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Item 2. Management’s Discussion and Analysis

2022-08-15 compared with 2022-05-16 · 213 added, 109 removed, 330 unchanged (49% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Finward Bancorp (the “Bancorp”) is a financial holding company registered with the Board of Governors of the Federal Reserve System.

Peoples Bank (the “Bank”), an Indiana commercial bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp.

Finward Bancorp (the “Bancorp”

or “Finward”) is a financial holding company registered with the Board of Governors of the Federal Reserve System.

Peoples Bank (“the Bank”), an Indiana commercial bank, and NWIN Risk Management, Inc., a captive insurance company, are wholly-owned subsidiaries of the Bancorp.

The Bancorp has no other business activity other than being a holding company for the Bank and NWIN Risk Management, Inc.

The following management’s discussion and analysis presents information concerning our financial condition as of March 31, 2022, as compared to December 31, 2021, and the results of operations for the three months ending March 31, 2022, and March 31, 2021.

The following management’s discussion and analysis presents information concerning our financial condition as of June 30, 2022, as compared to December 31, 2021, and the results of operations for the quarter and six months ending June 30, 2022, and June 30, 2021.

This discussion should be read in conjunction with the consolidated financial statements and other financial data presented elsewhere herein and with the financial statements and other financial data, as well as the Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

At March 31, 2022, the Bancorp had total assets of $2.1 billion, total loans receivable, net of deferred fees and costs of $1.4 billion and total deposits of $1.9 billion.

At June 30, 2022, the Bancorp had total assets of $2.1 billion, total loans receivable of $1.5 billion and total deposits of $1.9 billion.

Stockholders' equity totaled $136.7 million or 6.5% of total assets, with a book value per share of $31.80.

Net income for the three months ended March 31, 2022, was $2.1 million, or $0.53 earnings per common share for both basic and diluted calculations.

For the three months ended March 31, 2022, the return on average assets (ROA) was 0.44%, while the return on average stockholders’

Net income for the quarter ended June 30, 2022, was $4.4 million, or $1.04 earnings per common diluted share.

For the quarter ended June 30, 2022, the return on average assets (ROA) was 0.85%, while the return on average stockholders’

equity (ROE) was 12.45%.

Net income for the six months ended June 30, 2022, was $6.6 million, or $1.59 earnings per diluted common share.

For the six months ended June 30, 2022, the ROA was 0.65%, while the ROE was 8.40%.

Recent Developments

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Financial Condition

During the three months ended March 31, 2022, total assets increased by $477.1 million (29.4%), with interest-earning assets increasing by $419.5 million (27.5%).

Interest-earning assets totaled $1.9 billion at March 31, 2022, and $1.5 billion at December 31, 2021.

Earning assets represented 92.6% of total assets at March 31, 2022, and 94.0% of total assets at December 31, 2021.

The increase in total assets and interest earning assets for the three months was primarily the result of the acquisition of Royal.

Net loans receivable totaled $1.4 billion at March 31, 2022, compared to $966.7 million at December 31, 2021.

During the six months ended June 30, 2022, total assets increased by $480.7 million (29.7%), with interest-earning assets increasing by $415.3 million (27.3%).

At June 30, 2022, interest-earning assets totaled $1.9 billion compared to $1.5 billion at December 31, 2021.

Earning assets represented 92.3% of total assets at June 30, 2022 and 94.0% of total assets at December 31, 2021.

The increase in total assets and interest earning assets for the six months was primarily the result of the acquisition of RYFL.

Net loans receivable totaled $1.5 billion at June 30, 2022, compared to $953.4 million at December 31, 2021.

The loan portfolio, which is the Bancorp’s largest asset, is the primary source of both interest and fee income.

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Loans receivable to total deposits

The following table sets forth certain information at March 31, 2022, regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity.

The following table sets forth certain information at June 30, 2022, regarding the dollar amount of loans in the Bancorp’s portfolio based on their contractual terms to maturity.

Demand loans, loans having no schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less.

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The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis.

During the three months ended March 31, 2022, the Bancorp originated $15.7 million in new fixed rate mortgage loans for sale, compared to $49.1 million during the three months ended March 31, 2021.

Net gains realized from the mortgage loan sales totaled $607 thousand for the three months ended March 31, 2022, compared to $2.0 million for the three months ended March 31, 2021.

At March 31, 2022, the Bancorp had $1.4 million in loans that were classified as held for sale, compared to $5.0 million at December 31, 2021.

During the six months ended June 30, 2022, the Bancorp originated $33.5 million in new fixed rate mortgage loans for sale, compared to $94.2 million during the six months ended June 30, 2021.

Net gains realized from the mortgage loan sales totaled $898 thousand for the six months ended June 30, 2022, compared to $3.2 million for the six months ended June 30, 2021.

The decrease in net gains realized from mortgage loan sales for the six months ended June 30, 2022 compared to the prior year period is primarily due to lower demand for fixed rate mortgage loans as a result of increases in mortgage rates, which in-turn has resulted in a slowing in the sale of these mortgage loans.

At June 30, 2022, the Bancorp had $1.5 million in loans that were classified as held for sale, compared to $5.0 million at December 31, 2021.

Non-performing loans include those loans that are 90 days or more past due and those loans that have been placed on non-accrual status.

At March 31, 2022, all non-performing loans are also accounted for on a non-accrual basis, except for two commercial business loans totaling $213 thousand, two commercial real estate loans totaling $163 thousand, and two residential real estate loans totaling $117 thousand that remained accruing and more than 90 days past due.

The Bancorp at times will continue to classify loans as accruing, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being collected.

At June 30, 2022, non-performing loans that remained accruing and more than 90 days past due include four residential real estate loans totaling $610 thousand, three commercial real estate loans totaling $517 thousand, and two commercial business loans totaling $81 thousand.

The Bancorp will at times maintain certain loans on accrual status, despite being over 90 days past due, for short periods of time when management has reason to believe payments are in process of being received.

The Bancorp's nonperforming loans are summarized below:

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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Nonperforming loans to total assets

Substandard loans include non-performing loans and potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms.

No loans were internally classified as doubtful or loss at March 31, 2022 or December 31, 2021.

Substandard loans include potential problem loans, where information about possible credit issues or other conditions causes management to question the ability of such borrowers to comply with loan covenants or repayment terms.

No loans were internally classified as doubtful or loss at June 30, 2022 or December 31, 2021.

The Bancorp's substandard loans are summarized below:

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

10 unchanged sentences

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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Manufactured homes

At March 31, 2022, management is of the opinion that there are no loans, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure.

At June 30, 2022, management is of the opinion that there are no loans, where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms and which will imminently result in such loans being classified as past due, non-accrual or a troubled debt restructure.

Management does not presently anticipate that any of the non-performing loans or classified loans would materially affect future operations, liquidity or capital resources.

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The appropriateness of the current period provision and the overall adequacy of the ALL are determined through a disciplined and consistently applied quarterly process that reviews the Bancorp’s current credit risk within the loan portfolio and identifies the required allowance for loan losses given the current risk estimates.

The Bancorp's provision for loan losses for the three months ended are

summarized below:

The Bancorp's provision for loan losses for the six months ended are summarized below:

(Dollars in thousands)

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Residential real estate

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(Dollars in thousands)

As of March 31, 2022

As of June 30, 2022

Net Charge-offs

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(Dollars in thousands)

As of March 31, 2021

As of the six months ended June 30, 2021

Net Charge-offs

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Manufactured homes

The Bancorp's allowance to total loans and non-performing loans are

summarized below:

The ALL provisions take into consideration management’s current judgments about the credit quality of the loan portfolio, loan portfolio balances, changes in the portfolio mix, and local economic conditions.

In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

The Bancorp's allowance to total loans and non-performing loans are summarized below:

(Dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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ALL-to-non-performing loans (coverage ratio)

In determining the provision for loan losses for the current period, management has considered risks associated with the local economy, changes in loan balances and mix, and asset quality.

In addition, management considers additional reserves that have been established from acquisition activity.

In addition, management considers reserves that are not part of the ALL that have been established from acquisition activity.

The Bancorp acquired loans for which there was evidence of credit quality deterioration since origination and it was determined that it was probable that the Bancorp would be unable to collect all contractually required principal and interest payments.

At March 31, 2022, total purchased credit impaired loan reserves totaled $2.0 million compared to $1.4 million at December 31, 2021.

Additionally, the Bancorp has acquired loans where there was no evidence of credit quality deterioration since origination and has marked these loans to their fair values.

As part of the fair value of loans receivable, a net fair value discount was established for loans acquired and totaled $6.4 million at March 31, 2022, compared to $1.1 million at December 31, 2021.

At June 30, 2022, total purchased credit impaired loans reserves totaled $2.0 million compared to $1.4 million at December 31, 2021.

Additionally, the Bancorp has acquired loans where there was not evidence of credit quality deterioration since origination and has marked these loans to their fair values.

As part of the fair value of loans receivable, a net fair value discount was established for loans acquired of $6.0 million at June 30, 2022, compared to $1.1 million at December 31, 2021.

Details on these fair value marks and the additional reserves created can be found in Note 5, Loans Receivable.

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government securities, federal agency obligations, obligations of state and local municipalities, and corporate securities.

The securities portfolio, all of which is designated as available-for-sale, totaled $464.3 million at March 31, 2022, compared to $526.9 million at December 31, 2021, an increase of $62.6 million (11.9%).

The decrease is attributable to increased unrealized losses within the portfolio and a return of liquidity from the securities portfolio.

At March 31, 2022, the securities portfolio represented 23.9% of interest-earning assets and 22.1% of total assets compared to 34.6% of interest-earning assets and 32.5% of total assets at December 31, 2021.

The securities portfolio, all of which is designated as available-for-sale, totaled $400.5 million at June 30, 2022, compared to $526.9 million at December 31, 2021, a decrease of $126.4 million (24.0%).

The decrease is attributable to increased unrealized losses within the portfolio and the use of cashflows from the securities portfolio to fund loan growth.

The acute increase in interest rates during the six months ended June 30, 2022, including an increase by the Federal Reserve in the federal funds target rate from 0.25% as of December 31, 2021 to 1.75% as of June 30, 2022, was the primary cause of the increase in unrealized losses on available-for-sale securities within the Bancorp’s investment portfolio.

Management continues to actively monitor the securities portfolio and does not currently anticipate the need to realize losses from the securities portfolio, and it is unlikely the Bancorp will be required to sell the investments before recovery of their amortized cost bases, which may be at maturity.

At June 30, 2022, the securities portfolio represented 20.6% of interest-earning assets and 19.1% of total assets compared to 34.6% of interest-earning assets and 32.5% of total assets at December 31, 2021.

The Bancorp’s end-of-period investment portfolio and other short-term investments and stock balances were as follows:

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(Dollars in thousands)

Interest bearing deposits in other financial institutions

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Federal Home Loan Bank stock

The net increase in interest bearing deposits in other financial institutions and fed funds sold is primarily the result of the RYFL acquisition.

The net increase in interest bearing deposits in other financial institutions and fed funds sold is the result of the timing of cash flows and public fund deposits.

The contractual maturities and weighted average yields for the U.S.

government securities, agency securities, municipal securities, and collateralized debt obligations at June 30, 2022, are summarized in the table below.

Securities not due at a single maturity date, such as mortgage-backed securities and collateralized mortgage obligations are not included in the following table.

The carrying values are stated in thousands (000’s).

The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values.

Yields presented are not on a tax-equivalent basis.

Within 1 Year

After 10 Years

government sponsored entities:

treasury securities:

Municipal Securities:

Trust Preferred Securities:

Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes.

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The amounts are stated inthousands (000’s).

March 31, 2022

June 30, 2022

December 31, 2021

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Total deposits

As of March 31, 2022, and December 31, 2021, approximately $549.7 million and $452.0 million, respectively, of our deposit portfolio was uninsured.

As of June 30, 2022, and December 31, 2021, approximately $631.5 million and $452.0 million, respectively, of our deposit portfolio was uninsured.

The uninsured amounts are estimates based on the methodologies and assumptions used for the Bank's regulatory reporting requirements.

The overall increase in total deposits is a result of the RYFL acquisition, as well as management’s sales efforts along with customer preferences for competitively priced short-term liquid investments.

The increase in overall deposits is the result of the RYFL acquisition, as well as the Bancorp’s efforts to maintain and grow core deposits.

The Bancorp’s borrowed funds are primarily used to fund asset growth not supported by deposit generation.

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Repurchase agreements

Borrowed funds

Total borrowed funds

Repurchase agreements increased as part of normal account fluctuations within that product line.

Other assets totaled $42.0 million at June 30, 2022, compared to $14.9 million at December 31, 2021.

The increase in other assets is primarily related to increased deferred tax assets as result of increased unrealized losses within the securities portfolio.

Other liabilities totaled $23.1 million at June 30, 2022, compared to $15.3 milllion at December 31, 2021.

The increase in other liabilities is primarily the result of increased fair value of interest rate swap contracts and ACH prefunding liabilities.

Liquidity and Capital Resources

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In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.

During the three months ended March 31, 2022, cash and cash equivalents increased by $21.3 million compared to a $48.1 million increase for the three months ended March 31, 2021.

The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, and proceeds from the maturity and paydown of securities.

The primary uses of cash and cash equivalents were the purchase of securities, loan originations, and change in deposits.

Cash provided by operating activities totaled $722 thousand for the three months ended March 31, 2022, compared to cash provided of $16.4 million for the three months ended March 31, 2021.

During the six months ended June 30, 2022, cash and cash equivalents increased by $46.1 million compared to a $48.7 million increase for the six months ended June 30, 2021.

The primary sources of cash and cash equivalents were cash and cash equivalents from acquisition activity, the sale of loans originated for sale, proceeds from the sale of securities, proceeds from the maturity and paydown of securities, change in deposits, and change in repurchase agreements and other borrowed funds.

The primary uses of cash and cash equivalents were the purchase of securities, and loan originations.

Cash provided by operating activities totaled $5.9 million for the six months ended June 30, 2022, compared to cash provided of $13.6 million for the six month period ended June 30, 2021.

Cash provided from operating activities was primarily a result of net income and sale of loans originated for sale, offset by loans originated for sale and net change in accrued expenses and other liabilites.

Cash inflows from investing activities totaled $27.2 million for the current period, compared to cash outflows of $27.6 million for the three months ended March 31, 2021.

Cash inflows from investing activities for the current three months were primarily related to the cash and cash equivalents from acquisition activity, net, and proceeds from the sales and maturities of securities, offset against the net change in loans receivable and purchase of securiites.

Net cash outflows from financing activities totaled $6.6 million during the current period compared to net cash provided of $59.3 million for the three months ended March 31, 2021.

The net cash outflows from financing activities were primarily a result of net change in deposits, offset against the change in other borrowed funds.

On a cash basis, the Bancorp paid dividends on common stock of $1.1 million for the three months ended March 31, 2022 and March 31, 2021.

At March 31, 2022, outstanding commitments to fund loans totaled $241.7 million.

Cash provided from investing activities totaled $24.8 million for the current period, compared to cash outflows of $60.0 million for the six months ended June 30, 2021.

Cash provided from investing activities for the current six months were primarily related to the cash and cash equivalents from acquisition activity, net, and proceeds from the sales and maturities of securities, offset against the net change in loans receivable and purchase of securites.

Cash provided from financing activities totaled $15.4 million during the current period compared to net cash provided of $95.0 million for the six months ended June 30, 2021.

The net cash provided from financing activities were primarily a result of net change in deposits and the change in other borrowed funds.

On a cash basis, the Bancorp paid dividends on common stock of $2.4 million for the six months ended June 30, 2022, and $2.2 million for the six months ended June 30, 2021.

At June 30, 2022, outstanding commitments to fund loans totaled $276.1 million.

Approximately 54.1% of the commitments were at variable rates.

Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $11.5 million at March 31, 2022.

Standby letters of credit, which are conditional commitments issued by the Bancorp to guarantee the performance of a customer to a third party, totaled $13.6 million at June 30, 2022.

Management believes that the Bancorp has sufficient cash flow and borrowing capacity to fund all outstanding commitments and letters of credit, while maintaining proper levels of liquidity.

Management strongly believes that maintaining a high level of capital enhances safety and soundness.

During the three months ended March 31, 2022, stockholders' equity increased by $1.0 million (0.7%).

During the three months ended March 31, 2022, stockholders’

equity was primarily increased by additional paid in capital related to the RYFL acquisition, offset against increased unrealized losses on available for sale securities.

Increasing stockholders’

equity was net income of $2.1 million.

During the six months ended June 30, 2022, stockholders' equity decreased by $20.0 million (12.7%).

During the six months ended June 30, 2022, stockholders’

equity was primarily decreased by other comprehensive losses as the result of market value changes within the securities portfolio of $62.1 million and dividends declared of $2.7 million, offset by increased additional paid in capital related to the RYFL acquisition of $38.0 million and net income of $6.6 million.

On April 24, 2014 the Bancorp’s Board of Directors authorized a stock repurchase program to repurchase up to 50,000 shares of the Bancorp’s outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions.

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The stock repurchase program will be reviewed annually by the Board of Directors.

No shares were repurchased under the program during the first three months of 2022 or 2021.

During 2022, 10,863 restricted stock shares vested under the Bancorp’s 2015 Stock Option and Incentive Plan outlined in Note 9 of the financial statements, of which 2,336 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees.

The repurchase of these surrendered shares is considered outside of the scope of the formal stock repurchase program.

No shares were repurchased under the program during the first six months of 2022 or 2021.

During 2022, 11,158 restricted stock shares vested under the Incentive Plan outlined in Note 9 of the financial statements, of which 2,449 of these shares were withheld in the form of a net surrender to cover the withholding tax obligations of the vesting employees.

The repurchase of these surrendered shares is considered outside of the scope of the formal board approved stock repurchase program.

The Bank is subject to risk-based capital guidelines adopted by the FDIC.

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The third tier (Tier 2 Capital) includes instruments such as subordinated debt that have a minimum original maturity of at least five years and are subordinated to the claims of depositors and general creditors, total capital minority interest not included in Tier 1 Capital, and limited amounts of the allowance for loan losses, less applicable regulatory adjustments and deductions.

The Bank are required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%.

The Bank is required to maintain a Common Equity Tier 1 Capital ratio of 4.5%, a Tier 1 Capital ratio of 6%, and a Total Capital ratio (comprised of Tier 1 Capital plus Tier 2 Capital) of 8%.

In addition, the capital regulations provide for a minimum leverage ratio (Tier 1 capital to adjusted average assets) of 4%.

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exemption from consolidated bank holding company capital requirements, bank holding companies and savings and loan holding companies with less than $3 billion in consolidated assets, such as the Bancorp, are exempt from consolidated regulatory capital requirements, unless the FRB determines otherwise in particular cases.

During the three months ended March 31, 2022, the Bancorp’s and Bank’s regulatory capital ratios continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations.

During the six months ended June 30, 2022, the Bancorp’s and Bank’s risk weighted assets continued to be negatively impacted by regulatory requirements regarding collateralized debt obligations.

The regulatory requirements state that for collateralized debt obligations that have been downgraded below investment grade by the rating agencies, increased risk based asset weightings are required.

The Bancorp currently holds pooled trust preferred securities with a cost basis of $2.2 million.

The Bancorp currently holds pooled collateralized debt obligations with a cost basis of $2.2 million.

These investments currently have ratings that are below investment grade.

As a result, approximately $8.6 million of risk-based assets are generated by the trust preferred securities in the Bancorp’s and Bank’s total risk based capital calculation.

In addition, the following table shows that, at March 31, 2022, and December 31, 2021, the Bank’s capital exceeded all applicable regulatory capital requirements.

As a result, approximately $8.6 million of risk-based assets are generated by the collateralized debt obligations in the Bancorp’s and Bank’s total risk based capital calculation.

In addition, the following table shows that, at June 30, 2022, and December 31, 2021, the Bank’s capital exceeded all applicable regulatory capital requirements.

The dollar amounts are in millions.

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Corrective Action Regulations

At March 31, 2022

June 30, 2022

Common equity tier 1 capital to risk-weighted assets

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Moreover, the FDIC and the Federal Reserve Board may prohibit the payment of dividends if it determines that the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the Bank.

On February 25, 2022, the Board of Directors of the Bancorp declared a first quarter dividend of $0.31 per share.

The Bancorp’s first quarter dividend was paid to shareholders on April 4, 2022.

Results of Operations - Comparison of the Three Months Ended March 31, 2022, to the Three Months Ended March 31, 2021

For the three months ended March 31, 2022, the Bancorp reported net income of $2.1 million, compared to net income of $4.5 million for the three months ended March 31, 2021, a decrease of $2.4 million (53.0%).

For the three months ended March 31, 2022, the ROA was 0.44%, compared to 1.18% for the three months ended March 31, 2021.

The ROE was 5.01% for the three months ended March 31, 2022, compared to 11.94% for the three months ended March 31, 2021.

Net interest income for the three months ended March 31, 2022, was $15.5 million, an increase of $3.5 million (29.0%), compared to $12.0 million for the three months ended March 31, 2021.

The weighted-average yield on interest-earning assets was 3.49% for the three months ended March 31, 2022, compared to 3.59% for the three months ended March 31, 2021.

The weighted-average cost of funds for the three months ended March 31, 2022 was 0.08% compared to 0.20% for the three months ended March 31, 2021.

The impact of the 3.49% return on interest earning assets and the 0.08% cost of funds resulted in an interest rate spread of 3.41% for the current three months, an increase from the 3.39% spread for the three months ended March 31, 2021.

The net interest margin on earning assets was 3.41% for the three months ended March 31, 2022, and 3.40% for the three months ended March 31, 2021.

On a tax equivalent basis, the Bancorp’s net interest margin was 3.63% for the three months ended March 31, 2022, compared to 3.59% for the three months ended March 31, 2021.

On May 20, 2022, the Board of Directors of the Bancorp declared a second quarter dividend of $0.31 per share.

The Bancorp’s second quarter dividend was paid to shareholders on July 7, 2022.

Results of Operations - Comparison of the Three Months Ended June 30, 2022 to the Three Months Ended June 30, 2021

For the three months ended June 30, 2022, the Bancorp reported net income of $4.4 million, compared to net income of $3.6 million for the three months ended June 30, 2021, an increase of $860 thousand (24.1%).

For the three months, the ROA was 0.85%, compared to 0.90% for the three months ended June 30, 2021.

The ROE was 12.45% for the three months ended June 30, 2022, compared to 9.17% for the three months ended June 30, 2021.

Net interest income for the three months ended June 30, 2022 was $17.3 million, an increase of $5.4 million (45.7%), compared to $11.9 million for the three months ended June 30, 2021.

The weighted-average yield on interest-earning assets was 3.68% for the three months ended June 30, 2022, compared to 3.38% for the three months ended June 30, 2021.

The weighted-average cost of funds for the three months ended June 30, 2022 was 0.09% compared to 0.16% for the three months ended June 30, 2021.

The impact of the 3.68% return on interest earning assets and the 0.09% cost of funds resulted in an interest rate spread and margin of 3.59% for the current three months, a increase from the 3.22% spread for the three months ended June 30, 2021.

The Bancorp’s net interest margin on a tax-adjusted basis was 3.78% for the three months ended June 30, 2022, compared to 3.42% for the three months ended June 30, 2021.

The Bancorp believes that it is a standard practice in the banking industry to present net interest margin and net interest income on a fully-taxable equivalent basis, as these measures provide useful information to make peer comparisons.

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Three Months Ended

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Calculation of tax adjusted net interest margin

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Average balances are derived from daily balances.

Quarter-to-Date

Three Months Ended

(Dollars in thousands)

Average Balances, Interest, and Rates

March 31, 2022

March 31, 2021

June 30, 2022

June 30, 2021

Interest bearing deposits in other financial institutions

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** Net interest income divided by average interest-earning assets.

The increase in interest earning asset income for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, is primarily a result of the RYFL acquisition.

The decrease in interest bearing liability expense is primarily the result of the Bancorp adjusting deposit pricing to align with the current interest rate cycle.

The following table shows the change in noninterest income for the three months ending March 31, 2022, and March 31, 2021.

The increased net interest income and net interest margin for the three months ended June 30, 2022 was primarily the result of the increased earning assets acquired through the RYFL acquisition, reallocation of securities cashflows into organic loan growth, and maintaining lower interest expense.

The following table shows the change in noninterest income for the three months ending June 30, 2022, and June 30, 2021.

(Dollars in thousands)

Quarter Ended March 31,

3/31/2022 vs.

Three Months Ended June 30,

Noninterest income:

Fees and service charges

Wealth management operations

Gain on sale of loans held-for-sale, net

Gain on sale of securities, net

Increase in cash value of bank owned life insurance

Gain (loss) on sale of foreclosed real estate

Total noninterest income

The decrease in gain on sale of loans is the result of significant refinance in 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold.

We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase.

The increase in fees and service charges is primarily the result of the acquisition of RYFL and the resultant increase in our customer base.

The following table shows the change in noninterest expense for the three months ending June 30, 2022, and June 30, 2021.

(Dollars in thousands)

Three Months Ended June 30,

Noninterest expense:

Compensation and benefits

Data processing

Occupancy and equipment

Federal deposit insurance premiums

Total noninterest expense

The increase in compensation and benefits is primarily the result of the RYFL acquisition, management’s continued focus on talent management, and wage inflation.

The increase in data processing expense is primarily the result of increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino.

The increase in occupancy and equipment expense is primarily related to the RYFL acquisition and higher operating costs.

Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share.

The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets.

The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of RYFL, continued investments in strategic initiatives focusing on growth of the organization, and inflationary pressures.

For the three months ended June 30, 2022, data processing expense totaled $1.2 million, a decrease of $1.8 million from the three months ended March 31, 2022 total of $3.1 million.

The decrease for the three months ended June 30, 2022, is primarily related to $1.9 million in RYFL conversion expense recognized during the three months ended March 31, 2022.

The provision for income taxes was $587 thousand for the three months ended June 30, 2022, as compared to $395 thousand for the three months ended June 30, 2021, an increase of $192 thousand (48.6%).

The effective tax rate was 11.7% for the three months ended June 30, 2022, as compared to 10.0% for the three months ended June 30, 2021.

The Bancorp’s higher current three months effective tax rate is a result of higher earnings relative to tax preferred income.

Results of Operations - Comparison of the Six Months Ended June 30, 2022 to the Six Months Ended June 30, 2021

For the six months ended June 30, 2022, the Bancorp reported net income of $6.6 million, compared to net income of $8.1 million for the six months ended June 30, 2021, a decrease of $1.5 million (19.1%).

For the six months ended, the ROA was 0.65%, compared to 1.04 % for the six months ended June 30, 2021.

The ROE was 8.40% for the six months ended June 30, 2022, compared to 10.54% for the six months ended June 30, 2021.

Net interest income for the six months ended June 30, 2022, was $32.8 million, an increase of $8.9 million (37.3%), compared to $23.9 million for the six months ended June 30, 2021.

The weighted-average yield on interest-earning assets was 3.59% for the six months ended June 30, 2022, compared to 3.48% for the six months ended June 30, 2021.

The weighted-average cost of funds for the six months ended June 30, 2022, was 0.09% compared to 0.18% for the six months ended June 30, 2021.

The impact of the 3.59% return on interest earning assets and the 0.09% cost of funds resulted in an interest rate spread of 3.50% for the current six months, which is an increase from the spread of 3.30% as of June 30, 2021.

On a tax adjusted basis, the Bancorp’s net interest margin was 3.70% for the six months ended June 30, 2022, compared to 3.51% for the six months ended June 30, 2021.

Tax adjusted net interest margin represents a non-GAAP financial measure.

See the non-GAAP reconciliation table immediately below and the section captioned “Non-GAAP Financial Measures”

for further disclosure regarding non-GAAP financial measures.

(Dollars in thousands)

Six Months Ended

June 30, 2022

June 30, 2021

Calculation of tax adjusted net interest margin

Net interest income

Tax adjusted interest on securities and loans

Adjusted net interest income

Total average earning assets

Tax adjusted net interest margin

Information relating to the average consolidated balance sheet and the yield on average earning assets and cost of average liabilities for the periods indicated are in the following table.

Dividing the related interest, on an annualized basis, by the average balance of assets or liabilities drives the disclosed rates.

Average balances are derived from daily balances.

(Dollars in thousands)

Average Balances, Interest, and Rates

June 30, 2022

June 30, 2021

Interest bearing deposits in other financial institutions

Federal funds sold

Certificates of deposit in other financial institutions

Securities available-for-sale

Loans receivable*

Federal Home Loan Bank stock

Total interest earning assets

Cash and non-interest bearing deposits in other financial institutions

Allowance for loan losses

Other noninterest bearing assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Total deposits

Repurchase agreements

Borrowed funds

Total interest bearing liabilities

Other noninterest bearing liabilities

Total liabilities

Total stockholders' equity

Total liabilities and stockholders' equity

Net intrest spread

Net interest margin**

Ratio of interest-earning assets to interest-bearing liabilities

* Non-accruing loans have been included in the average balances.

** Net interest income divided by average interest-earning assets.

The increased net interest income and net interest margin for the six months ended June 30, 2022 was primarily the result of the increased earning assets acquired through the RYFL acquisition, reallocation of securities cashflows into organic loan growth, and maintaining lower interest expense.

The following table shows the change in noninterest income for the six months ending June 30, 2022, and June 30, 2021.

(Dollars in thousands)

Six Months Ended June 30,

Noninterest income:

Fees and service charges

Wealth management operations

Gain on sale of loans held-for-sale, net

Gain on sale of securities, net

2 unchanged sentences

Total noninterest income

The decrease in gain on sale of loans is the result of significant refinance activity which started in 2020 and continued into the following year due to the economic and low rate environment, which resulted in more loans originated and sold.

We anticipate the demand for mortgage loans will continue to revert to normal levels as borrowing rates on loans increase.

The increase in fees and service charges for the three-month period ended March 31, 2022 compared to the three-month period ended March 31, 2021 is primarily the result of changes in customer usage of bank services.

The following table shows the change in noninterest expense for the three months ending March 31, 2022, and March 31, 2021.

The decrease in gain on sale of loans is the result of significant refinance activity in 2021 due to the economic and low-rate environment, which resulted in more loans originated and sold.

We expect demand for fixed rate mortgage loans held-for-sale in the secondary market to be lower as borrowing rates on loans increase.

The increase in fees and service charges is primarily the result of the acquisition of RYFL and the resultant increase in our customer base.

The following table shows the change in noninterest expense for the six months ending June 30, 2022, and June 30, 2021.

(Dollars in thousands)

Quarter Ended March 31,

3/31/2022 vs.

Six Months Ended June 30,

Noninterest expense:

4 unchanged sentences

Total noninterest expense

For the three months ended March 31, 2022, the increase in compensation and benefits is primarily the result of the RYFL acquisition and management’s continued focus on talent management and retention.

The increase in data processing expense in primarily the result of data conversion expenses related to the acquisition of RYFL, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino.

The increase in occupancy and equipment expense is primarily related to the RYFL acquisition and related assets acquired in the transaction.

The increase in marketing expense is primarily the result of the RYFL acquisition.

The increase in other operating expenses is primarily the result of one-time expenses related to the acquisition of RYFL and continued investments in strategic initiatives focusing on growth of the organization.

Income tax expenses for the three months ended March 31, 2022, totaled $275 thousand, compared to income tax expense of $745 thousand for the three months ended March 31, 2021, a decrease of $470 thousand (63.1%).

The combined effective federal and state tax rates for the Bancorp was 11.4% for the three months ended March 31, 2022, compared to 14.1% for the three months ended March 31, 2021.

The Bancorp’s lower current period effective tax rate is a result of a greater increase to tax preferred income relative to earnings.

The increase in compensation and benefits is primarily the result of the RYFL acquisition, management’s continued focus on talent management, and wage inflation.

The increase in occupancy and equipment expense is primarily related to the RYFL acquisition and higher operating costs.

Marketing expenses have increased to enhance brand recognition in new markets and gain more wallet share.

The increase in federal deposit insurance premiums is primarily the result of growth of the bank’s average assets.

The increase in data processing expense is primarily the result of data conversion expenses related to the acquisition of RYFL, increased system utilization due to growth of the Bank, and continued investment in technological advancements such as Salesforce and nCino.

The provision for income taxes was $862 thousand for the six months ended June 30, 2022, as compared to $1.1 million for the six months ended June 30, 2021, a decrease of $278 thousand (24.4%).

The effective tax rate was 11.6% for the six months ended June 30, 2022, as compared to 12.3% for the six months ended June 30, 2021.

The Bancorp’s lower current period effective tax rate is a result of a greater increase in tax preferred income relative to earnings.

Critical Accounting Policies

27 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis