined with FFS and interest bearing deposits from banks, AFS debt securities offer substantial resources to meet either loan growth or reductions in Bancorp’s deposit funding base. Bancorp pledges portions of its investment securities portfolio to secure public funds, cash balances of certain WM&T accounts and SSUAR. At ~~September 30, 2021,~~March 31, 2022, total investment securities pledged for these purposes comprised 64% of the ~~AFS~~ debt securities portfolio, leaving approximately ~~$383~~$617 million of unpledged ~~AFS~~ debt securities.

Bancorp’s deposit base consists mainly of core deposits, defined as time deposits less than or equal to $250,000, demand, savings, money market deposit accounts and excludes public funds and brokered deposits. At ~~September 30, 2021,~~March 31, 2022, such deposits totaled ~~$4.8~~$5.85 billion and represented ~~89%~~87% of Bancorp’s total deposits, as compared with ~~$3.5~~$5.05 billion, or ~~89%~~87% of total deposits at December 31, ~~2020.~~2021. Because these core deposits are less volatile and are often tied to other products of Bancorp through long lasting relationships, they do not place undue pressure on liquidity. However, many of Bancorp’s individual depositors are currently maintaining historically high balances. These excess balances may be more sensitive to market rates, with potential decreases possibly straining Bancorp’s liquidity position.

As of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, Bancorp held brokered deposits totaling $4$21 million and ~~$25~~$5 million, respectively, all of which is attributed to deposits added through the ~~KB acquisition.~~acquisition-related activity over the past twelve months.

Included in total deposit balances at ~~September 30, 2021~~March 31, 2022 are ~~$499~~$760 million in public funds generally comprised of accounts with local government agencies and public school districts in the markets in which Bancorp ~~operates, including public funds deposits totaling $187 million added as a result of the KB acquisition.~~operates. At December 31, ~~2020,~~2021, public funds deposits totaled ~~$355 million.~~$645 million, the increase experienced during the first three months of 2022 being attributed mainly to relationships added through the CB acquisition.

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 ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, available credit from the FHLB totaled ~~$892 million~~$1.02 billion and ~~$804 million,~~$1.00 billion, respectively. The increase in available credit over the first nine months of 2021 is due to an increase in eligible loans (those pledged for collateral-based borrowing capacity) and the payoff of advances prior to maturity during the first three quarters of 2021. See the footnote titled “FHLB Advances” for additional detail. Additionally, Bancorp had unsecured available FFP lines with correspondent banks totaling $100 million and $80 million at ~~both September 30, 2021~~March 31, 2022 and December 31, ~~2020.~~2021, respectively. In addition, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line of the holding company.

During the normal course of business, Bancorp enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through Bancorp’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of Bancorp’s liquidity.

Bancorp’s principal source of cash is dividends paid to it as the sole shareholder of the Bank. As discussed in the ~~footnote~~Footnote titled “Commitments and Contingent Liabilities,” as of January 1st of any year, the Bank may pay dividends in an amount equal to the Bank’s net income of the prior two years less any dividends paid for the same two years. At ~~September 30, 2021,~~March 31, 2022, the Bank could pay an amount equal to ~~$36~~$22 million in dividends to Bancorp without regulatory approval subject to ongoing capital requirements of the Bank.

Cash flow is provided primarily through financing activities of Bancorp, which include raising deposits and borrowing funds from institutional sources such as advances from FHLB and FFP, as well as scheduled loan repayments and cash flows from ~~AFS~~ debt securities. These funds are primarily used to facilitate investment activities of Bancorp, which include making loans and purchasing securities for the investment portfolio. Another important source of cash is net income of the Bank from operating activities. For further detail regarding the sources and uses of cash, see the “Consolidated Statements of Cash Flows” in Bancorp’s consolidated financial statements.

In the normal course of business, Bancorp is party to activities that contain credit, market and operational risk that are not reflected in whole or in part in Bancorp’s consolidated financial statements. Such activities include traditional off-balance sheet credit-related financial instruments, commitments under operating leases and long-term debt.

Bancorp provides customers with off-balance sheet credit support through loan commitments and standby letters of credit. Unused loan commitments increased ~~$282~~$355 million as of ~~September 30, 2021~~March 31, 2022 compared to December 31, ~~2020,~~2021, the increase being driven by both the KBCB acquisition and new lines of credit. Total average line of credit utilization ~~improved to 40.6%~~was essentially flat at ~~September 30, 2021~~41.0% as of March 31, 2022 as compared to ~~38.0%~~41.2% at December 31, ~~2020 and 37.0%~~2021, both representing significant improvement from the pandemic-era low of 36.5% experienced at September 30, 2020. While improving over the prior quarter, depressed C&I line of credit usage has driven the dramatic decline in utilization experienced over the past year as customers took advantage of the more favorable financing provided by the PPP. For reference,March 31, 2021. C&I line of credit utilization was ~~28.9%~~31.6% at ~~September 30, 2021~~March 31, 2022 compared to ~~26.1%~~31.8% at December 31, ~~2020~~2021 and ~~the pre-pandemic average of 42.9% experienced in 2019.~~23.9% at March 31, 2021.

Commitments to extend credit are agreements to lend to customers as long as collateral is available as agreed upon and there is no violation of any condition established in the contracts. Commitments generally have fixed expiration dates or other termination clauses. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Bancorp uses the same credit and collateral policies in making commitments and conditional guarantees as for on-balance sheet instruments. Bancorp evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Collateral held varies, but may include accounts receivable, inventory, securities, equipment and real estate. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, our maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.

The ACL for off balance sheet credit exposures, which is separate from the ACL for loans and recorded in other liabilities on the consolidated balance sheets, stood at ~~$4.3~~$3.6 million and ~~$5.4~~$3.5 million as of ~~September 30, 2021~~March 31, 2022 and December 31, ~~2020,~~2021, respectively. ~~A net benefit of was recorded as provision for credit losses~~The CB acquisition resulted in a $500,000 increase to the ACL for off balance sheet credit exposures, ~~during~~with the ~~first nine months of 2021,~~corresponding offset recorded to goodwill (as opposed to provision expense). This increase was partially offset by a $400,000 benefit to provision expense recorded for the three period ended March 31, 2022, as nearly all applicable loan segments experienced declines in their reserve loss percentage consistent with generally improving model factors ~~as well as increased utilization, driving down available~~and improvement in line of credit ~~used to calculate exposure.~~utilization.

Standby letters of credit are conditional commitments issued by Bancorp to guarantee the performance of a customer to a third party beneficiary. Those guarantees are primarily issued to support commercial transactions. Standby letters of credit generally have maturities of one to two years.

In addition to owned banking facilities, Bancorp has entered into long-term leasing arrangements for certain branch facilities. Bancorp also has required future payments for a non-qualified defined benefit retirement plan, ~~FHLB advances~~TPS and the maturity of time deposits.

See the footnote titled “Commitments and Contingent Liabilities” for additional detail.

At ~~September 30, 2021,~~March 31, 2022, stockholders’ equity totaled ~~$664~~$758 million, representing an increase of ~~$223~~$82 million, or ~~51%~~12%, compared to December 31, ~~2020.~~2021. The ~~large~~ increase ~~over~~for the first ~~nine~~three months of ~~2021~~2022 was attributed mainly to stock issued in relation to the KBCB acquisition, which totaled ~~$205~~$134 million. Further, net income of ~~$50~~$7.9 million was ~~partially~~ offset by a ~~larger~~$50 million negative change in AOCI and dividends declared during the first ~~nine months~~quarter of ~~2021.~~2022. AOCI consists of net unrealized gains or losses on AFS debt securities and ~~hedging instruments, as well as~~ a minimum pension liability, each net of income taxes. AOCI declined ~~$11~~$50 million from December 31, ~~2020~~2021 to ~~September 30, 2021,~~March 31, 2022, with the fluctuation stemming from the changing interest rate environment and corresponding valuation of the AFS debt securities portfolio. See the “Consolidated Statement of Changes in Stockholders’ Equity” for further detail of changes in equity.

In May 2021, Bancorp’s Board of Directors extended its share repurchase program authorizing the repurchase of up to 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. The plan, which will expire in May 2023 unless otherwise extended or completed at an earlier date, does not obligate Bancorp to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. Based on economic developments over the past year and the increased importance of capital preservation, no shares were repurchased in ~~2020~~2021, nor the first ~~nine~~three months of ~~2021.~~2022. Approximately 741,000 shares remain eligible for repurchase under the current repurchase plan.

Bank holding companies and their subsidiary banks are required by regulators to meet risk-based capital standards. These standards, or ratios, measure the relationship of capital to a combination of balance sheet and off-balance sheet risks. The value of both balance sheet and off-balance sheet items are adjusted to reflect credit risks. See the ~~footnote~~Footnote titled “Regulatory Matters” for additional detail regarding regulatory capital requirements, as well as capital ratios of Bancorp and the Bank. The Bank exceeds regulatory capital ratios required to be well-capitalized. Regulatory framework does not define well capitalized for holding companies. Management considers the effects of growth on capital ratios as it contemplates plans for expansion.

The following table sets forth consolidated Bancorp’s and the Bank’s risk based capital ratios:

(1) Under regulatory risk-based capital guidelines, assets and credit-equivalent amounts of derivatives and off-balance sheet credit exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. Weighted values are added together, resulting in Bancorp's total risk-weighted assets. These ratios are computed in relation to average assets.

Capital ratios as of March 31, 2022 decreased compared December 31, 2021 as a result of substantial average asset and risk-weighted asset growth, driven by both organic and acquisition-related activity. While pressure was placed on risk-based capital and leverage ratios due to this growth, Bancorp continues to exceed the regulatory requirements for all calculations. Bancorp and the Bank intend to maintain a capital position that meets or exceeds the “well-capitalized” requirements as defined by the FRB and the FDIC, in addition to the capital conservation buffer.

Banking regulators have categorized the Bank as well-capitalized. To meet the definition of well-capitalized for prompt corrective action requirements, a bank must have a minimum 6.5% Common Equity Tier 1 Risk-Based Capital ratio, 8.0% Tier 1 Risk-Based Capital ratio, 10.0% Total Risk-Based Capital ratio and 5.0% Tier 1 Leverage ratio.

Additionally, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, Bancorp and the Bank must hold a 2.5% capital conservation buffer composed of Common Equity Tier 1 Risk-Based Capital above the minimum risk-based capital requirements for the Common Equity Tier 1 Risk-Based Capital ratio, Tier 1 Risk-Based Capital ratio and Total Risk-Based Capital ratio necessary to be considered adequately-capitalized. At ~~September 30, 2021,~~March 31, 2022, the adequately-capitalized minimums, including the capital conservation buffer, were a 6.0% Common Equity Tier 1 Risk-Based Capital ratio, 8.5% Tier 1 Risk-Based Capital ratio and 10.5% Total Risk-Based Capital ratio.

As a result of the CB acquisition, Bancorp ~~continues~~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 ~~exceed~~ the ~~regulatory requirements for all calculations.~~TPS. The TPS are treated as part of Tier 1 Capital. The subordinated note and related interest expense are included in Bancorp’s consolidated financial statements. The subordinated notes are currently redeemable at Bancorp’s option on a quarterly basis. As of March 31, 2022, subordinated notes added through the CB acquisition totaled $26 million. Bancorp ~~and~~chose not to redeem the subordinated notes on April 1, 2022.

Further, Bancorp had borrowing capacity of $20 million available through an unsecured borrowing line of the holding company as of March 31, 2022, which was added during the first quarter to allow capital flexibility at the Bank ~~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.~~level.

As permitted by the interim final rule issued on March 27, 2020 by the federal banking regulatory agencies, Bancorp elected the option to delay the estimated impact on regulatory capital related to the adoption of ASC 326 “Financial Instruments – Credit Losses,” or CECL, which was effective January 1, 2020. The initial impact of adoption of ASC 326, as well as 25% of the quarterly increases in the ACL subsequent to adoption of ASC 326 (collectively the “transition adjustments”) were declared to be delayed for two years. After two years, the cumulative amount of the transition adjustments will become fixed and will be phased out of the regulatory capital calculations evenly over a three-year period, with 75% recognized in year three, 50% recognized in year four and 25% recognized in year five. After five years, the temporary regulatory capital benefits will be fully reversed. Had Bancorp not elected to defer the regulatory capital impact of CECL, the post ASC 326 adoption capital ratios of Bancorp and the Bank would have exceeded the well-capitalized level.

The following table provides a reconciliation of total stockholders’ equity in accordance with GAAP to tangible stockholders’ equity (TCE), a non-GAAP disclosure. Bancorp provides the ~~tangible book value~~TCE per share, a non-GAAP measure, in addition to those defined by banking regulators, ~~because of~~based on its widespread use by investors as a means to evaluate capital ~~adequacy.~~adequacy:

The general decline between December 31, 2021 and March 31, 2022 for the ratios displayed in the table above is attributed largely to unrealized losses within the AFS debt securities portfolio stemming from the significant increase in interest rates during the first quarter, which drove a $50 million decline in AOCI and as a result, a decline in stockholders equity. Further, acquisition-related growth served to increase goodwill and total assets, which also contributed to lower ratios.

ACL ~~for~~on loans to total non-PPP loans represents the ACL ~~for~~on loans, divided by total loans less PPP loans. Non-performing loans to total non-PPP loans represents non-performing loans, divided by total loans less PPP loans. Delinquent loans to total non-PPP loans represents delinquent loans (consisting of all loans 30 days or more past due), divided by total loans less PPP loans. Bancorp believes these non-GAAP ~~ratios~~disclosures are important because they provide comparable ratios after eliminating PPP loans, which are fully guaranteed by the SBA and have not been allocated for within the ~~ACL.~~ACL and are not at risk of non-performance.

The efficiency ratio, a non-GAAP measure, equals total non-interest expenses divided by the sum of net interest income FTE and non-interest income. The ratio excludes net gains (losses) on sales, calls, and impairment of investment securities, if applicable. In addition to the efficiency ratio, Bancorp considers an adjusted efficiency ratio. Bancorp believes it is important because it provides a comparable ratio after eliminating the fluctuation in non-interest expenses related to amortization of investments in tax credit partnerships and non-recurring merger expenses.

Net interest income on a FTE basis includes the additional amount of interest income that would have been earned if investments in certain tax-exempt interest earning assets had been made in assets subject to federal, state and local taxes yielding the same after-tax income.

Information required by this item is included in Part I Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

As of the end of the period covered by this report, an evaluation was carried out by Stock Yards Bancorp, Inc.’s management, with the participation of its CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the Company’s CEO and CFO concluded that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~The~~Bancorp and the Bank ~~is a defendant~~are defendants in various legal proceedings that arise in the ordinary course of business. There is no such proceeding pending or, to the knowledge of management, threatened in which an adverse decision could result in a material adverse change in the business or consolidated financial position of Bancorp or the Bank.

The following table shows information relating to the repurchase of shares of common stock by Bancorp during the three months ended ~~September 30, 2021.~~March 31, 2022.

Effective May 22, 2019, Bancorp’s Board of Directors approved a share repurchase program authorizing the repurchase of 1 million shares, or approximately 4% of Bancorp’s total common shares outstanding at the time. Stock repurchases are expected to be made from time to time on the open market or in privately negotiated transactions, subject to applicable securities laws. The plan, which was extended in May 2021 and will expire in May 2023 unless otherwise extended or completed at an earlier date, does not obligate the Company to repurchase any specific dollar amount or number of shares prior to the plan’s expiration. No shares were repurchased in ~~2020,~~2021, nor through the first ~~nine~~three months of ~~2021.~~2022. Management does not intend to resume repurchasing in the near-term. Approximately 741,000 shares remain eligible for repurchase.

~~There were no equity securities of the registrant sold without registration during the quarter covered by this report.~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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)

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

Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
Emerging growth company ☐

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	98

Notes to Condensed Consolidated Financial Statements	1110

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	6368

Item 3. Quantitative and Qualitative Disclosures about Market Risk.	99

~~Item 4. Controls and Procedures.~~	99


~~PART II~~ – ~~OTHER INFORMATION~~	~~100~~

~~Item 1. Legal Proceedings.~~	~~100~~

~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.~~	101

Item ~~6. Exhibits.~~4. Controls and Procedures.	101


~~Signatures~~PART II –OTHER INFORMATION

Item 1. Legal Proceedings.	101

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	102

Item 6. Exhibits.	102


Signatures	103

Acronym or Term	Definition	Acronym or Term	Definition	Acronym or Term	Definition
ACH	Automatic Clearing House	EPS	Earnings Per Share	~~NPV~~NCI	~~Net Present Value~~Noncontrolling interest
AFS	Available for Sale	ETR	Effective Tax Rate	~~Net Interest Spread~~NIM	Net Interest ~~Spread~~Margin (FTE)
APIC	Additional paid-in capital	EVP	Executive Vice President	NMNPV	~~Not Meaningful~~Net Present Value
ACL	Allowance for Credit Losses	FASB	Financial Accounting Standards Board	~~OAEM~~Net Interest Spread	~~Other Assets Especially Mentioned~~Net Interest Spread (FTE)
AOCI	Accumulated Other Comprehensive Income	FDIC	Federal Deposit Insurance Corporation	~~OCI~~NM	~~Other Comprehensive Income~~Not Meaningful
ASC	Accounting Standards Codification	FFP	Federal Funds Purchased	~~OREO~~OAEM	Other ~~Real Estate Owned~~Assets Especially Mentioned
ASU	Accounting Standards Update	FFS	Federal Funds Sold	~~PPP~~OREO	~~SBA Paycheck Protection Program~~Other Real Estate Owned
ATM	Automated Teller Machine	FFTR	Federal Funds Target Rate	PVPPP	~~Present Value~~SBA Paycheck Protection Program
AUM	Assets Under Management	FHA	Federal Housing Authority	~~PCD~~PV	~~Purchased Credit Deteriorated~~Present Value
Bancorp / the Company	Stock Yards Bancorp, Inc.	FHC	Financial Holding Company	~~PCI~~PCD	Purchased Credit ~~Impaired~~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
CDCB	~~Certificate of Deposit~~Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust Company	GLB Act	Gramm-Leach-Bliley Act	SAB	Staff Accounting Bulletin
~~CDI~~CD	~~Core~~Certificate of Deposit ~~Intangible~~	GNMA	Government National Mortgage Association	SAR	Stock Appreciation Right
~~CECL~~CDI	~~Current Expected Credit Loss (ASC-326)~~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	~~SEC~~SOFR	~~Securities and Exchange Commission~~Secured Overnight Financing Right
CFO	Chief Financial Officer	KB	Kentucky Bancshares, Inc. and Kentucky Bank	SSUAR	Securities Sold Under Agreements to Repurchase
~~Commonwealth~~CLI	~~Commonwealth Bancshares, Inc. and Commonwealth Bank & Trust Company~~Customer list intangible	KSB	King Bancorp, Inc. and King Southern Bank	SVP	Senior Vice President
COVID-19	Coronavirus Disease - 2019	~~LIBOR~~LFA	~~London Interbank Offered Rate~~Landmark Financial Advisors, LLC	TBOC	The Bank Oldham County
CRA	Community Reinvestment Act	~~Loans~~LIBOR	~~Loans and Leases~~London Interbank Offered Rate	TCE	Tangible Common Equity
CRE	Commercial Real Estate	~~MBS~~Loans	~~Mortgage Backed Securities~~Loans and Leases	TDR	Troubled Debt Restructuring
Dodd-Frank Act	The Dodd-Frank Wall Street Reform and Consumer Protection Act	~~MSA~~MBS	~~Metropolitan Statistical Area~~Mortgage Backed Securities	TPS	Trust Preferred Securities
DTA	Deferred Tax Asset	~~MSRs~~MSA	~~Mortgage Servicing Rights~~Metropolitan Statistical Area	VA	U.S. Department of Veterans Affairs
DTL	Deferred Tax Liability	~~NASDAQ~~MSRs	~~The NASDAQ Stock Market, LLC~~Mortgage Servicing Rights	WM&T	Wealth Management and Trust
DCF	Discounted Cash Flow	~~NIM~~NASDAQ	~~Net Interest Margin (FTE)~~The NASDAQ Stock Market, LLC

	Three months ended					Nine months ended				Three months ended
	September 30,					September 30,				March 31,
	2021			2020		2021		2020		2022		2021
Interest income
Loans, including fees	$	43,307		$	33,844	$	120,402	$	101,692	$	44,743	$	37,000
Federal funds sold and interest bearing due from banks		208			54		358		673		282		66
Mortgage loans held for sale		53			173		175		359		24		64
Federal Home Loan Bank stock		83			56		204		197		54		57
Securities available for sale:
Securities Investment:
Taxable		3,206			1,973		8,245		6,434		4,680		2,295
Tax-exempt		91			44		184		177		201		36
Total interest income		46,948			36,144		129,568		109,532		49,984		39,518
Interest expense
Deposits		1,403			2,107		4,348		8,676		1,171		1,510
Securities sold under agreements to repurchase		6			7		16		31		17		5
Federal funds purchased and other short-term borrowings		5			2		11		33		3		2
Subordinated debentures											33		0
Federal Home Loan Bank advances		51			333		301		1,123		0		176
Total interest expense		1,465			2,449		4,676		9,863		1,224		1,693
Net interest income		45,483			33,695		124,892		99,669		48,760		37,825
Provision for credit losses		(1,525	)		4,968		1,147		17,918		2,279		(1,475	)
Net interest income after credit loss expense		47,008			28,727		123,745		81,751		46,481		39,300
Non-interest income
Wealth management and trust services		7,128			5,657		20,234		17,601		8,469		6,248
Deposit service charges		1,768			998		3,945		3,081		1,863		944
Debit and credit card income		3,887			2,218		9,444		6,261		4,119		2,273
Treasury management fees		1,771			1,368		5,041		3,901		1,904		1,540
Mortgage banking income		915			1,979		3,662		4,447		1,003		1,444
Net investment product sales commissions and fees		780			431		1,789		1,288		607		464
Bank owned life insurance		275			172		642		527		266		161
Other		1,090			220		2,489		1,095		972		770
Total non-interest income		17,614			13,043		47,246		38,201		19,203		13,844
Non-interest expenses
Compensation		17,381			13,300		45,888		37,296		17,969		12,827
Employee benefits		3,662			2,853		10,290		8,891		4,539		3,261
Net occupancy and equipment		2,732			2,177		7,021		6,045		3,025		2,045
Technology and communication		3,173			2,323		8,189		6,385		3,419		2,346
Debit and credit card processing		1,479			649		3,160		1,908		1,337		705
Marketing and business development		1,011			523		2,357		1,548		772		524
Postage, printing and supplies		630			472		1,499		1,355		733		409
Legal and professional		700			544		1,828		1,795		650		462
FDIC insurance		387			435		1,141		894		645		405
Amortization of investments in tax credit partnerships		53			52		315		141		88		31
Capital and deposit based taxes		556			1,076		1,541		3,331		518		458
Merger expenses		525			0		19,025		0		19,500		400
Federal Home Loan Bank early termination penalty		0			0		474		0
Intangible amortization											713		77
Other		2,269			1,242		4,980		3,041		2,389		1,023
Total non-interest expenses		34,558			25,646		107,708		72,630		56,297		24,973
Income before income tax expense		30,064			16,124		63,283		47,322		9,387		28,171
Income tax expense		6,902			1,591		13,227		6,189		1,445		5,461
Net income	$	23,162		$	14,533	$	50,056	$	41,133		7,942		22,710
Net income per share, basic	$	0.87		$	0.64	$	2.05	$	1.82
Net income per share, diluted	$	0.87		$	0.64	$	2.03	$	1.81
Less income attributed to noncontrolling interest											36		0
Net Income available to stockholders										$	7,906	$	22,710
Net income per common share, basic										$	0.29	$	1.00
Net income per common share, diluted										$	0.29	$	0.99
Weighted average outstanding shares
Basic		26,485			22,582		24,360		22,553		27,230		22,622
Diluted		26,726			22,802		24,602		22,759		27,485		22,865

													Accumulated
	Common stock						Additional						other			Total
	*Shares*						*paid-in*			*Retained*			*comprehensive*			*stockholders'*
	*outstanding*			*Amount*			*capital*			*earnings*			*income (loss)*			*Total*

Balance, January 1, 2021		22,692		$	36,500		$	41,886		$	353,574		$	8,741		$	440,701

Activity for three months ended March 31, 2021:
Net income		—			0			0			22,710			0			22,710
Other comprehensive loss		—			0			0			0			(11,791	)		(11,791	)
Stock compensation expense		—			0			849			0			0			849
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		89			296			4,144			(7,533	)		0			(3,093	)
Cash dividends declared, $0.27 per share		—			0			0			(6,144	)		0			(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		—			0			0			4,184			0			4,184
Other comprehensive income		—			0			0			0			4,840			4,840
Stock compensation expense		—			0			1,414			0			0			1,414
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		—			(2	)		(26	)		(45	)		0			(73	)
Stock issued for KB acquisition		3,808			12,682			191,988			0			0			204,670
Cash dividends declared, $0.27 per share		—			0			0			(7,178	)		0			(7,178	)
Shares cancelled		(1	)		(5	)		(55	)		60			0			0
Balance, June 30, 2021		26,588		$	49,471		$	240,200		$	359,628		$	1,790		$	651,089


Activity for three months ended September 30, 2021:
Net income		—			0			0			23,162			0			23,162
Other comprehensive loss		—			0			0			0			(4,421	)		(4,421	)
Stock compensation expense		—			0			1,165			0			0			1,165
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations		—			(1	)		(10	)		0			0			(11	)
Cash dividends declared, $0.28 per share		—			0			0			(7,437	)		0			(7,437	)
Shares cancelled		(3	)		(8	)		(101	)		109			0			0
Balance, September 30, 2021		26,585		$	49,462		$	241,254		$	375,462		$	(2,631	)	$	663,547

(continued)													Accumulated
	Common stock						Additional						other		Total
	Shares						paid-in			Retained			comprehensive		stockholders'
	outstanding			Amount			capital			earnings			income		Total

Balance, January 1, 2020		22,604		$	36,207		$	35,714		$	333,699		$	677	$	406,297

Activity for three months ended March 31, 2020:
Impact of adoption of ASC 326		—			0			0			(8,823	)		0		(8,823	)
Net income		—			0			0			13,232			0		13,232
Other comprehensive income		—			0			0			0			5,775		5,775
Stock compensation expense		—			0			817			0			0		817
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		62			203			1,858			(3,546	)		0		(1,485	)
Cash dividends declared, $0.27 per share		—			0			0			(6,111	)		0		(6,111	)
Shares cancelled		(1	)		(2	)		(22	)		24			0		0
Balance, March 31, 2020		22,665		$	36,408		$	38,367		$	328,475		$	6,452	$	409,702


Activity for three months ended June 30, 2020:
Net income		—			0			0			13,368			0		13,368
Other comprehensive income		—			0			0			0			2,364		2,364
Stock compensation expense		—			0			976			0			0		976
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations		2			8			96			(163	)		0		(59	)
Cash dividends declared, $0.27 per share		—			0			0			(6,120	)		0		(6,120	)
Shares cancelled		—			(1	)		(14	)		15			0		0
Balance, June 30, 2020		22,667		$	36,415		$	39,425		$	335,575		$	8,816	$	420,231
												��

Activity for three months ended September 30, 2020:
Net income		—			0			0			14,533			0		14,533
Other comprehensive income		—			0			0			0			56		56
Stock compensation expense		—			0			843			0			0		843
Stock issued for share-based awards, net of witholdings to satisfy employee tax obligations		27			91			1,049			(2,083	)		0		(943	)
Cash dividends declared, $0.27 per share		—			0			0			(6,122	)		0		(6,122	)
Shares cancelled		(2	)		(6	)		(61	)		67			0		0
Balance, September 30, 2020		22,692		$	36,500		$	41,256		$	341,970		$	8,872	$	428,598

For the nine months ended September 30,
For the three months ended March 31,
Supplemental cash flow information:	2021		2020		2022		2021
Interest paid	$	4,669	$	10,178	$	1,187	$	1,835
Income taxes paid, net of refunds		13,359		9,608		0		(105	)
Cash paid for operating lease liabilities		1,898		1,186		853		520
Supplemental non-cash activity:
Unfunded commitments in tax credit investments	$	6,307	$	9,667	$	3,131	$	6,109
Due to broker		3,590		0
Dividends payable		194		189		159		185
Loans transferred to OREO		7,106		119

Liabilities assumed in conjunction with acquisition:
Fair value of assets acquired	$	1,389,327		0	$	1,403,509	$	0
Consideration paid in acquisition		28,276		0		30,994		0
Common stock issued in acquisition		204,670		0		133,825		0
Noncontrolling interest of acquired entity						3,094		0
Total consideration paid		232,946		0		167,913		0
Liabilities assumed	$	1,156,381		0	$	1,235,596	$	0

	January 1, 2020
(in thousands)	As reported under ASC 326		Pre-ASC 326 Adoption		Impact of Adoption (1)

Allowance for credit losses on loans:

Commercial real estate - non-owner occupied	$	8,333	$	5,235	$	3,098
Commercial real estate - owner occupied		6,219		3,327		2,892
Total commercial real estate		14,552		8,562		5,990

Commercial and industrial - term		7,147		6,782		365
Commercial and industrial - line of credit		4,129		5,657		(1,528	)
Total commercial and industrial		11,276		12,439		(1,163	)

Residential real estate - owner occupied		2,713		1,527		1,186
Residential real estate - non-owner occupied		1,376		947		429
Total residential real estate		4,089		2,474		1,615

Construction and land development		5,161		2,105		3,056
Home equity lines of credit		842		728		114
Consumer		398		100		298
Leases		233		237		(4	)
Credit cards		96		146		(50	)
Total allowance for credit losses on loans	$	36,647	$	26,791	$	9,856

Total allowance for credit losses on off-balance sheet exposures	$	3,850	$	350	$	3,500

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

(in thousands)	Three months ended September 30, 2021			Three months ended September 30, 2020

Net interest income	$	45,483		$	42,458
Provision for credit losses		(1,525	)		4,718
Non-interest income		17,614			17,188
Non-interest expense		34,558			35,238
Income before taxes		30,064			19,690
Income tax expense		6,902			1,907
Net income	$	23,162		$	17,783

Earnings per share
Basic	$	0.87		$	0.67
Diluted		0.87			0.67

Basic weighted average shares outstanding		26,485			26,385
Diluted weighted average shares outstanding		26,726			26,605

(in thousands)	September 30, 2021		December 31, 2020		March 31, 2022		December 31, 2021

Commercial real estate - non-owner occupied	$	1,142,647	$	833,470	$	1,397,633	$	1,128,244
Commercial real estate - owner occupied		652,631		508,672		803,181		678,405
Total commercial real estate		1,795,278		1,342,142		2,200,814		1,806,649

Commercial and industrial - term		581,804		525,776		669,241		596,710
Commercial and industrial - term - PPP		231,335		550,186		71,361		140,734
Commercial and industrial - lines of credit		329,119		249,378		414,739		370,312
Total commercial and industrial		1,142,258		1,325,340		1,155,341		1,107,756

Residential real estate - owner occupied		398,069		239,191		492,123		400,695
Residential real estate - non-owner occupied		277,045		140,930		297,127		281,018
Total residential real estate		675,114		380,121		789,250		681,713

Construction and land development		303,642		291,764		346,372		299,206
Home equity lines of credit		140,027		95,366		186,024		138,976
Consumer		104,629		71,874		135,198		104,294
Leases		12,348		14,786		13,952		13,622
Credits cards		15,821		10,203		20,732		17,087
Total loans (1)	$	4,189,117	$	3,531,596	$	4,847,683	$	4,169,303

(in thousands)	May 31, 2021

Purchase price of PCD loans at acquisition	$	32,765
Allowance for credit losses at acquisition		(6,757	)
Non-credit discount (premium) at acquisition		(735	)
Fair value of PCD loans at acquisition	$	25,273

	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

(in thousands) Three Months Ended September 30, 2021	Beginning Balance		Initial Allowance on PCD Loans		Provision for Credit Losses on Loans			Charge-offs			Recoveries		Ending Balance
(in thousands)															Beginning		Initial Allowance on PCD		Provision for Credit Losses								Ending
Three Months Ended March 31, 2022															Balance		Loans		on Loans			Charge-offs			Recoveries		Balance

Commercial real estate - non-owner occupied	$	19,747	$	0	$	(3,582	)	$	0		$	6	$	16,171	$	15,960	$	3,508	$	1,140		$	0		$	12	$	20,620
Commercial real estate - owner occupied		9,548		0		2,131			(1,361	)		0		10,318		9,595		2,121		(411	)		0			21		11,326
Total commercial real estate		29,295		0		(1,451	)		(1,361	)		6		26,489		25,555		5,629		729			0			33		31,946

Commercial and industrial - term (1)		9,748		0		253			(240	)		5		9,766
Commercial and industrial - term																8,577		1,358		567			(113	)		719		11,108
Commercial and industrial - lines of credit		5,240		0		(328	)		0			0		4,912		4,802		1,874		(132	)		(36	)		0		6,508
Total commercial and industrial		14,988		0		(75	)		(240	)		5		14,678		13,379		3,232		435			(149	)		719		17,616

Residential real estate - owner occupied		4,350		0		420			(340	)		27		4,457		4,316		590		460			(6	)		3		5,363
Residential real estate - non-owner occupied		3,422		0		106			0			2		3,530		3,677		0		(319	)		0			3		3,361
Total residential real estate		7,772		0		526			(340	)		29		7,987		7,993		590		141			(6	)		6		8,724

Construction and land development		5,193		0		45			0			0		5,238		4,789		419		656			0			0		5,864
Home equity lines of credit		1,230		0		(173	)		0			0		1,057		1,044		2		421			0			0		1,467
Consumer		572		0		145			(274	)		284		727		772		78		262			(254	)		191		1,049
Leases		232		0		(38	)		0			0		194		204		0		7			0			0		211
Credit cards		142		0		21			0			0		163		162		0		28			0			0		190
Total	$	59,424	$	0	$	(1,000	)	$	(2,215	)	$	324	$	56,533	$	53,898	$	9,950	$	2,679		$	(409	)	$	949	$	67,067

(in thousands) Nine Months Ended September 30, 2021	Beginning Balance		Initial Allowance on PCD Loans		Provision for Credit Losses on Loans			Charge-offs			Recoveries		Ending Balance

Commercial real estate - non-owner occupied	$	19,396	$	1,491	$	(1,692	)	$	(3,065	)	$	41	$	16,171
Commercial real estate - owner occupied		6,983		2,112		2,029			(1,361	)		555		10,318
Total commercial real estate		26,379		3,603		337			(4,426	)		596		26,489

Commercial and industrial - term (1)		8,970		1,022		156			(409	)		27		9,766
Commercial and industrial - lines of credit		3,614		1,755		(457	)		0			0		4,912
Total commercial and industrial		12,584		2,777		(301	)		(409	)		27		14,678

Residential real estate - owner occupied		3,389		142		1,279			(383	)		30		4,457
Residential real estate - non-owner occupied		1,818		88		1,620			0			4		3,530
Total residential real estate		5,207		230		2,899			(383	)		34		7,987

Construction and land development		6,119		0		(884	)		0			3		5,238
Home equity lines of credit		895		147		14			0			1		1,057
Consumer		340		0		471			(561	)		477		727
Leases		261		0		(67	)		0			0		194
Credit cards		135		0		28			0			0		163
Total	$	51,920	$	6,757	$	2,497		$	(5,779	)	$	1,138	$	56,533

(in thousands) Three Months Ended September 30, 2020	Beginning Balance		Impact of Adopting ASC 326		Initial ACL on Loans Purchased with Credit Deterioration		Provision for Credit Losses on Loans			Charge-offs			Recoveries		Ending Balance

Commercial real estate - non-owner occupied	$	18,839	$	0	$	0	$	(558	)	$	(143	)	$	2	$	18,140
Commercial real estate - owner occupied		6,706		0		0		1,674			(1,351	)		0		7,029
Total commercial real estate		25,545		0		0		1,116			(1,494	)		2		25,169

Commercial and industrial - term		7,339		0		0		1,605			(1	)		1		8,944
Commercial and industrial - lines of credit		3,242		0		0		179			0			0		3,421
Total commercial and industrial		10,581		0		0		1,784			(1	)		1		12,365

Residential real estate - owner occupied		2,848		0		0		464			(61	)		13		3,264
Residential real estate - non-owner occupied		1,594		0		0		418			(2	)		0		2,010
Total residential real estate		4,442		0		0		882			(63	)		13		5,274

Construction and land development		5,608		0		0		420			0			0		6,028
Home equity lines of credit		832		0		0		106			0			0		938
Consumer		362		0		0		57			(140	)		57		336
Leases		223		0		0		34			0			0		257
Credit cards		115		0		0		19			0			0		134
Total	$	47,708	$	0	$	0	$	4,418		$	(1,698	)	$	73	$	50,501

(in thousands) Nine Months Ended September 30, 2020	Beginning Balance		Impact of Adopting ASC 326			Initial ACL on Loans Purchased with Credit Deterioration		Provision for Credit Losses on Loans			Charge-offs			Recoveries		Ending Balance

Commercial real estate - non-owner occupied	$	5,235	$	2,946		$	152	$	9,945		$	(143	)	$	5	$	18,140
Commercial real estate - owner occupied		3,327		1,542			1,350		2,161			(1,351	)		0		7,029
Total commercial real estate		8,562		4,488			1,502		12,106			(1,494	)		5		25,169

Commercial and industrial - term		6,782		365			0		1,790			(1	)		8		8,944
Commercial and industrial - lines of credit		5,657		(1,528	)		0		(708	)		0			0		3,421
Total commercial and industrial		12,439		(1,163	)		0		1,082			(1	)		8		12,365

Residential real estate - owner occupied		1,527		1,087			99		615			(79	)		15		3,264
Residential real estate - non-owner occupied		947		429			0		636			(2	)		0		2,010
Total residential real estate		2,474		1,516			99		1,251			(81	)		15		5,274

Construction and land development		2,105		3,056			0		867			0			0		6,028
Home equity lines of credit		728		114			0		96			0			0		938
Consumer		100		264			34		54			(394	)		278		336
Leases		237		(4	)		0		24			0			0		257
Credit cards		146		(50	)		0		38			0			0		134
Total	$	26,791	$	8,221		$	1,635	$	15,518		$	(1,970	)	$	306	$	50,501

	Non-accrual Loans						Past Due 90-Days-		Non-accrual Loans						Past Due 90-Days-
(in thousands)	*With No*		*Total*		*Troubled Debt*		*or-More and Still*		*With No*		*Total*		*Troubled Debt*		*or-More and Still*
September 30, 2021	*Recorded ACL*		*Non-accrual Loans*		*Restructurings*		*Accruing Interest*
March 31, 2022									*Recorded ACL*		*Non-accrual Loans*		*Restructurings (1)*		*Accruing Interest*

Commercial real estate - non-owner occupied	$	29	$	771	$	0	$	0	$	485	$	1,117	$	0	$	0
Commercial real estate - owner occupied		155		669		0		0		2,237		3,912		0		115
Total commercial real estate		184		1,440		0		0		2,722		5,029		0		115

Commercial and industrial - term		94		1,000		13		0		490		3,053		10		0
Commercial and industrial - PPP										0		0		0		4
Commercial and industrial - lines of credit		0		79		0		0		498		663		0		30
Total commercial and industrial		94		1,079		13		0		988		3,716		10		34

Residential real estate - owner occupied		805		1,912		0		0		794		2,636		0		0
Residential real estate - non-owner occupied		0		300		0		0		0		282		0		0
Total residential real estate		805		2,212		0		0		794		2,918		0		0

Construction and land development		0		0		0		0		0		0		0		0
Home equity lines of credit		0		181		0		0		0		481		0		0
Consumer		0		124		0		0		0		350		0		151
Leases		0		0		0		0		0		0		0		0
Credit cards		0		0		0		0		0		0		0		0
Total	$	1,083	$	5,036	$	13	$	0	$	4,504	$	12,494	$	10	$	300

(in thousands) September 30, 2021	Real Estate		Accounts Receivable / Equipment		Other		Total		ACL Allocation
(in thousands)													Accounts Receivable /						ACL
March 31, 2022											Real Estate		Equipment		Other		Total		Allocation

Commercial real estate - non-owner occupied	$	771	$	0	$	0	$	771	$	35	$	4,705	$	0	$	0	$	4,705	$	588
Commercial real estate - owner occupied		8,116		0		0		8,116		2,213		8,237		0		0		8,237		2,396
Total commercial real estate		8,887		0		0		8,887		2,248		12,942		0		0		12,942		2,984

Commercial and industrial - term		0		926		0		926		217		752		666		1,937		3,355		1,358
Commercial and industrial - lines of credit		0		0		0		0		0		0		1,553		2,956		4,509		1,402
Total commercial and industrial		0		926		0		926		217		752		2,219		4,893		7,864		2,760

Residential real estate - owner occupied		1,912		0		0		1,912		0		3,224		0		0		3,224		330
Residential real estate - non-owner occupied		511		0		0		511		116		489		0		0		489		116
Total residential real estate		2,423		0		0		2,423		116		3,713		0		0		3,713		446

Construction and land development		0		0		0		0		0		3,639		0		0		3,639		419
Home equity lines of credit		181		0		0		181		0		481		0		0		481		2
Consumer		0		0		34		34		0		0		0		167		167		20
Leases		0		0		0		0		0		0		0		0		0		0
Credit cards		0		0		0		0		0		0		0		0		0		0
Total collateral dependent loans	$	11,491	$	926	$	34	$	12,451	$	2,581	$	21,527	$	2,219	$	5,060	$	28,806	$	6,631

(in thousands) December 31, 2020	Real Estate		Accounts Receivable / Equipment		Other		Total		ACL Allocation

Commercial real estate - non-owner occupied	$	10,278	$	0	$	0	$	10,278	$	3,037
Commercial real estate - owner occupied		1,403		0		0		1,403		13
Total commercial real estate		11,681		0		0		11,681		3,050

Commercial and industrial - term		16		7		0		23		16
Commercial and industrial - lines of credit		0		88		0		88		0
Total commercial and industrial		16		95		0		111		16

Residential real estate - owner occupied		413		0		0		413		0
Residential real estate - non-owner occupied		101		0		0		101		0
Total residential real estate		514		0		0		514		0

Construction and land development		0		0		0		0		0
Home equity lines of credit		221		0		0		221		0
Consumer		0		0		4		4		0
Leases		0		0		0		0		0
Credit cards		0		0		0		0		0
Total collateral dependent loans	$	12,432	$	95	$	4	$	12,531	$	3,066

(in thousands)			30-59 days		60-89 days		90 or more		Total		Total				30-59 days		60-89 days		90 or more		Total		Total
September 30, 2021*	Current		Past Due		Past Due		Days Past Due		Past Due		Loans
March 31, 2022													Current		Past Due		Past Due		Days Past Due		Past Due		Loans

Commercial real estate - non-owner occupied	$	1,141,630	$	5	$	241	$	771	$	1,017	$	1,142,647	$	1,396,660	$	338	$	0	$	635	$	973	$	1,397,633
Commercial real estate - owner occupied		651,023		949		0		659		1,608		652,631		800,656		285		1,643		597		2,525		803,181
Total commercial real estate		1,792,653		954		241		1,430		2,625		1,795,278		2,197,316		623		1,643		1,232		3,498		2,200,814

Commercial and industrial - term		579,865		1,000		18		921		1,939		581,804		668,218		248		290		485		1,023		669,241
Commercial and industrial - term - PPP		231,165		170		0		0		170		231,335		71,237		118		2		4		124		71,361
Commercial and industrial - lines of credit		326,859		1,918		263		79		2,260		329,119		414,143		466		100		30		596		414,739
Total commercial and industrial		1,137,889		3,088		281		1,000		4,369		1,142,258		1,153,598		832		392		519		1,743		1,155,341

Residential real estate - owner occupied		394,026		2,148		464		1,431		4,043		398,069		488,272		2,119		4		1,728		3,851		492,123
Residential real estate - non-owner occupied		276,132		708		0		205		913		277,045		296,351		316		365		95		776		297,127
Total residential real estate		670,158		2,856		464		1,636		4,956		675,114		784,623		2,435		369		1,823		4,627		789,250

Construction and land development		303,642		0		0		0		0		303,642		346,372		0		0		0		0		346,372
Home equity lines of credit		139,632		121		221		53		395		140,027		185,461		139		170		254		563		186,024
Consumer		104,089		320		97		123		540		104,629		134,490		327		31		350		708		135,198
Leases		12,348		0		0		0		0		12,348		13,952		0		0		0		0		13,952
Credit cards		15,820		1		0		0		1		15,821		20,704		28		0		0		28		20,732
Total	$	4,176,231	$	7,340	$	1,304	$	4,242	$	12,886	$	4,189,117	$	4,836,516	$	4,384	$	2,605	$	4,178	$	11,167	$	4,847,683

(in thousands)	Term Loans Amortized Cost Basis by Origination Year												Revolving loans amortized
March 31, 2022	2022		2021		2020		2019		2018		Prior		cost basis		Total

Commercial real estate - non-owner occupied:
Risk rating
Pass	$	116,262	$	410,510	$	288,703	$	198,413	$	100,462	$	198,073	$	21,294	$	1,333,717
OAEM		0		5,938		2,363		19,387		0		5,601		6,105		39,394
Substandard		4,174		298		3,195		8,163		0		7,475		100		23,405
Substandard non-performing		0		0		39		0		0		1,078		0		1,117
Doubtful		0		0		0		0		0		0		0		0
Total Commercial real estate non-owner occupied	$	120,436	$	416,746	$	294,300	$	225,963	$	100,462	$	212,227	$	27,499	$	1,397,633

Commercial real estate - owner occupied:
Risk rating
Pass	$	44,171	$	213,962	$	205,034	$	110,962	$	79,334	$	108,379	$	7,833	$	769,675
OAEM		0		1,681		1,470		3,346		442		812		2,859		10,610
Substandard		2,294		2,617		1,811		7,345		2,031		2,487		399		18,984
Substandard non-performing		0		1,194		1,992		0		0		726		0		3,912
Doubtful		0		0		0		0		0		0		0		0
Total Commercial real estate owner occupied	$	46,465	$	219,454	$	210,307	$	121,653	$	81,807	$	112,404	$	11,091	$	803,181

Commercial and industrial - term:
Risk rating
Pass	$	80,556	$	276,156	$	135,281	$	55,767	$	48,529	$	59,735	$	0	$	656,024
OAEM		3,153		369		0		472		2,858		6		0		6,858
Substandard		164		1		35		2,527		165		414		0		3,306
Substandard non-performing		0		1,983		540		0		48		482		0		3,053
Doubtful		0		0		0		0		0		0		0		0
Total Commercial and industrial - term	$	83,873	$	278,509	$	135,856	$	58,766	$	51,600	$	60,637	$	0	$	669,241

Commercial and industrial - PPP
Risk rating
Pass	$	0	$	65,602	$	5,759	$	0	$	0	$	0	$	0	$	71,361
OAEM		0		0		0		0		0		0		0		0
Substandard		0		0		0		0		0		0		0		0
Substandard non-performing		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0
Total Commercial and industrial - PPP	$	0	$	65,602	$	5,759	$	0	$	0	$	0	$	0	$	71,361

													Revolving loans
(in thousands)	Term Loans Amortized Cost Basis by Origination Year												amortized				Term Loans Amortized Cost Basis by Origination Year												Revolving loans amortized
September 30, 2021	2021		2020		2019		2018		2017		Prior		cost basis		Total
December 31, 2021																	2021		2020		2019		2018		2017		Prior		cost basis		Total

Commercial real estate - non-owner occupied:
Risk rating
Pass	$	329,439	$	324,280	$	129,003	$	92,202	$	91,478	$	104,421	$	23,570	$	1,094,393	$	381,014	$	298,177	$	134,286	$	86,638	$	85,110	$	81,635	$	19,465	$	1,086,325
OAEM		3,199		4,842		19,741		0		356		1,658		426		30,222		3,186		2,666		19,784		0		353		1,619		248		27,856
Substandard		6,667		2,374		0		0		0		7,721		499		17,261		4,174		1,440		0		0		0		7,629		100		13,343
Substandard non-performing		0		38		103		0		601		0		29		771		0		39		78		0		592		11		0		720
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Commercial real estate non-owner occupied	$	339,305	$	331,534	$	148,847	$	92,202	$	92,435	$	113,800	$	24,524	$	1,142,647	$	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	$	142,157	$	204,692	$	101,865	$	86,396	$	38,327	$	49,337	$	5,560	$	628,334	$	203,545	$	192,322	$	91,078	$	75,062	$	33,713	$	44,364	$	9,236	$	649,320
OAEM		2,866		183		1,613		102		1,537		163		581		7,045		1,681		1,480		3,568		469		1,506		124		570		9,398
Substandard		2,476		5,089		5,993		1,292		634		102		997		16,583		5,051		3,605		5,985		1,275		627		0		1,396		17,939
Substandard non-performing		0		165		0		13		32		459		0		669		1,259		0		0		0		32		457		0		1,748
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Commercial real estate owner occupied	$	147,499	$	210,129	$	109,471	$	87,803	$	40,530	$	50,061	$	7,138	$	652,631	$	211,536	$	197,407	$	100,631	$	76,806	$	35,878	$	44,945	$	11,202	$	678,405

Commercial and industrial - term:
Risk rating
Pass	$	228,560	$	155,460	$	64,637	$	59,001	$	30,463	$	33,773	$	0	$	571,894	$	283,150	$	143,211	$	58,988	$	52,388	$	26,081	$	24,421	$	0	$	588,239
OAEM		313		191		283		4,121		10		0		0		4,918		738		86		254		3,382		8		0		0		4,468
Substandard		374		45		3,174		187		114		98		0		3,992		170		42		2,667		176		111		167		0		3,333
Substandard non-performing		0		760		168		55		0		17		0		1,000		0		543		72		55		0		0		0		670
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Commercial and industrial - term	$	229,247	$	156,456	$	68,262	$	63,364	$	30,587	$	33,888	$	0	$	581,804	$	284,058	$	143,882	$	61,981	$	56,001	$	26,200	$	24,588	$	0	$	596,710

Commercial and industrial - PPP
Risk rating
Pass	$	198,965	$	31,557	$	0	$	0	$	0	$	0	$	0	$	230,522	$	128,409	$	12,325	$	0	$	0	$	0	$	0	$	0	$	140,734
OAEM		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Substandard		0		813		0		0		0		0		0		813		0		0		0		0		0		0		0		0
Substandard non-performing		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Commercial and industrial - PPP	$	198,965	$	32,370	$	0	$	0	$	0	$	0	$	0	$	231,335	$	128,409	$	12,325	$	0	$	0	$	0	$	0	$	0	$	140,734

(continued)
													Revolving
													loans
(in thousands)	Term Loans Amortized Cost Basis by Origination Year												amortized				Term Loans Amortized Cost Basis by Origination Year												Revolving loans amortized
September 30, 2021	2021		2020		2019		2018		2017		Prior		cost basis		Total
December 31, 2021																	2021		2020		2019		2018		2017		Prior		cost basis		Total

Commercial and industrial - lines of credit
Risk rating
Pass	$	26,429	$	9,353	$	11,567	$	1,712	$	245	$	224	$	268,293	$	317,823	$	33,875	$	8,352	$	11,103	$	1,039	$	207	$	193	$	303,682	$	358,451
OAEM		0		0		0		0		0		0		5,497		5,497		0		0		0		0		0		0		6,355		6,355
Substandard		0		0		1,986		0		1,549		0		2,185		5,720		0		0		1,916		0		1,549		0		1,813		5,278
Substandard non-performing		0		0		0		0		0		0		79		79		0		0		0		0		0		0		228		228
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Commercial and industrial - lines of credit	$	26,429	$	9,353	$	13,553	$	1,712	$	1,794	$	224	$	276,054	$	329,119	$	33,875	$	8,352	$	13,019	$	1,039	$	1,756	$	193	$	312,078	$	370,312

Residential real estate - owner occupied
Risk rating
Pass	$	164,516	$	101,383	$	32,074	$	18,058	$	15,198	$	64,221	$	0	$	395,450	$	176,487	$	99,936	$	31,327	$	17,259	$	16,599	$	56,639	$	0	$	398,247
OAEM		102		0		175		0		87		0		0		364		101		0		174		0		0		0		0		275
Substandard		59		0		0		0		110		174		0		343		0		0		0		0		108		68		0		176
Substandard non-performing		202		201		134		232		837		306		0		1,912		164		103		136		230		714		650		0		1,997
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Residential real estate - owner occupied	$	164,879	$	101,584	$	32,383	$	18,290	$	16,232	$	64,701	$	0	$	398,069	$	176,752	$	100,039	$	31,637	$	17,489	$	17,421	$	57,357	$	0	$	400,695

Residential real estate - non-owner occupied
Risk rating
Pass	$	59,125	$	89,408	$	49,918	$	36,231	$	18,711	$	19,511	$	0	$	272,904	$	94,482	$	78,785	$	46,177	$	27,494	$	16,171	$	15,909	$	0	$	279,018
OAEM		476		217		2,099		223		0		468		0		3,483		352		126		281		132		0		462		0		1,353
Substandard		0		0		0		0		0		358		0		358		0		0		0		0		0		354		0		354
Substandard non-performing		0		0		45		28		0		227		0		300		103		0		45		28		0		117		0		293
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Residential real estate - non-owner occupied	$	59,601	$	89,625	$	52,062	$	36,482	$	18,711	$	20,564	$	0	$	277,045	$	94,937	$	78,911	$	46,503	$	27,654	$	16,171	$	16,842	$	0	$	281,018

Construction and land development
Risk rating
Pass	$	115,823	$	107,233	$	42,286	$	18,451	$	3,253	$	1,196	$	15,151	$	303,393	$	160,696	$	99,699	$	16,665	$	6,262	$	1,890	$	1,156	$	12,736	$	299,104
OAEM		0		0		0		0		0		0		249		249		0		0		0		0		102		0		0		102
Substandard		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Substandard non-performing		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Construction and land development	$	115,823	$	107,233	$	42,286	$	18,451	$	3,253	$	1,196	$	15,400	$	303,642	$	160,696	$	99,699	$	16,665	$	6,262	$	1,992	$	1,156	$	12,736	$	299,206

Home equity lines of credit
Risk rating
Pass	$	0	$	0	$	0	$	0	$	0	$	0	$	139,754	$	139,754	$	0	$	0	$	0	$	0	$	0	$	0	$	138,239	$	138,239
OAEM		0		0		0		0		0		0		92		92		0		0		0		0		0		0		91		91
Substandard		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Substandard non-performing		0		0		0		0		0		0		181		181		0		0		0		0		0		0		646		646
Doubtful		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
Total Home equity lines of credit	$	0	$	0	$	0	$	0	$	0	$	0	$	140,027	$	140,027	$	0	$	0	$	0	$	0	$	0	$	0	$	138,976	$	138,976

	September 30, 2021						December 31, 2020
			Specific		Additional				Specific		Additional
			reserve		commitment				reserve		commitment
(in thousands)	Balance		allocation		to lend		Balance		allocation		to lend

Commercial and industrial - term	$	13	$	13	$	0	$	16	$	16	$	0
Residential real estate		0		0		0		0		0		0
Total TDRs	$	13	$	13	$	0	$	16	$	16	$	0

	Three months ended					Nine months ended					Three months ended
	September 30,					September 30,					March 31,
(in thousands)	2021			2020		2021			2020		2022		2021
Balance at beginning of period	$	136,529		$	12,513	$	12,513		$	12,513	$	135,830	$	12,513
Goodwill acquired		0			0		124,016			0		66,694		0
Recast adjustments		(699	)		0		(699	)		0
Provisional period adjustments												0		0
Impairment		0			0		0			0		0		0
Balance at end of period	$	135,830		$	12,513	$	135,830		$	12,513	$	202,524	$	12,513

(in thousands)	CDI		CLI
2022	$	2,868	$	1,963
2023		3,015		2,002
2024		2,686		1,823
2025		2,375		1,643
2026		2,063		1,464
2027		1,752		1,284
2028		1,339		1,105
2029		888		925
2030		576		745
2031		264		566
2032		0		387
2033		0		207
2034		0		28
Total future expense	$	17,826	$	14,142

(dollars in thousands)	September 30, 2021			December 31, 2020			March 31, 2022			December 31, 2021
Outstanding balance at end of period	$	74,406		$	47,979		$	142,146		$	75,466
Weighted average interest rate at end of period		0.04	%		0.05	%		0.08	%		0.04	%

(dollars in thousands)	As of September 30, 2021					As of December 31, 2020
Maturity			Weighted average					Weighted average
Year	Advance		Fixed Rate			Advance		Fixed Rate
2021	$	10,000		0.22		$	12,148		0.68
2022		0		0			0		0
2023		0		0			268		1.00
2024		0		0			1,389		2.36
2025		0		0			2,827		2.43
2026		0		0			5,401		1.96
2027		0		0			5,323		1.73
2028		0		0			4,283		2.27

Total	$	10,000		0.22	%	$	31,639		1.52	%

(in thousands)	Commonwealth Statutory Trust III		Commonwealth Statutory Trust IV		Commonwealth Statutory Trust V		Total

Trust preferred securities	$	3,005	$	12,021	$	11,019	$	26,045
Subordinated debentures		3,000		12,000		11,000		26,000

Origination date	12/19/2003		12/15/2005		6/28/2007
Index	LIBOR + 2.85%		LIBOR + 1.35%		LIBOR + 1.40%

	Fair Value Measurements Using:						Total		Fair Value Measurements Using:						Total
September 30, 2021 (in thousands)	Level 1		Level 2		Level 3		Fair Value
March 31, 2022 (in thousands)									Level 1		Level 2		Level 3		Fair Value
Assets:
Available for sale debt securities:
U.S. Treasury and other U.S. Government obligations	$	83,712	$	0	$	0	$	83,712	$	116,338	$	0	$	0	$	116,338
Government sponsored enterprise obligations		0		146,287		0		146,287		0		124,651		0		124,651
Mortgage backed securities - government agencies		0		771,722		0		771,722		0		759,413		0		759,413
Obligations of states and political subdivisions		0		67,424		0		67,424		0		143,835		0		143,835
Other		0		1,003		0		1,003		0		6,118		0		6,118

Total available for sale debt securities		83,712		986,436		0		1,070,148		116,338		1,034,017		0		1,150,355

Mortgage loans held for sale										0		9,323		0		9,323
Rate lock loan commitments										0		702		0		702
Mandatory forward contracts										0		94		0		94
Interest rate swaps		0		4,180		0		4,180		0		2,536		0		2,536

Total assets	$	83,712	$	990,616	$	0	$	1,074,328	$	116,338	$	1,046,672	$	0	$	1,163,010

Liabilities:
Interest rate swaps	$	0	$	4,226	$	0	$	4,226	$	0	$	2,548	$	0	$	2,548

	Fair Value Measurements Using:						Total
December 31, 2020 (in thousands)	Level 1		Level 2		Level 3		Fair Value
Assets:
Available for sale debt securities:
Government sponsored enterprise obligations	$	0	$	138,078	$	0	$	138,078
Mortgage backed securities - government agencies		0		437,585		0		437,585
Obligations of states and political subdivisions		0		11,315		0		11,315

Total available for sale debt securities		0		586,978		0		586,978

Interest rate swaps		0		8,374		0		8,374

Total assets	$	0	$	595,352	$	0	$	595,352

Liabilities:
Interest rate swaps	$	0	$	8,391	$	0	$	8,391