Finward Bancorp 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   Summary 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 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 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 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 Acquisition of Royal Financial, Inc. On January 31, 2022, the Bancorp completed its acquisition of Royal Financial, Inc. (“RYFL”) pursuant to an Agreement and Plan of Merger dated July 28, 2021 (the “Merger Agreement”) between the Bancorp and RYFL. Pursuant to the terms of the Merger Agreement, RYFL merged with and into the Bancorp, with the Bancorp as the surviving corporation (the “RYFL Merger”). Simultaneous with the RYFL Merger, Royal Savings Bank, an Illinois state-chartered savings bank and wholly-owned subsidiary of RYFL, merged with and into the Bank, with the Bank as the surviving institution.   Under the terms of the Merger Agreement, RYFL stockholders who owned 101 or more shares of RYFL common stock were permitted to elect to receive either 0.4609 shares of Finward common stock or $20.14 in cash, or a combination of both, for each share of RYFL common stock owned, subject to proration and allocation provisions such that 65% of the shares of RYFL common stock outstanding immediately prior to the closing of the merger were converted into the right to receive shares of Finward common stock and the remaining 35% of the outstanding RYFL shares were converted into the right to receive cash. Stockholders holding less than 101 shares of RYFL common stock received fixed consideration of $20.14 in cash and no stock consideration for each share of RYFL common stock.   As a result of RYFL stockholder stock and cash elections and the related allocation and proration provisions of the Merger Agreement, Finward issued 795,423 shares of its common stock and paid cash consideration of approximately $18.7 million in the RYFL Merger. Based on the January 28, 2022 closing price of $47.75 per share of Finward common stock, the transaction had an implied valuation of approximately $56.7 million. The acquisition further expanded the Bank’s banking center network in Cook County and DuPage County, Illinois, expanding the Bank’s full-service retail banking network.   Financial Condition 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. The Bancorp’s lending strategy emphasizes quality loan growth, product diversification, and competitive and profitable pricing.   29     The Bancorp’s end-of-period loan balances were as follows:       (unaudited)                       June 30,     December 31,   (Dollars in thousands)   2022     2021       Balance     % Loans     Balance     % Loans                                     Residential real estate   $ 459,151       31.3 %     260,134       33.0 % Home equity     35,672       2.4 %     34,612       5.4 % Commercial real estate     420,735       28.6 %     317,145       31.2 % Construction and land development     153,422       10.4 %     123,822       9.7 % Multifamily     248,495       16.9 %     61,194       5.7 % Consumer     1,673       0.1 %     582       0.1 % Manufactured Homes     37,693       2.6 %     37,887       1.8 % Commercial business     103,649       7.1 %     115,772       11.4 % Government     8,081       0.6 %     8,991       1.7 % Loans receivable     1,468,571       100.0 %     960,139       100.0 % Plus:                                 Net deferred loans origination costs     6,482               6,810           Undisbursed loan funds     (672 )             (229 )         Loans receivable, net of deferred fees and costs   $ 1,474,381             $ 966,720                                             Adjustable rate loans / loans receivable   $ 636,956       43.4 %   $ 542,975       56.6 %         (unaudited)               June 30,     December 31,       2022     2021                     Loans receivable to total assets     70.2 %     59.6 % Loans receivable to earning assets     76.0 %     63.4 % Loans receivable to total deposits     76.9 %     67.4 %   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. Contractual principal repayments of loans do not necessarily reflect the actual term of the loan portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and because of enforcement of due-on-sale clauses, which give the Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the property subject to the mortgage. The amounts are stated in thousands (000’s).         Maturing     After one     After five                       within     but within     but within     After               one year     five years     fifteen years     fifteen years     Total   Residential real estate   $ 14,161     $ 28,807     $ 106,023     $ 310,160       459,151   Home equity     4,598       21,818       8,979       277       35,672   Commercial real estate     24,809       106,633       287,314       1,979       420,735   Construction and land development     33,355       42,343       58,097       19,627       153,422   Multifamily     20,093       101,066       124,754       2,582       248,495   Consumer     30       731       912       -       1,673   Manufactured Homes     -       61       10,190       27,442       37,693   Commercial business     43,699       42,507       16,948       495       103,649   Government     100       3,211       4,770       -       8,081   Total loans receivable   $ 140,845     $ 347,177     $ 617,987     $ 362,562     $ 1,468,571       The Bancorp is primarily a portfolio lender. Mortgage banking activities historically have been limited to the sale of fixed rate mortgage loans with contractual maturities greater than 15 years. These loans are identified as held for sale when originated and sold, on a loan-by-loan basis, in the secondary market. The Bancorp will also retain fixed rate mortgage loans with a contractual maturity greater than 15 years on a limited basis. 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.   30     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 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)   (unaudited)           Loan Segment   June 30, 2022     December 31, 2021   Residential real estate   $ 5,585     $ 4,682   Home equity     610       657   Commercial real estate     3,111       1,031   Construction and land development     -       -   Multifamily     369       455   Commercial business     346       436   Consumer     -       -   Manufactured homes     -       -   Government     -       -   Total   $ 10,021     $ 7,261   Nonperforming loans to total loans     0.68 %     0.75 % Nonperforming loans to total assets     0.48 %     0.45 %     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)   (unaudited)           Loan Segment   June 30, 2022     December 31, 2021   Residential real estate   $ 6,019     $ 3,722   Home equity     624       632   Commercial real estate     6,845       3,562   Construction and land development     -       -   Multifamily     2,901       384   Commercial business     279       387   Consumer     -       -   Manufactured homes     -       -   Government     -       -   Total   $ 16,668     $ 8,687     The increase in substandard loans is the result of loans acquired pursuant to the RYFL acquisition.   In addition to identifying and monitoring non-performing and other classified loans, management maintains a list of special mention loans. Special mention loans represent loans management is closely monitoring due to one or more factors that may cause the loan to become classified as substandard.   The Bancorp's special mention loans are summarized below:   (Dollars in thousands)   (unaudited)           Loan Segment   June 30, 2022     December 31, 2021   Residential real estate   $ 2,055     $ 2,940   Home equity     400       415   Commercial real estate     10,890       12,011   Construction and land development     800       3,630   Multifamily     1,541       153   Commercial business     3,057       1,915   Consumer     -       -   Manufactured homes     -       59   Government     -       -   Total   $ 18,743     $ 21,123     31     A loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to pay all amounts due according to the contractual terms of the loan agreement. Typically, management does not individually classify smaller-balance homogeneous loans, such as residential mortgages or consumer loans, as impaired, unless they are troubled debt restructurings.   Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. Purchased loans with evidence of credit quality deterioration since origination are considered purchased credit impaired loans. Expected future cash flows at the purchase date in excess of the fair value of loans are recorded as interest income over the life of the loans if the timing and amount of the future cash flows is reasonably estimable (“accretable yield”). The difference between contractually required payments and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference and represents probable losses in the portfolio. In determining the acquisition date fair value of purchased credit impaired loans, and in subsequent accounting, the Bancorp aggregates these purchased loans into pools of loans by common risk characteristics, such as credit risk rating and loan type. Subsequent to the purchase date, increases in cash flows over those expected at the purchase date are recognized as interest income prospectively. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses.   The Bancorp's impaired loans, including purchased credit impaired loans, are summarized below:   (Dollars in thousands)   (unaudited)           Loan Segment   June 30, 2022     December 31, 2021   Residential real estate   $ 2,347     $ 1,771   Home equity     154       284   Commercial real estate     3,816       1,600   Construction and land development     800       -   Multifamily     2,940       556   Commercial business     1,330       1,597   Consumer     20       -   Manufactured homes     -       -   Government     -       -   Total   $ 11,407     $ 5,808     The increase in impaired loans is the result of purchase credit impaired loans acquired pursuant to the RYFL acquisition.   At times, the Bancorp will modify the terms of a loan to forego a portion of interest or principal or reduce the interest rate on the loan to a rate materially less than market rates, or materially extend the maturity date of a loan as part of a troubled debt restructuring. The valuation basis for the Bancorp’s troubled debt restructurings is based on the present value of expected future cash flows; unless consistent cash flows are not present, then the fair value of the collateral securing the loan is the basis for valuation.   The Bancorp's troubled debt restructured loans are summarized below:   (Dollars in thousands)   (unaudited)           Loan Segment   June 30, 2022     December 31, 2021   Residential real estate   $ 1,230     $ 342   Home equity     84       83   Commercial real estate     617       747   Construction and land development     -       -   Multifamily     -       -   Commercial business     518       694   Consumer     -       -   Manufactured homes     -       -   Government     -       -   Total   $ 2,449     $ 1,866     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.   32     The allowance for loan losses (ALL) is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses, and decreased by charge-offs net of recoveries. A loan is charged‑off against the allowance by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. The determination of the amounts of the ALL and provisions for loan losses is based on management’s current judgments about the credit quality of the loan portfolio with consideration given to all known relevant internal and external factors that affect loan collectability as of the reporting date. 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 six months ended are summarized below:   (Dollars in thousands)                     (unaudited)           Loan Segment   June 30, 2022     June 30, 2021   Residential real estate   $ 226     $ 62   Home equity     16       96   Commercial real estate     12       533   Construction and land development     (375 )     393   Multifamily     280       114   Commercial business     (239 )     (53 ) Consumer     80       9   Manufactured homes     -       -   Government     -       -   Total   $ -     $ 1,154     The Bancorp's charge-off and recovery information is summarized below:       (Dollars in thousands)   (unaudited)       As of June 30, 2022   Loan Segment   Charge-off     Recoveries     Net Charge-offs   Residential real estate   $ -     $ 50     $ 50   Home equity     -       -       -   Commercial real estate     -       -       -   Construction and land development     -       -       -   Multifamily     -       -       -   Commercial business     -       38       38   Consumer     (37 )     12       (25 ) Manufactured homes     -       -           Government     -       -       -   Total   $ (37 )   $ 100     $ 63     The Bancorp's charge-off and recovery information is summarized below:       (Dollars in thousands)   (unaudited)       As of the six months ended June 30, 2021   Loan Segment   Charge-off     Recoveries     Net Charge-offs   Residential real estate   $ (4 )   $ 25     $ 21   Home equity     (1 )     -       (1 ) Commercial real estate     -       -       -   Construction and land development     -       -       -   Multifamily     -       -       -   Farmland     -       -       -   Commercial business     -       19       19   Consumer     (17 )     5       (12 ) Manufactured homes     -       -           Government     -       -       -   Total   $ (22 )   $ 49     $ 27       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.   33     The Bancorp's allowance to total loans and non-performing loans are summarized below:   (Dollars in thousands)   (unaudited)               June 30, 2022     December 31, 2021                     Allowance for loan losses   $ 13,406     $ 13,343   Total loans   $ 1,474,381     $ 966,720   Non-performing loans   $ 10,021     $ 7,261   ALL-to-total loans     0.91 %     1.38 % ALL-to-non-performing loans (coverage ratio)     133.8 %     183.8 %     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 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.   The primary objective of the Bancorp’s investment portfolio is to provide for the liquidity needs of the Bancorp and to contribute to profitability by providing a stable flow of dependable earnings. Funds are generally invested in federal funds, interest bearing balances in other financial institutions, U.S. 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 $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:       (unaudited)                               June 30,             December 31,           (Dollars in thousands)   2022             2021               Balance     % Securities     Balance     % Securities                                     U.S. government sponsored entities   $ 7,934       2.0 %   $ 8,669       1.6 % U.S. treasury securities     594       0.2 %     400       0.1 % Collateralized mortgage obligations and residential mortgage-backed securities     150,061       37.5 %     184,701       35.1 % Municipal securities     240,847       60.0 %     332,127       63.0 % Collateralized debt obligations     1,030       0.3 %     992       0.2 % Total securities available-for-sale   $ 400,466       100.0 %   $ 526,889       100.0 %       (unaudited)                               June 30,     December 31,     YTD           (Dollars in thousands)   2022     2021     Change               Balance     Balance       $     %                                     Interest bearing deposits in other financial institutions   $ 55,602     $ 19,987     $ 35,615       178.2 % Fed funds sold     2,856       464       2,392       515.5 % Certificates of deposit in other financial institutions     1,482       1,709       (227 )     -13.3 % Federal Home Loan Bank stock     3,038       3,247       (209 )     -6.4 %     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.   34     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     1 - 5 Years     5 - 10 Years     After 10 Years     Total       Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount   U.S. government sponsored entities:   $ -       0.00 %   $ -       0.00 %   $ 7,934       1.00 %   $ -       0.00 %   $ 7,934   AFS                                                                         U.S. treasury securities:                                                                         AFS     199       0.13 %     395       2.38 %     -       0.00 %     -       0.00 %     594   Municipal Securities:                                                                         AFS     296       5.14 %     1,561       3.93 %     16,935       3.43 %     222,055       2.76 %     240,847   Trust Preferred Securities:                                                                         AFS     -       0.00 %     -       0.00 %     -       0.00 %     1,030       2.57 %     1,030   Totals   $ 495       3.12 %   $ 1,956       3.62 %   $ 24,869       2.65 %   $ 223,085       2.76 %   $ 250,405       Deposits are a fundamental and cost-effective source of funds for lending and other investment purposes. The Bancorp offers a variety of products designed to attract and retain customers, with the primary focus on building and expanding relationships.   The Bancorp’s end-of-period deposit portfolio balances were as follows:       (unaudited)                               June 30,     December 31,     YTD   (Dollars in thousands)   2022     2021     Change       Balance     Balance     $     %                                     Checking   $ 755,256     $ 629,038     $ 126,218       20.1 % Savings     436,203       293,976       142,227       48.4 % Money market     327,360       271,970       55,390       20.4 % Certificates of deposit     398,396       239,217       159,179       66.5 % Total deposits   $ 1,917,215     $ 1,434,201     $ 483,014       33.7 %   The following table presents the average daily amount of deposits and average rates paid on such deposits for the periods indicated. The amounts are stated inthousands (000’s).       June 30, 2022                       (unaudited)     December 31, 2021       Amount     Rate %     Amount     Rate %   Noninterest bearing demand deposits   $ 361,252       -     $ 280,900       -   Interest bearing demand deposits     347,983       0.07       297,012       0.08   MMDA accounts     306,827       0.05       253,468       0.13   Savings accounts     409,210       0.14       277,839       0.06   Certificates of deposit     387,982       0.15       271,882       0.46   Total deposits   $ 1,813,254       0.08     $ 1,381,101       0.18     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 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. The Bancorp’s end-of-period borrowing balances were as follows:       (unaudited)                               June 30,     December 31,     YTD   (Dollars in thousands)   2022     2021     Change       Balance     Balance     $     %                                     Repurchase agreements   $ 24,536     $ 14,581     $ 9,955       68.3 % Total borrowed funds   $ 24,536     $ 14,581     $ 9,955       68.3 %   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 For the Bancorp, liquidity management refers to the ability to generate sufficient cash to fund current loan demand, meet deposit withdrawals, and pay dividends and operating expenses. Because profit and liquidity are often conflicting objectives, management attempts to maximize the Bank’s net interest margin by making adequate, but not excessive, liquidity provisions. Furthermore, funds are managed so that future profits will not be significantly impacted as funding costs increase.   Changes in the liquidity position result from operating, investing and financing activities. Cash flows from operating activities are generally the cash effects of transactions and other events that enter into the determination of net income. The primary investing activities include loan originations, loan repayments, investments in interest bearing balances in other financial institutions, and the purchase, sale, and maturity of investment securities. Financing activities focus almost entirely on the generation of customer deposits. In addition, the Bancorp utilizes borrowings (i.e., repurchase agreements, FHLB advances and federal funds purchased) as a source of funds.   35     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 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 $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 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. The stock repurchase program does not expire and is only limited by the number of shares that can be purchased. The stock repurchase program will be reviewed annually by the Board of Directors. 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. The regulations divide capital into multiple tiers. The first tier (Common Equity Tier 1 Capital) includes common shareholders’ equity, after deductions for various items including goodwill and certain other intangible assets, and after certain other adjustments. Common Equity Tier 1 Capital also includes accumulated other comprehensive income (for organizations that do not make opt-out elections). The next tier (Tier 1 Capital) is comprised of Common Equity Tier 1 Capital plus other qualifying capital instruments such as perpetual noncumulative preferred stock and junior subordinated debt issued to trusts, and other adjustments. 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 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%.   In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions by the institution and certain discretionary bonus payments to management if an institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements.   36     The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 required the FRB to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository subsidiaries. However, under the FRB’s “Small Bank Holding Company” 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 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 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 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.   (Dollars in millions)                                   Minimum Required To Be                       Minimum Required For     Well Capitalized Under Prompt       Actual     Capital Adequacy Purposes     Corrective Action Regulations   June 30, 2022   Amount     Ratio     Amount     Ratio     Amount     Ratio   Common equity tier 1 capital to risk-weighted assets   $ 155.5       10.5 %   $ 66.6       4.5 %   $ 96.2       6.5 % Tier 1 capital to risk-weighted assets   $ 155.5       10.5 %   $ 88.8       6.0 %   $ 118.3       8.0 % Total capital to risk-weighted assets   $ 168.9       11.4 %   $ 118.3       8.0 %   $ 147.9       10.0 % Tier 1 capital to adjusted average assets   $ 155.5       7.8 %   $ 81.0       4.0 %   $ 101.2       5.0 %   (Dollars in millions)                                   Minimum Required To Be                       Minimum Required For     Well Capitalized Under Prompt       Actual     Capital Adequacy Purposes     Corrective Action Regulations   At December 31, 2021   Amount     Ratio     Amount     Ratio     Amount     Ratio   Common equity tier 1 capital to risk-weighted assets   $ 136.6       13.0 %   $ 47.4       4.5 %     N/A       N/A   Tier 1 capital to risk-weighted assets   $ 136.6       13.0 %   $ 63.3       6.0 %     N/A       N/A   Total capital to risk-weighted assets   $ 149.8       14.2 %   $ 84.3       8.0 %     N/A       N/A   Tier 1 capital to adjusted average assets   $ 136.6       8.6 %   $ 64.2       4.0 %     N/A       N/A       The Bancorp’s ability to pay dividends to its shareholders is entirely dependent upon the Bank’s ability to pay dividends to the Bancorp. Under Indiana law, the Bank may pay dividends from its undivided profits (generally, earnings less losses, bad debts, taxes and other operating expenses) as is considered expedient by the Bank’s Board of Directors. However, the Bank must obtain the approval of the Indiana Department of Financial Institutions (DFI) if the total of all dividends declared by the Bank during the current year, including the proposed dividend, would exceed the sum of retained net income for the year to date plus its retained net income for the previous two years. For this purpose, “retained net income,” means net income as calculated for call report purposes, less all dividends declared for the applicable period. An exemption from DFI approval would require that the Bank have been assigned a composite uniform financial institutions rating of 1 or 2 as a result of the most recent federal or state examination; the proposed dividend would not result in a Tier 1 leverage ratio below 7.5%; and that the Bank not be subject to any corrective action, supervisory order, supervisory agreement, or board approved operating agreement. The aggregate amount of dividends that may be declared by the Bank in 2022, without the need for qualifying for an exemption or prior DFI approval, is its 2022 net profits plus $21.4 million. 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 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.   37     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. 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)   Three Months Ended   (unaudited)   June 30, 2022     June 30, 2021   Calculation of tax adjusted net interest margin                 Net interest income   $ 17,298     $ 11,872   Tax adjusted interest on securities and loans     930       745   Adjusted net interest income     18,228       12,617   Total average earning assets     1,927,664       1,473,625   Tax adjusted net interest margin     3.78 %     3.42 %     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.   Three Months Ended                                                 (Dollars in thousands)   Average Balances, Interest, and Rates   (unaudited)   June 30, 2022     June 30, 2021       Average Balance     Interest     Rate (%)     Average Balance     Interest     Rate (%)   ASSETS                                                 Interest bearing deposits in other financial institutions   $ 25,679     $ 45       0.70     $ 57,543     $ 9       0.06   Federal funds sold     1,388       2       0.58       1,288       -       -   Certificates of deposit in other financial institutions     1,625       3       0.74       1,473       7       1.90   Securities available-for-sale     438,309       2,449       2.23       433,355       2,124       1.96   Loans receivable*     1,457,625       15,221       4.18       976,520       10,275       4.21   Federal Home Loan Bank stock     3,038       20       2.63       3,446       20       2.32   Total interest earning assets     1,927,664     $ 17,740       3.68       1,473,625     $ 12,435       3.38   Cash and non-interest bearing deposits in other financial institutions     21,435                       36,377                   Allowance for loan losses     (13,399 )                     (13,255 )                 Other noninterest bearing assets     149,339                       97,863                   Total assets   $ 2,085,039                     $ 1,594,610                                                                     LIABILITIES AND STOCKHOLDERS' EQUITY                                                 Total deposits   $ 1,884,712     $ 389       0.08     $ 1,402,398     $ 549       0.16   Repurchase agreements     22,618       26       0.46       16,855       12       0.28   Borrowed funds     9,851       27       1.10       1,720       2       0.47   Total interest bearing liabilities     1,917,181     $ 442       0.09       1,420,973     $ 563       0.16   Other noninterest bearing liabilities     25,443                       17,787                   Total liabilities     1,942,624                       1,438,760                   Total stockholders' equity     142,415                       155,850                   Total liabilities and stockholders' equity   $ 2,085,039                     $ 1,594,610                                                                                                                       Net intrest spread     3.59 %                     3.22 %                 Net interest margin**     3.59 %                     3.22 %                 Ratio of interest-earning assets to interest-bearing liabilities   1.01x                     1.04x                     * 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 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.   38     The following table shows the change in noninterest income for the three months ending June 30, 2022, and June 30, 2021.   (Dollars in thousands)   Three Months Ended June 30,     6/30/2022     vs. 6/30/2021   (unaudited)   2022     2021     $ Change     % Change   Noninterest income:                                 Fees and service charges   $ 1,560     $ 1,471     $ 89       6.1 % Wealth management operations     588       576       12       2.1 % Gain on sale of loans held-for-sale, net     291       1,116       (825 )     -73.9 % Gain on sale of securities, net     258       269       (11 )     -4.1 % Increase in cash value of bank owned life insurance     193       188       5       2.7 % Gain (loss) on sale of foreclosed real estate     -       36       (36 )     -100.0 % Other     6       24       (18 )     -75.0 %                                   Total noninterest income   $ 2,896     $ 3,680     $ (784 )     -21.3 %   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,     6/30/2022     vs. 6/30/2021   (Unaudited)   2022     2021     $ Change     % Change   Noninterest expense:                                 Compensation and benefits   $ 7,538     $ 5,897     $ 1,641       27.8 % Data processing     1,246       597       649       108.7 % Occupancy and equipment     1,729       1,324       405       30.6 % Marketing     385       195       190       97.4 % Federal deposit insurance premiums     380       204       176       86.3 % Other     3,898       2,793       1,105       39.6 %                                   Total noninterest expense   $ 15,176     $ 11,010     $ 4,166       37.8 %     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.   39     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. 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. 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   (unaudited)   June 30, 2022     June 30, 2021   Calculation of tax adjusted net interest margin                 Net interest income   $ 32,833     $ 23,918   Tax adjusted interest on securities and loans     1,896       1,422   Adjusted net interest income     34,729       25,340   Total average earning assets     1,874,835       1,445,263   Tax adjusted net interest margin     3.70 %     3.51 %     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.   Year-to-Date                                                 (Dollars in thousands)   Average Balances, Interest, and Rates   (unaudited)   June 30, 2022     June 30, 2021       Average Balance     Interest     Rate (%)     Average Balance     Interest     Rate (%)   ASSETS           `                                   Interest bearing deposits in other financial institutions   $ 24,032     $ 53       0.44     $ 54,195     $ 21       0.08   Federal funds sold     4,683       2       0.09       1,040       -       -   Certificates of deposit in other financial institutions     1,674       6       0.72       1,535       15       1.95   Securities available-for-sale     474,016       5,024       2.12       408,753       4,065       1.99   Loans receivable*     1,366,900       28,507       4.17       976,059       21,021       4.31   Federal Home Loan Bank stock     3,530       42       2.38       3,681       40       2.17   Total interest earning assets     1,874,835     $ 33,634       3.59       1,445,263     $ 25,162       3.48   Cash and non-interest bearing deposits in other financial institutions     20,821                       35,055                   Allowance for loan losses     (13,383 )                     (12,960 )                 Other noninterest bearing assets     138,343                       97,967                   Total assets   $ 2,020,616                     $ 1,565,325                                                                     LIABILITIES AND STOCKHOLDERS' EQUITY                                                 Total deposits   $ 1,813,254     $ 726       0.08     $ 1,375,429     $ 1,200       0.17   Repurchase agreements     21,013       42       0.40       15,674       22       0.28   Borrowed funds     7,982       33       0.83       1,903       22       2.31   Total interest bearing liabilities     1,842,249     $ 801       0.09       1,393,006     $ 1,244       0.18   Other noninterest bearing liabilities     22,029                       18,295                   Total liabilities     1,864,278                       1,411,301                   Total stockholders' equity     156,338                       154,024                   Total liabilities and stockholders' equity   $ 2,020,616                     $ 1,565,325                                                                     Net intrest spread     3.50 %                     3.30 %                 Net interest margin**     3.50 %                     3.31 %                 Ratio of interest-earning assets to interest-bearing liabilities   1.02 x                   1.04 x                   * 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.   40     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,     6/30/2022     vs. 6/30/2021   (unadited)   2022     2021     $ Change     % Change   Noninterest income:                                 Fees and service charges   $ 2,864     $ 2,537     $ 327       12.9 % Wealth management operations     1,183       1,183       0       0.0 % Gain on sale of loans held-for-sale, net     898       3,165       (2,267 )     -71.6 % Gain on sale of securities, net     639       686       (47 )     -6.9 % Increase in cash value of bank owned life insurance     445       357       88       24.6 % Gain (loss) on sale of foreclosed real estate     -       27       (27 )     -100.0 % Other     11       38       (27 )     -71.1 %                                   Total noninterest income   $ 6,040     $ 7,993     $ (1,953 )     -24.4 %     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)   Six Months Ended June 30,     6/30/2022     vs. 6/30/2021   (unaudited)   2022     2021     $ Change     % Change   Noninterest expense:                                 Compensation and benefits   $ 14,905     $ 11,582     $ 3,323       28.7 % Data processing     4,300       1,125       3,175       282.2 % Occupancy and equipment     3,229       2,696       533       19.8 % Marketing     1,036       394       642       162.9 % Federal deposit insurance premiums     599       384       215       56.0 % Other     7,376       5,322       2,054       38.6 %                                   Total noninterest expense   $ 31,445     $ 21,503     $ 9,942       46.2 %   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 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.   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 Critical accounting policies are those accounting policies that management believes are most important to the portrayal of the Bancorp’s financial condition and that require management’s most difficult, subjective or complex judgments. The Bancorp’s critical accounting policies from December 31, 2021, remain unchanged.   Forward-Looking Statements Statements contained in this report that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words or phrases “would be,” “will allow,” “intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions are also intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. The Bancorp cautions readers that forward-looking statements, including without limitation those relating to the Bancorp’s future business prospects, merger and acquisition activities, interest income and expense, net income, liquidity, and capital needs are subject to certain risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements, due to, among other things, factors identified in this report, including those identified in the Bancorp’s 2021 Form 10-K.   41     Non-GAAP Financial Measures This filing includes certain financial measures that are identified as non-GAAP, including adjusted net interest income and tax adjusted net interest margin. The Bancorp provides these non-GAAP performance measures because they are used by management to evaluate and measure the Bancorp’s performance, which the Bancorp believes also is useful to assist investors in assessing the Bancorp’s operating performance. Where non-GAAP financial measures are used in this report, the most comparable GAAP measure, as well as the reconciliation to the most comparable GAAP measure, can be found in the tables referenced herein.   The adjusted net interest income and tax-adjusted net interest margin measures recognize the income tax savings when comparing taxable and tax-exempt assets. Interest income and yields on tax-exempt securities and loans are presented using the current federal income tax rate of 21%. Management believes that it is standard practice in the banking industry to present net interest income and net interest margin on a fully tax-equivalent basis and that it may enhance comparability for peer comparison purposes.   Although these non-GAAP financial measures are frequently used by investors to evaluate a financial institution’s business and performance, they have limitations as analytical tools and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In addition, these non-GAAP financial measures may differ from those used by other financial institutions to assess their business operations and performance.   Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.